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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
(Mark one)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For the Fiscal Year Ended
December 31, 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
00908
San Juan
,
Puerto Rico
(Zip Code)
(Address of principal executive office)
Registrant’s telephone number, including area code:
(
787
)
729-8200
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)
FBP
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities
Act.
Yes
☑
No
☐
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes
☐
No
☑
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 has filed a
report on and attestation to its management’s
assessment of the effectiveness of its internal control
over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its
audit report.
☑
If securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an
error
to previously issued financial statements.
☐
Indicate by check mark whether any of those error corrections are
restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s
executive
officers during the relevant recovery period pursuant
to §240.10D-1(b).
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☑
The aggregate market value of the voting common equity held
by non-affiliates of the registrant as of June 30,
2022 (the last trading day of the registrant’s
most recently completed second
fiscal quarter) was $
2,373,329,883
based on the closing price of $12.91 per share of the registrant’s
common stock on the New York
Stock Exchange on June 30, 2022. The registrant had no
nonvoting common equity outstanding as of June 30, 2022.
For the purposes of the foregoing calculation only,
the registrant has defined affiliates to include (a) the executive
officers named in
Part III of this Annual Report on Form 10-K; (b) all directors
of the registrant; and (c) each shareholder,
including the registrant’s employee benefit
plans but excluding shareholders that file on
Schedule 13G, known to the registrant to be the beneficial owner
of 5% or more of the outstanding shares of common stock of the
registrant as of June 30, 2022. The registrant’s
response to
this item is not intended to be an admission that any person
is an affiliate of the registrant for any purposes other than this
response.
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock,
as of the latest practicable date:
180,585,944
shares as of February 21, 2023.
Documents incorporated by reference:
Portions of the definitive proxy statement relating to
the registrant’s annual meeting of stockholders
scheduled to be held on May 18, 2023 are
incorporated by reference in response to Items 10, 11,
12, 13 and 14 of Part III of this Form 10-K.
2
FIRST BANCORP.
2022 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART
I
Item 1.
Business
5
Item 1A.
Risk Factors
21
Item 1B.
Unresolved Staff Comments
36
Item 2.
Properties
36
Item 3.
Legal Proceedings
36
Item 4.
Mine Safety Disclosures
36
PART
II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
37
Item 6.
[Reserved]
40
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
41
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
111
Item 8.
Financial Statements and Supplementary Data
112
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
221
Item 9A.
Controls and Procedures
221
Item 9B.
Other Information
221
Item 9C.
Disclosure regarding Foreign Jurisdictions that Prevent Inspections
221
PART
III
Item 10.
Directors, Executive Officers and Corporate Governance
222
Item 11.
Executive Compensation
222
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
222
Item 13.
Certain Relationships and Related Transactions, and Director Independence
222
Item 14.
Principal Accountant Fees and Services
223
PART
IV
Item 15.
Exhibits and Financial Statement Schedules
223
Item 16.
Form 10-K Summary
223
Exhibit Index
SIGNATURES
3
Forward-Looking Statements
This Form 10-K 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-K 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,” and the following:
●
the impacts 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
impact
the
Corporation’s
earnings
and
may
adversely
impact
origination
volumes,
liquidity,
and
financial
performance;
●
adverse changes
in general
economic conditions
in Puerto
Rico, the
United States
(“U.S.”), and
the U.S.
Virgin
Islands (the
“USVI”)
and
British
Virgin
Islands
(the
“BVI”),
including
in
the
interest
rate
environment,
unemployment
rates,
market
liquidity,
housing
absorption
rates,
real
estate
markets
and
U.S.
capital
markets,
which
may
affect
funding
sources,
loan
portfolio
performance
and credit
quality,
market prices
of investment
securities and
demand for
the Corporation’s
products
and services, and which may reduce the Corporation’s
revenues and earnings and the value of the Corporation’s
assets;
●
the impact
of government
financial assistance
for hurricane
recovery and
other disaster
relief on
economic activity
in Puerto
Rico, and the timing and pace of disbursements of funds earmarked for disaster
relief;
●
the
long-term
economic
and
other
effects
of
the
COVID-19
pandemic
and
their
impact
on
the
Corporation’s
business,
operations and
financial condition,
including the
impact of any
residual risks related
to the Corporation’s
participation in
the
Small Business Administration Paycheck Protection Program (“SBA PPP”);
●
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,
which
may
result
in
misuse
or
misappropriation
of
confidential
or
proprietary
information,
disruption
or
damage
to
our
systems, increased costs and losses or an adverse effect to our
reputation;
●
general competitive
factors and other
market risks as
well as the
implementation of
strategic growth opportunities,
including
risks, uncertainties and other factors or events related to any business acquisitions or
dispositions;
●
uncertainty as
to the
implementation of
the debt
restructuring plan
of Puerto
Rico (“Plan
of Adjustment”
or “PoA”)
and the
fiscal plan for Puerto Rico
as certified on January 27, 2022 (the
“2022 Fiscal Plan”) by the oversight
board established by the
Puerto Rico
Oversight, Management,
and Economic
Stability Act
(“PROMESA”),
or any
revisions to
it, on
our clients
and
loan portfolios, and any potential impact from future economic or political
developments in Puerto Rico;
●
uncertainty
as
to
the
continued
availability
of
wholesale
funding
sources,
such
as
securities
sold
under
agreements
to
repurchase, Federal Home Loan Bank (“FHLB”) advances and brokered certificates
of deposit (“brokered CDs”);
●
the impact of changes in accounting
standards or assumptions in applying
those standards, on forecasts of economic
variables
considered for the determination of the allowance for credit losses (“ACL”);
●
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;
4
●
environmental, social, and governance matters, including our climate-related
initiatives and commitments;
●
the impacts
of natural
or man-made
disasters, widespread
health emergencies,
geopolitical conflicts
(including
the ongoing
conflict
in
Ukraine),
terrorist
attacks
or
other
catastrophic
external
events,
including
impacts
of
such
events
on
general
economic conditions and on the Corporation’s
assumptions regarding forecasts of economic variables;
●
the effect
of changes
in the
interest rate
environment,
including uncertainty
about the
effect
of the
cessation of
the London
Interbank Offered Rate (“LIBOR”);
●
any adverse change
in the Corporation’s
ability to attract
and retain clients
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;
●
the impacts of applicable legislative, tax or regulatory changes on the
Corporation’s financial condition or
performance;
●
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,
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 the “FED”), the Federal Deposit
Insurance Corporation
(the “FDIC”),
government-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,
causing
an
additional increase in the Corporation’s
non-interest expenses;
●
any need to recognize impairments on the Corporation’s
financial instruments, goodwill and other intangible assets;
●
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; and
●
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.
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.
5
PART
I
Item 1.
Business
GENERAL
First
BanCorp.
is
a
publicly
owned
financial
holding
company
that
is
subject
to
regulation,
supervision
and
examination
by
the
Federal Reserve Board. The Corporation was incorporated under
the laws of the Commonwealth of Puerto Rico in 1948 to serve as the
bank holding company
for FirstBank. Through
its subsidiaries, including
FirstBank, the Corporation
provides full-service commercial
and consumer banking
services, mortgage banking
services, automobile financing,
trust services, insurance
agency services, and
other
financial products
and services
in Puerto
Rico, the
U.S., the
USVI and
the BVI.
As of
December 31,
2022, the
Corporation had
total
assets of $18.6 billion, including loans of $11.6
billion, total deposits of $16.1 billion, and total stockholders’ equity of $1.3
billion.
The
Corporation
provides
a wide
range
of financial
services for
retail,
commercial
and institutional
clients.
The
Corporation
has
two
wholly-owned
subsidiaries:
FirstBank
and
FirstBank
Insurance
Agency,
Inc.
(“FirstBank
Insurance
Agency”).
FirstBank
is
a
Puerto Rico-chartered commercial bank, and FirstBank Insurance
Agency is a Puerto Rico-chartered insurance agency.
FirstBank is subject to
the supervision, examination
and regulation of both
the Office of the
Commissioner of Financial Institutions
of
Puerto
Rico
(“OCIF”)
and
the
FDIC.
Deposits
are
insured
through
the
FDIC
Deposit
Insurance
Fund
(the
“DIF”).
In
addition,
within FirstBank, the
Bank’s USVI
operations are
subject to regulation
and examination by
the USVI Division
of Banking Insurance,
and Financial
Regulation;
its BVI
operations are
subject to
regulation by
the BVI
Financial Services
Commission; and
its operations
in
the
state
of
Florida
are
subject
to
regulation
and
examination
by
the
Florida
Office
of
Financial
Regulation.
The
Consumer
Financial Protection
Bureau (“CFPB”)
regulates FirstBank’s
consumer financial
products and
services.
FirstBank Insurance
Agency
is subject to the supervision, examination
and regulation of the Office of
the Insurance Commissioner of the
Commonwealth of Puerto
Rico and the Division of Banking and Insurance Financial Regulation in
the USVI.
FirstBank conducts its
business through its main
office located in
San Juan, Puerto Rico,
59 banking branches
in Puerto Rico, eight
banking
branches
in
the
USVI
and
the
BVI,
and
nine
banking
branches
in
the
state
of
Florida.
FirstBank
has
six
wholly-owned
subsidiaries
with
operations
in
Puerto
Rico:
First
Federal
Finance
Corp.
(d/b/a
Money
Express
La Financiera),
a
finance
company
specializing
in
the
origination
of
small
loans
with
27
offices
in
Puerto
Rico;
First
Management
of
Puerto
Rico,
a
Puerto
Rico
corporation,
which
holds
tax-exempt
assets;
FirstBank
Overseas
Corporation,
an
international
banking
entity
(an
“IBE”)
organized
under
the
International
Banking
Entity
Act
of
Puerto
Rico;
two
companies
engaged
in
the
operation
of
certain
real
estate
owned
(“OREO”) property
and one private equity fund.
For a
discussion of
certain significant
events that
have occurred
in the
year ended
December 31,
2022, please
refer to
“Significant
Events” included in Item 7. Management’s
Discussion and Analysis of Financial Condition and
Results of Operations of this Form 10-
K.
BUSINESS SEGMENTS
The Corporation has six reportable segments: Commercial and Corporate
Banking; Mortgage Banking; Consumer (Retail) Banking;
Treasury and Investments; United States
Operations; and Virgin
Islands Operations. These segments are described below,
as well as in
Note 27 - “Segment Information,” to the consolidated
financial statements for the year ended December 31, 2022 included in
Item 8 of
this Form 10-K.
Commercial and Corporate Banking
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
government
sector
in
the
Puerto
Rico
region.
The
Commercial
and
Corporate
Banking
segment
offers
commercial
loans,
including
commercial
real
estate
and
construction
loans,
as
well
as
other
products,
such
as
cash
management
and
business
management
services.
A
substantial
portion
of
the
commercial
and
corporate
banking portfolio is secured by the underlying real estate collateral and the personal
guarantees of the borrowers.
Mortgage Banking
The Mortgage Banking segment consists of the origination, sale and
servicing of a variety of residential mortgage loan products and
related hedging
activities in
the Puerto
Rico region.
Originations are
sourced through
different channels,
such as
FirstBank branches
and purchases
from mortgage
bankers,
and in
association with
new project
developers.
The Mortgage
Banking segment
focuses on
originating
residential
real
estate
loans,
some
of
which
conform
to
the
U.S.
Federal
Housing
Administration
(the
“FHA”),
U.S.
Veterans
Administration
(the
“VA”)
and
the
U.S.
Department
of
Agriculture
Rural
Development
(the
“RD”)
standards.
Originated
6
loans that meet
the FHA’s
standards qualify for
the FHA’s
insurance program whereas
loans that meet the
standards of the VA
or RD
are guaranteed by those respective federal agencies.
Mortgage
loans that
do not
qualify under
the FHA,
VA
or RD
programs
are
referred
to as
conventional
loans. Conventional
real
estate loans
can be
conforming or
non-conforming. Conforming
loans are residential
real estate loans
that meet
the standards
for sale
under
the
U.S.
Federal
National
Mortgage
Association
(“FNMA”)
and
the
U.S.
Federal
Home
Loan
Mortgage
Corporation
(“FHLMC”) programs.
Loans that
do not
meet FNMA
or FHLMC
standards are
referred to
as non-conforming
residential real
estate
loans. The Mortgage
Banking segment also acquires
and sells mortgages
in the secondary
markets. Residential real
estate conforming
loans are
sold to
investors like
FNMA and
FHLMC. Most
of the
Corporation’s
residential mortgage
loan portfolio
consists of
fixed-
rate, fully
amortizing, full
documentation loans.
The Corporation
has commitment
authority to
issue Government
National Mortgage
Association
(“GNMA”)
mortgage-backed
securities
(“MBS”).
Under
this
program,
the
Corporation
has
been
selling
FHA/VA
mortgage loans into the secondary market since 2009.
Consumer (Retail) Banking
The
Consumer
(Retail)
Banking
segment
consists
of
the
Corporation’s
consumer
lending
and
deposit-taking
activities
conducted
mainly through FirstBank’s
branch network in the Puerto Rico region.
Loans to consumers include auto loans,
finance leases, boat and
personal loans,
credit card loans,
and lines of
credit.
Deposit products include
interest-bearing and non-interest-bearing
checking and
savings accounts,
Individual Retirement
Accounts (“IRAs”)
and retail
certificates of
deposit (“retail
CDs”). Retail
deposits gathered
through each
branch of
FirstBank’s
retail network
serve as
one of
the funding
sources for
the lending
and investment
activities. This
segment also includes the Corporation’s
insurance agency activities in the Puerto Rico region.
Treasury and Investments
The
Treasury
and
Investments
segment
is
responsible
for
the
Corporation’s
treasury
and
investment
management
functions.
The
treasury
function,
which
includes
funding
and
liquidity
management,
lends
funds
to
the
Commercial
and
Corporate
Banking,
the
Mortgage
Banking,
the
Consumer
(Retail)
Banking
and
the
United
States
Operations
segments
to
finance
their
respective
lending
activities and
borrows from
those segments.
The Treasury
and Investments
segment also
obtains funding
through brokered
deposits,
advances from the FHLB, and repurchase agreements involving investment
securities, among other possible funding sources.
United States Operations
The
United
States Operations
segment
consists of
all banking
activities conducted
by FirstBank
on the
U.S. mainland.
FirstBank
provides a
wide range
of banking
services to
individual and
corporate customers,
primarily in
southern Florida
through nine
banking
branches.
The
United
States
Operations
segment
offers
an
array
of
both
consumer
and
commercial
banking
products
and
services.
Consumer banking
products include
checking, savings
and money
market accounts,
retail CDs,
internet banking
services, residential
mortgages,
home
equity
loans,
and
lines
of
credit.
Retail
deposits,
as
well
as
FHLB
advances
and
brokered
CDs
assigned
to
this
segment, serve as funding sources for its lending activities.
Commercial
banking
services
include
checking,
savings
and
money
market
accounts,
retail
CDs,
internet
banking
services,
cash
management
services,
remote
deposit
capture,
and
automated
clearing
house
(“ACH”)
transactions.
Loan
products
include
the
traditional commercial and industrial and commercial real estate products,
such as lines of credit, term loans and construction loans.
Virgin Islands Operations
The
Virgin
Islands
Operations
segment
consists
of
all
banking
activities
conducted
by
FirstBank
in
the
USVI
and
BVI
regions,
including
consumer and
commercial banking
services, with
a total
of
eight banking
branches serving
the islands
in the
USVI of
St.
Thomas,
St.
Croix,
and
St.
John,
and
the
island
of
Tortola
in
the
BVI.
The
Virgin
Islands
Operations
segment
is
driven
by
its
consumer, commercial lending and deposit
-taking activities.
Loans
to
consumers
include
auto
and
boat
loans,
lines
of
credit,
and
personal
and
residential
mortgage
loans.
Deposit
products
include
interest-bearing
and
non-interest-bearing
checking
and
savings
accounts,
IRAs,
and
retail
CDs.
Retail
deposits
gathered
through each branch serve as the funding sources for its own lending activities.
7
ENVIRONMENTAL
,
SOCIAL AND GOVERNANCE (“ESG”) PROGRAM
OVERVIEW
The
Corporation
is committed
to
supporting
our
clients,
employees,
shareholders
and
communities
in
which
we
serve.
Our
ESG
program builds on the Corporation’s
core values, including being a socially
responsible company.
The Corporation sees effective
ESG
management as a critical step towards a sustainable, inclusive and successful future.
During
2021,
the
Corporation
adopted
an
ESG
framework
through
which
it
establishes
and
communicates
its
ESG
strategy
and
overarching governance
policy.
In 2022,
the Corporation
continued evolving
its ESG
program,
including the
publication of
its initial
First
BanCorp.
Environmental,
Social
and
Governance
Report
for
2021
(the
“2021
ESG
Report”).
The
2021
ESG
Report
discloses
information
on
a
wide
range
of
ESG
topics,
including
governance
and
leadership;
responsible
business
practices;
employees
and
culture;
diversity,
equity
and
inclusion;
community
engagement;
and
environmental
stewardship.
The
ESG
Report
for
2022
is
expected
to
be
published
during
the
second
quarter
of
2023.
Also
in
2022,
the
Corporation’s
Board
of
Directors
(the
“Board
of
Directors”
or
the
“Board”)
approved
First
BanCorp.’s
Sustainability
Policy
(the
“Sustainability
Policy”),
which
establishes
the
Corporation’s framework
to address ESG matters.
ESG Governance
The Corporation’s
Board of Directors and
executive leadership team
share responsibilities relating
to oversight of our
ESG policies
and practices. In
February 2022, the
Corporate Governance and
Nominating Committee of
the Board of
Directors amended its charter
to
include
oversight
responsibility
of
ESG
matters,
and
it
has
primary
oversight
of
ESG
policies,
practices
and
disclosures.
Nonetheless, other committees
of the Corporation’s
Board of Directors
also play a role
in ESG oversight in
matters related to
risk and
cybersecurity management, human capital management, investment management
and credit risk management.
As part of
the ESG governance
structure set forth
in the Sustainability
Policy,
the responsibility of
day-to-day management
of our
ESG framework
and strategy
has been
delegated to
a management-level
ESG Committee,
comprised of
leaders from
different areas,
such
as
Human
Resources,
Enterprise
Risk
Management,
Strategic
Planning
and
Investor
Relations,
Legal
and
Corporate
Affairs,
Marketing, Compliance,
Finance, and
Corporate Internal
Audit. The
ESG Committee
is tasked
with aligning
priorities and
initiatives
for the
year,
setting and
monitoring
long-term objectives
and goals,
and leading
the annual
reporting process
on ESG
related topics.
The ESG Committee reports to the Corporate Governance and Nominating
Committee of the Board of Directors.
HUMAN CAPITAL MANAGEMENT
First BanCorp.
strives to be recognized as a leading and diversified financial institution,
offering a superior experience to our clients
and employees. We
believe that the key to our success is caring about our team as much
as we care about our customers. Our goal is to
be an
employer of
choice
within our
primary operating
regions, which
we believe
is achieved
and sustained
by adding
value
to our
employees’
lives
and
providing
satisfying
and
evolving
work
experience.
The
core
of
our
employer
value
proposition,
“The
Experience of Being 1,” is our commitment to our employees’ wellbeing,
success, professional development, and work environment.
Employees
As
of
December
31,
2022,
the
Corporation
and
its
subsidiaries
had
3,133
regular
employees,
nearly
all
of
whom
are
full-time,
representing a
2% increase
in overall
headcount from
December 31,
2021. The
Corporation had
2,773 employees
in the
Puerto Rico
region,
200
employees
in
the
Florida
region,
and
160
employees
in
the
Virgin
Islands
region.
As
of
December
31,
2022,
approximately 67% of the total employee population and 57% of
top and middle management, were women.
Oversight
The Human Resources Division manages all elements of the Corporation’s
human capital programs and strategies, including talent
recruiting and engagement, training and development, and compensation
and benefits, and directly reports to the Corporation’s
Chief
Risk Officer.
The
Human
Resources
Division
efforts
are also
overseen by
the
Corporation’s
Chief
Executive
Officer
(CEO)
and
the executive
management
team
through
regular
work-related
interactions.
Our
leaders
focus
on
strengthening
employee
management
and
engagement
and
maximizing
collaboration
between
departments
and
talents
by
promoting
an
open-door
culture
that
stimulates
frequent communication
between employees
and management.
This provides
more opportunities
to identify
employees' needs,
obtain
feedback
about
work
experience,
and
adapt
our
employee
engagement
as
we
believe
is
appropriate.
In
addition,
the
Corporation’s
Board
of
Directors
and
its
Compensation
and
Benefits
Committee
monitor
and
are
regularly
updated
on
the
Corporation’s
human
capital management strategies.
8
Talent Acquisition
and Retention
First
BanCorp.
is
an
equal
opportunity
employer,
which
considers
qualified
candidates
for
employment
to
fill
its
available
positions.
Our
efforts
are
focused
on
attracting
and
retaining
the
best
talent
for
the
Corporation,
including
college
graduates,
and
promoting internal mobility.
The attraction and selection process includes:
●
Promoting and posting our vacant positions
internally and externally.
●
Building our employer brand by participating in professional events and
job fairs and maintaining a relationship with
universities through internship programs and career forums.
●
A collaboration with hiring managers to ensure an accurate match between
role and candidate and reasonably speed up the
recruitment process to secure top candidates.
●
A robust management information system to enhance the effectiveness
of the recruitment process and provide candidates with
a unique experience.
●
A robust on-boarding process to engage and support the new employee’s
induction process, including assignment of a
“FirstPal” from day one to help with the organizational culture transition
and learning process.
We
believe
that
financial
security
is critical
for
our
employees.
Our
goal is to
maintain
compensation
levels that
are competitive
with comparable
job categories
in similar
organizations.
Our salary
administration program
is designed
to provide
compensation that
is
consistent
with
our
employees’
assigned
duties
and
responsibilities
in
order
to
recognize
differences
in
individual
performance
levels and to attract the right and best talent for each job.
In
addition
to
salary,
some
job
positions
are
eligible
to
participate
in
variable
pay
programs.
The
Corporation
has
different
incentive
programs
for
most
of
its
business
units.
These
incentive
programs
are
periodically
reviewed
to
align
them
to
business
strategies
and
ensure
sound
risk
management.
Further,
the
Corporation’s
Management
Award
Program
is
used
to
recognize
and
reward outstanding
performance for
exempt employees
who do
not participate
in other
variable pay
programs.
The Corporation also
has a
long-term incentive
plan for
top-performing
leaders and
employees with
high potential.
These programs
provide awards
based
upon
the
Corporation’s
and
individual’s
performance
and
are
key
for
the
attraction
and
engagement
of
the
best
talent
.
The
Corporation’s
investment in its
employees has resulted
in a stable-tenured
workforce, with an
average tenure of
10 years of service
as
of December
31, 2022. In
2022, employee voluntary
turnover rates remained
significantly higher
than pre-pandemic
levels, reflecting
workforce challenges
affecting most
industries. Our
employee voluntary
turnover rate
for 2022
was 13.3%,
mostly related
to hourly
employees in call centers and branches. For high performers
,
employees’ turnover was relatively low at 5.5%.
Talent Development
and Engagement
We
believe
that a
culture of
learning and
development
maximizes the
talent of
human
capital and
is the
foundation for
sustained
business success and our commitment to employee engagement continues
throughout employees’ time with the Corporation.
Our
training
program
strives
to
reflect
both
employees’
and
the
organization’s
needs.
The
Corporation
offers
more
than
8,000
training opportunities
through online
courses and
in-person or
virtual classes,
as well
as development
activities, special
projects, and
partial tuition reimbursement to complete a bachelor’s
or master's degree to eligible employees. Training
is offered on various subjects
within five main areas: fundamentals,
compliance and corporate governance,
specialized technical subjects, professional
development,
and leadership development.
In 2022
we provided
over 80 training
topics through
virtual and
in-person modalities
allowing our
employees to
continue learning
and complete development plans.
In 2022, we delivered more than 108,000 hours
of training and each employee completed an average
of 30.6 training hours.
Every year around 100 new and
existing supervisors and managers receive
training. In 2022, we delivered more than
6,200 hours of
supervision
and
management-related
training.
For
new
supervisors,
we
offer
a
program
intended
to
train
in
basic
supervision,
leadership and
communication skills,
and our
human resources
policies and
practices. In
addition, our
program for
active supervisors
and
managers
encourages
leaders
to
review
their
leadership
skills
with
feedback
received
from
instructors
and
coworkers.
The
program has been delivered to 63% of our current leaders since launched,
accounting for over 21,000 training hours.
In addition to these training opportunities, we have processes
to promote professional development and career
growth, including the
promotion of internal
career opportunities, performance
management processes, annual
talent review,
and robust succession
planning.
We
also
encourage
employees
to
participate
in
our
commitment
to
our
communities
through
our
volunteer
and
community
reinvestment programs.
In 2022, our
employees supported 36
organizations with
more than 1,800
hours of volunteer
work. The Bank
9
also
encourages
its
employees
to
serve
on
non-profit
organizations’
boards
of
directors.
In
2022,
First
BanCorp
employees
were
members
of
the
board
of
directors
for
24
non-profit
organizations
across
the
Puerto
Rico,
Florida,
and
Virgin
Islands
regions
and
offered approximately 1,500 hours of service.
Health & Wellness
Health
and
well-being
programs
are
a
strong
component
of
the
benefits
we
provide
to
our
employees.
First
BanCorp.
provides
competitive
benefits
programs
that
are
intended
to
address
even
the
most
pressing
needs
of
our
employees
and
their
families
to
promote
occupational,
physical,
emotional,
and
financial
health.
Our
comprehensive
wellness
package
includes
health,
dental
and
vision insurance
offered
through different
insurance company
options that
enable employees
to choose
those that
best accommodate
their
and
their
families’
needs.
We
also
offer
life
insurance
and
disability
plans,
as
well
as
a
defined
contribution
retirement
plan
option where both employee and employer contribute.
To
promote
work-life
balance,
we
grant
a
variety
of paid
time off
for
vacation,
sick,
maternity
and
paternity
leave,
bereavement
leave, marriage and personal days,
in-house health services, and a complete
wellness program, including nutrition, fitness,
health fairs,
personal
finance
education,
and
preventive
healthcare
activities,
nursing
services,
among
others.
The
Corporation
subsidizes
a
substantial portion of the cost of these benefits.
Initiatives
for
the safety
and security
of employees
have
always been
an important
priority.
In 2022,
in response
to the
ongoing
impacts of the COVID-19 pandemic, certain business units in the Florida
and Puerto Rico regions
incorporated
hybrid work schedules.
Additional activities implemented by the Corporation to support employees
included:
●
COVID-19 monitoring and contact tracing processes.
●
Free laboratory testing for all employees.
●
Paid leave for employees affected by the virus and special leave of
absence without pay for unique needs.
●
Training activities related to COVID-19, safety
measures, stress management, and remote work.
●
Reinforce COVID-19 vaccination to protect our workforce.
●
Offered multiple onsite vaccination clinics, including
updated bivalent COVID-19 vaccine clinics.
MARKET AREA AND COMPETITION
Puerto
Rico,
where
the
banking
market
is
highly
competitive,
is
the
main
geographic
service
area
of
the
Corporation.
As
of
December
31,
2022,
the
Corporation
also
had
a
presence
in
the
state
of
Florida
and
in
the
USVI
and
BVI.
Puerto
Rico
banks
are
subject to the same federal laws, regulations and supervision that apply to
similar institutions on the United States mainland.
Competitors include
other banks,
insurance companies,
mortgage banking
companies, small
loan companies,
automobile financing
companies,
leasing companies,
brokerage firms
with retail
operations,
credit unions
and certain
retailers that
operate in
Puerto
Rico,
the
Virgin
Islands
and
the
state
of
Florida,
as
well
as
fintech
companies
and
emerging
competition
from
digital
platforms.
The
Corporation’s
businesses compete
with these
other firms
with respect
to the
range of
products and
services offered
and the
types of
clients, customers and industries served.
SUPERVISION AND REGULATION
The
Corporation
and
FirstBank,
its
bank
subsidiary,
are
subject
to
comprehensive
federal
and
Puerto
Rican
supervision
and
regulation.
These
supervisory
and
regulatory
requirements
apply
to
all
aspects
of
the
Corporation’s
and
the
Bank’s
activities,
including commercial
and consumer
lending, deposit
taking, management,
governance and
other activities.
As part
of this
regulatory
framework, the
Corporation and
the Bank
are subject
to extensive
consumer financial
regulatory legal
and supervisory
requirements.
Further,
U.S.
financial
supervision
and
regulation
is
dynamic
in
nature,
and
supervisory
and
regulatory
requirements
are
subject
to
change
as
new
legislative
and
regulatory
actions
are
taken.
Future
legislation
may
increase
the
regulation
and
oversight
of
the
Corporation and the
Bank. Any change in
applicable laws or regulations,
however, may
have a material adverse
effect on the business
of commercial banks and bank holding companies, including the Bank and the
Corporation.
Bank Holding Company Activities and Other Limitations
The Corporation is registered under
the Bank Holding Company Act
of 1956, as amended (the
“Bank Holding Company Act”),
and
is subject to
ongoing supervision,
regulation and examination
by the Federal
Reserve Board.
The Corporation
is required to
file with
the Federal
Reserve Board
periodic and
annual reports
and other
information concerning
its own
business operations
and those
of its
subsidiaries.
The Bank Holding
Company Act also permits
a bank holding company
to elect to become
a financial holding
company and engage
in
a
broader
range
of
financial
activities.
The
Corporation
has
elected
to
be
a
financial
holding
company
under
the
Bank
Holding
10
Company Act.
Financial holding
companies may
engage, directly or
indirectly,
in any activity
that is determined
to be (i)
financial in
nature, (ii) incidental to
such financial activity,
or (iii) complementary to
a financial activity and does
not pose a substantial risk
to the
safety
and
soundness
of
depository
institutions
or
the
financial
system
generally.
The
Bank
Holding
Company
Act
specifically
provides that
the following
activities have
been determined
to be
“financial in
nature”: (i)
lending, trust
and other
banking activities;
(ii) insurance activities; (iii) financial
or economic advice or services; (iv)
pooled investments; (v) securities underwriti
ng and dealing;
(vi) domestic activities
permitted for an
existing bank holding
company; (vii) foreign
activities permitted for
an existing bank
holding
company; and (viii) merchant banking activities.
A
financial
holding
company
that
ceases
to
meet
certain
standards
is
subject
to
a
variety
of
restrictions,
depending
on
the
circumstances,
including
precluding
the
undertaking
of
new
financial
activities
or
the
acquisition
of
shares
or
control
of
other
companies.
Until
compliance
is
restored,
the
Federal
Reserve
Board
has
broad
discretion
to
impose
appropriate
limitations
on
the
financial holding
company’s
activities. The Corporation
and FirstBank must
be “well-capitalized”
and “well-managed”
for regulatory
purposes,
and
FirstBank
must
earn
“satisfactory”
or
better
ratings
on
its
periodic
Community
Reinvestment
Act
(“CRA”)
examinations for the Corporation to preserve its financial holding company status.
Under
federal
law
and
Federal
Reserve
Board
policy,
a
bank
holding
company
such
as
the
Corporation
is
expected
to
act
as
a
source of strength
to its banking
subsidiaries and to
commit required
levels of support
to them. This
support may be
required at times
when,
absent
such
policy,
the
bank
holding
company
might
not
otherwise
provide
such
support.
In
the
event
of
a
bank
holding
company’s
bankruptcy,
any
commitment
by the
bank holding
company
to a
federal bank
regulatory
agency to
maintain capital
of a
subsidiary bank will
be assumed by
the bankruptcy trustee
and be entitled
to a priority
of payment. In
addition, any capital
loans by a
bank
holding
company
to
any
of
its
subsidiary
banks
must
be
subordinated
in
right
of
payment
to
deposits
and
to
certain
other
indebtedness
of
such
subsidiary
bank.
As
of
December
31,
2022,
and
the
date
hereof,
FirstBank
was
and
is
the
only
banking
subsidiary of the Corporation.
State Chartered Non-Member Bank and Banking Laws and Regulations
in General
FirstBank is
subject to
regulation and
examination by
the OCIF,
the CFPB
and the
FDIC, and
is subject
to comprehensive
federal
and
state
(Commonwealth
of
Puerto
Rico)
regulations
that
regulate,
among
other
things,
the
scope
of
their
businesses,
their
investments, their reserves
against deposits, the
timing and availability
of deposited funds,
and the nature
and amount of
collateral for
certain loans.
The
OCIF,
the
CFPB
and
the
FDIC
periodically
examine
FirstBank
to
test
the
Bank’s
conformance
to
safe
and
sound
banking
practices and
compliance with
various statutory
and regulatory
requirements. This
oversight establishes
a comprehensive
framework
of
permissible
activities,
and
the
supervision
by
the
FDIC
is
also
intended
for
the
protection
of
the
FDIC’s
insurance
fund
and
depositors.
These
regulatory
authorities
have
discretion
in
connection
with
their
supervisory
and
enforcement
activities
and
examination policies, including policies
with respect to the classification of
assets and the establishment of adequate
loan loss reserves
for regulatory purposes.
Their enforcement authority
includes, among other
things, the ability to
assess civil monetary
penalties, issue
cease-and-desist
or
removal
orders,
and
initiate
injunctive
actions
against
banking
organizations
and
institution-affiliated
parties.
In
general,
these
enforcement
actions
may
be
initiated
for
violations
of
laws
and
regulations
and
for
engaging
in
unsafe
or
unsound
practices.
In addition,
certain bank
actions are
required by
statute and
implementing regulations.
Other actions
or failure
to act
may
provide the basis for enforcement action, including the filing of misleading or
untimely reports with regulatory authorities.
Regulatory Capital Requirements
The federal
banking agencies
have implemented
rules for
U.S. banks
that establish
minimum
regulatory capital
requirements, the
components
of
regulatory
capital,
and
the
risk-based
capital
treatment
of
bank
assets
and
off-balance
sheet
exposures.
These
rules
currently
apply
to
the
Corporation
and
FirstBank,
and
generally
are
intended
to
align
U.S.
regulatory
capital
requirements
with
international regulatory capital standards
adopted by the Basel Committee on Banking
Supervision (“Basel Committee”), in particular,
the international capital accord known as “Basel III.”
The current rules increase the quantity and quality
of capital required by,
among
other things, establishing a minimum common equity
capital requirement and an additional common equity
Tier 1 capital conservation
buffer.
In addition, the current rules revise and
harmonize the bank regulators’ rules for
calculating risk-weighted assets, by applying
a
variation of
the Basel
III “Standardized
Approach” for
the risk-weighting
of bank
assets and
off-balance
sheet exposures
to all
U.S.
banking organizations other than large internationally
active banks.
International
regulatory
developments
also
affect
the
regulation
and
supervision
of
U.S.
banking
organizations,
including
the
Corporation
and
FirstBank.
Both
the
Basel
Committee
and
the
Financial
Stability
Board
have
agreed
to
take
action
to
strengthen
regulation and
supervision of the
financial system
with greater international
consistency,
cooperation, and
transparency,
including the
adoption of
Basel III
and a
commitment to
raise capital
standards and
liquidity buffers
within the
banking system
under Basel
III. In
addition, 12 U.S.C. 5371 (the “Collins Amendment”),
among other things, eliminates certain trust-preferred
securities (“TRuPs”) from
Tier
1 capital.
Preferred securities
issued under
the U.S.
Treasury’s
Troubled
Asset Relief
Program (“TARP”)
are exempt
from this
change.
Bank holding
companies, such
as the
Corporation, were
required to
fully phase
out these
instruments from
Tier 1
capital by
11
January
1,
2016;
however,
these
instruments
may
remain
in
Tier
2
capital
until
the
instruments
are
redeemed
or
mature.
As
of
December 31,
2022, the
Corporation had
$178.3 million
in TRuPs
that were
subject to
a full
phase-out from
Tier 1
capital under
the
final regulatory capital rules discussed above.
Consistent
with
Basel
Committee
actions
noted
above,
the
Federal
Reserve
Board
has
adopted
risk-based
and
leverage
capital
adequacy guidelines
pursuant to which
it assesses the
adequacy of
capital in examining
and supervising a
bank holding
company and
in
analyzing
applications
to
it
under
the
Bank
Holding
Company
Act.
The
Corporation
and
FirstBank
became
subject
to
the
U.S.
Basel III capital rules beginning on January 1, 2015.
The
Basel III
rules
require
the
Corporation
to
maintain
an additional
capital
conservation
buffer
of
2.5%
to
avoid
limitations on
both (i)
capital distributions
(
e.g.
, repurchases
of capital
instruments, dividends
and interest payments
on capital
instruments) and
(ii)
discretionary bonus payments to executive officers and
heads of major business lines.
Under
the fully
phased-in Basel
III rules,
in order
to be
considered
adequately
capitalized and
not subject
to the
above-described
limitations,
the Corporation
is required
to maintain:
(i) a
minimum
common equity
Tier
1 Capital
(“CET1”)
to risk-weighted
assets
ratio of
at least
4.5%, plus
the 2.5%
“capital conservation
buffer,”
resulting in
a required
minimum CET1
ratio of
at least
7%; (ii)
a
minimum ratio
of total Tier
1 capital to
risk-weighted assets
of at least
6.0%, plus
the 2.5% capital
conservation buffer,
resulting in
a
required minimum
Tier
1 capital
ratio of
8.5%; (iii)
a minimum
ratio of
total Tier
1 plus
Tier
2 capital
to risk-weighted
assets of
at
least 8.0%, plus
the 2.5% capital
conservation buffer,
resulting in a required
minimum total capital ratio
of 10.5%; and
(iv) a required
minimum leverage ratio of 4%, calculated as the ratio of Tier
1 capital to average on-balance sheet (non-risk adjusted) assets.
The
Basel
III
rules
have
increased
our
regulatory
capital
requirements
and
require
us
to
hold
more
capital
against
certain
of
our
assets
and
off-balance
sheet
exposures.
Further,
as
part
of
its
response
to
the
impact
of
COVID-19,
on
March
31,
2020,
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
initial
impact
of
the
adoption
of
CECL on
retained
earnings
plus 25%
of
the
change
in
the
ACL (excluding
PCD
loans) 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.
The Corporation
and the Bank
elected to phase
in
the full effect of CECL on regulatory capital over the five-year transition
period.
The Corporation
and the
Bank compute
risk-weighted assets
using the
Standardized Approach
required by
the Basel
III rules.
The
Standardized
Approach
expands
the
risk-weighting
categories
from
the
four
major
categories
under
the
previous
regulatory
capital
rules (0%, 20%, 50%, and 100%) to a much larger and
more risk-sensitive number of categories, depending on the nature of the
assets.
In a
number of
cases, the
Standardized Approach
resulted in
higher risk
weights for
a variety of
asset categories.
Specific changes
to
the
risk-weightings
of assets
included,
among
other
things: (i)
applying
a 150%
risk
weight
instead of
a 100%
risk
weight
for high
volatility commercial
real estate acquisition,
development and
construction loans,
(ii) assigning
a 150%
risk weight
to exposures
that
are 90 days past due
(other than qualifying residential
mortgage exposures, which remain
at an assigned risk-weighting
of 100%), (iii)
establishing a 20% credit conversion factor for the unused portion
of a commitment with an original maturity of one year or less that is
not unconditionally
cancellable, in
contrast to
the 0%
risk-weighting under
the prior
rules and
(iv) requiring
capital to
be maintained
against
on-balance-sheet
and
off-balance-sheet
exposures
that
result
from
certain
cleared
transactions,
guarantees
and
credit
derivatives, and collateralized transactions (such as repurchase agreement
transactions).
Set forth below are the Corporation's and FirstBank's capital ratios as of December 31,
2022 based on Federal Reserve and FDIC
guidelines:
Banking Subsidiary
First BanCorp.
FirstBank
Well-Capitalized
Minimum
As of December 31, 2022
Total capital (Total
capital to risk-weighted assets)
19.21%
18.90%
10.00%
CET1 Capital (CET1 capital to risk-weighted assets)
16.53%
16.84%
6.50%
Tier 1 capital ratio (Tier
1 capital to risk-weighted assets)
16.53%
17.65%
8.00%
Leverage ratio
(1)
10.70%
11.43%
5.00%
_______________
(1) Tier 1 capital to average assets.
12
Stress-Testing
and Capital Planning Requirements
Federal
regulations
currently
do
not
impose
formal
stress-testing
requirements
on
banking
organizations
with
total
assets
of
less
than $100 billion,
such as the
Corporation and
FirstBank.
The federal banking
agencies have indicated
through interagency guidance
that the
capital planning
and risk
management
practices of
institutions with
total assets
of less
than $100
billion will
continue
to be
reviewed through the regular
supervisory process. Notwithstanding,
the Corporation monitors its
capital consistent with the
safety and
soundness expectations
of the
federal regulators
and continues
to perform
internal stress
testing as
part of
its annual
capital planning
process.
Dividend Restrictions
The Federal
Reserve Board
has a
policy
that, as
a matter
of prudent
banking,
a bank
holding
company should
generally not
pay
cash
dividends
unless
its
net
income
available
to
common
shareholders
for
the
past
four
quarters,
net
of
dividends
previously
paid
during
that
period,
has
been
sufficient
to
fully
fund
the
dividends
and
the
prospective
rate
of
earnings
retention
appears
to
be
consistent with the organization’s
capital needs, asset quality,
and overall current and prospective financial condition. Furthermore,
the
Federal
Reserve Board’s
regulatory capital
rule (Regulation
Q) limits
the amount
of capital
a bank
holding
company may
distribute
under certain circumstances. A banking
organization must maintain
a capital conservation buffer
of CET1 capital in an amount
greater
than 2.5% of
total risk weighted
assets to avoid being
subject to limitations on
capital distributions. The
Corporation is also subject
to
certain restrictions
generally imposed
on Puerto
Rico corporations
with respect
to the declaration
and payment
of dividends
(i.e., that
dividends may
be paid
out only
from the
Corporation’s
capital surplus
or,
in the
absence of
such excess,
from the
Corporation’s
net
earnings for such fiscal year and/or the preceding fiscal year).
The principal
source of
funds for
the Corporation,
as a
parent holding
company,
is dividends
declared and
paid by
its subsidiary,
FirstBank. The
ability of
FirstBank to
declare and
pay dividends
on its
capital stock
is regulated
by the
Puerto Rico
Banking Law
of
1933,
as
amended
(the
“Puerto
Rico
Banking
Law”),
the
Federal
Deposit
Insurance
Act
(the
“FDIA”),
and
FDIC
regulations.
In
general
terms,
the
Puerto
Rico
Banking
Law
provides
that when
the
expenditures
of a
bank
are greater
than
receipts,
the
excess
of
expenditures over
receipts shall
be charged
against undistributed
profits of
the bank
and the
balance, if
any,
shall be
charged
against
the required
reserve fund
of the
bank. If
the reserve
fund is
not sufficient
to cover
such balance
in whole
or in
part, the
outstanding
amount must
be charged
against the
bank’s
capital account.
The Puerto
Rico Banking
Law provides
that, until
said capital
has been
restored to its original
amount and the reserve
fund to 20% of
the original capital, the
bank may not declare
any dividends. In general,
regulations
of
the
FDIA
and
the
FDIC
restrict
the
payment
of
dividends
when
a
bank
is
undercapitalized
(as
discussed
in
Prompt
Corrective
Action
below),
when
a
bank
has
failed
to
pay
insurance
assessments,
or
when
there
are
safety
and
soundness
concerns
regarding such bank.
The
principal
source
of
funds
for
the
Corporation’s
parent
holding
company
is
dividends
declared
and
paid
by
its
subsidiary,
FirstBank. The ability
of FirstBank to declare
and pay dividends on
its capital stock is
regulated by the Puerto
Rico Banking Law,
the
Federal
Deposit
Insurance
Act
(the
“FDIA”),
and
FDIC
regulations.
In
general
terms,
the
Puerto
Rico
Banking
Law
provides
that
when
the
expenditures
of
a
bank
are
greater
than
receipts,
the
excess
of
expenditures
over
receipts
shall
be
charged
against
undistributed profits
of the bank
and the balance,
if any,
shall be charged
against the required
reserve fund
of the bank.
If the
reserve
fund
is not
sufficient
to cover
such
balance
in whole
or
in part,
the outstanding
amount must
be
charged
against the
bank’s
capital
account. The Puerto Rico Banking
Law provides that, until said capital
has been restored to its original
amount and the reserve fund
to
20%
of
the
original
capital,
the
bank
may
not
declare
any
dividends.
In
general,
the
FDIA
and
the
FDIC
regulations
restrict
the
payment of
dividends when
a bank
is undercapitalized
(as discussed
in
Prompt
Corrective
Action
below), when
a bank
has failed
to
pay insurance assessments, or when there are safety and soundness concerns regarding
such bank.
Refer
to
Part
II,
Item
5,
“Market
for
Registrant’s
Common
Equity,
Related
Stockholder
Matters
and
Issuer
Purchases
of
Equity
Securities” of this Annual Report on Form 10-K
for further information on the Corporation’s
distribution of dividends and repurchases
of common stock.
Consumer Financial Protection Bureau
The CFPB has
primary examination
and enforcement authority
over FirstBank and
other banks with
over $10 billion
in assets with
respect to consumer financial products and services.
The
CFPB’s
primary
functions
include
the
supervision
of
“covered
persons”
(broadly
defined
to
include
any
person
offering
or
providing a consumer
financial product or
service and any
affiliated service
provider) for compliance
with federal
consumer financial
laws.
It
implements
amendments
to
and
has
primary
authority
to
enforce
the
federal
consumer
financial
laws,
including
the
Equal
Credit Opportunity Act, the Truth
in Lending Act (“TILA”) and the
Real Estate Settlement Procedures Act (“RESPA”),
among others.
The
CFPB
also
has
broad
powers
to
prescribe
rules
applicable
to
a
covered
person
or
service
provider
in
connection
with
any
transaction with a consumer for a consumer financial product or service,
or the offering of a consumer financial product or service.
13
Among other
actions, the
CFPB has
issued regulations
setting forth
mortgage servicing
rules that
apply to
the Bank,
which affect
consumer notices
regarding delinquency,
foreclosure alternatives,
modification applications,
interest rate
adjustments and
options for
avoiding
“force-placed”
insurance.
Further,
the
CFPB has
adopted
rules and
forms
that
combine
certain
disclosures
that
consumers
receive in connection
with applying for and closing on a mortgage loan under the TILA and the RESPA.
The Volcker
Rule
Section 13 of the Bank Holding
Company Act (commonly known as
the Volcker
Rule), generally prohibits a banking
entity such as
the Corporation or the
Bank from acquiring or
retaining any ownership
in, or acting as sponsor
to, a hedge fund
or private equity fund
(“covered
fund”).
The
Volcker
Rule
also
prohibits
these
entities
from
engaging,
for
their
own
account,
in
short-term
proprietary
trading of certain securities, derivatives, commodity futures and options on
these instruments.
The Corporation and
the Bank are not engaged
in “proprietary trading” as
defined in the Volcker
Rule. In addition, the
Corporation
has reviewed its investments and concluded that they are not considered
covered funds under the Volcker
Rule.
Community Reinvestment Act and Home Mortgage Disclosure Act Regulations
The CRA encourages
banks to help meet
the credit needs of
the local communities in
which they offer
services, including low- and
moderate-income individuals, consistent with the safe and sound operation
of the bank.
The
CRA
requires
the
federal
supervisory
agencies,
as
part
of
the
general
examination
of
supervised
banks,
to
assess
a
bank’s
record of meeting the
credit needs of its
community,
assign a performance rating,
and take such record
and rating into account
in their
evaluation
of certain
applications by
such bank,
such as
an application
for approval
of a
merger
or the
establishment of
a branch.
A
rating of
less than “satisfactory”
could result
in the denial
of such applications.
The CRA
also requires
all institutions
to make
public
disclosure of their CRA ratings. FirstBank received a “satisfactory” CRA rating in
its most recent examination by the FDIC.
In
June
2022,
the
U.S.
federal
banking
regulatory
agencies
issued
a
joint
proposal
to
amend
their
regulations
implementing
the
CRA.
The
proposed
rules
would
materially
revise
the
current
CRA
framework,
including
new
assessment
area
requirements,
new
methods of calculating
credit for lending, investment,
and service activities, and
additional data collection and
reporting requirements.
The proposed rule
included analysis indicating
a significant increase in
the thresholds for large
banks to receive “Outstanding”
ratings
in the future.
USA PATRIOT
Act and Other Anti-Money Laundering Requirements
As a regulated
depository institution,
FirstBank is subject
to the
Bank Secrecy
Act, which imposes
a variety of
reporting and
other
requirements,
including
the requirement
to file
suspicious
activity and
currency
transaction
reports that
are designed
to assist
in the
detection and prevention
of money laundering,
terrorist financing and
other criminal activities.
In addition, under
Title III
of the USA
PATRIOT
Act of 2001,
all financial institutions
are required to
identify their customers,
adopt formal and
comprehensive anti-money
laundering programs,
scrutinize or
prohibit certain
transactions of
special concern,
and be
prepared to
respond to
inquiries from
U.S.
law enforcement agencies concerning their customers and their transactions.
On
January
1,
2021,
major
legislative
amendments
to
U.S.
anti-money
laundering
requirements
became
effective
through
the
enactment
of
Division
F
of
the
National
Defense
Authorization
Act
for
fiscal
year
2021,
otherwise
known
as
the
Anti-Money
Laundering
Act
of
2020
(“AML
Act”).
The
AML
Act
includes
a
variety
of
provisions
designed
to
modernize
the
anti-money
laundering
regulatory
regime
and
remediate
gaps
in
the
U.S.’s
approach
to
anti-money
laundering
and
countering
the
financing
of
terrorism,
including the
creation of
a national
database of
absence corporate
beneficial ownership
along
with significantly
enhanced
reporting
requirements,
increased
penalties
for
Bank
Secrecy
Act
violations,
clarification
of
Suspicious
Activity
Report
filing
and
sharing
requirements,
and
provisions
addressing
the
adverse
consequences
of
“de-risking,”
namely,
the
practice
of
financial
institutions’ termination or
limitation of business relationships
with clients or classes
of clients in order
to manage the risks
associated
with such clients.
Regulations implementing the Bank Secrecy Act and the USA
PATRIOT
Act are published and primarily enforced by
the Financial
Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Treasury.
Failure of a financial institution, such as the Corporation
or
the
Bank,
to
comply
with
the
requirements
of
the
Bank
Secrecy
Act
or
the
USA
PATRIOT
Act
could
have
serious
legal
and
reputational
consequences
for
the
institution,
including
the
possibility
of
regulatory
enforcement
or
other
legal
actions,
such
as
significant
civil
monetary
penalties.
The
Corporation
is
also
required
to
comply
with
federal
economic
and
trade
sanctions
requirements enforced by the Office of Foreign Assets Control
(“OFAC”), a bureau
of the U.S. Treasury.
The Corporation believes
it has adopted appropriate
policies, procedures and controls
to address compliance with
the Bank Secrecy
Act, USA
PATRIOT
Act and
economic/trade
sanctions requirements,
and to
implement banking
agency,
FinCEN, OFAC
and
other
U.S. Treasury regulations.
14
Financial Privacy and Cybersecurity
The Gramm-Leach-Bliley
Act limits the ability
of financial institutions to
disclose non-public information
about consumers to non-
affiliated
third
parties.
These
limitations
require
disclosure
of
privacy
policies
to
consumers
and,
in
some
circumstances,
allow
consumers to prevent disclosure of certain personal information to
a non-affiliated third party.
The
federal
banking
regulators
regularly
issue
guidance
regarding
cybersecurity
intended
to
enhance
cyber
risk
management
standards among financial
institutions. A financial
institution is expected
to establish multiple
lines of defense
and to ensure
their risk
management processes
address the
risk posed
by potential
threats to
the institution.
A financial
institution’s
management is
expected
to
maintain
sufficient
processes
to
effectively
respond
and
recover
the
institution’s
operations
after
a
cyber-attack.
A
financial
institution
is
also
expected
to
develop
appropriate
processes
to
enable
recovery
of
data
and
business
operations
if
a
critical
service
provider
of
the institution
falls
victim
to
this type
of
a
cyber-attack.
The Corporation’s
Information
Security
Program
reflects
these
requirements.
Limitations on Transactions with Affiliates
and Insiders
Certain transactions between FDIC-insured
banks financial institutions such
as FirstBank and its affiliates
are governed by Sections
23A and
23B of the
Federal Reserve Act
and by
Federal Reserve
Regulation W.
An affiliate
of a bank
is, in general,
any corporation
or entity
that controls,
is controlled
by,
or is
under common
control with
the bank,
including the
bank’s
parent holding
company and
any companies that are controlled by such holding company.
Generally,
Sections 23A and 23B of
the Federal Reserve Act (i)
limit the extent to which
the bank or its subsidiaries
may engage in
“covered
transactions”
with
any
one
affiliate
to
an
amount
equal
to
10%
of
such
bank’s
capital
stock
and
surplus,
and
contain
an
aggregate limit
on all
such transactions
with all
affiliates to
an amount
equal to 20%
of such
bank’s
capital stock and
surplus and
(ii)
require that
all “covered
transactions” be
on terms
that are
substantially the
same, or
at least
as favorable
to the
bank or
affiliate,
as
those
provided
to
a
non-affiliate.
The
term
“covered
transaction”
includes
the
making
of
loans,
purchase
of
assets,
issuance
of
a
guarantee, credit
derivatives, securities
lending and
other similar
transactions entailing
the provision
of financial
support by
the bank
to an affiliate. In
addition, loans or other extensions
of credit by the bank to
the affiliate are required
to be collateralized in accordance
with the requirements set forth in Section 23A of the Federal Reserve Act.
In
addition,
Sections
22(h)
and
(g)
of
the
Federal
Reserve
Act,
implemented
through
Regulation
O,
place
restrictions
on
commercial bank loans to executive officers,
directors, and principal stockholders of
the bank and its affiliates. Under
Section 22(h) of
the Federal Reserve
Act, bank loans to
a director, an
executive officer,
a greater than 10%
stockholder of the
bank, and certain related
interests of these persons,
may not exceed, together
with all other outstanding
loans to such persons
and affiliated interests,
the bank’s
limit on loans
to one borrower,
which is generally
equal to 15%
of the bank’s
unimpaired capital and
surplus in the
case of loans
that
are not fully secured,
and an additional 10% of
the bank's unimpaired capital
and unimpaired surplus in
the case of loans that
are fully
secured by
readily marketable
collateral having
a market
value at
least equal
to the
amount of
the loan.
Section 22(h)
of the
Federal
Reserve Act also requires
that loans to directors,
executive officers, and
principal stockholders be made
on terms that are substantially
the same
as offered
in comparable
transactions to
other persons
and also
requires prior
board approval
for certain
loans. In
addition,
the
aggregate
amount
of
extensions
of
credit
by
a
bank
to
insiders
cannot
exceed
the
bank’s
unimpaired
capital
and
surplus.
Furthermore, Section 22(g) of the Federal Reserve Act places additional
restrictions on loans to executive officers.
Executive Compensation
The federal banking agencies have
adopted interagency guidance governing
incentive-based compensation programs,
which applies
to
all
banking
organizations
regardless
of
asset
size.
This
guidance
uses
a
principles-based
approach
to
ensure
that
incentive-based
compensation arrangements
appropriately tie
rewards to
longer-term performance
and do
not undermine
the safety
and soundness
of
banking organizations
or create
undue risks
to the
financial system.
The interagency
guidance is
based on
three major
principles: (i)
balanced risk-taking
incentives; (ii) compatibility
with effective
controls and
risk management; and
(iii) strong
corporate governance.
The guidance further provides
that, where appropriate, the
banking agencies will take supervisory
or enforcement action to ensure
that
material deficiencies that pose a threat to the safety and soundness of the organization
are promptly addressed.
In May 2016, the federal financial regulators proposed
regulations (first proposed in 2011) governing
incentive-based compensation
practices at
covered
banking institutions,
which
would
include,
among
others,
all banking
organizations
with assets
of
$1 billion
or
greater.
Portions of these
proposed rules would
apply to the
Corporation and FirstBank.
Those applicable provisions
would generally
(i)
prohibit
types
and
features
of
incentive-based
compensation
arrangements
that
encourage
inappropriate
risk
because
they
are
“excessive”
or
“could
lead
to
material
financial
loss”
at
the
banking
institution;
(ii)
require
incentive-based
compensation
arrangements to
adhere to
three basic
principles: (1)
a balance
between risk
and reward;
(2) effective
risk management
and controls;
and
(3)
effective
governance;
and
(iii)
require
appropriate
board
of
directors
(or
committee)
oversight
and
recordkeeping
and
15
disclosures
to
the
banking
institution’s
primary
regulatory
agency.
The
nature
and
substance
of
any
final
action
to
adopt
these
proposed rules, and the timing of any such action, are not known at this time.
On October 26,
2022, the SEC also
finalized a rule
that directs stock exchanges
to require listed companies
to implement clawback
policies
to
recover
incentive-based
compensation
from
current
or
former
executive
officers
in
the
event
of
certain
financial
restatements,
and requires
companies to
disclose their
clawback policies
and their
actions under
those policies.
The stock
exchanges
will be required to file their proposed listing standards with the SEC for
approval no later than 90 days following the publication of
the
final rules in
the Federal Register,
which must be
effective no
later than one
year following
such publication.
The rules are
therefore
not expected to take effect until mid-2023 at the earliest.
Prompt Corrective Action
The
“prompt
corrective
action”
provisions
of
the
FDIA
require
the
federal
bank
regulatory
agencies
to
take
prompt
corrective
action
against
any
insured
depository
institution
(“institutions”)
that
are
undercapitalized.
The
FDIA
establishes
five
capital
categories:
well-capitalized,
adequately
capitalized,
undercapitalized,
significantly
undercapitalized,
and
critically
undercapitalized.
Well-capitalized institutions
significantly exceed the required minimum level for each relevant
capital measure.
A bank’s
capital category
may not
constitute
an accurate
representation
of the
overall financial
condition
or prospects
of a
bank,
such
as
the
Bank,
and
should
be
considered
in
conjunction
with
other
available
information
regarding
the
financial
condition
and
results of operations of such bank.
Deposit Insurance
FirstBank
is
subject
to
FDIC
deposit
insurance
assessments,
which
increased
for
all
banks,
including
FirstBank,
following
the
increase
in
deposit
insurance
coverage
to
up
to
$250,000
per
customer
and
the
FDIC’s
expanded
authority
to
increase
insurance
premiums implemented
by the
Dodd-Frank Act.
The FDIA
further requires
that the
designated reserve
ratio for
the DIF
for any
year
not be
less than
1.35% of
estimated insured
deposits or
the comparable
percentage of
the new
deposit assessment
base.
In addition,
the FDIC
was required
to take
the necessary
actions for
the reserve
ratio to
reach 1.35%
of estimated
insured deposits
by September
30, 2020.
The FDIC
managed to
reach the
goal early,
achieving a
reserve ratio
of 1.36%
in September
2018. However,
in the
third
quarter of
2020, the
FDIC announced
that the
reserve ratio
of the
DIF fell
nine basis
points between
the first
and second
quarters of
2020,
from 1.39%
to 1.30%.
The decline
was attributed
to an
unprecedented
surge
in deposits.
The FDIC
approved
a plan
that is
expected to restore
the DIF to
at least 1.35%
within eight years,
as required by
the FDIA. Under
the plan, the
FDIC will maintain
the
current
schedules
of assessment
rates for
all banks;
monitor
deposit
balance
trends,
potential losses
and
other
factors
that affect
the
reserve
ratio;
and
provide
updates
to
its
loss
and
income
projections
at
least twice
a
year.
The
FDIC has
also
adopted
a
final
rule
raising its
industry target
ratio of
reserves to
insured deposits
to 2%,
65 basis
points above
the statutory
minimum, but
the FDIC
has
indicated that it does not project that goal to be met for several years.
On October 18, 2022,
the FDIC adopted
a final rule, applicable
to all insured depository
institutions, to increase
initial base deposit
insurance assessment rate schedules
uniformly by 2 basis points,
beginning in the first quarterly
assessment period of 2023.
The FDIC
also
concurrently
maintained
the
designated
reserve
ratio
for
the
DIF
at
2%
for
2023.
The
increase
in
assessment
rate
schedules
is
intended to increase
the likelihood that
the reserve ratio
of the DIF
reaches the statutory
minimum of
1.35% by the
statutory deadline
of September 30, 2028. The new assessment rate schedules
will remain in effect unless and until the reserve
ratio meets or exceeds 2%
in order
to support growth
in the DIF
and progress
toward the FDIC’s
long-term goal
of a 2%
designated reserve
ratio. Progressively
lower assessment
rate schedules
will take
effect when
the reserve
ratio reaches
2% and
again when
it reaches
2.5%. The
Corporation
estimates an increase
of approximately 56%
in deposit insurance
expense for 2023
compared to the
FDIC insurance
expense levels in
2022.
FDIC Insolvency Authority
Under
Puerto
Rico banking
laws, the
OCIF may
appoint
the FDIC
as conservator
or receiver
of a
failed or
failing
FDIC-insured
Puerto Rican bank, and
the FDIA authorizes the FDIC
to accept such an appointment.
In addition, the FDIC has
broad authority under
the FDIA
to appoint
itself as
conservator
or receiver
of a
failed or
failing state
bank, including
a Puerto
Rican bank.
If the
FDIC is
appointed
conservator
or
receiver
of
a
bank
upon
the
bank’s
insolvency
or
the
occurrence
of
other
events,
the
FDIC
may
sell
or
transfer some, part or all
of a bank’s
assets and liabilities to another bank,
or liquidate the bank and pay
out insured depositors, as well
as uninsured
depositors and
other creditors
to the
extent of
the closed
bank’s
available assets.
As part
of its
insolvency authority,
the
FDIC has
the authority,
among other
things, to
take possession
of and
administer the
receivership
estate,
pay
out estate
claims, and
repudiate or
disaffirm certain
types of
contracts to
which the
bank was
a party
if the
FDIC believes
such contract
is burdensome
and
its disaffirmance
will aid
in
the
administration
of the
receivership.
The
FDIA
provides
that, in
the
event
of
the
liquidation
or
other
resolution of
an insured
depository institution,
including the
Bank, the
claims of
depositors of
the institution
(including the
claims of
the
FDIC
as
subrogee
of
insured
depositors)
and
certain
claims
for
administrative
expenses
of
the
FDIC
as
a
receiver
would
have
priority over
other general
unsecured claims
against the
institution. If
the Bank
were to
fail, insured
and uninsured
depositors, along
16
with the
FDIC, would
have priority
in payment
ahead of
unsecured, non-deposit
creditors, including
the Corporation,
with respect
to
any extensions of credit they have made to such insured depository institution.
Activities and Investments
The
principal
activities
of
FDIC-insured,
state-chartered
banks,
such
as
FirstBank,
are
generally
limited
to
those
that
are
permissible for national
banks. Similarly,
under regulations dealing
with equity investments, an
insured state-chartered bank
generally
may not directly
or indirectly acquire or
retain any equity
investments of a type,
or in an amount,
that is not permissible
for a national
bank.
Federal Home Loan Bank System
FirstBank is
a member
of the
FHLB system.
The FHLB
system consists
of eleven
regional FHLBs
governed and
regulated by
the
Federal
Housing
Finance
Agency.
The
FHLBs
serve
as
reserve
or
credit
facilities
for
member
institutions
within
their
assigned
regions.
FirstBank is a member
of the FHLB of
New York
and, as such,
is required to
acquire and hold
shares of capital
stock in the
FHLB
of New York
in an amount calculated
in accordance with the
requirements set forth
in applicable laws and
regulations. FirstBank is in
compliance
with
the
stock
ownership
requirements
of
the
FHLB
of
New
York.
All
loans,
advances
and
other
extensions
of
credit
made
by
the
FHLB
to
FirstBank
are
secured
by
a
portion
of
FirstBank’s
mortgage
loan
or
securities
portfolios,
certain
other
investments and the capital stock of the FHLB held by FirstBank.
The board of
directors of each
FHLB can increase
the minimum investment
requirements if it
has concluded that
additional capital
is required to meet its own regulatory capital requirements. Any
increase in the minimum investment requirements outside of
specified
ranges requires
the approval of
the Federal Housing
Finance Agency.
Because the extent
of any obligation
to increase our
investment
in any of
the FHLBs depends
entirely upon
the occurrence of
a future
event, the
amount of any
future investment
in the capital
stock
of the FHLBs is not determinable.
Ownership and Control
Because
of
FirstBank’s
status
as
an
FDIC-insured
bank,
as
defined
in
the
Bank
Holding
Company
Act,
the
Corporation,
as
the
owner of
FirstBank’s
common stock,
is subject to
certain restrictions
and disclosure
obligations under
various federal laws,
including
the
Bank
Holding
Company
Act
and
the
Change
in
Bank
Control
Act
(the
“CBCA”).
Regulations
adopted
pursuant
to
the
Bank
Holding Company Act and
the CBCA generally require prior
Federal Reserve Board or other
federal banking agency approval or
non-
objection for an acquisition
of control of an “insured
institution” (as defined in
the Act) or holding
company thereof by any person
(or
persons acting in
concert). Control is deemed
to exist if, among
other things, a person
(or group of persons
acting in concert)
acquires
25% or more
of any class of
voting stock of
an insured institution
or holding company
thereof. Under the CBCA,
control is presumed
to exist
subject to
rebuttal if
a person
(or group
of persons
acting in
concert) acquires
10% or
more of
any class
of voting
stock and
either (i) the
corporation has
registered securities under
Section 12
of the Exchange
Act, or (ii)
no person (or
group of persons
acting
in
concert)
will own,
control
or
hold
the
power
to
vote
a
greater
percentage
of that
class of
voting
securities
immediately
after
the
transaction.
The
concept
of
acting
in
concert
is
broad
and
subject
to
certain
rebuttable
presumptions,
including,
among
others,
that
relatives, business
partners, management
officials, affiliates
and others
are presumed
to be acting
in concert
with each other
and their
businesses. The regulations of the FDIC implementing the CBCA are generally
similar to those described above.
The Puerto
Rico Banking
Law requires
the approval
of the
OCIF for
changes in
control of
a Puerto
Rico bank.
See “Puerto
Rico
Banking Law” below for further detail.
Standards for Safety and Soundness
The
FDIA
requires
the
FDIC
and
other
federal
bank
regulatory
agencies
to
prescribe
standards
of
safety
and
soundness.
Bank
regulators
have
various
remedies
available
if
they
determine
that
the
financial
condition,
capital
resources,
asset
quality,
earnings
prospects, management,
liquidity,
or other
aspects of
a banking
organization’s
operations are
unsatisfactory.
The regulators
may also
take action
if they
determine that
the banking
organization or
its management
is violating
or has
violated any
law or
regulation. The
regulators
have
the
power
to,
among
other
things,
prohibit
unsafe
or
unsound
practices,
require
affirmative
actions
to
correct
any
violation
or
practice,
issue
administrative
orders
that
can
be
judicially
enforced,
direct
increases
in
capital,
direct
the
sale
of
subsidiaries
or
other
assets,
limit
dividends
and
distributions,
restrict
growth,
assess
civil
monetary
penalties,
remove
officers
and
directors, and terminate deposit insurance.
Engaging in
unsafe or
unsound practices
or failing
to comply
with applicable
laws, regulations,
and supervisory
agreements could
subject
the
Corporation,
its
subsidiaries,
and
their
respective
officers,
directors,
and
institution-affiliated
parties
to
the
remedies
described above,
and other
sanctions. In
addition, the
FDIC may
terminate a
bank’s
deposit insurance
upon a
finding that
the bank’s
17
financial condition is unsafe or unsound
or that the bank has engaged in unsafe
or unsound practices or has violated
an applicable rule,
regulation, order, or condition enacted
or imposed by the bank’s regulatory
agency.
Brokered Deposits
FDIC regulations
adopted
under the
FDIA govern
the receipt
of brokered
deposits by
banks. Well
-capitalized
institutions are
not
subject
to
limitations
on
brokered
deposits,
while
adequately-capitalized
institutions
are
able
to
accept,
renew
or
rollover
brokered
deposits only
with a
waiver from
the FDIC
and subject
to certain
restrictions on
the interest
paid on
such deposits.
Undercapitalized
institutions
are
not
permitted
to
accept
brokered
deposits.
In
October
2020,
the
FDIC
adopted
revisions
to
its
brokered
deposit
regulations that became
effective on April
1, 2021, with
full compliance extended
to January 1,
2022. For brokered
deposits, the final
rule established
a new framework
for analyzing
certain parts of
the “deposit
broker” definition,
including a
new interpretation
for the
“primary purpose” exception and the
business relationships that meet the exception.
Pursuant to this revision, during the fourth
quarter
of 2021, certain non-maturity deposits previously reported as brokered
deposits were recharacterized as non-brokered deposits.
COVID-Related Regulatory Activities
During 2020, the federal
banking agencies took several
actions to mitigate the
stress on regulated banks
resulting from the COVID-
19
pandemic.
These
actions
were
generally
designed
to
facilitate
the
ability
of
banks
to
provide
responsible
credit
and
liquidity
to
businesses and individuals
affected by
the COVID-19 pandemic,
and mitigate the
distorting effects
under regulatory
capital and other
requirements
resulting
from
the
pandemic.
In
addition
to
the
CECL
regulatory
capital
relief
discussed
above,
the
banking
agencies
adopted regulations
that, among
other things:
neutralized the
regulatory capital
and liquidity
effects
of banks
participating
in certain
COVID-related
Federal
Reserve
liquidity
facilities;
deferred
appraisal
and
valuation
requirements
after
the
closing
of
certain
residential
and
commercial
real
estate
transactions;
provided
temporary
relief
for
banks
from
the
FDIC’s
audit
and
reporting
requirements
for banks
that experienced
large
cash inflows
resulting
from participation
in the
SBA’s
PPP and
other COVID-related
facilities, or
otherwise resulting
from the
effects of
government stimulus
efforts.
These regulatory
actions were
taken in
conjunction
with
federal
financial
regulatory
efforts
to
encourage
banks
and
other
depositories
to
provide
responsible
credit
and
other
financial
assistance to consumers and small businesses in response to the pandemic.
Puerto Rico Banking Law
As
a
commercial
bank
organized
under
the
laws
of
the
Commonwealth
of
Puerto
Rico,
FirstBank
is
subject
to
supervision,
examination and regulation by the
commissioner of OCIF (the “Commissioner”)
pursuant to the Puerto Rico
Banking Law of 1933, as
amended (the “Banking Law”).
The Banking Law
contains various provisions
relating to FirstBank
and its affairs,
including its incorporation
and organization,
the
rights and responsibilities of
its directors, officers and
stockholders and its corporate powers,
lending limitations, capital requirements,
and investment requirements. In addition,
the Commissioner is given extensive rule-making
power and administrative discretion under
the Banking Law.
The Banking Law requires
every bank to maintain
a legal reserve, which shall
not be less than
20% of its demand
liabilities, except
government deposits (federal,
state and municipal) that
are secured by actual
collateral. The reserve is required
to be composed of
any
of
the
following
securities
or
a
combination
thereof:
(i) legal
tender
of
the
United
States;
(ii) checks
on
banks
or
trust
companies
located in any
part of Puerto
Rico that are
to be presented
for collection during
the day following
the day on
which they are
received;
(iii) money deposited
in other
banks provided
said deposits
are authorized
by the
Commissioner and
subject to
immediate collection;
(iv) federal
funds
sold
to any
Federal
Reserve
Bank
and
securities
purchased
under
agreements to
resell
executed
by the
bank
with
such funds
that are
subject to
be repaid
to the
bank on
or before
the close
of the
next
business day;
and
(v) any other
asset that
the
Commissioner identifies from time to time.
Section
17
of
the
Banking
Law
permits
Puerto
Rico
commercial
banks
to
make
loans
to
any
one
person,
firm,
partnership
or
corporation in an aggr
egate amount of up
to 15% of the sum
of: (i) the bank’s
paid-in capital; (ii) the bank’s
reserve fund; (iii) 50% of
the bank’s
retained earnings, subject
to certain limitations;
and (iv) any other
components that the
Commissioner may determine
from
time to time. If such loans are secured by
collateral worth at least 25% of the amount of the
loan, the aggregate maximum amount may
reach 33.33% of
the sum of
the bank’s
paid-in capital, reserve
fund, 50% of
retained earnings, subject
to certain limitations,
and such
other components
that the
Commissioner may
determine from
time to
time. There
are no
restrictions under
the Banking
Law on
the
amount of loans that may
be wholly secured by
bonds, securities and other
evidences of indebtedness of
the government of the
United
States,
or
of
the
Commonwealth
of
Puerto
Rico,
or
by
bonds,
not
in
default,
of
municipalities
or
instrumentalities
of
the
Commonwealth of Puerto Rico.
The Banking Law
requires that Puerto
Rico commercial banks prepare
each year a balance
summary of their
operations and submit
such balance
summary
for approval
at a
regular meeting
of stockholders,
together with
an explanatory
report thereon.
The Banking
18
Law also requires
that at least
10% of the
yearly net income
of a Puerto
Rico commercial bank
be credited annually
to a reserve
fund
until such reserve fund is in amount equal to the total paid-in-capital of the bank.
The
Banking
Law
also
provides
that
when
the
expenditures
of
a
Puerto
Rico
commercial
bank
are
greater
than
its
receipts,
the
excess of the expenditures
over receipts must be
charged against the
undistributed profits of the
bank, and the balance,
if any,
charged
against
the
reserve
fund,
as a
reduction
thereof.
If
there
is no
reserve
fund
sufficient
to cover
such balance
in
whole or
in
part,
the
outstanding amount
must be
charged against
the capital
account and
no dividend
may be declared
until said
capital has
been restored
to its original amount and the amount in the reserve fund equals 20% of the original
capital.
The Finance Board, which
is composed of nine members
from enumerated Puerto Rico
Government agencies, instrumentalities and
public
corporations,
including
the
Commissioner,
has
the
authority
to
regulate
the
maximum
interest
rates
and
finance
charges
that
may be
charged on
loans to
individuals
and unincorporated
businesses in
Puerto Rico.
The current
regulations of
the Finance
Board
provide that the applicable
interest rate on loans to
individuals and unincorporated
businesses, including real estate
development loans
but excluding certain
other personal and
commercial loans
secured by mortgages
on real estate
properties, is
to be determined
by free
competition. Accordingly,
the regulations do
not set a maximum
rate for charges
on retail installment
sales contracts, small
loans, and
credit card purchases. Furthermore, there is no
maximum rate set for installment sales contracts involving
motor vehicles, commercial,
agricultural and industrial equipment, commercial electric appliances and
insurance premiums.
International Banking Center Regulatory Act of Puerto Rico (“IBE Act 52”)
The business and operations
of FirstBank International Branch
(“FirstBank IBE” or the
“IBE division of FirstBank”)
and FirstBank
Overseas Corporation (the IBE
subsidiary of FirstBank) are subject
to supervision and regulation
by the Commissioner.
FirstBank and
FirstBank
Overseas
Corporation
were
created
under
Puerto
Rico
Act
52-1989,
as
amended,
known
as
the
“International
Banking
Center
Regulatory
Act”
(the
IBE
Act
52),
which
provides
for
total
Puerto
Rico
tax
exemption
on
net
income
derived
by
an
IBE
operating in
Puerto Rico
on the specific
activities identified
in the
IBE Act
52. 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. Under
the IBE Act 52, certain
sales, encumbrances, assignments, mergers,
exchanges or transfers of shares,
interests or participation(s) in the
capital
of
an
IBE
may
not be
initiated
without
the
prior
approval
of the
Commissioner.
The
IBE
Act
52
and
the regulations
issued
thereunder
by
the
Commissioner
(the
“IBE
Regulations”)
limit
the
business
activities
that
may
be
carried
out
by
an
IBE.
Such
activities are limited in part to persons and assets located outside of Puerto
Rico.
Pursuant to
the IBE Act
52 and the
IBE Regulations,
each of FirstBank
IBE and FirstBank
Overseas Corporation
must maintain
in
Puerto
Rico
books
and
records
of
its
transactions
in
the
ordinary
course
of
business.
FirstBank
IBE
and
FirstBank
Overseas
Corporation
are also
required to
submit to
the Commissioner
quarterly
and annual
reports of
their financial
condition and
results of
operations, including annual audited financial statements.
