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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
June 30, 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:
178,298,443
shares outstanding as of August 1, 2023.
2
FIRST BANCORP.
INDEX PAGE
PART
I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited) as of June
30, 2023 and December 31, 2022
5
Consolidated Statements
of Income
(Unaudited) –
Quarters and
Six-Month Periods
ended June
30, 2023
and 2022
6
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited) – Quarters and Six-Month Periods
ended June 30, 2023 and 2022
7
Consolidated Statements of Cash Flows (Unaudited) – Six-Month Periods
ended June 30, 2023 and 2022
8
Consolidated
Statements
of
Changes
in
Stockholders’
Equity
(Unaudited)
–
Quarters
and
Six-Month
Periods ended June 30, 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
78
Item 3. Quantitative and Qualitative Disclosures About Market Risk
135
Item 4. Controls and Procedures
Item 5. Other Information
135
135
PART
II. OTHER INFORMATION
Item 1.
Legal Proceedings
136
Item 1A. Risk Factors
136
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
138
Item 6.
Exhibits
139
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
hereof,
and
advises
readers
that
any
such
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”),
Part
II,
Item
1A,
“Risk
Factors”
in
the
Corporation’s
Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2023, 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 adverse effects on the Corporation’s
results of operations and its liquidity position;
●
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, including
Federal Deposit Insurance
Corporation (“FDIC”)
special assessments, 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
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 may require us to sell investment securities 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 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
incidents
that
occur,
such
as
an
April
2023
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;
●
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;
4
●
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
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,
or
the
need
of additional
credit
losses that
could
emerge
from
the
recent
downgrade
of
the
United
States of
America’s
Long-Term
Foreign-Currency
Issuer
Default
Rating
(“IDR”)
to
‘AA+’
from
‘AAA’,
resulting
in
additional
charges to the provision for credit losses on the Corporation’s
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 further 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;
●
residual impacts of the transition away from the London Interbank Offered
Rate (“LIBOR”);
●
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)
June 30, 2023
December 31, 2022
(In thousands, except for share information)
ASSETS
Cash and due from banks
$
1,046,534
$
478,480
Money market investments:
Time deposits with other financial institutions
300
300
Other short-term investments
700
1,725
Total money market investments
1,000
2,025
Available-for-sale debt securities, at fair value:
Securities pledged with creditors’ rights to repledge
79,909
81,103
Other available-for-sale debt securities
5,353,460
5,518,417
Total available-for-sale debt securities, at fair value (amortized cost of $
6,199,630
as of June 30, 2023, and
$
6,398,197
as of December 31, 2022; ACL of $
433
as of June 30, 2023 and $
458
as of December 31, 2022)
5,433,369
5,599,520
Held-to-maturity debt securities, at amortized cost, net of ACL
of $
8,401
as of June 30, 2023 and $
8,286
as of December 31, 2022 (fair value of $
410,181
as of June 30, 2023 and $
427,115
as of December 31, 2022)
416,325
429,251
Equity securities
48,101
55,289
Total investment securities
5,897,795
6,084,060
Loans, net of ACL of $
267,058
as of June 30, 2023 and $
260,464
as of December 31, 2022
11,452,257
11,292,361
Mortgage loans held for sale, at lower of cost or market
14,295
12,306
Total loans, net
11,466,552
11,304,667
Accrued interest receivable on loans and investments
70,368
69,730
Premises and equipment, net
146,640
142,935
Other real estate owned (“OREO”)
31,571
31,641
Deferred tax asset, net
153,925
155,584
Goodwill
38,611
38,611
Other intangible assets
17,092
21,118
Other assets
282,367
305,633
Total assets
$
19,152,455
$
18,634,484
LIABILITIES
Non-interest-bearing deposits
$
5,874,261
$
6,112,884
Interest-bearing deposits
10,945,431
10,030,583
Total deposits
16,819,692
16,143,467
Short-term securities sold under agreements to repurchase
73,934
75,133
Advances from the FHLB:
Short-term
-
475,000
Long-term
500,000
200,000
Total advances from the FHLB
500,000
675,000
Other long-term borrowings
161,700
183,762
Accounts payable and other liabilities
199,130
231,582
Total liabilities
17,754,456
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;
179,756,622
shares outstanding as of June 30, 2023 and
182,709,059
as of December 31, 2022
22,366
22,366
Additional paid-in capital
962,229
970,722
Retained earnings, includes legal surplus reserve of $
168,484
1,733,497
1,644,209
Treasury stock (at cost),
43,906,494
shares as of June 30, 2023 and
40,954,057
shares as of December 31, 2022
(547,706)
(506,979)
Accumulated other comprehensive loss, net of tax of $
8,468
(772,387)
(804,778)
Total stockholders’ equity
1,397,999
1,325,540
Total liabilities and stockholders’ equity
$
19,152,455
$
18,634,484
The accompanying notes are an integral part of these statements.
6
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands, except per share information)
Interest and dividend income:
Loans
$
218,066
$
179,261
$
428,702
$
353,048
Investment securities
26,258
26,491
53,368
49,738
Money market investments and interest-bearing cash accounts
7,880
2,873
12,530
3,693
Total interest and dividend income
252,204
208,625
494,600
406,479
Interest expense:
Deposits
41,604
7,694
71,489
15,346
Securities sold under agreements to repurchase:
Short-term
1,328
-
2,397
-
Long-term
-
1,972
-
4,154
Advances from the FHLB:
Short-term
435
-
4,776
-
Long-term
5,613
1,075
8,448
2,138
Other long-term borrowings
3,409
1,698
6,790
3,031
Total interest expense
52,389
12,439
93,900
24,669
Net interest income
199,815
196,186
400,700
381,810
Provision for credit losses - expense (benefit):
Loans and finance leases
20,770
12,665
37,026
(4,324)
Unfunded loan commitments
721
812
616
634
Debt securities
739
(3,474)
90
(109)
Provision for credit losses - expense (benefit)
22,230
10,003
37,732
(3,799)
Net interest income after provision for credit losses
177,585
186,183
362,968
385,609
Non-interest income:
Service charges and fees on deposit accounts
9,287
9,466
18,828
18,829
Mortgage banking activities
2,860
4,082
5,672
9,288
Gain on early extinguishment of debt
1,605
-
1,605
-
Insurance commission income
2,747
2,946
7,594
8,221
Card and processing income
11,135
10,300
22,053
19,981
Other non-interest income
8,637
4,147
13,037
7,480
Total non-interest income
36,271
30,941
68,789
63,799
Non-interest expenses:
Employees’ compensation and benefits
54,314
51,304
110,736
100,858
Occupancy and equipment
21,097
21,505
42,283
43,891
Business promotion
4,167
4,042
8,142
7,505
Professional service fees
11,596
12,036
23,569
22,630
Taxes, other than income taxes
5,124
4,689
10,236
9,707
FDIC deposit insurance
2,143
1,466
4,276
3,139
Net gain on OREO operations
(1,984)
(1,485)
(3,980)
(2,205)
Credit and debit card processing expenses
6,540
5,843
11,858
9,964
Communications
1,992
1,978
4,208
4,129
Other non-interest expenses
7,928
6,948
16,857
15,367
Total non-interest expenses
112,917
108,326
228,185
214,985
Income before income taxes
100,939
108,798
203,572
234,423
Income tax expense
30,284
34,103
62,219
77,128
Net income
$
70,655
$
74,695
$
141,353
$
157,295
Net income attributable to common stockholders
$
70,655
$
74,695
$
141,353
$
157,295
Net income per common share:
Basic
$
0.39
$
0.38
$
0.79
$
0.80
Diluted
$
0.39
$
0.38
$
0.78
$
0.80
The accompanying notes are an integral part of these statements.
7
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(Unaudited)
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Net income
$
70,655
$
74,695
$
141,353
$
157,295
Other comprehensive (loss) income, net of tax:
Available-for-sale debt securities:
Net unrealized holding (losses) gains on debt securities
(1)
(54,837)
(175,923)
32,391
(507,757)
Other comprehensive (loss) income for the period, net of tax
(54,837)
(175,923)
32,391
(507,757)
Total comprehensive income (loss)
$
15,818
$
(101,228)
$
173,744
$
(350,462)
(1)
Net unrealized holding (losses) gains on available-for-sale
debt securities have no tax effect because securities
are either tax-exempt, held by an International Banking Entity (“IBE”),
or
have a full deferred tax asset valuation allowance.
The accompanying notes are an integral part of these statements.
8
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six-Month Period Ended June 30,
2023
2022
(In thousands)
Cash flows from operating activities:
Net income
$
141,353
$
157,295
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
10,071
11,291
Amortization of intangible assets
4,026
4,510
Provision for credit losses - expense (benefit)
37,732
(3,799)
Deferred income tax expense
2,419
41,483
Stock-based compensation
3,997
2,580
Gain on early extinguishment of debt
(1,605)
-
Unrealized gain on derivative instruments
(291)
(864)
Net gain on disposals or sales, and impairments of premises
and equipment and other assets
(235)
(900)
Net gain on sales of loans and loans held-for-sale valuation adjustments
(989)
(3,965)
Net amortization of discounts, premiums, and deferred loan fees
and costs
686
(5,486)
Originations and purchases of loans held for sale
(88,696)
(143,692)
Sales and repayments of loans held for sale
85,398
157,098
Amortization of broker placement fees
128
64
Net amortization of premiums and discounts on investment securities
2,117
1,389
Decrease (increase) in accrued interest receivable
1,849
(3,555)
Increase (decrease) in accrued interest payable
9,369
(1,252)
Increase in other assets
(5,566)
(4,235)
(Decrease) increase in other liabilities
(35,307)
11,646
Net cash provided by operating activities
166,456
219,608
Cash flows from investing activities:
Net disbursements on loans held for investment
(226,714)
(186,902)
Proceeds from sales of loans held for investment
3,183
37,565
Proceeds from sales of repossessed assets
26,360
19,941
Purchases of available-for-sale debt securities
(961)
(512,327)
Proceeds from principal repayments and maturities of available-for-sale
debt securities
217,745
354,853
Purchases of held-to-maturity debt securities
-
(260,082)
Proceeds from principal repayments and maturities of held-to-maturity
debt securities
13,832
934
Additions to premises and equipment
(16,211)
(11,841)
Proceeds from sales of premises and equipment and other assets
578
1,138
Net redemptions (purchases) of other investments securities
7,219
(971)
Net cash provided by (used in) investing activities
25,031
(557,692)
Cash flows from financing activities:
Net increase (decrease) in deposits
675,911
(645,417)
Net repayments of short-term borrowings
(476,199)
-
Repayments of long-term borrowings
(19,795)
(100,000)
Proceeds from long-term borrowings
300,000
-
Repurchase of outstanding common stock
(53,217)
(152,713)
Dividends paid on common stock
(51,158)
(43,321)
Net cash provided by (used in) financing activities
375,542
(941,451)
Net increase (decrease) in cash and cash equivalents
567,029
(1,279,535)
Cash and cash equivalents at beginning of year
480,505
2,543,058
Cash and cash equivalents at end of period
$
1,047,534
$
1,263,523
Cash and cash equivalents include:
Cash and due from banks
$
1,046,534
$
1,261,590
Money market investments
1,000
1,933
$
1,047,534
$
1,263,523
The accompanying notes are an integral part of these statements.
9
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
(Unaudited)
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands, except per share information)
Common Stock
$
22,366
$
22,366
$
22,366
$
22,366
Additional Paid-In Capital:
Balance at beginning of period
959,912
966,771
970,722
972,547
Stock-based compensation expense
1,922
1,398
3,997
2,580
Common stock reissued under stock-based compensation plan
-
(23)
(13,139)
(7,003)
Restricted stock forfeited
395
71
649
93
Balance at end of period
962,229
968,217
962,229
968,217
Retained Earnings:
Balance at beginning of period
1,688,176
1,489,995
1,644,209
1,427,295
Impact of adoption of Accounting Standards Update (“ASU”) 2022-02 (See
Note 1)
-
-
(1,357)
-
Net income
70,655
74,695
141,353
157,295
Dividends on common stock ($
0.14
per share and $
0.12
per share for the quarters ended
June 30,
2023 and 2022, respectively; $
0.28
per share and $
0.22
for the
for the six-month periods ended June 30,
2023 and 2022, respectively)
(25,334)
(23,356)
(50,708)
(43,256)
Balance at end of period
1,733,497
1,541,334
1,733,497
1,541,334
Treasury Stock (at cost):
Balance at beginning of period
(547,311)
(282,197)
(506,979)
(236,442)
Common stock repurchases (See Note 14)
-
(100,000)
(53,217)
(152,713)
Common stock reissued under stock-based compensation plan
-
23
13,139
7,003
Restricted stock forfeited
(395)
(71)
(649)
(93)
Balance at end of period
(547,706)
(382,245)
(547,706)
(382,245)
Accumulated Other Comprehensive Loss, net
of tax:
Balance at beginning of period
(717,550)
(415,833)
(804,778)
(83,999)
Other comprehensive (loss) income, net of tax
(54,837)
(175,923)
32,391
(507,757)
Balance at end of period
(772,387)
(591,756)
(772,387)
(591,756)
Total stockholders’ equity
$
1,397,999
$
1,557,916
$
1,397,999
$
1,557,916
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
43
Note 6
–
Goodwill and Other Intangibles
44
Note 7 –
Non-Consolidated Variable Interest Entities (“VIEs”) and Servicing Assets
45
Note 8 –
Deposits
49
Note 9 –
Securities Sold Under Agreements to Repurchase (Repurchase
Agreements)
50
Note 10 –
Advances from the Federal Home Loan Bank (“FHLB”)
51
Note 11 –
Other Long-Term Borrowings
51
Note 12 –
Earnings per Common Share
52
Note 13 –
Stock-Based Compensation
53
Note 14 –
Stockholders’ Equity
56
Note 15 –
Accumulated Other Comprehensive Loss
58
Note 16 –
Employee Benefit Plans
58
Note 17 –
Income Taxes
59
Note 18
–
Fair Value
61
Note 19
–
Revenue from Contracts with Customers
66
Note 20 –
Segment Information
69
Note 21 –
Supplemental Statement of Cash Flows Information
72
Note 22 –
Regulatory Matters, Commitments, and Contingencies
73
Note 23 –
First BanCorp. (Holding Company Only) Financial Information
76
11
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS
(Unaudited)
NOTE 1 – BASIS
OF PRESENTATION AND
SIGNIFICANT
ACCOUNTING
POLICIES
The
Consolidated
Financial
Statements
(unaudited)
for
the
quarter
and
six-month
period
ended
June
30,
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 and
six-month period
ended June
30, 2023
are not
necessarily indicative
of the
results to
be
expected
for the
entire year.
Adoption of New Accounting Requirements
ASU 2022-02,
“Financial
Instruments
– Credit Losses
(Topic 326): Troubled
Debt Restructurings
(“TDR”) and
Vintage Disclosures”
Effective
January
1,
2023,
the
Corporation
adopted
ASU
2022-02,
which
removed
the
existing
measurement
and
disclosure
requirements
for
TDR
loans,
added
additional
disclosure
requirements
related
to
modifications
provided
to
borrowers
experiencing
financial difficulty regardless of
whether the modification
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 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 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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 June 30, 2023 were as follows:
June 30, 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
$
27,671
$
-
$
705
$
-
$
26,966
0.61
After 1 to 5 years
120,787
-
8,084
-
112,703
0.69
U.S. government-sponsored entities (“GSEs”) obligations:
Due within one year
224,161
-
5,089
-
219,072
0.42
After 1 to 5 years
2,344,874
56
209,839
-
2,135,091
0.85
After 5 to 10 years
11,267
4
871
-
10,400
3.16
After 10 years
10,844
22
1
-
10,865
5.38
Puerto Rico government obligations:
After 10 years
(2)
3,254
-
794
349
2,111
-
United States and Puerto Rico government obligations
2,742,858
82
225,383
349
2,517,208
0.83
Mortgage-backed securities (“MBS”):
Residential MBS:
Freddie Mac (“FHLMC”) certificates:
After 1 to 5 years
20,047
-
1,191
-
18,856
1.97
After 5 to 10 years
171,682
-
17,242
-
154,440
1.58
After 10 years
1,038,513
-
180,505
-
858,008
1.41
1,230,242
-
198,938
-
1,031,304
1.44
Ginnie Mae (“GNMA”) certificates:
Due within one year
1
-
-
-
1
2.53
After 1 to 5 years
20,426
-
1,257
-
19,169
1.25
After 5 to 10 years
32,172
-
2,952
-
29,220
1.70
After 10 years
219,768
7
26,660
-
193,115
2.63
272,367
7
30,869
-
241,505
2.42
Fannie Mae (“FNMA”) certificates:
After 1 to 5 years
22,434
-
1,399
-
21,035
1.72
After 5 to 10 years
338,605
-
31,862
-
306,743
1.75
After 10 years
1,102,263
38
178,364
-
923,937
1.37
1,463,302
38
211,625
-
1,251,715
1.46
Collateralized mortgage obligations (“CMOs”) issued
or guaranteed by the FHLMC, FNMA, and GNMA:
After 10 years
288,194
-
58,267
-
229,927
1.48
Private label:
After 10 years
7,498
-
2,168
84
5,246
7.61
Total Residential MBS
3,261,603
45
501,867
84
2,759,697
1.55
Commercial MBS:
After 1 to 5 years
44,311
-
7,308
-
37,003
2.15
After 5 to 10 years
25,656
-
3,430
-
22,226
2.13
After 10 years
125,202
-
27,967
-
97,235
1.40
Total Commercial MBS
195,169
-
38,705
-
156,464
1.67
Total MBS
3,456,772
45
540,572
84
2,916,161
1.56
Total available-for-sale debt securities
$
6,199,630
$
127
$
765,955
$
433
$
5,433,369
1.23
(1)
Excludes accrued interest receivable on available-for-sale debt securities that totaled $
10.7
million as of June 30, 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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 issued or guaranteed by the FHLMC, FNMA,
and GNMA:
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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
accumulated
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 June 30, 2023 and December 31, 2022. The tables also include debt securities for
which an ACL was recorded.
As of June 30, 2023
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
(In thousands)
U.S. Treasury and U.S. GSEs’
obligations
$
2,887
$
4
$
2,496,214
$
224,585
$
2,499,101
$
224,589
Puerto Rico government obligations
-
-
2,111
794
(1)
2,111
794
MBS:
Residential MBS:
FHLMC
19,638
959
1,011,666
197,979
1,031,304
198,938
GNMA
50,543
1,335
189,454
29,534
239,997
30,869
FNMA
42,650
2,361
1,204,127
209,264
1,246,777
211,625
CMOs issued or guaranteed by the FHLMC,
FNMA, and GNMA
378
10
229,549
58,257
229,927
58,267
Private label
-
-
5,246
2,168
(1)
5,246
2,168
Commercial MBS
15,403
370
141,061
38,335
156,464
38,705
$
131,499
$
5,039
$
5,279,428
$
760,916
$
5,410,927
$
765,955
(1)
Unrealized losses do not include the credit loss component recorded
as part of the ACL. As of June 30, 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)
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 issued or guaranteed by the FHLMC,
FNMA, and GNMA
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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
June
30,
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,
as
of
June
30,
2023,
the
Corporation
did
not
have
the
intent to
sell these
U.S. government
and agencies
debt securities
and determined
that it
was likely
that it
will not
be required
to sell
these
securities
before
their
anticipated
recovery,
the
Corporation
does
not
consider
impairments
on
these
securities
to
be
credit
related. 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.
Private label MBS
held as part
of the Corporation’s
available for sale
portfolio consist of
trust certificates issued
by an unaffiliated
party
backed
by
fixed-rate,
single-family
residential
mortgage
loans
in
the
U.S.
mainland
with
original
FICO
scores
over
700
and
moderate loan-to-value
ratios (under
80
%), as well as
moderate delinquency levels.
Upon the discontinuance
of LIBOR after
June 30,
2023,
and
following
the
provisions
of
the
Adjustable
Interest
Rate
Act
(the
“LIBOR
Act”)
and
Regulation
ZZ,
the
interest
rate
on
these private
label MBS
will transition
during
the third
quarter of
2023 from
3-month LIBOR
plus a
spread to
3-month CME
Term
Secured
Overnight
Financing
Rate
(“SOFR”)
plus
a
tenor
spread
adjustment
of
0.26161
%
and
the
original
spread
limited
to
the
weighted-average
coupon of
the underlying
collateral. 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. See Note
18 – Fair
Value
for the significant
assumptions used in
the valuation of
the private label
MBS as of
June 30, 2023 and December 31, 2022.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
17
For the residential
pass-through MBS issued by
the PRHFA
held as part of
the Corporation’s
available-for-sale portfolio
backed by
second
mortgage
residential
loans
in
Puerto
Rico,
the
ACL
was
determined
based
on
a
discounted
cash
flow
methodology
that
considered
the structure
and terms
of the
debt security.
The expected
cash flows
were discounted
at the
Treasury
yield curve
plus a
spread as
of the
reporting date
and compared
to the
amortized cost.
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. 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
and its
ability to
honor such
guarantee will
depend on,
among other
factors, its
financial condition
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 this security,
resulting in additional losses to the Corporation.
The following tables
present a roll-forward
by major security
type for the
quarters and six-month
periods ended June
30, 2023 and
2022 of the ACL on available-for-sale debt
securities:
Quarter Ended
June 30,
2023
Six-Month Period Ended June 30,
2023
Private label
MBS
Puerto Rico
Government
Obligations
Total
Private label
MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
83
$
366
$
449
$
83
$
375
$
458
Provision for credit losses - benefit
-
(16)
(16)
-
(25)
(25)
ACL on available-for-sale debt securities
$
83
$
350
$
433
$
83
$
350
$
433
Quarter Ended June 30,
2022
Six-Month Period Ended June 30,
2022
Private label
MBS
Puerto Rico
Government
Obligations
Total
Private label
MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
403
$
308
$
711
$
797
$
308
$
1,105
Provision for credit losses - (benefit) expense
(113)
78
(35)
(501)
78
(423)
Net charge-offs
-
-
-
(6)
-
(6)
ACL on available-for-sale debt securities
$
290
$
386
$
676
$
290
$
386
$
676
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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 June 30, 2023
and December 31, 2022 were as follows
:
June 30, 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
$
1,205
$
-
$
29
$
1,176
$
26
5.90
After 1 to 5 years
42,736
661
1,360
42,037
689
6.93
After 5 to 10 years
56,160
2,733
446
58,447
3,209
7.44
After 10 years
66,023
-
2,023
64,000
4,477
8.54
Total Puerto Rico municipal bonds
166,124
3,394
3,858
165,660
8,401
7.74
MBS:
Residential MBS:
FHLMC certificates:
After 5 to 10 years
18,836
-
1,203
17,633
-
3.03
After 10 years
18,936
-
906
18,030
-
4.33
37,772
-
2,109
35,663
-
3.68
GNMA certificates:
After 10 years
17,765
-
1,046
16,719
-
3.35
FNMA certificates:
After 10 years
69,956
-
3,161
66,795
-
4.17
CMOs issued or guaranteed by
FHLMC, FNMA, and GNMA
After 10 years
30,197
-
1,658
28,539
-
3.49
Total Residential MBS
155,690
-
7,974
147,716
-
3.83
Commercial MBS:
After 1 to 5 years
9,533
-
479
9,054
-
3.48
After 10 years
93,379
-
5,628
87,751
-
3.15
Total Commercial MBS
102,912
-
6,107
96,805
-
3.18
Total MBS
258,602
-
14,081
244,521
-
3.57
Total held-to-maturity debt securities
$
424,726
$
3,394
$
17,939
$
410,181
$
8,401
5.20
(1)
Excludes accrued interest receivable on held-to-maturity debt securities that totaled $
6.8
million as of June 30, 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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 issued or guaranteed by
FHLMC, FNMA, and GNMA
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 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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
June
30, 2023 and December 31, 2022, including debt securities for which
an ACL was recorded:
As of June 30, 2023
Less than 12 months
12 months or more
Total
Unrecognized
Unrecognized
Unrecognized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
(In thousands)
Puerto Rico municipal bonds
$
-
$
-
$
107,673
$
3,858
$
107,673
$
3,858
MBS:
Residential MBS:
FHLMC certificates
35,663
2,109
-
-
35,663
2,109
GNMA certificates
16,719
1,046
-
-
16,719
1,046
FNMA certificates
66,795
3,161
-
-
66,795
3,161
CMOs issued or guaranteed by FHLMC,
FNMA, and GNMA
28,539
1,658
-
-
28,539
1,658
Commercial MBS
9,054
479
87,751
5,628
96,805
6,107
Total held-to-maturity debt securities
$
156,770
$
8,453
$
195,424
$
9,486
$
352,194
$
17,939
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)
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 issued or guaranteed by FHLMC,
FNMA, and GNMA
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
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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.
The Corporation
does not
recognize an
ACL for MBS
issued by
GSEs 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 June 30, 2023.
A security is considered to be past due once it is 30 days contractually
past due
under the
terms of the
agreement. The
ACL of Puerto
Rico municipal
bonds increased
to $
8.4
million as of
June 30, 2023,
from $
8.3
million as of December 31, 2022, mostly driven by updated financial information
of certain bond issuers received during 2023.
The following tables present
the activity in the
ACL for held-to-maturity debt
securities by major security
type for the quarters
and
six-month periods ended June 30, 2023 and 2022:
Puerto Rico Municipal Bonds
Quarter Ended
Six-Month Period Ended
June 30,
2023
June 30,
2023
(In thousands)
Beginning Balance
$
7,646
$
8,286
Provision for credit losses - expense
755
115
ACL on held-to-maturity debt securities
$
8,401
$
8,401
Puerto Rico Municipal Bonds
Quarter Ended
Six-Month Period Ended
June 30,
2022
June 30,
2022
(In thousands)
Beginning Balance
$
12,324
$
8,571
Provision for credit losses - (benefit) expense
(3,439)
314
ACL on held-to-maturity debt securities
$
8,885
$
8,885
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 and
the measures taken, or to
be taken, by other government
entities in response
to
economic
and
fiscal
challenges,
the
Corporation
cannot be
certain
whether
future charges
to
the ACL
on
these
securities will
be
required.
