FIRST BANCORP /PR/ - Quarter Report: 2023 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM
10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2023
or
[ ]
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
☑
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
☑
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
☐
☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock:
179,788,698
2
FIRST BANCORP.
INDEX PAGE
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited) as of March 31, 2023 and December 31,
2022
Consolidated Statements of Income (Unaudited) – Quarters ended March 31, 2023 and 2022
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Quarters ended March 31, 2023
and 2022
Consolidated Statements of Cash Flows (Unaudited) – Quarters ended March 31, 2023 and 2022
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Quarters ended March 31,
2023 and 2022
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
SIGNATURES
3
Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), which are subject to the safe harbor created by such sections. When used in this Form 10-Q or future filings by First
BanCorp. (the “Corporation,” “we,” “us,” or “our”) with the U.S. Securities and Exchange Commission (the “SEC”), in the
Corporation’s press releases or in other public or stockholder communications made by the Corporation, or in oral statements made on
behalf of the Corporation by, or with the approval of, an authorized executive officer, the words or phrases “would,” “intends,” “will,”
“expect,” “should,” “plans,” “forecast,” “anticipate,” “look forward,” “believes,” and other terms of similar meaning or import, or the
negatives of these terms or variations of them, in connection with any discussion of future operating, financial or other performance
are meant to identify “forward-looking statements.”
The Corporation cautions readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the
date made, and advises readers that these forward-looking statements are not guarantees of future performance and involve certain
risks, uncertainties, estimates, and assumptions by us that are difficult to predict. Various factors, some of which are beyond our
control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements.
limited to, risks described or referenced in Part I, Item 1A, “Risk Factors,” in the Corporation’s Annual Report on Form 10-K for the
year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”) and the following:
●
the impacts of rising interest rates and inflation on the Corporation, including a decrease in demand for new loan originations
and refinancings, increased competition for borrowers, attrition in deposits, a reduction in the fair value of the Corporation’s
debt securities portfolio, and an increase in non-interest expenses which would impact the Corporation’s earnings and may
adversely impact origination volumes, liquidity, and financial performance;
●
volatility in the financial services industry, including failures or rumored failures of other depository institutions, and actions
taken by governmental agencies to stabilize the financial system, which could result in, among other things, bank deposit
runoffs and liquidity constraints;
●
the effect of continued changes in the fiscal and monetary policies and regulations of the United States (“U.S.”) federal
government, the Puerto Rico government and other governments, including those determined by the Board of the Governors
of the Federal Reserve System (the “Federal Reserve Board”), the Federal Reserve Bank of New York (the “New York FED”
or the “FED”), the Federal Deposit Insurance Corporation (the “FDIC”), government-sponsored housing agencies and
regulators in Puerto Rico, the U.S., and the U.S. Virgin Islands (the “USVI) and British Virgin Islands (the “BVI”);
●
uncertainty as to the ability of the Corporation’s banking subsidiary, FirstBank Puerto Rico (“FirstBank” or the “Bank”), to
retain its core deposits and generate sufficient cash flow through its wholesale funding sources, such as securities sold under
agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and brokered certificates of deposit (“brokered
CDs”), which in turn affects its ability to make dividend payments to the Corporation and could result in selling certain
investment securities portfolio at a loss;
●
adverse changes in general economic conditions in Puerto Rico, the U.S., and the USVI and BVI, including in the interest
rate environment, unemployment rates, market liquidity, housing absorption rates, real estate markets, and U.S. capital
markets, which may affect funding sources, loan portfolio performance and credit quality, market prices of investment
securities, and demand for the Corporation’s products and services, and which may reduce the Corporation’s revenues and
earnings and the value of the Corporation’s assets;
●
the impact of government financial assistance for hurricane recovery and other disaster relief on economic activity in Puerto
Rico, and the timing and pace of disbursements of funds earmarked for disaster relief;
●
the long-term economic and other effects of the COVID-19 pandemic and their impact on the Corporation’s business,
operations, and financial condition;
●
the ability of the Corporation, FirstBank, and third-party service providers to identify and prevent cyber-security incidents,
such as data security breaches, ransomware, malware, “denial of service” attacks, “hacking,” identity theft, and state-
sponsored cyberthreats, and the occurrence of and response to any, such as a recent security incident at one of our third-party
vendors, which may result in misuse or misappropriation of confidential or proprietary information, disruption, or damage to
our systems or those of third-party service providers, increased costs and losses or an adverse effect to our reputation;
4
●
general competitive factors and other market risks as well as the implementation of strategic growth opportunities, including
risks, uncertainties, and other factors or events related to any business acquisitions or dispositions;
●
uncertainty as to the implementation of the debt restructuring plan of Puerto Rico (“Plan of Adjustment” or “PoA”) and the
fiscal plan for Puerto Rico as certified on April 3, 2023 (the “2023 Fiscal Plan”) by the oversight board established by the
Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), or any revisions to it, on our clients and
loan portfolios, and any potential impact from future economic or political developments and tax regulations in Puerto Rico;
●
the impact of changes in accounting standards, or assumptions in applying those standards, on forecasts of economic
variables considered for the determination of the allowance for credit losses (“ACL”);
●
the ability of FirstBank to realize the benefits of its net deferred tax assets;
●
environmental, social, and governance matters, including our climate-related initiatives and commitments;
●
the impacts of natural or man-made disasters, widespread health emergencies, geopolitical conflicts (including the ongoing
conflict in Ukraine), terrorist attacks, or other catastrophic external events, including impacts of such events on general
economic conditions and on the Corporation’s assumptions regarding forecasts of economic variables;
●
the effect of changes in the interest rate environment, including uncertainty about the effect of the cessation of the London
Interbank Offered Rate (“LIBOR”);
●
any adverse change in the Corporation’s ability to attract and retain clients and gain acceptance from current and prospective
customers for new products and services, including those related to the offering of digital banking and financial services;
●
the risk that additional portions of the unrealized losses in the Corporation’s debt securities portfolio are determined to be
credit-related, resulting in additional charges to the provision for credit losses on the Corporation’s available-for-sale debt
securities portfolio;
●
the impacts of applicable legislative, tax, or regulatory changes on the Corporation’s financial condition or performance;
●
the risk of possible failure or circumvention of the Corporation’s internal controls and procedures and the risk that the
Corporation’s risk management policies may not be adequate;
●
the risk that the FDIC may further increase the deposit insurance premium and/or require special assessments, causing an
additional increase in the Corporation’s non-interest expenses;
●
any need to recognize impairments on the Corporation’s financial instruments, goodwill, and other intangible assets;
●
the risk that the impact of the occurrence of any of these uncertainties on the Corporation’s capital would preclude further
growth of FirstBank and preclude the Corporation’s Board of Directors (the “Board”) from declaring dividends; and
●
uncertainty as to whether FirstBank will be able to continue to satisfy its regulators regarding, among other things, its asset
quality, liquidity plans, maintenance of capital levels, and compliance with applicable laws, regulations and related
requirements.
occurrences or unanticipated events or circumstances after the date of such statements, except as required by the federal securities
laws.
5
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
March 31, 2023
December 31, 2022
(In thousands, except for share information)
ASSETS
Cash and due from banks
$
822,542
$
478,480
Money market investments:
Time deposits with other financial institutions
300
300
Other short-term investments
759
1,725
Total money market investments
1,059
2,025
Available-for-sale debt securities, at fair value:
Securities pledged with creditors’ rights to repledge
181,009
81,103
Other available-for-sale debt securities
5,408,247
5,518,417
Total available-for-sale debt securities, at fair value (amortized cost of $
6,300,696
$
6,398,197
449
458
5,589,256
5,599,520
Held-to-maturity debt securities, at amortized cost, net of ACL of $
7,646
8,286
as of December 31, 2022 (fair value of $
419,752
427,115
423,749
429,251
Equity securities
66,714
55,289
Total investment securities
6,079,719
6,084,060
Loans, net of ACL of $
265,567
260,464
11,312,418
11,292,361
Mortgage loans held for sale, at lower of cost or market
15,183
12,306
Total loans, net
11,327,601
11,304,667
Accrued interest receivable on loans and investments
63,841
69,730
Premises and equipment, net
137,580
142,935
Other real estate owned (“OREO”)
32,862
31,641
Deferred tax asset, net
154,780
155,584
Goodwill
38,611
38,611
Other intangible assets
19,073
21,118
Other assets
299,446
305,633
Total assets
$
18,977,114
$
18,634,484
LIABILITIES
Non-interest-bearing deposits
$
6,024,304
$
6,112,884
Interest-bearing deposits
10,027,661
10,030,583
Total deposits
16,051,965
16,143,467
Short-term securities sold under agreements to repurchase
172,982
75,133
Advances from the FHLB:
Short-term
425,000
475,000
Long-term
500,000
200,000
Total advances from the FHLB
925,000
675,000
Other long-term borrowings
183,762
183,762
Accounts payable and other liabilities
237,812
231,582
Total liabilities
17,571,521
17,308,944
Commitments and contingencies (See Note 22)
(nil)
(nil)
STOCKHOLDERS’ EQUITY
Common stock, $
0.10
2,000,000,000
223,663,116
179,788,698
shares outstanding as of March 31, 2023 and
182,709,059
22,366
22,366
Additional paid-in capital
959,912
970,722
Retained earnings, includes legal surplus reserve of $
168,484
1,688,176
1,644,209
Treasury stock (at cost) of
43,874,418
40,954,057
(547,311)
(506,979)
Accumulated other comprehensive loss, net of tax of $
8,468
(717,550)
(804,778)
Total stockholders’ equity
1,405,593
1,325,540
Total liabilities and stockholders’ equity
$
18,977,114
$
18,634,484
The accompanying notes are an integral part of these statements.
6
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter Ended March 31,
2023
2022
(In thousands, except per share information)
Interest and dividend income:
$
210,636
$
173,787
27,110
23,247
4,650
820
242,396
197,854
Interest expense:
29,885
7,652
1,069
-
-
2,182
4,341
-
2,835
1,063
3,381
1,333
41,511
12,230
200,885
185,624
Provision for credit losses - expense (benefit):
16,256
(16,989)
(105)
(178)
(649)
3,365
15,502
(13,802)
185,383
199,426
Non-interest income:
9,541
9,363
2,812
5,206
4,847
5,275
10,918
9,681
4,400
3,333
32,518
32,858
Non-interest expenses:
56,422
49,554
21,186
22,386
3,975
3,463
11,973
10,594
5,112
5,018
2,133
1,673
(1,996)
(720)
5,318
4,121
2,216
2,151
8,929
8,419
115,268
106,659
Income before income taxes
102,633
125,625
Income tax expense
31,935
43,025
Net income
$
70,698
$
82,600
Net income attributable to common stockholders
$
70,698
$
82,600
Net income per common share:
$
0.39
$
0.42
$
0.39
$
0.41
The accompanying notes are an integral part of these statements.
7
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Quarter Ended March 31,
2023
2022
(In thousands)
Net income
$
70,698
$
82,600
Other comprehensive income (loss), net of tax:
Available-for-sale debt securities:
Net unrealized holding gains (losses) on debt securities
87,228
(331,834)
Other comprehensive income (loss) for the period, net of tax
87,228
(331,834)
Total comprehensive income (loss)
$
157,926
$
(249,234)
The accompanying notes are an integral part of these statements.
8
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarter Ended March 31,
2023
2022
(In thousands)
Cash flows from operating activities:
Net income
$
70,698
$
82,600
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
5,080
5,872
Amortization of intangible assets
2,045
2,286
Provision for credit losses - expense (benefit)
15,502
(13,802)
Deferred income tax expense
1,564
31,707
Stock-based compensation
2,075
1,182
Unrealized loss (gain) on derivative instruments
3
(618)
Net gain on disposals or sales, and impairments of premises and equipment and other assets
(8)
(26)
Net gain on sales of loans and valuation adjustments
(766)
(2,461)
Net amortization of discounts, premiums, and deferred loan fees and costs
283
(2,933)
Originations and purchases of loans held for sale
(38,500)
(86,802)
Sales and repayments of loans held for sale
34,836
93,739
Amortization of broker placement fees
44
35
Net amortization of premiums and discounts on investment securities
630
1,690
Decrease in accrued interest receivable
8,566
3,919
Increase (decrease) in accrued interest payable
3,752
(906)
(Increase) decrease in other assets
168
352
Increase (decrease) increase in other liabilities
9,443
(1,000)
115,415
114,834
Cash flows from investing activities:
Net disbursements on loans held for investment
(71,193)
(48,370)
Proceeds from sales of loans held for investment
2,552
1,306
Proceeds from sales of repossessed assets
12,347
9,361
Purchases of available-for-sale debt securities
-
(497,327)
Proceeds from principal repayments and maturities of available-for-sale debt securities
113,218
208,397
Proceeds from principal repayments and maturities of held-to-maturity debt securities
6,652
400
Additions to premises and equipment
(1,689)
(6,764)
Proceeds from sales of premises and equipment and other assets
8
26
Net purchases of other investments securities
(11,360)
(21)
50,535
(332,992)
Cash flows from financing activities:
Net decrease in deposits
(92,354)
(456,211)
Net proceeds from short-term borrowings
47,849
-
Repayments of long-term borrowings
-
(100,000)
Proceeds from long-term borrowings
300,000
-
Repurchase of outstanding common stock
(53,217)
(52,713)
Dividends paid on common stock
(25,132)
(19,727)
177,146
(628,651)
Net increase (decrease) in cash and cash equivalents
343,096
(846,809)
Cash and cash equivalents at beginning of year
480,505
2,543,058
Cash and cash equivalents at end of period
$
823,601
$
1,696,249
Cash and cash equivalents include:
Cash and due from banks
$
822,542
$
1,694,066
Money market investments
1,059
2,183
$
823,601
$
1,696,249
The accompanying notes are an integral part of these statements.
9
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Quarter Ended March 31,
2023
2022
(In thousands, except per share information)
Common Stock
$
22,366
$
22,366
Additional Paid-In Capital:
970,722
972,547
2,075
1,182
(13,139)
(6,980)
254
22
959,912
966,771
Retained Earnings:
1,644,209
1,427,295
(1,357)
-
70,698
82,600
0.14
0.10
(25,374)
(19,900)
1,688,176
1,489,995
Treasury Stock (at cost)
(See Note 1)
:
(506,979)
(236,442)
(53,217)
(52,713)
13,139
6,980
(254)
(22)
(547,311)
(282,197)
Accumulated Other Comprehensive Loss, net of tax:
(804,778)
(83,999)
87,228
(331,834)
(717,550)
(415,833)
$
1,405,593
$
1,781,102
The accompanying notes are an integral part of these statements.
10
FIRST BANCORP.
INDEX TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Note 1 –
Basis of Presentation and Significant Accounting Policies
Note 2 –
Debt Securities
Note 3 –
Loans Held for Investment
Note 4
–
Allowance for Credit Losses for Loans and Finance Leases
Note 5 –
Other Real Estate Owned
Note 6
–
Goodwill and Other Intangibles
Note 7 –
Non-Consolidated Variable Interest Entities (“VIEs”) and Servicing Assets
Note 8 –
Deposits
Note 9 –
Securities Sold Under Agreements to Repurchase (Repurchase Agreements)
Note 10 –
Advances from the Federal Home Loan Bank (“FHLB”)
Note 11 –
Other Long-Term Borrowings
Note 12 –
Earnings per Common Share
Note 13 –
Stock-Based Compensation
Note 14 –
Stockholders’ Equity
Note 15 –
Accumulated Other Comprehensive Loss
Note 16 –
Employee Benefit Plans
Note 17 –
Income Taxes
Note 18
–
Fair Value
Note 19
–
Revenue from Contracts with Customers
Note 20 –
Segment Information
Note 21 –
Supplemental Statement of Cash Flows Information
Note 22 –
Regulatory Matters, Commitments, and Contingencies
Note 23 –
First BanCorp. (Holding Company Only) Financial Information
11
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements (unaudited) for the quarter ended March 31, 2023 (the “unaudited consolidated financial
statements”) of First BanCorp. (the “Corporation”) have been prepared in conformity with the accounting policies stated in the
Corporation’s Audited Consolidated Financial Statements for the fiscal year ended December 31, 2022 (the “audited consolidated financial
statements”) included in the 2022 Annual Report on Form 10-K, as updated by the information contained in this report. Certain information
and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in
the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant to the rules and regulations of the
SEC and, accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements, which
are included in the 2022 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the statement of financial position, results of operations and cash flows for the
interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.
The results of operations for the quarter ended March 31, 2023 are not necessarily indicative of the results to be expected for the entire
year.
Adoption of New Accounting Requirements
Accounting Standards Update (“ASU”) 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings
and Vintage Disclosures”
Effective January 1, 2023, the Corporation adopted ASU 2022-02, which removed the existing measurement and disclosure
requirements for Troubled Debt Restructured (“TDR”) loans, added additional disclosure requirements related to modifications provided to
borrowers experiencing financial difficulty regardless of whether the refinancing is accounted for as a new loan, and amends the guidance
on vintage disclosures to require disclosure of gross charge-offs by year of origination. Prior to adoption, a change in contractual terms of a
loan where a borrower was experiencing financial difficulty and received a concession not available through other sources was required to
be disclosed as a TDR, whereas now a borrower that is experiencing financial difficulty and there has been a direct change to the timing or
amount of contractual cash flows in the form of principal forgiveness, interest rate reduction, an other-than-insignificant payment delay, a
term extension, or any combination of these types of loan modifications in the current period needs to be disclosed. ASU 2022-02 did not
amend the definition of financial difficulty.
Modifications of receivables are within the scope of ASU 2022-02 if they are accounted for in accordance with Accounting Standards
Codification (“ASC”) 310-20. As such, finance leases are not within the scope of ASU 2022-02. Such modifications are evaluated
following the requirements in ASC 310-20 to determine whether they should be accounted for as a new loan or a continuation of the
existing loan.
allows the option of a non-discounted cash flow portfolio-based approach for modified loans to borrowers experiencing financial
difficulties.
The Corporation elected to apply a non-discounted cash flow, portfolio-based ACL approach for modified loans to borrowers
experiencing financial difficulties for all portfolios, using a modified retrospective transition method. The adoption resulted in a net increase
to the ACL of approximately $
2.1
1.3
driven by residential mortgage loans. The amount of defined modifications given to borrowers experiencing financial difficulty is disclosed
in Note 3 – Loans Held for Investment, along with the financial impact of those modifications.
The Corporation was not impacted by the adoption of the following ASUs during the first quarter of 2023:
●
ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method”
●
ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts
With Customers”
12
Recently Issued Accounting Standards Not Yet Effective or Not Yet Adopted
Standard
Description
Effective Date
Effect on the financial statements
ASU 2023-02, "Investments -
Equity Method and Joint Ventures
(Topic 323): Accounting for
Investments in Tax Credit
Structures Using the Proportional
Amortization Method"
In March 2023, the FASB issued
ASU 2023-02 which, among other
things, allows tax equity
investments, regardless of the tax
credit program from which the
income tax credits are received, to
be accounted for using the
proportional amortization method if
certain conditions are met and
requires specific disclosures of
such investments. The election
needs to be made on a tax-credit-
program-by-tax-credit-program
basis.
January 1, 2024. Early adoption is
permitted in any interim period.
The Corporation does not expect to
be impacted by the amendments of
this ASU since it does not hold tax
equity investments.
ASU 2023-01, "Leases (Topic
842): Common Control
Arrangements"
In March 2023, the FASB issued
ASU 2023-01 which, among other
things, generally requires a lessee
in a common-control lease
arrangement to amortize leasehold
improvements over the useful life
regardless of the lease term, subject
to certain exceptions. In addition, a
lessee that no longer controls the
use of the underlying asset will
account for the transfer of the
underlying asset as an adjustment
to equity.
January 1, 2024. Early adoption is
permitted for both interim and
annual financial statements that
have not yet been made available
for issuance.
The Corporation is evaluating the
impact that this ASU will have on its
financial statements. The
Corporation does not expect to be
materially impacted by the adoption
of this ASU during the first quarter
of 2024.
For other issued accounting standards not yet effective or not yet adopted, see Note 1 – Nature of Business and Summary of
Significant Accounting Policies, to the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K.
13
NOTE 2 – DEBT SECURITIES
Available-for-Sale Debt Securities
The amortized cost, gross unrealized gains and losses, ACL, estimated fair value, and weighted-average yield of available-for-sale
debt securities by contractual maturities as of March 31, 2023 were as follows:
March 31, 2023
Amortized cost
(1)
Gross
ACL
Fair value
Unrealized
Weighted-
Gains
Losses
average yield%
(Dollars in thousands)
U.S. Treasury securities:
$
27,744
$
-
$
890
$
-
$
26,854
0.61
120,916
-
7,348
-
113,568
0.69
U.S. government-sponsored entities (“GSEs”) obligations:
189,174
-
5,100
-
184,074
0.42
2,349,522
22
190,986
-
2,158,558
0.84
41,916
8
4,998
-
36,926
1.64
11,625
27
-
-
11,652
5.15
Puerto Rico government obligations:
(2)
3,302
-
733
366
2,203
-
United States and Puerto Rico government obligations
2,744,199
57
210,055
366
2,533,835
0.83
Mortgage-backed securities (“MBS”):
10,023
-
454
-
9,569
1.98
187,007
-
15,912
-
171,095
1.56
1,068,680
-
170,021
-
898,659
1.41
1,265,710
-
186,387
-
1,079,323
1.44
3
-
-
-
3
2.42
23,293
-
1,253
-
22,040
1.31
33,939
-
2,720
-
31,219
1.69
225,680
119
24,080
-
201,719
2.58
282,915
119
28,053
-
254,981
2.37
24,446
-
1,249
-
23,197
1.72
353,397
-
28,963
-
324,434
1.74
1,133,757
104
168,025
-
965,836
1.37
1,511,600
104
198,237
-
1,313,467
1.47
296,022
-
52,540
-
243,482
1.49
7,695
-
2,210
83
5,402
7.25
Total Residential MBS
3,363,942
223
467,427
83
2,896,655
1.55
27,584
7
4,551
-
23,040
2.27
44,584
-
4,929
-
39,655
1.90
120,387
-
24,316
-
96,071
1.23
Total Commercial MBS
192,555
7
33,796
-
158,766
1.53
Total MBS
3,556,497
230
501,223
83
3,055,421
1.54
Total available-for-sale debt securities
$
6,300,696
$
287
$
711,278
$
449
$
5,589,256
1.23
(1)
Excludes accrued interest receivable on available-for-sale debt securities that totaled $
10.7
consolidated statements of financial condition, and excluded from the estimate of credit losses.
(2)
Consists of a residential pass-through MBS issued by the Puerto Rico Housing Finance Authority (“PRHFA”) that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico
government in 2010 and is in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral.
14
The amortized cost, gross unrealized gains and losses, ACL, estimated fair value, and weighted-average yield of available-for-sale
debt securities by contractual maturities as of December 31, 2022 were as follows:
December 31, 2022
Amortized cost
Gross
ACL
Fair value
Unrealized
Weighted-
Gains
Losses
average yield%
(Dollars in thousands)
U.S. Treasury securities:
$
7,493
$
-
$
309
$
-
$
7,184
0.22
141,366
-
9,675
-
131,691
0.70
U.S. GSEs’ obligations:
129,018
-
4,036
-
124,982
0.32
2,395,273
22
227,724
-
2,167,571
0.83
56,251
13
7,670
-
48,594
1.54
12,170
36
-
-
12,206
4.62
Puerto Rico government obligations:
(2)
3,331
-
755
375
2,201
-
United States and Puerto Rico government obligations
2,744,902
71
250,169
375
2,494,429
0.83
MBS:
4,235
-
169
-
4,066
2.33
201,072
-
18,709
-
182,363
1.55
1,092,289
-
186,558
-
905,731
1.38
1,297,596
-
205,436
-
1,092,160
1.41
5
-
-
-
5
1.73
15,508
-
622
-
14,886
2.00
45,322
1
3,809
-
41,514
1.31
232,632
51
27,169
-
205,514
2.47
293,467
52
31,600
-
261,919
2.27
9,685
-
521
-
9,164
1.76
358,346
-
31,620
-
326,726
1.68
1,186,635
124
186,757
-
1,000,002
1.38
1,554,666
124
218,898
-
1,335,892
1.45
302,232
-
56,539
-
245,693
1.44
7,903
-
2,026
83
5,794
6.83
Total Residential MBS
3,455,864
176
514,499
83
2,941,458
1.52
30,578
-
4,463
-
26,115
2.43
44,889
-
5,603
-
39,286
1.89
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
consolidated statements of financial condition, and excluded from the estimate of credit losses.
(2)
Consists of a residential pass-through MBS issued by the PRHFA that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico government in 2010 and is in nonaccrual
status based on the delinquency status of the underlying second mortgage loans collateral.
15
Maturities of available-for-sale debt securities are based on the period of final contractual maturity. Expected maturities might
differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted-average yield on
available-for-sale debt securities is based on amortized cost and, therefore, does not give effect to changes in fair value. The net
unrealized gain or loss on available-for-sale debt securities is presented as part of other comprehensive loss
statements of financial condition.
The following tables present the fair value and gross unrealized losses of the Corporation’s available-for-sale debt securities,
aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as
of March 31, 2023 and December 31, 2022. The tables also include debt securities for which an ACL was recorded.
As of March 31, 2023
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
Fair Value
Fair Value
Fair Value
(In thousands)
Debt securities:
U.S. Treasury and U.S. GSEs’
$
17,615
$
611
$
2,496,925
$
208,711
$
2,514,540
$
209,322
Puerto Rico government obligations
-
-
2,203
733
(1)
2,203
733
21,354
710
1,057,950
185,677
1,079,304
186,387
45,949
868
197,581
27,185
243,530
28,053
41,186
1,741
1,262,700
196,496
1,303,886
198,237
10,596
117
232,886
52,423
243,482
52,540
-
-
5,402
2,210
(1)
5,402
2,210
3,833
220
148,640
33,576
152,473
33,796
$
140,533
$
4,267
$
5,404,287
$
707,011
$
5,544,820
$
711,278
7923
(1)
Unrealized losses do not include the credit loss component recorded as part of the ACL. As of March 31, 2023, the PRHFA bond and private label MBS had an ACL of $
0.4
$
0.1
As of December 31, 2022
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
Fair Value
Fair Value
Fair Value
(In thousands)
Debt securities:
U.S. Treasury and U.S. GSEs’
$
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
260,524
45,424
831,637
160,012
1,092,161
205,436
74,829
3,433
179,854
28,167
254,683
31,600
405,977
49,479
920,200
169,419
1,326,177
218,898
45,370
6,735
200,323
49,804
245,693
56,539
-
-
5,794
2,026
(1)
5,794
2,026
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
and $
0.1
16
Assessment for Credit Losses
Debt securities issued by U.S. government agencies, U.S. GSEs, and the U.S. Treasury, including notes and MBS, accounted for
substantially all of the total available-for-sale portfolio as of March 31, 2023, and the Corporation expects no credit losses on these
securities, given the explicit and implicit guarantees provided by the U.S. federal government. Because the decline in fair value is
attributable to changes in interest rates, and not credit quality, and because the Corporation does not have the intent to sell these U.S.
government and agencies debt securities and it is likely that it will not be required to sell the securities before their anticipated
recovery, the Corporation does not consider impairments on these securities to be credit related as of March 31, 2023. The
Corporation’s credit loss assessment was concentrated mainly on private label MBS and on Puerto Rico government debt securities,
for which credit losses are evaluated on a quarterly basis.
The Corporation’s available-for-sale MBS portfolio included private label MBS with a fair value of $
5.4
unrealized losses of approximately $
2.3
0.1
of the ACL.
The interest rate on these private-label MBS is variable, tied to 3-month LIBOR, and limited to the weighted-average
coupon on the underlying collateral.
ZZ, the LIBOR reference on these contracts will automatically transition by operation of law to 3-month CME Term Secured
Overnight Financing Rate (“SOFR”), plus a spread adjustment of 0.26161% on the first reset date after U.S. dollar (“USD”) LIBOR
ceases publication in June 2023.
The underlying collateral is fixed-rate, single-family residential mortgage loans in the United States
with original FICO scores over 700 and moderate loan-to-value ratios (under 80%), as well as moderate delinquency levels.
March 31, 2023, the Corporation did not have the intent to sell these securities and determined that it is likely that it will not be
required to sell the securities before anticipated recovery. The Corporation determined the ACL for private label MBS based on a risk-
adjusted discounted cash flow methodology that considers the structure and terms of the instruments. The Corporation utilized
probability of default (“PDs”) and loss given default (“LGDs”) that considered, among other things, historical payment performance,
loan-to-value attributes, and relevant current and forward-looking macroeconomic variables, such as regional unemployment rates and
the housing price index. Under this approach, expected cash flows (interest and principal) were discounted at the Treasury yield curve
as of the reporting date. Significant assumptions in the valuation of the private label MBS were as follows:
As of
As of
March 31, 2023
December 31, 2022
Weighted
Range
Weighted
Range
Average
Minimum
Maximum
Average
Minimum
Maximum
Discount rate
16.0%
16.0%
16.0%
16.2%
16.2%
16.2%
Prepayment rate
9.2%
1.6%
12.6%
11.8%
1.5%
15.2%
Projected cumulative loss rate
5.2%
0.2%
14.9%
5.6%
0.3%
15.6%
The Corporation evaluates if a credit loss exists, primarily by monitoring adverse variances in the present value of expected cash
flows. As of each of March 31, 2023 and December 31, 2022, the ACL for these private label MBS was $
0.1
17
As of March 31, 2023, the Corporation’s available-for-sale debt securities portfolio also included a residential pass-through MBS
issued by the PRHFA, collateralized by certain second mortgages, with a fair value of $
2.2
approximately $
1.1
0.4
ACL. The underlying second mortgage loans were originated under a program launched by the Puerto Rico government in 2010. This
residential pass-through MBS was structured as a zero-coupon bond for the first ten years (until July 2019). The underlying source of
repayment on this residential pass-through MBS are second mortgage loans in Puerto Rico. PRHFA, not the Puerto Rico government,
provides a guarantee in the event of default and subsequent foreclosure of the properties underlying the second mortgage loans.
During 2021, the Corporation placed this instrument in nonaccrual status based on the delinquency status of the underlying second
mortgage loans collateral. The Corporation determined the ACL on this instrument based on a discounted cash flow methodology that
considered the structure and terms of the debt security. The Corporation utilized PDs and LGDs that considered, among other things,
historical payment performance, loan-to-value attributes, and relevant current and forward-looking macroeconomic variables, such as
regional unemployment rates, the housing price index, and expected recovery from the PRHFA guarantee. Under this approach,
expected cash flows (interest and principal) were discounted at the Treasury yield curve plus a spread as of the reporting date and
compared to the amortized cost. In the event that the second mortgage loans default and the collateral is insufficient to satisfy the
outstanding balance of this residential pass-through MBS, PRHFA’s ability to honor its insurance will depend on, among other
factors, the financial condition of PRHFA at the time such obligation becomes due and payable. Deterioration of the Puerto Rico
economy or fiscal health of the PRHFA could impact the value of these securities, resulting in additional losses to the Corporation. As
of March 31, 2023, the Corporation did not have the intent to sell this security and determined that it was likely that it will not be
required to sell the security before its anticipated recovery.
available-for-sale debt securities:
Quarter Ended March 31, 2023
Private label MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
83
$
375
$
458
Provision for credit losses - benefit
-
(9)
(9)
$
83
$
366
$
449
Quarter Ended March 31, 2022
Private label MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
797
$
308
$
1,105
Provision for credit losses - benefit
(388)
-
(388)
Net charge-offs
(6)
-
(6)
$
403
$
308
$
711
18
Held-to-Maturity Debt Securities
The amortized cost, gross unrecognized gains and losses, estimated fair value, ACL, weighted-average yield and contractual
maturities of held-to-maturity debt securities as of March 31, 2023 and December 31, 2022 were as follows
:
March 31, 2023
Amortized cost
(1)
Gross Unrecognized
Fair value
Weighted-
Gains
Losses
ACL
average yield%
(Dollars in thousands)
Puerto Rico municipal bonds:
$
1,204
$
-
$
10
$
1,194
$
24
5.70
42,633
679
1,001
42,311
659
6.74
55,940
1,482
603
56,819
2,918
7.10
66,023
-
1,804
64,219
4,045
8.12
Total Puerto Rico municipal bonds
165,800
2,161
3,418
164,543
7,646
7.40
MBS:
FHLMC certificates:
After 5 to 10 years
$
20,129
$
-
$
762
$
19,367
$
-
3.03
After 10 years
19,176
-
596
18,580
-
4.30
39,305
-
1,358
37,947
-
3.65
GNMA certificates:
`
After 10 years
18,502
-
795
17,707
-
3.31
FNMA certificates:
After 10 years
71,258
-
2,190
69,068
-
4.16
CMOs:
After 10 years
32,522
-
1,154
31,368
-
3.49
Total Residential MBS
161,587
-
5,497
156,090
-
3.81
After 1 to 5 years
9,576
-
348
9,228
-
3.48
After 10 years
94,432
-
4,541
89,891
-
3.15
Total Commercial MBS
104,008
-
4,889
99,119
-
3.18
Total MBS
265,595
-
10,386
255,209
-
3.56
Total held-to-maturity debt securities
$
431,395
$
2,161
$
13,804
$
419,752
$
7,646
5.04
(1)
Excludes accrued interest receivable on held-to-maturity debt securities that totaled $
3.7
consolidated statements of financial condition, and is excluded from the estimate of credit losses.
19
December 31, 2022
Amortized cost
(1)
Gross Unrecognized
Fair value
Weighted-
Gains
Losses
ACL
average yield%
(Dollars in thousands)
Puerto Rico municipal bonds:
$
1,202
$
-
$
15
$
1,187
$
2
5.20
42,530
886
1,076
42,340
656
6.34
55,956
3,182
360
58,778
3,243
6.29
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:
FHLMC certificates:
After 5 to 10 years
$
21,443
$
-
$
746
$
20,697
$
-
3.03
After 10 years
19,362
-
888
18,474
-
4.21
40,805
-
1,634
39,171
-
3.59
GNMA certificates:
`
After 10 years
19,131
-
943
18,188
-
3.35
FNMA certificates:
After 10 years
72,347
-
3,155
69,192
-
4.14
CMOs:
After 10 years
34,456
-
1,424
33,032
-
3.49
Total Residential MBS
166,739
-
7,156
159,583
-
3.78
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
consolidated statements of financial condition, and is excluded from the estimate of credit losses.
20
The following tables present the Corporation’s held-to-maturity debt securities’ fair value and gross unrecognized losses,
aggregated by category and length of time that individual securities had been in a continuous unrecognized loss position, as of March
31, 2023 and December 31, 2022, including debt securities for which an ACL was recorded:
As of March 31, 2023
Less than 12 months
12 months or more
Total
Unrecognized
Unrecognized
Unrecognized
Fair Value
Fair Value
Fair Value
(In thousands)
Debt securities:
$
-
$
-
$
108,266
$
3,418
$
108,266
$
3,418
37,947
1,358
-
-
37,947
1,358
17,707
795
-
-
17,707
795
69,068
2,190
-
-
69,068
2,190
31,368
1,154
-
-
31,368
1,154
99,119
4,889
-
-
99,119
4,889
Total held-to-maturity debt securities
$
255,209
$
10,386
$
108,266
$
3,418
$
363,475
$
13,804
As of December 31, 2022
Less than 12 months
12 months or more
Total
Unrecognized
Unrecognized
Unrecognized
Fair Value
Fair Value
Fair Value
(In thousands)
Debt securities:
$
-
$
-
$
98,797
$
2,769
$
98,797
$
2,769
39,171
1,634
-
-
39,171
1,634
18,188
943
-
-
18,188
943
69,192
3,155
-
-
69,192
3,155
33,032
1,424
-
-
33,032
1,424
100,523
4,565
-
-
100,523
4,565
Total held-to-maturity debt securities
$
260,106
$
11,721
$
98,797
$
2,769
$
358,903
$
14,490
21
The Corporation classifies the held-to-maturity debt securities portfolio into the following major security types: MBS issued by
GSEs and Puerto Rico municipal bonds. As of March 31, 2023, all of the MBS included in the held-to-maturity debt securities
portfolio were issued by GSEs. The Corporation does not recognize an ACL for these securities since they are highly rated by major
rating agencies and have a long history of no credit losses. In the case of Puerto Rico municipal bonds, the Corporation determines the
ACL based on the product of a cumulative PD and LGD, and the amortized cost basis of the bonds over their remaining expected life
as described in Note 1 – Nature of Business and Summary of Significant Accounting Policies, to the audited consolidated financial
statements included in the 2022 Annual Report on Form 10-K.