The IBE Act
52 empowers
the Commissioner
to revoke
or suspend, after
notice and hearing,
a license issued
thereunder if,
among
other things, the IBE fails to
comply with the IBE Act 52, the IBE
Regulations or the terms of its license, or
if the Commissioner finds
that the business or affairs of the IBE are conducted in a manner
that is not consistent with the public interest.
In 2012, the Puerto Rico
government approved Act Number
273 (“Act 273”).
Act 273 replaces, prospectively,
IBE Act 52 with the
objective of
improving the
conditions for
conducting international
financial transactions
in Puerto Rico.
An IBE
existing on
the date
of approval
of Act
273, such
as FirstBank
IBE and
FirstBank Overseas
Corporation, can
continue operating
under IBE
Act 52,
or it
can
voluntarily
convert
to
an
International
Financial
Entity
(“IFE”)
under
Act
273
so
it
may
broaden
its
scope
of
Eligible
IFE
Activities, as defined
below,
and obtain
a grant of
tax exemption under
Act 273. As
of the date
of the issuance
of this Annual
Report
on Form 10-K, FirstBank IBE and FirstBank Overseas Corporation
are operating under IBE Act 52.
19
IFEs
are
licensed
by
the
Commissioner
and
authorized
to conduct
certain
Act
273
specified
financial
transactions
(“Eligible
IFE
Activities”). Once licensed, an
IFE can request a grant
of tax exemption (“Tax
Grant”) from the Puerto Rico
Department of Economic
Development
and Commerce,
which will
enumerate
and secure
the following
tax benefits
provided by
Act 273
as contractual
rights
(
i.e.
, regardless of future changes in Puerto Rico law) for a 15-year period:
(i)
to the IFE:
●
a fixed 4% Puerto Rico income tax rate on the net income derived by the IFE from
its Eligible IFE Activities; and
●
full property and municipal license tax exemptions on such activities.
(ii)
to its shareholders:
●
6% income tax rate on distributions to Puerto Rico resident
shareholders of earnings and profits derived from the Eligible IFE
Activities; and
●
full Puerto Rico income tax exemption on such distributions to non-Puerto
Rico resident shareholders.
The primary purpose of IFEs
is to attract Unites States and
foreign investors to Puerto Rico.
Consequently,
Act 273 authorizes IFEs
to engage
in traditional
banking and
financial transactions,
principally
with non-residents
of Puerto
Rico. Furthermore,
the scope
of
Eligible IFE Activities encompasses a wider variety of transactions than
those previously authorized to IBEs.
Act
187,
as
amended,
enacted
on
November
17,
2015,
requires
an
IBE
to
obtain
from
the
Commissioner
a
Certificate
of
Compliance every two years that certifies its compliance with the provisions
of IBE Act 52.
Puerto Rico Income Taxes
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,
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.
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
in
Puerto
Rico,
which
has
resulted
mainly
from
investments
in
government
obligations
and
MBS generally
exempt
from
U.S. and
Puerto
Rico
income
taxes and
from
doing business
through an
IBE unit
of the
Bank, and
through the
Bank’s
subsidiary,
FirstBank Overseas
Corporation, whose
interest
income and gain on sales is exempt from Puerto Rico income taxation.
United States Income Taxes
As
a
Puerto
Rico
corporation,
First
BanCorp.
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.
Insurance Operations Regulation
FirstBank Insurance Agency
is registered as an
insurance agency with
the Insurance Commissioner of
Puerto Rico and is subject
to
regulations
issued
by
the
Insurance
Commissioner
and
the
Division
of
Banking
and
Insurance
Financial
Regulation
in
the
USVI
relating
to,
among
other
things,
the
licensing
of
employees
and
sales
and
solicitation
and
advertising
practices,
and
by
the
Federal
Reserve as to certain consumer protection provisions mandated by
the Gramm-Leach-Bliley Act and its implementing regulations.
Mortgage Banking Operations
In
addition
to
FDIC
and
CFPB
regulations,
FirstBank
is
subject
to
the
rules
and
regulations
of
the
FHA,
VA,
FNMA,
FHLMC,
GNMA, and
the U.S.
Department of
Housing and
Urban Development
(“HUD”)
with respect
to originating,
processing,
selling and
servicing mortgage
loans and the
issuance and
sale of MBS.
Those rules
and regulations, among
other things, prohibit
discrimination
and
establish
underwriting
guidelines
that
include
provisions
for
inspections
and
appraisals,
require
credit
reports
on
prospective
borrowers
and
fix
maximum
loan
amounts,
and,
with
respect
to
VA
loans,
fix
maximum
interest
rates.
Moreover,
lenders
such
as
FirstBank are required
annually to submit
audited financial statements
to the FHA, VA,
FNMA, FHLMC, GNMA and
HUD and each
regulatory entity
has its
own financial
requirements. FirstBank’s
affairs are
also subject
to supervision
and examination
by the
FHA,
VA,
FNMA,
FHLMC,
GNMA
and
HUD
at
all
times
to
assure
compliance
with
applicable
regulations,
policies
and
procedures.
20
Mortgage origination activities are subject
to, among other requirements, the Equal
Credit Opportunity Act, TILA and
the RESPA
and
the
regulations
promulgated
thereunder
that,
among
other
things,
prohibit
discrimination
and
require
the
disclosure
of certain
basic
information to
mortgagors concerning
credit terms
and settlement
costs. FirstBank
is licensed
by the
Commissioner under
the Puerto
Rico
Mortgage
Banking
Law,
and,
as
such,
is
subject
to
regulation
by
the
Commissioner,
with
respect
to,
among
other
things,
licensing requirements and the establishment of maximum origination
fees on certain types of mortgage loan products.
WEBSITE ACCESS TO REPORT
The Corporation
makes available
annual reports
on Form
10-K, quarterly
reports on Form
10-Q, and
current reports
on Form
8-K,
and amendments to
those reports, and proxy
statements on Schedule 14A,
filed or furnished pursuant
to Sections 13(a), 14(a)
or 15(d)
of the Exchange Act,
free of charge on
or through its internet
website at www.1firstbank.com
(under “Investor Relations”),
as soon as
reasonably practicable
after the
Corporation electronically
files such
material with,
or furnishes
it to,
the SEC.
The SEC
maintains a
website that
contains
reports, proxy
and information
statements, and
other information
regarding issuers
that file
electronically
with
the SEC at www.sec.gov.
The
Corporation
also
makes
available
its
Corporate
Governance
Guidelines
and
Principles,
the
charters
of
the
Audit,
Asset/Liability,
Compensation
and
Benefits,
Credit,
Risk,
Trust,
and
Corporate
Governance
and
Nominating
Committees
and
the
documents listed below,
free of charge on or through its internet website at www.fbpinvestor.com
(under Corporate Governance):
•
Code of Ethics for CEO and Senior Financial Officers
•
Code of Ethical Conduct applicable to all employees
•
Independence Principles for Directors
•
2021 ESG Report
•
Sustainability Policy
The Corporate
Governance Guidelines and
Principles and the
aforementioned charters
and documents may
also be obtained
free of
charge
by
sending
a written
request
to
Mrs. Sara
Alvarez Cabrero
,
Executive
Vice
President,
General
Counsel
and
Secretary
of the
Board, PO Box 9146, San Juan, Puerto Rico 00908.
Website addresses
referenced in this Annual
Report on Form 10-K are provided
as textual references and for
convenience only,
and
the content on
the referenced websites does
not constitute a
part of this Annual
Report on Form 10-K
or any other report
or document
that the Corporation files with or furnishes to the SEC.
21
Item 1A.
Risk Factors
Below
is a
discussion
about material
risks
and
uncertainties that
could
impact
the Corporation’s
businesses,
results
of operations
and financial condition,
including by causing
the Corporation’s
actual results to differ
materially from those projected
in any forward-
looking statements. Other risks
and uncertainties, including those
not currently known to the
Corporation or its management and
those
that
the
Corporation
or
its management
currently
deems
to
be
immaterial,
could
also
materially
adversely
affect
the Corporation
in
future periods. Thus, the following
should not be considered a complete
discussion of all of the risks and
uncertainties the Corporation
may face. See the discussion under “Forward-Looking Statements,” in
this Annual Report on Form 10-K.
RISKS RELATING TO
THE BUSINESS ENVIRONMENT AND OUR INDUSTRY
The impacts
of rising
interest rates
and inflation
may reduce
demand for
new loan
originations and
refinancings and
increase
competition for borrowers, thus reducing net interest income.
Shifts in
short-term
interest rates
have
reduced net
interest income
in the
past and,
in the
future, may
reduce net
interest income,
which
is the
principal
component
of our
earnings. Net
interest income
is the
difference
between
the amounts
received by
us on
our
interest-earning assets and the
interest paid by us on
our interest-bearing liabilities. Differences
in the re-pricing structure of
our assets
and liabilities
may result
in changes
in our
profits when
interest rates
change.
For instance,
higher interest
rates increase
the cost
of
mortgage and
other loans
to consumers
and businesses
and may
reduce future
demand for
such loans,
which may
negatively impact
our
profits
by
reducing
the
amount
of
loan
interest
income
due
to
declines
in
volume.
Interest
rates
are
highly
sensitive
to
many
factors that
are beyond
our control,
including general
economic conditions,
inflationary trends,
changes in
government spending
and
debt issuances and
policies of various
governmental and
regulatory agencies,
in particular,
the Federal Reserve.
Throughout 2022
the
Federal Reserve raised
the target range
for the federal
funds rate on seven
separate occasions and
has indicated that
ongoing increases
may be appropriate.
Additionally,
basis risk is
the risk of
adverse consequences resulting
from unequal changes
in the difference,
also referred to
as the
“spread” or
basis, between
the rates
for two
or more
different
instruments with
the same
maturity and
occurs when
market rates
for
different financial
instruments or
the indices
used to
price assets and
liabilities change
at different
times or
by different
amounts. For
example, the interest expense
for liability instruments might
not change by the
same amount as interest income
received from loans
or
investments.
To
the
extent
that
the
interest
rates
on
loans
and
borrowings
change
at
different
rates
and
by
different
amounts,
the
margin between
our variable rate-based
assets and the cost
of the interest-bearing
liabilities might be
compressed and adversely
affect
net interest income.
Further,
rising interest
rates reduce
the value
of our
fixed-rate securities.
Any unrealized
loss from
these portfolios
impacts other
comprehensive
income, stockholders’
equity,
and the
tangible common
equity ratio.
Any realized
loss from
these portfolios
impacts
regulatory capital ratios.
Changes in prepayments may adversely affect net interest income.
Net
interest
income
could
also
be
affected
by
prepayments
of
MBS.
Generally,
when
rates
rise,
prepayments
of
principal
and
interest
will
decrease,
and
the
duration
of
MBS
securities
will
increase.
Conversely,
when
rates
fall,
prepayments
of
principal
and
interest
will
increase,
and
the
duration
of
mortgage-backed
securities
will
decrease.
Such
acceleration
in
the
prepayments
of
MBS
would lower yields on
these securities, as the amortization
of premiums paid upon
the acquisition of these securities
would accelerate.
Conversely,
acceleration in
the prepayments
of MBS
would increase
yields on
securities purchased
at a
discount, as
the accretion
of
the discount
would
accelerate. Also,
net interest
income
in future
periods might
be affected
by our
investment
in callable
securities
because decreases in interest rates might prompt the early redemption of such securities.
The transition
from LIBOR
to alternative
rates and
other potential
interest rate
reforms may
affect the
interest rates
we pay
or
receive.
A transition away
from the widespread
use of LIBOR to
alternative rates is
underway and will
continue until full
cessation of this
reference
rate.
These
changes
may
cause
such
rates
to
perform
differently
than
in
the
past,
or
to
disappear
entirely,
or
have
other
consequences which cannot be predicted.
A group
of market
participants convened
by the
Federal
Reserve,
the
Alternative
Reference
Rate Committee
(the
“ARRC”),
has
selected
the
Secured
Overnight
Financing
Rate
(“SOFR”)
as
its
recommended
alternative
to
LIBOR.
The
Federal
Reserve
Bank
of
New
York
started
to
publish
SOFR
in
April
2018. SOFR
is
a
broad
measure
of
the
cost
of
overnight
borrowings
collateralized
by
Treasury
securities
that
was
selected
by
the
ARRC
due
to
the
depth
and
robustness
of
the
U.S.
Treasury
repurchase
market.
The
passage
of
the
Adjustable
Interest
Rate
Act
(the
“LIBOR
Act”)
by
U.S.
Congress,
and
the
Federal
Reserve’s
implementing
rule,
should decrease
the risk
of contracts
that are
not remediated
prior to
the cessation
deadline by
providing the
terms for
a transition
to
SOFR.
22
The
market
transition
away
from
LIBOR
to
an
alternative
reference
rate,
such
as
SOFR,
is
complex
and
could
have
a
range
of
adverse effects on our business, financial condition, and results of operations.
In particular, any such transition could:
●
Adversely
affect
the
interest
rates
received
or
paid
on,
the
revenue
and
expenses
associated
with
or
the
value
of
the
Corporation’s
LIBOR-based
assets
and
liabilities,
which
include
certain
variable
rate
loans,
primarily
commercial
and
construction
loans,
private
label
MBSs,
the
Corporation’s
junior
subordinated
debentures,
and
certain
other
financial
arrangements such
as derivatives.
As of
December 31,
2022, the
most significant
of the Corporation’s
LIBOR-based assets
and liabilities consisted of
$1.4 billion of variable-rate
commercial and construction
loans (including unused commitments),
$124.4
million
of
Puerto
Rico
municipalities
bonds
held
as
part
of
the
Corporation’s
held-to-maturity
debt
securities
portfolio, $44.6
million of
U.S. agencies
debt securities
and private
label MBS
held as
part of
the Corporation’s
available-
for-sale debt securities portfolio, and $183.8 million of junior subordinated
debentures;
●
Prompt
inquiries
or
other
actions
from
regulators
in
respect
of
the
Corporation’s
preparation
and
readiness
for
the
replacement of LIBOR with an alternative reference rate; and
●
Result in
disputes,
litigation
or
other
actions
with
counterparties
regarding
the
interpretation
and
enforceability
of
certain
fallback language in LIBOR-based contracts.
The
transition
away
from
LIBOR
to
an
alternative
reference
rate
has
required
the
transition
to,
or
development
of,
appropriate
systems and analytics
to effectively
transition the Corporation’s
risk management and
other processes from
LIBOR-based products
to
those based
on the
applicable alternative
reference rate,
such as
SOFR. The
LIBOR Transition
Working
Group (“LTWG”),
which is
composed
by
officers
of
the
major
areas
affected
such
as
Treasury,
Legal,
Corporate
Loans,
Credit,
Operations,
Systems,
Asset-
Liability Management, Risk, Accounting,
Financial Reporting, Public Relations, and
Strategic Planning, are in charge
of executing the
LIBOR transition workplan.
The LTWG
is overseen by the Corporation’s
Management Investments &
Asset-Liability Committee and
the Board
of Directors
Asset-Liability
Committee.
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.
There
can
be
no
guarantee
that
these
efforts
will
successfully mitigate the operational risks associated with the transition away
from LIBOR to an alternative reference rate.
The manner and impact of the transition from LIBOR to an alternative reference
rate, as well as the effect of these developments on
our funding costs, loan and investment securities portfolios, asset-liability management,
and business, is uncertain.
Difficult market
and general
economic conditions
have affected
the financial
industry and
may continue
to adversely
affect us
in the future.
Given that most of our business is in Puerto Rico and the
U.S. and given the degree of interrelation
between Puerto Rico’s economy
and that
of the
U.S., we
are exposed
to downturns
in the
U.S. economy,
including factors
such as
employment levels
in the
U.S. and
real estate
valuations.
The deterioration
of these
conditions adversely
affected
us in
the past
and in
the future
could adversely
affect
the
credit
performance
of
mortgage
loans,
and
result
in
significant
write-downs
of
asset
values
by
financial
institutions,
including
government-sponsored entities as well as major commercial banks
and investment banks.
In particular, we may face the following
risks:
●
Our ability
to assess the
creditworthiness of
our customers
may be impaired
if the models
and approaches
we use to
select,
manage, and underwrite the loans become less predictive of future behaviors.
●
The
models
used
to
estimate
losses
inherent
in
the
credit
exposure,
particularly
those
under
CECL,
require
difficult,
subjective, and
complex judgments,
including forecasts
of economic
conditions and
how these
economic predictions
might
impair
the
ability
of
the borrowers
to
repay
their
loans, which
may
no longer
be
accurately estimated
and
which
may,
in
turn, impact the reliability of the models.
●
Our
ability
to
borrow
from
other
financial
institutions
or
to
engage
in
sales
of
mortgage
loans
to
third
parties
(including
mortgage
loan
securitization
transactions
with
government-sponsored
entities
and
repurchase
agreements)
on
favorable
terms, or at
all, could
be adversely
affected by
further disruptions
in the capital
or credit
markets or
other events,
including
deteriorating investor expectations.
●
Competitive dynamics
in the
industry could
change as
a result
of strategic
growth opportunities
in connection
with current
market conditions.
23
●
Expected
future
regulation
of
our
industry
may
increase
our
compliance
costs
and
limit
our
ability
to
pursue
business
opportunities.
●
There may be downward pressure on our stock price.
Any deterioration
of economic
conditions in
the U.S.
and disruptions
in the
financial markets
could adversely
affect our
ability to
access capital,
our business,
financial condition,
and results
of operations.
Unfavorable or
uncertain economic
and market
conditions
have
been
and
could
cause
declines
in
economic
growth,
business
activity
or
investor
or
business
confidence;
limitations
on
the
availability or
increases in
the cost
of credit
and capital;
increases in inflation
or interest rates;
high unemployment;
natural disasters;
epidemics and pandemics (such as the COVID-19 pandemic); or a combination
of these or other factors.
Additionally,
the
residential
mortgage
loan
origination
business
is
impacted
by
home
values
and
has
historically
been
cyclical,
enjoying periods of strong growth and profitability followed by periods
of shrinking volumes and industry-wide losses. During periods
of rising interest
rates, including the
series of interest rate
increases that occurred
in 2022, the refinancing
of many mortgage
products
tends to decrease as the economic incentives for borrowers to refinance their
existing mortgage loans are reduced.
Any sustained
period of
increased delinquencies,
foreclosures, or
losses could
adversely affect
our ability
to sell
loans, the
prices
we receive
for loans,
the values
of mortgage
loans held
for sale,
or residual
interests in
securitizations, which
could adversely
affect
our
financial
condition
and
results
of
operations.
In
addition,
any
additional
material
decline
in
real
estate
values
would
further
weaken the loan-to-value
ratios and increase
the possibility of
loss if a
borrower defaults. In
such event, we
will be subject
to the risk
of loss on such real estate arising from borrower defaults to the extent not covered
by third-party credit enhancement.
The currently
evolving situation
related to
the ongoing
COVID-19 pandemic
may impact
the Corporation’s
business, financial
condition and results of operations.
The ongoing COVID-19
pandemic created a global
public health crisis that has
resulted in challenging
economic conditions for our
business
and
is
likely
to
continue
to
do
so.
The
economic
impact
of
the
COVID-19
pandemic
has
caused
significant
volatility
and
disruption
in the
financial markets
of Puerto
Rico and
the other
markets in
which the
Corporation operates.
Further,
the uncertainty
surrounding
future
economic
conditions
has
challenged
management's
ability
to
estimate
the
pandemic's
impact
on
credit
quality,
revenues, and assets values.
The Corporation
may also
face residual
risk related
to its
participation in
the SBA PPP
program established
by the
CARES Act
of
2020.
The Corporation’s
participation
in
the
SBA PPP
and
any
other
such
programs
or
stimulus
packages
may
give
rise to
claims,
including
by governments,
regulators,
or customers
or through
class action
lawsuits, or
judgments
against the
Corporation
that
may
result in the
payment of damages
or the imposition
of fines, penalties
or restrictions by
regulatory authorities, or
result in reputational
harm.
The
occurrence
of
any
of
the
foregoing
could
have
a
material
adverse
effect
on
the
Corporation’s
results
of
operations
or
financial condition.
The
full
extent
to which
the COVID-19
pandemic
further
impacts
our
business, results
of
operations,
and
financial
condition,
as
well
as
our
regulatory
capital
and
liquidity
ratios,
will
depend
on
future
developments,
which
are
highly
uncertain
and
cannot
be
predicted, including
the duration of
the COVID-19
pandemic and its
impact on
the global economy,
as well as
any future
resumption
of responsive
actions taken by
governmental authorities
and other third
parties. Even after
the COVID-19
pandemic has subsided,
we
may continue
to experience materially
adverse impacts to
our business and
our results of
operations as
a result of
its global economic
impact.
We operate in a highly
competitive industry and market area.
We
face
substantial
competition
in
all
areas
of
our
operations
from
a
variety
of
different
competitors,
including
other
banks,
insurance
companies,
mortgage
banking
companies,
small
loan
companies,
automobile
financing
companies,
leasing
companies,
brokerage
firms
with
retail
operations,
credit
unions,
certain
retailers,
fintech
companies
and
digital
platforms.
The
Corporation’s
ability
to
compete
effectively
depends
on
the
relative
performance
of
its
products,
the
degree
to
which
the
features
of
its
products
appeal
to
customers,
and
the
extent
to
which
the
Corporation
meets
clients’
needs
and
expectations.
The
Corporation’s
ability
to
compete also depends on its ability to attract and retain professional and other
personnel, and on its reputation.
The
Corporation
encounters
intense competition
in attracting
and
retaining
deposits
and
in
its consumer
and
commercial
lending
activities. The
Corporation
competes for
loans with
other financial
institutions.
The Corporation’s
ability to
originate loans
depends
primarily on the rates and
fees charged and
the service it provides to
its borrowers in making
prompt credit decisions. There
can be no
assurance that
in the
future the
Corporation will
be able
to increase
its deposit
base, originate
loans in
the manner
or on
the terms
on
which it has done so in the past, or otherwise compete effectively.
24
The Corporation’s
credit quality and
the value of the
portfolio of Puerto
Rico government securities
has been, and
in the future
may
be,
adversely
affected
by
Puerto
Rico’s
economic
condition,
and
may
be
affected
by
actions
taken
by
the
Puerto
Rico
government or the PROMESA oversight board to address the ongoing fiscal and
economic challenges in Puerto Rico.
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.
On
November
10,
2022,
the
Puerto
Rico
Planning
Board
(“PRPB”)
presented
the
Economic
Report
to
the
Governor,
which
provides
an
analysis
of
Puerto
Rico’s
economy
during
fiscal
year
2021
and
a
short-term
forecast
for
fiscal
years
2022
and
2023.
According to the
PRPB, Puerto Rico’s
real gross national
product (“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
report, 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
disaster
relief funding
deployed
over
the period.
To
a
lesser extent,
growth
in
fiscal
year
2021
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
fiscal years
2022 and
2023, the
Puerto Rico
economy is forecasted to grow 4.0% and 0.7% in real
terms, according to the PRPB’s baseline
projection. Among the key assumptions
included in
this forecast
is the
positive impact
expected from
the ongoing
disbursements of
disaster recovery
funds ($2.8
billion and
$4.0 billion
in fiscal
years 2022
and 2023,
respectively),
as well
as the
stimulus from
remaining pandemic
relief funds
($1.1 billion
and $632
million in
fiscal years
2022 and
2023, respectively),
and the inclusion
of Puerto
Rico in
the Earned
Income Tax
Credit and
the Child Tax Credit
since 2021.
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 2022
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
benefited from
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).
As of December
31, 2022, the
Corporation had $338.9
million of direct
exposure to the
Puerto Rico government,
its municipalities
and public corporations. As of December 31, 2022, approximately
$183.4 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
$114.0
million
of
loans
and
obligations which are supported by
one or more specific sources of municipal
revenues. 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. In
addition
to
municipalities,
the
total
direct
exposure
also
included
$10.8
million
in
loans
to
an
affiliate
of
PREPA,
$27.4
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
PR
Housing
Finance
Authority
(“PRHFA”),
at
an
amortized
cost
of
$3.3
million
as
part
of
its
available-for-sale debt securities portfolio (fair value of $2.2 million as of
December 31, 2022).
In
addition,
as
of
December
31,
2022,
the
Corporation
had
$84.7
million
in
exposure
to
residential
mortgage
loans
that
are
guaranteed
by the
PRHFA.
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 regulations adopted by
the PRHFA
require the
establishment of
adequate reserves
to guarantee
the solvency
of its
mortgage loans
insurance program
As of
June 30,
2021, the
most
recent date
as of
which information
is available,
the PRHFA
had a
liability of
approximately $5
million as
an estimate
of the
losses
inherent in the portfolio.
As
of
December
31,
2022,
the
Corporation
had
$2.3
billion
of public
sector
deposits
in
Puerto
Rico.
Approximately
24%
of
the
public sector deposits as of
December 31, 2022 was from municipalities
and municipal agencies in Puerto
Rico and 76% was from
the
public corporation, the Puerto Rico central government and agencies, and
U.S. federal government agencies in Puerto Rico.
Instability in economic conditions,
delays in the receipt of
disaster relief funds allocated
to Puerto Rico, and
the potential impact on
asset
values
resulting
from
past
or
future
natural
disaster
events,
when
added
to
Puerto
Rico’s
ongoing
fiscal
challenges,
could
materially adversely affect our business, financial condition, liquidity,
results of operations and capital position.
25
A
deterioration
in
economic
conditions
in
the
U.S.
Virgin
Islands
and
British
Virgin
Islands
could
harm
our
results
of
operations.
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.
On
March
4,
2022,
the
United
States
Bureau
of
Economic
Analysis
(the
“BEA”)
released
its
estimates
of
gross
domestic
product
(“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.
These decreases
were partly
offset
by an
increase in
private inventory
investment, reflecting
an increase
in crude
oil and
other petroleum
products imported
and stored
in the
islands. In
addition, there
were reductions
in imports
of goods
including consumer
goods and
equipment, and
in imports
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.
Nonetheless,
over
the
past
two
years,
the
USVI
has
been
recovering
from
the
adverse
impact
caused
by
COVID-19
and
has
continued to make progress
on its rebuilding efforts
related to Hurricanes Irma
and Maria in 2017.
According to data published
by the
government,
over
$1.4
billion
in
disaster
recovery
funds
were
disbursed
during
2021
and
2022,
up 22%
from
the
preceding
2-year
period. On the fiscal front, revenues have trended positively
and the USVI Government successfully completed the
restructuring of the
government employee
retirement system. Although
no official
GDP data has
been released
for 2021
and/or 2022, the
aforementioned
developments,
as
well
as
the
positive
trend
reflected
by
key
economic
indicators
such
as
visitor
arrivals,
non-farm
payrolls
and
unemployment rate potentially indicate that the territory has experienced
an overall economic recovery since 2020.
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
December 31,
2022, the
Corporation had
$38.0 million
in loans
to USVI
government and
public corporations,
compared to
$39.2 million as of December 31,
2021. As of December 31, 2022,
all loans were currently performing
and up to date on principal
and
interest payments.
A
deterioration
in
economic
conditions
in
USVI
and
the
BVI
region
could
adversely
affect
our
business,
financial
condition,
liquidity, results of operations
and capital position.
We are subject to ESG risks that
could adversely affect our reputation and the market price of our securities.
The
Corporation
is
subject
to
a
variety
of
risks
arising
from ESG matters. ESG matters
include
climate
risk,
hiring
practices,
the
diversity
of our
work force,
and racial
and
social justice
issues involving
our personnel,
customers
and
third
parties with
whom
we
otherwise do
business. Risks arising
from ESG matters may
adversely affect,
among other things,
our reputation
and the market
price
of our securities.
For
example,
we
may
be
exposed
to
negative
publicity
based
on
the
identity
and
activities
of
those
to
whom
we
lend
and
with
which we
otherwise do
business and
the public’s
view of
the approach
and performance
of our
customers and
business partners
with
respect
to ESG matters.
Any
such
negative
publicity
could
arise
from
adverse
news
coverage
in
traditional
media
and
could
also
spread
through
the
use
of
social
media
platforms.
The
Corporation’s
relationships
and
reputation
with
its
existing
and
prospective
customers
and
third
parties
with
which
we
do
business
could
be
damaged
if
we
were
to
become
the
subject
of
any
such
negative
publicity. This,
in turn,
could have
an adverse
effect
on
our ability
to
attract
and retain
customers
and
employees
and could
have
a
negative impact on our business, financial condition
and results of operations.
Additionally,
concerns over
the long-term
impacts of
climate change
have led
and will
continue to
lead to
governmental efforts
to
mitigate
those
impacts.
Consumers
and
businesses
also
may
change
their
behavior
on
their
own
as
a
result
of
these
concerns.
The
Corporation
and
its
customers
will
need
to
respond
to
new
laws
and
regulations
as
well
as
consumer
and
business
preferences
resulting from climate change concerns.
Finally,
regulatory
authorities,
shareholders,
customers
and
other
stakeholders
are
considering
how
corporations
are
addressing
ESG
issues.
Regulations
already
adopted
or
being
considered
may
expand
mandatory
and
voluntary
reporting,
diligence
and
disclosure on specific ESG topics, such as greenhouse gas
emissions and other climate matters. These requirements
would likely result
in
increased ESG related
compliance
costs,
which
could
result
in
increases
to
our
overall
operational
costs.
Failure
to
adapt
to
or
26
comply
with
regulatory
requirements
or
investor
or
stakeholder
expectations
and
standards
could
negatively
impact
our
reputation,
ability to do business with certain partners, and our stock price.
Our
results
of
operations
could
be
adversely
affected
by
natural
disasters,
political
crises,
negative
global
climate
patterns
or
other catastrophic events.
Natural
disasters, which
nature and
severity may
be impacted
by climate
change,
such as
hurricanes,
floods, extreme
cold
events
and
other
adverse
weather
conditions;
political
crises,
such
as
terrorist
attacks,
war,
labor
unrest,
other
political
instability,
trade
policies
and
sanctions,
including
the
repercussions
of
the
ongoing
conflict
between
Russia
and
Ukraine;
negative
global
climate
patterns, especially
in water
stressed regions;
or other
catastrophic events,
such as
fires or
other disasters
occurring at
our locations,
whether occurring in
Puerto Rico, the U.S., or
internationally,
could cause a significant
adverse effect on the
economy and disrupt our
operations.
Certain areas
in which
our business
is concentrated,
including
Puerto
Rico and
the USVI,
are particularly
susceptible
to
earthquakes, hurricanes,
and major
storms. Further,
climate change
may increase
both the
frequency and
severity of
extreme weather
conditions
and
natural
disasters,
which
may
affect
our
business
operations,
either
in
a
particular
region
or
globally,
as
well
as
the
activities of our
customers. The Corporation
is also not
able to predict
the positive or
negative effects
that future events
or changes to
the U.S. or global economy,
financial markets, or regulatory and business environment could have on
our operations.
Climate change may materially
adversely affect the Corporation's business and results of operations.
Concerns over
the long-term effects
of climate change
have led and
will continue to
lead to governmental
efforts around
the world
to
mitigate
those
impacts.
Consumers
and
businesses
also
may
voluntarily
change
their behavior
as a
result
of
these
concerns.
The
Corporation
and
its
customers
will
need
to
respond
to
new
laws
and
regulations
as
well
as
consumer
and
business
preferences
resulting
from
climate
change
concerns.
The
Corporation
and
its
customers
may
face
cost
increases,
asset
value
reductions
and
operating process
changes. The
impact on
our customers
will likely
vary depending
on their
specific attributes,
including reliance
on
or role in fossil fuel activities. Among the impacts to the Corporation, we could
face reductions in creditworthiness on the part of some
customers
or in
the value
of assets
securing
loans. The
Corporation’s
efforts
to take
these risks
into account
in making
lending and
other
decisions,
including
increasing
our
business
with
climate-responsible
companies,
may
not
be
effective
in
protecting
the
Corporation from the negative impact of new laws and regulations or changes in
consumer or business behavior.
Deterioration in collateral values may result in additional losses.
Our business is affected by the value of the assets securing our loans or underlying
our investments.
We
had a
commercial and
construction loan
portfolio held
for investment
in the
amount of
$5.4 billion
as of
December 31,
2022.
Due to
their nature,
these loans
entail a
higher credit
risk than
consumer and
residential mortgage
loans, since
they are larger
in size,
concentrate
more
risk
in
a
single
borrower
and
are
generally
more
sensitive
to
economic
downturns.
Furthermore,
in
the
case
of
a
slowdown
in the
real estate
market,
it may
be difficult
to dispose
of the
properties
securing
these loans
upon any
foreclosure of
the
properties. We
may incur losses over the near term, either because of continued
deterioration in the quality of loans or because of sales
of
problem
loans,
which
would
likely
accelerate
the
recognition
of
losses. Any
such
losses
could
adversely
impact
our
overall
financial performance and results of operations.
Deterioration
of the
value of
real estate
collateral securing
our construction,
commercial and
residential mortgage
loan portfolios,
whether
located in
Puerto Rico
or elsewhere,
would result
in increased
credit losses. As
of December
31, 2022,
approximately
20%
and 25% of our loan portfolio held for investment consisted of commercial
mortgage and residential real estate loans, respectively.
Whether the collateral
that underlies our
loans is located
in Puerto Rico, the
USVI, the BVI, or
the U.S. mainland,
the performance
of our
loan portfolio
and the
collateral value
backing the
transactions are
dependent upon
the performance
of, and
conditions within,
each
specific
real
estate
market.
As
of
December
31,
2022,
our
commercial
mortgage
and
construction
real
estate
loans
held
for
investment in
the Puerto
Rico and
Virgin
Islands regions
and Florida
region amounted
to $1.9
billion and
$0.6 billion,
respectively,
which constituted 22% of the total loan portfolio held for investment.
We
measure credit
losses for
collateral dependent
loans based
on the
fair value
of the
collateral, which
is generally
obtained from
appraisals, adjusted
for undiscounted
selling costs
as appropriate.
Updated appraisals
are obtained
when we
determine that
loans are
collateral
dependent
and
are
updated
annually
thereafter.
In
addition,
appraisals
are
also
obtained
for
certain
residential
mortgage
loans on a spot
basis based on specific
characteristics, such as delinquency
levels, and age of
the appraisal. The appraised
value of the
collateral may decrease, or we may
not be able to recover collateral at
its appraised value. A significant decline
in collateral valuations
for
collateral
dependent
loans
has
required
and,
in
the
future,
may
require,
increases
in
our
credit
loss
expense
on
loans. Any
such
increase would have an adverse effect on our future financial condition
and results of operations.
27
Labor shortages and constraints in the supply chain could adversely affect
our clients’ operations as well as our operations.
Many
sectors in
Puerto
Rico, the
United
States, the
Virgin
Islands and
around
the world
are experiencing
a shortage
of workers.
Many of our commercial clients have
been impacted by this shortage along with
disruptions and constraints in the supply
chain, which
could
adversely
impact
their
operations
and
could
lead
to
reduced
cash
flow
and
difficulty
in
making
loan
repayments.
The
Corporation’s
industry
has
also
been
affected
by
the
shortage
of
workers,
as
well
as
increasing
wages
for
entry
level
and
certain
professional roles. This may
lead to open positions remaining
unfilled for longer periods of time,
which may affect the level of
service
provided by the Corporation, or a need to increase wages to attract workers.
The failure of other financial institutions could adversely affect
us.
Our ability to engage in
routine financing transactions could
be adversely affected
by future failures of financial
institutions and the
actions and
commercial
soundness of
other financial
institutions. Financial
institutions are
interrelated as
a result of
trading, clearing,
counterparty
and
other relationships.
We
have
exposure
to different
industries
and
counterparties
and
routinely
execute
transactions
with counterparties
in the financial
services industry,
including brokers
and dealers,
commercial banks,
investment banks,
investment
companies and other
institutional clients. In
certain of these transactions,
we are required to
post collateral to secure
the obligations to
the
counterparties.
In the
event
of
a bankruptcy
or
insolvency
proceeding
involving
one of
such counterparties,
we
may
experience
delays in recovering
the assets posted as
collateral, or we
may incur a
loss to the extent
that the counterparty
was holding collateral
in
excess of the obligation to such counterparty or under other circumstances.
In addition, many of these transactions
expose us to credit risk in
the event of a default by our
counterparty or client. The credit
risk
may be exacerbated when
the collateral held by us cannot
be realized or is liquidated
at prices not sufficient
to recover the full amount
of the loan
or derivative
exposure due to
us. Any losses
resulting from
our routine funding
transactions may
materially and adversely
affect our financial condition and results of operations.
RISKS RELATING TO
THE CORPORATION’S
BUSINESS
Certain funding sources may not be available to us and our funding sources may
prove insufficient and/or costly to replace.
FirstBank
relies
primarily
on
customer
deposits,
the
issuance
of
brokered
CDs,
and
advances
from
the
FHLB
of
New
York
to
maintain its lending
activities and to replace
certain maturing liabilities.
As of December 31,
2022, we had $105.8
million in brokered
CDs outstanding,
representing approximately
1% of our
total deposits. Approximately
$55.7 million, or
53% in brokered
CDs mature
over the twelve months
ending December 31, 2023, and
the average remaining term to
maturity of the brokered CDs outstanding
as of
December 31, 2022 was approximately 1.6
years. None of these brokered CDs are callable at the Corporation’s
option. In addition, the
Corporation had
$675 million
of FHLB
advances outstanding
as of
December 31,
2022, of
which $475.0
million are
short-term and
are scheduled
to mature
within the
next three
months and
$200 million
are long-term
and are
scheduled to
mature over
three to
five
years.
Although FirstBank has historically been
able to replace maturing deposits and
advances, we may not be able
to replace these funds
in the future if our financial condition or general
market conditions change. If we are unable to maintain access to funding
sources, our
results of operations and liquidity would be adversely affected.
Alternate
sources
of
funding
may
carry
higher
costs
than
sources
currently
utilized.
If
we
are
required
to
rely
heavily
on
more
expensive funding sources, profitability would be adversely affected.
We
may
determine
to
seek
debt
financing
in
the
future
to
achieve
our
long-term
business
objectives.
Additional
borrowings,
if
sought, may not be available to us, or if available, may
not be on acceptable terms. The availability of additional
financing will depend
on
a
variety
of
factors,
such
as
market
conditions,
the
general
availability
of
credit,
our
credit
ratings
and
our
credit
capacity.
The
recent rising interest
rate environment has
and may continue
to increase the
borrowing costs associated
with any additional
financing.
In addition, FirstBank
may seek to sell
loans as an additional
source of liquidity.
If additional financing
sources are unavailable or
are
not available on acceptable terms, our profitability and future prospects could
be adversely affected.
Downgrades in our credit ratings could further increase the cost of borrowing
funds.
The
Corporation’s
ability to
access new
non-deposit
sources of
funding
could be
adversely
affected
by downgrades
in our
credit
ratings. The Corporation’s
liquidity is to a
certain extent contingent upon
its ability to obtain
external sources of funding
to finance its
operations. The
Corporation’s
current credit
ratings and
any downgrades
in such
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
results
of
operations.
28
We depend on
cash dividends from FirstBank to meet our cash obligations.
As a holding company,
dividends from FirstBank, our banking subsidiary,
have provided a substantial portion of our cash flow used
to
service
the
interest
payments
on
our
TRuPs
and
other
obligations.
FirstBank
is
limited
by
law
in
its
ability
to
make
dividend
payments
and other
distributions
to us
based
on its
earnings and
capital position.
A failure
by
FirstBank
to generate
sufficient
cash
flow to make dividend payments to us may have a negative impact on our results of
operations and financial condition.
Our level of non-performing assets may adversely affect our future results of
operations.
Non-performing
assets decreased
by $28.9
million to
$129.2 million
as of
December 31,
2022, or
18%, from
$158.1 million
as of
December 31,
2021. As of
December 31, 2022,
we continued to
have a relevant
amount of nonaccrual
loans, even though
nonaccrual
loans decreased
by $20.8
million to
$89.9 million
as of
December 31,
2022, or
19%, from
$110.7
million as
of December
31, 2021.
Our
nonaccrual
loans represent
approximately
1% of
our $11.6
billion
loan
portfolio
as of
December 31,
2022.
If we
are unable
to
effectively maintain the quality
of our loan portfolio, our financial
condition and results of operations
may be materially and adversely
affected.
Our allowance for credit losses (“ACL”) may not be adequate to cover actual losses, and
we may be required to materially
increase our ACL, which may adversely affect our capital
ratios, financial condition and results of operations.
We are subject, among
other things, to the risk of loss from loan defaults and
foreclosures with respect to the loans we originate and
purchase. We
recognize periodic
credit loss
expenses on
loans, which
leads to
reductions in
our income
from operations,
in order
to
maintain
our ACL
on loans
at a
level that
our management
deems to
be appropriate
based upon
an assessment
of the
quality
of the
loan and lease portfolios.
Management may fail to
accurately estimate the level of
credit losses or may
have to increase our
credit loss
expense
on
loans in
the
future as
a
result
of
new
information
regarding
existing
loans,
future
increases
in
nonaccrual
loans
beyond
what
was
forecasted,
foreclosure
actions
and
loan
modifications,
changes
in
current
and
expected
economic
and
other
conditions
affecting
borrowers
or
for
other
reasons
beyond
our
control.
In
addition,
the
bank
regulatory
agencies
periodically
review
the
adequacy
of
our
ACL
on
loans
and
may
require
an
increase
in
the
credit
loss
expense
on
loans
or
the
recognition
of
additional
classified loans and loan charge-offs, based on
judgments that differ from those of management.
The level
of the
ACL reflects
management’s
estimates based
upon various
assumptions and
judgments as
to specific
credit risks;
evaluation of
industry concentrations;
loan loss
experience; current
loan portfolio
quality; present
economic, political
and regulatory
conditions;
unidentified
losses inherent
in the
current
loan portfolio
and reasonable
and supportable
forecasts. The
determination
of
the
appropriate
level
of
the
ACL
on
loans
inherently
involves
a
high
degree
of
subjectivity
and
requires
management
to
make
significant estimates and judgments
regarding current credit risks
and future trends, all
of which may undergo
material changes. If our
estimates
prove
to
be
incorrect,
our
ACL
on
loans
may
not
be
sufficient
to
cover
losses
in
our
loan
portfolio
and
our
credit
loss
expense on loans could increase substantially.
In addition, any increases in our credit loss expense on
loans or any loan losses in excess of our ACL on loans could have a material
adverse effect on our future capital ratios, financial condition
and results of operations.
The Corporation’s force-placed
insurance policies could be disputed by the customer.
The Corporation
maintains force-placed
insurance policies
that have
been put
into place
when a
borrower’s
insurance policy
on a
property has been canceled,
lapsed or was deemed
insufficient and the
borrower did not
secure a replacement policy.
A borrower may
make
a claim
against the
Corporation
under
such force
-placed insurance
policy and
the failure
of the
Corporation
to resolve
such a
claim
to
the
borrower’s
satisfaction
may
result
in
a
dispute
between
the
borrower
and
the
Corporation,
which
if
not
adequately
resolved, could have an adverse effect on the Corporation.
Defective and repurchased loans may harm our business and financial condition.
In
connection
with
the
sale
and
securitization
of
loans,
we
are
required
to
make
a
variety
of
customary
representations
and
warranties relating
to the
loans sold
or securitized.
Our obligations
with respect
to these
representations and
warranties are
generally
outstanding
for
the
life
of
the
loan,
and
relate
to,
among
other
things,
the
following:
(i)
compliance
with
laws
and
regulations;
(ii)
underwriting
standards;
(iii)
the
accuracy
of
information
in
the
loan
documents
and
loan
files;
and
(iv)
the
characteristics
and
enforceability of the loan.
A loan that
does not comply
with the representations
and warranties made
may take longer
to sell, may impact
our ability to obtain
third-party
financing
for
the
loan,
and
may
not
be
saleable
or
may
be
saleable
only
at
a
significant
discount.
If
such a
loan
is
sold
before
we
detect
non-compliance,
we
may
be
obligated
to repurchase
the
loan
and
bear
any
associated
loss directly,
or
we
may
be
obligated
to
indemnify
the purchaser
against
any
loss,
either
of
which
could
reduce
our cash
available
for
operations
and
liquidity.
29
Management
believes
that
it has
established
controls
to
ensure
that
loans
are
originated
in
accordance
with
the
secondary
market’s
requirements, but certain employees may make mistakes or may deliberately
violate our lending policies.
Our controls and procedures may fail or be circumvented, our risk management
policies and procedures may be inadequate and
operational risks could adversely affect our consolidated
results of operations.
We
may fail
to identify
and manage
risks related
to a
variety of
aspects of
our business,
including, but
not limited
to, operational
risk,
interest
rate
risk,
trading
risk,
fiduciary
risk,
legal
and
compliance
risk,
liquidity
risk
and
credit
risk.
We
have
adopted
and
periodically
improve
various
controls,
procedures,
policies
and
systems
to
monitor
and
manage
risk.
Any
improvements
to
our
controls, procedures,
policies and
systems, however,
may not
be adequate
to identify
and manage
the risks in
our various
businesses.
If our
risk framework
is ineffective,
either because
it fails to
keep pace
with changes in
the financial
markets or
our businesses or
for
other
reasons,
we
could
incur
losses,
suffer
reputational
damage,
or
find
ourselves
out
of
compliance
with
applicable
regulatory
mandates or expectations.
We may also be
subject to disruptions from external events, such as natural disasters and
cyber-attacks, which could cause delays or
disruptions
to
operational
functions,
including
information
processing
and
financial
market
settlement
functions.
In
addition,
our
customers,
vendors
and
counterparties
could
suffer
from
such
events.
Should
these
events
affect
us,
or
the
customers,
vendors
or
counterparties with
which we
conduct business,
our consolidated
results of
operations could
be negatively
affected. When
we record
balance
sheet
reserves
for
probable
loss
contingencies
related
to
operational
losses,
we
may
be
unable
to
accurately
estimate
our
potential
exposure,
and
any
reserves
we
establish
to
cover
operational
losses
may
not
be
sufficient
to
cover
our
actual
financial
exposure, which
may have
a material
impact on
our consolidated
results of
operations or
financial condition
for the
periods in
which
we recognize the losses.
Our failure to attract and retain a qualified workforce could harm our overall business
and results of operations.
The Corporation’s
success depends,
in large
part, on its
ability to attract
and retain
skilled, experienced personnel.
Competition for
qualified
candidates
in
the
activities
and
markets
that
the
Corporation
and
FirstBank
serves
is
intense,
and
while
the
Corporation
invests significantly
in the training
and development of
its employees,
it may not
be able to
hire people or
to retain them.
In addition,
high inflation
has impacted
both cost
structure and
employee demand
for wage
growth, which
may lead
to sustained
higher turnover
rates.
If
the
Corporation
is
unable
to
retain
its
most
qualified
employees,
its
performance
and
competitive
positioning
could
be
materially adversely affected.
Our businesses may be adversely affected by litigation.
We
have, in
the past,
been party
to claims
and legal
actions by
our customers,
or subject
to regulatory
supervisory actions
by the
government on
behalf of
customers, relating
to our
performance of
fiduciary or
contractual responsibilities.
In the
past, we
have also
been
subject
to
securities
class
action
litigation
by
our
shareholders
and
we
have
also
faced
employment
lawsuits
and
other
legal
claims. In
any future
claims or
actions, demands
for substantial
monetary damages
may be
asserted against
us, resulting
in financial
liability
or
an
adverse
effect
on
our
reputation
among
investors
or
on
customer
demand
for
our
products
and
services.
A
securities
class
action
suit
against
us
in
the
future
could
result
in
substantial
costs,
potential
liabilities
and
the
diversion
of
management’s
attention
and
resources.
We
may
be
unable
to
accurately
estimate
our
exposure
to
litigation
risk
when
we
record
balance
sheet
reserves for probable loss contingencies.
As a result, reserves we establish to
cover any settlements or judgments may
not be sufficient
to
cover
our
actual
financial
exposure,
which
has
occurred
in
the
past
and
may
occur
in
the
future,
resulting
in
a
material
adverse
impact on our consolidated results of operations or financial condition.
In
the
ordinary
course
of
our
business,
we
are
also
subject
to
various
regulatory,
governmental
and
law
enforcement
inquiries,
investigations and
subpoenas. These
may be
directed generally
to participants
in the
businesses in
which we
are involved
or may
be
specifically directed
at us. In
regulatory enforcement
matters, claims for
disgorgement, the
imposition of penalties
and the imposition
of other remedial sanctions are possible.
The resolution
of legal
actions or
regulatory matters,
when unfavorable,
has had,
and could
in the
future have,
a material
adverse
effect on our consolidated results of operations for
the quarter in which such actions or matters are resolved or a reserve is established.
Our businesses may be negatively affected by adverse publicity or
other reputational harm.
Our relationships
with many of
our customers
are predicated upon
our reputation
as a fiduciary
and a service
provider that adheres
to
the
highest
standards
of
ethics,
service
quality
and
regulatory
compliance.
Adverse
publicity,
regulatory
actions,
litigation,
operational failures, the failure to meet customer expectations and other
issues with respect to one or more of our businesses, including
FirstBank as our banking
subsidiary, could
materially and adversely affect
our reputation, or our ability
to attract and retain customers
or obtain
sources of
funding for
the same
or other
businesses. Preserving
and enhancing
our reputation
also depends
on maintaining
systems and procedures that
address known risks and regulatory
requirements, as well as our
ability to identify and mitigate
additional
30
risks
that
arise
due
to
changes
in
our
businesses,
the
market
places
in
which
we
operate,
the
regulatory
environment
and
customer
expectations.
If we
fail to
promptly address
matters that
bear on
our reputation,
our reputation
may be
materially adversely
affected
and our business may suffer.
Any impairment of our goodwill or other intangible assets may adversely affect
our operating results.
If our goodwill or other intangible assets become impaired, we may be
required to record a significant charge to earnings.
Goodwill is
tested for
impairment on
an annual
basis, and
more frequently
if events
or circumstances
lead management
to believe
the values of
goodwill may
be impaired.
Other intangible assets
are amortized
over the projected
useful lives of
the related intangible
asset,
generally
on
a
straight-line
basis,
and
these
assets
are
reviewed
periodically
for
impairment
when
events
or
changes
in
circumstances
indicate
that
the
fair
value
may
not
exceed
their
carrying
amount.
Factors
that
may
be
considered
a
change
in
circumstances
indicating
that
the
carrying
value
of
the
goodwill
or
amortizable
intangible
assets
may
not
be
recoverable
includes
reduced future
cash flow estimates,
decreases in the
current market
price of
our common
shares, negative
information concerning
the
terminal value of similarly situated insured depository institutions, and
slower growth rates in the industry.
The goodwill
annual impairment
evaluation process
includes a
qualitative assessment
of events
and circumstances
that may
affect
the reporting unit's fair value
to determine whether it was more
likely than not that the fair
value of any reporting unit was
less than its
carrying amount, including goodwill. If the result of the
qualitative assessment indicates that it is more likely than
not that the carrying
value of
goodwill exceeds
its fair
value, a
quantitative analysis
is made
to determine
the amount
of goodwill
impairment. Analyzing
goodwill
includes
consideration
of
various
factors
that
continue
to
rapidly
evolve
and
for
which
significant
uncertainty
remains,
including the
pace of
economic recovery
from the
ongoing impacts
of the
COVID-19 pandemic.
Further weakening
in the
economic
environment, such as decline in the performance
of the reporting units or other factors, could cause the
fair value of one or more of the
reporting
units
to
fall
below
their
carrying
value,
resulting
in
a
goodwill
impairment
charge.
Actual
values
may
differ
significantly
from this assessment. Such
differences could result
in future impairment of
goodwill that would,
in turn, negatively
impact our results
of
operations
and
the
reporting
unit
to
which
the
goodwill
relates.
During
the
fourth
quarter
of
2022,
management
performed
a
qualitative
analysis
of
the
carrying
amount
of
goodwill,
and
concluded
that
it
is
more-likely-than-not
that
the
fair
value
of
the
reporting units exceeded their carrying value. Therefore, no quantitative
analysis was required.
As of
December 31,
2022, the
book value
of our
goodwill was
$38.6 million,
which was
recorded at
FirstBank.
If an
impairment
determination
is
made
in
a
future
reporting
period,
our
earnings
and
book
value
of
goodwill
will
be
reduced
by
the
amount
of
the
impairment. If an
impairment loss is
recorded, it will
have little or
no impact on
the tangible book
value of our
common stock, or
our
regulatory capital
levels, but such
an impairment
loss could significantly
reduce FirstBank’s
earnings and
thereby restrict FirstBank’s
ability to make dividend payments to us without prior
regulatory approval, because Federal Reserve policy states
that the bank holding
company dividends should be paid from current earnings.
Recognition of deferred tax assets is dependent upon the generation of future taxable
income by the Bank.
As
of
December
31,
2022,
the
Corporation
had
a
deferred
tax
asset
of
$155.6
million
(net
of
a
valuation
allowance
of
$185.5
million, including
a valuation
allowance of
$149.5 million
against the
deferred tax
assets of
FirstBank). Under
the 2011
PR Code,
as
amended, the
Corporation and
its subsidiaries,
including FirstBank,
are treated
as separate
taxable entities
and are
not entitled
to file
consolidated tax
returns. 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.
Accounting for
income taxes
requires that
companies assess
whether a
valuation allowance
should be
recorded against
their deferred
tax asset based
on an assessment
of the amount
of the deferred
tax asset that
is more
likely than
not to be
realized. Due to
significant
estimates
utilized
in
determining
the valuation
allowance
and
the potential
for
changes
in facts
and
circumstances
in
the future,
the
Corporation
may
not
be
able
to
reverse
the
remaining
valuation
allowance
or
may
need
to
increase
its
current
deferred
tax
asset
valuation allowance.
The Corporation’s
judgments regarding tax accounting
policies and the resolution of
tax disputes may impact the
Corporation’s
earnings and cash
flow, and
changes in the tax
laws of multiple
jurisdictions can materially
affect our operations,
tax obligations,
and effective tax rate.
Significant
judgment
is
required
in
determining
the
Corporation’s
effective
tax
rate
and
in
evaluating
its
tax
positions.
The
Corporation
provides
for
uncertain
tax
positions
when
such
tax
positions
do
not
meet
the
recognition
thresholds
or
measurement
criteria prescribed by applicable GAAP.
Fluctuations in federal,
state, local, and foreign
taxes or a change
to uncertain tax positions,
including related interest
and penalties,
may impact
the Corporation’s
effective tax
rate. When particular
tax matters arise,
a number
of years may
elapse before such
matters
31
are audited
and finally
resolved. In
addition,
the Puerto
Rico Department
of Treasury
(“PRTD”),
the U.S.
Internal
Revenue Service
(“IRS”),
and
the
tax
authorities
in
the
jurisdictions
in
which
we
operate
may
challenge
our
tax
positions
and
we
may
estimate
and
provide
for
potential liabilities
that may
arise out
of tax
audits to
the extent
that uncertain
tax positions
fail to
meet the
recognition
standard under
applicable GAAP.
Unfavorable resolution
of any
tax matter
could increase
the effective
tax rate
and could
result in
a
material increase in our tax expense. Resolution of a tax issue may require
the use of cash in the year of resolution.
First BanCorp. is subject
to Puerto Rico income
tax on its income
from all sources. FirstBank
is treated as a
foreign corporation for
U.S. and USVI income
tax purposes and 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
regions.
The
USVI
jurisdiction
imposes
income
taxes
based
on
the
U.S.
Internal
Revenue
Code
under
the
“mirror
system”
established
by
the
Naval
Service
Appropriations Act of 1922. However,
the USVI jurisdiction also imposes an additional 10% surtax on the USVI tax liability,
if any.
These
tax
laws
are
complex
and
subject
to
different
interpretations.
We
must
make
judgments
and
interpretations
about
the
application
of
these
inherently
complex
tax
laws
when
determining
our
provision
for
income
taxes,
our
deferred
tax
assets
and
liabilities, and
our valuation
allowance. In
addition, legislative
changes, particularly
changes in
tax laws,
could adversely
impact our
results of operations.
Changes in applicable
tax laws in
Puerto Rico, the
U.S., or other
jurisdictions or tax
authorities’ new interpretations
could result in
increases in our overall taxes and the Corporation’s
financial condition or results of operations may be adversely impacted.
Our ability to use our NOL carryforwards may be limited.
The Corporation
has U.S.
and USVI
sourced NOL
carryforwards. Section
382 of
the U.S.
Internal Revenue
Code (“Section
382”)
limits the
ability to
utilize U.S.
and USVI
NOLs for income
tax purposes,
respectively,
at such
jurisdictions following
an event
of an
ownership
change. Generally,
an “ownership
change” occurs
when
certain shareholders
increase their
aggregate ownership
by more
than 50 percentage
points over their
lowest ownership percentage
over a three-year
testing period. Section
1034.04(u) of the
2011 PR
Code
is
significantly
similar
to
Section
382.
However,
Act
60-2019
amended
the
PR
Code
to
repeal
the
corporate
NOL
carryover
limitations upon change in control for taxable years beginning after December
31, 2018.
Upon the occurrence of a Section 382 ownership change, the use of
NOLs attributable to the period prior to the ownership change is
subject
to
limitations
and
only
a
portion
of
the
U.S.
and
USVI
NOLs,
as
applicable,
may
be
used
by
the
Corporation
to
offset
the
annual
U.S.
and
USVI
taxable
income,
if
any.
In
2017,
the
Corporation
completed
a
formal
ownership
change
analysis
within
the
meaning of Section 382 covering a
comprehensive period, and concluded that
an ownership change, for U.S. and
USVI purposes only,
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.
It is possible that
the utilization of our
U.S. and USVI NOLs
could be further limited
due to future changes
in our stock ownership,
as
a
result
of
either
sales
of
our
outstanding
shares
or
issuances
of
new
shares
that
could
separately
or
cumulatively
trigger
an
ownership
change
and,
consequently,
a
Section
382
limitation.
Any
further
Section
382
limitations
may
result
in
greater
U.S.
and
USVI tax
liabilities
than
we would
incur
in the
absence
of such
a limitation
and
any
increased liabilities
could
adversely affect
our
earnings and cash
flow.
We
may be able to
mitigate the adverse
effects associated with
a Section 382
limitation in the U.S.
and USVI
to the extent that we could credit any resulting
additional U.S. and USVI tax liability against our tax liability
in Puerto Rico. However,
our
ability
to
reduce
our
Puerto
Rico
tax
liability
through
such
a
credit
or
deduction
will
depend
on
our
tax
profile
at
each
annual
taxable period, which is dependent on various factors.
RISKS RELATING TO
TECHNOLOGY AND CYBERSECURITY
We
must respond
to rapid
technological changes,
and these
changes may
be more
difficult or
expensive than
anticipated.
We
may also be negatively
affected if we fail
to identify and address
operational risks associated
with the introduction of
or changes to
products and services.
Like
most
financial
institutions,
FirstBank
significantly
depends
on
technology
to
deliver
its
products
and
other
services
and
to
otherwise conduct
business. To
remain technologically
competitive and
operationally efficient,
FirstBank invests
in system
upgrades,
new
technological
solutions,
and
other
technology
initiatives.
If
competitors
introduce
new
products
and
services
embodying
new
technologies,
or if
new industry
standards and
practices emerge,
our existing
product
and service
offerings,
technology and
systems
may become obsolete.
Furthermore, if we fail
to adopt or develop
new technologies or
to adapt our products
and services to emerging
industry standards,
we may
lose current
and future
customers, which
could have
a material
adverse effect
on our
business, financial
condition and
results of
operations. The
financial services
industry is
changing rapidly
and, in
order to
remain competitive,
we must
continue
to
enhance
and
improve
the
functionality
and
features
of
our
products,
services
and
technologies.
These
changes
may
be
more difficult or expensive to implement than we anticipate.
32
When
we
launch
a
new
product
or
service,
introduce
a
new
platform
for
the
delivery
or
distribution
of
products
or
services
(including mobile
connectivity and
cloud computing),
or make changes
to an existing
product or service,
we may not
fully appreciate
or
identify
new operational
risks that
may
arise
from those
changes,
or
we may
fail
to
implement
adequate
controls
to mitigate
the
risks
associated
with
those
changes.
Significant
failure
in
this regard
could
diminish
our ability
to
operate
our
business or
result
in
potential
liability
to
our
customers
and
third
parties,
increased
operating
expenses,
weaker
competitive
standing,
and
significant
reputational, legal
and regulatory
costs. Any
of the
foregoing consequences
could materially
and adversely
affect our
businesses and
results of operations.
Our
operational
or
security
systems
or
infrastructure,
or
those
of
third
parties,
could
fail
or
be
breached.
Any
such
future
incidents could
potentially disrupt
our business
and adversely
impact our
results of
operations, liquidity,
and financial
condition,
as well as cause legal or reputational harm.
The potential
for operational
risk exposure
exists throughout our
business and,
as a result
of our
interactions with, and
reliance on,
third
parties,
is
not
limited
to
our
own
internal
operational
functions.
Our
operational
and
security
systems
and
infrastructure,
including our computer systems,
data management, and internal
processes, as well as those
of third parties that
perform key aspects of
our
business
operations,
such
as
data
processing,
information
security,
recording
and
monitoring
transactions,
online
banking
interfaces and services,
internet connections, and
network access are
integral to our
performance. We
rely on our
employees and third
parties in
our day-to-day
and ongoing
operations,
who may,
because of
human error,
misconduct,
malfeasance,
failure, or
breach of
our or of third-party systems or infrastructure, expose us to risk.
Our ability to
implement backup systems
and other safeguards
with respect to
third-party systems is more
limited than with
respect
to
our
own
systems.
In
addition,
our
financial,
accounting,
data
processing,
backup,
or
other
operating
or
security
systems
and
infrastructure may fail to
operate properly or become
disabled, damaged, or otherwise
compromised as a result of
a number of factors,
including
events that
are wholly
or partially
beyond our
control.
We
may
need to
take our
systems offline
if they
become infected
with malware or a computer
virus or because of another form of
cyberattack. If backup systems are utilized,
they may not process data
as quickly as our primary
systems and some data might
not have been saved to backup
systems, potentially resulting in a
temporary or
permanent loss of such data.
We
frequently update
our systems
to support
our operations
and growth
and to
remain compliant
with applicable
laws, rules,
and
regulations. In
addition, we
review and
strengthen our
security systems
in response
to any
cyber incident.
Such strengthening
entails
significant
costs
and
risks
associated
with
implementing
new
systems
and
integrating
them
with
existing
ones,
including
potential
business interruptions and
the risk that this
strengthening may not
be entirely effective.
Implementation and testing
of controls related
to
our
computer
systems,
security
monitoring,
and
retaining
and
training
personnel
required
to
operate
our
systems
also
entail
significant costs.
Such operational
risk exposures
could adversely
impact our
operations, liquidity,
and financial
condition, as
well as
cause
reputational
harm.
In
addition,
we
may
not
have
adequate
insurance
coverage
to
compensate
for
losses
from
a
major
interruption.
Cyber-attacks,
system
risks
and
data
protection
breaches
could
adversely
affect
our
ability
to
conduct
business,
manage
our
exposure to risk or
expand our business, result
in the disclosure or
misuse of confidential
or proprietary information,
increase our
costs to
maintain and
update our
operational and
security systems
and infrastructure,
and present
significant reputational,
legal
and regulatory costs
.
Our
business
is
highly
dependent
on
the
security,
controls
and
efficacy
of
our
infrastructure,
computer
and
data
management
systems,
as
well
as
those
of
our
customers,
suppliers,
and
other
third
parties.
To
access
our
network,
products
and
services,
our
employees,
customers, suppliers,
and other
third parties,
including downstream
service providers,
the financial
services industry
and
financial
data
aggregators,
with
whom
we
interact,
on
whom
we
rely
or
who
have
access
to
our
customers'
personal
or
account
information, increasingly
use personal mobile
devices or computing
devices that are
outside of our
network and control
environments
and
are
subject
to
their
own
cybersecurity
risks.
Our
business
relies
on
effective
access
management
and
the
secure
collection,
processing,
transmission,
storage and
retrieval
of confidential,
proprietary,
personal and
other
information
in our
computer
and data
management systems and networks, and in the computer and data management
systems and networks of third parties.
Information
security
risks
for
financial
institutions
have
significantly
increased
in
recent
years,
especially
given
the
increasing
sophistication and activities
of organized
computer criminals, hackers,
and terrorists and
our expansion of
online and digital
customer
services to
better
meet our
customer’s
needs.
These threats
may
derive
from fraud
or malice
on the
part of
our employees
or third-
party
providers
or
may
result
from
human
error
or
accidental
technological
failure.
These
threats
include
cyber-attacks,
such
as
computer viruses,
malicious or
destructive code,
phishing attacks,
denial of
service attacks, or
other security
breach tactics
that could
result
in
the
unauthorized
release,
gathering,
monitoring,
misuse,
loss,
destruction,
or
theft
of
confidential,
proprietary,
and
other
information, including
intellectual property,
of ours, our
employees, our customers,
or third parties,
damages to systems,
or otherwise
material
disruption
to
our
or
our
customers’
or
other
third
parties’
network
access
or
business
operations,
both
domestically
and
internationally.
33
While
we
maintain
an
Information
Security
Program
that
continuously
monitors
cyber-related
risks
and
ultimately
ensures
protection
for
the
processing,
transmission
and
storage
of confidential,
proprietary,
and other
information
in our
computer
systems,
and networks as well as
vendor management program
to oversee third party and
vendor risks, there is no
guarantee that we will not
be
exposed to or
be affected
by a cybersecurity
incident.
Cyber threats are
rapidly changing and
future attacks or
breaches could lead
to
other
security
breaches
of
the networks,
systems,
or
devices
that
our
customers
use
to
access our
integrated
products
and
services,
which,
in
turn,
could
result
in
unauthorized
disclosure,
release,
gathering,
monitoring,
misuse,
loss
or
destruction
of
confidential,
proprietary,
and
other
information
(including
account
data
information)
or
data
security
compromises.
As
cyber
threats
continue
to
evolve, we
may be required
to expend significant
additional resources to
modify or enhance
our protective measures,
investigate, and
remediate any information security vulnerabilities or incidents and develop
our capabilities to respond and recover.
The full extent of a
particular cyberattack,
and the
steps that
the Corporation
may need
to take
to investigate
such attack,
may not
be immediately
clear,
and it
could take
considerable additional
time for us
to determine
the complete
scope of
information compromised,
at which time
the
impact
on the
Corporation
and measures
to recover
and restore
to a
business-as-usual
state may
be difficult
to assess.
These factors
may
also
inhibit
our
ability
to
provide
full
and
reliable
information
about
the
cyberattack
to
our
customers,
third-party
vendors,
regulators, and the public.
A successful penetration or circumvention of our system security,
or the systems of our customers, suppliers, and other third parties,
could cause us serious negative consequences, including significant
operational, reputational, legal, and regulatory costs and concerns.
Any of these
adverse consequences could
adversely impact our
results of operations,
liquidity,
and financial condition.
In addition,
our
insurance
policies
may
not
be
adequate
to
compensate
us
for
the
potential
costs
and
other
losses
arising
from
cyber-attacks,
failures of
information technology
systems, or
security breaches,
and such
insurance policies
may not
be available
to us in
the future
on
economically
reasonable
terms, or
at
all.
Insurers
may
also
deny
us
coverage
as to
any
future
claim.
Any of
these
results
could
harm our growth prospects, financial condition, business, and reputation.
The Corporation is subject
to stringent and changing
privacy laws, regulations,
and standards as well
as policies, contracts, and
other
obligations
related
to
data
privacy
and
security.
Our
failure
to
comply
with
privacy
laws and
regulations,
as
well as
other
legal obligations, could have a material adverse effect on our business.
State,
federal,
and
foreign
governments
are
increasingly
enacting
laws
and
regulations
governing
the
collection,
use,
retention,
sharing, transfer,
and security
of personally
identifiable information
and data.
A variety
of federal,
state, local,
and foreign
laws and
regulations,
orders,
rules,
codes,
regulatory
guidance,
and
certain
industry
standards
regarding
privacy,
data
protection,
consumer
protection,
information
security,
and
the
processing
of
personal
information
and
other
data
apply
to
our
business.
State
laws
are
changing
rapidly,
and
new
legislation
proposed
or
enacted
in
a
number
of
other
states
imposes,
or
has
the
potential
to
impose,
additional obligations
on companies
that process
confidential, sensitive
and personal
information, and
will continue
to shape
the data
privacy
environment
nationally.
The
U.S.
federal
government
is
also
focused
on
privacy
matters.
Any
failure
by
us
or
any
of
our
business
partners
to
comply
with
applicable
laws,
rules,
and
regulations
may
result
in
investigations
or
actions
against
us
by
governmental entities, private
claims and litigation, fines,
penalties or other liabilities.
Such events may increase
our expenses, expose
us to
liabilities, and
impair our reputation,
which could have
a material
adverse effect
on our business.
While we
aim to comply
with
applicable data protection
laws and obligations
in all material
respects, there
is no assurance
that we will
not be subject
to claims that
we
have
violated
such
laws
and
obligations,
will
be
able
to
successfully
defend
against
such
claims,
or
will
not
be
subject
to
significant fines
and penalties
in the
event of
non-compliance. Additionally,
to the
extent multiple
state-level laws
are introduced
in
the U.S. with
inconsistent or conflicting
standards and there
is no federal
law to preempt
such laws, compliance
with such laws
could
be difficult and costly,
or impossible, to achieve, and we could be subject to fines and penalties in the event
of non-compliance.
RISK RELATING
TO THE REGULATION
OF OUR INDUSTRY
We are subject to certain regulatory
restrictions that may adversely affect our operations.
We
are subject
to supervision
and regulation
by the
Federal Reserve
Board and
the FDIC.
We
are a
bank holding
company and
a
financial holding
company under
the Bank
Holding Company
Act of
1956, as
amended. The
Bank is
also subject
to supervision
and
regulation by OCIF.
Under
federal
law,
financial
holding
companies
are
permitted
to
engage
in
a
broader
range
of
“financial”
activities
than
those
permitted
to
bank
holding
companies
that
are
not
financial
holding
companies.
A
financial
holding
company
that
ceases
to
meet
certain
standards
is
subject
to
a
variety
of
restrictions,
depending
on
the
circumstances,
including
the
prohibition
from
undertaking
new activities
or acquiring
shares or
control of
other companies.
If we
fail to
comply with
the requirements
from our
regulators,
we
may
become
subject
to
regulatory
enforcement
action
and
other
adverse
regulatory
actions
that
might
have
a
material
and
adverse
effect on our operations.
The FDIC insures
deposits at
FDIC-insured depository
institutions up
to certain limits
(currently,
$250,000 per depositor
account).
The FDIC charges insured
depository institutions premiums to
maintain the DIF.
In the event of a bank
failure, the FDIC takes control
34
of a failed
bank and, if
necessary,
pays all insured
deposits up to
the statutory deposit
insurance limits using
the resources of
the DIF.
The FDIC
is required
by law to
maintain adequate
funding of
the DIF,
and the
FDIC may
increase premium
assessments to
maintain
such
funding.
The
Dodd-Frank
Wall
Street
Reform
and
Consumer
Protection
Act
(the
“Dodd-Frank
Act”)
requires
the
FDIC
to
increase the DIF’s
reserves against future losses, which
will require institutions with assets
greater than $10 billion, such as
FirstBank,
to bear an increased responsibility for funding the prescribed reserve to support
the DIF.
The FDIC
may further
increase FirstBank’s
premiums or
impose additional
assessments or
prepayment requirements
in the
future.
The Dodd-Frank Act removed the statutory cap for the reserve ratio, leaving
the FDIC free to set this cap going forward.
Our
compensation
practices
are
subject
to
oversight
by
the
Federal
Reserve
Board
and
the
FDIC.
Any
deficiencies
in
our
compensation
practices
may
be
incorporated
into
our
supervisory
ratings,
which
can
affect
our
ability
to
make
acquisitions
or
perform other actions. In addition,
the regulation of our compensation practices has and may continue to change
in the future.
Our
compensation
practices
are subject
to
oversight
by
the Federal
Reserve
Board
and
the FDIC.
As discussed
in
Item
1
of
this
Annual Report
on Form 10-K,
the Corporation
currently is subject
to the interagency
guidance governing
the incentive compensation
activities of regulated
banks and bank
holding companies,
and other financial
regulators have also
implemented regulations
regarding
compensation
practices.
Our
failure
to
satisfy
these
restrictions
and
guidelines
could
expose
us
to
adverse
regulatory
criticism,
lowered supervisory ratings, and restrictions on our operations and acquisition activities.
The scope and
content of the U.S.
financial regulators’ policies
on executive compensation
are continuing to develop
and are likely
to continue evolving in
the future. It cannot be
determined at this time whether
compliance with such policies
will adversely affect the
ability of the Corporation and its subsidiaries to hire, retain and motivate their key employees.
We
are
subject
to
regulatory
capital
adequacy
guidelines,
and,
if
we
fail
to
meet
these
guidelines,
our
business
and
financial
condition will be adversely affected.
We
are subject
to stringent
regulatory
capital requirements.
Although
the Corporation
and FirstBank
met general
well-capitalized
capital ratios
as of
December 31,
2022, and
we expect
both companies
will continue
to exceed
the minimum
risk-based and
leverage
capital
ratio
requirements
for
well-capitalized
status
under
the
current
capital
rules,
we
cannot
assure
that
we
will
remain
at
such
levels.
If
we
fail
to
meet
these
minimum
capital
guidelines
and
other
regulatory
requirements,
our
business
and
financial
condition
will be materially and adversely affected.
If we fail to maintain certain capital
levels or are deemed not well managed under
regulatory
exam procedures,
or if we
experience certain
regulatory violations,
our status as
a financial
holding company,
and our ability
to offer
certain financial products will be compromised and our financial condition and
results of operations could be adversely affected.
Monetary
policies
and
regulations
of
the
Federal
Reserve
Board
could
adversely
affect
our
business,
financial
condition
and
results of operations.
In addition
to being
affected
by general
economic conditions,
our earnings
and growth
are affected
by the
policies of
the Federal
Reserve Board. An important
function of the Federal
Reserve Board is to regulate
the money supply and
credit conditions. Among the
instruments
used
by
the
Federal
Reserve
Board
to
implement
these
objectives
are
open
market
operations
in
U.S.
government
securities,
adjustments
of
the
discount
rate
and
changes
in
reserve
requirements
for
bank
deposits.
These
instruments
are
used
in
varying combinations to
influence overall economic
growth and the
distribution of credit,
bank loans, investments
and deposits. Their
use also affects interest rates charged on loans or paid
on deposits.
The monetary policies
and regulations of
the Federal Reserve Board,
which during 2022
included, but were not
limited to, multiple
increases in
the federal
funds rate
to reduce
inflation, have
had a
significant effect
on the
operating results
of commercial
banks and
are
expected
to
continue
to
do
so
in
the
future.
The
effects
of
such
policies
upon
our
business,
financial
condition
and
results
of
operations have been and may continue to be adverse.
We
are subject
to numerous
laws designed
to protect
consumers, including
the Community
Reinvestment Act
and fair
lending
laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The
Community
Reinvestment
Act,
the
Equal
Credit
Opportunity
Act,
the
Fair
Housing
Act
and
other
fair
lending
laws
and
regulations impose nondiscriminatory
lending requirements on financial
institutions. The U.S. Department
of Justice and other
federal
agencies
are
responsible
for
enforcing
these
laws and
regulations.
A successful
regulatory
challenge
to
an
institution's performance
under the Community Reinvestment
Act, the Equal Credit
Opportunity Act, the Fair
Housing Act or any
of the other fair lending
laws
and regulations
could result in
a wide variety
of sanctions, including
damages and civil
money penalties, injunctive
relief, restrictions
on mergers and acquisitions
activity, restrictions
on expansion and restrictions on entering
new business lines. Private parties may
also
have the
ability to
challenge an
institution's performance
under fair
lending laws
in private
class action
litigation. Such
actions could
have a material adverse effect on our business, financial condition
and results of operations.
35
We
face
a
risk
of
noncompliance
and
enforcement
action
related
to
the
Bank
Secrecy
Act
and
other
anti-money
laundering
statutes and regulations.
The
Bank
Secrecy
Act,
the
USA
PATRIOT
Act,
and
other
laws
and
regulations
require
financial
institutions
to
institute
and
maintain
an
effective
anti-money
laundering
program
and
file
suspicious
activity
and
currency
transaction
reports
as
appropriate,
among
other
duties.