From
time
to
time,
the
Corporation
has
held-to-maturity
securities
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
June
30,
2023
and
December
31,
2022,
the
Corporation
had
no
outstanding
held-to-maturity
securities
that
were
classified as cash and cash equivalents.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
22
Credit Quality Indicators:
The
held-to-maturity
debt
securities
portfolio
consisted
of
MBS
issued
by
GSEs
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 June 30, 2023 and December 31, 2022, all Puerto Rico municipal bonds
classified as held-to-maturity were classified as Pass.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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 June 30,
As of December 31,
2023
2022
(In thousands)
Puerto Rico and Virgin Islands region:
Residential mortgage loans, mainly secured by first mortgages
$
2,352,310
$
2,417,900
Construction loans
69,219
34,772
Commercial mortgage loans
1,800,289
1,834,204
Commercial and Industrial ("C&I") loans
2,011,774
1,860,109
Consumer loans
3,487,454
3,317,489
Loans held for investment
$
9,721,046
$
9,464,474
Florida region:
Residential mortgage loans, mainly secured by first mortgages
$
441,480
$
429,390
Construction loans
94,779
98,181
Commercial mortgage loans
519,780
524,647
C&I loans
934,427
1,026,154
Consumer loans
7,803
9,979
Loans held for investment
$
1,998,269
$
2,088,351
Total:
Residential mortgage loans, mainly secured by first mortgages
$
2,793,790
$
2,847,290
Construction loans
163,998
132,953
Commercial mortgage loans
2,320,069
2,358,851
C&I loans
(1)
2,946,201
2,886,263
Consumer loans
3,495,257
3,327,468
Loans held for investment
(2)
11,719,315
11,552,825
ACL on loans and finance leases
(267,058)
(260,464)
Loans held for investment, net
$
11,452,257
$
11,292,361
(1)
As of June 30, 2023 and December 31, 2022, includes
$
821.4
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 $
27.1
million and $
29.3
million as of June 30, 2023 and December 31, 2022, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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 June 30, 2023 and December 31, 2022 are as follows:
As of June 30, 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)
$
69,242
$
-
$
1,605
$
34,038
$
-
$
104,885
$
-
Conventional residential mortgage loans
(2) (6)
2,613,464
-
29,274
12,915
33,252
2,688,905
1,861
Commercial loans:
Construction loans
(6)
161,248
1,062
11
-
1,677
163,998
973
Commercial mortgage loans
(2) (6)
2,287,864
4,551
565
5,553
21,536
2,320,069
11,834
C&I loans
2,928,957
1,827
1,186
5,037
9,194
2,946,201
1,816
Consumer loans:
Auto loans
1,803,442
44,425
8,281
-
11,311
1,867,459
3,464
Finance leases
778,649
8,015
1,564
-
2,483
790,711
496
Personal loans
359,898
4,363
1,985
-
1,353
367,599
-
Credit cards
305,434
3,734
2,620
5,668
-
317,456
-
Other consumer loans
147,419
2,191
1,207
-
1,215
152,032
35
Total loans held for investment
$
11,455,617
$
70,168
$
48,298
$
63,211
$
82,021
$
11,719,315
$
20,479
(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 $
19.9
million of residential mortgage loans guaranteed by the FHA that were over 15 months delinquent as of June 30, 2023.
(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 $
9.5
million as of June 30, 2023 ($
8.5
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 $
6.5
million as of June 30, 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 $
9.8
million as of June 30, 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 June 30, 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, commercial mortgage loans, and construction loans past due 30-59 days, but less than two payments in arrears, as of June 30, 2023 amounted to $
6.6
million, $
62.9
million, $
1.9
million, and $
0.2
million, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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 as of December 31, 2022.
(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
in
nonaccrual
status,
any
accrued
but uncollected
interest
income
is reversed
and
charged
against interest
income
and the
amortization of
any net
deferred fees
is suspended.
The amount
of accrued
interest reversed
against interest
income
totaled
$
0.5
million
and
$
1.1
million
for
the
quarter
and
six-month
period
ended
June
30,
2023,
respectively,
compared
with
$
0.3
million and $
0.7
million for the quarter
and six-month period ended
June 30, 2022, respectively.
For the quarter and
six-month period
ended
June
30,
2023,
the
cash
interest
income
recognized
on
nonaccrual
loans
amounted
to
$
0.5
million
and
$
1.0
million,
respectively, compared
to $
0.3
million and $
0.7
million for the quarter and six-month period ended June 30, 2022, respectively.
As of
June
30,
2023,
the recorded
investment
on
residential
mortgage
loans collateralized
by
residential
real
estate property
that
were in
the process
of foreclosure
amounted to
$
50.9
million, including
$
21.5
million of
FHA/VA
government-guaranteed
mortgage
loans, and
$
7.2
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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
June 30,
2023, the
gross charge
-offs for
the six-month
period ended
June 30,
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, were as follows:
As of June 30,
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
$
29,645
$
22,238
$
11,093
$
-
$
-
$
3,887
$
-
$
66,863
$
31,879
Criticized:
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
7
-
-
-
2,349
-
2,356
2,893
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
29,645
$
22,245
$
11,093
$
-
$
-
$
6,236
$
-
$
69,219
$
34,772
Charge-offs on construction loans
$
-
$
-
$
-
$
-
$
-
$
38
$
-
$
38
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
94,161
$
385,980
$
139,699
$
322,212
$
283,938
$
381,556
$
427
$
1,607,973
$
1,655,728
Criticized:
Special Mention
-
4,487
-
33,698
-
118,636
-
156,821
145,415
Substandard
-
129
-
-
2,847
32,519
-
35,495
33,061
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
94,161
$
390,596
$
139,699
$
355,910
$
286,785
$
532,711
$
427
$
1,800,289
$
1,834,204
Charge-offs on commercial mortgage loans
$
-
$
-
$
-
$
-
$
-
$
106
$
-
$
106
C&I
Risk Ratings:
Pass
$
113,567
$
297,329
$
193,851
$
178,144
$
299,435
$
222,553
$
649,354
$
1,954,233
$
1,789,572
Criticized:
Special Mention
-
-
-
-
508
12,709
22,537
35,754
43,224
Substandard
-
-
389
634
13,797
6,682
285
21,787
27,313
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total C&I loans
$
113,567
$
297,329
$
194,240
$
178,778
$
313,740
$
241,944
$
672,176
$
2,011,774
$
1,860,109
Charge-offs on C&I loans
$
-
$
-
$
-
$
-
$
-
$
211
$
55
$
266
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
27
As of June 30,
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
$
32
$
47,557
$
47,190
$
-
$
-
$
-
$
-
$
94,779
$
98,181
Criticized:
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
32
$
47,557
$
47,190
$
-
$
-
$
-
$
-
$
94,779
$
98,181
Charge-offs on construction loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
6,258
$
184,611
$
69,659
$
40,608
$
51,005
$
122,449
$
19,642
$
494,232
$
503,184
Criticized:
Special Mention
-
-
-
-
13,156
11,224
-
24,380
20,295
Substandard
-
-
-
1,168
-
-
-
1,168
1,168
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
6,258
$
184,611
$
69,659
$
41,776
$
64,161
$
133,673
$
19,642
$
519,780
$
524,647
Charge-offs on commercial mortgage loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
C&I
Risk Ratings:
Pass
$
45,172
$
272,282
$
153,401
$
74,535
$
173,170
$
56,918
$
117,134
$
892,612
$
979,151
Criticized:
Special Mention
-
-
19,580
-
5,976
11,403
-
36,959
17,905
Substandard
-
-
-
652
193
2,825
300
3,970
29,098
Doubtful
-
-
-
-
-
886
-
886
-
Loss
-
-
-
-
-
-
-
-
-
Total C&I loans
$
45,172
$
272,282
$
172,981
$
75,187
$
179,339
$
72,032
$
117,434
$
934,427
$
1,026,154
Charge-offs on C&I loans
$
-
$
-
$
-
$
-
$
-
$
6,202
$
-
$
6,202
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
28
As of June 30,
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
$
29,677
$
69,795
$
58,283
$
-
$
-
$
3,887
$
-
$
161,642
$
130,060
Criticized:
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
7
-
-
-
2,349
-
2,356
2,893
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
29,677
$
69,802
$
58,283
$
-
$
-
$
6,236
$
-
$
163,998
$
132,953
Charge-offs on construction loans
$
-
$
-
$
-
$
-
$
-
$
38
$
-
$
38
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
100,419
$
570,591
$
209,358
$
362,820
$
334,943
$
504,005
$
20,069
$
2,102,205
$
2,158,912
Criticized:
Special Mention
-
4,487
-
33,698
13,156
129,860
-
181,201
165,710
Substandard
-
129
-
1,168
2,847
32,519
-
36,663
34,229
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
100,419
$
575,207
$
209,358
$
397,686
$
350,946
$
666,384
$
20,069
$
2,320,069
$
2,358,851
Charge-offs on commercial mortgage loans
$
-
$
-
$
-
$
-
$
-
$
106
$
-
$
106
C&I
Risk Ratings:
Pass
$
158,739
$
569,611
$
347,252
$
252,679
$
472,605
$
279,471
$
766,488
$
2,846,845
$
2,768,723
Criticized:
Special Mention
-
-
19,580
-
6,484
24,112
22,537
72,713
61,129
Substandard
-
-
389
1,286
13,990
9,507
585
25,757
56,411
Doubtful
-
-
-
-
-
886
-
886
-
Loss
-
-
-
-
-
-
-
-
-
Total C&I loans
$
158,739
$
569,611
$
367,221
$
253,965
$
493,079
$
313,976
$
789,610
$
2,946,201
$
2,886,263
Charge-offs on C&I loans
$
-
$
-
$
-
$
-
$
-
$
6,413
$
55
$
6,468
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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
June
30,
2023,
the
gross
charge-offs
for
the
six-month
period
ended
June
30,
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 June 30,
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
$
118
$
691
$
689
$
782
$
1,117
$
100,760
$
-
$
104,157
$
117,416
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
118
$
691
$
689
$
782
$
1,117
$
100,760
$
-
$
104,157
$
117,416
Conventional residential mortgage loans:
Accrual Status:
Performing
$
61,153
$
170,239
$
73,033
$
30,819
$
45,799
$
1,841,296
$
-
$
2,222,339
$
2,265,013
Non-Performing
-
-
35
-
171
25,608
-
25,814
35,471
Total conventional residential mortgage loans
$
61,153
$
170,239
$
73,068
$
30,819
$
45,970
$
1,866,904
$
-
$
2,248,153
$
2,300,484
Total:
Accrual Status:
Performing
$
61,271
$
170,930
$
73,722
$
31,601
$
46,916
$
1,942,056
$
-
$
2,326,496
$
2,382,429
Non-Performing
-
-
35
-
171
25,608
-
25,814
35,471
Total residential mortgage loans in Puerto Rico
and Virgin Islands Region
$
61,271
$
170,930
$
73,757
$
31,601
$
47,087
$
1,967,664
$
-
$
2,352,310
$
2,417,900
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
3
$
-
$
2,126
$
-
$
2,129
(1)
Excludes accrued interest receivable.
As of June 30,
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
$
-
$
-
$
-
$
-
$
-
$
728
$
-
$
728
$
742
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
-
$
-
$
-
$
-
$
-
$
728
$
-
$
728
$
742
Conventional residential mortgage loans:
Accrual Status:
Performing
$
37,150
$
80,115
$
48,955
$
30,517
$
28,459
$
208,118
$
-
$
433,314
$
421,347
Non-Performing
-
-
-
-
259
7,179
-
7,438
7,301
Total conventional residential mortgage loans
$
37,150
$
80,115
$
48,955
$
30,517
$
28,718
$
215,297
$
-
$
440,752
$
428,648
Total:
Accrual Status:
Performing
$
37,150
$
80,115
$
48,955
$
30,517
$
28,459
$
208,846
$
-
$
434,042
$
422,089
Non-Performing
-
-
-
-
259
7,179
-
7,438
7,301
Total residential mortgage loans in Florida region
$
37,150
$
80,115
$
48,955
$
30,517
$
28,718
$
216,025
$
-
$
441,480
$
429,390
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
30
As of June 30,
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
$
118
$
691
$
689
$
782
$
1,117
$
101,488
$
-
$
104,885
$
118,158
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
118
$
691
$
689
$
782
$
1,117
$
101,488
$
-
$
104,885
$
118,158
Conventional residential mortgage loans:
Accrual Status:
Performing
$
98,303
$
250,354
$
121,988
$
61,336
$
74,258
$
2,049,414
$
-
$
2,655,653
$
2,686,360
Non-Performing
-
-
35
-
430
32,787
-
33,252
42,772
Total conventional residential mortgage loans
$
98,303
$
250,354
$
122,023
$
61,336
$
74,688
$
2,082,201
$
-
$
2,688,905
$
2,729,132
Total:
Accrual Status:
Performing
$
98,421
$
251,045
$
122,677
$
62,118
$
75,375
$
2,150,902
$
-
$
2,760,538
$
2,804,518
Non-Performing
-
-
35
-
430
32,787
-
33,252
42,772
Total residential mortgage loans
$
98,421
$
251,045
$
122,712
$
62,118
$
75,805
$
2,183,689
$
-
$
2,793,790
$
2,847,290
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
3
$
-
$
2,126
$
-
$
2,129
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
31
The
following
tables present
the
amortized
cost
of
consumer
loans
by
portfolio
classes
and
by origination
year
based on
accrual
status as of
June 30, 2023,
the gross charge
-offs for
the six-month period
ended June 30,
2023 by portfolio
classes and by
origination
year, and the amortized cost of consumer
loans by portfolio classes based on accrual status as of December 31, 2022:
As of June 30,
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:
Auto loans:
Accrual Status:
Performing
$
326,746
$
604,040
$
445,754
$
214,692
$
167,480
$
95,343
$
-
$
1,854,055
$
1,783,782
Non-Performing
199
2,234
2,530
1,341
2,702
2,255
-
11,261
10,596
Total auto loans
$
326,945
$
606,274
$
448,284
$
216,033
$
170,182
$
97,598
$
-
$
1,865,316
$
1,794,378
Charge-offs on auto loans
$
174
$
3,355
$
2,287
$
886
$
1,205
$
745
$
-
$
8,652
Finance leases:
Accrual Status:
Performing
$
159,308
$
270,541
$
172,697
$
76,249
$
66,859
$
42,574
$
-
$
788,228
$
716,585
Non-Performing
-
619
490
525
380
469
-
2,483
1,645
Total finance leases
$
159,308
$
271,160
$
173,187
$
76,774
$
67,239
$
43,043
$
-
$
790,711
$
718,230
Charge-offs on finance leases
$
11
$
656
$
485
$
228
$
341
$
428
$
-
$
2,149
Personal loans:
Accrual Status:
Performing
$
88,877
$
148,554
$
43,113
$
22,164
$
39,809
$
23,410
$
-
$
365,927
$
351,664
Non-Performing
8
713
222
68
220
122
-
1,353
1,248
Total personal loans
$
88,885
$
149,267
$
43,335
$
22,232
$
40,029
$
23,532
$
-
$
367,280
$
352,912
Charge-offs on personal loans
$
24
$
3,414
$
1,435
$
662
$
1,180
$
834
$
-
$
7,549
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
317,456
$
317,456
$
311,731
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
317,456
$
317,456
$
311,731
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
8,447
$
8,447
Other consumer loans:
Accrual Status:
Performing
$
49,470
$
52,078
$
14,386
$
7,261
$
8,060
$
5,348
$
8,932
$
145,535
$
139,116
Non-Performing
40
527
192
50
65
201
81
1,156
1,122
Total other consumer loans
$
49,510
$
52,605
$
14,578
$
7,311
$
8,125
$
5,549
$
9,013
$
146,691
$
140,238
Charge-offs on other consumer loans
$
89
$
3,530
$
1,262
$
305
$
600
$
235
$
221
$
6,242
Total:
Performing
$
624,401
$
1,075,213
$
675,950
$
320,366
$
282,208
$
166,675
$
326,388
$
3,471,201
$
3,302,878
Non-Performing
247
4,093
3,434
1,984
3,367
3,047
81
16,253
14,611
Total consumer loans in Puerto Rico and Virgin
Islands region
$
624,648
$
1,079,306
$
679,384
$
322,350
$
285,575
$
169,722
$
326,469
$
3,487,454
$
3,317,489
Charge-offs on total consumer loans
$
298
$
10,955
$
5,469
$
2,081
$
3,326
$
2,242
$
8,668
$
33,039
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
32
As of June 30,
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
$
-
$
-
$
-
$
-
$
220
$
1,873
$
-
$
2,093
$
3,617
Non-Performing
-
-
-
-
-
50
-
50
76
Total auto loans
$
-
$
-
$
-
$
-
$
220
$
1,923
$
-
$
2,143
$
3,693
Charge-offs on auto loans
$
-
$
-
$
-
$
-
$
23
$
198
$
-
$
221
Finance leases:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-Performing
-
-
-
-
-
-
-
-
-
Total finance leases
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Charge-offs on finance leases
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Personal loans:
Accrual Status:
Performing
$
244
$
-
$
71
$
4
$
-
$
-
$
-
$
319
$
334
Non-Performing
-
-
-
-
-
-
-
-
-
Total personal loans
$
244
$
-
$
71
$
4
$
-
$
-
$
-
$
319
$
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
$
-
$
48
$
227
$
455
$
-
$
2,389
$
2,163
$
5,282
$
5,833
Non-Performing
-
-
-
-
-
21
38
59
119
Total other consumer loans
$
-
$
48
$
227
$
455
$
-
$
2,410
$
2,201
$
5,341
$
5,952
Charge-offs on other consumer loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total:
Performing
$
244
$
48
$
298
$
459
$
220
$
4,262
$
2,163
$
7,694
$
9,784
Non-Performing
-
-
-
-
-
71
38
109
195
Total consumer loans in Florida region
$
244
$
48
$
298
$
459
$
220
$
4,333
$
2,201
$
7,803
$
9,979
Charge-offs on total consumer loans
$
-
$
-
$
-
$
-
$
23
$
198
$
-
$
221
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
33
As of June 30,
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
$
326,746
$
604,040
$
445,754
$
214,692
$
167,700
$
97,216
$
-
$
1,856,148
$
1,787,399
Non-Performing
199
2,234
2,530
1,341
2,702
2,305
-
11,311
10,672
Total auto loans
$
326,945
$
606,274
$
448,284
$
216,033
$
170,402
$
99,521
$
-
$
1,867,459
$
1,798,071
Charge-offs on auto loans
$
174
$
3,355
$
2,287
$
886
$
1,228
$
943
$
-
$
8,873
Finance leases:
Accrual Status:
Performing
$
159,308
$
270,541
$
172,697
$
76,249
$
66,859
$
42,574
$
-
$
788,228
$
716,585
Non-Performing
-
619
490
525
380
469
-
2,483
1,645
Total finance leases
$
159,308
$
271,160
$
173,187
$
76,774
$
67,239
$
43,043
$
-
$
790,711
$
718,230
Charge-offs on finance leases
$
11
$
656
$
485
$
228
$
341
$
428
$
-
$
2,149
Personal loans:
Accrual Status:
Performing
$
89,121
$
148,554
$
43,184
$
22,168
$
39,809
$
23,410
$
-
$
366,246
$
351,998
Non-Performing
8
713
222
68
220
122
-
1,353
1,248
Total personal loans
$
89,129
$
149,267
$
43,406
$
22,236
$
40,029
$
23,532
$
-
$
367,599
$
353,246
Charge-offs on personal loans
$
24
$
3,414
$
1,435
$
662
$
1,180
$
834
$
-
$
7,549
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
317,456
$
317,456
$
311,731
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
317,456
$
317,456
$
311,731
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
8,447
$
8,447
Other consumer loans:
Accrual Status:
Performing
$
49,470
$
52,126
$
14,613
$
7,716
$
8,060
$
7,737
$
11,095
$
150,817
$
144,949
Non-Performing
40
527
192
50
65
222
119
1,215
1,241
Total other consumer loans
$
49,510
$
52,653
$
14,805
$
7,766
$
8,125
$
7,959
$
11,214
$
152,032
$
146,190
Charge-offs on other consumer loans
$
89
$
3,530
$
1,262
$
305
$
600
$
235
$
221
$
6,242
Total:
Performing
$
624,645
$
1,075,261
$
676,248
$
320,825
$
282,428
$
170,937
$
328,551
$
3,478,895
$
3,312,662
Non-Performing
247
4,093
3,434
1,984
3,367
3,118
119
16,362
14,806
Total consumer loans
$
624,892
$
1,079,354
$
679,682
$
322,809
$
285,795
$
174,055
$
328,670
$
3,495,257
$
3,327,468
Charge-offs on total consumer loans
$
298
$
10,955
$
5,469
$
2,081
$
3,349
$
2,440
$
8,668
$
33,260
(1)
Excludes accrued interest receivable.
As of June 30, 2023 and December 31, 2022, the balance of revolving loans
converted to term loans was
no
t material.
Accrued
interest
receivable
on
loans
totaled
$
52.8
million
as
of
June
30,
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
34
The
following
tables
present
information
about
collateral
dependent
loans
that
were
individually
evaluated
for
purposes
of
determining the ACL as of June 30, 2023 and December 31, 2022
:
As of June 30, 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
$
31,199
$
2,026
$
-
$
31,199
$
2,026
Commercial loans:
Construction loans
-
-
956
956
-
Commercial mortgage loans
6,590
1,016
52,447
59,037
1,016
C&I loans
2,563
418
10,601
13,164
418
Consumer loans:
Personal loans
-
-
-
-
-
Other consumer loans
173
17
-
173
17
$
40,525
$
3,477
$
64,004
$
104,529
$
3,477
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
June 30,
2023 was
68
%, compared
to
70
% as
of December
31, 2022,
which was
not considered a significant change in the extent to which collateral secured these loans.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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
first six
months of
2023, loans
pooled into
GNMA MBS
amounted to
approximately
$
66.4
million, compared to
$
79.7
million during the
first six months
of 2022, for
which the Corporation
recognized a net
gain on sale
of
$
1.4
million
and
$
2.3
million,
respectively.
Also, during
the
first
six
months
of 2023,
the
Corporation
sold
approximately
$
22.8
million of performing residential mortgage loans to FNMA, for
which the Corporation recognized a net gain on sale of $
0.6
million. In
addition,
during
the
first
six
months
of
2022,
the
Corporation
sold
approximately
$
75.2
million
and
$
3.2
million
of
performing
residential
mortgage
loans
to
FNMA
and
FHLMC,
respectively,
for
which
the
Corporation
recognized
a
net
gain
on
sale
of
$
3.3
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
June 30,
2023 and
December 31,
2022, rebooked
GNMA delinquent
loans that
were included in the residential mortgage loan portfolio amounted to $
6.5
million and $
10.4
million, respectively.
During the first
six months of 2023
and 2022, the Corporation
repurchased, pursuant to
the aforementioned repurchase
option, $
1.9
million
and
$
6.2
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.
During
the
first
six
months
of
2023
and
2022,
the
Corporation
purchased
C&I
loan
participations
in
the
Florida
region
totaling
$
28.0
million and $
76.4
million, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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
$
11.7
billion as
of June
30, 2023,
credit risk
concentration
was approximately
79
% in
Puerto Rico,
17
% in
the U.S.,
and
4
% in
the
USVI and BVI.
As
of
June
30,
2023,
the
Corporation
had
$
174.9
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
June
30,
2023,
approximately
$
105.2
million
consisted
of
loans
extended
to
municipalities
in
Puerto
Rico
that
are
general
obligations
supported
by
assigned
property
tax
revenues,
and $
28.1
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
June 30,
2023 included
$
9.5
million
in
loans granted
to an affiliate
of the
Puerto
Rico Electric
Power Authority
(“PREPA”)
and $
32.1
million in loans
to agencies or
public
corporations of the Puerto Rico government.
In addition, as of
June 30, 2023, the Corporation
had $
81.1
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 June
30, 2023,
the Corporation
had
$
78.9
million in
loans to
USVI government
public corporations,
compared to
$
38.0
million as
of December
31, 2022.
As of
June 30,
2023, all
loans
were currently performing and up to date on principal and interest payments.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
37
Loss Mitigation Program for Borrowers Experiencing
Financial Difficulty
Effective January 1, 2023, the Corporation
adopted ASU 2022-02. For additional information on the adoption,
see Note 1 – Basis of
Presentation and Significant Accounting Policies.
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.
The
loan
modifications
granted
to
borrowers
experiencing
financial
difficulty
that
are
associated
with
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
for
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
$
1.6
million
and
$
2.5
million in restructured residential
mortgage loans that are
government-guaranteed (e.g.,
FHA/VA
loans) and were modified
during the
quarter and six-month period ended June 30, 2023, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
38
The following tables present the amortized cost basis as of June 30,
2023 of loans modified to borrowers experiencing financial
difficulty during the quarter and six-month period ended
June 30,
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 June 30,
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
$
-
$
-
$
210
$
-
$
73
$
-
$
-
$
-
$
283
0.01%
Construction loans
-
-
-
-
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
30,170
-
-
30,170
1.30%
C&I loans
-
-
-
-
187
-
-
-
187
0.01%
Consumer loans:
Auto loans
-
-
-
-
82
69
-
678
(1)
829
0.04%
Personal loans
-
-
-
-
41
71
-
-
112
0.03%
Credit cards
-
-
-
486
(2)
-
-
-
-
486
0.15%
Other consumer loans
-
-
-
-
146
40
-
10
(1)
196
0.13%
Total modifications
$
-
$
-
$
210
$
486
$
529
$
30,350
$
-
$
688
$
32,263
Six-Month Period Ended June 30,
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
$
-
$
-
$
542
$
-
$
503
$
94
$
-
$
-
$
1,139
0.04%
Construction loans
-
-
-
-
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
30,170
-
-
30,170
1.30%
C&I loans
-
-
-
-
187
-
-
-
187
0.01%
Consumer loans:
Auto loans
-
-
-
-
167
103
-
1,155
(1)
1,425
0.08%
Personal loans
-
-
-
-
68
83
-
-
151
0.04%
Credit cards
-
-
-
732
(2)
-
-
-
-
732
0.23%
Other consumer loans
-
-
-
-
273
99
-
32
(1)
404
0.27%
Total modifications
$
-
$
-
$
542
$
732
$
1,198
$
30,549
$
-
$
1,187
$
34,208
(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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
39
The
following
tables
present
by
portfolio
classes
the
financial
effects
of
the
modifications
granted
to
borrowers
experiencing
financial difficulty,
other than those
associated to payment
delay,
during the
quarter and six-month
period ended June
30, 2023.
The
financial effects
of the modifications
associated to
payment delay
were discussed
above, and
as such,
were excluded
from the
tables
below:
Quarter Ended June 30,
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)
Forgiveness of
Principal and/or
Interest Amount
(In thousands)
Conventional residential mortgage loans
-
%
239
-
%
-
$
-
Construction loans
-
%
-
-
%
-
-
Commercial mortgage loans
-
%
-
0.25
%
64
-
C&I loans
-
%
72
-
%
-
-
Consumer loans:
Auto loans
-
%
27
3.96
%
30
-
Personal loans
-
%
37
5.41
%
26
-
Credit cards
16.26
%
-
-
%
-
-
Other consumer loans
-
%
28
1.87
%
22
-
Six-Month Period Ended June 30,
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)
Forgiveness of
Principal and/or
Interest Amount
(In thousands)
Conventional residential mortgage loans
-
%
118
2.40
%
157
$
-
Construction loans
-
%
-
-
%
-
-
Commercial mortgage loans
-
%
-
0.25
%
64
-
C&I loans
-
%
72
-
%
-
-
Consumer loans:
Auto loans
-
%
25
3.64
%
30
-
Personal loans
-
%
34
5.11
%
24
-
Credit cards
16.15
%
-
-
%
-
-
Other consumer loans
-
%
27
1.92
%
24
-
The following table presents by portfolio classes the performance of loans modified
during the six-month period ended June 30,
2023 that were granted to borrowers experiencing financial difficulty:
Six-Month Period Ended June 30,
2023
30-59
60-89
90+
Total
Delinquency
Current
Total
(In thousands)
Conventional residential mortgage loans
$
-
$
-
$
-
$
-
$
1,139
$
1,139
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
30,170
30,170
C&I loans
-
-
-
-
187
187
Consumer loans:
Auto loans
10
-
-
10
1,415
1,425
Personal loans
-
-
-
-
151
151
Credit cards
40
40
-
80
652
732
Other consumer loans
22
-
-
22
382
404
Total modifications
$
72
$
40
$
-
$
112
$
34,096
$
34,208
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 six-
month period ended June 30, 2023.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
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 June 30, 2023
(In thousands)
ACL:
Beginning balance
$
64,403
$
3,231
$
36,460
$
31,235
$
130,238
$
265,567
Provision for credit losses - (benefit) expense
(3,500)
1,202
5,999
2,997
14,072
20,770
Charge-offs
(1,146)
(38)
(88)
(6,350)
(16,462)
(24,084)
Recoveries
757
409
56
132
3,451
4,805
Ending balance
$
60,514
$
4,804
$
42,427
$
28,014
$
131,299
$
267,058
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Six-Month Period Ended June 30,
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 - (benefit) expense
(3,427)
2,062
7,245
1,347
29,799
37,026
Charge-offs
(2,129)
(38)
(106)
(6,468)
(33,260)
(42,001)
Recoveries
1,254
472
224
222
7,281
9,453
Ending balance
$
60,514
$
4,804
$
42,427
$
28,014
$
131,299
$
267,058
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Quarter Ended June 30,
2022
(In thousands)
ACL:
Beginning balance
$
68,820
$
1,842
$
30,138
$
36,784
$
107,863
$
245,447
Provision for credit losses - (benefit) expense
(2,797)
151
1,265
(1,102)
15,148
12,665
Charge-offs
(2,079)
(16)
(2)
(68)
(10,427)
(12,592)
Recoveries
1,287
43
1,218
589
3,495
6,632
Ending balance
$
65,231
$
2,020
$
32,619
$
36,203
$
116,079
$
252,152
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Six-Month Period Ended June 30,
2022
(In thousands)
ACL:
Beginning balance
$
74,837
$
4,048
$
52,771
$
34,284
$
103,090
$
269,030
Provision for credit losses - (benefit) expense
(7,668)
(2,063)
(21,375)
653
26,129
(4,324)
Charge-offs
(4,607)
(60)
(39)
(358)
(20,243)
(25,307)
Recoveries
2,669
95
1,262
1,624
7,103
12,753
Ending balance
$
65,231
$
2,020
$
32,619
$
36,203
$
116,079
$
252,152
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
41
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 applies
probability weights to
the baseline and
alternative downside economic
scenarios to estimate
the ACL with
the baseline scenario carrying
the highest weight. During
the second quarter of 2023,
the Corporation applied the
baseline scenario for
the commercial
mortgage and
construction loan
portfolios as
deterioration in
the CRE
price index
in these
portfolios is
expected at
a
lower extent
than projected
in the
alternative downside
scenario, particularly
in the Puerto
Rico region.
