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MarketScreener Homepage  >  Equities  >  Nyse  >  First BanCorp.    FBP   PR3186727065

FIRST BANCORP.

(FBP)
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FIRST BANCORP : PR/ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A) (form 10-Q)

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11/08/2019 | 01:42pm EDT

SELECTED FINANCIAL DATA

                                                                     Quarter ended                 Nine-Month Period Ended

(In thousands, except for per share data and financial ratios)

                                                              September 30,                     September 30,
                                                                 2019             2018            2019              2018

Condensed Income Statements:

             Total interest income                           $     172,295$     157,492$     508,277$      462,543
             Total interest expense                                 27,870           24,971          81,125            74,858
             Net interest income                                   144,425          132,521         427,152           387,685
             Provision for loan and lease losses                     7,398           11,524          31,752            51,604
             Non-interest income                                    21,401           18,523          66,167            61,779
             Non-interest expenses                                  92,833           90,865         275,742           267,108
             Income before income taxes                             65,595           48,655         185,825           130,752
             Income tax expense                                     19,268           12,332          54,897            30,249
             Net income                                             46,327           36,323         130,928           100,503
             Net income attributable to common stockholders         45,658           35,654         128,921            98,496

Per Common Share Results:

             Net earnings per common share-basic             $        0.21$        0.16$        0.60    $         0.46
             Net earnings per common share-diluted           $        0.21$        0.16$        0.59    $         0.45
             Cash dividends declared                         $        0.03    $           -   $        0.09    $            -
             Average shares outstanding                            216,690          216,149         216,569           215,516
             Average shares outstanding diluted                    217,227          216,775         217,053           216,584
             Book value per common share                     $        9.96$        8.71$        9.96    $         8.71
             Tangible book value per common share (1)        $        9.79$        8.52$        9.79    $         8.52
Selected Financial Ratios (In Percent):
Profitability:
             Return on Average Assets                                 1.47             1.18            1.41              1.10
             Interest Rate Spread                                     4.42             4.13            4.42              4.09
             Net Interest Margin                                      4.89             4.54            4.90              4.48
             Interest Rate Spread - tax equivalent basis              4.59             4.32            4.60              4.27
             (2)
             Net Interest Margin - tax equivalent basis (2)           5.06             4.73            5.08              4.66
             Return on Average Total Equity                           8.39             7.69            8.19              7.28
             Return on Average Common Equity                          8.53             7.84            8.33              7.43
             Average Total Equity to Average Total Assets            17.55            15.32           17.22             15.07
             Tangible common equity ratio (1)                        17.03            15.22           17.03             15.22
             Dividend payout ratio                                   14.24                -           15.12                 -
             Efficiency ratio (3)                                    55.98            60.16           55.90             59.43

Asset Quality:

             Allowance for loan and lease losses to total             1.85             2.30            1.85              2.30
             loans held for investment
             Net charge-offs (annualized) to average loans            0.61             1.52            0.93              1.27
             (4)
             Provision for loan and lease losses to net              53.48            34.93           50.77             62.26
             charge-offs
             Non-performing assets to total assets (4)                2.65             4.28            2.65              4.28
             Nonaccrual loans held for investment to total            2.41             3.89            2.41              3.89
             loans held for investment (4)
             Allowance to total nonaccrual loans held for            76.57            59.10           76.57             59.10
             investment (4)
             Allowance to total nonaccrual loans held for
             investment,
             excluding residential real estate loans                185.65           109.79          185.65            109.79

Other Information:

             Common Stock Price: End of period               $        9.98$        9.10$        9.98    $         9.10

                                                                As of
                                                            September 30,    As of December
                                                                 2019           31, 2018

Balance Sheet Data:
             Total loans, including loans held for sale      $   9,010,890$   8,901,309
             Allowance for loan and lease losses                   165,575          192,362
             Money market and investment securities              2,018,198        2,139,503
             Intangible assets                                      36,438           38,757
             Deferred tax asset, net                               273,845          319,851
             Total assets                                       12,530,713       12,243,561
             Deposits                                            9,132,899        8,994,714
             Borrowings                                          1,024,150        1,074,236
             Total preferred equity                                 36,104           36,104
             Total common equity                                 2,159,367        2,049,015
             Accumulated other comprehensive income (loss),          5,124         (40,415)
             net of tax
             Total equity                                        2,200,595        2,044,704


(1)Non-GAAP financial measures (as defined below). Refer to "Capital" below for additional information about the components and a reconciliation of these measures.