The
Financial
Crimes
Enforcement
Network
is
authorized
to
impose
significant
civil
money
penalties
for
violations
of
those
requirements
and
has
recently
engaged
in
coordinated
enforcement
efforts
with
the
individual
federal
banking
regulators, as well
as the U.S. Department
of Justice’s
Drug Enforcement Administration.
We
are also subject
to increased scrutiny
of
our compliance with
trade and economic sanctions
requirements and rules enforced
by OFAC.
If our policies, procedures
and systems
are deemed
deficient, we
would be
subject to
liability,
including fines
and regulatory
actions, which
may include
restrictions on
our
ability to pay dividends and the necessity to obtain regulatory
approvals to proceed with certain aspects of our business
plan, including
our acquisition plans. Failure
to maintain and implement adequate
programs to combat money
laundering and terrorist financing
could
also have serious reputational consequences
for us. Any of these results
could have a material adverse
effect on our business, financial
condition and results of operations.
36
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2022, First BanCorp. has ownership in the following
three main buildings located in Puerto Rico:
-
Headquarters –
Located at
First Federal
Building, 1519
Ponce de
León Avenue,
San Juan,
Puerto Rico.
Approximately 51%
of this 16-story office building is owned by the Corporation.
-
Service Center – Located at
1130 Muñoz Rivera
Avenue,
Hato Rey, Puerto
Rico. This facility,
which is fully occupied by the
Corporation,
houses
over
1,000
employees
from
operations
and
accommodates
branch
operations,
mortgage
operations,
Collections and Loss Mitigation, data processing and administrative and certain
other offices.
-
Consumer Lending
Center –
Located at
876 Muñoz
Rivera Avenue,
Hato Rey,
Puerto Rico.
This three-story
facility is
fully
occupied
by
the
Corporation
and
accommodates
a
retail
branch,
Money
Express,
Auto
Financing
and
Leasing
and
a
FirstBank Insurance Agency office, among others.
The
Corporation
owns
16 retail
branches
and 6
office
centers,
other
facilities,
and/or
parking
lots. It
leases 89
branch
premises,
loan
and
office
centers
and
other
facilities.
In
certain
situations,
financial
services
such
as
mortgage
and
insurance
businesses
and
commercial banking
services are
in the
same building
or branch.
All of
these premises
are in
Puerto Rico,
Florida,
the USVI
and the
BVI.
Management
believes
that
the
Corporation’s
properties
are
well
maintained
and
are suitable
for
the
Corporation’s
business
as
presently conducted.
Item 3. Legal Proceedings
Reference
is
made
to
Note
29,
“Regulatory
Matters,
Commitments
and
Contingencies,”
to
the
audited
consolidated
financial
statements included in Item 8 of this Annual Report on Form 10-K, which is incorporated
herein by reference.
Item 4. Mine Safety Disclosure.
Not applicable.
37
PART
II
Item 5. Market for Registrant’s Common Equity and Related
Stockholder Matters and Issuer Purchases of Equity Securities
INFORMATION ABOUT
MARKET AND HOLDERS
The Corporation’s
common stock
is traded
on the
New York
Stock Exchange
(“NYSE”) under
the symbol
FBP.
On February
21,
2023, there
were 320 holders
of record
of the Corporation’s
common stock,
not including
beneficial owners
whose shares are
held in
the name of brokers or other nominees.
As of
December 31,
2022 and
December 31,
2021, the
Corporation had
40,954,057
and 21,836,611
shares held
as treasury
stock,
respectively.
Refer to
“Stock Repurchases”
section for
more information
on common
stock repurchases
during the
fourth quarter
of
2022
held as treasury stock.
DIVIDENDS
Since November
2018, the
Corporation has
made quarterly
cash dividend
payments on
its shares
of common
stock. On
April 27,
2022, the Corporation announced that
it had increased the quarterly cash
dividend payment on common stock,
from $0.10 to $0.12 per
share,
commencing
in
the
second
quarter
of
2022.
In
addition,
on
February
9,
2023
the
Corporation
announced
that
its
Board
of
Directors
had
declared
a
quarterly
cash
dividend
of
$0.14
per
common
share,
which
represents
an
increase
of
17%
or
$0.02
per
common
share
compared
to
its
most
recent
dividend
paid
in
December
2022.
The
dividend
is
payable
on
March
10,
2023
to
shareholders of
record at
the close
of business
on February
24, 2023.
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.
Information
regarding
restrictions
on
dividends, is set forth in Item 1, “Business -Supervision and Regulation
–
Dividend Restrictions” and incorporated herein by reference.
The 2011
PR Code, as
amended, requires the
withholding of income
taxes from dividend
income sourced
within Puerto Rico
to be
received
by
any
individual,
resident
of
Puerto
Rico
or
not,
trusts
and
estates
and
by
non-resident
custodians,
partnerships,
and
corporations.
Residents of Puerto Rico
A special tax of 15% withheld at
source is imposed, in lieu of a regular
tax, on any eligible dividends paid to
individuals, trusts, and
estates.
Eligible
dividends
include
dividends
paid
by
a
domestic
Puerto
Rico
corporation.
However,
the
taxpayer
can
perform
an
election to be excluded from the 15% special tax and be taxed at regular
rates. Once this election is made it is irrevocable. The election
allows the
taxpayer to
include in
ordinary income
the eligible
dividends received
and take
a credit
for the
amount of
tax withheld
in
excess, if any.
Individuals that
are residents
of Puerto
Rico are
subject to
an alternative
minimum tax
(“AMT”) on
the AMT
Net Income
if their
regular
tax
liability
is
less
than
the
alternative
minimum
tax
liability.
The
AMT
applies
to
individual
taxpayers
whose
AMT
Net
taxable
income exceeds
$25,000.
The individual
AMT rate
ranges
from 1%
to 24%
depending
on the
AMT Net
Income. The
AMT
Net Income
includes various
categories
of tax-exempt
income and
income subject
to preferential
rates as
provided by
the PR
Code,
such as
dividends on
the Corporation’s
common stock
and long-term
capital gains
recognized on
the disposition
of the Corporation’s
common stock.
Nonresident U.S. Citizens
Dividends paid to a U.S. citizen who is not a resident of Puerto Rico will be subject
to a 15% income tax.
Nonresident U.S. citizens
have the right to partial or total exemptions under section 1062.08
of the 2011 PR Code.
Nonresident individuals that are
not US citizens
Dividends paid to any
individual who is not a
citizen of the United States and
who is not a resident
of Puerto Rico will generally
be
subject to a 15% Puerto Rico income tax which will be withheld at source.
Foreign Corporations and Partnerships
Corporations
and partnerships
not organized
under Puerto
Rico
laws that
have
not engaged
in a
trade
or business
in Puerto
Rico
during
the
taxable
year
in
which
the
dividend,
if
any,
is
paid
are
subject
to
the
10%
dividend
tax
withholding.
Corporations
or
partnerships not organized
under the laws of
Puerto Rico that have
engaged in a trade
or business in Puerto
Rico are not subject
to the
10% withholding, but they must declare any dividend as ordinary income on their
Puerto Rico income tax return.
38
STOCK REPURCHASES
Since
April
2021,
the
Corporation’s
Board
of
Directors
has
announced
two
repurchase
program
authorizations
for
repurchases
totaling
up
to
$650
million
of
the
Corporation’s
outstanding
stock.
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.
During 2022,
the Corporation
repurchased 3,409,697
shares of
its common
stock for
the
$50 million
remaining under
an authorization
to repurchase
covering up
to $300
million in
shares of
outstanding
stock approved
by
the Board of
Directors and publicly
announced by
the Corporation
on April 26,
2021, and 16,003,674
shares of its
common stock
for
$225.0 million under
the most recent authorized
$350 million stock repurchase
program publicly announced
on April 27, 2022.
As of
December
31,
2022,
the
Corporation
has
remaining
authorization
to
repurchase
approximately
$125
million
of
common
stock.
The
amount
and
timing
of
stock
repurchases
will
be
based
on
various
factors,
including
our
capital
requirements,
market
conditions
(including the trading price of our stock), and regulatory and legal considerations.
The following table provides information relating to the
Corporation’s purchases of
shares of its common stock in the fourth quarter
of 2022.
Approximate Dollar
Value of
Shares
Total
Number of
That May Yet
be
Shares Purchased
Purchased Under
Average
as Part of Publicly
These Plans or
Total
number of
Price
Announced Plans
Programs
Period
shares purchased
Paid
Or Programs
(In thousands)
(1)
October 1, 2022 to October 31, 2022
1,649,963
$
15.18
1,646,805
150,000
November 1, 2022 to November 30, 2022
-
-
-
150,000
December 1, 2022 to December 31, 2022
1,902,468
13.14
1,902,468
125,000
Total
3,552,431
(2)(3)
3,549,273
(1)
As
of
December 31,
2022,
the
Corporation
was
authorized to
purchase up
to
$350
million of
the
Corporation’s
common
stock under
the
program,
that
was
publicly
announced on
April
27,
2022,
of
which $225
million had
been
utilized.
The
remaining $125
million
in
the
table
represents the
remaining
amount
authorized under
the
stock repurchase
program as
of
December 31,
2022.
The program
does not
obligate the
Corporation to
acquire any
specific number
of
shares, does not
have an expiration
date 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 3,549,273 shares of common stock repurchased in
the open market at an average price of $14.09 for a
total purchase price of approximately $50 million.
(3)
Includes 3,158 shares of common stock acquired by
the Corporation to cover minimum tax withholding obligations upon the
vesting of equity-based awards. 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.
39
STOCK PERFORMANCE GRAPH
The
following
graph
shall
not
be
deemed
incorporated
by
reference
into
any
filing
under
the
Securities
Act
or
the
Exchange
Act,
except
to
the
extent
that First
BanCorp.
specifically
incorporates
this information
by
reference,
and
shall not
otherwise
be
deemed
filed with the SEC.
The
graph
below
compares
the
cumulative
total
stockholder
return
of
First
BanCorp.
during
the
measurement
period
with
the
cumulative
total return,
assuming reinvestment
of dividends,
of the
S&P 500
Index and
the S&P
Supercom
Banks Index
(the “Peer
Group”).
The Performance
Graph assumes
that $100
was invested
on December
31, 2017
in each
of First
BanCorp. common
stock,
the S&P 500 Index and
the Peer Group. The comparisons
in this table are set forth
in response to SEC disclosure requirements
and are
therefore not intended to forecast or be indicative of future performance
of First BanCorp.’s common
stock.
The cumulative total stockholder return was obtained
by dividing (i) the cumulative amount of dividends per share,
assuming dividend
reinvestment since
the measurement
point, December 31,
2017 plus (ii)
the change in
the per share
price since the
measurement date,
by the share price at the measurement date.
40
Item 6.
[Reserved]
41
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations (“MD&A”)
The following MD&A
relates to the accompanying
audited 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.
This
section also
presents certain
financial measures
that are not
based on
generally accepted
accounting principles
in the
United States
of
America
(“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.
The detailed financial discussion that follows focuses on
2022 results compared to 2021.
For a discussion of 2021 results compared
to
2020,
see
Item
7,
Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations
included
in
the
Corporation’s
Annual
Report
on
Form
10-K
for
the
year
ended
December
31,
2021,
filed
with
the
Securities
and
Exchange
Commission (“SEC”) on March 1, 2022.
In
this
discussion
and
analysis
of
our
financial
condition
and
results
of
operations,
we
have
included
information
that
may
constitute
“forward-looking
statements”
within
the
meaning
of
the
safe
harbor
provisions
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”).
Forward-looking statements are not historical
facts or statements of current conditions,
but instead represent only our beliefs regar
ding
future events, many of
which, by their nature, are inherently
uncertain and outside our control.
By identifying these statements
for you
in this manner,
we are alerting you to
the possibility that our actual
results, financial condition, liquidity
and capital actions may
differ
materially from the anticipated results,
financial condition, liquidity and capital
actions in these forward-looking statements.
Important
factors that
could cause
our results,
financial condition,
liquidity and
capital actions
to differ
from those
in these
statements include,
among others, those described in “Risk Factors” in Part I, Item 1A of this Form 10-K.
DESCRIPTION OF BUSINESS
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,
credit cards, personal
loans, small loans,
auto loans and
leases, and
insurance agency activities.
SIGNIFICANT EVENTS
Economy
The Corporation
remains cautiously optimistic
on economic conditions
in Puerto Rico,
its principal market.
Total
non-farm payroll
employment
rose
to
a
decade
high
of
927,100
in
December
2022,
or
a
4%
year-over-year
increase.
Moreover,
the
most
recent
Economic Development
Bank for
Puerto Rico’s
Economic Activity
Index (“EDB-EAI”),
which is
highly correlated
to Puerto
Rico’s
real gross
national product
(“GNP”) in
both level
and annual
growth rates,
showed a
2.6% growth
for the
first nine
months of
2022.
Although
global
expectations
point
to
an
economic
slowdown
in
the
United
States,
the
Corporation
expects
growth
in
the
local
economy
to
be
sustained
by
the
large
amount
of
federal
disaster
relief
funds
that
are
pending
to
be
disbursed.
Over
$45
billion
remaining
obligated
disaster
recovery
funding
has
been
earmarked
to
support
broad
based
economic
development
and
rebuilding
initiatives.
Growth
in
economic
activity,
the
robustness
of
the
labor
market,
supply
chain
complications
and
geopolitical
matters,
have
contributed to rising
inflation. In response,
the Federal Reserve (the
“FED”) has raised interest
rates and has
been reducing the
size of
its balance
sheet. Furthermore,
the FED
signaled that
it would
continue to
implement these
policy actions
in order
to bring
inflation
down. The
timing and
impact of
inflation and
rising interest
rates on
our business
and related
financial results
will depend
on future
developments, which are highly uncertain and difficult
to predict.
We
delivered positive
results in
2022, driven
by continued
execution of
strategic initiatives
including loan
and lease
growth,
and
expanded
fee
income
while
maintaining
disciplined
expense
management.
Credit
continues
to
perform
well,
reflecting
lower
nonaccrual and adversely
classified loan balances,
as well as charge
-off rates that
are still lower
than pre-pandemic
levels. We
remain
vigilant to
changing global
economic conditions
and the
effect that
restrictive monetary
policies may
continue to
have on
the overall
inflationary
environment.
We
believe
that
the Corporation
is well
equipped
to manage
rising market
challenges
going into
the
next
cycle.
We
are
highly
encouraged
by
the
growth
prospects
in
our
main
market,
which
should
continue
to
benefit
from
rebuilding
activity over the next few years.
42
See
“Update
on
the
Puerto
Rico
Fiscal
Situation”
below
for
additional
information
on
the
economic
and
fiscal
crisis
that
Puerto
Rico has experienced for more than a decade.
Return of Capital to Shareholders
In 2022, the
Corporation returned
approximately $363
million, or 119%
of 2022 earnings,
to its shareholders
through $275
million
in repurchases of common stock and the payment of $88 million in common
stock dividends.
For the year ended December
31, 2022, the Corporation repurchased
approximately 19.4 million shares of
common stock for a total
purchase
price
of
$275.0
million
under
previously
publicly-announced
stock
repurchase
programs.
Of
this
total,
$225.0
million
of
common
stock,
representing
16.0
million
common
shares
at
a
weighted-average
price
of
$14.06,
were
repurchased
under
the
$350
million
stock
repurchase
program
announced
on
April
27,
2022
(the
“2022
Repurchase
Plan”).
As
of
February
21,
2023,
the
Corporation
has
repurchased
approximately
18.1
million
shares
of
common
stock
totaling
$254.9
million
through
open
market
purchases
under
the
2022
Repurchase
Plan.
With
the
additional
purchases,
the
Corporation
has
$95.1
million
remaining
for
share
repurchases under the 2022 Repurchase Plan.
On February
9, 2023,
the Corporation’s
Board of
Directors declared
a quarterly
cash dividend
of $0.14
per common
share, which
represents an
increase of
$0.02 per
common share,
or a
17% increase,
compared to
its most
recent dividend
paid in
December 2022.
The dividend
is payable
on March
10,
2023 to
shareholders of
record
at the
close of
business on
February
24, 2023.
The increased
quarterly dividend level equates to an annualized dividend of $0.56 per common
share.
LIBOR Transition
On January 1, 2022,
the publication of certain
U.S. Dollar (“USD”) LIBOR
settings ceased. The
publication of the most
commonly
used
overnight,
one-month,
three-month,
six-month
and
twelve-month
USD
LIBOR
will
cease
immediately
after
June
30,
2023,
except that
per the
UK Financial
Conduct Authority
(the “FCA”)
proposal, the
one-, three-,
and six-month
tenors will
continue to
be
published on a “non-representative,” synthetic basis until September
30, 2024.
The Adjustable
Interest Rate
Act (the
“LIBOR Act”),
that was
enacted in
March 2022,
provides
a statutory
framework to
replace
USD LIBOR
for
contracts
governed
by
U.S.
law
that
do
not have
clear
and
practicable
provisions
for
replacing
USD LIBOR
after
June
30,
2023
(“tough
legacy
contracts”).
On
December
16,
2022,
the
FED
adopted
final
rule
12
C.F.R.
Part
253,
“Regulation
Implementing
the LIBOR
Act (Regulation
ZZ)” (the
“Final Rule”).
The Final
Rule identifies
replacement benchmark
rates based
on
the
Secured
Overnight
Financing
Rate (“SOFR”)
to
replace
the
aforementioned
USD LIBOR
settings
that
will
cease
after
June
30,
2023
in
contracts
subject
to
the
LIBOR
Act.
Under
the
final
rule,
tough
legacy
contracts
will
be
converted
by
operation
of
law
to
various forms of SOFR, along with a spread
adjustment, upon a LIBOR replacement date (i.e.,
the first London banking day after June
30, 2023).
The spread
adjustment was
designed to
compensate for
USD LIBOR
being higher
than SOFR in
two regards.
First, USD
LIBOR
is
an
unsecured
rate
while
SOFR
is
a
secured
rate.
Second,
USD
LIBOR
includes
term
premia.
In
addition,
the
final
rule
codifies
safe harbor
protections
for
selection or
use of
SOFR as
a replacement
benchmark
and
clarifies who
would be
considered
a
“determining person”
able to
elect a
replacement benchmark
when USD
LIBOR ceases
to be
published as
representative on
June 30,
2023.
As of
December 31,
2022, the
Corporation’s
risk exposure
to USD
LIBOR consisted
of the
following: (i)
$1.4 billion
of variable-
rate
commercial
and
construction
loans
(including
unused
commitments),
(ii)
$44.6
million
of
U.S.
agencies
debt
securities
and
private label mortgage-backed securities
(“MBS”) held as part
of the available-for-sale
debt securities portfolio, (iii)
$124.4 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
reported
as
other
borrowings
in
the
accompanying
audited
consolidated
statements
of
financial
condition
included
in
Item
8
of
this
Form
10-K.
Most
of
these
contracts
contain
adequate
features
to
convert
to
an
alternative
interest
rate;
however,
as
of
December
31,
2022,
contracts
totaling
approximately
$338.6
million
do
not
contain
fallback
language
mainly
consisting of the aforementioned
Puerto Rico municipalities bonds held
as part of the held-to-maturity debt
securities portfolio and the
junior
subordinated
debentures.
The
Corporation
expects
to
follow
the
provisions
of
the
LIBOR
Act
and
Regulation
ZZ
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
USD
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.
Legislative and Regulatory
A comprehensive discussion
of legislative and
regulatory matters affecting
us can be
found in Item
1: Business –
“Supervision and
Regulation” section of this Form 10-K.
43
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:
(i)
the
interest
rate
environment;
(ii)
the
volumes,
mix,
and
composition
of
interest-earning
assets,
and
interest-bearing
liabilities; and
(iii) the
repricing 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, cards
and processing income,
and insurance income),
gains (losses)
on sales of investments, gains (losses) on mortgage banking activities, and
income taxes.
The
Corporation
had
net
income
of
$305.1
million,
or
$1.59
per
diluted
common
share,
for
the
year
ended
December
31,
2022,
compared
to
$281.0
million,
or
$1.31
per
diluted
common
share,
for
the
year
ended
December
31,
2021.
Other
relevant
selected
financial indicators for the periods presented is included below:
Year
Ended December 31,
2022
2021
2020
Key Performance Indicator:
(1)
Return on Average
Assets
(2)
1.57
%
1.38
%
0.67
%
Return on Average
Total Equity
(3)
18.66
12.56
4.59
Efficiency Ratio
(4)
48.25
57.45
59.62
(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 by its average total
assets.
(3)
Measures the Corporation’s performance
based on its average stockholders’ equity and is calculated
by dividing net income 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.
44
The key
drivers of
the Corporation’s
GAAP financial
results for
the year
ended December
31, 2022,
compared to
the year
ended
December 31, 2021, include the following:
●
Net interest income for
the year ended December
31, 2022 was $795.3
million, compared to $729.9
million for the year ended
December 31,
2021. The
increase in
interest income
primarily reflects
a 39
basis points
increase in
the net
interest margin
to
4.12%. The
increase in
the net interest
margin was
mainly driven
by a
higher interest
rate environment
driving an
increase in
yields on
variable-rate commercial
loans,
interest-bearing cash
balances maintained
at the
FED, and
MBS, partially
offset by
higher cost of funds.
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
year
ended
December 31, 2022
was an expense
of $27.7 million,
compared to a
net benefit of
$65.7 million for
2021. The increase
in the
overall
provision
reflects
the
growth
in
the
loan
portfolio,
primarily
consumer
loans,
and
the
uncertainty
in
the
near-term
macroeconomic
outlook.
The benefit
reported
in 2021
reflected improvement
related
to reduced
uncertainties relating
to the
economic impacts of the COVID-19 pandemic, primarily reflected in
the commercial and residential mortgage loan portfolios.
Net
charge-offs
totaled
$34.2
million
for
the
year
ended
December
31,
2022,
or
0.31%
of
average
loans,
compared
to
net
charge-offs
of $55.1
million, or
0.48% of
average loans,
for the
year ended
December 31,
2021. Total
net charge-offs
for the
year ended
December 31,
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 2021
on a
non-GAAP basis
were $32.0
million,
or 0.28%
of average
loans.
The increase
in adjusted
net charge
-offs
was
primarily
reflected in
consumer
loans, as
well as
lower commercial
loans loss
recoveries. See
“Provision
for Credit
Losses”
and “Risk Management” below for analyses of the ACL and non-performing assets and
related ratios.
●
The Corporation
recorded non-interest
income of
$123.1 million
for the
year ended
December 31,
2022, compared
to $121.2
million for
2021. The
$1.9 million
increase was
primarily driven
by higher
transactional fee
income from
card and
merchant
transactions,
a
higher
realization
of
purchased
income
tax
credits,
and
an
increase
in
service
charges
and
fees
on
deposit
accounts,
partially offset
by a
decrease in
revenues from
mortgage banking
activities, primarily
related to
a lower
volume of
sales. See “Non-Interest Income” below for additional information.
●
Non-interest expenses
for the year
ended December 31,
2022 were
$443.1 million, compared
to $489.0 million
in 2021. Non-
interest
expenses
for
2021
included
$26.4
million
of
merger
and
restructuring
costs
associated
with
the
acquisition
and
integration
of Banco
Santander
Puerto
Rico (“BSPR”)
and
$3.0
million of
COVID-19 pandemic
-related
expenses, primarily
related
to
additional
cleaning,
safety
materials,
and
security
measures.
Adjusted
for
the
above-mentioned
merger
and
restructuring
costs and
COVID-19
expenses,
on
a
non-GAAP basis,
total
non-interest
expenses
in
2022
decreased
by $16.5
million,
when
compared
to
adjusted
total
non-interest
expenses
in
2021,
mainly
driven
by
a
decrease
in
outsourcing
technology service fees, higher
gains on other real
estate owned (“OREO”) activities,
as well as reductions
in the amortization
of intangible
assets and
charges to
legal and
operational reserves.
The efficiency
ratio for
the year
ended December
31, 2022
was
48.25%,
as
compared
to
57.45%
for
2021.
See
“Non-Interest
Expenses”
and
“Special
Items”
below
for
additional
information.
●
For
the
year
ended
December
31,
2022,
the
Corporation
recorded
an
income
tax
expense
of
$142.5
million,
compared
to
$146.8 million
for 2021.
The variance
was primarily
related to
a lower
effective tax
rate as
a result
of a
higher proportion
of
exempt to
taxable income
when compared
to 2021,
partially offset
by higher
pre-tax income.
As of
December 31,
2022, the
Corporation’s
net deferred
tax asset
amounted to
$155.6 million
(net of
a valuation
allowance of
$185.5 million,
including a
valuation
allowance
of
$149.5
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
22
–
Income
Taxes,
to
the
audited
consolidated financial statements included in Item 8 of this Form 10-K
for additional information.
●
As
of
December
31,
2022,
total
assets
were
approximately
$18.6
billion,
down
$2.2
billion
from
December
31,
2021.
The
decrease includes
a $2.1 billion
decline in cash
and cash equivalents
mainly in
connection with customer
deposit withdrawals
and maturities,
as well
as capital
return to
stockholders. In
addition, there
was a $571.4
million decrease
in total
investments,
driven
by
net
unrealized
losses
of
available-for-sale
debt
securities
of
$718.6
million
recorded
during
the
year
attributed
to
changes
in
market
interest
rates.
These
variances
were
partially
offset
by
growth
of
$469.3
million
in
total
loans.
See
“Financial Condition and Operating Data Analysis” below for additional information.
●
As of
December
31,
2022,
total liabilities
were
$17.3
billion,
down
$1.4
billion
from
December
31,
2021.
The decline
was
mainly
driven
by
a
$1.6
billion
decrease
in
total
deposits,
partially
offset
by
a
$250.1
million
net
increase
in
borrowings,
primarily short-term
advances from
the FHLB and
repurchase agreements.
The decline
in total deposits
reflected the
effect of
customers’
allocation
of
cash
into
higher
yielding
alternatives
and
elevated
customer
spending,
as
well
as
the
reduction
in
transactional account balances of government deposits. See
“Risk Management – Liquidity Risk and Capital Adequacy” below
for additional information about the Corporation’s
funding sources and strategy.
45
●
The
Bank’s
primary
sources
of
funding
are
consumer
and
commercial
core
deposits.
As
of
December
31,
2022,
these
core
deposits
funded
71%
of
total
assets.
Other
sources
of
liquidity
include
non-core
deposits,
such
as
brokered
CDs
and
government
deposits 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
December
31,
2022,
the
Corporation
had
approximately
$1.3
billion
available
for
funding
under
the
FED’s
Discount
Window
and
$644.2
million
available
for
additional borrowing capacity on FHLB lines of credit based on collateral
pledged at these entities.
●
As
of
December
31,
2022,
the
Corporation’s
stockholders’
equity
was
$1.3
billion,
a
decrease
of
$776.2
million
from
December 31, 2021.
The decline was driven
by a $718.6
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
purchase
of
approximately
19.4
million
shares
of
common
stock
for
a
total
purchase
price
of
approximately
$275.0
million
and
$88.2
million
in
dividends
declared to common
stock shareholders during
2022. These variances
were partially offset
by earnings generated during
2022.
The
Corporation’s
common
equity
tier
1
(“CET1”)
capital,
tier
1
capital,
total
capital,
and
leverage
ratios
were
16.53%,
16.53%, 19.21%,
and 10.70%,
respectively,
as of
December 31,
2022, compared
to CET1
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
$42.9 million
to $4.9
billion for
the
year
ended
December 31,
2022,
compared
to $4.8
billion
for 2021.
The Corporation
originated
$283.6
million
of Small
Business
Administration
Paycheck
Protection
Program
(“SBA
PPP”)
loans
during
the
year
ended
December
31,
2021.
Excluding
SBA
PPP
loan
originations,
total
loan
originations
increased
by
$326.5
million
consisting
of
a
$231.5
million
increase
in
consumer
loan
originations
and
a
$249.7
million
increase
in
commercial
and
construction
loan
originations,
partially offset by a $154.7 million decrease in residential mortgage
loan originations.
●
Total
non-performing assets
were $129.2
million as
of December
31, 2022,
a decrease
of $28.9
million, from
December 31,
2021.
The
decrease
was
driven
by:
(i)
a
$12.8
million
decrease
in
nonaccrual
commercial
and
construction
loans,
mainly
related
to
$8.5
million
in
loans
restored
to
accrual
status
and
collections;
(ii)
a
$12.3
million
reduction
in
nonaccrual
residential mortgage loans,
mostly driven by collections
and foreclosures; and
(iii) a $8.1 million
decrease in OREO and
other
assets, mainly
associated with
sales of
OREO residential
properties in
the Puerto
Rico region.
These variances
were partially
offset
by
an
increase
of
$4.3
million
in
nonaccrual
consumer
loans.
See
“Risk
Management
–
Nonaccrual
Loans
and
Non-
Performing Assets” below for additional information.
●
Adversely classified commercial and
construction loans decreased by
$83.7 million to $93.6 million
as of December 31, 2022,
compared to
December 31,
2021. The
decrease was
mostly driven
by $31.8
million in
payoffs and
paydowns associated
with
six commercial and construction loans,
each in excess of $1 million,
the sale of a $23.9 million commercial
and industrial loan
participation
in the
Florida region,
and the
upgrades in
the credit
risk classification
of three
commercial
and industrial
loans
totaling
$12.3
million.
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
of
the
markets where the Corporation operates.
46
SPECIAL ITEMS
The financial
results for
the year
ended December
31, 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
years
ended
December
31,
2021
and
2020
included the following Special Items:
Year
ended December 31, 2021
●
Merger and restructuring
costs of $26.4
million ($16.5 million
after-tax) in connection
with the BSPR acquisition
integration
process and
related restructuring
initiatives. Merger
and restructuring
costs 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 included costs related to system conversions, accelerated depreciation
charges
related
to
planned
closures
and
consolidation
of
branches
in
accordance
with
the
Corporation’s
integration
and
restructuring plan, and other integration related efforts.
●
Costs of
$3.0 million
($1.9 million
after-tax)
related to
the COVID-19
pandemic response
efforts,
primarily costs
related to
additional cleaning, safety materials, and security measures.
Year
ended December 31, 2020
●
Merger
and
restructuring
costs
of
$26.5
million
($16.6
million
after-tax)
in
connection
with
the
acquisition
of
BSPR
and
related
restructuring
initiatives.
Merger
and
restructuring
costs
primarily
included
consulting,
legal,
valuation,
and
other
professional
service
fees
associated
with
the
acquisition,
a
VSP
offered
to
eligible
employees,
retention
and
other
compensation bonuses, and expenses related to system conversions and
other integration-related efforts.
●
Gain on
sales of
U.S. agencies MBS
and U.S
Treasury
notes of
$13.2 million.
The gain
on tax-exempt
securities or
realized
at the tax-exempt international banking entity subsidiary level had no effect
on the income tax expense recorded in 2020.
●
Tax benefit of $8.0 million
related to the partial reversal of the deferred tax asset valuation allowance.
●
Costs of
$5.4 million
($3.4 million
after-tax)
related to
the COVID-19
pandemic response
efforts,
primarily costs
related to
additional cleaning, safety materials, and security measures.
●
Gain of
$0.1 million
realized on
the repurchase
of $0.4
million of
TRuPs.
The gain,
realized at
the holding
company level,
had no effect on the income tax expense in 2020.
●
Benefit
of
$6.2
million
($3.8
million
after-tax)
from
insurance
recoveries.
Insurance
recoveries
included
a
$5.0
million
benefit related
to the final
settlement of the
Corporation’s
business interruption
insurance claim related
to lost profits
caused
by Hurricanes Irma and Maria in 2017.
47
The
following
table
shows
the
net
income
reported
for
the
year
ended
December
31,
2022
and
reconciles
for
the
years
ended
December
31,
2021
and
2020,
the
reported
net
income
to
adjusted
net
income,
a
non-GAAP
financial
measure
that
excludes
the
Special Items identified above:
Year
Ended December 31,
2022
2021
2020
(In thousands)
Net income, as reported (GAAP)
$
305,072
$
281,025
$
102,273
Adjustments:
Merger and restructuring costs
-
26,435
26,509
COVID-19 pandemic-related expenses
-
2,958
5,411
Gain on sales of investment securities
-
-
(13,198)
Partial reversal of deferred tax asset valuation allowance
-
-
(8,000)
Gain on early extinguishment of debt
-
-
(94)
Benefit from hurricane-related insurance recoveries
-
-
(6,153)
Income tax impact of adjustments
(1)
-
(11,023)
(9,663)
Adjusted net income (Non-GAAP)
$
305,072
$
299,395
$
97,085
(1)
See "Special Items" above for the individual tax impact related
to the above adjustments, which were based on the Puerto Rico
statutory tax rate of 37.5%, as applicable.
Adjusted non-interest
expenses –
The following
tables reconcile
for the years
ended December
31, 2021
and 2020
the non-interest
expenses to adjusted non-interest expenses, which is a non-GAAP financial
measure that excludes the relevant Special Items identified
above:
2021
Non-Interest Expenses
(GAAP)
Merger and
Restructuring Costs
COVID 19 Pandemic-
Related Expenses
Adjusted (Non-GAAP)
(In thousands)
Non-interest expenses
$
488,974
$
26,435
$
2,958
$
459,581
Employees' compensation and benefits
200,457
-
67
200,390
Occupancy and equipment
93,253
-
2,601
90,652
Business promotion
15,359
-
22
15,337
Professional service fees
59,956
-
-
59,956
Taxes, other than income taxes
22,151
-
261
21,890
FDIC deposit insurance
6,544
-
-
6,544
Net gain on OREO operations
(2,160)
-
-
(2,160)
Credit and debit card processing expenses
22,169
-
-
22,169
Communications
9,387
-
-
9,387
Merger and restructuring costs
26,435
26,435
-
-
Other non-interest expenses
35,423
-
7
35,416
2020
Non-Interest
Expenses (GAAP)
Merger and
Restructuring Costs
COVID 19 Pandemic-
Related Expenses
Hurricane-Related
Insurance Recoveries
Adjusted (Non-
GAAP)
(In thousands)
Non-interest expenses
$
424,240
$
26,509
$
5,411
$
(1,153)
$
393,473
Employees' compensation and benefits
177,073
-
1,772
-
175,301
Occupancy and equipment
74,633
-
2,713
(789)
72,709
Business promotion
12,145
-
581
(184)
11,748
Professional service fees
52,633
-
8
(180)
52,805
Taxes, other than income taxes
17,762
-
274
-
17,488
FDIC deposit insurance
6,488
-
-
-
6,488
Net loss on OREO operations
3,598
-
-
-
3,598
Credit and debit card processing expenses
19,144
-
-
-
19,144
Communications
8,437
-
16
-
8,421
Merger and restructuring costs
26,509
26,509
-
-
-
Other non-interest expenses
25,818
-
47
-
25,771
48
CRITICAL ACCOUNTING ESTIMATES
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.
Accounting
estimates
require
assumptions
and
judgments
about
uncertain
matters
that
could
have
a
material
effect
on
the
consolidated
financial
statements.
The
Corporation’s
critical
accounting
estimates
that
are
particularly
susceptible
to
significant
changes
include
the
following:
(i)
the
ACL;
(ii)
valuation
of
financial
instruments;
and
(iii)
income taxes. Actual results could differ from estimates and assumptions
if different outcomes or conditions prevail.
Allowance for Credit Losses
The Corporation
maintains an ACL
for loans
and finance
leases based upon
management’s
estimate of the
lifetime expected
credit
losses in the loan portfolio, as of the balance sheet date, excluding
loans held for sale. Additionally,
the Corporation maintains an ACL
for
held-to-maturity
or
available-for-sale
debt
securities,
and
other
off-balance
sheet
credit
exposures
(
e.g.
, unfunded
loan
commitments). For loans and finance leases, unfunded loan commitments,
and held-to-maturity debt securities, the estimate of lifetime
credit losses
includes the
use of
quantitative models
that incorporate
forward-looking macroeconomic
scenarios that
are applied
over
the
contractual
lives
of
the
portfolios,
adjusted,
as
appropriate,
for
prepayments
and
permitted
extension
options
using
historical
experience.
For
purposes
of
the
ACL
for
lending
commitments,
such
allowance
is
determined
using
the
same
methodology
as
the
ACL
for
loans,
while
also
taking
into
consideration
the
probability
of
drawdowns
or
funding,
and
whether
such
commitments
are
cancellable by us. The
ACL for available-for-sale debt
securities is measured using a
risk-adjusted discounted cash flow
approach that
also
considers
relevant
current
and
forward-looking
economic
variables
and
the
ACL
is
limited
to
the
difference
between
the
fair
value of the security
and its amortized cost.
Judgment is specifically applied
in the determination of
economic assumptions, the length
of
the
initial
loss
forecast
period,
the
reversion
of
losses
beyond
the
initial
forecast
period,
historical
loss
expectations,
usage
of
macroeconomic
scenarios,
and
qualitative
factors,
which
may
not
be
adequately
captured
in
the
loss
model,
as
further
discussed
below.
The macroeconomic
scenarios utilized by
the Corporation include
variables that have
historically been key
drivers of increases and
decreases
in
credit
losses.
These
variables
include,
but
are
not
limited
to,
unemployment
rates,
housing
and
commercial
real
estate
prices, gross domestic
product levels, retail
sales, interest rate
forecasts, corporate
bond spreads, and
changes in equity
market prices.
The
Corporation
derives
the
economic
forecasts
it
uses
in
its
ACL
model
from
Moody's
Analytics.
The
latter
has
a
large
team
of
economists, database managers and operational engineers with a history
of producing monthly economic forecasts for over 25 years.
The
Corporation
has
currently
set
an
initial
forecast
period
(“reasonable
and
supportable
period”)
of
two
years
and
a
reversion
period of up to three
years, utilizing a straight-line
approach and reverting back
to the historical macroeconomic
mean for Puerto Rico
and the Virgin
Islands regions. For the
Florida region, the methodology
considers a reasonable and
supportable forecast period
and an
implicit reversion towards the historical
trend that varies for each macroeconomic
variable. After the reversion period,
a historical loss
forecast
period
covering
the
remaining
contractual
life,
adjusted
for
prepayments,
is
used
based
on
the
change
in
key
historical
economic variables
during representative
historical expansionary
and recessionary periods.
Changes in economic
forecasts impact the
probability
of
default
(“PD”),
loss-given
default
(“LGD”),
and
exposure
at
default
(“EAD”)
for
each
instrument,
and
therefore
influence the amount of future cash flows for each instrument that the Corporation
does not expect to collect.
Further,
the
Corporation
periodically
considers
the
need
for
qualitative
adjustments
to
the
ACL.
Qualitative
adjustments
may
be
related to and include,
but not be 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
qualitative
factors
applied
at
December
31,
2022,
and
the
importance
and
levels
of
the
qualitative
factors
applied,
may
change
in
future
periods
depending
on
the
level
of
changes
to
items
such
as
the
uncertainty
of
economic
conditions
and
management's
assessment
of
the
level
of
credit
risk
within
the loan
portfolio
as
a
result
of
such
changes,
compared
to the
amount of
ACL calculated
by the
model.
The evaluation
of qualitative
factors
is inherently
imprecise
and
requires
significant management judgment.
49
The ACL can also be
impacted by factors outside the Corporation’s
control, which include unanticipated
changes in asset quality of
the
portfolio,
such
as deterioration
in
borrower
delinquencies,
or
credit
scores
in
our
residential
real
estate
and
consumer
portfolio.
Further,
the current
fair
value of
collateral
is utilized
to assess
the
expected
credit losses
when
a financial
asset is
considered
to be
collateral dependent.
Our process
for determining
the ACL is
further discussed
in Note
1 –
Nature of
Business and
Summary of
Significant Accounting
Policies,
included
in
Item
8
of
this
Form
10-K.
Also,
see
“Allowance
for
Credit
Losses
for
Loans
and
Finance
Leases”
below
for
additional information on
the weighting of economic
scenarios to estimate the
ACL, changes in key
economic variables, and
the ACL
sensitivity analysis performed as of December 31, 2022.
Valuation
of financial instruments
The measurement
of fair value
is fundamental
to the Corporation’s
presentation of
its financial condition
and results of
operations.
The
Corporation
holds
debt
and
equity
securities,
derivatives,
and
other
financial
instruments
at
fair
value.
The
Corporation’s
significant assets
reflected at
fair value
on a
recurring basis
on the
Corporation’s
financial statements
consisted
of available-for-sale
debt
securities
amounting
to
$5.6
billion
as
of
December
31,
2022.
In
addition,
fair
value
is
also
used
for
measuring
other
non-
recurring fair value assets such as collateral dependent loans, OREO, and loans
held for sale.
Assets
and
liabilities
carried
at
fair
value
inherently
include
subjectivity
and
may
require
the
use
of
significant
assumptions,
adjustments and
judgment including,
among others,
discount rates,
cash flows,
default rates,
and loss
rates.
A significant
change
in
assumptions
may
result
in
a
significant
change
in
fair
value,
which
in
turn,
may
result
in
a
higher
degree
of
financial
statement
volatility
and
could
result
in
significant
impact
on
our
results
of
operations,
financial
condition
or
disclosures
of
fair
value
information.
The
fair value
of a
financial
instrument
is the
amount
that would
be received
to
sell an
asset or
paid
to transfer
a
liability
in
an
orderly transaction
between market
participants at
the measurement
date. The
Corporation categorizes
the fair
value of
its available-
for-sale
debt
securities
using
a
three-level
hierarchy
for
fair
value
measurements
that
distinguishes
between
market
participant
assumptions
developed
based
on
market
data
obtained
from
sources
independent
of
the
Corporation
(observable
inputs)
and
the
Corporation’s
own
assumptions
about
market
participant
assumptions
developed
based
on
the
best
information
available
in
the
circumstances
(unobservable
inputs).
The
hierarchy
of
inputs
used
in
determining
the
fair
value
maximizes
the
use
of
observable
inputs and
minimizes the
use of
unobservable inputs
by requiring
that observable
inputs be
used when
available. The
hierarchy level
assigned
to each
security
in the
Corporation’s
investment portfolio
was based
on management’s
assessment of
the transparency
and
reliability of the inputs used to estimate the fair values at the measurement
date.
The fair value
of available-for-sale debt
securities was based
on unadjusted quoted
market prices (as
is the case with
U.S. Treasury
securities
and
equity
securities
with
readily
determinable
fair
values),
when
available
(Level
1).
If
quoted
market
prices
are
unavailable, the
fair value
is based on
market prices
for comparable
assets (as is
the case
with MBS
and U.S.
agency debt
securities)
that are
based on
observable market
parameters,
including benchmark
yields, reported
trades, quotes
from brokers
or dealers,
issuer
spreads,
bids,
offers,
and
reference
data,
including
market
research
operations,
when
available
(Level
2).
Observable
prices
in
the
market
already consider
the risk
of nonperformance.
If listed
prices or
quotes
are not
available, fair
value
is based
upon discounted
cash flow
models that
use unobservable
inputs due
to the
limited market
activity of
the instrument,
as is
the case
with private
label
MBS held
by the
Corporation (Level
3). Assets
are classified
in their
entirety based
on the
lowest level
of input
that is
significant to
their fair value measurement.
Private label MBS
are collateralized
by fixed-rate
mortgages on single-family
residential properties
in the U.S.
with original
FICO
scores
over
700
and
moderate
loan-to-value
ratios
(under
80%),
as
well
as
moderate
delinquency
levels.
The
interest
rate
on
the
securities
is variable,
tied to
3-month
LIBOR,
and
limited to
the weighted
-average
coupon of
the underlying
collateral.
The market
valuation represents
the estimated
net cash
flows over
the projected
life of
the pool
of underlying
assets applying
a discount
rate that
reflects market
observed floating
spreads over
LIBOR, with
a widening
spread based
on a nonrated
security.
The market
valuation is
derived
from
a
model
that
utilizes
relevant
assumptions
such
as
the
prepayment
rate,
default
rate,
and
loss
severity
on
a
loan
level
basis. The
Corporation modeled
the cash
flow from
the fixed-rate
mortgage collateral
using
a static
cash flow
analysis according
to
collateral attributes
of the
underlying mortgage
pool (
i.e.
, loan
term, current
balance, note
rate, rate
adjustment type,
rate adjustment
frequency,
rate
caps,
and
others)
in
combination
with
prepayment
forecasts
based
on
historical
portfolio
performance.
The
Corporation models the variable cash flow of the security using the 3-month
LIBOR forward curve.
Declines in fair
value that are
credit-related are
recorded on the
balance sheet
through an
ACL with a
corresponding adjustment
to
provision for credit losses and declines that are non-credit-related are
recognized through other comprehensive income (loss).
If the
Corporation intends
to sell a
debt security
in an
unrealized loss
position or
determines that
it is more
likely than
not that
the
Corporation will be
required to sell
a debt security
before it recovers
its amortized cost
basis, the debt
security is written
down to fair
value
through
earnings.
As
of December
31,
2022,
the
Corporation
did
not
intend
to
sell
any
debt
securities
in
an
unrealized
loss
50
position
and
it
is
not
more
likely
than
not
that
the
Corporation
will
be
required
to
sell any
debt
securities
before
recovery
of
their
amortized cost basis.
For
debt
securities
in
an unrealized
loss position
for
which the
Corporation
does not
intend
to sell
the debt
security
and
it is
not
more likely than
not that the
Corporation will be
required to sell
the debt security,
the Corporation determines
whether the loss
is due
to
credit-related
factors
or
non-credit-related
factors.
For
debt
securities
in
an
unrealized
loss
position
for
which
the
losses
are
determined to be
the result of both
credit-related and non-credit-related
factors, the credit loss
is determined as
the difference between
the present value of the cash flows expected to be collected, and the amortized
cost basis of the debt security.
Available-for-sale
debt securities
held by
the Corporation
at year-end
primarily consisted
of securities
issued by
U.S. government-
sponsored entities
(“GSEs”), and
the aforementioned
private label
MBS.
Given the
explicit and
implicit guarantees
provided by
the
U.S. federal government, the Corporation believes the credit risk in
securities issued by the GSEs is low.
For the year ended December
31,
2022,
the
Corporation
determined
the
credit
losses
for
private
label
MBS
based
on
a
risk-adjusted
discounted
cash
flow
methodology that
considers qualitative
and quantitative
factors specific
to the
instruments, including
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
and
the
housing
price
index.
Under
this
approach,
expected
cash
flows (interest and principal) were discounted at the Treasury
yield curve as of the reporting date.
See
Note
25
–
Fair
Value,
to
the
audited
consolidated
financial
statements
included
in
Item
8
of
this
Form
10-K,
for
additional
information.
Income Taxes
The Corporation is required to estimate income taxes in preparing
its consolidated financial statements. This involves the estimation
of
current
income
tax
expense
together
with
an
assessment
of
temporary
differences
between
the
carrying
amounts
of
assets
and
liabilities
for
financial
reporting
purposes
and
the
amounts
used
for
income
tax
purposes.
The
determination
of
current
income
tax
expense
involves
estimates
and
assumptions
that
require
the
Corporation
to
assume
certain
positions
based
on
its
interpretation
of
current tax regulations. Management assesses the relative benefits and
risks of the appropriate tax treatment of transactions, taking into
account statutory,
judicial and regulatory
guidance, and recognizes
tax benefits
only when deemed
probable. Changes
in assumptions
affecting estimates
may be required
in the future
and estimated tax
liabilities may need
to be increased
or decreased accordingly.
The
Corporation adjusts
the accrual
of tax
contingencies in
light of
changing facts
and circumstances,
such as
the progress
of tax
audits,
case law
and emerging
legislation. The
Corporation’s
effective tax
rate includes
the impact
of tax
contingencies and
changes to
such
accruals,
as
considered
appropriate
by
management.
When
particular
tax
matters
arise,
a
number
of
years
may
elapse
before
such
matters are
audited by
the taxing
authorities and
finally resolved.
Favorable resolution
of such matters
or the
expiration of
the statute
of limitations may result in the release of tax contingencies that the
Corporation recognizes as a reduction to its effective
tax rate in the
year of resolution.
Unfavorable settlement
of any particular
issue could increase
the effective
tax rate and
may require the
use of cash
in the year of resolution.
As of December 31,
2022, we had $155.6
million of deferred tax
assets, net of a related
valuation allowance of $185.5
million. The
determination
of
deferred
tax
expense
or
benefit
is
based
on
changes
in
the
carrying
amounts
of
assets
and
liabilities
that
generate
temporary differences
and recognizes
enacted changes
in tax
rates and
laws in
the period
in which
they occur.
The carrying
value of
the Corporation’s net deferred tax
asset assumes that the Corporation will be able to generate sufficient
future taxable income based on
estimates and
assumptions. Valuation
allowances are
established, when
necessary,
to reduce
deferred tax
assets to
the amount
that is
more likely than not to be realized.
The determination of whether a valuation
allowance for deferred tax assets is appropriate
is subject
to
considerable
judgment
and
requires
the
evaluation
of
positive
and
negative
evidence
that
can
be
objectively
verified.
Positive
evidence
necessary
to
overcome
the
negative
evidence
includes
whether
future
taxable
income
in
sufficient
amounts
and
character
within the carryforward periods is
available under the tax law.
Consideration must be given to
all sources of taxable income including,
as
applicable,
the
future
reversal
of
existing
temporary
differences,
future
taxable
income
forecasts
exclusive
of
the
reversal
of
temporary differences and
carryforwards, and tax planning
strategies. When negative evidence (e.g.,
cumulative losses in recent years,
history
of operating
loss or
tax credit
carryforwards
expiring
unused)
exists, more
positive
evidence
than negative
evidence
will be
necessary.
The Corporation
has concluded
that based on
the level
of positive
evidence, it
is more
likely than
not that
the deferred
tax
asset will be realized, net of the existing valuation allowances
at December 31, 2022
and 2021. However, there is no
guarantee that the
tax benefits associated
with the deferred
tax assets will be
fully realized. The
positive evidence considered
by management in
arriving
at
its
conclusion
included
factors
such
as
the
following:
FirstBank’s
three-year
cumulative
income
position;
sustained
periods
of
profitability; management’s
proven ability to
forecast future income
accurately and execute
tax strategies; and
the utilization of NOLs
over the past three years. The negative evidence
considered by management included the following: uncertainties
about the state of the
Puerto Rico
economy,
including considerations
relating to
the effect
of hurricane
and pandemic
recovery funds
together with
Puerto
Rico
government
debt
restructuring
and
the
ultimate
sustainability
of
the
latest
fiscal
plan
certified
by
the
Puerto
Rico
Oversight,
Management, and Economic Stability Act (“PROMESA”) oversight board.
51
See
Note
22
-
Income
Taxes,
to
the
audited
consolidated
financial
statements
included
in
Item
8
on
Form
10-K,
for
further
information related to income taxes.
OTHER ESTIMATES
In addition
to the
critical accounting
estimates we
make in connection
with the
ACL, fair
value measurements,
and the accounting
for income
taxes, the
use of
estimates and
assumptions is
also important
in determining
the accounting
for goodwill
and identifiable
intangible
assets,
pension
and
postretirement
benefit
obligations,
and
provisions
for
losses
that
may
arise
from
litigation
and
regulatory proceedings (including governmental investigations).
Goodwill is
assessed for
impairment at
least annually
and more
frequently if
circumstances exist
that indicate
a possible
reduction
in the
fair value
of a
reporting unit
below its
carrying value.
When assessing
goodwill for
impairment, first,
a qualitative
assessment
can be
made to
determine whether
it is
more likely
than not
that the
estimated fair
value of
a reporting
unit is
less than
its estimated
carrying value. If
the results of the
qualitative assessment are
not conclusive, a
quantitative goodwill test
is performed. Estimating
the
fair
value
of
our
reporting
units
requires
judgment.
Critical
inputs
to
the
fair
value
estimates
may
include
projected
earnings,
macroeconomic conditions,
interest rate
levels, and
peers performance.
See Note 1
– Nature of
Business and
Summary of
Significant
Accounting Policies and
Note 9 –
Goodwill and Other
Intangibles, to the
audited consolidated
financial statements included
in Item 8
of
this Form
10-K,
for
further
information
about
goodwill and
identifiable
intangible
assets, including
intangible
assets recorded
in
connection
with the acquisition of BSPR.
Identifiable
intangible
assets
are
tested
for
impairment
when
events
or
changes
in
circumstances
suggest
that
an
asset’s
or
asset
group’s
carrying
value
may
not
be
fully
recoverable.
Judgment
is
required
to
evaluate
whether
indications
of
potential
impairment
have
occurred,
and
to
test intangible
assets for
impairment,
if
required.
An
impairment
is recognized
if
the
estimated
undiscounted
cash flows
relating to
the asset
or asset
group is
less than
the corresponding
carrying value.
The amortization
of identified
intangible
assets
is
based
upon
the
estimated
economic
benefits
to
be
received
over
their
economic
life,
which
is
also
subjective.
Customer
attrition rates that are based on historical experience are used to determine the
estimated economic life of intangibles assets.
As part of the BSPR acquisition,
the Corporation maintains two frozen
qualified noncontributory defined benefit
pension plans, and
a related complementary
postretirement benefits plan
covering medical benefits
and life insurance after
retirement.
Calculation of the
obligations and related
expenses under these
plans requires the
use of actuarial
valuation methods
and assumptions, which
are subject
to
management
judgment
and
may
differ
if
different
assumptions
are
used.
The
discount
rate
assumption
used
to
measure
the
postretirement
benefit obligation
is estimated
as the
single equivalent
rate such
that the
present value
of the
plan’s
projected benefit
obligation cash
flows using
the single
rate equals
the present
value of
those cash
flows using
the above
mean actuarial
yield curves.
See
Note
19
–
Employee
Benefit
Plans,
to
the
audited
consolidated
financial
statements
included
in
Item
8
of
this
Form
10-K,
for
disclosures related to the benefit plans.
As necessary,
we
also estimate
and
provide
for potential
losses that
may
arise out
of litigation
and
regulatory
proceedings
to the
extent
that
such losses
are
probable
and
can be
reasonably
estimated.
Judgment
is required
in making
these
estimates
and
our
final
liabilities may
ultimately be
materially different.
Our total
estimated liability
with respect
to litigation
and regulatory
proceedings is
determined on
a case-by-case basis
and represents
an estimate
of probable
losses after
considering, among
other factors,
the progress
of each case, our experience and the experience of
others in similar cases, proceedings or investigations, and
the opinions and views of
legal counsel.
The outcomes
of legal
actions are
unpredictable and
subject to
significant uncertainties,
and it
is inherently
difficult to
determine whether any loss is probable or even
possible. It is also inherently difficult to estimate
the amount of any loss and there may
be matters for which
a loss is probable or
reasonably possible but not currently
estimable. Accordingly,
actual losses may be in
excess
of
the
established
accrual
or
the
range
of
reasonably
possible
loss.
See
Note
29
–
Regulatory
Matters,
Commitments,
and
Contingencies to the audited consolidated financial statements included
in Item 8 of this Form 10-K.
52
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.
In
addition,
variable
sources
of
interest
income,
such
as
loan
fees,
periodic
dividends, and
collection of
interest on
nonaccrual loans,
can fluctuate
from period
to period.
Net interest
income for
the year
ended
December 31, 2022 was $795.3
million, compared to $729.9 million
for 2021.
On a tax-equivalent basis and excluding
the changes in
the fair
value of
derivative
instruments, net
interest income
for the
year ended
December 31,
2022 was
$828.4 million
compared
to
$753.7
million
for
the
year
ended
December
31,
2021.
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.
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.
Part I
Average volume
Interest income
(1)
/ expense
Average rate
(1)
Year Ended December
31,
2022
2021
2020
2022
2021
2020
2022
2021
2020
(Dollars in thousands)
Interest-earning assets:
Money market and other short-term investments
$
1,156,127
$
2,012,617
$
1,258,683
$
11,791
$
2,662
$
3,388
1.02
%
0.13
%
0.27
%
Government obligations
(2)
2,870,889
2,065,522
878,537
39,033
27,058
21,222
1.36
%
1.31
%
2.42
%
MBS
4,052,660
4,064,343
2,236,262
85,090
57,159
48,683
2.10
%
1.41
%
2.18
%
FHLB stock
20,419
28,208
32,160
1,114
1,394
1,959
5.46
%
4.94
%
6.09
%
Other investments
12,747
10,254
6,238
126
61
41
0.99
%
0.59
%
0.66
%
Total investments
(3)
8,112,842
8,180,944
4,411,880
137,154
88,334
75,293
1.69
%
1.08
%
1.71
%
Residential mortgage loans
2,886,594
3,277,087
3,119,400
160,359
177,747
166,019
5.56
%
5.42
%
5.32
%
Construction loans
121,642
181,470
168,967
7,350
12,766
9,094
6.04
%
7.03
%
5.38
%
Commercial and Industrial ("C&I") and Commercial
Mortgage loans
5,092,638
5,228,150
4,387,419
281,486
261,333
214,830
5.53
%
5.00
%
4.90
%
Finance leases
636,507
518,757
440,796
46,842
38,532
32,515
7.36
%
7.43
%
7.38
%
Consumer loans
2,461,632
2,207,685
1,952,120
262,542
239,725
216,263
10.67
%
10.86
%
11.08
%
Total loans
(4)(5)
11,199,013
11,413,149
10,068,702
758,579
730,103
638,721
6.77
%
6.40
%
6.34
%
Total interest-earning assets
$
19,311,855
$
19,594,093
$
14,480,582
$
895,733
$
818,437
$
714,014
4.64
%
4.18
%
4.93
%
Interest-bearing liabilities:
Interest-bearing checking accounts
$
3,942,419
$
3,667,523
$
2,197,980
$
15,568
$
5,776
$
5,933
0.39
%
0.16
%
0.27
%
Savings accounts
4,336,901
4,494,757
3,190,743
11,191
6,586
11,116
0.26
%
0.15
%
0.35
%
Retail certificates of deposit ("CDs")
2,213,145
2,636,303
2,741,388
18,102
26,138
43,350
0.82
%
0.99
%
1.58
%
Brokered CDs
69,694
141,959
357,965
1,500
2,982
7,989
2.15
%
2.10
%
2.23
%
Interest-bearing deposits
10,562,159
10,940,542
8,488,076
46,361
41,482
68,388
0.44
%
0.38
%
0.81
%
FHLB advances
179,452
354,055
505,478
5,136
8,199
11,251
2.86
%
2.32
%
2.23
%
Other borrowed funds
379,121
484,244
483,907
15,824
15,098
13,021
4.17
%
3.12
%
2.69
%
Total interest-bearing liabilities
$
11,120,732
$
11,778,841
$
9,477,461
$
67,321
$
64,779
$
92,660
0.61
%
0.55
%
0.98
%
Net interest income on a tax-equivalent basis and
excluding valuations
$
828,412
$
753,658
$
621,354
Interest rate spread
4.03
%
3.63
%
3.95
%
Net interest margin
4.29
%
3.85
%
4.29
%
(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. See "Basis of Presentation" below.
(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 $11.2 million,
$10.5 million, and $7.3 million for the years ended December
31, 2022, 2021, and 2020, respectively,
of income from prepayment
penalties and late fees related to the Corporation’s
loan portfolio.
53
Part II
2022 Compared to 2021
2021 Compared to 2020
Increase (decrease)
Increase (decrease)
Due to:
Due to:
Volume
Rate
Total
Volume
Rate
Total
(In thousands)
Interest income on interest-earning assets:
Money market and other short-term
investments
$
(4,934)
$
14,063
$
9,129
$
1,513
$
(2,239)
$
(726)
Government obligations
10,914
1,061
11,975
22,111
(16,275)
5,836
MBS
(205)
28,136
27,931
32,753
(24,277)
8,476
FHLB stock
(405)
125
(280)
(223)
(342)
(565)
Other investments
17
48
65
25
(5)
20
Total investments
5,387
43,433
48,820
56,179
(43,138)
13,041
Residential mortgage loans
(21,437)
4,049
(17,388)
8,509
3,219
11,728
Construction loans
(3,793)
(1,623)
(5,416)
713
2,959
3,672
C&l and Commercial Mortgage loans
(7,132)
27,285
20,153
41,940
4,563
46,503
Finance leases
8,706
(396)
8,310
5,789
228
6,017
Consumer loans
27,330
(4,513)
22,817
28,032
(4,570)
23,462
Total loans
3,674
24,802
28,476
84,983
6,399
91,382
Total interest income
$
9,061
$
68,235
$
77,296
$
141,162
$
(36,739)
$
104,423
Interest expense on interest-bearing liabilities:
Brokered CDs
$
(1,537)
$
55
$
(1,482)
$
(4,563)
$
(444)
$
(5,007)
Non-brokered interest-bearing deposits
(1,200)
7,561
6,361
14,669
(36,568)
(21,899)
FHLB advances
(4,520)
1,457
(3,063)
(3,438)
386
(3,052)
Other borrowed funds
(3,833)
4,559
726
222
1,855
2,077
Total interest expense
(11,090)
13,632
2,542
6,890
(34,771)
(27,881)
Change in net interest income
$
20,151
$
54,603
$
74,754
$
134,272
$
(1,968)
$
132,304
Portions of the Corporation’s
interest-earning assets, mostly investments
in obligations of some U.S.
government agencies and U.S.
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
22
-
Income
Taxes
to
the
audited
consolidated
financial
statements
included
in
Item
8
of
this
Form
10-K).
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.
54
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:
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
Interest income - GAAP
$
862,614
$
794,708
$
692,982
Unrealized gain on derivative instruments
(30)
(24)
(27)
Interest income excluding valuations
862,584
794,684
692,955
Tax-equivalent adjustment
33,149
23,753
21,059
Interest income on a tax-equivalent basis
and excluding valuations
$
895,733
$
818,437
$
714,014
Interest expense - GAAP
$
67,321
$
64,779
$
92,660
Net interest income - GAAP
$
795,293
$
729,929
$
600,322
Net interest income excluding valuations
$
795,263
$
729,905
$
600,295
Net interest income on a tax-equivalent basis
and excluding
valuations
$
828,412
$
753,658
$
621,354
Average Balances
Loans and leases
$
11,199,013
$
11,413,149
$
10,068,702
Total securities, other short-term investments and interest-bearing
cash balances
8,112,842
8,180,944
4,411,880
Average Interest-Earning Assets
$
19,311,855
$
19,594,093
$
14,480,582
Average Interest-Bearing Liabilities
$
11,120,732
$
11,778,841
$
9,477,461
Average Yield/Rate
Average yield on interest-earning assets - GAAP
4.47%
4.06%
4.79%
Average rate on interest-bearing liabilities - GAAP
0.61%
0.55%
0.98%
Net interest spread - GAAP
3.86%
3.51%
3.81%
Net interest margin - GAAP
4.12%
3.73%
4.15%
Average yield on interest-earning assets excluding valuations
4.47%
4.06%
4.79%
Average rate on interest-bearing liabilities
0.61%
0.55%
0.98%
Net interest spread excluding valuations
3.86%
3.51%
3.81%
Net interest margin excluding valuations
4.12%
3.73%
4.15%
Average yield on interest-earning assets on a tax-equivalent
basis and
excluding valuations
4.64%
4.18%
4.93%
Average rate on interest-bearing liabilities
0.61%
0.55%
0.98%
Net interest spread on a tax-equivalent basis
and excluding valuations
4.03%
3.63%
3.95%
Net interest margin on a tax-equivalent basis and excluding
valuations
4.29%
3.85%
4.29%
55
Net
interest
income
amounted
to
$795.3
million
for
the
year
ended
December
31,
2022,
an
increase
of
$65.4
million,
when
compared to
$729.9 million
for the
year ended
December 31,
2021.
The $65.4
million increase
in net
interest income
was primarily
due to:
●
A $31.1 million
increase in interest income
on consumer loans and
finance leases, mainly due
to a $371.7 million
increase in
the average balance of this portfolio, mostly related to growth in the auto loans
and finance leases portfolios.
●
A $30.0 million increase in interest income on investment
securities, driven by a decrease in the U.S. agencies MBS premium
amortization expense
associated to lower
prepayments as market
interest rates increased
during 2022.
In addition, there
was
an increase of
approximately $8.6 million
in interest income attributable
to an $805.4 million
increase in the average
balance
of
government
obligations
driven
by
the
redeployment
of
some
cash
balances
into
higher-yielding
liquid
investment
securities.
●
A $15.1
million increase
in interest
income on
commercial and
construction
loans, primarily
reflecting higher
interest rates
and higher
loan balances
(excluding SBA
PPP loans).
The effect
associated with
higher market
interest rates,
that included
the upward repricing
of variable-rate commercial
and construction
loans and new
loans originated at
higher interest,
resulted
in an
increase of
approximately $34.7
million in
interest income.
In addition,
there was
an increase
of approximately
$57.1
million in
the average
balance of
this portfolio
(excluding SBA
PPP loans),
which resulted
in an
increase of
approximately
$2.0
million
in
interest
income.
These
favorable
variances
were
partially
offset
by
a
$12.9
million
reduction
in
interest
income
from
SBA
PPP
loans,
from
$20.9
million
in
2021
to
$8.0
million
in
2022,
a
decrease
of
$6.7
million
in
interest
income attributed to
a lower discount accretion
for the acquired BSPR commercial
and construction loans, and
a reduction of
approximately
$2.9
million
related
to
the
benefit
of
interest
income
realized
from
deferred
interest
recognized
on
a
construction loan paid off in 2021.
The
interest
rate
on
approximately
56%
of
the
Corporation’s
commercial
and
construction
loans
is
variable,
42%
is based
upon
LIBOR,
SOFR and
other
indexes
and 14%
is based
upon
the
Prime rate
index.
During 2022,
the average
one-month
LIBOR
increased
182
basis
points,
the
average
three-month
LIBOR
increased
224
basis
points,
the
average
Prime
rate
increased 161
basis points, and
the average
three-month SOFR increased
215 basis points,
compared to
the average rates
for
such indexes in 2021.
●
A $9.1
million increase
in interest
income from
interest-bearing cash
balances, primarily
consisting of
cash balances
held at
the
FED,
mainly
due
to
the
effects
higher
market
interest
rates,
partially
offset
by
the
effects
associated
with
an
$856.5
million reduction in the average balance.
Partially offset by:
●
A $17.5
million decrease
in interest income
on residential
mortgage loans,
primarily related
to a $390.5
million reduction
in
the average balance of this portfolio, partially offset by higher
yields.
●
A $2.5 million increase in total interest expense, including:
o
a
$4.9
million
increase
in
interest
expense
on
interest-bearing
deposits,
primarily
associated
with
the
effects
of
higher
interest
rate
environment
on
average
rates
paid
in
2022,
partially
offset
by
the
effects
of
a
$378.4
million
reduction
in the
average balance
of interest-bearing
deposits reflecting
the effect
of customer
allocating more
cash
into higher yielding liquid alternative, as well as higher consumer spending;
o
a
$0.7
million
increase
in
interest
expense
on
other
borrowings,
consisting
of
a
$3.1
million
increase
in
interest
expense
on
variable-rate
junior
subordinated
debentures
that
are
tied
to
LIBOR,
partially
offset
by
a
$2.4
million
decrease in interest
expense on repurchase
agreements primarily related
to a $105.5 million
reduction in the
average
balance; and
o
a $3.1
million decrease
in interest
expense on
FHLB advances,
primarily
related to
the effects
of a
$174.6 million
decrease in the average balance
of FHLB advances, partially offset
by the effects of higher
market interest rates paid
on FHLB advances taken in 2022.
The net
interest margin
increased by
39 basis
points to
4.12% for
2022,
compared to
3.73% for
2021.
The improved
margin
was
primarily
attributable
to
higher
market
interest
rates
driving
an
increase
in
loans,
investment
securities,
and
interest-earning
cash
balance
yields,
partially
offset
by
higher
cost
of
funds,
the
impact
of
lower
accelerated
SBA
PPP
loan
fees
recognized
upon
forgiveness payments in 2002, and lower purchase discount
accretion as mentioned above.
56
Provision for Credit Losses
The provision
for credit
losses consists of
provisions for
credit losses on
loans and
finance leases,
unfunded loan
commitments, as
well as the debt securities portfolio. 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 $25.7
million for the year
ended December 31, 2022,
compared to
a net benefit
of $61.7
million for the
year ended December
31, 2021.
The variances by
major portfolio
category were
as
follows:
●
Provision for
credit losses
for the
commercial and
construction loan
portfolio was
a net benefit
of $23.1
million for
the year
ended December 31, 2022,
compared to a net benefit
of $65.3 million for
the year ended December
31, 2021. The net benefit
recorded
during
2022
mainly
reflects
reductions
in
qualitative
reserves
associated
with
reduced
uncertainty
around
the
economic impact
of the
COVID-19 pandemic,
particularly on
loans in
the hotel,
transportation and
entertainment industries,
partially offset
by loan
growth and
a less favorable
economic outlook
in the
projection of
certain forecasted
macroeconomic
variables,
such
as the
commercial
real
estate (“CRE”)
index.
Meanwhile,
the
net
benefit
recorded
in 2021
reflects
both
an
improved
broad
macroeconomic
environment
following
the
initial
impact
of
the
COVID-19
pandemic
and
an
overall
decrease in the size of this portfolio in the Puerto Rico region.
●
Provision for
credit losses
for the
consumer loans
and finance
leases portfolio
was an
expense of
$57.5 million
for the
year
ended December
31, 2022, compared
to $20.6 million
for the year
ended December 31,
2021. The
increase in charges
to the
provision
during
2022
was
driven
by
the
portfolio
growth,
uncertainties
in
the
macroeconomic
outlook
reflected
in
the
deterioration in forecasted variables such as the regional unemployment
rate, and higher net charge-offs.
●
Provision
for
credit
losses
for
the
residential
mortgage
loan
portfolio
was
a
net
benefit
of
$8.7
million
for
the
year
ended
December
31,
2022,
compared
to
$17.0
million
for
the
year
ended
December
31,
2021.
The
net
benefit
in
both
periods
reflects the
effect of
a continued
decrease in
the size
of the residential
mortgage loan
portfolio,
as well
as releases
related to
qualitative adjustments
associated with
reduced uncertainty
around the
economic impact
of the
COVID-19 pandemic,
while
also recognizing the uncertainty in the near-term macroeconomic
outlook.
During 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
Note 1
– Nature
of Business
and Summary
of Significant
Accounting Policies
in the
audited consolidated
financial
statements
included
in
Item
8
of
this
Form
10-K
for
additional
information
on
the
ACL
estimation
methodology
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,
as well as analyses of the ACL, non-performing assets, and related information.
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 $2.7 million for
the year ended December 31,
2022, compared to a net benefit of
$3.6 million for the year ended
December
31, 2021.
The expense
recorded during
2022 was
mainly driven
by an increase
in balance
of unfunded
loan commitments
principally
due to
newly originated
facilities which
remained undrawn
as of
December 31,
2022. On
the other
hand, the
net benefit
recorded in
2021
was
mainly
related
to
improvements
in
forecasted
macroeconomic
variables
following
the
initial
impact
of
the
COVID-19
pandemic.
Provision for credit losses for
held-to-maturity and available-for-sale debt
securities
The
provision
for
credit
losses
for
held-to-maturity
securities
was
a
net
benefit
of
$0.3
million
for
each
of
the
years
ended
December
31,
2022
and
2021.
The
net
benefit
recorded
during
2022
was
mainly
due
to
the
Corporation’s
reduction
in
qualitative
reserves driven
by improvements in
the underlying
financial information
of certain bond
issuers. Meanwhile,
the net benefit
recorded
in
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 year
ended
December 31, 2022, compared to $0.1 million for the year ended December 31,
2021.
57
Non-Interest Income
Non-interest income
amounted to
$123.1 million
for the
year ended
December 31,
2022, compared
to $121.2
million for
the same
period in 2021. The $1.9 million increase in non-interest income was primarily
due to:
●
A
$3.9
million
increase
in
credit
and
debit
cards,
point
of
sale
(“POS”)
and
merchant
fee
income
reflecting
increased
purchase and transaction volumes.
●
A
$3.4
million
increase
in
other
sources
of
non-interest
income
including:
(i)
a
$2.0
million
increase
related
to
higher
benefit recognized
in relation
to purchased
income tax
credits realized
during the
year; (ii)
a $1.5
million increase
in fees
and commissions from
insurance referrals; and
(iii) a $0.9 million
increase in gains
related to the
sale of long-lived
assets.
These variances were partially offset by a $0.4 million
increase in unrealized losses on marketable equity securities and the
effect
in
2021
of
a
$0.6
million
gain
recorded
in
connection
with
the
settlement
and
collection
of
an
insurance
claim
associated with a damaged property.
●
A $2.5
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 and an increase in the monthly
service fee charged on certain checking and
savings products
which was
effective in
the third
quarter of
2021, partially
offset by
a $0.7
million adjustment
during the
fourth
quarter
of
2022
to
reverse
previously
recognized
fees
on
non-sufficient
funds
as
part
of
changes
in
the
fees
structure.
●
A $1.8 million increase in insurance commission income.
Partially offset by:
●
A $9.7
million decrease
in revenues
from mortgage
banking activities,
mainly driven
by an
$11.8
million decrease
in net
realized gain
on sales
of residential
mortgage loans
in the
secondary market
mainly due
to a
lower volume
of sales
and a
$1.1 million
decrease
in servicing
fees. These
variances
were partially
offset
by a
$2.2 million
decrease in
the mortgage
servicing rights
amortization expense,
net of recoveries,
resulting from
reduced prepayment
rates. During
2022 and
2021,
net gains of
$8.4 million and
$20.2 million, respectively,
were recognized as a
result of GNMA
securitization transactions
and whole loan sales to U.S. GSEs amounting to $238.3 million and $518.9
million, respectively.
58
Non-Interest Expenses
Non-interest expenses for
the year ended
December 31, 2022 were
$443.1 million, compared
to $489.0 million
for the same period
in 2021. On a non-GAAP basis, excluding $26.4 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
$16.5
million
when
compared
with
adjusted
non-interest
expenses
in
2021.
See
“Special
Items”
above
for
additional
information. Some of the most significant variances in adjusted non
-interest expenses were as follows:
●
A
$12.1
million
decrease
in
adjusted
professional
service
fees,
driven
by
an
$11.2
million
decrease
in
outsourcing
technology
service
fees,
mainly
associated
with
the
effect
in
2021
of
both
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
$4.8
million
decrease
in adjusted
other
non-interest expenses
including:
(i) a
$2.6
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;
and (ii)
a $2.6
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.
●
A $3.6
million increase
in net
gains on
OREO operation
s, primarily
reflecting: (i)
a $2.3
million increase
in net
realized
gains on
sales of
OREO properties,
primarily residential
properties in
the Puerto
Rico region;
(ii) a
$1.9 million
decrease
in
OREO-related
operating
expenses,
primarily
taxes,
repairs
and
insurance;
and
(iii)
a
$1.6
million
decrease
in
write-
downs
to
the
value
of
OREO
properties.
These
variances
were
partially
offset
by
a
$2.2
million
decrease
in
income
recognized
from
rental
payments
mainly
associated
to
the
disposition
in
2021
of
a
large
OREO
income-producing
property.
●
A
$2.4
million
decrease
in
adjusted
occupancy
and
equipment
expenses,
primarily
related
to
a
reduction
in
equipment-
related depreciation charges and rental expenses, partially
offset by higher energy costs.
●
A
$1.6
million
decrease
in
adjusted
taxes,
other
than
income
taxes,
primarily
related
to
lower
sales
and
use
taxes,
municipal license taxes, and property taxes.
Partially offset by:
●
A
$5.6
million
increase
in
adjusted
employees’
compensation
and
benefits
expenses,
primarily
reflecting
a
$3.0
million
decrease in
deferred loan
origination costs
mainly driven
by the
effect of
SBA PPP
loan originations
closed during
2021,
as well as the effect of annual salary merit increases and higher medical
insurance premium costs.
●
A
$2.9 million
increase in adjusted
business promotion
expenses, mainly
related to
a $0.8 million
increase in
sponsorship
and public relations activities and
a $0.6 million increase
in donations expense, of which $0.3
million were granted to non-
profit organizations in the municipalities most affected
by Hurricane Fiona.
