FIRST BANCORP.
OPERATIONS ("MD&A")
SELECTED FINANCIAL DATA
Quarter ended
(In thousands, except for per share and financial
ratios) March 31,
2021 2020
Condensed Income Statements:
Total interest income $ 194,642 $ 165,264
Total interest expense 18,377 26,615
Net interest income 176,265 138,649
Provision for credit losses - (benefit) expense (15,252) 77,366
Non-interest income 30,956 30,200
Non-interest expenses 133,301 92,184
Income (loss) before income taxes 89,172 (701)
Income tax expense (benefit) 28,022 (2,967)
Net income 61,150 2,266
Net income attributable to common stockholders 60,481 1,597Per Common Share Results:
Net earnings per share-basic $ 0.28 $ 0.01
Net earnings per share-diluted $ 0.28 $ 0.01
Cash dividends declared $ 0.07 $ 0.05
Average shares outstanding 217,033 216,785
Average shares outstanding - diluted 218,277 217,314
Book value per common share $ 9.99 $ 9.92
Tangible book value per common share (1) $ 9.64 $ 9.76
Selected Financial Ratios (In Percent):
Profitability:
Return on Average Assets 1.30 % 0.07 %
Interest Rate Spread 3.69 4.17
Net Interest Margin 3.91 4.63
Interest Rate Spread - tax equivalent basis (2) 3.79 4.36
Net Interest Margin - tax equivalent basis (2) 4.01 4.82
Return on Average Total Equity 10.82 0.41
Return on Average Common Equity 10.88 0.29
Average Total Equity to Average Total Assets 12.01 17.38
Tangible common equity ratio (1) 10.90 16.36
Dividend payout ratio 25.12 678.80
Efficiency ratio (3) 64.33 54.60Asset Quality:
Allowance for credit losses for loans and
finance leases to total loans held for 3.08 % 3.24 %
investment
Net charge-offs (annualized) to average loans 0.43 0.78
Provision for credit losses for loans and
finance leases - (benefit) expense to net (115.47) 421.31
charge-offs
Non-performing assets to total assets 1.47 2.44
Nonaccrual loans held for investment to total 1.73 2.35
loans held for investment
Allowance for credit losses for loans and
finance leases to total nonaccrual loans held 178.49 137.91
for investment
Allowance for credit losses for loans and
finance leases to total nonaccrual loans held
for investment,
excluding residential real estate loans 522.00 327.52Other Information:
Common Stock Price: End of period $ 11.26 $
5.32
As of March As of December
31,2021 31, 2020
Balance Sheet Data:
Total loans, including loans held for sale $ 11,697,929 $ 11,827,578
Allowance for credit losses for loans and 358,936 385,887
finance leases
Money market and investment securities, net of 5,632,090 4,925,822
allowance for credit losses for debt securities
Goodwill and other intangible assets 76,998 79,525
Deferred tax asset, net 306,373 329,261
Total assets 19,413,734 18,793,071
Deposits 16,010,436 15,317,383
Borrowings 923,762 923,762
Total preferred equity 36,104 36,104
Total common equity 2,227,795 2,183,620
Accumulated other comprehensive (loss) income, (43,474) 55,455
net of tax
Total equity 2,220,425 2,275,179
__________________
(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, 2020 (the "2020 Annual Report on Form 10-K"). This section also presents
certain financial measures that are not based on generally accepted accounting
principles in the United States ("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 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"), 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
Stock Repurchase Program
On April 26, 2021 , the Corporation announced that its Board of Directors
approved a stock repurchase program, under which the Corporation may repurchase
up to $300 million of its outstanding stock, commencing in the second quarter of
2021 through June 30, 2022 . Repurchases under the program may be executed
through open market purchases, accelerated share repurchases and/or privately
negotiated transactions or plans, including under plans complying with Rule
10b5-1 under the Exchange Act. The Corporation's stock repurchase program is
subject to various factors, including the Corporation's capital position,
liquidity, financial performance and alternative uses of capital, stock trading
price, and general market conditions. The repurchase program may be modified,
extended, suspended, or terminated at any time at the Corporation's discretion
and may include the redemption of the $36.1 million in outstanding shares of the
Corporation's Series A through E Noncumulative Perpetual Monthly Income
Preferred Stock.
COVID-19 Pandemic
The COVID-19 pandemic has caused unprecedented uncertainty, volatility and
disruption in financial markets and in governmental, commercial and consumer
activity in many countries, including in the markets in which the Corporation
operates. In response, federal, state and local governments have taken and
continue to take actions designed to mitigate the effect of the virus on public
health and to address the economic impact from the virus. As the restrictive
measures were eased during 2020 and into 2021, based upon positive signs of
recovery from the impacts of the COVID-19 pandemic driven by vaccination and
government stimulus programs, economic activity has steadily improved. While
positive signs exist, new variants of the COVID-19 virus have emerged and a
recent increase in cases and hospitalizations related to the COVID-19 pandemic
is affecting Puerto Rico , our main market. In response, Puerto Rico's Governor
issued an executive order in early April 2021 that expanded the ongoing
overnight curfew and reduced the maximum occupancy for restaurants and other
establishments to 30%. However, the latest executive order announced by the
Puerto Rico's Governor on May 6, 2021 , modified the curfew back to 12:00 a.m. to
5:00 a.m. , two hours later than allowed under the previous order, and maintained
the maximum occupancy of restaurants and other establishments at 30%. At the
same time, in Puerto Rico , vaccination efforts began in January 2021 , starting
with first responders, and then including other groups by stages. Early in April
2021 , all residents 16 years of age or older were authorized to receive the
vaccine. As of May 2, 2021 , approximately 1.9 million vaccines of COVID-19 have
been administered in Puerto Rico . Approximately 1.1 million of people have
received at least one dose of the COVID-19 vaccine and approximately nine
hundred thousand people have completed the vaccination process.
The Corporation continues to operate consistently with guidance from federal and
local authorities. As of March 31, 2021 , branches were fully open with
additional health and safety requirements to comply with federal and local
health mandates, including, among other things, daily deep cleaning, face mask
requirements and strict social distancing measures. The Corporation has limited
in-person banking hours, with branches in Puerto Rico operating from 8:30 a.m.
to 4:30 p.m. on weekdays and 9:00 a.m. to 1:00 p.m. on Saturdays . The
Corporation continues to enhance client awareness of its digital banking
offerings, and registered and active users grew by 6% and 9%, respectively,
during the first quarter of 2021.
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Our results of operations for the first quarter of 2021 continue to reflect
improvement towards pre-pandemic levels. However, we maintain a cautious view of
the macroeconomic outlook due to continuing uncertainty regarding the pace of
recovery in the economy and uncertainty related to the COVID-19 pandemic,
including the emergence of new variants of the virus. Uncertainties associated
with the pandemic include the duration of the COVID-19 outbreak and any related
infections, including those from new variants of the virus, the effectiveness of
COVID-19 vaccines, the impact to our customers, employees and vendors and the
impact to the economy as a whole. In addition, the economic pressures and
uncertainties related to the COVID-19 pandemic have resulted in changes in
consumer spending behaviors, which may negatively impact the demand for loans
and other services we offer.
The Coronavirus Aid, Relief, and Economic Security ("CARES") Act of 2020, as
amended by the Consolidated Appropriations Act, 2021, included an allocation of
$659 billion for loans to be issued by financial institutions through the SBA
PPP. SBA PPP loans are forgivable, in whole or in part, if the proceeds are used
for payroll and other permitted purposes in accordance with the requirements of
the program. These loans carry a fixed rate of 1.00% and a term of two years
(loans made before June 5, 2020 ) or five years (loans made on or after June 5,
2020 ), if not forgiven, in whole or in part. Payments are deferred until either
the date on which the SBA remits the amount of forgiveness proceeds to the
lender or the date that is 10 months after the last day of the covered period if
the borrower does not apply for forgiveness within that 10-month period. On
December 27, 2020 , President Trump signed another COVID-19 relief bill that
extended and modified several provisions of the program. This included an
additional allocation of $284 billion . The SBA reactivated the program on
January 11, 2021 . The Corporation is originating additional SBA PPP loans, which
will currently extend through May 31, 2021 . As of March 31, 2021 , the
Corporation's SBA PPP loan portfolio, net of unearned fees of $14.1 million
totaled $430.5 million . The unearned fees are accreted into income based on the
contractual period of two years or five years, as applicable. Upon SBA
forgiveness, unamortized fees are then recognized into interest income. During
the first quarter of 2021, the Corporation originated $209.3 million in new SBA
PPP loans and received forgiveness remittances of approximately $175.7 million
in principal balance of SBA PPP loans originated in 2020. Forgiveness
remittances in the first quarter of 2021 resulted in the acceleration of fee
income recognition in the amount of $3.2 million .
Total deposits, excluding brokered deposits and government deposits, continue to
increase and were $13.3 billion as of March 31, 2021 , an increase of $472.3
million from December 31, 2020 . Our liquidity levels and capital position remain
strong, with capital ratios that are well above regulatory requirements. These
robust liquidity and capital levels provide us with significant flexibility to
maintain the strength of our balance sheet and return capital to shareholders
through share repurchases and dividend payments, subject to regulatory
considerations.
Integration of
The Corporation continues to make progress in integration activities, with the conversions of the commercial, consumer and credit card business systems completed during the first four months of 2021. The Corporation is on track and expects that the full system conversions will be completed by the end of the summer of 2021. In addition, the Corporation consolidated 3 banking branches during the first quarter of 2021 and expects to consolidate 6 to 7 additional banking branches during 2021. The Corporation continues to make progress in reducing personnel and service contract expenses and completing other business rationalization activities. The total amount of merger and restructuring costs related to the BSPR acquisition is estimated to be approximately$65 million . Cumulative merger and restructuring expenses of$49.2 million have been incurred throughMarch 31, 2020 , of which$11.3 million was incurred during the first quarter of 2021. The Corporation anticipates that most of the remainder of the estimated expenses will be incurred in the second and third quarters of 2021. Merger and restructuring costs in the first quarter of 2021 included approximately$4.8 million related to voluntary and involuntary separation programs implemented in thePuerto Rico region. The Corporation anticipates additional charges of approximately$1.7 million in the second quarter of 2021 in connection with the previously announced Employee Voluntary Separation Program ("VSP") offered to eligible employees inPuerto Rico . The Corporation also estimates that the combined entities will achieve total annual pre-tax savings of approximately$49 million , which are expected to be fully realized during 2022.
Update on Previously Reported Cybersecurity Incident
OnOctober 23, 2020 , we experienced a cybersecurity incident that affected certain of the Corporation's service channels. As a result of the incident and the security protocols that we activated to protect the Corporation's information and that of its customers, certain bank services were temporarily suspended for our customers. We restored normal operations shortly thereafter and did not experience any material day-to-day impact from the temporary suspension. The investigation into the incident is materially complete and no evidence of misuse of personal information has been identified. We completed regulatory-required notices, in accordance with local laws, related to potential exposure of personal information of affected individuals. We believe that the incident has been contained and we do not expect the incident to have a material impact on our business, operations or financial condition. Nevertheless, there can be no guarantee that we will not experience material adverse effects, such as loss of customer confidence, further disruptions in our operations, or remediation, mitigation, compliance or legal costs. 110 --------------------------------------------------------------------------------
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$61.2 million , or$0.28 per diluted common share, for the quarter endedMarch 31, 2021 , compared to$2.3 million , or$0.01 per diluted common share, for the same period in 2020.
The key drivers of the Corporation's GAAP financial results for the quarter
ended
?Net interest income for the quarter endedMarch 31, 2021 was$176.3 million , compared to$138.6 million for the first quarter of 2020. The increase was driven by an increase of$6.2 billion in average interest-earning assets and a decrease in the average cost of deposits, partially offset by the effect of lower market interest rates on loans and investment yields. The increase in average interest-earning assets was primarily related to the acquisition of BSPR effective onSeptember 1, 2020 , as well as purchases of investment securities, and higher interest-bearing cash balances. Through 2020 and the first quarter of 2021, the increased liquidity obtained from the growth in total deposits was primarily invested inU.S. agencies investment securities or in interest-bearing deposits maintained at theFederal Reserve Bank of New York ("New York FED"). The net interest margin decreased 72 basis points to 3.91% for the quarter endedMarch 31, 2021 , compared to 4.63% for the same period in 2020. The decrease was primarily related to the effect of lower market interest rates onU.S. agencies mortgage-backed securities ("MBS") and debt securities yields, affected by both higher prepayment rates and lower reinvestment yields, as well as in the repricing of variable rate commercial loans and interest-bearing cash balances. In addition, the net interest margin was adversely affected by a higher proportion of low-yielding assets, such asU.S. agencies investment securities and interest-bearing cash balances, to total interest-earning assets, partially offset by the decrease in the average interest rate paid on interest-bearing deposits. See "Net Interest Income" below for additional information. ?The provision for credit losses on loans, finance leases, and debt securities decreased by$92.6 million to a$15.2 million net benefit for the first quarter of 2021, compared to an expense of$77.4 million for the same period in 2020. The variance reflects the effect of reserve releases in the first quarter of 2021, primarily due to positive changes in the outlook of macroeconomic assumptions to which the reserve is correlated. The significant reserve builds in the prior year were due to the deterioration of the macroeconomic outlook as a result of the onset of the COVID-19 pandemic. Net charge-offs totaled$12.5 million for the first quarter of 2021, or 0.43% of average loans on an annualized basis, compared to$17.6 million , or 0.78% of average loans for the same period in 2020. The decrease consisted of a$4.6 million decline in net charge-offs taken on consumer loans and a$1.7 million decrease in net charge-offs taken on residential mortgage loans, partially offset by an increase of$1.2 million in net charge-offs taken on commercial and construction loans. Approximately$0.7 million of the commercial and construction charge-offs recorded in the first quarter was related to the transfer to held for sale of$28.2 million of criticized commercial loan participations. See "Provision for credit losses" and "Risk Management" below for analyses of the allowance for credit losses ("ACL") and non-performing assets and related ratios. 111 -------------------------------------------------------------------------------- ?The Corporation recorded non-interest income of$31.0 million for the first quarter of 2021, compared to$30.2 million for the same period in 2020. The increase was primarily driven by: (i) a$3.5 million increase in revenues from mortgage banking activities, driven by a higher volume of residential mortgage loan originations and sales that reflects, in part, the effect in the prior year of quarantines and lockdowns of non-essential businesses in connection with the COVID-19 pandemic; (ii) a$4.4 million total increase in transactional fees income from service charges and fees on deposits, credit and debit cards and POS interchange fees, and merchant-related activities due to the effect of the BSPR acquisition; and (iii) a$0.7 million increase in insurance commission income driven by a higher volume of loan originations, as compared to the first quarter of 2020. These variances were partially offset by the effect in the first quarter of 2020 of an$8.2 million gain recorded on the sale of approximately$275.6 million of available-for-saleU.S. agencies MBS. See "Non-Interest Income" below for additional information. ?Non-interest expenses for the first quarter of 2021 were$133.3 million , compared to$92.2 million for the same period in 2020. Non-interest expenses for the first quarter of 2021 included$11.3 million of merger and restructuring costs associated with the acquisition and integration of BSPR compared to$0.8 million for the first quarter of 2020. Total non-interest expenses also included$1.2 million of COVID-19 pandemic-related expenses, primarily related to cleaning and security protocols, compared to$0.4 million for the same period a year ago. Further, total non-interest expenses in the first quarter of 2020 included a$1.2 million benefit from hurricane-related insurance recoveries. Adjusted for the above-mentioned costs, total non-interest expenses for the first quarter of 2021 increased by$28.7 million , compared to the same period in 2020, primarily related to incremental expenses associated with operations, personnel, and branches acquired from BSPR. See "Non-Interest Expenses" below for additional information. ?For the first quarter of 2021, the Corporation recorded an income tax expense of$28.0 million , compared to an income tax benefit of$3.0 million for the same period in 2020. The variance was primarily related to higher pre-tax income, as well as a higher estimated effective tax rate resulting from higher level of taxable income. As ofMarch 31, 2021 , the Corporation had deferred tax assets of$306.4 million (net of a valuation allowance of$112.7 million , including a valuation allowance of$70.7 million against the deferred tax assets of the Corporation's banking subsidiary,FirstBank ), compared to net deferred tax assets of$329.3 million as ofDecember 31, 2020 . See "Income Taxes" below for additional information. ?As ofMarch 31, 2021 , total assets were$19.4 billion , an increase of$620.7 million fromDecember 31, 2020 . The increase was primarily related to a$763.9 million increase in investment securities, driven by purchases ofU.S. agencies MBS andU.S. agencies callable and bullet debentures, and an increase of$24.3 million in cash and cash equivalents attributable to the liquidity obtained from the growth in deposits and loan repayments. These variances were partially offset by a decrease of$129.7 million in total loans, consisting of a$134.5 million decrease in residential mortgage loans, and a$41.7 million decrease in commercial and construction loans (net of a$24.5 million increase in the SBA PPP loan portfolio), partially offset by an increase of$46.5 million in consumer loans. See "Financial Condition and Operating Data Analysis" below for additional information.
?As of
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?As of March 31, 2021 , the Corporation's stockholders' equity was $2.2 billion ,
a decrease of $54.8 million from December 31, 2020 . The decrease was driven by a
$98.9 million decrease in the fair value of available-for-sale investment
securities recorded as part of Other comprehensive (loss) income in the
consolidated statements of financial condition, driven by changes in market
interest rates, and common and preferred stock dividends declared in the first
quarter of 2021 totaling $16.0 million , partially offset by earnings generated
in the first quarter. The Corporation's common equity tier 1 ("CET1") capital,
tier 1 capital, total capital and leverage ratios were 17.68%, 17.99%, 20.73%
and 11.36%, respectively, as of March 31, 2021 , compared to CET1 capital, tier 1
capital, total capital and leverage ratios of 17.31%, 17.61%, 20.37%, and
11.26%, respectively, as of December 31, 2020 . 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 $1.2 billion for the
quarter ended March 31, 2021 , compared to $802.6 million for the same period in
2020. During the first quarter of 2021, the Corporation originated $209.3
million of SBA PPP loans. Excluding those loans, total loan originations
increased by $232.7 million to $1.0 billion during the first quarter of 2021, as
compared to the first quarter of 2020. The increase consisted of: (i) a $98.5
million increase in commercial and construction loan originations; (ii) an $83.9
million increase in residential mortgage loan originations; and (iii) a $50.2
million increase in consumer loan originations. The originations in the first
quarter of 2020 were affected by the onset of the COVID-19 pandemic and related
restrictive measures taken by governments, businesses and individuals that
caused significant disruptions in loan underwriting and closing process as a
result of a nearly two-month full lockdown of non-essential businesses that were
implemented in Puerto Rico on March 16, 2020 .
?Total non-performing assets were $284.9 million as of March 31, 2021 , a
decrease of $8.6 million from December 31, 2020 . The decrease was driven by a
$9.4 million reduction in nonaccrual commercial and construction loans,
including through the repayment of a $6.0 million nonaccrual construction loan
relationship in the Virgin Islands region, and a $3.9 million decrease in the
OREO portfolio balance, driven by write-downs to the value of certain
income-producing commercial properties and sales of residential properties. See
"Risk Management - Non-Accruing and Non-Performing Assets" below for additional
information.
?Adversely classified commercial and construction loans increased by $49.5
million to $204.7 million as of March 31, 2021 compared to December 31, 2020 .
The increase was driven by the downgrade of two commercial relationships in the
Puerto Rico region totaling $33.2 million . The Corporation is closely monitoring
its loan portfolio to identify potential at-risk segments, payment performance,
the need for permanent modifications, and the performance of different sectors
of the economy in all the markets where the Corporation operates.
