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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
____________
FORM
10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 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:
172,552,186
shares outstanding as of November 1, 2023.
2
FIRST BANCORP.
INDEX PAGE
PART
I. FINANCIAL INFORMATION
PAGE
Item 1.
Financial Statements:
Consolidated
Statements
of
Financial
Condition
(Unaudited)
as
of
September
30,
2023
and
December 31, 2022
5
Consolidated
Statements
of
Income
(Unaudited)
–
Quarters
and
Nine-Month
Periods
ended
September 30, 2023 and 2022
6
Consolidated
Statements
of
Comprehensive
Income
(Loss)
(Unaudited)
–
Quarters
and
Nine-
Month Periods ended September 30, 2023 and 2022
7
Consolidated
Statements
of
Cash
Flows
(Unaudited)
–
Nine-Month
Periods
ended
September
30, 2023 and 2022
8
Consolidated Statements
of Changes in
Stockholders’ Equity (Unaudited)
– Quarters and
Nine-
Month Periods ended September 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
79
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
134
Item 1.
Controls and Procedures
134
PART
II. OTHER INFORMATION
Item 1.
Legal Proceedings
135
Item 1A.
Risk Factors
135
Item 2.
Item 5.
Unregistered Sales of Equity Securities and Use of Proceeds
Other Information
137
137
Item 6.
Exhibits
138
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
materially
from
those
expressed
in,
or
implied
by,
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
fiscal year
ended December
31, 2022,
as amended
on October
13, 2023
(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
June 30, 2023, and the following:
●
the
impacts
of
elevated
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,
which
could
result
in,
among
other
things,
bank
deposit
runoffs, liquidity constraints, and increased regulatory
requirements and costs;
●
the
effect
of
continued
changes
in
the
fiscal
and
monetary
policies
and
regulations
of
the
United
States
(“U.S.”)
federal
government,
the Puerto
Rico government
and other governments,
including those
determined by
the Board
of the Governors
of the Federal Reserve System (the
“Federal Reserve Board”),
the Federal Reserve Bank of New York
(the “New York
FED”
or
the
“FED”),
the
Federal
Deposit
Insurance
Corporation
(the
“FDIC”),
government-sponsored
housing
agencies
and
regulators in Puerto
Rico, the U.S., and
the U.S. Virgin
Islands (the “USVI)
and British Virgin
Islands (the “BVI”),
that may
affect the future results of the Corporation;
●
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;
4
●
general competitive
factors and other
market risks as
well as the
implementation of
strategic growth opportunities,
including
risks, uncertainties, and other factors or events related to any business acquisitions
or dispositions;
●
uncertainty as
to the
implementation of
the debt
restructuring plan
of Puerto
Rico (“Plan
of Adjustment”
or “PoA”)
and the
fiscal plan
for Puerto
Rico as
certified
on April
3, 2023
(the “2023
Fiscal Plan”)
by the
oversight
board established
by the
Puerto Rico
Oversight, Management,
and Economic
Stability Act
(“PROMESA”),
or any
revisions to
it, on
our clients
and
loan portfolios, and any potential impact from future economic or political
developments and tax regulations in Puerto Rico;
●
the
impact
of
changes
in
accounting
standards,
or
assumptions
in
applying
those
standards,
and
of
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, the emergence
or continuation of
widespread health emergencies,
geopolitical
conflicts
(including
the ongoing
conflict
in Ukraine,
the conflict
in Israel
and
surrounding
areas,
the possible
expansion
of
such
conflicts
and
potential
geopolitical
consequences),
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 downgrade of the United
States of America’s
Long-Term
Foreign-Currency Issuer
Default Rating
(“IDR”)
to ‘AA+’
from ‘AAA’
in August
2023, 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;
●
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)
September 30, 2023
December 31, 2022
(In thousands, except for share information)
ASSETS
Cash and due from banks
$
583,913
$
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
-
81,103
Other available-for-sale debt securities
5,175,803
5,518,417
Total available-for-sale debt securities, at fair value (amortized cost of $
6,021,072
as of September 30, 2023, and
$
6,398,197
as of December 31, 2022; ACL of $
465
as of September 30, 2023 and $
458
as of December 31, 2022)
5,175,803
5,599,520
Held-to-maturity debt securities, at amortized cost, net of ACL
of $
2,250
as of September 30, 2023 and $
8,286
as of December 31, 2022 (fair value of $
342,851
as of September 30, 2023 and $
427,115
as of December 31, 2022)
356,919
429,251
Equity securities
48,683
55,289
Total investment securities
5,581,405
6,084,060
Loans, net of ACL of $
263,615
as of September 30, 2023 and $
260,464
as of December 31, 2022
11,687,317
11,292,361
Mortgage loans held for sale, at lower of cost or market
8,961
12,306
Total loans, net
11,696,278
11,304,667
Accrued interest receivable on loans and investments
68,783
69,730
Premises and equipment, net
144,611
142,935
Other real estate owned (“OREO”)
28,563
31,641
Deferred tax asset, net
150,805
155,584
Goodwill
38,611
38,611
Other intangible assets
15,229
21,118
Other assets
285,410
305,633
Total assets
$
18,594,608
$
18,634,484
LIABILITIES
Non-interest-bearing deposits
$
5,440,247
$
6,112,884
Interest-bearing deposits
10,994,990
10,030,583
Total deposits
16,435,237
16,143,467
Short-term securities sold under agreements to repurchase
-
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
194,603
231,582
Total liabilities
17,291,540
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;
174,386,326
shares outstanding as of September 30, 2023 and
182,709,059
as of December 31, 2022
22,366
22,366
Additional paid-in capital
963,791
970,722
Retained earnings, includes legal surplus reserve of $
168,484
1,790,652
1,644,209
Treasury stock (at cost),
49,276,790
shares as of September 30, 2023 and
40,954,057
shares as of December 31, 2022
(622,378)
(506,979)
Accumulated other comprehensive loss, net of tax of $
8,468
as of each September 30, 2023 and December 31, 2022
(851,363)
(804,778)
Total stockholders’ equity
1,303,068
1,325,540
Total liabilities and stockholders’ equity
$
18,594,608
$
18,634,484
The accompanying notes are an integral part of these statements.
6
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
(In thousands, except per share information)
Interest and dividend income:
Loans
$
227,930
$
191,740
$
656,632
$
544,788
Investment securities
24,519
26,289
77,887
76,027
Money market investments and interest-bearing cash accounts
10,956
4,654
23,486
8,347
Total interest and dividend income
263,405
222,683
758,005
629,162
Interest expense:
Deposits
54,298
9,978
125,787
25,324
Securities sold under agreements to repurchase:
Short-term
359
-
2,756
-
Long-term
-
1,993
-
6,147
Advances from the FHLB:
Short-term
-
-
4,776
-
Long-term
5,675
529
14,123
2,667
Other long-term borrowings
3,345
2,273
10,135
5,304
Total interest expense
63,677
14,773
157,577
39,442
Net interest income
199,728
207,910
600,428
589,720
Provision for credit losses - expense (benefit):
Loans and finance leases
10,643
14,352
47,669
10,028
Unfunded loan commitments
(128)
2,071
488
2,705
Debt securities
(6,119)
(640)
(6,029)
(749)
Provision for credit losses - expense
4,396
15,783
42,128
11,984
Net interest income after provision for credit losses
195,332
192,127
558,300
577,736
Non-interest income:
Service charges and fees on deposit accounts
9,552
9,820
28,380
28,649
Mortgage banking activities
2,821
3,400
8,493
12,688
Gain on early extinguishment of debt
-
-
1,605
-
Insurance commission income
2,790
2,624
10,384
10,845
Card and processing income
10,841
9,834
32,894
29,815
Other non-interest income
4,292
4,015
17,329
11,495
Total non-interest income
30,296
29,693
99,085
93,492
Non-interest expenses:
Employees’ compensation and benefits
56,535
52,939
167,271
153,797
Occupancy and equipment
21,781
22,543
64,064
66,434
Business promotion
4,759
5,136
12,901
12,641
Professional service fees
11,022
12,549
34,591
35,179
Taxes, other than income taxes
5,465
5,349
15,701
15,056
FDIC deposit insurance
2,143
1,466
6,419
4,605
Net gain on OREO operations
(2,153)
(1,064)
(6,133)
(3,269)
Credit and debit card processing expenses
6,779
6,410
18,637
16,374
Communications
2,219
2,272
6,427
6,401
Other non-interest expenses
8,088
7,589
24,945
22,956
Total non-interest expenses
116,638
115,189
344,823
330,174
Income before income taxes
108,990
106,631
312,562
341,054
Income tax expense
26,968
32,028
89,187
109,156
Net income
$
82,022
$
74,603
$
223,375
$
231,898
Net income attributable to common stockholders
$
82,022
$
74,603
$
223,375
$
231,898
Net income per common share:
Basic
$
0.47
$
0.40
$
1.25
$
1.20
Diluted
$
0.46
$
0.40
$
1.25
$
1.19
The accompanying notes are an integral part of these statements.
7
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(Unaudited)
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
(In thousands)
Net income
$
82,022
$
74,603
$
223,375
$
231,898
Other comprehensive loss, net of tax:
Available-for-sale debt
securities:
Net unrealized holding losses on debt securities
(1)
(78,976)
(270,937)
(46,585)
(778,694)
Other comprehensive loss for the period
(78,976)
(270,937)
(46,585)
(778,694)
Total comprehensive income (loss)
$
3,046
$
(196,334)
$
176,790
$
(546,796)
(1)
Net unrealized holding losses 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)
Nine-Month Period Ended September 30,
2023
2022
(In thousands)
Cash flows from operating activities:
Net income
$
223,375
$
231,898
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
15,274
16,810
Amortization of intangible assets
5,889
6,689
Provision for credit losses
42,128
11,984
Deferred income tax expense
5,539
42,382
Stock-based compensation
5,898
3,994
Gain on early extinguishment of debt
(1,605)
-
Unrealized gain on derivative instruments
(464)
(1,502)
Net gain on disposals or sales, and impairments of premises
and equipment and other assets
(235)
(897)
Net gain on sales of loans and loans held-for-sale valuation adjustments
(1,422)
(4,827)
Net amortization of discounts, premiums, and deferred loan fees
and costs
839
(7,532)
Originations and purchases of loans held for sale
(125,886)
(184,544)
Sales and repayments of loans held for sale
126,800
204,182
Amortization of broker placement fees
216
89
Net amortization of premiums and discounts on investment securities
3,836
2,648
Decrease in accrued interest receivable
3,545
85
Increase (decrease) in accrued interest payable
13,729
(1,467)
Decrease in other assets
6,077
663
(Decrease) increase in other liabilities
(39,810)
14,097
Net cash provided by operating activities
283,723
334,752
Cash flows from investing activities:
Net disbursements on loans held for investment
(485,198)
(308,386)
Proceeds from sales of loans held for investment
6,663
39,069
Proceeds from sales of repossessed assets
40,384
31,638
Purchases of available-for-sale debt securities
(5,458)
(512,327)
Proceeds from principal repayments and maturities of available-for-sale
debt securities
393,958
515,602
Purchases of held-to-maturity debt securities
-
(289,784)
Proceeds from principal repayments and maturities of held-to-maturity
debt securities
79,889
23,320
Additions to premises and equipment
(19,938)
(15,442)
Proceeds from sales of premises and equipment and other assets
578
1,138
Net redemptions of other investments securities
6,520
6,988
Proceeds from the settlement of insurance claims - investing activities
133
-
Net cash provided by (used in) investing activities
17,531
(508,184)
Cash flows from financing activities:
Net increase (decrease) in deposits
275,825
(1,221,614)
Net repayments of short-term borrowings
(550,133)
-
Repayments of long-term borrowings
(19,795)
(300,000)
Proceeds from long-term borrowings
300,000
-
Repurchase of outstanding common stock
(126,918)
(227,256)
Dividends paid on common stock
(75,825)
(65,766)
Net cash used in financing activities
(196,846)
(1,814,636)
Net increase (decrease) in cash and cash equivalents
104,408
(1,988,068)
Cash and cash equivalents at beginning of year
480,505
2,543,058
Cash and cash equivalents at end of period
$
584,913
$
554,990
Cash and cash equivalents include:
Cash and due from banks
$
583,913
$
552,933
Money market investments
1,000
2,057
$
584,913
$
554,990
The accompanying notes are an integral part of these statements.
9
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
(Unaudited)
Quarter Ended September 30,
Nine-Month Period Ended September 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
962,229
968,217
970,722
972,547
Stock-based compensation expense
1,901
1,414
5,898
3,994
Common stock reissued under stock-based compensation plan
(351)
(302)
(13,490)
(7,304)
Restricted stock forfeited
12
41
661
133
Balance at end of period
963,791
969,370
963,791
969,370
Retained Earnings:
Balance at beginning of period
1,733,497
1,541,334
1,644,209
1,427,295
Impact of adoption of Accounting Standards Update (“ASU”) 2022-02 (See
Note 1)
-
-
(1,357)
-
Net income
82,022
74,603
223,375
231,898
Dividends on common stock ($
0.14
per share and $
0.12
per share for the quarters ended
September 30, 2023 and 2022, respectively; $
0.42
per share and $
0.34
per share for the
for the nine-month periods ended September 30, 2023 and 2022, respectively)
(24,867)
(22,653)
(75,575)
(65,909)
Balance at end of period
1,790,652
1,593,284
1,790,652
1,593,284
Treasury Stock (at cost):
Balance at beginning of period
(547,706)
(382,245)
(506,979)
(236,442)
Common stock repurchases (See Note 14)
(75,011)
(75,010)
(128,228)
(227,723)
Common stock reissued under stock-based compensation plan
351
302
13,490
7,304
Restricted stock forfeited
(12)
(41)
(661)
(133)
Balance at end of period
(622,378)
(456,994)
(622,378)
(456,994)
Accumulated Other Comprehensive Loss, net
of tax:
Balance at beginning of period
(772,387)
(591,756)
(804,778)
(83,999)
Other comprehensive loss, net of tax
(78,976)
(270,937)
(46,585)
(778,694)
Balance at end of period
(851,363)
(862,693)
(851,363)
(862,693)
Total stockholders’ equity
$
1,303,068
$
1,265,333
$
1,303,068
$
1,265,333
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
42
Note 5 –
Other Real Estate Owned
45
Note 6
–
Goodwill and Other Intangibles
46
Note 7 –
Non-Consolidated Variable Interest Entities (“VIEs”) and Servicing Assets
47
Note 8 –
Deposits
51
Note 9 –
Securities Sold Under Agreements to Repurchase (Repurchase Agreements)
52
Note 10 –
Advances from the Federal Home Loan Bank (“FHLB”)
52
Note 11 –
Other Long-Term Borrowings
52
Note 12 –
Earnings per Common Share
53
Note 13 –
Stock-Based Compensation
54
Note 14 –
Stockholders’ Equity
57
Note 15 –
Accumulated Other Comprehensive Loss
59
Note 16 –
Employee Benefit Plans
59
Note 17 –
Income Taxes
60
Note 18
–
Fair Value
62
Note 19
–
Revenue from Contracts with Customers
67
Note 20 –
Segment Information
70
Note 21 –
Supplemental Statement of Cash Flows Information
73
Note 22 –
Regulatory Matters, Commitments, and Contingencies
74
Note 23 –
First BanCorp. (Holding Company Only) Financial Information
77
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 nine-month
period ended
September 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 Corporation evaluates subsequent events through
the date of filing with the SEC.
The results of operations for the quarter and nine-month period ended September 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, modifications given to borrowers experiencing financial
difficulty
for which
a
concession
was
granted
were required
to be
disclosed as
a TDR,
whereas now
modifications given
to borrowers
experiencing financial difficulty for
which 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 need to
be disclosed. ASU 2022-02 did not amend the
definition of financial difficulty.
ASU 2022-02 also eliminated the requirement to
only 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. As such, the
ACL for modified loans
within
the
scope
of
ASU
2022-02
is
determined
in
a
manner
consistent
with
the
methodology
for
the
respective
class
and
risk
characteristics of
such loans.
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.
Modifications
that
do
not
impact
the
contractual
payment
terms,
such
as
covenant
waivers,
and
any
modifications
made to loans held-for-sale and leases are
not included in the disclosures.
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
The Corporation does not expect to be impacted by the following ASUs
issued during 2023 that are not yet effective
or have not yet been
adopted:
●
ASU
2023-06,
“Disclosure
Improvements:
Codification
Amendments
in
Response
to
the
SEC’s
Disclosure
Update
and
Simplification Initiative”
●
ASU 2023-05, “Business Combinations – Joint Venture
Formations (Subtopic 805-60): Recognition and Initial Measurement”
●
ASU
2023-02,
“Investments
–
Equity
Method
and
Joint
Ventures
(Topic
323):
Accounting
for
Investments
in
Tax
Credit
Structures Using the Proportional Amortization Method”
●
ASU 2023-01, “Leases (Topic
842): Common Control Arrangements”
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 September 30, 2023 were
as follows:
September 30, 2023
Amortized cost
(1)
Gross
ACL
Fair value
(2)
Unrealized
Weighted-
Gains
Losses
average yield%
(Dollars in thousands)
U.S. Treasury securities:
Due within one year
$
47,585
$
-
$
1,313
$
-
$
46,272
0.54
After 1 to 5 years
100,671
-
6,220
-
94,451
0.74
U.S. government-sponsored entities (“GSEs”) obligations:
Due within one year
271,134
-
7,334
-
263,800
0.73
After 1 to 5 years
2,225,242
55
201,084
-
2,024,213
0.84
After 5 to 10 years
10,097
-
1,158
-
8,939
2.95
After 10 years
10,621
18
1
-
10,638
5.65
Puerto Rico government obligations:
After 10 years
(3)
3,204
-
1,374
382
1,448
-
United States and Puerto Rico government obligations
2,668,554
73
218,484
382
2,449,761
0.84
Mortgage-backed securities (“MBS”):
Residential MBS:
Freddie Mac (“FHLMC”) certificates:
After 1 to 5 years
21,356
-
1,205
-
20,151
2.06
After 5 to 10 years
160,407
-
18,393
-
142,014
1.55
After 10 years
1,013,862
-
211,720
-
802,142
1.40
1,195,625
-
231,318
-
964,307
1.43
Ginnie Mae (“GNMA”) certificates:
After 1 to 5 years
19,559
-
1,207
-
18,352
1.27
After 5 to 10 years
28,587
-
3,127
-
25,460
1.59
After 10 years
212,835
-
33,476
-
179,359
2.58
260,981
-
37,810
-
223,171
2.38
Fannie Mae (“FNMA”) certificates:
After 1 to 5 years
35,343
-
1,992
-
33,351
2.11
After 5 to 10 years
307,379
-
35,138
-
272,241
1.70
After 10 years
1,072,667
-
207,428
-
865,239
1.36
1,415,389
-
244,558
-
1,170,831
1.45
Collateralized mortgage obligations (“CMOs”) issued
or guaranteed by the FHLMC, FNMA, and GNMA:
After 10 years
280,056
-
62,888
-
217,168
1.54
Private label:
After 10 years
7,311
-
2,310
83
4,918
7.73
Total Residential MBS
3,159,362
-
578,884
83
2,580,395
1.54
Commercial MBS:
After 1 to 5 years
44,111
-
8,631
-
35,480
2.18
After 5 to 10 years
25,522
-
4,067
-
21,455
2.13
After 10 years
123,523
-
34,811
-
88,712
1.36
Total Commercial MBS
193,156
-
47,509
-
145,647
1.65
Total MBS
3,352,518
-
626,393
83
2,726,042
1.55
Total available-for-sale debt securities
$
6,021,072
$
73
$
844,877
$
465
$
5,175,803
1.24
(1)
Excludes accrued interest receivable on available-for-sale debt securities that totaled $
10.8
million as of September 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)
Includes $
521.3
million (amortized cost - $
587.0
million) that was pledged at the FHLB as collateral for borrowings and letters of credit as well as $
2.8
billion (amortized cost - $
3.2
billion) pledged as collateral for the
uninsured portion of government deposits. The secured parties are not permitted to sell or repledge the collateral.
(3)
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
(2)
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
(3)
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)
Includes $
250.6
million (amortized cost - $
286.5
million) that was pledged at the FHLB as collateral for borrowings and letters of credit as well as $
2.4
billion (amortized cost - $
2.8
billion) pledged as collateral for the
uninsured portion of government deposits. The secured parties are not permitted to sell or repledge the collateral.
(3)
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 September 30, 2023 and December 31, 2022. The tables also include debt
securities for which an ACL was recorded.
As of September 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
$
3,204
$
5
$
2,430,083
$
217,105
$
2,433,287
$
217,110
Puerto Rico government obligations
-
-
1,448
1,374
(1)
1,448
1,374
MBS:
Residential MBS:
FHLMC
12
1
964,295
231,317
964,307
231,318
GNMA
22,811
1,220
200,360
36,590
223,171
37,810
FNMA
9,195
191
1,161,636
244,367
1,170,831
244,558
CMOs issued or guaranteed by the FHLMC,
FNMA, and GNMA
-
-
217,168
62,888
217,168
62,888
Private label
-
-
4,918
2,310
(1)
4,918
2,310
Commercial MBS
11,509
202
134,138
47,307
145,647
47,509
$
46,731
$
1,619
$
5,114,046
$
843,258
$
5,160,777
$
844,877
(1)
Unrealized losses do not include the credit loss component recorded
as part of the ACL. As of September 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
September
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 September
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.
The interest
rate
on
these
private label
MBS is
variable, tied
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
U.S. 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 September 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 U.S. 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.
In
the
event
that
the
second
mortgage
loans
default
and
the
collateral
is
insufficient
to
satisfy
the
outstanding
balance
of
this
residential
pass-through
MBS,
PRHFA’s
ability
to
honor
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 nine
-month periods
ended September
30,
2023 and 2022 of the ACL on available-for-sale debt
securities:
Quarter Ended September 30,
2023
2022
Private label
MBS
Puerto Rico
Government
Obligations
Total
Private label
MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
83
$
350
$
433
$
290
$
386
$
676
Provision for credit losses - expense (benefit)
-
32
32
-
(12)
(12)
ACL on available-for-sale debt securities
$
83
$
382
$
465
$
290
$
374
$
664
Nine-Month Period Ended September 30,
2023
2022
Private label
MBS
Puerto Rico
Government
Obligations
Total
Private label
MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
83
$
375
$
458
$
797
$
308
$
1,105
Provision for credit losses - expense (benefit)
-
7
7
(501)
66
(435)
Net charge-offs
-
-
-
(6)
-
(6)
ACL on available-for-sale debt securities
$
83
$
382
$
465
$
290
$
374
$
664
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 September 30, 2023
and December 31, 2022 were as follows
:
September 30, 2023
Amortized cost
(1) (2)
Gross Unrecognized
Fair value
Weighted-
Gains
Losses
ACL
average yield%
(Dollars in thousands)
Puerto Rico municipal bonds:
Due within one year
$
3,159
$
15
$
23
$
3,151
$
46
9.30
After 1 to 5 years
51,133
1,052
1,111
51,074
1,320
7.71
After 5 to 10 years
35,831
3,540
271
39,100
605
7.05
After 10 years
16,595
212
-
16,807
279
8.75
Total Puerto Rico municipal bonds
106,718
4,819
1,405
110,132
2,250
7.70
MBS:
Residential MBS:
FHLMC certificates:
After 5 to 10 years
17,580
-
1,131
16,449
-
3.03
After 10 years
18,740
-
1,689
17,051
-
4.34
36,320
-
2,820
33,500
-
3.70
GNMA certificates:
After 10 years
16,786
-
1,414
15,372
-
3.35
FNMA certificates:
After 10 years
68,388
-
5,902
62,486
-
4.17
CMOs issued or guaranteed by
FHLMC, FNMA, and GNMA
After 10 years
29,156
-
1,898
27,258
-
3.49
Total Residential MBS
150,650
-
12,034
138,616
-
3.84
Commercial MBS:
After 1 to 5 years
9,489
-
516
8,973
-
3.48
After 10 years
92,312
-
7,182
85,130
-
3.15
Total Commercial MBS
101,801
-
7,698
94,103
-
3.18
Total MBS
252,451
-
19,732
232,719
-
3.57
Total held-to-maturity debt securities
$
359,169
$
4,819
$
21,137
$
342,851
$
2,250
4.80
(1)
Excludes accrued interest receivable on held-to-maturity debt securities that totaled $
2.8
million as of September 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)
Includes $
179.9
million (fair value - $
174.9
million) that serves as collateral for the uninsured portion of government deposits. The secured parties are not permitted to sell or repledge the collateral.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
19
December 31, 2022
Amortized cost
(1) (2)
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.
(2)
Includes $
190.1
million (fair value - $
189.4
million) that serves as collateral for the uninsured portion of government deposits. The secured parties are not permitted to sell or repledge the collateral.
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
September 30, 2023 and December 31, 2022, including debt securities for
which an ACL was recorded:
As of September 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
$
-
$
-
$
34,244
$
1,405
$
34,244
$
1,405
MBS:
Residential MBS:
FHLMC certificates
-
-
33,500
2,820
33,500
2,820
GNMA certificates
-
-
15,372
1,414
15,372
1,414
FNMA certificates
-
-
62,486
5,902
62,486
5,902
CMOs issued or guaranteed by FHLMC,
FNMA, and GNMA
-
-
27,258
1,898
27,258
1,898
Commercial MBS
-
-
94,103
7,698
94,103
7,698
Total held-to-maturity debt securities
$
-
$
-
$
266,963
$
21,137
$
266,963
$
21,137
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
September 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 decreased to $
2.3
million as of September 30, 2023, from $
8.3
million as of December 31, 2022, mostly driven by the refinancing
of a
$
46.5
million municipal
bond into
a shorter-term
commercial
loan structure and, to a lesser extent,
a reduction in qualitative reserves
driven by updated financial information
of certain bond issuers
received during the third quarter of 2023.
The following tables present
the activity in the
ACL for held-to-maturity debt
securities by major security
type for the quarters
and
nine-month periods ended September 30, 2023 and 2022:
Puerto Rico Municipal Bonds
Quarter Ended September 30,
2023
2022
(In thousands)
Beginning Balance
$
8,401
$
8,885
Provision for credit losses - benefit
(6,151)
(628)
ACL on held-to-maturity debt securities
$
2,250
$
8,257
Puerto Rico Municipal Bonds
Nine-Month Period Ended September 30,
2023
2022
(In thousands)
Beginning Balance
$
8,286
$
8,571
Provision for credit losses - benefit
(6,036)
(314)
ACL on held-to-maturity debt securities
$
2,250
$
8,257
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 September 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,
which
are
asset
quality
categories
defined
by
regulatory
authorities.
These
assets
have an
elevated level
of risk
and may
have a
high probability
of default
or total
loss. Puerto
Rico municipal
bonds that
do not
meet
the criteria
for classification
as criticized
assets are
considered
to be
Pass-rated securities.
