FIRST BANCORP.
OPERATIONS ("MD&A")
SELECTED FINANCIAL DATA
Quarter ended
(In thousands, except for per share and financial
ratios) March 31,
2020 2019
Condensed Income Statements:
Total interest income $ 165,264 $ 166,472
Total interest expense 26,615 26,291
Net interest income 138,649 140,181
Provision for credit losses 77,366 11,408
Non-interest income 30,200 22,543
Non-interest expenses 92,184 90,384
(Loss) income before income taxes (701) 60,932
Income tax (benefit) expense (2,967) 17,618
Net income 2,266 43,314
Net income attributable to common stockholders 1,597 42,645Per Common Share Results:
Net earnings per share-basic $ 0.01 $ 0.20
Net earnings per share-diluted $ 0.01 $ 0.20
Cash dividends declared $ 0.05 $ 0.03
Average shares outstanding 216,785 216,338
Average shares outstanding - diluted 217,314 216,950
Book value per common share $ 9.92 $ 9.50
Tangible book value per common share (1) $ 9.76 $ 9.32
Selected Financial Ratios (In Percent):
Profitability:
Return on Average Assets 0.07 % 1.43 %
Interest Rate Spread 4.17 4.45
Net Interest Margin 4.63 4.92
Interest Rate Spread - tax equivalent basis (2) 4.36 4.63
Net Interest Margin - tax equivalent basis (2) 4.82 5.11
Return on Average Total Equity 0.41 8.43
Return on Average Common Equity 0.29 8.58
Average Total Equity to Average Total Assets 17.38 16.97
Tangible common equity ratio (1) 16.36 16.42
Dividend payout ratio 678.80 15.22
Efficiency ratio (3) 54.60 55.29Asset Quality:
Allowance for credit losses for loans and
finance leases to total loans held for 3.24 2.04
investment
Net charge-offs (annualized) to average loans 0.78 1.10
Provision for credit losses for loans and 421.31 48.34
finance leases to net charge-offs
Non-performing assets to total assets 2.44 3.35
Nonaccrual loans held for investment to total 2.35 3.03
loans held for investment
Allowance for credit losses for loans and
finance leases to total nonaccrual loans held 137.91 67.36
for investment
Allowance for credit losses for loans and
finance leases to total nonaccrual loans held
for investment,
excluding residential real estate loans 327.52 130.56Other Information:
Common Stock Price: End of period $ 5.32 $
11.46
As of March 31 , As of December
2020 31, 2019
Balance Sheet Data:
Total loans, including loans held for sale $ 9,050,993 $ 9,041,682
Allowance for credit losses for loans and 292,774 155,139
finance leases
Money market and investment securities, net of 2,198,782 2,398,157
allowance for credit losses for debt securities
Goodwill and other intangible assets 34,958 35,671
Deferred tax asset, net 307,829 264,842
Total assets 13,047,977 12,611,266
Deposits 9,562,313 9,348,429
Borrowings 1,109,150 854,150
Total preferred equity 36,104 36,104
Total common equity 2,114,531 2,185,205
Accumulated other comprehensive income, net of 49,116 6,764
tax
Total equity 2,199,751 2,228,073
__________________
(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 the 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.
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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, 2019 . This section also presents certain financial measures that are not
based on generally accepted accounting principles in the United States ("GAAP").
See "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 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") and the
British Virgin Islands ("BVI"), and the State of Florida , concentrating on
commercial banking, residential mortgage loans, finance leases, credit cards,
personal loans, small loans, auto loans, and insurance agency activities.
RECENT DEVELOPMENTS
COVID-19 Pandemic
The novel coronavirus ("COVID-19") pandemic has had, and continues to have, an
adverse effect on the Corporation's business. The COVID-19 pandemic has severely
restricted the level of economic activity in the markets in which the
Corporation operates. Each of the jurisdictions in which the Corporation
operates has issued stay-at-home and non-essential business lockdown orders.
Puerto Rico's Governor issued a stay-at-home order on March 15, 2020 , which she
subsequently extended until May 3, 2020 . In addition to mandating that every
citizen stay at home except for essential activities, the order set out a
nightly curfew and a lockdown of non-essential businesses. Since March 31, 2020 ,
the Governor instituted additional restrictive measures, including limiting
travel by car, requiring the use of protective equipment, such as masks, the
maintenance of a distance of at least six feet between citizens, and a curfew
between 7 p.m. to 5 a.m. Although some of these restrictions have been modified,
the full lockdown of non-essential businesses continued until May 3, 2020 and
the stay-at-home order and the curfew was extended until May 25, 2020 . On May 1,
2020 , Puerto Rico's Governor announced a gradual reopening of the economy,
allowing the reopening on May 4, 2020 of sectors such as mortgage financial
services, insurance, and professional services including lawyers, engineers,
accountants and dental offices. On May 11, 2020 , the construction and
manufacturing sectors will be allowed to resume operations. Other sectors, such
as retail trade and auto sales, are expected to be allowed to reopen in mid to
late May 2020 , depending on how the COVID-19 trends in Puerto Rico cases develop
over the upcoming weeks. As of May 2, 2020 , 1,757 people in 73 municipalities in
Puerto Rico had tested positive for COVID-19 and 95 people' deaths were related
to the illness according to data provided by the Puerto Rico government. The
Corporation's businesses in the other jurisdictions in which it operates have
also been adversely affected. On March 26, 2020 , the Florida Governor issued a
stay-at-home order, and the state is expected to reopen essential operations
through a phase-in process beginning on May 4, 2020 . Additionally, in the USVI,
the government issued a stay-at-home order on March 23, 2020 , and the territory
announced a plan for a phased reopening of non-essential businesses beginning on
May 4, 2020 .
In light of the restrictions imposed by Puerto Rico , Florida and the Virgin
Islands , the Corporation modified its operations and the way it serves its
customers. For instance, the Corporation has implemented various steps to
protect its employees, consistent with guidance from federal and local
authorities, such as requiring that a majority of support staff work remotely
modifying the hours and staffing of its branch locations and implementing
stricter safety and cleaning protocols. The Corporation's branch transactions
and ATM volumes have declined but its digital and mobile banking activities have
increased. Consistent with regulatory guidance that endorses constructive
arrangements with borrowers affected by COVID-19, the Corporation adopted
payment deferral and relief programs in March 2020 . In addition, the Corporation
has waived late payment fees on loans and halted foreclosures and repossessions.
Furthermore, the Corporation has participated in the Small Business
Administration's ("SBA") Paycheck Protection Program ("PPP") under which it has
received approval from the SBA for loans to clients and small businesses in an
aggregate amount of $350.6 million as of May 7, 2020 , of which approximately
$313.2 million have been funded.
115
-------------------------------------------------------------------------------- The COVID-19 pandemic, and governmental, regulatory authorities, and societal responses have also affected the Corporation's financial results. The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, underemployment and unemployment, consumer spending, residential and commercial construction and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets. In response to the COVID-19 pandemic, various governmental and regulatory authorities have enacted measures and implemented programs designed to stimulate the economy and provide economic assistance to those affected by COVID-19 such as the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Some of the provisions of the CARES Act may improve the ability of impacted borrowers to pay their loans, including direct cash payments to eligible taxpayers below specified income limits, includingPuerto Rico residents, expanded unemployment insurance benefits and eligibility, and relief designed to prevent layoffs and business closures at small businesses. OnMarch 3, 2020 , theFederal Reserve Board (the "FED") reduced the target federal funds rate by 50 basis points, followed by an additional reduction of 100 basis points onMarch 16, 2020 . In addition, the Puerto Rico Government and the PROMESA oversight board have allocated more than$900 million in relief intended to stimulate thePuerto Rico economy and to assist individuals and local businesses. However, these reductions in interest rates and economic uncertainties have affected and might further adversely affect the Corporation's results of operations. As a result of the effect of the COVID-19 pandemic on forecasted economic and market conditions, the Corporation's financial results for the first quarter of 2020 included a reserve build of$59.8 million (i.e., the amount by which the provision for credit losses of$77.4 million exceeds net charge-offs of$17.6 million ). As ofMay 07, 2020 , the Corporation had under deferred repayment arrangements residential mortgage loans totaling$931.5 million , consumer loans totaling$1.0 billion , and commercial and construction loans totaling$1.8 billion , or 42% of its loan portfolio (see "Financial Condition and Operating Data Analysis" - Early Delinquency discussion, for additional information). In addition, the stay-at-home and lock down orders have resulted in a reduction of the Corporation's transaction fee income, such as that from credit and debit cards, automated teller machines (ATMs), and point-of-sale transactions, as well as the Corporation's volume of loan originations and closings. Further, the Corporation has incurred additional expenses, including providing incentives to employees working in its branches and increased expenses in cleaning and communications with customers. Notwithstanding, as ofMarch 31, 2020 , the Corporation's and the Bank's capital ratios were well in excess of all regulatory capital requirements and the Corporation maintained high liquidity levels with the cash and liquid securities to total assets ratio exceeding 17.5%, compared to 15.8% as ofDecember 31, 2019 . As ofMay 7, 2020 , the Corporation has approximately$383.7 million in available unused lines at theFederal Home Loan Bank ("FHLB") and the Primary Credit FED Discount Window Program has been activated as an alternate source of liquidity with approximately$973.2 million of availability, if needed. While management believes that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our financial results and regulatory capital ratios could be adversely impacted by further credit losses and we are unable to predict the extent, nature or duration of the effects of COVID-19 on our results of operations and financial condition at this time.
Update on Potential Acquisition of
With respect to the Corporation's announced transaction to acquireBanco Santander Puerto Rico ("BSPR"), the Corporation continues to work with the applicable regulators in their review of the transaction. Taking into account the impact of the COVID-19 pandemic, the Corporation now believes it is unlikely that all regulatory approvals necessary to close the transaction will be received by the middle of 2020 as previously expected. The Corporation continues to cooperate with its regulators and to provide additional requested information as part of the application process. The Form 8-K filed by the Corporation with theSecurities and Exchange Commission onOctober 22, 2019 , which includes the stock purchase agreement as an exhibit, provides additional information about the conditions to completing the transaction. 116
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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 environment; 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 credit 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
The key drivers of the Corporation's GAAP financial results for the quarter
ended
?Net interest income for the quarter endedMarch 31, 2020 was$138.6 million , compared to$140.2 million for the first quarter of 2019. The decrease of$1.6 million was driven primarily by: (i) a$5.1 million decrease in interest income on commercial and construction loans, primarily associated with the downward repricing of variable-rate commercial loans and lower collections of interest payments on nonaccrual loans; (ii) a$3.2 million decrease in interest income on residential mortgage loans, mainly due to a$231.6 million decrease in the average balance of this portfolio; (iii) a$0.6 million decrease in interest income from interest-bearing cash balances, primarily deposits maintained at theFederal Reserve Bank of New York ("New York FED"), due to decreases in the Federal Funds target rate; (iv) a$0.3 million increase in total interest expense, driven by the effect of a$555.4 million increase in the average balance of interest-bearing non-brokered deposits, partially offset by reductions in the average balance of FHLB advances and the downward repricing of variable rate repurchase agreements and junior subordinated debentures; and (v) a$0.1 million decrease in interest income on investment securities mainly related to a$1.3 million increase in the premium amortization expense onU.S. agencies mortgage-backed securities ("MBS"), almost entirely offset by an increase of$0.8 million in interest income due to a$140.8 million increase in the average balance of investment securities, and a$0.3 million increase related to the accelerated discount accretion onU.S. agencies bonds called prior to maturity in the first quarter of 2020. These decreases were partially offset by a$7.8 million increase in interest income on consumer loans. The net interest margin decreased to 4.63% for the first quarter of 2020, compared to 4.92% for the same period a year ago, primarily due to the aforementioned downward repricing of variable-rate commercial loans, as well as interest-bearing cash balances attributable to the effect of the lower interest rate environment, and the increase in the premium amortization expense onU.S. agencies MBS. See "Net Interest Income" below for additional information. ?The provision for credit losses on loans, finance leases, and debt securities increased by$66.0 million to$77.4 million for the first quarter of 2020, compared to$11.4 million for the same period in 2019, driven by the reserve build of$59.8 million in the first quarter of 2020 primarily in connection with the effect of the COVID-19 pandemic on forecasted economic and market conditions. EffectiveJanuary 1, 2020 , the Corporation adopted the current expected credit loss impairment model ("CECL") required by the Accounting Standards Codification ("ASC") Topic 326 ("ASC 326"), which replaced the incurred loss methodology. ASC 326 does not require restatement of comparative period financial statements; as such, results for the first quarter of 2020 reflect the adoption of ASC 326, while prior periods reflect results under the previously required incurred loss methodology. The adoption of ASC 326 resulted in a cumulative increase of approximately$93.2 million in the total allowance for credit losses ("ACL") as ofJanuary 1, 2020 . Net charge-offs totaled$17.6 million for the first quarter of 2020, or 0.78% of average loans on an annualized basis, compared to$24.5 million , or 1.10% of average loans for the same period in 2019. The decrease consisted of a$7.6 million decline in net charge-offs taken on commercial and construction loans and a$1.8 million decrease in net charge-offs taken on residential mortgage loans, partially offset by an increase of$2.5 million in net charge-offs taken on consumer loans. The decrease in net charge-offs on commercial and construction loans primarily reflects the effect of a$5.7 million charge-off taken in the first quarter of 2019 on a commercial and industrial loan in thePuerto Rico region. See "Provision for credit losses" and "Risk Management" below for analyses of the allowance for credit losses and non-performing assets and related ratios. 117
-------------------------------------------------------------------------------- ?The Corporation recorded non-interest income of$30.2 million for the first quarter of 2020, compared to$22.5 million for the same period in 2019. The increase was primarily driven by an$8.2 million gain recorded on the sale of approximately$275.6 million of available-for-saleU.S. agencies MBS, and a$0.4 million increase in insurance contingent commissions. These variances were partially offset by a$0.6 million decrease in transactional fee income from credit and debit cards, ATMs, and point-of-sale ("POS") and merchant-related activity as a resulted of reduced transactions caused by quarantines and lockdowns of non-essential businesses in connection with the COVID-19 pandemic. See "Non-Interest Income" below for additional information. ?Non-interest expenses for the first quarter of 2020 were$92.2 million compared to$90.4 million for the same period in 2019. The increase was primarily related to: (i) a$3.6 million increase in employees' compensation and benefits, primarily reflecting the effect in the first quarter of 2019 of a$2.3 million expense recovery related to an employee retention benefit payment received by the Bank under the Disaster Tax Relief and Airport Extension Act, as well as increases related to salary merit increases that took effect inJuly 2019 ; (ii) a$1.5 million increase in professional fees, primarily related to outsourced technology fees; and (iii) merger and restructuring costs of$0.8 million in connection with the pending acquisition of BSPR. These increases were partially offset by: (i) a$2.6 million decrease in losses from other real estate owned ("OREO") operations, primarily related to a$2.0 million decrease in write-downs to the value of OREO properties; and (ii) a$0.9 million decrease in occupancy and equipment costs, primarily related to insurance recoveries of$0.8 million recorded in the first quarter of 2020 in connection with hurricane-related costs. See "Non-Interest Expenses" below for additional information. ?For the first quarter of 2020, the Corporation recorded an income tax benefit of$3.0 million , compared to an income tax expense of$17.6 million for the same period in 2019. The variance was mostly attributable to an income tax benefit of approximately$20.0 million recorded in the first quarter of 2020 in connection with higher charges to the provision for credit losses for loans and debt securities due to the effect of the COVID-19 pandemic on forecasted economic conditions. As ofMarch 31, 2020 , the Corporation had a deferred tax asset of$307.8 million (net of a valuation allowance of$88.5 million , including a valuation allowance of$52.7 million against the deferred tax assets of the Corporation's banking subsidiary,FirstBank ). See "Income Taxes" below for additional information. OnJanuary 1, 2020 , the Corporation recognized an additional$31.3 million in deferred tax assets in connection with the transitional adjustment resulting from the adoption of the CECL accounting standard. ?As ofMarch 31, 2020 , total assets were$13.0 billion , an increase of$436.7 million fromDecember 31, 2019 . The increase was primarily related to a$443.6 million increase in cash and cash equivalents, attributable, among other things, to a$213.9 million growth in total deposits and proceeds of$200 million received from the cancellation of reverse repurchase agreements that were previously offset in the statement of financial condition against variable-rate repurchase agreements in accordance with ASC Topic 210-20-45-11. In addition, there was a net increase of$84.8 million in investment securities and account receivables from unsettled investment sales, as well as increases of$43.0 million in net deferred tax assets, and$9.3 million in total loans. These increases were partially offset by a$137.6 million increase in the ACL of loans and finance leases in connection with the cumulative effect of adopting ASC 326 onJanuary 1, 2020 and the charge to the provision during the first quarter of 2020. See "Financial Condition and Operating Data Analysis" below for additional information. ?As ofMarch 31, 2020 , total liabilities were$10.8 billion , an increase of$465.0 million fromDecember 31, 2019 . The increase was mainly due to a$200 million increase in the reported balance of repurchase agreements, reflecting the effect of the aforementioned cancellation of reverse repurchase agreements that were previously offset against variable-rate repurchase agreements in the consolidated statement of financial condition, a$91.2 million increase in total deposits, excluding brokered deposits and government deposits, a$100.9 million increase in non-maturity brokered deposits, and a$60.0 million increase related to short-term funding obtained from the FED's Primary Credit FED Discount Window Program during the first quarter 2020. See "Risk Management - Liquidity Risk and Capital Adequacy" below for additional information about the Corporation's funding sources. 118
-------------------------------------------------------------------------------- ?As ofMarch 31, 2020 , the Corporation's stockholders' equity was$2.2 billion , a decrease of$28.3 million fromDecember 31, 2019 . The decrease was driven by the$62.3 million transition adjustment related to the adoption of CECL recorded against beginning retained earnings, and common and preferred stock dividends declared in the first quarter of 2020 totaling$11.6 million , partially offset by the earnings generated in the first quarter, and an increase of approximately$50 million in the fair value of available-for-sale investment securities recorded as part of other comprehensive income. The Corporation's common equity tier 1 capital, tier 1 capital, total capital and leverage ratios under the Basel III rules were 21.79%, 22.19%, 25.42% and 15.98%, respectively, as ofMarch 31, 2020 , compared to common equity tier 1 capital, tier 1 capital, total capital and leverage ratios of 21.60%, 22.00%, 25.22%, and 16.15%, respectively, as ofDecember 31, 2019 . As permitted by the regulatory capital framework, the Corporation elected the option to delay for two years the estimate of the CECL methodology's effect on regulatory capital, relative to the incurred loss methodology's effect on capital, followed by a three-year transition period. See "Risk Management - Capital" below for additional information. ?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$802.6 million for the quarter endedMarch 31, 2020 , compared to$881.5 million for the same period in 2019. The decrease consisted of reductions of$35.2 million ,$31.8 million , and$11.9 million in residential mortgage loan originations, consumer loan originations, and commercial and constructions loan originations, respectively. These reductions reflect the effect of disruptions in the loan underwriting and closing process caused by the COVID-19 pandemic, including as a result of quarantines and the lockdown of non-essential businesses measures that began inPuerto Rico onMarch 16, 2020 . ?Total non-performing assets were$317.8 million as ofMarch 31, 2020 , an increase of$0.4 million fromDecember 31, 2019 . The increase was primarily related to consumer and residential mortgage loans that migrated to nonaccrual status prior to the deferral payment programs established by the Corporation to assist borrowers affected by the COVID-19 pandemic, partially offset by reductions in commercial and construction nonaccrual loans. See "Risk Management - Non-Accruing and Non-Performing Assets" below for additional information. ?Adversely classified commercial and construction loans decreased by$103.8 million to$116.7 million as ofMarch 31, 2020 compared toDecember 31, 2019 . The decrease was driven by the upgrade in the credit risk classification of a$117.5 million commercial mortgage loan relationship in thePuerto Rico region. 119 -------------------------------------------------------------------------------- The Corporation's financial results for the first quarter of 2020 and 2019 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 ended
?An$8.2 million gain on sales of approximately$275.6 million ofU.S. agencies MBS executed in the latter part of March. The gain, realized at the tax-exempt international banking entity subsidiary, had no effect in the income tax expense recorded in the first quarter of 2020.