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The Corporation's financial results for the first quarters of 2021 and 2020
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
?Merger and restructuring costs of$11.3 million ($7.0 million after-tax) in connection with the BSPR acquisition integration process and related restructuring initiatives. Merger and restructuring costs in the first quarter of 2021 included approximately$4.8 million related to voluntary and involuntary employee separation programs implemented in thePuerto Rico region. The Corporation anticipates additional charges of approximately$1.7 million in the second quarter of 2021 in connection with the previously announced VSP offered to eligible employees in thePuerto Rico region. Approximately 100 employees participated in the program. To allow for a transition period, the effective separation date for eligible employees is the period between the end ofNovember 2020 until the end ofJuly 2021 . In addition, merger and restructuring costs in the first quarter of 2021 included consulting fees, expenses related to system conversions and other integration related efforts, and accelerated depreciation charges related to planned closures and consolidation of branches in accordance with the Corporation's integration and restructuring plan. ?COVID-19 pandemic-related expenses of$1.2 million ($0.8 million after-tax), primarily costs related to additional cleaning, safety materials, and security measures. Quarter endedMarch 31, 2020 ?Gain of$8.2 million on sales of approximately$275.6 million ofU.S. agencies MBS executed in the latter part ofMarch 2020 . The gain, realized at the tax-exempt international banking entity subsidiary, had no effect on the income tax expense recorded in the first quarter of 2020. ?A benefit of$1.2 million ($0.7 million after-tax) resulting from insurance recoveries associated with hurricane-related expenses incurred primarily in thePuerto Rico region.
?Merger and restructuring costs of
?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.
The following table reconciles for the first quarter of 2021 and 2020 the reported net
income to adjusted net income (loss), a non-GAAP financial measure that excludes the
Special Items identified above:
Quarter ended March 31,
2021 2020
(In thousands)
Net income, as reported (GAAP) $ 61,150 $ 2,266
Adjustments:
Merger and restructuring costs 11,267 845
Benefit from hurricane-related insurance recoveries - (1,153)
Gain on sales of investment securities -
(8,247)
COVID-19 pandemic-related expenses 1,209 363 Income tax impact of adjustments (1) (4,679)
(21)
Adjusted net income (loss) (Non-GAAP)$ 68,947
(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. In preparing the consolidated financial statements management is required to make estimates, assumptions, and judgments that affect the amounts recorded for assets, liabilities and contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Corporation's significant accounting policies are described in Note 1 - Nature of Business and Summary of Significant Accounting Policies to the consolidated financial statements included in the 2020 Annual Report on Form 10-K. Not all significant accounting policies require management to make difficult, subjective or complex judgments. The Corporation's critical accounting estimates that are particularly susceptible to significant changes include: 1) the ACL; 2) income taxes; and 3) acquired loans. Actual results could differ from estimates and assumptions, if different outcomes or conditions prevail.
Allowance for Credit Losses
The Corporation maintains an ACL for loans and finance leases based upon management's estimate of the lifetime expected credit losses in the loan portfolio, as of the balance sheet date, excluding loans held for sale. Additionally, the Corporation maintains an ACL for debt securities classified as either held-to-maturity or available-for-sale, and other off-balance sheet credit exposures (e.g., unfunded loan commitments). For loans and finance leases, unfunded loan commitments, and held-to-maturity debt securities, the estimate of lifetime credit losses includes the use of quantitative models that incorporate forward-looking macroeconomic scenarios that are applied over the contractual lives of the portfolios, adjusted, as appropriate, for prepayments and permitted extension options using historical experience. The ACL for available-for-sale debt securities is measured using a risk-adjusted discounted cash flow approach that also considers relevant current and forward-looking economic variables and the ACL is limited to the difference between the fair value of the security and its amortized cost. Judgment is specifically applied in the determination of economic assumptions, the length of the initial loss forecast period, the reversion of losses beyond the initial forecast period, historical loss expectations, usage of macroeconomic scenarios, and qualitative factors, which may not be adequately captured in the loss model, as further discussed below. The macroeconomic scenarios utilized by the Corporation include variables that have historically been key drivers of increases and decreases in credit losses, as well as the estimated effects of the COVID-19 pandemic on such variables. These variables include, but are not limited to, unemployment rates, housing and commercial real estate prices, gross domestic product levels, retail sales, interest-rate forecasts, corporate bond spreads and changes in equity market prices. The Corporation derives the economic forecasts it uses in its ACL model fromMoody's Analytics . The latter has a large team of economists, data-base managers and operational engineers with a history of producing monthly economic forecasts for over 25 years. As ofMarch 31, 2021 , the Corporation used the base-case economic scenario fromMoody's Analytics in its estimation of 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 forPuerto Rico and theVirgin Islands regions. For theFlorida 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. Changes in economic forecasts impact the probability of default ("PD"), loss-given default ("LGD"), and exposure at default ("EAD") for each instrument, and therefore influence the amount of future cash flows for each instrument that the Corporation does not expect to collect. Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the model, the Corporation has identified certain economic variables that have significant influence in the Corporation's model for determining the ACL. As ofMarch 31, 2021 , the Corporation's ACL model considered the following assumptions for key economic variables in the base-case scenario: ?Commercial Real Estate Price Index year-over-year decrease of approximately 8.6% in the second quarter of 2021, followed by declines ranging from 8.8% - 9.7% during the remainder of 2021. ?Regional Home Price Index inPuerto Rico (purchase only prices), year-over-year increase of approximately 10.6% in the second quarter of 2021, followed by increases ranging from 0.5% - 1.9% during the remainder of 2021. For theFlorida region and theU.S. mainland (all transactions, including refinances), year-over-year increase of approximately 1.7% and 4.8%, respectively, in the second quarter of 2021, followed by declines ranging from 0.2% - 1.8% for theFlorida region and increases ranging from 3.0% - 3.9% for theU.S. mainland during the remainder of 2021. 115
-------------------------------------------------------------------------------- ?Levels of regional unemployment inPuerto Rico at approximately 8.1% in the second quarter of 2021, followed by modest improvements throughout the remainder of 2021 to an approximate level of 7.7% by the end of 2021. For theFlorida region and theU.S. mainland, unemployment rate of 6.2% and 6.3%, respectively, in the second quarter of 2021, followed by modest improvements throughout the remainder of 2021 to an approximate level of 5.5% inFlorida and 5.7% in theU.S. mainland by the end of 2021. ?A year-over-year increase in real gross domestic product ("GDP") in theU.S. mainland approximately 10.8% in the second quarter of 2021, followed by increasing levels of real GDP growth between 4.6% -5.0% during the remainder of 2021. Further, the Corporation periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (i) management's assessment of economic forecasts used in the model and how those forecasts align with management's overall evaluation of current and expected economic conditions; (ii) organization specific risks such as credit concentrations, collateral specific risks, nature and size of the portfolio and external factors that may ultimately impact credit quality, and (iii) other limitations associated with factors such as underwriting changes, among others. Management reviews the need for and appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods. The ACL can also be impacted by unanticipated changes in asset quality of the portfolio, such as increases in risk rating downgrades in our commercial portfolio, deterioration in borrower delinquencies or credit scores in our credit card portfolio or increases in the loan-to-value ratio ("LTVs") in our residential real estate portfolio. In addition, while we have incorporated our estimated impact of COVID-19 into our ACL, the ultimate impact of the pandemic is still unknown, including how long economic activities will be impacted and what effect the unprecedented levels of government fiscal and monetary actions will have on the economy and our credit losses. Further, the current fair value of collateral is utilized to assess the expected credit losses when a financial asset is considered to be collateral dependent. As described above, the process to determine the ACL requires numerous estimates and assumptions, some of which require a high degree of judgment and are often interrelated. Changes in the estimates and assumptions can result in significant changes in the ACL, as was the case during the first quarter of 2021. As ofMarch 31, 2021 , the total ACL for loans, held-to-maturity and available-for-sale securities, and off-balance sheet credit exposure decreased to$373.4 million , from$401.1 million as ofDecember 31, 2020 . The net reserve release of$27.7 million during the first quarter of 2021 consisted of net charge-offs of$12.5 million and a provision for credit losses net benefit of$15.3 million . The provision for credit losses net benefit recorded in the first quarter of 2021 primarily reflects an improvement in the outlook of macroeconomic variables to which the reserve is correlated, including improvements in unemployment rate forecasts, and the overall decrease in the size of the residential mortgage and the commercial and construction loan portfolios. Our process for determining the ACL is further discussed in Note 1 - Nature of Business and Summary of Significant Accounting Policies, to the consolidated financial statements included in the 2020 Annual Report on Form 10-K. 116 --------------------------------------------------------------------------------
Income Taxes The Corporation is required to estimate income taxes in preparing its consolidated financial statements. This involves the estimation of current income tax expense together with an assessment of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require the Corporation to assume certain positions based on its interpretation of current tax regulations. Management assesses the relative benefits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial and regulatory guidance, and recognizes tax benefits only when deemed probable. Changes in assumptions affecting estimates may be required in the future and estimated tax liabilities may need to be increased or decreased accordingly. The Corporation adjusts the accrual of tax contingencies in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. The Corporation's effective tax rate includes the impact of tax contingencies and changes to such accruals, as considered appropriate by management. When particular tax matters arise, a number of years may elapse before such matters are finally resolved by the taxing authorities. Favorable resolution of such matters or the expiration of the statute of limitations may result in the release of tax contingencies that the Corporation recognizes as a reduction to its effective tax rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective tax rate and may require the use of cash in the year of resolution. The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Corporation's net deferred tax asset assumes that the Corporation will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change, the Corporation may be required to record valuation allowances against its deferred tax assets, resulting in additional income tax expense in the consolidated statements of income. Management evaluates its deferred tax assets on a quarterly basis and assesses the need for a valuation allowance, if any. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assets will not be realized. The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires the evaluation of positive and negative evidence that can be objectively verified. Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character is available within the carryforward periods. Consideration must be given to all sources of taxable income, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, and tax planning strategies. When negative evidence (e.g., cumulative losses in recent years, history of operating loss or tax credit carryforwards expiring unused) exists, more positive evidence than negative evidence will be necessary. The Corporation has concluded that, based on the level of positive evidence, it is more likely than not that the deferred tax asset of$306.4 million (net of a valuation allowance of$112.7 million ) will be realized atMarch 31, 2021 . However, there is no guarantee that the tax benefits associated with the deferred tax assets will be fully realized. The positive evidence considered by management in arriving at its conclusion included factors such as:FirstBank's three-year cumulative income position; sustained periods of profitability; management's proven ability to forecast future income accurately and execute tax strategies; forecasts of future profitability under several potential scenarios that support the partial utilization of NOLs prior to their expiration from 2021 through 2024; and the utilization of NOLs over the past three-years. The negative evidence considered by management included: uncertainties about the state of thePuerto Rico economy, including considerations relating to the effect of hurricane and pandemic recovery funds together withPuerto Rico government debt renegotiation efforts and the ultimate sustainability of the latest fiscal plan certified by the PROMESA oversight board.
Refer to "Income Taxes" below for further information related to Income Taxes.
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Acquired Loans
Loans acquired through a purchase or a business combination are recorded at
their fair value as of the acquisition date. The Corporation performs an
assessment of acquired loans to first determine if such loans have experienced
more than insignificant deterioration in credit quality since their origination
and thus should be classified and accounted for as purchased credit deteriorated
("PCD") loans. For loans that have not experienced more than insignificant
deterioration in credit quality since origination, referred to as non-PCD loans,
the Corporation records such loans at fair value, with any resulting discount or
premium accreted or amortized into interest income over the remaining life of
the loan using the interest method. Additionally, upon the purchase or
acquisition of non-PCD loans, the Corporation measures and records an ACL based
on the Corporation's methodology for determining the ACL. The ACL for non-PCD
loans is recorded through a charge to the provision for credit losses in the
period in which the loans were purchased or acquired.
Acquired loans that are classified as PCD are recognized at fair value. The ACL
estimated for PCD loans as of the acquisition date is recorded as a gross-up of
the loan balance and the ACL. Any remaining discount or premium after the
gross-up is then recognized as an adjustment to yield over the remaining life of
the loan. After the acquisition date, the accounting for acquired loans and
leases, including PCD and non-PCD loans follows the same accounting guidance as
loans and leases originated by the Corporation. Characteristics relevant to the
classification of PCD loans include: delinquency, payment history since
origination, credit scores migration and/or other factors the Corporation may
become aware of through its initial analysis of acquired loans that may indicate
there has been more than insignificant deterioration in credit quality since a
loan's origination. In connection with the BSPR acquisition on September 1,
2020 , the Corporation acquired PCD loans and non-PCD loans with an aggregate
fair value of approximately $752.8 million and $1.8 billion , respectively. The
fair value of the loans acquired from BSPR was estimated based on a discounted
cash flow method under which the present value of the contractual cash flows was
calculated based on certain valuation assumptions such as default rates, loss
severity, and prepayment rates, consistent with the Corporation's CECL
methodology, and discounted using a market rate of return that accounts for both
the time value of money and investment risk factors. The discount rate utilized
to analyze fair value considered the cost of funds rate, capital charge,
servicing costs, and liquidity premium, mostly based on industry standards.
For PCD loans that, prior to the adoption of CECL, were classified as purchased
credit impaired ("PCI") loans and accounted for under ASC Subtopic 310-30,
"Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC
Subtopic 310-30"), the Corporation adopted CECL using the prospective transition
approach. As allowed by CECL, the Corporation elected to maintain pools of loans
accounted for under ASC Subtopic 310-30 as "units of accounts," conceptually
treating each pool as a single asset. As of March 31, 2021 , such PCD loans
consisted of $126.0 million of residential mortgage loans and $2.4 million of
commercial mortgage loans acquired by the Corporation as part of previously
completed asset acquisitions. As the Corporation elected to maintain pools of
units of account for loans previously accounted for under ASC Subtopic 310-30,
the Corporation is not able to remove loans from the pools until they are paid
off, written off or sold (consistent with the Corporation's practice prior to
adoption of CECL), but is required to follow CECL for purposes of the ACL.
Regarding interest income recognition for PCD loans that existed at the time of
adoption of CECL, the prospective transition approach for PCD loans required by
CECL 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 that the Corporation has elected
to maintain in previously existing pools pursuant to the policy election right
upon adoption of CECL should be made at the pool level, not the individual asset
level. In addition, the guidance provides that the Corporation can continue
accruing interest and not report the PCD loans as being in nonaccrual status if
the following criteria are met: (i) the Corporation can reasonably estimate the
timing and amounts of cash flows expected to be collected, and (ii) the
Corporation did not acquire the asset primarily for the rewards of ownership of
the underlying collateral, such as for use in operations or improving the
collateral for resale. Thus, the Corporation continues to exclude these pools of
PCD loans from nonaccrual loan statistics. In accordance with CECL, the
Corporation did not reassess whether modifications to individual acquired loans
accounted for within pools were TDR as of the date of adoption.
118
--------------------------------------------------------------------------------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 endedMarch 31, 2021 was$176.3 million , compared to$138.6 million for the comparable period in 2020. On a tax-equivalent basis and excluding the changes in the fair value of derivative instruments, net interest income for the quarter endedMarch 31, 2021 was$180.8 million , compared to$144.3 million for the comparable period in 2020. The following tables include a detailed analysis of net interest income for the indicated periods. Part I presents average volumes (based on the average daily balance) and rates on an adjusted tax-equivalent basis and Part II presents, also on an adjusted tax-equivalent basis, the extent to which changes in interest rates and changes in the volume of interest-related assets and liabilities have affected the Corporation's net interest income. For each category of interest-earning assets and interest-bearing liabilities, the tables provide information on changes in (i) volume (changes in volume multiplied by prior period rates), and (ii) rate (changes in rate multiplied by prior period volumes). The Corporation has allocated rate-volume variances (changes in rate multiplied by changes in volume) to either the changes in volume or the changes in rate based upon the effect of each factor on the combined totals. Net interest income on an adjusted tax-equivalent basis and excluding the change in the fair value of derivative instruments is a non-GAAP financial measure. For the definition of this non-GAAP financial measure, refer to the discussion in "Basis of Presentation" below. 119 --------------------------------------------------------------------------------
Part I
Average Volume Interest income (1) / expense Average Rate (1)
Quarter ended March 31, 2021 2020 2021 2020 2021 2020 (Dollars in thousands) Interest-earning assets: Money market and other$ 1,428,038 $ 770,708 $ 349 $ 2,262 0.10 % 1.18 % short-term investments Government obligations (2) 1,439,872 481,967
5,974 5,301 1.68 % 4.42 % MBS 3,604,584 1,763,813 9,730 14,009 1.09 % 3.19 % FHLB stock 31,228 33,390 401 596 5.21 % 7.18 % Other investments 7,238 5,668 9 11 0.50 % 0.78 % Total investments (3) 6,510,960 3,055,546 16,463 22,179 1.03 % 2.92 % Residential mortgage loans 3,493,822 2,890,810 45,586 38,655 5.29 % 5.38 % Construction loans 212,676 122,120 3,244 1,881 6.19 % 6.20 %
Commercial and Industrial
("C&I")
and Commercial mortgage loans 5,431,614 3,679,470 66,269 47,972 4.95 % 5.24 % Finance leases 481,995 421,740 8,870 7,919 7.46 % 7.55 % Consumer loans 2,148,159 1,883,278 58,737 52,310 11.09 % 11.17 % Total loans (4) (5) 11,768,266 8,997,418 182,706 148,737 6.30 % 6.65 %
Total interest-earning assets
Interest-bearing liabilities: Brokered certificates of deposit$ 188,949 $ 429,106 $ 989 $ 2,452 2.12 % 2.30 % ("CDs") Other interest-bearing deposits 10,702,468 6,580,393
11,353 17,202 0.43 % 1.05 % Loans payable - 4,396 - 3 - % 0.27 % Other borrowed funds 483,762 440,194 3,572 3,950 2.99 % 3.61 % FHLB advances 440,000 555,110 2,463 3,008 2.27 % 2.18 % Total interest-bearing$ 11,815,179 $ 8,009,199 $ 18,377 $ 26,615 0.63 % 1.34 % liabilities Net interest income on a tax equivalent basis and excluding valuations$ 180,792 $ 144,301 Interest rate spread 3.79 % 4.36 % Net interest margin 4.01 % 4.82 % (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$2.6 million and$2.2 million for the first quarter of 2021 and 2020, respectively, of income from prepayment penalties and late fees related to the Corporation's loan portfolio. 120 -------------------------------------------------------------------------------- Part II Quarter ended March 31, 2021 compared to 2020 Increase (decrease) Due to: (In thousands) Volume Rate Total Interest income on interest-earning assets: Money market and other short-term investments$ 1,055 $ (2,968) $ (1,913) Government obligations 7,285 (6,612) 673 MBS 9,840 (14,119) (4,279) FHLB stock (37) (158) (195) Other investments 2 (4) (2) Total investments 18,145 (23,861) (5,716) Residential mortgage loans 7,832 (901) 6,931 Construction loans 1,384 (21) 1,363 Commercial and Industrial and Commercial 21,993 (3,696) 18,297 mortgage loans Finance leases 1,091 (140) 951 Consumer loans 7,106 (679) 6,427 Total loans 39,406 (5,437) 33,969 Total interest income 57,551 (29,298) 28,253 Interest expense on interest-bearing liabilities: Brokered CDs (1,287) (176) (1,463) Non-brokered interest-bearing deposits 7,603 (13,452) (5,849) Loans payable (3) - (3) Other borrowed funds 346 (724) (378) FHLB advances (649) 104 (545) Total interest expense 6,010 (14,248) (8,238) Change in net interest income$ 51,541 $ (15,050) $ 36,491 Portions of the Corporation's interest-earning assets, mostly investments in obligations of someU.S. government agencies andU.S. government-sponsored entities ("GSEs"), generate interest that is exempt from income tax, principally inPuerto Rico . Also, interest and gains on sales of investments held by the Corporation's international banking entities ("IBEs") are tax-exempt underPuerto Rico tax law (see "Income Taxes" below for additional information). Management believes that the presentation of interest income on an adjusted tax-equivalent basis facilitates the comparison of all interest data related to these assets. The Corporation estimated the tax equivalent yield by dividing the interest rate spread on exempt assets by 1 less thePuerto 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 byPuerto 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 on interest-bearing liabilities or interest earned on interest-earning assets. 121
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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) 2021 2020
Interest Income - GAAP $ 194,642 $ 165,264
Unrealized gain on derivative instruments (25) -
Interest income excluding valuations 194,617 165,264
Tax-equivalent adjustment 4,552 5,652 Interest income on a tax-equivalent basis and excluding valuations 199,169 170,916 Interest Expense - GAAP 18,377 26,615 Net interest income - GAAP$ 176,265 $ 138,649 Net interest income excluding valuations$ 176,240
Net interest income on a tax-equivalent basis and excluding valuations$ 180,792 $ 144,301 Average Balances Loans and leases$ 11,768,266
6,510,960 3,055,546
Average Interest-Earning Assets$ 18,279,226
Average Interest-Bearing Liabilities$ 11,815,179
Average Yield/Rate Average yield on interest-earning assets - GAAP 4.32 % 5.51 % Average rate on interest-bearing liabilities - GAAP 0.63 % 1.34 % Net interest spread - GAAP 3.69 % 4.17 % Net interest margin - GAAP 3.91 % 4.63 %
Average yield on interest-earning assets excluding valuations
4.32 % 5.51 %
Average rate on interest-bearing liabilities 0.63 % 1.34 %
Net interest spread excluding valuations 3.69 % 4.17 %
Net interest margin excluding valuations 3.91 % 4.63 %
Average yield on interest-earning assets on a
tax-equivalent basis
and excluding valuations 4.42 % 5.70 %
Average rate on interest-bearing liabilities 0.63 % 1.34 %
Net interest spread on a tax-equivalent basis and
excluding valuations 3.79 % 4.36 %
Net interest margin on a tax-equivalent basis and
excluding valuations 4.01 % 4.82 %
122
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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 ended
?An$18.6 million increase in interest income on commercial and construction loans, mainly due to a$1.8 billion increase in the average balance of this portfolio, primarily related to both the effect of loans acquired in conjunction with the BSPR acquisition and the SBA PPP loans originated through 2020 and the first quarter of 2021. Total discount accretion related to fair value marks on commercial and construction loans acquired in the BSPR acquisition amounted to$2.7 million in the first quarter of 2021. Additionally, interest income for the first quarter of 2021 includes$5.4 million earned on average SBA PPP loan balances of$406.2 million , including the acceleration of fee income recognition in the amount of$3.2 million related to forgiveness remittances of$175.7 million received in the current quarter in principal balance of SBA PPP loans. The increase in interest income related to the higher average balances of commercial and construction loans in 2021 was partially offset by the decrease in yields in these portfolios. The decreases in yields on commercial and construction loans were the result of the predominance of loans in these categories with variable rates of interest tied to LIBOR and Prime rates, each of which decreased significantly in 2020 and remained low in the first quarter of 2021. As ofMarch 31, 2021 , the interest rate on approximately 39% of the Corporation's commercial and construction loans, excluding SBA PPP loans, was based upon LIBOR indices and 16% was based upon the Prime rate index. For the first quarter of 2021, the average one-month LIBOR rate declined 129 basis points, the average three-month LIBOR rate declined 133 basis points, and the average Prime rate declined 116 basis points compared to the average rates for such indices for the first quarter of 2020. ?A$7.4 million increase in interest income on consumer loans and finance leases, mainly due to a$325.1 million increase in the average balance of this portfolio, which resulted in an increase in interest income of approximately$8.5 million , largely related to auto loans and finance leases. The increase in the average balance reflects the effect of both consumer loans acquired in connection with the BSPR acquisition and organic growth. The benefit of the increase in the average balance of the consumer loan portfolio was partially offset by, among other things, the adverse effect of one less day in the first quarter of 2021, as compared to the same period in 2020, which resulted in a decrease of approximately$0.7 million on this portfolio.