(2)On a tax-equivalent basis and excluding the changes in fair value of derivative instruments (see "Net Interest Income" below for a reconciliation of these non-GAAP financial measures).

(3)Non-interest expenses to the sum of net interest income and non-interest income.


(4)Loans used in the denominator in calculating each of these ratios include
purchased credit-impaired ("PCI") loans. However, the Corporation separately
tracks and reports PCI loans and excludes these from nonaccrual loan and
non-performing asset amounts.



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The following MD&A relates to the accompanying unaudited consolidated financial
statements of First BanCorp. (the "Corporation" or "First BanCorp.") and should
be read in conjunction with such financial statements and the notes thereto.
This section also presents certain financial measures that are not based on
generally accepted accounting principles in the United States ("GAAP"). See
"Risk Management - Basis of Presentation" below for information about why the
non-GAAP financial measures are being presented and the reconciliation of the
non-GAAP financial measures for which the reconciliation is not presented
earlier.



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 (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 (the
"USVI") and British Virgin Islands (the "BVI"), and the State of Florida (USA),
concentrating on commercial banking, residential mortgage loan originations,
finance leases, credit cards, personal loans, small loans, auto loans, and
insurance agency activities.



SIGNIFICANT EVENTS



On October 21, 2019, the Corporation announced the signing of a stock purchase
agreement for FirstBank to acquire Santander Bancorp, the holding company of
Banco Santander Puerto Rico ("BSPR"). The purchase price will be a base amount
of $425 million, which represents a $63 million premium on the $362 million of
Santander Bancorp's consolidated core tangible common equity as of June 30,
2019, plus $638 million of Santander Bancorp's consolidated excess capital as of
June 30, 2019 paid at par, in an all cash transaction, subject to adjustment
based on Santander Bancorp's consolidated balance sheet as of the closing of the
acquisition. The transaction is structured as an acquisition of all of the
issued and outstanding common stock of Santander Bancorp, the sole shareholder
of BSPR, immediately followed by the merger of BSPR and its holding company into
FirstBank, with FirstBank being the surviving entity. As part of the
transaction, FirstBank will also acquire the operations of Santander Insurance
Agency, Inc., a wholly owned subsidiary of BSPR.



As of June 30, 2019, BSPR had $6.2 billion of assets, $3.1 billion of loans, and
$5.0 billion of deposits and operated a branch network of 27 locations spanning
15 municipalities across Puerto Rico. As part of the transaction, FirstBank will
not assume any of BSPR's non-performing assets. The Corporation believes that
the acquisition will significantly improve its scale and competitiveness in
Puerto Rico, while enhancing its funding and risk profile and expanding its
talent bench across retail, commercial business banking, and risk management
functions. In addition, the Corporation believes the acquisition will result in
cost savings and other potential synergies.



The stock purchase agreement has been unanimously approved by the Corporation's
and FirstBank's Boards of Directors. The transaction is subject to the
satisfaction of customary closing conditions, including receipt of all required
regulatory approvals, and is expected to close in the middle of 2020. The
Corporation expects to incur in restructuring charges of approximately $76
million expected to be phased-in 50% at closing with the remainder of the
charges to be incurred in 2021. See "Note 2 - Potential Acquisition of Banco
Santander Puerto Rico" to the accompanying unaudited consolidated financial
statements for additional information.



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 interest rate scenario; the volumes, mix and composition of
interest-earning assets and interest-bearing liabilities; and the re-pricing
characteristics of these assets and liabilities. The Corporation's results of
operations also depend on the provision for loan and lease losses, non-interest
expenses (such as personnel, occupancy, the deposit insurance premium and other
costs), non-interest income (mainly service charges and fees on deposits, and
insurance income), gains (losses) on sales of investments, gains (losses) on
mortgage banking activities, and income taxes.



