FIRST BANCORP. SELECTED FINANCIAL DATA
Quarter ended Six-Month Period Ended
(In thousands, except for per share data and financial ratios)
June 30, June 30,
2020 2019 2020 2019
Condensed Income Statements:
Total interest income $ 158,616 $ 169,510 $ 323,880 $ 335,982
Total interest expense 23,406 26,964 50,021 53,255
Net interest income 135,210 142,546 273,859 282,727
Provision for credit losses 39,014 12,534 116,380 23,942
Non-interest income 20,892 22,223 51,092 44,766
Non-interest expenses 89,786 92,937 181,970 183,321
Income before income taxes 27,302 59,298 26,601 120,230
Income tax expense 6,046 18,011 3,079 35,629
Net income 21,256 41,287 23,522 84,601
Net income attributable to common 20,587 40,618 22,184 83,263
stockholdersPer Common Share Results:
Net earnings per share-basic $ 0.09 $ 0.19 $ 0.10 $ 0.38
Net earnings per share-diluted $ 0.09 $ 0.19 $ 0.10 $ 0.38
Cash dividends declared $ 0.05 $ 0.03 $ 0.10 $ 0.06
Average shares outstanding 216,920 216,674 216,853 216,507
Average shares outstanding-diluted 217,570 216,978 217,442 216,965
Book value per common share $ 9.99 $ 9.74 $ 9.99 $ 9.74
Tangible book value per common share (1) $ 9.83 $ 9.57 $ 9.83 $ 9.57
Selected Financial Ratios (In Percent):
Profitability:
Return on Average Assets 0.63 1.33 0.36 1.38
Interest Rate Spread 3.83 4.42 4.00 4.43
Net Interest Margin 4.22 4.90 4.42 4.91
Interest Rate Spread - tax equivalent basis 3.99 4.59 4.18 4.61
(2)
Net Interest Margin - tax equivalent basis 4.38 5.07 4.59 5.09
(2)
Return on Average Total Equity 3.86 7.77 2.13 8.09
Return on Average Common Equity 3.80 7.90 2.05 8.23
Average Total Equity to Average Total Assets 16.32 17.12 16.83 17.05
Tangible common equity ratio (1) 15.25 16.64 15.25 16.64
Dividend payout ratio 52.68 16.00 97.75 15.60
Efficiency ratio (3) 57.52 56.40 56.00 55.98Asset Quality:
Allowance for credit losses for loans and
finance leases to total loans held for 3.41 1.89 3.41 1.89
investment
Net charge-offs (annualized) to average loans 0.43 1.07 0.60 1.09
Provision for credit losses for loans and 368.31 51.68 402.23 50.00
finance leases to net charge-offs
Non-performing assets to total assets 2.16 3.06 2.16 3.06
Nonaccrual loans held for investment to total 2.18 2.78 2.18 2.78
loans held for investment
Allowance for credit losses for loans and
finance leases to total nonaccrual loans
held for investment 156.54 67.96 156.54 67.96
Allowance for credit losses for loans and
finance leases to total nonaccrual loans
held for investment, excluding residential 390.70 139.16 390.70 139.16
real estate loansOther Information:
Common Stock Price: End of period $ 5.59 $ 11.04 $ 5.59 $ 11.04
As of June As of December
30, 2020 31, 2019
Balance Sheet Data:
Total loans, including loans held for sale $ 9,405,202 $ 9,041,682
Allowance for credit losses for loans and 319,297 155,139
finance leases
Money market and investment securities, net
of allowance for credit losses for debt 2,986,390 2,398,157
securities
Goodwill and other intangible assets 34,246 35,671
Deferred tax asset, net 306,175 264,842
Total assets 14,096,406 12,611,266
Deposits 10,696,686 9,348,429
Borrowings 974,150 854,150
Total preferred equity 36,104 36,104
Total common equity 2,125,460 2,185,205
Accumulated other comprehensive income, net 53,270 6,764
of tax
Total equity 2,214,834 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 non GAAP
financial measures to the most comparable 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. In
response to the COVID-19 pandemic, Puerto Rico's Governor issued an executive
order implementing a stay-at-home mandate on March 15, 2020 , which she
subsequently extended until May 3, 2020 . In addition to mandating that every
citizen stay at home except to conduct certain essential activities, the order
set out a nightly curfew and a lockdown of non-essential businesses.
