FIRST BANCORP /PR/ - Quarter Report: 2023 June (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
June 30, 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:
178,298,443
2
FIRST BANCORP.
INDEX PAGE
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2023 and December 31, 2022
Consolidated Statements of Income (Unaudited) – Quarters and Six-Month Periods ended June 30, 2023
and 2022
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Quarters and Six-Month Periods
ended June 30, 2023 and 2022
Consolidated Statements of Cash Flows (Unaudited) – Six-Month Periods ended June 30, 2023 and 2022
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Quarters and Six-Month
Periods ended June 30, 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
Item 5. Other Information
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 hereof, and advises readers that any such forward-looking statements are not guarantees of future performance and involve
certain risks, uncertainties, estimates, and assumptions by us that are difficult to predict. Various factors, some of which are beyond
our control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements.
limited to, risks described or referenced in Part I, Item 1A, “Risk Factors,” in the Corporation’s Annual Report on Form 10-K for the
year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”), Part II, Item 1A, “Risk Factors” in the Corporation’s
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023, and the following:
●
the impacts of rising interest rates and inflation on the Corporation, including a decrease in demand for new loan originations
and refinancings, increased competition for borrowers, attrition in deposits, a reduction in the fair value of the Corporation’s
debt securities portfolio, and adverse effects on the Corporation’s results of operations and its liquidity position;
●
volatility in the financial services industry, including failures or rumored failures of other depository institutions, and actions
taken by governmental agencies to stabilize the financial system, including Federal Deposit Insurance Corporation (“FDIC”)
special assessments, which could result in, among other things, bank deposit runoffs and liquidity constraints;
●
the effect of continued changes in the fiscal and monetary policies and regulations of the United States (“U.S.”) federal
government, the Puerto Rico government and other governments, including those determined by the Board of the Governors
of the Federal Reserve System (the “Federal Reserve Board”), the Federal Reserve Bank of New York (the “New York FED”
or the “FED”), the FDIC, government-sponsored housing agencies and regulators in Puerto Rico, the U.S., and the U.S.
Virgin Islands (the “USVI) and British Virgin Islands (the “BVI”);
●
uncertainty as to the ability of the Corporation’s banking subsidiary, FirstBank Puerto Rico (“FirstBank” or the “Bank”), to
retain its core deposits and generate sufficient cash flow through its wholesale funding sources, such as securities sold under
agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and brokered certificates of deposit (“brokered
CDs”), which may require us to sell investment securities at a loss;
●
adverse changes in general economic conditions in Puerto Rico, the U.S., and the USVI and BVI, including in the interest
rate environment, unemployment rates, market liquidity, housing absorption rates, real estate markets, and U.S. capital
markets, which may affect funding sources, loan portfolio performance and credit quality, market prices of investment
securities, and demand for the Corporation’s products and services, and which may reduce the Corporation’s revenues and
earnings and the value of the Corporation’s assets;
●
the impact of government financial assistance for hurricane recovery and other disaster relief on economic activity in Puerto
Rico, and the timing and pace of disbursements of funds earmarked for disaster relief;
●
the ability of the Corporation, FirstBank, and third-party service providers to identify and prevent cyber-security incidents,
such as data security breaches, ransomware, malware, “denial of service” attacks, “hacking,” identity theft, and state-
sponsored cyberthreats, and the occurrence of and response to any incidents that occur, such as an April 2023 security
incident at one of our third-party vendors, which may result in misuse or misappropriation of confidential or proprietary
information, disruption, or damage to our systems or those of third-party service providers, increased costs and losses or an
adverse effect to our reputation;
●
general competitive factors and other market risks as well as the implementation of strategic growth opportunities, including
risks, uncertainties, and other factors or events related to any business acquisitions or dispositions;
4
●
uncertainty as to the implementation of the debt restructuring plan of Puerto Rico (“Plan of Adjustment” or “PoA”) and the
fiscal plan for Puerto Rico as certified on April 3, 2023 (the “2023 Fiscal Plan”) by the oversight board established by the
Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), or any revisions to it, on our clients and
loan portfolios, and any potential impact from future economic or political developments and tax regulations in Puerto Rico;
●
the impact of changes in accounting standards, or assumptions in applying those standards, on forecasts of economic
variables considered for the determination of the allowance for credit losses (“ACL”);
●
the ability of FirstBank to realize the benefits of its net deferred tax assets;
●
environmental, social, and governance matters, including our climate-related initiatives and commitments;
●
the impacts of natural or man-made disasters, widespread health emergencies, geopolitical conflicts (including the ongoing
conflict in Ukraine), terrorist attacks, or other catastrophic external events, including impacts of such events on general
economic conditions and on the Corporation’s assumptions regarding forecasts of economic variables;
●
the effect of changes in the interest rate environment, including any adverse change in the Corporation’s ability to attract and
retain clients and gain acceptance from current and prospective customers for new products and services, including those
related to the offering of digital banking and financial services;
●
the risk that additional portions of the unrealized losses in the Corporation’s debt securities portfolio are determined to be
credit-related, or the need of additional credit losses that could emerge from the recent downgrade of the United States of
America’s Long-Term Foreign-Currency Issuer Default Rating (“IDR”) to ‘AA+’ from ‘AAA’, resulting in additional
charges to the provision for credit losses on the Corporation’s debt securities portfolio;
●
the impacts of applicable legislative, tax, or regulatory changes on the Corporation’s financial condition or performance;
●
the risk of possible failure or circumvention of the Corporation’s internal controls and procedures and the risk that the
Corporation’s risk management policies may not be adequate;
●
the risk that the FDIC may further increase the deposit insurance premium and/or require further special assessments, causing
an additional increase in the Corporation’s non-interest expenses;
●
any need to recognize impairments on the Corporation’s financial instruments, goodwill, and other intangible assets;
●
residual impacts of the transition away from the London Interbank Offered Rate (“LIBOR”);
●
the risk that the impact of the occurrence of any of these uncertainties on the Corporation’s capital would preclude further
growth of FirstBank and preclude the Corporation’s Board of Directors (the “Board”) from declaring dividends; and
●
uncertainty as to whether FirstBank will be able to continue to satisfy its regulators regarding, among other things, its asset
quality, liquidity plans, maintenance of capital levels, and compliance with applicable laws, regulations and related
requirements.
occurrences or unanticipated events or circumstances after the date of such statements, except as required by the federal securities
laws.
5
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
June 30, 2023
December 31, 2022
(In thousands, except for share information)
ASSETS
Cash and due from banks
$
1,046,534
$
478,480
Money market investments:
Time deposits with other financial institutions
300
300
Other short-term investments
700
1,725
Total money market investments
1,000
2,025
Available-for-sale debt securities, at fair value:
Securities pledged with creditors’ rights to repledge
79,909
81,103
Other available-for-sale debt securities
5,353,460
5,518,417
Total available-for-sale debt securities, at fair value (amortized cost of $
6,199,630
$
6,398,197
433
458
5,433,369
5,599,520
Held-to-maturity debt securities, at amortized cost, net of ACL of $
8,401
8,286
as of December 31, 2022 (fair value of $
410,181
427,115
416,325
429,251
Equity securities
48,101
55,289
Total investment securities
5,897,795
6,084,060
Loans, net of ACL of $
267,058
260,464
11,452,257
11,292,361
Mortgage loans held for sale, at lower of cost or market
14,295
12,306
Total loans, net
11,466,552
11,304,667
Accrued interest receivable on loans and investments
70,368
69,730
Premises and equipment, net
146,640
142,935
Other real estate owned (“OREO”)
31,571
31,641
Deferred tax asset, net
153,925
155,584
Goodwill
38,611
38,611
Other intangible assets
17,092
21,118
Other assets
282,367
305,633
Total assets
$
19,152,455
$
18,634,484
LIABILITIES
Non-interest-bearing deposits
$
5,874,261
$
6,112,884
Interest-bearing deposits
10,945,431
10,030,583
Total deposits
16,819,692
16,143,467
Short-term securities sold under agreements to repurchase
73,934
75,133
Advances from the FHLB:
Short-term
-
475,000
Long-term
500,000
200,000
Total advances from the FHLB
500,000
675,000
Other long-term borrowings
161,700
183,762
Accounts payable and other liabilities
199,130
231,582
Total liabilities
17,754,456
17,308,944
Commitments and contingencies (See Note 22)
(nil)
(nil)
STOCKHOLDERS’ EQUITY
Common stock, $
0.10
2,000,000,000
223,663,116
179,756,622
shares outstanding as of June 30, 2023 and
182,709,059
22,366
22,366
Additional paid-in capital
962,229
970,722
Retained earnings, includes legal surplus reserve of $
168,484
1,733,497
1,644,209
Treasury stock (at cost),
43,906,494
40,954,057
(547,706)
(506,979)
Accumulated other comprehensive loss, net of tax of $
8,468
(772,387)
(804,778)
Total stockholders’ equity
1,397,999
1,325,540
Total liabilities and stockholders’ equity
$
19,152,455
$
18,634,484
The accompanying notes are an integral part of these statements.
6
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands, except per share information)
Interest and dividend income:
$
218,066
$
179,261
$
428,702
$
353,048
26,258
26,491
53,368
49,738
7,880
2,873
12,530
3,693
252,204
208,625
494,600
406,479
Interest expense:
41,604
7,694
71,489
15,346
1,328
-
2,397
-
-
1,972
-
4,154
435
-
4,776
-
5,613
1,075
8,448
2,138
3,409
1,698
6,790
3,031
52,389
12,439
93,900
24,669
199,815
196,186
400,700
381,810
Provision for credit losses - expense (benefit):
20,770
12,665
37,026
(4,324)
721
812
616
634
739
(3,474)
90
(109)
22,230
10,003
37,732
(3,799)
177,585
186,183
362,968
385,609
Non-interest income:
9,287
9,466
18,828
18,829
2,860
4,082
5,672
9,288
1,605
-
1,605
-
2,747
2,946
7,594
8,221
11,135
10,300
22,053
19,981
8,637
4,147
13,037
7,480
36,271
30,941
68,789
63,799
Non-interest expenses:
54,314
51,304
110,736
100,858
21,097
21,505
42,283
43,891
4,167
4,042
8,142
7,505
11,596
12,036
23,569
22,630
5,124
4,689
10,236
9,707
2,143
1,466
4,276
3,139
(1,984)
(1,485)
(3,980)
(2,205)
6,540
5,843
11,858
9,964
1,992
1,978
4,208
4,129
7,928
6,948
16,857
15,367
112,917
108,326
228,185
214,985
Income before income taxes
100,939
108,798
203,572
234,423
Income tax expense
30,284
34,103
62,219
77,128
Net income
$
70,655
$
74,695
$
141,353
$
157,295
Net income attributable to common stockholders
$
70,655
$
74,695
$
141,353
$
157,295
Net income per common share:
$
0.39
$
0.38
$
0.79
$
0.80
$
0.39
$
0.38
$
0.78
$
0.80
The accompanying notes are an integral part of these statements.
7
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Net income
$
70,655
$
74,695
$
141,353
$
157,295
Other comprehensive (loss) income, net of tax:
Available-for-sale debt securities:
Net unrealized holding (losses) gains on debt securities
(54,837)
(175,923)
32,391
(507,757)
Other comprehensive (loss) income for the period, net of tax
(54,837)
(175,923)
32,391
(507,757)
Total comprehensive income (loss)
$
15,818
$
(101,228)
$
173,744
$
(350,462)
(1)
Net unrealized holding (losses) gains on available-for-sale debt securities have no tax effect because securities are either tax-exempt, held by an International Banking Entity (“IBE”), or
have a full deferred tax asset valuation allowance.
The accompanying notes are an integral part of these statements.
8
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six-Month Period Ended June 30,
2023
2022
(In thousands)
Cash flows from operating activities:
Net income
$
141,353
$
157,295
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
10,071
11,291
Amortization of intangible assets
4,026
4,510
Provision for credit losses - expense (benefit)
37,732
(3,799)
Deferred income tax expense
2,419
41,483
Stock-based compensation
3,997
2,580
Gain on early extinguishment of debt
(1,605)
-
Unrealized gain on derivative instruments
(291)
(864)
Net gain on disposals or sales, and impairments of premises and equipment and other assets
(235)
(900)
Net gain on sales of loans and loans held-for-sale valuation adjustments
(989)
(3,965)
Net amortization of discounts, premiums, and deferred loan fees and costs
686
(5,486)
Originations and purchases of loans held for sale
(88,696)
(143,692)
Sales and repayments of loans held for sale
85,398
157,098
Amortization of broker placement fees
128
64
Net amortization of premiums and discounts on investment securities
2,117
1,389
Decrease (increase) in accrued interest receivable
1,849
(3,555)
Increase (decrease) in accrued interest payable
9,369
(1,252)
Increase in other assets
(5,566)
(4,235)
(Decrease) increase in other liabilities
(35,307)
11,646
166,456
219,608
Cash flows from investing activities:
Net disbursements on loans held for investment
(226,714)
(186,902)
Proceeds from sales of loans held for investment
3,183
37,565
Proceeds from sales of repossessed assets
26,360
19,941
Purchases of available-for-sale debt securities
(961)
(512,327)
Proceeds from principal repayments and maturities of available-for-sale debt securities
217,745
354,853
Purchases of held-to-maturity debt securities
-
(260,082)
Proceeds from principal repayments and maturities of held-to-maturity debt securities
13,832
934
Additions to premises and equipment
(16,211)
(11,841)
Proceeds from sales of premises and equipment and other assets
578
1,138
Net redemptions (purchases) of other investments securities
7,219
(971)
25,031
(557,692)
Cash flows from financing activities:
Net increase (decrease) in deposits
675,911
(645,417)
Net repayments of short-term borrowings
(476,199)
-
Repayments of long-term borrowings
(19,795)
(100,000)
Proceeds from long-term borrowings
300,000
-
Repurchase of outstanding common stock
(53,217)
(152,713)
Dividends paid on common stock
(51,158)
(43,321)
375,542
(941,451)
Net increase (decrease) in cash and cash equivalents
567,029
(1,279,535)
Cash and cash equivalents at beginning of year
480,505
2,543,058
Cash and cash equivalents at end of period
$
1,047,534
$
1,263,523
Cash and cash equivalents include:
Cash and due from banks
$
1,046,534
$
1,261,590
Money market investments
1,000
1,933
$
1,047,534
$
1,263,523
The accompanying notes are an integral part of these statements.
9
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands, except per share information)
Common Stock
$
22,366
$
22,366
$
22,366
$
22,366
Additional Paid-In Capital:
959,912
966,771
970,722
972,547
1,922
1,398
3,997
2,580
-
(23)
(13,139)
(7,003)
395
71
649
93
962,229
968,217
962,229
968,217
Retained Earnings:
1,688,176
1,489,995
1,644,209
1,427,295
-
-
(1,357)
-
70,655
74,695
141,353
157,295
0.14
0.12
0.28
0.22
(25,334)
(23,356)
(50,708)
(43,256)
1,733,497
1,541,334
1,733,497
1,541,334
Treasury Stock (at cost):
(547,311)
(282,197)
(506,979)
(236,442)
-
(100,000)
(53,217)
(152,713)
-
23
13,139
7,003
(395)
(71)
(649)
(93)
(547,706)
(382,245)
(547,706)
(382,245)
Accumulated Other Comprehensive Loss, net of tax:
(717,550)
(415,833)
(804,778)
(83,999)
(54,837)
(175,923)
32,391
(507,757)
(772,387)
(591,756)
(772,387)
(591,756)
$
1,397,999
$
1,557,916
$
1,397,999
$
1,557,916
The accompanying notes are an integral part of these statements.
10
FIRST BANCORP.
INDEX TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Note 1 –
Basis of Presentation and Significant Accounting Policies
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
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements (unaudited) for the quarter and six-month period ended June 30, 2023 (the “unaudited
consolidated financial statements”) of First BanCorp. (the “Corporation”) have been prepared in conformity with the accounting policies
stated in the Corporation’s Audited Consolidated Financial Statements for the fiscal year ended December 31, 2022 (the “audited
consolidated financial statements”) included in the 2022 Annual Report on Form 10-K, as updated by the information contained in this
report. Certain information and note disclosures normally included in the financial statements prepared in accordance with generally
accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant
to the rules and regulations of the SEC and, accordingly, these financial statements should be read in conjunction with the audited
consolidated financial statements, which are included in the 2022 Annual Report on Form 10-K. All adjustments (consisting only of normal
recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the statement of financial position, results
of operations and cash flows for the interim periods have been reflected. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The results of operations for the quarter and six-month period ended June 30, 2023 are not necessarily indicative of the results to be
expected for the entire year.
Adoption of New Accounting Requirements
ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings (“TDR”) and Vintage Disclosures”
Effective January 1, 2023, the Corporation adopted ASU 2022-02, which removed the existing measurement and disclosure
requirements for TDR loans, added additional disclosure requirements related to modifications provided to borrowers experiencing
financial difficulty regardless of whether the modification is accounted for as a new loan, and amends the guidance on vintage disclosures
to require disclosure of gross charge-offs by year of origination. Prior to adoption, a change in contractual terms of a loan where a
borrower was experiencing financial difficulty and received a concession not available through other sources was required to be disclosed
as a TDR, whereas now a borrower that is experiencing financial difficulty and there has been a direct change to the timing or amount of
contractual cash flows in the form of principal forgiveness, interest rate reduction, an other-than-insignificant payment delay, a term
extension, or any combination of these types of loan modifications in the current period needs to be disclosed. ASU 2022-02 did not amend
the definition of financial difficulty.
Modifications of receivables are within the scope of ASU 2022-02 if they are accounted for in accordance with Accounting Standards
Codification (“ASC”) 310-20. As such, finance leases are not within the scope of ASU 2022-02. Such modifications are evaluated
following the requirements in ASC 310-20 to determine whether they should be accounted for as a new loan or a continuation of the
existing loan.
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 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.
be materially impacted by the
adoption of this ASU during the first
quarter of 2024.
For other issued accounting standards not yet effective or not yet adopted, see Note 1 – Nature of Business and Summary of
Significant Accounting Policies, to the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
13
NOTE 2 – DEBT SECURITIES
Available-for-Sale Debt Securities
The amortized cost, gross unrealized gains and losses, ACL, estimated fair value, and weighted-average yield of available-for-sale
debt securities by contractual maturities as of June 30, 2023 were as follows:
June 30, 2023
Amortized cost
(1)
Gross
ACL
Fair value
Unrealized
Weighted-
Gains
Losses
average yield%
(Dollars in thousands)
U.S. Treasury securities:
$
27,671
$
-
$
705
$
-
$
26,966
0.61
120,787
-
8,084
-
112,703
0.69
U.S. government-sponsored entities (“GSEs”) obligations:
224,161
-
5,089
-
219,072
0.42
2,344,874
56
209,839
-
2,135,091
0.85
11,267
4
871
-
10,400
3.16
10,844
22
1
-
10,865
5.38
Puerto Rico government obligations:
(2)
3,254
-
794
349
2,111
-
United States and Puerto Rico government obligations
2,742,858
82
225,383
349
2,517,208
0.83
Mortgage-backed securities (“MBS”):
20,047
-
1,191
-
18,856
1.97
171,682
-
17,242
-
154,440
1.58
1,038,513
-
180,505
-
858,008
1.41
1,230,242
-
198,938
-
1,031,304
1.44
1
-
-
-
1
2.53
20,426
-
1,257
-
19,169
1.25
32,172
-
2,952
-
29,220
1.70
219,768
7
26,660
-
193,115
2.63
272,367
7
30,869
-
241,505
2.42
22,434
-
1,399
-
21,035
1.72
338,605
-
31,862
-
306,743
1.75
1,102,263
38
178,364
-
923,937
1.37
1,463,302
38
211,625
-
1,251,715
1.46
288,194
-
58,267
-
229,927
1.48
7,498
-
2,168
84
5,246
7.61
Total Residential MBS
3,261,603
45
501,867
84
2,759,697
1.55
44,311
-
7,308
-
37,003
2.15
25,656
-
3,430
-
22,226
2.13
125,202
-
27,967
-
97,235
1.40
Total Commercial MBS
195,169
-
38,705
-
156,464
1.67
Total MBS
3,456,772
45
540,572
84
2,916,161
1.56
Total available-for-sale debt securities
$
6,199,630
$
127
$
765,955
$
433
$
5,433,369
1.23
(1)
Excludes accrued interest receivable on available-for-sale debt securities that totaled $
10.7
consolidated statements of financial condition, and excluded from the estimate of credit losses.
(2)
Consists of a residential pass-through MBS issued by the Puerto Rico Housing Finance Authority (“PRHFA”) that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico
government in 2010 and is in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
14
The amortized cost, gross unrealized gains and losses, ACL, estimated fair value, and weighted-average yield of available-for-sale
debt securities by contractual maturities as of December 31, 2022 were as follows:
December 31, 2022
Amortized cost
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
CMOs issued or guaranteed by the FHLMC, FNMA,
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
15
Maturities of available-for-sale debt securities are based on the period of final contractual maturity. Expected maturities might
differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted-average yield on
available-for-sale debt securities is based on amortized cost and, therefore, does not give effect to changes in fair value. The net
unrealized gain or loss on available-for-sale debt securities is presented as part of accumulated other comprehensive loss
consolidated statements of financial condition.
The following tables present the fair value and gross unrealized losses of the Corporation’s available-for-sale debt securities,
aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as
of June 30, 2023 and December 31, 2022. The tables also include debt securities for which an ACL was recorded.
As of June 30, 2023
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
Fair Value
Fair Value
Fair Value
(In thousands)
$
2,887
$
4
$
2,496,214
$
224,585
$
2,499,101
$
224,589
-
-
2,111
794
(1)
2,111
794
19,638
959
1,011,666
197,979
1,031,304
198,938
50,543
1,335
189,454
29,534
239,997
30,869
42,650
2,361
1,204,127
209,264
1,246,777
211,625
378
10
229,549
58,257
229,927
58,267
-
-
5,246
2,168
(1)
5,246
2,168
15,403
370
141,061
38,335
156,464
38,705
$
131,499
$
5,039
$
5,279,428
$
760,916
$
5,410,927
$
765,955
(1)
Unrealized losses do not include the credit loss component recorded as part of the ACL. As of June 30, 2023, the PRHFA bond and private label MBS had an ACL of $
0.4
$
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)
$
298,313
$
18,057
$
2,174,724
$
231,357
$
2,473,037
$
249,414
-
-
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
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
16
Assessment for Credit Losses
Debt securities issued by U.S. government agencies, U.S. GSEs, and the U.S. Treasury, including notes and MBS, accounted for
substantially all of the total available-for-sale portfolio as of June 30, 2023, and the Corporation expects no credit losses on these
securities, given the explicit and implicit guarantees provided by the U.S. federal government. Because the decline in fair value is
attributable to changes in interest rates, and not credit quality, and because, as of June 30, 2023, the Corporation did not have the
intent to sell these U.S. government and agencies debt securities and determined that it was likely that it will not be required to sell
these securities before their anticipated recovery, the Corporation does not consider impairments on these securities to be credit
related. The Corporation’s credit loss assessment was concentrated mainly on private label MBS and on Puerto Rico government debt
securities, for which credit losses are evaluated on a quarterly basis.
Private label MBS held as part of the Corporation’s available for sale portfolio consist of trust certificates issued by an unaffiliated
party backed by fixed-rate, single-family residential mortgage loans in the U.S. mainland with original FICO scores over 700 and
moderate loan-to-value ratios (under
80
%), as well as moderate delinquency levels. Upon the discontinuance of LIBOR after June 30,
2023, and following the provisions of the Adjustable Interest Rate Act (the “LIBOR Act”) and Regulation ZZ, the interest rate on
these private label MBS will transition during the third quarter of 2023 from
3-month LIBOR
Secured Overnight Financing Rate (“SOFR”) plus a tenor spread adjustment of
0.26161
% and the original spread limited to the
weighted-average coupon of the underlying collateral. The Corporation determined the ACL for private label MBS based on a risk-
adjusted discounted cash flow methodology that considers the structure and terms of the instruments. The Corporation utilized
probability of default (“PDs”) and loss given default (“LGDs”) that considered, among other things, historical payment performance,
loan-to-value attributes, and relevant current and forward-looking macroeconomic variables, such as regional unemployment rates and
the housing price index. Under this approach, expected cash flows (interest and principal) were discounted at the Treasury yield curve
as of the reporting date. See Note 18 – Fair Value for the significant assumptions used in the valuation of the private label MBS as of
June 30, 2023 and December 31, 2022.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
17
For the residential pass-through MBS issued by the PRHFA held as part of the Corporation’s available-for-sale portfolio backed by
second mortgage residential loans in Puerto Rico, the ACL was determined based on a discounted cash flow methodology that
considered the structure and terms of the debt security. The expected cash flows were discounted at the Treasury yield curve plus a
spread as of the reporting date and compared to the amortized cost. The Corporation utilized PDs and LGDs that considered, among
other things, historical payment performance, loan-to-value attributes, and relevant current and forward-looking macroeconomic
variables, such as regional unemployment rates, the housing price index, and expected recovery from the PRHFA guarantee. PRHFA,
not the Puerto Rico government, provides a guarantee in the event of default and subsequent foreclosure of the properties underlying
the second mortgage loans and its ability to honor such guarantee will depend on, among other factors, its financial condition at the
time such obligation becomes due and payable. Deterioration of the Puerto Rico economy or fiscal health of the PRHFA could impact
the value of this security, resulting in additional losses to the Corporation.
2022 of the ACL on available-for-sale debt securities:
Quarter Ended June 30, 2023
Six-Month Period Ended June 30, 2023
Private label
MBS
Puerto Rico
Government
Obligations
Total
Private label
MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
83
$
366
$
449
$
83
$
375
$
458
Provision for credit losses - benefit
-
(16)
(16)
-
(25)
(25)
$
83
$
350
$
433
$
83
$
350
$
433
Quarter Ended June 30, 2022
Six-Month Period Ended June 30, 2022
Private label
MBS
Puerto Rico
Government
Obligations
Total
Private label
MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
403
$
308
$
711
$
797
$
308
$
1,105
Provision for credit losses - (benefit) expense
(113)
78
(35)
(501)
78
(423)
Net charge-offs
-
-
-
(6)
-
(6)
$
290
$
386
$
676
$
290
$
386
$
676
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
18
Held-to-Maturity Debt Securities
The amortized cost, gross unrecognized gains and losses, estimated fair value, ACL, weighted-average yield and contractual
maturities of held-to-maturity debt securities as of June 30, 2023 and December 31, 2022 were as follows
:
June 30, 2023
Amortized cost
(1)
Gross Unrecognized
Fair value
Weighted-
Gains
Losses
ACL
average yield%
(Dollars in thousands)
Puerto Rico municipal bonds:
Due within one year
$
1,205
$
-
$
29
$
1,176
$
26
5.90
After 1 to 5 years
42,736
661
1,360
42,037
689
6.93
After 5 to 10 years
56,160
2,733
446
58,447
3,209
7.44
After 10 years
66,023
-
2,023
64,000
4,477
8.54
Total Puerto Rico municipal bonds
166,124
3,394
3,858
165,660
8,401
7.74
MBS:
FHLMC certificates:
After 5 to 10 years
18,836
-
1,203
17,633
-
3.03
After 10 years
18,936
-
906
18,030
-
4.33
37,772
-
2,109
35,663
-
3.68
GNMA certificates:
After 10 years
17,765
-
1,046
16,719
-
3.35
FNMA certificates:
After 10 years
69,956
-
3,161
66,795
-
4.17
CMOs issued or guaranteed by
After 10 years
30,197
-
1,658
28,539
-
3.49
Total Residential MBS
155,690
-
7,974
147,716
-
3.83
After 1 to 5 years
9,533
-
479
9,054
-
3.48
After 10 years
93,379
-
5,628
87,751
-
3.15
Total Commercial MBS
102,912
-
6,107
96,805
-
3.18
Total MBS
258,602
-
14,081
244,521
-
3.57
Total held-to-maturity debt securities
$
424,726
$
3,394
$
17,939
$
410,181
$
8,401
5.20
(1)
Excludes accrued interest receivable on held-to-maturity debt securities that totaled $
6.8
consolidated statements of financial condition, and excluded from the estimate of credit losses.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
19
December 31, 2022
Amortized cost
(1)
Gross Unrecognized
Fair value
Weighted-
Gains
Losses
ACL
average yield%
(Dollars in thousands)
Puerto Rico municipal bonds:
Due within one year
$
1,202
$
-
$
15
$
1,187
$
2
5.20
After 1 to 5 years
42,530
886
1,076
42,340
656
6.34
After 5 to 10 years
55,956
3,182
360
58,778
3,243
6.29
After 10 years
66,022
-
1,318
64,704
4,385
7.10
Total held-to-maturity debt securities
165,710
4,068
2,769
167,009
8,286
6.62
MBS:
FHLMC certificates:
After 5 to 10 years
21,443
-
746
20,697
-
3.03
After 10 years
19,362
-
888
18,474
-
4.21
40,805
-
1,634
39,171
-
3.59
GNMA certificates:
After 10 years
19,131
-
943
18,188
-
3.35
FNMA certificates:
After 10 years
72,347
-
3,155
69,192
-
4.14
CMOs issued or guaranteed by
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 excluded from the estimate of credit losses.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
20
The following tables present the Corporation’s held-to-maturity debt securities’ fair value and gross unrecognized losses,
aggregated by category and length of time that individual securities had been in a continuous unrecognized loss position, as of June
30, 2023 and December 31, 2022, including debt securities for which an ACL was recorded:
As of June 30, 2023
Less than 12 months
12 months or more
Total
Unrecognized
Unrecognized
Unrecognized
Fair Value
Fair Value
Fair Value
(In thousands)
$
-
$
-
$
107,673
$
3,858
$
107,673
$
3,858
35,663
2,109
-
-
35,663
2,109
16,719
1,046
-
-
16,719
1,046
66,795
3,161
-
-
66,795
3,161
28,539
1,658
-
-
28,539
1,658
9,054
479
87,751
5,628
96,805
6,107
Total held-to-maturity debt securities
$
156,770
$
8,453
$
195,424
$
9,486
$
352,194
$
17,939
As of December 31, 2022
Less than 12 months
12 months or more
Total
Unrecognized
Unrecognized
Unrecognized
Fair Value
Fair Value
Fair Value
(In thousands)
$
-
$
-
$
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
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
21
The Corporation classifies the held-to-maturity debt securities portfolio into the following major security types: MBS issued by
GSEs and Puerto Rico municipal bonds. The Corporation does not recognize an ACL for MBS issued by GSEs since they are highly
rated by major rating agencies and have a long history of no credit losses. In the case of Puerto Rico municipal bonds, the Corporation
determines the ACL based on the product of a cumulative PD and LGD, and the amortized cost basis of the bonds over their
remaining expected life as described in Note 1 – Nature of Business and Summary of Significant Accounting Policies, to the audited
consolidated financial statements included in the 2022 Annual Report on Form 10-K.
The Corporation performs periodic credit quality reviews on these issuers. All of the Puerto Rico municipal bonds were current as
to scheduled contractual payments as of June 30, 2023. A security is considered to be past due once it is 30 days contractually past due
under the terms of the agreement. The ACL of Puerto Rico municipal bonds increased to $
8.4
8.3
million as of December 31, 2022, mostly driven by updated financial information of certain bond issuers received during 2023.
six-month periods ended June 30, 2023 and 2022:
Puerto Rico Municipal Bonds
Quarter Ended
Six-Month Period Ended
June 30, 2023
June 30, 2023
(In thousands)
Beginning Balance
$
7,646
$
8,286
Provision for credit losses - expense
755
115
ACL on held-to-maturity debt securities
$
8,401
$
8,401
Puerto Rico Municipal Bonds
Quarter Ended
Six-Month Period Ended
June 30, 2022
June 30, 2022
(In thousands)
Beginning Balance
$
12,324
$
8,571
Provision for credit losses - (benefit) expense
(3,439)
314
ACL on held-to-maturity debt securities
$
8,885
$
8,885
During the second quarter of 2019, the oversight board established by PROMESA announced the designation of Puerto Rico’s 78
municipalities as covered instrumentalities under PROMESA. Municipalities may be affected by the negative economic and other
effects resulting from expense, revenue, or cash management measures taken by the Puerto Rico government to address its fiscal
situation, or measures included in its fiscal plan or fiscal plans of other government entities. Given the inherent uncertainties about the
fiscal situation of the Puerto Rico central government and the measures taken, or to be taken, by other government entities in response
to economic and fiscal challenges, the Corporation cannot be certain whether future charges to the ACL on these securities will be
required.
considered cash and cash equivalents and are classified as money market investments in the consolidated statements of financial
condition. As of June 30, 2023 and December 31, 2022, the Corporation had no outstanding held-to-maturity securities that were
classified as cash and cash equivalents.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
22
Credit Quality Indicators:
The held-to-maturity debt securities portfolio consisted of MBS issued by GSEs and financing arrangements with Puerto Rico
municipalities issued in bond form. As previously mentioned, the Corporation expects no credit losses on GSEs MBS. The Puerto
Rico municipal bonds are accounted for as securities but are underwritten as loans with features that are typically found in commercial
loans. Accordingly, the Corporation monitors the credit quality of these municipal bonds through the use of internal credit-risk ratings,
which are generally updated on a quarterly basis. The Corporation considers a municipal bond as a criticized asset if its risk rating is
Special Mention, Substandard, Doubtful, or Loss. Puerto Rico municipal bonds that do not meet the criteria for classification as
criticized assets are considered to be Pass-rated securities. For the definitions of the internal credit-risk ratings, see Note 3 – Debt
Securities, to the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K.
The Corporation periodically reviews its Puerto Rico municipal bonds to evaluate if they are properly classified, and to measure
credit losses on these securities. The frequency of these reviews will depend on the amount of the aggregate outstanding debt, and the
risk rating classification of the obligor.
The Corporation has a Loan Review Group that reports directly to the Corporation’s Risk Management Committee and
administratively to the Chief Risk Officer. The Loan Review Group performs annual comprehensive credit process reviews of the
Bank’s commercial loan portfolios, including the above-mentioned Puerto Rico municipal bonds accounted for as held-to-maturity
debt securities. The objective of these loan reviews is to assess accuracy of the Bank’s determination and maintenance of loan risk
rating and its adherence to lending policies, practices and procedures. The monitoring performed by this group contributes to the
assessment of compliance with credit policies and underwriting standards, the determination of the current level of credit risk, the
evaluation of the effectiveness of the credit management process, and the identification of any deficiency that may arise in the credit-
granting process. Based on its findings, the Loan Review Group recommends corrective actions, if necessary, that help in maintaining
a sound credit process. The Loan Review Group reports the results of the credit process reviews to the Risk Management Committee.
As of June 30, 2023 and December 31, 2022, all Puerto Rico municipal bonds classified as held-to-maturity were classified as Pass.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
23
NOTE 3 – LOANS HELD FOR INVESTMENT
The following table provides information about the loan portfolio held for investment by portfolio segment and disaggregated by
geographic locations as of the indicated dates:
As of June 30,
As of December 31,
2023
2022
(In thousands)
Puerto Rico and Virgin Islands region:
Residential mortgage loans, mainly secured by first mortgages
$
2,352,310
$
2,417,900
Construction loans
69,219
34,772
Commercial mortgage loans
1,800,289
1,834,204
Commercial and Industrial ("C&I") loans
2,011,774
1,860,109
Consumer loans
3,487,454
3,317,489
Loans held for investment
$
9,721,046
$
9,464,474
Florida region:
Residential mortgage loans, mainly secured by first mortgages
$
441,480
$
429,390
Construction loans
94,779
98,181
Commercial mortgage loans
519,780
524,647
C&I loans
934,427
1,026,154
Consumer loans
7,803
9,979
Loans held for investment
$
1,998,269
$
2,088,351
Total:
Residential mortgage loans, mainly secured by first mortgages
$
2,793,790
$
2,847,290
Construction loans
163,998
132,953
Commercial mortgage loans
2,320,069
2,358,851
C&I loans
(1)
2,946,201
2,886,263
Consumer loans
3,495,257
3,327,468
Loans held for investment
(2)
11,719,315
11,552,825
ACL on loans and finance leases
(267,058)
(260,464)
Loans held for investment, net
$
11,452,257
$
11,292,361
(1)
As of June 30, 2023 and December 31, 2022, includes $
821.4
838.5
primary source of repayment at origination was not dependent upon the real estate.
(2)
Includes accretable fair value net purchase discounts of $
27.1
29.3
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
24
The Corporation’s aging of the loan portfolio held for investment, as well as information about nonaccrual loans with no ACL, by
portfolio classes as of June 30, 2023 and December 31, 2022 are as follows:
As of June 30, 2023
Days Past Due and Accruing
Current
30-59
60-89
90+
(1) (2) (3)
Nonaccrual
(4)
Total loans held
for investment
Nonaccrual
Loans with no
ACL
(5)
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
(1) (3) (6)
$
69,242
$
-
$
1,605
$
34,038
$
-
$
104,885
$
-
(2) (6)
2,613,464
-
29,274
12,915
33,252
2,688,905
1,861
Commercial loans:
(6)
161,248
1,062
11
-
1,677
163,998
973
(2) (6)
2,287,864
4,551
565
5,553
21,536
2,320,069
11,834
2,928,957
1,827
1,186
5,037
9,194
2,946,201
1,816
Consumer loans:
1,803,442
44,425
8,281
-
11,311
1,867,459
3,464
778,649
8,015
1,564
-
2,483
790,711
496
359,898
4,363
1,985
-
1,353
367,599
-
305,434
3,734
2,620
5,668
-
317,456
-
147,419
2,191
1,207
-
1,215
152,032
35
$
11,455,617
$
70,168
$
48,298
$
63,211
$
82,021
$
11,719,315
$
20,479
(1)
It is the Corporation's policy to report delinquent Federal Housing Authority (“FHA”)/Veterans Affairs (“VA”) government-guaranteed residential mortgage loans as past-due loans 90 days and still accruing as opposed
to nonaccrual loans. The Corporation continues accruing interest on these loans until they have passed the 15 months delinquency mark, taking into consideration the FHA interest curtailment process. These balances
include $
19.9
(2)
Includes purchased credit deteriorated ("PCD") loans previously accounted for under ASC Subtopic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC Subtopic 310-30") for which
the Corporation made the accounting policy election of maintaining pools of loans as “units of account” both at the time of adoption of CECL on January 1, 2020 and on an ongoing basis for credit loss measurement.
These loans will continue to be excluded from nonaccrual loan statistics as long as the Corporation can reasonably estimate the timing and amount of cash flows expected to be collected on the loan pools. The portion of
such loans contractually past due 90 days or more, amounting to $
9.5
8.5
1.0
loans past due 90 days or more and still accruing category in the table above.