The Corporation had net income of $46.3 million, or $0.21 per diluted common
share, for the quarter ended September 30, 2019, compared to $36.3 million, or
$0.16 per diluted common share, for the same period in 2018.





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The key drivers of the Corporation's GAAP financial results for the quarter ended September 30, 2019, compared to the same period in 2018, include the following:




?Net interest income increased by $11.9 million to $144.4 million for the
quarter ended September 30, 2019, compared to $132.5 million for the same period
in 2018. The increase in net interest income was driven primarily by: (i) a $9.5
million increase in interest income on consumer loans, mainly due to a $342.8
million increase in the average balance of this portfolio, primarily due to the
growth in the average balance of auto loans, finance leases, and personal loans;
and (ii) a $7.5 million increase in interest income on commercial and
construction loans, primarily due to growth in the average balance of the
performing commercial portfolio and, the effect in the third quarter of 2019 of
a $3.0 million accelerated discount accretion from the payoff of a commercial
mortgage loan. These increases were partially offset by: (i) a $2.9 million
increase in total interest expense, driven by the effect of higher market
interest rates on the cost of retail and brokered CDs, partially offset by the
decline of $261.4 million in the average balance of brokered CDs and the
downward repricing of variable rate repurchase agreements and subordinated
debentures; and (ii) a $2.0 million decrease in interest income on residential
mortgage loans, mainly due to a $146.6 million decrease in the average balance
of this portfolio.



The net interest margin increased to 4.89% for the third quarter of 2019,
compared to 4.54% for the same period a year ago, primarily related to an
increase in the proportion of higher-yielding loans, such as consumer loans, to
total interest-earning assets, an improved funding mix driven by the increase in
the proportion of interest-earning assets funded by the growth in
non-interest-bearing deposits, and the aforementioned $3.0 million accelerated
discount accretion from the payoff of a commercial mortgage loan, which
increased the net interest margin by approximately 10 basis points in the third
quarter of 2019. See "Results of Operations - Net Interest Income" below for
additional information.



?The provision for loan and lease losses decreased by $4.1 million to $7.4
million for the third quarter of 2019, compared to $11.5 million for the same
period in 2018. The decrease was driven by a $6.5 million net loan loss reserve
release for commercial and construction loans in the third quarter of 2019,
primarily related to lower historical loss rates for commercial and industrial
loans, the upgrade in the credit risk classification of a large commercial and
industrial loan, and loan loss recoveries. In contrast, during the third quarter
of 2018, the Corporation recognized a $13.7 million provision that included the
effect of a $10.1 million charge related to several nonaccrual commercial and
construction loans transferred to held for sale during such period. This
variance was partially offset by a $14.2 million increase in the provision for
consumer loans, reflecting the effect in the third quarter of 2018 of
charge-offs of approximately $10.9 million on consumer loans taken against
previously established qualitative reserves associated with Hurricane Maria and
Irma as well as a $2.2 million release of hurricane-related qualitative reserves
for consumer loans. In addition, the provision for residential mortgage loans
increased by $1.8 million.



Net charge-offs totaled $13.8 million for the third quarter of 2019, or 0.61% of
average loans on an annualized basis, compared to $33.0 million, or 1.52% of
average loans, for the same period in 2018. Net charge-offs for the third
quarter of 2018 included approximately $12.5 million of charge-offs taken on
nonaccrual commercial and construction loans transferred to held for sale during
such period. Excluding the effect of charge-offs taken on loans transferred to
held for sale, there was a $2.3 million net decrease in commercial and
construction loan net charge-offs, reflecting the effect of a $1.7 million loan
loss recovery recorded in the third quarter of 2019 associated with a commercial
and industrial loan fully charged off in prior periods. In addition, there were
decreases of $3.1 million in residential mortgage loan net charge-offs and $1.3
million in consumer loan net charge-offs. See "Provision for Loan and Lease
Losses" and "Risk Management" below for an analysis of the allowance for loan
and lease losses and non-performing assets and related ratios.