Income Taxes
For
the
year
ended
December
31,
2022,
the
Corporation
recorded
an
income
tax
expense
of
$142.5
million
compared
to
$146.8
million in
2021. The
decrease in
income tax
expense for
2022, as
compared to
2021, was
related to
a higher
proportion of
exempt to
taxable income resulting in a lower effective tax rate,
partially offset by higher pre-tax income.
The Corporation’s
effective
tax rate
in the
year ended
December 31,
2022, excluding
entities from
which a
tax benefit
cannot be
recognized
and
discrete
items,
was
31.2%,
compared
to
33.9%
for
2021.
See
Note
22
-
Income
Taxes,
to
the
audited
consolidated
financial statements included in Item 8 of this Form 10-K, for additional
information.
59
OPERATING SEGMENTS
Based
upon
the
Corporation’s
organizational
structure
and
the
information
provided
to
the
Chief
Executive
Officer
of
the
Corporation,
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
December
31,
2022,
the
Corporation
had
six
reportable
segments:
Commercial
and
Corporate
Banking;
Consumer
(Retail)
Banking;
Mortgage
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. For additional information regarding First BanCorp.’s
reportable
segments, please
refer to
Note 27
- Segment
Information, to
the audited
consolidated financial
statements included
in Item
8 of
this
Form 10-K.
The accounting policies of the segments are the same as
those described in Note 1 - Nature of
Business and Summary of Significant
Accounting Policies, to the
audited consolidated financial
statements included in Item
8 of this 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.
For the
years ended December
31, 2022 and
2021, other operating
expenses not
allocated to a
particular segment
amounted to $155.3
million
and $192.2 million,
respectively.
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.
The
Treasury
and
Investments
segment
lends
funds
to
the
Consumer
(Retail)
Banking,
Mortgage
Banking,
Commercial
and
Corporate
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
Corporation
allocates
the
interest
rates
charged
or
credited by the
Treasury and
Investment and the
Consumer (Retail) Banking
segments 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
.
60
Commercial and Corporate Banking
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,
as well
as other
products, such
as cash
management
and
business management
services. A
substantial portion
of the
commercial and
corporate banking
portfolio is
secured by
the underlying
real estate
collateral
and
the personal
guarantees
of the
borrowers. Since
commercial
loans involve
greater
credit risk
than
a typical
residential mortgage
loan because
they are
larger in
size and
more risk
is concentrated
in a
single borrower,
the Corporation
has and
maintains a credit
risk management infrastructure
designed to mitigate
potential losses associated
with commercial
lending, including
underwriting and loan review functions, sales of loan participations, and
continuous monitoring of concentrations within portfolios.
The highlights
of the
Commercial and
Corporate Banking
segment’s
financial results
for the
years ended
December 31,
2022 and
2021 include the following:
●
Segment
income before
taxes for
the year
ended December
31, 2022
decreased to
$111.1
million, compared
to $239.3
million for 2021, for the reasons discussed below.
●
Net
interest
income
for
the year
ended
December
31,
2022
was $109.8
million,
compared
to $191.9
million
for 2021.
The decrease
in net
interest income
was primarily
attributable
to an
increase
in the
cost of
funds borrowed
from other
segments, resulting from higher
market interest rates, partially
offset by an increased
average balance of commercial
and
constructions loans and the upward repricing of variable-rate commercial
and construction loans during 2022.
●
For 2022, the provision for credit losses was a net benefit
of $20.2 million, compared to a net benefit of
$67.5 million for
2021.
The
net
benefit
recorded
during
2022
mainly
reflects
reductions
in
qualitative
reserves
associated
with
reduced
uncertainty
around
the
economic
impact
of
the
COVID-19
pandemic,
particularly
on
loans in
the hotel,
transportation
and entertainment
industries, partially
offset by
loan growth
and a
less favorable
economic outlook
in the
projection of
certain
forecasted
macroeconomic
variables,
such
as
the
commercial
real
estate
index.
Meanwhile,
the
net
benefit
recorded
in
2021
reflects
both
an
improved
broad
macroeconomic
environment
following
the
initial
impact
of
the
COVID-19 pandemic and an overall decrease in the size of this portfolio in the Puerto Rico
region.
●
Total
non-interest income
for the
year ended
December 31,
2022 amounted
to $18.2
million compared
to $16.0
million
for
2021.
The increase
in non-interest
income
was mainly
related
to a
combination of
the following;
i) a
$0.7 million
increase in service charges
on deposits, primarily related
to cash management fee income
from corporate customers; ii)
a
$0.5
million
increase
in
foreign
currency
exchange
commission
income;
iii)
a
$0.4
million
increase
from
merchant-
related income and iv) a benefit of approximately $0.3 million related
income tax credits purchased and realized in 2022.
●
Direct non-interest
expenses for
the year
ended December
31, 2022
were $37.1
million, compared
to $36.2
million for
2021.
The increase
is mainly
driven by
an increase
of $2.6
million in
employees’ compensation
and benefits
expenses,
primarily reflecting
the effects
of salary
annual merit
increases and
a decrease
in deferred
loan origination
costs mainly
driven
by
the
impact
of
the
SBA
PPP
loans
that
were
originated
in
2021.
Partially
offsetting
this
increase
is
a
$2.0
million
reduction
in
professional
service
fees,
primarily
associated
with
the
effects
in
2021
of
expenses
incurred
in
connection with the platform used for SBA PPP loan originations and
forgiveness funding.
61
Consumer (Retail) Banking
The
Consumer
(Retail)
Banking
segment
consists
of
the
Corporation’s
consumer
lending
and
deposit-taking
activities
conducted
mainly
through
FirstBank’s
branch
network
and
loan
centers
in
Puerto
Rico.
Loans
to
consumers
include
auto,
boat,
and
personal
loans, credit
card loans,
and lines
of credit.
Deposit products
include interest-bearing
and non-interest-bearing
checking and
savings
accounts, individual
retirement accounts
(“IRAs”), and
retail CDs.
Retail deposits
gathered through
each branch
of FirstBank’s
retail
network serve as one of the funding sources for the lending and investment activities.
Consumer lending
historically has
been mainly
driven by
auto loan
and leases
originations. The
Corporation follows
a strategy
of
seeking
to
provide
outstanding
service
to
selected
auto
dealers
that
provide
the
channel for
the
bulk
of
the Corporation’s
auto
loan
originations.
Personal
loans, credit
cards,
and,
to a
lesser extent,
boat
loans also
contribute
to interest
income
generated
on consumer
lending.
Management
plans
to
continue
to
be
active
in
the
consumer
loan
market,
applying
the
Corporation’s
strict
underwriting
standards.
Other activities included in this segment are insurance activities in the Puerto
Rico region.
The
highlights
of
the
Consumer
(Retail)
Banking
segment’s
financial
results
for
the
years
ended
December
31,
2022
and
2021
include the following:
●
Segment
income before
taxes for
the year
ended December
31, 2022
increased
to $301.3
million,
compared
to $165.8
million for 2021, for the reasons discussed below.
●
Net
interest
income
for
the year
ended
December
31,
2022
was $442.6
million,
compared
to $281.7
million
for 2021.
The
increase
was
mainly
due
to
higher
income
from
funds
loaned
to
other
business
segments
resulting
from
higher
market interest
rates. In
addition, the
average volume
of consumer
loans in
the Puerto
Rico region
increased by
$375.8
million,
mainly
in the
auto
loans and
finance
leases portfolios.
These
variances
were
partially offset
by
an increase
in
average rates paid to consumer customer deposits.
●
The
provision
for
credit
losses
for
the
year
ended
December
31,
2022
increased
by
$36.8
million
to
$57.1
million,
compared to $20.3
million for the
year ended December
31, 2021.
The increase in the
provision during
2022 was driven
by the portfolio
growth, uncertainties in the
macroeconomic outlook
reflected in the
deterioration in forecasted
variables
such as the regional unemployment rate, and higher net charge-offs.
●
Non-interest income for the
year ended December 31,
2022 was $78.5 million,
compared to $69.8 million
for 2021.
The
increase
was
primarily
related
to
a
$3.0
million
increase
in
credit
and
debit
cards,
POS
and
merchant
fee
income
reflecting increased
purchase and transaction
volumes, as well
as an increase
of $1.8 million
in service charges
and fees
on deposits primarily
related to an
increase in the
monthly service fee
charged on
certain checking and
savings products
which was effective
in the third quarter
of 2021.
Also reflected in
this variance are
a $1.6 million
increase on insurance
commission
income
and
a
benefit
of
$1.2
million
allocated
to
the
Consumer
(Retail)
Banking
segment
in
relation
to
income tax credits purchased and realized in 2022.
●
Direct non-interest expenses for
the year ended December
31, 2022 were $162.7 million,
compared to $165.4 million
for
2021.
The decrease
was primarily
related to
a $3.8
million reduction
in occupancy
and equipment
expenses driven
by
cost savings
achieved subsequent
to the
closure and
consolidation of
branches in
accordance with
the BSPR
acquisition
integration and
restructuring plan,
in particular rental
and depreciation
expense. In
addition, contributing
to the decrease
is
a
$2.0
million
reduction
in
professional
service
fees,
mainly
associated
with
the
effects
in
2021
of
temporary
processing
costs
incurred
in
connection
with
the
acquired
BSPR
operations
prior
to
systems
conversion,
and
a
$2.5
million reduction in the amortization expense of the purchased credit card
relationship intangible recognized in the BSPR
acquisition.
These variances were partially offset
by an increase of $4.5 million in
employees’ compensation and benefit
expenses, primarily reflecting the effects of salary
annual merit increases.
62
Mortgage Banking
The Mortgage Banking
segment conducts its operations
mainly through FirstBank.
The Mortgage Banking
segment consists of the
origination, sale, and
servicing of a variety
of residential mortgage loan
products. Originations are
sourced through different
channels,
such
as
FirstBank
branches
and
purchases
from
mortgage
bankers,
and
in
association
with
new
project
developers.
The
mortgage
banking segment
focuses on
originating
residential real
estate loans,
some of
which conform
to the
Federal Housing
Administration
(the
“FHA”),
the
Veterans
Administration
(the
“VA”),
and
U.S.
Department
of
Agriculture
Rural
Development
(“RD”)
standards.
Loans originated that meet
the FHA’s
standards qualify for
the FHA’s
insurance program whereas loans
that meet the standards
of the
VA
or the RD are guaranteed by their respective federal agencies.
Mortgage
loans that
do not
qualify under
the FHA,
VA,
or RD
programs
are referred
to as
conventional
loans. Conventional
real
estate loans can
be conforming or
non-conforming.
Conforming loans are
residential real estate
loans that meet
the standards for
sale
under
the
U.S.
Federal
National
Mortgage
Association
(“FNMA”)
and
the
U.S.
Federal
Home
Loan
Mortgage
Corporation
(“FHLMC”) programs.
Loans that
do not
meet FNMA
or FHLMC
standards are
referred to
as non-conforming
residential real
estate
loans. The Mortgage
Banking segment also acquires
and sells mortgages
in the secondary
markets. Residential real
estate conforming
loans are sold to investors like FNMA and FHLMC.
The Corporation has commitment authority to issue GNMA MBS.
The highlights
of the
Mortgage Banking
segment’s
financial results
for the
years ended
December 31,
2022 and
2021 include
the
following:
●
Segment
income
before
taxes
for
the
year
ended
December
31,
2022
decreased
to
$99.5
million,
compared
to
$115.8
million for 2021, for the reasons discussed below.
●
Net interest income for
the year ended December
31, 2022 was $98.9
million, compared to
$104.6 million for 2021.
The
decrease in
net interest
income was
mainly due
the decrease
in the
average balance
of residential
mortgage loans
in the
Puerto Rico region.
●
The provision
for credit losses
for 2022 was
a net benefit
of $7.6 million,
compared to a
net benefit of
$16.0 million for
2021.
The net
benefit in
both periods
reflects the
effect
of a
continued
decrease in
the size
of the
residential
mortgage
loan
portfolio
as
well
as
releases
related
to
qualitative
adjustments
associated
with
reduced
uncertainty
around
the
economic impact of the COVID-19 pandemic.
●
Non-interest income for the
year ended December 31,
2022 was $16.0 million,
compared to $24.3 million
for 2021.
The
decrease was mainly
driven by a
$10.2 million decrease
in net realized gain
on sales of residential
mortgage loans in
the
secondary market
mainly due
to a
lower volume
of sales,
and a
$0.6 million
decrease in
servicing fee
income, partially
offset by
a $2.2 million
decrease in mortgage
servicing rights amortization
expense resulting
from reduced
prepayments
rates.
●
Direct non-interest
expenses for
the year
ended December
31, 2022
were $23.0
million, compared
to $29.1
million for
2021.
The decrease
was mainly
related to
a $4.1
million increase
in gains
on OREO
operations, primarily
higher gains
realized on the sale of residential OREO properties.
63
Treasury and
Investments
The
Treasury
and
Investments
segment
is
responsible
for
the
Corporation’s
treasury
and
investment
management
functions.
The
treasury function, which
includes funding and
liquidity management, lends
funds to the
Commercial and Corporate
Banking segment,
the Mortgage
Banking segment,
the Consumer
(Retail) Banking
segment, and
the United
States Operations
segment to
finance their
respective lending
activities and
borrows from
those segments.
The Treasury
function also
obtains funds
through brokered
deposits,
advances from the FHLB, and repurchase agreements involving investment
securities, among other possible funding sources.
The investment function is intended to implement a leverage strategy for the
purposes of liquidity management, interest rate risk
management and earnings enhancement.
The interest rates charged or credited by Treasury
and Investments are based on market rates.
The
highlights
of
the
Treasury
and
Investments
segment’s
financial
results
for
the
years
ended
December
31,
2022
and
2021
include the following:
●
Segment
income
before
taxes
for
the
year
ended
December
31,
2022
decreased
to
$36.3
million,
compared
to
$55.6
million for 2021, for the reasons discussed below.
●
Net interest
income for
the year ended
December 31,
2022 was $39.6
million, compared
to net
interest income
of $59.3
million for
2021.
The decrease
was mainly
related to
a net
transfer pricing
charge of
$43.8 million
recognized in
2022
associated
to
the
cost
of
funds
borrowed
from
the
Consumer
(Retail)
Banking
segment,
as
compared
to
a
net
transfer
pricing credit of $14.7 million
recognized in 2021 from funds
loaned to other business segments.
This variance is mainly
driven by the
effects of a
higher volume of
investments securities funded
by demand deposits gathered
by the Consumer
(Retail) Banking operating segment as well as higher market interest rates.
●
Non-interest
loss
for
the
year
ended
December
31,
2022
was
$0.1
million,
compared
to
non-interest
income
of
$0.2
million
for
2021.
The
variance primarily
reflects
the
effect
of
a
$0.4
million
decrease
in the
fair
value
of
marketable
equity securities recorded through earnings.
●
Direct non-interest expenses for
2022 were $3.7 million, compared
to $4.1 million for 2021.
The decrease was primarily
reflected in employees’ compensation expense and professional service
fees.
64
United States Operations
The United
States Operations
segment
consists of
all banking
activities conducted
by FirstBank
on the
U.S. mainland.
FirstBank
provides a
wide range
of banking
services to
individual and
corporate customers
primarily in
southern Florida
through nine
banking
branches.
The United
States Operations
segment
offers
an array
of both
consumer
and commercial
banking
products
and
services.
Consumer banking
products include
checking, savings
and money
market accounts,
retail CDs,
internet banking
services, residential
mortgages, and
home equity
loans and
lines of
credit. Retail
deposits, as
well as
FHLB advances
and brokered
CDs, allocated
to this
operation serve as funding sources for its lending activities.
Commercial
banking
services
include
checking,
savings
and
money
market
accounts,
retail
CDs,
internet
banking
services,
cash
management services, remote data capture,
and automated clearing house (“ACH”)
transactions.
Loan products include the traditional
C&I and commercial real estate products, such as lines of credit, term loans,
and construction loans.
The highlights of the
United States operations segment’s
financial results for the years
ended December 31, 2022
and 2021, include
the following:
●
Segment
income
before
taxes
for
the
year
ended
December
31,
2022
increased
to
$53.1
million,
compared
to
$37.0
million for 2021, for the reasons discussed below.
●
Net interest income
for the year
ended December 31,
2022 was $80.5
million, compared to
$66.0 million for
2021.
The
increase was
mainly related
to higher
interest rates,
that include
the effect
of both
the upward
repricing of
variable-rate
commercial
and
construction
loans
and
new
loans
originated
at
higher
rates,
as
well
as
higher
average
loan
balances
(excluding SBA PPP loans).
●
For 2022,
the provision
for credit
losses was
a net
benefit of
$3.1 million,
compared to
a net benefit
of $1.0
million for
2021.
The
higher
benefit
recorded
in
2022
mainly
reflects
reductions
in
qualitative
reserves
associated
with
reduced
uncertainty around the economic impact of the COVID-19 pandemic,
partially offset by loan growth.
●
Total non
-interest income for the year
ended December 31, 2022
amounted to $2.9 million,
compared to $4.0 million
for
2021.
The decrease was primarily
related to a
$1.3 million decline in
revenues from mortgage
banking activities mainly
due
to
lower volume
of
sales and
lower servicing
fee
income, partially
offset
by a
$0.3 million
increase
in other
non-
deferrable loan fees.
●
Direct non-interest
expenses for
the year
ended December
31, 2022
were $33.4
million, compared
to $33.9
million for
2021.
The
decrease
was
mainly
due
to
reductions
in
professional
service
fees,
employee
compensation
expenses,
and
taxes other than income taxes, partially offset by increased business promotion
expenses.
65
Virgin
Islands Operations
The Virgin
Islands Operations
segment consists
of all
banking activities
conducted by
FirstBank in
the USVI
and BVI,
including
consumer
and commercial
banking
services,
with
a total
of eight
banking
branches
currently
serving
the islands
in
the USVI
of St.
Thomas,
St.
Croix,
and
St.
John,
and
the
island
of
Tortola
in
the
BVI.
The
Virgin
Islands
Operations
segment
is
driven
by
its
consumer, commercial lending, and deposit
-taking activities.
Loans
to
consumers
include
auto
and
boat
loans,
lines
of
credit,
and
personal
and
residential
mortgage
loans.
Deposit
products
include
interest-bearing
and
non-interest-bearing
checking
and
savings
accounts,
IRAs,
and
retail
CDs.
Retail
deposits
gathered
through each branch serve as the funding sources for its own lending activities.
The
highlights
of
the
Virgin
Islands
operations’
financial
results
for
the
years
ended
December
31,
2022
and
2021
include
the
following:
●
Segment income before taxes
for the year ended December
31, 2022 decreased to $1.7
million, compared to $6.5 million
for 2021, for the reasons discussed below.
●
Net interest income
for the year
ended December 31,
2022 was $23.8
million, compared to
$26.4 million for
2021.
The
decrease in net
interest income was mainly
related to a
$44.0 million decrease
in the average
balance of commercial
and
construction loans
(excluding SBA
PPP loans),
a $20.0
million decrease
in the
average balance
of residential
mortgage
loans and a reduction of $1.0 million in interest income from SBA PPP loans.
●
The
Corporation
recognized
a
provision
for
credit
losses
of
$2.0
million
for
the
year
ended
December
31,
2022,
compared
to
a
net
benefit
of
$1.3
million
for
2021.
The
provision
recorded
during
2022
was
primarily
related
to
consumer
loans
reflecting
the
effects
of
loan
growth,
higher
delinquency
and
charge-off
levels,
and
a
less
favorable
outlook of certain macroeconomic variables.
●
Non-interest
income for
the year
ended December
31, 2022
was $7.7
million, compared
to $6.9
million for
2021.
The
increase
was
primarily
related
to
a
$0.4
million
increase
in
fee-based
income
from
credit
and
debit
cards,
POS
and
merchant transactions, and a $0.3 million increase in income from insurance
commissions.
●
Direct non
-interest expens
es for
the year
ended December
31,
2022 were
$27.9
million compared
to $28.1
million
for
2021.
The decrease mainly reflects
the effect of
accelerated depreciation charges
in 2021 related to
the closing of certain
branches in the Virgin
Islands region, partially offset by an increase in employees’
compensation expenses.
66
FINANCIAL CONDITION AND OPERATING
DATA
ANALYSIS
Financial Condition
The following table presents an average balance sheet of the Corporation for the following
years:
December 31,
2022
2021
2020
(In thousands)
ASSETS
Interest-earning assets:
Money market and other short-term investments
$
1,156,127
$
2,012,617
$
1,258,683
U.S. and Puerto Rico government obligations
2,870,889
2,065,522
878,537
MBS
4,052,660
4,064,343
2,236,262
FHLB stock
20,419
28,208
32,160
Other investments
12,747
10,254
6,238
Total investments
8,112,842
8,180,944
4,411,880
Residential mortgage loans
2,886,594
3,277,087
3,119,400
Construction loans
121,642
181,470
168,967
Commercial loans
5,092,638
5,228,150
4,387,419
Finance leases
636,507
518,757
440,796
Consumer loans
2,461,632
2,207,685
1,952,120
Total loans
11,199,013
11,413,149
10,068,702
Total interest-earning
assets
19,311,855
19,594,093
14,480,582
Total non-interest-earning
assets
(1)
66,794
708,940
752,064
Total assets
$
19,378,649
$
20,303,033
$
15,232,646
LIABILITIES
Interest-bearing liabilities:
Interest-bearing checking accounts
$
3,942,419
$
3,667,523
$
2,197,980
Savings accounts
4,336,901
4,494,757
3,190,743
Retail CDs
2,213,145
2,636,303
2,741,388
Brokered CDs
69,694
141,959
357,965
Interest-bearing deposits
10,562,159
10,940,542
8,488,076
Loans payable
-
-
8,415
FHLB advances
179,452
354,055
475,492
Other borrowed funds
379,121
484,244
505,478
Total interest-bearing
liabilities
11,120,732
11,778,841
9,477,461
Total non-interest-bearing
liabilities
(2)
6,622,638
6,285,942
3,525,101
Total liabilities
17,743,370
18,064,783
13,002,562
STOCKHOLDERS' EQUITY
Stockholders' equity:
Preferred stock
-
32,938
36,104
Common stockholders' equity
1,635,279
2,205,312
2,193,980
Stockholders' equity
1,635,279
2,238,250
2,230,084
Total liabilities and stockholders'
equity
$
19,378,649
$
20,303,033
$
15,232,646
_________
(1) Includes, among other things, the ACL on loans and finance
leases and debt securities, as well as unrealized gains and losses
on available-for-sale debt securities.
(2) Includes, among other things, non-interest-bearing deposits.
67
The Corporation’s
total average assets
were $19.4
billion for the
year ended December
31, 2022, compared
to $20.3 billion
for the
year
ended
December
31,
2021,
a
net
decrease
of
$924.4
million.
The
variance
primarily
reflects
the
following:
(i)
a
decrease
of
$856.5
million
in
the
average
of
interest-bearing
cash
balances,
which
consisted
primarily
of
deposits
maintained
at
the
Federal
Reserve Bank; (ii)
a decrease of
$642.1 million
in non-interest-earning
assets mainly related
to unrealized losses
on available-for-sale
debt securities attributable
to changes in market
interest rates; and (iii)
a $214.1 million decrease
in the average balance
of total loans,
primarily
reflecting
the
overall
decrease
in
the
residential
mortgage
loan
portfolio
as
paydowns
exceeded
originations,
and
the
decrease
of
the
SBA
PPP
loan
portfolio,
partially
offset
by
an
increase
in
the
average
balance
of
auto
loans
and
finance
leases
portfolios.
These
variances
were
partially
offset
by
an
increase
of
$805.4
million
in
the
average
balance
of
U.S.
and
Puerto
Rico
government obligations mainly driven by the deployment of certain
cash balances into U.S. agencies debt securities.
The Corporation’s
total average
liabilities were
$17.7 billion
as of December
31, 2022,
a net decrease
of $321.4
million compared
to December
31,
2021.
The net
decrease
was mainly
related
to a
$378.4
million
decrease in
the average
balance
of interest-bearing
deposits reflecting
the effect
of customers
allocating more
cash into
higher yielding
liquid alternatives
as well
as elevated
consumer
spending,
and
a
$279.7
million
decrease
in
the
average
balance
of
borrowings
mainly
driven
by
the
repayment
of
long-term
debt
during
2022.
These
variances
were
partially
offset
by
a
$336.7
million
increase
in
the
average
balance
of
non-interest-bearing
liabilities, primarily non-interest-bearing deposits.
Assets
The Corporation’s
total assets were $18.6 billion as of
December 31, 2022, a decrease of $2.2
billion from December 31, 2021.
The
decrease
was primarily
related
to
a $2.1
billion
decrease
in cash
and
cash
equivalents mainly
attributable
to
the overall
decrease
in
total deposits,
the repurchase
of approximately
19.4 million
shares of
common stock
for a total
purchase price
of $275.0
million, and
the funding
of new loan
originations.
This decrease
in cash
and cash equivalents
was partially
offset by
a $250.1
million net increase
in borrowings.
In addition,
total investment
securities decreased
by $571.4
million, mainly
related to
the decrease
in the fair
value of
available-for-sale debt securities and
repayments, partially offset by
purchases of U.S. agencies and
MBS. As further discussed below,
these variances were partially offset by a $469.3 million
increase in total loans.
68
Loans Receivable, including Loans Held for Sale
As of
December 31,
2022, the
Corporation’s
total loan
portfolio before
the ACL
amounted to
$11.6
billion, an
increase of
$469.3
million compared to December
31, 2021. The growth reflects increases
of $341.6 million in the Puerto
Rico region and $139.6 million
in
the
Florida
region,
partially
offset
by
a
decrease
of $11.9
million
in
the
Virgin
Islands region.
On
a
portfolio
basis,
the
increase
consisted of a $439.5
million increase in consumer
loans, including a $369.7
million increase in auto loans
and leases, and an increase
of $184.3
million in
commercial and
construction loans
(net of
a $138.2
million decrease
in the
carrying value
of the
SBA PPP
loan
portfolio), partially offset
by a reduction of
$154.5 million in residential
mortgage loans. Excluding the
$138.2 million decrease
in the
carrying
value
of
SBA PPP
loans,
commercial
and
construction
loans
increased
by $322.5
million
mainly
reflecting
the origination
and purchases of loans
related to multiple commercial
relationships, each in excess
of $10 million, that
increased the portfolio
amount
by $637.1
million, partially
offset
by payoffs
and paydowns
of large
commercial
relationships totaling
$219.9 million,
the sale
of a
$35.2
million
commercial
and
industrial
loan
participation
in
the
Puerto
Rico
region,
and
the
sale
of
a
$23.9
million
adversely
classified commercial and
industrial loan participation in the Florida region.
As of December 31,
2022,
the loans held for
the Corporation’s
investment portfolio was 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
$11.6
billion
as
of
December
31,
2022,
the
Corporation
had
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 December 31, 2022
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
Residential mortgage loans
$
2,237,983
$
179,917
$
429,390
$
2,847,290
Construction loans
30,529
4,243
98,181
132,953
Commercial mortgage loans
1,768,890
65,314
524,647
2,358,851
Commercial and Industrial loans
(1)
1,791,235
68,874
1,026,154
2,886,263
Total commercial
loans
3,590,654
138,431
1,648,982
5,378,067
Consumer loans and finance leases
3,256,070
61,419
9,979
3,327,468
Total loans held
for investment, gross
$
9,084,707
$
379,767
$
2,088,351
$
11,552,825
Loans held for sale
12,306
-
-
12,306
Total loans, gross
$
9,097,013
$
379,767
$
2,088,351
$
11,565,131
(1) As of December 31, 2022, includes $6.8 million of SBA PPP loans
consisting of $4.8 million in the Puerto Rico region, $0.2
million in the Virgin Islands region,
and $1.8 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
Construction loans
38,789
4,344
95,866
138,999
Commercial mortgage loans
1,635,137
67,094
465,238
2,167,469
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.
First
BanCorp.
relies
primarily
on
its
retail
network
of
branches
to
originate
residential
and
consumer
personal
loans.
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. Auto loans
and finance
leases originations rely
primarily
on relationships with auto dealers and dedicated sales professionals who serve
selected locations in order facilitate originations.
69
The following table sets forth certain additional data (including loan production)
related to the Corporation's loan portfolio net of the
ACL on loans and finance leases as of and for the indicated dates:
For the Year
Ended December 31,
2022
2021
2020
(Dollars in thousands)
Beginning balance as of January 1
$
10,826,783
$
11,441,691
$
8,886,543
Residential real estate loans originated and purchased
468,599
623,290
560,012
Construction loans originated
112,640
102,538
126,499
C&I and commercial mortgage loans originated and purchased
2,950,904
2,994,893
2,751,058
Finance leases originated
308,811
240,419
152,254
Consumer loans originated
1,516,316
1,287,487
915,107
Total loans originated
and purchased
5,357,270
5,248,627
4,504,930
Loans acquired from BSPR
-
-
2,514,700
Sales of loans
(293,213)
(620,227)
(657,498)
Repayments and prepayments
(4,694,352)
(5,495,131)
(3,661,289)
Other increases (decreases)
(1)
108,179
251,823
(145,695)
Net increase (decrease)
477,884
(614,908)
2,555,148
Ending balance as of December 31
$
11,304,667
$
10,826,783
$
11,441,691
Percentage increase (decrease)
4.41%
(5.37)%
28.75%
_____________
(1)
Includes, among other things, the change in the ACL on loans
and finance leases and cancellation of loans due to the repossession
of the collateral and loans repurchased.
Residential Real Estate Loans
As of
December 31,
2022, the
Corporation’s
total residential
mortgage
loan portfolio,
including
loans held
for sale,
decreased by
$154.5
million,
as compared
to
the
balance
as of
December 31,
2021.
The
residential
mortgage
loan
portfolio
decreased
by
$144.0
million in
the Puerto
Rico region,
$8.6 million
in the
Virgin
Islands region,
and $1.9
million in
the Florida
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
45%
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.
Residential
mortgage
loan
originations
for
the
year
ended
December
31,
2022
amounted
to
$468.6
million,
compared
to
$623.3
million for 2021.
The decrease in residential
mortgage loan originations
of $154.7 million
consisted of declines
of $136.8 million
and
$21.8 million
in the Puerto
Rico and Florida
regions, respectively,
partially offset
by an increase
of $3.9 million
in the Virgin
Islands
region. The
decrease in
2022 reflects
lower levels
of refinancings
driven by
the effect
of higher
market interest
rates. Approximately
54% of the
$363.0 million residential
mortgage loan originations
in the Puerto
Rico region during
the year ended
December 31, 2022
were of conforming loans, compared to 88% of $499.7 million for the year ended
December 31, 2021.
70
Commercial and Construction Loans
As
of
December
31,
2022,
the
Corporation’s
commercial
and
construction
loan
portfolio
increased
by
$184.3
million
(net
of
a
$138.2 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 increased
by $49.6
million (net
of a
$98.0
million decrease
in the
SBA PPP loan portfolio),
as compared to the
balance as of December
31, 2021. Excluding the
$98.0 million decrease
in the SBA PPP
loan portfolio, commercial and
construction loans in the
Puerto Rico region increased by $147.6
million, driven by the origination
and
purchases
of loans
related to
eleven
commercial relationships,
each in
excess of
$10 million,
that increased
the portfolio
amount by
$315.3
million,
partially
offset
by
payoffs
and
paydowns,
including
the
payoff
of
three
commercial
and
construction
loans
totaling
$58.7 million each in excess of $10 million, and the sale of a $35.2 million commercial
and industrial loan participation.
In the
Florida region,
commercial and
construction loans
increased by
$147.2 million
(net of
a $32.2 million
decrease in
the SBA
PPP loan portfolio),
as compared to
the balance as
of December 31,
2021. Excluding the
$32.2 million decrease
in the SBA PPP
loan
portfolio,
commercial
and
construction
loans
in
the
Florida
region
increased
by
$179.4
million,
driven
by
the
origination
and
purchases of
loans related
to multiple commercial
relationships, each
in excess of
$10 million,
that increased
the portfolio amount
by
$321.8 million, partially
offset by the payoffs
and paydowns of eight
commercial relationships totaling
$161.2 million, and
the sale of
a $23.9 million adversely classified commercial and industrial loan
participation in the Florida region.
In the Virgin
Islands region,
commercial and construction
loans decreased
by $12.5 million,
driven by an
$8.0 million decrease
in
the SBA PPP loan portfolio, as compared to the balance as of December 31, 2021.
As of
December 31,
2022,
the Corporation
had $169.8
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
December
31,
2022,
the
Corporation
had
$38.0
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
December
31,
2022,
the
Corporation’s
total
exposure
to
shared
national
credit
(“SNC”)
loans
(including
unused
commitments)
amounted
to
$1.1
billion,
compared
to
$918.6
million
as
of
December
31,
2021.
As
of
December
31,
2022,
approximately
$189.3
million
of
the
SNC
exposure
is
related
to
the
portfolio
in
Puerto
Rico
and
$872.0
million
is
related
to
the
portfolio in the Florida region.
Commercial and construction loan originations (excluding government
loans) decreased by $22.3 million to $3.0 billion for the year
ended December
31, 2022,
when compared
to the
same period
of 2021.
Total
commercial and
construction loan
originations in
2021
includes
SBA
PPP
loan
originations
of
$283.7
million.
Excluding
SBA
PPP
loan
originations,
commercial
and
construction
loan
originations increased
by $261.4
million in
2022, compared
to 2021.
The increase
consisted of
increases of $201.4
million and
$93.0
million in the Puerto Rico and Florida regions, respectively,
partially offset by a decrease of $33.0 million in the Virgin
Islands region.
Government
loan
originations
for
2022
amounted
to
$51.1
million,
compared
to
$62.8
million
for
2021.
Government
loan
originations in both years primarily consisted of the renewal
of certain facilities in both the Virgin
Islands and the Puerto Rico regions,
and the utilization of an arranged overdraft line of credit of a government entity in the
Virgin Islands region.
Consumer Loans and Finance Leases
As of December
31, 2022, the
Corporation’s
consumer loan and
finance lease portfolio
increased by $439.5
million to $3.3
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
$226.5
million
and
$143.2
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 2022.
Originations of
auto loans
(including finance
leases) in
2022 amounted
to $1.0
billion, compared
to $932.7
million for
2021. The
increase
consisted
of increases
of $94.6
million and
$5.1 million,
respectively,
in the
Puerto Rico
and Virgin
Islands regions.
Other
consumer loan
originations, excluding
credit cards,
for 2022
amounted to
$304.5 million,
compared to
$172.7 million
in 2021.
Most
of the
increase in
other consumer
loan originations
in 2022,
when compared
to 2021,
was in
the Puerto
Rico region.
The utilization
activity on the outstanding credit card portfolio for 2022 amounted
to $488.3 million, compared to $422.5 million for 2021.
71
Maturities of Loans Receivable
The following tables
present the loans
held for investment
portfolio as of
December 31, 2022
by remaining contractual
maturities and
interest rate type:
After One Year
After Five Years
Total Portfolio
One Year or Less
Through Five Years
Through 15 Years
After 15 Years
(In thousands)
Residential mortgage
$
68,547
$
434,908
$
1,252,701
$
1,091,134
$
2,847,290
Construction loans
90,824
39,337
1,989
803
132,953
Commercial mortgage loans
962,336
1,191,268
199,833
5,414
2,358,851
C&I loans
1,213,757
1,341,101
326,474
4,931
2,886,263
Consumer loans
997,191
2,064,383
264,594
1,300
3,327,468
Total loans
(1)
$
3,332,655
$
5,070,997
$
2,045,591
$
1,103,582
$
11,552,825
Amount due in one year or less at:
Amount due after one year:
Total Portfolio
Fixed Interest Rates
Variable Interest
Rates
Fixed Interest Rates
Variable Interest
Rates
Residential mortgage
$
63,574
$
4,973
$
2,577,163
$
201,580
$
2,847,290
Construction loans
6,323
84,500
4,227
37,903
132,953
Commercial mortgage loans
725,300
237,036
921,832
474,683
2,358,851
C&I loans
270,125
943,632
422,871
1,249,635
2,886,263
Consumer loans
761,929
235,262
2,321,662
8,615
3,327,468
Total loans
(1)
$
1,827,251
$
1,505,403
$
6,247,755
$
1,972,416
$
11,552,825
(1)
Scheduled repayments are included in the maturity category in which the payment is due.
The amounts provided do not reflect prepayment assumptions related to the loan portfolio.
72
Investment Activities
As part of
its liquidity,
revenue diversification,
and interest rate
risk 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
December
31,
2022
amounted
to
$5.6
billion,
an
$854.2
million decrease
from December
31, 2021.
The decrease
was mainly
driven by
a $718.6
million decrease
in fair
value attributable
to
changes
in market
interest rates
and
the repayments
of approximately
$642.9 million
of U.S.
agencies
and
MBS, partially
offset
by
purchases
of U.S. agencies debentures and MBS totaling $512.3 million during 2022.
As
of
December
31,
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
December 31,
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 $3.3
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 $1.1
million as
of
December
31,
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 December 31, 2022, the Corporation’s
held-to-maturity debt securities portfolio, before the ACL, increased to
$437.5 million,
compared
to
$178.1
million
as
of
December
31,
2021,
mainly
driven
by
purchases
of
GSEs’
MBS
totaling
$289.8
million
during
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, 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 December
31, 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
the
exposure to Puerto Rico municipal bonds.
73
The following table presents the carrying values of investments as of the indicated dates:
December 31, 2022
December 31, 2021
(In thousands)
Money market investments
$
2,025
$
2,682
Available-for-sale
debt securities, at fair value:
U.S. government and agencies obligations
2,492,228
2,405,468
Puerto Rico government obligations
2,201
2,850
MBS:
Residential
2,941,458
3,803,933
Commercial
163,133
240,510
Other
500
1,000
Total available-for-sale
debt securities, at fair value
5,599,520
6,453,761
Held-to-maturity debt securities, at amortized cost:
MBS:
Residential
166,739
-
Commercial
105,088
-
Puerto Rico municipal bonds
165,710
178,133
ACL for held-to-maturity Puerto Rico municipal bonds
(8,286)
(8,571)
Total held-to-maturity
debt securities
429,251
169,562
Equity securities, including $42.9 million and $21.5 million of FHLB stock
as of December 31, 2022 and 2021, respectively
55,289
32,169
Total money market
investments and investment securities
$
6,086,085
$
6,658,174
The carrying values of debt securities as of December 31,
2022 by contractual maturity (excluding MBS), are shown below:
Carrying Amount
Weighted-Average
Yield %
(Dollars in thousands)
U.S. government and agencies obligations:
Due within one year
$
132,166
0.32
Due after one year through five years
2,299,262
0.82
Due after five years through ten years
48,594
1.54
Due after ten years
12,206
4.62
2,492,228
0.83
Puerto Rico government and municipalities obligations:
Due within one year
1,202
5.20
Due after one year through five years
42,530
6.34
Due after five years through ten years
55,956
6.29
Due after ten years
68,223
6.76
167,911
6.49
Other debt securities
Due within one year
500
0.84
Total
2,660,639
1.16
MBS
3,376,418
1.66
ACL on held-to-maturity debt securities
(8,286)
-
Total debt securities
$
6,028,771
1.45
74
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
securities.
As
of
December
31,
2022, the
Corporation had
approximately $2.0
billion in
callable debt
securities (U.S.
agencies debt
securities) with
an average
yield
of 0.83%, of which approximately 58% were
purchased at a discount and 7%
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,
refer to Note 3
– Debt Securities,
to the audited
financial statements included
in Item 8 of this
Form 10-
K, for additional information regarding the Corporation’s
debt securities portfolio.
RISK MANAGEMENT
General
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 risks and rewards 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.
Risk Definition
Liquidity Risk
Liquidity risk is the risk to earnings or capital arising from the possibility that the Corporation
will not have sufficient cash to meet
its short-term liquidity demands, such as from deposit redemptions or loan commitments.
See “Liquidity Risk and Capital Adequacy”
below for further details.
Interest Rate Risk
Interest rate risk is the risk arising from adverse movements in interest
rates. See “Interest Rate Risk Management”
below for
further details.
Market Risk
Market
risk
is
the
risk
of
loss
in
the
value
of
assets
or
liabilities
due
to
changes
in
market
conditions,
including
movements
in
market
rates or
prices, such
as interest
rates
or equity
prices. The
Corporation
evaluates market
risk together
with interest
rate risk.
Both
changes
in
market
values
and
changes
in
interest
rates
are
evaluated
and
forecasted.
See
“Interest
Rate
Risk
Management”
below for further details.
Credit Risk
Credit risk
is the
risk arising
from a
borrower’s or
a counterparty’s
failure to
meet the
terms of
a contract
with the
Corporation or
otherwise to perform as agreed. See “Credit Risk Management”
below for further details.
Operational Risk
Operational
risk
is
the
risk
arising
from
problems
with
the
delivery
of
services
or
products.
This
risk
is
a
function
of
internal
controls,
information
systems,
employees
and
operating
processes.
It
also
includes
risks
associated
with
the
Corporation’s
preparedness
for
the
occurrence
of
an
unforeseen
event.
This
risk
is
inherent
across
all
functions,
products,
and
services
of
the
Corporation. See “Operational Risk” below for further details.
75
Legal and Regulatory Risk
Legal and
regulatory
risk is
the risk
arising
from
the Corporation’s
failure
to comply
with laws
or regulations
that can
adversely
affect the Corporation’s
reputation and/or increase its exposure to litigation or penalties.
Reputational Risk
Reputational
risk
is
the
risk
arising
from
any
adverse
effect
on
the
Corporation’s
market
value,
capital,
or
earnings
arising
from
negative public opinion,
whether true or not.
This risk affects the
Corporation’s
ability to establish new
relationships or services,
or to
continue servicing existing relationships.
Model Risk
Model risk
is the potential
for adverse
consequences from
decisions based
upon incorrect
or misused
model outputs
and reports
or
based upon
an incomplete or
inaccurate model. The
use of models
exposes the Corporation
to some level
of model risk.
Model errors
can
contribute
to
incorrect
valuations
and
lead
to
operational
errors,
inappropriate
business
decisions,
or
incorrect
financial
entries.
The Corporation seeks to reduce model risk through rigorous model identification
and validation.
Capital Risk
Capital risk
is the
risk that
the Corporation
may lose
value on
its capital
or have
an inadequate
capital plan,
which would
result in
insufficient capital
resources to meet
minimum regulatory requirements
(the Corporation’s
authority to operate
as a bank is dependent
upon the maintenance of adequate capital resources), support its credit rating,
or support its growth and strategic options.
Strategic Risk
Strategic
risk
is
the
risk
arising
from
adverse
business
decisions,
poor
implementation
of
business
decisions,
or
lack
of
responsiveness
to
changes
in
the
banking
industry,
and
operating
environment.
This
risk
is
a
function
of
the
compatibility
of
the
Corporation’s strategic
goals, the business strategies
developed to achieve
those goals, the resources deployed
against these goals, and
the quality of implementation.
Information Technology
Risk
Information technology
risk is
the risk
arising from
the loss of
confidentiality,
integrity,
or availability
of information
systems and
risk
of
cyber
incidents
or
data
breaches.
It
includes
business
risks
associated
with
the
use,
ownership,
operation,
involvement,
influence, and adoption of information technology within the Corporation.
Risk Governance
The
following
discussion
highlights
the
roles
and
responsibilities
of
the
key
participants
in
the
Corporation’s
risk
management
framework:
Board of Directors
The Board
of Directors
oversees the
Corporation’s
overall
risk governance
program
with the
assistance
of the
Board
committees
discussed below.
Risk Committee
The
Board
of
Directors
has
appointed
the
Risk
Committee
to
assist
the
Board
in
fulfilling
its
responsibility
to
oversee
the
Corporation’s
management of
its company-wide
risk management
framework. The
committee’s
role is
one of
oversight, recognizing
that
management
is
responsible
for
designing,
implementing,
and
maintaining
an
effective
risk
management
framework.
The
committee’s primary responsibilities are
to:
●
Review and discuss management’s
assessment of the Corporation’s
aggregate enterprise-wide profile
and the alignment of the
Corporation’s risk profile with the
Corporation’s strategic plan, goals
,
and objectives;
●
Review and recommend to the Board the parameters and establishment of
the Corporation’s risk tolerance and risk appetite;
76
●
Receive
reports
from
management
and,
if
appropriate,
other
Board
committees,
regarding
the
Corporation’s
policies
and
procedures
related
to
the
Corporation’s
adherence
to
risk
limits
and
its
established
risk
tolerance
and
risk
appetite
or
on
selected risk topics;
●
Oversee the strategies,
policies, procedures, and
systems established by
management to identify,
assess, measure, and
manage
the
major
risks
facing
the
Corporation,
which
may
include
an
overview
of
the
Corporation’s
credit
risk,
operational
risk,
information
technology
risk,
compliance
risk,
interest
rate
risk,
liquidity
risk,
market
risk,
and
reputational
risk,
as
well
as
management’s capital management,
planning,
and process;
●
Oversee management’s activities with
respect to capital stress testing and model risk;
●
Review and discuss with management risk assessments for new products
and services; and
●
Review periodically the scope and effectiveness
of the Corporation’s regulatory compliance
policies and programs.
Asset and Liability Committee
The Board
of Directors
has appoint
ed the
Asset and
Liability Committee
to assist
the Board
in its
oversight
of the
Corporation’s
asset
and
liability
management
policies
related
to
the
management
of
the
Corporation’s
funds,
investments,
liquidity,
market
and
interest rate risk, and the use of derivatives. In doing so, the committee’s
primary functions involve:
●
The establishment of a process to enable the identification, assessment, and
management of risks that could affect the
Corporation’s assets and liabilities management;
●
The identification of the Corporation’s
risk tolerance levels for yield maximization relating to its assets and liabilities
management; and
●
The evaluation of the adequacy,
effectiveness,
and compliance with the Corporation’s
risk management process relating to
the Corporation’s assets and liabilities management,
including management’s role in
that process.
Credit Committee
The Board of
Directors has appointed
the Credit Committee to
assist the Board in
its oversight of the
Corporation’s policies
related
to the Corporation’s lending
function, or credit management. The committee’s
primary responsibilities are to:
●
Review the quality of the Corporation’s
credit portfolio and the trends affecting that portfolio;
●
Oversee the effectiveness and administration
of credit-related policies through the review of
such processes, reports and other
information as
it deems appropriate,
including the
loan-quality grading
and examination
process, internal and
external audits
and examinations
of the
Corporation’s
credit processes,
the incidence
of new
problem assets,
the frequency
and reasons
for
credit policy exceptions, the loan review functions and the asset classification
process;
●
Approve loans as required by the lending authorities approved by
the Board; and
●
Report to the Board regarding credit management.
Audit Committee
The Board of Directors has appointed
the Audit Committee to assist the
Board in fulfilling its responsibility to oversee
management
regarding:
●
The
conduct
and
integrity
of
the
Corporation’s
financial
reporting
to
any
governmental
or
regulatory
body,
stockholders,
other users of the Corporation’s financial
reports and the public;
●
The performance of the Corporation’s
internal audit function;
●
The Corporation’s internal
control over financial reporting and disclosure controls and procedures;
77
●
The
qualifications,
engagement,
compensation,
independence,
and
performance
of
the
Corporation’s
independent
auditors,
their
conduct
of
the
annual
audit
of
the
Corporation’s
financial
statements,
and
their
engagement
to
provide
any
other
services;
●
The application of the Corporation’s
related parties transaction policy as established by the Board;
●
The application of the Corporation’s
code of business conduct and ethics as established by management and
the Board;
●
The preparation
of the
Audit Committee
report required
to be
included
in the
proxy statement
for the
Corporation’s
annual
stockholders’ meeting by the rules of the SEC; and
●
The Corporation’s legal and
ethical compliance.
Corporate Governance and Nominating Committee
The
Board
of
Directors
has
appointed
the
Corporate
Governance
and
Nominating
Committee
to
develop,
review,
and
assess
corporate
governance
principles.
The
Corporate
Governance
and
Nominating
Committee
is
responsible
for
director
succession,
orientation
and
compensation,
identifying
and
recommending
new
director
candidates,
overseeing
the
evaluation
of
the
Board
and
management, annually
recommending to
the Board
the designation
of a
candidate to
hold the
position of
the Chairman
of the
Board,
and
directing
and
overseeing
the
Corporation’s
executive
succession
plan.
In
addition,
the
Corporate
Governance
and
Nominating
Committee is responsible for overseeing the Corporation’s
sustainability and environmental, social, and governance (“ESG”) policies.
Compensation and Benefits Committee
The Board
of Directors
has appoint
ed the
Compensation
and Benefits
Committee
to oversee
compensation
policies and
practices
including
the
evaluation
and
recommendation
to
the
Board
of
the
proper
and
competitive
salaries
and
incentive
compensation
programs of the executive officers and key employees of
the Corporation.
Trust Committee
The Board
of Directors
of the
Bank has
appointed the
Trust Committee
to assist
such Board
of Directors
in fulfilling
its oversight
responsibilities with respect to the Trust
Department and its fiduciary responsibilities. The
Trust Committee’s
main responsibilities are
to
ensure
proper
exercise
of
the
fiduciary
powers
of
the
Bank
and
to
review
the
activities
of
the
Trust
Department.
The
Trust
Committee has jurisdiction over all aspects of the Trust
Department and may act on behalf of the Board of Directors of the Bank.
Management Roles and Responsibilities
While
the
Board
of
Directors
has
the
responsibility
to
oversee
the
risk
governance
program,
management
is
responsible
for
implementing
the necessary
policies and
procedures,
and internal
controls. To
carry out
these responsibilities,
the Corporation
has a
clearly
defined
risk governance
culture. To
ensure that
risk management
is communicated
at all
levels of
the Corporation,
and each
area understands
its specific
role, the
Corporation has
established several
management level
committees to
support risk
oversight,
as
follows:
Executive Risk Management Committee
The
Executive
Risk
Management
Committee
is
responsible
for
exercising
oversight
of
information
regarding
First
BanCorp.’s
enterprise
risk
management
framework,
including
the
significant
policies,
procedures,
and
practices
employed
to
manage
the
identified
risk
categories
(credit
risk,
operational
risk,
legal
and
regulatory
risk,
reputational
risk,
model
risk,
and
capital
risk).
In
carrying
out
its
oversight
responsibilities,
each
committee
member
is
entitled
to
rely
on
the
integrity
and
expertise
of
those
people
providing
information
to
the committee
and
on
the
accuracy
and
completeness
of
such
information,
absent
actual
knowledge
of
an
inaccuracy.
The
Chief
Executive
Officer
appoints
the
Executive
Risk Management
Committee
and members
of
the Corporation’s
senior
and
executive management have
the opportunity to
share their insights about
the types of risks
that could impede
the Corporation’s
ability
to achieve
its business
objectives. The
Chief Risk
Officer
of the
Corporation directs
the agenda
for
the meetings
and the
Enterprise
Risk Management
(“ERM”) and
Operational Risk
Director serves
as secretary
of the
committee and
maintains the
minutes on
behalf
of the committee. The General Auditor also participates in the committee as an observer.
78
The
committee
provides
assistance
and
support
to
the
Chief
Risk
Officer
to
promote
effective
risk
management
throughout
the
Corporation.
The
Chief
Risk
Officer
and
the
ERM
and
Operational
Risk
Director
report
to
the
Committee
matters
related
to
the
enterprise risk management framework of the Corporation, including, but not
limited to:
●
The risk governance structure;
●
The risk competencies of the Corporation;
●
The Corporation’s risk appetite statement
and risk tolerance; and
●
The risk management
strategy and associated risk
management initiatives and
how both support the
business strategy
and business model of the Corporation.
Other Management Committees
As
part
of
its
governance
framework,
the
Corporation
has
various
additional
risk
management
related-committees.
These
committees are
jointly responsible
for ensuring
adequate risk
measurement and
management in
their respective
areas of authority.
At
the management level, these committees include:
●
Management’s
Investment and
Asset Liability Committee
(the “MIALCO”)
– oversees interest
rate and market
risk, liquidity
management
and
other
related
matters,
including
sensitivity
of
the
Corporation’s
earnings
under
various
interest
rate
scenarios. This committee
makes recommendations as
to any adjustments to
asset liability management and
financial resource
allocation
in
light
of
current
events,
risks,
exposures,
and
regulatory
requirements
and
approves
related
policies.
Refer
to
“Liquidity Risk and Capital Adequacy”
and “Interest Rate Risk Management”
below for further details.
●
Information Technology
Steering Committee –
oversees and counsels
on matters related
to information
technology and cyber
security, including
the development of information management policies and procedures throughout
the Corporation.
●
Bank Secrecy Act Committee – oversees, monitors,
and reports on the Corporation’s compliance with
the Bank Secrecy Act.
●
Credit Committees (consisting
of a Credit
Management Committee and
a Delinquency Committee)
– oversees and
establishes
standards for credit
risk management processes
within the Corporation.
The Credit Management
Committee is responsible
for
the approval
of loans
above an
established size
threshold. The
Delinquency Committee
is responsible
for the
periodic review
of credit exceptions,
past-due loans, portfolio
concentrations, foreclosures,
collection, loan mitigation
programs, risk appetite,
leveraged loans, business production and the Bank’s
internal credit-risk rating classification;
●
Vendor
Management
Committee
–
oversees
policies,
procedures,
and
related
practices
related
to
the
Corporation’s
vendor
management
efforts.
The
Vendor
Management
Committee’s
primary
functions
involve
the
establishment
of
processes
and
procedures to enable the recognition, assessment, management,
and monitoring of vendor management risks.
●
ESG Committee
– primarily
responsible for
aligning ESG
priorities and
initiatives for
the year,
setting and
monitoring long-
term objectives
and goals,
and leading
the annual
reporting process
on ESG
related topics.
The Committee
also oversees
the
sustainability policy
and integrates
climate change
risk factors
into the
corporate governance,
strategy and
risk management.
The ESG Committee regularly reports to the Corporate Governance
and Nominating Committee of the Board of Directors.
●
The Community
Reinvestment Act
Executive Committee
– oversees,
monitors,
and reports
on the
Corporation’s
compliance
with Community Reinvestment Act regulatory requirements.
●
Anti-Fraud
Committee
–
oversees
the
Corporation’s
policies,
procedures
and
related
practices relating
to
the
Corporation’s
anti-fraud measures.
●
Regulatory
Compliance
Committee
–
oversees
the
Corporation’s
Regulatory
Compliance
Management
System.
The
Regulatory
Compliance
Committee
reviews
and
discusses
any
regulatory
compliance
laws
and
regulations
that
impact
performance
of
regulatory
compliance
policies,
programs
and
procedures.
The
Regulatory
Compliance
Committee
also
ensures the coordination of regulatory compliance requirements throughout
departments and business units.
●
Regulatory Reporting Committee
– oversees and
assists the senior
officers in fulfilling
their responsibility for oversight
of the
accuracy
and
timeliness
of
the
required
regulatory
reports
and
related
policies
and
procedures,
addresses
changes
and/or
concerns
communicated
by
the
regulators,
and
addresses
issues
identified
during
the
regulatory
reporting
process.
The
Regulatory
Reporting
Committee
oversees
and
updates,
as
necessary,
the
established
controls
and
procedures
designed
to
ensure that information in regulatory reports is recorded, processed, and
accurately reported and on a timely basis.
79
●
Complaints
Management
Committee
–
assists
in
overseeing
the
complaint
management
process
implemented
across
the
Corporation
within
the
Corporation’s
three
marketplaces:
Puerto
Rico,
the
Virgin
Islands,
and
Florida.
The
Complaints
Management
Committee
supports
the
Corporation’s
complaints
management
program
relating
to
resolution
of
complaints
within the
lines of
business. When
appropriate, the
Complaints Management
Committee evaluates
existing corrective
actions
within the lines of business related to complaints and complaint management practices
within those business units.
●
Project Portfolio
Management Committee
– reviews
and oversees
the performance
of the portfolio
and individual
technology
projects
during
the
Project
Management
Cycle
(Initiation,
Planning,
Execution,
Control
&
Monitoring,
and
Closing).
The
Project
Portfolio
Management
Committee
balances
conflicting
demands
between
projects,
decides
on
priorities
assigned
to
each project
based on
organizational priorities
and capacity,
and oversees
project budgets,
risks, and
actions taken
to control
and mitigate risks.
●
Current Expected Credit Losses (“CECL”)
Committee – oversees the Corporation’s
requirements for the calculation of CECL,
including the implementation
of new models,
if necessary,
selection of vendors
and monitoring of the
guidance from different
regulatory
agencies
with
regards
to
CECL
requirements.
The
CECL
Committee
reviews
estimated
credit
loss
inputs,
key
assumptions, and
qualitative overlays.
In addition,
the Committee
approves the
determination of
reasonable and
supportable
periods
used
with
respect
to macroeconomic
forecasts,
and
the
historical
loss reversion
method
and
parameters.
The CECL
Committee reports to the Audit Committee the results of the ACL each reporting
period.
●
Capital Planning
Committee –
oversees the
Capital Planning
Process and
is responsible
for operating
in accordance
with the
Capital
Policy
and
ensuring
compliance
with
its
guidelines.
The
Capital
Planning
Committee
develops
and
proposes
to
the
Board
changes
to
the
Capital
Policy
and
the
capital
plan
targets,
limits,
performance
metrics,
internal
stress
testing
and
guidelines for Capital Management Activities.
●
Business Continuity
Committee –
responsible to
create governance
and planning
structure that
will enable
FirstBank to
craft
an enterprise
Business Continuity Management
(BCM) program
that ensures the
Bank is able
to continue business
operations
after a major disruption occurs.
●
Emergency Committee
– Responsible
to activate
an emergency
or disaster
recovery procedure
to ensure
the safety
of Bank’s
personnel and the continuity of critical Bank services.
Officers
As part of its governance framework, the following officers
play a key role in the Corporation’s risk
management process:
●
The Chief Executive
Officer (“CEO”) is
responsible for the
overall risk governance
structure of the Corporation.
The CEO is
ultimately responsible for business strategies, strategic objectives, risk management
priorities, and policies.
●
The
Chief Operating
Officer
(“COO”)
manages
the Corporation’s
operational
framework,
including
information
technology
(“IT”),
facilities,
banking
operations,
corporate
security,
and
enterprise
architecture.
The
COO
oversees
the
effective
and
efficient execution of the various technology initiatives
to support the Corporation’s growth and
improve overall efficiency.
●
The Chief Risk Officer
(“CRO”) is responsible for
the oversight of the
risk management of the
Corporation as well as
the risk
governance
processes.
The
CRO, together
with
the
ERM
and
Operational
Risk Director,
monitor
key
risks
and
manage the
operational
risk
program.
The
CRO
provides
the
leadership
and
strategy
for
the
Corporation’s
risk
management
and
monitoring
activities and
is responsible
for the
oversight
of regulatory
compliance, loan
review,
model risk,
and operational
risk
management.
The
CRO
supervises
talent
management
efforts,
maintains
adequate
succession
planning
practices
and
promotes
employee
engagement.
The
Human
Resources
Director
supports
the
CRO
in
the
human
capital
and
talent
management efforts.
●
Chief Credit Officer, Portfolio
Risk Manager, Loan Review Manager
and other Senior Executives are responsible for
managing and executing the Corporation’s
credit risk program.
●
The
Chief
Financial
Officer
(“CFO”),
together
with
the
Corporation’s
Treasurer
and
the
Asset
and
Liability
Management
(“ALM”) Director,
manage the
Corporation’s
interest rate
and market
and liquidity
risk programs
and, jointly
with the
Chief
Accounting Officer
and the
Corporate Controller,
are responsible
for the
implementation of
accounting policies
and practices
in accordance with
GAAP and applicable
regulatory requirements. The
ERM and Operational
Risk Director assist the
CFO in
the review of the Corporation’s internal
control over financial reporting and disclosure controls and procedures.
80
●
The
Chief
Accounting
Officer
and
the
Corporate
Controller
are
responsible
for
the development
and
implementation
of
the
Corporation’s
accounting policies
and practices
and the
review and
monitoring of
critical accounts
and transactions
to ensure
that they are reported in accordance with GAAP and applicable regulatory
requirements.
●
The Corporate Strategic
and Business Development
Director is responsible
for the development
of the Corporation’s
strategic
and
business
plan,
by
coordinating
and
collaborating
with
the
executive
team
and
all
corporate
groups
involved
with
the
strategic and business planning process.
●
The
Corporate
Strategy
and
Investor
Relations
Officer
is
responsible
for
managing
communications
with
the
investor
community
and
sell-side
research
analysts
and
for
coordinating
and
collaborating
with the
executive
team
and
all corporate
groups involved with the adequate execution of the strategic and business planning
process.
●
The
ERM
and
Operational
Risk
Director
is
responsible
for
driving
the
identification,
assessment,
measurement,
mitigation,
and
monitoring
of
key
risks
throughout
the
Corporation.
The
ERM
and
Operational
Risk
Director
promotes
and
instills
a
culture
of
risk
control,
identifies
and
monitors
the
resolution
of
major
and
critical
operational
risk
issues
across
the
Corporation
and serves
as a
key
advisor
to business
executives with
regards
to risk
exposure
to the
organization,
corrective
actions and
corporate policies
and best practices
to mitigate
risks. The Financi
al and Model
Risk Manager,
IT Risk Manager,
Retail
Quality
Assurance
Manager,
Regulatory
Affairs
Manager
and
Corporate
Risk
Managers
assist
the
ERM
and
Operational Risk Director in the monitoring of key risks and oversight
of risk management practices.
●
The
Compliance
Director
is
responsible
for
oversight
of
regulatory
compliance.
The
Compliance
Director
maintains
an
inventory of applicable regulations, implements an enterprise-wide
compliance risk assessment, and monitors compliance with
significant
regulations.
The
Compliance
Director
is
responsible
for
building
awareness
of
and
educating
business
units
and
subsidiaries on, regulatory risks.
●
The General
Counsel is
responsible
for
the oversight
of legal
risks, including
matters
such as
contract
structuring,
litigation
risk,
and
all
legal-related
aspects
of
the
Corporation’s
business.
The
Corporate
Affairs
Officer
assists
the
General
Counsel
with various
legal areas,
including,
but not
limited,
to SEC
reporting
matters, insurance
coverage
and liability,
and contract
structuring.
●
The
Chief
Information
Officer
(“CIO”)
is responsible
for
overseeing
technology
services provided
by IT
vendors
including
the following:
(i) the fulfillment
of contractual
obligations and
responsibilities;
(ii) the development
of policies and
standards
related
to
the
technology;
(iii)
services
provided;
(iv)
billing
and
invoice
processing;
(v)
Service
Level
Agreement
(SLA)
metrics and compliance; and vi) the Business Continuity Strategy.
●
The Corporate
Security Officer
(“CSO”) is
responsible for
the oversight
of information
security policies
and procedures,
and
the ongoing
monitoring
of existing
and new
vendors’ due
diligence for
information security.
In addition,
the CSO
identifies
risk factors, and determines solutions to security needs.
81
Liquidity Risk and Capital Adequacy,
Interest Rate Risk Management, Credit Risk
Management, Operational Risk, Legal
and Compliance Risk and Concentration Risk
The
following
discussion
highlights
First
BanCorp.’s
adopted
policies
and
procedures
for
liquidity
risk
and
capital
adequacy,
interest rate risk, credit risk, operational risk, legal and compliance risk, and
concentration risk.
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.
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.
The Asset
and Liability
Committee of
the Board
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
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, market
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 Corporate
Strategic and
Business Development
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
Corporate
Controller’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
to
estimate
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
is 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 period of
stress, 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 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
December
31,
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 $3.5
billion, or
19.0% 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
22.5%
of
total
assets
as
of
December
31,
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 customer
deposits withdrawals
and
maturities, as
well as the funding of loan growth.
As
of
December
31,
2022,
the
Corporation
had
$644.2
million
available
for
credit
from
the
FHLB.
The
Corporation
also
maintains borrowing
capacity at
the FED
Discount Window.
The Corporation
does not
consider borrowing
capacity from
the FED
82
Discount
Window
as a
primary
source
of liquidity
but had
approximately
$1.3 billion
available
for
funding under
the FED’s
BIC
Program as
of December
31, 2022
as an
additional contingent
source. Total
loans pledged
to the
FED Discount
Window
amounted
to $2.2 billion as of
December 31, 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 December
31, 2022, the holding
company had $19.3 million
of cash and cash
equivalents. Cash and
cash equivalents at
the
Bank level
as of
December
31, 2022
were approximately
$479.8
million,
primarily
balances deposited
at the
FED. The
Bank had
$105.8
million
in
brokered
CDs
as
of
December
31,
2022,
of
which
approximately
$55.7
million
mature
over
the
next
twelve
months.
Liquidity
at
the
Bank
level
is
highly
dependent
on
bank
deposits,
which
fund
86.9%
of
the
Bank’s
assets
(or
86.3%
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 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.
Over the
last twelve
months, the
FED’s
policy to
control the
inflationary economic
environment,
including the
rising of
market
interest
rates,
have
resulted
in
excess
liquidity
gradually
tapering
off
and
impacting
the
Corporation’s
core
deposit
balances
as
customers have
allocated cash
into higher
yielding options.
During the
fourth quarter
of 2022,
the Corporation
increased the
use of
short-term advances
from the
FHLB, repurchase
agreements, and
other sources,
such as
wholesale funding
brokers. The
additional
use
and
future
levels
of
these
sources
of
funding
are
dependent
on
factors
such
as
the
loan
portfolio
future
pipeline,
customers
continuing
to
allocate
more
cash
into
higher
yielding
alternatives,
among
other
factors.
Funding
through
these
sources
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 December
31, 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.
83
The following table summarizes commitments to extend credit and standby letters of
credit as of the indicated dates:
December 31,
2022
2021
(In thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Construction undisbursed funds
$
170,639
$
197,917
Unused personal lines of credit
978,219
1,180,824
Commercial lines of credit
761,634
725,259
Letters of credit:
Commercial letters of credit
68,647
151,140
Standby letters of credit
9,160
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 and, thus, 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 $3.4
billion as of December
31,
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,
credit
facilities, and cash flows 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.
Additional funding
is provided
by short-
and long-term
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 fundi
ng 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.
84
The Corporation’s principal sources
of funding are discussed below:
Deposits
The following table presents the composition of total deposits as of the indicated
dates:
As of December 31,
2022
2021
(Dollars in thousands)
Interest-bearing savings accounts
$
3,902,888
$
4,729,387
Interest-bearing checking accounts
3,770,993
3,492,645
CDs
2,356,702
2,535,349
Interest-bearing deposits
(1)
10,030,583
10,757,381
Non-interest-bearing deposits
6,112,884
7,027,513
Total
$
16,143,467
$
17,784,894
Interest-bearing deposits:
Average balance
outstanding
$
10,562,159
$
10,940,542
Non-interest-bearing deposits:
Average balance
outstanding
$
6,391,171
$
6,063,715
Weighted average
rate during the period on interest-bearing deposits
0.44%
0.38%
(1)
The weighted-average interest rate on total interest-bearing deposits
as of December 31, 2022 and 2021 was 1.03% and 0.31%,
respectively.
Retail
deposits
–
The
Corporation’s
deposit
products
include
regular
savings
accounts,
demand
deposit
accounts,
money
market
accounts,
and
retail
CDs. As
of
December
31,
2022,
the
Corporation’s
deposits,
excluding
government
deposits
and
brokered
CDs,
decreased by $1.1 billion
to $13.3 billion from
$14.4 billion as of December
31, 2021. The $1.1
billion decrease was primarily
related
to
lower
balances
in
commercial
savings
accounts,
retail
CDs,
and
retail
demand
deposits
accounts
primarily
in
the
Puerto
Rico
region, reflecting,
among other
things, the
effect of
customers’ allocation
of cash
balances into
higher-yielding
options and
elevated
customer spending.
Government deposits
– As of
December 31,
2022, the Corporation
had $2.3 billion
of Puerto Rico
public sector deposits
($2.2 billion
in transactional
accounts and
$162.6 million
in time
deposits), compared
to $2.7
billion as
of December
31, 2021,
which are
insured
by
the
FDIC
up
to
the
applicable
limits
and
the
uninsured
portion
is
fully
collateralized.
Approximately
24%
of
the
public
sector
deposits
as
of
December
31,
2022
were
from
municipalities
and
municipal
agencies
in
Puerto
Rico
and
76%
were
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
December
31,
2022,
the
Corporation
had
$442.8
million
of
government
deposits
in
the
Virgin
Islands
region
(December 31, 2021 - $568.4 million) and $11.6
million in the Florida region (December 31, 2021 - $9.6 million).
Estimate of Uninsured
Deposits –
As of December 31,
2022 and 2021, the estimated
amount of uninsured deposits
totaled $7.6 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 December
31, 2022
and 2021
include
the
uninsured
portion
of
government
deposits,
which
are
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.
85
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 December
31, 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
$
289,172
$
56,286
$
148,966
$
197,107
$
691,531
Other uninsured time deposits
$
21,874
$
7,027
$
17,281
$
4,855
$
51,037
Brokered
CDs
– Total
brokered CDs
increased during
2022 by $5.4
million to $105.8
million as of
December 31,
2022, compared
to
$100.4 million as of December 31, 2021.
The average remaining term to maturity of the brokered CDs outstanding
as of December 31, 2022 was approximately 1.6 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 years ended December 31, 2022, 2021, and 2020.
Borrowings
As of December 31, 2022, total borrowings amounted to $933.9 million, compared
to $683.8 million as of December 31, 2021.
The following table presents the composition of total borrowings as of the indicated
dates:
Weighted Average
Rate as of
As of December 31,
December 31, 2022
2022
2021
(Dollars in thousands)
Short-term securities sold under agreements to repurchase
4.55%
$
75,133
$
-
Long-term securities sold under agreements to repurchase
-
-
300,000
Short-term advances from FHLB
4.56%
475,000
-
Long-term advances from FHLB
4.25%
200,000
200,000
Other borrowings
7.33%
183,762
183,762
Total
5.04%
$
933,895
$
683,762
Securities
sold
under
agreements
to
repurchase
-
The
Corporation’s
investment
portfolio
is
funded
in
part
with
repurchase
agreements.
The Corporation’s
outstanding
short-term
securities sold
under repurchase
agreements
amounted
to $75.1
million
as of
December
31,
2022
and
are
scheduled
to
mature
during
the
first
quarter
of
2023.
The
$300.0
million
of
long-term
repurchase
agreements
that were
outstanding
as of
December 31,
2021 matured
or were
called close
to its
maturity during
2022. 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 12
– Securities
Sold Under
Agreements to
Repurchase, to
the audited
consolidated financial
statements included
in Item 8 of this Form 10-K, 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, 2022, the outstanding balance
of fixed-rate FHLB advances was $675.0 million, compared
to $200.0 million as of
December 31,
2021. The $200.0
million in long-term
FHLB advances outstanding
as of December
31, 2021 matured
and were repaid
during
the third
quarter of
2022.
In addition,
during
the fourth
quarter of
2022,
the Corporation
added $475.0
million of
short-term
FHLB advances that are scheduled
to mature during the
first quarter of 2023 and
$200.0 million of long-term
FHLB advances that are
scheduled
to
mature
in
November
2027.
Of
the
$675.0
million
in
FHLB
advances,
$225.0
million
were
pledged
with
investment
86
securities
and
$450.0
million
were
pledged
with
mortgage
loans.
As
of
December
31,
2022,
the
Corporation
had
$644.2
million
available for additional credit on FHLB lines of credit based on collateral
pledged at the FHLB of New York
.
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
December
31,
2022
and
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.
Under the
indentures, the
Corporation has the
right, from
time to time,
and without
causing an event
of default,
to defer payments
of interest
on
the Junior Subordinated
Deferrable Debentures by
extending the interest
payment period at
any time and
from time to time
during the
term of
the subordinated
debentures
for up
to twenty
consecutive
quarterly periods.
As of
December 31,
2022,
the Corporation
was
current
on
all
interest
payments
due
on
its
subordinated
debt.
See
Note
14
–
Other
Borrowings
and
Note
10
–
Non-Consolidated
Variable
Interest
Entities
(“VIE”)
and
Servicing
Assets,
to
the
audited
consolidated
financial
statements
included
in
Item
8
of
this
Form 10-K for additional information.
Other Sources
of Funds
and Liquidity
- The
Corporation’s
principal uses
of funds
are for
the origination
of loans,
the repayment
of
maturing deposits
and borrowings,
and deposits
withdrawals. 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 2022,
loans pooled into GNMA MBS amounted
to approximately $144.5
million. Also, during
2022, the Corporation
sold approximately $93.8
million of performing
residential mortgage
loans to FNMA and
FHLMC.
The
FED
Discount
Window
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 December 31, 2022,
the Corporation had approximately $1.3
billion available for funding under the FED’s
Discount Window based on collateral pledged at the
FED.
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
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.
87
Cash Flows
Cash and
cash equivalents
were $480.5
million as
of December
31, 2022,
a decrease
of $2.1
billion when
compared to
December
31, 2021.
The following
discussion highlights
the major
activities and
transactions that
affected
the Corporation’s
cash flows
during
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.
For the years ended December
31, 2022 and 2021, net
cash provided by operating activities
was $440.5 million and
$399.7 million,
respectively.
Net cash
generated from
operating activities
was higher
than reported
net income
largely as
a result
of adjustments
for
non-cash items such
as depreciation and
amortization, deferred income
tax expense and the
provision for credit
losses, 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 year ended December
31, 2022, net cash used in
investing
activities was
$681.5 million,
primarily due
to purchases
of U.S.
agencies debentures
and MBS
and net
disbursements on
loans held
for investment, partially offset by repayments of U.S. agencies MBS and
proceeds from sales of commercial loan participations
.
For the
year ended
December 31,
2021, net
cash used
in investing
activities was
$1.3
billion, primarily
due to
a higher
volume of
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
repayments, as
well as
proceeds from
U.S. agencies
bonds called
prior
to maturity, the bulk sale of
residential mortgage nonaccrual loans, and the sale of criticized commercial
and construction loans.
Cash Flows from Financing Activities
The Corporation’s
financing activities
primarily
include the
receipt of
deposits and
the issuance
of brokered
CDs, the
issuance of
and payments
on long-term
debt, the
issuance of
equity instruments,
return of
capital, and
activities related
to its
short-term funding.
For
the
year
ended
December 31,
2022,
net cash
used by
financing
activities
was $1.8
billion,
mainly
reflecting
a decrease
in
total
deposits, the repayment of long-term debt, and capital
returned to stockholders. These variances were partially offset
by proceeds from
short-term borrowings.
For the
year ended
December 31,
2021, net
cash provided by
financing activities
was $1.9
billion, mainly
reflecting an
increase in
non-brokered deposits,
partially offset
by capital
returned to
stockholders,
and repayment
of matured
long-term FHLB
advances and
brokered CDs.
88
Capital
As of December 31, 2022, the Corporation’s
stockholders’ equity was $1.3 billion,
a decrease of $776.2 million from
December 31,
2021.
The decrease
was driven
by a
$718.6 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
19.4
million shares
of common
stock for
a total
purchase
price
of approximately
$275.0 million,
and common
stock dividends
declared in
2022 totaling
$88.2 million
or $0.46
per common
share, partially
offset by
earnings generated during 2022.
On February
9, 2023,
the Corporation’s
Board of
Directors declared
a quarterly
cash dividend
of $0.14
per common
share, which
represents an
increase of
$0.02 per
common share,
or a
17% increase,
compared to
its most
recent dividend
paid in
December 2022.
The dividend
is payable on
March 10, 2023
to shareholders of
record at the
close of business
on February
24, 2023.
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, which
commenced
in the
second quarter
of 2022
and
at the
time was
expected to
be executed
over four
quarters. The
Corporation’s
share repurchase
program does
not obligate
it to
acquire any specific number of shares. As of February
21, 2023, the Corporation has repurchased approximately
18.1 million shares of
common stock
for a total
purchase price
of $254.9
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
common
equity
less
goodwill,
and
other
intangible assets.
Tangible
assets are
total assets
less the
previously mentioned
intangible assets.
See “Basis
of Presentation”
below
for additional information.