(3)
Include rebooked loans, which were previously pooled into GNMA securities, amounting to $
6.5
repurchase loans that meet GNMA’s specified delinquency criteria. For accounting purposes, these loans subject to the repurchase option are required to be reflected on the financial statements with an offsetting
liability.
(4)
Nonaccrual loans in the Florida region amounted to $
9.8
(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, commercial mortgage loans, and construction loans past due 30-59 days, but less than two payments in arrears, as of June 30, 2023 amounted to $
6.6
62.9
1.9
million, and $
0.2
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
25
As of December 31, 2022
Days Past Due and Accruing
Current
30-59
60-89
90+
(1)(2)(3)
Nonaccrual
(4)
Total loans held
for investment
Nonaccrual
Loans with no
ACL
(5)
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
(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 as of December 31, 2022.
(2)
Includes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans as “units of account” both at the time of adoption
of CECL on January 1, 2020 and on an ongoing basis for credit loss measurement. These loans will continue to be excluded from nonaccrual loan statistics as long as the Corporation can reasonably estimate the timing
and amount of cash flows expected to be collected on the loan pools. The portion of such loans contractually past due 90 days or more, amounting to $
12.0
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 in nonaccrual status, any accrued but uncollected interest income is reversed and charged against interest
income and the amortization of any net deferred fees is suspended. The amount of accrued interest reversed against interest income
totaled $
0.5
1.1
0.3
million and $
0.7
ended June 30, 2023, the cash interest income recognized on nonaccrual loans amounted to $
0.5
1.0
respectively, compared to $
0.3
0.7
As of June 30, 2023, the recorded investment on residential mortgage loans collateralized by residential real estate property that
were in the process of foreclosure amounted to $
50.9
21.5
loans, and $
7.2
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
26
Based on the most recent analysis performed, the amortized cost of commercial and construction loans by portfolio classes and by
origination year based on the internal credit -risk category as of June 30, 2023, the gross charge -offs for the six-month period ended
June 30, 2023 by portfolio classes and by origination year, and the amortized cost of commercial and construction loans by portfolio
classes based on the internal credit-risk category as of December 31, 2022, were as follows:
As of June 30, 2023
Puerto Rico and Virgin Islands region
Term Loans
As of December 31, 2022
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
CONSTRUCTION
$
29,645
$
22,238
$
11,093
$
-
$
-
$
3,887
$
-
$
66,863
$
31,879
-
-
-
-
-
-
-
-
-
-
7
-
-
-
2,349
-
2,356
2,893
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
29,645
$
22,245
$
11,093
$
-
$
-
$
6,236
$
-
$
69,219
$
34,772
$
-
$
-
$
-
$
-
$
-
$
38
$
-
$
38
COMMERCIAL MORTGAGE
$
94,161
$
385,980
$
139,699
$
322,212
$
283,938
$
381,556
$
427
$
1,607,973
$
1,655,728
-
4,487
-
33,698
-
118,636
-
156,821
145,415
-
129
-
-
2,847
32,519
-
35,495
33,061
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
94,161
$
390,596
$
139,699
$
355,910
$
286,785
$
532,711
$
427
$
1,800,289
$
1,834,204
$
-
$
-
$
-
$
-
$
-
$
106
$
-
$
106
C&I
$
113,567
$
297,329
$
193,851
$
178,144
$
299,435
$
222,553
$
649,354
$
1,954,233
$
1,789,572
-
-
-
-
508
12,709
22,537
35,754
43,224
-
-
389
634
13,797
6,682
285
21,787
27,313
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
113,567
$
297,329
$
194,240
$
178,778
$
313,740
$
241,944
$
672,176
$
2,011,774
$
1,860,109
$
-
$
-
$
-
$
-
$
-
$
211
$
55
$
266
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
27
As of June 30, 2023
Term Loans
As of December 31, 2022
Florida region
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
CONSTRUCTION
$
32
$
47,557
$
47,190
$
-
$
-
$
-
$
-
$
94,779
$
98,181
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
32
$
47,557
$
47,190
$
-
$
-
$
-
$
-
$
94,779
$
98,181
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
COMMERCIAL MORTGAGE
$
6,258
$
184,611
$
69,659
$
40,608
$
51,005
$
122,449
$
19,642
$
494,232
$
503,184
-
-
-
-
13,156
11,224
-
24,380
20,295
-
-
-
1,168
-
-
-
1,168
1,168
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
6,258
$
184,611
$
69,659
$
41,776
$
64,161
$
133,673
$
19,642
$
519,780
$
524,647
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
C&I
$
45,172
$
272,282
$
153,401
$
74,535
$
173,170
$
56,918
$
117,134
$
892,612
$
979,151
-
-
19,580
-
5,976
11,403
-
36,959
17,905
-
-
-
652
193
2,825
300
3,970
29,098
-
-
-
-
-
886
-
886
-
-
-
-
-
-
-
-
-
-
$
45,172
$
272,282
$
172,981
$
75,187
$
179,339
$
72,032
$
117,434
$
934,427
$
1,026,154
$
-
$
-
$
-
$
-
$
-
$
6,202
$
-
$
6,202
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
28
As of June 30, 2023
Total
Term Loans
As of December 31, 2022
Amortized Cost Basis by Origination Year (1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
CONSTRUCTION
$
29,677
$
69,795
$
58,283
$
-
$
-
$
3,887
$
-
$
161,642
$
130,060
-
-
-
-
-
-
-
-
-
-
7
-
-
-
2,349
-
2,356
2,893
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
29,677
$
69,802
$
58,283
$
-
$
-
$
6,236
$
-
$
163,998
$
132,953
$
-
$
-
$
-
$
-
$
-
$
38
$
-
$
38
COMMERCIAL MORTGAGE
$
100,419
$
570,591
$
209,358
$
362,820
$
334,943
$
504,005
$
20,069
$
2,102,205
$
2,158,912
-
4,487
-
33,698
13,156
129,860
-
181,201
165,710
-
129
-
1,168
2,847
32,519
-
36,663
34,229
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
100,419
$
575,207
$
209,358
$
397,686
$
350,946
$
666,384
$
20,069
$
2,320,069
$
2,358,851
$
-
$
-
$
-
$
-
$
-
$
106
$
-
$
106
C&I
$
158,739
$
569,611
$
347,252
$
252,679
$
472,605
$
279,471
$
766,488
$
2,846,845
$
2,768,723
-
-
19,580
-
6,484
24,112
22,537
72,713
61,129
-
-
389
1,286
13,990
9,507
585
25,757
56,411
-
-
-
-
-
886
-
886
-
-
-
-
-
-
-
-
-
-
$
158,739
$
569,611
$
367,221
$
253,965
$
493,079
$
313,976
$
789,610
$
2,946,201
$
2,886,263
$
-
$
-
$
-
$
-
$
-
$
6,413
$
55
$
6,468
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
29
The following tables present the amortized cost of residential mortgage loans by portfolio classes and by origination year based on
accrual status as of June 30, 2023, the gross charge-offs for the six-month period ended June 30, 2023 by portfolio classes and by
origination year, and the amortized cost of residential mortgage loans by portfolio classes based on accrual status as of December 31,
2022:
As of June 30, 2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Puerto Rico and Virgin Islands Region:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
118
$
691
$
689
$
782
$
1,117
$
100,760
$
-
$
104,157
$
117,416
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA government-guaranteed loans
$
118
$
691
$
689
$
782
$
1,117
$
100,760
$
-
$
104,157
$
117,416
Conventional residential mortgage loans:
Accrual Status:
Performing
$
61,153
$
170,239
$
73,033
$
30,819
$
45,799
$
1,841,296
$
-
$
2,222,339
$
2,265,013
Non-Performing
-
-
35
-
171
25,608
-
25,814
35,471
Total conventional residential mortgage loans
$
61,153
$
170,239
$
73,068
$
30,819
$
45,970
$
1,866,904
$
-
$
2,248,153
$
2,300,484
Total:
Accrual Status:
Performing
$
61,271
$
170,930
$
73,722
$
31,601
$
46,916
$
1,942,056
$
-
$
2,326,496
$
2,382,429
Non-Performing
-
-
35
-
171
25,608
-
25,814
35,471
Total residential mortgage loans in Puerto Rico
and Virgin Islands Region
$
61,271
$
170,930
$
73,757
$
31,601
$
47,087
$
1,967,664
$
-
$
2,352,310
$
2,417,900
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
3
$
-
$
2,126
$
-
$
2,129
(1)
Excludes accrued interest receivable.
As of June 30, 2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Florida Region:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
728
$
-
$
728
$
742
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA government-guaranteed loans
$
-
$
-
$
-
$
-
$
-
$
728
$
-
$
728
$
742
Conventional residential mortgage loans:
Accrual Status:
Performing
$
37,150
$
80,115
$
48,955
$
30,517
$
28,459
$
208,118
$
-
$
433,314
$
421,347
Non-Performing
-
-
-
-
259
7,179
-
7,438
7,301
Total conventional residential mortgage loans
$
37,150
$
80,115
$
48,955
$
30,517
$
28,718
$
215,297
$
-
$
440,752
$
428,648
Total:
Accrual Status:
Performing
$
37,150
$
80,115
$
48,955
$
30,517
$
28,459
$
208,846
$
-
$
434,042
$
422,089
Non-Performing
-
-
-
-
259
7,179
-
7,438
7,301
Total residential mortgage loans in Florida region
$
37,150
$
80,115
$
48,955
$
30,517
$
28,718
$
216,025
$
-
$
441,480
$
429,390
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
30
As of June 30, 2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Total:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
118
$
691
$
689
$
782
$
1,117
$
101,488
$
-
$
104,885
$
118,158
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA government-guaranteed loans
$
118
$
691
$
689
$
782
$
1,117
$
101,488
$
-
$
104,885
$
118,158
Conventional residential mortgage loans:
Accrual Status:
Performing
$
98,303
$
250,354
$
121,988
$
61,336
$
74,258
$
2,049,414
$
-
$
2,655,653
$
2,686,360
Non-Performing
-
-
35
-
430
32,787
-
33,252
42,772
Total conventional residential mortgage loans
$
98,303
$
250,354
$
122,023
$
61,336
$
74,688
$
2,082,201
$
-
$
2,688,905
$
2,729,132
Total:
Accrual Status:
Performing
$
98,421
$
251,045
$
122,677
$
62,118
$
75,375
$
2,150,902
$
-
$
2,760,538
$
2,804,518
Non-Performing
-
-
35
-
430
32,787
-
33,252
42,772
Total residential mortgage loans
$
98,421
$
251,045
$
122,712
$
62,118
$
75,805
$
2,183,689
$
-
$
2,793,790
$
2,847,290
Charge-offs on residential mortgage loans
$
-
$
-
$
-
$
3
$
-
$
2,126
$
-
$
2,129
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
31
The following tables present the amortized cost of consumer loans by portfolio classes and by origination year based on accrual
status as of June 30, 2023, the gross charge -offs for the six-month period ended June 30, 2023 by portfolio classes and by origination
year, and the amortized cost of consumer loans by portfolio classes based on accrual status as of December 31, 2022:
As of June 30, 2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Puerto Rico and Virgin Islands Region:
Auto loans:
Accrual Status:
Performing
$
326,746
$
604,040
$
445,754
$
214,692
$
167,480
$
95,343
$
-
$
1,854,055
$
1,783,782
Non-Performing
199
2,234
2,530
1,341
2,702
2,255
-
11,261
10,596
Total auto loans
$
326,945
$
606,274
$
448,284
$
216,033
$
170,182
$
97,598
$
-
$
1,865,316
$
1,794,378
Charge-offs on auto loans
$
174
$
3,355
$
2,287
$
886
$
1,205
$
745
$
-
$
8,652
Finance leases:
Accrual Status:
Performing
$
159,308
$
270,541
$
172,697
$
76,249
$
66,859
$
42,574
$
-
$
788,228
$
716,585
Non-Performing
-
619
490
525
380
469
-
2,483
1,645
Total finance leases
$
159,308
$
271,160
$
173,187
$
76,774
$
67,239
$
43,043
$
-
$
790,711
$
718,230
Charge-offs on finance leases
$
11
$
656
$
485
$
228
$
341
$
428
$
-
$
2,149
Personal loans:
Accrual Status:
Performing
$
88,877
$
148,554
$
43,113
$
22,164
$
39,809
$
23,410
$
-
$
365,927
$
351,664
Non-Performing
8
713
222
68
220
122
-
1,353
1,248
Total personal loans
$
88,885
$
149,267
$
43,335
$
22,232
$
40,029
$
23,532
$
-
$
367,280
$
352,912
Charge-offs on personal loans
$
24
$
3,414
$
1,435
$
662
$
1,180
$
834
$
-
$
7,549
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
317,456
$
317,456
$
311,731
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
317,456
$
317,456
$
311,731
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
8,447
$
8,447
Other consumer loans:
Accrual Status:
Performing
$
49,470
$
52,078
$
14,386
$
7,261
$
8,060
$
5,348
$
8,932
$
145,535
$
139,116
Non-Performing
40
527
192
50
65
201
81
1,156
1,122
Total other consumer loans
$
49,510
$
52,605
$
14,578
$
7,311
$
8,125
$
5,549
$
9,013
$
146,691
$
140,238
Charge-offs on other consumer loans
$
89
$
3,530
$
1,262
$
305
$
600
$
235
$
221
$
6,242
Total:
Performing
$
624,401
$
1,075,213
$
675,950
$
320,366
$
282,208
$
166,675
$
326,388
$
3,471,201
$
3,302,878
Non-Performing
247
4,093
3,434
1,984
3,367
3,047
81
16,253
14,611
Total consumer loans in Puerto Rico and Virgin
Islands region
$
624,648
$
1,079,306
$
679,384
$
322,350
$
285,575
$
169,722
$
326,469
$
3,487,454
$
3,317,489
Charge-offs on total consumer loans
$
298
$
10,955
$
5,469
$
2,081
$
3,326
$
2,242
$
8,668
$
33,039
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
32
As of June 30, 2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Florida Region:
Auto loans:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
220
$
1,873
$
-
$
2,093
$
3,617
Non-Performing
-
-
-
-
-
50
-
50
76
Total auto loans
$
-
$
-
$
-
$
-
$
220
$
1,923
$
-
$
2,143
$
3,693
Charge-offs on auto loans
$
-
$
-
$
-
$
-
$
23
$
198
$
-
$
221
Finance leases:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-Performing
-
-
-
-
-
-
-
-
-
Total finance leases
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Charge-offs on finance leases
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Personal loans:
Accrual Status:
Performing
$
244
$
-
$
71
$
4
$
-
$
-
$
-
$
319
$
334
Non-Performing
-
-
-
-
-
-
-
-
-
Total personal loans
$
244
$
-
$
71
$
4
$
-
$
-
$
-
$
319
$
334
Charge-offs on personal loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Other consumer loans:
Accrual Status:
Performing
$
-
$
48
$
227
$
455
$
-
$
2,389
$
2,163
$
5,282
$
5,833
Non-Performing
-
-
-
-
-
21
38
59
119
Total other consumer loans
$
-
$
48
$
227
$
455
$
-
$
2,410
$
2,201
$
5,341
$
5,952
Charge-offs on other consumer loans
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total:
Performing
$
244
$
48
$
298
$
459
$
220
$
4,262
$
2,163
$
7,694
$
9,784
Non-Performing
-
-
-
-
-
71
38
109
195
Total consumer loans in Florida region
$
244
$
48
$
298
$
459
$
220
$
4,333
$
2,201
$
7,803
$
9,979
Charge-offs on total consumer loans
$
-
$
-
$
-
$
-
$
23
$
198
$
-
$
221
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
33
As of June 30, 2023
As of
December 31,
2022
Term Loans
Amortized Cost Basis by Origination Year
(1)
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
Total:
Auto loans:
Accrual Status:
Performing
$
326,746
$
604,040
$
445,754
$
214,692
$
167,700
$
97,216
$
-
$
1,856,148
$
1,787,399
Non-Performing
199
2,234
2,530
1,341
2,702
2,305
-
11,311
10,672
Total auto loans
$
326,945
$
606,274
$
448,284
$
216,033
$
170,402
$
99,521
$
-
$
1,867,459
$
1,798,071
Charge-offs on auto loans
$
174
$
3,355
$
2,287
$
886
$
1,228
$
943
$
-
$
8,873
Finance leases:
Accrual Status:
Performing
$
159,308
$
270,541
$
172,697
$
76,249
$
66,859
$
42,574
$
-
$
788,228
$
716,585
Non-Performing
-
619
490
525
380
469
-
2,483
1,645
Total finance leases
$
159,308
$
271,160
$
173,187
$
76,774
$
67,239
$
43,043
$
-
$
790,711
$
718,230
Charge-offs on finance leases
$
11
$
656
$
485
$
228
$
341
$
428
$
-
$
2,149
Personal loans:
Accrual Status:
Performing
$
89,121
$
148,554
$
43,184
$
22,168
$
39,809
$
23,410
$
-
$
366,246
$
351,998
Non-Performing
8
713
222
68
220
122
-
1,353
1,248
Total personal loans
$
89,129
$
149,267
$
43,406
$
22,236
$
40,029
$
23,532
$
-
$
367,599
$
353,246
Charge-offs on personal loans
$
24
$
3,414
$
1,435
$
662
$
1,180
$
834
$
-
$
7,549
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
317,456
$
317,456
$
311,731
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
317,456
$
317,456
$
311,731
Charge-offs on credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
8,447
$
8,447
Other consumer loans:
Accrual Status:
Performing
$
49,470
$
52,126
$
14,613
$
7,716
$
8,060
$
7,737
$
11,095
$
150,817
$
144,949
Non-Performing
40
527
192
50
65
222
119
1,215
1,241
Total other consumer loans
$
49,510
$
52,653
$
14,805
$
7,766
$
8,125
$
7,959
$
11,214
$
152,032
$
146,190
Charge-offs on other consumer loans
$
89
$
3,530
$
1,262
$
305
$
600
$
235
$
221
$
6,242
Total:
Performing
$
624,645
$
1,075,261
$
676,248
$
320,825
$
282,428
$
170,937
$
328,551
$
3,478,895
$
3,312,662
Non-Performing
247
4,093
3,434
1,984
3,367
3,118
119
16,362
14,806
Total consumer loans
$
624,892
$
1,079,354
$
679,682
$
322,809
$
285,795
$
174,055
$
328,670
$
3,495,257
$
3,327,468
Charge-offs on total consumer loans
$
298
$
10,955
$
5,469
$
2,081
$
3,349
$
2,440
$
8,668
$
33,260
(1)
Excludes accrued interest receivable.
As of June 30, 2023 and December 31, 2022, the balance of revolving loans converted to term loans was
no
t material.
Accrued interest receivable on loans totaled $
52.8
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
34
The following tables present information about collateral dependent loans that were individually evaluated for purposes of
determining the ACL as of June 30, 2023 and December 31, 2022
:
As of June 30, 2023
Collateral Dependent Loans -
With Allowance
Collateral Dependent
Loans - With No
Related Allowance
Collateral Dependent Loans - Total
Amortized Cost
Related
Allowance
Amortized Cost
Amortized Cost
Related
Allowance
(In thousands)
Residential mortgage loans:
Conventional residential mortgage loans
$
31,199
$
2,026
$
-
$
31,199
$
2,026
Commercial loans:
Construction loans
-
-
956
956
-
Commercial mortgage loans
6,590
1,016
52,447
59,037
1,016
C&I loans
2,563
418
10,601
13,164
418
Consumer loans:
Personal loans
-
-
-
-
-
Other consumer loans
173
17
-
173
17
$
40,525
$
3,477
$
64,004
$
104,529
$
3,477
As of December 31, 2022
Collateral Dependent Loans -
With Allowance
Collateral Dependent
Loans - With No
Related Allowance
Collateral Dependent Loans - Total
Amortized Cost
Related
Allowance
Amortized Cost
Amortized Cost
Related
Allowance
(In thousands)
Residential mortgage loans:
Conventional residential mortgage loans
$
36,206
$
2,571
$
-
$
36,206
$
2,571
Commercial loans:
Construction loans
-
-
956
956
-
Commercial mortgage loans
2,466
897
62,453
64,919
897
C&I loans
1,513
322
17,590
19,103
322
Consumer loans:
Personal loans
56
1
64
120
1
Other consumer loans
207
29
-
207
29
$
40,448
$
3,820
$
81,063
$
121,511
$
3,820
The allowance related to collateral dependent loans reported in the tables above includes qualitative adjustments applied to the loan
portfolio that consider possible changes in circumstances that could ultimately impact credit losses and might not be reflected in
historical data or forecasted data incorporated in the quantitative models. The underlying collateral for residential mortgage and
consumer collateral dependent loans consisted of single-family residential properties, and for commercial and construction loans
consisted primarily of office buildings, multifamily residential properties, and retail establishments. The weighted-average loan-to-
value coverage for collateral dependent loans as of June 30, 2023 was
68
%, compared to
70
% as of December 31, 2022, which was
not considered a significant change in the extent to which collateral secured these loans.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
35
Purchases and Sales of Loans
In the ordinary course of business, the Corporation enters into securitization transactions and whole loan sales with GNMA and
GSEs, such as FNMA and FHLMC. During the first six months of 2023, loans pooled into GNMA MBS amounted to approximately
$
66.4
79.7
of $
1.4
2.3
22.8
million of performing residential mortgage loans to FNMA, for which the Corporation recognized a net gain on sale of $
0.6
addition, during the first six months of 2022, the Corporation sold approximately $
75.2
3.2
residential mortgage loans to FNMA and FHLMC, respectively, for which the Corporation recognized a net gain on sale of $
3.3
million and $
0.1
servicing the loans. In addition, the Corporation agrees to repurchase loans if it breaches any of the representations and warranties
included in the sale agreement. These representations and warranties are consistent with the GSEs’ selling and servicing guidelines
(i.e., ensuring that the mortgage was properly underwritten according to established guidelines).
For loans pooled into GNMA MBS, the Corporation, as servicer, holds an option to repurchase individual delinquent loans issued
on or after January 1, 2003 when certain delinquency criteria are met. This option gives the Corporation the unilateral ability, but not
the obligation, to repurchase the delinquent loans at par without prior authorization from GNMA. Since the Corporation is considered
to have regained effective control over the loans, it is required to recognize the loans and a corresponding repurchase liability
regardless of its intent to repurchase the loans. As of June 30, 2023 and December 31, 2022, rebooked GNMA delinquent loans that
were included in the residential mortgage loan portfolio amounted to $
6.5
10.4
During the first six months of 2023 and 2022, the Corporation repurchased, pursuant to the aforementioned repurchase option, $
1.9
million and $
6.2
guaranteed, and the risk of loss related to the repurchased loans is generally limited to the difference between the delinquent interest
payment advanced to GNMA, which is computed at the loan’s interest rate, and the interest payments reimbursed by FHA, which are
computed at a pre-determined debenture rate. Repurchases of GNMA loans allow the Corporation, among other things, to maintain
acceptable delinquency rates on outstanding GNMA pools and remain as a seller and servicer in good standing with GNMA.
Historically, losses on these repurchases of GNMA delinquent loans have been immaterial and no provision has been made at the time
of sale.
Loan sales to FNMA and FHLMC are without recourse in relation to the future performance of the loans. The Corporation’s risk of
loss with respect to these loans is also minimal as these repurchased loans are generally performing loans with documentation
deficiencies.
During the first six months of 2023 and 2022, the Corporation purchased C&I loan participations in the Florida region totaling
$
28.0
76.4
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
36
Loan Portfolio Concentration
The Corporation’s primary lending area is Puerto Rico. The Corporation’s banking subsidiary, FirstBank, also lends in the USVI
and BVI markets and in the United States (principally in the state of Florida). Of the total gross loans held for investment portfolio of
$
11.7
79
% in Puerto Rico,
17
% in the U.S., and
4
% in the
USVI and BVI.
As of June 30, 2023, the Corporation had $
174.9
municipalities and public corporations, compared to $
169.8
$
105.2
property tax revenues, and $
28.1
vast majority of revenues of the municipalities included in the Corporation’s loan portfolio are independent of budgetary subsidies
provided by the Puerto Rico central government. These municipalities are required by law to levy special property taxes in such
amounts as are required to satisfy the payment of all of their respective general obligation bonds and notes. In addition to loans
extended to municipalities, the Corporation’s exposure to the Puerto Rico government as of June 30, 2023 included $
9.5
loans granted to an affiliate of the Puerto
Rico Electric
Power Authority (“PREPA”) and $
32.1
corporations of the Puerto Rico government.
In addition, as of June 30, 2023, the Corporation had $
81.1
the PRHFA, a government instrumentality that has been designated as a covered entity under PROMESA, compared to $
84.7
as of December 31, 2022. Residential mortgage loans guaranteed by the PRHFA are secured by the underlying properties and the
guarantees serve to cover shortfalls in collateral in the event of a borrower default.
The Corporation also has credit exposure to USVI government entities. As of June 30, 2023, the Corporation had
$
78.9
loans to USVI government public corporations, compared to $
38.0
were currently performing and up to date on principal and interest payments.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
37
Loss Mitigation Program for Borrowers Experiencing Financial Difficulty
Effective January 1, 2023, the Corporation adopted ASU 2022-02. For additional information on the adoption, see Note 1 – Basis of
Presentation and Significant Accounting Policies.
The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program. Depending
upon the nature of a borrower’s financial condition, restructurings or loan modifications through this program are provided, as well as
other restructurings of individual C&I, commercial mortgage, construction, and residential mortgage loans. The Corporation may also
modify contractual terms to comply with regulations regarding the treatment of certain bankruptcy filings and discharge situations.
The loan modifications granted to borrowers experiencing financial difficulty that are associated with payment delays typically
include the following:
-
Forbearance plans – Payments of either interest and/or principal are deferred for a pre-established period of time, generally not
exceeding six months in any given year. The deferred interest and/or principal is repaid as either a lump sum payment at
maturity date or by extending the loan’s maturity date by the number of forbearance months granted.
-
Payment plans – Borrowers are allowed to pay the regular monthly payment plus the pre-established delinquent amounts
during a period generally not exceeding six months. At the end of the payment plan, the borrower is required to resume making
its regularly scheduled loan payments.
-
Trial modifications – These types of loan modifications are granted for residential mortgage loans. Borrower s continue making
reduced monthly payments during the trial period, which is generally of up to six months. The reduced payments that are made
by the borrower during the trial period will result in a payment delay with respect to the original contractual terms of the loan
since the loan has not yet been contractually modified. After successful completion of the trial period, the mortgage loan is
contractually modified.
Modifications in the form of a reduction in interest rate, term extension, an other-than-insignificant payment delay, or any
combination of these types of loan modifications that have occurred in the current reporting period for a borrower experiencing
financial difficulty are disclosed in the tables below.
The below disclosures relate to loan modifications granted to borrowers experiencing financial difficulty in which there was a
change in the timing and/or amount of contractual cash flows in the form of any of the aforementioned types of modifications,
including restructurings that resulted in a more-than-insignificant payment delay. These disclosures exclude $
1.6
2.5
million in restructured residential mortgage loans that are government-guaranteed (e.g., FHA/VA loans) and were modified during the
quarter and six-month period ended June 30, 2023, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
38
The following tables present the amortized cost basis as of June 30, 2023 of loans modified to borrowers experiencing financial
difficulty during the quarter and six-month period ended June 30, 2023, by portfolio classes and type of modification granted, and
the percentage of these modified loans relative to the total period-end amortized cost basis of receivables in the portfolio class:
Quarter Ended June 30, 2023
Payment Delay Only
Forbearance
Payment
Plan
Trial
Modification
Interest
Rate
Reduction
Term
Extension
Combination of
Interest Rate
Reduction and
Term Extension
Forgiveness
of principal
and/or
interest
Other
Total
Percentage of
Total by
Portfolio
Classes
(In thousands)
Conventional residential mortgage loans
$
-
$
-
$
210
$
-
$
73
$
-
$
-
$
-
$
283
0.01%
Construction loans
-
-
-
-
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
30,170
-
-
30,170
1.30%
C&I loans
-
-
-
-
187
-
-
-
187
0.01%
Consumer loans:
Auto loans
-
-
-
-
82
69
-
678
(1)
829
0.04%
Personal loans
-
-
-
-
41
71
-
-
112
0.03%
Credit cards
-
-
-
486
(2)
-
-
-
-
486
0.15%
Other consumer loans
-
-
-
-
146
40
-
10
(1)
196
0.13%
$
-
$
-
$
210
$
486
$
529
$
30,350
$
-
$
688
$
32,263
Six-Month Period Ended June 30, 2023
Payment Delay Only
Forbearance
Payment
Plan
Trial
Modification
Interest
Rate
Reduction
Term
Extension
Combination of
Interest Rate
Reduction and
Term Extension
Forgiveness
of principal
and/or
interest
Other
Total
Percentage of
Total by
Portfolio
Classes
(In thousands)
Conventional residential mortgage loans
$
-
$
-
$
542
$
-
$
503
$
94
$
-
$
-
$
1,139
0.04%
Construction loans
-
-
-
-
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
30,170
-
-
30,170
1.30%
C&I loans
-
-
-
-
187
-
-
-
187
0.01%
Consumer loans:
Auto loans
-
-
-
-
167
103
-
1,155
(1)
1,425
0.08%
Personal loans
-
-
-
-
68
83
-
-
151
0.04%
Credit cards
-
-
-
732
(2)
-
-
-
-
732
0.23%
Other consumer loans
-
-
-
-
273
99
-
32
(1)
404
0.27%
$
-
$
-
$
542
$
732
$
1,198
$
30,549
$
-
$
1,187
$
34,208
(1)
Modification consists of court mandated reduction to 0% interest rate for remaining loan term to borrowers in bankruptcy proceedings unless dismissal occurs.
(2)
Modification consists of reduction in interest rate and revocation of revolving line privileges.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
39
The following tables present by portfolio classes the financial effects of the modifications granted to borrowers experiencing
financial difficulty, other than those associated to payment delay, during the quarter and six-month period ended June 30, 2023. The
financial effects of the modifications associated to payment delay were discussed above, and as such, were excluded from the tables
below:
Quarter Ended June 30, 2023
Combination of Interest Rate Reduction
and Term Extension
Weighted-Average
Interest Rate
Reduction (%)
Weighted-Average
Term Extension (in
months)
Weighted-Average
Interest Rate
Reduction (%)
Weighted-Average
Term Extension (in
months)
Forgiveness of
Principal and/or
Interest Amount
(In thousands)
Conventional residential mortgage loans
-
%
239
-
%
-
$
-
Construction loans
-
%
-
-
%
-
-
Commercial mortgage loans
-
%
-
0.25
%
64
-
C&I loans
-
%
72
-
%
-
-
Consumer loans:
Auto loans
-
%
27
3.96
%
30
-
Personal loans
-
%
37
5.41
%
26
-
Credit cards
16.26
%
-
-
%
-
-
Other consumer loans
-
%
28
1.87
%
22
-
Six-Month Period Ended June 30, 2023
Combination of Interest Rate Reduction
and Term Extension
Weighted-Average
Interest Rate
Reduction (%)
Weighted-Average
Term Extension (in
months)
Weighted-Average
Interest Rate
Reduction (%)
Weighted-Average
Term Extension (in
months)
Forgiveness of
Principal and/or
Interest Amount
(In thousands)
Conventional residential mortgage loans
-
%
118
2.40
%
157
$
-
Construction loans
-
%
-
-
%
-
-
Commercial mortgage loans
-
%
-
0.25
%
64
-
C&I loans
-
%
72
-
%
-
-
Consumer loans:
Auto loans
-
%
25
3.64
%
30
-
Personal loans
-
%
34
5.11
%
24
-
Credit cards
16.15
%
-
-
%
-
-
Other consumer loans
-
%
27
1.92
%
24
-
The following table presents by portfolio classes the performance of loans modified during the six-month period ended June 30,
2023 that were granted to borrowers experiencing financial difficulty:
Six-Month Period Ended June 30, 2023
30-59
60-89
90+
Total
Delinquency
Current
Total
(In thousands)
Conventional residential mortgage loans
$
-
$
-
$
-
$
-
$
1,139
$
1,139
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
30,170
30,170
C&I loans
-
-
-
-
187
187
Consumer loans:
Auto loans
10
-
-
10
1,415
1,425
Personal loans
-
-
-
-
151
151
Credit cards
40
40
-
80
652
732
Other consumer loans
22
-
-
22
382
404
$
72
$
40
$
-
$
112
$
34,096
$
34,208
There were
no
default (failure by the borrower to make payments of either principal, interest, or both for a period of 90 days or more) during the six-
month period ended June 30, 2023.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
40
NOTE 4 – ALLOWANCE FOR CREDIT LOSSES FOR LOANS AND FINANCE LEASES
The following tables present the activity in the ACL on loans and finance leases by portfolio segment for the indicated periods:
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Quarter Ended June 30, 2023
(In thousands)
ACL:
Beginning balance
$
64,403
$
3,231
$
36,460
$
31,235
$
130,238
$
265,567
Provision for credit losses - (benefit) expense
(3,500)
1,202
5,999
2,997
14,072
20,770
Charge-offs
(1,146)
(38)
(88)
(6,350)
(16,462)
(24,084)
Recoveries
757
409
56
132
3,451
4,805
Ending balance
$
60,514
$
4,804
$
42,427
$
28,014
$
131,299
$
267,058
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Six-Month Period Ended June 30, 2023
(In thousands)
ACL:
Beginning balance
$
62,760
$
2,308
$
35,064
$
32,906
$
127,426
$
260,464
Impact of adoption of ASU 2022-02
2,056
-
-
7
53
2,116
Provision for credit losses - (benefit) expense
(3,427)
2,062
7,245
1,347
29,799
37,026
Charge-offs
(2,129)
(38)
(106)
(6,468)
(33,260)
(42,001)
Recoveries
1,254
472
224
222
7,281
9,453
Ending balance
$
60,514
$
4,804
$
42,427
$
28,014
$
131,299
$
267,058
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Quarter Ended June 30, 2022
(In thousands)
ACL:
Beginning balance
$
68,820
$
1,842
$
30,138
$
36,784
$
107,863
$
245,447
Provision for credit losses - (benefit) expense
(2,797)
151
1,265
(1,102)
15,148
12,665
Charge-offs
(2,079)
(16)
(2)
(68)
(10,427)
(12,592)
Recoveries
1,287
43
1,218
589
3,495
6,632
Ending balance
$
65,231
$
2,020
$
32,619
$
36,203
$
116,079
$
252,152
Residential Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Six-Month Period Ended June 30, 2022
(In thousands)
ACL:
Beginning balance
$
74,837
$
4,048
$
52,771
$
34,284
$
103,090
$
269,030
Provision for credit losses - (benefit) expense
(7,668)
(2,063)
(21,375)
653
26,129
(4,324)
Charge-offs
(4,607)
(60)
(39)
(358)
(20,243)
(25,307)
Recoveries
2,669
95
1,262
1,624
7,103
12,753
Ending balance
$
65,231
$
2,020
$
32,619
$
36,203
$
116,079
$
252,152
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
41
The Corporation estimates the ACL following the methodologies described in Note 1 – Nature of Business and Summary of
Significant Accounting Policies, to the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K,
for each portfolio segment.
The Corporation applies probability weights to the baseline and alternative downside economic scenarios to estimate the ACL with
the baseline scenario carrying the highest weight. During the second quarter of 2023, the Corporation applied the baseline scenario for
the commercial mortgage and construction loan portfolios as deterioration in the CRE price index in these portfolios is expected at a
lower extent than projected in the alternative downside scenario, particularly in the Puerto Rico region. The economic scenarios used
in the ACL determination contained assumptions related to economic uncertainties associated with geopolitical instability, the
commercial real estate price index (“CRE price index”), high inflation levels, and the expected path of interest rate increases by the
FED.
As of June 30, 2023, the ACL for loans and finance leases was $
267.1
6.6
260.5
of December 31, 2022. The ACL for commercial and construction loans increased by $
5.0
forecasted CRE price index to account for an increased uncertainty in the CRE market at a national level that could potentially impact
the markets served by the Corporation coupled with the growth in the commercial and construction loan portfolios. The ACL for
consumer loans increased by $
3.9
historical charge-off levels,
partially offset by updated macroeconomic variables, such as the unemployment rate, which are now
forecasted to deteriorate at a slower pace than previously expected. The ACL for residential mortgage loans decreased by $
2.3
mainly driven by a more favorable economic outlook in the projection of certain forecasted macroeconomic variables, such as the
Regional Home Price Index, partially offset by a $
2.1
for which the Corporation elected to discontinue the use of a discounted cash flow methodology for restructured accruing loans. See
Note 1
– Basis of Presentation and Significant Accounting Policies for additional information related to the adoption of ASU 2022-02
during 2023.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
42
The tables below present the ACL related to loans and finance leases and the carrying values of loans by portfolio segment as of
June 30, 2023 and December 31, 2022:
As of June 30, 2023
Residential Mortgage
Loans
Construction
Loans
Commercial Mortgage
Loans
Commercial and
Industrial Loans
Consumer Loans
Total
(Dollars in thousands)
Total loans held for investment:
$
2,793,790
$
163,998
$
2,320,069
$
2,946,201
$
3,495,257
$
11,719,315
60,514
4,804
42,427
28,014
131,299
267,058
2.17
%
2.93
%
1.83
%
0.95
%
3.76
%
2.28
%
As of December 31, 2022
Residential Mortgage
Loans
Construction
Loans
Commercial Mortgage
Loans
Commercial and
Industrial Loans
Consumer Loans
Total
(Dollars in thousands)
Total loans held for investment:
$
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 June 30, 2023 and December 31,
2022. The Corporation estimates the ACL for these off-balance sheet exposures following the methodology described in Note 1 –
Nature of Business and Summary of Accounting Policies, to the audited consolidated financial statements included in the 2022 Annual
Report on Form 10-K. As of June 30, 2023, the ACL for off-balance sheet credit exposures increased to $
4.9
4.3
million as of December 31, 2022, driven by the deterioration in the forecasted CRE price index and its effect in construction unfunded
loan commitments.
