UNITED STATES

 

 SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

______________

 

FORM 10-Q

(Mark One)

 

[X]         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

[   ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 For the transition period from ______ to _______

 

COMMISSION FILE NUMBER 001-14793

 

First BanCorp.

 

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

Puerto Rico

 

66-0561882

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification number)

 

 

 

1519 Ponce de León Avenue, Stop 23

Santurce, Puerto Rico

(Address of principal executive offices)

 

00908

(Zip Code)

 

 

 

(787) 729-8200

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     No   

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

 

Yes    No    

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

   Large accelerated filer  

Accelerated filer

 

 

  Non-accelerated filer  (Do not check if a smaller reporting company)

Smaller reporting company    

 

Emerging growth company     

 

If an emerging growth company, indicate by check mark if the registered has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.     

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes    No  

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.     

 

Common stock: 216,406,013 shares outstanding as of April 30, 2018.

 


 

 

FIRST BANCORP.

INDEX PAGE

 

 

PART I. FINANCIAL INFORMATION

PAGE

             Item 1. Financial Statements:

 

Consolidated Statements of Financial Condition (Unaudited) as of March 31, 2018 and December 31, 2017 

6

Consolidated Statements of  Income  (Unaudited) – Quarters ended March 31, 2018 and 2017

7

Consolidated Statements of Comprehensive Income (Unaudited) – Quarters ended March 31, 2018 and 2017

8

Consolidated Statements of Cash Flows (Unaudited) – Quarters ended March 31, 2018 and 2017

9

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Quarters ended March 31, 2018 and 2017

10

                                  Notes to Consolidated Financial Statements (Unaudited)                                                

     11

             Item 2. Management's Discussion and Analysis of Financial Condition

 

                          and Results of Operations                                                                          

77

             Item 3. Quantitative and Qualitative Disclosures About Market Risk

137

             Item 4. Controls and Procedures

137

 

 

PART II. OTHER INFORMATION

 

             Item 1.    Legal Proceedings

139

             Item 1A. Risk Factors

139

             Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

140

             Item 3.    Defaults Upon Senior Securities

141

             Item 4.    Mine Safety Disclosures 

141

             Item 5.    Other Information

141

             Item 6.    Exhibits

141

 

 

SIGNATURES           

 

 

 

2 


 

Forward Looking Statements

 

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the safe harbor created by such sections.  When used in this Form 10-Q or future filings by First BanCorp. (the “Corporation”) with the U.S. Securities and Exchange Commission (“SEC”), in the Corporation’s press releases or in other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would,” “intends,” “will likely result,” “expect,” “should,” “anticipate,” “look forward,” “believes,” and other terms of similar meaning or import in connection with any discussion of future operating, financial or other performance are meant to identify “forward-looking statements.”

 

First BanCorp. wishes to caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and to advise readers that these forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, estimates, and assumptions by us that are difficult to predict.  Various factors, some of which are beyond our control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. 

 

The two hurricanes that affected the Corporation’s service areas in 2017 are discussed below in Note 2 to the financial statements and in various sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These events caused significant uncertainties, the outcome of which will impact the Corporation’s future results.

 

Factors that could cause actual results to differ from those expressed in the Corporation’s forward-looking statements include, but are not limited to, risks described or referenced below in Part II, Item 1A. “Risk Factors” and the following:

 

·         the actual pace and magnitude of economic recovery in the Corporation’s service areas that were affected by two hurricanes during 2017 compared to Management’s current views on the economic recovery;

 

·         uncertainties about the effectiveness and the timing of the completion of the rebuilding taking place in the regions affected by the hurricanes, including the rebuilding of the public infrastructure, such as Puerto Rico’s power grid, how and the extent to which government, private or philanthropic funds will be invested in the affected communities, how many displaced individuals will return to their homes in both the short- and long-term, and what other demographic changes will take place, if any;

 

·         uncertainty as to the ultimate outcomes of actions taken, or those that may be taken, by the Puerto Rico government, or the oversight board established by the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) to address Puerto Rico’s financial problems, including the filing of a form bankruptcy under Title III of PROMESA, which provides a court debt restructuring process similar to U.S. bankruptcy protection, and the effects of measures included in the Puerto Rico government fiscal plan, or any revisions to it, on our clients and loan portfolios;

 

·         the ability of the Puerto Rico government or any of its public corporations or other instrumentalities to repay its respective debt obligations, including the effect of payment defaults on the Puerto Rico government general obligations, bonds of the Government Development Bank for Puerto Rico (the “GDB”) and certain bonds of government public corporations, and recent and any future downgrades of the long-term and short-term debt ratings of the Puerto Rico government, which could exacerbate Puerto Rico’s adverse economic conditions and, in turn, further adversely impact the Corporation;

 

 

3 


 

·         uncertainty about whether the Federal Reserve Bank of New York ( the “New York FED” or “Federal Reserve”) will continue to provide approvals for receiving dividends from the Corporation’s subsidiary, FirstBank Puerto Rico (“FirstBank” or the “Bank”), or making payments of dividends on non-cumulative perpetual preferred stock, or payments on trust preferred securities or subordinated debt, incurring, increasing or guaranteeing debt or repurchasing any capital securities, despite the consents that have enabled the Corporation to receive quarterly dividends from FirstBank since the second quarter of 2016, to pay quarterly interest payments on the Corporation’s subordinated debentures associated with its trust preferred securities since the second quarter of 2016, and to pay monthly dividends on the non-cumulative perpetual preferred stock since December 2016;

 

·         a decrease in demand for the Corporation’s products and services and lower revenues and earnings because of the continued recession in Puerto Rico;

 

·         uncertainty as to the availability of certain funding sources, such as brokered certificates of deposit (“brokered CDs”);

 

·         the Corporation’s reliance on brokered CDs to fund operations and provide liquidity;

 

·         the risk of not being able to fulfill the Corporation’s cash obligations or resume paying dividends to the Corporation’s common stockholders in the future due to the Corporation’s need to receive regulatory approvals to declare or pay any dividends and to take dividends or any other form of payment representing a reduction in capital from FirstBank or FirstBank’s failure to generate sufficient cash flow to make a dividend payment to the Corporation;

 

·         the weakness of the real estate markets and of the consumer and commercial sectors and their impact on the credit quality of the Corporation’s loans and other assets, which have contributed and may continue to contribute to, among other things, high levels of non-performing assets, charge-offs and provisions for loan and lease losses, and may subject the Corporation to further risk from loan defaults and foreclosures;

 

·         the ability of FirstBank to realize the benefits of its net deferred tax assets;

 

·         adverse changes in general economic conditions in Puerto Rico, the United States (“U.S.”), the U.S. Virgin Islands (“USVI”), and the British Virgin Islands (“BVI”), including the interest rate environment, market liquidity, housing absorption rates, real estate prices, and disruptions in the U.S. capital markets, which reduced interest margins and affected funding sources, and have affected demand for all of the Corporation’s products and services and reduced the Corporation’s revenues and earnings and the value of the Corporation’s assets, and may continue to have these effects;

 

·         an adverse change in the Corporation’s ability to attract new clients and retain existing ones;

 

·         the risk that additional portions of the unrealized losses in the Corporation’s investment portfolio are determined to be other-than-temporary, including additional impairments on the Corporation’s remaining $8.1 million of the Puerto Rico government’s debt securities;   

 

·         uncertainty about regulatory and legislative changes for financial services companies in Puerto Rico, the U.S., the USVI and the BVI, which could affect the Corporation’s financial condition or performance and could cause the Corporation’s actual results for future periods to differ materially from prior results and anticipated or projected results;

 

 

4 


 

·         changes in the fiscal and monetary policies and regulations of the U.S. federal government and the Puerto Rico and other governments, including those determined by the Board of the Governors of the Federal Reserve System (the “Federal Reserve Board”), the New York FED, the Federal Deposit Insurance Corporation (“FDIC”), government-sponsored housing agencies, and regulators in Puerto Rico, and the USVI and BVI;

 

·         the risk of possible failure or circumvention of controls and procedures and the risk that the Corporation’s risk management policies may not be adequate;

 

·         the risk that the FDIC may increase the deposit insurance premium and/or require special assessments to replenish its insurance fund, causing an additional increase in the Corporation’s non-interest expenses;

 

·         the impact on the Corporation’s results of operations and financial condition of acquisitions and dispositions;

 

·         a need to recognize impairments on the Corporation’s financial instruments, goodwill or other intangible assets relating to acquisitions;

 

·         the risk that downgrades in the credit ratings of the Corporation’s long-term senior debt will adversely affect the Corporation’s ability to access necessary external funds;

 

·         the effect on the Corporation’s businesses, business practices and results of operations of a potential higher interest rate environment;

 

·         uncertainty as to whether FirstBank will be able to satisfy its regulators regarding, among other things, its asset quality, liquidity plans, maintenance of capital levels, and compliance with applicable laws, regulations and related requirements; and

 

·         general competitive factors and industry consolidation.

 

    The Corporation does not undertake, and specifically disclaims any obligation, to update any “forward-looking statements” to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by the federal securities laws.

 

Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017, as well as “Part II, Item 1A, Risk Factors,” in this Quarterly Report on Form 10-Q, for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

5 


 

 

FIRST BANCORP.

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

 

March 31, 2018

 

December 31, 2017

(In thousands, except for share information)

ASSETS

 

 

 

 

 

Cash and due from banks

$

743,409

 

$

705,980

Money market investments:

 

 

 

 

 

   Time deposits with other financial institutions

 

3,126

 

 

3,126

   Other short-term investments

 

97,289

 

 

7,289

      Total money market investments

 

100,415

 

 

10,415

 

 

 

 

 

 

Investment securities available for sale, at fair value:

 

 

 

 

 

   Securities pledged that can be repledged

 

242,738

 

 

350,123

   Other investment securities

 

1,572,766

 

 

1,540,893

      Total investment securities available for sale

 

1,815,504

 

 

1,891,016

 

 

 

 

 

 

Investment securities held to maturity, at amortized cost:

 

 

 

 

 

   Securities pledged that can be repledged

 

-

 

 

-

   Other investment securities

 

150,486

 

 

150,627

Total investment securities held to maturity, fair value of $134,856 (2017- $131,032)

 

150,486

 

 

150,627

 

 

 

 

 

 

Other investment securities

 

43,532

 

 

43,119

Loans, net of allowance for loan and lease losses of $225,856

 

 

 

 

 

   (2017 - $231,843)

 

8,470,034

 

 

8,618,633

Loans held for sale, at lower of cost or market

 

91,375

 

 

32,980

      Total loans, net

 

8,561,409

 

 

8,651,613

Premises and equipment, net

 

143,115

 

 

141,895

Other real estate owned

 

154,639

 

 

147,940

Accrued interest receivable on loans and investments

 

44,093

 

 

57,172

Other assets

 

443,784

 

 

461,491

      Total assets

$

12,200,386

 

$

12,261,268

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Non-interest-bearing deposits

$

2,019,823

 

$

1,833,665

Interest-bearing deposits

 

7,046,642

 

 

7,188,966

      Total deposits

 

9,066,465

 

 

9,022,631

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

200,000

 

 

300,000

Advances from the Federal Home Loan Bank ("FHLB")

 

715,000

 

 

715,000

Other borrowings

 

184,150

 

 

208,635

Accounts payable and other liabilities

 

157,667

 

 

145,905

      Total liabilities

 

10,323,282

 

 

10,392,171

 

 

 

 

 

 

STOCKHOLDERSʼ EQUITY

 

 

 

 

 

Preferred stock, authorized, 50,000,000 shares:

 

 

 

 

 

      Non-cumulative Perpetual Monthly Income Preferred Stock:

 

 

 

 

 

         issued 22,004,000 shares, outstanding 1,444,146 shares, aggregate

 

 

 

 

 

         liquidation value of $36,104

 

36,104

 

 

36,104

Common stock, $0.10 par value, authorized, 2,000,000,000 shares;

 

 

 

 

 

         issued, 220,877,719 shares (2017 - 220,382,343 shares issued)

 

22,088

 

 

22,038

Less: Treasury stock (at par value)

 

(449)

 

 

(410)

Common stock outstanding, 216,390,329 shares outstanding (2017 - 216,278,040

 

 

 

 

 

         shares outstanding)

 

21,639

 

 

21,628

Additional paid-in capital

 

936,342

 

 

936,772

Retained earnings, includes legal surplus reserve of $59,693

 

927,681

 

 

895,208

Accumulated other comprehensive loss, net of tax of $7,752

 

(44,662)

 

 

(20,615)

      Total stockholdersʼ equity

 

1,877,104

 

 

1,869,097

         Total liabilities and stockholdersʼ equity

$

12,200,386

 

$

12,261,268

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

6 


 

 

FIRST BANCORP.

 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

Quarter Ended

 

March 31, 2018

 

March 31, 2017

(In thousands, except per share information)

 

 

 

Interest and dividend income:

 

 

 

 

 

   Loans

$

133,175

 

$

131,442

   Investment securities

 

13,987

 

 

13,302

   Money market investments and interest-bearing cash accounts

 

2,256

 

 

484

      Total interest income

149,418

 

145,228

Interest expense:

 

 

 

 

 

   Deposits

 

16,971

 

 

15,972

   Securities sold under agreements to repurchase

 

2,297

 

 

2,623

   Advances from FHLB

 

3,372

 

 

2,122

   Other borrowings

 

2,085

 

 

1,962

      Total interest expense

24,725

 

22,679

         Net interest income

 

124,693

 

 

122,549

Provision for loan and lease losses

 

20,544

 

 

25,442

Net interest income after provision for loan and lease losses

104,149

 

97,107

Non-interest income:

 

 

 

 

 

   Service charges and fees on deposit accounts

 

5,088

 

 

5,790

   Mortgage banking activities

 

4,165

 

 

3,616

   Other-than-temporary impairment ("OTTI") losses on available-for-sale debt securities:

 

 

 

 

 

      Total other-than-temporary impairment losses

 

-

 

 

(12,231)

      Portion of other-than-temporary impairment

 

 

 

 

 

         recognized in other comprehensive income ("OCI")

 

-

 

 

-

   Net impairment losses on available-for-sale debt securities

 

-

 

 

(12,231)

   Gain on early extinguishment of debt

 

2,316

 

 

-

   Insurance commission income

 

3,355

 

 

3,587

   Other non-interest income

 

7,860

 

 

7,481

      Total non-interest income

22,784

 

8,243

Non-interest expenses:

 

 

 

 

 

   Employees' compensation and benefits

 

40,684

 

 

38,653

   Occupancy and equipment

 

15,105

 

 

14,088

   Business promotion

 

2,576

 

 

3,281

   Professional fees

 

10,060

 

 

10,956

   Taxes, other than income taxes

 

3,856

 

 

3,676

   Insurance and supervisory fees

 

3,855

 

 

4,909

   Net loss on other real estate owned ("OREO") and OREO operations

 

190

 

 

4,076

   Credit and debit card processing expenses

 

3,537

 

 

2,831

   Communications

 

1,482

 

 

1,543

   Other non-interest expenses

 

4,682

 

 

3,869

      Total non-interest expenses

86,027

 

87,882

 

 

 

 

 

 

Income before income taxes

 

40,906

 

 

17,468

 

 

 

 

 

 

Income tax (expense) benefit

 

(7,758)

 

 

8,073

 

 

 

 

 

 

Net income

$

33,148

 

$

25,541

 

 

 

 

 

 

Net income attributable to common stockholders

$

32,479

 

$

24,872

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

   Basic

$

0.15

 

$

0.12

   Diluted

$

0.15

 

$

0.11

Dividends declared per common share

$

-

 

$

-

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

7 


 

 

FIRST BANCORP.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

  

 

Quarter Ended

 

 

March 31,

 

 

March 31,

 

2018

 

 

2017

(In thousands)

 

 

 

 

 

 

 

Net income

$

33,148

 

$

25,541

 

 

 

 

 

 

Available-for-sale debt securities on which an other-than-temporary

 

 

 

 

 

      impairment has been recognized:

 

 

 

 

 

    Unrealized gain (loss) on debt securities on which an

 

 

 

 

 

      other-than-temporary impairment has been recognized

 

496

 

 

(2,930)

    Reclassification adjustment for other-than-temporary impairment

 

 

 

 

 

      on debt securities included in net income

 

-

 

 

12,231

All other unrealized holding (losses) gains on available-for-sale securities arising during the period

 

(24,549)

 

 

1,395

Amount reclassified out of accumulated other comprehensive loss per Accounting Standards

 

 

 

 

 

   Update ("ASU") 2016-01

 

6

 

 

-

    Other comprehensive (loss) income for the period

 

(24,047)

 

 

10,696

         Total comprehensive income

$

9,101

 

$

36,237

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

8 


 

 

FIRST BANCORP.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Quarter Ended

 

March 31, 2018

 

March 31, 2017

(In thousands)

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

   Net income

$

33,148

 

$

25,541

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

   Depreciation and amortization

 

3,922

 

 

4,141

   Amortization of intangible assets

 

1,006

 

 

1,121

   Provision for loan and lease losses

 

20,544

 

 

25,442

   Deferred income tax expense (benefit)

 

5,472

 

 

(6,016)

   Stock-based compensation

 

2,205

 

 

1,734

   Other-than-temporary impairments on debt securities

 

-

 

 

12,231

   Gain on early extinguishment of debt

 

(2,316)

 

 

-

   Unrealized loss on derivative instruments

 

52

 

 

57

   Net (gain) loss on sales of premises and equipment and other assets

 

(847)

 

 

9

   Net gain on sales of loans

 

(1,096)

 

 

(1,472)

   Net amortization/accretion of premiums, discounts, and deferred loan fees and costs

 

(2,095)

 

 

(2,031)

   Originations and purchases of loans held for sale

 

(65,984)

 

 

(81,389)

   Sales and repayments of loans held for sale

 

76,163

 

 

86,924

   Loans held for sale valuation adjustment

 

558

 

 

-

   Amortization of broker placement fees

 

367

 

 

527

   Net amortization/accretion of premium and discounts on investment securities

 

476

 

 

461

   Decrease in accrued interest receivable

 

13,061

 

 

3,413

   Increase in accrued interest payable

 

8

 

 

174

   Decrease in other assets

 

10,566

 

 

5,419

   Increase in other liabilities

 

166

 

 

8,517

       Net cash provided by operating activities

 

95,376

 

 

84,803

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

   Principal collected on loans

 

590,753

 

 

669,615

   Loans originated and purchased

 

(550,257)

 

 

(704,175)

   Proceeds from sales of loans held for investment

 

13,274

 

 

53,245

   Proceeds from sales of repossessed assets

 

10,559

 

 

12,159

   Purchases of available-for-sale securities

 

(49,626)

 

 

(5,003)

   Proceeds from principal repayments and maturities of available-for-sale securities

 

100,195

 

 

53,830

   Proceeds from principal repayments of held-to-maturity securities

 

141

 

 

141

   Additions to premises and equipment

 

(5,142)

 

 

(2,840)

   Proceeds from sale of premises and equipment and other assets

 

1,857

 

 

637

   Net redemptions of other equity securities

 

-

 

 

4,500

      Net cash provided by investing activities

 

111,754

 

 

82,109

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

   Net increase in deposits

 

45,026

 

 

58,722

   Change in securities sold under agreements to repurchase

 

(100,000)

 

 

-

   Net FHLB advances paid

 

-

 

 

(100,000)

   Repayment of junior subordinated debentures

 

(21,434)

 

 

-

   Repurchase of outstanding common stock

 

(2,624)

 

 

(528)

   Dividends paid on preferred stock

 

(669)

 

 

(669)

      Net cash used in financing activities

 

(79,701)

 

 

(42,475)

Net increase in cash and cash equivalents

 

127,429

 

 

124,437

Cash and cash equivalents at beginning of period

 

716,395

 

 

299,685

Cash and cash equivalents at end of period

$

843,824

 

$

424,122

 

 

 

 

 

 

Cash and cash equivalents include:

 

 

 

 

 

   Cash and due from banks

$

743,409

 

$

414,034

   Money market instruments

 

100,415

 

 

10,088

 

$

843,824

 

$

424,122

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

9 


 

 

FIRST BANCORP.

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

  

 

Quarter Ended

 

March 31,

 

March 31,

 

2018

 

2017

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

$

36,104

 

$

36,104

 

 

 

 

 

 

Common Stock outstanding:

 

 

 

 

 

   Balance at beginning of period

 

21,628

 

 

21,745

   Common stock issued as compensation

 

15

 

 

14

   Common stock withheld for taxes

 

(38)

 

 

(11)

   Restricted stock grants

 

34

 

 

95

      Balance at end of period

 

21,639

 

 

21,843

 

 

 

 

 

 

Additional Paid-In-Capital:

 

 

 

 

 

   Balance at beginning of period

 

936,772

 

 

931,856

   Stock-based compensation

 

2,205

 

 

1,734

   Common stock withheld for taxes

 

(2,586)

 

 

(517)

   Restricted stock grants

 

(34)

 

 

(95)

   Common stock issued as compensation

 

(15)

 

 

(14)

      Balance at end of period

 

936,342

 

 

932,964

 

 

 

 

 

 

Retained Earnings:

 

 

 

 

 

   Balance at beginning of period

 

895,208

 

 

830,928

   Net income

 

33,148

 

 

25,541

   Dividends on preferred stock

 

(669)

 

 

(669)

   Amount reclassified from accumulated other comprehensive loss per ASU 2016-01

 

(6)

 

 

-

      Balance at end of period

 

927,681

 

 

855,800

 

 

 

 

 

 

Accumulated Other Comprehensive (Loss) Income, net of tax:

 

 

 

 

 

   Balance at beginning of period

 

(20,615)

 

 

(34,390)

   Other comprehensive (loss) income, net of tax

 

(24,047)

 

 

10,696

      Balance at end of period

 

(44,662)

 

 

(23,694)

 

 

 

 

 

 

         Total stockholdersʼ equity

$

1,877,104

 

$

1,823,017

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

10 


 

 

FIRST BANCORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

The Consolidated Financial Statements (unaudited) of First BanCorp. (the “Corporation”) have been prepared in conformity with the accounting policies stated in the Corporation’s Audited Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017. Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant to the rules and regulations of the SEC and, accordingly, these financial statements should be read  in conjunction with the Audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2017, which are included in the Corporation’s 2017 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the statement of financial position, results of operations and cash flows for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The results of operations for the quarter ended March 31, 2018 are not necessarily indicative of the results to be expected for the entire year. 

 

Adoption of New Accounting Requirements and Recently Issued but Not Yet Effective Accounting Requirements

 

The Financial Accounting Standards Board (“FASB”) has issued the following accounting pronouncements and guidance relevant to the Corporation’s operations:

 

Revenue Recognition

 

In May 2014, the FASB updated the Accounting Standards Codification (the “Codification” or the “ASC”) to create a new, principles-based revenue recognition framework. This guidance requires entities to recognize revenues when they transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance describes a 5-step process that entities can apply to achieve the core principle of revenue recognition and requires disclosures sufficient to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and the significant judgments used in determining that information.

 

    The Corporation adopted the guidance on January 1, 2018 using a modified retrospective method, in which the guidance applies to existing contracts in effect at January 1, 2018 and new contracts entered into after this date. Most of the Corporation’s revenue, including net interest income, gain on sale of loans, and mortgage servicing fees is explicitly out of scope of the new revenue recognition guidance. The Corporation conducted an assessment of the revenue streams that were potentially affected by the new guidance and reviewed contracts in scope to ensure compliance with the new guidance.

 

The Corporation has identified service charges on deposits and related cash management services, insurance commissions, merchant-related income, and card interchange income as its most significant revenue streams within the scope of the standard.  For the revenue streams that were found in scope, management reviewed in detail its most significant contracts with corresponding customers. The adoption of this guidance did not have a material effect on the Corporation’s consolidated financial statements. However, additional disclosures required by the standard have been included in Note 22 – Revenue from Contracts with Customers, to the Corporation’s consolidated financial statements.

 

Recognition and Measurement of Financial Assets and Liabilities

 

In January 2016, the FASB updated the Codification to require an entity to: (i) measure equity investments at fair value through net income, with certain exceptions, thus, eliminating eligibility for the available-for-sale category; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price; and (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available-for-sale debt securities in combination with other deferred tax assets. The guidance provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment, adjusted for certain observable price changes. The guidance also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The adoption of this standard during the first quarter of 2018 did not have a material effect on the Corporation’s consolidated financial statements.

 

11 


 

Statement of Cash Flows Presentation – Restricted Cash

 

In August 2016 and November 2016, the FASB updated the Codification to provide specific guidance on the classification and presentation of certain cash payments and cash receipts, including changes in restricted cash, in the statement of cash flows. This guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Corporation adopted the provisions of this guidance during the first quarter of 2018 without any material effect on the Corporation’s consolidated financial statements.

 

Income Tax Effect of Intra-Entity Transfers of Assets

 

In October 2016, the FASB updated the Codification to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. With this Update, entities are required to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Under current GAAP, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the assets are sold to an outside party. This Update does not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. For example, GAAP requires an entity to disclose a comparison of income tax expense (benefit) with statutory expectations (a rate reconciliation for public entities or a description of the nature of each significant reconciling item for nonpublic entities) and also requires an entity to disclose the types of temporary differences and carryforwards that give rise to a significant portion of deferred income taxes. The Corporation adopted the provisions of this guidance during the first quarter of 2018 without any effect on the Corporation’s consolidated financial statements.

 

Clarifying what Changes Qualify as a Modification of a Share-Based Payment Award

 

In May 2017, the FASB updated the codification to reduce the cost and complexity when applying ASC Topic 718, “Compensation – Stock Compensation,” and standardize the practice of applying Topic 718 to financial reporting. Topic 718 prescribes the accounting treatment of a modification in the terms or conditions of a share-based payment award. The guidance clarifies what changes would qualify as a modification. This was done by better defining what does not constitute a modification. In order for a change to a share-based arrangement to not require Topic 718 modification treatment, all of the following must be met: (i) the fair value (or alternative measurement method used) of the modified award equals the fair value (or alternative measurement method used) of the original award immediately before the original award is modified; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under this Update. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The Corporation adopted the provisions of this guidance on January 1, 2018 without any effect on the Corporation’s consolidated financial statements. The Corporation’s Omnibus Plan provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, cash-based awards and other stock-based awards. If any change occurs in the future to awards issued under the Omnibus Plan, the Corporation will evaluate it under this guidance.

 

Lease Accounting

 

In February 2016, the FASB updated the Codification to provide guidance for the financial reporting about leasing transactions. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the guidance will require both types of leases to be recognized on the balance sheet. The guidance will also require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The guidance on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period presented in the financial statements. As lessees, the Corporation has lease agreements for branch locations that are currently considered operating leases, and therefore are not recognized on the Corporation’s consolidated balance sheets. The Corporation expects that the new guidance will require these leases to be recognized on the consolidated balance sheets as a right-of-use asset with a corresponding lease liability. The Corporation continues to evaluate the effect that this guidance will have on the Corporation’s consolidated financial statements.

 

 

 

12 


 

Accounting for Financial Instruments – Credit Losses

 

In June 2016, the FASB updated the Codification to introduce new guidance for the accounting for credit losses on instruments that includes an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The CECL model will apply to: (1) financial assets subject to credit losses and measured at amortized cost and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses (“ECL”) should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating ECL. The guidance does not prescribe a specific method to make the estimate, so its application will require significant judgment.

 

Generally, upon initial recognition of a financial asset, the estimate of the ECL will be recorded through an allowance for loan and lease losses with an offset to current earnings. Subsequently, the ECL will need to be reassessed each period, and both negative and positive changes to the estimate will be recognized through an adjustment to the allowance for loan and lease losses and earnings.

 

The guidance amends the current OTTI model for available-for-sale debt securities. The new available-for-sale debt security model will require an estimate of ECL only when the fair value is below the amortized cost of the asset. The length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer affect the determination of whether a credit loss exists. As such, the new available-for-sale debt security model is not an OTTI model. In addition, credit losses on available-for-sale debt securities will now be limited to the difference between the security’s amortized cost basis and its fair value. The available-for-sale debt security model will also require the use of an allowance to record estimated credit losses (and subsequent recoveries).

 

The purchased financial assets with credit deterioration (“PCD”) model applies to purchased financial assets (measured at amortized cost or available-for-sale) that have experienced more than insignificant credit deterioration since origination. This represents a change from the scope of what are considered purchased credit-impaired assets under today’s model. In contrast to the accounting for originated or purchased assets that do not qualify as PCD, the initial estimate of expected credit losses for a PCD would be recognized through an allowance for loan and lease losses with an offset to the cost basis of the related financial asset at acquisition (i.e., there is no effect to net income at initial recognition). Subsequently, the accounting will follow the applicable CECL or available-for-sale debt security impairment model with all adjustments of the allowance for loan and lease losses recognized through earnings. Beneficial interests classified as held-to-maturity or available-for-sale will need to apply the PCD model if the beneficial interest meets the definition of PCD or if there is a significant difference between contractual and expected cash flows at initial recognition.

 

In general, the new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings as of the beginning of the first period in which the guidance becomes effective. However, prospective application is required for PCD assets previously accounted for under ASC 310-30 and for debt securities for which an OTTI was recognized prior to the date of adoption.

 

This guidance also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year).

 

The guidance will be effective for public business entities that are SEC filers in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the guidance will be permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

 

The Corporation has developed a transition roadmap in order to comply with the timely implementation of this new accounting framework. The Corporation has created a working group with members from multiple areas across the organization that is responsible for assessing the effect of the standard, evaluating interpretative issues, and evaluating the current credit loss models against the new guidance to determine any necessary changes and other related implementation activities. The working group provides periodic updates to the Corporation’s CECL Management Committee, which has oversight responsibilities for the implementation efforts. The Corporation continues to evaluate the effect that this guidance, including the method of implementation, will have on its consolidated financial statements.

 

Subsequent Measurement of Goodwill

 

    In January 2017, the FASB updated the Codification to simplify the subsequent measurement of goodwill by eliminating Step 2 from the current two-step goodwill impairment test. This guidance provides that a goodwill impairment test be conducted by comparing the fair value of a reporting unit with its carrying amount. Entities are to recognize an impairment charge for goodwill

13 


 

equal to the excess of the carrying amount over the reporting unit’s fair value. Entities have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The effect of this guidance will depend upon the performance of the reporting units and the market conditions affecting the fair value of each reporting unit going forward.

 

Amortization of Premiums and Discounts of Callable Debt Securities

 

In March 2017, the FASB updated the Codification to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. With respect to securities held at a discount, the amendments do not require an accounting change; thus, the discount continues to be amortized to maturity. Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date. An entity must have a large number of similar loans to consider estimates of future principal prepayments when applying the interest method. However, an entity that holds an individual callable debt security at a premium may not amortize that premium to the earliest call date. If that callable debt security is subsequently called, the entity records a loss equal to the unamortized premium. The amendments in this Update more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. In most cases, market participants price securities to the call date that produces the worst yield when the coupon is above current market rates (that is, the security is trading at a premium) and price securities to maturity when the coupon is below market rates (that is, the security is trading at a discount) in anticipation that the borrower will act in its economic best interest. As a result, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this guidance is not expected to have a material effect on the Corporation’s consolidated statement of financial condition or results of operations. As of March 31, 2018, the Corporation had $4.3  million of callable debt securities held at a premium (unamortized premium of $50 thousand).

 

Derivatives and Hedging

 

In August 2017, the FASB updated the Codification to: (i) expand hedge accounting for nonfinancial and financial risk components and amend measurement methodologies to more closely align hedge accounting with a company’s risk management activities; (ii) decrease the complexity of preparing and understanding hedge results by eliminating the separate measurement and reporting of hedge ineffectiveness; (iii) enhance transparency, comparability, and understanding of hedge results through enhanced disclosures and changing the presentation of hedge results to align the effects of the hedging instrument and the hedged item; and (iv) reduce the cost and complexity of applying hedge accounting by simplifying the manner in which assessments of hedge effectiveness may be performed. This Update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The guidance requires companies to apply requirements to existing hedging relationships on the date of adoption, and the effect of the adoption should be reflected as of the beginning of the fiscal year of adoption. As of March 31, 2018, all of the derivatives held by the Corporation were considered economic undesignated hedges. The adoption of this guidance is not expected to have a material effect on the Corporation’s consolidated statement of financial condition or results of operations.

 

Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income

 

    In February 2018, the FASB updated the Codification to provide entities with an option to reclassify tax effects that were stranded in accumulated other comprehensive income, pursuant to the recently enacted Tax Cuts and Jobs Act of 2017 (the “Tax Act”), to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. This guidance may be early adopted in any interim or annual period for which financial statements have not yet been issued and applied either in the period of adoption or retrospectively to each period in which the effect of the change in the corporate tax rate in the Tax Act is recognized. The adoption of this guidance is not expected to have an effect on the Corporation’s consolidated financial statements.

14 


 

NOTE 2 – UPDATE ON EFFECTS OF NATURAL DISASTERS

 

Two strong hurricanes affected the Corporation’s service areas during September 2017. The following summarizes the more significant continuing financial repercussions of these natural disasters for the Corporation and for its major subsidiary, FirstBank.

 

Credit Quality and Allowance for Loan and Lease Losses

 

Relationship officers continued to closely monitor the performance of hurricane-affected loan customers during the first quarter of 2018, and data became available on the performance of consumer and residential credits that had been under payment deferral programs. This information was factored into the determination of the allowance for loan and lease losses as of March 31, 2018. Although the identification and evaluation of hurricane-affected credits has been substantially completed, management’s assessment of the hurricanes’ effect is still subject to uncertainties, both those specific to some individual customers, such as the resolution of insurance claims, and those applicable to the overall economic prospects of the hurricane-affected areas as a whole. During the first quarter of 2018, the Corporation recorded a net loan loss reserve release of approximately $6.4 million in connection with revised estimates associated with the effects of the hurricanes. The revised estimates were primarily attributable to updated assessments of financial performance and repayment prospects of certain individually-assessed commercial credits and lower reserve requirements resulting from payments received during the first quarter that reduced the balance of the consumer loan portfolio outstanding on the dates of the hurricanes.

  

As of March 31, 2018, the hurricane-related allowance amounted to $62.1 million (net of a $2.8 million charge-off taken on a hurricane-affected construction credit during the fourth quarter of 2017). With the resolution of uncertainties and the ongoing collection of information on individual commercial customers and statistics on the consumer and residential loan portfolios, the loss estimate will be revised as needed. Refer to Note 7, – Loans Held for Investment, to the consolidated financial statements for information about non-performing loans and early delinquency statistics.

 

Disaster Response Plan Costs, Casualty Losses and Related Insurance

 

The Corporation has incurred a variety of costs to operate in disaster response mode, and some facilities and their contents were damaged by the storms.  The Corporation maintains insurance for casualty losses as well as for reasonable and necessary disaster response costs and certain revenue lost through business interruption. Most of the significant disaster response costs were incurred by the end of the first quarter of 2018. The cost were included, where appropriate, in an insurance claim receivable based on management’s understanding of the underlying coverage. An insurance claim receivable of $5.3 million was included as part of other assets as of March 31, 2018, and the Corporation has incurred $9.4 million of hurricane-related disaster response costs and casualty losses, including $1.6 million charged to operations in the first quarter of 2018.  Impairments, recoverable expenses and expected recoveries are included as part of “Other non-interest income” in the statement of income.  Management also believes that there is a possibility that some gains will be recognized with respect to casualty and lost revenue claims in future periods, but this is contingent on reaching agreement on the Corporation’s claims with the insurance carriers.

 

Liquidity Management  

 

The Corporation experienced rapid accumulation of deposits after the hurricanes in the fourth quarter of 2017 and the first quarter of 2018.  Total deposits as of March 31, 2018, excluding brokered CDs, increased $238.3 million from December 31, 2017 and $599.8 million since September 30, 2017.  The most significant increase was in non-interest-bearing demand deposits, which grew 10%, or $186.2 million from December 31, 2017 and $433.7 million, or 27%, since September 30, 2017.  Hurricane-related factors, such as the effect of payment deferral programs available to customers, disaster relief funds, and settlement of insurance claims continue to contribute to this accumulation.  Although management expects the balances accumulated by deposit customers in the hurricane-affected areas to reduce over time, it is difficult to predict when and to what degree, and there may be further growth as insurance claims are resolved and additional disaster-recovery funds are distributed. 

15 


 

NOTE 3 – EARNINGS PER COMMON SHARE

 

 

The calculations of earnings per common share for the quarters ended March 31, 2018 and 2017 are as follows:

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

March 31,

 

March 31,

 

 

 

2018

 

2017

 

(In thousands, except per share information)

 

 

 Net income

$

33,148

 

$

25,541

 

 Less: Preferred stock dividends

 

(669)

 

 

(669)

 

 Net income attributable to common stockholders

$

32,479

 

$

24,872

 

 

 

 

 

 

 

 

 

Weighted-Average Shares:

 

 

 

 

 

 

 

Average common shares outstanding

 

214,646

 

 

213,340

 

 

Average potential dilutive common shares

 

1,648

 

 

4,033

 

 

Average common shares outstanding-assuming dilution

 

216,294

 

 

217,373

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

$

0.15

 

$

0.12

 

 

Diluted

$

0.15

 

$

0.11

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares issued and outstanding. Net income attributable to common stockholders represents net income adjusted for any preferred stock dividends, including any dividends declared, and any cumulative dividends related to the current dividend period that have not been declared as of the end of the period. Basic weighted-average common shares outstanding exclude unvested shares of restricted stock that do not contain non-forfeitable dividend rights.

 

Potential dilutive common shares consist of unvested shares of restricted stock that do not contain non-forfeitable dividend rights, performance units that do not contain non-forfeitable dividend rights if the performance condition in met as of the end of the reporting period, and outstanding warrants using the treasury stock method. This method assumes that the potential dilutive common shares are issued and outstanding and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to purchase common stock at the exercise date. The difference between the numbers of potential dilutive shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Unvested shares of restricted stock and performance units that do not contain non-forfeitable dividend rights, and outstanding warrants that result in lower potential dilutive shares issued than shares purchased under the treasury stock method, are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share.

16 


 

NOTE 4 – STOCK-BASED COMPENSATION   

 

   On May 24, 2016, the Corporation’s stockholders approved the amendment and restatement of the First BanCorp. Omnibus Incentive Plan, as amended (the “Omnibus Plan”), to, among other things, increase the number of shares of common stock reserved for issuance under the Omnibus Plan, extend the term of the Omnibus Plan to May 24, 2026 and re-approve the material terms of the performance goals under the Omnibus Plan for purposes of the then Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended. The Omnibus Plan provides for equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, cash-based awards and other stock-based awards. The Omnibus Plan authorizes the issuance of up to 14,169,807 shares of common stock, subject to adjustments for stock splits, reorganizations and other similar events. As of March 31, 2018, 7,063,074 authorized shares of common stock were available for issuance under the Omnibus Plan. The Corporation’s Board of Directors, based on the recommendation of the Corporation’s Compensation and Benefits Committee, has the power and authority to determine those eligible to receive awards and to establish the terms and conditions of any awards, subject to various limits and vesting restrictions that apply to individual and aggregate awards. 

 

Restricted Stock

 

Under the Omnibus Plan, the Corporation may grant restricted stock to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While the restricted stock is subject to forfeiture and does not contain non-forfeitable dividend rights, restricted stock participants may exercise full voting rights. The restricted stock granted under the Omnibus Plan is typically subject to a vesting period. During the first quarter of 2018, the Corporation awarded 341,189 shares of restricted stock to employees, fifty percent (50%) of those shares vest in two years from the grant date and the remaining 50% vest in three years of the grant date. Included in those 341,189 shares of restricted stock were 20,447 shares granted to retirement-eligible employees at the grant date. The fair value of the shares of restricted stock granted in the first quarter of 2018 was based on the market price of the Corporation’s outstanding common stock on the date of the grant.  

  

 

 

   The following table summarizes the restricted stock activity in the first quarter of 2018 under the Omnibus Plan:

 

 

 

 

 

 

 

 

Quarter Ended

 

 

March 31, 2018

 

 

Number of

 

 

 

 

 

shares of

 

 

Weighted-Average

 

 

restricted

 

 

Grant Date

 

 

stock

 

 

 Fair Value

 

 

 

 

 

 

Non-vested shares at beginning of period

1,816,968

 

$

2.76

Granted

341,189

 

 

6.29

Vested

(1,061,476)

 

 

2.02

Non-vested shares at March 31, 2018

1,096,681

 

$

4.58

 

 

 

 

 

 

 

    For the quarters ended March 31, 2018 and 2017, the Corporation recognized $1.1 million and $0.9 million, respectively, of stock-based compensation expense related to restricted stock awards. As of March 31, 2018, there was $3.9 million of total unrecognized compensation cost related to non-vested shares of restricted stock. The weighted average period over which the Corporation expects to recognize such cost is 1.7 years. The total expense determined for restricted stock awards granted to retirement-eligible employees was charged against earnings at the grant date.

 

    During the first quarter of 2017, the Corporation awarded 949,332 shares of restricted stock to employees subject to a vesting period of two years. Included in those 949,332 shares of restricted stock were 838,332 shares granted to certain senior officers consistent with the requirements of the Troubled Asset Relief Program (“TARP”) Interim Final Rule. On May 10, 2017, the United States Department of the Treasury (the “U.S. Treasury) announced that it had sold all of its remaining 10,291,553 shares of the Corporation’s common stock. As a result of the sale by the U.S. Treasury, the Corporation is no longer subject to the compensation-related restrictions under TARP, which substantially limited the Corporation’s ability to award short-term and long-term incentives to the Corporation’s executives, and the Corporation’s senior officers are no longer subject to the transferability restrictions on their shares of restricted stock. However, since the U.S. Treasury did not recover the full amount of its original investment under TARP, the senior officers forfeited 2,370,571, or 50%, of their outstanding shares of restricted stock, resulting in a reduction in the number of common shares outstanding. The U.S. Treasury continues to hold a warrant to purchase 1,285,899 shares of the Corporation’s common stock.

 

     

 

 

17 


 

The fair value of the shares of restricted stock granted in the first quarter of 2017 was based on the market price of the Corporation’s outstanding common stock on the date of the grant. For the 838,332 shares of restricted stock granted under the TARP requirements, the market price was discounted assuming that 50% of the shares of restricted stock would become freely transferable and the remaining 50% would be forfeited, resulting in a fair value of $2.71 for each share of restricted stock granted under TARP requirements.

 

    Stock-based compensation accounting guidance requires the Corporation to reverse compensation expense for any awards that are forfeited due to employee or director turnover. Quarterly changes in the estimated forfeiture rate may have a significant effect on stock-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period in which the forfeiture estimate is changed.  If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease in the expense recognized in the financial statements.  If the actual forfeiture rate is lower than the estimated forfeiture rate, an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase in the expense recognized in the financial statements. The estimated forfeiture rate did not change as a result of the restricted shares forfeited in connection with the aforementioned U.S. Treasury’s sale of the Corporation’s common stock. 

 

Performance Units

 

Under the Omnibus Plan, the Corporation may award performance unit awards to Omnibus Plan participants.  During the first quarter of 2018, the Corporation granted 304,408 unit awards to executives, with each unit representing the value of one share of the Corporation’s common stock.  The performance unit awards granted are for the performance period beginning January 1, 2018 and ending on December 31, 2020 and are subject to a three-year requisite service period.  These awards do not contain non-forfeitable rights to dividend equivalent amounts and can only be settled in shares of the Corporation’s common stock. Included in those 304,408 performance unit awards were 29,171 units granted to retirement-eligible executives at the grant date.  The performance unit will vest based on the achievement of a pre-established tangible book value per share target as of December 31, 2020.  All of the performance units will vest if performance is at the pre-established performance target level or above.  However, the participants may vest on 50% of the awards to the extent that performance is below the target but at 80% of the pre-established performance target level (the 80% minimum threshold).  If performance is between the 80% minimum threshold and the pre-established performance target level, the participants will vest on a proportional amount. No performance units will vest if performance is below the 80% minimum threshold. 

 

The fair value of the performance unit awards granted in the first quarter of 2018 was based on the market price of the Corporation’s outstanding common stock on the date of the grant.  For the first quarter of 2018, the Corporation recognized $0.2 million of stock-based compensation related to performance unit awards.  As of March 31, 2018, there was $1.7 million of total unrecognized compensation cost related to unvested performance units that the Corporation expects to recognize over the three-year requisite service period. The total expense determined for the performance unit awards granted to retirement-eligible executives was charged against earnings at the grant date. The total amount of compensation expense recognized reflects management’s assessment of the probability that the pre-established performance goal will be achieved. A cumulative adjustment is recognized to compensation expense in the current period to reflect any changes in the probability of achievement of the performance goals.        

 

Salary stock

  

   Also, effective April 1, 2013, the Corporation’s Board of Directors determined to increase the salary amounts paid to certain executive officers primarily by paying the increased salary amounts in the form of shares of the Corporation’s common stock issued under the Omnibus Plan, instead of cash. During the first quarter of 2018, the Corporation issued 154,187 shares of common stock (first quarter of 2017 – 135,692 shares) with a weighted average market value of $5.80 (first quarter of 2017 - $6.31) as salary stock compensation. This resulted in a compensation expense of $0.8 million recorded in each of the first quarter of 2018 and 2017.

   

   During the quarter ended March 31, 2018, the Corporation withheld 56,131 shares (first quarter of 2017 – 45,710 shares) from the common stock paid to certain senior officers as additional compensation and 326,956 shares of the restricted stock that vested during the first quarter of 2018 (first quarter of 2017 – 52,590 shares) to cover employees’ payroll and income tax withholding liabilities; these shares are held as treasury shares. The Corporation paid in cash any fractional share of salary stock to which the officer was entitled. In the consolidated financial statements, the Corporation treats shares withheld for tax purposes as common stock repurchases.

18 


 

NOTE 5 – INVESTMENT SECURITIES

 

Investment Securities Available for Sale

 

The amortized cost, non-credit loss component of OTTI recorded in OCI, gross unrealized gains and losses recorded in OCI, approximate fair value, and weighted-average yield of investment securities available for sale by contractual maturities as of March 31, 2018 and December 31, 2017 were as follows:

 

 

 

March 31, 2018

 

 

Amortized cost

 

Noncredit Loss Component of OTTI Recorded in OCI

 

Gross

 

Fair value

 

 

 

 

 

Unrealized

 

 

Weighted-

 

 

 

 

gains

 

losses

 

 

average yield %

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within one year

$

49,799

 

$

-

 

$

-

 

$

22

 

$

49,777

 

1.55

After 1 to 5 years

 

7,465

 

 

-

 

 

-

 

 

73

 

 

7,392

 

1.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    agencies obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Due within one year

 

72,484

 

 

-

 

 

-

 

 

242

 

 

72,242

 

1.08

   After 1 to 5 years

 

309,459

 

 

-

 

 

-

 

 

4,996

 

 

304,463

 

1.42

   After 5 to 10 years

 

133,471

 

 

-

 

 

26

 

 

2,736

 

 

130,761

 

2.74

   After 10 years

 

39,190

 

 

-

 

 

-

 

 

254

 

 

38,936

 

2.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Puerto Rico government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   After 5 to 10 years

 

4,052

 

 

-

 

 

22

 

 

-

 

 

4,074

 

3.14

   After 10 years

 

4,035

 

 

-

 

 

-

 

 

1,301

 

 

2,734

 

6.97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States and Puerto

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Rico government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    obligations

 

619,955

 

 

-

 

 

48

 

 

9,624

 

 

610,379

 

1.76

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Freddie Mac ("FHLMC") certificates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After 5 to 10 years

 

43,037

 

 

-

 

 

12

 

 

1,305

 

 

41,744

 

1.96

After 10 years

 

262,934

 

 

-

 

 

-

 

 

8,379

 

 

254,555

 

2.28

 

 

 

305,971

 

 

-

 

 

12

 

 

9,684

 

 

296,299

 

2.23

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Ginnie Mae ("GNMA") certificates:            

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

 

136

 

 

-

 

 

3

 

 

-

 

 

139

 

2.77

After 5 to 10 years

 

65,098

 

 

-

 

 

683

 

 

137

 

 

65,644

 

3.04

After 10 years

 

140,314

 

 

-

 

 

4,492

 

 

986

 

 

143,820

 

3.81

 

 

 

205,548

 

 

-

 

 

5,178

 

 

1,123

 

 

209,603

 

3.57

 Fannie Mae ("FNMA") certificates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

 

15,735

 

 

-

 

 

177

 

 

195

 

 

15,717

 

2.89

After 5 to 10 years

 

109,562

 

 

-

 

 

-

 

 

4,279

 

 

105,283

 

1.76

After 10 years

531,560

 

 

-

 

 

1,818

 

 

14,320

 

 

519,058

 

2.52

    

 

 

656,857

 

 

-

 

 

1,995

 

 

18,794

 

 

640,058

 

2.40

Collateralized mortgage obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   guaranteed by the FHLMC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   and  GNMA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

 

8,154

 

 

-

 

 

8

 

 

11

 

 

8,151

 

2.53

After 10 years

 

34,619

 

 

-

 

 

321

 

 

-

 

 

34,940

 

2.53

 

 

 

42,773

 

 

-

 

 

329

 

 

11

 

 

43,091

 

2.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other mortgage pass-through

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     trust certificates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   After 10 years

 

21,309

 

 

5,235

 

 

-

 

 

-

 

 

16,074

 

4.49

Total mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     securities

 

1,232,458

 

 

5,235

 

 

7,514

 

 

29,612

 

 

1,205,125

 

2.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

available for sale

$

1,852,413

 

$

5,235

 

$

7,562

 

$

39,236

 

$

1,815,504

 

2.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19 


 

 

 

December 31, 2017

 

 

Amortized cost

 

Noncredit Loss Component of OTTI Recorded in OCI

 

Gross

 

Fair value

 

 

 

 

 

Unrealized

 

 

Weighted-

 

 

 

 

gains

 

losses

 

 

average yield%

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

$

7,458

 

$

-

 

$

-

 

$

57

 

$

7,401

 

1.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    agencies obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Due within one year

 

122,471

 

 

-

 

 

-

 

 

319

 

 

122,152

 

1.06

 

   After 1 to 5 years

 

309,472

 

 

-

 

 

28

 

 

3,735

 

 

305,765

 

1.42

 

   After 5 to 10 years

 

133,451

 

 

-

 

 

117

 

 

319

 

 

133,249

 

2.72

 

   After 10 years

 

40,769

 

 

-

 

 

1

 

 

149

 

 

40,621

 

1.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Puerto Rico government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   After 5 to 10 years

 

4,071

 

 

-

 

 

47

 

 

-

 

 

4,118

 

3.14

 

   After 10 years

 

3,972

 

 

-

 

 

-

 

 

1,277

 

 

2,695

 

6.97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States and Puerto

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Rico government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    obligations

 

621,664

 

 

-

 

 

193

 

 

5,856

 

 

616,001

 

1.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 FHLMC certificates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After 5 to 10 years

 

18,658

 

 

-

 

 

14

 

 

63

 

 

18,609

 

2.14

 

After 10 years

 

297,733

 

 

-

 

 

217

 

 

4,853

 

 

293,097

 

2.23

 

  

 

316,391

 

 

-

 

 

231

 

 

4,916

 

 

311,706

 

2.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 GNMA certificates:            

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

 

81

 

 

-

 

 

1

 

 

-

 

 

82

 

3.23

 

After 5 to 10 years

 

69,661

 

 

-

 

 

1,244

 

 

-

 

 

70,905

 

3.05

  

After 10 years

 

145,067

 

 

-

 

 

5,910

 

 

334

 

 

150,643

 

3.81

 

 

 

214,809

 

 

-

 

 

7,155

 

 

334

 

 

221,630

 

3.56

 FNMA certificates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

 

20,831

 

 

-

 

 

294

 

 

109

 

 

21,016

 

2.69

   

After 5 to 10 years

 

49,934

 

 

-

 

 

-

 

 

818

 

 

49,116

 

1.83

 

After 10 years

613,129

 

 

-

 

 

3,180

 

 

6,401

 

 

609,908

 

2.43

    

 

 

683,894

 

 

-

 

 

3,474

 

 

7,328

 

 

680,040

 

2.39

Collateralized mortgage obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

issued or guaranteed by

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLMC and GNMA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

 

5,918

 

 

-

 

 

14

 

 

-

 

 

5,932

 

2.21

 

After 5 to 10 years

 

2,556

 

 

-

 

 

11

 

 

-

 

 

2,567

 

2.23

 

After 10 years

 

35,331

 

 

-

 

 

231

 

 

-

 

 

35,562

 

2.22

 

 

 

43,805

 

 

-

 

 

256

 

 

-

 

 

44,061

 

2.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other mortgage pass-through

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     trust certificates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   After 10 years

 

22,791

 

 

5,731

 

 

-

 

 

-

 

 

17,060

 

2.44

Total mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   securities

 

1,281,690

 

 

5,731

 

 

11,116

 

 

12,578

 

 

1,274,497

 

2.54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within one year

 

100

 

 

-

 

 

-

 

 

-

 

 

100

 

1.48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Securities (1) 

 

424

 

 

-

 

 

-

 

 

6

 

 

418

 

2.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

available for sale

$

1,903,878

 

$

5,731

 

$

11,309

 

$

18,440

 

$

1,891,016

 

2.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

As of January 1, 2018, the Corporation adopted ASU 2016-01, resulting in the reclassification of equity securities from available-for-sale investment securities to other investment securities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20 


 

Maturities of mortgage-backed securities (“MBS”) are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted-average yield on investment securities available for sale is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gain or loss on securities available for sale and the noncredit loss component of OTTI are presented as part of OCI.