The Corporation performs periodic credit quality reviews on these issuers. All of the Puerto Rico municipal bonds were current as
to scheduled contractual payments as of March 31, 2023. A security is considered to be past due once it is 30 days contractually past
due under the terms of the agreement. The Puerto Rico municipal bonds had an ACL of $
7.6
to $
8.3
of certain bond issuers received during the first quarter of 2023.
ended March 31, 2023 and 2022:
Puerto Rico Municipal Bonds
Quarter Ended
March 31, 2023
March 31, 2022
(In thousands)
Beginning Balance
$
8,286
$
8,571
Provision for credit losses - (benefit) expense
(640)
3,753
ACL on held-to-maturity debt securities
$
7,646
$
12,324
During the second quarter of 2019, the oversight board established by PROMESA announced the designation of Puerto Rico’s 78
municipalities as covered instrumentalities under PROMESA. Municipalities may be affected by the negative economic and other
effects resulting from expense, revenue, or cash management measures taken by the Puerto Rico government to address its fiscal
situation, or measures included in its fiscal plan or fiscal plans of other government entities. Given the inherent uncertainties about the
fiscal situation of the Puerto Rico central government, the COVID-19 pandemic, and the measures taken, or to be taken, by other
government entities in response to economic and fiscal challenges on municipalities, the Corporation cannot be certain whether future
charges to the ACL on these securities will be required.
considered cash and cash equivalents and are classified as money market investments in the consolidated statements of financial
condition. As of March 31, 2023 and December 31, 2022, the Corporation had no outstanding securities held to maturity that were
classified as cash and cash equivalents.
22
Credit Quality Indicators:
The held-to-maturity debt securities portfolio consisted of GSEs
’
MBS and financing arrangements with Puerto Rico municipalities
issued in bond form. As previously mentioned, the Corporation expects no credit losses on GSEs MBS. The Puerto Rico municipal
bonds are accounted for as securities but are underwritten as loans with features that are typically found in commercial loans.
Accordingly, the Corporation monitors the credit quality of these municipal bonds through the use of internal credit-risk ratings, which
are generally updated on a quarterly basis. The Corporation considers a municipal bond as a criticized asset if its risk rating is Special
Mention, Substandard, Doubtful, or Loss. Puerto Rico municipal bonds that do not meet the criteria for classification as criticized
assets are considered to be Pass-rated securities. For the definitions of the internal credit-risk ratings, see Note 3 – Debt Securities, to
the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K.
The Corporation periodically reviews its Puerto Rico municipal bonds to evaluate if they are properly classified, and to measure
credit losses on these securities. The frequency of these reviews will depend on the amount of the aggregate outstanding debt, and the
risk rating classification of the obligor.
The Corporation has a Loan Review Group that reports directly to the Corporation’s Risk Management Committee and
administratively to the Chief Risk Officer. The Loan Review Group performs annual comprehensive credit process reviews of the
Bank’s commercial loan portfolios, including the above-mentioned Puerto Rico municipal bonds accounted for as held-to-maturity
debt securities. The objective of these loan reviews is to assess accuracy of the Bank’s determination and maintenance of loan risk
rating and its adherence to lending policies, practices and procedures. The monitoring performed by this group contributes to the
assessment of compliance with credit policies and underwriting standards, the determination of the current level of credit risk, the
evaluation of the effectiveness of the credit management process, and the identification of any deficiency that may arise in the credit-
granting process. Based on its findings, the Loan Review Group recommends corrective actions, if necessary, that help in maintaining
a sound credit process. The Loan Review Group reports the results of the credit process reviews to the Risk Management Committee.
As of March 31, 2023 and December 31, 2022, all Puerto Rico municipal bonds classified as held-to-maturity were classified as
Pass.
23
NOTE 3 – LOANS HELD FOR INVESTMENT
The following table provides information about the loan portfolio held for investment by portfolio segment and disaggregated by
geographic locations as of the indicated dates:
As of March 31,
As of December 31,
2023
2022
(In thousands)
Puerto Rico and Virgin Islands region:
Residential mortgage loans, mainly secured by first mortgages
$
2,381,782
$
2,417,900
Construction loans
48,195
34,772
Commercial mortgage loans
1,829,173
1,834,204
Commercial and Industrial ("C&I") loans
1,941,228
1,860,109
Consumer loans
3,398,245
3,317,489
Loans held for investment
$
9,598,623
$
9,464,474
Florida region:
Residential mortgage loans, mainly secured by first mortgages
$
429,746
$
429,390
Construction loans
95,469
98,181
Commercial mortgage loans
524,486
524,647
C&I loans
920,961
1,026,154
Consumer loans
8,700
9,979
Loans held for investment
$
1,979,362
$
2,088,351
Total:
Residential mortgage loans, mainly secured by first mortgages
$
2,811,528
$
2,847,290
Construction loans
143,664
132,953
Commercial mortgage loans
2,353,659
2,358,851
C&I loans
(1)
2,862,189
2,886,263
Consumer loans
3,406,945
3,327,468
Loans held for investment
(2)
11,577,985
11,552,825
ACL on loans and finance leases
(265,567)
(260,464)
Loans held for investment, net
$
11,312,418
$
11,292,361
(1)
As of March 31, 2023 and December 31, 2022, includes $
837.8
838.5
the primary source of repayment at origination was not dependent upon the real estate.
(2)
Includes accretable fair value net purchase discounts of $
28.3
29.3
24
The Corporation’s aging of the loan portfolio held for investment, as well as information about nonaccrual loans with no ACL, by
portfolio classes as of March 31, 2023 and December 31, 2022 are as follows:
As of March 31, 2023
Days Past Due and Accruing
Current
30-59
60-89
90+
(1) (2) (3)
Nonaccrual
(4)
Total loans held
for investment
Nonaccrual
Loans with no
ACL
(5)
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
(1) (3) (6)
$
67,977
$
-
$
1,869
$
41,723
$
-
$
111,569
$
-
(2) (6)
2,626,542
-
23,367
13,640
36,410
2,699,959
2,250
Commercial loans:
141,870
-
-
-
1,794
143,664
972
(2) (6)
2,323,116
509
507
7,929
21,598
2,353,659
15,787
2,840,568
1,438
424
6,355
13,404
2,862,189
1,858
Consumer loans:
1,780,593
34,754
6,380
-
11,138
1,832,865
3,342
743,656
8,056
1,562
-
2,208
755,482
344
353,214
4,160
2,098
-
1,263
360,735
-
299,387
3,989
2,518
4,733
-
310,627
-
143,035
1,916
958
-
1,327
147,236
21
$
11,319,958
$
54,822
$
39,683
$
74,380
$
89,142
$
11,577,985
$
24,574
(1)
It is the Corporation's policy to report delinquent Federal Housing Authority (“FHA”)/Veterans Affairs (“VA”) government-guaranteed residential mortgage loans as past-due loans 90 days and still accruing as opposed
to nonaccrual loans. The Corporation continues accruing interest on these loans until they have passed the 15 months delinquency mark, taking into consideration the FHA interest curtailment process. These balances
include $
25.9
(2)
Includes purchased credit deteriorated ("PCD") loans previously accounted for under ASC Subtopic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC Subtopic 310-30") for which
the Corporation made the accounting policy election of maintaining pools of loans as “units of account” both at the time of adoption of CECL on January 1, 2020 and on an ongoing basis for credit loss measurement.
These loans will continue to be excluded from nonaccrual loan statistics as long as the Corporation can reasonably estimate the timing and amount of cash flows expected to be collected on the loan pools. The portion of
such loans contractually past due 90 days or more, amounting to $
10.4
9.4
1.0
the loans past due 90 days or more and still accruing category in the table above.
(3)
Include rebooked loans, which were previously pooled into GNMA securities, amounting to $
7.1
repurchase loans that meet GNMA’s specified delinquency criteria. For accounting purposes, these loans subject to the repurchase option are required to be reflected on the financial statements with an offsetting
liability.
(4)
Nonaccrual loans in the Florida region amounted to $
15.2
(5)
Includes $
0.3
(6)
According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal
Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears on two or more monthly payments. FHA/VA government-guaranteed loans,
conventional residential mortgage loans, and commercial mortgage loans past due 30-59 days, but less than two payments in arrears, as of March 31, 2023 amounted to $
5.3
60.7
1.1
respectively.
25
As of December 31, 2022
Days Past Due and Accruing
Current
30-59
60-89
90+
(1)(2)(3)
Nonaccrual
(4)
Total loans held
for investment
Nonaccrual
Loans with no
ACL
(5)
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
(1) (3) (6)
$
67,116
$
-
$
2,586
$
48,456
$
-
$
118,158
$
-
(2) (6)
2,643,909
-
25,630
16,821
42,772
2,729,132
2,292
Commercial loans:
130,617
-
-
128
2,208
132,953
977
(2) (6)
2,330,094
300
2,367
3,771
22,319
2,358,851
15,991
2,868,989
1,984
1,128
6,332
7,830
2,886,263
3,300
Consumer loans:
1,740,271
40,039
7,089
-
10,672
1,798,071
2,136
707,646
7,148
1,791
-
1,645
718,230
330
346,366
3,738
1,894
-
1,248
353,246
-
301,013
3,705
2,238
4,775
-
311,731
-
141,687
1,804
1,458
-
1,241
146,190
-
$
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
guaranteed by the FHA that were over 15 months delinquent.
(2)
Includes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans as “units of account” both at the time of adoption
of CECL on January 1, 2020 and on an ongoing basis for credit loss measurement. These loans will continue to be excluded from nonaccrual loan statistics as long as the Corporation can reasonably estimate the timing
and amount of cash flows expected to be collected on the loan pools. The portion of such loans contractually past due 90 days or more, amounting to $
12.0
11.0
residential mortgage loans and $
1.0
(3)
Include rebooked loans, which were previously pooled into GNMA securities, amounting to $
10.3
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
(5)
Includes $
0.3
(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
65.2
1.6
respectively.
When a loan is placed on nonaccrual status, any accrued but uncollected interest income is reversed and charged against interest
income and the amortization of any net deferred fees is suspended. The amount of accrued interest reversed against interest income
totaled $
0.6
0.4
2023 and 2022, the cash interest income recognized on nonaccrual loans amounted to $
0.5
0.4
As of March 31, 2023, the recorded investment on residential mortgage loans collateralized by residential real estate property that
were in the process of foreclosure amounted to $
62.6
27.2
loans, and $
8.8
The Corporation commences the
foreclosure process on residential real estate loans when a borrower becomes
120
timelines vary depending on whether the property is located in a judicial or non-judicial state. Occasionally, foreclosures may be
delayed due to, among other reasons, mandatory mediations, bankruptcy, court delays, and title issues.
Credit Quality Indicators:
The Corporation categorizes loans into risk categories based on relevant information about the ability of the borrowers to service
their debt such as current financial information, historical payment experience, credit documentation, public information, and current
economic trends, among other factors. The Corporation analyzes non-homogeneous loans, such as commercial mortgage, C&I, and
construction loans individually to classify the loans’ credit risk. As mentioned above, the Corporation periodically reviews its
commercial and construction loans to evaluate if they are properly classified. The frequency of these reviews will depend on the
amount of the aggregate outstanding debt, and the risk rating classification of the obligor. In addition, during the renewal and annual
review process of applicable credit facilities, the Corporation evaluates the corresponding loan grades. The Corporation uses the same
definition for risk ratings as those described for Puerto Rico municipal bonds accounted for as held-to-maturity debt securities, as
discussed in Note 3 – Debt Securities, to the audited consolidated financial statements included in the 2022 Annual Report on Form
10-K.
For residential mortgage and consumer loans, the Corporation also evaluates credit quality based on its interest accrual status.
26
Based on the most recent analysis performed, the amortized cost of commercial and construction loans by portfolio classes and by
origination year based on the internal credit-risk category as of March 31, 2023, the gross charge -offs for the quarter ended March 31,
2023 by portfolio classes and by origination year, and the amortized cost of commercial and construction loans by portfolio classes
based on the internal credit-risk category as of December 31, 2022, was as follows:
As of March 31, 2023
Puerto Rico and Virgin Islands region
Term Loans
As of December 31, 2022
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
CONSTRUCTION
$
6,479
$
16,509
$
18,842
$
-
$
-
$
3,885
$
-
$
45,715
$
31,879
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,480
-
2,480
2,893
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
6,479
$
16,509
$
18,842
$
-
$
-
$
6,365
$
-
$
48,195
$
34,772
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
COMMERCIAL MORTGAGE
$
67,469
$
391,295
$
139,536
$
325,141
$
301,638
$
400,794
$
478
$
1,626,351
$
1,655,728
-
1,177
-
36,546
75
131,350
-
169,148
145,415
-
132
-
-
2,797
30,745
-
33,674
33,061
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
67,469
$
392,604
$
139,536
$
361,687
$
304,510
$
562,889
$
478
$
1,829,173
$
1,834,204
$
-
$
-
$
-
$
-
$
-
$
18
$
-
$
18
C&I
$
70,739
$
303,603
$
188,155
$
181,284
$
308,225
$
254,283
$
565,758
$
1,872,047
$
1,789,572
-
132
839
-
1,029
12,885
32,322
47,207
43,224
-
-
396
652
13,430
7,117
379
21,974
27,313
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
70,739
$
303,735
$
189,390
$
181,936
$
322,684
$
274,285
$
598,459
$
1,941,228
$
1,860,109
$
-
$
-
$
-
$
-
$
-
$
63
$
55
$
118
(1) Excludes accrued interest receivable.
27
As of March 31, 2023
Term Loans
As of December 31, 2022
Florida region
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
CONSTRUCTION
$
107
$
50,019
$
42,867
$
-
$
-
$
-
$
2,476
$
95,469
$
98,181
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
107
$
50,019
$
42,867
$
-
$
-
$
-
$
2,476
$
95,469
$
98,181
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
COMMERCIAL MORTGAGE
$
3,529
$
177,392
$
70,147
$
41,024
$
51,320
$
140,177
$
19,551
$
503,140
$
503,184
-
-
-
6,947
13,231
-
-
20,178
20,295
-
-
-
1,168
-
-
-
1,168
1,168
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
3,529
$
177,392
$
70,147
$
49,139
$
64,551
$
140,177
$
19,551
$
524,486
$
524,647
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
C&I
$
36,642
$
276,868
$
134,512
$
75,953
$
183,443
$
72,650
$
92,816
$
872,884
$
979,151
-
-
19,677
-
5,974
11,725
-
37,376
17,905
-
-
-
264
195
2,854
300
3,613
29,098
-
-
-
-
-
7,088
-
7,088
-
-
-
-
-
-
-
-
-
-
$
36,642
$
276,868
$
154,189
$
76,217
$
189,612
$
94,317
$
93,116
$
920,961
$
1,026,154
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
(1) Excludes accrued interest receivable.
28
As of March 31, 2023
Total
Term Loans
As of December 31, 2022
Amortized Cost Basis by Origination Year (1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
CONSTRUCTION
$
6,586
$
66,528
$
61,709
$
-
$
-
$
3,885
$
2,476
$
141,184
$
130,060
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,480
-
2,480
2,893
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
6,586
$
66,528
$
61,709
$
-
$
-
$
6,365
$
2,476
$
143,664
$
132,953
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
COMMERCIAL MORTGAGE
$
70,998
$
568,687
$
209,683
$
366,165
$
352,958
$
540,971
$
20,029
$
2,129,491
$
2,158,912
-
1,177
-
43,493
13,306
131,350
-
189,326
165,710
-
132
-
1,168
2,797
30,745
-
34,842
34,229
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
70,998
$
569,996
$
209,683
$
410,826
$
369,061
$
703,066
$
20,029
$
2,353,659
$
2,358,851
$
-
$
-
$
-
$
-
$
-
$
18
$
-
$
18
C&I
$
107,381
$
580,471
$
322,667
$
257,237
$
491,668
$
326,933
$
658,574
$
2,744,931
$
2,768,723
-
132
20,516
-
7,003
24,610
32,322
84,583
61,129
-
-
396
916
13,625
9,971
679
25,587
56,411
-
-
-
-
-
7,088
-
7,088
-
-
-
-
-
-
-
-
-
-
$
107,381
$
580,603
$
343,579
$
258,153
$
512,296
$
368,602
$
691,575
$
2,862,189
$
2,886,263
$
-
$
-
$
-
$
-
$
-
$
63
$
55
$
118
(1) Excludes accrued interest receivable.
29
The following tables present the amortized cost of residential mortgage loans by portfolio classes and by origination year based on
accrual status as of March 31, 2023, the gross charge-offs for the quarter ended March 31, 2023 by portfolio classes and by origination
year, and the amortized cost of residential mortgage loans by portfolio classes based on accrual status as of December 31, 2022:
As of March 31, 2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Puerto Rico and Virgin Islands Region:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
-
$
696
$
448
$
765
$
1,557
$
107,368
$
-
$
110,834
$
117,416
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA government-guaranteed loans
$
-
$
696
$
448
$
765
$
1,557
$
107,368
$
-
$
110,834
$
117,416
Conventional residential mortgage loans:
Accrual Status:
Performing
$
24,859
$
171,599
$
74,692
$
31,497
$
47,705
$
1,891,603
$
-
$
2,241,955
$
2,265,013
Non-Performing
-
-
35
-
-
28,958
-
28,993
35,471
Total conventional residential mortgage loans
$
24,859
$
171,599
$
74,727
$
31,497
$
47,705
$
1,920,561
$
-
$
2,270,948
$
2,300,484
Total:
Accrual Status:
Performing
$
24,859
$
172,295
$
75,140
$
32,262
$
49,262
$
1,998,971
$
-
$
2,352,789
$
2,382,429
Non-Performing
-
-
35
-
-
28,958
-
28,993
35,471
Total residential mortgage loans in Puerto Rico
and Virgin Islands Region
$
24,859
$
172,295
$
75,175
$
32,262
$
49,262
$
2,027,929
$
-
$
2,381,782
$
2,417,900
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
3
$
-
$
980
$
-
$
983
(1)
Excludes accrued interest receivable.
As of March 31, 2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Florida Region:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
735
$
-
$
735
$
742
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA government-guaranteed loans
$
-
$
-
$
-
$
-
$
-
$
735
$
-
$
735
$
742
Conventional residential mortgage loans:
Accrual Status:
Performing
$
13,232
$
81,619
$
48,991
$
31,157
$
29,403
$
217,192
$
-
$
421,594
$
421,347
Non-Performing
-
-
-
-
265
7,152
-
7,417
7,301
Total conventional residential mortgage loans
$
13,232
$
81,619
$
48,991
$
31,157
$
29,668
$
224,344
$
-
$
429,011
$
428,648
Total:
Accrual Status:
Performing
$
13,232
$
81,619
$
48,991
$
31,157
$
29,403
$
217,927
$
-
$
422,329
$
422,089
Non-Performing
-
-
-
-
265
7,152
-
7,417
7,301
Total residential mortgage loans in Florida region
$
13,232
$
81,619
$
48,991
$
31,157
$
29,668
$
225,079
$
-
$
429,746
$
429,390
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
(1)
Excludes accrued interest receivable.
30
As of March 31, 2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Total:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
-
$
696
$
448
$
765
$
1,557
$
108,103
$
-
$
111,569
$
118,158
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA government-guaranteed loans
$
-
$
696
$
448
$
765
$
1,557
$
108,103
$
-
$
111,569
$
118,158
Conventional residential mortgage loans:
Accrual Status:
Performing
$
38,091
$
253,218
$
123,683
$
62,654
$
77,108
$
2,108,795
$
-
$
2,663,549
$
2,686,360
Non-Performing
-
-
35
-
265
36,110
-
36,410
42,772
Total conventional residential mortgage loans
$
38,091
$
253,218
$
123,718
$
62,654
$
77,373
$
2,144,905
$
-
$
2,699,959
$
2,729,132
Total:
Accrual Status:
Performing
$
38,091
$
253,914
$
124,131
$
63,419
$
78,665
$
2,216,898
$
-
$
2,775,118
$
2,804,518
Non-Performing
-
-
35
-
265
36,110
-
36,410
42,772
Total residential mortgage loans
$
38,091
$
253,914
$
124,166
$
63,419
$
78,930
$
2,253,008
$
-
$
2,811,528
$
2,847,290
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
3
$
-
$
980
$
-
$
983
(1)
Excludes accrued interest receivable.
31
The following tables present the amortized cost of consumer loans by portfolio classes and by origination year based on accrual
status as of March 31, 2023, the gross charge-offs for the quarter ended March 31, 2023 by portfolio classes and by origination, and
the amortized cost of consumer loans by portfolio classes based on accrual status as of December 31, 2022:
As of March 31, 2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Puerto Rico and Virgin Islands Regions:
Auto loans:
Accrual Status:
Performing
$
165,925
$
638,402
$
478,373
$
234,358
$
186,331
$
115,561
$
-
$
1,818,950
$
1,783,782
Non-Performing
-
2,419
2,243
1,347
2,708
2,399
-
11,116
10,596
Total auto loans
$
165,925
$
640,821
$
480,616
$
235,705
$
189,039
$
117,960
$
-
$
1,830,066
$
1,794,378
Charge-offs on auto loans
$
19
$
1,827
$
1,210
$
467
$
632
$
365
$
-
$
4,520
Finance leases:
Accrual Status:
Performing
$
78,870
$
282,486
$
183,061
$
82,206
$
74,421
$
52,230
$
-
$
753,274
$
716,585
Non-Performing
-
551
222
433
376
626
-
2,208
1,645
Total finance leases
$
78,870
$
283,037
$
183,283
$
82,639
$
74,797
$
52,856
$
-
$
755,482
$
718,230
Charge-offs on finance leases
$
-
$
227
$
270
$
97
$
185
$
200
$
-
$
979
Personal loans:
Accrual Status:
Performing
$
44,647
$
163,311
$
49,275
$
25,703
$
46,765
$
29,411
$
-
$
359,112
$
351,664
Non-Performing
-
490
188
117
229
239
-
1,263
1,248
Total personal loans
$
44,647
$
163,801
$
49,463
$
25,820
$
46,994
$
29,650
$
-
$
360,375
$
352,912
Charge-offs on personal loans
$
-
$
1,517
$
840
$
279
$
680
$
384
$
-
$
3,700
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
310,627
$
310,627
$
311,731
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
310,627
$
310,627
$
311,731
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
4,057
$
4,057
Other consumer loans:
Accrual Status:
Performing
$
23,413
$
66,230
$
17,612
$
8,219
$
9,851
$
6,468
$
8,700
$
140,493
$
139,116
Non-Performing
-
540
171
59
104
230
98
1,202
1,122
Total other consumer loans
$
23,413
$
66,770
$
17,783
$
8,278
$
9,955
$
6,698
$
8,798
$
141,695
$
140,238
Charge-offs on other consumer loans
$
14
$
1,842
$
762
$
174
$
326
$
178
$
91
$
3,387
Total:
Performing
$
312,855
$
1,150,429
$
728,321
$
350,486
$
317,368
$
203,670
$
319,327
$
3,382,456
$
3,302,878
Non-Performing
-
4,000
2,824
1,956
3,417
3,494
98
15,789
14,611
Total consumer loans in Puerto Rico and Virgin
Islands region
$
312,855
$
1,154,429
$
731,145
$
352,442
$
320,785
$
207,164
$
319,425
$
3,398,245
$
3,317,489
Charge-offs on total consumer loans
$
33
$
5,413
$
3,082
$
1,017
$
1,823
$
1,127
$
4,148
$
16,643
(1)
Excludes accrued interest receivable.
32
As of March 31, 2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Florida Region:
Auto loans:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
259
$
2,518
$
-
$
2,777
$
3,617
Non-Performing
-
-
-
-
-
22
-
22
76
Total auto loans
$
-
$
-
$
-
$
-
$
259
$
2,540
$
-
$
2,799
$
3,693
Charge-offs on auto loans
$
-
$
-
$
-
$
-
$
8
$
147
$
-
$
155
Finance leases:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-Performing
-
-
-
-
-
-
-
-
-
Total finance leases
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Charge-offs on finance leases
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Personal loans:
Accrual Status:
Performing
$
274
$
8
$
71
$
7
$
-
$
-
$
-
$
360
$
334
Non-Performing
-
-
-
-
-
-
-
-
-
Total personal loans
$
274
$
8
$
71
$
7
$
-
$
-
$
-
$
360
$
334
Charge-offs on personal loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Other consumer loans:
Accrual Status:
Performing
$
-
$
49
$
229
$
460
$
-
$
2,455
$
2,223
$
5,416
$
5,833
Non-Performing
-
-
-
-
-
21
104
125
119
Total other consumer loans
$
-
$
49
$
229
$
460
$
-
$
2,476
$
2,327
$
5,541
$
5,952
Charge-offs on other consumer loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total:
Performing
$
274
$
57
$
300
$
467
$
259
$
4,973
$
2,223
$
8,553
$
9,784
Non-Performing
-
-
-
-
-
43
104
147
195
Total consumer loans in Florida region
$
274
$
57
$
300
$
467
$
259
$
5,016
$
2,327
$
8,700
$
9,979
Charge-offs on total consumer loans
$
-
$
-
$
-
$
-
$
8
$
147
$
-
$
155
(1)
Excludes accrued interest receivable.
33
As of March 31, 2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Total:
Auto loans:
Accrual Status:
Performing
$
165,925
$
638,402
$
478,373
$
234,358
$
186,590
$
118,079
$
-
$
1,821,727
$
1,787,399
Non-Performing
-
2,419
2,243
1,347
2,708
2,421
-
11,138
10,672
Total auto loans
$
165,925
$
640,821
$
480,616
$
235,705
$
189,298
$
120,500
$
-
$
1,832,865
$
1,798,071
Charge-offs on auto loans
$
19
$
1,827
$
1,210
$
467
$
640
$
512
$
-
$
4,675
Finance leases:
Accrual Status:
Performing
$
78,870
$
282,486
$
183,061
$
82,206
$
74,421
$
52,230
$
-
$
753,274
$
716,585
Non-Performing
-
551
222
433
376
626
-
2,208
1,645
Total finance leases
$
78,870
$
283,037
$
183,283
$
82,639
$
74,797
$
52,856
$
-
$
755,482
$
718,230
Charge-offs on finance leases
$
-
$
227
$
270
$
97
$
185
$
200
$
-
$
979
Personal loans:
Accrual Status:
Performing
$
44,921
$
163,319
$
49,346
$
25,710
$
46,765
$
29,411
$
-
$
359,472
$
351,998
Non-Performing
-
490
188
117
229
239
-
1,263
1,248
Total personal loans
$
44,921
$
163,809
$
49,534
$
25,827
$
46,994
$
29,650
$
-
$
360,735
$
353,246
Charge-offs on personal loans
$
-
$
1,517
$
840
$
279
$
680
$
384
$
-
$
3,700
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
310,627
$
310,627
$
311,731
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
310,627
$
310,627
$
311,731
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
4,057
$
4,057
Other consumer loans:
Accrual Status:
Performing
$
23,413
$
66,279
$
17,841
$
8,679
$
9,851
$
8,923
$
10,923
$
145,909
$
144,949
Non-Performing
-
540
171
59
104
251
202
1,327
1,241
Total other consumer loans
$
23,413
$
66,819
$
18,012
$
8,738
$
9,955
$
9,174
$
11,125
$
147,236
$
146,190
Charge-offs on other consumer loans
$
14
$
1,842
$
762
$
174
$
326
$
178
$
91
$
3,387
Total:
Performing
$
313,129
$
1,150,486
$
728,621
$
350,953
$
317,627
$
208,643
$
321,550
$
3,391,009
$
3,312,662
Non-Performing
-
4,000
2,824
1,956
3,417
3,537
202
15,936
14,806
Total consumer loans
$
313,129
$
1,154,486
$
731,445
$
352,909
$
321,044
$
212,180
$
321,752
$
3,406,945
$
3,327,468
Charge-offs on total consumer loans
$
33
$
5,413
$
3,082
$
1,017
$
1,831
$
1,274
$
4,148
$
16,798
(1)
Excludes accrued interest receivable.
Accrued interest receivable on loans totaled $
49.4
53.1
reported as part of accrued interest receivable on loans and investment securities in the consolidated statements of financial condition
and is excluded from the estimate of credit losses.
34
The following tables present information about collateral dependent loans that were individually evaluated for purposes of
determining the ACL as of March 31, 2023 and December 31, 2022
:
As of March 31, 2023
Collateral Dependent Loans -
With Allowance
Collateral Dependent
Loans - With No
Related Allowance
Collateral Dependent Loans - Total
Amortized Cost
Related
Allowance
Amortized Cost
Amortized Cost
Related
Allowance
(In thousands)
Residential mortgage loans:
Conventional residential mortgage loans
$
34,257
$
2,410
$
152
$
34,409
$
2,410
Commercial loans:
Construction loans
-
-
956
956
-
Commercial mortgage loans
2,449
896
61,851
64,300
896
C&I loans
1,789
347
13,331
15,120
347
Consumer loans:
Personal loans
55
1
-
55
1
Other consumer loans
-
-
-
-
-
$
38,550
$
3,654
$
76,290
$
114,840
$
3,654
As of December 31, 2022
Collateral Dependent Loans -
With Allowance
Collateral Dependent
Loans - With No
Related Allowance
Collateral Dependent Loans - Total
Amortized Cost
Related
Allowance
Amortized Cost
Amortized Cost
Related
Allowance
(In thousands)
Residential mortgage loans:
Conventional residential mortgage loans
$
36,206
$
2,571
$
-
$
36,206
$
2,571
Commercial loans:
Construction loans
-
-
956
956
-
Commercial mortgage loans
2,466
897
62,453
64,919
897
C&I loans
1,513
322
17,590
19,103
322
Consumer loans:
Personal loans
56
1
64
120
1
Other consumer loans
207
29
-
207
29
$
40,448
$
3,820
$
81,063
$
121,511
$
3,820
The allowance related to collateral dependent loans reported in the tables above includes qualitative adjustments applied to the loan
portfolio that consider possible changes in circumstances that could ultimately impact credit losses and might not be reflected in
historical data or forecasted data incorporated in the quantitative models. The underlying collateral for residential mortgage and
consumer collateral dependent loans consisted of single-family residential properties, and for commercial and construction loans
consisted primarily of office buildings, multifamily residential properties, and retail establishments. The weighted-average loan-to-
value coverage for collateral dependent loans as of March 31, 2023 was
69
%, compared to
70
% as of December 31, 2022, which was
not considered a significant change in the extent to which collateral secured these loans.
35
Purchases and Sales of Loans
In the ordinary course of business, the Corporation enters into securitization transactions and whole loan sales with GNMA and
GSEs, such as FNMA and FHLMC. During the quarters ended March 31, 2023 and 2022, loans pooled into GNMA MBS amounted to
approximately $
29.4
41.5
0.9
and $
1.3
8.0
performing residential mortgage loans to FNMA, of which the Corporation recognized a net gain on sale of $
0.2
during the quarter ended March 31, 2022, the Corporation sold approximately $
50.0
2.4
mortgage loans to FNMA and FHLMC, respectively, of which the Corporation recognized a net gain on sale of $
2.1
0.1
million, respectively. The Corporation’s continuing involvement with the loans that it sells consists primarily of servicing the loans. In
addition, the Corporation agrees to repurchase loans if it breaches any of the representations and warranties included in the sale
agreement. These representations and warranties are consistent with the GSEs’ selling and servicing guidelines (i.e., ensuring that the
mortgage was properly underwritten according to established guidelines).
For loans pooled into GNMA MBS, the Corporation, as servicer, holds an option to repurchase individual delinquent loans issued
on or after January 1, 2003 when certain delinquency criteria are met. This option gives the Corporation the unilateral ability, but not
the obligation, to repurchase the delinquent loans at par without prior authorization from GNMA. Since the Corporation is considered
to have regained effective control over the loans, it is required to recognize the loans and a corresponding repurchase liability
regardless of its intent to repurchase the loans. As of March 31, 2023 and December 31, 2022, rebooked GNMA delinquent loans that
were included in the residential mortgage loan portfolio amounted to $
7.1
10.4
During the quarters ended March 31, 2023 and 2022, the Corporation repurchased, pursuant to the aforementioned repurchase
option, $
1.5
0.5
is fully guaranteed, and the risk of loss related to the repurchased loans is generally limited to the difference between the delinquent
interest payment advanced to GNMA, which is computed at the loan’s interest rate, and the interest payments reimbursed by FHA,
which are computed at a pre-determined debenture rate. Repurchases of GNMA loans allow the Corporation, among other things, to
maintain acceptable delinquency rates on outstanding GNMA pools and remain as a seller and servicer in good standing with GNMA.
Historically, losses on these repurchases of GNMA delinquent loans have been immaterial and no provision has been made at the time
of sale.
Loan sales to FNMA and FHLMC are without recourse in relation to the future performance of the loans. The Corporation’s risk of
loss with respect to these loans is also minimal as these repurchased loans are generally performing loans with documentation
deficiencies.
No
Corporation purchased certain C&I loan participations in the Florida region totaling $
46.4
36
Loan Portfolio Concentration
The Corporation’s primary lending area is Puerto Rico. The Corporation’s banking subsidiary, FirstBank, also lends in the USVI
and BVI markets and in the United States (principally in the state of Florida). Of the total gross loans held for investment portfolio of
$
11.6
80
% in Puerto Rico,
17
% in the U.S., and
3
% in the
USVI and BVI.
As of March 31, 2023, the Corporation had $
170.9
municipalities and public corporations, compared to $
169.8
$
102.7
property tax revenues, and $
28.0
vast majority of revenues of the municipalities included in the Corporation’s loan portfolio are independent of budgetary subsidies
provided by the Puerto Rico central government. These municipalities are required by law to levy special property taxes in such
amounts as are required to satisfy the payment of all of their respective general obligation bonds and notes. In addition to loans
extended to municipalities, the Corporation’s exposure to the Puerto Rico government as of March 31, 2023 included $
10.2
loans granted to an affiliate of the Puerto
Rico Electric
Power Authority (“PREPA”) and $
30.0
corporations of the Puerto Rico government.
In addition, as of March 31, 2023, the Corporation had $
82.9
by the PRHFA, a government instrumentality that has been designated as a covered entity under PROMESA, compared to $
84.7
million as of December 31, 2022. Residential mortgage loans guaranteed by the PRHFA are secured by the underlying properties and
the guarantees serve to cover shortfalls in collateral in the event of a borrower default.
The Corporation also has credit exposure to USVI government entities. As of March 31, 2023, the Corporation had
$
38.7
loans to USVI government public corporations, compared to $
38.0
were currently performing and up to date on principal and interest payments.
37
Loss Mitigation Program for Borrowers Experiencing Financial Difficulty
The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program. Depending
upon the nature of a borrower’s financial condition, restructurings or loan modifications through this program are provided, as well as
other restructurings of individual C&I, commercial mortgage, construction, and residential mortgage loans. The Corporation may also
modify contractual terms to comply with regulations regarding the treatment of certain bankruptcy filings and discharge situations.
See Note 1 – Basis of Presentation and Significant Accounting Policies, for additional information related to the accounting policies of
loan modifications granted to borrowers experiencing financial difficulty.
The loan modifications granted to borrowers experiencing financial difficulty that are associated to payment delays typically
include the following:
-
Forbearance plans – Payments of either interest and/or principal are deferred for a pre-established period of time, generally not
exceeding six months in any given year. The deferred interest and/or principal is repaid as either a lump sum payment at
maturity date or by extending the loan’s maturity date by the number of forbearance months granted.
-
Payment plans – Borrowers are allowed to pay the regular monthly payment plus the pre-established delinquent amounts
during a period generally not exceeding six months. At the end of the payment plan, the borrower is required to resume making
its regularly scheduled loan payments.