The following table presents the activity in the ACL for unfunded loan commitments and standby letters of credit for the quarters
and six-month periods ended June 30, 2023 and 2022:
Quarter Ended
Six-Month Period Ended
June 30,
June 30,
2023
2022
2023
2022
(In thousands)
Beginning Balance
$
4,168
$
1,359
$
4,273
$
1,537
Provision for credit losses - expense
721
812
616
634
Ending balance
$
4,889
$
2,171
$
4,889
$
2,171
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
43
NOTE 5
–
OTHER REAL ESTATE OWNED
The following table presents the OREO inventory as of the indicated dates:
June 30, 2023
December 31, 2022
(In thousands)
OREO balances, carrying value:
Residential
(1)
$
23,621
$
24,025
Construction
1,892
1,764
Commercial
6,058
5,852
Total
$
31,571
$
31,641
(1)
Excludes $
20.9
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 and six-month periods
ended June 30, 2023 and 2022.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
44
NOTE 6 – GOODWILL AND OTHER INTANGIBLES
Goodwill
Goodwill as of each of June 30, 2023 and December 31, 2022 amounted to $
38.6
The Corporation’s policy is to assess
goodwill and other intangibles for impairment on an annual basis during the fourth quarter of each year, and more frequently if events
or circumstances lead management to believe that the values of goodwill or other intangibles may be impaired. During the fourth
quarter of 2022, management performed a qualitative analysis over the carrying amount of each relevant reporting units’ goodwill and
concluded that it is more-likely-than-not that the fair value of the reporting units exceeded their carrying value. This assessment
involved identifying the inputs and assumptions that most affect fair value, including evaluating significant and relevant events
impacting each reporting entity, and evaluating such factors to determine if a positive assertion can be made that it is more-likely-
than-not that the fair value of the reporting units exceeded their carrying amount. As of December 31, 2022, the Corporation
concluded that it is more-likely-than-not that the fair value of the reporting units exceeded their carrying value. The Corporation
determined that there have been no significant events since the last annual assessment that could indicate potential goodwill
impairment on reporting units for which the goodwill is allocated. As a result, no impairment charges for goodwill were recorded
during the first six months of 2023.
There were
no
Other Intangible Assets
The following table presents the gross amount and accumulated amortization of the Corporation’s intangible assets subject to
amortization as of the indicated dates:
As of
As of
June 30,
December 31,
2023
2022
(Dollars in thousands)
Core deposit intangible:
Gross amount
$
87,544
$
87,544
Accumulated amortization
(70,469)
(66,644)
Net carrying amount
$
17,075
$
20,900
Remaining amortization period (in years)
6.5
7.0
Purchased credit card relationship intangible:
Gross amount
$
3,800
$
3,800
Accumulated amortization
(3,783)
(3,595)
Net carrying amount
$
17
$
205
Remaining amortization period (in years)
0.2
0.7
Insurance customer relationship intangible:
Gross amount
$
-
$
1,067
Accumulated amortization
-
(1,054)
Net carrying amount
$
-
$
13
Remaining amortization period (in years)
-
0.1
During the quarter and six-month period ended June 30, 2023, the Corporation recognized $
2.0
4.0
respectively, in amortization expense on its other intangibles subject to amortization, compared to $
2.2
4.5
the same periods in 2022, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
45
The Corporation amortizes core deposit intangibles and customer relationship intangible based on the projected useful lives of the
related deposits in the case of core deposit intangibles, and over the projected useful lives of the related client relationships in the case
of the customer relationship intangible. As mentioned above, the Corporation analyzes core deposit intangibles and the customer
relationship intangible annually for impairment, or sooner if events and circumstances indicate possible impairment. Factors that may
suggest impairment include customer attrition and run-off. Management is unaware of any events and/or circumstances that would
indicate a possible impairment to the core deposit intangibles or the customer relationship intangible as of June 30, 2023.
The estimated aggregate annual amortization expense related to the intangible assets subject to amortization for future periods was
as follows as of June 30, 2023:
(In thousands)
Remaining 2023
$
3,710
2024
6,416
2025
3,509
2026
872
2027
872
2028 and after
1,713
NOTE 7 – NON-CONSOLIDATED VARIABLE INTEREST ENTITIES (“VIEs”) AND SERVICING ASSETS
The Corporation transfers residential mortgage loans in sale or securitization transactions in which it has continuing involvement,
including servicing responsibilities and guarantee arrangements. All such transfers have been accounted for as sales as required by
applicable accounting guidance.
When evaluating the need to consolidate counterparties to which the Corporation has transferred assets, or with which the
Corporation has entered into other transactions, the Corporation first determines if the counterparty is an entity for which a variable
interest exists. If no scope exception is applicable and a variable interest exists, the Corporation then evaluates whether it is the
primary beneficiary of the VIE and whether the entity should be consolidated or not.
Below is a summary of transactions with VIEs for which the Corporation has retained some level of continuing involvement:
Trust-Preferred Securities (“TRuPs”)
In April 2004, FBP Statutory Trust I, a financing trust that is wholly owned by the Corporation, sold to institutional investors $
100
million of its variable -rate TRuPs. FBP Statutory Trust I used the proceeds of the issuance, together with the proceeds of the purchase
by the Corporation of $
3.1
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. Upon the discontinuance of LIBOR after June 30, 2023,
and following the provisions of the LIBOR Act and Regulation ZZ, the interest rate on the TRuPs will transition during the third
quarter of 2023 from
3-month LIBOR
0.26161
%.
The
Junior Subordinated Deferrable Debentures mature on June 17, 2034, and September 20, 2034, respectively; however, under certain
circumstances, the maturity of Junior Subordinated Deferrable Debentures may be shortened (such shortening would result in a
mandatory redemption of the variable-rate TRuPs).
During the second quarter of 2023, the Corporation completed the repurchase of $
21.4
part of a privately-negotiated transaction with investors, resulting in a commensurate reduction in the related floating rate junior
subordinated debentures. The purchase price paid by the Corporation equated to
92.5
% of the $
21.4
7.5
%
discount resulted in a gain of approximately $
1.6
early extinguishment of debt.” As of June 30, 2023 and December 31, 2022, these Junior Subordinated Deferrable Debentures
amounted to $
161.7
183.8
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
46
Under the indentures, the Corporation has the right, from time to time, and without causing an event of default, to defer payments
of interest on the Junior Subordinated Deferrable Debentures by extending the interest payment period at any time and from time to
time during the term of the subordinated debentures for up to twenty consecutive quarterly periods. As of June 30, 2023, the
Corporation was current on all interest payments due on its subordinated debt.
Private Label MBS
During 2004 and 2005, an unaffiliated party, referred to in this subsection as the seller, established a series of statutory trusts to
effect the securitization of mortgage loans and the sale of trust certificates (“private label MBS”). The seller initially provided the
servicing for a fee, which is senior to the obligations to pay private label MBS holders. The seller then entered into a sales agreement
through which it sold and issued the private label MBS in favor of the Corporation’s banking subsidiary, FirstBank. Currently, the
Bank is the sole owner of these private label MBS; the servicing of the underlying residential mortgages that generate the principal
and interest cash flows is performed by another third party, which receives a servicing fee. As mentioned above, upon the
discontinuance of LIBOR after June 30, 2023, and following the provisions of the LIBOR Act and Regulation ZZ, the interest rate on
these private label MBS will transition during the third quarter of 2023 from 3-month LIBOR plus a spread to 3-month CME Term
SOFR plus a tenor spread adjustment of
0.26161
% and the original spread limited to the weighted-average coupon of the underlying
collateral. The principal payments from the underlying loans are remitted to a paying agent (servicer), who then remits interest to the
Bank. Interest income is shared to a certain extent with the FDIC, which has an interest only strip (“IO”) tied to the cash flows of the
underlying loans and is entitled to receive the excess of the interest income less a servicing fee over the variable rate income that the
Bank earns on the securities. The FDIC became the owner of the IO upon its intervention of the seller, a failed financial institution. No
recourse agreement exists, and the Bank, as the sole holder of the securities, absorbs all risks from losses on non-accruing loans and
repossessed collateral. As of June 30, 2023, the amortized cost and fair value of these private label MBS amounted to $
7.5
$
5.2
7.6
%, which is included as part of the Corporation’s available-for-sale
debt securities portfolio. As described in Note 2 – Debt Securities, the ACL on these private label MBS amounted to $
0.1
June 30, 2023.
Servicing Assets (MSRs)
The Corporation typically transfers first lien residential mortgage loans in conjunction with GNMA securitization transactions in
which the loans are exchanged for cash or securities that are readily redeemed for cash proceeds and servicing rights. The securities
issued through these transactions are guaranteed by GNMA and, under seller/servicer agreements, the Corporation is required to
service the loans in accordance with the issuers’ servicing guidelines and standards. As of June 30, 2023, the Corporation serviced
loans securitized through GNMA with a principal balance of $
2.1
FNMA or FHLMC with servicing retained. The Corporation recognizes as separate assets the rights to service loans for others,
whether those servicing assets are originated or purchased. MSRs are included as part of other assets in the consolidated statements of
financial condition.
The changes in MSRs are shown below for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Balance at beginning of period
$
28,431
$
30,753
$
29,037
$
30,986
Capitalization of servicing assets
706
828
1,238
1,958
Amortization
(1,102)
(1,273)
(2,230)
(2,603)
Recoveries
1
9
5
64
Other
(1)
(2)
(40)
(16)
(128)
Balance at end of period
$
28,034
$
30,277
$
28,034
$
30,277
(1)
Mainly represents adjustments related to the repurchase of loans serviced for others.
Impairment charges are recognized through a valuation allowance for each individual stratum of servicing assets. The valuation
allowance is adjusted to reflect the amount, if any, by which the cost basis of the servicing asset for a given stratum of loans being
serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
47
Changes in the impairment allowance were as follows for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Balance at beginning of period
$
8
$
23
$
12
$
78
Recoveries
(1)
(9)
(5)
(64)
$
7
$
14
$
7
$
14
The components of net servicing income, included as part of mortgage banking activities in the consolidated statements of income,
are shown below for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Servicing fees
$
2,660
$
2,821
$
5,378
$
5,640
Late charges and prepayment penalties
211
219
410
413
Adjustment for loans repurchased
(2)
(40)
(16)
(128)
2,869
3,000
5,772
5,925
Amortization and impairment of servicing assets
(1,101)
(1,264)
(2,225)
(2,539)
$
1,768
$
1,736
$
3,547
$
3,386
The Corporation’s MSRs are subject to prepayment and interest rate risks. Key economic assumptions used in determining the fair
value at the time of sale of the related mortgages for the indicated periods ranged as follows:
Weighted Average
Maximum
Minimum
Six-Month Period Ended June 30, 2023
Constant prepayment rate:
6.7
%
11.6
%
4.8
%
7.4
%
16.0
%
3.8
%
5.9
%
9.0
%
2.1
%
Discount rate:
11.5
%
11.5
%
11.5
%
9.5
%
9.5
%
9.5
%
12.9
%
14.0
%
11.5
%
Six-Month Period Ended June 30, 2022
Constant prepayment rate:
6.7
%
18.3
%
4.8
%
6.6
%
18.4
%
3.4
%
6.3
%
21.9
%
4.5
%
Discount rate:
11.9
%
12.0
%
11.5
%
9.9
%
10.0
%
9.5
%
12.4
%
14.5
%
11.5
%
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
48
The weighted averages of the key economic assumptions that the Corporation used in its valuation model and the sensitivity of the
current fair value to immediate
10
% and
20
% adverse changes in those assumptions for mortgage loans as of June 30, 2023 and
December 31, 2022 were as follows:
June 30,
December 31,
2023
2022
(In thousands)
Carrying amount of servicing assets
$
28,034
$
29,037
Fair value
$
44,420
$
44,710
Weighted-average expected life (in years)
7.79
7.80
Constant prepayment rate (weighted-average annual rate)
6.28
%
6.40
%
$
1,025
$
1,048
$
2,008
$
2,054
Discount rate (weighted-average annual rate)
10.71
%
10.69
%
$
1,902
$
1,925
$
3,660
$
3,704
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10%
variation in assumptions generally cannot be extrapolated because the relationship between the change in assumption and the change
in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSR is
calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example,
increases in market interest rates may result in lower prepayments), which may magnify or counteract the sensitivities
.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
49
NOTE 8 – DEPOSITS
The following table summarizes deposit balances as of the indicated dates:
June 30, 2023
December 31, 2022
(In thousands)
Type of account and interest rate:
Non-interest-bearing deposit accounts
$
5,874,261
$
6,112,884
Interest-bearing saving accounts
3,642,728
3,902,888
Interest-bearing checking accounts
4,258,871
3,770,993
Certificates of deposit (“CDs”)
2,680,250
2,250,876
Brokered CDs
363,582
105,826
$
16,819,692
$
16,143,467
The following table presents the contractual maturities of CDs, including brokered CDs, as of June 30, 2023:
Total
(In thousands)
Three months or less
$
685,606
Over three months to six months
511,428
Over six months to one year
752,768
Over one year to two years
783,288
Over two years to three years
139,807
Over three years to four years
41,543
Over four years to five years
122,471
Over five years
6,921
$
3,043,832
The following were the components of interest expense on deposits for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Interest expense on deposits
$
41,553
$
7,757
$
71,477
$
15,574
Accretion of premiums from
acquisitions
(33)
(92)
(116)
(292)
Amortization of broker placement fees
84
29
128
64
$
41,604
$
7,694
$
71,489
$
15,346
Total U.S. time deposits with balances of more than $250,000 amounted to $
1.3
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 June 30, 2023 and December 31, 2022, unamortized broker placement fees amounted to
$
0.4
0.3
method.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
50
NOTE 9 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (REPURCHASE AGREEMENTS)
Repurchase agreements as of the indicated dates consisted of the following:
June 30, 2023
December 31, 2022
(In thousands)
Short-term Fixed-rate repurchase agreements
(1)
$
73,934
$
75,133
(1)
Weighted-average interest rate of
5.35
% and
4.55
% as of June 30, 2023 and December 31, 2022, respectively.
Repurchase agreements mature as follows as of the indicated date:
June 30, 2023
(In thousands)
Within one month
$
23,934
Over one month to three months
$
50,000
$
73,934
As of June 30, 2023 and December 31, 2022, the securities underlying such agreements were delivered to the dealers with which
the repurchase agreements were transacted. In accordance with the master agreements, in the event of default, repurchase agreements
have a right of set-off against the other party for amounts owed under the related agreement and any other amount or obligation owed
with respect to any other agreement or transaction between them. As of June 30, 2023 and December 31, 2022, repurchase agreements
were fully collateralized and not offset in the consolidated statements of financial condition.
Repurchase agreements as of June 30, 2023, grouped by counterparty, were as follows:
Weighted-Average
Counterparty
Amount
Maturity (In Months)
(Dollars in thousands)
JP Morgan Chase
$
73,934
1
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
51
NOTE 10 – ADVANCES FROM THE FEDERAL HOME LOAN BANK (“FHLB
”)
The following is a summary of the advances from the FHLB as of the indicated dates:
June 30, 2023
December 31, 2022
(In thousands)
Short-term
Fixed
-rate advances from the FHLB
(1)
$
-
$
475,000
Long-term
Fixed
-rate advances from the FHLB
(2)
500,000
200,000
$
500,000
$
675,000
(1)
Weighted-average interest rate of
4.56
% as of December 31, 2022.
(2)
Weighted-average interest rate of
4.45
% and
4.25
% as of June 30, 2023 and December 31, 2022, respectively.
Advances from the FHLB mature as follows as of the indicated date:
June 30, 2023
(In thousands)
Over one to five years
$
500,000
During the six-month period ended June 30, 2023, the Corporation added $
300.0
average cost of
4.59
%, and repaid its short-term FHLB advances.
NOTE 11 – OTHER LONG-TERM BORROWINGS
Junior Subordinated Debentures
Junior subordinated debentures, as of the indicated dates, consisted of:
June 30,
December 31,
(In thousands)
2023
2022
Floating rate junior subordinated debentures (FBP Statutory Trust I)
(1)
(3)
$
43,143
$
65,205
Floating rate junior subordinated debentures (FBP Statutory Trust II)
(2) (3)
118,557
118,557
$
161,700
$
183,762
(1)
Amount represents junior subordinated interest-bearing debentures due in 2034 with a floating interest rate of
2.75
% over
3-month LIBOR
8.26
% as of June 30, 2023 and
7.49
% as of
December 31, 2022).
(2)
Amount represents junior subordinated interest-bearing debentures due in 2034 with a floating interest rate of
2.50
% over
3-month LIBOR
8.01
% as of June 30, 2023 and
7.25
% as of
December 31, 2022).
(3)
See Note 7 - Non-Consolidated Variable Interest Entities (“VIEs”) and Servicing Assets, for additional information on the nature and terms of these debentures, the LIBOR transition of
these contracts, and the Corporation’s repurchase in the second quarter of 2023 of $
21.4
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
52
NOTE 12 – EARNINGS PER COMMON
.
SHARE
The calculations of earnings per common share for the quarters and six-month periods ended June 30, 2023 and 2022 are as follows:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands, except per share information)
Net income attributable to common stockholders
$
70,655
$
74,695
$
141,353
$
157,295
Weighted-Average Shares:
178,926
194,405
179,567
196,257
351
961
686
1,184
179,277
195,366
180,253
197,441
Earnings per common share:
Basic
$
0.39
$
0.38
$
0.79
$
0.80
Diluted
$
0.39
$
0.38
$
0.78
$
0.80
Earnings per common share is computed by dividing net income attributable to common stockholders by the weighted-average
number of common shares issued and outstanding. Net income attributable to common stockholders represents net income adjusted for
any preferred stock dividends, including any dividends declared but not yet paid, and any cumulative dividends related to the current
dividend period that have not been declared as of the end of the period. Basic weighted-average common shares outstanding exclude
unvested shares of restricted stock that do not contain non-forfeitable dividend rights.
Potential dilutive common shares consist of unvested shares of restricted stock and performance units (if any of the performance
conditions are met as of the end of the reporting period), that do not contain non-forfeitable dividend or dividend equivalent rights
using the treasury stock method. This method assumes that proceeds equal to the amount of compensation cost attributable to future
services is used to repurchase shares on the open market at the average market price for the period. The difference between the
number of potential dilutive shares issued and the shares purchased is added as incremental shares to the actual number of shares
outstanding to compute diluted earnings per share. Unvested shares of restricted stock outstanding during the period that result in
lower potentially dilutive shares issued than shares purchased under the treasury stock method are not included in the computation of
dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. There were
no
shares of common stock during the quarters and six-month periods ended June 30, 2023 and 2022.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
53
NOTE 13 – STOCK-BASED
.
COMPENSATION
The First Bancorp Omnibus Incentive Plan (the “Omnibus Plan”), which is effective until May 24, 2026, provides for equity-based
and non equity-based compensation incentives (the “awards”). The Omnibus Plan authorizes the issuance of up to
14,169,807
of common stock, subject to adjustments for stock splits, reorganizations and other similar events. As of June 30, 2023, there were
3,174,889
recommendation of the Compensation and Benefits Committee of the Board, has the power and authority to determine those eligible
to receive awards and to establish the terms and conditions of any awards, subject to various limits and vesting restrictions that apply
to individual and aggregate awards.
Restricted Stock
Under the Omnibus Plan, the Corporation may grant restricted stock to plan participants, subject to forfeiture upon the occurrence
of certain events until the dates specified in the participant’s award agreement. While the restricted stock is subject to forfeiture and
does not contain non-forfeitable dividend rights, participants may exercise full voting rights with respect to the shares of restricted
stock granted to them. The fair value of the shares of restricted stock granted was based on the market price of the Corporation’s
common stock on the date of the respective grant. The shares of restricted stocks granted to employees are subject to the following
vesting period: fifty percent (
50
%) of those shares vest on the two-year anniversary of the grant date and the remaining
50
% vest on
the three-year anniversary of the grant date. The shares of restricted stock granted to directors are generally subject to vesting on the
one-year anniversary of the grant date. The Corporation issued
495,891
connection with restricted stock awards, which were reissued from treasury shares.
The following table summarizes the restricted stock activity under the Omnibus Plan during the six-month periods ended June 30,
2023 and 2022:
Six-Month Period Ended
Six-Month Period Ended
June 30, 2023
June 30, 2022
Number of
Weighted-
Number of
Weighted-
shares of
Average
shares of
Average
restricted
Grant Date
restricted
Grant Date
stock
stock
Unvested shares outstanding at beginning of year
938,491
$
9.14
1,148,775
$
6.61
Granted
(1)
495,891
11.99
301,440
13.15
Forfeited
(57,491)
11.29
(10,364)
8.82
Vested
(481,536)
5.93
(487,198)
5.72
Unvested shares outstanding at end of period
895,355
$
12.31
952,653
$
9.11
(1)
Includes for the six-month period ended June 30, 2023,
3,502
492,389
which
33,718
3,048
of restricted stock awarded to independent directors and
298,392
6,084
and thus charged to earnings as of the grant date.
For the quarter and six month-periods ended June 30, 2023, the Corporation recognized $
1.4
3.0
of stock-based compensation expense related to restricted stock awards, compared to $
0.9
1.8
periods in 2022, respectively. As of June 30, 2023, there was $
6.4
shares of restricted stock that the Corporation expects to recognize over a weighted average period of
1.9
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
54
Performance Units
Under the Omnibus Plan, the Corporation may award performance units to participants, with each unit representing the value of one
share of the Corporation’s common stock.
These awards, which are granted to executives, do not contain non-forfeitable rights to
dividend equivalent amounts and can only be settled in shares of the Corporation’s common stock.
On March 16, 2023, the Corporation granted 216,876 performance units to executives. Performance units granted on or after March
16, 2023 will vest on the third anniversary of the effective date of the award based on actual achievement of two performance metrics
weighted equally: relative total shareholder return (“Relative TSR”), compared to companies that comprise the KBW Nasdaq
Regional Banking Index, and the achievement of a tangible book value per share (“TBVPS”) goal, which is measured based upon the
growth in the tangible book value during the performance cycle, adjusted for certain allowable non-recurring transactions. The
participant may earn 50% of their target opportunity for threshold-level performance and up to 150% of their target opportunity for
maximum-level performance, based on the achievement of the performance goals during a three-year performance cycle. Amounts
between threshold, target and maximum performance will vest in a proportional amount. Performance units granted prior to March 16,
2023 vest subject only to achievement of a TBVPS goal and the participant may earn only up to 100% of their target opportunity.
The following table summarizes the performance units activity under the Omnibus Plan during the six-month periods ended June
30, 2023 and 2022:
Six-Month Period Ended
Six-Month Period Ended
June 30, 2023
June 30, 2022
Number
Weighted -
Number
Weighted -
of
Average
of
Average
Performance
Grant Date
Performance
Grant Date
Units
Fair Value
Units
Fair Value
Performance units at beginning of year
791,923
7.36
814,899
7.06
Additions
(1)
216,876
12.24
166,669
13.15
Vested
(2)
(474,538)
4.08
(189,645)
11.16
Performance units at end of period
534,261
12.25
791,923
7.36
(1)
Units granted during the six-month periods ended June 30, 2023 are subject to the achievement of the Relative TSR and TBVPS performance goals during a three-year performance cycle
beginning January 1, 2023 and ending on December 31, 2025. Units granted during the six-month period ended June 30, 2022 are subject to the achievement of the TBVPS performance
goal during a three-year performance cycle beginning January 1, 2022 and ending on December 31, 2024.
(2)
Units vested during the six-month period ended June 30, 2023 are related to performance units granted in 2020 that met certain pre-established targets and were settled with shares of
common stock reissued from treasury shares. Units vested during the six-month period ended June 30, 2022 are related to performance units granted in 2019 that met certain pre-
established targets and were settled with shares of common stock reissued from treasury shares.
The fair value of the performance units awarded during the six-month periods ended June 30, 2023 and 2022, that was based on the
TBVPS goal component, was calculated based on the market price of the Corporation’s common stock on the respective date of the
grant and assuming attainment of 100% of target opportunity. As of June 30, 2023, there have been no changes in management’s
assessment of the probability that the pre-established TBVPS goal will be achieved; as such, no cumulative adjustment to
compensation expense has been recognized. The fair value of the performance units awarded during the six-month period ended June
30, 2023, that was based on the Relative TSR component, was calculated using a Monte Carlo simulation. Since the Relative TSR
component is considered a market condition, the fair value of the portion of the award based on Relative TSR is not revised
subsequent to grant date based on actual performance.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
55
The following table summarizes the valuation assumptions used to calculate the fair value of the Relative TSR component of the
performance units granted under the Omnibus Plan during the six-month period ended June 30, 2023:
Six-Month Period Ended
June 30, 2023
Risk-free interest rate
(1)
3.98
%
Correlation coefficient
77.16
Expected dividend yield
(2)
-
Expected volatility
(3)
41.37
Expected life (in years)
2.79
(1)
Based on the yield on zero-coupon U.S. Treasury STRIPS as of the grant date.
(2)
Assumes that dividends are reinvested at each ex-dividend date.
(3)
Calculated based on the historical volatility of the Corporation's stock price with a look-back period equal to the simulation term using daily stock prices.
For the quarter and six-month periods ended June 30, 2023 and 2022, the Corporation recognized $
0.5
1.0
respectively, of stock-based compensation expense related to performance units, compared to $
0.5
0.8
same periods in 2022, respectively. As of June 30, 2023, there was $
4.1
unvested performance units that the Corporation expects to recognize over a weighted average period of
2.2
Shares withheld
During the first six months of 2023, the Corporation withheld
287,835
201,930
restricted stock that vested during such period to cover the officers’ payroll and income tax withholding liabilities; these shares are
held as treasury shares. The Corporation paid in cash any fractional share of salary stock to which an officer was entitled. In the
consolidated financial statements, the Corporation presents shares withheld for tax purposes as common stock repurchases.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
56
NOTE 14 – STOCKHOLDERS’ EQUITY
Stock Repurchase Programs
On April 27, 2022, the Corporation announced that its Board approved a stock repurchase program that provides authorization to
repurchase up to $
350
2023, the Corporation had remaining authorization to repurchase approximately $
75
24, 2023, the Corporation announced that its Board of Directors approved a new stock repurchase program, under which the
Corporation may repurchase up to $
225
third quarter of 2024. The Corporation expects to repurchase approximately $
150
2023, of which $
75
350
resumed in July 2023.
Repurchases under the programs may be executed through open market purchases, accelerated share repurchases, and/or privately
negotiated transactions or plans, including under plans complying with Rule 10b5-1 under the Exchange Act. The Corporation’s stock
repurchase program s are subject to various factors, including the Corporation’s capital position, liquidity, financial performance and
alternative uses of capital, stock trading price, and general market conditions. The Corporation’s stock repurchase programs do not
obligate it to acquire any specific number of shares and do not have an expiration date. The stock repurchase programs may be
modified, suspended, or terminated at any time at the Corporation’s discretion. The Parent Company has no operations and depends on
dividends, distributions and other payments from its subsidiaries to fund dividend payments, stock repurchases, and to fund all
payments on its obligations, including debt obligations.
Common Stock
The following table shows the change in shares of common stock outstanding for the six-month periods ended June 30, 2023 and
2022:
Total Number of Shares
Six-Month Period Ended June 30,
2023
2022
Common stock outstanding, beginning balance
182,709,059
201,826,505
Common stock repurchased
(1)(2)
(3,865,375)
(10,680,890)
Common stock reissued under stock-based compensation plan
970,429
491,085
Restricted stock forfeited
(57,491)
(10,364)
Common stock outstanding, ending balances
179,756,622
191,626,336
For the six-month periods ended June 30, 2023 includes
3,577,540
13.98
for a total purchase price of $
50
350
7,069,263
14.15
100
350
stock repurchase program and
3,409,697
14.66
50
under a prior publicly-announced $
300
For the six-month periods ended June 30, 2023 and 2022 also includes
287,835
201,930
taxes.
For the quarter and six-month period ended June 30, 2023, total cash dividends declared on shares of common stock amounted to
$
25.3
50.7
23.4
43.3
2022. On
July 24, 2023
, the Corporation announced that its Board had declared a quarterly cash dividend of $
0.14
payable on
September 8, 2023
August 24, 2023
. The Corporation intends to
continue to pay quarterly dividends on common stock. However, the Corporation’s common stock dividends, including the
declaration, timing, and amount, remain subject to consideration and approval by the Corporation’s Board Directors at the relevant
times.
Preferred Stock
The Corporation has
50,000,000
1.00
, subject to certain terms. This stock
may be issued in series and the shares of each series have such rights and preferences as are fixed by the Board when authorizing the
issuance of that particular series and are redeemable at the Corporation’s option.
No
June 30, 2023 and December 31, 2022.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
57
Treasury Stock
The following table shows the change in shares of treasury stock for the six-month periods ended June 30, 2023 and 2022.
Total Number of Shares
Six-Month Period Ended June 30,
2023
2022
Treasury stock, beginning balance
40,954,057
21,836,611
Common stock repurchased
3,865,375
10,680,890
Common stock reissued under stock-based compensation plan
(970,429)
(491,085)
Restricted stock forfeited
57,491
10,364
Treasury stock, ending balances
43,906,494
32,036,780
FirstBank Statutory Reserve (Legal Surplus)
The Puerto Rico Banking Law of 1933, as amended (the “Puerto Rico Banking Law”), requires that a minimum of
10
% of
FirstBank’s net income for the year be transferred to a legal surplus reserve until such surplus equals the total of paid-in-capital on
common and preferred stock. Amounts transferred to the legal surplus reserve from retained earnings are not available for distribution
to the Corporation without the prior consent of the Puerto Rico Commissioner of Financial Institutions.
The Puerto Rico Banking Law
provides that, when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over
receipts must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the legal
surplus reserve, as a reduction thereof. If the legal surplus reserve is not sufficient to cover such balance in whole or in part, the
outstanding amount must be charged against the capital account and the Bank cannot pay dividends until it can replenish the legal
surplus reserve to an amount of at least 20% of the original capital contributed.
retained earnings in the Corporation’s consolidated statements of financial condition, amounted to $
168.5
2023 and December 31, 2022. There were
no
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
58
NOTE 15 – ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive loss for the quarters and six-month periods ended
June 30, 2023 and 2022:
Changes in Accumulated Other Comprehensive Loss by Component
(1)
Quarter ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Unrealized net holding losses on available-for-sale debt securities:
Beginning balance
$
(718,744)
$
(419,224)
$
(805,972)
$
(87,390)
(2)
(54,837)
(175,923)
32,391
(507,757)
Ending balance
$
(773,581)
$
(595,147)
$
(773,581)
$
(595,147)
Adjustment of pension and postretirement benefit plans:
Beginning balance
$
1,194
$
3,391
$
1,194
$
3,391
-
-
-
-
Ending balance
$
1,194
$
3,391
$
1,194
$
3,391
____________________
(1)
All amounts presented are net of tax.
(2)
Net unrealized holding (losses) gains on available-for-sale debt securities have no tax effect because securities are either tax-exempt, held by an IBE, or have a full deferred tax asset valuation allowance.
NOTE 16 – EMPLOYEE BENEFIT PLANS
The Corporation maintains two frozen qualified noncontributory defined benefit pension plans (the “Pension Plans”), and a related
complementary post-retirement benefit plan (the “Postretirement Benefit Plan”) covering medical benefits and life insurance after
retirement that it obtained in the Banco Santander Puerto Rico (“BSPR”) acquisition on September 1, 2020. One defined benefit
pension plan covers substantially all of BSPR’s former employees who were active before January 1, 2007, while the other defined
benefit pension plan covers personnel of an institution previously acquired by BSPR. Benefits are based on salary and years of service.
The accrual of benefits under the Pension Plans is frozen to all participants.
The Corporation requires recognition of a plan’s overfunded and underfunded status as an asset or liability with an offsetting
adjustment to accumulated other comprehensive loss pursuant to the ASC Topic 715, “Compensation-Retirement Benefits.”
The following table presents the components of net periodic cost (benefit) for the indicated periods:
Affected Line Item
in the Consolidated
Quarter Ended June 30,
Six-Month Period Ended June
30,
Statements of Income
2023
2022
2023
2022
(In thousands)
Net periodic cost (benefit), pension
plans:
Interest cost
Other expenses
$
950
$
654
$
1,900
$
1,308
Expected return on plan assets
Other expenses
(885)
(1,040)
(1,771)
(2,079)
Net periodic cost (benefit), pension plans
65
(386)
129
(771)
Net periodic cost, postretirement plan
Other expenses
6
2
12
3
Net periodic cost (benefit)
$
71
$
(384)
$
141
$
(768)
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
59
NOTE 17 – INCOME TAXES
Income tax expense includes Puerto Rico and USVI income taxes, as well as applicable U.S. federal and state taxes. The
Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, FirstBank is treated as
a foreign corporation for U.S. and USVI income tax purposes and, accordingly, is generally subject to U.S. and USVI income tax only
on its income from sources within the U.S. and USVI or income effectively connected with the conduct of a trade or business in those
jurisdictions. Any such tax paid in the U.S. and USVI is also creditable against the Corporation’s Puerto Rico tax liability, subject to
certain conditions and limitations.
Under the Puerto Rico Internal Revenue Code of 2011 PR (the “2011 PR Code”), the Corporation and its subsidiaries are treated as
separate taxable entities and are not entitled to file consolidated tax returns and, thus, the Corporation is generally not entitled to
utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net
operating loss (“NOL”), a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL
carry-forward period. Pursuant to the 2011 PR Code, the carry-forward period for NOLs incurred during taxable years that
commenced after December 31, 2004 and ended before January 1, 2013 is 12 years; for NOLs incurred during taxable years
commencing after December 31, 2012, the carryover period is 10 years. The 2011 PR Code provides a dividend received deduction of
100
% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and
85
% on dividends received from
other taxable domestic corporations.
The Corporation has maintained an effective tax rate lower than the Puerto Rico maximum statutory rate of
37.5
% mainly by
investing in government obligations and MBS exempt from U.S. and Puerto Rico income taxes and by doing business through an
international banking entity (an “IBE”) unit of the Bank, and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose
interest income and gains on sales are exempt from Puerto Rico income taxation. The IBE unit and FirstBank Overseas Corporation
were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net
income derived by IBEs operating in Puerto Rico on the specific activities identified in the IBE Act. An IBE that operates as a unit of
a bank pays income taxes at the corporate standard rates to the extent that the IBE’s net income exceeds
20
% of the bank’s total net
taxable income.
For the second quarter of 2023, the Corporation recorded an income tax expense of $
30.3
34.1
second quarter of 2022. For the first six months of 2023, the Corporation recorded an income tax expense of $
62.2
to $
77.1
compared to the same period a year ago, was related to lower pre-tax income and a higher proportion of exempt to taxable income
resulting in a lower effective tax rate. The Corporation’s estimated annual effective tax rate, excluding entities with pre-tax losses
from which a tax benefit cannot be recognized and discrete items, was
30.1
% for the first six months of 2023, compared to
31.7
% for
the first six months of 2022.
As of June 30, 2023, the Corporation had a deferred tax asset of $
153.9
184.2
against the deferred tax asset, compared to a deferred tax asset of $
155.6
185.5
December 31, 2022. The net deferred tax asset of the Corporation’s banking subsidiary, FirstBank, amounted to $
153.9
June 30, 2023, net of a valuation allowance of $
147.0
155.6
valuation allowance of $
149.5
tax assets associated with capital losses carry forward and unrealized losses of available-for-sale debt securities.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
60
In 2017, the Corporation completed a formal ownership change analysis within the meaning of Section 382 of the U.S. Internal
Revenue Code (“Section 382”) covering a comprehensive period and concluded that an ownership change had occurred during such
period. The Section 382 limitation has resulted in higher U.S. and USVI income tax liabilities that we would have incurred in the
absence of such limitation. The Corporation has mitigated to an extent the adverse effects associated with the Section 382 limitation as
any such tax paid in the U.S. or USVI can be creditable against Puerto Rico tax liabilities or taken as a deduction against taxable
income. However, our ability to reduce our Puerto Rico tax liability through such a credit or deduction depends on our tax profile at
each annual taxable period, which is dependent on various factors. For the quarter and six-month period ended June 30, 2023, the
Corporation incurred current income tax expense of approximately $
1.5
4.0
operations, compared to $
2.5
4.1
USVI operations in the quarters and six-month periods ended June 30, 2023 and 2022.
The Corporation accounts for uncertain tax positions under the provisions of ASC Topic 740. The Corporation’s policy is to report
interest and penalties related to unrecognized tax positions in income tax expense. As of June 30, 2023, the Corporation had $
0.2
million of accrued interest and penalties related to uncertain tax positions in the amount of $
1.0
which, if recognized, would decrease the effective income tax rate in future periods. The amount of unrecognized tax benefits may
increase or decrease in the future for various reasons, including adding amounts for current tax year positions, expiration of open
income tax returns due to the statute of limitations, changes in management’s judgment about the level of uncertainty, the status of
examinations, litigation and legislative activity, and the addition or elimination of uncertain tax positions. The statute of limitations
under the 2011 PR Code is four years after a tax return is due or filed, whichever is later; the statute of limitations for U.S. and USVI
income tax purposes is three years after a tax return is due or filed, whichever is later. The completion of an audit by the taxing
authorities or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Corporation’s
liability for income taxes. Any such adjustment could be material to the results of operations for any given quarterly or annual period
based, in part, upon the results of operations for the given period. For U.S. and USVI income tax purposes, all tax years subsequent to
2018 remain open to examination. For Puerto Rico tax purposes, all tax years subsequent to 2017 remain open to examination.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
61
NOTE 18 – FAIR VALUE
Fair Value Measurement
ASC Topic 820, “Fair Value Measurement,” defines fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. This guidance also establishes a fair value hierarchy for classifying assets and
liabilities, which is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable.
One of three levels of inputs may be used to measure fair value:
Level 1
Valuations of Level 1 assets and liabilities are obtained from readily-available pricing sources for market
transactions involving identical assets or liabilities in active markets.
Level 2
Va
luations of Level 2 assets and liabilities are based on observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
Level 3
Va
luations of Level 3 assets and liabilities are based on unobservable inputs that are supported by little or no market
activity and are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined by using pricing models for which the determination of fair value requires
significant management judgment as to the estimation.
description of the valuation methodologies used to measure financial instruments at fair value on a recurring basis.
Assets and liabilities measured at fair value on a recurring basis are summarized below as of June 30, 2023 and December 31, 2022:
As of June 30, 2023
As of December 31, 2022
Fair Value Measurements Using
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
(In thousands)
Assets:
Debt securities available for sale:
U.S. Treasury securities
$
139,669
$
-
$
-
$
139,669
$
138,875
$
-
$
-
$
138,875
Noncallable U.S. agencies debt securities
-
475,295
-
475,295
-
389,787
-
389,787
Callable U.S. agencies debt securities
-
1,900,133
-
1,900,133
-
1,963,566
-
1,963,566
MBS
-
2,910,915
5,246
(1)
2,916,161
-
3,098,797
5,794
(1)
3,104,591
Puerto Rico government obligations
-
-
2,111
2,111
-
-
2,201
2,201
Other investments
-
-
-
-
-
-
500
500
Equity securities
4,891
-
-
4,891
4,861
-
-
4,861
Derivative assets
-
494
-
494
-
633
-
633
Liabilities:
Derivative liabilities
-
357
-
357
-
476
-
476
(1) Related to private label MBS.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
62
The table below presents a reconciliation of the beginning and ending balances of all assets measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) for the quarters and six-month periods ended June 30, 2023 and 2022:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
Level 3 Instruments Only
Securities Available for
Sale
(1)
Securities Available for
Sale
(1)
Securities Available for
Sale
(1)
Securities Available for
Sale
(1)
(In thousands)
Beginning balance
$
7,605
$
10,647
$
8,495
$
11,084
(19)
(106)
(181)
(393)
(2)
16
35
25
423
(245)
(396)
(982)
(3)
(934)
Ending balance
$
7,357
$
10,180
$
7,357
$
10,180
___________________
(1)
Amounts mostly related to private label MBS.