?A
?Merger and restructuring costs of$0.8 million ($0.5 million after-tax) in connection with the previously announced stock purchase agreement withSantander Holdings USA, Inc. to acquire BSPR and related restructuring initiatives. Merger and restructuring costs in the first quarter of 2020 primarily included consulting, legal, and other pre-conversion related efforts associated with the pending acquisition of BSPR. ?Costs of$0.4 million ($0.2 million after-tax) related to the COVID-19 pandemic response efforts, primarily additional cleaning costs and communications with customers.
Quarter ended
?A$6.4 million ($4.0 million after-tax) positive effect on earnings related to loan loss reserve releases resulting from revised estimates of the hurricane-related qualitative reserves associated with the effects of Hurricanes Irma and Maria, primarily related to consumer and commercial loans. ?A$2.3 million expense recovery related to an employee retention benefit payment (the "Benefit") received by the Bank under the Disaster Tax Relief and Airport Extension Act of 2017, as amended (the "Act"). The Benefit was recorded as an offset to the employees' compensation and benefits expenses recognized in the first quarter of 2019 and was not treated as taxable income by virtue of the Act.
The following table reconciles for the first quarter of 2020 and 2019 the reported net
income to adjusted net (loss) income, a non-GAAP financial measure that excludes the
Special Items identified above:
Quarter ended March 31,
2020 2019
(In thousands)
Net income, as reported (GAAP) $ 2,266 $ 43,314
Adjustments:
Merger and restructuring costs 845 -
Hurricane-related loan loss reserve release - (6,425)
Employee retention benefit - Disaster Tax Relief and Airport Extension Act of 2017
- (2,317)
Benefit from hurricane-related insurance recoveries (1,153)
-
Gain on sales of investment securities (8,247) -
COVID-19 pandemic-related expenses 363 -
Income tax impact of adjustments (1) (21) 2,409
Adjusted net (loss) income (Non-GAAP)$ (5,947)
(1)See "Basis of Presentation" below for the individual tax impact related to reconciling items.
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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 credit losses; 2) income taxes; 3) the classification and values of financial instruments; and 4) income recognition on loans. 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 endedDecember 31, 2019 (the "2019 Annual Report on Form 10-K"). In connection with our adoption of CECL onJanuary 1, 2020 , the Corporation has updated its critical accounting policy for the allowance for credit losses.
Allowance for Credit Losses
The Corporation maintains an ACL for loans and finance leases, which is management's estimate of the expected credit losses in the loan portfolio, at the balance sheet date, excluding loans held for sale. Additionally, the Corporation maintains an allowance for credit losses for debt securities classified as either held-to-maturity (HTM) or available-for-sale (AFS), and other off-balance sheet credit exposures (e.g., unfunded loan commitments). In connection with the adoption of CECL, the Corporation updated its approach for estimating expected credit losses, which includes new areas for management judgment, described more fully below, and updated its accounting policies. For more information, see Note 1 - Basis of Presentation and Significant Accounting Policies to the accompanying unaudited consolidated financial statements in this Form 10-Q. For loans and finance leases, unfunded loan commitments, and HTM debt securities, the ACL is measured based on the remaining contractual term of the financial asset exposures adjusted, as appropriate, for prepayments and permitted extension options using historical experience, current conditions, and forecasted information. For AFS debt securities, the ACL is measured using a discounted cash flow approach and is limited to the difference between the fair value of the security and its amortized cost. Changes in the ACL and, therefore, in the related provision for credit losses can materially affect net income. In applying the judgment and review required to determine the ACL, management considerations include the evaluation of past events, historical experience, changes in economic forecasts and conditions, customer behavior, collateral values, and the length of the initial loss forecast period, and other influences. From time to time, changes in economic factors or assumptions, business strategy, products or product mix, or debt security investment strategy, may result in a corresponding increase or decrease in our ACL.
The Corporation's methodology for estimating the ACL under CECL for applicable loans and debt securities includes the following key components:
?Forecasted economic variables, such as, unemployment rate, home and commercial
real estate prices, and gross domestic product (GDP), are used to estimate
expected credit losses. The Corporation has currently set an initial forecast
period ("reasonable and supportable period") of 2 years and a reversion period
of up to 3 years, utilizing a straight-line approach and reverting back to the
historical macroeconomic mean for Puerto Rico and the Virgin Islands regions.
For the Florida region, the methodology considers a reasonable and supportable
forecast period and an implicit reversion towards the historical trend that
varies for each macroeconomic variable, achieving the steady state by year 5.
?After the reversion period, a historical loss forecast period covering the remaining contractual life, adjusted for prepayments, is used based on the change in key historical economic variables during representative historical expansionary and recessionary periods.
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?The ACL for loans, unfunded loan commitments, and HTM debt securities is
primarily measured based on a probability of default (PD)/loss given default
(LGD) modeled approach, The current fair value of collateral is utilized to
assess the expected credit losses when a financial asset is considered to be
collateral dependent.
?The ACL on a troubled debt restructured ("TDR") loan is generally measured
using a discounted cash flow method unless they are collateral dependent and
measured based on the fair value of the collateral. The discounted cash flow
methods will provide the estimated life-time credit losses. For credit card,
personal, and nonaccrual auto loans and finance leases modified in a TDR, the
ACL is measured using the same methodologies as those used for all other loans
in those portfolios.
?The remaining contractual term of a loan is adjusted for expected prepayments,
as appropriate. The contractual term excludes expected extensions, renewals, and
modifications unless either of the following applies: the Corporation has a
reasonable expectation at the reporting date that a TDR will be executed with an
individual borrower or the extension or renewal options are included in the
original or modified contract at the reporting date and are not unconditionally
cancellable by the Corporation.
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 ended March 31, 2020 was $138.6
million , compared to $140.2 million for the comparable period in 2019. On a
tax-equivalent basis and excluding the changes in the fair value of derivative
instruments, net interest income for the quarter ended March 31, 2020 was $144.3
million , compared to $145.5 million for the comparable period in 2019.
The following tables include a detailed analysis of net interest income for the
indicated periods. Part I presents average volumes (based on the average daily
balance) and rates on an adjusted tax-equivalent basis and Part II presents,
also on an adjusted tax-equivalent basis, the extent to which changes in
interest rates and changes in the volume of interest-related assets and
liabilities have affected the Corporation's net interest income. For each
category of interest-earning assets and interest-bearing liabilities, the tables
provide information on changes in (i) volume (changes in volume multiplied by
prior period rates), and (ii) rate (changes in rate multiplied by prior period
volumes). The Corporation has allocated rate-volume variances (changes in rate
multiplied by changes in volume) to either the changes in volume or the changes
in rate based upon the effect of each factor on the combined totals.
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The net interest income is computed on an adjusted tax-equivalent basis and excluding the change in the fair value of derivative instruments. For the definition and reconciliation of this non-GAAP financial measure, refer to the discussion in "Basis of Presentation" below.
Part I
Average Volume Interest income (1) / expense Average Rate (1)
Quarter ended March 31, 2020 2019 2020 2019 2020 2019 (Dollars in thousands) Interest-earning assets: Money market and other$ 770,708 $ 490,045 $ 2,262 $ 2,829 1.18 % 2.34 % short-term investments Government obligations (2) 481,967 765,250 5,301 7,476 4.42 % 3.96 % MBS 1,763,813 1,333,752 14,009 11,897 3.19 % 3.62 % FHLB stock 33,390 41,930 596 696 7.18 % 6.73 % Other investments 5,668 3,078 11 6 0.78 % 0.79 % Total investments (3) 3,055,546 2,634,055 22,179 22,904 2.92 % 3.53 % Residential mortgage loans 2,890,810 3,122,372 38,655 41,819 5.38 % 5.43 % Construction loans 122,120 85,485 1,881 1,329 6.20 % 6.31 % Commercial and Industrial and 3,679,470 3,724,486 47,972 53,282 5.24 % 5.80 %
Commercial mortgage loans
Finance leases 421,740 341,789 7,919 6,386 7.55 % 7.58 % Consumer loans 1,883,278 1,638,742 52,310 46,078 11.17 % 11.40 % Total loans (4) (5) 8,997,418 8,912,874 148,737 148,894 6.65 % 6.78 %
Total interest-earning assets
Interest-bearing liabilities:
Brokered CDs$ 429,106 $ 523,258 $
2,452 $ 2,687 2.30 % 2.08 %
Other interest-bearing deposits 6,580,393 6,024,953 17,202 14,805 1.05 % 1.00 % Loans payable 4,396 - 3 - 0.27 % - % Other borrowed funds 440,194 327,001 3,950 5,014 3.61 % 6.22 % FHLB advances 555,110 740,000 3,008 3,785 2.18 % 2.07 % Total interest-bearing$ 8,009,199 $ 7,615,212 $ 26,615 $ 26,291 1.34 % 1.40 % liabilities Net interest income$ 144,301 $ 145,507 Interest rate spread 4.36 % 4.63 % Net interest margin 4.82 % 5.11 % (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 thePuerto 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.
(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$2.2 million and$2.1 million for the first quarter of 2020 and 2019, respectively, of income from prepayment penalties and late fees related to the Corporation's loan portfolio. 123
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Part II
Quarter ended March 31,
2020 compared to 2019
Increase (decrease)
Due to:
(In thousands) Volume Rate Total
Interest income on interest-earning assets:
Money market and other short-term investments $ 1,249 $ (1,816) $ (567)
Government obligations (2,932) 757 (2,175)
MBS 3,706 (1,594) 2,112
FHLB stock (145) 45 (100)
Other investments 5 - 5
Total investments 1,883 (2,608) (725)
Residential mortgage loans (2,792) (372) (3,164)
Construction loans 576 (24) 552
Commercial and Industrial and Commercial (593) (4,717) (5,310)
mortgage loans
Finance leases 1,535 (2) 1,533
Consumer loans 7,077 (845) 6,232
Total loans 5,803 (5,960) (157)
Total interest income 7,686 (8,568) (882)
Interest expense on interest-bearing
liabilities:
Brokered CDs (504) 269 (235)
Other interest-bearing deposits 1,501 896 2,397
Loans payable 3 - 3
Other borrowed funds 1,414 (2,478) (1,064)
FHLB advances (965) 188 (777)
Total interest expense 1,449 (1,125) 324
Change in net interest income $ 6,237 $ (7,443) $ (1,206)
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 "Income Taxes" below for additional information). To
facilitate the comparison of all interest data related to these assets, the
interest income has been converted to an adjusted tax equivalent basis. 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
("valuations") 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 or interest earned on interest-bearing liabilities or
interest-earning assets, respectively.
124
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The following table reconciles net interest income in accordance with GAAP to net interest
income, excluding valuations, and net interest income on an adjusted tax-equivalent basis for
the indicated periods. The table also reconciles net interest spread and net interest margin on
a GAAP basis to these items excluding valuations, and on an adjusted tax-equivalent basis:
Quarter Ended March 31,
(Dollars in thousands) 2020 2019
Interest Income - GAAP $ 165,264 $ 166,472
Unrealized loss on derivative instruments - 4
Interest income excluding valuations 165,264 166,476
Tax-equivalent adjustment 5,652 5,322 Interest income on a tax-equivalent basis and excluding valuations 170,916 171,798 Interest Expense - GAAP 26,615 26,291 Net interest income - GAAP$ 138,649 $ 140,181 Net interest income excluding valuations$ 138,649
Net interest income on a tax-equivalent basis and excluding valuations$ 144,301 $ 145,507 Average Balances Loans and leases$ 8,997,418
3,055,546 2,634,055
Average Interest-Earning Assets$ 12,052,964
Average Interest-Bearing Liabilities$ 8,009,199
Average Yield/Rate Average yield on interest-earning assets - GAAP 5.51 % 5.85 % Average rate on interest-bearing liabilities - GAAP 1.34 % 1.40 % Net interest spread - GAAP 4.17 % 4.45 % Net interest margin - GAAP 4.63 % 4.92 %
Average yield on interest-earning assets excluding valuations
5.51 % 5.85 %
Average rate on interest-bearing liabilities 1.34 % 1.40 %
Net interest spread excluding valuations 4.17 % 4.45 %
Net interest margin excluding valuations 4.63 % 4.92 %
Average yield on interest-earning assets on a
tax-equivalent basis
and excluding valuations 5.70 % 6.03 %
Average rate on interest-bearing liabilities 1.34 % 1.40 %
Net interest spread on a tax-equivalent basis and
excluding valuations 4.36 % 4.63 %
Net interest margin on a tax-equivalent basis and
excluding valuations 4.82 % 5.11 %
125
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Interest income on interest-earning assets primarily represents interest earned on loans held for investment and investment securities.
Interest expense on interest-bearing liabilities primarily represents interest paid on brokered CDs, retail deposits, repurchase agreements, advances from the FHLB and junior subordinated debentures. Unrealized gains or losses on derivatives represent changes in the fair value of derivatives, primarily interest rate caps used for protection against rising interest rates. For the quarter endedMarch 31, 2020 , net interest income decreased$1.6 million to$138.6 million , compared to$140.2 million for the same period in 2019. The$1.6 million decrease in net interest income was primarily due to: ?A$5.1 million decrease in interest income on commercial and construction loans, primarily related to the downward repricing of variable-rate commercial and construction loans and lower collections of interest payments on nonaccrual loans. As ofMarch 31, 2020 , the interest rate on approximately 44% of the Corporation's commercial and construction loans was based upon LIBOR indexes and 20% was based upon the Prime rate index. For the first quarter of 2020, the average one-month LIBOR rate declined 109 basis points, the average three-month LIBOR rate declined 115 basis points, and the average Prime rate declined 109 basis points compared to the average rates for such indexes for the first quarter of 2019.
?A
?A$0.6 million decrease in interest income from interest-bearing cash balances, which consisted primarily of deposits maintained at theNew York FED . Balances at theNew York FED earned 0.10% as ofMarch 31, 2020 compared to 2.40% as ofMarch 31, 2019 , a decrease attributable to declines in the Federal Funds target rate. The decrease in rate was partially offset by a$280.7 million increase in the average balance of interest-bearing cash balances. ?A$0.3 million increase in interest expense, primarily due to a$2.2 million increase in interest expense on interest-bearing deposits, driven by both a$555.4 million increase in the average balance of non-brokered deposits and an increase in the average interest rates paid on retail CDs. This was partially offset by: (i) a$0.8 million decrease in interest expense on FHLB advances, primarily related to a$184.9 million decrease in the average balance; (ii) a$0.6 million decrease in interest expense on repurchase agreement primarily related to the downward repricing of variable-rate repurchase agreements, and (iii) a$0.4 million decrease in interest expense related to the downward repricing of floating-rate junior subordinated debentures. ?A$0.1 million decrease in interest income on investment securities, mainly related to a$1.3 million increase in the premium amortization expense onU.S. agencies MBS, almost entirely offset by an increase of$0.8 million in connection with a$140.8 million increase in the average balance of investment securities, and a$0.3 million increase related to the accelerated discount accretion onU.S. agencies bonds called prior to maturity in the first quarter of 2020. Given the stimulus actions taken by the federal government to contain the economic fallout from the COVID-19 pandemic, market interest rates remain at low levels, potentially triggering accelerated exercise of call options and prepayment rights on investment securities. Partially offset by: ?A$7.8 million increase in interest income on consumer loans, mainly due to a$324.5 million increase in the average balance of this portfolio, primarily as a result of increases of auto loans, personal loans and finance leases. The net interest margin decreased by 29 basis points to 4.63% for the first quarter of 2020, compared to 4.92% for the first quarter of 2019. The decrease was primarily attributable to the downward repricing of variable rate commercial and construction loans, as well as interest-bearing cash balances attributable to the effect of the lower interest rate environment, and the increase in the premium amortization expense onU.S. agencies MBS. On an adjusted tax-equivalent basis, net interest income for the quarter endedMarch 31, 2020 decreased by$1.2 million to$144.3 million , compared to$145.5 million for the same period in 2019. The tax-equivalent adjustment increased by$0.3 million due to an increase in the average balance ofU.S. agencies MBS held by the IBE subsidiary First Bank Overseas. 126 --------------------------------------------------------------------------------
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 held-to-maturity and available-for-sale debt securities. OnJanuary 1, 2020 , the Corporation adopted ASU 2016-13, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology to estimate the ACL of certain financial assets considering, among other things, expected future changes in macroeconomic conditions. The Corporation adopted ASU 2016-13 using the modified retrospective method, resulting in a cumulative increase of approximately$93.2 million in the total ACL with a corresponding decrease, net of applicable taxes, in beginning retained earnings as ofJanuary 1, 2020 . Results for reporting periods beginning afterJanuary 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. See Note 1 - Basis of Presentation and Significant Accounting Policies, to the consolidated financial statements for further information about the day-one impact of adopting ASU 2016-13, as well as a description of the methodologies that the Corporation follows to determine the ACL.
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 increased by$62.2 million to$74.0 million for the first quarter of 2020 compared to$11.8 million for the first quarter of 2019. The variances by major portfolio category are as follow: ?Provision for credit losses on commercial and construction loans of$24.6 million , compared to a release of$5.0 million in the first quarter of 2019. The increase reflects deterioration in the macro-economic environment due to the COVID-19 pandemic reflected across multiple sectors with the higher increases in the ACL made for loans in the accommodation, retail real estate, and transportation industries. The exposure to these industries represents approximately 28% of the total commercial and construction loan portfolio as ofMarch 31, 2020 . The reserve release recorded in the first quarter of 2019 was primarily related to a$3.4 million reserve release associated with the resolution of uncertainties surrounding the repayment prospects of a hurricane-affected commercial customer. ?Provision for credit losses on residential mortgage loans of$16.2 million , compared to$6.6 million in the first quarter of 2019. The increase was driven by a$12.4 million reserve build (i.e., provision of$16.2 million in excess of net charge-offs of$3.8 million ) in the first quarter of 2020, reflecting forecasted credit deterioration due to the COVID-19 pandemic, partially offset by the decline in the balance of this portfolio. ?Provision for credit losses on consumer loans and finance leases of$33.2 million , compared to$10.2 million in the first quarter of 2019. The increase was driven by a$19.5 million reserve build (i.e., provision of$33.2 million in excess of net charge-offs of$13.7 million ) in the first quarter of 2020 reflecting forecasted credit deterioration due to the COVID-19 pandemic, primarily reflected in the credit cards and unsecured personal loans portfolios, and the increase in the overall size of this portfolio. In addition, the variance reflects the effect in the first quarter of 2019 of a$3.0 million reserve release related to revised estimates associated with the effects of Hurricanes Irma and Maria, attributable to the updated payment patterns and credit risk analyses applied to consumer borrowers subject to payment deferral programs that expired early in 2018. See "Risk Management - Credit Risk Management" below for an analysis of the allowance for credit losses, non-performing assets, and related information, and see "Financial Condition and Operating Data Analysis - Loan Portfolio and Risk Management - Credit Risk Management" below for additional information concerning the Corporation's loan portfolio exposure in the geographic areas where the Corporation does business.
