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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
____________
FORM
10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2023
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to
___________________
COMMISSION FILE NUMBER
001-14793
FIRST BANCORP
.
(EXACT NAME OF REGISTRANT AS SPECIFIED
IN ITS CHARTER)
Puerto Rico
66-0561882
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1519 Ponce de León Avenue
,
Stop 23
San Juan
,
Puerto Rico
(Address of principal executive offices)
00908
(Zip Code)
(
787
)
729-8200
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock ($0.10 par value per share)
FBP
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90
days.
Yes
☑
No
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required
to submit such files).
Yes
☑
No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of
the Exchange Act.
Large accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to
use the extended transition period for complying with any
new or revised
financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act.
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☑
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest practicable date.
Common stock:
179,788,698
shares outstanding as of May 1, 2023.
2
FIRST BANCORP.
INDEX PAGE
PART
I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated
Statements
of
Financial
Condition
(Unaudited)
as
of
March
31,
2023
and
December
31,
2022
5
Consolidated Statements of Income (Unaudited) – Quarters ended
March 31, 2023 and 2022
6
Consolidated Statements of
Comprehensive Income (Loss)
(Unaudited) – Quarters
ended March 31, 2023
and 2022
7
Consolidated Statements of Cash Flows (Unaudited) – Quarters ended
March 31, 2023 and 2022
8
Consolidated
Statements
of
Changes
in
Stockholders’
Equity
(Unaudited)
–
Quarters
ended
March
31,
2023 and 2022
9
Notes to Consolidated Financial Statements (Unaudited)
10
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
73
Item 3. Quantitative and Qualitative Disclosures About Market Risk
121
Item 4. Controls and Procedures
121
PART
II. OTHER INFORMATION
Item 1.
Legal Proceedings
122
Item 1A. Risk Factors
122
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
124
Item 6.
Exhibits
125
SIGNATURES
3
Forward-Looking Statements
This Quarterly Report on Form 10-Q
(“Form 10-Q”) contains forward-looking statements
within the meaning of Section 27A
of the
Securities Act
of 1933,
as amended (the
“Securities Act”),
and Section
21E of
the Securities
Exchange Act
of 1934,
as amended (the
“Exchange Act”), which are subject
to the safe harbor created by
such sections. When used in this
Form 10-Q or future filings by
First
BanCorp.
(the
“Corporation,”
“we,”
“us,”
or
“our”)
with
the
U.S.
Securities
and
Exchange
Commission
(the
“SEC”),
in
the
Corporation’s press
releases or in other public or
stockholder communications made by
the Corporation, or in oral statements
made on
behalf of the Corporation by,
or with the approval of, an
authorized executive officer,
the words or phrases “would,” “intends,”
“will,”
“expect,” “should,”
“plans,” “forecast,”
“anticipate,” “look forward,”
“believes,” and other
terms of similar
meaning or import,
or the
negatives of
these terms
or variations
of them,
in connection
with any
discussion of
future operating,
financial or
other performance
are meant to identify “forward-looking statements.”
The Corporation cautions readers
not to place undue reliance on
any such “forward-looking statements,” which
speak only as of the
date
made,
and
advises
readers
that
these
forward-looking
statements
are
not
guarantees
of
future
performance
and
involve
certain
risks,
uncertainties,
estimates,
and
assumptions
by
us
that
are
difficult
to
predict.
Various
factors,
some
of
which
are
beyond
our
control, could cause actual results to differ materially from
those expressed in, or implied by,
such forward-looking statements.
Factors that could
cause results to
differ from
those expressed in
the Corporation’s
forward-looking statements
include, but
are not
limited to, risks
described or
referenced in
Part I, Item
1A, “Risk Factors,”
in the Corporation’s
Annual Report
on Form 10-K
for the
year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”)
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,
a reduction
in the fair
value of the
Corporation’s
debt
securities portfolio,
and an
increase
in non-interest
expenses which
would impact
the Corporation’s
earnings and
may
adversely impact origination volumes, liquidity,
and financial performance;
●
volatility in the
financial services industry,
including failures or
rumored failures of
other depository institutions,
and actions
taken
by
governmental
agencies
to
stabilize
the
financial
system,
which
could
result
in,
among
other
things,
bank
deposit
runoffs and liquidity constraints;
●
the
effect
of
continued
changes
in
the
fiscal
and
monetary
policies
and
regulations
of
the
United
States
(“U.S.”)
federal
government,
the Puerto
Rico government
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, the U.S., and the U.S. Virgin
Islands (the “USVI) and British Virgin
Islands (the “BVI”);
●
uncertainty as
to the
ability of
the Corporation’s
banking subsidiary,
FirstBank Puerto
Rico (“FirstBank”
or the
“Bank”), to
retain its core
deposits and
generate sufficient
cash flow through
its wholesale funding
sources, such as
securities sold
under
agreements
to
repurchase,
Federal
Home
Loan
Bank
(“FHLB”)
advances,
and
brokered
certificates
of
deposit
(“brokered
CDs”),
which
in
turn
affects
its
ability
to
make
dividend
payments
to
the
Corporation
and
could
result
in
selling
certain
investment securities portfolio at a loss;
●
adverse
changes
in general
economic
conditions
in Puerto
Rico, the
U.S., and
the USVI
and
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;
●
the ability
of the
Corporation,
FirstBank,
and
third-party
service providers
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 and
response to any,
such as a recent security
incident at one of our
third-party
vendors, which may
result in misuse
or misappropriation of
confidential or proprietary
information, disruption,
or damage to
our systems or those of third-party service providers, increased costs and
losses or an adverse effect to our reputation;
4
●
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 April
3, 2023
(the “2023
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 and tax regulations in Puerto Rico;
●
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 FirstBank to realize the benefits of its net deferred tax assets;
●
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
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 (the “Board”) 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
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
March 31, 2023
December 31, 2022
(In thousands, except for share information)
ASSETS
Cash and due from banks
$
822,542
$
478,480
Money market investments:
Time deposits with other financial institutions
300
300
Other short-term investments
759
1,725
Total money market investments
1,059
2,025
Available-for-sale debt securities, at fair value:
Securities pledged with creditors’ rights to repledge
181,009
81,103
Other available-for-sale debt securities
5,408,247
5,518,417
Total available-for-sale debt securities, at fair value (amortized cost of $
6,300,696
as of March 31, 2023, and
$
6,398,197
as of December 31, 2022; ACL of $
449
as of March 31, 2023 and $
458
as of December 31, 2022)
5,589,256
5,599,520
Held-to-maturity debt securities, at amortized cost, net of ACL
of $
7,646
as of March 31, 2023 and $
8,286
as of December 31, 2022 (fair value of $
419,752
as of March 31, 2023 and $
427,115
as of December 31, 2022)
423,749
429,251
Equity securities
66,714
55,289
Total investment securities
6,079,719
6,084,060
Loans, net of ACL of $
265,567
as of March 31, 2023 and
$
260,464
as of December 31, 2022
11,312,418
11,292,361
Mortgage loans held for sale, at lower of cost or market
15,183
12,306
Total loans, net
11,327,601
11,304,667
Accrued interest receivable on loans and investments
63,841
69,730
Premises and equipment, net
137,580
142,935
Other real estate owned (“OREO”)
32,862
31,641
Deferred tax asset, net
154,780
155,584
Goodwill
38,611
38,611
Other intangible assets
19,073
21,118
Other assets
299,446
305,633
Total assets
$
18,977,114
$
18,634,484
LIABILITIES
Non-interest-bearing deposits
$
6,024,304
$
6,112,884
Interest-bearing deposits
10,027,661
10,030,583
Total deposits
16,051,965
16,143,467
Short-term securities sold under agreements to repurchase
172,982
75,133
Advances from the FHLB:
Short-term
425,000
475,000
Long-term
500,000
200,000
Total advances from the FHLB
925,000
675,000
Other long-term borrowings
183,762
183,762
Accounts payable and other liabilities
237,812
231,582
Total liabilities
17,571,521
17,308,944
Commitments and contingencies (See Note 22)
(nil)
(nil)
STOCKHOLDERS’ EQUITY
Common stock, $
0.10
par value,
2,000,000,000
shares authorized;
223,663,116
shares issued;
179,788,698
shares outstanding as of March 31, 2023
and
182,709,059
as of December 31, 2022
22,366
22,366
Additional paid-in capital
959,912
970,722
Retained earnings, includes legal surplus reserve of $
168,484
1,688,176
1,644,209
Treasury stock (at cost) of
43,874,418
shares as of March 31, 2023 and
40,954,057
shares as of December 31, 2022
(547,311)
(506,979)
Accumulated other comprehensive loss, net of tax of $
8,468
(717,550)
(804,778)
Total stockholders’ equity
1,405,593
1,325,540
Total liabilities and stockholders’ equity
$
18,977,114
$
18,634,484
The accompanying notes are an integral part of these statements.
6
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter Ended March 31,
2023
2022
(In thousands, except per share information)
Interest and dividend income:
Loans
$
210,636
$
173,787
Investment securities
27,110
23,247
Money market investments and interest-bearing cash accounts
4,650
820
Total interest and dividend income
242,396
197,854
Interest expense:
Deposits
29,885
7,652
Securities sold under agreements to repurchase:
Short-term
1,069
-
Long-term
-
2,182
Advances from the FHLB:
Short-term
4,341
-
Long-term
2,835
1,063
Other long-term borrowings
3,381
1,333
Total interest expense
41,511
12,230
Net interest income
200,885
185,624
Provision for credit losses - expense (benefit):
Loans and finance leases
16,256
(16,989)
Unfunded loan commitments
(105)
(178)
Debt securities
(649)
3,365
Provision for credit losses - expense (benefit)
15,502
(13,802)
Net interest income after provision for credit losses
185,383
199,426
Non-interest income:
Service charges and fees on deposit accounts
9,541
9,363
Mortgage banking activities
2,812
5,206
Insurance commission income
4,847
5,275
Card and processing income
10,918
9,681
Other non-interest income
4,400
3,333
Total non-interest income
32,518
32,858
Non-interest expenses:
Employees’ compensation and benefits
56,422
49,554
Occupancy and equipment
21,186
22,386
Business promotion
3,975
3,463
Professional service fees
11,973
10,594
Taxes, other than
income taxes
5,112
5,018
FDIC deposit insurance
2,133
1,673
Net gain on OREO operations
(1,996)
(720)
Credit and debit card processing expenses
5,318
4,121
Communications
2,216
2,151
Other non-interest expenses
8,929
8,419
Total non-interest expenses
115,268
106,659
Income before income taxes
102,633
125,625
Income tax expense
31,935
43,025
Net income
$
70,698
$
82,600
Net income attributable to common stockholders
$
70,698
$
82,600
Net income per common share:
Basic
$
0.39
$
0.42
Diluted
$
0.39
$
0.41
The accompanying notes are an integral part of these statements.
7
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(Unaudited)
Quarter Ended March 31,
2023
2022
(In thousands)
Net income
$
70,698
$
82,600
Other comprehensive income (loss), net of tax:
Available-for-sale debt securities:
Net unrealized holding gains (losses) on debt securities
87,228
(331,834)
Other comprehensive income (loss) for the period, net of tax
87,228
(331,834)
Total comprehensive income (loss)
$
157,926
$
(249,234)
The accompanying notes are an integral part of these statements.
8
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarter Ended March 31,
2023
2022
(In thousands)
Cash flows from operating activities:
Net income
$
70,698
$
82,600
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
5,080
5,872
Amortization of intangible assets
2,045
2,286
Provision for credit losses - expense (benefit)
15,502
(13,802)
Deferred income tax expense
1,564
31,707
Stock-based compensation
2,075
1,182
Unrealized loss (gain) on derivative instruments
3
(618)
Net gain on disposals or sales, and impairments of premises and
equipment and other assets
(8)
(26)
Net gain on sales of loans and valuation adjustments
(766)
(2,461)
Net amortization of discounts, premiums, and deferred loan fees
and costs
283
(2,933)
Originations and purchases of loans held for sale
(38,500)
(86,802)
Sales and repayments of loans held for sale
34,836
93,739
Amortization of broker placement fees
44
35
Net amortization of premiums and discounts on investment securities
630
1,690
Decrease in accrued interest receivable
8,566
3,919
Increase (decrease) in accrued interest payable
3,752
(906)
(Increase) decrease in other assets
168
352
Increase (decrease) increase in other liabilities
9,443
(1,000)
Net cash provided by operating activities
115,415
114,834
Cash flows from investing activities:
Net disbursements on loans held for investment
(71,193)
(48,370)
Proceeds from sales of loans held for investment
2,552
1,306
Proceeds from sales of repossessed assets
12,347
9,361
Purchases of available-for-sale debt securities
-
(497,327)
Proceeds from principal repayments and maturities of available-for-sale
debt securities
113,218
208,397
Proceeds from principal repayments and maturities of held-to-maturity
debt securities
6,652
400
Additions to premises and equipment
(1,689)
(6,764)
Proceeds from sales of premises and equipment and other assets
8
26
Net purchases of other investments securities
(11,360)
(21)
Net cash provided by (used in) investing activities
50,535
(332,992)
Cash flows from financing activities:
Net decrease in deposits
(92,354)
(456,211)
Net proceeds from short-term borrowings
47,849
-
Repayments of long-term borrowings
-
(100,000)
Proceeds from long-term borrowings
300,000
-
Repurchase of outstanding common stock
(53,217)
(52,713)
Dividends paid on common stock
(25,132)
(19,727)
Net cash provided by (used in) financing activities
177,146
(628,651)
Net increase (decrease) in cash and cash equivalents
343,096
(846,809)
Cash and cash equivalents at beginning of year
480,505
2,543,058
Cash and cash equivalents at end of period
$
823,601
$
1,696,249
Cash and cash equivalents include:
Cash and due from banks
$
822,542
$
1,694,066
Money market investments
1,059
2,183
$
823,601
$
1,696,249
The accompanying notes are an integral part of these statements.
9
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
(Unaudited)
Quarter Ended March 31,
2023
2022
(In thousands, except per share information)
Common Stock
$
22,366
$
22,366
Additional Paid-In Capital:
Balance at beginning of period
970,722
972,547
Stock-based compensation expense
2,075
1,182
Common stock reissued under stock-based compensation plan
(13,139)
(6,980)
Restricted stock forfeited
254
22
Balance at end of period
959,912
966,771
Retained Earnings:
Balance at beginning of period
1,644,209
1,427,295
Impact of adoption of Accounting Standards Update (“ASU”)
2022-02 (See Note 1)
(1,357)
-
Net income
70,698
82,600
Dividends on common stock (2023 - $
0.14
per share; 2022 - $
0.10
per share)
(25,374)
(19,900)
Balance at end of period
1,688,176
1,489,995
Treasury Stock (at cost)
(See Note 1)
:
Balance at beginning of period
(506,979)
(236,442)
Common stock repurchases (See Note 14)
(53,217)
(52,713)
Common stock reissued under stock-based compensation plan
13,139
6,980
Restricted stock forfeited
(254)
(22)
Balance at end of period
(547,311)
(282,197)
Accumulated Other Comprehensive Loss, net of tax:
Balance at beginning of period
(804,778)
(83,999)
Other comprehensive income (loss), net of tax
87,228
(331,834)
Balance at end of period
(717,550)
(415,833)
Total stockholders’ equity
$
1,405,593
$
1,781,102
The accompanying notes are an integral part of these statements.
10
FIRST BANCORP.
INDEX TO NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
PAGE
Note 1 –
Basis of Presentation and Significant Accounting Policies
11
Note 2 –
Debt Securities
13
Note 3 –
Loans Held for Investment
23
Note 4
–
Allowance for Credit Losses for Loans and Finance Leases
40
Note 5 –
Other Real Estate Owned
42
Note 6
–
Goodwill and Other Intangibles
43
Note 7 –
Non-Consolidated Variable Interest Entities (“VIEs”) and Servicing Assets
44
Note 8 –
Deposits
48
Note 9 –
Securities Sold Under Agreements to Repurchase (Repurchase Agreements)
49
Note 10 –
Advances from the Federal Home Loan Bank (“FHLB”)
50
Note 11 –
Other Long-Term Borrowings
50
Note 12 –
Earnings per Common Share
51
Note 13 –
Stock-Based Compensation
52
Note 14 –
Stockholders’ Equity
55
Note 15 –
Accumulated Other Comprehensive Loss
57
Note 16 –
Employee Benefit Plans
57
Note 17 –
Income Taxes
58
Note 18
–
Fair Value
60
Note 19
–
Revenue from Contracts with Customers
64
Note 20 –
Segment Information
66
Note 21 –
Supplemental Statement of Cash Flows Information
68
Note 22 –
Regulatory Matters, Commitments, and Contingencies
69
Note 23 –
First BanCorp. (Holding Company Only) Financial Information
72
11
NOTE 1 – BASIS
OF PRESENTATION AND
SIGNIFICANT
ACCOUNTING
POLICIES
The
Consolidated Financial
Statements (unaudited)
for
the
quarter
ended
March
31,
2023
(the
“unaudited consolidated
financial
statements”)
of
First
BanCorp.
(the
“Corporation”)
have
been
prepared
in
conformity
with
the
accounting
policies
stated
in
the
Corporation’s Audited
Consolidated
Financial
Statements
for the fiscal
year ended December
31, 2022 (the
“audited consolidated
financial
statements”)
included
in the 2022
Annual Report
on Form
10-K, as
updated
by the information
contained
in this
report.
Certain information
and note disclosures
normally included
in the financial
statements
prepared in accordance
with generally
accepted accounting
principles
in
the United States
of America
(“GAAP”)
have been condensed
or omitted
from these statements
pursuant to
the rules and
regulations
of the
SEC and, accordingly, these financial statements
should be read in conjunction with the audited consolidated
financial statements,
which
are included in the 2022 Annual Report on Form 10-K. All adjustments
(consisting only of normal
recurring adjustments)
that are, in the
opinion of management,
necessary for
a fair presentation
of the statement
of financial
position, results
of operations
and cash flows for
the
interim
periods
have been
reflected.
All significant
intercompany
accounts
and transactions
have been
eliminated
in consolidation.
The results of operations
for the quarter ended
March 31, 2023
are not necessarily
indicative
of the results to be expected
for the entire
year.
Adoption
of New Accounting
Requirements
Accounting Standards Update (“ASU”) 2022-02, “Financial Instruments
– Credit
Losses (Topic 326):
Troubled Debt
Restructurings
and Vintage Disclosures”
Effective
January
1,
2023,
the
Corporation
adopted
ASU
2022-02,
which
removed
the
existing
measurement
and
disclosure
requirements
for Troubled
Debt Restructured
(“TDR”) loans,
added additional
disclosure
requirements
related to
modifications
provided
to
borrowers experiencing
financial difficulty
regardless of whether
the refinancing
is accounted for as a new loan,
and amends the guidance
on vintage
disclosures
to require
disclosure
of gross
charge-offs by
year of
origination.
Prior to
adoption,
a change
in contractual
terms of
a
loan where a borrower
was experiencing
financial difficulty
and received
a concession
not available
through other
sources was required
to
be disclosed
as a TDR, whereas
now a borrower
that is experiencing
financial
difficulty
and there
has been a direct
change to the
timing or
amount of contractual
cash flows in the form of principal
forgiveness, interest
rate reduction,
an other-than-insignificant
payment delay, a
term extension,
or any combination
of these types of loan modifications
in the current period
needs to be disclosed. ASU
2022-02 did not
amend the
definition
of financial
difficulty.
Modifications
of receivables are within the scope of ASU 2022-02 if they are accounted for in accordance with Accounting
Standards
Codification (“ASC”)
310-20.
As
such,
finance
leases
are
not
within
the
scope
of
ASU
2022-02.
Such
modifications are
evaluated
following the requirements in
ASC 310-20
to determine whether
they should
be accounted
for as
a
new loan
or
a
continuation of the
existing
loan.
ASU 2022-02 also eliminated
the requirement
to use a discounted cash flow method
for TDRs for the determination
of the ACL, and
allows
the
option
of
a
non-discounted cash
flow
portfolio-based approach
for
modified
loans
to
borrowers
experiencing
financial
difficulties.
The
Corporation
elected
to
apply
a
non-discounted
cash
flow,
portfolio-based ACL
approach
for
modified
loans
to
borrowers
experiencing
financial
difficulties
for all
portfolios,
using a modified
retrospective
transition
method.
The adoption
resulted
in a net
increase
to
the ACL
of
approximately $
2.1
million and
a
decrease to
retained earnings of
approximately $
1.3
million, after tax,
predominantly
driven by residential
mortgage
loans. The
amount of
defined modifications
given to borrowers
experiencing
financial
difficulty
is disclosed
in Note
3 – Loans
Held for
Investment,
along with
the financial
impact of
those modifications.
The Corporation
was not
impacted
by the adoption
of the following
ASUs during
the first
quarter of
2023:
●
ASU 2022-01,
“Derivatives
and Hedging
(Topic 815): Fair
Value Hedging – Portfolio
Layer Method”
●
ASU 2021-08, “Business
Combinations
(Topic 805): Accounting for Contract
Assets and Contract Liabilities
From Contracts
With Customers”
12
Recently Issued Accounting Standards Not Yet
Effective or Not Yet
Adopted
Standard
Description
Effective Date
Effect on the financial statements
ASU 2023-02, "Investments -
Equity Method and Joint Ventures
(Topic 323): Accounting for
Investments in Tax Credit
Structures Using the Proportional
Amortization Method"
In March 2023, the FASB issued
ASU 2023-02 which, among other
things, allows tax equity
investments, regardless of the tax
credit program from which the
income tax credits are received, to
be accounted for using the
proportional amortization method if
certain conditions are met and
requires specific disclosures of
such investments. The election
needs to be made on a tax-credit-
program-by-tax-credit-program
basis.
January 1, 2024. Early adoption is
permitted in any interim period.
The Corporation does not expect to
be impacted by the amendments of
this ASU since it does not hold tax
equity investments.
ASU 2023-01, "Leases (Topic
842): Common Control
Arrangements"
In March 2023, the FASB issued
ASU 2023-01 which, among other
things, generally requires a lessee
in a common-control lease
arrangement to amortize leasehold
improvements over the useful life
regardless of the lease term, subject
to certain exceptions. In addition, a
lessee that no longer controls the
use of the underlying asset will
account for the transfer of the
underlying asset as an adjustment
to equity.
January 1, 2024. Early adoption is
permitted for both interim and
annual financial statements that
have not yet been made available
for issuance.
The Corporation is evaluating the
impact that this ASU will have on its
financial statements. The
Corporation does not expect to be
materially impacted by the adoption
of this ASU during the first quarter
of 2024.
For
other
issued
accounting
standards
not
yet
effective
or
not
yet
adopted,
see
Note
1
–
Nature
of
Business
and
Summary
of
Significant Accounting Policies, to the audited consolidated financial
statements included in the 2022 Annual Report on Form 10-K.
13
NOTE 2 – DEBT SECURITIES
Available-for-Sale
Debt Securities
The amortized
cost, gross
unrealized gains
and losses,
ACL, estimated
fair value,
and weighted-average
yield of
available-for-sale
debt securities by contractual maturities as of March 31, 2023 were as follows:
March 31, 2023
Amortized cost
(1)
Gross
ACL
Fair value
Unrealized
Weighted-
Gains
Losses
average yield%
(Dollars in thousands)
U.S. Treasury securities:
Due within one year
$
27,744
$
-
$
890
$
-
$
26,854
0.61
After 1 to 5 years
120,916
-
7,348
-
113,568
0.69
U.S. government-sponsored entities (“GSEs”) obligations:
Due within one year
189,174
-
5,100
-
184,074
0.42
After 1 to 5 years
2,349,522
22
190,986
-
2,158,558
0.84
After 5 to 10 years
41,916
8
4,998
-
36,926
1.64
After 10 years
11,625
27
-
-
11,652
5.15
Puerto Rico government obligations:
After 10 years
(2)
3,302
-
733
366
2,203
-
United States and Puerto Rico government obligations
2,744,199
57
210,055
366
2,533,835
0.83
Mortgage-backed securities (“MBS”):
Residential MBS:
Freddie Mac (“FHLMC”) certificates:
After 1 to 5 years
10,023
-
454
-
9,569
1.98
After 5 to 10 years
187,007
-
15,912
-
171,095
1.56
After 10 years
1,068,680
-
170,021
-
898,659
1.41
1,265,710
-
186,387
-
1,079,323
1.44
Ginnie Mae (“GNMA”) certificates:
Due within one year
3
-
-
-
3
2.42
After 1 to 5 years
23,293
-
1,253
-
22,040
1.31
After 5 to 10 years
33,939
-
2,720
-
31,219
1.69
After 10 years
225,680
119
24,080
-
201,719
2.58
282,915
119
28,053
-
254,981
2.37
Fannie Mae (“FNMA”) certificates:
After 1 to 5 years
24,446
-
1,249
-
23,197
1.72
After 5 to 10 years
353,397
-
28,963
-
324,434
1.74
After 10 years
1,133,757
104
168,025
-
965,836
1.37
1,511,600
104
198,237
-
1,313,467
1.47
Collateralized mortgage obligations issued or
guaranteed by the FHLMC, FNMA and
GNMA (“CMOs”):
After 10 years
296,022
-
52,540
-
243,482
1.49
Private label:
After 10 years
7,695
-
2,210
83
5,402
7.25
Total Residential MBS
3,363,942
223
467,427
83
2,896,655
1.55
Commercial MBS:
After 1 to 5 years
27,584
7
4,551
-
23,040
2.27
After 5 to 10 years
44,584
-
4,929
-
39,655
1.90
After 10 years
120,387
-
24,316
-
96,071
1.23
Total Commercial MBS
192,555
7
33,796
-
158,766
1.53
Total MBS
3,556,497
230
501,223
83
3,055,421
1.54
Total available-for-sale debt securities
$
6,300,696
$
287
$
711,278
$
449
$
5,589,256
1.23
(1)
Excludes accrued interest receivable on available-for-sale debt securities that totaled $
10.7
million as of March 31, 2023 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 Puerto Rico Housing Finance Authority (“PRHFA”) that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico
government in 2010 and is in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral.
14
The amortized
cost, gross
unrealized gains
and losses,
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:
Residential MBS:
FHLMC certificates:
After 1 to 5 years
4,235
-
169
-
4,066
2.33
After 5 to 10 years
201,072
-
18,709
-
182,363
1.55
After 10 years
1,092,289
-
186,558
-
905,731
1.38
1,297,596
-
205,436
-
1,092,160
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
358,346
-
31,620
-
326,726
1.68
After 10 years
1,186,635
124
186,757
-
1,000,002
1.38
1,554,666
124
218,898
-
1,335,892
1.45
CMOs:
After 10 years
302,232
-
56,539
-
245,693
1.44
Private label:
After 10 years
7,903
-
2,026
83
5,794
6.83
Total Residential MBS
3,455,864
176
514,499
83
2,941,458
1.52
Commercial MBS:
After 1 to 5 years
30,578
-
4,463
-
26,115
2.43
After 5 to 10 years
44,889
-
5,603
-
39,286
1.89
After 10 years
121,464
-
23,732
-
97,732
1.23
Total Commercial MBS
196,931
-
33,798
-
163,133
1.56
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 and is in nonaccrual
status based on the delinquency status of the underlying second mortgage loans collateral.
15
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
in
the
consolidated
statements of financial condition.
The
following
tables
present
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 March 31, 2023 and December 31, 2022. The tables also include debt securities for
which an ACL was recorded.
As of March 31, 2023
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
$
17,615
$
611
$
2,496,925
$
208,711
$
2,514,540
$
209,322
Puerto Rico government obligations
-
-
2,203
733
(1)
2,203
733
MBS:
Residential MBS:
FHLMC
21,354
710
1,057,950
185,677
1,079,304
186,387
GNMA
45,949
868
197,581
27,185
243,530
28,053
FNMA
41,186
1,741
1,262,700
196,496
1,303,886
198,237
CMOs
10,596
117
232,886
52,423
243,482
52,540
Private label
-
-
5,402
2,210
(1)
5,402
2,210
Commercial MBS
3,833
220
148,640
33,576
152,473
33,796
$
140,533
$
4,267
$
5,404,287
$
707,011
$
5,544,820
$
711,278
7923
(1)
Unrealized losses do not include the credit loss component recorded
as part of the ACL. As of March 31, 2023, the
PRHFA bond and private label MBS
had an ACL of $
0.4
million and
$
0.1
million, respectively.
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:
Residential MBS:
FHLMC
260,524
45,424
831,637
160,012
1,092,161
205,436
GNMA
74,829
3,433
179,854
28,167
254,683
31,600
FNMA
405,977
49,479
920,200
169,419
1,326,177
218,898
CMOs
45,370
6,735
200,323
49,804
245,693
56,539
Private label
-
-
5,794
2,026
(1)
5,794
2,026
Commercial MBS
30,179
2,215
132,953
31,583
163,132
33,798
$
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, the
PRHFA bond and private label MBS
had an ACL of $
0.4
million
and $
0.1
million, respectively.
16
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
March 31,
2023, 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
March
31,
2023.
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
$
5.4
million,
which
had
unrealized losses
of approximately
$
2.3
million as
of March
31, 2023,
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.
Following the
provisions of
the Adjustable
Interest Rate Act
(the “LIBOR
Act”) and
Regulation
ZZ,
the
LIBOR
reference
on
these
contracts
will
automatically
transition
by
operation
of
law
to
3-month
CME
Term
Secured
Overnight Financing
Rate (“SOFR”),
plus a
spread adjustment
of 0.26161%
on the
first reset
date after
U.S. dollar
(“USD”) LIBOR
ceases publication
in June
2023.
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
March
31,
2023,
the
Corporation
did
not
have
the
intent
to
sell
these
securities
and
determined
that
it
is
likely
that
it
will
not
be
required to sell the securities before
anticipated recovery.
The Corporation determined the ACL
for private label MBS based on
a risk-
adjusted
discounted
cash
flow
methodology
that
considers
the
structure
and
terms
of
the
instruments.
The
Corporation
utilized
probability of
default (“PDs”)
and loss
given default
(“LGDs”) that
considered, among
other things,
historical payment
performance,
loan-to-value attributes, and relevant
current and forward-looking macroeconomic
variables, such as regional unemployment
rates and
the housing price
index. Under this 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
March 31, 2023
December 31, 2022
Weighted
Range
Weighted
Range
Average
Minimum
Maximum
Average
Minimum
Maximum
Discount rate
16.0%
16.0%
16.0%
16.2%
16.2%
16.2%
Prepayment rate
9.2%
1.6%
12.6%
11.8%
1.5%
15.2%
Projected cumulative loss rate
5.2%
0.2%
14.9%
5.6%
0.3%
15.6%
The Corporation
evaluates if
a credit
loss exists,
primarily
by monitoring
adverse variances
in the
present value
of expected
cash
flows. As of each of March 31, 2023 and December 31, 2022, the
ACL for these private label MBS was $
0.1
million.