-
Trial modifications – These types of loan modifications are granted for residential mortgage loans. Borrower s continue making
reduced monthly payments during the trial period, which is generally of up to six months. The reduced payments that are made
by the borrower during the trial period will result in a payment delay with respect to the original contractual terms of the loan
since the loan has not yet been contractually modified. After successful completion of the trial period, the mortgage loan is
contractually modified.
Modifications in the form of a reduction in interest rate, term extension, an other-than-insignificant payment delay, or any
combination of these types of loan modifications that have occurred in the current reporting period to a borrower experiencing
financial difficulty are disclosed in the tables below.
The below disclosures relate to loan modifications granted to borrowers experiencing financial difficulty in which there was a
change in the timing and/or amount of contractual cash flows in the form of any of the aforementioned types of modifications,
including restructurings that resulted in a more-than-insignificant payment delay. These disclosures exclude $
0.9
restructured residential mortgage loans that are government -guaranteed (e.g., FHA/VA loans) and were modified during the quarter
ended March 31, 2023.
The following table presents the amortized cost basis as of March 31, 2023 of loans modified to borrowers experiencing financial
difficulty during the quarter ended March 31, 2023, by portfolio classes and type of modification granted, and the percentage of these
modified loans relative to the total period-end amortized cost basis of receivables in the portfolio class:
Quarter Ended March 31, 2023
Payment Delay Only
Forbearance
Payment
Plan
Trial
Modification
Interest
Rate
Reduction
Term
Extension
Combination of
Interest Rate
Reduction and
Term Extension
Forgiveness
of principal
and/or
interest
Other
Total
Percentage of
Total by
Portfolio
Classes
(In thousands)
Conventional residential mortgage loans
$
-
$
-
$
332
$
-
$
433
$
115
$
-
$
-
$
880
0.03%
Construction loans
-
-
-
-
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
-
-
-
-
-
C&I loans
-
-
-
-
-
-
-
40
(1)
40
0.00%
Consumer loans:
Auto loans
-
-
-
-
89
38
-
584
(1)
711
0.04%
Personal loans
-
-
-
-
28
14
-
-
42
0.01%
Credit cards
-
-
-
289
(2)
-
-
-
-
289
0.09%
Other consumer loans
-
-
-
-
132
60
-
26
(1)
218
0.15%
$
-
$
-
$
332
$
289
$
682
$
227
$
-
$
650
$
2,180
(1)
Modification consists of court mandated reduction to 0% interest rate for remaining loan term to borrowers in bankruptcy proceedings unless dismissal occurs.
(2)
Modification consists of reduction in interest rate and revocation of revolving line privileges.
38
The following table presents the financial effects of the modifications granted to borrowers experiencing financial difficulty
during the quarter ended March 31, 2023, by portfolio classes, other than those associated to payment delay. The qualitative financial
effects of the modifications associated to payment delay were discussed above, and as such, were excluded from the table below:
Quarter Ended March 31, 2023
Combination of Interest Rate Reduction
and Term Extension
Weighted-Average
Interest Rate
Reduction (%)
Weighted-Average
Term Extension (in
months)
Weighted-Average
Interest Rate
Reduction (%)
Weighted-Average
Term Extension (in
months)
Weighted-Average
Forgiveness of
Principal and/or
Interest
(In thousands)
Conventional residential mortgage loans
-
98
2.11%
141
$
-
Construction loans
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
C&I loans
-
-
-
-
-
Consumer loans:
Auto loans
-
22
2.88%
28
-
Personal loans
-
30
3.36%
12
-
Credit cards
16.04%
-
-
-
-
Other consumer loans
-
27
1.96%
26
-
The following table presents the performance of loans modified during the quarter ended March 31, 2023 that were granted to
borrowers experiencing financial difficulty, by portfolio classes:
Quarter Ended March 31, 2023
30-59
60-89
90+
Total
Delinquency
Current
Total
(In thousands)
Conventional residential mortgage loans
$
-
$
-
$
-
$
-
$
880
$
880
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
-
C&I loans
-
-
-
-
40
40
Consumer loans:
Auto loans
44
138
-
182
529
711
Personal loans
-
-
-
-
42
42
Credit cards
103
89
-
192
97
289
Other consumer loans
-
-
-
-
218
218
$
147
$
227
$
-
$
374
$
1,806
$
2,180
There were no loans modified to borrowers experiencing financial difficulty on or after January 1, 2023, which had a payment
default (failure by the borrower to make payments of either principal, interest, or both for a period of 90 days or more) during the
quarter ended March 31, 2023.
39
Troubled Debt Restructuring (“TDR”) Disclosures Prior to Adoption of ASU 2022-02
Prior to the adoption of ASU 2022-02, a restructuring of a loan constituted a TDR if the creditor, for economic or legal reason
related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. See Note 1
“Nature of Business and Summary of Significant Accounting Policies” and Note 4 “Loans Held for Investment” to the Consolidated
Financial Statements in the 2022 Annual Report on Form 10-K for additional discussion of TDRs. The following tables present TDR
loans completed during the quarter ended March 31, 2022:
Quarter Ended March 31, 2022
Interest rate
below market
Maturity or
term extension
Combination of
reduction in
interest rate and
extension of
maturity
Forgiveness of
principal and/or
interest
Other
(1)
Total
(In thousands)
Conventional residential mortgage loans
$
215
$
731
$
190
$
-
$
1,857
$
2,993
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
-
C&I loans
-
-
-
-
5
5
Consumer loans:
Auto loans
792
54
147
-
-
993
Finance leases
-
246
-
-
18
264
Personal loans
-
60
18
-
-
78
Credit cards
(2)
189
-
-
-
-
189
Other consumer loans
33
106
-
9
-
148
Total TDRs
$
1,229
$
1,197
$
355
$
9
$
1,880
$
4,670
(1)
Other concessions granted by the Corporation include payment plans under judicial stipulation or loss mitigation programs, or a combination of two or more of the concessions listed in
the table. Amounts included in Other that represent a combination of concessions are excluded from the amounts reported in the column for such individual concessions.
(2)
Concession consists of reduction in interest rate and revocation of revolving line privileges.
Quarter Ended March 31, 2022
Number of contracts
Pre-modification Amortized
Cost
Post-modification Amortized
Cost
(Dollars in thousands)
Conventional residential mortgage loans
23
$
2,996
$
2,993
Construction loans
-
-
-
Commercial mortgage loans
-
-
-
C&I loans
1
5
5
Consumer loans:
51
995
993
13
264
264
5
78
78
44
189
189
27
146
148
164
$
4,673
$
4,670
Loan modifications considered TDR loans that defaulted (failure by the borrower to make payments of either principal, interest, or
both for a period of 90 days or more) during the quarter ended March 31, 2022, and had become TDR loans during the 12-months
preceding the default date, were as follows:
Quarter Ended March 31, 2022
Number of contracts
Amortized Cost
(Dollars in thousands)
Conventional residential mortgage loans
3
$
389
Construction loans
-
-
Commercial mortgage loans
-
-
C&I loans
-
-
Consumer loans:
24
522
1
16
-
-
11
79
2
11
41
$
1,017
40
NOTE 4 – ALLOWANCE FOR CREDIT LOSSES FOR LOANS AND FINANCE LEASES
The following tables present the activity in the ACL on loans and finance leases by portfolio segment for the indicated periods:
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Quarter Ended March 31, 2023
(In thousands)
ACL:
Beginning balance
$
62,760
$
2,308
$
35,064
$
32,906
$
127,426
$
260,464
Impact of adoption of ASU 2022-02
2,056
-
-
7
53
2,116
Provision for credit losses - expense (benefit)
73
860
1,246
(1,650)
15,727
16,256
Charge-offs
(983)
-
(18)
(118)
(16,798)
(17,917)
Recoveries
497
63
168
90
3,830
4,648
Ending balance
$
64,403
$
3,231
$
36,460
$
31,235
$
130,238
$
265,567
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Quarter Ended March 31, 2022
(In thousands)
ACL:
Beginning balance
$
74,837
$
4,048
$
52,771
$
34,284
$
103,090
$
269,030
Provision for credit losses - (benefit) expense
(4,871)
(2,214)
(22,640)
1,755
10,981
(16,989)
Charge-offs
(2,528)
(44)
(37)
(290)
(9,816)
(12,715)
Recoveries
1,382
52
44
1,035
3,608
6,121
Ending balance
$
68,820
$
1,842
$
30,138
$
36,784
$
107,863
$
245,447
The Corporation estimates the ACL following the methodologies described in Note 1 – Nature of Business and Summary of
Significant Accounting Policies, to the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K,
for each portfolio segment.
The Corporation applie s probability weights to the baseline and alternative downside economic scenarios to estimate the ACL with
the baseline scenario carrying the highest weight. The economic scenarios used in the ACL determination contained assumptions
related to economic uncertainties associated with geopolitical instability, high inflation levels, and the expected path of interest rate
increases by the FED.
As of March 31, 2023, the ACL for loans and finance leases was $
265.6
5.1
260.5
of December 31, 2022. The ACL for commercial and construction loans remained relatively flat when compared to the previous
quarter as a result of the following offsetting factors: reserve increases of $
5.0
loan in the Florida region in the power generation industry; and $
1.1
of certain forecasted macroeconomic variables, such as the commercial real estate price index (“CRE price index”); partially offset by
reserve decreases of $
6.1
of a $
24.3
increased by $
2.9
historical charge-off levels. The ACL for residential mortgage loans increased by $
1.6
2.1
increase in the ACL, due to the adoption of ASU 2022-02, for which the Corporation elected to discontinue the use of a discounted
cash flow methodology for restructured accruing loans. This adjustment had a corresponding decrease, net of applicable taxes, in
beginning retained earnings as of January 1, 2023. See Note 1
– Basis of Presentation and Significant Accounting Policies for
information related to the adoption of ASU 2022-02 during the first quarter of 2023.
Total net charge-offs increased by $
6.7
13.3
in 2022. The variance consisted of a $
6.8
portfolio classes, and a $
0.6
$
0.7
41
The tables below present the ACL related to loans and finance leases and the carrying values of loans by portfolio segment as of
March 31, 2023 and December 31, 2022:
As of March 31, 2023
Residential Mortgage
Loans
Construction
Loans
Commercial Mortgage
Loans
Commercial and
Industrial Loans
Consumer Loans
Total
(Dollars in thousands)
Total loans held for investment:
$
2,811,528
$
143,664
$
2,353,659
$
2,862,189
$
3,406,945
$
11,577,985
64,403
3,231
36,460
31,235
130,238
265,567
2.29
%
2.25
%
1.55
%
1.09
%
3.82
%
2.29
%
As of December 31, 2022
Residential Mortgage
Loans
Construction
Loans
Commercial Mortgage
Loans
Commercial and
Industrial Loans
Consumer Loans
Total
(Dollars in thousands)
Total loans held for investment:
$
2,847,290
$
132,953
$
2,358,851
$
2,886,263
$
3,327,468
$
11,552,825
62,760
2,308
35,064
32,906
127,426
260,464
2.20
%
1.74
%
1.49
%
1.14
%
3.83
%
2.25
%
In addition, the Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to
credit risk via a contractual obligation to extend credit, such as unfunded loan commitments and standby letters of credit for
commercial and construction loans, unless the obligation is unconditionally cancellable by the Corporation. See Note 22 – Regulatory
Matters, Commitments, and Contingencies for information on off -balance sheet exposures as of March 31, 2023 and December 31,
2022. The Corporation estimates the ACL for these off-balance sheet exposures following the methodology described in Note 1 –
Nature of Business and Summary of Accounting Policies, to the audited consolidated financial statements included in the 2022 Annual
Report on Form 10-K. As of March 31, 2023, the ACL for off-balance sheet credit exposures decreased to $
4.2
4.3
million as of December 31, 2022.
The following table presents the activity in the ACL for unfunded loan commitments and standby letters of credit for the quarters
ended March 31, 2023 and 2022:
Quarter Ended March 31,
2023
2022
(In thousands)
Beginning Balance
$
4,273
$
1,537
Provision for credit losses - (benefit)
(105)
(178)
$
4,168
$
1,359
42
NOTE 5
–
OTHER REAL ESTATE OWNED
The following table presents the OREO inventory as of the indicated dates:
March 31, 2023
December 31, 2022
(In thousands)
OREO balances, carrying value:
Residential
(1)
$
24,984
$
24,025
Commercial
6,114
5,852
Construction
1,764
1,764
Total
$
32,862
$
31,641
(1)
Excludes $
22.6
23.5
Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” and are presented as a receivable as part of other assets in the consolidated statements of financial
condition.
See Note 18 - Fair Value for information on write-downs recorded on OREO properties during the quarters ended March 31, 2023
and 2022.
43
NOTE 6 – GOODWILL AND OTHER INTANGIBLES
Goodwill
Goodwill as of each of March 31, 2023 and December 31, 2022 amounted to $
38.6
The Corporation’s policy is to assess
goodwill and other intangibles for impairment on an annual basis during the fourth quarter of each year, and more frequently if events
or circumstances lead management to believe that the values of goodwill or other intangibles may be impaired. During the fourth
quarter of 2022, management performed a qualitative analysis over the carrying amount of each relevant reporting units’ goodwill and
concluded that it is more-likely-than-not that the fair value of the reporting units exceeded their carrying value. This assessment
involved identifying the inputs and assumptions that most affect fair value, including evaluating significant and relevant events
impacting each reporting entity, and evaluating such factors to determine if a positive assertion can be made that it is more-likely-
than-not that the fair value of the reporting units exceeded their carrying amount. As of December 31, 2022, the Corporation
concluded that it is more-likely-than-not that the fair value of the reporting units exceeded their carrying value. The Corporation
determined that there have been no significant events since the last annual assessment that could indicate potential goodwill
impairment on reporting units for which the goodwill is allocated. As a result, no impairment charges for goodwill were recorded
during the quarter ended March 31, 2023.
There were
no
Other Intangible Assets
The following table presents the gross amount and accumulated amortization of the Corporation’s intangible assets subject to
amortization as of the indicated dates:
As of
As of
March 31,
December 31,
2023
2022
(Dollars in thousands)
Core deposit intangible:
Gross amount
$
87,544
$
87,544
Accumulated amortization
(68,557)
(66,644)
Net carrying amount
$
18,987
$
20,900
Remaining amortization period (in years)
6.8
7.0
Purchased credit card relationship intangible:
Gross amount
$
3,800
$
3,800
Accumulated amortization
(3,714)
(3,595)
Net carrying amount
$
86
$
205
Remaining amortization period (in years)
0.4
0.7
Insurance customer relationship intangible:
Gross amount
$
-
$
1,067
Accumulated amortization
-
(1,054)
Net carrying amount
$
-
$
13
Remaining amortization period (in years)
-
0.1
During the quarters ended March 31, 2023 and 2022, the Corporation recognized $
2.0
2.3
amortization expense on its other intangibles subject to amortization.
44
The Corporation amortizes core deposit intangibles and customer relationship intangible based on the projected useful lives of the
related deposits in the case of core deposit intangibles, and over the projected useful lives of the related client relationships in the case
of the customer relationship intangible. The Corporation analyzes core deposit intangibles and the customer relationship intangible
annually for impairment, or sooner if events and circumstances indicate possible impairment. Factors that may suggest impairment
include customer attrition and run-off. Management is unaware of any events and/or circumstances that would indicate a possible
impairment to the core deposit intangibles or the customer relationship intangible as of March 31, 2023.
The estimated aggregate annual amortization expense related to the intangible assets subject to amortization for future periods was
as follows as of March 31, 2023:
(In thousands)
2023
$
5,691
2024
6,416
2025
3,509
2026
872
2027
872
2028 and after
1,713
NOTE 7 – NON-CONSOLIDATED VARIABLE INTEREST ENTITIES (“VIEs”) AND SERVICING ASSETS
The Corporation transfers residential mortgage loans in sale or securitization transactions in which it has continuing involvement,
including servicing responsibilities and guarantee arrangements. All such transfers have been accounted for as sales as required by
applicable accounting guidance.
When evaluating the need to consolidate counterparties to which the Corporation has transferred assets, or with which the
Corporation has entered into other transactions, the Corporation first determines if the counterparty is an entity for which a variable
interest exists. If no scope exception is applicable and a variable interest exists, the Corporation then evaluates whether it is the
primary beneficiary of the VIE and whether the entity should be consolidated or not.
Below is a summary of transactions with VIEs for which the Corporation has retained some level of continuing involvement:
Trust-Preferred Securities (“TRuPs”)
In April 2004, FBP Statutory Trust I, a financing trust that is wholly owned by the Corporation, sold to institutional investors $
100
million of its variable -rate TRuPs. FBP Statutory Trust I used the proceeds of the issuance, together with the proceeds of the purchase
by the Corporation of $
3.1
103.1
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
Statutory Trust II used the proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $
3.9
FBP Statutory Trust II variable-rate common securities, to purchase $
128.9
Junior Subordinated Deferrable Debentures. The debentures, net of related issuance costs, are presented in the Corporation’s
consolidated statements of financial condition as other long-term borrowings. The variable-rate TRuPs are fully and unconditionally
guaranteed by the Corporation.
The Junior Subordinated Deferrable Debentures mature on June 17, 2034, and September 20, 2034,
respectively; however, under certain circumstances, the maturity of Junior Subordinated Deferrable Debentures may be shortened
(such shortening would result in a mandatory redemption of the variable-rate TRuPs).
31, 2022, these Junior Subordinated Deferrable Debentures amounted to $
183.8
Under the indentures, the Corporation has the right, from time to time, and without causing an event of default, to defer payments
of interest on the Junior Subordinated Deferrable Debentures by extending the interest payment period at any time and from time to
time during the term of the subordinated debentures for up to twenty consecutive quarterly periods. As of March 31, 2023, the
Corporation was current on all interest payments due on its subordinated debt.
45
Private Label MBS
During 2004 and 2005, an unaffiliated party, referred to in this subsection as the seller, established a series of statutory trusts to
effect the securitization of mortgage loans and the sale of trust certificates (“private label MBS”). The seller initially provided the
servicing for a fee, which is senior to the obligations to pay private label MBS holders. The seller then entered into a sales agreement
through which it sold and issued the private label MBS in favor of the Corporation’s banking subsidiary, FirstBank. Currently, the
Bank is the sole owner of these private label MBS; the servicing of the underlying residential mortgages that generate the principal
and interest cash flows is performed by another third party, which receives a servicing fee. These private label MBS are variable-rate
securities indexed to
3-month LIBOR
LIBOR Act and Regulation ZZ, the LIBOR reference of these private label MBS shall be replaced by the 3-month CME Term SOFR
rate plus a spread adjustment of 0.26161% on the first reset date after USD LIBOR ceases publication in June 2023. The principal
payments from the underlying loans are remitted to a paying agent (servicer), who then remits interest to the Bank. Interest income is
shared to a certain extent with the FDIC, which has an interest only strip (“IO”) tied to the cash flows of the underlying loans and is
entitled to receive the excess of the interest income less a servicing fee over the variable rate income that the Bank earns on the
securities. This IO is limited to the weighted-average coupon on the mortgage loans. The FDIC became the owner of the IO upon its
intervention of the seller, a failed financial institution. No recourse agreement exists, and the Bank, as the sole holder of the securities,
absorbs all risks from losses on non-accruing loans and repossessed collateral. As of March 31, 2023, the amortized cost and fair value
of these private label MBS amounted to $
7.7
5.4
7.25
%, which is
included as part of the Corporation’s available-for-sale debt securities portfolio. As described in Note 2 – Debt Securities, the ACL on
these private label MBS amounted to $
0.1
Servicing Assets (MSRs)
The Corporation typically transfers first lien residential mortgage loans in conjunction with GNMA securitization transactions in
which the loans are exchanged for cash or securities that are readily redeemed for cash proceeds and servicing rights. The securities
issued through these transactions are guaranteed by GNMA and, under seller/servicer agreements, the Corporation is required to
service the loans in accordance with the issuers’ servicing guidelines and standards. As of March 31, 2023, the Corporation serviced
loans securitized through GNMA with a principal balance of $
2.1
FNMA or FHLMC with servicing retained. The Corporation recognizes as separate assets the rights to service loans for others,
whether those servicing assets are originated or purchased. MSRs are included as part of other assets in the consolidated statements of
financial condition.
The changes in MSRs are shown below for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Balance at beginning of year
$
29,037
$
30,986
Capitalization of servicing assets
532
1,130
Amortization
(1,128)
(1,330)
Temporary impairment recoveries
4
55
Other
(1)
(14)
(88)
Balance at end of period
$
28,431
$
30,753
(1)
Mainly represents adjustments related to the repurchase of loans serviced for others.
Impairment charges are recognized through a valuation allowance for each individual stratum of servicing assets. The valuation
allowance is adjusted to reflect the amount, if any, by which the cost basis of the servicing asset for a given stratum of loans being
serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized.
46
Changes in the impairment allowance were as follows for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Balance at beginning of year
$
12
$
78
Recoveries
(4)
(55)
$
8
$
23
The components of net servicing income, included as part of mortgage banking activities in the consolidated statements of income,
are shown below for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Servicing fees
$
2,718
$
2,819
Late charges and prepayment penalties
199
194
Adjustment for loans repurchased
(14)
(88)
2,903
2,925
Amortization and impairment of servicing assets
(1,124)
(1,275)
$
1,779
$
1,650
The Corporation’s MSRs are subject to prepayment and interest rate risks. Key economic assumptions used in determining the fair
value at the time of sale of the related mortgages for the indicated periods ranged as follows:
Weighted Average
Maximum
Minimum
Quarter Ended March 31, 2023
Constant prepayment rate:
6.7
%
11.6
%
4.8
%
7.7
%
16.0
%
3.8
%
5.7
%
7.0
%
2.1
%
Discount rate:
11.5
%
11.5
%
11.5
%
9.5
%
9.5
%
9.5
%
12.8
%
14.0
%
11.5
%
Quarter Ended March 31, 2022
Constant prepayment rate:
6.7
%
18.3
%
4.8
%
6.6
%
18.4
%
3.4
%
6.6
%
21.9
%
4.9
%
Discount rate:
12.0
%
12.0
%
12.0
%
10.0
%
10.0
%
10.0
%
12.3
%
14.5
%
12.0
%
47
The weighted averages of the key economic assumptions that the Corporation used in its valuation model and the sensitivity of the
current fair value to immediate
10
% and
20
% adverse changes in those assumptions for mortgage loans as of March 31, 2023 and
December 31, 2022 were as follows:
March 31,
December 31,
2023
2022
(In thousands)
Carrying amount of servicing assets
$
28,431
$
29,037
Fair value
$
45,270
$
44,710
Weighted-average expected life (in years)
7.80
7.80
Constant prepayment rate (weighted-average annual rate)
6.34
%
6.40
%
$
1,040
$
1,048
$
2,036
$
2,054
Discount rate (weighted-average annual rate)
10.70
%
10.69
%
$
1,960
$
1,925
$
3,770
$
3,704
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10%
variation in assumptions generally cannot be extrapolated because the relationship between the change in assumption and the change
in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSR is
calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example,
increases in market interest rates may result in lower prepayments), which may magnify or counteract the sensitivities
.
48
NOTE 8 – DEPOSITS
The following table summarizes deposit balances as of the indicated dates:
March 31, 2023
December 31, 2022
(In thousands)
Type of account and interest rate:
Non-interest-bearing deposit accounts
$
6,024,304
$
6,112,884
Interest-bearing saving accounts
3,808,182
3,902,888
Interest-bearing checking accounts
3,547,963
3,770,993
Certificates of deposit (“CDs”)
2,418,611
2,250,876
Brokered CDs
252,905
105,826
$
16,051,965
$
16,143,467
The following table presents the contractual maturities of CDs, including brokered CDs, as of March 31, 2023:
Total
(In thousands)
Three months or less
$
499,307
Over three months to six months
361,274
Over six months to one year
732,933
Over one year to two years
751,913
Over two years to three years
155,590
Over three years to four years
46,748
Over four years to five years
117,009
Over five years
6,742
$
2,671,516
The following were the components of interest expense on deposits for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Interest expense on deposits
$
29,924
$
7,817
Accretion of premiums from acquisitions
(83)
(200)
Amortization of broker placement fees
44
35
$
29,885
$
7,652
Total U.S. time deposits with balances of more than $250,000 amounted to $
1.1
1.0
December 31, 2022, respectively. This amount does not include brokered CDs that are generally participated out by brokers in shares
of less than the FDIC insurance limit. As of March 31, 2023 and December 31, 2022, unamortized broker placement fees amounted to
$
0.4
0.3
method.
49
NOTE 9 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (REPURCHASE AGREEMENTS)
Repurchase agreements as of the indicated dates consisted of the following:
March 31, 2023
December 31, 2022
(In thousands)
Short-term Fixed-rate repurchase agreements
(1)
$
172,982
$
75,133
(1)
Weighted-average interest rate of
5.08
% and
4.55
% as of March 31, 2023 and December 31, 2022.
The $
75.1
of 2023. In addition, the Corporation added $
173.0
taken by management in light of recent instability in the banking sector.
Repurchase agreements mature as follows as of the indicated date:
March 31, 2023
(In thousands)
Within one month
$
172,982
As of March 31, 2023 and December 31, 2022, the securities underlying such agreements were delivered to the dealers with which
the repurchase agreements were transacted. In accordance with the master agreements, in the event of default, repurchase agreements
have a right of set-off against the other party for amounts owed under the related agreement and any other amount or obligation owed
with respect to any other agreement or transaction between them. As of March 31, 2023 and December 31, 2022, repurchase
agreements were fully collateralized and not offset in the consolidated statements of financial condition.
Repurchase agreements as of March 31, 2023, grouped by counterparty, were as follows:
Weighted-Average
Counterparty
Amount
Maturity (In Months)
(Dollars in thousands)
JP Morgan Chase
$
172,982
1
50
NOTE 10 – ADVANCES FROM THE FEDERAL HOME LOAN BANK (“FHLB
”)
The following is a summary of the advances from the FHLB as of the indicated dates:
March 31,
December 31,
2023
2022
(In thousands)
Short-term
Fixed
-rate advances from the FHLB
(1)
$
425,000
$
475,000
Long-term
Fixed
-rate advances from the FHLB
(2)
500,000
200,000
$
925,000
$
675,000
(1)
Weighted-average interest rate of
5.04
% and
4.56
% as of March 31, 2023 and December 31, 2022, respectively.
(2)
Weighted-average interest rate of
4.45
% and
4.25
% as of March 31, 2023 and December 31, 2022, respectively.
Advances from the FHLB mature as follows as of the indicated date:
March 31, 2023
(In thousands)
Within one month
$
425,000
Over one to five years
500,000
$
925,000
During the first quarter of 2023, the Corporation added $
425.0
5.04
%
and $
300.0
4.59
%, and repaid upon maturity $
475.0
FHLB advances at an average cost of
4.56
%.
NOTE 11 – OTHER LONG-TERM BORROWINGS
Junior Subordinated Debentures
Junior subordinated debentures, as of the indicated dates, consisted of:
March 31,
December 31,
(In thousands)
2023
2022
Floating rate junior subordinated debentures (FBP Statutory Trust I)
(1)
(3)
(4)
$
65,205
$
65,205
Floating rate junior subordinated debentures (FBP Statutory Trust II)
(2) (3)
(4)
118,557
118,557
$
183,762
$
183,762
(1)
Amount represents junior subordinated interest-bearing debentures due in 2034 with a floating interest rate of
2.75
% over
3-month LIBOR
7.66
% as of March 31, 2023 and
7.49
% as of
December 31, 2022).
(2)
Amount represents junior subordinated interest-bearing debentures due in 2034 with a floating interest rate of
2.50
% over
3-month LIBOR
7.46
% as of March 31, 2023 and
7.25
% as of
December 31, 2022).
(3)
Following the provisions of the LIBOR Act and Regulation ZZ, the LIBOR reference on these contracts will automatically transition by operation of law to three-month CME Term
SOFR, plus a spread adjustment of 0.26161% on the first reset date after USD LIBOR ceases publication in June 2023.
(4)
See Note 7 - Non-Consolidated Variable Interest Entities ("VIEs") and Servicing Assets, for additional information on the nature and terms of these debentures.
51
NOTE 12 – EARNINGS PER COMMON
.
SHARE
The calculations of earnings per common share for the quarters ended March 31, 2023 and 2022 are as follows:
Quarter Ended March 31,
2023
2022
(In thousands, except per share information)
Net income attributable to common stockholders
$
70,698
$
82,600
Weighted-Average Shares:
180,215
198,130
1,021
1,407
181,236
199,537
Earnings per common share:
Basic
$
0.39
$
0.42
Diluted
$
0.39
$
0.41
Earnings per common share is computed by dividing net income attributable to common stockholders by the weighted-average
number of common shares issued and outstanding. Net income attributable to common stockholders represents net income adjusted for
any preferred stock dividends, including any dividends declared but not yet paid, and any cumulative dividends related to the current
dividend period that have not been declared as of the end of the period. Basic weighted-average common shares outstanding exclude
unvested shares of restricted stock that do not contain non-forfeitable dividend rights.
Potential dilutive common shares consist of unvested shares of restricted stock and performance units (if any of the performance
conditions are met as of the end of the reporting period), that do not contain non-forfeitable dividend or dividend equivalent rights
using the treasury stock method. This method assumes that proceeds equal to the amount of compensation cost attributable to future
services is used to repurchase shares on the open market at the average market price for the period. The difference between the
number of potential dilutive shares issued and the shares purchased is added as incremental shares to the actual number of shares
outstanding to compute diluted earnings per share. Unvested shares of restricted stock outstanding during the period that result in
lower potentially dilutive shares issued than shares purchased under the treasury stock method are not included in the computation of
dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. There were
no
shares of common stock during the quarters ended March 31, 2023 and 2022.
52
NOTE 13 – STOCK-BASED
.
COMPENSATION
The First Bancorp Omnibus Incentive Plan (the “Omnibus Plan”), which is effective until May 24, 2026, provides for equity-based
and non equity-based compensation incentives (the “awards”). The Omnibus Plan authorizes the issuance of up to
14,169,807
of common stock, subject to adjustments for stock splits, reorganizations and other similar events. As of March 31, 2023, there were
3,142,813
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
50
% vest on
the
three-year
one-year
495,891
with restricted stock awards, which were reissued from treasury shares.
The following table summarizes the restricted stock activity under the Omnibus Plan during the quarters ended March 31, 2023
and 2022:
Quarter ended
Quarter ended
March 31, 2023
March 31, 2022
Number of
Weighted-
Number of
Weighted-
shares of
Average
shares of
Average
restricted
Grant Date
restricted
Grant Date
stock
stock
Unvested shares outstanding at beginning of year
938,491
$
9.14
1,148,775
$
6.61
Granted
(1)
495,891
11.99
299,440
13.15
Forfeited
(25,415)
9.98
(3,092)
6.69
Vested
(481,536)
5.93
(487,198)
5.72
Unvested shares outstanding at end of period
927,431
$
12.32
957,925
$
9.10
(1)
For the quarter ended March 31, 2023, includes
3,502
492,389
33,718
3,048
stock awarded to independent directors and
296,392
6,084
charged to earnings as of the grant date.
For the quarters ended March 31, 2023 and 2022, the Corporation recognized $
1.6
0.9
based compensation expense related to restricted stock awards. As of March 31, 2023, there was $
7.8
compensation cost related to unvested shares of restricted stock that the Corporation expects to recognize over a weighted average
period of
2.1
53
Performance Units
Under the Omnibus Plan, the Corporation may award performance units to participants, with each unit representing the value of one
share of the Corporation’s common stock.
These awards, which are granted to executives, do not contain non-forfeitable rights to
dividend equivalent amounts and can only be settled in shares of the Corporation’s common stock.
On March 16, 2023, the Corporation granted 216,876 performance units to executives. Performance units granted on or after March
16, 2023 will vest on the third anniversary of the effective date of the award based on actual achievement of two performance metrics
weighted equally: relative total shareholder return (“Relative TSR”), compared to companies that comprise the KBW Nasdaq
Regional Banking Index, and the achievement of a tangible book value per share (“TBVPS”) goal, which is measured based upon the
growth in the tangible book value during the performance cycle, adjusted for certain allowable non-recurring transactions. The
participant may earn 50% of their target opportunity for threshold-level performance and up to 150% of their target opportunity for
maximum-level performance, based on the achievement of the performance goals during a three-year performance cycle. Amounts
between threshold, target and maximum performance will vest on a proportional amount. Performance units granted prior to March
16, 2023 vest subject only to achievement of a TBVPS goal. In addition, the participant may earn only up to 100% of their target
opportunity.
The following table summarizes the performance units activity under the Omnibus Plan during the quarters ended March 31, 2023
and 2022:
Quarter ended
Quarter ended
March 31, 2023
March 31, 2022
Number
Weighted -
Number
Weighted -
of
Average
of
Average
Performance
Grant Date
Performance
Grant Date
Units
Fair Value
Units
Fair Value
Performance units at beginning of year
791,923
7.36
814,899
7.06
Additions
(1)
216,876
12.24
166,669
13.15
Vested
(2)
(474,538)
4.08
(189,645)
11.16
Performance units at end of period
534,261
12.25
791,923
7.36
(1)
Units granted during the quarter ended March 31, 2023 are based on the achievement of the Relative TSR and TBVPS performance goals during a three-year performance cycle beginning
January 1, 2023 and ending on December 31, 2025. Units granted during the quarter ended March 31, 2022 are based on the TBVPS achievement of the performance goal during a three-
year performance cycle beginning January 1, 2022 and ending on December 31, 2024.
(2)
Units vested during the quarter ended March 31, 2023 are related to performance units granted in 2020 that met the pre-established target and were settled with shares of common stock
reissued from treasury shares. Units vested during the quarter ended March 31, 2022 are related to performance units granted in 2019 that met the pre-established target and were settled
with shares of common stock reissued from treasury shares.
The fair value of the performance units awarded during the quarter ended March 31, 2023 and 2022, that was based on the TBVPS
goal component, was calculated based on the market price of the Corporation’s common stock on the respective date of the grant and
assuming attainment of 100% of target opportunity. As of March 31, 2023, there have been no changes on management’s assessment
of the probability that the pre-established TBVPS goal will be achieved; as such, no cumulative adjustment to compensation expense
has been recognized. The fair value of the performance units awarded during the quarter ended March 31, 2023, that was based on the
Relative TSR component, was calculated using a Monte Carlo simulation. Since the Relative TSR component is considered a market
condition, the fair value of the portion of the award based on Relative TSR is not revised subsequent to grant date based on actual
performance.
For the quarters ended March 31, 2023 and 2022, the Corporation recognized $
0.5
0.3
based compensation expense related to performance units. As of March 31, 2023, there was $
4.7
compensation cost related to unvested performance units that the Corporation expects to recognize over a weighted average period of
2.4
54
The following table summarizes the valuation assumptions used to calculate the fair value of the Relative TSR component of the
performance units granted under the Omnibus Plan during the quarter ended March 31, 2023:
Quarter Ended
March 31, 2023
Risk-free interest rate
(1)
3.98
%
Correlation coefficient
77.16
Expected dividend yield
(2)
-
Expected volatility
(3)
41.37
Expected life (in years)
2.79
(1)
Based on the yield on zero-coupon U.S. Treasury STRIPS as of the grant date.
(2)
Assumes that dividends are reinvested at each ex-dividend date.
(3)
Calculated based on the historical volatility of each company's stock price with a look-back period equal to the simulation term using daily stock prices.
Shares withheld
During the first quarter of 2023, the Corporation withheld
287,835
201,930
stock that vested during such period to cover the officers’ payroll and income tax withholding liabilities; these shares are held as
treasury shares. The Corporation paid in cash any fractional share of salary stock to which an officer was entitled. In the consolidated
financial statements, the Corporation presents shares withheld for tax purposes as common stock repurchases.
55
NOTE 14 – STOCKHOLDERS’ EQUITY
Stock Repurchase Programs
On April 27, 2022, the Corporation announced that its Board approved a stock repurchase program, under which the Corporation
may repurchase up to $
350
under the program may be executed through open market purchases, accelerated share repurchases and/or privately negotiated
transactions or plans, including plans complying with Rule 10b5-1 under the Exchange Act. The Corporation’s common stock
repurchase program is subject to various factors, including the Corporation’s capital position, liquidity, financial performance and
alternative uses of capital, stock trading price, and general market conditions. The repurchase program may be modified, suspended,
or terminated at any time at the Corporation’s discretion. The program does not obligate the Corporation to acquire any specific
number of shares and does not have an expiration date. During the first quarter of 2023, the Corporation repurchased
3,577,540
of common stock through open market transactions at an average purchase price of $
13.98
$
50
75
stock. Considering the industry-wide uncertain environment, the Corporation decided to pause share buybacks during the second
quarter of 2023 and it expects to resume shares repurchases during the third quarter of 2023 subject to factors mentioned above.