 

The following tables show the Corporation’s available-for-sale investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2018 and December 31, 2017. The tables also include debt securities for which an OTTI was recognized and only the amount related to a credit loss was recognized in earnings. For unrealized losses for which OTTI was recognized, the related credit loss was charged against the amortized cost basis of the debt security.

 

 

As of March 31, 2018

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

Fair Value

 

 Losses 

 

Fair Value

 

 Losses 

 

Fair Value

 

 Losses 

(In thousands)

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Puerto Rico-government obligations

$

-

 

$

-

 

$

2,734

 

$

1,301

 

$

2,734

 

$

1,301

   U.S. Treasury and U.S. government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      agenciesʼ obligations

 

238,248

 

 

3,306

 

 

360,298

 

 

5,017

 

 

598,546

 

 

8,323

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   FNMA

 

354,552

 

 

7,690

 

 

259,076

 

 

11,104

 

 

613,628

 

 

18,794

   FHLMC

 

138,510

 

 

2,916

 

 

157,598

 

 

6,768

 

 

296,108

 

 

9,684

   GNMA

 

68,490

 

 

1,123

 

 

-

 

 

-

 

 

68,490

 

 

1,123

   Collateralized mortgage obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      issued or guaranteed by

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      FHLMC and GNMA

 

5,907

 

 

11

 

 

-

 

 

-

 

 

5,907

 

 

11

   Other mortgage pass-through

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      trust certificates

 

-

 

 

-

 

 

16,074

 

 

5,235

 

 

16,074

 

 

5,235

 

$

805,707

 

$

15,046

 

$

795,780

 

$

29,425

 

$

1,601,487

 

$

44,471

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

Fair Value

 

 Losses 

 

Fair Value

 

 Losses 

 

Fair Value

 

 Losses 

(In thousands)

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Puerto Rico-government obligations

$

-

 

$

-

 

$

2,695

 

$

1,277

 

$

2,695

 

$

1,277

   U.S. Treasury and U.S. government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      agenciesʼ obligations

 

136,459

 

 

494

 

 

362,050

 

 

4,085

 

 

498,509

 

 

4,579

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   FNMA

 

189,699

 

 

1,705

 

 

274,963

 

 

5,623

 

 

464,662

 

 

7,328

   FHLMC

 

91,174

 

 

590

 

 

166,331

 

 

4,326

 

 

257,505

 

 

4,916

   GNMA

 

39,145

 

 

334

 

 

-

 

 

-

 

 

39,145

 

 

334

   Other mortgage pass-through

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      trust certificates

 

-

 

 

-

 

 

17,060

 

 

5,731

 

 

17,060

 

 

5,731

Equity securities (1) 

 

-

 

 

-

 

 

407

 

 

6

 

 

407

 

 

6

 

$

456,477

 

$

3,123

 

$

823,506

 

$

21,048

 

$

1,279,983

 

$

24,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) As of January 1, 2018, the Corporation adopted ASU 2016-01, resulting in the reclassification of equity securities from available-for-sale investment securities to other investment securities.

21 


 

Assessment for OTTI

 

Debt securities issued by U.S. government agencies, U.S. government-sponsored entities, and the U.S. Treasury accounted for approximately 98% of the total available-for-sale portfolio as of March 31, 2018, and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government.  The Corporation’s OTTI assessment was concentrated mainly on private label MBS, and on Puerto Rico government debt securities, for which credit losses are evaluated on a quarterly basis. The Corporation considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

 

·         The length of time and the extent to which the fair value has been less than the amortized cost basis;

·         Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the financial condition of the issuer, credit ratings, the failure of the issuer to make scheduled principal or interest payments, recent legislation and government actions affecting the issuer’s industry, and actions taken by the issuer to deal with the present economic climate;

·         Changes in the near term prospects of the underlying collateral for a security, if any, such as changes in default rates, loss severity given default, and significant changes in prepayment assumptions; and

·         The level of cash flows generated from the underlying collateral, if any, supporting the principal and interest payments of the debt securities.

 

The Corporation recorded OTTI losses on available-for-sale debt securities as follows:

 

 

 

 

 

 

 

Quarter ended March 31,

 

 

 

2018

 

2017

 

 

(In thousands)

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

$

-

 

$

(12,231)

 

 

Portion of other-than-temporary impairment recognized in OCI

 

-

 

 

-

 

 

Net impairment losses recognized in earnings (1)

$

-

 

$

(12,231)

 

 

_________

 

 

 

 

 

 

(1)

Credit losses on Puerto Rico government debt securities, recorded in the first quarter of 2017.

 

 

 

 

 

 

 

 

 

 

 

     The following tables summarize the roll-forward of credit losses on debt securities held by the Corporation for which a portion of an OTTI is recognized in OCI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative OTTI credit losses recognized in earnings on securities still held

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit impairments

 

 

 

 

 

December 31,

 

recognized in earnings on

 

March 31,

 

 

 

2017

 

securities that have been

 

2018

 

 

 

Balance

 

previously impaired

 

Balance

 

(In thousands)

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

     Private label MBS

$

6,792

 

$

-

 

$

6,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative OTTI credit losses recognized in earnings on securities still held

 

 

 

 

 

 

Credit impairments

 

 

 

 

 

December 31,

 

recognized in earnings on

 

March 31,

 

 

 

2016

 

securities that have been

 

2017

 

 

 

Balance

 

 previously impaired

 

Balance

 

(In thousands)

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

 

 

 

 

 

 

 

     Puerto Rico government obligations

$

22,189

 

$

12,231

 

$

34,420

 

     Private label MBS

 

6,792

 

$

-

 

 

6,792

 

Total OTTI credit losses for available-for-sale

 

 

 

 

 

 

 

 

 

    debt securities

$

28,981

 

$

12,231

 

$

41,212

 

 

 

 

 

 

 

 

 

 

 

22 


 

 

During the second quarter of 2017, the Corporation sold for an aggregate of $23.4 million three Puerto Rico government available-for-sale debt securities, specifically bonds of the Government Development Bank for Puerto Rico (the “GDB”) and the Puerto Rico Public Buildings Authority, carried on its book at an amortized cost at the time of sale of $23.0 million (net of $34.4 million in cumulative OTTI impairment charges). Approximately $12.2 million of the cumulative OTTI charges on these securities was recorded in the first quarter of 2017.

 

  For the OTTI charge recorded on the Puerto Rico government debt securities in the first quarter of 2017, the Corporation considered the latest available information about the Puerto Rico government’s financial condition, including but not limited to credit ratings downgrades, revised estimates of recovery rates, and other relevant developments such as government actions, including debt exchange proposals and the fiscal plan published by the Puerto Rico government in March 2017, as applicable. The Corporation applied a discounted cash flow analysis to its Puerto Rico government debt securities in order to calculate the cash flows expected to be collected and to determine if any portion of the decline in market value of these securities was considered a credit-related OTTI. The analysis derived an estimate of value based on the present value of risk-adjusted cash flows of the underlying securities and included consideration of the following components:

·         The contractual future cash flows of the bonds were projected based on the key terms as set forth in the official statements for each security. Such key terms include, among others, the interest rate, amortization schedule, if any, and maturity date.

 

·         The risk-adjusted cash flows were calculated based on a probability of default analysis and recovery rate assumptions, including the weighting of different scenarios of ultimate recovery, considering the credit rating of each security. Constant monthly default rates were assumed throughout the life of the bonds, which considered the respective security's credit rating as of the date of the analysis.

 

·         The adjusted future cash flows were then discounted at the original effective yield of each investment based on the purchase price and expected risk-adjusted future cash flows as of the purchase date of each investment.

The discounted risk-adjusted cash flow analysis for the three Puerto Rico government bonds mentioned above assumed a default probability of 100%, as these three non-performing bonds had been in default since the third quarter of 2016. Based on this analysis, the Corporation recorded in the first quarter of 2017 credit-related OTTI amounting to $12.2 million, assuming recovery rates ranging from 15% to 80% (with a weighted average of 41%).

 

In addition, the Corporation performed on OTTI assessment on its private label MBS, which are collateralized by fixed-rate mortgages on single-family residential properties in the United States. The interest rate on these private-label MBS is variable, tied to 3-month LIBOR and limited to the weighted-average coupon on the underlying collateral. The underlying mortgages are fixed-rate, single-family loans with original FICO scores (over 700) and moderate loan-to-value ratios (under 80%), as well as moderate delinquency levels. Based on the expected cash flows, and since the Corporation does not have the intention to sell the securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, only the credit loss component, if any, is reflected in earnings.  Significant assumptions in the valuation of the private label MBS were as follows:

 

 

As of

 

As of

 

March 31, 2018

 

December 31, 2017

 

Weighted

 

 

 

Weighted

 

 

 

Average

 

Range

 

Average

 

Range

 

 

 

 

 

 

 

 

Discount rate

14.5%

 

14.5%

 

14.0%

 

14.0%

Prepayment rate

15.2%

 

7.5% - 24.5%

 

16.4%

 

12.0% - 29.0%

Projected Cumulative Loss Rate

4%

 

0% - 9%

 

3%

 

0% - 6.8%

 

 No OTTI charges on private label MBS were recorded in either the first quarter of 2018 or the first quarter of 2017.

 

 

 

23 


 

Investments Held to Maturity

 

The amortized cost, gross unrealized gains and losses, approximate fair value, weighted-average yield and contractual maturities of investment securities held to maturity as of March 31, 2018 and December 31, 2017 were as follows:

 

 

 

March 31, 2018

 

 

Amortized cost

 

 

 

 

Fair value

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

gains

 

losses

 

 

average yield%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Puerto Rico Municipal Bonds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   After 1 to 5 years

$

3,712

 

 

$

-

 

$

161

 

$

3,551

 

5.39

 

   After 5 to 10 years

 

39,523

 

 

 

-

 

 

2,703

 

 

36,820

 

5.35

 

   After 10 years

 

107,251

 

 

 

-

 

 

12,766

 

 

94,485

 

5.21

Total investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

held to maturity

$

150,486

 

 

$

-

 

$

15,630

 

$

134,856

 

5.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Amortized cost

 

 

 

 

Fair value

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

gains

 

losses

 

 

average-yield%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Puerto Rico Municipal Bonds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   After 1 to 5 years

$

3,853

 

 

$

-

 

$

173

 

$

3,680

 

5.38

 

   After 5 to 10 years

 

39,523

 

 

 

-

 

 

3,048

 

 

36,475

 

5.28

 

   After 10 years

 

107,251

 

 

 

-

 

 

16,374

 

 

90,877

 

4.93

Total investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

held to maturity

$

150,627

 

 

$

-

 

$

19,595

 

$

131,032

 

5.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24 


 

The following tables show the Corporation’s held-to-maturity investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2018 and December 31, 2017:

 

 

As of March 31, 2018

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

Fair Value

 

 Losses 

 

Fair Value

 

 Losses 

 

Fair Value

 

 Losses 

 

 

(In thousands)

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Puerto Rico Municipal Bonds

$

-

 

$

-

 

$

134,856

 

$

15,630

 

$

134,856

 

$

15,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

Fair Value

 

 Losses 

 

Fair Value

 

 Losses 

 

Fair Value

 

 Losses 

 

 

(In thousands)

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Puerto Rico Municipal Bonds

$

-

 

$

-

 

$

131,032

 

$

19,595

 

$

131,032

 

$

19,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     The Corporation determines the fair market value of Puerto Rico Municipal Bonds based on a discounted cash flow analysis using risk-adjusted discount rates. A security with similar characteristics traded in the open market is used as a proxy for each municipal bond. Then the cash flow is discounted at the average spread over the discount curve exhibited by the proxy security at the end of each quarter.

          

    Approximately 70% of the held-to-maturity municipal bonds were issued by three of the largest municipalities in Puerto Rico. The vast majority of revenues of these three municipalities is independent of the Puerto Rico central government. These obligations typically are not issued in bearer form, nor are they registered with the SEC and are not rated by external credit agencies. In most cases, these bonds have priority over the payment of operating costs and expenses of the municipality, which are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and loans. The PROMESA oversight board has not designated any of Puerto Rico’s 78 municipalities as covered entities under PROMESA. However, while the fiscal plan recently certified by the PROMESA oversight board did not contemplate a restructuring of the debt of Puerto Rico’s municipalities, the plan did call for the gradual elimination of budgetary subsidies provided to municipalities by the central government. Furthermore, municipalities are also likely to be affected by the negative economic and other effects resulting from the recent hurricanes and from expense, revenue or cash management measures taken by the Puerto Rico government to address its fiscal and liquidity shortfalls, or measures included in fiscal plans of other government entities, such as the fiscal plans of the GDB and the Puerto Rico Electric Power Authority (“PREPA”). Given the uncertain effect that the negative fiscal situation of the Puerto Rico central government and the measures taken or to be taken by other government entities may have on municipalities, the Corporation cannot be certain if future impairment charges will be required relating to these securities.

 

     From time to time, the Corporation has securities held to maturity with an original maturity of three months or less that are considered cash and cash equivalents and classified as money market investments in the consolidated statements of financial condition.  As of March 31, 2018 and December 31, 2017, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents.  

25 


 

NOTE 6 – OTHER INVESTMENT SECURITIES

 

Institutions that are members of the FHLB system are required to maintain a minimum investment in FHLB stock. Such minimum investment is calculated as a percentage of aggregate outstanding mortgages, and the FHLB requires an additional investment that is calculated as a percentage of total FHLB advances, letters of credit, and the collateralized portion of outstanding interest-rate swaps. The stock is capital stock issued at $100 par value. Both stock and cash dividends may be received on FHLB stock.

 

As of each March 31, 2018 and December 31, 2017, the Corporation had investments in FHLB stock with a book value of $40.9 million. The net realizable value is a reasonable proxy for the fair value of these instruments. Dividend income from FHLB stock for the quarters ended March 31, 2018 and 2017 was $0.7 million and $0.5 million, respectively.

 

The FHLB of New York issued the shares of FHLB stock owned by the Corporation. The FHLB of New York is part of the Federal Home Loan Bank System, a national wholesale banking network of 11 regional, stockholder-owned congressionally chartered banks. The Federal Home Loan Banks are all privately capitalized and operated by their member stockholders. The system is supervised by the Federal Housing Finance Agency, which ensures that the Federal Home Loan Banks operate in a financially safe and sound manner, remain adequately capitalized and able to raise funds in the capital markets, and carry out their housing finance mission.

 

As of January 1, 2018, the Corporation adopted ASU 2016-01, resulting in the reclassification of equity securities with readily determinable fair value of approximately $0.4 million from available-for-sale investment securities to other investment securities. During the first quarter of 2018, the Corporation measured these equity securities at fair value through earnings resulting in the recognition of a market-to-market loss of $7 thousand recorded as part of other non-interest income in the statement of income.

 

The Corporation has other equity securities that do not have a readily-available fair value. The carrying value of such securities as of each March 31, 2018 and December 31, 2017 was $2.2 million.

 

NOTE 7 – LOANS HELD FOR INVESTMENT

 

The following provides information about the loan portfolio held for investment:

 

 

 

 

As of

 

 

As of

 

 

March 31,

 

December 31,

 

 

 

2018

 

 

2017

(In thousands)

 

 

 

 

 

 

 

 

Residential mortgage loans, mainly secured by first mortgages

$

3,267,868

 

$

3,290,957

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

      Construction loans (1) 

 

79,150

 

 

111,397

      Commercial mortgage loans (1) 

 

1,552,503

 

 

1,614,972

      Commercial and Industrial loans (2) 

 

2,061,773

 

 

2,083,253

Total Commercial loans

 

3,693,426

 

 

3,809,622

 

 

 

 

 

 

 

Finance leases

 

262,863

 

 

257,462

 

 

 

 

 

 

 

Consumer loans

 

1,471,733

 

 

1,492,435

 

 

 

 

 

 

 

Loans held for investment (2)

 

8,695,890

 

 

8,850,476

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

(225,856)

 

 

(231,843)

 

 

 

 

 

 

 

Loans held for investment, net

$

8,470,034

 

$

8,618,633

__________

(1)

During the first quarter of 2018, the Corporation transferred $57.2 million (net of fair value write-downs of $9.7 million) in non-performing loans to held for sale. Loans transferred to held for sale consisted of a $30.0 million non-performing construction loan (net of a $5.1 million fair value write-down) and two non-performing commercial mortgage loans totaling $27.2 million (net of fair value write-downs of $4.6 million).

(2)

As of March 31, 2018 and December 31, 2017, includes $823.2 million and $833.5 million, respectively, of commercial loans that are secured by real estate but are not dependent upon the real estate for repayment.

26 


 

       Loans held for investment on which accrual of interest income had been discontinued were as follows:

 

 

As of

 

As of

 

March 31,

 

December 31,

 

2018

 

2017

(In thousands)

 

 

 

 

 

Non-performing loans:

 

 

 

 

 

   Residential mortgage

$

171,380

 

$

178,291

   Commercial mortgage (1) 

 

115,179

 

 

156,493

   Commercial and Industrial

 

85,325

 

 

85,839

   Construction:

 

 

 

 

 

      Land

 

14,949

 

 

15,026

      Construction-commercial (1) 

 

-

 

 

35,100

      Construction-residential

 

1,287

 

 

1,987

   Consumer:

 

 

 

 

 

      Auto loans

 

13,453

 

 

10,211

      Finance leases

 

1,801

 

 

1,237

      Other consumer loans

 

8,603

 

 

5,370

Total non-performing loans held for investment (2)(3)(4) 

$

411,977

 

$

489,554

_______________

 

 

 

 

 

 

 

(1)

During the first quarter of 2018, the Corporation transferred $57.2 million (net of fair value write-downs of $9.7 million) in non-performing loans to held for sale. Loans transferred to held for sale consisted of a $30.0 million non-performing construction loan (net of a $5.1 million fair value write-down) and two non-performing commercial mortgage loans totaling $27.2 million (net of fair value write-downs of $4.6 million).

 

 

 

 

 

 

 

(2)

Excludes $64.9 million and $8.3 million of non-performing loans held for sale as of March 31, 2018 and December 31, 2017, respectively.

 

  

 

 

 

 

 

(3)

Amount excludes purchased-credit impaired ("PCI") loans with a carrying value of approximately $155.3 million and $158.2 million as of March 31, 2018 and December 31, 2017, respectively, primarily mortgage loans acquired from Doral Bank in the first quarter of 2015 and from Doral Financial in the second quarter of 2014, as further discussed below. These loans are not considered non-performing due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using an estimated cash flow analysis.

 

  

 

 

 

 

 

(4)

Non-performing loans exclude $366.4 million and $374.7 million of Troubled Debt Restructuring ("TDR") loans that are in compliance with the modified terms and in accrual status as of March 31, 2018 and December 31, 2017, respectively.

 

During the first quarter of 2018, the Corporation transferred to held for sale three non-performing commercial and construction loans. The aggregate recorded investment in these loans was written down to $57.2 million, which resulted in charge-offs of $9.7 million of which $4.1 million was taken against previously-established reserves for loan losses, resulting in a charge to the provision for loan and lease losses of $5.6 million for the first quarter of 2018. Loans transferred to held for sale consisted of a $30.0 million non-performing construction loan (net of a $5.1 million fair value write-down) and two non-performing commercial mortgage loans totaling $27.2 million (net of fair value write-downs of $4.6 million).

 

Loans in Process of Foreclosure

    As of March 31, 2018, the recorded investment of residential mortgage loans collateralized by residential real estate property that are in the process of foreclosure amounted to $152.3 million, including $22.7 million of loans insured by the FHA or guaranteed by the VA, and $18.2 million of PCI loans. The Corporation commences the foreclosure process on residential real estate loans when a borrower becomes 120 days delinquent in accordance with the guidelines of the Consumer Financial Protection Bureau (“CFPB”). Foreclosure procedures and timelines vary depending on whether the property is located in a judicial or non-judicial state. Judicial states (Puerto Rico, Florida and USVI) require the foreclosure to be processed through the state’s court while foreclosure in non-judicial states (BVI) is processed without court intervention. Foreclosure timelines vary according to state law and investor guidelines. Occasionally, foreclosures may be delayed due to, among other reasons, mandatory mediations, bankruptcy, court delays and title issues.  

27 


 

      The Corporation’s aging of the loans held for investment portfolio is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 Days Past Due

 

60-89 Days Past Due

 

90 days or more Past Due (1) 

 

Total Past Due

 

Purchased Credit-Impaired Loans

 

Current

 

Total loans held for investment

 

90 days past due and still accruing

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   FHA/VA and other government-guaranteed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      loans (2)(3)(4) 

$

-

 

$

3,665

 

$

107,693

 

$

111,358

 

$

-

 

$

35,927

 

$

147,285

 

$

107,693

   Other residential mortgage loans (4) 

 

-

 

 

57,505

 

 

186,535

 

 

244,040

 

 

151,067

 

 

2,725,476

 

 

3,120,583

 

 

15,155

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Commercial and Industrial loans

 

13,137

 

 

2,419

 

 

86,095

 

 

101,651

 

 

-

 

 

1,960,122

 

 

2,061,773

 

 

770

   Commercial mortgage loans (4) 

 

-

 

 

49,807

 

 

119,156

 

 

168,963

 

 

4,214

 

 

1,379,326

 

 

1,552,503

 

 

3,977

   Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Land (4) 

 

-

 

 

12

 

 

17,108

 

 

17,120

 

 

-

 

 

9,330

 

 

26,450

 

 

2,159

     Construction-commercial

 

-

 

 

1,012

 

 

-

 

 

1,012

 

 

-

 

 

45,227

 

 

46,239

 

 

-

     Construction-residential (4) 

 

-

 

 

-

 

 

2,488

 

 

2,488

 

 

-

 

 

3,973

 

 

6,461

 

 

1,201

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Auto loans

 

32,438

 

 

7,891

 

 

13,453

 

 

53,782

 

 

-

 

 

784,711

 

 

838,493

 

 

-

   Finance leases

 

5,843

 

 

2,216

 

 

1,801

 

 

9,860

 

 

-

 

 

253,003

 

 

262,863

 

 

-

   Other consumer loans

 

13,701

 

 

4,577

 

 

10,434

 

 

28,712

 

 

-

 

 

604,528

 

 

633,240

 

 

1,831

      Total loans held for investment

$

65,119

 

$

129,104

 

$

544,763

 

$

738,986

 

$

155,281

 

$

7,801,623

 

$

8,695,890

 

$

132,786

_____________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Includes non-performing loans and accruing loans that are contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges and fees until charged-off at 180 days.

(2)

It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past-due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $30.6 million of residential mortgage loans insured by the FHA or guaranteed by the VA that are over 15 months delinquent, and are no longer accruing interest as of March 31, 2018.

(3)

As of March 31, 2018, includes $73.3 million of defaulted loans collateralizing Government National Mortgage Association ("GNMA") securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.

(4)

According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears two or more monthly payments. FHA/VA and other government-guaranteed loans, other residential mortgage loans, commercial mortgage loans, land loans, and construction-residential loans past due 30-59 days as of March 31, 2018 amounted to $6.8 million, $122.0 million, $5.2 million, $0.6 million, and $0.2 million respectively.

 

      

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 Days Past Due

 

60-89 Days Past Due

 

90 days or more Past Due (1) 

 

Total Past Due

 

Purchased Credit- Impaired Loans

 

Current

 

Total loans held for investment

 

90 days past due and still accruing (2) (3)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   FHA/VA and other government-guaranteed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      loans (2)(3)(4) 

$

-

 

$

6,792

 

$

102,815

 

$

109,607

 

$

-

 

$

29,332

 

$

138,939

 

$

102,815

   Other residential mortgage loans (4) 

 

-

 

 

92,502

 

 

193,750

 

 

286,252

 

 

153,991

 

 

2,711,775

 

 

3,152,018

 

 

15,459

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Commercial and Industrial loans

 

8,971

 

 

576

 

 

88,156

 

 

97,703

 

 

-

 

 

1,985,550

 

 

2,083,253

 

 

2,317

   Commercial mortgage loans (4) 

 

-

 

 

7,525

 

 

163,180

 

 

170,705

 

 

4,183

 

 

1,440,084

 

 

1,614,972

 

 

6,687

   Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Land (4) 

 

-

 

 

124

 

 

15,177

 

 

15,301

 

 

-

 

 

11,630

 

 

26,931

 

 

151

      Construction-commercial

 

-

 

 

-

 

 

35,100

 

 

35,100

 

 

-

 

 

41,456

 

 

76,556

 

 

-

      Construction-residential

 

-

 

 

95

 

 

1,987

 

 

2,082

 

 

-

 

 

5,828

 

 

7,910

 

 

-

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Auto loans

 

57,560

 

 

23,783

 

 

10,211

 

 

91,554

 

 

-

 

 

752,777

 

 

844,331

 

 

-

   Finance leases

 

10,549

 

 

3,484

 

 

1,237

 

 

15,270

 

 

-

 

 

242,192

 

 

257,462

 

 

-

   Other consumer loans

 

10,776

 

 

5,052

 

 

9,361

 

 

25,189

 

 

-

 

 

622,915

 

 

648,104

 

 

3,991

      Total loans held for investment

$

87,856

 

$

139,933

 

$

620,974

 

$

848,763

 

$

158,174

 

$

7,843,539

 

$

8,850,476

 

$

131,420

____________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Includes non-performing loans and accruing loans that are contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges and fees until charged-off at 180 days.

(2)

It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past-due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $29.9 million of residential mortgage loans insured by the FHA or guaranteed by the VA that are over 15 months delinquent, and are no longer accruing interest as of December 31, 2017.

(3)

As of December 31, 2017, includes $62.1 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.

(4)

According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears on two or more monthly payments. FHA/VA and other government-guaranteed loans, other residential mortgage loans, commercial mortgage loans, and land loans past due 30-59 days as of December 31, 2017 amounted to $6.0 million, $224.0 million, $9.0 million, and $2.5 million, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28 


 

 

 The Corporation’s credit quality indicators by loan type as of March 31, 2018 and December 31, 2017 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Credit Exposure-Credit Risk Profile Based on Creditworthiness Category:

 

 

Substandard

 

Doubtful

 

Loss

 

Total Adversely Classified (1)

 

Total Portfolio

March 31, 2018

 

 

 

 

(In thousands)

 

 

Commercial mortgage

$

269,926

 

$

2,117

 

$

-

 

$

272,043

 

$

1,552,503

Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Land

 

15,971

 

 

391

 

 

-

 

 

16,362

 

 

26,450

  Construction-commercial

 

-

 

 

-

 

 

-

 

 

-

 

 

46,239

  Construction-residential

 

1,287

 

 

-

 

 

-

 

 

1,287

 

 

6,461

Commercial and Industrial

 

144,205

 

 

7,745

 

 

729

 

 

152,679

 

 

2,061,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Credit Exposure-Credit Risk Profile Based on Creditworthiness Category:

 

 

Substandard

 

Doubtful

 

Loss

 

Total Adversely Classified (1) 

 

Total Portfolio

December 31, 2017

 

 

 

 

(In thousands)

 

 

Commercial mortgage

$

257,503

 

$

4,166

 

$

-

 

$

261,669

 

$

1,614,972

Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Land

 

15,971

 

 

490

 

 

-

 

 

16,461

 

 

26,931

  Construction-commercial

 

35,100

 

 

-

 

 

-

 

 

35,100

 

 

76,556

  Construction-residential

 

1,987

 

 

-

 

 

-

 

 

1,987

 

 

7,910

Commercial and Industrial

 

154,416

 

 

3,854

 

 

676

 

 

158,946

 

 

2,083,253

_________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 Excludes non-peforming loans held for sale of $64.9 million ($27.2 million commercial mortgage, $30.0 million construction-commercial, and $7.7 million construction-land) and $8.3 million (construction-land) as of March 31, 2018 and December 31, 2017, respectively.

29 


 

The Corporation considers a loan as adversely classified if its risk rating is Substandard, Doubtful or Loss.   These categories are defined as follows:

 

Substandard – A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful – Doubtful classifications have all of the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently known facts, conditions and values. A Doubtful classification may be appropriate in cases where significant risk exposures are perceived, but loss cannot be determined because of specific reasonable pending factors, which may strengthen the credit in the near term.

 

Loss – Assets classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset even though partial recovery may occur in the future. There is little or no prospect for near term improvement and no realistic strengthening action of significance pending.

 

March 31, 2018

Consumer Credit Exposure-Credit Risk Profile Based on Payment Activity

 

 

Residential Real-Estate

 

Consumer

 

 

FHA/VA/ Guaranteed (1)

 

Other residential loans

 

Auto

 

Finance Leases

 

Other Consumer

(In thousands)

 

 

Performing

$

147,285

 

$

2,798,136

 

$

825,040

 

$

261,062

 

$

624,637

Purchased Credit-Impaired (2) 

 

-

 

 

151,067

 

 

-

 

 

-

 

 

-

Non-performing

 

-

 

 

171,380

 

 

13,453

 

 

1,801

 

 

8,603

   Total

$

147,285

 

$

3,120,583

 

$

838,493

 

$

262,863

 

$

633,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as 90 days past-due loans and still accruing as opposed to non-performing loans since the principal repayment is insured. This balance includes $30.6 million of residential mortgage loans insured by the FHA or guaranteed by the VA, which are over 15 months delinquent, and are no longer accruing interest as of March 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

PCI loans are excluded from non-performing statistics due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

Consumer Credit Exposure-Credit Risk Profile Based on Payment Activity

 

 

 

Residential Real-Estate

 

Consumer

 

 

FHA/VA/ Guaranteed (1)

 

Other residential loans

 

Auto

 

Finance Leases

 

Other Consumer

(In thousands)

 

 

Performing

$

138,939

 

$

2,819,736

 

$

834,120

 

$

256,225

 

$

642,734

Purchased Credit-Impaired (2) 

 

-

 

 

153,991

 

 

-

 

 

-

 

 

-

Non-performing

 

-

 

 

178,291

 

 

10,211

 

 

1,237

 

 

5,370

   Total

$

138,939

 

$

3,152,018

 

$

844,331

 

$

257,462

 

$

648,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as 90 days past due loans and still accruing as opposed to non-performing loans since the principal repayment is insured. This balance includes $29.9 million of residential mortgage loans insured by the FHA or guaranteed by the VA that are over 15 months delinquent, and are no longer accruing interest as of December 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

PCI loans are excluded from non-performing statistics due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

 

30 


 

    The following tables present information about impaired loans held for investment, excluding PCI loans, which are reported separately as discussed below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Specific Allowance

 

Average Recorded Investment

 

Interest Income Recognized On Accrual Basis

 

Interest Income Recognized On Cash Basis

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   FHA/VA-Guaranteed loans

$

-

 

$

 -    

 

$

-

 

$

-

 

$

-

 

$

-

   Other residential mortgage loans

 

94,817

 

 

126,672

 

 

-

 

 

95,274

 

 

723

 

 

170

   Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Commercial mortgage loans

 

60,811

 

 

99,837

 

 

-

 

 

61,445

 

 

82

 

 

37

      Commercial and Industrial loans

 

24,712

 

 

27,679

 

 

-

 

 

24,825

 

 

246

 

 

11

   Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Land 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

         Construction-commercial

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

         Construction-residential

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

   Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Auto loans

 

387

 

 

387

 

 

-

 

 

394

 

 

2

 

 

-

      Finance leases

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

      Other consumer loans

 

2,266

 

 

3,051

 

 

-

 

 

2,327

 

 

29

 

 

17

 

$

182,993

 

$

257,626

 

$

-

 

$

184,265

 

$

1,082

 

$

235

With a related specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   FHA/VA-Guaranteed loans

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

   Other residential mortgage loans

 

322,793

 

 

359,048

 

 

22,546

 

 

324,110

 

 

3,654

 

 

231

   Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Commercial mortgage loans

 

101,315

 

 

117,838

 

 

13,451

 

 

102,304

 

 

661

 

 

47

      Commercial and Industrial loans

 

95,066

 

 

117,400

 

 

14,375

 

 

92,382

 

 

302

 

 

20

   Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Land 

 

11,815

 

 

20,001

 

 

1,432

 

 

11,864

 

 

25

 

 

8

         Construction-commercial

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

         Construction-residential

 

252

 

 

355

 

 

52

 

 

252

 

 

-

 

 

-

   Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Auto loans

 

20,424

 

 

20,424

 

 

3,379

 

 

20,943

 

 

397

 

 

-

      Finance leases

 

1,876

 

 

1,876

 

 

84

 

 

1,958

 

 

35

 

 

-

      Other consumer loans

 

9,746

 

 

10,092

 

 

1,611

 

 

9,913

 

 

283

 

 

27

 

$

563,287

 

$

647,034

 

$

56,930

 

$

563,726

 

$

5,357

 

$

333

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   FHA/VA-Guaranteed loans

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

   Other residential mortgage loans

 

417,610

 

 

485,720

 

 

22,546

 

 

419,384

 

 

4,377

 

 

401

   Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Commercial mortgage loans

 

162,126

 

 

217,675

 

 

13,451

 

 

163,749

 

 

743

 

 

84

      Commercial and Industrial loans

 

119,778

 

 

145,079

 

 

14,375

 

 

117,207

 

 

548

 

 

31

   Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Land 

 

11,815

 

 

20,001

 

 

1,432

 

 

11,864

 

 

25

 

 

8

         Construction-commercial

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

         Construction-residential

 

252

 

 

355

 

 

52

 

 

252

 

 

-

 

 

-

   Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Auto loans

 

20,811

 

 

20,811

 

 

3,379

 

 

21,337

 

 

399

 

 

-

      Finance leases

 

1,876

 

 

1,876

 

 

84

 

 

1,958

 

 

35

 

 

-

      Other consumer loans

 

12,012

 

 

13,143

 

 

1,611

 

 

12,240

 

 

312

 

 

44

 

$

746,280

 

$

904,660

 

$

56,930

 

$

747,991

 

$

6,439

 

$

568

31 


 

Impaired Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Specific Allowance

 

Average Recorded Investment

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

With no related specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

   FHA/VA-Guaranteed loans

$

-

 

$

-

 

$

-

 

$

-

 

   Other residential mortgage loans

 

116,818

 

 

154,048

 

 

-

 

 

120,241

 

   Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

      Commercial mortgage loans

 

65,100

 

 

100,612

 

 

-

 

 

86,563

 

      Commercial and Industrial loans

 

28,292

 

 

31,254

 

 

-

 

 

28,567

 

   Construction:

 

 

 

 

 

 

 

 

 

 

 

 

         Land

 

48

 

 

49

 

 

-

 

 

48

 

        Construction-commercial

 

-

 

 

-

 

 

-

 

 

-

 

        Construction-residential

 

-

 

 

-

 

 

-

 

 

-

 

   Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

      Auto loans

 

267

 

 

267

 

 

-

 

 

290

 

      Finance leases

 

-

 

 

-

 

 

-

 

 

-

 

      Other consumer loans

 

2,521

 

 

3,688

 

 

-

 

 

2,745

 

 

$

213,046

 

$

289,918

 

$

-

 

$

238,454

 

With a related specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

   FHA/VA-Guaranteed loans

$

-

 

$

-

 

$

-

 

$

-

 

   Other residential mortgage loans

 

316,616

 

 

349,284

 

 

22,086

 

 

318,606

 

   Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

      Commercial mortgage loans

 

87,814

 

 

124,084

 

 

9,783

 

 

93,720

 

      Commercial and Industrial loans

 

90,008

 

 

112,005

 

 

12,359

 

 

92,666

 

   Construction:

 

 

 

 

 

 

 

 

 

 

 

 

         Land

 

11,865

 

 

19,973

 

 

1,402

 

 

14,126

 

        Construction-commercial

 

35,101

 

 

38,595

 

 

560

 

 

35,996

 

        Construction-residential

 

252

 

 

355

 

 

55

 

 

252

 

   Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

      Auto loans

 

22,338

 

 

22,338

 

 

3,665

 

 

24,328

 

      Finance leases

 

2,184

 

 

2,184

 

 

104

 

 

2,428

 

      Other consumer loans

 

11,084

 

 

11,830

 

 

1,396

 

 

11,579

 

 

$

577,262

 

$

680,648

 

$

51,410

 

$

593,701

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

   FHA/VA-Guaranteed loans

$

-

 

$

-

 

$

-

 

$

-

 

   Other residential mortgage loans

 

433,434

 

 

503,332

 

 

22,086

 

 

438,847

 

   Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

      Commercial mortgage loans

 

152,914

 

 

224,696

 

 

9,783

 

 

180,283

 

      Commercial and Industrial loans

 

118,300

 

 

143,259

 

 

12,359

 

 

121,233

 

   Construction:

 

 

 

 

 

 

 

 

 

 

 

 

         Land

 

11,913

 

 

20,022

 

 

1,402

 

 

14,174

 

        Construction-commercial

 

35,101

 

 

38,595

 

 

560

 

 

35,996

 

        Construction-residential

 

252

 

 

355

 

 

55

 

 

252

 

   Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

      Auto loans

 

22,605

 

 

22,605

 

 

3,665

 

 

24,618

 

      Finance leases

 

2,184

 

 

2,184

 

 

104

 

 

2,428

 

      Other consumer loans

 

13,605

 

 

15,518

 

 

1,396

 

 

14,324

 

 

$

790,308

 

$

970,566

 

$

51,410

 

$

832,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income of approximately $6.9 million ($6.4 million on an accrual basis and $0.5 million on a cash basis) was recognized on impaired loans for the first quarter of 2017.

 

32 


 

 

    The following table shows the activity for impaired loans and the related specific reserve during  the first quarter of 2018 and 2017:

 

 

 

 

 

 

 

 

 

Quarter ended

 

 

March 31, 2018

 

March 31, 2017

Impaired Loans:

(In thousands)

   Balance at beginning of period

$

790,308

 

$

887,905

   Loans determined impaired during the period

 

61,408

 

 

19,628

   Charge-offs (1) (2)

 

(17,213)

 

 

(17,404)

   Loans sold, net of charge-offs

 

(4,121)

 

 

(53,245)

   Increases to existing impaired loans

 

6,998

 

 

541

   Foreclosures

 

(11,675)

 

 

(9,457)

   Loans no longer considered impaired

 

(1,507)

 

 

(892)

   Loans transferred to held for sale

 

(57,213)

 

 

-

   Paid in full or partial payments

 

(20,705)

 

 

(19,878)

      Balance at end of period

$

746,280

 

$

807,198

 

 

 

 

 

 

 

(1)

The first quarter of 2018 includes charge-offs totaling $9.7 million associated with the $57.2 million in non-performing loans transferred to held for sale.

(2)

 The first quarter of 2017 includes a charge-off of $10.7 million related to the sale of the PREPA credit line as further discussed below.

 

 

 

 

 

 

 

 

Quarter ended

 

March 31, 2018

 

March 31, 2017

Specific Reserve:

(In thousands)

   Balance at beginning of period

$

51,410

 

$

64,421

   Provision for loan losses

 

22,703

 

 

18,862

   Net charge-offs

 

(17,183)

 

 

(16,972)

      Balance at end of period

$

56,930

 

$

66,311

 

 

 

 

 

 

33 


 

Purchased Credit Impaired Loans (PCI)

 

   The Corporation acquired PCI loans accounted for under ASC 310-30 as part of a transaction that closed on February 27, 2015 in which FirstBank acquired 10 Puerto Rico branches of Doral Bank, and acquired certain assets, including PCI loans, and assumed deposits, through an alliance with Banco Popular of Puerto Rico, that was the successful lead bidder with the FDIC on the failed Doral Bank, as well as other co-bidders. The Corporation also acquired PCI loans in previously completed asset acquisitions that are accounted for under ASC 310-30. These previous transactions include the acquisition from Doral Financial in the second quarter of 2014 of all its rights, title and interest in first and second residential mortgages loans in full satisfaction of secured borrowings owed by such entity to FirstBank.

 

Under ASC 310-30, the acquired PCI loans were aggregated into pools based on similar characteristics (i.e. delinquency status and loan terms). Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Since the loans are accounted for under ASC 310-30, they are not considered non-performing and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The Corporation recognizes additional losses on this portfolio when it is probable that the Corporation will be unable to collect all cash flows expected as of the acquisition date plus additional cash flows expected to be collected arising from changes in estimates after the acquisition date.       

 

The carrying amounts of PCI loans were as follows:

 

 

As of

 

 

March 31,

 

 

December 31,

 

 

2018

 

 

2017

(In thousands)

 

Residential mortgage loans

$

151,067

 

$

153,991

Commercial mortgage loans

 

4,214

 

 

4,183

Total PCI loans

$

155,281

 

$

158,174

Allowance for loan losses

 

(11,251)

 

 

(11,251)

Total PCI loans, net of allowance for loan losses

$

144,030

 

$

146,923

 

 

 

 

 

 

 

 

 

The following tables present PCI loans by past due status as of March 31, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

30-59 Days

 

60-89 Days

 

90 days or more

 

Total Past Due

 

 

 

Total PCI loans

 

 

 

 

 

 

Current

 

(In thousands)

 

Residential mortgage loans

$

-

 

$

8,291

 

$

27,025

 

$

35,316

 

$

115,751

 

$

151,067

Commercial mortgage loans

 

-

 

 

-

 

 

3,234

 

 

3,234

 

 

980

 

 

4,214

Total (1) 

$

-

 

$

8,291

 

$

30,259

 

$

38,550

 

$

116,731

 

$

155,281

_____________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage and commercial mortgage loans are considered past due when the borrower is in arrears two or more monthly payments. PCI residential mortgage loans and commercial mortgage loans past due 30-59 days as of March 31, 2018 amounted to $13.5 million and $0.2 million, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

30-59 Days

 

60-89 Days

 

90 days or more

 

Total Past Due

 

 

 

Total PCI loans

 

 

 

 

 

 

Current

 

(In thousands)

 

Residential mortgage loans

$

-

 

$

16,600

 

$

26,471

 

$

43,071

 

$

110,920

 

$

153,991

Commercial mortgage loans

 

-

 

 

355

 

 

2,834

 

 

3,189

 

 

994

 

 

4,183

Total (1) 

$

-

 

$

16,955

 

$

29,305

 

$

46,260

 

$

111,914

 

$

158,174

_____________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage and commercial mortgage loans are considered past due when the borrower is in arrears two or more monthly payments. PCI residential mortgage loans and commercial mortgage loans past due 30-59 days as of December 31, 2017 amounted to $28.1 million and $0.2 million, respectively

34 


 

 

Initial Fair Value and Accretable Yield of PCI Loans

 

At acquisition, the Corporation estimated the cash flows the Corporation expected to collect on PCI loans. Under the accounting guidance for PCI loans, the difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. This difference is neither accreted into income nor recorded on the Corporation’s consolidated statements of financial condition. The excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans, using the effective-yield method.

 

Changes in Accretable Yield of Acquired Loans

 

Subsequent to the acquisition of loans, the Corporation is required to periodically evaluate its estimate of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications from non-accretable yield to accretable yield. Increases in the cash flows expected to be collected will generally result in an increase in interest income over the remaining life of the loan or pool of loans. Decreases in expected cash flows due to further credit deterioration will generally result in an impairment charge recognized in the Corporation’s provision for loan and lease losses, resulting in an increase to the allowance for loan and lease losses. As of March 31, 2018, the reserve related to PCI loans acquired from Doral Financial in 2014 and from Doral Bank in 2015 amounted to $11.3 million.   

  

 

Changes in the accretable yield of PCI loans for the quarters ended March 31, 2018 and 2017 were as follows:

 

 

 

 

 

 

 

 

 

March 31, 2018

 

March 31, 2017

(In thousands)

 

 

Balance at beginning of period

$

103,682

 

$

116,462

Accretion recognized in earnings

 

(2,623)

 

 

(2,797)

   Balance at end of period

$

101,059

 

$

113,665

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35 


 

Changes in the carrying amount of loans accounted for pursuant to ASC 310-30 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended

 

Quarter ended

 

 

 

March 31, 2018

 

March 31, 2017

(In thousands)

 

 

 

 

Balance at beginning of period

$

158,174

 

$

165,818

Accretion

 

2,623

 

 

2,797

Collections

 

(3,396)

 

 

(4,593)

Foreclosures

 

(2,120)

 

 

(922)

    Ending balance

$

155,281

 

$

163,100

Allowance for loan losses

 

 

(11,251)

 

 

(6,857)

Ending balance, net of allowance for loan losses

 

$

144,030

 

$

156,243

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in the allowance for loan losses related to PCI loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended

 

Quarter ended

 

 

 

March 31, 2018

 

March 31, 2017

(In thousands)

 

 

 

Balance at beginning of period

$

11,251

 

$

6,857

Provision for loan losses

 

-

 

 

-

Balance at the end of period

 

$

11,251

 

$

6,857

 

The outstanding principal balance of PCI loans, including amounts charged off by the Corporation, amounted to $192.0 million as of March 31, 2018 (December 31, 2017- $196.6 million).  

36 


 

Purchases and Sales of Loans

 

During the first quarter of 2018, the Corporation purchased $14.5 million of residential mortgage loans consistent with a strategic program to purchase ongoing residential mortgage loan production from mortgage bankers in Puerto Rico. In general, the loans purchased from mortgage bankers were conforming residential mortgage loans. Purchases of conforming residential mortgage loans provide the Corporation the flexibility to retain or sell the loans, including through securitization transactions, depending upon the Corporation’s interest rate risk management strategies. When the Corporation sells such loans, it generally keeps the servicing of the loans.

 

In the ordinary course of business, the Corporation sells residential mortgage loans (originated or purchased) to GNMA and government-sponsored entities (“GSEs”), such as FNMA and FHLMC, which generally securitize the transferred loans into mortgage-backed securities for sale into the secondary market. During the first quarter of 2018, the Corporation sold $54.4 million of FHA/VA mortgage loans to GNMA, which packaged them into mortgage-backed securities. Also during the first quarter of 2018, the Corporation sold approximately $20.1 million of performing residential mortgage loans to FNMA and FHLMC. The Corporation’s continuing involvement in these sold loans consists primarily of servicing the loans. In addition, the Corporation agreed to repurchase loans when it breaches any of the representations and warranties included in the sale agreement. These representations and warranties are consistent with the GSEs’ selling and servicing guidelines (i.e., ensuring that the mortgage was properly underwritten according to established guidelines).

 

For loans sold to GNMA, the Corporation holds an option to repurchase individual delinquent loans issued on or after January 1, 2003 when the borrower fails to make any payment for three consecutive months. This option gives the Corporation the ability, but not the obligation, to repurchase the delinquent loans at par without prior authorization from GNMA.

 

Under ASC Topic 860, Transfer and Servicing, once the Corporation has the unilateral ability to repurchase the delinquent loan, it is considered to have regained effective control over the loan and is required to recognize the loan and a corresponding repurchase liability on the balance sheet regardless of the Corporation’s intent to repurchase the loan. As of March 31, 2018 and December 31, 2017, rebooked GNMA delinquent loans included in the residential mortgage loan portfolio amounted to $73.3 million and $62.1 million, respectively.

 

During the first quarters of 2018 and 2017, the Corporation repurchased, pursuant to its repurchase option with GNMA, $1.1 million and $10.7 million, respectively, of loans previously sold to GNMA.  The principal balance of these loans is fully guaranteed and the risk of loss related to the repurchased loans is generally limited to the difference between the delinquent interest payment advanced to GNMA, which is computed at the loan’s interest rate, and the interest payments reimbursed by FHA, which are computed at a pre-determined debenture rate.  Repurchases of GNMA loans allow the Corporation, among other things, to maintain acceptable delinquency rates on outstanding GNMA pools and remain as a seller and servicer in good standing with GNMA. During the fourth quarter of 2017, the Corporation requested and received approval from GNMA for the exclusion of loans in the areas affected by Hurricanes Irma and Maria from calculations of delinquency and default ratios established in the GNMA Mortgage-Backed Securities Guide. The Corporation generally remediates any breach of representations and warranties related to the underwriting of such loans according to established GNMA guidelines without incurring losses.  The Corporation does not maintain a liability for estimated losses as a result of breaches in representations and warranties.