For additional
descriptions 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 September 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 September 30,
As of December 31,
2023
2022
(In thousands)
Puerto Rico and Virgin Islands region:
Residential mortgage loans, mainly secured by first mortgages
$
2,353,679
$
2,417,900
Construction loans
102,327
34,772
Commercial mortgage loans
1,780,008
1,834,204
Commercial and Industrial ("C&I") loans
2,088,274
1,860,109
Consumer loans
3,582,001
3,317,489
Loans held for investment
$
9,906,289
$
9,464,474
Florida region:
Residential mortgage loans, mainly secured by first mortgages
$
458,952
$
429,390
Construction loans
100,447
98,181
Commercial mortgage loans
536,105
524,647
C&I loans
942,680
1,026,154
Consumer loans
6,459
9,979
Loans held for investment
$
2,044,643
$
2,088,351
Total:
Residential mortgage loans, mainly secured by first mortgages
$
2,812,631
$
2,847,290
Construction loans
202,774
132,953
Commercial mortgage loans
2,316,113
2,358,851
C&I loans
(1)
3,030,954
2,886,263
Consumer loans
3,588,460
3,327,468
Loans held for investment
(2)
11,950,932
11,552,825
ACL on loans and finance leases
(263,615)
(260,464)
Loans held for investment, net
$
11,687,317
$
11,292,361
(1)
As of September 30, 2023 and December 31, 2022, includes
$
807.6
million and $
838.5
million, respectively, of commercial loans that were secured by real estate
and for which the primary source of repayment at origination was
not dependent upon such real estate.
(2)
Includes accretable fair value net purchase discounts of $
25.8
million and $
29.3
million as of September 30, 2023 and December 31, 2022, respectively.
Various
loans
were
assigned
as
collateral
for
borrowings,
government
deposits,
time
deposits
accounts,
and
related
unused
commitments.
The carrying
value of
loans pledged
as collateral
amounted
to $
4.4
billion and
$
4.3
billion as
of September
30, 2023
and December
31, 2022,
respectively.
As of
each of
September 30,
2023 and
December 31,
2022, loans
pledged as
collateral include
$
1.8
billion that were pledged
at the FHLB as
collateral for borrowings and
letters of credit; $
2.4
billion that were pledged
at the FED
Discount
Window
as
collateral
for
borrowings,
compared
to
$
2.2
billion
as
of
December
31,
2022;
and
$
68.2
million
serve
as
collateral for the uninsured portion of government deposits, compared to $
123.7
million as of December 31, 2022.
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 September 30, 2023 and December 31, 2022 are as follows:
As of September 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)
$
69,175
$
-
$
2,754
$
32,167
$
-
$
104,096
$
-
Conventional residential mortgage loans
(2) (6)
2,633,303
-
31,328
11,958
31,946
2,708,535
1,910
Commercial loans:
Construction loans
(6)
199,293
1,834
-
7
1,640
202,774
973
Commercial mortgage loans
(2) (6)
2,290,012
930
1,166
2,373
21,632
2,316,113
5,458
C&I loans
2,998,999
441
1,956
10,749
18,809
3,030,954
1,523
Consumer loans:
Auto loans
1,826,679
52,755
10,648
-
13,103
1,903,185
102
Finance leases
816,251
10,421
2,346
-
2,522
831,540
-
Personal loans
367,428
5,708
2,840
-
1,874
377,850
-
Credit cards
308,519
4,563
3,230
5,638
-
321,950
-
Other consumer loans
148,251
2,399
1,647
-
1,638
153,935
1
Total loans held for investment
$
11,657,910
$
79,051
$
57,915
$
62,892
$
93,164
$
11,950,932
$
9,967
(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 $
17.4
million of residential mortgage loans guaranteed by the FHA that were over 15 months delinquent as of September 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 $
8.9
million as of September 30,
2023 ($
8.0
million conventional residential mortgage loans and $
0.9
million commercial mortgage loans), is presented
in the loans past due 90 days or more and still accruing category in the table above.
(3)
Include rebooked loans, which were previously pooled into GNMA securities, amounting to $
8.5
million as of September 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 $
8.7
million as of September 30, 2023, primarily nonaccrual residential mortgage loans and C&I loans.
(5)
There were
no
nonaccrual loans with no ACL in the Florida region as of September 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 September 30, 2023 amounted to $
6.9
million, $
65.5
million, $
1.0
million, and $
0.1
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 $
0.9
million and $
2.0
million for the quarter
and nine-month period ended
September 30, 2023, respectively,
compared to $
0.5
million
and
$
1.2
million
for
the
quarter
and
nine-month
period
ended
September
30,
2022,
respectively.
For
the
quarter
and
nine-
month period
ended September
30, 2023,
the cash interest
income recognized on
nonaccrual loans amounted
to $
0.4
million and $
1.4
million,
respectively,
compared
to
$
0.3
million
and
$
1.0
million
for
the
quarter
and
nine-month
period
ended
September
30,
2022,
respectively.
As of
September 30,
2023, the
recorded investment
on residential
mortgage loans
collateralized by
residential real
estate property
that
were
in
the
process
of
foreclosure
amounted
to
$
43.8
million,
including
$
18.4
million
of
FHA/VA
government-guaranteed
mortgage
loans,
and
$
6.1
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
26
For residential mortgage and consumer loans, the Corporation also evaluates credit
quality based on its interest accrual status.
Based on
the most
recent analysis
performed, the
amortized cost
of commercial
and construction
loans by portfolio
classes and
by
origination year
based on
the internal
credit-risk category
as of
September 30,
2023, the
gross charge
-offs for
the nine-month
period
ended September
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 September 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
$
44,895
$
36,361
$
14,939
$
-
$
-
$
3,824
$
-
$
100,019
$
31,879
Criticized:
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
2,308
-
2,308
2,893
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
44,895
$
36,361
$
14,939
$
-
$
-
$
6,132
$
-
$
102,327
$
34,772
Charge-offs on construction loans
$
-
$
-
$
-
$
-
$
-
$
42
$
-
$
42
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
118,701
$
382,403
$
138,404
$
318,372
$
278,814
$
355,823
$
1,153
$
1,593,670
$
1,655,728
Criticized:
Special Mention
-
4,438
-
33,670
-
112,829
-
150,937
145,415
Substandard
-
127
-
-
2,825
31,639
-
34,591
33,061
Doubtful
-
-
-
-
-
810
-
810
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
118,701
$
386,968
$
138,404
$
352,042
$
281,639
$
501,101
$
1,153
$
1,780,008
$
1,834,204
Charge-offs on commercial mortgage loans
$
-
$
-
$
-
$
-
$
-
$
107
$
-
$
107
C&I
Risk Ratings:
Pass
$
216,614
$
293,433
$
165,637
$
171,386
$
284,636
$
188,691
$
697,937
$
2,018,334
$
1,789,572
Criticized:
Special Mention
546
-
-
-
492
2,469
33,448
36,955
43,224
Substandard
1
-
385
617
13,439
18,178
365
32,985
27,313
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total C&I loans
$
217,161
$
293,433
$
166,022
$
172,003
$
298,567
$
209,338
$
731,750
$
2,088,274
$
1,860,109
Charge-offs on C&I loans
$
-
$
-
$
-
$
-
$
-
$
218
$
57
$
275
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
27
As of September 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
$
787
$
54,329
$
39,004
$
-
$
-
$
-
$
236
$
94,356
$
98,181
Criticized:
Special Mention
-
-
6,091
-
-
-
-
6,091
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
787
$
54,329
$
45,095
$
-
$
-
$
-
$
236
$
100,447
$
98,181
Charge-offs on construction loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
22,043
$
185,268
$
63,924
$
40,330
$
50,661
$
119,451
$
29,008
$
510,685
$
503,184
Criticized:
Special Mention
-
-
-
-
13,080
11,172
-
24,252
20,295
Substandard
-
-
-
1,168
-
-
-
1,168
1,168
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
22,043
$
185,268
$
63,924
$
41,498
$
63,741
$
130,623
$
29,008
$
536,105
$
524,647
Charge-offs on commercial mortgage loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
C&I
Risk Ratings:
Pass
$
80,515
$
271,894
$
172,186
$
57,897
$
135,159
$
54,973
$
122,583
$
895,207
$
979,151
Criticized:
Special Mention
-
-
19,532
-
11,878
11,169
-
42,579
17,905
Substandard
-
-
-
632
191
3,185
-
4,008
29,098
Doubtful
-
-
-
-
-
886
-
886
-
Loss
-
-
-
-
-
-
-
-
-
Total C&I loans
$
80,515
$
271,894
$
191,718
$
58,529
$
147,228
$
70,213
$
122,583
$
942,680
$
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 September 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
$
45,682
$
90,690
$
53,943
$
-
$
-
$
3,824
$
236
$
194,375
$
130,060
Criticized:
Special Mention
-
-
6,091
-
-
-
-
6,091
-
Substandard
-
-
-
-
-
2,308
-
2,308
2,893
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
45,682
$
90,690
$
60,034
$
-
$
-
$
6,132
$
236
$
202,774
$
132,953
Charge-offs on construction loans
$
-
$
-
$
-
$
-
$
-
$
42
$
-
$
42
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
140,744
$
567,671
$
202,328
$
358,702
$
329,475
$
475,274
$
30,161
$
2,104,355
$
2,158,912
Criticized:
Special Mention
-
4,438
-
33,670
13,080
124,001
-
175,189
165,710
Substandard
-
127
-
1,168
2,825
31,639
-
35,759
34,229
Doubtful
-
-
-
-
-
810
-
810
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
140,744
$
572,236
$
202,328
$
393,540
$
345,380
$
631,724
$
30,161
$
2,316,113
$
2,358,851
Charge-offs on commercial mortgage loans
$
-
$
-
$
-
$
-
$
-
$
107
$
-
$
107
C&I
Risk Ratings:
Pass
$
297,129
$
565,327
$
337,823
$
229,283
$
419,795
$
243,664
$
820,520
$
2,913,541
$
2,768,723
Criticized:
Special Mention
546
-
19,532
-
12,370
13,638
33,448
79,534
61,129
Substandard
1
-
385
1,249
13,630
21,363
365
36,993
56,411
Doubtful
-
-
-
-
-
886
-
886
-
Loss
-
-
-
-
-
-
-
-
-
Total C&I loans
$
297,676
$
565,327
$
357,740
$
230,532
$
445,795
$
279,551
$
854,333
$
3,030,954
$
2,886,263
Charge-offs on C&I loans
$
-
$
-
$
-
$
-
$
-
$
6,420
$
57
$
6,477
(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
September
30,
2023,
the
gross charge
-offs
for
the
nine-month
period
ended
September
30,
2023 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 September 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
$
220
$
686
$
1,455
$
660
$
1,104
$
99,007
$
-
$
103,132
$
117,416
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
220
$
686
$
1,455
$
660
$
1,104
$
99,007
$
-
$
103,132
$
117,416
Conventional residential mortgage loans:
Accrual Status:
Performing
$
114,791
$
168,507
$
69,903
$
30,088
$
44,999
$
1,797,010
$
-
$
2,225,298
$
2,265,013
Non-Performing
-
-
35
-
174
25,040
-
25,249
35,471
Total conventional residential mortgage loans
$
114,791
$
168,507
$
69,938
$
30,088
$
45,173
$
1,822,050
$
-
$
2,250,547
$
2,300,484
Total:
Accrual Status:
Performing
$
115,011
$
169,193
$
71,358
$
30,748
$
46,103
$
1,896,017
$
-
$
2,328,430
$
2,382,429
Non-Performing
-
-
35
-
174
25,040
-
25,249
35,471
Total residential mortgage loans in Puerto Rico
and Virgin Islands Region
$
115,011
$
169,193
$
71,393
$
30,748
$
46,277
$
1,921,057
$
-
$
2,353,679
$
2,417,900
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
3
$
-
$
2,619
$
-
$
2,622
(1)
Excludes accrued interest receivable.
As of September 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
$
-
$
-
$
-
$
-
$
-
$
964
$
-
$
964
$
742
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
-
$
-
$
-
$
-
$
-
$
964
$
-
$
964
$
742
Conventional residential mortgage loans:
Accrual Status:
Performing
$
71,543
$
78,806
$
47,891
$
29,868
$
27,387
$
195,796
$
-
$
451,291
$
421,347
Non-Performing
-
16
-
-
257
6,424
-
6,697
7,301
Total conventional residential mortgage loans
$
71,543
$
78,822
$
47,891
$
29,868
$
27,644
$
202,220
$
-
$
457,988
$
428,648
Total:
Accrual Status:
Performing
$
71,543
$
78,806
$
47,891
$
29,868
$
27,387
$
196,760
$
-
$
452,255
$
422,089
Non-Performing
-
16
-
-
257
6,424
-
6,697
7,301
Total residential mortgage loans in Florida region
$
71,543
$
78,822
$
47,891
$
29,868
$
27,644
$
203,184
$
-
$
458,952
$
429,390
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
-
$
-
$
6
$
-
$
6
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
30
As of September 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
$
220
$
686
$
1,455
$
660
$
1,104
$
99,971
$
-
$
104,096
$
118,158
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
220
$
686
$
1,455
$
660
$
1,104
$
99,971
$
-
$
104,096
$
118,158
Conventional residential mortgage loans:
Accrual Status:
Performing
$
186,334
$
247,313
$
117,794
$
59,956
$
72,386
$
1,992,806
$
-
$
2,676,589
$
2,686,360
Non-Performing
-
16
35
-
431
31,464
-
31,946
42,772
Total conventional residential mortgage loans
$
186,334
$
247,329
$
117,829
$
59,956
$
72,817
$
2,024,270
$
-
$
2,708,535
$
2,729,132
Total:
Accrual Status:
Performing
$
186,554
$
247,999
$
119,249
$
60,616
$
73,490
$
2,092,777
$
-
$
2,780,685
$
2,804,518
Non-Performing
-
16
35
-
431
31,464
-
31,946
42,772
Total residential mortgage loans
$
186,554
$
248,015
$
119,284
$
60,616
$
73,921
$
2,124,241
$
-
$
2,812,631
$
2,847,290
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
3
$
-
$
2,625
$
-
$
2,628
(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 September
30, 2023,
the gross
charge-offs
for the
nine-month period
ended September
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 September 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
$
483,036
$
567,954
$
414,852
$
195,698
$
149,360
$
77,639
$
-
$
1,888,539
$
1,783,782
Non-Performing
1,271
3,122
2,654
1,407
2,472
2,141
-
13,067
10,596
Total auto loans
$
484,307
$
571,076
$
417,506
$
197,105
$
151,832
$
79,780
$
-
$
1,901,606
$
1,794,378
Charge-offs on auto loans
$
630
$
5,420
$
3,412
$
1,391
$
1,811
$
1,237
$
-
$
13,901
Finance leases:
Accrual Status:
Performing
$
243,524
$
258,990
$
162,169
$
70,224
$
60,539
$
33,572
$
-
$
829,018
$
716,585
Non-Performing
7
741
466
434
305
569
-
2,522
1,645
Total finance leases
$
243,531
$
259,731
$
162,635
$
70,658
$
60,844
$
34,141
$
-
$
831,540
$
718,230
Charge-offs on finance leases
$
172
$
1,182
$
921
$
419
$
446
$
579
$
-
$
3,719
Personal loans:
Accrual Status:
Performing
$
133,568
$
133,763
$
37,159
$
19,132
$
33,558
$
18,492
$
-
$
375,672
$
351,664
Non-Performing
162
1,146
196
71
161
138
-
1,874
1,248
Total personal loans
$
133,730
$
134,909
$
37,355
$
19,203
$
33,719
$
18,630
$
-
$
377,546
$
352,912
Charge-offs on personal loans
$
242
$
5,765
$
2,137
$
892
$
1,812
$
1,077
$
-
$
11,925
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
321,950
$
321,950
$
311,731
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
321,950
$
321,950
$
311,731
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
13,294
$
13,294
Other consumer loans:
Accrual Status:
Performing
$
69,063
$
40,513
$
11,921
$
6,396
$
6,377
$
4,442
$
9,071
$
147,783
$
139,116
Non-Performing
323
671
184
52
91
160
95
1,576
1,122
Total other consumer loans
$
69,386
$
41,184
$
12,105
$
6,448
$
6,468
$
4,602
$
9,166
$
149,359
$
140,238
Charge-offs on other consumer loans
$
662
$
5,418
$
1,853
$
446
$
851
$
297
$
354
$
9,881
Total:
Performing
$
929,191
$
1,001,220
$
626,101
$
291,450
$
249,834
$
134,145
$
331,021
$
3,562,962
$
3,302,878
Non-Performing
1,763
5,680
3,500
1,964
3,029
3,008
95
19,039
14,611
Total consumer loans in Puerto Rico and Virgin
Islands region
$
930,954
$
1,006,900
$
629,601
$
293,414
$
252,863
$
137,153
$
331,116
$
3,582,001
$
3,317,489
Charge-offs on total consumer loans
$
1,706
$
17,785
$
8,323
$
3,148
$
4,920
$
3,190
$
13,648
$
52,720
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
32
As of September 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
$
-
$
-
$
-
$
-
$
187
$
1,356
$
-
$
1,543
$
3,617
Non-Performing
-
-
-
-
-
36
-
36
76
Total auto loans
$
-
$
-
$
-
$
-
$
187
$
1,392
$
-
$
1,579
$
3,693
Charge-offs on auto loans
$
-
$
-
$
-
$
-
$
23
$
263
$
-
$
286
Finance leases:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-Performing
-
-
-
-
-
-
-
-
-
Total finance leases
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Charge-offs on finance leases
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Personal loans:
Accrual Status:
Performing
$
231
$
-
$
71
$
2
$
-
$
-
$
-
$
304
$
334
Non-Performing
-
-
-
-
-
-
-
-
-
Total personal loans
$
231
$
-
$
71
$
2
$
-
$
-
$
-
$
304
$
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
$
55
$
47
$
225
$
451
$
-
$
2,295
$
1,441
$
4,514
$
5,833
Non-Performing
-
-
-
-
-
20
42
62
119
Total other consumer loans
$
55
$
47
$
225
$
451
$
-
$
2,315
$
1,483
$
4,576
$
5,952
Charge-offs on other consumer loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total:
Performing
$
286
$
47
$
296
$
453
$
187
$
3,651
$
1,441
$
6,361
$
9,784
Non-Performing
-
-
-
-
-
56
42
98
195
Total consumer loans in Florida region
$
286
$
47
$
296
$
453
$
187
$
3,707
$
1,483
$
6,459
$
9,979
Charge-offs on total consumer loans
$
-
$
-
$
-
$
-
$
23
$
263
$
-
$
286
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
33
As of September 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
$
483,036
$
567,954
$
414,852
$
195,698
$
149,547
$
78,995
$
-
$
1,890,082
$
1,787,399
Non-Performing
1,271
3,122
2,654
1,407
2,472
2,177
-
13,103
10,672
Total auto loans
$
484,307
$
571,076
$
417,506
$
197,105
$
152,019
$
81,172
$
-
$
1,903,185
$
1,798,071
Charge-offs on auto loans
$
630
$
5,420
$
3,412
$
1,391
$
1,834
$
1,500
$
-
$
14,187
Finance leases:
Accrual Status:
Performing
$
243,524
$
258,990
$
162,169
$
70,224
$
60,539
$
33,572
$
-
$
829,018
$
716,585
Non-Performing
7
741
466
434
305
569
-
2,522
1,645
Total finance leases
$
243,531
$
259,731
$
162,635
$
70,658
$
60,844
$
34,141
$
-
$
831,540
$
718,230
Charge-offs on finance leases
$
172
$
1,182
$
921
$
419
$
446
$
579
$
-
$
3,719
Personal loans:
Accrual Status:
Performing
$
133,799
$
133,763
$
37,230
$
19,134
$
33,558
$
18,492
$
-
$
375,976
$
351,998
Non-Performing
162
1,146
196
71
161
138
-
1,874
1,248
Total personal loans
$
133,961
$
134,909
$
37,426
$
19,205
$
33,719
$
18,630
$
-
$
377,850
$
353,246
Charge-offs on personal loans
$
242
$
5,765
$
2,137
$
892
$
1,812
$
1,077
$
-
$
11,925
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
321,950
$
321,950
$
311,731
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
321,950
$
321,950
$
311,731
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
13,294
$
13,294
Other consumer loans:
Accrual Status:
Performing
$
69,118
$
40,560
$
12,146
$
6,847
$
6,377
$
6,737
$
10,512
$
152,297
$
144,949
Non-Performing
323
671
184
52
91
180
137
1,638
1,241
Total other consumer loans
$
69,441
$
41,231
$
12,330
$
6,899
$
6,468
$
6,917
$
10,649
$
153,935
$
146,190
Charge-offs on other consumer loans
$
662
$
5,418
$
1,853
$
446
$
851
$
297
$
354
$
9,881
Total:
Performing
$
929,477
$
1,001,267
$
626,397
$
291,903
$
250,021
$
137,796
$
332,462
$
3,569,323
$
3,312,662
Non-Performing
1,763
5,680
3,500
1,964
3,029
3,064
137
19,137
14,806
Total consumer loans
$
931,240
$
1,006,947
$
629,897
$
293,867
$
253,050
$
140,860
$
332,599
$
3,588,460
$
3,327,468
Charge-offs on total consumer loans
$
1,706
$
17,785
$
8,323
$
3,148
$
4,943
$
3,453
$
13,648
$
53,006
(1)
Excludes accrued interest receivable.
As of September 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 $
55.2
million as of September
30, 2023 (as
compared to $
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 September 30, 2023 and December
31, 2022
:
As of September 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
$
27,341
$
1,596
$
68
$
27,409
$
1,596
Commercial loans:
Construction loans
-
-
956
956
-
Commercial mortgage loans
12,525
1,651
44,722
57,247
1,651
C&I loans
12,062
2,105
6,649
18,711
2,105
Consumer loans:
Personal loans
28
-
-
28
-
Other consumer loans
162
17
-
162
17
$
52,118
$
5,369
$
52,395
$
104,513
$
5,369
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
September 30, 2023
was
72
%, 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
nine months of 2023,
loans pooled into GNMA MBS
amounted to approximately
$
102.9
million, compared
to $
115.7
million during the
first nine months
of 2022,
for which the
Corporation recognized
a net gain
on
sale
of
$
2.2
million
and
$
3.2
million,
respectively.
Also,
during
the
first
nine
months
of
2023,
the
Corporation
sold
approximately
$
28.6
million
of
performing
residential
mortgage
loans
to
FNMA
and
FHLMC,
compared
to
$
90.8
million
during
the
first
nine
months
of
2022,
for
which
the
Corporation
recognized
a
net
gain
on
sale
of
$
0.7
million
and
$
4.0
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 September
30, 2023 and
December 31, 2022,
rebooked GNMA delinquent
loans
that were included in the residential mortgage loan portfolio amounted
to $
8.5
million and $
10.4
million, respectively.
During
the
first
nine
months
of
2023
and
2022,
the
Corporation
repurchased,
pursuant
to
the
aforementioned
repurchase
option,
$
2.5
million and $
8.2
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
nine
months of
2023
and
2022,
the
Corporation
purchased
C&I
loan
participations
in
the Florida
region
totaling
$
61.3
million and $
135.4
million, respectively.
There were
no
significant sales of
commercial loan
participations during the
first nine
months of 2023. Meanwhile, during the first nine months
of 2022, the Corporation sold a $
35.2
million commercial and industrial loan
participation in the Puerto Rico region.
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
$
12.0
billion as of
September 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
September
30,
2023,
the Corporation
had $
185.0
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
September
30,
2023,
approximately
$
115.8
million consisted
of loans
extended
to municipalities
in Puerto
Rico that
are general
obligations supported
by
assigned
property
tax
revenues,
and
$
25.6
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
September 30,
2023 included
$
8.9
million in
loans granted to
an affiliate of
the Puerto Rico
Electric Power Authority
(“PREPA”)
and $
34.7
million in loans
to agencies
or public corporations of the Puerto Rico government.
In
addition,
as
of
September
30,
2023,
the
Corporation
had
$
79.3
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
September
30,
2023,
the
Corporation
had
$
87.5
million in
loans to
USVI government
public corporations,
compared to
$
38.0
million as
of December
31, 2022.
As of September
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 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.
Many
factors
are
considered
when
evaluating
whether
there
is
an
other-than-
insignificant
payment
delay,
such as
the significance
of the
restructured
payment
amount relative
to the
unpaid
principal balance
or
collateral value of the loan or the relative significance of the delay to
the original loan terms.
The
below
disclosures
relate
to
loan
modifications
granted
to
borrowers
experiencing
financial
difficulty
in
which
there
was
a
change
in
the
timing
and/or
amount
of
contractual
cash
flows
in
the
form
of
any
of
the
aforementioned
types
of
modifications,
including
restructurings
that
resulted
in
a
more-than-insignificant
payment
delay.
These
disclosures
exclude
$
0.9
million
and
$
3.2
million in restructured residential
mortgage loans that are
government-guaranteed (e.g.,
FHA/VA
loans) and were modified
during the
quarter and nine-month period ended September 30, 2023, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
38
The
following
tables
present
the
amortized
cost
basis
as
of
September
30,
2023
of
loans
modified
to
borrowers
experiencing
financial difficulty
during the quarter
and nine-month period
ended September 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 September 30,2023
Payment Delay Only
Forbearance
Payment Plan
Trial
Modification
Interest Rate
Reduction
Term
Extension
Combination
of Interest
Rate
Reduction
and Term
Extension
Other
Total
Percentage
of Total by
Portfolio
Classes
(In thousands)
Conventional residential mortgage loans
$
-
$
-
$
401
$
-
$
-
$
-
$
-
$
401
0.01%
Construction loans
-
-
-
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
2,225
-
-
2,225
0.10%
C&I loans
-
-
-
192
-
-
-
192
0.01%
Consumer loans:
Auto loans
-
-
-
-
74
59
608
(1)
741
0.04%
Personal loans
-
-
-
-
67
87
-
154
0.04%
Credit cards
-
-
-
368
(2)
-
-
-
368
0.11%
Other consumer loans
-
-
-
-
54
4
4
(1)
62
0.04%
Total modifications
$
-
$
-
$
401
$
560
$
2,420
$
150
$
612
$
4,143
Nine-Month Period Ended September 30,2023
Payment Delay Only
Forbearance
Payment Plan
Trial
Modification
Interest Rate
Reduction
Term
Extension
Combination
of Interest
Rate
Reduction
and Term
Extension
Other
Total
Percentage
of Total by
Portfolio
Classes
(In thousands)
Conventional residential mortgage loans
$
-
$
-
$
610
$
-
$
687
$
239
$
-
$
1,536
0.05%
Construction loans
-
-
-
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
2,225
30,170
-
32,395
1.40%
C&I loans
-
-
-
192
185
-
-
377
0.01%
Consumer loans:
Auto loans
-
-
-
-
234
153
1,511
(1)
1,898
0.10%
Personal loans
-
-
-
-
132
165
-
297
0.08%
Credit cards
-
-
-
1,033
(2)
-
-
-
1,033
0.32%
Other consumer loans
-
-
-
-
311
90
28
(1)
429
0.28%
Total modifications
$
-
$
-
$
610
$
1,225
$
3,774
$
30,817
$
1,539
$
37,965
(1)
Modification consists of reduction to 0% interest rate for remaining loan term to borrowers in bankruptcy proceedings or consumer credit counseling programs 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
nine-month
period
ended
September
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 September 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)
(In thousands)
Conventional residential mortgage loans
-
%
-
-
%
-
Construction loans
-
%
-
-
%
-
Commercial mortgage loans
-
%
13
-
%
-
C&I loans
0.45
%
-
-
%
-
Consumer loans:
Auto loans
-
%
31
2.27
%
25
Personal loans
-
%
35
3.61
%
41
Credit cards
16.67
%
-
-
%
-
Other consumer loans
-
%
22
2.00
%
10
Nine-Month Period Ended September 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)
(In thousands)
Conventional residential mortgage loans
-
%
105
2.95
%
105
Construction loans
-
%
-
-
%
-
Commercial mortgage loans
-
%
13
0.25
%
64
C&I loans
0.45
%
72
-
%
-
Consumer loans:
Auto loans
-
%
27
3.10
%
28
Personal loans
-
%
35
4.29
%
33
Credit cards
16.27
%
-
-
%
-
Other consumer loans
-
%
26
1.74
%
23
The following table presents by portfolio classes the performance of loans modified
during the nine-month period ended
September 30, 2023 that were granted to borrowers experiencing financial
difficulty:
Nine-Month Period Ended September 30, 2023
30-59
60-89
90+
Total
Delinquency
Current
Total
(In thousands)
Conventional residential mortgage loans
$
71
$
-
$
-
$
71
$
1,465
$
1,536
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
32,395
32,395
C&I loans
-
-
-
-
377
377
Consumer loans:
Auto loans
22
-
-
22
1,876
1,898
Personal loans
15
-
-
15
282
297
Credit cards
149
35
-
184
849
1,033
Other consumer loans
34
17
15
(1)
66
363
429
Total modifications
$
291
$
52
$
15
$
358
$
37,607
$
37,965
(1)
Consists of loan modifications that defaulted (failure
by the borrower to make payments of
either principal, interest, or both for a
period of 90 days or more) during the
quarter and nine-month period ended September
30, 2023, and that had been modified after January 1, 2023.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
40
Troubled Debt
Restructuring ("TDR") Disclosures Prior to
Adoption of ASU 2022-02
The
following
provides
additional
disclosures
previously
required
by
ASC
Subtopic
310-40,
Receivables
-
Troubled
Debt
Restructurings
by
Creditors,
related
to
the quarter
and
nine-month
period
ended
September
30,
2022.