?A
?An$8.2 million decrease in total interest expense, primarily due to: (i) a$5.8 million decrease in interest expense on interest-bearing checking, savings and non-brokered time deposits, primarily related to the effect of lower rates paid in response to theFederal Fund target rate decreases over the past year that more than offset the effect of the$4.1 billion increase in average balance; (ii) a$1.5 million decrease in interest expense on brokered CDs, primarily related to the$240.2 million decrease in the average balance in related deposits; (iii) a$0.5 million decrease in interest expense on FHLB advances, primarily related to a$115.1 million decrease in the average balance of FHLB advances; and (iv) a$0.7 million decrease in interest expense related to the downward repricing of floating-rate junior subordinated debentures. 123 --------------------------------------------------------------------------------
Partially offset by: ?A$1.9 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% during the first quarter of 2021, compared to 1.17% for the same period a year ago, a decrease attributable to declines in the Federal Funds target rate. The adverse effect of lower rates was partially offset by a$657.3 million increase in the average balance of interest-bearing cash balances, primarily related to the growth in deposits made by customers. ?A$1.6 million decrease in interest income on investment securities, primarily related to the adverse effects of a higher premium amortization expense related to higher prepayment rates ofU.S. agencies MBS and lower reinvestment yields, partially offset by an increase of$2.8 billion in the average balance of investment securities, largely related toU.S. agencies MBS and debt securities. The net interest margin decreased by 72 basis points to 3.91% for the first quarter of 2021, compared to 4.63% for the first quarter of 2020. The decrease was primarily attributable to the effect of the low interest rate environment onU.S. agencies MBS prepayment rates, reinvestment yields on investment securities, and the repricing of variable rate commercial loans and interest-bearing cash balances. In addition, net interest margin was adversely affected by a higher proportion of low-yielding assets, such as interest-bearing cash balances,U.S. agencies MBS and debt securities, to total interest-earning assets, partially offset by the decrease in the average rate paid on interest-bearing deposits. On an adjusted tax-equivalent basis, net interest income for the quarter endedMarch 31, 2021 increased by$36.5 million to$180.8 million , compared to$144.3 million for the same period in 2020. The tax-equivalent adjustment decreased by$1.1 million , primarily due to a decrease in tax-exempt interest income onU.S. agencies MBS held by the IBE subsidiary First Bank Overseas. 124 --------------------------------------------------------------------------------
Provision for Credit Losses
The provision for credit losses consists of provisions for credit losses on loans and finance leases and, unfunded loan commitments, as well as held-to-maturity and available-for-sale debt securities. The principal changes in the provision for credit losses by main categories follow:
Provision for credit losses for loans and finance leases
The provision for credit losses for loans and finance leases was a net benefit of$14.4 million for the first quarter of 2021, compared to an expense of$74.0 million for the first quarter of 2020. The variances by major portfolio category are as follow: ?Provision for credit losses for the commercial and construction loan portfolio was a net benefit of$14.6 million for the first quarter of 2021, compared to an expense of$24.6 million in the first quarter of 2020. The net benefit recorded in the first quarter of 2021, reflects improvements in projected macroeconomic variables, primarily in the unemployment rate variable, and, to a lesser extent, the overall decrease in the size of these portfolios in thePuerto Rico region. The significant reserve builds in the prior year were due to the deterioration of the macroeconomic outlook as a result of the onset of the COVID-19 pandemic reflected across multiple sectors with higher increases in the ACL made for loans in the accommodation, retail real estate, and transportation industries. ?Provision for credit losses for the residential mortgage loan portfolio was a net benefit of$4.2 million for the first quarter of 2021, compared to an expense of$16.2 million in the first quarter of 2020. The net benefit recorded in the first quarter of 2021 reflects the effect of both continued improvements in the outlook of macroeconomic variables, such as regional unemployment rates and the Home Price Index, particularly in theFlorida region, and the overall portfolio decrease. The significant reserve builds in the prior year were due to the deterioration of the macroeconomic outlook as a result of the onset of the COVID-19 pandemic. ?Provision for credit losses for the consumer loans and finance leases portfolio was an expense of$4.3 million for the first quarter of 2021, compared to$33.2 million in the first quarter of 2020. The charges to the provision in the first quarter of 2021 were primarily related to the auto loans and finance lease portfolios that, among other things, accounted for the overall increase in the size of these portfolios, as well as charges to the provision for credit card loans that, among other things, reflect deterioration in delinquency trends, partially offset by releases associated with continued improvements in macroeconomic variables. The significant reserve builds in the prior year were due to the deterioration of the macroeconomic outlook as a result of the onset of the COVID-19 pandemic primarily reflected in the credit cards and unsecured personal loan portfolios. See "Risk Management - Credit Risk Management" below for an analysis of the ACL, 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 provision for credit losses for unfunded commercial and construction loan commitments and standby letters of credit was a net benefit of$0.7 million for the first quarter of 2021, compared to an expense of$1.8 million in the first quarter of 2020. The net benefit recorded in the first quarter of 2021 was primarily related to a construction loan commitment due to improvements in the outlook of macroeconomic variables. The reserve build in the prior year was due to the deterioration of the macroeconomic outlook as a result of the onset of the COVID-19 pandemic.
Provision for credit losses for held-to-maturity and available-for-sale debt securities
As ofMarch 31, 2021 , the held-to-maturity debt securities portfolio consisted ofPuerto Rico municipal bonds. The provision for credit losses for held-to-maturity securities was an expense of$24 thousand for the first quarter of 2021, compared to$1.1 million for the same period a year ago. Meanwhile, the provision for credit losses for available-for-sale debt securities was a net benefit of$0.1 million for the first quarter of 2021, compared to an expense of$0.4 million for the same period a year ago. Changes to the ACL for available-for-sale debt securities were primarily in connection with private label MBS resulting from changes in the present value of expected cash flows based upon the performance of the underlying mortgages and changes in macroeconomic conditions. 125
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Non-Interest Income
The following table presents the composition of non-interest income for the indicated
periods:
Quarter Ended March 31,
2021 2020
(In thousands)
Service charges on deposit accounts $ 8,304 $ 5,957
Mortgage banking activities 7,273 3,788
Insurance income 5,241 4,582
Other operating income 10,138 7,626
Non-interest income before net gain
on sales of investment securities 30,956 21,953
Net gain on sales of investment securities - 8,247
Total $ 30,956 $ 30,200
126
-------------------------------------------------------------------------------- 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 2021 amounted to$31.0 million , compared to$30.2 million for the same period in 2020. The$0.8 million increase in non-interest income was primarily related to: ?A 3.5 million increase in revenues from mortgage banking activities, primarily related to a$2.3 million increase in realized gains on sales of residential mortgage loans in the secondary market, a$0.9 million increase related to the net change in mark-to-market gains and losses from both interest rate lock commitments and To-Be-Announced ("TBA") MBS forward contracts, and a$0.8 million increase in service fee income. These variances were partially offset by a$0.7 million increase in the amortization expense related to mortgage servicing rights. Total loans sold in the secondary market to GNMA andU.S. GSEs during the first quarter of 2021 amounted to$151.5 million with a related net gain of$5.7 million (including realized gains of$0.3 million on TBA MBS hedges), compared to total loans sold in the secondary market during the first quarter of 2020 of$93.7 million with a related net gain of$3.4 million (net of realized losses of$0.4 million on TBA MBS hedges). The lower interest rate environment prevailing in 2021, as compared to the first quarter of 2020, and the adverse effect in prior years of disruptions in the loan originations and closing process related to the onset of the COVID-19 pandemic and related restrictive measures, resulted in a higher volume of conforming residential mortgage loan originations and sales. ?A$2.5 million increase Other operating income in the table above, primarily related to: (i) a$2.1 million increase in transactional fee income from credit and debit cards, POS, and merchant-related activity, reflecting both higher transaction volumes and income generated by the acquired BSPR operations; and (ii) a$0.3 million increase in wire transfer commission income.
?A
?A$0.7 million increase in insurance income, driven by both higher property insurance commissions, positively impacted by a higher volume of residential mortgage loan originations during the first quarter of 2021, when compared to same period in 2020, and higher insurance contingent commissions received by the insurance agency in the first quarter of 2021 as compared to the same period in 2020. Partially offset by: ?The effect in the first quarter of 2020 of an$8.2 million gain on sales of approximately$275.6 million of available-for-saleU.S. agencies MBS. The securities sold carried an increased prepayment risk given the dramatic drops in market interest rates inMarch 2020 . 127 --------------------------------------------------------------------------------
Non-Interest Expenses
The following table presents the components of non-interest expenses for the indicated
periods:
Quarter Ended March 31,
2021 2020
(In thousands)
Employees' compensation and benefits $ 50,842 Occupancy and equipment 24,242
15,127
FDIC deposit insurance premium 1,988
1,522
Taxes, other than income taxes 6,199
3,880
Professional fees:
Collections, appraisals and other credit-related 1,310
1,696
fees
Outsourced technology services 12,373
6,829
Other professional fees 4,018
3,268
Credit and debit card processing expenses 4,278 3,950 Business promotion 2,970 3,622 Communications 2,462 1,877 Net loss on OREO and OREO operations expenses 1,898
1,188
Merger and restructuring costs 11,267 845 Other 9,454 5,521 Total$ 133,301 $ 92,184 128
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Non-interest expenses for the quarter ended
?Merger and restructuring costs associated with the acquisition of BSPR of$11.3 million for the first quarter of 2021, compared to$0.8 million for the first quarter of 2020. These costs primarily included charges related to voluntary and involuntary employee separation programs implemented in thePuerto Rico region, as well as consulting fees, expenses related to system conversions and other integration related efforts, and accelerated depreciation charges related to planned closures and consolidation of branches in accordance with the Corporation's integration and restructuring plan. ?COVID-19 pandemic-related expenses of$1.2 million for the first quarter of 2021, compared to$0.4 million for the first quarter of 2020. For the first quarter of 2021 these costs primarily consisted of: (i) expenses of$1.0 million associated with cleaning and security protocols, included as part of Occupancy and equipment costs in the table above; and (ii)$0.1 million in sales and use taxes, included as part of Taxes, other than income taxes in the table above. For the first quarter of 2020, these costs primarily consisted of: (i) expenses of$0.2 million associated with advertising and digital marketing media related to communications with customers, included as part of Business promotions in the table above; (ii) expenses of$0.1 million associated with cleaning and security protocols, included as part of Occupancy and equipment in the table above; and (iii) expenses of$0.1 million associated with staff relations, included as part of Employees' compensation and benefits in the table above. ?Benefit from hurricane-related expenses insurance recoveries recorded as contra-expense in the first quarter of 2020 amounting to$1.2 million , primarily related to repairs and maintenance expenses, included as a contra expense of Occupancy and equipment costs in the table above. On a non-GAAP basis, adjusted non-interest expenses, excluding the effect of the Special Items mentioned above, amounted to$120.8 million for the first quarter of 2021, compared to$92.1 million for the first quarter of 2020. The$28.7 million increase in adjusted non-interest expenses primarily reflects the effect of operations, personnel, and branches acquired from BSPR. Some of the most significant variances in adjusted non-interest expenses follows: ?An$8.0 million increase in adjusted employees' compensation and benefits expenses, primarily driven by incremental expenses related to personnel retained from the acquisition of BSPR, partially offset by a$2.2 million decrease in deferred loan origination costs, primarily in connection with the origination of SBA PPP loans in the first quarter of 2021. ?A$7.4 million increase in adjusted occupancy and equipment expenses, primarily related to incremental expenses associated with the BSPR acquired operations including rental and software maintenance expenses. ?A$5.7 million increase in adjusted professional service fees, including a$5.5 million increase in outsourced technology fees, primarily related to approximately$3.1 million of temporary technology processing costs of the acquired BSPR operations while system conversions are completed, as well as costs of approximately$1.5 million incurred in connection with the platform used for SBA PPP loan originations and forgiveness funding. ?A$3.9 million increase in adjusted Other non-interest expenses, in the table above, including a$2.2 million increase in the amortization of intangible assets, primarily associated with the intangibles assets recognized in connection with the BSPR acquisition, and a$1.3 million increase in insurance and supervisory expenses, primarily associated with higher costs on insurance policies. ?A$2.2 million increase in adjusted taxes, other than income taxes, primarily related to incremental municipal license taxes, property taxes, and sales and use taxes related to the acquired operations. ?A$0.7 million increase in losses from OREO operations, primarily reflecting a$1.7 million increase in write-downs to the value of OREO properties, largely related to a commercial property in thePuerto Rico region, and a$0.2 million decrease in income recognized from rental payments associated with OREO income-producing properties, partially offset by a$0.7 million increase in net realized gains on sales of OREO properties and a$0.4 million decrease in OREO-related operating expenses, primarily taxes, repairs, and maintenance expenses.
?A
129
--------------------------------------------------------------------------------Income Taxes For the first quarter of 2021, the Corporation recorded an income tax expense of$28.0 million , compared to an income tax benefit of$3.0 million for the same period in 2020. The variance was primarily related to both a higher estimated effective tax rate resulting from higher levels of book taxable income and higher pre-tax income, driven by credit loss reserve releases in the fourth quarter of 2021 compared to the significant reserve builds recorded in the first quarter of 2020. For the quarter endedMarch 31, 2021 , 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 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 2021, excluding entities from which a tax benefit cannot be recognized and discrete items, was 31% compared to 24% for the first quarter of 2020. The Corporation's net deferred tax asset amounted to$306.4 million as ofMarch 31, 2021 , net of a valuation allowance of$112.7 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. The net deferred tax asset of the Corporation's banking subsidiary,FirstBank , amounted to$306.2 million as ofMarch 31, 2021 , net of a valuation allowance of$70.7 million , compared to a net deferred tax asset of$329.1 million , net of a valuation allowance of$59.9 million , as ofDecember 31, 2020 . The decrease in the deferred tax asset was mainly driven by the aforementioned credit loss reserve release and the usage of net operating losses. The increase in the valuation allowance during the first quarter of 2021 was primarily related to the change in the market value of available-for-sale securities. The Corporation maintains a full valuation allowance for its deferred tax assets associated with capital loss carryforward, thus, the change in the market value of available-for-sale securities resulted in a change in the deferred tax asset and an equal change in the valuation allowance without having an effect on earnings. 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 2021, the Corporation incurred an income tax expense of approximately$1.1 million related to itsU.S. operations, compared to$1.0 million for the same period in 2020. The limitation did not impact the USVI operations in the first quarter of 2021 and 2020. 130 --------------------------------------------------------------------------------
FINANCIAL CONDITION AND OPERATING DATA ANALYSIS
Assets The Corporation's total assets were$19.4 billion as ofMarch 31, 2021 , an increase of$620.7 million fromDecember 31, 2020 . The increase was primarily related to a$763.9 million increase in investment securities, mainly driven by purchases ofU.S. agencies MBS andU.S agencies callable and bullet debentures totaling$1.4 billion during the first quarter, partially offset by approximately$202.1 million ofU.S. agencies bonds that were called prior to maturity during the first quarter, prepayments of$314.1 million ofU.S. agencies MBS, and a$98.9 million decrease in the fair value of available-for-sale investment securities attributable to changes in market interest rates. In addition, there was an increase of$24.3 million in cash and cash equivalents attributable to the liquidity obtained from the growth in deposits. These variances were partially offset by a decrease of$129.7 million in total loans, as further discussed below. Loan Portfolio
The following table presents the composition of the Corporation's loan portfolio, including loans held for sale, as of the indicated dates:
March 31, December 31,
(In thousands) 2021 2020
Residential mortgage loans $
3,395,081
Commercial loans:
Commercial mortgage loans 2,216,887 2,230,602
Construction loans 190,996 212,500
Commercial and Industrial loans (1) 3,182,706 3,202,590
Total commercial loans 5,590,589 5,645,692
Consumer loans and finance leases 2,656,189 2,609,643
Total loans held for investment 11,641,859 11,777,289
Less:
Allowance for credit losses for loans and finance (358,936) (385,887)
leases
Total loans held for investment, net $
11,282,923
Loans held for sale 56,070 50,289
Total loans, net $
11,338,993
(1) As of
respectively, of SBA PPP loans.