17
As of
March 31,
2023, 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
(until 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.
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
March
31,
2023,
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
quarters ended March
31, 2023 and
2022 of the
ACL on
available-for-sale debt securities:
Quarter Ended March 31, 2023
Private label MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
83
$
375
$
458
Provision for credit losses - benefit
-
(9)
(9)
ACL on available-for-sale debt securities
$
83
$
366
$
449
Quarter Ended March 31, 2022
Private label MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
797
$
308
$
1,105
Provision for credit losses - benefit
(388)
-
(388)
Net charge-offs
(6)
-
(6)
ACL on available-for-sale debt securities
$
403
$
308
$
711
18
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 March 31, 2023 and
December 31, 2022 were as follows
:
March 31, 2023
Amortized cost
(1)
Gross Unrecognized
Fair value
Weighted-
Gains
Losses
ACL
average yield%
(Dollars in thousands)
Puerto Rico municipal bonds:
Due within one year
$
1,204
$
-
$
10
$
1,194
$
24
5.70
After 1 to 5 years
42,633
679
1,001
42,311
659
6.74
After 5 to 10 years
55,940
1,482
603
56,819
2,918
7.10
After 10 years
66,023
-
1,804
64,219
4,045
8.12
Total Puerto Rico municipal bonds
165,800
2,161
3,418
164,543
7,646
7.40
MBS:
Residential MBS:
FHLMC certificates:
After 5 to 10 years
$
20,129
$
-
$
762
$
19,367
$
-
3.03
After 10 years
19,176
-
596
18,580
-
4.30
39,305
-
1,358
37,947
-
3.65
GNMA certificates:
`
After 10 years
18,502
-
795
17,707
-
3.31
FNMA certificates:
After 10 years
71,258
-
2,190
69,068
-
4.16
CMOs:
After 10 years
32,522
-
1,154
31,368
-
3.49
Total Residential MBS
161,587
-
5,497
156,090
-
3.81
Commercial MBS:
After 1 to 5 years
9,576
-
348
9,228
-
3.48
After 10 years
94,432
-
4,541
89,891
-
3.15
Total Commercial MBS
104,008
-
4,889
99,119
-
3.18
Total MBS
265,595
-
10,386
255,209
-
3.56
Total held-to-maturity debt securities
$
431,395
$
2,161
$
13,804
$
419,752
$
7,646
5.04
(1)
Excludes accrued interest receivable on held-to-maturity debt securities that totaled $
3.7
million as of March 31, 2023, 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.
19
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 held-to-maturity debt securities
$
165,710
$
4,068
$
2,769
$
167,009
$
8,286
6.62
MBS:
Residential 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 10 years
72,347
-
3,155
69,192
-
4.14
CMOs:
After 10 years
34,456
-
1,424
33,032
-
3.49
Total Residential MBS
166,739
-
7,156
159,583
-
3.78
Commercial MBS:
After 1 to 5 years
9,621
-
396
9,225
-
3.48
After 10 years
95,467
-
4,169
91,298
-
3.15
Total Commercial MBS
105,088
-
4,565
100,523
-
3.18
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.
20
The
following
tables
present
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 March
31, 2023 and December 31, 2022, including debt securities for which
an ACL was recorded:
As of March 31, 2023
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
$
-
$
-
$
108,266
$
3,418
$
108,266
$
3,418
MBS:
Residential MBS:
FHLMC certificates
37,947
1,358
-
-
37,947
1,358
GNMA certificates
17,707
795
-
-
17,707
795
FNMA certificates
69,068
2,190
-
-
69,068
2,190
CMOs
31,368
1,154
-
-
31,368
1,154
Commercial MBS
99,119
4,889
-
-
99,119
4,889
Total held-to-maturity debt securities
$
255,209
$
10,386
$
108,266
$
3,418
$
363,475
$
13,804
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:
Residential MBS:
FHLMC certificates
39,171
1,634
-
-
39,171
1,634
GNMA certificates
18,188
943
-
-
18,188
943
FNMA certificates
69,192
3,155
-
-
69,192
3,155
CMOs
33,032
1,424
-
-
33,032
1,424
Commercial MBS
100,523
4,565
-
-
100,523
4,565
Total held-to-maturity debt securities
$
260,106
$
11,721
$
98,797
$
2,769
$
358,903
$
14,490
21
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
March
31,
2023,
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,
to the
audited
consolidated
financial
statements included in the 2022 Annual Report on Form 10-K.
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
March 31, 2023.
A security
is considered
to be past
due once
it is 30
days contractually
past
due under the
terms of the agreement.
The Puerto Rico
municipal bonds had
an ACL of $
7.6
million as of
March 31, 2023,
compared
to $
8.3
million as of
December 31, 2022,
mostly related to
a reduction in
qualitative reserves driven
by updated financial
information
of certain bond issuers received during the first quarter of 2023.
The
following
table
presents
the
activity
in
the
ACL
for
held-to-maturity
debt
securities
by
major
security
type
for
the
quarters
ended March 31, 2023 and 2022:
Puerto Rico Municipal Bonds
Quarter Ended
March 31, 2023
March 31, 2022
(In thousands)
Beginning Balance
$
8,286
$
8,571
Provision for credit losses - (benefit) expense
(640)
3,753
ACL on held-to-maturity debt securities
$
7,646
$
12,324
During the
second quarter
of 2019,
the oversight
board established
by 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 its fiscal plan or
fiscal plans of other
government entities. 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
March
31,
2023
and
December
31,
2022,
the
Corporation
had
no
outstanding
securities
held
to maturity
that
were
classified as cash and cash equivalents.
22
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. For the
definitions of
the internal
credit-risk ratings, see
Note 3 –
Debt Securities, to
the audited consolidated financial statements included in the 2022 Annual
Report on Form 10-K.
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
March 31,
2023 and
December 31,
2022,
all Puerto
Rico
municipal
bonds
classified
as held-to-maturity
were
classified as
Pass.
23
NOTE 3 – LOANS HELD FOR INVESTMENT
The
following table
provides information
about
the
loan
portfolio held
for
investment by
portfolio segment
and
disaggregated by
geographic locations
as of the indicated
dates:
As of March 31,
As of December 31,
2023
2022
(In thousands)
Puerto Rico and Virgin Islands region:
Residential mortgage loans, mainly secured by first mortgages
$
2,381,782
$
2,417,900
Construction loans
48,195
34,772
Commercial mortgage loans
1,829,173
1,834,204
Commercial and Industrial ("C&I") loans
1,941,228
1,860,109
Consumer loans
3,398,245
3,317,489
Loans held for investment
$
9,598,623
$
9,464,474
Florida region:
Residential mortgage loans, mainly secured by first mortgages
$
429,746
$
429,390
Construction loans
95,469
98,181
Commercial mortgage loans
524,486
524,647
C&I loans
920,961
1,026,154
Consumer loans
8,700
9,979
Loans held for investment
$
1,979,362
$
2,088,351
Total:
Residential mortgage loans, mainly secured by first mortgages
$
2,811,528
$
2,847,290
Construction loans
143,664
132,953
Commercial mortgage loans
2,353,659
2,358,851
C&I loans
(1)
2,862,189
2,886,263
Consumer loans
3,406,945
3,327,468
Loans held for investment
(2)
11,577,985
11,552,825
ACL on loans and finance leases
(265,567)
(260,464)
Loans held for investment, net
$
11,312,418
$
11,292,361
(1)
As of March 31, 2023 and December 31, 2022, includes $
837.8
million and $
838.5
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 $
28.3
million and $
29.3
million as of March 31, 2023 and December 31, 2022, respectively.
24
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 March 31, 2023 and December 31, 2022 are as follows:
As of March 31, 2023
Days Past Due and Accruing
Current
30-59
60-89
90+
(1) (2) (3)
Nonaccrual
(4)
Total loans held
for investment
Nonaccrual
Loans with no
ACL
(5)
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
FHA/VA government-guaranteed
loans
(1) (3) (6)
$
67,977
$
-
$
1,869
$
41,723
$
-
$
111,569
$
-
Conventional residential mortgage loans
(2) (6)
2,626,542
-
23,367
13,640
36,410
2,699,959
2,250
Commercial loans:
Construction loans
141,870
-
-
-
1,794
143,664
972
Commercial mortgage loans
(2) (6)
2,323,116
509
507
7,929
21,598
2,353,659
15,787
C&I loans
2,840,568
1,438
424
6,355
13,404
2,862,189
1,858
Consumer loans:
Auto loans
1,780,593
34,754
6,380
-
11,138
1,832,865
3,342
Finance leases
743,656
8,056
1,562
-
2,208
755,482
344
Personal loans
353,214
4,160
2,098
-
1,263
360,735
-
Credit cards
299,387
3,989
2,518
4,733
-
310,627
-
Other consumer loans
143,035
1,916
958
-
1,327
147,236
21
Total loans held for investment
$
11,319,958
$
54,822
$
39,683
$
74,380
$
89,142
$
11,577,985
$
24,574
(1)
It is the Corporation's policy to report delinquent Federal Housing Authority (“FHA”)/Veterans Affairs (“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 $
25.9
million of residential mortgage loans guaranteed by the FHA that were over 15 months delinquent.
(2)
Includes purchased credit deteriorated ("PCD") loans previously accounted for under ASC Subtopic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC Subtopic 310-30") for which
the Corporation made the accounting policy election of maintaining pools of loans as “units of account” both at the time of adoption of CECL on January 1, 2020 and on an ongoing basis for credit loss measurement.
These loans will continue to be excluded from nonaccrual loan statistics as long as the Corporation can reasonably estimate the timing and amount of cash flows expected to be collected on the loan pools. The portion of
such loans contractually past due 90 days or more, amounting to $
10.4
million as of March 31, 2023 ($
9.4
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 $
7.1
million as of March 31, 2023. 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 $
15.2
million as of March 31, 2023, primarily nonaccrual residential mortgage loans and C&I loans.
(5)
Includes $
0.3
million of nonaccrual C&I loans with no ACL in the Florida region as of March 31, 2023.
(6)
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 March 31, 2023 amounted to $
5.3
million, $
60.7
million, and $
1.1
million,
respectively.
25
As of December 31, 2022
Days Past Due and Accruing
Current
30-59
60-89
90+
(1)(2)(3)
Nonaccrual
(4)
Total loans held
for investment
Nonaccrual
Loans with no
ACL
(5)
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
FHA/VA government-guaranteed
loans
(1) (3) (6)
$
67,116
$
-
$
2,586
$
48,456
$
-
$
118,158
$
-
Conventional residential mortgage loans
(2) (6)
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) (6)
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)
Includes $
0.3
million of nonaccrual C&I loans with no ACL in the Florida region as of December 31, 2022.
(6)
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.
When a
loan
is placed
on nonaccrual
status, any
accrued but
uncollected
interest income
is reversed
and
charged
against interest
income
and the
amortization of
any net
deferred fees
is suspended.
The amount
of accrued
interest reversed
against interest
income
totaled $
0.6
million and $
0.4
million for the
quarters ended March
31, 2023 and
2022, respectively.
For the quarters
ended March 31,
2023 and 2022, the cash interest income recognized on nonaccrual loans
amounted to $
0.5
million and $
0.4
million, respectively.
As of
March 31,
2023, the
recorded investment
on residential
mortgage loans
collateralized by
residential real
estate property
that
were in
the process
of foreclosure
amounted to
$
62.6
million, including
$
27.2
million of
FHA/VA
government-guaranteed
mortgage
loans, and
$
8.8
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, to
the audited
consolidated financial
statements included
in the
2022 Annual
Report on
Form
10-K.
For residential mortgage and consumer loans, the Corporation also evaluates credit
quality based on its interest accrual status.
26
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 March
31, 2023, the gross charge
-offs for the quarter
ended March 31,
2023 by
portfolio
classes and
by origination
year,
and the
amortized
cost of
commercial and
construction loans
by portfolio
classes
based on the internal credit-risk category as of December 31, 2022, was as follows:
As of March 31,
2023
Puerto Rico and Virgin Islands region
Term Loans
As of December 31, 2022
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
CONSTRUCTION
Risk Ratings:
Pass
$
6,479
$
16,509
$
18,842
$
-
$
-
$
3,885
$
-
$
45,715
$
31,879
Criticized:
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
2,480
-
2,480
2,893
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
6,479
$
16,509
$
18,842
$
-
$
-
$
6,365
$
-
$
48,195
$
34,772
Charge-offs on construction loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
67,469
$
391,295
$
139,536
$
325,141
$
301,638
$
400,794
$
478
$
1,626,351
$
1,655,728
Criticized:
Special Mention
-
1,177
-
36,546
75
131,350
-
169,148
145,415
Substandard
-
132
-
-
2,797
30,745
-
33,674
33,061
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
67,469
$
392,604
$
139,536
$
361,687
$
304,510
$
562,889
$
478
$
1,829,173
$
1,834,204
Charge-offs on commercial mortgage loans
$
-
$
-
$
-
$
-
$
-
$
18
$
-
$
18
C&I
Risk Ratings:
Pass
$
70,739
$
303,603
$
188,155
$
181,284
$
308,225
$
254,283
$
565,758
$
1,872,047
$
1,789,572
Criticized:
Special Mention
-
132
839
-
1,029
12,885
32,322
47,207
43,224
Substandard
-
-
396
652
13,430
7,117
379
21,974
27,313
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total C&I loans
$
70,739
$
303,735
$
189,390
$
181,936
$
322,684
$
274,285
$
598,459
$
1,941,228
$
1,860,109
Charge-offs on C&I loans
$
-
$
-
$
-
$
-
$
-
$
63
$
55
$
118
(1) Excludes accrued interest receivable.
27
As of March 31,
2023
Term Loans
As of December 31, 2022
Florida region
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
CONSTRUCTION
Risk Ratings:
Pass
$
107
$
50,019
$
42,867
$
-
$
-
$
-
$
2,476
$
95,469
$
98,181
Criticized:
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
107
$
50,019
$
42,867
$
-
$
-
$
-
$
2,476
$
95,469
$
98,181
Charge-offs on construction loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
3,529
$
177,392
$
70,147
$
41,024
$
51,320
$
140,177
$
19,551
$
503,140
$
503,184
Criticized:
Special Mention
-
-
-
6,947
13,231
-
-
20,178
20,295
Substandard
-
-
-
1,168
-
-
-
1,168
1,168
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
3,529
$
177,392
$
70,147
$
49,139
$
64,551
$
140,177
$
19,551
$
524,486
$
524,647
Charge-offs on commercial mortgage loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
C&I
Risk Ratings:
Pass
$
36,642
$
276,868
$
134,512
$
75,953
$
183,443
$
72,650
$
92,816
$
872,884
$
979,151
Criticized:
Special Mention
-
-
19,677
-
5,974
11,725
-
37,376
17,905
Substandard
-
-
-
264
195
2,854
300
3,613
29,098
Doubtful
-
-
-
-
-
7,088
-
7,088
-
Loss
-
-
-
-
-
-
-
-
-
Total C&I loans
$
36,642
$
276,868
$
154,189
$
76,217
$
189,612
$
94,317
$
93,116
$
920,961
$
1,026,154
Charge-offs on C&I loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
(1) Excludes accrued interest receivable.
28
As of March 31,
2023
Total
Term Loans
As of December 31, 2022
Amortized Cost Basis by Origination Year (1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
CONSTRUCTION
Risk Ratings:
Pass
$
6,586
$
66,528
$
61,709
$
-
$
-
$
3,885
$
2,476
$
141,184
$
130,060
Criticized:
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
2,480
-
2,480
2,893
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
6,586
$
66,528
$
61,709
$
-
$
-
$
6,365
$
2,476
$
143,664
$
132,953
Charge-offs on construction loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
70,998
$
568,687
$
209,683
$
366,165
$
352,958
$
540,971
$
20,029
$
2,129,491
$
2,158,912
Criticized:
Special Mention
-
1,177
-
43,493
13,306
131,350
-
189,326
165,710
Substandard
-
132
-
1,168
2,797
30,745
-
34,842
34,229
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
70,998
$
569,996
$
209,683
$
410,826
$
369,061
$
703,066
$
20,029
$
2,353,659
$
2,358,851
Charge-offs on commercial mortgage loans
$
-
$
-
$
-
$
-
$
-
$
18
$
-
$
18
C&I
Risk Ratings:
Pass
$
107,381
$
580,471
$
322,667
$
257,237
$
491,668
$
326,933
$
658,574
$
2,744,931
$
2,768,723
Criticized:
Special Mention
-
132
20,516
-
7,003
24,610
32,322
84,583
61,129
Substandard
-
-
396
916
13,625
9,971
679
25,587
56,411
Doubtful
-
-
-
-
-
7,088
-
7,088
-
Loss
-
-
-
-
-
-
-
-
-
Total C&I loans
$
107,381
$
580,603
$
343,579
$
258,153
$
512,296
$
368,602
$
691,575
$
2,862,189
$
2,886,263
Charge-offs on C&I loans
$
-
$
-
$
-
$
-
$
-
$
63
$
55
$
118
(1) Excludes accrued interest receivable.
29
The following
tables present the
amortized cost of
residential mortgage
loans by portfolio
classes and by
origination year
based on
accrual status as of March 31, 2023,
the gross charge-offs for the quarter
ended March 31, 2023 by portfolio classes and by origination
year, and the amortized cost of residential mortgage
loans by portfolio classes based on accrual status as of December 31, 2022:
As of March 31,
2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Puerto Rico and Virgin Islands Region:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
-
$
696
$
448
$
765
$
1,557
$
107,368
$
-
$
110,834
$
117,416
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
-
$
696
$
448
$
765
$
1,557
$
107,368
$
-
$
110,834
$
117,416
Conventional residential mortgage loans:
Accrual Status:
Performing
$
24,859
$
171,599
$
74,692
$
31,497
$
47,705
$
1,891,603
$
-
$
2,241,955
$
2,265,013
Non-Performing
-
-
35
-
-
28,958
-
28,993
35,471
Total conventional residential mortgage loans
$
24,859
$
171,599
$
74,727
$
31,497
$
47,705
$
1,920,561
$
-
$
2,270,948
$
2,300,484
Total:
Accrual Status:
Performing
$
24,859
$
172,295
$
75,140
$
32,262
$
49,262
$
1,998,971
$
-
$
2,352,789
$
2,382,429
Non-Performing
-
-
35
-
-
28,958
-
28,993
35,471
Total residential mortgage loans in Puerto Rico
and Virgin Islands Region
$
24,859
$
172,295
$
75,175
$
32,262
$
49,262
$
2,027,929
$
-
$
2,381,782
$
2,417,900
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
3
$
-
$
980
$
-
$
983
(1)
Excludes accrued interest receivable.
As of March 31,
2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Florida Region:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
735
$
-
$
735
$
742
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
-
$
-
$
-
$
-
$
-
$
735
$
-
$
735
$
742
Conventional residential mortgage loans:
Accrual Status:
Performing
$
13,232
$
81,619
$
48,991
$
31,157
$
29,403
$
217,192
$
-
$
421,594
$
421,347
Non-Performing
-
-
-
-
265
7,152
-
7,417
7,301
Total conventional residential mortgage loans
$
13,232
$
81,619
$
48,991
$
31,157
$
29,668
$
224,344
$
-
$
429,011
$
428,648
Total:
Accrual Status:
Performing
$
13,232
$
81,619
$
48,991
$
31,157
$
29,403
$
217,927
$
-
$
422,329
$
422,089
Non-Performing
-
-
-
-
265
7,152
-
7,417
7,301
Total residential mortgage loans in Florida region
$
13,232
$
81,619
$
48,991
$
31,157
$
29,668
$
225,079
$
-
$
429,746
$
429,390
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
(1)
Excludes accrued interest receivable.
30
As of March 31,
2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Total:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
-
$
696
$
448
$
765
$
1,557
$
108,103
$
-
$
111,569
$
118,158
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
-
$
696
$
448
$
765
$
1,557
$
108,103
$
-
$
111,569
$
118,158
Conventional residential mortgage loans:
Accrual Status:
Performing
$
38,091
$
253,218
$
123,683
$
62,654
$
77,108
$
2,108,795
$
-
$
2,663,549
$
2,686,360
Non-Performing
-
-
35
-
265
36,110
-
36,410
42,772
Total conventional residential mortgage loans
$
38,091
$
253,218
$
123,718
$
62,654
$
77,373
$
2,144,905
$
-
$
2,699,959
$
2,729,132
Total:
Accrual Status:
Performing
$
38,091
$
253,914
$
124,131
$
63,419
$
78,665
$
2,216,898
$
-
$
2,775,118
$
2,804,518
Non-Performing
-
-
35
-
265
36,110
-
36,410
42,772
Total residential mortgage loans
$
38,091
$
253,914
$
124,166
$
63,419
$
78,930
$
2,253,008
$
-
$
2,811,528
$
2,847,290
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
3
$
-
$
980
$
-
$
983
(1)
Excludes accrued interest receivable.
31
The
following
tables present
the
amortized
cost
of
consumer
loans
by
portfolio
classes
and
by origination
year
based on
accrual
status as
of March
31, 2023,
the gross
charge-offs
for the
quarter ended
March 31,
2023 by
portfolio classes
and by
origination, and
the amortized cost of consumer loans by portfolio classes based on accrual status as of
December 31, 2022:
As of March 31,
2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Puerto Rico and Virgin Islands Regions:
Auto loans:
Accrual Status:
Performing
$
165,925
$
638,402
$
478,373
$
234,358
$
186,331
$
115,561
$
-
$
1,818,950
$
1,783,782
Non-Performing
-
2,419
2,243
1,347
2,708
2,399
-
11,116
10,596
Total auto loans
$
165,925
$
640,821
$
480,616
$
235,705
$
189,039
$
117,960
$
-
$
1,830,066
$
1,794,378
Charge-offs on auto loans
$
19
$
1,827
$
1,210
$
467
$
632
$
365
$
-
$
4,520
Finance leases:
Accrual Status:
Performing
$
78,870
$
282,486
$
183,061
$
82,206
$
74,421
$
52,230
$
-
$
753,274
$
716,585
Non-Performing
-
551
222
433
376
626
-
2,208
1,645
Total finance leases
$
78,870
$
283,037
$
183,283
$
82,639
$
74,797
$
52,856
$
-
$
755,482
$
718,230
Charge-offs on finance leases
$
-
$
227
$
270
$
97
$
185
$
200
$
-
$
979
Personal loans:
Accrual Status:
Performing
$
44,647
$
163,311
$
49,275
$
25,703
$
46,765
$
29,411
$
-
$
359,112
$
351,664
Non-Performing
-
490
188
117
229
239
-
1,263
1,248
Total personal loans
$
44,647
$
163,801
$
49,463
$
25,820
$
46,994
$
29,650
$
-
$
360,375
$
352,912
Charge-offs on personal loans
$
-
$
1,517
$
840
$
279
$
680
$
384
$
-
$
3,700
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
310,627
$
310,627
$
311,731
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
310,627
$
310,627
$
311,731
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
4,057
$
4,057
Other consumer loans:
Accrual Status:
Performing
$
23,413
$
66,230
$
17,612
$
8,219
$
9,851
$
6,468
$
8,700
$
140,493
$
139,116
Non-Performing
-
540
171
59
104
230
98
1,202
1,122
Total other consumer loans
$
23,413
$
66,770
$
17,783
$
8,278
$
9,955
$
6,698
$
8,798
$
141,695
$
140,238
Charge-offs on other consumer loans
$
14
$
1,842
$
762
$
174
$
326
$
178
$
91
$
3,387
Total:
Performing
$
312,855
$
1,150,429
$
728,321
$
350,486
$
317,368
$
203,670
$
319,327
$
3,382,456
$
3,302,878
Non-Performing
-
4,000
2,824
1,956
3,417
3,494
98
15,789
14,611
Total consumer loans in Puerto Rico and Virgin
Islands region
$
312,855
$
1,154,429
$
731,145
$
352,442
$
320,785
$
207,164
$
319,425
$
3,398,245
$
3,317,489
Charge-offs on total consumer loans
$
33
$
5,413
$
3,082
$
1,017
$
1,823
$
1,127
$
4,148
$
16,643
(1)
Excludes accrued interest receivable.
32
As of March 31,
2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Florida Region:
Auto loans:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
259
$
2,518
$
-
$
2,777
$
3,617
Non-Performing
-
-
-
-
-
22
-
22
76
Total auto loans
$
-
$
-
$
-
$
-
$
259
$
2,540
$
-
$
2,799
$
3,693
Charge-offs on auto loans
$
-
$
-
$
-
$
-
$
8
$
147
$
-
$
155
Finance leases:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-Performing
-
-
-
-
-
-
-
-
-
Total finance leases
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Charge-offs on finance leases
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Personal loans:
Accrual Status:
Performing
$
274
$
8
$
71
$
7
$
-
$
-
$
-
$
360
$
334
Non-Performing
-
-
-
-
-
-
-
-
-
Total personal loans
$
274
$
8
$
71
$
7
$
-
$
-
$
-
$
360
$
334
Charge-offs on personal loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Other consumer loans:
Accrual Status:
Performing
$
-
$
49
$
229
$
460
$
-
$
2,455
$
2,223
$
5,416
$
5,833
Non-Performing
-
-
-
-
-
21
104
125
119
Total other consumer loans
$
-
$
49
$
229
$
460
$
-
$
2,476
$
2,327
$
5,541
$
5,952
Charge-offs on other consumer loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total:
Performing
$
274
$
57
$
300
$
467
$
259
$
4,973
$
2,223
$
8,553
$
9,784
Non-Performing
-
-
-
-
-
43
104
147
195
Total consumer loans in Florida region
$
274
$
57
$
300
$
467
$
259
$
5,016
$
2,327
$
8,700
$
9,979
Charge-offs on total consumer loans
$
-
$
-
$
-
$
-
$
8
$
147
$
-
$
155
(1)
Excludes accrued interest receivable.
33
As of March 31,
2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Total:
Auto loans:
Accrual Status:
Performing
$
165,925
$
638,402
$
478,373
$
234,358
$
186,590
$
118,079
$
-
$
1,821,727
$
1,787,399
Non-Performing
-
2,419
2,243
1,347
2,708
2,421
-
11,138
10,672
Total auto loans
$
165,925
$
640,821
$
480,616
$
235,705
$
189,298
$
120,500
$
-
$
1,832,865
$
1,798,071
Charge-offs on auto loans
$
19
$
1,827
$
1,210
$
467
$
640
$
512
$
-
$
4,675
Finance leases:
Accrual Status:
Performing
$
78,870
$
282,486
$
183,061
$
82,206
$
74,421
$
52,230
$
-
$
753,274
$
716,585
Non-Performing
-
551
222
433
376
626
-
2,208
1,645
Total finance leases
$
78,870
$
283,037
$
183,283
$
82,639
$
74,797
$
52,856
$
-
$
755,482
$
718,230
Charge-offs on finance leases
$
-
$
227
$
270
$
97
$
185
$
200
$
-
$
979
Personal loans:
Accrual Status:
Performing
$
44,921
$
163,319
$
49,346
$
25,710
$
46,765
$
29,411
$
-
$
359,472
$
351,998
Non-Performing
-
490
188
117
229
239
-
1,263
1,248
Total personal loans
$
44,921
$
163,809
$
49,534
$
25,827
$
46,994
$
29,650
$
-
$
360,735
$
353,246
Charge-offs on personal loans
$
-
$
1,517
$
840
$
279
$
680
$
384
$
-
$
3,700
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
310,627
$
310,627
$
311,731
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
310,627
$
310,627
$
311,731
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
4,057
$
4,057
Other consumer loans:
Accrual Status:
Performing
$
23,413
$
66,279
$
17,841
$
8,679
$
9,851
$
8,923
$
10,923
$
145,909
$
144,949
Non-Performing
-
540
171
59
104
251
202
1,327
1,241
Total other consumer loans
$
23,413
$
66,819
$
18,012
$
8,738
$
9,955
$
9,174
$
11,125
$
147,236
$
146,190
Charge-offs on other consumer loans
$
14
$
1,842
$
762
$
174
$
326
$
178
$
91
$
3,387
Total:
Performing
$
313,129
$
1,150,486
$
728,621
$
350,953
$
317,627
$
208,643
$
321,550
$
3,391,009
$
3,312,662
Non-Performing
-
4,000
2,824
1,956
3,417
3,537
202
15,936
14,806
Total consumer loans
$
313,129
$
1,154,486
$
731,445
$
352,909
$
321,044
$
212,180
$
321,752
$
3,406,945
$
3,327,468
Charge-offs on total consumer loans
$
33
$
5,413
$
3,082
$
1,017
$
1,831
$
1,274
$
4,148
$
16,798
(1)
Excludes accrued interest receivable.
Accrued
interest
receivable
on
loans
totaled
$
49.4
million
as
of
March
31,
2023
($
53.1
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.
34
The
following
tables
present
information
about
collateral
dependent
loans
that
were
individually
evaluated
for
purposes
of
determining the ACL as of March 31, 2023 and December 31, 2022
:
As of March 31, 2023
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
$
34,257
$
2,410
$
152
$
34,409
$
2,410
Commercial loans:
Construction loans
-
-
956
956
-
Commercial mortgage loans
2,449
896
61,851
64,300
896
C&I loans
1,789
347
13,331
15,120
347
Consumer loans:
Personal loans
55
1
-
55
1
Other consumer loans
-
-
-
-
-
$
38,550
$
3,654
$
76,290
$
114,840
$
3,654
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
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 March
31, 2023 was
69
%, compared to
70
% as of December
31, 2022, which
was
not considered a significant change in the extent to which collateral secured these
loans.
35
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 quarters ended March
31, 2023 and 2022, loans pooled into GNMA MBS amounted
to
approximately $
29.4
million and
$
41.5
million, respectively,
for which
the Corporation
recognized a
net gain
on sale
of $
0.9
million
and
$
1.3
million,
respectively.
Also,
during
the
quarter
ended
March
31,
2023,
the
Corporation
sold
approximately
$
8.0
million
of
performing residential
mortgage loans
to FNMA, of
which the
Corporation recognized
a net gain
on sale of
$
0.2
million. In addition,
during the quarter ended March 31,
2022, the Corporation sold approximately
$
50.0
million and $
2.4
million of performing residential
mortgage loans to
FNMA and FHLMC,
respectively,
of which the
Corporation recognized
a net gain
on sale of
$
2.1
million and $
0.1
million, 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 March 31, 2023
and December 31, 2022,
rebooked GNMA delinquent
loans that
were included in the residential mortgage loan portfolio amounted
to $
7.1
million and $
10.4
million, respectively.
During
the
quarters
ended
March
31,
2023
and
2022,
the
Corporation
repurchased,
pursuant
to
the
aforementioned
repurchase
option, $
1.5
million and $
0.5
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’s risk of
loss
with
respect
to
these
loans
is
also
minimal
as
these
repurchased
loans
are
generally
performing
loans
with
documentation
deficiencies.