?The Corporation recorded non-interest income of $21.4 million for the third
quarter of 2019, compared to $18.5 million for the third quarter of 2018. The
increase was primarily driven by the effect in the third quarter of 2018 of a
$2.7 million loss from sales of $24.5 million in nonaccrual commercial and
construction loans held for sale. In addition, during the third quarter of 2019,
there were increases of $0.7 million in transaction fee income from credit and
debit card interchange fees, $0.5 million in insurance commission income, and
$0.5 million in fee income from service charges on deposits, compared to the
third quarter of 2018. These variances were partially offset by a $0.5 million
other-than-temporary impairment ("OTTI") charge on private label mortgage-backed
securities ("MBS") recorded in the third quarter of 2019 and the effect in the
third quarter of 2018 of both a $0.5 million gain on the sale of fixed assets of
a relocated banking branch in Puerto Rico and a $0.5 million gain from
hurricane-related insurance proceeds.





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?Non-interest expenses for the third quarter of 2019 were $92.8 million,
compared to $90.9 million for the same period in 2018. The increase was driven
by: (i) a $2.2 million increase in employees' compensation and benefit expenses
primarily related to salary merit increases and other adjustments related to the
annual compensation review process that took effect in July 2019, a higher
headcount and related higher matching contributions to the employees' retirement
plan, and an increase in the employees' medical insurance expense; (ii) a $1.0
million increase in professional fees, primarily related to outsourced
technology fees and an increase in legal fees associated with strategic
projects, including costs related to the aforementioned stock purchase agreement
for the acquisition of BSPR; and (iii) a $0.5 million increase in occupancy and
equipment costs, primarily in depreciation and amortization expenses. These
increases were partially offset by a $1.8 million decrease in losses from OREO
operations, primarily due to lower write-downs to the value of OREO properties.
See "Non-Interest Expenses" below for additional information.



?For the third quarter of 2019, the Corporation recorded an income tax expense
of $19.3 million, compared to $12.3 million for the same period in 2018. The
increase was driven by higher pre-tax earnings generated in the third quarter of
2019 and, to a lesser extent, an increase in the effective tax rate attributable
to a higher proportion of taxable to exempt income in 2019. The Corporation's
estimated annual effective tax rate for the first nine months of 2019, excluding
entities from which a tax benefit cannot be recognized and discrete items, was
29%, compared to 26% for the first nine months of 2018. The estimated annual
effective tax rate, including all entities for 2019, was 30% (29% excluding
discrete items), compared to 24% for the first nine months of 2018 (25%
excluding discrete items). As of September 30, 2019, the Corporation had a
deferred tax asset of $273.8 million (net of a valuation allowance of $87.2
million, including a valuation allowance of $56.2 million against the deferred
tax assets of the Corporation's banking subsidiary, FirstBank). See "Income
Taxes" below for additional information.



?As of September 30, 2019, total assets were $12.5 billion, an increase of
$287.2 million from December 31, 2018. The increase was mainly due to a $389.7
million increase in cash and cash equivalents, driven by proceeds from U.S.
agency bonds that matured or were called prior to maturity and prepayments of
U.S. agency MBS that have not yet been reinvested, as well as cash provided from
operating activities in the first nine months of 2019, a $109.6 million increase
in total loans, and a $63.3 million increase related to the recognition of a
right-of-use asset for operating leases in accordance with the adoption of the
Accounting Standards Update No. ("ASU") 2016-02, "Leases (Topic 842)" ("ASU
2016-02"). The $109.6 million increase in total loans reflects a growth of $97.6
million in the Puerto Rico region and a $21.3 million increase in the Florida
region, partially offset by a $9.3 million decrease in the Virgin Islands
region. On a portfolio basis, the increase consisted of growth of $255.0 million
in consumer loans, and $11.3 million in commercial and construction loans,
despite the repayment of certain large criticized commercial mortgage loans and
net of an $87.9 million decrease in nonaccrual commercial and construction
loans. The increase in these loan portfolios was partially offset by a $156.8
million decrease in the residential mortgage loan portfolio.