Subsequently, the governor instituted additional restrictive measures, including
limiting travel by car and requiring the use of protective equipment, such as
face masks, the maintenance of a distance of at least six feet between citizens,
and a curfew between 7 p.m. to 5 a.m. Some of these restrictions have been
modified. On May 4, 2020 , the Puerto Rico government began to implement a
gradual reopening plan beginning with the finance and real estate sectors and
followed by the manufacturing and construction sectors in the middle of May.
Effective June 16, 2020 , the Puerto Rico Government terminated the stay-at-home
order and reduced the curfew to 10 p.m. to 5 a.m. While most other parts of the
economy of Puerto Rico have reopened, under new guidelines that affect how
individuals interact and how businesses and government operate, the results for
the second quarter of 2020 continued to be adversely affected by reductions in
transaction volumes due to disruptions caused by the COVID-19 pandemic.
On July 3, 2020 , the Puerto Rico Government established new requirements for
travelers entering Puerto Rico , including the requirement that a traveler obtain
a negative COVID-19 test result within 72 hours prior to arrival, and mandatory
quarantines in certain circumstances.
On July 16, 2020 , amidst an increase in COVID-19 cases, Puerto Rico's Governor
issued an executive order that included, among other things, reimplementing
certain prior restrictions such as the closure of bars, gyms, marinas, theaters
and casinos and restrictions in the use of beaches, and extending the curfew
through July 31, 2020 . Lastly, on July 31, 2020 , Puerto Rico's Governor issued
an executive order that extended the curfew through August 15, 2020 , extends the
closure and restrictions included in the July 16, 2020 order, and bans the sale
of alcohol and the operation of non-essential businesses on Sundays. As of
August 2, 2020 , more than 7,000 people had tested positive for COVID-19 and over
200 deaths that were caused by or related to the illness have been reported,
according to data provided by the Puerto Rico government.
123
-------------------------------------------------------------------------------- The Corporation's businesses in the other jurisdictions in which it operates have also been adversely affected by the COVID-19 pandemic. OnMarch 26, 2020 ,Florida's Governor issued a stay-at-home order, and the state began to reopen essential operations through a phase-in process onMay 4, 2020 . OnJune 5, 2020 , portions ofFlorida entered phase 2 of their reopening process. In response to a subsequent rise in the number of reported COVID-19 cases, state and local officials reimplemented significant restrictions on local businesses and social gatherings. Additionally, in theU.S. Virgin Islands , the government issued a stay-at-home order onMarch 23, 2020 . OnMarch 30, 2020 , theU.S. Virgin Islands government issued an order extending the stay-at-home mandate throughApril 30, 2020 and then onApril 29, 2020 issued an order lifting the stay-at-home order and permitting certain categories of businesses to resume operations, subject to safety protocols and limitations, effectiveMay 4 . TheU.S. Virgin Islands tourism-based economy reopened onJune 1, 2020 , with new requirements for travelers and new guidance on how to conduct businesses while protecting the public health. Due to the recent increase in COVID-19 cases, bars, gaming centers and casinos are closed until further notice. The USVI is conducting routine temperature checks and health screenings at the ports of entry. No quarantine is required if travelers meet certain criteria. However, travelers whose state of residence has a COVID-19 positivity rate greater than 10 percent are required to produce evidence of a negative COVID-19 antigen test result that was received within five days prior to travel to the USVI. In light of the restrictions imposed byPuerto Rico ,Florida and theVirgin 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, implementing stricter safety and cleaning protocols, including measures for contact tracing and preventive testing. Branches inPuerto Rico are operating until4:30 p.m. on weekdays and1:00 p.m. on Saturdays . Although the Corporation's branch transactions and ATM volumes have declined due to the aforementioned quarantines and lockdowns, its digital and mobile banking activities have increased. Digital monetary transactions, such as mobile banking, have increased 32%, and the Corporation's digital banking users inPuerto Rico have grown 26% since the beginning of the year. The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, underemployment and unemployment, consumer spending, and residential, commercial, construction and other economic activities have resulted in less economic activity, volatile equity market valuations and significant volatility and disruption in financial markets. For instance, 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 . Governments globally intervened with fiscal policies to mitigate the impact, including the Coronavirus Aid, Relief, and Economic Security of 2020 (the "CARES Act of 2020") Act inthe United States ("U.S."), which intented to provide economic relief