FIRST BANCORP /PR/
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended
or
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
(EXACT NAME OF REGISTRANT AS SPECIFIED
IN ITS CHARTER)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
,
(Zip Code)
(Address of principal executive office)
Registrant’s telephone number, including area code:
(
)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities
Act.
☑
☐
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes
☐
☑
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.
☑
☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
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 such files).
☑
☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer,
a non-accelerated filer, a smaller reporting company,
or an 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
☐
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company,
indicate by check mark if the registrant 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 has filed a
report on and attestation to its management’s
assessment of the effectiveness of its internal control
over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its
audit report.
☑
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
☑
The aggregate market value of the voting common equity held
by non-affiliates of the registrant as of June 30,
2021 (the last trading day of the registrant’s
most recently completed second
fiscal quarter) was $
nonvoting common equity outstanding as of June 30, 2021.
For the purposes of the foregoing calculation only,
the registrant has defined affiliates to include (a) the executive
officers named in
Part III of this Annual Report on Form 10-K; (b) all directors
of the registrant; and (c) each shareholder,
including the registrant’s employee benefit
plans but excluding shareholders that file on
Schedule 13G, known to the registrant to be the beneficial owner
of 5% or more of the outstanding shares of common stock
of the registrant as of June 30, 2021. The registrant’s
response to
this item is not intended to be an admission that any person
is an affiliate of the registrant for any purposes other than this
response.
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock,
as of the latest practicable date:
Documents incorporated by reference:
Portions of the definitive proxy statement relating
to the registrant’s annual meeting of stockholders
scheduled to be held on May 20, 2022 are
incorporated by reference in response to Items 10, 11,
12, 13 and 14 of Part III of this Form 10-K.
2
FIRST BANCORP.
2021 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART
I
Item 1.
6
Item 1A.
25
Item 1B.
40
Item 2.
40
Item 3.
40
Item 4.
40
PART
II
Item 5.
41
Item 6.
45
Item 7.
46
Item 7A.
132
Item 8.
133
Item 9.
273
Item 9A.
273
Item 9B.
273
Item 9C.
273
PART
III
Item 10.
274
Item 11.
274
Item 12.
274
Item 13.
274
Item 14.
275
PART
IV
Item 15.
275
Item 16.
275
3
Forward-Looking Statements
This Form 10-K 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-K or future filings
by First BanCorp. (the “Corporation,” “we,”
“us,” or “our”)
with the U.S.
Securities and
Exchange Commission (the
“SEC”), in the
Corporation’s
press releases or
in other public
or
stockholder
communications
made
by
the
Corporation,
or
in
oral
statements
made
on
behalf
of
the
Corporation
by,
or
with
the
approval of,
an authorized executive
officer,
the words or
phrases “would,” “intends,”
“will,” “expect,”
“should,”,
“plans”, “forecast”
“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.”
The Corporation cautions readers
not to place undue reliance on
any such “forward-looking statements,” which
speak only as of the
date
made,
and
advises
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.
Factors that could
cause results to
differ from
those expressed in
the Corporation’s
forward-looking statements
include, but
are not
limited to, risks described or referenced in Part I, Item 1A, “Risk Factors,” and the
following:
●
uncertainties
relating
to
the
impact
of
the
ongoing
COVID-19
pandemic
or
any
future
regional
or
global
health
crisis,
including new
variants and
mutations of
the virus,
such as
the Omicron
variant, and
the efficacy
and acceptance
of various
vaccines
and
treatments
for
the
disease,
on
the
Corporation’s
business,
operations,
employees,
credit
quality,
financial
condition and net
income, including because
of uncertainties
as to the
extent and duration
of the pandemic
and the impact
of
the pandemic on consumer spending, borrowing and saving
habits, the underemployment and unemployment rates, which can
adversely affect repayment patterns, the Puerto
Rico economy and the global economy,
as well as the risk that the COVID-19
pandemic may
exacerbate any
other factor
that could
cause our
actual results
to differ
materially from
those expressed
in or
implied by any forward-looking statements;
●
risks related
to the
effect on
the Corporation
and its
customers of
governmental, regulatory
or central
bank responses
to the
COVID-19
pandemic
and
the
Corporation’s
participation
in
any
such
responses
or
programs,
such
as
the
Small
Business
Administration
Paycheck
Protection
Program
(“SBA
PPP”)
established
by
the
Coronavirus
Aid,
Relief,
and
Economic
Security Act of 2020,
as amended (the “CARES Act
of 2020”), including any
judgments, claims, damages, penalties,
fines or
reputational
damage
resulting
from
claims
or
challenges
against
the
Corporation
by
governments,
regulators,
customers
or
otherwise, relating to the Corporation’s
participation in any such responses or programs;
●
risks,
uncertainties
and
other
factors
related
to
the
Corporation’s
acquisition
of
Banco
Santander
Puerto
Rico
(“BSPR”),
including
the risks
that the
Corporation’s
may not
realize, either
fully or
on a
timely basis,
the cost
savings and
any other
synergies from
the acquisition
that the
Corporation expected,
because of
deposit attrition,
customer loss
and/or revenue
loss
as a
result of
unexpected factors
or events,
including those
that are
outside of
our control
following the
acquisition, and
the
impact on the Corporation’s results of
operations and financial condition of other business acquisitions, or dispositions;
●
uncertainty as to
the ultimate outcomes
of the recently
approved Puerto Rico’s
debt restructuring plan
(“Plan of Adjustment”
or “PoA”)
and its
2022 fiscal
plan, or
any revisions
to it,
on our
clients and
loan portfolios,
and any
potential impact
from
future economic or political developments in Puerto Rico;
●
the impact that a resumption of
a slowing economy and unemployment
or underemployment may have on
the performance of
our
loan
and
lease
portfolio,
the
market
price
of
our
investment
securities,
the
availability
of
sources
of
funding
and
the
demand for our products;
●
uncertainty
as
to
the
availability
of
wholesale
funding
sources,
such
as
securities
sold
under
agreements
to
repurchase,
Federal Home Loan Bank (“FHLB”) advances and brokered certificates of
deposit (“brokered CDs”);
●
the effect
of a
resumption of
deteriorating economic
conditions in
the real
estate markets
and the
consumer and
commercial
sectors
and
their
impact
on
the credit
quality
of
the Corporation’s
loans
and
other
assets, which
may
contribute
to, among
other
things,
higher
than
targeted
levels
of
non-performing
assets,
charge-offs
and
provisions
for
credit
losses,
and
may
subject the Corporation to further risk from loan defaults and foreclosures;
●
the
impact
of
changes
in
accounting
standards
or
assumptions
in
applying
those
standards,
including
the
impact
of
the
ongoing COVID-19
pandemic on forecasted
economic variables
considered for
the determination
of the allowance
for credit
losses (“ACL”) required by the current expected credit losses (“CECL”) accounting
standard;
4
●
the ability of the
Corporation’s banking
subsidiary FirstBank Puerto
Rico (“FirstBank” or the
“Bank”)
to realize the benefits
of its net deferred tax assets;
●
the ability of FirstBank to generate sufficient cash flow to make dividend
payments to the Corporation;
●
the impact
of rising
interest rates
and
inflation
on the
Corporation,
including
a decrease
in demand
for
new mortgage
loan
originations
and
refinancings
and
increased
competition
for
borrowers,
which
would
likely
pressure
the
Corporation’s
margins and have an adverse impact on origination volumes and
financial performance;
●
adverse
changes
in
general
economic
conditions
in
Puerto
Rico,
the
United
States
(“U.S.”),
the
U.S.