No
significant
purchases
of
loans
were
executed
during
the
first
quarter
of
2023.
During
the
quarter
ended
March
31,
2022,
the
Corporation purchased certain C&I loan participations in the Florida region
totaling $
46.4
million.
36
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 March
31, 2023,
credit risk
concentration was
approximately
80
% in Puerto
Rico,
17
% in the
U.S., and
3
% in
the
USVI and BVI.
As
of
March
31,
2023,
the
Corporation
had
$
170.9
million
outstanding
in
loans
extended
to
the
Puerto
Rico
government,
its
municipalities and
public corporations,
compared to
$
169.8
million as
of December
31, 2022.
As of
March 31,
2023, approximately
$
102.7
million
consisted
of
loans
extended
to
municipalities
in
Puerto
Rico
that
are
general
obligations
supported
by
assigned
property
tax
revenues,
and $
28.0
million
of
loans which
are supported
by one
or
more
specific sources
of municipal
revenues. The
vast
majority
of
revenues
of the
municipalities
included
in
the
Corporation’s
loan
portfolio
are
independent
of
budgetary
subsidies
provided
by
the
Puerto
Rico
central
government.
These
municipalities
are
required
by
law
to
levy
special
property
taxes
in
such
amounts
as
are
required
to
satisfy
the
payment
of
all
of
their
respective
general
obligation
bonds
and
notes.
In
addition
to
loans
extended to municipalities,
the Corporation’s
exposure to the Puerto
Rico government as of
March 31, 2023 included
$
10.2
million in
loans granted
to an affiliate
of the
Puerto
Rico Electric
Power Authority
(“PREPA”)
and $
30.0
million in loans
to agencies or
public
corporations of the Puerto Rico government.
In addition,
as of March
31, 2023, the
Corporation had
$
82.9
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
$
84.7
million as of
December 31, 2022.
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
March 31, 2023, the Corporation had
$
38.7
million in
loans to USVI
government public corporations,
compared to $
38.0
million as of
December 31, 2022.
As of March
31, 2023, all
loans
were currently performing and up to date on principal and interest payments.
37
Loss Mitigation Program for Borrowers Experiencing
Financial Difficulty
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 are provided,
as well as
other restructurings of
individual C&I, commercial
mortgage, construction, and
residential mortgage
loans. The Corporation
may also
modify
contractual
terms
to
comply
with
regulations
regarding
the
treatment
of
certain
bankruptcy
filings
and
discharge
situations.
See Note 1 – Basis of Presentation and Significant
Accounting Policies, for additional information related to
the accounting policies of
loan modifications granted to borrowers experiencing financial difficulty.
The
loan
modifications
granted
to
borrowers
experiencing
financial
difficulty
that
are
associated
to
payment
delays
typically
include the following:
-
Forbearance plans –
Payments of either interest
and/or principal are
deferred for a pre-established
period of time, generally
not
exceeding
six
months
in
any
given
year.
The
deferred
interest
and/or
principal
is
repaid
as
either
a
lump
sum
payment
at
maturity date or by extending the loan’s
maturity date by the number of forbearance months granted.
-
Payment
plans
–
Borrowers
are
allowed
to
pay
the
regular
monthly
payment
plus
the
pre-established
delinquent
amounts
during a period generally not exceeding
six months.
At the end of the payment plan, the
borrower is required to resume making
its regularly scheduled loan payments.
-
Trial modifications
– These types of loan
modifications are granted for
residential mortgage loans. Borrower
s
continue making
reduced monthly payments during
the trial period, which
is generally of up to
six months. The reduced
payments that are made
by the
borrower during
the trial
period will
result in
a payment
delay with
respect to
the original
contractual terms
of the loan
since
the
loan
has
not
yet
been
contractually
modified.
After
successful
completion
of
the
trial
period,
the
mortgage
loan
is
contractually modified.
Modifications
in
the
form
of
a
reduction
in
interest
rate,
term
extension,
an
other-than-insignificant
payment
delay,
or
any
combination
of
these
types
of
loan
modifications
that
have
occurred
in
the
current
reporting
period
to
a
borrower
experiencing
financial difficulty are disclosed in the tables below.
The
below
disclosures
relate
to
loan
modifications
granted
to
borrowers
experiencing
financial
difficulty
in
which
there
was
a
change
in
the
timing
and/or
amount
of
contractual
cash
flows
in
the
form
of
any
of
the
aforementioned
types
of
modifications,
including
restructurings
that
resulted
in
a
more-than-insignificant
payment
delay.
These
disclosures
exclude
$
0.9
million
in
restructured
residential
mortgage
loans that
are government
-guaranteed
(e.g., FHA/VA
loans)
and
were modified
during
the quarter
ended March 31, 2023.
The following table presents the amortized cost basis as of March 31, 2023 of loans modified
to borrowers experiencing financial
difficulty during the quarter ended March 31, 2023, by portfolio
classes and type of modification granted, and the percentage of these
modified loans relative to the total period-end amortized cost basis of receivables
in the portfolio class:
Quarter Ended March 31,
2023
Payment Delay Only
Forbearance
Payment
Plan
Trial
Modification
Interest
Rate
Reduction
Term
Extension
Combination of
Interest Rate
Reduction and
Term Extension
Forgiveness
of principal
and/or
interest
Other
Total
Percentage of
Total by
Portfolio
Classes
(In thousands)
Conventional residential mortgage loans
$
-
$
-
$
332
$
-
$
433
$
115
$
-
$
-
$
880
0.03%
Construction loans
-
-
-
-
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
-
-
-
-
-
C&I loans
-
-
-
-
-
-
-
40
(1)
40
0.00%
Consumer loans:
Auto loans
-
-
-
-
89
38
-
584
(1)
711
0.04%
Personal loans
-
-
-
-
28
14
-
-
42
0.01%
Credit cards
-
-
-
289
(2)
-
-
-
-
289
0.09%
Other consumer loans
-
-
-
-
132
60
-
26
(1)
218
0.15%
Total modifications
$
-
$
-
$
332
$
289
$
682
$
227
$
-
$
650
$
2,180
(1)
Modification consists of court mandated reduction to 0% interest rate for remaining loan term to borrowers in bankruptcy proceedings unless dismissal occurs.
(2)
Modification consists of reduction in interest rate and revocation of revolving line privileges.
38
The following table presents the financial effects of the modifications
granted to borrowers experiencing financial difficulty
during the quarter ended March 31, 2023, by portfolio classes, other
than those associated to payment delay.
The qualitative financial
effects of the modifications associated to payment delay were discussed
above, and as such, were excluded from the table below:
Quarter Ended March 31, 2023
Combination of Interest Rate Reduction
and Term Extension
Weighted-Average
Interest Rate
Reduction (%)
Weighted-Average
Term Extension (in
months)
Weighted-Average
Interest Rate
Reduction (%)
Weighted-Average
Term Extension (in
months)
Weighted-Average
Forgiveness of
Principal and/or
Interest
(In thousands)
Conventional residential mortgage loans
-
98
2.11%
141
$
-
Construction loans
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
C&I loans
-
-
-
-
-
Consumer loans:
Auto loans
-
22
2.88%
28
-
Personal loans
-
30
3.36%
12
-
Credit cards
16.04%
-
-
-
-
Other consumer loans
-
27
1.96%
26
-
The following table presents the performance of loans modified during the quarter
ended March 31,
2023 that were granted to
borrowers experiencing financial difficulty,
by portfolio classes:
Quarter Ended March 31,
2023
30-59
60-89
90+
Total
Delinquency
Current
Total
(In thousands)
Conventional residential mortgage loans
$
-
$
-
$
-
$
-
$
880
$
880
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
-
C&I loans
-
-
-
-
40
40
Consumer loans:
Auto loans
44
138
-
182
529
711
Personal loans
-
-
-
-
42
42
Credit cards
103
89
-
192
97
289
Other consumer loans
-
-
-
-
218
218
Total modifications
$
147
$
227
$
-
$
374
$
1,806
$
2,180
There
were
no
loans
modified
to
borrowers
experiencing
financial
difficulty
on
or
after
January
1,
2023,
which
had
a
payment
default
(failure
by
the
borrower
to
make
payments
of
either principal,
interest,
or both
for
a
period
of
90 days
or more)
during
the
quarter ended March 31, 2023.
39
Troubled Debt
Restructuring (“TDR”) Disclosures Prior to Adoption
of ASU 2022-02
Prior
to
the
adoption
of
ASU
2022-02,
a
restructuring
of
a
loan
constituted
a
TDR
if
the
creditor,
for
economic
or
legal
reason
related
to the
borrower’s
financial difficulties,
grants a
concession to
the borrower
that it
would not
otherwise consider.
See Note
1
“Nature of
Business and
Summary of
Significant Accounting
Policies” and
Note 4
“Loans Held
for Investment”
to the
Consolidated
Financial Statements
in the 2022
Annual Report
on Form
10-K for
additional discussion
of TDRs. The
following tables
present TDR
loans completed during the quarter ended March 31, 2022:
Quarter Ended March 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
$
215
$
731
$
190
$
-
$
1,857
$
2,993
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
-
C&I loans
-
-
-
-
5
5
Consumer loans:
Auto loans
792
54
147
-
-
993
Finance leases
-
246
-
-
18
264
Personal loans
-
60
18
-
-
78
Credit cards
(2)
189
-
-
-
-
189
Other consumer loans
33
106
-
9
-
148
Total TDRs
$
1,229
$
1,197
$
355
$
9
$
1,880
$
4,670
(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.
Quarter Ended March 31, 2022
Number of contracts
Pre-modification Amortized
Cost
Post-modification Amortized
Cost
(Dollars in thousands)
Conventional residential mortgage loans
23
$
2,996
$
2,993
Construction loans
-
-
-
Commercial mortgage loans
-
-
-
C&I loans
1
5
5
Consumer loans:
Auto loans
51
995
993
Finance leases
13
264
264
Personal loans
5
78
78
Credit Cards
44
189
189
Other consumer loans
27
146
148
Total TDRs
164
$
4,673
$
4,670
Loan modifications
considered TDR loans
that defaulted (failure
by the borrower
to make payments
of either principal,
interest, or
both
for
a period
of 90
days or
more)
during the
quarter
ended March
31, 2022,
and had
become
TDR loans
during
the 12-months
preceding the default date, were as follows:
Quarter Ended March 31, 2022
Number of contracts
Amortized Cost
(Dollars in thousands)
Conventional residential mortgage loans
3
$
389
Construction loans
-
-
Commercial mortgage loans
-
-
C&I loans
-
-
Consumer loans:
Auto loans
24
522
Finance leases
1
16
Personal loans
-
-
Credit cards
11
79
Other consumer loans
2
11
Total TDRs
41
$
1,017
40
NOTE 4 – 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
Quarter Ended March 31, 2023
(In thousands)
ACL:
Beginning balance
$
62,760
$
2,308
$
35,064
$
32,906
$
127,426
$
260,464
Impact of adoption of ASU 2022-02
2,056
-
-
7
53
2,116
Provision for credit losses - expense (benefit)
73
860
1,246
(1,650)
15,727
16,256
Charge-offs
(983)
-
(18)
(118)
(16,798)
(17,917)
Recoveries
497
63
168
90
3,830
4,648
Ending balance
$
64,403
$
3,231
$
36,460
$
31,235
$
130,238
$
265,567
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Quarter Ended March 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
(4,871)
(2,214)
(22,640)
1,755
10,981
(16,989)
Charge-offs
(2,528)
(44)
(37)
(290)
(9,816)
(12,715)
Recoveries
1,382
52
44
1,035
3,608
6,121
Ending balance
$
68,820
$
1,842
$
30,138
$
36,784
$
107,863
$
245,447
The
Corporation
estimates
the
ACL
following
the
methodologies
described
in
Note
1
–
Nature
of
Business
and
Summary
of
Significant Accounting
Policies, to
the audited
consolidated financial
statements included
in the
2022 Annual
Report on
Form 10-K,
for each portfolio segment.
The Corporation applie
s
probability weights to
the baseline and
alternative downside economic
scenarios
to estimate the ACL
with
the
baseline
scenario
carrying
the
highest
weight.
The
economic
scenarios
used
in
the
ACL
determination
contained
assumptions
related
to economic
uncertainties associated
with geopolitical
instability,
high
inflation levels,
and
the expected
path
of interest
rate
increases by the FED.
As of March 31, 2023, the ACL for loans and finance leases was $
265.6
million, an increase of $
5.1
million, from $
260.5
million as
of
December
31,
2022.
The
ACL
for
commercial
and
construction
loans
remained
relatively
flat
when
compared
to
the
previous
quarter as a result of
the following offsetting factors:
reserve increases of $
5.0
million for a new nonaccrual
commercial and industrial
loan in the Florida region in the power generation industry; and $
1.1
million due to a less favorable economic outlook in the projection
of certain forecasted
macroeconomic variables, such
as the commercial
real estate price index
(“CRE price index”);
partially offset by
reserve decreases
of $
6.1
million associated
with the receipt
of updated
financial information
of certain borrowers
and the repayment
of a $
24.3
million adversely classified
commercial and industrial
participated loan in
the Florida region.
The ACL for consumer
loans
increased by $
2.9
million, primarily reflecting
the effect of
the increase in
the size of the
consumer loan
portfolios and the
increase in
historical charge-off levels. The ACL for
residential mortgage loans increased by $
1.6
million, in part due to a $
2.1
million cumulative
increase in
the ACL,
due to
the adoption
of ASU
2022-02, for
which the
Corporation elected
to discontinue
the use
of a
discounted
cash
flow
methodology
for
restructured
accruing
loans.
This
adjustment
had
a
corresponding
decrease,
net
of
applicable
taxes,
in
beginning
retained
earnings
as
of
January
1,
2023.
See
Note
1
–
Basis
of
Presentation
and
Significant
Accounting
Policies
for
information related to the adoption of ASU 2022-02 during the first quarter
of 2023.
Total
net charge-offs
increased by $
6.7
million to $
13.3
million during the first
quarter of 2023, when
compared to the same
period
in 2022. The variance consisted of a $
6.8
million increase in net charge-offs on
consumer and finance leases, reflected across all major
portfolio classes, and
a $
0.6
million decrease in net
recoveries in the commercial
and construction loan portfolios,
partially offset by
a
$
0.7
million decrease in net charge-offs on residential mortgage
loans.
41
The tables below
present the ACL
related to loans
and finance leases
and the carrying
values of loans
by portfolio segment
as of
March 31,
2023 and December 31, 2022:
As of March 31,
2023
Residential Mortgage
Loans
Construction
Loans
Commercial Mortgage
Loans
Commercial and
Industrial Loans
Consumer Loans
Total
(Dollars in thousands)
Total loans held for investment:
Amortized cost of loans
$
2,811,528
$
143,664
$
2,353,659
$
2,862,189
$
3,406,945
$
11,577,985
Allowance for credit losses
64,403
3,231
36,460
31,235
130,238
265,567
Allowance for credit losses to
amortized cost
2.29
%
2.25
%
1.55
%
1.09
%
3.82
%
2.29
%
As of December 31, 2022
Residential Mortgage
Loans
Construction
Loans
Commercial Mortgage
Loans
Commercial and
Industrial Loans
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
%
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 22 –
Regulatory
Matters,
Commitments,
and Contingencies
for
information
on off
-balance
sheet exposures
as of
March 31,
2023 and
December
31,
2022.
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,
to the audited consolidated financial statements included in the
2022 Annual
Report
on Form
10-K.
As of
March
31, 2023,
the ACL
for off-balance
sheet
credit exposures
decreased
to $
4.2
million,
from
$
4.3
million 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
quarters
ended March 31, 2023 and 2022:
Quarter Ended March 31,
2023
2022
(In thousands)
Beginning Balance
$
4,273
$
1,537
Provision for credit losses - (benefit)
(105)
(178)
Ending balance
$
4,168
$
1,359
42
NOTE 5
–
OTHER REAL ESTATE
OWNED
The following table presents the OREO inventory as of the indicated dates:
March 31, 2023
December 31, 2022
(In thousands)
OREO balances, carrying value:
Residential
(1)
$
24,984
$
24,025
Commercial
6,114
5,852
Construction
1,764
1,764
Total
$
32,862
$
31,641
(1)
Excludes $
22.6
million and $
23.5
million as of March 31,
2023 and December 31,
2022, respectively,
of foreclosures that met
the conditions of ASC
Subtopic 310-40 “Reclassification
of
Residential Real
Estate Collateralized
Consumer Mortgage
Loans upon
Foreclosure,” and
are presented
as a
receivable as
part of
other assets
in the
consolidated statements
of financial
condition.
See Note 18
- Fair Value
for information
on write-downs
recorded on OREO
properties during
the quarters ended
March 31, 2023
and 2022.
43
NOTE 6 – GOODWILL AND OTHER INTANGIBLES
Goodwill
Goodwill as
of each
of March
31, 2023
and December
31, 2022
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. As of December 31, 2022, the Corporation
concluded that it is more-likely-than-not that the fair value of the reporting units exceeded their carrying value. The Corporation
determined that there have been no significant events since the last annual assessment that could indicate potential goodwill
impairment on reporting units for which the goodwill is allocated. As a result, no impairment charges for goodwill were recorded
during the quarter ended March 31, 2023.
There were
no
changes in the carrying amount of goodwill during the quarter ended March
31, 2022.
Other Intangible Assets
The
following
table
presents
the
gross
amount
and
accumulated
amortization
of
the
Corporation’s
intangible
assets
subject
to
amortization as of the indicated dates:
As of
As of
March 31,
December 31,
2023
2022
(Dollars in thousands)
Core deposit intangible:
Gross amount
$
87,544
$
87,544
Accumulated amortization
(68,557)
(66,644)
Net carrying amount
$
18,987
$
20,900
Remaining amortization period (in years)
6.8
7.0
Purchased credit card relationship intangible:
Gross amount
$
3,800
$
3,800
Accumulated amortization
(3,714)
(3,595)
Net carrying amount
$
86
$
205
Remaining amortization period (in years)
0.4
0.7
Insurance customer relationship intangible:
Gross amount
$
-
$
1,067
Accumulated amortization
-
(1,054)
Net carrying amount
$
-
$
13
Remaining amortization period (in years)
-
0.1
During
the
quarters
ended
March
31,
2023
and
2022,
the
Corporation
recognized
$
2.0
million
and
$
2.3
million,
respectively,
in
amortization expense on its other intangibles subject to amortization.
44
The Corporation amortizes core deposit intangibles and customer relationship intangible 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 the customer relationship intangible. The Corporation analyzes core deposit intangibles and the customer relationship intangible
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 the customer relationship intangible as of March 31, 2023.
The estimated
aggregate annual
amortization expense
related to the
intangible assets
subject to amortization
for future periods
was
as follows as of March 31, 2023:
(In thousands)
2023
$
5,691
2024
6,416
2025
3,509
2026
872
2027
872
2028 and after
1,713
NOTE 7 – NON-CONSOLIDATED
VARIABLE
INTEREST ENTITIES (“VIEs”) AND SERVICING
ASSETS
The Corporation
transfers residential
mortgage loans
in sale
or securitization
transactions in
which it
has continuing
involvement,
including
servicing
responsibilities
and
guarantee
arrangements.
All
such
transfers
have
been
accounted
for
as
sales
as
required
by
applicable accounting guidance.
When
evaluating
the
need
to
consolidate
counterparties
to
which
the
Corporation
has
transferred
assets,
or
with
which
the
Corporation has
entered into
other transactions,
the Corporation
first determines
if the
counterparty is
an entity
for which
a variable
interest
exists.
If
no
scope
exception
is
applicable
and
a
variable
interest
exists,
the
Corporation
then
evaluates
whether
it
is
the
primary beneficiary of the VIE and whether the entity should be consolidated
or not.
Below is a summary of transactions with VIEs for which the Corporation has retained
some level of continuing involvement:
Trust-Preferred
Securities (“TRuPs”)
In April 2004,
FBP Statutory Trust
I, a financing
trust that is wholly
owned by the
Corporation, sold to
institutional investors $
100
million of its variable
-rate TRuPs. FBP Statutory
Trust I used
the proceeds of the
issuance, together with the
proceeds of the purchase
by
the
Corporation
of
$
3.1
million
of
FBP
Statutory
Trust
I
variable-rate
common
securities, to
purchase
$
103.1
million
aggregate
principal
amount
of
the
Corporation’s
Junior
Subordinated
Deferrable
Debentures.
In
September
2004,
FBP
Statutory
Trust
II,
a
financing
trust that
is wholly
owned by
the Corporation,
sold to
institutional investors
$
125
million of
its variable-rate
TRuPs. FBP
Statutory Trust
II used
the proceeds of
the issuance,
together with
the proceeds of
the purchase by
the Corporation
of $
3.9
million of
FBP Statutory
Trust
II variable-rate
common securities,
to purchase
$
128.9
million aggregate
principal amount
of the
Corporation’s
Junior
Subordinated
Deferrable
Debentures.
The
debentures,
net
of
related
issuance
costs,
are
presented
in
the
Corporation’s
consolidated
statements
of financial
condition as
other long-term
borrowings. The
variable-rate TRuPs
are fully
and unconditionally
guaranteed
by the
Corporation.
The Junior Subordinated Deferrable Debentures mature on June 17, 2034, and September 20, 2034,
respectively; however, under certain circumstances, the maturity of Junior Subordinated Deferrable Debentures may be shortened
(such shortening would result in a mandatory redemption of the variable-rate TRuPs).
As of
each of
March 31,
2023 and
December
31, 2022, these Junior Subordinated Deferrable Debentures amounted
to $
183.8
million.
Under the
indentures, the
Corporation has
the right,
from time
to time,
and without
causing an
event of
default, to
defer payments
of interest
on the
Junior Subordinated
Deferrable Debentures
by extending
the interest
payment period
at any
time and
from time
to
time
during
the
term
of
the
subordinated
debentures
for
up
to
twenty
consecutive
quarterly
periods.
As
of
March
31,
2023,
the
Corporation was current on all interest payments due on its subordinated
debt.
45
Private Label MBS
During
2004
and
2005,
an unaffiliated
party,
referred
to in
this subsection
as the
seller,
established
a
series of
statutory
trusts
to
effect
the
securitization
of
mortgage
loans
and
the
sale
of
trust
certificates
(“private
label
MBS”).
The
seller
initially
provided
the
servicing for
a fee, which
is senior to
the obligations to
pay private label
MBS holders. The
seller then entered
into a sales
agreement
through
which
it sold
and
issued
the
private
label
MBS in
favor
of
the
Corporation’s
banking
subsidiary,
FirstBank.
Currently,
the
Bank is
the sole
owner of
these private
label MBS;
the servicing
of the
underlying
residential mortgages
that generate
the principal
and interest
cash flows is
performed by
another third
party,
which receives
a servicing
fee. These private
label MBS are
variable-rate
securities indexed
to
3-month LIBOR
plus a spread.
As mentioned above
in Note 2,
Debt Securities, pursuant
to the provisions
of the
LIBOR Act and
Regulation ZZ, the
LIBOR reference of
these private label
MBS shall be
replaced by
the 3-month CME
Term
SOFR
rate
plus
a
spread
adjustment
of
0.26161%
on the
first
reset
date
after
USD LIBOR
ceases publication
in
June 2023.
The
principal
payments from
the underlying loans
are remitted to
a paying agent
(servicer), who then
remits interest to
the Bank. Interest
income is
shared to
a certain
extent with
the FDIC,
which has
an interest
only strip
(“IO”) tied
to the
cash flows
of the
underlying loans
and is
entitled
to
receive
the
excess
of
the
interest
income
less
a
servicing
fee
over
the
variable
rate
income
that
the
Bank
earns
on
the
securities. This
IO is
limited to
the weighted-average
coupon on
the mortgage
loans. The
FDIC became
the owner
of the IO
upon its
intervention of the seller,
a failed financial institution.
No recourse agreement exists, and
the Bank, as the sole
holder of the securities,
absorbs all risks from losses on non-accruing loans and
repossessed collateral. As of March 31, 2023, the amortized
cost and fair value
of these private
label MBS amounted
to $
7.7
million and $
5.4
million, respectively,
with a weighted average
yield of
7.25
%, which is
included as part of
the Corporation’s
available-for-sale debt securities portfolio.
As described in Note 2
– Debt Securities, the ACL on
these private label MBS amounted to $
0.1
million as of March 31, 2023.
Servicing Assets (MSRs)
The
Corporation
typically
transfers
first
lien
residential
mortgage
loans in
conjunction
with
GNMA
securitization
transactions
in
which the
loans are
exchanged for
cash or
securities that
are readily
redeemed for
cash proceeds
and servicing
rights. The
securities
issued
through
these
transactions
are
guaranteed
by
GNMA
and,
under
seller/servicer
agreements,
the
Corporation
is
required
to
service the
loans in
accordance with
the issuers’
servicing guidelines
and standards.
As of
March 31,
2023, the
Corporation serviced
loans
securitized
through
GNMA
with
a
principal
balance
of
$
2.1
billion.
Also,
certain
conventional
conforming
loans
are
sold
to
FNMA
or
FHLMC
with
servicing
retained.
The
Corporation
recognizes
as
separate
assets
the
rights
to
service
loans
for
others,
whether those servicing
assets are originated or
purchased. MSRs are included
as part of other
assets in the consolidated
statements of
financial condition.
The changes in MSRs are shown below for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Balance at beginning of year
$
29,037
$
30,986
Capitalization of servicing assets
532
1,130
Amortization
(1,128)
(1,330)
Temporary impairment
recoveries
4
55
Other
(1)
(14)
(88)
Balance at end of period
$
28,431
$
30,753
(1)
Mainly represents adjustments related to the repurchase
of loans serviced for others.
Impairment
charges
are
recognized
through
a
valuation
allowance
for
each
individual
stratum
of
servicing
assets.
The
valuation
allowance
is adjusted
to reflect
the amount,
if any,
by which
the cost
basis of
the servicing
asset for
a given
stratum of
loans being
serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing
asset for a given stratum is not recognized.
46
Changes in the impairment allowance were as follows for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Balance at beginning of year
$
12
$
78
Recoveries
(4)
(55)
Balance at end of period
$
8
$
23
The components
of net servicing
income, included as
part of mortgage
banking activities in
the consolidated statements
of income,
are shown below for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Servicing fees
$
2,718
$
2,819
Late charges and prepayment penalties
199
194
Adjustment for loans repurchased
(14)
(88)
Servicing income, gross
2,903
2,925
Amortization and impairment of servicing assets
(1,124)
(1,275)
Servicing income, net
$
1,779
$
1,650
The Corporation’s
MSRs are subject
to prepayment
and interest rate
risks. Key economic
assumptions used
in determining
the fair
value at the time of sale of the related mortgages for the indicated periods
ranged as follows:
Weighted Average
Maximum
Minimum
Quarter Ended March 31, 2023
Constant prepayment rate:
Government-guaranteed mortgage loans
6.7
%
11.6
%
4.8
%
Conventional conforming mortgage loans
7.7
%
16.0
%
3.8
%
Conventional non-conforming mortgage loans
5.7
%
7.0
%
2.1
%
Discount rate:
Government-guaranteed mortgage loans
11.5
%
11.5
%
11.5
%
Conventional conforming mortgage loans
9.5
%
9.5
%
9.5
%
Conventional non-conforming mortgage loans
12.8
%
14.0
%
11.5
%
Quarter Ended March 31, 2022
Constant prepayment rate:
Government-guaranteed mortgage loans
6.7
%
18.3
%
4.8
%
Conventional conforming mortgage loans
6.6
%
18.4
%
3.4
%
Conventional non-conforming mortgage loans
6.6
%
21.9
%
4.9
%
Discount rate:
Government-guaranteed mortgage loans
12.0
%
12.0
%
12.0
%
Conventional conforming mortgage loans
10.0
%
10.0
%
10.0
%
Conventional non-conforming mortgage loans
12.3
%
14.5
%
12.0
%
47
The weighted
averages of the
key economic
assumptions that the
Corporation used
in its valuation
model and the
sensitivity of the
current
fair
value
to
immediate
10
% and
20
% adverse
changes
in
those
assumptions
for
mortgage
loans
as of
March
31,
2023
and
December 31, 2022 were as follows:
March 31,
December 31,
2023
2022
(In thousands)
Carrying amount of servicing assets
$
28,431
$
29,037
Fair value
$
45,270
$
44,710
Weighted-average
expected life (in years)
7.80
7.80
Constant prepayment rate (weighted-average annual
rate)
6.34
%
6.40
%
Decrease in fair value due to 10% adverse change
$
1,040
$
1,048
Decrease in fair value due to 20% adverse change
$
2,036
$
2,054
Discount rate (weighted-average annual rate)
10.70
%
10.69
%
Decrease in fair value due to 10% adverse change
$
1,960
$
1,925
Decrease in fair value due to 20% adverse change
$
3,770
$
3,704
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10%
variation in assumptions generally cannot be extrapolated because the relationship between the change in assumption and the change
in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSR is
calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example,
increases in market interest rates may result in lower prepayments), which may magnify or counteract the sensitivities
.
48
NOTE 8 – DEPOSITS
The following table summarizes deposit balances as of the indicated dates:
March 31, 2023
December 31, 2022
(In thousands)
Type of account and interest rate:
Non-interest-bearing deposit accounts
$
6,024,304
$
6,112,884
Interest-bearing saving accounts
3,808,182
3,902,888
Interest-bearing checking accounts
3,547,963
3,770,993
Certificates of deposit (“CDs”)
2,418,611
2,250,876
Brokered CDs
252,905
105,826
Total
$
16,051,965
$
16,143,467
The following table presents the contractual maturities of CDs, including brokered CDs, as of March 31,
2023:
Total
(In thousands)
Three months or less
$
499,307
Over three months to six months
361,274
Over six months to one year
732,933
Over one year to two years
751,913
Over two years to three years
155,590
Over three years to four years
46,748
Over four years to five years
117,009
Over five years
6,742
Total
$
2,671,516
The following were the components of interest expense on deposits for the
indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Interest expense on deposits
$
29,924
$
7,817
Accretion of premiums from acquisitions
(83)
(200)
Amortization of broker placement fees
44
35
Total
$
29,885
$
7,652
Total
U.S. time
deposits with
balances of
more than
$250,000 amounted
to $
1.1
billion and
$
1.0
billion as
of March
31, 2023
and
December 31,
2022, respectively.
This amount does
not include brokered
CDs that are
generally participated
out by brokers
in shares
of less than the FDIC
insurance limit. As of March
31, 2023 and December
31, 2022, unamortized broker
placement fees amounted to
$
0.4
million and
$
0.3
million, respectively,
which are
amortized over
the contractual
maturity of
the brokered
CDs under
the interest
method.