The economic
scenarios used
in
the
ACL
determination
contained
assumptions
related
to
economic
uncertainties
associated
with
geopolitical
instability,
the
commercial
real estate
price index
(“CRE price
index”), high
inflation levels,
and the
expected path
of interest
rate increases
by the
FED.
As of June
30, 2023, the
ACL for loans
and finance
leases was $
267.1
million, an increase
of $
6.6
million, from $
260.5
million as
of December 31, 2022. The ACL for
commercial and construction loans increased
by $
5.0
million, mainly due to a deterioration
in the
forecasted CRE price
index to account for
an increased uncertainty
in the CRE market
at a national level
that could potentially impact
the
markets
served
by
the
Corporation
coupled
with
the
growth
in
the
commercial
and
construction
loan
portfolios.
The
ACL
for
consumer loans increased by $
3.9
million, primarily reflecting the effect
of the increase in the size of
the consumer loan portfolios and
historical
charge-off
levels,
partially
offset
by
updated
macroeconomic
variables,
such
as
the
unemployment
rate,
which
are
now
forecasted to deteriorate at a slower pace than previously
expected. The ACL for residential mortgage loans
decreased by $
2.3
million,
mainly
driven
by
a
more
favorable
economic
outlook
in
the
projection
of
certain
forecasted
macroeconomic
variables,
such
as
the
Regional Home
Price Index,
partially offset
by 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. See
Note 1
– Basis of Presentation
and Significant Accounting
Policies for additional
information related to
the adoption of ASU
2022-02
during 2023.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
42
The tables below
present the ACL
related to loans
and finance leases
and the carrying
values of loans
by portfolio segment
as of
June 30,
2023 and December 31, 2022:
As of June 30,
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
$
2,793,790
$
163,998
$
2,320,069
$
2,946,201
$
3,495,257
$
11,719,315
Allowance for credit losses
60,514
4,804
42,427
28,014
131,299
267,058
Allowance for credit losses to
amortized cost
2.17
%
2.93
%
1.83
%
0.95
%
3.76
%
2.28
%
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
June
30,
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
June
30,
2023,
the
ACL
for
off-balance
sheet
credit
exposures
increased
to
$
4.9
million,
from
$
4.3
million as of December 31,
2022, driven by the deterioration
in the forecasted CRE price
index and its effect
in construction unfunded
loan commitments.
The following
table presents
the activity
in the
ACL for
unfunded loan
commitments and
standby letters
of credit
for the
quarters
and six-month periods ended June 30, 2023 and 2022:
Quarter Ended
Six-Month Period Ended
June 30,
June 30,
2023
2022
2023
2022
(In thousands)
Beginning Balance
$
4,168
$
1,359
$
4,273
$
1,537
Provision for credit losses - expense
721
812
616
634
Ending balance
$
4,889
$
2,171
$
4,889
$
2,171
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
43
NOTE 5
–
OTHER REAL ESTATE
OWNED
The following table presents the OREO inventory as of the indicated dates:
June 30, 2023
December 31, 2022
(In thousands)
OREO balances, carrying value:
Residential
(1)
$
23,621
$
24,025
Construction
1,892
1,764
Commercial
6,058
5,852
Total
$
31,571
$
31,641
(1)
Excludes $
20.9
million and $
23.5
million as
of June 30,
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 and
six-month periods
ended June 30, 2023 and 2022.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
44
NOTE 6 – GOODWILL AND OTHER INTANGIBLES
Goodwill
Goodwill
as of
each
of
June 30,
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 first six months of 2023.
There were
no
changes in the carrying amount of goodwill during the quarter and six-month
period ended June 30, 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
June 30,
December 31,
2023
2022
(Dollars in thousands)
Core deposit intangible:
Gross amount
$
87,544
$
87,544
Accumulated amortization
(70,469)
(66,644)
Net carrying amount
$
17,075
$
20,900
Remaining amortization period (in years)
6.5
7.0
Purchased credit card relationship intangible:
Gross amount
$
3,800
$
3,800
Accumulated amortization
(3,783)
(3,595)
Net carrying amount
$
17
$
205
Remaining amortization period (in years)
0.2
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
quarter
and
six-month
period
ended
June
30,
2023,
the
Corporation
recognized
$
2.0
million
and
$
4.0
million,
respectively,
in amortization
expense
on its
other intangibles
subject to
amortization,
compared to
$
2.2
million
and $
4.5
million for
the same periods in 2022, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
45
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. As mentioned above, 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 June 30, 2023.
The estimated
aggregate annual
amortization expense
related to the
intangible assets
subject to amortization
for future periods
was
as follows as of June 30, 2023:
(In thousands)
Remaining 2023
$
3,710
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.
Upon the discontinuance of
LIBOR after June 30, 2023,
and
following
the
provisions
of
the
LIBOR
Act
and
Regulation
ZZ,
the
interest
rate
on
the
TRuPs
will
transition
during
the
third
quarter of
2023 from
3-month LIBOR
plus a
spread to
3-month CME
Term
SOFR plus
a tenor
spread adjustment
of
0.26161
%.
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).
During the second quarter of 2023, the Corporation
completed the repurchase of $
21.4
million of TRuPs of FBP Statutory Trust I as
part
of
a
privately-negotiated
transaction
with
investors,
resulting
in
a
commensurate
reduction
in
the
related
floating
rate
junior
subordinated
debentures.
The
purchase
price
paid
by
the
Corporation
equated
to
92.5
%
of
the
$
21.4
million
par
value.
The
7.5
%
discount resulted
in a
gain of
approximately
$
1.6
million, which
is reflected
in the
consolidated statements
of income
as a
“Gain on
early
extinguishment
of
debt.”
As
of
June
30,
2023
and
December
31,
2022,
these
Junior
Subordinated
Deferrable
Debentures
amounted to $
161.7
million and $
183.8
million, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
46
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
June
30,
2023,
the
Corporation was current on all interest payments due on its subordinated
debt.
Private Label MBS
During
2004
and
2005,
an unaffiliated
party,
referred
to in
this subsection
as the
seller,
established
a
series of
statutory
trusts
to
effect
the
securitization
of
mortgage
loans
and
the
sale
of
trust
certificates
(“private
label
MBS”).
The
seller
initially
provided
the
servicing for
a fee, which
is senior to
the obligations to
pay private label
MBS holders. The
seller then entered
into a sales
agreement
through
which
it sold
and
issued
the
private
label
MBS in
favor
of
the
Corporation’s
banking
subsidiary,
FirstBank.
Currently,
the
Bank is
the sole
owner of
these private
label MBS;
the servicing
of the
underlying
residential mortgages
that generate
the principal
and
interest
cash
flows
is
performed
by
another
third
party,
which
receives
a
servicing
fee.
As
mentioned
above,
upon
the
discontinuance of LIBOR
after June 30,
2023, and following
the provisions of
the LIBOR Act and
Regulation ZZ, the
interest rate on
these private
label MBS
will transition
during
the third
quarter of
2023 from
3-month LIBOR
plus a
spread to
3-month CME
Term
SOFR plus
a tenor
spread adjustment
of
0.26161
% and
the original
spread limited
to the
weighted-average coupon
of the
underlying
collateral. 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. 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 June
30, 2023, the amortized cost and fair
value of these private label MBS
amounted to $
7.5
million and
$
5.2
million,
respectively,
with
a
weighted
average
yield
of
7.6
%,
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
June 30, 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
June
30,
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 June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Balance at beginning of period
$
28,431
$
30,753
$
29,037
$
30,986
Capitalization of servicing assets
706
828
1,238
1,958
Amortization
(1,102)
(1,273)
(2,230)
(2,603)
Recoveries
1
9
5
64
Other
(1)
(2)
(40)
(16)
(128)
Balance at end of period
$
28,034
$
30,277
$
28,034
$
30,277
(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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
47
Changes in the impairment allowance were as follows for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Balance at beginning of period
$
8
$
23
$
12
$
78
Recoveries
(1)
(9)
(5)
(64)
Balance at end of period
$
7
$
14
$
7
$
14
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 June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Servicing fees
$
2,660
$
2,821
$
5,378
$
5,640
Late charges and prepayment penalties
211
219
410
413
Adjustment for loans repurchased
(2)
(40)
(16)
(128)
Servicing income, gross
2,869
3,000
5,772
5,925
Amortization and impairment of servicing assets
(1,101)
(1,264)
(2,225)
(2,539)
Servicing income, net
$
1,768
$
1,736
$
3,547
$
3,386
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
Six-Month Period Ended June 30,
2023
Constant prepayment rate:
Government-guaranteed mortgage loans
6.7
%
11.6
%
4.8
%
Conventional conforming mortgage loans
7.4
%
16.0
%
3.8
%
Conventional non-conforming mortgage loans
5.9
%
9.0
%
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
12.9
%
14.0
%
11.5
%
Six-Month Period Ended June 30,
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
6.3
%
21.9
%
4.5
%
Discount rate:
Government-guaranteed mortgage loans
11.9
%
12.0
%
11.5
%
Conventional conforming mortgage loans
9.9
%
10.0
%
9.5
%
Conventional non-conforming mortgage loans
12.4
%
14.5
%
11.5
%
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
48
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
June
30,
2023
and
December 31, 2022 were as follows:
June 30,
December 31,
2023
2022
(In thousands)
Carrying amount of servicing assets
$
28,034
$
29,037
Fair value
$
44,420
$
44,710
Weighted-average
expected life (in years)
7.79
7.80
Constant prepayment rate (weighted-average annual
rate)
6.28
%
6.40
%
Decrease in fair value due to 10% adverse change
$
1,025
$
1,048
Decrease in fair value due to 20% adverse change
$
2,008
$
2,054
Discount rate (weighted-average annual rate)
10.71
%
10.69
%
Decrease in fair value due to 10% adverse change
$
1,902
$
1,925
Decrease in fair value due to 20% adverse change
$
3,660
$
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
.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
49
NOTE 8 – DEPOSITS
The following table summarizes deposit balances as of the indicated dates:
June 30, 2023
December 31, 2022
(In thousands)
Type of account and interest rate:
Non-interest-bearing deposit accounts
$
5,874,261
$
6,112,884
Interest-bearing saving accounts
3,642,728
3,902,888
Interest-bearing checking accounts
4,258,871
3,770,993
Certificates of deposit (“CDs”)
2,680,250
2,250,876
Brokered CDs
363,582
105,826
Total
$
16,819,692
$
16,143,467
The following table presents the contractual maturities of CDs, including brokered CDs, as of June 30,
2023:
Total
(In thousands)
Three months or less
$
685,606
Over three months to six months
511,428
Over six months to one year
752,768
Over one year to two years
783,288
Over two years to three years
139,807
Over three years to four years
41,543
Over four years to five years
122,471
Over five years
6,921
Total
$
3,043,832
The following were the components of interest expense on deposits for the
indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Interest expense on deposits
$
41,553
$
7,757
$
71,477
$
15,574
Accretion of premiums from
acquisitions
(33)
(92)
(116)
(292)
Amortization of broker placement fees
84
29
128
64
Total
$
41,604
$
7,694
$
71,489
$
15,346
Total
U.S. time
deposits with
balances
of more
than $250,000
amounted
to $
1.3
billion and
$
1.0
billion
as of
June 30,
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 June
30, 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
50
NOTE 9 – SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE (REPURCHASE AGREEMENTS)
Repurchase agreements as of the indicated dates consisted of the following:
June 30, 2023
December 31, 2022
(In thousands)
Short-term Fixed-rate repurchase agreements
(1)
$
73,934
$
75,133
(1)
Weighted-average interest rate
of
5.35
% and
4.55
% as of June 30, 2023 and December 31, 2022, respectively.
Repurchase agreements mature as follows as of the indicated date:
June 30,
2023
(In thousands)
Within one month
$
23,934
Over one month to three months
$
50,000
Total
$
73,934
As of
June 30,
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 June 30, 2023 and December
31, 2022, repurchase agreements
were fully collateralized and not offset in the consolidated
statements of financial condition.
Repurchase agreements as of June 30, 2023, grouped by counterparty,
were as follows:
Weighted-Average
Counterparty
Amount
Maturity (In Months)
(Dollars in thousands)
JP Morgan Chase
$
73,934
1
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
51
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:
June 30, 2023
December 31, 2022
(In thousands)
Short-term
Fixed
-rate advances from the FHLB
(1)
$
-
$
475,000
Long-term
Fixed
-rate advances from the FHLB
(2)
500,000
200,000
$
500,000
$
675,000
(1)
Weighted-average interest rate of
4.56
% as of December 31, 2022.
(2)
Weighted-average interest rate of
4.45
% and
4.25
% as of June 30,
2023 and December 31, 2022, respectively.
Advances from the FHLB mature as follows as of the indicated date:
June 30, 2023
(In thousands)
Over one to five years
$
500,000
During
the
six-month
period
ended
June
30,
2023,
the
Corporation
added
$
300.0
million
of
long-term
FHLB
advances
at
an
average cost of
4.59
%, and repaid its short-term FHLB advances.
NOTE 11 – OTHER LONG-TERM
BORROWINGS
Junior Subordinated Debentures
Junior subordinated debentures, as of the indicated dates, consisted of:
June 30,
December 31,
(In thousands)
2023
2022
Floating rate junior subordinated debentures (FBP Statutory Trust
I)
(1)
(3)
$
43,143
$
65,205
Floating rate junior subordinated debentures (FBP Statutory Trust
II)
(2) (3)
118,557
118,557
$
161,700
$
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
(
8.26
% as of June 30, 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
(
8.01
% as of June 30,
2023 and
7.25
% as of
December 31, 2022).
(3)
See Note 7 - Non-Consolidated Variable
Interest Entities
(“VIEs”) and Servicing Assets, for additional information on the nature
and terms of these debentures, the LIBOR transition of
these contracts, and the Corporation’s repurchase
in the second quarter of 2023 of $
21.4
million in TRuPs associated with FBP Statutory Trust
I.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
52
NOTE 12 – EARNINGS PER COMMON
.
SHARE
The calculations of earnings per common share for the quarters and six-month periods
ended June 30,
2023 and 2022 are as follows:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands, except per share information)
Net income attributable to common stockholders
$
70,655
$
74,695
$
141,353
$
157,295
Weighted-Average
Shares:
Average common
shares outstanding
178,926
194,405
179,567
196,257
Average potential
dilutive common shares
351
961
686
1,184
Average common
shares outstanding - assuming dilution
179,277
195,366
180,253
197,441
Earnings per common share:
Basic
$
0.39
$
0.38
$
0.79
$
0.80
Diluted
$
0.39
$
0.38
$
0.78
$
0.80
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 and six-month periods
ended June 30, 2023 and 2022.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
53
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
June 30,
2023,
there
were
3,174,889
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 six-month
period ended
June 30,
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 six-month periods ended June 30,
2023 and 2022:
Six-Month Period Ended
Six-Month Period Ended
June 30,
2023
June 30,
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
301,440
13.15
Forfeited
(57,491)
11.29
(10,364)
8.82
Vested
(481,536)
5.93
(487,198)
5.72
Unvested shares outstanding at end of period
895,355
$
12.31
952,653
$
9.11
(1)
Includes for the six-month period ended June 30, 2023,
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 six-month period ended June 30, 2022,
3,048
shares
of restricted stock awarded to independent directors and
298,392
shares of restricted stock awarded to employees, of which
6,084
shares were granted to retirement-eligible employees
and thus charged to earnings as of the grant date.
For the quarter and
six month-periods ended June
30, 2023, the Corporation
recognized $
1.4
million and $
3.0
million, respectively,
of
stock-based
compensation
expense
related
to
restricted
stock
awards,
compared
to
$
0.9
million
and
$
1.8
million
for
the
same
periods in 2022, respectively.
As of June 30, 2023,
there was $
6.4
million of total unrecognized
compensation cost related to
unvested
shares of restricted stock that the Corporation expects to recognize over a weighted
average period of
1.9
years.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
54
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 in a proportional amount. Performance units granted prior to March 16,
2023 vest subject only to achievement of a TBVPS goal and 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 six-month
periods ended
June
30, 2023 and 2022:
Six-Month Period Ended
Six-Month Period Ended
June 30,
2023
June 30,
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 six-month periods ended June
30,
2023 are subject to 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 six-month period ended June 30,
2022 are subject to the achievement of the TBVPS performance
goal during a three-year performance cycle beginning January 1,
2022 and ending on December 31, 2024.
(2)
Units vested during the six-month period ended June 30,
2023 are related to performance units granted in 2020 that met certain pre-established
targets and were settled with shares of
common stock reissued from treasury shares. Units
vested during the six-month period ended June 30,
2022 are related to performance units granted in 2019 that met certain
pre-
established targets and were settled with shares
of common stock reissued from treasury shares.
The fair value of the performance units awarded during the six-month periods ended June 30, 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 June 30, 2023, there have been no changes in 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 six-month period ended June
30, 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
55
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 six-month
period ended June 30, 2023:
Six-Month Period Ended
June 30,
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 the Corporation's
stock price with a look-back period equal to the simulation
term using daily stock prices.
For the
quarter
and
six-month
periods
ended
June 30,
2023 and
2022,
the Corporation
recognized
$
0.5
million
and
$
1.0
million,
respectively,
of
stock-based
compensation
expense
related
to
performance
units,
compared
to
$
0.5
million
and
$
0.8
million
for
the
same periods
in 2022,
respectively.
As of
June 30,
2023,
there was
$
4.1
million
of total
unrecognized
compensation cost
related
to
unvested performance units that the Corporation expects to recognize
over a weighted average period of
2.2
years.
Shares withheld
During
the first
six
months
of 2023,
the Corporation
withheld
287,835
shares (first
six
months
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
56
NOTE 14 –
STOCKHOLDERS’
EQUITY
Stock Repurchase Programs
On April
27, 2022,
the Corporation
announced that
its Board
approved a
stock repurchase
program
that provides
authorization
to
repurchase
up
to
$
350
million
of
its
outstanding
common
stock,
which
commenced
in
the
second
quarter
of
2022.
As
of
June
30,
2023, the
Corporation had
remaining authorization
to repurchase
approximately $
75
million of
common stock.
Furthermore, on
July
24,
2023,
the
Corporation
announced
that
its
Board
of
Directors
approved
a
new
stock
repurchase
program,
under
which
the
Corporation may
repurchase up
to $
225
million of
its outstanding
common stock,
which it
expects to
execute through
the end
of the
third quarter
of 2024.
The Corporation
expects to
repurchase approximately
$
150
million in
common stock
during the
second half
of
2023,
of which
$
75
million
relates to
the remaining
amount of
the aforementioned
$
350
million
stock repurchase
program
that was
resumed in July 2023.
Repurchases under
the programs
may be
executed through
open market
purchases, accelerated
share repurchases,
and/or privately
negotiated transactions or
plans, including under plans
complying with Rule 10b5-1
under the Exchange Act.
The Corporation’s
stock
repurchase program
s
are 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
Corporation’s
stock
repurchase
programs
do
not
obligate
it
to
acquire
any
specific
number
of
shares
and
do
not
have
an
expiration
date.
The
stock
repurchase
programs
may
be
modified, suspended, or terminated at any time at the Corporation’s
discretion. 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.
Common Stock
The following table shows the change in shares of common stock outstanding for
the six-month periods ended June 30,
2023 and
2022:
Total
Number of Shares
Six-Month Period Ended June 30,
2023
2022
Common stock outstanding, beginning balance
182,709,059
201,826,505
Common stock repurchased
(1)(2)
(3,865,375)
(10,680,890)
Common stock reissued under stock-based compensation plan
970,429
491,085
Restricted stock forfeited
(57,491)
(10,364)
Common stock outstanding, ending balances
179,756,622
191,626,336
(1)
For the six-month periods
ended June 30,
2023 includes
3,577,540
shares of common stock
repurchased in the
open market during the
first quarter of 2023
at an average
price of $
13.98
for a
total
purchase
price
of $
50
million
under
the
$
350
million
stock
repurchase
program
announced
on
April
27,
2022.
For the
six-month
period
ended
June
30,
2022
included
7,069,263
shares of common stock repurchased
in the open market at an
average price of $
14.15
per share for a total purchase
price of approximately $
100
million under the $
350
million
stock repurchase
program and
3,409,697
shares of
common stock
repurchased in
the open
market at
an average
price of
$
14.66
for a
total purchase
price of
approximately $
50
million
under a prior publicly-announced $
300
million stock repurchase program which was completed during
the first quarter of 2022.
(2)
For the six-month periods ended June 30,
2023 and 2022 also includes
287,835
and
201,930
shares, respectively, of common
stock surrendered to cover officers’ payroll and
income
taxes.
For the
quarter and
six-month period
ended June
30, 2023,
total cash
dividends declared
on shares
of common
stock amounted
to
$
25.3
million
and
$
50.7
million,
respectively,
compared
to
$
23.4
million
and
$
43.3
million,
respectively,
for
the
same
periods
of
2022. On
July 24, 2023
, the Corporation
announced that its
Board had declared
a quarterly cash
dividend of $
0.14
per common share
payable
on
September 8, 2023
to
shareholders
of
record
at
the
close
of
business
on
August 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.
Preferred Stock
The Corporation
has
50,000,000
authorized shares of
preferred stock with
a par value
of $
1.00
, 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 and
are redeemable
at the Corporation’s
option.
No
shares of preferred
stock were
outstanding as
of
June 30, 2023 and December 31, 2022.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
57
Treasury Stock
The following table shows the change in shares of treasury stock for the six-month
periods ended June 30,
2023 and 2022.
Total
Number of Shares
Six-Month Period Ended June 30,
2023
2022
Treasury stock, beginning balance
40,954,057
21,836,611
Common stock repurchased
3,865,375
10,680,890
Common stock reissued under stock-based compensation plan
(970,429)
(491,085)
Restricted stock forfeited
57,491
10,364
Treasury stock, ending balances
43,906,494
32,036,780
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
June 30,
2023 and December 31, 2022. There were
no
transfers to the legal surplus reserve during the first half of 2023.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
58
NOTE 15 – ACCUMULATED
OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive
loss for the quarters and six-month periods ended
June 30, 2023 and 2022:
Changes in Accumulated Other Comprehensive
Loss by Component
(1)
Quarter ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Unrealized net holding losses on available-for-sale
debt securities:
Beginning balance
$
(718,744)
$
(419,224)
$
(805,972)
$
(87,390)
Other comprehensive (loss) income
(2)
(54,837)
(175,923)
32,391
(507,757)
Ending balance
$
(773,581)
$
(595,147)
$
(773,581)
$
(595,147)
Adjustment of pension and postretirement
benefit plans:
Beginning balance
$
1,194
$
3,391
$
1,194
$
3,391
Other comprehensive (loss) income
-
-
-
-
Ending balance
$
1,194
$
3,391
$
1,194
$
3,391
____________________
(1)
All amounts presented are net of tax.
(2)
Net unrealized holding (losses) gains on available-for-sale debt securities have no tax effect because securities are either tax-exempt, held by an IBE, or have a full deferred tax asset valuation allowance.
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 June 30,
Six-Month Period Ended June
30,
Statements of Income
2023
2022
2023
2022
(In thousands)
Net periodic cost (benefit), pension
plans:
Interest cost
Other expenses
$
950
$
654
$
1,900
$
1,308
Expected return on plan assets
Other expenses
(885)
(1,040)
(1,771)
(2,079)
Net periodic cost (benefit), pension plans
65
(386)
129
(771)
Net periodic cost, postretirement plan
Other expenses
6
2
12
3
Net periodic cost (benefit)
$
71
$
(384)
$
141
$
(768)
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
59
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 second
quarter of 2023,
the Corporation recorded
an income tax
expense of $
30.3
million compared to
$
34.1
million in the
second quarter
of 2022.
For the first
six months of
2023, the
Corporation recorded
an income tax
expense of
$
62.2
million compared
to
$
77.1
million
for
the
same
period
in
2022.
The
decrease
in
income
tax
expense
for
the
quarter
and
first
six
months
of
2023,
as
compared
to the
same period
a year
ago,
was 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,
excluding
entities
with
pre-tax
losses
from which a
tax benefit cannot
be recognized and
discrete items, was
30.1
% for the
first six months
of 2023, compared
to
31.7
% for
the first six months of 2022.
As of
June
30,
2023,
the
Corporation
had
a
deferred
tax
asset of
$
153.9
million,
net
of a
valuation
allowance
of
$
184.2
million
against the deferred tax
asset, compared to a
deferred tax asset of $
155.6
million, net of a valuation
allowance of $
185.5
million, as of
December 31,
2022. The
net deferred
tax asset of
the Corporation’s
banking subsidiary,
FirstBank, amounted
to $
153.9
million as
of
June
30,
2023,
net
of
a
valuation
allowance
of
$
147.0
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
60
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
quarter
and
six-month
period
ended
June
30,
2023,
the
Corporation
incurred
current
income
tax
expense
of
approximately
$
1.5
million
and
$
4.0
million,
respectively,
related
to
its
U.S.
operations, compared to
$
2.5
million and $
4.1
million, respectively,
for comparable periods in 2022.
The limitation did not impact
the
USVI operations in the quarters and six-month periods ended June
30, 2023 and 2022.