Prior
to the
adoption of
ASU
2022-02,
a restructuring
of a
loan constituted
a TDR
if the
creditor,
for economic
or legal
reasons related
to the
borrower's financial
difficulties, granted
a concession to
the borrower that
it would not
otherwise consider.
See Note 1
- Nature of
Business and Summary
of Significant
Accounting Policies
and Note
4 -
Loans Held
For Investment
to the
audited consolidated
financial statements
included
in
the
2022
Annual
Report
on
Form
10-K
for
additional
discussion
of
TDRs.
The
following
tables
present
TDR
loans
completed
during the quarter and nine-month period ended September 30,
2022:
Quarter Ended September 30,2022
Total
Interest rate
below market
Maturity or
term extension
Combination
of reduction in
interest rate
and extension
of maturity
Forgiveness of
principal
and/or interest
Other
(1)
Total
(In thousands)
TDRs:
Conventional residential mortgage loans
$
-
$
132
$
-
$
-
$
1,022
$
1,154
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
-
C&I loans
495
-
-
-
-
495
Consumer loans:
Auto loans
661
42
84
-
-
787
Finance leases
-
82
-
-
-
82
Personal loans
-
75
58
-
-
133
Credit cards
252
(2)
-
-
-
-
252
Other consumer loans
10
56
-
19
-
85
Total TDRs
$
1,418
$
387
$
142
$
19
$
1,022
$
2,988
(1)
Other concessions granted by the Corporation include payment
plans under judicial stipulation or loss mitigation programs, or
a combination of two or more of the concessions listed
in
the table. Amounts included in Other that represent a combination of
concessions are excluded from the amounts reported in the
column for such individual concessions.
(2)
Concession consists of reduction in interest rate and revocation
of revolving line privileges.
Nine-Month Period Ended September 30,2022
Total
Interest rate
below market
Maturity or
term extension
Combination
of reduction in
interest rate
and extension
of maturity
Forgiveness of
principal
and/or interest
Other
(1)
Total
(In thousands)
TDRs:
Conventional residential mortgage loans
$
215
$
1,484
$
190
$
-
$
3,709
$
5,598
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
245
5,178
-
467
5,890
C&I loans
895
-
-
825
1,083
2,803
Consumer loans:
Auto loans
2,120
126
264
-
-
2,510
Finance leases
-
451
-
-
18
469
Personal loans
99
135
84
-
-
318
Credit cards
647
(2)
-
-
-
-
647
Other consumer loans
93
188
-
37
-
318
Total TDRs
$
4,069
$
2,629
$
5,716
$
862
$
5,277
$
18,553
(1)
Other concessions granted by the Corporation include payment
plans under judicial stipulation or loss mitigation programs, or
a combination of two or more of the concessions listed
in
the table. Amounts included in Other that represent a combination of
concessions are excluded from the amounts reported in the
column for such individual concessions.
(2)
Concession consists of reduction in interest rate and revocation
of revolving line privileges.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
41
Quarter Ended September 30,2022
Nine-Month Period Ended September 30,2022
Number of
contracts
Pre-modification
Amortized Cost
Post-modification
Amortized Cost
Number of
contracts
Pre-modification
Amortized Cost
Post-modification
Amortized Cost
(Dollars in thousands)
TDRs:
Conventional residential mortgage loans
12
$
1,220
$
1,154
49
$
5,668
$
5,598
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
3
5,897
5,890
C&I loans
3
495
495
15
3,031
2,803
Consumer loans:
Auto loans
35
790
787
123
2,512
2,510
Finance leases
5
82
82
26
469
469
Personal loans
7
116
133
19
301
318
Credit Cards
50
251
252
139
646
647
Other consumer loans
29
83
85
77
311
318
Total TDRs
141
$
3,037
$
2,988
451
$
18,835
$
18,553
Loan modifications considered
TDR loans that defaulted
(failure by the
borrower to make
payments of either
principal, interest, or
both
for
a
period
of
90
days or
more)
during
the
quarter
and
nine-month
period
ended
September
30,
2022,
and
had
become
TDR
loans during the 12-months preceding the default date, were as follows:
Quarter Ended September 30,2022
Nine-Month Period Ended September 30,2022
Number of contracts
Amortized Cost
Number of contracts
Amortized Cost
(Dollars in thousands)
Conventional residential mortgage loans
1
$
50
5
$
534
Construction loans
-
-
-
-
Commercial mortgage loans
-
-
-
-
C&I loans
-
-
-
-
Consumer loans:
Auto loans
31
776
75
1,674
Finance leases
-
-
1
16
Personal loans
-
-
-
-
Credit cards
14
60
39
201
Other consumer loans
1
2
5
19
Total
47
$
888
125
$
2,444
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
42
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 September 30, 2023
(In thousands)
ACL:
Beginning balance
$
60,514
$
4,804
$
42,427
$
28,014
$
131,299
$
267,058
Provision for credit losses - (benefit) expense
(3,349)
(642)
(1,344)
1,931
14,047
10,643
Charge-offs
(499)
(4)
(1)
(9)
(19,746)
(20,259)
Recoveries
534
1,463
75
161
3,940
6,173
Ending balance
$
57,200
$
5,621
$
41,157
$
30,097
$
129,540
$
263,615
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Quarter Ended September 30,
2022
(In thousands)
ACL:
Beginning balance
$
65,231
$
2,020
$
32,619
$
36,203
$
116,079
$
252,152
Provision for credit losses - expense (benefit)
755
(179)
(2,383)
(1,228)
17,387
14,352
Charge-offs
(1,466)
(63)
(3)
(8)
(12,522)
(14,062)
Recoveries
559
43
57
494
4,264
5,417
Ending balance
$
65,079
$
1,821
$
30,290
$
35,461
$
125,208
$
257,859
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Nine-Month Period Ended September 30,
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
(6,776)
1,420
5,901
3,278
43,846
47,669
Charge-offs
(2,628)
(42)
(107)
(6,477)
(53,006)
(62,260)
Recoveries
1,788
1,935
299
383
11,221
15,626
Ending balance
$
57,200
$
5,621
$
41,157
$
30,097
$
129,540
$
263,615
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Nine-Month Period Ended September 30,
2022
(In thousands)
ACL:
Beginning balance
$
74,837
$
4,048
$
52,771
$
34,284
$
103,090
$
269,030
Provision for credit losses - (benefit) expense
(6,913)
(2,242)
(23,758)
(575)
43,516
10,028
Charge-offs
(6,073)
(123)
(42)
(366)
(32,765)
(39,369)
Recoveries
3,228
138
1,319
2,118
11,367
18,170
Ending balance
$
65,079
$
1,821
$
30,290
$
35,461
$
125,208
$
257,859
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
43
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,
as updated by the information contained in this report, for each portfolio
segment.
The Corporation
generally applies
probability weights
to the
baseline and
alternative downside
economic scenarios
to estimate
the
ACL with
the
baseline
scenario
carrying
the highest
weight.
The
scenarios
that are
chosen each
quarter
and
the
weighting
given
to
each
scenario
for
the
different
loan
portfolio
categories
depend
on
a
variety
of
factors
including
recent
economic
events,
leading
national and
regional economic
indicators, and
industry trends.
During the
third quarter
of 2023,
the Corporation
continued to
apply
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.
In
addition,
during the
third quarter
of 2023,
the Corporation
applied the
alternative downside
scenario for
the credit
cards portfolio
to
account
for
an
increased
uncertainty
in
charge-off
trends
and
projection
of
certain
macroeconomic
variables,
such
as
retail
sales.
Results for
the ACL
include updated
macroeconomic projections
which continue
to reflect
deterioration on
the long-term
outlook of
certain
macroeconomic
variables,
such
as unemployment
rate
and
retail
sales,
but
at
a
slower
pace,
mostly
driven
by
actual
results
outperforming previous forecasts.
As
of
September
30,
2023,
the
ACL
for
loans
and
finance
leases
was
$
263.6
million,
an
increase
of
$
3.1
million,
from
$
260.5
million
as
of
December
31,
2022.
The
ACL
for
commercial
and
construction
loans
increased
by
$
6.6
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,
and a
$
1.7
million incremental
reserve recorded
during the
third quarter
of 2023
associated with
the inflow
to nonaccrual
status of
a
$
9.5
million
commercial
and
industrial
loan
in
the
Puerto
Rico
region.
The
ACL
for
consumer
loans
increased
by
$
2.1
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.
The
ACL
for
residential
mortgage
loans
decreased
by
$
5.6
million,
mainly
driven
by
updated
macroeconomic
variables,
such
as the
Regional
Home
Price
Index
and
the
unemployment
rate,
partially
offset
by
the
$
2.1
million cumulative increase in the ACL due to the adoption of ASU 2022-02
on January 1, 2023.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
44
The tables below
present the ACL
related to loans
and finance leases
and the carrying
values of loans
by portfolio segment
as of
September 30,
2023 and December 31, 2022:
As of September 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
$
2,812,631
$
202,774
$
2,316,113
$
3,030,954
$
3,588,460
$
11,950,932
Allowance for credit losses
57,200
5,621
41,157
30,097
129,540
263,615
Allowance for credit losses to
amortized cost
2.03
%
2.77
%
1.78
%
0.99
%
3.61
%
2.21
%
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
September
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 September 30,
2023, the ACL for
off-balance sheet credit
exposures increased to $
4.8
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 nine-month periods ended September 30, 2023 and 2022:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2023
2022
2023
2022
(In thousands)
Beginning Balance
$
4,889
$
2,171
$
4,273
$
1,537
Provision for credit losses - (benefit) expense
(128)
2,071
488
2,705
Ending balance
$
4,761
$
4,242
$
4,761
$
4,242
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
45
NOTE 5
–
OTHER REAL ESTATE
OWNED
The following table presents the OREO inventory as of the indicated dates:
September 30, 2023
December 31, 2022
(In thousands)
OREO balances, carrying value:
Residential
(1)
$
20,740
$
24,025
Construction
1,861
1,764
Commercial
5,962
5,852
Total
$
28,563
$
31,641
(1)
Excludes $
19.6
million and $
23.5
million as of September 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
nine-month periods
ended September 30, 2023 and 2022.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
46
NOTE 6 – GOODWILL AND OTHER INTANGIBLES
Goodwill
Goodwill
as
of
each
of
September
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 nine months of 2023.
There were
no
changes in
the carrying
amount of
goodwill during
the quarters
and nine-month
periods ended
September 30,
2023
and 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
September 30,
December 31,
2023
2022
(Dollars in thousands)
Core deposit intangible:
Gross amount
$
87,544
$
87,544
Accumulated amortization
(72,315)
(66,644)
Net carrying amount
$
15,229
$
20,900
Remaining amortization period (in years)
6.3
7.0
Purchased credit card relationship intangible:
Gross amount
$
-
$
3,800
Accumulated amortization
-
(3,595)
Net carrying amount
$
-
$
205
Remaining amortization period (in years)
-
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
nine-month
period
ended
September
30,
2023,
the
Corporation recognized
$
1.9
million
and $
5.9
million,
respectively,
in amortization
expense
on its
other intangibles
subject to
amortization,
compared to
$
2.2
million
and $
6.7
million for
the same periods in 2022, respectively.
The Corporation amortizes core deposit intangibles based on the projected useful lives of the related deposits. Core deposit
intangibles are analyzed 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 as of September 30, 2023.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
47
The estimated
aggregate annual
amortization expense
related to the
intangible assets
subject to amortization
for future periods
was
as follows as of September 30, 2023
.
(In thousands)
Remaining 2023
$
1,847
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.
These TRuPs are variable-rate instruments
indexed to
3-
month CME Term SOFR
plus a
tenor spread
adjustment of
0.26161
% and the
original spread
of
2.75
% for the
FBP Statutory
Trust I
and
2.50
% for
the FBP
Statutory Trust
II.
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
September 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)
48
Under the
indentures, the
Corporation has
the right,
from time
to time,
and without
causing an
event of
default, to
defer payments
of interest
on the
Junior Subordinated
Deferrable Debentures
by extending
the interest
payment period
at any
time and
from time
to
time
during
the term
of the
subordinated
debentures
for
up to
twenty
consecutive
quarterly
periods.
As of
September
30,
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 that
receives
a
servicing
fee.
These
private
label
MBS are
variable-rate
securities indexed
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 September
30, 2023, the
amortized cost and
fair
value
of these
private
label MBS
amounted
to $
7.3
million and
$
4.9
million, respectively,
with a
weighted
average yield
of
7.73
%,
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 September 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
September
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 September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
(In thousands)
Balance at beginning of period
$
28,034
$
30,277
$
29,037
$
30,986
Capitalization of servicing assets
601
679
1,839
2,637
Amortization
(1,035)
(1,247)
(3,265)
(3,850)
Temporary impairment
recoveries
7
1
12
65
Other
(1)
(6)
(20)
(22)
(148)
Balance at end of period
$
27,601
$
29,690
$
27,601
$
29,690
(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)
49
Changes in the impairment allowance were as follows for the indicated periods:
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
(In thousands)
Balance at beginning of period
$
7
$
14
$
12
$
78
Temporary impairment
recoveries
(7)
(1)
(12)
(65)
Balance at end of period
$
-
$
13
$
-
$
13
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 September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
(In thousands)
Servicing fees
$
2,606
$
2,758
$
7,984
$
8,398
Late charges and prepayment penalties
137
201
547
614
Other
(1)
(6)
(20)
(22)
(148)
Servicing income, gross
2,737
2,939
8,509
8,864
Amortization and impairment of servicing assets
(1,028)
(1,246)
(3,253)
(3,785)
Servicing income, net
$
1,709
$
1,693
$
5,256
$
5,079
(1) Mainly represents adjustments related to the repurchase
of loans serviced for others.
The Corporation’s
MSRs are subject
to prepayment
and interest rate
risks. Key economic
assumptions used
in determining
the fair
value at the time of sale of the related mortgages for the indicated periods
ranged as follows:
Weighted Average
Maximum
Minimum
Nine-Month Period Ended September 30,
2023
Constant prepayment rate:
Government-guaranteed mortgage loans
6.6
%
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
13.0
%
14.0
%
11.5
%
Nine-Month Period Ended September 30,
2022
Constant prepayment rate:
Government-guaranteed mortgage loans
6.6
%
18.3
%
4.8
%
Conventional conforming mortgage loans
6.6
%
18.4
%
3.4
%
Conventional non-conforming mortgage loans
6.0
%
21.9
%
3.8
%
Discount rate:
Government-guaranteed mortgage loans
11.8
%
12.0
%
11.5
%
Conventional conforming mortgage loans
9.8
%
10.0
%
9.5
%
Conventional non-conforming mortgage loans
12.4
%
14.5
%
11.5
%
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
50
The weighted
averages of the
key economic
assumptions that the
Corporation used
in its valuation
model and the
sensitivity of the
current fair value
to immediate
10
% and
20
% adverse changes in
those assumptions for mortgage
loans as of September
30, 2023 and
December 31, 2022 were as follows:
September 30,
December 31,
2023
2022
(In thousands)
Carrying amount of servicing assets
$
27,601
$
29,037
Fair value
$
45,114
$
44,710
Weighted-average
expected life (in years)
7.75
7.80
Constant prepayment rate (weighted-average annual
rate)
6.31
%
6.40
%
Decrease in fair value due to 10% adverse change
$
1,036
$
1,048
Decrease in fair value due to 20% adverse change
$
2,027
$
2,054
Discount rate (weighted-average annual rate)
10.72
%
10.69
%
Decrease in fair value due to 10% adverse change
$
1,937
$
1,925
Decrease in fair value due to 20% adverse change
$
3,727
$
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)
51
NOTE 8 – DEPOSITS
The following table summarizes deposit balances as of the indicated dates:
September 30, 2023
December 31, 2022
(In thousands)
Type of account:
Non-interest-bearing deposit accounts
$
5,440,247
$
6,112,884
Interest-bearing saving accounts
3,687,203
3,902,888
Interest-bearing checking accounts
4,242,672
3,770,993
Certificates of deposit (“CDs”)
2,754,776
2,250,876
Brokered CDs
310,339
105,826
Total
$
16,435,237
$
16,143,467
The following table presents the contractual maturities of CDs, including brokered
CDs, as of September 30,
2023:
Total
(In thousands)
Three months or less
$
786,211
Over three months to six months
496,333
Over six months to one year
785,367
Over one year to two years
716,417
Over two years to three years
113,932
Over three years to four years
49,303
Over four years to five years
110,325
Over five years
7,227
Total
$
3,065,115
The following were the components of interest expense on deposits for the
indicated periods:
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
(In thousands)
Interest expense on deposits
$
54,243
$
10,045
$
125,720
$
25,619
Accretion of premiums from acquisitions
(33)
(92)
(149)
(384)
Amortization of broker placement fees
88
25
216
89
Total
$
54,298
$
9,978
$
125,787
$
25,324
Total
Puerto
Rico
and
U.S.
time
deposits
with
balances
of
more
than
$250,000
amounted
to
$
1.4
billion
and
$
1.0
billion
as
of
September 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
each
of
September
30,
2023
and
December
31,
2022,
unamortized broker
placement fees amounted
to $
0.3
million, which
are amortized
over the contractual
maturity of the
brokered CDs
under the interest method.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
52
NOTE 9 – SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE (REPURCHASE AGREEMENTS)
Repurchase agreements as of the indicated dates consisted of the following:
September 30, 2023
December 31, 2022
(In thousands)
Short-term Fixed-rate repurchase agreements
(1) (2)
$
-
$
75,133
(1)
Weighted-average interest rate
of
4.55
% as of December 31, 2022. As of September 30,
2023, the Corporation repaid and did not renew its short-term repurchase
agreements.
(2)
As of 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 December 31, 2022, repurchase agreements were
fully collateralized and not offset in the consolidated
statements of financial condition.
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:
September 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 September 30, 2023 and December 31, 2022, respectively.
Advances from the FHLB mature as follows as of the indicated date:
September 30, 2023
(In thousands)
Over one to five years
(1)
$
500,000
'(1) Average remaining term to maturity of
2.74
years.
During the nine-month period
ended September 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:
(In thousands)
September 30, 2023
December 31, 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 CME Term SOFR
plus a
0.26161
% tenor spread
adjustment as of September 30, 2023 and
2.75
% over
3-month LIBOR
as of December 31, 2022 (
8.42
% as of September 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 CME Term SOFR
plus a
0.26161
% tenor spread
adjustment as of September 30, 2023 and
2.50
% over
3-month LIBOR
as of December 31, 2022 (
8.16
% as of September 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 these
debentures.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
53
NOTE 12 – EARNINGS PER COMMON
.
SHARE
The calculations of earnings per common share for the quarters and nine-month
periods ended September 30, 2023 and 2022 are as
follows:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2023
2022
2023
2022
(In thousands, except per share information)
Net income attributable to common stockholders
$
82,022
$
74,603
$
223,375
$
231,898
Weighted-Average
Shares:
Average common
shares outstanding
176,358
187,236
178,486
193,217
Average potential
dilutive common shares
604
1,083
658
1,151
Average common
shares outstanding -
assuming dilution
176,962
188,319
179,144
194,368
Earnings per common share:
Basic
$
0.47
$
0.40
$
1.25
$
1.20
Diluted
$
0.46
$
0.40
$
1.25
$
1.19
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 nine-month periods
ended September 30, 2023 and 2022.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
54
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
September 30,
2023, there
were
3,151,949
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
519,794
shares
during
the
nine-month
period
ended
September
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 nine-month periods ended
September 30, 2023 and 2022:
Nine-Month Period Ended September 30,
2023
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)
519,794
12.06
323,364
13.18
Forfeited
(58,454)
11.31
(15,108)
8.79
Vested
(503,460)
6.27
(510,007)
6.05
Unvested shares outstanding at end of period
896,371
$
12.32
947,024
$
9.12
(1)
Includes, for the nine-month period ended September 30,2023,
25,786
shares of restricted stock awarded to independent directors
and
494,008
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 nine-month period ended September
30,2022,
24,972
shares of restricted stock awarded to independent directors and
298,392
shares of restricted stock awarded to employees, of which
6,084
shares were granted to
retirement-eligible employees and thus charged to earnings
as of the grant date.
For
the
quarter
and
nine
month-period
ended
September
30,
2023,
the
Corporation
recognized
$
1.3
million
and
$
4.3
million,
respectively,
of stock-based
compensation expense
related to
restricted stock
awards, compared
to $
0.9
million and
$
2.7
million for
the
same
periods
in
2022,
respectively.
As of
September
30,
2023,
there
was $
5.4
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
1.7
years.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
55
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 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 individual achievement of each performance goal 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
nine-month
periods
ended
September 30, 2023 and 2022:
Nine-Month Period Ended September 30,
2023
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 nine-month period ended September 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 nine-month period ended
September 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 nine-month period ended September 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 nine-month period ended September 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 nine-month periods ended September 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 September 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 nine-month period ended
September 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)
56
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 nine-month
period ended September 30, 2023:
Nine-Month Period Ended
September 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
Separate Trading of Registered Interest and
Principal of Securities 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
nine-month
periods
ended
September
30,
2023,
the
Corporation
recognized
$
0.6
million
and
$
1.6
million,
respectively,
of
stock-based
compensation
expense
related
to
performance
units,
compared
to
$
0.5
million
and
$
1.3
million
for
the
same periods in 2022,
respectively.
As of September 30, 2023,
there was $
3.6
million of total unrecognized
compensation cost related
to unvested performance units that the Corporation expects to recognize
over a weighted average period of
2.0
years.
Shares withheld
During the first nine
months of 2023, the
Corporation withheld
288,613
shares (as compared to
202,649
shares during the first
nine
months
of
2022)
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)
57
NOTE 14 –
STOCKHOLDERS’
EQUITY
Stock Repurchase Programs
During the third quarter of 2023, the Corporation repurchased
5,392,458
shares of common stock at an average price of $
13.91
for a
total cost of $
75
million which completed the
$
350
million stock repurchase program
approved by the Board of
Directors on April 27,
2022.
For
the
nine-month
period
ended
September
30,
2023,
the
Corporation
repurchased
8,969,998
shares
at
an
average
price
of
$
13.94
for a total cost of $
125
million under this stock repurchase program.
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. Repurchases
under the program may be
executed through open market purchases,
accelerated share repurchases,
and/or
privately
negotiated
transactions
or
plans,
including
under
plans
complying
with
Rule
10b5-1
under
the
Exchange
Act.
The
Corporation’s
stock repurchase
program is
subject to
various factors,
including the
Corporation’s
capital position,
liquidity,
financial
performance
and
alternative
uses of
capital,
stock
trading price,
and
general
market
conditions.
The
Corporation’s
stock
repurchase
program
does
not
obligate
it
to
acquire
any
specific
number
of
shares
and
does
not
have
an
expiration
date.
The
stock
repurchase
program
may
be
modified,
suspended,
or
terminated
at
any
time
at
the
Corporation’s
discretion.
The
Corporation
repurchased
no
shares
of
common
stock
under
the
current
repurchase
authorization
during
the
quarter
ended
September
30,
2023.
The
Parent
Company
has
no
operations
and
depends
on
dividends,
distributions
and
other
payments
from
its
subsidiaries
to
fund
dividend
payments, stock repurchases, and to fund all payments on its obligations, including
debt obligations.
Common Stock
The following table shows the change in shares of common stock outstanding
for the quarters and nine-month periods ended
September 30, 2023 and 2022:
Total
Number of Shares
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2023
2022
2023
2022
Common stock outstanding, beginning balance
179,756,622
191,626,336
182,709,059
201,826,505
Common stock repurchased
(1)
(5,393,236)
(5,385,857)
(9,258,611)
(16,066,747)
Common stock reissued under stock-based compensation plan
23,903
21,924
994,332
513,009
Restricted stock forfeited
(963)
(4,744)
(58,454)
(15,108)
Common stock outstanding, ending balances
174,386,326
186,257,659
174,386,326
186,257,659
(1)
For the quarter and nine-month period ended September 30, 2023 includes
778
and
288,613
shares, respectively, of common
stock surrendered to cover plan participants' payroll and
income taxes.
For
the
quarter
and
nine-month
period
ended
September
30,
2023,
total
cash
dividends
declared
on
shares
of
common
stock
amounted
to $
24.9
million
and $
75.6
million, respectively,
compared
to $
22.7
million
and $
65.9
million,
respectively,
for
the same
periods
in
2022.
On
October 31, 2023
,
the
Corporation
announced
that
its
Board
declared
a
quarterly
cash
dividend
of
$
0.14
per
common
share
payable
on
December 8, 2023
to
shareholders
of
record
at
the
close
of
business
on
November 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
September 30, 2023 and December 31, 2022.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
58
Treasury Stock
The following table shows the change in shares of treasury stock for the quarters and nine-month
periods ended September 30,
2023 and 2022:
Total
Number of Shares
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2023
2022
2023
2022
Treasury stock, beginning balance
43,906,494
32,036,780
40,954,057
21,836,611
Common stock repurchased
5,393,236
5,385,857
9,258,611
16,066,747
Common stock reissued under stock-based compensation plan
(23,903)
(21,924)
(994,332)
(513,009)
Restricted stock forfeited
963
4,744
58,454
15,108
Treasury stock, ending balances
49,276,790
37,405,457
49,276,790
37,405,457
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
September 30, 2023 and December 31, 2022. There were
no
transfers to the legal surplus reserve during the first nine months of 2023.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
59
NOTE 15 – ACCUMULATED
OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive
loss for the quarters and nine-month periods ended
September 30, 2023 and 2022:
Changes in Accumulated Other Comprehensive
Loss by Component
(1)
Quarter ended September 30,
Nine-Month Period Ended September
30,
2023
2022
2023
2022
(In thousands)
Unrealized net holding losses on available-for-sale
debt securities:
Beginning balance
$
(773,581)
$
(595,147)
$
(805,972)
$
(87,390)
Other comprehensive loss
(2)
(78,976)
(270,937)
(46,585)
(778,694)
Ending balance
$
(852,557)
$
(866,084)
$
(852,557)
$
(866,084)
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 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 September 30,
Nine-Month Period Ended September 30,
Statements of Income
2023
2022
2023
2022
(In thousands)
Net periodic cost (benefit), pension plans:
Interest cost
Other expenses
$
950
$
654
$
2,850
$
1,962
Expected return on plan assets
Other expenses
(886)
(1,040)
(2,657)
(3,119)
Net periodic cost (benefit), pension plans
64
(386)
193
(1,157)
Net periodic cost, postretirement plan
Other expenses
7
2
19
5
Net periodic cost (benefit)
$
71
$
(384)
$
212
$
(1,152)
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
60
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
(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
third quarter
of 2023,
the Corporation
recorded an
income tax
expense of
$
27.0
million compared
to $
32.0
million in
the
third quarter of 2022. For the first
nine months of 2023, the Corporation
recorded an income tax expense of
$
89.2
million compared to
$
109.2
million for the same period in 2022.