to businesses and individuals. Some of these provisions may improve the ability of impacted borrowers to repay their loans, including by providing 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. OnApril 22, 2020 , thePuerto Rico government announced that it received over$2.2 billion from theU.S. Treasury Department as part of the CARES Act stimulus package. The plan allocates funding for three main components: (i) testing, contact tracing, isolation and treatment; (ii) reactivating the economy and protecting jobs; and (iii) continuity of government services. In addition, the Puerto Rico Government and the PROMESA oversight board have allocated over$900 million intented to stimulate thePuerto Rico economy and provide cash flow relief to those affected by the COVID-19 pandemic. Unemployed workers had been receiving a$600 per week supplementary unemployment benefit provided by the CARES Act of 2020, a benefit that expired onJuly 31, 2020 . OnAugust 8, 2020 , theU.S. President signed an executive order and three memorandums that, if implemented, would extend the supplementary unemployment benefit at a rate of$400 per week and defer through the end of the year payroll taxes for workers earning less than$100,000 a year, among other things. As announced, States will be asked to cover 25% of the cost of the supplementary unemployment benefit. The termination or further reductions to the supplementary unemployment benefit could adversely affect the ability of borrowers to repay their loans. Consistent with regulatory guidance that endorses constructive arrangements with borrowers affected by COVID-19, the Corporation adopted payment deferral and relief programs inMarch 2020 . As ofJune 30, 2020 , the Corporation had under deferred repayment arrangements 76,205 loans, totaling$3.4 billion , or 36%, of its total loan portfolio held for investment, consisting of 5,860 residential mortgage loans, totaling$849.6 million , 69,619 consumer loans, totaling$784.0 million , and 726 commercial and construction loans, totaling$1.7 billion . 124 -------------------------------------------------------------------------------- Loans under repayment moratoriums decreased during the month of July to$1.8 billion , or 20%, of the total loan portfolio held for investment as ofJuly 30, 2020 , primarily due to borrowers who have resumed their scheduled payments. The$1.8 billion of loans under deferred repayment arrangements as ofJuly 31, 2020 consisted of 3,974 residential mortgage loans, totaling$623.1 million , 32,791 consumer loans, totaling$240.0 million , and 333 commercial and construction loans, totaling$966.7 million (for additional information about these programs, refer to "Financial Condition and Operating Data Analysis - Early Delinquency.") In addition, the Corporation is participating in theSmall Business Administration ("SBA") Paycheck Protection Program ("PPP") to help provide loans to the Corporation's small business customers to provide them with additional working capital. During the second quarter of 2020, the Corporation originated 5,423 loans under this program, totaling approximately$375.2 million , of which$368.7 million (book value as ofJune 30, 2020 of$359.6 million ) was still outstanding as ofJune 30, 2020 . Furthermore, as ofJuly 31, 2020 , the Corporation had received approval for 632 additional client applications and funded$14.9 million during the month of July. The Corporation's financial results included a provision for credit losses on loans, finance leases and debt securities of$39.0 million and$116.4 million for the second quarter and first six months of 2020, respectively. The provision includes reserve builds of$29.1 million (i.e., the amount by which the provision for credit losses of$39.0 million exceeds net charge-offs of$9.9 million ) in the second quarter of 2020 and$88.9 million (i.e., the amount by which the provision for credit losses of$116.4 million exceeds net charge-offs of$27.5 million ) during the first six months of 2020, largely related to the effect of the COVID-19 pandemic on current and forecasted economic and market conditions. In addition, the stay-at-home and lock down orders have adversely affected the Corporation's transaction fee income, such as that from credit and debit cards, automated teller machines (ATMs), and point-of-sale (POS) transactions, which decreased by$1.8 million during the second quarter of 2020, as compared to the same period in 2019. In addition, service charges on deposit accounts decreased by$1.4 million in the second quarter of 2020, compared to the second quarter of 2019. Further, the lower interest rate environment and disruptions in the origination of loans and closing processes have adversely affected the Corporation's net interest income and reduced the net interest margin by 68 basis points to 4.22% for the second quarter of 2020 compared to 4.90% for the same period a year ago. Nevertheless, as ofJune 30, 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 21.0%, compared to 15.8% as ofDecember 31, 2019 . As ofJune 30, 2020 , the Corporation had approximately$386.4 million in available unused lines at theFederal Home Loan Bank ("FHLB") and approximately$997.1 million available for borrowings through the Primary Credit FED Discount Window Program, if needed. As a result of payments received by individuals and commercial customers from government stimulus packages, as well as the effects of payment deferral programs and reductions in consumer spending, total non-brokered deposits increased during the second quarter by$1.2 billion to$10.1 billion as ofJune 30, 2020 , compared to$8.9 billion as ofMarch 31, 2020 . 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 Pending Acquisition of