 

Loan sales to FNMA and FHLMC are without recourse in relation to the future performance of the loans.  The Corporation repurchased at par loans previously sold to FNMA and FHLMC in the amount of $3 thousand and $6 thousand during the first quarters of 2018 and 2017, respectively. The Corporation’s risk of loss with respect to these loans is also minimal as these repurchased loans are generally performing loans with documentation deficiencies.

 

     In addition, during the first quarter of 2018, the Corporation sold a $5.6 million commercial and industrial adversely-classified loan in Puerto Rico, recording a charge-off of $1.3 million, and a $9.2 million commercial and industrial loan participation in the Florida region.

 

Sale of the Puerto Rico Electric Power Authority (“PREPA”) Loan

 

    During the first quarter of 2017, the Corporation received an unsolicited offer and sold its outstanding participation in the PREPA line of credit with a book value of $64 million at the time of sale (principal balance of $75 million), thereby reducing its direct exposure to the Puerto Rico government.  A specific reserve of approximately $10.2 million had been allocated to this loan.  Gross proceeds of $53.2 million from the sale resulted in an incremental loss of $0.6 million recorded as a charge to the provision for loan and lease losses in the first quarter of 2017.

 

 

 

37 


 

Loan Portfolio Concentration

    

     The Corporation’s primary lending area is Puerto Rico.  The Corporation’s banking subsidiary, First Bank, also lends in the USVI and BVI markets and in the United States (principally in the state of Florida).  Of the total gross loans held for investment of $8.7 billion as of March 31, 2018, credit risk concentration was approximately 75% in Puerto Rico, 19% in the United States, and 6% in the USVI and BVI.

     

    As of March 31, 2018, the Corporation had $54.8 million outstanding loans extended to the Puerto Rico government, its municipalities and public corporations, compared to $55.9 million as of December 31, 2017. Approximately $33.1 million of the outstanding loans as of March 31, 2018 consisted of loans extended to municipalities in Puerto Rico, which in most cases are supported by assigned property tax revenues.  The vast majority of revenues of the municipalities included in the Corporation’s loan portfolio are independent of the Puerto Rico central government. These municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and notes. Late in 2015, the GDB and the Municipal Revenue Collection Center (“CRIM”) signed and perfected a deed of trust. Through this deed, the GDB, 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 in Puerto Rico. In addition to loans extended to municipalities, the Corporation’s exposure to the Puerto Rico government as of March 31, 2018 includes a $6.7 million loan extended to a unit of the central government, and a $15.0 million loan granted to an affiliate of PREPA.

  

   Furthermore, as of March 31, 2018, the Corporation had three loans granted to the hotel industry in Puerto Rico that were previously guaranteed by the Puerto Rico Tourism Development Fund (“TDF”) with an outstanding principal balance of $116.2 million (book value $61.6 million), compared to $120.2 million outstanding (book value of $70.8 million) as of December 31, 2017. Historically, the borrower and the operations of the underlying collateral of these loans have been the primary sources of repayment and the TDF, which is a subsidiary of the GDB, provided a secondary guarantee for payment performance. As part of agreements executed in the second quarter of 2017 and first quarter of 2018, the TDF paid $7.6 million and $4.0 million, respectively, to honor a portion of its guarantee on these loans.  As provided in the agreements, the cash payments received by the Corporation released the TDF from its liability as a guarantor of these loans. All three of the commercial mortgage loans previously guaranteed by the TDF have been classified as non-performing and impaired since the first quarter of 2016, and interest payments have been applied against principal since then. In addition, the GDB agreed to issue to the Bank a fixed income financial instrument pursuant to the GDB’s Restructuring Support Agreement approved by the PROMESA oversight board. During the first quarter of 2018, two of these three commercial mortgage loans, with an aggregate outstanding principal balance of $50.4 million (book value of $27.2 million) were transferred to held for sale.

   

    In addition, the Corporation had $115.9 million in exposure to residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority. Residential mortgage loans guaranteed by the Puerto Rico Housing Finance Authority are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. The Puerto Rico government guarantees up to $75 million of the principal under the mortgage loan insurance program. According to the most recently released audited financial statements of the Puerto Rico Housing Finance Authority, as of June 30, 2015, the Puerto Rico Housing Finance Authority’s mortgage loans insurance program covered loans in an aggregate of approximately $552 million. The regulations adopted by the Puerto Rico Housing Finance Authority require the establishment of adequate reserves to guarantee the solvency of the mortgage loan insurance fund. As of June 30, 2015, the most recent date as to which information is available, the Puerto Rico Housing Finance Authority had a restricted net position for such purposes of approximately $77.4 million.

 

The Corporation also has credit exposure to USVI government entities. As of March 31, 2018, the Corporation had $76.7 million in loans to USVI government instrumentalities and public corporations, compared to $70.4 million as of December 31, 2017. Of the amount outstanding as of March 31, 2018, public corporations of the USVI owed approximately $53.5 million and an independent instrumentality of the USVI government owed approximately $23.2 million. As of March 31, 2018 all loans were currently performing and up to date on principal and interest payments.

 

    The Corporation cannot predict at this time the ultimate effect that the current fiscal situation of the Commonwealth of Puerto Rico, the uncertainty about the debt restructuring process, the various legislative and other measures adopted and to be adopted by the Puerto Rico government and the PROMESA oversight board in response to such fiscal situation, and Hurricane Maria will have on the Puerto Rico economy, the Corporation’s clients, and the Corporation’s financial condition and results of operations.

 

 

 

38 


 

Troubled Debt Restructurings

 

The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico that is similar to the U.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. As of March 31, 2018, the Corporation’s total TDR loans held for investment of $572.4 million consisted of $350.0 million of residential mortgage loans, $96.3 million of commercial and industrial loans, $85.8 million of commercial mortgage loans, $6.6 million of construction loans, and $33.7 million of consumer loans. Outstanding unfunded commitments on TDR loans amounted to $1.9 million as of March 31, 2018. In addition, the loans held for sale portfolio includes a $30.0 million TDR construction loan.

 

The Corporation’s loss mitigation programs for residential mortgage and consumer loans can provide for one or a combination of the following: movement of interest past due to the end of the loan, extension of the loan term, deferral of principal payments and reduction of interest rates either permanently or for a period of up to six years (increasing back in step-up rates). Additionally, in certain cases, the restructuring may provide for the forgiveness of contractually-due principal or interest. Uncollected interest is added to the end of the loan term at the time of the restructuring and not recognized as income until collected or when the loan is paid off. These programs are available only to those borrowers who have defaulted, or are likely to default, permanently on their loan and would lose their homes in a foreclosure action absent some lender concession. Nevertheless, if the Corporation is not reasonably assured that the borrower will comply with its contractual commitment, properties are foreclosed.

 

   Prior to permanently modifying a loan, the Corporation may enter into trial modifications with certain borrowers. Trial modifications generally represent a six-month period during which the borrower makes monthly payments under the anticipated modified payment terms prior to a formal modification. Upon successful completion of a trial modification, the Corporation and the borrower enter into a permanent modification. TDR loans that are participating in or that have been offered a binding trial modification are classified as TDRs when the trial offer is made and continue to be classified as TDRs regardless of whether the borrower enters into a permanent modification. As of March 31, 2018, the Corporation classified an additional $0.5 million of residential mortgage loans as TDRs that were participating in or had been offered a trial modification.

 

For the commercial real estate, commercial and industrial, and construction loan portfolios, at the time of a restructuring, the Corporation determines, on a loan-by-loan basis, whether a concession was granted for economic or legal reasons related to the borrower’s financial difficulty. Concessions granted for loans in these portfolios could include: reductions in interest rates to rates that are considered below market; extension of repayment schedules and maturity dates beyond original contractual terms; waivers of borrower covenants; forgiveness of principal or interest; or other contractual changes that would be considered a concession. The Corporation mitigates loan defaults for these loan portfolios through its collection function. The function’s objective is to minimize both early stage delinquencies and losses upon default of loans in these portfolios. In the case of the commercial and industrial,  commercial mortgage, and construction loan portfolios, the Corporation’s Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of OREO. 

 

In addition, the Corporation extends, renews, and restructures loans with satisfactory credit profiles. Many commercial loan facilities are structured as lines of credit, which generally have one year terms and, therefore, are required to be renewed annually. Other facilities may be restructured or extended from time to time based upon changes in the borrower’s business needs, use of funds, timing of completion of projects, and other factors. If the borrower is not deemed to have financial difficulties, extensions, renewals, and restructurings are done in the normal course of business and not considered concessions, and the loans continue to be recorded as performing.

39 


 

     Selected information on TDR loans held for investment that includes the recorded investment by loan class and modification type is summarized in the following tables. This information reflects all TDRs held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

Interest rate below market

 

Maturity or term extension

 

Combination of reduction in interest rate and extension of maturity

 

Forgiveness of principal and/or interest

 

Forbearance Agreement

 

 

Other (1) 

 

Total

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Non- FHA/VA Residential Mortgage loans

$

24,390

 

$

8,396

 

$

255,731

 

$

-

 

$

-

 

 

$

61,463

 

$

349,980

   Commercial Mortgage loans

 

6,518

 

 

36,411

 

 

30,739

 

 

-

 

 

2,020

 

 

 

10,146

 

 

85,834

   Commercial and Industrial loans

 

2,497

 

 

20,448

 

 

15,705

 

 

-

 

 

3,197

 

 

 

54,418

 

 

96,265

   Construction loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Land

 

17

 

 

3,860

 

 

2,177

 

 

-

 

 

-

 

 

 

324

 

 

6,378

     Construction-commercial (2) 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

-

 

 

-

     Construction-residential

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

217

 

 

217

   Consumer loans - Auto

 

-

 

 

1,235

 

 

12,944

 

 

-

 

 

-

 

 

 

6,632

 

 

20,811

   Finance leases

 

-

 

 

196

 

 

1,680

 

 

-

 

 

-

 

 

 

-

 

 

1,876

   Consumer loans - Other

 

952

 

 

1,775

 

 

6,356

 

 

166

 

 

-

 

 

 

1,766

 

 

11,015

      Total Troubled Debt Restructurings (2) 

$

34,374

 

$

72,321

 

$

325,332

 

$

166

 

$

5,217

 

 

$

134,966

 

$

572,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Other concessions granted by the Corporation included deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation, or a combination of the concessions listed in the table.

(2)

Excludes TDRs held for sale amounting to $30.0 million as of March 31, 2018.

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Interest rate below market

 

Maturity or term extension

 

Combination of reduction in interest rate and extension of maturity

 

Forgiveness of principal and/or interest

 

Forbearance Agreement

 

 

Other (1)

 

Total

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Non- FHA/VA Residential Mortgage loans

$

25,964

 

$

8,318

 

$

267,578

 

$

-

 

$

-

 

 

$

62,070

 

$

363,930

   Commercial Mortgage loans

 

6,563

 

 

2,094

 

 

31,870

 

 

-

 

 

-

 

 

 

10,285

 

 

50,812

   Commercial and Industrial loans

 

2,510

 

 

20,648

 

 

16,049

 

 

-

 

 

6,623

 

 

 

48,282

 

 

94,112

   Construction loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Land

 

18

 

 

3,941

 

 

2,186

 

 

-

 

 

-

 

 

 

331

 

 

6,476

     Construction-commercial

 

-

 

 

-

 

 

-

 

 

35,100

 

 

-

 

 

 

-

 

 

35,100

     Construction-residential

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

217

 

 

217

   Consumer loans - Auto

 

-

 

 

1,347

 

 

14,233

 

 

-

 

 

-

 

 

 

7,025

 

 

22,605

   Finance leases

 

-

 

 

238

 

 

1,946

 

 

-

 

 

-

 

 

 

-

 

 

2,184

   Consumer loans - Other

 

892

 

 

2,097

 

 

6,891

 

 

217

 

 

-

 

 

 

1,686

 

 

11,783

      Total Troubled Debt Restructurings

$

35,947

 

$

38,683

 

$

340,753

 

$

35,317

 

$

6,623

 

 

$

129,896

 

$

587,219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Other concessions granted by the Corporation included deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation, or a combination of the concessions listed in the table.

 

  

40 


 

 

The following table presents the Corporation's TDR loans held for investment activity:

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

March 31, 2018

 

March 31, 2017

(In thousands)

 

 

 

 

 

Beginning Balance of TDRs

$

587,219

 

$

647,048

New TDRs

 

43,419

 

 

40,899

Increases to existing TDRs

 

6,771

 

 

424

Charge-offs post modification (1) (2)

 

(9,171)

 

 

(14,662)

Sales, net of charge-offs

 

-

 

 

(53,245)

Foreclosures

 

(7,043)

 

 

(4,371)

TDR transferred to held for sale, net of charge-off

 

(30,000)

 

 

-

Paid-off and partial payments

 

(18,819)

 

 

(13,729)

   Ending balance of TDRs

$

572,376

 

$

602,364

 

 

 

 

 

 

 

(1)

The first quarter of 2018 includes a charge-off of $5.1 million associated with a $30.0 million construction loan transferred to held for sale.

(2)

The first quarter of 2017 includes a charge-off of $10.7 million related to the sale of the PREPA credit line.

 

 

 

 

 

 

 

 

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 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 non-performing 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. A TDR loan that specifies an interest rate that at the time of the restructuring is greater than or equal to the rate the Corporation is willing to accept for a new loan with comparable risk may not be reported as a TDR, or an impaired loan in the calendar years subsequent to the restructuring, if it is in compliance with its modified terms. The Corporation did not remove any loans from the TDR classification during the first quarter of 2018 and 2017.

41 


 

The following table provides a breakdown of the TDR loans held for investment by those in accrual and non-accrual status:

 

 

 

 

 

 

 

 

 

 

 

 

 

   

As of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Accrual

 

Non-accrual (1)(2) 

 

Total TDRs

 

   (In thousands)

 

 

 

 

 

 

 

 

      Non-FHA/VA Residential Mortgage loans

$

272,659

 

$

77,321

 

$

349,980

      Commercial Mortgage loans

 

24,010

 

 

61,824

 

 

85,834

      Commercial and Industrial loans

 

43,251

 

 

53,014

 

 

96,265

      Construction loans:

 

 

 

 

 

 

 

 

         Land

 

1,197

 

 

5,181

 

 

6,378

        Construction-commercial (2) 

 

-

 

 

-

 

 

-

        Construction-residential

 

-

 

 

217

 

 

217

      Consumer loans - Auto

 

14,082

 

 

6,729

 

 

20,811

      Finance leases

 

1,653

 

 

223

 

 

1,876

      Consumer loans - Other

 

9,570

 

 

1,445

 

 

11,015

          Total Troubled Debt Restructurings

$

366,422

 

$

205,954

 

$

572,376

 

 

 

 

 

 

 

 

 

 

 (1) 

Included in non-accrual loans are $53.2 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.

 (2) 

Excludes a $30.0 million non-performing construction loans transferred to held for sale during the first quarter of 2018.

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Accrual

 

Non-accrual (1) 

 

Total TDRs

(In thousands)

 

 

 

 

 

 

 

 

      Non-FHA/VA Residential Mortgage loans

$

280,729

 

$

83,201

 

$

363,930

      Commercial Mortgage loans

 

23,329

 

 

27,483

 

 

50,812

      Commercial and Industrial loans

 

41,536

 

 

52,576

 

 

94,112

      Construction loans:

 

 

 

 

 

 

 

 

         Land

 

1,291

 

 

5,185

 

 

6,476

        Construction-commercial

 

-

 

 

35,100

 

 

35,100

        Construction-residential

 

-

 

 

217

 

 

217

      Consumer loans - Auto

 

15,548

 

 

7,057

 

 

22,605

      Finance leases

 

1,968

 

 

216

 

 

2,184

      Consumer loans - Other

 

10,294

 

 

1,489

 

 

11,783

         Total Troubled Debt Restructurings

$

374,695

 

$

212,524

 

$

587,219

 

 

 

 

 

 

 

 

 

 

(1)

Included in non-accrual loans are $88.6 million in loans that are performing under the terms of the restructuring agreement but are reported in non-accrual 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.

 

 

42 


 

TDR loans exclude restructured residential mortgage loans that are guaranteed by the U.S. federal government (i.e., FHA/VA loans) totaling $62.1 million as of March 31, 2018 (December 31, 2017 - $62.1 million). The Corporation excludes FHA/VA guaranteed loans from TDR loan statistics given that, in the event that the borrower defaults on the loan, the principal and interest (at the specified debenture rate) are guaranteed by the U.S. government; therefore, the risk of loss on these types of loans is very low. The Corporation does not consider loans with U.S. federal government guarantees to be impaired loans for the purpose of calculating the allowance for loan and lease losses.

 

   Loan modifications that are considered TDR loans completed during the first quarters of 2018 and 2017 were as follows:

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2018

 

Number of contracts

 

Pre-modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

(Dollars in thousands)

 

 

 

 

 

 

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

   Non-FHA/VA Residential Mortgage loans

24

 

$

2,608

 

$

2,614

   Commercial Mortgage loans

3

 

 

36,746

 

 

36,758

   Commercial and Industrial loans

3

 

 

2,597

 

 

2,582

   Consumer loans - Auto

45

 

 

680

 

 

680

   Consumer loans - Other

136

 

 

785

 

 

785

      Total Troubled Debt Restructurings

211

 

$

43,416

 

$

43,419

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2017

 

Number of contracts

 

Pre-modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

(Dollars in thousands)

 

 

 

 

 

 

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

   Non-FHA/VA Residential Mortgage loans

40

 

$

4,650

 

$

4,508

   Commercial Mortgage loans

6

 

 

22,438

 

 

22,198

   Commercial and Industrial loans

3

 

 

10,748

 

 

10,748

   Construction loans:

 

 

 

 

 

 

 

      Land

1

 

 

25

 

 

28

   Consumer loans - Auto

152

 

 

2,247

 

 

2,247

   Finance leases

8

 

 

186

 

 

186

   Consumer loans - Other

210

 

 

969

 

 

984

      Total Troubled Debt Restructurings

420

 

$

41,263

 

$

40,899

 

 

 

 

 

 

 

 

 

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-performing loan. Recidivism on a modified loan occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The Corporation considers a loan to have defaulted if the borrower has failed to make payments of either principal, interest, or both for a period of 90 days or more.

43 


 

    Loan modifications considered TDR loans that defaulted during the quarters ended March 31, 2018 and March 31, 2017, and had become TDR during the 12-month period preceding the default date, were as follows:

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31,

 

2018

 

2017

 

Number of contracts

 

Recorded Investment

 

Number of contracts

 

Recorded Investment

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Non-FHA/VA Residential Mortgage loans

4

 

$

387

 

3

 

$

277

Commercial Mortgage loans

-

 

 

-

 

1

 

 

57

Consumer loans - Auto

2

 

 

23

 

4

 

 

61

Finance leases

1

 

 

22

 

-

 

 

-

Consumer loans - Other

11

 

 

54

 

17

 

 

61

   Total

18

 

$

486

 

25

 

$

456

 

 

 

 

 

 

 

 

 

 

 

For certain TDR loans, the Corporation splits the loans into two new notes, A and B notes. The A note is restructured to comply with the Corporation’s lending standards at current market rates, and is tailored to suit the customer’s ability to make timely interest and principal payments. The B note includes the granting of the concession to the borrower and varies by situation. The B note is charged off but the obligation is not forgiven to the borrower, and any payments collected are accounted for as recoveries. At the time of the restructuring, the A note is identified and classified as a TDR loan. If the loan performs for at least six months according to the modified terms, the A note may be returned to accrual status. The borrower’s payment performance prior to the restructuring is 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. In the periods following the calendar year in which a loan is restructured, the A note may no longer be reported as a TDR loan if it is in accrual status, is in compliance with its modified terms, and yields a market rate (as determined and documented at the time of the restructuring).

 

The recorded investment in loans held for investment restructured using the A/B note restructure workout strategy was approximately $35.6 million as of March 31, 2018. The following table provides additional information about the volume of this type of loan restructuring and the effect on the allowance for loan and lease losses in the first quarters of 2018 and 2017:

 

 

 

 

 

 

 

(In thousands)

March 31, 2018

 

 

March 31, 2017

Principal balance deemed collectible at end of period

$

35,553

 

$

36,564

Amount charged off

$

-

 

$

-

Charges to the provision for loan losses

$

1,412

 

$

915

Allowance for loan losses at end of period

$

5,258

 

$

6,056

 

 

 

 

 

 

 

Approximately $3.1 million of the loans restructured using the A/B note restructure workout strategy were in accrual status as of March 31, 2018. These loans continue to be individually evaluated for impairment purposes.

44 


 

NOTE 8 – ALLOWANCE FOR LOAN AND LEASE LOSSES

 

    The changes in the allowance for loan and lease losses were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Residential Mortgage Loans

 

Commercial Mortgage Loans

 

Commercial & Industrial Loans

 

Construction Loans

 

Consumer Loans

 

Total

Quarter ended March 31, 2018

 

 

 

 

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

58,975

 

$

48,493

 

$

48,871

 

$

4,522

 

$

70,982

 

$

231,843

   Charge-offs

 

(3,371)

 

 

(6,810)

 

 

(1,930)

 

 

(5,177)

 

 

(12,072)

 

 

(29,360)

   Recoveries

 

335

 

 

49

 

 

62

 

 

13

 

 

2,370

 

 

2,829

   Provision

 

447

 

 

8,661

 

 

656

 

 

4,764

 

 

6,016

 

 

20,544

Ending balance

$

56,386

 

$

50,393

 

$

47,659

 

$

4,122

 

$

67,296

 

$

225,856

Ending balance: specific reserve for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   impaired loans

$

22,546

 

$

13,451

 

$

14,375

 

$

1,484

 

$

5,074

 

$

56,930

Ending balance: purchased credit-impaired loans (1) 

$

10,873

 

$

378

 

$

-

 

$

-

 

$

-

 

$

11,251

Ending balance: general allowance

$

22,967

 

$

36,564

 

$

33,284

 

$

2,638

 

$

62,222

 

$

157,675

Loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Ending balance

$

3,267,868

 

$

1,552,503

 

$

2,061,773

 

$

79,150

 

$

1,734,596

 

$

8,695,890

   Ending balance: impaired loans

$

417,610

 

$

162,126

 

$

119,778

 

$

12,067

 

$

34,699

 

$

746,280

   Ending balance: purchased credit-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     impaired loans

$

151,067

 

$

4,214

 

$

-

 

$

-

 

$

-

 

$

155,281

   Ending balance: loans with general allowance

$

2,699,191

 

$

1,386,163

 

$

1,941,995

 

$

67,083

 

$

1,699,897

 

$

7,794,329



 

(In thousands)

Residential Mortgage Loans

 

Commercial Mortgage Loans

 

Commercial & Industrial Loans

 

Construction Loans

 

Consumer Loans

 

Total

Quarter ended March 31, 2017

 

 

 

 

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

33,980

 

$

57,261

 

$

61,953

 

$

2,562

 

$

49,847

 

$

205,603

   Charge-offs

 

(8,225)

 

 

(1,362)

 

 

(12,052)

 

 

(63)

 

 

(11,192)

 

 

(32,894)

   Recoveries

 

749

 

 

30

 

 

875

 

 

445

 

 

2,981

 

 

5,080

   Provision (release)

 

9,271

 

 

12,539

 

 

(4,806)

 

 

942

 

 

7,496

 

 

25,442

Ending balance

$

35,775

 

$

68,468

 

$

45,970

 

$

3,886

 

$

49,132

 

$

203,231

Ending balance: specific reserve for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   impaired loans

$

8,551

 

$

36,638

 

$

12,711

 

$

2,835

 

$

5,576

 

$

66,311

Ending balance: purchased credit-impaired loans (1) 

$

6,545

 

$

312

 

$

-

 

$

-

 

$

-

 

$

6,857

Ending balance: general allowance

$

20,679

 

$

31,518

 

$

33,259

 

$

1,051

 

$

43,556

 

$

130,063

Loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Ending balance

$

3,272,598

 

$

1,596,176

 

$

2,108,532

 

$

137,887

 

$

1,707,156

 

$

8,822,349

   Ending balance: impaired loans

$

432,798

 

$

193,035

 

$

86,059

 

$

51,801

 

$

43,505

 

$

807,198

   Ending balance: purchased credit-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      impaired loans

$

158,940

 

$

4,160

 

$

-

 

$

-

 

$

-

 

$

163,100

   Ending balance: loans with general allowance

$

2,680,860

 

$

1,398,981

 

$

2,022,473

 

$

86,086

 

$

1,663,651

 

$

7,852,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 Refer to Note 7 - Loans Held for Investment-PCI Loans for a detail of changes in the allowance for loan losses related to PCI loans.

                                     

45 


 

    

   As of March 31, 2018, the Corporation maintained a $0.6 million reserve for unfunded loan commitments (December 31, 2017 - $0.7 million), mainly related to outstanding commitments on floor plan revolving lines of credit. The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance sheet loan commitments to borrowers that are experiencing financial difficulties at the balance sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included as part of accounts payable and other liabilities in the consolidated statement of financial condition and any change to the reserve is included as part of other non-interest expenses in the consolidated statements of income.

 

During the first quarter of 2018, the Corporation implemented enhancements to the methodology behind the calculation of the allowance for commercial loans, which includes, among others,  the following: (i) a revised procedure to determine the historical loss rates applicable for each commercial loan regulatory-based credit risk categories (i.e., pass, special mention, substandard and doubtful) that changed the previous blending of loss rates for loans risk-rated special mention, substandard and doubtful with an aggregation methodology whereas historical losses and portfolio balances of special mention loans are allocated to pass or substandard categories based on the historical proportion of the loans in this risk category that ultimate cured or resulted uncollectible;  (ii) a quarterly sensitivity analysis using actual historical loss rates for loans risk-rated pass, special mention and substandard to compare the results of such sensitivity to the calculated reserves under the revised procedure, and  (iii) establishment of sensitivity thresholds that could trigger further reviews and/or adjustments prior to reaching a conclusion as to the adequacy of the allowance for loan and lease losses for the Corporation’s commercial portfolios.

 

The comparison of the revised procedure with the sensitivity analysis resulted in an immaterial increase to the qualitative reserve for commercial mortgage loans that was recorded as of March 31, 2018. The Corporation engaged an independent third party to assess the allowance framework and the appropriateness of assumptions used in the analysis and expects such review to be completed during the second quarter of 2018.

 

Refer to Note 2, – “Updates on Effects of Natural Disasters,” for information about changes to the hurricane-related allowance established by the Corporation in 2017.  

 

NOTE 9 – LOANS HELD FOR SALE

 

The Corporation’s loans held-for-sale portfolio as of the dates indicated was composed of:

 

 

 

        As of

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

(In thousands)

 

Residential mortgage loans

$

26,430

 

$

24,690

Construction loans (1) 

 

37,732

 

 

8,290

Commercial mortgage loans (1) 

 

27,213

 

 

-

   Total (1) 

$

91,375

 

$

32,980

 

 

 

 

 

 

 

(1)

During the first quarter of 2018, the Corporation transferred $57.2 million (net of fair value write-downs of $9.7 million) in non-performing loans to held for sale. Loans transferred to held for sales consisted of a $30.0 million non-performing construction loan (net of a $5.1 million fair value write-down) and two non-performing commercial mortgage loans totaling $27.2 million (net of fair value write-downs of $4.6 million).

 

NOTE 10  OTHER REAL ESTATE OWNED

 

    The following table presents OREO inventory as of the dates indicated:

 

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

2018

 

2017

(In thousands)

 

 

 

 

 

OREO

 

 

 

 

 

   OREO balances, carrying value:

 

 

 

 

 

      Residential (1) 

$

60,240

 

$

54,381

      Commercial

 

83,911

 

 

82,871

      Construction

 

10,488

 

 

10,688

         Total

$

154,639

 

$

147,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Excludes $17.8 million and $21.3 million as of March 31, 2018 and December 31, 2017, respectively, of foreclosures that meet the conditions of ASC 310-40 and are presented as a receivable (other assets) in the statement of financial condition.

 

 

 

 

 

46 


 

 

NOTE 11 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

One of the market risks facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of the Corporation’s assets or liabilities and will adversely affect the Corporation’s net interest income from its loan and investment portfolios.  The overall objective of the Corporation’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

 

The Corporation designates a derivative as a fair value hedge, cash flow hedge or economic undesignated hedge when it enters into the derivative contract. As of March 31, 2018 and December 31, 2017, all derivatives held by the Corporation were considered economic undesignated hedges.  These undesignated hedges are recorded at fair value with the resulting gain or loss recognized in current earnings.

 

The following summarizes the principal derivative activities used by the Corporation 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 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 to-be-announced (“TBA”) mortgage-backed securities that will settle over the standard delivery date and do not qualify as “regular way” security trades. Regular-way security trades are contracts that have no net settlement provision and no market mechanism to facilitate net settlement and that provide for delivery of a security within the time frame 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. These securities are used to economically hedge the FHA/VA residential mortgage loan securitizations of the mortgage-banking operations. Unrealized gains (losses) are recognized as part of mortgage banking activities in the consolidated statement of income.

 

To satisfy the needs of its customers, the Corporation may enter into non-hedging transactions. On these transactions, the Corporation generally participates as a buyer in one of the agreements and as a seller in the other agreement under the same terms and conditions.

 

In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument.

 

      The following table summarizes the notional amounts of all derivative instruments:

 

 

 

 

 

 

 

Notional Amounts (1) 

 

As of

 

As of

 

March 31,

 

December 31,

(In thousands)

2018

 

2017

Undesignated economic hedges:

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

   Written interest rate cap agreements

$

90,510

 

$

91,010

   Purchased interest rate cap agreements

 

90,510

 

 

91,010

 

 

 

 

 

 

Forward Contracts:

 

 

 

 

 

   Sale of TBA GNMA MBS pools

 

25,000

 

 

26,000

 

$

206,020

 

$

208,020

 

 

 

 

 

 

(1) Notional amounts are presented on a gross basis with no netting of offsetting exposure positions.

47 


 

      The following table summarizes for derivative instruments their fair values and location in the consolidated statements of financial condition:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

Liability Derivatives

 

Statement of

 

March 31,

 

December 31,

 

 

 

March 31,

 

December 31,

 

Financial

 

2018

 

2017

 

 

 

2018

 

2017

 

Condition Location

 

Fair

Value

 

Fair

Value

 

Statement of Financial Condition Location

 

Fair

Value

 

Fair

Value

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Undesignated economic hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Written interest rate cap agreements

Other assets

 

$

-

 

$

-

 

Accounts payable and other liabilities

 

$

668

 

$

305

   Purchased interest rate cap agreements

Other assets

 

 

668

 

 

305

 

Accounts payable and other liabilities

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Sales of TBA GNMA MBS pools

Other assets

 

 

3

 

 

7

 

Accounts payable and other liabilities

 

 

67

 

 

19

 

 

 

$

671

 

$

312

 

 

 

$

735

 

$

324

 

      The following table summarizes the effect of derivative instruments on the statement of income:

 

 

 

 

 

 

 

 

 

 

 

(Loss) 

 

Location of Loss

 

 

Quarter Ended

 

Recognized in Statement

 

March 31,

 

of Income on Derivatives

 

2018

 

2017

 

 

 

 

(In thousands)

UNDESIGNATED ECONOMIC HEDGES:

 

 

 

 

 

 

 

   Interest rate contracts:

 

 

 

 

 

 

 

      Written and purchased interest rate cap agreements

Interest income - Loans

 

$

-

 

$

(1)

   Forward contracts:

 

 

 

 

 

 

 

      Sales of TBA GNMA MBS pools

Mortgage Banking Activities

 

 

(52)

 

 

(56)

         Total loss on derivatives

 

 

$

(52)

 

$

(57)

 

Derivative instruments 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, for the most part, on the shape of the yield curve, and the level of interest rates, as well as the expectations for rates in the future.  

 

As of March 31, 2018, the Corporation had not entered into any derivative instrument containing credit-risk-related contingent features.

       

48 


 

NOTE 12 – OFFSETTING OF ASSETS AND LIABILITIES

 

The Corporation enters into master agreements with counterparties, primarily related to derivatives and repurchase agreements, that may allow for netting of exposures in the event of default. In an event of default, each party has a right of set-off against the other party for amounts owed under the related agreement and any other amount or obligation owed with respect to any other agreement or transaction between them. The following table presents information about the offsetting of financial assets and liabilities as well as derivative assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Financial Assets and Derivative Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

Net Amounts of Assets Presented in the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

Gross Amounts of Recognized  Assets

 

Gross Amounts Offset in the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

 

 

Financial Instruments

 

Cash Collateral

 

 

(In thousands)

 

 

 

 

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

668

 

$

-

 

$

668

 

$

(45)

 

$

(623)

 

$

-

Securities purchased under agreements to resell

 

200,000

 

 

(200,000)

 

 

-

 

 

-

 

 

-

 

 

-

Total

$

200,668

 

$

(200,000)

 

$

668

 

$

(45)

 

$

(623)

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

Net Amounts of Assets Presented in the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

Gross Amounts of Recognized  Assets

 

Gross Amounts Offset in the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

 

 

Financial Instruments

 

Cash Collateral

 

 

 

 

 

 

 

 

Net Amount

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

305

 

$

-

 

$

305

 

$

(305)

 

$

-

 

$

-

Securities purchased under agreements to resell

 

200,000

 

 

(200,000)

 

 

-

 

 

-

 

 

-

 

 

-

Total

$

200,305

 

$

(200,000)

 

$

305

 

$

(305)

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Financial Liabilities and Derivative Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

Net Amounts of Liabilities Presented in the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

Gross Amounts of Recognized  Liabilities

 

Gross Amounts Offset in the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

 

 

Financial Instruments

 

Cash Collateral

 

 

(In thousands)

 

 

 

 

 

Net Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

$

400,000

 

$

(200,000)

 

$

200,000

 

$

(200,000)

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

Net Amounts of Liabilities Presented in the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

Gross Amounts of Recognized  Liabilities

 

Gross Amounts Offset in the Statement of Financial Position

 

 

 

 

 

 

 

 

 

 

 

 

Financial Instruments

 

Cash Collateral

 

 

 

 

 

 

 

 

Net Amount

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

$

500,000

 

$

(200,000)

 

$

300,000

 

$

(300,000)

 

$

-

 

$

-

50 


 

NOTE 13 – GOODWILL AND OTHER INTANGIBLES

    

Goodwill as of March 31, 2018 and December 31, 2017 amounted to $28.1 million, recognized as part of “Other Assets” in the consolidated statements of financial condition. The Corporation conducted its annual evaluation of goodwill and other intangibles during the fourth quarter of 2017. The Corporation’s goodwill is related to the acquisition of FirstBank Florida in 2005.

 

There have been no significant events related to the Florida reporting unit that could indicate potential goodwill impairment since the date of the last evaluation; therefore, no goodwill impairment evaluation was performed during the first quarter of 2018. Goodwill and other indefinite life intangibles are reviewed at least annually for impairment.

 

    In connection with the acquisition of the FirstBank-branded credit card loan portfolio, in the second quarter of 2012, the Corporation recognized a purchased credit card relationship intangible of $24.5 million, which is being amortized over the remaining estimated life of 3.6 years on an accelerated basis based on the estimated attrition rate of the purchased credit card accounts, which reflects the pattern in which the economic benefits of the intangible asset are consumed. These benefits are consumed as the revenue stream generated by the cardholder relationship is realized. 

 

The core deposit intangible includes the core deposit intangible acquired in the February 2015 Doral Bank transaction amounting to $3.6 million as of March 31, 2018. 

 

In the first quarter of 2016, FirstBank Insurance Agency acquired certain insurance customer accounts and related customer records and recognized an insurance customer relationship intangible of $1.1 million ($0.7 million as of March 31, 2018), which is being amortized over the next 4.7 years on a straight-line basis. The acquired accounts have a direct relationship to the previous mortgage loan portfolio acquisitions from Doral Bank and Doral Financial in 2015 and 2014.

 

    The following table shows the gross amount and accumulated amortization of the Corporation’s intangible assets recognized as part of Other Assets in the consolidated statements of financial condition:

 

 

 

 

 

 

 

As of

 

As of

 

March 31,

 

December 31,

 

2018

 

2017

(Dollars in thousands)

 

 

 

 

 

Core deposit intangible:

 

 

 

 

 

   Gross amount, beginning of period

$

51,664

 

$

51,664

   Accumulated amortization (1)

 

(46,580)

 

 

(46,186)

   Net carrying amount

$

5,084

 

$

5,478

 

 

 

 

 

 

Remaining amortization period

 

6.8 years

 

 

7.0 years

 

 

 

 

 

 

Purchased credit card relationship intangible:

 

 

 

 

 

   Gross amount

$

24,465

 

$

24,465

   Accumulated amortization (2)

 

(17,039)

 

 

(16,465)

   Net carrying amount

$

7,426

 

$

8,000

 

 

 

 

 

 

Remaining amortization period

 

3.6 years

 

 

3.9 years

 

 

 

 

 

 

Insurance customer relationship intangible:

 

 

 

 

 

   Gross amount

$

1,067

 

$

1,067

   Accumulated amortization (3)

 

(330)

 

 

(292)

   Net carrying amount

$

737

 

$

775

 

 

 

 

 

 

Remaining amortization period

 

4.7 years

 

 

5.0 years

 

 

 

 

 

 

(1) For the quarters ended March 31, 2018 and 2017, the amortization expense of core deposit intangibles amounted to $0.4 million and $0.5 million, respectively.

(2) For each of the quarters ended March 31, 2018 and 2017, the amortization expense of the purchased credit card relationship intangible amounted to $0.6 million.

(3) For each of the quarters ended March 31, 2018 and 2017, the amortization expense of the insurance customer relationship intangible amounted to $38 thousand.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51 


 

 

The estimated aggregate annual amortization expense related to the intangible assets for future periods is as follows:

 

 

 

 

 

 

 

 

Amount

 

 

 

 

(In thousands)

 

2018

$

2,585

 

2019

 

3,088

 

2020

 

2,851

 

2021

 

2,658

 

2020

 

915

 

2023 and after

 

1,150

 

 

 

 

 

 

 

NOTE 14 – NON-CONSOLIDATED VARIABLE INTEREST ENTITIES (“VIE”) AND SERVICING ASSETS

 

   The Corporation transfers residential mortgage loans in sale or securitization transactions in which it has continuing involvement, including servicing responsibilities and guarantee arrangements. All such transfers have been accounted for as sales, as required by applicable accounting guidance.

 

    When evaluating the need to consolidate counterparties to which the Corporation has transferred assets or with which the Corporation has entered into other transactions, the Corporation first determines if the counterparty is an entity for which a variable interest exists. If no scope exception is applicable and a variable interest exists, the Corporation then evaluates if it is the primary beneficiary of the VIE and whether the entity should be consolidated or not.

 

    Below is a summary of transfers of financial assets to VIEs for which the Corporation has retained some level of continuing involvement:

 

GNMA

 

The Corporation typically transfers first lien residential mortgage loans in conjunction with GNMA securitization transactions in which the loans are exchanged for cash or securities that are readily-redeemed for cash proceeds and servicing rights. The securities issued through these transactions are guaranteed by the issuer and, under seller/servicer agreements, the Corporation is required to service the loans in accordance with the issuers’ servicing guidelines and standards. As of March 31, 2018, the Corporation serviced loans securitized through GNMA with a principal balance of $1.7 billion.

 

Trust Preferred Securities

 

     In 2004, FBP Statutory Trust I, a financing trust that is wholly owned by the Corporation, sold to institutional investors $100 million of its variable-rate trust-preferred securities. 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 financing trust that is wholly owned by the Corporation, sold to institutional investors $125 million of its variable-rate trust-preferred securities. FBP Statutory 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 debentures are presented in the Corporation’s consolidated statement of financial condition as Other Borrowings, net of related issuance costs. The variable-rate trust-preferred securities are fully and unconditionally guaranteed by the Corporation. The Junior Subordinated Deferrable Debentures issued by the Corporation in April 2004 and September 2004 mature on June 17, 2034 and September 20, 2034, respectively; however, under certain circumstances, the maturity of Junior Subordinated Deferrable Debentures may be shortened (such shortening would result in a mandatory redemption of the variable-rate trust-preferred securities).

 

During the first quarter of 2018, the Corporation completed the repurchase of $23.8 million of trust preferred securities of the FBP Statutory Trust I that were auctioned in a public sale at which the Corporation was invited to participate. The Corporation repurchased and cancelled the repurchased trust preferred securities, resulting in a commensurate reduction in the related Floating Rate Junior Subordinated Debentures. The Corporation’s winning bid equated to 90% of the $23.8 million par value. The 10% discount resulted in a gain of approximately $2.3 million, which is reflected in the statement of income as a “Gain on early extinguishment of debt.”

 

The Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act eliminated certain trust-preferred securities from Tier 1 Capital; however, these instruments may remain in Tier 2 capital until the instruments are redeemed or mature. Under the indentures, the Corporation has the right, from time to time, and without causing an event of default, to defer payments of

52 


 

interest on the Junior Subordinated Deferrable Debentures by extending the interest payment period at any time and from time to time during the term of the subordinated debentures for up to twenty consecutive quarterly periods. During the second quarter of 2016, the Corporation, having received approval from the Federal Reserve, paid $31.2 million for all of the accrued but deferred interest payments plus the interest for the second quarter of 2016 on the Corporation’s subordinated debentures associated with its trust preferred securities. Subsequently, the Corporation has received quarterly approvals that have enabled it to make scheduled quarterly interest payments.  As of March 31, 2018, the Corporation was current on all interest payments due on its subordinated debt. In October 2017, the New York FED terminated the formal written agreement (the “Written Agreement”) entered into on June 3, 2010 between the Corporation and the Reserve Bank. However, the Corporation has agreed with its regulators to continue to obtain approval before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or trust-preferred securities, incurring or guaranteeing debt or purchasing or redeeming any corporate stock. The Corporation has received approval to make the subordinated debentures’ quarterly payment for June 30, 2018.

 

Grantor Trusts

 

    During 2004 and 2005, an unaffiliated party, referred to in this subsection as the seller, established a series of statutory trusts to effect the securitization of mortgage loans and the sale of trust certificates (the “Grantor Trusts”). The seller initially provided the servicing for a fee, which is senior to the obligations to pay trust certificate holders. The seller then entered into a sales agreement through which it sold and issued the trust certificates in favor of the Corporation’s banking subsidiary. Currently, the Bank is the sole owner of the trust certificates; the servicing of the underlying residential mortgages that generate the principal and interest cash flows is performed by another third party, which receives a servicing fee. The securities are variable-rate securities indexed to 90-day LIBOR plus a spread. The principal payments from the underlying loans are remitted to a paying agent (servicer), who then remits interest to the Bank. Interest income is shared to a certain extent with the FDIC, which has an interest only strip (“IO”) tied to the cash flows of the underlying loans and is entitled to receive the excess of the interest income less a servicing fee over the variable-rate income that the Bank earns on the securities. This IO is limited to the weighted-average coupon on the securities. The FDIC became the owner of the IO upon its intervention of the seller, a failed financial institution. No recourse agreement exists, and the Bank, as the sole holder of the certificates, absorbs all risks from losses on non-accruing loans and repossessed collateral. As of March 31, 2018, the amortized cost and fair value of the Grantor Trusts amounted to $21.3 million and $16.1 million, respectively, with a weighted average yield of 4.49%.

 

Investment in unconsolidated entity

 

On February 16, 2011, FirstBank sold an asset portfolio consisting of performing and non-performing construction, commercial mortgage and commercial and industrial loans with an aggregate book value of $269.3 million to CPG/GS, an entity organized under the laws of the Commonwealth of Puerto Rico and majority owned by PRLP Ventures LLC ("PRLP"), a company created by Goldman, Sachs & Co. and Caribbean Property Group.  In connection with the sale, the Corporation received $88.5 million in cash and a 35% interest in CPG/GS, and made a loan in the amount of $136.1 million representing seller financing provided by FirstBank. The loan has a seven-year maturity and bears variable interest at 30-day LIBOR plus 300 basis points and is secured by a pledge of all of the acquiring entity's assets as well as PRLP's 65% ownership interest in CPG/GS. As of March 31, 2018, the carrying amount of the loan was $4.1 million, which was included in the Corporation's commercial and industrial loans held for investment portfolio. The loan matured in February 2018 and is in the process of refinancing. As of March 31, 2018, the loan is current on its interest payments. FirstBank’s equity interest in CPG/GS is accounted for under the equity method. The loss recorded in 2014 reduced to zero the carrying amount of the Bank’s investment in CPG/GS. No negative investment needs to be reported as the Bank has no legal obligation or commitment to provide further financial support to this entity; thus, no further losses have been or will be recorded on this investment.

 

FirstBank also provided an $80 million advance facility to CPG/GS to fund unfunded commitments and costs to complete projects under construction, which was fully disbursed in 2011, and a $20 million working capital line of credit to fund certain expenses of CPG/GS.  The working capital line expired in September 2016. During 2012, CPG/GS repaid the outstanding balance of the advance facility to fund unfunded commitments, and the funds became available for rewithdrawal under a one-time revolver agreement. This facility loan bears variable interest at 30-day LIBOR plus 300 basis points. As of March 31, 2018, the carrying value of the amount outstanding under the revolver agreement was $6.8 million, which was included in the Corporation's commercial and industrial loans held for investment portfolio.

 

   Cash proceeds received by CPG/GS have been first used to cover operating expenses and debt service payments, including those related to the note receivable, and the revolver agreement, described above, which must be substantially repaid before proceeds can be used for other purposes, including the return of capital to both PRLP and FirstBank. FirstBank will not receive any return on its equity interest until PRLP receives an aggregate amount equivalent to its initial investment and a priority return of at least 12%, which has not occurred, resulting in FirstBank’s interest in CPG/GS being subordinate to PRLP’s interest. CPG/GS will then begin to make payments pro rata to PRLP and FirstBank, 35% and 65%, respectively, until FirstBank has achieved a 12% return on its invested capital and the aggregate amount of distributions is equal to FirstBank’s capital contributions to CPG/GS.

 

53 


 

    The Bank has determined that CPG/GS is a VIE in which the Bank is not the primary beneficiary.  In determining the primary beneficiary of CPG/GS, the Bank considered applicable guidance that requires the Bank to qualitatively assess the determination of the primary beneficiary (or consolidator) of CPG/GS based on whether it has both the power to direct the activities of CPG/GS that most significantly impact the entity's economic performance and the obligation to absorb losses of CPG/GS that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. The Bank determined that it does not have the power to direct the activities that most significantly impact the economic performance of CPG/GS as it does not have the right to manage the loan portfolio, impact foreclosure proceedings, or manage the construction and sale of the property; therefore, the Bank concluded that it is not the primary beneficiary of CPG/GS.

 

Servicing Assets

 

The Corporation sells residential mortgage loans to GNMA, which generally securitizes the transferred loans into mortgage-backed securities. Also, certain conventional conforming loans are sold to FNMA or FHLMC with servicing retained. The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or purchased.

 

    The changes in servicing assets are shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended

 

 

 

March 31,

 

March 31,

 

 

 

2018

 

2017

 

(In thousands)

 

 

 

 

 

 

Balance at beginning of period

$

25,255

 

$

26,244

 

Capitalization of servicing assets

 

887

 

 

875

 

Amortization

 

(737)

 

 

(788)

 

Adjustment to fair value

 

713

 

 

(160)

 

Other (1) 

 

17

 

 

159

 

   Balance at end of period

$

26,135

 

$

26,330

 

(1)

Amount represents the adjustment to fair value related to the repurchase of loans serviced for others.

 

Impairment charges are recognized through a valuation allowance for each individual stratum of servicing assets. The valuation allowance is adjusted to reflect the amount, if any, by which the cost basis of the servicing asset for a given stratum of loans being serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized.

 

    Changes in the impairment allowance were as follows:

 

 

 

 

 

 

 

 

Quarter ended

 

 

March 31,

 

March 31,

 

 

2018

 

2017

 

(In thousands)

 

 

 

 

 

 

Balance at beginning of period

$

1,451

 

$

461

 

Temporary impairment charges

 

17

 

 

160

 

OTTI of servicing assets

 

(65)

 

 

(621)

 

Recoveries

 

(730)

 

 

-

 

   Balance at end of period

$

673

 

$

-

 

54 


 

 

    The components of net servicing income are shown below:

 

 

 

 

 

 

 

 

 

 

Quarter ended

 

 

 

March 31,

 

March 31,

 

 

 

2018

 

2017

 

 

 

 

(In thousands)

Servicing fees

$

2,120

 

$

2,024

 

Late charges and prepayment penalties

 

120

 

 

99

 

Adjustment for loans repurchased

 

17

 

 

159

 

Other

 

-

 

 

(7)

 

   Servicing income, gross

 

2,257

 

 

2,275

 

Amortization and impairment of servicing assets

 

(24)

 

 

(948)

 

      Servicing income, net

$

2,233

 

$

1,327

 

 

 

 

 

 

 

 

 

 

 

 

 

   The Corporation’s servicing assets are subject to prepayment and interest rate risks. As of March 31, 2018, fair values of the Corporation’s servicing assets were based on a valuation model that incorporates market-driven assumptions regarding discount rates and mortgage prepayment rates, adjusted by the particular characteristics of the Corporation’s servicing portfolio. The Corporation used constant prepayment rate assumptions for the Corporation’s servicing assets for the government-guaranteed mortgage loans of 5.6% and 6.0% for the quarters ended March 31, 2018 and 2017, respectively. For conventional conforming mortgage loans, the Corporation used 6.2% and 6.3% for the quarters ended March 31, 2018 and 2017, respectively, and, for the conventional non-conforming mortgage loans, the Corporation used 9.1% and 9.5% for the quarters ended March 31, 2018 and 2017, respectively. Discount rate assumptions used were 12% for government-guaranteed mortgage loans; 10% for conventional conforming mortgage loans; and 14.3% for conventional non-conforming mortgage loans for each of the quarters ended March 31, 2018 and 2017.

 

     The weighted averages of the key economic assumptions that the Corporation used in its valuation model and the sensitivity of the current fair value to immediate 10% and 20% adverse changes in those assumptions for mortgage loans as of March 31, 2018 were as follows:  

 

 

(Dollars in thousands)

Carrying amount of servicing assets

$

26,135

 

Fair value

$

30,720

 

Weighted-average expected life (in years)

 

8.56

 

 

 

 

 

Constant prepayment rate (weighted-average annual rate)

 

5.89%

 

   Decrease in fair value due to 10% adverse change

$

725

 

   Decrease in fair value due to 20% adverse change

$

1,421

 

 

 

 

 

Discount rate (weighted-average annual rate)

 

11.23%

 

   Decrease in fair value due to 10% adverse change

$

1,503

 

   Decrease in fair value due to 20% adverse change

$

2,876

 

 

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship between the change in assumption and the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the servicing asset is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the sensitivities.