300
program approved by the Board on April 26, 2021 by purchasing through open market transactions
3,409,697
at an average price of $
14.66
50
Common Stock
The following table shows the change in shares of common stock outstanding for the quarters ended March 31, 2023, and 2022:
Total Number of Shares
Quarter Ended March 31,
2023
2022
Common stock outstanding, beginning balance
182,709,059
201,826,505
Common stock repurchased
(1)
(3,865,375)
(3,611,627)
Common stock reissued under stock-based compensation plan
970,429
489,085
Restricted stock forfeited
(25,415)
(3,092)
Common stock outstanding, ending balances
179,788,698
198,700,871
For the quarters ended March 31, 2023 and 2022 includes
287,835
201,930
For the quarters ended March 31, 2023 and 2022, total cash dividends declared on shares of common stock amounted to $
25.4
million and $
19.9
April 27, 2023
, the Corporation announced that its Board had declared a quarterly cash
dividend of $
0.14
June 9, 2023
May 24, 2023
. The
Corporation intends to continue to pay quarterly dividends on common stock. However, the Corporation’s common stock dividends,
including the declaration, timing, and amount, remain subject to consideration and approval by the Corporation’s Board Directors at
the relevant times.
56
Preferred Stock
The Corporation has
50,000,000
1.00
, redeemable at the Corporation’s
option, subject to certain terms. This stock may be issued in series and the shares of each series have such rights and preferences as are
fixed by the Board when authorizing the issuance of that particular series.
No
31, 2023 and December 31, 2022.
Treasury Stock
The following table shows the change in shares of treasury stock for the quarters ended March 31, 2023 and 2022.
Total Number of Shares
Quarter Ended March 31,
2023
2022
Treasury stock, beginning balance
40,954,057
21,836,611
Common stock repurchased
(1)
3,865,375
3,611,627
Common stock reissued under stock-based compensation plan
(970,429)
(489,085)
Restricted stock forfeited
25,415
3,092
Treasury stock, ending balances
43,874,418
24,962,245
(1)
For the quarters ended March 31, 2023 and 2022 includes
287,835
201,930
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.
retained earnings in the Corporation’s consolidated statements of financial condition, amounted to $
168.5
31, 2023 and December 31, 2022.
no
57
NOTE 15 – ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive loss for the quarters ended March 31, 2023 and
2022:
Changes in Accumulated Other Comprehensive Loss by Component
(1)
Quarter ended March 31,
2023
2022
(In thousands)
Unrealized net holding losses on available-for-sale debt securities:
Beginning balance
$
(805,972)
$
(87,390)
87,228
(331,834)
Ending balance
$
(718,744)
$
(419,224)
Adjustment of pension and postretirement benefit plans:
Beginning balance
$
1,194
$
3,391
-
-
Ending balance
$
1,194
$
3,391
____________________
(1) All amounts presented are net of tax.
NOTE 16 – EMPLOYEE BENEFIT PLANS
The Corporation maintains two frozen qualified noncontributory defined benefit pension plans (the “Pension Plans”), and a related
complementary post-retirement benefit plan (the “Postretirement Benefit Plan”) covering medical benefits and life insurance after
retirement that it obtained in the Banco Santander Puerto Rico (“BSPR”) acquisition on September 1, 2020. One defined benefit
pension plan covers substantially all of BSPR’s former employees who were active before January 1, 2007, while the other defined
benefit pension plan covers personnel of an institution previously acquired by BSPR. Benefits are based on salary and years of service.
The accrual of benefits under the Pension Plans is frozen to all participants.
The Corporation requires recognition of a plan’s overfunded and underfunded status as an asset or liability with an offsetting
adjustment to accumulated other comprehensive loss pursuant to the ASC Topic 715, “Compensation-Retirement Benefits.”
The following table presents the components of net periodic cost (benefit) for the indicated periods:
Affected Line Item
in the Consolidated
Quarter Ended
Statements of Income
March 31, 2023
March 31, 2022
(In thousands)
Net periodic cost (benefit), pension plans:
Interest cost
Other expenses
$
950
$
654
Expected return on plan assets
Other expenses
(886)
(1,039)
Net periodic cost (benefit), pension plans
64
(385)
Net periodic cost, postretirement plan
Other expenses
6
1
Net periodic cost (benefit)
$
70
$
(384)
58
NOTE 17 – INCOME TAXES
Income tax expense includes Puerto Rico and USVI income taxes, as well as applicable U.S. federal and state taxes. The
Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, FirstBank is treated as
a foreign corporation for U.S. and USVI income tax purposes and, accordingly, is generally subject to U.S. and USVI income tax only
on its income from sources within the U.S. and USVI or income effectively connected with the conduct of a trade or business in those
jurisdictions. Any such tax paid in the U.S. and USVI is also creditable against the Corporation’s Puerto Rico tax liability, subject to
certain conditions and limitations.
Under the Puerto Rico Internal Revenue Code of 2011 PR (the “2011 PR Code”), the Corporation and its subsidiaries are treated as
separate taxable entities and are not entitled to file consolidated tax returns and, thus, the Corporation is generally not entitled to
utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net
operating loss (“NOL”), a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL
carry-forward period. Pursuant to the 2011 PR Code, the carry-forward period for NOLs incurred during taxable years that
commenced after December 31, 2004 and ended before January 1, 2013 is 12 years; for NOLs incurred during taxable years
commencing after December 31, 2012, the carryover period is 10 years. The 2011 PR Code provides a dividend received deduction of
100
% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and
85
% on dividends received from
other taxable domestic corporations.
The Corporation has maintained an effective tax rate lower than the Puerto Rico maximum statutory rate of
37.5
% mainly by
investing in government obligations and MBS exempt from U.S. and Puerto Rico income taxes and by doing business through an
international banking entity (an “IBE”) unit of the Bank, and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose
interest income and gains on sales are exempt from Puerto Rico income taxation. The IBE unit and FirstBank Overseas Corporation
were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net
income derived by IBEs operating in Puerto Rico on the specific activities identified in the IBE Act. An IBE that operates as a unit of
a bank pays income taxes at the corporate standard rates to the extent that the IBE’s net income exceeds
20
% of the bank’s total net
taxable income.
For the first quarter of 2023, the Corporation recorded an income tax expense of $
31.9
43.0
first quarter of 2022. The variance was primarily related to lower pre-tax income and a lower estimated effective tax rate as a result of
a higher proportion of exempt to taxable income when compared to the same period in 2022. The Corporation’s estimated annual
effective tax rate, excluding entities with pre-tax losses from which a tax benefit cannot be recognized and discrete items, was
31.2
%
for the first quarter of 2023, compared to
32.9
% for the first quarter of 2022.
The net deferred tax asset of the Corporation’s banking subsidiary, FirstBank, amounted to $
154.8
net of a valuation allowance of $
139.1
155.6
$
149.5
with capital losses carry forward and unrealized losses of available-for-sale debt securities. The reduction in the valuation allowance
was related to the change in the market value of available-for-sale debt securities, which resulted in a change in the deferred tax asset
and an equal change in the valuation allowance without impacting earnings.
59
In 2017, the Corporation completed a formal ownership change analysis within the meaning of Section 382 of the U.S. Internal
Revenue Code (“Section 382”) covering a comprehensive period and concluded that an ownership change had occurred during such
period. The Section 382 limitation has resulted in higher U.S. and USVI income tax liabilities that we would have incurred in the
absence of such limitation. The Corporation has mitigated to an extent the adverse effects associated with the Section 382 limitation as
any such tax paid in the U.S. or USVI can be creditable against Puerto Rico tax liabilities or taken as a deduction against taxable
income. However, our ability to reduce our Puerto Rico tax liability through such a credit or deduction depends on our tax profile at
each annual taxable period, which is dependent on various factors. For the first quarters of 2023 and 2022, the Corporation incurred
current income tax expense of approximately $
2.5
1.6
did not impact the USVI operations in the first quarters of 2023 and 2022, respectively .
The Corporation accounts for uncertain tax positions under the provisions of ASC Topic 740. The Corporation’s policy is to report
interest and penalties related to unrecognized tax positions in income tax expense. As of March 31, 2023, the Corporation had $
0.2
million of accrued interest and penalties related to uncertain tax positions in the amount of $
1.0
which, if recognized, would decrease the effective income tax rate in future periods. The amount of unrecognized tax benefits may
increase or decrease in the future for various reasons, including adding amounts for current tax year positions, expiration of open
income tax returns due to the statute of limitations, changes in management’s judgment about the level of uncertainty, the status of
examinations, litigation and legislative activity, and the addition or elimination of uncertain tax positions. The statute of limitations
under the 2011 PR Code is four years after a tax return is due or filed, whichever is later; the statute of limitations for U.S. and USVI
income tax purposes is three years after a tax return is due or filed, whichever is later. The completion of an audit by the taxing
authorities or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Corporation’s
liability for income taxes. Any such adjustment could be material to the results of operations for any given quarterly or annual period
based, in part, upon the results of operations for the given period. For U.S. and USVI income tax purposes, all tax years subsequent to
2018 remain open to examination. For Puerto Rico tax purposes, all tax years subsequent to 2017 remain open to examination.
60
NOTE 18 – FAIR VALUE
Fair Value Measurement
ASC Topic 820, “Fair Value Measurement,” defines fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. This guidance also establishes a fair value hierarchy for classifying assets and
liabilities, which is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable.
One of three levels of inputs may be used to measure fair value:
Level 1
Valuations of Level 1 assets and liabilities are obtained from readily-available pricing sources for market
transactions involving identical assets or liabilities in active markets.
Level 2
Va
luations of Level 2 assets and liabilities are based on observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
Level 3
Va
luations of Level 3 assets and liabilities are based on unobservable inputs that are supported by little or no market
activity and are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined by using pricing models for which the determination of fair value requires
significant management judgment as to the estimation.
description of the valuation methodologies used to measure financial instruments at fair value on a recurring basis.
Assets and liabilities measured at fair value on a recurring basis are summarized below as of March 31, 2023 and December 31,
2022:
As of March 31, 2023
As of December 31, 2022
Fair Value Measurements Using
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
(In thousands)
Assets:
Debt securities available for sale:
U.S. Treasury securities
$
140,422
$
-
$
-
$
140,422
$
138,875
$
-
$
-
$
138,875
Noncallable U.S. agencies debt securities
-
428,675
-
428,675
-
389,787
-
389,787
Callable U.S. agencies debt securities
-
1,962,535
-
1,962,535
-
1,963,566
-
1,963,566
MBS
-
3,050,019
5,402
(1)
3,055,421
-
3,098,797
5,794
(1)
3,104,591
Puerto Rico government obligations
-
-
2,203
2,203
-
-
2,201
2,201
Other investments
-
-
-
-
-
-
500
500
Equity securities
4,926
-
-
4,926
4,861
-
-
4,861
Derivative assets
-
628
-
628
-
633
-
633
Liabilities:
Derivative liabilities
-
645
-
645
-
476
-
476
(1) Related to private label MBS.
61
The table below presents a reconciliation of the beginning and ending balances of all assets measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) for the quarters ended March 31, 2023 and 2022:
Quarter Ended March 31,
2023
2022
Level 3 Instruments Only
Securities Available for Sale
(1)
Securities Available for Sale
(1)
(In thousands)
Beginning balance
$
8,495
$
11,084
(162)
(287)
(2)
9
388
(3)
(737)
(538)
Ending balance
$
7,605
$
10,647
___________________
(1)
Amounts mostly related to private label MBS.
(2)
Changes in unrealized gains included in earnings were recognized within provision for credit losses - expense (benefit) and relate to assets still held as of the reporting date.
(3)
Includes the $
0.5
The tables below present quantitative information for significant assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) as of March 31, 2023 and December 31, 2022:
March 31, 2023
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
Minimum
Maximum
(Dollars in thousands)
Available-for-sale debt securities:
$
5,402
Discounted cash flows
Discount rate
16.0%
16.0%
16.0%
Prepayment rate
1.6%
12.6%
9.2%
Projected cumulative loss rate
0.2%
14.9%
5.2%
$
2,203
Discounted cash flows
Discount rate
12.8%
12.8%
12.8%
Projected cumulative loss rate
19.0%
19.0%
19.0%
December 31, 2022
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
Minimum
Maximum
(Dollars in thousands)
Available-for-sale debt securities:
$
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%
$
2,201
Discounted cash flows
Discount rate
12.9%
12.9%
12.9%
Projected cumulative loss rate
19.3%
19.3%
19.3%
Information about Sensitivity to Changes in Significant Unobservable Inputs
Private label MBS: The significant unobservable inputs in the valuation include probability of default, the loss severity assumption,
and prepayment rates. Shifts in those inputs would result in different fair value measurements. Increases in the probability of default,
loss severity assumptions, and prepayment rates in isolation would generally result in an adverse effect on the fair value of the
instruments. The Corporation modeled meaningful and possible shifts of each input to assess the effect on the fair value estimation.
Puerto Rico Government Obligations: The significant unobservable input used in the fair value measurement is the assumed loss rate
of the underlying residential mortgage loans that collateralize these obligations, which are guaranteed by the PRHFA. A significant
increase (decrease) in the assumed rate would lead to a (lower) higher fair value estimate. The fair value of these bonds was based on
a discounted cash flow methodology that considers the structure and terms of the debt security. The Corporation utilizes PDs and
LGDs that consider, among other things, historical payment performance, loan-to value attributes, and relevant current and forward-
looking macroeconomic variables, such as regional unemployment rates, the housing price index, and expected recovery of the
PRHFA guarantee. Under this approach, expected cash flows (interest and principal) are discounted at the Treasury yield curve plus a
spread as of the reporting date and compared to the amortized cost.
62
Additionally, fair value is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP.
As of March 31, 2023, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a non-
recurring basis and still held at March 31, 2023, as shown in the following table:
Carrying value as of March 31,
Related to losses recorded for the Quarter Ended
March 31,
2023
2022
2023
2022
(In thousands)
Level 3:
Loans receivable
$
3,486
$
25,951
$
(60)
$
(3,539)
OREO
(2)
814
1,432
(33)
(73)
(1)
Consists mainly of collateral dependent commercial and construction loans. The Corporation generally measured losses based on the fair value of the collateral. The Corporation derived
the fair values from external appraisals that took into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and
assumptions of the collateral (e.g., absorption rates), which are not market observable.
(2)
The Corporation derived the fair values from appraisals that took into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific
characteristics and assumptions of the properties (e.g., absorption rates and net operating income of income producing properties), which are not market observable. Losses were related to
market valuation adjustments after the transfer of the loans to the OREO portfolio.
See Note 25 – Fair Value, to the audited consolidated financial statements to the audited consolidated financial statements included in
the 2022 Annual Report on Form 10-K for qualitative information regarding the fair value measurements for Level 3 financial
instruments measured at fair value on nonrecurring basis.
The following tables present the carrying value, estimated fair value and estimated fair value level of the hierarchy of financial
instruments as of March 31, 2023 and December 31, 2022:
Total Carrying Amount
in Statement of
Financial Condition as
of March 31, 2023
Fair Value Estimate as of
March 31, 2023
Level 1
Level 2
Level 3
(In thousands)
Assets:
Cash and due from banks and money market investments (amortized cost)
$
823,601
$
823,601
$
823,601
$
-
$
-
Available-for-sale debt securities (fair value)
5,589,256
5,589,256
140,422
5,441,229
7,605
Held-to-maturity debt securities (amortized cost)
431,395
Less: ACL on held-to-maturity debt securities
(7,646)
Held-to-maturity debt securities, net of ACL
$
423,749
419,752
-
255,209
164,543
Equity securities (amortized cost)
61,788
61,788
-
61,788
(1)
-
Other equity securities (fair value)
4,926
4,926
4,926
-
-
Loans held for sale (lower of cost or market)
15,183
15,214
-
15,214
-
Loans held for investment (amortized cost)
11,577,985
Less: ACL for loans and finance leases
(265,567)
Loans held for investment, net of ACL
$
11,312,418
11,030,421
-
-
11,030,421
MSRs (amortized cost)
28,431
45,270
-
-
45,270
Derivative assets (fair value)
628
628
-
628
-
Liabilities:
Deposits (amortized cost)
$
16,051,965
$
16,039,550
$
-
$
16,039,550
$
-
Short-term securities sold under agreements to repurchase (amortized cost)
172,982
173,936
-
173,936
-
Advances from the FHLB (amortized cost):
425,000
426,665
-
426,665
-
500,000
501,990
-
501,990
-
Other long-term borrowings (amortized cost)
183,762
187,183
-
-
187,183
Derivative liabilities (fair value)
645
645
-
645
-
(1) Includes FHLB stock with a carrying value of $
54.2
(2) Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.
63
Total Carrying
Amount in Statement
of Financial Condition
as of December 31,
2022
Fair Value Estimate as of
December 31, 2022
Level 1
Level 2
Level 3
(In thousands)
Assets:
Cash and due from banks and money market investments (amortized cost)
$
480,505
$
480,505
$
480,505
$
-
$
-
Available-for-sale debt securities (fair value)
5,599,520
5,599,520
138,875
5,452,150
8,495
Held-to-maturity debt securities (amortized cost)
437,537
Less: ACL on held-to-maturity debt securities
(8,286)
Held-to-maturity debt securities, net of ACL
$
429,251
427,115
-
260,106
167,009
Equity securities (amortized cost)
50,428
50,428
-
50,428
(1)
-
Other equity securities (fair value)
4,861
4,861
4,861
-
-
Loans held for sale (lower of cost or market)
12,306
12,306
-
12,306
-
Loans held for investment (amortized cost)
11,552,825
Less: ACL for loans and finance leases
(260,464)
Loans held for investment, net of ACL
$
11,292,361
11,106,809
-
-
11,106,809
MSRs (amortized cost)
29,037
44,710
-
-
44,710
Derivative assets (fair value)
(2)
633
633
-
633
-
Liabilities:
Deposits (amortized cost)
$
16,143,467
$
16,139,937
$
-
$
16,139,937
$
-
Short-term securities sold under agreements to repurchase (amortized cost)
75,133
75,230
-
75,230
-
Advances from the FHLB (amortized cost)
475,000
474,731
-
474,731
-
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
(2) Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.
The short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include cash and
cash due from banks and other short-term assets, such as FHLB stock. Certain assets, the most significant being premises and
equipment, goodwill and other intangible assets, are not considered financial instruments and are not included above. Accordingly,
this fair value information is not intended to, and does not, represent the Corporation’s underlying value. Many of these assets and
liabilities that are subject to the disclosure requirements are not actively traded, requiring management to estimate fair values. These
estimates necessarily involve the use of assumptions and judgment about a wide variety of factors, including but not limited to,
relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.
64
NOTE 19 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
In accordance with ASC Topic 606, “Revenue from Contracts with Customers” (“ASC Topic 606”), revenues are recognized when
control of promised goods or services is transferred to customers and in an amount that reflects the consideration to which the
Corporation expects to be entitled in exchange for those goods or services. At contract inception, once the contract is determined to be
within the scope of ASC Topic 606, the Corporation assesses the goods or services that are promised within each contract, identifies
the respective performance obligations, and assesses whether each promised good or service is distinct. The Corporation then
recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the
performance obligation is satisfied.
Disaggregation of Revenue
The following tables summarize the Corporation’s revenue, which includes net interest income on financial instruments and non-
interest income, disaggregated by type of service and business segment for the quarters ended March 31, 2023 and 2022:
Quarter ended March 31, 2023
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial
and Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
(1)
$
21,788
$
137,744
$
14,940
$
(658)
$
20,930
$
6,141
$
200,885
Service charges and fees on deposit accounts
-
5,486
3,154
-
165
736
9,541
Insurance commissions
-
4,640
-
-
28
179
4,847
Merchant-related income
-
2,263
-
-
29
468
2,760
Credit and debit card fees
-
7,638
22
-
2
496
8,158
Other service charges and fees
161
1,152
854
-
583
344
3,094
Not in scope of ASC Topic 606
2,913
855
145
160
40
5
4,118
3,074
22,034
4,175
160
847
2,228
32,518
Total Revenue
$
24,862
$
159,778
$
19,115
$
(498)
$
21,777
$
8,369
$
233,403
Quarter ended March 31, 2022
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial
and Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
(1)
$
25,779
$
89,546
$
40,415
$
7,409
$
16,482
$
5,993
$
185,624
Service charges and fees on deposit accounts
-
5,539
2,976
-
138
710
9,363
Insurance commissions
-
4,967
-
-
29
279
5,275
Merchant-related income
-
1,822
373
-
5
389
2,589
Credit and debit card fees
-
6,671
16
-
(7)
410
7,090
Other service charges and fees
143
1,110
1,113
-
499
157
3,022
Not in scope of ASC Topic 606
(1)
5,109
354
76
(112)
80
12
5,519
Total non-interest income
5,252
20,463
4,554
(112)
744
1,957
32,858
Total Revenue
$
31,031
$
110,009
$
44,969
$
7,297
$
17,226
$
7,950
$
218,482
(1)
Most of the Corporation's revenue is not within the scope of ASC Topic 606. The guidance explicitly excludes net interest income from financial assets and liabilities, as well as other non-interest income from loans, leases, investment securities and derivative
financial instruments.
65
For the quarters ended March 31, 2023 and 2022, most of the Corporation’s revenue within the scope of ASC Topic 606 was
related to performance obligations satisfied at a point in time.
See Note 26 – Revenue from Contracts with Customers, to the audited consolidated financial statements included in the 2022
Annual Report on Form 10-K for a discussion of major revenue streams under the scope of ASC Topic 606.
Contract Balances
A
contract liability is an entity’s obligation to transfer goods or services to a customer in exchange for consideration from the
customer. FirstBank participates in a merchant revenue-sharing agreement with another entity to which the Bank sold its merchant
contracts portfolio and related point-of-sale terminals, and a growth agreement with an international card service association to expand
the customer base and enhance product offerings. FirstBank recognizes the revenue under these agreements over time, as the Bank
completes its performance obligations.
The following table shows the activity of contract liabilities for the quarters ended March 31, 2023 and 2022:
Quarter Ended March 31,
2023
2022
(In thousands)
Beginning Balance
$
841
$
1,443
Less:
(81)
(289)
Ending balance
$
760
$
1,154
As of March 31, 2023 and 2022, there were no contract assets recorded on the Corporation’s consolidated financial statements.
Other
Except for the contract liabilities noted above, the Corporation did not have any significant performance obligations as of March 31,
2023. The Corporation also did not have any material contract acquisition costs and did not make any significant judgments or
estimates in recognizing revenue for financial reporting purposes.
66
NOTE 20 – SEGMENT INFORMATION
Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer, the operating
segments are based primarily on the Corporation’s lines of business for its operations in Puerto Rico, the Corporation’s principal
market, and by geographic areas for its operations outside of Puerto Rico. As of March 31, 2023, the Corporation had
six
segments: Mortgage Banking; Consumer (Retail) Banking; Commercial and Corporate Banking; Treasury and Investments; United
States Operations; and Virgin Islands Operations. Management determined the reportable segments based on the internal structure
used to evaluate performance and to assess where to allocate resources. Other factors, such as the Corporation’s organizational chart,
nature of the products, distribution channels, and the economic characteristics of the products, were also considered in the
determination of the reportable segments.
The Mortgage Banking segment consists of the origination, sale, and servicing of a variety of residential mortgage loans. The
Mortgage Banking segment also acquires and sells mortgages in the secondary markets. In addition, the Mortgage Banking segment
includes mortgage loans purchased from other local banks and mortgage bankers. The Consumer (Retail) Banking segment consists of
the Corporation’s consumer lending and deposit-taking activities conducted mainly through its branch network and loan centers. The
Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for large customers represented
by specialized and middle-market clients and the public sector. The Commercial and Corporate Banking segment offers commercial
loans, including commercial real estate and construction loans, and floor plan financings, as well as other products, such as cash
management and business management services. The Treasury and Investments segment is responsible for the Corporation’s
investment portfolio and treasury functions that are executed to manage and enhance liquidity. This segment lends funds to the
Commercial and Corporate Banking, the Mortgage Banking, the Consumer (Retail) Banking, and the United States Operations
segments to finance their lending activities and borrows from those segments. The Consumer (Retail) Banking segment also lends
funds to other segments. The interest rates charged or credited by the Treasury and Investments and the Consumer (Retail) Banking
segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s
actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment. The
United States Operations segment consists of all banking activities conducted by FirstBank in the United States mainland, including
commercial and consumer banking services. The Virgin Islands Operations segment consists of all banking activities conducted by the
Corporation in the USVI and BVI, including commercial and consumer banking services.
The accounting policies of the segments are the same as those referred to in Note 1 – Nature of Business and Summary of
Significant Accounting Policies, to the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K.
The Corporation evaluates the performance of the segments based on net interest income, the provision for credit losses, non-
interest income and direct non-interest expenses. The segments are also evaluated based on the average volume of their interest-
earning assets less the ACL.
67
The following tables present information about the reportable segments for the indicated periods:
Mortgage
Banking
Consumer
(Retail) Banking
Commercial and
Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
For the quarter ended March 31, 2023:
Interest income
$
31,907
$
83,174
$
62,343
$
27,466
$
31,114
$
6,392
$
242,396
Net (charge) credit for transfer of funds
(10,119)
77,735
(47,403)
(19,539)
(674)
-
-
Interest expense
-
(23,165)
-
(8,585)
(9,510)
(251)
(41,511)
Net interest income (loss)
21,788
137,744
14,940
(658)
20,930
6,141
200,885
Provision for credit losses - (benefit) expense
(506)
15,224
(2,536)
(9)
4,655
(1,326)
15,502
Non-interest income
3,074
22,034
4,175
160
847
2,228
32,518
Direct non-interest expenses
5,087
41,627
9,365
947
8,304
6,825
72,155
$
20,281
$
102,927
$
12,286
$
(1,436)
$
8,818
$
2,870
$
145,746
Average earnings assets
$
2,171,061
$
3,174,150
$
3,713,633
$
6,216,498
$
2,067,848
$
366,338
$
17,709,528
Mortgage
Banking
Consumer
(Retail) Banking
Commercial and
Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
For the quarter ended March 31, 2022:
Interest income
$
33,071
$
70,437
$
47,027
$
22,184
$
18,857
$
6,278
$
197,854
Net (charge) credit for transfer of funds
(7,292)
24,282
(6,612)
(9,949)
(429)
-
-
Interest expense
-
(5,173)
-
(4,826)
(1,946)
(285)
(12,230)
Net interest income
25,779
89,546
40,415
7,409
16,482
5,993
185,624
Provision for credit losses - (benefit) expense
(3,703)
11,144
(16,622)
(388)
(3,547)
(686)
(13,802)
Non-interest income (loss)
5,252
20,463
4,554
(112)
744
1,957
32,858
Direct non-interest expenses
6,906
39,271
8,859
885
8,479
6,973
71,373
$
27,828
$
59,594
$
52,732
$
6,800
$
12,294
$
1,663
$
160,911
Average earnings assets
$
2,293,648
$
2,759,482
$
3,664,104
$
8,145,949
$
2,065,638
$
378,169
$
19,306,990
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Net income:
Total income for segments
$
145,746
$
160,911
Other operating expenses
43,113
35,286
Income before income taxes
102,633
125,625
Income tax expense
31,935
43,025
$
70,698
$
82,600
Average assets:
Total average earning assets for segments
$
17,709,528
$
19,306,990
Average non-earning assets
847,628
947,011
$
18,557,156
$
20,254,001
(1)
Expenses pertaining to corporate administrative functions that support the operating segment, but are not specifically attributable to or managed by any segment, are not included in the
reported financial results of the operating segments. The unallocated corporate expenses include certain general and administrative expenses and related depreciation and amortization
expenses.
68
NOTE 21 – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
Supplemental statement of cash flows information is as follows for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Cash paid for:
$
37,798
$
13,300
10,926
2,598
4,316
4,751
Non-cash investing and financing activities:
6,414
6,770
15,356
10,772
532
1,130
28,736
40,823
2,345
1,176
-
15,000
1,630
2,791
69
NOTE 22 – REGULATORY MATTERS, COMMITMENTS, AND CONTINGENCIES
Regulatory Matters
The Corporation and FirstBank are each subject to various regulatory capital requirements imposed by the U.S. federal banking
agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material adverse effect on the Corporation’s financial statements and activities.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific
capital guidelines that involve quantitative measures of the Corporation’s and FirstBank’s assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts and classification are also subject
to qualitative judgments and adjustment by the regulators with respect to minimum capital requirements, components, risk weightings,
and other factors. As of March 31, 2023 and December 31, 2022, the Corporation and FirstBank exceeded the minimum regulatory
capital ratios for capital adequacy purposes and FirstBank exceeded the minimum regulatory capital ratios to be considered a well
capitalized institution under the regulatory framework for prompt corrective action. As of March 31, 2023, management does not
believe that any condition has changed or event has occurred that would have changed the institution’s status.
The Corporation and FirstBank compute risk-weighted assets using the standardized approach required by the U.S. Basel III capital
rules (“Basel III rules”).
The Basel III rules require the Corporation to maintain an additional capital conservation buffer of
2.5
% on certain regulatory
capital ratios to avoid limitations on both (i) capital distributions (
e.g.
, repurchases of capital instruments, dividends and interest
payments on capital instruments) and (ii) discretionary bonus payments to executive officers and heads of major business lines.
As part of its response to the impact of COVID-19, on March 31, 2020, the federal banking agencies issued an interim final rule
that provided the option to temporarily delay the effects of CECL on regulatory capital for two years, followed by a three-year
transition period. The interim final rule provides that, at the election of a qualified banking organization, the day one impact to
retained earnings plus
25
% of the change in the ACL (as defined in the final rule) from January 1, 2020 to December 31, 2021 will be
delayed for two years and phased-in at
25
% per year beginning on January 1, 2022 over a three-year period, resulting in a total
transition period of five years. Accordingly, as of March 31, 2023, the capital measures of the Corporation and the Bank included
$
32.4
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
remainder of the three-year transition period. The federal financial regulatory agencies may take other measures affecting regulatory
capital to address the COVID-19 pandemic and related macroeconomic conditions, although the nature and impact of such actions
cannot be predicted at this time.
70
The regulatory capital position of the Corporation and the FirstBank as of March 31, 2023 and December 31, 2022, which reflects
the delay in the full effect of CECL on regulatory capital, were as follows:
Regulatory Requirements
Actual
For Capital Adequacy Purposes
To be Well -Capitalized
Thresholds
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
As of March 31, 2023
Total Capital (to Risk-Weighted Assets)
$
2,366,591
19.02
%
$
995,597
8.0
%
N/A
N/A
%
$
2,327,600
18.71
%
$
995,452
8.0
%
$
1,244,315
10.0
%
CET1 Capital (to Risk-Weighted Assets)
$
2,032,369
16.33
%
$
560,023
4.5
%
N/A
N/A
%
$
2,071,650
16.65
%
$
559,942
4.5
%
$
808,805
6.5
%
Tier I Capital (to Risk-Weighted Assets)
$
2,032,369
16.33
%
$
746,697
6.0
%
N/A
N/A
%
$
2,171,650
17.45
%
$
746,589
6.0
%
$
995,452
8.0
%
Leverage ratio
$
2,032,369
10.57
%
$
769,399
4.0
%
N/A
N/A
%
$
2,171,650
11.29
%
$
769,102
4.0
%
$
961,378
5.0
%
As of December 31, 2022
Total Capital (to Risk-Weighted Assets)
$
2,385,866
19.21
%
$
993,405
8.0
%
N/A
N/A
%
$
2,346,093
18.90
%
$
993,264
8.0
%
$
1,241,580
10.0
%
CET1 Capital (to Risk-Weighted Assets)
$
2,052,333
16.53
%
$
558,790
4.5
%
N/A
N/A
%
$
2,090,832
16.84
%
$
558,711
4.5
%
$
807,027
6.5
%
Tier I Capital (to Risk-Weighted Assets)
$
2,052,333
16.53
%
$
745,054
6.0
%
N/A
N/A
%
$
2,190,832
17.65
%
$
744,948
6.0
%
$
993,264
8.0
%
Leverage ratio
$
2,052,333
10.70
%
$
767,075
4.0
%
N/A
N/A
%
$
2,190,832
11.43
%
$
766,714
4.0
%
$
958,392
5.0
%
71
Commitments
The Corporation enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments may include commitments to extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the
contract. Commitments generally have fixed expiration dates or other termination clauses. Since certain commitments are expected to
expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of
the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. In the
case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any time and without cause. As
of March 31, 2023, commitments to extend credit amounted to approximately $
2.0
0.9
card loans. In addition, commercial and financial standby letters of credit as of March 31, 2023 amounted to approximately $
93.6
million.
Contingencies
As of March 31, 2023, First BanCorp. and its subsidiaries were defendants in various legal proceedings, claims and other loss
contingencies arising in the ordinary course of business. On at least a quarterly basis, the Corporation assesses its liabilities and
contingencies in connection with threatened and outstanding legal proceedings, claims and other loss contingencies utilizing the latest
information available. For legal proceedings, claims and other loss contingencies where it is both probable that the Corporation will
incur a loss and the amount can be reasonably estimated, the Corporation establishes an accrual for the loss. Once established, the
accrual is adjusted as appropriate to reflect any relevant developments. For legal proceedings, claims and other loss contingencies
where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established.
Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that some of them are
currently in preliminary stages), the existence in some of the current proceedings of multiple defendants whose share of liability has
yet to be determined, the numerous unresolved issues in the proceedings, and the inherent uncertainty of the various potential
outcomes of such proceedings. Accordingly, the Corporation’s estimate will change from time to time, and actual losses may be more
or less than the current estimate.
While the final outcome of legal proceedings, claims, and other loss contingencies is inherently uncertain, based on information
currently available, management believes that the final disposition of the Corporation’s legal proceedings, claims and other loss
contingencies, to the extent not previously provided for, will not have a material adverse effect on the Corporation’s consolidated
financial position as a whole.
If management believes that, based on available information, it is at least reasonably possible that a material loss (or material loss in
excess of any accrual) will be incurred in connection with any legal contingencies, the Corporation discloses an estimate of the
possible loss or range of loss, either individually or in the aggregate, as appropriate, if such an estimate can be made, or discloses that
an estimate cannot be made. Based on the Corporation’s assessment as of March 31, 2023, no such disclosures were necessary.
72
NOTE 23- FIRST BANCORP. (HOLDING COMPANY ONLY) FINANCIAL INFORMATION
The following condensed financial information presents the financial position of First BanCorp. at the holding company level only
as of March 31, 2023 and December 31, 2022, and the results of its operations for the quarters ended March 31, 2023 and 2022:
Statements of Financial Condition
As of March 31,
As of December 31,
2023
2022
(In thousands)
Assets
Cash and due from banks
$
13,981
$
19,279
Other investment securities
735
735
Investment in First Bank Puerto Rico, at equity
1,544,874
1,464,026
Investment in First Bank Insurance Agency, at equity
32,374
28,770
Investment in FBP Statutory Trust I
1,951
1,951
Investment in FBP Statutory Trust II
3,561
3,561
Dividends receivable
637
624
Other assets
426
430
$
1,598,539
$
1,519,376
Liabilities and Stockholders’ Equity
Liabilities:
Long-term borrowings
$
183,762
$
183,762
Accounts payable and other liabilities
9,184
10,074
192,946
193,836
Stockholders’ equity
1,405,593
1,325,540
$
1,598,539
$
1,519,376
Statements of Income
Quarter Ended March 31,
2023
2022
(In thousands)
Income
$
53
$
4
78,870
63,593
102
40
79,025
63,637
Expense
3,381
1,333
410
439
3,791
1,772
Income before income taxes and equity in undistributed earnings of subsidiaries
75,234
61,865
Income tax expense
1,078
1,106
Equity in undistributed earnings of subsidiaries (distribution in excess of
(3,458)
21,841
Net income
$
70,698
$
82,600
Other comprehensive income (loss), net of tax
87,228
(331,834)
Comprehensive income (loss)
$
157,926
$
(249,234)
73
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (“MD&A”)
The following MD&A relates to the accompanying unaudited consolidated financial statements of First BanCorp. (the
“Corporation,” “we,” “us,” “our,” or “First BanCorp.”) and should be read in conjunction with such financial statements and the notes
thereto, and our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”). This
section also presents certain financial measures that are not based on generally accepted accounting principles in the United States of
America (“GAAP”). See “Non-GAAP Financial Measures and Reconciliations” below for information about why non-GAAP
financial measures are presented and references to reconciliations of non-GAAP financial measures to the most comparable GAAP
financial measures.