89
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 December 31, 2022 and 2021, respectively:
December 31,
December 31,
2022
2021
(In thousands, except ratios and per share information)
Total equity
- GAAP
$
1,325,540
$
2,101,767
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
(205)
(1,198)
Core deposit intangible
(20,900)
(28,571)
Insurance customer relationship intangible
(13)
(165)
Tangible common
equity
$
1,265,811
$
2,033,222
Total assets - GAAP
$
18,634,484
$
20,785,275
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
(205)
(1,198)
Core deposit intangible
(20,900)
(28,571)
Insurance customer relationship intangible
(13)
(165)
Tangible assets
$
18,574,755
$
20,716,730
Common shares outstanding
182,709
201,827
Tangible common
equity ratio
6.81%
9.81%
Tangible book
value per common share
$
6.93
$
10.07
The Corporation’s
tangible common equity
ratio decreased to 6.81%
as of December 31, 2022,
compared to 9.81% as
of December
31, 2021. The decrease
in tangible common
equity includes the effect
of the $718.6 million
decrease in the fair
value of available-for-
sale debt securities due to changes in market interest rates recognized
as part of other accumulated other comprehensive loss.
See
Note
29
-
Regulatory
Matters,
Commitments
and
Contingencies
for
the
regulatory
capital
positions
of
the
Corporation
and
FirstBank as of December 31, 2022 and 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
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.
During
the
years
ended
December
31,
2022
and
2021,
the
Corporation
transferred
$30.9
million
and
$28.3
million,
respectively,
to
the
legal
surplus
reserve.
FirstBank’s
legal
surplus
reserve,
included
as
part
of
retained
earnings in
the Corporation’s
consolidated statements
of financial
condition, amounted
to $168.5
and $137.6
million as
of December
31, 2022 and 2021, respectively.
Capital risk is
the risk that
our capital is
insufficient to
support our business
activities under normal
and stressed market
conditions
or we
face capital
reductions
or risk-weighted
assets increases,
including
from
new or
revised rules
or changes
in interpretations
of
existing
rules,
and
are
therefore
unable
to
meet
our
internal
capital
targets
or
external
regulatory
capital
requirements.
Capital
adequacy
is of
critical importance
to us.
Accordingly,
we have
in place
a comprehensive
capital management
policy that
provides a
framework, defines objectives
and establishes guidelines
to maintain an
appropriate level and
composition of capital
in both business-
as-usual
and
stressed
conditions.
Our
capital
management
framework
is
designed
to
provide
us
with
the
information
needed
to
comprehensively manage risk and
develop and apply projected
stress scenarios that capture
idiosyncratic vulnerabilities with
a goal of
holding
sufficient
capital
to
remain
adequately
capitalized
even
after
experiencing
a
severe
stress
event.
We
have
established
a
comprehensive governance
structure to
manage and
oversee our
capital management
activities and
compliance with
capital rules
and
related
policies.
Capital
planning
activities
are
overseen
by
the
Capital
Planning
Committee
which
is
chaired
by
the
CEO
and
is
comprised
of
the
following
members:
the
CFO,
CRO,
and
the
Corporate
Strategy
and
Investor
Relations
Officer.
In
addition,
committees
and
members
of
senior
management
are
responsible
for
the
ongoing
monitoring
of
our
capital
adequacy
and
evaluate
current and
future regulatory
capital requirements,
review the
results of
our capital
planning and
stress tests
processes and
the results
of
our
capital models,
and
review
our
contingency
funding and
capital
plan
and
key
capital adequacy
metrics,
including
regulatory
capital ratios.
90
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
monitors, among
other things, current
and expected conditions
in global 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 in light of
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
simulations
reflect
gradual
upward
and
downward
interest
rate
movements
of
200
basis
points
(“bps”)
during
a
twelve-month
period.
The
Corporation
carries
out
the
simulations 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
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
CDs
rates,
repurchase
agreements
rates,
and
the
mortgage commitment rate of 30 years.
As of
December 31,
2022, the
Corporation forecasted
the 12-month
net interest
income assuming
December 31,
2022 interest
rate
curves remain
constant. Then,
net interest
income was
estimated under
rising and
falling rates
scenarios. For
rising rates
scenarios, a
gradual
(ramp)
parallel
upward
shift
of
the
yield
curve
is
assumed
during
the
first
twelve
months
(the
“+200
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 ramp” scenario).
The
LIBOR/Swap
rates
for
December
31,
2022,
as
compared
to
the
January
31,
2022
rates
used
for
the
December
31,
2021
sensitivity
analysis,
reflected
an
increase
in
the
short-term
sector
of
the
curve,
that
is
between
one
to
twelve
months,
of
449
basis
points (“bps”)
on average;
while market
rates increased
in the
medium-term sector
of the
curve, that
is between
2 to
5 years,
by 274
bps. In the long-term sector,
that is over 5-year maturities, market
rates increased 196 bps as compared
to January 31, 2022.
A similar
pattern
in
market
rates
changes
were
observed
in
the
Treasury
and
the
SOFR
curve
of
416
and
410
bps
in
the
short-term
sector,
respectively, 282 and 247
in the medium-term sector, respectively,
and 200 and 167 bps in the long-term sector, respectively.
91
The following table presents the results of the simulations as of December 31, 2022
and 2021.
Consistent with prior years,
these exclude non-cash changes in the fair value of derivatives:
December 31, 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
$
7.8
0.96
%
$
11.5
1.37
%
$
34.5
4.81
%
$
39.1
5.17
%
- 200 bps ramp
$
(13.1)
(1.61)
%
$
(17.0)
(2.03)
%
$
(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
while maintaining
a sound
liquidity position.
As of
December 31,
2022 and
2021, the
simulations showed
that the
Corporation continues to have an asset-sensitive position.
As of December 31, 2022, the
net interest income for the
next twelve months under
a non-static balance sheet scenario
is estimated
to
increase
by
$11.5
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
coupled
with
changes
in
market
interest
rates and
its impact
on deposit
betas. As
of
December
31,
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.
In addition,
the repricing
of the
more sensitive
interest-bearing deposits,
such as
government deposits,
have
resulted in increases in deposit betas which ultimately impact net interest income.
As of December 31, 2022,
under a falling rate,
non-static balance sheet scenario,
the net interest income
is estimated to decrease
by $17.0
million, when
compared against
the base
simulation.
The
increase in
net interest
income
sensitivity for
the -200
bps ramp
scenario,
when compared to December
31, 2021, was driven
by higher sensitivity
in the asset side as
a result of rate
decompression as
market rates move
away from historically
low interest rate
levels, allowing for
greater downward interest
rate shifts, which
more than
offset the aforementioned repricing of the more sensitive interest-bearing
deposits described above.
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.
As
of
December
31,
2022
and
2021,
the
Corporation
considered
all
of
its
derivative
instruments
to
be
undesignated
economic
hedges.
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
and
the
amount
of
gains
and
losses
reported
in
the
consolidated statements of
income, see Note
24 - Derivative Instruments
and Hedging Activities,
to the audited
consolidated financial
statements included in Item 8 of this Form 10-K.
92
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,
monitoring
of
loan
concentrations
and
related
credit
quality,
counterparty
credit
risk,
economic
and
market
conditions,
and
legislative
or
regulatory
mandates.
The
Corporation
also
performs
independent
loan
review
and
quality
control
procedures,
statistical
analysis,
comprehensive
financial
analysis,
established
management committees,
and 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. agencies
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.
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.
During 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 actions
to control
inflationary economic
conditions. For
periods prior
to 2022,
the Corporation
calculated the
ACL using
the baseline
scenario. As
of December
31, 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 year
2023 is
expected to
contract by
2.96%,
compared
to an
average projected appreciation for 2023 of 8.68% as of December 31,
2021.
93
●
Average
Regional
Home
Price Index
forecast
for year
2023 in
Puerto
Rico (purchase
only prices)
shows a
deterioration of
6.88%, when compared to the forecast for 2023 as of December 31, 2021.
●
An increase in levels of regional
unemployment in Puerto Rico to 8.55%
for the year 2023, compared to the
forecast for 2023
of 7.60% as of December 31, 2021.
For the Florida region and the U.S.
mainland, an increase in unemployment rate
to 4.23%
and 4.83%, respectively,
for the year 2023, compared to 2.88% and 3.49%, respectively,
for 2023 as of December 31, 2021.
●
A decrease
in real
GDP in
the U.S.
mainland to
0.26%
for the
year 2023,
compared to
the forecast
for 2023
of 2.84%
as of
December 31, 2021.
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
December 31,
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
9.16% for
the year
2023, compared
to 8.55%
for the
same period
on the
probability-weighted economic scenario projections.
To
demonstrate the sensitivity
to key economic
parameters used in
the calculation of
our ACL at December
31, 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 $41
million at December 31,
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 and challenges,
which continue to
evolve, 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 December
31, 2022.
As
of
December
31,
2022,
the
ACL
for
loans
and
finance
leases
was
$260.5
million,
down
approximately
$8.5
million
from
December 31,
2021. The
ACL reduction
for commercial
and construction
loans was
$20.8
million during
2022, primarily
reflecting
reduced
uncertainties
related
to
the
COVID-19
pandemic,
particularly
on
loans
in
the
hotel,
transportation
and
entertainment
industries;
and,
to a
lesser extent,
the effect
during
the second
half of
2022 of
reserve releases
totaling
$4.8 million
associated with
two
adversely
classified
loans
that
were
paid
off
or
sold,
partially
offset
by
an
increase
in
the
size
of
the
loan
portfolio
and
a
less
favorable economic outlook in the
projection of certain forecasted macroeconomic
variables, such as the CRE price
index. In addition,
there was an ACL reduction of
$12.0 million for residential mortgage loans,
partially offset by a $24.3 million
increase in the ACL for
consumer loans.
The net reduction
in the
ACL for residential
mortgage loans
was primarily
driven by
the overall
decrease in
the size
of this portfolio
and, to a lesser extent,
a decrease in qualitative
adjustments due to improvements
in underlying portfolio metrics.
The
ACL increase
for consumer
loans was
mainly driven
by a
less favorable
long-term outlook
of certain
macroeconomic variables,
such
as the regional unemployment rate, and an increasing trend in delinquency
and charge-off levels in the consumer loan portfolios.
The ratio
of the
ACL for
loans and
finance leases
to total
loans held
for investment
decreased to
2.25%
as of
December 31,
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
portfolio
decreased
from
2.51%
as
of
December
31,
2021
to
2.20% as of December
31, 2022, primarily due
to a decrease in qualitative
adjustments due to improvements
in underlying
portfolio metrics.
●
The
ACL to
total
loans
ratio
for
the
commercial
mortgage
portfolio
decreased
from
2.43% as
of
December
31,
2021
to
1.49%
as
of
December
31,
2022,
primarily
reflecting
reduced
uncertainties
related
to
the
COVID-19
pandemic,
as
previously discussed.
●
The ACL
to total
loans ratio
for
the commercial
and industrial
portfolio
was 1.14%
as of
December
31, 2022,
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 1.74%
as of December
31, 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.
94
●
The ACL
to total
loans ratio
for the
consumer loan
portfolio increased
from 3.57%
as of December
31, 2021
to 3.83% as
of December
31, 2022, primarily
associated to a
less favorable long
-term outlook of
certain macroeconomic variables
and
an increasing trend in delinquency and charge-off
levels in the consumer loan portfolios.
The ratio
of the
total ACL
for loans
and finance
leases to
nonaccrual
loans held
for investment
was 289.61%
as of
December 31,
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 $260.5
million as
of December
31, 2022,
or
2.25% of
total loans,
compared with
$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.
Year Ended December
31,
2022
2021
2020
(Dollars in thousands)
ACL for loans and finance leases, beginning of year
$
269,030
$
385,887
$
155,139
Impact of adopting CECL
-
-
81,165
Initial allowance on purchased credit deteriorated ("PCD") loans
-
-
28,744
Provision for credit losses - expense (benefit):
Residential mortgage
(8,734)
(16,957)
22,427
(1)
Commercial mortgage
(18,994)
(55,358)
81,125
(1)
Commercial and Industrial
(1,770)
(8,549)
6,627
(1)
Construction
(2,342)
(1,408)
2,105
Consumer and finance leases
57,519
20,552
56,433
(1)
Total provision for credit losses
- expense (benefit)
25,679
(61,720)
168,717
(1)
Charge-offs:
Residential mortgage
(6,890)
(33,294)
(2)
(11,017)
Commercial mortgage
(85)
(1,494)
(3,330)
Commercial and Industrial
(2,067)
(1,887)
(3,634)
Construction
(123)
(87)
(76)
Consumer and finance leases
(48,165)
(43,948)
(46,483)
Total charge offs
(57,330)
(80,710)
(64,540)
Recoveries:
Residential mortgage
3,547
4,777
1,519
Commercial mortgage
1,372
281
1,936
Commercial and Industrial
2,459
6,776
3,192
Construction
725
163
184
Consumer and finance leases
14,982
13,576
9,831
Total recoveries
23,085
25,573
16,662
Net charge-offs
(34,245)
(55,137)
(3)
(47,878)
ACL for loans and finance leases, end of year
$
260,464
$
269,030
$
385,887
ACL for loans and finance leases to year-end total loans
held for investment
2.25%
2.43%
3.28%
Net charge-offs to average loans outstanding
during the year
0.31%
0.48%
0.48%
Provision for credit losses - expense (benefit) for loans and finance
leases to net charge-offs
during the year
0.75x
-1.12x
3.52x
(1)
Includes a $37.5 million
charge related to the establishment
of the initial reserves
for non-PCD loans acquired
in conjunction with the BSPR
acquisition consisting of: (i)
a $13.6 million charge
related
to non-PCD residential
mortgage loans; (ii)
a $9.2 million
charge related to
non-PCD commercial mortgage
loans, (iii) a
$4.6 million charge
related to non-PCD
commercial and industrial
loans, and
(iv) a $10.1 million charge related to non-PCD consumer loans.
(2)
Includes net charge-offs totaling $23.1 million associated with a bulk sale of residential
nonaccrual loans and related servicing advance receivables.
(3)
Excluding net charge-offs associated with the bulk sale, total net charge
-offs to related average loans for the year ended 2023 was 0.28%.
95
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 December 31,
2022
2021
Amount
Percent of loans in
each category to total
loans
Amount
Percent of loans in
each category to total
loans
(Dollars in thousands)
Residential mortgage loans
$
62,760
25%
$
74,837
27%
Commercial mortgage loans
35,064
20%
52,771
20%
Commercial and industrial loans
32,906
25%
34,284
26%
Construction loans
2,308
1%
4,048
1%
Consumer loans and finance leases
127,426
29%
103,090
26%
$
260,464
100%
$
269,030
100%
The following table sets forth information concerning the composition of the
Corporation's loan portfolio and related ACL by
loan category as of the indicated dates:
As of December 31, 2022
Residential
Mortgage
Loans
Commercial
Mortgage
Loans
C&I Loans
Consumer and
Finance Leases
Construction
Loans
(Dollars in thousands)
Total
Total loans held for investment:
Amortized cost of loans
$
2,847,290
$
2,358,851
$
2,886,263
$
132,953
$
3,327,468
$
11,552,825
Allowance for credit losses
62,760
35,064
32,906
2,308
127,426
260,464
Allowance for credit losses to amortized cost
2.20
%
1.49
%
1.14
%
1.74
%
3.83
%
2.25
%
As of December 31, 2021
Residential
Mortgage
Loans
Commercial
Mortgage
Loans
C&I Loans
Consumer and
Finance Leases
Construction
Loans
(Dollars in thousands)
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
%
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
December
31,
2022,
the
ACL
for
off-balance
sheet
credit
exposures
increased
by $2.7
million
to $4.3
million,
when
compared
to
December 31,
2021,
mainly driven
by an
increase
in
balance
of
unfunded
loan
commitments
principally
due
to
newly
originated
facilities
which
remained
undrawn
as
of December
31,
2022.
Allowance for Credit Losses for Held-to-Maturity
Debt Securities
As
of
December
31,
2022,
the
ACL
for
held-to-maturity
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
December
31,
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 $0.5
million as of December 31, 2022, compared to $1.1 million as of December 31, 2021.
96
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. See Note
1 – Nature
of Business and
Summary
of Significant
Accounting Policies,
to the
audited consolidated
financial statements
included
in Item
8 of
this Form
10-K,
for additional information.
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 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
fair
value
less
estimated
costs
to
sell
the
real
estate
acquired.
Appraisals
are
obtained periodically,
generally on an annual basis.
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.
97
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 (i.e.,
well secured and in process
of collection) 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
fail
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.
Troubled
debt
restructurings
(“TDRs”)
are
classified
as
either
accrual
or
nonaccrual
loans.
A
loan
in
nonaccrual
status
and
restructured
as
a
TDR
will
remain
in
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.
The following table presents non-performing assets as of the indicated dates:
December 31,
December 31,
2022
2021
(Dollars in thousands)
Nonaccrual loans held for investment:
Residential mortgage
$
42,772
$
55,127
Commercial mortgage
22,319
25,337
Commercial and Industrial
7,830
17,135
Construction
2,208
2,664
Consumer and finance leases
14,806
10,454
Total nonaccrual loans held for investment
(1)
89,935
110,717
OREO
31,641
40,848
Other repossessed property
5,380
3,687
Other assets
(2)
2,202
2,850
Total non-performing assets
(1)
$
129,158
$
158,102
Past due loans 90 days and still accruing
(3) (4) (5)
$
80,517
$
115,448
Non-performing assets to total assets
0.69
%
0.76
%
Nonaccrual loans held for investment to total loans held for investment
0.78
%
1.00
%
ACL for loans and finance leases
$
260,464
$
269,030
ACL for loans and finance leases to total nonaccrual loans held
for investment
289.61
%
242.99
%
ACL for loans and finance leases to total nonaccrual loans held
for investment, excluding residential real estate loans
552.26
%
483.95
%
(1)
Nonaccrual loans
exclude $328.1
million and
$363.4 million
of TDR
loans that
were
in compliance
with the
modified terms
and in
accrual status
as of
December 31,
2022 and
2021,
respectively.
(2)
Residential pass-through MBS issued by the PRHFA
held as part of the available-for-sale debt securities
portfolio.
(3)
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 amounted to $12.0 million and $20.6 million as
of December 31, 2022 and 2021, respectively.
(4)
Includes FHA/VA
government-guaranteed residential mortgage 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 $28.2 million
and $46.6 million
of FHA government guaranteed residential mortgage loans that
were over 15 months delinquent as of December 31, 2022 and
2021, respectively.
(5)
Includes rebooked
loans, which
were previously
pooled into
GNMA securities,
amounting to
$10.3 million
and $7.2
million as
of December
31, 2022
and 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.
98
Total
nonaccrual loans
were $89.9
million as
of December
31, 2022.
This represents
a net
decrease of
$20.8 million
from $110.7
million as
of December
31, 2021.
The net
decrease was
primarily related
to a
$12.8 million
reduction in
nonaccrual commercial
and
construction loans,
mostly driven by
$8.5 million in
loans returned to
accrual status and
$8.5 million in
collections, partially offset
by
inflows of $5.7
million. In addition,
nonaccrual residential mortgage
loans decreased
by $12.3 million
mainly related to
$15.4 million
of loans
restored to
accrual status,
$11.8
million in
collections, and
$3.9 million
in loans
transferred to
OREO during
2022, partially
offset
by
inflows
of
$20.3
million.
These
variances
were
partially
offset
by
a
$4.3
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:
December 31,
December 31,
2022
2021
(In thousands)
Puerto Rico:
Nonaccrual loans held for investment:
Residential mortgage
$
28,857
$
39,256
Commercial mortgage
14,341
15,503
Commercial and Industrial
5,859
14,708
Construction
831
1,198
Consumer and finance leases
14,142
10,177
Total nonaccrual loans held for investment
64,030
80,842
OREO
28,135
36,750
Other repossessed property
5,275
3,456
Other assets
2,202
2,850
Total non-performing assets
$
99,642
$
123,898
Past due loans 90 days and still accruing
$
76,417
$
114,001
Virgin Islands:
Nonaccrual loans held for investment:
Residential mortgage
$
6,614
$
8,719
Commercial mortgage
7,978
9,834
Commercial and Industrial
1,179
1,476
Construction
1,377
1,466
Consumer
469
144
Total nonaccrual loans held for investment
17,617
21,639
OREO
3,475
3,450
Other repossessed property
76
187
Total non-performing assets
$
21,168
$
25,276
Past due loans 90 days and still accruing
$
4,100
$
1,265
United States:
Nonaccrual loans held for investment:
Residential mortgage
$
7,301
$
7,152
Commercial and Industrial
792
951
Consumer
195
133
Total nonaccrual loans held for investment
8,288
8,236
OREO
31
648
Other repossessed property
29
44
Total non-performing assets
$
8,348
$
8,928
Past due loans 90 days and still accruing
$
-
$
182
99
Nonaccrual commercial mortgage loans
decreased by $3.0 million to
$22.3 million as of December
31, 2022, from $25.3 million
as
of December 31,
2021. The decrease was
primarily associated to
collections and loans
restored to accrual status
during 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 $9.3 million to
$7.8 million as of December 31, 2022,
from $17.1 million
as of
December 31,
2021. The
decrease was
primarily
associated with
loans restored
to accrual
status during
2022, including
a $5.2
million
commercial
and
industrial
loan
in
the
Puerto
Rico
region,
and
collections,
including
the
repayment
of
a
$1.2
million
commercial and industrial
loan in the
Puerto Rico region.
This variance was
partially offset
by inflows, including
the inflow of
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
December
31,
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)
Year ended
December 31, 2022
Beginning balance
$
25,337
$
17,135
$
2,664
$
45,136
Plus:
Additions to nonaccrual
2,934
2,749
20
5,703
Less:
Loans returned to accrual status
(1,585)
(6,864)
(48)
(8,497)
Nonaccrual loans transferred to OREO
(549)
(273)
(130)
(952)
Nonaccrual loans charge-offs
(83)
(385)
(114)
(582)
Loan collections
(3,333)
(4,934)
(184)
(8,451)
Reclassification
(402)
402
-
-
Ending balance
$
22,319
$
7,830
$
2,208
$
32,357
Commercial
Mortgage
Commercial &
Industrial
Construction
Total
(In thousands)
Year ended
December 31, 2021
Beginning balance
$
29,611
$
20,881
$
12,971
$
63,463
Plus:
Additions to nonaccrual
5,090
4,367
23
9,480
Less:
Loans returned to accrual status
(2,376)
(752)
(319)
(3,447)
Nonaccrual loans transferred to OREO
(1,011)
(1,441)
(252)
(2,704)
Nonaccrual loans charge-offs
(1,433)
(629)
(86)
(2,148)
Loan collections
(4,326)
(6,471)
(6,585)
(17,382)
Reclassification
(218)
1,180
-
962
Nonaccrual loans sold, net of charge-offs
-
-
(3,088)
(3,088)
Ending balance
$
25,337
$
17,135
$
2,664
$
45,136
100
Nonaccrual
residential
mortgage loans
decreased by
$12.3 million
to $42.8
million as
of December
31, 2022,
compared to
$55.1
million as of December 31,
2021. The decrease was primarily related
to loans restored to accrual status
of $15.4 million, $11.8
million
in collections,
including the
payoff of
an individual
loan of
approximately $1.3
million, foreclosures
of $3.9
million, and
charge-offs
of $1.6 million
during the year
ended in 2022,
partially offset
by inflows, including
the inflow of
an individual loan
of approximately
$1.4 million.
The following table presents the activity of residential nonaccrual loans held for investment
for the indicated periods:
Year
ended December 31,
2022
2021
(In thousands)
Beginning balance
$
55,127
$
125,367
Plus:
Additions to nonaccrual
20,320
33,543
Less:
Loans returned to accrual status
(15,362)
(15,918)
Nonaccrual loans transferred to OREO
(3,895)
(8,058)
Nonaccrual loans charge-offs
(1)
(1,594)
(26,735)
Loan collections
(11,824)
(20,595)
Reclassification
-
(962)
Nonaccrual loans sold
-
(31,515)
Ending balance
$
42,772
$
55,127
(1)
For the year ended December 31, 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 $4.3 million to
$14.8 million as of
December 31,
2022,
compared
to
$10.5
million
as of
December
31,
2021.
The
increase
was
mainly
reflected
in
the
auto
loans
and
finance
leases
portfolio.
As of
December
31,
2022,
approximately
$15.3
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 $7.8 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
year
ended
December
31,
2022,
interest
income
of
approximately
$0.9
million
related
to
nonaccrual
loans
with
a
carrying value
of $24.1
million as
of December
31, 2022, mainly
nonaccrual commercial
and construction
loans, was applied
against
the related principal balances under the cost-recovery method.
101
Total loans in early
delinquency (
i.e.
, 30-89 days past due loans, as defined in regulatory reporting
instructions) amounted to $104.9
million as of December 31, 2022,
an increase of $14.6 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 $21.5
million to $70.9
million as of
December 31,
2022, mainly reflected
in auto loans.
●
Residential mortgage loans in early delinquency decreased by $6.0
million to $28.2 million as of December 31, 2022.
●
Commercial and construction loans in early delinquency decreased
by $0.9 million to $5.8 million as of December 31, 2022.
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
December 31, 2022,
the Corporation’s
total TDR loans
held
for
investment
amounted
to
$366.7
million,
a
decrease
of
$48.0
million
from
$414.7
million
as
of
December
31,
2021.
The
decrease was mainly related to payoffs and paydowns of
residential mortgage and commercial and industrial loans.
See Note 4
- Loans Held
for Investment,
to the audited
consolidated financial
statements included
in Item 8
of this Form
10-K, 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
that
did
not
extend
beyond
December
31,
2022,
for
residents of Puerto
Rico that were
directly impacted
by the passing
of the hurricane.
This program provided
payment deferral
or term
extension
on a
one payment
basis, that
did not
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 continued
to accrue
interest during
the deferral
or extension
period. For
credit cards,
borrowers who
were
30 days or
less past due
as of September
16, 2022 were
eligible for this
program. For residential
mortgage loans and
consumer loans,
borrowers
who
were
60
days
or
less
past
due
as
of
September
16,
2022
were
eligible
for
this
program.
For
both
consumer
and
residential mortgage
loans subject
to the
deferral programs,
each borrower
was required
to opt
in on
a monthly
basis to
the program
and
had
to
resume
making
their regularly
scheduled
loan
payments
at
the
end
of
the
deferral
period.
For
consumer
loans,
deferred
amounts extended the
maturity date by
the number of
deferred periods. For
residential mortgage loans,
deferred amounts were
moved
to
the
end
of
the
loan
term.
Borrowers
that
made
a
payment
during
any
given
month
were
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 was frozen to the status that existed in the month prior to the relief granted.
Loans
subject
to
the
above-described
program
were
not
considered
TDRs
since
the
deferral
or
extension
was
considered
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
December
31,
2022,
the
Corporation
entered
into
deferral
or
extension
payment
agreements
on
consumer
and
residential
mortgage
loans totaling
$73.1 million
pursuant to
this program.
Customers who
were unable
to resume
making their
contractual loan
payments
upon
exiting
from
these
deferral
programs
may
require
further
assistance
and
may
receive
or
be
eligible
to
receive
modifications,
which could be considered TDRs.
102
The OREO portfolio,
which is part
of non-performing
assets, decreased by
$9.2 million to
$31.6 million
as of December
31, 2022,
compared
to
$40.8
million
as
of
December
31,
2021.
The
following
tables
show
the
composition
of
the
OREO
portfolio
as
of
December 31,
2022 and
2021, as
well as
the activity
of the
OREO portfolio
by geographic
area during
the year
ended December
31,
2022:
OREO Composition by Region
As of December 31,
2022
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
23,388
$
606
$
31
$
24,025
Commercial
3,042
2,810
-
5,852
Construction
1,705
59
-
1,764
$
28,135
$
3,475
$
31
$
31,641
As of December 31, 2021
(In thousands)
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
For the year ended December 31, 2022
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Beginning Balance
$
36,750
$
3,450
$
648
$
40,848
Additions
14,719
601
31
15,351
Sales
(20,727)
(590)
(648)
(21,965)
Write-downs and other adjustments
(2,607)
14
-
(2,593)
Ending Balance
$
28,135
$
3,475
$
31
$
31,641
103
Net Charge-offs and Total
Credit Losses
Net charge
-offs
totaled
$34.2 million
for
the year
ended December
31, 2022,
or 0.31%
of average
loans on
an annualized
basis,
compared to $55.1
million, or annualized
0.48% of average
loans for the
year ended December
31, 2021. The
bulk sale of nonaccrual
residential mortgage
loans added
$23.1
million in
net charge-off
s
for the
year ended
December 31,
2021. Excluding
the effect
of net
charge-offs
related to the bulk sale, total net charge-offs in 2021
were $32.0 million, or 0.28% of average loans.
Residential mortgage
loans net
charge-offs
for the
year ended
December 31,
2022 were
$3.3 million,
or an
annualized 0.12%
of
average residential loans, compared to $28.5 million,
or an annualized 0.87% of average residential mortgage
loans, for the year ended
December 31, 2021.
Excluding the effect
of net charge
-offs related
to the bulk
sale, residential mortgage
loans net charge-offs
for the
year
ended
December
31,
2021
were
$5.4
million,
or
0.17%
of
average
residential
mortgage
loans.
Approximately
$1.4
million
in
charge-offs
recorded
during
2022
resulted
from
valuations
of
collateral
dependent
residential
mortgage
loans,
compared
to
$5.7
million in
2021. Net
charge-offs
on residential
mortgage loans
also included
$2.6 million
during the
year ended
December 31,
2022
related to foreclosures recorded in 2022, compared to $2.8 million recorded
for the same period in 2021.
Commercial
mortgage
loans net
recoveries
for
the year
ended
December
31,
2022 were
$1.3
million,
or
an annualized
0.06%
of
average commercial mortgage
loans, compared to
net charge-offs
of $1.2 million, or
an annualized 0.06%
of related average
loans for
the
year
ended
December
31,
2021.
Commercial
mortgage
loans
net
recoveries
for
2022
included
recoveries
totaling
$1.2
million
associated with two commercial mortgage relationships.
Commercial and industrial loans net recoveries
for the year ended December 31, 2022 were $0.4
million, or an annualized 0.01% of
average commercial and industrial loans, compared to $4.9 million,
or an annualized 0.16% of related average loans for the year ended
December 31,
2021. The
lower net
recoveries for
2022
reflects both
the effect
of a
$1.7 million
charge-off
recognized in
connection
with
the
sale of
an
adversely classified
commercial
and
industrial
loan
participation
in
the
Florida
region
in
2022
and
the
effect
in
2021 of
a $5.2 million
loan loss recovery
recognized in
connection with the
paydown of a
nonaccrual commercial
and industrial loan
participation in the Puerto Rico region.
Construction
loans
net
recoveries
for
the
year
ended
December
31,
2022
were
$0.6
million,
or
an
annualized
0.49%
of
average
construction loans,
compared to
$0.1 million,
or an
annualized 0.04%
of related
average loans,
for the
same period
in 2021.
The net
recoveries for 2022 included a $0.5 million loan loss recovery
of a construction loan in the Puerto Rico region.
Net
charge-offs
of
consumer
loans
and
finance
leases
for
the
year
ended
December
31,
2022
were
$33.2
million,
or
1.07%
of
related
average
loans,
compared
to
$30.4
million,
or
1.11%
of
related
average
loans,
for 2021
.
The
increase
in
2022 was
primarily
reflected in the personal
loan portfolio, when compared
to the same period
in 2021. Notwithstanding,
the net charge-off
ratio for 2022
decreased due to a higher average balance of loans held-in-portfolio
that more than offset the increase in net charge-offs.
The following table presents net charge-offs (recoveries)
to average loans held-in-portfolio for the indicated periods:
Year Ended
December 31,
2022
2021
2020
Residential mortgage
(1)
0.12
%
0.87
%
0.30
%
Commercial mortgage
(0.06)
%
0.06
%
0.08
%
Commercial and Industrial
(0.01)
%
(0.16)
%
0.02
%
Construction
(0.49)
%
(0.04)
%
(0.06)
%
Consumer loans and finance leases
1.07
%
1.11
%
1.53
%
Total loans
(1)
0.31
%
0.48
%
0.48
%
(1)
For
the
year
ended
December
31,
2021,
includes
net
charge-offs
totaling
$23.1
million
associated
with
the
bulk
sale
of
residential
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 year ended 2021
was 0.17% and 0.28%,
respectively.
104
The following table presents net charge-offs (recoveries)
to average loans held in various portfolios by geographic segment for the
indicated periods:
Year Ended December
31,
2022
2021
2020
PUERTO RICO:
Residential mortgage
(1)
0.14
%
1.09
%
0.39
%
Commercial mortgage
(0.04)
%
0.08
%
0.26
%
Commercial and Industrial
(0.11)
%
(0.30)
%
-
%
Construction
(1.68)
%
(0.05)
%
(0.11)
%
Consumer and finance leases
1.07
%
1.10
%
1.51
%
Total loans
(1)
0.37
%
0.59
%
0.62
%
VIRGIN ISLANDS:
Residential mortgage
0.18
%
0.06
%
0.17
%
Commercial mortgage
(0.22)
%
(0.23)
%
(0.18)
%
Construction
-
%
-
%
(0.04)
%
Consumer and finance leases
1.23
%
1.16
%
0.65
%
Total loans
0.23
%
0.13
%
0.13
%
FLORIDA:
Residential mortgage
(0.03)
%
(0.01)
%
-
%
Commercial mortgage
(0.10)
%
(0.01)
%
(0.48)
%
Commercial and Industrial
0.17
%
0.10
%
0.04
%
Construction
(0.06)
%
(0.04)
%
(0.05)
%
Consumer and finance leases
0.30
%
2.15
%
4.35
%
Total loans
0.05
%
0.07
%
-
%
(1)
For
the
year
ended
December
31,
2021,
includes
net
charge-offs
totaling
$23.1
million
associated
with
the
bulk
sale
of
residential
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 in
the Puerto
Rico region
for the
year ended
2021 was 0.21% and 0.34%, respectively.
105
The above ratios are not necessarily indicative of the results expected in
subsequent periods.
Total
net charge
-offs plus
gains on
OREO operations
for the
year ended
December 31,
2022
amounted to
$28.4 million,
or a
loss
rate of
0.25% of
average loans
and repossessed
assets, compared
to losses
of $53.0
million, or
a loss
rate of
0.46% on
an annualized
basis, for the year ended December 31, 2021.
The following table presents information about the OREO inventory
and credit losses for the indicated periods:
Year Ended December 31,
2022
2021
2020
(Dollars in thousands)
OREO
OREO balances, carrying value:
Residential
$
24,025
$
29,533
$
32,418
Commercial
5,852
7,331
44,356
Construction
1,764
3,984
6,286
Total
$
31,641
$
40,848
$
83,060
OREO activity (number of properties):
Beginning property inventory
418
513
697
Properties acquired
156
167
120
Properties disposed
(230)
(262)
(304)
Ending property inventory
344
418
513
Average holding period (in days)
Residential
606
700
626
Commercial
2,570
2,018
2,170
Construction
2,185
2,115
2,151
Total average holding period (in days)
1,057
1,075
1,566
OREO operations gain (loss):
Market adjustments and gains (losses) on sale:
Residential
$
7,742
$
4,166
$
(29)
Commercial
420
(1,182)
(886)
Construction
(418)
820
(484)
Total net gain (loss)
7,744
3,804
(1,399)
Other OREO operations expenses
(1,918)
(1,644)
(2,199)
Net Gain (Loss) on OREO operations
$
5,826
$
2,160
$
(3,598)
(CHARGE-OFFS) RECOVERIES
Residential charge-offs, net
(1)
$
(3,343)
$
(28,517)
$
(9,498)
Commercial recoveries (charge-offs), net
1,679
3,676
(1,836)
Construction recoveries, net
602
76
108
Consumer and finance leases charge-offs, net
(33,183)
(30,372)
(36,652)
Total charge-offs, net
(34,245)
(55,137)
(47,878)
TOTAL CREDIT LOSSES
(2)
$
(28,419)
$
(52,977)
$
(51,476)
LOSS RATIO PER CATEGORY
(3)
Residential
(0.15)
%
0.74
%
0.30
%
Commercial
(0.04)
(0.05)
0.06
Construction
(0.15)
(0.48)
0.21
Consumer
1.07
1.11
1.53
TOTAL CREDIT LOSS RATIO
(4)
0.25
%
0.46
%
0.51
%
(1)
For the year ended December 31, 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 (loss) on OREO operations plus charge
-offs, net.
(3)
Calculated as net charge-offs plus market adjustment
and gains (losses) on sale of OREO divided by average loans and
repossessed assets.
(4)
Calculated as net charge-offs plus net gain (loss)
on OREO operations divided by average loans and repossessed
assets.
106
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 $11.6
billion as of
December 31, 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.
Update on the Puerto Rico Fiscal and Economic Situation
A significant
portion of
the Corporation’s
business activities
and credit
exposure is
concentrated in
the Commonwealth
of Puerto
Rico, which
has experienced
economic and
fiscal distress
over the
last decade.
Since declaring
bankruptcy and
benefitting from
the
enactment of the federal Puerto
Rico Oversight, Management and
Economic Stability Act (“PROMESA”) in
2016, the Government of
Puerto
Rico
has
made
progress
on
fiscal
matters
primarily
by
restructuring
a
large
portion
of
its
outstanding
public
debt
and
identifying funding sources for its unfunded pension system.
Economic Indicators
On
November
10,
2022,
the
Puerto
Rico
Planning
Board
(“PRPB”)
presented
the
Economic
Report
to
the
Governor,
which
provides
an
analysis
of
Puerto
Rico’s
economy
during
fiscal
year
2021
and
a
short-term
forecast
for
fiscal
years
2022
and
2023.
According to the
PRPB, Puerto Rico’s
real gross national
product (“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
report, 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
disaster
relief funding
deployed
over
the period.
To
a
lesser extent,
growth
in
fiscal
year
2021
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. According
to the PRPB’s
baseline projection
the
Puerto Rico
economy is
forecasted to
continue growing
for fiscal
years 2022
and 2023.
Among the
key assumptions
included in
this
forecast
is the
positive
impact
expected
from
the ongoing
disbursements
of disaster
recovery
funds
($2.8
billion
and $4.0
billion
in
fiscal years 2022 and
2023, respectively),
as well as the
stimulus from remaining pandemic
relief funds ($1.1 billion
and $632 million
in
fiscal
years
2022
and
2023,
respectively),
and
the
inclusion
of
Puerto
Rico
in
the
Earned
Income
Tax
Credit
and
the
Child
Tax
Credit.
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 correlated
to
Puerto
Rico’s
real
GNP.
For
December
2022,
preliminary
estimates
showed
that the
EDB-EAI
increased
1.6%
and
0.6%
on
a
month-over-month
and
year-over-year
basis,
respectively.
Similarly,
for
calendar
year
2022,
the
107
preliminary data
reflects that
the index
averaged 124.4
during the
year,
which would
represent a
1.8% increase
from the
comparable
figure in 2021.
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 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 2022
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
benefited from
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, 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 advantage
of this unique opportunity,
create an environment of
fiscal stability,
and develop the
conditions for long-term growth and economic development
,
while continuing to underline the need to implement structural reforms
to
maximize the positive impact of federal recovery funds.
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,
including
$1.4
billion
that
were
contributed
on
September
30,
2022.
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.
On
December
6,
2022,
the
HTA
Plan
of
Adjustment
became
effective. The
transactions therein
significantly lessen
HTA’s
debt burden
by reducing
HTA’s
funded debt
by 75%,
from $6.4 billion
to $1.245
billion senior
and $359
million subordinate
HTA
toll road-supported
debt. The
substantial consummation
of the
HTA
Plan
of Adjustment
represents a
significant
achievement
in advancing
Puerto Rico’s
public
policy objective
to attain
fiscal responsibility
and to
access the
capital markets
and is
expected to
enable HTA
to make
the necessary
investments to
improve and
maintain Puerto
Rico’s roads and other transportation
infrastructure.
On February 9,
2023, the PROMESA
oversight board
filed an amended
proposed Plan of
Adjustment and Disclosure
Statement to
restructure the
debt of
the Puerto
Rico Electric
Power Authority
(“PREPA-POA”).
The PREPA
-POA proposes
to cut
PREPA’s
more
than $10 billion of debt and other
claims by almost half, to approximately
$5.68 billion. According to the PROMESA
oversight board,
108
the
restructured
debt
would
be paid
by
a hybrid
charge
(the “Legacy
Charge”)
consisting
of
a
flat
connection
fee
and
a
volumetric
charge based
on the amount
of PREPA
customers’ electricity
usage that would
be added to
the electricity bills.
The proposed
Legacy
Charge is
subject to
approval by
the Puerto
Rico Energy
Bureau, the
independent energy
regulator.
The Court
will hold
a hearing
to
consider approval of the Disclosure Statement on February 28, 2023.
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
September
30, 2022,
there were
a total
of 5,63
7
active 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.
On
January
25,
2023,
the
Government
of
Puerto
Rico
announced
that
the
Puerto
Rico
Public-Private
Partnerships
Authority
(“P3A”) selected
Genera PR
LLC (“Genera”)
to operate
and maintain PREPA’s
legacy power
plants pursuant
to a 10-year
Operation
and Maintenance
Agreement. Genera
was selected
by the
P3A after
a competitive
process that
began in
2020. Under
the agreement,
Genera will
operate, maintain,
decommission, and
modernize the
PREPA-owned
thermal power
generation system
of approximately
3,600 MW
after a
mobilization period.
In this
role, Genera
will manage
the operating
budget, fuel
contracts and
federal funds
for the
generation fleet
on behalf
of PREPA.
Key features
of Genera’s
proposal selected
by the
P3A include
(i) significant
cost-savings for
the benefit
of Puerto
Rico’s
ratepayers through
fuel management
and streamlined
operations, (ii)
improved reliability
and efficiency
across
the
generation
system
with
a
focus
on
distributed
power
and
microgrids,
(iii)
retirement
of
antiquated
power
plants
while
ensuring there is reliable,
low-cost and cleaner generation
in load centers to support
the transition to renewables,
and (iv) commitment
to local
hiring
and
plans to
recruit, train
and
incentivize
employees.
Headquartered
in San
Juan,
PR, Genera
is a
power
and
energy
service provider, and an independently
managed subsidiary of New Fortress Energy (NASDAQ: NFE).
On January 26, 2023, FEMA announced that it had recently approved
approximately $422 million to restore and renovate 37 multi-
family
residential
properties
belonging
to
the
Public
Housing
Administration
due
to
damaged
caused
by
Hurricane
María.
These
works
will
benefit
over
5,400
families
throughout
the
island.
According
to
FEMA,
the
funds
include
nearly
$165.3
million
for
measures that seek to strengthen the facilities, thus mitigating future damage from
other disasters.
The PROMESA
oversight board,
in collaboration
with the
Government of
Puerto Rico,
is currently
in the
process of
developing,
submitting, and
certifying the 2023
Fiscal Plan for
the Commonwealth of
Puerto Rico (the
“2023 Fiscal Plan”).
On January 25,
2023,
the PROMESA
oversight board
sent a
letter to
the Governor
of Puerto
Rico outlining
a revised
schedule in
order to
allow additional
time
for
the
integration
of
more
recent
information
regarding
Puerto
Rico’s
macroeconomic
environment,
federal
funding,
and
Government revenues and expenditures
that will underpin the Fiscal Year
2024 development process
in the spring of 2023.
According
to the
letter,
the PROMESA
oversight board
expects to
certify the
2023 Fiscal
Plan on
or before
March 16,
2023. In
a separate
letter
sent to the Governor on February 16,
2023, the PROMESA oversight board mentioned
that the fact that this will be the first
fiscal plan
to be certified in a
fully post-restructuring environment presents
a unique opportunity to focus
the 2023 Fiscal Plan on
three pillars: (i)
entrenching
a
legacy
of
strong
fiscal
management
to
prevent
a
recurrence
of
past
challenges
and
secure
a
stable
base
for
future
prosperity,
(ii) establishing
conditions for
economic prosperity
to improve
the livelihood
of Puerto
Rico’s
citizens and
bolster public
finances to facilitate
key government programs,
(ii) instilling a culture
of public-sector excellence
through targeted actions
focused on
enhancing the foundation for high performance in the public sector.
109
Exposure to Puerto Rico Government
As of December
31, 2022, the
Corporation had $338.9
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
December
31,
2022,
approximately
$183.4
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
$114.0
million
of
loans
and
obligations
which
are
supported
by
one
or
more
specific
sources
of
municipal
revenues.
Approximately
72%
of
the
Corporation’s
exposure
to
Puerto
Rico
municipalities
consisted
primarily
of
senior
priority loans
and 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
$10.8
million
in
loans
to
an
affiliate
of
PREPA,
$27.4
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 $3.3
million as
part of
its available-for-sale
debt securities
portfolio (fair
value of
$2.2 million
as of
December 31,
2022).
The
following
table
details
the
Corporation’s
total
direct
exposure
to
Puerto
Rico
government
obligations
according
to
their
maturities:
As of December 31,
2022
Investment
Portfolio
Total
(Amortized cost)
Loans
Exposure
(In thousands)
Puerto Rico Housing Finance Authority:
After 10 years
$
3,331
$
-
$
3,331
Total
Puerto Rico Housing Finance Authority
3,331
-
3,331
Puerto Rico public corporation:
After 5 to 10 years
-
27,354
27,354
Total Puerto Rico public
corporation
-
27,354
27,354
Affiliate of the Puerto Rico Electric Power Authority:
Due within one year
-
10,849
10,849
Total Puerto Rico government
affiliate
-
10,849
10,849
Total
Puerto Rico public corporation and government affiliate
-
38,203
38,203
Municipalities:
Due within one year
1,202
19,093
20,295
After 1 to 5 years
42,530
55,901
98,431
After 5 to 10 years
55,956
56,652
112,608
After 10 years
66,022
-
66,022
Total
Municipalities
165,710
131,646
297,356
Total
Direct Government Exposure
$
169,041
$
169,849
$
338,890
110
In
addition,
as
of
December
31,
2022,
the
Corporation
had
$84.7
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,
2021,
the
PRHFA’s
mortgage
loans
insurance
program
covered
loans
in
an
aggregate
amount
of
approximately
$473
million.
The
regulations
adopted
by
the
PRHFA
require
the
establishment
of
adequate
reserves to
guarantee
the solvency
of the
mortgage loans
insurance program.
As of
June 30,
2021, the
most recent
date as
of which
information is available, the PRHFA
had a liability of approximately $5 million as an estimate of the
losses inherent in the portfolio.
As of December
31, 2022, the
Corporation had
$2.3 billion of
public sector deposits
in Puerto Rico,
compared to $2.7
billion as of
December
31,
2021.
Approximately
24%
of
the
public
sector
deposits
as
of
December
31,
2022
was
from
municipalities
and
municipal agencies
in Puerto
Rico and
76% 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.
On
March
4,
2022,
the
United
States
Bureau
of
Economic
Analysis
(the
“BEA”)
released
its
estimates
of
gross
domestic
product
(“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.
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, there
were 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.
Nonetheless,
over
the
past
two
years,
the
USVI
has
been
recovering
from
the
adverse
impact
caused
by
COVID-19
and
has
continued to make progress
on its rebuilding efforts
related to Hurricanes Irma
and Maria in 2017.
According to data published
by the
government,
over
$1.4
billion
in
disaster
recovery
funds
were
disbursed
during
2021
and
2022,
up 22%
from
the
preceding
2-year
period. On the fiscal front, revenues have trended positively
and the USVI Government successfully completed the
restructuring
of the
government employee
retirement system. Although
no official
GDP data has
been released
for 2021
and/or 2022, the
aforementioned
developments,
as
well
as
the
positive
trend
reflected
by
key
economic
indicators
such
as
visitor
arrivals,
non-farm
payrolls
and
unemployment rate potentially indicate that the territory has experienced
an overall economic recovery since 2020.
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 December 31, 2022,
the Corporation had $38.0 million
in loans to USVI public corporations,
compared to $39.2 million as of
December 31, 2021. As of December 31, 2022, all loans were currently performing
and up to date on principal and interest payments.
111
BASIS OF PRESENTATION
The Corporation
has included
in this
Form 10-K
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 Operati
ons -
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
common equity
less 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 years
ended December
31, 2021 and 2020 that reflect the described items that were excluded
for one of those reasons.
CEO and CFO Certifications
First BanCorp.’s Chief Executive
Officer and Chief Financial Officer have
filed with the SEC certifications required by Section 302
and Section 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2, 32.1
and 32.2 to this Annual Report on Form 10-K.
In addition, in 2022, First BanCorp’s
Chief Executive Officer provided to the NYSE his annual certification,
as required for all
NYSE listed companies, that he was not aware of any violation by the Corporation
of the NYSE corporate governance listing
standards.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
The information required
herein is incorporated by
reference to the information
included under the sub-caption
“Interest Rate Risk
Management”
in Item
7 “Management’s
Discussion and
Analysis of
Financial Condition
and Results
of Operations,”
of this
Annual
Report on Form 10-K.
112
Item 8. Financial Statements and Supplementary Data
FIRST BANCORP.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
(PCAOB No.
173
)….…………………………..
113
Management’s Report on Internal Control over Financial Reporting
…………………………………………
115
Consolidated Statements of Financial Condition
……………………………………………………………...
116
Consolidated Statements of Income
……...…………………………………………………………………...
117
Consolidated Statements of Comprehensive (Loss) Income
……...………………………………………..…
118
Consolidated Statements of Cash Flows
………………………………………………………………………
119
Consolidated Statements of Changes in Stockholders’ Equity
………………………………………………..
120
Notes to Consolidated Financial Statements
…………………………………………………………………..
122
113
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors
of First BanCorp.
San Juan, Puerto Rico
Opinions on the Financial Statements and Internal Control
over Financial Reporting
We
have
audited
the
accompanying
consolidated
statements
of
financial
condition
of
First
BanCorp.
(the
"Company")
as
of
December 31, 2022 and 2021, the related consolidated
statements of income, comprehensive (loss) income, cash flows, and changes
in
stockholders’
equity
for
each
of
the
years
in
the
three-year
period
ended
December
31,
2022,
and
the
related
notes
(collectively
referred
to
as
the
"financial
statements").
We
also
have
audited
the
Company’s
internal
control
over
financial
reporting
as
of
December
31,
2022,
based
on
criteria
established
in
Internal
Control
–
Integrated
Framework:
(2013)
issued
by
the
Committee
of
Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion,
the financial statements
referred to above
present fairly,
in all material respects,
the financial position
of the Company
as of
December 31,
2022 and
2021, and
the results
of its
operations and
its cash
flows for
each of
the years
in the
three-year period
ended December
31, 2022
in conformity
with accounting
principles generally
accepted in
the United
States of
America.
Also in
our
opinion, the Company maintained,
in all material respects, effective
internal control over financial
reporting as of December
31, 2022,
based on criteria established in Internal Control – Integrated Framework:
(2013) issued by COSO.
Basis for Opinions
The
Company’s
management
is
responsible
for
these
financial
statements,
for
maintaining
effective
internal
control
over
financial
reporting,
and
for
its
assessment
of
the
effectiveness
of
internal
control
over
financial
reporting,
included
in
the
accompanying
Management’s
Report
on Internal
Control
over
Financial
Reporting.
Our responsibility
is to
express an
opinion
on the
Company’s
financial statements
and an
opinion on
the Company’s
internal control
over financial
reporting based
on our
audits.
We
are a
public
accounting firm
registered with
the Public
Company Accounting
Oversight Board
(United States)
("PCAOB") and
are required
to be
independent with
respect to
the Company
in accordance
with the
U.S. federal
securities laws and
the applicable
rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted
our audits in accordance with the
standards of the PCAOB. Those standards require
that we plan and perform the audits
to obtain reasonable
assurance about whether
the financial statements are
free of material misstatement,
whether due to error
or fraud,
and whether effective internal control
over financial reporting was maintained in all material respects.
Our
audits
of
the
financial
statements
included
performing
procedures
to
assess
the
risks
of
material
misstatement
of
the
financial
statements, whether due to error or fraud,
and performing procedures that respond to
those risks. Such procedures included examining,
on
a
test basis,
evidence
regarding
the
amounts
and
disclosures
in
the
financial
statements.
Our
audits
also
included
evaluating
the
accounting
principles
used
and
significant
estimates
made
by
management,
as
well
as
evaluating
the
overall
presentation
of
the
financial statements. Our audit
of internal control over
financial reporting included obtaining
an understanding of internal
control over
financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design
and operating effectiveness
of internal control
based on the
assessed risk.
Our audits also
included performing
such other procedures
as we considered
necessary
in the circumstances.
We believe that our audits
provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s
internal control over financial reporting is a
process designed to provide reasonable assurance
regarding the reliability of
financial reporting and
the preparation of
financial statements for
external purposes in
accordance with generally
accepted accounting
principles.
A
company’s
internal
control
over
financial
reporting
includes
those
policies
and
procedures
that
(1)
pertain
to
the
maintenance
of
records
that,
in
reasonable
detail,
accurately
and
fairly
reflect
the
transactions
and
dispositions
of
the
assets
of
the
company; (2) provide
reasonable assurance that
transactions are recorded
as necessary to permit
preparation of financial
statements in
accordance with
generally accepted
accounting principles,
and that
receipts and
expenditures of
the company
are being
made only
in
accordance
with
authorizations
of
management
and
directors
of
the
company;
and
(3)
provide
reasonable
assurance
regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s
assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections
of any evaluation
of effectiveness to
future periods are
subject to the
risk that controls
may become inadequate
because of changes
in
conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
114
Critical Audit Matter
The
critical
audit
matter
communicated
below
is a
matter
arising
from
the
current
period
audit
of
the
financial
statements
that
was
communicated or required
to be communicated
to the audit
committee and that:
(1) relates to accounts
or disclosures that
are material
to the financial
statements and (2)
involved our especially
challenging, subjective,
or complex judgments.
The communication of
the
critical
audit
matter
does
not
alter
in
any
way
our
opinion
on
the
financial
statements,
taken
as
a
whole,
and
we
are
not,
by
communicating
the
critical
audit
matter
below,
providing
a
separate
opinion
on
the
critical
audit
matter
or
on
the
accounts
or
disclosures to which it relates.
Allowance for Credit Losses – Model and Forecast of Macroeconomic Variables
As described
in Notes
1 and
5 to
the financial
statements, the
allowance for
credit losses
(“ACL”) for
loans and
finance leases
is an
accounting
estimate
of
expected
credit
losses
over
the
contractual
life
of
financial
assets
carried
at
amortized
cost
and
off-balance-
sheet credit exposures.
The calculation
of the
ACL for
loans and
finance leases
is primarily
measured based
on a
probability
of default
/ loss
given
default
modeled approach. The
estimate of the
probability of default and
loss given default
assumptions uses economic
forecasts and relevant
current
and
forward-looking
macroeconomic
variables,
such
as:
unemployment
rate;
housing
and
real
estate
price
indices;
interest
rates; market
risk factors;
and gross
domestic
product, and
considers
conditions
throughout Puerto
Rico, the
Virgin
Islands,
and the
State of Florida.
A significant amount
of judgment is
required to
assess the reasonableness
of the selection
of economic forecasts
and
macroeconomic variables. Changes to these assumptions could have
a material effect on the Company’s
financial results.
The
model
and
the
current
and
forward-looking
macroeconomic
variables
used
contribute
significantly
to
the
determination
of
the
ACL for
loans and
finance leases.
We
identified the
assessment of
the model
design and
construction and
the assessment
of relevant
macroeconomic
variables
as a
critical audit
matter as
the impact
of these
judgments
represents a
significant
portion
of the
ACL for
loans
and
finance
leases
and
because
management’s
estimate
required
especially
subjective
auditor
judgment
and
significant
audit
effort, including the need for specialized skill.
The primary procedures we performed to address these critical audit matters included:
●
Testing
the effectiveness
of controls
over the
evaluation of
the selection
of economic
forecasts and
the current
and forward-
looking macroeconomic variables, including controls addressing:
o
Management’s review and
approval of the economic forecasts and macroeconomic variables.
o
Management’s
review
of
the
reasonableness
of
the
results
of
the
selection
of
economic
forecasts
and
macroeconomic variables used in the calculation.
●
Substantively
testing
management’s
process,
including
evaluating
their
judgments
and
assumptions,
for
economic
forecast
selection and macroeconomic variables, which included:
o
Evaluation of reasonableness of economic forecasts selection.
o
Evaluation
of
the
completeness
and
accuracy
of
data
inputs
used
as
a
basis
for
the
adjustments
relating
to
macroeconomic variables.
o
Evaluation,
with
the
assistance
of
professionals
with
specialized
skill
and
knowledge,
of
the
reasonableness
of
management’s
judgments related
to the
economic forecast
and macroeconomic
variables used
in the
determination
of
the
ACL
for
loans.
Among
other
procedures,
our
evaluation
considered
evidence
from
internal
and
external
sources, loan portfolio performance trends and whether such assumptions were
applied consistently period to period.
o
Analytical evaluation of the variables period to period for directional consistency
and testing for reasonableness.
/s/
Crowe LLP
We have served
as the Company’s auditor since 2018.
Fort Lauderdale, Florida
February 28, 2023
Stamp No. E511055 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
115
Management’s Report on Internal Control
over Financial Reporting
To the Stockholders
and Board of Directors of First BanCorp.:
First BanCorp.’s
(the “Corporation”)
internal control
over financial
reporting is
a process
designed
and effected
by those
charged
with
governance,
management,
and
other
personnel,
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
and the preparation of reliable
financial statements in accordance
with accounting principles generally
accepted in the United States of
America
(“GAAP”).
The
Corporation’s
internal
control
over
financial
reporting
includes
those
policies
and
procedures
that:
(1) pertain to the
maintenance of records
that, in reasonable detail,
accurately and fairly reflect
the transactions and dispositions
of the
assets
of
the
Corporation;
(2) provide
reasonable
assurance
that
transactions
are
recorded
as
necessary
to
permit
the
preparation
of
financial
statements
in
accordance
with
GAAP,
and
that
receipts
and
expenditures
of
the
Corporation
are
being
made
only
in
accordance
with
authorizations
of
management
and
directors
of
the
Corporation;
and
(3) provide
reasonable
assurance
regarding
prevention,
or timely
detection and
correction
of unauthorized
acquisition,
use, or
disposition of
the Corporation’s
assets that
could
have a material effect on the financial statements.
Because of
its inherent
limitations, internal
control over
financial reporting
may not
prevent, or
detect and
correct misstatements.
Also,
projections
of
any
evaluation
of
effectiveness
to
future
periods
are
subject
to
the
risk
that
controls
may
become
inadequate
because of changes in conditions, or that the degree of compliance with the policies
and procedures may deteriorate.
Management
is
responsible
for
establishing
and
maintaining
effective
internal
control
over
financial
reporting.
Management
assessed
the
effectiveness
of
the
Corporation’s
internal
control
over
financial
reporting
as
of
December 31,
2022,
based
on
the
framework
set
forth
by
the
Committee
of
Sponsoring
Organizations
of
the
Treadway
Commission
(COSO)
in
Internal
Control-
Integrated
Framework
(2013).
Based
on
that
assessment,
management
concluded
that,
as
of
December
31,
2022,
the
Corporation’s
internal control over financial reporting is effective
based on the criteria established in Internal Control-Integrated Framework (2013).
The effectiveness
of FirstBancorp.’s
internal control over
financial reporting as
of December 31, 2022,
has been audited
by Crowe
LLP,
an independent public accounting firm, as stated in their accompanying
report dated February 28, 2023.
First BanCorp.
/s/
Aurelio Alemán
Aurelio Alemán
President and Chief Executive Officer
Date: February 28, 2023
/s/
Orlando Berges
Orlando Berges
Executive Vice President
and Chief Financial Officer
Date: February 28, 2023
116
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2022
December 31, 2021
(In thousands, except for share information)
ASSETS
Cash and due from banks
$
478,480
$
2,540,376
Money market investments:
Time deposits with other financial institutions
300
300
Other short-term investments
1,725
2,382
Total money market investments
2,025
2,682
Available-for-sale debt securities, at fair value:
Securities pledged with creditors’ rights to repledge
81,103
321,180
Other available-for-sale debt securities
5,518,417
6,132,581
Total available-for-sale debt securities, at fair value (amortized cost 2022 - $
6,398,197
;
2021 - $
6,534,503
; allowance for credit losses (“ACL”) of $
458
as of December 31, 2022
and $
1,105
as of December 31, 2021)
5,599,520
6,453,761
Held-to-maturity debt securities, at amortized cost, net of ACL
of $
8,286
as of December 31, 2022 and $
8,571
as of December 31, 2021 (fair value 2022 - $
427,115
; 2021 - $
167,147
)
429,251
169,562
Equity securities
55,289
32,169
Total investment securities
6,084,060
6,655,492
Loans, net of ACL of $
260,464
(2021 - $
269,030
)
11,292,361
10,791,628
Mortgage loans held for sale, at lower of cost or market
12,306
35,155
Total loans, net
11,304,667
10,826,783
Accrued interest receivable on loans and investments
69,730
61,507
Premises and equipment, net
142,935
146,417
Other real estate owned (“OREO”)
31,641
40,848
Deferred tax asset, net
155,584
208,482
Goodwill
38,611
38,611
Other intangible assets
21,118
29,934
Other assets
305,633
234,143
Total assets
$
18,634,484
$
20,785,275
LIABILITIES
Non-interest-bearing deposits
$
6,112,884
$
7,027,513
Interest-bearing deposits
10,030,583
10,757,381
Total deposits
16,143,467
17,784,894
Securities sold under agreements to repurchase
75,133
300,000
Advances from the Federal Home Loan Bank ("FHLB")
675,000
200,000
Other borrowings
183,762
183,762
Accounts payable and other liabilities
231,582
214,852
Total liabilities
17,308,944
18,683,508
Commitments and contingencies (See Note 29)
(nil)
(nil)
STOCKHOLDERS’ EQUITY
Common stock, $
0.10
par value, authorized,
2,000,000,000
shares;
223,663,116
shares issued;
182,709,059
shares outstanding (2021 -
201,826,505
shares outstanding)
22,366
22,366
Additional paid-in capital (See Note 1)
970,722
972,547
Retained earnings, includes legal surplus reserve of $
168,484
(2021 - $
137,591
)
1,644,209
1,427,295
Treasury stock, at cost
40,954,057
shares (2021 -
21,836,611
shares) (See Note 1)
(506,979)
(236,442)
Accumulated other comprehensive loss, net of tax of $
8,468
as of December 31, 2022 (2021 - $
9,786
)
(804,778)
(83,999)
Total stockholders’ equity
1,325,540
2,101,767
Total liabilities and stockholders’ equity
$
18,634,484
$
20,785,275
The accompanying notes are an integral part of these statements.
117
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF INCOME
Year
Ended December 31,
2022
2021
2020
(In thousands, except per share information)
Interest and dividend income:
Loans
$
747,901
$
719,153
$
631,047
Investment securities
102,922
72,893
58,547
Money market investments and interest-bearing cash accounts
11,791
2,662
3,388
Total interest and dividend income
862,614
794,708
692,982
Interest expense:
Deposits
46,361
41,482
68,388
Securities sold under agreements to repurchase
7,555
9,963
6,645
Advances from FHLB
5,136
8,199
11,251
Other borrowings
8,269
5,135
6,376
Total interest expense
67,321
64,779
92,660
Net interest income
795,293
729,929
600,322
Provision for credit losses - expense (benefit):
Loans and finance leases
25,679
(61,720)
168,717
Unfunded loan commitments
2,736
(3,568)
1,183
Debt securities
(719)
(410)
1,085
Provision for credit losses - expense (benefit)
27,696
(65,698)
170,985
Net interest income after provision for credit losses
767,597
795,627
429,337
Non-interest income:
Service charges and fees on deposit accounts
37,823
35,284
24,612
Mortgage banking activities
15,260
24,998
22,124
Net gain on investment securities
-
-
13,198
Gain on early extinguishment of debt
-
-
94
Insurance commission income
13,743
11,945
9,364
Card and processing income
40,416
36,508
25,609
Other non-interest income
15,850
12,429
16,225
Total non-interest income
123,092
121,164
111,226
Non-interest expenses:
Employees' compensation and benefits
206,038
200,457
177,073
Occupancy and equipment
88,277
93,253
74,633
Business promotion
18,231
15,359
12,145
Professional service fees
47,848
59,956
52,633
Taxes, other than
income taxes
20,267
22,151
17,762
Federal Deposit Insurance Corporation ("FDIC") deposit insurance
6,149
6,544
6,488
Net (gain) loss on OREO operations
(5,826)
(2,160)
3,598
Credit and debit card processing expenses
22,736
22,169
19,144
Communications
8,723
9,387
8,437
Merger and restructuring costs
-
26,435
26,509
Other non-interest expenses
30,662
35,423
25,818
Total non-interest expenses
443,105
488,974
424,240
Income before income taxes
447,584
427,817
116,323
Income tax expense
142,512
146,792
14,050
Net income
$
305,072
$
281,025
$
102,273
Net income attributable to common stockholders
$
305,072
$
277,338
$
99,597
Net income per common share:
Basic
$
1.60
$
1.32
$
0.46
Diluted
$
1.59
$
1.31
$
0.46
The accompanying notes are an integral part of these statements.
118
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
INCOME
Year Ended
December 31,
2022
2021
2020
(In thousands)
Net income
$
305,072
$
281,025
$
102,273
Other comprehensive (loss) income, net of tax:
Available-for-sale debt securities:
Net unrealized holding (losses) gains on debt securities
(718,582)
(143,115)
61,791
Reclassification adjustment for provision for credit loss expense
-
-
368
Reclassification adjustment for net gains included in net income on sales
-
-
(13,198)
Defined benefit plans adjustments:
Net actuarial (loss) gain
(2,199)
3,660
(270)
Reclassification adjustment for amortization of net actuarial loss
2
1
-
Other comprehensive (loss) income for the year, net of tax
(720,779)
(139,454)
48,691
Total comprehensive (loss) income
$
(415,707)
$
141,571
$
150,964
Year Ended
December 31,
2022
2021
2020
(In thousands)
Income tax effect of items included in other comprehensive (loss) income:
Defined benefit plans adjustments:
Net actuarial (loss) gain
$
1,319
$
(2,199)
$
162
Reclassification adjustment for amortization of net actuarial loss
(1)
-
-
Total income tax effect of items included in other comprehensive (loss) income
$
1,318
$
(2,199)
$
162
The accompanying notes are an integral part of these statements.
119
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2022
2021
2020
(In thousands)
Cash flows from operating activities:
Net income
$
305,072
$
281,025
$
102,273
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
22,289
24,965
20,068
Amortization of intangible assets
8,816
11,407
5,912
Provision for credit losses - expense (benefit)
27,696
(65,698)
170,985
Deferred income tax expense (benefit)
54,216
118,323
(4,371)
Stock-based compensation
5,407
5,460
5,117
Gain on early extinguishment of debt
-
-
(94)
Gain on sales of investment securities
-
-
(13,198)
Unrealized gain on derivative instruments
(1,098)
(4,227)
(5,635)
Net gain on disposals or sales, and impairments of
premises and equipment and other assets
(706)
(32)
(215)
Net gain on sales of loans and valuation adjustments
(5,498)
(14,791)
(13,273)
Net amortization of discounts, premiums, and deferred
loan fees and costs
(7,853)
(25,294)
(8,602)
Originations and purchases of loans held for sale
(214,962)
(503,200)
(648,052)
Sales and repayments of loans held for sale
235,199
528,253
659,349
Amortization of broker placement fees
106
218
537
Net amortization of premiums and discounts on investment
securities
3,435
26,549
19,410
(Increase) decrease in accrued interest receivable
(11,340)
7,701
6,419
Increase (decrease) in accrued interest payable
1,706
(2,776)
(2,990)
(Increase) decrease in other assets
(2,437)
24,344
(5,018)
Increase (decrease) increase in other liabilities
20,437
(12,506)
9,116
Net cash provided by operating activities
440,485
399,721
297,738
Cash flows from investing activities:
Net (disbursements) repayments on loans held for investment
(603,853)
599,097
(335,152)
Proceeds from sales of loans held for investment
62,168
81,458
6,788
Proceeds from sales of repossessed assets
46,281
55,867
35,270
Proceeds from sales of available-for-sale debt securities
-
-
1,195,250
Purchases of available-for-sale debt securities
(512,327)
(3,447,921)
(3,820,148)
Proceeds from principal repayments and maturities of available-for-sale
debt securities
626,802
1,445,873
1,277,762
Purchases of held-to-maturity debt securities
(289,784)
-
-
Proceeds from principal repayments and maturities of
held-to-maturity debt securities
32,153
12,677
6,431
Additions to premises and equipment
(20,459)
(13,349)
(16,070)
Proceeds from sales of premises and equipment and
other assets
1,196
832
497
Net (purchases) redemptions of other investments securities
(23,637)
5,322
3,881
Proceeds from the settlement of insurance claims -
investing activities
-
550
-
Net (payments) cash acquired in acquisition
-
(3,381)
406,626
Net cash used in investing activities
(681,460)
(1,262,975)
(1,238,865)
Cash flows from financing activities:
Net (decrease) increase in deposits
(1,706,118)
2,472,579
1,767,441
Net proceeds (repayments) of short-term borrowings
550,133
-
(35,000)
Repayments of long-term borrowings
(500,000)
(240,000)
(95,282)
Proceeds from long-term borrowings
200,000
-
-
Proceeds from long-term reverse repurchase agreements
-
-
200,000
Repurchase of outstanding common stock
(277,769)
(216,522)
(206)
Dividends paid on common stock
(87,824)
(65,021)
(43,416)
Dividends paid on preferred stock
-
(2,453)
(2,676)
Redemption of preferred stock-
Series A through E
-
(36,104)
-
Net cash (used in) provided by financing activities
(1,821,578)
1,912,479
1,790,861
Net (decrease) increase in cash and cash equivalents
(2,062,553)
1,049,225
849,734
Cash and cash equivalents at beginning of year
2,543,058
1,493,833
644,099
Cash and cash equivalents at end of year
$
480,505
$
2,543,058
$
1,493,833
Cash and cash equivalents include:
Cash and due from banks
$
478,480
$
2,540,376
$
1,433,261
Money market instruments
2,025
2,682
60,572
$
480,505
$
2,543,058
$
1,493,833
The accompanying notes are an integral part of these statements.
120
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY
Year Ended December 31,
2022
2021
2020
(In thousands, except per share information)
Preferred Stock:
Balance at beginning of year
$
-
$
36,104
$
36,104
Redemption of Series A through E Preferred Stock
-
(36,104)
-
Balance at end of year
-
-
36,104
Common Stock:
Balance at beginning of year
22,366
22,303
22,210
Common stock issued under stock-based compensation
plan
-
63
93
Balance at end of year
22,366
22,366
22,303
Additional Paid-In Capital
(See Note 1)
:
Balance at beginning of year
972,547
965,385
960,342
Stock-based compensation expense
5,407
5,460
5,117
Common stock reissued/issued under stock-based compensation
plan
(7,365)
(63)
(93)
Restricted stock forfeited
133
531
19
Issuance costs of Series A through E Preferred Stock redeemed
-
1,234
-
Balance at end of year
970,722
972,547
965,385
Retained Earnings:
Balance at beginning of year
1,427,295
1,215,321
1,221,817
Impact of adoption of Accounting Standards Codification
("ASC" or "Codification")
Topic 326, "Financial Instruments - Credit Losses" ("ASC 326" or "CECL")
(62,322)
Balance at beginning of period (as adjusted for impact of adoption
of ASC 326)
1,159,495
Net income
305,072
281,025
102,273
Dividends on common stock (2022 - $
0.46
per share; 2021 - $
0.31
per share; 2020 - $
0.20
per share)
(88,158)
(65,364)
(43,771)
Dividends on preferred stock
-
(2,453)
(2,676)
Excess of redemption value over carrying value of Series
A through E Preferred Stock redeemed
-
(1,234)
-
Balance at end of year
1,644,209
1,427,295
1,215,321
Treasury Stock (at cost)
(See Note 1)
:
Balance at beginning of year
(236,442)
(19,389)
(19,170)
Common stock repurchases (See Note 17)
(277,769)
(216,522)
(200)
Common stock reissued under stock-based compensation plan
7,365
-
-
Restricted stock forfeited
(133)
(531)
(19)
Balance at end of year
(506,979)
(236,442)
(19,389)
Accumulated Other Comprehensive (Loss) Income, net of tax:
Balance at beginning of year
(83,999)
55,455
6,764
Other comprehensive (loss) income, net of tax
(720,779)
(139,454)
48,691
Balance at end of year
(804,778)
(83,999)
55,455
Total stockholders’ equity
$
1,325,540
$
2,101,767
$
2,275,179
The accompanying notes are an integral part of these statements.
121
FIRST BANCORP.
INDEX TO NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
PAGE
Note 1 –
Nature of Business and Summary of Significant Accounting Policies
122
Note 2 –
Money Market Investments
138
Note 3 –
Debt Securities
139
Note 4 –
Loans Held for Investment
148
Note 5
–
Allowance for Credit Losses for Loans and Finance Leases
164
Note 6
–
Premises and Equipment
167
Note 7 –
Other Real Estate Owned
167
Note 8 –
Related-Party Transactions
168
Note 9
–
Goodwill and Other Intangibles
169
Note 10 –
Non-Consolidated Variable
Interest Entities (“VIE”) and Servicing Assets
171
Note 11 –
Deposits and Related Interest
176
Note 12 –
Securities Sold Under Agreements to Repurchase
178
Note 13 –
Advances from the Federal Home Loan Bank (“FHLB”)
180
Note 14 –
Other Borrowings
181
Note 15 –
Earnings per Common Share
182
Note 16 –
Stock-Based Compensation
183
Note 17 –
Stockholders’ Equity
185
Note 18 –
Other Comprehensive (Loss) Income
187
Note 19 –
Employee Benefit Plans
188
Note 20 –
Other Non-Interest Income
193
Note 21 –
Other Non-Interest Expenses
193
Note 22 –
Income Taxes
194
Note 23 –
Operating Leases
197
Note 24 –
Derivative Instruments and Hedging Activities
199
Note 25
–
Fair Value
202
Note 26
–
Revenue from Contracts with Customers
207
Note 27 –
Segment Information
211
Note 28 –
Supplemental Statement of Cash Flows Information
214
Note 29 –
Regulatory Matters, Commitments, and Contingencies
215
Note 30 –
First BanCorp. (Holding Company Only) Financial Information
218
122
NOTE 1
–
NATURE OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
First BanCorp. (the “Corporation”)
is a publicly owned, Puerto
Rico-chartered financial holding
company organized under
the laws
of the Commonwealth
of Puerto Rico in
1948. The Corporation
is subject to regulation,
supervision, and examination
by the Board
of
Governors of
the Federal
Reserve System
(the “Federal
Reserve Board”).
Through its
subsidiaries, including
its banking
subsidiary,
FirstBank Puerto Rico (“FirstBank”
or the “Bank”), the Corporation
provides full-service commercial
and consumer banking services,
mortgage banking
services, automobile
financing, trust
services, insurance
agency services,
and other
financial products
and services
with operations in Puerto Rico, the United States, the U.S. Virgin
Islands (the “USVI”), and the British Virgin
Islands (the “BVI”).
The Corporation
has two
wholly-owned subsidiaries:
FirstBank Puerto
Rico (“FirstBank”
or the
“Bank”), and
FirstBank Insurance
Agency,
Inc.
(“FirstBank
Insurance
Agency”).
FirstBank
is
a
Puerto
Rico-chartered
commercial
bank,
and
FirstBank
Insurance
Agency is
a Puerto
Rico-chartered insurance
agency.
FirstBank is
subject to
the supervision,
examination, and
regulation of
both the
Office
of
the
Commissioner
of
Financial
Institutions
of
the
Commonwealth
of
Puerto
Rico
(the
“OCIF”)
and
the
Federal
Deposit
Insurance
Corporation
(“FDIC”).
Deposits
are
insured
through
the
FDIC
Deposit
Insurance
Fund.
FirstBank
also
operates
in
the
State
of
Florida,
subject
to
regulation
and
examination
by
the
Florida
Office
of
Financial
Regulation
and
the
FDIC;
in
the
USVI,
subject to regulation
and examination by
the USVI Division
of Banking, Insurance,
and Financial Regulation;
and in the
BVI, subject
to regulation
by the
British Virgin
Islands Financial
Services Commission.
The Consumer
Financial Protection
Bureau (the
“CFPB”)
regulates FirstBank’s consumer
financial products and services.