Virgin
Islands
(the
“USVI”),
and
the
British
Virgin
Islands
(the
“BVI”),
including
the
interest
rate
environment,
market
liquidity,
housing
absorption rates, real estate prices, and disruptions in the U.S. capital
markets, including as a result of the ongoing COVID-19
pandemic,
which
may
further
reduce
interest
margins,
affect
funding
sources
and
demand
for
all
of
the
Corporation’s
products and services, and reduce the Corporation’s
revenues and earnings and the value of the Corporation’s
assets;
●
the
effect
of
changes
in
the
interest
rate
environment,
including
the
cessation
of
the
London
Interbank
Offered
Rate
(“LIBOR”), which could adversely affect the Corporation’s
results of operations, cash flows and liquidity;
●
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 credit-
related, including
additional charges
to the provision
for credit losses
on the Corporation’s
remaining exposure
to the Puerto
Rico government’s
debt securities
held as
part of
the available-for
-sale securities
portfolio
with a
fair value
of $2.9
million
($3.6 million amortized cost) and an ACL of $0.3 million;
●
uncertainty about
legislative, tax
or regulatory
changes that
affect financial
services companies
in Puerto
Rico, the
U.S. and
the
USVI
and
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;
●
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 Federal
Reserve Bank
of New
York
(the “New
York
FED”, “FED”
or “Federal
Reserve”), the
Federal
Deposit Insurance Corporation (the “FDIC”),
government-sponsored housing agencies, and
regulators in Puerto Rico, and the
USVI and BVI;
●
the
risk
of
possible
failure
or
circumvention
of
the
Corporation’s
internal
controls
and
procedures
and
the
risk
that
the
Corporation’s risk management
policies may not be adequate;
●
the
Corporation’s
ability
to
identify
and
prevent
cyber-security
incidents,
such
as
data
security
breaches,
ransomware,
malware, “denial of service” attacks, “hacking”
and identity theft, and the occurrence of any of
which may result in misuse or
misappropriation
of
confidential
or
proprietary
information,
and
could
result
in
the
disruption
or
damage
to
our
systems,
increased costs and losses or an adverse effect to our reputation;
●
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;
5
●
a need
to recognize
impairments on
the Corporation’s
financial instruments,
goodwill and
other intangible
assets relating
to
business acquisitions, including as a result of the ongoing COVID-19 pandemic;
●
the
effect
of
changes
in
the
interest
rate
environment
on
the
global
economy,
on
the
Corporation’s
businesses,
business
practices,
and
results
of
operations,
including
the
impact
of
rising
interest
rates
and
inflation
on
the
Corporation
and
a
decrease
in
demand
for
new
mortgage
loan
originations
and
refinancings
and
increased
competition
for
borrowers,
which
could pressure the Corporation’s
margins and have an adverse impact on origination volumes and
financial performance;
●
the risk
that the
impact
of the
occurrence
of any
of these
uncertainties
on the
Corporation’s
capital would
preclude
further
growth of the Bank and preclude the Corporation’s
Board of Directors from declaring dividends;
●
uncertainty as
to whether
FirstBank will
be able
to continue
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.
reflect
occurrences
or
unanticipated
events
or
circumstances
after
the
date
of
such
statements,
except
as
required
by
the
federal
securities laws.
6
PART
I
Item 1.
Business
GENERAL
First
BanCorp.
is
a
publicly
owned
financial
holding
company
that
is
subject
to
regulation,
supervision
and
examination
by
the
Federal Reserve
Board. The
Corporation was
incorporated under
the laws
of the
Commonwealth of
Puerto Rico
to serve
as the
bank
holding company for FirstBank.
The Corporation is a full-service
provider of financial services and
products with operations in Puerto
Rico, the
U.S., the
USVI and
the BVI.
As of
December 31,
2021, the
Corporation had
total assets
of $20.8
billion, total
deposits of
$17.8 billion, and total stockholders’ equity of $2.1
billion.
The
Corporation
provides
a wide
range
of financial
services for
retail,
commercial
and institutional
clients.
The
Corporation
has
two
wholly-owned
subsidiaries:
FirstBank
and
FirstBank
Insurance
Agency,
Inc.
(“FirstBank
Insurance
Agency”).
FirstBank
is
a
Puerto Rico-chartered commercial bank, and FirstBank Insurance
Agency is a Puerto Rico-chartered insurance agency.
FirstBank is subject to
the supervision, examination
and regulation of both
the Office of the
Commissioner of Financial Institutions
of
Puerto
Rico
(“OCIF”)
and
the
FDIC.
Deposits
are
insured
through
the
FDIC
Deposit
Insurance
Fund
(the
“DIF”).
In
addition,
within FirstBank,
the Bank’s
USVI operations
are subject
to regulation
and examination
by the
United States
Virgin
Islands Banking
Board; its BVI
operations are subject
to regulation by
the British Virgin
Islands Financial Services
Commission; and
its operations in
the state
of Florida
are subject
to regulation
and examination
by the
Florida Office
of Financial
Regulation. The
Consumer Financial
Protection Bureau
(“CFPB”) regulates
FirstBank’s
consumer financial
products and
services.
FirstBank Insurance
Agency is
subject
to the supervision,
examination and regulation
of the Office of
the Insurance Commissioner
of the Commonwealth of
Puerto Rico and
the Division of Banking and Insurance Financial Regulation in the USVI.
FirstBank conducts its
business through its main
office located in
San Juan, Puerto Rico, 64
banking branches in Puerto
Rico, eight
banking branches in
the USVI and
the BVI, and
11 banking
branches in the
state of Florida
(USA). FirstBank has
four wholly owned
subsidiaries
with
operations
in
Puerto
Rico:
First
Federal
Finance
Corp.
(d/b/a
Money
Express
La Financiera),
a
finance
company
specializing
in
the
origination
of
small
loans
with
28
offices
in
Puerto
Rico;
First
Management
of
Puerto
Rico,
a
Puerto
Rico
corporation,
which
holds
tax-exempt
assets;
FirstBank
Overseas
Corporation,
an
international
banking
entity
(an
“IBE”)
organized
under
the International
Banking
Entity
Act of
Puerto
Rico;
and
one dormant
company formerly
engaged
in the
operation
of certain
other real estate owned (“OREO”) property.
For a
discussion
of certain
significant
events that
have occurred
in 2021,
please refer
to “Significant
Events”
included
in Item
7.
Management’s Discussion and
Analysis of Financial Condition and Results of Operations of this Form
10-K.
BUSINESS SEGMENTS
The Corporation has six reportable segments: Commercial and Corporate
Banking; Mortgage Banking; Consumer (Retail) Banking;
Treasury and Investments; United States
Operations; and Virgin
Islands Operations. These segments are described below,
as well as in
Note 36 - “Segment Information,” to the consolidated
financial statements for the year ended December 31, 2021 included in
Item 8 of
this Form 10-K.
Commercial and Corporate Banking
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 government
sector in
the Puerto
Rico region.
FirstBank has
developed
expertise
in
a
wide
variety
of
industries.