49
NOTE 9 – SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE (REPURCHASE AGREEMENTS)
Repurchase agreements as of the indicated dates consisted of the following:
March 31, 2023
December 31, 2022
(In thousands)
Short-term Fixed-rate repurchase agreements
(1)
$
172,982
$
75,133
(1)
Weighted-average interest rate
of
5.08
% and
4.55
% as of March 31, 2023 and December 31, 2022.
The $
75.1
million in repurchase
agreements outstanding
as of December
31, 2022 matured
and were repaid
during the first
quarter
of
2023.
In
addition,
the
Corporation
added
$
173.0
million
in
short-term
repurchase
agreements
reflecting
precautionary
measures
taken by management in light of recent instability in the banking sector.
Repurchase agreements mature as follows as of the indicated date:
March 31,
2023
(In thousands)
Within one month
$
172,982
As of March
31, 2023 and
December 31, 2022,
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
March
31,
2023
and
December
31,
2022,
repurchase
agreements were fully collateralized and not offset in the consolidated
statements of financial condition.
Repurchase agreements as of March 31, 2023, grouped by counterparty,
were as follows:
Weighted-Average
Counterparty
Amount
Maturity (In Months)
(Dollars in thousands)
JP Morgan Chase
$
172,982
1
50
NOTE 10 – ADVANCES
FROM THE FEDERAL HOME LOAN BANK (“FHLB
”)
The following is a summary of the advances from the FHLB as of the indicated dates:
March 31,
December 31,
2023
2022
(In thousands)
Short-term
Fixed
-rate advances from the FHLB
(1)
$
425,000
$
475,000
Long-term
Fixed
-rate advances from the FHLB
(2)
500,000
200,000
$
925,000
$
675,000
(1)
Weighted-average interest rate of
5.04
% and
4.56
% as of March 31, 2023 and December 31, 2022, respectively.
(2)
Weighted-average interest rate of
4.45
% and
4.25
% as of March 31, 2023 and December 31, 2022, respectively.
Advances from the FHLB mature as follows as of the indicated date:
March 31, 2023
(In thousands)
Within one month
$
425,000
Over one to five years
500,000
Total
$
925,000
During the
first quarter
of 2023,
the Corporation
added $
425.0
million of
short-term FHLB
advances at
an average
cost of
5.04
%
and $
300.0
million of
long-term FHLB
advances at
an average cost
of
4.59
%, and repaid
upon maturity
$
475.0
million of
short-term
FHLB advances at an average cost of
4.56
%.
NOTE 11 – OTHER LONG-TERM
BORROWINGS
Junior Subordinated Debentures
Junior subordinated debentures, as of the indicated dates, consisted of:
March 31,
December 31,
(In thousands)
2023
2022
Floating rate junior subordinated debentures (FBP Statutory Trust
I)
(1)
(3)
(4)
$
65,205
$
65,205
Floating rate junior subordinated debentures (FBP Statutory Trust
II)
(2) (3)
(4)
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
(
7.66
% as of March 31, 2023 and
7.49
% as of
December 31, 2022).
(2)
Amount represents junior subordinated interest-bearing debentures
due in 2034 with a floating interest rate of
2.50
% over
3-month LIBOR
(
7.46
% as of March 31, 2023 and
7.25
% as of
December 31, 2022).
(3)
Following the provisions of the LIBOR Act and Regulation
ZZ, the LIBOR reference on these contracts will automatically transition
by operation of law to three-month CME Term
SOFR, plus a spread adjustment of 0.26161% on the first reset
date after USD LIBOR ceases publication in June 2023.
(4)
See Note 7 - Non-Consolidated Variable
Interest Entities
("VIEs") and Servicing Assets, for additional information on the nature
and terms of these debentures.
51
NOTE 12 – EARNINGS PER COMMON
.
SHARE
The calculations of earnings per common share for the quarters ended March 31, 2023
and 2022 are as follows:
Quarter Ended March 31,
2023
2022
(In thousands, except per share information)
Net income attributable to common stockholders
$
70,698
$
82,600
Weighted-Average
Shares:
Average common
shares outstanding
180,215
198,130
Average potential
dilutive common shares
1,021
1,407
Average common
shares outstanding - assuming dilution
181,236
199,537
Earnings per common share:
Basic
$
0.39
$
0.42
Diluted
$
0.39
$
0.41
Earnings
per
common
share
is
computed
by
dividing
net
income
attributable
to
common
stockholders
by
the
weighted-average
number of common shares issued and outstanding. Net income attributable
to common stockholders represents net income adjusted for
any preferred
stock dividends,
including any
dividends declared
but not
yet paid,
and any cumulative
dividends related
to the
current
dividend period
that have
not been
declared as
of the
end of
the period.
Basic weighted-average
common shares
outstanding exclude
unvested shares of restricted stock that do not contain non-forfeitable
dividend rights.
Potential dilutive
common
shares consist
of unvested
shares of
restricted
stock and
performance
units (if
any
of the
performance
conditions
are
met
as of
the end
of
the reporting
period),
that
do
not contain
non-forfeitable
dividend
or dividend
equivalent
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 quarters ended March 31, 2023 and
2022.
52
NOTE 13 – STOCK-BASED
.
COMPENSATION
The First Bancorp
Omnibus Incentive
Plan (the “Omnibus
Plan”), which is
effective until
May 24, 2026,
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
March 31,
2023, there
were
3,142,813
authorized
shares
of
common
stock
available
for
issuance
under
the
Omnibus
Plan.
The
Board,
based
on
the
recommendation of
the Compensation
and Benefits
Committee of
the Board,
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. The Corporation issued
495,891
shares during the quarter
ended March 31, 2023
in connection
with restricted stock awards, which were reissued from treasury shares.
The following table summarizes the restricted stock activity under the Omnibus
Plan during the quarters ended March 31, 2023
and 2022:
Quarter ended
Quarter ended
March 31,
2023
March 31,
2022
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
938,491
$
9.14
1,148,775
$
6.61
Granted
(1)
495,891
11.99
299,440
13.15
Forfeited
(25,415)
9.98
(3,092)
6.69
Vested
(481,536)
5.93
(487,198)
5.72
Unvested shares outstanding at end of period
927,431
$
12.32
957,925
$
9.10
(1)
For the quarter ended March 31, 2023, includes
3,502
shares of restricted stock awarded to independent directors and
492,389
shares of restricted stock awarded to employees, of which
33,718
shares were granted to retirement-eligible employees and thus
charged to earnings as of the grant date. Includes
for the quarter ended March 31, 2022,
3,048
shares of restricted
stock awarded to independent directors and
296,392
shares of restricted stock awarded to employees, of which
6,084
shares were granted to retirement-eligible employees and thus
charged to earnings as of the grant date.
For the quarters
ended March 31,
2023 and 2022,
the Corporation recognized
$
1.6
million and $
0.9
million, respectively,
of stock-
based compensation
expense related
to restricted
stock awards.
As of
March 31,
2023,
there was
$
7.8
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
2.1
years.
53
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.
On March 16, 2023, the Corporation granted 216,876 performance units to executives. Performance units granted on or after March
16, 2023 will vest on the third anniversary of the effective date of the award based on actual achievement of two performance metrics
weighted equally: relative total shareholder return (“Relative TSR”), compared to companies that comprise the KBW Nasdaq
Regional Banking Index, and the achievement of a tangible book value per share (“TBVPS”) goal, which is measured based upon the
growth in the tangible book value during the performance cycle, adjusted for certain allowable non-recurring transactions. The
participant may earn 50% of their target opportunity for threshold-level performance and up to 150% of their target opportunity for
maximum-level performance, based on the achievement of the performance goals during a three-year performance cycle. Amounts
between threshold, target and maximum performance will vest on a proportional amount. Performance units granted prior to March
16, 2023 vest subject only to achievement of a TBVPS goal. In addition, the participant may earn only up to 100% of their target
opportunity.
The following
table summarizes
the performance
units activity under
the Omnibus
Plan during
the quarters
ended March
31, 2023
and 2022:
Quarter ended
Quarter ended
March 31,
2023
March 31,
2022
Number
Weighted -
Number
Weighted -
of
Average
of
Average
Performance
Grant Date
Performance
Grant Date
Units
Fair Value
Units
Fair Value
Performance units at beginning of year
791,923
7.36
814,899
7.06
Additions
(1)
216,876
12.24
166,669
13.15
Vested
(2)
(474,538)
4.08
(189,645)
11.16
Performance units at end of period
534,261
12.25
791,923
7.36
(1)
Units granted during the quarter ended March 31, 2023
are based on the achievement of the Relative TSR and TBVPS
performance goals during a three-year performance cycle beginning
January 1, 2023 and ending on December 31, 2025. Units
granted during the quarter ended March 31, 2022 are based
on the TBVPS achievement of the performance goal during a three-
year performance cycle beginning January 1, 2022 and ending
on December 31, 2024.
(2)
Units vested during the quarter ended March 31, 2023 are
related to performance units granted in 2020 that met the pre-established
target and were settled with shares of common stock
reissued from treasury shares. Units vested during the quarter ended
March 31, 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.
The fair value of the performance units awarded during the quarter ended March 31, 2023 and 2022, that was based on the TBVPS
goal component, was calculated based on the market price of the Corporation’s common stock on the respective date of the grant and
assuming attainment of 100% of target opportunity. As of March 31, 2023, there have been no changes on management’s assessment
of the probability that the pre-established TBVPS goal will be achieved; as such, no cumulative adjustment to compensation expense
has been recognized. The fair value of the performance units awarded during the quarter ended March 31, 2023, that was based on the
Relative TSR component, was calculated using a Monte Carlo simulation. Since the Relative TSR component is considered a market
condition, the fair value of the portion of the award based on Relative TSR is not revised subsequent to grant date based on actual
performance.
For the quarters
ended March 31,
2023 and 2022,
the Corporation recognized
$
0.5
million and $
0.3
million, respectively,
of stock-
based
compensation
expense
related
to
performance
units.
As
of
March
31,
2023,
there
was
$
4.7
million
of
total
unrecognized
compensation cost
related to unvested
performance units
that the Corporation
expects to recognize
over a weighted
average period
of
2.4
years.
54
The following
table summarizes
the valuation
assumptions used
to calculate
the fair
value of
the Relative
TSR component
of the
performance units granted under the Omnibus Plan during the quarter
ended March 31, 2023:
Quarter Ended
March 31,
2023
Risk-free interest rate
(1)
3.98
%
Correlation coefficient
77.16
Expected dividend yield
(2)
-
Expected volatility
(3)
41.37
Expected life (in years)
2.79
(1)
Based on the yield on zero-coupon U.S. Treasury
STRIPS as of the grant date.
(2)
Assumes that dividends are reinvested at each ex-dividend date.
(3)
Calculated based on the historical volatility of each company's
stock price with a look-back period equal to the simulation term
using daily stock prices.
Shares withheld
During the
first quarter
of 2023,
the Corporation
withheld
287,835
shares (first
quarter of
2022 –
201,930
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.
55
NOTE 14 –
STOCKHOLDERS’
EQUITY
Stock Repurchase Programs
On April
27, 2022,
the Corporation
announced that
its Board
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. During the first quarter
of 2023, the Corporation
repurchased
3,577,540
shares
of common stock through
open market transactions at
an average purchase price
of $
13.98
per share for a total
price of approximately
$
50
million. As of
March 31, 2023,
the Corporation has
remaining authorization to
repurchase approximately $
75
million of common
stock.
Considering
the
industry-wide
uncertain
environment,
the
Corporation
decided
to
pause
share
buybacks
during
the
second
quarter of 2023 and it expects to resume shares repurchases during the third quarter
of 2023 subject to factors mentioned above.
During
the
first
quarter
of
2022,
the
Corporation
completed
a
previously
publicly-announced
$
300
million
stock
repurchase
program approved by the Board
on April 26, 2021 by purchasing through
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.
Common Stock
The following table shows the change in shares of common stock outstanding for
the quarters ended March 31, 2023, and 2022:
Total
Number of Shares
Quarter Ended March 31,
2023
2022
Common stock outstanding, beginning balance
182,709,059
201,826,505
Common stock repurchased
(1)
(3,865,375)
(3,611,627)
Common stock reissued under stock-based compensation plan
970,429
489,085
Restricted stock forfeited
(25,415)
(3,092)
Common stock outstanding, ending balances
179,788,698
198,700,871
(1)
For the quarters ended March 31,
2023 and 2022
includes
287,835
and
201,930
shares, respectively, of common stock
surrendered to cover officers' payroll and income taxes.
For
the
quarters
ended
March
31,
2023
and
2022,
total
cash
dividends
declared
on
shares
of
common
stock
amounted
to
$
25.4
million
and
$
19.9
million,
respectively.
On
April 27, 2023
, the
Corporation
announced
that its
Board
had
declared
a quarterly
cash
dividend of $
0.14
per common share payable
on
June 9, 2023
to shareholders of record
at the close of
business on
May 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.
56
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 when
authorizing the issuance
of that particular
series.
No
shares of preferred
stock were outstanding
as of March
31, 2023 and December 31, 2022.
Treasury Stock
The following table shows the change in shares of treasury stock for the quarters ended
March 31,
2023 and 2022.
Total
Number of Shares
Quarter Ended March 31,
2023
2022
Treasury stock, beginning balance
40,954,057
21,836,611
Common stock repurchased
(1)
3,865,375
3,611,627
Common stock reissued under stock-based compensation plan
(970,429)
(489,085)
Restricted stock forfeited
25,415
3,092
Treasury stock, ending balances
43,874,418
24,962,245
(1)
For the quarters ended March 31,
2023 and 2022 includes
287,835
and
201,930
shares, respectively, of common stock
surrendered 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.
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
as of
each March
31, 2023 and December 31, 2022.
There were
no
transfers to the legal surplus reserve during the quarter ended March 31, 2023.
57
NOTE 15 – ACCUMULATED
OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive
loss for the quarters ended March 31, 2023 and
2022:
Changes in Accumulated Other Comprehensive
Loss by Component
(1)
Quarter ended March 31,
2023
2022
(In thousands)
Unrealized net holding losses on available-for-sale
debt securities:
Beginning balance
$
(805,972)
$
(87,390)
Other comprehensive income (loss)
87,228
(331,834)
Ending balance
$
(718,744)
$
(419,224)
Adjustment of pension and postretirement
benefit plans:
Beginning balance
$
1,194
$
3,391
Other comprehensive income (loss)
-
-
Ending balance
$
1,194
$
3,391
____________________
(1) All amounts presented are net of tax.
NOTE 16 – EMPLOYEE BENEFIT PLANS
The Corporation
maintains two frozen
qualified noncontributory
defined benefit pension
plans (the “Pension
Plans”), and
a related
complementary
post-retirement
benefit
plan
(the
“Postretirement
Benefit
Plan”)
covering
medical
benefits
and
life
insurance
after
retirement
that
it
obtained
in
the
Banco
Santander
Puerto
Rico
(“BSPR”)
acquisition
on
September
1,
2020.
One
defined
benefit
pension
plan covers
substantially all
of BSPR’s
former
employees who
were active
before January
1, 2007,
while
the other
defined
benefit pension plan covers personnel of an institution previously acquired
by BSPR. Benefits are based on salary and years of service.
The accrual of benefits under the Pension Plans is frozen to all participants.
The
Corporation
requires
recognition
of
a
plan’s
overfunded
and
underfunded
status
as
an
asset
or
liability
with
an
offsetting
adjustment to accumulated other comprehensive loss pursuant to
the ASC Topic 715, “Compensation-Retirement
Benefits.”
The following table presents the components of net periodic cost (benefit) for
the indicated periods:
Affected Line Item
in the Consolidated
Quarter Ended
Statements of Income
March 31, 2023
March 31, 2022
(In thousands)
Net periodic cost (benefit), pension plans:
Interest cost
Other expenses
$
950
$
654
Expected return on plan assets
Other expenses
(886)
(1,039)
Net periodic cost (benefit), pension plans
64
(385)
Net periodic cost, postretirement plan
Other expenses
6
1
Net periodic cost (benefit)
$
70
$
(384)
58
NOTE 17 –
INCOME TAXES
Income
tax
expense
includes
Puerto
Rico
and
USVI
income
taxes,
as
well
as
applicable
U.S.
federal
and
state
taxes.
The
Corporation is subject
to Puerto Rico income
tax on its income
from all sources.
As a Puerto Rico
corporation, FirstBank is
treated as
a foreign corporation for U.S. and
USVI income tax purposes and, accordingly,
is generally subject to U.S. and USVI
income tax only
on its income from
sources within the U.S.
and USVI or income
effectively connected with
the conduct of a
trade or business in
those
jurisdictions. Any
such tax
paid in
the U.S.
and USVI
is also
creditable against
the Corporation’s
Puerto Rico
tax liability,
subject to
certain conditions and limitations.
Under the Puerto Rico
Internal Revenue Code of
2011 PR (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
international banking
entity (an
“IBE”) unit
of the
Bank, and
through the
Bank’s
subsidiary,
FirstBank Overseas
Corporation, whose
interest income
and gains
on sales
are exempt
from Puerto
Rico income
taxation. The
IBE unit
and FirstBank
Overseas Corporation
were created
under the
International Banking
Entity
Act of
Puerto
Rico, which
provides for
total Puerto
Rico tax
exemption on
net
income derived by
IBEs operating in
Puerto Rico on the
specific activities identified
in the IBE Act.
An IBE that operates
as a unit of
a bank
pays income
taxes at
the corporate
standard rates
to the
extent that
the IBE’s
net income
exceeds
20
% of
the bank’s
total net
taxable income.
For the
first quarter
of 2023,
the Corporation
recorded
an income
tax expense
of $
31.9
million
compared
to $
43.0
million in
the
first quarter of 2022.
The variance was primarily
related to lower pre-tax
income and a lower estimated
effective tax rate
as a result of
a
higher
proportion
of
exempt
to
taxable
income
when
compared
to
the
same
period
in
2022.
The
Corporation’s
estimated
annual
effective tax
rate, excluding
entities with pre-tax
losses from which
a tax benefit
cannot be recognized
and discrete items,
was
31.2
%
for the first quarter of 2023, compared to
32.9
% for the first quarter of 2022.
The net
deferred tax
asset of
the Corporation’s
banking subsidiary,
FirstBank, amounted
to $
154.8
million as
of March
31, 2023,
net of a valuation
allowance of $
139.1
million, compared to
a net deferred
tax asset of $
155.6
million, net of
a valuation allowance
of
$
149.5
million, as
of December
31, 2022.
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.
The reduction
in the
valuation allowance
was related to
the change in
the market value
of available-for-sale
debt securities,
which resulted in
a change in
the deferred tax
asset
and an equal change in the valuation allowance without impacting earnings.
59
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 the
first quarters
of 2023
and 2022,
the Corporation
incurred
current income tax expense
of approximately $
2.5
million and $
1.6
million, respectively,
related to its U.S. operations.
The limitation
did not impact the USVI operations in the first quarters of 2023 and 2022, respectively
.
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
March 31,
2023,
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.
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.
60
NOTE 18 –
FAIR VALUE
Fair Value
Measurement
ASC Topic
820, “Fair
Value
Measurement,”
defines fair
value as
the exchange
price that
would be
received for
an asset
or paid
to
transfer
a
liability
(an
exit
price)
in
the
principal
or
most
advantageous
market
for
the
asset
or
liability
in
an
orderly
transaction
between market
participants on
the measurement
date. This
guidance also
establishes a
fair value
hierarchy for
classifying assets
and
liabilities, which is based on
whether the inputs to
the valuation techniques used
to measure fair value are
observable or unobservable.
One of three levels of inputs may be used to measure fair value:
Level 1
Valuations
of
Level
1
assets
and
liabilities
are
obtained
from
readily-available
pricing
sources
for
market
transactions involving identical assets or liabilities in active markets.
Level 2
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.
See Note 25
– Fair Value
,
to the audited
consolidated financial
statements included
in the 2022
Annual Report
on Form
10-K for
a
description of the valuation methodologies used to measure financial
instruments at fair value on a recurring basis.
Assets and liabilities measured at fair value on a recurring basis are summarized below as of
March 31, 2023 and December 31,
2022:
As of March 31, 2023
As of December 31, 2022
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
$
140,422
$
-
$
-
$
140,422
$
138,875
$
-
$
-
$
138,875
Noncallable U.S. agencies debt securities
-
428,675
-
428,675
-
389,787
-
389,787
Callable U.S. agencies debt securities
-
1,962,535
-
1,962,535
-
1,963,566
-
1,963,566
MBS
-
3,050,019
5,402
(1)
3,055,421
-
3,098,797
5,794
(1)
3,104,591
Puerto Rico government obligations
-
-
2,203
2,203
-
-
2,201
2,201
Other investments
-
-
-
-
-
-
500
500
Equity securities
4,926
-
-
4,926
4,861
-
-
4,861
Derivative assets
-
628
-
628
-
633
-
633
Liabilities:
Derivative liabilities
-
645
-
645
-
476
-
476
(1) Related to private label MBS.
61
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 quarters
ended March 31, 2023 and 2022:
Quarter Ended March 31,
2023
2022
Level 3 Instruments Only
Securities Available for Sale
(1)
Securities Available for Sale
(1)
(In thousands)
Beginning balance
$
8,495
$
11,084
Total gains (losses):
Included in other comprehensive loss (unrealized)
(162)
(287)
Included in earnings (unrealized)
(2)
9
388
Principal repayments and amortization
(3)
(737)
(538)
Ending balance
$
7,605
$
10,647
___________________
(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.
(3)
Includes the $
0.5
million repayment of a matured debt security.
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 March 31, 2023 and December 31, 2022:
March 31, 2023
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
Minimum
Maximum
(Dollars in thousands)
Available-for-sale
debt securities:
Private label MBS
$
5,402
Discounted cash flows
Discount rate
16.0%
16.0%
16.0%
Prepayment rate
1.6%
12.6%
9.2%
Projected cumulative loss rate
0.2%
14.9%
5.2%
Puerto Rico government obligations
$
2,203
Discounted cash flows
Discount rate
12.8%
12.8%
12.8%
Projected cumulative loss rate
19.0%
19.0%
19.0%
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%
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.
62
Additionally, fair value
is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP.
As of March 31, 2023, the Corporation recorded losses or valuation adjustments
for assets recognized at fair value on a non-
recurring basis and still held at March 31, 2023, as shown in the following table:
Carrying value as of March 31,
Related to losses recorded for the Quarter Ended
March 31,
2023
2022
2023
2022
(In thousands)
Level 3:
Loans receivable
(1)
$
3,486
$
25,951
$
(60)
$
(3,539)
OREO
(2)
814
1,432
(33)
(73)
(1)
Consists mainly of
collateral dependent
commercial and construction
loans. The
Corporation generally
measured losses
based on the
fair value of
the collateral.
The Corporation derived
the fair values from
external appraisals that
took into consideration
prices in observed
transactions involving similar
assets in similar locations
but adjusted for
specific characteristics
and
assumptions of the collateral (e.g., absorption rates), which are
not market observable.
(2)
The Corporation
derived the
fair values
from appraisals
that took
into consideration
prices in
observed transactions
involving similar
assets in
similar locations
but adjusted
for specific
characteristics and assumptions of
the properties (e.g., absorption
rates and net operating
income of income producing
properties), which are not
market observable. Losses
were related to
market valuation adjustments after the transfer of the loans to the
OREO portfolio.
See Note 25 – Fair Value,
to the audited consolidated financial
statements to the audited
consolidated financial statements included
in
the
2022
Annual
Report
on
Form
10-K
for
qualitative
information
regarding
the
fair
value
measurements
for
Level
3
financial
instruments measured at fair value on nonrecurring basis.
The following tables present the carrying value, estimated fair value and estimated
fair value level of the hierarchy of financial
instruments as of March 31, 2023 and December 31, 2022:
Total Carrying Amount
in Statement of
Financial Condition as
of March 31, 2023
Fair Value Estimate as
of
March 31, 2023
Level 1
Level 2
Level 3
(In thousands)
Assets:
Cash and due from banks and money market investments
(amortized cost)
$
823,601
$
823,601
$
823,601
$
-
$
-
Available-for-sale debt
securities (fair value)
5,589,256
5,589,256
140,422
5,441,229
7,605
Held-to-maturity debt securities (amortized cost)
431,395
Less: ACL on held-to-maturity debt securities
(7,646)
Held-to-maturity debt securities, net of ACL
$
423,749
419,752
-
255,209
164,543
Equity securities (amortized cost)
61,788
61,788
-
61,788
(1)
-
Other equity securities (fair value)
4,926
4,926
4,926
-
-
Loans held for sale (lower of cost or market)
15,183
15,214
-
15,214
-
Loans held for investment (amortized cost)
11,577,985
Less: ACL for loans and finance leases
(265,567)
Loans held for investment, net of ACL
$
11,312,418
11,030,421
-
-
11,030,421
MSRs (amortized cost)
28,431
45,270
-
-
45,270
Derivative assets (fair value)
(2)
628
628
-
628
-
Liabilities:
Deposits (amortized cost)
$
16,051,965
$
16,039,550
$
-
$
16,039,550
$
-
Short-term securities sold under agreements to repurchase (amortized
cost)
172,982
173,936
-
173,936
-
Advances from the FHLB (amortized cost):
Short-term
425,000
426,665
-
426,665
-
Long-term
500,000
501,990
-
501,990
-
Other long-term borrowings (amortized cost)
183,762
187,183
-
-
187,183
Derivative liabilities (fair value)
(2)
645
645
-
645
-
(1) Includes FHLB stock with a carrying value of $
54.2
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.
63
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
$
-
Short-term securities sold under agreements to repurchase (amortized
cost)
75,133
75,230
-
75,230
-
Advances from the FHLB (amortized cost)
Short-term
475,000
474,731
-
474,731
-
Long-term
200,000
199,865
-
199,865
-
Other long-term 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.
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.
64
NOTE 19 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
In accordance with
ASC Topic
606, “Revenue from
Contracts with Customers” (“ASC
Topic
606”), revenues are
recognized when
control
of
promised
goods
or
services
is
transferred
to
customers
and
in
an
amount
that
reflects
the
consideration
to
which
the
Corporation expects to be
entitled in exchange for those
goods or services. At contract
inception, once the contract
is determined to be
within the
scope of
ASC Topic
606, the
Corporation assesses
the goods
or services
that are
promised within
each contract,
identifies
the
respective
performance
obligations,
and
assesses
whether
each
promised
good
or
service
is
distinct.
The
Corporation
then
recognizes
as revenue
the amount
of the
transaction price
that is
allocated to
the respective
performance obligation
when (or
as) the
performance obligation is satisfied.
Disaggregation of Revenue
The following
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 quarters ended March 31, 2023 and 2022:
Quarter ended March 31, 2023
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial
and Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
(1)
$
21,788
$
137,744
$
14,940
$
(658)
$
20,930
$
6,141
$
200,885
Service charges and fees on deposit accounts
-
5,486
3,154
-
165
736
9,541
Insurance commissions
-
4,640
-
-
28
179
4,847
Merchant-related income
-
2,263
-
-
29
468
2,760
Credit and debit card fees
-
7,638
22
-
2
496
8,158
Other service charges and fees
161
1,152
854
-
583
344
3,094
Not in scope of ASC Topic
606
(1)
2,913
855
145
160
40
5
4,118
Total non-interest income
3,074
22,034
4,175
160
847
2,228
32,518
Total Revenue
$
24,862
$
159,778
$
19,115
$
(498)
$
21,777
$
8,369
$
233,403
Quarter ended March 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)
$
25,779
$
89,546
$
40,415
$
7,409
$
16,482
$
5,993
$
185,624
Service charges and fees on deposit accounts
-
5,539
2,976
-
138
710
9,363
Insurance commissions
-
4,967
-
-
29
279
5,275
Merchant-related income
-
1,822
373
-
5
389
2,589
Credit and debit card fees
-
6,671
16
-
(7)
410
7,090
Other service charges and fees
143
1,110
1,113
-
499
157
3,022
Not in scope of ASC Topic
606
(1)
5,109
354
76
(112)
80
12
5,519
Total non-interest
income
5,252
20,463
4,554
(112)
744
1,957
32,858
Total Revenue
$
31,031
$
110,009
$
44,969
$
7,297
$
17,226
$
7,950
$
218,482
(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.
65
For
the
quarters
ended
March
31,
2023
and
2022,
most
of
the
Corporation’s
revenue
within
the
scope
of
ASC
Topic
606
was
related to performance obligations satisfied at a point in time.
See
Note
26
–
Revenue
from
Contracts
with
Customers,
to
the
audited
consolidated
financial
statements
included
in
the
2022
Annual Report on Form 10-K for a discussion of major revenue streams under
the scope of ASC Topic 606.
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 point-of-sale 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 activity of contract liabilities for the quarters
ended March 31, 2023 and 2022:
Quarter Ended March 31,
2023
2022
(In thousands)
Beginning Balance
$
841
$
1,443
Less:
Revenue recognized
(81)
(289)
Ending balance
$
760
$
1,154
As of March 31, 2023 and 2022, 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 March 31,
2023.
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.
66
NOTE 20 – 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
March 31,
2023, 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, to the audited consolidated financial
statements included in the 2022 Annual Report on Form 10-K.
The
Corporation
evaluates
the
performance
of
the
segments
based
on
net
interest
income,
the
provision
for
credit
losses,
non-
interest
income
and
direct
non-interest
expenses.
The
segments
are
also
evaluated
based
on
the
average
volume
of
their
interest-
earning assets less the ACL.
67
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 quarter ended March 31, 2023:
Interest income
$
31,907
$
83,174
$
62,343
$
27,466
$
31,114
$
6,392
$
242,396
Net (charge) credit for transfer of funds
(10,119)
77,735
(47,403)
(19,539)
(674)
-
-
Interest expense
-
(23,165)
-
(8,585)
(9,510)
(251)
(41,511)
Net interest income (loss)
21,788
137,744
14,940
(658)
20,930
6,141
200,885
Provision for credit losses - (benefit) expense
(506)
15,224
(2,536)
(9)
4,655
(1,326)
15,502
Non-interest income
3,074
22,034
4,175
160
847
2,228
32,518
Direct non-interest expenses
5,087
41,627
9,365
947
8,304
6,825
72,155
Segment income (loss)
$
20,281
$
102,927
$
12,286
$
(1,436)
$
8,818
$
2,870
$
145,746
Average earnings assets
$
2,171,061
$
3,174,150
$
3,713,633
$
6,216,498
$
2,067,848
$
366,338
$
17,709,528
Mortgage
Banking
Consumer
(Retail) Banking
Commercial and
Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
For the quarter ended March 31, 2022:
Interest income
$
33,071
$
70,437
$
47,027
$
22,184
$
18,857
$
6,278
$
197,854
Net (charge) credit for transfer of funds
(7,292)
24,282
(6,612)
(9,949)
(429)
-
-
Interest expense
-
(5,173)
-
(4,826)
(1,946)
(285)
(12,230)
Net interest income
25,779
89,546
40,415
7,409
16,482
5,993
185,624
Provision for credit losses - (benefit) expense
(3,703)
11,144
(16,622)
(388)
(3,547)
(686)
(13,802)
Non-interest income (loss)
5,252
20,463
4,554
(112)
744
1,957
32,858
Direct non-interest expenses
6,906
39,271
8,859
885
8,479
6,973
71,373
Segment income
$
27,828
$
59,594
$
52,732
$
6,800
$
12,294
$
1,663
$
160,911
Average earnings assets
$
2,293,648
$
2,759,482
$
3,664,104
$
8,145,949
$
2,065,638
$
378,169
$
19,306,990
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Net income:
Total income for segments
$
145,746
$
160,911
Other operating expenses
(1)
43,113
35,286
Income before income taxes
102,633
125,625
Income tax expense
31,935
43,025
Total consolidated net income
$
70,698
$
82,600
Average assets:
Total average earning assets for segments
$
17,709,528
$
19,306,990
Average non-earning assets
847,628
947,011
Total consolidated average assets
$
18,557,156
$
20,254,001
(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.