Provision for credit losses for unfunded loan commitments
The Corporation recorded a provision for credit losses for unfunded commercial and construction loan commitments and standby letters of credit of$1.8 million in the first quarter of 2020, compared to a release of$0.4 million in the first quarter of 2019. The increase was driven by the effect of the deteriorating economic outlook due to the COVID-19 pandemic.
Provision for credit losses for held-to-maturity and available-for-sale debt securities
The Corporation recorded a provision for credit losses for held-to-maturity and available-for-sale debt securities of$1.1 million and$0.4 million , respectively, in the first quarter of 2020 as a result of CECL requirements in effect sinceJanuary 1, 2020 . ASU 2016-13 requires the determination of expected credit losses over the life of held-to-maturity securities and changed the accounting for available-for-sale debt securities to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities that management does not intend to sell or believes that it is more likely than not it will not be required to sell. 127 --------------------------------------------------------------------------------
Non-Interest Income
The following table presents the composition of non-interest income for the indicated
periods:
Quarter Ended March 31,
2020 2019
(In thousands)
Service charges on deposit accounts $ 5,957 $ 5,716
Mortgage banking activities 3,788 3,627
Insurance income 4,582 4,250
Other operating income 7,626 8,950
Non-interest income before net gain
on sales of investment securities 21,953 22,543
Net gain on sales of investment securities 8,247 -
Total $ 30,200 $ 22,543
128
-------------------------------------------------------------------------------- Non-interest income primarily consists of income from service charges on deposit accounts, commissions derived from various banking and insurance activities, gains and losses on mortgage banking activities, interchange and other fees related to debit and credit cards, and net gains and losses on investment securities.
Service charges on deposit accounts include monthly fees, overdraft fees, and other fees on deposit accounts, as well as corporate cash management fees.
Income from mortgage banking activities includes gains on sales and securitizations of loans, revenues earned for administering residential mortgage loans originated by the Corporation and subsequently sold with servicing retained, and unrealized gains and losses on forward contracts used to hedge the Corporation's securitization pipeline. In addition, lower-of-cost-or-market valuation adjustments to the Corporation's residential mortgage loans held-for-sale portfolio and servicing rights portfolio, if any, are recorded as part of mortgage banking activities.
Insurance income consists mainly of insurance commissions earned by the
Corporation's subsidiary,
The other operating income category is composed of miscellaneous fees such as debit, credit card and POS interchange fees, as well as contractual shared revenues from merchant contracts sold in 2015.
The net gain on investment securities reflects gains or losses as a result of sales that are consistent with the Corporation's investment policies.
Non-interest income for the first quarter of 2020 amounted to$30.2 million , compared to$22.5 million for the same period in 2019. The$7.7 million increase in non-interest income was primarily related to:
?An
?A
?A
?A 0.2 million increase in revenues from mortgage banking activities, driven by a$1.3 million increase in gains on sales of residential mortgage loans in the secondary market, partially offset by a$0.6 million increase in unrealized marked-to-market losses on To-Be-Announced ("TBA") MBS forward contracts and a$0.2 million increase in the mortgage servicing rights amortization expense. Total loans sold in the secondary market toU.S. GSEs during the first quarter of 2020 amounted to$93.7 million with a related net gain of$3.4 million (net of realized losses of$0.4 million on settled TBA hedges), compared to total loans sold in the secondary market during the first quarter of 2019 of$77.3 million with a related net gain of$2.2 million (net of realized losses of$0.6 million on settled TBA hedges). Partially offset by: ?A$1.3 million decrease in Other operating income in the table above, primarily related to a$0.6 million decrease in transactional fee income from credit and debit cards, ATMs, and POS and merchant-related activity as a result of reduced transactions caused by quarantines and lockdowns of non-essential businesses in connection with the COVID-19 pandemic, the effect in 2019 of a$0.2 million gain recorded on the sale of$4.8 million in nonaccrual commercial loans held for sale, and a$0.1 million decrease in non-deferrable loan fee income, such as expired commitment fees. 129
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Non-Interest Expenses
The following table presents the components of non-interest expenses for the indicated
periods:
Quarter Ended March 31,
2020 2019
(In thousands)
Employees' compensation and benefits $ 42,859 Occupancy and equipment 15,127
16,055
FDIC deposit insurance premium 1,522
1,698
Taxes, other than income taxes 3,880
3,820
Professional fees:
Collections, appraisals and other credit-related 1,696
1,717
fees
Outsourced technology services 6,829
5,520
Other professional fees 3,268
3,073
Credit and debit card processing expenses 3,950 4,154 Business promotion 3,622 3,706 Communications 1,877 1,752 Net loss on OREO and OREO operations expenses 1,188
3,743
Merger and restructuring costs 845 - Other 5,521 5,850 Total$ 92,184 $ 90,384 130
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Non-interest expenses for the first quarter of 2020 were
?A$3.6 million increase in employees' compensation and benefits, primarily related to the effect in the first quarter of 2019 of the$2.3 million expense recovery related to the employee retention benefit payment received by the Bank by virtue of the Disaster Tax Relief and Airport Extension Act, as well as increases related to salary merit increases that took effect inJuly 2019 .
?A
?Merger and restructuring costs amounting to$0.8 million in connection with the pending acquisition of BSPR. These costs primarily included consulting, legal, and other pre-integration related efforts. Partially offset by: ?A$2.6 million decrease in net loss on OREO operations, primarily related to a$2.0 million decrease in write-downs to the value of OREO properties and a$0.8 million decrease in OREO-related operating expenses, primarily repairs and maintenance, partially offset by a$0.2 million decrease in income recognized from rental payments associated with OREO income-producing properties. ?A$0.9 million decrease in occupancy and equipment costs, primarily related to insurance recoveries of$0.8 million recorded in the first quarter of 2020 in connection with hurricane-related costs.
?A
?A
?A
131
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Income Taxes Income tax expense includesPuerto Rico and USVI income taxes, as well as applicableU.S. federal and state taxes. The Corporation is subject toPuerto Rico income tax on its income from all sources. As aPuerto Rico corporation, First BanCorp. is treated as a foreign corporation forU.S. and USVI income tax purposes and, accordingly, is generally subject toU.S. and USVI income tax only on its income from sources within theU.S. and USVI or income effectively connected with the conduct of a trade or business in those jurisdictions. Any such tax paid in theU.S. and USVI is also creditable against the Corporation'sPuerto Rico tax liability, subject to certain conditions and limitations. Under the Puerto Rico Internal Revenue Code of 2011, as amended (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 afterDecember 31, 2004 and ended beforeJanuary 1, 2013 is 12 years; for NOLs incurred during taxable years commencing afterDecember 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 inPuerto Rico and 85% on dividends received from other taxable domestic corporations. The Corporation has maintained an effective tax rate lower than the maximum statutory rate of 37.5%, mainly by investing in government obligations and MBS exempt fromU.S. andPuerto Rico income taxes and by doing business through an IBE unit of the Bank, and through the Bank's subsidiary,FirstBank Overseas Corporation , whose interest income and gains on sales is exempt fromPuerto Rico income taxation.The IBE and FirstBank Overseas Corporation were created under the International Banking Entity Act ofPuerto Rico , which provides for totalPuerto Rico tax exemption on net income derived by IBEs operating inPuerto 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. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was enacted onMarch 27, 2020 , includes several provisions to stimulate theU.S. economy in the midst of the COVID-19 pandemic. The CARES Act includes tax provisions that temporarily modified the taxable income limitations for NOL usage to offset future taxable income, NOL carryback provisions and other related income and non-income based tax laws. The Corporation has evaluated such provisions and determined that the impact of the CARES Act to income tax provision and deferred tax assets asMarch 31, 2020 was not significant. For the first quarter of 2020, the Corporation recorded an income tax benefit of$3.0 million , compared to an income tax expense of$17.6 million for the same period in 2019. The variance was mostly attributable to an income tax benefit of approximately$20.0 million recorded in the first quarter of 2020 in connection with higher charges to the provision for credit losses for loans, finance leases and debt securities due to the effect of the COVID-19 pandemic on forecasted economic conditions. 132
-------------------------------------------------------------------------------- For the quarter endedMarch 31, 2020 , the Corporation calculated the provision for income taxes by applying the estimated annual effective tax rate for the full fiscal year to ordinary income or loss. In the computation of the consolidated worldwide annual estimated effective tax rate, ASC Topic 740-270, "Income Taxes" ("ASC Topic 740-270"), requires the exclusion of legal entities with pre-tax losses from which a tax benefit cannot be recognized. The Corporation's estimated annual effective tax rate in the first quarter of 2020, excluding entities from which a tax benefit cannot be recognized and discrete items, was 24% compared to 28% for the first quarter of 2019. The estimated annual effective tax rate including all entities for 2020 was 26% (25% excluding discrete items), compared to 29% for the first quarter of 2019, (26% excluding discrete items). OnJanuary 1, 2020 , the Corporation increased its deferred tax assets by$31.3 million in connection with the transitional adjustment resulting from the adoption of the CECL accounting standard. The Corporation's net deferred tax asset amounted to$307.8 million as ofMarch 31, 2020 , net of a valuation allowance of$88.5 million , and management concluded, based upon the assessment of all positive and negative evidence, that it is more likely than not that the Corporation will generate sufficient taxable income within the applicable NOL carry-forward periods to realize such amount. Due to the inherent uncertainties related to the extent and duration of the COVID-19 pandemic, there is no evidence that can be objectively verified at this time to affect the Corporation's assessment about the ability to realize its deferred tax assets. The net deferred tax asset of the Corporation's banking subsidiary,FirstBank , amounted to$307.7 million as ofMarch 31, 2020 , net of a valuation allowance of$52.7 million , compared to a net deferred tax asset of$264.8 million , net of a valuation allowance of$55.6 million , as ofDecember 31, 2019 . In 2017, the Corporation completed a formal ownership change analysis within the meaning of Section 382 of theU.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 higherU.S. and USVI income tax liabilities than 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 theU.S. or USVI can be creditable againstPuerto Rico tax liabilities or taken as a deduction against taxable income. However, our ability to reduce ourPuerto Rico tax liability through such a credit or deduction depends on our tax profile at each annual taxable period, which is dependent on various factors. For the first quarter of 2020, the Corporation incurred an income tax expense of approximately$1 million related to itsU.S. operations, compared to$1.8 million for the same period in 2019. The limitation did not impact the USVI operations in the first quarter of 2020 and 2019. 133
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FINANCIAL CONDITION AND OPERATING DATA ANALYSIS
Assets The Corporation's total assets were$13.0 billion as ofMarch 31, 2020 , an increase of$436.7 million fromDecember 31, 2019 . The increase was primarily related to a$443.6 million increase in cash and cash equivalents, attributable, among other things, the$213.9 million growth in total deposits, as well as proceeds of$200 million received from the cancellation of reverse repurchase agreements that were previously offset in the statement of financial condition against variable-rate repurchase agreements in accordance with ASC Topic 210-20-45-1. In addition, there was a net increase of$84.8 million in investment securities and account receivables from unsettled investment sales, as well as increases of$43.0 million in net deferred tax assets, and$9.3 million in total loans, as further discussed below. These increases were partially offset by a$137.6 million increase in the ACL of loans and finance leases in connection with the cumulative effect of adopting ASC 326 onJanuary 1, 2020 and the reserves build during the first quarter of 2020. Loan Portfolio
The following table presents the composition of the Corporation's loan portfolio, including loans held for sale, as of the dates indicated:
March 31, December 31,
(In thousands) 2020 2019
Residential mortgage loans $
2,875,672
Commercial loans:
Commercial mortgage loans 1,454,753 1,444,586
Construction loans 159,675 111,317
Commercial and Industrial loans 2,236,218 2,230,876
Total commercial loans 3,850,646 3,786,779
Consumer loans 2,312,629 2,281,653
Total loans held for investment 9,038,947 9,002,205
Less:
Allowance for credit losses for loans and finance (292,774) (155,139)
leases
Total loans held for investment, net $ 8,746,173 $ 8,847,066
Loans held for sale
12,046 39,477
Total loans, net $ 8,758,219 $ 8,886,543
134
-------------------------------------------------------------------------------- As ofMarch 31, 2020 , the Corporation's total loan portfolio, before the allowance for credit losses, amounted to$9.1 billion , an increase of$9.3 million when compared toDecember 31, 2019 . The variance consisted of a$60.0 million increase in theFlorida region, partially offset by reductions of$41.8 million and$8.9 million inPuerto Rico and theVirgin Islands regions, respectively. On a portfolio basis, the increase consisted of a$63.8 million growth in commercial and construction loans and a$31.0 million increase in consumer loans, partially offset by an$85.5 million decrease in residential mortgage loans. The increase in total loans in theFlorida region consisted of a$74.1 million increase in the balance of commercial and construction loans, partially offset by reductions of$9.8 million in residential mortgage loans and$4.3 million in consumer loans. The increase in commercial and construction loans was driven by new loan originations, including$62.3 million on four large facilities individually in excess of$7 million . The decrease in total loans in thePuerto Rico region consisted of reductions of$68.6 million and$7.1 million in residential mortgage and commercial and construction loans, respectively, partially offset by a$33.9 million increase in consumer loans. The decrease in commercial and construction loans was mainly related to an$8.9 million decrease in the total balance of floor plan lines of credit and principal repayments received during the first quarter that reduced by$8.9 million the balance of three large commercial and industrial lines of credit, partially offset by an increase in the balance of certain construction facilities. The decrease in residential mortgage loans in thePuerto Rico region reflects the effect of collections, charge-offs, sales of loans held for sale, and approximately$4.3 million of foreclosures recorded in the first quarter, which more than offset a reduced volume of residential mortgage loan originations. The increase in consumer loans was driven by new loan originations, but at a slower pace than during prior quarters due to disruptions caused by the COVID-19 pandemic. As of the date hereof, the amount of draws from unfunded loan commitments has not increased significantly due to COVID-19. The decrease in total loans in theVirgin Islands region reflects reductions of$7.1 million in residential mortgage loans and$3.2 million in commercial and construction loans, partially offset by an increase of$1.4 million in consumer loans. 135
-------------------------------------------------------------------------------- As ofMarch 31, 2020 , the loans held for investment portfolio was comprised of commercial and construction loans (43%), residential real estate loans (32%), and consumer and finance leases (25%). Of the total gross loan portfolio held for investment of$9.0 billion as ofMarch 31, 2020 , the Corporation had credit risk concentration of approximately 74% in thePuerto Rico region, 21% inthe United States region (mainly in the state ofFlorida ), and 5% in theVirgin Islands region, as shown in the following table: As of March 31, 2020 Puerto Rico Virgin Islands United States Total (In thousands) Residential mortgage loans$ 2,094,269 $ 223,903 $ 557,500 $ 2,875,672 Commercial mortgage loans 1,014,664 64,725 375,364 1,454,753 Construction loans 46,291 12,222 101,162 159,675 Commercial and Industrial loans 1,266,200 105,228 864,790 2,236,218 Total commercial loans 2,327,155 182,175 1,341,316 3,850,646 Consumer loans 2,225,102 51,302 36,225 2,312,629 Total loans held for investment, gross$ 6,646,526 $ 457,380 $ 1,935,041 $ 9,038,947 Loans held for sale 7,628 88 4,330 12,046 Total loans, gross$ 6,654,154 $ 457,468 $ 1,939,371 $ 9,050,993 As of December 31, 2019 Puerto Rico Virgin Islands United States Total (In thousands) Residential mortgage loans$ 2,136,818 $ 230,769 $ 566,186 $ 2,933,773 Commercial mortgage loans 1,012,523 67,377 364,686 1,444,586 Construction loans 36,102 12,144 63,071 111,317 Commercial and Industrial loans 1,285,594 105,819 839,463 2,230,876 Total commercial loans 2,334,219 185,340 1,267,220 3,786,779 Consumer loans 2,191,207 49,924 40,522 2,281,653 Total loans held for investment, gross$ 6,662,244 $ 466,033 $ 1,873,928 $ 9,002,205 Loans held for sale 33,709 350 5,418 39,477 Total loans, gross$ 6,695,953 $ 466,383 $ 1,879,346 $ 9,041,682 136
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Residential Real Estate Loans As ofMarch 31, 2020 , the Corporation's residential mortgage loan portfolio held for investment decreased by$58.1 million , as compared to the balance as ofDecember 31, 2019 , reflecting reductions in all regions as principal repayments, charge-offs, and foreclosures exceeded the volume of residential mortgage loan originations. Consistent with the Corporation's strategies, the residential mortgage loan portfolio held for investment decreased by$42.5 million in thePuerto Rico region,$8.7 million in theFlorida region, and$6.9 million in theVirgin Islands region. Approximately 87% of the$60.5 million in residential mortgage loan originations in thePuerto Rico region during the first quarter of 2020 consisted of conforming loan originations and refinancings. The majority of the Corporation's outstanding balance of residential mortgage loans inPuerto Rico and in theVirgin Islands regions consisted of fixed-rate loans that traditionally carry higher yields than residential mortgage loans in theFlorida region. In theFlorida region, approximately 57% 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 ofMarch 31, 2020 , the Corporation's commercial and construction loan portfolio increased by$63.9 million to$3.9 billion , as compared to the balance as ofDecember 31, 2019 . In theFlorida region, commercial and construction loans increased by$74.1 million , mainly attributable to new loan originations, including the origination of a$30.6 million construction loan. As explained above, the decrease in thePuerto Rico region of$7.1 million was mainly related to an$8.9 million decrease in the total balance of floor plan lines of credit and principal repayments received during the first quarter that reduced by$8.9 million the balance of three large commercial and industrial lines of credit, partially offset by an increase in the balance of certain construction facilities. The commercial and construction loan portfolio in theVirgin Islands region decreased by$3.2 million . As ofMarch 31, 2020 , the Corporation had$56.6 million outstanding in loans extended to thePuerto Rico government, its municipalities and public corporations, compared to$57.7 million as ofDecember 31, 2019 . Approximately$43.0 million of the outstanding loans as ofMarch 31, 2020 consisted of loans extended to municipalities inPuerto Rico , which in most cases are supported by assigned property tax revenues. The vast majority of revenues of the municipalities included in the Corporation's loan portfolio are independent of thePuerto Rico central government. These 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. Late in 2015, theGovernment Development Bank for Puerto Rico ("GDB") and the Municipal Revenue Collection Center ("CRIM") signed and perfected a deed of trust. Through this deed, thePuerto Rico Fiscal Agency andFinancial Advisory Authority , as fiduciary, is bound to keep the CRIM funds separate from any other deposits and must distribute the funds pursuant to applicable law. The CRIM funds are deposited at another commercial depository financial institution inPuerto Rico . In addition to loans extended to municipalities, the Corporation's loan exposure to thePuerto Rico government as ofMarch 31, 2020 included a$13.7 million loan granted to an affiliate of thePuerto Rico Electric Power Authority ("PREPA"). The Corporation also has credit exposure to USVI government entities. As ofMarch 31, 2020 , the Corporation had$62.5 million in loans to USVI government instrumentalities and public corporations, compared to$64.1 million as ofDecember 31, 2019 . Of the amount outstanding as ofMarch 31, 2020 , public corporations of the USVI owed approximately$39.3 million and an independent instrumentality of the USVI government owed approximately$23.2 million . As ofMarch 31, 2020 , all loans were currently performing and up to date on principal and interest payments. As ofMarch 31, 2020 , the Corporation's total exposure to shared national credit ("SNC") loans (including unused commitments) amounted to$813.9 million , compared to$820.4 million as ofDecember 31, 2019 . As ofMarch 31, 2020 , approximately$150.0 million of the SNC exposure related to the portfolio inPuerto Rico and$663.9 million related to the portfolio in theFlorida region. 137
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The composition of the Corporation's construction loan portfolio held for
investment as of
As ofMarch 31, 2020 Puerto Rico Virgin Islands United States Total (In thousands) Loans for residential housing projects: Mid-rise (1) $ 509 $ 956 $ -$ 1,465 Single-family, detached 5,334 673 6,971 12,978 Total for residential housing projects 5,843 1,629 6,971 14,443 Construction loans to individuals secured by 48 475 - 523 residential properties Loans for commercial projects 27,854 8,463 92,307 128,624 Land loans - residential 7,318 1,655 1,884 10,857 Land loans - commercial 5,228 - - 5,228 Total construction loan portfolio, gross 46,291 12,222 101,162 159,675 Allowance for credit losses (3,670) (367) (1,216) (5,253) Total construction loan portfolio, net$ 42,621 $ 11,855 $ 99,946 $ 154,422 ____________________ (1) Mid-rise relates to buildings of up to 7 stories. As ofDecember 31, 2019 Puerto Rico Virgin Islands United States Total (In thousands) Loans for residential housing projects: Mid-rise (1) $ 514 $ 956 $ -$ 1,470 Single-family, detached 246 797 6,267 7,310 Total for residential housing projects 760 1,753 6,267 8,780 Construction loans to individuals secured by 48 473 - 521 residential properties Loans for commercial projects 22,827 8,160 54,536 85,523 Land loans - residential 7,193 1,758 2,268 11,219 Land loans - commercial 5,274 - - 5,274 Total construction loan portfolio, gross 36,102 12,144 63,071 111,317 Allowance for credit losses (1,706) (655) (9) (2,370) Total construction loan portfolio, net$ 34,396 $ 11,489 $ 63,062 $ 108,947 ____________________ (1) Mid-rise relates to buildings of up to 7 stories.