FirstBank Insurance Agency
is subject to the supervision,
examination, and regulation of
the Office of the
Insurance Commissioner
of
the
Commonwealth
of
Puerto
Rico
and
the
Division
of
Banking
and
Insurance
Financial
Regulation
in
the
USVI.
FirstBank conducts its
business through its
main office located
in San Juan, Puerto
Rico,
59
banking branches in
Puerto Rico,
eight
banking branches in the
USVI and the BVI, and
nine
banking branches in the
state of Florida (USA).
FirstBank has six wholly-owned
subsidiaries
with
operations
in
Puerto
Rico:
First
Federal
Finance
Corp.
(d/b/a
Money
Express
La Financiera),
a
finance
company
specializing
in
the
origination
of
small
loans
with
27
offices
in
Puerto
Rico;
First
Management
of
Puerto
Rico,
a
Puerto
Rico
corporation,
which
holds
tax-exempt
assets;
FirstBank
Overseas
Corporation,
an
international
banking
entity
(an
“IBE”)
organized
under the
International Banking
Entity Act
of Puerto
Rico; two
companies engaged
in the
operation of
certain real
estate properties;
and
a wholly-owned
subsidiary of
FirstBank organized
in 2022
under the
laws of
the Commonwealth
of Puerto
Rico and
Act 60
of
2019, which will commence operations in 2023 and will engage in investing
and lending transactions.
General
The accompanying
consolidated audited financial
statements have
been prepared
in conformity
with generally accepted
accounting
principles (“GAAP”). The following is a description of the Corporation’s
most significant accounting policies.
Principles of consolidation
The
consolidated
financial
statements
include
the
accounts
of
the
Corporation
and
its
subsidiaries.
All
significant
intercompany
balances
and
transactions
have
been
eliminated
in
consolidation.
The
results
of
operations
of
companies
or
assets
acquired
are
included
from
the
date
of
acquisition.
Statutory
business
trusts
that
are
wholly-owned
by
the
Corporation
and
are
issuers
of
trust-
preferred
securities
(“TRuPs”)
and
entities
in
which
the
Corporation
has
a
non-controlling
interest,
are
not
consolidated
in
the
Corporation’s
consolidated
financial
statements
in
accordance
with
authoritative
guidance
issued
by
the
Financial
Accounting
Standards Board
(“FASB”)
for consolidation
of variable
interest entities
(“VIEs”). See
“Variable
Interest Entities”
below for
further
details regarding the Corporation’s
accounting policy for these entities
.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
123
Use of estimates in the preparation of financial statements
The
preparation
of
financial
statements
in
conformity
with GAAP
requires
management
to
make
estimates
and
assumptions
that
affect
the reported
amounts of
assets, liabilities,
and contingent
liabilities as
of the
date of
the financial
statements, and
the reported
amounts of revenues and expenses during the reporting period.
Management
makes
significant
estimates
in
determining
the
allowance
for
credit
losses
(“ACL”),
income
taxes,
as
well
as
fair
value
measurements
of
investment
securities,
goodwill,
other
intangible
assets,
pension
assets
and
liabilities,
mortgage
servicing
rights, and loans held for sale.
Actual results could differ from those estimates.
Change in accounting method
Effective
on September
30, 2022,
the Corporation
changed the
accounting method
for accounting
for its
treasury stock
from a
par
value to a
cost method. The
Corporation believes the
cost method is
preferable as it
more accurately reflects
in treasury stock
the cost
of stocks repurchased and
it enhances comparability of
financial results with other
financial institutions. The Corporation
reflected the
application of
this new accounting
method retrospectively
by adjusting
prior period
amounts for
treasury stock
and additional
paid-in
capital.
The
retrospective
adjustment,
which
was
reflected
in
the
consolidated
statements
of
financial
condition
and
statements
of
changes
in
stockholders’
equity,
was
limited
to
an
increase
in
the
beginning
balance
of
treasury
stock
at
January
1,
2020
of
$
19
million and an increase in
additional paid-in capital for
the same amount, which was
considered immaterial. These adjustments
had no
impact
on
previously
issued
statements
of
income,
comprehensive
income,
cash
flows,
and
executive
compensation
and
regulatory
capital measures.
Cash and cash equivalents
For purposes of
reporting cash
flows, cash and
cash equivalents include
cash on hand,
cash items in
transit, and
amounts due
from
the Federal Reserve Bank of New York
(the “Federal Reserve” or the “FED”) and other
depository institutions. The term also includes
money market funds and short-term investments with original maturities of
three months or less.
Investment securities
The Corporation classifies its investments in debt and equity securities into one
of four categories:
Held-to-maturity
— Debt
securities that
the entity
has the
intent and
ability to
hold to
maturity.
These securities
are carried
at
amortized
cost.
The
Corporation
may
not
sell
or
transfer
held-to-maturity
securities
without
calling
into
question
its
intent
to
hold other debt securities to
maturity, unless
a nonrecurring or unusual event
that could not have been reasonably
anticipated has
occurred.
Trading
— Debt securities that
are bought and
held principally for
the purpose of
selling them in
the near term.
These securities
are
carried
at
fair
value,
with
unrealized
gains
and
losses
reported
in
earnings.
As
of
December
31,
2022,
and
2021,
the
Corporation did not hold debt securities for trading purposes.
Available-for-sale
— Debt
securities not
classified as
held-to-maturity or
trading. These
securities are
carried at
fair value,
with
unrealized
holding
gains
and
losses,
net
of
deferred
taxes,
reported
in
other
comprehensive
loss
(“OCL”)
as
a
separate
component of
stockholders’ equity.
The unrealized
holding gains
and losses
do not
affect earnings
until they
are realized,
or an
ACL is recorded.
Equity
securities
—
Equity
securities
that
do
not
have
readily
available
fair
values
are
classified
as
equity
securities
in
the
consolidated
statements
of
financial
condition.
These
securities
are
stated
at
cost
less
impairment,
if
any.
This
category
is
principally
composed of
FHLB stock
that the
Corporation owns
to comply
with FHLB
regulatory requirements.
The realizable
value of
the FHLB
stock equals
its cost.
Also included
in this
category
are marketable
equity securities
held at
fair value
with
changes in unrealized gains or losses recorded through earnings in other
non-interest income.
Premiums
and
discounts
on
debt
securities
are
amortized
as an
adjustment
to
interest
income
on
investments
over
the life
of
the
related securities
under the
interest method
without anticipating
prepayments, except
for mortgage-backed
securities (“MBS”)
where
prepayments are anticipated. Premiums on
callable debt securities, if any,
are amortized to the earliest call date.
Purchases and sales of
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
124
securities are
recognized on
a trade-date
basis, the
date the
order to
buy or
sell is executed
.
Gains and
losses on
sales are
determined
using the specific identification method.
A debt
security
is placed
on nonaccrual
status at
the time
any
principal
or interest
payment
becomes 90 days
delinquent.
Interest
accrued
but
not
received
for
a
security
placed
on
nonaccrual
is
reversed
against
interest
income.
See
Note
3
–
Debt
Securities
for
additional information on nonaccrual debt securities.
Allowance
for
Credit
Losses
–
Held-to-Maturity
Debt
Securities:
As
of
December
31,
2022,
the
held-to-maturity
debt
securities
portfolio consisted of U.S. government-sponsored entities (“GSEs”)
MBS and Puerto Rico municipal bonds.
The ACL
on held-to-maturity
debt securities
is based
on an
expected loss
methodology referred
to as
current expected
credit loss
(“CECL”)
methodology
by
major
security
type.
Any
expected
credit
loss
is
provided
through
the
ACL
on
held-to-maturity
debt
securities
and
is
deducted
from
the
amortized
cost
basis
of
the
security
so
that
the
statement
of
financial
condition
reflects
the
net
amount the Corporation expects to collect.
The Corporation
does not
recognize an
ACL for
GSEs’ MBS
since they
are either
explicitly or
implicitly guaranteed
by the
U.S.
government,
are highly
rated by
major rating
agencies, and
have a
long history
of no
credit losses.
For the
ACL of
held-to-maturity
Puerto
Rico municipal
bonds,
the Corporation
considers historical
credit loss
information
that is
adjusted for
current conditions
and
reasonable
and
supportable
forecasts.
These
Puerto
Rico
municipal
obligations
typically
are
not
issued
in
bearer
form, nor
are they
registered
with
the
Securities
and
Exchange
Commission
(“SEC”)
and
are
not
rated
by
external
credit
agencies.
These
financing
arrangements with Puerto
Rico municipalities were
issued in bond form
and accounted for as
securities but underwritten as
loans with
features
that
are
typically
found
in
commercial
loans.
Accordingly,
similar
to
commercial
loans,
an
internal
risk
rating
(
i.e
.,
pass,
special
mention,
substandard,
doubtful,
or
loss)
is
assigned
to
each
bond
at
the
time
of
issuance
or
acquisition
and
monitored
on
a
continuous basis
with a
formal assessment
completed,
at a
minimum, on
a quarterly
basis. The
Corporation determines
the ACL
for
held-to-maturity
Puerto
Rico
municipal
bonds
based
on
the
product
of
a
cumulative
probability
of
default
(“PD”)
and
loss
given
default (“LGD”),
and the amortized
cost basis of
each bond over
its remaining expected
life. PD estimates
represent the point
-in-time
as
of
which
the
PD
is
developed,
and
are
updated
quarterly
based
on,
among
other
things,
the
payment
performance
experience,
financial
performance
and
market
value
indicators,
and
current
and
forecasted
relevant
forward-looking
macroeconomic
variables
over the
expected life
of the
bonds,
to determine
a lifetime
term structure
PD curve.
LGD estimates are
determined based
on, among
other
things,
historical
charge-off
events
and
recovery
payments
(if
any),
government
sector
historical
loss
experience,
as
well
as
relevant current
and forecasted
macroeconomic expectations
of variables,
such as unemployment
rates, interest
rates, and
market risk
factors based on industry
performance, to determine a
lifetime term structure LGD
curve. Under this approach,
all future period losses
for each
instrument are
calculated using
the PD
and LGD
loss rates
derived
from the
term structure
curves applied
to the
amortized
cost
basis
of
each
bond.
For
the
relevant
macroeconomic
expectations
of
variables,
the
methodology
considers
an
initial
forecast
period
(a
“reasonable
and
supportable
period”)
of
two
years
and
a
reversion
period
of
up
to
three
years,
utilizing
a
straight-line
approach and
reverting back
to the
historical macroeconomic
mean. After
the reversion
period, the
Corporation uses
a historical
loss
forecast period covering the remaining contractual
life based on the changes in key historical
economic variables during representative
historical
expansionary
and
recessionary
periods.
Furthermore,
the
Corporation
periodically
considers
the
need
for
qualitative
adjustments
to
the
ACL.
Qualitative
adjustments
may
be
related
to
and
include,
but
not
be
limited
to,
factors
such
as:
(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 resolution strategies,
among others.
The Corporation
has elected not
to measure
an ACL on
accrued interest related
to held-to-maturity
debt securities,
as uncollectible
accrued
interest receivables
are written
off
on a
timely manner.
See Note
3 –
Debt Securities
for additional
information
about ACL
balances for
held-to-maturity debt
securities, activity
during the
period, and
information about
changes in
circumstances that
caused
changes in the ACL for held-to-maturity debt securities during the years ended December
31, 2022, 2021, and 2020.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
125
Allowance
for
Credit
Losses
–
Available-for-Sale
Debt
Securities:
For
available-for-sale
debt
securities
in
an
unrealized
loss
position, the Corporation first assesses whether
it intends to sell, or it is more
likely than not that it will be required
to sell, the security
before
recovery
of
its
amortized
cost
basis.
If
either
of
the
criteria
regarding
intent
or
requirement
to
sell
is
met,
the
security’s
amortized cost
basis is
written down
to fair
value. Any
previously recognized
ACL should
first be
written off
and
the write-down
in
excess of such ACL would be recorded through
a charge to the provision for credit losses. For available
-for-sale debt securities that do
not
meet
the
aforementioned
criteria,
the
Corporation
evaluates
whether
the
decline
in
fair
value
has
resulted
from
credit
losses
or
other
factors.
In
making
this
assessment,
management
considers
the
cash
position
of
the
issuer
and
its
cash
and
capital
generation
capacity,
which could
increase or
diminish the
issuer’s ability
to repay
its bond
obligations, the
extent to
which the
fair value
is less
than
the
amortized
cost
basis,
any
adverse
change
to
the
credit
conditions
and
liquidity
of
the
issuer,
taking
into
consideration
the
latest
information
available
about
the
financial
condition
of
the
issuer,
credit
ratings,
the
failure
of
the
issuer
to
make
scheduled
principal or interest payments, recent legislation and
government actions affecting the issuer’s
industry, and
actions taken by the issuer
to deal with
the economic climate.
The Corporation also
takes into consideration
changes in the near-term
prospects of the underlying
collateral
of
a
security,
if
any,
such
as
changes
in
default
rates,
loss
severity
given
default,
and
significant
changes
in
prepayment
assumptions
and
the
level
of
cash
flows
generated
from
the
underlying
collateral,
if
any,
supporting
the
principal
and
interest
payments
on the
debt
securities. If
this assessment
indicates that
a credit
loss exists,
the
present
value
of cash
flows expected
to be
collected from
the security
is compared
to the
amortized cost
basis of
the security.
If the
present value
of cash
flows expected
to be
collected is less than the amortized
cost basis, a credit loss exists and
the Corporation records an ACL for
the credit loss, limited to the
amount by which
the fair value
is less than
the amortized cost
basis. The Corporation
recognizes in OCL
any impairment that
has not
been recorded through an ACL. Non-credit-related impairments result from
other factors, including changes in interest rates.
The Corporation
records changes
in the
ACL as
a provision
for (or
reversal of)
credit loss
expense. Losses
are charged
against the
allowance
when
management
believes
the
uncollectability
of
an
available-for-sale
debt
security
is
confirmed
or
when
either
of
the
criteria regarding
intent or requirement
to sell is met.
The Corporation
has elected not
to measure an
ACL on accrued
interest related
to available-for-sale debt securities, as uncollectible accrued interest
receivables are written off on a timely manner.
Substantially all
of the
Corporation’s
available-for-sale debt
securities are
issued by
GSEs. These
securities are
either explicitly
or
implicitly guaranteed
by the
U.S. government,
are highly
rated by
major rating
agencies, and
have a
long history
of no
credit losses.
Accordingly,
there
is
a
zero-credit
loss
expectation
on
these
securities.
For
further
information,
including
the
methodology
and
assumptions
used
for
the
discounted
cash
flow
analyses
performed
on
other
available-for-sale
debt
securities
such
as
private
label
MBS and
bonds issued
by the Puerto
Rico Housing
Finance Authority
(“PRHFA”),
see Note
3 –
Debt Securities,
and Note
25 –
Fair
Value.
Loans held for investment
Loans that the
Corporation has
the ability and
intent to hold
for the foreseeable
future are classified
as held
for investment
and are
reported
at amortized
cost, net
of its
ACL. The
substantial majority
of the
Corporation’s
loans are
classified as
held for
investment.
Amortized cost is the principal outstanding balance,
net of unearned interest, cumulative charge
-offs, unamortized deferred origination
fees
and
costs,
and
unamortized
premiums
and
discounts.
The
Corporation
reports
credit
card
loans
at
their
outstanding
unpaid
principal balance plus uncollected
billed interest and fees
net of such amounts
deemed uncollectible. Interest
income is accrued on
the
unpaid
principal
balance.
Fees
collected
and
costs
incurred
in
the
origination
of
new
loans
are
deferred
and
amortized
using
the
interest
method
or
a
method
that
approximates
the
interest
method
over
the
term
of
the
loan
as
an
adjustment
to
interest
yield.
Unearned
interest
on
certain
personal
loans,
auto
loans,
and
finance
leases
and
discounts
and
premiums
are
recognized
as
income
under a
method that
approximates the
interest method.
When a
loan is paid-off
or sold,
any remaining
unamortized net
deferred fees,
or costs, discounts and premiums are included in loan interest income
in the period of payoff.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
126
Nonaccrual
and
Past-Due
Loans
-
Loans
on
which
the
recognition
of
interest
income
has
been
discontinued
are
designated
as
nonaccrual.
Loans
are
classified
as
nonaccrual
when
they
are
90
days
past
due
for
interest
and
principal,
except
for
residential
mortgage loans insured or guaranteed
by the Federal Housing Administration
(the “FHA”), the Veterans
Administration (the “VA”)
or
the
PRHFA,
and
credit
card
loans.
It
is
the
Corporation’s
policy
to
report
delinquent
mortgage
loans
insured
by
the
FHA,
or
guaranteed by
the VA
or the
PRHFA,
as loans
past due
90
days and
still accruing
as opposed
to nonaccrual
loans since
the principal
repayment is insured or guaranteed. However,
the Corporation discontinues the recognition of
income relating to FHA/VA
loans when
such
loans
are
over
15
months
delinquent,
taking
into
consideration
the
FHA
interest
curtailment
process,
and
relating
to
PRHFA
loans when
such loans are
over
90
days delinquent.
Credit card loans
continue to
accrue finance charges
and fees until
charged off
at
180
days. Loans
generally may
be placed
on nonaccrual
status prior
to when
required by
the policies
described above
when the
full
and
timely
collection
of
interest
or
principal
becomes
uncertain
(generally
based
on
an
assessment
of
the
borrower’s
financial
condition
and
the
adequacy
of
collateral,
if
any).
When
a
loan
is
placed
on
nonaccrual
status,
any
accrued
but
uncollected
interest
income
is
reversed
and
charged
against
interest
income
and
amortization
of
any
net
deferred
fees
is
suspended.
Interest
income
on
nonaccrual
loans
is
recognized
only
to
the
extent
it
is
received
in
cash.
However,
when
there
is
doubt
regarding
the
ultimate
collectability of loan
principal, all cash
thereafter received is
applied to reduce
the carrying value of
such loans (
i.e.
, the cost recovery
method). Under the cost-recovery
method, interest income is not
recognized until the loan balance has
been collected in full, including
the charged-off
portion. Generally,
the Corporation returns
a loan to
accrual status when
all delinquent interest
and principal becomes
current under
the terms of
the loan agreement,
or after a
sustained period of
repayment performance
(
six months
) and the
loan is well
secured and in
the process of collection,
and full repayment
of the remaining
contractual principal and
interest is expected.
Loans that
are
past
due
30
days
or
more
as
to
principal
or
interest
are
considered
delinquent,
with
the
exception
of
residential
mortgage,
commercial mortgage,
and construction loans,
which are considered
past due when
the borrower is
in arrears on
two or more
monthly
payments.
The
Corporation
has
elected
not
to
measure
an
ACL
on
accrued
interest
related
to
loans
held
for
investment,
as
uncollectible accrued interest receivables
are written off on a timely manner.
Loans Acquired
–
Loans acquired through a purchase
or a business combination
are recorded at their fair
value as of the acquisition
date.
The
Corporation
performs
an
assessment
of
acquired
loans
to
first
determine
if
such
loans
have
experienced
a
more
than
insignificant deterioration
in credit
quality since
their origination
and thus
should be
classified and
accounted for
as purchased
credit
deteriorated
(“PCD”)
loans.
For
loans
that
have
not
experienced
a
more
than
insignificant
deterioration
in
credit
quality
since
origination,
referred
to as
non-PCD loans,
the
Corporation
records
such loans
at fair
value,
with any
resulting
discount or
premium
accreted
or
amortized
into
interest
income
over
the
remaining
life
of
the
loan
using
the
interest
method.
Additionally,
upon
the
purchase or acquisition of non-PCD loans,
the Corporation measures and records
an ACL based on the Corporation’s
methodology for
determining
the
ACL.
The
ACL for
non-PCD
loans
is
recorded
through
a
charge
to
the
provision
for
credit
losses
in
the
period
in
which the loans are purchased or acquired.
Acquired loans that are classified
as PCD are recognized at fair
value, which includes any premiums
or discounts resulting from
the
difference between
the initial amortized
cost basis and
the par value.
Premiums and non-credit
loss related discounts
are amortized or
accreted into interest
income over the
remaining life of
the loan using
the interest method.
Unlike non-PCD loans,
the initial ACL
for
PCD loans is established through an adjustment
to the acquired loan balance and not through a charge
to the provision for credit losses
in the period in which the loans are acquired. At acquisition, the ACL for
PCD loans, which represents the fair value credit discount, is
determined
using
a
discounted
cash
flow
method
that
considers
the
PDs
and
LGDs
used
in
the
Corporation’s
ACL
methodology.
Characteristics
of
PCD
loans
include
the
following:
delinquency,
payment
history
since
origination,
credit
scores
migration
and/or
other
factors
the Corporation
may
become
aware of
through its
initial analysis
of acquired
loans that
may
indicate
there has
been
a
more than
insignificant deterioration
in credit
quality since
a loan’s
origination. In
connection with
the Banco
Santander Puerto
Rico
(“BSPR”)
acquisition
on
September
1,
2020,
the
Corporation
acquired
PCD
loans
with
an
aggregate
fair
value
at
acquisition
of
approximately $
752.8
million, and recorded
an initial ACL
of approximately $
28.7
million, which was added
to the amortized
cost of
the loans.
Subsequent
to
acquisition,
the
ACL
for
both
non-PCD
and
PCD
loans
is
determined
pursuant
to
the
Corporation’s
ACL
methodology in the same manner as all other loans.
For PCD loans
that prior to
the adoption of
ASC 326 were
classified as purchased
credit impaired (“PCI”)
loans and accounted
for
under
the
FASB
Accounting
Standards
Codification
(the
“Codification”
or
“ASC”)
Subtopic
310-30,
“Accounting
for
Purchased
Loans Acquired
with Deteriorated
Credit Quality”
(ASC Subtopic
310-30), the
Corporation adopted
ASC 326
using the
prospective
transition approach.
As allowed
by ASC
326, 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. As of
December 31,
2022, such
PCD loans consisted
of $
101.7
million of residential mortgage
loans and $
1.9
million of commercial
mortgage loans acquired by
the Corporation as part
of
acquisitions
completed
prior
to
2020.
These
previous
transactions
include
a
transaction
completed
on
February
27,
2015,
in
which
FirstBank
acquired
ten
Puerto
Rico
branches
of
Doral
Bank,
acquired
certain
assets,
including
PCD
loans,
and
assumed
deposits,
through an alliance with
Banco Popular of Puerto
Rico, which was the successful
lead bidder with the
FDIC on the failed Doral
Bank,
as well as other
co-bidders, and the
acquisition from Doral
Financial in the first
quarter of 2014
of all of its
rights, title and
interest in
first
and
second
residential
mortgage
loans
in
full
satisfaction
of
secured
borrowings
owed
by
such
entity
to
FirstBank.
As
the
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
127
Corporation
elected
to
maintain
pools
of
units
of
account
for
loans
previously
accounted
for
under
ASC
Subtopic
310-30,
the
Corporation is
not able
to remove
loans from
the pools
until they
are paid
off, written
off or
sold (consistent
with the
Corporation’s
practice
prior
to
adoption
of
ASC
326),
but
is
required
to
follow
ASC
326
for
purposes
of
the
ACL.
Regarding
interest
income
recognition for PCD loans that
existed at the time of adoption
of ASC 326, the prospective transition
approach for PCD loans required
by
ASC
326
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
that the
Corporation has
elected to
maintain in
previously
existing
pools
pursuant
to the
policy
election
right upon
adoption of
ASC 326
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
use
of
the
collateral
in
operations
or
improving
the
collateral
for
resale.
Thus,
the
Corporation
continues
to
exclude
these
pools
of
PCD
loans
from
nonaccrual
loan
statistics.
In
accordance
with
ASC
326,
the
Corporation
did
not
reassess
whether
modifications
to
individual
acquired
loans
accounted
for
within
pools
were
troubled
debt
restructurings (“TDRs”) as of the date of adoption.
Charge-off
of Uncollectible
Loans -
Net charge
-offs consist
of the
unpaid principal
balances of
loans held
for investment
that the
Corporation
determines are
uncollectible,
net of
recovered amounts.
The Corporation
records charge
-offs as
a reduction
to the
ACL
and subsequent recoveries of previously charged-off
amounts are credited to the ACL.
The Corporation
designates as
collateral dependent
certain commercial,
residential and
consumer loans
secured by
collateral when
foreclosure is probable or when repayment
is expected to be provided substantially through
the operation or sale of the collateral
when
the borrower is experiencing
financial difficulties based
on its assessment as
of the reporting
date. Commercial and
construction loans
are considered collateral
dependent when they exhibit
specific risk characteristics such
as repayment capacity under
certain thresholds
or credit deterioration. Residential mortgage loans are
considered collateral dependent when
180
days or more past due and secured by
residential real estate.
Moreover, since
the ACL of auto
loans and finance
leases is calculated
using either a
PD/LGD model or
a risk-
adjusted
discounted
cash
flow
method
for
loans
modified
or
reasonably
expected
to
be
modified
in
a
TDR
and
performing
in
accordance
with
restructured
terms,
these
loans
are
not
considered
collateral
dependent.
The
ACL
of
collateral
dependent
loans
is
based on the fair value of the collateral at the reporting date, adjusted for undiscounted
estimated costs to sell.
Collateral
dependent
loans
in
the
construction,
commercial
mortgage,
and
commercial
and
industrial
(“C&I”)
loan
portfolios
are
written
down
to
their
net
realizable
value
(fair
value
of
collateral,
less
estimated
costs
to
sell)
when
loans
are
considered
to
be
uncollectible and
have balances
of $
0.5
million or
more. Within
the consumer
loan portfolio,
closed-end consumer
loans are
charged
off when
payments are
120
days in
arrears. Open-end
(revolving credit)
consumer loans,
including credit
card loans,
are charged
off
when
payments
are
180
days
in
arrears.
Residential
mortgage
loans
that
are
180
days
delinquent
are
reviewed
and
charged-off,
as
needed, to
the fair
value of
the underlying
collateral less
cost to
sell. Generally,
all loans
may be
charged off
or written
down to
the
fair
value
of
the
collateral
prior
to
the
application
of
the
policies
described
above
if
a
loss-confirming
event
has
occurred.
Loss-
confirming
events
include,
but
are
not
limited
to,
bankruptcy
(unsecured),
continued
delinquency,
or
receipt
of
an
asset
valuation
indicating a collateral deficiency when the asset is the sole source of repayment.
Troubled
Debt Restructurings
- A restructuring
of a loan
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.
However,
not
all
loan
modifications
are TDRs.
Modifications
resulting
in TDRs
may
include
changes to
one
or more
terms of
the loan,
including
but not
limited to,
a change
in interest
rate, an
extension of
the repayment
period, a
reduction in
payment amount,
and partial
forgiveness
or
deferment of principal
or accrued interest.
TDR loans are
classified as either
accrual or nonaccrual
loans. Loans in
accrual status may
remain in accrual status when
their contractual terms have been
modified in a TDR if the
loans had demonstrated performance
prior to
the restructuring
and payment in
full under the
restructured terms
is expected.
Otherwise, loans
on nonaccrual
status and
restructured
as TDRs 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.
A loan
that had
previously been
modified in
a TDR
and is
subsequently refinanced
under then-current
underwriting standards
at a
market rate with no concessionary terms is accounted for as a new loan and is no
longer reported as a TDR.
Refer
to
Accounting
Standards
Updates
(“ASU”)
2022-02,
“Financial
Instruments
–
Credit
Losses
(Topic
326):
Troubled
Debt
Restructurings and
Vintage
Disclosures” below for
information on the
amendments to the
TDR guidance that
are effective
on or after
January 1, 2023
.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
128
Allowance for credit losses for loans and finance leases
The ACL
for
loans and
finance leases
held
for
investment
is a
valuation
account
that is
deducted
from the
loans’
amortized
cost
basis
to
present
the
net
amount
expected
to
be
collected
on
loans.
Loans
are
charged-off
against
the
allowance
when
management
confirms the loan balance is uncollectable.
The Corporation
estimates the
allowance 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
any
difference
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.
Expected
credit losses
are estimated
over the contractual term
of the loans, adjusted by
prepayments when appropriate.
The contractual term excludes
expected extensions,
renewals, and
modifications unless
either of
the following
applies: the
Corporation has
a reasonable
expectation at
the reporting
date
that a
TDR will
be executed
with an
individual borrower
or the
extension or
renewal options
are included
in the original
or modified
contract at the reporting date and are not unconditionally cancellable by
the Corporation.
The
Corporation
estimates
the
ACL
primarily
based
on
a
PD/LGD
modeled
approach,
or
individually
primarily
for
collateral
dependent loans and certain TDR
loans. The Corporation evaluates
the need for changes to the
ACL by portfolio segments and
classes
of
loans
within
certain
of
those
portfolio
segments.
Factors
such
as
the
credit
risk
inherent
in
a
portfolio
and
how
the Corporation
monitors the
related quality,
as well
as the
estimation approach
to estimate
credit losses,
are considered
in the
determination of
such
portfolio segments and classes. The Corporation has identified the following
portfolio segments:
●
Residential
mortgage
– Residential
mortgage
loans
are
loans
secured
by
residential
real
property
together
with
the
right
to
receive
the payment
of principal
and interest
on the
loan. The
majority of
the Corporation’s
residential
loans are
fixed-rate
first lien closed-end loans secured by 1-4 single-family residential properties.
●
Commercial
mortgage
– Commercial
mortgage
loans
are
loans
secured
primarily
by
commercial
real
estate
properties
for
which
the
primary
source
of
repayment
comes
from
rent
and
lease
payments
that
are
generated
by
an
income-producing
property.
●
Commercial and Industrial
– C&I loans include both unsecured and secured
loans for which the primary source of repayment
comes
from
the
ongoing
operations
and
activities
conducted
by
the
borrower
and
not
from
rental
income
or
the
sale
or
refinancing
of
any
underlying
real
estate
collateral;
thus,
credit
risk
is
largely
dependent
on
the
commercial
borrower’s
current
and
expected
financial condition.
The
C&I
loan
portfolio
consists
of
loans
granted
to
large
corporate
customers
as
well as middle-market customers across several industries, and the government
sector.
●
Construction
–
Construction
loans
consisted
generally
of
loans
secured
by
real
estate
made
to
finance
the
construction
of
industrial,
commercial,
or
residential
buildings
and
included
loans
to
finance
land
development
in
preparation
for
erecting
new
structures.
These
loans
involve
an
inherently
higher
level
of
risk
and
sensitivity
to
market
conditions.
Demand
from
prospective tenants or purchasers may erode after construction begins because
of a general economic slowdown or otherwise.
●
Consumer
–
Consumer
loans
generally
consisted
of
unsecured
and
secured
loans
extended
to
individuals
for
household,
family, and other personal
expenditures, including several classes of products.
For
purposes
of
the
ACL
determination,
the
Corporation
stratifies
portfolio
segments
by
two
main
regions
(
i.e.,
the
Puerto
Rico/Virgin
Islands
region
and
the
Florida
region).
The
ACL
is
measured
using
a
PD/LGD
model
that
is
calculated
based
on
the
product of a
cumulative PD and
LGD. PD and
LGD estimates are
updated quarterly
for each loan
over the remaining
expected life
to
determine
lifetime
term
structure
curves.
Under
this approach,
the
Corporation
calculates losses
for
each
loan
for
all future
periods
using the
PD and
LGD loss
rates derived
from the
term structure
curves applied
to the
amortized cost
basis of
the loans,
considering
prepayments.
For
residential
mortgage
loans,
the
Corporation
stratifies
the
portfolio
segment
by
the
following
two
classes:
(i)
government-
guaranteed
residential
mortgage
loans,
and
(ii)
conventional
mortgage
loans.
Government-guaranteed
loans
are
those
originated
to
qualified
borrowers
under
the
FHA
and
the
VA
standards.
Originated
loans
that
meet
the
FHA’s
standards
qualify
for
the
FHA’s
insurance program whereas
loans that meet the
standards of the VA
are guaranteed by
such entity.
No credit losses are
determined for
loans insured or guaranteed
by the FHA or the VA
due to the explicit
guarantee of the U.S. federal
government. On the other
hand, an
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
129
ACL is
calculated for
conventional
residential mortgage
loans, which
are loans
that do
not qualify
under the
FHA or
VA
programs.
PD
estimates
are
based
on,
among
other
things,
historical
payment
performance
and
relevant
current
and
forward-looking
macroeconomic variables,
such as regional
unemployment rates. On
the other hand,
LGD estimates are based
on, among other
things,
historical
charge-off
events
and
recovery
payments,
loan-to-value
attributes,
and
relevant
current
and
forecasted
macroeconomic
variables, such as the regional housing price index.
For commercial
mortgage loans,
PD estimates
are based on,
among other
things, industry historical
loss experience,
property type,
occupancy,
and
relevant
current
and
forward-looking
macroeconomic
variables.
On
the
other
hand,
LGD
estimates
are
based
on
historical charge-off events and recovery
payments, industry historical loss experience, specific attributes
of the loans, such as loan-to-
value,
debt
service
coverage
ratios,
and
net
operating
income,
as
well
as
relevant
current
and
forecasted
macroeconomic
variables
expectations,
such
as
commercial
real
estate
price
indexes,
the
gross
domestic
product
(“GDP”),
interest
rates,
and
unemployment
rates, among others.
For C&I
loans, PD
estimates are
based on
industry historical
loss experience,
financial performance
and market
value indicators,
and
current
and
forecasted
relevant
forward-looking
macroeconomic
variables.
On
the
other
hand,
LGD
estimates
are
based
on
industry
historical
loss
experience,
specific
attributes
of
the loans,
such
as loan
to
value,
as
well
as relevant
current
and
forecasted
expectations
for
macroeconomic
variables,
such
as
unemployment
rates,
interest
rates,
and
market
risk
factors
based
on
industry
performance and the equity market.
For
construction
loans,
PD
estimates
are
based
on,
among
other
things,
historical
payment
performance
experience,
industry
historical
loss experience,
underlying
type
of
collateral,
and
relevant
current and
forward-looking
macroeconomic
variables. On
the
other
hand,
LGD
estimates
are
based
on
historical
charge-off
events
and
recovery
payments,
industry
historical
loss
experience,
specific attributes of the
loans, such as loan-to-value, debt service
coverage ratios, and relevant current
and forecasted macroeconomic
variables, such as unemployment rates, GDP,
interest rates, and real estate price indexes.
For consumer loans,
the Corporation stratifies
the portfolio segment by
the following five classes: (i)
auto loans; (ii) finance
leases;
(iii) credit
cards; (iv)
personal loans;
and (v)
other consumer
loans, such
as open-end
home equity
revolving lines
of credit
and other
types
of
consumer
credit
lines,
among
others.
In
determining
the
ACL,
management
considers
consumer
loans
risk
characteristics
including, but not limited to,
credit quality indicators such as
payment performance period, delinquency
and original FICO scores. For
auto loans and finance
leases, PD estimates are based on,
among other things, the historical
payment performance and relevant
current
and forward-looking macroeconomic
variables, such as regional
unemployment rates. On the
other hand, LGD estimates
are primarily
based
on
historical
charge-off
events
and
recovery
payments.
For
the
credit
card
and
personal
loan
portfolios,
the
Corporation
determines
the ACL
on a
pool basis,
based on
products
PDs and
LGDs developed
considering
historical
losses for
each origination
vintage by
length of
loan terms,
by geography,
payment performance
and by
credit score.
The PD
and LGD
for each cohort
consider
key macroeconomic variables, such as regional GDP,
unemployment rates, and retail sales, among others.
For the
ACL determination
of all
portfolios, the
expectations for
relevant macroeconomic
variables related
to the
Puerto Rico
and
Virgin
Islands
region consider
an initial
reasonable
and
supportable
period of
two years
and
a
reversion
period
of up
to
three years
,
utilizing a
straight-line approach
and reverting
back to
the historical
macroeconomic
mean. For
the Florida
region, the
methodology
considers
a
reasonable
and
supportable
forecast
period
and
an
implicit
reversion
towards
the
historical
trend
that
varies
for
each
macroeconomic variable.
After the reversion
period, a
historical loss
forecast period
covering the
remaining contractual
life, adjusted
for prepayments,
is used
based on
the changes
in key
historical economic
variables during
representative historical
expansionary and
recessionary periods.
Furthermore, the
Corporation periodically
considers the
need for
qualitative adjustments
to the
ACL. Qualitative
adjustments may
be related
to and include,
but not be
limited to factors
such as: (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,
including, but
not
limited to, expectations
about interest rate,
inflation, and
real estate price
levels, as well
as labor
challenges; (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.
In addition
to loans previously
written down
to their respective
realizable values,
the ACL on
loans that have
been modified or
are
reasonably
expected
to
be
modified
in
a
TDR
and
that
have
balances
of
$
0.5
million
or
more
in
the
case
of
commercial
and
construction
loans
(other
than
commercial
mortgage
and
construction
loans,
in
which
the
ACL
is
based
on
the
fair
value
of
the
collateral
at
the
reporting
date,
adjusted
for
undiscounted
estimated
costs
to
sell)
is
generally
measured
using
a
risk-adjusted
discounted cash flow
method. Under this
approach, all future
cash flows (interest
and principal) for
each loan are
adjusted by the
PDs
and LGDs derived from the term
structure curves and prepayments and
then discounted at the rate of the
loan prior to the restructuring
(or at the
effective interest
rate as of the
reporting date for
non-TDRs previously written
down to their
respective realizable values)
to
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
130
arrive
at
the
net
present
value
of
future
cash
flows.
For
credit
cards,
personal
loans,
and
nonaccrual
auto
loans
and
finance
leases
modified in a TDR, the ACL is measured using the same methodologies as those used
for all other loans in those portfolios.
See Note 5 –
Allowance for Credit Losses
for Loans and Finance
Leases for additional
information about reserve
balances for each
portfolio
segment,
activity
during
the
period,
and
information
about
changes
in
circumstances
that
caused
changes
in
the
ACL
for
loans and finance leases during the year ended December 31, 2022,
2021, and 2020.
Refer
to
ASU
2022-02
discussion
below
for
information
on
the
amendments
to
the
TDR
guidance
that
are
effective
on
or
after
January 1, 2023.
Allowance for credit losses on off-balance sheet credit exposures and
other assets
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
unless
the
obligation
is
unconditionally
cancellable
by
the
Corporation.
The
ACL
on
off-
balance sheet
credit exposures is
adjusted as a
provision for credit
loss expense. The
estimate includes consideration
of the likelihood
that funding
will occur and
an estimate of
expected credit
losses on commitments
expected to be
funded over its
estimated life.
As of
December 31,
2022, the
off-balance sheet
credit exposures
primarily consisted
of unfunded
loan commitments
and standby
letters of
credit
for
commercial
and
construction
loans.
The
Corporation
utilized
the
PDs
and
LGDs
derived
from
the
above-explained
methodologies
for
the
commercial
and
construction
loan
portfolios.
Under
this
approach,
all
future
period
losses
for
each
loan
are
calculated using
the PD
and LGD
loss rates
derived from
the term
structure curves
applied to
the usage
given default
exposure. The
ACL on off-balance sheet
credit exposures is included as
part of accounts payable and
other liabilities in the consolidated
statement of
financial condition with adjustments included as part of the provision
for credit losses in the consolidated statements of income.
See
Note
5
–
Allowance
for
Credit
Losses
for
Loans
and
Finance
Leases
for
additional
information
about
reserve
balances
for
unfunded
loan commitments,
activity during
the period,
and information
about changes
in circumstances
that caused
changes in
the
ACL for off-balance sheet credit exposures
during the years ended December 31, 2022, 2021 and 2020.
The
Corporation
also
estimates
expected
credit
losses
for
certain
accounts
receivable,
primarily
claims
from
government-
guaranteed
loans,
loan
servicing-related
receivables,
and
other
receivables.
The
ACL
on other
assets
measured
at
amortized
cost
is
included
as part
of other
assets in
the
consolidated
statement of
financial
condition
with adjustments
included
as part
of other
non-
interest expenses
in the consolidated
statements of income.
As of December
31, 2022 and
2021, the
ACL on other
assets measured at
amortized cost was immaterial.
Loans held for sale
Loans
that the
Corporation
intends to
sell or
that
the Corporation
does not
have
the ability
and
intent to
hold
for the
foreseeable
future
are
classified
as
held-for-sale
loans.
Loans
held
for
sale
are
recorded
at
the
lower
of
cost
or
fair
value
less
costs
to
sell.
Generally,
the
loans
held-for-sale
portfolio
consists
of
conforming
residential
mortgage
loans
that
will
be
pooled
into
Government
National Mortgage Association (“GNMA”)
MBS, which are then sold to
investors, and conforming residential mortgage
loans that the
Corporation intends
to sell to
GSEs, such as
the Federal National
Mortgage Association
(“FNMA”) and the
U.S. Federal
Home Loan
Mortgage Corporation (“FHLMC”).
Generally,
residential mortgage
loans held for sale
are valued on
an aggregate portfolio
basis and
the
value
is
primarily
derived
from
quotations
based
on
the
MBS
market.
The
amount
by
which
cost
exceeds
market
value
in
the
aggregate portfolio
of residential
mortgage loans
held for
sale, if
any,
is accounted
for as
a valuation
allowance with
changes therein
included
in
the
determination
of
net
income
and
reported
as
part
of
mortgage
banking
activities
in
the
consolidated
statements
of
income.
Loan
costs
and
fees
are
deferred
at
origination
and
are
recognized
in
income
at
the
time
of
sale
and
are
included
in
the
amortized cost basis when
evaluating the need for
a valuation allowance. The fair
value of commercial and construction
loans held for
sale, if any,
is primarily derived
from external appraisals,
or broker price
opinions that the
Corporation considers,
with changes in
the
valuation allowance reported as part of other non-interest income
in the consolidated statements of income.
In certain circumstances,
the Corporation transfers
loans from/to held
for sale or held
for investment based
on a change in
strategy.
If such a
change in holding
strategy is made, significant
adjustments to the loans’
carrying values may
be necessary.
Reclassifications
of loans held
for investment to held
for sale are made
at the amortized
cost on the date
of transfer and
establish a new cost
basis upon
transfer.
Write-downs of
loans transferred from
held for investment
to held for
sale are recorded
as charge-offs at
the time of
transfer.
Any
previously
recorded
ACL
is
reversed
in
earnings
after
applying
the
write-down
policy.
Subsequent
changes
in
value
below
amortized cost are reflected in
non-interest income in the consolidated
statements of income. Reclassifications of
loans held for sale to
held for investment are
made at the amortized
cost on the transfer
date and any previously
recorded valuation allowance
is reversed in
earnings. Upon transfer to held for investment, the Corporation calculates
an ACL using the CECL impairment model.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
131
Transfers and servicing of financial assets and extinguishment
of liabilities
After a transfer of
financial assets in a
transaction that qualifies
for accounting as
a sale, the Corporation
derecognizes the financial
assets when it has surrendered control and derecognizes liabilities when they
are extinguished.
A transfer of financial
assets in which the
Corporation surrenders control
over the assets is
accounted for as
a sale to the extent
that
consideration other
than beneficial
interests is
received in
exchange.
The criteria
that must
be met
to determine
that the
control over
transferred
assets has
been surrendered
include
the following:
(i) the assets
must be
isolated from
creditors of
the transferor;
(ii) the
transferee
must
obtain
the
right
(free
of
conditions
that
constrain
it
from
taking
advantage
of
that
right)
to
pledge
or
exchange
the
transferred
assets;
and
(iii) the
transferor
cannot
maintain
effective
control
over
the
transferred
assets
through
an
agreement
to
repurchase
them
before
their maturity.
When
the
Corporation
transfers
financial
assets
and
the
transfer
fails
any
one
of
the
above
criteria,
the
Corporation
is
prevented
from
derecognizing
the
transferred
financial
assets
and
the
transaction
is
accounted
for
as
a
secured borrowing.
Servicing assets
The Corporation recognizes
as separate assets the
rights to service
loans for others,
whether those servicing
assets are originated
or
purchased. In the ordinary course of business, loans are
pooled into GNMA MBS for sale in the secondary
market or sold to FNMA or
FHLMC, with servicing retained.
When the Corporation sells mortgage loans, it recognizes any retained servicing right.
Mortgage
servicing
rights
(“servicing
assets”
or
“MSRs”)
retained
in
a
sale
or
securitization
arise
from
contractual
agreements
between
the
Corporation
and
investors
in
mortgage
securities and
mortgage
loans. Under
these
contracts,
the
Corporation
performs
loan-servicing functions
in exchange
for fees and
other remuneration.
The MSRs, included
as part of
other assets in
the statements of
financial condition,
entitle the Corporation
to servicing fees
based on
the outstanding
principal balance of
the mortgage loans
and the
contractual
servicing
rate.
The
servicing
fees
are
credited
to
income
on
a
monthly
basis
when
collected
and
recorded
as
part
of
mortgage
banking
activities
in
the
consolidated
statements
of
income.
In
addition,
the
Corporation
generally
receives
other
remuneration
consisting
of
mortgagor-contracted
fees
such
as
late
charges
and
prepayment
penalties,
which
are
credited
to
income
when collected.
Considerable judgment is required
to determine the fair value of
the Corporation’s
MSRs. Unlike highly liquid investments,
the fair
value
of
MSRs
cannot
be
readily
determined
because
these
assets
are
not
actively
traded
in
securities
markets.
The
initial
carrying
value
of
an
MSR is
determined
based
on
its fair
value.
The Corporation
determines
the
fair
value
of
the
MSRs using
a
discounted
static cash
flow analysis,
which incorporates
current market
assumptions commonly
used by
buyers of
these MSRs
and was
derived
from
prevailing
conditions
in
the
secondary
servicing
market.
The
valuation
of
the
Corporation’s
MSRs
incorporates
two
sets
of
assumptions: (i) market-derived
assumptions for discount
rates, servicing costs,
escrow earnings rates,
floating earnings rates,
and the
cost
of
funds;
and
(ii) market
assumptions
calibrated
to
the
Corporation’s
loan
characteristics
and
portfolio
behavior
for
escrow
balances, delinquencies and foreclosures, late fees, prepayments, and prepayment
penalties.
Once
recorded,
the
Corporation
periodically
evaluates
MSRs
for
impairment.
Impairments
are
recognized
through
a
valuation
allowance for
each individual
stratum of
servicing assets.
For purposes
of performing
the MSR
impairment evaluation,
the servicing
portfolio
is
stratified
on
the
basis
of
certain
risk
characteristics,
such
as
region,
terms,
and
coupons.
The
Corporation
conducts
an
other-than-temporary
impairment analysis
to evaluate
whether a
loss in
the value
of the
MSR in
a particular
stratum, if
any,
is other
than temporary or not.
When the recovery of the
value is unlikely in the
foreseeable future, a write-down
of the MSR in the
stratum to
its
estimated
recoverable
value
is
charged
to
the
valuation
allowance.
Impairment
charges
are
recorded
as
part
of
revenues
from
mortgage banking activities in the consolidated statements of income
.
The
MSRs
are
amortized
over
the
estimated
life
of
the
underlying
loans
based
on
an
income
forecast
method
as
a
reduction
of
servicing income.
The income forecast
method of amortization
is based on
projected cash flows.
A particular periodic
amortization is
calculated
by
applying
to
the
carrying
amount
of
the
MSRs
the
ratio
of
the
cash
flows
projected
for
the
current
period
to
total
remaining net MSR forecasted cash flow.
Premises and equipment
Premises
and
equipment
are
carried
at
cost,
net
of
accumulated
depreciation
and
amortization.
Depreciation
is
provided
on
the
straight-line method
over the
estimated useful
life of
each type
of asset.
Amortization of
leasehold improvements
is computed
over
the terms
of the
leases (
i.e.
, the
contractual term
plus lease
renewals that
are reasonably
assured) or
the estimated
useful lives
of the
improvements, whichever
is shorter.
Costs of
maintenance and
repairs that
do not
improve or
extend the
life of
the respective
assets
are expensed
as incurred.
Costs of
renewals and
betterments are
capitalized. When
the Corporation
sells or
disposes of
assets, their
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
132
cost and related
accumulated depreciation
are removed from
the accounts and
any gain or
loss is reflected
in earnings as
part of other
non-interest
income
in
the
consolidated
statements
of
income.
When
the
asset
is
no
longer
used
in
operations,
and
the Corporation
intends to
sell it,
the asset
is reclassified
to other
assets held
for sale
and is
reported at
the lower
of the
carrying amount
or fair
value
less cost to
sell. Premises
and equipment
are evaluated
for impairment
whenever events
or changes
in circumstances
indicate that
the
carrying amount
of the
asset may
not be
recoverable. Impairments
on premises
and equipment
are included
as part of
occupancy and
equipment expenses in the consolidated statements of income.
Operating leases
The Corporation,
as lessee,
determines
if an
arrangement
is a
lease or
contains a
lease at
inception.
Operating lease
liabilities are
recognized
based
on
the
present
value
of
the
remaining
lease
payments,
discounted
using
the
discount
rate
for
the
lease
at
the
commencement
date,
or
at
acquisition
date
in
case
of
a
business
combination.
As
the
rates
implicit
in
the
Corporation’s
operating
leases are
not readily
determinable,
the Corporation
generally uses
an incremental
borrowing
rate based
on information
available
at
the commencement
date to
determine the
present value
of future
lease payments.
The incremental
borrowing rate
is calculated
based
on fully
amortizing secured
borrowings. Operating
right-of-use (“ROU”)
assets are
generally recognized
based on
the amount
of the
initial measurement of the
lease liability. Non-lease
components, such as common
area maintenance charges,
are not considered a
part
of the
gross-up of
the ROU
asset and
lease liability
and are
recognized as
incurred. The
Corporation’s
leases are
primarily related
to
operating leases
for the
Bank’s
branches. Most
of the
Corporation’s
leases with
operating ROU
assets have
terms of
two years
to
30
years
, some
of which
include options
to extend
the leases
for up
to
ten years
.
The Corporation
does not
recognize ROU
assets and
lease
liabilities
that
arise
from
short-term
leases
(less
than
12
months).
Operating
lease
expense,
which
is
included
as
part
of
occupancy and equipment expenses
in the consolidated statements
of income,
is recognized on a straight-line
basis over the lease term
that is based
on the
Corporation’s
assessment of
whether the
renewal options
are reasonably
certain to be
exercised. The
Corporation
includes
the
ROU
assets
and
lease
liabilities
as
part
of
other
assets
and
accounts
payable
and
other
liabilities,
respectively,
in
the
consolidated statements
of financial condition.
As of December 31, 2022, the Corporation, as lessee, did
no
t have any leases that qualified as finance leases.
Other real estate owned (“OREO”)
OREO,
which
consists
of
real estate
acquired
in
settlement of
loans,
is recorded
at fair
value
less estimated
costs to
sell the
real
estate acquired.
Generally,
loans have
been
written down
to their
net realizable
value
prior
to
foreclosure.
Any further
reduction
to
their net
realizable
value
is recorded
with a
charge
to the
ACL at
the
time of
foreclosure
or within
six months.
Thereafter,
costs of
maintaining
and
operating
these
properties,
losses
recognized
on
the
periodic
reevaluations
of
these
properties,
and
gains
or
losses
resulting
from
the
sale of
these
properties
are
charged
or
credited
to
earnings
and
are
included
as part
of
net
gain
(loss) on
OREO
operations in the consolidated statements of income. Appraisals are obtained
periodically, generally
on an annual basis
.
Claims arising from FHA/VA
government-guaranteed residential mortgage loans
Upon
the
foreclosure
on
property
collateralizing
an
FHA/VA
government-guaranteed
residential
mortgage
loan,
the
Corporation
derecognizes
the
government-guaranteed
mortgage
loan
and
recognizes
a
receivable
as
part
of
other
assets
in
the
consolidated
statements
of
condition
if
the
conditions
in
ASC
Subtopic
310-40,
“Reclassification
of
Residential
Real
Estate
Collateralized
Consumer
Mortgage
Loans
upon
Foreclosure,”
(ASC
Subtopic
310-40)
are
met.
See
Note
7–
Other
Real
Estate
Owned
for
information on foreclosures associated to
FHA/VA
government-guaranteed residential mortgage loans
reclassified to other assets as of
December 31, 2022 and 2021.
Goodwill and other intangible assets
Goodwill
–
Goodwill
represents
the
cost
in
excess
of
the
fair
value
of
net
assets
acquired
(including
identifiable
intangibles)
in
transactions accounted
for as
business combinations.
The Corporation
allocates goodwill
to the
reporting unit(s)
that are
expected to
benefit from
the synergies
of the
business combination.
Once goodwill
has been
assigned to
a reporting
unit, it
no longer
retains its
association with
a particular
acquisition, and
all of
the activities within
a reporting
unit, whether
acquired or
internally generated,
are
available to support
the value of the
goodwill.
The Corporation tests goodwill
for impairment at
least annually and more
frequently if
circumstances exist that indicate a possible reduction
in the fair value of a reporting unit below its carrying
value. If, after assessing all
relevant
events
or
circumstances,
the
Corporation
concludes
that
it
is
more-likely-than-not
that
the
fair
value
of
a
reporting
unit
is
below its
carrying value,
then an
impairment test
is required.
In addition
to the
goodwill recorded
at the
Commercial and
Corporate,
Consumer
Retail,
and
Mortgage
Banking
reporting
units
in
connection
with
the
acquisition
of
BSPR
in
2020,
the
Corporation’s
goodwill
is
mostly
related
to
the
United
States
(Florida)
reporting
unit.
See
Note
9–
Goodwill
and
Other
Intangible
Assets
for
information on the qualitative assessment performed by the Corporation
during the fourth quarter of 2022.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
133
Other
Intangible
Assets
–
The
Corporation’s
other
intangible
assets
primarily
relate
to
core
deposits.
The
Corporation
amortizes
core deposit intangibles based
on the projected useful
lives of the related deposits,
generally on a straight-line
basis, and reviews these
assets for impairment whenever events
or changes in circumstances indicate that the carrying amount may not
exceed their fair value.
Securities purchased and sold under agreements to repurchase
The
Corporation
accounts
for
securities
purchased
under
resale
agreements
and
securities
sold
under
repurchase
agreements
as
collateralized financing
transactions. Generally,
the Corporation
records these
agreements at
the amount
at which
the securities
were
purchased or
sold. The
Corporation monitors
the fair
value of
securities purchased
and sold,
and obtains
collateral from,
or returns
it
to,
the counterparties
when
appropriate.
These financing
transactions
do not
create material
credit risk
given
the collateral
involved
and the related monitoring process.
The Corporation sells and acquires
securities under agreements to repurchase or
resell the same or
similar
securities.
Generally,
similar
securities
are
securities
from
the
same
issuer,
with
identical
form
and
type,
similar
maturity,
identical
contractual
interest rates,
similar assets
as collateral,
and the
same aggregate
unpaid
principal amount.
The counterparty
to
certain agreements may have the right to repledge the collateral by contract
or custom. The Corporation presents such assets separately
in
the
consolidated
statements
of
financial
condition
as
securities
pledged
with
creditors’
rights
to
repledge.
Repurchase
and
resale
activities may be
transacted under
legally enforceable
master repurchase
agreements that give
the Corporation, in
the event of
default
by
the
counterparty,
the
right
to
liquidate
securities
held
and
to
offset
receivables
and
payables
with
the
same
counterparty.
The
Corporation offsets repurchase
and resale transactions with the same
counterparty in the consolidated statements
of financial condition
where it has such
a legally enforceable
right under a master
netting agreement,
the intention of setoff
is existent, the transactions
have
the same maturity date, and the amounts are determinable.
From
time
to
time,
the
Corporation
modifies
repurchase
agreements
to
take
advantage
of
prevailing
interest
rates.
Following
applicable
GAAP guidance,
if
the
Corporation determines
that
the debt
under
the modified
terms
is substantially
different
from
the
original terms,
the modification
must be accounted
for as an
extinguishment of
debt. The
Corporation considers
modified terms
to be
substantially different
if the present
value of
the cash flows
under the
terms of the
new debt instrument
is at least
10
% different
from
the
present
value
of
the
remaining
cash
flows
under
the
terms
of
the
original
instrument.
The
new
debt
instrument
will be
initially
recorded
at fair
value, and
that amount
will be
used
to determine
the debt
extinguishment
gain or
loss to
be recognized
through the
consolidated statements
of income
and the
effective rate
of the
new instrument.
If the
Corporation determines
that the
debt under
the
modified
terms is
not
substantially
different,
then
the
new effective
interest
rate
is determined
based on
the
carrying amount
of
the
original
debt
instrument.
The
Corporation
has
determined
that
none
of
the
repurchase
agreements
modified
in
the
past
were
substantially different from the original terms, and,
therefore, these modifications were not accounted for as extinguishments of debt
.
Income taxes
The Corporation
uses the
asset and
liability method
for the
recognition of
deferred tax
assets and liabilities
for the
expected future
tax consequences
of events
that have
been recognized
in the
Corporation’s
financial statements
or tax
returns.
Deferred income
tax
assets
and
liabilities
are
determined
for
differences
between
the
financial
statement
and
tax
bases
of
assets
and
liabilities
that
will
result in taxable
or deductible amounts
in the future.
The computation is
based on enacted
tax laws and
rates applicable to
periods in
which the temporary
differences are expected
to be recovered or
settled. The effect
on deferred tax assets and
liabilities of a change
in
tax rates
is recognized
in income
at the
time of
enactment of
such change
in tax
rates. Any
interest or
penalties due
for payment
of
income taxes are included
in the provision for income
taxes. Valuation
allowances are established, when
necessary, to
reduce deferred
tax assets to the
amount that is more
likely than not to
be realized. In making
such assessment, significant
weight is given to
evidence
that can
be objectively
verified, including
both positive
and negative
evidence. The
authoritative guidance
for accounting
for income
taxes requires the consideration of all sources of taxable income
available to realize the deferred tax asset, including the future
reversal
of
existing
temporary
differences,
tax
planning
strategies
and
future
taxable
income,
exclusive
of
the
impact
of
the
reversal
of
temporary differences and
carryforwards. In estimating
taxes, management assesses the
relative merits and risks
of the appropriate tax
treatment
of
transactions
considering
statutory,
judicial,
and
regulatory
guidance.
See
Note
22
–
Income
Taxes
for
additional
information.
Under
the authoritative
accounting guidance,
income tax
benefits are
recognized and
measured based
on a
two-step analysis:
i) a
tax
position
must
be
more
likely than
not
to be
sustained
based solely
on
its technical
merits
in
order
to
be recognized;
and
ii)
the
benefit
is
measured
at
the
largest
dollar
amount
of
that
position
that
is
more
likely
than
not
to
be
sustained
upon
settlement.
The
difference between
a benefit not
recognized in
accordance with
this analysis
and the
tax benefit
claimed on
a tax return
is referred
to
as an Unrecognized Ta
x
Benefit.
The Corporation releases income tax effects from OCL as pension
and postretirement liabilities are extinguished.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
134
Stock repurchases
Treasury
shares
are
recorded
at
their
reacquisition
cost,
as
a
reduction
of
stockholders’
equity
in
the
consolidated
statements
of
financial condition. When
reissuing treasury shares
for the granting
of stock-based compensation
awards, treasury stock
is reduced by
the
cost
allocated
to
such
stock
and
additional
paid-in
capital
is
credited
for
gains
and
debited
for
losses
when
treasury
stock
is
reissued at prices that differ from the reacquisition cost.
Stock-based compensation
Compensation
cost
is
recognized
in
the
financial
statements
for
all
share-based
payment
grants.
The
First
BanCorp.
Omnibus
Incentive
Plan,
as
amended
(the
“Omnibus
Plan”)
provides
for
equity-based
and
non-equity-based
compensation
incentives
(the
“awards”)
through
the
grant
of
stock
options,
stock
appreciation
rights,
restricted
stock,
restricted
stock
units,
performance
shares,
other stock-based
awards and
cash-based awards.
The compensation
cost for
an award,
determined
based on
the estimate
of the
fair
value
at
the
grant
date
(considering
forfeitures
and
any
post-vesting
restrictions),
is
recognized
over
the
period
during
which
an
employee
or director
is required
to
provide
services
in
exchange
for
an
award,
which
is the
vesting
period,
taking
into account
the
retirement eligibility of the award.
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. For additional information regarding
the Corporation’s
equity-based compensation and
awards granted, see Note 16 – Stock-Based Compensation.
Comprehensive (loss) income
Comprehensive (loss)
income for
First BanCorp. includes
net income,
as well as
changes
in unrealized
gains (losses) on
available-
for-sale debt securities and change in unrecognized pension
and post-retirement costs, net of estimated tax effects.
Pension and other postretirement benefits
The Corporation
maintains two
frozen qualified
noncontributory defined
benefit pension
plans (the
“Pension Plans”)
(including a
complementary postretirement
benefits plan covering medical benefits
and life insurance after retirement)
that it assumed in the BSPR
acquisition.
Pension costs are computed
on the basis of
accepted actuarial methods
and are charged
to current operations.
Net pension costs are
based on
various actuarial
assumptions regarding
future experience
under the
plan, which
include costs
for services
rendered during
the
period,
interest
costs
and
return
on
plan
assets,
as
well
as
deferral
and
amortization
of
certain
items
such
as
actuarial
gains
or
losses.
The funding
policy is to
contribute to
the plan,
as necessary,
to provide
for services
to date and
for those expected
to be earned
in
the future. To
the extent that these
requirements are fully
covered by assets in
the plan, a contribution
may not be made
in a particular
year.
The
cost
of
postretirement
benefits,
which
is determined
based on
actuarial
assumptions
and
estimates
of
the
costs of
providing
these benefits in the future, is accrued during the years that the employee renders
the required service.
The
guidance
for
compensation
retirement
benefits
of
ASC
Topic
715,
“Retirement
Benefits,”
requires
the
recognition
of
the
funded status
of each
defined pension
benefit plan,
retiree health
care plan
and other
postretirement benefit
plans on
the statement
of
financial condition.
In addition,
the Corporation
maintains contributory
retirement plans
covering substantially
all employees.
Employer contributions
to the plan are charged
to current earnings as part of
employees’ compensation and benefits expenses
in the consolidated statements of
income.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
135
Segment information
The Corporation reports financial and
descriptive information about its reportable
segments. Operating segments are components
of
an
enterprise
about
which
separate
financial
information
is available
that
is evaluated
regularly
by management
in
deciding
how
to
allocate resources
and in assessing
performance.
The Corporation’s
management determined
that the segregation
that best fulfills
the
segment definition described above
is by 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 December
31, 2022, the
Corporation had
the following
six
operating
segments
that
are
all
reportable
segments:
Commercial
and
Corporate
Banking;
Mortgage
Banking;
Consumer
(Retail)
Banking;
Treasury and Investments; United States Operations;
and Virgin
Islands Operations. See Note 27 – Segment Information for additional
information.
Valuation
of financial instruments
The measurement
of fair value
is fundamental
to the Corporation’s
presentation of
its financial condition
and results of
operations.
The Corporation
holds debt
and equity
securities, derivatives,
and other
financial instruments
at fair
value. The
Corporation holds
its
investments and liabilities
mainly to manage liquidity
needs and interest
rate risks. A meaningful
part of the Corporation’s
total assets
is reflected at fair value on the Corporation’s
financial statements.
The FASB’s
authoritative guidance
for 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
financial
instruments.
The
hierarchy
is
based
on
whether
the
inputs
to
the
valuation
techniques
used
to
measure
fair
value
are
observable or unobservable.
Under the
fair value
accounting guidance,
an entity
has the
irrevocable option
to elect,
on a
contract-by-contract
basis, to measure
certain financial assets and
liabilities at fair value
at the inception of
the contract and, thereafter,
to reflect any changes
in fair value in
current earnings.
The Corporation
did not
make any
fair value
option election
as of
December 31,
2022 or
2021. See
Note 25
– Fair
Value
for additional information.
Revenue from contract with customers
See Note
26 –
Revenue from
Contracts with
Customers, for
a detailed
description of
the Corporation’s
policies on
the recognition
and presentation
of revenues from
contracts with customers,
including the
income recognition for
the insurance agency
commissions’
revenue.
Earnings per common share
Basic earnings per share
is calculated 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
preferred
stock
dividends
declared
but
not
yet
paid,
and
any
cumulative
preferred
stock
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
excludes
unvested
shares
of
restricted
stock
that
do
not
contain
non-forfeitable
dividend
rights.
The
computation of diluted earnings per share is similar to the computation
of basic earnings per share except that the number of weighted-
average
common
shares
is
increased
to
include
the
number
of
additional
common
shares
that
would
have
been
outstanding
if
the
dilutive common shares had been issued, referred to as potential common shares.
Potential dilutive
common shares
consist of
unvested shares
of restricted
stock that
do not
contain non-forfeitable
dividend rights,
warrants
outstanding
during
the
period,
and
common
stock
issued
under
the
assumed
exercise
of
stock
options,
if
any,
using
the
treasury stock
method.
This method
assumes that
the potential
dilutive common
shares are
issued and
outstanding and
the proceeds
from the exercise, in addition to the amount
of compensation cost attributable to future services, are used
to purchase common stock at
the
exercise
date.
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, stock options, and
warrants outstanding during the
period, if any,
that result in lower potential
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. 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
136
Accounting Standards Adopted in 2022
ASU
2022-06,
“Reference
Rate
Reform
(Topic
848):
Deferral
of
the
Sunset
Date
of
Topic
848”,
which
was
effective
upon
the
issuance
of
this
ASU
in
December
2022,
extends
the
sunset
(or
expiration
date)
of
ASC
Topic
848
from
December
31,
2022
to
December
31,
2024.
Notwithstanding,
the
Corporation
expects
to
follow
the
provisions
of
the
LIBOR
Act
for
the
transition
of
any
residual exposure after June 30, 2023.
The Corporation was not impacted by the adoption of the following 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”
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
137
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 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
TDRs recognition and
measurement guidance. As such,
the requirement to use a discounted
cash flow method for TDRs that
involve a concession that can only
be captured by means of this
method is no longer required and
the consideration of reasonably
expected TDRs is eliminated from
ASC Topic 326. In addition, the
ASU enhances disclosure
requirements for loan restructurings
by creditors made to borrowers
experiencing financial difficulty for
which the terms of the receivables
have been modified, regardless of
whether the refinancing is
accounted for as a new loan, 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 adopted the
amendments of this update during
the first quarter of 2023 using a
modified retrospective transition
method with respect to the portion of
the standard that relates to the
recognition and measurement of
TDRs (i.e. 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 January 1, 2023, the
Corporation recorded a cumulative
effect adjustment of
$
1
million,
after-tax, as a reduction to retained
earnings. In addition, the Corporation
performed the necessary data updates
to comply with the enhanced
disclosure requirements.
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.
ASU 2021-08, “Business
Combinations (Topic 805):
Accounting for Contract Assets and
Contract Liabilities From Contracts
With Customers”
In October 2021, the FASB issued
ASU 2021-08 which, among
others, requires that the acquirer
recognize and measure contract
assets and contract liabilities
acquired in a business combination
in accordance with Topic 606 and
provides certain practical
expedients.
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 will consider these
amendments on business
combinations completed on or after
the adoption date.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
138
NOTE 2 – MONEY MARKET
.
INVESTMENTS
Money market investments are composed of time deposits,
overnight deposits with other financial institutions,
and other short-term
investments with original maturities of three months or less.
Money market investments as of December 31, 2022 and 2021 were as follows:
2022
2021
(Dollars in thousands)
Time deposits with other financial institutions
(1) (2)
$
300
$
300
Overnight deposits with other financial institutions
(3)
541
1,200
Other short-term investments
(4)
1,184
1,182
$
2,025
$
2,682
(1)
Consists of time deposits segregated for compliance with the Puerto
Rico International Banking Law.
(2)
Interest rate of
0.40
% and
0.05
% as of December 31, 2022 and 2021, respectively.
(3)
Weighted-average interest rate
of
4.33
% and
0.07
% as of December 31, 2022 and 2021, respectively.
(4)
Weighted-average interest rate
of
0.14
% and
0.15
% as of December 31, 2022 and 2021, respectively.
As
of
December
31,
2022,
the
Corporation
had
$
0.5
million
(2021
-
$
1.2
million)
in
money
market
investments
pledged
as
collateral as part of margin calls associated to derivative contracts.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
139
NOTE 3 – DEBT SECURITIES
Available-for-Sale
Debt Securities
The amortized
cost, gross
unrealized gains
and losses
recorded in
OCL, ACL,
estimated fair
value,
and weighted-average
yield of
available-for-sale debt securities by contractual maturities as of
December 31, 2022 were as follows:
December 31, 2022
Amortized cost
(1)
Gross
ACL
Fair value
Unrealized
Weighted-
Gains
Losses
average yield%
(Dollars in thousands)
U.S. Treasury securities:
Due within one year
$
7,493
$
-
$
309
$
-
$
7,184
0.22
After 1 to 5 years
141,366
-
9,675
-
131,691
0.70
U.S. GSEs' obligations:
Due within one year
129,018
-
4,036
-
124,982
0.32
After 1 to 5 years
2,395,273
22
227,724
-
2,167,571
0.83
After 5 to 10 years
56,251
13
7,670
-
48,594
1.54
After 10 years
12,170
36
-
-
12,206
4.62
Puerto Rico government obligations:
After 10 years
(2)
3,331
-
755
375
2,201
-
United States and Puerto Rico government obligations
2,744,902
71
250,169
375
2,494,429
0.83
MBS:
FHLMC certificates:
After 1 to 5 years
4,235
-
169
-
4,066
2.33
After 5 to 10 years
204,085
-
19,061
-
185,024
1.55
After 10 years
1,092,289
-
186,558
-
905,731
1.38
1,300,609
-
205,788
-
1,094,821
1.41
GNMA certificates:
Due within one year
5
-
-
-
5
1.73
After 1 to 5 years
15,508
-
622
-
14,886
2.00
After 5 to 10 years
45,322
1
3,809
-
41,514
1.31
After 10 years
232,632
51
27,169
-
205,514
2.47
293,467
52
31,600
-
261,919
2.27
FNMA certificates:
After 1 to 5 years
9,685
-
521
-
9,164
1.76
After 5 to 10 years
400,223
-
36,871
-
363,352
1.70
After 10 years
1,186,635
124
186,757
-
1,000,002
1.38
1,596,543
124
224,149
-
1,372,518
1.46
Collateralized mortgage obligations issued or guaranteed
by the FHLMC, FNMA and GNMA ("CMOs"):
After 1 to 5 years
30,578
-
4,463
-
26,115
2.43
After 10 years
423,695
-
80,271
-
343,424
1.38
454,273
-
84,734
-
369,539
1.45
Private label:
After 10 years
7,903
-
2,026
83
5,794
6.83
Total MBS
3,652,795
176
548,297
83
3,104,591
1.52
Other
Due within one year
500
-
-
-
500
0.84
Total available-for-sale debt securities
$
6,398,197
$
247
$
798,466
$
458
$
5,599,520
1.22
(1)
Excludes accrued interest receivable on available-for-sale debt securities that totaled $
11.1
million as of December 31, 2022 reported as part of accrued interest receivable on loans and investment securities in the
consolidated statements of financial condition, and 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 the delinquency status of the underlying second mortgage loans collateral.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
140
The amortized
cost, gross
unrealized gains
and losses
recorded in
OCL, 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
ACL
Fair value
Unrealized
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. GSEs' 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 reported as part of accrued interest receivable on loans and investment securities in the
consolidated statements of financial condition, and 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 the delinquency status of the underlying second mortgage loans collateral.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
141
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 December 31, 2022 and 2021. The tables also include debt securities for
which an ACL was recorded.
As of December 31, 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. GSEs'
obligations
$
298,313
$
18,057
$
2,174,724
$
231,357
$
2,473,037
$
249,414
Puerto Rico government obligations
-
-
2,201
755
(1)
2,201
755
MBS:
FHLMC
263,184
45,776
831,637
160,012
1,094,821
205,788
GNMA
74,829
3,433
179,854
28,167
254,683
31,600
FNMA
424,178
51,289
938,625
172,860
1,362,803
224,149
CMOs
54,688
6,788
314,851
77,946
369,539
84,734
Private label
-
-
5,794
2,026
(1)
5,794
2,026
$
1,115,192
$
125,343
$
4,447,686
$
673,123
$
5,562,878
$
798,466
(1)
Unrealized losses do not include the credit loss component recorded
as part of the ACL. As of December 31, 2022, PRHFA
bond and private label MBS had an ACL of $
0.4
million and
$
0.1
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. GSEs'
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
142
There
were
no
sales
of
available-for-sale
debt
securities
during
the
years
ended
December
31,
2022
and
2021.
During
the
year
ended December
31, 2020, proceeds
from sales of
available-for-sale debt
securities amounted
to $
1.2
billion, including
gross realized
gains of
$
13.3
million and
gross realized
losses of
$
0.1
million. The
$
13.2
million net
gain was
realized on
tax-exempt
securities or
was realized at the
tax-exempt international
banking entity subsidiary,
which had no
effect in the
income tax expense
recorded during
the year ended December 31, 2020.
Assessment for Credit Losses
Debt securities
issued by
U.S. government
agencies,
U.S. GSEs,
and
the U.S.
Treasury,
including
notes and
MBS, accounted
for
substantially all of the total available-for
-sale portfolio as of December 31, 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
December
31,
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
$
5.8
million,
which
had
unrealized
losses of
approximately $
2.1
million as
of December
31, 2022,
of which
$
0.1
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 December 31,
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 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
and
the housing
price
index.
Under
this approach,
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
December 31, 2022
December 31, 2021
Weighted
Range
Weighted
Range
Average
Minimum
Maximum
Average
Minimum
Maximum
Discount rate
16.2%
16.2%
16.2%
12.9%
12.9%
12.9%
Prepayment rate
11.8%
1.5%
15.2%
15.2%
7.6%
24.9%
Projected Cumulative Loss Rate
5.6%
0.3%
15.6%
7.6%
0.2%
15.7%
The Corporation
evaluates if
a credit
loss exists,
primarily
by monitoring
adverse variances
in the
present value
of expected
cash
flows. As of December 31, 2022, the ACL for these
private label MBS was $
0.1
million, compared to $
0.8
million as of December 31,
2021.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
143
As
of
December
31,
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
$
1.1
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 December
31, 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.
The following
tables present
a roll-forward
by major
security type
for the
years ended
December 31,
2022, 2021,
and 2020
of the
ACL on available-for-sale debt securities:
Year
Ended December 31, 2022
Private label MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
797
$
308
$
1,105
Provision for credit losses - (benefit) expense
(501)
67
(434)
Net charge-offs
(213)
-
(213)
ACL on available-for-sale debt securities
$
83
$
375
$
458
Year
Ended December 31, 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
(69)
-
(69)
ACL on available-for-sale debt securities
$
797
$
308
$
1,105
Year
Ended December 31, 2020
Private label MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
-
$
-
$
-
Provision for credit losses - expense
1,333
308
1,641
Net charge-offs
(331)
-
(331)
ACL on available-for-sale debt securities
$
1,002
$
308
$
1,310
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
144
During
2022,
the
Corporation
recognized
$
86.1
million
of
interest
income
on
available-for-sale
debt
securities
(2021
-
$
62.7
million; 2020 - $
49.0
million), of which $
40.7
million was exempt (2021 - $
25.7
million; 2020 - $
38.5
million). The exempt securities
primarily relate to MBS and
government obligations held by
IBEs (as defined in the
International Banking Entity
Act of Puerto Rico),
whose interest income and sales are exempt from Puerto Rico income
taxation under that act.