OnJuly 28, 2020 , the Corporation announced that it has received all requisite regulatory approvals for the completion of the previously announced acquisition ofBanco Santander Puerto Rico ("BSPR") byFirstBank . It has received approvals from theBoard of Governors of theFederal Reserve System , theFederal Deposit Insurance Corporation and theOffice of the Commissioner of Financial Institutions of Puerto Rico . Subject to the satisfaction of the remaining customary conditions to closing, the Corporation expects to complete the acquisition bySeptember 1, 2020 . 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. On a pro forma basis based onJune 30, 2020 figures, upon closing of the transaction,FirstBank expects to have approximately$18.8 billion in assets, a$12 billion loan portfolio,$15.4 billion of deposits, and approximately 650,000 customers. In addition,FirstBank expects to have 450 ATMs, 73 branches, and more than 3,500 employees. 125
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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$21.3 million , or$0.09 per diluted common share, for the quarter endedJune 30, 2020 , compared to$41.3 million , or$0.19 per diluted common share, for the same period in 2019.
The key drivers of the Corporation's GAAP financial results for the quarter
ended
?Net interest income for the quarter endedJune 30, 2020 was$135.2 million , compared to$142.5 million for the second quarter of 2019. The decrease of$7.3 million was primarily related to: (i) a$7.5 million decrease in interest income on commercial and construction loans, primarily associated with the downward repricing of variable-rate commercial loans due to declines in short-term market interest rates, partially offset by an increase in the average balance of these portfolios that was driven by SBA PPP loans originated during the second quarter of 2020; (ii) a$3.5 million decrease in interest income on residential mortgage loans, primarily due to a decrease of 227.8 million in the average balance of this portfolio; (iii) a$3.1 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 declines in the Federal Funds target rate; and (iv) a$0.2 million decrease in interest income on investment securities mainly related to a$2.0 million increase in the premium amortization expense onU.S. agencies mortgage-backed securities ("MBS"), a$1.0 million decrease in interest income onU.S. agencies bonds, driven by lower yields available on purchases, and a$0.4 million decrease related to the downward repricing ofPuerto Rico municipalities bonds tied to the decrease in short-term market interest rates, partially offset by an increase in interest income of approximately$3.0 million due to a$512.2 million increase in the average balance of investment securities. These variances were partially offset by: (i) a$3.6 million decrease in total interest expense, reflecting a reduction of approximately$3.5 million attributable to the lower average interest rate paid on interest-bearing checking, savings and non-brokered time deposits, a$1.0 million decrease associated with the$222.6 million decrease in the average balance of FHLB advances, and a$0.8 million decrease related to the downward repricing of junior subordinated debentures tied to decreases in the three-month LIBOR index, partially offset by an increase of approximately$1.4 million in interest expense related to a$715.3 million in the average balance of interest-bearing deposits; and (ii) a$3.4 million increase in interest income on consumer loans, primarily related to a$227.4 million increase in the average balance of this portfolio. The net interest margin decreased to 4.22% for the second quarter of 2020, compared to 4.90% for the same period a year ago. The decrease was primarily due to the effect of the low interest rate environment on the repricing of variable rate commercial loans and interest-bearing cash balances, as well as on theU.S. agencies premium amortization expense. In addition, net interest margin was adversely affected by a higher proportion of low-yielding assets, such as the interest-bearing cash balances,U.S agencies bonds and MBS, and SBA PPP loans, to total interest-earning assets, partially offset by the decrease in the average interest rate paid on interest-bearing deposits. 126