55 


 

NOTE 15 – DEPOSITS

 

    The following table summarizes deposit balances as of the dates indicated:

 

March 31,

 

 

December 31,

 

2018

 

2017

(In thousands)

 

 

 

 

 

Type of account:

 

 

 

 

 

Non-interest bearing checking accounts

$

2,019,823

 

$

1,833,665

Savings accounts

 

2,413,446

 

 

2,401,385

Interest-bearing checking accounts

 

1,242,957

 

 

1,207,511

Certificates of deposit

 

2,434,162

 

 

2,429,585

Brokered certificates of deposit (CDs)

 

956,077

 

 

1,150,485

 

$

9,066,465

 

$

9,022,631

 

 

    Brokered CDs mature as follows:

 

 

 

 

 

 

 

 

March 31, 2018

 

(In thousands)

 

 

 

 

 

 

 

Three months or less

 

$

133,119

 

Over three months to six months

 

 

149,170

 

Over six months to one year

 

 

265,986

 

Over one year but less than three years

 

 

316,191

 

Three to five years

 

 

90,231

 

Over five years

 

 

1,380

 

Total

 

$

956,077

 

    The following are the components of interest expense on deposits:

 

 

 

 

 

 

 

Quarter Ended

 

March 31,

 

 

March 31,

 

2018

 

 

2017

(In thousands)

 

Interest expense on deposits

$

16,607

 

$

15,468

Accretion of premium from acquisition

 

(3)

 

 

(23)

Amortization of broker placement fees

 

367

 

 

527

   Interest expense on deposits

$

16,971

 

$

15,972

56 


 

NOTE 16 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

  Securities sold under agreements to repurchase (repurchase agreements) consisted of the following:

 

 

 

 

 

 

 

March, 31

 

December 31,

 

 

2018

 

2017

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Short-term fixed-rate repurchase agreement with a rate of 1.53%

$

-

 

$

100,000

Long-term fixed-rate repurchase agreements, interest ranging from 1.96% to 2.26% (1)(2)

 

200,000

 

 

200,000

 

 

$

200,000

 

$

300,000

 

 

 

 

 

 

 

(1)

Reported net of securities purchased under agreements to repurchase (reverse repurchase agreements) by counterparty, when applicable, pursuant to ASC 210-20-45-11.

 

 

 

 

 

 

 

(2)

As of March 31, 2018, includes $200 million with an average rate of 2.11% that lenders have the right to call before their contractual maturities at various dates beginning on May 6, 2018. Subsequent to March 31, 2018, no lender has exercised its call option on repurchase agreements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Repurchase agreements mature as follows:

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

(In thousands)

 

 

 

 

 

 

Three to four years

 

 

200,000

 

   Total

 

$

200,000

 

 

 

 

 

 

As of March 31, 2018 and December 31, 2017, the securities underlying such agreements were delivered to the dealers with which the repurchase agreements were transacted.

 

    Repurchase agreements as of March 31, 2018, grouped by counterparty, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Weighted-Average

 

Counterparty

 

Amount

 

Maturity (In Months)

 

 

 

 

 

 

 

 

JP Morgan Chase

 

$

200,000

 

46

 

 

 

 

 

 

 

57 


 

NOTE 17 – ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB)

 

The following is a summary of the advances from the FHLB:

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2018

 

2017

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term fixed-rate advances from FHLB, with a weighted-average

 

 

 

 

 

 

    interest rate of 1.91%

$

715,000

 

$

715,000

 

    Advances from FHLB mature as follows:

 

 

 

 

 

 

March 31,

 

 

2018

 

(In thousands)

 

 

 

 

 

 

 

Over three months to six months

$

25,000

 

Over six months to one year

 

70,000

 

Over one to three years

 

300,000

 

Over three to five years

 

320,000

 

   Total

$

715,000

 

 

 

 

 

As of March 31, 2018, the Corporation had additional capacity of approximately $689.5 million on this credit facility based on collateral pledged at the FHLB, including a haircut reflecting the perceived risk associated with the collateral.

 

NOTE 18 – OTHER BORROWINGS

 

 Other borrowings, as of the indicated dates, consisted of:

 

 

March 31,

 

December 31,

 

2018

 

2017

 

(In thousands)

Junior subordinated debentures due in 2034,

 

 

 

 

 

   interest-bearing at a floating rate of 2.75%

 

 

 

 

 

   over 3-month LIBOR (4.92% as of March 31, 2018

 

 

 

 

 

   and 4.35% as of December 31, 2017) (1) 

$

65,593

 

$

90,078

 

 

 

 

 

 

Junior subordinated debentures due in 2034,

 

 

 

 

 

   interest-bearing at a floating rate of 2.50%

 

 

 

 

 

   over 3-month LIBOR (4.70% as of  March 31, 2018

 

 

 

 

 

  and 4.12% as of December 31, 2017)

 

118,557

 

 

118,557

 

$

184,150

 

$

208,635

 

 

 

 

 

 

(1) Refer to Note 14, - "Non-Consolidated Variable Interest Entities and Servicing Assets-Trust Preferred Securities," for additional information about the Corporation repurchase and cancellation in the first quarter of 2018 of $23.8 million in trust-preferred securities associated with these junior subordinated debentures.

 

 

 

 

 

 

 

 

 

 

 

 

58 


 

NOTE 19 – STOCKHOLDERS’ EQUITY

 

Common Stock

 

As of March 31, 2018 and December 31, 2017, the Corporation had 2,000,000,000 authorized shares of common stock with a par value of $0.10 per share. As of March 31, 2018 and December 31, 2017, there were 220,877,719 and 220,382,343 shares issued, respectively, and 216,390,329 and 216,278,040 shares outstanding, respectively. Refer to Note 4 for information about transactions related to common stock under the Omnibus Plan.

 

 

Preferred Stock

 

The Corporation has 50,000,000 authorized shares of preferred stock with a par value of $1.00, redeemable at the Corporation’s option, subject to certain terms. This stock may be issued in series and the shares of each series have such rights and preferences as are fixed by the Board of Directors when authorizing the issuance of that particular series.  As of March 31, 2018, the Corporation has five outstanding series of non-convertible, non-cumulative preferred stock: 7.125% non-cumulative perpetual monthly income preferred stock, Series A; 8.35% non-cumulative perpetual monthly income preferred stock, Series B; 7.40% non-cumulative perpetual monthly income preferred stock, Series C; 7.25% non-cumulative perpetual monthly income preferred stock, Series D; and 7.00% non-cumulative perpetual monthly income preferred stock, Series E.  The liquidation value per share is $25.

 

  Effective January 17, 2012, the Corporation delisted all of its outstanding series of non-convertible, non-cumulative preferred stock from the New York Stock Exchange. The Corporation has not arranged for listing and/or registration on another national securities exchange or for quotation of the Series A through E Preferred Stock in a quotation medium. In December 2016, for the first time since July 2009, the Corporation paid dividends on its non-cumulative perpetual monthly income preferred stock, after receiving regulatory approval. Since then, the Corporation has continued to pay monthly dividend payments on the non-cumulative perpetual monthly income preferred stock. The Corporation intends to request approval in future periods to continue monthly dividend payments on the non-cumulative perpetual monthly income preferred stock. The Corporation has received regulatory approval to pay the monthly dividends on the Corporation’s Series A through E Preferred Stock through June 2018.

 

  On October 3, 2017, the Federal Reserve terminated the Written Agreement entered into on June 3, 2010 between the Corporation and the Federal Reserve. However, the Corporation has agreed with its regulators to continue to obtain approval before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or trust preferred securities, incurring or guaranteeing debt or purchasing or redeeming any corporate stock.   

 

Treasury stock

 

During the first quarter of 2018 and 2017, the Corporation withheld an aggregate of 383,087 shares and 98,300 shares, respectively, of the common stock paid to certain senior officers as additional compensation and restricted stock that vested during the first quarter of 2018 and 2017 to cover employees’ payroll and income tax withholding liabilities; these shares are held as treasury stock. As of March 31, 2018 and December 31, 2017, the Corporation had 4,487,390 and 4,104,303 shares held as treasury stock, respectively.

 

FirstBank Statutory Reserve (Legal Surplus)

 

The Banking Law of the Commonwealth of Puerto Rico requires that a minimum of 10% of FirstBank’s net income for the year be transferred to a legal surplus reserve until such surplus equals the total of paid-in-capital on common and preferred stock. Amounts transferred to the legal surplus reserve from the retained earnings account are not available for distribution to the Corporation, including for payment as dividends to the stockholders, without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The Puerto Rico Banking Law provides that, when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over receipts must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the legal surplus reserve, as a reduction thereof. If there is no legal surplus reserve sufficient to cover such balance in whole or in part, the 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. During the fourth quarter of 2017, $7.3 million was transferred to the legal surplus reserve. FirstBank’s legal surplus reserve, included as part of retained earnings in the Corporation’s consolidated statement of financial condition, amounted to $59.7 million as of March 31, 2018.  There were no transfers to the legal surplus reserve during the quarter ended March 31, 2018. 

59 


 

  NOTE 20 - INCOME TAXES

  

    Income tax expense includes Puerto Rico and USVI income taxes as well as applicable U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, First BanCorp. is treated as a foreign corporation for U.S. and USVI income tax purposes and is generally subject to U.S. and USVI income tax only on its income from sources within the U.S. and USVI or income effectively connected with the conduct of a trade or business in those regions. Any such tax paid in the U.S. and USVI is also creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions and limitations.

 

     Under the Puerto Rico Internal Revenue Code of 2011, as amended (the “2011 PR Code”), the Corporation and its subsidiaries are treated as separate taxable entities and are generally not entitled to file consolidated tax returns and, thus, the Corporation is generally not entitled to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss (“NOL”), a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL carry-forward period. The 2011 PR Code allows entities organized as limited liability companies to perform an election to become a non-taxable “pass-through” entity and utilize losses to offset income from other “pass-through” entities, subject to certain limitations, with the remaining net income passing-through to its partner entities. The 2011 PR Code also provides a dividend received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations.

 

       On March 1, 2017, the Corporation completed the applicable regulatory filings to change the tax status of its subsidiary, First Federal Finance, from a taxable corporation to a non-taxable “pass-through” entity. This election allows the Corporation to realize tax benefits of its deferred tax assets associated with pass-through ordinary net operating losses available at the banking subsidiary, FirstBank, which were subject to a full valuation allowance as of December 31, 2016, against now pass-through ordinary income from this profitable subsidiary.

 

On March 1, 2017, the Corporation also completed the applicable regulatory filings to change the tax status of its subsidiary, FirstBank Insurance, from a taxable corporation to a non-taxable “pass-through” entity. This election allows the Corporation to offset pass-through income projected to be earned by FirstBank Insurance with net operating losses available at the Holding Company level.

 

     The Corporation has maintained an effective tax rate lower than the maximum statutory rate mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income taxes and by doing business through an International Banking Entity (“IBE”) unit of the Bank, and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose interest income and gain on sales is exempt from Puerto Rico income taxation. The IBE and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico on the specific activities identified in the IBE Act. An IBE that operates as a unit of a bank pays income taxes at the corporate standard rates to the extent that the IBE’s net income exceeds 20% of the bank’s total net taxable income.

 

    For the first quarter of 2018, the Corporation recorded a income tax expense of $7.8 million, compared to an income tax benefit of $8.1 million for the same period in 2017. The variance was mostly attributable to a $13.2 million tax benefit recorded in the first quarter of 2017 as a result of the above discussed change in tax status of certain subsidiaries from taxable corporations to limited liability companies that elected to be treated as partnerships for income tax purposes in Puerto Rico, higher pre-tax earnings in the first quarter of 2018, and a higher estimated effective tax rate for 2018.

 

For the quarter ended March 31, 2018, 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 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 2018, excluding entities from which a tax benefit cannot be recognized and discrete items, was 27% compared to 24% for the first quarter of 2017.  The estimated annual effective tax rate including all entities for 2018 was 19% (23% excluding discrete items) compared to 13% for the first quarter of 2017 (25% excluding discrete items, primarily the tax benefit resulting from the previously mentioned change in the tax status of the two subsidiaries).

 

    The Corporation’s net deferred tax asset amounted to $289.3 million as of March 31, 2018, net of a valuation allowance of $186.1 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 $289.2 million as of March 31, 2018, net of a valuation allowance of $150.0 million, compared to net deferred tax asset of $294.7 million, net of a valuation allowance of $150.7 million, as of December 31, 2017.

 

60 


 

During the third quarter of 2017, the Corporation completed a formal ownership change analysis within the meaning of Section 382 of the U.S. Internal Revenue Code (“Section 382”) covering a comprehensive period, and concluded that an ownership change occurred during such period. Section 382 limits the ability to utilize U.S. and USVI NOLs for income tax purposes at such jurisdictions following an event of an ownership change.  The Section 382 limitation could result in higher U.S. and USVI liabilities in the future than we would incur in the absence of such limitation. As of March 31, 2018, and as a result of the Section 382 limitation, the Corporation incurred an income tax expense of approximately $1.6 million related to its U.S. operations. The limitation did not affect the USVI operations in the first quarter of 2018. Prospectively, the Corporation expects that it will be able to mitigate the adverse effects associated with the Section 382 limitation as any such tax paid in the U.S. or USVI could be creditable against Puerto Rico tax liabilities or taken as deduction against taxable income.  However, our ability to reduce our Puerto Rico tax liability through such a credit or deduction depends on our tax profile at each annual taxable period, which is dependent on various factors.

 

   As of March 31, 2018, the Corporation did not have Unrecognized Tax Benefits (“UTBs”) recorded on its books. The Corporation classifies all interest and penalties, if any, related to tax uncertainties as income tax expense. Audit periods remain open for review until the statute of limitations has passed. The statute of limitations under the 2011 PR Code is four years; the statute of limitations for U.S. and USVI income tax purposes is three years after a tax return is due or filed, whichever is later, for each. The completion of an audit by the taxing authorities or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Corporation’s liability for income taxes. Any such adjustment could be material to the results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. For U.S. and USVI income tax purposes, all tax years subsequent to 2012 remain open to examination. For Puerto Rico tax purposes, all tax years subsequent to 2012 remain open to examination.

 

    On December 22, 2017, the United States president signed H.R.1, The Tax Cuts and Jobs Acts, which includes an overhaul of individual, business and international taxes and has affected our branch operations in the U.S. and the USVI. The bill includes measures reducing corporate taxes from 35% to 21%, a repeal of the corporate alternative minimum tax regime, changes to business deductions and NOLs, a 15.5% tax on mandatory repatriation of liquid assets, 10% tax on base erosion payments, and a minimum 10.5% tax on inclusion of global intangible low-tax income by U.S. shareholders, among other significant changes. The main provisions affecting our operations in the U.S. and the USVI in the first quarter for 2018 include: the change in tax rate to 21%, the limitation to the amount certain financial institutions may deduct for premiums paid to the FDIC, and changes in permanent differences, such as the meals and entertainment deductions. Other significant provisions, such as the base erosion and anti-abuse tax, do not affect the Corporation’s U.S. and USVI branch operations since these operations’ receipts do not exceed the annual threshold of U.S. effectively connected gross receipts.

 

NOTE 21 – FAIR VALUE

 

Fair Value Measurement

 

The FASB authoritative guidance for fair value measurement defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  This guidance also establishes a fair value hierarchy for classifying financial instruments.  The hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable.  Three levels of inputs may be used to measure fair value:

  

 

Level 1

Valuations of Level 1 assets and liabilities are obtained from readily-available pricing sources for market transactions involving identical assets or liabilities.  Level 1 assets and liabilities include equity securities that trade in an active exchange market, as well as certain U.S. Treasury and other U.S. government and agency securities and corporate debt securities that are traded by dealers or brokers in active markets.

Level 2

Valuations of Level 2 assets and liabilities are based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair value is estimated based on the value of identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments, and (iii) derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3

Valuations of Level 3 assets and liabilities are based on unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models for which the determination of fair value requires significant management judgments estimation. 

 

 

61 


 

 

For the first quarter of 2018, there were no transfers into or out of Level 1, Level 2 or Level 3 of the fair value hierarchy.

 

Financial Instruments Recorded at Fair Value on a Recurring Basis

 

Investment securities available for sale

 

The fair value of investment securities was the market value based on quoted market prices (as is the case with Treasury notes and non-callable U.S. Agency debt securities), when available (Level 1), or, when available, market prices for identical or comparable assets (as is the case with MBS and callable U.S. agency debt) that are based on observable market parameters, including benchmark yields, reported trades, quotes from brokers or dealers, issuer spreads, bids, offers and reference data, including market research operations (Level 2). Observable prices in the market already consider the risk of nonperformance. If listed prices or quotes are not available, fair value is based upon discounted cash flow models that use unobservable inputs due to the limited market activity of the instrument, as is the case with certain private label MBS held by the Corporation (Level 3).

 

Private label MBS are collateralized by fixed-rate mortgages on single-family residential properties in the United States; the interest rate on the securities is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The market valuation represents the estimated net cash flows over the projected life of the pool of underlying assets applying a discount rate that reflects market observed floating spreads over LIBOR, with a widening spread based on a nonrated security. The market valuation is derived from a model that utilizes relevant assumptions, such as the prepayment rate, default rate, and loss severity on a loan level basis. The Corporation modeled the cash flow from the fixed-rate mortgage collateral using a static cash flow analysis according to collateral attributes of the underlying mortgage pool (i.e., loan term, current balance, note rate, rate adjustment type, rate adjustment frequency, rate caps, and others) in combination with prepayment forecasts based on historical portfolio performance. The variable cash flow of the security is modeled using the 3-month LIBOR forward curve. Loss assumptions were driven by the combination of default and loss severity estimates, using an asset-level risk assessment method taking into account loan credit characteristics (loan-to-value, state jurisdiction, delinquency, property type and pricing behavior, and others) to provide an estimate of default and loss severity.

 

Refer to the table below for further information regarding qualitative information for all assets and liabilities measured at fair value using significant unobservable inputs (Level 3).

 

Derivative instruments

 

The fair value of most of the Corporation’s derivative instruments is based on observable market parameters and takes into consideration the credit risk component of paying counterparties, when appropriate. On interest caps, only the seller's credit risk is considered.  The caps were valued using a discounted cash flow approach based on the related LIBOR and swap rate for each cash flow.

 

A credit spread is considered for those derivative instruments that are not secured. The cumulative mark-to-market effect of credit risk in the valuation of derivative instruments for the quarters ended March 31, 2018 and 2017 was immaterial.

  

 

     Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

As of December 31, 2017

 

 

Fair Value Measurements Using 

 

Fair Value Measurements Using 

 

(In thousands)

Level 1

 

Level 2

 

Level 3

 

Assets/Liabilities at Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Assets/Liabilities at Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Securities available for sale :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Equity securities (1) 

$

-

 

$

-

 

$

-

 

$

-

 

$

418

 

$

-

 

$

-

 

$

418

   U.S. Treasury Securities

 

57,169

 

 

-

 

 

-

 

 

57,169

 

 

7,401

 

 

-

 

 

-

 

 

7,401

   Noncallable U.S. agency debt

 

-

 

 

329,170

 

 

-

 

 

329,170

 

 

-

 

 

361,971

 

 

-

 

 

361,971

   Callable U.S. agency debt and MBS

 

-

 

 

1,406,283

 

 

-

 

 

1,406,283

 

 

-

 

 

1,497,253

 

 

-

 

 

1,497,253

   Puerto Rico government obligations

 

-

 

 

4,074

 

 

2,734

 

 

6,808

 

 

-

 

 

4,118

 

 

2,695

 

 

6,813

   Private label MBS

 

-

 

 

-

 

 

16,074

 

 

16,074

 

 

-

 

 

-

 

 

17,060

 

 

17,060

   Other investments

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

100

 

 

100

Equity securities (1) 

 

413

 

 

-

 

 

-

 

 

413

 

 

-

 

 

-

 

 

-

 

 

-

Derivatives, included in assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Purchased interest rate cap agreements

 

-

 

 

668

 

 

-

 

 

668

 

 

-

 

 

305

 

 

-

 

 

305

   Forward contracts

 

-

 

 

3

 

 

-

 

 

3

 

 

-

 

 

7

 

 

-

 

 

7

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives, included in liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Written interest rate cap agreement

 

-

 

 

668

 

 

-

 

 

668

 

 

-

 

 

305

 

 

-

 

 

305

   Forward contracts

 

-

 

 

67

 

 

-

 

 

67

 

 

-

 

 

19

 

 

-

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

As of January 1, 2018, the Corporation adopted ASU 2016-01, resulting in the reclassification of equity securities from available-for-sale investment securities to other investment securities. As of December 31, 2017, equity securities had a net unrealized loss of $6 thousand.

62 


 

 

The table below presents a reconciliation of the beginning and ending balances of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters ended March 31, 2018 and 2017.

 

 

  Quarter ended March 31,

 

 

2018

 

2017

Level 3 Instruments Only

Securities

 

Securities

(In thousands)

Available For Sale(1)

 

Available For Sale(1)

 

 

 

 

 

 

 

Beginning balance

$

19,855

 

 

22,914

   Total gains (losses) (realized/unrealized):

 

 

 

 

 

      Included in other comprehensive income

 

472

 

 

518

   Principal repayments and amortization

 

(1,519)

 

 

(2,050)

Ending balance

$

18,808

 

$

21,382

 

 

 

 

 

 

 

(1)

Amounts mostly related to private label MBS.

 

 

  The table below presents qualitative information for significant assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of March 31, 2018:

 

 

 

 

 

 

 

 

 

 

March 31, 2018

(In thousands)

Fair Value

 

Valuation Technique

 

Unobservable Input

 

Range

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

   Private label MBS

$

16,074

 

Discounted cash flows

 

Discount rate

 

14.5%

 

 

 

 

 

 

Prepayment rate

 

7.5% - 24.5% (Weighted Average 15.2%)

 

 

 

 

 

 

Projected Cumulative Loss Rate

 

0.00% - 9.0% (Weighted Average 4.0%)

   Puerto Rico government obligations

 

 2,734  

 

Discounted cash flows

 

Discount rate

 

6.24%

 

 

 

 

 

 

Prepayment rate

 

3.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63 


 

Information about Sensitivity to Changes in Significant Unobservable Inputs

 

Private label MBS: The significant unobservable inputs in the valuation include probability of default, the loss severity assumption, and prepayment rates. Shifts in those inputs would result in different fair value measurements. Increases in the probability of default, loss severity assumptions, and prepayment rates in isolation would generally result in an adverse effect on the fair value of the instruments. Meaningful and possible shifts of each input were modeled to assess the effect on the fair value estimation.

 

Puerto Rico Government Obligations: The significant unobservable input used in the fair value measurement is the assumed prepayment rate of the underlying residential mortgage loans that collateralize these obligations that are guaranteed by the Puerto Rico Housing Finance Authority. A significant increase (decrease) in the assumed rate would lead to a higher (lower) fair value estimate. The fair value of these bonds was based on a discounted cash flow analysis that contemplates the credit quality of the holder of second mortgages and a discount for liquidity constraints on the bonds considering the absence of an active market for them. Due to the guarantee of the Puerto Rico Housing Finance Authority and other applicable contractual safeguards, no additional credit spread is applied for services default.

 

There were no changes in unrealized gains and losses recorded in earnings for the quarters ended March 31, 2018 and 2017 for Level 3 assets and liabilities that were still held at the end of each period.  

 

Additionally, fair value is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP. Adjustments to fair value usually result from the application of lower-of-cost or market accounting (e.g., loans held for sale carried at the lower-of-cost or fair value and repossessed assets) or write downs of individual assets (e.g., goodwill and loans).

 

   As of March 31, 2018, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying value as of March 31, 2018

 

(Losses) Gains recorded for the Quarter Ended                    March 31, 2018

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable (1)

$

-

 

$

-

 

$

392,493

 

$

(4,224)

Other real estate owned (2)

 

-

 

 

-

 

 

154,639

 

 

(287)

Mortgage servicing rights (3)

 

-

 

 

-

 

 

26,135

 

 

713

Loans held for sale (4)

 

-

 

 

-

 

 

64,945

 

 

(6,203)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Consists mainly of impaired commercial and construction loans.  The impairments were generally measured based on the fair value of the collateral. The fair values were derived from external appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g., absorption rates), which are not market observable.

(2)

The fair values were derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g., absorption rates and net operating income of income producing properties), which are not market observable.  Losses were related to market valuation adjustments after the transfer of the loans to the OREO portfolio.

(3)

Fair value adjustments to mortgage servicing rights were mainly due to assumptions associated with mortgage prepayment rates. The Corporation carries its mortgage servicing rights at the lower of cost or market, measured at fair value on a non-recurring basis.  Assumptions for the value of mortgage servicing rights include:  Prepayment rate 5.89%, Discount Rate 11.23%.

(4)

The value of these loans was primarily derived from external appraisals, adjusted for specific characteristics of the loans.

 

 

64 


 

   As of March 31, 2017, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying value as of March 31, 2017

 

 (Losses) recorded for the Quarter Ended March 31, 2017

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable (1)

$

-

 

$

-

 

$

430,162

 

$

(15,211)

Other real estate owned (2)

 

-

 

 

-

 

 

137,784

 

 

(4,180)

Mortgage servicing rights (3)

 

-

 

 

-

 

 

26,330

 

 

(160)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 Consists mainly of impaired commercial and construction loans.  The impairments were generally measured based on the fair value of the underlying collateral. The fair values were derived from external appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g., absorption rates), which are not market observable.

(2)

The fair values were derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g., absorption rates and net operating income of income producing properties), which are not market observable.  Losses were related to market valuation adjustments after the transfer of the loans to the OREO portfolio.

(3)

Fair value adjustments to mortgage servicing rights were mainly due to assumptions associated with mortgage prepayments rates. The Corporation carries its mortgage servicing rights at the lower of cost or market, measured at fair value on a non-recurring basis. Assumptions for the value of mortgage servicing rights include: Prepayment Rate 6.17%, Discount Rate 11.20%.

 

   Qualitative information regarding the fair value measurements for Level 3 financial instruments are as follows:

 

 

 

 

 

March 31, 2018

 

Method

 

Inputs

Loans

Income, Market, Comparable Sales, Discounted Cash Flows

 

External appraised values; probability weighting of broker price opinions; management assumptions regarding market trends or other relevant factors

OREO

Income, Market, Comparable Sales, Discounted Cash Flows

 

External appraised values; probability weighting of broker price opinions; management assumptions regarding market trends or other relevant factors

Mortgage servicing rights

Discounted Cash Flows

 

Weighted average prepayment rate of 5.89%; weighted average discount rate of 11.23%

 

The following is a description of the valuation methodologies used for instruments that are not measured or reported at fair value on a recurring basis or reported at fair value on a non-recurring basis. The estimated fair value was calculated using certain facts and assumptions, which vary depending on the specific financial instrument.

 

Cash and due from banks and money market investments

 

The carrying amounts of cash and due from banks and money market investments are reasonable estimates of their fair value. Money market investments include held-to-maturity securities, which have a contractual maturity of three months or less. The fair value of these securities is based on quoted market prices in active markets that incorporate the risk of nonperformance.

 

Investment securities held to maturity

 

Investment securities held to maturity consist of financing arrangements with Puerto Rico municipalities issued in bond form but underwritten as loans with features that are typically found in commercial loan transactions. These obligations typically are not issued in bearer form, nor are they registered with the SEC and are not rated by external credit agencies. The fair value of these financing arrangements was based on a discounted cash flow analysis using risk-adjusted discount rates (Level 3). A security with similar characteristics traded in the open market is used as a proxy for each municipal bond. Then the cash flow is discounted at the average spread over the discount curve exhibited by the proxy security at the end of each quarter.

 

 

 

65 


 

Other investment securities

 

Equity or other securities that do not have a readily available fair value are stated at their net realizable value, which management believes is a reasonable proxy for their fair value. This category is principally composed of stock that the Corporation owns to comply with FHLB regulatory requirements. The realizable value of the FHLB stock equals its cost as this stock can be freely redeemed at par.

 

Loans receivable, including loans held for sale

 

     The fair value of loans held for investment and of mortgage loans held for sale is estimated using discounted cash flow analyses, based on interest rates currently being offered for loans with similar terms and credit quality and with adjustments that the Corporation’s management believes a market participant would consider in determining fair value. Loans are classified by type, such as commercial, residential mortgage, and automobile. These asset categories are further segmented into fixed- and adjustable-rate categories.  Valuations are carried out based on categories and not on a loan-by-loan basis.  Prepayment assumptions are considered for non-residential loans. For residential mortgage loans, prepayment estimates are based on a prepayment model that combined both a historical calibration and current market prepayment expectations.  Discount rates are based on the U.S. Treasury and LIBOR/Swap Yield Curves at the date of the analysis, and included appropriate adjustments for expected credit losses and liquidity.    

 

Deposits

 

The estimated fair value of demand deposits and savings accounts, which are deposits with no defined maturities, equals the amount payable on demand at the reporting date. The fair values of retail fixed-rate time deposits and brokered CDs, with stated maturities, are based on the present value of the future cash flows expected to be paid on the deposits. The discount rates used were based on retail and brokered CDs market rates as of March 31, 2018. The cash flows were based on contractual maturities; no early repayments were assumed.

 

Securities sold under agreements to repurchase

 

Some repurchase agreements reprice at least quarterly, and their outstanding balances are estimated to be their fair value. Where longer commitments are involved, fair value is estimated using exit price indications of the cost of unwinding the transactions as of the end of the reporting period. The brokers who are the counterparties provide these indications, which the Corporation evaluates. Securities sold under agreements to repurchase are fully collateralized by investment securities.

 

Advances from FHLB

 

The fair value of advances from the FHLB is estimated using exit price indications provided by the counterparty.  Advances from the FHLB are fully collateralized by mortgage loans and, to a lesser extent, investment securities.

 

Other borrowings

 

Other borrowings consist of junior subordinated debentures. Projected cash flows from the debentures were discounted using the Bloomberg BB Finance curve plus a credit spread. This credit spread was estimated using the difference in yield curves between swap rates and a yield curve that considers the industry and credit rating of the Corporation as issuer of the debenture at a tenor comparable to the time to maturity of the debentures.

  

66 


 

    The following tables present the carrying value, estimated fair value and estimated fair value level of the hierarchy of financial instruments as of March 31, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Carrying Amount in Statement of Financial Condition March 31, 2018

 

Fair Value Estimate March 31, 2018

 

Level 1

 

Level 2

 

Level 3

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks and money

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   market investments (amortized cost)

$

843,824

 

$

843,824

 

$

843,824

 

$

-

 

$

-

Investment securities available

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   for sale (fair value)

 

1,815,504

 

 

1,815,504

 

 

57,169

 

 

1,739,527

 

 

18,808

Investment securities held to maturity (amortized cost)

 

150,486

 

 

134,856

 

 

-

 

 

-

 

 

134,856

Equity Securities (fair value)

 

413

 

 

413

 

 

413

 

 

-

 

 

-

Other investment securities (amortized cost)

 

43,119

 

 

43,119

 

 

-

 

 

43,119

 

 

-

Loans held for sale (lower of cost or market)

 

91,375

 

 

91,736

 

 

-

 

 

26,791

 

 

64,945

Loans held for investment (amortized cost)

 

8,695,890

 

 

 

 

 

 

 

 

 

 

 

 

Less: allowance for loan and lease losses

 

(225,856)

 

 

 

 

 

 

 

 

 

 

 

 

   Loans held for investment, net of allowance

$

8,470,034

 

 

8,262,128

 

 

-

 

 

-

 

 

8,262,128

Derivatives, included in assets (fair value)

 

668

 

 

668

 

 

-

 

 

668

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits (amortized cost)

 

9,066,465

 

 

9,070,024

 

 

-

 

 

9,070,024

 

 

-

Securities sold under agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    to repurchase (amortized cost)

 

200,000

 

 

226,076

 

 

-

 

 

226,076

 

 

-

Advances from FHLB (amortized cost)

 

715,000

 

 

701,079

 

 

-

 

 

701,079

 

 

-

Other borrowings (amortized cost)

 

184,150

 

 

171,378

 

 

-

 

 

-

 

 

171,378

Derivatives, included in liabilities (fair value)

 

735

 

 

735

 

 

-

 

 

735

 

 

-

 

 

Total Carrying Amount in Statement of Financial Condition December 31, 2017

 

Fair Value Estimate December 31, 2017

 

Level 1

 

Level 2

 

Level 3

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks and money

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   market investments (amortized cost)

$

716,395

 

$

716,395

 

$

716,395

 

$

-

 

$

-

Investment securities available

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   for sale (fair value)

 

1,891,016

 

 

1,891,016

 

 

7,819

 

 

1,863,342

 

 

19,855

Investment securities held to maturity (amortized cost)

 

150,627

 

 

131,032

 

 

-

 

 

-

 

 

131,032

Other investment securities (amortized cost)

 

43,119

 

 

43,119

 

 

-

 

 

43,119

 

 

-

Loans held for sale (lower of cost or market)

 

32,980

 

 

34,979

 

 

-

 

 

25,237

 

 

9,742

Loans held for investment (amortized cost)

 

8,850,476

 

 

-

 

 

-

 

 

-

 

 

-

Less: allowance for loan and lease losses

 

(231,843)

 

 

-

 

 

-

 

 

-

 

 

-

    Loans held for investment, net of allowance

$

8,618,633

 

 

8,372,865

 

 

-

 

 

-

 

 

8,372,865

Derivatives, included in assets (fair value)

 

312

 

 

312

 

 

-

 

 

312

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits (amortized cost)

 

9,022,631

 

 

9,026,600

 

 

-

 

 

9,026,600

 

 

-

Securities sold under agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   to repurchase (amortized cost)

 

300,000

 

 

325,913

 

 

-

 

 

325,913

 

 

-

Advances from FHLB (amortized cost)

 

715,000

 

 

707,272

 

 

-

 

 

707,272

 

 

-

Other borrowings (amortized cost)

 

208,635

 

 

189,424

 

 

-

 

 

-

 

 

189,424

Derivatives, included in liabilities (fair value)

 

324

 

 

324

 

 

-

 

 

324

 

 

-

 

The short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include cash and due from banks and other short-term assets, such as FHLB stock. Certain assets, the most significant being premises and equipment, mortgage servicing rights, deposits base, and other customer relationship intangibles, are not considered financial instruments and are not included above. Accordingly, this fair value information is not intended to, and does not, represent the Corporation’s underlying value. Many of these assets and liabilities subject to the disclosure requirements are not actively traded, requiring management to estimate fair values. These estimates necessarily involve the use of judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected futures cash flows, and appropriate discount rates.

67 


 

NOTE 22 – REVENUE FROM CONTRACTS WITH CUSTOMERS

 

As noted in Note 1, the Corporation adopted the provisions of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018. Results for reporting periods beginning after December 31, 2017 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with Topic 605.

 

Revenue Recognition  

 

In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration to which the Corporation expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Corporation performs the following five steps: (i) identifies the contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the Corporation satisfies a performance obligation. The Corporation only applies the five-step model to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Corporation assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Corporation then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

Disaggregation of Revenue

 

The following table summarizes the Corporation’s revenue, which includes net interest income on financial instruments and non-interest income, disaggregated by type of service and business segments for the quarter ended March 31, 2018:  

 

(In thousands)

Mortgage Banking

 

Consumer (Retail) Banking

 

Commercial and Corporate

 

Treasury and Investments

 

United States Operations

 

Virgin Islands Operations

 

Total

For the quarter ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (1) 

$

21,205

 

$

51,049

 

$

18,920

 

$

12,518

 

$

13,392

 

$

7,609

 

$

124,693

Service charges and fees on deposit accounts

 

-

 

 

3,165

 

 

1,092

 

 

-

 

 

134

 

 

697

 

 

5,088

Insurance commissions

 

-

 

 

3,144

 

 

-

 

 

-

 

 

12

 

 

199

 

 

3,355

Merchant-related income

 

-

 

 

645

 

 

161

 

 

-

 

 

-

 

 

185

 

 

991

Credit and debit card fees

 

-

 

 

4,169

 

 

255

 

 

-

 

 

128

 

 

542

 

 

5,094

Other service charges and fees

 

33

 

 

800

 

 

300

 

 

-

 

 

1,039

 

 

82

 

 

2,254

Not in scope of Topic 606 (1)

 

4,051

 

 

7

 

 

(549)

 

 

2,378

 

 

95

 

 

20

 

 

6,002

   Total non-interest income

 

4,084

 

 

11,930

 

 

1,259

 

 

2,378

 

 

1,408

 

 

1,725

 

 

22,784

Total Revenue

$

25,289

 

$

62,979

 

$

20,179

 

$

14,896

 

$

14,800

 

$

9,334

 

$

147,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Most of the Corporation’s revenue is not within the scope of ASU No. 2014-09, Revenue from Contracts with Customers. The guidance explicitly excludes net interest income from financial assets and liabilities, as well as other noninterest income from loans, leases, investment securities and derivative financial instruments.

                                           

 

For the three months ended March 31, 2018, substantially all of the Corporation’s revenue under the scope of Topic 606 was related to performance obligations satisfied at a point in time.

 

The following is a discussion of revenues within the scope of Topic 606.

 

Service Charges and Fees on Deposit Accounts

 

Service charges and fees on deposit accounts relate to fees generated from a variety of deposit products and services rendered to customers.  Charges include, but are not limited to, overdraft fees, non-sufficient fund fees, dormant fees and monthly service charges. Such fees are recognized concurrently with the event on a daily basis or on a monthly basis depending upon the customer’s cycle date.  These depository arrangements are considered day-to-day contracts that do not extend beyond the services performed, as customers have the right to terminate these contracts with no penalty or, if any, nonsubstantive penalties.  As a consequence, the income recognition under the standard is not different for the Corporation’s practice before the adoption of this guidance.

  

 

 

68 


 

Insurance Commissions

For insurance commissions, which include regular and contingent commissions paid to the Corporation’s insurance agency, the agreements contain a performance obligation related to the sale/issuance of the policy and ancillary administrative post-issuance support. The performance obligation will be satisfied as the policies are issued and revenue will be recognized at that point in time.  In addition, contingent commission income was found to be constrained, as defined under the new standard. Contingent commission income will be included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or payments are received, which is consistent with the Corporation’s practice before the adoption of this guidance. For the quarter ended March 31, 2018, the Corporation recognized revenue of $2.1 million as payments were received and constraints were released.

 

Merchant-related Income

 

For merchant-related income, the determination of which included the consideration of a 2015 sale of merchant contracts that involved sales of point of sale (“POS”) terminals and entry into a marketing alliance under a revenue-sharing agreement, the Corporation concluded that control of the POS terminals and merchant contracts was transferred to the customer at the contract’s inception. With respect to the related revenue-sharing agreement, the Corporation satisfies the marketing alliance performance obligation over the life of the contract, and the associated transaction price is recognized as the entity performs and any constraints over the variable consideration are resolved. There was no material change in the timing or measurement of revenues. The overall effect on an ongoing basis of the new revenue guidance, as compared the Corporation’s practice before the adoption of this guidance, is expected to be immaterial.

 

Credit and Debit Card Fees

 

Credit and debit card fees primarily represent revenues earned from interchange fees and ATM fees. Interchange and network revenues are earned on credit and debit card transactions conducted with payment networks. ATM fees are primarily earned as a result of surcharges assessed to non-FirstBank customers who use a FirstBank ATM. Such fees are generally recognized concurrently with the delivery of services on a daily basis.  As a consequence, the income recognition is unchanged from the Corporation’s practice before the adoption of this guidance. 

 

Other Fees

 

Other fees primarily include revenues generated from wire transfers, lockboxes, and bank issuances of checks. Such fees are recognized concurrently with the event or on a monthly basis.

 

Contract Balances  

 

A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer. As mentioned above, during 2015, the Bank entered into a long-term strategic marketing alliance with another entity to which the Bank sold its merchant contracts portfolio and related POS terminals.  Merchant services are marketed through FirstBank’s branches and offices in Puerto Rico and the Virgin Islands.  Under the marketing and referral agreement, FirstBank shares with this entity revenues generated by the merchant contracts over the term of the 10-year agreement.  As of March 31, 2018 and December 31, 2017, this contract liability amounted to $2.3 million and $2.4 million, respectively, which will be recognized over the remaining term of the contract. For the quarter ended March 31, 2018, the Corporation recognized revenue and contract liabilities decreased by approximately $0.1 million due to the passage of time. There were no changes in contract liabilities due to changes in transaction price estimates

 

A contract asset is the right to consideration for transferred goods or services when the amount is conditioned on something other than the passage of time. As of March 31, 2018 and December 31, 2017, there were no receivables from contracts with customers or contract assets recorded on the Corporation’s consolidated financial statements.

 

Other  

 

Except for the contract liabilities noted above, the Corporation did not have any significant performance obligations as of March 31, 2018. The Corporation also did not have any material contract acquisition costs and did not make any significant judgments or estimates in recognizing revenue for financial reporting purposes. 

  

69 


 

NOTE 23 – SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental cash flow information is as follows:

 

 

Quarter  Ended March 31,

 

2018

 

2017

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

 

 

   Interest on borrowings

$

24,353

 

$

22,001

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

Additions to OREO

 

15,867

 

 

13,597

Additions to auto and other repossessed assets

 

17,508

 

 

11,516

Capitalization of servicing assets

 

887

 

 

875

Loan securitizations

 

54,382

 

 

60,525

Loans held for investment transferred to held for sale

 

67,937

 

 

-

Property plant and equipment transferred to other assets

 

-

 

 

1,185

 

 

 

 

 

 

 

NOTE 24 – SEGMENT INFORMATION

 

Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer of the Corporation and, to a lesser extent, the Board of Directors, the operating segments are based primarily on the Corporation’s lines of business for its operations in Puerto Rico, the Corporation’s principal market, and by geographic areas for its operations outside of Puerto Rico.  As of March 31, 2018, the Corporation had six reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments; United States Operations; and Virgin Islands Operations.  Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Corporation’s organizational chart, nature of the products, distribution channels, and the economic characteristics of the product were also considered in the determination of the reportable segment.

 

The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for large customers represented by specialized and middle-market clients and the public sector. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and construction loans, and floor plan financings, as well as other products, such as cash management and business management services. The Mortgage Banking segment consists of the origination, sale, and servicing of a variety of residential mortgage loans. The Mortgage Banking segment also acquires and sells mortgages in the secondary markets.  In addition, the Mortgage Banking segment includes mortgage loans purchased from other local banks and mortgage bankers.  The Consumer (Retail) Banking segment consists of the Corporation’s consumer lending and deposit-taking activities conducted mainly through its branch network and loan centers. The Treasury and Investments segment is responsible for the Corporation’s investment portfolio and treasury functions that are executed to manage and enhance liquidity.  This segment also lends funds to the Commercial and Corporate Banking, Mortgage Banking and Consumer (Retail) Banking segments to finance their lending resources and also borrows from those segments.  The Consumer (Retail) Banking and the United States Operations segments also lend funds to the other segments. The interest rates charged or credited by Treasury and Investments, the Consumer (Retail) Banking, and the United States Operations segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment. The United States Operations segment consists of all banking activities conducted by FirstBank in the United States mainland, including commercial and retail banking services.  The Virgin Islands Operations segment consists of all banking activities conducted by the Corporation in the USVI and BVI, including commercial and retail banking services.

 

The accounting policies of the segments are the same as those referred to in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” in the audited consolidated financial statements of the Corporation for the year ended December 31, 2017, which are included in the Corporation’s 2017 Annual Report on Form 10-K.

 

The Corporation evaluates the performance of the segments based on net interest income, the provision for loan and lease losses, non-interest income, and direct non-interest expenses. The segments are also evaluated based on the average volume of their interest-earning assets less the allowance for loan and lease losses.

70 


 

The following table presents information about the reportable segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Mortgage Banking

 

Consumer (Retail) Banking

 

Commercial and Corporate

 

Treasury and Investments

 

United States Operations

 

Virgin Islands Operations

 

Total

For the quarter ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

32,321

 

$

42,550

 

$

32,337

 

$

14,254

 

$

19,527

 

$

8,429

 

$

149,418

Net (charge) credit for transfer of funds

 

(11,116)

 

 

15,222

 

 

(13,417)

 

 

9,974

 

 

(663)

 

 

-

 

 

-

Interest expense

 

-

 

 

(6,723)

 

 

-

 

 

(11,710)

 

 

(5,472)

 

 

(820)

 

 

(24,725)

Net interest income

 

21,205

 

 

51,049

 

 

18,920

 

 

12,518

 

 

13,392

 

 

7,609

 

 

124,693

Provision for loan and lease losses

 

(381)

 

 

(5,793)

 

 

(6,800)

 

 

-

 

 

(1,459)

 

 

(6,111)

 

 

(20,544)

Non-interest income

 

4,084

 

 

11,930

 

 

1,259

 

 

2,378

 

 

1,408

 

 

1,725

 

 

22,784

Direct non-interest expenses

 

(7,720)

 

 

(26,901)

 

 

(6,714)

 

 

(948)

 

 

(7,956)

 

 

(7,622)

 

 

(57,861)

   Segment income (loss)

$

17,188

 

$

30,285

 

$

6,665

 

$

13,948

 

$

5,385

 

$

(4,399)

 

$

69,072

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average earnings assets

$

2,293,482

 

$

1,566,795

 

$

2,632,220

 

$

2,470,830

 

$

1,709,918

 

$

571,199

 

$

11,244,444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Mortgage Banking

 

Consumer (Retail) Banking

 

Commercial and Corporate

 

Treasury and Investments

 

United States Operations

 

Virgin Islands Operations

 

Total

For the quarter ended March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

33,958

 

$

42,917

 

$

29,411

 

$

13,757

 

$

15,789

 

$

9,396

 

$

145,228

Net (charge) credit for transfer of funds

 

(11,698)

 

 

4,909

 

 

(9,318)

 

 

16,233

 

 

(126)

 

 

-

 

 

-

Interest expense

 

-

 

 

(5,900)

 

 

-

 

 

(11,806)

 

 

(4,195)

 

 

(778)

 

 

(22,679)

Net interest income

 

22,260

 

 

41,926

 

 

20,093

 

 

18,184

 

 

11,468

 

 

8,618

 

 

122,549

(Provision) release for loan and lease losses

 

(8,936)

 

 

(7,142)

 

 

(8,055)

 

 

-

 

 

35

 

 

(1,344)

 

 

(25,442)

Non-interest income (loss)

 

3,586

 

 

13,379

 

 

1,237

 

 

(12,170)

 

 

505

 

 

1,706

 

 

8,243

Direct non-interest expenses

 

(9,879)

 

 

(27,418)

 

 

(9,367)

 

 

(1,207)

 

 

(7,859)

 

 

(6,750)

 

 

(62,480)

   Segment income

$

7,031

 

$

20,745

 

$

3,908

 

$

4,807

 

$

4,149

 

$

2,230

 

$

42,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average earnings assets

$

2,500,750

 

$

1,775,931

 

$

2,548,936

 

$

2,157,882

 

$

1,393,215

 

$

617,820

 

$

10,994,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    The following table presents a reconciliation of the reportable segment financial information to the consolidated totals:

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

March 31,

 

 

2018

 

2017

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

   Total income for segments and other

$

69,072

 

$

42,870

   Other operating expenses (1)

 

(28,166)

 

 

(25,402)

    Income before income taxes

 

40,906

 

 

17,468

    Income tax (expense) benefit

 

(7,758)

 

 

8,073

      Total consolidated net income

$

33,148

 

$

25,541

 

 

 

 

 

 

 

Average assets:

 

 

 

 

 

 

 

 

 

 

 

 

   Total average earning assets for segments 

$

11,244,444

 

$

10,994,534

   Average non-earning assets                        

 

947,460

 

 

886,492

      Total consolidated average assets

$

12,191,904

 

$

11,881,026

 

 

 

 

 

 

 

(1)

Expenses pertaining to corporate administrative functions that support the operating segment but are not specifically attributable to or managed by any segment are not included in the reported financial results of the operating segments. The unallocated corporate expenses include certain general and administrative expenses and related depreciation and amortization expenses.

71 


 

NOTE 25 – REGULATORY MATTERS, COMMITMENTS AND CONTINGENCIES

 

The Corporation and FirstBank are each subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Corporation’s financial statements and activities. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s and FirstBank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts and classifications are also subject to qualitative judgments and adjustment by the regulators with respect to minimum capital requirements, components, risk weightings, and other factors.

 

On October 3, 2017, the New York FED terminated the Written Agreement entered into on June 3, 2010 between the Corporation and the New York FED. However, the Corporation has agreed with the New York FED to continue to obtain the approval of the New York FED before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or trust preferred securities, incurring or guaranteeing debt or purchasing or redeeming any corporate stock. 

 

Although the Corporation and FirstBank became subject to the U.S. Basel III capital rules (“Basel III rules”) beginning on January 1, 2015, certain requirements of the Basel III rules are being phased-in over several years and, in general, will be fully effective as of January 1, 2019, although certain elements of the new rules have recently been deferred by the federal banking agencies. The Corporation and FirstBank compute risk-weighted assets using the Standardized Approach required by the Basel III rules.

 

The Basel III rules require the Corporation to maintain an additional capital conservation buffer of 2.5% 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. The phase-in of the capital conservation buffer began on January 1, 2016 with a first year requirement of 0.625% of additional Common Equity Tier 1 Capital (“CET1”), which is being progressively increased over a four-year period, increasing by that same percentage amount on each subsequent January 1 until it reaches the fully phased-in 2.5% CET1 requirement on January 1, 2019.

 

Under the fully phased-in Basel III rules, in order to be considered adequately capitalized, the Corporation will be required to maintain: (i) a minimum CET1 capital to risk-weighted assets ratio of at least 4.5%, plus the 2.5% capital conservation buffer, resulting in a required minimum CET1 ratio of at least 7%, (ii) a minimum ratio of total Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum Tier 1 capital ratio of 8.5%, (iii) a minimum ratio of total Tier 1 plus Tier 2 capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum total capital ratio of 10.5%, and (iv) a required minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average on-balance sheet (non-risk adjusted) assets.

     

     In addition, as required under the Basel III rules, the Corporation’s trust preferred securities (“TRuPs”) were fully phased-out from Tier 1 capital as of January 1, 2016. However, the Corporation’s TRuPs may continue to be included in Tier 2 capital until the instruments are redeemed or mature.

 

On November 21, 2017, the Federal Reserve Board, the FDIC, and the Office of the Comptroller of the Currency finalized an extension of the phase-in of certain Basel III capital rules for banks not using the Basel advanced approaches. The extension, which was effective January 1, 2018, pauses the full transition to the Basel III treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital of unconsolidated financial institutions and minority interests, pending the banking agencies’ broader efforts, announced in September 2017, to simplify the regulatory capital rules that apply to banking organizations that are not subject to the advanced approaches capital rules. Because the advanced approaches capital rules apply to banking organizations with more than $250 billion in total consolidated assets or at least $10 billion in total on-balance sheet foreign exposure, the extension relief applies broadly to community, midsize, and regional banks, including the Corporation and FirstBank.