The
Commercial
and
Corporate
Banking
segment
offers
commercial
loans,
including
commercial real estate and construction
loans, as well as other products,
such as cash management and business
management services.
A
substantial
portion
of
the
commercial
and
corporate
banking
portfolio
is
secured
by
the
underlying
real
estate
collateral
and
the
personal guarantees of the borrowers.
Mortgage Banking
The Mortgage
Banking operations
consist of
the origination,
sale and
servicing of
a variety
of residential
mortgage loan
products
and
related
hedging
activities
in
the
Puerto
Rico
region.
Originations
are
sourced
through
different
channels,
such
as
FirstBank
branches
and
purchases
from
mortgage
bankers,
and
in
association
with
new
project
developers.
The
Mortgage
Banking
segment
focuses on
originating residential
real estate
loans, some
of which
conform to
the U.S.
Federal Housing
Administration (the
“FHA”),
U.S.
Veterans
Administration
(the
“VA”)
and
the
U.S.
Department
of
Agriculture
Rural
Development
(the
“RD”)
standards.
7
Originated loans that
meet the FHA’s
standards qualify for
the FHA’s
insurance program whereas
loans that meet the
standards of the
VA
or RD are guaranteed by those respective federal agencies.
Mortgage
loans that
do not
qualify
under the
FHA,
VA
or RD
programs
are referred
to as
conventional
loans. Conventional
real
estate loans
can be
conforming or
non-conforming. Conforming
loans are residential
real estate loans
that meet
the standards
for sale
under
the
U.S.
Federal
National
Mortgage
Association
(“FNMA”)
and
the
U.S.
Federal
Home
Loan
Mortgage
Corporation
(“FHLMC”) programs.
Loans that
do not
meet FNMA
or FHLMC
standards are
referred to
as non-conforming
residential real
estate
loans. The
Corporation’s
strategy is
to penetrate
markets by
providing customers
with a
variety of
high-quality mortgage
products to
serve
their
financial
needs
through
a
faster
and
simpler
process
and
at
competitive
prices.
The
Mortgage
Banking
segment
also
acquires and
sells mortgages
in the
secondary markets.
Residential real
estate conforming
loans are
sold to
investors like
FNMA and
FHLMC.
Most
of
the
Corporation’s
residential
mortgage
loan
portfolio
consists
of
fixed-rate,
fully
amortizing,
full
documentation
loans. The
Corporation has
commitment authority
to issue Government
National Mortgage
Association (“GNMA”)
mortgage-backed
securities (“MBS”).
Under this
program,
the Corporation
has been
selling FHA/VA
mortgage
loans into
the secondary
market since
2009.
Consumer (Retail) Banking
The
Consumer
(Retail)
Banking
segment
consists
of
the
Corporation’s
consumer
lending
and
deposit-taking
activities
conducted
mainly through FirstBank’s
branch network in the Puerto Rico region.
Loans to consumers include auto loans,
finance leases, boat and
personal loans,
credit card loans,
and lines of
credit.
Deposit products include
interest-bearing and non-interest-bearing
checking and
savings accounts,
Individual Retirement
Accounts (“IRAs”)
and retail
certificates of
deposit (“re
tail CDs”).
Retail deposits
gathered
through each
branch of
FirstBank’s
retail network
serve as
one of
the funding
sources for
the lending
and investment
activities. This
segment also includes the Corporation’s
insurance agency activities in the Puerto Rico region.
Treasury and Investments
The
Treasury
and
Investments
segment
is
responsible
for
the
Corporation’s
treasury
and
investment
management
functions.
The
treasury
function,
which
includes
funding
and
liquidity
management,
lends
funds
to
the
Commercial
and
Corporate
Banking,
Mortgage
Banking,
the
Consumer
(Retail)
Banking
and
the
United
States
operations
segments
to
finance
their
respective
lending
activities
and
borrows
from
those segments.
The Treasury
and
Investment
segment
also obtains
funding
through
brokered deposits,
advances from the FHLB, and repurchase agreements involving investment
securities, among other possible funding sources.
United States Operations
The
United
States Operations
segment
consists of
all banking
activities conducted
by FirstBank
on
the U.S.
mainland.
FirstBank
provides
a
wide range
of banking
services to
individual
and
corporate
customers,
primarily
in
southern
Florida
through
11
banking
branches.
The
United
States
Operations
segment
offers
an
array
of
both
consumer
and
commercial
banking
products
and
services.
Consumer banking
products include
checking, savings
and money
market accounts,
retail CDs,
internet banking
services, residential
mortgages,
home
equity
loans,
and
lines
of
credit.
Retail
deposits,
as
well
as
FHLB
advances
and
brokered
CDs
assigned
to
this
segment, serve as funding sources for its lending
activities.
The commercial banking services include
checking, savings and money market
accounts, retail CDs, internet banking services,
cash
management
services,
remote
deposit
capture,
and
automated
clearing
house,
or
ACH,
transactions.
Loan
products
include
the
traditional commercial and industrial and commercial real estate products,
such as lines of credit, term loans and construction loans.
Virgin Islands Operations
The
Virgin
Islands
Operations
segment
consists
of
all
banking
activities
conducted
by
FirstBank
in
the
USVI
and
BVI
regions,
including
consumer and
commercial banking
services, with
a total
of eight
banking branches
serving
the islands
in the
USVI of
St.
Thomas,
St.
Croix,
and
St.
John,
and
the
island
of
Tortola
in
the
BVI.
The
Virgin
Islands
Operations
segment
is
driven
by
its
consumer, commercial lending and deposit
-taking activities.
Loans
to
consumers
include
auto
and
boat
loans,
lines
of
credit,
and
personal
and
residential
mortgage
loans.
Deposit
products
include
interest-bearing
and
non-interest-bearing
checking
and
savings
accounts,
IRAs,
and
retail
CDs.
Retail
deposits
gathered
through each branch serve as the funding sources for its own lending activities.
8
ENVIRONMENTAL
,
SOCIAL AND GOVERNANCE (ESG) PROGRAM OVERVIEW
The
Corporation
is
committed
to
supporting
our
clients,
employees,
shareholders
and
communities
in
which
we
serve.
With
oversight from our Board of Directors, the Corporation
is focused on implementing ESG practices to support
environmental and social
sustainability with an effective governance framework.
During
2021,
the
Corporation
made
progress
towards
formally
establishing
our
ESG
Program
by
adopting
an
ESG
framework
through
which
we
will
establish
and
communicate
the
Corporation’s
ESG
strategy
and
overarching
governance
policy,
with
anticipated plans to publish an ESG report during 2022.
The
Corporate
Governance
and
Nominating
Committee
of the
Board
of
Directors
has
direct oversight
of
ESG policies,
practices
and disclosures.
Additionally, during
2021, the Corporation established
an ESG Committee at the
management level, which primarily
is
responsible
for
driving
the
Corporation’s
ESG
policies
and
strategy
and
reporting
regularly
to
the
Corporate
Governance
and
Nominating Committee.
The ESG
Committee will
align priorities
and initiatives
for the
year,
provide strategy
recommendations and
lead
the
reporting
process
on
ESG
related
topics.
The
ESG
Committee
is
composed
of
a
core,
cross-functional
group
of
senior
management,
with
representatives
from
our
Investor
Relations,
Corporate
Affairs,
Corporate
Communications,
Human
Resources,
Risk, Credit and Finance functions.