These increases were partially offset by a $211.4 million decrease in total
investment securities, driven by prepayments of U.S. agency MBS and bonds that
matured or were called prior to maturity. In addition, there was a $46.0 million
decrease in the net deferred tax asset and a $28.4 million decrease in the OREO
portfolio balance. See "Financial Condition and Operating Data Analysis" below
for additional information.



?As of September 30, 2019, total liabilities were $10.3 billion, an increase of
$131.3 million from December 31, 2018. The increase was mainly due a $159.1
million increase in government deposits, a $51.6 million increase in
non-government deposits, excluding brokered CDs, and a $66.2 million increase
related to the effect of the liability for operating leases recorded in
connection with the adoption of ASU 2016-02 in 2019. These increases were
partially offset by the repayment at maturity of a $50.1 million short-term
repurchase agreement and a $72.6 million decrease in brokered CDs. See "Risk
Management - Liquidity Risk and Capital Adequacy" below for additional
information about the Corporation's funding sources.



?As of September 30, 2019, the Corporation's stockholders' equity was $2.2
billion, an increase of $155.9 million from December 31, 2018. The increase was
mainly driven by the earnings generated in the first nine months of 2019 and a
$45.5 million increase in the fair value of available-for-sale investment
securities recorded as part of Other comprehensive income, partially offset by
common and preferred stock dividends declared in the first nine months of 2019
totaling $21.6 million. The Corporation's Total Capital, Common Equity Tier 1
Capital, Tier 1 Capital and Leverage ratios were 25.27%, 21.61%, 22.02%, and
16.04%, respectively, as of September 30, 2019, compared to Total Capital,
Common Equity Tier 1 Capital, Tier 1 Capital and Leverage ratios of 24.00%,
20.30%, 20.71%, and 15.37%, respectively, as of December 31, 2018. See "Risk
Management - Capital" below for additional information.





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?Total loan production, including purchases, refinancings, renewals and draws
from existing revolving and non-revolving commitments, but excluding the
utilization activity on outstanding credit cards, was $1.0 billion for the
quarter ended September 30, 2019, compared to $809.6 million for the same period
in 2018. The increase primarily resulted from a $212.7 million increase in
commercial and construction loan originations in the Puerto Rico region,
including both an increase in new loan originations and a higher dollar amount
of refinancings and renewals in 2019.



?Total non-performing assets were $332.1 million as of September 30, 2019, a
decrease of $135.0 million from December 31, 2018. The decrease was primarily
attributable to: (i) the repayment of a $31.5 million nonaccrual commercial
mortgage loan in the Florida region, the largest nonaccrual loan in the
portfolio; (ii) a $12.9 million reduction related to the split loan
restructuring of a commercial mortgage loan in the Puerto Rico region; (iii)
charge-offs on nonaccrual commercial and constructions loans amounting to $21.6
million, including a charge-off of $11.4 million on the aforementioned
nonaccrual commercial mortgage loan repaid in the Florida region; (iv) a $20.2
million decrease in nonaccrual residential mortgage loans; (v) sales and
repayments of nonaccrual commercial and construction loans held for sale
totaling $9.2 million during the first nine months of 2019; (vi) additional
collections on nonaccrual commercial and construction loans of approximately
$12.0 million during the first nine months of 2019; and (vii) a $0.8 million
decrease in nonaccrual consumer loans. In addition, there was a $28.4 million
decrease in the balance of the OREO properties portfolio, including as a result
of the sale of a $10.8 million commercial OREO property in the third quarter of
2019. See "Risk Management - Non-Accruing and Non-Performing Assets" below for
additional information.



?Adversely classified commercial and construction loans, including loans held
for sale, decreased by $101.0 million to $255.0 million as of September 30,
2019, compared to $356.0 million as of December 31, 2018. The decrease was
driven by the aforementioned payoff of a $31.5 million nonaccrual commercial
mortgage loan in the Florida region, the upgrade in the credit risk
classification of several commercial loans totaling $20.8 million, charge-offs,
collections, and the aforementioned reduction of $9.2 million related to sales
and repayments of nonaccrual loans held for sale.