EXECUTIVE SUMMARY
First BanCorp. is a diversified financial holding company headquartered in San Juan, Puerto Rico offering a full range of financial
products to consumers and commercial customers through various subsidiaries. First BanCorp. is the holding company of FirstBank
Puerto Rico (“FirstBank” or the “Bank”) and FirstBank Insurance Agency. Through its wholly -owned subsidiaries, the Corporation
operates in Puerto Rico, the United States Virgin Islands (“USVI”), the British Virgin Islands (“BVI”), and the state of Florida,
concentrating on commercial banking, residential mortgage loans, credit cards, personal loans, small loans, auto loans and leases, and
insurance agency activities.
Recent Developments
Economy and Market Volatility
Growth in economic activity and demand for goods and services, alongside labor shortages, supply chain complications and
geopolitical matters, have contributed to rising inflation. In response, the Federal Reserve has raised interest rates and has begun
reducing the size of its balance sheet. In March and May 2023, certain large U.S. regional banks with assets over $100 billion were
closed and placed into receivership with the FDIC. The closures of those banks and adverse developments affecting other banks
resulted in heightened levels of market volatility that has negatively impacted customer confidence in the safety and soundness of
financial institutions. These developments have resulted in certain regional banks experiencing higher than normal deposit outflows
and an elevated level of competition for available deposits in the market. The impact of market volatility from the adverse
developments in the banking industry, along with continued high inflation and rising interest rates on our business and related
financial results, will depend on future developments, which are highly uncertain and difficult to predict.
Our results this quarter reflect continued discipline expense management, stable credit quality metrics, a sound liquidity position,
and solid capital levels, despite the market disruption. With our disciplined and proactive approach, the Corporation is well positioned
to manage through the uncertain economic outlook on the horizon. As of March 31, 2023, the Corporation had approximately $5.5
billion of unused available liquidity, representing 114% of total estimated uninsured deposits, excluding fully collateralized deposits,
of $4.8 billion, and a strong capital position with a common equity tier 1 (“CET1”) ratio of 16.33%.
FDIC deposit insurance premium.
See “Risk Management – Liquidity Risk” below for additional information about the Corporation’s funding sources and strategy.
Return of Capital to Shareholders
In the first quarter of 2023, the Corporation returned approximately $75.1 million, or 106% of first quarter 2023 earnings, to its
shareholders through $50.0 million in repurchases of common stock and the payment of $25.1 million in common stock dividends,
which reflects an increase in the common stock dividend by 17%, from $0.12 for the fourth quarter of 2022 to $0.14 per share for the
first quarter of 2023.
As of March 31, 2023, the Corporation has remaining authorization to repurchase approximately $75 million of common stock. Due
to recent market events, the Corporation intends to temporarily pause common stock repurchases during the second quarter of 2023
and expects to resume such repurchases during the third quarter of 2023 subject to various factors, including the Corporation’s capital
position, liquidity, financial performance and alternative uses of capital, stock trading price, and general market conditions.
74
London Interbank Offered Rate (“LIBOR”) Transition
On January 1, 2022, the publication of certain U.S. Dollar (“USD”) LIBOR settings ceased. The publication of the most commonly
used overnight, one-month, three-month, six-month and twelve-month USD LIBOR will cease immediately after June 30, 2023,
except that per the UK Financial Conduct Authority (the “FCA”) proposal, the one-, three-, and six-month tenors will continue to be
published on a “non-representative,” synthetic basis until September 30, 2024.
The Adjustable Interest Rate Act (the “LIBOR Act”), that was enacted in March 2022, provides a statutory framework to replace
USD LIBOR for contracts governed by U.S. law that do not have clear and practicable provisions for replacing USD LIBOR after
June 30, 2023 (“tough legacy contracts”). On December 16, 2022, the FED adopted Regulation ZZ, which identifies replacement
benchmark rates based on the Secured Overnight Financing Rate (“SOFR”) to replace the aforementioned USD LIBOR settings that
will cease after June 30, 2023 in contracts subject to the LIBOR Act. Under Regulation ZZ, tough legacy contracts will be converted
by operation of law to various forms of SOFR, along with a spread adjustment, upon a LIBOR replacement date (i.e., the first London
banking day after June 30, 2023). The spread adjustment was designed to compensate for USD LIBOR being higher than SOFR in
two regards. First, USD LIBOR is an unsecured rate while SOFR is a secured rate. Second, USD LIBOR includes term premia. In
addition, Regulation ZZ codifies safe harbor protections for selection or use of SOFR as a replacement benchmark and clarifies who
would be considered a “determining person” able to elect a replacement benchmark when USD LIBOR ceases to be published as
representative on June 30, 2023.
As of March 31, 2023, the Corporation’s risk exposure to USD LIBOR that mature after June 30, 2023 consisted of the following:
(i) $1.2 billion of variable-rate commercial and construction loans (including unused commitments), (ii) $40.7 million of U.S.
agencies debt securities and private label mortgage-backed securities (“MBS”) held as part of the available-for-sale debt securities
portfolio, (iii) $124.7 million of Puerto Rico municipalities bonds held as part of the held-to-maturity debt securities portfolio, and (iv)
$183.8 million of junior subordi nated debentures reported as other long-term borrowings in the consolidated statements of financial
condition. Most of these contracts contain adequate features to convert to an alternative interest rate; however, as of March 31, 2023,
contracts totaling approximately $338.4 million do not contain fallback language mainly consisting of the aforementioned Puerto Rico
municipalities bonds held as part of the held-to-maturity debt securities portfolio and the junior subordinated debentures. Following
the provisions of the LIBOR Act and Regulation ZZ, the LIBOR reference on the junior subordinated debentures will automatically
transition by operation of law to 3-month CME Term SOFR, plus a spread adjustment of 0.26161% on the first reset date after USD
LIBOR ceases publication in June 2023. In addition, for the transition of any residual exposure after June 30, 2023, the Corporation
expects to follow the provisions of the LIBOR Act and Regulation ZZ.
The Corporation continues to execute its LIBOR transition workplan. Source systems have been updated to support alternative
reference rates. At this time alternative reference rates are predominantly SOFR based. In addition, the Corporation continues working
with its interest rate risk monitoring framework and a strategy for managing interest rate risk during the transition from LIBOR to
SOFR. We continue to monitor market developments and legislative and regulatory updates, with additional updates expected through
the remainder of 2023.
CRITICAL ACCOUNTING POLICIES AND PRACTICES
The accounting principles of the Corporation and the methods of applying these principles conform to GAAP. In preparing the
consolidated financial statements, management is required to make estimates, assumptions, and judgments that affect the amounts
recorded for assets, liabilities and contingent liabilities as of the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Note 1 of the Notes to Consolidated Financial Statements included in our 2022 Annual
Report on Form 10-K, as supplemented by this report including this MD&A, describes the significant accounting policies we used in
our Consolidated Financial Statements.
Not all significant accounting policies require management to make difficult, subjective or complex judgments. Critical accounting
estimates are those estimates made in accordance with GAAP that involve a significant level of uncertainty and have had or are
reasonably likely to have a material impact on the Corporation’s financial condition and results of operations. The Corporation’s
critical accounting estimates that are particularly susceptible to significant changes include, but are not limited to, the following: (i)
the allowance for credit losses (“ACL”); (ii) valuation of financial instruments; and (iii) income taxes. For more information regarding
valuation of financial instruments and income taxes policies, assumptions, and judgments, see “Critical Accounting Estimates” in Part
II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”),” in the 2022
Annual Report on Form 10-K. The “Risk Management – Credit Risk Management” section below details the policies, assumptions,
and judgments related to the ACL. Actual results could differ from estimates and assumptions if different outcomes or conditions
prevail.
75
Overview of Results of Operations
First BanCorp.'s results of operations depend primarily on its net interest income, which is the difference between the interest
income earned on its interest-earning assets, including investment securities and loans, and the interest expense incurred on its
interest-bearing liabilities, including deposits and borrowings. Net interest income is affected by various factors, including the
following: (i) the interest rate environment; (ii) the volumes, mix, and composition of interest-earning assets, and interest-bearing
liabilities; and (iii) the repricing characteristics of these assets and liabilities. The Corporation ’s results of operations also depend on
the provision for credit losses, non-interest expenses (such as personnel, occupancy, the FDIC deposit insurance premium and other
costs), non-interest income (mainly service charges and fees on deposits, cards and processing income, and insurance income), gains
(losses) on sales of investments, gains (losses) on mortgage banking activities, and income taxes.
The Corporation had net income of $70.7 million, or $0.39 per diluted common share, for the quarter ended March 31, 2023,
compared to $82.6 million, or $0.41 per diluted common share, for the quarter ended March 31, 2022. Other relevant selected
financial indicators for the periods presented are included below:
Quarter Ended March 31,
2023
2022
Key Performance Indicator:
(1)
Return on Average Assets
(2)
1.55
%
1.65
%
Return on Average Total Equity
(3)
21.00
16.64
Efficiency Ratio
(4)
49.39
48.82
(1)
These financial ratios are used by Management to monitor the Corporation’s financial performance and whether it is using its assets efficiently.
(2)
Indicates how profitable the Corporation is in relation to its total assets and is calculated by dividing net income on an annualized basis by its average total assets.
(3)
Measures the Corporation’s performance based on its average stockholders’ equity and is calculated by dividing net income on an annualized basis by its average total stockholders’
equity.
(4)
Measures how much the Corporation incurred to generate a dollar of revenue and is calculated by dividing non-interest expenses by total revenue.
The key drivers of the Corporation’s GAAP financial results for the quarter ended March 31, 2023, compared to the first quarter of
2022, include the following:
●
Net interest income for the quarter ended March 31, 2023 increased to $200.9 million, compared to $185.6 million for the first
quarter of 2022, mainly driven by the effect in the commercial loan portfolio of higher market interest rates in the upward
repricing of variable -rate loans and in new loan originations, and the growth in consumer loans, partially offset by an increase
in interest expense due to the increase in borrowings and a 110 basis point increase in the average cost of interest-bearing
liabilities. See "Net Interest Income" below for additional information.
●
The provision for credit losses on loans, finance leases, unfunded loan commitments and debt securities for the quarter ended
March 31, 2023 was an expense of $15.5 million, compared to a net benefit of $13.8 million for the first quarter of 2022,
mainly due to the $4.7 million increase in the provision for the consumer loan portfolios and the net benefit of $23.1 million
recorded in the first quarter of 2022 for the commercial and construction loan portfolio as a result of reductions in qualitative
reserves as a result of reduced uncertainty regarding COVID-19.
Net charge-offs totaled $13.3 million for the quarter ended March 31, 2023, or 0.46% of average loans on an annualized basis,
compared to net charge-offs of $6.6 million, or 0.24% of average loans, for the first quarter of 2022. The increase in net
charge-offs was mainly in consumer loans. See “Provision for Credit Losses” and “Risk Management” below for analyses of
the ACL and non-performing assets and related ratios.
●
The Corporation recorded non-interest income of $32.5 million for the quarter ended March 31, 2023, compared to $32.9
million for the first quarter of 2022. See “Non-Interest Income” below for additional information.
●
Non-interest expenses for the quarter ended March 31, 2023 increased by $8.6 million to $115.3 million, mainly driven by a
$6.9 million increase in employees’ compensation and benefits expenses due to annual salary merit increases and an increase
in bonuses, stock-based compensation expense of retirement-eligible employees, payroll taxes, and medical insurance
premium costs. The efficiency ratio for the first quarter of 2023 was 49.39%, as compared to 48.82% for the same period in
2022. See “Non-Interest Expenses” below for additional information.
76
●
Income tax expense decreased to $31.9 million for the first quarter of 2023, compared to $43.0 million for the same period in
2022 driven by a lower pre-tax income. The Corporation’s estimated effective tax rate, excluding entities with pre-tax losses
from which a tax benefit cannot be recognized and discrete items, decrease to 31.2% for the first quarter of 2023, compared to
32.9% for the first quarter of 2022, reflecting a higher proportion of exempt to taxable income. See “Income Taxes” below and
Note 17 – Income Taxes , to the unaudited consolidated financial statements herein for additional information.
●
As of March 31, 2023, total assets were approximately $19.0 billion, an increase of $342.6 million from December 31, 2022,
primarily due to a $343.1 million increase in cash and cash equivalents, which was mainly attributable to a $347.8 million
addition to borrowings to increase available cash as a precautionary measure in light of recent instability in the banking sector
and a $28.0 million increase in total loans, partially offset by the $4.3 million decrease in total investment securities. See
“Financial Condition and Operating Data Analysis” below for additional information.
●
As of March 31, 2023, total liabilities were $17.6 billion, an increase of $262.5 million from December 31, 2022, mainly
driven by the $347.8 million increase in borrowings, partially offset by an overall decrease in total deposits. See “Risk
Management – Liquidity Risk” below for additional information about the Corporation’s funding sources and strategy.
●
The Bank’s primary sources of funding are consumer and commercial core deposits, which exclude government deposits and
brokered CDs. As of March 31, 2023, these core deposits amounting to $13.1 billion funded 69.17% of total assets. In addition
to approximately $3.2 billion in cash and free high quality liquid assets, the Bank maintains borrowing capacity at the FHLB
and the FED Discount Window. As of March 31, 2023, the Corporation had approximately $1.4 billion available for funding
under the FED’s Discount Window and $882.5 million available for additional borrowing capacity on FHLB lines of credit
based on collateral pledged at these entities. On a combined basis, as of March 31, 2023, the Corporation had $5.5 billion
available to meet liquidity needs. See “Risk Management – Liquidity Risk” below for additional information about the
Corporation’s funding sources and strategy.
●
As of March 31, 2023, the Corporation’s total stockholders’ equity was $1.4 billion, an increase of $80.1 million from
December 31, 2022. The increase was driven by an $87.2 million increase in the fair value of available-for-sale debt securities
recorded as part of accumulated other comprehensive loss in the consolidated statements of financial condition, as a result of
changes in market interest rates, and the earnings generated during the first quarter of 2023. These increases were partially
offset by the repurchase of approximately 3.6 million shares of common stock for a total purchase price of approximately
$50.0 million and $25.4 million in dividends declared to common stock shareholders during the first quarter of 2023. The
Corporation’s CET1 capital, tier 1 capital, total capital, and leverage ratios were 16.33%, 16.33%, 19.02%, and 10.57%,
respectively, as of March 31, 2023, compared to CET1 capital, tier 1 capital, total capital, and leverage ratios of 16.53%,
16.53%, 19.21%, and 10.70%, respectively, as of December 31, 2022. See “Risk Management – Capital” below for additional
information.
●
Total loan production, including purchases, refinancings, renewals, and draws from existing revolving and non-revolving
commitments, increased by $5.5 million to $1.2 billion for the quarter ended March 31, 2023. See “Financial Condition and
Operating Data Analysis” below for additional information.
●
Total non-performing assets were $129.0 million as of March 31, 2023, a decrease of $0.2 million, from December 31, 2022.
The net decrease was driven by a $6.3 million reduction in nonaccrual residential mortgage loans, mostly due to loans restored
to accrual status, collections and foreclosures; partially offset by a $4.4 million increase in nonaccrual commercial and
construction loans, mainly related to the inflow of a $7.1 million commercial and industrial participated loan in the Florida
region related to a borrower engaged in the power generation industry . See “Risk Management – Nonaccrual Loans and Non-
Performing Assets” below for additional information.
●
Adversely classified commercial and construction loans decreased by $23.6 million to $70.0 million as of March 31, 2023,
compared to December 31, 2022, mainly driven by the payoff of a $24.3 million commercial and industrial participated loan in
the Florida region in the leisure and hospitality industry.
77
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
The Corporation has included in this Quarterly Report on Form 10-Q (“Form 10-Q”) the following financial measures that are not
recognized under GAAP, which are referred to as non-GAAP financial measures:
Net Interest Income, Interest Rate Spread, and Net Interest Margin, Excluding Valuations , and on a Tax -Equivalent Basis
Net interest income, interest rate spread, and net interest margin, excluding the changes in the fair value of derivative instruments
and on a tax-equivalent basis, are reported in order to provide to investors additional information about the Corporation’s net interest
income that management uses and believes should facilitate comparability and analysis of the periods presented. The changes in the
fair value of derivative instruments have no effect on interest due or interest earned on interest-bearing liabilities or interest-earning
assets, respectively. The tax-equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable
and tax-exempt assets and assumes a marginal income tax rate. Income from tax-exempt earning assets is increased by an amount
equivalent to the taxes that would have been paid if this income had been taxable at statutory rates. Management believes that it is a
standard practice in the banking industry to present net interest income, interest rate spread, and net interest margin on a fully tax-
equivalent basis. This adjustment puts all earning assets, most notably tax-exempt securities and tax-exempt loans, on a common basis
that facilitates comparison of results to the results of peers.
See “Result of Operations – Net Interest Income” below, for the table that reconciles net interest income in accordance with GAAP
to the non-GAAP financial measure of net interest income, excluding valuations, and on a tax-equivalent basis for the indicated
periods. The table also reconciles net interest spread and net interest margin on a GAAP basis to these items excluding valuations, and
on a tax-equivalent basis.
Tangible Common Equity Ratio and Tangible Book Value Per Common Share
The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures that management
believes are generally used by the financial community to evaluate capital adequacy. Tangible common equity is total common equity
less goodwill and other intangibles. Similarly, tangible assets are total assets less goodwill and other intangibles. Management and
many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more
traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other
intangible assets, typically stemming from the use of the purchase method of accounting for mergers and acquisitions. Accordingly,
the Corporation believes that disclosures of these financial measures may be useful to investors. Neither tangible common equity nor
tangible assets, or the related measures, should be considered in isolation or as a substitute for stockholders’ equity, total assets, or any
other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation calculates its tangible common
equity, tangible assets, and any other related measures may differ from that of other companies reporting measures with similar names.
See “Risk Management – Capital” below for the table that reconciles the Corporation’s total equity and total assets in accordance
with GAAP to the tangible common equity and tangible assets figures used to calculate the non-GAAP financial measures of Tangible
Common Equity Ratio and Tangible Book Value per Common Share.
78
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the excess of interest earned by First BanCorp. on its interest-earning assets over the interest incurred on its
interest-bearing liabilities. First BanCorp.’s net interest income is subject to interest rate risk due to the repricing and maturity
mismatch of the Corporation’s assets and liabilities. In addition, variable sources of interest income, such as loan fees, periodic
dividends, and collection of interest on nonaccrual loans, can fluctuate from period to period. Net interest income for the quarter ended
March 31, 2023 was $200.9 million, compared to $185.6 million for the first quarter of 2022. On a tax-equivalent basis and excluding
the changes in the fair value of derivative instruments, net interest income for the quarter ended March 31, 2023 was $207.2 million
compared to $192.8 million for the quarter ended March 31, 2022.
The following tables include a detailed analysis of net interest income for the indicated periods. Part I presents average volumes
(based on the average daily balance) and rates on an adjusted tax-equivalent basis and Part II presents, also on an adjusted tax-
equivalent basis, the extent to which changes in interest rates and changes in the volume of interest-related assets and liabilities have
affected the Corporation’s net intere st income. For each category of interest-earning assets and interest-bearing liabilities, the tables
provide information on changes in (i) volume (changes in volume multiplied by prior period rates), and (ii) rate (changes in rate
multiplied by prior period volumes). The Corporation has allocated rate-volume variances (changes in rate multiplied by changes in
volume) to either the changes in volume or the changes in rate based upon the effect of each factor on the combined totals.
Net interest income on an adjusted tax equivalent basis and excluding the change in the fair value of derivative instruments is a
non-GAAP financial measure. For the definition of this non-GAAP financial measure, refer to the discussion in “Non-GAAP
Measures and Reconciliations” above.
79
Part I
Average volume
Interest income
(1)
Average rate
(1)
Quarter ended March 31,
2023
2022
2023
2022
2023
2022
(Dollars in thousands)
Interest-earning assets:
Money market and other short-term investments
$
404,249
$
1,835,766
$
4,650
$
820
4.67
%
0.18
%
Government obligations
(2)
2,909,976
2,736,095
10,765
8,232
1.50
%
1.22
%
MBS
3,864,145
4,041,975
19,396
19,420
2.04
%
1.95
%
FHLB stock
40,838
21,465
421
287
4.18
%
5.42
%
Other investments
13,139
11,786
139
21
4.29
%
0.72
%
Total investments
(3)
7,232,347
8,647,087
35,371
28,780
1.98
%
1.35
%
Residential mortgage loans
2,835,240
2,961,456
39,794
40,687
5.69
%
5.57
%
Construction loans
146,041
114,732
2,676
1,524
7.43
%
5.39
%
Commercial and industrial ("C&I") and commercial mortgage loans
5,167,727
5,103,870
85,885
62,004
6.74
%
4.93
%
Finance leases
735,500
588,200
13,809
10,912
7.61
%
7.52
%
Consumer loans
2,634,891
2,338,597
71,214
61,151
10.96
%
10.60
%
Total loans
(4)(5)
11,519,399
11,106,855
213,378
176,278
7.51
%
6.44
%
$
18,751,746
$
19,753,942
$
248,749
$
205,058
5.38
%
4.21
%
Interest-bearing liabilities:
Time deposits
$
2,342,360
$
2,363,045
$
10,782
$
4,421
1.87
%
0.76
%
Brokered certificates of deposit ("CDs")
166,698
91,713
1,587
477
3.86
%
2.11
%
Other interest-bearing deposits
7,544,901
8,132,149
17,516
2,754
0.94
%
0.14
%
Securities sold under agreements to repurchase
91,004
241,111
1,069
2,182
4.76
%
3.67
%
Advances from the FHLB
629,167
200,000
7,176
1,063
4.63
%
2.16
%
Other long-term borrowings
183,762
183,762
3,381
1,333
7.46
%
2.94
%
Total interest-bearing liabilities
$
10,957,892
$
11,211,780
$
41,511
$
12,230
1.54
%
0.44
%
Net interest income on a tax-equivalent basis and excluding
valuations
$
207,238
$
192,828
Interest rate spread
3.84
%
3.77
%
Net interest margin
4.48
%
3.96
%
(1)
On an adjusted tax-equivalent basis. The Corporation estimated the adjusted tax-equivalent yield by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory tax
rate of 37.5% and adding to it the cost of interest-bearing liabilities. The tax-equivalent adjustment recognizes the income tax savings when comparing taxable and tax-exempt assets.
Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread and net interest margin on a fully tax-equivalent basis.
Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons. The Corporation excludes changes in the fair value of
derivatives from interest income and interest expense because the changes in valuation do not affect interest received or paid. See “Non-GAAP Measures and Reconciliations” above.
(2)
Government obligations include debt issued by government-sponsored agencies.
(3)
Unrealized gains and losses on available-for-sale debt securities are excluded from the average volumes.
(4)
Average loan balances include the average of nonaccrual loans.
(5)
Interest income on loans includes $3.1 million and $2.6 million for the quarters ended March 31, 2023 and 2022, respectively, of income from prepayment penalties and late fees related to
the Corporation’s loan portfolio.
80
Part II
Quarter ended March 31,
2023 compared to 2022
Variance due to:
Volume
Rate
Total
(In thousands)
Interest income on interest-earning assets:
Money market and other short-term investments
$
(8,698)
$
12,528
$
3,830
Government obligations
549
1,984
2,533
MBS
(885)
861
(24)
FHLB stock
232
(98)
134
Other investments
3
115
118
Total investments
(8,799)
15,390
6,591
Residential mortgage loans
(1,771)
878
(893)
Construction loans
482
670
1,152
C&l and commercial mortgage loans
785
23,096
23,881
Finance leases
2,764
133
2,897
Consumer loans
7,953
2,110
10,063
Total loans
10,213
26,887
37,100
Total interest income
$
1,414
$
42,277
$
43,691
Interest expense on interest-bearing liabilities:
Time deposits
$
(67)
$
6,428
$
6,361
Brokered CDs
551
559
1,110
Other interest-bearing deposits
(573)
15,335
14,762
Securities sold under agreements to repurchase
(1,561)
448
(1,113)
Advances from the FHLB
3,985
2,128
6,113
Other borrowings
-
2,048
2,048
Total interest expense
2,335
26,946
29,281
Change in net interest income
$
(921)
$
15,331
$
14,410
Portions of the Corporation’s interest-earning assets, mostly investments in obligations of some U.S. government agencies and U.S.
government-sponsored entities (“GSEs”), generate interest that is exempt from income tax, principally in Puerto Rico. Also, interest
and gains on sales of investments held by the Corporation’s international banking entities (“IBEs”) are tax-exempt under Puerto Rico
tax law (see Note 17 - Income Taxes, to the unaudited consolidated financial statements herein for additional information).
Management believes that the presentation of interest income on an adjusted tax-equivalent basis facilitates the comparison of all
interest data related to these assets. The Corporation estimated the tax equivalent yield by dividing the interest rate spread on exempt
assets by 1 less the Puerto Rico statutory tax rate (37.5%) and adding to it the average cost of interest-bearing liabilities. The
computation considers the interest expense disallowance required by Puerto Rico tax law.
Management believes that the presentation of net interest income, excluding the effects of the changes in the fair value of the
derivative instruments, provides additional information about the Corporation’s net interest income and facilitates comparability and
analysis from period to period. The changes in the fair value of the derivative instruments have no effect on interest due on interest-
bearing liabilities or interest earned on interest-earning assets.
81
The following table reconciles net interest income in accordance with GAAP to net interest income, excluding valuations, and net
interest income on an adjusted tax-equivalent basis for the indicated periods. The table also reconciles net interest spread and net
interest margin on a GAAP basis to these items excluding valuations, and on an adjusted tax-equivalent basis:
Quarter Ended March 31,
2023
2022
(Dollars in thousands)
Interest income - GAAP
$
242,396
$
197,854
Unrealized loss (gain) on derivative instruments
6
(15)
Interest income excluding valuations
242,402
197,839
Tax-equivalent adjustment
6,347
7,219
Interest income on a tax-equivalent basis and excluding valuations
$
248,749
$
205,058
Interest expense - GAAP
$
41,511
$
12,230
Net interest income - GAAP
$
200,885
$
185,624
Net interest income excluding valuations
$
200,891
$
185,609
Net interest income on a tax-equivalent basis and excluding valuations
$
207,238
$
192,828
Average Balances
Loans and leases
$
11,519,399
$
11,106,855
Total securities, other short-term investments and interest-bearing cash balances
7,232,347
8,647,087
Average Interest-Earning Assets
$
18,751,746
$
19,753,942
Average Interest-Bearing Liabilities
$
10,957,892
$
11,211,780
Average Yield/Rate
Average yield on interest-earning assets - GAAP
5.24%
4.06%
Average rate on interest-bearing liabilities - GAAP
1.54%
0.44%
Net interest spread - GAAP
3.70%
3.62%
Net interest margin - GAAP
4.34%
3.81%
Average yield on interest-earning assets excluding valuations
5.24%
4.06%
Average rate on interest-bearing liabilities
1.54%
0.44%
Net interest spread excluding valuations
3.70%
3.62%
Net interest margin excluding valuations
4.34%
3.81%
Average yield on interest-earning assets on a tax-equivalent basis and excluding valuations
5.38%
4.21%
Average rate on interest-bearing liabilities
1.54%
0.44%
Net interest spread on a tax-equivalent basis and excluding valuations
3.84%
3.77%
Net interest margin on a tax-equivalent basis and excluding valuations
4.48%
3.96%
82
Net interest income amounted to $200.9 million for the quarter ended March 31, 2023, an increase of $15.3 million, when
compared to $185.6 million for same period in 2022. The $15.3 million increase in net interest income was primarily due to:
●
A $36.9 million increase in interest income on loans including:
-
A $24.6 million increase in interest income on commercial and construction loans, of which approximately $25.1 million
was related to the effect of higher market interest rates in the upward repricing of variable-rate loans and in new loan
originations, and approximately $2.5 million was related to the $210.9 million increase in the average balance of this
portfolio (excluding Small Business Administration Paycheck Protection Program (“SBA PPP”) loans). These variances
were partially offset by a reduction in interest income from SBA PPP loans. The interest income recognized from SBA
PPP loans for the quarters ended March 31, 2023 and 2022 amounted to $0.2 million and $3.2 million, respectively.
The interest rate on approximately 55% of the Corporation’s commercial and construction loans is variable, 42% is based
upon LIBOR, SOFR and other indexes and 13% is based upon the Prime rate index. For the first quarter of 2023, the
average one-month LIBOR increased 439 basis points, the average three-month LIBOR increased 440 basis points, the
average Prime rate increased 440 basis points, and the average three-month SOFR increased 444 basis points, compared
to the average rates for such indexes during the first quarter of 2022.
-
A $13.0 million increase in interest income on consumer loans and finance leases, primarily driven by the $443.6 million
increase in the average balance of this portfolio, which increased interest income by approximately $10.5 million, and
approximately $2.5 million increase in interest income associated to the positive effects of higher market interest rates on
the consumer portfolio yields, primarily in the credit cards portfolio.
-
A $0.7 million decrease in the residential mortgage loans portfolio interest income, primarily related to the $126.2
million reduction in the average balance of this portfolio, which resulted in an approximate decrease of $1.7 million in
interest income, partially offset by the positive effect of new loan originations at higher current market interest rates.
●
A $3.8 million increase in interest income from interest-bearing cash balances, which consisted primarily of cash balances
deposited at the Federal Reserve Bank (“FED”), mainly due to the effect of higher market interest rates, partially offset by the
$1.4 billion decrease in the average balance of interest-bearing cash.
●
A $3.8 million increase in interest income on investment securities, mainly driven by:
-
A $1.3 million increase in interest income on U.S. government and agencies debt securities, mainly driven by higher-
yielding securities purchased in the first quarter of 2022.
-
A $1.3 million increase in interest income on Puerto Rico municipal bonds, mainly due to the upward repricing of
variable-rate bonds.
-
A $1.0 million increase in interest income on U.S. agencies MBS, mainly driven by a decrease in the premium
amortization expense associated with lower prepayments and the positive effects from higher-yielding U.S. agencies
MBS purchased in the second quarter of 2022. These variances were partially offset by a $177.8 million decrease in the
average balance of this portfolio, which resulted in an approximate reduction of $0.9 million in interest income.
83
Partially offset by:
●
A $22.2 million increase in interest expense on interest-bearing deposits, including :
-
A $14.7 million increase in interest expense on interest-bearing checking and saving accounts, driven by an increase of
$15.3 million in average rates paid in the first quarter of 2023 as a result of the overall higher interest rate environment,
partially offset by a reduction of $587.2 million in the average balance of these deposits, which resulted in a decrease of
approximately $0.6 million in interest expense.
-
A $6.4 million increase in interest expense on time deposits, excluding brokered CDs, mainly associated with higher
rates being paid in the first quarter of 2023 on new issuances and renewals also associated with the higher interest rate
environment. The average cost of time deposits in the first quarter of 2023, excluding brokered CDs, increased 111 basis
points to 1.87% when compared to the same period in 2022.
-
A $1.1 million increase in interest expense on brokered CDs, driven by new issuances at current higher market interest
rates that resulted in an increase of $75.0 million in the average balance, which resulted in additional interest expense of
approximately $0.5 million.
●
A
$7.0 million net increase in interest expense on borrowings, including:
-
A $6.1 million increase in interest expense on advances from the FHLB mainly associated with an increase in the
average balance of $429.2 million to increase available cash, which resulted in additional interest expense of
approximately $4.0 million, and the effect of approximately $2.1 million associated with new FHLB advances at higher
interest rates.
-
A
$2.0 million increase in interest expense on other long-term borrowings, driven by the upward repricing of junior
subordinated debentures tied to the increase in the three-month LIBOR index.
-
balance of $150.1 million.
Net interest margin for the first quarter of 2023 increased to 4.34%, compared to 3.81% for the same period in 2022, reflecting,
among other things, the upward repricing of variable-rate commercial loans, the growth in higher yielding loans, primarily consumer
loans, and the change in asset mix, reflecting an increase of higher -yielding assets. These factors were partially offset by the increase
in borrowings in the first quarter of 2023 and a 11 0 basis points increase in the average cost of interest-bearing liabilities.
84
Provision for Credit Losses
The provision for credit losses consists of provisions for credit losses on loans and finance leases, unfunded loan commitments, as
well as the debt securities portfolio. The principal changes in the provision for credit losses by main categories follow:
Provision for credit losses for loans and finance leases
The provision for credit losses for loans and finance leases was an expense of $16.3 million for the first quarter of 2023, compared
to a net benefit of $17.0 million for the first quarter of 2022. The variances by major portfolio category were as follows:
●
Provision for credit losses for the commercial and construction loan portfolio was an expense of $0.5 million the first quarter
of 2023, compared to a net benefit of $23.1 million for the first quarter of 2022. The expense recognized during the first
quarter of 2023 was impacted by the following factors: reserve increases of $5.0 million for a new nonacccrual commercial
and industrial participated loan in the Florida region in the power generation industry, and $1.1 million due to a less favorable
economic outlook in the projection of certain forecasted macroeconomic variables, such as the commercial real estate price
index (“CRE price index”); partially offset by reserve decreases of $6.1 million associated with the receipt of updated
financial information of certain borrowers. Meanwhile, the net benefit recorded in the first quarter of 2022 mainly reflects
reductions in qualitative reserves mostly associated with a continued positive long-term outlook of forecasted
macroeconomic variables, primarily in the commercial real estate price index, as a result of the reduced uncertainty regarding
COVID-19, particularly on loans in the hotel, transportation and entertainment industries and, to a lesser extent,
improvements in updated financial information received from borrowers during the first quarter of 2022.
●
Provision for credit losses for the residential mortgage loan portfolio was an expense of $0.1 million for the first quarter of
2023, compared to a net benefit of $4.9 million for the first quarter of 2022. The net benefit recorded for the first quarter of
2022 was primarily related to the overall decrease in the size of the residential mortgage loan portfolio and continued
improvements in the long-term outlook of forecasted macroeconomic variables, such as the housing price index.
●
Provision for credit losses for the consumer loans and finance leases portfolio was $15.7 million for the first quarter of 2023,
compared to $11.0 million for the first quarter of 2022. The increase primarily reflects the increase in the size of the
consumer loan portfolios and the increase in historical charge-off levels in all major portfolio classes.
Provision for credit losses for unfunded loan commitments
The provision for credit losses for unfunded commercial and construction loan commitments and standby letters of credit was a net
benefit of $0.1 million for each of the first quarters of 2023 and 2022.
Provision for credit losses for held-to-maturity and available-for-sale debt securities
The provision for credit losses for held-to-maturity securities was a net benefit of $0.6 million for the first quarter of 2023,
compared to an expense of $3.7 million for the first quarter of 2022. The net benefit recorded during the first quarter of 2023 was
mostly related to a reduction in qualitative reserves driven by updated financial information of certain bond issuers.
85
Non-Interest Income
Non-interest income amounted to $32.5 million for the first quarter of 2023, compared to $32.9 million for the same period in 2022.
The $0.4 million decrease in non-interest income was primarily due to:
●
A $2.4 million decrease in revenues from mortgage banking activities, mainly driven by a decrease in net realized gain on
sales of residential mortgage loans in the secondary market mainly due to a lower volume of sales. During the first quarters
of 2023 and 2022, net gains of $1.1 million and $3.5 million, respectively, were recognized as a result of GNMA
securitization transactions and whole loan sales to U.S. GSEs amounting to $37.4 million and $93.9 million, respectively.
●
A $0.4 million decrease in insurance commission income, mainly in contingent commissions.
Partially offset by:
●
A $1.2 million increase in card and processing income mainly related to higher interchange income and merchant-related
referral fees received during the first quarter of 2023.