The Corporation
intends to
report to
shareholders and
other key
stakeholders regarding
these efforts
with an
ESG Report
that will
align
with
leading
standards
and
frameworks,
including
the
Sustainability
Accounting
Standards
Board
and
the
United
Nations
Sustainable Development
Goals. The Corporation
expects to publish
the Corporation’s
inaugural 2021 ESG
Report during the
second
quarter of 2022.
HUMAN CAPITAL MANAGEMENT
First BanCorp.
strives to be recognized as a leading and diversified financial institution,
offering a superior experience to our clients
and employees. We
believe that the key to our success is caring about our team as much
as we care about our customers. Our goal is to
be an “Employer of Choice” within our
primary operating regions, which we
believe can be achieved and sustained by adding
value to
our
employees’
lives
and
providing
the
right
work
experience.
The
core
of
our
Employer
Value
Proposition,
“The
Experience
of
Being 1”, is our commitment to our employees’ wellbeing, success, professional
development, and work environment.
Structure
As of December
31, 2021,
the Corporation
and its subsidiaries
had 3,075
regular employees,
nearly all
of whom
are full-time. The
Corporation
had 2,722
employees in
the Puerto
Rico region,
200 employees
in the
Florida region,
and 153
employees in
the Virgin
Islands region. As
of December 31, 2021,
approximately 67% of the
total employees and 57%
of the top and
middle management, are
women.
The
overall
headcount
was
7.45%
lower
than
as
of
December
31,
2020,
primarily
as
a
result
of
the
completion
of
the
integration
of
BSPR
operations.
The
Human
Resources
Division
reports
to
the
Corporation’s
Chief
Risk
Officer
and
manages
all
aspects
related
to
the
Corporation’s
human
capital,
including
talent
recruiting
and
engagement,
training
and
development,
and
compensation and benefits.
The
Human
Resources
Division
efforts
are
overseen
by
the
Corporation’s
Chief
Executive
Officer
(CEO)
and
the
executive
management
team
through
regular
work-related
interactions.
Our
leaders
focus
on
strengthening
employee
management
and
engagement,
and
maximizing
collaboration
between
departments
and
talents
by
promoting
an
open-door
culture
that
stimulates
frequent communication
between employees
and management.
This provides
more opportunities
to identify
employees' needs,
obtain
feedback
about
work
experience,
and
adapt
our
employee
engagement
as
we
believe
is
appropriate.
In
addition,
the
Corporation’s
Board
of Directors
and
the Board’s
Compensation
and Benefits
Committee
monitor
and are
regularly
updated
on the
Corporation’s
human capital management strategies.
Recruitment and Retention
First
BanCorp.
is
an
equal
opportunity
employer,
which
considers
qualified
candidates
for
employment
to
fill
its
available
positions.
Our
efforts
are
focused
on
attracting
and
retaining
the
best
talent
for
the
Corporation,
including
college
graduates.
The
attraction and selection process includes:
●
Building our employer brand by participating in professional events and
job fairs and maintaining a relationship with
universities through internship programs and career forums.
9
●
A partnership with hiring managers to ensure an accurate match between
role and candidate and reasonably speed up the
recruitment process to secure top candidates.
●
A robust management information system to enhance the effectiveness
of the recruitment process and provide candidates with
a unique experience.
●
A robust on-boarding process to engage and support the new employee’s
induction process, including our mentorship program
for new hires,
“FirstPal”.
Our
commitment
to
employee
engagement
continues
throughout
the
employee’s
time
with
the
Corporation.
Therefore,
we
have
talent management processes to attract
and engage the best talent and
promote professional development and
career growth, including,
promoting
internal
career
opportunities,
performance
management
processes,
annual
talent
review,
and
robust
succession
planning,
among
other
practices.
We
also
promote
our
commitment
to
our
communities
through
our
volunteer
and
community
reinvestment
programs. In
2021, despite
the COVID-19
pandemic,
we supported
14 organizations
with volunteer
work and over
80 others
through
donations.
We
believe
that
financial
security
is critical
for
our
employees.
Our
goal is to
maintain
compensation
levels that
are competitive
with comparable
job categories
in similar
organizations.
Our salary
administration program
is designed
to provide
compensation that
is
consistent
with
our
employees’
assigned
duties
and
responsibilities
in
order
to
recognize
differences
in
individual
performance
levels and to attract the right talent for each job.
In
addition
to
salary,
some
job
positions
are
eligible
to
participate
in
variable
pay
programs.
The
Corporation
has
different
incentive
programs
for
most
of
the
business
units.
These
incentive
programs
are
periodically
reviewed
to
align
them
to
business
strategies
and
ensure
sound
risk
management.
Further,
the
Corporation’s
Management
Award
Program
is
used
to
recognize
and
reward outstanding
performance for
exempt employees
who do
not participate
in other
variable pay
programs. The Corporation
also
has a Long-Term
Incentive Plan for
top-performing leaders and
employees with high
potential. These programs
provide awards based
upon
the
Corporation’s
and
individual’s
performance
and
are
key
for
the
attraction
and
engagement
of
the
best
talent
.
The
Corporation’s investment
in its employees has resulted
in a stable-tenured workforce,
with an average tenure
of 10 years of service. In
2021, employee’s
voluntary turnover increased
globally affecting most
industries. Our employee
voluntary turnover rate
for 2021
was
18.4%, mostly related
to hourly employees
in call centers
and branches. Voluntary
turnover for all
other positions was
9.5%,
for high
performers employees’ turnover was relatively low at 7.5%.
Talent Development
First BanCorp. believes
that a culture
of learning
and development maximizes
the talent of
human capital and
is the foundation
for
sustained business success.
The
Corporation
provides
face-to-face,
online
and
virtual
training,
development
activities,
special
projects,
and
partial
tuition
reimbursement
to
complete
a
bachelor’s
or
master's
degree.
Training
is
offered
on
various
subjects
that
are
classified
into
the
following
five
main
areas:
fundamentals,
compliance
and
corporate
governance,
specialized
technical
subjects,
professional
development,
and
leadership
development.
Our
training
and
development
programs
strives
to
reflect
both
the
employees’
and
the
organization’s needs.
We
offer
more
than
7,000
training
opportunities
through
online
courses
and
in-person
or
virtual
classes.
In
2021,
due
to
the
COVID-19 pandemic,
we provided
over 70
training opportunities
(both internal
and external)
through
virtual and
online modalities.
This
action
allowed
our
employees
to
keep
learning
even
when
they
were
working
remotely.
For
2021,
we
delivered
more
than
119,000 hours of training. Furthermore,
employees each completed on average 32.21 training hours.
Every
year
around
100
new
and
existing
supervisors
and
managers
receive
training.
For
new
supervisors,
we
offer
a
program
intended to
train in basic
supervision, leadership
and communication
skills, and our
human resources policies
and practices. We
have
delivered more
than 9,000
hours of
supervision and
management-related
training over
the last
three years.
In addition,
our program
for active
supervisors and
managers encourages
leaders to
review their
leadership skills
with feedback
received from
instructors and
coworkers.
In
the
past
five
years,
the
program
has
been
delivered
to
60%
of
our
current
leaders,
including
new
leaders
from
the
acquired BSPR business, accounting for over 20,000 training hours since the
program was launched.
10
Health & Wellness
Health
and
wellness
programs
are
a
strong
component
of
the
benefits
we
provide
to
our
employees.