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
June
30,
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
61
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
June 30, 2023 and December 31, 2022:
As of June 30,
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
$
139,669
$
-
$
-
$
139,669
$
138,875
$
-
$
-
$
138,875
Noncallable U.S. agencies debt securities
-
475,295
-
475,295
-
389,787
-
389,787
Callable U.S. agencies debt securities
-
1,900,133
-
1,900,133
-
1,963,566
-
1,963,566
MBS
-
2,910,915
5,246
(1)
2,916,161
-
3,098,797
5,794
(1)
3,104,591
Puerto Rico government obligations
-
-
2,111
2,111
-
-
2,201
2,201
Other investments
-
-
-
-
-
-
500
500
Equity securities
4,891
-
-
4,891
4,861
-
-
4,861
Derivative assets
-
494
-
494
-
633
-
633
Liabilities:
Derivative liabilities
-
357
-
357
-
476
-
476
(1) Related to private label MBS.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
62
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
and six-month periods ended June 30, 2023 and 2022:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
Level 3 Instruments Only
Securities Available for
Sale
(1)
Securities Available for
Sale
(1)
Securities Available for
Sale
(1)
Securities Available for
Sale
(1)
(In thousands)
Beginning balance
$
7,605
$
10,647
$
8,495
$
11,084
Total (losses)/gains:
Included in other comprehensive loss (unrealized)
(19)
(106)
(181)
(393)
Included in earnings (unrealized)
(2)
16
35
25
423
Principal repayments and amortization
(245)
(396)
(982)
(3)
(934)
Ending balance
$
7,357
$
10,180
$
7,357
$
10,180
___________________
(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 a $
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 June 30,
2023 and December 31, 2022:
June 30,
2023
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
Minimum
Maximum
(Dollars in thousands)
Available-for-sale
debt securities:
Private label MBS
$
5,246
Discounted cash flows
Discount rate
16.7%
16.7%
16.7%
Prepayment rate
1.2%
12.0%
8.9%
Projected cumulative loss rate
0.2%
15.5%
5.6%
Puerto Rico government obligations
$
2,111
Discounted cash flows
Discount rate
13.4%
13.4%
13.4%
Projected cumulative loss rate
18.5%
18.5%
18.5%
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.
See
Note
2
–
Debt
Securities
for
information
on the methodology used to calculate the fair value of these debt securities.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
63
Additionally, fair value
is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP.
As of June 30, 2023, the Corporation recorded losses or valuation adjustments
for assets recognized at fair value on a non-recurring
basis and still held at June 30, 2023, as shown in the following table:
Carrying value as of June 30, 2023
Related to (losses) gains
recorded for the Quarter
Ended June 30, 2023
Related to (losses) gains
recorded for the Six-
Month Period Ended
June 30, 2023
(Losses) gains recorded
for the Quarter Ended
June 30, 2023
(Losses) gains recorded
for the Six-Month Period
Ended June 30, 2023
(In thousands)
Level 3:
Loans receivable
(1)
$
8,011
$
8,920
$
(6,515)
$
(6,744)
OREO
(2)
1,471
2,038
45
12
Level 2:
Loans held for sale
(3)
$
14,295
$
14,295
$
(73)
$
(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.
(3)
The Corporation derived the fair value of these loans based
on secondary market prices of instruments with similar characteristics.
As of June 30,
2022, the Corporation recorded losses or valuation adjustments for assets recognized
at fair value on a non-recurring
basis and still held at June 30, 2022, as shown in the following table:
Carrying value as of June 30, 2022
Related to (losses) gains
recorded for the Quarter
Ended June 30, 2022
Related to losses
recorded for the Six-
Month Period Ended
June 30, 2022
(Losses) gains recorded
for the Quarter Ended
June 30, 2022
Losses recorded for the
Six-Month Period Ended
June 30, 2022
(In thousands)
Level 3:
Loans receivable
(1)
$
5,422
$
29,967
$
(817)
$
(3,848)
OREO
(2)
2,140
2,741
35
(38)
Premises and equipment
(3)
-
1,242
-
(218)
(1)
Consists mainly of
collateral dependent
commercial and construction
loans. The
Corporation generally
measured losses
based on the
fair value of
the collateral.
The Corporation derived
the fair values from
external appraisals that
took into consideration
prices in observed
transactions involving similar
assets in similar locations
but adjusted for
specific characteristics
and
assumptions of the collateral (e.g., absorption rates), which are
not market observable.
(2)
The Corporation
derived the
fair values
from appraisals
that took
into consideration
prices in
observed transactions
involving similar
assets in
similar locations
but adjusted
for specific
characteristics and assumptions of
the properties (e.g., absorption
rates and net operating
income of income producing
properties), which are not
market observable. Losses
were related to
market valuation adjustments after the transfer of the loans to the
OREO portfolio.
(3)
Relates to a banking facility reclassified to held-for-sale
and measured at the fair value of the collateral.
See Note
25 –
Fair Value,
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
64
The following tables present the carrying value, estimated fair value and estimated
fair value level of the hierarchy of financial
instruments as of June 30, 2023 and December 31, 2022:
Total Carrying Amount
in Statement of
Financial Condition as
of June 30, 2023
Fair Value Estimate as
of
June 30, 2023
Level 1
Level 2
Level 3
(In thousands)
Assets:
Cash and due from banks and money market investments (amortized
cost)
$
1,047,534
$
1,047,534
$
1,047,534
$
-
$
-
Available-for-sale debt
securities (fair value)
5,433,369
5,433,369
139,669
5,286,343
7,357
Held-to-maturity debt securities (amortized cost)
424,726
Less: ACL on held-to-maturity debt securities
(8,401)
Held-to-maturity debt securities, net of ACL
$
416,325
410,181
-
244,521
165,660
Equity securities (amortized cost)
43,210
43,210
-
43,210
(1)
-
Other equity securities (fair value)
4,891
4,891
4,891
-
-
Loans held for sale (lower of cost or market)
14,295
14,295
-
14,295
-
Loans held for investment (amortized cost)
11,719,315
Less: ACL for loans and finance leases
(267,058)
Loans held for investment, net of ACL
$
11,452,257
11,256,830
-
-
11,256,830
MSRs (amortized cost)
28,034
44,420
-
-
44,420
Derivative assets (fair value)
(2)
494
494
-
494
-
Liabilities:
Deposits (amortized cost)
$
16,819,692
$
16,820,272
$
-
$
16,820,272
$
-
Short-term securities sold under agreements to repurchase (amortized
cost)
73,934
74,030
-
74,030
-
Advances from the FHLB (amortized cost):
Long-term
500,000
495,589
-
495,589
-
Other long-term borrowings (amortized cost)
161,700
162,983
-
-
162,983
Derivative liabilities (fair value)
(2)
357
357
-
357
-
(1) Includes FHLB stock with a carrying value of $
34.7
million, which are considered restricted.
(2) Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
65
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
66
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 and
six-month periods
ended June
30, 2023
and 2022:
Quarter ended June 30, 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)
$
21,360
$
142,597
$
12,933
$
(2,789)
$
19,690
$
6,024
$
199,815
Service charges and fees on deposit accounts
-
5,087
3,326
-
172
702
9,287
Insurance commissions
-
2,464
-
-
79
204
2,747
Merchant-related income
-
2,035
-
-
39
385
2,459
Credit and debit card fees
-
8,117
28
-
10
521
8,676
Other service charges and fees
33
1,508
1,094
-
660
207
3,502
Not in scope of ASC Topic
606
(1)
3,029
1,010
3,697
1,680
195
(11)
9,600
Total non-interest income
3,062
20,221
8,145
1,680
1,155
2,008
36,271
Total Revenue
$
24,422
$
162,818
$
21,078
$
(1,109)
$
20,845
$
8,032
$
236,086
Quarter ended June 30, 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)
$
26,335
$
102,397
$
31,379
$
11,466
$
18,688
$
5,921
$
196,186
Service charges and fees on deposit accounts
-
5,495
3,069
-
157
745
9,466
Insurance commissions
-
2,724
-
-
20
202
2,946
Merchant-related income
-
1,711
381
-
17
327
2,436
Credit and debit card fees
-
7,391
21
-
3
449
7,864
Other service charges and fees
59
2,066
876
-
485
157
3,643
Not in scope of ASC Topic
606
(1)
4,108
396
101
(51)
(4)
36
4,586
Total non-interest
income
4,167
19,783
4,448
(51)
678
1,916
30,941
Total Revenue
$
30,502
$
122,180
$
35,827
$
11,415
$
19,366
$
7,837
$
227,127
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
67
Six-Month Period Ended June 30, 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)
$
43,148
$
280,341
$
27,873
$
(3,447)
$
40,620
$
12,165
$
400,700
Service charges and fees on deposit accounts
-
10,573
6,480
-
337
1,438
18,828
Insurance commissions
-
7,104
-
-
107
383
7,594
Merchant-related income
-
4,298
-
-
68
853
5,219
Credit and debit card fees
-
15,755
50
-
12
1,017
16,834
Other service charges and fees
194
2,660
1,948
-
1,243
551
6,596
Not in scope of ASC Topic
606
(1)
5,942
1,865
3,842
1,840
235
(6)
13,718
Total non-interest income
6,136
42,255
12,320
1,840
2,002
4,236
68,789
Total Revenue
$
49,284
$
322,596
$
40,193
$
(1,607)
$
42,622
$
16,401
$
469,489
Six-Month Period Ended June 30, 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)
$
52,114
$
191,943
$
71,794
$
18,875
$
35,170
$
11,914
$
381,810
Service charges and fees on deposit accounts
-
11,034
6,045
-
295
1,455
18,829
Insurance commissions
-
7,691
-
-
49
481
8,221
Merchant-related income
-
3,533
754
-
22
716
5,025
Credit and debit card fees
-
14,062
37
-
(4)
859
14,954
Other service charges and fees
202
3,176
1,989
-
984
314
6,665
Not in scope of ASC Topic
606
(1)
9,217
750
177
(163)
76
48
10,105
Total non-interest income
9,419
40,246
9,002
(163)
1,422
3,873
63,799
Total Revenue
$
61,533
$
232,189
$
80,796
$
18,712
$
36,592
$
15,787
$
445,609
(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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
68
For the quarters
and six-month periods
ended June 30,
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
and six-month periods ended June 30, 2023 and 2022:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Beginning balance
$
760
$
1,154
$
841
$
1,443
Revenue recognized
(152)
(105)
(233)
(394)
Ending balance
$
608
$
1,049
$
608
$
1,049
As of June 30, 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 other performance
obligations as of
June 30, 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
69
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
June 30,
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
70
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)
Quarter ended June 30, 2023:
Interest income
$
31,605
$
86,989
$
65,356
$
29,528
$
32,098
$
6,628
$
252,204
Net (charge) credit for transfer
of funds
(10,245)
86,144
(52,423)
(22,739)
(737)
-
-
Interest expense
-
(30,536)
-
(9,578)
(11,671)
(604)
(52,389)
Net interest income (loss)
21,360
142,597
12,933
(2,789)
19,690
6,024
199,815
Provision for credit losses - (benefit) expense
(3,829)
13,669
7,675
(16)
4,017
714
22,230
Non-interest income
3,062
20,221
8,145
1,680
1,155
2,008
36,271
Direct non-interest expenses
5,533
41,814
9,340
923
8,502
6,731
72,843
Segment income (loss)
$
22,718
$
107,335
$
4,063
$
(2,016)
$
8,326
$
587
$
141,013
Average earnings assets
$
2,144,340
$
3,241,768
$
3,770,463
$
6,364,024
$
2,038,621
$
371,685
$
17,930,901
Mortgage
Banking
Consumer
(Retail) Banking
Commercial and
Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Quarter ended June 30, 2022:
Interest income
$
33,205
$
73,487
$
47,513
$
27,143
$
21,081
$
6,196
$
208,625
Net (charge) credit for transfer of funds
(6,870)
34,039
(16,134)
(10,705)
(330)
-
-
Interest expense
-
(5,129)
-
(4,972)
(2,063)
(275)
(12,439)
Net interest income
26,335
102,397
31,379
11,466
18,688
5,921
196,186
Provision for credit losses - (benefit) expense
(3,605)
15,055
(470)
(35)
(1,678)
736
10,003
Non-interest income (loss)
4,167
19,783
4,448
(51)
678
1,916
30,941
Direct non-interest expenses
5,681
40,546
9,048
905
8,237
6,765
71,182
Segment income
$
28,426
$
66,579
$
27,249
$
10,545
$
12,807
$
336
$
145,942
Average earnings assets
$
2,243,188
$
2,860,086
$
3,624,176
$
7,769,754
$
2,036,108
$
370,590
$
18,903,902
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Six-Month Period Ended June 30, 2023
Interest income
$
63,512
$
170,163
$
127,699
$
56,994
$
63,212
$
13,020
$
494,600
Net (charge) credit for transfer of funds
(20,364)
163,879
(99,826)
(42,278)
(1,411)
-
-
Interest expense
-
(53,701)
-
(18,163)
(21,181)
(855)
(93,900)
Net interest income
43,148
280,341
27,873
(3,447)
40,620
12,165
400,700
Provision for credit losses - (benefit) expense
(4,335)
28,893
5,139
(25)
8,672
(612)
37,732
Non-interest income
6,136
42,255
12,320
1,840
2,002
4,236
68,789
Direct non-interest expenses
10,620
83,441
18,705
1,870
16,806
13,556
144,998
Segment income
$
42,999
$
210,262
$
16,349
$
(3,452)
$
17,144
$
3,457
$
286,759
Average earnings assets
$
2,157,626
$
3,208,146
$
3,742,205
$
6,290,669
$
2,053,154
$
369,026
$
17,820,826
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Six-Month Period Ended June 30, 2022
Interest income
$
66,276
$
143,924
$
94,540
$
49,327
$
39,938
$
12,474
$
406,479
Net (charge) credit for transfer of funds
(14,162)
58,321
(22,746)
(20,654)
(759)
-
-
Interest expense
-
(10,302)
-
(9,798)
(4,009)
(560)
(24,669)
Net interest income
52,114
191,943
71,794
18,875
35,170
11,914
381,810
Provision for credit losses - (benefit) expense
(7,308)
26,199
(17,092)
(423)
(5,225)
50
(3,799)
Non-interest income (loss)
9,419
40,246
9,002
(163)
1,422
3,873
63,799
Direct non-interest expenses
12,587
79,817
17,907
1,790
16,716
13,738
142,555
Segment income
$
56,254
$
126,173
$
79,981
$
17,345
$
25,101
$
1,999
$
306,853
Average earnings assets
$
2,268,279
$
2,810,062
$
3,662,720
$
7,931,699
$
2,050,791
$
374,358
$
19,097,909
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
71
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Net income:
Total income for segments
$
141,013
$
145,942
$
286,759
$
306,853
Other operating expenses
(1)
40,074
37,144
83,187
72,430
Income before income taxes
100,939
108,798
203,572
234,423
Income tax expense
30,284
34,103
62,219
77,128
Total consolidated net income
$
70,655
$
74,695
$
141,353
$
157,295
Average assets:
Total average earning assets for segments
$
17,930,901
$
18,903,902
$
17,820,826
$
19,097,909
Average non-earning assets
857,677
820,924
852,680
890,043
Total consolidated average assets
$
18,788,578
$
19,724,826
$
18,673,506
$
19,987,952
(1)
Expenses pertaining to corporate administrative functions that support
the operating segment, but are not specifically attributable to
or managed by any segment, are not included in the
reported financial results of the operating segments. The
unallocated corporate expenses include certain general and administrative
expenses and related depreciation and amortization
expenses.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
72
NOTE 21 – SUPPLEMENTAL
STATEMENT
OF CASH FLOWS INFORMATION
Supplemental statement of cash flows information is as follows for the
indicated periods:
Six-Month Period Ended June 30,
2023
2022
(In thousands)
Cash paid for:
Interest on borrowings
$
84,530
$
26,148
Income tax
82,215
15,295
Operating cash flow from operating leases
8,630
9,156
Non-cash investing and financing activities:
Additions to OREO
10,738
10,698
Additions to auto and other repossessed assets
29,720
20,575
Capitalization of servicing assets
1,238
1,958
Loan securitizations
65,092
78,397
Loans held for investment transferred to held for sale
2,962
2,443
Payable related to unsettled purchases of investment securities
4,502
20,202
ROU assets obtained in exchange for operating lease liabilities
2,263
1,158
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
73
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
June
30,
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
June
30,
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
June
30,
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 macroeconomic
conditions, as
well as
the effect
of recent
regional bank
failures in
the U.S.
mainland, although
the
nature and impact of such actions cannot be predicted at this time.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
74
The regulatory capital position of
the Corporation and the FirstBank
as of June 30, 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 June 30, 2023
Total Capital (to Risk-Weighted
Assets)
First BanCorp.
$
2,396,564
19.15
%
$
1,001,189
8.0
%
N/A
N/A
%
FirstBank
$
2,326,581
18.59
%
$
1,001,046
8.0
%
$
1,251,307
10.0
%
CET1 Capital (to Risk-Weighted Assets)
First BanCorp.
$
2,082,843
16.64
%
$
563,169
4.5
%
N/A
N/A
%
FirstBank
$
2,069,732
16.54
%
$
563,088
4.5
%
$
813,350
6.5
%
Tier I Capital (to Risk-Weighted
Assets)
First BanCorp.
$
2,082,843
16.64
%
$
750,892
6.0
%
N/A
N/A
%
FirstBank
$
2,169,732
17.34
%
$
750,784
6.0
%
$
1,001,046
8.0
%
Leverage ratio
First BanCorp.
$
2,082,843
10.73
%
$
776,742
4.0
%
N/A
N/A
%
FirstBank
$
2,169,732
11.18
%
$
776,431
4.0
%
$
970,539
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
%
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
75
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 June
30, 2023,
commitments to
extend credit
amounted to
approximately $
2.0
billion, of
which $
1.0
billion relates
to retail
credit
card
loans.
In
addition,
commercial
and
financial
standby
letters
of
credit
as
of
June
30,
2023
amounted
to
approximately
$
66.0
million.
Contingencies
As
of
June
30,
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 June 30, 2023, no such disclosures were necessary.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
76
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
June 30,
2023 and
December 31,
2022, and
the results
of its
operations
for the
quarters and
six-month periods
ended June
30,
2023 and 2022:
Statements of Financial Condition
As of June 30,
As of December 31,
2023
2022
(In thousands)
Assets
Cash and due from banks
$
54,625
$
19,279
Other investment securities
735
735
Investment in First Bank Puerto Rico, at equity
1,484,887
1,464,026
Investment in First Bank Insurance Agency,
at equity
22,024
28,770
Investment in FBP Statutory Trust I
1,289
1,951
Investment in FBP Statutory Trust II
3,561
3,561
Dividends receivable
700
624
Other assets
542
430
Total assets
$
1,568,363
$
1,519,376
Liabilities and Stockholders’ Equity
Liabilities:
Long-term borrowings
$
161,700
$
183,762
Accounts payable and other liabilities
8,664
10,074
Total liabilities
170,364
193,836
Stockholders’ equity
1,397,999
1,325,540
Total liabilities and stockholders’
equity
$
1,568,363
$
1,519,376
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
77
Statements of Income
Quarter Ended
Six-Month Period Ended
June 30,
June 30,
2023
2022
2023
2022
(In thousands)
Income
Interest income on money market investments
$
57
$
10
$
110
$
14
Dividend income from banking subsidiaries
78,932
178,679
157,802
242,272
Dividend income from nonbanking subsidiaries
12,000
-
12,000
-
Gain on early extinguishment of debt
1,605
-
1,605
-
Other income
101
51
203
91
Total income
92,695
178,740
171,720
242,377
Expense
Other long-term borrowings
3,409
1,698
6,790
3,031
Other non-interest expenses
462
434
872
873
Total expense
3,871
2,132
7,662
3,904
Income before income taxes and equity in undistributed
earnings of subsidiaries
88,824
176,608
164,058
238,473
Income tax expense
783
793
1,861
1,899
Distribution in excess of earnings of subsidiaries
(17,386)
(101,120)
(20,844)
(79,279)
Net income
$
70,655
$
74,695
$
141,353
$
157,295
Other comprehensive (loss) income, net of tax
(54,837)
(175,923)
32,391
(507,757)
Comprehensive income (loss)
$
15,818
$
(101,228)
$
173,744
$
(350,462)
78
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, reconciliations
of non-GAAP financial
measures to the
most comparable GAAP
financial measures,
and references to non-GAAP financial measures reconciliations presented
in other sections.
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
During
the
second
quarter
of
2023,
inflation
has
continued
to
trend
lower
but
remaining
at
elevated
levels
above
the
Federal
Reserve
(“FED”)
target.
In
July
2023,
the
FED
raised
interest
rates
by
an
additional
25 basis
points,
thereby
increasing
the
federal
funds rate
to a
target range
of 5.25%
to 5.50%,
bringing borrowing
costs to
the highest
level since
January 2001.
This represents
the
eleventh
time
in
17
months
that
the
FED
has
raised
rates
in
an
effort
to
significantly
reduce
liquidity
in
the
financial
markets
and
continue
to reduce
inflation. The
FED resumed
the tightening
campaign after
a pause
in June,
while noticing
the economy
has been
expanding
at
a
moderate
pace,
job
gains
have
been
robust
in
recent
months,
and
the
unemployment
rate
has
remained
low
while
inflation remains elevated.
The Corporation remains vigilant as to the potential impacts
that monetary policy or a potential slowdown in the U.S. economy
may
have on
credit and
loan demand.
Notwithstanding, it
is encouraged
by the
ongoing business
activity and
economic growth
in Puerto
Rico over the
short and medium
term. For example,
strong auto and
retail sales reported
during the first
half of 2023
suggest growing
consumer confidence in Puerto Rico. The economic
backdrop in Puerto Rico continues to be supported
by strong labor markets, which
have led to unemployment remaining stable, and a consistent flow of
federal disaster funds and foreign investment.
Our
quarterly
results
reflected
continued
execution
of
our
strategy
and
strength
of
our
balance
sheet,
reflected
through
deposit
growth and increased
capital levels driven
by earnings and
capital optimization. Although
total net interest
income remains stable,
the
overall higher
interest rate environment
resulted in a
lower interest margin
for the second
quarter of
2023. The
overall higher
interest
rate environment
should continue
to benefit
our interest
income as
variable loans
and cash
held at
the FED
will reprice
accordingly
and
projected
loan
growth
will occur
at
higher
yields.
Interest
expense,
on
the
other
hand,
is also
expected
to
increase
as maturing
deposits and
government deposits
will reprice
at higher
rates and
non-interest-bearing
and other
low-cost deposits
could continue
to
shift to higher
cost deposits, resulting
in margin
pressures. Credit continues
to perform well
and our liquidity
position remains strong.
With
our
disciplined
and
proactive
approach,
we
believe
the
Corporation
is
positioned
to
continue
growing
the
franchise
and
supporting our people and the communities we serve while enhancing shareholder
value.
79
Stock Repurchase Programs
On July
24, 2023,
the Corporation
announced that
its Board
of Directors
approved a
new stock
repurchase program,
under which
the Corporation
may repurchase
up to
$225 million
of its
outstanding common
stock, which
it expects
to execute
through the
end of
the third quarter of 2024.
The Corporation
expects to repurchase
approximately $150 million
in common stock
during the second
half of 2023,
of which $75
million relates to
the remaining amount
of the $350
million stock repurchase
program announced on
April 27, 2022
that was resumed
in July 2023.
The Corporation expects
to fully utilize this
remaining authorization during
the third quarter of
2023. From July 1,
2023
through August
1, 2023, the
Corporation repurchased
approximately 1.5
million shares
of common
stock for a
total purchase price
of
$19.5 million.
Repurchases under
the stock repurchase
programs may be
executed through
open market purchases,
accelerated share
repurchases,
and/or
privately
negotiated
transactions
or
plans,
including
under
plans
complying
with
Rule
10b5-1
under
the
Exchange
Act.
The
Corporation’s
stock
repurchase
programs
are
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
Corporation’s
stock
repurchase
programs
do
not
obligate
it
to
acquire
any
specific
number
of
shares
and
do
not
have
an
expiration
date.
The
stock
repurchase programs may be modified, suspended, or terminated
at any time at the Corporation’s discretion.
Repurchase of Trust
-
Preferred Securities (“TRuPs”)
During the second quarter
of 2023, the Corporation completed
the repurchase of $21.4 million
of TRuPs of the FBP Statutory
Trust
I as
part of
a privately
-negotiated
transaction,
resulting
in a
commensurate
reduction
in the
related
floating
rate junior
subordinated
debentures. The purchase
price equated to 92.5%
of the $21.4 million
par value of the
TRuPs. The 7.5% discount
resulted in a gain
of
approximately $1.6 million, which is reflected in the consolidated statement
s
of income as “Gain on early extinguishment of debt.”
Release of Corporate Sustainability Report
On June 26, 2023,
the Corporation announced
the release of its Corporate
Sustainability Report for
2022, which is its second
report
on Environmental,
Social and
Governance
(“ESG”)
and sustainability
matters. This
report
highlights
the Corporation’s
strategy
and
development relating to ESG matters and covers the progress of the Corporation’s
ESG program during 2022.
London Interbank Offered Rate (“LIBOR”)
Transition
On June
30, 2023,
the US
dollar (“USD”) LIBOR
panel ended,
and USD
LIBOR rates
are no
longer considered
representative of
the
market.
For
the
transition
of
residual
exposures
tied
to
USD
LIBOR
as
of
June
30,
2023,
the
Corporation
will
continue
to
follow
the
provisions
of
the
Adjustable
Interest
Rate
Act
(the
“LIBOR
Act”)
and
Regulation
ZZ.
As
of
June
30,
2023,
the
Corporation’s
risk
exposure
to
USD
LIBOR
that
mature
after
June
30,
2023
consisted
of
the
following:
(i)
$0.8
billion
of
variable-rate
commercial
and
construction loans
(including unused commitments),
(ii) $39.4
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) $122.3
million of
Puerto Rico
municipalities bonds
held as
part of
the held-to-maturity
debt securities
portfolio, and
(iv) $161.7
million of
junior subordinated
debentures reported
as other
long-term borrowings in the consolidated statements
of financial condition.
Source systems have been updated to
support alternative reference rates. As
such, we have developed a SOFR-enabled
interest rate risk
monitoring framework and a strategy for managing interest
rate risk during the transition from LIBOR to SOFR.
80
Other Recent Developments
Following the recent failure of two
U.S. regional banks and resulting
losses to the FDIC’s
Deposit Insurance Fund (“DIF”), on
May 11,
2023, the
FDIC approved
a notice of
proposed rulemaking
that would
implement a special
assessment at an
annual rate of
approximately
12.5 basis
points over
eight quarterly
periods, commencing
with the
first quarter
of 2024,
to recover
the cost
associated with
protecting
uninsured depositors
as part
of those
financial institution
failures. The
assessment base
for the
special assessment
would be
equal to
an
insured depository
institution’s estimated
uninsured deposits
reported as
of December
31, 2022,
adjusted to
exclude the
first $5
billion in
estimated
uninsured
deposits.
Notwithstanding,
the
special
assessment
could
be
subject
to
change
depending
on
whether
there
are
any
shortfalls on
amounts collected.
If the
final rule
is issued
as proposed,
the estimated
impact of
the special
assessment on
the Corporation
would be an increase in non-interest expense
by approximately $6 million that would need to be
accrued once the proposed rule is finalized.
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
Quarterly
Report
on
Form
10-Q,
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
of
this
MD&A
details
the
policies,
assumptions, and
judgments related
to the
ACL. Actual
results could
differ
from estimates
and assumptions
if different
outcomes or
conditions prevail.
81
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.
For
the
quarter
and
six-month
period
ended
June
30,
2023,
the
Corporation
had
net
income
of
$70.7
million
($0.39
per
diluted
common
share)
and
$141.4
million
($0.78
per
diluted
common
share),
respectively,
compared
to
$74.7
million
($0.38
per
diluted
common
share)
and
$157.3
million
($0.80
per
diluted
common
share),
for
the
comparable
periods
in
2022.