●
A $1.1 million increase in other sources of non-interest income including: (i) a $0.3 million increase related to higher
unused commitment fees; (ii) a $0.2 million increase related to higher benefit recognized in relation to purchased income
tax credits realized; (iii) a $0.2 million increase in unrealized gains on marketable equity securities; and (iii) a $0.2 million
increase in fees and commissions from insurance referrals.
Non-Interest Expenses
Non-interest expenses for the quarter ended March 31, 2023 amounted to $115.3 million, compared to $106.7 million for the same
period in 2022. The efficiency ratio for the first quarter of 2023 was 49.39%, compared to 48.82% for the first quarter of 2022. The
$8.6 million increase in non-interest expenses was primarily due to:
●
A
$6.9 million increase in employees’ compensation and benefits expenses, mainly driven by annual salary merit increases
and an increase in bonuses, stock-based compensation expense of retirement-eligible employees, payroll taxes, and
medical insurance premium costs.
●
A
$1.4 million increase in professional service fees, driven by a $1.2 million increase in outsourcing technology service
fees.
●
A
$1.2 million increase in credit and debit card processing fees.
●
A
$0.5 million increase in business promotion expenses, mainly related to a $0.7 million increase in credit card loyalty
rewards expense, partially offset by a $0.3 million decrease in sponsorship activities.
●
A
$0.5 million increase in FDI C deposit insurance cost, driven by the two basis points increase on the initial base deposit
insurance assessment rate that came into effect during the first quarter of 2023.
Partially offset by:
●
A
$1.3 million increase in net gains on OREO operations, mainly driven by a $1.4 million increase in net realized gains on
sales of OREO properties, primarily residential properties in the Puerto Rico region.
●
A
$1.2 million decrease in occupancy and equipment expenses, primarily related to a reduction in rental expenses and
equipment-related depreciation charges.
86
Income Taxes
For the first quarter of 2023, the Corporation recorded an income tax expense of $31.9 million compared to $43.0 million for the
same period in 2022. The decrease in income tax expense was mainly related to lower pre-tax income and a higher proportion of
exempt to taxable income resulting in a lower effective tax rate.
The Corporation’s estimated annual effective tax rate in the first quarter of 2023, excluding entities from which a tax benefit cannot
be recognized and discrete items, was 31.2%, compared to 32.9% for the first quarter of 2022. See Note 17 - Income Taxes, to the
unaudited consolidated financial statements herein for additional information.
FINANCIAL CONDITION AND OPERATING ANALYSIS
Assets
The Corporation’s total assets were $19.0 billion as of March 31, 2023, an increase of $342.6 million from December 31, 2022. The
increase was primarily related to a $343.1 million increase in cash and cash equivalents mainly attributable to the $347.8 million
increase in borrowings to enhance available cash as a precautionary measure in light of recent instability in the banking sector. In
addition, as further discussed below, total loans increased by $28.0 million. These variances were partially offset by a $4.3 million
decrease in total investment securities.
Loans Receivable, including Loans Held for Sale
As of March 31, 2023, the Corporation’s total loan portfolio before the ACL amounted to $11.6 billion, an increase of $28.0 million
compared to December 31, 2022. The increase consisted of a $141.5 million growth in the Puerto Rico region, partially offset by
decreases of $108.6 million in the Florida region and $4.9 million in the Virgin Islands region. On a portfolio basis, the increase
consisted of a $79.5 million growth in consumer loans, including a $72.0 million increase in auto and leases, partially offset by
decreases of $32.9 million in residential mortgage loans and $18.6 million in commercial and construction loans.
As of March 31, 2023, the loans held for the Corporation’s investment portfolio was comprised of commercial and construction
loans (46%), residential real estate loans (24%), and consumer and finance leases (30%). Of the total gross loan portfolio held for
investment of $11.6 billion as of March 31, 2023, the Corporation had credit risk concentration of approximately 80% in the Puerto
Rico region, 17% in the United States region (mainly in the state of Florida), and 3% in the Virgin Islands region, as shown in the
following table:
87
As of March 31, 2023
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
Residential mortgage loans
$
2,205,659
$
176,123
$
429,746
$
2,811,528
Construction loans
44,297
3,898
95,469
143,664
Commercial mortgage loans
1,766,479
62,694
524,486
2,353,659
Commercial and Industrial loans
1,872,215
69,013
920,961
2,862,189
Total commercial loans
3,682,991
135,605
1,540,916
5,359,512
Consumer loans and finance leases
3,335,014
63,231
8,700
3,406,945
Total loans held for investment, gross
$
9,223,664
$
374,959
$
1,979,362
$
11,577,985
Loans held for sale
14,830
-
353
15,183
Total loans, gross
$
9,238,494
$
374,959
$
1,979,715
$
11,593,168
As of December 31, 2022
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
Residential mortgage loans
$
2,237,983
$
179,917
$
429,390
$
2,847,290
Construction loans
30,529
4,243
98,181
132,953
Commercial mortgage loans
1,768,890
65,314
524,647
2,358,851
Commercial and Industrial loans
1,791,235
68,874
1,026,154
2,886,263
Total commercial loans
3,590,654
138,431
1,648,982
5,378,067
Consumer loans and finance leases
3,256,070
61,419
9,979
3,327,468
Total loans held for investment, gross
$
9,084,707
$
379,767
$
2,088,351
$
11,552,825
Loans held for sale
12,306
-
-
12,306
Total loans, gross
$
9,097,013
$
379,767
$
2,088,351
$
11,565,131
88
Residential Real Estate Loans
As of March 31, 2023, the Corporation’s total residential mortgage loan portfolio, including loans held for sale, decreased by $32.9
million, as compared to the balance as of December 31, 2022. The decline in the residential mortgage loan portfolio reflects decreases
of $29.8 million in the Puerto Rico region and $3.8 million in the Virgin Islands region, partially offset by an increase of $0.7 million
in the Florida region. The decline was driven by repayments, foreclosures, and charge -offs, which more than offset the volume of new
loan originations kept on the balance sheet.
The majority of the Corporation’s outstanding balance of residential mortgage loans in the Puerto Rico and the Virgin Islands
regions as of March 31, 2023 consisted of fixed-rate loans that traditionally carry higher yields than residential mortgage loans in the
Florida region. In the Florida region, approximately 44% of the residential mortgage loan portfolio consisted of hybrid adjustable-rate
mortgages. In accordance with the Corporation’s underwriting guidelines, residential mortgage loans are primarily fully documented
loans, and the Corporation does not originate negative amortization loans.
Commercial and Construction Loans
As of March 31, 2023, the Corporation’s commercial and construction loan portfolio decreased by $18.6 million, as compared to
the balance as of December 31, 2022.
In the Florida region, commercial and construction loans decreased by $108.1 million, as compared to the balance as of December
31, 2022. This decrease reflected $93.3 million in payoffs and paydowns of five commercial and industrial relationships in the Florida
region, each in excess of $10 million, including the payoff of a $24.3 million commercial and industrial participated loan in the leisure
and hospitality industry.
In the Virgin Islands region, commercial and construction loans decreased by $2.8 million, as compared to the balance as of
December 31, 2022.
In the Puerto Rico region, commercial and construction loans increased by $92.3 million, as compared to the balance as of
December 31, 2022. This increase was driven by the origination of several loans, including four commercial relationships, each in
excess of $10 million, that increased the portfolio amount by $54.2 million.
As of March 31, 2023, the Corporation had $170.9 million outstanding in loans extended to the Puerto Rico government, its
municipalities, and public corporations, compared to $169.8 million as of December 31, 2022. See “Exposure to Puerto Rico
Government” below for additional information.
The Corporation also has credit exposure to USVI government entities. As of March 31, 2023, the Corporation had $38.7 million
in loans to USVI government public corporations, compared to $38.0 million as of December 31, 2022. See “Exposure to USVI
Government” below for additional information.
As of March 31, 2023, the Corporation’s total commercial mortgage loan exposure amounted to $2.4 billion, or 44% of the total
commercial loan portfolio. Of this total, $379 million and $38 million is in office real estate in the Puerto Rico and Florida regions,
respectively. Total office real estate maturing during the remainder of 2023 and 2024 amounted to $107 million.
As of March 31, 2023, the Corporation’s total exposure to shared national credit (“SNC”) loans (including unused commitments)
amounted to $1.1 billion as of each of March 31, 2023 and December 31, 2022. As of March 31, 2023, approximately $207.6 million
of the SNC exposure is related to the portfolio in Puerto Rico and $858.3 million is related to the portfolio in the Florida region.
Consumer Loans and Finance Leases
As of March 31, 2023, the Corporation’s consumer loan and finance lease portfolio increased by $79.5 million to $3.4 billion, as
compared to the portfolio balance of $3.3 billion as of December 31, 2022. This increase was mainly related to increases of $34.8
million and $37.2 million in the auto loans and finance leases portfolios, respectively. The growth in consumer loans is mainly
reflected in the Puerto Rico region across all portfolio classes.
89
Loan Production
First BanCorp. relies primarily on its retail network of branches to originate residential and consumer loans. The Corporation may
supplement its residential mortgage originations with wholesale servicing released mortgage loan purchases from mortgage bankers.
The Corporation manages its construction and commercial loan originations through centralized units and most of its originations
come from existing customers, as well as through referrals and direct solicitations. Auto loans and finance leases originations rely
primarily on relationships with auto dealers and dedicated sales professionals who serve selected locations to facilitate originations.
The following table provides a breakdown of First BanCorp.’s loan production, including purchases, refinancings, renewals and
draws from existing revolving and non-revolving commitments, for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Residential mortgage
$
77,302
$
122,513
Construction
35,499
19,986
Commercial mortgage
88,692
127,985
Commercial and Industrial
555,882
490,296
Consumer
435,318
426,467
$
1,192,693
$
1,187,247
During the quarter ended March 31, 2023, total loan originations, including purchases, refinancings, and draws from existing
revolving and non-revolving commitments, amounted to approximately $1.2 billion, an increase of $5.5 million, compared to the first
quarter of 2022.
Residential mortgage loan originations for the quarter ended March 31, 2023 amounted to $77.3 million, compared to $122.5
million for the first quarter of 2022. The decrease of $45.2 million in the first quarter of 2023, as compared to the same period in 2022,
reflects declines of $42.2 million in the Puerto Rico region, $2.5 million in the Florida region, and $0.5 million in the Virgin Islands
region. Approximately 60% of the $61.5 million residential mortgage loan originations in the Puerto Rico region during the first
quarter of 2023 were of conforming loans, compared to 67% of $103.7 million for the first quarter of 2022. The decrease during the
first quarter of 2023 is related to a lower volume of conforming loan originations and refinancings, in part due to a higher interest rate
environment.
Commercial and construction loan originations (excluding government loans) for the quarter ended March 31, 2023 amounted to
$672.8 million, compared to $633.8 million for the first quarter of 2022. The increase of $39.0 million in the first quarter of 2023
consisted of increases of $93.7 million and $0.5 million in the Puerto Rico and the Virgin Islands regions, respectively, partially offset
by a decrease of $55.2 million in the Florida region.
Government loan originations for the quarter ended March 31, 2023 amounted to $7.2 million, an increase of $2.8 million,
compared to $4.4 million for the first quarter of 2022. Government loan originations during the first quarter of 2023 were mainly
related to the origination of a loan to an agency of the Puerto Rico government for a low-income housing project and the utilization of
an arranged overdraft line of credit of a government entity in the Virgin Islands region. Government loan originations during the first
quarter of 2022 were related to the utilization of an arranged overdraft line of credit of a government entity in the Virgin Islands
region.
Originations of auto loans (including finance leases) for the quarter ended March 31, 2023 amounted to $245.1 million, compared
to $261.3 million for the first quarter of 2022. The decrease in the first quarter of 2023, as compared to the same quarter of 2022,
consisted of a $17.5 million decrease in the Puerto Rico region, partially offset by a $1.3 million increase in the Virgin Islands region.
Other consumer loan originations, other than credit cards, for the quarter ended March 31, 2023 amounted to $71.9 million, compared
to $55.7 million for the first quarter of 2022. Most of the increase in other consumer loan originations for the first quarter of 2023, as
compared with the same period in 2022, was in the Puerto Rico region. The utilization activity on the outstanding credit card portfolio
for the quarter ended March 31, 2023 amounted to $118.4 million, compared to $109.5 million for the same period in 2022.
90
Investment Activities
As part of its liquidity, revenue diversification, and interest rate risk management strategies, First BanCorp. maintains a debt
securities portfolio classified as available for sale or held to maturity.
The Corporation’s total available-for-sale debt securities portfolio as of March 31, 2023 amounted to $5.6 billion, a $10.3 million
decrease from December 31, 2022. The decrease was mainly driven by repayments of approximately $95.9 million of U.S. agencies
and MBS, partially offset by an $87.2 million increase in fair value attributable to changes in market interest rates. As of March 31,
2023, the Corporation had a net unrealized loss on available-for-sale debt securities of $711.0 million. This unrealized loss is
attributable to instruments on book s carrying a lower interest rate than market rates. The Corporation expects that this unrealized loss
will reverse over time. The Corporation expects the portfolio to continue to decrease as repayments are received over the next two
years and further expects that the accumulated other comprehensive loss will decrease accordingly, excluding the impact of market
interest rates.
As of March 31, 2023, substantially all of the Corporation’s available-for-sale debt securities portfolio was invested in U.S.
government and agencies debentures and fixed-rate GSEs’ MBS. In addition, as of March 31, 2023, the Corporation held a bond
issued by the PRHFA, classified as available for sale, specifically a residential pass-through MBS in the aggregate amount of $3.3
million (fair value - $2.2 million). This residential pass-through MBS issued by the PRHFA is collateralized by certain second
mortgages originated under a program launched by the Puerto Rico government in 2010 and had an unrealized loss of $1.1 million as
of March 31, 2023, of which $0.4 million is due to credit deterioration. During 2021, the Corporation placed this instrument in
nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral.
As of March 31, 2023, the Corporation’s held-to-maturity debt securities portfolio, before the ACL, decreased to $431.4 million,
compared to $437.5 million as of December 31, 2022. Held-to-maturity debt securities consisted of fixed-rate GSEs’ MBS and
financing arrangements with Puerto Rico municipalities issued in bond form, which the Corporation accounts for as securities, but
which were underwritten as loans with features that are typically found in commercial loans. Puerto Rico municipal bonds typically
are not issued in bearer form, are not registered with the Securities and Exchange Commission, and are not rated by external credit
agencies. These bonds have seniority to the payment of operating costs and expenses of the municipality and, in most cases, are
supported by assigned property tax revenues. As of March 31, 2023, approximately 74% of the Corporation’s municipality bonds
consisted of obligations issued by four of the largest municipalities in Puerto Rico. The municipalities are required by law to levy
special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and loans.
Given the uncertainties as to the effects that the fiscal position of the Puerto Rico central government, and the measures taken, or to be
taken, by other government entities may have on municipalities, the Corporation cannot be certain whether future charges to the ACL
on these securities will be required. As of March 31, 2023, the ACL for held-to-maturity debt securities was $7.6 million, compared to
$8.3 million as of December 31, 2022.
See “Risk Management – Exposure to Puerto Rico Government” below for information and details about the Corporation’s total
direct exposure to the Puerto Rico government, including municipalities and “Credit Risk Management” below for the ACL of the
exposure to Puerto Rico municipal bonds.
91
March 31, 2023
December 31, 2022
(In thousands)
Money market investments
$
1,059
$
2,025
Available-for-sale debt securities, at fair value:
U.S. government and agencies obligations
2,531,632
2,492,228
Puerto Rico government obligations
2,203
2,201
MBS:
2,896,655
2,941,458
158,766
163,133
-
500
Total available-for-sale debt securities, at fair value
5,589,256
5,599,520
Held-to-maturity debt securities, at amortized cost:
MBS:
161,587
166,739
104,008
105,088
Puerto Rico municipal bonds
165,800
165,710
(7,646)
(8,286)
Total held-to-maturity debt securities
423,749
429,251
Equity securities, including $54.2 million and $42.9 million of FHLB stock
as of March 31, 2023 and December 31, 2022, respectively
66,714
55,289
Total money market investments and investment securities
$
6,080,778
$
6,086,085
Carrying Amount
Weighted-Average Yield %
(Dollars in thousands)
U.S. government and agencies obligations:
Due within one year
$
210,928
0.44
Due after one year through five years
2,272,126
0.83
Due after five years through ten years
36,926
1.64
Due after ten years
11,652
5.15
2,531,632
0.83
Puerto Rico government and municipalities obligations:
Due within one year
1,204
5.70
Due after one year through five years
42,633
6.74
Due after five years through ten years
55,940
7.10
Due after ten years
68,226
7.73
168,003
7.26
MBS
3,321,016
1.68
ACL on held-to-maturity debt securities
(7,646)
-
Total debt securities
$
6,013,005
1.48
92
Net interest income in future periods could be affected by prepayments of MBS. Any acceleration in the prepayments of MBS
purchased at a premium
would lower yields on these securities, since the amortization of premiums paid upon acquisition would
accelerate. Conversely, acceleration of the prepayments of MBS would increase yields on securities purchased at a discount, since the
amortization of the discount would accelerate. These risks are directly linked to future period market interest rate fluctuations. Net
interest income in future periods might also be affected by the Corporation’s investment in callable securities. As of March 31, 2023,
the Corporation had approximately $2.0 billion in callable debt securities (U.S. agencies debt securities) with an average yield of
0.84%, of which approximately 59% were purchased at a discount and 5% at a premium. See “Risk Management” below for further
analysis of the effects of changing interest rates on the Corporation’s net interest income and the Corporation’s interest rate risk
management strategies. Also, refer to Note 2 – Debt Securities to the unaudited consolidated financial statements herein for additional
information regarding the Corporation’s debt securities portfolio.
RISK MANAGEMENT
General
Risks are inherent in virtually all aspects of the Corporation’s business activities and operations. Consequently, effective risk
management is fundamental to the success of the Corporation. The primary goals of risk management are to ensure that the
Corporation’s risk-taking activities are consistent with the Corporation’s objectives and risk tolerance, and that there is an appropriate
balance between risks and rewards in order to maximize stockholder value.
The Corporation has in place a risk management framework to monitor, evaluate and manage the principal risks assumed in
conducting its activities. First BanCorp.’s business is subject to eleven broad categories of risks: (i) liquidity risk; (ii) interest rate risk;
(iii) market risk; (iv) credit risk; (v) operational risk; (vi) legal and regulatory risk; (vii) reputational risk; (viii) model risk; (ix) capital
risk; (x) strategic risk; and (xi) information technology risk. First BanCorp. has adopted policies and procedures designed to identify
and manage the risks to which the Corporation is exposed.
The Corporation’s risk management policies are described below, as well as in Part II, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” in the 2022 Annual Report on Form 10-K.
Liquidity Risk
Liquidity risk involves the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and
business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity
management involves forecasting funding requirements and maintaining sufficient capacity to meet liquidity needs and
accommodate fluctuations in asset and liability levels due to changes in the Corporation’s business operations or unanticipated
events.
The Corporation manages liquidity at two levels. The first is the liquidity of the parent company, or First Bancorp., which is the
holding company that owns the banking and non-banking subsidiaries. The second is the liquidity of the banking subsidiary, or
FirstBank.
The Asset and Liability Committee of the Board is responsible for overseeing management’s establishment of the Corporation’s
liquidity policy, as well as approving operating and contingency procedures and monitoring liquidity on an ongoing basis. The
Management’s Investment and Asset Liability Committee (“MIALCO”), which reports to the Board’s Asset and Liability
Committee, uses measures of liquidity developed by management that involve the use of several assumptions to review the
Corporation’s liquidity position on a monthly basis. The MIALCO oversees liquidity management, interest rate risk, market risk,
and other related matters.
The MIALCO is composed of senior management officers, including the Chief Executive Officer, the Chief Financial Officer, the
Chief Risk Officer, the Corporate Strategic and Business Development Director, the Treasury and Investments Risk Manager, the
Financial Planning and Asset and Liability Management (“ALM”) Director, and the Treasurer. The Treasury and Investments
Division is responsible for planning and executing the Corporation’s funding activities and strategy, monitoring liquidity availability
on a daily basis, and reviewing liquidity measures on a weekly basis. The Treasury and Investments Accounting and Operations area
of the Corporate Controller’s Department is responsible for calculating the liquidity measurements used by the Treasury and
Investment Division to review the Corporation’s liquidity position on a monthly basis. The Financial Planning and ALM Division is
responsible to estimate the liquidity gap for longer periods.
93
To ensure adequate liquidity through the full range of potential operating environments and market conditions, the Corporation
conducts its liquidity management and business activities in a manner that is intended to preserve and enhance funding stability,
flexibility, and diversity. Key components of this operating strategy include a strong focus on the continued development of
customer-based funding, the maintenance of direct relationships with wholesale market funding providers, and the maintenance of
the ability to liquidate certain assets when, and if, requirements warrant.
The Corporation develops and maintains contingency funding plans. These plans evaluate the Corporation’s liquidity position
under various operating circumstances and are designed to help ensure that the Corporation will be able to operate through periods
of stress when access to normal sources of funds is constrained. The plans project funding requirements during a potential period of
stress, specify and quantify sources of liquidity, outline actions and procedures for effectively managing liquidity through a period of
stress, and define roles and responsibilities for the Corporation’s employees. Under the contingency funding plans, the Corporation
stresses the balance sheet and the liquidity position to critical levels that mimic difficulties in generating funds or even maintaining
the current funding position of the Corporation and the Bank and are designed to help ensure the ability of the Corporation and the
Bank to honor their respective commitments. The Corporation has established liquidity triggers that the MIALCO monitors in order
to maintain the ordinary funding of the banking business. The MIALCO developed contingency funding plans for the following
three scenarios: a credit rating downgrade, an economic cycle downturn event, and a concentration event. The Board’s Asset and
Liability Committee reviews and approves these plans on an annual basis.
The Corporation manages its liquidity in a proactive manner and in an effort to maintain a sound liquidity position. It uses
multiple measures to monitor its liquidity position, including core liquidity, basic liquidity, and time-based reserve measures. Cash
and cash equivalents amounted to $823.6 million as of March 31, 2023, compared to $480.5 million as of December 31, 2022. Free
high-quality liquid securities that could be liquidated or pledged within one day amounted to $2.4 billion as of March 31, 2023,
compared to $3.1 billion as of December 31, 2022. As of March 31, 2023, the estimated core liquidity reserve (which includes cash
and free high quality liquid assets such as U.S. government and GSEs obligations that could be liquidated or pledged within one
day) was $3.2 billion, or 16.77% of total assets, compared to $3.5 billion, or 19.02% of total assets as of December 31, 2022. The
basic liquidity ratio (which adds available secured lines of credit to the core liquidity) was approximately 21.42% of total assets as of
March 31, 2023, compared to 22.48% of total assets as of December 31, 2022.
As of March 31, 2023, in addition to the aforementioned $3.2 billion in cash and free high quality liquid assets, the Corporation
had $882.5 million available for credit with the FHLB based on the value of collateral pledged with the FHLB. The Corporation also
maintains borrowing capacity at the FED Discount Window. The Corporation does not consider borrowing capacity from the FED
Discount Window as a primary source of liquidity but had approximately $1.4 billion available for funding under the FED’s BIC
Program as of March 31, 2023 as an additional contingent source of liquidity. Total loans pledged to the FED Discount Window
amounted to $2.3 billion as of March 31, 2023. The Corporation also does not rely on uncommitted inter-bank lines of credit (federal
funds lines) to fund its operations and does not include them in the basic liquidity measure. On a combined basis, as of March 31,
2023, the Corporation had $5.5 billion available to meet liquidity needs , while maintaining a strong capital position.
The Bank had $252.9 million in brokered CDs as of March 31, 2023, of which approximately $180.9 million mature over the next
twelve months. Liquidity at the Bank level is highly dependent on bank deposits, which fund 84.9% of the Bank’s assets (or 83.5%
excluding brokered CDs). Historically, the use of brokered CDs has been an additional source of funding for the Corporation as it
provides an additional efficient channel for funding diversification and can be obtained faster than regular retail deposits. Funding
through brokered CDs may continue to increase the overall cost of funding for the Corporation and impact the net interest margin.
In addition, as further discussed below, the Corporation maintain a large, stable core deposit base and a diversified base of readily
available wholesale funding sources, including advances from the FHLB through pledged borrowing capacity, securities sold under
agreements to repurchase, and access to certificates of deposit issued through brokers. Funding through wholesale funding may
continue to increase the overall cost of funding for the Corporation and impact the net interest margin.
Over the last year, the FED’s policies to control the inflationary economic environment, including repeated market interest rate
increases, have resulted in excess liquidity gradually tapering off and impacting the Corporation’s core deposit balances as
customers have allocated cash into higher yielding options. During the first quarter of 2023, the banking industry in the U.S.
mainland experienced deposit runoff that led to the collapse of certain financial institutions. As a precautionary measure, during the
first quarter of 2023, the Corporation increased the use of advances from the FHLB, repurchase agreements, and other sources, such
as wholesale funding brokers, to increase cash and cash equivalents. Increased use of long-term FHLB advances has been part of the
Corporation’s interest rate risk management strategy to mitigate the impact of market interest rate increases. The additional use and
future levels of these sources of funding are dependent on factors such as the loan portfolio future pipeline and customers continuing
to allocate more cash into higher yielding alternatives, among other factors. The Corporation believes that as uncertainty in the
banking industry eases certain short-term borrowings will be repaid and not renewed.
94
As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the
financial needs of its customers. These financial instruments may include loan commitments and standby letters of credit. These
commitments are subject to the same credit policies and approval processes used for on-balance sheet instruments. These
instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements
of financial condition. As of March 31, 2023, the Corporation’s commitments to extend credit amounted to approximately $2.0
billion. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Since certain commitments are expected to expire without being drawn upon, the total commitment
amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the
option to reevaluate the agreement prior to additional disbursements. There have been no significant or unexpected draws on
existing commitments. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at
any time and without cause.
March 31, 2023
December 31, 2022
(In thousands)
Financial instruments whose contract amounts represent credit risk:
$
200,105
$
170,639
949,701
936,231
41,639
41,988
772,240
761,634
84,724
68,647
8,886
9,160
The Corporation engages in the ordinary course of business in other financial transactions that are not recorded on the balance
sheet, or may be recorded on the balance sheet in amounts that are different from the full contract or notional amount of the
transaction and, thus, affect the Corporation’s liquidity position. These transactions are designed to (i) meet the financial needs of
customers, (ii) manage the Corporation’s credit, market and liquidity risks, (iii) diversify the Corporation’s funding sources, and (iv)
optimize capital.
In addition to the aforementioned off-balance sheet debt obligations and unfunded commitments to extend credit, the Corporation
has obligations and commitments to make future payments under contracts, amounting to approximately $4.0 billion as of March 31,
2023. Our material cash requirements comprise primarily of contractual obligations to make future payments related to time
deposits, short-term borrowings, long-term debt, and operating lease obligations. We also have other contractual cash obligations
related to certain binding agreements we have entered into for services including outsourcing of technology services, security,
advertising and other services which are not material to our liquidity needs. We currently anticipate that our available funds, credit
facilities, and cash flows from operations will be sufficient to meet our operational cash needs for the foreseeable future.
Off-balance sheet transactions are continuously monitored to consider their potential impact to our liquidity position and changes
are applied to the balance between sources and uses of funds, as deemed appropriate, to maintain a sound liquidity position.
Sources of Funding
The Corporation utilizes different sources of funding to help ensure that adequate levels of liquidity are available when needed.
Diversification of funding sources is of great importance to protect the Corporation’s liquidity from market disruptions. The principal
sources of short-term funds are deposits, including brokered CDs. Additional funding is provided by short- and long-term securities
sold under agreements to repurchase and lines of credit with the FHLB. Consistent with its strategy, the Corporation has been seeking
to add core deposits.
The Asset and Liability Committee reviews credit availability on a regular basis. The Corporation also sells mortgage loans as a
supplementary source of funding and has obtained long-term funding in the past through the issuance of notes and long-term brokered
CDs. In addition, the Corporation also maintains as additional contingent sources borrowing capacity at the FED’s BIC Program and
recently enrolled in the FED’s Bank Term Funding Program (“BTFP”).
95
While liquidity is an ongoing challenge for all financial institutions, management believes that the Corporation’s available
borrowing capacity and efforts to grow core deposits will be adequate to provide the necessary funding for the Corporation’s business
plans in the foreseeable future.
The Corporation’s principal sources of funding are discussed below:
Retail core deposits
– The Corporation’s deposit products include regular savings accounts, demand deposit accounts, money market
accounts, and retail CDs. As of March 31, 2023, the Corporation’s core deposits, which exclude government deposits and brokered
CDs, decreased by $142.7 million to $13.1 billion from $13.3 billion as of December 31, 2022. The decrease was primarily related to
saving and checking accounts in the Florida region used for loan repayments, as well as customers continuing to reallocate cash into
higher-yielding alternatives. Notwithstanding, these reductions were partially offset by an increase in time deposits, including a shift
from non-interest bearing or low-interest bearing products to time deposits, driven by higher rates offered, as well as certain large
commercial deposit inflows in the Puerto Rico region. The average balance per retail core deposit account is $26 thousand.
Government deposits
transactional accounts and $161.9 million in time deposits), compared to $2.3 billion as of December 31, 2022. The decrease was
primarily related to reductions in the balance of operational accounts of a public corporation. These deposits are insured by the FDIC
up to the applicable limits and the uninsured portions is fully collateralized. Approximately 25% of the public sector deposits as of
March 31, 2023 were from municipalities and municipal agencies in Puerto Rico and 75% were from public corporations, the central
government and agencies, and U.S. federal government agencies in Puerto Rico.
In addition, as of March 31, 2023, the Corporation had $462.0 million of government deposits in the Virgin Islands region
(December 31, 2022 - $442.8 million) and $11.3 million in the Florida region (December 31, 2022 - $11.6 million).
The uninsured portions of government deposits were collateralized by securities and loans with an amortized cost of $3.1 billion as
of each of March 31, 2023 and December 31, 2022, and an estimated market value of $2.8 billion and $2.7 billion, respectively. In
addition to securities and loans, as of each of March 31, 2023 and December 31, 2022, the Corporation used $200.0 million in letters
of credit issued by the FHLB as pledges for public deposits in the Virgin Islands.
Estimate of Uninsured Deposits –
As of March 31, 2023 and December 31, 2022, the estimated amount of uninsured deposits
totaled $7.2 billion and $7.6 billion, respectively, generally representing the portion of deposits in domestic offices that exceed the
FDIC insurance limit of $250,000 and amounts in any other uninsured deposit account. The balances presented as of March 31, 2023
and December 31, 2022, include the uninsured portion of government deposits, which are fully collateralized as previously mentioned.
Excluding fully collateralized deposits, $4.8 billion of these deposits are uninsured, which represent 30.13% of total deposits,
excluding brokered CDs, as of March 31, 2023, compared to $4.9 billion, or 30.65% of total deposits, excluding brokered CDs, as of
December 31, 2022. The amount of uninsured deposits is calculated based on the same methodologies and assumptions used for our
bank regulatory reporting requirements adjusted for cash held by wholly-owned subsidiaries at the Bank.
$250,000) and other time deposits that are otherwise uninsured as of March 31, 2023:
(In thousands)
3 months or
less
3 months to
6 months
6 months to
1 year
Over 1 year
Total
U.S. time deposits in excess of FDIC insurance
limits
$
125,162
$
84,861
$
217,846
$
341,507
$
769,376
Other uninsured time deposits
$
18,814
$
10,058
$
9,864
$
5,647
$
44,383
Brokered CDs
as of December 31, 2022. The increase reflects the effect of new issuances amounting to $189.7 million with an all-in cost of 4.70%,
partially offset by approximately $42.6 million of maturing brokered CDs, with an all-in cost of 4.06%, that were paid off during the
first quarter of 2023.
The average remaining term to maturity of the brokered CDs outstanding as of March 31, 2023 was approximately 1.1 years.
The use of brokered CDs provides an efficient channel for funding diversification and interest rate management. Brokered CDs are
insured by the FDIC up to regulatory limits and can be obtained faster than regular retail deposits.
Refer to “Net Interest Income” above for information about average balances of interest-bearing deposits and the average interest
rate paid on deposits, for the quarters ended March 31, 2023 and 2022.
96
Securities sold under agreements to repurchase -
The Corporation’s investment portfolio is funded in part with repurchase
agreements. The Corporation’s outstanding short-term securities sold under repurchase agreements amounted to $173.0 million as of
March 31, 2023, compared to $75.1 million as of December 31, 2022. During the first quarter of 2023, the Corporation added $173.0
million of short-term repurchase agreements at an average cost of 5.08% reflecting precautionary measures taken by management in
light of recent instability in the banking sector, and repaid upon maturity $75.1 million of short-term repurchase agreements at an
average cost of 4.55%. In addition to these repurchase agreements, the Corporation has been able to maintain access to credit by using
cost-effective sources such as FHLB advances. See Note 9 – Securities Sold Under Agreements to Repurchase (Repurchase
Agreements) to the unaudited consolidated financial statements herein for further details about repurchase agreements outstanding by
counterparty and maturities.
Under the Corporation’s repurchase agreements, as is the case with derivative contracts, the Corporation is required to pledge cash
or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines
due to changes in interest rates, a liquidity crisis or any other factor, the Corporation is required to deposit additional cash or securities
to meet its margin requirements, thereby adversely affecting its liquidity. Given the quality of the collateral pledged, the Corporation
has not experienced margin calls from counterparties arising from credit-quality-related write-downs in valuations.
Advances from the FHLB –
The Bank is a member of the FHLB system and obtains advances to fund its operations under a collateral
agreement with the FHLB that requires the Bank to maintain qualifying mortgages and/or investments as collateral for advances taken.
As of March 31, 2023, the outstanding balance of fixed-rate FHLB advances was $925.0 million, compared to $675.0 million as of
December 31, 2022. During the first quarter of 2023, the Corporation added $425.0 million of short-term FHLB advances at an
average cost of 5.04% and $300.0 million of long-term FHLB advances at an average cost of 4.59%, and repaid upon maturity $475.0
million of short-term FHLB advances at an average cost of 4.56%. Of the $925.0 million in FHLB advances as of March 31, 2023,
$700.0 million were pledged with investment securities and $225.0 million were pledged with mortgage loans. As of March 31, 2023,
the Corporation had $882.5 million available for additional credit on FHLB lines of credit based on collateral pledged at the FHLB of
New York.
Trust Preferred Securities –
In 2004, FBP Statutory Trusts I and II, statutory trusts that are wholly-owned by the Corporation and not
consolidated in the Corporation’s financial statements, sold to institutional investors variable-rate TRuPs and used the proceeds of
these issuances, together with the proceeds of the purchases by the Corporation of variable rate common securities, to purchase junior
subordinated deferrable debentures. The subordinated debentures are presented in the Corporation’s consolidated statements of
financial condition as other long-term borrowings. As of each of March 31, 2023 and December 31, 2022, the Corporation had
subordinated debentures outstanding in the aggregate amount of $183.8 million with maturity dates from June 17, 2034 through
September 20, 2034. Under the indentures, the Corporation has the right, from time to time, and without causing an event of default, to
defer payments of interest on the Junior Subordinated Deferrable Debentures by extending the interest payment period at any time and
from time to time during the term of the subordinated debentures for up to twenty consecutive quarterly periods. As of March 31,
2023, the Corporation was current on all interest payments due on its subordinated debt. See Note 11 – Other Long-Term Borrowings
and Note 7 – Non-Consolidated Var iable Interest Entities (“VIEs”) and Servicing Assets to unaudited consolidated financial
statements herein for additional information.
Other Sources of Funds and Liquidity
maturing deposits and borrowings, and deposits withdrawals. In connection with its mortgage banking activities, the Corporation has
invested in technology and personnel to enhance the Corporation’s secondary mortgage market capabilities.
The enhanced capabilities improve the Corporation’s liquidity profile as they allow the Corporation to derive liquidity, if needed,
from the sale of mortgage loans in the secondary market. The U.S. (including Puerto Rico) secondary mortgage market is still highly-
liquid, in large part because of the sale of mortgages through guarantee programs of the FHA, VA, U.S. Department of Housing and
Urban Development (“HUD”), FNMA and FHLMC. During the first quarter of 2023, loans pooled into GNMA MBS amounted to
approximately $29.4 million. Also, during the first quarter of 2023, the Corporation sold approx imately $8.0 million of performing
residential mortgage loans to FNMA.