 

    Please refer to the discussion in “Part I, – Item 1, – Business – Supervision and Regulation,” included in the Corporation’s 2017 Annual Report on Form 10-K for a more complete discussion of supervision and regulatory matters and activities that affect the Corporation and its subsidiaries.

 

  

72 


 

 

The Corporation's and its banking subsidiary's regulatory capital positions as of  March 31, 2018 and December 31, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory Requirements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

For Capital Adequacy Purposes

 

To be Well-Capitalized-General Thresholds

 

 

 

 

 

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        First BanCorp.

$

1,990,146

 

22.98%

 

$

692,691

 

8.0%

 

 

N/A

 

N/A

        FirstBank

$

1,950,261

 

22.52%

 

$

692,671

 

8.0%

 

$

865,838

 

10.0%

Common Equity Tier 1 Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        First BanCorp.

$

1,665,842

 

19.24%

 

$

389,639

 

4.5%

 

 

N/A

 

N/A

        FirstBank

$

1,532,690

 

17.70%

 

$

389,627

 

4.5%

 

$

562,795

 

6.5%

Tier I Capital (to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        First BanCorp.

$

1,701,946

 

19.66%

 

$

519,518

 

6.0%

 

 

N/A

 

N/A

        FirstBank

$

1,840,690

 

21.26%

 

$

519,503

 

6.0%

 

$

692,671

 

8.0%

Leverage ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        First BanCorp.

$

1,701,946

 

14.18%

 

$

480,078

 

4.0%

 

 

N/A

 

N/A

        FirstBank

$

1,840,690

 

15.35%

 

$

479,527

 

4.0%

 

$

599,408

 

5.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        First BanCorp.

$

1,989,873

 

22.53%

 

$

706,432

 

8.0%

 

 

N/A

 

N/A

        FirstBank

$

1,947,627

 

22.06%

 

$

706,218

 

8.0%

 

$

882,772

 

10.0%

Common Equity Tier 1 Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        First BanCorp.

$

1,674,164

 

18.96%

 

$

397,368

 

4.5%

 

 

N/A

 

N/A

        FirstBank

$

1,562,431

 

17.70%

 

$

397,248

 

4.5%

 

$

573,802

 

6.5%

Tier I Capital (to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        First BanCorp.

$

1,675,282

 

18.97%

 

$

529,824

 

6.0%

 

 

N/A

 

N/A

        FirstBank

$

1,835,445

 

20.79%

 

$

529,663

 

6.0%

 

$

706,218

 

8.0%

Leverage ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        First BanCorp.

$

1,675,282

 

14.03%

 

$

477,643

 

4.0%

 

 

N/A

 

N/A

        FirstBank

$

1,835,445

 

15.39%

 

$

477,056

 

4.0%

 

$

596,320

 

5.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73 


 

The Corporation enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and commitments to sell mortgage loans at fair value. As of March 31, 2018, commitments to extend credit amounted to approximately $1.2 billion, of which $650.5 million relates to credit card loans. Commercial and Financial standby letters of credit amounted to approximately $43.3 million. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to making additional disbursements. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any time and without cause.

      

As of March 31, 2018, First BanCorp. and its subsidiaries were defendants in various legal proceedings arising in the ordinary course of business. On at least a quarterly basis, the Corporation assesses its liabilities and contingencies in connection with threatened and outstanding legal cases, matters and proceedings, utilizing the latest information available. For cases, matters and proceedings where it is both probable the Corporation will incur a loss and the amount can be reasonably estimated, the Corporation establishes an accrual for the loss. Once established, the accrual is adjusted as appropriate to reflect any relevant developments. For cases, matters or proceedings where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established.

 

Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that some of them are currently in preliminary stages), the existence of multiple defendants in some of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, the Corporation’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.

 

While the final outcome of legal cases, matters, and proceedings is inherently uncertain, based on information currently available, Management believes that the final disposition of the Corporation’s legal cases, matters or proceedings, to the extent not previously provided for, will not have a material negative adverse effect on the Corporation’s consolidated financial position as a whole.

 

If management believes that, based on available information, it is at least reasonably possible that a material loss (or additional material loss in excess of any accrual) will be incurred in connection with any legal actions, the Corporation discloses an estimate of the possible loss or range of loss, either individually or in the aggregate, as appropriate, if such an estimate can be made, or discloses that an estimate cannot be made. Based on the Corporation’s assessment as of March 31, 2018, no such disclosures were necessary. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these cases, matters and proceedings, if unfavorable, may be material to the Corporation’s consolidated financial position on a particular period.

 

Ramirez Torres, et al. v Banco Popular de Puerto Rico, et al.  FirstBank Puerto Rico is named a defendant in a class action complaint, filed on February 17, 2017 at the Court of First Instance in San Juan, Puerto Rico, captioned Ramirez Torres, et al. v. Banco Popular de Puerto Rico, et al. The complaint seeks damages and preliminary and permanent injunctive relief on behalf of the purported class against Banco Popular de Puerto Rico and other financial institutions with insurance agency subsidiaries in Puerto Rico. Plaintiffs contend that in November 2015, Antilles Insurance Company obtained approval from the Puerto Rico Insurance Commissioner to market an endorsement that allowed its customers to obtain a reimbursement of their insurance premium for good experience, but that defendants failed to offer this product or disclose its existence to their customers, favoring other products instead, in violation of their fiduciary duties as insurance producers. Plaintiffs seek a determination that defendants unlawfully failed to comply with their fiduciary duty to disclose the existence of this new insurance benefit from this carrier, as well as double or treble damages (the latter subject to a determination that defendants engaged in anti-monopolistic practices in failing to offer this product). On July 31, 2017, the court entered judgment dismissing the complaint with prejudice. On August 30, 2017, Plaintiffs filed an Appeal before the Court of Appeals and FirstBank filed its opposition. On March 20, 2018, the Court of Appeals entered Judgment revoking the Court of First Instance, ordering a class certification hearing as well as a preliminary injunction hearing. Our lawyers intend to file a writ of Certiorari in the Supreme Court.

74 


 

NOTE 26 – FIRST BANCORP. (HOLDING COMPANY ONLY) FINANCIAL INFORMATION

 

The following condensed financial information presents the financial position of the Holding Company only as of March 31, 2018 and December 31, 2017, and the results of its operations for the quarters ended March 31, 2018 and 2017.

 

Statements of Financial Condition

 

 

 

 

 

 

 

As of March 31,

 

 

As of December 31,

 

2018

 

2017

(In thousands)

 

 

 

 

Assets

 

 

 

 

 

Cash and due from banks

$

16,866

 

$

20,864

Money market investments

 

6,111

 

 

6,111

Other investment securities

 

285

 

 

285

Loans held for investment, net

 

178

 

 

191

Investment in First Bank Puerto Rico, at equity

 

2,015,111

 

 

2,028,641

Investment in First Bank Insurance Agency, at equity

 

14,933

 

 

12,400

Investment in FBP Statutory Trust I

 

1,963

 

 

2,698

Investment in FBP Statutory Trust II

 

3,561

 

 

3,561

Other assets

 

5,671

 

 

3,799

   Total assets

$

2,064,679

 

$

2,078,550

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Other borrowings

$

184,150

 

$

208,635

Accounts payable and other liabilities

 

3,425

 

 

818

   Total liabilities

 

187,575

 

 

209,453

 

 

 

 

 

 

Stockholders' equity

 

1,877,104

 

 

1,869,097

   Total liabilities and stockholders' equity

$

2,064,679

 

$

2,078,550

75 


 

Statements of Income

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

March 31,

 

March 31,

 

 

2018

 

2017

 

 

(In thousands)

 

 

 

 

 

 

 

Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

   Interest income on money market investments

$

5

 

$

5

 

   Dividends from banking subsidiary

 

21,584

 

 

1,930

 

   Other income

 

63

 

 

62

 

 

 

21,652

 

 

1,997

 

 

 

 

 

 

 

 

Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

   Other borrowings

 

2,085

 

 

1,963

 

   Other operating expenses

 

596

 

 

967

 

 

 

2,681

 

 

2,930

 

 

 

 

 

 

 

 

Gain on early extinguishment of debt

 

2,316

 

 

-

 

 

 

 

 

 

 

 

Income (loss) income before income taxes and equity in undistributed

 

 

 

 

 

 

   earnings of subsidiaries

 

21,287

 

 

(933)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in undistributed earnings of subsidiaries

 

11,861

 

 

26,474

 

 

 

 

 

 

 

 

Net income

$

33,148

 

$

25,541

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax

 

(24,047)

 

 

10,696

 

 

 

 

 

 

 

 

Comprehensive income

$

9,101

 

$

36,237

 

 

 

NOTE 27 – SUBSEQUENT EVENTS

 

The Corporation has performed an evaluation of events occurring  subsequent to March 31, 2018; management has determined that there were no events occurring in this period that require disclosure in or adjustment to the accompanying financial statements.

76 


 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

                 OPERATIONS (“MD&A”)

 

SELECTED FINANCIAL DATA

 

 

 

 

 

 

 

 

Quarter ended

 

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

March 31,

 

 

 

2018

 

2017

 

Condensed Income Statements:

 

 

 

 

 

 

 

Total interest income

$

149,418

 

$

145,228

 

 

Total interest expense

 

24,725

 

 

22,679

 

 

Net interest income

 

124,693

 

 

122,549

 

 

Provision for loan and lease losses

 

20,544

 

 

25,442

 

 

Non-interest income

 

22,784

 

 

8,243

 

 

Non-interest expenses

 

86,027

 

 

87,882

 

 

Income before income taxes

 

40,906

 

 

17,468

 

 

Income tax (expense) benefit

 

(7,758)

 

 

8,073

 

 

Net income

 

33,148

 

 

25,541

 

 

Net income attributable to common stockholders

 

32,479

 

 

24,872

 

Per Common Share Results:

 

 

 

 

 

 

 

Net earnings per common share-basic

$

0.15

 

$

0.12

 

  

Net earnings per common share-diluted

$

0.15

 

$

0.11

 

 

Cash dividends declared

$

-

 

$

-

 

 

Average shares outstanding

 

214,646

 

 

213,340

 

 

Average shares outstanding diluted

 

216,214

 

 

217,373

 

 

Book value per common share

$

8.51

 

$

8.18

 

 

Tangible book value per common share (1) 

$

8.32

 

$

7.97

 

Selected Financial Ratios (In Percent):

 

 

 

 

 

 

Profitability:

 

 

 

 

 

 

 

Return on Average Assets

 

1.10

 

 

0.87

 

 

Interest Rate Spread

 

4.05

 

 

4.15

 

 

Net Interest Margin

 

4.40

 

 

4.42

 

 

Interest Rate Spread - tax equivalent basis (2) 

 

4.22

 

 

4.31

 

 

Net Interest Margin - tax equivalent basis (2) 

 

4.57

 

 

4.58

 

 

Return on Average Total Equity

 

7.22

 

 

5.77

 

 

Return on Average Common Equity

 

7.37

 

 

5.88

 

 

Average Total Equity to Average Total Assets

 

15.27

 

 

15.12

 

 

Tangible common equity ratio (1) 

 

14.80

 

 

14.70

 

 

Dividend payout ratio

 

-

 

 

-

 

 

Efficiency ratio (3) 

 

58.33

 

 

67.19

 

Asset Quality:

 

 

 

 

 

 

 

Allowance for loan and lease losses to total loans held for investment

 

2.60

 

 

2.30

 

 

Net charge-offs (annualized) to average loans (4)  

 

1.21

 

 

1.26

 

 

Provision for loan and lease losses to net charge-offs

 

77.43

 

 

91.47

 

 

Non-performing assets to total assets (4) 

 

5.22

 

 

5.44

 

 

Non-performing loans held for investment to total loans held for investment (4) 

 

4.74

 

 

5.41

 

 

Allowance to total non-performing loans held for investment (4) 

 

54.82

 

 

42.56

 

 

Allowance to total non-performing loans held for investment,

 

 

 

 

 

 

 

  excluding residential real estate loans

 

93.87

 

 

62.98

 

Other Information:

 

 

 

 

 

 

 

Common Stock Price: End of period

$

6.02

 

$

5.65

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

As of December 31, 2017

 

Balance Sheet Data:

 

 

 

 

 

 

 

Loans, including loans held for sale

$

8,787,265

 

$

8,883,456

 

 

Allowance for loan and lease losses

 

225,856

 

 

231,843

 

 

Money market and investment securities

 

2,109,937

 

 

2,095,177

 

 

Intangible assets

 

41,345

 

 

42,351

 

 

Deferred tax asset, net

 

289,338

 

 

294,809

 

 

Total assets

 

12,200,386

 

 

12,261,268

 

 

Deposits

 

9,066,465

 

 

9,022,631

 

 

Borrowings

 

1,099,150

 

 

1,223,635

 

 

Total preferred equity

 

36,104

 

 

36,104

 

 

Total common equity

 

1,885,662

 

 

1,853,608

 

 

Accumulated other comprehensive loss, net of tax

 

(44,662)

 

 

(20,615)

 

 

Total equity

 

1,877,104

 

 

1,869,097

 

__________________

 

 (1) 

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

 

 (2) 

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

 

 (3) 

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

 

 (4) 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

77 


 

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

 

EXECUTIVE SUMMARY

 

First BanCorp. is a diversified financial holding company headquartered in San Juan, Puerto Rico offering a full range of financial products to consumers and commercial customers through various subsidiaries. First BanCorp. is the holding company of FirstBank Puerto Rico (“FirstBank” or the “Bank”) and FirstBank Insurance Agency. Through its wholly-owned subsidiaries, the Corporation operates offices in Puerto Rico, the United States Virgin Islands and British Virgin Islands, and the State of Florida (USA), concentrating on commercial banking, residential mortgage loan originations, finance leases, credit cards, personal loans, small loans, auto loans, and insurance agency and broker-dealer activities. 

 

OVERVIEW OF RESULTS OF OPERATIONS

 

First BanCorp.'s results of operations depend primarily on its net interest income, which is the difference between the interest income earned on its interest-earning assets, including investment securities and loans, and the interest expense incurred on its interest-bearing liabilities, including deposits and borrowings.  Net interest income is affected by various factors, including: the interest rate scenario; the volumes, mix and composition of interest-earning assets and interest-bearing liabilities; and the re-pricing characteristics of these assets and liabilities. The Corporation's results of operations also depend on the provision for loan and lease losses, non-interest expenses (such as personnel, occupancy, the deposit insurance premium and other costs), non-interest income (mainly service charges and fees on deposits, insurance income and revenues from broker-dealer operations), gains (losses) on sales of investments, gains (losses) on mortgage banking activities, and income taxes.

 

The Corporation had net income of $33.1 million, or $0.15 per diluted common share, for the quarter ended March 31, 2018, compared to $25.5 million, or $0.11 per diluted common share, for the same period in 2017. 

 

The key drivers of the Corporation’s GAAP financial results include the following:

 

·         Net interest income increased by $2.1 million to $124.7 million for the quarter ended March 31, 2018 compared to $122.5 million for the same period in 2017. The increase in net interest income was driven primarily by: (i) a $3.0 million increase in interest income on commercial and construction loans, primarily associated with the upward repricing of variable-rate commercial loans; (ii) a  $1.8 million increase in interest income from interest-bearing cash balances, primarily deposits maintained at the Federal Reserve Bank of New York (“New York FED”), due to both higher average balance and increases in the Federal Funds target rate; and (iii) a $0.7 million increase in interest income on investment securities primarily due to the gradual investment of liquidity in higher-yielding U.S agency debt securities. 

 

The aforementioned variances were partially offset by: (i) a $2.0 million increase in interest expense primarily reflecting the effect of higher market interest rates on the cost of Federal Home Loan Bank of New York (“FHLB”) advances, brokered certificates of deposit (“CDs”), retail CDs, and commercial money market accounts tied to short-term interest rates, partially offset by a $262.4 million decrease in the average balance of total interest-bearing liabilities, primarily brokered CDs and repurchase agreements; (ii) a $0.9 million decrease in interest income on residential mortgage loans associated with both a $33.7 million decrease in the average balance of this portfolio and higher inflows of loans to non-performing status as compared to the first quarter of 2017; and (iii) a $0.4 million decrease in interest income on consumer loans primarily due to higher non-performing auto loan levels.

 

The net interest margin decreased slightly to 4.40% for the first quarter of 2018 compared to 4.42% for the same period a year ago, primarily related to higher non-performing residential and consumer loan levels.   Refer to Net Interest Income below  for additional information.   

 

·         The provision for loan and lease losses decreased by $4.9 million to $20.5 million for the first quarter of 2018 compared to $25.4 million for the same period in 2017. The decrease was driven by: (i) an $8.8 million decrease in the provision for residential mortgage loans, primarily related to lower charge-off levels and the effect in the first quarter of 2017 of adjustments to the loss severity estimates used in the calculation of the general reserve, including adjustments to liquidation cost assumptions, and (ii) a $1.5 million decrease in the provision for consumer loans, primarily related to a $2.0 million reserve release in the first quarter of 2018 resulting from payments received that reduced the balance of the consumer loan portfolio outstanding on the dates of the hurricanes.  These variances were partially offset by a $5.4 million increase in the provision for commercial and construction loans driven by a $5.6 million charge recorded in connection with $57.2 million in loans transferred to held for sale during the first quarter of 2018, and the downgrade in the credit risk classification of a $46.8 million commercial mortgage loan in Florida,

78 


 

partially offset by a net loan loss reserve release of approximately $4.2 million related to revised estimates to the reserves associated with the effects of Hurricanes Maria and Irma resulting from updated assessments of financial performance and repayment prospects of certain individually-assessed commercial credits.   

 

During the first quarter of 2018, the Corporation transferred to held for sale three non-performing commercial and construction loans.  The aggregate recorded investment in these loans was written down to $57.2 million, which resulted in charge-offs of $9.7 million and an incremental loss of $5.6 million reflected in the provision for loan and lease losses for the first quarter of 2018.

 

Net charge-offs totaled $26.5 million for the first quarter of 2018, or 1.21% of average loans on an annualized basis, compared to $27.8 million, or 1.26% of average loans for the same period in 2017.  The decrease reflects a reduction of $4.4 million in net charge-offs taken on residential mortgage loans, partially offset by a $1.7 million increase in net charge-offs of commercial and construction loans and a $1.5 million increase in net charge-offs of consumer loans.  The increase in net charge-offs of commercial and construction loans reflects the effects of the aforementioned $9.7 million in charge-offs taken on loans transferred to held for sale, a $1.3 million charge-off taken on a $5.6 million adversely classified loan sold during the first quarter of 2018, and a $1.2 million decrease in loan loss recoveries, partially offset by a $10.7 million charge-off recorded on the sale of the Corporation’s participation in the Puerto Rico Electric Power Authority (“PREPA”) line of credit in the first quarter of 2017.  The increase in net charge-offs of consumer loans primarily reflects the effect in the first quarter of 2017 of a loan loss recovery of $1.2 million on the sale of certain credit card loans that had been fully charged-off in prior periods. Refer to Provision for loan and lease losses and Risk Management below for an analysis of the allowance for loan and lease losses and non-performing assets and related ratios.

  

 

·         The Corporation recorded non-interest income of $22.8 million for the first quarter of 2018, compared to $8.2 million for the same period in 2017.  The increase was primarily driven by: (i) the impact in the first quarter of 2017 of a $12.2 million other-than-temporary impairment (“OTTI”) charge on bonds of the Government Development Bank for Puerto Rico (the “GDB”) and the Puerto Rico Public Buildings Authority that were subsequently sold in the second quarter of 2017; (ii) a $2.3 million gain on the repurchase and cancellation of $23.8 million in trust preferred securities, and (iii) a $0.5 million increase in revenues from the mortgage banking activities driven by a $0.7 million adjustment recorded in the first quarter of 2018 to reduce the valuation allowance of mortgage servicing rights.  These variances were partially offset by a $0.7 million decreases in service charges on deposit accounts. Refer to Non-Interest Income below for additional information.  

 

·         Non-interest expenses for the first quarter of 2018 was $86.0 million compared to $87.9 million for the same period in 2017.  The decrease in non-interest expenses was largely driven by: (i) a $3.9 million decrease in losses on OREO operations, driven by a $3.6 million decrease in write-downs to the value of OREO properties; (ii) a $1.1 million decrease in the Federal Deposit Insurance Corporation (“FDIC”) insurance premium expense reflecting, among other things, the effect of reductions in brokered CDs, a strengthened capital position, and higher liquidity levels tied to the growth in non-interest bearing deposits; and (iii) a $0.9 million decrease in professional service fees, primarily due to reductions in attorneys’ collection fees. 

 

These variances were partially offset by: (i) a $2.0 million increase in employees’ compensation and benefits expenses, reflecting costs associated with a cash transition award paid to certain senior officers of $0.6 million in connection with the previously-reported executive compensation program that became effective in the third quarter of 2017, a $0.4 million increase in stock-based compensation expense, and an increase of approximately $0.9 million in bonus expenses; (ii) a $1.0 million increase in occupancy and equipment costs, primarily resulting from hurricane-related expenses, such as repairs and security matters; and (iii) a $0.7 million increase resulting from lower net reserve releases related to unfunded loan commitments.  Refer to Non Interest Expenses below for additional information.

 

·         For the first quarter of 2018, the Corporation recorded income tax expense of $7.8 million, compared to an income tax benefit of $8.1 million for the same period in 2017. The variance was mostly attributable to the aforementioned $13.2 million tax benefit recorded in the first quarter of 2017 as a result of the change in tax status of certain subsidiaries from taxable corporations to limited liability companies that elected to be treated as partnerships for income tax purposes in Puerto Rico, as well as higher pre-tax earnings in the first quarter of 2018 and a higher estimated effective tax rate for 2018. The Corporation’s estimated annual effective tax rate in the first quarter of 2018, excluding entities from which a tax benefit cannot be recognized and discrete items, was 27% compared to 24% for the first quarter of 2017. The estimated annual effective tax rate including all entities for 2018 was 19% (23% excluding discrete items), compared to 13% for the first quarter of 2017 (25% excluding discrete items, primarily the tax benefit resulting from the above-mentioned change in the tax status of certain subsidiaries). As of March 31, 2018, the Corporation had a net deferred tax asset of $289.3 million (net of a valuation allowance of $186.1 million).  Refer to Income Taxes below for additional information.  

 

79 


 

·         As of March 31, 2018, total assets were $12.2 billion, a decrease of $60.9 million from December 31, 2017. The decrease was mainly due to a $96.2 million decrease in total loans, primarily reflecting reductions of $83.8 million and $15.5 million in the Puerto Rico and Virgin Island regions, respectively, partially offset by a $3.1 million increase in the Florida region.  The decrease reflects the effect of three large loans totaling $28.3 million that were paid off during the first quarter, two large loans totaling $14.8 million that were sold during the first quarter, and significant payments received, including payments that reduced the outstanding balance of three revolving commercial lines of credit in Puerto Rico by $24.2 million.  Total investment securities decreased by $75.2 million, driven by U.S. agency MBS prepayments and a decrease in the fair value of available-for-sale investment securities.  Accrued interest receivables on loans and investment securities decreased by $13.1 million, primarily related to interest payments collected on loans after the expiration in the first quarter of 2018 of the three-month payment deferral program extended to eligible customers affected by Hurricanes Maria and Irma. These variances were partially offset by a $127.4 million increase in cash and cash equivalents, largely driven by the growth in non-interest bearing deposits during the first quarter of 2018 and proceeds from U.S. agency MBS and loan repayments, partially offset by liquidity used to pay off maturing brokered CDs and a $100 million short-term repurchase agreement as well as for the repurchase of $23.8 million of trust preferred securities.  Refer to Financial Condition and Operating Data Analysis  below for additional information.

 

·         As of March 31, 2018, total liabilities were $10.3 billion, a decrease of $68.9 million from December 31, 2017.  The decrease was mainly due to the repayment at maturity of a $100 million short-term repurchase agreement, the repurchase and cancellation of $23.8 million in trust preferred securities, and a $194.4 million decrease in brokered CDs.  These variances were partially offset by a $194.6 million increase in deposits, excluding government deposits and brokered CDs, primarily reflected in non-interest bearing deposits. Hurricane-related factors, such as the effect of payment deferral programs, disaster relief funds, and settlements of insurance claims contributed to this accumulation.  Government deposits increased by $43.7 million, primarily related to an increase in the balance of a Puerto Rico government-owned corporation’s transactional deposit account.  Refer to Risk Management – Liquidity Risk and Capital Adequacy below for additional information about the Corporation’s funding sources.

    

·         As of March 31, 2018, the Corporation’s stockholders’ equity was $1.9 billion, an increase of $8.0 million from December 31, 2017.  The increase was mainly driven by the earnings generated in the first quarter, partially offset by a decrease in the fair value of available-for-sale investment securities recorded as part of other comprehensive loss.  The Corporation’s Total Capital, Common Equity Tier 1 Capital, Tier 1 Capital and Leverage ratios calculated under the Basel III rules as currently in effect were 22.98%, 19.24%, 19.66%, and 14.18%, respectively, as of March 31, 2018, compared to Total Capital, Common Equity Tier 1 Capital, Tier 1 Capital and Leverage ratios of 22.53%, 18.96%, 18.97%, and 14.03%, respectively, as of December 31. 2017. Refer to Risk Management – Capital below for additional information. 

 

·         Total loan production, including purchases, refinancings, renewals and draws from existing revolving and non-revolving commitments, was $606.3 million for the quarter ended March 31, 2018, excluding the utilization activity on outstanding credit cards, compared to $867.6 million for the same period in 2017. The decrease was largely affected by the effect in the first quarter of 2017 of the refinancing and renewal of three large commercial loans in Puerto Rico totaling $176.4 million, and lower origination volumes on residential and consumer loans spread through all of the regions served by the Corporation.     

 

·         Total non-performing assets were $637.2 million as of March 31, 2018, a decrease of $13.4 million from December 31, 2017. The decrease was primarily attributable to charge-offs totaling $11.4 million taken on four commercial and construction loans, including $9.7 million associated with the aforementioned loans transferred to held for sale during the first quarter, and payments totaling $4.0 million received in the first quarter to reduce the outstanding balance of commercial mortgage loans that were previously guaranteed by the TDF. 

 

·         Adversely classified commercial and construction loans, including loans held for sale, increased by $24.9 million to $507.3 million as of March 31, 2018, driven by the downgrade in the credit risk classification of a $46.8 million commercial mortgage loan in the Florida region, partially offset by the sale of a $5.6 million commercial and industrial loan, collections, and charge offs.

 

 

 

80 


 

The Corporation’s financial results for the first quarter of 2018 and 2017 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 March 31, 2018

 

·          Positive effect in earnings of $4.8 million ($2.9 million after-tax) related to a $6.4 million net loan loss reserve release in connection  with revised estimates of the reserves associated with the effects of Hurricanes Irma and Maria, partially offset by $1.6 million of hurricane-related expenses recorded in the first quarter. Refer to Provision for Loan and Lease Losses below for additional information.

 

·          Charge to the provision for loan and lease losses of $5.6 million ($3.4 million after-tax) associated with three non-performing commercial and construction loans totaling $57.2 million that were transferred to held for sale during the first quarter. Refer to Provision for Loan and Lease Losses below for additional information.

 

·          Gain of $2.3 million on the repurchase and cancellation of $23.8 million in trust preferred securities, reflected in the consolidated statement of income as “Gain on early extinguishment of debt.” The gain, realized at the holding company level, had no effect on the income tax expense in 2018. Refer to Non-Interest Income below for additional information.

    

 

Quarter ended March 31, 2017

 

·          Tax benefit of $13.2 million related to the change in tax status of certain subsidiaries from taxable corporations to limited liability companies that make an election to be treated as partnerships for income tax purposes in Puerto Rico. Refer to Income Taxes below for additional information.

   

·          OTTI charge of $12.2 million on Puerto Rico government debt securities, specifically bonds of the GDB and the Puerto Rico Public Buildings Authority.  No tax benefit was recognized for the OTTI charge in 2017.

 

·          Charge to the provision for loan and lease losses of $0.6 million ($0.3 million after-tax) related to the sale of the Corporation’s participation in the PREPA line of credit with a book value of $64 million at the time of sale.  Refer to Provision for Loan and Lease Losses below for additional information.

 

·          Costs of $0.3 million associated with a secondary offering of the Corporation’s common stock by certain of the existing stockholders.  The costs, incurred at the holding company level, had no effect on the income tax expense in the quarter ended March 31, 2017 based on available operating expenses and net operating losses at the holding company level.           

  

 

      The following table reconciles for the first quarter of 2018 and 2017, the reported net income to adjusted net income, a non-GAAP financial measure that excludes the Special Items identified above:

 

 

 

 

 

 

 

 

 

Quarter ended March 31,

 

 

 

2018

 

2017

 

 

(In thousands)

 

 

 

 

 

 

 

Net income, as reported (GAAP)

$

33,148

 

$

25,541

 

 

Adjustments:

 

 

 

 

 

 

 

    Hurricane-related loan loss reserve release

 

(6,407)

 

 

-

 

 

    Hurricane-related expenses

 

1,596

 

 

-

 

 

    Charge to the provision related to loans transferred to held for sale

 

5,645

 

 

-

 

 

    Gain on early extinguishment of debt

 

(2,316)

 

 

-

 

 

    Income tax benefit related to change in tax-status of certain subsidiaries

 

-

 

 

(13,161)

 

 

    Charge to the provision related to the sale of the PREPA credit line

 

-

 

 

569

 

 

    Secondary offering costs

 

-

 

 

274

 

 

    Other-than-temporary impairment on debt securities

 

-

 

 

12,231

 

 

    Income tax impact of adjustments (1)

 

(324)

 

 

(222)

 

 

Adjusted net income

$

31,342

 

$

25,232

 

 

 

 

 

 

 

 

 

 

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

 

 

81 


 

Critical Accounting Policies and Practices

 

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

 

The Corporation’s critical accounting policies are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in First BanCorp.’s 2017 Annual Report on Form 10-K. There have not been any material changes in the Corporation’s critical accounting policies since December 31, 2017. 

  

RESULTS OF OPERATIONS

 

Net Interest Income

 

Net interest income is the excess of interest earned by First BanCorp. on its interest-earning assets over the interest incurred on its interest-bearing liabilities. First BanCorp.’s net interest income is subject to interest rate risk due to the repricing and maturity mismatch of the Corporation’s assets and liabilities. Net interest income for the quarter ended March 31, 2018 was $124.7 million compared to $122.5 million for the comparable period in 2017. On a tax-equivalent basis and excluding the changes in the fair value of derivative instruments, net interest income for the quarter ended March 31, 2018 was $129.5 million compared to $126.2 million for the comparable period in 2017.

 

The following tables include a detailed analysis of net interest income. Part I presents average volumes (based on the average daily balance) and rates on an adjusted tax-equivalent basis and Part II presents, also on an adjusted tax-equivalent basis, the extent to which changes in interest rates and changes in the volume of interest-related assets and liabilities have affected the Corporation’s net interest income. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in volume multiplied by prior period rates), and (ii) changes in rate (changes in rate multiplied by prior period volumes). Rate-volume variances (changes in rate multiplied by changes in volume) have been allocated to the changes in volume and rate based upon their respective percentage of the combined totals.

 

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

82 


 

Part I

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Volume

 

Interest income (1) / expense

 

Average Rate (1)

 

Quarter ended March 31,

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market & other short-term investments

$

618,468

 

$

268,934

 

$

2,256

 

$

484

 

1.48

%

 

0.73

%

 

Government obligations (2)

 

798,186

 

 

729,307

 

 

6,193

 

 

4,360

 

3.15

%

 

2.42

%

 

Mortgage-backed securities

 

1,260,142

 

 

1,334,560

 

 

10,625

 

 

11,614

 

3.42

%

 

3.53

%

 

FHLB stock

 

40,937

 

 

39,560

 

 

693

 

 

461

 

6.87

%

 

4.73

%

 

Other investments

 

2,705

 

 

2,699

 

 

2

 

 

2

 

0.30

%

 

0.30

%

 

   Total investments (3)

 

2,720,438

 

 

2,375,060

 

 

19,769

 

 

16,921

 

2.95

%

 

2.89

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage loans

 

3,227,222

 

 

3,260,885

 

 

43,350

 

 

44,280

 

5.45

%

 

5.51

%

 

Construction loans

 

118,907

 

 

130,494

 

 

922

 

 

1,144

 

3.14

%

 

3.56

%

 

Commercial and Industrial and commercial mortgage loans

 

3,688,415

 

 

3,760,594

 

 

45,189

 

 

41,820

 

4.97

%

 

4.51

%

 

Finance leases

 

260,119

 

 

234,729

 

 

4,660

 

 

4,314

 

7.27

%

 

7.45

%

 

Consumer loans

 

1,484,305

 

 

1,475,569

 

 

40,306

 

 

41,070

 

11.01

%

 

11.29

%

 

   Total loans (4) (5)

 

8,778,968

 

 

8,862,271

 

 

134,427

 

 

132,628

 

6.21

%

 

6.07

%

 

      Total interest-earning assets

$

11,499,406

 

$

11,237,331

 

$

154,196

 

$

149,549

 

5.44

%

 

5.40

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brokered CDs

$

1,043,255

 

$

1,413,667

 

$

4,355

 

$

4,805

 

1.69

%

 

1.38

%

 

Other interest-bearing deposits

 

6,021,699

 

 

5,884,772

 

 

12,616

 

 

11,167

 

0.85

%

 

0.77

%

 

Other borrowed funds

 

414,488

 

 

516,187

 

 

4,382

 

 

4,585

 

4.29

%

 

3.60

%

 

FHLB advances

 

715,000

 

 

642,222

 

 

3,372

 

 

2,122

 

1.91

%

 

1.34

%

 

   Total interest-bearing liabilities

$

8,194,442

 

$

8,456,848

 

$

24,725

 

$

22,679

 

1.22

%

 

1.09

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

 

$

129,471

 

$

126,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

 

 

 

 

4.22

%

 

4.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

 

 

 

 

 

4.57

%

 

4.58

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

On an adjusted tax-equivalent basis.  The adjusted tax-equivalent yield was estimated by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory tax rate of 39.0% and adding to it the cost of interest-bearing liabilities.  The tax-equivalent adjustment recognizes the income tax savings when comparing taxable and tax-exempt assets.  Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread and net interest margin on a fully tax-equivalent basis. Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons. Changes in the fair value of derivatives are excluded from interest income and interest expense because the changes in valuation do not affect interest received or paid.

(2)

Government obligations include debt issued by government-sponsored agencies. 

(3)

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

(4)

Average loan balances include the average of non-performing loans.

(5)

Interest income on loans included $1.8 million and $2.1 million for the first quarter of 2018 and 2017, respectively, of income from prepayment penalties and late fees related to the Corporation’s loan portfolio. 

   

83 


 

Part II

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31,

 

 

 

2018 compared to 2017

 

 

 

Increase (decrease)

 

 

 

Due to:

 

 

(In thousands)

Volume

 

Rate

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income on interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Money market and other short-term investments

$

990

 

$

782

 

$

1,772

 

 

   Government obligations

 

441

 

 

1,392

 

 

1,833

 

 

   Mortgage-backed securities

 

(635)

 

 

(354)

 

 

(989)

 

 

   FHLB stock

 

17

 

 

215

 

 

232

 

 

   Other investments

 

-

 

 

-

 

 

-

 

 

      Total investments

 

813

 

 

2,035

 

 

2,848

 

 

 

 

 

 

 

 

 

 

 

 

 

   Residential mortgage loans

 

(455)

 

 

(475)

 

 

(930)

 

 

   Construction loans

 

(96)

 

 

(126)

 

 

(222)

 

 

   Commercial and Industrial and Commercial mortgage loans

 

(879)

 

 

4,248

 

 

3,369

 

 

   Finance leases

 

465

 

 

(119)

 

 

346

 

 

   Consumer loans

 

249

 

 

(1,013)

 

 

(764)

 

 

      Total loans

 

(716)

 

 

2,515

 

 

1,799

 

 

         Total interest income

 

97

 

 

4,550

 

 

4,647

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense on interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Brokered CDs

 

(1,419)

 

 

969

 

 

(450)

 

 

   Other interest-bearing deposits

 

265

 

 

1,184

 

 

1,449

 

 

   Other borrowed funds

 

(1,002)

 

 

799

 

 

(203)

 

 

   FHLB advances

 

262

 

 

988

 

 

1,250

 

 

      Total interest expense

 

(1,894)

 

 

3,940

 

 

2,046

 

 

Change in net interest income

$

1,991

 

$

610

 

$

2,601

 

 

Portions of the Corporation’s interest-earning assets, mostly investments in obligations of some U.S. government agencies and sponsored entities, generate interest that is exempt from income tax, principally in Puerto Rico. Also, interest and gains on sales of investments held by the Corporation’s international banking entities (“IBEs”) are tax-exempt under Puerto Rico tax law (refer to Income Taxes below for additional information). To facilitate the comparison of all interest data related to these assets, the interest income has been converted to an adjusted taxable equivalent basis. The tax equivalent yield was estimated by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory tax rate, as adjusted for changes to enacted tax rates (39.0%) and adding to it the average cost of interest-bearing liabilities. The computation considers the interest expense disallowance required by Puerto Rico tax law.

 

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. The changes in the fair value of the derivative instruments have no effect on interest due or interest earned on interest-bearing liabilities or interest-earning assets, respectively.

  

84 


 

   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. 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)

2018

 

2017

 

 

 

 

 

 

 

 

 

 

Interest Income - GAAP

$

149,418

 

 

$

145,228

 

 

Unrealized loss on derivative instruments

 

-

 

 

 

1

 

 

Interest income excluding valuations

 

149,418

 

 

 

145,229

 

 

Tax-equivalent adjustment

 

4,778

 

 

 

4,320

 

 

Interest income on a tax-equivalent basis excluding valuations

 

154,196

 

 

 

149,549

 

 

 

 

 

 

 

 

 

 

 

Interest Expense - GAAP

 

24,725

 

 

 

22,679

 

 

 

 

 

 

 

 

 

 

 

Net interest income - GAAP

$

124,693

 

 

$

122,549

 

 

 

 

 

 

 

 

 

 

 

Net interest income excluding valuations - Non-GAAP

$

124,693

 

 

$

122,550

 

 

 

 

 

 

 

 

 

 

 

Net interest income on a tax-equivalent basis and excluding valuations- Non-GAAP

$

129,471

 

 

$

126,870

 

 

 

 

 

 

 

 

 

 

 

Average Balances

 

 

 

 

 

 

 

 

Loans and leases

$

8,778,968

 

 

$

8,862,271

 

 

Total securities, other short-term investments and interest-bearing cash balances

 

2,720,438

 

 

 

2,375,060

 

 

Average Interest-Earning Assets

$

11,499,406

 

 

$

11,237,331

 

 

 

 

 

 

 

 

 

 

 

Average Interest-Bearing Liabilities

$

8,194,442

 

 

$

8,456,848

 

 

 

 

 

 

 

 

 

 

 

Average Yield/Rate

 

 

 

 

 

 

 

 

Average yield on interest-earning assets - GAAP

 

5.27

%

 

 

5.24

%

 

Average rate on interest-bearing liabilities - GAAP

 

1.22

%

 

 

1.09

%

 

Net interest spread - GAAP

 

4.05

%

 

 

4.15

%

 

Net interest margin - GAAP

 

4.40

%

 

 

4.42

%

 

 

 

 

 

 

 

 

 

 

Average yield on interest-earning assets excluding valuations- Non-GAAP

 

5.27

%

 

 

5.24

%

 

Average rate on interest-bearing liabilities

 

1.22

%

 

 

1.09

%

 

Net interest spread excluding valuations- Non-GAAP

 

4.05

%

 

 

4.15

%

 

Net interest margin excluding valuations- Non-GAAP

 

4.40

%

 

 

4.42

%

 

 

 

 

 

 

 

 

 

 

Average yield on interest-earning assets on a tax-equivalent basis

 

 

 

 

 

 

 

 

    and excluding valuations - Non-GAAP

 

5.44

%

 

 

5.40

%

 

Average rate on interest-bearing liabilities

 

1.22

%

 

 

1.09

%

 

Net interest spread on a tax-equivalent basis and excluding valuations- Non-GAAP

 

4.22

%

 

 

4.31

%

 

Net interest margin on a tax-equivalent basis and excluding valuations- Non-GAAP

 

4.57

%

 

 

4.58

%

 

 

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, branch-based 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 March 31, 2018, net interest income increased $2.1 million to $124.7 million, compared to $122.5 million for the same period in 2017.  The $2.1 million increase in net interest income was primarily due to:

 

·         A $3.0 million increase in interest income on commercial and construction loans, primarily associated with the upward repricing of variable-rate commercial loans.

 

·         A $1.8 million increase in interest income from interest-bearing cash balances due to both an increase of $305.5 million in the average balance of deposits maintained at the New York FED and increases in the Federal Funds target rate.  The growth in non-interest bearing deposits provided higher liquidity levels in the first quarter of 2018 as compared to the same period a year ago.  In addition, the Federal Funds target rate has increased three times since the end of the first quarter of 2017 from a range of 0.75% - 1.00% to its current range of 1.50% - 1.75%. 

85 


 

 

·         A $0.7 million increase in interest income on investment securities primarily due to the gradual investment of liquidity in higher-yielding U.S agency debt securities.

 

Partially offset by:

 

 

·         A $2.0 million increase in interest expense, primarily reflecting the effect of higher market interest rates on the cost of FHLB advances, brokered CDs, retail CDs, and commercial money market accounts tied to short-term interest rates, partially offset by a $262.4 million decrease in the average balance of total interest-bearing liabilities, primarily brokered CDs and repurchase agreements.  Over the last 12 months, the Corporation repaid $744.5 million of maturing brokered CDs with an all-in cost of 1.18% and new issuances amounted to $341.3 million with an all-in cost of 1.69%.  While the Corporation continues to reduce its reliance in brokered CDs, it is increasing the core deposit base.  For the first quarter of 2018 the average balance of non-brokered interest-bearing deposits increased by $136.9 million and the average balance of non-interest-bearing deposits increased by$468.9 million, as compared to the same period in 2017.

 

·         A $0.9 million decrease in interest income on residential mortgage loans associated with both a $33.7 million decrease in the average balance of this portfolio and higher inflows of loans to non-performing status as compared to the first quarter of 2017.

 

·         A $0.4 million decrease in interest income on consumer loans primarily due to higher non-performing auto loan levels.

 

The net interest margin decreased by 2 basis points to 4.40% for the first quarter of 2018, compared to 4.42% for the first quarter of 2017, driven by higher non-performing residential and consumer loan levels and the change in mix of earning assets, partially offset by an improved funding mix driven by the increase in the proportion of interest-earning assets funded by the growth in non-interest bearing deposits.  Loans decreased as a percentage of interest-earning assets from 78.8% in the first quarter of 2017 to 76.3% in the first quarter of 2018.

     

On an adjusted tax-equivalent basis, net interest income for the first quarter of 2018 increased by $2.6 million to $129.5 million when compared to the same period in 2017. In addition to the facts discussed above, the increase for the first quarter of 2018 also included an increase of $0.5 million in the tax-equivalent adjustment primarily attributable to a higher volume of tax exempt U.S agency debt securities.

 

Provision for Loan and Lease Losses

 

The provision for loan and lease losses is charged to earnings to maintain the allowance for loan and lease losses at a level that the Corporation considers adequate to absorb probable losses inherent in the portfolio. The adequacy of the allowance for loan and lease losses is also based upon a number of additional factors, including trends in charge-offs and delinquencies, current economic conditions, the fair value of the underlying collateral and the financial condition of the borrowers, and, as such, includes amounts based on judgments and estimates made by the Corporation. Important factors that influence this judgment are re-evaluated on a quarterly basis to respond to changing conditions.

 

     As described in Note 2, “Update on Effects of Natural Disasters to the accompanying consolidated financial statements,” two strong hurricanes affected the Corporation’s service areas during September 2017.  These hurricanes caused widespread property damage, flooding, power outages, and water and communication service interruptions, and severely disrupted normal economic activity in the affected areas.  Relationship officers continued to closely monitor the performance of hurricane-affected loan customers during the first quarter of 2018, and data became available on the performance of consumer and residential credits that had been under payment deferral programs.  This information was factored into the determination of the allowance for loan and lease losses as of March 31, 2018.  Although the identification and evaluation of hurricane-affected credits has been substantially completed, management’s assessment of the hurricanes’ effect is still subject to uncertainties, both those specific to some individual customers, such as the resolution of insurance claims, and those applicable to the overall economic prospects of the hurricane affected areas as a whole.  During the first quarter of 2018, the Corporation recorded a net loan loss reserve release of approximately $6.4 million in connection with revised estimates associated with the effects of the hurricanes.  The reserve release consisted of a $4.2 million release attributable to updated assessments of financial performance and repayment prospects of certain individually-assessed commercial credits and a $2.2 million release related to lower reserve requirements resulting from payments received during the first quarter that reduced the balance of consumer and, to a lesser extent, residential mortgage loans outstanding on the dates of the hurricanes.  As of March 31, 2018, the hurricane-related allowance amounted to $62.1 million (net of a $2.8 million charge-off taken on a hurricane-affected construction credit during the fourth quarter of 2017).  With the ongoing collection of information on individual commercial customers and statistics on the consumer and residential loan portfolios, the loss estimate will be revised as needed.  The methodologies that the Corporation used to determine the hurricane-related qualitative estimate and for the review of individual large commercial credits are discussed in detail in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” in the

86 


 

audited consolidated financial statements of the Corporation’s for the year ended December 31, 2017, which are included in the Corporation’s 2017 Annual Report on Form 10-K.

 

In addition, during the first quarter of 2018, the Corporation transferred to held for sale three non-performing commercial and construction loans.  The aggregate recorded investment in these loans was written down to $57.2 million, which resulted in charge-offs of $9.7 million and an incremental loss of $5.6 million reflected in the provision for loan and lease losses for the first quarter of 2018. Loans transferred to held for sale consisted of a $30.0 million non-performing construction loans in the Virgin Islands (net of a $5.1 million write-down to fair value recorded at the time of the transfer) and two non-performing commercial mortgage loans totaling $27.2 million (net of write-downs to fair value of $4.6 million recorded at the time of the transfer).

 

     Further, the provision for loan and lease losses for the first quarter of 2017 included a $0.6 million charge related to the PREPA credit line.  Refer to Note 7, “Loans Held For Investment – Purchases and Sales of Loans,” for additional information about this transaction.         

 

On a non-GAAP basis, excluding the effect of the above mentioned changes related to the hurricanes, the loans transferred to held for sale, and the sale of the PREPA credit line, the adjusted provision for loan and lease losses of $21.3 million for the first quarter of 2018 decreased by $3.6 million as compared to the adjusted provision of $24.9 million for the first quarter of 2017.  The $3.6 million decrease in the adjusted provision was driven by:

  

·         An $8.7 million decrease in the adjusted provision for residential mortgage loans, primarily related to lower charge-off levels and the effect in the first quarter of 2017 of adjustments to the loss severity estimates used in the calculation of the general reserve, including adjustments to liquidation cost assumptions.

 

Partially offset by:

 

·         A $4.6 million increase in the adjusted provision for commercial and construction loans, driven by the downgrade in the credit risk classification of a $46.8 million commercial mortgage loan in Florida.

 

·         A $0.6 million increase in the adjusted provision for consumer loans, primarily reflecting the effect in the first quarter of 2017 of a loan loss recovery of $1.2 million on the sale of certain credit card loans that had been fully charged-off in prior periods.

 

Refer to Basis of Presentation below for a reconciliation of the GAAP provision for loan and lease losses to the non-GAAP provision for loan and lease losses excluding the effect of the hurricane-related reserve release, the loans transferred to held for sale, and the sale of the PREPA credit line.  Also refer to Risk Management – Credit Risk Management below for an analysis of the allowance for loan and lease losses, including enhancements to the calculation of the allowance for loan losses for commercial and construction loans implemented in the first quarter of 2018, non-performing assets, impaired loans and related information, and refer to 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.

  

 

Non-Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31,

 

 

 

2018

 

2017

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

$

5,088

 

$

5,790

 

 

Mortgage banking activities

 

4,165

 

 

3,616

 

 

Insurance income

 

3,355

 

 

3,587

 

 

Other operating income

 

7,860

 

 

7,481

 

 

 

 

 

 

 

 

 

 

Non-interest income before OTTI on debt securities and gain on

 

 

 

 

 

 

 

    early extinguishment of debt

 

20,468

 

 

20,474

 

 

OTTI on debt securities

 

-

 

 

(12,231)

 

 

Gain on early extinguishment of debt

 

2,316

 

 

-

 

 

   Total

$

22,784

 

$

8,243

 

 

87 


 

Non-interest income primarily consists of income from service charges on deposit accounts, commissions derived from various banking, securities 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 investments and impairments.  

 

 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 securitization 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, FirstBank Insurance Agency, Inc.

 

The other operating income category is composed of miscellaneous fees such as debit, credit card and point of sale (“POS”) interchange fees, as well as contractually 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, as well as OTTI charges on the Corporation’s investment portfolio.

 

The gain on early extinguishment of debt is related to the repurchase and cancellation in the first quarter of 2018 of $23.8 million in trust preferred securities of FBP Statutory Trust I that were auctioned in a public sale at which the Corporation was invited to participate. The Corporation repurchased and cancelled the repurchased trust preferred securities, resulting in a commensurate reduction in the related Floating Rate Junior Subordinated Debentures.  The Corporation’s winning bid equated to 90% of the $23.8 million par value.  The 10% discount resulted in a gain of $2.3 million, which is reflected in the statement of income as a “Gain on early extinguishment of debt.”  As of March 31, 2018, the Corporation still had Floating Rate Junior Subordinated Debentures (“subordinated debt”) outstanding in the aggregate amount of $184.2 million. 

 

Non-interest income for the first quarter of 2018 amounted to $22.8 million, compared to $8.2 million for the same period in 2017. The $14.5 million increase in non-interest income was primarily related to:

 

·         The effect in the first quarter of 2017 of a $12.2 million OTTI charge on three Puerto Rico Government debt securities held by the Corporation as part of its available-for-sale securities portfolio, specifically bonds of the GDB and the Puerto Rico Public Buildings Authority.  These bonds were sold in the second quarter of 2017.

 

·         The $2.3 million gain recorded in the first quarter of 2018 on the repurchase and cancellation of $23.8 million in trust preferred securities.

 

·         A $0.5 million increase in revenues from mortgage banking activities driven by a $0.7 million adjustment recorded in the first quarter of 2018 to reduce the valuation allowance of mortgage servicing rights, partially offset by lower conforming loan originations and sales in the secondary market resulting in a $0.3 million decrease in gain on sale of residential mortgage loans.  Total loans sold in the secondary market to U.S. government-sponsored entities amounted to $74.5 million with a related gain of $1.9 million in the first quarter of 2018, including gains of $0.6 million on To-Be-Announced MBS (“TBA”) hedges, compared to $85.1 million with a related gain of $2.3 million in the first quarter of 2017, net of TBA hedge losses of $60 thousand. 