131
-------------------------------------------------------------------------------- As ofMarch 31, 2021 , the Corporation's total loan portfolio, before the ACL, amounted to$11.7 billion , a decrease of$129.7 million when compared toDecember 31, 2020 . The decrease consisted of reductions of$125.6 million in thePuerto Rico region and$15.5 million in theVirgin Islands region, partially offset by an$11.4 million increase in theFlorida region. On a portfolio basis, the decrease consisted of reductions of$134.5 million in residential mortgage loans and$41.7 million in commercial and construction loans (net of a$24.5 million increase in the SBA PPP loan portfolio), partially offset by an increase of$46.5 million in consumer loans. As further discussed below, the decrease in commercial and construction loans reflects, among other things, the effect of the sale of a$14.3 million criticized commercial loan participation in theFlorida region, the repayment of a$6.0 million nonaccrual construction relationship, as well as large repayments for certain term loans and revolving lines of credit in thePuerto Rico region, partially offset by new loan originations, primarily in theFlorida region. The decrease in thePuerto Rico region consisted of reductions of$99.7 million in residential mortgage loans and$75.3 million in commercial and construction loans (net of a$5.5 million increase in the SBA PPP loan portfolio), partially offset by an increase of$49.4 million in consumer loans, primarily auto loans and finance leases. The decline in the residential mortgage loan portfolio in thePuerto Rico region reflects the effect of repayments and charge-offs, which more than offset the volume of new loan originations kept on the loan portfolio held for investment. The growth in consumer loans was driven by new loan originations, primarily auto loans and finance leases, partially offset by reductions in the balances of personal loans and credit card loans. Excluding the$5.5 million increase in the SBA PPP loan portfolio, commercial and construction loans in thePuerto Rico region decreased by$80.8 million , driven by several commercial term loans individually in excess of$1 million that were paid off in the first quarter and totaled approximately$31.8 million , principal repayments that reduced by$34.5 million the balance of revolving lines of credits related to four commercial and industrial relationships, and additional repayments, which more than offset the volume of new loan originations. The decrease in total loans in theVirgin Islands region consisted of reductions of$7.2 million in residential mortgage loans, and$8.7 million in commercial and construction loans (including a$0.2 million decrease in the SBA PPP loan portfolio), partially offset by a$0.4 million increase in the balance of consumer loans. The decrease in commercial and construction loans reflects, among other things, the aforementioned$6.0 million repayment of a nonaccrual construction relationship. The increase in total loans in theFlorida region consisted of an increase of$42.3 million in commercial and construction loans, partially offset by reductions of$27.6 million in residential mortgage loans and$3.3 million in consumer loans. The increase in the commercial and construction loan portfolio included a$19.2 million increase in the SBA PPP loan portfolio. Excluding the increase in the SBA PPP loan portfolio, commercial and construction loans in theFlorida region increased by$23.1 million , driven by the origination of several commercial loans individually in excess of$10 million related to three commercial and industrial relationships and totaling$47.0 million , partially offset by the sale of a$14.3 million criticized commercial loan participation and loan repayments. 132
-------------------------------------------------------------------------------- As ofMarch 31, 2021 , the loans held for investment portfolio was comprised of commercial and construction loans (48%), residential real estate loans (29%), and consumer and finance leases (23%). Of the total gross loan portfolio held for investment of$11.6 billion as ofMarch 31, 2021 , the Corporation had credit risk concentration of approximately 79% in thePuerto Rico region, 17% inthe United States region (mainly in the state ofFlorida ), and 4% in theVirgin Islands region, as shown in the following table: As of March 31, 2021 Puerto Rico Virgin Islands United States Total (In thousands) Residential mortgage loans$ 2,698,364 $ 205,528 $ 491,189 $ 3,395,081 Commercial mortgage loans 1,767,431 58,314 391,142 2,216,887 Construction loans 64,468 4,817 121,711 190,996 Commercial and Industrial loans (1) 2,094,809 129,204 958,693 3,182,706 Total commercial loans 3,926,708 192,335 1,471,546 5,590,589 Consumer loans and finance leases 2,580,682 52,102 23,405 2,656,189 Total loans held for investment, gross$ 9,205,754 $ 449,965 $ 1,986,140 $ 11,641,859 Loans held for sale 35,719 1,309 19,042 56,070 Total loans, gross$ 9,241,473 $ 451,274 $ 2,005,182 $ 11,697,929 (1) As ofMarch 31, 2021 , includes$430.5 million of SBA PPP loans consisting of$306.6 million in thePuerto Rico region,$27.2 million in theVirgin Islands region, and$96.7 million inthe United States region. As of December 31, 2020 Puerto Rico Virgin Islands United States Total (In thousands) Residential mortgage loans$ 2,788,827 $ 213,376 $ 519,751 $ 3,521,954 Commercial mortgage loans 1,793,095 60,129 377,378 2,230,602 Construction loans 73,619 11,397 127,484 212,500 Commercial and Industrial loans (1) 2,135,291 129,440 937,859 3,202,590 Total commercial loans 4,002,005 200,966 1,442,721 5,645,692 Consumer loans and finance leases 2,531,206 51,726 26,711 2,609,643 Total loans held for investment, gross$ 9,322,038 $ 466,068 $ 1,989,183 $ 11,777,289 Loans held for sale 44,994 681 4,614 50,289 Total loans, gross$ 9,367,032 $ 466,749 $ 1,993,797 $ 11,827,578
(1) As of
133
--------------------------------------------------------------------------------Residential Real Estate Loans As ofMarch 31, 2021 , the Corporation's total residential mortgage loan portfolio, including loans held for sale, decreased by$134.5 million , as compared to the balance as ofDecember 31, 2020 . The decline reflects reductions in all regions driven by repayments and charge-offs, which more than offset the volume of new loan originations kept on the balance sheet. Consistent with the Corporation's strategies, the residential mortgage loan portfolio decreased by$99.7 million in thePuerto Rico region,$27.6 million in theFlorida region, and$7.2 million in theVirgin Islands region. Approximately 92% of the$131.4 million in residential mortgage loan originations in thePuerto Rico region during the first quarter of 2021 consisted of conforming loan originations and refinancings. Conforming mortgage loans are generally originated with the intent to sell in the secondary market to GNMA andU.S. government-sponsored agencies. The majority of the Corporation's outstanding balance of residential mortgage loans in thePuerto Rico andVirgin Islands regions consisted of fixed-rate loans that traditionally carry higher yields than residential mortgage loans in theFlorida region. In theFlorida region, approximately 56% 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, 2021 , the Corporation's commercial and construction loan portfolio, including loans held for sale, decreased by$41.7 million (net of a$24.5 million increase in the SBA PPP loan portfolio), as compared to the balance as ofDecember 31, 2020 . The decrease in commercial and construction loans was primarily reflected in thePuerto Rico region, which declined by$75.3 million (net of a$5.5 million increase in the SBA PPP loan portfolio), as compared to the balance as ofDecember 31, 2020 . Excluding the$5.5 million increase in the SBA PPP loan portfolio, commercial and construction loans inPuerto Rico decreased by$80.8 million , driven by several commercial term loans individually in excess of$1 million that were paid off in the first quarter and totaled approximately$31.8 million , principal repayments that reduced by$34.5 million the balance of revolving lines of credits related to four commercial and industrial relationships, and additional repayments, which more than offset the volume of new loan originations. In theVirgin Islands region, commercial and construction loans decreased by$8.7 million (including a$0.2 million decrease in the SBA PPP loan portfolio) as compared to the balance as ofDecember 31, 2020 . The decrease in theVirgin Islands region, primarily reflects the effect of the aforementioned$6.0 million repayment of a nonaccrual construction relationship. In theFlorida region, commercial and construction loans increased by$42.3 million (including a$19.2 million increase in the SBA PPP loan portfolio). Excluding the$19.2 million increase in the SBA PPP loan portfolio, commercial and construction loans in theFlorida region increased by$23.1 million , driven by the origination of several commercial loans individually in excess of$10 million related to three commercial and industrial relationships and totaling$47.0 million , partially offset by the sale of a$14.3 million criticized commercial loan participation and loans repayments. As mentioned above, the SBA reactivated the PPP inJanuary 2021 . The Corporation is originating additional PPP loans, which originations will extend throughMay 31, 2021 . In the first quarter of 2021, the Corporation originated$209.3 million in PPP loans and received forgiveness remittances of approximately$175.7 million in the principal balance of PPP loans originated in 2020. Forgiveness remittances in the first quarter of 2021 resulted in the acceleration of fee income recognition in the amount of$3.2 million . As ofMarch 31, 2021 , SBA PPP loans, net of unearned fees of$14.1 million , totaled$430.5 million , compared to$406.0 million as ofDecember 31, 2020 . As ofMarch 31, 2021 , the Corporation had$197.5 million outstanding in loans extended to thePuerto Rico government, its municipalities and public corporations, compared to$201.3 million as ofDecember 31, 2020 . As ofMarch 31, 2021 , approximately$107.2 million consisted of loans extended to municipalities inPuerto Rico that are supported by assigned property tax revenues, and$37.4 million consisted of municipal special obligation bonds. The vast majority of revenues of the municipalities included in the Corporation's loan portfolio are independent of budgetary subsidies provided by thePuerto Rico central government. These municipalities are required by law to levy special property taxes in such amounts as are required to satisfy the payment of all of their respective general obligation bonds and notes. 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 exposure to thePuerto Rico government as ofMarch 31, 2021 included$13.5 million in loans granted to an affiliate of thePuerto Rico Electric Power Authority ("PREPA") and$39.4 million in loans to an agency of thePuerto Rico central government. 134
-------------------------------------------------------------------------------- The Corporation also has credit exposure to USVI government entities. As ofMarch 31, 2021 , the Corporation had$62.2 million in loans to USVI government instrumentalities and public corporations, compared to$61.8 million as ofDecember 31, 2020 . Of the amount outstanding as ofMarch 31, 2021 , public corporations of the USVI owed approximately$39.0 million and an independent instrumentality of the USVI government owed approximately$23.2 million . As ofMarch 31, 2021 , all loans were currently performing and up to date on principal and interest payments. As ofMarch 31, 2021 , the Corporation's total exposure to shared national credit ("SNC") loans (including unused commitments) amounted to$902.1 million , compared to$882.9 million as ofDecember 31, 2020 . As ofMarch 31, 2021 , approximately$167.1 million of the SNC exposure related to the portfolio inPuerto Rico and$735.0 million related to the portfolio in theFlorida region.
The composition of the Corporation's construction loan portfolio held for
investment as of
As ofMarch 31, 2021 Puerto Rico Virgin Islands United States Total (In thousands) Loans for residential housing projects: Mid-rise (1) $ 105 $ 956 $ -$ 1,061 Single-family, detached 15,104 139 4,496 19,739 Total for residential housing projects 15,209 1,095 4,496 20,800 Construction loans to individuals secured by 48 - - 48 residential properties Loans for commercial projects 39,470 2,414 116,029 157,913 Land loans - residential 4,902 1,308 1,186 7,396 Land loans - commercial 4,839 - - 4,839 Total construction loan portfolio, gross 64,468 4,817 121,711 190,996 ACL (1,870) (256) (2,789) (4,915) Total construction loan portfolio, net$ 62,598 $ 4,561$ 118,922 $ 186,081 ____________________ (1) Mid-rise relates to buildings of up to 7 stories. As ofDecember 31, 2020 Puerto Rico Virgin Islands United States Total (In thousands) Loans for residential housing projects: Mid-rise (1) $ 116 $ 956 $ -$ 1,072 Single-family, detached 14,685 459 4,980 20,124 Total for residential housing projects 14,801 1,415 4,980 21,196 Construction loans to individuals secured by 48 - - 48 residential properties Loans for commercial projects 48,185 8,635 120,888 177,708 Land loans - residential 5,685 1,347 1,616 8,648 Land loans - commercial 4,900 - - 4,900 Total construction loan portfolio, gross 73,619 11,397 127,484 212,500 ACL (1,752) (880) (2,748) (5,380) Total construction loan portfolio, net$ 71,867 $ 10,517 $ 124,736 $ 207,120 ____________________ (1) Mid-rise relates to buildings of up to 7 stories. 135 --------------------------------------------------------------------------------
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 $ 74,686
Construction loans held for investment in nonaccrual status $ 6,378
Net charge offs - Construction loans $ 9
ACL - Construction loans $ 4,915
Nonaccrual construction loans to total construction loans 3.34%
ACL for construction loans to total construction loans held for
investment 2.57%
Net charge-offs (annualized) to total average construction loans 0.02%
136
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Consumer Loans and Finance Leases
As ofMarch 31, 2021 , the Corporation's consumer loan and finance lease portfolio increased by$46.5 million to$2.7 billion , as compared to the portfolio balance as ofDecember 31, 2020 . The increase primarily reflects increases in auto loans and finance leases, which increased by$59.6 million and$20.6 million , respectively, partially offset by reductions in personal loans, credit cards loans, other lines of credit, and boat loans of$17.9 million ,$13.5 million ,$1.4 million , and$0.9 million , respectively. The growth in consumer loans is mainly reflected in thePuerto Rico region and was driven by an increased level of loan originations. Loan Production First BanCorp. relies primarily on its retail network of branches to originate residential and consumer loans. The Corporation supplements its residential mortgage originations with wholesale servicing released mortgage loan purchases from mortgage bankers. The Corporation manages its construction and commercial loan originations through centralized units and most of its originations come from existing customers, as well as through referrals and direct solicitations. The following table provides a breakdown of First BanCorp.'s loan production, including purchases, refinancings, renewals and draws from existing revolving and non-revolving commitments, for the periods indicated: Quarter Ended March 31, 2021 2020 (In thousands) Residential mortgage$ 163,927 $ 80,009 Commercial mortgage 31,539 115,832 Commercial and Industrial 777,203 358,475 Construction 24,021 50,615 Consumer 342,063 282,027 Total loan production$ 1,338,753 $ 886,958 Total loan originations, including purchases, refinancings, and draws from existing revolving and non-revolving commitments, amounted to approximately$1.3 billion in the first quarter of 2021, compared to$887.0 million for the comparable period in 2020. During the first quarter of 2021, the Corporation originated SBA PPP loans totaling$209.3 million . Excluding SBA PPP loans, total loan originations increased by$242.5 million from$887.0 million originated in the first quarter of 2020 million to$1.1 billion in the first quarter of 2021. The originations in the first quarter of 2020 were affected by the spread of COVID-19 and related restrictive measures that caused a sharp contraction in economic activity and high levels of volatility across most financial markets. Residential mortgage loan originations amounted to$163.9 million for the first quarter of 2021, compared to$80.0 million for the first quarter of 2020. The increase of$83.9 million in the first quarter of 2021, as compared to the same period of 2020, reflects increases of approximately$70.9 million and$13.0 million in thePuerto Rico andFlorida regions, respectively. The increase reflects the effect of both a higher volume of refinanced loans and conforming loan originations driven by the effect of lower mortgage loan interest rates and increased home purchasing activity and the effect in 2020 of disruptions in the loan underwriting and closing processes caused by the almost two-month lockdown related to the COVID-19 pandemic that was implemented inPuerto Rico onMarch 16, 2020 . Commercial and construction loan originations (excluding government loans) amounted to$829.7 million for the first quarter of 2021, compared to$524.4 million for the first quarter of 2020. Total commercial and construction loan originations during the first quarter of 2021 include SBA PPP loan originations of$209.3 million . Excluding SBA PPP loans, commercial and construction loan originations were$620.4 million , an increase of$95.9 million compared with the same period in 2020. The growth reflects an increase of$98.0 million in thePuerto Rico region, partially offset by reductions of$1.9 million and$0.2 million in theFlorida andVirgin Islands regions, respectively. The increase in thePuerto Rico region reflects an increase in the utilization of floor plan and other commercial lines of credit, as compared to the first quarter of 2020, reflecting the effect in 2020 of disruptions caused by the COVID-19 pandemic and related restrictive measures on economic activities, as well as the overall increase in the portfolio commercial lines of credit in 2021 related to the acquisition of BSPR late in the third quarter of 2020. Government loan originations amounted to$3.1 million for the first quarter of 2021, compared to$0.5 million for the first quarter of 2020. Government loan originations in each of those periods are related to the utilization of an arranged overdraft line of credit of a government entity in theVirgin Islands region. 137
-------------------------------------------------------------------------------- Originations of auto loans (including finance leases) for the first quarter of 2021 amounted to$208.7 million , an increase of$57.5 million , compared to$151.2 million for the first quarter of 2020. The increase was primarily reflected in thePuerto Rico region with an increase of$58.1 million , partially offset by a decrease of$0.6 million in theVirgin Islands region. The increase in auto loan and finance lease originations reflects, among other things, the effect in 2020 of disruptions caused by the COVID-19 pandemic-related lockdowns and quarantines. Personal loan originations for the first quarter of 2021, other than credit cards, amounted to$39.2 million , compared to$46.5 million for the first quarter of 2020. Most of the decrease in personal loan originations for the first quarter of 2021, as compared with the same period in 2020, was in thePuerto Rico region, as federal stimulus payments to individuals has softened the demand for personal loans in recent quarters. The utilization activity on the outstanding credit card portfolio for the first quarter of 2021 amounted to$94.1 million , compared to$84.3 million for the first quarter of 2020. Investment Activities As part of its liquidity, revenue diversification and interest rate risk management 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, 2021 amounted to$5.4 billion , a$759.8 million increase fromDecember 31, 2020 . The increase was mainly driven by the aforementioned purchases ofU.S. agencies MBS andU.S. agencies callable and bullet debentures totaling$1.4 billion during the first quarter, partially offset by approximately$202.1 million ofU.S. agencies bonds that were called prior to maturity during the first quarter, prepayments of$314.1 million ofU.S. agencies MBS, and a$98.9 million decrease in the fair value of available-for-sale investment securities attributable to changes in market interest rates. Despite recent increases, long-term market interest rates remain at low levels, which may trigger accelerated exercises of call options and prepayment rights on investments securities in the future. 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, 2021 , the Corporation held a bond issued by thePuerto Rico Housing Finance Authority ("PRHFA"), classified as available for sale, specifically a residential pass-through MBS in the aggregate amount of$3.9 million (fair value -$2.8 million ). This residential pass-through MBS issued by the PRHFA is collateralized by certain second mortgages originated under a program launched by thePuerto Rico government in 2010 and had an unrealized loss of$1.1 million as ofMarch 31, 2021 , of which$0.3 million is due to credit deterioration and was charged against earnings through an ACL during 2020. As ofMarch 31, 2021 , the Corporation's held-to-maturity investment securities portfolio, before the ACL, amounted to$189.7 million , relatively flat compared to$189.5 million as ofDecember 31, 2020 . As ofMarch 31, 2021 , the ACL for held-to-maturity debt securities was$8.9 million , relatively flat compared to$8.8 million as ofDecember 31, 2020 . Held-to-maturity investment securities consisted of financing arrangements withPuerto Rico municipalities issued in bond form, which the Corporation accounts for as securities, but which were underwritten as loans with features that are typically found in commercial loans. These obligations typically are not issued in bearer form, are not registered with theSecurities and Exchange Commission , and are not rated by external credit agencies. These bonds have seniority to the payment of operating costs and expenses of the municipality and, in most cases, are supported by assigned property tax revenues. Approximately 60% of the Corporation's municipality bonds consisted of obligations issued by three of the largest municipalities inPuerto Rico . The municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and loans. Given the uncertainties as to the effects that the fiscal position of thePuerto Rico central government, the COVID-19 pandemic, and the measures taken, or to be taken, by other government entities may have on municipalities, the Corporation cannot be certain whether future charges to the ACL on these securities will be required. See "Risk Management - Exposure to Puerto Rico Government" below for information and details about the Corporation's total direct exposure to thePuerto Rico government, including municipalities. 138 -------------------------------------------------------------------------------- The following table presents the carrying values of investments as of the indicated dates: March 31, December 31, 2021 2020 (In thousands) Money market investments$ 2,932 $ 60,572
Investment securities available for sale, at fair value:
1,399,291 1,187,674
Puerto Rico government obligations 2,829 2,899
MBS 4,004,020 3,455,796
Other 650 650Total investment securities available for sale, at fair value 5,406,790
4,647,019
Investment securities held to maturity, at amortized cost:
189,680 189,488
ACL for held-to-maturity debt securities (8,869) (8,845)
180,811 180,643
Equity securities, including
41,558 37,588
Total money market investments and investment securities
139
--------------------------------------------------------------------------------
MBS as of the indicated dates consisted of:
March 31, December 31,
(In thousands) 2021 2020
Available for sale:
FHLMC certificates $ 1,393,701 $ 1,149,871
GNMA certificates 577,118 699,492
FNMA certificates 1,625,954 1,320,281
Collateralized mortgage obligations issued or
guaranteed by FHLMC, FNMA or GNMA 398,950 277,724
Private label MBS 8,297 8,428
Total MBS $ 4,004,020 $ 3,455,796
The carrying values of investment securities classified as available for sale and held
to maturity as of March 31, 2021 by contractual maturity (excluding MBS) are shown
below:
Carrying Weighted
(In thousands) Amount Average Yield %
U.S. government and agencies obligations:
Due within one year $ 18,061 2.00
Due after one year through five years 751,504
0.57
Due after five years through ten years 608,992 0.84
Due after ten years 20,734 0.65
1,399,291 0.71
Puerto Rico government and municipalities
obligations:
Due within one year 2,968 5.38
Due after one year through five years 14,843
2.57
Due after five years through ten years 88,564 4.65
Due after ten years 86,134 3.72
192,509 4.08
Other investment securities:
Due after one year through five years 650 2.90
Total 1,592,450 1.11
MBS 4,004,020 1.32
ACL on held-to-maturity debt securities (8,869) -
Total investment securities available for sale and
1.26
held to maturity
140
-------------------------------------------------------------------------------- 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, 2021 , the Corporation had approximately$1.2 billion in debt securities (U.S. agencies government securities) with embedded calls, which were primarily purchased at a discount and with an average yield of 0.69%. 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 , in the Corporation's unaudited consolidated financial statements for the quarter endedMarch 31, 2021 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," in the 2020 Annual Report on Form 10-K.