The FED Discount Window is a cost-efficient contingent source of funding for the Corporation in highly-volatile market
conditions. As previously mentioned, although currently not in use, as of March 31, 2023, the Corporation had approximately $1.4
billion available for funding under the FED’s Discount Window based on collateral pledged at the FED.
The FED’s BTFP was established by the Federal Reserve Board in March 2023 as an additional source of funding for depository
institutions to borrow up to the par value of eligible collateral for terms of up to one year. The BTFP eliminates the need for
depository institutions to sell their debt securities in times of stress. Eligible collateral includes high-quality securities such as U.S.
Treasuries, U.S. agency securities, and U.S. agency MBS. Borrowers that are eligible for primary credit under the Borrower-in-
Custody Program (“BIC”) are eligible to borrow under the BTFP. In addition, any eligible collateral pledged to the discount window
can be used under the BTFP. The rate for term advances will be the one-year overnight index swap rate plus 10 basis points and will
97
be fixed for the term of the advance on the day the advance is made. As previously mentioned, the Corporation enrolled in the BTF
P
during the first quarter of 2023 to further diversify its contingency funding sources.
Effect of Credit Ratings on Access to Liquidity
The Corporation’s liquidity is contingent upon its ability to obtain external sources of funding to finance its operations. The
Corporation’s current credit ratings and any downgrade in credit ratings can hinder the Corporation’s access to new forms of external
funding and/or cause external funding to be more expensive, which could, in turn, adversely affect its results of operations. Also,
changes in credit ratings may further affect the fair value of unsecured derivatives whose value takes into account the Corporation’s
own credit risk.
The Corporation does not have any outstanding debt or derivative agreements that would be affected by credit rating downgrades.
Furthermore, given the Corporation’s non-reliance on corporate debt or other instruments directly linked in terms of pricing or volume
to credit ratings, the liquidity of the Corporation has not been affected in any material way by downgrades. The Corporation’s ability
to access new non-deposit sources of funding, however, could be adversely affected by credit downgrades.
As of the date hereof, the Corporation’s credit as a long-term issuer is rated BB+ by S&P and BB by Fitch. As of the date hereof,
FirstBank’s credit ratings as a long-term issuer are BB+ by S&P, one notch below S&P’s minimum BBB- level required to be
considered investment grade; and BB by Fitch, two notches below Fitch’s minimum BBB- level required to be considered investment
grade. The Corporation’s credit ratings are dependent on a number of factors, both quantitative and qualitative, and are subject to
change at any time. The disclosure of credit ratings is not a recommendation to buy, sell or hold the Corporation’s securities. Each
rating should be evaluated independently of any other rating.
98
Cash Flows
Cash and cash equivalents were $823.6 million as of March 31, 2023, an increase of $343.1 million when compared to December
31, 2022. The following discussion highlights the major activities and transactions that affected the Corporation’s cash flows during
the first quarters of 2023 and 2022:
Cash Flows from Operating Activities
First BanCorp.’s operating assets and liabilities vary significantly in the normal course of business due to the amount and timing of
cash flows. Management believes that cash flows from operations, available cash balances, and the Corporation’s ability to generate
cash through short and long-term borrowings will be sufficient to fund the Corporation’s operating liquidity needs for the foreseeable
future.
For the first quarters of 2023 and 2022, net cash provided by operating activities was $115.4 million and $114.8 million,
respectively. Net cash generated from operating activities was higher than reported net income largely as a result of adjustments for
non-cash items such as depreciation and amortization, deferred income tax expense and the provision for credit losses, as well as cash
generated from sales of loans held for sale.
Cash Flows from Investing Activities
The Corporation’s investing activities primarily relate to originating loans to be held for investment, as well as purchasing, selling,
and repaying available-for-sale and held-to-maturity debt securities. For the first quarter of 2023, net cash provided by investing
activities was $50.5 million, primarily due to repayments of U.S. agencies MBS, partially offset by net disbursements on loans held
for investment.
For the first quarter of 2022, net cash used in investing activities was $333.0 million, primarily due to purchases of U.S. agencies
and MBS, and net disbursements on loans held for investment, partially offset by repayments of U.S. agencies and MBS.
The Corporation’s financing activities primarily include the receipt of deposits and the issuance of brokered CDs, the issuance of
and payments on long-term debt, the issuance of equity instruments, return of capital, and activities related to its short-term funding.
For the quarter ended March 31, 2023, net cash provided by financing activities was $177.1 million, mainly reflecting net proceeds of
$347.8 million from borrowings, partially offset by a decrease in total deposits and capital returned to stockholders.
For the first quarter of 2022, net cash used in financing activities was $628.7 million, mainly reflecting a decrease in government
deposits, the repayment at maturity of a $100 million repurchase agreement and capital returned to stockholders.
99
Capital
As of March 31, 2023, the Corporation’s stockholders’ equity was $1.4 billion, an increase of $80.1 million from December 31,
2022. The growth was driven by the $87.2 million increase in the fair value of available-for-sale debt securities recorded as part of
accumulated other comprehensive loss in the consolidated statements of financial condition, as a result of changes in market interest
rates, and the earnings generated in the first quarter of 2023, partially offset by the repurchase of 3.6 million shares of common stock
for a total purchase price of approximately $50.0 million, common stock dividends declared in the first quarter of 2023 totaling $25.4
million or $0.14 per common share, and the $1.3 million impact to retained earnings related to the adoption of Accounting Standards
Update (“ASU”) 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage
Disclosures.” See Note 1 – Basis of Presentation and Significant Accounting Policies and Note 4 – Allowance for Credit Losses for
Loans and Finance Leases, for additional information related to the adoption of ASU 2022-02.
On April 27, 2023, the Corporation’s Board declared a quarterly cash dividend of $0.14 per common share payable on June 9, 2023
to shareholders of record at the close of business on May 24, 2023. The Corporation intends to continue to pay quarterly dividends on
common stock. The Corporation’s common stock dividends, including the declaration, timing and amount, remain subject to the
consideration and approval by the Corporation’s Board at the relevant times.
On April 27, 2022, the Corporation announced that its Board approved a stock repurchase program, under which the Corporation
may repurchase up to $350 million of its outstanding common stock, which commenced in the second quarter of 2022. The
Corporation’s stock repurchase program does not obligate it to acquire any specific number of shares and does not have an expiration
date. As of March 31, 2023, the Corporation has repurchased approximately 19.6 million shares of common stock for a total purchase
price of $275 million under this stock repurchase program. Considering the industry-wide uncertain environment, the Corporation
decided to pause share buybacks during the second quarter of 2023 and it expects to resume shares repurchases during the third
quarter of 2023. The Parent Company has no operations and depends on dividends, distributions and other payments from its
subsidiaries to fund dividend payments, stock repurchases, and to fund all payments on its obligations, including debt obligations.
The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures generally used by
the financial community to evaluate capital adequacy. Tangible common equity is total common equity less goodwill and other
intangible assets. Tangible assets are total assets less the previously mentioned intangible assets. See “Non-GAAP Financial
Measures and Reconciliations” above for additional information.
100
measures, to total equity and total assets, respectively, as of March 31, 2023 and December 31, 2022, respectively:
March 31, 2023
December 31, 2022
(In thousands, except ratios and per share information)
Total equity - GAAP
$
1,405,593
$
1,325,540
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
(86)
(205)
Core deposit intangible
(18,987)
(20,900)
Insurance customer relationship intangible
-
(13)
Tangible common equity
$
1,347,909
$
1,265,811
Total assets - GAAP
$
18,977,114
$
18,634,484
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
(86)
(205)
Core deposit intangible
(18,987)
(20,900)
Insurance customer relationship intangible
-
(13)
Tangible assets
$
18,919,430
$
18,574,755
Common shares outstanding
179,789
182,709
Tangible common equity ratio
7.12%
6.81%
Tangible book value per common share
$
7.50
$
6.93
See Note 22 - Regulatory Matters, Commitments and Contingencies, to the unaudited consolidated financial statements herein for
the regulatory capital positions of the Corporation and FirstBank as of March 31, 2023 and December 31, 2022, respectively.
The Banking Law of the Commonwealth of Puerto Rico requires that a minimum of 10% of FirstBank’s net income for the year be
transferred to a legal surplus reserve until such surplus equals the total of paid-in-capital on common and preferred stock. Amounts
transferred to the legal surplus reserve from retained earnings are not available for distribution to the Corporation without the prior
consent of the Puerto Rico Commissioner of Financial Institutions. The Puerto Rico Banking Law provides that, when the
expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over receipts must be charged
against the undistributed profits of the bank, and the balance, if any, must be charged against the legal surplus reserve, as a reduction
thereof. If the legal surplus reserve is not sufficient to cover such balance in whole or in part, the outstanding amount must be charged
against the capital account and the Bank cannot pay dividends until it can replenish the legal surplus reserve to an amount of at least
20% of the original capital contributed. FirstBank’s legal surplus reserve, included as part of retained earnings in the Corporation’s
consolidated statements of financial condition, amounted to $168.5 million as of each of March 31, 2023 and December 31, 2022,
respectively. There were no transfers to the legal surplus reserve during the first quarter of 2023.
101
First BanCorp manages its asset/liability position to limit the effects of changes in interest rates on net interest income and to
maintain stability of profitability under varying interest rate scenarios. The MIALCO oversees interest rate risk and monitors, among
other things, current and expected conditions in global financial markets, competition and prevailing rates in the local deposit market,
liquidity, loan originations pipeline, securities market values, recent or proposed changes to the investment portfolio, alternative
funding sources and related costs, hedging and the possible purchase of derivatives such as swaps and caps, and any tax or regulatory
issues which may be pertinent to these areas. The MIALCO approves funding decisions in light of the Corporation’s overall strategies
and objectives.
On at least a quarterly basis, the Corporation performs a consolidated net interest income simulation analysis to estimate the potential
change in future earnings from projected changes in interest rates. These simulations are carried out over a one-to-five-year time
horizon, assuming upward and downward yield curve shifts. The rate scenarios considered in these simulations reflect gradual upward
and downward interest rate movements of 200 basis points (“bps”) during a twelve-month period. The Corporation carries out the
simulations in two ways:
(1) Using a static balance sheet, as the Corporation had on the simulation date, and
(2) Using a dynamic balance sheet based on recent patterns and current strategies.
The balance sheet is divided into groups of assets and liabilities by maturity or re-pricing structure and their corresponding interest
yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future
funding sources and costs, the possible exercise of options, changes in prepayment rates, deposit decay and other factors, which may
be important in projecting net interest income.
The Corporation uses a simulation model to project future movements in the Corporation’s balance sheet and income statement. The
starting point of the projections corresponds to the actual values on the balance sheet on the date of the simulations. These simulations
are highly complex and are based on many assumptions that are intended to reflect the general behavior of the balance sheet
components over the modeled periods. It is unlikely that actual events will match these assumptions in all cases. For this reason, the
results of these forward-looking computations are only approximations of the true sensitivity of net interest income to changes in
market interest rates. Several benchmark and market rate curves were used in the modeling process, primarily the LIBOR/Swap curve,
SOFR curve, Prime Rate, U.S. Treasury yield curve, FHLB rates, brokered CDs rates, repurchase agreements rates, and the mortgage
commitment rate of 30 years.
As of March 31, 2023, the Corporation forecasted the 12-month net interest income assuming March 31, 2023 interest rate curves
remain constant. Then, net interest income was estimated under rising and falling rates scenarios. For the rising rate scenario, a
gradual (ramp) parallel upward shift of the yield curve is assumed during the first twelve months (the “+200 ramp” scenario).
Conversely, for the falling rate scenario, a gradual (ramp) parallel downward shift of the yield curve is assumed during the first twelve
months (the “-200 ramp” scenario).
The LIBOR/Swap rates for March 31, 2023, as compared to the January 31, 2023, rates used for the December 31, 2022 sensitivity
analysis, reflected an increase in the short-term sector of the curve, or between one to twelve months, of 18 basis points (“bps”) on
average; while market rates decreased in the medium-term sector of the curve, or between 2 to 5 years, by 37 bps, and in the long-term
sector of the curve, or over 5-year maturities, by 36 bps. A similar increase in market rates changes were observed in the Treasury and
the SOFR curve of 29 and 13 bps in the short -term sector, respectively; while market rates decreased in the medium-term sector by 38
and 40 bps, respectively, and by 36 and 37 bps in the long-term sector, respectively.
102
years, these exclude non-cash changes in the fair value of derivatives:
March 31, 2023
December 31, 2022
Net Interest Income Risk
Net Interest Income Risk
(Projected for the next 12 months)
(Projected for the next 12 months)
Static Simulation
Growing Balance Sheet
Static Simulation
Growing Balance Sheet
(Dollars in millions)
$ Change
% Change
$ Change
% Change
$ Change
% Change
$ Change
% Change
+ 200 bps ramp
$
9.4
1.15
%
$
9.7
1.14
%
$
7.8
0.96
%
$
11.5
1.37
%
- 200 bps ramp
$
(12.6)
(1.54)
%
$
(12.7)
(1.49)
%
$
(13.1)
(1.61)
%
$
(17.0)
(2.03)
%
asset composition while maintaining a sound liquidity position. See “Risk Management – Liquidity Risk” above for liquidity ratios.
As of March 31, 2023 and December 31, 2022, the simulations showed that the Corporation continues to have an asset-sensitive
position.
increase by $9.7 million in the rising rate scenario, when compared against the base simulation. The decrease in net interest income
sensitivity for the +200 bps ramp scenario, as compared to December 31, 2022, is primarily driven by the changes in the overall
funding mix, including decreases in average non-interest deposits to total deposits and customers reallocating to higher yielding
alternatives, partially offset by decreases in lower yielding assets, such as the investment portfolio being repaid, and being replaced by
higher yielding assets due to the growth on the loan portfolio.
$12.7 million, when compared against the base simulation. The change in net interest income sensitivity for the -200 bps ramp
scenario, when compared to December 31, 2022, was driven by a higher deposit beta assumed in the March 31, 2023 simulation for
non-maturity deposits, which under the falling rate scenario would reprice and consequently impact net interest income at a faster pace
than the previous simulation.
Credit Risk Management
First BanCorp. is subject to credit risk mainly with respect to its portfolio of loans receivable and off-balance-sheet instruments,
principally loan commitments. Loans receivable represents loans that First BanCorp. holds for investment and, therefore, First
BanCorp. is at risk for the term of the loan. Loan commitments represent commitments to extend credit, subject to specific conditions,
for specific amounts and maturities. These commitments may expose the Corporation to credit risk and are subject to the same review
and approval process as for loans made by the Bank. See “Liquidity Risk” above for further details. The Corporation manages its
credit risk through its credit policy, underwriting, monitoring of loan concentrations and related credit quality, counterparty credit risk,
economic and market conditions, and legislative or regulatory mandates. The Corporation also performs independent loan review and
quality control procedures, statistical analysis, comprehensive financial analysis, established management committees, and employs
proactive collection and loss mitigation efforts. Furthermore, personnel performing structured loan workout functions are responsible
for mitigating defaults and minimizing losses upon default within each region and for each business segment. In the case of the
commercial and industrial, commercial mortgage and construction loan portfolios, the Special Asset Group (“SAG”) focuses on
strategies for the accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of
OREO. In addition to the management of the resolution process for problem loans, the SAG oversees collection efforts for all loans to
prevent migration to the nonaccrual and/or adversely classified status. The SAG utilizes relationship officers, collection specialists and
attorneys.
The Corporation may also have risk of default in the securities portfolio. The securities held by the Corporation are principally
fixed-rate U.S. agencies MBS and U.S. Treasury and agencies securities. Thus, a substantial portion of these instruments is backed by
mortgages, a guarantee of a U.S. GSE or the full faith and credit of the U.S. government.
Management, consisting of the Corporation’s Commercial Credit Risk Officer, Retail Credit Risk Officer, Chief Credit Officer, and
other senior executives, has the primary responsibility for setting strategies to achieve the Corporation’s credit risk goals and
objectives. Management has documented these goals and objectives in the Corporation’s Credit Policy.
103
Allowance for Credit Losses and Non-performing Assets
Allowance for Credit Losses for Loans and Finance Leases
The ACL for loans and finance leases represents the estimate of the level of reserves appropriate to absorb expected credit losses
over the estimated life of the loans. The amount of the allowance is determined using relevant available information, from internal and
external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience
is a significant input for the estimation of expected credit losses, as well as adjustments to historical loss information made for
differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level,
or term. Additionally, the Corporation’s assessment involves evaluating key factors, which include credit and macroeconomic
indicators, such as changes in unemployment rates, property values, and other relevant factors to account for current and forecasted
market conditions that are likely to cause estimated credit losses over the life of the loans to differ from historical credit losses. Such
factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of
severe stress. The process includes judgments and quantitative elements that may be subject to significant change. Further, the
Corporation periodically considers the need for qualitative reserves to the ACL. Qualitative adjustments may be related to and include,
but are not limited to, factors such as the following: (i) management’s assessment of economic forecasts used in the model and how
those forecasts align with management’s overall evaluation of current and expected economic conditions; (ii) organization specific
risks such as credit concentrations, collateral specific risks, nature and size of the portfolio and external factors that may ultimately
impact credit quality, and (iii) other limitations associated with factors such as changes in underwriting and loan resolution strategies,
among others. The ACL for loans and finance leases is reviewed at least on a quarterly basis as part of the Corporation’s continued
evaluation of its asset quality.
The Corporation applie s probability weights to the baseline and alternative downside economic scenarios to estimate the ACL with
the baseline scenario carrying the highest weight. The economic scenarios used in the ACL determination contained assumptions
related to economic uncertainties associated with geopolitical instability, high inflation levels, and the expected path of interest rate
increases by the FED. As of March 31, 2023, the Corporation’s ACL model considered the following assumptions for key economic
variables in the probability-weighted economic scenarios:
●
Average Commercial Real Estate (“CRE”) Price Index at the national level is forecasted to contract by 2.55% for the
remainder of 2023 and grow by 0.74% for 2024.
●
Average Regional Home Price Index forecasts in Puerto Rico and Florida (purchase only prices) are expected to remain
relatively flat for the remainder of 2023 and 2024.
●
Average regional unemployment in Puerto Rico of 7.53% for the remainder of 2023 and 8.57% for 2024. For the Florida
region and the U.S. mainland, average unemployment rate of 3.59% and 4.19%, respectively, for the remainder of 2023, and
4.23% and 4.62%, respectively, for 2024.
●
Average annualized change in real gross domestic product (“GDP”) in the U.S. mainland of 0.89% for the remainder of 2023
and 1.52% for 2024.
It is difficult to estimate how potential changes in one factor or input might affect the overall ACL because management considers a
wide variety of factors and inputs in estimating the ACL. Changes in the factors and inputs considered may not occur at the same rate
and may not be consistent across all geographies or product types, and changes in factors and inputs may be directionally inconsistent,
such that improvement in one factor or input may offset deterioration in others. However, to demonstrate the sensitivity of credit loss
estimates to macroeconomic forecasts as of March 31, 2023, management compared the modeled estimates under the probability-
weighted economic scenarios against a more adverse scenario. Under this more adverse scenario, as an example, average
unemployment rate for the Puerto Rico region increases to 8.04% for the remainder of 2023, compared to 7.53% for the same period
on the probability-weighted economic scenario projections.
104
To demonstrate the sensitivity to key economic parameters used in the calculation of the ACL at March 31, 2023, management
calculated the difference between the quantitative ACL and this more adverse scenario. Excluding consideration of qualitative
adjustments, this sensitivity analysis would result in a hypothetic al increase in the ACL of approximately $34 million at March 31,
2023. This analysis relates only to the modeled credit loss estimates and is not intended to estimate changes in the overall ACL as it
does not reflect any potential changes in other adjustments to the qualitative calculation, which would also be influenced by the
judgment management applies to the modeled lifetime loss estimates to reflect the uncertainty and imprecision of these estimates
based on current circumstances and conditions. Recognizing that forecasts of macroeconomic conditions are inherently uncertain,
particularly in light of recent economic conditions and challenges, which continue to evolve, management believes that its process to
consider the available information and associated risks and uncertainties is appropriately governed and that its estimates of expected
credit losses were reasonable and appropriate for the quarter ended March 31, 2023.
As of March 31, 2023, the ACL for loans and finance leases was $265.6 million, an increase of $5.1 million from $260.5 million as
of December 31, 2022. The ACL for commercial and construction loans remained relatively flat when compared to the previous
quarter as a result of the following offsetting factors: reserve increases of $5.0 million for a new nonaccrual commercial and industrial
loan in the Florida region in the power generation industry; and $1.1 million due to a less favorable economic outlook in the projection
of certain forecasted macroeconomic variables, such as the CRE price index; partially offset by reserve decreases of $6.1 million
associated with the receipt of updated financial information of certain borrowers and the repayment of a $24.3 million adversely
classified commercial and industrial participated loan in the Florida region. The ACL for consumer loans increased by $2.9 million,
primarily reflecting the effect of the increase in the size of the consumer loan portfolios and the increase in historical charge-off levels.
The ACL for residential mortgage loans increased by $1.6 million, in part to a $2.1 million cumulative increase in the ACL due to the
adoption of ASU 2022-02, for which the Corporation elected to discontinue the use of a discounted cash flow methodology for
restructured accruing loans. This adjustment had a corresponding decrease, net of applicable taxes, in beginning retained earnings as
of January 1, 2023. See Note 1
– Basis of Presentation and Significant Accounting Policies, to the unaudited consolidated financial
statements herein for information related to the adoption of ASU 2022 -02 during the first quarter of 2023.
The ratio of the ACL for loans and finance leases to total loans held for investment increased to 2.29% as of March 31, 2023,
compared to 2.25% as of December 31, 2022. An explanation for the change for each portfolio follows:
●
The ACL to total loans ratio for the residential mortgage portfolio increased from 2.20% as of December 31, 2022 to
2.29% as of March 31, 2023, primarily due to the aforementioned $2.1 million cumulative increase in the ACL due to the
adoption of ASU 2022-02 during the first quarter of 2023.
●
The ACL to total loans ratio for the construction loan portfolio increased from 1.74% as of December 31, 2022 to 2.25%
as of March 31, 2023 as a result of new loan originations which have a longer duration and ultimately result in higher loss
rates.
●
The ACL to total loans ratio for the commercial mortgage portfolio increased from 1.49% as of December 31, 2022 to
1.55% as of March 31, 2023, primarily reflecting a less favorable economic outlook in the projection of certain forecasted
macroeconomic variables, such as the CRE price index, partially offset by reserve decreases associated with the receipt of
updated financial information of certain borrowers.
●
The ACL to total loans ratio for the commercial and industrial portfolio decreased from 1.14% as of December 31, 2022 to
1.09% as of March 31, 2023, mainly due to reserve decreases associated with the receipt of updated financial information
of certain borrowers and the repayment of a $24.3 million adversely classified commercial and industrial participated loan
in the Florida region, partially offset by the aforementioned reserve increase of $5.0 million for a new nonaccrual
commercial and industrial participated loan in the Florida region in the power generation industry.
●
The ACL to total loans ratio for the consumer loan portfolio was 3.82% as of March 31, 2023, compared to 3.83% as of
December 31, 2022.
The ratio of the total ACL for loans and finance leases to nonaccrual loans held for investment was 297.91% as of March 31, 2023,
compared to 289.61% as of December 31, 2022.
Substantially all of the Corporation’s loan portfolio is located within the boundaries of the U.S. economy. Whether the collateral is
located in Puerto Rico, the U.S. and British Virgin Islands, or the U.S. mainland (mainly in the state of Florida), the performance of
the Corporation’s loan portfolio and the value of the collateral supporting the transactions are dependent upon the performance of and
conditions within each specific area’s real estate market. The Corporation believes it sets adequate loan-to-value ratios following its
regulatory and credit policy standards.
105
As shown in the following tables, the ACL for loans and finance leases amounted to $265.6 million as of March 31, 2023, or 2.29%
of total loans, compared with $260.5 million, or 2.25% of total loans, as of December 31, 2022. See “Results of Operations - Provision
for Credit Losses” above for additional information.
Quarter Ended March 31,
2023
2022
(Dollars in thousands)
ACL for loans and finance leases, beginning of year
$
260,464
$
269,030
Impact of adoption of ASU 2022-02
2,116
-
Provision for credit losses - expense (benefit):
Residential mortgage
73
(4,871)
Construction
860
(2,214)
Commercial mortgage
1,246
(22,640)
Commercial and industrial
(1,650)
1,755
Consumer and finance leases
15,727
10,981
Total provision for credit losses - expense (benefit)
16,256
(16,989)
Charge-offs:
Residential mortgage
(983)
(2,528)
Construction
-
(44)
Commercial mortgage
(18)
(37)
Commercial and industrial
(118)
(290)
Consumer and finance leases
(16,798)
(9,816)
Total charge offs
(17,917)
(12,715)
Recoveries:
Residential mortgage
497
1,382
Construction
63
52
Commercial mortgage
168
44
Commercial and industrial
90
1,035
Consumer and finance leases
3,830
3,608
Total recoveries
4,648
6,121
Net charge-offs
(13,269)
(6,594)
ACL for loans and finance leases, end of period
$
265,567
$
245,447
ACL for loans and finance leases to period-end total loans held for investment
2.29%
2.21%
Net charge-offs (annualized) to average loans outstanding during the period
0.46%
0.24%
Provision for credit losses - expense (benefit) for loans and finance leases to net charge-offs during the period
1.23x
-2.58x
106
loan category, and the percentage of loan balances in each category to the total as such loans as of the indicated dates:
As of March 31, 2023
Residential
Mortgage
Loans
Commercial
Mortgage
Loans
C&I Loans
Consumer and
Finance
Leases
Construction
Loans
(Dollars in thousands)
Total
Total loans held for investment:
$
2,811,528
$
143,664
$
2,353,659
$
2,862,189
$
3,406,945
$
11,577,985
24
%
1
%
20
%
25
%
30
%
100
%
64,403
3,231
36,460
31,235
130,238
265,567
2.29
%
2.25
%
1.55
%
1.09
%
3.82
%
2.29
%
As of December 31, 2022
Residential
Mortgage
Loans
Commercial
Mortgage
Loans
C&I Loans
Consumer and
Finance Leases
Construction
Loans
(Dollars in thousands)
Total
Total loans held for investment:
$
2,847,290
$
132,953
$
2,358,851
$
2,886,263
%
$
3,327,468
$
11,552,825
25
%
1
%
20
%
25
%
29
%
100
%
62,760
2,308
35,064
32,906
127,426
260,464
2.20
%
1.74
%
1.49
%
1.14
%
3.83
%
2.25
%
Allowance for Credit Losses for Unfunded Loan Commitments
The Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk as a
result of a contractual obligation to extend credit, such as pursuant to unfunded loan commitments and standby letters of credit for
commercial and construction loans, unless the obligation is unconditionally cancellable by the Corporation. The ACL for off-balance
sheet credit exposures is adjusted as a provision for credit loss expense. As of March 31, 2023, the ACL for off-balance sheet credit
exposures decreased by $0.1 million to $4.2 million, when compared to December 31, 2022.
Allowance for Credit Losses for Held-to-Maturity Debt Securities
As of March 31, 2023, the ACL for held-to-maturity securities portfolio was entirely related to financing arrangements with Puerto
Rico municipalities issued in bond form, which the Corporation accounts for as securities, but which were underwritten as loans with
features that are typically found in commercial loans. As of March 31, 2023, the ACL for held-to-maturity debt securities was $7.6
million, compared to $8.3 million as of December 31, 2022.
Allowance for Credit Losses for Available -for-Sale Debt Securities
issued by the PRHFA, was $0.4 million as of March 31, 2023, compared to $0.5 million as of December 31, 2022.
107
Nonaccrual Loans and Non-performing Assets
Total non-performing assets consist of nonaccrual loans (generally loans held for investment or loans held for sale in which the
recognition of interest income was discontinued when the loan became 90 days past due or earlier if the full and timely collection of
interest or principal is uncertain), foreclosed real estate and other repossessed properties, and non-performing investment securities, if
any. When a loan is placed in nonaccrual status, any interest previously recognized and not collected is reversed and charged against
interest income. Cash payments received are recognized when collected in accordance with the contractual terms of the loans. The
principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized on a
cash basis (when collected). However, when management believes that the ultimate collectability of principal is in doubt, the interest
portion is applied to the outstanding principal. The risk exposure of this portfolio is diversified as to individual borrowers and
industries, among other factors. In addition, a large portion is secured with real estate collateral.
Nonaccrual Loans Policy
Residential Real Estate Loans
interest and principal for a period of 90 days or more.
Commercial and Construction Loans
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
a period of 90 days or more.
Consumer Loans
for a period of 90 days or more. Credit card loans continue to accrue finance charges and fees until charged-off at 180 days delinquent.
Purchased Credit Deteriorated Loans (“PCD”)
— For PCD loans, the nonaccrual status is determined in the same manner as for
other loans, except for PCD loans that prior to the adoption of CECL were classified as purchased credit impaired (“PCI”) loans and
accounted for under ASC Subtopic 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality”
(ASC Subtopic 310 -30). As allowed by CECL, the Corporation elected to maintain pools of loans accounted for under ASC Subtopic
310-30 as “units of accounts,” conceptually treating each pool as a single asset. Regarding interest income recognition, the prospective
transition approach for PCD loans was applied at a pool level, which froze the effective interest rate of the pools as of January 1, 2020.
According to regulatory guidance, the determination of nonaccrual or accrual status for PCD loans with respect to which the
Corporation has made a policy election to maintain previously existing pools upon adoption of CECL should be made at the pool
level, not the individual asset level. In addition, the guidance provides that the Corporation can continue accruing interest and not
report the PCD loans as being in nonaccrual status if the following criteria are met: (i) the Corporation can reasonably estimate the
timing and amounts of cash flows expected to be collected; and (ii) the Corporation did not acquire the asset primarily for the rewards
of ownership of the underlying collateral, such as the use in operations or improving the collateral for resale. Thus, the Corporation
continues to exclude these pools of PCD loans from nonaccrual loan statistics.
Other Real Estate Owned
OREO acquired in settlement of loans is carried at fair value less estimated costs to sell the real estate acquired. Appraisals are
obtained periodically, generally on an annual basis.
Other Repossessed Property
The other repossessed property category generally includes repossessed boats and autos acquired in settlement of loans.
Repossessed boats and autos are recorded at the lower of cost or estimated fair value.
Other Non-Performing Assets
This category consisted of a residential pass-through MBS issued by the PRHFA placed in non-performing status in the second
quarter of 2021 based on the delinquency status of the underlying second mortgage loans.
108
Loans Past-Due 90 Days and Still Accruing
These are accruing loans that are contractually delinquent 90 days or more. These past-due loans are either current as to interest but
delinquent as to the payment of principal (i.e., well secured and in process of collection) or are insured or guaranteed under applicable
FHA, VA, or other government-guaranteed programs for residential mortgage loans. Furthermore, as required by instructions in
regulatory reports, loans past due 90 days and still accruing include loans previously pooled into GNMA securities for which the
Corporation has the option but not the obligation to repurchase loans that meet GNMA’s specified delinquency criteria (e.g.,
borrowers fail to make any payment for three consecutive months). For accounting purposes, these GNMA loans subject to the
repurchase option are required to be reflected on the financial statements with an offsetting liability. In addition, loans past due 90
days and still accruing include PCD loans, as mentioned above, and credit cards that continue accruing interest until charged-off at
180 days.
The following table presents non-performing assets as of the indicated dates:
March 31, 2023
December 31, 2022
(Dollars in thousands)
Nonaccrual loans held for investment:
Residential mortgage
$
36,410
$
42,772
Construction
1,794
2,208
Commercial mortgage
21,598
22,319
Commercial and Industrial
13,404
7,830
Consumer and finance leases
15,936
14,806
Total nonaccrual loans held for investment
89,142
89,935
OREO
32,862
31,641
Other repossessed property
4,743
5,380
Other assets
2,203
2,202
Total non-performing assets
$
128,950
$
129,158
Past due loans 90 days and still accruing
(2) (3) (4)
$
74,380
$
80,517
Non-performing assets to total assets
0.68
%
0.69
%
Nonaccrual loans held for investment to total loans held for investment
0.77
%
0.78
%
ACL for loans and finance leases
$
265,567
$
260,464
ACL for loans and finance leases to total nonaccrual loans held for investment
297.91
%
289.61
%
ACL for loans and finance leases to total nonaccrual loans held for investment, excluding residential real estate loans
503.62
%
552.26
%
(1)
Residential pass-through MBS issued by the PRHFA held as part of the available-for-sale debt securities portfolio.
(2)
Includes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans as “units of
account” both at the time of adoption of CECL on January 1, 2020 and on an ongoing basis for credit loss measurement. These loans will continue to be excluded from nonaccrual loan
statistics as long as the Corporation can reasonably estimate the timing and amount of cash flows expected to be collected on the loan pools. The portion of such loans contractually past due
90 days or more amounted to $10.4 million and $12.0 million as of March 31, 2023 and December 31, 2022, respectively.
(3)
Includes FHA/VA government-guaranteed residential mortgage as loans past-due 90 days and still accruing as opposed to nonaccrual loans. The Corporation continues accruing interest on
these loans until they have passed the 15 months delinquency mark, taking into consideration the FHA interest curtailment process. These balances include $25.9 million and $28.2 million
of FHA government guaranteed residential mortgage loans that were over 15 months delinquent as of March 31, 2023 and December 31, 2022, respectively.
(4)
Includes rebooked loans, which were previously pooled into GNMA securities, amounting to $7.1 million and $10.3 million as of March 31, 2023 and December 31, 2022, respectively.
Under the GNMA program, the Corporation has the option but not the obligation to repurchase loans that meet GNMA’s specified delinquency criteria. For accounting purposes, the loans
subject to the repurchase option are required to be reflected on the financial statements with an offsetting liability.
109
Total nonaccrual loans were $89.1 million as of March 31, 2023. This represents a net decrease of $0.8 million from $89.9 million
as of December 31, 2022. The net decrease was primarily related to a $6.3 million reduction in nonaccrual residential mortgage loans,
partially offset by increases of $4.4 million and $1.1 million in nonaccrual commercial and construction loans and nonaccrual
consumer loans, respectively.
The following table shows non-performing assets by geographic segment as of the indicated dates:
March 31, 2023
December 31, 2022
(In thousands)
Puerto Rico:
Nonaccrual loans held for investment:
Residential mortgage
$
22,924
$
28,857
Construction
737
831
Commercial mortgage
13,677
14,341
Commercial and Industrial
4,589
5,859
Consumer and finance leases
15,483
14,142
Total nonaccrual loans held for investment
57,410
64,030
OREO
28,323
28,135
Other repossessed property
4,620
5,275
Other assets
2,203
2,202
Total non-performing assets
$
92,556
$
99,642
Past due loans 90 days and still accruing
$
72,000
$
76,417
Virgin Islands:
Nonaccrual loans held for investment:
Residential mortgage
$
6,069
$
6,614
Construction
1,057
1,377
Commercial mortgage
7,921
7,978
Commercial and Industrial
1,163
1,179
Consumer
306
469
Total nonaccrual loans held for investment
16,516
17,617
OREO
4,539
3,475
Other repossessed property
112
76
Total non-performing assets
$
21,167
$
21,168
Past due loans 90 days and still accruing
$
2,380
$
4,100
United States:
Nonaccrual loans held for investment:
Residential mortgage
$
7,417
$
7,301
Commercial and Industrial
7,652
792
Consumer
147
195
Total nonaccrual loans held for investment
15,216
8,288
OREO
-
31
Other repossessed property
11
29
Total non-performing assets
$
15,227
$
8,348
110
Nonaccrual commercial and industrial loans increased by $5.6 million to $13.4 million as of March 31, 2023, from $7.8 million as
of December 31, 2022. The increase was primarily driven by the migration to nonaccrual status of a $7.1 million commercial and
industrial participated loan in the Florida region related to a borrower engaged in the power generation industry, partially offset by
collections, including the payoff of an individual commercial and industrial loan of approximately $1.0 million in the Puerto Rico
region.