The decrease in income tax expense for
the third quarter of 2023, as compared
to the same
quarter
of
the
previous
year,
was
the
result
of
a
lower
effective
tax
rate
due
to
increased
business
activities
in
a
wholly-owned
subsidiary of FirstBank,
which is engaged in
lending and investing activities,
that provided additional tax
advantages under the
Puerto
Rico tax
code,
as well
as a
higher proportion
of exempt
income to
taxable income.
The decrease
in income
tax expense
for the
first
nine
months of
2023,
as compared
to the
same period
in 2022,
was mainly
related
to lower
pre-tax income
,
the aforementioned
tax
advantages
and
a
higher
proportion
of
exempt
to
taxable
income.
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
28.2
% for
the first
nine months
of
2023, compared to
31.8
% for the first nine months of 2022.
As
of
September
30,
2023,
the
Corporation
had
a
deferred
tax
asset
of
$
150.8
million,
net
of
a
valuation
allowance
of
$
195.1
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 $
150.8
million
as
of
September
30,
2023,
net
of
a
valuation
allowance
of
$
157.9
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)
61
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 nine-month period
ended September 30,
2023,
the Corporation
incurred current
income tax
expense of
approximately $
2.8
million and
$
6.8
million, respectively,
related to
its U.S.
operations, compared to
$
3.0
million and $
7.1
million, respectively,
for comparable periods in 2022.
The limitation did not impact
the
USVI operations in the quarters and nine-month periods ended
September 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
September
30,
2023,
the
Corporation
had
$
0.2
million
of
accrued
interest
and
penalties
related
to
uncertain
tax
positions
in
the
amount
of
$
0.8
million
that
it acquired
from
BSPR, which, if
recognized, would
decrease the
effective income
tax rate in
future periods.
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
2019 remain open to examination. For Puerto Rico tax purposes, all tax years
subsequent to 2018 remain open to examination.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
62
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
September 30, 2023 and December 31,
2022:
As of September 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
$
140,723
$
-
$
-
$
140,723
$
138,875
$
-
$
-
$
138,875
Noncallable U.S. agencies debt securities
-
430,515
-
430,515
-
389,787
-
389,787
Callable U.S. agencies debt securities
-
1,877,075
-
1,877,075
-
1,963,566
-
1,963,566
MBS
-
2,721,124
4,918
(1)
2,726,042
-
3,098,797
5,794
(1)
3,104,591
Puerto Rico government obligations
-
-
1,448
1,448
-
-
2,201
2,201
Other investments
-
-
-
-
-
-
500
500
Equity securities
4,775
-
-
4,775
4,861
-
-
4,861
Derivative assets
-
360
-
360
-
633
-
633
Liabilities:
Derivative liabilities
-
170
-
170
-
476
-
476
(1) Related to private label MBS.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
63
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 nine-month periods ended September 30, 2023 and 2022:
Quarter Ended September 30,
Nine-Month Period Ended September 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
$
7,357
$
10,180
$
8,495
$
11,084
Total (losses)/gains:
Included in other comprehensive loss (unrealized)
(722)
(177)
(903)
(570)
Included in earnings (unrealized)
(2)
(32)
12
(7)
435
Principal repayments and amortization
(237)
(1,152)
(1,219)
(3)
(2,086)
Ending balance
$
6,366
$
8,863
$
6,366
$
8,863
___________________
(1)
Amounts mostly related to private label MBS.
(2)
Changes in unrealized (losses) 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 September 30, 2023 and December 31, 2022:
September 30, 2023
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
Minimum
Maximum
(Dollars in thousands)
Available-for-sale
debt securities:
Private label MBS
$
4,918
Discounted cash flows
Discount rate
17.3%
17.3%
17.3%
Prepayment rate
1.2%
8.8%
5.3%
Projected cumulative loss rate
0.2%
13.7%
5.5%
Puerto Rico government obligations
$
1,448
Discounted cash flows
Discount rate
13.9%
13.9%
13.9%
Projected cumulative loss rate
24.5%
24.5%
24.5%
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)
64
Additionally, fair value
is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP.
As of September 30, 2023, the Corporation recorded losses or valuation adjustments
for assets recognized at fair value on a non-
recurring basis and still held at September 30, 2023, as shown in the following
table:
Carrying value as of September 30, 2023
Related to (losses) gains
recorded for the Quarter
Ended September 30,
2023
Related to losses
recorded for the Nine-
Month Period Ended
September 30, 2023
(Losses) gains recorded
for the Quarter Ended
September 30, 2023
Losses recorded for the
Nine-Month Period
Ended September 30,
2023
(In thousands)
Level 3:
Loans receivable
(1)
$
16,655
$
24,933
$
(2,495)
$
(9,234)
OREO
(2)
1,085
2,124
(169)
(205)
Level 2:
Loans held for sale
(3)
$
8,961
$
8,961
$
16
$
(57)
(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 published secondary market prices of MBS with similar characteristics.
As of September 30, 2022, the Corporation recorded losses or valuation adjustments
for assets recognized at fair value on a non-
recurring basis and still held at September 30, 2022, as shown in the following
table:
Carrying value as of September 30, 2022
Related to losses
recorded for the Quarter
Ended September 30,
2022
Related to losses
recorded for the Nine-
Month Period Ended
September 30, 2022
Losses recorded for the
Quarter Ended
September 30, 2022
Losses recorded for the
Nine-Month Period
Ended September 30,
2022
(In thousands)
Level 3:
Loans receivable
(1)
$
4,207
$
27,531
$
(227)
$
(2,978)
OREO
(2)
1,234
2,913
(57)
(34)
Premises and equipment
(3)
-
1,242
-
(218)
Level 2:
Loans held for sale
(4)
$
12,169
$
12,169
$
(177)
$
(177)
(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.
(4)
The Corporation derived the fair value of these loans based
on published secondary market prices of MBS with similar characteristics.
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)
65
The following tables present the carrying value, estimated fair value and estimated
fair value level of the hierarchy of financial
instruments as of September 30, 2023 and December 31, 2022:
Total Carrying Amount
in Statement of
Financial Condition as
of September 30, 2023
Fair Value Estimate as
of
September 30, 2023
Level 1
Level 2
Level 3
(In thousands)
Assets:
Cash and due from banks and money market investments (amortized
cost)
$
584,913
$
584,913
$
584,913
$
-
$
-
Available-for-sale debt
securities (fair value)
5,175,803
5,175,803
140,723
5,028,714
6,366
Held-to-maturity debt securities (amortized cost)
359,169
Less: ACL on held-to-maturity debt securities
(2,250)
Held-to-maturity debt securities, net of ACL
$
356,919
342,851
-
232,719
110,132
Equity securities (amortized cost)
43,908
43,908
-
43,908
(1)
-
Other equity securities (fair value)
4,775
4,775
4,775
-
-
Loans held for sale (lower of cost or market)
8,961
8,961
-
8,961
-
Loans held for investment (amortized cost)
11,950,932
Less: ACL for loans and finance leases
(263,615)
Loans held for investment, net of ACL
$
11,687,317
11,566,106
-
-
11,566,106
MSRs (amortized cost)
27,601
45,114
-
-
45,114
Derivative assets (fair value)
(2)
360
360
-
360
-
Liabilities:
Deposits (amortized cost)
$
16,435,237
$
16,447,189
$
-
$
16,447,189
$
-
Advances from the FHLB (amortized cost):
Long-term
500,000
491,505
-
491,505
-
Other long-term borrowings (amortized cost)
161,700
159,549
-
-
159,549
Derivative liabilities (fair value)
(2)
170
170
-
170
-
(1) Includes FHLB stock with a carrying value of $
34.6
million, which is 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)
66
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 is 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)
67
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 nine-month
periods ended
September 30,
2023 and 2022:
Quarter ended September 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)
$
18,279
$
147,066
$
13,212
$
(4,055)
$
19,749
$
5,477
$
199,728
Service charges and fees on deposit accounts
-
5,286
3,406
-
155
705
9,552
Insurance commissions
-
2,596
-
-
68
126
2,790
Merchant-related income
-
2,156
-
-
19
319
2,494
Credit and debit card fees
-
7,826
24
-
4
493
8,347
Other service charges and fees
50
1,262
853
-
615
163
2,943
Not in scope of ASC Topic
606
(1)
2,971
1,044
185
(3)
(14)
(13)
4,170
Total non-interest income
3,021
20,170
4,468
(3)
847
1,793
30,296
Total Revenue
$
21,300
$
167,236
$
17,680
$
(4,058)
$
20,596
$
7,270
$
230,024
Quarter ended September 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)
$
24,338
$
118,408
$
22,861
$
14,827
$
21,494
$
5,982
$
207,910
Service charges and fees on deposit accounts
-
5,744
3,169
-
151
756
9,820
Insurance commissions
-
2,485
-
-
16
123
2,624
Merchant-related income
-
1,458
347
-
32
330
2,167
Credit and debit card fees
-
7,209
21
-
(2)
439
7,667
Other service charges and fees
85
1,228
340
-
595
195
2,443
Not in scope of ASC Topic
606
(1)
3,648
997
399
33
(19)
(86)
4,972
Total non-interest
income
3,733
19,121
4,276
33
773
1,757
29,693
Total Revenue
$
28,071
$
137,529
$
27,137
$
14,860
$
22,267
$
7,739
$
237,603
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
68
Nine-Month Period Ended September 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)
$
61,427
$
427,407
$
41,085
$
(7,502)
$
60,369
$
17,642
$
600,428
Service charges and fees on deposit accounts
-
15,859
9,886
-
492
2,143
28,380
Insurance commissions
-
9,700
-
-
175
509
10,384
Merchant-related income
-
6,454
-
-
87
1,172
7,713
Credit and debit card fees
-
23,581
74
-
16
1,510
25,181
Other service charges and fees
244
3,922
2,801
-
1,858
714
9,539
Not in scope of ASC Topic
606
(1)
8,913
2,909
4,027
1,837
221
(19)
17,888
Total non-interest income
9,157
62,425
16,788
1,837
2,849
6,029
99,085
Total Revenue
$
70,584
$
489,832
$
57,873
$
(5,665)
$
63,218
$
23,671
$
699,513
Nine-Month Period Ended September 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)
$
76,452
$
310,351
$
94,655
$
33,702
$
56,664
$
17,896
$
589,720
Service charges and fees on deposit accounts
-
16,778
9,214
-
446
2,211
28,649
Insurance commissions
-
10,176
-
-
65
604
10,845
Merchant-related income
-
4,991
1,101
-
54
1,046
7,192
Credit and debit card fees
-
21,271
58
-
(6)
1,298
22,621
Other service charges and fees
287
4,404
2,329
-
1,579
509
9,108
Not in scope of ASC Topic
606
(1)
12,865
1,747
576
(130)
57
(38)
15,077
Total non-interest income
13,152
59,367
13,278
(130)
2,195
5,630
93,492
Total Revenue
$
89,604
$
369,718
$
107,933
$
33,572
$
58,859
$
23,526
$
683,212
(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)
69
For the
quarters and
nine-month periods
ended September
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 nine-month periods ended
September 30, 2023 and
2022:
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
(In thousands)
Beginning balance
$
608
$
1,049
$
841
$
1,443
Revenue recognized
(81)
(104)
(314)
(498)
Ending balance
$
527
$
945
$
527
$
945
As of September 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
September 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)
70
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
September
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)
71
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 September 30,2023:
Interest income
$
31,208
$
90,976
$
68,138
$
32,146
$
33,560
$
7,377
$
263,405
Net (charge) credit for transfer of funds
(12,929)
96,836
(54,926)
(27,817)
(1,164)
-
-
Interest expense
-
(40,746)
-
(8,384)
(12,647)
(1,900)
(63,677)
Net interest income (loss)
18,279
147,066
13,212
(4,055)
19,749
5,477
199,728
Provision for credit losses - (benefit) expense
(3,288)
13,707
(7,235)
32
873
307
4,396
Non-interest income (loss)
3,021
20,170
4,468
(3)
847
1,793
30,296
Direct non-interest expenses
5,201
43,431
9,658
958
8,535
6,647
74,430
Segment income (loss)
$
19,387
$
110,098
$
15,257
$
(5,048)
$
11,188
$
316
$
151,198
Average earnings assets
$
2,127,641
$
3,336,158
$
3,769,370
$
6,382,276
$
2,041,662
$
406,499
$
18,063,606
Mortgage
Banking
Consumer
(Retail) Banking
Commercial and
Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Quarter ended September 30,2022:
Interest income
$
32,349
$
77,576
$
53,506
$
28,203
$
24,804
$
6,245
$
222,683
Net (charge) credit for transfer of funds
(8,011)
47,577
(30,645)
(8,447)
(474)
-
-
Interest expense
-
(6,745)
-
(4,929)
(2,836)
(263)
(14,773)
Net interest income
24,338
118,408
22,861
14,827
21,494
5,982
207,910
Provision for credit losses - expense (benefit)
2,092
16,705
(3,519)
(12)
(624)
1,141
15,783
Non-interest income
3,733
19,121
4,276
33
773
1,757
29,693
Direct non-interest expenses
6,489
42,080
9,295
942
8,479
7,097
74,382
Segment income (loss)
$
19,490
$
78,744
$
21,361
$
13,930
$
14,412
$
(499)
$
147,438
Average earnings assets
$
2,211,675
$
2,974,894
$
3,622,907
$
7,095,503
$
2,040,656
$
365,743
$
18,311,378
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Nine-Month Period Ended September 30,2023
Interest income
$
94,720
$
261,139
$
195,837
$
89,140
$
96,772
$
20,397
$
758,005
Net (charge) credit for transfer of funds
(33,293)
260,715
(154,752)
(70,095)
(2,575)
-
-
Interest expense
-
(94,447)
-
(26,547)
(33,828)
(2,755)
(157,577)
Net interest income (loss)
61,427
427,407
41,085
(7,502)
60,369
17,642
600,428
Provision for credit losses - (benefit) expense
(7,623)
42,600
(2,096)
7
9,545
(305)
42,128
Non-interest income
9,157
62,425
16,788
1,837
2,849
6,029
99,085
Direct non-interest expenses
15,821
126,872
28,363
2,828
25,341
20,203
219,428
Segment income (loss)
$
62,386
$
320,360
$
31,606
$
(8,500)
$
28,332
$
3,773
$
437,957
Average earnings assets
$
2,147,521
$
3,251,286
$
3,751,359
$
6,321,540
$
2,049,281
$
381,655
$
17,902,642
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Nine-Month Period Ended September 30,2022
Interest income
$
98,625
$
221,500
$
148,046
$
77,530
$
64,742
$
18,719
$
629,162
Net (charge) credit for transfer of funds
(22,173)
105,898
(53,391)
(29,101)
(1,233)
-
-
Interest expense
-
(17,047)
-
(14,727)
(6,845)
(823)
(39,442)
Net interest income
76,452
310,351
94,655
33,702
56,664
17,896
589,720
Provision for credit losses - (benefit) expense
(5,216)
42,904
(20,611)
(435)
(5,849)
1,191
11,984
Non-interest income (loss)
13,152
59,367
13,278
(130)
2,195
5,630
93,492
Direct non-interest expenses
19,076
121,897
27,202
2,732
25,195
20,835
216,937
Segment income
$
75,744
$
204,917
$
101,342
$
31,275
$
39,513
$
1,500
$
454,291
Average earnings assets
$
2,249,203
$
2,865,610
$
3,654,906
$
7,642,121
$
2,047,375
$
371,468
$
18,830,683
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
72
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals for the indicated periods:
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
(In thousands)
Net income:
Total income for segments
$
151,198
$
147,438
$
437,957
$
454,291
Other operating expenses
(1)
42,208
40,807
125,395
113,237
Income before income taxes
108,990
106,631
312,562
341,054
Income tax expense
26,968
32,028
89,187
109,156
Total consolidated net income
$
82,022
$
74,603
$
223,375
$
231,898
Average assets:
Total average earning assets for segments
$
18,063,606
$
18,311,378
$
17,902,642
$
18,830,683
Average non-earning assets
832,374
835,740
845,837
873,911
Total consolidated average assets
$
18,895,980
$
19,147,118
$
18,748,479
$
19,704,594
(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)
73
NOTE 21 – SUPPLEMENTAL
STATEMENT
OF CASH FLOWS INFORMATION
Supplemental statement of cash flows information is as follows for the
indicated periods:
Nine-Month Period Ended September 30,
2023
2022
(In thousands)
Cash paid for:
Interest
$
143,792
$
41,205
Income tax
88,258
22,943
Operating cash flow from operating leases
12,939
13,759
Non-cash investing and financing activities:
Additions to OREO
14,951
13,653
Additions to auto and other repossessed assets
48,245
33,119
Capitalization of servicing assets
1,839
2,637
Loan securitizations
100,735
113,757
Loans held for investment transferred to held for sale
3,255
3,893
Right-of-use assets obtained in exchange for operating lease liabilities
3,042
2,297
Payable related to unsettled common stock shares repurchases
1,310
467
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
74
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
September
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
September
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 September
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
phased-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
regional bank failures
in the U.S.
mainland during
the first half
of 2023, although the nature and impact of such actions cannot be predicted
at this time.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
75
The
regulatory
capital
position
of
the
Corporation
and
the
FirstBank
as
of
September
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 September 30,2023
Total Capital (to Risk-Weighted
Assets)
First BanCorp.
$
2,385,079
18.84
%
$
1,012,868
8.0
%
N/A
N/A
%
FirstBank
$
2,335,546
18.45
%
$
1,012,710
8.0
%
$
1,265,888
10.0
%
CET1 Capital (to Risk-Weighted Assets)
First BanCorp.
$
2,069,675
16.35
%
$
569,738
4.5
%
N/A
N/A
%
FirstBank
$
2,077,017
16.41
%
$
569,649
4.5
%
$
822,827
6.5
%
Tier I Capital (to Risk-Weighted
Assets)
First BanCorp.
$
2,069,675
16.35
%
$
759,651
6.0
%
N/A
N/A
%
FirstBank
$
2,177,017
17.20
%
$
759,533
6.0
%
$
1,012,710
8.0
%
Leverage ratio
First BanCorp.
$
2,069,675
10.57
%
$
783,163
4.0
%
N/A
N/A
%
FirstBank
$
2,177,017
11.12
%
$
782,913
4.0
%
$
978,641
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)
76
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 September 30, 2023, commitments to extend credit amounted to
approximately $
2.0
billion, of which $
961.1
million relates to retail
credit card loans.
In addition, commercial
and financial standby
letters of credit
as of September
30, 2023 amounted
to approximately
$
72.1
million.
Contingencies
As of
September 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 September 30, 2023, no such disclosures were necessary.
Following the
failure of
several financial
institutions in
the first
half of
2023, the
FDIC issued
a notice
of proposed
rulemaking in
May 2023
that would
implement a
special assessment
to recover
the cost
associated with
protecting
uninsured
depositors as
part
of
those
financial
institutions’
failures.
The
Corporation
continues
to
monitor
the
status
of
the
proposed
special
assessment
and
the
impact to its future operating results.
The Corporation expects to record the impact when the final rule is enacted.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
77
NOTE 23- FIRST BANCORP.
(HOLDING COMPANY
ONLY) FINANCIAL
INFORMATION
The following
condensed financial information
presents the financial
position of
First BanCorp.
at the holding
company level only
as
of
September
30,
2023
and
December
31,
2022,
and
the
results
of
its
operations
for
the
quarters
and
nine-month
periods
ended
September 30, 2023 and 2022:
Statements of Financial Condition
As of September 30,
As of December 31,
2023
2022
(In thousands)
Assets
Cash and due from banks
$
34,804
$
19,279
Other investment securities
735
735
Investment in First Bank Puerto Rico, at equity
1,410,410
1,464,026
Investment in First Bank Insurance Agency,
at equity
23,596
28,770
Investment in FBP Statutory Trust I
1,289
1,951
Investment in FBP Statutory Trust II
3,561
3,561
Dividends receivable
715
624
Other assets
577
430
Total assets
$
1,475,687
$
1,519,376
Liabilities and Stockholders’ Equity
Liabilities:
Long-term borrowings
$
161,700
$
183,762
Accounts payable and other liabilities
10,919
10,074
Total liabilities
172,619
193,836
Stockholders’ equity
1,303,068
1,325,540
Total liabilities and stockholders’
equity
$
1,475,687
$
1,519,376
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS – (Continued)
78
Statements of Income
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2023
2022
2023
2022
(In thousands)
Income
Interest income on money market investments
$
77
$
19
$
187
$
33
Dividend income from banking subsidiaries
82,178
49,728
239,980
292,000
Dividend income from nonbanking subsidiaries
-
-
12,000
-
Gain on early extinguishment of debt
-
-
1,605
-
Other income
101
68
304
159
Total income
82,356
49,815
254,076
292,192
Expense
Interest expense on long-term borrowings
3,345
2,273
10,135
5,304
Other non-interest expenses
452
422
1,324
1,295
Total expense
3,797
2,695
11,459
6,599
Income before income taxes and equity in undistributed
earnings of subsidiaries
78,559
47,120
242,617
285,593
Income tax expense
745
735
2,606
2,634
Equity in undistributed earnings of subsidiaries
(distributions in excess of earnings)
4,208
28,218
(16,636)
(51,061)
Net income
$
82,022
$
74,603
$
223,375
$
231,898
Other comprehensive loss, net of tax
(78,976)
(270,937)
(46,585)
(778,694)
Comprehensive income (loss)
$
3,046
$
(196,334)
$
176,790
$
(546,796)
79
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 fiscal
year
ended
December 31,
2022,
as amended
on October
13,
2023
(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
The
Federal
Reserve
(“FED”)
continues
to
be
committed
to
bringing
inflation
down
to
its
2%
goal.
Projections
suggest
that
inflation will reach
the 2% target by
2026. In light of
the progress reached thus
far with respect to
the FED’s
tightening campaign, the
FED has decided
to leave the
federal funds rate
unchanged, at a
target range
of 5.25% to
5.50% after the
last interest rate
hike in July
2023. Notwithstanding, the FED is prepared to raise rates further if appropriate.
Recent indicators
suggest that
economic activity
continues expanding,
and so far
this year,
growth in
real GDP
has come
in above
expectations.
As
such,
in
July
2023,
the
Economic
Development
Bank
for
Puerto
Rico’s
Economic
Activity
Index
(“EDB-EAI”)
registered the highest
reading since June
2015. Labor markets
remain strong, although
they are cooling
as evidenced by the
slight rise
in the national unemployment rate to 3.9% in October 2023, from 3.6% in
June 2023.
The Corporation remains cautiously
optimistic on economic conditions in Puerto
Rico, its principal market. For
the third quarter we
earned $82.0
million in
net income
and delivered
a strong return
on average
assets of
1.72% driven
by a
combination of
loan growth
across all
our businesses,
disciplined expense
management, and
encouraging economic
trends in
our main
market. The
Corporation’s
loan
growth
strategy
has
been
supported
by
increased
business
activity
and
economic
tailwinds,
particularly
in
its
main
market,
coupled with
timely execution
across the
three regions.
Going forward,
the Corporation
expects loan
growth as
it redeploys a
portion
of investment
portfolio cash
flows into
higher yielding
assets and
the pace
of draws
on recently
extended construction
loan facilities
begins to accelerate.
On the
other hand,
the deposit
market share
continues to
reflect a
gradual erosion
of excess
liquidity in
the overall
market and
the
migration of
retail customers to
higher rate options
outside the traditional
banking sector,
such as credit
unions and the
U.S. Treasury
market,
partially
offset
by
a
stabilization
in
commercial
deposit
balances.
The
Corporation
remains
focused
on retaining
its
deposit
market
in
the
segments
it
serves
by
pricing
its
products
as
a
function
of
the
market
environment
and
by
accounting
for
the
future
economic value of new and existing relationships, which could potentially
lead to further increments in interest expense.
80
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 (“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
The
Corporation’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,
professional service
fees 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
nine-month
period
ended
September
30,
2023,
the
Corporation
had
net
income
of
$82.0
million
($0.46
per
diluted
common
share)
and
$223.4
million
($1.25
per
diluted
common
share),
respectively,
compared
to
$74.6
million
($0.40
per
diluted
common
share)
and
$231.9
million
($1.19
per
diluted
common
share),
for
the
comparable
periods
in
2022.
Other
relevant
selected financial indicators for the periods presented are included below:
Quarter Ended September 30,
Nine-Month Period Ended September
30,
2023
2022
2023
2022
Key Performance Indicator:
(1)
Return on Average
Assets
(2)
1.72
%
1.55
%
1.59
%
1.57
%
Return on Average
Common Equity
(3)
20.70
19.00
19.00
17.73
Efficiency Ratio
(4)
50.71
48.48
49.29
48.33
(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 common stockholders’ equity and is calculated
by dividing net income on an annualized basis by its
average total common
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
September
30,
2023,
compared
to
the
third
quarter of 2022, include the following:
●
Net interest
income for
the quarter
ended September
30, 2023
decreased to
$199.7 million,
compared to
$207.9 million
for
the
third
quarter
of
2022,
mainly
driven
by
an
increase
in
interest
expense
due
to
higher
rates
paid
on
interest-bearing
deposits
and
a
continued
migration
from
non-interest-bearing
and
other
low-cost
deposits
to
higher-cost
deposits,
partially
offset 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,
and the growth in the
consumer portfolio.
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
September 30, 2023
was $4.4 million,
compared to $15.8
million for the
third quarter of
2022. The decrease
in the provision
expense was primarily
related to updated
macroeconomic variables, which
are forecasted to
deteriorate at a
slower pace than
projected
in
third
quarter
of
2022,
and
a
higher
net
benefit
recorded
for
held-to-maturity
debt
securities
during
the
third
quarter of 2023.
Net charge-offs
totaled $14.1 million
for the quarter
ended September
30, 2023, or
0.48% of average
loans on an
annualized
basis,
compared
to $8.6
million,
or
0.31% of
average
loans,
for
the third
quarter of
2022,
mainly
driven by
a $7.5
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 $30.3 million for
the quarter ended September
30, 2023, compared to $29.7
million for the third quarter of 2022. See “Non-Interest Income” below for
additional information.
●
Non-interest expenses for
the quarter ended
September 30, 2023
increased by $1.4 million
to $116.6
million. The increase in
non-interest
expenses
mainly
reflects
a
$3.6
million
increase
in
employees’
compensation
and
benefits
expenses
driven
by
annual
salary
merit
increases
and
minimum
wage
adjustments,
partially
offset
by
a
$1.5
million
decrease
in
professional
service fees and a $1.1
million increase in net gains
on other real estate owned
(“OREO”) operations. The
efficiency ratio for
the
third
quarter
of
2023
was
50.71%,
as
compared
to
48.48%
for
the
same
period
in
2022.