Other
relevant
selected
financial indicators for the periods presented are included below:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
Key Performance Indicator:
(1)
Return on Average
Assets
(2)
1.51
%
1.52
%
1.53
%
1.59
%
Return on Average
Common Equity
(3)
19.66
17.82
20.31
17.18
Efficiency Ratio
(4)
47.83
47.69
48.60
48.25
(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
June 30, 2023, compared to the second
quarter of
2022, include the following:
●
Net
interest
income
for
the
quarter
ended
June
30,
2023
increased
to
$199.8
million,
compared
to
$196.2
million
for
the
second
quarter of
2022, mainly
driven by
the effect
in the
commercial
loan
portfolio of
higher
market interest
rates on
the
upward repricing of variable-rate
loans and on new
loan originations, the growth
in consumer loans, and
the impact of higher
market interest rates on
interest-bearing cash balances, partially
offset by an increase
in interest expense mainly
due to higher
rates paid on interest-bearing deposits.
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
June
30,
2023 was
$22.2
million,
compared
to $10.0
million
for
the second
quarter of
2022.
The increase
in the
provision
expense reflects
a $9.9
million increase
in the
provision for
the commercial
and construction
loan portfolio
resulting from
a
deterioration in the forecasted commercial real estate price index (“CRE price
index”).
Net charge-offs
totaled $19.3 million
for the quarter
ended June 30,
2023, or 0.67%
of average loans
on an annualized
basis,
compared to $6.0 million,
or 0.21% of average
loans,
for the second quarter
of 2022, mainly driven
by a $6.2 million charge-
off
recorded
on
a commercial
and
industrial
participated
loan
in
the
Florida
region
in
the power
generation
industry
and a
$6.1 million
increase in
consumer
loans net
charge-offs.
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
$36.3
million
for
the
quarter
ended
June
30,
2023,
compared
to
$30.9
million
for
the
second
quarter
of
2022.
Non-interest
income
for
the
second
quarter
of
2023
includes
a
$3.6
million
gain
recognized
from
a
legal
settlement
and
the
$1.6
million
gain
on
the
repurchase
of
$21.4
million
in
junior
subordinated
debentures.
On
a
non-GAAP
basis,
excluding
the
effect
of
these
Special
Items
(as
defined
below),
adjusted
non-interest
income
increased
by
$0.2
million.
See
“Non-Interest
Income”
and
“Non-GAAP
Financial
Measures
and
Reconciliations”
below for additional information.
●
Non-interest expenses
for the quarter
ended June
30, 2023
increased by $4.6
million to $112.9
million. The
increase in non-
interest
expenses
mainly
reflects
a
$3.0
million
increase
in
employees’
compensation
and
benefits
expenses
due
to
annual
salary
merit
increases
as
well
as
higher
stock-based
compensation
expense
and
medical
insurance
premium
costs.
The
efficiency ratio
for the
second quarter
of 2023
was 47.83%,
as compared
to 47.69%
for the
same period
in 2022.
On a
non-
82
GAAP basis,
excluding
the
aforementioned
Special Items
,
the adjusted
efficiency
ratio for
the second
quarter of
2023 was
48.91%.
See
“Non-Interest
Expenses”
and
“Non-GAAP
Financial
Measures
and
Reconciliations”
below
for
additional
information.
●
Income tax expense decreased to
$30.3 million for the second quarter of
2023, compared to $34.1 million for
the same period
in 2022 driven
by a lower
pre-tax income
and a higher
proportion of exempt
to taxable income
resulting in
a lower effective
tax rate. 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
d
to 30.1
%
for
the first
six months
of 2023,
compared
to 31.7%
for
the first
six
months of 2022.
See “Income Taxes”
below and Note
17 – Income
Taxes,
to the unaudited
consolidated financial statements
herein for additional information.
●
As of
June 30,
2023, total
assets were
approximately
$19.2 billion,
an increase
of $518.0
million from
December 31,
2022,
primarily
due
to
a
$567.0
million
increase
in
cash
and
cash
equivalents
mainly
attributable
to
the
overall
increase
in
total
deposits,
and
a
$168.5
million
increase
in
total
loans,
partially
offset
by
a
$186.3
million
decrease
in
total
investment
securities. See “Financial Condition and Operating Data Analysis” below for
additional information.
●
As
of
June
30,
2023,
total
liabilities
were
$17.8
billion,
an
increase
of
$445.5
million
from
December
31,
2022,
mainly
driven
by
the
overall
increase
in
total
deposits,
including
brokered
CDs,
partially
offset
by
a
$198.3
million
decrease
in
borrowings.
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 certificates of deposit (“CDs”). As of June 30, 2023,
these core deposits, amounting to $13.0 billion, funded 67.99%
of total
assets. Approximately
$4.7 billion,
or 28.79%
of such deposits,
are uninsured
deposits. 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’s
Discount
Window.
As
of
June
30,
2023,
the
Corporation
had
approximately
$1.4
billion
available
for
funding
under
the
FED’s
Discount
Window
and $980.9
million available
for additional
borrowing
capacity on
FHLB lines
of credit
based on
collateral pledged
at these
entities. On
a combined
basis, as
of June
30, 2023,
the Corporation
had $5.6
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
June
30,
2023,
the
Corporation’s
total
stockholders’
equity
was
$1.4
billion,
an
increase
of
$72.5
million
from
December 31,
2022. The
increase was driven
by the earnings
generated in
the first half
of 2023 and
a $32.4 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. This increase was partially offset
by $50.7 million
in dividends declared
to common stock
shareholders during
the first six
months of 2023
and the repurchase
of
approximately
3.6
million
shares
of
common
stock
for
a
total
purchase
price
of
approximately
$50.0
million.
The
Corporation’s
CET1
capital,
tier
1
capital,
total
capital,
and
leverage
ratios
were
16.64%,
16.64%,
19.15%,
and
10.73%,
respectively,
as
of
June
30,
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, decreased
by $274.9 million
to $1.2 billion
for the quarter
ended June 30,
2023. See “Financial
Condition and
Operating Data Analysis” below for additional information.
●
Total
non-performing assets
were $121.1
million as
of June
30, 2023,
a decrease
of $8.1
million, from
December 31,
2022.
The
net
decrease
was
driven
by
a
$9.5
million
reduction
in
nonaccrual
residential
mortgage
loans
mainly
due
to
loans
restored to
accrual status, partially
offset by
a $1.5 million
increase in nonaccrual
consumer loans.
See “Risk Management
–
Nonaccrual Loans and Non-Performing Assets” below for additional information.
●
Adversely
classified
commercial
and
construction
loans
decreased
by
$27.9
million
to
$65.7
million
as
of
June
30,
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.
83
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.
Adjusted Net Income,
Adjusted Non-Interest Income, and Adjusted Efficiency
Ratio
To
supplement the
Corporation’s
financial statements
presented in
accordance with
GAAP,
the Corporation
uses, and believes
that
investors
benefit from
disclosure
of, non-GAAP
financial measures
that reflect
adjustments to
net income,
non-interest income,
and
the efficiency ratio
to exclude items that management
believes are not reflective
of core operating performance
(“Special Items”). The
financial results for
the quarter and
six-month period ended
June 30, 2022
did not include any
significant Special Items.
The financial
results for the quarter and six-month period ended June 30, 2023
included the following Special Items:
Quarter and Six-Month Period Ended June 30, 2023
-
A
$3.6
million
($2.3
million
after-tax)
gain
recognized
from
a
legal
settlement
reflected
in
the
consolidated
statements
of
income as part of other non-interest income.
-
A
$1.6
million
gain
on
the
repurchase
of
$21.4
million
in
junior
subordinated
debentures
reflected
in
the
consolidated
statements
of
income
as
“Gain
on
early
extinguishment
of
debt.”
The
junior
subordinated
debentures
are
reflected
in
the
consolidated statements
of financial condition
as “Other long-term
borrowings.” The
purchase price
equated to
92.5% of the
$21.4
million
par
value
of
the
TRuPs.
The
7.5%
discount
resulted
in
the
gain
of
$1.6
million.
The
gain,
realized
at
the
holding company level, had no effect on the income tax expense in 2023.
84
The following
table reconciles
for
the quarter
and six-month
period ended
June 30,
2023 the
reported
net income
to adjusted
net
income, a non-GAAP financial measure that excludes the Special Items identified
above:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2023
(In thousands)
Net income, as reported (GAAP)
$
70,655
$
141,353
Adjustments:
Gain recognized from a legal settlement
(3,600)
(3,600)
Gain on early extinguishment of debt
(1,605)
(1,605)
Income tax impact of adjustments
(1)
1,350
1,350
Adjusted net income (Non-GAAP)
$
66,800
$
137,498
(1)
See "Adjusted Net Income, Adjusted Non-Interest Income, and
Adjusted Efficiency Ratio" above for the individual tax
impact related to the above adjustments, which were
based on the
Puerto Rico statutory tax rate of 37.5%, as applicable.
85
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 in
nonaccrual loans,
can fluctuate
from period
to period.
Net interest
income for
the quarter
and
six-month period
ended June
30, 2023
was $199.8
million and
$400.7 million,
respectively,
compared to
$196.2 million
and $381.8
million
for
the
comparable
periods
in
2022.
On
a
tax-equivalent
basis
and
excluding
the
changes
in
the
fair
value
of
derivative
instruments,
net
interest
income
for
the
quarter
and
six-month
period
ended
June
30,
2023
was
$205.4
million
and
$412.6
million,
respectively, compared
to $205.6 million and $398.4 million for the comparable periods in 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 interest
income. For
each category
of interest-earning
assets and
interest-bearing
liabilities, the
tables
provide
information
on
changes
in
(i)
volume
(changes
in
volume
multiplied
by
prior
period
rates),
and
(ii)
rate
(changes
in
rate
multiplied by
prior period
volumes). The
Corporation has
allocated rate-volume
variances (changes
in rate
multiplied by
changes in
volume) to either the changes in volume or the changes in rate based upon the
effect of each factor on the combined totals.
Net
interest
income
on
an
adjusted
tax
equivalent
basis and
excluding
the
change
in
the fair
value
of derivative
instruments
is a
non-GAAP
financial
measure.
For
the
definition
of
this
non-GAAP
financial
measure,
refer
to
the
discussion
in
“Non-GAAP
Measures and Reconciliations” above.
Part I
Average volume
Interest income
(1)
/ expense
Average rate
(1)
Quarter ended June 30,
2023
2022
2023
2022
2023
2022
(Dollars in thousands)
Interest-earning assets:
Money market and other short-term investments
$
617,356
$
1,530,353
$
7,880
$
2,873
5.12
%
0.75
%
Government obligations
(2)
2,909,204
2,922,226
10,973
10,090
1.51
%
1.38
%
MBS
3,757,425
4,081,573
17,087
22,804
1.82
%
2.24
%
FHLB stock
36,265
21,275
780
251
8.63
%
4.73
%
Other investments
13,739
12,595
58
12
1.69
%
0.38
%
Total investments
(3)
7,333,989
8,568,022
36,778
36,030
2.01
%
1.69
%
Residential mortgage loans
2,808,465
2,891,403
39,864
40,573
5.69
%
5.63
%
Construction loans
149,783
124,070
2,903
1,768
7.77
%
5.72
%
Commercial and industrial ("C&I") and commercial mortgage loans
5,191,040
5,054,223
89,290
64,500
6.90
%
5.12
%
Finance leases
769,316
617,399
14,714
11,410
7.67
%
7.41
%
Consumer loans
2,672,912
2,415,215
74,192
63,724
11.13
%
10.58
%
Total loans
(4)(5)
11,591,516
11,102,310
220,963
181,975
7.65
%
6.57
%
Total interest-earning assets
$
18,925,505
$
19,670,332
$
257,741
$
218,005
5.46
%
4.45
%
Interest-bearing liabilities:
Time deposits
$
2,511,504
$
2,202,228
$
15,667
$
3,838
2.50
%
0.70
%
Brokered certificates of deposit ("CDs")
333,557
76,790
3,761
404
4.52
%
2.11
%
Other interest-bearing deposits
7,517,995
8,704,448
22,176
3,452
1.18
%
0.16
%
Securities sold under agreements to repurchase
101,397
200,000
1,328
1,972
5.25
%
3.95
%
Advances from the FHLB
534,231
200,000
6,048
1,075
4.54
%
2.16
%
Other long-term borrowings
177,701
183,762
3,409
1,698
7.69
%
3.71
%
Total interest-bearing liabilities
$
11,176,385
$
11,567,228
$
52,389
$
12,439
1.88
%
0.43
%
Net interest income on a tax-equivalent basis and excluding
valuations - non-GAAP
$
205,352
$
205,566
Interest rate spread
3.58
%
4.01
%
Net interest margin
4.35
%
4.19
%
86
Part I
Average volume
Interest income
(1)
/ expense
Average rate
(1)
Six-Month Period Ended June 30,
2023
2022
2023
2022
2023
2022
(Dollars in thousands)
Interest-earning assets:
Money market and other short-term investments
$
511,392
$
1,682,216
$
12,530
$
3,693
4.94
%
0.44
%
Government obligations
(2)
2,909,587
2,829,675
21,738
18,322
1.51
%
1.31
%
MBS
3,810,491
4,061,883
36,483
42,224
1.93
%
2.10
%
FHLB stock
38,539
21,370
1,201
538
6.28
%
5.08
%
Other investments
13,441
12,193
197
33
2.96
%
0.55
%
Total investments
(3)
7,283,450
8,607,337
72,149
64,810
2.00
%
1.52
%
Residential mortgage loans
2,821,779
2,926,236
79,658
81,260
5.69
%
5.60
%
Construction loans
147,923
119,427
5,579
3,292
7.61
%
5.56
%
C&I and commercial mortgage loans
5,179,448
5,078,910
175,175
126,504
6.82
%
5.02
%
Finance leases
752,501
602,880
28,523
22,322
7.64
%
7.47
%
Consumer loans
2,654,008
2,377,118
145,406
124,875
11.05
%
10.59
%
Total loans
(4)(5)
11,555,659
11,104,571
434,341
358,253
7.58
%
6.51
%
Total interest-earning assets
$
18,839,109
$
19,711,908
$
506,490
$
423,063
5.42
%
4.33
%
Interest-bearing liabilities:
Time deposits
$
2,427,399
$
2,282,192
$
26,449
$
8,259
2.20
%
0.73
%
Brokered CDs
250,588
84,210
5,348
881
4.30
%
2.11
%
Other interest-bearing deposits
7,531,374
8,419,880
39,692
6,206
1.06
%
0.15
%
Securities sold under agreements to repurchase
96,229
220,442
2,397
4,154
5.02
%
3.80
%
Advances from the FHLB
581,436
200,000
13,224
2,138
4.59
%
2.16
%
Other long-term borrowings
180,715
183,762
6,790
3,031
7.58
%
3.33
%
Total interest-bearing liabilities
$
11,067,741
$
11,390,486
$
93,900
$
24,669
1.71
%
0.44
%
Net interest income on a tax-equivalent basis and excluding
valuations - non-GAAP
$
412,590
$
398,394
Interest rate spread
3.71
%
3.89
%
Net interest margin
4.42
%
4.08
%
(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 Financial Measures and
Reconciliations"
below.
(2)
Government obligations include debt issued by government-sponsored
agencies.
(3)
Unrealized gains and losses on available-for-sale debt securities
are excluded from the average volumes.
(4)
Average loan balances include
the average of nonaccrual loans.
(5)
Interest income on loans includes $2.9 million and $3.0 million for
the quarters ended June 30, 2023 and 2022, respectively,
and $6.0 million and $5.6 million for the six-month periods
ended June 30, 2023 and 2022, respectively,
of income from prepayment penalties and late fees related to the Corporation’s
loan portfolio.
87
Part II
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023 Compared to 2022
2023 Compared to 2022
Variance due to:
Variance due to:
Volume
Rate
Total
Volume
Rate
Total
(In thousands)
Interest income on interest-earning assets:
Money market and other short-term investments
$
(6,709)
$
11,716
$
5,007
$
(15,795)
$
24,632
$
8,837
Government obligations
(48)
931
883
530
2,886
3,416
MBS
(1,710)
(4,007)
(5,717)
(2,523)
(3,218)
(5,741)
FHLB stock
244
285
529
511
152
663
Other investments
1
45
46
4
160
164
Total investments
(8,222)
8,970
748
(17,273)
24,612
7,339
Residential mortgage loans
(1,173)
464
(709)
(2,943)
1,341
(1,602)
Construction loans
415
720
1,135
899
1,388
2,287
C&I and commercial mortgage loans
1,790
23,000
24,790
2,551
46,120
48,671
Finance leases
2,893
411
3,304
5,660
541
6,201
Consumer loans
7,037
3,431
10,468
15,003
5,528
20,531
Total loans
10,962
28,026
38,988
21,170
54,918
76,088
Total interest income
$
2,740
$
36,996
$
39,736
$
3,897
$
79,530
$
83,427
Interest expense on interest-bearing liabilities:
Time deposits
$
1,234
$
10,595
$
11,829
$
558
$
17,632
$
18,190
Brokered CDs
2,502
855
3,357
2,927
1,540
4,467
Other interest-bearing deposits
(953)
19,677
18,724
(2,830)
36,316
33,486
Securities sold under agreements to repurchase
(1,132)
488
(644)
(2,733)
976
(1,757)
Advances from the FHLB
2,992
1,981
4,973
6,967
4,119
11,086
Other borrowings
(86)
1,797
1,711
(99)
3,858
3,759
Total interest expense
4,557
35,393
39,950
4,790
64,441
69,231
Change in net interest income
$
(1,817)
$
1,603
$
(214)
$
(893)
$
15,089
$
14,196
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.
88
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 June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(Dollars in thousands)
Interest income - GAAP
$
252,204
$
208,625
$
494,600
$
406,479
Unrealized (gain) loss on derivative instruments
(3)
(9)
3
(24)
Interest income excluding valuations - non-GAAP
252,201
208,616
494,603
406,455
Tax-equivalent adjustment
5,540
9,389
11,887
16,608
Interest income on a tax-equivalent basis
and excluding valuations - non-GAAP
$
257,741
$
218,005
$
506,490
$
423,063
Interest expense - GAAP
$
52,389
$
12,439
$
93,900
$
24,669
Net interest income - GAAP
$
199,815
$
196,186
$
400,700
$
381,810
Net interest income excluding valuations - non-GAAP
$
199,812
$
196,177
$
400,703
$
381,786
Net interest income on a tax-equivalent basis
and excluding valuations - non-GAAP
$
205,352
$
205,566
$
412,590
$
398,394
Average Balances
Loans and leases
$
11,591,516
$
11,102,310
$
11,555,659
$
11,104,571
Total securities, other short-term investments and interest-bearing
cash balances
7,333,989
8,568,022
7,283,450
8,607,337
Average Interest-Earning Assets
$
18,925,505
$
19,670,332
$
18,839,109
$
19,711,908
Average Interest-Bearing Liabilities
$
11,176,385
$
11,567,228
$
11,067,741
$
11,390,486
Average Yield/Rate
Average yield on interest-earning assets - GAAP
5.35%
4.25%
5.29%
4.16%
Average rate on interest-bearing liabilities - GAAP
1.88%
0.43%
1.71%
0.44%
Net interest spread - GAAP
3.47%
3.82%
3.58%
3.72%
Net interest margin - GAAP
4.23%
4.00%
4.29%
3.91%
Average yield on interest-earning assets excluding valuations
- non-GAAP
5.35%
4.25%
5.29%
4.16%
Average rate on interest-bearing liabilities
1.88%
0.43%
1.71%
0.44%
Net interest spread excluding valuations
- non-GAAP
3.47%
3.82%
3.58%
3.72%
Net interest margin excluding valuations - non-GAAP
4.23%
4.00%
4.29%
3.91%
Average yield on interest-earning assets on a tax-equivalent
basis and excluding
valuations - non-GAAP
5.46%
4.45%
5.42%
4.33%
Average rate on interest-bearing liabilities
1.88%
0.43%
1.71%
0.44%
Net interest spread on a tax-equivalent basis
and excluding valuations - non-GAAP
3.58%
4.01%
3.71%
3.89%
Net interest margin on a tax-equivalent basis and excluding
valuations - non-GAAP
4.35%
4.19%
4.42%
4.08%
89
Net interest income amounted to
$199.8 million for the quarter
ended June 30, 2023, an increase
of $3.6 million, when compared
to
$196.2 million for same period in 2022. The $3.6 million increase in net
interest income was primarily due to:
●
A $38.8 million increase in interest income on loans including:
-
A $25.5 million increase in interest
income on commercial and construction
loans, of which approximately $24.
4
million
was related
to the
effect of
higher market
interest rates
on the
upward repricing
of variable-rate
loans and
on new
loan
originations,
and
approximately
$2.9
million
was
related
to
the
$229.9
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 June 30, 2023 and 2022, amounted to $0.1
million and $2.0 million, respectively.
As of June 30, 2023, the
interest rate on approximately 54% of
the Corporation’s
commercial and construction loans was
tied to variable
rates, with 29%
based upon LIBOR
or SOFR of
3 months or
less, 13% based
upon the Prime
rate index,
and
12%
based
on
other
indexes.
For
the
second
quarter
of
2023,
the
average
one-month
LIBOR
increased
410
basis
points,
the
average
three-month
LIBOR increased
388
basis points,
the
average
Prime
rate increased
422
basis points,
and the average three-month SOFR increased
382 basis points, compared to the
average rates for such indexes during
the
second quarter of 2022.
-
A $13.8 million increase in interest
income on consumer loans and finance
leases, primarily driven by the $409.6
million
increase in the average balance
of this portfolio, which
increased interest income by approximately
$10.1 million, and an
approximately $3.7 million
increase in interest income
associated with the positive
effects of higher market
interest rates
on new consumer loan originations and the repricing of the credit cards portfolio.
Partially offset by:
-
A $0.5 million
decrease in interest
income on residential
mortgage loans, primarily
related to an
$82.9 million reduction
in
the
average
balance
of this
portfolio,
which
resulted
in an
approximate
decrease
of
$1.1
million
in
interest income,
partially offset by the positive effect of new loan
originations at higher current market interest rates.
●
A
$4.8 million increase in interest income from interest-bearing cash
balances and investment securities, including:
-
A
$5.0
million
increase
in
interest
income
from
interest-bearing
cash
balances,
which
consisted
primarily
of
cash
balances deposited at
the FED, mainly due
to the effect
of higher market interest
rates, partially offset
by the impact of a
$913.0 million decrease in the average volume of interest-bearing
cash balances.
-
A
$1.3
million
increase
in
interest
income
on
Puerto
Rico
municipal
bonds,
mainly
due
to
the
upward
repricing
of
variable-rate bonds.
-
A $0.3
million
increase
in
interest income
on
U.S. government
and
agencies
debt
securities, mainly
driven
by
higher-
yielding securities purchased late in the second quarter of 2022.
-
A $0.5 million increase in dividends received from the FHLB during the second quarter
of 2023.
Partially offset by:
-
A $2.4
million decrease
in interest
income on
U.S. agencies
MBS, of
which $1.5
million was
associated with
a $324.1
million decrease
in the
average balance
of this
portfolio, and
the remaining
variance to
a higher
level of
U.S. agencies’
MBS premium amortization expense associated with changes in anticipated
prepayments.
90
Partially offset by:
●
A $33.9 million increase
in interest expense on interest-bearing deposits, including:
-
An $18.7 million
increase in interest expense
on interest-bearing checking
and saving accounts,
driven by an
increase of
approximately
$20.5
million
associated
with
higher
interest
rates
paid
in
the
second
quarter
of
2023
as
a
result
of
the
overall
higher
interest
rate
environment,
partially
offset
by
a
decrease
of
approximately
$1.8
million
resulting
from
a
$1.2
billion decline
in the
average balance
of these
deposits. The
average
cost of
interest-bearing
checking
and
saving
accounts increased by
102 basis points to
1.18% in the
second quarter of
2023 as compared
to 0.16% in
the same period
in
2022.
Excluding
public
sector
deposits,
the
average
cost
of
interest-bearing
checking
and
saving
accounts
for
the
second quarter of 2023 was 0.67%, compared to 0.17% for the same period
a year ago.
-
An $11.8
million increase
in interest
expense on
time deposits,
excluding brokered
CDs, mainly
associated with
higher
rates
paid
in
the
second
quarter
of
2023
on
new
issuances
and
renewals
also
associated
with
the
higher
interest
rate
environment.
The average
cost of
time deposits
in the
second quarter
of 2023,
excluding brokered
CDs, increased
180
basis points to 2.50% when compared to the same period in 2022
.
-
A $3.4
million increase
in interest
expense on
brokered CDs,
of which
$2.5 million
was associated
with the
increase of
$256.8 million in the average balance.
●
A
$6.0 million net increase in interest expense on borrowings, including:
-
A $5.0
million increase
in interest
expense on
advances from
the FHLB,
of which
$3.0 million
was associated
with an
increase
of
$334.2
million
in
the
average
balance
to
increase
available
cash
as
a
precautionary
measure
in
the
first
quarter of 2023, and $2.0 million was associated with new FHLB advances
at higher interest rates.
-
A
$1.7
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
$0.7
million
decrease
in
interest
expense
on
repurchase
agreements,
mainly
driven
by
a
reduction
in
the
average
balance of $98.6 million, partially offset by a higher average cost of
funds in the second quarter of 2023.
91
Net interest
income amounted
to $400.7
million for
the six-month
period ended
June 30, 2023,
an increase
of $18.9
million, when
compared to $381.8 million for same period in 2022. The $18.9 million
increase in net interest income was primarily due to:
●
A $75.7 million increase in interest income on loans including:
-
A $50.1 million increase in
interest income on commercial and
construction loans, of which approximately
$49.5 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
$5.4
million
was
related
to
the
$220.6
million
increase
in
the
average
balance
of
this
portfolio (excluding
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
six-month
periods
ended
June
30,
2023
and
2022, amounted to $0.3 million and $5.1 million, respectively.
As of June 30, 2023, the
interest rate on approximately 54% of
the Corporation’s
commercial and construction loans was
tied to variable
rates, with 29%
based upon LIBOR
or SOFR of
3 months or
less, 13% based
upon the Prime
rate index,
and
12%
based
on
other
indexes.
For
the
six-month
period
ended
June
30,
2023,
the
average
one-month
LIBOR
increased 424
basis points,
the average
three-month LIBOR
increased 414
basis points,
the average
three-month SOFR
increased 413 basis points,
and the average Prime
rate increased 431 basis points,
compared to the average
rates for such
indexes during the same period of the prior year.
-
A $26.8 million increase in interest
income on consumer loans and finance
leases, primarily driven by the $426.5
million
increase
in the
average
balance of
this portfolio,
which
increased interest
income
by approximately
$20.6
million,
and
the approximately
$6.1 million
increase in
interest income
associated with
the positive
effects of
higher market
interest
rates on new consumer loan originations and the repricing of the credit cards portfolio
.
Partially offset by:
-
A
$1.2
million
decrease
in
interest
income
on
residential
mortgage
loans,
primarily
related
to
the
$104.5
million
reduction in
the average
balance of
this portfolio,
which resulted
in an
approximate
decrease of
$2.7 million
in interest
income,
partially
offset
by
the
positive
effect
of
new
loan
originations
at
higher
current
market
interest
rates,
which
resulted in an approximate increase of $1.6 million in the first six months of
2023.