(2)
Changes in unrealized gains included in earnings were recognized within provision for credit losses - expense (benefit) and relate to assets still held as of the reporting date.
(3)
Includes a $
0.5
The tables below present quantitative information for significant assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) as of June 30, 2023 and December 31, 2022:
June 30, 2023
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
Minimum
Maximum
(Dollars in thousands)
Available-for-sale debt securities:
$
5,246
Discounted cash flows
Discount rate
16.7%
16.7%
16.7%
Prepayment rate
1.2%
12.0%
8.9%
Projected cumulative loss rate
0.2%
15.5%
5.6%
$
2,111
Discounted cash flows
Discount rate
13.4%
13.4%
13.4%
Projected cumulative loss rate
18.5%
18.5%
18.5%
December 31, 2022
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
Minimum
Maximum
(Dollars in thousands)
Available-for-sale debt securities:
$
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. See Note 2 – Debt Securities for
information on the methodology used to calculate the fair value of these debt securities.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
63
Additionally, fair value is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP.
As of June 30, 2023, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a non-recurring
basis and still held at June 30, 2023, as shown in the following table:
Carrying value as of June 30, 2023
Related to (losses) gains
recorded for the Quarter
Ended June 30, 2023
Related to (losses) gains
recorded for the Six-
Month Period Ended
June 30, 2023
(Losses) gains recorded
for the Quarter Ended
June 30, 2023
(Losses) gains recorded
for the Six-Month Period
Ended June 30, 2023
(In thousands)
Level 3:
Loans receivable
(1)
$
8,011
$
8,920
$
(6,515)
$
(6,744)
OREO
(2)
1,471
2,038
45
12
Level 2:
Loans held for sale
(3)
$
14,295
$
14,295
$
(73)
$
(73)
(1)
Consists mainly of collateral dependent commercial and construction loans. The Corporation generally measured losses based on the fair value of the collateral. The Corporation derived
the fair values from external appraisals that took into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and
assumptions of the collateral (e.g., absorption rates), which are not market observable.
(2)
The Corporation derived the fair values from appraisals that took into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific
characteristics and assumptions of the properties (e.g., absorption rates and net operating income of income producing properties), which are not market observable. Losses were related to
market valuation adjustments after the transfer of the loans to the OREO portfolio.
(3)
The Corporation derived the fair value of these loans based on secondary market prices of instruments with similar characteristics.
As of June 30, 2022, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a non-recurring
basis and still held at June 30, 2022, as shown in the following table:
Carrying value as of June 30, 2022
Related to (losses) gains
recorded for the Quarter
Ended June 30, 2022
Related to losses
recorded for the Six-
Month Period Ended
June 30, 2022
(Losses) gains recorded
for the Quarter Ended
June 30, 2022
Losses recorded for the
Six-Month Period Ended
June 30, 2022
(In thousands)
Level 3:
Loans receivable
(1)
$
5,422
$
29,967
$
(817)
$
(3,848)
OREO
(2)
2,140
2,741
35
(38)
Premises and equipment
(3)
-
1,242
-
(218)
(1)
Consists mainly of collateral dependent commercial and construction loans. The Corporation generally measured losses based on the fair value of the collateral. The Corporation derived
the fair values from external appraisals that took into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and
assumptions of the collateral (e.g., absorption rates), which are not market observable.
(2)
The Corporation derived the fair values from appraisals that took into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific
characteristics and assumptions of the properties (e.g., absorption rates and net operating income of income producing properties), which are not market observable. Losses were related to
market valuation adjustments after the transfer of the loans to the OREO portfolio.
(3)
Relates to a banking facility reclassified to held-for-sale and measured at the fair value of the collateral.
See Note 25 – Fair Value, to the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K for
qualitative information regarding the fair value measurements for Level 3 financial instruments measured at fair value on nonrecurring
basis.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
64
The following tables present the carrying value, estimated fair value and estimated fair value level of the hierarchy of financial
instruments as of June 30, 2023 and December 31, 2022:
Total Carrying Amount
in Statement of
Financial Condition as
of June 30, 2023
Fair Value Estimate as of
June 30, 2023
Level 1
Level 2
Level 3
(In thousands)
Assets:
Cash and due from banks and money market investments (amortized cost)
$
1,047,534
$
1,047,534
$
1,047,534
$
-
$
-
Available-for-sale debt securities (fair value)
5,433,369
5,433,369
139,669
5,286,343
7,357
Held-to-maturity debt securities (amortized cost)
424,726
Less: ACL on held-to-maturity debt securities
(8,401)
Held-to-maturity debt securities, net of ACL
$
416,325
410,181
-
244,521
165,660
Equity securities (amortized cost)
43,210
43,210
-
43,210
(1)
-
Other equity securities (fair value)
4,891
4,891
4,891
-
-
Loans held for sale (lower of cost or market)
14,295
14,295
-
14,295
-
Loans held for investment (amortized cost)
11,719,315
Less: ACL for loans and finance leases
(267,058)
Loans held for investment, net of ACL
$
11,452,257
11,256,830
-
-
11,256,830
MSRs (amortized cost)
28,034
44,420
-
-
44,420
Derivative assets (fair value)
494
494
-
494
-
Liabilities:
Deposits (amortized cost)
$
16,819,692
$
16,820,272
$
-
$
16,820,272
$
-
Short-term securities sold under agreements to repurchase (amortized cost)
73,934
74,030
-
74,030
-
Advances from the FHLB (amortized cost):
500,000
495,589
-
495,589
-
Other long-term borrowings (amortized cost)
161,700
162,983
-
-
162,983
Derivative liabilities (fair value)
357
357
-
357
-
(1) Includes FHLB stock with a carrying value of $
34.7
(2) Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
65
Total Carrying
Amount in Statement
of Financial Condition
as of December 31,
2022
Fair Value Estimate as of
December 31, 2022
Level 1
Level 2
Level 3
(In thousands)
Assets:
Cash and due from banks and money market investments (amortized cost)
$
480,505
$
480,505
$
480,505
$
-
$
-
Available-for-sale debt securities (fair value)
5,599,520
5,599,520
138,875
5,452,150
8,495
Held-to-maturity debt securities (amortized cost)
437,537
Less: ACL on held-to-maturity debt securities
(8,286)
Held-to-maturity debt securities, net of ACL
$
429,251
427,115
-
260,106
167,009
Equity securities (amortized cost)
50,428
50,428
-
50,428
(1)
-
Other equity securities (fair value)
4,861
4,861
4,861
-
-
Loans held for sale (lower of cost or market)
12,306
12,306
-
12,306
-
Loans held for investment (amortized cost)
11,552,825
Less: ACL for loans and finance leases
(260,464)
Loans held for investment, net of ACL
$
11,292,361
11,106,809
-
-
11,106,809
MSRs (amortized cost)
29,037
44,710
-
-
44,710
Derivative assets (fair value)
(2)
633
633
-
633
-
Liabilities:
Deposits (amortized cost)
$
16,143,467
$
16,139,937
$
-
$
16,139,937
$
-
Short-term securities sold under agreements to repurchase (amortized cost)
75,133
75,230
-
75,230
-
Advances from the FHLB (amortized cost)
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
66
NOTE 19 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
In accordance with ASC Topic 606, “Revenue from Contracts with Customers” (“ASC Topic 606”), revenues are recognized when
control of promised goods or services is transferred to customers and in an amount that reflects the consideration to which the
Corporation expects to be entitled in exchange for those goods or services. At contract inception, once the contract is determined to be
within the scope of ASC Topic 606, the Corporation assesses the goods or services that are promised within each contract, identifies
the respective performance obligations, and assesses whether each promised good or service is distinct. The Corporation then
recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the
performance obligation is satisfied.
Disaggregation of Revenue
The following tables summarize the Corporation’s revenue, which includes net interest income on financial instruments and non-
interest income, disaggregated by type of service and business segment for the quarters and six-month periods ended June 30, 2023
and 2022:
Quarter ended June 30, 2023
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial
and Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
(1)
$
21,360
$
142,597
$
12,933
$
(2,789)
$
19,690
$
6,024
$
199,815
Service charges and fees on deposit accounts
-
5,087
3,326
-
172
702
9,287
Insurance commissions
-
2,464
-
-
79
204
2,747
Merchant-related income
-
2,035
-
-
39
385
2,459
Credit and debit card fees
-
8,117
28
-
10
521
8,676
Other service charges and fees
33
1,508
1,094
-
660
207
3,502
Not in scope of ASC Topic 606
3,029
1,010
3,697
1,680
195
(11)
9,600
3,062
20,221
8,145
1,680
1,155
2,008
36,271
Total Revenue
$
24,422
$
162,818
$
21,078
$
(1,109)
$
20,845
$
8,032
$
236,086
Quarter ended June 30, 2022
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial
and Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
(1)
$
26,335
$
102,397
$
31,379
$
11,466
$
18,688
$
5,921
$
196,186
Service charges and fees on deposit accounts
-
5,495
3,069
-
157
745
9,466
Insurance commissions
-
2,724
-
-
20
202
2,946
Merchant-related income
-
1,711
381
-
17
327
2,436
Credit and debit card fees
-
7,391
21
-
3
449
7,864
Other service charges and fees
59
2,066
876
-
485
157
3,643
Not in scope of ASC Topic 606
(1)
4,108
396
101
(51)
(4)
36
4,586
Total non-interest income
4,167
19,783
4,448
(51)
678
1,916
30,941
Total Revenue
$
30,502
$
122,180
$
35,827
$
11,415
$
19,366
$
7,837
$
227,127
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
67
Six-Month Period Ended June 30, 2023
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial and
Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
(1)
$
43,148
$
280,341
$
27,873
$
(3,447)
$
40,620
$
12,165
$
400,700
Service charges and fees on deposit accounts
-
10,573
6,480
-
337
1,438
18,828
Insurance commissions
-
7,104
-
-
107
383
7,594
Merchant-related income
-
4,298
-
-
68
853
5,219
Credit and debit card fees
-
15,755
50
-
12
1,017
16,834
Other service charges and fees
194
2,660
1,948
-
1,243
551
6,596
Not in scope of ASC Topic 606
5,942
1,865
3,842
1,840
235
(6)
13,718
6,136
42,255
12,320
1,840
2,002
4,236
68,789
Total Revenue
$
49,284
$
322,596
$
40,193
$
(1,607)
$
42,622
$
16,401
$
469,489
Six-Month Period Ended June 30, 2022
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial and
Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
(1)
$
52,114
$
191,943
$
71,794
$
18,875
$
35,170
$
11,914
$
381,810
Service charges and fees on deposit accounts
-
11,034
6,045
-
295
1,455
18,829
Insurance commissions
-
7,691
-
-
49
481
8,221
Merchant-related income
-
3,533
754
-
22
716
5,025
Credit and debit card fees
-
14,062
37
-
(4)
859
14,954
Other service charges and fees
202
3,176
1,989
-
984
314
6,665
Not in scope of ASC Topic 606
9,217
750
177
(163)
76
48
10,105
9,419
40,246
9,002
(163)
1,422
3,873
63,799
Total Revenue
$
61,533
$
232,189
$
80,796
$
18,712
$
36,592
$
15,787
$
445,609
(1)
Most of the Corporation's revenue is not within the scope of ASC Topic 606. The guidance explicitly excludes net interest income from financial assets and liabilities, as well as other non-interest income from loans,
leases, investment securities and derivative financial instruments.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
68
For the quarters and six-month periods ended June 30, 2023 and 2022, most of the Corporation’s revenue within the scope of ASC
Topic 606 was related to performance obligations satisfied at a point in time.
See Note 26 – Revenue from Contracts with Customers, to the audited consolidated financial statements included in the 2022
Annual Report on Form 10-K for a discussion of major revenue streams under the scope of ASC Topic 606.
Contract Balances
A
contract liability is an entity’s obligation to transfer goods or services to a customer in exchange for consideration from the
customer. FirstBank participates in a merchant revenue-sharing agreement with another entity to which the Bank sold its merchant
contracts portfolio and related point-of-sale terminals, and a growth agreement with an international card service association to expand
the customer base and enhance product offerings. FirstBank recognizes the revenue under these agreements over time, as the Bank
completes its performance obligations.
The following table shows the activity of contract liabilities for the quarters and six-month periods ended June 30, 2023 and 2022:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Beginning balance
$
760
$
1,154
$
841
$
1,443
(152)
(105)
(233)
(394)
Ending balance
$
608
$
1,049
$
608
$
1,049
As of June 30, 2023 and 2022, there were no contract assets recorded on the Corporation’s consolidated financial statements.
Other
Except for the contract liabilities noted above, the Corporation did not have any other performance obligations as of June 30, 2023.
The Corporation also did not have any material contract acquisition costs and did not make any significant judgments or estimates in
recognizing revenue for financial reporting purposes.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
69
NOTE 20 – SEGMENT INFORMATION
Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer, the operating
segments are based primarily on the Corporation’s lines of business for its operations in Puerto Rico, the Corporation’s principal
market, and by geographic areas for its operations outside of Puerto Rico. As of June 30, 2023, the Corporation had
six
segments: Mortgage Banking; Consumer (Retail) Banking; Commercial and Corporate Banking; Treasury and Investments; United
States Operations; and Virgin Islands Operations. Management determined the reportable segments based on the internal structure
used to evaluate performance and to assess where to allocate resources. Other factors, such as the Corporation’s organizational chart,
nature of the products, distribution channels, and the economic characteristics of the products, were also considered in the
determination of the reportable segments.
The Mortgage Banking segment consists of the origination, sale, and servicing of a variety of residential mortgage loans. The
Mortgage Banking segment also acquires and sells mortgages in the secondary markets. In addition, the Mortgage Banking segment
includes mortgage loans purchased from other local banks and mortgage bankers. The Consumer (Retail) Banking segment consists of
the Corporation’s consumer lending and deposit-taking activities conducted mainly through its branch network and loan centers. The
Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for large customers represented
by specialized and middle-market clients and the public sector. The Commercial and Corporate Banking segment offers commercial
loans, including commercial real estate and construction loans, and floor plan financings, as well as other products, such as cash
management and business management services. The Treasury and Investments segment is responsible for the Corporation’s
investment portfolio and treasury functions that are executed to manage and enhance liquidity. This segment lends funds to the
Commercial and Corporate Banking, the Mortgage Banking, the Consumer (Retail) Banking, and the United States Operations
segments to finance their lending activities and borrows from those segments. The Consumer (Retail) Banking segment also lends
funds to other segments. The interest rates charged or credited by the Treasury and Investments and the Consumer (Retail) Banking
segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s
actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment. The
United States Operations segment consists of all banking activities conducted by FirstBank in the United States mainland, including
commercial and consumer banking services. The Virgin Islands Operations segment consists of all banking activities conducted by the
Corporation in the USVI and BVI, including commercial and consumer banking services.
The accounting policies of the segments are the same as those referred to in Note 1 – Nature of Business and Summary of
Significant Accounting Policies, to the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K.
The Corporation evaluates the performance of the segments based on net interest income, the provision for credit losses, non-
interest income and direct non-interest expenses. The segments are also evaluated based on the average volume of their interest-
earning assets less the ACL.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
70
The following tables present information about the reportable segments for the indicated periods:
Mortgage
Banking
Consumer
(Retail) Banking
Commercial and
Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Quarter ended June 30, 2023:
Interest income
$
31,605
$
86,989
$
65,356
$
29,528
$
32,098
$
6,628
$
252,204
Net (charge) credit for transfer of funds
(10,245)
86,144
(52,423)
(22,739)
(737)
-
-
Interest expense
-
(30,536)
-
(9,578)
(11,671)
(604)
(52,389)
Net interest income (loss)
21,360
142,597
12,933
(2,789)
19,690
6,024
199,815
Provision for credit losses - (benefit) expense
(3,829)
13,669
7,675
(16)
4,017
714
22,230
Non-interest income
3,062
20,221
8,145
1,680
1,155
2,008
36,271
Direct non-interest expenses
5,533
41,814
9,340
923
8,502
6,731
72,843
$
22,718
$
107,335
$
4,063
$
(2,016)
$
8,326
$
587
$
141,013
Average earnings assets
$
2,144,340
$
3,241,768
$
3,770,463
$
6,364,024
$
2,038,621
$
371,685
$
17,930,901
Mortgage
Banking
Consumer
(Retail) Banking
Commercial and
Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Quarter ended June 30, 2022:
Interest income
$
33,205
$
73,487
$
47,513
$
27,143
$
21,081
$
6,196
$
208,625
Net (charge) credit for transfer of funds
(6,870)
34,039
(16,134)
(10,705)
(330)
-
-
Interest expense
-
(5,129)
-
(4,972)
(2,063)
(275)
(12,439)
Net interest income
26,335
102,397
31,379
11,466
18,688
5,921
196,186
Provision for credit losses - (benefit) expense
(3,605)
15,055
(470)
(35)
(1,678)
736
10,003
Non-interest income (loss)
4,167
19,783
4,448
(51)
678
1,916
30,941
Direct non-interest expenses
5,681
40,546
9,048
905
8,237
6,765
71,182
$
28,426
$
66,579
$
27,249
$
10,545
$
12,807
$
336
$
145,942
Average earnings assets
$
2,243,188
$
2,860,086
$
3,624,176
$
7,769,754
$
2,036,108
$
370,590
$
18,903,902
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Six-Month Period Ended June 30, 2023
Interest income
$
63,512
$
170,163
$
127,699
$
56,994
$
63,212
$
13,020
$
494,600
Net (charge) credit for transfer of funds
(20,364)
163,879
(99,826)
(42,278)
(1,411)
-
-
Interest expense
-
(53,701)
-
(18,163)
(21,181)
(855)
(93,900)
Net interest income
43,148
280,341
27,873
(3,447)
40,620
12,165
400,700
Provision for credit losses - (benefit) expense
(4,335)
28,893
5,139
(25)
8,672
(612)
37,732
Non-interest income
6,136
42,255
12,320
1,840
2,002
4,236
68,789
Direct non-interest expenses
10,620
83,441
18,705
1,870
16,806
13,556
144,998
$
42,999
$
210,262
$
16,349
$
(3,452)
$
17,144
$
3,457
$
286,759
Average earnings assets
$
2,157,626
$
3,208,146
$
3,742,205
$
6,290,669
$
2,053,154
$
369,026
$
17,820,826
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Six-Month Period Ended June 30, 2022
Interest income
$
66,276
$
143,924
$
94,540
$
49,327
$
39,938
$
12,474
$
406,479
Net (charge) credit for transfer of funds
(14,162)
58,321
(22,746)
(20,654)
(759)
-
-
Interest expense
-
(10,302)
-
(9,798)
(4,009)
(560)
(24,669)
Net interest income
52,114
191,943
71,794
18,875
35,170
11,914
381,810
Provision for credit losses - (benefit) expense
(7,308)
26,199
(17,092)
(423)
(5,225)
50
(3,799)
Non-interest income (loss)
9,419
40,246
9,002
(163)
1,422
3,873
63,799
Direct non-interest expenses
12,587
79,817
17,907
1,790
16,716
13,738
142,555
$
56,254
$
126,173
$
79,981
$
17,345
$
25,101
$
1,999
$
306,853
Average earnings assets
$
2,268,279
$
2,810,062
$
3,662,720
$
7,931,699
$
2,050,791
$
374,358
$
19,097,909
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
71
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Net income:
Total income for segments
$
141,013
$
145,942
$
286,759
$
306,853
Other operating expenses
40,074
37,144
83,187
72,430
Income before income taxes
100,939
108,798
203,572
234,423
Income tax expense
30,284
34,103
62,219
77,128
$
70,655
$
74,695
$
141,353
$
157,295
Average assets:
Total average earning assets for segments
$
17,930,901
$
18,903,902
$
17,820,826
$
19,097,909
Average non-earning assets
857,677
820,924
852,680
890,043
$
18,788,578
$
19,724,826
$
18,673,506
$
19,987,952
(1)
Expenses pertaining to corporate administrative functions that support the operating segment, but are not specifically attributable to or managed by any segment, are not included in the
reported financial results of the operating segments. The unallocated corporate expenses include certain general and administrative expenses and related depreciation and amortization
expenses.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
72
NOTE 21 – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
Supplemental statement of cash flows information is as follows for the indicated periods:
Six-Month Period Ended June 30,
2023
2022
(In thousands)
Cash paid for:
$
84,530
$
26,148
82,215
15,295
8,630
9,156
Non-cash investing and financing activities:
10,738
10,698
29,720
20,575
1,238
1,958
65,092
78,397
2,962
2,443
4,502
20,202
2,263
1,158
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
73
NOTE 22 – REGULATORY MATTERS, COMMITMENTS, AND CONTINGENCIES
Regulatory Matters
The Corporation and FirstBank are each subject to various regulatory capital requirements imposed by the U.S. federal banking
agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material adverse effect on the Corporation’s financial statements and activities.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific
capital guidelines that involve quantitative measures of the Corporation’s and FirstBank’s assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts and classification are also subject
to qualitative judgments and adjustment by the regulators with respect to minimum capital requirements, components, risk weightings,
and other factors. As of June 30, 2023 and December 31, 2022, the Corporation and FirstBank exceeded the minimum regulatory
capital ratios for capital adequacy purposes and FirstBank exceeded the minimum regulatory capital ratios to be considered a well
capitalized institution under the regulatory framework for prompt corrective action. As of June 30, 2023, management does not
believe that any condition has changed or event has occurred that would have changed the institution’s status.
The Corporation and FirstBank compute risk-weighted assets using the standardized approach required by the U.S. Basel III capital
rules (“Basel III rules”).
The Basel III rules require the Corporation to maintain an additional capital conservation buffer of
2.5
% on certain regulatory
capital ratios to avoid limitations on both (i) capital distributions (
e.g.
, repurchases of capital instruments, dividends and interest
payments on capital instruments) and (ii) discretionary bonus payments to executive officers and heads of major business lines.
As part of its response to the impact of COVID-19, on March 31, 2020, the federal banking agencies issued an interim final rule
that provided the option to temporarily delay the effects of CECL on regulatory capital for two years, followed by a three-year
transition period. The interim final rule provides that, at the election of a qualified banking organization, the day one impact to
retained earnings plus
25
% of the change in the ACL (as defined in the final rule) from January 1, 2020 to December 31, 2021 will be
delayed for two years and phased-in at
25
% per year beginning on January 1, 2022 over a three-year period, resulting in a total
transition period of five years. Accordingly, as of June 30, 2023, the capital measures of the Corporation and the Bank included
$
32.4
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 macroeconomic conditions, as well as the effect of recent regional bank failures in the U.S. mainland, although the
nature and impact of such actions cannot be predicted at this time.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
74
The regulatory capital position of the Corporation and the FirstBank as of June 30, 2023 and December 31, 2022, which reflects the
delay in the full effect of CECL on regulatory capital, were as follows:
Regulatory Requirements
Actual
For Capital Adequacy Purposes
To be Well -Capitalized
Thresholds
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
As of June 30, 2023
Total Capital (to Risk-Weighted Assets)
$
2,396,564
19.15
%
$
1,001,189
8.0
%
N/A
N/A
%
$
2,326,581
18.59
%
$
1,001,046
8.0
%
$
1,251,307
10.0
%
CET1 Capital (to Risk-Weighted Assets)
$
2,082,843
16.64
%
$
563,169
4.5
%
N/A
N/A
%
$
2,069,732
16.54
%
$
563,088
4.5
%
$
813,350
6.5
%
Tier I Capital (to Risk-Weighted Assets)
$
2,082,843
16.64
%
$
750,892
6.0
%
N/A
N/A
%
$
2,169,732
17.34
%
$
750,784
6.0
%
$
1,001,046
8.0
%
Leverage ratio
$
2,082,843
10.73
%
$
776,742
4.0
%
N/A
N/A
%
$
2,169,732
11.18
%
$
776,431
4.0
%
$
970,539
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
%
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
75
Commitments
The Corporation enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments may include commitments to extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the
contract. Commitments generally have fixed expiration dates or other termination clauses. Since certain commitments are expected to
expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of
the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. In the
case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any time and without cause. As
of June 30, 2023, commitments to extend credit amounted to approximately $
2.0
1.0
card loans. In addition, commercial and financial standby letters of credit as of June 30, 2023 amounted to approximately $
66.0
million.
Contingencies
As of June 30, 2023, First BanCorp. and its subsidiaries were defendants in various legal proceedings, claims and other loss
contingencies arising in the ordinary course of business. On at least a quarterly basis, the Corporation assesses its liabilities and
contingencies in connection with threatened and outstanding legal proceedings, claims and other loss contingencies utilizing the latest
information available. For legal proceedings, claims and other loss contingencies where it is both probable that the Corporation will
incur a loss and the amount can be reasonably estimated, the Corporation establishes an accrual for the loss. Once established, the
accrual is adjusted as appropriate to reflect any relevant developments. For legal proceedings, claims and other loss contingencies
where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established.
Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that some of them are
currently in preliminary stages), the existence in some of the current proceedings of multiple defendants whose share of liability has
yet to be determined, the numerous unresolved issues in the proceedings, and the inherent uncertainty of the various potential
outcomes of such proceedings. Accordingly, the Corporation’s estimate will change from time to time, and actual losses may be more
or less than the current estimate.
While the final outcome of legal proceedings, claims, and other loss contingencies is inherently uncertain, based on information
currently available, management believes that the final disposition of the Corporation’s legal proceedings, claims and other loss
contingencies, to the extent not previously provided for, will not have a material adverse effect on the Corporation’s consolidated
financial position as a whole.
If management believes that, based on available information, it is at least reasonably possible that a material loss (or material loss in
excess of any accrual) will be incurred in connection with any legal contingencies, the Corporation discloses an estimate of the
possible loss or range of loss, either individually or in the aggregate, as appropriate, if such an estimate can be made, or discloses that
an estimate cannot be made. Based on the Corporation’s assessment as of June 30, 2023, no such disclosures were necessary.
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
76
NOTE 23- FIRST BANCORP. (HOLDING COMPANY ONLY) FINANCIAL INFORMATION
The following condensed financial information presents the financial position of First BanCorp. at the holding company level only
as of June 30, 2023 and December 31, 2022, and the results of its operations for the quarters and six-month periods ended June 30,
2023 and 2022:
Statements of Financial Condition
As of June 30,
As of December 31,
2023
2022
(In thousands)
Assets
Cash and due from banks
$
54,625
$
19,279
Other investment securities
735
735
Investment in First Bank Puerto Rico, at equity
1,484,887
1,464,026
Investment in First Bank Insurance Agency, at equity
22,024
28,770
Investment in FBP Statutory Trust I
1,289
1,951
Investment in FBP Statutory Trust II
3,561
3,561
Dividends receivable
700
624
Other assets
542
430
$
1,568,363
$
1,519,376
Liabilities and Stockholders’ Equity
Liabilities:
Long-term borrowings
$
161,700
$
183,762
Accounts payable and other liabilities
8,664
10,074
170,364
193,836
Stockholders’ equity
1,397,999
1,325,540
$
1,568,363
$
1,519,376
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
77
Statements of Income
Quarter Ended
Six-Month Period Ended
June 30,
June 30,
2023
2022
2023
2022
(In thousands)
Income
$
57
$
10
$
110
$
14
78,932
178,679
157,802
242,272
12,000
-
12,000
-
1,605
-
1,605
-
101
51
203
91
92,695
178,740
171,720
242,377
Expense
3,409
1,698
6,790
3,031
462
434
872
873
3,871
2,132
7,662
3,904
Income before income taxes and equity in undistributed
88,824
176,608
164,058
238,473
Income tax expense
783
793
1,861
1,899
Distribution in excess of earnings of subsidiaries
(17,386)
(101,120)
(20,844)
(79,279)
Net income
$
70,655
$
74,695
$
141,353
$
157,295
Other comprehensive (loss) income, net of tax
(54,837)
(175,923)
32,391
(507,757)
Comprehensive income (loss)
$
15,818
$
(101,228)
$
173,744
$
(350,462)
78
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (“MD&A”)
The following MD&A relates to the accompanying unaudited consolidated financial statements of First BanCorp. (the
“Corporation,” “we,” “us,” “our,” or “First BanCorp.”) and should be read in conjunction with such financial statements and the notes
thereto, and our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”). This
section also presents certain financial measures that are not based on generally accepted accounting principles in the United States of
America (“GAAP”). See “Non-GAAP Financial Measures and Reconciliations” below for information about why non-GAAP
financial measures are presented, reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures,
and references to non-GAAP financial measures reconciliations presented in other sections.
EXECUTIVE SUMMARY
First BanCorp. is a diversified financial holding company headquartered in San Juan, Puerto Rico offering a full range of financial
products to consumers and commercial customers through various subsidiaries. First BanCorp. is the holding company of FirstBank
Puerto Rico (“FirstBank” or the “Bank”) and FirstBank Insurance Agency. Through its wholly -owned subsidiaries, the Corporation
operates in Puerto Rico, the United States Virgin Islands (“USVI”), the British Virgin Islands (“BVI”), and the state of Florida,
concentrating on commercial banking, residential mortgage loans, credit cards, personal loans, small loans, auto loans and leases, and
insurance agency activities.
Recent Developments
Economy and Market Volatility
During the second quarter of 2023, inflation has continued to trend lower but remaining at elevated levels above the Federal
Reserve (“FED”) target. In July 2023, the FED raised interest rates by an additional 25 basis points, thereby increasing the federal
funds rate to a target range of 5.25% to 5.50%, bringing borrowing costs to the highest level since January 2001. This represents the
eleventh time in 17 months that the FED has raised rates in an effort to significantly reduce liquidity in the financial markets and
continue to reduce inflation. The FED resumed the tightening campaign after a pause in June, while noticing the economy has been
expanding at a moderate pace, job gains have been robust in recent months, and the unemployment rate has remained low while
inflation remains elevated.
The Corporation remains vigilant as to the potential impacts that monetary policy or a potential slowdown in the U.S. economy may
have on credit and loan demand. Notwithstanding, it is encouraged by the ongoing business activity and economic growth in Puerto
Rico over the short and medium term. For example, strong auto and retail sales reported during the first half of 2023 suggest growing
consumer confidence in Puerto Rico. The economic backdrop in Puerto Rico continues to be supported by strong labor markets, which
have led to unemployment remaining stable, and a consistent flow of federal disaster funds and foreign investment.
Our quarterly results reflected continued execution of our strategy and strength of our balance sheet, reflected through deposit
growth and increased capital levels driven by earnings and capital optimization. Although total net interest income remains stable, the
overall higher interest rate environment resulted in a lower interest margin for the second quarter of 2023. The overall higher interest
rate environment should continue to benefit our interest income as variable loans and cash held at the FED will reprice accordingly
and projected loan growth will occur at higher yields. Interest expense, on the other hand, is also expected to increase as maturing
deposits and government deposits will reprice at higher rates and non-interest-bearing and other low-cost deposits could continue to
shift to higher cost deposits, resulting in margin pressures. Credit continues to perform well and our liquidity position remains strong.
With our disciplined and proactive approach, we believe the Corporation is positioned to continue growing the franchise and
supporting our people and the communities we serve while enhancing shareholder value.
79
Stock Repurchase Programs
On July 24, 2023, the Corporation announced that its Board of Directors approved a new stock repurchase program, under which
the Corporation may repurchase up to $225 million of its outstanding common stock, which it expects to execute through the end of
the third quarter of 2024.
The Corporation expects to repurchase approximately $150 million in common stock during the second half of 2023, of which $75
million relates to the remaining amount of the $350 million stock repurchase program announced on April 27, 2022 that was resumed
in July 2023. The Corporation expects to fully utilize this remaining authorization during the third quarter of 2023. From July 1, 2023
through August 1, 2023, the Corporation repurchased approximately 1.5 million shares of common stock for a total purchase price of
$19.5 million.
Repurchases under the stock repurchase programs may be executed through open market purchases, accelerated share repurchases,
and/or privately negotiated transactions or plans, including under plans complying with Rule 10b5-1 under the Exchange Act. The
Corporation’s stock repurchase programs are subject to various factors, including the Corporation’s capital position, liquidity,
financial performance and alternative uses of capital, stock trading price, and general market conditions. The Corporation’s stock
repurchase programs do not obligate it to acquire any specific number of shares and do not have an expiration date. The stock
repurchase programs may be modified, suspended, or terminated at any time at the Corporation’s discretion.
Repurchase of Trust - Preferred Securities (“TRuPs”)
During the second quarter of 2023, the Corporation completed the repurchase of $21.4 million of TRuPs of the FBP Statutory Trust
I as part of a privately -negotiated transaction, resulting in a commensurate reduction in the related floating rate junior subordinated
debentures. The purchase price equated to 92.5% of the $21.4 million par value of the TRuPs. The 7.5% discount resulted in a gain of
approximately $1.6 million, which is reflected in the consolidated statement s of income as “Gain on early extinguishment of debt.”
Release of Corporate Sustainability Report
On June 26, 2023, the Corporation announced the release of its Corporate Sustainability Report for 2022, which is its second report
on Environmental, Social and Governance (“ESG”) and sustainability matters. This report highlights the Corporation’s strategy and
development relating to ESG matters and covers the progress of the Corporation’s ESG program during 2022.
London Interbank Offered Rate (“LIBOR”) Transition
On June 30, 2023, the US dollar (“USD”) LIBOR panel ended, and USD LIBOR rates are no longer considered representative of the
market. For the transition of residual exposures tied to USD LIBOR as of June 30, 2023, the Corporation will continue to follow the
provisions of the Adjustable Interest Rate Act (the “LIBOR Act”) and Regulation ZZ. As of June 30, 2023, the Corporation’s risk
exposure to USD LIBOR that mature after June 30, 2023 consisted of the following: (i) $0.8 billion of variable-rate commercial and
construction loans (including unused commitments), (ii) $39.4 million of U.S. agencies debt securities and private label mortgage-backed
securities (“MBS”) held as part of the available-for-sale debt securities portfolio, (iii) $122.3 million of Puerto Rico municipalities bonds
held as part of the held-to-maturity debt securities portfolio, and (iv) $161.7 million of junior subordinated debentures reported as other
long-term borrowings in the consolidated statements of financial condition.
Source systems have been updated to support alternative reference rates. As such, we have developed a SOFR-enabled interest rate risk
monitoring framework and a strategy for managing interest rate risk during the transition from LIBOR to SOFR.
80
Other Recent Developments
Following the recent failure of two U.S. regional banks and resulting losses to the FDIC’s Deposit Insurance Fund (“DIF”), on May 11,
2023, the FDIC approved a notice of proposed rulemaking that would implement a special assessment at an annual rate of approximately
12.5 basis points over eight quarterly periods, commencing with the first quarter of 2024, to recover the cost associated with protecting
uninsured depositors as part of those financial institution failures. The assessment base for the special assessment would be equal to an
insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion in
estimated uninsured deposits. Notwithstanding, the special assessment could be subject to change depending on whether there are any
shortfalls on amounts collected. If the final rule is issued as proposed, the estimated impact of the special assessment on the Corporation
would be an increase in non-interest expense by approximately $6 million that would need to be accrued once the proposed rule is finalized.
CRITICAL ACCOUNTING POLICIES AND PRACTICES
The accounting principles of the Corporation and the methods of applying these principles conform to GAAP. In preparing the
consolidated financial statements, management is required to make estimates, assumptions, and judgments that affect the amounts
recorded for assets, liabilities and contingent liabilities as of the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Note 1 of the Notes to Consolidated Financial Statements included in our 2022 Annual
Report on Form 10-K, as supplemented by this Quarterly Report on Form 10-Q, including this MD&A, describes the significant
accounting policies we used in our consolidated financial statements.
Not all significant accounting policies require management to make difficult, subjective or complex judgments. Critical accounting
estimates are those estimates made in accordance with GAAP that involve a significant level of uncertainty and have had or are
reasonably likely to have a material impact on the Corporation’s financial condition and results of operations. The Corporation’s
critical accounting estimates that are particularly susceptible to significant changes include, but are not limited to, the following: (i)
the allowance for credit losses (“ACL”); (ii) valuation of financial instruments; and (iii) income taxes. For more information regarding
valuation of financial instruments and income taxes policies, assumptions, and judgments, see “Critical Accounting Estimates” in Part
II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”),” in the 2022
Annual Report on Form 10-K. The “Risk Management – Credit Risk Management” section of this MD&A details the policies,
assumptions, and judgments related to the ACL. Actual results could differ from estimates and assumptions if different outcomes or
conditions prevail.
81
Overview of Results of Operations
First BanCorp.'s results of operations depend primarily on its net interest income, which is the difference between the interest
income earned on its interest-earning assets, including investment securities and loans, and the interest expense incurred on its
interest-bearing liabilities, including deposits and borrowings. Net interest income is affected by various factors, including the
following: (i) the interest rate environment; (ii) the volumes, mix, and composition of interest-earning assets, and interest-bearing
liabilities; and (iii) the repricing characteristics of these assets and liabilities. The Corporation ’s results of operations also depend on
the provision for credit losses, non-interest expenses (such as personnel, occupancy, the FDIC deposit insurance premium and other
costs), non-interest income (mainly service charges and fees on deposits, cards and processing income, and insurance income), gains
(losses) on sales of investments, gains (losses) on mortgage banking activities, and income taxes.
For the quarter and six-month period ended June 30, 2023, the Corporation had net income of $70.7 million ($0.39 per diluted
common share) and $141.4 million ($0.78 per diluted common share), respectively, compared to $74.7 million ($0.38 per diluted
common share) and $157.3 million ($0.80 per diluted common share), for the comparable periods in 2022. Other relevant selected
financial indicators for the periods presented are included below:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
Key Performance Indicator:
(1)
Return on Average Assets
(2)
1.51
%
1.52
%
1.53
%
1.59
%
Return on Average Common Equity
(3)
19.66
17.82
20.31
17.18
Efficiency Ratio
(4)
47.83
47.69
48.60
48.25
(1)
These financial ratios are used by management to monitor the Corporation’s financial performance and whether it is using its assets efficiently.
(2)
Indicates how profitable the Corporation is in relation to its total assets and is calculated by dividing net income on an annualized basis by its average total assets.