See
“Non-Interest
Expenses”
below for additional information.
82
●
Income tax expense decreased to $27.0 million for the third quarter
of 2023, compared to $32.0 million for the same period in
2022
driven
by
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,
decreased
to
28.2%
for
the
first
nine
months
of
2023, compared
to 31.8%
for the first
nine months
of 2022. See
“Income Taxes”
below and
Note 17
– Income Taxes,
to the
unaudited consolidated financial statements herein for additional information.
●
As
of
September
30,
2023,
total
assets
were
approximately
$18.6
billion,
a
decrease
of
$39.9
million
from
December
31,
2022,
primarily
related to
a $46.6
million
decrease in
the fair
value of
available-for-sale
debt
securities recorded
as part
of
accumulated other
comprehensive loss
in the
consolidated statements
of financial
condition. Total
assets were
also impacted
by repayments of investment securities, partially offset by increases in total
loans and cash and cash equivalents.
●
As of
September 30,
2023, total
liabilities were
$17.3 billion,
a decrease
of $17.4
million from
December 31,
2022, mainly
driven
by
a
$272.2
million
decrease
in
borrowings
and
a
$37.0
million
decrease
in
accounts
payable
and
other
liabilities,
partially
offset
by a
$291.8 million
increase
in total
deposits, including
brokered
certificates of
deposit (“CDs”).
See “Risk
Management – Liquidity Risk” below for additional information about the Corporation’s
funding sources and strategy.
●
The Bank’s
primary sources of funding
are consumer and commercial
core deposits, which exclude
government deposits and
brokered
CDs.
As
of
September
30,
2023,
these
core
deposits,
amounting
to
$12.9
billion,
funded
69.17%
of
total
assets.
Excluding
fully collateralized
government
deposits, estimated
uninsured deposits
amounted
to $4.8
billion as
of September
30, 2023. In
addition to approximately
$2.7 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 September
30, 2023, the
Corporation had
approximately $1.4
billion
available
for
funding
under
the
FED’s
Discount
Window
and
$947.8
million
available
for
additional
borrowing
capacity
on
FHLB
lines
of
credit
based
on
collateral
pledged
at
these
entities.
On
a
combined
basis,
as
of
September
30,
2023,
the
Corporation
had
$5.1
billion,
or
107%
of
uninsured
deposits,
available
to
meet
liquidity
needs.
See
“Risk
Management – Liquidity Risk” below for additional information about the Corporation’s
funding sources and strategy.
●
As of
September
30,
2023,
the Corporation’s
total
stockholders’
equity
was $1.3
billion,
a
decrease
of
$22.5
million
from
December 31, 2022. The decrease was
mainly driven by the repurchase
of approximately 9.0 million shares
of common stock
for
a
total
purchase
price
of
approximately
$125.0
million,
$75.6
million
in
dividends
declared
to
common
stock
shareholders,
and
a
$46.6
million
decrease
in
the
fair
value
of
available-for-sale
debt
securities
recorded
as
part
of
accumulated other
comprehensive loss
in the
consolidated statements
of financial
condition as
a result
of changes
in market
interest rates. This decrease was
partially offset by the
earnings generated in the first
nine months of 2023. The
Corporation’s
CET1 capital, tier
1 capital, total
capital, and
leverage ratios were
16.35%, 16.35%, 18.84%,
and 10.57%, respectively,
as of
September 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,
increased
by
$124.9
million
to
$1.4
billion
for
the
quarter
ended
September
30,
2023
driven
by
a
higher
volume
of
commercial
loan
originations.
See
“Financial
Condition
and
Operating
Data
Analysis”
below
for
additional
information.
●
Total
non-performing assets
were $130.2
million as
of September
30, 2023,
an increase
of $1.0
million, from
December 31,
2022,
primarily related to a
net increase of $3.3
million in nonaccrual loans,
which include the inflow to
nonaccrual of a $9.5
million
commercial
and
industrial loan
in the
Puerto
Rico region
,
partially
offset
by a
$2.3 million
reduction
in other
non-
performing
assets.
See
“Risk
Management
–
Nonaccrual
Loans
and
Non-Performing
Assets”
below
for
additional
information.
●
Adversely
classified
commercial
and
construction
loans
decreased
by
$16.8
million
to
$76.8
million
as
of
September
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,
partially offset
by the
aforementioned inflow
of a
$9.5 million
commercial and
industrial loan
in
the Puerto Rico region.
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 quarters
ended September 30, 2023 and
2022 and for the nine-month period
ended September 30, 2022 did not
include
any
significant
Special
Items.
The
financial
results
for
the
nine-month
period
ended
September
30,
2023
included
the
following Special Items:
Nine-Month Period Ended September 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 recorded
in 2023.
84
The following
table shows
the net
income for
the third
quarter of
2023 and
reconciles for
the nine-month
period ended
September
30,
2023
the reported
net
income
to adjusted
net income,
a
non-GAAP
financial
measure
that excludes
the Special
Items identified
above:
Quarter Ended September 30,
Nine-Month Period Ended
September 30,
2023
2023
(In thousands)
Net income, as reported (GAAP)
$
82,022
$
223,375
Adjustments:
Gain recognized from a legal settlement
-
(3,600)
Gain on early extinguishment of debt
-
(1,605)
Income tax impact of adjustments
(1)
-
1,350
Adjusted net income (Non-GAAP)
$
82,022
$
219,520
(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
nine-month
period ended
September 30,
2023 was
$199.7 million
and $600.4
million, respectively,
compared to
$207.9 million
and
$589.7 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
nine-month
period
ended
September
30,
2023
was
$204.4
million
and
$617.0
million, respectively,
compared to $217.0 million and $615.4 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
Financial Measures and Reconciliations” above.
Part I
Average volume
Interest income
(1)
/ expense
Average rate
(1)
Quarter ended September 30,
2023
2022
2023
2022
2023
2022
(Dollars in thousands)
Interest-earning assets:
Money market and other short-term investments
$
807,883
$
882,759
$
10,956
$
4,654
5.38
%
2.09
%
Government obligations
(2)
2,817,646
2,912,130
9,415
10,325
1.33
%
1.41
%
MBS
3,650,737
4,113,870
15,677
22,028
1.70
%
2.12
%
FHLB stock
34,666
16,677
768
292
8.79
%
6.95
%
Other investments
14,294
13,094
61
45
1.69
%
1.36
%
Total investments
(3)
7,325,226
7,938,530
36,877
37,344
2.00
%
1.87
%
Residential mortgage loans
2,800,675
2,855,927
39,640
39,874
5.62
%
5.54
%
Construction loans
183,507
118,794
4,937
1,831
10.67
%
6.12
%
Commercial and industrial ("C&I") and commercial mortgage loans
5,261,849
5,085,257
93,711
73,518
7.07
%
5.74
%
Finance leases
808,480
647,586
15,802
11,751
7.75
%
7.20
%
Consumer loans
2,728,945
2,511,300
77,125
67,504
11.21
%
10.66
%
Total loans
(4)(5)
11,783,456
11,218,864
231,215
194,478
7.78
%
6.88
%
Total interest-earning assets
$
19,108,682
$
19,157,394
$
268,092
$
231,822
5.57
%
4.80
%
Interest-bearing liabilities:
Time deposits
$
2,708,297
$
2,109,521
$
19,852
$
3,788
2.91
%
0.71
%
Brokered certificates of deposit ("CDs")
318,831
63,524
3,830
333
4.77
%
2.08
%
Other interest-bearing deposits
7,956,856
8,372,342
30,616
5,857
1.53
%
0.28
%
Securities sold under agreements to repurchase
26,254
200,000
359
1,993
5.43
%
3.95
%
Advances from the FHLB
500,000
97,826
5,675
529
4.50
%
2.15
%
Other long-term borrowings
161,700
183,762
3,345
2,273
8.21
%
4.91
%
Total interest-bearing liabilities
$
11,671,938
$
11,026,975
$
63,677
$
14,773
2.16
%
0.53
%
Net interest income on a tax-equivalent basis and excluding
valuations - non-GAAP
$
204,415
$
217,049
Interest rate spread
3.41
%
4.27
%
Net interest margin
4.24
%
4.49
%
86
Part I
Average volume
Interest income
(1)
/ expense
Average rate
(1)
Nine-Month Period Ended September 30,
2023
2022
2023
2022
2023
2022
(Dollars in thousands)
Interest-earning assets:
Money market and other short-term investments
$
611,308
$
1,412,802
$
23,486
$
8,347
5.14
%
0.79
%
Government obligations
(2)
2,878,603
2,857,462
31,153
28,647
1.45
%
1.34
%
MBS
3,756,654
4,079,403
52,160
64,252
1.86
%
2.11
%
FHLB stock
37,234
19,788
1,969
830
7.07
%
5.61
%
Other investments
13,729
12,496
258
78
2.51
%
0.83
%
Total investments
(3)
7,297,528
8,381,951
109,026
102,154
2.00
%
1.63
%
Residential mortgage loans
2,814,667
2,902,542
119,298
121,134
5.67
%
5.58
%
Construction loans
159,914
119,214
10,516
5,123
8.79
%
5.75
%
C&I and commercial mortgage loans
5,207,216
5,081,049
268,886
200,022
6.90
%
5.26
%
Finance leases
771,366
617,946
44,325
34,073
7.68
%
7.37
%
Consumer loans
2,679,261
2,422,337
222,531
192,379
11.10
%
10.62
%
Total loans
(4)(5)
11,632,424
11,143,088
665,556
552,731
7.65
%
6.63
%
Total interest-earning assets
$
18,929,952
$
19,525,039
$
774,582
$
654,885
5.47
%
4.48
%
Interest-bearing liabilities:
Time deposits
$
2,522,061
$
2,224,002
$
46,301
$
12,047
2.45
%
0.72
%
Brokered CDs
273,586
77,239
9,178
1,214
4.49
%
2.10
%
Other interest-bearing deposits
7,674,759
8,403,860
70,308
12,063
1.22
%
0.19
%
Securities sold under agreements to repurchase
72,648
213,553
2,756
6,147
5.07
%
3.85
%
Advances from the FHLB
553,993
165,568
18,899
2,667
4.56
%
2.15
%
Other long-term borrowings
174,307
183,762
10,135
5,304
7.77
%
3.86
%
Total interest-bearing liabilities
$
11,271,354
$
11,267,984
$
157,577
$
39,442
1.87
%
0.47
%
Net interest income on a tax-equivalent basis and excluding
valuations - non-GAAP
$
617,005
$
615,443
Interest rate spread
3.60
%
4.01
%
Net interest margin
4.36
%
4.21
%
(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"
above.
(2)
Government obligations include debt issued by government-sponsored
agencies.
(3)
Unrealized gains and losses on available-for-sale debt securities
are excluded from the average volumes.
(4)
Average loan balances include
the average of nonaccrual loans.
(5)
Interest income on loans includes $2.9 million for each of the quarters
ended September 30, 2023 and 2022, and $8.9 million and $8.5
million for the nine-month periods ended September
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 September 30,
Nine-Month Period Ended September 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
$
(674)
$
6,976
$
6,302
$
(17,834)
$
32,973
$
15,139
Government obligations
(328)
(582)
(910)
213
2,293
2,506
MBS
(2,302)
(4,049)
(6,351)
(4,842)
(7,250)
(12,092)
FHLB stock
382
94
476
878
261
1,139
Other investments
4
12
16
8
172
180
Total investments
(2,918)
2,451
(467)
(21,577)
28,449
6,872
Residential mortgage loans
(771)
537
(234)
(3,705)
1,869
(1,836)
Construction loans
1,311
1,795
3,106
2,112
3,281
5,393
C&I and commercial mortgage loans
2,630
17,563
20,193
5,081
63,783
68,864
Finance leases
3,091
960
4,051
8,764
1,488
10,252
Consumer loans
6,039
3,582
9,621
21,058
9,094
30,152
Total loans
12,300
24,437
36,737
33,310
79,515
112,825
Total interest income
$
9,382
$
26,888
$
36,270
$
11,733
$
107,964
$
119,697
Interest expense on interest-bearing liabilities:
Time deposits
$
1,355
$
14,709
$
16,064
$
1,819
$
32,435
$
34,254
Brokered CDs
2,647
850
3,497
5,506
2,458
7,964
Other interest-bearing deposits
(658)
25,417
24,759
(2,527)
60,772
58,245
Securities sold under agreements to repurchase
(2,037)
403
(1,634)
(4,668)
1,277
(3,391)
Advances from the FHLB
4,061
1,085
5,146
10,991
5,241
16,232
Other borrowings
(352)
1,424
1,072
(380)
5,211
4,831
Total interest expense
5,016
43,888
48,904
10,741
107,394
118,135
Change in net interest income
$
4,366
$
(17,000)
$
(12,634)
$
992
$
570
$
1,562
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
Nine-Month Period Ended
September 30,
September 30,
2023
2022
2023
2022
(Dollars in thousands)
Interest income - GAAP
$
263,405
$
222,683
$
758,005
$
629,162
Unrealized gain on derivative instruments
(3)
(11)
-
(35)
Interest income excluding valuations - non-GAAP
263,402
222,672
758,005
629,127
Tax-equivalent adjustment
4,690
9,150
16,577
25,758
Interest income on a tax-equivalent basis
and excluding valuations - non-GAAP
$
268,092
$
231,822
$
774,582
$
654,885
Interest expense - GAAP
$
63,677
$
14,773
$
157,577
$
39,442
Net interest income - GAAP
$
199,728
$
207,910
$
600,428
$
589,720
Net interest income excluding valuations - non-GAAP
$
199,725
$
207,899
$
600,428
$
589,685
Net interest income on a tax-equivalent basis
and excluding valuations - non-GAAP
$
204,415
$
217,049
$
617,005
$
615,443
Average Balances
Loans and leases
$
11,783,456
$
11,218,864
$
11,632,424
$
11,143,088
Total securities, other short-term investments and interest-bearing
cash balances
7,325,226
7,938,530
7,297,528
8,381,951
Average Interest-Earning Assets
$
19,108,682
$
19,157,394
$
18,929,952
$
19,525,039
Average Interest-Bearing Liabilities
$
11,671,938
$
11,026,975
$
11,271,354
$
11,267,984
Average Yield/Rate
Average yield on interest-earning assets - GAAP
5.47%
4.61%
5.35%
4.31%
Average rate on interest-bearing liabilities - GAAP
2.16%
0.53%
1.87%
0.47%
Net interest spread - GAAP
3.31%
4.08%
3.48%
3.84%
Net interest margin - GAAP
4.15%
4.31%
4.24%
4.04%
Average yield on interest-earning assets excluding valuations
- non-GAAP
5.47%
4.61%
5.35%
4.31%
Average rate on interest-bearing liabilities
2.16%
0.53%
1.87%
0.47%
Net interest spread excluding valuations
- non-GAAP
3.31%
4.08%
3.48%
3.84%
Net interest margin excluding valuations - non-GAAP
4.15%
4.31%
4.24%
4.04%
Average yield on interest-earning assets on a tax-equivalent
basis and excluding
valuations - non-GAAP
5.57%
4.80%
5.47%
4.48%
Average rate on interest-bearing liabilities
2.16%
0.53%
1.87%
0.47%
Net interest spread on a tax-equivalent basis
and excluding valuations - non-GAAP
3.41%
4.27%
3.60%
4.01%
Net interest margin on a tax-equivalent basis and excluding
valuations - non-GAAP
4.24%
4.49%
4.36%
4.21%
89
Net
interest
income
amounted
to
$199.7
million
for
the
quarter
ended
September
30,
2023,
a
decrease
of
$8.2
million,
when
compared to $207.9 million for same period in 2022. The $8.2 million decrease
in net interest income was primarily due to:
●
A $44.3 million increase in interest expense on interest-bearing deposits, consisting
of:
-
A $24.8
million increase
in interest
expense on
interest-bearing checking
and saving
accounts, driven
by an
increase of
$25.4
million
associated
with
higher
interest
rates
paid
in
the
third
quarter
of
2023
as
a
result
of
the
overall
higher
interest
rate
environment,
partially
offset
by
a
decrease
of $0.7
million
resulting
from
a
$415.5
million
decline
in
the
average balance
of these
deposits. The
average cost
of interest-bearing
checking and
saving accounts
increased by
125
basis points
to 1.53%
in the
third
quarter of
2023 as
compared to
0.28%
in the
same period
in 2022,
mostly driven
by
public
sector
deposits in
the
Puerto
Rico
region.
Excluding
public
sector deposits,
the
average
cost
of
interest-bearing
checking
and
saving accounts
for
the third
quarter of
2023 was
0.74%,
compared to
0.33%
for
the same
period a
year
ago.
-
A
$16.1
million
increase
in
interest
expense
on
time
deposits,
excluding
brokered
CDs,
of
which
$14.7
million
was
related to
higher rates
paid on
new issuances
and renewals also
associated with
the higher
interest rate
environment and
$1.4 million was due
to the $598.9 million
increase in the average balance
.
The average cost of time
deposits in the third
quarter
of
2023,
excluding
brokered
CDs,
increased
220
basis
points
to
2.91%
when
compared
to
the
same
period
in
2022.
-
A
$3.4
million
increase
in
interest
expense
on
brokered
CDs,
mainly
driven
by
the
increase
of
$255.3
million
in
the
average balance.
●
A
$4.6 million net increase in interest expense on borrowings, consisting of:
-
A $5.2
million increase
in interest
expense on
advances from
the FHLB,
of which
$4.1 million
was associated
with an
increase of
$402.2 million
in the
average balance,
and $1.1
million was
associated with
new FHLB
advances at
higher
interest rates.
-
A
$1.1
million
increase
in
interest
expense
on
other
long-term
borrowings,
driven
by
the
upward
repricing
of
junior
subordinated debentures,
partially offset by a
$0.4 million decrease in interest
expense associated with a
decline of $22.1
million in the average balance.
Partially offset by:
-
A $1.7
million decrease
in interest
expense on
repurchase agreements,
mainly driven
by the
$173.7 million
decrease in
the average balance.
90
Partially offset by:
●
A $36.2 million increase in interest income on loans including:
-
A $22.5 million increase
in interest income on
commercial and construction loans,
of which $19.4
million was related to
the
effect
of
higher
market
interest
rates
on
the
upward
repricing
of
variable-rate
loans and
on
new
loan
originations,
$3.9
million
was
related
to
the
increase
of
$271.9
million
in
the
average
balance
(excluding
Small
Business
Administration Paycheck
Protection Program (“SBA
PPP”) loans), and
interest income of $1.2
million recognized in the
third quarter of 2023
due to the collection
of a previously
charged-off construction
loan in the Puerto
Rico region. These
variances were partially offset by a $2.0 million reduction
in interest income from SBA PPP loans.
As
of
September
30,
2023,
the
interest
rate
on
approximately
54%
of
the
Corporation’s
commercial
and
construction
loans was tied
to variable
rates, with 30%
based upon
SOFR of 3
months or
less, 13% based
upon the
Prime rate index,
and 11%
based on other indexes.
For the third quarter
of 2023, the average
one-month SOFR increased
287 basis points,
the
average
three-month
SOFR
increased
255
basis
points,
and
the
average
Prime
rate
increased
308
basis
points,
compared to the average rates for such indexes during the third quarter of 2022.
-
A
$13.7
million
increase
in
interest
income
on
consumer
loans
and
finance
leases,
driven
by
an
increase
of
$378.5
million in the average balance of this portfolio,
and, to a lesser extent, the upward repricing of the credit cards portfolio.
●
A $4.5 million increase in interest income from interest-bearing cash
balances and investment securities, consisting of:
-
A
$6.3
million
increase
in
interest
income
from
interest-bearing
cash
balances,
which
consisted
primarily
of
cash
balances
deposited
at
the
FED,
due
to
an
increase
of
$7.0
million
associated
with
the
effect
of
higher
market
interest
rates, partially offset by a $0.7 million decrease due to a decline
of $74.9 million in the average balance.
-
A $0.5 million increase in
dividends received from the
FHLB during the third quarter of
2023, mainly driven by a
higher
volume of FHLB stock due to the aforementioned increase in advances
for the third quarter of 2023.
Partially offset by:
-
A $2.3
million
decrease
in interest
income
on debt
securities, mainly
driven
by a
decrease of
$3.1
million
related
to a
decline
of
$557.6
million
in
the
average
balance,
and
a
higher
level
of
U.S.
agencies’
MBS
premium
amortization
expense associated
with changes in
anticipated prepayments,
partially offset
by higher yields
mainly associated
with the
upward repricing of variable-rate municipal bonds.
Net
interest
margin
for
the
third
quarter
of
2023
decreased
to
4.15%,
compared
to
4.31%
for
the
same
period
in
2022.
The
net
interest margin
decrease primarily reflects
an increase in
the average cost
of interest-bearing
liabilities, mainly reflecting
the effect
of
higher rates
paid on
deposits, primarily
in public
sector deposits
and a
continued migration
from non-interest-bearing
and other
low-
cost deposits to
higher-cost deposits.
These variances
were partially offset
by 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 third quarter of 2023.
91
Net interest income amounted
to $600.4 million for
the nine-month period
ended September 30, 2023,
an increase of $10.7 million,
when compared to $589.7 million for same period in 2022. The $10.7
million increase in net interest income was primarily due to:
●
A $111.9 million
increase in interest income on loans consisting of:
-
A $72.7
million increase in interest
income on commercial and
construction loans, of
which $69.1 million was
related to
the effect
of higher
market interest
rates in
the upward
repricing of
variable-rate loans
and in
new loan
originations and
$9.2
million
was
related
to
the
increase
of
$236.8
million
in
the
average
balance
(excluding
SBA
PPP
loans).
These
variances were partially offset by a $6.8 million
reduction in interest income from SBA PPP loans.
For
the
nine-month
period
ended
September
30,
2023,
the
average
one-month
SOFR
increased
381
basis
points,
the
average three-month
SOFR increased 360
basis points, and
the average Prime
rate increased 389
basis points, compared
to the average rates for such indexes during the same period of the prior year.
-
A
$40.4
million
increase
in
interest
income
on
consumer
loans
and
finance
leases,
driven
by
the
increase
of
$410.3
million in the average balance of this portfolio, and, to a lesser extent, the upward
repricing of the credit cards portfolio.
Partially offset by:
-
A
$1.2 million decrease in
interest income on residential
mortgage loans, driven by
a $3.4 million decrease related
to the
$87.9 million
decline in
the average
balance of
this portfolio,
partially offset
by a
$2.2 million
increase associated
with
the positive effect of new loan originations at higher current market
interest rates.
●
A
$17.0 million increase in interest income from interest-bearing cash balances
and investment securities, consisting of:
-
A $15.1
million
increase
in
interest income
from
interest-bearing
cash balances,
driven by
the
effect
of higher
market
interest rates, partially offset by the impact of a $801.5 million
decrease in the average balance of interest-bearing cash.
-
A $1.3 million
increase in dividend
income,
mainly driven by
the aforementioned
higher volume
of FHLB stock
for the
first nine months of 2023.
-
A
$0.5
million
net
increase
in
interest
income
on
debt
securities,
which
includes
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
$26.0
million
decline
in
the
average
balance.
This
favorable
variance
was
partially
offset
by
a
$2.2
million decrease
in interest income
on U.S. agencies
debentures and
MBS mainly driven
by the $275.6
million decrease
in the
average balance
of this
portfolio,
partially offset
by the
positive effects
from higher-yielding
U.S. agencies
MBS
purchased during 2022.
92
Partially offset by:
●
A $100.5 million increase in interest expense on interest-bearing deposits, consisting
of:
-
A
$58.2
million
increase
in
interest
expense
on
interest-bearing
checking
and
saving
accounts,
mainly
driven
by
an
increase
of
$60.7
million
associated
with
higher
interest
rates
paid
in
the
first
nine
months
of
2023
as
a
result
of
the
overall
higher
interest
rate
environment,
partially
offset
by
a
$2.5
million
decrease
resulting
from
a
decline
of
$729.1
million
in
the
average
balance
of
these
deposits.
The
average
cost
of
interest-bearing
checking
and
saving
accounts
increased
by
103
basis
points
to
1.22%
in
the
first
nine
months
of
2023
as
compared
to
0.19%
in
the
same
period
in
2022,
mostly driven
by public
sector deposits
in the
Puerto
Rico region.
Excluding
public sector
deposits,
the average
cost of interest-bearing
checking and savings
accounts for the
first nine months
of 2023 was
0.66%, compared
to 0.20%
for the same period a year ago.
-
A $34.3
million
increase
in
interest expense
on time
deposits, excluding
brokered
CDs, mainly
associated
with
higher
rates paid
in the
first nine
months of
2023 on
new issuances
and
renewals also
associated
with the
higher
interest rate
environment. The average
cost of time deposits
in the first
nine months of
2023, excluding brokered
CDs, increased 173
basis points to 2.45%
when compared to the same period in 2022.
-
An $8.0
million increase
in interest
expense
on brokered
CDs, driven
by the
increase of
$196.3 million
in the
average
balance.
●
A $17.7 million net increase in interest expense on borrowings, including:
-
A $16.3 million increase
in interest expense on
advances from the FHLB, of
which $11.0 million
was associated with an
increase of
$388.4 million
in the
average balance
,
and $5.2
million was
associated with
new FHLB
advances at
higher
interest rates.
-
A
$4.8
million
increase
in
interest
expense
on
other
long-term
borrowings,
mainly
driven
by
the
upward
repricing
of
junior subordinated debentures.
Partially offset by:
-
A $3.4
million decrease
in interest expense
on repurchase
agreements, driven
by a
$4.7 million
decrease associated
to a
decline
of $140.9
million
in the
average balance
,
partially offset
by a
$1.3 million
increase associated
with new
short-
term repurchase agreements entered into during 2023 at higher interest
rates.
Net interest margin
increased by 20 basis
points to 4.24% for
the first nine months
of 2023, compared to
4.04% for the same
period
of 2022.
The net
interest margin
increase primarily
reflects the
upward repricing
of variable-rate
commercial loans
and the
growth in
higher yielding
loans, primarily
in commercial
and consumer
loans. These
factors were
partially offset
by an
increase in
the average
cost of interest-bearing
liabilities, mainly reflecting
the effect of
higher rates paid
on deposits, primarily
in public sector
deposits, and
a continued migration from non-interest-bearing and other low-cost deposits to higher
-cost deposits.
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
$10.6
million
for
the
third
quarter
of
2023,
compared
to
$14.4
million for the third quarter of 2022.
The variances by major portfolio category were as follows:
●
Provision for credit
losses for the residential
mortgage loan portfolio
was a net benefit
of $3.3 million for
the third quarter of
2023, compared
to an
expense of
$0.8 million
for the
third quarter
of 2022.
The net
benefit recorded
for the
third quarter
of
2023
was
primarily
related
to
the
aforementioned
updated
macroeconomic
variables
and,
to
a
lesser
extent,
a
reduction
in
qualitative reserves driven by the sustained levels of collateral values.
●
Provision for
credit losses
for the
consumer loans
and finance
leases portfolio
was an
expense of
$14.0 million
for the
third
quarter of
2023, compared
to an
expense of
$17.4 million
for the
third quarter
of 2022.