First
BanCorp.
provides
competitive
benefits
programs
that
are
intended
to
address
even
the
most
pressing
needs
of
our
employees
and
their
families
to
promote
physical, emotional,
and
financial health.
Our comprehensive
benefits
package includes
health, dental
and vision
insurance
offered
through different
insurance company
options that
enable an
employee to
choose the
one that
best accommodates
their needs
and
those of
their family.
We
also offer
life insurance
and disability
plans; and
a retirement-defined
contribution
plan option
where
both employee and employer contribute.
To
promote work-life
balance, we
grant a variety
of paid
time off
for vacation,
illness, maternity
and paternity
leave, bereavement
leave, marriage and personal days,
in-house health services, and a complete
wellness program, including nutrition, fitness,
health fairs,
personal
finance
education,
and
preventive
healthcare
activities,
among
others.
The
Corporation
contributes
a
substantial
portion
towards
the costs of all these benefits.
Initiatives for
the safety and
security of employees
have always been
an important priority.
In 2021, in
response to the
COVID-19
pandemic,
over
60%
of
the
Corporation’s
employees
were
able
to
work
remotely.
Additional
activities
implemented
by
the
Corporation to support employees included:
●
COVID-19 monitoring, and contact tracing processes.
●
Free testing for all employees.
●
Paid leave for employees affected by the virus and special leave of
absence without pay for unique needs.
●
Enhanced cleaning activities, installed barriers (plexiglass or similar materials)
to comply with social distance guidelines and
protect customers and employees, provided
face masks, hand sanitizers and cleaning materials, and implemented the taking
of
the temperature of all employees and customers who enter the Corporation’s
facilities.
●
Training activities related to COVID-19, safety
measures, stress management,
and remote work.
●
Implemented a COVID-19 vaccination mandate to protect our workforce.
●
Offered multiple onsite vaccination clinics, including vaccination
booster clinics.
11
WEBSITE ACCESS TO REPORT
The Corporation
makes available
annual reports
on Form
10-K, quarterly
reports on Form
10-Q, and
current reports
on Form
8-K,
and amendments
to those
reports, and
proxy statements
on Schedule
14A, filed
or furnished
pursuant to
section 13(a),
14(a) or
15(d)
of the Exchange Act,
free of charge on
or through its internet
website at www.1firstbank.com
(under “Investor Relations”),
as soon as
reasonably practicable
after the
Corporation
electronically files
such material
with, or
furnishes it
to, the
SEC. The
SEC maintains
a
website that
contains
reports, proxy
and information
statements, and
other information
regarding issuers
that file
electronically
with
the SEC at www.sec.gov.
The Corporation
also makes
available the
Corporation’s
corporate governance
guidelines and
principles, the
charters of
the audit,
asset/liability,
compensation
and
benefits,
credit,
risk,
trust,
corporate
governance
and
nominating
committees
and
the
codes
of
conduct
and
independence
principles
mentioned
below,
free
of
charge
on
or
through
its
internet
website
at
www.1firstbank.com
(under “Investor Relations”):
•
Code of Ethics for CEO and Senior Financial Officers
•
Code of Ethics applicable to all employees
•
Corporate Governance Guidelines and Principles
•
Independence Principles for Directors
The corporate governance
guidelines and principles
and the aforementioned
charters and codes may
also be obtained free
of charge
by
sending
a written
request
to Mrs. Sara
Alvarez
Cabrero, Executive
Vice
President,
General
Counsel
and
Secretary of
the
Board,
PO Box 9146, San Juan, Puerto Rico 00908.
Website
addresses
referenced
in
this
Annual
Report
on
Form
10-K
are
provided
for
convenience
only,
and
the
content
on
the
referenced websites does not constitute a part of this Annual Report on
Form 10-K.
12
MARKET AREA AND COMPETITION
Puerto
Rico,
where
the
banking
market
is
highly
competitive,
is
the
main
geographic
service
area
of
the
Corporation.
As
of
December
31,
2021,
the
Corporation
also
had
a
presence
in
the
state
of
Florida
and
in
the
USVI
and
BVI.
Puerto
Rico
banks
are
subject to the same federal laws, regulations and supervision that apply
to similar institutions in the United States mainland.
Competitors include
other banks,
insurance companies,
mortgage banking
companies, small
loan companies,
automobile financing
companies,
leasing companies,
brokerage firms
with retail
operations,
credit unions
and certain
retailers that
operate in
Puerto Rico,
the Virgin
Islands and
the state
of Florida,
as well
as Fintechs
and
emerging
competition
from digital
platforms.
The Corporation’s
businesses
compete
with
these
other
firms
with
respect
to
the
range
of
products
and
services
offered
and
the
types
of
clients,
customers and industries served.
The
Corporation’s
ability
to
compete
effectively
depends
on
the
relative
performance
of
its
products,
the
degree
to
which
the
features
of
its
products
appeal
to
customers,
and
the
extent
to
which
the
Corporation
meets
clients’
needs
and
expectations.
The
Corporation’s ability to compete also depends
on its ability to attract and retain professional and other personnel, and on its reputation.
The
Corporation
encounters
intense
competition
in attracting
and
retaining
deposits
and
in
its consumer
and
commercial
lending
activities. The
Corporation
competes for
loans with
other financial
institutions, some
of which
are larger
and have
greater resources
available than
those of
the Corporation.
Management believes
that the
Corporation has
been able
to compete
effectively for
deposits
and loans by
offering a variety
of account products
and loans with competitive
features, by pricing
its products at competitive
interest
rates,
by
offering
convenient
branch
locations,
and
by
emphasizing
the
quality
of
its service.
The
Corporation’s
ability
to
originate
loans depends
primarily on
the rates
and fees
charged and
the service
it provides
to its
borrowers in
making prompt
credit decisions.
There can
be no
assurance that
in the
future the
Corporation will
be able
to continue
to increase its
deposit base
or originate
loans in
the manner or on the terms on which it has done so in the past.
SUPERVISION AND REGULATION
The
Corporation
and
FirstBank,
its
bank
subsidiary,
are
subject
to
comprehensive
federal
and
Puerto
Rican
supervision
and
regulation.
These
supervisory
and
regulatory
requirements
apply
to
all
aspects
of
the
Corporation’s
and
the
Bank’s
activities,
including commercial
and consumer
lending, deposit
taking, management,
governance and
other activities.
As part
of this
regulatory
framework, the
Corporation and
the Bank
are subject
to extensive
consumer financial
regulatory legal
and supervisory
requirements.
Further,
U.S.
financial
supervision
and
regulation
is
dynamic
in
nature,
and
supervisory
and
regulatory
requirements
are
subject
to
change
as
new
legislative
and
regulatory
actions
are
taken.
Future
legislation
may
increase
the
regulation
and
oversight
of
the
Corporation and the
Bank. Any change in
applicable laws or regulations,
however, may
have a material adverse
effect on the business
of commercial banks and bank holding companies, including the Bank and
the Corporation.
Bank Holding Company Activities and Other Limitations
The
Corporation
is
registered
under,
and
subject
to,
supervision
and
regulation
by
the
Federal
Reserve
Board
under
the
Bank
Holding Company
Act of
1956, as
amended (the
“Bank Holding
Company Act”).