(3)
Measures the Corporation’s performance based on its average stockholders’ equity and is calculated by dividing net income on an annualized basis by its average total stockholders’ equity.
(4)
Measures how much the Corporation incurred to generate a dollar of revenue and is calculated by dividing non-interest expenses by total revenue.
The key drivers of the Corporation’s GAAP financial results for the quarter ended June 30, 2023, compared to the second quarter of
2022, include the following:
●
Net interest income for the quarter ended June 30, 2023 increased to $199.8 million, compared to $196.2 million for the
second quarter of 2022, mainly driven by the effect in the commercial loan portfolio of higher market interest rates on the
upward repricing of variable-rate loans and on new loan originations, the growth in consumer loans, and the impact of higher
market interest rates on interest-bearing cash balances, partially offset by an increase in interest expense mainly due to higher
rates paid on interest-bearing deposits. See "Net Interest Income" below for additional information.
●
The provision for credit losses on loans, finance leases, unfunded loan commitments and debt securities for the quarter ended
June 30, 2023 was $22.2 million, compared to $10.0 million for the second quarter of 2022. The increase in the provision
expense reflects a $9.9 million increase in the provision for the commercial and construction loan portfolio resulting from a
deterioration in the forecasted commercial real estate price index (“CRE price index”).
Net charge-offs totaled $19.3 million for the quarter ended June 30, 2023, or 0.67% of average loans on an annualized basis,
compared to $6.0 million, or 0.21% of average loans, for the second quarter of 2022, mainly driven by a $6.2 million charge-
off recorded on a commercial and industrial participated loan in the Florida region in the power generation industry and a
$6.1 million increase in consumer loans net charge-offs. See “Provision for Credit Losses” and “Risk Management” below
for analyses of the ACL and non-performing assets and related ratios.
●
The Corporation recorded non-interest income of $36.3 million for the quarter ended June 30, 2023, compared to $30.9
million for the second quarter of 2022. Non-interest income for the second quarter of 2023 includes a $3.6 million gain
recognized from a legal settlement and the $1.6 million gain on the repurchase of $21.4 million in junior subordinated
debentures. On a non-GAAP basis, excluding the effect of these Special Items (as defined below), adjusted non-interest
income increased by $0.2 million. See “Non-Interest Income” and “Non-GAAP Financial Measures and Reconciliations”
below for additional information.
●
Non-interest expenses for the quarter ended June 30, 2023 increased by $4.6 million to $112.9 million. The increase in non-
interest expenses mainly reflects a $3.0 million increase in employees’ compensation and benefits expenses due to annual
salary merit increases as well as higher stock-based compensation expense and medical insurance premium costs. The
efficiency ratio for the second quarter of 2023 was 47.83%, as compared to 47.69% for the same period in 2022. On a non-
82
GAAP basis, excluding the aforementioned Special Items , the adjusted efficiency ratio for the second quarter of 2023 was
48.91%. See “Non-Interest Expenses” and “Non-GAAP Financial Measures and Reconciliations” below for additional
information.
●
Income tax expense decreased to $30.3 million for the second quarter of 2023, compared to $34.1 million for the same period
in 2022 driven by a lower pre-tax income and a higher proportion of exempt to taxable income resulting in a lower effective
tax rate. The Corporation’s estimated effective tax rate, excluding entities with pre-tax losses from which a tax benefit cannot
be recognized and discrete items, decrease d to 30.1 % for the first six months of 2023, compared to 31.7% for the first six
months of 2022. See “Income Taxes” below and Note 17 – Income Taxes, to the unaudited consolidated financial statements
herein for additional information.
●
As of June 30, 2023, total assets were approximately $19.2 billion, an increase of $518.0 million from December 31, 2022,
primarily due to a $567.0 million increase in cash and cash equivalents mainly attributable to the overall increase in total
deposits, and a $168.5 million increase in total loans, partially offset by a $186.3 million decrease in total investment
securities. See “Financial Condition and Operating Data Analysis” below for additional information.
●
As of June 30, 2023, total liabilities were $17.8 billion, an increase of $445.5 million from December 31, 2022, mainly
driven by the overall increase in total deposits, including brokered CDs, partially offset by a $198.3 million decrease in
borrowings. See “Risk Management – Liquidity Risk” below for additional information about the Corporation’s funding
sources and strategy.
●
The Bank’s primary sources of funding are consumer and commercial core deposits, which exclude government deposits and
brokered certificates of deposit (“CDs”). As of June 30, 2023, these core deposits, amounting to $13.0 billion, funded 67.99%
of total assets. Approximately $4.7 billion, or 28.79% of such deposits, are uninsured deposits. In addition to approximately
$3.2 billion in cash and free high quality liquid assets, the Bank maintains borrowing capacity at the FHLB and the FED’s
Discount Window. As of June 30, 2023, the Corporation had approximately $1.4 billion available for funding under the
FED’s Discount Window and $980.9 million available for additional borrowing capacity on FHLB lines of credit based on
collateral pledged at these entities. On a combined basis, as of June 30, 2023, the Corporation had $5.6 billion available to
meet liquidity needs. See “Risk Management – Liquidity Risk” below for additional information about the Corporation’s
funding sources and strategy.
●
As of June 30, 2023, the Corporation’s total stockholders’ equity was $1.4 billion, an increase of $72.5 million from
December 31, 2022. The increase was driven by the earnings generated in the first half of 2023 and a $32.4 million increase
in the fair value of available-for-sale debt securities recorded as part of accumulated other comprehensive loss in the
consolidated statements of financial condition as a result of changes in market interest rates. This increase was partially offset
by $50.7 million in dividends declared to common stock shareholders during the first six months of 2023 and the repurchase
of approximately 3.6 million shares of common stock for a total purchase price of approximately $50.0 million. The
Corporation’s CET1 capital, tier 1 capital, total capital, and leverage ratios were 16.64%, 16.64%, 19.15%, and 10.73%,
respectively, as of June 30, 2023, compared to CET1 capital, tier 1 capital, total capital, and leverage ratios of 16.53%,
16.53%, 19.21%, and 10.70%, respectively, as of December 31, 2022. See “Risk Management – Capital” below for
additional information.
●
Total loan production, including purchases, refinancings, renewals, and draws from existing revolving and non-revolving
commitments, decreased by $274.9 million to $1.2 billion for the quarter ended June 30, 2023. See “Financial Condition and
Operating Data Analysis” below for additional information.
●
Total non-performing assets were $121.1 million as of June 30, 2023, a decrease of $8.1 million, from December 31, 2022.
The net decrease was driven by a $9.5 million reduction in nonaccrual residential mortgage loans mainly due to loans
restored to accrual status, partially offset by a $1.5 million increase in nonaccrual consumer loans. See “Risk Management –
Nonaccrual Loans and Non-Performing Assets” below for additional information.
●
Adversely classified commercial and construction loans decreased by $27.9 million to $65.7 million as of June 30, 2023,
compared to December 31, 2022, mainly driven by the payoff of a $24.3 million commercial and industrial participated loan
in the Florida region in the leisure and hospitality industry.
83
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
The Corporation has included in this Quarterly Report on Form 10-Q (“Form 10-Q”) the following financial measures that are not
recognized under GAAP, which are referred to as non-GAAP financial measures:
Net Interest Income, Interest Rate Spread, and Net Interest Margin, Excluding Valuations , and on a Tax -Equivalent Basis
Net interest income, interest rate spread, and net interest margin, excluding the changes in the fair value of derivative instruments
and on a tax-equivalent basis, are reported in order to provide to investors additional information about the Corporation’s net interest
income that management uses and believes should facilitate comparability and analysis of the periods presented. The changes in the
fair value of derivative instruments have no effect on interest due or interest earned on interest-bearing liabilities or interest-earning
assets, respectively. The tax-equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable
and tax-exempt assets and assumes a marginal income tax rate. Income from tax-exempt earning assets is increased by an amount
equivalent to the taxes that would have been paid if this income had been taxable at statutory rates. Management believes that it is a
standard practice in the banking industry to present net interest income, interest rate spread, and net interest margin on a fully tax-
equivalent basis. This adjustment puts all earning assets, most notably tax-exempt securities and tax-exempt loans, on a common basis
that facilitates comparison of results to the results of peers.
See “Result of Operations – Net Interest Income” below, for the table that reconciles net interest income in accordance with GAAP
to the non-GAAP financial measure of net interest income, excluding valuations, and on a tax-equivalent basis for the indicated
periods. The table also reconciles net interest spread and net interest margin on a GAAP basis to these items excluding valuations, and
on a tax-equivalent basis.
Tangible Common Equity Ratio and Tangible Book Value Per Common Share
The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures that management
believes are generally used by the financial community to evaluate capital adequacy. Tangible common equity is total common equity
less goodwill and other intangibles. Similarly, tangible assets are total assets less goodwill and other intangibles. Management and
many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more
traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other
intangible assets, typically stemming from the use of the purchase method of accounting for mergers and acquisitions. Accordingly,
the Corporation believes that disclosures of these financial measures may be useful to investors. Neither tangible common equity nor
tangible assets, or the related measures, should be considered in isolation or as a substitute for stockholders’ equity, total assets, or any
other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation calculates its tangible common
equity, tangible assets, and any other related measures may differ from that of other companies reporting measures with similar names.
See “Risk Management – Capital” below for the table that reconciles the Corporation’s total equity and total assets in accordance
with GAAP to the tangible common equity and tangible assets figures used to calculate the non-GAAP financial measures of tangible
common equity ratio and tangible book value per common share.
Adjusted Net Income, Adjusted Non-Interest Income, and Adjusted Efficiency Ratio
To supplement the Corporation’s financial statements presented in accordance with GAAP, the Corporation uses, and believes that
investors benefit from disclosure of, non-GAAP financial measures that reflect adjustments to net income, non-interest income, and
the efficiency ratio to exclude items that management believes are not reflective of core operating performance (“Special Items”). The
financial results for the quarter and six-month period ended June 30, 2022 did not include any significant Special Items. The financial
results for the quarter and six-month period ended June 30, 2023 included the following Special Items:
Quarter and Six-Month Period Ended June 30, 2023
-
A $3.6 million ($2.3 million after-tax) gain recognized from a legal settlement reflected in the consolidated statements of
income as part of other non-interest income.
-
A $1.6 million gain on the repurchase of $21.4 million in junior subordinated debentures reflected in the consolidated
statements of income as “Gain on early extinguishment of debt.” The junior subordinated debentures are reflected in the
consolidated statements of financial condition as “Other long-term borrowings.” The purchase price equated to 92.5% of the
$21.4 million par value of the TRuPs. The 7.5% discount resulted in the gain of $1.6 million. The gain, realized at the
holding company level, had no effect on the income tax expense in 2023.
84
The following table reconciles for the quarter and six-month period ended June 30, 2023 the reported net income to adjusted net
income, a non-GAAP financial measure that excludes the Special Items identified above:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2023
(In thousands)
Net income, as reported (GAAP)
$
70,655
$
141,353
Adjustments:
Gain recognized from a legal settlement
(3,600)
(3,600)
Gain on early extinguishment of debt
(1,605)
(1,605)
Income tax impact of adjustments
(1)
1,350
1,350
Adjusted net income (Non-GAAP)
$
66,800
$
137,498
(1)
See "Adjusted Net Income, Adjusted Non-Interest Income, and Adjusted Efficiency Ratio" above for the individual tax impact related to the above adjustments, which were based on the
Puerto Rico statutory tax rate of 37.5%, as applicable.
85
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the excess of interest earned by First BanCorp. on its interest-earning assets over the interest incurred on its
interest-bearing liabilities. First BanCorp.’s net interest income is subject to interest rate risk due to the repricing and maturity
mismatch of the Corporation’s assets and liabilities. In addition, variable sources of interest income, such as loan fees, periodic
dividends, and collection of interest in nonaccrual loans, can fluctuate from period to period. Net interest income for the quarter and
six-month period ended June 30, 2023 was $199.8 million and $400.7 million, respectively, compared to $196.2 million and $381.8
million for the comparable periods in 2022. On a tax-equivalent basis and excluding the changes in the fair value of derivative
instruments, net interest income for the quarter and six-month period ended June 30, 2023 was $205.4 million and $412.6 million,
respectively, compared to $205.6 million and $398.4 million for the comparable periods in 2022.
The following tables include a detailed analysis of net interest income for the indicated periods. Part I presents average volumes
(based on the average daily balance) and rates on an adjusted tax-equivalent basis and Part II presents, also on an adjusted tax-
equivalent basis, the extent to which changes in interest rates and changes in the volume of interest-related assets and liabilities have
affected the Corporation’s net interest income. For each category of interest-earning assets and interest-bearing liabilities, the tables
provide information on changes in (i) volume (changes in volume multiplied by prior period rates), and (ii) rate (changes in rate
multiplied by prior period volumes). The Corporation has allocated rate-volume variances (changes in rate multiplied by changes in
volume) to either the changes in volume or the changes in rate based upon the effect of each factor on the combined totals.
Net interest income on an adjusted tax equivalent basis and excluding the change in the fair value of derivative instruments is a
non-GAAP financial measure. For the definition of this non-GAAP financial measure, refer to the discussion in “Non-GAAP
Measures and Reconciliations” above.
Part I
Average volume
Interest income
(1)
Average rate
(1)
Quarter ended June 30,
2023
2022
2023
2022
2023
2022
(Dollars in thousands)
Interest-earning assets:
Money market and other short-term investments
$
617,356
$
1,530,353
$
7,880
$
2,873
5.12
%
0.75
%
Government obligations
(2)
2,909,204
2,922,226
10,973
10,090
1.51
%
1.38
%
MBS
3,757,425
4,081,573
17,087
22,804
1.82
%
2.24
%
FHLB stock
36,265
21,275
780
251
8.63
%
4.73
%
Other investments
13,739
12,595
58
12
1.69
%
0.38
%
Total investments
(3)
7,333,989
8,568,022
36,778
36,030
2.01
%
1.69
%
Residential mortgage loans
2,808,465
2,891,403
39,864
40,573
5.69
%
5.63
%
Construction loans
149,783
124,070
2,903
1,768
7.77
%
5.72
%
Commercial and industrial ("C&I") and commercial mortgage loans
5,191,040
5,054,223
89,290
64,500
6.90
%
5.12
%
Finance leases
769,316
617,399
14,714
11,410
7.67
%
7.41
%
Consumer loans
2,672,912
2,415,215
74,192
63,724
11.13
%
10.58
%
Total loans
(4)(5)
11,591,516
11,102,310
220,963
181,975
7.65
%
6.57
%
$
18,925,505
$
19,670,332
$
257,741
$
218,005
5.46
%
4.45
%
Interest-bearing liabilities:
Time deposits
$
2,511,504
$
2,202,228
$
15,667
$
3,838
2.50
%
0.70
%
Brokered certificates of deposit ("CDs")
333,557
76,790
3,761
404
4.52
%
2.11
%
Other interest-bearing deposits
7,517,995
8,704,448
22,176
3,452
1.18
%
0.16
%
Securities sold under agreements to repurchase
101,397
200,000
1,328
1,972
5.25
%
3.95
%
Advances from the FHLB
534,231
200,000
6,048
1,075
4.54
%
2.16
%
Other long-term borrowings
177,701
183,762
3,409
1,698
7.69
%
3.71
%
Total interest-bearing liabilities
$
11,176,385
$
11,567,228
$
52,389
$
12,439
1.88
%
0.43
%
Net interest income on a tax-equivalent basis and excluding
valuations - non-GAAP
$
205,352
$
205,566
Interest rate spread
3.58
%
4.01
%
Net interest margin
4.35
%
4.19
%
86
Part I
Average volume
Interest income
(1)
Average rate
(1)
Six-Month Period Ended June 30,
2023
2022
2023
2022
2023
2022
(Dollars in thousands)
Interest-earning assets:
Money market and other short-term investments
$
511,392
$
1,682,216
$
12,530
$
3,693
4.94
%
0.44
%
Government obligations
(2)
2,909,587
2,829,675
21,738
18,322
1.51
%
1.31
%
MBS
3,810,491
4,061,883
36,483
42,224
1.93
%
2.10
%
FHLB stock
38,539
21,370
1,201
538
6.28
%
5.08
%
Other investments
13,441
12,193
197
33
2.96
%
0.55
%
Total investments
(3)
7,283,450
8,607,337
72,149
64,810
2.00
%
1.52
%
Residential mortgage loans
2,821,779
2,926,236
79,658
81,260
5.69
%
5.60
%
Construction loans
147,923
119,427
5,579
3,292
7.61
%
5.56
%
C&I and commercial mortgage loans
5,179,448
5,078,910
175,175
126,504
6.82
%
5.02
%
Finance leases
752,501
602,880
28,523
22,322
7.64
%
7.47
%
Consumer loans
2,654,008
2,377,118
145,406
124,875
11.05
%
10.59
%
Total loans
(4)(5)
11,555,659
11,104,571
434,341
358,253
7.58
%
6.51
%
$
18,839,109
$
19,711,908
$
506,490
$
423,063
5.42
%
4.33
%
Interest-bearing liabilities:
Time deposits
$
2,427,399
$
2,282,192
$
26,449
$
8,259
2.20
%
0.73
%
Brokered CDs
250,588
84,210
5,348
881
4.30
%
2.11
%
Other interest-bearing deposits
7,531,374
8,419,880
39,692
6,206
1.06
%
0.15
%
Securities sold under agreements to repurchase
96,229
220,442
2,397
4,154
5.02
%
3.80
%
Advances from the FHLB
581,436
200,000
13,224
2,138
4.59
%
2.16
%
Other long-term borrowings
180,715
183,762
6,790
3,031
7.58
%
3.33
%
Total interest-bearing liabilities
$
11,067,741
$
11,390,486
$
93,900
$
24,669
1.71
%
0.44
%
Net interest income on a tax-equivalent basis and excluding
valuations - non-GAAP
$
412,590
$
398,394
Interest rate spread
3.71
%
3.89
%
Net interest margin
4.42
%
4.08
%
(1)
On an adjusted tax-equivalent basis. The Corporation estimated the adjusted tax-equivalent yield by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory
tax rate of 37.5% and adding to it the cost of interest-bearing liabilities. The tax-equivalent adjustment recognizes the income tax savings when comparing taxable and tax-exempt assets.
Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread and net interest margin on a fully tax-equivalent basis.
Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons. The Corporation excludes changes in the fair value
of derivatives from interest income and interest expense because the changes in valuation do not affect interest received or paid. See "Non-GAAP Financial Measures and Reconciliations"
below.
(2)
Government obligations include debt issued by government-sponsored agencies.
(3)
Unrealized gains and losses on available-for-sale debt securities are excluded from the average volumes.
(4)
Average loan balances include the average of nonaccrual loans.
(5)
Interest income on loans includes $2.9 million and $3.0 million for the quarters ended June 30, 2023 and 2022, respectively, and $6.0 million and $5.6 million for the six-month periods
ended June 30, 2023 and 2022, respectively, of income from prepayment penalties and late fees related to the Corporation’s loan portfolio.
87
Part II
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023 Compared to 2022
2023 Compared to 2022
Variance due to:
Variance due to:
Volume
Rate
Total
Volume
Rate
Total
(In thousands)
Interest income on interest-earning assets:
Money market and other short-term investments
$
(6,709)
$
11,716
$
5,007
$
(15,795)
$
24,632
$
8,837
Government obligations
(48)
931
883
530
2,886
3,416
MBS
(1,710)
(4,007)
(5,717)
(2,523)
(3,218)
(5,741)
FHLB stock
244
285
529
511
152
663
Other investments
1
45
46
4
160
164
Total investments
(8,222)
8,970
748
(17,273)
24,612
7,339
Residential mortgage loans
(1,173)
464
(709)
(2,943)
1,341
(1,602)
Construction loans
415
720
1,135
899
1,388
2,287
C&I and commercial mortgage loans
1,790
23,000
24,790
2,551
46,120
48,671
Finance leases
2,893
411
3,304
5,660
541
6,201
Consumer loans
7,037
3,431
10,468
15,003
5,528
20,531
Total loans
10,962
28,026
38,988
21,170
54,918
76,088
Total interest income
$
2,740
$
36,996
$
39,736
$
3,897
$
79,530
$
83,427
Interest expense on interest-bearing liabilities:
Time deposits
$
1,234
$
10,595
$
11,829
$
558
$
17,632
$
18,190
Brokered CDs
2,502
855
3,357
2,927
1,540
4,467
Other interest-bearing deposits
(953)
19,677
18,724
(2,830)
36,316
33,486
Securities sold under agreements to repurchase
(1,132)
488
(644)
(2,733)
976
(1,757)
Advances from the FHLB
2,992
1,981
4,973
6,967
4,119
11,086
Other borrowings
(86)
1,797
1,711
(99)
3,858
3,759
Total interest expense
4,557
35,393
39,950
4,790
64,441
69,231
Change in net interest income
$
(1,817)
$
1,603
$
(214)
$
(893)
$
15,089
$
14,196
Portions of the Corporation’s interest-earning assets, mostly investments in obligations of some U.S. government agencies and U.S.
government-sponsored entities (“GSEs”), generate interest that is exempt from income tax, principally in Puerto Rico. Also, interest
and gains on sales of investments held by the Corporation’s international banking entities (“IBEs”) are tax-exempt under Puerto Rico
tax law (see Note 17 - Income Taxes, to the unaudited consolidated financial statements herein for additional information).
Management believes that the presentation of interest income on an adjusted tax-equivalent basis facilitates the comparison of all
interest data related to these assets. The Corporation estimated the tax equivalent yield by dividing the interest rate spread on exempt
assets by 1 less the Puerto Rico statutory tax rate (37.5%) and adding to it the average cost of interest-bearing liabilities. The
computation considers the interest expense disallowance required by Puerto Rico tax law.
Management believes that the presentation of net interest income, excluding the effects of the changes in the fair value of the
derivative instruments, provides additional information about the Corporation’s net interest income and facilitates comparability and
analysis from period to period. The changes in the fair value of the derivative instruments have no effect on interest due on interest-
bearing liabilities or interest earned on interest-earning assets.
88
The following table reconciles net interest income in accordance with GAAP to net interest income, excluding valuations, and net
interest income on an adjusted tax-equivalent basis for the indicated periods. The table also reconciles net interest spread and net
interest margin on a GAAP basis to these items excluding valuations, and on an adjusted tax-equivalent basis:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(Dollars in thousands)
Interest income - GAAP
$
252,204
$
208,625
$
494,600
$
406,479
Unrealized (gain) loss on derivative instruments
(3)
(9)
3
(24)
Interest income excluding valuations - non-GAAP
252,201
208,616
494,603
406,455
Tax-equivalent adjustment
5,540
9,389
11,887
16,608
Interest income on a tax-equivalent basis and excluding valuations - non-GAAP
$
257,741
$
218,005
$
506,490
$
423,063
Interest expense - GAAP
$
52,389
$
12,439
$
93,900
$
24,669
Net interest income - GAAP
$
199,815
$
196,186
$
400,700
$
381,810
Net interest income excluding valuations - non-GAAP
$
199,812
$
196,177
$
400,703
$
381,786
Net interest income on a tax-equivalent basis and excluding valuations - non-GAAP
$
205,352
$
205,566
$
412,590
$
398,394
Average Balances
Loans and leases
$
11,591,516
$
11,102,310
$
11,555,659
$
11,104,571
Total securities, other short-term investments and interest-bearing cash balances
7,333,989
8,568,022
7,283,450
8,607,337
Average Interest-Earning Assets
$
18,925,505
$
19,670,332
$
18,839,109
$
19,711,908
Average Interest-Bearing Liabilities
$
11,176,385
$
11,567,228
$
11,067,741
$
11,390,486
Average Yield/Rate
Average yield on interest-earning assets - GAAP
5.35%
4.25%
5.29%
4.16%
Average rate on interest-bearing liabilities - GAAP
1.88%
0.43%
1.71%
0.44%
Net interest spread - GAAP
3.47%
3.82%
3.58%
3.72%
Net interest margin - GAAP
4.23%
4.00%
4.29%
3.91%
Average yield on interest-earning assets excluding valuations - non-GAAP
5.35%
4.25%
5.29%
4.16%
Average rate on interest-bearing liabilities
1.88%
0.43%
1.71%
0.44%
Net interest spread excluding valuations - non-GAAP
3.47%
3.82%
3.58%
3.72%
Net interest margin excluding valuations - non-GAAP
4.23%
4.00%
4.29%
3.91%
Average yield on interest-earning assets on a tax-equivalent basis and excluding
valuations - non-GAAP
5.46%
4.45%
5.42%
4.33%
Average rate on interest-bearing liabilities
1.88%
0.43%
1.71%
0.44%
Net interest spread on a tax-equivalent basis and excluding valuations - non-GAAP
3.58%
4.01%
3.71%
3.89%
Net interest margin on a tax-equivalent basis and excluding valuations - non-GAAP
4.35%
4.19%
4.42%
4.08%
89
Net interest income amounted to $199.8 million for the quarter ended June 30, 2023, an increase of $3.6 million, when compared to
$196.2 million for same period in 2022. The $3.6 million increase in net interest income was primarily due to:
●
A $38.8 million increase in interest income on loans including:
-
A $25.5 million increase in interest income on commercial and construction loans, of which approximately $24. 4 million
was related to the effect of higher market interest rates on the upward repricing of variable-rate loans and on new loan
originations, and approximately $2.9 million was related to the $229.9 million increase in the average balance of this
portfolio (excluding Small Business Administration Paycheck Protection Program (“SBA PPP”) loans). These variances
were partially offset by a reduction in interest income from SBA PPP loans. The interest income recognized from SBA
PPP loans for the quarters ended June 30, 2023 and 2022, amounted to $0.1 million and $2.0 million, respectively.
As of June 30, 2023, the interest rate on approximately 54% of the Corporation’s commercial and construction loans was
tied to variable rates, with 29% based upon LIBOR or SOFR of 3 months or less, 13% based upon the Prime rate index,
and 12% based on other indexes. For the second quarter of 2023, the average one-month LIBOR increased 410 basis
points, the average three-month LIBOR increased 388 basis points, the average Prime rate increased 422 basis points,
and the average three-month SOFR increased 382 basis points, compared to the average rates for such indexes during the
second quarter of 2022.
-
A $13.8 million increase in interest income on consumer loans and finance leases, primarily driven by the $409.6 million
increase in the average balance of this portfolio, which increased interest income by approximately $10.1 million, and an
approximately $3.7 million increase in interest income associated with the positive effects of higher market interest rates
on new consumer loan originations and the repricing of the credit cards portfolio.
Partially offset by:
-
A $0.5 million decrease in interest income on residential mortgage loans, primarily related to an $82.9 million reduction
in the average balance of this portfolio, which resulted in an approximate decrease of $1.1 million in interest income,
partially offset by the positive effect of new loan originations at higher current market interest rates.
●
A
$4.8 million increase in interest income from interest-bearing cash balances and investment securities, including:
-
A $5.0 million increase in interest income from interest-bearing cash balances, which consisted primarily of cash
balances deposited at the FED, mainly due to the effect of higher market interest rates, partially offset by the impact of a
$913.0 million decrease in the average volume of interest-bearing cash balances.
-
A $1.3 million increase in interest income on Puerto Rico municipal bonds, mainly due to the upward repricing of
variable-rate bonds.
-
A $0.3 million increase in interest income on U.S. government and agencies debt securities, mainly driven by higher-
yielding securities purchased late in the second quarter of 2022.
-
A $0.5 million increase in dividends received from the FHLB during the second quarter of 2023.
Partially offset by:
-
A $2.4 million decrease in interest income on U.S. agencies MBS, of which $1.5 million was associated with a $324.1
million decrease in the average balance of this portfolio, and the remaining variance to a higher level of U.S. agencies’
MBS premium amortization expense associated with changes in anticipated prepayments.
90
Partially offset by:
●
A $33.9 million increase in interest expense on interest-bearing deposits, including:
-
An $18.7 million increase in interest expense on interest-bearing checking and saving accounts, driven by an increase of
approximately $20.5 million associated with higher interest rates paid in the second quarter of 2023 as a result of the
overall higher interest rate environment, partially offset by a decrease of approximately $1.8 million resulting from a
$1.2 billion decline in the average balance of these deposits. The average cost of interest-bearing checking and saving
accounts increased by 102 basis points to 1.18% in the second quarter of 2023 as compared to 0.16% in the same period
in 2022. Excluding public sector deposits, the average cost of interest-bearing checking and saving accounts for the
second quarter of 2023 was 0.67%, compared to 0.17% for the same period a year ago.
-
An $11.8 million increase in interest expense on time deposits, excluding brokered CDs, mainly associated with higher
rates paid in the second quarter of 2023 on new issuances and renewals also associated with the higher interest rate
environment. The average cost of time deposits in the second quarter of 2023, excluding brokered CDs, increased 180
basis points to 2.50% when compared to the same period in 2022 .
-
A $3.4 million increase in interest expense on brokered CDs, of which $2.5 million was associated with the increase of
$256.8 million in the average balance.
●
A
$6.0 million net increase in interest expense on borrowings, including:
-
A $5.0 million increase in interest expense on advances from the FHLB, of which $3.0 million was associated with an
increase of $334.2 million in the average balance to increase available cash as a precautionary measure in the first
quarter of 2023, and $2.0 million was associated with new FHLB advances at higher interest rates.
-
A
$1.7 million increase in interest expense on other long-term borrowings, driven by the upward repricing of junior
subordinated debentures tied to the increase in the three-month LIBOR index.
-
balance of $98.6 million, partially offset by a higher average cost of funds in the second quarter of 2023.
91
Net interest income amounted to $400.7 million for the six-month period ended June 30, 2023, an increase of $18.9 million, when
compared to $381.8 million for same period in 2022. The $18.9 million increase in net interest income was primarily due to:
●
A $75.7 million increase in interest income on loans including:
-
A $50.1 million increase in interest income on commercial and construction loans, of which approximately $49.5 million
was related to the effect of higher market interest rates in the upward repricing of variable-rate loans and in new loan
originations, and approximately $5.4 million was related to the $220.6 million increase in the average balance of this
portfolio (excluding SBA PPP loans). These variances were partially offset by a reduction in interest income from SBA
PPP loans. The interest income recognized from SBA PPP loans for the six-month periods ended June 30, 2023 and
2022, amounted to $0.3 million and $5.1 million, respectively.
As of June 30, 2023, the interest rate on approximately 54% of the Corporation’s commercial and construction loans was
tied to variable rates, with 29% based upon LIBOR or SOFR of 3 months or less, 13% based upon the Prime rate index,
and 12% based on other indexes. For the six-month period ended June 30, 2023, the average one-month LIBOR
increased 424 basis points, the average three-month LIBOR increased 414 basis points, the average three-month SOFR
increased 413 basis points, and the average Prime rate increased 431 basis points, compared to the average rates for such
indexes during the same period of the prior year.
-
A $26.8 million increase in interest income on consumer loans and finance leases, primarily driven by the $426.5 million
increase in the average balance of this portfolio, which increased interest income by approximately $20.6 million, and
the approximately $6.1 million increase in interest income associated with the positive effects of higher market interest
rates on new consumer loan originations and the repricing of the credit cards portfolio .
Partially offset by:
-
A
$1.2 million decrease in interest income on residential mortgage loans, primarily related to the $104.5 million
reduction in the average balance of this portfolio, which resulted in an approximate decrease of $2.7 million in interest
income, partially offset by the positive effect of new loan originations at higher current market interest rates, which
resulted in an approximate increase of $1.6 million in the first six months of 2023.
●
A $8.8 million increase in interest income from interest-bearing cash balances, which consisted primarily of cash balances
deposited at the FED, mainly due to the effect of higher market interest rates, partially offset by the impact of a $1.2 billion
decrease in the average balance of interest-bearing cash.
●
A
$3.6 million increase in interest income on investment securities, mainly driven by:
-
A $2.7 million increase in interest income on Puerto Rico municipal bonds, mainly due to the upward repricing of
variable-rate bonds, partially offset by the impact of a $12.3 million reduction in the average balance.
-
A $1.5 million increase in interest income on U.S. government and agencies debt securities, mainly driven by higher-
yielding securities purchased late in the second quarter of 2022.
-
A $0.8 million increase in dividend income from FHLB stock, mainly driven by a higher average balance tied with the
increase in FHLB advances taken as a precautionary measure in the first quarter of 2023.
Partially offset by:
-
A $1.4 million decrease in interest income on U.S. agencies MBS, of which $2.4 million was associated with a $251.4
million decrease in the average balance of this portfolio, partially offset by a $1.0 million increase associated with a
lower level of premium amortization expense due to changes in anticipated prepayments and the positive effects from
higher-yielding U.S. agencies MBS purchased in the second quarter of 2022.
92
Partially offset by:
●
A $56.1 million increase in interest expense on interest-bearing deposits, including:
-
A $33.5 million increase in interest expense on interest-bearing checking and saving accounts, driven by an increase of
approximately $35.7 million associated with higher interest rates paid in the first half of 2023 as a result of the overall
higher interest rate environment, partially offset by a decrease of approximately $2.2 million resulting from a decline of
approximately $888.5 million in the average balance of these deposits.
-
An $18.1 million increase in interest expense on time deposits, excluding brokered CDs, mainly associated with higher
rates paid in the first half of 2023 on new issuances and renewals also associated with the higher interest rate
environment. The average cost of time deposits in the first half of 2023, excluding brokered CDs, increased 147 basis
points to 2.20% when compared to the same period in 2022.
-
A $4.5 million increase in interest expense on brokered CDs, of which $2.9 million was associated with the increase of
$166.4 million in the average balance and $1.6 million was associated to the overall higher interest rate environment.
●
A $13.1 million net increase in interest expense on borrowings, including:
-
An $11.1 million increase in interest expense on advances from the FHLB, of which $7.0 million was associated with an
increase of $381.4 million in the average balance to increase available cash as a precautionary measure in the first
quarter of 2023, and $4.1 million was associated with new FHLB advances at higher interest rates.
-
A $3.8 million increase in interest expense on other long-term borrowings, driven by the upward repricing of junior
subordinated debentures tied to the increase in the three-month LIBOR index.
Partially offset by:
-
A $1.8 million decrease in interest expense on repurchase agreements, mainly driven by a reduction in the average
balance of $124.2 million, which resulted in an approximate reduction of $2.7 million in interest expense, partially offset
by a $0.9 million increase in interest expense associated with new short -term repurchase agreements entered into during
2023 at higher interest rates.
Net interest margin for the second quarter of 2023 increased to 4.23%, compared to 4.00% for the same period in 2022, and by 38
basis points to 4.29% for the first six months of 2023, compared to 3.91% for the same period of 2022. The net interest margin
increase primarily reflects the upward repricing of variable-rate commercial loans, the growth in higher yielding loans, primarily
consumer loans, and the change in asset mix, reflecting a higher proportion of higher-yielding assets in the 2023 periods. These factors
were partially offset by an increase in the average cost of interest-bearing liabilities.
93
Provision for Credit Losses
The provision for credit losses consists of provisions for credit losses on loans and finance leases, unfunded loan commitments, as
well as the debt securities portfolio. The principal changes in the provision for credit losses by main categories follow:
Provision for credit losses for loans and finance leases
The provision for credit losses for loans and finance leases was $20.8 million for the second quarter of 2023, compared to $12.7
million for the second quarter of 2022. The variances by major portfolio category were as follows:
●
Provision for credit losses for the commercial and construction loan portfolio was $10.2 million for the second quarter of
2023, compared to $0.3 million for the second quarter of 2022. The expense recognized during the second quarter of 2023
was mainly due to a deterioration in the forecasted CRE price index and the increase in size of this portfolio.
●
Provision for credit losses for the consumer loans and finance leases portfolio was $14.1 million for the second quarter of
2023, compared to $15.2 million for the second quarter of 2022. The decrease was primarily related to updates in
macroeconomic variables, such as the unemployment rate.
●
Provision for credit losses for the residential mortgage loan portfolio was a net benefit of $3.5 million for the second quarter
of 2023, compared to a net benefit of $2.8 million for the second quarter of 2022. The higher net benefit recorded for the
second quarter of 2023 was primarily related to updates in the projection of certain forecasted macroeconomic variables, such
as the Regional Home Price Index.
The provision for credit losses for loans and finance leases was an expense of $37.0 million for the first half of 2023, compared to a
net benefit of $4.3 million for the same period in 2022. The variances by major portfolio category were as follows:
●
Provision for credit losses for the commercial and construction loan portfolio was an expense of $10.7 million for the first
half of 2023, compared to a net benefit of $22.8 million for the same period of 2022. The expense recognized during the first
half of 2023 was mainly due to a deterioration in the forecasted CRE price index, a $6.2 million charge associated with a
nonaccrual commercial and industrial participated loan in the Florida region in the power generation industry and, to a lesser
extent, portfolio growth. Meanwhile, the net benefit recorded during the first six months of 2022 mainly reflects reductions in
qualitative reserves associated with reduced COVID-19 uncertainties, partially offset by reserve builds related to
uncertainties regarding the macroeconomic outlook.
●
Provision for credit losses for the residential mortgage loan portfolio was a net benefit of $3.4 million for the first half of
2023, compared to a net benefit of $7.7 million for the same period of 2022. The net benefit recorded for both periods was
primarily related to a continued favorable economic outlook in the projection of certain forecasted macroeconomic variables,
such as the Regional Home Price Index.
●
Provision for credit losses for the consumer loans and finance leases portfolio was $29.7 million for the first half of 2023,
compared to $26.2 million for the same period of 2022. The increase primarily reflects the increase in the size of the
consumer loan portfolios and the increase in historical charge-off levels in all major portfolio classes, partially offset by
updates in macroeconomic variables, such as the unemployment rate.
94
Provision for credit losses for unfunded loan commitments
The provision for credit losses for unfunded commercial and construction loan commitments and standby letters of credit was $0.7
million and $0.6 million for the second quarter and the first half of 2023, respectively, compared to $0.8 million and $0.7 million,
respectively, for the same periods in 2022.
Provision for credit losses for held-to-maturity and available-for-sale debt securities
The provision for credit losses for held-to-maturity debt securities was $0.8 million and $0.1 million for the second quarter and first
half of 2023, respectively, compared to a net benefit of $3.4 million and an expense of $0.3 million, respectively, for the same periods
of 2022. The increase in the provision recorded during the second quarter and the first half of 2023 was mostly driven by higher
exposure risk associated with the rising interest rate environment.
The provision for credit losses for available-for-sale debt securities was a net benefit of $16 thousand and $25 thousand for the
second quarter and first half of 2023, respectively, compared to a net benefit of $35 thousand and $0.4 million, respectively, for the
same periods in 2022.