The following table presents further information related to the Corporation's
construction portfolio as of and for the quarter ended
(Dollars in thousands)
Total undisbursed funds under existing commitments $ 189,440
Construction loans held for investment in nonaccrual status $
9,663
Net recoveries - Construction loans $ 24
Allowance for credit losses - Construction loans $ 5,253
Nonaccrual construction loans to total construction loans 6.05%
Allowance for credit losses for construction loans to total
construction loans held for investments 3.29%
Net recoveries (annualized) to total average construction loans -0.08%
138
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Consumer Loans and Finance Leases
As ofMarch 31, 2020 , the Corporation's consumer loan and finance lease portfolio increased by$31.0 million to$2.3 billion , as compared to the portfolio balance as ofDecember 31, 2019 . The increase primarily reflects increases in auto loans, finance leases, and boat loans, which increased by$28.2 million and$14.6 million , respectively, partially offset by reductions in credit card loans and personal loans of$8.2 million and$3.1 million , respectively. The increase in consumer loans was driven by new loan originations, but at a slower pace than during prior quarters due to disruptions caused by the COVID-19 pandemic. Loan Production First BanCorp. relies primarily on its retail network of branches to originate residential and consumer loans. The Corporation supplements its residential mortgage originations with wholesale servicing released mortgage loan purchases from mortgage bankers. The Corporation manages its construction and commercial loan originations through centralized units and most of its originations come from existing customers, as well as through referrals and direct solicitations. The following table provides a breakdown of First BanCorp.'s loan production, including purchases, refinancings, renewals and draws from existing revolving and nonrevolving commitments, for the periods indicated: Quarter Ended March 31, 2020 2019 (In thousands) Residential mortgage$ 80,009 $ 115,204 Commercial mortgage 115,832 62,389 Commercial and Industrial 358,475 464,345 Construction 50,615 10,048 Consumer 282,027 318,721 Total loan production$ 886,958 $ 970,707 The beginning of the first quarter of 2020 was characterized by favorable market conditions, However, in March, the spread of COVID-19 caused a sharp contraction in economic activity and high levels of volatility across most financial markets. During the first quarter of 2020, total loan originations, including purchases, refinancings, and draws from existing revolving and non-revolving commitments, amounted to approximately$887.0 million , compared to$970.7 million for the comparable period in 2019. Residential mortgage loan originations and purchases amounted to$80.0 million for the first quarter of 2020, compared to$115.2 million for the first quarter of 2019. These statistics include purchases from mortgage bankers of$0.8 million for the first quarter of 2020, compared to$4.3 million for the comparable period in 2019. The decrease of$35.2 million in the first quarter of 2020, as compared to the same period of 2019, reflects decreases of approximately$34.2 million and$3.0 million in thePuerto Rico andFlorida regions, respectively, partially offset by an increase of$2.0 million in theVirgin Islands region. The decrease reflects the effect of disruptions in the loan underwriting and closing processes caused by the lockdown inPuerto Rico sinceMarch 16, 2020 related to the COVID-19 pandemic. Commercial and construction loan originations (excluding government loans) amounted to$524.4 million for the first quarter of 2020, compared to$531.0 million for the first quarter of 2019. The decrease in the first quarter of 2020, compared to the same period in 2019, reflects reductions of approximately$17.5 million and$6.5 million in theFlorida andVirgin Islands regions, respectively, partially offset by an increase of approximately$17.4 million in thePuerto Rico region. The increase in thePuerto Rico region reflects increases in the utilization of floor plan lines of credit and construction loan facilities, despite the disruption caused by the COVID-19 pandemic toward the end of the quarter. Government loan originations amounted to$0.5 million for the first quarter of 2020, compared to$5.8 million for the first quarter of 2019. Government loan originations in each of those periods were mainly related to the utilization of an arranged overdraft line of credit of a government entity in theVirgin Islands region. Originations of auto loans (including finance leases) for the first quarter of 2020 amounted to$151.2 million , a decrease of$12.6 million , compared to$163.8 million for the first quarter of 2019. The decrease was primarily attributable to thePuerto Rico andFlorida regions with decreases of$10.6 million and$2.8 million , respectively, partially offset by a$0.8 million increase in theVirgin Islands region. Personal loan originations for the first quarter of 2020, other than credit cards, amounted to$46.5 million , compared to$65.6 million for the first quarter of 2019. Most of the decrease in personal loan originations for the first quarter of 2020, as compared with the same period in 2019, was in thePuerto Rico region. The utilization activity on the outstanding credit card portfolio for the first quarter of 2020 amounted to$84.3 million , compared to$89.3 million for the first quarter of 2019. The reduction in consumer loan originations is attributable primarily to disruptions caused by the COVID-19 pandemic. 139
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Investment Activities As part of its liquidity, revenue diversification and interest rate risk strategies, First BanCorp. maintains an investment portfolio that is classified as available for sale or held to maturity. The Corporation's total available-for-sale investment securities portfolio as ofMarch 31, 2020 amounted to$1.9 billion , a$191.3 million decrease fromDecember 31, 2019 . The decrease was mainly driven by the aforementioned sales of$275.6 million ofU.S. agencies MBS and related realized gain of$8.2 million , prepayments of$74.0 million ofU.S. agencies MBS, and$27.7 million ofU.S. agencies bonds that were called prior to maturity, partially offset by purchases of$147.8 million ofU.S. agencies MBS and bonds, an increase of approximately$50 million in the fair value of available-for-sale securities. The sales of$275.6 million had settlement dates in April; thus, as ofMarch 31, 2020 , the decrease in the investment securities portfolio was offset by a corresponding increase in accounts receivable on unsettled investment sales included as part of other assets in the consolidated statements of financial condition. Given the stimulus actions being taken by the federal government to contain the economic effects of the COVID-19 pandemic, market interest rates remain at low levels, potentially triggering accelerated exercise of call options and prepayment rights on investments securities. These risks are directly linked to future period market interest rate fluctuations. As ofMarch 31, 2020 , approximately 99% of the Corporation's available-for-sale securities portfolio was invested inU.S. government and agencies debentures and fixed-rate GSEs MBS (mainly GNMA,FNMA and FHLMC fixed-rate securities). In addition, as ofMarch 31, 2020 , the Corporation owned bonds of thePuerto Rico Housing Finance Authority ("PRHFA"), classified as available for sale, in the aggregate amount of$8.1 million , carried on the Corporation's books at their aggregate fair value of$7.3 million . Approximately$4.1 million (fair value -$3.0 million ) of these bonds consisted of a residential pass-through MBS issued by the PRHFA that is collateralized by second mortgages originated under a program launched by thePuerto Rico government in 2010. As ofMarch 31, 2020 , the Corporation's held-to-maturity investment securities portfolio, before the ACL, amounted to$138.5 million , down$0.1 million fromDecember 31, 2019 . Upon adoption of CECL onJanuary 1, 2020 , the Corporation recognized an ACL for held-to-maturity debt securities of approximately$8.1 million , as a cumulative effect adjustment from a change in accounting policy, with a corresponding decrease in beginning retained earnings, net of applicable income taxes. As ofMarch 31, 2020 , the ACL for held-to-maturity debt securities was$9.3 million , including the$8.1 million effect of adopting CECL and a$1.1 million charge to the provision recorded in the first quarter of 2020. Held-to-maturity investment securities consisted of financing arrangements withPuerto Rico municipalities issued in bond form, which the Corporation accounts for as securities, but which were underwriten as loans with features that are typically found in commercial loans. These obligations typically are not issued in bearer form, are not registered with theSEC , and are not rated by external credit agencies. These bonds have seniority to the payment of operating costs and expenses of the municipality and are supported by assigned property tax revenues. Approximately 70% of the Corporation's municipality bonds consisted of obligations issued by three of the largest municipalities inPuerto Rico . The municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and loans. The increase in the ACL during the first quarter of 2020 primarily reflects the effect of the deteriorating economic outlook due to the COVID-19 pandemic on the macroeconomic variables considered for the determination of the ACL. Given the uncertainties as to effects that the negative fiscal position of thePuerto Rico central government, the COVID-19 pandemic outbreak, and the measures taken, or to be taken, by other government entities may have on municipalities, the Corporation cannot be certain whether future charges to the ACL on these securities will be required. See "Risk Management - Exposure to Puerto Rico Government" below for information and details about the Corporation's total direct exposure to thePuerto Rico government, including municipalities. 140 -------------------------------------------------------------------------------- The following table presents the carrying values of investments as ofMarch 31, 2020 andDecember 31, 2019 : March 31, December 31, 2020 2019 (In thousands) Money market investments$ 97,708 $ 97,708
Investment securities available for sale, at fair value:
354,723 332,199
Puerto Rico government obligations 7,330 7,322
MBS 1,569,625 1,783,504
Other 500 500Total investment securities available for sale, at fair value 1,932,178
2,123,525
Investment securities held-to-maturity, at amortized cost: Puerto Rico Municipal Bonds
138,534 138,675
Allowance for credit losses for held-to-maturity debt securities (9,268)
-
129,266 138,675
Equity securities, including
39,630 38,249
Total money market investments and investment securities
141
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MBS as of
March 31, December 31,
(In thousands) 2020 2019
Available for sale:
FHLMC certificates $ 385,768 $ 509,210
GNMA certificates 363,039 312,882
FNMA certificates 722,565 869,417
Collateralized mortgage obligations issued or
guaranteed by FHLMC, FNMA or GNMA 87,953 80,879
Private label MBS 10,300 11,116
Total MBS $ 1,569,625 $ 1,783,504
The carrying values of investment securities classified as available for sale and held
to maturity as of March 31, 2020 by contractual maturity (excluding MBS) are shown
below:
Carrying Weighted
(Dollars in thousands) Amount Average Yield %
U.S. Government and agencies obligations
Due within one year $ 98,094 1.57
Due after one year through five years 119,942
2.04
Due after five years through ten years 113,443 2.06
Due after ten years 23,244 0.65
354,723 1.82
Puerto Rico government and municipalities
obligations
Due within one year 321 5.65
Due after one year through five years 8,122
4.99
Due after five years through ten years 60,872 5.40
Due after ten years 76,549 5.34
145,864 5.35
Other Investment Securities
Due after one year through five years 500 2.95
Total 501,087 2.86
MBS 1,569,625 2.63
Allowance for credit losses on held-to-maturity (9,268) -
debt securities Total investment securities available for sale and$ 2,061,444 2.69 held to maturity 142
-------------------------------------------------------------------------------- Net interest income of future periods could be affected by prepayments of MBS. Any acceleration in the prepayments of MBS would lower yields on these securities, since the amortization of premiums paid upon acquisition of these securities 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. Also, net interest income in future periods might be affected by the Corporation's investment in callable securities. As ofMarch 31, 2020 , the Corporation had approximately$203.3 million in debt securities (U.S. agencies andPuerto Rico government securities) with embedded calls, which were primarily purchased at a discount and with an average yield of 2.16%. 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 5, -Investment Securities , to the accompanying unaudited consolidated financial statements for additional information regarding the Corporation's investment portfolio. RISK MANAGEMENT
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 risk and reward 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: (1) liquidity risk; (2) interest rate risk; (3) market risk; (4) credit risk; (5) operational risk; (6) legal and compliance risk; (7) reputational risk; (8) model risk; (9) capital risk; (10) strategic risk; and (11) 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," of the 2019 Annual Report on Form 10-K.
Liquidity Risk and Capital Adequacy
Liquidity is 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, which is the holding company that owns the banking and
non-banking subsidiaries. The second is the liquidity of the banking subsidiary.
During the first quarter of 2020, the Corporation continued to pay quarterly
interest payments on the subordinated debentures associated with its trust
preferred securities ("TRuPs"), the monthly dividend income on its
non-cumulative perpetual monthly income preferred stock, and quarterly dividends
on its common stock.
The Asset and Liability Committee of the Corporation's Board of Directors is
responsible for establishing 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 of Directors' 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 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
Retail Financial Services Director, the risk manager of the Treasury and
Investments Division, the Financial Analysis and Asset/Liability 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
Comptroller's Department is responsible for calculating the liquidity
measurements used by the Treasury and Investment Division to review the
Corporation's liquidity position on a monthly basis. The Financial Analysis and
Asset/Liability Director estimates the liquidity gap for longer periods.
143
-------------------------------------------------------------------------------- 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 will 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 difficult period, and define roles and responsibilities for the Corporation's employees. Under the contingency funding plans, the Corporation stresses the balance sheet and the liquidity position to critical levels that mimic difficulties in generating funds or even maintaining the current funding position of the Corporation and the Bank and are designed to help ensure the ability of the Corporation and the Bank to honor their respective commitments. The Corporation has established liquidity triggers that the MIALCO monitors in order to maintain the ordinary funding of the banking business. The MIALCO developed contingency funding plans for the following four scenarios: a local market event, a credit rating downgrade, an economic cycle downturn event, and a concentration event. The Board of Directors'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 the liquidity position, including core liquidity, basic liquidity, and time-based reserve measures. As ofMarch 31, 2020 , the estimated core liquidity reserve (which includes cash and free liquid assets) was$2.3 billion , or 17.6% of total assets, compared to$2.0 billion , or 15.8% of total assets, as ofDecember 31, 2019 . The basic liquidity ratio (which adds available secured lines of credit to the core liquidity) was approximately 21.6% of total assets, compared to 20.1% of total assets as ofDecember 31, 2019 . As ofMarch 31, 2020 , the Corporation had$529.4 million available for additional credit from the FHLB. Unpledged liquid securities, mainly fixed-rate MBS andU.S. agency debentures, amounted to approximately$1.2 billion as ofMarch 31, 2020 . The Corporation 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. As ofMarch 31, 2020 , the holding company had$22.2 million of cash and cash equivalents. Cash and cash equivalents at the Bank level as ofMarch 31, 2020 were approximately$1.1 billion . The Bank had$452.0 million in brokered CDs as ofMarch 31, 2020 , of which approximately$290.1 million mature over the next twelve months. In addition, the Corporation had non-maturity brokered deposits totaling$223.2 million as ofMarch 31, 2020 . Liquidity at the Bank level is highly dependent on bank deposits, which fund 74% of the Bank's assets (or 69% excluding brokered deposits). Sources of Funding The Corporation utilizes different sources of funding to help ensure that adequate levels of liquidity are available when needed. Diversification of funding sources is of great importance to protect the Corporation's liquidity from market disruptions. The principal sources of short-term funds are deposits, including brokered deposits, securities sold under agreements to repurchase, and lines of credit with the FHLB.The Asset and Liability Committee reviews credit availability on a regular basis. The Corporation has also sold mortgage loans as a supplementary source of funding and participates in the Borrower-in-Custody ("BIC") Program of the FED.The Corporation has also obtained long-term funding in the past through the issuance of notes and long-term brokered CDs. As ofMarch 31, 2020 , the amount of brokered CDs had increased by$16.9 million to$452.0 million from brokered CDs of$435.1 million as ofDecember 31, 2019 . In addition, non-maturity brokered deposits, such as a money market account maintained by a deposit broker, increased in the first quarter of 2020 by$100.9 million to$223.2 million as ofMarch 31, 2020 . Consistent with its strategy, the Corporation has been seeking to add core deposits. As ofMarch 31, 2020 , the Corporation's deposits, excluding brokered deposits and government deposits, increased by$91.2 million to$7.8 billion , as further discussed below. The Corporation continues to have access to financing through counterparties to repurchase agreements, the FHLB, and other agents, such as wholesale funding brokers. While liquidity is an ongoing challenge for all financial institutions, management believes that the Corporation's available borrowing capacity and efforts to grow retail deposits will be adequate to provide the necessary funding for the Corporation's business plans in the foreseeable future.
The Corporation's principal sources of funding are:
Brokered deposits - Historically, a large portion of the Corporation's funding has been brokered CDs issued byFirstBank . Total brokered CDs increased during the first quarter of 2020 by$16.9 million to$452.0 million as ofMarch 31, 2020 .
The average remaining term to maturity of the brokered CDs outstanding as of
144
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The use of brokered CDs has historically been an important source of funding for
the Corporation. The Corporation encounters intense competition in attracting
and retaining regular retail deposits in Puerto Rico . The brokered CD market is
very competitive and liquid, and has enabled the Corporation to obtain
substantial amounts of funding in short periods of time. This strategy has
enhanced the Corporation's liquidity position, since brokered CDs are insured by
the FDIC up to regulatory limits and can be obtained faster than regular retail
deposits. In addition, the Corporation may obtain funds from brokers deposited
in non-maturity money market accounts tied to the one-month LIBOR index.
Non-maturity brokered deposits increased in the first quarter of 2020 by $100.9
million to $223.2 million as of March 31, 2020 .
The following table presents contractual maturities of time deposits with
denominations of
Total
(In thousands)
Three months or less $ 460,203
Over three months to six months 334,546
Over six months to one year 645,175
Over one year 990,650
Total $ 2,430,574
CDs in denominations of
Government deposits - As ofMarch 31, 2020 , the Corporation had$818.8 million ofPuerto Rico public sector deposits ($686.3 million in transactional accounts and$132.5 million in time deposits), compared to$826.9 million as ofDecember 31, 2019 . Approximately 36% is from municipalities and municipal agencies inPuerto Rico and 64% is from public corporations and the central government and agencies.