●
A $8.8
million
increase
in interest
income
from
interest-bearing
cash balances,
which
consisted primarily
of
cash balances
deposited at
the FED,
mainly due
to the
effect of
higher market
interest rates,
partially offset
by the
impact of
a $1.2
billion
decrease in the average balance of interest-bearing cash.
●
A
$3.6 million increase in interest income on investment securities, mainly driven
by:
-
A
$2.7
million
increase
in
interest
income
on
Puerto
Rico
municipal
bonds,
mainly
due
to
the
upward
repricing
of
variable-rate bonds, partially offset by the impact of
a $12.3 million reduction in the average balance.
-
A $1.5
million
increase
in
interest income
on
U.S. government
and
agencies
debt
securities, mainly
driven
by
higher-
yielding securities purchased late in the second quarter of 2022.
-
A $0.8
million increase
in dividend
income from
FHLB stock,
mainly driven
by a
higher average
balance tied
with the
increase in FHLB advances taken as a precautionary measure in the
first quarter of 2023.
Partially offset by:
-
A $1.4
million decrease
in interest
income on
U.S. agencies
MBS, of
which $2.4
million was
associated with
a $251.4
million
decrease
in
the
average
balance
of
this
portfolio,
partially
offset
by
a
$1.0
million
increase
associated
with
a
lower
level
of premium
amortization
expense
due
to changes
in
anticipated
prepayments
and
the positive
effects
from
higher-yielding U.S. agencies MBS purchased in the second quarter of
2022.
92
Partially offset by:
●
A $56.1 million increase in interest expense on interest-bearing deposits, including:
-
A $33.5
million increase
in interest
expense on
interest-bearing checking
and saving
accounts, driven
by an
increase of
approximately
$35.7 million
associated with
higher interest
rates paid
in the
first half
of 2023
as a
result of
the overall
higher interest
rate environment,
partially offset
by a decrease
of approximately
$2.2 million
resulting from
a decline of
approximately $888.5 million in the average balance of these deposits.
-
An $18.1
million increase
in interest
expense on
time deposits,
excluding brokered
CDs, mainly
associated with
higher
rates
paid
in
the
first
half
of
2023
on
new
issuances
and
renewals
also
associated
with
the
higher
interest
rate
environment.
The average
cost of
time deposits
in the
first
half of
2023,
excluding
brokered CDs,
increased
147
basis
points to 2.20% when compared to the same period in 2022.
-
A $4.5
million increase
in interest
expense on
brokered CDs,
of which
$2.9 million
was associated
with the
increase of
$166.4 million in the average balance and $1.6 million was associated to the overall
higher interest rate environment.
●
A $13.1 million net increase in interest expense on borrowings, including:
-
An $11.1
million increase in interest
expense on advances from
the FHLB, of which $7.0
million was associated with
an
increase
of
$381.4
million
in
the
average
balance
to
increase
available
cash
as
a
precautionary
measure
in
the
first
quarter of 2023, and $4.1 million was associated with new FHLB advances
at higher interest rates.
-
A
$3.8
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.
Partially offset by:
-
A
$1.8
million
decrease
in
interest
expense
on
repurchase
agreements,
mainly
driven
by
a
reduction
in
the
average
balance of $124.2 million,
which resulted in an approximate
reduction of $2.7 million in
interest expense, partially offset
by a $0.9
million increase in
interest expense associated
with new short
-term repurchase agreements
entered into during
2023 at higher interest rates.
Net interest
margin for
the second
quarter of
2023 increased
to 4.23%,
compared to
4.00% for
the same
period in
2022, and
by 38
basis
points
to
4.29%
for
the
first
six
months
of
2023,
compared
to
3.91%
for
the
same
period
of
2022.
The
net
interest
margin
increase
primarily
reflects
the
upward
repricing
of
variable-rate
commercial
loans,
the
growth
in
higher
yielding
loans,
primarily
consumer loans, and the change in asset mix, reflecting a higher
proportion of higher-yielding assets in the 2023
periods. These factors
were partially offset by an increase in the average cost of interest-bearing
liabilities.
93
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 $20.8
million for
the second
quarter of
2023, compared
to $12.7
million for the second quarter of 2022. The variances by major portfolio
category were as follows:
●
Provision
for
credit
losses
for
the
commercial
and
construction
loan
portfolio
was
$10.2
million
for
the
second
quarter
of
2023,
compared to
$0.3 million
for the
second quarter
of 2022.
The expense
recognized during
the second
quarter of
2023
was mainly due to a deterioration in the forecasted CRE price index and the
increase in size of this portfolio.
●
Provision
for
credit
losses for
the
consumer
loans
and finance
leases portfolio
was
$14.1
million
for
the second
quarter
of
2023,
compared
to
$15.2
million
for
the
second
quarter
of
2022.
The
decrease
was
primarily
related
to
updates
in
macroeconomic variables, such as the unemployment rate.
●
Provision for
credit losses for
the residential
mortgage loan portfolio
was a net
benefit of $3.5
million for the
second quarter
of
2023,
compared
to
a net
benefit
of
$2.8
million
for
the second
quarter
of 2022.
The higher
net
benefit
recorded
for the
second quarter of 2023
was primarily related to updates in the projection
of certain forecasted macroeconomic variables, such
as the Regional Home Price Index.
The provision for credit losses
for loans and finance leases was an
expense of $37.0 million for
the first half of 2023, compared to
a
net benefit of $4.3 million for the same period in 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
$10.7
million for
the first
half of 2023, compared
to a net benefit
of $22.8 million for
the same period of
2022. The expense
recognized during the first
half
of
2023
was mainly
due
to
a
deterioration
in the
forecasted
CRE price
index,
a
$6.2
million
charge
associated
with
a
nonaccrual commercial
and industrial participated
loan in the Florida
region in the
power generation industry
and, to a
lesser
extent, portfolio growth.
Meanwhile, the net benefit recorded during the
first six months of 2022 mainly reflects reductions
in
qualitative
reserves
associated
with
reduced
COVID-19
uncertainties,
partially
offset
by
reserve
builds
related
to
uncertainties regarding the macroeconomic outlook.
●
Provision
for
credit losses
for
the
residential
mortgage
loan portfolio
was a
net
benefit
of $3.4
million
for
the
first half
of
2023,
compared to
a net
benefit of
$7.7 million
for the
same period
of 2022.
The net
benefit recorded
for both
periods was
primarily related to
a continued favorable
economic outlook in
the projection of
certain forecasted macroeconomic
variables,
such as the Regional Home Price Index.
●
Provision
for
credit losses
for
the consumer
loans and
finance leases
portfolio
was $29.7
million
for
the first
half of
2023,
compared
to
$26.2
million
for
the
same
period
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,
partially
offset
by
updates in macroeconomic variables, such as the unemployment rate.
94
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 $0.7
million
and
$0.6
million
for
the second
quarter
and
the
first half
of
2023,
respectively,
compared
to $0.8
million
and
$0.7
million,
respectively, for the
same periods in 2022.
Provision for credit losses for
held-to-maturity and available-for-sale debt
securities
The provision for credit losses
for held-to-maturity debt securities was
$0.8 million and $0.1 million
for the second quarter and first
half of 2023, respectively,
compared to a net benefit
of $3.4 million and an
expense of $0.3 million,
respectively, for
the same periods
of
2022.
The
increase
in
the
provision
recorded
during
the
second
quarter
and
the
first
half
of
2023
was
mostly
driven
by
higher
exposure risk associated with the rising interest rate environment.
The
provision
for
credit
losses
for
available-for-sale
debt
securities
was
a
net
benefit
of
$16
thousand
and
$25
thousand
for
the
second quarter
and first
half of
2023, respectively,
compared to
a net
benefit of
$35 thousand
and $0.4
million, respectively,
for the
same periods in 2022.
95
Non-Interest Income
Non-interest
income amounted
to $36.3
million for
the second
quarter of
2023, compared
to $30.9
million for
the same
period in
2022.
Non-interest income
for the second
quarter of
2023 includes the
$3.6 million
gain recognized
from a legal
settlement,
included
as part
of other
non-interest income
,
and the
$1.6 million
gain on
the repurchase
of $21.4
million in
junior subordinated
debentures,
included as part of gain on early extinguishment of debt.
See “Non-GAAP Financial Measures and Reconciliations” in this MD&A for
further information. On a non-GAAP basis, excluding the effect
of these Special Items, adjusted non-interest income increased by
$0.2
million primarily due to:
●
A $1.0
million
net increase
in adjusted
other non
-interest income
including:
(i) a
$0.8 million
benefit
recognized
during
the second
quarter of
2023
in relation
to purchased
income tax
credits realized;
(ii) $0.3
million
in debit
card incentives
collected during
the second
quarter of
2023; (iii)
a $0.3
million increase
related to
higher unused
loan commitment
fees;
and (v) a $0.6 million decrease in net gains on fixed assets.
●
A $0.8
million
increase
in card
and
processing
income
mainly
related
to higher
interchange
income
received
during
the
second quarter of 2023.
Partially offset by:
●
A $1.2 million decrease
in revenues from mortgage
banking activities, mainly driven
by a decrease in
the net realized gain
on sales
of residential
mortgage loans
in the
secondary market
due to
a lower
volume of
sales and
lower margins.
During
the second quarters of
2023 and 2022, net realized
gains of $0.9 million
and $2.2 million, respectively,
were recognized as
a
result
of
GNMA
securitization
transactions
and
whole
loan
sales to
U.S.
GSEs
amounting
to
$51.8
million
and
$64.2
million, respectively.
●
A $0.2 million decrease in insurance commission income.
●
A$0.2 million decrease in service in charges and fees on deposits accounts
.
Non-interest
income for
the six-month
period ended
June 30,
2023 amounted
to $68.8
million, compared
to $63.8
million for
the
same period
in 2022.
On a
non-GAAP basis,
excluding the
effect of
the aforementioned
Special Items,
adjusted non-interest
income
decreased by $0.2 million primarily due to:
●
A $3.6 million decrease
in revenues from mortgage
banking activities, mainly driven
by a decrease in
the net realized gain
on sales
of residential
mortgage loans
in the
secondary market
due to
a lower
volume of
sales and
lower margins.
During
the first six months
of 2023 and
2022, net gains
of $2.0 million
and $5.7 million,
respectively,
were recognized as
a result
of GNMA
securitization transactions
and whole
loan sales
to U.S.
GSEs amounting
to $89.2
million and
$158.1 million,
respectively.
●
A
$0.6
million
decrease
in
insurance
commission
income,
mainly
due
to
lower
contingent
commissions
recognized
in
2023.
Partially offset by:
●
A
$2.1
million
increase
in
card
and
processing
income
mainly
related
to
higher
interchange
income
during
the
first
six
months of 2023.
●
A $1.9
million
net
increase
in
adjusted
other
non-interest
income
including:
(i)
a $1.0
million
increase
related
to higher
benefit recognized in relation to
purchased income tax credits realized
;
(ii) a $0.6
million increase related to higher
unused
loan commitment
fees; (iii)
$0.3 million
in debit
card incentives
collected during
the second
quarter of
2023; (iv)
a $0.3
million
increase
in
unrealized
gains
on
marketable
equity
securities;
and
(v)
a
$0.2
million
increase
in
fees
and
commissions from insurance referrals;
partially offset by a $0.7 million decrease in net gains on fixed
assets.
96
Non-Interest Expenses
Non-interest
expenses for
the quarter
ended June
30, 2023
amounted
to $112.9
million, compared
to $108.3
million for
the same
period in
2022. The
efficiency ratio
for the
second quarter of
2023 was
47.83%, compared
to 47.69% for
the second
quarter of
2022.
On a
non-GAAP basis,
excluding the
aforementioned Special
Items,
the adjusted
efficiency ratio
for the
second quarter
of 2023
was
48.91%. The $4.6 million increase in non-interest expenses was primarily due
to:
●
A
$3.0
million
increase
in
employees’
compensation
and
benefits
expenses,
mainly
driven
by
annual
salary
merit
increases,
higher stock-based compensation expense, and higher medical insurance
premium costs.
●
A
$1.0
million
increase
in
other
non-interest
expenses,
in
part
due
to
an
increase
in
charges
for
legal
and
operational
reserves and an increase of $0.5 million in net periodic cost of pension plans.
●
A
$0.7 million increase in credit and debit card processing fees, mainly
due to higher credit card assessment fees.
●
A
$0.6 million
increase in
the FDIC deposit
insurance expense,
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.
●
A $0.4 million increase in taxes, other than income taxes, primarily related
to higher license fees.
Partially offset by:
●
A
$0.5 million
increase in
net gains
on OREO
operations,
mainly driven
by an
increase in
net realized
gains on
sales of
OREO properties, primarily residential properties in the Puerto Rico region
.
●
A
$0.4
million
decrease
in
occupancy
and
equipment
expenses,
primarily
reflecting
reductions
in
depreciation
charges,
energy costs, and maintenance charges.
●
A $0.4 million decrease in professional service fees, mainly due
to a decrease in outsourced technology service fees.
Non-interest expenses for
the first six months
of 2023 amounted
to $228.2 million, compared
to $215.0 million for
the same period
in 2022.
The efficiency ratio
for the first
six months of
2023 was 48.60%,
compared to 48.25%
for the first
six months of
2022. On a
non-GAAP
basis,
excluding
the
aforementioned
Special
Items,
the
adjusted
efficiency
ratio
for
the
first
six
months
of
2023
was
49.15%. The $13.2 million increase in non-interest expenses was primarily
due to:
●
A
$9.9 million increase in employees’
compensation and benefits expenses, mainly driven
by annual salary merit increases
and
an
increase
in
bonuses,
medical
insurance
premium
costs,
stock-based
compensation
expense,
and
payroll
taxes,
partially offset by higher deferral of loan origination costs.
●
A
$1.9 million increase in credit and debit card processing expenses.
●
A
$1.5
million
increase
in
other
non-interest
expenses,
in
part
due
to
an
increase
in
charges
for
legal
and
operational
reserves and an increase of $0.9 million in net periodic cost of pension plans
.
●
A
$1.2 million
increase in
the FDIC deposit
insurance expense,
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.
●
A
$0.9 million increase in professional service fees, driven by an increase
in outsourced technology service fees.
●
A
$0.6 million increase
in business promotion
expenses, mainly resulting
from higher advertising
and marketing expenses
associated with the commemoration of the 75th anniversary of the
Bank.
●
A $0.5 million
increase in taxes,
other than income
taxes, primarily
related to higher
license fees, sales
and use taxes,
and
property taxes.
97
Partially offset by:
●
A
$1.8 million
increase in
net gains
on OREO
operations,
mainly driven
by an
increase in
net realized
gains on
sales of
OREO properties,
primarily residential properties in the Puerto Rico region.
●
A
$1.6
million
decrease
in
occupancy
and
equipment
expenses,
primarily
reflecting
reductions
in
depreciation
charges,
rental expenses, and energy costs.
Income Taxes
For the second quarter of 2023, the Corporation recorded an income
tax expense of $30.3 million, compared to $34.1 million for the
same period in
2022. For the
first six months of
2023, the Corporation
recorded an income
tax expense of
$62.2 million, compared
to
$77.1
million
for
the
same
period
in
2022.
The
decrease
in
income
tax
expense
for
the
quarter
and
first
six
months
of
2023,
as
compared
to the
same periods
a year
ago, 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 six
months of
2023,
excluding entities
from
which a
tax benefit
cannot be recognized and discrete items, was 30.1%, compared
to 31.7% for the first six months of 2022. See Note 17 - Income
Taxes,
to the unaudited consolidated financial statements herein
for additional information.
As of
June
30,
2023,
the
Corporation
had
a
deferred
tax
asset of
$153.9
million,
net
of a
valuation
allowance
of
$184.2
million
against the deferred tax
asset, compared to a
deferred tax asset of $155.6
million, net of a valuation
allowance of $185.5 million,
as of
December
31,
2022.
Income
tax
paid
for
the
six-month
period
ended
June
30,
2023
amounted
to
$82.2
million
compared
to
$15.3
million for
the same
period in
2022. The
increase is related
to the
full utilization
during 2022
of certain
deferred tax
assets related
to
NOLs that were available for regular income tax which decreased the amount due
for income taxes.
98
FINANCIAL CONDITION AND OPERATING
ANALYSIS
Assets
The Corporation’s
total assets
were $19.2
billion as of
June 30, 2023,
an increase of
$518.0 million
from December
31, 2022. The
increase was primarily related to a $567.0 million
increase in cash and cash equivalents,
primarily interest-bearing deposits maintained
at
the
FED
aligned
with
the
overall
increase
in
government
and
time
deposits.
In
addition,
as
further
discussed
below,
total
loans
increased by $168.5 million. These variances were partially offset
by a $186.3 million decrease in total investment securities.
Loans Receivable, including Loans Held for Sale
As of June 30, 2023,
the Corporation’s
total loan portfolio before
the ACL amounted to $11.7
billion, an increase of
$168.5 million
compared to
December 31, 2022.
In terms of
geography,
the growth consisted
of increases of
$220.7 million and
$37.9 million in
the
Puerto Rico
and Virgin
Islands regions,
respectively,
partially offset
by a $90.1
million decrease
in the
Florida region. On
a portfolio
basis, the
growth consi
sted of
increases of
$167.8 million
in consumer
loans, including
a $141.9
million increase
in auto
loans and
leases,
and
$52.2
million
in commercial
and
construction
loans,
partially
offset
by
a $51.5
million
decrease
in residential
mortgage
loans.
As of
June 30,
2023, the
loans in
the Corpo
ration’s
held-for-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 $11.7 billion as of June 30,
2023, the Corporation had credit risk concentration of approximately 79% in
the Puerto Rico
region, 17% in the United States region (mainly in
the state of Florida), and 4% in the Virgin
Islands region, as shown in the following
table:
As of June 30, 2023
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
Residential mortgage loans
$
2,179,539
$
172,771
$
441,480
$
2,793,790
Construction loans
65,427
3,792
94,779
163,998
Commercial mortgage loans
1,734,514
65,775
519,780
2,320,069
Commercial and Industrial loans
1,902,803
108,971
934,427
2,946,201
Total commercial loans
3,702,744
178,538
1,548,986
5,430,268
Consumer loans and finance leases
3,421,376
66,078
7,803
3,495,257
Total loans held for investment,
gross
$
9,303,659
$
417,387
$
1,998,269
$
11,719,315
Loans held for sale
14,094
201
-
14,295
Total loans, gross
$
9,317,753
$
417,588
$
1,998,269
$
11,733,610
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
99
Residential Real Estate Loans
As of
June 30,
2023, the
Corporation’s
total residential
mortgage loan
portfolio, including
loans held
for sale,
decreased by
$51.5
million, as compared
to the balance as
of December 31, 2022.
The decline in the
residential mortgage loan portfolio
reflects decreases
of $56.7 million in the Puerto Rico region and
$6.9 million in the Virgin
Islands region, partially offset by an increase of
$12.1 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
June 30,
2023 consisted
of fixed-rate
loans that
traditionally
carry higher
yields than
residential mortgage
loans in
the
Florida region. In
the Florida region,
approximately 42% 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 June
30, 2023, the
Corporation’s
commercial and construction
loan portfolio increased
by $52.2 million,
as compared to
the
balance as of December 31, 2022.
In
the
Puerto
Rico
region,
commercial
and
construction
loans
increased
by
$112.1
million,
as
compared
to
the
balance
as
of
December
31,
2022.
This
increase
was
driven
by
the
origination
of
several
loans,
including
five
commercial
relationships,
each
in
excess of $10
million, that increased
the portfolio amount
by $66.0 million
and a $60.3
million increase in
the outstanding balance
of
floor plan lines of credit.
In
the
Virgin
Islands
region,
commercial
and
construction
loans
increased
by
$40.1
million,
as
compared
to
the
balance
as
of
December 31, 2022. The increase was driven by the
utilization of $47.0 million of a new $100.0 million line
of credit facility extended
to a government public corporation.
In the Florida
region, commercial and
construction loans decreased
by $100.0 million,
as compared to
the balance as
of December
31, 2022. This decrease
reflected $90.4 million in
payoffs and paydowns of
five commercial and industrial
relationships in the Florida
region, each
in excess
of $10
million, including
the aforementioned
payoff of
a $24.3
million commercial
and industrial
participated
loan in the leisure and hospitality industry.
As
of
June
30,
2023,
the
Corporation
had
$174.9
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 June
30, 2023, the
Corporation had $78.9
million in
loans to
USVI government
public corporations,
compared to
$38.0 million
as of
December 31,
2022. The
increase in
loans to
USVI
government
public
corporations
was
driven
by
the
aforementioned
$47.0
million
line
of
credit
utilization.
See
“Exposure
to
USVI
Government” below for additional information.
As
of
June
30,
2023,
the
Corporation’s
total
commercial
mortgage
loan
exposure
amounted
to
$2.3
billion,
or
43%
of
the
total
commercial
loan
portfolio.
The commercial
mortgage
loan
portfolio
includes
an
exposure
to
office
real
estate amount
ing
to
$428.3
million ($384.3 million
and $44.0 million
in the Puerto Rico
and Florida regions,
respectively), of which
approximately $76.1 million
matures during the remainder of 2023 and 2024.
As
of
June
30,
2023,
the
Corporation’s
total
exposure
to
shared
national
credit
(“SNC”)
loans
(including
unused
commitments)
amounted to
$1.1 billion
as of each
of June
30, 2023
and December
31, 2022.
As of
June 30,
2023, approximately
$206.2 million
of
the
SNC
exposure
is
related
to
the
portfolio
in
the
Puerto
Rico
region
and
$847.4
million
is
related
to
the
portfolio
in
the
Florida
region.
Consumer Loans and Finance Leases
As of
June 30,
2023,
the Corporation’s
consumer
loan
and finance
lease portfolio
increased by
$167.8
million
to $3.5
billion,
as
compared
to
the
portfolio
balance
of
$3.3
billion
as
of
December
31,
2022.
This
increase
was
mainly
related
to
increases
of
$72.5
million
and
$69.4
million
in
the
finance
leases
and
auto
loans
portfolios,
respectively.
The
growth
in
consumer
loans
was
mainly
reflected in the Puerto Rico region across all portfolio classes.
100
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 June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Residential mortgage
$
115,251
$
126,532
$
192,553
$
249,045
Construction
47,006
46,880
82,505
66,866
Commercial mortgage
42,384
205,720
131,076
333,705
Commercial and Industrial
550,574
622,714
1,106,456
1,113,010
Consumer
454,005
482,252
889,323
908,719
Total loan production
$
1,209,220
$
1,484,098
$
2,401,913
$
2,671,345
During the quarter
and six-month period
ended June 30,
2023, total loan
originations, including
purchases, refinancings, and
draws
from
existing
revolving
and
non-revolving
commitments,
amounted
to
approximately
$1.2
billion
and
$2.4
billion,
respectively,
compared to $1.5 billion and $2.7 billion, respectively,
for the comparable periods in 2022.
Residential mortgage
loan originations
for the
quarter and
six-month period
ended June
30, 2023
amounted to
$115.3 million
and
$192.6
million, respectively
,
compared
to $126.5
million
and $249.0
million, respectively,
for the
comparable periods
in 2022.
The
decrease of
$11.2
million in
the second
quarter of
2023, as
compared to
the same
period in
2022, reflects
declines of
$9.1 million
in
the
Puerto
Rico
region,
$1.3
million
in
the
Virgin
Islands
region,
and
$0.8
million
in
the
Florida
region.
For
the
six-month
period
ended June 30, 2023, the decrease
of $56.4 million consisted of declines
of $51.4 million in the Puerto Rico
region, $3.3 million in the
Florida
region,
and
$1.7
million
in
the
Virgin
Islands
region.
Approximately
58%
of
the
$150.0
million
residential
mortgage
loan
originations in the
Puerto Rico region during
the first half of
2023 consisted of
conforming loans, compared
to 59% of $201.4
million
for the
first half
of 2022.
The decrease
during the
first half
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 and
six-month period
ended June
30,
2023
amounted
to
$563.6
million
and
$1.2
billion,
respectively,
compared
to
$860.9
million
and
$1.5
billion,
respectively,
for
the
comparable periods
in 2022.
The decrease
of $297.3
million in
the second
quarter of
2023, as
compared to
the same
period in
2022,
reflects
declines
of
$158.2
million
in
the
Florida
region,
$124.8
million
in
the
Puerto
Rico
region,
and
$14.3
million
in
the
Virgin
Islands
region.
Commercial
loan
originations
for
the
second
quarter
of
2022
include
three
commercial
mortgage
loans
over
$10
million originated
in the Puerto Rico
region totaling $53.8
million and two
commercial mortgage loans
over $10 million
originated in
the Florida
region
totaling
$37.3 million.
For the
first six
months
of 2023,
the decrease
of $258.2
million
consisted
of decreases
of
$213.3 million in the Florida region, $31.1 million in the Puerto Rico region, and
$13.8 million in the Virgin
Islands region.
Government
loan
originations
for
the
quarter
and
six-month
period
ended
June
30,
2023
amounted
to
$76.3
million
and
$83.6
million, respectively,
compared to $14.4 million and $18.9 million, respectively,
for the comparable periods in 2022. Government loan
originations
during
the
first
half
of
2023
were
mainly
related
to
the
aforementioned
line
of
credit
utilization
in
the
Virgin
Islands
region,
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. On the other hand, government loan
originations during the
first half
of 2022 were mainly
related to
the renewal
of a
municipal loan
in the
Puerto Rico
region and
the utilization
of the
arranged
overdraft line of credit of a government entity in the Virgin
Islands region.
101
Originations of auto
loans (including finance
leases) for the quarter
and six-month period
ended June 30,
2023 amounted to
$250.3
million and
$495.4 million,
respectively,
compared to
$269.5 million
and $530.8
million, respectively,
for the
comparable periods
in
2022. The
decrease in
the second
quarter of
2023, as
compared to
the same
quarter of
2022, consisted
of a
$21.2 million
decrease in
the Puerto
Rico region,
partially offset
by a $2.0
million increase in
the Virgin
Islands region.
The decrease
in the first
six months
of
2023, as
compared to
the same
period of
the previous
year, consisted
of a
$38.7 million
decrease in
the Puerto
Rico region,
partially
offset by a $3.3
million increase in the Virgin
Islands region. Other consumer
loan originations,
other than credit cards,
for the quarter
and six-month period ended June
30, 2023 amounted to $77.7 million
and $149.6 million, respectively,
compared to $87.2 million and
$142.8 million,
respectively,
for the
comparable periods
in 2022.
The utilization
activity on
the outstanding
credit card
portfolio
for
the
quarter
and
six-month
period
ended
June
30,
2023
amounted
to
$125.9
million
and
$244.3
million,
respectively,
compared
to
$125.6 million and $235.0 million, respectively,
for the comparable periods in 2022.
102
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
June 30,
2023 amounted
to $5.4
billion, a
$166.2 million
decrease from
December 31, 2022
.
The decrease was
mainly driven
by repayments of
approximately $200.4
million of U.S.
agencies
MBS and
debentures,
partially
offset
by a
$32.4
million increase
in fair
value attributable
to changes
in market
interest rates.
As of
June 30, 2023, the
Corporation had a net
unrealized loss on available-for-sale
debt securities of $765.8
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 and it is likely that it will not be required
to sell the securities before their anticipated recovery.
The Corporation
expects the portfolio will
continue to decrease and
the accumulated other comprehensive
loss will decrease accordingly,
excluding the
impact of market interest rates.