95
Non-Interest Income
Non-interest income amounted to $36.3 million for the second quarter of 2023, compared to $30.9 million for the same period in
2022. Non-interest income for the second quarter of 2023 includes the $3.6 million gain recognized from a legal settlement, included
as part of other non-interest income , and the $1.6 million gain on the repurchase of $21.4 million in junior subordinated debentures,
included as part of gain on early extinguishment of debt. See “Non-GAAP Financial Measures and Reconciliations” in this MD&A for
further information. On a non-GAAP basis, excluding the effect of these Special Items, adjusted non-interest income increased by $0.2
million primarily due to:
●
A $1.0 million net increase in adjusted other non -interest income including: (i) a $0.8 million benefit recognized during
the second quarter of 2023 in relation to purchased income tax credits realized; (ii) $0.3 million in debit card incentives
collected during the second quarter of 2023; (iii) a $0.3 million increase related to higher unused loan commitment fees;
and (v) a $0.6 million decrease in net gains on fixed assets.
●
A $0.8 million increase in card and processing income mainly related to higher interchange income received during the
second quarter of 2023.
Partially offset by:
●
A $1.2 million decrease in revenues from mortgage banking activities, mainly driven by a decrease in the net realized gain
on sales of residential mortgage loans in the secondary market due to a lower volume of sales and lower margins. During
the second quarters of 2023 and 2022, net realized gains of $0.9 million and $2.2 million, respectively, were recognized as
a result of GNMA securitization transactions and whole loan sales to U.S. GSEs amounting to $51.8 million and $64.2
million, respectively.
●
A $0.2 million decrease in insurance commission income.
●
A$0.2 million decrease in service in charges and fees on deposits accounts .
Non-interest income for the six-month period ended June 30, 2023 amounted to $68.8 million, compared to $63.8 million for the
same period in 2022. On a non-GAAP basis, excluding the effect of the aforementioned Special Items, adjusted non-interest income
decreased by $0.2 million primarily due to:
●
A $3.6 million decrease in revenues from mortgage banking activities, mainly driven by a decrease in the net realized gain
on sales of residential mortgage loans in the secondary market due to a lower volume of sales and lower margins. During
the first six months of 2023 and 2022, net gains of $2.0 million and $5.7 million, respectively, were recognized as a result
of GNMA securitization transactions and whole loan sales to U.S. GSEs amounting to $89.2 million and $158.1 million,
respectively.
●
A $0.6 million decrease in insurance commission income, mainly due to lower contingent commissions recognized in
2023.
Partially offset by:
●
A $2.1 million increase in card and processing income mainly related to higher interchange income during the first six
months of 2023.
●
A $1.9 million net increase in adjusted other non-interest income including: (i) a $1.0 million increase related to higher
benefit recognized in relation to purchased income tax credits realized ; (ii) a $0.6 million increase related to higher unused
loan commitment fees; (iii) $0.3 million in debit card incentives collected during the second quarter of 2023; (iv) a $0.3
million increase in unrealized gains on marketable equity securities; and (v) a $0.2 million increase in fees and
commissions from insurance referrals; partially offset by a $0.7 million decrease in net gains on fixed assets.
96
Non-Interest Expenses
Non-interest expenses for the quarter ended June 30, 2023 amounted to $112.9 million, compared to $108.3 million for the same
period in 2022. The efficiency ratio for the second quarter of 2023 was 47.83%, compared to 47.69% for the second quarter of 2022.
On a non-GAAP basis, excluding the aforementioned Special Items, the adjusted efficiency ratio for the second quarter of 2023 was
48.91%. The $4.6 million increase in non-interest expenses was primarily due to:
●
A
$3.0 million increase in employees’ compensation and benefits expenses, mainly driven by annual salary merit
increases, higher stock-based compensation expense, and higher medical insurance premium costs.
●
A $1.0 million increase in other non-interest expenses, in part due to an increase in charges for legal and operational
reserves and an increase of $0.5 million in net periodic cost of pension plans.
●
A
$0.7 million increase in credit and debit card processing fees, mainly due to higher credit card assessment fees.
●
A
$0.6 million increase in the FDIC deposit insurance expense, driven by the two basis points increase on the initial base
deposit insurance assessment rate that came into effect during the first quarter of 2023.
●
A $0.4 million increase in taxes, other than income taxes, primarily related to higher license fees.
Partially offset by:
●
A
$0.5 million increase in net gains on OREO operations, mainly driven by an increase in net realized gains on sales of
OREO properties, primarily residential properties in the Puerto Rico region .
●
A
$0.4 million decrease in occupancy and equipment expenses, primarily reflecting reductions in depreciation charges,
energy costs, and maintenance charges.
●
A $0.4 million decrease in professional service fees, mainly due to a decrease in outsourced technology service fees.
Non-interest expenses for the first six months of 2023 amounted to $228.2 million, compared to $215.0 million for the same period
in 2022. The efficiency ratio for the first six months of 2023 was 48.60%, compared to 48.25% for the first six months of 2022. On a
non-GAAP basis, excluding the aforementioned Special Items, the adjusted efficiency ratio for the first six months of 2023 was
49.15%. The $13.2 million increase in non-interest expenses was primarily due to:
●
A
$9.9 million increase in employees’ compensation and benefits expenses, mainly driven by annual salary merit increases
and an increase in bonuses, medical insurance premium costs, stock-based compensation expense, and payroll taxes,
partially offset by higher deferral of loan origination costs.
●
A
$1.9 million increase in credit and debit card processing expenses.
●
A $1.5 million increase in other non-interest expenses, in part due to an increase in charges for legal and operational
reserves and an increase of $0.9 million in net periodic cost of pension plans .
●
A
$1.2 million increase in the FDIC deposit insurance expense, driven by the two basis points increase on the initial base
deposit insurance assessment rate that came into effect during the first quarter of 2023.
●
A
$0.9 million increase in professional service fees, driven by an increase in outsourced technology service fees.
●
A
$0.6 million increase in business promotion expenses, mainly resulting from higher advertising and marketing expenses
associated with the commemoration of the 75th anniversary of the Bank.
●
A $0.5 million increase in taxes, other than income taxes, primarily related to higher license fees, sales and use taxes, and
property taxes.
97
Partially offset by:
●
A
$1.8 million increase in net gains on OREO operations, mainly driven by an increase in net realized gains on sales of
OREO properties, primarily residential properties in the Puerto Rico region.
●
A
$1.6 million decrease in occupancy and equipment expenses, primarily reflecting reductions in depreciation charges,
rental expenses, and energy costs.
Income Taxes
For the second quarter of 2023, the Corporation recorded an income tax expense of $30.3 million, compared to $34.1 million for the
same period in 2022. For the first six months of 2023, the Corporation recorded an income tax expense of $62.2 million, compared to
$77.1 million for the same period in 2022. The decrease in income tax expense for the quarter and first six months of 2023, as
compared to the same periods a year ago, was mainly related to lower pre-tax income and a higher proportion of exempt to taxable
income resulting in a lower effective tax rate.
The Corporation’s estimated annual effective tax rate in the first six months of 2023, excluding entities from which a tax benefit
cannot be recognized and discrete items, was 30.1%, compared to 31.7% for the first six months of 2022. See Note 17 - Income Taxes,
to the unaudited consolidated financial statements herein for additional information.
As of June 30, 2023, the Corporation had a deferred tax asset of $153.9 million, net of a valuation allowance of $184.2 million
against the deferred tax asset, compared to a deferred tax asset of $155.6 million, net of a valuation allowance of $185.5 million, as of
December 31, 2022. Income tax paid for the six-month period ended June 30, 2023 amounted to $82.2 million compared to $15.3
million for the same period in 2022. The increase is related to the full utilization during 2022 of certain deferred tax assets related to
NOLs that were available for regular income tax which decreased the amount due for income taxes.
98
FINANCIAL CONDITION AND OPERATING ANALYSIS
Assets
The Corporation’s total assets were $19.2 billion as of June 30, 2023, an increase of $518.0 million from December 31, 2022. The
increase was primarily related to a $567.0 million increase in cash and cash equivalents, primarily interest-bearing deposits maintained
at the FED aligned with the overall increase in government and time deposits. In addition, as further discussed below, total loans
increased by $168.5 million. These variances were partially offset by a $186.3 million decrease in total investment securities.
Loans Receivable, including Loans Held for Sale
As of June 30, 2023, the Corporation’s total loan portfolio before the ACL amounted to $11.7 billion, an increase of $168.5 million
compared to December 31, 2022. In terms of geography, the growth consisted of increases of $220.7 million and $37.9 million in the
Puerto Rico and Virgin Islands regions, respectively, partially offset by a $90.1 million decrease in the Florida region. On a portfolio
basis, the growth consi sted of increases of $167.8 million in consumer loans, including a $141.9 million increase in auto loans and
leases, and $52.2 million in commercial and construction loans, partially offset by a $51.5 million decrease in residential mortgage
loans.
As of June 30, 2023, the loans in the Corpo ration’s held-for-investment portfolio was comprised of commercial and construction
loans (46%), residential real estate loans (24%), and consumer and finance leases (30%). Of the total gross loan portfolio held for
investment of $11.7 billion as of June 30, 2023, the Corporation had credit risk concentration of approximately 79% in the Puerto Rico
region, 17% in the United States region (mainly in the state of Florida), and 4% in the Virgin Islands region, as shown in the following
table:
As of June 30, 2023
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
Residential mortgage loans
$
2,179,539
$
172,771
$
441,480
$
2,793,790
Construction loans
65,427
3,792
94,779
163,998
Commercial mortgage loans
1,734,514
65,775
519,780
2,320,069
Commercial and Industrial loans
1,902,803
108,971
934,427
2,946,201
3,702,744
178,538
1,548,986
5,430,268
Consumer loans and finance leases
3,421,376
66,078
7,803
3,495,257
$
9,303,659
$
417,387
$
1,998,269
$
11,719,315
Loans held for sale
14,094
201
-
14,295
$
9,317,753
$
417,588
$
1,998,269
$
11,733,610
As of December 31, 2022
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
Residential mortgage loans
$
2,237,983
$
179,917
$
429,390
$
2,847,290
Construction loans
30,529
4,243
98,181
132,953
Commercial mortgage loans
1,768,890
65,314
524,647
2,358,851
Commercial and Industrial loans
1,791,235
68,874
1,026,154
2,886,263
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
$
9,084,707
$
379,767
$
2,088,351
$
11,552,825
Loans held for sale
12,306
-
-
12,306
$
9,097,013
$
379,767
$
2,088,351
$
11,565,131
99
Residential Real Estate Loans
As of June 30, 2023, the Corporation’s total residential mortgage loan portfolio, including loans held for sale, decreased by $51.5
million, as compared to the balance as of December 31, 2022. The decline in the residential mortgage loan portfolio reflects decreases
of $56.7 million in the Puerto Rico region and $6.9 million in the Virgin Islands region, partially offset by an increase of $12.1 million
in the Florida region. The decline was driven by repayments, foreclosures, and charge -offs, which more than offset the volume of new
loan originations kept on the balance sheet.
The majority of the Corporation’s outstanding balance of residential mortgage loans in the Puerto Rico and the Virgin Islands
regions as of June 30, 2023 consisted of fixed-rate loans that traditionally carry higher yields than residential mortgage loans in the
Florida region. In the Florida region, approximately 42% of the residential mortgage loan portfolio consisted of hybrid adjustable-rate
mortgages. In accordance with the Corporation’s underwriting guidelines, residential mortgage loans are primarily fully documented
loans, and the Corporation does not originate negative amortization loans.
Commercial and Construction Loans
As of June 30, 2023, the Corporation’s commercial and construction loan portfolio increased by $52.2 million, as compared to the
balance as of December 31, 2022.
In the Puerto Rico region, commercial and construction loans increased by $112.1 million, as compared to the balance as of
December 31, 2022. This increase was driven by the origination of several loans, including five commercial relationships, each in
excess of $10 million, that increased the portfolio amount by $66.0 million and a $60.3 million increase in the outstanding balance of
floor plan lines of credit.
In the Virgin Islands region, commercial and construction loans increased by $40.1 million, as compared to the balance as of
December 31, 2022. The increase was driven by the utilization of $47.0 million of a new $100.0 million line of credit facility extended
to a government public corporation.
In the Florida region, commercial and construction loans decreased by $100.0 million, as compared to the balance as of December
31, 2022. This decrease reflected $90.4 million in payoffs and paydowns of five commercial and industrial relationships in the Florida
region, each in excess of $10 million, including the aforementioned payoff of a $24.3 million commercial and industrial participated
loan in the leisure and hospitality industry.
As of June 30, 2023, the Corporation had $174.9 million outstanding in loans extended to the Puerto Rico government, its
municipalities, and public corporations, compared to $169.8 million as of December 31, 2022. See “Exposure to Puerto Rico
Government” below for additional information.
The Corporation also has credit exposure to USVI government entities. As of June 30, 2023, the Corporation had $78.9 million in
loans to USVI government public corporations, compared to $38.0 million as of December 31, 2022. The increase in loans to USVI
government public corporations was driven by the aforementioned $47.0 million line of credit utilization. See “Exposure to USVI
Government” below for additional information.
As of June 30, 2023, the Corporation’s total commercial mortgage loan exposure amounted to $2.3 billion, or 43% of the total
commercial loan portfolio. The commercial mortgage loan portfolio includes an exposure to office real estate amount ing to $428.3
million ($384.3 million and $44.0 million in the Puerto Rico and Florida regions, respectively), of which approximately $76.1 million
matures during the remainder of 2023 and 2024.
As of June 30, 2023, the Corporation’s total exposure to shared national credit (“SNC”) loans (including unused commitments)
amounted to $1.1 billion as of each of June 30, 2023 and December 31, 2022. As of June 30, 2023, approximately $206.2 million of
the SNC exposure is related to the portfolio in the Puerto Rico region and $847.4 million is related to the portfolio in the Florida
region.
Consumer Loans and Finance Leases
As of June 30, 2023, the Corporation’s consumer loan and finance lease portfolio increased by $167.8 million to $3.5 billion, as
compared to the portfolio balance of $3.3 billion as of December 31, 2022. This increase was mainly related to increases of $72.5
million and $69.4 million in the finance leases and auto loans portfolios, respectively. The growth in consumer loans was mainly
reflected in the Puerto Rico region across all portfolio classes.
100
Loan Production
First BanCorp. relies primarily on its retail network of branches to originate residential and consumer loans. The Corporation may
supplement its residential mortgage originations with wholesale servicing released mortgage loan purchases from mortgage bankers.
The Corporation manages its construction and commercial loan originations through centralized units and most of its originations
come from existing customers, as well as through referrals and direct solicitations. Auto loans and finance leases originations rely
primarily on relationships with auto dealers and dedicated sales professionals who serve selected locations to facilitate originations.
The following table provides a breakdown of First BanCorp.’s loan production, including purchases, refinancings, renewals and
draws from existing revolving and non-revolving commitments, for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Residential mortgage
$
115,251
$
126,532
$
192,553
$
249,045
Construction
47,006
46,880
82,505
66,866
Commercial mortgage
42,384
205,720
131,076
333,705
Commercial and Industrial
550,574
622,714
1,106,456
1,113,010
Consumer
454,005
482,252
889,323
908,719
$
1,209,220
$
1,484,098
$
2,401,913
$
2,671,345
During the quarter and six-month period ended June 30, 2023, total loan originations, including purchases, refinancings, and draws
from existing revolving and non-revolving commitments, amounted to approximately $1.2 billion and $2.4 billion, respectively,
compared to $1.5 billion and $2.7 billion, respectively, for the comparable periods in 2022.
Residential mortgage loan originations for the quarter and six-month period ended June 30, 2023 amounted to $115.3 million and
$192.6 million, respectively , compared to $126.5 million and $249.0 million, respectively, for the comparable periods in 2022. The
decrease of $11.2 million in the second quarter of 2023, as compared to the same period in 2022, reflects declines of $9.1 million in
the Puerto Rico region, $1.3 million in the Virgin Islands region, and $0.8 million in the Florida region. For the six-month period
ended June 30, 2023, the decrease of $56.4 million consisted of declines of $51.4 million in the Puerto Rico region, $3.3 million in the
Florida region, and $1.7 million in the Virgin Islands region. Approximately 58% of the $150.0 million residential mortgage loan
originations in the Puerto Rico region during the first half of 2023 consisted of conforming loans, compared to 59% of $201.4 million
for the first half of 2022. The decrease during the first half of 2023 is related to a lower volume of conforming loan originations and
refinancings, in part due to a higher interest rate environment.
Commercial and construction loan originations (excluding government loans) for the quarter and six-month period ended June 30,
2023 amounted to $563.6 million and $1.2 billion, respectively, compared to $860.9 million and $1.5 billion, respectively, for the
comparable periods in 2022. The decrease of $297.3 million in the second quarter of 2023, as compared to the same period in 2022,
reflects declines of $158.2 million in the Florida region, $124.8 million in the Puerto Rico region, and $14.3 million in the Virgin
Islands region. Commercial loan originations for the second quarter of 2022 include three commercial mortgage loans over $10
million originated in the Puerto Rico region totaling $53.8 million and two commercial mortgage loans over $10 million originated in
the Florida region totaling $37.3 million. For the first six months of 2023, the decrease of $258.2 million consisted of decreases of
$213.3 million in the Florida region, $31.1 million in the Puerto Rico region, and $13.8 million in the Virgin Islands region.
Government loan originations for the quarter and six-month period ended June 30, 2023 amounted to $76.3 million and $83.6
million, respectively, compared to $14.4 million and $18.9 million, respectively, for the comparable periods in 2022. Government loan
originations during the first half of 2023 were mainly related to the aforementioned line of credit utilization in the Virgin Islands
region, a loan to an agency of the Puerto Rico government for a low-income housing project, and the utilization of an arranged
overdraft line of credit of a government entity in the Virgin Islands region. On the other hand, government loan originations during the
first half of 2022 were mainly related to the renewal of a municipal loan in the Puerto Rico region and the utilization of the arranged
overdraft line of credit of a government entity in the Virgin Islands region.
101
Originations of auto loans (including finance leases) for the quarter and six-month period ended June 30, 2023 amounted to $250.3
million and $495.4 million, respectively, compared to $269.5 million and $530.8 million, respectively, for the comparable periods in
2022. The decrease in the second quarter of 2023, as compared to the same quarter of 2022, consisted of a $21.2 million decrease in
the Puerto Rico region, partially offset by a $2.0 million increase in the Virgin Islands region. The decrease in the first six months of
2023, as compared to the same period of the previous year, consisted of a $38.7 million decrease in the Puerto Rico region, partially
offset by a $3.3 million increase in the Virgin Islands region. Other consumer loan originations, other than credit cards, for the quarter
and six-month period ended June 30, 2023 amounted to $77.7 million and $149.6 million, respectively, compared to $87.2 million and
$142.8 million, respectively, for the comparable periods in 2022. The utilization activity on the outstanding credit card portfolio for
the quarter and six-month period ended June 30, 2023 amounted to $125.9 million and $244.3 million, respectively, compared to
$125.6 million and $235.0 million, respectively, for the comparable periods in 2022.
102
Investment Activities
As part of its liquidity, revenue diversification, and interest rate risk management strategies, First BanCorp. maintains a debt
securities portfolio classified as available for sale or held to maturity.
The Corporation’s total available-for -sale debt securities portfolio as of June 30, 2023 amounted to $5.4 billion, a $166.2 million
decrease from December 31, 2022 . The decrease was mainly driven by repayments of approximately $200.4 million of U.S. agencies
MBS and debentures, partially offset by a $32.4 million increase in fair value attributable to changes in market interest rates. As of
June 30, 2023, the Corporation had a net unrealized loss on available-for-sale debt securities of $765.8 million. This unrealized loss is
attributable to instruments on book s carrying a lower interest rate than market rates. The Corporation expects that this unrealized loss
will reverse over time and it is likely that it will not be required to sell the securities before their anticipated recovery. The Corporation
expects the portfolio will continue to decrease and the accumulated other comprehensive loss will decrease accordingly, excluding the
impact of market interest rates.
As of June 30, 2023, substantially all of the Corporation’s available-for-sale debt securities portfolio was invested in U.S.
government and agencies debentures and fixed-rate GSEs’ MBS. In addition, as of June 30, 2023, the Corporation held a bond issued
by the PRHFA, classified as available for sale, specifically a residential pass-through MBS in the aggregate amount of $3.3 million
(fair value - $2.1 million). This residential pass-through MBS issued by the PRHFA is collateralized by certain second mortgages
originated under a program launched by the Puerto Rico government in 2010 and had an unrealized loss of $1.1 million as of June 30,
2023, of which $0.3 million is due to credit deterioration. During 2021, the Corporation placed this instrument in nonaccrual status
based on the delinquency status of the underlying second mortgage loans collateral.
As of June 30, 2023, the Corporation’s held-to-maturity debt securities portfolio, before the ACL, decreased to $424.7 million,
compared to $437.5 million as of December 31, 2022. Held-to-maturity debt securities consisted of fixed-rate GSEs’ MBS and
financing arrangements with Puerto Rico municipalities issued in bond form, which the Corporation accounts for as securities, but
which were underwritten as loans with features that are typically found in commercial loans. Puerto Rico municipal bonds typically
are not issued in bearer form, are not registered with the SEC, and are not rated by external credit agencies. These bonds have
seniority to the payment of operating costs and expenses of the municipality and, in most cases, are supported by assigned property tax
revenues. As of June 30, 2023, approximately 74% of the Corporation’s municipal bonds consisted of obligations issued by four of the
largest municipalities in Puerto Rico. The municipalities are required by law to levy special property taxes in such amounts as are
required for the payment of all of their respective general obligation bonds and loans. Given the uncertainties as to the effects that the
fiscal position of the Puerto Rico central government, and the measures taken, or to be taken, by other government entities may have
on municipalities, and the higher interest rate environment, the Corporation cannot be certain whether future charges to the ACL on
these securities will be required. As of June 30, 2023, the ACL for held-to-maturity debt securities was $8.4 million, compared to $8.3
million as of December 31, 2022.
See “Risk Management – Exposure to Puerto Rico Government” below for information and details about the Corporation’s total
direct exposure to the Puerto Rico government, including municipalities , and “Credit Risk Management” below for the ACL of the
exposure to Puerto Rico municipal bonds.
103
June 30, 2023
December 31, 2022
(In thousands)
Money market investments
$
1,000
$
2,025
Available-for-sale debt securities, at fair value:
U.S. government and agencies obligations
2,515,097
2,492,228
Puerto Rico government obligations
2,111
2,201
MBS:
2,759,697
2,941,458
156,464
163,133
Other
-
500
Total available-for-sale debt securities, at fair value
5,433,369
5,599,520
Held-to-maturity debt securities, at amortized cost:
MBS:
155,690
166,739
102,912
105,088
Puerto Rico municipal bonds
166,124
165,710
(8,401)
(8,286)
Total held-to-maturity debt securities
416,325
429,251
Equity securities, including $34.7 million and $42.9 million of FHLB stock
as of June 30, 2023 and December 31, 2022, respectively
48,101
55,289
Total money market investments and investment securities
$
5,898,795
$
6,086,085
Carrying Amount
Weighted-Average Yield %
(Dollars in thousands)
U.S. government and agencies obligations:
Due within one year
$
246,038
0.44
Due after one year through five years
2,247,794
0.84
Due after five years through ten years
10,400
3.16
Due after ten years
10,865
5.38
2,515,097
0.83
Puerto Rico government and municipalities obligations:
Due within one year
1,205
5.90
Due after one year through five years
42,736
6.93
Due after five years through ten years
56,160
7.44
Due after ten years
68,134
8.14
168,235
7.59
MBS
3,174,763
1.70
ACL on held-to-maturity debt securities
(8,401)
-
Total debt securities
$
5,849,694
1.48
104
Net interest income in future periods could be affected by prepayments of MBS. Any acceleration in the prepayments of MBS
purchased at a premium
would lower yields on these securities, since the amortization of premiums paid upon acquisition would
accelerate. Conversely, acceleration of the prepayments of MBS would increase yields on securities purchased at a discount, since the
amortization of the discount would accelerate. These risks are directly linked to future period market interest rate fluctuations. Net
interest income in future periods might also be affected by the Corporation’s investment in callable securities. As of June 30, 2023, the
Corporation had approximately $1.9 billion in callable debt securities (U.S. agencies debt securities) with an average yield of 0.78%,
of which approximately 60% were purchased at a discount and 3% at a premium. See “Risk Management” below for further analysis
of the effects of changing interest rates on the Corporation’s net interest income and the Corporation’s interest rate risk management
strategies. Also, refer to Note 2 – Debt Securities to the unaudited consolidated financial statements herein for additional information
regarding the Corporation’s debt securities portfolio.
RISK MANAGEMENT
General
Risks are inherent in virtually all aspects of the Corporation’s business activities and operations. Consequently, effective risk
management is fundamental to the success of the Corporation. The primary goals of risk management are to ensure that the
Corporation’s risk-taking activities are consistent with the Corporation’s objectives and risk tolerance, and that there is an appropriate
balance between risks and rewards in order to maximize stockholder value.
The Corporation has in place a risk management framework to monitor, evaluate and manage the principal risks assumed in
conducting its activities. First BanCorp.’s business is subject to eleven broad categories of risks: (i) liquidity risk; (ii) interest rate risk;
(iii) market risk; (iv) credit risk; (v) operational risk; (vi) legal and regulatory risk; (vii) reputational risk; (viii) model risk; (ix) capital
risk; (x) strategic risk; and (xi) information technology risk. First BanCorp. has adopted policies and procedures designed to identify
and manage the risks to which the Corporation is exposed.
The Corporation’s risk management policies are described below, as well as in Part II, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” in the 2022 Annual Report on Form 10-K.
Liquidity Risk
Liquidity risk involves the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and
business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity
management involves forecasting funding requirements and maintaining sufficient capacity to meet liquidity needs and
accommodate fluctuations in asset and liability levels due to changes in the Corporation’s business operations or unanticipated
events.
The Corporation manages liquidity at two levels. The first is the liquidity of the parent company, or First Bancorp., which is the
holding company that owns the banking and non-banking subsidiaries. The second is the liquidity of the banking subsidiary,
FirstBank.
The Asset and Liability Committee of the Board is responsible for overseeing management’s establishment of the Corporation’s
liquidity policy, as well as approving operating and contingency procedures and monitoring liquidity on an ongoing basis. The
Management’s Investment and Asset Liability Committee (“MIALCO”), which reports to the Board’s Asset and Liability
Committee, uses measures of liquidity developed by management that involve the use of several assumptions to review the
Corporation’s liquidity position on a monthly basis. The MIALCO oversees liquidity management, interest rate risk, market risk,
and other related matters.
The MIALCO is composed of senior management officers, including the Chief Executive Officer, the Chief Financial Officer, the
Chief Risk Officer, the Corporate Strategic and Business Development Director, the Business Group Director, the Treasury and
Investments Risk Manager, the Financial Planning and Asset and Liability Management (“ALM”) Director, and the Treasurer. The
Treasury and Investments Division is responsible for planning and executing the Corporation’s funding activities and strategy,
monitoring liquidity availability on a daily basis, and reviewing liquidity measures on a weekly basis. The Treasury and Investments
Accounting and Operations area of the Corporate Controller’s Department is responsible for calculating the liquidity measurements
used by the Treasury and Investment Division to review the Corporation’s liquidity position on a weekly basis. The Financial
Planning and ALM Division is responsible for estimating the liquidity gap for longer periods.
105
To ensure adequate liquidity through the full range of potential operating environments and market conditions, the Corporation
conducts its liquidity management and business activities in a manner that is intended to preserve and enhance funding stability,
flexibility, and diversity. Key components of this operating strategy include a strong focus on the continued development of
customer-based funding, the maintenance of direct relationships with wholesale market funding providers, and the maintenance of
the ability to liquidate certain assets when, and if, requirements warrant.
The Corporation develops and maintains contingency funding plans. These plans evaluate the Corporation’s liquidity position
under various operating circumstances and are designed to help ensure that the Corporation will be able to operate through periods
of stress when access to normal sources of funds is constrained. The plans project funding requirements during a potential period of
stress, specify and quantify sources of liquidity, outline actions and procedures for effectively managing liquidity through a period of
stress, and define roles and responsibilities for the Corporation’s employees. Under the contingency funding plans, the Corporation
stresses the balance sheet and the liquidity position to critical levels that mimic difficulties in generating funds or even maintaining
the current funding position of the Corporation and the Bank and are designed to help ensure the ability of the Corporation and the
Bank to honor their respective commitments. The Corporation has established liquidity triggers that the MIALCO monitors in order
to maintain the ordinary funding of the banking business. The MIALCO has developed contingency funding plans for the following
three scenarios: a credit rating downgrade, an economic cycle downturn event, and a concentration event. The Board’s Asset and
Liability Committee reviews and approves these plans on an annual basis.
The Corporation manages its liquidity in a proactive manner and in an effort to maintain a sound liquidity position. It uses
multiple measures to monitor its liquidity position, including core liquidity, basic liquidity, and time-based reserve measures. Cash
and cash equivalents amounted to $1.0 billion as of June 30, 2023, compared to $480.5 million as of December 31, 2022. Free high-
quality liquid securities that could be liquidated or pledged within one day amounted to $2.2 billion as of June 30, 2023, compared
to $3.1 billion as of December 31, 2022. As of June 30, 2023, the estimated core liquidity reserve (which includes cash and free high
quality liquid assets such as U.S. government and GSEs obligations that could be liquidated or pledged within one day) was $3.2
billion, or 16.70% of total assets, compared to $3.5 billion, or 19.02% of total assets as of December 31, 2022. The basic liquidity
ratio (which adds available secured lines of credit to the core liquidity) was approximately 21.82% of total assets as of June 30,
2023, compared to 22.48% of total assets as of December 31, 2022.
As of June 30, 2023, in addition to the aforementioned $3.2 billion in cash and free high quality liquid assets, the Corporation had
$980.9 million available for credit with the FHLB based on the value of loan collateral pledged with the FHLB. The Corporation
also maintains borrowing capacity at the FED Discount Window. The Corporation does not consider borrowing capacity from the
FED Discount Window as a primary source of liquidity but had approximately $1.4 billion available for funding under the FED’s
Borrower-in-Custody (“BIC”) Program as of June 30, 2023 as an additional contingent source of liquidity. Total loans pledged to the
FED Discount Window amounted to $2.4 billion as of June 30, 2023. The Corporation also does not rely on uncommitted inter-bank
lines of credit (federal funds lines) to fund its operations and does not include them in the basic liquidity measure. On a combined
basis, as of June 30, 2023, the Corporation had $5.6 billion of total available liquidity, or 1.17x of uninsured deposits excluding
government deposits, to meet liquidity needs, while maintaining a strong capital position.
Liquidity at the Bank level is highly dependent on bank deposits, which fund 88.2% of the Bank’s assets (or 86.3% excluding
brokered CDs). In addition, as further discussed below, the Corporation maintains a diversified base of readily available wholesale
funding sources, including advances from the FHLB through pledged borrowing capacity, securities sold under agreements to
repurchase, and access to CDs through brokers. Funding through wholesale funding may continue to increase the overall cost of
funding for the Corporation and impact the net interest margin.
As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the
financial needs of its customers. These financial instruments may include loan commitments and standby letters of credit. These
commitments are subject to the same credit policies and approval processes used for on-balance sheet instruments. These
instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements
of financial condition. As of June 30, 2023, the Corporation’s commitments to extend credit amounted to approximately $2.0 billion.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in
the contract. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to
reevaluate the agreement prior to additional disbursements. There have been no significant or unexpected draws on existing
commitments. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any
time and without cause.
106
June 30, 2023
December 31, 2022
(In thousands)
Financial instruments whose contract amounts represent credit risk:
$
189,458
$
170,639
955,292
936,231
40,346
41,988
795,820
761,634
57,732
68,647
8,267
9,160
The Corporation engages in the ordinary course of business in other financial transactions that are not recorded on the balance
sheet, or may be recorded on the balance sheet in amounts that are different from the full contract or notional amount of the
transaction and, thus, affect the Corporation’s liquidity position. These transactions are designed to (i) meet the financial needs of
customers, (ii) manage the Corporation’s credit, market and liquidity risks, (iii) diversify the Corporation’s funding sources, and (iv)
optimize capital.
In addition to the aforementioned off-balance sheet debt obligations and unfunded commitments to extend credit, the Corporation
has obligations and commitments to make future payments under contracts, amounting to approximately $3.9 billion as of June 30,
2023. Our material cash requirements comprise primarily of contractual obligations to make future payments related to time
deposits, short-term borrowings, long-term debt, and operating lease obligations. We also have other contractual cash obligations
related to certain binding agreements we have entered into for services including outsourcing of technology services, security,
advertising and other services which are not material to our liquidity needs. We currently anticipate that our available funds, credit
facilities, and cash flows from operations will be sufficient to meet our operational cash needs for the foreseeable future.
Off-balance sheet transactions are continuously monitored to consider their potential impact to our liquidity position and changes
are applied to the balance between sources and uses of funds, as deemed appropriate, to maintain a sound liquidity position.
Sources of Funding
The Corporation utilizes different sources of funding to help ensure that adequate levels of liquidity are available when needed.
Diversification of funding sources is of great importance to protect the Corporation’s liquidity from market disruptions. The principal
sources of short-term funding are deposits, including brokered CDs. Additional funding is provided by short- and long-term securities
sold under agreements to repurchase and lines of credit with the FHLB. Consistent with its strategy, the Corporation has been seeking
to add core deposits.
The Asset and Liability Committee reviews credit availability on a regular basis. The Corporation also sells mortgage loans as a
supplementary source of funding and has obtained long-term funding in the past through the issuance of notes and long-term brokered
CDs. In addition, the Corporation also maintains as additional contingent sources borrowing capacity at the FED’s BIC Program and
is enrolled in the FED’s Bank Term Funding Program (“BTFP”).
While liquidity is an ongoing challenge for all financial institutions, management believes that the Corporation’s available
borrowing capacity and efforts to grow core deposits will be adequate to provide the necessary funding for the Corporation’s business
plans in the foreseeable future.
107
The Corporation’s principal sources of funding are discussed below:
Retail core deposits
– The Corporation’s deposit products include regular savings accounts, demand deposit accounts, money
market accounts, and retail CDs. As of June 30, 2023, the Corporation’s core deposits, which exclude government deposits and
brokered CDs, decreased by $247.0 million to $13.0 billion from $13.3 billion as of December 31, 2022. The decrease was primarily
related to saving and checking accounts primarily in the Puerto Rico and Florida regions. Notwithstanding, these reductions were
partially offset by an increase in time deposits, including a shift from non-interest bearing or low-interest bearing products to time
deposits, driven by higher rates offered. Over the last year, the FED’s policies to control the inflationary economic environment,
including repeated market interest rate increases, have resulted in excess liquidity gradually tapering off and impacting the
Corporation’s core deposit balances as customers continued to reallocate cash into higher yielding alternatives. Further shift may
continue to increase the overall cost of funding for the Corporation and impact the net interest margin. For the second quarter of
2023, the average balance per retail core deposit account was $26 thousand.
Government deposits
transactional accounts and $140.1 million in time deposits), compared to $2.3 billion as of December 31, 2022. The increase was
related to higher balances of interest-bearing transactional accounts. Government deposits are insured by the FDIC up to the
applicable limits and the uninsured portions is fully collateralized. Approximately 21% of the public sector deposits as of June 30,
2023 were from municipalities and municipal agencies in Puerto Rico and 79% were from public corporations, the central government
and agencies, and U.S. federal government agencies in Puerto Rico.
In addition, as of June 30, 2023, the Corporation had $524.5 million of government deposits in the Virgin Islands region (December
31, 2022 - $442.8 million) and $12.1 million in the Florida region (December 31, 2022 - $11.6 million).
The uninsured portions of government deposits were collateralized by securities and loans with an amortized cost of $3.7 billion
and $3.1 billion as of June 30, 2023 and December 31, 2022, respectively, and an estimated market value of $3.3 billion and $2.7
billion, respectively. In addition to securities and loans, as of June 30, 2023 and December 31, 2022, the Corporation used $225.0
million and $200.0 million, respectively, in letters of credit issued by the FHLB as pledges for public deposits in the Virgin Islands.
Estimate of Uninsured Deposits –
As of June 30, 2023 and December 31, 2022, the estimated amount of uninsured deposits totaled
$8.0 billion and $7.6 billion, respectively, generally representing the portion of deposits that exceed the FDIC insurance limit of
$250,000 and amounts in any other uninsured deposit account. The balances presented as of June 30, 2023 and December 31, 2022
include the uninsured portion of fully collateralized government deposits which amounted to $3.3 billion and $2.6 billion,
respectively. Excluding fully collateralized deposits, $4.7 billion of these deposits are uninsured, which represent 28.79% of total
deposits, excluding brokered CDs, as of June 30, 2023, compared to $4.9 billion, or 30.65% of total deposits, excluding brokered CDs,
as of December 31, 2022. The increase is mostly related to government deposits, which are fully collateralized as previously
mentioned.
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 June 30, 2023:
(In thousands)
3 months or
less
3 months to
6 months
6 months to
1 year
Over 1 year
Total
U.S. time deposits in excess of FDIC insurance
limits
$
254,158
$
108,835
$
225,068
$
357,972
$
946,033
Other uninsured time deposits
$
16,675
$
10,763
$
10,277
$
6,546
$
44,261
Brokered CDs
of December 31, 2022. The increase reflects the effect of new issuances amounting to $475.6 million with an all-in cost of 4.97%,
partially offset by approximately $217.8 million of maturing brokered CDs, with an all-in cost of 4.92%, that were paid off during the
first six months of 2023.
The average remaining term to maturity of the brokered CDs outstanding as of June 30, 2023 was approximately 1 year.
The increased use of brokered CDs was primar ily related to short-term funding in our Florida region, The future use of brokered
CDs will depend on multiple factors including excess liquidity at each of the regions, future cash needs and any tax implications.
Brokered CDs are insured by the FDIC up to regulatory limits and can be obtained faster than regular retail deposits.
108
Refer to “Net Interest Income” above for information about average balances of interest-bearing deposits and the average interest
rate paid on deposits, for the quarters and six-month periods ended June 30, 2023 and 2022.
Securities sold under agreements to repurchase -
The Corporation’s investment portfolio is funded in part with repurchase
agreements. The Corporation’s outstanding short-term securities sold under repurchase agreements amounted to $73.9 million as of
June 30, 2023, compared to $75.1 million as of December 31, 2022. In addition to these repurchase agreements, the Corporation has
been able to maintain access to credit by using cost-effective sources such as FHLB advances. See Note 9 – Securities Sold Under
Agreements to Repurchase (Repurchase Agreements) to the unaudited consolidated financial statements herein for further details
about repurchase agreements outstanding by counterparty and maturities.