The decrease
in the
provision in
the
third
quarter
of
2023
was
primarily
related
to
updated
macroeconomic
variables,
mainly
in
the
projection
of
the
unemployment rate and retail sales growth in the case of credit cards.
●
Provision for
credit losses
for the
commercial and
construction loan
portfolio was
a net
benefit of
$0.1 million
for the
third
quarter of
2023, compared
to a
net benefit
of $3.8
million for
the third
quarter of
2022. The
net benefit
for the
commercial
and
construction
loan
portfolio
for
the
third
quarter
of
2023
included
various
offsetting
factors
including
a
recovery
associated to the collection
of a fully charged-off
construction loan in the Puerto
Rico region, partially offset
by an additional
provision
recorded
on
the
aforementioned
$9.5
million
commercial
and
industrial
loan
in
the
Puerto
Rico
region
which
migrated to non-accrual.
The net benefit
for the commercial
and construction loan
portfolio for the
third quarter of
2022 was
related mostly to a reduction in reserves due to updated financial information received
during the third quarter of 2022.
The provision
for credit losses
for loans
and finance leases
was $47.7
million for the
first nine months
of 2023, compared
to $10.0
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
$10.6
million for
the first
nine months of 2023,
compared to a net
benefit of $26.6 million
for the same period
of 2022. The expense
recognized during
the first nine months
of 2023 was mainly
due to a deterioration
in the forecasted commercial
real estate (“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,
the aforementioned
$1.7 million reserve
associated with the
inflow to
nonaccrual status
of a
$9.5
million commercial and
industrial loan in the
Puerto Rico region and,
to a lesser extent,
portfolio growth. Meanwhile,
the net
benefit
recorded
during
the
first
nine
months
of
2022
mainly
reflects
reductions
in
qualitative
reserves
associated
with
reduced COVID-19 uncertainties and updated borrowers’ financial information.
●
Provision for
credit losses
for the
consumer loans
and finance
leases portfolio
was an
expense of
$43.9 million
for the
first
nine months
of 2023,
compared to
an expense
of $43.5
million for
the same
period of
2022. The
increase primarily
reflects
the increase in
the size of the consumer
loan portfolios and historical
charge-off levels
in all major portfolio
classes, partially
offset by the aforementioned updates in macroeconomic variables.
●
Provision
for
credit
losses
for
the
residential
mortgage
loan
portfolio
was
a
net
benefit
of
$6.8
million
for
the
first
nine
months
of
2023,
compared
to a
net
benefit
of
$6.9
million
for
the
same
period
of 2022.
The
net
benefit
recorded
for
both
periods was primarily related to updated macroeconomic variables.
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 a
net
benefit of $0.1 million
and an expense of $0.5 million
for the third quarter and
first nine months of 2023, respectively,
compared to an
expense
of
$2.0
million
and
$2.7
million,
respectively,
for
the
same
periods
in
2022.
The
expense
recorded
during
the
first
nine
months of
2022 was
mainly driven
by an
increase in
unfunded loan
commitments principally
due to
then newly
originated facilities
which remained undrawn as of September 30, 2022.
Provision for credit losses for
held-to-maturity and available-for-sale debt
securities
The provision
for credit
losses for
held-to-maturity debt
securities was
a net
benefit of
$6.2 million
and $6.0
million for
the third
quarter
and first
nine months
of 2023,
respectively,
compared to
a net
benefit of
$0.6 million
and $0.3
million, respectively,
for the
same
periods
of
2022.
The
net
benefit
recorded
during
the
third
quarter
and
first
nine
months
of
2023
was
mostly
driven
by
the
aforementioned refinancing
of a $46.5
million municipal
bond into
a shorter-term
commercial loan structure
and, to
a lesser extent,
a
reduction
in qualitative
reserves driven
by updated
financial information
of certain
bond issuers
received
during the
third quarter
of
2023.
The provision
for credit
losses for
available-for-sale
debt securities
was an
expense of
$32 thousand
and $7
thousand for
the third
quarter and
first nine
months of
2023, respectively,
compared to
a net
benefit of
$12 thousand
and $0.4
million, respectively,
for the
same periods in 2022.
95
Non-Interest Income
Non-interest
income
amounted
to
$30.3
million
for
the
third
quarter
of
2023,
compared
to
$29.7
million
for
the
same
period
in
2022.
The $0.6 million increase in non-interest income was primarily due to:
●
A
$1.0
million
increase
in
card
and
processing
income
mainly
in
interchange
income
related
to
higher
transactional
volumes.
●
A $0.3 million
increase in other
non-interest income,
mainly driven
by a $0.2
million increase related
to higher
benefit of
purchased income tax credits realized.
●
A $0.2 million increase in insurance commission income.
Partially offset by:
●
A $0.6 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 third quarters
of 2023 and 2022,
net realized gains
of $0.9 million
and $1.5 million, respectively,
were recognized as a
result
of
GNMA
securitization
transactions
and
whole
loan
sales
to
U.S.
GSEs
amounting
to
$42.3
million
and
$48.4
million, respectively.
●
A $0.3 million decrease in service in charges and fees on deposit accounts
.
Non-interest
income for
the nine-month
period ended
September 30,
2023 amounted
to $99.1
million, compared
to $93.5
million
for the same
period in 2022.
Non-interest income
for the nine-month
period ended September
30, 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 $0.4 million primarily
due to:
●
A
$3.1
million
increase
in
card
and
processing
income
mainly
in
interchange
income
related
to
higher
transactional
volumes.
●
A $2.2
million
net
increase
in
adjusted
other
non-interest
income
including:
(i)
a $1.2
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)
a
$0.4
million
decrease
in
unrealized
losses
on
marketable
equity
securities;
and
(iv)
$0.3
million
in
debit
card
incentives
collected
during
2023;
partially
offset
by
a
$0.7
million
decrease
in
net
gains
on
fixed
assets.
Partially offset by:
●
A $4.2 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
first
nine
months
of
2023
and
2022,
net
gains
of
$2.9
million
and
$7.2
million,
respectively,
were
recognized
as
a
result of
GNMA
securitization
transactions
and
whole
loan sales
to U.S.
GSEs amounting
to $131.5
million
and
$206.5
million, respectively.
●
A $0.5 million decrease in insurance commission income.
●
A $0.2 million decrease in service in charges and fees on deposit accounts.
96
Non-Interest Expenses
Non-interest
expenses for
the quarter
ended September
30, 2023
amounted to
$116.6
million, compared
to $115.2
million for
the
same period in 2022.
The efficiency ratio
for the third quarter of
2023 was 50.71%, compared
to 48.48% for the
third quarter of 2022.
The $1.4 million increase in non-interest expenses was primarily due
to:
●
A
$3.6 million
increase in
employees’ compensation
and benefits
expenses, driven
by increases
of $2.5
million in
salary
compensation
mainly
due
to annual
salary
merit
increases
and
minimum
wage
adjustments,
$0.5
million
in
stock-based
compensation expense, and $0.4 million in medical insurance premium
costs.
●
A
$0.7 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 $0.5
million
increase
in other
non-interest
expenses,
mainly
due
to an
increase
of $0.5
million
in net
periodic
cost of
pension plans
and a
$0.3 million
increase in
charges
for legal
and operational
reserves, partially
offset
by a
$0.3 million
decrease in amortization
of intangible
assets, mainly in
the purchased
credit card relationship
intangible assets
recognized
in connection with the Banco Santander Puerto Rico acquisition becoming
fully amortized in 2023.
●
A
$0.4 million
increase in
credit and
debit card
processing fees,
mainly driven
by higher
transactional volumes,
partially
offset by higher incentives collected.
Partially offset by:
●
A
$1.5
million
decrease
in
professional
service
fees,
mainly
due
to
reductions
of
$0.6
million
in
consulting
fees;
$0.3
million in outsourced technology service fees; and $0.3 million in collections,
appraisals, and other credit-related fees.
●
A
$1.1 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
$0.8
million
decrease
in
occupancy
and
equipment
expenses,
primarily
reflecting
reductions
in
rental
expenses
and
energy costs.
●
A $0.4
million decrease
in business promotion
expenses, mainly
due to
a decrease
in donations
and advertising
expenses,
and adjustments
recorded to
reduce the credit
card loyalty
reward program
liability consistent
with lower historical
trends
of
customer
redemptions,
partially
offset
by expenses
associated with
the commemoration
of the
75
th
anniversary
of the
Bank.
Non-interest
expenses
for
the
first
nine
months
of
2023
amounted
to
$344.8
million,
compared
to
$330.2
million
for
the
same
period in
2022. The
efficiency
ratio for
the first
nine months
of 2023
was 49.29%,
compared to
48.33% for
the first
nine months
of
2022.
On
a non-GAAP
basis,
excluding
the
aforementioned
Special
Items,
the
adjusted efficiency
ratio
for
the first
nine
months
of
2023 was 49.66%. The $14.6 million increase in non-interest expenses was primarily
due to:
●
A
$13.5
million
increase
in
employees’
compensation
and
benefits
expenses,
mainly
driven
by
annual
salary
merit
increases and minimum
wage adjustments and
increases in bonuses accruals
,
medical insurance premium
costs, and stock-
based compensation expense; partially offset by higher
deferral of loan origination costs.
●
A
$2.3
million
increase
in
credit
and
debit
card
processing
expenses,
mainly
driven
by
higher
transactional
volumes,
partially offset by higher incentives collected.
●
A $2.0
million
increase
in other
non-interest
expenses,
mainly
due
to an
increase
of $1.4
million
in net
periodic
cost of
pension plans
and a
$1.0 million
increase in
charges
for legal
and operational
reserves, partially
offset
by a
$0.8 million
decrease in amortization
of intangible
assets, mainly in
the purchased
credit card relationship
intangible assets recognized
in connection with the Banco Santander Puerto Rico acquisition becoming
fully amortized in 2023.
●
A
$1.8 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.
97
Partially offset by:
●
A
$2.9 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
$2.4
million
decrease
in
occupancy
and
equipment
expenses,
primarily
reflecting
reductions
in
rental
expenses,
depreciation charges, and energy costs; partially
offset by an increase in maintenance charges and
property taxes.
Income Taxes
For the
third quarter
of 2023, the
Corporation recorded
an income
tax expense of
$27.0 million,
compared to
$32.0 million
for the
same period in 2022. For the first nine months of
2023, the Corporation recorded an income tax expense
of $89.2 million, compared to
$109.2 million for the same period
in 2022. The decrease in income tax expense
for the third quarter of 2023, as
compared to the same
quarter of the
previous year,
was the result
of a lower
effective tax
rate due to
increased business activities
with tax advantages
under
the Puerto
Rico tax
code, which
resulted in
additional deductions
in the
banking subsidiary,
as well
as a
higher proportion
of exempt
income to
taxable income,
partially offset
by higher
pre-tax income.
The decrease
in income
tax expense
for the
first nine
months of
2023, as compared to the same period in 2022,
was mainly related to lower pre-tax income; and the aforementioned
increased business
activities during the
third quarter of
2023 and a
higher proportion of
exempt to taxable
income which resulted
in a lower
effective tax
rate.
The Corporation’s
estimated annual
effective tax
rate in
the first
nine months
of 2023,
excluding entities
from which
a tax
benefit
cannot
be
recognized
and
discrete
items,
was
28.2%,
compared
to
31.8%
for
the
first
nine
months
of
2022.
See
Note
17
-
Income
Taxes, to the
unaudited consolidated financial statements herein for additional informatio
n.
As
of
September
30,
2023,
the
Corporation
had
a
deferred
tax
asset
of
$150.8
million,
net
of
a
valuation
allowance
of
$195.1
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 nine-month
period ended September
30, 2023 amounted
to $ 88.3
million,
compared to
$22.9 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 $18.6
billion as
of September
30, 2023,
a decrease
of $39.9
million from
December 31,
2022,
primarily related to a $46.6 million decrease in the fair value of
available-for-sale debt securities recorded as part
of accumulated other
comprehensive loss in the consolidated statements of financial condition
.
Total assets were also impacted
by repayments of investment
securities, partially offset by increases in total loans and
cash and cash equivalents.
Loans Receivable, including Loans Held for Sale
As of
September 30,
2023, the
Corporation’s
total loan
portfolio before
the ACL
amounted to
$12.0 billion,
an increase
of $394.8
million compared to December 31, 2022. In
terms of geography,
the growth consisted of increases of $394.9 million
and $43.6 million
in
the
Puerto
Rico
and
Virgin
Islands
regions,
respectively,
partially
offset
by
a
$43.7
million
decrease
in
the
Florida
region.
On a
portfolio
basis,
the
growth
consisted
of
increases
of
$261.0
million
in
consumer
loans,
including
a
$218.4
million
increase
in
auto
loans and
leases, and
$171.8 million
in commercial
and construction
loans, partially
offset by
a $38.0
million decrease
in residential
mortgage loans.
As of
September
30,
2023,
the Corporation’s
loans
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
$12.0
billion
as
of
September
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 September 30, 2023
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
Residential mortgage loans
$
2,182,882
$
170,797
$
458,952
$
2,812,631
Construction loans
98,565
3,762
100,447
202,774
Commercial mortgage loans
1,714,974
65,034
536,105
2,316,113
Commercial and Industrial loans
1,971,686
116,588
942,680
3,030,954
Total commercial loans
3,785,225
185,384
1,579,232
5,549,841
Consumer loans and finance leases
3,514,817
67,184
6,459
3,588,460
Total loans held for investment,
gross
$
9,482,924
$
423,365
$
2,044,643
$
11,950,932
Loans held for sale
8,961
-
-
8,961
Total loans, gross
$
9,491,885
$
423,365
$
2,044,643
$
11,959,893
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
Residential Real Estate Loans
As of
September 30,
2023, the
Corporation’s
total residential
mortgage loan
portfolio, including
loans held
for sale,
decreased by
$38.0
million,
as compared
to the
balance
as of
December 31,
2022.
The
decline
in
the residential
mortgage
loan
portfolio
reflects
decreases
of $58.4
million in
the Puerto
Rico region
and $9.2
million in
the Virgin
Islands region,
partially offset
by an
increase of
$29.6 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
September 30, 2023
consisted of fixed-rate
loans that traditionally
carry higher yields
than residential mortgage
loans in
99
the Florida region.
In the Florida region,
approximately 40% of
the residential mortgage
loan portfolio consisted
of hybrid adjustable-
rate
mortgages.
In
accordance
with
the
Corporation’s
underwriting
guidelines,
residential
mortgage
loans
are
primarily
fully
documented loans, and the Corporation does not originate negative amortization
loans.
Commercial and Construction Loans
As of September 30, 2023,
the Corporation’s commercial
and construction loan portfolio increased
by $171.8 million, as compared
to the balance as of December 31, 2022.
In
the
Puerto
Rico
region,
commercial
and
construction
loans
increased
by
$194.6
million,
as
compared
to
the
balance
as
of
December 31, 2022. This
increase was driven by
the origination of several
term loans, including six
commercial relationships, each
in
excess
of
$10
million,
which
increased
the
portfolio
amount
by
$86.1
million,
increased
lines
of
credit utilizations
including
$72.7
million
associated
three
lines
of
credit,
and
a
$62.3
million
increase
in
the
outstanding
balance
of
floor
plan
lines
of
credit.
The
variance also reflects
the aforementioned refinancing
of a $46.5
million municipal loan
into a commercial
loan. These variances
were
partially
offset
by
multiple
payoffs
and
paydowns,
including
two
commercial
and
industrial
relationships,
each
in
excess
of
$10
million, totaling $50.2 million.
In
the
Virgin
Islands
region,
commercial
and
construction
loans
increased
by
$47.0
million,
as
compared
to
the
balance
as
of
December 31, 2022. The increase was driven by the
utilization of $55.8 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
$69.8 million,
as compared
to the
balance as
of December
31, 2022. This decrease reflected
$106.4 million in payoffs and
paydowns of six commercial and industrial
relationships in the Florida
region,
each
in
excess
of
$10
million,
including
the
aforementioned
payoff
of
a
$24.3
million
adversely
classified
commercial
and
industrial
participated
loan, partially
offset
by the
originations
of three
commercial
and industrial
term loans,
each in
excess of
$10
million, which increased the portfolio amount by $54.1 million.
As of
September 30,
2023, the
Corporation had
$185.0 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
September
30,
2023,
the
Corporation
had
$87.5
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
$55.8 million
line of
credit utilization.
See “Exposure
to
USVI Government” below for additional information.
As of
September
30, 2023,
the Corporation’s
total commercial
mortgage
loan
exposure amounted
to $2.3
billion,
or 42%
of the
total
commercial
loan
portfolio.
The
commercial
mortgage
loan
portfolio
includes
an
exposure
to
office
real
estate
amounting
to
$417.7 million
($374.0 million and
$43.7 million in
the Puerto Rico
and Florida regions,
respectively), of which
approximately $77.2
million matures during the remainder of 2023 and 2024.
As
of
September
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
September
30,
2023
and
December
31,
2022.
As
of
September
30,
2023,
approximately $234.7 million of
the SNC exposure is related
to the portfolio in the
Puerto Rico region and $847.0
million is related to
the portfolio in the Florida region.
Consumer Loans and Finance Leases
As of September
30, 2023, the Corporation’s
consumer loan and finance
lease portfolio increased by
$261.0 million to $3.6
billion,
as compared to
the portfolio balance
of $3.3 billion
as of December
31, 2022. This increase
was mainly related
to increases of $113.3
million
and
$105.1
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 September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
(In thousands)
Residential mortgage
$
129,852
$
103,897
$
322,405
$
352,942
Construction
71,897
21,892
154,402
88,758
Commercial mortgage
65,171
96,894
196,247
430,599
Commercial and Industrial
640,848
562,828
1,747,304
1,675,838
Consumer
462,080
459,402
1,351,403
1,368,121
Total loan production
$
1,369,848
$
1,244,913
$
3,771,761
$
3,916,258
During the quarter and nine-month
period ended September 30, 2023,
total loan originations, including purchases, refinancings,
and
draws from existing revolving and
non-revolving commitments, amounted to
approximately $1.4 billion and $3.8
billion, respectively,
compared to $1.2 billion and $3.9 billion, respectively,
for the comparable periods in 2022.
Residential
mortgage
loan
originations
for
the
quarter
and
nine-month
period
ended
September
30,
2023
amounted
to
$129.9
million and
$322.4 million,
respectively,
compared to
$103.9 million
and $352.9
million, respectively,
for the
comparable periods
in
2022.
The
increase
of $26.0
million
in
the third
quarter of
2023,
as compared
to the
same
period
in 2022,
reflects
growth
of $13.4
million
in
the
Puerto
Rico
region,
$12.2
million
in
the
Florida
region,
and
$0.4
million
in
the
Virgin
Islands
region.
For
the
nine-
month
period
ended
September
30,
2023,
the
decrease
of
$30.5
million
consisted
of
declines
of
$38.0
million
in
the
Puerto
Rico
region and
$1.4 million
in the Virgin
Islands region,
partially offset
by an $8.9
million increase
in the
Florida region. Approximately
52%
of
the
$243.2
million
residential
mortgage
loan
originations
in
the
Puerto
Rico
region
during
the
first
nine
months
of
2023
consisted of
conforming loans,
compared to
58% of
$281.2 million
for the
first nine
months of
2022. During
2023, the
Corporation's
ratio
of
conforming
loan
originations
to
total
originations
has
been
decreasing
in
part
due
to
an
increase
in
non-conforming
loan
originations, particularly in the Florida region, and is expected to remain at current
levels.
Commercial
and
construction
loan
originations
(excluding
government
loans)
for
the
quarter
and
nine-month
period
ended
September
30,
2023
amounted
to
$692.8
million
and
$1.9
billion,
respectively,
compared
to
$679.7
million
and
$2.2
billion,
respectively,
for the comparable
periods in
2022. The
increase of
$13.1
million in the
third quarter
of 2023,
as compared
to the
same
period
in
2022,
reflects
growth
of
$18.0
million
in
the
Puerto
Rico
region,
partially
offset
by
decreases
of
$3.0
million
and
$1.9
million
in
the
Florida
and
Virgin
Islands
regions,
respectively.
For
the
first
nine
months
of
2023,
the
decrease
of
$229.3
million
consisted of
decreases of
$216.4 million
in the
Florida region
and $13.0
million in
the Puerto
Rico region,
partially offset
by a
$0.1
million increase in the Virgin
Islands region.
Government
loan
originations
for
the
quarter
and
nine-month
period
ended
September
30,
2023
amounted
to
$85.1
million
and
$168.7
million,
respectively,
compared
to
$1.8
million
and
$36.6
million,
respectively,
for
the
comparable
periods
in
2022.
Government loan
originations during
the first
nine months
of 2023
were mainly
related to
the aforementioned
refinancing of
a $46.5
million municipal
loan into
a commercial
loan, 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
nine
months
of 2022 were
mainly
related
to
the
renewal
of
a
public
corporation
line
of
credit
in
the
Virgin
Islands
region,
the
renewal
of
a
municipal loan in the Puerto Rico region, and the utilization of an arranged
overdraft line of credit of a government entity in the Virgin
Islands region.
101
Originations of auto
loans (including finance
leases) for the
quarter and nine-month
period ended September
30, 2023 amounted
to
$259.2
million
and
$754.6
million,
respectively,
compared
to
$244.9
million
and
$775.7
million,
respectively,
for
the
comparable
periods
in
2022.
The
increase
in
the
third
quarter
of
2023,
as
compared
to
the
same
quarter
of
2022,
consisted
of
a
$14.5
million
increase
in the
Puerto
Rico region,
partially
offset
by a
$0.2
million
decrease
in the
Virgin
Islands region
.
The decrease
in the
first
nine months
of 2023,
as compared
to the
same period
of the
previous year,
consisted of
a $24.3
million decrease
in the
Puerto Rico
region,
partially
offset
by
a
$3.2
million
increase
in
the
Virgin
Islands
region.
Other
consumer
loan
originations,
other
than
credit
cards, for
the quarter
and nine-month
period ended
September 30,
2023 amounted
to $79.5
million and
$229.0 million,
respectively,
compared
to
$90.2
million
and
$233.0
million,
respectively,
for
the
comparable
periods
in
2022.
The
utilization
activity
on
the
outstanding
credit card
portfolio
for
the
quarter
and
nine-month
period
ended
September
30,
2023
amounted
to $123.4
million
and
$367.8 million, respectively,
compared to $124.3 million and $359.3 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
September
30,
2023
amounted
to
$5.2
billion,
a
$423.7
million decrease
from December
31, 2022.
The decrease
was mainly
driven by
repayments of
approximately $302.
9
million of
U.S.
agencies
MBS
and
debentures;
repayments
of
$74.3
million
associated
to
matured
securities,
of
which
$73.8
million
were
FNMA
callable
debentures;
and
a $46.6
million
decrease
in fair
value
attributable
to changes
in market
interest rates.
As of
September
30,
2023,
the
Corporation
had
a
net
unrealized
loss
on
available-for-sale
debt
securities
of
$844.8
million.
This
net
unrealized
loss
is
attributable to
instruments on books
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
September
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 September
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 $3.2
million
(fair
value
-
$1.4
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 $1.8
million as
of September
30, 2023,
of which
$0.4 million
is due
to credit
deterioration.
During 2021,
the Corporation
placed this
instrument
in
nonaccrual status based on the delinquency status of the underlying
second mortgage loans collateral.
As
of
September
30,
2023,
the
Corporation’s
held-to-maturity
debt
securities
portfolio,
before
the
ACL,
decreased
to
$359.2
million, compared to
$437.5 million as
of December 31,
2022, mainly due
to the refinancing
of a $46.5 million
municipal bond into
a
shorter-term
commercial
loan
structure
and
$33.4
million
in
repayments.
Held-to-maturity
debt
securities
include
fixed-rate
GSEs’
MBS
with
a
carrying
value
of
$252.5
million
and
a
fair
value
of
$232.7
million
as
of September
30,
2023.
Held-to-maturity
debt
securities also
include 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
September
30,
2023,
approximately
54%
of
the
Corporation’s
municipal
bonds
consisted
of
obligations issued by three
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 September
30, 2023,
the ACL for
held-to-maturity debt
securities
was
$2.3
million,
compared
to
$8.3
million
as
of
December
31,
2022.
The
decrease
in
the
ACL
of held-to-maturity
debt
securities was mostly driven by the aforementioned refinancing
of a $46.5 million municipal bond into a shorter-term
commercial loan
structure
and,
to
a
lesser
extent,
a
reduction
in
qualitative
reserves
driven
by
updated
financial
information
of
certain
bond
issuers
received during the third quarter of 2023.
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:
September 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
2,448,313
2,492,228
Puerto Rico government obligations
1,448
2,201
MBS:
Residential
2,580,395
2,941,458
Commercial
145,647
163,133
Other
-
500
Total available-for-sale
debt securities, at fair value
5,175,803
5,599,520
Held-to-maturity debt securities, at amortized cost:
MBS:
Residential
150,650
166,739
Commercial
101,801
105,088
Puerto Rico municipal bonds
106,718
165,710
ACL for held-to-maturity Puerto Rico municipal bonds
(2,250)
(8,286)
Total held-to-maturity
debt securities
356,919
429,251
Equity securities, including $34.6 million and $42.9 million of FHLB stock
as of September 30,
2023 and December 31, 2022, respectively
48,683
55,289
Total money market
investments and investment securities
$
5,582,405
$
6,086,085
The carrying values of debt securities as of September 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
$
310,072
0.70
Due after one year through five years
2,118,664
0.83
Due after five years through ten years
8,939
2.95
Due after ten years
10,638
5.65
2,448,313
0.85
Puerto Rico government and municipalities obligations:
Due within one year
3,159
9.30
Due after one year through five years
51,133
7.71
Due after five years through ten years
35,831
7.05
Due after ten years
18,043
7.33
108,166
7.48
MBS
2,978,493
1.69
ACL on held-to-maturity debt securities
(2,250)
-
Total debt securities
$
5,532,722
1.44
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
September
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 61% 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 $584.9
million as
of September
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 $2.1
billion as
of September
30,
2023,
compared
to
$3.1
billion
as
of
December
31,
2022.
As
of
September
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
$2.7 billion,
or 14.58%
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
19.67% of total
assets as of September 30, 2023, compared to 22.48% of total assets as of December
31, 2022.
As
of
September
30,
2023,
in
addition
to
the
aforementioned
$2.7
billion
in
cash
and
free
high
quality
liquid
assets,
the
Corporation had $947.8 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
September 30,
2023 as
a contingent
source of
liquidity.
Total
loans
pledged
to the
FED Discount
Window
amounted
to $2.4
billion as
of September
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 September
30, 2023,
the Corporation
had $5.1
billion of
total available
liquidity,
or 107%
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
88.7%
of the
Bank’s
assets (or
87.0%
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 September
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:
September 30,
2023
December 31, 2022
(In thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Construction undisbursed funds
$
245,641
$
170,639
Unused credit card lines
961,118
936,231
Unused personal lines of credit
39,569
41,988
Commercial lines of credit
763,349
761,634
Letters of credit:
Commercial letters of credit
64,148
68,647
Standby letters of credit
7,911
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
$3.8
billion
as
of
September 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
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 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
and
commercial
core
deposits
–
The
Corporation’s
deposit
products
include
regular
savings
accounts,
demand
deposit
accounts,
money
market
accounts,
and
retail
CDs.
As
of
September
30,
2023,
the
Corporation’s
core
deposits,
which
exclude
government deposits
and brokered
CDs, decreased
by $406.0
million to
$12.9 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 third quarter of 2023, the average balance per retail and commercial
core deposit account was $19 thousand.