In addition, as of
Retail deposits - The Corporation's deposit products also include regular savings accounts, demand deposit accounts, money market accounts and retail CDs. Total deposits, excluding brokered deposits and government deposits, increased by$91.2 million to$7.8 billion from a balance of$7.7 billion as ofDecember 31, 2019 , reflecting an increase of$150.5 million in thePuerto Rico region, partially offset by decreases of$46.7 million and$12.6 million in theFlorida andVirgin Islands regions, respectively. The variance in thePuerto Rico region included increases in retail time deposits, as well as savings and demand deposit account balances. The decrease in theFlorida region was primarily reflected in retail time deposits. Refer to Net Interest Income above for information about average balances of interest-bearing deposits, and the average interest rate paid on deposits for the quarters endedMarch 31, 2020 and 2019. Securities sold under agreements to repurchase - The Corporation's investment portfolio is funded in part with repurchase agreements. The Corporation's outstanding securities sold under repurchase agreements amounted to$300.0 million as ofMarch 31, 2020 andDecember 31, 2019 . One of the Corporation's strategies has been the use of structured repurchase agreements and long-term repurchase agreements to reduce liquidity risk and manage exposure to interest rate risk by lengthening the final maturities of its liabilities while keeping funding costs at reasonable levels. 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 18, Securities Sold Under Agreements To Repurchase, in the Corporation's unaudited consolidated financial statements for the quarter endedMarch 31, 2020 for further details about repurchase agreements outstanding by counterparty and maturities. During the first quarter of 2020, the Corporation exercised its call option on$200 million of reverse repurchase agreements that were previously offset in the 2019 statement of financial condition against variable-rate repurchase agreements, pursuant to ASC topic 210-20-45-11, "Balance Sheet - Offsetting - Repurchase and Reverse Repurchase Agreements. 145 -------------------------------------------------------------------------------- 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 ofMarch 31, 2020 andDecember 31, 2019 , the outstanding balance of FHLB advances, which were primarily long-term fixed-rate advances, was$565.0 million and$570.0 million , respectively. As ofMarch 31, 2020 , the Corporation had$529.4 million available for additional credit on FHLB lines of credit. Trust-Preferred Securities - In 2004, FBP Statutory Trust I, a statutory trust that is wholly-owned by the Corporation and not consolidated in the Corporation's financial statements, sold to institutional investors$100 million of its variable-rate TRuPs. FBP Statutory Trust I used the proceeds of the issuance, together with the proceeds of the purchase by the Corporation of$3.1 million of FBP Statutory Trust I variable rate common securities, to purchase$103.1 million aggregate principal amount of the Corporation's junior subordinated deferrable debentures. Also in 2004, FBP Statutory Trust II, a statutory trust that is wholly-owned by the Corporation and not consolidated in the Corporation's financial statements, sold to institutional investors$125 million of its variable-rate TRuPs. FBPStatutory Trust II used the proceeds of the issuance, together with the proceeds of the purchase by the Corporation of$3.9 million of FBP Statutory Trust II variable rate common securities, to purchase$128.9 million aggregate principal amount of the Corporation's junior subordinated deferrable debentures. The subordinated debentures are presented in the Corporation's consolidated statement of financial condition as other borrowings. The variable-rate TRuPs are fully and unconditionally guaranteed by the Corporation. The$100 million junior subordinated deferrable debentures issued by the Corporation inApril 2004 and the$125 million issued inSeptember 2004 mature onJune 17, 2034 andSeptember 20, 2034 , respectively; however, under certain circumstances, the maturity of the subordinated debentures may be shortened (such shortening would result in a mandatory redemption of the variable-rate TRuPs). TheCollins Amendment of the Dodd-Frank Act eliminated certain TRuPs from Tier 1 Capital. Bank holding companies, such as the Corporation, were required to fully phase out these instruments from Tier I capital byJanuary 1, 2016 ; however, they may remain in Tier 2 capital until the instruments are redeemed or mature. As of each ofMarch 31, 2020 andDecember 31, 2019 , the Corporation had subordinated debentures outstanding in the aggregate amount of$184.2 million . As ofMarch 31, 2020 , the Corporation was current on all interest payments due related to its subordinated debentures. Other Sources of Funds and Liquidity - The Corporation's principal uses of funds are for the origination of loans and the repayment of maturing deposits and borrowings. In connection with its mortgage banking activities, the Corporation has invested in technology and personnel to enhance the Corporation's secondary mortgage market capabilities. 146
-------------------------------------------------------------------------------- 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. TheU.S. (includingPuerto Rico ) secondary mortgage market is still highly-liquid, in large part because of the sale of mortgages through guarantee programs of the FHA,VA ,U.S. Department of Housing and Urban Development ("HUD"),FNMA and FHLMC. During the first quarter of 2020, the Corporation sold approximately$60.9 million of FHA/VA mortgage loans to GNMA, which packages them into MBS. In addition, the FED has taken several steps to promote economic and financial stability in response to the significant economic disruption caused by the COVID-19 pandemic. These actions are intended to stimulate economic activity by reducing interest rates and provide liquidity to financial markets so that firms have access to needed funding. Federal funds target rates were lowered to a range of 0% to 0.25%, making de FED Discount Window Program a viable source of funding given the highly-volatile market conditions. As ofMarch 31, 2020 , the Corporation had$60 million outstanding in short-term borrowings from the Primary Credit FED Discount Window Program with a rate of 0.25% and had approximately$758 million available for additional funding under this program. Although currently not in use, other potential sources of short-term funding for the Corporation include commercial paper and federal funds purchased. Furthermore, in previous years, the Corporation entered into several financing transactions to diversify its funding sources, including the issuance of notes payable and, as noted above, junior subordinated debentures, as part of its longer-term liquidity and capital management activities.
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 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 B+ by S&P and B+ by Fitch. As of the date hereof,FirstBank's credit ratings as a long-term issuer are B3 by Moody's, six notches below their definition of investment grade; BB- by S&P, three notches below their definition of investment grade; and B+ by Fitch, four notches below their definition of 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. Cash Flows
Cash and cash equivalents were
147
--------------------------------------------------------------------------------Cash Flows from Operating Activities
First BanCorp.'s operating assets and liabilities vary significantly in the normal course of business due to the amount and timing of cash flows. Management believes that cash flows from operations, available cash balances and the Corporation's ability to generate cash through short- and long-term borrowings will be sufficient to fund the Corporation's operating liquidity needs for the foreseeable future. For the first quarters of 2020 and 2019, net cash provided by operating activities was$91.5 million and$83.0 million , respectively. Net cash generated from operating activities was higher than reported net income largely as a result of adjustments for items such as the provision for credit losses, depreciation and amortization, as well as the cash generated from sales of loans held for sale.
Cash Flows from Investing Activities
The Corporation's investing activities primarily relate to originating loans to be held for investment, as well as purchasing, selling and repaying available-for-sale and held-to-maturity investment securities. For the quarter endedMarch 31, 2020 , net cash used in investing activities was$105.6 million , primarily due to liquidity used to fund commercial and consumer loan originations and purchases ofU.S. agencies MBS and bonds, partially offset by principal collected on loans andU.S. agencies MBS prepayments, as well as proceeds fromU.S. agencies bonds called prior to maturity. For the quarter endedMarch 31, 2019 , net cash used in investing activities was$105.5 million , primarily due to liquidity used to fund commercial and consumer loan originations, partially offset by principal collected on loans andU.S. agencies MBS prepayments.
Cash Flows from Financing Activities
The Corporation's financing activities primarily include the receipt of deposits and the issuance of brokered CDs, the issuance of and payments on long-term debt, the issuance of equity instruments and activities related to its short-term funding. For the first quarter of 2020, net cash provided by financing activities was$457.7 million , mainly reflecting an increase in non-brokered deposits, short-term funding obtained from the Primary Credit FED Discount Window Program, and proceeds from the early cancellation of long-term reverse repurchase agreements that were previously offset against variable-rate repurchase agreements in the 2019 consolidated statement of financial condition, partially offset by dividends paid on common and preferred stock. For the first quarter of 2019, net cash provided by financing activities was$25.3 million , mainly reflecting the growth in non-brokered deposits, partially offset by the repayment of a matured short-term repurchase agreement and dividends paid on common and preferred stock. 148 --------------------------------------------------------------------------------
Capital
As ofMarch 31, 2020 , the Corporation's stockholders' equity was$2.2 billion , a decrease of$28.3 million fromDecember 31, 2019 . The decrease was driven by the$62.3 million transition adjustment related to the adoption of CECL recorded against beginning retained earnings, and common and preferred stock dividends declared in the first quarter of 2020 totaling$11.6 million , partially offset by the earnings generated in the first quarter, and an increase of approximately$50 million in the fair value of available-for-sale investment securities recorded as part of other comprehensive income. The Corporation intends to continue to pay monthly dividend payments on the preferred stock and quarterly dividends on common stock. Set forth below are First BanCorp.'s andFirstBank's regulatory
capital ratios as of
March 31, 2020 and December 31, 2019:
Banking Subsidiary
To be well
First FirstBank capitalized
BanCorp. (1) (1) thresholds
As of March 31, 2020
Total capital ratio (Total capital to risk-weighted
assets) 25.42% 24.91% 10.00%
Common Equity Tier 1 capital ratio
(Common equity Tier 1 capital to risk weighted
assets) 21.79% 20.26% 6.50%
Tier 1 capital ratio (Tier 1 capital to risk-weighted
assets) 22.19% 23.65% 8.00%
Leverage ratio 15.98% 17.05% 5.00%
(1) As permitted by the regulatory capital framework, the Corporation elected to delay
for two years the day-one impact related to the adoption of
CECL on
plus 25% of the change in the ACL from January 1, 2020 to
effects, will be phased in at 25% per year beginning on January 1, 2022.
Banking Subsidiary
To be well
First capitalized
BanCorp FirstBank thresholds
As of December 31, 2019
Total capital (Total capital to risk-weighted assets) 25.22% 24.74% 10.00%
Common Equity Tier 1 capital ratio
(Common equity Tier 1 capital to risk weighted
assets) 21.60% 20.09% 6.50%
Tier 1 capital ratio (Tier 1 capital to risk-weighted
assets) 22.00% 23.49% 8.00%
Leverage ratio 16.15% 17.26% 5.00%
149
-------------------------------------------------------------------------------- Although the Corporation andFirstBank became subject to the Basel III rules beginning onJanuary 1, 2015 , the federal banking agencies have deferred certain elements of the Basel III rules. The Corporation andFirstBank compute risk-weighted assets using the Standardized Approach required by the Basel III rules. The Basel III rules require the Corporation to maintain an additional capital conservation buffer of 2.5% of additional Common Equity Tier 1 Capital ("CET1") 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. Under the Basel III rules, in order to be considered adequately capitalized and not subject to the above described limitations, the Corporation is required to maintain: (i) a minimum CET1 capital to risk-weighted assets ratio of at least 4.5%, plus the 2.5% "capital conservation buffer," resulting in a required minimum CET1 ratio of at least 7%; (ii) a minimum ratio of total Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum Tier 1 capital ratio of 8.5%; (iii) a minimum ratio of total Tier 1 plus Tier 2 capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum total capital ratio of 10.5%; and (iv) a required minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average on-balance sheet (non-risk adjusted) assets.
In addition, as required under the Basel III rules, the Corporation's TRuPs were
fully phased-out from Tier 1 capital as of
TheFederal Reserve Board , theFDIC , and theOffice of the Comptroller of the Currency (collectively "the agencies") have issued several rulemakings over the last two years to simplify certain aspects of the capital rule. For example, the capital rule included transitional arrangements for mortgage servicing assets, temporary difference deferred tax assets, and investments in the capital of unconsolidated financial institutions that a banking organization did not deduct from CET1 capital. In 2017, the agencies adopted a transition rule to allow non-advanced approaches banking organizations, such as the Corporation andFirstBank , to continue to apply the transition treatment in effect in 2017 (including the 100 percent risk weight for mortgage servicing assets, temporary difference deferred tax assets, and significant investments in the capital of unconsolidated financial institutions instead of the 250 percent risk weight required under the Basel III rules) while the agencies considered the simplifications proposal. OnJuly 9, 2019 , the agencies adopted a final rule that supersedes the regulatory capital transition rules and eliminates the transition provisions that are no longer operative. The final rule was generally effectiveApril 1, 2020 , with early adoption permitted onJanuary 1, 2020 , and eliminates: (i) the 10% CET1 capital deduction threshold, which applies individually to holdings of mortgage servicing assets, temporary difference deferred tax assets, and significant investments in the capital of unconsolidated financial institutions in the form of common stock; (ii) the 15% CET1 capital deduction threshold, which applies to the aggregate amount of such items; (iii) the 10% threshold for non-significant investments, which applies to holdings of regulatory capital of unconsolidated financial institutions; and (iv) the deduction treatment for significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. Instead, the final rule requires non-advanced approaches banking organizations to deduct from CET1 capital any amount of mortgage servicing assets, temporary difference deferred tax assets, and investments in the capital of unconsolidated financial institutions that individually exceeds 25% of CET1 capital of the banking organization (the 25% common equity tier 1 capital deduction threshold). The final rule retains the deferred requirement that a banking organization must apply a 250% risk weight to non-deducted mortgage servicing assets or temporary difference deferred tax assets. The Corporation adopted the provisions of this rule onApril 1, 2020 . On a pro-forma basis, the Corporation's CET1 capital, Tier 1 capital, Total capital, and Leverage regulatory capital ratios incorporating changes required by this final rule as if they were effective as ofMarch 31, 2020 would have been 21.24%, 21.63%, 24.81%, and 15.98%, respectively. As part of its response to the impact of COVID-19, onMarch 31, 2020 , the FED, theFDIC andOffice of the Comptroller of the Currency 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 the day 1 impact to retained earnings plus 25% of the change in the ACL (excluding loans purchased with credit deterioration ("PCD loans")) fromJanuary 1, 2020 toDecember 31, 2021 will be delayed for two years and phased-in at 25% per year beginning onJanuary 1, 2022 . Accordingly, as ofMarch 31, 2020 , the capital measures of the Corporation and the Bank shown in the table above exclude the$62.3 million day 1 impact to retained earnings and 25% of the increase in the allowance for credit losses (as defined in the final rue) fromJanuary 1, 2020 toMarch 31, 2020 . The federal financial regulatory agencies may take other measures affecting regulatory capital to address the COVID-19 pandemic, although the nature and impact of such measures cannot be predicted at this time. The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures generally used by the financial community to evaluate capital adequacy. Tangible common equity is total equity less preferred equity, goodwill, core deposit intangibles, purchased credit card relationship assets and insurance customer relationship intangible asset. Tangible assets are total assets less intangible assets such as goodwill, core deposit intangibles, purchased credit card relationships and insurance customer asset relationships. See "Basis of Presentation" below for additional information. 150 -------------------------------------------------------------------------------- The following table is a reconciliation of the Corporation's tangible common equity and tangible assets, non-GAAP financial measures, to total equity and total assets, respectively, as ofMarch 31, 2020 andDecember 31, 2019 , respectively: March 31, December 31, (In thousands, except ratios and per share information) 2020 2019 Total equity - GAAP$ 2,199,751 $ 2,228,073 Preferred equity (36,104) (36,104) Goodwill (28,098) (28,098)
Purchased credit card relationship intangible (3,141)
(3,615)
Core deposit intangible (3,287) (3,488)
Insurance customer relationship intangible (432)
(470)
Tangible common equity $ 2,128,689 $ 2,156,298
Total assets - GAAP $ 13,047,977 $ 12,611,266
Goodwill (28,098) (28,098)Purchased credit card relationship intangible (3,141)
(3,615)
Core deposit intangible (3,287) (3,488)
Insurance customer relationship intangible (432) (470)
Tangible assets $ 13,013,019 $ 12,575,595
Common shares outstanding 218,161 217,359
Tangible common equity ratio 16.36% 17.15%
Tangible book value per common share $ 9.76 $
9.92
The Banking Law of the Commonwealth of Puerto Rico requires that a minimum of
10% of FirstBank's net income for the year be transferred to a legal surplus
reserve until such surplus equals the total of paid-in-capital on common and
preferred stock. Amounts transferred to the legal surplus reserve from retained
earnings are not available for distribution to the Corporation, including for
payment as dividends to the stockholders, 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
there is no legal surplus reserve sufficient to cover such balance in whole or
in part, the Corporation must charge the outstanding amount 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 $97.6 million as of March 31, 2020 and December 31, 2019 . There were
no transfers to the legal surplus reserve during the quarter ended March 31,
2020 .
Off -Balance Sheet Arrangements
In the ordinary course of business, the Corporation engages in 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. These transactions are designed to (1) meet the financial needs of customers, (2) manage the Corporation's credit, market and liquidity risks, (3) diversify the Corporation's funding sources, and (4) optimize capital. 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 ofMarch 31, 2020 , the Corporation's commitments to extend credit amounted to approximately$1.4 billion , of which$692.4 million related to credit card loans. Commercial and financial standby letters of credit amounted to approximately$73.9 million . 151 --------------------------------------------------------------------------------
Contractual Obligations and Commitments
The following table presents information about the maturities of the Corporation's contractual obligations and commitments, which consist of CDs, long-term contractual debt obligations, commitments to sell mortgage loans and commitments to extend credit:
Contractual Obligations and Commitments
As of March 31, 2020
Less than 1
Total year 1-3 years 3-5 years After 5 years
(In thousands)
Contractual obligations:
Certificates of deposit $ 3,148,919 $ 1,861,886
- 100,000 200,000 -
repurchase
Advances from FHLB 565,000 125,000 440,000 - -
Loans payable 60,000 60,000 - - -
Other borrowings 184,150 - - - 184,150
Operating leases 74,809 10,233 17,557 13,117 33,902
Total contractual obligations $ 4,332,878 $ 2,057,119 $ 1,572,441 $ 478,802 $ 224,516 Commitments to sell mortgage loans
Standby letters of credit$ 4,472 Commitments to extend credit: Lines of credit$ 1,210,938 Letters of credit 69,472 Construction undisbursed funds 189,440 Total commercial commitments$ 1,469,850 152
-------------------------------------------------------------------------------- The Corporation has obligations and commitments to make future payments under contracts, such as debt and lease agreements, and under other commitments to sell mortgage loans at fair value and to extend credit. 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. Interest Rate Risk Management First BanCorp. manages its asset/liability position in order 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, in doing so, the MIALCO assesses, among other things, current and expected conditions in world financial markets, competition and prevailing rates in the local deposit market, liquidity, the pipeline of loan originations, 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 that may be pertinent to these areas. The MIALCO approves funding decisions in light of the Corporation's overall strategies and objectives. On 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. The Corporation carries out these simulations over a one-to-five-year time horizon and assumes upward and downward yield curve shifts. The rate scenarios considered in these simulations reflect gradual upward and downward interest rate movements of 200 basis points during a twelve-month period. The Corporation carries out the simulations in two ways:
(1) Using a static balance sheet, as the Corporation had on the simulation date, and
(2) Using a dynamic balance sheet based on recent patterns and current strategies.