The Corporation
is subject
to ongoing
regulation,
supervision, and examination by the Federal Reserve Board, and
is required to file with the Federal Reserve Board periodic and annual
reports and other information concerning its own business operations
and those of its subsidiaries.
The Bank Holding
Company Act also permits
a bank holding company
to elect to become
a financial holding
company and engage
in a
broad range
of activities
that are
financial in
nature. The
Corporation elected
to be
a financial
holding company
under the
Bank
Holding
Company
Act.
Financial
holding
companies may
engage,
directly
or indirectly,
in any
activity
that is
determined
to be
(i)
financial
in
nature,
(ii)
incidental
to
such
financial
activity,
or
(iii)
complementary
to
a
financial
activity
and
does
not
pose
a
substantial risk
to the
safety and
soundness of
depository institutions
or the
financial system
generally.
The Bank
Holding Company
Act
specifically
provides
that
the
following
activities
have
been
determined
to
be
“financial
in
nature”:
(i)
lending,
trust
and
other
banking
activities;
(ii)
insurance
activities;
(iii)
financial
or
economic
advice
or
services;
(iv)
pooled
investments;
(v)
securities
underwriting
and
dealing; (vi)
domestic
activities permitted
for
an existing
bank holding
company;
(vii)
foreign
activities permitted
for an existing bank holding company; and (viii) merchant banking
activities.
A
financial
holding
company
that
ceases
to
meet
certain
standards
is
subject
to
a
variety
of
restrictions,
depending
on
the
circumstances,
including
precluding
the
undertaking
of
new
financial
activities
or
the
acquisition
of
shares
or
control
of
other
companies.
Until
compliance
is
restored,
the
Federal
Reserve
Board
has
broad
discretion
to
impose
appropriate
limitations
on
the
financial
holding
company’s
activities.
If
compliance
is
not
restored
within
180
days,
the
Federal
Reserve
Board
may
ultimately
require the
financial holding
company to
divest its
depository institutions
or,
in the
alternative, to
discontinue or
divest any
activities
that are not permitted
to non-financial holding companies.
The Corporation and FirstBank
must be well-capitalized
and well-managed
13
for
regulatory
purposes,
and
FirstBank
must
earn
“satisfactory”
or
better
ratings
on
its
periodic
Community
Reinvestment
Act
(“CRA”) examinations for the Corporation to preserve its financial
holding company status.
Under
federal
law
and
Federal
Reserve
Board
policy,
a
bank
holding
company
such
as
the
Corporation
is
expected
to
act
as
a
source of financial
and managerial strength
to its banking
subsidiaries and
to commit required
levels of support
to them. This
support
may be required
at times when,
absent such policy,
the bank holding
company might not
otherwise provide
such support. In
the event
of
a
bank
holding
company’s
bankruptcy,
any
commitment
by
the
bank
holding
company
to
a
federal
bank
regulatory
agency
to
maintain capital of a subsidiary bank will be assumed by the bankruptcy
trustee and be entitled to a priority of payment.
to deposits
and to
certain other
indebtedness of
such subsidiary
bank. As
of December
31, 2021,
and the
date hereof,
FirstBank was
and is the only depository
institution subsidiary of the Corporation.
Federal law directs the Federal Reserve
Board to adopt regulations
implementing the statutory source-of-strength requirements; how
ever, such regulations have not yet been proposed.
Regulatory Capital Requirements
The federal
banking agencies
have implemented
rules for
U.S. banks
that establish
minimum
regulatory
capital requirements,
the
components
of
regulatory
capital,
and
the
risk-based
capital
treatment
of
bank
assets
and
off-balance
sheet
exposures.
These
rules
currently
apply
to
the
Corporation
and
FirstBank,
and
generally
are
intended
to
align
U.S.
regulatory
capital
requirements
with
international regulatory capital standards
adopted by the Basel Committee on Banking
Supervision (“Basel Committee”), in particular,
the most recent international capital accord adopted in
2010 (and revised in 2011) known
as “Basel III.”
The current rules increase the
quantity
and quality
of capital
required
by,
among other
things, establishing
a minimum
common
equity capital
requirement
and an
additional common
equity Tier
1 capital
conservation buffer.
In addition,
the current
rules revise
and harmonize
the bank
regulators’
rules for
calculating risk-weighted
assets to
enhance risk
sensitivity and
address weaknesses
that have
been identified,
by applying
a
variation
of the
Basel III
“Standardized
Approach” for
the risk-weighting
of bank
assets and
off-balance
sheet exposures
to all
U.S.
banking organizations other than large
internationally active banks.
International
regulatory developments
also can
affect
the regulation
and
supervision
of U.S.
banking
organizations,
including
the
Corporation
and FirstBank.
Both the
Basel Committee
and the
Financial Stability
Board (established
in April
2009 by
the Group
of
Twenty
Finance
Ministers
and
Central
Bank
Governors)
have
agreed
to
take
action
to
strengthen
regulation
and
supervision
of
the
financial
system
with
greater
international
consistency,
cooperation,
and
transparency,
including
the
adoption
of
Basel
III
and
a
commitment to raise capital standards and liquidity buffers
within the banking system under Basel III. In addition, 12 U.S.C. 5371
(the
“Collins
Amendment”),
among
other
things,
eliminates
certain
trust-preferred
securities
(“TRuPs”)
from
Tier
1
capital.
Preferred
securities
issued
under
the
U.S.
Treasury’s
Troubled
Asset
Relief
Program
(“TARP”)
are
exempt
from
this
change.
Bank
holding
companies,
such
as
the
Corporation,
were
required
to
fully
phase
out
these
instruments
from
Tier
1
capital
by
January
1,
2016;
however, these instruments
may remain in Tier
2 capital until the instruments
are redeemed or mature.
As of December 31, 2021,
the
Corporation
had $178.3
million in
TRuPs that
were subject
to a
full phase-out
from Tier
1 capital
under the
final regulatory
capital
rules discussed above.
Consistent
with
Basel
Committee
actions
noted
above,
the
Federal
Reserve
Board
has
adopted
risk-based
and
leverage
capital
adequacy guidelines
pursuant to which
it assesses the
adequacy of
capital in examining
and supervising a
bank holding
company and
in
analyzing
applications
to
it
under
the
Bank
Holding
Company
Act.
The
Corporation
and
FirstBank
became
subject
to
the
U.S.
Basel III
capital rules
beginning on
January 1,
2015, and
compute risk-weighted
assets using
the Standardized
Approach required
by
these 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.
Under
the fully
phased-in Basel
III
rules, in
order to
be considered
adequately
capitalized and
not subject
to the
above-described
limitations,
the Corporation
is required
to maintain:
(i) a
minimum
common equity
Tier
1 Capital
(“CET1”)
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 Tie
r
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.
The
Basel
III
rules
have
increased
our
regulatory
capital
requirements
and
require
us
to
hold
more
capital
against
certain
of
our
assets and off
-balance sheet exposures.
The Corporation’s
CET1 capital ratio,
Tier 1
capital ratio, total
capital ratio, and
the leverage
ratio under the Basel III rules, as of December 31, 2021, were 17.
80%, 17.80%, 20.50%, and 10.14%, respectively.
14
Further,
as part
of its
response
to the
impact
of COVID-19,
on March
31, 2020,
federal banking
agencies
issued an
interim final
rule that
provided the
option to
temporarily
delay the
effects of
CECL on
regulatory
capital for
two years,
followed by
a three-year
transition
period.