As
of
June
30,
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
June 30, 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
-
$2.1
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 June 30,
2023,
of which
$0.3
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
June
30,
2023,
the
Corporation’s
held-to-maturity
debt
securities
portfolio,
before
the
ACL,
decreased
to
$424.7
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
SEC,
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 June 30, 2023, approximately
74% of the Corporation’s
municipal 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,
and the
higher interest
rate environment,
the Corporation
cannot be
certain whether
future charges
to the
ACL on
these securities will be required.
As of June 30, 2023, the ACL
for held-to-maturity debt securities was
$8.4 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.
103
The following table presents the carrying values of investments as of the indicated dates:
June 30, 2023
December 31, 2022
(In thousands)
Money market investments
$
1,000
$
2,025
Available-for-sale
debt securities, at fair value:
U.S. government and agencies obligations
2,515,097
2,492,228
Puerto Rico government obligations
2,111
2,201
MBS:
Residential
2,759,697
2,941,458
Commercial
156,464
163,133
Other
-
500
Total available-for-sale
debt securities, at fair value
5,433,369
5,599,520
Held-to-maturity debt securities, at amortized cost:
MBS:
Residential
155,690
166,739
Commercial
102,912
105,088
Puerto Rico municipal bonds
166,124
165,710
ACL for held-to-maturity Puerto Rico municipal bonds
(8,401)
(8,286)
Total held-to-maturity
debt securities
416,325
429,251
Equity securities, including $34.7 million and $42.9 million of FHLB stock
as of June 30,
2023 and December 31, 2022, respectively
48,101
55,289
Total money market
investments and investment securities
$
5,898,795
$
6,086,085
The carrying values of debt securities as of June 30, 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
$
246,038
0.44
Due after one year through five years
2,247,794
0.84
Due after five years through ten years
10,400
3.16
Due after ten years
10,865
5.38
2,515,097
0.83
Puerto Rico government and municipalities obligations:
Due within one year
1,205
5.90
Due after one year through five years
42,736
6.93
Due after five years through ten years
56,160
7.44
Due after ten years
68,134
8.14
168,235
7.59
MBS
3,174,763
1.70
ACL on held-to-maturity debt securities
(8,401)
-
Total debt securities
$
5,849,694
1.48
104
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 June 30, 2023, the
Corporation had
approximately $1.9
billion in
callable debt securities
(U.S. agencies
debt securities)
with an
average yield
of 0.78%,
of which
approximately 60%
were purchased
at a discount
and 3% 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,
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
Business
Group
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
weekly
basis.
The
Financial
Planning and ALM Division is responsible for estimating the liquidity
gap for longer periods.
105
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 has
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 $1.0 billion
as of June 30, 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
$2.2 billion
as of
June 30,
2023, compared
to $3.1 billion as of December 31, 2022.
As of June 30, 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
16.70% 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
21.82%
of
total
assets
as
of
June
30,
2023,
compared to 22.48% of total assets as of December 31, 2022.
As of June 30, 2023, in
addition to the aforementioned $3.2
billion in cash and free high
quality liquid assets, the Corporation
had
$980.9
million
available
for credit
with the
FHLB based
on
the value
of loan
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
Borrower-in-Custody (“BIC”) Program as of June 30, 2023
as an additional contingent source of liquidity.
Total loans pledged
to the
FED Discount Window
amounted to $2.4 billion as of
June 30, 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
June
30,
2023,
the
Corporation
had
$5.6
billion
of
total
available
liquidity,
or
1.17x
of
uninsured
deposits
excluding
government deposits, to meet liquidity needs,
while maintaining a strong capital position.
Liquidity
at
the Bank
level
is highly
dependent
on
bank deposits,
which
fund
88.2%
of the
Bank’s
assets (or
86.3%
excluding
brokered CDs).
In addition,
as further
discussed below,
the Corporation
maintains 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
CDs
through
brokers.
Funding
through
wholesale
funding
may
continue
to
increase
the
overall
cost
of
funding for the Corporation and impact the net interest margin.
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 June 30, 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.
106
The following table summarizes commitments to extend credit and standby letters of
credit as of the indicated dates:
June 30,
2023
December 31, 2022
(In thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Construction undisbursed funds
$
189,458
$
170,639
Unused credit card lines
955,292
936,231
Unused personal lines of credit
40,346
41,988
Commercial lines of credit
795,820
761,634
Letters of credit:
Commercial letters of credit
57,732
68,647
Standby letters of credit
8,267
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 $3.9
billion as
of June
30,
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
funding 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
is enrolled in the FED’s Bank Term
Funding Program (“BTFP”).
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.
107
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
June
30,
2023,
the
Corporation’s
core
deposits,
which
exclude
government
deposits
and
brokered CDs, decreased by $247.0
million to $13.0 billion from $13.3 billion
as of December 31, 2022. The decrease was
primarily
related
to saving
and
checking
accounts
primarily
in the
Puerto
Rico and
Florida
regions. 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.
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
continued
to
reallocate
cash
into
higher
yielding
alternatives.
Further
shift
may
continue
to
increase
the
overall
cost
of
funding
for
the
Corporation
and
impact
the net
interest
margin.
For
the
second
quarter
of
2023, the average balance per retail core deposit account was $26 thousand.
Government
deposits
–
As of
June 30,
2023,
the
Corporation had
$2.9
billion
of Puerto
Rico
public
sector deposits
($2.8
billion
in
transactional
accounts
and
$140.1
million
in
time
deposits),
compared
to
$2.3
billion
as
of
December
31,
2022.
The
increase
was
related
to
higher
balances
of
interest-bearing
transactional
accounts.
Government
deposits
are
insured
by
the
FDIC
up
to
the
applicable
limits and
the
uninsured
portions
is fully
collateralized.
Approximately
21%
of
the
public
sector
deposits
as of
June
30,
2023 were from municipalities and
municipal agencies in Puerto Rico
and 79% were from public corporations,
the central government
and agencies, and U.S. federal government agencies in Puerto Rico.
In addition, as of June 30, 2023, the Corporation
had $524.5 million of government deposits in the Virgin
Islands region (December
31, 2022 - $442.8 million) and $12.1 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
$3.7
billion
and
$3.1
billion
as
of
June
30,
2023
and
December
31,
2022,
respectively,
and
an
estimated
market
value
of
$3.3
billion
and
$2.7
billion,
respectively.
In
addition
to
securities
and
loans,
as of
June
30,
2023
and
December
31,
2022,
the
Corporation
used
$225.0
million and $200.0 million, respectively,
in letters of credit issued by the FHLB as pledges for public deposits in the Virgin
Islands.
Estimate of Uninsured
Deposits –
As of June
30, 2023 and December
31, 2022, the
estimated amount of
uninsured deposits totaled
$8.0
billion
and
$7.6
billion,
respectively,
generally
representing
the
portion
of
deposits
that
exceed
the
FDIC
insurance
limit
of
$250,000
and amounts
in any
other uninsured
deposit account.
The balances
presented as
of June
30, 2023
and December
31, 2022
include
the
uninsured
portion
of
fully
collateralized
government
deposits
which
amounted
to
$3.3
billion
and
$2.6
billion,
respectively.
Excluding
fully
collateralized
deposits,
$4.7
billion
of
these
deposits
are
uninsured,
which
represent
28.79%
of
total
deposits,
excluding brokered CDs, as of June 30, 2023, compared
to $4.9 billion, or 30.65% of total deposits,
excluding brokered CDs,
as
of
December
31,
2022.
The
increase
is
mostly
related
to
government
deposits,
which
are
fully
collateralized
as
previously
mentioned.
The
amount of
uninsured
deposits is
calculated
based on
the
same
methodologies
and assumptions
used for
our bank
regulatory
reporting requirements adjusted for cash held by wholly-owned subsidiaries
at the Bank.
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 June 30, 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
$
254,158
$
108,835
$
225,068
$
357,972
$
946,033
Other uninsured time deposits
$
16,675
$
10,763
$
10,277
$
6,546
$
44,261
Brokered CDs
– Total brokered
CDs increased by $257.8 million to $363.6 million as of June
30, 2023, compared to $105.8 million as
of
December
31,
2022.
The increase
reflects
the
effect
of new
issuances
amounting
to $475.6
million
with
an all-in
cost
of
4.97%,
partially offset by
approximately $217.8 million
of maturing brokered
CDs, with an all-in
cost of 4.92%, that
were paid off during
the
first six months of 2023.
The average remaining term to maturity of the brokered CDs outstanding
as of June 30, 2023 was approximately 1 year.
The increased
use of
brokered CDs
was primar
ily related
to short-term
funding in
our Florida
region, The
future use
of brokered
CDs
will
depend
on
multiple
factors
including
excess
liquidity
at
each
of
the
regions,
future
cash
needs
and
any
tax
implications.
Brokered CDs are insured by the FDIC up to regulatory limits and can be obtained
faster than regular retail deposits.
108
Refer to
“Net Interest
Income” above
for information
about average
balances of
interest-bearing deposits
and the
average interest
rate paid on deposits, for the quarters and six-month periods ended
June 30, 2023 and 2022.
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 $73.9
million
as of
June 30,
2023, compared
to $75.1
million as
of December
31, 2022.
In addition
to these
repurchase agreements,
the Corporation
has
been
able to
maintain
access to
credit by
using
cost-effective
sources such
as FHLB
advances.
See
Note 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
June 30,
2023, the
outstanding balance
of fixed-rate
FHLB advances
was $500.0
million, compared
to $675.0
million as
of December
31, 2022.
During the
six-month period
ended June
30, 2023,
the Corporation
added $300.0
million of
long-
term FHLB advances at an
average cost of 4.59%, and
repaid its short-term FHLB advances. Of
the $500.0 million in FHLB advances
as of June 30, 2023, $400.0 million were pledged
with investment securities and $100.0 million were pledged
with mortgage loans. As
of
June
30,
2023,
the
Corporation
had
$980.9
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.
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.
During the second quarter
of 2023, the Corporation completed
the repurchase of $21.4 million
of TRuPs of the FBP Statutory
Trust
I as
part of
a privately
-negotiated
transaction,
resulting
in a
commensurate
reduction
in the
related
floating
rate junior
subordinated
debentures. The purchase
price equated to 92.5%
of the $21.5 million
par value of the
TRuPs. The 7.5% discount
resulted in a gain
of
approximately $1.6 million, which
is reflected in the consolidated
statements of income as “Gain on
early extinguishment of debt.” As
of June 30,
2023 and December
31, 2022, the
Corporation had junior
subordinated debentures outstanding
in the aggregate amount
of
$161.7 million
and $183.8
million, respectively,
with maturity
dates ranging
from June
17, 2034
through September
20, 2034.
As of
June
30, 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
Variable
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
six months of 2023, loans
pooled into GNMA MBS amounted
to
approximately
$66.4
million.
Also,
during
the
first
six
months
of
2023,
the
Corporation
sold
approximately
$22.8
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
June
30,
2023,
the
Corporation
had
approximately
$1.4
billion available for funding under the FED’s
Discount Window based on collateral pledged at the FED.
109
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
BIC Program, such
as FirstBank,
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 be
fixed for
the term
of the
advance on
the day
the advance
is made.
As previously
mentioned, the
Corporation enrolled
in the
BTFP during
the
first quarter
of 2023
to further
diversify its
contingency funding
sources and
has approximately
$2.2 million
available for
funding as
of June 30, 2023.
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.
110
Cash Flows
Cash and
cash equivalents
were $1.0
billion as
of June
30, 2023,
an increase
of $567.0
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 six months 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
six
months
of
2023
and
2022,
net
cash
provided
by
operating
activities
was
$166.5
million
and
$219.6
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 and repayments 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 six-month period
ended June 30,
2023, net cash
provided
by
investing
activities
was
$25.0 million,
primarily
due
to repayments
of available
-for-sale
and
held-to-maturity debt
securities
and
proceeds from sales of repossessed assets, partially offset
by net disbursements on loans held for investment.
For the six-month
period ended June
30, 2022, net
cash used in
investing activities
was $557.7
million, primarily
due to purchases
of U.S.
agencies
debentures
and
MBS,
and
net
disbursements
on
loans
held
for
investment,
partially
offset
by
repayments
of
U.S.
agencies MBS.
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
six-month
period
ended
June
30,
2023,
net
cash
provided
by
financing
activities
was
$375.5
million,
mainly
reflecting
a
$675.9 million
net increase
in deposits,
partially offset
by a
$196.0 million
net decrease
in borrowings
and $104.4
million of
capital
returned to stockholders.
For
the
first
six
months
of
2022,
net
cash
used
in
financing
activities
was
$941.5
million,
mainly
reflecting
a
net
decrease
in
deposits, the repayment at maturity of a $100 million repurchase agreement,
and $196.0 million of capital returned to stockholders.
111
Capital
As of June 30, 2023, the Corporation’s
stockholders’ equity was $1.4 billion, an increase of $72.5
million from December 31, 2022.
The growth was
driven by the earnings
generated in the first
half of 2023
and the $32.4
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, partially
offset by
common stock
dividends
declared in
the first
half of
2023 totaling
$50.7
million
or
$0.28
per
common
share,
the
repurchase
of
3.6
million
shares
of
common
stock
for
a
total
purchase
price
of
approximately $50.0 million,
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”
during
the
first
quarter
of
2023.
See
Note
1
–
Basis
of
Presentation
and
Significant
Accounting
Policies
for
additional
information
related to the adoption of ASU 2022-02.
On July 24,
2023, the Corporation’s
Board declared a
quarterly cash dividend
of $0.14 per common
share payable on
September 8,
2023
to
shareholders
of
record
at
the
close
of
business
on
August
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 July
24, 2023,
the Corporation
announced that
its Board
of Directors
approved a
new stock
repurchase program,
under which
the Corporation
may repurchase
up to
$225 million
of its
outstanding common
stock, which
it expects
to execute
through the
end of
the third quarter of 2024.
The Corporation
expects to repurchase
approximately $150 million
in common stock
during the second
half of 2023,
of which $75
million relates to
the remaining amount
of the $350
million stock repurchase
program announced
on April 27,
2022 that was resumed
in July 2023.
The Corporation expects
to fully utilize this
remaining authorization during
the third quarter of
2023. From July
1, 2023
through August
1, 2023, the
Corporation repurchased
approximately 1.5
million shares of
common stock
for a total
purchase price
of
$19.5 million.
Repurchases under
the programs
may be
executed through
open market
purchases, accelerated
share repurchases,
and/or privately
negotiated transactions or
plans, including under plans
complying with Rule 10b5-1
under the Exchange Act.
The Corporation’s
stock
repurchase program
s
are 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
Corporation’s
stock
repurchase
programs
do
not
obligate
it
to
acquire
any
specific
number
of
shares
and
do
not
have
an
expiration
date.
The
stock
repurchase
programs
may
be
modified,
suspended, or terminated at any time at the Corporation’s
discretion. 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.
112
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 June 30, 2023 and December 31, 2022, respectively:
June 30,
2023
December 31, 2022
(In thousands, except ratios and per share information)
Total equity
- GAAP
$
1,397,999
$
1,325,540
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
(17)
(205)
Core deposit intangible
(17,075)
(20,900)
Insurance customer relationship intangible
-
(13)
Tangible common
equity - non-GAAP
$
1,342,296
$
1,265,811
Total assets - GAAP
$
19,152,455
$
18,634,484
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
(17)
(205)
Core deposit intangible
(17,075)
(20,900)
Insurance customer relationship intangible
-
(13)
Tangible assets -
non-GAAP
$
19,096,752
$
18,574,755
Common shares outstanding
179,757
182,709
Tangible common
equity ratio - non-GAAP
7.03%
6.81%
Tangible book
value per common share - non-GAAP
$
7.47
$
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 June
30, 2023 and December 31, 2022, respectively.
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
of June
30, 2023 and December 31, 2022, respectively.
There were no transfers to the legal surplus reserve during the first half of 2023.
113
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. The
rate scenarios
considered in
these simulations
reflect gradual
upward or
downward interest
rate movements
in the
yield
curve,
for
gradual
(ramp)
parallel
shifts
in
the
yield
curve
of
200
basis
points
(“bps”)
during
a
twelve-month
period,
or
immediate
upward or downward
changes in interest
rate movements of 200
bps, for interest
rate shock scenarios.
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
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 June 30, 2023, the Corporation forecasted the 12-month
net interest income assuming June 30, 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 SOFR
curve for
June 30,
2023, as
compared to
December 31,
2022, reflects
an increase
of 60
bps on
average in
the short-term
sector of
the curve,
or between
one to
twelve months;
37 bps in
the medium-term
sector of
the curve,
or between
2 to
5 years;
and 5
bps
in
the
long-term
sector
of the
curve,
or
over
5-year
maturities.
A
similar
increase
in
market
rates
changes
was observed
in
the
Treasury
(CMT) yield
curve with
an increase
of 88
bps in
the short-term
sector,
29 bps
in the
medium-term sector,
and 6
bps in
the
long-term sector.
114
The following table presents the results of the simulations as of June 30,
2023 and December 31, 2022. Consistent with prior years,
these exclude non-cash changes in the fair value of derivatives:
Net Interest Income Risk
(% Change Projected for the next 12 months)
Static Simulation
Growing Balance Sheet
June 30,
2023
December 31, 2022
June 30,
2023
December 31, 2022
Gradual Change in Interest Rates:
+ 200 bps ramp
0.94
%
0.96
%
1.01
%
1.37
%
- 200 bps ramp
-1.38
%
-1.61
%
-1.42
%
-2.03
%
Immediate Change in Interest Rates:
+ 200 bps shock
3.76
%
2.35
%
3.18
%
2.56
%
- 200 bps shock
-5.43
%
-4.71
%
-4.77
%
-5.02
%
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
June 30,
2023 and
December 31,
2022, the
simulations showed
that the
Corporation
continues to
have a
slight asset-sensitive
position.
As of
June 30,
2023, the
net interest
income for
the next
twelve months
under a
non-static balance
sheet scenario
is estimated
to
increase by
1.01% in
the rising rate
scenario, when
compared against
the base
simulation. When
compared with
December 31,
2022,
the net interest income
sensitivity for the +200
bps ramp scenario decreased
by 36 bps. The
reduction in sensitivity was
mainly driven
by
the
migration
from
non-interest-bearing
and
other
low-cost
deposits
to
higher
cost
deposits,
such
as
time
deposits,
as
well
as
increases in
government
deposits which
have
a higher
beta, partially
offsetting
the growth
in the
loan portfolio
at higher
yields,
the
repricing of variable rate loans and overall higher yields in other interest
earning assets such as cash balances held at the FED.
Under a falling rate scenario,
as of June 30, 2023,
the net interest income on
the non-static balance sheet scenario
is estimated to
decrease
by
1.42%,
when
compared
against
the
base
simulation.
When
compared
to
December
31,
2022.
the
net
interest
income
sensitivity decreases for the -200-bps ramp scenario by approximately
61 bps in the non-static balance sheet driven by a higher
deposit
beta assumed in the June 30, 2023 simulation for non-maturity deposits,
and the aforementioned migration to higher cost deposits.
As discussed
above, the
Corporation evaluates
other scenarios
such as
immediate upward
or downward
changes in
interest rate
movements of 200 bps, for
interest rate shock scenarios. As
of June 30, 2023
and December 31, 2022,
the simulations showed that the
Corporation continues to have an asset-sensitive position.
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.
115
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.
116
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 applies
probability weights to
the baseline and
alternative downside economic
scenarios to estimate
the ACL with
the baseline scenario carrying
the highest weight. During
the second quarter of 2023,
the Corporation applied the
baseline scenario for
the commercial
mortgage and
construction loan
portfolios as
deterioration in
the CRE
price index
in these
portfolios is
expected at
a
lower extent
than projected
in the
alternative downside
scenario, particularly
in the Puerto
Rico region.
The economic
scenarios used
in the
ACL determination
contained
assumptions
related
to economic
uncertainties associated
with geopolitical
instability,
the CRE
price index,
high inflation
levels, and
the expected
path of
interest rate
increases by
the FED.
As of
June 30, 2023,
the Corporation’s
ACL model considered the following assumptions for key economic variables
in the probability-weighted economic scenarios:
●
Average
CRE price
index at
the national
level is
forecasted to
contract by
4.08% for
the remainder
of 2023
and 6.24%
for
2024.
●
Average Regiona
l
Home Price Index forecasts
in Puerto Rico (purchase only prices) shows a growth of 8.58%
and 6.36%, for
the
remainder
of
2023
and
2024,
respectively,
when
compared
to
the
previous
quarter
forecast.
For
the
Florida
region,
average Home
Price Index
forecasts shows
a growth
of 3.74%
and 2.24%
for the
remainder of
2023 and
2024, respectively,
when compared to the previous quarter forecast.
●
Average
regional
unemployment
in
Puerto
Rico
of
6.84%
for
the
remainder
of
2023
and
8.12%
for
2024.
For
the
Florida
region and the
U.S. mainland, average
unemployment rate of
3.60% and 4.13%,
respectively,
for the remainder
of 2023, and
4.37% and 4.79%, respectively,
for 2024.
●
Average
annualized change in real
gross domestic product (“GDP”)
in the U.S. mainland
of 1.07% for the
remainder of 2023
and 1.18% 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
June
30,
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 7.64%
for the
remainder of
2023, compared
to 6.84%
for the same
period
on the probability-weighted economic scenario projections.
117
To
demonstrate
the
sensitivity
to
key
economic
parameters
used
in
the
calculation
of
the
ACL
at
June
30,
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
hypothetical
increase
in
the
ACL
of
approximately
$53
million
at
June
30,
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 period ended
June 30, 2023.
As of June
30, 2023, the
ACL for loans
and finance
leases was $267.1
million, an increase
of $6.6 million,
from $260.5 million
as
of December 31, 2022. The ACL for
commercial and construction loans increased
by $5.0 million, mainly due to a
deterioration in the
forecasted CRE price
index to account for
an increased uncertainty
in the CRE market
at a national level
that could potentially
impact
the
markets
served
by
the
Corporation
coupled
with
the
growth
in
the
commercial
and
construction
loan
portfolios.
The
ACL
for
consumer loans increased by $3.9
million, primarily reflecting the effect
of the increase in the size of
the consumer loan portfolios and
historical
charge-off
levels,
partially
offset
by
updated
macroeconomic
variables,
such
as
the
unemployment
rate,
which
are
now
forecasted to deteriorate at a slower pace than
previously expected. The ACL for residential mortgage
loans decreased by $2.3 million,
mainly
driven
by
a
more
favorable
economic
outlook
in
the
projection
of
certain
forecasted
macroeconomic
variables,
such
as
the
Regional Home
Price Index,
partially offset
by 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. See
Note
1
–
Basis
of
Presentation
and
Significant
Accounting
Policies
to
the
unaudited
consolidated
financial
statements
herein
for
additional information related to the adoption of ASU 2022-02 during
2023.
The
ratio
of
the
ACL
for
loans
and
finance
leases
to
total
loans
held
for
investment
increased
to
2.28%
as
of
June
30,
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
decreased
from
2.20%
as
of
December
31,
2022
to
2.17% as of
June 30,
2023, primarily
reflecting a
more favorable
economic outlook
in the projection
of certain
forecasted
macroeconomic
variables,
such
as
the
Regional
Home
Price
Index,
partially
offset
by
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
2.93%
as of June 30, 2023 mainly due to the aforementioned deterioration
in the forecasted CRE price index.
●
The
ACL
to
total
loans
ratio for
the
commercial
mortgage
portfolio
increased
from
1.49%
as
of
December
31,
2022
to
1.83% as of June 30, 2023 mainly due to the aforementioned deterioration
in the forecasted CRE price index.
●
The ACL to total loans ratio
for the commercial and industrial portfolio
decreased from 1.14% as of December
31, 2022 to
0.95% as of June
30, 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 higher exposure
risk associated with the rising interest rate environment.
●
The ACL to
total loans ratio
for the consumer
loan portfolio decreased
from 3.83% as
of December
31, 2022
to 3.76% as
of June 30, 2023 mainly due to updates in macroeconomic variables, such as the
unemployment rate.
The ratio
of the
total ACL
for loans
and finance
leases to
nonaccrual loans
held for
investment was
325.60% as
of June
30, 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.
118
As shown in
the following
tables, the ACL
for loans
and finance
leases amounted
to $267.1
million as of
June 30,
2023, or 2.28%
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 June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(Dollars in thousands)
ACL for loans and finance leases, beginning of year
$
265,567
$
245,447
$
260,464
$
269,030
Impact of adoption of ASU 2022-02
-
-
2,116
-
Provision for credit losses - (benefit) expense:
Residential mortgage
(3,500)
(2,797)
(3,427)
(7,668)
Construction
1,202
151
2,062
(2,063)
Commercial mortgage
5,999
1,265
7,245
(21,375)
Commercial and industrial
2,997
(1,102)
1,347
653
Consumer and finance leases
14,072
15,148
29,799
26,129
Total provision for credit losses
- expense (benefit)
20,770
12,665
37,026
(4,324)
Charge-offs:
Residential mortgage
(1,146)
(2,079)
(2,129)
(4,607)
Construction
(38)
(16)
(38)
(60)
Commercial mortgage
(88)
(2)
(106)
(39)
Commercial and industrial
(6,350)
(68)
(6,468)
(358)
Consumer and finance leases
(16,462)
(10,427)
(33,260)
(20,243)
Total charge offs
(24,084)
(12,592)
(42,001)
(25,307)
Recoveries:
Residential mortgage
757
1,287
1,254
2,669
Construction
409
43
472
95
Commercial mortgage
56
1,218
224
1,262
Commercial and industrial
132
589
222
1,624
Consumer and finance leases
3,451
3,495
7,281
7,103
Total recoveries
4,805
6,632
9,453
12,753
Net charge-offs
(19,279)
(5,960)
(32,548)
(12,554)
ACL for loans and finance leases, end of period
$
267,058
$
252,152
$
267,058
$
252,152
ACL for loans and finance leases to period-end total loans
held for investment
2.28%
2.25%
2.28%
2.25%
Net charge-offs (annualized) to average loans
outstanding during the period
0.67%
0.21%
0.56%
0.23%
Provision for credit losses - expense (benefit) for loans and finance
leases to net charge-
offs during the period
1.08x
2.13x
1.14x
-0.34x
119
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 June 30,
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
$
2,793,790
$
163,998
$
2,320,069
$
2,946,201
$
3,495,257
$
11,719,315
Percent of loans in each category to total loans
24
%
1
%
20
%
25
%
30
%
100
%
Allowance for credit losses
60,514
4,804
42,427
28,014
131,299
267,058
Allowance for credit losses to amortized cost
2.17
%
2.93
%
1.83
%
0.95
%
3.76
%
2.28
%
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
June 30,
2023,
the
ACL for
off-balance
sheet
credit
exposures
increased
by
$0.6
million
to
$4.9
million,
when
compared
to
December
31,
2022,
driven
by
the
deterioration
in
the
forecasted CRE price index and its effect in construction unfunded
loan commitments.
Allowance for Credit Losses for Held-to-Maturity
Debt Securities
As of
June 30,
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
June
30,
2023,
the
ACL
for
held-to-maturity
debt
securities
was
$8.4
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 June 30, 2023, compared to $0.5 million as of December 31, 2022.
120
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
consists
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.