 

·         A $0.4 million increase in “other operating income” in the table above, reflecting the effect of a $0.8 million gain on the sale of fixed assets of a closed banking branch in Florida and a $0.3 million increase in transaction fee income from credit and debit cards, POS, and ATMs, partially offset by a $0.6 million lower of cost or market adjustment recorded in the first quarter of 2017 to reduce the carrying value of a construction loan held for sale.

 

 

Partially offset by:

 

·         A $0.7 million decrease in service charges on deposit accounts, primarily related to a decrease in the volume of returned item and overdraft fee transactions. 

 

·         A $0.2 million decrease in seasonal contingent insurance commissions received by the insurance agency based on the prior year’s production of insurance policies. 

  

88 


 

 

Non-Interest Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   The following table presents the components of non-interest expenses:

 

 

Quarter Ended March 31,

 

 

 

2018

 

2017

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees' compensation and benefits

$

40,684

 

$

38,653

 

 

Occupancy and equipment

 

15,105

 

 

14,088

 

 

Insurance and supervisory fees

 

3,855

 

 

4,909

 

 

Taxes, other than income taxes

 

3,856

 

 

3,676

 

 

Professional fees:

 

 

 

 

 

 

 

      Collections, appraisals and other credit-related fees

 

1,599

 

 

2,072

 

 

      Outsourcing technology services

 

5,123

 

 

5,354

 

 

      Other professional fees

 

3,338

 

 

3,530

 

 

Credit and debit card processing expenses

 

3,537

 

 

2,831

 

 

Business promotion

 

2,576

 

 

3,281

 

 

Communications

 

1,482

 

 

1,543

 

 

Net loss on OREO and OREO operations

 

190

 

 

4,076

 

 

Other

 

4,682

 

 

3,869

 

 

      Total

$

86,027

 

$

87,882

 

 

Non-interest expenses for the first quarter of 2018 were $86.0 million, compared to $87.9 million for the same period in 2017.  The $1.9 million decrease in non-interest expenses was mainly due to:

 

·         A $3.9 million decrease in losses from OREO operations, primarily reflecting a $3.6 million decrease in write downs to the value of OREO properties.  

 

·         A $1.1 million decrease in the FDIC insurance premium expense, included as part of “Insurance and supervisory fees” in the table above, reflecting, among other things, the effect of reductions in brokered CDs, a strengthened capital position, and improved liquidity metrics tied to the growth in non-interest-bearing deposits.

 

·         A $0.9 million decrease in total professional service fees, primarily reflecting lower attorneys’ collection fees.

 

·         A $0.7 million decrease in business promotion expenses, primarily due to the timing of marketing related-activities and lower charitable contribution expenses. 

 

 

89 


 

These decreases were partially offset by:

 

·         A $2.0 million increase in employee’s compensation and benefits, primarily reflecting costs associated with a cash transition award paid to certain senior officers of $0.6 million in connection with the previously-reported executive compensation program that became effective in the third quarter of 2017, a $0.4 million increase in stock-based compensation expense, and an increase of approximately $0.9 million in bonuses expense. 

 

·         A $1.0 million increase in occupancy and equipment expenses, primarily related to hurricane-related expenses amounting to $1.6 million recorded in the first quarter of 2018, mostly attributable to repairs and security matters.  These variances were partially offset by lower electricity and property tax expenses.  The Corporation has incurred a variety of costs to operate in disaster response mode, and some facilities and their contents were damaged by the storms.  The Corporation maintains insurance for casualty losses, as well as for reasonable and necessary disaster response costs and certain revenue lost through business interruption. Most of the significant disaster response costs were incurred by the end of the first quarter of 2018. These costs were included, where appropriate, in an insurance claim receivable based on management’s understanding of the underlying coverage. An insurance claim receivable of $5.3 million was included in other assets as of March 31, 2018. The Corporation has incurred $9.3 million of hurricane-related disaster response costs and casualty losses, including the aforementioned $1.6 million charge to operations in the first quarter of 2018.

 

·         A $0.8 million increase in “other operating expenses” in the table above, primarily reflecting related to lower net reserve releases related to unfunded loan commitments.  

 

·         A $0.7 million increase in credit and debit card processing expenses, mainly related to higher transaction volumes.

 

Income Taxes

 

Income tax expense includes Puerto Rico and USVI income taxes as well as applicable U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, First BanCorp. is treated as a foreign corporation for U.S. and USVI income tax purposes and is generally subject to U.S. and USVI income tax only on its income from sources within the U.S. and USVI or income effectively connected with the conduct of a trade or business in those regions. Any such tax paid in the U.S. and USVI is also creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions and limitations.

 

Under the Puerto Rico Internal Revenue Code of 2011, as amended (the “2011 PR Code”), the Corporation and its subsidiaries are treated as separate taxable entities and are generally not entitled to file consolidated tax returns and, thus, the Corporation is generally not entitled  to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss (“NOL”), a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL carry-forward period. The 2011 PR Code allows entities organized as limited liability companies to perform an election to become a non-taxable “pass-through” entity and utilize losses to offset income from other “pass-through” entities, subject to certain limitations, with the remaining net income passing-through its partner entities.  The 2011 PR Code also provides a dividend received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations.

 

  On March 1, 2017, the Corporation completed the applicable regulatory filings to change the tax status of its subsidiary, First Federal Finance, from a taxable corporation to a non-taxable “pass-through” entity. This election allows the Corporation to realize tax benefits of its deferred tax assets associated with pass-through ordinary net operating losses available at the banking subsidiary, FirstBank, which were subject to a full valuation allowance as of December 31, 2016, against now pass-through ordinary income from this profitable subsidiary.

 

On March 1, 2017, the Corporation also completed the applicable regulatory filings to change the tax status of its subsidiary, FirstBank Insurance, from a taxable corporation to a non-taxable “pass-through” entity. This election allows the Corporation to offset pass-through income earned by FirstBank Insurance with net operating losses available at the holding company (the “Holding Company”) level.

     

The Corporation has maintained an effective tax rate lower than the maximum statutory rate mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income taxes and by doing business through an International Banking Entity (“IBE”) unit of the Bank, and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose interest income and gain on sales is exempt from Puerto Rico income taxation. The IBE and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico on the specific activities identified in the IBE Act. An IBE that operates as a unit of a bank pays income taxes at the corporate standard rates to the extent that the IBE’s net income exceeds 20% of the bank’s total net taxable income.

90 


 

 

For the first quarter of 2018, the Corporation recorded an income tax expense of $7.8 million, compared to an income tax benefit of $8.1 million for the same period in 2017. The variance was mostly attributable to the $13.2 million tax benefit recorded in the first quarter of 2017 as a result of the above discussed change in tax status of certain subsidiaries from taxable corporations to limited liability companies that elected to be treated as partnerships for income tax purposes in Puerto Rico, higher pre-tax earnings in the first quarter of 2018, and a higher estimated effective tax rate for 2018.

 

     For the quarter ended March 31, 2018, 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 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 2018, excluding entities from which a tax benefit cannot be recognized and discrete items, was 27% compared to 24% for the first quarter of 2017.  The estimated annual effective tax rate including all entities for 2018 was 19% (23% excluding discrete items),  compared to 13% for the first quarter of 2017, (25% excluding discrete items, primarily the tax benefit resulting from the previously mentioned change in the tax status of two subsidiaries)

   

  The Corporation’s net deferred tax asset amounted to $289.3 million as of March 31, 2018, net of a valuation allowance of $186.1 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 $289.2 million as of March 31, 2018, net of a valuation allowance of $150.0 million, compared to net deferred tax asset of $294.7 million, net of a valuation allowance of $150.7 million, as of December 31, 2017.

 

During the third quarter of 2017, the Corporation completed a formal ownership change analysis within the meaning of Section 382 of the U.S. Internal Revenue Code (“Section 382”) covering a comprehensive period, and concluded that an ownership change occurred during such period. Section 382 limits the ability to utilize U.S. and USVI NOLs for income tax purposes at such jurisdictions following an event of an ownership change.  The Section 382 limitation could result in higher U.S. and USVI liabilities in the future than we would incur in the absence of such limitation. As of March 31, 2018, and as a result of the Section 382 limitation, the Corporation incurred an income tax expense of approximately $1.6 million related to its U.S. operations. The limitation did not affect the USVI operations in the first quarter of 2018. Prospectively, the Corporation expects that it will be able to mitigate the adverse effects associated with the Section 382 limitation as any such tax paid in the U.S. or USVI could be creditable against Puerto Rico tax liabilities or taken as deduction against taxable income.  However, our ability to reduce our Puerto Rico tax liability through such a credit or deduction depends on our tax profile at each annual taxable period, which is dependent on various factors.

 

On December 22, 2017, the United States president signed H.R.1, The Tax Cuts and Jobs Act, which includes an overhaul of individual, business and international taxes and has affected our branch operations in the U.S. and the USVI. The bill includes measures reducing corporate taxes from 35% to 21%, a repeal of the corporate alternative minimum tax regime, changes to business deductions and NOLs, a 15.5% tax on mandatory repatriation of liquid assets, 10% tax on base erosion payments, and a minimum 10.5% tax on inclusion of global intangible low-tax income by U.S. shareholders, among other significant changes. The main provisions affecting our operations in the U.S. and the USVI in the first quarter for 2018 include: the change in tax rate to 21%, the limitation to the amount certain financial institutions may deduct for premiums paid to the FDIC, and changes in permanent differences such as the meals and entertainment deductions. Other significant provisions, such as the base erosion and anti-abuse tax, do not affect the Corporation’s US and USVI branch operations since these operations’ receipts do not exceed the annual threshold of US effectively connected gross receipts.

 

On April 16, 2018, the Puerto Rico House of Representatives introduced the house legislative project 1544 (“P de la C. 1544”) including proposed changes to the Puerto Rico Income Tax Code. The P de la C. 1544 proposes changes effective January 1, 2019 including: a reduction in the maximum corporate tax rate to 31% from the current 39%, the NOL limitation will increase to 90% from the current 80%, and changes to the alternative minimum tax (“AMT”) computation including a reduction in rate to 23%, from the current 30%, among others. The legislative project also eliminates the exemption on interest income of certain mortgage loans, and provides additional limitations to deductions related to meals and travel. Other proposed measures include a reduction of the business to business services sales tax for electronic payments to 2%, from the current 4%, effective July 1, 2018, and to 0% effective July 1, 2019.  The P de la C. 1544 also includes preventive measures which condition the reductions in income tax rates and sales and taxes to the government reaching the budgeted revenue collections.

91 


 

FINANCIAL CONDITION AND OPERATING DATA ANALYSIS

 

Assets

 

The Corporation’s total assets were $12.2 billion as of March 31, 2018, a decrease of $60.9 million from December 31, 2017. The decrease, as further discussed below, was mainly due to a $96.2 million decrease in total loans, a $75.2 million decrease in total investment securities, and a $13.1 million decrease in accrued interest receivables on loans and investments. 

 

The variances were partially offset by a $127.4 million increase in cash and cash equivalents, largely driven by the increase of $186.2 million in non-interest-bearing deposits during the first quarter of 2018 and proceeds from U.S. agency MBS and loan repayments, partially offset by liquidity used to pay off maturing brokered CDs and a $100 million short-term repurchase agreement, as well as for the repurchase of $23.8 million of trust preferred securities.

 

Loan Portfolio

 

   The following table presents the composition of the Corporation’s loan portfolio, including loans held for sale, as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

(In thousands)

2018

 

2017

 

 

 

 

 

 

 

 

 

Residential mortgage loans

$

3,267,868

 

$

3,290,957

 

Commercial loans:

 

 

 

 

 

 

     Commercial mortgage loans (1) 

 

1,552,503

 

 

1,614,972

 

     Construction loans (1) 

 

79,150

 

 

111,397

 

     Commercial and Industrial loans

 

2,061,773

 

 

2,083,253

 

Total commercial loans

 

3,693,426

 

 

3,809,622

 

Finance leases

 

262,863

 

 

257,462

 

Consumer loans

 

1,471,733

 

 

1,492,435

 

Total loans held for investment

 

8,695,890

 

 

8,850,476

 

Less:

 

 

 

 

 

 

     Allowance for loan and lease losses

 

(225,856)

 

 

(231,843)

 

Total loans held for investment, net

$

8,470,034

 

$

8,618,633

 

      Loans held for sale (1) 

 

91,375

 

 

32,980

 

Total loans, net

$

8,561,409

 

$

8,651,613

 

__________________

 

 

 

 

 

 

 

(1)

During the first quarter of 2018, the Corporation transferred $57.2 million in loans (net of fair value write-downs of $9.7 million at the time of the transfer) to held for sale. Loans transferred to held for sale consisted of a $30.0 million non-performing construction loan in the Virgin Islands (net of a fair value write-down of $5.1 million at the time of the transfer) and two non-performing commercial mortgage loans totaling $27.2 million in Puerto Rico (net of fair value write-downs of $4.6 million at the time of the transfer).

92 


 

As of March 31, 2018, the Corporation’s total loan portfolio, before allowance, amounted to $8.8 billion, down $96.2 million when compared to December 31, 2017. The decline primarily reflects reductions of $83.8 million and $15.5 million in the Puerto Rico and Virgin Island regions, respectively. The decrease was mainly related to a $59.5 million decline in the commercial and construction loan portfolio driven by three large loans totaling $28.3 million that were paid off during the first quarter, two large loans totaling $14.8 million sold in the first quarter, and significant payments received in the first quarter, including payments that reduced the outstanding balance of three revolving commercial lines of credit in Puerto Rico by $24.2 million. The variances were partially offset by an increase of $3.1 million in the Florida region.

 

   As shown in the table above, as of March 31, 2018, the loans held for investment portfolio was comprised of commercial and construction loans (42%), residential real estate loans (38%), and consumer and finance leases (20%). Of the total gross loan portfolio held for investment of $8.7 billion as of March 31, 2018, approximately 75% has credit risk concentration in Puerto Rico, 19% in the United States (mainly in the state of Florida) and 6% in the Virgin Islands, as shown in the following table:

 

As of March 31, 2018

Puerto Rico

 

Virgin  Islands

 

United  States

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage loans

$

2,396,307

 

$

273,557

 

$

598,004

 

$

3,267,868

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage loans

 

1,062,693

 

 

90,817

 

 

398,993

 

 

1,552,503

Construction loans

 

42,148

 

 

8,309

 

 

28,693

 

 

79,150

Commercial and Industrial loans

 

1,366,090

 

 

121,182

 

 

574,501

 

 

2,061,773

Total commercial loans

 

2,470,931

 

 

220,308

 

 

1,002,187

 

 

3,693,426

 

 

 

 

 

 

 

 

 

 

 

 

Finance leases

 

262,863

 

 

-

 

 

-

 

 

262,863

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

1,368,759

 

 

45,215

 

 

57,759

 

 

1,471,733

Total loans held for investment, gross

$

6,498,860

 

$

539,080

 

$

1,657,950

 

$

8,695,890

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

50,814

 

 

30,000

 

 

10,561

 

 

91,375

Total loans, gross

$

6,549,674

 

$

569,080

 

$

1,668,511

 

$

8,787,265

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

Puerto Rico

 

Virgin  Islands

 

United  States

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage loans

$

2,413,379

 

$

282,738

 

$

594,840

 

$

3,290,957

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage loans

 

1,127,409

 

 

95,464

 

 

392,099

 

 

1,614,972

Construction loans

 

41,511

 

 

43,314

 

 

26,572

 

 

111,397

Commercial and Industrial loans

 

1,373,714

 

 

116,323

 

 

593,216

 

 

2,083,253

Total commercial loans

 

2,542,634

 

 

255,101

 

 

1,011,887

 

 

3,809,622

 

 

 

 

 

 

 

 

 

 

 

 

Finance leases

 

257,462

 

 

-

 

 

-

 

 

257,462

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

1,389,560

 

 

46,412

 

 

56,463

 

 

1,492,435

Total loans held for investment, gross

$

6,603,035

 

$

584,251

 

$

1,663,190

 

$

8,850,476

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

30,397

 

 

325

 

 

2,258

 

 

32,980

Total loans, gross

$

6,633,432

 

$

584,576

 

$

1,665,448

 

$

8,883,456

 

 

 

 

 

 

 

 

 

 

 

 

93 


 

Residential Real Estate Loans

 

    As of March 31, 2018, the Corporation’s residential mortgage loan portfolio held for investment decreased by $23.1 million as compared to the balance as of December 31, 2017, mainly resulting from activities in Puerto Rico as principal repayments, charge-offs and $12.9 million of foreclosures recorded in the first quarter of 2018, exceeded the volume of loans originated and held for investment purposes. The residential mortgage loan portfolio held for investment in the Puerto Rico and Virgin Island regions decreased during the first quarter of 2018 by $17.1 million and $9.2 million, respectively, partially offset by an increase of $3.2 million in the Florida region.   

 

    The majority of the Corporation’s outstanding balance of residential mortgage loans in Puerto Rico and the Virgin Islands consists of fixed-rate loans that traditionally carried higher yields than residential mortgage loans in Florida. In the Florida region, approximately 57% of the residential mortgage loan portfolio consisted of adjustable rate mortgages. In accordance with the Corporation’s underwriting guidelines, residential mortgage loans are mostly fully-documented loans, and the Corporation does not originate negative amortization loans.  Refer to Contractual Obligations and Commitments below for additional information about outstanding commitments to sell mortgage loans.

 

Commercial and Construction Loans

 

As of March 31, 2018, the Corporation’s commercial and construction loan portfolio held for investment decreased by $116.2 million to $3.7 billion, as compared to the balance as of December 31, 2017. The decrease in commercial and construction loans held for investment was mainly related to the aforementioned transfer of $57.2 million of non-performing loans to held for sale (net of fair value write-downs of $9.7 million recorded at the time of the transfer), three large loans totaling $28.3 million that were paid off during the first quarter, two large loans totaling $14.8 million sold in the first quarter, and significant payments received in the first quarter, including payments that reduced the outstanding balance of three revolving commercial lines of credit in Puerto Rico by $24.2 million. 

 

The commercial and construction loan portfolio, including loans held for sale, decreased by $45.0 million in the Puerto Rico region driven by a $7.7 million commercial mortgage loan paid off during the first quarter, the aforementioned sale of a $5.6 million adversely classified loans, payments of $4.0 million that reduced the outstanding balance of loans that were previously guaranteed by the TDF, significant repayments that reduced the balance of certain commercial loans, including payments totaling $24.2 million that reduced the outstanding balance of three revolving commercial lines of credit, and charge-offs.  In the Virgin Islands, commercial and construction loans decreased by $4.7 million, driven by the fair value write-down of $5.1 million recorded on the construction loan transferred to held for sale during the first quarter.  In Florida, commercial and construction loans decreased by $9.7 million, mainly attributable to the sale of a $9.2 million commercial loan participation and two large loans paid off during the first quarter totaling $20.6 million, partially offset by new loan originations.

 

As of March 31, 2018, the Corporation had $54.8 million of outstanding loans extended to the Puerto Rico government, its municipalities and public corporations, compared to $55.9 million as of December 31, 2017. Approximately $33.1 million of the outstanding loans as of March 31, 2018 consisted of loans extended to municipalities in Puerto Rico, which in most cases are supported by assigned property tax revenues. The vast majority of revenues of the municipalities included in the Corporation’s loan portfolio are independent of the Puerto Rico central government. These municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and notes. Late in 2015, the GDB and the Municipal Revenue Collection Center (“CRIM”) signed and perfected a deed of trust. Through this deed, the GDB, as fiduciary, is required 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 in Puerto Rico. Approximately $6.7 million of the outstanding loans as of March 31, 2018 consisted of a loan to a unit of the central government, and approximately $15.0 million consisted of a loan to an affiliate of PREPA.   

 

  Furthermore, as of March 31, 2018, the Corporation had three loans granted to the hotel industry in Puerto Rico that were previously guaranteed by the TDF with an outstanding principal balance of $116.2 million (book value $61.6 million), compared to $120.2 million outstanding (book value of $70.8 million) as of December 31, 2017. Historically, the borrower and the operations of the underlying collateral of these loans have been the primary sources of repayment and the TDF, which is a subsidiary of the GDB, provided a secondary guarantee for payment performance. As part of agreements executed in the second quarter of 2017 and first quarter of 2018, the TDF paid $7.6 million and $4.0 million, respectively, to honor a portion of its guarantee on these loans.  As provided in the agreements, the cash payments received by the Corporation released the TDF from its liability as a guarantor of these loans. All three of the commercial mortgage loans previously guaranteed by the TDF have been classified as non-performing and impaired since the first quarter of 2016, and interest payments have been applied against principal since then. Approximately $5.2 million of interest payments received on loans previously guaranteed by the TDF since late March 2016 have been applied against principal. In addition, the GDB agreed to issue to the Bank a fixed income financial instrument pursuant to the GDB’s Restructuring Support Agreement approved by the PROMESA oversight board. During the first quarter of 2018, two of these three commercial

94 


 

mortgage loans, with an aggregate outstanding principal balance of $50.4 million (book value of $27.2 million) were transferred to held for sale.

 

The Corporation also has credit exposure to USVI government entities. As of March 31, 2018, the Corporation had $76.7 million in loans to USVI government instrumentalities and public corporations, compared to $70.4 million as of December 31, 2017. Of the amount outstanding as of March 31, 2018, public corporations of the USVI owed approximately $53.5 million and an independent instrumentality of the USVI government owed approximately $23.2 million. As of March 31, 2018, all loans were currently performing and up to date on principal and interest payments.

 

As of March 31, 2018, the Corporation’s total exposure to shared national credit (“SNC”) loans amounted to $730.1 million.  As of March 31, 2018, approximately $269.0 million of the SNC exposure related to the portfolio in Puerto Rico and $461.1 million related to the portfolio in the Florida region.

 

The composition of the Corporation’s construction loan portfolio held for investment as of March 31, 2018 by category and geographic location follows:

  

 

As of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Puerto Rico

 

Virgin Islands

 

United  States

 

Total

(In thousands)

 

 

Loans for residential housing projects:

 

 

 

 

 

 

 

 

 

 

 

              Mid-rise (1) 

$

587

 

$

-

 

$

-

 

$

587

              Single-family, detached

 

1,862

 

 

689

 

 

2,314

 

 

4,865

Total for residential housing projects

 

2,449

 

 

689

 

 

2,314

 

 

5,452

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loans to individuals secured by residential properties

 

426

 

 

595

 

 

-

 

 

1,021

Loans for commercial projects (2) 

 

15,267

 

 

4,629

 

 

26,364

 

 

46,260

Land loans - residential

 

12,739

 

 

2,402

 

 

15

 

 

15,156

Land loans - commercial

 

11,305

 

 

-

 

 

-

 

 

11,305

                     Total before net deferred fees and allowance for loan losses

$

42,186

 

$

8,315

 

$

28,693

 

$

79,194

Net deferred fees

 

(38)

 

 

(6)

 

 

-

 

 

(44)

                     Total construction loan portfolio, gross

 

42,148

 

 

8,309

 

 

28,693

 

 

79,150

Allowance for loan losses

 

(3,369)

 

 

(738)

 

 

(15)

 

 

(4,122)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total construction loan portfolio, net (2) 

$

38,779

 

$

7,571

 

$

28,678

 

$

75,028

____________________

 (1) 

Mid-rise relates to buildings of up to 7 stories.

 (2) 

Excludes a construction-commercial loan held for sale of $30.0 million in the Virgin Islands.

95 


 

       The following table presents further information related to the Corporation’s construction portfolio as of and for the quarter ended March 31, 2018:

 

 

(In thousands)

 

 

 

Total undisbursed funds under existing commitments

$

70,433

 

Construction loans held for investment in non-accrual status

$

16,236

 

Construction loans held for sale in non-accrual status

$

37,732

 

Net charge offs - Construction loans (1) 

$

5,164

 

Allowance for loan losses - Construction loans

$

4,122

 

 

 

 

 

Non-performing construction loans to total construction loans, including held for sale

 

46.17%

 

 

 

 

 

Allowance for loan losses for construction loans to total construction loans held for investments

 

5.21%

 

 

 

 

 

Net charge-offs (annualized) to total average construction loans (1) 

 

17.37%

 

 

 

(1) Includes a charge-off of $5.1 million associated with the fair value write-down of a $30.0 million construction loan transferred to held for sale in the Virgin Islands.

 

 

 

 

 

      The following summarizes the construction loans for residential housing projects in Puerto Rico segregated by the  estimated selling price of the units:

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

          Under $300k

$

1,787

 

          Over $600k (1) 

 

662

 

 

$

2,449

_____________

 (1) 

One residential housing project in Puerto Rico.

 

 

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Consumer Loans and Finance Leases

 

As of March 31, 2018, the Corporation’s consumer loan and finance lease portfolio decreased by $15.3 million to $1.7 billion, as compared to the portfolio balance as of December 31, 2017.  The decrease was primarily reflected in credit card, auto loans, and boat loans, which decreased by $9.9 million, $5.8 million, and $2.5 million, respectively, partially offset by a $5.4 million increase in finance leases. The decrease was primarily associated with the result of charge-offs and repayments that exceeded the volume of new 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 nonrevolving commitments, for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended March 31,

 

 

 

 

 

 

2018

 

2017

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

$

120,774

 

$

164,140

 

 

 

 

 

Commercial and industrial and commercial mortgage

 

335,075

 

 

524,695

 

 

 

 

 

Construction

 

10,684

 

 

25,615

 

 

 

 

 

Finance leases

 

27,478

 

 

24,388

 

 

 

 

 

Consumer

 

189,430

 

 

205,647

 

 

 

 

 

   Total loan production

$

683,441

 

$

944,485

 

 

 

 

 

 

The Corporation is experiencing continued loan demand and has continued its targeted origination strategy. During the first quarter of 2018, total loan originations, including purchases, refinancing’s and draws from existing revolving and non-revolving commitments, amounted to approximately $683.4 million, compared to $944.5 million for the comparable period in 2017.

 

Residential mortgage loan originations and purchases amounted to $120.8 million for the first quarter of 2018, compared to $164.1 million for the first quarter of 2017.  These statistics include purchases from mortgage bankers of $14.5 million for the first quarter of 2018, compared to $14.8 million for the comparable period in 2017. The decrease of $43.4 million in the first quarter of 2018, as compared to the same period of 2017, reflects declines of approximately $27.4 million in Puerto Rico, primarily in conforming loan originations and refinancings, and decreases of $14.4 million and $1.6 million in Florida and the Virgin Islands, respectively.

 

Commercial and construction loan originations (excluding government loans) amounted to $329.8 million for the first quarter of 2018, compared to $550.3 million for the first quarter of 2017.  The decrease in the first quarter of 2018, compared to the same period in 2017, reflects a decrease of approximately $217.8 million in the Puerto Rico region, primarily due to the effect in the first quarter of 2017 of the refinancing and renewal of three large commercial loans in Puerto Rico totaling $176.4 million and reduced activity compared to pre-hurricane levels, and a decrease of $4.7 million in the Virgin Island region, partially offset by an increase of $2.1 million in the Florida region.

 

Government loan originations amounted to $16.0 million for the first quarter of 2018, mainly related to the utilization of an arranged overdraft line of credit of a government entity in the Virgin Islands region.

 

Originations of auto loans (including finance leases) for the first quarter of 2018 amounted to $101.4 million, a decrease of $4.0 million, compared to $105.4 million for the first quarter of 2017. The decrease was primarily reflected in the Puerto Rico and Florida regions with decreases of $3.6 million and $0.6 million, respectively, partially offset by a $0.2 million increase in the Virgin Islands. Personal loan originations for the first quarter 2018, other than credit cards, amounted to $38.4 million, compared to $47.7 million for the first quarter of 2017. Most of the decrease in personal loan originations for the first quarter of 2018, as compared with the same period in 2017, was reflected in the Puerto Rico region. The utilization activity on the outstanding credit card portfolio for the first quarter of 2018 amounted to $77.1 million, compared to $76.9 million for the first quarter of 2017.

 

 

 

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Investment Activities

 

As part of its liquidity, revenue diversification and interest rate risk strategies, First BanCorp. maintains an investment portfolio that is classified as available for sale or held to maturity. The Corporation’s total available-for-sale investment securities portfolio as of March 31, 2018 amounted to $1.8 billion, a decrease of $75.5 million from December 31, 2017. The decrease was mainly driven by U.S. agency MBS prepayments of $42.3 million and a $24.1 million decrease in the fair value of available-for-sale investment securities, primarily U.S. agency MBS, due to changes in market interest rates.      

 

As of March 31, 2018, approximately 98% of the Corporation’s available-for-sale securities portfolio was invested in U.S. Government and agency debentures and fixed-rate U.S. government sponsored-agency MBS (mainly GNMA, FNMA and FHLMC fixed-rate securities).

 

The Corporation owns bonds of the Puerto Rico Housing Finance Authority in the aggregate amount of $8.1 million that are carried on the Corporation’s books at their aggregate fair value of $6.8 million and are current as to contractual payments as of March 31, 2018.

 

As of March 31, 2018, the Corporation’s held-to-maturity investment securities portfolio amounted to $150.5 million, down $0.1 million from December 31, 2017. Held-to-maturity investment securities consist of financing arrangements with Puerto Rico municipalities issued in bond form, which are accounted for as securities, but are 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 the SEC and are not rated by external credit agencies. These bonds have seniority to the payment of operating costs and expenses of the municipality and are supported by assigned property tax revenues.  Approximately 70% of the Corporation’s municipality bonds consist of obligations issued by three of the largest municipalities in Puerto Rico. These municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and loans.

 

    Refer to Exposure to Puerto Rico Government below for information and details about the Corporation’s total direct exposure to the Puerto Rico Government.

 

   The following table presents the carrying value of investments as of the indicated dates:

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2018

 

2017

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Money market investments

$

100,415

 

$

10,415

 

 

 

 

 

 

 

Investment securities available for sale, at fair value:

 

 

 

 

 

   U.S. government and agencies obligations

 

603,571

 

 

609,188

   Puerto Rico government obligations

 

6,808

 

 

6,813

   Mortgage-backed securities

 

1,205,125

 

 

1,274,497

   Other (1) 

 

-

 

 

518

Total investment securities available for sale, at fair value

 

1,815,504

 

 

1,891,016

 

 

 

 

 

 

 

Investment securities held-to-maturity, at amortized cost:

 

 

 

 

 

   Puerto Rico Municipal Bonds

 

150,486

 

 

150,627

 

 

 

 

 

 

 

Other investment securities, including $40.9 million of FHLB stock

 

 

 

 

 

       as of March 31, 2018 and December 31, 2017 (1) 

 

43,532

 

 

43,119

     Total money market and investment securities

$

2,109,937

 

$

2,095,177

________________

 

 

 

 

 

(1)

As of January 1, 2018, the Corporation adopted ASU 2016-01, resulting in the reclassification of equity securities from available-for-sale investment securities to other investment securities.

 

 

 

 

 

 

 

98 


 

   Mortgage-backed securities as of the indicated dates consisted of:

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

(In thousands)

2018

 

2017

 

 

 

 

 

 

Available for sale:

 

 

 

 

 

   FHLMC certificates

$

296,299

 

$

311,706

   GNMA certificates

 

209,603

 

 

221,630

   FNMA certificates

 

640,058

 

 

680,040

   Collateralized mortgage obligations issued or

 

 

 

 

 

      guaranteed by FHLMC and GNMA

 

43,091

 

 

44,061

   Other mortgage pass-through certificates

 

16,074

 

 

17,060

Total mortgage-backed securities

$

1,205,125

 

$

1,274,497

 

   The carrying values of investment securities classified as available for sale and held to maturity as of March 31, 2018 by contractual maturity (excluding mortgage-backed securities) are shown below:

 

 

 

 

 

 

 

Carrying

 

Weighted

(Dollars in thousands)

Amount

 

Average Yield %

 

 

 

 

 

 

U.S. Government and agencies obligations

 

 

 

 

 

   Due within one year

$

122,019

 

1.27

 

   Due after one year through five years

 

311,855

 

1.42

 

   Due after five years through ten years

 

130,761

 

2.74

 

   Due after ten years

 

38,936

 

2.07

 

 

 

603,571

 

1.72

 

 

 

 

 

 

 

Puerto Rico government and municipalities obligations

 

 

 

 

 

   Due after one year through five years

 

3,712

 

5.39

 

   Due after five years through ten years

 

43,597

 

5.14

 

   Due after ten years

 

109,985

 

5.27

 

 

 

157,294

 

5.24

 

 

 

 

 

 

 

Total

 

760,865

 

2.44

 

 

 

 

 

 

 

Mortgage-backed securities

 

1,205,125

 

2.60

 

 

 

 

 

 

 

Total investment securities available for sale and held to maturity

$

1,965,990

 

2.54

 

99 


 

Net interest income of future periods could be affected by prepayments of mortgage-backed securities. Any acceleration in the prepayments of mortgage-backed securities would lower yields on these securities, as the amortization of premiums paid upon acquisition of these securities would accelerate. Conversely, acceleration of the prepayments of mortgage-backed securities would increase yields on securities purchased at a discount, as 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 of March 31, 2018, the Corporation had approximately $221.3 million in debt securities (U.S. agencies and Puerto Rico government securities) with embedded calls and with an average yield of 2.15%. Refer to Risk Management below for further analysis of the effects of changing interest rates on the Corporation’s net interest income and of the interest rate risk management strategies followed by the Corporation. Also refer to Note 5 to the accompanying unaudited consolidated financial statements for additional information regarding the Corporation’s investment portfolio.

 

 

RISK MANAGEMENT

 

Risks are inherent in virtually all aspects of the Corporation’s business activities and operations. Consequently, effective risk management is fundamental to the success of the Corporation. The primary goals of risk management are to ensure that the Corporation’s risk-taking activities are consistent with the Corporation’s objectives and risk tolerance, and that there is an appropriate balance between risk and reward in order to maximize stockholder value.

 

The Corporation has in place a risk management framework to monitor, evaluate and manage the principal risks assumed in conducting its activities. First BanCorp.’s business is subject to eleven broad categories of risks: (1) liquidity risk; (2) interest rate risk; (3) market risk; (4) credit risk; (5) operational risk; (6) legal and compliance risk; (7) reputational risk; (8) model risk; (9) capital risk; (10) strategic risk; and (11) information technology risk.  First BanCorp. has adopted policies and procedures designed to identify and manage the risks to which the Corporation is exposed.

  

The Corporation’s risk management policies are described below as well as in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of First BanCorp.’s 2017 Annual Report on Form 10-K.

 

Liquidity Risk and Capital Adequacy

 

Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet liquidity needs and accommodate fluctuations in asset and liability levels due to changes in the Corporation’s business operations or unanticipated events.

 

The Corporation manages liquidity at two levels. The first is the liquidity of the parent company, which is the holding company that owns the banking and non-banking subsidiaries. The second is the liquidity of the banking subsidiary. As of March 31, 2018, FirstBank could not pay any dividend to the holding company except upon receipt of required regulatory approvals.  During the first quarter of 2018, the Corporation continued to pay quarterly interest payments on the subordinated debentures associated with its trust preferred securities and the monthly dividend income on its non-cumulative perpetual monthly income preferred stock pursuant to regulatory approvals.

 

The Asset and Liability Committee of the Board of Directors is responsible for establishing the Corporation’s liquidity policy, as well as approving operating and contingency procedures and monitoring liquidity on an ongoing basis. The Management Investment and Asset Liability Committee (the “MIALCO”), using measures of liquidity developed by management that involve the use of several assumptions, reviews the Corporation’s liquidity position on a monthly basis. The MIALCO oversees liquidity management, interest rate risk and other related matters.

 

The MIALCO, which reports to the Board of Directors’ Asset and Liability Committee, is composed of senior management officers, including the Chief Executive Officer, the Chief Financial Officer, the Chief Risk Officer, the Retail Financial Services Director, the Risk Manager of the Treasury and Investments Division, the Financial Analysis and Asset/Liability Director and the Treasurer. The Treasury and Investments Division is responsible for planning and executing the Corporation’s funding activities and strategy, monitoring liquidity availability on a daily basis, and reviewing liquidity measures on a weekly basis. The Treasury and Investments Accounting and Operations area of the Controller’s Department is responsible for calculating the liquidity measurements used by the Treasury and Investment Division to review the Corporation’s liquidity position on a monthly basis.  The Financial Analysis and Asset/Liability Director estimates the liquidity gap for longer periods.

  

To ensure adequate liquidity through the full range of potential operating environments and market conditions, the Corporation conducts its liquidity management and business activities in a manner that will preserve and enhance funding stability, flexibility and diversity. Key components of this operating strategy include a strong focus on the continued development of customer-based funding, the maintenance of direct relationships with wholesale market funding providers, and the maintenance of the ability to liquidate certain assets when, and if, requirements warrant.

100 


 

 

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 through a difficult period, and define roles and responsibilities.  Under the contingency funding plan, the Corporation stresses the balance sheet and the liquidity position to critical levels that imply difficulties in getting new 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 its respective commitments, and establish liquidity triggers monitored by the MIALCO in order to maintain the ordinary funding of the banking business. Four different scenarios are defined in the contingency funding plan: local market event, credit rating downgrade, an economic cycle downturn event, and a concentration event. They are reviewed and approved annually by the Board of Directors’ Asset and Liability Committee.

 

The Corporation manages its liquidity in a proactive manner and maintains a sound liquidity position. It uses multiple measures to monitor the liquidity position, including core liquidity, basic liquidity, and time-based reserve measures. As of March 31, 2018, the estimated core liquidity reserve (which includes cash and free liquid assets) was $2.0 billion or 16.2% of total assets, compared to $1.9 billion or 15.6% of total assets as of December 31, 2017. The basic liquidity ratio (which adds available secured lines of credit to the core liquidity) was approximately 21.9% of total assets, compared to 21.2% of total assets as of December 31, 2017.   The increase in core liquidity levels was largely driven by the aforementioned deposit build-up experienced after the hurricanes.  As of March 31, 2018, the Corporation had $689.5 million available for additional credit from the FHLB of New York. Unpledged liquid securities as of March 31, 2018, mainly fixed-rate MBS and U.S. agency debentures, amounted to approximately $1.0 billion. 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 of March 31, 2018, the holding company had $23.0 million of cash and cash equivalents. Cash and cash equivalents at the Bank level as of March 31, 2018 were approximately $837.0 million. The Bank had $956.1 million in brokered CDs as of March 31, 2018, of which approximately $548.3 million mature over the next twelve months. Liquidity at the Bank level is highly dependent on bank deposits, which fund 75% of the Bank’s assets (or 67% excluding brokered CDs).

 

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 CDs, securities sold under agreements to repurchase, and lines of credit with the FHLB.

 

The Asset Liability Committee of the Board of Directors reviews credit availability on a regular basis. The Corporation has also sold mortgage loans as a supplementary source of funding. Long-term funding has also been obtained in the past through the issuance of notes and long-term brokered CDs. The cost of these different alternatives, among other things, is taken into consideration.

 

The Corporation has continued reducing the amounts of its outstanding brokered CDs. As of March 31, 2018, the amount of brokered CDs had decreased $194.4 million to $956.1 million from brokered CDs of $1.2 billion as of December 31, 2017. At the same time as the Corporation focuses on reducing its reliance on brokered CDs, it is seeking to add core deposits.  During the first quarter of 2018, the Corporation increased non-brokered deposits, excluding government deposits, by $194.6 million to $7.4 billion as further discussed below.    

  

The Corporation continues to have the support of creditors, including 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 CDs A large portion of the Corporation’s funding has been brokered CDs issued by FirstBank. Total brokered CDs decreased during the first quarter of 2018 by $194.4 million to $956.1 million as of March 31, 2018.    

 

     The average remaining term to maturity of the retail brokered CDs outstanding as of March 31, 2018 was approximately 1.3 year.

 

     The use of brokered CDs has historically been important for the growth of the Corporation. The Corporation encounters intense competition in attracting and retaining regular retail deposits in Puerto Rico. The brokered CD market is very competitive and liquid, and has enabled the Corporation to obtain substantial amounts of funding in short periods of time. This strategy has enhanced the Corporation’s liquidity position, since brokered CDs are insured by the FDIC up to regulatory limits and can be obtained faster than regular retail deposits.

 

101 


 

     The following table presents contractual maturities of time deposits with denominations of $100,000 or higher as of March 31, 2018:

 

 

 

 

 

 

 

Total

 

 

 

(In thousands)

 

 

 

 

 

Three months or less

$

412,728

 

Over three months to six months

 

420,571

 

Over six months to one year

 

641,050

 

Over one year

 

1,135,050

 

Total

$

2,609,399

 

     Certificates of deposit in denominations of $100,000 or higher include brokered CDs of $956 million issued to deposit brokers in the form of large certificates of deposit that are generally participated out by brokers in amounts of less than the FDIC insurance limit.

 

Government deposits – As of March 31, 2018, the Corporation had $541.4 million of Puerto Rico public sector deposits ($443.0 million in transactional accounts and $98.4 million in time deposits) compared to $490.3 million as of December 31, 2017. Approximately 24% came from municipalities and municipal agencies in Puerto Rico and 76% came from public corporations and the central government and agencies.  Most of the increase in 2018 was related to the increase in the balance of a Puerto Rico government-owned corporation’s transactional deposit account.

 

     In addition, as of March 31, 2018, the Corporation had $154.3 million of government deposits in the Virgin Islands, compared to $161.7 million as of December 31, 2017.

 

Retail deposits The Corporation’s deposit products also include regular saving accounts, demand deposit accounts, money market accounts and retail CDs. Total deposits, excluding brokered CDs and government deposits, increased by $194.6 million to $7.4 billion from the balance of $7.2 billion as of December 31, 2017.  The higher balance reflects increases of $137.2 million and $72.5 million in Puerto Rico and the Virgin Islands, respectively, partially offset by a $15.2 million decrease in Florida.  The Corporation experienced rapid accumulation of deposits after the hurricanes in the fourth quarter of 2017 and the first quarter of 2018.  Total deposits as of March 31, 2018, excluding brokered CDs and government deposits, increased $194.6 million from December 31, 2017 and $571.6 million since September 30, 2017.  The most significant increase was in noninterest-bearing demand deposits, which grew 10%, or $186.2 million, since December 31, 2017 and $433.6 million, or 27%, since September 30, 2017.  Hurricane-related factors, such as the effect of payment deferral programs available to customers, disaster relief funds, and settlement of insurance claims, continue to contribute to this accumulation.  Although management expects the balances accumulated by deposit customers in the hurricane-affected areas to reduce over time, it is difficult to predict when and to what degree, and there may be further growth as insurance claims are resolved and additional disaster-recovery funds are distributed.  Refer to Note 15 in the accompanying unaudited consolidated financial statements for further details.

 

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 ended March 31, 2018 and 2017.

 

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 $400 million as of March 31, 2018, compared to $500 million as of December 31, 2017.  The Corporation repaid at maturity a $100 million short-term repurchase agreement carried at a cost of 1.53%.  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. Refer to Note 16 in the Corporation’s unaudited consolidated financial statements for the quarter ended March 31, 2018 for further details about repurchase agreements outstanding by counterparty and maturities.

 

As of March 31, 2018, the Corporation had $200 million of reverse repurchase agreements with a counterparty under a master netting arrangement that provides for a right of setoff that meets the conditions of ASC 210-20-45-11 for a net presentation.  These repurchase agreements and reverse repurchase agreements are presented net on the consolidated statement of financial condition.

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.

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     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 March 31, 2018 and December 31, 2017, the outstanding balance of FHLB advances was $715.0 million.  As of March 31, 2018, the Corporation had $689.5 million available for additional credit on FHLB lines of credit.

 

Trust-Preferred Securities – In 2004, FBP Statutory Trust I, a statutory trust that is wholly-owned by the Corporation and not consolidated in the Corporation’s financial statements, sold to institutional investors $100 million of its variable-rate trust-preferred securities. 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 trust-preferred securities. FBP statutory 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 trust-preferred debentures are presented in the Corporation’s consolidated statement of financial condition as Other Borrowings. The variable-rate trust-preferred securities are fully and unconditionally guaranteed by the Corporation. The $100 million Junior Subordinated Deferrable Debentures issued by the Corporation in April 2004 and the $125 million issued in September 2004 mature on June 17, 2034 and September 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 trust-preferred securities). The Collins Amendment of the Dodd-Frank Act eliminated certain trust-preferred securities from Tier 1 Capital. Bank Holding Companies such as the Corporation were required to fully phase out these instruments from Tier I capital by January 1, 2016; however, they may remain in Tier 2 capital until the instruments are redeemed or mature.

 

As mentioned above, during the first quarter of 2018, the Corporation completed the repurchase of $23.8 million of trust preferred securities of FBP Statutory Trust I that were being auctioned in a public sale at which the Corporation was invited to participate. The Corporation repurchased and cancelled the repurchased trust preferred securities, resulting in a commensurate reduction in the related subordinated debenture.  As of March 31, 2018, the Corporation still had subordinated debentures outstanding in the aggregate amount of $184.2 million. 

 

During the second quarter of 2016, the Corporation received approval from the Federal Reserve and paid $31.2 million for all the accrued but deferred interest payments plus the interest for the 2016 second quarter on the Corporation’s subordinated debentures associated with its trust-preferred securities. Subsequently, the Corporation received quarterly regulatory approvals and made scheduled quarterly interest payments.  As of March 31, 2018, the Corporation was current on all interest payments due related to its subordinated debentures.  On October 3, 2017, the New York FED terminated the Written Agreement entered into on June 3, 2010 between the Corporation and the Federal Reserve.  However, the Corporation has agreed with its regulators to continue to obtain approval before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or trust-preferred securities, incurring or guaranteeing debt or purchasing or redeeming any corporate stock.  The Corporation has received approval to make the subordinated debentures quarterly payment for June 30, 2018. The Corporation intends to request approval for future periods to continue regularly-scheduled quarterly payments. 

 

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. The ratio of residential real estate loans to total loans has increased over time. Commensurate with the increase in its mortgage banking activities, the Corporation has also invested in technology and personnel to enhance the Corporation’s secondary mortgage market capabilities.

 

The enhanced capabilities improve the Corporation’s liquidity profile as they allow the Corporation to derive liquidity, if needed, from the sale of mortgage loans in the secondary market. The U.S. (including Puerto Rico) secondary mortgage market is still highly liquid, in large part because of the sale of mortgages through guarantee programs of the FHA, VA, HUD, FNMA and FHLMC. During the first quarter of 2018, the Corporation sold approximately $54.4 million of FHA/VA mortgage loans to GNMA, which packages them into mortgage-backed securities. Any regulatory actions affecting GNMA, FNMA or FHLMC could adversely affect the secondary mortgage market.

 

Although currently not in use, other potential sources of short-term funding for the Corporation include commercial paper and federal funds purchased. Furthermore, in previous years, the Corporation entered into several financing transactions to diversify its funding sources, including the issuance of notes payable and, as noted above, junior subordinated debentures as part of its longer-term

103 


 

liquidity and capital management activities.  No assurance can be given that these sources of liquidity will be available in the future and, if available, will be on comparable terms. 

 

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 further downgrade in credit ratings can hinder the Corporation’s access to new forms of external funding and/or cause external funding to be more expensive, which could in turn adversely affect results of operations. Also, changes in credit ratings may further affect the fair value of unsecured derivatives that consider the Corporation’s own credit risk as part of the valuation.

 

The Corporation does not have any outstanding debt or derivative agreements that would be affected by credit 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 so far 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.

 

The Corporation’s credit as a long-term issuer is currently rated B+ by S&P and B- by Fitch. At the FirstBank subsidiary level, long-term issuer ratings are currently Caa1 by Moody’s, seven notches below their definition of investment grade, B+ by S&P, four notches below their definition of investment grade, and B- by Fitch, six 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 $843.8 million as of March 31, 2018, an increase of $127.4 million when compared to the balance as of December 31, 2017. The following discussion highlights the major activities and transactions that affected the Corporation’s cash flows during the first quarters of 2018 and 2017.

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 cash flows from operations, available cash balances and the Corporation’s ability to generate cash through short- and long-term borrowings will be sufficient to fund the Corporation’s operating liquidity needs for the foreseeable future.

 

For the first quarters of 2018 and 2017, net cash provided by operating activities was $95.4 million and $84.8 million, respectively.  Net cash generated from operating activities was higher than reported net income largely as a result of adjustments for items such as the provision for loan and lease losses, depreciation and amortization, and impairments, as well as the cash generated from sales of loans held for sale. 

 

Cash Flows from Investing Activities

 

The Corporation’s investing activities primarily relate to originating loans to be held for investment and purchasing, selling and repaying available-for-sale and held-to-maturity investment securities. For the quarter ended March 31, 2018, net cash provided by investing activities was $111.8 million, primarily reflecting U.S. agency MBS prepayments and proceeds from the aforementioned sale of a commercial loan participation in Florida and an adversely classified loan in Puerto Rico.  

 

For the first quarter of 2017, net cash provided by investing activities was $82.1 million, primarily reflecting U.S. agency MBS prepayments and proceeds from the sale of the PREPA credit line. 

 

Cash Flows from Financing Activities

The Corporation’s financing activities primarily include the receipt of deposits and the issuance of brokered CDs, the issuance and payments of long-term debt, the issuance of equity instruments and activities related to its short-term funding. For the first quarter of 2018, net cash used in financing activities was $79.7 million, mainly reflecting the effect of repayments of maturing brokered CDs and a $100 million short-term repurchase agreement, as well as the repurchase of trust-preferred securities, partially offset by the increase in non-brokered deposits.   

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 In the first quarter of 2017, net cash used in financing activities was $42.5 million, mainly reflecting the effect of repayments of maturing short-term FHLB advances and brokered CDs, partially offset by the increase in non-brokered deposits.   

Capital

As of March 31, 2018, the Corporation’s stockholders’ equity was $1.9 billion, an increase of $8.0 million from December 31, 2017.  The increase was mainly driven by the earnings generated in the first quarter, partially offset by a decrease in the fair value of available-for-sale investment securities recorded as part of other comprehensive loss.  In December 31, 2016, for the first time since July 2009, the Corporation paid dividends on its non-cumulative perpetual monthly income preferred stock, after receiving regulatory approval.  Since then, the Corporation has continued to pay monthly dividend payments on the non-cumulative perpetual monthly income preferred stock. As mentioned above, on October 3, 2017, the Federal Reserve terminated the Written Agreement entered into on June 3, 2010 between the Corporation and the Federal Reserve. However, the Corporation has agreed with its regulators to continue to obtain approval before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or trust preferred securities, incurring or guaranteeing debt or purchasing or redeeming any corporate stock. The Corporation received regulatory approvals to pay the monthly dividends on the Corporation’s Series A through E Preferred Stock through June 2018. The Corporation intends to request approval in future periods to continue to pay monthly dividend payments on the non-cumulative perpetual monthly income preferred stock.