The
interim
final
rule
provides
that,
at
the
election
of
a
qualified
banking
organization,
the
initial
impact
of
the
adoption of CECL on retained
earnings plus 25% of the change
in the ACL (excluding PCD loans)
from January 1, 2020 to
December
31, 2021 will be delayed
for two years and phased-in
at 25% per year beginning on
January 1, 2022 over a three
-year period, resulting
in a total transition period of five years. The Corporation
and the Bank elected to phase in the full effect of CECL on
regulatory capital
over the five-year transition period.
The Corporation
and the
Bank compute
risk-weighted assets
using the
Standardized Approach
required by
the Basel
III rules.
The
Standardized Approach
for risk-weightings
has expanded
the risk-weighting
categories from
the four
major risk-weighting
categories
under the previous regulatory
capital rules (0%, 20%,
50%, and 100%) to
a much larger and
more risk-sensitive number of
categories,
depending on the
nature of the assets.
In a number
of cases, the Standardized
Approach resulted in higher
risk weights for a
variety of
asset
categories.
Specific
changes
to
the
risk-weightings
of
assets
included,
among
other
things:
(i)
applying
a
150%
risk
weight
instead of a 100% risk
weight for high volatility commercial
real estate acquisition, development
and construction loans, (ii) assigning
a 150%
risk weight
to exposures
that are
90 days
past due
(other than
qualifying residential
mortgage exposures,
which remain
at an
assigned
risk-weighting
of 100%),
(iii) establishing
a 20%
credit conversion
factor for
the unused
portion of
a commitment
with an
original maturity
of one
year or
less that
is not unconditionally
cancellable, in
contrast to
the 0%
risk-weighting under
the prior
rules
and
(iv) requiring
capital to
be maintained
against on-balance-sheet
and
off-balance-sheet
exposures
that result
from certain
cleared
transactions, guarantees and credit derivatives, and collateralized transactions
(such as repurchase agreement transactions).
15
Reserve and FDIC guidelines:
Banking Subsidiary
First BanCorp.
FirstBank
Well-
Capitalized
Minimum
As of December 31, 2021
Total capital (Total
capital to
20.50%
20.23%
10.00%
CET1 Capital (CET1
17.80%
18.12%
6.50%
Tier 1 capital ratio (Tier
1 capital
17.80%
19.03%
8.00%
Leverage ratio
(1)
10.14%
10.85%
5.00%
_______________
(1)
Consumer Financial Protection Bureau
The CFPB has
primary examination
and enforcement authority
over FirstBank and
other banks with
over $10 billion
in assets with
respect to consumer financial products and services.
CFPB regulations
issued over
the past
few years
implement 2010
amendments
to the
Equal Credit
Opportunity
Act, the
Truth
in
Lending
Act
(“TILA”),
and
the
Real
Estate
Settlement
Procedures
Act
(“RESPA”).
In
general,
among
other
changes,
these
regulations
collectively:
(i)
require
lenders
to
make
a
reasonable,
good
faith
determination
of
a
prospective
residential
mortgage
borrower’s ability
to repay
based on
specific underwriting
criteria and
set standards
related to
the determination
by mortgage
lenders
of
a
consumer’s
ability
to
repay
the
mortgage;
(ii)
require
stricter
underwriting
of
“qualified
mortgages,”
discussed
below,
that
presumptively
satisfy
the
ability
to
pay
requirement
(thereby
providing
the
lender
a
safe
harbor
from
non-compliance
claims);
(iii)
specify new limitations on
loan originator compensation and establish
criteria for the qualifications
of, and registration or licensing
of,
loan originators;
(iv) expand
the coverage
of the
Home Ownership
and Equity
Protections Act
of 1994
to high-cost
mortgage loans;
(v) expand mandated
loan escrow accounts
for certain loans;
(vi) establish appraisal
requirements under
the Equal Credit Opportunity
Act and
require lenders
to provide
a free
copy of
all appraisals to
applicants for
first lien
loans; (vii)
establish appraisal
standards for
most
“higher-risk
mortgages”
under
TILA;
(viii)
combine
in
a
single
form
required
loan
disclosures
under
TILA
and
RESPA;
(ix)
define
a
“qualified
mortgage”
;
and
(x)
afford
safe
harbor
legal
protections
for
lenders
making
qualified
loans
that
are
not
“higher
priced.”
The
CFPB
also
has
issued
regulations
setting
forth
new
mortgage
servicing
rules
that
apply
to
the
Bank.
The
regulations
affect
notices
given
to
consumers
as
to
delinquency,
foreclosure
alternatives
and
loss
mitigation,
modification
applications,
interest
rate
adjustments and options for avoiding “force-placed” insurance.
Further,
the
CFPB
has
adopted
rules
and
forms
that
combine
certain
disclosures
that
consumers
receive
in
connection
with
applying
for
and
closing
on
a
mortgage
loan
under
the
TILA
and
the
RESPA.
Consistent
with
this
requirement,
the
CFPB
amended
Regulation
X (RESPA)
and
Regulation
Z (TILA)
to
establish
disclosure
requirements
and
forms
in
Regulation
Z for
most
closed
-end
consumer
credit
transactions
secured
by
real
property.
In
addition
to
combining
the
existing
disclosure
requirements
and
implementing
new
requirements
imposed
by
federal
law,
the
rule
provides
extensive
guidance
regarding
compliance
with
those
requirements.
Stress-Testing
and Capital Planning Requirements
Federal
regulations
currently
do
not
impose
formal
stress-testing
requirements
on
banking
organizations
with
total
assets
of
less
than $100 billion,
such as the
Corporation and
FirstBank.
The federal banking
agencies have indicated
through interagency guidance
that the capital
planning and risk
management practices
of institutions with total
of assets of
less than $100
billion will continue
to be
reviewed
through the
regular supervisory
process.
Although
the Corporation
will continue
to monitor
its capital
consistent with
the
safety
and
soundness
expectations
of
the
federal regulators,
the
Corporation
will no
longer conduct
company-run
stress testing
as a
result of
the legislative
and regulatory
amendments.
However,
the Corporation
continues to
use customized
stress testing
to support
the business and as part of its capital planning process.
16
The Volcker
Rule
Section 13 of
the Bank Holding
Company Act (commonly
known as the
Volcker
Rule) , subject
to important exceptions,
generally
prohibits a banking
entity such as the Corporation
or the Bank from
acquiring or retaining any
ownership in, or acting
as sponsor to, a
hedge
fund
or
private
equity
fund
(“covered
fund”).
The
Volcker
Rule
also
prohibits
these
entities
from
engaging,
for
their
own
account, in short-term proprietary trading of certain securities, derivatives,
commodity futures and options on these instruments.
Final
regulations
implementing
the
Volcker
Rule
have
been
adopted
by
the
financial
regulatory
agencies
and
are
now
generally
effective.
The Corporation and
the Bank are not engaged
in “proprietary trading” as
defined in the Volcker
Rule. In addition, the
Corporation
undertook
a
review
of
its
investments
to
determine
if
any
meet
the
Volcker
Rule’s
definition
of
“covered
funds”.
Based
on
that
review, the Corporation
concluded that its investments are not considered covered funds under the Volcker
Rule.