The balance sheet is divided into groups of assets and liabilities by maturity or re-pricing structure and their corresponding interest rate 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 period in question. It is unlikely that actual events will match these assumptions in most cases. For this reason, the results of these forward-looking computations are only approximations of the true sensitivity of net interest income to changes in market interest rates. The Corporation uses several benchmark and market rate curves in the modeling process, primarily the LIBOR/SWAP curve, Prime,Treasury , FHLB rates, brokered CD rates, repurchase agreement rates and the mortgage commitment rate of 30 years. As ofMarch 31, 2020 , the Corporation forecasted the 12-month net interest income assumingMarch 31, 2020 interest rate curves remain constant. Then, net interest income was estimated under rising and falling rate scenarios. For the rising rates scenario, the Corporation assumed a gradual (ramp) parallel upward shift of the yield curve during the first 12 months (the "+200 ramp" scenario). Conversely, for the falling rates scenario, it assumed a gradual (ramp) parallel downward shift of the yield curve during the first 12 months (the "-200 ramp" scenario). However, given the current low levels of interest rates, along with the current yield curve slope, a full downward shift of 200 basis points would represent an unrealistic scenario. Therefore, under the falling rate scenario, rates move downward up to 200 basis points, but without reaching zero. The resulting scenario shows interest rates close to zero in most cases, reflecting a flattening yield curve instead of a parallel downward scenario. The Libor/Swap curve forMarch 2020 , as compared toDecember 2019 , reflected a 79 basis points reduction in the short-term horizon, between 1 to 12 months, while market rates also decreased by 122 basis points in the medium term, that is, between 2 to 5 years. In the long-term, that is, over a 5-year-time horizon, market rates decreased by 119 basis points, with an inversion in mid-terms of the curve. TheU.S. Treasury curve in the short-term horizon decreased by 144 basis points and in the medium-term horizon decreased by 133 basis points, as compared to theDecember 2019 end of month levels. The long-term horizon decreased by 112 basis points as compared toDecember 2019 end of month levels.
The following table presents the results of the simulations as of
153
--------------------------------------------------------------------------------
March 31, 2020 December 31, 2019
Net Interest Income Risk Net Interest Income Risk
(Projected for the next 12 months) (Projected for the next 12 months)
Static Simulation Growing Balance Sheet Static Simulation Growing Balance Sheet
(Dollars in
millions) Change % Change Change % Change Change % Change Change % Change
+ 200 bps
ramp $ 19.5 3.66 % $ 17.7 3.14 % $ 15.9 2.85 % $ 19.6 3.32 %
- 200 bps
ramp $ (4.1) (0.77) % $ (4.8) (0.86) % $ (21.4) (3.84) % $ (25.1) (4.25) %
The Corporation continues to manage its balance sheet structure to control and
limit the overall interest rate risk. As of March 31, 2020 , the simulations
showed that the Corporation continues to maintain an asset-sensitive position.
The Corporation has continued repositioning the balance sheet and improving the
funding mix, mainly driven by an increase in the average balance of
interest-bearing deposits with low rate elasticity, and replacing FHLB Advances
with short-term funding from the Primary Credit FED Discount Window Program,
which represent a low-cost source of funding. The above-mentioned growth in
deposits, along with proceeds from loan repayments have contributed to fund the
continued increment in the consumer and commercial loan portfolios, while
maintaining higher liquidity levels.
Taking into consideration the above-mentioned facts for modeling purposes, as of
March 31, 2020 , the net interest income for the next 12 months under a growing
balance sheet scenario was estimated to increase by $17.7 million in the rising
rate scenario when compared against the Corporation's flat or unchanged interest
rate forecast scenario, compared to an estimated increase of $19.6 million as of
December 31, 2019 . Under the falling rate, growing balance sheet scenario, the
net interest income was estimated to decrease by $4.8 million compared to an
estimated decrease of $25.1 million as of December 31, 2019 , reflecting the
effect of current low levels of market interest rates on the base scenario and
the model assumptions for the falling rate scenarios described above (i.e., no
negative interest rates modeled).
Derivatives
First BanCorp. uses derivative instruments and other strategies to manage its exposure to interest rate risk caused by changes in interest rates beyond management's control.
The following summarizes major strategies, including derivative activities that the Corporation uses in managing interest rate risk:
Interest rate cap agreements - Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value of the interest rate cap increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection from rising interest rates. Forward contracts - Forward contracts are sales of TBAs that will settle over the standard delivery date and do not qualify as "regular way" security trades. Regular-way security trades are contracts that have no net settlement provision and no market mechanism to facilitate net settlement and that provide for delivery of a security within the timeframe generally established by regulations or conventions in the market-place or exchange in which the transaction is being executed. The forward sales are considered derivative instruments that need to be marked-to-market. The Corporation uses these securities to economically hedge the FHA/VA residential mortgage loan securitizations of the mortgage-banking operations. The Corporation also reports as forward contracts the mandatory mortgage loan sales commitments entered into with GSEs that require or permit net settlement via a pair-off transaction or the payment of a pair-off fee. Unrealized gains (losses) are recognized as part of mortgage banking activities in the consolidated statements of income. Interest Rate Lock Commitments - Interest rate lock commitments are agreements under which the Corporation agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Under the agreement, the Corporation commits to lend funds to a potential borrower generally on a fixed rate basis, regardless of whether interest rates change in the market. For detailed information regarding the volume of derivative activities (e.g., notional amounts), location and fair values of derivative instruments in the consolidated statements of financial condition and the amount of gains and losses reported in the consolidated statements of income, see Note 12, - Derivative Instruments and Hedging Activities, in the accompanying unaudited consolidated financial statements. The following tables summarize the fair value changes in the Corporation's derivatives, as well as the sources of the fair values, as of or for the indicated dates or periods: Asset Derivatives Liability Derivatives Quarter Ended Quarter Ended 154
-------------------------------------------------------------------------------- (In thousands) March 31, 2020 March
31, 2020
Fair value of contracts outstanding at the beginning of the period $ 372 $
(149)
Changes in fair value during the period (40)
(663)
Fair value of contracts outstanding as
of March 31, 2020 $ 332 $ (812)
Sources of Fair Value
Payment Due by Period
Maturity in
Maturity Maturity 3-5 Excess of 5 Total Fair (In thousands)
Less Than One Year Maturity 1-3 Years Years Years Value
As of March 31, 2020
Pricing from observable market
inputs -
Asset Derivatives $ 323 $ - $ 9 $ - $ 332
Pricing from observable market
inputs -
Liability Derivatives (803) - (9) - (812)
$ (480) $ - $ - $ - $ (480)
Derivative instruments, such as interest rate caps, are subject to market risk.
As is the case with investment securities, the market value of derivative
instruments is largely a function of the financial market's expectations
regarding the future direction of interest rates. Accordingly, current market
values are not necessarily indicative of the future impact of derivative
instruments on earnings. This will depend, in part, on the level of interest
rates, as well as expectations for rates in the future.
As of
The use of derivatives involves market and credit risk. The market risk of
derivatives stems principally from the potential for changes in the value of
derivative contracts based on changes in interest rates. The credit risk of
derivatives arises from the potential for default of the counterparty. To manage
this credit risk, the Corporation deals with counterparties that it considers to
be of good credit standing, enters into master netting agreements whenever
possible and, when appropriate, obtains collateral. Master netting agreements
incorporate rights of set-off that provide for the net settlement of contracts
with the same counterparty in the event of default.
Credit Risk Management
First BanCorp. is subject to credit risk mainly with respect to its portfolio of
loans receivable and off-balance-sheet instruments, mainly 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 "Contractual Obligations and Commitments" above for
further details. The Corporation manages its credit risk through its credit
policy, underwriting, independent loan review and quality control procedures,
statistical analysis, comprehensive financial analysis, and established
management committees. The Corporation also 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 ("C&I"), 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. In the case of residential construction projects, the workout
function monitors project specifics, such as project management and marketing,
as deemed necessary.
The Corporation may also have risk of default in the securities portfolio. The
securities held by the Corporation are principally fixed-rate U.S. agency 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.
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Management, consisting of the Corporation's Commercial Credit Risk Officer,
Retail Credit Risk Officer, Chief Lending 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.
Allowance for Credit Losses and Non-performing Assets
Allowance for Credit Losses for Loans and Finance Leases
The allowance for credit losses 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. An internal risk rating is assigned to each business loan at the time of approval and is subject to subsequent periodic reviews by the Corporation's senior management. The allowance for credit losses 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 ACL for loans and finance leases was$155.1 million as ofDecember 31, 2019 . Upon adoption of CECL onJanuary 1, 2020 , the Corporation recognized an increase in the ACL for loans and finance leases of approximately$81.2 million , as a cumulative effect adjustment from a change in accounting policy, with a corresponding decrease in retained earnings, net of applicable income taxes. As ofMarch 31, 2020 , the ACL for loans and finance leases was$292.8 million , up$137.7 million fromDecember 31, 2019 , driven by the$81.2 million increase as a result of adopting CECL and a$56.5 million reserve build (i.e., the provision of$74.0 million in excess of the net charge-offs of$17.6 million ) in the first quarter of 2020. The increase in the ACL for loans and finance leases primarily reflects the effect of a deteriorating economic outlook due to the COVID-19 pandemic across all loan portfolio categories. Refer to Note 1, - Basis of Presentation and Significant Accounting Policies, in the accompanying unaudited consolidated financial statements for additional information about the day-one impact of the CECL adoption by portfolio segments and description of the methodologies used by the Corporation to determine the ACL.
The ratio of the allowance for credit losses for loan and finance leases to
total loans held for investment increased to 3.24% as of
?The allowance to total loans ratio for the residential mortgage portfolio
increased from 1.53% as of
?The allowance to total loans ratio for the commercial mortgage portfolio decreased from 2.71% as ofDecember 31, 2019 to 2.34% as ofMarch 31, 2020 , reflecting, among other things, the effect of macroeconomic variables considered for this shorter-term portfolio that smoothed the effect of historical losses at the time of the CECL adoption onJanuary 1, 2020 , partially offset by the charges to the provision recorded in the first quarter related to the effect of the COVID-19 pandemic. ?The allowance to total loans ratio for the C&I portfolio increased from 0.68% as ofDecember 31, 2019 to 1.71% as ofMarch 31, 2020 , reflecting the effect of the CECL adoption and the effect of the COVID-19 pandemic on forecasted economic conditions.
?The allowance to total loans ratio for the construction loan portfolio
increased from 2.13% as of
?The allowance to total loans ratio for the consumer loan portfolio increased from 2.35% as ofDecember 31, 2019 to 4.68% as ofMarch 31, 2020 , primarily reflecting the effect of the CECL adoption on longer duration portfolios and the effect of the COVID-19 pandemic on forecasted economic conditions. 156 --------------------------------------------------------------------------------
The ratio of the total allowance to nonaccrual loans held for investment was
137.91% as of
Substantially all of the Corporation's loan portfolio is located within the boundaries of theU.S. economy. Whether the collateral is located inPuerto Rico , theU.S. andBritish Virgin Islands or theU.S. mainland (mainly in the state ofFlorida ), 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 real estate market inPuerto Rico experienced readjustments in value driven by reduced demand and general adverse economic conditions. The Corporation believes it sets adequate loan-to-value ratios following its regulatory and credit policy standards.
As shown in the following table, the allowance for credit losses for loans and
finance leases amounted to
Quarter Ended March 31
(Dollars in thousands) 2020 2019
Allowance for credit losses for loans and finance leases,
Impact of adopting ASC 326 81,165 - Provision (release) for credit losses: Residential Mortgage 16,218 6,639 Commercial Mortgage 14,167 121 Commercial and Industrial (1) 8,391 (5,009) Construction 2,062 (95) Consumer and Finance Leases (2) 33,207 10,164 Total provision for credit losses for loans and finance leases$ 74,045 $ 11,820 (3) Charge-offs Residential Mortgage$ (4,435) $ (6,173) Commercial Mortgage (128) (2,400) Commercial and Industrial (125) (6,311) Construction (3) (207) Consumer and Finance Leases (15,504) (13,269) Total charge offs$ (20,195) $ (28,360) Recoveries: Residential Mortgage 656 626 Commercial Mortgage 44 128 Commercial and Industrial 115 1,095 Construction 27 41 Consumer and Finance Leases 1,778 2,020 Total recoveries$ 2,620 $ 3,910 Net charge-offs$ (17,575) $ (24,450) Allowance for credit losses for loans and finance leases, end of$ 292,774 $ 183,732 period Allowance for credit losses for loans and finance leases to 3.24 % 2.04 %
period end total loans held for investment Net charge-offs (annualized) to average loans outstanding during 0.78 %
1.10 %
the period Provision for credit losses for loans and finance leases to net 4.21 x
0.48 x
charge-offs during the period
Provision for credit losses for loans and finance leases to net
charge-offs during the period, excluding the
effect of the hurricane-related qualitative reserve release in 4.21 x 0.75 x
the first quarter of 2019(4)
(1)Net of a loan loss reserve release of$3.4 million for the first quarter of 2019, associated with revised estimates of the effects of Hurricanes Maria and Irma. (2)Net of a loan loss reserve release of$3.0 million for the first quarter of 2019, associated with revised estimates of the effects of Hurricanes Maria and Irma. (3)Net of a loan loss reserve release of$6.4 million for the first quarter of 2019, associated with revised estimates of the effects of Hurricanes Maria and Irma.
(4)Non-GAAP financial measure, see "Basis of Presentation" below for a reconciliation of this measure.
157
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The following table sets forth information concerning the allocation of the allowance for credit losses for loans
and finance leases by loan category and the percentage of loan balances in each category to the total of such loans
as of the dates indicated:
As of As of
March 31, 2020 December 31, 2019
Percent of Percent of
loans in loans in
each each
category to category to
(Dollars in thousands) Amount total loans Amount total loans
Residential mortgage loans $ 107,082 32 % $ 44,806 33 %
Commercial mortgage loans 33,971 16 % 39,194 16 %
Construction loans 5,253 2 % 2,370 1 %
Commercial and Industrial loans 38,310 25 % 15,198 25 %
Consumer loans and finance leases 108,158 25 % 53,571 25 %
$ 292,774 100 % $ 155,139 100 %
The following table sets forth information concerning the composition of the Corporation's loan portfolio and related allowance for
credit losses as of
As of March 31, 2020 Residential Commercial Consumer and
Mortgage Mortgage Finance
(Dollars in thousands) Loans Loans C&I Loans Construction Loans Leases Total
Total loans held for
investment:
Amortized cost of loans $ 2,875,672 $ 1,454,753 $ 2,236,218 $ 159,675 $ 2,312,629 $ 9,038,947
Allowance for credit losses 107,082 33,971 38,310 5,253 108,158 292,774
Allowance for credit losses 3.72 % 2.34 % 1.71 % 3.29 % 4.68 % 3.24 %
to amortized cost
As of December 31, 2019 Residential Commercial Consumer and
Mortgage Mortgage Finance
(Dollars in thousands) Loans Loans C&I LoansConstruction Loans Leases Total Total loans held for investment: Amortized cost of loans
$ 2,933,773 $ 1,444,586 $ 2,230,876 $ 111,317$ 2,281,653 $ 9,002,205 Allowance for credit losses 44,806 39,194 15,198 2,370 53,571 155,139 Allowance for credit losses to 1.53 % 2.71 % 0.68 % 2.13 % 2.35 % 1.72 % amortized cost 158
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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 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. The ACL on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. Upon adoption of CECL onJanuary 1, 2020 , the Corporation recognized an increase in the ACL for off-balance sheet exposures of approximately$3.9 million , as a cumulative effect adjustment from a change in accounting policy, with a corresponding decrease in beginning retained earnings, net of applicable income taxes. As ofMarch 31, 2020 , the ACL for off-balance sheet credit exposures was$5.7 million , including the$3.9 million effect of adopting CECL and a$1.8 million charge to the provision in the first quarter of 2020. The increase in the allowance for credit losses for unfunded loan commitments in the first quarter of 2020 primarily reflects the effect of the deteriorating economic outlook due to the COVID-19 pandemic.
Allowance for Credit Losses for
As ofMarch 31, 2020 , the held-to-maturity securities portfolio consisted ofPuerto Rico municipal bonds. Upon adoption of CECL onJanuary 1, 2020 , the Corporation recognized an ACL for held-to-maturity securities of approximately$8.1 million , as a cumulative effect adjustment from a change in accounting policy, with a corresponding decrease in retained earnings, net of applicable income taxes. As ofMarch 31, 2020 , the ACL for held-to-maturity debt securities was$9.3 million , including the$8.1 million effect of adopting CECL and a$1.1 million charge to the provision recorded in the first quarter of 2020. The increase in the allowance for credit losses for held-to-maturity debt securities in the first quarter of 2020 primarily reflects the effect of the deteriorating economic outlook due to the COVID-19 pandemic.
Allowance for Credit Losses for
During the first quarter of 2020, the Corporation established a$0.4 million ACL in connection with private label MBS held as part of the available-for-sale investment securities portfolio. The ACL was derived from a decline in the present value of expected cash flows attributed to credit factors, taking into consideration the effect of the deteriorating forecasted economic conditions due to the COVID-19 pandemic.
Nonaccrual Loans and Non-performing Assets
Total non-performing assets consist of nonaccrual loans (generally loans held
for investment or loans held for sale on which the recognition of interest
income was discontinued when the loan became 90 days past due or earlier if the
full and timely collection of interest or principal is uncertain), foreclosed
real estate and other repossessed properties, and non-performing investment
securities, if any. When a loan is placed in nonaccrual status, any interest
previously recognized and not collected is reversed and charged against interest
income. Cash payments received are recognized when collected in accordance with
the contractual terms of the loans. The principal portion of the payment is used
to reduce the principal balance of the loan, whereas the interest portion is
recognized on a cash basis (when collected). However, when management believes
that the ultimate collectability of principal is in doubt, the interest portion
is applied to the outstanding principal. The risk exposure of this portfolio is
diversified as to individual borrowers and industries, among other factors. In
addition, a large portion is secured with real estate collateral.
Nonaccrual Loans Policy
Residential Real Estate Loans - The Corporation generally classifies real estate
loans in nonaccrual status when it has not received interest and principal for a
period of 90 days or more.
Commercial and Construction Loans - The Corporation classifies commercial loans
(including commercial real estate and construction loans) in nonaccrual status
when it has not received interest and principal for a period of 90 days or more
or when it does not expect to collect all of the principal or interest due to
deterioration in the financial condition of the borrower.
159
--------------------------------------------------------------------------------Finance Leases - The Corporation classifies finance leases in nonaccrual status when it has not received interest and principal for a period of 90 days or more.
Consumer Loans - The Corporation classifies consumer loans in nonaccrual status
when it has not received interest and principal for a period of 90 days or more.
Credit card loans continue to accrue finance charges and fees until charged-off
at 180 days delinquent.
Purchased Credit Deteriorated Loans - The Corporation adopted ASC 326 using the
prospective transition approach for PCD loans that were previously classified as
purchased credit impaired ("PCI") loans and accounted for under ASC Topic 310-30
(ASC 310-30). As allowed by ASC 326, the Corporation elected to maintain pools
of loans accounted for under ASC 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 on adoption of ASC 326 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 use
of collateral 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 the lower of cost (carrying value of the loan) or fair value less estimated costs to sell off the real estate. 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.