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 December 31, 2022 and
2021 were as follows
:
December 31, 2022
Amortized cost
(1)
Gross Unrecognized
Fair value
Weighted-
Gains
Losses
ACL
average yield%
(Dollars in thousands)
Puerto Rico municipal bonds:
Due within one year
$
1,202
$
-
$
15
$
1,187
$
2
5.20
After 1 to 5 years
42,530
886
1,076
42,340
656
6.34
After 5 to 10 years
55,956
3,182
360
58,778
3,243
6.29
After 10 years
66,022
-
1,318
64,704
4,385
7.10
Total Puerto Rico municipal bonds
165,710
4,068
2,769
167,009
8,286
6.62
MBS:
FHLMC certificates:
After 5 to 10 years
$
21,443
$
-
$
746
$
20,697
$
-
3.03
After 10 years
19,362
-
888
18,474
-
4.21
40,805
-
1,634
39,171
-
3.59
GNMA certificates:
`
After 10 years
19,131
-
943
18,188
-
3.35
FNMA certificates:
After 1 to 5 years
9,621
-
396
9,225
-
3.48
After 10 years
72,347
-
3,155
69,192
-
4.14
81,968
-
-
3,551
78,417
-
4.06
CMOs
After 10 years
129,923
-
5,593
124,330
-
3.24
Total MBS
271,827
-
11,721
260,106
-
3.55
Total held-to-maturity debt securities
$
437,537
$
4,068
$
14,490
$
427,115
$
8,286
4.71
(1)
Excludes accrued interest receivable on held-to-maturity debt securities that totaled $
5.5
million as of December 31, 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
Weighted-
Gains
Losses
ACL
average yield%
(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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
145
During 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 unrecognized
losses, aggregated
by category and length of time that individual securities had been
in a continuous unrecognized loss position, as of December 31,
2022
and 2021, including debt securities for which an ACL was recorded:
As of December 31, 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
$
-
$
-
$
98,797
$
2,769
$
98,797
$
2,769
MBS:
FHLMC certificates
39,171
1,634
-
-
39,171
1,634
GNMA certificates
18,188
943
-
-
18,188
943
FNMA certificates
78,417
3,551
-
-
78,417
3,551
CMOs
124,330
5,593
-
-
124,330
5,593
Total held-to-maturity debt securities
$
260,106
$
11,721
$
98,797
$
2,769
$
358,903
$
14,490
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
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
146
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
December
31,
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.
The Corporation
performs periodic
credit quality
reviews on
these issuers.
All of
the Puerto
Rico municipal
bonds were
current as
to
scheduled
contractual
payments
as
of
December
31,
2022.
The
Puerto
Rico
municipal
bonds
had
an
ACL
of
$
8.3
million
as
of
December
31,
2022,
down
$
0.3
million
from
$
8.6
million
as
of
December
31,
2021,
mostly
related
to
a
reduction
in
qualitative
reserves driven by improvements in the underlying financial information
of certain issuers during 2022.
The following table
presents the activity
in the ACL for
held-to-maturity debt
securities by major
security type for
the years ended
December 31, 2022, 2021 and 2020:
Puerto Rico Municipal Bonds
Year
Ended
December 31, 2022
December 31, 2021
December 31, 2020
(In thousands)
Beginning Balance
$
8,571
$
8,845
$
-
Impact of adopting ASC 326
-
-
8,134
Initial allowance on PCD debt securities
-
-
1,269
Provision for credit losses - (benefit)
(285)
(274)
(558)
ACL on held-to-maturity debt securities
$
8,286
$
8,571
$
8,845
During the second quarter of 2019, the oversight board established
by 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
economic
and
fiscal
challenges
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
December 31,
2022 and
2021, the
Corporation had
no
outstanding securities
held to
maturity that
were classified
as
cash and cash equivalents.
During 2022,
the Corporation recognized
$
15.5
million of interest
income on
held-to-maturity debt
securities (2021
- $
8.8
million;
2020 -
$
7.6
million), of
which $
15.4
million was
exempt (2021
- $
8.8
million; 2020
- $
7.6
million). The
exempt securities
primarily
relate to
MBS held
by IBEs
(as defined
in the
International Banking
Entity Act
of Puerto
Rico), whose
interest income
and sales
are
exempt from Puerto Rico income taxation under that act; and tax-exempt Puerto
Rico municipal bonds.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
147
Credit Quality Indicators:
The held-to-maturity debt securities
portfolio consisted of GSEs
’
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. The asset categories are defined
below:
Pass –
Assets classified
as pass
have
a well-defined
primary source
of repayment,
with no
apparent risk,
strong financial
position,
minimal operating
risk, profitability,
liquidity and
strong capitalization
and include
assets categorized
as watch.
Assets classified
as
watch have
acceptable business
credit, but
borrowers
’
operations, cash
flow or
financial condition
evidence more
than average
risk
and requires additional level of supervision and attention from loan officers.
Special Mention
– Special
Mention assets
have potential
weaknesses that
deserve management’s
close attention.
If left uncorrected,
these potential weaknesses
may result in deterioration
of the repayment prospects
for the asset or
in the Corporation’s
credit position
at
some
future
date.
Special
Mention
assets
are
not
adversely
classified
and
do
not
expose
the
Corporation
to
sufficient
risk
to
warrant adverse classification.
Substandard – Substandard
assets are inadequately
protected by the
current sound worth
and paying capacity
of the obligor
or of the
collateral pledged, if any.
Assets so classified must have a well-defined weakness or weaknesses that jeopardize
the liquidation of the
debt. They are characterized by the distinct possibility that the institution will sustain some
loss if the deficiencies are not corrected.
Doubtful
–
Doubtful
classifications
have
all
the
weaknesses
inherent
in
those
classified
Substandard
with
the
added
characteristic
that
the
weaknesses
make
collection
or
liquidation
in
full
highly
questionable
and
improbable,
based
on
currently
known
facts,
conditions and values.
A Doubtful classification
may be appropriate
in cases where significant
risk exposures are
perceived, but loss
cannot be determined because of specific reasonable pending factors,
which may strengthen the credit in the near term.
Loss –
Assets classified
as Loss
are considered
uncollectible and
of such
little value
that their continuance
as bankable
assets is not
warranted.
This
classification
does
not
mean
that
the
asset
has
absolutely
no
recovery
or
salvage
value,
but
rather
that
it
is
not
practical or desirable to defer writing
off this asset even though partial
recovery may occur in the future. There
is little or no prospect
for near term improvement and no realistic strengthening action of
significance pending.
The
Corporation
periodically
reviews
its Puerto
Rico
municipal
bonds
to
evaluate
if
they are
properly
classified,
and to
measure
credit losses on
these securities. 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 December 31, 2022 and 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 December
31,
2022 and 2021. A security is considered to be past due once it is 30 days contractually
past due under the terms of the agreement.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
148
NOTE 4 – LOANS HELD FOR INVESTMENT
The
following
table
provides
information
about
the
loan
portfolio
held
for
investment
by
portfolio
segment
and
disaggregated
by
geographic locations
as of the indicated
dates:
As of December 31,
As of December 31,
2022
2021
(In thousands)
Puerto Rico and Virgin Islands region:
Residential mortgage loans, mainly secured by first mortgages
$
2,417,900
$
2,549,573
Construction loans
34,772
43,133
Commercial mortgage loans
1,834,204
1,702,231
C&I loans
1,860,109
1,946,597
Consumer loans
3,317,489
2,872,384
Loans held for investment
$
9,464,474
$
9,113,918
Florida region:
Residential mortgage loans, mainly secured by first mortgages
$
429,390
$
429,322
Construction loans
98,181
95,866
Commercial mortgage loans
524,647
465,238
C&I loans
1,026,154
940,654
Consumer loans
9,979
15,660
Loans held for investment
$
2,088,351
$
1,946,740
Total:
Residential mortgage loans, mainly secured by first mortgages
$
2,847,290
$
2,978,895
Construction loans
132,953
138,999
Commercial mortgage loans
2,358,851
2,167,469
C&I loans
(1)
2,886,263
2,887,251
Consumer loans
3,327,468
2,888,044
Loans held for investment
(2)
11,552,825
11,060,658
ACL on loans and finance leases
(260,464)
(269,030)
Loans held for investment, net
$
11,292,361
$
10,791,628
(1)
As of December 31, 2022 and 2021, includes $
838.5
million and $
952.1
million, respectively, of commercial loans that were secured by real estate and the
primary
source of repayment at origination was not dependent upon the
real estate.
(2)
Includes accretable fair value net purchase discounts of $
29.3
million and $
35.3
million as of December 31, 2022 and 2021, respectively.
As of
December 31,
2022,
and
2021,
the
Corporation
had net
deferred
origination
costs on
its loan
portfolio
amounting
to $
11.2
million
and
$
4.3
million,
respectively.
The total
loan
portfolio
is net
of unearned
income
of $
103.4
million
and
$
79.0
million
as of
December 31, 2022 and
2021, respectively,
of which $
99.2
million and $
75.8
million are related
to finance leases
as of December
31,
2022 and 2021, respectively.
As of
December 31,
2022,
the Corporation
was servicing
residential
mortgage
loans owned
by others
in
an
aggregate
amount
of
$
3.9
billion (2021
— $
4.0
billion), and
commercial loan
participations owned
by others
in an
aggregate amount
of $
305.1
million as
of December 31, 2022 (2021 — $
383.5
million).
Various
loans, mainly secured
by first mortgages,
were assigned
as collateral for
time deposits accounts,
public funds, borrowings,
and
related
unused
commitments.
Total
loans
carrying
value
pledged
as
collateral
amounted
to
$
4.3
billion
and
$
4.1
billion
as
of
December 31,
2022
and
2021,
respectively.
As
of
December
31,
2022,
loans
pledged
as
collateral
include
$
2.2
billion
of
pledged
collateral related
to the
Borrower-in-Custody
Program (the
“BIC Program”)
of the
FED which
remained undrawn
and $
1.8
billion of
loans pledged to the FHLB, compared to $
2.1
billion and $
1.8
billion, respectively, as of
December 31, 2021.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
149
The Corporation’s
aging of
the loan
portfolio held
for investment,
as well
as information
about nonaccrual
loans with
no ACL
by
portfolio classes as of December 31, 2022 and 2021 are as follows:
As of December 31, 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)
$
67,116
$
-
$
2,586
$
48,456
$
-
$
118,158
$
-
Conventional residential mortgage loans
(2) (7)
2,643,909
-
25,630
16,821
42,772
2,729,132
2,292
Commercial loans:
Construction loans
130,617
-
-
128
2,208
132,953
977
Commercial mortgage loans
(2) (7)
2,330,094
300
2,367
3,771
22,319
2,358,851
15,991
C&I loans
2,868,989
1,984
1,128
6,332
7,830
2,886,263
3,300
Consumer loans:
Auto loans
1,740,271
40,039
7,089
-
10,672
1,798,071
2,136
Finance leases
707,646
7,148
1,791
-
1,645
718,230
330
Personal loans
346,366
3,738
1,894
-
1,248
353,246
-
Credit cards
301,013
3,705
2,238
4,775
-
311,731
-
Other consumer loans
141,687
1,804
1,458
-
1,241
146,190
-
Total loans held for investment
$
11,277,708
$
58,718
$
46,181
$
80,283
$
89,935
$
11,552,825
$
25,026
(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 $
28.2
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 $
12.0
million as of December 31, 2022 ($
11.0
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 $
10.3
million as of December 31, 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 $
8.3
million as of December 31, 2022, primarily nonaccrual residential mortgage loans.
(5)
Nonaccrual loans exclude $
328.1
million of TDR loans that were in compliance with modified terms and in accrual status as of December 31, 2022.
(6)
Includes $
0.3
million of nonaccrual C&I loans with no ACL in the Florida region as of December 31, 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 December 31, 2022 amounted to $
6.1
million, $
65.2
million, and $
1.6
million,
respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
150
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 $
1.7
million, $
2.0
million and $
1.9
million for the years ended December
31, 2022, 2021, and 2020, respectively.
For the years
ended December
31, 2022,
2021, and
2020, the
cash interest
income recognized
on nonaccrual
loans amounted
to $
1.5
million, $
2.3
million, and $
2.0
million, respectively.
As of
December 31,
2022, the
recorded investment
on residential
mortgage loans
collateralized by
residential real
estate property
that
were
in
the
process
of
foreclosure
amounted
to
$
72.4
million,
including
$
29.4
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.
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,
C&I,
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 3 – Debt Securities.
For residential mortgage and consumer loans, the Corporation also evaluates credit
quality based on its interest accrual status.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
151
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
December
31,
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 December 31,
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
$
9,463
$
18,385
$
-
$
-
$
-
$
4,031
$
-
$
31,879
$
38,066
Criticized:
Special Mention
-
-
-
-
-
-
-
-
765
Substandard
-
-
-
-
-
2,893
-
2,893
4,302
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
9,463
$
18,385
$
-
$
-
$
-
$
6,924
$
-
$
34,772
$
43,133
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
391,589
$
141,456
$
363,115
$
296,954
$
193,795
$
267,793
$
1,026
$
1,655,728
$
1,395,569
Criticized:
Special Mention
1,198
-
3,583
6,919
12,042
121,673
-
145,415
259,263
Substandard
135
-
-
2,819
-
30,107
-
33,061
47,399
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
392,922
$
141,456
$
366,698
$
306,692
$
205,837
$
419,573
$
1,026
$
1,834,204
$
1,702,231
C&I
Risk Ratings:
Pass
$
297,932
$
195,460
$
184,856
$
315,987
$
88,484
$
179,201
$
527,652
$
1,789,572
$
1,852,552
Criticized:
Special Mention
138
912
-
500
9,867
2,631
29,176
43,224
32,650
Substandard
203
351
1,324
14,119
725
10,238
353
27,313
61,395
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total C&I loans
$
298,273
$
196,723
$
186,180
$
330,606
$
99,076
$
192,070
$
557,181
$
1,860,109
$
1,946,597
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
152
As of December 31,
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
$
48,536
$
42,841
$
-
$
14
$
-
$
-
$
6,790
$
98,181
$
95,866
Criticized:
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
48,536
$
42,841
$
-
$
14
$
-
$
-
$
6,790
$
98,181
$
95,866
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
176,131
$
70,525
$
41,413
$
54,839
$
71,404
$
70,316
$
18,556
$
503,184
$
404,304
Criticized:
Special Mention
-
-
6,986
13,309
-
-
-
20,295
60,618
Substandard
-
-
1,168
-
-
-
-
1,168
316
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
176,131
$
70,525
$
49,567
$
68,148
$
71,404
$
70,316
$
18,556
$
524,647
$
465,238
C&I
Risk Ratings:
Pass
$
277,637
$
163,210
$
77,027
$
223,504
$
66,484
$
35,028
$
136,261
$
979,151
$
826,823
Criticized:
Special Mention
-
-
-
5,974
-
11,931
-
17,905
49,946
Substandard
-
-
267
24,852
-
3,678
301
29,098
63,885
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total C&I loans
$
277,637
$
163,210
$
77,294
$
254,330
$
66,484
$
50,637
$
136,562
$
1,026,154
$
940,654
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
153
As of December 31,
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
$
57,999
$
61,226
$
-
$
14
$
-
$
4,031
$
6,790
$
130,060
$
133,932
Criticized:
Special Mention
-
-
-
-
-
-
-
-
765
Substandard
-
-
-
-
-
2,893
-
2,893
4,302
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
57,999
$
61,226
$
-
$
14
$
-
$
6,924
$
6,790
$
132,953
$
138,999
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
567,720
$
211,981
$
404,528
$
351,793
$
265,199
$
338,109
$
19,582
$
2,158,912
$
1,799,873
Criticized:
Special Mention
1,198
-
10,569
20,228
12,042
121,673
-
165,710
319,881
Substandard
135
-
1,168
2,819
-
30,107
-
34,229
47,715
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
569,053
$
211,981
$
416,265
$
374,840
$
277,241
$
489,889
$
19,582
$
2,358,851
$
2,167,469
C&I
Risk Ratings:
Pass
$
575,569
$
358,670
$
261,883
$
539,491
$
154,968
$
214,229
$
663,913
$
2,768,723
$
2,679,375
Criticized:
Special Mention
138
912
-
6,474
9,867
14,562
29,176
61,129
82,596
Substandard
203
351
1,591
38,971
725
13,916
654
56,411
125,280
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total C&I loans
$
575,910
$
359,933
$
263,474
$
584,936
$
165,560
$
242,707
$
693,743
$
2,886,263
$
2,887,251
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
154
The following
tables present the
amortized cost of
residential mortgage
loans by portfolio
classes and by
origination year
based on
accrual
status as
of
December
31,
2022,
and
the
amortized cost
of
residential
mortgage
loans
by
portfolio
classes based
on
accrual
status as of December 31, 2021:
As of December 31,
2022
As of
December 31,
2021
Term Loans
Amortized Cost Basis by Origination Year
(1)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Puerto Rico and Virgin Islands Region:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
700
$
693
$
802
$
1,407
$
3,784
$
110,030
$
-
$
117,416
$
124,652
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
700
$
693
$
802
$
1,407
$
3,784
$
110,030
$
-
$
117,416
$
124,652
Conventional residential mortgage loans:
Accrual Status:
Performing
$
172,628
$
75,397
$
31,885
$
47,911
$
72,285
$
1,864,907
$
-
$
2,265,013
$
2,376,946
Non-Performing
-
35
-
219
279
34,938
-
35,471
47,975
Total conventional residential mortgage loans
$
172,628
$
75,432
$
31,885
$
48,130
$
72,564
$
1,899,845
$
-
$
2,300,484
$
2,424,921
Total:
Accrual Status:
Performing
$
173,328
$
76,090
$
32,687
$
49,318
$
76,069
$
1,974,937
$
-
$
2,382,429
$
2,501,598
Non-Performing
-
35
-
219
279
34,938
-
35,471
47,975
Total residential mortgage loans in Puerto Rico
and Virgin Islands Region
$
173,328
$
76,125
$
32,687
$
49,537
$
76,348
$
2,009,875
$
-
$
2,417,900
$
2,549,573
(1)
Excludes accrued interest receivable.
As of December 31,
2022
As of
December 31,
2021
Term Loans
Amortized Cost Basis by Origination Year
(1)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Florida Region:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
742
$
-
$
742
$
740
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
-
$
-
$
-
$
-
$
-
$
742
$
-
$
742
$
740
Conventional residential mortgage loans:
Accrual Status:
Performing
$
82,968
$
49,479
$
31,405
$
31,144
$
37,268
$
189,083
$
-
$
421,347
$
421,430
Non-Performing
-
-
-
272
477
6,552
-
7,301
7,152
Total conventional residential mortgage loans
$
82,968
$
49,479
$
31,405
$
31,416
$
37,745
$
195,635
$
-
$
428,648
$
428,582
Total:
Accrual Status:
Performing
$
82,968
$
49,479
$
31,405
$
31,144
$
37,268
$
189,825
$
-
$
422,089
$
422,170
Non-Performing
-
-
-
272
477
6,552
-
7,301
7,152
Total residential mortgage loans in Florida region
$
82,968
$
49,479
$
31,405
$
31,416
$
37,745
$
196,377
$
-
$
429,390
$
429,322
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
155
As of December 31,
2022
As of
December 31,
2021
Term Loans
Amortized Cost Basis by Origination Year
(1)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Total:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
700
$
693
$
802
$
1,407
$
3,784
$
110,772
$
-
$
118,158
$
125,392
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
700
$
693
$
802
$
1,407
$
3,784
$
110,772
$
-
$
118,158
$
125,392
Conventional residential mortgage loans:
Accrual Status:
Performing
$
255,596
$
124,876
$
63,290
$
79,055
$
109,553
$
2,053,990
$
-
$
2,686,360
$
2,798,376
Non-Performing
-
35
-
491
756
41,490
-
42,772
55,127
Total conventional residential mortgage loans
$
255,596
$
124,911
$
63,290
$
79,546
$
110,309
$
2,095,480
$
-
$
2,729,132
$
2,853,503
Total:
Accrual Status:
Performing
$
256,296
$
125,569
$
64,092
$
80,462
$
113,337
$
2,164,762
$
-
$
2,804,518
$
2,923,768
Non-Performing
-
35
-
491
756
41,490
-
42,772
55,127
Total residential mortgage loans
$
256,296
$
125,604
$
64,092
$
80,953
$
114,093
$
2,206,252
$
-
$
2,847,290
$
2,978,895
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
156
The
following
tables present
the
amortized
cost
of
consumer
loans
by
portfolio
classes
and
by origination
year
based on
accrual
status as of December
31, 2022, and the amortized
cost of consumer loans
by portfolio classes based on
accrual status as of December
31, 2021:
As of December 31,
2022
As of
December 31,
2021
Term Loans
Amortized Cost Basis by Origination Year
(1)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Puerto Rico and Virgin Islands Regions:
Auto loans:
Accrual Status:
Performing
$
674,145
$
510,950
$
254,196
$
206,345
$
99,008
$
39,138
$
-
$
1,783,782
$
1,556,097
Non-Performing
1,666
2,140
1,596
2,508
1,385
1,301
-
10,596
6,684
Total auto loans
$
675,811
$
513,090
$
255,792
$
208,853
$
100,393
$
40,439
$
-
$
1,794,378
$
1,562,781
Finance leases:
Accrual Status:
Performing
$
292,995
$
192,435
$
88,196
$
81,186
$
48,332
$
13,441
$
-
$
716,585
$
574,139
Non-Performing
176
253
305
219
384
308
-
1,645
866
Total finance leases
$
293,171
$
192,688
$
88,501
$
81,405
$
48,716
$
13,749
$
-
$
718,230
$
575,005
Personal loans:
Accrual Status:
Performing
$
175,875
$
55,993
$
29,320
$
53,911
$
22,838
$
13,727
$
-
$
351,664
$
314,867
Non-Performing
348
249
135
289
112
115
-
1,248
1,208
Total personal loans
$
176,223
$
56,242
$
29,455
$
54,200
$
22,950
$
13,842
$
-
$
352,912
$
316,075
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
311,731
$
311,731
$
290,226
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
311,731
$
311,731
$
290,226
Other consumer loans:
Accrual Status:
Performing
$
79,630
$
21,488
$
9,345
$
11,941
$
4,030
$
3,761
$
8,921
$
139,116
$
126,734
Non-Performing
409
201
61
119
20
241
71
1,122
1,563
Total other consumer loans
$
80,039
$
21,689
$
9,406
$
12,060
$
4,050
$
4,002
$
8,992
$
140,238
$
128,297
Total:
Performing
$
1,222,645
$
780,866
$
381,057
$
353,383
$
174,208
$
70,067
$
320,652
$
3,302,878
$
2,862,063
Non-Performing
2,599
2,843
2,097
3,135
1,901
1,965
71
14,611
10,321
Total consumer loans in Puerto Rico and Virgin
Islands region
$
1,225,244
$
783,709
$
383,154
$
356,518
$
176,109
$
72,032
$
320,723
$
3,317,489
$
2,872,384
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
157
As of December 31,
2022
As of
December 31,
2021
Term Loans
Amortized Cost Basis by Origination Year
(1)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Florida Region:
Auto loans:
Accrual Status:
Performing
$
-
$
-
$
-
$
305
$
2,333
$
979
$
-
$
3,617
$
8,759
Non-Performing
-
-
-
-
36
40
-
76
-
Total auto loans
$
-
$
-
$
-
$
305
$
2,369
$
1,019
$
-
$
3,693
$
8,759
Finance leases:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-Performing
-
-
-
-
-
-
-
-
-
Total finance leases
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Personal loans:
Accrual Status:
Performing
$
254
$
71
$
9
$
-
$
-
$
-
$
-
$
334
$
107
Non-Performing
-
-
-
-
-
-
-
-
-
Total personal loans
$
254
$
71
$
9
$
-
$
-
$
-
$
-
$
334
$
107
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Other consumer loans:
Accrual Status:
Performing
$
49
$
231
$
464
$
-
$
39
$
2,588
$
2,462
$
5,833
$
6,661
Non-Performing
-
-
-
-
-
21
98
119
133
Total other consumer loans
$
49
$
231
$
464
$
-
$
39
$
2,609
$
2,560
$
5,952
$
6,794
Total:
Performing
$
303
$
302
$
473
$
305
$
2,372
$
3,567
$
2,462
$
9,784
$
15,527
Non-Performing
-
-
-
-
36
61
98
195
133
Total consumer loans in Florida region
$
303
$
302
$
473
$
305
$
2,408
$
3,628
$
2,560
$
9,979
$
15,660
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
158
As of December 31,
2022
As of
December 31,
2021
Term Loans
Amortized Cost Basis by Origination Year
(1)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Total:
Auto loans:
Accrual Status:
Performing
$
674,145
$
510,950
$
254,196
$
206,650
$
101,341
$
40,117
$
-
$
1,787,399
$
1,564,856
Non-Performing
1,666
2,140
1,596
2,508
1,421
1,341
-
10,672
6,684
Total auto loans
$
675,811
$
513,090
$
255,792
$
209,158
$
102,762
$
41,458
$
-
$
1,798,071
$
1,571,540
Finance leases:
Accrual Status:
Performing
$
292,995
$
192,435
$
88,196
$
81,186
$
48,332
$
13,441
$
-
$
716,585
$
574,139
Non-Performing
176
253
305
219
384
308
-
1,645
866
Total finance leases
$
293,171
$
192,688
$
88,501
$
81,405
$
48,716
$
13,749
$
-
$
718,230
$
575,005
Personal loans:
Accrual Status:
Performing
$
176,129
$
56,064
$
29,329
$
53,911
$
22,838
$
13,727
$
-
$
351,998
$
314,974
Non-Performing
348
249
135
289
112
115
-
1,248
1,208
Total personal loans
$
176,477
$
56,313
$
29,464
$
54,200
$
22,950
$
13,842
$
-
$
353,246
$
316,182
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
311,731
$
311,731
$
290,226
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
311,731
$
311,731
$
290,226
Other consumer loans:
Accrual Status:
Performing
$
79,679
$
21,719
$
9,809
$
11,941
$
4,069
$
6,349
$
11,383
$
144,949
$
133,395
Non-Performing
409
201
61
119
20
262
169
1,241
1,696
Total other consumer loans
$
80,088
$
21,920
$
9,870
$
12,060
$
4,089
$
6,611
$
11,552
$
146,190
$
135,091
Total:
Performing
$
1,222,948
$
781,168
$
381,530
$
353,688
$
176,580
$
73,634
$
323,114
$
3,312,662
$
2,877,590
Non-Performing
2,599
2,843
2,097
3,135
1,937
2,026
169
14,806
10,454
Total consumer loans
$
1,225,547
$
784,011
$
383,627
$
356,823
$
178,517
$
75,660
$
323,283
$
3,327,468
$
2,888,044
(1)
Excludes accrued interest receivable.
Accrued interest receivable
on loans totaled
$
53.1
million as of
December 31, 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
159
The
following
tables
present
information
about
collateral
dependent
loans
that
were
individually
evaluated
for
purposes
of
determining the ACL as of December 31, 2022 and 2021
:
As of December 31, 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:
Conventional residential mortgage loans
$
36,206
$
2,571
$
-
$
36,206
$
2,571
Commercial loans:
Construction loans
-
-
956
956
-
Commercial mortgage loans
2,466
897
62,453
64,919
897
C&I loans
1,513
322
17,590
19,103
322
Consumer loans:
Personal loans
56
1
64
120
1
Other consumer loans
207
29
-
207
29
$
40,448
$
3,820
$
81,063
$
121,511
$
3,820
As of 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:
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:
Personal loans
78
1
-
78
1
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
December 2022
decreased to
70
%, compared
to
78
% as
of December
31, 2021,
mainly driven by the payoff of a $
16.2
million C&I loan in the Puerto Rico region that had a loan-to-value ratio of
116
%.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
160
Purchases and Sales of Loans
In
the
ordinary
course
of
business,
the
Corporation
enters
into
securitization
transactions
and
whole
loan
sales
with
GNMA
and
GSEs,
such
as
FNMA
and
FHLMC.
During
the
years
ended
December
31,
2022,
2021,
and
2020,
loans
pooled
into GNMA
MBS
amounted
to approximately
$
144.5
million,
$
190.8
million and
$
219.6
million, respectively,
of which
the Corporation
recognized
a
net gain on
sale of $
4.2
million, $
8.8
million, and $
9.9
million for the
years ended
December 31, 2022,
2021, and 2020,
respectively.
Also, during
the years ended
December 31,
2022, 2021,
and 2020, the
Corporation sold approximately
$
93.8
million, $
328.2
million,
and
$
255.0
million,
respectively,
of
performing
residential
mortgage
loans
to
FNMA
and
FHLMC,
of
which
the
Corporation
recognized a net gain on
sale of $
4.2
million, $
11.4
million, and $
8.3
million for the years ended
December 31, 2022, 2021, and
2020,
respectively.
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
December
31,
2022
and
2021,
rebooked
GNMA
delinquent
loans
that
were
included in the residential mortgage loan portfolio amounted to $
10.4
million and $
7.2
million, respectively.
During
the
years
ended
December
31,
2022,
2021,
and
2020,
the
Corporation
repurchased,
pursuant
to
the
aforementioned
repurchase
option,
$
8.2
million,
$
1.1
million,
and
$
55.0
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.
Historically, losses
on these repurchases of GNMA
delinquent loans have been immaterial
and
no provision has been made at the time of sale.
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 $
0.4
million, $
0.3
million, and $
42
thousand during
the years
ended December
31, 2022,
2021, and
2020, respectively.
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
year ended
December 31,
2022, the
Corporation sold
a $
35.2
million C&I
loan participation
in the
Puerto Rico
region
and
a $
23.9
million
criticized
C&I loan
participation
in the
Florida
region.
Also, during
the year
ended
December 31,
2021,
a $
3.1
million
construction
loan
in
the Puerto
Rico
region
and
four criticized
commercial
loan participations
in the
Florida region
totaling
$
43.1
million
were sold.
Further,
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 charge to the provision for credit losses in the third quarter of
2021.
Finally, the
Corporation participated in the
Main Street Lending program
established by the FED under
the CARES Act of 2020,
as
amended,
to
support
lending
to
small
and
medium-sized
businesses
that
were
in
sound
financial
condition
before
the
onset
of
the
COVID-19 pandemic.
Under this
program, the
Corporation originated
loans to
borrowers meeting
the terms
and requirements
of the
program, including requirements
as to eligibility,
use of proceeds and
priority,
and sold a 95% participation
interest in these loans
to a
special purpose
vehicle
(the “Main
Street SPV”)
organized
by the
FED to
purchase the
participation
interests from
eligible lenders,
including the
Corporation. During
the fourth
quarter of
2020, the
Corporation originated
23
loans under
this program
totaling $
184.4
million in principal amount and sold participation interests totaling $
175.1
million to the Main Street SPV.
During
the
years
ended
December
31,
2022,
2021,
and
2020,
the
Corporation
purchased
C&I
loan
participations
in
the
Florida
region totaling $
135.4
million, $
174.7
million, and $
40.0
million, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
161
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
$
11.6
billion as
of December
31, 2022,
credit risk
concentration was
approximately
79
% in
Puerto Rico,
18
% in
the U.S.,
and
3
% in
the USVI and BVI.
As of
December
31,
2022,
the Corporation
had
$
169.8
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
December
31,
2022,
approximately
$
102.7
million consisted
of loans
extended
to municipalities
in Puerto
Rico that
are general
obligations supported
by
assigned
property
tax
revenues,
and
$
28.9
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
loans
extended
to
municipalities,
the
Corporation’s
exposure
to
the
Puerto
Rico
government
as
of
December
31,
2022
included
$
10.8
million in loans
granted to an affiliate
of the Puerto
Rico Electric
Power Authority (“PREPA”)
and $
27.4
million in loans to
an
agency of the Puerto Rico central government.
In
addition,
as
of
December
31,
2022,
the
Corporation
had
$
84.7
million
in
exposure
to
residential
mortgage
loans
that
are
guaranteed by the
PRHFA, a
government 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
December
31,
2022,
the
Corporation
had
$
38.0
million in
loans to
USVI government
public corporations,
compared to
$
39.2
million as
of December
31, 2021.
As of
December 31,
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 December
31, 2022,
the Corporation’s
total TDR
loans held
for investment
amounted to
$
366.7
million, of
which $
328.1
million
were in
accruing status.
See Note
1 –
Nature of
Business and
Summary Significant
of Accounting
Policies, for
information on
when
the
Corporation
classifies
TDR
loans
as
either
accrual
or
nonaccrual
loans.
The
total
TDR
loans
held
for
investment
consisted
of
$
240.6
million of residential mortgage loans, $
49.6
million of C&I loans, $
63.3
million of commercial mortgage loans, $
1.2
million of
construction loans, and $
12.0
million of consumer loans.
As of December 31, 2022,
the Corporation included as TDRs
$
0.7
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 $
53.9
million as of December 31, 2022, compared with $
57.6
million as of December 31, 2021. As of December 31,
2022, the
Corporation has committed to lend up to an additional $
4
thousand on TDR consumer loans.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
162
The following tables present TDR loans completed during 2022,
2021 and 2020:
Year Ended December 31,
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)
Conventional residential mortgage loans
$
433
$
1,551
$
242
$
-
$
4,874
$
7,100
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
245
5,178
-
467
5,890
C&I loans
2,402
-
618
825
1,083
4,928
Consumer loans:
Auto loans
2,877
232
345
-
-
3,454
Finance leases
-
573
-
-
18
591
Personal loans
99
171
105
-
19
394
Credit cards
(2)
-
-
-
-
816
816
Other consumer loans
112
272
16
43
-
443
Total TDRs
$
5,923
$
3,044
$
6,504
$
868
$
7,277
$
23,616
(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.
(2)
Concession consists of reduction in interest rate and revocation
of revolving line privileges.
Year Ended December 31,
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)
Conventional residential mortgage loans
$
365
$
859
$
2,647
$
-
$
3,723
$
7,594
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
10,586
-
637
11,223
C&I loans
-
300
9,100
-
508
9,908
Consumer loans:
Auto loans
1,888
433
277
-
-
2,598
Finance leases
-
645
26
-
26
697
Personal loans
13
60
387
-
44
504
Credit cards
(2)
-
-
-
-
1,426
1,426
Other consumer loans
110
79
-
77
-
266
Total TDRs
$
2,376
$
2,376
$
23,023
$
77
$
6,364
$
34,216
(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.
(2)
Concession consists of reduction in interest rate and revocation
of revolving line privileges.
Year Ended December 31,
2020
Interest rate
below market
Maturity or
term extension
Combination of
reduction in
interest rate
and extension
of maturity
Forgiveness of
principal
and/or interest
Forbearance
Agreement
Other
(1)
Total
(In thousands)
Conventional residential mortgage
loans
$
18
$
545
$
2,044
$
-
$
-
$
5,700
$
8,307
Construction loans
-
-
-
-
-
-
-
Commercial mortgage loans
-
-
271
-
-
553
824
C&I loans
31
-
4,107
-
18,386
-
22,524
Consumer loans:
Auto loans
1,902
413
275
-
-
33
2,623
Finance leases
-
408
-
-
-
-
408
Personal loans
38
74
145
-
-
48
305
Credit cards
(2)
-
-
-
-
-
783
783
Other consumer loans
219
83
24
219
-
-
545
Total TDRs
$
2,208
$
1,523
$
6,866
$
219
$
18,386
$
7,117
$
36,319
(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.
(2)
Concession consists of reduction in interest rate and revocation
of revolving line privileges.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
163
Year Ended December 31,
2022
2021
2020
Number of
contracts
Pre-modification
Amortized Cost
Post-modification
Amortized Cost
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)
Conventional residential mortgage loans
68
$
7,165
$
7,100
66
$
7,687
$
7,594
103
$
9,027
$
8,307
Construction loans
-
-
-
-
-
-
-
-
-
Commercial mortgage loans
3
5,897
5,890
7
11,285
11,223
5
824
824
C&I loans
17
5,156
4,928
6
10,031
9,908
14
22,544
22,524
Consumer loans:
Auto loans
168
3,404
3,454
134
2,601
2,598
163
2,635
2,623
Finance leases
33
592
591
42
692
697
29
408
408
Personal loans
26
366
394
46
497
504
30
306
305
Credit Cards
170
815
816
246
1,426
1,426
159
783
783
Other consumer loans
115
434
443
65
266
266
145
613
545
Total TDRs
600
$
23,829
$
23,616
612
$
34,485
$
34,216
648
$
37,140
$
36,319
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
2022, 2021
and 2020,
and had
become TDR
loans during
the 12-months
preceding the
default date, were as follows:
Year Ended December 31,
2022
2021
2020
Number of
contracts
Amortized Cost
Number of
contracts
Amortized Cost
Number of
contracts
Amortized Cost
(Dollars in thousands)
Conventional residential mortgage loans
2
$
124
-
$
-
4
$
465
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
-
C&I loans
-
-
-
-
3
124
Consumer loans:
Auto loans
96
2,049
92
1,625
55
947
Finance leases
1
16
-
-
1
5
Personal loans
-
-
1
1
1
7
Credit cards
28
156
24
126
23
93
Other consumer loans
8
30
11
45
58
209
Total
135
$
2,375
128
$
1,797
145
$
1,850
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 2022, 2021, and 2020, there were no new Note A and B restructurings.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
164
NOTE 5 – ALLOWANCE
FOR CREDIT LOSSES FOR LOANS AND FINANCE LEASES
The following tables present the activity in the ACL on loans and finance leases by portfolio
segment for the indicated periods:
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Year Ended December
31,
2022
(In thousands)
ACL:
Beginning balance
$
74,837
$
4,048
$
52,771
$
34,284
$
103,090
$
269,030
Provision for credit losses - (benefit) expense
(8,734)
(2,342)
(18,994)
(1,770)
57,519
25,679
Charge-offs
(6,890)
(123)
(85)
(2,067)
(48,165)
(57,330)
Recoveries
3,547
725
1,372
2,459
14,982
23,085
Ending balance
$
62,760
$
2,308
$
35,064
$
32,906
$
127,426
$
260,464
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Year Ended December
31,
2021
(In thousands)
ACL:
Beginning balance
$
120,311
$
5,380
$
109,342
$
37,944
$
112,910
$
385,887
Provision for credit losses - (benefit) expense
(16,957)
(1,408)
(55,358)
(8,549)
20,552
(61,720)
Charge-offs
(33,294)
(87)
(1,494)
(1,887)
(43,948)
(80,710)
Recoveries
4,777
163
281
6,776
13,576
25,573
Ending balance
$
74,837
$
4,048
$
52,771
$
34,284
$
103,090
$
269,030
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Year Ended December
31, 2020
(In thousands)
ACL:
Beginning balance, prior to adoption of CECL
$
44,806
$
2,370
$
39,194
$
15,198
$
53,571
$
155,139
Impact of adopting CECL
49,837
797
(19,306)
14,731
35,106
81,165
Allowance established for acquired PCD loans
12,739
-
9,723
1,830
4,452
28,744
Provision for credit losses - expense
(1)
22,427
2,105
81,125
6,627
56,433
168,717
Charge-offs
(11,017)
(76)
(3,330)
(3,634)
(46,483)
(64,540)
Recoveries
1,519
184
1,936
3,192
9,831
16,662
Ending balance
$
120,311
$
5,380
$
109,342
$
37,944
$
112,910
$
385,887
(1)
Includes a $
37.5
million charge related to the establishment of the initial reserves
for non-PCD loans acquired in conjunction with the
BSPR acquisition consisting of: (i) a $
13.5
million
charge related to non-PCD residential mortgage loans;
(ii) a $
9.2
million charge related to non-PCD commercial mortgage loans,
(iii) a $
4.6
million charge related to non-PCD C&I loans,
and (iv) a $
10.2
million charge related to non-PCD consumer loans.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
165
The
Corporation
estimates
the
ACL
following
the
methodologies
described
in
Note
1
–
Nature
of
Business
and
Summary
of
Significant Accounting Policies, above,
for each portfolio segment.
During 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
the
continued
conflict
in
Ukraine,
the
overall
inflationary environment
and a potential
slowdown in economic
activity as a
result of the
FED’s policy
actions to control
inflationary
economic conditions. For periods prior to 2022, the Corporation calculated
the ACL using the baseline scenario.
As
of
December
31,
2022,
the
ACL
for
loans
and
finance
leases
was
$
260.5
million,
down
approximately
$
8.5
million
from
December 31,
2021. The
ACL reduction
for commercial
and construction
loans was
$
20.8
million during
2022, primarily
reflecting
reduced COVID-19 uncertainties, particularly
on loans in the hotel,
transportation and entertainment industries;
and, to a lesser extent,
the effect
during the
second half
of 2022
of reserve
releases totaling
$
4.8
million associated
with two
adversely classified
loans that
were paid off
or sold, partially offset
by an increase in
the size of the
loan portfolio. In addition,
there was an ACL
reduction of $
12.0
million for residential mortgage loans,
partially offset by a $
24.3
million increase in the ACL for
consumer loans. The net reduction
in
the ACL for residential mortgage
loans was primarily driven
by the overall decrease
in the size of this portfolio
and, to a lesser extent,
a
decrease
in
qualitative
adjustments
due
to
improvements
in
underlying
portfolio
metrics.
The
ACL
increase
for
consumer
loans
consisted
of
charges
to
the
provision
of
$
57.5
million
recorded
in
2022
mainly
due
to
a
deterioration
in
the
outlook
of
certain
macroeconomic variables, such as
the regional unemployment rate,
and an increasing trend in delinquency
and charge-off levels in
the
consumer loan
portfolios.
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.
Total
net
charge-offs
decreased
by
$
20.9
million
to
$
34.2
million,
when
compared
to
2021.
The
variance
consisted
of
a
$
25.2
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;
partially
offset
by
a $
2.8
million increase
in net
charge-offs
on consumer
and
finance leases,
primarily
in the
personal loans
portfolio,
and
a
$
1.5
million decrease in net recoveries in the commercial and construction loan portfolios.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
166
The tables below
present the ACL
related to loans
and finance leases
and the carrying
values of loans
by portfolio segment
as of
December 31, 2022 and 2021:
As of December 31,
2022
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
$
2,847,290
$
132,953
$
2,358,851
$
2,886,263
$
3,327,468
$
11,552,825
Allowance for credit losses
62,760
2,308
35,064
32,906
127,426
260,464
Allowance for credit losses to
amortized cost
2.20
%
1.74
%
1.49
%
1.14
%
3.83
%
2.25
%
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 December 31, 2022 and 2021, includes $
6.8
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.
See Note 29 –
Regulatory
Matters,
Commitments,
and
Contingencies
for
information
on off
-balance
sheet
exposures
as of
December 31,
2022
and
2021.
The
Corporation
estimates
the
ACL
for
these
off-balance
sheet
exposures
following
the
methodology
described
in
Note
1
–
Nature
of
Business and Summary of Accounting Policies. As of
December 31, 2022, the ACL for off-balance
sheet credit exposures increased to
$
4.3
million, from $
1.5
million as of
December 31, 2021,
mainly driven by
an increase in the
balance of unfunded
loan commitments
principally due to newly originated facilities which remained undrawn
as of December 31, 2022.
The
following
table
presents
the
activity
in
the
ACL
for
unfunded
loan
commitments
and
standby
letters
of
credit
for
the
years
ended December 31, 2022, 2021 and 2020:
Year
Ended December 31,
2022
2021
2020
(In thousands)
Beginning Balance
$
1,537
$
5,105
$
-
Impact of adopting CECL
-
-
3,922
Provision for credit losses - expense (benefit)
2,736
(3,568)
1,183
Ending balance
$
4,273
$
1,537
$
5,105
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
167
NOTE 6 – PREMISES AND EQUIPMENT
Premises and equipment comprise:
Useful Life Range In Years
As of December 31,
Minimum
Maximum
2022
2021
(Dollars in thousands)
Buildings and improvements
10
35
$
135,802
$
138,524
Leasehold improvements
1
10
76,390
79,419
Furniture, equipment and software
2
10
155,567
148,171
367,759
366,114
Accumulated depreciation and amortization
(264,233)
(251,659)
103,526
114,455
Land
24,485
23,873
Projects in progress
14,924
8,089
Total premises and equipment,
net
$
142,935
$
146,417
Depreciation and
amortization expense
amounted to
$
22.3
million, $
25.0
million, and
$
20.1
million for
the years ended
December
31, 2022, 2021, and 2020, respectively.
During
the year
ended December
31, 2021,
the Corporation
received insurance
proceeds of
$
0.6
million related
to the
settlement
and collection of an
insurance claim associated with a
damaged property.
This amount is included as
part of other non-interest
income
in the consolidated statements of income.
During
the year
ended December
31,
2020, the
Corporation
received
insurance proceeds
of $
5.0
million
resulting
from
the final
settlement
of
the
business
interruption
insurance
claim related
to
lost profits
caused
by Hurricanes
Irma
and
Maria. This
amount
is
included
as
part
of
other
non-interest
income
in
the
consolidated
statements
of
income.
In
addition,
during
2020,
the
Corporation
received insurance
proceeds of
$
1.2
million related
to hurricane-related
expenses claims
recorded as
a contra-account
of non-interest
expenses, primarily consisting of occupancy and equipment costs.
See Note 25 - Fair Value
for information on write-downs recorded on long-lived assets held for
sale as of December 31, 2022. Also,
see Note
20 –
Other
Non-Interest
Income
for
gains on
sales of
fixed
assets recognized
during
the years
ended December
31,
2022,
2021, and 2020.
NOTE 7
–
OTHER REAL ESTATE
OWNED
The following table presents the OREO inventory as of the indicated dates:
December 31,
2022
2021
(In thousands)
OREO
OREO balances, carrying value:
Residential
(1)
$
24,025
$
29,533
Commercial
5,852
7,331
Construction
1,764
3,984
Total
$
31,641
$
40,848
(1)
Excludes $
23.5
million and
$
22.2
million
as of
December 31,
2022 and
2021,
respectively,
of foreclosures
that meet
the conditions
of ASC
Subtopic 310-40
and are
presented as
a
receivable as part of other assets in the consolidated statements
of financial condition.
See Note 25 - Fair Value
for information on write-downs recorded on
OREO properties during the years ended
December 31, 2022,
2021, and 2020.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
168
NOTE 8 – RELATED-PARTY
TRANSACTIONS
The
Corporation
has
granted
loans
to
its
directors,
executive
officers,
and
certain
related
individuals
or
entities
in
the
ordinary
course of business. The movement and balance of these loans were as follows:
Amount
(In thousands)
Balance at December 31,
2020
(1)
$
504
New loans
286
Payments
(108)
Other changes
261
Balance at December 31,
2021
(1)
943
New loans
89
Payments
(149)
Balance at December 31,
2022
(1)
$
883
(1) Includes loans granted to related parties which were then
sold in the secondary market.
These loans
were made
subject to
the provisions
of the
Federal Reserve’s
Regulation O
- “Loans
to Executive
Officers, Directors
and
Principal
Shareholders
of
Member
Banks,”
which
governs
the
permissible
lending
relationships
between
a
financial
institution
and its executive officers, directors, principal
shareholders, their families,
and related parties.
Amounts related to changes in the status
of those who are considered
related parties are reported as other
changes in the table above,
which, for 2021, was mainly
related to the
addition
of
three
new
executive
officers
and
the
departure
of
one
executive
officer.
There
were
no
changes
in
the
status of
related
parties during 2022.
From
time
to
time,
the
Corporation,
in
the
ordinary
course
of
its
business,
obtains
services
from
related
parties
or
makes
contributions to non-profit organizations that have some association
with the Corporation.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
169
NOTE 9 – GOODWILL AND OTHER INTANGIBLES
Goodwill
Goodwill
as
of
each
of
December
31,
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 2022, management performed a qualitative analysis over the carrying amount of each relevant reporting units’
goodwill and concluded that it is more-likely-than-not that the fair value of the reporting units exceeded their carrying value. 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 the reporting units exceeded their carrying amount.
In the qualitative assessment performed for each reporting unit, the Corporation evaluated events and circumstances that could
impact the fair value including the following:
● Macroeconomic conditions, such as improvement or deterioration in general economic conditions;
● Industry and market considerations;
● Interest rate fluctuations;
● Overall financial performance of the entity;
● Performance of industry peers over the last year; and
● Recent market transactions.
Management considered positive and negative evidence obtained during the evaluation of significant events and circumstances and
evaluated such information to conclude that it is more likely than not that the reporting unit’s fair value is greater than their carrying
amount; thus, quantitative tests were not required.
As
a
result,
no
impairment
charges
for
goodwill
were
recorded
during
the
year
ended December 31, 2022.
There were
no
changes in the
carrying amount
of goodwill during
the year ended
December 31, 2022.
The changes in
the carrying
amount of goodwill attributable to operating segments 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) (2)
385
533
3,313
-
4,231
Goodwill, December 31, 2020
$
959
$
2,733
$
8,248
$
26,692
$
38,632
Measurement period adjustment
(1) (2)
53
74
(148)
-
(21)
Goodwill, December 31, 2021
$
1,012
$
2,807
$
8,100
$
26,692
$
38,611
(1)
Recognized in connection with the BSPR acquisition on September
1, 2020.
(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").
Merger and Restructuring Costs – BSPR Acquisition
In connection
with the
BSPR acquisition
on September
1, 2020,
the Corporation
recognized acquisition
expenses of
$
26.4
million
and $
26.5
million during the years ended
December 31, 2021 and
2020, respectively.
No
acquisition expenses were recognized
during
the
year
ended
December
31,
2022.
Acquisition,
integration,
and
restructuring
expenses
were
included
in
merger
and
restructuring
costs in
the consolidated
statements
of income,
and
consisted
primarily
of legal
fees, severance
and
personnel-related costs,
service
contracts
cancellation
penalties,
valuation
services,
systems
conversion,
and
other
integration
efforts,
as
well
as
accelerated
depreciation
charges related
to planned
closures and
consolidation of
branches in
accordance with
the Corporation’s
integration
and
restructuring plan.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
170
Other Intangible Assets
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
December 31,
December 31,
2022
2021
(Dollars in thousands)
Core deposit intangible:
Gross amount
$
87,544
$
87,544
Accumulated amortization
(66,644)
(58,973)
Net carrying amount
$
20,900
$
28,571
Remaining amortization period (in years)
7.0
8.0
Purchased credit card relationship intangible:
Gross amount
$
3,800
$
3,800
Accumulated amortization
(3,595)
(2,602)
Net carrying amount
$
205
$
1,198
Remaining amortization period (in years)
0.7
1.7
Insurance customer relationship intangible:
Gross amount
$
1,067
$
1,067
Accumulated amortization
(1,054)
(902)
Net carrying amount
$
13
$
165
Remaining amortization period (in years)
0.1
1.1
During
the
years
ended
December
31,
2022,
2021,
and
2020,
the
Corporation
recognized
$
8.8
million,
$
11.4
million,
and
$
5.9
million, respectively,
in amortization expense on its other intangibles subject to amortization.
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 December 31, 2022.
The estimated
aggregate annual
amortization expense
related to the
intangible assets
subject to amortization
for future periods
was
as follows as of December 31, 2022:
(In thousands)
2023
$
7,736
2024
6,416
2025
3,509
2026
872
2027
872
2028 and after
1,713
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
171
NOTE 10 – 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 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
December
31,
2022
and
2021,
these
Junior
Subordinated Deferrable Debentures amounted to $
183.8
million.
During the third
quarter of 2020,
the Corporation completed
the repurchase of
$
0.4
million of TRuPs
of the FBP
Statutory Trust
I,
which resulted in
a commensurate reduction
in the related Floating
Rate Junior Subordinated
Debentures. The Corporation’s
purchase
price equated
to
75
% of
the $
0.4
million par
value. The
25
% discount
resulted in
a gain
of approximately
$
0.1
million. This
gain is
reflected in the consolidated statements of income as gain on early extinguishment
of debt.
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
December 31, 2022,
the Corporation was
current on all
interest payments due on its subordinated debt.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
172
Private Label MBS
During
2004
and
2005,
an unaffiliated
party,
referred
to in
this subsection
as the
seller,
established
a
series of
statutory
trusts
to
effect
the
securitization
of
mortgage
loans
and
the
sale
of
trust
certificates
(“private
label
MBS”).
The
seller
initially
provided
the
servicing for
a fee, which
is senior to
the obligations to
pay private label
MBS holders. The
seller then entered
into a sales
agreement
through
which
it sold
and
issued
the
private
label
MBS in
favor
of
the
Corporation’s
banking
subsidiary,
FirstBank.
Currently,
the
Bank is
the sole
owner of
these private
label MBS;
the servicing
of the
underlying
residential mortgages
that generate
the principal
and interest
cash flows is
performed by
another third
party,
which receives
a servicing
fee. These
private label
MBS are variable
-rate
securities indexed
to
3-month LIBOR
plus a spread.
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
December
31,
2022,
the
amortized
cost
and
fair
value
of
these
private
label
MBS
amounted
to
$
7.9
million
and
$
5.8
million,
respectively,
with
a
weighted
average
yield
of
6.83
%,
which
is
included
as
part
of
the
Corporation’s
available-for-sale debt securities portfolio.
As described in Note 3 – Debt Securities,
the ACL on these private label MBS amounted
to
$
0.1
million as of December 31, 2022.
Investment in Unconsolidated Entity
On
February
16,
2011,
FirstBank
sold
an
asset
portfolio
consisting
of
performing
and
nonaccrual
construction,
commercial
mortgage,
and
C&I
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
173
Servicing Assets (MSRs)
The
Corporation
typically
transfers
first
lien
residential
mortgage
loans in
conjunction
with
GNMA
securitization
transactions
in
which the
loans are
exchanged for
cash or
securities that
are readily
redeemed for
cash proceeds
and servicing
rights. The
securities
issued
through
these
transactions
are
guaranteed
by
GNMA
and,
under
seller/servicer
agreements,
the
Corporation
is
required
to
service
the
loans
in
accordance
with
the
issuers’
servicing
guidelines
and
standards.
As
of
December
31,
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.
The changes in MSRs are show below for the indicated dates:
Year
Ended December 31,
2022
2021
2020
(In thousands)
Balance at beginning of year
$
30,986
$
33,071
$
26,762
Purchases of servicing assets
(1)
-
-
7,781
Capitalization of servicing assets
3,122
5,194
4,864
Amortization
(4,978)
(7,215)
(5,777)
Temporary
impairment recoveries (charges), net
66
124
(206)
Other
(2)
(159)
(188)
(353)
Balance at end of year
$
29,037
$
30,986
$
33,071
(1)
Represents MSRs acquired in the BSPR acquisition.
(2)
Mainly represents adjustments related to the repurchase
of loans serviced for others, including MSRs related to
loans previously serviced for BSPR and eliminated
as part of the acquisition in the third quarter of 2020.
Impairment
charges
are
recognized
through
a
valuation
allowance
for
each
individual
stratum
of
servicing
assets.
The
valuation
allowance
is adjusted
to reflect
the amount,
if any,
by which
the cost
basis of
the servicing
asset for
a given
stratum of
loans being
serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing
asset for a given stratum is not recognized.
Changes in the impairment allowance were as follows for the indicated periods:
Year
Ended December 31,
2022
2021
2020
(In thousands)
Balance at beginning of year
$
78
$
202
$
73
Temporary impairment
charges
-
-
301
OTTI of servicing assets
-
-
(77)
Recoveries
(66)
(124)
(95)
Balance at end of year
$
12
$
78
$
202
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
174
The components
of net servicing
income, included as
part of mortgage
banking activities in
the consolidated statements
of income,
are shown below for the indicated periods:
Year
Ended December 31,
2022
2021
2020
(In thousands)
Servicing fees
$
11,096
$
12,176
$
9,268
Late charges and prepayment penalties
823
697
570
Adjustment for loans repurchased
(159)
(188)
(353)
Other
-
(1)
-
Servicing income, gross
11,760
12,684
9,485
Amortization and impairment of servicing assets
(4,912)
(7,091)
(5,983)
Servicing income, net
$
6,848
$
5,593
$
3,502
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
Year Ended
December 31, 2022
Constant prepayment rate:
Government-guaranteed mortgage loans
6.7
%
18.3
%
4.8
%
Conventional conforming mortgage loans
7.4
%
18.4
%
3.4
%
Conventional non-conforming mortgage loans
6.0
%
21.9
%
3.6
%
Discount rate:
Government-guaranteed mortgage loans
11.7
%
12.0
%
11.5
%
Conventional conforming mortgage loans
9.7
%
10.0
%
9.5
%
Conventional non-conforming mortgage loans
12.5
%
14.5
%
11.5
%
Year Ended
December 31, 2021
Constant prepayment rate:
Government-guaranteed mortgage loans
6.2
%
17.1
%
3.7
%
Conventional conforming mortgage loans
6.2
%
18.2
%
2.8
%
Conventional non-conforming mortgage loans
6.4
%
14.5
%
4.4
%
Discount rate:
Government-guaranteed mortgage loans
12.0
%
12.0
%
12.0
%
Conventional conforming mortgage loans
10.0
%
10.0
%
10.0
%
Conventional non-conforming mortgage loans
12.8
%
14.5
%
12.0
%
Year Ended
December 31, 2020
Constant prepayment rate:
Government-guaranteed mortgage loans
6.1
%
16.0
%
3.9
%
Conventional conforming mortgage loans
6.3
%
19.0
%
3.0
%
Conventional non-conforming mortgage loans
6.3
%
18.0
%
4.3
%
Discount rate:
Government-guaranteed mortgage loans
12.0
%
12.0
%
12.0
%
Conventional conforming mortgage loans
10.0
%
10.0
%
10.0
%
Conventional non-conforming mortgage loans
12.3
%
14.5
%
12.0
%
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
175
The weighted
averages of the
key economic
assumptions that the
Corporation used
in its valuation
model and the
sensitivity of the
current fair value
to immediate
10
% and
20
% adverse changes
in those assumptions
for mortgage loans
as of December
31, 2022 and
2021 were as follows:
December 31,
December 31,
2022
2021
(In thousands)
Carrying amount of servicing assets
$
29,037
$
30,986
Fair value
$
44,710
$
42,132
Weighted-average
expected life (in years)
7.80
7.96
Constant prepayment rate (weighted-average annual
rate)
6.40
%
6.55
%
Decrease in fair value due to 10% adverse change
$
1,048
$
1,027
Decrease in fair value due to 20% adverse change
$
2,054
$
2,011
Discount rate (weighted-average annual rate)
10.69
%
11.17
%
Decrease in fair value due to 10% adverse change
$
1,925
$
1,852
Decrease in fair value due to 20% adverse change
$
3,704
$
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
.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
176
NOTE 11 – DEPOSITS AND RELATED
INTEREST
The following table summarizes deposit balances as of the indicated dates:
December 31,
2022
2021
(In thousands)
Type of account and interest rate:
Non-interest-bearing deposit accounts
$
6,112,884
$
7,027,513
Interest-bearing saving accounts
3,902,888
4,729,387
Interest-bearing checking accounts
3,770,993
3,492,645
Certificates of deposit ("CDs")
2,250,876
2,434,932
Brokered CDs
105,826
100,417
Total
$
16,143,467
$
17,784,894
The
weighted-average
interest
rate
on
total
interest-bearing
deposits
as
of
December 31,
2022
and
2021
was
1.03
%
and
0.31
%,
respectively.
As
of
December 31,
2022,
the
aggregate
amount
of
unplanned
overdrafts
of
demand
deposits
that
were
reclassified
as
loans
amounted
to
$
1.7
million
(2021
-
$
1.6
million).
Pre-arranged
overdrafts
lines
of
credit,
also
reported
as
loans,
amounted
to
$
24.5
million as of December 31, 2022 (2021 - $
24.2
million).
The following table presents the contractual maturities of CDs, including brokered
CDs, as of December 31, 2022:
Total
(In thousands)
Three months or less
$
640,532
Over three months to six months
288,407
Over six months to one year
593,915
Over one year to two years
517,970
Over two years to three years
178,158
Over three years to four years
38,952
Over four years to five years
92,103
Over five years
6,665
Total
$
2,356,702
Total
U.S. time
deposits with
balances of
more than
$250,000 amounted
to $
1.0
billion for
each of
the years
ended December
31,
2022
and 2021.
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 December 31,
2022, unamortized
broker placement
fees amounted
to $
0.3
million (2021
- $
0.2
million),
which are amortized over the contractual maturity of the brokered CDs under
the interest method.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
177
Brokered CDs mature as follows:
December 31,
2022
(In thousands)
Three months or less
$
42,681
Over six months to one year
12,986
Over one year to three years
35,440
Over three years to five years
14,719
Total
$
105,826
As of
December 31,
2022,
deposit
accounts
issued
to
government
agencies
amounted
to $
2.8
billion
(2021
-
$
3.3
billion).
These
deposits are insured by the FDIC up to the applicable limits. The uninsured
portions were collateralized by securities and loans with an
amortized cost
of $
3.1
billion (2021
- $
3.4
billion) and
an estimated
market value
of $
2.7
billion (2021
- $
3.3
billion). In
addition to
securities and loans,
as of December
31, 2022, the
Corporation used $
200.0
million in letters of
credit issued by
the FHLB as pledges
for public deposits
in the Virgin
Islands. As of December
31, 2022, the Corporation
had $
2.3
billion of government
deposits in Puerto
Rico
(2021
-
$
2.7
billion),
$
442.8
million
in
the
Virgin
Islands
(2021
-
$
568.4
million)
and
$
11.6
million
in
Florida
(2021
-
$
9.6
million).
A table showing interest expense on deposits for the indicated periods
follows:
Year Ended
December 31,
2022
2021
2020
(In thousands)
Interest-bearing checking accounts
$
15,568
$
5,776
$
5,933
Savings
11,191
6,586
11,116
CDs
18,102
26,138
43,350
Brokered CDs
1,500
2,982
7,989
Total
$
46,361
$
41,482
$
68,388
The
total
interest
expense
on deposits
included
the
amortization
of
broker
placement
fees
related
to
brokered
CDs
amounting
to
$
0.1
million, $
0.2
million, and
$
0.5
million for
2022, 2021
and 2020,
respectively.
Total
interest expense
also included
$
0.5
million,
$
1.3
million and
$
1.0
million for
2022, 2021,
and 2020,
respectively,
for the
accretion of premiums
related to
time deposits assumed
in the BSPR acquisition.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
178
NOTE 12 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (repurchase agreements)
as of the indicated dates consisted of the following:
December 31,
2022
2021
(In thousands)
Short-term Fixed-rate repurchase agreements
(1)
$
75,133
$
-
Long-term Fixed-rate repurchase agreements
(2)
-
300,000
$
75,133
$
300,000
(1)
Weighted-average interest rate
of
4.55
% as of December 31, 2022.
(2)
Weighted-average interest rate
of
3.35
% as of December 31, 2021. During the first quarter of 2021, the
interest rate related to securities sold under agreement to repurchase
totaling $
200
million changed from a variable rate (3-month LIBOR plus
130
to
132
basis points) to a fixed rate of
3.90
% after the end of a pre-specified lockout period.
Of the $
300.0
million in long-term
repurchase agreements
outstanding as of
December 31, 2021,
$
100.0
million matured and
were
repaid
in
the
first
quarter
of
2022
and
the
remaining
$
200.0
million
were
repaid
prior
to
maturity
upon
the
exercise
of
the
counterparty’s
call
option
in
the
fourth
quarter
of
2022.
In
addition,
the
Corporation
added
$
75.1
million
in
short-term
repurchase
agreements reflecting actions taken as part of management’s
liquidity and funding needs.
Repurchase agreements mature as follows as of the indicated date:
December 31,
2022
(In thousands)
Within one month
$
25,133
Over one month to three months
50,000
Total
$
75,133
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
179
The following securities were sold under agreements to repurchase:
As of December 31,
2022
Underlying Securities
Amortized Cost
of Underlying
Securities
Balance of
Borrowing
Approximate
Fair Value of
Underlying
Securities
Weighted Average
Interest Rate of
Security
(Dollars in thousands)
U.S. government-sponsored agencies
$
60,081
$
50,134
$
54,093
0.62
%
MBS
29,959
24,999
27,010
2.08
%
Total
$
90,040
$
75,133
$
81,103
Accrued interest receivable
$
137
As of December 31,
2021
Underlying Securities
Amortized Cost
of Underlying
Securities
Balance of
Borrowing
Approximate
Fair Value of
Underlying
Securities
Weighted Average
Interest Rate of
Security
(Dollars in thousands)
U.S. government-sponsored agencies
$
-
$
-
$
-
-
%
MBS
319,225
300,000
321,180
1.33
%
Total
$
319,225
$
300,000
$
321,180
Accrued interest receivable
$
599
As
of
December
31,
2022
and
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 December
31, 2022
and 2021,
repurchase agreements
were fully
collateralized and
not offset
in the consolidated
statements of financial
condition. See Note
24
–
Derivative Instruments and
Hedging
Activities for information on rights of set-off associated
to economic undesignated hedges.
The maximum aggregate
balance of repurchase
agreements outstanding
at any month-end
during each of
the year ended
December
31, 2022 and 2021 was $
300.0
million. The average balance during 2022 was $
194.9
million (2021 - $
300.5
million).
Repurchase agreements as of December 31, 2022, grouped by
counterparty, were as follows:
Weighted-Average
Counterparty
Amount
Maturity (In Months)
(Dollars in thousands)
JP Morgan Chase
$
75,133
1
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
180
NOTE 13 – ADVANCES
FROM THE FEDERAL HOME LOAN BANK (“FHLB
”)
The following is a summary of the advances from the FHLB as of the indicated dates:
December 31,
December 31,
2022
2021
(In thousands)
Short-term
Fixed
-rate advances from FHLB
(1)
$
475,000
$
-
Long-term
Fixed
-rate advances from FHLB
(2)
200,000
200,000
$
675,000
$
200,000
(1)
Weighted-average interest rate of
4.56
% as of December 31, 2022.
(2)
Weighted-average interest rate of
4.25
% and
2.16
% as of December 31, 2022 and 2021, respectively.
Advances from FHLB mature as follows as of the indicated date:
December 31, 2022
(In thousands)
Within one month
$
350,000
Over one to three months
125,000
Over three to five years
200,000
Total
$
675,000
The $
200.0
million in
FHLB advances
outstanding as
of December
31, 2021
matured and
were repaid
during the
third quarter
of
2022. In
addition, during
the fourth
quarter of
2022, the
Corporation added
$
475.0
million of
short-term FHLB
advances and
$
200.0
million of long-term FHLB advances.
The maximum
aggregate balance
of advances
from the FHLB
outstanding at
any month-end
during the
years ended
December 31,
2022 and
2021 was
$
675.0
million and
$
440.0
million, respectively.
The total
average balance
of FHLB
advances during
2022 was
$
179.5
million (2021 - $
354.1
million).
The Corporation
receives advances
and applies
for the
issuance of
letters of
credit from
the FHLB
under an
Advances, Collateral
Pledge, and
Security Agreement
(the “Collateral
Agreement”), which
requires the
Corporation to
maintain a
minimum of
qualifying
mortgage
collateral
or
Treasury
or
U.S.
agencies
MBS
collateral,
as
applicable.
The
amount
of
collateral
required
for
an
advance
incorporates a
collateral discount
or “haircut,”
which is incorporated
into the member’s
pledge and determined
by the FHLB.
Haircut
refers to the percentage
by which an asset’s
market value is reduced
for the purpose of collateral
levels. As of December
31, 2022 and
2021, the
estimated value
of specific
mortgage loans
pledged as
collateral amounted
to $
1.3
billion and
$
1.4
billion, respectively,
as
computed
by
the
FHLB
for
collateral
purposes,
which
represents
a
haircut
of
14
%
and
17
%
as
of
December
31,
2022
and
2021,
respectively.
The
carrying
value
of
such
loans
as
of
December
31,
2022
amounted
to
$
1.8
billion
(2021
-
$
1.8
billion).
As
of
December
31,
2022,
the
estimated
value
of
U.S.
government-sponsored
agencies’
obligations
and
U.S.
agencies
MBS
pledged
as
collateral
amounted
to $
238.1
million.
As of
December
31,
2022,
the Corporation
had
additional
capacity
of approximately
$
644.2
million on
this credit
facility based
on collateral
pledged
at the
FHLB, adjusted
by a
haircut reflecting
the perceived
risk associated
with the collateral.
Advances may
be repaid
prior to maturity,
in whole or
in part, at
the option of
the borrower
upon payment
of any
applicable
fee specified
in the
contract
governing
such advance.
In
calculating
the fee,
due
consideration
is given
to (i)
all
relevant
factors,
including,
but
not limited
to,
any
and
all applicable
costs of
repurchasing
and/or prepaying
any
associated
liabilities and/or
hedges
entered
into
with
respect
to
the
applicable
advance;
(ii)
the
financial
characteristics,
in
their
entirety,
of
the
advance
being
prepaid;
and (iii),
in the
case of
adjustable-rate
advances,
the expected
future earnings
of the
replacement
borrowing
as long
as the
replacement borrowing
is at least
equal to
the original
advance’s
par value
and the
replacement borrowing’s
tenor is
at least
equal to
the remaining maturity of the prepaid advance.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
181
NOTE 14 – OTHER BORROWINGS
Junior Subordinated Debentures
Junior subordinated debentures, as of the indicated dates, consisted of:
December 31,
December 31,
(In thousands)
2022
2021
Floating rate junior subordinated debentures (FBP Statutory Trust
I)
(1) (3)
$
65,205
$
65,205
Floating rate junior subordinated debentures (FBP Statutory Trust
II)
(2)(3)
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
(
7.49
% as of December 31, 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
(
7.25
% as of December 31, 2022 and
2.71
%
as of December 31, 2021).
(3)
See Note 10 - Non-Consolidated Variable
Interest Entities and Servicing Assets for additional information on
the nature and terms of these debentures.
Loans Payable
The
Corporation
participates
in
the
BIC
Program
of
the
FED.
Through
the
BIC
Program,
a
broad
range
of
loans
(including
commercial,
consumer,
and residential
mortgages)
may be
pledged as
collateral for
borrowings through
the FED
Discount Window.
As
of
December
31,
2022,
pledged
collateral
that
is
related
to
this
credit
facility
amounted
to
$
2.2
billion,
mainly
commercial,
consumer,
and
residential
mortgage
loans,
which
after
a
margin
“haircut”
to
discount
the
value
of
collateral
pledged,
represents
approximately $
1.3
billion of credit
availability under
this program.
The FED Discount
Window program
provides the opportunity
to
access a
low-rate short-term
source of
funding in
a high
volatility market
environment. There
were
no
outstanding borrowings
under
the FED Discount Window as of December
31, 2022 and 2021.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
182
NOTE 15 – EARNINGS PER COMMON
.
SHARE
The calculations of earnings per common share for the years ended December 31,
2022, 2021, and 2020 are as follows:
Year
Ended December 31,
2022
2021
2020
(In thousands, except per share information)
Net income
$
305,072
$
281,025
$
102,273
Less: Preferred stock dividends
-
(2,453)
(2,676)
Less: Excess of redemption value over carrying value of Series A through E
Preferred Stock redeemed
-
(1,234)
-
Net income attributable to common stockholders
$
305,072
$
277,338
$
99,597
Weighted-Average
Shares:
Average common
shares outstanding
190,805
210,122
216,904
Average potential
dilutive common shares
1,163
1,178
764
Average common
shares outstanding - assuming dilution
191,968
211,300
217,668
Earnings per common share:
Basic
$
1.60
$
1.32
$
0.46
Diluted
$
1.59
$
1.31
$
0.46
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. For 2021, net income attributable
to common stockholders was
also adjusted due
to the one
-time effect
to retained
earnings of the
excess of the
redemption value
paid over the
carrying value of
the
Series A through E Preferred Stock redeemed as discussed in
Note 17 – Stockholders’ Equity.
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
during the
years ended
December 31,
2022, 2021
and 2020.
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
183
NOTE 16 – STOCK-BASED
.
COMPENSATION
On
April
29,
2008,
the
Corporation’s
stockholders
approved
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
December
31,
2022,
there
were
3,830,165
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
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 stock
granted to
directors are
generally subject
to vesting
on the
one-year
anniversary of the grant date.
Common shares issued during the year
ended December 31, 2022 in connection with
restricted
stock awards were reissued from treasury shares.
The following table summarizes the restricted stock activity under the Omnibus
Plan during the years ended December 31, 2022
and 2021:
2022
2021
Number of
Weighted-
Number of
Weighted-
shares of
Average
shares of
Average
restricted
Grant Date
restricted
Grant Date
stock
Fair Value
stock
Fair Value
Unvested shares outstanding at beginning of year
1,148,775
$
6.61
1,320,723
$
5.74
Granted
(1)
327,195
13.21
324,360
11.47
Forfeited
(15,108)
8.79
(82,486)
6.42
Vested
(522,371)
6.13
(413,822)
7.69
Unvested shares outstanding at end of year
938,491
$
9.14
1,148,775
$
6.61
(1)
For the year ended December 31, 2022, includes
27,529
shares of restricted stock awarded to independent directors and
299,666
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
year ended December 31, 2021,
29,291
shares of
restricted stock awarded to independent directors and
295,069
shares of restricted stock awarded to employees, of which
19,804
shares were granted to retirement-eligible employees
and thus charged to earnings as of the grant date.
For the
years ended
December 31,
2022, 2021,
and 2020,
the Corporation
recognized $
3.7
million, $
3.5
million, and
$
3.2
million,
respectively,
of
stock-based
compensation
expense
related
to
restricted
stock
awards.
As
of
December
31,
2022,
there
was
$
3.8
million of total unrecognized compensation cost related to
unvested shares of restricted stock that the Corporation expects to recognize
over a weighted average period of
1.5
years.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
184
Performance Units
Under the Omnibus Plan, the Corporation may award
performance units to 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 at the end of a three-year performance period. 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
during the
year ended
December 31,
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
during the years
ended December 31, 2022
and 2021:
Year
Ended
Year
Ended
(Number of units)
December 31,
2022
December 31,
2021
Performance units at beginning of year
814,899
1,006,768
Additions
166,669
160,485
Vested
(1)
(189,645)
(304,408)
Forfeited
-
(47,946)
Performance units as of December 31, 2022
791,923
814,899
(1)
Units vested during 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 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
common
stock
on
the
respective date
of the grant.
For the
years ended
December 31,
2022, 2021,
and 2020,
the Corporation
recognized $
1.7
million, $
2.0
million, and $
1.8
million, respectively,
of stock-based compensation
expense related
to performance units.
As of December
31, 2022,
there was
$
2.5
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.
Other awards
Under
the Omnibus
Plan,
the Corporation
may
grant
shares of
unrestricted
stock to
plan
participants.
During the
third
quarter
of
2020, the
Corporation granted
to its independent
directors
19,157
shares of unrestricted
stock that were
fully vested
at the time
of the
grant
date.
For
the
year
ended
December
31,
2020,
the
Corporation
recognized
$
0.1
million
of
stock-based
compensation
expense
related to unrestricted stock awards. There were
no
grants of unrestricted stock in 2022 and 2021.
Shares withheld
During the year ended
December 31, 2022, the
Corporation withheld
205,807
shares (2021 –
214,374
shares) of the restricted
stock
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
185
NOTE 17 –
STOCKHOLDERS’
EQUITY
Stock Repurchase Programs
During the
first quarter
of 2022
the Corporation
completed the
$
300
million stock
repurchase program
approved by
the Board
of
Directors on
April 26, 2021
by purchasing though
open market transactions
3,409,697
shares of common
stock at an
average price of
$
14.66
for a total purchase price of approximately $
50
million.
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,
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,
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
and does
not have
an expiration
date.
Under this
stock repurchase
program,
the Corporation
repurchased
during
the
year
ended
December
31,
2022,
16,003,674
shares
of
common
stock
through
open
market
transactions
at
an
average
purchase
price of
$
14.06
per share
for
a total
price
of approximately
$
225
million.
As of
December
31, 2022,
the Corporation
has
remaining authorization to repurchase approximately $
125
million of common stock.
During
the
year
ended
December
31,
2022,
First
BanCorp.
repurchased
19,413,371
shares
for
a
total
purchase
price
of
approximately $
275
million under all stock repurchase programs.
The shares received are held as treasury stock.
Common Stock
The following table shows the change in shares of common stock outstanding for
the years ended December 31, 2022, 2021 and 2020:
Total
Number of Shares
2022
2021
2020
Common stock outstanding, beginning balance
201,826,505
218,235,064
217,359,337
Common stock repurchased
(1)
(19,619,178)
(16,954,841)
(51,814)
Common stock reissued/issued under stock-based compensation
plan
516,840
628,768
930,627
Restricted stock forfeited
(15,108)
(82,486)
(3,086)
Common stock outstanding, ending balances
182,709,059
201,826,505
218,235,064
(1)
For 2022, 2021 and 2020 includes
205,807
,
214,374
and
51,814
shares, respectively, of common stock
surrender to cover officers' payroll and income taxes.
For
the
years
ended
December
31,
2022,
2021
and
2020,
total
cash
dividends
declared
on
shares
of
common
stock
amounted
to
$
88.2
million,
$
65.4
million,
and
$
43.8
million,
respectively.
On
February 9, 2023
the
Corporation
announced
that
its
Board
of
Directors
had
declared
a
quarterly
cash
dividend
of
$
0.14
per
common
share,
which
represents
an
increase
of
17
%
or
$
0.02
per
common
share
compared
to
its
most
recent
dividend
paid
in
December
2022.