68
NOTE 21 – SUPPLEMENTAL
STATEMENT
OF CASH FLOWS INFORMATION
Supplemental statement of cash flows information is as follows for the indicated
periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Cash paid for:
Interest on borrowings
$
37,798
$
13,300
Income tax
10,926
2,598
Operating cash flow from operating leases
4,316
4,751
Non-cash investing and financing activities:
Additions to OREO
6,414
6,770
Additions to auto and other repossessed assets
15,356
10,772
Capitalization of servicing assets
532
1,130
Loan securitizations
28,736
40,823
Loans held for investment transferred to held for sale
2,345
1,176
Payable related to unsettled purchases of available-for-sale debt securities
-
15,000
ROU assets obtained in exchange for operating lease liabilities
1,630
2,791
69
NOTE 22 – 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
March 31,
2023 and
December 31,
2022,
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
March
31,
2023,
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
one
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
March
31,
2023,
the
capital
measures
of
the
Corporation
and
the
Bank
included
$
32.4
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
$
32.4
million
remains
excluded
to
be
phase-in
during
the
remainder of
the three-year
transition period.
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.
70
The regulatory
capital position
of the
Corporation and
the FirstBank as
of March
31, 2023
and December
31, 2022,
which reflects
the delay in the full 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 March 31, 2023
Total Capital (to Risk-Weighted
Assets)
First BanCorp.
$
2,366,591
19.02
%
$
995,597
8.0
%
N/A
N/A
%
FirstBank
$
2,327,600
18.71
%
$
995,452
8.0
%
$
1,244,315
10.0
%
CET1 Capital (to Risk-Weighted Assets)
First BanCorp.
$
2,032,369
16.33
%
$
560,023
4.5
%
N/A
N/A
%
FirstBank
$
2,071,650
16.65
%
$
559,942
4.5
%
$
808,805
6.5
%
Tier I Capital (to Risk-Weighted
Assets)
First BanCorp.
$
2,032,369
16.33
%
$
746,697
6.0
%
N/A
N/A
%
FirstBank
$
2,171,650
17.45
%
$
746,589
6.0
%
$
995,452
8.0
%
Leverage ratio
First BanCorp.
$
2,032,369
10.57
%
$
769,399
4.0
%
N/A
N/A
%
FirstBank
$
2,171,650
11.29
%
$
769,102
4.0
%
$
961,378
5.0
%
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
%
71
Commitments
The Corporation enters
into financial instruments
with off-balance sheet
risk in the normal
course of business to
meet the financing
needs
of
its
customers.
These
financial
instruments
may
include
commitments
to
extend
credit
and
standby
letters
of
credit.
Commitments to extend credit are agreements
to lend to a customer as long
as there is no violation of any conditions
established in the
contract. Commitments
generally have fixed
expiration dates or
other termination clauses.
Since certain commitments
are expected
to
expire without
being drawn
upon, the
total commitment
amount does
not necessarily
represent future
cash requirements.
For most
of
the
commercial
lines
of
credit,
the
Corporation
has
the
option
to
reevaluate
the
agreement
prior
to
additional
disbursements.
In
the
case of credit cards and personal lines of credit, the Corporation can
cancel the unused credit facility at any time and without cause.
As
of March 31, 2023,
commitments to extend
credit amounted to approximately
$
2.0
billion, of which $
0.9
billion relates to retail
credit
card
loans.
In
addition,
commercial
and
financial
standby
letters
of
credit
as
of
March
31,
2023
amounted
to
approximately
$
93.6
million.
Contingencies
As
of
March
31,
2023,
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 March 31, 2023, no such disclosures were necessary.
72
NOTE 23- FIRST BANCORP.
(HOLDING COMPANY
ONLY) FINANCIAL
INFORMATION
The following
condensed financial information
presents the financial
position of
First BanCorp.
at the holding
company level only
as of March 31, 2023 and December 31, 2022, and the results of its operations
for the quarters ended March 31, 2023 and 2022:
Statements of Financial Condition
As of March 31,
As of December 31,
2023
2022
(In thousands)
Assets
Cash and due from banks
$
13,981
$
19,279
Other investment securities
735
735
Investment in First Bank Puerto Rico, at equity
1,544,874
1,464,026
Investment in First Bank Insurance Agency,
at equity
32,374
28,770
Investment in FBP Statutory Trust I
1,951
1,951
Investment in FBP Statutory Trust II
3,561
3,561
Dividends receivable
637
624
Other assets
426
430
Total assets
$
1,598,539
$
1,519,376
Liabilities and Stockholders’ Equity
Liabilities:
Long-term borrowings
$
183,762
$
183,762
Accounts payable and other liabilities
9,184
10,074
Total liabilities
192,946
193,836
Stockholders’ equity
1,405,593
1,325,540
Total liabilities and stockholders’
equity
$
1,598,539
$
1,519,376
Statements of Income
Quarter Ended March 31,
2023
2022
(In thousands)
Income
Interest income on money market investments
$
53
$
4
Dividend income from banking subsidiaries
78,870
63,593
Other income
102
40
Total income
79,025
63,637
Expense
Other borrowings
3,381
1,333
Other operating expenses
410
439
Total expense
3,791
1,772
Income before income taxes and equity in undistributed
earnings of subsidiaries
75,234
61,865
Income tax expense
1,078
1,106
Equity in undistributed earnings of subsidiaries (distribution in excess of
earnings)
(3,458)
21,841
Net income
$
70,698
$
82,600
Other comprehensive income (loss), net of tax
87,228
(331,834)
Comprehensive income (loss)
$
157,926
$
(249,234)
73
ITEM
2.
MANAGEMENT’S
DISCUSSION
AND
ANALYSIS
OF
FINANCIAL
CONDITION
AND
RESULTS
OF
OPERATIONS (“MD&A”)
The
following
MD&A
relates
to
the
accompanying
unaudited
consolidated
financial
statements
of
First
BanCorp.
(the
“Corporation,” “we,” “us,”
“our,” or “First
BanCorp.”) and should be
read in conjunction with
such financial statements and
the notes
thereto,
and our Annual Report on
Form 10-K for the year
ended December 31, 2022 (the “2022
Annual Report on Form 10-K”).
This
section also
presents certain
financial measures
that are not
based on
generally accepted
accounting principles
in the
United States
of
America
(“GAAP”).
See
“Non-GAAP
Financial
Measures
and
Reconciliations”
below
for
information
about
why
non-GAAP
financial
measures
are
presented
and
references
to
reconciliations
of
non-GAAP
financial
measures
to
the
most
comparable
GAAP
financial measures.
EXECUTIVE SUMMARY
First BanCorp.
is a diversified
financial holding
company headquartered
in San Juan,
Puerto Rico offering
a full range
of financial
products to
consumers and
commercial customers
through various
subsidiaries. First
BanCorp.
is the
holding company
of FirstBank
Puerto
Rico
(“FirstBank”
or the
“Bank”)
and
FirstBank
Insurance
Agency.
Through
its wholly
-owned
subsidiaries,
the Corporation
operates
in
Puerto
Rico,
the
United
States
Virgin
Islands
(“USVI”),
the
British
Virgin
Islands
(“BVI”),
and
the
state
of
Florida,
concentrating on
commercial banking,
residential mortgage loans,
credit cards, personal
loans, small loans,
auto loans and
leases, and
insurance agency activities.
Recent Developments
Economy and Market Volatility
Growth
in
economic
activity
and
demand
for
goods
and
services,
alongside
labor
shortages,
supply
chain
complications
and
geopolitical
matters,
have
contributed
to
rising
inflation.
In
response,
the
Federal
Reserve
has
raised
interest
rates
and
has
begun
reducing the
size of
its balance
sheet. In
March and
May 2023,
certain large
U.S. regional
banks with
assets over
$100 billion
were
closed
and
placed
into
receivership
with
the
FDIC.
The
closures
of
those
banks
and
adverse
developments
affecting
other
banks
resulted
in
heightened
levels
of
market
volatility
that
has
negatively
impacted
customer
confidence
in
the
safety
and
soundness
of
financial
institutions.
These developments
have resulted
in certain
regional banks
experiencing
higher than
normal deposit
outflows
and
an
elevated
level
of
competition
for
available
deposits
in
the
market.
The
impact
of
market
volatility
from
the
adverse
developments
in
the
banking
industry,
along
with
continued
high
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.
Our results
this quarter
reflect continued
discipline expense
management,
stable credit
quality metrics,
a sound
liquidity position,
and solid capital levels, despite
the market disruption.
With our disciplined
and proactive approach, the
Corporation is well positioned
to manage
through the
uncertain economic
outlook on
the horizon.
As of
March 31,
2023, the
Corporation had
approximately
$5.5
billion of
unused available
liquidity,
representing 114%
of total
estimated uninsured
deposits, excluding
fully collateralized
deposits,
of $4.8 billion, and a strong capital position with a common equity tier 1 (“CET1”)
ratio of 16.33%.
In the aftermath of the recent bank failures, the
banking agencies could propose certain actions that may
impact capital ratios or the
FDIC deposit insurance premium.
See “Risk Management – Liquidity Risk” below for additional information
about the Corporation’s funding
sources and strategy.
Return of Capital to Shareholders
In
the
first
quarter
of 2023,
the Corporation
returned
approximately
$75.1
million,
or
106%
of
first
quarter
2023
earnings, to
its
shareholders
through $50.0
million
in repurchases
of common
stock and
the payment
of $25.1
million
in
common
stock dividends,
which reflects an
increase in the
common stock dividend
by 17%,
from $0.12 for
the fourth quarter
of 2022 to
$0.14 per share
for the
first quarter of 2023.
As of March 31, 2023, the Corporation has remaining authorization to
repurchase approximately $75 million of common stock. Due
to recent
market events,
the Corporation
intends to
temporarily pause
common stock
repurchases
during the
second quarter
of 2023
and expects to
resume such repurchases
during the third quarter
of 2023 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.
74
London Interbank Offered Rate (“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
Regulation
ZZ,
which
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
Regulation ZZ,
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, Regulation
ZZ 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
March 31, 2023,
the Corporation’s
risk exposure to USD
LIBOR that mature
after June 30,
2023 consisted of
the following:
(i)
$1.2
billion
of
variable-rate
commercial
and
construction
loans
(including
unused
commitments),
(ii)
$40.7
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) $124.7 million of Puerto
Rico municipalities bonds held as part of
the held-to-maturity debt securities portfolio,
and (iv)
$183.8
million of
junior subordi
nated debentures
reported as
other
long-term borrowings
in the
consolidated
statements of
financial
condition.
Most of
these contracts contain
adequate features
to convert
to an alternative
interest rate;
however,
as of March
31, 2023,
contracts totaling approximately
$338.4 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. Following
the provisions
of the
LIBOR Act
and Regulation
ZZ, the
LIBOR reference
on the
junior subordinated
debentures will
automatically
transition by
operation of
law to
3-month CME
Term
SOFR, plus
a spread
adjustment of
0.26161% on
the first
reset date
after USD
LIBOR ceases
publication in
June 2023.
In addition,
for the
transition of
any residual
exposure after
June 30,
2023, the
Corporation
expects to follow the provisions of the LIBOR Act and Regulation ZZ.
The
Corporation
continues
to
execute
its
LIBOR
transition
workplan.
Source
systems
have
been
updated
to
support
alternative
reference rates. At this time
alternative reference rates are predominantly
SOFR based. In addition, the
Corporation continues working
with
its
interest
rate
risk
monitoring
framework
and
a
strategy
for
managing
interest
rate
risk
during
the
transition
from
LIBOR
to
SOFR. We
continue to monitor market
developments and legislative and
regulatory updates, with additional
updates expected through
the remainder of 2023.
CRITICAL ACCOUNTING POLICIES AND PRACTICES
The
accounting
principles
of
the
Corporation
and
the
methods
of
applying
these
principles
conform
to
GAAP.
In
preparing
the
consolidated
financial
statements,
management
is
required
to
make
estimates,
assumptions,
and
judgments
that
affect
the
amounts
recorded for assets,
liabilities and contingent
liabilities as of
the date of
the financial statements
and the reported
amounts of revenues
and
expenses
during
the
reporting
periods.
Note
1
of
the Notes
to
Consolidated
Financial
Statements
included
in
our
2022
Annual
Report on
Form 10-K,
as supplemented
by this
report including
this MD&A,
describes the significant
accounting policies we
used in
our Consolidated Financial Statements.
Not all significant
accounting policies require
management to make
difficult, subjective
or complex judgments.
Critical accounting
estimates
are
those
estimates
made
in
accordance
with
GAAP
that
involve
a
significant
level
of
uncertainty
and
have
had
or
are
reasonably
likely
to
have
a
material
impact
on
the
Corporation’s
financial
condition
and
results
of
operations.
The
Corporation’s
critical accounting
estimates that
are particularly
susceptible
to significant
changes include,
but are
not limited
to, the
following:
(i)
the allowance for credit losses (“ACL”);
(ii) valuation of financial instruments;
and (iii) income taxes. For more
information regarding
valuation of financial
instruments and income taxes
policies, assumptions, and
judgments, see “Critical Accounting
Estimates” in Part
II,
Item
7,
“Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations
(“MD&A”),”
in
the
2022
Annual Report
on Form
10-K.
The “Risk
Management –
Credit Risk
Management” section
below details
the policies,
assumptions,
and
judgments
related
to
the
ACL.
Actual
results
could
differ
from
estimates
and
assumptions
if
different
outcomes
or
conditions
prevail.
75
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 FDIC
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
$70.7
million,
or
$0.39
per
diluted
common
share,
for
the
quarter
ended
March
31,
2023,
compared
to
$82.6
million,
or
$0.41
per
diluted
common
share,
for
the
quarter
ended
March
31,
2022.
Other
relevant
selected
financial indicators for the periods presented are included
below:
Quarter Ended March 31,
2023
2022
Key Performance Indicator:
(1)
Return on Average
Assets
(2)
1.55
%
1.65
%
Return on Average
Total Equity
(3)
21.00
16.64
Efficiency Ratio
(4)
49.39
48.82
(1)
These financial ratios are used by Management to monitor the Corporation’s
financial performance and whether it is using its assets
efficiently.
(2)
Indicates how profitable the Corporation is in relation to its total assets
and is calculated by dividing net income on an annualized basis
by its average total assets.
(3)
Measures the Corporation’s performance
based on its average stockholders’ equity and is calculated
by dividing net income on an annualized basis by its average
total stockholders’
equity.
(4)
Measures how much the Corporation incurred to generate a
dollar of revenue and is calculated by dividing non-interest expenses
by total revenue.
The key drivers
of the Corporation’s
GAAP financial results
for the quarter
ended March 31, 2023,
compared to the
first quarter of
2022, include the following:
●
Net interest income for
the quarter ended March 31,
2023 increased to $200.9 million,
compared to $185.6 million for
the first
quarter
of
2022,
mainly
driven
by
the
effect
in
the
commercial
loan
portfolio
of
higher
market
interest
rates
in
the
upward
repricing of variable
-rate loans and
in new loan
originations, and the
growth in consumer
loans, partially offset
by an increase
in
interest
expense
due
to
the
increase
in
borrowings
and
a
110
basis
point
increase
in
the
average
cost
of
interest-bearing
liabilities. 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 quarter
ended
March
31,
2023
was
an
expense
of
$15.5
million,
compared
to
a
net
benefit
of
$13.8
million
for
the
first
quarter
of
2022,
mainly due
to the
$4.7 million
increase in
the provision
for the
consumer loan
portfolios and
the net
benefit of
$23.1 million
recorded in
the first
quarter of
2022 for
the commercial
and construction
loan portfolio
as a result
of reductions
in qualitative
reserves as a result of reduced uncertainty regarding COVID-19.
Net charge-offs totaled
$13.3 million for the quarter
ended March 31, 2023, or 0.46%
of average loans on an
annualized basis,
compared
to
net
charge-offs
of
$6.6
million,
or
0.24%
of
average
loans,
for
the
first
quarter
of
2022.
The
increase
in
net
charge-offs
was mainly
in consumer
loans. 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
$32.5
million
for
the
quarter
ended
March
31,
2023,
compared
to
$32.9
million for the first quarter of 2022. See “Non-Interest Income” below
for additional information.
●
Non-interest expenses
for the
quarter ended
March 31,
2023 increased
by $8.6
million to
$115.3
million, mainly
driven by
a
$6.9 million
increase in
employees’ compensation
and benefits expenses
due to
annual salary
merit increases
and an
increase
in
bonuses,
stock-based
compensation
expense
of
retirement-eligible
employees,
payroll
taxes,
and
medical
insurance
premium costs.
The efficiency
ratio for
the first
quarter of
2023 was
49.39%, as
compared to
48.82% for
the same
period in
2022. See “Non-Interest Expenses” below for additional information.
76
●
Income tax expense
decreased to $31.9
million for the
first quarter of
2023, compared
to $43.0 million
for the same
period in
2022 driven
by a
lower pre-tax
income.
The Corporation’s
estimated effective
tax rate,
excluding entities
with pre-tax
losses
from which a tax
benefit cannot be recognized
and discrete items, decrease to
31.2% for the first
quarter of 2023, compared
to
32.9% for the first quarter of 2022, reflecting a higher proportion
of exempt to taxable income. See “Income Taxes”
below and
Note 17 – Income Taxes
,
to the unaudited consolidated financial statements herein for additional information.
●
As of
March 31,
2023, total
assets were approximately
$19.0 billion,
an increase
of $342.6
million from
December 31,
2022,
primarily
due
to
a
$343.1
million
increase
in
cash
and
cash
equivalents,
which
was
mainly
attributable
to
a
$347.8
million
addition to borrowings to increase
available cash as a precautionary
measure in
light of recent instability in the
banking sector
and
a
$28.0
million
increase
in
total
loans,
partially
offset
by
the
$4.3
million
decrease
in
total
investment
securities.
See
“Financial Condition and Operating Data Analysis” below for additional information.
●
As
of
March
31,
2023,
total
liabilities
were
$17.6
billion,
an
increase
of
$262.5
million
from
December
31,
2022,
mainly
driven
by
the
$347.8
million
increase
in
borrowings,
partially
offset
by
an
overall
decrease
in
total
deposits.
See
“Risk
Management – Liquidity Risk” below for additional information about the Corporation’s
funding sources and strategy.
●
The Bank’s
primary sources
of funding
are consumer
and commercial
core deposits,
which exclude
government deposits
and
brokered CDs. As of March 31, 2023, these core deposits amounting
to $13.1 billion funded 69.17% of total assets. In addition
to approximately
$3.2 billion
in cash
and free
high quality
liquid assets,
the Bank
maintains borrowing
capacity at
the FHLB
and the
FED Discount
Window.
As of
March 31,
2023, the
Corporation had
approximately $1.4
billion available
for funding
under
the FED’s
Discount
Window
and
$882.5
million
available for
additional
borrowing
capacity
on FHLB
lines of
credit
based
on
collateral
pledged
at
these
entities.
On
a
combined
basis,
as
of
March
31,
2023,
the
Corporation
had
$5.5
billion
available
to
meet
liquidity
needs.
See
“Risk
Management
–
Liquidity
Risk”
below
for
additional
information
about
the
Corporation’s funding
sources and strategy.
●
As
of
March
31,
2023,
the
Corporation’s
total
stockholders’
equity
was
$1.4
billion,
an
increase
of
$80.1
million
from
December 31, 2022. The
increase was driven by an
$87.2 million increase 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,
and
the
earnings
generated
during
the
first
quarter
of
2023.
These
increases
were
partially
offset
by
the
repurchase
of
approximately
3.6
million
shares
of
common
stock
for
a
total
purchase
price
of
approximately
$50.0
million
and
$25.4
million
in
dividends
declared
to
common
stock
shareholders
during
the
first
quarter
of
2023.
The
Corporation’s
CET1
capital,
tier
1
capital,
total
capital,
and
leverage
ratios
were
16.33%,
16.33%,
19.02%,
and
10.57%,
respectively,
as
of
March
31,
2023,
compared
to
CET1
capital,
tier
1
capital,
total
capital,
and
leverage
ratios
of
16.53%,
16.53%, 19.21%, and 10.70%, respectively,
as of December 31, 2022.
See “Risk Management – Capital” below
for additional
information.
●
Total
loan
production,
including
purchases,
refinancings,
renewals,
and
draws
from
existing
revolving
and
non-revolving
commitments,
increased by
$5.5 million
to $1.2
billion for
the quarter
ended March
31, 2023.
See “Financial
Condition and
Operating Data Analysis” below for additional information.
●
Total
non-performing assets
were $129.0
million as of
March 31, 2023,
a decrease of
$0.2 million,
from December
31, 2022.
The net decrease was driven by
a $6.3 million reduction in nonaccrual
residential mortgage loans, mostly
due to loans restored
to
accrual
status,
collections
and
foreclosures;
partially
offset
by
a
$4.4
million
increase
in
nonaccrual
commercial
and
construction
loans, mainly
related
to
the
inflow
of
a
$7.1 million
commercial
and
industrial
participated
loan
in
the Florida
region related
to a borrower
engaged in the
power generation industry
.
See “Risk Management
– Nonaccrual Loans
and Non-
Performing Assets” below for additional information.
●
Adversely
classified
commercial
and
construction
loans
decreased
by
$23.6
million
to
$70.0
million
as of
March
31, 2023,
compared to December 31, 2022, mainly driven by the payoff
of a $24.3 million commercial and industrial participated loan in
the Florida region in the leisure and hospitality industry.
77
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
The Corporation
has included
in this
Quarterly Report
on Form
10-Q (“Form
10-Q”) the
following financial
measures that
are not
recognized under GAAP,
which are referred to as non-GAAP financial measures:
Net Interest Income,
Interest Rate Spread,
and Net Interest
Margin, Excluding Valuations
,
and on a Tax
-Equivalent Basis
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 “Result of Operations
– Net Interest Income”
below, for
the table that reconciles
net interest income
in accordance with GAAP
to
the
non-GAAP
financial
measure
of
net
interest
income,
excluding
valuations,
and
on
a
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 a tax-equivalent basis.
Tangible
Common Equity Ratio and Tangible
Book Value
Per Common Share
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” below
for the
table that
reconciles the
Corporation’s
total equity
and total
assets in
accordance
with GAAP to the tangible
common equity and tangible assets
figures used to calculate the
non-GAAP financial measures of
Tangible
Common Equity Ratio and Tangible
Book Value
per Common Share.
78
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 quarter
ended
March 31, 2023 was $200.9 million,
compared to $185.6 million for the
first quarter of 2022.
On a tax-equivalent basis and excluding
the changes
in the
fair value
of derivative
instruments, net
interest income
for the
quarter ended
March 31,
2023 was
$207.2 million
compared to $192.8 million for the quarter ended March 31, 2022.
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 intere
st income.
For each
category of
interest-earning
assets and
interest-bearing
liabilities, the
tables
provide
information
on
changes
in
(i)
volume
(changes
in
volume
multiplied
by
prior
period
rates),
and
(ii)
rate
(changes
in
rate
multiplied by
prior period
volumes). The
Corporation has
allocated rate-volume
variances (changes
in rate
multiplied by
changes in
volume) to either the changes in volume or the changes in rate based upon the
effect of each factor on the combined totals.
Net
interest
income
on
an
adjusted
tax
equivalent
basis and
excluding
the
change
in
the fair
value
of derivative
instruments
is a
non-GAAP
financial
measure.
For
the
definition
of
this
non-GAAP
financial
measure,
refer
to
the
discussion
in
“Non-GAAP
Measures and Reconciliations” above.
79
Part I
Average volume
Interest income
(1)
/ expense
Average rate
(1)
Quarter ended March 31,
2023
2022
2023
2022
2023
2022
(Dollars in thousands)
Interest-earning assets:
Money market and other short-term investments
$
404,249
$
1,835,766
$
4,650
$
820
4.67
%
0.18
%
Government obligations
(2)
2,909,976
2,736,095
10,765
8,232
1.50
%
1.22
%
MBS
3,864,145
4,041,975
19,396
19,420
2.04
%
1.95
%
FHLB stock
40,838
21,465
421
287
4.18
%
5.42
%
Other investments
13,139
11,786
139
21
4.29
%
0.72
%
Total investments
(3)
7,232,347
8,647,087
35,371
28,780
1.98
%
1.35
%
Residential mortgage loans
2,835,240
2,961,456
39,794
40,687
5.69
%
5.57
%
Construction loans
146,041
114,732
2,676
1,524
7.43
%
5.39
%
Commercial and industrial ("C&I") and commercial mortgage loans
5,167,727
5,103,870
85,885
62,004
6.74
%
4.93
%
Finance leases
735,500
588,200
13,809
10,912
7.61
%
7.52
%
Consumer loans
2,634,891
2,338,597
71,214
61,151
10.96
%
10.60
%
Total loans
(4)(5)
11,519,399
11,106,855
213,378
176,278
7.51
%
6.44
%
Total interest-earning assets
$
18,751,746
$
19,753,942
$
248,749
$
205,058
5.38
%
4.21
%
Interest-bearing liabilities:
Time deposits
$
2,342,360
$
2,363,045
$
10,782
$
4,421
1.87
%
0.76
%
Brokered certificates of deposit ("CDs")
166,698
91,713
1,587
477
3.86
%
2.11
%
Other interest-bearing deposits
7,544,901
8,132,149
17,516
2,754
0.94
%
0.14
%
Securities sold under agreements to repurchase
91,004
241,111
1,069
2,182
4.76
%
3.67
%
Advances from the FHLB
629,167
200,000
7,176
1,063
4.63
%
2.16
%
Other long-term borrowings
183,762
183,762
3,381
1,333
7.46
%
2.94
%
Total interest-bearing liabilities
$
10,957,892
$
11,211,780
$
41,511
$
12,230
1.54
%
0.44
%
Net interest income on a tax-equivalent basis and excluding
valuations
$
207,238
$
192,828
Interest rate spread
3.84
%
3.77
%
Net interest margin
4.48
%
3.96
%
(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 “Non-GAAP Measures and Reconciliations”
above.
(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 $3.1 million and $2.6 million for
the quarters ended March 31, 2023 and 2022, respectively,
of income from prepayment penalties and late fees related to
the Corporation’s loan portfolio.
80
Part II
Quarter ended March 31,
2023 compared to 2022
Variance due to:
Volume
Rate
Total
(In thousands)
Interest income on interest-earning assets:
Money market and other short-term investments
$
(8,698)
$
12,528
$
3,830
Government obligations
549
1,984
2,533
MBS
(885)
861
(24)
FHLB stock
232
(98)
134
Other investments
3
115
118
Total investments
(8,799)
15,390
6,591
Residential mortgage loans
(1,771)
878
(893)
Construction loans
482
670
1,152
C&l and commercial mortgage loans
785
23,096
23,881
Finance leases
2,764
133
2,897
Consumer loans
7,953
2,110
10,063
Total loans
10,213
26,887
37,100
Total interest income
$
1,414
$
42,277
$
43,691
Interest expense on interest-bearing liabilities:
Time deposits
$
(67)
$
6,428
$
6,361
Brokered CDs
551
559
1,110
Other interest-bearing deposits
(573)
15,335
14,762
Securities sold under agreements to repurchase
(1,561)
448
(1,113)
Advances from the FHLB
3,985
2,128
6,113
Other borrowings
-
2,048
2,048
Total interest expense
2,335
26,946
29,281
Change in net interest income
$
(921)
$
15,331
$
14,410
Portions of the Corporation’s
interest-earning assets, mostly investments
in obligations of some U.S.
government agencies and U.S.
government-sponsored
entities (“GSEs”),
generate interest
that is
exempt from
income tax,
principally in
Puerto Rico.
Also, interest
and gains
on sales of
investments held by
the Corporation’s
international banking
entities (“IBEs”) are
tax-exempt under
Puerto Rico
tax
law
(see
Note
17
-
Income
Taxes,
to
the
unaudited
consolidated
financial
statements
herein
for
additional
information).
Management
believes
that
the
presentation
of
interest
income
on
an
adjusted
tax-equivalent
basis
facilitates
the
comparison
of
all
interest data
related to
these assets. The
Corporation estimated
the tax
equivalent yield
by dividing
the interest
rate spread
on exempt
assets
by
1
less
the
Puerto
Rico
statutory
tax
rate
(37.5%)
and
adding
to
it
the
average
cost
of
interest-bearing
liabilities.
The
computation considers the interest expense disallowance required
by Puerto Rico tax law.
Management
believes
that
the
presentation
of
net
interest
income,
excluding
the
effects
of
the
changes
in
the
fair
value
of
the
derivative
instruments,
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.
81
The following
table reconciles
net interest
income in
accordance with
GAAP to
net interest
income, excluding
valuations, and
net
interest
income
on
an
adjusted
tax-equivalent
basis
for
the
indicated
periods.