 

  

 

    Set forth below are First BanCorp.'s and FirstBank's regulatory capital ratios as of March 31, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking Subsidiary

 

 

First BanCorp.

 

FirstBank

To be well capitalized - General thresholds

 

 

 

 

Fully

 

 

 

Fully

 

 

As of March 31, 2018

Actual  

 

Phased-in (1) 

 

Actual  

 

Phased-in (1) 

 

 

Total capital ratio (Total capital to risk-weighted assets)

22.98%

 

22.47%

 

22.52%

 

22.03%

10.00%

 

Common Equity Tier 1 capital ratio

 

 

 

 

 

 

 

 

 

  (Common equity Tier 1 capital to risk weighted assets)

19.24%

 

18.79%

 

17.70%

 

17.29%

6.50%

 

Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)

19.66%

 

19.19%

 

21.26%

 

20.76%

8.00%

 

Leverage ratio

14.18%

 

14.18%

 

15.35%

 

15.35%

5.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking Subsidiary

 

 

First BanCorp

 

FirstBank

To be well capitalized - General thresholds

 

 

 

 

Fully

 

 

 

Fully

 

 

As of December 31, 2017

Actual  

 

Phased-in (1) 

 

Actual  

 

Phased-in (1) 

 

 

Total capital (Total capital to risk-weighted assets)

22.53%

 

21.99%

 

22.06%

 

21.53%

10.00%

 

Common Equity Tier 1 capital ratio

 

 

 

 

 

 

 

 

 

  (Common equity Tier 1 capital to risk weighted assets)

18.96%

 

18.09%

 

17.70%

 

16.86%

6.50%

 

Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)

18.97%

 

18.49%

 

20.79%

 

20.26%

8.00%

 

Leverage ratio

14.03%

 

14.01%

 

15.39%

 

15.37%

5.00%

 

 

 

 

 

 

 

 

 

 

 

(1) Certain adjustments required under the Basel III rules will be phased-in through the end of 2018 although certain elements of the Basel III rules have recently been deferred by the federal banking agencies. The ratios shown in this column are calculated assuming a fully phased-in adjustments as if they were effective as of March 31, 2018 and December 31, 2017.

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Although the Corporation and FirstBank became subject to the Basel III rules beginning on January 1, 2015, certain requirements of the Basel III rules are being phased-in over several years and, in general, will be fully effective as of January 1, 2019; however, the federal banking agencies have recently deferred certain elements of the Basel III rules. The Corporation and FirstBank compute risk-weighted assets using the Standardized Approach required by the Basel III rules. 

 

The Basel III rules require the Corporation to maintain an additional capital conservation buffer of 2.5% 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. The phase-in of the capital conservation buffer began on January 1, 2016 with a first year requirement of 0.625% of additional Common Equity Tier 1 capital (“CET1”), which is being progressively increased, by that same percentage amount on each subsequent January 1 until it reaches the fully phased-in 2.5% CET1 requirement on January 1, 2019.

 

Under the fully phased-in Basel III rules, in order to be considered adequately capitalized, the Corporation will be required to maintain: (i) a minimum CET1 capital to risk-weighted assets ratio of at least 4.5%, plus the 2.5% “capital conservation buffer,” resulting in a required minimum CET1 ratio of at least 7%; (ii) a minimum ratio of total Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum Tier 1 capital ratio of 8.5%; (iii) a minimum ratio of total Tier 1 plus Tier 2 capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum total capital ratio of 10.5%; and (iv) a required minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average on-balance sheet (non-risk adjusted) assets.

 

In addition, as required under Basel III rules, the Corporation’s trust-preferred securities (“TRuPs”) were fully phased-out from Tier 1 capital on January 1, 2016.  However, the Corporation’s TRuPs may continue to be included in Tier 2 capital until the instruments are redeemed or mature.

 

On November 21, 2017, the Federal Reserve Board, the FDIC, and the Office of the Comptroller of the Currency finalized an extension of the phase-in of certain Basel III capita rules for banks not using the Basel advanced approaches capital rule.  The extension, which was effective on January 1, 2018, pauses the full transition of the Basel III treatment of mortgage servicing assets, certain deferred tax assets, and investments in the capital of unconsolidated financial institutions and minority interests, pending the banking agencies’ broader efforts, announced in September 2017, to simplify the regulatory capital rules that apply to banking organizations that are not subject to the advanced approaches capital rules.  Because the advanced approaches capital rules apply to banking organizations with more than $250 billion in assets or foreign bank subsidiaries with more than $10 billion in assets, the extension relief applies broadly to community, midsize, and regional banks, including the Corporation and FirstBank.

 

The Corporation, as an institution with more than $10 billion but less than $50 billion of total consolidated assets, is subject to certain requirements established by the Dodd-Frank Act, including those related to capital stress testing.  Consistent with these requirements, the Corporation submitted its third annual company-run stress test to regulators in July 2017, which was made public in October 2017.  The results show that even in a severely adverse economic environment, the Corporation’s and the Bank’s capital ratios exceed both the regulatory minimum required ratios mandated under Basel III and the generally required well-capitalized thresholds throughout the nine-quarter planning horizon. 

 

The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures generally used by the financial community to evaluate capital adequacy. Tangible common equity is total equity less preferred equity, goodwill, core deposit intangibles, purchased credit card relationship assets and insurance customer relationship intangible assets. Tangible assets are total assets less goodwill, core deposit intangibles, purchased credit card relationship and insurance customer assets relationship assets intangible assets.  Refer to Basis of Presentation below for additional information.

 

     The following table is a reconciliation of the Corporation’s tangible common equity and tangible assets as of March 31, 2018 and December 31, 2017, respectively:

 

 

 

March 31,

 

December 31,

 

(In thousands, except ratios and per share information)

2018

 

2017

 

 

 

 

 

 

 

 

Total equity - GAAP

$

1,877,104

 

$

1,869,097

 

Preferred equity

 

(36,104)

 

 

(36,104)

 

Goodwill

 

(28,098)

 

 

(28,098)

 

Purchased credit card relationship intangible

 

(7,426)

 

 

(8,000)

 

Core deposit intangible

 

(5,084)

 

 

(5,478)

 

Insurance customer relationship intangible

 

(737)

 

 

(775)

 

Tangible common equity

$

1,799,655

 

$

1,790,642

 

 

 

 

 

 

 

 

Total assets - GAAP

$

12,200,386

 

$

12,261,268

 

Goodwill

 

(28,098)

 

 

(28,098)

 

Purchased credit card relationship intangible

 

(7,426)

 

 

(8,000)

 

Core deposit intangible

 

(5,084)

 

 

(5,478)

 

Insurance customer relationship intangible

 

(737)

 

 

(775)

 

Tangible assets

$

12,159,041

 

$

12,218,917

 

Common shares outstanding

 

216,390

 

 

216,278

 

 

 

 

 

 

 

 

Tangible common equity ratio

 

14.80%

 

 

14.65%

 

Tangible book value per common share

$

8.32

 

$

8.28

 

 

 

 

 

 

 

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The Banking Law of the Commonwealth of Puerto Rico requires that a minimum of 10% of FirstBank’s net income for the year be transferred to legal surplus until such surplus equals the total of paid-in-capital on common and preferred stock. Amounts transferred to the legal surplus account from the retained earnings account are not available for distribution to the Corporation, including for payment as dividends to the stockholders, without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The Puerto Rico Banking Law provides that, when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over receipts must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the legal surplus reserve, as a reduction thereof. If there is no legal surplus reserve sufficient to cover such balance, in whole or in part, the 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. During the fourth quarter of 2017, $7.3 million was transferred to the legal surplus reserve. FirstBank’s legal surplus reserve, included as part of retained earnings in the Corporation’s consolidated statement of financial condition, amounted to $59.7 million as of March 31, 2018.  There were no transfers to the legal surplus reserve during the quarter ended March 31, 2018.

 

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 or 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 statement of financial position. As of March 31, 2018, commitments to extend credit amounted to approximately $1.2 billion, of which $650.5 million related to credit card loans.  Commercial and financial standby letters of credit amounted to approximately $43.3 million.  Commitments to extend credit are agreements to lend to customers as long as the conditions established in the contract are met.

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Contractual Obligations and Commitments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       The following table presents a detail of 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, 2018

 

 

Total

 

Less than 1 year

 

1-3 years

 

3-5 years

 

After 5 years

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Certificates of deposit

$

3,390,239

 

$

1,905,798

 

$

1,106,492

 

$

371,183

 

$

6,766

   Securities sold under agreements to repurchase (1) 

 

200,000

 

 

-

 

 

-

 

 

200,000

 

 

-

   Advances from FHLB

 

715,000

 

 

95,000

 

 

300,000

 

 

320,000

 

 

-

   Other borrowings

 

184,150

 

 

-

 

 

-

 

 

-

 

 

184,150

Total contractual obligations

$

4,489,389

 

$

2,000,798

 

$

1,406,492

 

$

891,183

 

$

190,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to sell mortgage loans

$

59,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standby letters of credit

$

2,369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Lines of credit

$

1,103,190

 

 

 

 

 

 

 

 

 

 

 

 

   Letters of credit

 

40,959

 

 

 

 

 

 

 

 

 

 

 

 

   Construction undisbursed funds

 

70,433

 

 

 

 

 

 

 

 

 

 

 

 

Total commercial commitments

$

1,214,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Reported net of reverse repurchase agreement by counterparty, when applicable, pursuant to ASC 210-20-45-11.

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The Corporation has obligations and commitments to make future payments under contracts, such as debt and lease agreements, and under other commitments to sell mortgage loans at fair value and to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Other contractual obligations result mainly from contracts for the rental and maintenance of equipment. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. There have been no significant or unexpected draws on existing commitments.  In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any time and without cause.

 

Interest Rate Risk Management

 

First BanCorp. manages its asset/liability position in order to limit the effects of changes in interest rates on net interest income and to maintain stability of profitability under varying interest rate scenarios. The MIALCO oversees interest rate risk, and the MIALCO’s meetings focus on, 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. These simulations are carried out over a one-to-five-year time horizon, assuming 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. Simulations are carried out 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 detailed by maturity or re-pricing structure and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and costs, the possible exercise of options, changes in prepayment rates, deposit decay and other factors, which may be important in projecting net interest income.

 

The Corporation uses a simulation model to project future movements in the Corporation’s balance sheet and income statement. The starting point of the projections corresponds to the actual values on the balance sheet on the date of the simulations.

 

These simulations are highly complex, and are based on many assumptions that are intended to reflect the general behavior of the balance sheet components over the 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. Several benchmark and market rate curves were used in the modeling process, primarily the LIBOR/SWAP curve, Prime, Treasury, FHLB rates, brokered CD rates, repurchase agreements rates and the mortgage commitment rate of 30 years.

 

The 12-month net interest income is forecasted assuming the March 31, 2018 interest rate curves remain constant. Then, net interest income is estimated under rising and falling rate scenarios. For the rising rate scenario, a gradual (ramp) parallel upward shift of the yield curve is assumed during the first 12 months (the “+200 ramp” scenario). Conversely, for the falling rate scenario, a gradual (ramp) parallel downward shift of the yield curve is assumed during the first 12 months (the “-200 ramp” scenario). However, given the current low levels of interest rates, 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 for March 2018, as compared to December 2017, reflected a 54 basis points increase in the short-term horizon, between 1 to 12 months, while market rates increased by 48 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 38 basis points, causing a more flattened yield curve. The U.S. Treasury curve in the short-term increased by 36 basis points and in the medium-term horizon increased by 39 basis points, as compared to the December 2017 end of month levels. The long-term horizon increased by 28 basis points as compared to December 2017 end-of-month levels.

 

    The following table presents the results of the simulations as of March 31, 2018 and December 31, 2017.  Consistent with prior years, these exclude non-cash changes in the fair value of derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

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

$

18.2

 

3.54

%

 

$

18.1

 

3.41

%

 

$

18.0

 

3.55

%

 

$

17.5

 

3.42

%

- 200 bps ramp

$

(16.7)

 

(3.24)

%

 

$

(19.4)

 

(3.65)

%

 

$

(14.6)

 

(2.89)

%

 

$

(17.7)

 

(3.47)

%

109 


 

 

The Corporation continues to manage its balance sheet structure to control the overall interest rate risk. As of March 31, 2018, the simulations showed that the Corporation maintains an asset-sensitive position.  The Corporation has continued repositioning the balance sheet and improving the funding mix, driven by an increase in the average balance of non-interest bearing deposits and reductions in brokered certificates of deposits, short-term repurchase agreements and other borrowings.  The above-mentioned growth in non-interest bearing deposits, along with proceeds from US agency mortgage-backed securities and loan repayments, has helped the Corporation continue to maintain high liquidity levels.

 

Taking into consideration the above-mentioned facts for modeling purposes, the net interest income for the next 12 months under a non-static balance sheet scenario is estimated to increase by $18.1 million in the rising rate scenario when compared against the Corporation’s flat or unchanged interest rate forecast scenario. Under the falling rate, non-static scenario, the net interest income is estimated to decrease by $19.4 million.

 

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, used by the Corporation 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 increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection from rising interest rates.

 

Forward contracts - Forward contracts are sales of TBAs 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. These securities are used to hedge the FHA/VA residential mortgage loan securitizations of the mortgage-banking operations. Unrealized gains (losses) are recognized as part of mortgage banking activities in the consolidated statement of income.

 

     For detailed information regarding the volume of derivative activities (e.g., notional amounts), location and fair values of derivative instruments in the consolidated statement of financial condition and the amount of gains and losses reported in the consolidated statement of income, refer to Note 11 in the accompanying unaudited consolidated financial statements.

  

 

    The following tables summarize the fair value changes in the Corporation’s derivatives as well as the sources of the fair values:

 

Asset Derivatives

 

Liability Derivatives

 

Quarter Ended

 

Quarter Ended

(In thousands)

March 31, 2018

 

March 31, 2018

 

 

 

 

 

 

Fair value of contracts outstanding at the beginning

 

 

 

 

 

   of the period

$

312

 

$

(324)

Changes in fair value during the period

 

359

 

 

(411)

Fair value of contracts outstanding as of March 31, 2018

$

671

 

$

(735)

 

 

 

 

 

 

 

 

Sources of Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment Due by Period

 

 

 

 

 

 

 

 

 

Maturity 1-3 Years

 

Maturity 3-5 Years

 

Maturity in Excess of 5 Years

 

Total Fair Value

 

 

 

 

Maturity

 

 

 

 

 

(In thousands)

Less Than One Year

 

 

 

 

 

As of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pricing from observable market inputs -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Asset Derivatives

 

 

 

$

3

 

$

668

 

$

-

 

$

-

 

$

671

 

Pricing from observable market inputs -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Liability Derivatives

 

 

 

(67)

 

 

(668)

 

 

-

 

 

-

 

 

(735)

 

 

 

 

 

 

$

(64)

 

$

-

 

$

-

 

$

-

 

$

(64)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

110 


 

 

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, for the most part, on the level of interest rates, as well as expectations for rates in the future.

 

As of March 31, 2018 and December 31, 2017, all of the derivative instruments held by the Corporation were considered undesignated economic hedges.

 

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 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. 

 

Refer to Note 21 of the accompanying unaudited consolidated financial statements for additional information regarding the fair value determination of derivative instruments.  

 

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 derivatives and 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. Refer to Contractual Obligations and Commitments above for further details. The credit risk of derivatives arises from the potential of the counterparty’s default on its contractual obligations. To manage this credit risk, the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. For further details and information on the Corporation’s derivative credit risk exposure, refer to Interest Rate Risk Management above. The Corporation manages its credit risk through its credit policy, underwriting, independent loan review and quality control procedures, statistical analysis, comprehensive financial analysis, and established management committees. The Corporation also employs proactive collection and loss mitigation efforts. Furthermore, personnel performing structured loan workout functions are responsible for mitigating defaults and minimizing losses upon default within each region and for each business segment. In the case of the commercial and industrial (“C&I”), commercial mortgage and construction loan portfolios, the Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of OREO.  In addition to the management of the resolution process for problem loans, the SAG oversees collection efforts for all loans to prevent migration to the non-performing and/or adversely classified status.  The SAG utilizes relationship officers, collection specialists and attorneys. In the case of residential construction projects, the workout function monitors project specifics, such as project management and marketing, as deemed necessary.

 

The Corporation may also have risk of default in the securities portfolio. The securities held by the Corporation are principally fixed-rate U.S. agency mortgage-backed securities and U.S. Treasury and agency securities. Thus, a substantial portion of these instruments is backed by mortgages, a guarantee of a U.S. government-sponsored entity or the full faith and credit of the U.S. government.

 

    Management, consisting of the Corporation’s Commercial Credit Risk Officer, Retail Credit Risk Officer, Chief Lending Officer and other senior executives, has the primary responsibility for setting strategies to achieve the Corporation’s credit risk goals and objectives. These goals and objectives are documented in the Corporation’s Credit Policy.

  

 

111 


 

Allowance for Loan and Lease Losses and Non-performing Assets

 

Allowance for Loan and Lease Losses

 

The allowance for loan and lease losses represents the estimate of the level of reserves appropriate to absorb inherent credit losses. The amount of the allowance is determined by empirical analysis and judgments regarding the quality of each individual loan portfolio. All known relevant internal and external factors that affect loan collectability are considered, including analyses of historical charge-off experience, migration patterns, changes in economic conditions, and changes in loan collateral values. For example, factors affecting the economies of Puerto Rico, Florida (USA), the United States Virgin Islands and the British Virgin Islands may contribute to delinquencies and defaults above the Corporation’s historical loan and lease 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.

 

The allowance for loan and lease losses provides for probable losses that have been identified with specific valuation allowances for individually evaluated impaired loans and probable losses believed to be inherent in the loan portfolio that have not been specifically identified. An internal risk rating is assigned to each business loan at the time of approval and is subject to subsequent periodic reviews by the Corporation’s senior management. The allowance for loan and lease losses is reviewed on a quarterly basis as part of the Corporation’s continued evaluation of its asset quality.

 

Hurricanes Maria and Irma caused widespread property damage, flooding, power outages, and water and communication services interruptions, and severely disrupted normal economic activity in the affected areas.  Damages associated with these hurricane-related events have had and will continue to have significant short-term economic repercussions, both positive and negative, for the Corporation’s commercial and individual loan customers in the most severely affected parts of Puerto Rico and the Virgin Islands.  While these events have affected certain quality metrics, including higher non-performing assets, the hurricanes’ ultimate effect on loan collections is uncertain.  The methodologies used by the Corporation to determine the hurricane-related qualitative estimate and for the review of individual large commercial credits are discussed in detail in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” in the audited consolidated financial statements for the year ended December 31, 2017, which are included in the Corporation’s 2017 Annual Report on Form 10-K.  With the ongoing collection of information on individual commercial customers and statistics on the consumer and residential loan portfolios, the loss estimate will be revised as needed.

   

 

The ratio of the allowance for loan and lease losses to total loans held for investment remained relatively flat at 2.60% as of March 31, 2018, compared to 2.62% as of December 31, 2017. The change for each portfolio follows:

 

·          The allowance to total loans ratio for the residential mortgage portfolio decreased from 1.79% as of December 31, 2017 to 1.73% as of March 31, 2018, primarily due to lower delinquency levels reflecting the effect of clients that resumed their payments after the expiration of the three-month payment deferral program.

 

·          The allowance to total loans ratio for the commercial mortgage portfolio increased from 3.00% as of December 31, 2017 to 3.25% as of March 31, 2018, driven by the effect of the downgrade of a $46.8 million loans in Florida. 

 

·          The allowance to total loans for the C&I portfolio decreased from 2.35% as of December 31, 2017 to 2.31% as of March 31, 2018, reflecting the effect of a $3.8 million net loan loss reserve release related to revised estimates of the reserve associated with the effects of Hurricanes Maria and Irma, primarily due to updated assessments about the performance and repayment prospects of certain individually assessed commercial loans. 

 

·          The allowance to total loans for the construction loan portfolio increased from 4.06% as of December 31, 2017 to 5.21% as of March 31, 2018, primarily due to the effect of the aforementioned transfer of loans to held for sale, including the transfer to held for sale of a $30.0 million construction loan in the Virgin Islands.

 

·          The allowance to total loans for the consumer loan portfolio decreased from 4.06% as of December 31, 2017 to 3.88% as of March 31, 2018, reflecting the effect of a $2.0 million release of the hurricane-related qualitative reserve resulting from payments received during the first quarter that reduced the balance of the consumer loan portfolio outstanding on the dates of the hurricanes.

 

The ratio of the total allowance to non-performing loans held for investment was 54.82% as of March 31, 2018 compared to 47.36% as of December 31, 2017, reflecting the effect of the aforementioned transfer to held for sale of non-performing commercial and construction loans totaling $57.2 million.   

   

Substantially all of the Corporation’s loan portfolio is located within the boundaries of the U.S. economy. Whether the collateral is located in Puerto Rico, the U.S. and British Virgin Islands or the U.S. mainland (mainly in the state of Florida), the performance of the

112 


 

Corporation’s loan portfolio and the value of the collateral supporting the transactions are dependent upon the performance of and conditions within each specific area’s real estate market. The real estate market in Puerto Rico experienced readjustments in value driven by the loss of income due to higher unemployment, reduced demand and general adverse economic conditions that were exacerbated by the effect of Hurricanes Maria and Irma. The Corporation sets adequate loan-to-value ratios following its regulatory and credit policy standards.

 

As shown in the following table, the allowance for loan and lease losses amounted to $225.9 million as of March 31, 2018, or 2.60% of total loans, compared with $231.8 million, or 2.62% of total loans, as of December 31, 2017. Refer to Provision for Loan and Lease Losses above for additional information.

 

 

 

Quarter Ended March 31

 

 

(Dollars in thousands)

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses, beginning of period

$

231,843

 

 

$

205,603

 

 

Provision (release) for loan and lease losses:

 

 

 

 

 

 

 

 

           Residential Mortgage (1) 

 

447

 

 

 

9,271

 

 

           Commercial Mortgage (2) 

 

8,661

 

 

 

12,539

 

 

           Commercial and Industrial (3)

 

656

 

 

 

(4,806)

 

 

           Construction (4)

 

4,764

 

 

 

942

 

 

           Consumer and Finance Leases (5) 

 

6,016

 

 

 

7,496

 

 

Total provision for loan and lease losses (6) 

 

20,544

 

 

 

25,442

 

 

Charge-offs

 

 

 

 

 

 

 

 

           Residential Mortgage

 

(3,371)

 

 

 

(8,225)

 

 

           Commercial Mortgage (7) 

 

(6,810)

 

 

 

(1,362)

 

 

           Commercial and Industrial (8) 

 

(1,930)

 

 

 

(12,052)

 

 

           Construction (9) 

 

(5,177)

 

 

 

(63)

 

 

           Consumer and Finance Leases

 

(12,072)

 

 

 

(11,192)

 

 

Total charge offs (10) 

 

(29,360)

 

 

 

(32,894)

 

 

Recoveries:

 

 

 

 

 

 

 

 

           Residential Mortgage

 

335

 

 

 

749

 

 

           Commercial Mortgage

 

49

 

 

 

30

 

 

           Commercial and Industrial

 

62

 

 

 

875

 

 

           Construction

 

13

 

 

 

445

 

 

           Consumer and Finance Leases

 

2,370

 

 

 

2,981

 

 

Total recoveries

 

2,829

 

 

 

5,080

 

 

Net Charge-Offs

 

(26,531)

 

 

 

(27,814)

 

 

Allowance for loan and lease losses, end of period

$

225,856

 

 

$

203,231

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses to period end total loans held for investment

 

2.60

%

 

 

2.30

%

 

Allowance for loan and lease losses, excluding the $62.1 million hurricane-related allowance, to period

 

 

 

 

 

 

 

 

 

end total loans held for investment (11) 

 

1.88

%

 

 

2.30

%

 

Net charge-offs (annualized) to average loans outstanding during the period

 

1.21

%

 

 

1.26

%

 

Net charge-offs (annualized), excluding charge-offs of $9.7 million related to loans transferred to held

 

 

 

 

 

 

 

 

 

for sale in the first quarter of 2018 and the charge-off of $10.7 million related to the sale of the

 

 

 

 

 

 

 

 

 

 PREPA credit line in the first quarter of 2017, to average loans outstanding during the period (11) 

 

0.77

%

 

 

0.78

%

 

Provision for loan and lease losses to net charge-offs during the period

 

0.77

x

 

 

0.91

x

 

Provision for loan and lease losses to net charge-offs during period, excluding the effect of the

 

 

 

 

 

 

 

 

 

hurricane-related reserve release and loans transferred to held for sale in the first quarter of 2018,

 

 

 

 

 

 

 

 

 

and the effect of the sale of the PREPA credit line in the first quarter of 2017 (11) 

 

1.26

x

 

 

1.46

x

 

____________________

 

 

 

 

 

 

 

 

(1)

Net of a $0.1 million net loan loss reserve release for the first quarter of 2018 associated with the effects of Hurricanes Maria and Irma.

 

(2)

Net of a $0.2 million net loan loss reserve release for the first quarter of 2018 associated with the revised estimates of the effects of Hurricanes Maria and Irma. Includes a provision of $1.1 million associated with $27.2 million in non-performing commercial mortgage loans transferred to held for sale in the first quarter of 2018.

 

(3)

Net of a $3.8 million net loan loss reserve release for the first quarter of 2018 associated with revised estimates of the effects of Hurricanes Maria and Irma. Includes a provision of $0.6 million associated with the sale of the PREPA credit line in the first quarter of 2017.

 

(4)

Net of a $0.2 million net loan loss reserve release for the first quarter of 2018 associated with the revised estimates of the effects of Hurricanes Maria and Irma. Includes a provision of $4.5 million associated with a $30.0 million non-performing construction loan transferred to held for sale in the first quarter of 2018.

 

(5)

Net of a $2.0 million net loan loss reserve release for the first quarter of 2018 associated with revised estimates of the effects of Hurricanes Maria and Irma.

 

 

(6)

Net of a $6.4 million net loan loss reserve release for the first quarter of 2018 associated with revised estimates of the effects of Hurricanes Maria and Irma. Includes a provision of $5.6 million associated with $57.2 million in non-performing loans transferred to held for sale in the first quarter of 2018. Includes a provision of $0.6 million associated with the sale of the PREPA credit line in the first quarter of 2017.

 

 

(7)

Includes charge-offs totaling $4.6 million associated with $27.2 million in non-performing commercial mortgage loans transferred to held for sale in the first quarter of 2018.

 

 

(8)

Includes a charge-off of $10.7 million associated with the sale of the PREPA credit line in the first quarter of 2017.

 

 

(9)

Includes a charge-off of $5.1 million associated with a $30.0 million non-performing construction loan transferred to held for sale in the first quarter of 2018.

 

 

(10)

Includes charge-offs totaling $9.7 million associated with $57.2 million in non-performing loans transferred to held for sale in the first quarter of 2018. Includes a charge-off of $10.7 million associated with the sale of the PREPA credit line in the first quarter of 2017.

 

 

(11)

Non-GAAP financial measures, refer to Basis of Presentation below for a reconciliation of these measures.

 

 

 

 

 

 

 

 

 

 

 

 

113 


 

   The following table sets forth information concerning the allocation of the allowance for loan and lease losses 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, 2018

 

 

December 31, 2017

 

(In thousands)

Amount

 

Percent of loans in each category to total loans

 

 

Amount

 

Percent of loans in each category to total loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage loans

$

56,386

 

 

37

%

 

$

58,975

 

 

37

%

Commercial mortgage loans

 

50,393

 

 

18

%

 

 

48,493

 

 

18

%

Construction loans

 

4,122

 

 

1

%

 

 

4,522

 

 

1

%

Commercial and Industrial loans

 

47,659

 

 

24

%

 

 

48,871

 

 

24

%

Consumer loans and finance leases

 

67,296

 

 

20

%

 

 

70,982

 

 

20

%

 

$

225,856

 

 

100

%

 

$

231,843

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the first quarter of 2018, the Corporation implemented enhancements to the methodology behind the calculation of the allowance for commercial loans, which includes, among others,  the following: (i) a revised procedure to determine the historical loss rates applicable for each commercial loan regulatory-based credit risk categories (i.e., pass, special mention, substandard and doubtful) that changed the previous blending of loss rates for loans risk-rated special mention, substandard and doubtful with an aggregation methodology whereas historical losses and portfolio balances of special mention loans are allocated to pass or substandard categories based on the historical proportion of the loans in this risk category that ultimate cured or resulted uncollectible;  (ii) a quarterly sensitivity analysis using actual historical loss rates for loans risk-rated pass, special mention and substandard to compare the results of such sensitivity to the calculated reserves under the revised procedure, and  (iii) establishment of sensitivity thresholds that could trigger further reviews and/or adjustments prior to reaching a conclusion as to the adequacy of the allowance for loan and lease losses for the Corporation’s commercial portfolios.

 

The comparison of the revised procedure with the sensitivity analysis resulted in an immaterial increase to the qualitative reserve for commercial mortgage loans that was recorded as of March 31, 2018. The Corporation engaged an independent third party to assess the allowance framework and the appropriateness of assumptions used in the analysis and expects such review to be completed during the second quarter of 2018.

114 


 

    The following table sets forth information concerning the composition of the Corporation's allowance for loan and lease losses as of March 31, 2018 and December 31, 2017 by loan category and by whether the allowance and related provisions were calculated individually or through a general valuation allowance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

Residential Mortgage Loans

 

Commercial Mortgage Loans

 

 

 

 

 

Consumer and Finance Leases

 

 

 

 

 

 

 

 

Construction Loans

 

 

 

 

(Dollars in thousands)

 

 

C&I Loans

 

 

 

Total

 

Impaired loans without specific reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Principal balance of loans, net of charge-offs

$

94,817

 

$

60,811

 

$

24,712

 

$

-

 

$

2,653

 

$

182,993

 

Impaired loans with specific reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Principal balance of loans, net of charge-offs

 

322,793

 

 

101,315

 

 

95,066

 

 

12,067

 

 

32,046

 

 

563,287

 

   Allowance for loan and lease losses

 

22,546

 

 

13,451

 

 

14,375

 

 

1,484

 

 

5,074

 

 

56,930

 

   Allowance for loan and lease losses to principal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       balance

 

6.98

%

 

13.28

%

 

15.12

%

 

12.30

%

 

15.83

%

 

10.11

%

PCI loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Carrying value of PCI loans

 

151,067

 

 

4,214

 

 

-

 

 

-

 

 

-

 

 

155,281

 

   Allowance for PCI loans

 

10,873

 

 

378

 

 

-

 

 

-

 

 

-

 

 

11,251

 

   Allowance for PCI loans to carrying value

 

7.20

%

 

8.97

%

 

-

 

 

-

 

 

-

 

 

7.25

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans with general allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Principal balance of loans

 

2,699,191

 

 

1,386,163

 

 

1,941,995

 

 

67,083

 

 

1,699,897

 

 

7,794,329

 

   Allowance for loan and lease losses

 

22,967

 

 

36,564

 

 

33,284

 

 

2,638

 

 

62,222

 

 

157,675

 

   Allowance for loan and lease losses to principal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       balance

 

0.85

%

 

2.64

%

 

1.71

%

 

3.93

%

 

3.66

%

 

2.02

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Principal balance of loans

$

3,267,868

 

$

1,552,503

 

$

2,061,773

 

$

79,150

 

$

1,734,596

 

$

8,695,890

 

   Allowance for loan and lease losses

 

56,386

 

 

50,393

 

 

47,659

 

 

4,122

 

 

67,296

 

 

225,856

 

   Allowance for loan and lease losses to principal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       balance (1) 

 

1.73

%

 

3.25

%

 

2.31

%

 

5.21

%

 

3.88

%

 

2.60

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage Loans

 

Commercial Mortgage Loans

 

 

 

 

 

Consumer and Finance Leases

 

 

 

 

 

 

 

 

 

Construction Loans

 

 

 

 

(Dollars in thousands)

 

 

C&I Loans

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans without specific reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Principal balance of loans, net of charge-offs

$

116,818

 

$

65,100

 

$

28,292

 

$

48

 

$

2,788

 

$

213,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with specific reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Principal balance of loans, net of charge-offs

 

316,616

 

 

87,814

 

 

90,008

 

 

47,218

 

 

35,606

 

 

577,262

 

   Allowance for loan and lease losses

 

22,086

 

 

9,783

 

 

12,359

 

 

2,017

 

 

5,165

 

 

51,410

 

   Allowance for loan and lease losses to principal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        balance

 

6.98

%

 

11.14

%

 

13.73

%

 

4.27

%

 

14.51

%

 

8.91

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PCI loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Carrying value of PCI loans

 

153,991

 

 

4,183

 

 

-

 

 

-

 

 

-

 

 

158,174

 

   Allowance for PCI loans

 

10,873

 

 

378

 

 

-

 

 

-

 

 

-

 

 

11,251

 

   Allowance for PCI loans to carrying value

 

7.06

%

 

9.04

%

 

-

 

 

-

 

 

-

 

 

7.11

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans with general allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Principal balance of loans

 

2,703,532

 

 

1,457,875

 

 

1,964,953

 

 

64,131

 

 

1,711,503

 

 

7,901,994

 

   Allowance for loan and lease losses

 

26,016

 

 

38,332

 

 

36,512

 

 

2,505

 

 

65,817

 

 

169,182

 

   Allowance for loan and lease losses to principal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        balance

 

0.96

%

 

2.63

%

 

1.86

%

 

3.91

%

 

3.85

%

 

2.14

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Principal balance of loans

$

3,290,957

 

$

1,614,972

 

$

2,083,253

 

$

111,397

 

$

1,749,897

 

$

8,850,476

 

   Allowance for loan and lease losses

 

58,975

 

 

48,493

 

 

48,871

 

 

4,522

 

 

70,982

 

 

231,843

 

   Allowance for loan and lease losses to principal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        balance (1) 

 

1.79

%

 

3.00

%

 

2.35

%

 

4.06

%

 

4.06

%

 

2.62

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

__________

 (1) 

Loans used in the denominator include PCI loans of $155.3 million and $158.2 million as of March 31, 2018 and December 31, 2017, respectively. However, the Corporation separately tracks and reports PCI loans and excludes these loans from the amounts of non-performing loans, impaired loans, TDRs and non-performing assets.

115 


 

    The following tables show the activity for impaired loans held for investment and the related specific reserve during the first quarter of 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

March 31, 2018

 

March 31, 2017

 

 

(In thousands)

 

Impaired Loans:

 

 

 

 

 

 

Balance at beginning of period

$

790,308

 

$

887,905

 

Loans determined impaired during the period

 

61,408

 

 

19,628

 

Charge-offs (1) (2)

 

(17,213)

 

 

(17,404)

 

Loans sold, net of charge-offs

 

(4,121)

 

 

(53,245)

 

Increases to existing impaired loans

 

6,998

 

 

541

 

Foreclosures

 

(11,675)

 

 

(9,457)

 

Loans no longer considered impaired

 

(1,507)

 

 

(892)

 

Loans transferred to held for sale

 

(57,213)

 

 

-

 

Paid in full or partial payments

 

(20,705)

 

 

(19,878)

 

     Balance at end of period

$

746,280

 

$

807,198

 

 

 

 

 

 

 

(1)

 The first quarter of 2018 includes charge-offs totaling $9.7 million associated with the $57.2 million in non-performing loans transferred to held for sale.

(2)

 The first quarter of 2017 includes a charge-off of $10.7 million related to the sale of the PREPA credit line.

 

 

 

Quarter Ended

 

 

(In thousands)

 

Specific Reserve:

 

 

 

 

 

 

Balance at beginning of period

$

51,410

 

$

64,421

 

Provision for loan losses

 

22,702

 

 

19,294

 

Net charge-offs

 

(17,183)

 

 

(17,404)

 

     Balance at end of period

$

56,929

 

$

66,311

 

 

 

 

 

 

 

 

In addition, as of March 31, 2018, the Corporation maintained a $0.6 million reserve for unfunded loan commitments, mainly related to outstanding commitments on floor plan revolving lines of credit. The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance sheet loan commitments to borrowers that are experiencing financial difficulties at the balance sheet date. The reserve for unfunded loan commitments is included as part of accounts payable and other liabilities in the consolidated statement of financial condition and any change to the reserve is included as part of other non-interest expenses in the consolidated statement of income.

 

Non-performing Loans and Non-performing Assets

 

Total non-performing assets consist of non-performing loans (generally loans held for investment or loans held for sale on which the recognition of interest income has been 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. When a loan is placed in non-performing status, any interest previously recognized and not collected is reversed and charged against interest income.

 

Non-performing Loans Policy

 

Residential Real Estate Loans — The Corporation classifies real estate loans in non-performing status when interest and principal have not been received for a period of 90 days or more.

 

Commercial and Construction Loans — The Corporation places commercial loans (including commercial real estate and construction loans) in non-performing status when interest and principal have not been received for a period of 90 days or more or when collection of all of the principal or interest is not expected due to deterioration in the financial condition of the borrower.     

 

Finance Leases — Finance leases are classified in non-performing status when interest and principal have not been received for a period of 90 days or more.

 

Consumer Loans — Consumer loans are classified in non-performing status when interest and principal have not been received 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.

 

116 


 

Purchased Credit Impaired Loans — PCI loans were recorded at fair value at acquisition. Since the initial fair value of these loans included an estimate of credit losses expected to be realized over the remaining lives of the loans, the subsequent accounting for PCI loans differs from the accounting for non-PCI loans. Therefore, the Corporation separately tracks and reports PCI loans and excludes these from the amounts of non-performing loans, impaired loans, TDR loans, and non-performing assets. 

 

Cash payments received on certain loans that are impaired and collateral dependent 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.

 

Other Real Estate Owned

 

OREO acquired in settlement of loans is carried at the lower of cost (the carrying value of the loan) or fair value less estimated costs to sell off the real estate. Appraisals are obtained periodically, but generally, on an annual basis.

 

Other Repossessed Property

 

The other repossessed property category generally includes repossessed boats and autos acquired in settlement of loans. Repossessed boats and autos are recorded at the lower of cost or estimated fair value.

 

Past-Due Loans 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 and VA programs. Past due loans 90 days and still accruing also include PCI loans with individual delinquencies over 90 days, primarily related to mortgage loans acquired from Doral Bank in 2015 and from Doral Financial in 2014.

 

     TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual 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 loans 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.

117 


 

    The following table presents non-performing assets as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

(Dollars in thousands)

2018

 

2017

 

 

 

 

 

 

 

 

 

Non-performing loans held for investment:

 

 

 

 

 

 

 

           Residential mortgage

$

171,380

 

 

$

178,291

 

           Commercial mortgage (1)

 

115,179

 

 

 

156,493

 

           Commercial and Industrial

 

85,325

 

 

 

85,839

 

           Construction (1)

 

16,236

 

 

 

52,113

 

           Finance leases

 

1,801

 

 

 

1,237

 

           Consumer

 

22,056

 

 

 

15,581

 

Total non-performing loans held for investment (1) 

$

411,977

 

 

$

489,554

 

OREO

 

154,639

 

 

 

147,940

 

Other repossessed property

 

5,646

 

 

 

4,802

 

Total non-performing assets, excluding loans held for sale

$

572,262

 

 

$

642,296

 

 

 

 

 

 

 

 

 

 

Non-performing loans held for sale (1) 

 

64,945

 

 

 

8,290

 

          Total non-performing assets, including loans held for sale (2)(3) 

$

637,207

 

 

$

650,586

 

 

 

 

 

 

 

 

 

 

Past due loans 90 days and still accruing (4)(5) 

$

163,045

 

 

$

160,725

 

Non-performing assets to total assets

 

5.22

%

 

 

5.31

%

Non-performing loans held for investment to total loans held for investment

 

4.74

%

 

 

5.53

%

Allowance for loan and lease losses

$

225,856

 

 

$

231,843

 

Allowance to total non-performing loans held for investment (6) 

 

54.82

%

 

 

47.36

%

Allowance to total non-performing loans held for investment,

 

 

 

 

 

 

 

     excluding residential real estate loans (7) 

 

93.87

%

 

 

74.48

%

 

 

 

 

 

 

 

 

 

___________

 (1) 

During the first quarter of 2018, the Corporation transferred $57.2 million (net of fair value write-downs of $9.7 million) in non-performing loans to held for sale. Loans transferred to held for sale consisted of a $30.0 million non-performing construction loan (net of a $5.1 million fair value write-down) and two non-performing commercial mortgage loans totaling $27.2 million (net of fair value write-downs of $4.6 million).

 (2) 

Purchased credit impaired loans accounted for under ASC 310-30 of $155.3 million and $158.2 million as of March 31, 2018 and December 31, 2017, respectively, are excluded and not considered non-performing due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.

 (3) 

Non-performing assets exclude $366.4 million and $374.7 million of TDR loans that were in compliance with the modified terms and in accrual status as of March 31, 2018 and December 31, 2017, respectively.

 (4) 

It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past-due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $30.6 million of residential mortgage loans insured by the FHA or guaranteed by the VA that are over 15 months delinquent, and are no longer accruing interest as of March 31, 2018.

 (5) 

Amounts include purchased credit impaired loans with individual delinquencies over 90 days and still accruing with a carrying value as of March 31, 2018 and December 31, 2017 of approximately $30.3 million and $29.3 million, respectively, primarily related to loans acquired from Doral Bank in the first quarter of 2015 and from Doral Financial in the second quarter of 2014.

 (6) 

The ratio of the allowance for loan and lease losses to non-performing loans held for investment, excluding the hurricane-related allowance, was 39.74% and 33.39% as of March 31, 2018 and December 31, 2017, respectively.

 (7) 

The ratio of the allowance for loan and lease losses to non-performing loans held for investment, excluding the residential real estate and the hurricane-related allowance, was 68.05% and 52.52% as of March 31, 2018 and December 31, 2017, respectively.

 

 

 

 

 

 

 

 

 

118 


 

The following table shows non-performing assets by geographic segment:

 

March 31,

 

December 31,

(Dollars in thousands)

2018

 

2017

Puerto Rico:

 

 

 

 

 

Non-performing loans held for investment:

 

 

 

 

 

       Residential mortgage

$

141,432

 

$

147,852

       Commercial mortgage (1) 

 

89,575

 

 

128,232

       Commercial and Industrial

 

78,913

 

 

79,809

       Construction

 

14,458

 

 

14,506

       Finance leases

 

1,801

 

 

1,237

       Consumer

 

20,985

 

 

14,885

             Total non-performing loans held for investment

 

347,164

 

 

386,521

 

 

 

 

 

 

 

OREO

 

146,128

 

 

140,063

Other repossessed property

 

5,501

 

 

4,723

            Total non-performing assets, excluding loans held for sale

$

498,793

 

$

531,307

Non-performing loans held for sale (1) 

 

34,945

 

 

8,290

            Total non-performing assets, including loans held for sale (2) 

$

533,738

 

$

539,597

Past due loans 90 days and still accruing  (3) 

$

161,281

 

$

151,724

 

 

 

 

 

 

 

Virgin Islands:

 

 

 

 

 

Non-performing loans held for investment:

 

 

 

 

 

       Residential mortgage

$

19,004

 

$

22,110

       Commercial mortgage

 

22,973

 

 

25,309

       Commercial and Industrial

 

6,412

 

 

6,030

       Construction (4) 

 

1,778

 

 

37,607

       Consumer

 

729

 

 

281

             Total non-performing loans held for investment

 

50,896

 

 

91,337

 

 

 

 

 

 

 

OREO

 

7,015

 

 

6,306

Other repossessed property

 

32

 

 

26

                Total non-performing assets, excluding loans held for sale

$

57,943

 

$

97,669

Non-performing loans held for sale (4) 

 

30,000

 

 

-

                Total non-performing assets, including loans held for sale

$

87,943

 

$

97,669

Past due loans 90 days and still accruing

$

1,764

 

$

9,001

 

 

 

 

 

 

 

United States:

 

 

 

 

 

Non-performing loans held for investment:

 

 

 

 

 

       Residential mortgage

$

10,944

 

$

8,329

       Commercial mortgage

 

2,631

 

 

2,952

       Consumer

 

342

 

 

415

             Total non-performing loans held for investment

 

13,917

 

 

11,696

 

 

 

 

 

 

 

OREO

 

1,496

 

 

1,571

Other repossessed property

 

113

 

 

53

            Total non-performing assets

$

15,526

 

$

13,320

Past due loans 90 days and still accruing

$

-

 

$

-

 

 

 

 

 

 

 

 (1) 

During the first quarter of 2018, the Corporation transferred two non-performing commercial mortgage loans totaling $27.2 million (net of fair value write-downs of $4.6 million) to held for sale.

 (2) 

Purchased credit impaired loans accounted for under ASC 310-30 of $155.3 million and $158.2 million as of March 31, 2018 and December 31, 2017, respectively, are excluded and not considered non-performing due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.

 (3) 

Amount includes purchased credit impaired loans with individual delinquencies over 90 days and still accruing with a carrying value as of  March 31, 2018  and December 31, 2017 of approximately $30.3 million and $29.3 million, respectively, primarily related to loans acquired from Doral Bank in the first quarter of 2015 and  from Doral Financial in the second quarter of 2014.

 (4) 

During the first quarter of 2018, the Corporation transferred a $30.0 million non-performing construction loan (net of a $5.1 million fair value write-down) to held for sale.

 

 

119 


 

     Total non-performing loans, including non-performing loans held for sale, were $476.9 million as of March 31, 2018. This represents a decrease of $20.9 million from $497.8 million as of December 31, 2017. The decrease in non-performing loans was primarily attributable to the charge-offs totaling $11.4 million taken on four commercial and construction loans, including $9.7 million associated with the aforementioned loans transferred to held-for-sale during the first quarter, and payments totaling $4.0 million received in the first quarter of 2018 that reduced the outstanding balance of non-performing commercial mortgage loans that were previously guaranteed by the TDF.   

      

    Non-performing commercial mortgage loans, including loans held for sale, decreased by $14.1 million to $142.4 million as of March 31, 2018 from $156.5 million as of December 31, 2017. The decrease was primarily related to charge-offs totaling $6.3 million taken on three commercial mortgage loans in Puerto Rico, including $4.6 million related to $27.2 million in loans transferred to held for sale in the first quarter of 2018, the aforementioned payments totaling $4.0 million received in the first quarter that reduced the outstanding balance of non-performing commercial mortgage loans that were previously guaranteed by the TDF, and a $1.6 million loan brought current and restored to accrual status in the Virgin Islands.  Total inflows of non-performing commercial mortgage loans were $3.6 million during the first quarter of 2018 compared to $0.9 million for the same period in 2017. 

 

     Non-performing C&I loans decreased by $0.5 million to $85.3 million as of March 31, 2018 from $85.8 million as of December 31, 2017. Total inflows of non-performing C&I loans were $2.8 million for the quarter ended March 31, 2018, compared to $1.4 million for the same quarter in 2017. 

 

Non-performing construction loans, including non-performing construction loans held for sale, decreased by $6.4 million to $54.0 million as of March 31, 2018 from $60.4 million as of December 31, 2017, mainly due to the $5.1 million charge-off taken on the $30.0 million non-performing construction loan transferred to held for sale in the Virgin Islands, and a $0.6 million write-down to the fair value of another construction loan held for sale in Puerto Rico.  The inflows of non-performing construction loans during the first quarter of 2018 amounted to $0.2 million compared to inflows of $0.5 million for the same period in 2017.

 

    The following tables present the activity of commercial and construction non-performing loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

Commercial & Industrial

 

Construction

 

 

Total

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

156,493

 

$

85,839

 

$

52,113

 

 

294,445

    Plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to non-performing

 

3,568

 

 

2,772

 

 

196

 

 

6,536

    Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans returned to accrual status

 

 

(3,151)

 

 

-

 

 

-

 

 

(3,151)

 

Non-performing loans transferred to OREO

 

 

(1,456)

 

 

(1,133)

 

 

(58)

 

 

(2,647)

 

Non-performing loans charged-off

 

 

(6,810)

 

 

(531)

 

 

(5,177)

 

 

(12,518)

 

Loan collections 

 

 

(6,251)

 

 

(1,622)

 

 

(57)

 

 

(7,930)

 

Reclassification

 

 

-

 

 

-

 

 

(781)

 

 

(781)

 

Loans transferred to loans held for sale, net of charge-offs

 

(27,214)

 

 

-

 

 

(30,000)

 

 

(57,214)

Ending balance

 

$

115,179

 

$

85,325

 

$

16,236

 

$

216,740

120 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

Commercial & Industrial

 

Construction

 

 

Total

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

178,696

 

$

146,599

 

$

49,852

 

 

375,147

    Plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to non-performing

 

905

 

 

1,389

 

 

457

 

 

2,751

    Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans returned to accrual status

 

 

(473)

 

 

(812)

 

 

-

 

 

(1,285)

 

Non-performing loans transferred to OREO

 

 

(531)

 

 

(457)

 

 

(162)

 

 

(1,150)

 

Non-performing loans charged-off

 

 

(1,107)

 

 

(11,975)

 

 

(60)

 

 

(13,142)

 

Loan collections 

 

 

(2,829)

 

 

(3,527)

 

 

(1,619)

 

 

(7,975)

 

Reclassification

 

 

247

 

 

-

 

 

-

 

 

247

 

Non-performing loans sold, net of charge-off

 

 

-

 

 

(53,245)

 

 

-

 

 

(53,245)

Ending balance

 

$

174,908

 

$

77,972

 

$

48,468

 

$

301,348

 

 The following tables present the activity of commercial and construction non-performing loans held for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

Construction

 

 

Total

(In thousands)

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2018

 

 

 

 

 

 

 

 

Beginning balance

 

$

-

 

$

8,079

 

$

8,079

    Plus:

 

 

 

 

 

 

 

 

 

 

Loans transferred from held for investment

 

27,213

 

 

30,000

 

 

57,213

    Less:

 

 

 

 

 

 

 

 

 

 

Lower of cost or market adjustment

 

 

-

 

 

(558)

 

 

(558)

Ending balance

 

$

27,213

 

$

37,521

 

$

64,734

 

    Total non-performing commercial and construction loans, including non-performing loans held for sale, with a book value of $281.7 million as of March 31, 2018 are being carried (net of reserves and accumulated charge-offs) at 49.0% of unpaid principal balance. 

 

Non-performing residential mortgage loans decreased by $6.9 million to $171.4 as of March 31, 2018 from $178.3 million as of December 31, 2017. The decrease was driven by loans transferred to the OREO portfolio, loans brought current, and charge-offs recorded during the first quarter, partially offset by inflows of loans that already had delinquent payments before the hurricanes and failed to resume their payments after the expiration of the three-month payments deferral programs.