Under the Corporation’s repurchase agreements, as is the case with derivative contracts, the Corporation is required to pledge cash
or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines
due to changes in interest rates, a liquidity crisis or any other factor, the Corporation is required to deposit additional cash or securities
to meet its margin requirements, thereby adversely affecting its liquidity. Given the quality of the collateral pledged, the Corporation
has not experienced margin calls from counterparties arising from credit-quality-related write-downs in valuations.
Advances from the FHLB –
The Bank is a member of the FHLB system and obtains advances to fund its operations under a
collateral agreement with the FHLB that requires the Bank to maintain qualifying mortgages and/or investments as collateral for
advances taken. As of June 30, 2023, the outstanding balance of fixed-rate FHLB advances was $500.0 million, compared to $675.0
million as of December 31, 2022. During the six-month period ended June 30, 2023, the Corporation added $300.0 million of long-
term FHLB advances at an average cost of 4.59%, and repaid its short-term FHLB advances. Of the $500.0 million in FHLB advances
as of June 30, 2023, $400.0 million were pledged with investment securities and $100.0 million were pledged with mortgage loans. As
of June 30, 2023, the Corporation had $980.9 million available for additional credit on FHLB lines of credit based on collateral
pledged at the FHLB of New York.
Trust Preferred Securities –
In 2004, FBP Statutory Trusts I and II, statutory trusts that are wholly-owned by the Corporation and
not consolidated in the Corporation’s financial statements, sold to institutional investors variable-rate TRuPs and used the proceeds of
these issuances, together with the proceeds of the purchases by the Corporation of variable rate common securities, to purchase junior
subordinated deferrable debentures. The subordinated debentures are presented in the Corporation’s consolidated statements of
financial condition as other long-term borrowings. Under the indentures, the Corporation has the right, from time to time, and without
causing an event of default, to defer payments of interest on the Junior Subordinated Deferrable Debentures by extending the interest
payment period at any time and from time to time during the term of the subordinated debentures for up to twenty consecutive
quarterly periods.
During the second quarter of 2023, the Corporation completed the repurchase of $21.4 million of TRuPs of the FBP Statutory Trust
I as part of a privately -negotiated transaction, resulting in a commensurate reduction in the related floating rate junior subordinated
debentures. The purchase price equated to 92.5% of the $21.5 million par value of the TRuPs. The 7.5% discount resulted in a gain of
approximately $1.6 million, which is reflected in the consolidated statements of income as “Gain on early extinguishment of debt.” As
of June 30, 2023 and December 31, 2022, the Corporation had junior subordinated debentures outstanding in the aggregate amount of
$161.7 million and $183.8 million, respectively, with maturity dates ranging from June 17, 2034 through September 20, 2034. As of
June 30, 2023, the Corporation was current on all interest payments due on its subordinated debt. See Note 11 – Other Long-Term
Borrowings and Note 7 – Non-Consolidated Variable Interest Entities (“VIEs”) and Servicing Assets to unaudited consolidated
financial statements herein for additional information.
Other Sources of Funds and Liquidity
maturing deposits and borrowings, and deposits withdrawals. In connection with its mortgage banking activities, the Corporation has
invested in technology and personnel to enhance the Corporation’s secondary mortgage market capabilities.
The enhanced capabilities improve the Corporation’s liquidity profile as they allow the Corporation to derive liquidity, if needed,
from the sale of mortgage loans in the secondary market. The U.S. (including Puerto Rico) secondary mortgage market is still highly-
liquid, in large part because of the sale of mortgages through guarantee programs of the FHA, VA, U.S. Department of Housing and
Urban Development (“HUD”), FNMA and FHLMC. During the first six months of 2023, loans pooled into GNMA MBS amounted to
approximately $66.4 million. Also, during the first six months of 2023, the Corporation sold approximately $22.8 million of
performing residential mortgage loans to FNMA.
The FED Discount Window is a cost-efficient contingent source of funding for the Corporation in highly-volatile market
conditions. As previously mentioned, although currently not in use, as of June 30, 2023, the Corporation had approximately $1.4
billion available for funding under the FED’s Discount Window based on collateral pledged at the FED.
109
The FED’s BTFP was established by the Federal Reserve Board in March 2023 as an additional source of funding for depository
institutions to borrow up to the par value of eligible collateral for terms of up to one year. The BTFP eliminates the need for
depository institutions to sell their debt securities in times of stress. Eligible collateral includes high-quality securities such as U.S.
Treasuries, U.S. agency securities, and U.S. agency MBS. Borrowers that are eligible for primary credit under the BIC Program, such
as FirstBank, are eligible to borrow under the BTFP. In addition, any eligible collateral pledged to the discount window can be used
under the BTFP. The rate for term advances will be the one -year overnight index swap rate plus 10 basis points and will be fixed for
the term of the advance on the day the advance is made. As previously mentioned, the Corporation enrolled in the BTFP during the
first quarter of 2023 to further diversify its contingency funding sources and has approximately $2.2 million available for funding as
of June 30, 2023.
Effect of Credit Ratings on Access to Liquidity
The Corporation’s liquidity is contingent upon its ability to obtain external sources of funding to finance its operations. The
Corporation’s current credit ratings and any downgrade in credit ratings can hinder the Corporation’s access to new forms of external
funding and/or cause external funding to be more expensive, which could, in turn, adversely affect its results of operations. Also,
changes in credit ratings may further affect the fair value of unsecured derivatives whose value takes into account the Corporation’s
own credit risk.
The Corporation does not have any outstanding debt or derivative agreements that would be affected by credit rating downgrades.
Furthermore, given the Corporation’s non-reliance on corporate debt or other instruments directly linked in terms of pricing or volume
to credit ratings, the liquidity of the Corporation has not been affected in any material way by downgrades. The Corporation’s ability
to access new non-deposit sources of funding, however, could be adversely affected by credit downgrades.
As of the date hereof, the Corporation’s credit as a long-term issuer is rated BB+ by S&P and BB by Fitch. As of the date hereof,
FirstBank’s credit ratings as a long-term issuer are BB+ by S&P, one notch below S&P’s minimum BBB- level required to be
considered investment grade; and BB by Fitch, two notches below Fitch’s minimum BBB- level required to be considered investment
grade. The Corporation’s credit ratings are dependent on a number of factors, both quantitative and qualitative, and are subject to
change at any time. The disclosure of credit ratings is not a recommendation to buy, sell or hold the Corporation’s securities. Each
rating should be evaluated independently of any other rating.
110
Cash Flows
Cash and cash equivalents were $1.0 billion as of June 30, 2023, an increase of $567.0 million when compared to December 31,
2022. The following discussion highlights the major activities and transactions that affected the Corporation’s cash flows during the
first six months of 2023 and 2022:
Cash Flows from Operating Activities
First BanCorp.’s operating assets and liabilities vary significantly in the normal course of business due to the amount and timing of
cash flows. Management believes that cash flows from operations, available cash balances, and the Corporation’s ability to generate
cash through short and long-term borrowings will be sufficient to fund the Corporation’s operating liquidity needs for the foreseeable
future.
For the first six months of 2023 and 2022, net cash provided by operating activities was $166.5 million and $219.6 million,
respectively. Net cash generated from operating activities was higher than reported net income largely as a result of adjustments for
non-cash items such as depreciation and amortization, deferred income tax expense and the provision for credit losses, as well as cash
generated from sales and repayments of loans held for sale.
Cash Flows from Investing Activities
The Corporation’s investing activities primarily relate to originating loans to be held for investment, as well as purchasing, selling,
and repaying available -for-sale and held-to-maturity debt securities. For the six-month period ended June 30, 2023, net cash provided
by investing activities was $25.0 million, primarily due to repayments of available -for-sale and held-to-maturity debt securities and
proceeds from sales of repossessed assets, partially offset by net disbursements on loans held for investment.
For the six-month period ended June 30, 2022, net cash used in investing activities was $557.7 million, primarily due to purchases
of U.S. agencies debentures and MBS, and net disbursements on loans held for investment, partially offset by repayments of U.S.
agencies MBS.
The Corporation’s financing activities primarily include the receipt of deposits and the issuance of brokered CDs, the issuance of
and payments on long-term debt, the issuance of equity instruments, return of capital, and activities related to its short-term funding.
For the six-month period ended June 30, 2023, net cash provided by financing activities was $375.5 million, mainly reflecting a
$675.9 million net increase in deposits, partially offset by a $196.0 million net decrease in borrowings and $104.4 million of capital
returned to stockholders.
For the first six months of 2022, net cash used in financing activities was $941.5 million, mainly reflecting a net decrease in
deposits, the repayment at maturity of a $100 million repurchase agreement, and $196.0 million of capital returned to stockholders.
111
Capital
As of June 30, 2023, the Corporation’s stockholders’ equity was $1.4 billion, an increase of $72.5 million from December 31, 2022.
The growth was driven by the earnings generated in the first half of 2023 and the $32.4 million increase in the fair value of available-
for-sale debt securities recorded as part of accumulated other comprehensive loss in the consolidated statements of financial condition,
as a result of changes in market interest rates, partially offset by common stock dividends declared in the first half of 2023 totaling
$50.7 million or $0.28 per common share, the repurchase of 3.6 million shares of common stock for a total purchase price of
approximately $50.0 million, and the $1.3 million impact to retained earnings related to the adoption of Accounting Standards Update
(“ASU”) 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”
during the first quarter of 2023. See Note 1 – Basis of Presentation and Significant Accounting Policies for additional information
related to the adoption of ASU 2022-02.
On July 24, 2023, the Corporation’s Board declared a quarterly cash dividend of $0.14 per common share payable on September 8,
2023 to shareholders of record at the close of business on August 24, 2023. The Corporation intends to continue to pay quarterly
dividends on common stock. The Corporation’s common stock dividends, including the declaration, timing and amount, remain
subject to the consideration and approval by the Corporation’s Board at the relevant times.
On July 24, 2023, the Corporation announced that its Board of Directors approved a new stock repurchase program, under which
the Corporation may repurchase up to $225 million of its outstanding common stock, which it expects to execute through the end of
the third quarter of 2024.
The Corporation expects to repurchase approximately $150 million in common stock during the second half of 2023, of which $75
million relates to the remaining amount of the $350 million stock repurchase program announced on April 27, 2022 that was resumed
in July 2023. The Corporation expects to fully utilize this remaining authorization during the third quarter of 2023. From July 1, 2023
through August 1, 2023, the Corporation repurchased approximately 1.5 million shares of common stock for a total purchase price of
$19.5 million.
Repurchases under the programs may be executed through open market purchases, accelerated share repurchases, and/or privately
negotiated transactions or plans, including under plans complying with Rule 10b5-1 under the Exchange Act. The Corporation’s stock
repurchase program s are subject to various factors, including the Corporation’s capital position, liquidity, financial performance and
alternative uses of capital, stock trading price, and general market conditions. The Corporation’s stock repurchase programs do not
obligate it to acquire any specific number of shares and do not have an expiration date. The stock repurchase programs may be
modified, suspended, or terminated at any time at the Corporation’s discretion. The Parent Company has no operations and depends on
dividends, distributions and other payments from its subsidiaries to fund dividend payments, stock repurchases, and to fund all
payments on its obligations, including debt obligations.
The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures generally used by
the financial community to evaluate capital adequacy. Tangible common equity is total common equity less goodwill and other
intangible assets. Tangible assets are total assets less the previously mentioned intangible assets. See “Non-GAAP Financial
Measures and Reconciliations” above for additional information.
112
measures, to total equity and total assets, respectively, as of June 30, 2023 and December 31, 2022, respectively:
June 30, 2023
December 31, 2022
(In thousands, except ratios and per share information)
Total equity - GAAP
$
1,397,999
$
1,325,540
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
(17)
(205)
Core deposit intangible
(17,075)
(20,900)
Insurance customer relationship intangible
-
(13)
Tangible common equity - non-GAAP
$
1,342,296
$
1,265,811
Total assets - GAAP
$
19,152,455
$
18,634,484
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
(17)
(205)
Core deposit intangible
(17,075)
(20,900)
Insurance customer relationship intangible
-
(13)
Tangible assets - non-GAAP
$
19,096,752
$
18,574,755
Common shares outstanding
179,757
182,709
Tangible common equity ratio - non-GAAP
7.03%
6.81%
Tangible book value per common share - non-GAAP
$
7.47
$
6.93
See Note 22 - Regulatory Matters, Commitments and Contingencies, to the unaudited consolidated financial statements herein for
the regulatory capital positions of the Corporation and FirstBank as of June 30, 2023 and December 31, 2022, respectively.
The Puerto Rico Banking Law of 1933, as amended (the “Puerto Rico Banking Law”) requires that a minimum of 10% of
FirstBank’s net income for the year be transferred to a legal surplus reserve until such surplus equals the total of paid-in-capital on
common and preferred stock. Amounts transferred to the legal surplus reserve from retained earnings are not available for distribution
to the Corporation without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The Puerto Rico Banking Law
provides that, when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over
receipts must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the legal
surplus reserve, as a reduction thereof. If the legal surplus reserve is not sufficient to cover such balance in whole or in part, the
outstanding amount must be charged against the capital account and the Bank cannot pay dividends until it can replenish the legal
surplus reserve to an amount of at least 20% of the original capital contributed. FirstBank’s legal surplus reserve, included as part of
retained earnings in the Corporation’s consolidated statements of financial condition, amounted to $168.5 million as of each of June
30, 2023 and December 31, 2022, respectively. There were no transfers to the legal surplus reserve during the first half of 2023.
113
First BanCorp manages its asset/liability position to limit the effects of changes in interest rates on net interest income and to
maintain stability of profitability under varying interest rate scenarios. The MIALCO oversees interest rate risk and monitors, among
other things, current and expected conditions in global financial markets, competition and prevailing rates in the local deposit market,
liquidity, loan originations pipeline, securities market values, recent or proposed changes to the investment portfolio, alternative
funding sources and related costs, hedging and the possible purchase of derivatives such as swaps and caps, and any tax or regulatory
issues which may be pertinent to these areas. The MIALCO approves funding decisions in light of the Corporation’s overall strategies
and objectives.
On at least a quarterly basis, the Corporation performs a consolidated net interest income simulation analysis to estimate the potential
change in future earnings from projected changes in interest rates. These simulations are carried out over a one-to-five-year time
horizon. The rate scenarios considered in these simulations reflect gradual upward or downward interest rate movements in the yield
curve, for gradual (ramp) parallel shifts in the yield curve of 200 basis points (“bps”) during a twelve-month period, or immediate
upward or downward changes in interest rate movements of 200 bps, for interest rate shock scenarios. The Corporation carries out the
simulations in two ways:
(1) Using a static balance sheet, as the Corporation had on the simulation date, and
(2) Using a dynamic balance sheet based on recent patterns and current strategies.
The balance sheet is divided into groups of assets and liabilities by maturity or re-pricing structure and their corresponding interest
yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future
funding sources and costs, the possible exercise of options, changes in prepayment rates, deposit decay and other factors, which may
be important in projecting net interest income.
The Corporation uses a simulation model to project future movements in the Corporation’s balance sheet and income statement. The
starting point of the projections corresponds to the actual values on the balance sheet on the date of the simulations. These simulations
are highly complex and are based on many assumptions that are intended to reflect the general behavior of the balance sheet
components over the modeled periods. It is unlikely that actual events will match these assumptions in all cases. For this reason, the
results of these forward-looking computations are only approximations of the sensitivity of net interest income to changes in market
interest rates. Several benchmark and market rate curves were used in the modeling process, primarily the LIBOR/Swap curve, SOFR
curve, Prime Rate, U.S. Treasury yield curve, FHLB rates, brokered CDs rates, repurchase agreements rates, and the mortgage
commitment rate of 30 years.
As of June 30, 2023, the Corporation forecasted the 12-month net interest income assuming June 30, 2023 interest rate curves remain
constant. Then, net interest income was estimated under rising and falling rates scenarios. For the rising rate scenario, a gradual (ramp)
parallel upward shift of the yield curve is assumed during the first twelve months (the “+200 ramp” scenario). Conversely, for the
falling rate scenario, a gradual (ramp) parallel downward shift of the yield curve is assumed during the first twelve months (the “-200
ramp” scenario).
The SOFR curve for June 30, 2023, as compared to December 31, 2022, reflects an increase of 60 bps on average in the short-term
sector of the curve, or between one to twelve months; 37 bps in the medium-term sector of the curve, or between 2 to 5 years; and 5
bps in the long-term sector of the curve, or over 5-year maturities. A similar increase in market rates changes was observed in the
Treasury (CMT) yield curve with an increase of 88 bps in the short-term sector, 29 bps in the medium-term sector, and 6 bps in the
long-term sector.
114
these exclude non-cash changes in the fair value of derivatives:
Net Interest Income Risk
(% Change Projected for the next 12 months)
Static Simulation
Growing Balance Sheet
June 30, 2023
December 31, 2022
June 30, 2023
December 31, 2022
Gradual Change in Interest Rates:
0.94
%
0.96
%
1.01
%
1.37
%
-1.38
%
-1.61
%
-1.42
%
-2.03
%
Immediate Change in Interest Rates:
3.76
%
2.35
%
3.18
%
2.56
%
-5.43
%
-4.71
%
-4.77
%
-5.02
%
asset composition while maintaining a sound liquidity position. See “Risk Management – Liquidity Risk” above for liquidity ratios.
As of June 30, 2023 and December 31, 2022, the simulations showed that the Corporation continues to have a slight asset-sensitive
position.
increase by 1.01% in the rising rate scenario, when compared against the base simulation. When compared with December 31, 2022,
the net interest income sensitivity for the +200 bps ramp scenario decreased by 36 bps. The reduction in sensitivity was mainly driven
by the migration from non-interest-bearing and other low-cost deposits to higher cost deposits, such as time deposits, as well as
increases in government deposits which have a higher beta, partially offsetting the growth in the loan portfolio at higher yields, the
repricing of variable rate loans and overall higher yields in other interest earning assets such as cash balances held at the FED.
decrease by 1.42%, when compared against the base simulation. When compared to December 31, 2022. the net interest income
sensitivity decreases for the -200-bps ramp scenario by approximately 61 bps in the non-static balance sheet driven by a higher deposit
beta assumed in the June 30, 2023 simulation for non-maturity deposits, and the aforementioned migration to higher cost deposits.
movements of 200 bps, for interest rate shock scenarios. As of June 30, 2023 and December 31, 2022, the simulations showed that the
Corporation continues to have an asset-sensitive position.
Credit Risk Management
First BanCorp. is subject to credit risk mainly with respect to its portfolio of loans receivable and off-balance-sheet instruments,
principally loan commitments. Loans receivable represents loans that First BanCorp. holds for investment and, therefore, First
BanCorp. is at risk for the term of the loan. Loan commitments represent commitments to extend credit, subject to specific conditions,
for specific amounts and maturities. These commitments may expose the Corporation to credit risk and are subject to the same review
and approval process as for loans made by the Bank. See “Liquidity Risk” above for further details. The Corporation manages its
credit risk through its credit policy, underwriting, monitoring of loan concentrations and related credit quality, counterparty credit risk,
economic and market conditions, and legislative or regulatory mandates. The Corporation also performs independent loan review and
quality control procedures, statistical analysis, comprehensive financial analysis, established management committees, and employs
proactive collection and loss mitigation efforts. Furthermore, personnel performing structured loan workout functions are responsible
for mitigating defaults and minimizing losses upon default within each region and for each business segment. In the case of the
commercial and industrial, commercial mortgage and construction loan portfolios, the Special Asset Group (“SAG”) focuses on
strategies for the accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of
OREO. In addition to the management of the resolution process for problem loans, the SAG oversees collection efforts for all loans to
prevent migration to the nonaccrual and/or adversely classified status. The SAG utilizes relationship officers, collection specialists and
attorneys.
115
The Corporation may also have risk of default in the securities portfolio. The securities held by the Corporation are principally
fixed-rate U.S. agencies MBS and U.S. Treasury and agencies securities. Thus, a substantial portion of these instruments is backed by
mortgages, a guarantee of a U.S. GSE or the full faith and credit of the U.S. government.
Management, consisting of the Corporation’s Commercial Credit Risk Officer, Retail Credit Risk Officer, Chief Credit Officer, and
other senior executives, has the primary responsibility for setting strategies to achieve the Corporation’s credit risk goals and
objectives. Management has documented these goals and objectives in the Corporation’s Credit Policy.
116
Allowance for Credit Losses and Non-performing Assets
Allowance for Credit Losses for Loans and Finance Leases
The ACL for loans and finance leases represents the estimate of the level of reserves appropriate to absorb expected credit losses
over the estimated life of the loans. The amount of the allowance is determined using relevant available information, from internal and
external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience
is a significant input for the estimation of expected credit losses, as well as adjustments to historical loss information made for
differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level,
or term. Additionally, the Corporation’s assessment involves evaluating key factors, which include credit and macroeconomic
indicators, such as changes in unemployment rates, property values, and other relevant factors to account for current and forecasted
market conditions that are likely to cause estimated credit losses over the life of the loans to differ from historical credit losses. Such
factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of
severe stress. The process includes judgments and quantitative elements that may be subject to significant change. Further, the
Corporation periodically considers the need for qualitative reserves to the ACL. Qualitative adjustments may be related to and include,
but are not limited to, factors such as the following: (i) management’s assessment of economic forecasts used in the model and how
those forecasts align with management’s overall evaluation of current and expected economic conditions; (ii) organization specific
risks such as credit concentrations, collateral specific risks, nature and size of the portfolio and external factors that may ultimately
impact credit quality, and (iii) other limitations associated with factors such as changes in underwriting and loan resolution strategies,
among others. The ACL for loans and finance leases is reviewed at least on a quarterly basis as part of the Corporation’s continued
evaluation of its asset quality.
The Corporation applies probability weights to the baseline and alternative downside economic scenarios to estimate the ACL with
the baseline scenario carrying the highest weight. During the second quarter of 2023, the Corporation applied the baseline scenario for
the commercial mortgage and construction loan portfolios as deterioration in the CRE price index in these portfolios is expected at a
lower extent than projected in the alternative downside scenario, particularly in the Puerto Rico region. The economic scenarios used
in the ACL determination contained assumptions related to economic uncertainties associated with geopolitical instability, the CRE
price index, high inflation levels, and the expected path of interest rate increases by the FED. As of June 30, 2023, the Corporation’s
ACL model considered the following assumptions for key economic variables in the probability-weighted economic scenarios:
●
Average CRE price index at the national level is forecasted to contract by 4.08% for the remainder of 2023 and 6.24% for
2024.
●
Average Regiona l Home Price Index forecasts in Puerto Rico (purchase only prices) shows a growth of 8.58% and 6.36%, for
the remainder of 2023 and 2024, respectively, when compared to the previous quarter forecast. For the Florida region,
average Home Price Index forecasts shows a growth of 3.74% and 2.24% for the remainder of 2023 and 2024, respectively,
when compared to the previous quarter forecast.
●
Average regional unemployment in Puerto Rico of 6.84% for the remainder of 2023 and 8.12% for 2024. For the Florida
region and the U.S. mainland, average unemployment rate of 3.60% and 4.13%, respectively, for the remainder of 2023, and
4.37% and 4.79%, respectively, for 2024.
●
Average annualized change in real gross domestic product (“GDP”) in the U.S. mainland of 1.07% for the remainder of 2023
and 1.18% for 2024.
It is difficult to estimate how potential changes in one factor or input might affect the overall ACL because management considers a
wide variety of factors and inputs in estimating the ACL. Changes in the factors and inputs considered may not occur at the same rate
and may not be consistent across all geographies or product types, and changes in factors and inputs may be directionally inconsistent,
such that improvement in one factor or input may offset deterioration in others. However, to demonstrate the sensitivity of credit loss
estimates to macroeconomic forecasts as of June 30, 2023, management compared the modeled estimates under the probability-
weighted economic scenarios against a more adverse scenario. Under this more adverse scenario, as an example, average
unemployment rate for the Puerto Rico region increases to 7.64% for the remainder of 2023, compared to 6.84% for the same period
on the probability-weighted economic scenario projections.
117
To demonstrate the sensitivity to key economic parameters used in the calculation of the ACL at June 30, 2023, management
calculated the difference between the quantitative ACL and this more adverse scenario. Excluding consideration of qualitative
adjustments, this sensitivity analysis would result in a hypothetical increase in the ACL of approximately $53 million at June 30,
2023. This analysis relates only to the modeled credit loss estimates and is not intended to estimate changes in the overall ACL as it
does not reflect any potential changes in other adjustments to the qualitative calculation, which would also be influenced by the
judgment management applies to the modeled lifetime loss estimates to reflect the uncertainty and imprecision of these estimates
based on current circumstances and conditions. Recognizing that forecasts of macroeconomic conditions are inherently uncertain,
particularly in light of recent economic conditions and challenges, which continue to evolve, management believes that its process to
consider the available information and associated risks and uncertainties is appropriately governed and that its estimates of expected
credit losses were reasonable and appropriate for the period ended June 30, 2023.
As of June 30, 2023, the ACL for loans and finance leases was $267.1 million, an increase of $6.6 million, from $260.5 million as
of December 31, 2022. The ACL for commercial and construction loans increased by $5.0 million, mainly due to a deterioration in the
forecasted CRE price index to account for an increased uncertainty in the CRE market at a national level that could potentially impact
the markets served by the Corporation coupled with the growth in the commercial and construction loan portfolios. The ACL for
consumer loans increased by $3.9 million, primarily reflecting the effect of the increase in the size of the consumer loan portfolios and
historical charge-off levels,
partially offset by updated macroeconomic variables, such as the unemployment rate, which are now
forecasted to deteriorate at a slower pace than previously expected. The ACL for residential mortgage loans decreased by $2.3 million,
mainly driven by a more favorable economic outlook in the projection of certain forecasted macroeconomic variables, such as the
Regional Home Price Index, partially offset by a $2.1 million cumulative increase in the ACL due to the adoption of ASU 2022-02,
for which the Corporation elected to discontinue the use of a discounted cash flow methodology for restructured accruing loans. See
Note 1
– Basis of Presentation and Significant Accounting Policies to the unaudited consolidated financial statements herein for
additional information related to the adoption of ASU 2022-02 during 2023.
The ratio of the ACL for loans and finance leases to total loans held for investment increased to 2.28% as of June 30, 2023,
compared to 2.25% as of December 31, 2022. An explanation for the change for each portfolio follows:
●
The ACL to total loans ratio for the residential mortgage portfolio decreased from 2.20% as of December 31, 2022 to
2.17% as of June 30, 2023, primarily reflecting a more favorable economic outlook in the projection of certain forecasted
macroeconomic variables, such as the Regional Home Price Index, partially offset by the aforementioned $2.1 million
cumulative increase in the ACL due to the adoption of ASU 2022-02 during the first quarter of 2023.
●
The ACL to total loans ratio for the construction loan portfolio increased from 1.74% as of December 31, 2022 to 2.93%
as of June 30, 2023 mainly due to the aforementioned deterioration in the forecasted CRE price index.
●
The ACL to total loans ratio for the commercial mortgage portfolio increased from 1.49% as of December 31, 2022 to
1.83% as of June 30, 2023 mainly due to the aforementioned deterioration in the forecasted CRE price index.
●
The ACL to total loans ratio for the commercial and industrial portfolio decreased from 1.14% as of December 31, 2022 to
0.95% as of June 30, 2023, mainly due to reserve decreases associated with the receipt of updated financial information of
certain borrowers and the repayment of a $24.3 million adversely classified commercial and industrial participated loan in
the Florida region, partially offset by higher exposure risk associated with the rising interest rate environment.
●
The ACL to total loans ratio for the consumer loan portfolio decreased from 3.83% as of December 31, 2022 to 3.76% as
of June 30, 2023 mainly due to updates in macroeconomic variables, such as the unemployment rate.
The ratio of the total ACL for loans and finance leases to nonaccrual loans held for investment was 325.60% as of June 30, 2023,
compared to 289.61% as of December 31, 2022.
Substantially all of the Corporation’s loan portfolio is located within the boundaries of the U.S. economy. Whether the collateral is
located in Puerto Rico, the U.S. and British Virgin Islands, or the U.S. mainland (mainly in the state of Florida), the performance of
the Corporation’s loan portfolio and the value of the collateral supporting the transactions are dependent upon the performance of and
conditions within each specific area’s real estate market. The Corporation believes it sets adequate loan-to-value ratios following its
regulatory and credit policy standards.
118
As shown in the following tables, the ACL for loans and finance leases amounted to $267.1 million as of June 30, 2023, or 2.28%
of total loans, compared with $260.5 million, or 2.25% of total loans, as of December 31, 2022. See “Results of Operations - Provision
for Credit Losses” above for additional information.
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(Dollars in thousands)
ACL for loans and finance leases, beginning of year
$
265,567
$
245,447
$
260,464
$
269,030
Impact of adoption of ASU 2022-02
-
-
2,116
-
Provision for credit losses - (benefit) expense:
Residential mortgage
(3,500)
(2,797)
(3,427)
(7,668)
Construction
1,202
151
2,062
(2,063)
Commercial mortgage
5,999
1,265
7,245
(21,375)
Commercial and industrial
2,997
(1,102)
1,347
653
Consumer and finance leases
14,072
15,148
29,799
26,129
Total provision for credit losses - expense (benefit)
20,770
12,665
37,026
(4,324)
Charge-offs:
Residential mortgage
(1,146)
(2,079)
(2,129)
(4,607)
Construction
(38)
(16)
(38)
(60)
Commercial mortgage
(88)
(2)
(106)
(39)
Commercial and industrial
(6,350)
(68)
(6,468)
(358)
Consumer and finance leases
(16,462)
(10,427)
(33,260)
(20,243)
Total charge offs
(24,084)
(12,592)
(42,001)
(25,307)
Recoveries:
Residential mortgage
757
1,287
1,254
2,669
Construction
409
43
472
95
Commercial mortgage
56
1,218
224
1,262
Commercial and industrial
132
589
222
1,624
Consumer and finance leases
3,451
3,495
7,281
7,103
Total recoveries
4,805
6,632
9,453
12,753
Net charge-offs
(19,279)
(5,960)
(32,548)
(12,554)
ACL for loans and finance leases, end of period
$
267,058
$
252,152
$
267,058
$
252,152
ACL for loans and finance leases to period-end total loans held for investment
2.28%
2.25%
2.28%
2.25%
Net charge-offs (annualized) to average loans outstanding during the period
0.67%
0.21%
0.56%
0.23%
Provision for credit losses - expense (benefit) for loans and finance leases to net charge-
offs during the period
1.08x
2.13x
1.14x
-0.34x
119
loan category, and the percentage of loan balances in each category to the total as such loans as of the indicated dates:
As of June 30, 2023
Residential
Mortgage
Loans
Commercial
Mortgage
Loans
C&I Loans
Consumer and
Finance
Leases
Construction
Loans
(Dollars in thousands)
Total
Total loans held for investment:
$
2,793,790
$
163,998
$
2,320,069
$
2,946,201
$
3,495,257
$
11,719,315
24
%
1
%
20
%
25
%
30
%
100
%
60,514
4,804
42,427
28,014
131,299
267,058
2.17
%
2.93
%
1.83
%
0.95
%
3.76
%
2.28
%
As of December 31, 2022
Residential
Mortgage
Loans
Commercial
Mortgage
Loans
C&I Loans
Consumer and
Finance Leases
Construction
Loans
(Dollars in thousands)
Total
Total loans held for investment:
$
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 June 30, 2023, the ACL for off-balance sheet credit
exposures increased by $0.6 million to $4.9 million, when compared to December 31, 2022, driven by the deterioration in the
forecasted CRE price index and its effect in construction unfunded loan commitments.
Allowance for Credit Losses for Held-to-Maturity Debt Securities
As of June 30, 2023, the ACL for held-to-maturity securities portfolio was entirely related to financing arrangements with Puerto
Rico municipalities issued in bond form, which the Corporation accounts for as securities, but which were underwritten as loans with
features that are typically found in commercial loans. As of June 30, 2023, the ACL for held-to-maturity debt securities was $8.4
million, compared to $8.3 million as of December 31, 2022.
Allowance for Credit Losses for Available -for-Sale Debt Securities
issued by the PRHFA, was $0.4 million as of June 30, 2023, compared to $0.5 million as of December 31, 2022.
120
Nonaccrual Loans and Non-performing Assets
Total non-performing assets consist of nonaccrual loans (generally loans held for investment or loans held for sale in which the
recognition of interest income was discontinued when the loan became 90 days past due or earlier if the full and timely collection of
interest or principal is uncertain), foreclosed real estate and other repossessed properties, and non-performing investment securities, if
any. When a loan is placed in nonaccrual status, any interest previously recognized and not collected is reversed and charged against
interest income. Cash payments received are recognized when collected in accordance with the contractual terms of the loans. The
principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized on a
cash basis (when collected). However, when management believes that the ultimate collectability of principal is in doubt, the interest
portion is applied to the outstanding principal. The risk exposure of this portfolio is diversified as to individual borrowers and
industries, among other factors. In addition, a large portion is secured with real estate collateral.
Nonaccrual Loans Policy
Residential Real Estate Loans
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 consists of a residential pass-through MBS issued by the PRHFA placed in non-performing status in the second
quarter of 2021 based on the delinquency status of the underlying second mortgage loans.
121
Loans Past-Due 90 Days and Still Accruing
These are accruing loans that are contractually delinquent 90 days or more. These past-due loans are either current as to interest but
delinquent as to the payment of principal (i.e., well secured and in proc ess of collection) or are insured or guaranteed under applicable
FHA, VA, or other government-guaranteed programs for residential mortgage loans. Furthermore, as required by instructions in
regulatory reports, loans past due 90 days and still accruing include loans previously pooled into GNMA securities for which the
Corporation has the option but not the obligation to repurchase loans that meet GNMA’s specified delinquency criteria (e.g.,
borrowers fail to make any payment for three consecutive months). For accounting purposes, these GNMA loans subject to the
repurchase option are required to be reflected in the financial statements with an offsetting liability. In addition, loans past due 90 days
and still accruing include PCD loans, as mentioned above, and credit cards that continue accruing interest until charged-off at 180
days.
The following table presents non-performing assets as of the indicated dates:
June 30, 2023
December 31, 2022
(Dollars in thousands)
Nonaccrual loans held for investment:
Residential mortgage
$
33,252
$
42,772
Construction
1,677
2,208
Commercial mortgage
21,536
22,319
Commercial and Industrial
9,194
7,830
Consumer and finance leases
16,362
14,806
Total nonaccrual loans held for investment
82,021
89,935
OREO
31,571
31,641
Other repossessed property
5,404
5,380
Other assets
2,111
2,202
Total non-performing assets
$
121,107
$
129,158
Past due loans 90 days and still accruing
(2) (3) (4)
$
63,211
$
80,517
Non-performing assets to total assets
0.63
%
0.69
%
Nonaccrual loans held for investment to total loans held for investment
0.70
%
0.78
%
ACL for loans and finance leases
$
267,058
$
260,464
ACL for loans and finance leases to total nonaccrual loans held for investment
325.60
%
289.61
%
ACL for loans and finance leases to total nonaccrual loans held for investment, excluding residential real estate loans
547.60
%
552.26
%
(1)
Residential pass-through MBS issued by the PRHFA held as part of the available-for-sale debt securities portfolio.
(2)
Includes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans as “units of
account” both at the time of adoption of CECL on January 1, 2020 and on an ongoing basis for credit loss measurement. These loans will continue to be excluded from nonaccrual loan
statistics as long as the Corporation can reasonably estimate the timing and amount of cash flows expected to be collected on the loan pools. The portion of such loans contractually past due
90 days or more amounted to $9.5 million and $12.0 million as of June 30, 2023 and December 31, 2022, respectively.
(3)
Includes FHA/VA government-guaranteed residential mortgage as loans past-due 90 days and still accruing as opposed to nonaccrual loans. The Corporation continues accruing interest on
these loans until they have passed the 15 months delinquency mark, taking into consideration the FHA interest curtailment process. These balances include $19.9 million and $28.2 million
of FHA government guaranteed residential mortgage loans that were over 15 months delinquent as of June 30, 2023 and December 31, 2022, respectively.
(4)
Includes rebooked loans, which were previously pooled into GNMA securities, amounting to $6.5 million and $10.3 million as of June 30, 2023 and December 31, 2022, respectively.
Under the GNMA program, the Corporation has the option but not the obligation to repurchase loans that meet GNMA’s specified delinquency criteria. For accounting purposes, the loans
subject to the repurchase option are required to be reflected on the financial statements with an offsetting liability.
122
Total nonaccrual loans were $82.0 million as of June 30, 2023. This represents a net decrease of $7.9 million from $89.9 million as
of December 31, 2022. The net decrease was primarily related to a $9.5 million reduction in nonaccrua l residential mortgage loans,
partially offset by increases of $1.5 million and $0.1 million in nonaccrual consumer loans and nonaccrual commercial and
construction loans, respectively.
The following table shows non-performing assets by geographic segment as of the indicated dates:
June 30, 2023
December 31, 2022
(In thousands)
Puerto Rico:
Nonaccrual loans held for investment:
Residential mortgage
$
20,047
$
28,857
Construction
703
831
Commercial mortgage
13,337
14,341
Commercial and Industrial
5,808
5,859
Consumer and finance leases
15,874
14,142
Total nonaccrual loans held for investment
55,769
64,030
OREO
27,107
28,135
Other repossessed property
5,226
5,275
Other assets
2,111
2,202
Total non-performing assets
$
90,213
$
99,642
Past due loans 90 days and still accruing
$
60,964
$
76,417
Virgin Islands:
Nonaccrual loans held for investment:
Residential mortgage
$
5,767
$
6,614
Construction
974
1,377
Commercial mortgage
8,199
7,978
Commercial and Industrial
1,119
1,179
Consumer
379
469
Total nonaccrual loans held for investment
16,438
17,617
OREO
4,464
3,475
Other repossessed property
168
76
Total non-performing assets
$
21,070
$
21,168
Past due loans 90 days and still accruing
$
2,108
$
4,100
United States:
Nonaccrual loans held for investment:
Residential mortgage
$
7,438
$
7,301
Commercial and Industrial
2,267
792
Consumer
109
195
Total nonaccrual loans held for investment
9,814
8,288
OREO
-
31
Other repossessed property
10
29
Total non-performing assets
$
9,824
$
8,348
Past due loans 90 days and still accruing
$
139
$
-
123
Nonaccrual commercial and industrial loans increased by $1.4 million to $9.2 million as of June 30, 2023, from $7.8 million as of
December 31, 2022.
Nonaccrual commercial mortgage loans decreased by $0.8 million to $21.5 million as of June 30, 2023, from $22.3 million as of
December 31, 2022.