The
table
also
reconciles
net
interest
spread
and
net
interest margin on a GAAP basis to these items excluding valuations, and
on an adjusted tax-equivalent basis:
Quarter Ended March 31,
2023
2022
(Dollars in thousands)
Interest income - GAAP
$
242,396
$
197,854
Unrealized loss (gain) on derivative instruments
6
(15)
Interest income excluding valuations
242,402
197,839
Tax-equivalent adjustment
6,347
7,219
Interest income on a tax-equivalent basis
and excluding valuations
$
248,749
$
205,058
Interest expense - GAAP
$
41,511
$
12,230
Net interest income - GAAP
$
200,885
$
185,624
Net interest income excluding valuations
$
200,891
$
185,609
Net interest income on a tax-equivalent basis
and excluding valuations
$
207,238
$
192,828
Average Balances
Loans and leases
$
11,519,399
$
11,106,855
Total securities, other short-term investments and interest-bearing
cash balances
7,232,347
8,647,087
Average Interest-Earning Assets
$
18,751,746
$
19,753,942
Average Interest-Bearing Liabilities
$
10,957,892
$
11,211,780
Average Yield/Rate
Average yield on interest-earning assets - GAAP
5.24%
4.06%
Average rate on interest-bearing liabilities - GAAP
1.54%
0.44%
Net interest spread - GAAP
3.70%
3.62%
Net interest margin - GAAP
4.34%
3.81%
Average yield on interest-earning assets excluding valuations
5.24%
4.06%
Average rate on interest-bearing liabilities
1.54%
0.44%
Net interest spread excluding valuations
3.70%
3.62%
Net interest margin excluding valuations
4.34%
3.81%
Average yield on interest-earning assets on a tax-equivalent
basis and excluding valuations
5.38%
4.21%
Average rate on interest-bearing liabilities
1.54%
0.44%
Net interest spread on a tax-equivalent basis
and excluding valuations
3.84%
3.77%
Net interest margin on a tax-equivalent basis and excluding
valuations
4.48%
3.96%
82
Net
interest
income
amounted
to
$200.9
million
for
the
quarter
ended
March
31,
2023,
an
increase
of
$15.3
million,
when
compared to $185.6 million for same period in 2022. The $15.3 million
increase in net interest income was primarily due to:
●
A $36.9 million increase in interest income on loans including:
-
A $24.6 million increase in
interest income on commercial and
construction loans, of which approximately
$25.1 million
was related
to
the effect
of higher
market
interest
rates
in the
upward repricing
of variable-rate
loans
and
in new
loan
originations,
and
approximately
$2.5
million
was
related
to
the
$210.9
million
increase
in
the
average
balance
of
this
portfolio (excluding
Small Business Administration
Paycheck Protection
Program (“SBA PPP”)
loans). These
variances
were partially
offset by
a reduction
in interest
income from
SBA PPP
loans. The
interest income
recognized from
SBA
PPP loans for the quarters ended March 31, 2023 and 2022 amounted to $0.2
million and $3.2 million, respectively.
The interest rate on approximately 55% of the Corporation’s
commercial and construction loans is variable, 42% is based
upon
LIBOR, SOFR
and
other
indexes
and
13% is
based upon
the Prime
rate index.
For the
first quarter
of 2023,
the
average one-month
LIBOR increased
439 basis
points, the
average three-month
LIBOR increased
440 basis
points, the
average Prime rate
increased 440 basis
points, and
the average three-month
SOFR increased 444
basis points, compared
to the average rates for such indexes during the first quarter of 2022.
-
A $13.0 million increase in interest
income on consumer loans and finance
leases, primarily driven by the $443.6
million
increase
in the
average
balance of
this portfolio,
which
increased interest
income
by approximately
$10.5
million,
and
approximately $2.5
million increase in interest income associated to the positive
effects
of higher market interest rates on
the consumer portfolio yields,
primarily in the credit cards portfolio.
-
A
$0.7
million
decrease
in
the
residential
mortgage
loans
portfolio
interest
income,
primarily
related
to
the
$126.2
million reduction
in the
average balance
of this
portfolio, which
resulted in
an approximate
decrease of
$1.7 million
in
interest income, partially offset by the positive effect
of new loan originations at higher current market interest rates.
●
A $3.8
million
increase
in interest
income
from
interest-bearing
cash balances,
which
consisted primarily
of
cash balances
deposited at the Federal Reserve Bank (“FED”), mainly due to the
effect of higher market interest rates, partially offset
by the
$1.4 billion decrease in the average balance of interest-bearing cash.
●
A $3.8 million increase in interest income on investment securities, mainly driven
by:
-
A $1.3
million
increase
in
interest income
on
U.S. government
and
agencies
debt
securities,
mainly
driven
by
higher-
yielding securities purchased in the first quarter of 2022.
-
A
$1.3
million
increase
in
interest
income
on
Puerto
Rico
municipal
bonds,
mainly
due
to
the
upward
repricing
of
variable-rate bonds.
-
A
$1.0
million
increase
in
interest
income
on
U.S.
agencies
MBS,
mainly
driven
by
a
decrease
in
the
premium
amortization
expense
associated
with
lower
prepayments
and
the
positive
effects
from
higher-yielding
U.S.
agencies
MBS purchased
in the second
quarter of
2022. These variances
were partially
offset by
a $177.8
million decrease
in the
average balance of this portfolio, which resulted in an approximate reduction
of $0.9 million in interest income.
83
Partially offset by:
●
A $22.2 million increase in interest expense on interest-bearing deposits, including
:
-
A $14.7
million increase
in interest
expense on
interest-bearing checking
and saving
accounts, driven
by an
increase of
$15.3
million in average
rates paid in
the first quarter
of 2023 as
a result of
the overall
higher interest rate
environment,
partially offset
by a reduction
of $587.2 million
in the average
balance of these
deposits, which resulted
in a decrease
of
approximately $0.6 million in interest expense.
-
A
$6.4
million
increase
in
interest
expense
on
time
deposits,
excluding
brokered
CDs,
mainly
associated
with
higher
rates being
paid in
the first
quarter of
2023 on
new issuances
and renewals
also associated
with the
higher interest
rate
environment.
The average cost of time
deposits in the first quarter
of 2023, excluding brokered
CDs, increased 111
basis
points to 1.87% when compared to the same period in 2022.
-
A $1.1
million increase
in interest
expense on
brokered CDs,
driven by
new issuances
at current
higher market
interest
rates that resulted
in an increase
of $75.0 million
in the average balance,
which resulted in
additional interest expense
of
approximately $0.5 million.
●
A
$7.0 million net increase in interest expense on borrowings,
including:
-
A
$6.1
million
increase
in
interest
expense
on
advances
from
the
FHLB
mainly
associated
with
an
increase
in
the
average
balance
of
$429.2
million
to
increase
available
cash,
which
resulted
in
additional
interest
expense
of
approximately $4.0
million, and
the effect
of approximately
$2.1 million
associated with
new FHLB
advances at
higher
interest rates.
-
A
$2.0
million
increase
in
interest
expense
on
other
long-term
borrowings,
driven
by
the
upward
repricing
of
junior
subordinated debentures tied to the increase in the three-month LIBOR index.
-
A
$1.1
million
decrease
in
interest
expense
on
repurchase
agreements,
mainly
driven
by
a
reduction
in
the
average
balance of $150.1 million.
Net
interest
margin
for
the
first
quarter
of
2023
increased
to
4.34%,
compared
to
3.81%
for
the
same
period
in
2022,
reflecting,
among other
things, the
upward repricing
of variable-rate
commercial loans,
the growth
in higher
yielding loans,
primarily consumer
loans, and
the change
in asset mix,
reflecting an
increase of higher
-yielding assets. These
factors were
partially offset
by the increase
in borrowings in the first quarter of 2023 and a 11
0
basis points increase in the average cost of interest-bearing liabilities.
84
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 $16.3 million
for the first
quarter of 2023,
compared
to a net benefit of $17.0 million for the first quarter of 2022. The variances
by major portfolio category were as follows:
●
Provision for credit
losses for the commercial
and construction loan
portfolio was an expense
of $0.5 million
the first quarter
of
2023,
compared
to
a
net
benefit
of
$23.1
million
for
the
first
quarter
of
2022.
The
expense
recognized
during
the
first
quarter of
2023 was
impacted by
the following
factors: reserve
increases of
$5.0 million
for a
new nonacccrual
commercial
and industrial participated loan in the Florida region in the power generation
industry, and $1.1 million due
to a less favorable
economic outlook
in the
projection of
certain forecasted
macroeconomic
variables, such
as the
commercial real
estate price
index
(“CRE
price
index”);
partially
offset
by
reserve
decreases
of
$6.1
million
associated
with
the
receipt
of
updated
financial
information
of
certain
borrowers.
Meanwhile,
the net
benefit
recorded
in the
first quarter
of
2022
mainly
reflects
reductions
in
qualitative
reserves
mostly
associated
with
a
continued
positive
long-term
outlook
of
forecasted
macroeconomic variables, primarily
in the commercial real estate price
index, as a result of the reduced
uncertainty regarding
COVID-19,
particularly
on
loans
in
the
hotel,
transportation
and
entertainment
industries
and,
to
a
lesser
extent,
improvements in updated financial information received from borrowers
during the first quarter of 2022.
●
Provision for
credit losses
for the
residential mortgage
loan portfolio
was an
expense of
$0.1 million
for the
first quarter
of
2023,
compared to
a net benefit
of $4.9
million for
the first
quarter of
2022. The
net benefit
recorded for
the first
quarter of
2022
was
primarily
related
to
the
overall
decrease
in
the
size
of
the
residential
mortgage
loan
portfolio
and
continued
improvements in the long-term outlook of forecasted macroeconomic
variables, such as the housing price index.
●
Provision for credit
losses for the consumer
loans and finance leases
portfolio was $15.7
million for the first
quarter of 2023,
compared
to
$11.0
million
for
the
first
quarter
of
2022.
The
increase
primarily
reflects
the
increase
in
the
size
of
the
consumer loan portfolios and the increase in historical charge-off
levels in all major portfolio classes.
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 a
net
benefit of $0.1 million for each of the first quarters of 2023 and 2022.
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
$0.6
million
for
the
first
quarter
of
2023,
compared
to an
expense
of
$3.7
million
for
the
first
quarter
of
2022.
The net
benefit
recorded
during
the
first
quarter
of
2023
was
mostly related to a reduction in qualitative reserves driven by updated financial information
of certain bond issuers.
85
Non-Interest Income
Non-interest income amounted to $32.5 million for the
first quarter of 2023, compared to $32.9 million for
the same period in 2022.
The $0.4 million decrease in non-interest income
was primarily due to:
●
A $2.4 million
decrease in revenues
from mortgage banking
activities, mainly driven
by a decrease in
net realized gain
on
sales of residential mortgage loans in the secondary market mainly
due to a lower volume of sales. During the first quarters
of
2023
and
2022,
net
gains
of
$1.1
million
and
$3.5
million,
respectively,
were
recognized
as
a
result
of
GNMA
securitization transactions and whole loan sales to U.S. GSEs amounting
to $37.4 million and $93.9 million, respectively.
●
A $0.4 million decrease in insurance commission income,
mainly in contingent commissions.
Partially offset by:
●
A $1.2
million increase
in card
and processing
income mainly
related to
higher interchange
income and
merchant-related
referral fees received during the first quarter of 2023.
●
A
$1.1
million
increase
in
other
sources
of
non-interest
income
including:
(i)
a
$0.3
million
increase
related
to
higher
unused commitment
fees; (ii)
a $0.2
million increase
related to
higher benefit
recognized in
relation to
purchased income
tax credits realized; (iii) a
$0.2 million increase in
unrealized gains on marketable
equity securities; and (iii) a
$0.2
million
increase in fees and commissions from insurance referrals.
Non-Interest Expenses
Non-interest expenses
for the quarter
ended March 31,
2023 amounted to
$115.3 million,
compared to
$106.7 million for
the same
period in
2022. The
efficiency ratio
for the
first quarter
of 2023
was 49.39%,
compared to
48.82% for
the first
quarter of
2022. The
$8.6 million increase in non-interest expenses was primarily due
to:
●
A
$6.9 million increase in employees’
compensation and benefits expenses, mainly driven
by annual salary merit increases
and
an
increase
in
bonuses,
stock-based
compensation
expense
of
retirement-eligible
employees,
payroll
taxes,
and
medical insurance premium costs.
●
A
$1.4 million
increase in
professional service
fees, driven
by a
$1.2 million
increase in
outsourcing
technology
service
fees.
●
A
$1.2 million increase in credit and debit card processing fees.
●
A
$0.5
million
increase
in
business promotion
expenses,
mainly
related
to
a
$0.7
million
increase
in
credit
card
loyalty
rewards expense,
partially offset by a $0.3 million decrease in sponsorship
activities.
●
A
$0.5 million
increase in FDI
C
deposit insurance
cost, driven
by the two
basis points increase
on the initial
base deposit
insurance assessment rate that came into effect during the first quarter
of 2023.
Partially offset by:
●
A
$1.3 million increase in net gains
on OREO operations, mainly driven
by a $1.4 million increase in
net realized gains on
sales of OREO properties, primarily residential properties in the Puerto
Rico region.
●
A
$1.2
million
decrease
in
occupancy
and
equipment
expenses,
primarily
related
to
a
reduction
in
rental
expenses
and
equipment-related depreciation charges.
86
Income Taxes
For the
first quarter
of 2023,
the Corporation
recorded an
income tax
expense of
$31.9 million
compared to
$43.0 million
for the
same
period
in
2022.
The
decrease
in
income
tax
expense
was
mainly
related
to
lower
pre-tax
income
and
a
higher
proportion
of
exempt to taxable income resulting in a lower effective tax rate.
The Corporation’s
estimated annual effective tax
rate in the first quarter of
2023, excluding entities from
which a tax benefit cannot
be recognized
and discrete
items, was
31.2%,
compared
to 32.9%
for the
first quarter
of 2022.
See Note
17 -
Income Taxes,
to the
unaudited consolidated financial statements herein for additional
information.
FINANCIAL CONDITION AND OPERATING
ANALYSIS
Assets
The Corporation’s total assets
were $19.0 billion as of March 31, 2023, an increase
of $342.6 million from December 31, 2022. The
increase
was
primarily
related
to
a
$343.1
million
increase
in
cash
and
cash
equivalents
mainly
attributable
to
the
$347.8
million
increase
in
borrowings
to
enhance
available
cash
as
a
precautionary
measure
in
light
of
recent
instability
in
the
banking
sector.
In
addition,
as further
discussed
below,
total
loans
increased
by
$28.0
million.
These
variances
were
partially
offset
by a
$4.3
million
decrease in total investment securities.
Loans Receivable, including Loans Held for Sale
As of March 31, 2023, the Corporation’s
total loan portfolio before the ACL amounted to $11.6
billion, an increase of $28.0 million
compared
to
December
31,
2022.
The
increase
consisted
of
a
$141.5
million
growth
in
the
Puerto
Rico
region,
partially
offset
by
decreases
of
$108.6
million
in
the
Florida
region
and
$4.9
million
in
the
Virgin
Islands
region.
On
a
portfolio
basis,
the
increase
consisted
of
a
$79.5
million
growth
in
consumer
loans,
including
a
$72.0
million
increase
in
auto
and
leases,
partially
offset
by
decreases
of $32.9 million in residential mortgage loans and $18.6 million
in commercial and construction loans.
As of
March
31,
2023,
the
loans held
for
the
Corporation’s
investment
portfolio
was comprised
of
commercial
and
construction
loans
(46%),
residential
real
estate
loans
(24%),
and
consumer
and
finance
leases
(30%).
Of
the
total
gross
loan
portfolio
held
for
investment of
$11.6
billion as
of March
31, 2023,
the Corporation
had credit
risk concentration
of approximately
80% in
the Puerto
Rico region,
17% in
the United
States region
(mainly
in the
state of
Florida),
and
3% in
the Virgin
Islands region,
as shown
in the
following table:
87
As of March 31, 2023
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
Residential mortgage loans
$
2,205,659
$
176,123
$
429,746
$
2,811,528
Construction loans
44,297
3,898
95,469
143,664
Commercial mortgage loans
1,766,479
62,694
524,486
2,353,659
Commercial and Industrial loans
1,872,215
69,013
920,961
2,862,189
Total commercial
loans
3,682,991
135,605
1,540,916
5,359,512
Consumer loans and finance leases
3,335,014
63,231
8,700
3,406,945
Total loans held
for investment, gross
$
9,223,664
$
374,959
$
1,979,362
$
11,577,985
Loans held for sale
14,830
-
353
15,183
Total loans, gross
$
9,238,494
$
374,959
$
1,979,715
$
11,593,168
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
1,791,235
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
88
Residential Real Estate Loans
As of March 31,
2023, the Corporation’s
total residential mortgage loan
portfolio, including loans
held for sale, decreased
by $32.9
million, as compared
to the balance as
of December 31, 2022.
The decline in the
residential mortgage loan portfolio
reflects decreases
of $29.8 million
in the Puerto Rico
region and $3.8
million in the Virgin
Islands region, partially
offset by an
increase of $0.7 million
in the Florida region.
The decline 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 as of
March 31,
2023 consisted of
fixed-rate loans
that traditionally
carry higher yields
than residential
mortgage loans
in the
Florida region. In
the Florida region,
approximately 44% of
the residential mortgage
loan portfolio consisted
of hybrid adjustable-rate
mortgages. In
accordance with
the Corporation’s
underwriting guidelines,
residential mortgage
loans are
primarily fully
documented
loans, and the Corporation does not originate negative amortization loans.
Commercial and Construction Loans
As of
March 31,
2023, the
Corporation’s
commercial and
construction loan
portfolio decreased
by $18.6
million, as
compared to
the balance as of December 31, 2022.
In the Florida
region, commercial and
construction loans decreased
by $108.1 million,
as compared to
the balance as
of December
31, 2022. This decrease
reflected $93.3 million in
payoffs and paydowns of
five commercial and industrial
relationships in the Florida
region, each in excess of $10 million,
including the payoff of a $24.3
million commercial and industrial participated
loan in the leisure
and hospitality industry.
In
the
Virgin
Islands
region,
commercial
and
construction
loans
decreased
by
$2.8
million,
as
compared
to
the
balance
as
of
December 31, 2022.
In
the
Puerto
Rico
region,
commercial
and
construction
loans
increased
by
$92.3
million,
as
compared
to
the
balance
as
of
December
31,
2022.
This
increase
was
driven
by
the
origination
of
several
loans,
including
four
commercial
relationships,
each
in
excess of $10 million, that increased the portfolio amount by $54.2 million.
As
of
March
31,
2023,
the
Corporation
had
$170.9
million
outstanding
in
loans
extended
to
the
Puerto
Rico
government,
its
municipalities,
and
public
corporations,
compared
to
$169.8
million
as
of
December
31,
2022.
See
“Exposure
to
Puerto
Rico
Government” below for additional information.
The Corporation
also has
credit exposure
to USVI
government entities.
As of
March 31,
2023, the
Corporation had
$38.7 million
in
loans
to
USVI
government
public
corporations,
compared
to
$38.0
million
as
of
December
31,
2022.
See
“Exposure
to
USVI
Government”
below for additional information.
As of
March 31,
2023, the
Corporation’s
total commercial
mortgage loan
exposure amounted
to $2.4
billion, or
44% of
the total
commercial
loan portfolio.
Of this
total, $379
million and
$38 million
is in
office real
estate in
the Puerto
Rico and
Florida regions,
respectively.
Total office
real estate maturing during the remainder of 2023 and 2024 amounted
to $107 million.
As of
March 31,
2023, the
Corporation’s
total exposure
to shared
national credit
(“SNC”) loans
(including unused
commitments)
amounted to $1.1
billion as of
each of March
31, 2023 and
December 31, 2022.
As of March
31, 2023, approximately
$207.6 million
of the SNC exposure is related to the portfolio in Puerto Rico and $858.3 million
is related to the portfolio in the Florida region.
Consumer Loans and Finance Leases
As of
March 31,
2023, the
Corporation’s
consumer loan
and finance
lease portfolio
increased by
$79.5 million
to $3.4
billion, as
compared
to
the
portfolio
balance
of
$3.3
billion
as
of
December
31,
2022.
This
increase
was
mainly
related
to
increases
of
$34.8
million
and
$37.2
million
in
the
auto
loans
and
finance
leases
portfolios,
respectively.
The
growth
in
consumer
loans
is
mainly
reflected in the Puerto Rico region across all portfolio classes.
89
Loan Production
First
BanCorp.
relies
primarily
on
its
retail
network
of
branches
to
originate
residential
and
consumer
loans.
The
Corporation
may
supplement
its residential
mortgage originations
with wholesale
servicing released
mortgage loan
purchases from
mortgage bankers.
The
Corporation
manages
its
construction
and
commercial
loan
originations
through
centralized
units
and
most
of
its
originations
come
from
existing
customers,
as
well
as
through
referrals
and
direct
solicitations.
Auto
loans
and
finance
leases
originations
rely
primarily on relationships with auto dealers and dedicated sales professionals who
serve selected locations to facilitate originations.
The
following
table
provides
a
breakdown
of
First
BanCorp.’s
loan
production,
including
purchases,
refinancings,
renewals
and
draws from existing revolving and non-revolving commitments, for
the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Residential mortgage
$
77,302
$
122,513
Construction
35,499
19,986
Commercial mortgage
88,692
127,985
Commercial and Industrial
555,882
490,296
Consumer
435,318
426,467
Total loan production
$
1,192,693
$
1,187,247
During
the
quarter
ended
March
31,
2023,
total
loan
originations,
including
purchases,
refinancings,
and
draws
from
existing
revolving and non-revolving
commitments, amounted
to approximately $1.2
billion, an increase
of $5.5 million,
compared to the
first
quarter of 2022.
Residential
mortgage
loan
originations
for
the
quarter
ended
March
31,
2023
amounted
to
$77.3
million,
compared
to
$122.5
million for the first quarter of 2022. The decrease of $45.2 million
in the first quarter of 2023, as compared to the same period
in 2022,
reflects
declines of
$42.2 million
in the
Puerto Rico
region,
$2.5 million
in the
Florida region,
and $0.5
million in
the Virgin
Islands
region.
Approximately
60%
of
the
$61.5
million
residential
mortgage
loan
originations
in
the
Puerto
Rico
region
during
the
first
quarter of
2023 were
of conforming
loans, compared
to 67%
of $103.7
million for
the first
quarter of
2022. The
decrease during
the
first quarter of 2023
is related to a
lower volume of conforming
loan originations and refinancings,
in part due to a
higher interest rate
environment.
Commercial
and
construction
loan
originations
(excluding government
loans)
for the
quarter ended
March 31,
2023 amounted
to
$672.8
million,
compared
to $633.8
million
for
the
first
quarter
of
2022.
The
increase
of
$39.0
million
in
the
first
quarter
of
2023
consisted of increases of $93.7
million and $0.5 million in
the Puerto Rico and the Virgin
Islands regions, respectively,
partially offset
by a decrease of $55.2 million in the Florida region.
Government
loan
originations
for
the
quarter
ended
March
31,
2023
amounted
to
$7.2
million,
an
increase
of
$2.8
million,
compared
to
$4.4
million
for
the
first
quarter
of
2022.
Government
loan
originations
during
the
first
quarter
of
2023
were
mainly
related to the origination
of a loan to an
agency of the Puerto Rico
government for a low-income
housing project and the utilization
of
an arranged
overdraft line of
credit of
a government entity
in the Virgin
Islands region. Government
loan originations during
the first
quarter
of
2022
were
related
to
the
utilization
of
an
arranged
overdraft
line
of
credit
of
a
government
entity
in
the
Virgin
Islands
region.
Originations of
auto loans
(including finance
leases) for
the quarter
ended March
31, 2023
amounted to
$245.1 million,
compared
to
$261.3
million
for
the first
quarter
of
2022.
The
decrease
in
the
first
quarter
of
2023,
as compared
to
the
same
quarter
of
2022,
consisted of a $17.5
million decrease in the
Puerto Rico region, partially
offset by a
$1.3 million increase in
the Virgin
Islands region.
Other consumer loan
originations, other than credit
cards, for the quarter
ended March 31, 2023
amounted to $71.9
million, compared
to $55.7
million for the
first quarter of
2022. Most of
the increase in
other consumer
loan originations for
the first quarter
of 2023, as
compared with the same
period in 2022, was in
the Puerto Rico region.
The utilization activity on
the outstanding credit card portfolio
for the quarter ended March 31, 2023 amounted to $118.4
million, compared to $109.5 million for the same period in 2022.
90
Investment Activities
As
part
of
its
liquidity,
revenue
diversification,
and
interest
rate
risk
management
strategies,
First
BanCorp.
maintains
a
debt
securities portfolio classified as available for sale or held to maturity.
The Corporation’s
total available-for-sale
debt securities
portfolio as
of March
31, 2023
amounted to
$5.6 billion,
a $10.3
million
decrease from
December 31,
2022.
The decrease
was mainly
driven by
repayments of
approximately $95.9
million of
U.S. agencies
and MBS,
partially offset
by an
$87.2 million
increase in
fair value
attributable to
changes in
market interest
rates. As
of March
31,
2023,
the
Corporation
had
a
net
unrealized
loss
on
available-for-sale
debt
securities
of
$711.0
million.
This
unrealized
loss
is
attributable to
instruments on book
s
carrying a lower
interest rate than
market rates. The
Corporation expects
that this unrealized
loss
will reverse
over
time.
The Corporation
expects
the
portfolio
to
continue
to
decrease
as repayments
are received
over
the
next
two
years
and
further
expects
that the
accumulated
other
comprehensive
loss will
decrease
accordingly,
excluding
the impact
of
market
interest rates.
As
of
March
31,
2023,
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
March
31,
2023,
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
March
31,
2023,
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
March 31,
2023,
the Corporation’s
held-to-maturity
debt
securities portfolio,
before the
ACL, decreased
to $431.4
million,
compared
to
$437.5
million
as
of
December
31,
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.
As
of
March
31,
2023,
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 March 31, 2023, the ACL
for held-to-maturity debt securities was
$7.6 million, compared to
$8.3 million as of December 31, 2022.
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.
91
The following table presents the carrying values of investments as of the indicated dates:
March 31, 2023
December 31, 2022
(In thousands)
Money market investments
$
1,059
$
2,025
Available-for-sale
debt securities, at fair value:
U.S. government and agencies obligations
2,531,632
2,492,228
Puerto Rico government obligations
2,203
2,201
MBS:
Residential
2,896,655
2,941,458
Commercial
158,766
163,133
Other
-
500
Total available-for-sale
debt securities, at fair value
5,589,256
5,599,520
Held-to-maturity debt securities, at amortized cost:
MBS:
Residential
161,587
166,739
Commercial
104,008
105,088
Puerto Rico municipal bonds
165,800
165,710
ACL for held-to-maturity Puerto Rico municipal bonds
(7,646)
(8,286)
Total held-to-maturity
debt securities
423,749
429,251
Equity securities, including $54.2 million and $42.9 million of FHLB stock
as of March 31,
2023 and December 31, 2022, respectively
66,714
55,289
Total money market
investments and investment securities
$
6,080,778
$
6,086,085
The carrying values of debt securities as of March 31, 2023 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
$
210,928
0.44
Due after one year through five years
2,272,126
0.83
Due after five years through ten years
36,926
1.64
Due after ten years
11,652
5.15
2,531,632
0.83
Puerto Rico government and municipalities obligations:
Due within one year
1,204
5.70
Due after one year through five years
42,633
6.74
Due after five years through ten years
55,940
7.10
Due after ten years
68,226
7.73
168,003
7.26
MBS
3,321,016
1.68
ACL on held-to-maturity debt securities
(7,646)
-
Total debt securities
$
6,013,005
1.48
92
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.
Net
interest income
in future periods
might also be
affected by
the Corporation’s
investment in
callable securities. As
of March
31, 2023,
the
Corporation
had
approximately
$2.0
billion
in
callable
debt
securities
(U.S.
agencies
debt
securities)
with
an
average
yield
of
0.84%, of
which approximately
59% were
purchased at
a discount
and 5%
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 2
– Debt Securities to
the unaudited consolidated
financial statements herein 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.
The
Corporation’s
risk
management
policies
are
described
below,
as
well
as
in
Part
II,
Item
7,
“Management’s
Discussion
and
Analysis of Financial Condition and Results of Operations,” in the 2022 Annual
Report on Form 10-K.
Liquidity Risk
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,
or First
Bancorp., which
is the
holding
company
that
owns
the
banking
and
non-banking
subsidiaries.
The
second
is
the
liquidity
of
the
banking
subsidiary,
or
FirstBank.
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
Management’s
Investment
and
Asset
Liability
Committee
(“MIALCO”),
which
reports
to
the
Board’s
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
Asset
and
Liability
Management
(“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.
93
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’s
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
its liquidity
position, including
core liquidity,
basic liquidity,
and time-based
reserve measures.
Cash
and cash equivalents
amounted to $823.6
million as of
March 31, 2023,
compared to $480.5
million as of
December 31, 2022.
Free
high-quality
liquid
securities
that
could
be
liquidated
or
pledged
within
one
day
amounted
to
$2.4
billion
as
of
March
31,
2023,
compared to $3.1
billion as of
December 31, 2022.
As of March
31, 2023, 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
or
pledged
within
one
day) was
$3.2 billion,
or 16.77%
of total
assets, compared
to $3.5
billion, or
19.02% of
total assets
as of
December 31,
2022. The
basic liquidity ratio (which adds available secured lines of credit to the
core liquidity) was approximately 21.42% of total assets as of
March 31, 2023, compared to 22.48% of total assets as of December 31,
2022.
As of
March 31,
2023,
in addition
to the
aforementioned $3.2
billion in
cash and
free high
quality liquid
assets, the
Corporation
had $882.5 million available for
credit with the
FHLB based on the value of collateral
pledged with the FHLB. The Corporation
also
maintains borrowing
capacity at
the FED
Discount Window.
The Corporation
does not
consider borrowing
capacity from
the FED
Discount
Window
as a
primary
source
of liquidity
but had
approximately
$1.4
billion
available
for
funding under
the FED’s
BIC
Program
as of
March
31,
2023 as
an
additional
contingent
source
of liquidity.
Total
loans pledged
to
the
FED
Discount
Window
amounted to $2.3 billion as of March 31, 2023. 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.
On a
combined basis,
as of
March 31,
2023, the Corporation had $5.5 billion available to meet liquidity needs
,
while maintaining a strong capital position.
The Bank had $252.9 million in brokered
CDs as of March 31, 2023, of which
approximately $180.9 million mature over
the next
twelve months.
Liquidity at
the Bank level
is highly dependent
on bank deposits,
which fund
84.9% of the
Bank’s assets
(or 83.5%
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.
Funding
through brokered CDs may continue to increase the overall cost of funding for the
Corporation and impact the net interest margin.
In addition, as further discussed
below, the
Corporation maintain a large,
stable core deposit base and a
diversified base of readily
available wholesale
funding sources,
including advances
from the FHLB
through pledged
borrowing capacity,
securities sold
under
agreements
to
repurchase,
and
access
to
certificates
of
deposit
issued
through
brokers.
Funding
through
wholesale
funding
may
continue to increase the overall cost of funding for the Corporation and impact the net
interest margin.
Over the
last year,
the FED’s
policies to
control the
inflationary economic
environment, including
repeated market
interest rate
increases,
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
first
quarter
of
2023,
the
banking
industry
in
the
U.S.
mainland experienced
deposit runoff
that led to
the collapse of
certain financial
institutions. As a
precautionary measure,
during the
first quarter of
2023, the Corporation
increased the use of
advances from the FHLB,
repurchase agreements, and
other sources, such
as wholesale funding brokers,
to increase cash and cash
equivalents. Increased use of long-term
FHLB advances has been part
of the
Corporation’s
interest rate risk
management strategy
to mitigate
the impact of
market interest rate
increases. The
additional use
and
future levels of these sources of
funding are dependent on factors such
as the loan portfolio future pipeline
and customers continuing
to
allocate
more
cash
into
higher
yielding
alternatives,
among
other
factors.