Liquidity Risk and Capital Adequacy
Liquidity risk involves the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet liquidity needs and accommodate fluctuations in asset and liability levels due to changes in the Corporation's business operations or unanticipated events. The Corporation manages liquidity at two levels. The first is the liquidity of the parent company, 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 2021, the Corporation continued to pay quarterly interest payments on the subordinated debentures associated with its 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 overseeing management's establishment of the Corporation's liquidity policy, as well as approving operating and contingency procedures and monitoring liquidity on an ongoing basis. The Management's Investment andAsset 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, theRetail Financial Services Director, the risk manager of theTreasury and Investments Division, the Financial Planning and ALM Director and the Treasurer. TheTreasury 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. TheTreasury and Investments Accounting and Operations area of the Comptroller's Department is responsible for calculating the liquidity measurements used by theTreasury and Investment Division to review the Corporation's liquidity position on a monthly basis. The Financial Planning and ALM Division is responsible to estimates the liquidity gap for longer periods. 141
-------------------------------------------------------------------------------- To ensure adequate liquidity through the full range of potential operating environments and market conditions, the Corporation conducts its liquidity management and business activities in a manner that is intended to preserve and enhance funding stability, flexibility and diversity. Key components of this operating strategy include a strong focus on the continued development of customer-based funding, the maintenance of direct relationships with wholesale market funding providers, and the maintenance of the ability to liquidate certain assets when, and if, requirements warrant. The Corporation develops and maintains contingency funding plans. These plans evaluate the Corporation's liquidity position under various operating circumstances and are designed to help ensure that the Corporation will be able to operate through periods of stress when access to normal sources of funds is constrained. The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, outline actions and procedures for effectively managing liquidity through a 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 three scenarios: a credit rating downgrade, an economic cycle downturn event, and a funding 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, 2021 , the estimated core liquidity reserve (which includes cash and free liquid assets) was$4.6 billion , or 23.9% of total assets, compared to$4.1 billion , or 21.6% of total assets, as ofDecember 31, 2020 . The basic liquidity ratio (which adds available secured lines of credit to the core liquidity) was approximately 29.9% of total assets as ofMarch 31, 2021 , compared to 27.9% of total assets as ofDecember 31, 2020 . As ofMarch 31, 2021 , the Corporation had$1.2 billion available for additional credit from the FHLB. Unpledged liquid securities, mainly fixed-rate MBS andU.S. agency debentures, amounted to approximately$3.1 billion as ofMarch 31, 2021 . 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, 2021 , the holding company had$19.4 million of cash and cash equivalents. Cash and cash equivalents at the Bank level as ofMarch 31, 2021 were approximately$1.5 billion . The Bank had$162.1 million in brokered CDs as ofMarch 31, 2021 , of which approximately$76.5 million mature over the next twelve months. In addition, the Corporation had non-maturity brokered deposits totaling$248.3 million as ofMarch 31, 2021 . Liquidity at the Bank level is highly dependent on bank deposits, which fund 83% of the Bank's assets (or 81% 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, 2021 , the amount of brokered CDs had decreased by$54.1 million to$162.1 million , from$216.2 million as ofDecember 31, 2020 . Non-maturity brokered deposits, such as a money market account maintained by a deposit broker, increased in the first quarter of 2021 by$22.8 million to$248.3 million as ofMarch 31, 2021 . Consistent with its strategy, the Corporation has been seeking to add core deposits. As ofMarch 31, 2021 , the Corporation's deposits, excluding brokered deposits and government deposits, increased by$472.3 million to$13.3 billion , compared to$12.8 billion as ofDecember 31, 2020 . This increase is primarily related to a$505.8 million increase in demand deposits and a$107.7 million increase in savings deposits, primarily in thePuerto Rico andVirgin Islands regions, partially offset by a$141.2 million decrease in retail CDs 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 - Total brokered CDs decreased during the first quarter of 2021 by$54.1 million to$162.1 million as ofMarch 31, 2021 , compared to$216.2 million as ofDecember 31, 2020 . 142 --------------------------------------------------------------------------------
The average remaining term to maturity of the brokered CDs outstanding as of
The use of brokered CDs has historically been an additional source of funding for the Corporation. It provides an additional efficient channel for funding diversification and interest rate management. Brokered CDs are insured by theFDIC 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 short-term money market rates such as the Federal funds rate. The following table presents a summary of time deposits as of the indicated dates: March 31, 2021 December 31, 2020 (In thousands) Total time deposits $ 2,854,291 $ 3,030,485$100,000 or more 2,168,298 2,322,041$250,000 or more 1,181,138 1,259,036
The following table presents contractual maturities of time deposits with
denominations of
Total
(In thousands)
Three months or less $ 444,861 Over three months to six months 359,330 Over six months to one year 621,272 Over one year 742,835 Total $ 2,168,298
Time deposits include brokered CDs of
Government deposits - As ofMarch 31, 2021 , the Corporation had$2.0 billion ofPuerto Rico public sector deposits ($1.9 billion in transactional accounts and$174.8 million in time deposits), compared to$1.8 billion as ofDecember 31, 2020 . Approximately 19% of the public sector deposits as ofMarch 31, 2021 was from municipalities and municipal agencies inPuerto Rico and 81% was from public corporations, the central government and agencies, andU.S. federal government agencies inPuerto Rico . The increase was primarily related to increases in transactional account balances of government public corporations that reflect, among other things, the funds received by government entities from federal disaster recovery funding allocated toPuerto Rico .
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$472.3 million to$13.3 billion from a balance of$12.8 billion as ofDecember 31, 2020 , reflecting increases of$415.2 million in thePuerto Rico region,$47.5 million in theVirgin Islands region, and$9.6 million in theFlorida region. On a deposit type basis, there were increases of$505.8 million in demand deposits, reflecting increases across all regions, and$107.7 million in savings deposits, primarily in thePuerto Rico region, partially offset by a$141.2 million decrease in retail CDs, reflecting decreases across all regions. 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, 2021 and 2020. 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 million as of each ofMarch 31, 2021 andDecember 31, 2020 . 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, 2021 for further details about repurchase agreements outstanding by counterparty and maturities. 143 -------------------------------------------------------------------------------- Under the Corporation's repurchase agreements, as is the case with derivative contracts, the Corporation is required to pledge cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines due to changes in interest rates, a liquidity crisis or any other factor, the Corporation is required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. Given the quality of the collateral pledged, the Corporation has not experienced margin calls from counterparties arising from credit-quality-related write-downs in valuations. Advances from the FHLB - The Bank is a member of the FHLB system and obtains advances to fund its operations under a collateral agreement with the FHLB that requires the Bank to maintain qualifying mortgages and/or investments as collateral for advances taken. As of each ofMarch 31, 2021 andDecember 31, 2020 , the outstanding balance of FHLB advances was$440.0 million . As ofMarch 31, 2021 , the Corporation had$1.2 billion available for additional borrowing capacity 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 trust-preferred securities ("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 statements 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, 2021 andDecember 31, 2020 , the Corporation had subordinated debentures outstanding in the aggregate amount of$183.8 million . As ofMarch 31, 2021 , 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. 144
-------------------------------------------------------------------------------- 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 2021, the Corporation sold approximately$56.1 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 remain at range of 0% to 0.25%, making the Primary Credit FED Discount Window Program a cost-efficient contingent source of funding for the Corporation given the highly-volatile market conditions. Although currently not in use, as ofMarch 31, 2021 , the Corporation had approximately$1.0 billion available for funding under the FED's BIC Program. As an SBA-qualified PPP lender, the Bank is eligible to borrow under the PPP Liquidity Facility by pledging SBA PPP loans. The Corporation is not currently utilizing the PPP Liquidity Facility.
Effect of Credit Ratings on Access to Liquidity
The Corporation's liquidity is contingent upon its ability to obtain external sources of funding to finance its operations. The Corporation's current credit ratings and any downgrade in credit ratings can hinder the Corporation's access to new forms of external funding and/or cause external funding to be more expensive, which could, in turn, adversely affect its results of operations. Also, changes in credit ratings may further affect the fair value of unsecured derivatives whose value takes into account the Corporation's own credit risk. The Corporation does not have any outstanding debt or derivative agreements that would be affected by credit rating downgrades. Furthermore, given the Corporation's non-reliance on corporate debt or other instruments directly linked in terms of pricing or volume to credit ratings, the liquidity of the Corporation has not been affected in any material way by downgrades. The Corporation's ability to access new non-deposit sources of funding, however, could be adversely affected by credit downgrades. As of the date hereof, the Corporation's credit as a long-term issuer is rated B+ by S&P and B+ by Fitch. As of the date hereof,FirstBank's credit ratings as a long-term issuer are B2 by Moody's, five notches below their definition of investment grade; BB by S&P, two 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
145
--------------------------------------------------------------------------------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 quarter of 2021 and 2020, net cash provided by operating activities was$112.7 million and$91.5 million , respectively. Net cash generated from operating activities was higher than reported net income largely as a result of adjustments for items such as depreciation and amortization, cash generated from sales of loans held for sale, and, in 2020, the provision for credit losses expense.
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 quarters endedMarch 31, 2021 andMarch 31, 2020 , net cash used in investing activities was$768.1 million and$105.6 million , respectively, primarily due to purchases ofU.S. agencies investment securities and liquidity used to fund commercial and consumer loan originations, partially offset by principal collected on loans andU.S. agencies MBS prepayments, as well as proceeds fromU.S. agencies bonds called prior to maturity.
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 2021, net cash provided by
financing activities was
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. 146 --------------------------------------------------------------------------------
Capital
As ofMarch 31, 2021 , the Corporation's stockholders' equity was$2.2 billion , a decrease of$54.8 million fromDecember 31, 2020 . The decrease was driven by a$98.9 million decrease in the fair value of available-for-sale investment securities recorded as part of Other comprehensive (loss) income in the consolidated statements of financial condition, and common and preferred stock dividends declared in the first quarter totaling$16.0 million , partially offset by earnings generated in the first quarter. In the first quarter of 2021, the Corporation' Board of Directors declared a quarterly cash dividend of$0.07 per common share, which represented$0.02 per common share, or a 40%, increase from the immediate preceding quarter's dividend level. In addition, sinceDecember 2016 , the Corporation has been making monthly dividend payments on its outstanding shares of non-cumulative perpetual Series A through E preferred stock. The Corporation intends to continue to pay monthly dividend payments on the preferred stock and quarterly dividends on common stock. The Corporation's common stock and other stock dividends, including the declaration, timing and amount, remain subject to the consideration and approval by the Corporation's Board of Directors at the relevant times. OnApril 26, 2021 , the Corporation announced that its Board of Directors approved a stock repurchase program, under which the Corporation may repurchase up to$300 million of its outstanding stock, commencing in the second quarter of 2021 throughJune 30, 2022 . Repurchases under the program may be executed through open market purchases, accelerated share repurchases and/or privately negotiated transactions or plans, including under plans complying with Rule 10b5-1 under the Exchange Act. The Corporation's stock repurchase program will be subject to various factors, including the Corporation's capital position, liquidity, financial performance and alternative uses of capital, stock trading price, and general market conditions. The repurchase program may be modified, extended, suspended, or terminated at any time at the Corporation's discretion and may include the redemption of the$36.1 million in outstanding shares of the Corporation's Series A through E Noncumulative Perpetual Monthly Income Preferred Stock. Set forth below are First BanCorp.'s andFirstBank's regulatory
capital ratios as of
2021 and December 31, 2020:
Banking Subsidiary
First FirstBank To be well
BanCorp. (1) (1) capitalized-thresholds
As of March 31, 2021
Total capital ratio (Total capital to risk-weighted
assets) 20.73% 20.24% 10.00%
CET1 capital ratio
(CET1 capital to risk weighted assets) 17.68% 16.41% 6.50%
Tier 1 capital ratio (Tier 1 capital to risk-weighted
assets) 17.99% 18.99% 8.00%
Leverage ratio 11.36% 12.00% 5.00%
Banking Subsidiary
First FirstBank To be well
BanCorp. (1) (1) capitalized-thresholds
As of December 31, 2020
Total capital (Total capital to risk-weighted assets) 20.37% 19.91% 10.00%
CET1 capital ratio
(CET1 capital to risk weighted assets) 17.31% 16.05% 6.50%
Tier 1 capital ratio (Tier 1 capital to risk-weighted
assets) 17.61% 18.65% 8.00%
Leverage ratio 11.26% 11.92% 5.00%
(1) As permitted by the regulatory capital framework, the Corporation elected to delay for two
years the initial impact related to the adoption of CECL on
change in the ACL from January 1, 2020 to December 31, 2021 . Such effects, will be phased in at
25% per year beginning on January 1, 2022 .
147
-------------------------------------------------------------------------------- The Corporation andFirstBank compute risk-weighted assets using the standardized approach required by theU.S. Basel III capital rules ("Basel III rules"). The Basel III rules require the Corporation to maintain an additional capital conservation buffer of 2.5% of additional CET1 capital 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. As part of its response to the impact of COVID-19, onMarch 31, 2020 , the agencies issued an interim final rule that provided the option to temporarily delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule provides that, at the election of a qualified banking organization, the initial impact to retained earnings related to the adoption of CECL plus 25% of the change in the ACL (excluding 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 over a three-year period, resulting in a total transition period of five years. Accordingly, as ofMarch 31, 2021 , the capital measures of the Corporation and the Bank exclude the$62.3 million initial impact to retained earnings and 25% of the increase in the ACL (as defined in the interim final rule) fromJanuary 1, 2020 toMarch 31, 2021 . The federal financial regulatory agencies may take other measures affecting regulatory capital to address the COVID-19 pandemic, although the nature and impact of such measures cannot be predicted at this time. The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures generally used by the financial community to evaluate capital adequacy. Tangible common equity is total equity less preferred equity, goodwill, core deposit intangibles, purchased credit card relationship intangible assets and insurance customer relationship intangible asset. Tangible assets are total assets less intangible assets such as goodwill, core deposit intangibles, purchased credit card relationships and insurance customer asset relationships. See "Basis of Presentation" below for additional information. The following table is a reconciliation of the Corporation's tangible common equity and tangible assets, non-GAAP financial measures, to total equity and total assets, respectively, as ofMarch 31, 2021 andDecember 31, 2020 , respectively: March 31, December 31, (In thousands, except ratios and per share information) 2021 2020 Total equity - GAAP$ 2,220,425 $ 2,275,179 Preferred equity (36,104) (36,104) Goodwill (38,611) (38,632)
Purchased credit card relationship intangible (3,768)
(4,733)
Core deposit intangible (34,339) (35,842)
Insurance customer relationship intangible (280)
(318)
Tangible common equity $ 2,107,323 $ 2,159,550
Total assets - GAAP $ 19,413,734 $ 18,793,071
Goodwill (38,611) (38,632)Purchased credit card relationship intangible (3,768)
(4,733)
Core deposit intangible (34,339) (35,842)
Insurance customer relationship intangible (280) (318)
Tangible assets $ 19,336,736 $ 18,713,546
Common shares outstanding 218,629 218,235
Tangible common equity ratio 10.90% 11.54%
Tangible book value per common share $ 9.64 $ 9.90
148
-------------------------------------------------------------------------------- The Banking Law of theCommonwealth of Puerto Rico requires that a minimum of 10% ofFirstBank'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 thePuerto Rico Commissioner of Financial Institutions. The Puerto Rico Banking Law provides that, when the expenditures of aPuerto Rico commercial bank are greater than receipts, the excess of the expenditures over receipts must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the legal surplus reserve, as a reduction thereof. If the legal surplus reserve is not sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the capital account and the Bank cannot pay dividends until it can replenish the legal surplus reserve to an amount of at least 20% of the original capital contributed.FirstBank's legal surplus reserve, included as part of retained earnings in the Corporation's consolidated statements of financial condition, amounted to$109.3 million as of eachMarch 31, 2021 andDecember 31, 2020 . There were no transfers to the legal surplus reserve during the quarter endedMarch 31, 2021 .