-------------------------------------------------------------------------------- ?The provision for credit losses on loans, finance leases, and debt securities increased by$26.5 million to$39.0 million for the second quarter of 2020, compared to$12.5 million for the same period in 2019, driven by the reserve build of$29.1 million in the second quarter of 2020, which reflects the adverse effect of the COVID-19 pandemic on current and forecasted economic conditions. EffectiveJanuary 1, 2020 , the Corporation adopted the current expected credit loss impairment model ("CECL") required by 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 second quarter and first six months 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 allowance for credit losses ("ACL") as ofJanuary 1, 2020 . Net charge-offs totaled$9.9 million for the second quarter of 2020, or 0.43% of average loans on an annualized basis, compared to$24.3 million , or 1.07% of average loans for the same period in 2019. The decrease consisted of an$11.4 million decline in net charge-offs taken on commercial and construction loans, a$2.4 million decrease in net charge-offs taken on residential mortgage loans, and a$0.6 million decrease in net charge-offs taken on consumer loans. The decrease in net-charge offs on commercial and construction loans primarily reflects the effect of an$11.4 million charge-off taken on a commercial mortgage loan in theFlorida region in the prior year period. Meanwhile, the decrease in net charge-offs taken on residential mortgage and consumer loans reflects, in part, the effect of the deferred repayment arrangements provided to borrowers affected by the COVID-19 pandemic that maintained the delinquency status that existed at the date of the event until the end of the deferral period. See "Provision for credit losses" and "Risk Management" below for analyses of the ACL and non-performing assets and related ratios. ?The Corporation recorded non-interest income of$20.9 million for the second quarter of 2020, compared to$22.2 million for the same period in 2019. The$1.3 million decrease was primarily related to: (i) a$1.8 million decrease in transactional fee income from credit and debit cards, ATMs, POS, and merchant-related activity, primarily reflecting lower retail sales volume due to disruptions caused by quarantines and lockdowns of non-essential businesses in connections with the COVID-19 pandemic, which inPuerto Rico were imposed in mid-March of 2020; (ii) a$1.4 million decrease in service charges on deposits accounts, primarily related to a reduction in the number of returned checks, paid items, overdraft and cash management fee transactions resulting from disruptions in business activities caused by the COVID-19 pandemic; (iii) a$0.7 million decrease in revenues from mortgage banking activities, primarily related to a lower volume of conforming loan sales affected by disruptions caused by the COVID-19 pandemic; (iv) a$0.7 million decrease in fees and commissions for other banking services, such as mail and cable transmission, official checks, safe deposits and insurance referrals, among others; and (v) a$0.6 million decrease in insurance commission income. These variances were partially offset by a$4.4 million increase in gains from hurricane-related insurance recoveries, related to a$5.0 million benefit in the second quarter of 2020 resulting from the final settlement of the Corporation's business interruption insurance claim associated with lost profits caused by Hurricanes Irma and Maria in 2017. See "Non-Interest Income" below for additional information. ?Non-interest expenses for the second quarter of 2020 were$89.8 million compared to$92.9 million for the same period in 2019. The$3.1 million decrease was primarily related to: (i) a$4.2 million decrease in losses from OREO operations, primarily related to a$3.3 million decrease in write-downs and losses on sales of OREO properties; (ii) a$1.6 million decrease in business promotion expenses, primarily related to lower advertising, marketing, and sponsorships activities, as well as lower costs related to the credit card rewards program; (iii) a$1.3 million decrease in employees' compensation and benefits, driven by a$2.7 million increase in deferred loan origination costs in connection with the origination of SBA PPP loan, which was partially offset by expenses of$1.7 million recorded in the second quarter of 2020 in connection with bonuses paid to branch personnel and other essential employees for working during the pandemic, as well as employee-related expenses, such as expenses for the administration of COVID-19 tests and purchases of personal protective equipment; and (iv) a$0.4 million decrease in traveling and mileage expenses. 127
-------------------------------------------------------------------------------- The decrease was partially offset by: (i) merger and restructuring costs of$2.9 million in connection with the pending acquisition of BSPR; (ii) a$0.5 million increase in occupancy and equipment expenses, driven by expenses of$0.9 million recorded in the second quarter of 2020 related to COVID-19 pandemic response efforts, including additional cleaning and security protocol expenses; and (ii) a$0.3 million increase in professional fees, including a$1.8 million increase in outsourced technology fees, primarily associated with the platform used for the origination of SBA PPP loans, partially offset by a$0.9 million decrease in consulting and legal expenses, and a$0.6 million decrease in collection fees, appraisals and title-related matters. ?For the second quarter of 2020, the Corporation recorded an income tax expense of$6.0 million , compared