The
Corporation
believes
that
as
uncertainty
in
the
banking industry eases certain short-term borrowings will be repaid and
not renewed.
94
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
March
31,
2023,
the
Corporation’s
commitments
to
extend
credit
amounted
to
approximately
$2.0
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.
The following table summarizes commitments to extend credit and standby letters of
credit as of the indicated dates:
March 31,
2023
December 31, 2022
(In thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Construction undisbursed funds
$
200,105
$
170,639
Unused credit card lines
949,701
936,231
Unused personal lines of credit
41,639
41,988
Commercial lines of credit
772,240
761,634
Letters of credit:
Commercial letters of credit
84,724
68,647
Standby letters of credit
8,886
9,160
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,
affect
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 $4.0
billion as of March 31,
2023.
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
also
sells mortgage
loans
as a
supplementary source of
funding and has obtained
long-term funding in the past
through the issuance of
notes and long-term brokered
CDs. In
addition, the
Corporation also
maintains as
additional contingent
sources borrowing
capacity at
the FED’s
BIC Program
and
recently enrolled in the FED’s Bank
Term Funding
Program (“BTFP”).
95
While
liquidity
is
an
ongoing
challenge
for
all
financial
institutions,
management
believes
that
the
Corporation’s
available
borrowing capacity and
efforts to grow
core deposits will be
adequate to provide
the necessary funding
for the Corporation’s
business
plans in the foreseeable future.
The Corporation’s principal
sources of funding are discussed below:
Retail core
deposits
– The
Corporation’s
deposit products
include regular
savings accounts,
demand deposit
accounts, money
market
accounts,
and retail
CDs. As
of March
31, 2023,
the Corporation’s
core deposits,
which exclude
government
deposits and
brokered
CDs, decreased by
$142.7 million to
$13.1 billion from
$13.3 billion as
of December 31,
2022. The decrease
was primarily related
to
saving and
checking accounts
in the
Florida region
used for
loan repayments,
as well
as customers
continuing to
reallocate cash
into
higher-yielding alternatives.
Notwithstanding, these
reductions were
partially offset
by an
increase in
time deposits,
including
a shift
from
non-interest
bearing
or
low-interest
bearing
products
to
time
deposits,
driven
by
higher
rates
offered,
as
well
as
certain
large
commercial deposit inflows in the Puerto Rico region. The average balance per retail
core deposit account is $26 thousand.
Government deposits
– As
of March
31, 2023,
the Corporation
had $2.2
billion of
Puerto Rico
public sector
deposits ($2.0
billion in
transactional
accounts
and
$161.9
million
in
time
deposits),
compared
to
$2.3
billion
as
of
December
31,
2022.
The
decrease
was
primarily related
to reductions in
the balance
of operational accounts
of a public
corporation. These
deposits are insured
by the FDIC
up to
the applicable
limits and
the uninsured
portions is
fully
collateralized.
Approximately
25% of
the public
sector deposits
as of
March 31,
2023 were
from municipalities
and municipal
agencies in
Puerto Rico
and 75% were
from public
corporations, the
central
government and agencies, and U.S. federal government agencies in Puerto Rico.
In
addition,
as
of
March
31,
2023,
the
Corporation
had
$462.0
million
of
government
deposits
in
the
Virgin
Islands
region
(December 31, 2022 - $442.8 million) and $11.3
million in the Florida region (December 31, 2022 - $11.6
million).
The uninsured portions
of government deposits
were collateralized by
securities and loans with
an amortized cost
of $3.1 billion
as
of each
of March
31, 2023
and December
31, 2022,
and an
estimated market
value of
$2.8 billion
and $2.7
billion, respectively.
In
addition to
securities and loans,
as of each
of March
31, 2023 and
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.
Estimate
of
Uninsured
Deposits
–
As
of
March
31,
2023
and
December
31,
2022,
the
estimated
amount
of
uninsured
deposits
totaled
$7.2
billion
and
$7.6 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 March
31, 2023
and December 31, 2022, include the uninsured
portion of government deposits, which are fully collateralized
as previously mentioned.
Excluding
fully
collateralized
deposits,
$4.8
billion
of
these
deposits
are
uninsured,
which
represent
30.13%
of
total
deposits,
excluding brokered
CDs, as of
March 31,
2023, compared
to $4.9 billion,
or 30.65% of
total deposits,
excluding brokered
CDs, as of
December 31,
2022. The
amount of
uninsured deposits
is calculated
based on
the same
methodologies and
assumptions used
for our
bank regulatory reporting requirements adjusted for cash held by wholly-owned
subsidiaries at the Bank.
The following table presents by contractual maturities the amount of U.S. time deposits in
excess of FDIC insurance limits (over
$250,000) and other time deposits that are otherwise uninsured as of March
31, 2023:
(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
$
125,162
$
84,861
$
217,846
$
341,507
$
769,376
Other uninsured time deposits
$
18,814
$
10,058
$
9,864
$
5,647
$
44,383
Brokered
CDs
– Total
brokered CDs increased by
$147.1 million to $252.9
million as of March 31,
2023, compared to $105.8
million
as of December
31, 2022.
The increase reflects
the effect
of new issuances
amounting to
$189.7 million
with an all-in
cost of 4.70%,
partially offset
by approximately
$42.6 million
of maturing
brokered CDs,
with an
all-in cost
of 4.06%,
that were
paid off
during the
first quarter of 2023.
The average remaining term to maturity of the brokered CDs outstanding
as of March 31, 2023 was approximately 1.1 years.
The use of
brokered CDs provides
an efficient channel
for funding diversification
and interest rate management.
Brokered CDs are
insured by the FDIC up to regulatory limits and can be obtained faster than regular
retail deposits.
Refer to
“Net Interest
Income” above
for information
about average
balances of
interest-bearing deposits
and the
average interest
rate paid on deposits, for the quarters ended March 31, 2023 and 2022.
96
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 $173.0
million as
of
March 31, 2023,
compared to $75.1
million as of
December 31, 2022.
During the first
quarter of 2023,
the Corporation added
$173.0
million of
short-term repurchase
agreements at
an average
cost of
5.08% reflecting
precautionary measures
taken by
management in
light
of
recent
instability
in
the
banking
sector,
and
repaid
upon
maturity
$75.1
million
of
short-term
repurchase
agreements
at
an
average cost of 4.55%.
In addition to these repurchase
agreements, the Corporation has
been able to maintain access
to credit by using
cost-effective
sources
such
as
FHLB
advances.
See
Note
9
–
Securities
Sold
Under
Agreements
to
Repurchase
(Repurchase
Agreements) to
the unaudited consolidated
financial statements
herein 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
March 31,
2023,
the outstanding
balance of
fixed-rate FHLB
advances
was $925.0
million, compared
to $675.0
million as
of
December
31,
2022.
During
the
first
quarter
of
2023,
the
Corporation
added
$425.0
million
of
short-term
FHLB
advances
at
an
average cost of 5.04%
and $300.0 million of
long-term FHLB advances
at an average cost of
4.59%, and repaid upon
maturity $475.0
million of
short-term
FHLB advances
at an
average cost
of 4.56%.
Of the
$925.0 million
in FHLB
advances
as of
March 31,
2023,
$700.0 million were
pledged with investment
securities and $225.0
million were pledged with
mortgage loans. As of
March 31, 2023,
the Corporation had
$882.5 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
long-term
borrowings.
As
of
each
of
March
31,
2023
and
December
31,
2022,
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
March
31,
2023,
the Corporation was
current on all
interest payments due
on its subordinated
debt. See Note
11 –
Other Long-Term
Borrowings
and
Note
7
–
Non-Consolidated
Var
iable
Interest
Entities
(“VIEs”)
and
Servicing
Assets
to
unaudited
consolidated
financial
statements herein 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
the
first
quarter
of
2023,
loans pooled
into GNMA
MBS amounted
to
approximately
$29.4
million.
Also,
during
the
first
quarter of
2023,
the
Corporation
sold approx
imately
$8.0 million
of
performing
residential mortgage loans to FNMA.
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
March
31,
2023,
the
Corporation
had
approximately
$1.4
billion available for funding under the FED’s
Discount Window based on collateral pledged at the
FED.
The FED’s
BTFP was
established
by the
Federal Reserve
Board in
March 2023
as an
additional source
of funding
for depository
institutions
to
borrow
up
to
the
par
value
of
eligible
collateral
for
terms
of
up
to
one
year.
The
BTFP
eliminates
the
need
for
depository
institutions
to
sell their
debt
securities
in
times
of
stress. Eligible
collateral
includes
high-quality
securities such
as U.S.
Treasuries,
U.S.
agency
securities,
and
U.S.
agency
MBS.
Borrowers
that
are
eligible
for
primary
credit
under
the
Borrower-in-
Custody Program
(“BIC”) are
eligible to
borrow under
the BTFP.
In addition,
any eligible
collateral pledged
to the
discount window
can be
used under
the BTFP.
The rate
for term
advances will
be the
one-year overnight
index swap
rate plus
10 basis points
and will
97
be fixed
for the term
of the advance
on the day
the advance is
made. As previously
mentioned, the
Corporation enrolled
in the BTF
P
during the first quarter of 2023 to further diversify its contingency funding
sources.
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.
98
Cash Flows
Cash and
cash equivalents
were $823.6
million as
of March
31, 2023,
an increase
of $343.1
million when
compared to
December
31, 2022.
The following
discussion highlights
the major
activities and
transactions that
affected
the Corporation’s
cash flows
during
the first quarters
of 2023 and 2022:
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
first
quarters
of
2023
and
2022,
net
cash
provided
by
operating
activities
was
$115.4
million
and
$114.8
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
first
quarter
of
2023,
net
cash
provided
by
investing
activities was
$50.5
million, primarily
due to
repayments of
U.S. agencies
MBS, partially
offset
by net
disbursements on
loans held
for investment.
For the
first quarter
of 2022,
net cash
used in
investing activities
was $333.0
million, primarily
due to
purchases of
U.S. agencies
and MBS, and net disbursements on loans held for investment, partially offset
by repayments of U.S. agencies and MBS.
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 quarter
ended March 31, 2023,
net cash provided by
financing activities was
$177.1 million, mainly
reflecting net proceeds
of
$347.8 million from borrowings,
partially offset by a decrease in total deposits and capital returned
to stockholders.
For the
first quarter
of 2022,
net cash
used in
financing activities
was $628.7
million, mainly
reflecting a
decrease in
government
deposits, the repayment at maturity of a $100 million repurchase agreement
and capital returned to stockholders.
99
Capital
As of
March
31,
2023,
the Corporation’s
stockholders’
equity was
$1.4
billion,
an
increase of
$80.1
million
from
December
31,
2022.
The growth
was driven
by the
$87.2
million
increase 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, and the
earnings generated in
the first quarter
of 2023, partially
offset by
the repurchase of
3.6 million shares
of common
stock
for a total
purchase price of
approximately $50.0 million,
common stock dividends
declared in the
first quarter of
2023 totaling $25.4
million or
$0.14 per
common share,
and the $1.3
million impact
to retained
earnings related
to the adoption
of Accounting
Standards
Update
(“ASU”)
2022-02,
“Financial
Instruments
–
Credit
Losses
(Topic
326):
Troubled
Debt
Restructurings
and
Vintage
Disclosures.” See
Note 1
– Basis
of Presentation
and Significant
Accounting Policies
and Note
4 –
Allowance for
Credit Losses
for
Loans and Finance Leases, for additional information related to the
adoption of ASU 2022-02.
On April 27, 2023, the
Corporation’s Board
declared a quarterly cash dividend
of $0.14 per common share
payable on June 9, 2023
to shareholders of
record at the close
of business on May
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 at the relevant times.
On April
27, 2022,
the Corporation
announced that
its Board
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.
The
Corporation’s
stock repurchase program
does not obligate
it to acquire
any specific number
of shares and
does not have
an expiration
date. As of
March 31, 2023,
the Corporation has
repurchased approximately
19.6 million shares of
common stock for
a total purchase
price
of
$275
million
under
this stock
repurchase
program.
Considering
the
industry-wide
uncertain
environment,
the Corporation
decided
to
pause
share
buybacks
during
the
second
quarter
of
2023
and
it
expects
to
resume
shares
repurchases
during
the
third
quarter
of
2023.
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
“Non-GAAP
Financial
Measures and Reconciliations”
above for additional information.
100
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 March 31, 2023 and December 31, 2022, respectively:
March 31,
2023
December 31, 2022
(In thousands, except ratios and per share information)
Total equity
- GAAP
$
1,405,593
$
1,325,540
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
(86)
(205)
Core deposit intangible
(18,987)
(20,900)
Insurance customer relationship intangible
-
(13)
Tangible common
equity
$
1,347,909
$
1,265,811
Total assets - GAAP
$
18,977,114
$
18,634,484
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
(86)
(205)
Core deposit intangible
(18,987)
(20,900)
Insurance customer relationship intangible
-
(13)
Tangible assets
$
18,919,430
$
18,574,755
Common shares outstanding
179,789
182,709
Tangible common
equity ratio
7.12%
6.81%
Tangible book
value per common share
$
7.50
$
6.93
See Note
22 -
Regulatory Matters,
Commitments and
Contingencies, to
the unaudited
consolidated financial
statements herein
for
the regulatory capital positions of the Corporation and FirstBank as of March
31, 2023 and December 31, 2022, 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.
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
as of
each
of
March
31,
2023
and
December
31,
2022,
respectively. There were
no transfers to the legal surplus reserve during the first quarter of 2023.
101
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 at least 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
March 31,
2023, the
Corporation forecasted
the 12-month
net interest
income assuming
March 31,
2023 interest
rate curves
remain
constant.
Then,
net
interest
income
was
estimated
under
rising
and
falling
rates
scenarios.
For
the
rising
rate
scenario,
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 rate 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
March 31,
2023, as
compared to
the January
31, 2023,
rates used
for the
December 31,
2022 sensitivity
analysis, reflected
an increase
in the
short-term
sector of
the curve,
or between
one to
twelve months,
of 18
basis points
(“bps”) on
average; while market rates decreased in the medium-term
sector of the curve, or between 2 to 5 years, by 37 bps,
and in the long-term
sector of the curve, or
over 5-year maturities, by 36
bps. A similar increase in market
rates changes were observed in
the Treasury and
the SOFR curve of 29
and 13 bps in the short
-term sector, respectively;
while market rates decreased
in the medium-term sector
by 38
and 40 bps, respectively,
and by 36 and 37 bps in the long-term sector, respectively.
102
The following table presents the results of the simulations as of March 31,
2023 and December 31, 2022.
Consistent with prior
years, these exclude non-cash changes in the fair value of derivatives:
March 31, 2023
December 31, 2022
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
$
9.4
1.15
%
$
9.7
1.14
%
$
7.8
0.96
%
$
11.5
1.37
%
- 200 bps ramp
$
(12.6)
(1.54)
%
$
(12.7)
(1.49)
%
$
(13.1)
(1.61)
%
$
(17.0)
(2.03)
%
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.
See “Risk
Management
– Liquidity
Risk” above
for liquidity
ratios.
As
of
March
31,
2023
and
December
31,
2022,
the
simulations
showed
that
the
Corporation
continues
to
have
an
asset-sensitive
position.
As of March
31, 2023, the
net interest income
for the next
twelve months under
a non-static balance
sheet scenario is
estimated to
increase by
$9.7 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,
2022,
is
primarily
driven
by
the
changes
in
the
overall
funding
mix,
including
decreases
in
average
non-interest
deposits
to
total
deposits
and
customers
reallocating
to
higher
yielding
alternatives, partially offset
by decreases in lower yielding
assets, such as the investment
portfolio being repaid, and being
replaced by
higher yielding assets due to the growth on the loan portfolio.
As of March
31, 2023, under a
falling rate, non-static
balance sheet scenario,
the net interest
income is estimated
to decrease by
$12.7
million,
when
compared
against
the
base
simulation.
The
change
in
net
interest
income
sensitivity
for
the
-200
bps
ramp
scenario, when
compared to
December 31,
2022, was
driven by
a higher
deposit beta
assumed in
the March
31, 2023
simulation for
non-maturity deposits, which under the falling rate scenario would
reprice and consequently impact net interest income at
a faster pace
than the previous simulation.
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”
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.
103
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.
The Corporation applie
s
probability weights to
the baseline and
alternative downside economic
scenarios to estimate
the ACL with
the
baseline
scenario
carrying
the
highest
weight.
The
economic
scenarios
used
in
the
ACL
determination
contained
assumptions
related
to economic
uncertainties associated
with geopolitical
instability,
high
inflation levels,
and
the expected
path
of interest
rate
increases by
the FED.
As of
March 31,
2023, the
Corporation’s
ACL model
considered the
following assumptions
for key
economic
variables in the probability-weighted economic scenarios:
●
Average
Commercial
Real
Estate
(“CRE”)
Price
Index
at
the
national
level
is
forecasted
to
contract
by
2.55%
for
the
remainder of 2023 and grow by 0.74% for 2024.
●
Average
Regional
Home
Price
Index
forecasts
in
Puerto
Rico
and
Florida
(purchase
only
prices)
are
expected
to
remain
relatively flat for the remainder of 2023 and 2024.
●
Average
regional
unemployment
in
Puerto
Rico
of
7.53%
for
the
remainder
of
2023
and
8.57%
for
2024.
For
the
Florida
region and the
U.S. mainland, average
unemployment rate of
3.59% and 4.19%,
respectively,
for the remainder
of 2023, and
4.23% and 4.62%, respectively,
for 2024.
●
Average
annualized change in real
gross domestic product (“GDP”)
in the U.S. mainland
of 0.89% for the
remainder of 2023
and 1.52% for 2024.
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
March
31,
2023,
management
compared
the
modeled
estimates
under
the
probability-
weighted
economic
scenarios
against
a
more
adverse
scenario.
Under
this
more
adverse
scenario,
as
an
example,
average
unemployment rate
for the Puerto
Rico region
increases to 8.04%
for the
remainder of
2023, compared
to 7.53%
for the same
period
on the probability-weighted economic scenario projections.
104
To
demonstrate
the
sensitivity
to
key
economic
parameters
used
in
the
calculation
of
the
ACL
at
March
31,
2023,
management
calculated
the
difference
between
the
quantitative
ACL
and
this
more
adverse
scenario.
Excluding
consideration
of
qualitative
adjustments,
this sensitivity
analysis
would
result in
a hypothetic
al increase
in the
ACL of
approximately
$34
million at
March
31,
2023.
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
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 quarter ended
March 31, 2023.
As of March 31, 2023,
the ACL for loans and finance
leases was $265.6 million, an
increase of $5.1 million from
$260.5 million as
of
December
31,
2022.
The
ACL
for
commercial
and
construction
loans
remained
relatively
flat
when
compared
to
the
previous
quarter as a result of
the following offsetting factors:
reserve increases of $5.0 million
for a new nonaccrual commercial
and industrial
loan in the Florida region in the power generation industry; and $1.1
million due to a less favorable economic outlook in the projection
of
certain
forecasted
macroeconomic
variables,
such
as
the
CRE
price
index;
partially
offset
by
reserve
decreases
of
$6.1
million
associated
with
the
receipt
of
updated
financial
information
of
certain
borrowers
and
the
repayment
of
a
$24.3
million
adversely
classified commercial
and industrial
participated
loan in
the Florida
region. The
ACL for
consumer loans
increased by
$2.9 million,
primarily reflecting the effect of the increase in
the size of the consumer loan portfolios and the increase
in historical charge-off levels.
The ACL for residential
mortgage loans increased
by $1.6 million, in
part to a $2.1 million
cumulative increase in the
ACL due to the
adoption
of
ASU
2022-02,
for
which
the
Corporation
elected
to
discontinue
the
use
of
a
discounted
cash
flow
methodology
for
restructured accruing
loans. This
adjustment had
a corresponding
decrease, net
of applicable
taxes, in
beginning retained
earnings as
of January
1, 2023.
See Note
1
– Basis
of Presentation
and Significant
Accounting
Policies, to
the unaudited
consolidated
financial
statements herein for information related to the adoption of ASU 2022
-02 during the first quarter of 2023.
The
ratio
of
the
ACL
for
loans
and
finance
leases
to
total
loans
held
for
investment
increased
to
2.29%
as
of
March
31,
2023,
compared to 2.25% as of December 31, 2022. An explanation for the change
for each portfolio follows:
●
The
ACL
to
total
loans
ratio
for
the
residential
mortgage
portfolio
increased
from
2.20%
as
of
December
31,
2022
to
2.29% as of
March 31, 2023,
primarily due
to the aforementioned
$2.1 million cumulative
increase in the
ACL due to
the
adoption of ASU 2022-02 during the first quarter of 2023.
●
The ACL
to total
loans ratio
for the
construction loan
portfolio increased
from 1.74%
as of
December 31,
2022 to
2.25%
as of March
31, 2023 as a
result of new
loan originations which
have a longer duration
and ultimately result in
higher loss
rates.
●
The
ACL
to
total
loans
ratio for
the
commercial
mortgage
portfolio
increased
from
1.49%
as
of
December
31,
2022
to
1.55% as of
March 31, 2023,
primarily reflecting
a less favorable
economic outlook in
the projection of
certain forecasted
macroeconomic variables,
such as the
CRE price index,
partially offset
by reserve decreases
associated with the
receipt of
updated financial information of certain borrowers.
●
The ACL to total loans ratio
for the commercial and industrial portfolio
decreased from 1.14% as of December
31, 2022 to
1.09% as of
March 31, 2023,
mainly due
to reserve decreases
associated with
the receipt of
updated financial
information
of certain borrowers
and the repayment
of a $24.3 million
adversely classified commercial
and industrial participated
loan
in
the
Florida
region,
partially
offset
by
the
aforementioned
reserve
increase
of
$5.0
million
for
a
new
nonaccrual
commercial and industrial participated loan in the Florida region
in the power generation industry.
●
The ACL
to total
loans ratio
for the
consumer loan
portfolio was
3.82% as
of March
31, 2023,
compared to
3.83% as
of
December 31, 2022.
The ratio of the
total ACL for loans
and finance leases to
nonaccrual loans held
for investment was
297.91% as of March
31, 2023,
compared to 289.61% as of December 31, 2022.
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.
105
As shown in the following tables,
the ACL for loans and finance leases
amounted to $265.6 million as of
March 31, 2023, or 2.29%
of total loans, compared with $260.5 million, or 2.25%
of total loans, as of December 31, 2022. See “Results of Operations
- Provision
for Credit Losses” above for additional information.
Quarter Ended March 31,
2023
2022
(Dollars in thousands)
ACL for loans and finance leases, beginning of year
$
260,464
$
269,030
Impact of adoption of ASU 2022-02
2,116
-
Provision for credit losses - expense (benefit):
Residential mortgage
73
(4,871)
Construction
860
(2,214)
Commercial mortgage
1,246
(22,640)
Commercial and industrial
(1,650)
1,755
Consumer and finance leases
15,727
10,981
Total provision for credit losses
- expense (benefit)
16,256
(16,989)
Charge-offs:
Residential mortgage
(983)
(2,528)
Construction
-
(44)
Commercial mortgage
(18)
(37)
Commercial and industrial
(118)
(290)
Consumer and finance leases
(16,798)
(9,816)
Total charge offs
(17,917)
(12,715)
Recoveries:
Residential mortgage
497
1,382
Construction
63
52
Commercial mortgage
168
44
Commercial and industrial
90
1,035
Consumer and finance leases
3,830
3,608
Total recoveries
4,648
6,121
Net charge-offs
(13,269)
(6,594)
ACL for loans and finance leases, end of period
$
265,567
$
245,447
ACL for loans and finance leases to period-end total loans
held for investment
2.29%
2.21%
Net charge-offs (annualized) to average loans
outstanding during the period
0.46%
0.24%
Provision for credit losses - expense (benefit) for loans and finance
leases to net charge-offs during the period
1.23x
-2.58x
106
The following tables set forth information concerning the composition of the
Corporation's loan portfolio and related ACL by
loan category, and the percentage
of loan balances in each category to the total as such loans as of the indicated dates:
As of March 31,
2023
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
$
2,811,528
$
143,664
$
2,353,659
$
2,862,189
$
3,406,945
$
11,577,985
Percent of loans in each category to total loans
24
%
1
%
20
%
25
%
30
%
100
%
Allowance for credit losses
64,403
3,231
36,460
31,235
130,238
265,567
Allowance for credit losses to amortized cost
2.29
%
2.25
%
1.55
%
1.09
%
3.82
%
2.29
%
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
$
132,953
$
2,358,851
$
2,886,263
%
$
3,327,468
$
11,552,825
Percent of loans in each category to total loans
25
%
1
%
20
%
25
%
29
%
100
%
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
%
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
March 31,
2023, the
ACL for
off-balance
sheet credit
exposures decreased by $0.1 million to $4.2 million, when compared
to December 31, 2022.
Allowance for Credit Losses for Held-to-Maturity
Debt Securities
As of March
31, 2023, 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
March 31,
2023, the
ACL for
held-to-maturity debt
securities was
$7.6
million, compared to $8.3
million as of December 31, 2022.
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 $0.4
million as of March 31, 2023, compared to $0.5 million as of December 31, 2022.
107
Nonaccrual Loans and Non-performing Assets
Total
non-performing
assets
consist
of
nonaccrual
loans
(generally
loans
held
for
investment
or
loans
held
for
sale
in
which
the
recognition of
interest income
was discontinued
when the
loan became
90 days
past due
or earlier
if the
full and
timely collection
of
interest or principal
is uncertain), foreclosed
real estate and
other repossessed
properties, and non-performing
investment securities, if
any.
When a
loan is placed
in nonaccrual
status, any
interest previously
recognized and
not collected
is reversed
and charged
against
interest
income.
Cash
payments
received
are
recognized
when
collected
in
accordance
with
the
contractual
terms
of
the
loans.
The
principal
portion
of the
payment is
used to
reduce
the principal
balance
of the
loan,
whereas the
interest portion
is recognized
on a
cash basis
(when collected).
However,
when management
believes that
the ultimate
collectability of
principal is
in doubt,
the interest
portion
is
applied
to
the
outstanding
principal.
The
risk
exposure
of
this
portfolio
is
diversified
as
to
individual
borrowers
and
industries, among other factors. In addition, a large portion
is secured with real estate collateral.
Nonaccrual Loans Policy
Residential Real Estate Loans
— The Corporation generally classifies real estate loans in nonaccrual
status when it has not received
interest and principal for a period of 90 days or more.
Commercial
and
Construction
Loans
—
The
Corporation
classifies
commercial
loans
(including
commercial
real
estate
and
construction loans) in nonaccrual
status when it has not
received interest and principal
for a period of 90
days or more or when
it does
not expect to collect all of the principal or interest due to deterioration in the financial
condition of the borrower.
Finance Leases
— The Corporation
classifies finance leases
in nonaccrual status
when it has not
received interest and
principal for
a period of 90 days or more.
Consumer Loans
— The Corporation
classifies consumer
loans in nonaccrual
status when it
has not received
interest and
principal
for a period of 90 days or more. Credit card loans continue to accrue finance
charges and fees until charged-off at 180
days delinquent.
Purchased
Credit Deteriorated
Loans (“PCD”)
— 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
includes
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.
108
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.
The following table presents non-performing assets as of the indicated dates:
March 31, 2023
December 31, 2022
(Dollars in thousands)
Nonaccrual loans held for investment:
Residential mortgage
$
36,410
$
42,772
Construction
1,794
2,208
Commercial mortgage
21,598
22,319
Commercial and Industrial
13,404
7,830
Consumer and finance leases
15,936
14,806
Total nonaccrual loans held for investment
89,142
89,935
OREO
32,862
31,641
Other repossessed property
4,743
5,380
Other assets
(1)
2,203
2,202
Total non-performing assets
$
128,950
$
129,158
Past due loans 90 days and still accruing
(2) (3) (4)
$
74,380
$
80,517
Non-performing assets to total assets
0.68
%
0.69
%
Nonaccrual loans held for investment to total loans held for investment
0.77
%
0.78
%
ACL for loans and finance leases
$
265,567
$
260,464
ACL for loans and finance leases to total nonaccrual loans held
for investment
297.91
%
289.61
%
ACL for loans and finance leases to total nonaccrual loans held
for investment, excluding residential real estate loans
503.62
%
552.26
%
(1)
Residential pass-through MBS issued by the PRHFA
held as part of the available-for-sale debt securities
portfolio.
(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 amounted to $10.4 million and $12.0 million as
of March 31, 2023 and December 31, 2022, respectively.
(3)
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 $25.9 million and $28.2 million
of FHA government guaranteed residential mortgage loans that were
over 15 months delinquent as of March 31, 2023 and December
31, 2022, respectively.
(4)
Includes rebooked loans, which were previously pooled into
GNMA securities, amounting to $7.1 million and $10.3 million as
of March 31, 2023 and December 31, 2022, 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.
109
Total
nonaccrual loans were
$89.1 million as
of March 31,
2023.
This represents a
net decrease of
$0.8 million from
$89.9 million
as of December
31, 2022. The net
decrease was primarily
related to a $6.3
million reduction in nonaccrual
residential mortgage loans,
partially
offset
by
increases
of
$4.4
million
and
$1.1
million
in
nonaccrual
commercial
and
construction
loans
and
nonaccrual
consumer loans, respectively.
The following table shows non-performing assets by geographic segment
as of the indicated dates:
March 31, 2023
December 31, 2022
(In thousands)
Puerto Rico:
Nonaccrual loans held for investment:
Residential mortgage
$
22,924
$
28,857
Construction
737
831
Commercial mortgage
13,677
14,341
Commercial and Industrial
4,589
5,859
Consumer and finance leases
15,483
14,142
Total nonaccrual loans held for investment
57,410
64,030
OREO
28,323
28,135
Other repossessed property
4,620
5,275
Other assets
2,203
2,202
Total non-performing assets
$
92,556
$
99,642
Past due loans 90 days and still accruing
$
72,000
$
76,417
Virgin Islands:
Nonaccrual loans held for investment:
Residential mortgage
$
6,069
$
6,614
Construction
1,057
1,377
Commercial mortgage
7,921
7,978
Commercial and Industrial
1,163
1,179
Consumer
306
469
Total nonaccrual loans held for investment
16,516
17,617
OREO
4,539
3,475
Other repossessed property
112
76
Total non-performing assets
$
21,167
$
21,168
Past due loans 90 days and still accruing
$
2,380
$
4,100
United States:
Nonaccrual loans held for investment:
Residential mortgage
$
7,417
$
7,301
Commercial and Industrial
7,652
792
Consumer
147
195
Total nonaccrual loans held for investment
15,216
8,288
OREO
-
31
Other repossessed property
11
29
Total non-performing assets
$
15,227
$
8,348
110
Nonaccrual commercial
and industrial loans
increased by $5.6
million to $13.4
million as of
March 31, 2023,
from $7.8 million
as
of
December
31,
2022.