121
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 proc
ess 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 in
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:
June 30, 2023
December 31, 2022
(Dollars in thousands)
Nonaccrual loans held for investment:
Residential mortgage
$
33,252
$
42,772
Construction
1,677
2,208
Commercial mortgage
21,536
22,319
Commercial and Industrial
9,194
7,830
Consumer and finance leases
16,362
14,806
Total nonaccrual loans held for investment
82,021
89,935
OREO
31,571
31,641
Other repossessed property
5,404
5,380
Other assets
(1)
2,111
2,202
Total non-performing assets
$
121,107
$
129,158
Past due loans 90 days and still accruing
(2) (3) (4)
$
63,211
$
80,517
Non-performing assets to total assets
0.63
%
0.69
%
Nonaccrual loans held for investment to total loans held for investment
0.70
%
0.78
%
ACL for loans and finance leases
$
267,058
$
260,464
ACL for loans and finance leases to total nonaccrual loans held
for investment
325.60
%
289.61
%
ACL for loans and finance leases to total nonaccrual loans held
for investment, excluding residential real estate loans
547.60
%
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 $9.5 million and $12.0 million as of
June 30, 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 $19.9 million and $28.2 million
of FHA government guaranteed residential mortgage loans that were
over 15 months delinquent as of June 30, 2023 and December
31, 2022, respectively.
(4)
Includes rebooked loans, which were previously pooled into
GNMA securities, amounting to $6.5 million and $10.3 million as
of June 30, 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.
122
Total
nonaccrual loans were $82.0
million as of June
30, 2023. This represents
a net decrease of $7.9
million from $89.9 million
as
of December
31, 2022.
The net
decrease
was primarily
related to
a $9.5
million reduction
in nonaccrua
l
residential mortgage
loans,
partially
offset
by
increases
of
$1.5
million
and
$0.1
million
in
nonaccrual
consumer
loans
and
nonaccrual
commercial
and
construction loans, respectively.
The following
table shows non-performing assets by geographic segment as of the indicated dates:
June 30, 2023
December 31, 2022
(In thousands)
Puerto Rico:
Nonaccrual loans held for investment:
Residential mortgage
$
20,047
$
28,857
Construction
703
831
Commercial mortgage
13,337
14,341
Commercial and Industrial
5,808
5,859
Consumer and finance leases
15,874
14,142
Total nonaccrual loans held for investment
55,769
64,030
OREO
27,107
28,135
Other repossessed property
5,226
5,275
Other assets
2,111
2,202
Total non-performing assets
$
90,213
$
99,642
Past due loans 90 days and still accruing
$
60,964
$
76,417
Virgin Islands:
Nonaccrual loans held for investment:
Residential mortgage
$
5,767
$
6,614
Construction
974
1,377
Commercial mortgage
8,199
7,978
Commercial and Industrial
1,119
1,179
Consumer
379
469
Total nonaccrual loans held for investment
16,438
17,617
OREO
4,464
3,475
Other repossessed property
168
76
Total non-performing assets
$
21,070
$
21,168
Past due loans 90 days and still accruing
$
2,108
$
4,100
United States:
Nonaccrual loans held for investment:
Residential mortgage
$
7,438
$
7,301
Commercial and Industrial
2,267
792
Consumer
109
195
Total nonaccrual loans held for investment
9,814
8,288
OREO
-
31
Other repossessed property
10
29
Total non-performing assets
$
9,824
$
8,348
Past due loans 90 days and still accruing
$
139
$
-
123
Nonaccrual commercial
and industrial
loans increased
by $1.4
million to $9.2
million as of
June 30,
2023, from
$7.8 million
as of
December 31, 2022.
Nonaccrual
commercial mortgage
loans decreased
by $0.8
million to
$21.5 million
as of
June 30,
2023, from
$22.3 million
as of
December 31, 2022.
Nonaccrual construction loans
decreased by $0.5 million
to $1.7 million as of
June 30, 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 June 30, 2023
Beginning balance
$
1,794
$
21,598
$
13,404
$
36,796
Plus:
Additions to nonaccrual
-
439
2,691
3,130
Less:
Loans returned to accrual status
-
-
(374)
(374)
Nonaccrual loans transferred to OREO
-
(61)
-
(61)
Nonaccrual loans charge-offs
-
(88)
(6,350)
(6,438)
Loan collections
(117)
(352)
(177)
(646)
Ending balance
$
1,677
$
21,536
$
9,194
$
32,407
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Six-Month Period Ended June 30, 2023
Beginning balance
$
2,208
$
22,319
$
7,830
$
32,357
Plus:
Additions to nonaccrual
127
983
10,161
11,271
Less:
Loans returned to accrual status
-
(361)
(526)
(887)
Nonaccrual loans transferred to OREO
(332)
(223)
(183)
(738)
Nonaccrual loans charge-offs
-
(106)
(6,468)
(6,574)
Loan collections
(326)
(1,082)
(1,620)
(3,028)
Reclassification
-
6
-
6
Ending balance
$
1,677
$
21,536
$
9,194
$
32,407
124
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Quarter Ended June 30, 2022
Beginning balance
$
2,543
$
26,576
$
18,129
$
47,248
Plus:
Additions to nonaccrual
18
53
579
650
Less:
Loans returned to accrual status
(48)
(157)
(255)
(460)
Nonaccrual loans transferred to OREO
(67)
(88)
(273)
(428)
Nonaccrual loans charge-offs
(16)
(2)
(37)
(55)
Loan collections
(55)
(1,629)
(1,064)
(2,748)
Ending balance
$
2,375
$
24,753
$
17,079
$
44,207
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Six-Month Period Ended June 30, 2022
Beginning balance
$
2,664
$
25,337
$
17,135
$
45,136
Plus:
Additions to nonaccrual
18
2,934
2,158
5,110
Less:
Loans returned to accrual status
(48)
(358)
(464)
(870)
Nonaccrual loans transferred to OREO
(80)
(549)
(273)
(902)
Nonaccrual loans charge-offs
(56)
(39)
(327)
(422)
Loan collections
(123)
(2,170)
(1,552)
(3,845)
Reclassification
-
(402)
402
-
Ending balance
$
2,375
$
24,753
$
17,079
$
44,207
125
Nonaccrual residential mortgage loans decreased by $9.5
million to $33.3 million as of June 30, 2023, compared
to $42.8 million as
of December
31, 2022.
The decrease
was primarily
related
to $
6.6 million
of loans
restored to
accrual status,
$4.3 million
of loans
transferred to OREO, and $3.1 million in collections, partially offset
by inflows of $5.1 million.
The following table presents the activity of residential nonaccrual loans held for investment
for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Beginning balance
$
36,410
$
48,818
$
42,772
$
55,127
Plus:
Additions to nonaccrual
3,009
4,403
5,090
9,731
Less:
Loans returned to accrual status
(2,714)
(5,332)
(6,651)
(8,781)
Nonaccrual loans transferred to OREO
(1,549)
(1,185)
(4,259)
(2,122)
Nonaccrual loans charge-offs
(401)
(515)
(621)
(950)
Loan collections
(1,503)
(1,601)
(3,073)
(8,417)
Reclassification
-
-
(6)
-
Ending balance
$
33,252
$
44,588
$
33,252
$
44,588
The amount of nonaccrual consumer
loans, including finance leases, increased
by $1.5 million to $16.3 million
as of June 30, 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 June 30, 2023, approximately $18.5 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 six-month
period ended June
30, 2023, interest income
of approximately $0.2 million
related to nonaccrual
loans with a
carrying
value of
$24.1 million
as of
June 30,
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 $118.5
million
as of
June 30,
2023, an
increase
of $13.6
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 increased by $7.5 million to $78.4 million,
mainly in the auto loans portfolio.
●
Commercial
and
construction
loans
in
early
delinquency
increased
by
$3.4
million
to
$9.2
million,
mainly
due
to
a
$4.5
million commercial
mortgage loan
in the
Puerto Rico
region that
matured and
is in
the process of
renewal but
for which
the
Corporation continues to receive interest and principal payments from
the borrower.
●
Residential mortgage loans in early delinquency increased by $2.7
million to $30.9 million.
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.
126
The OREO portfolio,
which is part of
non-performing assets, amounted
to $31.6 million as
of each of June
30, 2023 and December
31, 2022.
The following
tables show
the composition
of the
OREO portfolio
as of
June 30,
2023 and
December 31,
2022, as
well as
the activity of the OREO portfolio by geographic area during the six-month
period ended June 30, 2023:
OREO Composition by Region
As of June 30, 2023
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
22,026
$
1,595
$
-
$
23,621
Construction
1,833
59
-
1,892
Commercial
3,248
2,810
-
6,058
$
27,107
$
4,464
$
-
$
31,571
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
Six-Month Period Ended June 30, 2023
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Beginning Balance
$
28,135
$
3,475
$
31
$
31,641
Additions
9,442
1,295
-
10,737
Sales
(9,820)
(306)
(31)
(10,157)
Write-downs and other adjustments
(650)
-
-
(650)
Ending Balance
$
27,107
$
4,464
$
-
$
31,571
127
Net Charge-offs and Total
Credit Losses
Net charge-offs
totaled $19.3
million for
the second
quarter of
2023, or
0.67% of
average loans
on an
annualized basis,
compared
to
$6.0
million,
or an
annualized
0.21%
of
average
loans,
for
the
second
quarter
of 2022.
For
the
six-month
period
ended
June 30,
2023,
net
charge-offs
totaled
$32.5
million,
or
an
annualized
0.56%
of
average
loans,
compared
to $12.6
million,
or an
annualized
0.23% of average loans,
for the same period in 2022.
Consumer loans
and finance
leases net
charge-offs
for the
second quarter
of 2023
were $13.0
million, or
an annualized
1.51% of
related average
loans, compared to
$6.9 million, or
an annualized 0.91%
of related average
loans, for the
second quarter of
2022. Net
charge-offs
of
consumer
loans
and
finance
leases
for
the
six-month
period
ended
June
30,
2023
were
$26.0
million,
or
1.53%
of
related average loans, compared to $13.2 million, or an annualized
0.88% of related average loans, for the same period in 2022.
Commercial
and
industrial
loans
net
charge-offs
for
the
second
quarter
of
2023
were
$6.2
million,
or
an
annualized
0.87%
of
related
average
loans,
compared
to
net
recoveries
of
$0.5
million,
or
an
annualized
0.07%
of
related
average
loans,
for
the
second
quarter of
2022. Commercial
and industrial
loans net
charge-offs for
the six-month
period
ended June
30, 2023
were $6.2
million, or
0.44% of
related average
loans,
compared to
net recoveries
of $1.3
million, or
an annualized
0.09% of
related average
loans, for
the
same
period
in
2022.
The
net
charge-offs
for
the
second
quarter
and
first
six
months
of
2023
included
a
$6.2
million
charge-off
recorded on a commercial and industrial participated loan in the Florida
region in the power generation industry.
Residential
mortgage
loans
net
charge-offs
for
the
second
quarter
of
2023
were
$0.5
million,
or
an
annualized
0.06%
of
related
average loans,
compared to $0.8
million, or an
annualized 0.11%
of related average
loans, for the
second quarter of
2022. Residential
mortgage
loans net
charge-offs
for
the six-month
period ended
June 30,
2023 were
$0.8 million,
or an
annualized
0.06% of
related
average loans, compared to $1.9 million, or an annualized
0.13% of related average loans, for the same period of
2022. Approximately
$0.3
million of charge-offs
for the second quarter of
2023 and $0.5 million for
the first six months of
2023 resulted from valuations
of
collateral
dependent
residential
mortgage
loans,
compared
to
$0.5
million
and
$0.9
million
for
the
comparable
periods
in
2022.
Charge-offs
on residential
mortgage loans
also included
$0.3
million and
$0.8 million
related to
foreclosures recorded
in the
second
quarter and
first six
months of 2023,
respectively,
compared to
$0.5 million
and $1.8
million, recorded
for the
comparable periods
in
2022,
respectively.
Commercial mortgage
loans net
charge-offs
for the
second quarter
of 2023
were $32
thousand, or
an annualized
0.01% of
related
average loans,
compared to
net recoveries
of $1.2
million, or
an annualized
0.22% of
related average
loans, for
the second
quarter
of
2022.
Commercial mortgage
loans net
recoveries for
the six-month
period ended
June 30,
2023 were
$0.1 million,
or an
annualized
0.01%
of related
average
loans, compared
to
$1.2
million,
or
an
annualized
0.11%
or related
average
loans,
for
the same
period
in
2022.
Construction
loans
net
recoveries
for
the
second
quarter
of
2023
were
$0.4
million,
or
an
annualized
0.99%
of
related
average
loans, compared to $27 thousand, or an annualized 0.09%
of related average loans, for the same period in 2022. Construction
loans net
recoveries
for
the
six-month
period
ended
June
30,
2023
were
$0.4
million,
or
an
annualized
0.59%
of
related
average
loans,
compared to $35 thousand, or an annualized 0.06% of related
average loans, for the same period in 2022.
128
The following table presents annualized net charge-offs
(recoveries) to average loans held-in-portfolio for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
Residential mortgage
0.06
%
0.11
%
0.06
%
0.13
%
Construction
(0.99)
%
(0.09)
%
(0.59)
%
(0.06)
%
Commercial mortgage
0.01
%
(0.22)
%
(0.01)
%
(0.11)
%
Commercial and industrial
0.87
%
(0.07)
%
0.44
%
(0.09)
%
Consumer and finance leases
1.51
%
0.91
%
1.53
%
0.88
%
Total loans
0.67
%
0.21
%
0.56
%
0.23
%
The following table presents annualized net charge-offs
(recoveries) to average loans held in various portfolios by geographic
segment for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
PUERTO RICO:
Residential mortgage
0.08
%
0.13
%
0.09
%
0.16
%
Construction
(3.04)
%
(0.14)
%
(1.86)
%
(0.03)
%
Commercial mortgage
0.02
%
(0.16)
%
0.01
%
(0.08)
%
Commercial and industrial
0.01
%
(0.12)
%
0.01
%
(0.14)
%
Consumer and finance leases
1.51
%
0.93
%
1.47
%
0.88
%
Total loans
0.56
%
0.30
%
0.57
%
0.29
%
VIRGIN ISLANDS:
Residential mortgage
(0.02)
%
0.16
%
(0.05)
%
0.13
%
Construction
3.93
%
-
%
1.93
%
-
%
Commercial mortgage
(0.23)
%
(0.22)
%
(0.22)
%
(0.22)
%
Commercial and industrial
-
%
-
%
(0.01)
%
(0.01)
%
Consumer and finance leases
2.02
%
0.59
%
2.10
%
1.18
%
Total loans
0.34
%
0.12
%
0.31
%
0.19
%
FLORIDA:
Residential mortgage
(0.04)
%
(0.05)
%
(0.02)
%
(0.03)
%
Construction
(0.06)
%
(0.06)
%
(0.05)
%
(0.08)
%
Commercial mortgage
-
%
(0.40)
%
(0.04)
%
(0.21)
%
Commercial and industrial
2.67
%
-
%
1.31
%
-
%
Consumer and finance leases
(1.16)
%
(2.32)
%
(0.45)
%
(0.43)
%
Total loans
1.23
%
(0.13)
%
0.60
%
(0.06)
%
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 half of 2023 amounted to $28.6 million, or
a loss rate of 0.25% on
an
annualized
basis
of
average
loans
and
repossessed
assets,
compared
to
losses
of
$10.3
million,
or
a
loss
rate
of
0.19%
on
an
annualized basis, for the first half of 2022.
129
The following table presents information about the OREO inventory
and credit losses for the indicated periods:
Quarter ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(Dollars in thousands)
OREO
OREO balances, carrying value:
Residential
$
23,621
$
31,780
$
23,621
$
31,780
Construction
1,892
2,657
1,892
2,657
Commercial
6,058
7,269
6,058
7,269
Total
$
31,571
$
41,706
$
31,571
$
41,706
OREO activity (number of properties):
Beginning property inventory
344
442
344
418
Properties acquired
44
41
103
109
Properties disposed
(68)
(52)
(127)
(96)
Ending property inventory
320
431
320
431
Average holding period (in days)
Residential
524
658
524
658
Construction
2,178
2,162
2,178
2,162
Commercial
2,580
2,041
2,580
2,041
Total average holding period (in days)
1,018
995
1,018
995
OREO operations gain (loss):
Market adjustments and gains (losses) on sale:
Residential
$
2,553
$
1,988
$
5,043
$
2,980
Construction
7
11
47
114
Commercial
-
(62)
(67)
(79)
Total net gain
2,560
1,937
5,023
3,015
Other OREO operations expenses
(576)
(452)
(1,043)
(810)
Net Gain on OREO operations
$
1,984
$
1,485
$
3,980
$
2,205
(CHARGE-OFFS) RECOVERIES
Residential charge-offs, net
$
(389)
$
(792)
$
(875)
$
(1,938)
Construction recoveries, net
371
27
434
35
Commercial (charge-offs) recoveries, net
(6,250)
1,737
(6,128)
2,489
Consumer and finance leases charge-offs, net
(13,011)
(6,932)
(25,979)
(13,140)
Total charge-offs,
net
(19,279)
(5,960)
(32,548)
(12,554)
TOTAL CREDIT LOSSES
(1)
$
(17,295)
$
(4,475)
$
(28,568)
$
(10,349)
(GAIN) LOSS RATIO PER CATEGORY
(2)
Residential
(0.31)
%
(0.16)
%
(0.15)
%
(0.07)
%
Construction
(1.00)
%
(0.12)
%
(0.32)
%
(0.24)
%
Commercial
0.48
%
(0.13)
%
0.12
%
(0.09)
%
Consumer
1.51
%
0.91
%
0.76
%
0.88
%
TOTAL CREDIT LOSS RATIO
(3)
0.60
%
0.16
%
0.25
%
0.19
%
(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.
130
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
$11.7
billion as
of June
30, 2023,
the Corporation
had credit
risk of
approximately 79%
in the
Puerto Rico region,
17% in the United States region, and 4% in the Virgin
Islands region.
131
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
June
15,
2023,
the
Puerto
Rico
Planning
Board
(“PRPB”)
presented
the
updated
Economic
Report
to
the
Governor,
which
provides
an
analysis
of
Puerto
Rico’s
economy
during
fiscal
year
2022
and
a
short-term
forecast
for
fiscal
years
2023
and
2024.
According
to
the
PRPB,
Puerto
Rico’s
real
gross
national
product
(“GNP”)
expanded
by
3.7%
in
fiscal
year
2022,
which
was
the
highest annual real GNP
growth registered in Puerto
Rico since fiscal year 1999.
The growth was primarily driven
by a sharp increase
in personal consumption expenditures reflecting an increase of
approximately 8.5% when compared to fiscal year 2021, increase
in net
exports of 4.8%, and growth in fixed capital investments of 12.6%.
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
May
2023,
preliminary
estimates
showed
that
the
EDB-EAI
increased
0.8% on
a month-over-month
basis and
1.8% higher
than May
2022.
Over the
12-month
period ended
May 31,
2023,
the
EDB-EAI averaged 124.8, approximately 0.2% above the comparable
figure a year earlier.
Labor
market
trends
remain
positive.
Data
published
by
the
Bureau
of
Labor
Statistics
show
June
2023
payroll
employment
in
Puerto
Rico
increased
by
2.4%
when
compared
to
June
2022,
supported
by
a
year-over-year
increase
of
8.6%
in
Leisure
and
Hospitality
payroll employment and a 12.0%
year-over-year increase
in
Construction
-related payroll employment
.
The unemployment
rate stood at 6.1% as of June 2023.
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 pos
t-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
to properly
delivery 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
power/energy
sector
reform
to
improve
availability,
reliability
and
affordability
of
energy,
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
facilitating
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
COVID-19
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 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.
132
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
Puerto Rico’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
Puerto Rico’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”).
On June 23, 2023,
the Fiscal Oversight and
Management Board for
Puerto Rico certified a new
fiscal plan for PREPA
which included
the most
recent projections
of energy
consumption in
Puerto Rico
and consequently
reflected a
significant reduction
in the
projected
revenues for
PREPA
over the
next years.
As such,
PREPA
concluded
that its
ability to
repay its
outstanding debt
was significantly
less
than
what
was
previously
stated.
On
June
26,
2023,
Judge
Laura
Taylor
Swain
resolved
that
PREPA’s
bondholders
have
an
unsecured claim
of $2.4 billion
against PREPA
and not
the approximately
$9.0 billion
that bondholders
were claiming. This
decision
could
result
in a
75% haircut
on
PREPA’s
outstanding
debt
and
may
reduce
the ability
of
bondholders
to impose
higher
electricity
rates to consumers to pay for debt service.
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, particularly in the aftermath of
Hurricane Maria in 2017. During the first five months
of
2023, over
$1.8 billion
in disaster relief
funds have
been disbursed
through FEMA
Public Assistance
program and
the Department
of
Housing and
Urban Development’s
“Community Development
Block Grant”
program, a
117%
increase when
compared to
the same
period
in
2022,
and
the
Fiscal
Oversight
and
Management
Board
for
Puerto
Rico
is
currently
projecting
over
$5
billion
in
total
disbursements to
take place during
2023.
These funds will
continue to play
a key role
in supporting Puerto
Rico’s economic
stability
and are expected to have a positive impact on the Island’s
infrastructure.
On June
21, 2023,
Fitch Ratings
issued a
credit rating
research note
highlighting the
government’s
commitment
to improving
its
continuing
disclosure
practices and
the release
of
the 2021
audited
financial
statements.
The
government
has
made
great strides
in
recent years
with regards
to its
financial transparency
and its
on target
to release
its audited
financial statements
on time
and in
line
with regulatory expectations.
133
Exposure to Puerto Rico Government
As of
June 30,
2023, the
Corporation had
$344.3 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 June
30, 2023,
approximately $186.2
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
$113.2
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 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 $9.5
million in
loans to
an affiliate
of
PREPA,
$32.1 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 $2.1 million as of
June 30, 2023).
The
following
table
details
the
Corporation’s
total
direct
exposure
to
Puerto
Rico
government
obligations
according
to
their
maturities:
As of June 30, 2023
Investment
Portfolio
(Amortized
cost)
Loans
Total
Exposure
(In thousands)
Puerto Rico Housing Finance Authority:
After 10 years
$
3,254
$
-
$
3,254
Total
Puerto Rico Housing Finance Authority
3,254
-
3,254
Agencies and public corporation of the Puerto Rico government:
After 1 to 5 years
-
6,160
6,160
After 5 to 10 years
-
25,979
25,979
Total agencies and public
corporation of the Puerto Rico government
-
32,139
32,139
Affiliate of the Puerto Rico Electric Power Authority:
Due within one year
-
9,519
9,519
Total Puerto Rico government
affiliate
-
9,519
9,519
Total
Puerto Rico public corporations and government affiliate
-
41,658
41,658
Municipalities:
Due within one year
1,205
10,600
11,805
After 1 to 5 years
42,736
55,909
98,645
After 5 to 10 years
56,160
66,717
122,877
After 10 years
66,023
-
66,023
Total
Municipalities
166,124
133,226
299,350
Total
Direct Government Exposure
$
169,378
$
174,884
$
344,262
134
In addition, as of
June 30, 2023, the Corporation
had $81.1 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
June
30,
2023,
the
Corporation
had
$2.9
billion
of
public
sector
deposits
in
Puerto
Rico,
compared
to
$2.3
billion
as
of
December
31,
2022.
Approximately
21%
of the
public
sector deposits
as of
June 30,
2023
were from
municipalities
and
municipal
agencies in
Puerto Rico
and 79%
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
several fiscal and economic
challenges that have deteriorated
the overall financial
and
economic
conditions
in
the
area.
However,
on
May
22,
2023,
the
United
States
Bureau
of
Economic
Analysis
(the
“BEA”)
released its
estimates of
real gross domestic
product (“GDP”)
for 2021.
According to
the BEA,
the USVI’s
real GDP
increased 2.8%
in
2021
after
decreasing
1.9%
in
2020.
The
increase
in
real
GDP
reflected
increases
in
exports
and
personal
consumption
expenditures.
These
increases
were
partly
offset
by
decreases
in
private
inventory
investment,
private
fixed
investment,
and
government spending. Imports, a subtraction item in the calculation of
GDP,
also decreased.
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, which
occurred in
2017. According
to data
published by
the
government, over
$4.7 billion
in disaster
recovery funds
were disbursed
as of
2023 and
$3.4 billion
were remaining
obligated funds
waiting to
be disbursed.
On the
fiscal front,
revenues have
trended
positively and
the USVI
government
successfully completed
the
restructuring
of the
government employee
retirement system.
Moreover,
labor market
trends are
stable with
payroll employment
for
the month of June 2023, up 3.2% when compared to June 2022.
Finally, 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
deteriorates
again,
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
June
30,
2023,
the
Corporation
had
$78.9
million
in
loans
to
USVI
public
corporations,
compared
to
$38.0
million
as
of
December
31,
2022.
The
increase
in
loans
to
USVI
public
corporations
was
driven
the aforementioned
$47.0
million
line
of
credit
utilization.
As of June 30, 2023, all loans were currently performing and up to date on principal
and interest payments.
135
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 June
30, 2023 the
end of the
period covered by
this Quarterly Report
on Form 10-Q.
Based on this
evaluation, the
Chief Executive Officer
and
Chief Financial
Officer
concluded that
the Corporation’s
disclosure
controls
and
procedures were
effective
as of
June 30,
2023
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 June 30,
2023 that have materially
affected, or are
reasonably likely to
materially affect, the Corporation’s
internal control over financial reporting.
ITEM 5.
OTHER INFORMATION
No director
or officer
(as defined
in Rule
16a-1(f) of
the Exchange
Act) of
the Corporation
adopted
, modified,
or
terminated
any
Rule 10b5-1 trading arrangement or
any
non-Rule
10b5-1
trading arrangement (as such terms are defined
in Item 408 of Regulation S-
K under the Exchange Act) during the quarter ended June 30, 2023.
136
PART II - OTHER INFORMATION
In accordance
with the
instructions to
Part II
of Form
10-Q, 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
the unaudited
consolidated
financial
statements
herein, which is incorporated by reference in this Part II, 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,
as previously disclosed,
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.
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.
As of
June 30, 2023, the Corporation has not incurred any material expenses related
to the incident and does not expect any future impact.
137
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,
liquidity constraints,
and new capital requirements.
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.
For example,
on May
11, 2023,
the FDIC
issued a
proposed rule
to recover
the losses
to the
Deposit
Insurance Fund
(“DIF”) associated with
protecting uninsured depositors
as part of
the aforementioned
financial institution failures.
Under
the proposed
rule, the
FDIC would
collect a
special assessment
at an
annual rate
of approximately
12.5 basis
points over
eight quarterly
periods,
commencing with the first quarter of 2024. The assessment
base for the special assessment would be equal to an
insured depository
institution’s estimated uninsured deposits reported as
of December 31, 2022, adjusted
to exclude the first $5
billion in estimated uninsured
deposits.
Notwithstanding, the
special assessment
could be
subject to
change depending
on whether
there are
any shortfalls
on amounts
collected.
If the final rule
is issued as proposed, the
estimated impact of the special
assessment on the Corporation would
be an increase in
non-interest expense by approximately $6
million that would need to be accrued once the
proposed rule is finalized.
138
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 June
30, 2023.
Issuer Purchases of Equity Securities
There were
no
repurchases of
common stock
during the
quarter ended
June
30,
2023.
As
of
June
30,
2023,
the
Corporation
has
remaining authorization to repurchase $75 million under the $350 million
stock repurchase program announced on April 27, 2022.
139
ITEM 6.
EXHIBITS
See the Exhibit Index below, which is incorporated by
reference herein:
EXHIBIT INDEX
Exhibit No.
Description
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 June 30, 2023, formatted in Inline
XBRL (included within the Exhibit 101 attachments)
140
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:
August 8, 2023
By:
/s/ Aurelio Alemán
Aurelio Alemán
President and Chief Executive Officer
Date: August 8, 2023
By:
/s/ Orlando Berges
Orlando Berges
Executive Vice President and Chief Financial Officer