The Corporation's financial results for the third quarter and first nine months
of 2019 and 2018 included the following items that management believes are not
reflective of core operating performance, are not expected to reoccur with any
regularity or may reoccur at uncertain times and in uncertain amounts (the
"Special Items"):



Quarter and Nine-Month Period Ended September 30, 2019


?A $3.0 million ($1.8 million after-tax) positive effect in earnings related to
the accelerated discount accretion from the payoff of an acquired commercial
mortgage loan in the third quarter of 2019.

?Benefits of $0.4 million ($0.2 million after-tax) and $1.2 million ($0.7
million after-tax) for the third quarter and nine-month period ended September
30, 2019, respectively, resulting from hurricane-related insurance recoveries
related to repairs and maintenance costs, and impairments associated with
facilities in the Virgin Islands.

?A $0.5 million OTTI charge on private label MBS recorded in the tax-exempt international banking entity subsidiary in the third quarter of 2019.


?Benefit of $0.8 million ($0.5 million after-tax) for the second quarter of 2019
resulting from hurricane-related insurance recoveries related to repairs and
maintenance costs, and impairments, associated with facilities in the British
Virgin Islands.



?Net loan loss reserve release of $6.4 million ($4.0 million after-tax) for the
first quarter of 2019 in connection with revised estimates of the qualitative
reserves associated with the effects of Hurricanes Maria and Irma, primarily
related to consumer and commercial loans. See "Provision for Loan and Lease
Losses" below for additional information.



?Expense recovery of $2.3 million recorded in the first quarter of 2019 related
to an employee retention benefit payment (the "Benefit") received by the Bank by
virtue of the Disaster Tax Relief and Airport Extension Act of 2017, as amended
(the "Disaster Tax Relief Act"). The Benefit was recorded as an offset to
employees' compensation and benefits expenses and is not treated as taxable
income by virtue of the Disaster Tax Relief Act.



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Quarter and Nine-Month Period Ended September 30, 2018




· Net loan loss reserve releases of $2.8 million ($1.7 million after-tax) for
the third quarter of 2018 and $11.2 million ($6.9 million after-tax) for the
first nine months of 2018 in connection with revised estimates of the
qualitative reserves associated with the effects of Hurricanes Maria and Irma.
See "Provision for Loan and Lease Losses" below for additional information.



· Gain of $0.5 million ($0.3 million after-tax) recorded in the third quarter of 2018 resulting from hurricane-related insurance proceeds in excess of fixed-asset impairment charges.




· Hurricane-related expenses of $0.5 million ($0.3 million after-tax) for the
third quarter of 2018 and $2.8 million ($1.7 million after-tax) for the first
nine months of 2018.



· Gain of $2.3 million recorded in the first quarter of 2018 on the repurchase
and cancellation of $23.8 million in variable rate trust-preferred securities
("TRuPs"), reflected in the consolidated statements of income as Gain on early
extinguishment of debt. The gain, realized at the holding company level, had no
effect on the income tax expense in 2018. See "Non-Interest Income" below for
additional information.


The following table reconciles for the third quarter and first nine months of 2019 and 2018 the reported net income to adjusted net income, a non-GAAP financial measure that excludes the Special Items identified above:





                                                                                              Nine-month period ended
                                                          Quarter ended September 30,              September 30,
                                                            2019               2018            2019             2018
(In thousands)
Net income, as reported (GAAP)                         $        46,327$        36,323$   130,928$    100,503
Adjustments:
Accelerated discount accretion due to early payoff of
acquired loan                                                  (2,953)                  -       (2,953)                -
Hurricane-related loan loss reserve release                          -            (2,781)       (6,425)         (11,245)
Benefit from hurricane-related insurance recoveries              (379)              (478)       (1,199)            (478)
Hurricane-related expenses                                           -                533             -            2,783
OTTI on debt securities                                            497                  -           497                -
Employee retention benefit - Disaster Tax Relief Act                 -                  -       (2,317)                -
Gain on early extinguishment of debt                                 -                  -             -          (2,316)
Income tax impact of adjustments (1)                             1,250              1,063         3,967            3,486
Adjusted net income (Non-GAAP) (2)                     $        44,742    $ 

34,660 $ 122,498$ 92,733

(1)See "Basis of Presentation" below for the individual tax impact related to each reconciling item.