Government deposits
– As of September
30, 2023, the
Corporation had $2.8
billion of Puerto Rico
public sector deposits
($2.6 billion
in transactional
accounts and
$137.0 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
are fully collateralized.
Approximately 22% of
the public sector
deposits as of September
30,
2023
were
from
municipalities
and
municipal
agencies
in
Puerto
Rico
and
78%
were
from
public
corporations,
the
central
government and its agencies, and U.S. federal government agencies in Puerto
Rico.
In addition,
as of
September 30,
2023, the
Corporation had
$480.6 million
of government
deposits in
the Virgin
Islands region
(as
compared
to $442.8
million
as of
December
31,
2022)
and $12.3
million
in
the Florida
region
(as
compared
to $11.6
million
as of
December 31, 2022).
The uninsured
portions
of government
deposits were
collateralized
by securities
and
loans with
an amortized
cost of
$3.5
billion
and
$3.1 billion
as of
September 30,
2023
and
December 31,
2022,
respectively,
and an
estimated market
value
of $3.0
billion
and
$2.7 billion,
respectively.
In addition to
securities and loans,
as of September
30, 2023 and
December 31, 2022,
the Corporation used
$175.0 million
and $200.0
million, respectively,
in letters
of credit
issued by
the FHLB as
pledges for
a portion
of public
deposits in
the Virgin
Islands.
Estimate of
Uninsured
Deposits –
As of
September 30,
2023 and
December 31,
2022, the
estimated amount
of uninsured
deposits
totaled $7.8
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 September
30, 2023 and December 31,
2022
include
the
uninsured
portion
of
fully
collateralized
government
deposits
which
amounted
to
$3.1
billion
and
$2.6
billion,
respectively.
The increase is mostly
related to government deposits,
which are fully collateralized
as previously mentioned.
Excluding
fully
collateralized
government
deposits,
uninsured
deposits
amounted
to
$4.8
billion,
which
represent
29.47%
of
total
deposits
(excluding brokered CDs), as of September 30, 2023, compared to $4.9 billion,
or 30.65%, as of December 31, 2022.
The
amount of
uninsured
deposits is
calculated
based on
the
same
methodologies
and assumptions
used for
our bank
regulatory
reporting requirements adjusted for cash held by wholly-owned subsidiaries
at the Bank.
The following table presents by contractual maturities the amount of U.S. time deposits in
excess of FDIC insurance limits (over
$250,000) and other time deposits that are otherwise uninsured as of September
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
$
285,002
$
144,955
$
215,056
$
334,396
$
979,409
Other uninsured time deposits
$
17,923
$
9,170
$
11,653
$
5,448
$
44,194
Brokered
CDs
–
Total
brokered
CDs increased
by $204.5
million
to $310.3
million
as of
September 30,
2023,
compared
to $105.8
million as of
December 31,
2022. The increase
reflects the effect
of new issuances
amounting to
$593.1 million
with an all-in
cost of
5.05%,
partially offset
by approximately
$388.6
million of
maturing
brokered
CDs, with
an all-in
cost of
4.90%, that
were paid
off
during the first nine months of 2023.
The average remaining term to maturity of the brokered CDs outstanding
as of September 30, 2023 was approximately 0.8 year.
The
increased use
of brokered
CDs was
primarily
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
The following table presents the contractual maturities of brokered CDs as of September
30,
2023:
Total
(In thousands)
Three months or less
$
156,398
Over three months to six months
67,987
Over six months to one year
29,438
Over one year to three years
29,554
Over three years to five years
26,962
Total
$
310,339
Refer to
“Net Interest
Income” above
for information
about average
balances of
interest-bearing deposits
and the
average interest
rate paid on deposits, for the quarters and nine-month periods ended September
30, 2023 and 2022.
Securities
sold
under
agreements
to
repurchase
-
As
of
September
30,
2023,
there
were
no
outstanding
repurchase
agreements
(December 31,
2022 –
$75.1 million).
As of
September 30,
2023, the
Corporation repaid
and did
not renew
its short-term
repurchase
agreements.
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.
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
September 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
nine-month
period
ended
September
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
September 30,
2023, $400.0
million were
pledged with
investment securities
and $100.0
million were
pledged
with mortgage
loans. As of
September 30,
2023, the
Corporation had
$947.8 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 $21.4 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
statements of income as “Gain on
early extinguishment of debt.” As
of
September
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
September 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-
109
liquid, in
large part
because of
the sale
of mortgages
through guarantee
programs of
the FHA,
VA,
U.S. Department
of Housing
and
Urban Development
(“HUD”), FNMA and
FHLMC. During
the first nine
months of
2023, loans pooled
into GNMA MBS
amounted
to
approximately
$102.9
million.
Also,
during
the
first
nine
months
of
2023,
the
Corporation
sold
approximately
$28.6
million
of
performing residential mortgage loans to FNMA and FHLMC.
The
FED
Discount
Window
is
a
cost-efficient
contingent
source
of
funding
for
the
Corporation
in
highly-volatile
market
conditions. As previously mentioned, although currently
not in use, as of September 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.
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 is the
one-year overnight index
swap rate plus 10
basis points and
is fixed for the
term of
the advance on the day the advance is made.
Effect of Credit Ratings on Access to Liquidity
The
Corporation’s
liquidity
is
contingent
upon
its
ability
to
obtain
deposits
and
other
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
$584.9
million
as
of
September
30,
2023,
an
increase
of
$104.4
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 nine 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
nine
months
of
2023
and
2022,
net
cash
provided
by
operating
activities
was
$283.7
million
and
$334.8
million,
respectively.
Net cash
generated from
operating activities
was higher
than reported
net income
largely as
a result
of adjustments
for
non-cash items such
as depreciation and
amortization, deferred income
tax expense and the
provision for credit
losses, as well as cash
generated from
sales and
repayments of
loans held
for sale.
Net cash
provided by
operating activities
includes an
increase in
income
tax
paid
as a
result
of
the
full utilization
during
2022 of
certain
deferred
tax
assets related
to
NOLs
that
were
available
for
regular
income tax.
Cash Flows from Investing Activities
The Corporation’s
investing activities primarily
relate to originating
loans to be
held for investment,
as well as
purchasing, selling,
and
repaying
available-for-sale
and
held-to-maturity debt
securities. For
the nine
-month period
ended September
30, 2023,
net cash
provided
by
investing
activities
was
$17.5
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
nine-month
period
ended
September
30,
2022,
net
cash
used
in
investing
activities
was
$508.2
million,
primarily
due
to
purchases
of
available-for-sale
and
held-to-maturity
debt
securities,
and
net
disbursements
on
loans
held
for
investment,
partially
offset
by
repayments
of
available-for-sale
and
held-to-maturity
debt
securities
and
proceeds
from
sales
of
commercial
loan
participations.
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
nine-month
period
ended
September
30,
2023,
net cash
used
in
financing
activities was
$196.8
million,
mainly
reflecting
a
$269.9 million
net decrease
in borrowings
and $200.8
million of
capital returned
to stockholders,
partially offset
by a
$275.8 million
net increase in deposits.
For the first nine months
of 2022, net cash used in
financing activities was $1.8 billion,
mainly reflecting a net decrease
in deposits,
a $300.0 million decrease in borrowings and $290.8 million of capital returned
to stockholders.
111
Capital
As of September
30, 2023, the Corporation’s
stockholders’ equity was
$1.3 billion, a decrease
of $22.5 million
from December 31,
2022.
The
decrease
was
driven
by
the
repurchase
of
approximately
9.0
million
shares
of
common
stock
for
a
total
cost
of
$125.0
million, common
stock dividends
declared in
the first
nine months
of 2023
totaling $75.6
million or
$0.42 per
common share,
and a
$46.6 million decrease
in the fair
value of available-for-sale
debt securities recorded
as part of
accumulated other comprehensive
loss
in the
consolidated statements
of financial
condition. These
variances were
partially offset
by the
earnings generated
in the
first nine
months of 2023.
On October 31, 2023, the Corporation’s
Board declared a quarterly cash dividend of
$0.14 per common share payable on December
8, 2023 to shareholders of
record at the close of business on
November 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.
During
the
third
quarter
of
2023,
the
Corporation
repurchased
5.4
million
shares
of
its
common
stock
for
a
total
cost
of
$75.0
million which
completed the
$350 million
stock repurchase program
approved by
the Board of
Directors on
April 27, 2022.
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.
Repurchases
under
the
program
may
be
executed
through
open
market
purchases,
accelerated
share
repurchases, and/or privately
negotiated transactions
or plans, including under
plans complying with
Rule 10b5-1 under
the Exchange
Act. The
Corporation’s
stock repurchase
program is
subject to
various factors,
including the
Corporation’s
capital position,
liquidity,
financial
performance
and
alternative
uses
of
capital,
stock
trading
price,
and
general
market
conditions.
The
Corporation’s
stock
repurchase
program
does
not
obligate
it
to
acquire
any
specific
number
of
shares
and
does
not
have
an
expiration
date.
The
stock
repurchase
program
may
be
modified,
suspended,
or
terminated
at
any
time
at
the
Corporation’s
discretion.
The
Corporation
repurchased
no
shares
of
common
stock
under
the
current
repurchase
authorization
during
the
quarter
ended
September
30,
2023.
However, as of November
1, 2023, the Corporation has repurchased
approximately 1.8 million shares of common
stock for a total cost
of $25.0 million
under the $225 million
stock repurchase program
approved in July 2023.
The Parent Company
has no operations
and
depends
on
dividends,
distributions
and
other
payments
from
its
subsidiaries
to
fund
dividend
payments,
stock
repurchases,
and
to
fund all payments on its obligations, including debt obligations.
The tangible common
equity ratio and
tangible book value
per common share
are non-GAAP financial
measures generally used
by
the
financial
community
to
evaluate
capital
adequacy.
Tangible
common
equity
is
total
common
equity
less
goodwill
and
other
intangible
assets.
Tangible
assets
are
total
assets
less
the
previously
mentioned
intangible
assets.
See
“Non-GAAP
Financial
Measures and Reconciliations” above for additional information.
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 September 30,2023 and December 31, 2022, respectively:
September 30, 2023
December 31, 2022
(In thousands, except ratios and per share information)
Total equity
- GAAP
$
1,303,068
$
1,325,540
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
-
(205)
Core deposit intangible
(15,229)
(20,900)
Insurance customer relationship intangible
-
(13)
Tangible common
equity - non-GAAP
$
1,249,228
$
1,265,811
Total assets - GAAP
$
18,594,608
$
18,634,484
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
-
(205)
Core deposit intangible
(15,229)
(20,900)
Insurance customer relationship intangible
-
(13)
Tangible assets -
non-GAAP
$
18,540,768
$
18,574,755
Common shares outstanding
174,386
182,709
Tangible common
equity ratio - non-GAAP
6.74%
6.81%
Tangible book
value per common share - non-GAAP
$
7.16
$
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 September
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
September
30, 2023
and
December 31,
2022,
respectively.
There
were no
transfers to
the legal
surplus
reserve
during the
first nine
months 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
and
300
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
repricing 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
simulation
date.
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
September 30,
2023, the
Corporation forecasted
the 12-month
net interest
income assuming
September 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)
and immediate
(shock) parallel
upward shift
of the
yield curve
is assumed
during the
first twelve
months (the
“+300
ramp”, “+200
ramp” and
“+200 shock”
scenarios). Conversely,
for the
falling rate
scenario, a
gradual (ramp)
and immediate
(shock)
parallel downward shift
of the yield curve
is assumed during the
first twelve months (the
“-300 ramp”, “-200
ramp” and “-200
shock”
scenarios).
The SOFR curve for
September 30, 2023, as
compared to December 31,
2022, reflects an increase
of 70 bps on
average in the short-
term sector
of the
curve, or
between one
to twelve
months;
58 bps
in the
medium-term sector
of the
curve, or
between 2
to 5
years;
and 71
bps in
the long-term
sector of
the curve,
or over
5-year maturities.
An increase
in market
rates changes
was also
observed in
the Constant Maturity Treasury yield curve
with an increase of 102 bps in the short-term sector,
60 bps in the medium-term sector, and
75 bps in the long-term sector.
114
The following table presents the results of the static simulations as of September 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)
September 30, 2023
December 31, 2022
Gradual Change in Interest Rates:
+ 300 bps ramp
0.00
%
1.42
%
- 300 bps ramp
-0.30
%
-2.78
%
+ 200 bps ramp
0.00
%
0.96
%
- 200 bps ramp
-0.13
%
-1.61
%
Immediate Change in Interest Rates:
+ 200 bps shock
1.26
%
2.35
%
- 200 bps shock
-2.22
%
-4.71
%
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 September
30, 2023, the net
interest income simulations
show the Corporation
has a relatively neutral
sensitivity position for
the next twelve months under a static balance sheet scenario,
as compared to an asset sensitive position as of December 31, 2022.
The reduction
in interest
rate sensitivity
reflects shifts
in funding
mix, including
an increased
migration from
non-interest-bearing
deposits and
other low-cost
deposits to
higher-cost deposits,
and updated
assumptions about
depositor behavior,
impacting both
beta
and decay assumptions, as a result of the higher interest rate environment
and options outside the traditional banking sector.
Under the
static simulation,
the Corporation
assumes that
maturing instruments
are replaced
with like
instruments at
the repricing
rate with
the proportional
remaining change
in interest
rate in
the period
that the
instrument matures.
The Corporation’s
results may
vary
significantly
from
the
ones
presented
above
under
alternative
balance
sheet
compositions,
such
as
a
growing
balance
sheet
scenario
which,
for
example,
would
assume
that
cash
flows
from
the
investment
securities
portfolio
and
loan
repayments
will
be
redeployed into higher yielding alternatives.
Credit Risk Management
First BanCorp.
is subject
to
credit
risk
mainly
with
respect to
its portfolio
of loans
receivable
and
off-balance-sheet
instruments,
principally
loan
commitments.
Loans
receivable
represents
loans
that
First
BanCorp.
holds
for
investment
and,
therefore,
First
BanCorp. is at risk for
the term of the loan.
Loan commitments represent commitments
to extend credit, subject
to specific conditions,
for specific amounts
and maturities. These commitments
may expose the Corporation
to credit risk and
are subject to the
same review
and
approval
process
as
for
loans
made
by
the
Bank.
See
“Liquidity
Risk”
above
for
further
details.
The
Corporation
manages
its
credit risk through its credit policy,
underwriting, monitoring of loan concentrations and
related credit quality,
counterparty credit risk,
economic and
market conditions, and
legislative or regulatory
mandates. The Corporation
also performs independent
loan review
and
quality
control
procedures,
statistical
analysis,
comprehensive
financial
analysis,
established
management
committees,
and
employs
proactive collection
and loss
mitigation efforts.
Furthermore, personnel
performing structured
loan workout
functions are
responsible
for
mitigating
defaults
and
minimizing
losses
upon
default
within
each
region
and
for
each
business
segment.
In
the
case
of
the
commercial
and
industrial,
commercial
mortgage
and
construction
loan
portfolios,
the
Special
Asset
Group
(“SAG”)
focuses
on
strategies for the
accelerated reduction of
non-performing assets through
note sales, short sales,
loss mitigation programs,
and sales of
OREO. In addition to
the management of the
resolution process for problem
loans, the SAG oversees collection
efforts for all
loans to
prevent migration to the nonaccrual and/or adversely classified
status. The SAG utilizes relationship officers,
collection specialists and
attorneys.
The
Corporation
may
also
have
risk
of
default
in
the
securities
portfolio.
The
securities
held
by
the
Corporation
are
principally
fixed-rate U.S. agencies
MBS and U.S. Treasury
and agencies securities. Thus,
a substantial portion
of these instruments is
backed by
mortgages, a guarantee of a U.S. GSE or the full faith and credit of the U.S. government.
Management, consisting of the
Corporation’s Commercial
Credit Risk Officer,
Retail Credit Risk Officer,
Chief Credit Officer,
and
other
senior
executives,
has
the
primary
responsibility
for
setting
strategies
to
achieve
the
Corporation’s
credit
risk
goals
and
objectives. Management has documented these goals and objectives in the Corporation’s
Credit Policy.
115
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
generally applies
probability weights
to the
baseline and
alternative downside
economic scenarios
to estimate
the
ACL with
the
baseline
scenario
carrying
the highest
weight.
The
scenarios
that are
chosen each
quarter
and
the
weighting
given
to
each
scenario
for
the
different
loan
portfolio
categories
depend
on
a
variety
of
factors
including
recent
economic
events,
leading
national and
regional economic
indicators, and
industry trends.
During the
third quarter
of 2023,
the Corporation
continued to
apply
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.
In
addition,
during the
third quarter
of 2023,
the Corporation
applied the
alternative downside
scenario for
the credit
cards portfolio
to
account for
an increased
uncertainty in
charge-off
trends and
projection of
certain macroeconomic
variables, such
as retail sales.
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
expected future interest
rate adjustments in
the FED funds rate.
As
of
September
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
4.19% for
the remainder
of 2023
and 6.49%
for
2024.
●
Regional
Home Price Index forecast in Puerto Rico (purchase only prices)
is projected to remain relatively flat throughout the
remainder of 2023 and 2024, while in the Florida region,
Home Price Index forecast is projected to contract by approximately
5.70%.
●
Average regional
unemployment in Puerto Rico is forecasted at 6.34% for the
remainder of 2023 and 7.22% for 2024. For the
Florida
region
and
the
U.S.
mainland,
average
unemployment
rate
is
forecasted
at
3.37%
and
4.03%,
respectively,
for
the
remainder of 2023, and 4.30% and 4.80%, respectively,
for 2024.
●
Annualized real
gross domestic
product (“GDP”)
in the
U.S. mainland
is projected
to grow
at a
slower pace
until the
fourth
quarter of 2024 where it is expected to grow at approximately 0.90%.
It is difficult to estimate how potential changes
in one factor or input might affect the overall ACL because
management considers a
wide variety of
factors and inputs in
estimating the ACL.
Changes in the
factors and inputs considered
may not occur
at the same rate
and may not be consistent
across all geographies or product
types, and changes in factors
and inputs may be directionally
inconsistent,
such that improvement
in one factor
or input may
offset deterioration
in others. However,
to demonstrate the
sensitivity of credit
loss
estimates to macroeconomic
forecasts as of
September 30, 2023
,
management compared the
modeled estimates under
the probability-
weighted economic
scenarios against a
more adverse scenario.
The more adverse
scenario incorporates an
additional adverse scenario
and decreases
the weight
applied to
the baseline
scenario. Under
this more
adverse scenario,
as an
example, average
unemployment
rate
for
the
Puerto
Rico
region
increases
to
6.63%
for
the
remainder
of
2023,
compared
to
6.34%
for
the
same
period
on
the
probability-weighted economic scenario projections.
116
To
demonstrate the sensitivity
to key economic
parameters used in
the calculation of
the ACL at September
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 $44 million
at September 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
September 30, 2023.
As
of
September
30,
2023,
the
ACL
for
loans
and
finance
leases
was
$263.6
million,
an
increase
of
$3.1
million,
from
$260.5
million
as
of
December
31,
2022.
The
ACL
for
commercial
and
construction
loans
increased
by
$6.6
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,
and a
$1.7 million
incremental reserve
recorded during
the third
quarter of
2023 associated
with the
inflow to
nonaccrual status
of a
$9.5
million
commercial
and
industrial
loan
in
the
Puerto
Rico
region.
The
ACL
for
consumer
loans
increased
by
$2.1
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. The unemployment rate
as well as retail sales are still
expected to deteriorate on
the long-
term
outlook
but
at
a
slower
pace,
mostly
driven
by
actual
results
outperforming
previous
projections.
The
ACL
for
residential
mortgage
loans
decreased
by
$5.6
million,
mainly
driven
by
updated
macroeconomic
variables,
such
as
the
Regional
Home
Price
Index and the unemployment rate,
partially offset by a $2.1 million
cumulative increase in the ACL
due to the adoption of
Accounting
Standards Update
(“ASU”) 2022-02,
“Financial Instruments
– Credit
Losses (Topic
326): Troubled
Debt Restructurings
and Vintage
Disclosures”,
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.
The ratio
of the ACL
for loans and
finance leases
to total
loans held
for investment
decreased to
2.21%
as of September
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
2.03% as of September
30, 2023, primarily
reflecting updated macroeconomic
variables, such as the
Regional Home Price
Index and the
unemployment rate, 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
2.77%
as of September 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
1.78% as of September 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
0.99% as of September 30, 2023, mainly due to
updated macroeconomic variables, such as the unemployment
rate, and the
aforementioned
repayment
of
a
$24.3
million
adversely
classified
commercial
and
industrial
participated
loan
in
the
Florida region, partially
offset by the
aforementioned $1.7 million
incremental reserve recorded
during the third
quarter of
2023 associated
with the
inflow to
nonaccrual
status of
a $9.5
million commercial
and industrial
loan in
the Puerto
Rico
region.
●
The ACL to
total loans ratio
for the consumer
loan portfolio decreased
from 3.83% as
of December
31, 2022
to 3.61% as
of September 30, 2023, mainly due to the aforementioned updates in macroeconomic
variables.
The ratio
of the
total ACL
for loans
and finance
leases to
nonaccrual loans
held for
investment was
282.96% as
of September
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.
117
As shown
in the
following tables,
the ACL
for loans
and finance
leases amounted
to $263.6
million as
of September
30, 2023,
or
2.21% 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 September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
(Dollars in thousands)
ACL for loans and finance leases, beginning of year
$
267,058
$
252,152
$
260,464
$
269,030
Impact of adoption of ASU 2022-02
-
-
2,116
-
Provision for credit losses - (benefit) expense:
Residential mortgage
(3,349)
755
(6,776)
(6,913)
Construction
(642)
(179)
1,420
(2,242)
Commercial mortgage
(1,344)
(2,383)
5,901
(23,758)
Commercial and industrial
1,931
(1,228)
3,278
(575)
Consumer and finance leases
14,047
17,387
43,846
43,516
Total provision for credit losses
- expense
10,643
14,352
47,669
10,028
Charge-offs:
Residential mortgage
(499)
(1,466)
(2,628)
(6,073)
Construction
(4)
(63)
(42)
(123)
Commercial mortgage
(1)
(3)
(107)
(42)
Commercial and industrial
(9)
(8)
(6,477)
(366)
Consumer and finance leases
(19,746)
(12,522)
(53,006)
(32,765)
Total charge offs
(20,259)
(14,062)
(62,260)
(39,369)
Recoveries:
Residential mortgage
534
559
1,788
3,228
Construction
1,463
43
1,935
138
Commercial mortgage
75
57
299
1,319
Commercial and industrial
161
494
383
2,118
Consumer and finance leases
3,940
4,264
11,221
11,367
Total recoveries
6,173
5,417
15,626
18,170
Net charge-offs
(14,086)
(8,645)
(46,634)
(21,199)
ACL for loans and finance leases, end of period
$
263,615
$
257,859
$
263,615
$
257,859
ACL for loans and finance leases to period-end total loans
held for investment
2.21%
2.28%
2.21%
2.28%
Net charge-offs (annualized) to average loans
outstanding during the period
0.48%
0.31%
0.54%
0.25%
Provision for credit losses - expense for loans and finance
leases to net charge-offs during
the period
0.76x
1.66x
1.02x
0.47x
118
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 of such loans as of the indicated dates:
As of September 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
$
2,812,631
$
202,774
$
2,316,113
$
3,030,954
$
3,588,460
$
11,950,932
Percent of loans in each category to total loans
24
%
2
%
19
%
25
%
30
%
100
%
Allowance for credit losses
57,200
5,621
41,157
30,097
129,540
263,615
Allowance for credit losses to amortized cost
2.03
%
2.77
%
1.78
%
0.99
%
3.61
%
2.21
%
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
September
30,
2023,
the
ACL
for
off-balance
sheet
credit exposures
increased by
$0.5 million
to $4.8
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
September
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
September
30,
2023,
the
ACL
for
held-to-maturity
debt
securities was $2.3
million, compared to
$8.3 million as of
December 31, 2022.
The decrease was mostly
driven by the refinancing
of
a $46.5 million municipal bond
into a shorter-term commercial loan
structure and, to a lesser extent, a reduction
in qualitative reserves
driven by updated financial information of certain bond issuers received
during the third quarter of 2023.
Allowance for Credit Losses for Available
-for-Sale Debt Securities
The
ACL
for
available-for-sale
debt
securities,
which
is
associated
with
private
label
MBS
and
a
residential
pass-through
MBS
issued by the PRHFA, was $0.5
million as of each of September 30, 2023 and December 31, 2022.
119
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.
120
Loans Past-Due 90 Days and Still Accruing
These are accruing loans
that are contractually delinquent
90 days or more. These
past-due loans are either
current as to interest but
delinquent as to the
payment of principal (i.e.,
well secured and in process
of collection) or are
insured or guaranteed under
applicable
FHA,
VA,
or
other
government-guaranteed
programs
for
residential
mortgage
loans.
Furthermore,
as
required
by
instructions
in
regulatory
reports,
loans
past
due
90
days
and
still
accruing
include
loans
previously
pooled
into
GNMA
securities
for
which
the
Corporation
has
the
option
but
not
the
obligation
to
repurchase
loans
that
meet
GNMA’s
specified
delinquency
criteria
(e.g.,
borrowers
fail
to
make
any
payment
for
three
consecutive
months).
For
accounting
purposes,
these
GNMA
loans
subject
to
the
repurchase option are required to be reflected 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:
September 30, 2023
December 31, 2022
(Dollars in thousands)
Nonaccrual loans held for investment:
Residential mortgage
$
31,946
$
42,772
Construction
1,640
2,208
Commercial mortgage
21,632
22,319
Commercial and Industrial
18,809
7,830
Consumer and finance leases
19,137
14,806
Total nonaccrual loans held for investment
93,164
89,935
OREO
28,563
31,641
Other repossessed property
7,063
5,380
Other assets
(1)
1,448
2,202
Total non-performing assets
$
130,238
$
129,158
Past due loans 90 days and still accruing
(2) (3) (4)
$
62,892
$
80,517
Non-performing assets to total assets
0.70
%
0.69
%
Nonaccrual loans held for investment to total loans held for investment
0.78
%
0.78
%
ACL for loans and finance leases
$
263,615
$
260,464
ACL for loans and finance leases to total nonaccrual loans held
for investment
282.96
%
289.61
%
ACL for loans and finance leases to total nonaccrual loans held
for investment, excluding residential real estate loans
430.62
%
552.26
%
(1)
Residential pass-through MBS issued by the PRHFA
held as part of the available-for-sale debt securities
portfolio.
(2)
Includes PCD loans previously accounted for under ASC Subtopic 310-30
for which the Corporation made the accounting policy
election of maintaining pools of loans as “units of
account” both at the time of adoption of CECL on January
1, 2020 and on an ongoing basis for credit loss measurement.
These loans will continue to be excluded from nonaccrual loan
statistics as long as the Corporation can reasonably estimate the
timing and amount of cash flows expected to be collected on
the loan pools. The portion of such loans contractually past due
90 days or more amounted to $8.9 million and $12.0 million as of
September 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 $17.4 million and $28.2 million
of FHA government guaranteed residential mortgage loans that were
over 15 months delinquent as of September 30,
2023 and December 31, 2022, respectively.
(4)
Includes rebooked loans, which were previously pooled into
GNMA securities, amounting to $8.5 million and $10.3 million as
of September 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.