to$18.0 million for the same period in 2019. The variance was mostly attributable to an income tax benefit of approximately$9.9 million recorded in the second 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 well as a decrease in the effective tax rate resulting from a decreased taxable income proportionate to pre-tax income. As ofJune 30, 2020 , the Corporation had a deferred tax asset of$306.2 million (net of a valuation allowance of$87.3 million , including a valuation allowance of$50.8 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 ofJune 30, 2020 , total assets were$14.1 billion , an increase of$1.5 billion fromDecember 31, 2019 . The increase was primarily related to a$657.4 million increase in cash and cash equivalents, attributable, among other things, to additional liquidity in connection with the growth in total deposits, and a$599.6 million increase in available-for-sale investment securities, driven by purchases ofU.S. agencies bonds and MBS. In addition, there was a$363.5 million increase in total loans, consisting of a$393.9 million increase in commercial and construction loans, including SBA PPP loans with a book value of$359.6 million as ofJune 30, 2020 , and a$13.6 million increase in consumer loans, partially offset by a$44.0 million decrease in residential mortgage loans. These increases were partially offset by a$164.2 million increase in the ACL for loans and finance leases in connection with the cumulative effect of adopting ASC 326 onJanuary 1, 2020 and the reserves build during the first half of 2020. See "Financial Condition and Operating Data Analysis" below for additional information. ?As ofJune 30, 2020 , total liabilities were$11.9 billion , an increase of$1.5 billion fromDecember 31, 2019 . The increase was mainly due to a$1.1 billion increase in total deposits, excluding brokered deposits and government deposits, a$155.4 million increase in government deposits, a$124.8 million increase in non-maturity brokered deposits, and 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 statements of financial condition.
These variances were partially offset by an
?As ofJune 30, 2020 , the Corporation's stockholders' equity was$2.2 billion , a decrease of$13.2 million fromDecember 31, 2019 . The decrease was driven by the$62.3 million transition adjustment related to the adoption of CECL that was recorded against beginning retained earnings, and common and preferred stock dividends declared in the first six months of 2020 totaling$23.2 million , partially offset by the earnings generated in the first half of 2020, and an increase of approximately$46.5 million in other comprehensive income ("OCI") related to changes in the fair value of available-for-sale investment securities. The Corporation's common equity tier 1 capital, tier 1 capital, total capital and leverage ratios were 21.52%, 21.90%, 25.08% and 15.23%, respectively, as ofJune 30, 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 effect of the estimate of the CECL methodology 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. 128
-------------------------------------------------------------------------------- ?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$902.9 million for the quarter endedJune 30, 2020 , compared to$885.4 million for the same period in 2019. The variance consisted of an increase of$187.4 million in commercial and construction loans originations, driven by the approximately$375.2 million of SBA PPP loans originated in the second quarter of 2020, partially offset by reductions of$158.5 million and$11.5 million in consumer and residential mortgage loan originations, respectively. The reductions of consumer and residential mortgage loans 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 and continued untilMay 3, 2020 . OnMay 4, 2020 , thePuerto Rico government began to implement a gradual reopening planning beginning with the finance and real estate sectors, while the retail auto sales sector reopened in late-May. Notwithstanding the decrease in consumer loan originations, as compared to the second quarter of 2019, auto loans and finance leases originations picked up in the month of June after the re-opening, with originations over$40 million and$15 million , respectively, which are volumes consistent with pre-COVID-19 pandemic levels. ?Total non-performing assets were$303.8 million as ofJune 30, 2020 , a decrease of$13.6 million fromDecember 31, 2019 . The decrease was primarily related to a$5.0 million decrease in nonaccrual commercial and construction loans, including the payoff of a$2.0 million commercial mortgage loan in theVirgin Islands and the restoration to accrual status of$1.7 million of loans related to a commercial mortgage borrower in thePuerto Rico region, a$2.6 million decrease in nonaccrual consumer loans, and a$5.3 million decrease in the OREO portfolio balance. See "Risk Management - Non-Accruing and Non-Performing Assets" below for additional information. ?Adversely classified commercial and construction loans decreased by$103.0 million to$117.5 million as ofJune 30, 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 during the first quarter of 2020. While approximately 95% of the Corporation's small business banking customers and 100% of the corporate banking customers had reopened their businesses during the second quarter of 2020, the Corporation is closely monitoring reinstatement of closings of certain non-essential businesses in response to the recent increase in COVID-19 cases in bothPuerto Rico andFlorida , the payment performance after the end of payment deferral periods, and the performance of different sectors of the economy in all the markets where the Corporation operates. 129