(2)The Corporation is no longer considering the effect of loans transferred to
held for sale as a Special Item, and, thus, this effect is no longer presented
as an adjustment from GAAP to non-GAAP financial measures, such as adjusted net
income, adjusted provision for loan and lease losses, and adjusted provision to
net-charge-offs ratio.

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Critical Accounting Policies and Practices




The accounting principles of the Corporation and the methods of applying these
principles conform to GAAP. The Corporation's critical accounting policies
relate to: 1) the allowance for loan and lease losses; 2) OTTI; 3) income taxes;
4) the classification and values of financial instruments; 5) income recognition
on loans; 6) loans acquired; and 7) loans held for sale. These critical
accounting policies involve judgments, estimates and assumptions made by
management 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. Actual
results could differ from estimates, if different assumptions or conditions
prevail. Certain determinations inherently require greater reliance on the use
of estimates, assumptions, and judgments and, as such, have a greater
possibility of producing results that could be materially different than those
originally reported.



The Corporation's critical accounting policies are described in Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in First BanCorp.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 2018 (the "2018 Annual Report on Form 10-K"). There have not
been any material changes in the Corporation's critical accounting policies
since December 31, 2018.



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. Net interest income for the quarter and nine-month period ended
September 30, 2019 was $144.4 million and $427.2 million, respectively, compared
to $132.5 million and $387.7 million for the comparable periods in 2018. On a
tax-equivalent basis and excluding the changes in the fair value of derivative
instruments, net interest income for the quarter and nine-month period ended
September 30, 2019 was $149.4 million and $442.4 million, respectively, compared
to $137.9 million and $403.0 million for the comparable periods in 2018.



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,
information is provided on changes in (i) volume (changes in volume multiplied
by prior period rates) and (ii) rate (changes in rate multiplied by prior period
volumes). Rate-volume variances (changes in rate multiplied by changes in
volume) have been allocated to either the changes in volume or the changes in
rate based upon the effect of each factor on the combined totals.



                                      100

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The net interest income is computed on an adjusted tax-equivalent basis and excluding the change in the fair value of derivative instruments. For the definition and reconciliation of this non-GAAP financial measure, refer to the discussion in "Basis of Presentation" below.



Part I
                                       Average Volume            Interest income (1) / expense        Average Rate (1)
   Quarter ended September 30,       2019           2018            2019               2018            2019       2018

   (Dollars in thousands)
   Interest-earning assets:
   Money market and other        $    762,934$    661,374   $         4,081    $         3,166      2.12 %     1.90 %
   short-term investments
   Government obligations (2)         588,287        785,400             6,752              7,174      4.55 %     3.62 %
   MBS                              1,295,189      1,402,554             9,820             11,219      3.01 %     3.17 %
   Federal Home Loan Bank              41,779         39,778               660                687      6.27 %     6.85 %

("FHLB") stock

   Other investments                    3,395          3,042                 7                  5      0.82 %     0.65 %
   Total investments (3)            2,691,584      2,892,148            21,320             22,251      3.14 %     3.05 %
   Residential mortgage loans       3,018,603      3,165,250            40,610             42,601      5.34 %     5.34 %
   Construction loans                 104,816        122,186             1,691              1,233      6.40 %     4.00 %
   Commercial and Industrial and    3,748,186      3,576,886            55,543             48,269      5.88 %     5.35 %

Commercial mortgage loans

   Finance leases                     378,866        295,866             7,192              5,575      7.53 %     7.48 %
   Consumer loans                   1,776,254      1,516,432            50,904             42,976     11.37 %    11.24 %
   Total loans (4) (5)              9,026,725      8,676,620           155,940            140,654      6.85 %     6.43 %

Total interest-earning assets $ 11,718,309$ 11,568,768$ 177,260$ 162,905 6.00 % 5.59 %