The
increase
was
primarily
driven
by
the
migration
to
nonaccrual
status
of
a
$7.1
million
commercial
and
industrial
participated
loan
in the
Florida
region
related
to a
borrower
engaged
in
the power
generation
industry,
partially
offset
by
collections,
including
the
payoff
of
an
individual
commercial
and
industrial
loan
of
approximately
$1.0
million
in
the
Puerto
Rico
region.
Nonaccrual commercial
mortgage loans decreased
by $0.8 million
to $21.5 million
as of March
31, 2023, from
$22.3 million as
of
December 31, 2022.
Nonaccrual construction
loans decreased
by $0.4
million to
$1.8 million
as of
March 31,
2023, from
$2.2 million
as of
December
31, 2022.
The following tables present the activity of commercial and construction
nonaccrual loans held for investment for the indicated
periods:
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Quarter Ended March 31, 2023
Beginning balance
$
2,208
$
22,319
$
7,830
$
32,357
Plus:
Additions to nonaccrual
127
544
7,470
8,141
Less:
Loans returned to accrual status
-
(361)
(152)
(513)
Nonaccrual loans transferred to OREO
(332)
(162)
(183)
(677)
Nonaccrual loans charge-offs
-
(18)
(118)
(136)
Loan collections
(209)
(730)
(1,443)
(2,382)
Reclassification
-
6
-
6
Ending balance
$
1,794
$
21,598
$
13,404
$
36,796
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Quarter Ended March 31, 2022
Beginning balance
$
2,664
$
25,337
$
17,135
$
45,136
Plus:
Additions to nonaccrual
-
2,881
1,579
4,460
Less:
Loans returned to accrual status
-
(201)
(209)
(410)
Nonaccrual loans transferred to OREO
(13)
(461)
-
(474)
Nonaccrual loans charge-offs
(40)
(37)
(290)
(367)
Loan collections
(68)
(541)
(488)
(1,097)
Reclassification
-
(402)
402
-
Ending balance
$
2,543
$
26,576
$
18,129
$
47,248
111
Nonaccrual residential mortgage
loans decreased by $6.3
million to $36.5 million
as of March 31,
2023, compared to
$42.8 million
as of
December
31,
2022.
The decrease
was primarily
related
to
$3.9 million
loans restored
to accrual
status,
$2.7
million
of
loans
transferred to OREO, and $1.6 million in collections, partially offset
by inflows of $2.1 million.
The following table presents the activity of residential nonaccrual loans held for investment
for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Beginning balance
$
42,772
$
55,127
Plus:
Additions to nonaccrual
2,081
5,328
Less:
Loans returned to accrual status
(3,937)
(3,449)
Nonaccrual loans transferred to OREO
(2,710)
(937)
Nonaccrual loans charge-offs
(220)
(435)
Loan collections
(1,570)
(6,816)
Reclassification
(6)
-
Ending balance
$
36,410
$
48,818
The
amount
of
nonaccrual
consumer
loans,
including
finance leases,
increased
by
$1.1
million
to
$15.9
million
as of
March
31,
2023,
compared
to
$14.8
million
as of
December
31,
2022.
The
increase
was mainly
reflected
in
the
auto
loans
and
finance
leases
portfolio.
As
of
March
31,
2023,
approximately
$22.7
million
of
the
loans
placed
in
nonaccrual
status,
mainly
commercial
loans,
and
residential
loans,
were
current,
or
had
delinquencies
of
less
than
90
days
in
their
interest
payments.
Collections
on
these
loans
are
being recorded on a cash basis through earnings, or on a cost-recovery basis, as conditions
warrant.
During the quarter ended March 31, 2023,
interest income of approximately $0.1 million related to
nonaccrual loans with a carrying
value of
$29.5 million
as of
March 31,
2023, mainly
nonaccrual commercial
and construction
loans, was
applied against
the related
principal balances under the cost-recovery method.
Total
loans in early
delinquency (
i.e.
, 30-89 days past
due loans, as
defined in regulatory
reporting instructions) amounted
to $94.5
million as
of March
31, 2023,
a decrease
of $10.4
million, compared
to $104.9
million as
of December
31, 2022.
The variances
by
major portfolio categories are as follows:
●
Consumer loans in early delinquency decreased by $4.5 million to
$66.4 million, mainly in the auto loans portfolio.
●
Residential mortgage loans in early delinquency decreased by $3.0
million to $25.2 million.
●
Commercial and
construction loans
in early
delinquency decreased
by $2.9
million, mainly
due to
the migration
to past
due
90 days
and still
accruing of
a $2.3
million commercial
mortgage loan
that matured
and is
in the
process of
renewal but
for
which the Corporation continues to receive interest and principal payments
from the borrower.
In addition,
the Corporation
provides
homeownership
preservation
assistance to
its customers
through
a loss
mitigation
program.
Depending
upon
the
nature
of
a
borrower’s
financial
condition,
restructurings
or
loan
modifications
through
this
program
are
provided,
as well
as other
restructurings
of individual
C&I, commercial
mortgage, construction,
and residential
mortgage loans.
See
Note
1
–
Basis
of
Presentation
and
Significant
Accounting
Policies,
to
the
unaudited
consolidated
financial
statements
herein
for
additional information
related to
the accounting
policies of
loan modifications
granted to
borrowers experiencing
financial difficulty.
In
addition,
see
Note
3
-
Loans
Held
for
Investment,
to
the
unaudited
consolidated
financial
statements
herein
for
additional
information and statistics about the Corporation’s
modified loans.
112
The OREO
portfolio, which
is part of
non-performing assets,
increased to
$32.9 million
as of
March 31,
2023, compared
to $31.6
million
as
of
December
31,
2022.
The
following
tables
show
the
composition
of
the
OREO
portfolio
as
of
March
31,
2023
and
December 31, 2022, as well as the activity of the OREO portfolio by geographic
area during the quarter ended March 31, 2023:
OREO Composition by Region
As of March 31, 2023
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
23,314
$
1,670
$
-
$
24,984
Construction
1,705
59
-
1,764
Commercial
3,304
2,810
-
6,114
$
28,323
$
4,539
$
-
$
32,862
As of December 31, 2022
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
23,388
$
606
$
31
$
24,025
Construction
1,705
59
-
1,764
Commercial
3,042
2,810
-
5,852
$
28,135
$
3,475
$
31
$
31,641
OREO Activity by Region
Quarter Ended March 31, 2023
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Beginning Balance
$
28,135
$
3,475
$
31
$
31,641
Additions
5,351
1,064
-
6,415
Sales
(4,409)
-
(31)
(4,440)
Write-downs and other adjustments
(754)
-
-
(754)
Ending Balance
$
28,323
$
4,539
$
-
$
32,862
113
Net Charge-offs and Total
Credit Losses
Net charge-offs
totaled $13.3
million for
the first quarter
of 2023,
or 0.46%
of average
loans on an
annualized basis,
compared to
$6.6 million, or an annualized 0.24%
of average loans for the first quarter of 2022.
Residential
mortgage
loans
net
charge-offs
for
the
first
quarter
of
2023
were
$0.5
million,
or
an
annualized
0.07%
of
related
average loans, compared to
$1.2 million, or an annualized
0.15% of related average loans,
for the first quarter of
2022. Approximately
$0.2
million
in
charge-offs
recorded
during
the
first
quarter
of
2023
resulted
from
valuations
of
collateral
dependent
residential
mortgage loans,
compared to
$0.4 million
in for
the same
period in
2022. Net
charge-offs
on residential
mortgage loans
for the
first
quarter of
2023 also
included $0.5
million related
to foreclosures
recorded during
the first
quarter of
2023, compared
to $1.3
million
recorded for the same period in 2022.
Construction loans
net recoveries
for the
first quarter
of 2023
were $0.1
million, or
an annualized
0.17% of
related average
loans,
compared to $8 thousand, or an annualized 0.03% of related average
loans, for the same period in 2022.
Commercial
mortgage
loans
net
recoveries
for
the
first
quarter
of
2023
were
$0.1
million,
or
an
annualized
0.03%
of
average
commercial mortgage loans, compared to $7 thousand for the first quarter
of 2022.
Commercial and industrial loans
net charge-offs
for the first quarter of 2023
were $28 thousand, compared
to net recoveries of $0.8
million,
or
an
annualized
0.10%
of
related
average
loans
for
the
first
quarter
of
2022.
For
the
first
quarter
of
2022,
a
$0.9
million
recovery was recorded in the Puerto Rico region in connection with a nonaccrual commercial
loan that was paid off during the quarter.
Net charge-offs
of consumer
loans and
finance leases
for the
first quarter
of 2023
were $13.0
million, or
1.54% of
related average
loans,
compared to $6.1 million, or 0.85% of related average
loans, for the first quarter of 2022.
The following table presents annualized net charge-offs
(recoveries) to average loans held-in-portfolio for the indicated periods:
Quarter Ended March 31,
2023
2022
Residential mortgage
0.07
%
0.15
%
Construction
(0.17)
%
(0.03)
%
Commercial mortgage
(0.03)
%
-
%
Commercial and industrial
-
%
(0.10)
%
Consumer loans and finance leases
1.54
%
0.85
%
Total loans
0.46
%
0.24
%
114
The following table presents net charge-offs (recoveries)
to average loans held in various portfolios by geographic segment for the
indicated periods:
Quarter Ended March 31,
2023
2022
PUERTO RICO:
Residential mortgage
0.10
%
0.19
%
Construction
(0.47)
%
0.08
%
Commercial mortgage
-
%
0.01
%
Commercial and industrial
0.01
%
(0.16)
%
Consumer and finance leases
1.53
%
0.83
%
Total loans
0.58
%
0.29
%
VIRGIN ISLANDS:
Residential mortgage
(0.08)
%
0.10
%
Commercial mortgage
(0.21)
%
(0.22)
%
Commercial and industrial
(0.01)
%
(0.01)
%
Consumer and finance leases
2.19
%
1.78
%
Total loans
0.29
%
0.25
%
FLORIDA:
Construction
(0.05)
%
(0.09)
%
Commercial mortgage
(0.09)
%
-
%
Consumer and finance leases
0.17
%
1.31
%
Total loans
(0.03)
%
0.01
%
The above ratios are
based on annualized charge
-offs and are not
necessarily indicative of the
results expected for the
entire year or
in subsequent periods.
Total net charge
-offs plus gains on OREO operations for the first quarter
of 2023 amounted to $11.3 million,
or a loss rate of 0.37%
on
an
annualized
basis
of
average
loans
and
repossessed
assets,
compared
to
losses
of
$5.9
million,
or
a
loss
rate
of
0.21%
on
an
annualized basis, for the first quarter of 2022.
115
The following table presents information about the OREO inventory
and credit losses for the indicated periods:
Quarter ended March 31,
2023
2022
(Dollars in thousands)
OREO
OREO balances, carrying value:
Residential
$
24,984
$
32,208
Construction
1,764
3,458
Commercial
6,114
7,228
Total
$
32,862
$
42,894
OREO activity (number of properties):
Beginning property inventory
344
418
Properties acquired
59
68
Properties disposed
(59)
(44)
Ending property inventory
344
442
Average holding
period (in days)
Residential
533
656
Construction
2,266
1,979
Commercial
2,468
2,011
Total average holding
period (in days)
986
991
OREO operations gain (loss):
Market adjustments and gains (losses) on sale:
Residential
$
2,490
$
992
Construction
40
103
Commercial
(67)
(17)
Total net gain
2,463
1,078
Other OREO operations expenses
(467)
(358)
Net Gain on OREO operations
$
1,996
$
720
(CHARGE-OFFS) RECOVERIES
Residential charge-offs, net
$
(486)
$
(1,146)
Construction recoveries, net
63
8
Commercial recoveries, net
122
752
Consumer and finance leases charge-offs, net
(12,968)
(6,208)
Total charge
-offs, net
(13,269)
(6,594)
TOTAL CREDIT
LOSSES
(1)
$
(11,273)
$
(5,874)
LOSS RATIO PER CATEGORY
(2)
Residential
(0.28)
%
0.02
%
Construction
(0.28)
%
(0.37)
%
Commercial
-
%
(0.06)
%
Consumer
1.54
%
0.85
%
TOTAL CREDIT
LOSS RATIO
(3)
0.37
%
0.21
%
(1)
Equal to net gain on OREO operations plus charge-offs,
net.
(2)
Calculated as net charge-offs plus market adjustment
and gains (losses) on sale of OREO divided by average loans and
repossessed assets.
(3)
Calculated as net charge-offs plus net gain on OREO
operations divided by average loans and repossessed
assets.
116
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
March 31, 2023,
the Corporation had
credit risk of
approximately 80% in
the
Puerto Rico region, 17% in the United States region, and 3% in the Virgin
Islands region.
117
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.
Although no official
GNP data has
been released
to date for fiscal year 2022, the 2023 Fiscal Plan model estimates that Puerto Rico’s
real GNP expanded by 2.0% in fiscal year 2022.
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
February
2023,
preliminary
estimates
showed
that
the
EDB-EAI
increased
0.3%
on
a
month-over-month;
however,
it
stood
0.2%
lower
on
a
year-over-year
basis.
Over
the
12-month
period
ended
February 28, 2023, the EDB-EAI averaged 124.5, approximately 0.9%
above the comparable figure a year earlier.
Fiscal Plan
On April
3, 2023,
the PROMESA
oversight board
certified the
2023 Fiscal
Plan for
Puerto Rico
(the “2023
Fiscal Plan”).
Unlike
previous versions
of the
fiscal plan,
the PROMESA
oversight board
segregated the
2023 Fiscal Plan
into three
different volumes.
As
the first fiscal plan
certified in a post-bankruptcy
environment, Volume
1 presents a
Transformation Plan
that highlights priority
areas
to cement fiscal responsibility,
accelerate economic growth in a sustainable manner,
and restore market access to Puerto Rico. Volume
2 provides additional details
on economic trends and
financial projections, and Volume
3 maps out the supplementary
implementation
details to
guide
the government’s
implementation
of the
requirements
of the
2023 Fiscal
Plan, as
well as
additional
initiatives
from
prior fiscal plans which remain mandatory and are still pending to be implemented.
The
2023
Fiscal
Plan
prioritizes
resource
allocation
across
three
major
pillars:
(i)
entrenching
a
legacy
of
strong
financial
management
through
the
implementation
of
a
comprehensive
financial
management
agenda,
(ii)
instilling
a
culture
of public
-sector
performance
and
excellence
in
order
to
properly
deliver
quality
public
services,
and
(iii)
investing
for
economic
growth
to
ensure
sufficient
revenues are
generated to
support the
delivery of
services. According
to the
Transformation
Plan, the
fiscal and
economic
turnaround
of
Puerto
Rico
cannot
be
accomplished
without
the
implementation
of
structural
economic
reforms
that
promote
sustainable
economic
development.
These
reforms
include
the
power/energy
sector
reform
to
improve
availability,
reliability
and
affordability of energy,
the K-12 and higher
education reform to expand
opportunity and prepare
the workforce to
compete for jobs of
the future,
and an
infrastructure reform
aimed at
improving the
efficiency of
the economy
and facilitate
investment. The
2023 Fiscal
Plan projects that
these reforms, if implemented
successfully, will
contribute 0.75% in
GNP growth by
fiscal year 2026.
Additionally,
the
2023
Fiscal
Plan
provides
a
roadmap
for
a
tax
reform
directed
towards
establishing
a
tax
regime
that
is
more
competitive
for
investors and more equitable for individuals.
The
2023
Fiscal
Plan
notes
that
Puerto
Rico
has
had
a
strong
recovery
in
the
aftermath
of
the
pandemic
crisis
with
labor
participation
trending
positively
and
unemployment
at
historically
low
levels.
However,
it
recognizes
that
such
recovery
has
been
primarily
fueled
by
the
unprecedented
influx
of
federal
funds,
which
have
an
outsized
and
temporary
impact
that
may
mask
underlying structural
weaknesses in
the economy.
As such,
the 2023
Fiscal Plan
projects a
0.7% decline
in real
GNP for
the current
fiscal
year
2023,
followed
by a
period
of near-zero
real
growth in
the coming
fiscal years
2024
through 2026.
Also,
the fiscal
plan
projects that
Puerto Rico’s
population will
continue the
long-term trend
of steady
decline. Notwithstanding,
the Transformation
Plan
depicts
that,
if
managed
properly,
these
non-recurring
federal
funds
can
be
leveraged
into
sustainable
longer-term
growth
and
opportunity.
118
The 2023
Fiscal Plan projects
that approximately
$81 billion in
total disaster relief
funding, from
federal and
private sources,
will
be disbursed
as part
of the
reconstruction
efforts over
a span
of 18
years (fiscal
years 2018
through 2035).
These funds
will benefit
individuals,
the public
(e.g., reconstruction
of major
infrastructure,
roads,
and schools),
and
will cover
part of
the Commonwealth’s
share of
the cost
of disaster
relief funding.
Also, the
2023 Fiscal
Plan projects
accelerated
deployment
of the
remaining
COVID-19
relief
funds
in
fiscal
year
2023
through
2025,
with
approximately
$9.3
billion
expected
to
be
disbursed,
compared
to
$4.5
billion
projected in the previous
fiscal plan. Additionally,
the 2023 Fiscal Plan continues
to account for $2.3
billion in federal funds
to Puerto
Rico
from
the
Bipartisan
Infrastructure
Law
directed
towards
improving
the
Island’s
infrastructure
over
fiscal
years
2022
through
2026.
Debt Restructuring
Over
80%
of
Puerto
Rico’s
outstanding
debt
has
been
restructured
to
date.
On
March
15,
2022,
the
Plan
of
Adjustment
of
the
central
government’s
debt
became
effective
through
the
exchange
of more
than
$33
billion
of
existing
bonds
and
other
claims
into
approximately
$7
billion
of
new
bonds,
saving
Puerto
Rico
more
than
$50
billion
in
debt
payments
to
creditors.
Also,
the
restructurings
of
the
Puerto
Rico
Sales
Tax
Financing
Corporation
(“COFINA”),
the
Highways
and
Transportation
Authority
(“HTA”),
and
the
Puerto
Rico
Aqueducts
and
Sewers
Authority
(“PRASA”)
are
expected
to
yield
savings
of
approximately
$17.5
billion, $3.0
billion, and
$400 million,
respectively,
in future
debt service
payments. The
main restructurings
pending include
that of
the Puerto Rico Electric Power Authority (“PREPA”)
and the Puerto Rico Industrial Company (“PRIDCO”).
According
to
the
PROMESA
oversight
board,
the
filed
PREPA
Plan
of
Adjustment
(“PREPA-POA”)
reduces
PREPA’s
legacy
financial and
general unsecured
debt by
approximately 40%
as it
contemplates the
issuance of
$5.7 billion
in new
bonds that
will be
exchanged for the discharge
of approximately $10.0 billion
in outstanding debt. The
new bonds are expected to
be paid from revenues
generated
by
a
“Legacy
Charge”,
which
consists
of
a
fixed
and
volumetric
charge
on
customers’
bills
that
will
vary
based
on
the
category of customer and
level of usage. This Legacy
Charge is expected to
generate sufficient revenue
to pay down the new
bonds in
35 years based
on the projections
presented in PREPA’s
2022 certified fiscal
plan. For pensions,
the PREPA
-POA provides PREPA’s
pension
system with
treatment substantially
similar to
the treatment
of the
Commonwealth’s
pensions.
The PREPA
-POA closes
the
pension system to new
entrants, preserves the benefits
of current retirees, eliminates
any future cost of living
adjustments, and ensures
all benefits accrued to date by active participants are protected.
On
March
23,
2022,
the
Title
III
Court
issued
a
ruling
that
upholds
the
PROMESA
oversight
board’s
position
that
PREPA
bondholders’
collateral
security
is
limited
to
the
money
PREPA
deposits
in
accounts
established
pursuant
to
the
trust
agreement
governing the issuance
of the bonds.
The court also
rejected the bondholders’
contention that they
have a general
unsecured claim for
the full amount of their principal
and interest. As such, the court
limited their unsecured claim to
future net revenues for the
remainder
of the
terms of
the bonds.
According
to the
PROMESA oversight
board,
this decision
of the
court
was a
significant
win
for
Puerto
Rico and its path to reliable electricity and economic growth.
Although PREPA’s
overall mediation process has been
slower than expected, PREPA’s
Title III confirmation process
is underway,
a confirmation
hearing has
been set
for mid-July
2023 and, according
to the
2023 Fiscal
Plan, the
plan is
expected to
go effective
by
the second quarter of 2024.
Other Developments
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
December
31,
2022,
there were
a
total
of 6,286
active
permanent
work
projects reported, more than twice the comparable amount reported
as of December 31, 2021, of 2,650 projects.
119
Exposure to Puerto Rico Government
As of March 31,
2023, the Corporation
had $340.0 million of
direct exposure to the
Puerto Rico government,
its municipalities and
public corporations, compared to $338.9 million
as of December 31, 2022. As of March 31, 2023,
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
$113.1
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
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 $10.2
million in
loans to
an
affiliate
of PREPA,
$30.0
million in
loans to
agencies or
public corporations
of the
Puerto Rico
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 March 31, 2023).
The
following
table
details
the
Corporation’s
total
direct
exposure
to
Puerto
Rico
government
obligations
according
to
their
maturities:
As of March 31, 2023
Investment
Portfolio
Total
(Amortized
cost)
Loans
Exposure
(In thousands)
Puerto Rico Housing Finance Authority:
After 10 years
$
3,302
$
-
$
3,302
Total
Puerto Rico Housing Finance Authority
3,302
-
3,302
Agencies and public corporation of the Puerto Rico government:
After 1 to 5 years
-
3,313
3,313
After 5 to 10 years
-
26,671
26,671
Total agencies and public
corporation of the Puerto Rico government
-
29,984
29,984
Affiliate of the Puerto Rico Electric Power Authority:
Due within one year
-
10,184
10,184
Total Puerto Rico government
affiliate
-
10,184
10,184
Total
Puerto Rico public corporations and government affiliate
-
40,168
40,168
Municipalities:
Due within one year
1,204
18,148
19,352
After 1 to 5 years
42,633
55,905
98,538
After 5 to 10 years
55,940
56,652
112,592
After 10 years
66,023
-
66,023
Total
Municipalities
165,800
130,705
296,505
Total
Direct Government Exposure
$
169,102
$
170,873
$
339,975
120
In addition,
as of March
31, 2023, the
Corporation had
$82.9 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, 2022 –
$84.7
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
March
31,
2023,
the
Corporation
had
$2.2
billion
of public
sector
deposits
in
Puerto
Rico,
compared
to
$2.3
billion
as
of
December 31,
2022. Approximately
25% of
the public
sector deposits
as of
March 31,
2023 were
from municipalities
and municipal
agencies in
Puerto Rico
and 75%
were from
public corporations,
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
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
partially
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
March 31,
2023, the
Corporation had
$38.7
million in
loans to
USVI public
corporations,
compared to
$38.0 million
as of
December 31, 2022. As of March 31, 2023, all loans were currently performing
and up to date on principal and interest payments.
121
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES
ABOUT MARKET
RISK
For
information
regarding
market
risk
to
which
the
Corporation
is
exposed,
see
the
information
contained
in
Part
I,
Item
2.
“Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results of
Operations
— Risk
Management”
in
this Quarterly
Report on Form 10-Q.
ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
First
BanCorp.’s
management,
including
its
Chief
Executive
Officer
and
Chief
Financial
Officer,
evaluated
the
effectiveness
of
First
BanCorp.’s
disclosure
controls
and
procedures
(as
defined
in
Rules
13a-15(e)
and
15d-15(e)
under
the
Exchange
Act)
as
of
March
31,
2023.
Based
on
this
evaluation
as
of
the
end
of
the
period
covered
by
this
Quarterly
Report
on
Form
10-Q,
the
Chief
Executive Officer
and Chief Financial
Officer concluded
that the Corporation’s
disclosure controls and
procedures were effective
and
provide reasonable
assurance that
the information
required to
be disclosed
by the
Corporation in
reports that
the Corporation
files or
submits under
the Exchange
Act is recorded,
processed, summarized
and reported
within the
time periods
specified in
SEC rules
and
forms
and is
accumulated
and reported
to the
Corporation’s
management,
including
the Chief
Executive
Office
and Chief
Financial
Officer, as appropriate,
to allow timely decisions regarding required disclosures.
Internal Control over Financial Reporting
There were
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
March 31, 2023
that have materially
affected, or
are reasonably
likely
to materially affect, the Corporation’s
internal control over financial reporting.
122
PART II - OTHER INFORMATION
In accordance
with the instructions
to Part II, the
other specified
items in this part
have been omitted
because they
are not applicable,
or the
information
has been
previously
reported.
ITEM 1.
LEGAL PROCEEDINGS
For
a
discussion of
legal proceedings, see
Note 22
–
Regulatory Matters, Commitments and
Contingencies, to unaudited
consolidated
financial
statements
herein, which is incorporated by reference in this Item 1.
ITEM 1A.
RISK FACTORS
The Corporation’s
business,
operating
results
and/or the
market price
of our common
stock may
be significantly
affected by
a number of
factors. A detailed discussion
of certain risk factors that could
affect the Corporation’s future
operations, financial
condition or results for
future periods
is set forth
in Part
I, Item
1A., “Risk
Factors,”
in the
2022 Annual
Report on
Form 10-K.
These risk
factors,
and others,
could
cause actual results to differ materially from historical
results or the results contemplated by the forward-looking
statements contained
in
this report. Also, refer to the discussion
in “Forward Looking
Statements” and Part
I, Item 2. “Management’s Discussion
and Analysis of
Financial Condition
and Results of Operations,”
in this Quarterly
Report on Form 10-Q
for additional
information
that may supplement
or
update the
discussion
of risk
factors
in the
2022 Annual
Report
on Form
10-K.
Other than
as described
below, there
have been
no material
changes
from those
risk factors
previously
disclosed
in Part
I, Item 1A.
“Risk
Factors,”
in the
2022 Annual
Report
on Form
10-K.
Cyber-attacks,
system risks
and data
protection breaches
to our
computer systems
and networks
or those
of third-party
service
providers 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.
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 a 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. For example,
we recently learned
that one of our
third-party vendors was
the
victim
of
a
security
incident
in
April
2023
involving
a
set
of
data
that
included
some
information
on
FirstBank’s
mortgage
loan
business. In
response to learning
of the incident,
we promptly launched
our own internal
investigation, which
confirmed that our
own
systems were
not
compromised,
and
any operational
and
financial impact
was minimal.
We
are working
with cybersecurity
experts
and legal counsel
to fully assess
the impact of
the security incident
reported by our
third-party vendor and
any required disclosures
to
the applicable regulatory authorities
and impacted customers. Our
vendor has indicated (and
we have no evidence
to the contrary) that
to date
there is
no evidence
that there
has been
any actual
or attempted
misuse of
information. We
may incur
expenses related
to the
123
incident, including
expenses to
remediate and
investigate this
matter.
Additionally,
we remain
subject to
risks and
uncertainties as
a
result of the incident, including legal, reputational and financial risks.
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
volatility
in
the
financial
services
industry,
including
failures
or
rumored
failures
of
other
depository
institutions,
and
actions taken by
governmental agencies to
stabilize the financial
system, could result
in, among other
things, bank deposit
runoffs
and liquidity constraints.
The closure and placement
into receivership
with the FDIC of certain large U.S.
regional banks with
assets over $100 billion
in March
and May 2023, and adverse developments affecting
other banks, resulted in heightened
levels of market volatility and consequently
have
negatively
impacted customer
confidence
in the safety
and soundness
of financial
institutions.
These developments
have resulted
in certain
regional banks
experiencing
higher than normal
deposit outflows
and an elevated
level of competition
for available
deposits in the market.
Although we have not been materially impacted by these recent bank failures, the resulting speed at which news, including
social media
outlets, led depositors to withdraw funds from these and
other financial institutions,
as well as
the volatile impact to stock
prices, could
have a material effect on
operations. The impact of market volatility from the adverse developments
in the banking industry, along with
continued high 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.
In the aftermath of these recent bank failures, the banking agencies could propose
certain actions that may impact capital ratios
or the
FDIC deposit
insurance
premium.
124
ITEM 2.
UNREGISTERED
SALES OF
EQUITY SECURITIES
AND USE OF
PROCEEDS
The Corporation
did not
have any
unregistered
sales of
equity
securities
during the
quarter
ended March
31, 2023.
Issuer Purchases
of Equity
Securities
The following table provides information in relation to
the Corporation’s purchases of shares of
its common stock during the
quarter
ended March 31, 2023:
Period
Total Number of Shares
Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar Value
of Shares That May Yet
be
Purchased Under These
Plans or Programs (In
thousands)
(1)
January 1, 2023 - January 31, 2023
306,106
$
13.25
306,106
$
120,944
February 1, 2023 - February 28, 2023
2,282,608
14.24
2,282,608
88,429
March 1, 2023 - March 31, 2023
1,276,661
13.04
988,826
75,000
Total
3,865,375
(2)(3)
3,577,540
(1)
As of March 31, 2023,
the Corporation was authorized
to purchase up to
$350 million of its
common stock under the
stock repurchase program, that
was publicly announced
on April 27,
2022, of which $275.0 million had
been utilized. The remaining $75.0 million
in the table represents the remaining amount
authorized under the stock repurchase
program as of March 31,
2023. The
stock repurchase
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 3,577,540
shares of common stock repurchased in the open market at an average
price of $13.98 for a total purchase price of approximately $50.0
million.
(3)
Includes 287,835
shares of
common stock
withheld by
the Corporation
to cover
minimum tax
withholding obligations
upon the
vesting of
restricted stock
and performance
units. 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.
125
ITEM 6.
EXHIBITS
See the
Exhibit Index
below, which
is incorporated
by reference
herein:
EXHIBIT INDEX
Exhibit No.
Description
10.1*
Form of First BanCorp Long-Term Equity Incentive Award Agreement
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. Quarterly Report on Form 10-Q
for the quarter ended March 31, 2023, formatted in
Inline XBRL (included within the Exhibit 101 attachments)
*Management contract or compensatory plan or agreement.
126
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the
Corporation has duly caused this report to
be signed on
its
behalf by
the undersigned
hereunto
duly authorized:
First BanCorp.
Registrant
Date:
May 10,
2023
By:
/s/ Aurelio
Alemán
Aurelio Alemán
President
and Chief
Executive
Officer
Date: May
10,
2023
By:
/s/ Orlando
Berges
Orlando
Berges
Executive
Vice President
and Chief
Financial
Officer