Nonaccrual commercial mortgage loans decreased by $0.8 million to $21.5 million as of March 31, 2023, from $22.3 million as of
December 31, 2022.
Nonaccrual construction loans decreased by $0.4 million to $1.8 million as of March 31, 2023, from $2.2 million as of December
31, 2022.
periods:
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Quarter Ended March 31, 2023
Beginning balance
$
2,208
$
22,319
$
7,830
$
32,357
Plus:
Additions to nonaccrual
127
544
7,470
8,141
Less:
Loans returned to accrual status
-
(361)
(152)
(513)
Nonaccrual loans transferred to OREO
(332)
(162)
(183)
(677)
Nonaccrual loans charge-offs
-
(18)
(118)
(136)
Loan collections
(209)
(730)
(1,443)
(2,382)
Reclassification
-
6
-
6
Ending balance
$
1,794
$
21,598
$
13,404
$
36,796
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Quarter Ended March 31, 2022
Beginning balance
$
2,664
$
25,337
$
17,135
$
45,136
Plus:
Additions to nonaccrual
-
2,881
1,579
4,460
Less:
Loans returned to accrual status
-
(201)
(209)
(410)
Nonaccrual loans transferred to OREO
(13)
(461)
-
(474)
Nonaccrual loans charge-offs
(40)
(37)
(290)
(367)
Loan collections
(68)
(541)
(488)
(1,097)
Reclassification
-
(402)
402
-
Ending balance
$
2,543
$
26,576
$
18,129
$
47,248
111
Nonaccrual residential mortgage loans decreased by $6.3 million to $36.5 million as of March 31, 2023, compared to $42.8 million
as of December 31, 2022. The decrease was primarily related to $3.9 million loans restored to accrual status, $2.7 million of loans
transferred to OREO, and $1.6 million in collections, partially offset by inflows of $2.1 million.
The following table presents the activity of residential nonaccrual loans held for investment for the indicated periods:
Quarter Ended March 31,
2023
2022
(In thousands)
Beginning balance
$
42,772
$
55,127
Additions to nonaccrual
2,081
5,328
Loans returned to accrual status
(3,937)
(3,449)
Nonaccrual loans transferred to OREO
(2,710)
(937)
Nonaccrual loans charge-offs
(220)
(435)
Loan collections
(1,570)
(6,816)
Reclassification
(6)
-
Ending balance
$
36,410
$
48,818
The amount of nonaccrual consumer loans, including finance leases, increased by $1.1 million to $15.9 million as of March 31,
2023, compared to $14.8 million as of December 31, 2022. The increase was mainly reflected in the auto loans and finance leases
portfolio.
As of March 31, 2023, approximately $22.7 million of the loans placed in nonaccrual status, mainly commercial loans, and
residential loans, were current, or had delinquencies of less than 90 days in their interest payments. Collections on these loans are
being recorded on a cash basis through earnings, or on a cost-recovery basis, as conditions warrant.
During the quarter ended March 31, 2023, interest income of approximately $0.1 million related to nonaccrual loans with a carrying
value of $29.5 million as of March 31, 2023, mainly nonaccrual commercial and construction loans, was applied against the related
principal balances under the cost-recovery method.
Total loans in early delinquency (
i.e.
, 30-89 days past due loans, as defined in regulatory reporting instructions) amounted to $94.5
million as of March 31, 2023, a decrease of $10.4 million, compared to $104.9 million as of December 31, 2022. The variances by
major portfolio categories are as follows:
●
Consumer loans in early delinquency decreased by $4.5 million to $66.4 million, mainly in the auto loans portfolio.
●
Residential mortgage loans in early delinquency decreased by $3.0 million to $25.2 million.
●
Commercial and construction loans in early delinquency decreased by $2.9 million, mainly due to the migration to past due
90 days and still accruing of a $2.3 million commercial mortgage loan that matured and is in the process of renewal but for
which the Corporation continues to receive interest and principal payments from the borrower.
In addition, the Corporation provides homeownership preservation assistance to its customers through a loss mitigation program.
Depending upon the nature of a borrower’s financial condition, restructurings or loan modifications through this program are
provided, as well as other restructurings of individual C&I, commercial mortgage, construction, and residential mortgage loans. See
Note 1 – Basis of Presentation and Significant Accounting Policies, to the unaudited consolidated financial statements herein for
additional information related to the accounting policies of loan modifications granted to borrowers experiencing financial difficulty.
In addition, see Note 3 - Loans Held for Investment, to the unaudited consolidated financial statements herein for additional
information and statistics about the Corporation’s modified loans.
112
The OREO portfolio, which is part of non-performing assets, increased to $32.9 million as of March 31, 2023, compared to $31.6
million as of December 31, 2022. The following tables show the composition of the OREO portfolio as of March 31, 2023 and
December 31, 2022, as well as the activity of the OREO portfolio by geographic area during the quarter ended March 31, 2023:
OREO Composition by Region
As of March 31, 2023
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
23,314
$
1,670
$
-
$
24,984
Construction
1,705
59
-
1,764
Commercial
3,304
2,810
-
6,114
$
28,323
$
4,539
$
-
$
32,862
As of December 31, 2022
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
23,388
$
606
$
31
$
24,025
Construction
1,705
59
-
1,764
Commercial
3,042
2,810
-
5,852
$
28,135
$
3,475
$
31
$
31,641
OREO Activity by Region
Quarter Ended March 31, 2023
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Beginning Balance
$
28,135
$
3,475
$
31
$
31,641
Additions
5,351
1,064
-
6,415
Sales
(4,409)
-
(31)
(4,440)
Write-downs and other adjustments
(754)
-
-
(754)
Ending Balance
$
28,323
$
4,539
$
-
$
32,862
113
Net Charge-offs and Total Credit Losses
$6.6 million, or an annualized 0.24% of average loans for the first quarter of 2022.
average loans, compared to $1.2 million, or an annualized 0.15% of related average loans, for the first quarter of 2022. Approximately
$0.2 million in charge-offs recorded during the first quarter of 2023 resulted from valuations of collateral dependent residential
mortgage loans, compared to $0.4 million in for the same period in 2022. Net charge-offs on residential mortgage loans for the first
quarter of 2023 also included $0.5 million related to foreclosures recorded during the first quarter of 2023, compared to $1.3 million
recorded for the same period in 2022.
Construction loans net recoveries for the first quarter of 2023 were $0.1 million, or an annualized 0.17% of related average loans,
compared to $8 thousand, or an annualized 0.03% of related average loans, for the same period in 2022.
Commercial mortgage loans net recoveries for the first quarter of 2023 were $0.1 million, or an annualized 0.03% of average
commercial mortgage loans, compared to $7 thousand for the first quarter of 2022.
Commercial and industrial loans net charge-offs for the first quarter of 2023 were $28 thousand, compared to net recoveries of $0.8
million, or an annualized 0.10% of related average loans for the first quarter of 2022. For the first quarter of 2022, a $0.9 million
recovery was recorded in the Puerto Rico region in connection with a nonaccrual commercial loan that was paid off during the quarter.
Net charge-offs of consumer loans and finance leases for the first quarter of 2023 were $13.0 million, or 1.54% of related average
loans, compared to $6.1 million, or 0.85% of related average loans, for the first quarter of 2022.
Quarter Ended March 31,
2023
2022
Residential mortgage
0.07
%
0.15
%
Construction
(0.17)
%
(0.03)
%
Commercial mortgage
(0.03)
%
-
%
Commercial and industrial
-
%
(0.10)
%
Consumer loans and finance leases
1.54
%
0.85
%
Total loans
0.46
%
0.24
%
114
indicated periods:
Quarter Ended March 31,
2023
2022
PUERTO RICO:
Residential mortgage
0.10
%
0.19
%
Construction
(0.47)
%
0.08
%
Commercial mortgage
-
%
0.01
%
Commercial and industrial
0.01
%
(0.16)
%
Consumer and finance leases
1.53
%
0.83
%
Total loans
0.58
%
0.29
%
VIRGIN ISLANDS:
Residential mortgage
(0.08)
%
0.10
%
Commercial mortgage
(0.21)
%
(0.22)
%
Commercial and industrial
(0.01)
%
(0.01)
%
Consumer and finance leases
2.19
%
1.78
%
Total loans
0.29
%
0.25
%
FLORIDA:
Construction
(0.05)
%
(0.09)
%
Commercial mortgage
(0.09)
%
-
%
Consumer and finance leases
0.17
%
1.31
%
Total loans
(0.03)
%
0.01
%
The above ratios are based on annualized charge -offs and are not necessarily indicative of the results expected for the entire year or
in subsequent periods.
Total net charge -offs plus gains on OREO operations for the first quarter of 2023 amounted to $11.3 million, or a loss rate of 0.37%
on an annualized basis of average loans and repossessed assets, compared to losses of $5.9 million, or a loss rate of 0.21% on an
annualized basis, for the first quarter of 2022.
115
The following table presents information about the OREO inventory and credit losses for the indicated periods:
Quarter ended March 31,
2023
2022
(Dollars in thousands)
OREO
OREO balances, carrying value:
Residential
$
24,984
$
32,208
Construction
1,764
3,458
Commercial
6,114
7,228
Total
$
32,862
$
42,894
OREO activity (number of properties):
Beginning property inventory
344
418
Properties acquired
59
68
Properties disposed
(59)
(44)
Ending property inventory
344
442
Average holding period (in days)
Residential
533
656
Construction
2,266
1,979
Commercial
2,468
2,011
Total average holding period (in days)
986
991
OREO operations gain (loss):
Market adjustments and gains (losses) on sale:
Residential
$
2,490
$
992
Construction
40
103
Commercial
(67)
(17)
Total net gain
2,463
1,078
Other OREO operations expenses
(467)
(358)
Net Gain on OREO operations
$
1,996
$
720
(CHARGE-OFFS) RECOVERIES
Residential charge-offs, net
$
(486)
$
(1,146)
Construction recoveries, net
63
8
Commercial recoveries, net
122
752
Consumer and finance leases charge-offs, net
(12,968)
(6,208)
Total charge -offs, net
(13,269)
(6,594)
TOTAL CREDIT LOSSES
(1)
$
(11,273)
$
(5,874)
LOSS RATIO PER CATEGORY
(2)
Residential
(0.28)
%
0.02
%
Construction
(0.28)
%
(0.37)
%
Commercial
-
%
(0.06)
%
Consumer
1.54
%
0.85
%
TOTAL CREDIT LOSS RATIO
(3)
0.37
%
0.21
%
(1)
Equal to net gain on OREO operations plus charge-offs, net.
(2)
Calculated as net charge-offs plus market adjustment and gains (losses) on sale of OREO divided by average loans and repossessed assets.
(3)
Calculated as net charge-offs plus net gain on OREO operations divided by average loans and repossessed assets.
116
Operational Risk
The Corporation faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of
banking and financial products. Coupled with external influences, such as market conditions, security risks, and legal risks, the
potential for operational and reputational loss has increased. To mitigate and control operational risk, the Corporation has developed,
and continues to enhance, specific internal controls, policies and procedures that are designed to identify and manage operational risk
at appropriate levels throughout the organization. The purpose of these mechanisms is to provide reasonable assurance that the
Corporation’s business operations are functioning within the policies and limits established by management.
The Corporation classifies operational risk into two major categories: business-specific and corporate-wide affecting all business
lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies,
processes and assessments. With respect to corporate-wide risks, such as information security, business recovery, and legal and
compliance, the Corporation has specialized groups, such as the Legal Department, Information Security, Corporate Compliance, and
Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to
the needs of the business groups.
Legal and Compliance Risk
Legal and compliance risk includes the risk of noncompliance with applicable legal and regulatory requirements, the risk of adverse
legal judgments against the Corporation, and the risk that a counterparty’s performance obligations will be unenforceable. The
Corporation is subject to extensive regulation in the different jurisdictions in which it conducts its business, and this regulatory
scrutiny has been significantly increasing over the years. The Corporation has established, and continues to enhance, procedures that
are designed to ensure compliance with all applicable statutory, regulatory and any other legal requirements. The Corporation has a
Compliance Director who reports to the Chief Risk Officer and is responsible for the oversight of regulatory compliance and
implementation of an enterprise-wide compliance risk assessment process. The Compliance division has officer roles in each major
business area with direct reporting responsibilities to the Corporate Compliance Group.
Concentration Risk
The Corporation conducts its operations in a geographically concentrated area, as its main market is Puerto Rico. Of the total gross
loan portfolio held for investment of $11.6 billion as of March 31, 2023, the Corporation had credit risk of approximately 80% in the
Puerto Rico region, 17% in the United States region, and 3% in the Virgin Islands region.
117
Update on the Puerto Rico Fiscal and Economic Situation
A significant portion of the Corporation’s business activities and credit exposure is concentrated in the Commonwealth of Puerto
Rico, which has experienced economic and fiscal distress over the last decade. Since declaring bankruptcy and benefitting from the
enactment of the federal Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) in 2016, the Government of
Puerto Rico has made progress on fiscal matters primarily by restructuring a large portion of its outstanding public debt and
identifying funding sources for its unfunded pension system.
Economic Indicators
On November 10, 2022, the Puerto Rico Planning Board (“PRPB”) presented the Economic Report to the Governor, which
provides an analysis of Puerto Rico’s economy during fiscal year 2021 and a short-term forecast for fiscal years 2022 and 2023.
According to the PRPB, Puerto Rico’s real gross national product (“GNP”) expanded by 1.0% in fiscal year 2021, significantly above
the PRPB’s original baseline projection of a 2.0% contraction. According to the report, real GNP growth was primarily driven by a
sharp increase in personal consumption expenditures reflecting the relaxation of COVID-related restrictions, as well as the impact of
the substantial disaster relief funding deployed over the period. To a lesser extent, growth in fiscal year 2021 was also driven by a
higher level of investments in machinery, equipment, and construction. These favorable variances were partially offset by an increase
in imports, a reduction in exports, and a negative change in the level of inventories. Although no official GNP data has been released
to date for fiscal year 2022, the 2023 Fiscal Plan model estimates that Puerto Rico’s real GNP expanded by 2.0% in fiscal year 2022.
There are other indicators that gauge economic activity and are published with greater frequency, for example, the Economic
Development Bank for Puerto Rico’s Economic Activity Index (“EDB-EAI”). Although not a direct measure of Puerto Rico’s real
GNP, the EDB-EAI is correlated to Puerto Rico’s real GNP. For February 2023, preliminary estimates showed that the EDB-EAI
increased 0.3% on a month-over-month; however, it stood 0.2% lower on a year-over-year basis. Over the 12-month period ended
February 28, 2023, the EDB-EAI averaged 124.5, approximately 0.9% above the comparable figure a year earlier.
Fiscal Plan
On April 3, 2023, the PROMESA oversight board certified the 2023 Fiscal Plan for Puerto Rico (the “2023 Fiscal Plan”). Unlike
previous versions of the fiscal plan, the PROMESA oversight board segregated the 2023 Fiscal Plan into three different volumes. As
the first fiscal plan certified in a post-bankruptcy environment, Volume 1 presents a Transformation Plan that highlights priority areas
to cement fiscal responsibility, accelerate economic growth in a sustainable manner, and restore market access to Puerto Rico. Volume
2 provides additional details on economic trends and financial projections, and Volume 3 maps out the supplementary implementation
details to guide the government’s implementation of the requirements of the 2023 Fiscal Plan, as well as additional initiatives from
prior fiscal plans which remain mandatory and are still pending to be implemented.
The 2023 Fiscal Plan prioritizes resource allocation across three major pillars: (i) entrenching a legacy of strong financial
management through the implementation of a comprehensive financial management agenda, (ii) instilling a culture of public -sector
performance and excellence in order to properly deliver quality public services, and (iii) investing for economic growth to ensure
sufficient revenues are generated to support the delivery of services. According to the Transformation Plan, the fiscal and economic
turnaround of Puerto Rico cannot be accomplished without the implementation of structural economic reforms that promote
sustainable economic development. These reforms include the power/energy sector reform to improve availability, reliability and
affordability of energy, the K-12 and higher education reform to expand opportunity and prepare the workforce to compete for jobs of
the future, and an infrastructure reform aimed at improving the efficiency of the economy and facilitate investment. The 2023 Fiscal
Plan projects that these reforms, if implemented successfully, will contribute 0.75% in GNP growth by fiscal year 2026. Additionally,
the 2023 Fiscal Plan provides a roadmap for a tax reform directed towards establishing a tax regime that is more competitive for
investors and more equitable for individuals.
The 2023 Fiscal Plan notes that Puerto Rico has had a strong recovery in the aftermath of the pandemic crisis with labor
participation trending positively and unemployment at historically low levels. However, it recognizes that such recovery has been
primarily fueled by the unprecedented influx of federal funds, which have an outsized and temporary impact that may mask
underlying structural weaknesses in the economy. As such, the 2023 Fiscal Plan projects a 0.7% decline in real GNP for the current
fiscal year 2023, followed by a period of near-zero real growth in the coming fiscal years 2024 through 2026. Also, the fiscal plan
projects that Puerto Rico’s population will continue the long-term trend of steady decline. Notwithstanding, the Transformation Plan
depicts that, if managed properly, these non-recurring federal funds can be leveraged into sustainable longer-term growth and
opportunity.
118
The 2023 Fiscal Plan projects that approximately $81 billion in total disaster relief funding, from federal and private sources, will
be disbursed as part of the reconstruction efforts over a span of 18 years (fiscal years 2018 through 2035). These funds will benefit
individuals, the public (e.g., reconstruction of major infrastructure, roads, and schools), and will cover part of the Commonwealth’s
share of the cost of disaster relief funding. Also, the 2023 Fiscal Plan projects accelerated deployment of the remaining COVID-19
relief funds in fiscal year 2023 through 2025, with approximately $9.3 billion expected to be disbursed, compared to $4.5 billion
projected in the previous fiscal plan. Additionally, the 2023 Fiscal Plan continues to account for $2.3 billion in federal funds to Puerto
Rico from the Bipartisan Infrastructure Law directed towards improving the Island’s infrastructure over fiscal years 2022 through
2026.
Debt Restructuring
Over 80% of Puerto Rico’s outstanding debt has been restructured to date. On March 15, 2022, the Plan of Adjustment of the
central government’s debt became effective through the exchange of more than $33 billion of existing bonds and other claims into
approximately $7 billion of new bonds, saving Puerto Rico more than $50 billion in debt payments to creditors. Also, the
restructurings of the Puerto Rico Sales Tax Financing Corporation (“COFINA”), the Highways and Transportation Authority
(“HTA”), and the Puerto Rico Aqueducts and Sewers Authority (“PRASA”) are expected to yield savings of approximately $17.5
billion, $3.0 billion, and $400 million, respectively, in future debt service payments. The main restructurings pending include that of
the Puerto Rico Electric Power Authority (“PREPA”) and the Puerto Rico Industrial Company (“PRIDCO”).
According to the PROMESA oversight board, the filed PREPA Plan of Adjustment (“PREPA-POA”) reduces PREPA’s legacy
financial and general unsecured debt by approximately 40% as it contemplates the issuance of $5.7 billion in new bonds that will be
exchanged for the discharge of approximately $10.0 billion in outstanding debt. The new bonds are expected to be paid from revenues
generated by a “Legacy Charge”, which consists of a fixed and volumetric charge on customers’ bills that will vary based on the
category of customer and level of usage. This Legacy Charge is expected to generate sufficient revenue to pay down the new bonds in
35 years based on the projections presented in PREPA’s 2022 certified fiscal plan. For pensions, the PREPA -POA provides PREPA’s
pension system with treatment substantially similar to the treatment of the Commonwealth’s pensions. The PREPA -POA closes the
pension system to new entrants, preserves the benefits of current retirees, eliminates any future cost of living adjustments, and ensures
all benefits accrued to date by active participants are protected.
On March 23, 2022, the Title III Court issued a ruling that upholds the PROMESA oversight board’s position that PREPA
bondholders’ collateral security is limited to the money PREPA deposits in accounts established pursuant to the trust agreement
governing the issuance of the bonds. The court also rejected the bondholders’ contention that they have a general unsecured claim for
the full amount of their principal and interest. As such, the court limited their unsecured claim to future net revenues for the remainder
of the terms of the bonds. According to the PROMESA oversight board, this decision of the court was a significant win for Puerto
Rico and its path to reliable electricity and economic growth.
Although PREPA’s overall mediation process has been slower than expected, PREPA’s Title III confirmation process is underway,
a confirmation hearing has been set for mid-July 2023 and, according to the 2023 Fiscal Plan, the plan is expected to go effective by
the second quarter of 2024.
Other Developments
Notable progress continues to be made as part of the ongoing efforts of prioritizing the restoration, improvement, and
modernization of Puerto Rico’s infrastructure. According to the Central Office for Recovery, Reconstruction, and Resiliency
(“COR3”), progress is evidenced by the significant increase in permanent work projects that have already started executing the
reconstruction efforts with FEMA obligated funding. As of December 31, 2022, there were a total of 6,286 active permanent work
projects reported, more than twice the comparable amount reported as of December 31, 2021, of 2,650 projects.
119
Exposure to Puerto Rico Government
As of March 31, 2023, the Corporation had $340.0 million of direct exposure to the Puerto Rico government, its municipalities and
public corporations, compared to $338.9 million as of December 31, 2022. As of March 31, 2023, approximately $183.4 million of the
exposure consisted of loans and obligations of municipalities in Puerto Rico that are supported by assigned property tax revenues and
for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their
repayment, and $113.1 million of loans and obligations which are supported by one or more specific sources of municipal revenues.
Approximately 72% of the Corporation’s exposure to Puerto Rico municipalities consisted primarily of senior priority loans and
obligations concentrated in four of the largest municipalities in Puerto Rico. The municipalities are required by law to levy special
property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and notes.
Furthermore, municipalities are also likely to be affected by the negative economic and other effects resulting from as expense,
revenue, or cash management measures taken to address the Puerto Rico government’s fiscal problems and measures included in fiscal
plans of other government entities. In addition to municipalities, the total direct exposure also included $10.2 million in loans to an
affiliate of PREPA, $30.0 million in loans to agencies or public corporations of the Puerto Rico government, and obligations of the
Puerto Rico government, specifically a residential pass-through MBS issued by the PRHFA, at an amortized cost of $3.3 million as
part of its available-for-sale debt securities portfolio (fair value of $2.2 million as of March 31, 2023).
The following table details the Corporation’s total direct exposure to Puerto Rico government obligations according to their
maturities:
As of March 31, 2023
Investment
Portfolio
Total
(Amortized
cost)
Loans
Exposure
(In thousands)
Puerto Rico Housing Finance Authority:
$
3,302
$
-
$
3,302
Total Puerto Rico Housing Finance Authority
3,302
-
3,302
Agencies and public corporation of the Puerto Rico government:
-
3,313
3,313
-
26,671
26,671
Total agencies and public corporation of the Puerto Rico government
-
29,984
29,984
-
10,184
10,184
Total Puerto Rico government affiliate
-
10,184
10,184
Total Puerto Rico public corporations and government affiliate
-
40,168
40,168
Municipalities:
1,204
18,148
19,352
42,633
55,905
98,538
55,940
56,652
112,592
66,023
-
66,023
Total Municipalities
165,800
130,705
296,505
Total Direct Government Exposure
$
169,102
$
170,873
$
339,975
120
In addition, as of March 31, 2023, the Corporation had $82.9 million in exposure to residential mortgage loans that are guaranteed
by the PRHFA, a governmental instrumentality that has been designated as a covered entity under PROMESA (December 31, 2022 –
$84.7 million). Residential mortgage loans guaranteed by the PRHFA are secured by the underlying properties and the guarantees
serve to cover shortfalls in collateral in the event of a borrower default. The Puerto Rico government guarantees up to $75 million of
the principal for all loans under the mortgage loan insurance program. According to the most recently released audited financial
statements of the PRHFA, as of June 30, 2021, the PRHFA’s mortgage loans insurance program covered loans in an aggregate amount
of approximately $473 million. The regulations adopted by the PRHFA require the establishment of adequate reserves to guarantee the
solvency of the mortgage loans insurance program. As of June 30, 2021, the most recent date as of which information is available, the
PRHFA had a liability of approximately $5 million as an estimate of the losses inherent in the portfolio.
As of March 31, 2023, the Corporation had $2.2 billion of public sector deposits in Puerto Rico, compared to $2.3 billion as of
December 31, 2022. Approximately 25% of the public sector deposits as of March 31, 2023 were from municipalities and municipal
agencies in Puerto Rico and 75% were from public corporations, the Puerto Rico central government and agencies, and U.S. federal
government agencies in Puerto Rico.
Exposure to USVI Government
The Corporation has operations in the USVI and has credit exposure to USVI government entities.
For many years, the USVI has been experiencing a number of fiscal and economic challenges that have deteriorated the overall
financial and economic conditions in the area. On March 4, 2022, the United States Bureau of Economic Analysis (the “BEA”)
released its estimates of GDP for 2020. According to the BEA, the USVI’s real GDP decreased 2.2%. Also, the BEA revised its
previously published real GDP growth estimate for 2019 from 2.2% to 2.8%. According to the BEA, the decline in real GDP for 2020
reflected decreases in exports of services, private fixed investment, personal consumption expenditures, and government spending
primarily as a result of the effects of the COVID-19 pandemic. These decreases were partially offset by an increase in private
inventory investment, reflecting an increase in crude oil and other petroleum products imported and stored in the islands. In addition,
there were reductions in imports of goods including consumer goods and equipment, and in imports of services. According to the
BEA, expenditures funded by the various federal grants and transfer payments are reflected in the GDP estimates; however, the full
effects of the pandemic cannot be quantified in the GDP statistics for the USVI because the impacts are generally embedded in source
data and cannot be separately identified.
Nonetheless, over the past two years, the USVI has been recovering from the adverse impact caused by COVID-19 and has
continued to make progress on its rebuilding efforts related to Hurricanes Irma and Maria in 2017. According to data published by the
government, over $1.4 billion in disaster recovery funds were disbursed during 2021 and 2022, up 22% from the preceding 2-year
period. On the fiscal front, revenues have trended positively and the USVI Government successfully completed the restructuring of the
government employee retirement system. Although no official GDP data has been released for 2021 and/or 2022, the aforementioned
developments, as well as the positive trend reflected by key economic indicators such as visitor arrivals, non-farm payrolls and
unemployment rate potentially indicate that the territory has experienced an overall economic recovery since 2020.
debts of the USVI and its public corporations and instrumentalities. To the extent that the fiscal condition of the USVI government
continues to deteriorate, the U.S. Congress or the government of the USVI may enact legislation allowing for the restructuring of the
financial obligations of the USVI government entities or imposing a stay on creditor remedies, including by making PROMESA
applicable to the USVI.
As of March 31, 2023, the Corporation had $38.7 million in loans to USVI public corporations, compared to $38.0 million as of
December 31, 2022. As of March 31, 2023, all loans were currently performing and up to date on principal and interest payments.
121
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk to which the Corporation is exposed, see the information contained in Part I, Item 2.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management” in this Quarterly
Report on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
First BanCorp.’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of
First BanCorp.’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
March 31, 2023. Based on this evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief
Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective and
provide reasonable assurance that the information required to be disclosed by the Corporation in reports that the Corporation files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms and is accumulated and reported to the Corporation’s management, including the Chief Executive Office and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosures.
Internal Control over Financial Reporting
There were no changes to the Corporation’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during our most recent quarter ended March 31, 2023 that have materially affected, or are reasonably likely
to materially affect, the Corporation’s internal control over financial reporting.
122
PART II - OTHER INFORMATION
In accordance with the instructions to Part II, the other specified items in this part have been omitted because they are not applicable, or the
information has been previously reported.
ITEM 1. LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Note 22 – Regulatory Matters, Commitments and Contingencies, to unaudited consolidated
financial statements herein, which is incorporated by reference in this Item 1.
ITEM 1A. RISK FACTORS
The Corporation’s business, operating results and/or the market price of our common stock may be significantly affected by a number of
factors. A detailed discussion of certain risk factors that could affect the Corporation’s future operations, financial condition or results for
future periods is set forth in Part I, Item 1A., “Risk Factors,” in the 2022 Annual Report on Form 10-K. These risk factors, and others, could
cause actual results to differ materially from historical results or the results contemplated by the forward-looking statements contained in
this report. Also, refer to the discussion in “Forward Looking Statements” and Part I, Item 2. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” in this Quarterly Report on Form 10-Q for additional information that may supplement or
update the discussion of risk factors in the 2022 Annual Report on Form 10-K.
Other than as described below, there have been no material changes from those risk factors previously disclosed in Part I, Item 1A. “Risk
Factors,” in the 2022 Annual Report on Form 10-K.
Cyber-attacks, system risks and data protection breaches to our computer systems and networks or those of third-party service
providers could adversely affect our ability to conduct business, manage our exposure to risk or expand our business, result in the
disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and
security systems and infrastructure, and present significant reputational, legal and regulatory costs
.
Our business is highly dependent on the security, controls and efficacy of our infrastructure, computer and data management
systems, as well as those of our customers, suppliers, and other third parties. To access our network, products and services, our
employees, customers, suppliers, and other third parties, including downstream service providers, the financial services industry and
financial data aggregators, with whom we interact, on whom we rely or who have access to our customers
’
personal or account
information, increasingly use personal mobile devices or computing devices that are outside of our network and control environments
and are subject to their own cybersecurity risks. Our business relies on effective access management and the secure collection,
processing, transmission, storage and retrieval of confidential, proprietary, personal and other information in our computer and data
management systems and networks, and in the computer and data management systems and networks of third parties.
Information security risks for financial institutions have significantly increased in recent years, especially given the increasing
sophistication and activities of organized computer criminals, hackers, and terrorists and our expansion of online and digital customer
services to better meet our customer’s needs. These threats may derive from fraud or malice on the part of our employees or third-
party providers or may result from human error or accidental technological failure. These threats include cyber-attacks, such as
computer viruses, malicious or destructive code, phishing attacks, denial of service attacks, or other security breach tactics that could
result in the unauthorized release, gathering, monitoring, misuse, loss, destruction, or theft of confidential, proprietary, and other
information, including intellectual property, of ours, our employees, our customers, or third parties, damages to systems, or otherwise
material disruption to our or our customers’ or other third parties’ network access or business operations, both domestically and
internationally.
While we maintain an Information Security Program that continuously monitors cyber-related risks and ultimately ensures
protection for the processing, transmission, and storage of confidential, proprietary, and other information in our computer systems
and networks, as well as a vendor management program to oversee third party and vendor risks, there is no guarantee that we will not
be exposed to or be affected by a cybersecurity incident. For example, we recently learned that one of our third-party vendors was the
victim of a security incident in April 2023 involving a set of data that included some information on FirstBank’s mortgage loan
business. In response to learning of the incident, we promptly launched our own internal investigation, which confirmed that our own
systems were not compromised, and any operational and financial impact was minimal. We are working with cybersecurity experts
and legal counsel to fully assess the impact of the security incident reported by our third-party vendor and any required disclosures to
the applicable regulatory authorities and impacted customers. Our vendor has indicated (and we have no evidence to the contrary) that
to date there is no evidence that there has been any actual or attempted misuse of information. We may incur expenses related to the
123
incident, including expenses to remediate and investigate this matter. Additionally, we remain subject to risks and uncertainties as a
result of the incident, including legal, reputational and financial risks.
Cyber threats are rapidly changing, and future attacks or breaches could lead to other security breaches of the networks, systems, or
devices that our customers use to access our integrated products and services, which, in turn, could result in unauthorized disclosure,
release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary, and other information (including account data
information) or data security compromises. As cyber threats continue to evolve, we may be required to expend significant additional
resources to modify or enhance our protective measures, investigate, and remediate any information security vulnerabilities or
incidents and develop our capabilities to respond and recover. The full extent of a particular cyberattack, and the steps that the
Corporation may need to take to investigate such attack, may not be immediately clear, and it could take considerable additional time
for us to determine the complete scope of information compromised, at which time the impact on the Corporation and measures to
recover and restore to a business-as-usual state may be difficult to assess. These factors may also inhibit our ability to provide full and
reliable information about the cyberattack to our customers, third-party vendors, regulators, and the public.
A successful penetration or circumvention of our system security, or the systems of our customers, suppliers, and other third parties,
could cause us serious negative consequences, including significant operational, reputational, legal, and regulatory costs and concerns.
Any of these adverse consequences could adversely impact our results of operations, liquidity, and financial condition. In addition,
our insurance policies may not be adequate to compensate us for the potential costs and other losses arising from cyber-attacks,
failures of information technology systems, or security breaches, and such insurance policies may not be available to us in the future
on economically reasonable terms, or at all. Insurers may also deny us coverage as to any future claim. Any of these results could
harm our growth prospects, financial condition, business, and reputation.
The volatility in the financial services industry, including failures or rumored failures of other depository institutions, and
actions taken by governmental agencies to stabilize the financial system, could result in, among other things, bank deposit runoffs
and liquidity constraints.
The closure and placement into receivership with the FDIC of certain large U.S. regional banks with assets over $100 billion in March
and May 2023, and adverse developments affecting other banks, resulted in heightened levels of market volatility and consequently have
negatively impacted customer confidence in the safety and soundness of financial institutions. These developments have resulted in certain
regional banks experiencing higher than normal deposit outflows and an elevated level of competition for available deposits in the market.
Although we have not been materially impacted by these recent bank failures, the resulting speed at which news, including social media
outlets, led depositors to withdraw funds from these and other financial institutions, as well as the volatile impact to stock prices, could
have a material effect on operations. The impact of market volatility from the adverse developments in the banking industry, along with
continued high inflation and rising interest rates on our business and related financial results, will depend on future developments, which
are highly uncertain and difficult to predict.
In the aftermath of these recent bank failures, the banking agencies could propose certain actions that may impact capital ratios or the
FDIC deposit insurance premium.
124
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Corporation did not have any unregistered sales of equity securities during the quarter ended March 31, 2023.
Issuer Purchases of Equity Securities
The following table provides information in relation to the Corporation’s purchases of shares of its common stock during the quarter
ended March 31, 2023:
Period
Total Number of Shares
Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar Value
of Shares That May Yet be
Purchased Under These
Plans or Programs (In
thousands)
(1)
January 1, 2023 - January 31, 2023
306,106
$
13.25
306,106
$
120,944
February 1, 2023 - February 28, 2023
2,282,608
14.24
2,282,608
88,429
March 1, 2023 - March 31, 2023
1,276,661
13.04
988,826
75,000
Total
3,865,375
(2)(3)
3,577,540
(1)
As of March 31, 2023, the Corporation was authorized to purchase up to $350 million of its common stock under the stock repurchase program, that was publicly announced on April 27,
2022, of which $275.0 million had been utilized. The remaining $75.0 million in the table represents the remaining amount authorized under the stock repurchase program as of March 31,
2023. The stock repurchase program does not obligate the Corporation to acquire any specific number of shares, does not have an expiration date and may be modified, suspended, or
terminated at any time at the Corporation's discretion. Under the stock repurchase program, shares may be repurchased through open market purchases, accelerated share repurchases
and/or privately negotiated transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
(2)
Includes 3,577,540 shares of common stock repurchased in the open market at an average price of $13.98 for a total purchase price of approximately $50.0 million.
(3)
Includes 287,835 shares of common stock withheld by the Corporation to cover minimum tax withholding obligations upon the vesting of restricted stock and performance units. The
Corporation intends to continue to satisfy statutory tax withholding obligations in connection with the vesting of outstanding restricted stock and performance units through the
withholding of shares.
125
ITEM 6. EXHIBITS
See the Exhibit Index below, which is incorporated by reference herein:
EXHIBIT INDEX
Exhibit No.
Description
10.1*
31.1
31.2
32.1
32.2
101.INS
Inline XBRL Instance Document, filed herewith. The instance document does not appear in the interactive data file because
its XBRL tags are embedded within the inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document, filed herewith
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document, filed herewith
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith
101.DEF
Inline XBRL Taxonomy Extension Definitions Linkbase Document, filed herewith
104
The cover page of First BanCorp. Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in
Inline XBRL (included within the Exhibit 101 attachments)
*Management contract or compensatory plan or agreement.
126
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized:
First BanCorp.
Registrant
Date: May 10, 2023
By: /s/ Aurelio Alemán
Date: May 10, 2023
By: /s/ Orlando Berges