121
Total nonaccrual
loans were $93.2 million as of September
30, 2023. This represents an increase
of $3.3 million from $89.9 million
as of
December 31,
2022, primarily
related to
increases of
$9.8 million
and $4.4
million in
nonaccrual commercial
and construction
loans
and
nonaccrual
consumer
loans,
respectively,
partially
offset
by
a
$10.9
million
reduction
in
nonaccrual
residential
mortgage
loans.
The following table shows non-performing assets by geographic segment
as of the indicated dates:
September 30, 2023
December 31, 2022
(In thousands)
Puerto Rico:
Nonaccrual loans held for investment:
Residential mortgage
$
19,378
$
28,857
Construction
669
831
Commercial mortgage
13,220
14,341
Commercial and Industrial
15,779
5,859
Consumer and finance leases
18,564
14,142
Total nonaccrual loans held for investment
67,610
64,030
OREO
23,547
28,135
Other repossessed property
6,799
5,275
Other assets
1,448
2,202
Total non-performing assets
$
99,404
$
99,642
Past due loans 90 days and still accruing
$
57,834
$
76,417
Virgin Islands:
Nonaccrual loans held for investment:
Residential mortgage
$
5,871
$
6,614
Construction
971
1,377
Commercial mortgage
8,412
7,978
Commercial and Industrial
1,094
1,179
Consumer
475
469
Total nonaccrual loans held for investment
16,823
17,617
OREO
4,638
3,475
Other repossessed property
264
76
Total non-performing assets
$
21,725
$
21,168
Past due loans 90 days and still accruing
$
4,678
$
4,100
United States:
Nonaccrual loans held for investment:
Residential mortgage
$
6,697
$
7,301
Commercial and Industrial
1,936
792
Consumer
98
195
Total nonaccrual loans held for investment
8,731
8,288
OREO
378
31
Other repossessed property
-
29
Total non-performing assets
$
9,109
$
8,348
Past due loans 90 days and still accruing
$
380
$
-
122
Nonaccrual
commercial
and
industrial
loans
increased
by
$11.0
million
to
$18.8
million
as
of
September
30,
2023,
from
$7.8
million as of December 31, 2022.
For the nine-month period ended
September 30, 2023, inflows to
nonaccrual included a $9.5 million
commercial and industrial
loan in the Puerto
Rico region and a
$7.1 million commercial
and industrial participated
loan in the
Florida
region in the power generation industry,
in which a $6.2 million charge was recorded.
Nonaccrual
construction
loans
decreased
by
$0.6
million
to
$1.6
million
as
of
September
30,
2023,
from
$2.2
million
as
of
December 31, 2022.
Nonaccrual commercial mortgage loans decreased
by $0.6 million to $21.7 million as of September
30, 2023, from $22.3 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 September 30, 2023
Beginning balance
$
1,677
$
21,536
$
9,194
$
32,407
Plus:
Additions to nonaccrual
-
522
10,569
11,091
Less:
Loans returned to accrual status
-
-
(199)
(199)
Nonaccrual loans transferred to OREO
-
-
(547)
(547)
Nonaccrual loans charge-offs
-
(1)
(9)
(10)
Loan collections
(37)
(425)
(199)
(661)
Ending balance
$
1,640
$
21,632
$
18,809
$
42,081
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Quarter Ended September 30, 2022
Beginning balance
$
2,375
$
24,753
$
17,079
$
44,207
Plus:
Additions to nonaccrual
2
-
179
181
Less:
Loans returned to accrual status
-
(189)
(75)
(264)
Nonaccrual loans transferred to OREO
(50)
-
-
(50)
Nonaccrual loans charge-offs
(58)
(2)
(8)
(68)
Loan collections
(32)
(821)
(1,460)
(2,313)
Ending balance
$
2,237
$
23,741
$
15,715
$
41,693
123
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Nine-Month Period Ended September 30, 2023
Beginning balance
$
2,208
$
22,319
$
7,830
$
32,357
Plus:
Additions to nonaccrual
127
1,505
20,730
22,362
Less:
Loans returned to accrual status
-
(361)
(725)
(1,086)
Nonaccrual loans transferred to OREO
(332)
(223)
(730)
(1,285)
Nonaccrual loans charge-offs
-
(107)
(6,477)
(6,584)
Loan collections
(363)
(1,507)
(1,819)
(3,689)
Reclassification
-
6
-
6
Ending balance
$
1,640
$
21,632
$
18,809
$
42,081
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Nine-Month Period Ended September 30, 2022
Beginning balance
$
2,664
$
25,337
$
17,135
$
45,136
Plus:
Additions to nonaccrual
20
2,934
2,337
5,291
Less:
Loans returned to accrual status
(48)
(547)
(539)
(1,134)
Nonaccrual loans transferred to OREO
(130)
(549)
(273)
(952)
Nonaccrual loans charge-offs
(114)
(41)
(335)
(490)
Loan collections
(155)
(2,991)
(3,012)
(6,158)
Reclassification
-
(402)
402
-
Ending balance
$
2,237
$
23,741
$
15,715
$
41,693
124
Nonaccrual
residential mortgage
loans decreased
by $10.9
million to
$31.9 million
as of
September 30,
2023, compared
to $42.8
million as of
December 31, 2022.
The decrease was
primarily related to
$10.4 million of
loans restored to
accrual status, $5.2
million
of loans transferred to OREO, and $4.0 million in collections, partially offset
by inflows of $9.6 million.
The following table presents the activity of residential nonaccrual loans held for investment
for the indicated periods:
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
(In thousands)
Beginning balance
$
33,252
$
44,588
$
42,772
$
55,127
Plus:
Additions to nonaccrual
4,510
4,782
9,600
14,513
Less:
Loans returned to accrual status
(3,788)
(3,630)
(10,439)
(12,411)
Nonaccrual loans transferred to OREO
(984)
(495)
(5,243)
(2,617)
Nonaccrual loans charge-offs
(83)
(356)
(704)
(1,306)
Loan collections
(961)
(1,853)
(4,034)
(10,270)
Reclassification
-
-
(6)
-
Ending balance
$
31,946
$
43,036
$
31,946
$
43,036
The amount of nonaccrual
consumer loans, including finance
leases, increased by $4.4
million to $19.2 million
as of September 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 September 30, 2023,
approximately $26.5 million of
the loans placed in nonaccrual status,
mainly commercial 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 nine-month period ended
September 30, 2023, interest income of
approximately $0.2 million related to
nonaccrual loans
with a
carrying value
of $34.9
million as
of September
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 $137.0
million as of
September 30, 2023,
an increase of
$32.1 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 $25.7 million to
$96.6 million, mainly in the auto loans portfolio.
●
Residential mortgage loans in early delinquency increased by $5.9
million to $34.1 million.
●
Commercial and construction loans in early delinquency increased
by $0.5 million to $6.3 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.
125
The
OREO
portfolio,
which
is
part
of
non-performing
assets,
amounted
to
$28.6
million
as
of
September
30,
2023
and
$31.6
million as
of December
31, 2022.
The following
tables show
the composition
of the
OREO portfolio
as of
September 30,
2023 and
December 31,
2022, as well
as the activity
of the OREO
portfolio by geographic
area during the
nine-month period
ended September
30, 2023:
OREO Composition by Region
As of September 30, 2023
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
18,971
$
1,769
$
-
$
20,740
Construction
1,802
59
-
1,861
Commercial
2,774
2,810
378
5,962
$
23,547
$
4,638
$
378
$
28,563
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
Nine-Month Period Ended September 30, 2023
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Beginning Balance
$
28,135
$
3,475
$
31
$
31,641
Additions
12,602
1,970
378
14,950
Sales
(15,930)
(776)
(31)
(16,737)
Write-downs and other adjustments
(1,260)
(31)
-
(1,291)
Ending Balance
$
23,547
$
4,638
$
378
$
28,563
126
Net Charge-offs and Total
Credit Losses
Net charge-offs
totaled $14.1
million for
the third
quarter of
2023,
or 0.48% of
average loans
on an annualized
basis, compared
to
$8.6
million, or
an annualized
0.31%
of average
loans, for
the third
quarter of
2022. For
the nine-month
period ended
September 30,
2023,
net
charge-offs
totaled
$46.6
million,
or
an
annualized
0.54%
of
average
loans,
compared
to $21.1
million,
or an
annualized
0.25% of average loans,
for the same period in 2022.
Consumer
loans
and
finance
leases
net
charge-offs
for
the
third
quarter
of
2023
were
$15.8
million,
or
an
annualized
1.79%
of
related average
loans, compared
to $8.3
million, or
an annualized
1.05% of
related average
loans, for
the third
quarter of
2022. Net
charge-offs
of consumer
loans and
finance leases
for the
nine-month period
ended September
30, 2023
were $41.8
million, or
1.61%
of related average loans, compared to $21.4 million, or an annualized
0.94% of related average loans, for the same period in 2022.
Commercial and
industrial loans
net recoveries
for the
third quarter
of 2023
were $0.2
million, or
an annualized
0.02% of
related
average loans,
compared to
$0.5 million,
or an
annualized 0.07%
of related
average loans,
for the
third quarter
of 2022.
Commercial
and
industrial
loans
net
charge-offs
for
the
nine-month
period
ended
September
30,
2023
were
$6.1
million,
or
0.28%
of
related
average
loans,
compared
to net
recoveries
of $1.8
million,
or
an
annualized
0.08%
of
related
average
loans, for
the same
period
in
2022. The net charge-offs
for the first nine 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.
Construction loans
net recoveries for
the third
quarter of
2023 were $1.4
million, or an
annualized 3.18%
of related
average loans,
compared
to
net
charge-offs
of
$20
thousand,
or
an
annualized
0.07%
of
related
average
loans,
for
the
same
period
in
2022.
Construction loans
net recoveries
for the nine
-month period
ended September
30, 2023
were $1.9
million, or
an annualized
1.58% of
related average
loans, compared
to $15
thousand, or
an annualized
0.02% of
related average
loans, for
the same
period in
2022. The
net recoveries
for the
third quarter
and first
nine months
of 2023
included a
$1.4 million
recovery recorded
on a
construction loan
in
the Puerto Rico region.
Residential
mortgage
loans
net
recoveries
for
the
third
quarter
of
2023
were
$35
thousand,
or
an
annualized
0.01%
of
related
average loans,
compared to
net-charge-offs
of $0.9
million, or
an annualized
0.13% of
related average
loans, for
the third
quarter of
2022.
Residential
mortgage
loans
net
charge-offs
for
the
nine-month
period
ended
September
30,
2023
were
$0.8
million,
or
an
annualized 0.04%
of related
average loans,
compared to
$2.8 million,
or an
annualized 0.13%
of related
average loans,
for the
same
period of
2022. Approximately
$0.1 million
of charge-offs
for the
third quarter
of 2023
and $0.6
million for
the first
nine months
of
2023 resulted
from valuations
of collateral
dependent
residential mortgage
loans, compared
to $0.3
million
and $1.2
million
for the
comparable
periods
in
2022,
respectively.
Charge-offs
on
residential
mortgage
loans
also
included
$0.3
million
and
$1.2
million
related
to
foreclosures
recorded
in
the
third
quarter
and
first nine
months
of
2023,
respectively,
compared
to
$0.6
million
and
$2.4
million, recorded for the comparable periods in 2022, respectively.
Commercial
mortgage
loans
net
recoveries
for
the
third
quarter
of
2023
were
$0.1
million,
or
an
annualized
0.01%
of
related
average
loans,
relatively
unchanged
compared
to the
third quarter
of 2022.
Commercial mortgage
loans net
recoveries for
the nine-
month
period
ended
September
30,
2023
were
$0.2
million,
or
an
annualized
0.01%
of
related
average
loans,
compared
to
$1.3
million, or
an annualized
0.08% of related
average loans,
for the same
period in
2022. Commercial
mortgage loans
net recoveries
for
the first nine months of 2022 included recoveries totaling $1.2 million
associated with two commercial mortgage relationships.
127
The following table presents annualized net (recoveries) charge
-offs to average loans held-in-portfolio for the indicated periods:
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
Residential mortgage
(0.01)
%
0.13
%
0.04
%
0.13
%
Construction
(3.18)
%
0.07
%
(1.58)
%
(0.02)
%
Commercial mortgage
(0.01)
%
(0.01)
%
(0.01)
%
(0.08)
%
Commercial and industrial
(0.02)
%
(0.07)
%
0.28
%
(0.08)
%
Consumer and finance leases
1.79
%
1.05
%
1.61
%
0.94
%
Total loans
0.48
%
0.31
%
0.54
%
0.25
%
The following table presents annualized net (recoveries) charge
-offs to average loans held in various portfolios by geographic
segment for the indicated periods:
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
PUERTO RICO:
Residential mortgage
-
%
0.15
%
0.06
%
0.16
%
Construction
(7.30)
%
0.53
%
(4.32)
%
0.09
%
Commercial mortgage
(0.01)
%
-
%
-
%
(0.05)
%
Commercial and industrial
(0.03)
%
(0.11)
%
-
%
(0.13)
%
Consumer and finance leases
1.78
%
1.04
%
1.61
%
0.94
%
Total loans
0.59
%
0.38
%
0.58
%
0.32
%
VIRGIN ISLANDS:
Residential mortgage
(0.12)
%
0.30
%
-
%
0.19
%
Construction
0.42
%
-
%
-
%
-
%
Commercial mortgage
(0.21)
%
(0.22)
%
(0.02)
%
(0.22)
%
Consumer and finance leases
2.15
%
1.67
%
0.33
%
1.35
%
Total loans
0.26
%
0.36
%
0.05
%
0.24
%
FLORIDA:
Residential mortgage
(0.01)
%
(0.05)
%
(0.02)
%
(0.03)
%
Construction
(0.05)
%
(0.04)
%
(0.05)
%
(0.06)
%
Commercial mortgage
-
%
-
%
(0.03)
%
(0.14)
%
Commercial and industrial
(0.01)
%
-
%
0.88
%
-
%
Consumer and finance leases
(0.16)
%
0.47
%
(0.37)
%
(0.16)
%
Total loans
(0.01)
%
(0.01)
%
0.39
%
(0.05)
%
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 net of gains on
OREO operations for the first nine
months of 2023 amounted to $40.5 million,
or a loss rate of
0.46% on an annualized
basis of average loans
and repossessed assets, compared
to losses of $17.9
million, or a loss
rate of 0.21% on
an annualized basis, for the same period in 2022.
128
The following table presents information about the OREO inventory
and credit losses for the indicated periods:
Quarter ended September 30,
Nine-Month Period Ended September 30,
2023
2022
2023
2022
(Dollars in thousands)
OREO
OREO balances, carrying value:
Residential
$
20,740
$
30,036
$
20,740
$
30,036
Construction
1,861
2,613
1,861
2,613
Commercial
5,962
6,033
5,962
6,033
Total
$
28,563
$
38,682
$
28,563
$
38,682
OREO activity (number of properties):
Beginning property inventory
320
431
344
418
Properties acquired
36
30
139
139
Properties disposed
(75)
(49)
(202)
(145)
Ending property inventory
281
412
281
412
Average holding period (in days)
Residential
464
656
464
656
Construction
2,302
2,192
2,302
2,192
Commercial
2,598
2,420
2,598
2,420
Total average holding period (in days)
1,029
1,035
1,029
1,035
OREO operations gain (loss):
Market adjustments and gains (losses) on sale:
Residential
$
2,577
$
1,159
$
7,620
$
4,139
Construction
52
(7)
99
107
Commercial
41
408
(26)
329
Total net gain
2,670
1,560
7,693
4,575
Other OREO operations expenses
(517)
(496)
(1,560)
(1,306)
Net Gain on OREO operations
$
2,153
$
1,064
$
6,133
$
3,269
RECOVERIES (CHARGE-OFFS)
Residential recoveries (charge-offs), net
$
35
$
(907)
$
(840)
$
(2,845)
Construction recoveries (charge-offs), net
1,459
(20)
1,893
15
Commercial recoveries (charge-offs) , net
226
540
(5,902)
3,029
Consumer and finance leases charge-offs, net
(15,806)
(8,258)
(41,785)
(21,398)
Total charge-offs,
net
(14,086)
(8,645)
(46,634)
(21,199)
TOTAL CREDIT LOSSES
(1)
$
(11,933)
$
(7,581)
$
(40,501)
$
(17,930)
(GAIN) LOSS RATIO PER CATEGORY
(2)
Residential
(0.37)
%
(0.03)
%
(0.32)
%
(0.06)
%
Construction
(3.26)
%
0.09
%
(1.64)
%
(0.13)
%
Commercial
(0.02)
%
(0.07)
%
0.15
%
(0.09)
%
Consumer
1.78
%
1.04
%
1.61
%
0.94
%
TOTAL CREDIT LOSS RATIO
(3)
0.40
%
0.27
%
0.46
%
0.21
%
(1)
Equal to net gain on OREO operations plus charge-offs,
net.
(2)
Calculated as net recoveries (charge-offs) plus
market adjustments 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.
129
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
$12.0 billion as
of September 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.
130
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 underfunded 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
August
2023,
preliminary
estimates
showed
that
the
EDB-EAI
decreased 0.2%
on a
month-over-month
basis; however,
the EDB-EAI
increased 3.3%
when compared
to August
2022. Over
the 12-
month period ended August 31, 2023, the EDB-EAI averaged 125.8,
approximately 0.6% above the comparable figure a year earlier.
Labor
market
trends
remain
positive.
Data
published
by
the
Bureau
of
Labor
Statistics
showed
that
September
2023
payroll
employment in Puerto
Rico increased by
2.3% when compared
to September 2022,
supported by a year-over
-year increase of 9.4%
in
Leisure
and
Hospitality
payroll
employment
and
a
11.9%
year-over-year
increase
in
Construction
-related
payroll
employment
.
The
unemployment rate stood at 6.0% as of September 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 post-bankruptcy
environment, Volume
1 presents a
Transformation Plan
that highlights priority
areas
to cement fiscal responsibility,
accelerate economic growth in a sustainable manner,
and restore market access to Puerto Rico. Volume
2 provides additional details
on economic trends and
financial projections, and Volume
3 maps out the supplementary
implementation
details to
guide
the government’s
implementation
of the
requirements
of the
2023 Fiscal
Plan, as
well as
additional
initiatives
from
prior fiscal plans which remain mandatory and are still pending to be implemented.
The
2023
Fiscal
Plan
prioritizes
resource
allocation
across
three
major
pillars:
(i)
entrenching
a
legacy
of
strong
financial
management
through
the
implementation
of
a
comprehensive
financial
management
agenda,
(ii)
instilling
a
culture
of public
-sector
performance
and excellence
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.
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
131
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 years 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.
On August 25, 2023,
the PROMESA oversight board
announced that it filed
the third amended Plan
of Adjustment to reduce
more
than $10 billion
of total asserted
claims by various
creditors against PREPA
by approximately 80%
to $2.5 billion,
excluding pension
liabilities.
According
to
the
PROMESA
oversight
board,
bondholders
who
support
the
plan
would
recover
12.5%
of
their
original
asserted claim, while
bondholders who
do not agree
to the proposed
plan would recover
3.5% of
their asserted claim.
Combined with
other previous
agreements and
settlements that
remain in
place, approximately
43% of
PREPA’s
creditors support
the third
amended
plan.
In
addition
to
conforming
to
Judge
Taylor
Swain’s
ruling
made
in
June,
the
amended
plan
also
conforms
to
the
previously
disclosed
debt
sustainability
analysis
in
the
revised
PREPA
Fiscal
Plan
certified
in
June
2023
that
is
based
on
the
most
recent
projections of
PREPA’s
operating costs
and future
demand for
its services.
The PREPA
pension treatment
remains unchanged
under
the third
amended
plan. PREPA
retirees will
be paid
in full
for
all benefits
earned
through the
effective
date of
the plan.
After
that
date, no further benefits can be
earned under the defined benefit plan
by existing or new participants. The
disclosure statement hearing
for
the amended
plan
has
been
scheduled
for
November
14, 2023,
and
the
confirmation
hearing
is expected
to take
place
in
March
2024, according to a court order dated September 11,
2023.
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
eight months
of 2023,
over $2.6 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,
an
81%
increase
when
compared
to
the
same period in
2022.
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.
For
example,
approximately
86%
of
the
projects
that
FEMA
has
obligated
to
address damage
caused by
Hurricane Maria
have resources
to reinforce
their infrastructure,
among other
hazard mitigation
measures,
that will prepare these facilities for
future weather events. To
date, the agency has allocated over
$31 billion for nearly 10,800 projects
under
its
Public
Assistance
program
of
which
2,069
permanent
works
have
been
completed
while
over
2,800
are
currently
in
the
process of construction, according to the Central Office for Recovery,
Reconstruction and Resiliency (“COR3”).
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 is
on target
to release
its audited
financial
statements on
time and
in line
with regulatory expectations.
On
October
17,
2023,
the
Government
of
Puerto
Rico
announced
the
execution
of
a
$2.85
billion
concession
agreement
with
Puerto
Rico
Tollroads
LLC
(“PR
Tollroads”),
a
subsidiary
of
Abertis
Infraestructuras
SA,
to
operate,
maintain,
and
improve
the
Puerto Rico
toll roads
currently managed
by HTA.
Pursuant to
the agreement,
PR Tollroads
will pay
HTA
a concession
fee of
about
$2.85 billion which
will enable HTA
to pay off
approximately $1.6 billion
of its outstanding
debt. In addition,
the concession fee
will
provide an
estimated $1.1
billion in
new funding
to be
dedicated for
road-maintenance
purposes and
other long-term
investments of
transportation projects.
132
Exposure to Puerto Rico Government
As of September
30, 2023, the Corporation
had $294.9 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
September
30,
2023,
approximately
$188.9
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 $59.2
million consisted of
loans and obligations
which are supported
by one or more
specific sources
of municipal
revenues. Approximately
73% 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
$8.9
million
in
loans
to an
affiliate
of PREPA,
$34.7
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
$3.2 million
as
part of its available-for-sale debt securities portfolio (fair
value of $1.4 million as of September 30, 2023).
The
following
table
details
the
Corporation’s
total
direct
exposure
to
Puerto
Rico
government
obligations
according
to
their
maturities:
As of September 30, 2023
Investment
Portfolio
(Amortized
cost)
Loans
Total
Exposure
(In thousands)
Puerto Rico Housing Finance Authority:
After 10 years
$
3,204
$
-
$
3,204
Total
Puerto Rico Housing Finance Authority
3,204
-
3,204
Agencies and public corporation of the Puerto Rico government:
After 1 to 5 years
-
9,330
9,330
After 5 to 10 years
-
25,376
25,376
Total agencies and public
corporation of the Puerto Rico government
-
34,706
34,706
Affiliate of the Puerto Rico Electric Power Authority:
Due within one year
-
-
-
After 1 to 5 years
-
8,938
8,938
Total Puerto Rico government
affiliate
-
8,938
8,938
Total
Puerto Rico public corporations and government affiliate
-
43,644
43,644
Municipalities:
Due within one year
3,159
7,179
10,338
After 1 to 5 years
51,133
52,323
103,456
After 5 to 10 years
35,831
81,858
117,689
After 10 years
16,595
-
16,595
Total
Municipalities
106,718
141,360
248,078
Total
Direct Government Exposure
$
109,922
$
185,004
$
294,926
133
In
addition,
as
of
September
30,
2023,
the
Corporation
had
$79.3
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,
2022,
the
PRHFA’s
mortgage
loans
insurance
program
covered
loans
in
an
aggregate
amount
of
approximately
$418
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,
2022, the
most recent
date as
of which
information is available, the PRHFA
had a liability of approximately $1 million as an estimate of
the losses inherent in the portfolio.
As of September
30, 2023, the Corporation
had $2.8 billion
of public sector
deposits in Puerto
Rico, compared to
$2.3 billion as
of
December
31,
2022.
Approximately
22%
of
the
public
sector
deposits
as
of
September
30,
2023
were
from
municipalities
and
municipal agencies in Puerto Rico and 78% 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
$4.9 billion in
disaster recovery
funds were disbursed
as of August
2023 and $5.8
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 September 2023, up 1.1% when compared to September
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 September 30, 2023, the Corporation had $87.5 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 by
the aforementioned $55.8
million line of
credit
utilization.
As of September 30, 2023, all loans were currently performing and up to date on principal
and interest payments.
134
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES
ABOUT MARKET
RISK
For
information
regarding
market
risk
to
which
the
Corporation
is
exposed,
see
the
information
contained
in
Part
I,
Item
2.
“Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results of
Operations
— Risk
Management”
in
this Quarterly
Report on Form 10-Q.
ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
First
BanCorp.’s
management,
including
its
Chief
Executive
Officer
and
Chief
Financial
Officer,
evaluated
the
effectiveness
of
First
BanCorp.’s
disclosure
controls
and
procedures
(as
defined
in
Rules
13a-15(e)
and
15d-15(e)
under
the
Exchange
Act)
as
of
September
30,
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 September
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 September
30, 2023
that have
materially
affected,
or are
reasonably
likely to materially affect, the Corporation’s
internal control over financial reporting.
135
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.
The
Corporation has not incurred any material expenses related to the incident and does
not expect any future impact.
136
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.
137
ITEM 2.
UNREGISTERED
SALES OF
EQUITY SECURITIES
AND USE OF
PROCEEDS
The Corporation did not have any unregistered sales
of equity securities during the quarter ended September
30, 2023.
Issuer Purchases of Equity Securities
The
following
table
provides
information
in
relation
to
the
Corporation’s
purchases
of
its
common
stock
during
the
quarter
ended
September 30, 2023.
Period
Total Number of Shares
Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar Value
of Shares That May Yet
be
Purchased Under These
Plans or Programs (In
thousands)
(1)
July 1, 2023 - July 31, 2023
1,424,636
$
13.37
1,424,636
$
280,954
August 1, 2023 - August 31, 2023
2,142,034
14.45
2,142,034
250,000
September 1, 2023 - September 30, 2023
1,826,566
13.69
1,825,788
225,000
Total
5,393,236
(2) (3)
5,392,458
(1)
During the
third quarter
of 2023,
the Corporation
completed the
$350 million
stock repurchase
program approved
by the
Board of
Directors on
April 27,
2022. 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. The
stock repurchase
program does
not obligate
the Corporation
to acquire
any specific
number of
shares, does
not have
an expiration
date and
may be
modified, suspended,
or
terminated at
any time
at the
Corporation's
discretion. Under
the stock
repurchase program,
shares may
be repurchased
through open
market purchases,
accelerated share
repurchases
and/or privately negotiated transactions, including under plans
complying with Rule 10b5-1 under the Exchange Act.
(2)
Includes 5,392,458 shares of common stock repurchased in the open
market at an average price of $13.91 for a total purchase price
of approximately $75 million.
(3)
Includes 778 shares
of common stock
withheld by the
Corporation to cover
minimum tax
withholdings obligations in
connection with the
vesting of outstanding
restricted stock through
the withholding of shares.
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 September 30, 2023.
138
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 September 30, 2023, formatted in
Inline XBRL (included within the Exhibit 101 attachments)
139
SIGNATURES
Pursuant to
the requirements
of the
Securities Exchange
Act of
1934, the
Corporation has
duly caused
this report
to be
signed on
its
behalf by the undersigned hereunto duly authorized:
First BanCorp.
Registrant
Date:
November 8, 2023
By:
/s/ Aurelio Alemán
Aurelio Alemán
President and Chief Executive Officer
Date: November 8, 2023
By:
/s/ Orlando Berges
Orlando Berges
Executive Vice President and Chief Financial Officer