-------------------------------------------------------------------------------- The Corporation's financial results for the second quarter and first six months 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 and Six-Month Period Ended
?A$0.2 million loss and an$8.1 million gain on sales ofU.S. agencies MBS recorded in the second quarter and six-month period endedJune 30, 2020 , respectively. The sales were recorded at the tax-exempt international banking entity subsidiary; thus, there were no effect on the income tax expense recorded in the second quarter and first six months of 2020. ?A$5.0 million ($3.1 million after-tax) benefit recorded in the second quarter of 2020 resulting from the final settlement of the Corporation's business interruption insurance claim related to lost profits caused by Hurricanes Irma and Maria in 2017. ?Costs of$3.0 million ($1.9 million after-tax) and$3.3 million ($2.1 million after-tax) related to the COVID-19 pandemic response efforts recorded in the second quarter and six-month period endedJune 30, 2020 , respectively, including approximately$1.7 million in bonuses paid to branch personnel and other essential employees for working during the pandemic during the second quarter, as well as other employee-related expenses such as expenses for the administration of COVID-19 tests and purchases of personal protective equipment. ?Merger and restructuring costs of$2.9 million ($1.8 million after-tax) and$3.7 million ($2.3 million after-tax) for the second quarter and six-month period endedJune 30, 2020 , respectively, in connection with the previously announced stock purchase agreement withSantander Holdings USA, Inc. relating to the Corporation's acquisition of BSPR and related restructuring initiatives. ?A$1.2 million ($0.7 million after-tax) benefit recorded in the first quarter of 2020 resulting from insurance recoveries associated with hurricane-related expenses incurred primarily in thePuerto Rico region.
Quarter and Six-Month Period Ended
· A$0.8 million ($0.5 million after-tax) benefit recorded in the second quarter of 2019 resulting from hurricane-related insurance recoveries related to repair and maintenance costs and impairments associated with facilities in theBritish Virgin Islands . · A$6.4 million ($4.0 million after-tax) positive effect on earnings recorded in the first quarter of 2019 related to net 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. See "Provision for Credit Losses" below for additional information. · A$2.3 million expense recovery recorded in the first quarter of 2019 related to an employee retention benefit payment (the "Benefit") received by the Bank under the Disaster Tax Relief and Airport Extension Act of 2017, as amended (the "Disaster Tax Relief Act"). The Benefit was recorded as an offset to employees' compensation and benefits expenses and was not treated as taxable income by virtue of the Disaster Tax Relief Act. 130
-------------------------------------------------------------------------------- The following table reconciles for the quarter and six-month periods endedJune 30, 2020 and 2019 the reported net income to adjusted net income, a non-GAAP financial measure that excludes the Special Items identified above: Six-month period ended Quarter ended June 30, June 30, 2020 2019 2020 2019 (In thousands) Net income, as reported (GAAP)$ 21,256 $ 41,287 $ 23,522 $ 84,601 Adjustments: Loss (gain) on sales of investment securities 155 - (8,092) Merger and restructuring costs 2,902 - 3,747 - COVID-19 pandemic-related expenses 2,961 - 3,324 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 (5,000)
(820) (6,153) (820) Income tax impact of adjustments (1) (324) 308 (345) 2,717 Adjusted net income (Non-GAAP)$ 21,950 $
40,775
(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 ACL 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.
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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.
?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 the loan is collateral dependent, in
which case the ACL is measured based on the fair value of the collateral. The
discounted cash flow method 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 and six-month period ended June
30, 2020 was $135.2 million and $273.9 million , respectively, compared to $142.5
million and $282.7 million for the comparable periods in 2019. On a
tax-equivalent basis and excluding the changes in the fair value of derivative
instruments, net interest income for the quarter and six-month period ended June
30, 2020 was $140.3 million and $284.6 million , respectively, compared to $147.5
million and $293.0 million for the comparable periods 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.