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 or are insured or guaranteed under applicable FHA,VA or other government-guaranteed programs for residential mortgage loans. Loans past due 90 days and still accruing also include PCD loans with individual delinquencies over 90 days, primarily related to mortgage loans acquired fromDoral Bank in 2015 and fromDoral Financial in 2014. TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual status and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of six months, and there is evidence that such payments can and are likely to continue as agreed. The Corporation considers performance prior to the restructuring, or significant events that coincide with the restructuring, in assessing whether the borrower can meet the new terms, which may result in the loan being returned to accrual status at the time of the restructuring or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. 160
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The following table presents non-performing assets as of the indicated dates:
March 31, December 31,
2020 2019
(Dollars in thousands)
Nonaccrual loans held for investment:
Residential mortgage $ 122,903 $ 121,408
Commercial mortgage 35,953 40,076
Commercial and Industrial 19,734 18,773
Construction 9,663 9,782
Consumer 24,042 20,629
Total nonaccrual loans held for investment $ 212,295 $ 210,668
OREO 99,674 101,626
Other repossessed property 5,832 5,115
Total non-performing assets (1)(2) $ 317,801 $ 317,409
Past due loans 90 days and still accruing (3)(4) $ 132,058 $ 135,490
Non-performing assets to total assets 2.44 % 2.52 %
Nonaccrual loans held for investment to total loans held for 2.35 % 2.34 %
investment
Allowance for credit losses for loans and finance leases
$ 155,139 Allowance for credit losses for loans and finance leases to 137.91 % 73.64 % total nonaccrual loans held for investment Allowance for credit losses for loans and finance leases to total nonaccrual loans held for investment, excluding residential real estate loans 327.52 % 173.81 % (1)Excludes PCD loans previously accounted for under ASC 310-30 for which the Corporation made the accounting policy election to mantain pools of loans accounted for under ASC 310-30 as "units of account" both at the time of adoption of ASC 326 and on an ongoing basis for credit loss measurement. These loans will accrete interest income based on the effective interest rate of the loan pools determined at the time of adoption of ASC 326 and 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 amortized cost of such loans as ofMarch 31, 2020 andDecember 31, 2019 amounted to$134.0 million and$136.7 million , respectively. (2)Nonaccrual loans exclude$401.6 million and$398.3 million of TDR loans that were in compliance with the modified terms and in accrual status as ofMarch 31, 2020 andDecember 31, 2019 , respectively. (3)It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA, guaranteed by theVA , and other government-insured loans as loans past-due 90 days and still accruing as opposed to nonaccrual loans since the principal repayment is insured. 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$34.6 million and$37.9 million of residential mortgage loans insured by the FHA that were over 15 months delinquent as ofMarch 31, 2020 andDecember 31, 2019 , respectively. (4)Includes 90-days past due and still accruing PCD loans previously accounted for under ASC 310-30 for which the Corporation made the accounting policy election to maintain the loan pools both at the time of adoption of ASC 326 and on an ongoing basis for credit loss measurement. The amortized cost of 90-days-past due and still accruing PCD loans as ofMarch 31, 2020 andDecember 31, 2019 amounted to$25.4 million and$27.0 million , respectively. 161 -------------------------------------------------------------------------------- The following table shows non-performing assets by geographic segment as of the indicated dates: March 31, December 31, (In thousands) 2020 2019 Puerto Rico: Nonaccrual loans held for investment: Residential mortgage$ 98,529 $ 97,214 Commercial mortgage 22,061 23,963 Commercial and Industrial 17,988 16,155 Construction 1,992 2,024 Consumer 22,748 19,483 Total nonaccrual loans held for investment 163,318 158,839 OREO 94,151 96,585 Other repossessed property 5,619 4,810 Total non-performing assets (1)$ 263,088 $ 260,234 Past due loans 90 days and still accruing (2) $
125,623
Virgin Islands : Nonaccrual loans held for investment: Residential mortgage$ 10,191 $ 10,903 Commercial mortgage 13,892 16,113 Commercial and Industrial 1,454 2,303 Construction 7,671 7,758 Consumer 439 467 Total nonaccrual loans held for investment 33,647 37,544 OREO 5,328 4,909 Other repossessed property 103 146 Total non-performing assets$ 39,078 $ 42,599 Past due loans 90 days and still accruing $
5,723
United States : Nonaccrual loans held for investment: Residential mortgage$ 14,183 $ 13,291 Commercial and Industrial 292 315 Consumer 855 679 Total nonaccrual loans held for investment 15,330 14,285 OREO 195 132 Other repossessed property 110 159 Total non-performing assets$ 15,635 $ 14,576 Past due loans 90 days and still accruing $
712 $ 129
(1)Excludes PCD loans previously accounted for under ASC 310-30 for which the Corporation made the accounting policy election to maintain pools of loans accounted for under ASC 310-30 as "units of account" both at the time of adoption of ASC 326 and on an ongoing basis for credit loss measurement. These loans will accrete interest income based on the effective interest rate of the loan pools determined at the time of adoption of ASC 326 and 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 amortized cost of such loans as ofMarch 31, 2020 andDecember 31, 2019 amounted to$134.0 million and$136.7 million , respectively. (2)Includes 90-days past due and still accruing PCD loans previously accounted for under ASC 310-30 for which the Corporation made the accounting policy election to maintain the loan pools both at the time of adoption of ASC 326 and on an ongoing basis for credit loss measurement. The amortized cost of 90-days-past due and still accruing PCD loans as ofMarch 31, 2020 andDecember 31, 2019 amounted to$25.4 million and$27.0 million , respectively. 162
-------------------------------------------------------------------------------- Total nonaccrual loans were$212.3 million as ofMarch 31, 2020 . This represents an increase of$1.6 million from$210.7 million as ofDecember 31, 2019 . The increase was primarily related to consumer and residential mortgage loans that migrated to nonaccrual status prior to the deferral payment programs established by the Corporation to assist borrowers affected by the COVID-19 pandemic, partially offset by reductions in commercial and construction nonaccrual loans. Nonaccrual commercial mortgage loans decreased by$4.1 million to$36.0 million as ofMarch 31, 2020 from$40.1 million as ofDecember 31, 2019 . The decrease was primarily related to collections of approximately$2.5 million during the first quarter of 2020 and the restoration to accrual status of$1.7 million of loans related to a commercial mortgage borrower in thePuerto Rico region. Total inflows of nonaccrual commercial mortgage loans were$0.4 million for the first quarter of 2020, compared to$0.5 million for the same period in 2019. Nonaccrual C&I loans increased by$0.9 million to$19.7 million as ofMarch 31, 2020 from$18.8 million as ofDecember 31, 2019 . Total inflows of nonaccrual C&I loans were$2.6 million for the first quarter of 2020, compared to$0.1 million for the same quarter in 2019, reflecting the effect of the inflow of a$2.5 million loan in thePuerto Rico region. Nonaccrual construction loans remained relatively flat with a total of$9.7 million as ofMarch 21, 2020 when compared to$9.8 million as ofDecember 31, 2019 . There were no inflows of construction loans to nonaccrual status during the first quarter of 2020 compared to inflows of$0.1 million for the same period in 2019. The following tables present the activity of commercial and construction nonaccrual loans held for investment for the indicated periods: Commercial Commercial & Mortgage Industrial Construction Total (In thousands) Quarter endedMarch 31, 2020 Beginning balance$ 40,076 $
18,773 $ 9,782
Additions to nonaccrual 351 2,568 - 2,919
Less:
Loans returned to accrual status (1,687) (801) - (2,488)
Nonaccrual loans transferred to OREO (126) (263) - (389)
Nonaccrual loans charge-offs (125) (124) (3) (252)
Loan collections (2,536) (419) (116) (3,071)
Ending balance $ 35,953 $ 19,734 $ 9,663 $ 65,350
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Commercial Commercial &
Mortgage Industrial Construction Total
(In thousands)
Quarter ended March 31, 2019
Beginning balance $ 109,536 $ 30,382 $ 8,362 148,280
Plus:
Additions to nonaccrual 494 139 67 700
Less:
Loans returned to accrual status (11,182) (124) - (11,306)
Nonaccrual loans transferred to OREO (822) (214) (459) (1,495)
Nonaccrual loans charge-offs (2,395) (6,235) (101) (8,731)
Loan collections (2,439) (1,441) (169) (4,049)
Ending balance $ 93,192 $ 22,507 $ 7,700 $ 123,399
Nonaccrual residential mortgage loans increased by $1.5 million to $122.9
million as of March 31, 2020 , compared to $121.4 million as of December 31,
2019 . The increase was mainly related to the inflow of two loans individually in
excess of $1 million totaling $3.0 million . The inflows of nonaccrual
residential mortgage loans during the first quarter of 2020 were $12.6 million ,
an increase of $1.1 million , compared to inflows of $11.5 million for the same
period in 2019.
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The following table presents the activity of residential mortgage nonaccrual loans
held for investment for the indicated periods:
Quarters Ended
March 31, March 31,
(In thousands) 2020 2019
Beginning balance $ 121,408 $ 147,287
Plus:
Additions to nonaccrual 12,588 11,460
Less:
Loans returned to accrual status (2,581) (9,370)
Nonaccrual loans transferred to OREO (3,550) (7,290) Nonaccrual loans charge-offs (3,234) (4,357) Loan collections (1,728) (5,681) Ending balance$ 122,903 $ 132,049 The amount of nonaccrual consumer loans, including finance leases, increased by$3.4 million to$24.0 million asMarch 31, 2020 , compared to$20.6 million as ofDecember 31, 2019 . The increase was primarily in auto loans, driven by consumer loans that migrated to nonaccrual status prior to the deferral payment programs established by the Corporation to assist borrower affect by the COVID-19 pandemic. The inflows of nonaccrual consumer loans during the first quarter of 2020 were$15.6 million , an increase of$3.6 million , compared to inflows of$12.0 million for the same period in 2019. As ofMarch 31, 2020 , approximately$27.1 million of the loans placed in nonaccrual status, mainly commercial loans, were current, or had delinquencies of less than 90 days in their interest payments, including$16.3 million of TDRs maintained in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and there is no doubt about full collectability. Collections on these loans are being recorded on a cash basis through earnings, or on a cost-recovery basis, as conditions warrant. During the quarter endedMarch 31, 2020 , interest income of approximately$0.3 million related to nonaccrual loans with a carrying value of$57.0 million as ofMarch 31, 2020 , mainly nonaccrual construction and commercial loans, was applied against the related principal balances under the cost-recovery method. 165 -------------------------------------------------------------------------------- Total loans in early delinquency (i.e., 30-89 days past due loans, as defined in regulatory report instructions) amounted to$94.7 million as ofMarch 31, 2020 , a decrease of$68.0 million compared to$162.7 million as ofDecember 31, 2019 . The variances by major portfolio categories follow: ?Residential mortgage loans in early delinquency decreased by$45.6 million to$42.0 million as ofMarch 31, 2020 , and consumer loans in early delinquency decreased by$22.6 million to$46.9 million as ofMarch 31, 2020 . The decrease was primarily related to the combination of payments received and the effect of the deferred repayment programs established by the Corporation to assist customers affected by the COVID-19 pandemic, as further explained below.
?Commercial and construction loans in early delinquency increased in the first
quarter of 2020 by
In working with borrower affected by the COVID-19 pandemic, the Corporation implemented payment deferral programs to alleviate the hardships being experienced by the Corporation's borrowers. The Corporation has agreed to let consumer borrowers defer payments on their loans (i.e., residential mortgage, personal loans, auto loans, finance leases, and small loans) for a period up toJune 30, 2020 , with the possibility of a further extension up toAugust 31, 2020 , if needed, as long as the borrowers were current in their payments or no more than 2 payments in arrears (not having exceeded 89 days past due as ofMarch 16, 2020 ) and who did not make their monthly payment corresponding to the month of March. In the case of credit cards and individual lines of credit, the borrowers were required to be current or less than 29 days past due in their payment as ofMarch 16, 2020 to qualify for the payment deferral program. For both consumer and residential mortgage loans subject to the deferral programs, each borrower is required to begin making their regularly scheduled loan payment at the end of the deferral period and the deferred amounts were moved to the end of the loan. The payment deferral programs were applied prospectively beginning, in some instances, with the scheduled contractual payment due in March. For commercial loans, any request for payment deferral is analyzed on a case by case basis. As ofMay 7, 2020 , the Corporation has under deferred repayment arrangements approximately 7,064 residential mortgage loans totaling$931.5 million , 93,629 consumer loans totaling$1.0 billion , and 741 commercial and construction loans totaling$1.8 billion . In accordance with interagency guidance issued inMarch 2020 , these short-term deferrals are not considered TDRs unless the borrower was previously experiencing financial difficulty and the concession granted was significant in relation to the exposure based on criteria established in ASC Subtopic 310-40. In addition, the risk-rating on COVID-19 modified loans did not change, and the delinquency of these loans will not increase after the deferral period if the borrower resumes its scheduled payments. The credit quality of these loans will be reevaluated after the deferral period ends. As a certifiedSmall Business Administration ("SBA") lender, the Corporation is participating in the SBA Paycheck Protection Program (PPP) to help provide loans to the Corporation's small business customers to provide them with additional working capital. As ofMay 7, 2020 , the Corporation has received approval from the SBA for 3,792 applications received sinceApril 3, 2020 , the first date on which small business customers could apply for such loans, totaling approximately$350.6 million , of which approximately$313.2 million has already been funded. In addition, the Corporation provides homeownership preservation assistance to its customers through a loss mitigation program inPuerto Rico that is similar to theU.S. government's Home Affordable Modification Program guidelines. Depending upon the nature of borrowers' financial condition, restructurings or loan modifications through this program, as well as other restructurings of individual commercial, commercial mortgage, construction, and residential mortgage loans, fit the definition of a TDR. A restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms that bring a defaulted loan current and provide sustainable affordability. Changes may include, among others, the extension of the maturity of the loan and modifications of the loan rate. See Note 7, - Loans Held for Investment, to the accompanying unaudited consolidated financial statements for additional information and statistics about the Corporation's TDR loans. TDR loans are classified as either accrual or nonaccrual loans. Loans in accrual status may remain in accrual status when their contractual terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, loans on nonaccrual status and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of six months, and there is evidence that such payments can, and are likely to, continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of the restructuring or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Loan modifications increase the Corporation's interest income by returning a nonaccrual loan to performing status, if applicable, increase cash flows by providing for payments to be made by the borrower, and limit increases in foreclosure and OREO costs. 166
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The following table provides a breakdown between the accrual and nonaccrual TDRs as of the indicated date:
(In thousands) As of March 31, 2020
Accrual Nonaccrual (1) Total TDRs
Conventional residential mortgage loans $ 256,497 $ 54,866 $ 311,363
Construction loans 3,200 1,075 4,275
Commercial mortgage loans 50,672 23,660 74,332
Commercial and Industrial loans 73,531 9,188 82,719
Consumer loans:
Auto loans 8,021 6,165 14,186
Finance leases 1,544 7 1,551
Personal loans 1,052 22 1,074
Credit cards 2,754 - 2,754
Consumer loans - Other 4,332 709 5,041
Total Troubled Debt Restructurings $ 401,603 $
95,692
(1)Included in nonaccrual loans are$16.3 million in loans that are performing under the terms of the restructuring agreement but are reported in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and are deemed fully collectible. The OREO portfolio, which is part of non-performing assets, decreased by$2.0 million to$99.6 million as ofMarch 31, 2020 from$101.6 million as ofDecember 31, 2019 . The following tables show the composition of the OREO portfolio as ofMarch 31, 2020 andDecember 31, 2019 , as well as the activity during the quarter endedMarch 31, 2020 of the OREO portfolio by geographic region: OREO Composition by Region (In thousands) As of March 31, 2020 Puerto Rico Virgin Islands Florida Consolidated Residential$ 44,911 $ 1,452 $ 64$ 46,427 Commercial 42,566 3,180 132 45,878 Construction 6,674 695 - 7,369$ 94,151 $ 5,327 $ 196$ 99,674 (In thousands) As of December 31, 2019 Puerto Rico Virgin Islands Florida Consolidated Residential$ 45,890 $ 1,022 $ -$ 46,912 Commercial 43,959 3,180 132 47,271 Construction 6,736 707 - 7,443$ 96,585 $ 4,909 $ 132$ 101,626 OREO Activity by Region (In thousands) As of March 31, 2020 Puerto Rico Virgin Islands Florida Consolidated Beginning Balance$ 96,585 $ 4,909 $ 132$ 101,626 Additions 4,722 498 64 5,284 Sales (5,237) (9) - (5,246) Write-down and other (1,919) (71) - (1,990) adjustments Ending Balance$ 94,151 $ 5,327 $ 196$ 99,674 167
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Net Charge-offs and Total Credit Losses
Net charge-offs totaled$17.6 million for the first quarter of 2020, or 0.78% of average loans on an annualized basis, compared to$24.5 million , or 1.10% of average loans for the same period in 2019. Commercial mortgage loans net charge-offs in the first quarter of 2020 were$0.1 million , or an annualized 0.02% of average commercial mortgage loans, compared to$2.3 million , or an annualized 0.59% of average loans, for the first quarter of 2019. Commercial mortgage loans net charge-offs for the first quarter of 2019 included a charge-off of$2.1 million taken on the restructuring of loans related to a commercial mortgage relationship in thePuerto Rico region.
Construction loans net recoveries in the first quarter of 2020 were
Commercial and industrial loans net charge-offs in the first quarter of 2020 were$10 thousand , compared to$5.2 million , or an annualized 0.96%, for the first quarter of 2019. Commercial and industrial loans net charge-offs for the first quarter of 2019 included a$5.7 million charge-off taken against a previously-established specific reserve associated with a commercial and industrial loan in thePuerto Rico region. Residential mortgage loans net charge-offs in the first quarter of 2020 were$3.8 million , or an annualized 0.52% of related average loans, compared to$5.5 million , or an annualized 0.71% of related average loans, for the first quarter of 2019. Approximately$3.0 million in charge-offs for the first quarter of 2020 resulted from valuations of collateral dependent residential mortgage loans given high delinquency levels, compared to$4.0 million for the first quarter of 2019. Net charge-offs on residential mortgage loans for the first quarter of 2020 also included$1.1 million related to foreclosures, compared to$1.3 million in the first quarter of 2019. Net charge-offs of consumer loans and finance leases in the first quarter of 2020 were$13.7 million , or an annualized 2.38% of related average loans, compared to$11.2 million , or an annualized 2.27% of average loans, in the first quarter of 2019. The increase is primarily related to an increase in charge-offs taken on personal loans and credit cards associated, in part, with larger portfolio balances.