The
dividend
is
payable
on
March 10, 2023
to
shareholders of
record at
the close
of business
on
February 24, 2023
. 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
186
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
then
outstanding
shares
of
Series
A
through
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 during the year ended
December 31, 2022. For the years
ended December 31, 2021 and 2020,
total cash dividends paid on
shares of preferred stock amounted to $
2.5
million and $
2.7
million, respectively.
Treasury Stock
The following table shows the change in shares of treasury stock for the years ended December
31,
2022, 2021 and 2020.
Total
Number of Shares
2022
2021
2020
Treasury stock, beginning balance
21,836,611
4,799,284
4,744,384
Common stock repurchased
(1)
19,619,178
16,954,841
51,814
Common stock reissued under stock-based compensation plan
(516,840)
-
-
Restricted stock forfeited
15,108
82,486
3,086
Treasury stock, ending balances
40,954,057
21,836,611
4,799,284
(1)
For 2022, 2021 and 2020 includes
205,807
,
214,374
and
51,814
shares, respectively, of common stock
surrender to cover officers' payroll and income taxes.
FirstBank Statutory Reserve (Legal Surplus)
The
Puerto
Rico
Banking
Law
of
1933,
as
amended
(the
“Puerto
Rico
Banking
Law”),
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 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.
During the years ended
December 31, 2022
and 2021,
$
30.9
million and
$
28.3
million, respectively,
was transferred
to the
legal surplus
reserve. FirstBank’s
legal surplus
reserve, included
as
part
of
retained
earnings
in
the
Corporation’s
consolidated
statements
of
financial
condition,
amounted
to
$
168.5
million
and
$
137.6
million as of December 31, 2022 and 2021, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
187
NOTE 18 – OTHER COMPREHENSIVE (LOSS) INCOME
The following table presents change in accumulated other comprehensive (loss)
income for the years ended December 31, 2022,
2021, and 2020:
Changes in Accumulated Other Comprehensive
(Loss) Income by Component
(1)
Year ended December 31,
2022
2021
2020
(In thousands)
Unrealized net holding (losses) gains on available-for-sale
debt securities:
Beginning balance
$
(87,390)
$
55,725
$
6,764
Other comprehensive (loss) income
(718,582)
(143,115)
48,961
Ending balance
$
(805,972)
$
(87,390)
$
55,725
Adjustment of pension and postretirement
benefit plans:
Beginning balance
$
3,391
$
(270)
$
-
Other comprehensive (loss) income
(2,197)
3,661
(270)
Ending balance
$
1,194
$
3,391
$
(270)
____________________
(1) All amounts presented are net of tax.
The following table presents the amounts reclassified out of each component
of accumulated other comprehensive (loss) income for
the years ended December 31, 2022, 2021, and 2020:
Reclassifications Out of Accumulated Other
Comprehensive (Loss) Income
Affected Line Item in the Consolidated
Statements of Income
Year ended
December 31,
2022
2021
2020
(In thousands)
Unrealized net holding (losses) gains on
available-for-sale debt securities:
Realized gain on sales
Net gain on investment securities
$
-
$
-
$
(13,198)
Adjustment of pension and postretirement
benefit plans:
Amortization of net loss
Other expenses
3
1
-
Total before tax
$
3
$
1
$
(13,198)
Income tax expense
(1)
-
-
Total, net of tax
$
2
$
1
$
(13,198)
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
188
NOTE 19 – 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 (income) pursuant
to the ASC Topic 715,
Compensation-Retirement Benefits.
The following
table presents
the changes
in projected
benefit obligation
and changes
in plan
assets for
the years
ended December
31, 2022 and 2021:
December 31, 2022
December 31, 2021
(In thousands)
Changes in projected benefit obligation:
Projected benefit obligation at the beginning of period, defined benefit
pension
plans
$
97,867
$
108,253
Interest cost
2,614
2,473
Actuarial gain
(1)
(21,265)
(6,699)
Benefits paid
(5,708)
(6,160)
Projected benefit obligation at the end of period, pension plans
$
73,508
$
97,867
Projected benefit obligation, other postretirement benefit plan
182
195
Projected benefit obligation at the end of period
$
73,690
$
98,062
Changes in plan assets:
Fair value of plan assets at the beginning of period
$
103,487
$
105,963
Actual return on plan assets - (loss) gain
(20,590)
3,684
Benefits paid
(5,708)
(6,160)
Fair value of pension plan assets at the end of period
(2)
$
77,189
$
103,487
Net asset, pension plans
3,681
5,620
Net benefit obligation, other postretirement benefit plan
(182)
(195)
Net asset
$
3,499
$
5,425
(1)
Significant components of the Pension Plans’ actuarial gain that
changed the benefit obligation were mainly related to updates
in discount rates.
(2)
Other postretirement plan did not contain any assets as of
December 31, 2022 and 2021.
The weighted-average
discount rate
used to
determine
the benefit
obligation
as of
December
31, 2022
and
2021, was
5.43
% and
2.77
%,
respectively.
The
discount
rate
is
estimated
as
the
single
equivalent
rate
such
that
the
present
value
of
the
plan’s
projected
benefit obligation
cash flows
using the
single rate
equals the
present value
of those
cash flows
using the
above mean
actuarial yield
curve.
In
developing
the
expected
long-term
rate
of
return
assumption,
the
Corporation
evaluated
input
from
a
consultant
and
the
Corporation’s
long-term inflation
assumptions and
interest rate
scenarios. Projected
returns are
based on
the same
asset categories
as
the plan using
well-known broad
indexes. Expected
returns are based
on historical
returns with adjustments
to reflect a
more realistic
future return. The Corporation anticipated
that the Plan’s portfolio
would generate a long-term rate of
return of
4.80
% and
4.43
% as of
December 31, 2022 and 2021. Adjustments are done
by categories, taking into consideration current and future
market conditions. The
Corporation also considered
historical returns on
its plan assets to
review the expected
rate of return. The
investment policy statement
for
the
Pension
Plans
includes
the
following:
(i)
liability
hedging
assets
to
reduce
funded
status
risk,
(ii)
diversified
return
seeking
assets to reduce
equity risk,
and (iii) establishes
different glidepaths
specific for
each plan
to systematically reduce
risk as
the funded
status improves.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
189
The following
table presents
information
for
the plans
with a
projected
benefit obligation
and accumulated
benefit obligation
in
excess of plan assets for the years ended December 31, 2022 and 2021:
December 31, 2022
December 31, 2021
(In thousands)
Projected benefit obligation
$
48,501
$
195
Accumulated benefit obligation
48,501
195
Fair value of plan assets
$
46,398
$
-
The following
table presents
the components
of net
periodic benefit
for the
years ended
December 31,
2022 and
2021, and
for the
period from September 1, 2020 to December 31, 2020:
Affected Line Item
Period from
in the Consolidated
September 1, 2020 to
Statements of Income
December 31, 2022
December 31, 2021
December 31, 2020
(In thousands)
Net periodic benefit, pension plans:
Interest cost
Other expenses
$
2,614
$
2,473
$
900
Expected return on plan assets
Other expenses
(4,158)
(4,523)
(2,062)
Net periodic benefit, pension plans
(1,544)
(2,050)
(1,162)
Net periodic cost, postretirement plan
Other expenses
8
6
2
Net periodic benefit
$
(1,536)
$
(2,044)
$
(1,160)
The following table
presents the weighted-average
assumptions used to determine
the net periodic benefit
for the pension and
other
postretirement
benefit
plans
for
the
years
ended
December
31,
2022
and
2021,
and
for
the
period
from
September
1,
2020
to
December 31, 2020:
Period from
September 1, 2020 to
December 31, 2022
December 31, 2021
December 31, 2020
Discount rate
2.77%
2.36%
2.53%
Expected return on plan assets
4.43%
5.99%
5.98%
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
190
The following table presents the changes in pre-tax accumulated other comprehensive
income (loss) of the Pension Plans and
Postretirement Benefit Plan as of December 31, 2022, 2021, and 2020:
December 31, 2022
December 31, 2021
Period from
September 1, 2020
to
December 31, 2020
(In thousands)
Accumulated other comprehensive income (loss) at beginning of period,
pension plans
$
5,457
$
(404)
$
-
Net (loss) gain
(3,483)
5,861
(404)
Accumulated other comprehensive income (loss) at end of period, pension
plans
1,974
5,457
(404)
Accumulated other comprehensive loss at end of period,
postretirement plan
(61)
(29)
(28)
Accumulated other comprehensive income (loss) at end of period
$
1,913
$
5,428
$
(432)
The following are the pre-tax amounts recognized
in accumulated other comprehensive (loss) income for
the years ended December
31, 2022 and 2021, and for the period from September 1, 2020 to December 31,
2020:
December
31, 2022
December 31, 2021
Period from
September 1, 2020
to December 31,
2020
(In thousands)
Net actuarial (loss) gain, pension plans
$
(3,483)
$
5,861
$
(404)
Net actuarial loss, other postretirement benefit plan
(35)
(2)
(28)
Amortization of net loss
3
1
-
Net amount recognized
$
(3,515)
$
5,860
$
(432)
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
191
The Pension Plans asset allocations as of December 31, 2022 and 2021 by asset category
are as follows:
December 31, 2022
December 31, 2021
Asset category
Investment in funds
97%
98%
Other
3%
2%
100%
100%
As
of
December
31,
2022
and
2021,
substantially
all
of
the
plan
assets
of
$
77.2
million
and
$
103.5
million,
respectively,
were
invested
in
common
collective
trusts,
which
primarily
consist of
equity
securities,
mortgage-backed
securities,
corporate
bonds
and
U.S.
Treasuries.
The
portfolios
in
both
plans
have
been
measured
at
fair
value
using
the
net
asset
value
per
unit
as
a
practical
expedient
as permitted
by ASC
Topic
820 and,
accordingly,
have not
been classified
in the
fair value
hierarchy as
of December
31,
2022.
Determination of Fair Value
The following is a description of the valuation inputs and techniques
used to measure the fair value of pension plan assets:
Investment in
Funds -
Investment in
common collective
trusts have
been measured
at fair
value using
the net
assets value
per unit
practical expedient and, accordingly,
have not been classified in the
fair value hierarchy.
Fair value is based on the calculated
net asset
value of shares held by the Plan as reported by the sponsor of the funds.
Interest-Bearing
Deposits
-
Interest-bearing
deposits consist
of
money
market
accounts with
short-term
maturities and,
therefore,
the carrying value approximates fair value.
The Corporation does
no
t expect to contribute to the Pension Plans during 2023.
The Corporation’s
investment policy
with respect
to the
Corporation’s
Pension
Plans is
to optimize,
without undue
risk, the
total
return
on investment
of the
Plan assets
after inflation,
within
a framework
of prudent
and reasonable
portfolio
risk. The
investment
portfolio
is
diversified
in
multiple
asset
classes
to
reduce
portfolio
risk,
and
assets
may
be
shifted
between
asset
classes
to
reduce
volatility when
warranted by projections
of the economic
and/or financial
market environment,
consistent with
Employee Retirement
Income
Security Act
of 1974,
as amended
(ERISA).
As circumstances
and
market conditions
change,
the Corporation’s
target
asset
allocations
may
be
amended
to reflect
the
most
appropriate
distribution
given
the new
environment,
consistent with
the
investment
objectives.
Expected future benefit payments for the plans are as follows:
Amount
(Dollars in thousands)
2023
$
6,436
2024
6,292
2025
5,985
2026
5,999
2027
5,860
2028 through 2031
27,411
$
57,983
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
192
Defined Contribution Plan
In
addition,
FirstBank
provides
contributory
retirement
plans
pursuant
to
Section 1081.01
of
the
Puerto
Rico
Internal
Revenue
Code of
2011
(the “2011
PR Code”)
for Puerto
Rico employees
and Section 401(k)
of the U.S.
Internal Revenue
Code for
USVI and
U.S. employees (the “Plans”).
All of the Corporation’s
full-time employees are
eligible to participate
in the Plans after
completion of
three months
of service
for purposes
of making
elective deferral
contributions and
one year
of service
for purposes
of sharing
in the
Bank’s
matching, qualified
matching, and
qualified non-elective
contributions. The
Bank contributes
a matching
contribution of
fifty
cents for
every dollar
up to
the first
6
% of
the participants’
eligible compensation
that a
participant contributes
to the
Plan on
a pre-
tax basis.
The matching contribution of fifty cents for every dollar of the employee’s contribution is comprised of: (i) twenty-five
cents for every dollar of the employee’s contribution up to 6% of the employee’s eligible compensation to be paid to the Plan as of
each bi-weekly payroll; and (ii) an additional twenty-five cents for every dollar of the employee’s contribution up to 6% of the
employee’s eligible compensation to be deposited as a lump sum subsequent to the Plan Year.
Puerto Rico employees
were permitted
to contribute
up to $
15,000
for each of
the years ended
December 31,
2022, 2021
and 2020 (USVI
and U.S. employees
- $
20,500
for
2022,
$
19,500
for
2021
and
$
19,500
for
2020).
Additional
contributions
to
the
Plans
may
be
voluntarily
made
by
the
Bank
as
determined
by its
Board of
Directors.
No
additional discretionary
contributions were
made for
the years
ended December
31,
2022,
2021, and 2020.
The Bank had total
plan expenses of
$
3.5
million for the
year ended December
31, 2022 (2021
- $
3.5
million; 2020 -
$
3.0
million).
On
September
1,
2020,
the
Bank
completed
the
acquisition
of
Santander
Bancorp,
a
wholly-owned
subsidiary
of
Santander
Holdings USA,
Inc. and
the holding
company of
BSPR. Prior
to the
acquisition date,
BSPR was
the sponsor
of the
Banco Santander
de Puerto Rico Employees’
Savings Plan (“the Santander
Plan”). Effective on
September 1, 2020, the
Bank became the sponsor
of the
Santander Plan. Overall responsibility for
administrating the Santander Plan rests with
the Plan’s Administration
Committee. Effective
December 31,
2020, the
Santander Plan
was merged
with the
Plans. The
contributory savings
plan assumed
in the
BSPR acquisition
also provided for matching contribution up to
6
% of the employee’s compensation.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
193
NOTE 20 – OTHER NON-INTEREST INCOME
A detail of other non-interest income is as follows for the indicated periods:
Year
Ended December 31,
2022
2021
2020
(In thousands)
Non-deferrable loan fees
$
3,167
$
2,990
$
3,750
Mail and cable transmission commissions
3,100
3,116
2,540
Gain from insurance proceeds
-
550
5,000
Net (loss) gain on equity securities
(522)
(102)
38
Gain from sales of fixed assets
924
32
215
Other
9,181
5,843
4,682
Total
$
15,850
$
12,429
$
16,225
NOTE 21 – OTHER NON-INTEREST EXPENSES
A detail of other non-interest expenses is as follows for the indicated periods:
Year
Ended December 31,
2022
2021
2020
(In thousands)
Supplies and printing
$
1,505
$
1,830
$
2,391
Amortization of intangible assets
8,816
11,407
5,912
Servicing and processing fees
5,343
5,121
4,696
Insurance and supervisory fees
9,354
9,098
6,324
Provision for operational losses
2,518
5,069
3,390
Other
3,126
2,898
3,105
Total
$
30,662
$
35,423
$
25,818
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
194
NOTE 22 –
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
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
Puerto
Rico
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 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.
The components of income tax expense are summarized below for
the indicated periods:
Year
Ended December 31,
2022
2021
2020
(In thousands)
Current income tax expense
$
88,296
$
28,469
$
18,421
Deferred income tax expense:
Reversal of deferred tax asset valuation allowance
-
-
(8,000)
Other deferred income tax expense
54,216
118,323
3,629
Total income
tax expense
$
142,512
$
146,792
$
14,050
The differences between the income tax expense applicable to income
before the provision for income taxes and the amount
computed by applying the statutory tax rate in Puerto Rico were as follows for
the indicated periods:
Year Ended December
31,
2022
2021
2020
Amount
% of Pretax
Income
Amount
% of Pretax
Income
Amount
% of Pretax
Income
(Dollars in thousands)
Computed income tax at statutory rate
$
167,844
37.5
%
$
160,431
37.5
%
$
43,621
37.5
%
Federal and state taxes
10,268
2.2
%
7,014
1.6
%
4,944
4.2
%
Benefit of net exempt income
(31,266)
(7.0)
%
(20,717)
(4.8)
%
(26,780)
(23.0)
%
Disallowed NOL carryforward resulting from net exempt
income
14,221
3.2
%
8,791
2.0
%
9,054
7.8
%
Deferred tax valuation allowance
(8,410)
(1.9)
%
(13,572)
(3.2)
%
(12,095)
(10.4)
%
Share-based compensation windfall
(1,492)
(0.3)
%
(1,044)
(0.2)
%
157
0.1
%
Other permanent differences
(7,647)
(1.7)
%
(1,185)
(0.3)
%
(387)
(0.3)
%
Tax return to provision adjustments
(519)
(0.1)
%
(406)
(0.1)
%
597
0.5
%
Other-net
(487)
(0.1)
%
7,480
1.7
%
(5,061)
(4.3)
%
Total income tax expense
$
142,512
31.8
%
$
146,792
34.2
%
$
14,050
12.1
%
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
195
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and their tax bases. Significant components
of the Corporation's deferred tax assets and liabilities as of
December 31, 2022 and 2021 were as follows:
December 31,
2022
2021
(In thousands)
Deferred tax asset:
NOL and capital losses carryforward
$
72,485
$
137,860
Allowance for credit losses
104,014
105,917
Alternative Minimum Tax
credits available for carryforward
40,823
37,361
Unrealized loss on OREO valuation
6,462
7,703
Settlement payment-closing agreement
7,031
7,031
Legal and other reserves
6,345
4,576
Reserve for insurance premium cancellations
781
881
Differences between the assigned values and tax bases of assets
and liabilities recognized in purchase business combinations
5,665
8,926
Unrealized loss on available-for-sale debt securities, net
100,776
14,181
Other
7,722
4,420
Total gross deferred tax assets
$
352,104
$
328,856
Deferred tax liabilities:
Servicing assets
9,786
10,510
Pension Plan assets
719
2,035
Other
509
506
Total gross deferred tax liabilities
11,014
13,051
Valuation
allowance
(185,506)
(107,323)
Net deferred tax asset
$
155,584
$
208,482
Accounting
for
income
taxes
requires
that
companies
assess
whether
a
valuation
allowance
should
be
recorded
against
their
deferred
tax
asset
based
on
an
assessment
of
the
amount
of
the
deferred
tax
asset
that
is
“more
likely
than
not”
to
be
realized.
Valua
tion allowances
are established,
when necessary,
to reduce
deferred tax
assets to
the amount
that is
more likely
than not
to be
realized. Management
assesses the valuation
allowance recorded
against deferred
tax assets at
each reporting
date. The determ
ination
of whether a
valuation allowance for
deferred tax assets is
appropriate is subject
to considerable judgment
and requires the
evaluation
of
positive
and
negative
evidence
that
can
be
objectively
verified.
Consideration
must
be
given
to
all
sources
of
taxable
income
available to realize
the deferred tax asset,
including, as applicable,
the future reversal
of existing temporary
differences, future
taxable
income forecasts exclusive of the reversal of temporary
differences and carryforwards, and tax planning
strategies. In estimating taxes,
management assesses
the relative
merits and
risks of
the appropriate
tax treatment
of transactions
considering statutory,
judicial, and
regulatory guidance.
The
net
deferred
tax
asset
of
the
Corporation’s
banking
subsidiary,
FirstBank,
amounted
to
$
155.6
million
as
of
December
31,
2022,
net
of
a
valuation
allowance
of
$
149.5
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. The
increase in
the valuation
allowance during
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
and
unrealized
losses
of
available-for-sale
debt
securities.
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 impacting earnings.
Management’s
estimate
of
future
taxable
income
is
based
on
internal
projections
that
consider
historical
performance,
multiple
internal scenarios and
assumptions, as well as
external data that
management believes is
reasonable. If events
are identified that
affect
the Corporation’s
ability to utilize
its deferred tax
assets, the analysis
will be updated
to determine if
any adjustments to
the valuation
allowance
are
required.
If
actual
results
differ
significantly
from
the
current
estimates
of
future
taxable
income,
even
if
caused
by
adverse
macro-economic
conditions,
the
remaining
valuation
allowance
may
need
to
be
increased.
Such
an
increase
could
have
a
material adverse effect on the Corporation’s
financial condition and results of operations.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
196
As of December
31, 2022, approximately
$
279.9
million of the
deferred tax
assets of the
Corporation are
attributable to temporary
differences
or
tax
credit
carryforwards
that
have
no
expiration
date,
compared
to
$
177.9
million
in
2021.
The
valuation
allowance
attributable to
FirstBank’s
deferred tax
assets of $
149.5
million as
of December
31, 2022 is
related to
the change in
the market
value
of available-for-sale
debt securities,
NOLs attributable
to the Virgin
Islands jurisdiction,
and capital
losses. The remaining
balance of
$
36.0
million of the
Corporation’s
deferred tax asset
valuation allowance non-attributable
to FirstBank is
mainly related to
NOLs and
capital losses
at the
holding
company level.
The Corporation
will continue
to provide
a valuation
allowance against
its deferred
tax
assets in each
applicable tax
jurisdiction until
the need
for a valuation
allowance is
eliminated. The
need for
a valuation
allowance is
eliminated
when
the
Corporation
determines
that
it
is
more
likely
than
not
the
deferred
tax
assets
will
be
realized.
The
ability
to
recognize the
remaining deferred
tax assets that
continue to
be subject to
a valuation
allowance will be
evaluated on
a quarterly basis
to determine
if there
are any
significant
events that
would affect
the ability
to utilize
these deferred
tax assets.
As of
December
31,
2022,
of
the
$
72.5
million
of
NOL
and
capital
losses
carryforward,
$
61.2
million,
which
are
fully
valued,
have
expiration
dates
ranging from year
2023 through year
2037. From this
amount, approximately
$
30.5
million expires in
year 2023 and
are not expected
to be realized.
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
that
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 2022, 2021
and 2020, the Corporation
incurred current income
tax expense
of approximately $
10.3
million, $
6.8
million and $
4.9
million, respectively,
related to its
U.S. operations.
The limitation
did not impact the USVI operations in 2022, 2021 and 2020.
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
a 1%
excise tax
on stock
repurchases, and
a 15%
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.
The
legislation did
not have
an effect
on the Corporation’s
effective tax
rate in
2022 and
is not expected
to have
a material
impact on our
2023 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 December 31, 2022, the Corporation had
$
0.2
million of
accrued interest
and penalties
related to
uncertain tax
positions in
the amount
of $
1.0
million that
it acquired
from BSPR,
which,
if
recognized,
would
decrease
the
effective
income
tax
rate
in
future
periods.
During
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 after
a tax return
is due or
filed, whichever
is later; 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
197
NOTE 23
–
OPERATING
LEASES
The
Corporation
accounts
for
its
leases
in
accordance
with
ASC
842
“Leases”
(“ASC
Topic
842).
The
Corporation’s
operating
leases are primarily
related to the
Corporation’s
branches. Our
leases mainly have
terms ranging
from
two years
to
30 years
, some of
which
include
options
to
extend
the
leases
for
up
to
ten years
.
Liabilities
to
make
future
lease
payments
are
recorded
in
accounts
payable
and
other
liabilities,
while
right-of-use
(“ROU”)
assets
are
recorded
in
other
assets
in
the
Corporation’s
consolidated
statements of
financial condition.
As of
December 31,
2022 and
2021, the
Corporation did
not classify
any of
its leases
as a
finance
lease.
Operating lease cost for the
year ended December 31, 2022
amounted to $
18.4
million (2021 - $
18.2
million; 2020 - $
13.8
million),
and is recorded in occupancy and equipment in the consolidated
statements
of income.
Supplemental balance sheet information related to leases as of the indicated
dates was as follows:
As of
As of
December 31,
December 31,
2022
2021
(Dollars in thousands)
ROU asset
$
78,855
$
90,319
Operating lease liability
$
81,954
$
93,772
Operating lease weighted-average remaining lease term (in years)
7.5
8.0
Operating lease weighted-average discount rate
2.37%
2.24%
Generally,
the
Corporation
cannot
practically
determine
the interest
rate
implicit
in
the lease.
Therefore,
the Corporation
uses
its
incremental borrowing rate as the discount rate for
the lease. See Note 1 – Nature of Business and Summary of
Significant Accounting
Policies for information on how the Corporation determines its incremental
borrowing rate.
Supplemental cash flow information related to leases was as follows:
Year Ended
Year Ended
Year Ended
December 31,
December 31,
December 31,
2022
2021
2020
(In thousands)
Operating cash flow from operating leases
(1)
$
18,202
$
19,328
$
13,464
ROU assets obtained in exchange for operating lease liabilities
(2) (3)
$
5,744
$
5,833
$
1,328
(1)
Represents cash paid for amounts included in the measurement of operating
lease liabilities.
(2)
Represents non-cash activity and, accordingly,
is not reflected in the consolidated statements of cash flows.
For the year ended December 31, 2020 excludes $
52.1
million ROU assets and
related liabilities assumed in the BSPR acquisition.
(3)
For the year ended December 31, 2022 and 2021 excludes $
3.0
million and $
1.3
million, respectively, of lease
terminations. For the year ended December 31, 2020, there were
no
lease
terminations.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
198
Maturities under operating lease liabilities as of December 31, 2022,
were as follows:
Amount
(In thousands)
2023
$
16,763
2024
16,008
2025
15,096
2026
14,025
2027
5,929
2028 and after
23,025
Total lease payments
90,846
Less: imputed interest
(8,892)
Total present value
of lease liability
$
81,954
Leases Not Yet
Commenced
As of
December 31,
2022, the
Corporation
has additional
operating
leases that
were signed
but have
not yet
commenced with
an
undiscounted contract amount of $
1.1
million, which will have lease terms ranging from
five
to
ten years
.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
199
NOTE 24 – DERIVATIVE
INSTRUMENTS
AND HEDGING ACTIVITIES
One of
the market
risks facing
the Corporation
is interest
rate risk,
which includes
the risk that
changes in
interest rates
will result
in changes in the value of
the Corporation’s assets or
liabilities and will adversely
affect the Corporation’s
net interest income from its
loan
and
investment
portfolios.
The
overall
objective
of
the
Corporation’s
interest
rate
risk
management
activities
is
to
reduce
the
variability of earnings caused by changes in interest rates.
As of
December 31,
2022 and
2021, all
derivatives held
by the
Corporation were
considered economic
undesignated hedges.
The
Corporation records these undesignated hedges at fair value with the
resulting gain or loss recognized in current earnings.
The following summarizes the principal derivative activities used by
the Corporation in managing interest rate risk:
Interest Rate
Cap Agreements
– Interest rate cap
agreements provide the right
to receive cash if
a reference interest rate rises
above
a contractual rate. The value of
the interest rate cap increases as the
reference interest rate rises. The Corporation
enters into interest
rate cap agreements for protection from rising interest rates.
Forward
Contracts
–
Forward
contracts
are
primarily
sales
of
to-be-announced
(“TBA”)
MBS
that
will
settle
over
the
standard
delivery
date
and
do
not
qualify
as
“regular
way”
security
trades.
Regular-way
security
trades
are
contracts
that
have
no
net
settlement provision and no market
mechanism to facilitate net settlement
and that provide for delivery
of a security within the
time
frame
generally
established
by
regulations
or
conventions
in
the
marketplace
or
exchange
in
which
the
transaction
is
being
executed.
The forward
sales are
considered
derivative
instruments
that need
to be
marked
to market.
The Corporation
uses these
securities
to
economically
hedge
the
FHA/VA
residential
mortgage
loan
securitizations
of
the mortgage
banking
operations.
The
Corporation
also
reports
as forward
contracts
the mandatory
mortgage
loan
sales commitments
that
it enters
into with
GSEs that
require or
permit net settlement
via a pair-off
transaction or the
payment of
a pair-off
fee. Unrealized gains
(losses) are recognized
as part of mortgage banking activities in the consolidated statements of income
.
Interest
Rate
Lock
Commitments
–
Interest
rate
lock
commitments
are
agreements
under
which
the
Corporation
agrees to
extend
credit to a borrower under
certain specified terms and conditions in
which the interest rate and the maximum
amount of the loan are
set prior to funding.
Under the agreement,
the Corporation commits
to lend funds to
a potential borrower,
generally on a fixed
rate
basis, regardless of whether interest rates change in the market.
Interest Rate
Swaps
– The Corporation
acquired interest
rate swaps
as a result
of the acquisition
of BSPR. An
interest rate
swap is
an
agreement
between
two
entities
to
exchange
cash
flows
in
the
future.
The
agreements
acquired
from
BSPR
consist
of
the
Corporation offering
borrower-facing derivative
products using a
“back-to-back” structure
in which the
borrower-facing derivative
transaction is paired
with an identical, offsetting
transaction with an
approved dealer-counterparty.
By using a back-to-back
trading
structure, both
the commercial
borrower and
the Corporation
are largely
insulated from
market risk
and volatility.
The agreements
set the
dates on
which
the cash
flows will
be paid
and
the manner
in which
the cash
flows will
be calculated.
The fair
values
of
these swaps
are recorded
as components
of other
assets or
accounts payable
and other
liabilities in
the Corporation’s
consolidated
statements of financial
condition. Changes in
the fair values of
interest rate swaps,
which occur due
to changes in interest
rates, are
recorded in the consolidated statements of income as a component of interest income
on loans.
To
satisfy
the
needs
of
its
customers,
the
Corporation
may
enter
into
non-hedging
transactions.
In
these
transactions,
the
Corporation generally participates as
a buyer in one
of the agreements and
as a seller in the
other agreement under
the same terms and
conditions.
In addition, the Corporation
enters into certain contracts
with embedded derivatives that
do not require separate accounting
as these
are clearly and closely
related to the economic
characteristics of the host
contract. When the embedded
derivative possesses economic
characteristics that are not clearly and closely related
to the economic characteristics of the host contract,
it is bifurcated, carried at fair
value, and designated as a trading or non-hedging derivative instrument.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
200
The following table summarizes for derivative instruments their notional
amounts, fair values and location in the consolidated
statements of financial condition as of the indicated dates:
Asset Derivatives
Liability Derivatives
Notional Amounts
(1)
Statements of Financial
Condition Location
Fair Value
Statements of Financial Condition
Location
Fair Value
December 31,
December 31,
December 31,
2022
2021
2022
2021
2022
2021
(In thousands)
Undesignated economic hedges:
Interest rate contracts:
Interest rate swap agreements
$
9,290
$
12,588
Other assets
$
313
$
1,098
Accounts payable and other liabilities
$
278
$
1,092
Written interest rate cap agreements
14,500
14,500
Other assets
-
-
Accounts payable and other liabilities
197
8
Purchased interest rate cap agreements
14,500
14,500
Other assets
199
8
Accounts payable and other liabilities
-
-
Interest rate lock commitments
3,225
12,097
Other assets
63
379
Accounts payable and other liabilities
-
-
Forward Contracts:
Sales of TBA GNMA MBS pools
11,000
27,000
Other assets
58
-
Accounts payable and other liabilities
1
78
Forward loan sales commitments
-
12,668
Other assets
-
20
Accounts payable and other liabilities
-
-
$
52,515
$
93,353
$
633
$
1,505
$
476
$
1,178
(1) Notional amounts are presented on a gross basis with no netting of offsetting exposure positions.
The following table summarizes the effect of derivative instruments on
the consolidated statements of income for the indicated
periods:
Gain (or Loss)
Location of Gain (Loss)
Year ended
on Derivative Recognized in
December 31,
Statements of Income
2022
2021
2020
(In thousands)
Undesignated economic hedges:
Interest rate contracts:
Interest rate swap agreements
Interest income - loans
$
28
$
24
$
27
Written and purchased interest rate cap agreements
Interest income - loans
2
-
-
Interest rate lock commitments
Mortgage banking activities
(322)
(687)
576
Forward contracts:
Sales of TBA GNMA MBS pools
Mortgage banking activities
135
114
(54)
Forward loan sales commitments
Mortgage banking activities
(20)
-
(37)
Total (loss) gain on derivatives
$
(177)
$
(549)
$
512
Derivative
instruments
are
subject
to
market
risk.
As
is
the
case
with
investment
securities,
the
market
value
of
derivative
instruments
is largely
a
function
of
the financial
market’s
expectations
regarding
the future
direction
of interest
rates.
Accordingly,
current market
values are
not necessarily
indicative of
the future
impact of
derivative instruments
on earnings.
This will
depend, for
the most part, on the shape of the yield curve, and the level of interest rates, as well as the expectations
for rates in the future.
As of
December 31,
2022 and
2021, the
Corporation had
not entered
into any
derivative instrument
containing credit
-risk-related
contingent features.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
201
Credit and Market Risk of Derivatives
The
Corporation
uses
derivative
instruments
to
manage
interest
rate
risk.
By
using
derivative
instruments,
the
Corporation
is
exposed to credit and market risk.
If the
counterparty
fails to
perform, credit
risk is
equal to
the extent
of the
Corporation’s
fair value
gain on
the derivative.
When
the fair value of
a derivative instrument contract
is positive, this generally
indicates that the counterparty
owes the Corporation which,
therefore, creates a credit
risk for the Corporation.
When the fair value
of a derivative instrument
contract is negative, the
Corporation
owes the counterparty.
The Corporation minimizes
its credit risk in
derivative instruments by
entering into transactions with
reputable
broker
dealers
(
i.e.,
financial
institutions)
that
are
reviewed
periodically
by
the
Management
Investment
and
Asset
Liability
Committee of the
Corporation (the “MIALCO”)
and by the Board
of Directors. The
Corporation also has
a policy of requiring
that all
derivative instrument contracts be governed by an International Swaps and
Derivatives Association Master Agreement, which includes
a
provision
for
netting.
The
Corporation
has
a
policy
of
diversifying
derivatives
counterparties
to
reduce
the
consequences
of
counterparty default.
The cumulative mark
-to-market effect
of credit risk
in the valuation
of derivative
instruments in 2022,
2021 and
2020 was immaterial.
Market risk is
the adverse effect
that a change
in interest rates
or implied volatility
rates has on
the value of
a financial instrument.
The Corporation
manages the
market risk
associated with
interest rate
contracts by
establishing and
monitoring limits
as to
the types
and degree of risk that may be undertaken.
In
accordance
with
the
master
agreements,
in
the
event
of
default,
each
party
has
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
December
31,
2022
and
2021,
derivatives
were
overcollateralized.
See
Note
12
–
Securities
Sold
Under Agreements to Repurchase for information on rights of set-off
associated to assets sold under agreements to repurchase.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
202
NOTE 25 –
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
Va
luations 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
Va
luations 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.
Financial Instruments Recorded at Fair Value
on a Recurring Basis
Debt securities available for sale and marketable equity securities held at fair value
The fair
value of
investment securities
was based
on unadjusted
quoted market
prices (as
is the
case with
U.S. Treasury
securities
and equity securities with
readily determinable fair values),
when available (Level 1),
or market prices for comparable
assets (as is the
case with
U.S. agencies
MBS and
U.S. agency
debt securities)
that are
based on
observable market
parameters, including
benchmark
yields,
reported
trades,
quotes
from
brokers
or
dealers,
issuer
spreads,
bids,
offers
and
reference
data,
including
market
research
operations,
when available
(Level 2).
Observable prices
in the
market already
consider the
risk of
nonperformance. If
listed prices
or
quotes are
not available, fair
value is based
upon discounted
cash flow models
that use unobservable
inputs due to
the limited market
activity of the instrument, as is the case with certain private label MBS held by the
Corporation (Level 3).
Derivative instruments
The
fair
value
of
most
of
the
Corporation’s
derivative
instruments
is
based
on
observable
market
parameters
and
takes
into
consideration
the
credit
risk
component
of
paying
counterparties,
when
appropriate.
On interest
caps,
only
the
seller's
credit
risk
is
considered.
The
Corporation
valued
the
interest
rate
swaps
and
caps
using
a
discounted
cash
flow
approach
based
on
the
related
LIBOR and swap forward rate for each cash flow.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
203
Assets and liabilities measured at fair value on a recurring basis are summarized below as of
December 31, 2022 and 2021:
As of December 31,
2022
As of December 31, 2021
Fair Value Measurements Using
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
(In thousands)
Assets:
Debt securities available for sale:
U.S. Treasury securities
$
138,875
$
-
$
-
$
138,875
$
148,486
$
-
$
-
$
148,486
Noncallable U.S. agencies debt securities
-
389,787
-
389,787
-
285,028
-
285,028
Callable U.S. agencies debt securities
-
1,963,566
-
1,963,566
-
1,971,954
-
1,971,954
MBS
-
3,098,797
5,794
(1)
3,104,591
-
4,037,209
7,234
(1)
4,044,443
Puerto Rico government obligations
-
-
2,201
2,201
-
-
2,850
2,850
Other investments
-
-
500
500
-
-
1,000
1,000
Equity securities
4,861
-
-
4,861
5,378
-
-
5,378
Derivative assets
-
633
-
633
-
1,505
-
1,505
Liabilities:
Derivative liabilities
-
476
-
476
-
1,178
-
1,178
(1) Related to private label MBS.
The table
below presents
a reconciliation
of the
beginning and
ending balances
of all
assets measured
at fair
value on
a recurring
basis using significant unobservable inputs (Level 3) for the years ended
December 31, 2022, 2021, and 2020:
2022
2021
2020
Level 3 Instruments Only
Securities Available for
Sale
(1)
Securities Available for
Sale
(1)
Securities Available for
Sale
(1)
(In thousands)
Beginning balance
$
11,084
$
11,977
$
14,590
Total gains (losses):
Included in other comprehensive income (unrealized)
(401)
1,281
2,403
Included in earnings (unrealized)
(2)
434
136
(1,641)
BSPR securities acquired
-
-
150
Purchases
-
1,000
-
Principal repayments and amortization
(2,622)
(3,310)
(3,525)
Ending balance
$
8,495
$
11,084
$
11,977
___________________
(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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
204
The tables below present quantitative information for significant assets measured at
fair value on a recurring basis using significant
unobservable inputs (Level 3) as of December 31, 2022 and 2021:
December 31,
2022
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
Minimum
Maximum
(Dollars in thousands)
Available-for-sale
debt securities:
Private label MBS
$
5,794
Discounted cash flows
Discount rate
16.2%
16.2%
16.2%
Prepayment rate
1.5%
15.2%
11.8%
Projected cumulative loss rate
0.3%
15.6%
5.6%
Puerto Rico government obligations
$
2,201
Discounted cash flows
Discount rate
12.9%
12.9%
12.9%
Projected cumulative loss rate
19.3%
19.3%
19.3%
December 31,
2021
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
Minimum
Maximum
(Dollars in thousands)
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
expected
recovery
of
the
PRHFA
guarantee. Under
this approach, expected
cash flows (interest and
principal) are discounted
at the Treasury
yield curve plus a
spread as of the reporting date and compared to the amortized cost.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
205
Additionally, fair value
is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP.
As of December 31, 2022, the Corporation recorded losses or valuation adjustments
for assets recognized at fair value on a non-
recurring basis and still held at December 31, 2022, as shown in the following
table:
Carrying value as of December 31,
Related to losses recorded for the Year Ended
December 31,
2022
2021
2020
2022
2021
2020
(In thousands)
Level 3:
Loans receivable
(1)
$
11,437
$
31,534
$
74,197
$
(736)
$
(5,466)
$
(13,737)
OREO
(2)
5,461
9,126
50,248
(917)
(48)
(1,837)
Premises and equipment
(3)
1,242
-
-
(218)
-
-
Level 2:
Loans held for sale
$
12,306
$
-
$
-
$
(106)
$
-
$
-
(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.
Qualitative information regarding the fair value measurements for Level 3
financial instruments as of December 31, 2022 are as
follows:
December 31, 2022
Method
Inputs
Loans
Income, Market, Comparable
Sales, Discounted Cash Flows
External appraised values; probability weighting of broker price
opinions; management assumptions regarding market trends or other
relevant factors
OREO
Income, Market, Comparable
Sales, Discounted Cash Flows
External appraised values; probability weighting of broker price
opinions; management assumptions regarding market trends or other
relevant factors
Premises and equipment
Market
External appraised value
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
206
The following tables present the carrying value, estimated fair value and estimated
fair value level of the hierarchy of financial
instruments as of December 31, 2022 and 2021:
Total Carrying Amount
in Statement of
Financial Condition as
of December 31, 2022
Fair Value Estimate as of
December 31, 2022
Level 1
Level 2
Level 3
(In thousands)
Assets:
Cash and due from banks and money market
investments (amortized cost)
$
480,505
$
480,505
$
480,505
$
-
$
-
Available-for-sale debt securities (fair value)
5,599,520
5,599,520
138,875
5,452,150
8,495
Held-to-maturity debt securities (amortized
cost)
437,537
Less: ACL on held-to-maturity debt securities
(8,286)
Held-to-maturity debt securities, net of
ACL
$
429,251
427,115
-
260,106
167,009
Equity securities (amortized cost)
50,428
50,428
-
50,428
(1)
-
Other equity securities (fair value)
4,861
4,861
4,861
-
-
Loans held for sale (lower of cost or market)
12,306
12,306
-
12,306
-
Loans held for investment (amortized cost)
11,552,825
Less: ACL for loans and finance leases
(260,464)
Loans held for investment, net of ACL
$
11,292,361
11,106,809
-
-
11,106,809
MSRs (amortized cost)
29,037
44,710
-
-
44,710
Derivative assets (fair value)
(2)
633
633
-
633
-
Liabilities:
Deposits
(amortized cost)
$
16,143,467
$
16,139,937
$
-
$
16,139,937
$
-
Securities sold under agreements to repurchase
(amortized cost)
75,133
75,230
-
75,230
-
Advances from FHLB (amortized cost)
675,000
674,596
-
674,596
-
Other borrowings (amortized cost)
183,762
187,246
-
-
187,246
Derivative liabilities (fair value)
(2)
476
476
-
476
-
(1) Includes FHLB stock with a carrying value of $
42.9
million, which are considered restricted.
(2) Includes interest rate swap agreements, interest rate caps,
forward contracts, interest rate lock commitments, and forward loan
sales commitments.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
207
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
$
-
$
-
Available-for-sale debt securities (fair value)
6,453,761
6,453,761
148,486
6,294,191
11,084
Held-to-maturity debt securities (amortized
cost)
178,133
Less: ACL on held-to-maturity debt securities
(8,571)
Held-to-maturity debt securities, net of
ACL
$
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: ACL for loans and finance leases
(269,030)
Loans held for investment, net of ACL
$
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, which are considered restricted.
(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 future cash flows,
and appropriate discount rates.
NOTE 26 – 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
208
Disaggregation of Revenue
The following
tables summarize
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 years ended December 31, 2022, 2021 and 2020:
Year ended December
31, 2022:
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial and
Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
(1)
$
98,920
$
442,624
$
109,822
$
39,600
$
80,485
$
23,842
$
795,293
Service charges and fees on deposit accounts
-
21,906
12,412
-
607
2,898
37,823
Insurance commissions
-
12,733
-
-
15
995
13,743
Merchant-related income
-
6,622
1,483
-
74
1,335
9,514
Credit and debit card fees
-
29,061
85
-
(7)
1,763
30,902
Other service charges and fees
341
4,558
3,397
-
2,113
684
11,093
Not in scope of ASC Topic
606
(1)
15,609
3,577
812
(74)
58
35
20,017
Total non-interest income
15,950
78,457
18,189
(74)
2,860
7,710
123,092
Total Revenue
$
114,870
$
521,081
$
128,011
$
39,526
$
83,345
$
31,552
$
918,385
Year ended December
31, 2021:
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial and
Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
(1)
$
104,638
$
281,703
$
191,917
$
59,331
$
65,967
$
26,373
$
729,929
Service charges and fees on deposit accounts
-
20,083
11,807
-
555
2,839
35,284
Insurance commissions
-
11,166
-
-
114
665
11,945
Merchant-related income
-
6,279
1,079
-
51
1,055
8,464
Credit and debit card fees
-
26,360
83
-
19
1,602
28,064
Other service charges and fees
771
4,185
2,640
-
1,825
556
9,977
Not in scope of ASC Topic
606
(1)
23,507
1,701
423
227
1,399
173
27,430
Total non-interest income
24,278
69,774
16,032
227
3,963
6,890
121,164
Total Revenue
$
128,916
$
351,477
$
207,949
$
59,558
$
69,930
$
33,263
$
851,093
Year ended December
31, 2020:
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial and
Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
(1)
$
76,025
$
220,678
$
135,591
$
87,879
$
54,025
$
26,124
$
600,322
Service charges and fees on deposit accounts
-
13,286
8,026
-
553
2,747
24,612
Insurance commissions
-
8,754
-
-
52
558
9,364
Merchant-related income
-
4,516
478
-
41
809
5,844
Credit and debit card fees
-
18,218
62
-
16
1,469
19,765
Other service charges and fees
342
2,900
2,260
184
1,800
1,508
8,994
Not in scope of ASC Topic
606 (1) (2)
21,727
3,288
1,780
13,524
2,168
160
42,647
Total non-interest income
22,069
50,962
12,606
13,708
4,630
7,251
111,226
Total Revenue
$
98,094
$
271,640
$
148,197
$
101,587
$
58,655
$
33,375
$
711,548
(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)
For the
year ended December
31, 2020, includes
a $
5.0
million benefit resulting
from the final
settlement of the
Corporation’s business
interruption insurance
claim
related to
lost
profits caused
by Hurricanes
Irma and
Maria in
2017.
This insurance
recovery is
presented as
part of
other
non-interest income
in the
consolidated statements of income.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
209
For
2022,
2021,
and
2020,
most
of
the
Corporation’s
revenue
within
the
scope
of
ASC
Topic
606
was
related
to
performance
obligations satisfied at a point in time.
The following is a discussion of the revenues under the scope of ASC Topic
606.
Service Charges and Fees on Deposit Accounts
Service
charges
and fees
on deposit
accounts
relate to
fees generated
from a
variety of
deposit products
and
services rendered
to
customers. Charges
primarily include,
but are not
limited to, overdraft
fees, insufficient
fund fees,
dormant fees,
and monthly
service
charges. Such
fees are recognized
concurrently with
the event at
the time of
occurrence or on
a monthly basis,
in the case
of monthly
service
charges.
These
depository
arrangements
are
considered
day-to-day
contracts
that
do
not
extend
beyond
the
services
performed, as customers have the right to terminate these contracts with no
penalty or, if any,
nonsubstantive penalties.
Insurance Commissions
For
insurance
commissions,
which
include
regular
and
contingent
commissions
paid
to
the
Corporation’s
insurance
agency,
the
agreements
contain
a
performance
obligation
related
to
the
sale/issuance
of
the
policy
and
ancillary
administrative
post-issuance
support.
The performance
obligations
are
satisfied
when
the policies
are
issued, and
revenue
is recognized
at
that point
in
time.
In
addition,
contingent
commission
income
may
be
considered
to
be
constrained,
as
defined
under
ASC
Topic
606.
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,
thus, is
recorded in
subsequent periods.
For the
years ended
December
31,
2022,
2021
and
2020,
the
Corporation
recognized
contingent
commission
income
at
the
time
that
payments
were
confirmed and constraints
were released of
$
3.2
million, $
3.3
million, and $
3.3
million, respectively,
which was related to
the volume
of insurance policies sold in the prior year.
Card and processing
income
Card and processing income includes merchant-related income, and
credit and debit card fees.
For
merchant-related
income,
the
determination
of
income
recognition
included
the
consideration
of
a
2015
sale
of
merchant
contracts
that
involved
sales
of
point
of
sale
(“POS”)
terminals
and
a
marketing
alliance
under
a
revenue-sharing
agreement.
The
Corporation
concluded
that
control
of
the
POS
terminals
and
merchant
contracts
was
transferred
to
the
customer
at
the
contract’s
inception.
With
respect
to
the
related
revenue-sharing
agreement,
the
Corporation
satisfies
the
marketing
alliance
performance
obligation over
the life of
the contract,
and recognizes the
associated transaction price
as the entity
performs and any
constraints over
the variable consideration are resolved.
Credit
and
debit
card
fees
primarily
represent
revenues
earned
from
interchange
fees
and
ATM
fees.
Interchange
and
network
revenues are earned on credit and
debit card transactions conducted with
payment networks. ATM
fees are primarily earned as a
result
of surcharges
assessed to
non-FirstBank customers
who use
a FirstBank
ATM.
Such fees
are generally
recognized concurrently
with
the delivery of services on a daily basis.
The
Corporation
offers
products,
primarily
credit
cards,
that
offer
various
rewards
to
reward
program
members,
such
as
airline
tickets, cash, or
merchandise, based
on account
activity.
The Corporation
generally recognizes the
cost of rewards
as part of
business
promotion
expenses when
the rewards
are earned
by the
customer and,
at that
time, records
the corresponding
reward liability.
The
Corporation
determines
the
reward
liability
based
on
points
earned
to
date
that
the
Corporation
expects
to
be
redeemed
and
the
average
cost
per
point
redemption.
The
reward
liability
is
reduced
as
points
are
redeemed.
In
estimating
the
reward
liability,
the
Corporation considers historical
reward redemption behavior,
the terms of the
current reward program,
and the card purchase
activity.
The reward liability
is sensitive to
changes in the
reward redemption
type and redemption
rate, which is
based on the
expectation that
the
vast
majority
of
all points
earned
will eventually
be
redeemed.
The
reward
liability,
which
is included
in other
liabilities in
the
consolidated statements of financial condition, totaled $
9.2
million and $
8.8
million as of December 31, 2022 and 2021, respectively.
Other Fees
Other fees primarily
include revenues generated
from wire transfers,
lockboxes, bank
issuances of checks
and trust fees
recognized
from
transfer
paying
agent,
retirement
plan,
and
other
trustee
activities.
Revenues
are
recognized
on
a
recurring
basis
when
the
services are rendered and are included as part of other non-interest income
in the consolidated statements of income.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
210
Contract Balances
A
contract
liability
is
an
entity’s
obligation
to
transfer
goods
or
services
to
a
customer
in
exchange
for
consideration
from
the
customer.
FirstBank
participates
in
a
merchant
revenue-sharing
agreement
with
another
entity
to
which
the
Bank
sold
its
merchant
contracts
portfolio
and
related
POS
terminals
and
a
growth
agreement
with
an
international
card
service
association
to
expand
the
customer
base
and
enhance
product
offerings.
FirstBank
recognizes
the
revenue
under
these
agreements
over
time,
as
the
Bank
completes its performance obligations.
The following table
shows the balances
of contract liabilities
recognized in relation
to these agreements
and the amount
of revenue
recognized for the years ended December 31, 2022, 2021 and 2020:
2022
2021
2020
(In thousands)
Beginning Balance
$
1,443
$
2,151
$
2,476
Less:
Revenue recognized
(602)
(708)
(325)
Ending balance
$
841
$
1,443
$
2,151
As of December 31, 2022 and 2021 there were
no
contract assets recorded on the Corporation’s
consolidated financial statements.
Other
Except for the contract liabilities noted above, the Corporation did not have
any significant performance obligations as of December
31, 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
211
NOTE 27 – 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
December
31,
2022,
the
Corporation
had
six
reportable segments: Mortgage Banking;
Consumer (Retail) Banking; Commercial
and Corporate 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
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
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
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,
the
Mortgage
Banking,
the
Consumer
(Retail)
Banking,
and
the
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.
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.
The following tables present information about the reportable segments for the indicated periods:
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
For the year ended December 31, 2022:
Interest income
$
130,185
$
302,631
$
205,888
$
104,215
$
94,782
$
24,913
$
862,614
Net (charge) credit for transfer of funds
(31,265)
173,917
(96,066)
(43,838)
(2,748)
-
-
Interest expense
-
(33,924)
-
(20,777)
(11,549)
(1,071)
(67,321)
Net interest income
98,920
442,624
109,822
39,600
80,485
23,842
795,293
Provision for credit losses - (benefit) expense
(7,643)
57,123
(20,241)
(434)
(3,073)
1,964
27,696
Non-interest income (loss)
15,950
78,457
18,189
(74)
2,860
7,710
123,092
Direct non-interest expenses
23,049
162,663
37,131
3,702
33,365
27,911
287,821
Segment income
$
99,464
$
301,295
$
111,121
$
36,258
$
53,053
$
1,677
$
602,868
Average earnings assets
$
2,233,245
$
2,918,800
$
3,626,107
$
7,300,208
$
2,069,030
$
369,504
$
18,516,894
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
212
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
For the year ended December 31, 2021:
Interest income
$
144,203
$
271,127
$
201,684
$
67,841
$
82,194
$
27,659
$
794,708
Net (charge) credit for transfer of funds
(39,565)
38,859
(9,767)
14,687
(4,214)
-
-
Interest expense
-
(28,283)
-
(23,197)
(12,013)
(1,286)
(64,779)
Net interest income
104,638
281,703
191,917
59,331
65,967
26,373
729,929
Provision for credit losses - (benefit) expense
(16,030)
20,322
(67,544)
(136)
(975)
(1,335)
(65,698)
Non-interest income
24,278
69,774
16,032
227
3,963
6,890
121,164
Direct non-interest expenses
29,125
165,357
36,219
4,093
33,902
28,084
296,780
Segment income
$
115,821
$
165,798
$
239,274
$
55,601
$
37,003
$
6,514
$
620,011
Average earnings assets
$
2,506,365
$
2,551,278
$
3,793,945
$
7,827,326
$
2,126,528
$
430,499
$
19,235,941
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
For the year ended December 31, 2020:
Interest income
$
128,043
$
240,725
$
155,254
$
55,003
$
84,169
$
29,788
$
692,982
Net (charge) credit for transfer of funds
(52,018)
18,771
(19,663)
59,074
(6,164)
-
-
Interest expense
-
(38,818)
-
(26,198)
(23,980)
(3,664)
(92,660)
Net interest income
76,025
220,678
135,591
87,879
54,025
26,124
600,322
Provision for credit losses - expense
22,518
54,094
74,607
2,774
12,592
4,400
170,985
Non-interest income
22,069
50,962
12,606
13,708
4,630
7,251
111,226
Direct non-interest expenses
33,054
131,133
28,631
3,449
33,782
28,815
258,864
Segment income
$
42,522
$
86,413
$
44,959
$
95,364
$
12,281
$
160
$
281,699
Average earnings assets
$
2,241,753
$
2,202,595
$
3,039,786
$
4,232,144
$
2,026,619
$
458,608
$
14,201,505
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals for the indicated periods:
Year Ended
December 31,
2022
2021
2020
(In thousands)
Net income:
Total income for segments
$
602,868
$
620,011
$
281,699
Other operating expenses
(1)
155,284
192,194
165,376
Income before income taxes
447,584
427,817
116,323
Income tax expense
142,512
146,792
14,050
Total consolidated net income
$
305,072
$
281,025
$
102,273
Average assets:
Total average earning assets for segments
$
18,516,894
$
19,235,941
$
14,201,505
Average non-earning assets
861,755
1,067,092
1,031,141
Total consolidated average assets
$
19,378,649
$
20,303,033
$
15,232,646
(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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
213
The following table presents revenues (interest income plus non-interest income) and selected balance sheet data by geography based on the
location in which the transaction was originated as of indicated dates:
2022
2021
2020
(In thousands)
Revenues:
Puerto Rico
$
855,441
$
795,166
$
678,370
United States
97,642
86,157
88,799
Virgin Islands
32,623
34,549
37,039
Total consolidated revenues
$
985,706
$
915,872
$
804,208
Selected Balance Sheet Information:
Total assets:
Puerto Rico
$
16,020,987
$
18,175,910
$
16,091,112
United States
2,213,333
2,189,440
2,117,966
Virgin Islands
400,164
419,925
583,993
Loans:
Puerto Rico
$
9,097,013
$
8,755,434
$
9,367,032
United States
2,088,351
1,948,716
1,993,797
Virgin Islands
379,767
391,663
466,749
Deposits:
Puerto Rico
(1)
$
12,933,570
$
14,113,874
$
12,338,934
United States
(2)
1,623,725
1,928,749
1,622,481
Virgin Islands
1,586,172
1,742,271
1,355,968
(1)
For 2022, 2021, and 2020, includes $
1.4
million, $
34.2
million, and $
109.0
million, respectively, of brokered CDs allocated
to Puerto Rico operations.
(2)
For 2022, 2021, and 2020 includes $
104.4
million, $
66.2
million, and $
107.1
million, respectively, of brokered CDs
allocated to United States operations.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
214
NOTE 28 – SUPPLEMENTAL
STATEMENT
OF CASH FLOWS INFORMATION
Supplemental statement of cash flows information is as follows for the indicated
periods:
Year Ended
December 31,
2022
2021
2020
(In thousands)
Cash paid for:
Interest on borrowings
$
65,986
$
68,668
$
94,872
Income tax
51,798
15,477
16,713
Operating cash flow from operating leases
18,202
19,328
13,464
Non-cash investing and financing activities:
Additions to OREO
15,350
19,348
7,249
Additions to auto and other repossessed assets
45,607
33,408
36,203
Capitalization of servicing assets
3,122
5,194
4,864
Loan securitizations
141,909
191,434
221,491
Loans held for investment transferred to held for sale
4,632
33,010
10,817
Payable related to unsettled purchases of available-for-sale investment securities
-
-
24,033
ROU asset obtained in exchange for operating lease liabilities
2,733
4,553
1,328
Acquisition
(1)
:
Consideration
$
-
$
584
$
1,280,424
Fair value of assets acquired
-
605
5,561,564
Liabilities assumed
-
-
4,291,674
(1)
Recognized in connection with the BSPR acquisition on September
1, 2020.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
215
NOTE 29 – REGULATORY
MATTERS, COMMITMENTS,
AND CONTINGENCIES
Regulatory Matters
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 December
31, 2022 and 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
December 31, 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
December
31,
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 phase-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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
216
The regulatory capital position of
the Corporation and the Bank as
of December 31, 2022,
and 2021, which reflects 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 December 31, 2022
Total Capital (to Risk-Weighted
Assets)
First BanCorp.
$
2,385,866
19.21
%
$
993,405
8.0
%
N/A
N/A
%
FirstBank
$
2,346,093
18.90
%
$
993,264
8.0
%
$
1,241,580
10.0
%
CET1 Capital (to Risk-Weighted Assets)
First BanCorp.
$
2,052,333
16.53
%
$
558,790
4.5
%
N/A
N/A
%
FirstBank
$
2,090,832
16.84
%
$
558,711
4.5
%
$
807,027
6.5
%
Tier I Capital (to Risk-Weighted
Assets)
First BanCorp.
$
2,052,333
16.53
%
$
745,054
6.0
%
N/A
N/A
%
FirstBank
$
2,190,832
17.65
%
$
744,948
6.0
%
$
993,264
8.0
%
Leverage ratio
First BanCorp.
$
2,052,333
10.70
%
$
767,075
4.0
%
N/A
N/A
%
FirstBank
$
2,190,832
11.43
%
$
766,714
4.0
%
$
958,392
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
%
Cash Restrictions
The Corporation’s
bank subsidiary,
FirstBank, is
required by
the Puerto
Rico Banking
Law to
maintain minimum
average weekly
reserve balances to
cover demand deposits.
The amount of those
minimum average weekly
reserve balances for
the period that
ended
December 31,
2022
was
$
1.1
billion
(2021
-
$
1.2
billion).
As
of
December 31,
2022
and
2021,
the
Bank
complied
with
the
requirement.
Cash
and
due
from
banks
as
well
as
other
highly
liquid
securities
are
used
to
cover
the
required
average
reserve
balances.
As of December
31, 2022, and
as required by
the Puerto Rico
International Banking
Law,
the Corporation maintained
$
0.3
million
in time deposits, related to FirstBank Overseas Corporation, an international
banking entity that is a subsidiary of FirstBank.
Commitments
The
Corporation’s
exposure
to
credit
loss
in
the
event
of
nonperformance
by
the
other
party
to
the
financial
instrument
on
commitments to extend credit
and standby letters of credit
is represented by the contractual amount
of those instruments. Management
uses the same
credit policies
and approval process
in entering into
commitments and
conditional obligations
as it does
for on-balance
sheet instruments.
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
217
In
general,
commercial
and
standby
letters
of
credit
are
issued
to
facilitate
foreign
and
domestic
trade
transactions.
Normally,
commercial and standby
letters of credit
are short-term commitments
used to finance
commercial contracts for
the shipment of goods.
The
collateral
for
these
letters
of
credit
includes
cash
or
available
commercial
lines
of
credit.
The
fair
value
of
commercial
and
standby letters
of credit
is based
on the
fees currently
charged for
such agreements,
which, as
of December 31,
2022 and
2021, were
not significant.
The following table summarizes commitments to extend credit and standby letters of
credit as of the indicated dates:
December 31,
2022
2021
(In thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Construction undisbursed funds
$
170,639
$
197,917
Unused personal lines of credit
978,219
1,180,824
Commercial lines of credit
761,634
725,259
Letters of credit:
Commercial letters of credit
68,647
151,140
Standby letters of credit
9,160
4,342
Contingencies
As of
December 31,
2022, First
BanCorp. and
its subsidiaries
were defendants
in various
legal proceedings,
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 December 31, 2022, no such disclosures were necessary.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
218
NOTE 30- 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 December 31, 2022
and 2021, and the
results of its operations
and cash flows for
the years ended December
31, 2022, 2021, and
2020:
Statements of Financial Condition
As of December 31,
2022
2021
(In thousands)
Assets
Cash and due from banks
$
19,279
$
20,751
Other investment securities
735
285
Investment in First Bank Puerto Rico, at equity
1,464,026
2,247,289
Investment in First Bank Insurance Agency,
at equity
28,770
19,521
Investment in FBP Statutory Trust I
1,951
1,951
Investment in FBP Statutory Trust II
3,561
3,561
Dividends receivable
624
295
Other assets
430
71
Total assets
$
1,519,376
$
2,293,724
Liabilities and Stockholders' Equity
Liabilities:
Other borrowings
$
183,762
$
183,762
Accounts payable and other liabilities
10,074
8,195
Total liabilities
193,836
191,957
Stockholders' equity
1,325,540
2,101,767
Total liabilities and stockholders'
equity
$
1,519,376
$
2,293,724
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
219
Statements of Income
Year
Ended December 31,
2022
2021
2020
(In thousands)
Income
Interest income on money market investments
$
79
$
51
$
71
Dividend income from banking subsidiaries
368,670
98,060
52,707
Dividend income from non-banking subsidiaries
-
30,000
-
Other income
248
154
439
Total income
368,997
128,265
53,217
Expense
Other borrowings
8,253
5,135
6,355
Other operating expenses
1,730
1,929
2,097
Total expense
9,983
7,064
8,452
Gain on early extinguishment of debt
-
-
94
Income before income taxes and equity
in undistributed earnings of subsidiaries
359,014
121,201
44,859
Income tax expense
3,448
2,854
2,429
Equity in undistributed earnings of subsidiaries (distribution in excess of
earnings)
(50,494)
162,678
59,843
Net income
$
305,072
$
281,025
$
102,273
Other comprehensive (loss) income, net of tax
(720,779)
(139,454)
48,691
Comprehensive (loss) income
$
(415,707)
$
141,571
$
150,964
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
220
Statements of Cash Flows
Year Ended December 31,
2022
2021
2020
(In thousands)
Cash flows from operating activities:
Net income
$
305,072
$
281,025
$
102,273
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation
148
149
231
Equity in undistributed earnings of subsidiaries
50,494
(162,678)
(59,843)
Gain on early extinguishment of debt
-
-
(94)
Net decrease (increase) in other assets
(688)
1,657
(1,514)
Net increase (decrease) in other liabilities
1,545
3,578
(459)
Net cash provided by operating activities
356,571
123,731
40,594
Cash flows from investing activities:
Purchase of equity securities
(450)
-
-
Return of capital from wholly-owned subsidiaries
(1)
8,000
200,000
-
Net cash provided by investing activities
7,550
200,000
-
Cash flows from financing activities:
Repurchase of common stock
(277,769)
(216,522)
(206)
Repayment of junior subordinated debentures
-
-
(282)
Dividends paid on common stock
(87,824)
(65,021)
(43,416)
Dividends paid on preferred stock
-
(2,453)
(2,676)
Redemption of preferred stock - Series A through E
-
(36,104)
-
Net cash used in financing activities
(365,593)
(320,100)
(46,580)
Net (decrease) increase in cash and cash equivalents
(1,472)
3,631
(5,986)
Cash and cash equivalents at beginning of the year
20,751
17,120
23,106
Cash and cash equivalents at end of year
$
19,279
$
20,751
$
17,120
Cash and cash equivalents include:
Cash and due from banks
$
19,279
$
20,751
$
10,909
Money market instruments
-
-
6,211
$
19,279
$
20,751
$
17,120
(1)
During 2022, FirstBank of Puerto Rico, a wholly-owned subsidiary of First BanCorp., redeemed
0.3
million shares of its preferred stock for a total price of
approximately $
8.0
million.
During 2021, FirstBank of Puerto Rico, a wholly-owned subsidiary of First BanCorp., redeemed
8
million shares of its
preferred stock for a total price of approximately $
200
million.
221
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosures
None.
Item 9A. 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 Rule
13a-15(e) and
15d-15(e) under
the Exchange
Act) as
of the
end of the
period covered by
this Annual Report
on Form 10-K.
Based on this evaluation
as of the period
covered by this Form
10-K,
our
CEO
and
CFO
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
CEO and
CFO, as
appropriate
to
allow
timely
decisions
regarding required disclosure.
Management’s Report on Internal Control
over Financial Reporting
Management’s
Report on Internal Control over Financial
Reporting is included in Item 8 of
this Form 10-K and incorporated herein
by reference.
The effectiveness of the Corporation’s
internal control over financial reporting as of December
31, 2022 has been audited by Crowe
LLP,
an independent registered
public accounting firm,
as stated in
their report included
in Item 8
of this Annual
Report on Form
10-
K.
Changes in 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
December
31,
2022
that
have
materially
affected,
or
are
reasonably likely to materially affect, the Corporation’s
internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
222
PART
III
Item 10. Directors, Executive Officers and Corporate Governance
Information
in
response
to
this
item
is
incorporated
herein
by
reference
from
the
sections
entitled
“Information
With
Respect
to
Nominees Standing for Election as
Directors and With Respect
to Executive Officers of the
Corporation,” “Corporate Governance and
Related Matters,”
“Delinquent Section
16(a) Reports”
and “Audit
Committee Report”
contained in
First BanCorp.’s
definitive Proxy
Statement for use
in connection with its
2023 Annual Meeting
of Stockholders (the “2023
Proxy Statement”) to
be filed with the
SEC
within 120 days of December 31, 2022.
Item 11. Executive Compensation.
Information
in
response
to
this
item
is
incorporated
herein
by
reference
from
the
sections
entitled
“Compensation
Committee
Interlocks
and
Insider
Participation,”
“Compensation
of
Directors,”
“Non-Management
Chairman
and
Specialized
Expertise,”
“Executive Compensation Disclosure –
Compensation Discussion and Analysis,” “Executive
Compensation Tables
and Compensation
Information” and “Compensation Committee Report” in the 2023 Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Securities authorized for issuance under equity compensation plans
The following table sets forth information about First BanCorp. common stock
authorized for issuance under First BanCorp.’s
existing equity compensation plan as of December 31, 2022:
Plan category
(a)
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
(b)
Weighted Average Exercise
Price of Outstanding
Options, Warrants and
Rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
Equity compensation plans, approved by stockholders
791,923
(1)
$
-
3,830,165
(2)
Equity compensation plans not approved by stockholders
N/A
N/A
N/A
Total
791,923
$
-
3,830,165
(1)
Amount represents unvested performance-based
units granted to executives, with each
unit representing one share of the
Corporation's common stock.
Performance shares will vest on
the
achievement of
a pre-established
performance target
goal at
the end
of a
three-year performance
period.
Refer to
Note 16
- "Stock-Based
Compensation" of
the Notes
to Consolidated
Financial Statements for more information
on performance units.
(2)
Securities available for future issuance under the First BanCorp.
2008 Omnibus Incentive Plan (the "Omnibus Plan"), which
was initially approved by stockholders on April 29,
2008. Most
recently,
on May
24, 2016,
the Omnibus
Plan was
amended to,
among other
things, increase
the number
of shares
of common
stock reserved
for issuance
under the
Omnibus Plan
and
extend the term of
the Omnibus Plan to
May 24, 2026. The
Omnibus Plan provides for
equity-based compensation incentives
through the grant of
stock options, stock
appreciation rights,
restricted stock, restricted
stock units, performance
shares, and other
stock-based awards. As
amended, the Omnibus
Plan provides for the
issuance of up to
14,169,807 shares of common
stock, subject to adjustments for stock splits, reorganization
and other similar events.
Additional
information
in
response
to
this
item
is
incorporated
by
reference
from
the
section
entitled
“Security
Ownership
of
Certain Beneficial Owners and Management” in the 2023 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions,
and Director Independence
Information in response to this item is incorporated herein by reference
from the sections entitled “Certain Relationships and Related
Person Transactions” and “Corporate
Governance and Related Matters” in the 2023 Proxy Statement.
223
Item 14. Principal Accountant Fees and Services.
Audit Fees
Information
in
response
to
this
item
is
incorporated
herein
by
reference
from
the
section
entitled
“Audit
Fees”
and
“Audit
Committee Report” in the 2023 Proxy Statement.
PART
IV
Item 15. Exhibits and Financial Statement Schedules
(a) List of documents filed as part of this report.
(1)
Financial Statements.
The
following
consolidated
financial
statements
of
First
BanCorp.,
together
with
the
reports
thereon
of
First
BanCorp.’s
independent registered
public accounting
firm, Crowe LLP
(PCAOB ID No.
173),
dated February 28,
2023, are included
in Item 8
of
this Annual Report on Form 10-K:
– Report of Crowe LLP,
Independent Registered Public Accounting Firm.
–
Attestation Report of Crowe LLP,
Independent Registered Public Accounting Firm on Internal Control over
Financial
Reporting.
–Consolidated Statements of Financial Condition as of December
31, 2022 and 2021.
–Consolidated Statements of Income for Each of the Three Years
in the Period Ended December 31, 2022.
– Consolidated Statements of Comprehensive (Loss) Income for
Each of the Three Years
in the Period Ended December 31,
2022.
– Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended December 31, 2022.
– Consolidated Statements of Changes in Stockholders’ Equity for
Each of the Three Years
in the Period Ended December 31,
2022.
– Notes to the Consolidated Financial Statements.
(2) Financial statement schedules.
All financial schedules have been omitted because they are not applicable or
the required information is shown in the financial
statements or notes thereto.
(b) Exhibits listed in the Exhibit Index below are filed herewith as part of this Annual Report on
Form 10-K and are incorporated
herein by reference.
Item 16. Form 10-K Summary
Not applicable.
224
EXHIBIT INDEX
Exhibit No.
Description
3.1
Restated Articles of Incorporation, incorporated by reference from Exhibit 3.1 of the Registration Statement on Form S-
1/A, filed on October 20, 2011.
3.2
Amended and Restated By-Laws, incorporated by reference from Exhibit 3.2 of the Form 8-K, filed on March 31, 2020.
4.1
Description of First BanCorp. capital stock.
10.1*
First BanCorp Omnibus Incentive Plan, as amended, incorporated by reference from Exhibit 99.1 of the Form S-8, filed on
June 21, 2016.
10.2*
10.3*
10.4*
Form of Restricted Stock Award Agreement
Form of First BanCorp Long-Term Incentive Award Agreement, incorporated by reference from Exhibit 10.1 of the Form
10-Q for the quarter ended March 31, 2018, filed on May 10, 2018.
Employment Agreement between First BanCorp and Aurelio Alemán, incorporated by reference from Exhibit 10.6- of the
Form 10-K for the year ended December 31, 1998, filed on March 26, 1999.
10.5*
Amendment No. 1 to Employment Agreement between First BanCorp and Aurelio Alemán, incorporated by reference from
Exhibit 10.2 of the Form 10-Q for the quarter ended March 31, 2009, filed on May 11, 2009.
10.6*
Amendment No. 2 to Employment Agreement between First BanCorp and Aurelio Alemán, incorporated by reference from
Exhibit 10.6 of the Form 10-K for the year ended December 31, 2009, filed on March 2, 2010.
10.7*
Employment Agreement between First BanCorp and Orlando Berges, incorporated by reference from Exhibit 10.1 of the
Form 10-Q for the quarter ended June 30, 2009, filed on August 11, 2009.
10.8*
Letter Agreement between First BanCorp. and Roberto R. Herencia, incorporated by reference from Exhibit 10.1 of the
Form 8-K/A, filed on November 2, 2011.
10.9*
Offer Letter between First BanCorp and Juan Acosta Reboyras, incorporated by reference from Exhibit 10.1 of the Form 8-
K, filed on September 3, 2014.
10.10*
Offer Letter between First BanCorp and Luz A. Crespo, incorporated by reference from Exhibit 10.1 of the Form 8-K, filed
on February 9, 2015.
10.11*
Offer Letter between First BanCorp and John A. Heffern, incorporated by reference from Exhibit 10.1 of the Form 8-K,
filed on November 1, 2017.
10.12*
Offer Letter between First BanCorp and Daniel E. Frye, incorporated by reference from Exhibit 10.1 of the Form 8-K, filed
on August 31, 2018.
10.13*
Offer Letter between First BanCorp and Félix M. Villamil, incorporated by reference from Exhibit 10.1 of the Form 8-K,
filed on November 5, 2020.
10.14*
Offer Letter between First BanCorp and Patricia M. Eaves, incorporated by reference from Exhibit 10.1 of the Form 8-K,
filed on April 1, 2021.
10.15*
Form of Executive Employment Agreement executed by each executive officer, incorporated by reference from Exhibit
10.1 of the Form 10-Q for the quarter ended June 30, 2018, filed on August 9, 2018.
10.16*
Revised
Non-Management and Non-
Employee
Directors of the Board of Directors Compensation Structure,
incorporated
by reference from Exhibit 10.1 of the Form 10-Q for the quarter
ended September 30, 2022, filed on November 8,
2022.
18.1
Preferability letter from Crowe, LLP regarding a change in accounting method dated November 8, 2022, incorporated by
reference form Exhibit 18 of the Form 10-Q for the quarter ended September 30, 2022, filed on November 8, 2022.
21.1
List of First BanCorp’s subsidiaries
23.1
Consent of Crowe LLP
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
Inline 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
Inline XBRL Taxonomy Extension Schema Document, filed herewith
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document, filed herewith
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith
101.DEF
Inline XBRL Taxonomy Extension Definitions Linkbase Document, filed herewith
104
The cover page of First BanCorp. Annual Report on Form
10-K for the year ended December 31, 2022, formatted in
Inline
XBRL (included within the Exhibit 101 attachments)
_____________________________
*Management contract or compensatory plan or agreement.
225
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.
By:
/s/ Aurelio Alemán
Date: 2/28/2023
Aurelio Alemán
President, Chief Executive Officer and Director
Pursuant
to
the
requirements
of
the
Securities
Exchange
Act
of
1934,
this
report
has
been
signed
by
the
following
persons
on
behalf
of
the
registrant and in the capacities and on the dates indicated.
/s/ Aurelio Alemán
Date: 2/28/2023
Aurelio Alemán
President, Chief Executive Officer and Director
/s/ Orlando Berges
Date: 2/28/2023
Orlando Berges, CPA
Executive Vice President and Chief Financial Officer
/s/ Roberto R. Herencia
Date: 2/28/2023
Roberto R. Herencia,
Director and Chairman of the Board
/s/ Patricia M. Eaves
Date: 2/28/2023
Patricia M. Eaves,
Director
/s/ Luz A. Crespo
Date: 2/28/2023
Luz A. Crespo,
Director
/s/ Juan Acosta-Reboyras
Date: 2/28/2023
Juan Acosta-Reboyras,
Director
/s/ John A. Heffern
Date: 2/28/2023
John A. Heffern,
Director
/s/ Daniel E. Frye
Date: 2/28/2023
Daniel E. Frye,
Director
/s/ Tracey Dedrick
Date: 2/28/2023
Tracey Dedrick,
Director
/s/ Felix Villamil
Date: 2/28/2023
Felix Villamil,
Director
/s/ Said Ortiz
Date: 2/28/2023
Said Ortiz, CPA
Senior Vice President and Chief Accounting Officer