Nonaccrual construction loans decreased by $0.5 million to $1.7 million as of June 30, 2023, from $2.2 million as of December 31,
2022.
periods:
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Quarter Ended June 30, 2023
Beginning balance
$
1,794
$
21,598
$
13,404
$
36,796
Plus:
Additions to nonaccrual
-
439
2,691
3,130
Less:
Loans returned to accrual status
-
-
(374)
(374)
Nonaccrual loans transferred to OREO
-
(61)
-
(61)
Nonaccrual loans charge-offs
-
(88)
(6,350)
(6,438)
Loan collections
(117)
(352)
(177)
(646)
Ending balance
$
1,677
$
21,536
$
9,194
$
32,407
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Six-Month Period Ended June 30, 2023
Beginning balance
$
2,208
$
22,319
$
7,830
$
32,357
Plus:
Additions to nonaccrual
127
983
10,161
11,271
Less:
Loans returned to accrual status
-
(361)
(526)
(887)
Nonaccrual loans transferred to OREO
(332)
(223)
(183)
(738)
Nonaccrual loans charge-offs
-
(106)
(6,468)
(6,574)
Loan collections
(326)
(1,082)
(1,620)
(3,028)
Reclassification
-
6
-
6
Ending balance
$
1,677
$
21,536
$
9,194
$
32,407
124
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Quarter Ended June 30, 2022
Beginning balance
$
2,543
$
26,576
$
18,129
$
47,248
Plus:
Additions to nonaccrual
18
53
579
650
Less:
Loans returned to accrual status
(48)
(157)
(255)
(460)
Nonaccrual loans transferred to OREO
(67)
(88)
(273)
(428)
Nonaccrual loans charge-offs
(16)
(2)
(37)
(55)
Loan collections
(55)
(1,629)
(1,064)
(2,748)
Ending balance
$
2,375
$
24,753
$
17,079
$
44,207
Construction
Commercial
Mortgage
Commercial &
Industrial
Total
(In thousands)
Six-Month Period Ended June 30, 2022
Beginning balance
$
2,664
$
25,337
$
17,135
$
45,136
Plus:
Additions to nonaccrual
18
2,934
2,158
5,110
Less:
Loans returned to accrual status
(48)
(358)
(464)
(870)
Nonaccrual loans transferred to OREO
(80)
(549)
(273)
(902)
Nonaccrual loans charge-offs
(56)
(39)
(327)
(422)
Loan collections
(123)
(2,170)
(1,552)
(3,845)
Reclassification
-
(402)
402
-
Ending balance
$
2,375
$
24,753
$
17,079
$
44,207
125
Nonaccrual residential mortgage loans decreased by $9.5 million to $33.3 million as of June 30, 2023, compared to $42.8 million as
of December 31, 2022. The decrease was primarily related to $ 6.6 million of loans restored to accrual status, $4.3 million of loans
transferred to OREO, and $3.1 million in collections, partially offset by inflows of $5.1 million.
The following table presents the activity of residential nonaccrual loans held for investment for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(In thousands)
Beginning balance
$
36,410
$
48,818
$
42,772
$
55,127
Additions to nonaccrual
3,009
4,403
5,090
9,731
Loans returned to accrual status
(2,714)
(5,332)
(6,651)
(8,781)
Nonaccrual loans transferred to OREO
(1,549)
(1,185)
(4,259)
(2,122)
Nonaccrual loans charge-offs
(401)
(515)
(621)
(950)
Loan collections
(1,503)
(1,601)
(3,073)
(8,417)
Reclassification
-
-
(6)
-
Ending balance
$
33,252
$
44,588
$
33,252
$
44,588
The amount of nonaccrual consumer loans, including finance leases, increased by $1.5 million to $16.3 million as of June 30, 2023,
compared to $14.8 million as of December 31, 2022. The increase was mainly reflected in the auto loans and finance leases portfolio.
As of June 30, 2023, approximately $18.5 million of the loans placed in nonaccrual status, mainly commercial loans, and residential
loans, were current, or had delinquencies of less than 90 days in their interest payments. Collections on these loans are being recorded
on a cash basis through earnings, or on a cost-recovery basis, as conditions warrant.
During the six-month period ended June 30, 2023, interest income of approximately $0.2 million related to nonaccrual loans with a
carrying value of $24.1 million as of June 30, 2023, mainly nonaccrual commercial and construction loans, was applied against the
related principal balances under the cost-recovery method.
Total loans in early delinquency (
i.e.
, 30-89 days past due loans, as defined in regulatory reporting instructions) amounted to $118.5
million as of June 30, 2023, an increase of $13.6 million, compared to $104.9 million as of December 31, 2022. The variances by
major portfolio categories are as follows:
●
Consumer loans in early delinquency increased by $7.5 million to $78.4 million, mainly in the auto loans portfolio.
●
Commercial and construction loans in early delinquency increased by $3.4 million to $9.2 million, mainly due to a $4.5
million commercial mortgage loan in the Puerto Rico region that matured and is in the process of renewal but for which the
Corporation continues to receive interest and principal payments from the borrower.
●
Residential mortgage loans in early delinquency increased by $2.7 million to $30.9 million.
In addition, the Corporation provides homeownership preservation assistance to its customers through a loss mitigation program.
Depending upon the nature of a borrower’s financial condition, restructurings or loan modifications through this program are
provided, as well as other restructurings of individual C&I, commercial mortgage, construction, and residential mortgage loans. See
Note 1 – Basis of Presentation and Significant Accounting Policies, to the unaudited consolidated financial statements herein for
additional information related to the accounting policies of loan modifications granted to borrowers experiencing financial difficulty.
In addition, see Note 3 - Loans Held for Investment, to the unaudited consolidated financial statements herein for additional
information and statistics about the Corporation’s modified loans.
126
The OREO portfolio, which is part of non-performing assets, amounted to $31.6 million as of each of June 30, 2023 and December
31, 2022. The following tables show the composition of the OREO portfolio as of June 30, 2023 and December 31, 2022, as well as
the activity of the OREO portfolio by geographic area during the six-month period ended June 30, 2023:
OREO Composition by Region
As of June 30, 2023
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
22,026
$
1,595
$
-
$
23,621
Construction
1,833
59
-
1,892
Commercial
3,248
2,810
-
6,058
$
27,107
$
4,464
$
-
$
31,571
As of December 31, 2022
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
23,388
$
606
$
31
$
24,025
Construction
1,705
59
-
1,764
Commercial
3,042
2,810
-
5,852
$
28,135
$
3,475
$
31
$
31,641
OREO Activity by Region
Six-Month Period Ended June 30, 2023
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Beginning Balance
$
28,135
$
3,475
$
31
$
31,641
Additions
9,442
1,295
-
10,737
Sales
(9,820)
(306)
(31)
(10,157)
Write-downs and other adjustments
(650)
-
-
(650)
Ending Balance
$
27,107
$
4,464
$
-
$
31,571
127
Net Charge-offs and Total Credit Losses
to $6.0
million, or an annualized 0.21% of average loans, for the second quarter of 2022. For the six-month period ended June 30,
2023, net charge-offs totaled $32.5 million, or an annualized 0.56% of average loans, compared to $12.6 million, or an annualized
0.23% of average loans, for the same period in 2022.
Consumer loans and finance leases net charge-offs for the second quarter of 2023 were $13.0 million, or an annualized 1.51% of
related average loans, compared to $6.9 million, or an annualized 0.91% of related average loans, for the second quarter of 2022. Net
charge-offs of consumer loans and finance leases for the six-month period ended June 30, 2023 were $26.0 million, or 1.53% of
related average loans, compared to $13.2 million, or an annualized 0.88% of related average loans, for the same period in 2022.
Commercial and industrial loans net charge-offs for the second quarter of 2023 were $6.2 million, or an annualized 0.87% of
related average loans, compared to net recoveries of $0.5 million, or an annualized 0.07% of related average loans, for the second
quarter of 2022. Commercial and industrial loans net charge-offs for the six-month period ended June 30, 2023 were $6.2 million, or
0.44% of related average loans, compared to net recoveries of $1.3 million, or an annualized 0.09% of related average loans, for the
same period in 2022. The net charge-offs for the second quarter and first six months of 2023 included a $6.2 million charge-off
recorded on a commercial and industrial participated loan in the Florida region in the power generation industry.
average loans, compared to $0.8 million, or an annualized 0.11% of related average loans, for the second quarter of 2022. Residential
mortgage loans net charge-offs for the six-month period ended June 30, 2023 were $0.8 million, or an annualized 0.06% of related
average loans, compared to $1.9 million, or an annualized 0.13% of related average loans, for the same period of 2022. Approximately
$0.3 million of charge-offs for the second quarter of 2023 and $0.5 million for the first six months of 2023 resulted from valuations of
collateral dependent residential mortgage loans, compared to $0.5 million and $0.9 million for the comparable periods in 2022.
Charge-offs on residential mortgage loans also included $0.3 million and $0.8 million related to foreclosures recorded in the second
quarter and first six months of 2023, respectively, compared to $0.5 million and $1.8 million, recorded for the comparable periods in
2022, respectively.
Commercial mortgage loans net charge-offs for the second quarter of 2023 were $32 thousand, or an annualized 0.01% of related
average loans, compared to net recoveries of $1.2 million, or an annualized 0.22% of related average loans, for the second quarter of
2022. Commercial mortgage loans net recoveries for the six-month period ended June 30, 2023 were $0.1 million, or an annualized
0.01% of related average loans, compared to $1.2 million, or an annualized 0.11% or related average loans, for the same period in
2022.
Construction loans net recoveries for the second quarter of 2023 were $0.4 million, or an annualized 0.99% of related average
loans, compared to $27 thousand, or an annualized 0.09% of related average loans, for the same period in 2022. Construction loans net
recoveries for the six-month period ended June 30, 2023 were $0.4 million, or an annualized 0.59% of related average loans,
compared to $35 thousand, or an annualized 0.06% of related average loans, for the same period in 2022.
128
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
Residential mortgage
0.06
%
0.11
%
0.06
%
0.13
%
Construction
(0.99)
%
(0.09)
%
(0.59)
%
(0.06)
%
Commercial mortgage
0.01
%
(0.22)
%
(0.01)
%
(0.11)
%
Commercial and industrial
0.87
%
(0.07)
%
0.44
%
(0.09)
%
Consumer and finance leases
1.51
%
0.91
%
1.53
%
0.88
%
Total loans
0.67
%
0.21
%
0.56
%
0.23
%
segment for the indicated periods:
Quarter Ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
PUERTO RICO:
Residential mortgage
0.08
%
0.13
%
0.09
%
0.16
%
Construction
(3.04)
%
(0.14)
%
(1.86)
%
(0.03)
%
Commercial mortgage
0.02
%
(0.16)
%
0.01
%
(0.08)
%
Commercial and industrial
0.01
%
(0.12)
%
0.01
%
(0.14)
%
Consumer and finance leases
1.51
%
0.93
%
1.47
%
0.88
%
Total loans
0.56
%
0.30
%
0.57
%
0.29
%
VIRGIN ISLANDS:
Residential mortgage
(0.02)
%
0.16
%
(0.05)
%
0.13
%
Construction
3.93
%
-
%
1.93
%
-
%
Commercial mortgage
(0.23)
%
(0.22)
%
(0.22)
%
(0.22)
%
Commercial and industrial
-
%
-
%
(0.01)
%
(0.01)
%
Consumer and finance leases
2.02
%
0.59
%
2.10
%
1.18
%
Total loans
0.34
%
0.12
%
0.31
%
0.19
%
FLORIDA:
Residential mortgage
(0.04)
%
(0.05)
%
(0.02)
%
(0.03)
%
Construction
(0.06)
%
(0.06)
%
(0.05)
%
(0.08)
%
Commercial mortgage
-
%
(0.40)
%
(0.04)
%
(0.21)
%
Commercial and industrial
2.67
%
-
%
1.31
%
-
%
Consumer and finance leases
(1.16)
%
(2.32)
%
(0.45)
%
(0.43)
%
Total loans
1.23
%
(0.13)
%
0.60
%
(0.06)
%
The above ratios are based on annualized charge -offs and are not necessarily indicative of the results expected for the entire year or
in subsequent periods.
Total net charge -offs plus gains on OREO operations for the first half of 2023 amounted to $28.6 million, or a loss rate of 0.25% on
an annualized basis of average loans and repossessed assets, compared to losses of $10.3 million, or a loss rate of 0.19% on an
annualized basis, for the first half of 2022.
129
The following table presents information about the OREO inventory and credit losses for the indicated periods:
Quarter ended June 30,
Six-Month Period Ended June 30,
2023
2022
2023
2022
(Dollars in thousands)
OREO
OREO balances, carrying value:
Residential
$
23,621
$
31,780
$
23,621
$
31,780
Construction
1,892
2,657
1,892
2,657
Commercial
6,058
7,269
6,058
7,269
Total
$
31,571
$
41,706
$
31,571
$
41,706
OREO activity (number of properties):
Beginning property inventory
344
442
344
418
Properties acquired
44
41
103
109
Properties disposed
(68)
(52)
(127)
(96)
Ending property inventory
320
431
320
431
Average holding period (in days)
Residential
524
658
524
658
Construction
2,178
2,162
2,178
2,162
Commercial
2,580
2,041
2,580
2,041
Total average holding period (in days)
1,018
995
1,018
995
OREO operations gain (loss):
Market adjustments and gains (losses) on sale:
Residential
$
2,553
$
1,988
$
5,043
$
2,980
Construction
7
11
47
114
Commercial
-
(62)
(67)
(79)
Total net gain
2,560
1,937
5,023
3,015
Other OREO operations expenses
(576)
(452)
(1,043)
(810)
Net Gain on OREO operations
$
1,984
$
1,485
$
3,980
$
2,205
(CHARGE-OFFS) RECOVERIES
Residential charge-offs, net
$
(389)
$
(792)
$
(875)
$
(1,938)
Construction recoveries, net
371
27
434
35
Commercial (charge-offs) recoveries, net
(6,250)
1,737
(6,128)
2,489
Consumer and finance leases charge-offs, net
(13,011)
(6,932)
(25,979)
(13,140)
Total charge-offs, net
(19,279)
(5,960)
(32,548)
(12,554)
TOTAL CREDIT LOSSES
(1)
$
(17,295)
$
(4,475)
$
(28,568)
$
(10,349)
(GAIN) LOSS RATIO PER CATEGORY
(2)
Residential
(0.31)
%
(0.16)
%
(0.15)
%
(0.07)
%
Construction
(1.00)
%
(0.12)
%
(0.32)
%
(0.24)
%
Commercial
0.48
%
(0.13)
%
0.12
%
(0.09)
%
Consumer
1.51
%
0.91
%
0.76
%
0.88
%
TOTAL CREDIT LOSS RATIO
(3)
0.60
%
0.16
%
0.25
%
0.19
%
(1)
Equal to net gain on OREO operations plus charge-offs, net.
(2)
Calculated as net charge-offs plus market adjustment and gains (losses) on sale of OREO divided by average loans and repossessed assets.
(3)
Calculated as net charge-offs plus net gain on OREO operations divided by average loans and repossessed assets.
130
Operational Risk
The Corporation faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of
banking and financial products. Coupled with external influences, such as market conditions, security risks, and legal risks, the
potential for operational and reputational loss has increased. To mitigate and control operational risk, the Corporation has developed,
and continues to enhance, specific internal controls, policies and procedures that are designed to identify and manage operational risk
at appropriate levels throughout the organization. The purpose of these mechanisms is to provide reasonable assurance that the
Corporation’s business operations are functioning within the policies and limits established by management.
The Corporation classifies operational risk into two major categories: business-specific and corporate-wide affecting all business
lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies,
processes and assessments. With respect to corporate-wide risks, such as information security, business recovery, and legal and
compliance, the Corporation has specialized groups, such as the Legal Department, Information Security, Corporate Compliance, and
Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to
the needs of the business groups.
Legal and Compliance Risk
Legal and compliance risk includes the risk of noncompliance with applicable legal and regulatory requirements, the risk of adverse
legal judgments against the Corporation, and the risk that a counterparty’s performance obligations will be unenforceable. The
Corporation is subject to extensive regulation in the different jurisdictions in which it conducts its business, and this regulatory
scrutiny has been significantly increasing over the years. The Corporation has established, and continues to enhance, procedures that
are designed to ensure compliance with all applicable statutory, regulatory and any other legal requirements. The Corporation has a
Compliance Director who reports to the Chief Risk Officer and is responsible for the oversight of regulatory compliance and
implementation of an enterprise-wide compliance risk assessment process. The Compliance division has officer roles in each major
business area with direct reporting responsibilities to the Corporate Compliance Group.
Concentration Risk
The Corporation conducts its operations in a geographically concentrated area, as its main market is Puerto Rico. Of the total gross
loan portfolio held for investment of $11.7 billion as of June 30, 2023, the Corporation had credit risk of approximately 79% in the
Puerto Rico region, 17% in the United States region, and 4% in the Virgin Islands region.
131
Update on the Puerto Rico Fiscal and Economic Situation
A significant portion of the Corporation’s business activities and credit exposure is concentrated in the Commonwealth of Puerto
Rico, which has experienced economic and fiscal distress over the last decade. Since declaring bankruptcy and benefitting from the
enactment of the federal Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) in 2016, the Government of
Puerto Rico has made progress on fiscal matters primarily by restructuring a large portion of its outstanding public debt and
identifying funding sources for its unfunded pension system.
Economic Indicators
On June 15, 2023, the Puerto Rico Planning Board (“PRPB”) presented the updated Economic Report to the Governor, which
provides an analysis of Puerto Rico’s economy during fiscal year 2022 and a short-term forecast for fiscal years 2023 and 2024.
According to the PRPB, Puerto Rico’s real gross national product (“GNP”) expanded by 3.7% in fiscal year 2022, which was the
highest annual real GNP growth registered in Puerto Rico since fiscal year 1999. The growth was primarily driven by a sharp increase
in personal consumption expenditures reflecting an increase of approximately 8.5% when compared to fiscal year 2021, increase in net
exports of 4.8%, and growth in fixed capital investments of 12.6%.
There are other indicators that gauge economic activity and are published with greater frequency, for example, the Economic
Development Bank for Puerto Rico’s Economic Activity Index (“EDB-EAI”). Although not a direct measure of Puerto Rico’s real
GNP, the EDB-EAI is correlated to Puerto Rico’s real GNP. For May 2023, preliminary estimates showed that the EDB-EAI
increased 0.8% on a month-over-month basis and 1.8% higher than May 2022. Over the 12-month period ended May 31, 2023, the
EDB-EAI averaged 124.8, approximately 0.2% above the comparable figure a year earlier.
Labor market trends remain positive. Data published by the Bureau of Labor Statistics show June 2023 payroll employment in
Puerto Rico increased by 2.4% when compared to June 2022, supported by a year-over-year increase of 8.6% in
Leisure and
Hospitality
payroll employment and a 12.0% year-over-year increase in
Construction
-related payroll employment
.
rate stood at 6.1% as of June 2023.
Fiscal Plan
On April 3, 2023, the PROMESA oversight board certified the 2023 Fiscal Plan for Puerto Rico (the “2023 Fiscal Plan”). Unlike
previous versions of the fiscal plan, the PROMESA oversight board segregated the 2023 Fiscal Plan into three different volumes. As
the first fiscal plan certified in a pos t-bankruptcy environment, Volume 1 presents a Transformation Plan that highlights priority areas
to cement fiscal responsibility, accelerate economic growth in a sustainable manner, and restore market access to Puerto Rico. Volume
2 provides additional details on economic trends and financial projections, and Volume 3 maps out the supplementary implementation
details to guide the government’s implementation of the requirements of the 2023 Fiscal Plan, as well as additional initiatives from
prior fiscal plans which remain mandatory and are still pending to be implemented.
The 2023 Fiscal Plan prioritizes resource allocation across three major pillars: (i) entrenching a legacy of strong financial
management through the implementation of a comprehensive financial management agenda, (ii) instilling a culture of public -sector
performance and excellence to properly delivery quality public services, and (iii) investing for economic growth to ensure sufficient
revenues are generated to support the delivery of services. According to the Transformation Plan, the fiscal and economic turnaround
of Puerto Rico cannot be accomplished without the implementation of structural economic reforms that promote sustainable economic
development. These reforms include power/energy sector reform to improve availability, reliability and affordability of energy,
education reform to expand opportunity and prepare the workforce to compete for jobs of the future, and an infrastructure reform
aimed at improving the efficiency of the economy and facilitating investment. The 2023 Fiscal Plan projects that these reforms, if
implemented successfully, will contribute 0.75% in GNP growth by fiscal year 2026. Additionally, the 2023 Fiscal Plan provides a
roadmap for a tax reform directed towards establishing a tax regime that is more competitive for investors and more equitable for
individuals.
The 2023 Fiscal Plan notes that Puerto Rico has had a strong recovery in the aftermath of the COVID-19 pandemic crisis with
labor participation trending positively and unemployment at historically low levels. However, it recognizes that such recovery has
been primarily fueled by the unprecedented influx of federal funds which have an outsized and temporary impact that may mask
underlying structural weaknesses in the economy. As such, the 2023 Fiscal Plan projects a 0.7% decline in real GNP for the current
fiscal year 2023, followed by a period of near-zero real growth in fiscal years 2024 through 2026. Also, the fiscal plan projects that
Puerto Rico’s population will continue the long-term trend of steady decline. Notwithstanding, the Transformation Plan depicts that, if
managed properly, these non-recurring federal funds can be leveraged into sustainable longer-term growth and opportunity.
132
The 2023 Fiscal Plan projects that approximately $81 billion in total disaster relief funding, from federal and private sources, will
be disbursed as part of the reconstruction efforts over a span of 18 years (fiscal years 2018 through 2035). These funds will benefit
individuals, the public (e.g., reconstruction of major infrastructure, roads, and schools), and will cover part of Puerto Rico’s share of
the cost of disaster relief funding. Also, the 2023 Fiscal Plan projects accelerated deployment of the remaining COVID-19 relief funds
in fiscal year 2023 through 2025, with approximately $9.3 billion expected to be disbursed, compared to $4.5 billion projected in the
previous fiscal plan. Additionally, the 2023 Fiscal Plan continues to account for $2.3 billion in federal funds to Puerto Rico from the
Bipartisan Infrastructure Law directed towards improving Puerto Rico’s infrastructure over fiscal years 2022 through 2026.
Debt Restructuring
Over 80% of Puerto Rico’s outstanding debt has been restructured to date. On March 15, 2022, the Plan of Adjustment of the
central government’s debt became effective through the exchange of more than $33 billion of existing bonds and other claims into
approximately $7 billion of new bonds, saving Puerto Rico more than $50 billion in debt payments to creditors. Also, the
restructurings of the Puerto Rico Sales Tax Financing Corporation (“COFINA”), the Highways and Transportation Authority
(“HTA”), and the Puerto Rico Aqueducts and Sewers Authority (“PRASA”) are expected to yield savings of approximately $17.5
billion, $3.0 billion, and $400 million, respectively, in future debt service payments. The main restructurings pending include that of
the Puerto Rico Electric Power Authority (“PREPA”) and the Puerto Rico Industrial Company (“PRIDCO”).
On June 23, 2023, the Fiscal Oversight and Management Board for Puerto Rico certified a new fiscal plan for PREPA which included
the most recent projections of energy consumption in Puerto Rico and consequently reflected a significant reduction in the projected
revenues for PREPA over the next years. As such, PREPA concluded that its ability to repay its outstanding debt was significantly
less than what was previously stated. On June 26, 2023, Judge Laura Taylor Swain resolved that PREPA’s bondholders have an
unsecured claim of $2.4 billion against PREPA and not the approximately $9.0 billion that bondholders were claiming. This decision
could result in a 75% haircut on PREPA’s outstanding debt and may reduce the ability of bondholders to impose higher electricity
rates to consumers to pay for debt service.
Other Developments
Notable progress continues to be made as part of the ongoing efforts of prioritizing the restoration, improvement, and
modernization of Puerto Rico’s infrastructure, particularly in the aftermath of Hurricane Maria in 2017. During the first five months of
2023, over $1.8 billion in disaster relief funds have been disbursed through FEMA Public Assistance program and the Department of
Housing and Urban Development’s “Community Development Block Grant” program, a 117% increase when compared to the same
period in 2022, and the Fiscal Oversight and Management Board for Puerto Rico is currently projecting over $5 billion in total
disbursements to take place during 2023. These funds will continue to play a key role in supporting Puerto Rico’s economic stability
and are expected to have a positive impact on the Island’s infrastructure.
On June 21, 2023, Fitch Ratings issued a credit rating research note highlighting the government’s commitment to improving its
continuing disclosure practices and the release of the 2021 audited financial statements. The government has made great strides in
recent years with regards to its financial transparency and its on target to release its audited financial statements on time and in line
with regulatory expectations.
133
Exposure to Puerto Rico Government
As of June 30, 2023, the Corporation had $344.3 million of direct exposure to the Puerto Rico government, its municipalities and
public corporations, compared to $338.9 million as of December 31, 2022. As of June 30, 2023, approximately $186.2 million of the
exposure consisted of loans and obligations of municipalities in Puerto Rico that are supported by assigned property tax revenues and
for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their
repayment, and $113.2 million of loans and obligations which are supported by one or more specific sources of municipal revenues.
Approximately 72% of the Corporation’s exposure to Puerto Rico municipalities consisted primarily of senior priority loans and
obligations concentrated in four of the largest municipalities in Puerto Rico. The municipalities are required by law to levy special
property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and notes.
Furthermore, municipalities are also likely to be affected by the negative economic and other effects resulting from expense, revenue,
or cash management measures taken to address the Puerto Rico government’s fiscal problems and measures included in fiscal plans of
other government entities. In addition to municipalities, the total direct exposure also included $9.5 million in loans to an affiliate of
PREPA, $32.1 million in loans to agencies or public corporations of the Puerto Rico government, and obligations of the Puerto Rico
government, specifically a residential pass-through MBS issued by the PRHFA, at an amortized cost of $3.3 million as part of its
available-for-sale debt securities portfolio (fair value of $2.1 million as of June 30, 2023).
The following table details the Corporation’s total direct exposure to Puerto Rico government obligations according to their
maturities:
As of June 30, 2023
Investment
Portfolio
(Amortized
cost)
Loans
Total
Exposure
(In thousands)
Puerto Rico Housing Finance Authority:
$
3,254
$
-
$
3,254
Total Puerto Rico Housing Finance Authority
3,254
-
3,254
Agencies and public corporation of the Puerto Rico government:
-
6,160
6,160
-
25,979
25,979
Total agencies and public corporation of the Puerto Rico government
-
32,139
32,139
-
9,519
9,519
Total Puerto Rico government affiliate
-
9,519
9,519
Total Puerto Rico public corporations and government affiliate
-
41,658
41,658
Municipalities:
1,205
10,600
11,805
42,736
55,909
98,645
56,160
66,717
122,877
66,023
-
66,023
Total Municipalities
166,124
133,226
299,350
Total Direct Government Exposure
$
169,378
$
174,884
$
344,262
134
In addition, as of June 30, 2023, the Corporation had $81.1 million in exposure to residential mortgage loans that are guaranteed by
the PRHFA, a governmental instrumentality that has been designated as a covered entity under PROMESA (December 31, 2022 –
$84.7 million). Residential mortgage loans guaranteed by the PRHFA are secured by the underlying properties and the guarantees
serve to cover shortfalls in collateral in the event of a borrower default. The Puerto Rico government guarantees up to $75 million of
the principal for all loans under the mortgage loan insurance program. According to the most recently released audited financial
statements of the PRHFA, as of June 30, 2021, the PRHFA’s mortgage loans insurance program covered loans in an aggregate amount
of approximately $473 million. The regulations adopted by the PRHFA require the establishment of adequate reserves to guarantee the
solvency of the mortgage loans insurance program. As of June 30, 2021, the most recent date as of which information is available, the
PRHFA had a liability of approximately $5 million as an estimate of the losses inherent in the portfolio.
As of June 30, 2023, the Corporation had $2.9 billion of public sector deposits in Puerto Rico, compared to $2.3 billion as of
December 31, 2022. Approximately 21% of the public sector deposits as of June 30, 2023 were from municipalities and municipal
agencies in Puerto Rico and 79% were from public corporations, the Puerto Rico central government and agencies, and U.S. federal
government agencies in Puerto Rico.
Exposure to USVI Government
The Corporation has operations in the USVI and has credit exposure to USVI government entities.
For many years, the USVI has been experiencing several fiscal and economic challenges that have deteriorated the overall financial
and economic conditions in the area. However, on May 22, 2023, the United States Bureau of Economic Analysis (the “BEA”)
released its estimates of real gross domestic product (“GDP”) for 2021. According to the BEA, the USVI’s real GDP increased 2.8%
in 2021 after decreasing 1.9% in 2020. The increase in real GDP reflected increases in exports and personal consumption
expenditures. These increases were partly offset by decreases in private inventory investment, private fixed investment, and
government spending. Imports, a subtraction item in the calculation of GDP, also decreased.
Over the past two years, the USVI has been recovering from the adverse impact caused by COVID-19 and has continued to make
progress on its rebuilding efforts related to Hurricanes Irma and Maria, which occurred in 2017. According to data published by the
government, over $4.7 billion in disaster recovery funds were disbursed as of 2023 and $3.4 billion were remaining obligated funds
waiting to be disbursed. On the fiscal front, revenues have trended positively and the USVI government successfully completed the
restructuring of the government employee retirement system. Moreover, labor market trends are stable with payroll employment for
the month of June 2023, up 3.2% when compared to June 2022.
Finally, PROMESA does not apply to the USVI and, as such, there is currently no federal legislation permitting the restructuring of
the debts of the USVI and its public corporations and instrumentalities. To the extent that the fiscal condition of the USVI government
deteriorates again, the U.S. Congress or the government of the USVI may enact legislation allowing for the restructuring of the
financial obligations of the USVI government entities or imposing a stay on creditor remedies, including by making PROMESA
applicable to the USVI.
As of June 30, 2023, the Corporation had $78.9 million in loans to USVI public corporations, compared to $38.0 million as of
December 31, 2022. The increase in loans to USVI public corporations was driven the aforementioned $47.0 million line of credit
utilization. As of June 30, 2023, all loans were currently performing and up to date on principal and interest payments.
135
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk to which the Corporation is exposed, see the information contained in Part I, Item 2.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management” in this Quarterly
Report on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
First BanCorp.’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of
First BanCorp.’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June
30, 2023 the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2023
and provide reasonable assurance that the information required to be disclosed by the Corporation in reports that the Corporation files
or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules
and forms and is accumulated and reported to the Corporation’s management, including the Chief Executive Office and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Internal Control over Financial Reporting
There were no changes to the Corporation’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during our most recent quarter ended June 30, 2023 that have materially affected, or are reasonably likely to
materially affect, the Corporation’s internal control over financial reporting.
ITEM 5. OTHER INFORMATION
No director or officer (as defined in Rule 16a-1(f) of the Exchange Act) of the Corporation
adopted
, modified, or
terminated
Rule 10b5-1 trading arrangement or any
non-Rule
10b5-1
K under the Exchange Act) during the quarter ended June 30, 2023.
136
PART II - OTHER INFORMATION
In accordance with the instructions to Part II of Form 10-Q, the other specified items in this part have been omitted because they are not
applicable, or the information has been previously reported.
ITEM 1. LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Note 22 – Regulatory Matters, Commitments and Contingencies, to the unaudited consolidated
financial statements herein, which is incorporated by reference in this Part II, Item 1.
ITEM 1A. RISK FACTORS
The Corporation’s business, operating results and/or the market price of our common stock may be significantly affected by a number of
factors. A detailed discussion of certain risk factors that could affect the Corporation’s future operations, financial condition or results for
future periods is set forth in Part I, Item 1A., “Risk Factors,” in the 2022 Annual Report on Form 10-K. These risk factors, and others, could
cause actual results to differ materially from historical results or the results contemplated by the forward-looking statements contained in
this report. Also, refer to the discussion in “Forward Looking Statements” and Part I, Item 2. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” in this Quarterly Report on Form 10-Q for additional information that may supplement or
update the discussion of risk factors in the 2022 Annual Report on Form 10-K.
Other than as described below, there have been no material changes from those risk factors previously disclosed in Part I, Item 1A. “Risk
Factors,” in the 2022 Annual Report on Form 10-K.
Cyber-attacks, system risks and data protection breaches to our computer systems and networks or those of third-party service
providers could adversely affect our ability to conduct business, manage our exposure to risk or expand our business, result in the
disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and
security systems and infrastructure, and present significant reputational, legal and regulatory costs
.
Our business is highly dependent on the security, controls and efficacy of our infrastructure, computer and data management
systems, as well as those of our customers, suppliers, and other third parties. To access our network, products and services, our
employees, customers, suppliers, and other third parties, including downstream service providers, the financial services industry and
financial data aggregators, with whom we interact, on whom we rely or who have access to our customers
’
personal or account
information, increasingly use personal mobile devices or computing devices that are outside of our network and control environments
and are subject to their own cybersecurity risks. Our business relies on effective access management and the secure collection,
processing, transmission, storage and retrieval of confidential, proprietary, personal and other information in our computer and data
management systems and networks, and in the computer and data management systems and networks of third parties.
Information security risks for financial institutions have significantly increased in recent years, especially given the increasing
sophistication and activities of organized computer criminals, hackers, and terrorists and our expansion of online and digital customer
services to better meet our customer’s needs. These threats may derive from fraud or malice on the part of our employees or third-
party providers or may result from human error or accidental technological failure. These threats include cyber-attacks, such as
computer viruses, malicious or destructive code, phishing attacks, denial of service attacks, or other security breach tactics that could
result in the unauthorized release, gathering, monitoring, misuse, loss, destruction, or theft of confidential, proprietary, and other
information, including intellectual property, of ours, our employees, our customers, or third parties, damages to systems, or otherwise
material disruption to our or our customers’ or other third parties’ network access or business operations, both domestically and
internationally.
While we maintain an Information Security Program that continuously monitors cyber-related risks and ultimately ensures
protection for the processing, transmission, and storage of confidential, proprietary, and other information in our computer systems
and networks, as well as a vendor management program to oversee third party and vendor risks, there is no guarantee that we will not
be exposed to or be affected by a cybersecurity incident. For example, as previously disclosed, one of our third-party vendors was the
victim of a security incident in April 2023 involving a set of data that included some information on FirstBank’s mortgage loan
business. In response to learning of the incident, we promptly launched our own internal investigation, which confirmed that our own
systems were not compromised, and any operational and financial impact was minimal. Our vendor has indicated (and we have no
evidence to the contrary) that to date there is no evidence that there has been any actual or attempted misuse of information. As of
June 30, 2023, the Corporation has not incurred any material expenses related to the incident and does not expect any future impact.
137
Cyber threats are rapidly changing, and future attacks or breaches could lead to other security breaches of the networks, systems, or
devices that our customers use to access our integrated products and services, which, in turn, could result in unauthorized disclosure,
release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary, and other information (including account data
information) or data security compromises. As cyber threats continue to evolve, we may be required to expend significant additional
resources to modify or enhance our protective measures, investigate, and remediate any information security vulnerabilities or
incidents and develop our capabilities to respond and recover. The full extent of a particular cyberattack, and the steps that the
Corporation may need to take to investigate such attack, may not be immediately clear, and it could take considerable additional time
for us to determine the complete scope of information compromised, at which time the impact on the Corporation and measures to
recover and restore to a business-as-usual state may be difficult to assess. These factors may also inhibit our ability to provide full and
reliable information about the cyberattack to our customers, third-party vendors, regulators, and the public.
A successful penetration or circumvention of our system security, or the systems of our customers, suppliers, and other third parties,
could cause us serious negative consequences, including significant operational, reputational, legal, and regulatory costs and concerns.
Any of these adverse consequences could adversely impact our results of operations, liquidity, and financial condition. In addition,
our insurance policies may not be adequate to compensate us for the potential costs and other losses arising from cyber-attacks,
failures of information technology systems, or security breaches, and such insurance policies may not be available to us in the future
on economically reasonable terms, or at all. Insurers may also deny us coverage as to any future claim. Any of these results could
harm our growth prospects, financial condition, business, and reputation.
The volatility in the financial services industry, including failures or rumored failures of other depository institutions, and
actions taken by governmental agencies to stabilize the financial system, could result in, among other things, bank deposit runoffs,
liquidity constraints, and new capital requirements.
The closure and placement into receivership with the FDIC of certain large U.S. regional banks with assets over $100 billion in March
and May 2023, and adverse developments affecting other banks, resulted in heightened levels of market volatility and consequently have
negatively impacted customer confidence in the safety and soundness of financial institutions. These developments have resulted in certain
regional banks experiencing higher than normal deposit outflows and an elevated level of competition for available deposits in the market.
Although we have not been materially impacted by these recent bank failures, the resulting speed at which news, including social media
outlets, led depositors to withdraw funds from these and other financial institutions, as well as the volatile impact to stock prices, could
have a material effect on operations. The impact of market volatility from the adverse developments in the banking industry, along with
continued high inflation and rising interest rates on our business and related financial results, will depend on future developments, which
are highly uncertain and difficult to predict.
In the aftermath of these recent bank failures, the banking agencies could propose certain actions that may impact capital ratios or the
FDIC deposit insurance premium. For example, on May 11, 2023, the FDIC issued a proposed rule to recover the losses to the Deposit
Insurance Fund (“DIF”) associated with protecting uninsured depositors as part of the aforementioned financial institution failures. Under
the proposed rule, the FDIC would collect a special assessment at an annual rate of approximately 12.5 basis points over eight quarterly
periods, commencing with the first quarter of 2024. The assessment base for the special assessment would be equal to an insured depository
institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured
deposits. Notwithstanding, the special assessment could be subject to change depending on whether there are any shortfalls on amounts
collected. If the final rule is issued as proposed, the estimated impact of the special assessment on the Corporation would be an increase in
non-interest expense by approximately $6 million that would need to be accrued once the proposed rule is finalized.
138
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Corporation did not have any unregistered sales of equity securities during the quarter ended June 30, 2023.
Issuer Purchases of Equity Securities
There were no repurchases of common stock during the quarter ended June 30, 2023. As of June 30, 2023, the Corporation has
remaining authorization to repurchase $75 million under the $350 million stock repurchase program announced on April 27, 2022.
139
ITEM 6. EXHIBITS
See the Exhibit Index below, which is incorporated by reference herein:
EXHIBIT INDEX
Exhibit No.
Description
31.1
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 June 30, 2023, formatted in Inline
XBRL (included within the Exhibit 101 attachments)
140
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized:
First BanCorp.
Registrant
Date: August 8, 2023
By: /s/ Aurelio Alemán
Date: August 8, 2023
By: /s/ Orlando Berges