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, 2021 , the Corporation's commitments to extend credit amounted to approximately$2.1 billion , of which$1.2 billion related to credit card loans. Commercial and financial standby letters of credit amounted to approximately$115.5 million . 149
--------------------------------------------------------------------------------
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, 2021
Less than 1
Total year 1-3 years 3-5 years After 5 years
(In thousands)
Contractual obligations:
Certificates of deposit $ 2,854,291 $ 1,874,205
100,000 - 200,000 -
repurchase
Advances from FHLB 440,000 240,000 200,000 - -
Other borrowings 183,762 - - - 183,762
Operating leases 113,789 18,775 33,130 27,336 34,548
Total contractual obligations $ 3,891,842 $ 2,232,980 $ 1,035,358 $ 393,801 $ 229,703 Commitments to sell mortgage loans
Standby letters of credit$ 4,929 Commitments to extend credit: Lines of credit$ 1,975,693 Letters of credit 110,583 Construction undisbursed funds 74,686 Total commercial commitments$ 2,160,962 150
-------------------------------------------------------------------------------- The Corporation has obligations and commitments to make future payments under contracts, such as debt and lease agreements, and 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 a stable level 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, 2021 , the Corporation forecasted the 12-month net interest income assumingMarch 31, 2021 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 2021 , as compared toDecember 2020 , reflected a 5 basis points reduction in the short-term horizon, between 1 to 12 months, while market rates increased by 37 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 increased by 80 basis points, as compared toDecember 31, 2020 levels. TheU.S. Treasury curve in the short-term horizon decreased by 5 basis points and in the medium-term horizon increased by 37 basis points, as compared to theDecember 31, 2020 levels. The long-term horizon increased by 80 basis points as compared toDecember 31, 2020 levels. 151
-------------------------------------------------------------------------------- The following table presents the results of the simulations as ofMarch 31, 2021 andDecember 31, 2020 . Consistent with prior years, these exclude non-cash changes in the fair value of derivatives: March 31, 2021 December 31, 2020 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$ 25.1 3.47 %$ 30.7 4.06 %$ 32.3 4.53 %$ 36.0 4.96 % - 200 bps ramp$ (13.6) (1.88) %$ (14.2) (1.88) %$ (12.1) (1.69) %$ (13.9) (1.91) % The Corporation continues to manage its balance sheet structure to control and limit the overall interest rate risk. As ofMarch 31, 2021 , 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 by increasing the average balance of interest-bearing deposits with low rate elasticity and non-interest bearing deposits, and reductions in brokered CDs. The above-mentioned growth in deposits, along with proceeds from loan repayments, have contributed to fund increases inU.S. agencies MBS and debt securities, while maintaining higher liquidity levels. The Corporation relied on its existing funding to fund SBA PPP loans, including deposits already at the Bank, and is not currently participating in the PPP Liquidity Facility or the Money Market Mutual Fund Liquidity Facility established by the FED. The decreased net interest income sensitivity for the +200bps ramp was driven by the deployment of cash balances with short-term repricing into long-term investment securities, as well as lower estimated prepayment cash flows in the investment portfolio due to higher rates in the mid and long term tenors, the decrease in the loan portfolio, and lower balances in CDs with maturities within a year. The slight increase in net interest income sensitivity for the -200bps ramp was driven by a lower rate environment near floor levels in which a full down parallel movement of -200bps will not be possible, which has a major impact in cash balances and short-term reprising categories, including variable rate commercial loan portfolios, investment portfolio and CDs. Taking into consideration the above-mentioned facts for modeling purposes, as ofMarch 31, 2021 , the net interest income for the next 12 months under a growing balance sheet scenario was estimated to increase by$30.7 million in the rising rate scenario, compared to an estimated increase of$36.0 million as ofDecember 31, 2020 . Under the falling rate, growing balance sheet scenario, the net interest income was estimated to decrease by$14.2 million , compared to an estimated decrease of$13.9 million as ofDecember 31, 2020 , 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 TBA MBS 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 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 that it enters 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. 152 -------------------------------------------------------------------------------- Interest Rate Swaps - The Corporation acquired interest rate swaps as a result of the BSPR acquisition completed onSeptember 1, 2020 . An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreements acquired in the BSPR acquisition consist of a "back-to-back" structure in which a borrower-facing derivative transaction is paired with an identical, offsetting transaction with an approved dealer-counterparty. By using a back-to-back trading structure, both the commercial borrower and the Corporation are largely insulated from market risk and volatility. The agreements set the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. The fair values of interest rate swaps are recorded as components of other assets in the Corporation's consolidated statements of financial condition. Changes in the fair values of interest rate swaps, which occur due to changes in interest rates, are recorded in the consolidated statements of income as a component of interest income on loans. 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 Corporation's unaudited consolidated financial statements for the quarter endedMarch 31, 2021 . 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 (In thousands) March 31, 2021 March 31, 2021 Fair value of contracts outstanding at the beginning of the period $ 2,482 $
(1,920)
Changes in fair value during the period (213) 564
Fair value of contracts outstanding as
of March 31, 2021 $ 2,269 $ (1,356)
Sources of Fair Value
Payment Due by Period
Maturity in
Maturity Less Maturity 1-3 Excess of 5 Total Fair
(In thousands) Than One Year Years Maturity 3-5 Years Years Value
As of March 31, 2021
Pricing from observable market inputs - $ $ 8 $ - $ 1,314 $ 2,269
Asset Derivatives 947
Pricing from observable market inputs - (44) (6) - (1,306) (1,356)
Liability Derivatives
$ 903 $ 2 $ - $ 8 $ 913
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.
153
--------------------------------------------------------------------------------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, commercial mortgage and construction loan portfolios, theSpecial 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-rateU.S. agency MBS andU.S. Treasury and agencies securities. Thus, a substantial portion of these instruments is backed by mortgages, a guarantee of aU.S. GSE or the full faith and credit of theU.S. government. 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 ACL for loans and finance leases represents the estimate of the level of reserves appropriate to absorb expected credit losses over the estimated life of the loans. The amount of the allowance is determined using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience is a significant input for the estimation of expected credit losses, as well as adjustments to historical loss information made for differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term. Additionally, the Corporation's assessment involves evaluating key factors, which include credit and macroeconomic indicators, such as changes in unemployment rates, property values, and other relevant factors to account for current and forecasted market conditions that are likely to cause estimated credit losses over the life of the loans to differ from historical credit losses. Such factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of severe stress. The process includes judgments and quantitative elements that may be subject to significant change. An internal risk rating is assigned to each commercial loan at the time of approval and is subject to subsequent periodic reviews by the Corporation's senior management. The ACL for loans and finance leases is reviewed at least on a quarterly basis as part of the Corporation's continued evaluation of its asset quality. As ofMarch 31, 2021 , the ACL for loans and finance leases was$358.9 million , down$27.0 million fromDecember 31, 2020 . The decrease in the ACL for loans and finance leases primarily reflects an improvement in the outlook of macroeconomic variables to which the reserve is correlated. Refer to Note 1, - Nature of Business and Summary of Significant Accounting Policies, in the 2020 Annual Report on Form 10-K for description of the methodologies used by the Corporation to determine the ACL. 154
-------------------------------------------------------------------------------- The ratio of the ACL for loans and finance leases to total loans held for investment decreased to 3.08% as ofMarch 31, 2021 , compared to 3.28% as ofDecember 31, 2020 . On a non-GAAP basis, excluding SBA PPP loans, the ratio of the ACL for loans and finance leases to adjusted total loans held for investment was 3.20% as ofMarch 31, 2021 , compared to 3.39% as ofDecember 31, 2020 . For the definition and reconciliation of this non-GAAP financial measure, refer to the discussion in "Basis of Presentation" below. An explanation for the change for each portfolio follows:
?The ACL to total loans ratio for the residential mortgage loan portfolio
decreased from 3.42% as of
?The ACL to total loans ratio for the commercial mortgage loan portfolio decreased from 4.90% as ofDecember 31, 2020 to 4.50% as ofMarch 31, 2021 , primarily reflecting an improvement in the outlook of macroeconomic variables to which the reserve is correlated, including improvements in unemployment rate forecasts. ?The ACL to total loans ratio for the commercial and industrial portfolio decreased from 1.18% as ofDecember 31, 2020 to 1.01% as ofMarch 31, 2021 , reflecting the effect from the general improvements in the macroeconomic outlook, together with releases associated with updated borrowers' financial information. On a non-GAAP basis, excluding SBA PPP loans, the ratio of the ACL for commercial and industrial loans to adjusted total commercial and industrial loans held for investment was 1.17% as ofMarch 31, 2021 , compared to 1.36% as ofDecember 31, 2020 . ?The ACL to total loans ratio for the construction loan portfolio increased from 2.53% as ofDecember 31, 2020 to 2.57% as ofMarch 31, 2021 , primarily reflecting the effect of updated borrowers' financial metrics, partially offset by the release of the reserve previously-established for the$6.0 million nonaccrual construction loan repaid in the first quarter of 2021. ?The ACL to total loans ratio for the consumer loan portfolio decreased from 4.33% as ofDecember 31, 2020 to 4.07% as ofMarch 31, 2021 , primarily related to improvements in macroeconomic variables, as well as the shift in the composition of this portfolio that experienced increases in auto loans and finance leases and reductions in personal and small loan portfolios that carried a higher ACL coverage.
The ratio of the total ACL to nonaccrual loans held for investment was 178.49%
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 Corporation believes it sets adequate loan-to-value ratios following its regulatory and credit policy standards. 155
-------------------------------------------------------------------------------- As shown in the following table, the ACL for loans and finance leases amounted to$358.9 million as ofMarch 31, 2021 , or 3.08% of total loans, compared with$385.9 million , or 3.28% of total loans, as ofDecember 31, 2020 . See "Results of Operation - Provision for Credit Losses" above for additional information. Quarter Ended March 31 (Dollars in thousands) 2021 2020
ACL for loans and finance leases, beginning of period
$ 155,139 Impact of adopting CECL - 81,165 Provision for credit losses - (benefit) expense: Residential mortgage (4,175) 16,218 Commercial mortgage (8,820) 14,167 Commercial and Industrial (5,312) 8,391 Construction (456) 2,062 Consumer and finance leases 4,320
33,207
Total provision for credit losses for loans and finance
$ 74,045 leases - (benefit) expense Charge-offs Residential mortgage$ (2,825) $ (4,435) Commercial mortgage (794) (128) Commercial and Industrial (809) (125) Construction (45) (3) Consumer and finance leases (11,761) (15,504) Total charge offs$ (16,234) $ (20,195) Recoveries: Residential mortgage 733 656 Commercial mortgage 54 44 Commercial and Industrial 264 115 Construction 36 27 Consumer and finance leases 2,639 1,778 Total recoveries$ 3,726 $ 2,620 Net charge-offs$ (12,508) $ (17,575) ACL for loans and finance leases, end of period$ 358,936
ACL for loans and finance leases to period-end total 3.08 % 3.24 %
loans held for investment
Net charge-offs (annualized) to average loans outstanding 0.43 % 0.78 %
during the period
Provision for credit losses - (benefit) expense for loans -1.15 x 4.21 x
and finance leases to net charge-offs during the period
156
--------------------------------------------------------------------------------
The following table sets forth information concerning the allocation of the Corporation's ACL 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, 2021 December 31, 2020
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$ 114,044 29 %$ 120,311 30 % Commercial mortgage loans 99,782 19 % 109,342 19 % Construction loans 4,915 2 % 5,380 2 % Commercial and Industrial loans 32,087 27 % 37,944 27 % Consumer loans and finance leases 108,108 23 % 112,910 22 %$ 358,936 100 %$ 385,887 100 %
The following table sets forth information concerning the composition of the Corporation's loan portfolio and related ACL as of
As of March 31, 2021 Residential Commercial Commercial and Consumer and
Mortgage Mortgage Industrial Finance
(Dollars in thousands) Loans Loans Loans Construction Loans Leases Total
Total loans held for
investment:
Amortized cost of loans $ 3,395,081 $ 2,216,887 $ 3,182,706 $ 190,996 $ 2,656,189 $ 11,641,859
Allowance for credit losses 114,044 99,782 32,087 4,915 108,108 358,936
Allowance for credit losses 3.36 % 4.50 % 1.01 % 2.57 % 4.07 % 3.08 %
to amortized cost
As of December 31, 2020 Residential Commercial Commercial and Consumer and
Mortgage Mortgage Industrial Finance
(Dollars in thousands) Loans Loans Loans Construction Loans Leases Total Total loans held for investment: Amortized cost of loans
$ 3,521,954 $ 2,230,602 $ 3,202,590 $ 212,500$ 2,609,643 $ 11,777,289 Allowance for credit losses 120,311 109,342 37,944 5,380 112,910 385,887 Allowance for credit losses to 3.42 % 4.90 % 1.18 % 2.53 % 4.33 % 3.28 % amortized cost 157
--------------------------------------------------------------------------------
Allowance for Credit Losses for Unfunded Loan Commitments
The Corporation estimates expected credit losses over the contractual period during which the Corporation is exposed to credit risk as a result of a contractual obligation to extend credit, such as pursuant to unfunded loan commitments and standby letters of credit for commercial and construction loans, unless the obligation is unconditionally cancellable by the Corporation. The ACL for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. As ofMarch 31, 2021 , the ACL for off-balance sheet credit exposures was$4.4 million , down$0.7 million from$5.1 million as ofDecember 31, 2020 . The decrease was mainly in connection with a construction loan commitment due to improvements in the outlook of macroeconomic variables.
Allowance for Credit Losses for
As ofMarch 31, 2021 , the held-to-maturity debt securities portfolio consisted ofPuerto Rico municipal bonds. As ofMarch 31, 2021 , the ACL for held-to-maturity debt securities was$8.9 million , relatively flat compared to$8.8 million as ofDecember 31, 2020 .
Allowance for Credit Losses for
As of
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.
158
--------------------------------------------------------------------------------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 - For PCD loans, the nonaccrual status is
determined in the same manner as for other loans, except for PCD loans that
prior to the adoption of CECL were classified as purchased credit impaired
("PCI") loans and accounted for under ASC Subtopic 310-30, "Receivables - Loans
and Debt Securities Acquired with Deteriorated Credit Quality" (ASC Subtopic
310-30). As allowed by CECL, the Corporation elected to maintain pools of loans
accounted for under ASC Subtopic 310-30 as "units of accounts," conceptually
treating each pool as a single asset. Regarding interest income recognition, the
prospective transition approach for PCD loans was applied at a pool level, which
froze the effective interest rate of the pools as of January 1, 2020 . According
to regulatory guidance, the determination of nonaccrual or accrual status for
PCD loans with respect to which the Corporation has made a policy election to
maintain previously existing pools upon adoption of CECL should be made at the
pool level, not the individual asset level. In addition, the guidance provides
that the Corporation can continue accruing interest and not report the PCD loans
as being in nonaccrual status if the following criteria are met: (i) the
Corporation can reasonably estimate the timing and amounts of cash flows
expected to be collected; and (ii) the Corporation did not acquire the asset
primarily for the rewards of ownership of the underlying collateral, such as the
use in operations or improving the collateral for resale. Thus, the Corporation
continues to exclude these pools of PCD loans from nonaccrual loan statistics.
Other Real Estate Owned
OREO acquired in settlement of loans is carried at fair value less estimated costs to sell off the real estate. Appraisals are obtained periodically, generally on an annual basis.
Other Repossessed Property The other repossessed property category generally included 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. Furthermore, as required by instructions in regulatory reports, loans past due 90 days and still accruing include loans previously pooled into GNMA securities for which the Corporation has the option but not the obligation to repurchase loans that meet GNMA's specified delinquency criteria (e.g., borrowers fails to make any payment for three consecutive months). For accounting purposes, these GNMA loans subject to the repurchase option are required to be reflected on the financial statements with an offsetting liability 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. 159
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The following table presents non-performing assets as of the indicated dates:
March 31, December 31,
2021 2020
(Dollars in thousands)
Nonaccrual loans held for investment:
Residential mortgage $ 132,339 $ 125,367
Commercial mortgage 28,548 29,611
Commercial and Industrial 19,128 20,881
Construction 6,378 12,971
Consumer and finance leases 14,708 16,259
Total nonaccrual loans held for investment $ 201,101 $ 205,089
OREO 79,207 83,060
Other repossessed property 4,544 5,357
Total non-performing assets (1)(2) $ 284,852 $ 293,506
Past due loans 90 days and still accruing (3)(4) $ 160,884 $ 146,889
Non-performing assets to total assets 1.47 % 1.56 %
Nonaccrual loans held for investment to total loans held for 1.73 % 1.74 %
investment
ACL for loans and finance leases$ 358,936 $ 385,887
ACL for loans and finance leases to total nonaccrual loans held 178.49 %
188.16 %
for investment
ACL for loans and finance leases to total nonaccrual loans held
for investment,
excluding residential real estate loans 522.00 % 484.04 %
(1)Excludes PCD loans previously accounted for under ASC Subtopic 310-30 for
which the Corporation made the accounting policy election of maintaining pools
of loans accounted for under ASC Subtopic 310-30 as "units of account" both at
the time of adoption of CECL and on an ongoing basis for credit loss
measurement. These loans accrete interest income based on the effective interest
rate of the loan pools determined at the time of adoption of CECL 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 of March
31, 2021 and December 31, 2020 amounted to $128.4 million and $130.9 million ,
respectively.
(2)Nonaccrual loans exclude $373.8 million and $393.3 million of TDR loans that
were in compliance with the modified terms and in accrual status as of March 31,
2021 and December 31, 2020 , respectively.