121 


 

 

The following table presents the activity of residential non-performing loans held for investment:

 

 

 

 

 

 

 

 

 

Quarters Ended

(In thousands)

March 31, 2018

 

March 31, 2017

 

 

 

 

 

 

 

Beginning balance

$

178,291

 

$

160,867

       Plus:

 

 

 

 

 

      Additions to non-performing

 

26,961

 

 

22,848

      Less:

 

 

 

 

 

      Loans returned to accrual status

 

(19,121)

 

 

(12,150)

      Non-performing loans transferred to OREO

 

(10,129)

 

 

(9,551)

      Non-performing loans charged-off

 

(2,800)

 

 

(4,452)

      Loan collections

 

(2,603)

 

 

(2,422)

      Reclassification

 

781

 

 

(247)

Ending balance

$

171,380

 

$

154,893

 

 

 

 

 

 

 

 

 

 

The amount of non-performing consumer loans, including finance leases, increased by $7.0 million during the first quarter of 2018 to $23.9 million compared to $16.8 million as of December 31, 2017.  The increase was mainly related to inflows of loans that already had delinquent payments before the hurricanes and failed to resume their payments after the expiration of the three-month payment deferral program.  The inflows of non-performing consumer loans during the first quarter of 2018 were $16.3 million, an increase of $8.5 million, compared to inflows of $7.8 million for the same period in 2017.

 

As of March 31, 2018, approximately $83.3 million of the loans placed in non-accrual status, mainly commercial loans, were current, or had delinquencies of less than 90 days in their interest payments, including $53.2 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 ended March 31, 2018, interest income of approximately $1.5 million related to non-performing loans with a carrying value of $281.9 million as of March 31, 2018, mainly non-performing construction and commercial loans, was applied against the related principal balances under the cost-recovery method.

     

 

 

122 


 

As of March 31, 2018, approximately $74.6 million, or 18.1% of total non-performing loans held for investment have been charged-off to their net realizable value and no specific reserve was allocated as shown in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Residential Mortgage Loans

 

Commercial Mortgage Loans

 

C&I Loans

 

Construction

Loans

 

Consumer and Finance Leases

 

Total

 

As of March 31, 2018

 

 

 

Non-performing loans held for investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   charged-off to realizable value

$

56,696

 

$

13,816

 

$

3,305

 

$

-

 

$

811

 

$

74,628

 

Other non-performing loans held

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    for investment

 

114,684

 

 

101,363

 

 

82,020

 

 

16,236

 

 

23,046

 

 

337,349

 

Total non-performing loans held

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    for investment

$

171,380

 

$

115,179

 

$

85,325

 

$

16,236

 

$

23,857

 

$

411,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to non-performing loans held for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     investments

 

32.90

%

 

43.75

%

 

55.86

%

 

25.39

%

 

282.08

%

 

54.82

%

Allowance to non-performing loans held for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     investments, excluding non-performing loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     charged-off to realizable value

 

49.17

%

 

49.72

%

 

58.11

%

 

25.39

%

 

292.01

%

 

66.95

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

Non-performing loans held for investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   charged-off to realizable value

$

76,668

 

$

60,680

 

$

6,872

 

$

48

 

$

843

 

$

145,111

 

Other non-performing loans held

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    for investment

 

101,623

 

 

95,813

 

 

78,967

 

 

52,065

 

 

15,975

 

 

344,443

 

Total non-performing loans held

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    for investment

$

178,291

 

$

156,493

 

$

85,839

 

$

52,113

 

$

16,818

 

$

489,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to non-performing loans held for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     investments

 

33.08

%

 

30.99

%

 

56.93

%

 

8.68

%

 

422.06

%

 

47.36

%

Allowance to non-performing loans held for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     investments, excluding non-performing loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     charged-off to realizable value

 

58.03

%

 

50.61

%

 

61.89

%

 

8.69

%

 

444.33

%

 

67.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

123 


 

Total loans in early delinquency (i.e., 30-89 days past due loans, as defined in regulatory report instructions) amounted to $202.5 million as of March 31, 2018, a decrease of $42.2 million compared to $244.7 million as of December 31, 2017.  The variances by major portfolio categories follow:  

·         Consumer loans in early delinquency decreased in the first quarter by $44.5 million to $66.7 million as of March 31, 2018 from $111.2 million as of December 31, 2017, and residential mortgage loans in early delinquency decreased in the first quarter by $46.4 million to $69.5 million as of March 31, 2018 from $115.9 million as of December 31, 2017. These variances reflect a combination of clients that resumed their payments after the expiration of the three-month payment deferral programs and loans classified as non-performing during the first quarter.  When compared to pre-hurricane levels, consumer loans in early delinquency decreased by $16.2 million to $66.7 million as of March 31, 2018 from $82.9 million as of June 30, 2017, and residential mortgage loans in early delinquency decreased by $35.2 million to $69.5 million as of March 31, 2018 from $104.7 million as of June 30, 2017. 

 

·         Commercial and construction loans in early delinquency increased in the first quarter by $48.7 million to $66.4 million as of March 31, 2018 from $17.7 million as of December 31, 2017, primarily related to the aforementioned $46.8 million commercial mortgage loan adversely classified in the Florida region during the first quarter of 2018.  When compared to pre-hurricane levels, commercial and construction loans in early delinquency increased by $60.4 million to $66.4 million as of March 31, 2018 from $6.0 million as of June 30, 2017.  

 

The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico that is similar to the U.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. Refer to Note 7, “Loans Held for Investment,” to the accompanying consolidated financial statements for additional information and statistics about the Corporation’s TDR loans.  

 

TDR loans are classified as either accrual or nonaccrual loans. Loans in accrual status may remain in accrual status when their contractual terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, loans on nonaccrual 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 non-accrual loan. Loan modifications increase the Corporation’s interest income by returning a non-performing 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.

  

124 


 

    The following table provides a breakdown between the accrual and nonaccrual TDRs:

 

 

 

 

 

 

 

 

 

 

(In thousands)

As of March 31, 2018

 

 

Accrual

 

Non-accrual (1)(2) 

 

Total TDRs

 

 

 

 

 

 

 

 

 

 

      Non-FHA/VA Residential Mortgage loans

$

272,659

 

$

77,321

 

$

349,980

      Commercial Mortgage loans

 

24,010

 

 

61,824

 

 

85,834

      Commercial and Industrial loans

 

43,251

 

 

53,014

 

 

96,265

      Construction loans (2)

 

1,197

 

 

5,398

 

 

6,595

      Consumer loans - Auto

 

14,082

 

 

6,729

 

 

20,811

      Finance leases

 

1,653

 

 

223

 

 

1,876

      Consumer loans - Other

 

9,570

 

 

1,445

 

 

11,015

         Total Troubled Debt Restructurings

$

366,422

 

$

205,954

 

$

572,376

 

 

 

 

 

 

 

 

 

 

(1)

Included in non-accrual loans are $53.2 million in loans that were performing under the terms of the restructuring agreement but are reported in non-accrual 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.

(2)

Excludes a $30.0 million non-performing construction loans transferred to held for sale during the first quarter of 2018.

 

The OREO portfolio, which is part of non-performing assets, increased by $6.7 million to $154.7 million as of March 31, 2018 from $147.9 million as of December 31, 2017. The following tables show the composition of the OREO portfolio as of March 31, 2018 and December 31, 2017, as well as the activity during the quarter ended March 31, 2018 of the OREO portfolio by geographic region:

 

OREO Composition by Region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

As of March 31, 2018

 

 

Puerto Rico

Virgin Islands

Florida

 

Consolidated

 

Residential

$

57,652

$

1,223

$

1,365

$

60,240

 

Commercial

 

78,853

 

4,926

 

132

 

83,911

 

Construction

 

9,623

 

865

 

-

 

10,488

 

 

$

146,128

$

7,014

$

1,497

$

154,639

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

As of December 31, 2017

 

 

Puerto Rico

Virgin Islands

Florida

 

Consolidated

 

Residential

$

52,427

$

514

$

1,440

$

54,381

 

Commercial

 

77,812

 

4,927

 

132

 

82,871

 

Construction

 

9,823

 

865

 

-

 

10,688

 

 

$

140,062

$

6,306

$

1,572

$

147,940

 

 

 

 

 

 

 

 

 

 

 

OREO Activity by Region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

As of March 31, 2018

 

 

Puerto Rico

Virgin Islands

Florida

 

Consolidated

 

Beginning Balance

$

140,062

$

6,306

$

1,572

$

147,940

 

Additions

 

15,073

 

708

 

85

 

15,866

 

Sales

 

(8,103)

 

-

 

(160)

 

(8,263)

 

Fair value adjustments

 

(904)

 

-

 

-

 

(904)

 

Ending Balance

$

146,128

$

7,014

$

1,497

$

154,639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

125 


 

Net Charge-offs and Total Credit Losses

 

Net charge-offs totaled $26.5 million for the first quarter of 2018, or 1.21% of average loans on an annualized basis, compared to $27.8 million, or 1.26% of average loans for the same period in 2017.  Net charge-offs for the first quarter of 2018 included charge-offs totaling $9.7 million associated with the $57.2 million in non-performing commercial and construction loans transferred to held for sale.  For the first quarter of 2017, net charge-offs included a $10.7 million charge-off related to the sale of the PREPA credit line.  Excluding the charge offs related to the loans transferred to held for sale in the first quarter of 2018 and the charge-off related to the sale of the PREPA credit line, total adjusted net charge-offs for the first quarter of 2018 were $16.9 million, or 0.77% of average loans on an annualized basis, compared to adjusted net charge-offs of $17.1 million, 0.78% of average loans for the first quarter of 2017.

 

 Commercial mortgage loans net charge-offs in the first quarter of 2018 were $6.8 million, or an annualized 1.69% of average commercial mortgage loans, compared to $1.3 million, or an annualized 0.33% of average loans, for the first quarter of 2017.  Commercial mortgage loans net charge-offs for the first quarter of 2018 included $4.6 million associated with $27.2 million in non-performing loans transferred to held for sale.  Excluding the effect of the loans transferred to held for sale, adjusted commercial mortgage loans net charge-offs for the first quarter of 2018 were $2.2 million.  The increase, as compared to the first quarter of 2017, was primarily related to a commercial relationship in Puerto Rico.

  

 Construction loans net charge-offs in the first quarter of 2018 were $5.2 million, or an annualized 17.37% of related average loans, compared to net recoveries of $0.4 million for the first quarter of 2017. The variance was primarily related to the $5.1 million charge-off recorded on the $30.0 million non-performing loan transferred to held for sale in the Virgin Islands.

     

Commercial and industrial loans net charge-offs in the first quarter of 2018 totaled $1.9 million, or an annualized 0.36% of related average loans, compared to $11.2 million, or an annualized 2.07%, for the first quarter of 2017.   For the first quarter of 2017, commercial and industrial net charge-offs included a $10.7 million charge-off related to the sale of the PREPA credit line.

 

Residential mortgage loans net charge-offs in the first quarter of 2018 were $3.0 million, or an annualized 0.38% of related average loans, compared to $7.5 million, or an annualized 0.92% of related average loans, for the first quarter of 2017. Approximately $2.4  million in charge-offs for the first quarter of 2018 resulted from valuations for impairment purposes of residential mortgage loans considered homogeneous given high delinquency and loan-to-value levels, compared to $3.7 million for the first quarter of 2017. Net charge-offs on residential mortgage loans also included $0.7 million related to foreclosures, compared to $3.0 million in the first quarter of 2017.

 

Net charge-offs of consumer loans and finance leases in the first quarter of 2018 were $9.7 million, or an annualized 2.22% of related average loans, compared to $8.2 million, or an annualized 1.92% of average loans, in the first quarter of 2017.  The increase primarily reflects the effect of the loan loss recovery of $1.2 million recorded in the first quarter of 2017 on the sale of certain credit card loans that had been fully charged off in prior periods.

 

    The following table presents annualized net charge-offs to average loans held-in-portfolio:

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

Residential mortgage

0.38

%

 

0.92

%

 

Commercial mortgage (1) 

1.69

%

 

0.33

%

 

Commercial and industrial (2) 

0.36

%

 

2.07

%

 

Construction (3) (4)

17.37

%

 

(1.17)

%

 

Consumer and finance leases

2.22

%

 

1.92

%

 

Total loans (5) (6)

1.21

%

 

1.26

%

 

_______________

 

 

 

 

 

 

 (1) 

Includes net charge-offs totaling $4.6 million associated with $27.2 million in non-performing commercial mortgage loans transferred to held for sale in the first quarter of 2018. The ratio of commercial mortgage net charge-offs to average loans, excluding the charge-offs associated with commercial mortgage loans transferred to held for sale, was 0.55% for the first quarter of 2018.

 (2) 

Includes a charge-off of $10.7 million associated with the sale of the PREPA credit line in the first quarter of 2017. The ratio of commercial and industrial net charge-offs to average loans, excluding the charge-off associated with the sale of the PREPA credit line, was 0.08% for the first quarter of 2017.

 (3) 

Includes a charge-off of $5.1 million associated with a $30.0 million non-performing construction loan transferred to held for sale in the first quarter of 2018. The ratio of construction net charge-offs to average loans, excluding the charge-off associated with the construction loan transferred to held for sale, was 0.22% for the first quarter of 2018.

 (4) 

For the first quarter of 2017, recoveries in construction loans exceeded charge-offs.

 (5) 

Includes net charge-offs totaling $9.7 million associated with $57.2 million in non-performing loans transferred to held for sale in the first quarter of 2018. The ratio of total loans net charge-offs to average loans, excluding charge-offs associated with loans transferred to held for sale, was 0.77% for the first quarter of 2018.

 (6) 

Includes a charge-off of $10.7 million associated with the sale of the PREPA credit line in the first quarter of 2017. The ratio of total net charge-offs to average loans, excluding the charge-off associated with the sale of the PREPA credit line, was 0.78% in the first quarter of 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

126 


 

 

    The following table presents net charge-offs (or recoveries) to average loans held in various portfolios by geographic segment:

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

March 31,

 

March 31,

 

 

 

2018

 

2017

 

PUERTO RICO:

 

 

 

 

 

Residential mortgage

0.43

%

1.19

%

 

Commercial mortgage (1) 

2.45

%

0.46

%

 

Commercial and Industrial (2) 

0.52

%

2.86

%

 

Construction

0.62

%

0.52

%

 

Consumer and finance leases

2.25

%

1.96

%

 

   Total loans (3) 

1.25

%

1.62

%

VIRGIN ISLANDS:

 

 

 

 

 

Residential mortgage

0.73

%

0.10

%

 

Commercial mortgage (4) 

(0.15)

%

(0.11)

%

 

Commercial and Industrial (5) 

(0.01)

%

-

%

 

Construction (6) (7)

46.90

%

(3.90)

%

 

Consumer and finance leases

2.55

%

1.19

%

 

   Total loans (8) (9)

4.01

%

(0.15)

%

FLORIDA:

 

 

 

 

 

Residential mortgage

-

%

0.11

%

 

Commercial mortgage (10)

(0.01)

%

(0.01)

%

 

Commercial and Industrial

0.05

%

-

%

 

Construction (11) 

(0.20)

%

(0.12)

%

 

Consumer and finance leases

1.30

%

1.43

%

 

   Total loans

0.06

%

0.09

%

 

 

 

 

 

 

(1) Includes charge-offs totaling $4.6 million associated with $27.2 million in non-performing commercial mortgage loans transferred to held for sale in the first quarter of 2018. The ratio of commercial mortgage net-charge offs to average loans in Puerto Rico, excluding the charge-offs associated with commercial mortgage loans transferred to held for sale was 0.80% for  the first quarter of 2018.

(2) Includes the charge-off of $10.7 million associated with the sale of the PREPA credit line in the first quarter of 2017. The ratio of commercial and industrial net charge-offs to average loans in Puerto Rico, excluding the charge-off associated with the sale of the PREPA credit line, was 0.12%.

(3) Includes charge-offs totaling $4.6 million associated with $27.2 million in non-performing loans transferred to held for sale in the first quarter of 2018. The ratio of total loans net charge-offs to average loans in Puerto Rico, excluding charge-offs associated with loans transferred to held for sale, was 0.97% for the first quarter of 2018.

(4) For the first quarter of 2018 and 2017, recoveries in commercial mortgage loans in the Virgin Islands exceeded charge-offs.

(5) For the first quarter of 2018, recoveries in commercial and industrial loans in the Virgin Islands exceeded charge-offs.

(6) Includes a charge-off of $5.1 million associated with a $30.0 million non-performing construction loan transferred to held for sale in the first quarter of 2018. The ratio of construction net charge-offs to average loans in the Virgin Islands, excluding the charge-off associated with the construction loans transferred to held for sale, was 0.00% for the first quarter of 2018.

(7) For the first quarter of 2017, recoveries in construction loans in the Virgin Islands exceeded charge-offs.

(8) Includes the charge-off of $5.1 million associated with the $30.0 million non-performing loan transferred to held for sale in the Virgin Islands in the first quarter of 2018. The ratio of total loans net charge-offs to average loans in the Virgin Islands, excluding charge-offs associated with the loan transferred to held for sale, was 0.52% for the first quarter of 2018.

(9) For the first quarter of 2017, recoveries in total loans in the Virgin Islands exceeded charge-offs.

(10) For the first quarter of 2018 and 2017, recoveries in commercial mortgage loans in Florida exceeded charge-offs.

(11) For the first quarter of 2018 and 2017, recoveries in construction loans in Florida exceeded charge-offs.

127 


 

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 credit losses (equal to net charge-offs plus losses on OREO operations) for the first quarter of 2018 amounted to $26.7 million, or a loss rate of 1.20% on an annualized basis to average loans and repossessed assets, compared to credit losses of $31.9 million, or a loss rate of 1.59% on an annualized basis, for the same period in 2017.

  

 

The following table presents information about of the OREO inventory and credit losses for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

 March 31,

(Dollars in thousands)

2018

 

2017

 

 

 

 

 

OREO

 

 

 

 

 

 

 

       OREO balances, carrying value:

 

 

 

 

 

              Residential

$

60,240

 

$

50,683

              Commercial

 

83,911

 

 

76,208

              Construction

 

10,488

 

 

10,893

                     Total

$

154,639

 

$

137,784

 

 

 

 

 

 

 

 

      OREO activity (number of properties):

 

 

 

 

 

             Beginning property inventory

 

708

 

 

626

             Properties acquired

 

130

 

 

114

             Properties disposed

 

(83)

 

 

(69)

             Ending property inventory

 

755

 

 

671

 

 

 

 

 

 

 

 

     Average holding period (in days)

 

 

 

 

 

            Residential

 

416

 

 

333

            Commercial

 

1,092

 

 

881

            Construction

 

1,473

 

 

1,150

 

 

 

 

855

 

 

701

       OREO operations gain (loss) :

 

 

 

 

 

            Market adjustments and gain (losses) on sale:

 

 

 

 

 

                    Residential

$

179

 

$

(1,388)

                    Commercial

 

(175)

 

 

(3,383)

                    Construction

 

(163)

 

 

793

 

 

 

 

(159)

 

 

(3,978)

       Other OREO operations expenses

 

(31)

 

 

(97)

                    Net Loss on OREO operations

$

(190)

 

$

(4,075)

 

 

 

 

 

 

 

 

CHARGE-OFFS

 

 

 

 

 

            Residential charge offs, net

 

(3,036)

 

 

(7,476)

            Commercial charge offs, net

 

(8,629)

 

 

(12,509)

            Construction charge offs, net

 

(5,164)

 

 

382

            Consumer and finance leases charge-offs, net

 

(9,702)

 

 

(8,211)

            Total charge-offs, net

 

(26,531)

 

 

(27,814)

TOTAL CREDIT LOSSES (1) 

$

(26,721)

 

$

(31,889)

 

 

 

 

 

 

 

 

LOSS RATIO PER CATEGORY (2)

 

 

 

 

 

         Residential

 

0.35%

 

 

1.07%

         Commercial

 

0.93%

 

 

1.66%

         Construction

 

16.31%

 

 

-3.28%

         Consumer

 

2.22%

 

 

1.91%

TOTAL CREDIT LOSS RATIO (3) 

 

1.20%

 

 

1.59%

________

 (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 sale 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.

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  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 risk, 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 designated 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 last several years. The Corporation has established and continues to enhance procedures based on legal and regulatory requirements that are designed to ensure compliance with all applicable statutory and regulatory 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 relationships to the Corporate Compliance Group.

 

Concentration Risk

 

The Corporation conducts its operations in a geographically concentrated area, as its main market is Puerto Rico. However, the Corporation has diversified its geographical risk, as evidenced by its operations in the Virgin Islands and in Florida. Of the total gross loan portfolio held for investment of $8.7 billion as of March 31, 2018, credit risk concentration was approximately 75% in Puerto Rico, 19% in the United States (mainly in the state of Florida) and 6% in the Virgin Islands. 

 

Update to the Puerto Rico Fiscal Situation

 

Economy Indicators and Projections

 

A significant portion of our financial activities and credit exposure is concentrated in the Commonwealth of Puerto Rico, which has been in an economic recession since 2006, that has been exacerbated by the effects of Hurricanes Irma and Maria in 2017.  The New Fiscal Plan certified by the PROMESA oversight board, projects a contraction in the Puerto Rico’s gross national product (“GNP”) of 13.2% for fiscal year 2018, followed by projected growths of 5.9% and 1.6% for fiscal years 2019 and 2020, respectively. Such projected growth was based on an assumption that over $62 billion of disaster relief funding will enter the economy of Puerto Rico from federal and private sources. Of the total disaster relief funding of $62 billion, approximately $35 billion is estimated to be used for public assistance, $19 billion for individual assistance, and $8 billion will be used for private and business insurance pay outs. Meanwhile, the GDB Economic Activity Index (the “GDB-EAI”) in December 2017 was 104.9, a 13.9% reduction compared to March 2017, and a decrease of 13.3% compared to August 2017. The GDB-EAI is a coincident index of economic activity for Puerto Rico made up of four indicators (non-farm payroll employment, electric power generation, cement sales and gasoline consumption).  The New Fiscal Plan projects that the hurricanes will create a spike in inflation of 2.0% in fiscal year 2018, with subsequent average increases of about 1.8.

5% over the next six years, until fiscal year 2023.  The seasonally adjusted unemployment rate in Puerto Rico was 10.9% in December 2017, compared to 12.4% in December 2016.

 

GDB liquidation plan

 

On July 14, 2017, the PROMESA oversight board authorized the GDB to pursue the restructuring of its debts under Title VI of PROMESA and conditionally certified the GDB’s Restructuring Support Agreement (“RSA”) under the relevant provisions of Title VI.  The PROMESA oversight board’s decision was in response to a request from Puerto Rico’s Fiscal Agency and Financial Advisory Authority, dated June 30, 2017, in which the agency noted that the proposed restructuring, along with certain related settlements contemplated by the RSA, will result in an efficient wind down of GDB’s operations and a comprehensive financial restructuring of GDB’s obligations. The RSA provides for the organized and consensual restructuring of a substantial portion of the

129 


 

GDB’s liabilities, including the GDB public bonds, deposit claims by municipalities and certain non-public entities, and claims under certain GDB-issued letters of credit and guarantees (“Participating Bond Claims”). In exchange for releasing the GDB from liability relating to these claims, the claim-holders will receive new bonds to be issued by a new entity.

 

On April 20, 2018, the PROMESA oversight board approved the new GDB fiscal plan. The new GDB fiscal plan authorizes the recently amended terms of the GDB’s Restructuring Support Agreement (“RSA”). It also paves the way for the GDB’s operational wind-down, provides for a simplified transaction structure, and ensures equal treatment of creditors. It also offers municipalities offset rights against their deposit claims.

 

New Fiscal Plan

 

On April 19, 2018, the PROMESA oversight board’s twelfth public meeting took place. In that meeting, the PROMESA oversight board approved the Commonwealth of Puerto Rico New Fiscal Plan (the “New Fiscal Plan”). The New Fiscal Plan uses a six-year horizon and projects a six-year cumulative decline in population of 12%. In addition, the New Fiscal Plan established an annual emergency reserve of $130 million for 10 years. As mentioned above, it also assumes $62 billion in disaster relief funding. The New Fiscal Plan include a series of structural reforms in areas, such as: (i) human capital and labor, (ii) ease of doing business, (iii) power sector reform, and (iv) infrastructure reform.  The plan also proposes fiscal measures projected to drive $12.3 billion in increased revenues and reduced expenditures through fiscal year 2023, and up to $142 billion in fiscal benefits over a 30-year period.  These fiscal measures include areas, such as: (i) tax compliance and incentives, (ii) governmental rightsizing, (iii) healthcare reform, (iv) reduction of appropriations, (v) comprehensive pension reform, and (vi) fiscal controls, budgeting, procurement practices and accountability.

 

Exposure to Puerto Rico Government

 

As of March 31, 2018, the Corporation had $213.4 million of direct exposure to the Puerto Rico government, its municipalities and public corporations, compared to $214.5 million as of December 31, 2017. As of March 31, 2018, approximately $183.5 million of the exposure consisted of loans and obligations of municipalities in Puerto Rico that are supported by assigned property tax revenues and for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment, compared to $184.6 million as of December 31, 2017.  Approximately 73% of the Corporation’s municipality exposure consisted primarily of senior priority obligations concentrated in three of the largest municipalities in Puerto Rico. These municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and notes. The PROMESA oversight board has not designated any of the Commonwealth’s 78 municipalities as covered entities under PROMESA.  However, while the recent fiscal plan approved by the PROMESA oversight board did not contemplate a restructuring of the debt of Puerto Rico’s municipalities, the plan did call for the gradual elimination of budgetary subsidies provided to municipalities. Furthermore, municipalities are also likely to be affected by the negative economic and other effects resulting from expense, revenue or cash management measures taken to address the Puerto Rico government’s fiscal and liquidity shortfalls, as well as measures included in fiscal plans of other government entities.  In addition to municipalities, the total direct exposure also included a $6.7 million loan to a unit of the central government, and a $15.0 million loan to an affiliate of PREPA.  The Corporation’s total direct exposure also included obligations of the Puerto Rico government, specifically bonds of the Puerto Rico Housing Finance Authority, at an amortized cost of $8.1 million as part of its available-for-sale investment securities portfolio recorded on its books at a fair value of $6.8 million as of March 31, 2018.

 

 

The following table details the Corporation’s total direct exposure to the Puerto Rico Government according to their maturities:

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

 

Investment

 

 

 

 

 

 

 

 

Portfolio

 

 

 

 

 

Total

 

 

 

(Amortized cost)

 

 

Loans

 

 

Exposure

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

Central Government:

 

 

 

 

 

 

 

 

   After 1 to 5 years

$

-

 

$

6,739

 

$

6,739

Total Central Government

 

-

 

 

6,739

 

 

6,739

 

 

 

 

 

 

 

 

 

 

Puerto Rico Housing Finance Authority:

 

 

 

 

 

 

 

 

   After 5 to 10 years

 

4,052

 

 

-

 

 

4,052

   After 10 years

 

4,035

 

 

-

 

 

4,035

Total Puerto Rico Housing Finance Authority

 

8,087

 

 

-

 

 

8,087

 

 

 

 

 

 

 

 

 

 

Public Corporations:

 

 

 

 

 

 

 

 

Affiliate of the Puerto Rico Electric Power Authority:

 

 

 

 

 

 

 

 

    After 1 to 5 years

 

-

 

 

14,984

 

 

14,984

Total Public Corporations

 

-

 

 

14,984

 

 

14,984

 

  

 

 

 

 

 

 

 

 

Municipalities:

 

 

 

 

 

 

 

 

    After 1 to 5 years

 

3,712

 

 

33,056

 

 

36,768

    After 5 to 10 years

 

39,523

 

 

-

 

 

39,523

    After 10 years

 

107,251

 

 

-

 

 

107,251

Total Municipalities

 

150,486

 

 

33,056

 

 

183,542

Total Direct Government Exposure

$

158,573

 

$

54,779

 

$

213,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

130 


 

 

Furthermore, as of March 31, 2018, the Corporation had three loans granted to the hotel industry in Puerto Rico that were previously guaranteed by the TDF with an outstanding principal balance of $116.2 million (book value $61.6 million), compared to $120.2 million outstanding (book value of $70.8 million) as of December 31, 2017. Historically, the borrower and the operations of the underlying collateral of these loans have been the primary sources of repayment and the TDF, which is a subsidiary of the GDB, provided a secondary guarantee for payment performance. As part of agreements executed in the second quarter of 2017 and first quarter of 2018, the TDF paid $7.6 million and $4.0 million, respectively, to honor a portion of its guarantee on these loans.  As provided in the agreements, the cash payments received by the Corporation released the TDF from its liability as a guarantor of these loans. All three of the commercial mortgage loans previously guaranteed by the TDF have been classified as non-performing and impaired since the first quarter of 2016, and interest payments have been applied against principal since then. Approximately $5.2 million of interest payments received on loans previously guaranteed by the TDF since late March 2016 have been applied against principal. In addition, the GDB agreed to issue to the Bank a fixed income financial instrument pursuant to the GDB’s Restructuring Support Agreement approved by the PROMESA oversight board. During the first quarter of 2018, two of these three commercial mortgage loans, with an aggregate outstanding principal balance of $50.4 million (book value of $27.2 million) were transferred to held for sale.

 

In addition, the Corporation had $115.9 million in exposure to residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority. Residential mortgage loans guaranteed by the Puerto Rico Housing Finance Authority are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. The Puerto Rico government guarantees up to $75 million of the principal under the mortgage loan insurance program. According to the most recently released audited financial statements of the Puerto Rico Housing Finance Authority, as of June 30, 2015, the Puerto Rico Housing Finance Authority’s mortgage loans insurance program covered loans in aggregate of approximately $552 million. The regulations adopted by the Puerto Rico Housing Finance Authority require the establishment of adequate reserves to guarantee the solvency of the mortgage loan insurance fund. As of June 30, 2015, the most recent date as to which information is available, the Puerto Rico Housing Finance Authority had a restricted net position for such purposes of approximately $77.4 million.

 

As of March 31, 2018, the Corporation had $541.4 million of public sector deposits in Puerto Rico, compared to $490.3 million as of December 31, 2017. Approximately 24% is from municipalities and municipal agencies in Puerto Rico and 76% is from public corporations and the central government and agencies in Puerto Rico.

 

Exposure to USVI Government

 

The Corporation has operations in the USVI and has credit exposure to USVI government entities.

 

The USVI is experiencing a number of fiscal and economic challenges, exacerbated by the impact of Hurricane Irma in the third quarter of 2017, that could adversely affect the ability of its public corporations and instrumentalities to service their outstanding debt obligations.  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, 2018, the Corporation had $76.7 million in loans to USVI government instrumentalities and public corporations, compared to $70.4 million as of December 31, 2017. Of the amount outstanding as of March 31, 2018, public corporations of the USVI owed approximately $53.5 million and an independent instrumentality of the USVI government owned approximately $23.2 million.  As of March 31, 2018, all loans were currently performing and up to date on principal and interest payments.

 

 

131 


 

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.  

 

Basis of Presentation

 

The Corporation has included in this Form 10-Q the following financial measures that are not recognized under GAAP, which are referred to as non-GAAP financial measures:

1.       Net interest income, interest rate spread, and net interest margin are reported excluding the changes in the fair value of derivative instruments and on a tax-equivalent basis in order to provide to investors additional information about the Corporation’s net interest income that management uses and believes should facilitate comparability and analysis. 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. Refer to Net Interest Income above for the table that reconciles the non-GAAP financial measure “net interest income excluding fair value changes and on a tax-equivalent basis” with net interest income calculated and presented in accordance with GAAP.  The table also reconciles the non-GAAP financial measures “net interest spread and margin excluding fair value changes and on a tax-equivalent basis” with net interest spread and margin calculated and presented in accordance with GAAP.

 

2.       The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures 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 asset and the insurance customer relationship intangible asset. Tangible assets are total assets less goodwill, core deposit intangibles, and other intangibles, such as the purchased credit card relationship intangible asset and the insurance customer relationship intangible asset. 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 also 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. Refer to Risk Management – Capital above for a reconciliation of the Corporation’s tangible common equity and tangible assets.

 

3.       Adjusted provision for loan and lease losses, adjusted net charge-offs and the ratios of adjusted net charge-offs to average loans, adjusted provision for loan and lease losses to net charge-offs, and the adjusted allowance to total loans held for investment are non-GAAP financial measures that exclude the effects related to: (a) a $6.4 million net loan loss reserve release recorded in the first quarter of 2018 in connection with revised estimates of the reserve associated with the effects of Hurricanes Maria and Irma, (b) a $5.6 million charge to the provision associated with commercial and construction loans transferred to held for sale in the first quarter of 2018, and (c) the effect related to the sale of the Corporation’s participation in the PREPA line of credit in the first quarter of 2017.  Management believes that this information helps investors understand the adjusted measures without regard to items that are not expected to reoccur with any regularity or may reoccur at uncertain times and in uncertain amounts on reported results and facilitates comparisons with prior periods.

 

132 


 

4.       Adjusted non-interest income excludes the effect of the $2.3 million gain on the repurchase and cancellation of trust preferred securities in the first quarter of 2018 and the effect of $12.2 million in other-than-temporary impairment charges on debt securities recorded in the first quarter of 2017. Management believes that the exclusion from non-interest income of items that are not expected to reoccur with any regularity or may reoccur at uncertain times or in uncertain amounts facilitates comparisons with prior periods, and provides an alternate presentation of the Corporation’s performance. 

 

5.       Adjusted non-interest expenses reflect the exclusion of hurricane-related expenses of $1.6 million associated with the effects of Hurricanes Irma and Maria in the first quarter of 2018, and the exclusion of costs of $0.3 million associated with a secondary offering of the Corporation’s common stock by certain of the existing stockholders in the first quarter of 2017. Management believes that adjustments to non-interest expenses of items that are above normal or recurring levels, are not expected to reoccur with any regularity or may reoccur at uncertain times and in uncertain amounts facilitate comparisons with prior periods, and provide an alternate presentation of the Corporation’s performance.

 

6.       Adjusted net income that reflects the effect of the $13.2 million tax benefit recorded in the first quarter of 2017 related to the change in tax status of certain subsidiaries from taxable corporations to limited liability companies, and the effect of all the items mentioned above and their tax related impacts as follows:

 

·         Tax expense of $2.5 million in the first quarter of 2018 related to the net loan loss reserve release resulting from the revised estimates of the reserves associated with the effects of Hurricanes Maria and Irma (calculated based on the statutory tax rate of 39%).

 

·         Tax benefit of $2.2 million in the first quarter of 2018 related to the charges to the provision for loan and lease losses recorded in connection with the $57.2 million in loans transferred to held for sale (calculated based on the statutory tax rate of 39%).

 

·         Tax benefit of $0.6 million in the first quarter of 2018 related to hurricane-related costs (calculated based on the statutory tax rate of 39%).

 

·         Tax benefit of $0.2 million in the first quarter of 2017 related to the charge to the provision for loan and lease losses in connection with the sale of the Corporation’s participation in the PREPA credit line (calculated based on the statutory tax rate of 39%).

 

·         No tax expense/benefit was recorded for the gain on repurchase and cancellation of trust preferred securities and for costs related to the secondary offering that was recorded at the holding company level in the first quarter of 2018 and the first quarter of 2017, respectively.

 

·         No tax benefit was recognized for the OTTI charges recorded in the first quarter of 2017 on tax-exempt bonds of the GDB and the Puerto Rico Public Buildings Authority.

 

Management believes that adjustments to net income of items that are not reflective of core operating performance, are not expected to reoccur with any regularity or may reoccur at uncertain times and in uncertain amounts facilitate comparisons with prior periods, and provide an alternate presentation of the Corporation’s performance.

 

The Corporation uses these non-GAAP financial measures, and believes that these non-GAAP financial measures enhance the ability of analysts and investors to analyze trends in the Corporation’s business and understand the performance of the Corporation. In addition, the Corporation may utilize these non-GAAP financial measures as a guide in its budgeting and long-term planning process. Any analysis of these non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP.

 

133 


 

Refer to Overview of Results of Operations above for the reconciliation of the non-GAAP financial measure “adjusted net income,” to the GAAP financial measures. The following tables reconcile the non-GAAP financial measures “adjusted net charge-offs,” “adjusted net charge-offs to average loans ratio,” “adjusted provision for loan and lease losses,” “adjusted provision for loan and lease losses to adjusted net charge-offs,” “adjusted allowance for loan and lease losses to total loans held for investment,” “adjusted non-interest income,” and “adjusted non-interest expenses,” to the GAAP financial measures for the first quarter of 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 First Quarter

 

As reported                 (GAAP)

 

Loans Transferred to Held for Sale

 

Storm-related Allowance

 

Storm-related Expenses and Related Adjustments

 

Repurchase and Cancellation of Trust Preferred Securities

 

Adjusted                 (Non-GAAP)

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net-charge offs (1) 

$

26,531

$

(9,673)

$

-

$

-

$

-

$

16,858

 

 

 

Total net charge-offs to average loans

 

1.21%

 

 

 

 

 

 

 

 

 

0.77%

 

 

 

   Commercial mortgage

 

6,761

 

(4,573)

 

-

 

-

 

-

 

2,188

 

 

 

     Commercial mortgage net charge-offs average loans

 

1.69%

 

 

 

 

 

 

 

 

 

0.55%

 

 

 

   Construction

 

5,164

 

(5,100)

 

-

 

-

 

-

 

64

 

 

 

     Construction net charge-offs to average loans

 

17.37%

 

 

 

 

 

 

 

 

 

0.22%

 

 

 

Provision for loan and lease losses

$

20,544

$

(5,645)

$

6,407

$

-

$

-

$

21,306

 

 

 

   Residential mortgage

 

447

 

-

 

136

 

-

 

-

 

583

 

 

 

   Commercial mortgage

 

8,661

 

(1,105)

 

245

 

-

 

-

 

7,801

 

 

 

   Commercial and industrial

 

656

 

-

 

3,822

 

-

 

-

 

4,478

 

 

 

   Construction

 

4,764

 

(4,540)

 

161

 

-

 

-

 

385

 

 

 

   Consumer

 

6,016

 

-

 

2,043

 

-

 

-

 

8,059

 

 

 

Non-interest income

$

22,784

$

-

$

-

$

-

$

(2,316)

$

20,468

 

 

 

   Gain on early extinguishment of debt

 

2,316

 

-

 

-

 

-

 

(2,316)

 

-

 

 

 

Non-interest expenses

$

86,027

$

 

$

 

$

(1,596)

$

-

$

84,431

 

 

 

    Employees' compensation and benefits

 

40,684

 

-

 

-

 

(5)

 

-

 

40,679

 

 

 

    Occupancy and equipment

 

15,105

 

-

 

-

 

(1,549)

 

-

 

13,556

 

 

 

    Business promotion

 

2,576

 

-

 

-

 

(31)

 

-

 

2,545

 

 

 

__________________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Net charge-offs percentages annualized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 First Quarter

 

As reported                 (GAAP)

 

Sale of PREPA Credit Line

 

Secondary Offering Costs

 

OTTI on Debt Securities

 

Adjusted                 (Non-GAAP)

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net-charge offs (1) 

$

27,814

$

(10,734)

$

-

$

-

$

17,080

 

 

 

 

 

Total net charge-offs to average loans

 

1.26%

 

 

 

 

 

 

 

0.78%

 

 

 

 

 

   Commercial and Industrial

 

11,177

 

(10,734)

 

-

 

-

 

443

 

 

 

 

 

     Commercial and industrial net charge-offs average loans

 

2.07%

 

 

 

 

 

 

 

0.08%

 

 

 

 

 

Provision for loan and lease losses

$

25,442

$

(569)

$

-

$

-

$

24,873

 

 

 

 

 

   Commercial and industrial

 

(4,806)

 

(569)

 

-

 

-

 

(5,375)

 

 

 

 

 

Non-interest income

$

8,243

$

-

$

-

$

12,231

$

20,474

 

 

 

 

 

   (Loss) gain on investments and impairments

 

(12,231)

 

-

 

-

 

12,231

 

-

 

 

 

 

 

Non-interest expenses

$

87,882

$

 

$

(274)

$

-

$

87,608

 

 

 

 

 

    Professional fees

 

10,956

 

-

 

(254)

 

-

 

10,702

 

 

 

 

 

    Business promotion

 

3,281

 

-

 

(20)

 

-

 

3,261

 

 

 

 

 

__________________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Net charge-offs percentages annualized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

134 


 

     The following tables reconcile the ratios of provision for loan and lease losses to net charge-offs, net charge-offs to average loans, and allowance for loan and lease losses to total loans held for investment for the first quarter of 2018 and 2017 to the Non-GAAP financial measure "adjusted provision for loan and lease losses to net charge-offs," "adjusted net charge-offs to average loans," and "adjusted allowance for loan and lease losses to total loans held for investment" for the first quarter of 2018 and 2017:

 

 

 

 

 

 

 

Provision for Loan and Lease Losses to Net Charge-Offs

 

and Net Charge-Offs to Average Loans

 

(GAAP to Non-GAAP reconciliation)

 

Quarter Ended March 31, 2018

 

Provision for Loan

 

Net Charge-Offs

(In thousands)

and Lease Losses

 

 

 

 

 

 

 

Provision for loan and lease losses and net charge-offs (GAAP)

$

20,544

 

$

26,531

Less special items:

 

 

 

 

 

           Loans transferred to held for sale

 

(5,645)

 

 

(9,673)

           Storm-related reserve release/(charge) to the provision for loan and lease losses

 

6,407

 

 

-

Provision for loan and lease losses and net charge-offs, excluding special items (Non-GAAP)  

$

21,306

 

$

16,858

 

 

 

 

 

 

Average Loans

$

8,778,968

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses to net charge-offs (GAAP)

 

77.43%

 

 

 

Provision for loan and lease losses to net charge-offs, excluding special items (Non-GAAP)   

 

126.39%

 

 

 

Net charge-offs to average loans (GAAP)

 

1.21%

 

 

 

Net charge-offs to average loans, excluding special items (Non-GAAP)

 

0.77%

 

 

 

 

135 


 

 

 

 

 

 

 

 

Provision for Loan and Lease Losses to Net Charge-Offs

 

and Net Charge-Offs to Average Loans

 

(GAAP to Non-GAAP reconciliation)

 

Quarter Ended March 31, 2017

 

Provision for Loan

 

Net Charge-Offs

(In thousands)

and Lease Losses

 

 

 

 

 

 

 

Provision for loan and lease losses and net charge-offs (GAAP)

$

25,442

 

$

27,814

Less special items:

 

 

 

 

 

           Sale of the PREPA credit line

 

(569)

 

 

(10,734)

Provision for loan and lease losses and net charge-offs, excluding special items (Non-GAAP)  

$

24,873

 

$

17,080

 

 

 

 

 

 

Average Loans

$

8,862,271

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses to net charge-offs (GAAP)

 

91.47%

 

 

 

Provision for loan and lease losses to net charge-offs, excluding special items (Non-GAAP)   

 

145.63%

 

 

 

Net charge-offs to average loans (GAAP)

 

1.26%

 

 

 

Net charge-offs to average loans, excluding special items (Non-GAAP)

 

0.78%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses to Total Loans Held for Investment (GAAP to Non-GAAP reconciliation)

 

Allowance for Loan and Lease Losses to Total Loans Held for Investment (GAAP to Non-GAAP reconciliation)

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

As of December 31, 2017

(In thousands)

Allowance for Loan and Lease Losses

 

Total Loans Held for Investment

 

Allowance for Loan and Lease Losses

 

Total Loans Held for Investment

 

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses  and Total Loans Held for Investment (GAAP)

$225,856

 

$8,695,890

 

$231,843

 

$8,850,476

Less Special items:

 

 

 

 

 

 

 

  Storm-related allowance for loan and lease losses

(62,136)

 

-

 

(68,543)

 

-

  Allowance for Loan and Lease Losses and Total Loans Held for Investment,

 

 

 

 

 

 

 

        excluding special items (Non-GAAP)

$163,720

 

$8,695,890

 

$163,300

 

$8,850,476

 

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses to Total Loans Held for Investment (GAAP)

2.60%

 

 

 

2.62%

 

 

Allowance for Loan and Lease Losses to Total Loans Held for Investment,

 

 

 

 

 

 

 

 excluding special items (Non-GAAP)

1.88%

 

 

 

1.85%

 

 

 

 

 

 

 

 

 

 

136 


 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For information regarding market risk to which the Corporation is exposed, see the information contained in “Part I – Item 2 -“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.”

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure Control and Procedures

 

First BanCorp.’s management evaluated the effectiveness of the design and operation of First BanCorp.’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2018. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to ensure timely decisions regarding required disclosures. During the evaluation of disclosure controls and procedures and our internal control over financial reporting as of December 31, 2017, which was conducted during the preparation of our financial statements that were included in our Annual Report on Form 10-K for the year ended December 31, 2017, management identified a material weakness in internal control over financial reporting relating to management’s review and approval of the appropriateness of certain assumptions used to estimate the allowance for loan losses for commercial loans. As a result, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our disclosure controls and procedures and our internal control over financial reporting were ineffective. Upon identification of the material weakness and under the direction of our Chief Executive Officer and Chief Financial Officer, we developed a plan to remediate the material weakness.

 

As of March 31, 2018, and as described under Status of Remediation of Material Weakness in Internal Control Over Financial Reporting below, the material weakness has not being fully remediated. As a result, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2018, our disclosure controls and procedures were not effective. Notwithstanding the aforementioned material weakness, management has taken additional steps to assure the accuracy of our allowance for loan losses for commercial loans as of March 31, 2018, and has concluded that the financial statements included in this report fairly present, in all material respects, our financial condition for the periods presented in conformity with generally accepted accounting principles.

 

Internal Control over Financial Reporting

 

There have been no changes to the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting, other than as described below under the caption “Status of Remediation of Material Weakness in Internal Control Over Financial Reporting.”

 

Status of Remediation of Material Weakness in Internal Control Over Financial Reporting

 

As previously described in Part II, Item 9A of our 2017 Form 10-K, we began implementing a remediation plan to address the control deficiency that led to the material weakness mentioned above. The remediation plan includes the following:

 

·          Implementing a revised procedure to determine the historical loss rates to be applied to the different commercial loans regulatory-based credit risk categories (i.e., pass, special mention, substandard and doubtful).

 

·          Implementing a quarterly sensitivity analysis using actual historical loss rates for loans risk-rated pass, special mention and substandard to compare the results of such sensitivity to the calculated reserves under the revised procedure, and establishing sensitivity thresholds that could trigger further reviews and/or adjustments prior to reaching a conclusion as to the adequacy of the allowance for loan losses for the Corporation’s commercial portfolio.

 

·          Engaging an independent third party to assess the allowance framework and the appropriateness of the assumptions used in the analysis.

 

 

 

137 


 

The Corporation implemented enhancements to the methodology and internal controls behind the calculation of the allowance for commercial loans that were in place and operating during the first quarter of 2018, which includes, among others, the following: (i) a revised procedure to determine the historical loss rates applicable for each commercial loan regulatory-based credit risk category (i.e., pass, special mention, substandard and doubtful) that changed the previous blending of loss rates for loans risk-rated special mention, substandard and doubtful to an aggregation methodology under which historical losses and portfolio balances of special mention loans are allocated to pass or substandard categories based on the historical proportion of the loans in this risk category that are ultimately cured or resulted uncollectible; and (ii) the implementation of a quarterly sensitivity analysis and establishment of sensitivity thresholds as described in the Remediation Plan.

 

In addition, the Corporation engaged an independent third party to assess the allowance framework and the appropriateness of assumptions used in the analysis and expects such review to be completed during the second quarter of 2018.

Management believes that the new procedures and controls discussed above will appropriately remediate the material weakness; however, the effectiveness of the controls has not been fully tested by management. The Corporation expects to remediate the material weakness during 2018 subsequent to the completion of the independent third party assessment and when, in the opinion of our management, the revised control processes have been operating on a satisfactory basis for a sufficient period of time and have been independently validated by management.

 

The remediation and ultimate resolution of the material weakness will be reviewed with the Audit Committee of the Corporation’s Board of Directors.

  

138 


 

PART II - OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

    Not applicable.

 

 ITEM 1A.  RISK FACTORS

 

The Corporation’s business, operating results and/or the market price of our common and preferred stock may be significantly affected by a number of factors.  For a detailed discussion of certain risk factors that could affect the Corporation’s future operations, financial condition or results for future periods see the risk factors in Item 1A, “Risk Factors,” in the Corporation’s 2017 Annual Report on Form 10-K.  These factors could also cause actual results to differ materially from historical results or the results contemplated by the forward-looking statements contained in this report.  Also refer to the discussion in “Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report for additional information that may supplement or update the discussion of  risk factors in the Corporation’s 2017 Form 10-K.  

 

  There have been no other material changes from those risk factors previously disclosed in Item 1A, “Risk Factors,“ of Part I of the Corporation’s 2017 Form 10-K.  Additional risks and uncertainties that are not currently known to the Corporation or are currently deemed by the Corporation to be immaterial also may materially adversely affect the Corporation’s business, financial condition or results of operations.

 

 

 

  

139 


 

ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

            

a)       Not applicable.

 

b)       Not applicable

 

c)       Purchase of equity securities by the issuer and affiliated purchases. The following table provides information relating to the Corporation’s purchases of shares of its common stock in the first quarter of 2018.

 

 

Period

 

Total number of shares purchased (1) 

 

 

Average price paid

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Maximum Number of Shares That May Yet be Purchased Under These Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 2018

 

26,346

 

$

5.48

 

 

-

 

 

-

 

February 2018

 

15,497

 

 

6.02

 

 

-

 

 

-

 

March 2018

 

341,244

 

 

6.44

 

 

-

 

 

-

 

Total

 

383,087

 

$

6.35

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Reflects shares of common stock withheld from the common stock paid to certain senior officers as additional compensation which the Corporation calls salary stock, and upon vesting of restricted stock to cover minimum tax withholding obligations. The Corporation intends to continue to satisfy statutory tax withholding obligations in connection with shares paid as salary stock to certain senior officers and the vesting of outstanding restricted stock through the withholding of shares.  

140 


 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

             Not applicable.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

              Not applicable.

 

ITEM 5.  OTHER INFORMATION

  

           Not applicable.

 

ITEM 6.  EXHIBITS

 

See the Exhibit Index below:

141 


 

Exhibit Index

 

10.1 – Form of First BanCorp Long-Term Incentive Award Agreement.

 

31.1 – CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2 - CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  

 

32.1 - CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2 - CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  

 

101.1- Interactive Data File (Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, furnished in XBRL (eXtensible Business Reporting Language)

  

142 


 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized: 

 

 

First BanCorp.

 

Registrant

 

 

Date: May 10, 2018

By:

/s/ Aurelio Alemán

 

 

Aurelio Alemán

 

 

President and Chief Executive Officer

 

 

 

 

Date: May 10, 2018

By:

/s/ Orlando Berges

 

 

Orlando Berges

 

 

Executive Vice President and Chief Financial Officer

 

143