The following table shows the ratios of annualized net charge-offs to average loans held-in-portfolio for the indicated periods:
Quarter Ended
March 31, March 31,
2020 2019
Residential mortgage 0.52 % 0.71 %
Commercial mortgage 0.02 % 0.59 %
Commercial and industrial - % 0.96 %
Construction (1) (0.08) % 0.78 %
Consumer 2.38 % 2.27 %
Total loans 0.78 % 1.10 %
(1)For the quarter ended
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The following table presents the ratio of annualized net charge-offs (or recoveries) to
average loans held in various portfolios by geographic segment for the indicated periods:
Quarter Ended
March 31, March 31,
2020 2019
PUERTO RICO:
Residential mortgage 0.68 % 0.95 %
Commercial mortgage 0.05 % 0.93 %
Commercial and Industrial 0.01 % 1.53 %
Construction (1) (0.13) % 2.43 %
Consumer and finance leases 2.38 % 2.30 %
Total loans 1.02 % 1.46 %
VIRGIN ISLANDS:
Residential mortgage 0.36 % 0.10 %
Commercial mortgage (2) (0.14) % (0.38) %
Commercial and Industrial - % - %
Construction - % - %
Consumer and finance leases 0.86 % 0.76 %
Total loans 0.25 % 0.07 %
FLORIDA:
Residential mortgage 0.02 % 0.07 %
Commercial mortgage (3) (0.02) % (0.04) %
Commercial and Industrial (4) (0.01) % - %
Construction (5) (0.07) % (0.16) %
Consumer and finance leases 4.55 % 2.49 %
Total loans 0.09 % 0.09 %
(1)For the first quarter of 2020, recoveries in construction loans in
(2)For the first quarter of 2020 and 2019, recoveries in commercial mortgage
loans in the
(3)For the first quarter of 2020 and 2019, recoveries in commercial mortgage
loans in
(4)For the first quarter of 2020, recoveries in commercial and industrial loans
in
(5)For the first quarter of 2020 and 2019, recoveries in construction loans in
169
--------------------------------------------------------------------------------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 losses on OREO operations for the first quarter of 2020 amounted to$18.8 million , or a loss rate of 0.82% on an annualized basis to average loans and repossessed assets, compared to losses of$28.2 million , or a loss rate of 1.25% on an annualized basis, for the same period in 2019. The following table presents information about the OREO inventory and credit losses for the periods indicated: Quarter Ended March 31, (Dollars in thousands) 2020 2019 OREO OREO balances, carrying value: Residential$ 46,427 $ 50,076 Commercial 45,878 68,904 Construction 7,369 10,736 Total$ 99,674 $ 129,716 OREO activity (number of properties): Beginning property inventory 697 694 Properties acquired 52 119 Properties disposed (55) (98) Ending property inventory 694 715 Average holding period (in days) Residential 408 398 Commercial 1,870 1,434 Construction 1,793 1,378 Total average holding period (in days) 1,183
1,029
OREO operations loss: Market adjustments and losses on sale: Residential$ (14) $ (123) Commercial (475) (2,135) Construction (132) (277) Total losses on sale (621)
(2,535)
Other OREO operations expenses (567) (1,208) Net Loss on OREO operations$ (1,188) $ (3,743) CHARGE-OFFS Residential charge offs, net (3,779) (5,547) Commercial charge offs, net (94) (7,488) Construction recoveries (charge-offs), net 24
(166)
Consumer and finance leases charge-offs, net (13,726) (11,249) Total charge-offs, net (17,575) (24,450) TOTAL LOSSES (1)$ (18,763) $ (28,193) LOSS RATIO PER CATEGORY (2): Residential 0.52% 0.71% Commercial 0.06% 1.01% Construction 0.33% 1.85% Consumer 2.38% 2.27% TOTAL LOSS RATIO (3) 0.82% 1.25% ________
(1)Equal to net loss on OREO operations plus charge-offs, net.
(2)Calculated as net charge-offs plus market adjustments, and gains (losses) on sales of OREO divided by average loans and repossessed assets.
(3)Calculated as net charge-offs plus net loss on OREO operations divided by average loans and repossessed assets.
170
--------------------------------------------------------------------------------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 theCorporate Compliance Group . Concentration Risk The Corporation conducts its operations in a geographically concentrated area, as its main market isPuerto Rico . However, the Corporation has diversified its geographical risk, as evidenced by its operations in theVirgin Islands and inFlorida . Of the total gross loan portfolio held for investment of$9.0 billion as ofMarch 31, 2020 , the Corporation had credit risk of approximately 74% inPuerto Rico , 21% inthe United States , and 5% in theVirgin Islands .
Update to the Puerto Rico Fiscal Situation
Fiscal Plan A significant portion of our financial activities and credit exposure is concentrated in theCommonwealth of Puerto Rico , which has been in an economic recession since 2006. OnMay 3, 2020 , the government ofPuerto Rico submitted its most recent Fiscal Plan (the "revised fiscal plan") to the PROMESA oversight board. This revised fiscal plan, however, has not been approved. In this revised fiscal plan, thePuerto Rico government estimates the direct economic damage of the COVID-19 pandemic inPuerto Rico at$0.8 billion in fiscal year 2020 and$5.8 billion in fiscal year 2021, corresponding to 1.1% of thePuerto Rico nominal gross national product ("GNP") in 2020 and 9.2% in fiscal year 2021. The revised fiscal plan estimatesPuerto Rico's real GNP will contract at 3.6% in fiscal year 2020 and 7.8% in fiscal year 2021. However, as stated in the revised fiscal plan, there remains considerably uncertainty about the ultimate duration and magnitude of the pandemic and thus the size of the economic losses. The revised fiscal plan estimates that over 350,000Puerto Rico residents (including self-employed residents) will file for unemployment due to the COVID-19 pandemic and that the claims will begin to decline beginning inJune 2020 at a rate consistent with the declining trend following Hurricane Maria. The revised fiscal plan estimates that, beginning in fiscal year 2021, the unfavorable impact of the COVID-19 pandemic will result in a pre-contractual debt service deficit of$708 million . As per the revised fiscal plan, an annual deficit is forecast to continue through fiscal year 2023. From fiscal year 2024 through fiscal year 2029, the revised fiscal plan estimates an annual surplus as the impact of COVID-19 diminishes and the Commonwealth achieves positive nominal GNP growth averaging 1.5% per year. As the revised fiscal plan submitted by thePuerto Rico government assumes thatPuerto Rico will no longer have the previously estimated surpluses to pay bondholders, thePuerto Rico government is calling on the PROMESA oversight board to consider a re-evaluation, if not withdrawal, of the PROMESA oversight board's proposed plan of adjustment filed with the Title III Court. 171
-------------------------------------------------------------------------------- The revised fiscal plan accounts for the impact of federal funds granted through several government programs, including the CARES Act and a$787 million local package of direct assistance to workers and businesses (the "Puerto Rico COVID-19 Stimulus Package") in fiscal year 2020, fiscal year 2021, and fiscal year 2022. SeveralU.S. government programs (the principal being the CARES Act) provide aid toPuerto Rico and its residents of approximately$12.8 billion , primarily through$3.0 billion in direct payments toPuerto Rico residents,$2.2 billion in relief to state and local governments and$3.9 billion in additional unemployment benefits. In addition, the revised fiscal plan assumes that, of the$787 million Puerto Rico COVID-19 Stimulus Package,$336 million will be reimbursed by theU.S. government through the CARES Act,$157 million will be reapportioned from the existing budget, and$131 million will be reapportioned fromU.S. government funding. The remaining$163 million is assumed to be funded out of thePuerto Rico General Fund ("the General Fund"). In addition to the$787 million package, thePuerto Rico Governor has proposed a$500 per person stimulus payment for private sector workers and retirees, which equates to an additional$349 million to be funded out of the General Fund. The revised fiscal plan assumes a$1 billion working capital fund to address the liquidity constraints associated with the reimbursement nature of disaster relief programs and a parametric insurance coverage required by theU.S. government in case of natural disasters. The revised fiscal plan estimates that theU.S. government and local stimulus efforts will positively affect thePuerto Rico economy by approximately$5.7 billion between fiscal year 2020 and fiscal year 2022. The revised fiscal plan assumes that consumer spending of the COVID-19 related stimulus funds will not exceed the maximum rate at which hurricane relief money was spent in 2018, when consumers and businesses received insurance andU.S. government assistance to replace income and meet immediate consumption needs. Therefore, the revised fiscal plan estimates that the impact of the stimulus will be$0.5 billion ,$4.2 billion and$0.9 billion in fiscal years 2020, 2021 and 2022, respectively. The revised fiscal plan includes and maintains a series of structural reforms in areas such as: (i) human capital and labor; (ii) ease of doing business; (iii) power sector reform; and (iv) infrastructure reform, and other fiscal measures. However, thePuerto Rico government stated that fiscal reforms could be postponed. The revised fiscal plan, among other things, also assumes no incremental expense cuts for theDepartment of Education , theDepartment of Health , and theDepartment of Public Safety for the duration of the forecast given the nature of the services these agencies provide and includes proposals to alleviate the municipalities' obligations to pay PayGo liabilities and provide a two-year delay in contemplated reductions of municipalities' appropriations. Other Developments OnApril 14, 2020 , the PROMESA oversight board announced that it certified the Action Plan by thePuerto Rico Department of Housing (PRDOH) detailing the use of funds from theU.S. Department of Housing's (HUD) Community Development Block Grant Disaster Recovery Program (CDBG-DR). PRDOH was appointed as the agency responsible for administering approximately$20 billion in CDBGDR funding thatPuerto Rico will receive from HUD, with oversight provided by theCentral Office for Recovery , Reconstruction and Resilience ofPuerto Rico (COR3). InFebruary 2018 , HUD had allocated the first grant of$1.5 billion . InJanuary 2020 , HUD announced the grant agreement for the second tranche of$8.2 billion , which requires PRDOH to submit an updated Action Plan for the PROMESA oversight board to review and certify that the programs are consistent with the Certified Fiscal Plan and Certified Budget. In addition to these funds, HUD allocated toPuerto Rico $8.3 billion related to disaster resilience and$1.9 billion related to the energy grid. The PROMESA oversight board also certified the budget for the next$1.7 billion block of funding, as required by HUD prior to providing PRDOH access to the funds and to continue implementing the Action Plan. 172 --------------------------------------------------------------------------------
Exposure to Puerto Rico Government
As ofMarch 31, 2020 , the Corporation had$203.3 million of direct exposure to thePuerto Rico government, its municipalities and public corporations, compared to$204.5 million as ofDecember 31, 2019 . As ofMarch 31, 2020 , approximately$181.5 million of the exposure consisted of loans and obligations of municipalities inPuerto 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, compared to$182.5 million as ofDecember 31, 2019 . Approximately 76% of the Corporation's municipality exposure consisted primarily of senior priority obligations concentrated in three of the largest municipalities inPuerto 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. During the second quarter of 2019, the PROMESA oversight board announced the designation of the Commonwealth's 78 municipalities as covered instrumentalities under PROMESA. Meanwhile, the latest fiscal plan submitted by thePuerto Rico government to the PROMESA oversight board did not contemplate a restructuring of the debt ofPuerto Rico's municipalities, but the plan did call for the gradual elimination of budgetary subsidies provided to municipalities. Furthermore, municipalities are also likely to be affected by the negative economic and other effects resulting from the COVID-19 pandemic, as well as expense, revenue or cash management measures taken to address thePuerto 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 a$13.7 million loan to an affiliate of PREPA and obligations of thePuerto Rico government, specifically bonds of the PRHFA, at an amortized cost of$8.1 million as part of its available-for-sale investment securities portfolio (fair value of$7.3 million as ofMarch 31, 2020 ).
The following table details the Corporation's total direct exposure to
As of March 31, 2020
Investment
Portfolio Total
(Amortized
cost) Loans Exposure
(In thousands)
Puerto Rico Housing Finance Authority :
After 5 to 10 years $ 4,000 $ - $ 4,000
After 10 years 4,113 - 4,113
Total Puerto Rico Housing Finance Authority 8,113 - 8,113
Public Corporations:
Affiliate of the Puerto Rico Electric Power
Authority :
After 1 to 5 years - 13,668 13,668
Total Public Corporations - 13,668 13,668
Municipalities:
Due within one year 321 21,124 21,445
After 1 to 5 years 8,122 8,323 16,445
After 5 to 10 years 56,511 13,507 70,018
After 10 years 73,580 - 73,580
Total Municipalities 138,534 42,954 181,488
Total Direct Government Exposure $ 146,647 $ 56,622 $ 203 ,269
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-------------------------------------------------------------------------------- In addition, as of March 31, 2020, the Corporation had $103.6 million in exposure to residential mortgage loans that are guaranteed by the PRHFA, compared to $106.9 million as of December 31, 2019. 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. ThePuerto 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, 2016, the PRHFA's mortgage loans insurance program covered loans in an aggregate of approximately $576 million. The regulations adopted by the PRHFA require the establishment of adequate reserves to guarantee the solvency of the mortgage loan insurance fund. As of June 30, 2016, the most recent date as to which information is available, the PRHFA had a restricted net position for such purposes of approximately $77.4 million. As of March 31, 2020, the Corporation had $818.8 million of public sector deposits inPuerto Rico , compared to $826.9 million as of December 31, 2019. Approximately 36% is from municipalities and municipal agencies inPuerto Rico and 64% is from public corporations and the central government and agencies inPuerto Rico . Exposure to USVI Government
The Corporation has operations in the USVI and has credit exposure to USVI government entities.
The USVI is experiencing a number of fiscal and economic challenges that could adversely affect the ability of its public corporations and instrumentalities to service their outstanding debt obligations and that could be exacerbated by the effect of the COVID-19 pandemic. Preliminary data released by theU.S. Department of Commerce ,Bureau of Economic Analysis showed that the USVI real GDP increased 1.5% in 2018 after decreasing 0.6% in 2017. In mid- February 2017, the USVI was facing a financial crisis due to a high debt level of $2 billion and a structural budget deficit of $110 million. In addition, the most recent actuarial analysis of public pensions found a net pension liability of about $4 billion. Despite recent improvements in general fund revenues, several challenges remain present, including the need to close the USVI government structural deficit gap, implement measures to address the solvency of the USVI government employee retirement system, and regain access to capital markets at reasonable terms. On September 23, 2019, Moody's downgraded the most senior bonds of theVirgin Islands Water and Power Authority to eight steps below investment grade. 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 continues to deteriorate, theU.S. Congress or the government of the USVI may enact legislation allowing for the restructuring of the financial obligations of the USVI government entities or imposing a stay on creditor remedies, including by making PROMESA applicable to the USVI. As of March 31, 2020, the Corporation had $62.5 million in loans to USVI government instrumentalities and public corporations, compared to $64.1 million as of December 31, 2019. Of the amount outstanding as of March 31, 2020, public corporations of the USVI owed approximately $39.3 million and an independent instrumentality of the USVI government owed approximately $23.2 million. As of March 31, 2020, all loans were currently performing and up to date on principal and interest payments.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
conformity with GAAP, which requires the measurement of the financial position
and operating results in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a greater impact on a financial institution's performance
than the effects of general levels of inflation. Interest rate movements are not
necessarily correlated with changes in the prices of goods and services.
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Basis of Presentation
The Corporation has included in this Form 10-Q the following financial measures
that are not recognized under GAAP, which are referred to as non-GAAP financial
measures:
1.Net interest income, interest rate spread, and net interest margin are
reported excluding the changes in the fair value of derivative instruments and
on a tax-equivalent basis 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 "Results of Operations - Net
Interest Income" above for the table that reconciles the non-GAAP financial
measure "net interest income excluding fair value changes and on a
tax-equivalent basis" with net interest income calculated and presented in
accordance with GAAP. The table also reconciles the non-GAAP financial measures
"net interest spread and margin excluding fair value changes and on a
tax-equivalent basis" with net interest spread and margin calculated and
presented in accordance with GAAP.
2.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 equity less preferred equity, goodwill, core deposit intangibles, and
other intangibles, such as the purchased credit card relationship intangible and
the insurance customer relationship intangible. Tangible assets are total assets
less goodwill, core deposit intangibles, and other intangibles, such as the
purchased credit card relationship intangible and the insurance customer
relationship intangible. 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" above for a
reconciliation of the Corporation's tangible common equity and tangible assets.
3.Adjusted provision for credit losses for loans and finance leases ratio is a
non-GAAP financial measure that excludes the effects related to the net loan
loss reserve releases of $6.4 million for the quarter ended March 31, 2019
resulting from revised estimates of the qualitative reserve associated with the
effects of Hurricanes Maria and Irma. Management believes that this information
helps investors understand the adjusted measure without regard to items that are
not expected to reoccur with any regularity or may reoccur at uncertain times
and in uncertain amounts on reported results and facilitates comparisons with
other periods. See below for the reconciliation of the GAAP measure ratio of
provision for credit losses for loans and finance leases to net charge-offs to
the Non-GAAP ratio of the adjusted provision for credit losses for loans and
finance leases to net charge-offs.
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4.Adjusted net (loss) income that reflects the effect of the following exclusions:
?Gain of $8.2 million on the sales of
?COVID-19 pandemic-related expenses of $0.4 million in the first quarter of 2020.
?Merger and restructuring costs of $0.8 million recorded in the first quarter of 2020 related to transaction costs and restructuring initiatives in connection with the pending acquisition of BSPR.
?Total benefit of $1.2 million recorded in the first quarter of 2020 resulting from insurance recoveries associated with hurricane-related expenses.
?Net loan loss reserve release of $6.4 million in the first quarter of 2019 resulting from revised estimates of the hurricane-related qualitative reserves.
?The $2.3 million expense recovery recognized in the first quarter of 2019 related to the employee retention benefit payment received by the Bank under the Disaster Tax Relief and Airport Extension Act of 2017, as amended.
?The tax-related effects of all the pre-tax items mentioned in the above bullets as follows:
-Tax benefit of $0.1 million in the first quarter of 2020 in connection with the COVID-19 pandemic-related expenses (calculated based on the statutory tax rate of 37.5%).
-Tax benefit of $0.3 million in the first quarter of 2020 related to merger and restructuring costs in connection with the pending acquisition of BSPR (calculated based on the statutory tax rate of 37.5%).
-Tax expense of $0.4 million in the first quarter of 2020 related to the benefit of hurricane-related insurance recoveries (calculated based on the statutory tax rate of 37.5%). -Tax expense of $2.4 million in the first quarter of 2019 related to reserve releases associated with the hurricane-related qualitative reserve (calculated based on the statutory tax rate of 37.5%). -No tax expense was recorded for the gain on sales ofU.S. agencies MBS in the first quarter of 2020. Those gains were recorded at the tax-exempt international banking entity subsidiary level.
-The employee retention benefit recognized in 2019 was not treated as taxable income by virtue of the Disaster Tax Relief and Airport Extension Act of 2017.
Management believes that adjustments to net income of items that 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, facilitates comparisons with prior periods and provides an alternate presentation of the Corporation's performance.
The Corporation uses these non-GAAP financial measures and believes that these
non-GAAP financial measures enhance the ability of analysts and investors to
analyze trends in the Corporation's business and understand the performance of
the Corporation. In addition, the Corporation may utilize these non-GAAP
financial measures as a guide in its budgeting and long-term planning process.
Any analysis of these non-GAAP financial measures should be used only in
conjunction with results presented in accordance with GAAP.
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See "Overview of Results of Operations" above for the reconciliation of the
non-GAAP financial measure "adjusted net (loss) income," to the GAAP financial
measure. The following table reconciles the "provision for credit losses for
loans and finance leases to net charge-offs ratio" GAAP financial measure to the
non-GAAP financial measure "adjusted provision for credit losses for loans and
finance leases to net charge-offs ratio," for the first quarter of 2019:
Provision for credit losses for loans and finance
leases to Net Charge-Offs
(GAAP to Non-GAAP reconciliation)
Quarter Ended March 31, 2019
Provision for Credit
Losses for
Loans and Finance
(In thousands) Leases Net Charge-Offs
Provision for credit losses for loans
and finance leases and net charge-offs $ 11,820 $ 24,450
(GAAP)
Less special item: Hurricane-related qualitative reserve 6,425 -
release
Provision for credit losses for loans and finance leases and net charge-offs, excluding special items (Non-GAAP) $ 18,245 $
24,450
Provision for credit losses for loans and finance leases to net charge-offs 48.34%
(GAAP)
Provision for credit losses for loans
and finance leases to net charge-offs,
excluding special items (Non-GAAP) 74.62%
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