(3)It is the Corporation's policy to report delinquent residential mortgage
loans insured by the FHA, guaranteed by the
(4)These include rebooked loans, which were previously pooled into GNMA securities, amounting to$17.2 million and$10.7 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively. Under the GNMA program, the Corporation has the option but not the obligation to repurchase loans that meet GNMA's specified delinquency criteria. For accounting purposes, the loans subject to the repurchase option are required to be reflected on the financial statements with an offsetting liability. 160
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The following table shows non-performing assets by geographic segment as of the indicated dates:
March 31, December 31,
(In thousands) 2021 2020
Puerto Rico :
Nonaccrual loans held for investment:
Residential mortgage $ 105,846 $ 101,763
Commercial mortgage 17,979 18,733
Commercial and Industrial 17,103 18,876
Construction 4,871 5,323
Consumer and finance leases 13,854 15,081
Total nonaccrual loans held for investment 159,653 159,776
OREO 75,005 78,618
Other repossessed property 4,339 5,120
Total non-performing assets (1) $ 238,997 $ 243,514
Past due loans 90 days and still accruing (2) $
159,084
Virgin Islands : Nonaccrual loans held for investment: Residential mortgage$ 11,956 $ 9,182 Commercial mortgage 10,569 10,878 Commercial and Industrial 1,489 1,444 Construction 1,507 7,648 Consumer 284 354 Total nonaccrual loans held for investment 25,805 29,506 OREO 4,202 4,411 Other repossessed property 69 109 Total non-performing assets$ 30,076 $ 34,026 Past due loans 90 days and still accruing $
1,550
United States : Nonaccrual loans held for investment: Residential mortgage$ 14,537 $ 14,422 Commercial and Industrial 536 561 Consumer 570 824 Total nonaccrual loans held for investment 15,643 15,807 OREO - 31 Other repossessed property 136 128 Total non-performing assets$ 15,779 $ 15,966 Past due loans 90 days and still accruing $
250 $ 250
(1)Excludes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans accounted for under ASC Subtopic 310-30 as "units of account" both at the time of adoption of CECL and on an ongoing basis for credit loss measurement. These loans accrete interest income based on the effective interest rate of the loan pools determined at the time of adoption of CECL 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, 2021 andDecember 31, 2020 amounted to$128.4 million and$130.9 million , respectively. (2)These include rebooked loans, which were previously pooled into GNMA securities, amounting to$17.2 million and$10.7 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively. Under the GNMA program, the Corporation has the option but not the obligation to repurchase loans that meet GNMA's specified delinquency criteria. For accounting purposes, the loans subject to the repurchase option are required to be reflected on the financial statements with an offsetting liability. 161
-------------------------------------------------------------------------------- Total nonaccrual loans were$201.1 million as ofMarch 31, 2021 . This represents a decrease of$4.0 million from$205.1 million as ofDecember 31, 2020 . The decrease was primarily related to a$9.4 million reduction in nonaccrual commercial and construction nonaccrual loans, including through the repayment of a$6.0 million construction loan relationship in theVirgin Islands region, and a$1.6 million decrease in nonaccrual consumer loans. These variances were partially offset by an increase of$7.0 million in nonaccrual residential mortgage loans. Nonaccrual commercial mortgage loans decreased by$1.0 million to$28.5 million as ofMarch 31, 2021 from$29.6 million as ofDecember 31, 2020 . The decrease was primarily related to the payoff of a$1.4 million commercial mortgage loan in thePuerto Rico region, charge-offs and the transfer of loans to OREO, partially offset by inflows. Total inflows of nonaccrual commercial mortgage loans were$3.7 million for first quarter of 2021, compared to$0.4 million for the same quarter in 2020. Nonaccrual commercial and industrial loans decreased by$1.8 million to$19.1 million as ofMarch 31, 2021 from$20.9 million as ofDecember 31, 2020 . The decrease was primarily related to collections of approximately$1.3 million in the first quarter of 2021. Total inflows of nonaccrual commercial and industrial loans were$0.2 million for the first quarter of 2021, compared to$2.6 million for the same quarter in 2020. Nonaccrual construction loans decreased by$6.6 million to$6.4 million as ofMarch 31, 2021 from$13.0 million as ofDecember 31, 2020 . The decrease was primarily related to the aforementioned$6.0 million repayment of a construction loan relationship in theVirgin Islands region. The following tables present the activity of commercial and construction nonaccrual loans held for investment for the indicated periods: Commercial Commercial & Mortgage Industrial Construction Total (In thousands) Quarter endedMarch 31, 2021 Beginning balance$ 29,611
Additions to nonaccrual 3,657 239 1 3,897
Less:
Loans returned to accrual status (1,444) (51) (173) (1,668)
Nonaccrual loans transferred to OREO (660) (580) (135) (1,375)
Nonaccrual loans charge-offs (793) (94) (45) (932)
Loan collections (1,744) (1,346) (6,241) (9,331)
Reclassification (79) 79 - -
Ending balance $ 28,548 $ 19,128 $ 6,378 $ 54,054
162
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Commercial Commercial &
Mortgage Industrial Construction Total
(In thousands)
Quarter ended March 31, 2020
Beginning balance $ 40,076 $ 18,773 $ 9,782 68,631
Plus:
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 loan charge-offs (125) (124) (3) (252)
Loan collections (2,536) (419) (116) (3,071)
Ending balance $ 35,953 $ 19,734 $ 9,663 $ 65,350 Nonaccrual residential mortgage loans increased by
163
--------------------------------------------------------------------------------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) 2021 2020
Beginning balance $ 125,367 $ 121,408
Plus:
Additions to nonaccrual 17,326 12,588
Less:
Loans returned to accrual status (3,858) (2,581)
Nonaccrual loans transferred to OREO (2,184) (3,550) Nonaccrual loans charge-offs (2,183) (3,234) Loan collections (2,129) (1,728) Ending balance$ 132,339 $ 122,903 The amount of nonaccrual consumer loans, including finance leases, decreased by$1.6 million to$14.7 million asMarch 31, 2021 , compared to$16.2 million as ofDecember 31, 2020 . The decrease was primarily in personal loans and finance leases, driven by collections, charge-offs, and auto repossessions recorded in the first quarter, partially offset by inflows. The inflows of nonaccrual consumer loans during the first quarter of 2021 were$10.7 million , a decrease of$4.9 million , compared to inflows of$15.6 million for the same period in 2020. As ofMarch 31, 2021 , approximately$25.5 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$7.1 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, 2021 , interest income of approximately$0.7 million related to nonaccrual loans with a carrying value of$46.7 million as ofMarch 31, 2021 , mainly nonaccrual construction and commercial loans, was applied against the related principal balances under the cost-recovery method. 164 -------------------------------------------------------------------------------- Total loans in early delinquency (i.e., 30-89 days past due loans, as defined in regulatory reporting instructions) amounted to$143.6 million as ofMarch 31, 2021 , a decrease of$5.2 million , compared to$148.8 million as ofDecember 31, 2020 . The variances by major portfolio categories were as follow: ?Residential mortgage loans in early delinquency decreased by$19.2 million to$47.9 million as ofMarch 31, 2021 , and consumer loans in early delinquency decreased by$15.4 million to$40.3 million as ofMarch 31, 2021 . The decreases reflect the combination of loans brought current during the first quarter and loans that migrated to nonaccrual status as explained above. ?Commercial and construction loans in early delinquency increased in the first quarter by$29.4 million to$55.3 million as ofMarch 31, 2021 , primarily as a result of the migration of a$19.1 million commercial mortgage loan that reached delinquent status during the first quarter and the migration of a commercial mortgage loan that is delinquent for over 30 days with respect to a final balloon payment of$14.2 million but with respect to which the Corporation continues to receive from the borrower interest and principal payments. 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 Corporation's unaudited consolidated financial statements for the quarter endedMarch 31, 2021 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. 165 --------------------------------------------------------------------------------
The following table provides a breakdown between the accrual and nonaccrual TDRs as of the indicated date:
(In thousands) As of March 31, 2021
Accrual Nonaccrual (1) Total TDRs
Conventional residential mortgage loans $ 248,921 $ 57,612 $ 306,533
Construction loans 2,589 763 3,352
Commercial mortgage loans 44,633 16,812 61,445
Commercial and Industrial loans 64,126 5,790 69,916
Consumer loans:
Auto loans 5,853 5,020 10,873
Finance leases 1,092 16 1,108
Personal loans 804 - 804
Credit cards 2,488 - 2,488
Consumer loans - Other 3,300 385 3,685
Total Troubled Debt Restructurings $ 373,806 $
86,398
(1)Included in nonaccrual loans are$7.1 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. Under the provisions of the CARES Act of 2020, as amended by the Consolidated Appropriations Act, 2021 enacted onDecember 27, 2020 , financial institutions may permit loan modifications for borrowers affected by the COVID-19 pandemic throughJanuary 1, 2022 without categorizing the modifications as TDRs, as long as the loan meets certain conditions, including the requirement that the loan was not more than 30 days past due as ofDecember 31, 2019 . As ofMarch 31, 2021 , commercial loans totaling$324.1 million , or 2.78% of the balance of the total loan portfolio held for investment, were permanently modified under the provisions of Section 4013 of the CARES Act of 2020, as amended by Division N, Title V, Section 541 of the Consolidated Appropriations Act. These permanent modifications on commercial loans were primarily related to borrowers in industries with longer expected recovery times, mostly hospitality, retail and entertainment industries. With respect to temporary deferred repayment arrangements established in 2020 to assist borrowers affected by the COVID-19 pandemic, as ofMarch 31, 2021 , all loans previously modified under such programs have completed their deferral period. 166 -------------------------------------------------------------------------------- The OREO portfolio, which is part of non-performing assets, decreased by$3.9 million to$79.2 million as ofMarch 31, 2021 from$83.1 million as ofDecember 31, 2020 . The following tables show the composition of the OREO portfolio as ofMarch 31, 2021 andDecember 31, 2020 , as well as the activity of the OREO portfolio by geographic area during the quarter endedMarch 31, 2021 : OREO Composition by Region (In thousands) As of March 31, 2021 Puerto Rico Virgin Islands Florida Consolidated Residential$ 30,875 $ 767 $ -$ 31,642 Commercial 38,158 3,180 - 41,338 Construction 5,972 255 - 6,227$ 75,005 $ 4,202 $ -$ 79,207 (In thousands) As of December 31, 2020 Puerto Rico Virgin Islands Florida Consolidated Residential$ 31,517 $ 870$ 31 $ 32,418 Commercial 41,176 3,180 - 44,356 Construction 5,925 361 - 6,286$ 78,618 $ 4,411$ 31 $ 83,060 OREO Activity by Region (In thousands) For the quarter ended March 31, 2021 Puerto Rico Virgin Islands Florida Consolidated Beginning Balance$ 78,618 $ 4,411$ 31 $ 83,060 Additions 4,521 - - 4,521 Sales (5,440) (200) (31) (5,671) Write-down adjustments (2,694) (9) - (2,703) Ending Balance$ 75,005 $ 4,202 $ -$ 79,207 167
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Net Charge-offs and Total Credit Losses
Net charge-offs totaled
Commercial mortgage loans net charge-offs in the first quarter of 2021 were$0.7 million , or an annualized 0.13% of average commercial mortgage loans, compared to$0.1 million , or an annualized 0.02% of related average loans, for the first quarter of 2020. Commercial mortgage loans net charge-offs for the first quarter of 2021 included a charge-off of$0.5 million taken on a commercial mortgage relationship in thePuerto Rico region.
Construction loans net charge-offs in the first quarter of 2021 were
Commercial and industrial loans net charge-offs in the first quarter of 2021 were$0.5 million , or an annualized 0.07% of average commercial and industrial loans, compared to$10 thousand , or an annualized of 0.00% of related average loans, for the first quarter of 2020. The Corporation recorded charge-offs of$0.7 million related to the$28.2 million in criticized commercial loan participations transferred to held for sale in the first quarter of 2021. Residential mortgage loans net charge-offs in the first quarter of 2021 were$2.1 million , or an annualized 0.24% of related average loans, compared to$3.8 million , or an annualized 0.52% of related average loans, for the first quarter of 2020. Approximately$2.2 million of charge-offs taken in the first quarter of 2021 resulted from valuations of collateral dependent residential mortgage loans given high delinquency levels, compared to$3.0 million for the first quarter of 2020. Net charge-offs on residential mortgage loans for the first quarter of 2021 also included$0.3 million related to foreclosures, compared to$1.1 million in the first quarter of 2020. Net charge-offs of consumer loans and finance leases in the first quarter of 2021 were$9.1 million , or an annualized 1.39% of related average loans, compared to$13.7 million , or an annualized 2.38% of related average loans, in the first quarter of 2020. The decrease was primarily reflected in the auto, credit cards, and small personal loan portfolios.
The following table shows the ratios of annualized net charge-offs (recoveries) to average loans held-in-portfolio for the indicated periods:
Quarter Ended
March 31, March 31,
2021 2020
Residential mortgage 0.24 % 0.52 %
Commercial mortgage 0.13 % 0.02 %
Commercial and industrial 0.07 % - %
Construction 0.02 % (0.08) %
Consumer loans and finance leases 1.39 % 2.38 %
Total loans 0.43 % 0.78 %
168
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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,
2021 2020
PUERTO RICO :
Residential mortgage 0.30 % 0.68 %
Commercial mortgage 0.18 % 0.05 %
Commercial & Industrial (0.03) % 0.01 %
Construction 0.12 % (0.13) %
Consumer and finance leases 1.34 % 2.38 %
Total loans 0.48 % 1.02 %
VIRGIN ISLANDS:
Residential mortgage 0.10 % 0.36 %
Commercial mortgage (0.24) % (0.14) %
Commercial and Industrial - % - %
Construction - % - %
Consumer and finance leases 1.30 % 0.86 %
Total loans 0.16 % 0.25 %
FLORIDA:
Residential mortgage - % 0.02 %
Commercial mortgage (0.01) % (0.02) %
Commercial and Industrial 0.29 % (0.01) %
Construction (0.04) % (0.07) %
Consumer and finance leases 6.55 % 4.55 %
Total loans 0.22 % 0.09 %
169
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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 2021 amounted to$14.4 million , or a loss rate of 0.49% on an annualized basis of average loans and repossessed assets, compared to losses of$18.8 million , or a loss rate of 0.82% on an annualized basis, for the same period in 2020. The following table presents information about the OREO inventory and credit losses for the periods indicated: Quarter Ended March 31, 2021 2020 (Dollars in thousands) OREO OREO balances, carrying value: Residential$ 31,642 $ 46,427 Commercial 41,338 45,878 Construction 6,227 7,369 Total$ 79,207 $ 99,674 OREO activity (number of properties): Beginning property inventory 513 697 Properties acquired 38 52 Properties disposed (62) (55) Ending property inventory 489 694 Average holding period (in days) Residential 652 408 Commercial 2,266 1,870 Construction 2,009 1,793 Total average holding period (in days) 1,601
1,183
OREO operations loss: Market adjustments and gains (losses) on sale: Residential$ 360 $ (14) Commercial (2,168) (475) Construction 224 (132) Total losses on sale (1,584)
(621)
Other OREO operations expenses (314) (567) Net Loss on OREO operations $ (1,898) $ (1,188) (CHARGE-OFFS) RECOVERIES Residential charge offs, net (2,092) (3,779) Commercial charge offs, net (1,285) (94) Construction (charge-offs) recoveries, net (9) 24 Consumer and finance leases charge-offs, net (9,122) (13,726) Total charge-offs, net (12,508) (17,575) TOTAL CREDIT LOSSES (1) $ (14,406) $ (18,763) LOSS RATIO PER CATEGORY (2): Residential 0.20% 0.52% Commercial 0.25% 0.06% Construction -0.39% 0.33% Consumer 1.38% 2.38% TOTAL CREDIT LOSS RATIO (3) 0.49% 0.82% ________
(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 the Corporate Compliance Group. Concentration Risk The Corporation conducts its operations in a geographically concentrated area, as its main market isPuerto Rico . Of the total gross loan portfolio held for investment of $11.6 billion as of March 31, 2021, the Corporation had credit risk of approximately 79% in thePuerto Rico region, 17% inthe United States region, and 4% in theVirgin Islands region.
Update to the Puerto Rico Fiscal Situation
A significant portion of our financial activities and credit exposure is
concentrated in the
Fiscal Plan On April 23, 2021, the PROMESA oversight board certified the 2021 Fiscal Plan for theCommonwealth of Puerto Rico (the "2021 Fiscal Plan"). Similar to previous fiscal plans, the 2021 Fiscal Plan incorporates updated information related to the macroeconomic environment, as well as government revenues, expenditures and reform efforts. The 2021 Fiscal Plan takes into consideration the prolonged heightened unemployment rates inPuerto Rico while accounting for the impact of federal and local stimulus funding to counter the economic shocks from the COVID-19 pandemic. Moreover, the 2021 Fiscal Plan outlines recent implementation progress on operational and structural reforms and restores fiscal measures for fiscal year 2022 that had been paused in fiscal year 2021. Lastly, the 2021 Fiscal Plan includes targeted investments in civil service reform to address challenges of management of the government's human resources and other stated government needs. The 2021 Fiscal Plan estimates thatPuerto Rico's real gross national product ("GNP") will grow by 3.8% and 1.5% in fiscal years 2021 and 2022, respectively, supported by the federal and local relief funds related to the COVID-19 pandemic, Hurricanes Irma and Maria, and earthquakes. These forecasts are better than those presented in the previously certified fiscal plan which estimated a 0.5% expansion in fiscal year 2021, followed by a 1.5% contraction in fiscal year 2022. According to the 2021 Fiscal Plan, while economic activity has been significantly reduced, extraordinary unemployment insurance and other direct transfer programs have more than offset the estimated income loss due to less economic activity. As a result, personal income has temporarily increased on a net basis. Nonetheless, the PROMESA oversight board recognizes that there is considerable uncertainty around the near-term economic outcomes forPuerto Rico and theU.S. mainland. 171
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Impact of the Pandemic-Related Federal and Local Support Packages
When estimating the impact of COVID-19 onPuerto Rico's economy, the 2021 Fiscal Plan factors in certain economic effects. Specifically, the approach incorporates two primary factors: (i) lost income from an enduring spike in unemployment, and (ii) the relative amount of income that will be replaced by extraordinaryU.S. federal government support. The forecast includes a gradual reduction of unemployment figures through fiscal year 2021; however, unemployment levels at the end of fiscal year 2021 are estimated to be around 2.5 percentage points higher than at the onset of the crisis. In response to the pandemic crisis, both theU.S. federal government andPuerto Rico government have launched major relief packages intended to contain and mitigate the spread of the virus, support residents and frontline workers, and facilitate the economic recovery. The 2021 Fiscal Plan takes into consideration the amounts and timing of these stimulus programs. The local stimulus consisted of a $787.7 million emergency measures support package (the "Puerto Rico COVID-19 Stimulus Package"), which offered direct assistance to workers and businesses. The package was funded through $500 million of incremental new spending (made available via special appropriation), $131 million for education-related materials through existing federally funded government contracts, and $157 million through a reapportionment within the fiscal year 2020 Commonwealth General Fund budget. According to the 2021 Fiscal Plan, as of April 2021, $643.6 million (or 81.7% of the total package) had been disbursed. On the federal side, there have been various rounds of stimulus packages that have included direct assistance to businesses, individuals, and families, as well as funding provided to local governments to assist with the pandemic response. Specifically, the 2021 Fiscal Plan incorporates the funding stemming from (i) the Families First Coronavirus Response Act (March 18, 2020), (ii) the CARES Act of 2020 (March 27, 2020), (iii) the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 ("CRRSA") (December 27, 2020), and (iv) the American Rescue Plan ("ARP") Act of 2021 (March 21, 2021). Notably, the ARP Act created new and permanent economic support programs forPuerto Rico : an expanded Earning Income Tax Credit ("EITC") program, with up to $600 million in federal support, and the permanent expansion of eligibility criteria for the Child Tax Credit ("CTC"). Overall, the total funding forPuerto Rico resulting from these packages is estimated at $43.5 billion as follows: (i) $408 million from the Families First Coronavirus Response Act, (ii) $18.0 billion from the CARES Act of 2020, (iii) $7.4 billion from the CRRSA Act, and (iv) $17.7 billion from the ARP Act of 2021. The 2021 Fiscal Plan considers the combined effect of federal and local economic support in three ways. First, certain types of funding intended to prevent revenue and job loss are assumed to mitigate what otherwise would have been an even higher unemployment and revenue loss had those funds not been provided (i.e., the SBA Paycheck Protection Program). The second type of funds are those administered through economic support programs designed to provide income support directly from theU.S. federal or local government (i.e., unemployment benefits, economic impact payments, among others). The 2021 Fiscal Plan estimates that around 60% of income support funding will be spent over the fiscal years 2020-2023 period. The remaining 40% of funds is projected to be saved and/or used to pay down debt, and then is spent over a 30-year period according to the long-term consumption smoothing concept. Lastly, for government expenditures and programs funded by federal and local economic support programs, the 2021 Fiscal Plan uses the same approach as it does in estimating the pass-through of these expenditures toPuerto Rico as has been used for other types of economic stimulus funding, such as disaster-recovery spending. Moreover, the 2021 Fiscal Plan takes into consideration the estimated impact on growth related to permanent changes in EITC and CTC programs, including the additional fiscal cost of increased local funding required to fund the minimum local spending requirements to attain the maximum federal funds available under the ARP Act.