133
--------------------------------------------------------------------------------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 June 30, 2020 2019 2020 2019 2020 2019
(Dollars in thousands)
Interest-earning assets:
Money market and other
short-term investments
Government obligations (2) 737,301 720,106 5,263 7,254 2.87 % 4.04 % MBS 1,787,611 1,285,812 12,340 10,316 2.78 % 3.22 % FHLB stock 31,684 41,720 490 657 6.22 % 6.32 % Other investments 6,267 3,030 10 7 0.64 % 0.93 % Total investments (3) 3,636,532 2,641,185 18,386 21,674 2.03 % 3.29 % Residential mortgage loans 2,847,192 3,075,037 37,812 41,350 5.34 % 5.39 % Construction loans 169,508 91,711 2,185 1,511 5.18 % 6.61 % Commercial and Industrial and 3,944,614 3,809,702 46,755 54,693 4.77 % 5.76 %
Commercial mortgage loans
Finance leases 429,286 360,224 7,747 6,735 7.26 % 7.50 % Consumer loans 1,857,278 1,698,944 50,866 48,477 11.02 % 11.44 % Total loans (4) (5) 9,247,878 9,035,618 145,365 152,766 6.32 % 6.78 %
Total interest-earning assets
Interest-bearing liabilities:
Brokered CDs$ 418,246 $ 509,102 $ 2,270 $ 2,782 2.18 % 2.19 % Other interest-bearing 6,987,301 6,181,141 14,727 16,321 0.85 % 1.06 % deposits Loans payable 29,451 - 18 - 0.25 % - % Other borrowed funds 484,150 284,150 3,521 4,034 2.92 % 5.69 % FHLB advances 517,363 740,000 2,870 3,827 2.23 % 2.07 % Total interest-bearing$ 8,436,511 $ 7,714,393 $ 23,406 $ 26,964 1.12 % 1.40 % liabilities Net interest income$ 140,345 $ 147,476 Interest rate spread 3.99 % 4.59 % Net interest margin 4.38 % 5.07 % 134
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Average Volume Interest income (1) / expense Average Rate (1)
Six-Month Period Ended June 2020 2019 2020 2019 2020 2019 30, (Dollars in thousands) Interest-earning assets:
Money market and other
short-term investments
Government obligations (2) 609,636 742,553 10,564 14,730 3.48 % 4.00 % MBS 1,777,327 1,309,650 26,349 22,213 2.98 % 3.42 % FHLB stock 32,537 41,825 1,086 1,353 6.71 % 6.52 % Other investments 5,968 3,054 21 13 0.71 % 0.86 % Total investments (3) 3,347,656 2,637,641 40,565 44,578 2.44 % 3.41 % Residential mortgage loans 2,869,001 3,098,574 76,467 83,169 5.36 % 5.41 % Construction loans 145,814 88,615 4,066 2,840 5.61 % 6.46 % Commercial and Industrial and 3,812,042 3,767,329 94,727 107,975 5.00 % 5.78 % Commercial mortgage loans Finance leases 425,513 351,058 15,666 13,121 7.40 % 7.54 % Consumer loans 1,870,278 1,669,009 103,176 94,555 11.09 % 11.42 % Total loans (4) (5) 9,122,648 8,974,585 294,102 301,660 6.48 % 6.78 %
Total interest-earning assets
Interest-bearing liabilities:
Brokered CDs$ 423,676 $ 516,141 $ 4,722 $ 5,469 2.24 % 2.14 % Other interest-bearing 6,783,847 6,103,478 31,929 31,126 0.95 % 1.03 % deposits Loans payable 16,923 - 21 - 0.25 % - % Other borrowed funds 462,172 305,457 7,471 9,048 3.25 % 5.97 % FHLB advances 536,236 740,000 5,878 7,612 2.20 % 2.07 % Total interest-bearing$ 8,222,854 $ 7,665,076 $ 50,021 $ 53,255 1.22 % 1.40 % liabilities Net interest income$ 284,646 $ 292,983 Interest rate spread 4.18 % 4.61 % Net interest margin 4.59 % 5.09 % (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$0.9 million and$1.9 million for the quarters endedJune 30, 2020 and 2019, respectively, and$3.2 million and$4.0 million for the six-month periods endedJune 30, 2020 and 2019, respectively, of income from prepayment penalties and late fees related to the Corporation's loan portfolio. 135
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