Interest-bearing liabilities:

   Brokered CDs                  $    502,569$    763,988   $         2,843    $         3,495      2.24 %     1.81 %
   Other interest-bearing           6,290,767      6,050,621            17,498             13,484      1.10 %     0.88 %
   deposits
   Other borrowed funds               284,150        323,280             3,651              4,648      5.10 %     5.70 %
   FHLB advances                      741,522        692,174             3,878              3,344      2.07 %     1.92 %
   Total interest-bearing        $  7,819,008$  7,830,063$        27,870$        24,971      1.41 %     1.27 %
   liabilities
   Net interest income                                         $       149,390$       137,934
   Interest rate spread                                                                                4.59 %     4.32 %
   Net interest margin                                                                                 5.06 %     4.73 %




                                        Average Volume            Interest

income (1) / expense Average Rate (1)

   Nine-Month Period Ended            2019           2018            2019               2018            2019       2018
   September 30,

   (Dollars in thousands)
   Interest-earning assets:

Money market and other $ 615,499$ 686,886$ 10,350 $ 8,809 2.25 % 1.71 %

short-term investments

   Government obligations (2)          690,566        801,954            21,482             20,470      4.16 %     3.41 %
   MBS                               1,304,777      1,325,780            32,033             32,669      3.28 %     3.29 %
   FHLB stock                           41,809         40,505             2,013              2,036      6.44 %     6.72 %
   Other investments                     3,169          2,795                20                  9      0.84 %     0.43 %
   Total investments (3)             2,655,820      2,857,920            65,898             63,993      3.32 %     2.99 %

Residential mortgage loans 3,071,624 3,195,572 123,779

            128,793      5.39 %     5.39 %
   Construction loans                   94,075        120,734             4,531              3,261      6.44 %     3.61 %
   Commercial and Industrial and     3,760,878      3,630,655           163,518            141,807      5.81 %     5.22 %
   Commercial mortgage loans
   Finance leases                      360,429        276,158            20,313             15,136      7.54 %     7.33 %
   Consumer loans                    1,705,150      1,492,579           145,459            124,907     11.41 %    11.19 %
   Total loans (4) (5)               8,992,156      8,715,698           457,600            413,904      6.80 %     6.35 %

Total interest-earning assets $ 11,647,976$ 11,573,618$ 523,498$ 477,897 6.01 % 5.52 %

Interest-bearing liabilities:

   Brokered CDs                   $    511,567$    892,980   $         8,312    $        11,715      2.17 %     1.75 %
   Other interest-bearing            6,166,594      6,051,197            48,624             39,209      1.05 %     0.87 %
   deposits
   Other borrowed funds                298,277        373,639            12,699             13,808      5.69 %     4.94 %
   FHLB advances                       740,513        707,308            11,490             10,126      2.07 %     1.91 %
   Total interest-bearing         $  7,716,951$  8,025,124$        81,125$        74,858      1.41 %     1.25 %
   liabilities
   Net interest income                                          $       442,373$       403,039
   Interest rate spread                                                                                 4.60 %     4.27 %
   Net interest margin                                                                                  5.08 %     4.66 %




(1)On an adjusted tax-equivalent basis. The adjusted tax-equivalent yield was
estimated by dividing the interest rate spread on exempt assets by 1 less the
Puerto Rico statutory tax rate of 37.5% (39% for the quarter and nine-month
period ended September 30, 2018) 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. Changes in the fair value
of derivatives are excluded from interest income and interest expense because
the changes in valuation do not affect interest received or paid.

(2)Government obligations include debt issued by government-sponsored agencies.

(3)Unrealized gains and losses on available-for-sale securities are excluded from the average volumes.

(4)Average loan balances include the average of nonaccrual loans.


(5)Interest income on loans includes $2.4 million and $1.8 million for the
quarters ended September 30, 2019 and 2018, respectively, and $6.7 million and
$5.7 million for the nine-month periods ended September 30, 2019 and 2018,
respectively, of income from prepayment penalties and late fees related to the
Corporation's loan portfolio.



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© Edgar Online, source Glimpses

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