Impact of Disaster Relief Funding
The 2021 Fiscal Plan projects that approximately $84 billion of disaster relief funding in total, from federal and private sources, will be disbursed in reconstruction efforts over a period of 18 years (fiscal year 2018 to fiscal year 2035). Specifically, an estimated $47 billion is expected to come from theFederal Emergency Management Agency ("FEMA") Disaster Relief Fund for Public Assistance, Hazard Mitigation, Mission Assignments, and Individual Assistance. Such amounts include $948 million in funding related to the 2019 and 2020 earthquakes. The 2021 Fiscal Plan includes approximately $20 billion from the federal Department ofHousing and Urban Development ("HUD") Community DevelopmentBlock Grant - Disaster Recovery ("CDBG-DR") program, of which $2.7 billion is estimated to be allocated to offset the Commonwealth and its associated entities' expectedFEMA -related cost-share requirements. Lastly, an estimated $7 billion stems from private and business insurance payouts, while $8 billion is related to other sources of federal funding. The certified fiscal plan assumes a $750 million 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. According to the 2021 Fiscal Plan, this will help to accelerateFEMA -approved reconstruction projects, particularly permanent projects. 172
-------------------------------------------------------------------------------- Similar to previous versions, the 2021 Fiscal Plan outlines a series of structural reforms. These structural reforms include (i) human capital and welfare reform, (ii) K-12 education reform, (iii) ease of doing business reform, (iv) power sector reform; and (v) infrastructure reform. Furthermore, the 2021 Fiscal Plan allocates strategic investments to enhance economic growth, facilitate government response to emergencies, and optimize frontline service delivery. Moreover, the 2021 Fiscal Plan includes investments geared towards strengthening the ability ofPuerto Rico to benefit from the growing importance of technology. Specifically, the 2021 Fiscal Plan allocates $400 million to incentivize private sector investments in broadband build-out and to improve access to faster speed offerings in underserved areas. In addition, the 2021 Fiscal Plan addresses the need for a comprehensive civil service reform and outlines a comprehensive plan to improve the civil service, starting with a pilot for financial management personnel that includes almost $800 million in investment (between fiscal year 2022 and fiscal year 2051) in order to enhance strategic human capital planning, recruitment, performance management and evaluations, and succession planning, as well as hiring of additional staff and salary increases for key personnel, as deemed necessary. Lastly, the 2021 Fiscal Plan focuses on improving the responsiveness, efficiency, and affordability of the government by establishing a set of fiscal measures aimed to create robust fiscal controls and accountability through (i) the establishment of the Office of the Chief Financial Office of the government ofPuerto Rico , (ii) consolidation and streamlining of agency operations, (iii) reduction of Medicaid and pensions cost, (iv) increasing revenue collections through improved compliance, and (v) enhancing the fiscal self-sufficiency of theUniversity of Puerto Rico and municipalities. According to the 2021 Fiscal Plan, the impact of these fiscal measures is estimated to increase thePuerto Rico government revenues by $2.7 billion and reduce expenditures by $7.5 billion over the fiscal year 2021-fiscal year 2026 period. Other Developments
On February 2, 2021, HUD and
Significant progress has been made in adjustingPuerto Rico's debt. According to the 2021 Fiscal Plan, the restructuring of more than a third of the outstanding debt has already been completed, totaling $27 billion, including the Government Development Bank ("GDB"), thePuerto Rico Sales Tax Financing Corporation ("COFINA"), and the Puerto Rico Aqueduct and Sewer Authority ("PRASA"). On March 8, 2021, the PROMESA oversight board filed an amended Plan of Adjustment (the "2021 POA") to restructure approximately $35 billion of debt and other claims against theCommonwealth of Puerto Rico , the Public Buildings Authority ("PBA"), and the Employee Retirement System ("ERS"); and more than $50 billion of pension liability. The 2021 POA reduces the Commonwealth's debt from $35 billion in outstanding claims by approximately 80% to $7.4 billion in future debt and is expected to save thePuerto Rico government almost $60 billion in debt service payments when including COFINA debt service. The terms of the 2021 POA reflect the cumulative effects of the COVID-19 pandemic, the ongoing recession, and a series of natural disasters over the last several years onPuerto Rico and its economy. On April 12, 2021, the PROMESA oversight board announced that it had reached an agreement in principle withAssured Guaranty Corp. ,Assured Guaranty Municipal Corp. andNational Public Finance Guarantee Corporation to settle claims against theCommonwealth of Puerto Rico over monies historically appropriated conditionally to certain Commonwealth instrumentalities (clawback claims), including the Highway and Transportation Authority ("HTA") and thePuerto Rico Convention Center District Authority ("CCDA"), and to restructure the debt of HTA and CCDA. According to the Oversight Board, the agreement also provides a template for treatment of other similarly situated creditors at thePuerto Rico Infrastructure Financing Authority ("PRIFA") and the Metropolitan Bus Authority ("MBA"). The agreement in principle will be incorporated into the 2021 POA. On April 19, 2021, HUD announced the approval of $8.2 billionin Community Development Block Grant Mitigation ("CDBG-MIT") funds forPuerto Rico , along with the removal of onerous restrictions unique toPuerto Rico that limited the access to CDBG-DR recovery funds that were allocated following Hurricane Maria in September 2017. According to the press release, among the restrictions removed by HUD are the incremental grant obligations (or tranche structure) and review by the Federal Financial Monitor. HUD also removed the requirement forPuerto Rico to request and submit any certification, observations, and recommendations by the PROMESA oversight board, beyond what is already required by law. On April 23, 2021, the PROMESA oversight board certified the 2021 fiscal plan (the "2021 CRIM Fiscal Plan") for the Municipal Revenue Collection Center ("CRIM"). Similar to the Commonwealth's fiscal plan, the 2021 CRIM Fiscal Plan provides a road map to a fairer, more efficient property tax system that will provide municipalities with more stable income. Specifically, the 2021 CRIM Fiscal Plan outlines 11 measures for CRIM to collect additional tax revenue by adding properties that were previously untaxed, to update appraisals to reflect improvements to properties, and to make it easier for property owners to pay taxes-all without increasing tax rates. Property taxes constitute the most significant revenue stream for municipalities, and these measures to enhance tax collections under the existing tax rates represents a significant opportunity for municipalities to improve their finances. 173 -------------------------------------------------------------------------------- On April 26, 2021, theU.S. Census Bureau announced the results for the 2020 Census. According to the Census Bureau, the resident population ofPuerto Rico on April 1, 2020, was 3,285,874, down by 439,915 (or 11.8%) from the 2010 Census, placingPuerto Rico at the top of the list in terms of population loss across all 50 states. Nonetheless, such result exceeds the Census Bureau's estimated population as of July 2019 as well as other estimates made prior to the announcement.
Exposure to Puerto Rico Government
As of March 31, 2021, the Corporation had $391.1 million of direct exposure to thePuerto Rico government, its municipalities and public corporations, compared to $394.8 million as of December 31, 2020. As of March 31, 2021, approximately $201.4 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, and $132.9 million consisted of municipal revenue and special obligation bonds. Approximately 70% of the Corporation's exposure toPuerto Rico municipalities consisted primarily of senior priority obligations concentrated in four 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 certified by 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 and established certain funds available to municipalities to incentivize service consolidation. 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 situation and measures included in fiscal plans of other government entities. In addition to municipalities, the total direct exposure also included $13.5 million in loans to an affiliate of PREPA, $39.4 million in loans to an agency of thePuerto Rico central government, and obligations of thePuerto Rico government, specifically a residential pass-through MBS issued by the PRHFA, at an amortized cost of $3.9 million as part of its available-for-sale investment securities portfolio (fair value of $2.8 million as of March 31, 2021). 174 --------------------------------------------------------------------------------
The following table details the Corporation's total direct exposure to
As of March 31, 2021
Investment
Portfolio Total
(Amortized
cost) Loans Exposure
(In thousands)
Puerto Rico Housing Finance Authority:
After 10 years $ 3,926 $ - $ 3,926
Total Puerto Rico Housing Finance Authority 3,926 - 3,926
Puerto Rico Government agencies and public
corporations:
Puerto Rico government agencies:
After 1 to 5 years - 7,534 7,534
After 5 to 10 years - 31,904 31,904
Total Puerto Rico government agencies - 39,438 39,438
Affiliate of the Puerto Rico Electric Power
Authority :
After 1 to 5 years - 13,451 13,451
Total Public Corporations - 13,451 13,451
Total Puerto Rico government agencies
and public corporations - 52,889 52,889
Municipalities:
Due within one year 2,968 41,855 44,823
After 1 to 5 years 14,843 92,540 107,383
After 5 to 10 years 88,564 10,230 98,794
After 10 years 83,305 - 83,305
Total Municipalities 189,680 144,625 334,305
Total Direct Government Exposure $ 193,606 $ 197,514 $ 391,120
175
-------------------------------------------------------------------------------- In addition, as of March 31, 2021, the Corporation had $103.8 million in exposure to residential mortgage loans that are guaranteed by the PRHFA, compared to $106.5 million as of December 31, 2020. 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, 2017, the PRHFA's mortgage loans insurance program covered loans in an aggregate amount of approximately $571 million. The regulations adopted by the PRHFA, requires the establishment of adequate reserves to guarantee the solvency of the mortgage loans insurance program. As of June 30, 2017, the most recent date as of which information is available, the PRHFA had an unrestricted deficit of approximately $6.9 million with respect to required reserves for the mortgage loan insurance program. As of March 31, 2021, the Corporation had $2.0 billion of public sector deposits inPuerto Rico , compared to $1.8 billion as of December 31, 2020. Approximately 19% of the public sector deposits as of March 31, 2021 was from municipalities and municipal agencies inPuerto Rico and 81% was from public corporations, the central government and agencies, andU.S. federal government agencies inPuerto Rico . Exposure to USVI Government
The Corporation has operations in the USVI and has credit exposure to USVI government entities.
For many years, the USVI has been experiencing a number of fiscal and economic
challenges that have deteriorated the overall financial and economic conditions
in the area. According to the United States Bureau of Economic Analysis ("BEA"),
GDP estimates show that the economy grew by 1.5% in 2018 after contracting at a
compounded annual rate of 1.2% between 2012 and 2017. Growth in 2018 was
primarily driven by consumer spending, private fixed investment, and government
spending, reflecting the influx of federal disaster recovery funding in the
aftermath of the two major hurricanes in 2017. Although the USVI government
expects this expansionary trend to be reflected in the 2019 GDP estimates, the
economic threat resulting from the COVID-19 pandemic is anticipated to diminish
growth throughout 2020 and 2021.
Similar to Puerto Rico , the USVI has benefited from the various rounds of
economic stimulus programs deployed by the Federal Government. Overall total
pandemic-related relief funding allocated to the USVI exceeds $750 million.
According to information published by the government of the U.S. Virgin Islands
("GVI"), between April 7, 2020 and April 11, 2021, the government had issued
106,846 unemployment-related insurance checks totaling $130.1 million,
consisting of (i) 56,578 checks amounting to $48.1 million in regular
unemployment insurance benefits and (ii) 50,268 checks totaling $82.0 million in
pandemic-related unemployment benefits. Furthermore, as of April 25, 2021, over
3,000 applications from USVI businesses had been approved for the SBA PPP
amounting to more than $194.9 million, according to data published by the SBA.
On March 29, 2021, Moody's Investor Services ("Moody's") announced the
completion of its periodic review of the ratings of the U.S. Virgin Islands and
other ratings that are associated with the same analytical unit. According to
Moody's, "the USVI's Caa3 rating reflects a small and highly concentrated
economy, government finances that have been severely strained, a very poorly
funded pension system that is rapidly depleting its asset base, financial
reporting and other governance challenges, and the government's loss of access
to the capital markets since 2017. Despite some recent improvement in the
government's liquidity and near-term financial position, the rating incorporates
the risk that the reemergence of a significant structural deficit, combined with
the expected insolvency of the Government Employees' Retirement System ("GERS"),
will lead the government to restructure its debt."
176
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On April 9, 2021, the United States Court of Appeals for the Third Circuit (the
"Third Circuit") determined that the GVI is not liable for approximately $43
million in interest and fees for past due contributions to the GERS . On April
19, 2021, Moody's issued an opinion regarding the decision. According to
Moody's, "the ruling is credit positive for the USVI, because it will provide a
more than $40 million reprieve from court-ordered pension contributions and thus
help the financially stressed territory's near-term ability to continue
providing government services. However, it does little to alter the looming
insolvency of the GERS within the next several years. The USVI almost certainly
cannot afford to pay pensions directly to retirees if GERS depletes its assets,
and likely cannot politically cut benefits while paying debt service in full to
bondholders, meaning a GERS insolvency is highly likely to drive a debt default
and restructuring." Unless there is an infusion of cash or reduction of
benefits, Moody's projected that the GERS will run out of assets by fiscal year
2024, which starts on September 1, 2023.
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, the U.S. Congress or the
government of the USVI may enact legislation allowing for the restructuring of
the financial obligations of the USVI government entities or imposing a stay on
creditor remedies, including by making PROMESA applicable to the USVI.
As of March 31, 2021, the Corporation had $62.2 million in loans to USVI
government instrumentalities and public corporations, compared to $61.8 million
as of December 31, 2020. Of the amount outstanding as of March 31, 2021, public
corporations of the USVI owed approximately $39.0 million and an independent
instrumentality of the USVI government owed approximately $23.2 million. As of
March 31, 2021, 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.
177
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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 excluding
the changes in the fair value of derivative instruments and on a tax-equivalent
basis are reported in order to provide to investors additional information about
the Corporation's net interest income that management uses and believes should
facilitate comparability and analysis of the periods presented. The changes in
the fair value of derivative instruments have no effect on interest due or
interest earned on interest-bearing liabilities or interest-earning assets,
respectively. The tax-equivalent adjustment to net interest income recognizes
the income tax savings when comparing taxable and tax-exempt assets and assumes
a marginal income tax rate. Income from tax-exempt earning assets is increased
by an amount equivalent to the taxes that would have been paid if this income
had been taxable at statutory rates. Management believes that it is a standard
practice in the banking industry to present net interest income, interest rate
spread, and net interest margin on a fully tax-equivalent basis. This adjustment
puts all earning assets, most notably tax-exempt securities and tax-exempt
loans, on a common basis that facilitates comparison of results to the results
of peers. See "Results of Operations - Net Interest Income" above for the table
that reconciles the net interest income calculated and presented in accordance
with GAAP with the non-GAAP financial measure "net interest income excluding
fair value changes and on a tax-equivalent basis." The table also reconciles net
interest spread and margin calculated and presented in accordance with GAAP with
the non-GAAP financial measures "net interest spread and margin excluding fair
value changes and on a tax-equivalent basis."
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.ACL for loans and finance leases to adjusted total loans held for investment
ratio is a non-GAAP financial measure that excludes SBA PPP loans amounting to
$430.5 million and $406.0 million as of March 31, 2021 and December 31, 2020,
respectively. The SBA PPP loans are fully-guaranteed by the SBA, and the
principal amount of the loans may be forgiven in full or in part, thus
presenting less credit risk than a non-SBA PPP loan. Management believes the use
of this non-GAAP measure provides additional understanding when assessing the
Corporation's reserve coverage and facilitates comparison with other periods.
See below for the reconciliation of the GAAP ratio of ACL for loans and finance
leases to total loans held for investment to the Non-GAAP ratio of the ACL for
loans and finance leases to adjusted total loans held for investment.
4.To supplement the Corporation's financial statements presented in accordance
with GAAP, the Corporation uses, and believes that investors would benefit from
disclosure of, non-GAAP financial measures that reflect adjustments to net
income and non-interest expenses to exclude items that management identifies as
Special Items because management believes they 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. This Form 10-Q includes the
following non-GAAP financial measures for the quarter ended March 31, 2021 and
2020 that reflect the described items that were excluded for one of those
reasons.
178
--------------------------------------------------------------------------------Adjusted net income that reflects the effect of the following exclusions:
?Merger and restructuring costs of $11.3 million and $0.8 million recorded in the first quarters of 2021 and 2020, respectively, related to transaction costs and restructuring initiatives in connection with the acquisition of BSPR.
?COVID-19 pandemic-related expenses of $1.2 million and $0.4 million in the first quarters of 2021 and 2020, respectively.
?Gain of $8.2 million on the sales of
?Total benefit of $1.2 million recorded in the first quarter of 2020 resulting from insurance recoveries associated with expenses related to Hurricanes Irma and Maria.
?The tax-related effects of all the pre-tax items mentioned in the above bullets as follows:
-Tax benefit of $4.2 million and $0.3 million in the first quarter of 2021 and 2020, respectively, related to merger and restructuring costs in connection with the acquisition of BSPR (calculated based on the statutory tax rate of 37.5%). -Tax benefit of $0.5 million and $0.1 million in the first quarter of 2021 and 2020, respectively, in connection with the COVID-19 pandemic-related expenses (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%). -No tax expense was recorded for the gain on sales ofU.S. agencies MBS in the first quarter of 2020. Those sales were recorded at the tax-exempt international banking entity subsidiary level.
See "Overview of Results of Operations" above for the reconciliation of the non-GAAP financial measure "adjusted net income" to the GAAP financial measure.
179
--------------------------------------------------------------------------------Adjusted non-interest expenses - The following tables reconcile for the first quarter of 2021 and 2020 the non-interest expenses to adjusted non-interest expenses, which is a non-GAAP financial measure that excludes the relevant Special Items identified above:
(In thousands)
Merger and COVID 19
Non-Interest Restructuring Pandemic-Related Adjusted
Quarter ended March 31, 2021 Expenses (GAAP) Costs Expenses (Non-GAAP)
Non-interest expenses $ 133,301 $ 11,267 $ 1,209 $ 120,825
Employees' compensation and
benefits 50,842 - 27 50,815
Occupancy and equipment 24,242 - 1,039 23,203
Business promotion 2,970 - 18 2,952
Professional service fees 17,701 - - 17,701
Taxes, other than income taxes 6,199 - 125 6,074
FDIC deposit insurance 1,988 - - 1,988
Net loss on OREO and OREO
expenses 1,898 - - 1,898
Credit and debit card
processing expenses 4,278 - - 4,278
Communications 2,462 - - 2,462
Merger and restructuring costs 11,267 11,267 - -
Other non-interest expenses 9,454 - - 9,454
(In thousands)
COVID 19
Non-Interest Merger and Pandemic-Related Hurricane-Related Adjusted Quarter ended March 31, 2020 Expenses (GAAP) Restructuring Costs
Expenses Insurance Recoveries (Non-GAAP)
Non-interest expenses $ 92,184 $ 845 $ 363 $ (1,153) $ 92,129
Employees' compensation and
benefits 42,859 - 51 - 42,808
Occupancy and equipment 15,127 - 133 (789) 15,783
Business promotion 3,622 - 177 (184) 3,629
Professional service fees 11,793 - - (180) 11,973
Taxes, other than income
taxes 3,880 - 2 - 3,878
FDIC deposit insurance 1,522 - - - 1,522
Net loss on OREO and OREO
expenses 1,188 - - - 1,188
Credit and debit card
processing expenses 3,950 - - - 3,950
Communications 1,877 - - - 1,877
Merger and restructuring
costs 845 845 - - -
Other non-interest expenses 5,521 - - - 5,521
180
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Allowance for credit losses on loans and finance leases to adjusted total loans
held for investment ratio - The following table reconciles the "ACL for loans
and finance leases to total loans held for investment ratio," the GAAP financial
ratio, to the non-GAAP financial measure "ACL for loans and finance leases to
adjusted total loans held for investment ratio," as of March 31, 2021 and
December 31, 2020.
Allowance for Credit Losses for Loans and
Finance Leases
to Loans Held for Investment
(GAAP to Non-GAAP reconciliation)
As of March 31, 2021
Allowance for Credit Loans Held
Losses for for
Loans and Finance Leases Investment
(In thousands)
Allowance for credit losses for loans and
finance leases and loans held for investment $ 358,936 $ 11,641,859
(GAAP)
Less:
SBA PPP loans - 430,493
Allowance for credit losses for loans and
finance leases and adjusted loans held for
investment,
excluding SBA PPP loans (Non-GAAP) $ 358,936 $ 11,211,366
Allowance for credit losses for loans and finance leases to loans held for investment 3.08 %
(GAAP)
Allowance for credit losses for loans and
finance leases to adjusted loans held for
investment,
excluding SBA PPP loans (Non-GAAP) 3.20 %
Allowance for Credit Losses for Loans and
Finance Leases
to Loans Held for Investment
(GAAP to Non-GAAP reconciliation)
As of December 31, 2020
Allowance for Credit Loans Held
Losses for for
Loans and Finance Leases Investment
(In thousands)
Allowance for credit losses for loans and
finance leases and loans held for investment $ 385,887 $ 11,777,289
(GAAP)
Less:
SBA PPP loans - 405,953
Allowance for credit losses for loans and
finance leases and adjusted loans held for
investment,
excluding SBA PPP loans (Non-GAAP) $ 385,887 $ 11,371,336
Allowance for credit losses for loans and finance leases to loans held for investment 3.28 %
(GAAP)
Allowance for credit losses for loans and
finance leases to adjusted loans held for
investment,
excluding SBA PPP loans (Non-GAAP) 3.39 %
Management believes that the presentation of adjusted net income, adjusted
non-interest expenses and adjustments to the various components of non-interest
expenses, and the ratio of allowance for credit losses to adjusted total loans
held for investment enhances 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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