Community Reinvestment Act and Home Mortgage Disclosure Act Regulations
The CRA encourages
banks to help
meet the credit
needs of the
local communities
in which a
bank offers
their services, including
low- and moderate-income individuals, consistent with the safe and
sound operation of the bank.
The
CRA
requires
the
federal
supervisory
agencies,
as
part
of
the
general
examination
of
supervised
banks,
to
assess
a
bank’s
record of meeting
the credit needs of
its community,
assign a performance rating,
and take such record
and rating into account
in their
evaluation of certain applications
by such bank. The
CRA also requires all institutions
to make public disclosure
of their CRA ratings.
FirstBank received a “satisfactory” CRA rating in its most recent examination
by the FDIC.
Failure
to
adequately
serve
the
communities
could
result
in
the
denial
by
the
regulators
of
proposals
to
merge,
consolidate
or
acquire new assets, as well as expand or relocate branches.
The federal bank
regulatory agencies have
amended their respective
CRA regulations primarily
to conform to
changes made by
the
CFPB
to
Regulation
C, which
implements
the Home
Mortgage
Disclosure
Act.
The Home
Mortgage
Disclosure Act
requires
many
financial institutions to maintain, report, and publicly disclose loan-level
information about mortgages.
USA PATRIOT
Act and Other Anti-Money Laundering Requirements
As a regulated
depository institution,
FirstBank is subject
to the
Bank Secrecy
Act, which imposes
a variety of
reporting and
other
requirements,
including
the requirement
to file
suspicious
activity and
currency
transaction
reports that
are designed
to assist
in the
detection and prevention
of money laundering,
terrorist financing and
other criminal activities.
In addition, under
Title III
of the USA
PATRIOT
Act of 2001, also
known as the International
Money Laundering Abatement
and Anti-Terrorism
Financing Act of 2001,
all
financial
institutions
are
required
to,
among
other
things,
identify
their
customers,
adopt
formal
and
comprehensive
anti-money
laundering programs,
scrutinize or
prohibit altogether
certain transactions
of special
concern, and
be prepared
to respond
to inquiries
from U.S. law enforcement agencies concerning their customers and
their transactions.
On
January
1,
2021,
major
legislative
amendments
to
U.S.
anti-money
laundering
requirements
became
effective
through
the
enactment
of
Division
F
of
the
National
Defense
Authorization
Act
for
fiscal
year
2021,
otherwise
known
as
the
Anti-Money
Laundering Act
of 2020
(“AML Act”).
The new
legislation includes
a variety
of provisions
that are
designed to
modernize the
anti-
money laundering regulatory regime
and remediate gaps in the U.S.’s
approach to anti-money laundering
and countering the financing
of terrorism, including the creation
of a national database of absence
corporate beneficial ownership along
with significantly enhanced
reporting
requirements,
increased
penalties
for
Bank
Secrecy
Act
violations,
clarification
of
Suspicious
Activity
Report
filing
and
sharing
requirements,
and
provisions
addressing
the
adverse
consequences
of
“de-risking,”
namely,
the
practice
of
financial
institutions’ termination or
limitation of business relationships
with clients or classes
of clients in order
to manage the risks associated
with such clients.
Regulations implementing the Bank Secrecy Act and the
USA PATRIOT
Act are published and primarily enforced
by the Financial
Crimes Enforcement Network (“FinCEN”), a bureau
of the U.S. Treasury.
Failure of a financial institution, such as the Corporation or
the
Bank,
to
comply
with
the
requirements
of
the
Bank
Secrecy
Act
or
the
USA
PATRIOT
Act
could
have
serious
legal
and
reputational
consequences
for
the
institution,
including
the
possibility
of
regulatory
enforcement
or
other
legal
actions,
such
as
significant
civil
monetary
penalties.
The
Corporation
is
also
required
to
comply
with
federal
economic
and
trade
sanctions
requirements enforced by the Office of Foreign Assets Control
(“OFAC”), a bureau
of the U.S. Treasury.
17
The Corporation believes
it has adopted appropriate
policies, procedures and controls
to address compliance with
the Bank Secrecy
Act, USA
PATRIOT
Act and
economic/trade
sanctions requirements,
and to
implement banking
agency,
FinCEN, OFAC
and
other
U.S. Treasury
regulations.
Further,
FinCEN is
expected to
propose regulations
in the
near future
that implement
the requirements
of
the
AML
Act,
and
the
Corporation
will
adjust
its
policies,
procedures
and
controls
accordingly
upon
the
adoption
of
any
final
regulations.
State Chartered Non-Member Bank and Banking Laws and Regulations
in General
FirstBank is
subject to
regulation and
examination by
the OCIF,
the CFPB
and the
FDIC, and
is subject
to comprehensive
federal
and
state
(Commonwealth
of
Puerto
Rico)
regulations
that
regulate,
among
other
things,
the
scope
of
their
businesses,
their
investments, their reserves
against deposits, the
timing and availability
of deposited funds,
and the nature
and amount of
collateral for
certain loans.
The
OCIF,
the
CFPB
and
the
FDIC
periodically
examine
FirstBank
to
test
the
Bank’s
conformance
to
safe
and
sound
banking
practices
and
compliance
with
various
statutory
and
regulatory
requirements.
This
regulation
and
supervision
establish
a
comprehensive framework and oversight
of activities in which the Bank
can engage.
The regulation and supervision by the
FDIC also
are intended
for the
protection of
the FDIC’s
insurance fund
and depositors.
The regulatory
structure gives
the regulatory
authorities
discretion in
connection with their
supervisory and
enforcement activities and
examination policies, including
policies with respect
to
the classification
of assets
and
the establishment
of adequate
loan
loss reserves
for
regulatory
purposes.
This enforcement
authority
includes,
among
other
things,
the
ability
to
assess
civil
monetary
penalties,
issue
cease-and-desist
or
removal
orders,
and
initiate
injunctive
actions
against
banking
organizations
and
institution-affiliated
parties.
In
general,
these
enforcement
actions
may
be
initiated for
violations of
laws and
regulations and
for engaging
in unsafe
or unsound
practices. In
addition, certain
bank actions
are
required
by
statute
and
implementing
regulations.
Other
actions
or
failure
to
act
may
provide
the
basis
for
enforcement
action,
including the filing of misleading or untimely reports with regulatory
authorities.
Dividend Restrictions
and
Stock
Repurchases
at
Bank
Holding
Companies”
(the “Supervisory
Letter”)
discusses the
ability
of bank
holding
companies
to
declare
dividends
and
to
repurchase
equity
securities.
The
Supervisory
Letter
is
generally
consistent
with
prior
Federal
Reserve
supervisory policies and guidance, although it places greater emphasis on
discussions with the regulators prior to dividend declarations
and
redemption
or repurchase
decisions
even
when not
explicitly required
by the
regulations.
The
Federal
Reserve
Board
provides
that the principles discussed in the Supervisory Letter are applicable to all bank
holding companies.
generally
not
maintain
a
given
rate
of
cash
dividends
unless
its
net
income
available
to
common
shareholders
for
the
past
four
quarters, net of dividends
previously paid during that period,
has been sufficient
to fully fund the dividends
and the prospective rate of
earnings
retention
appears
to
be
consistent
with
the
organization’s
capital
needs,
asset
quality,
and
overall
current
and
prospective
financial
condition. The
Corporation
is subject
to certain
restrictions generally
imposed on
Puerto
Rico corporations
with respect
to
the declaration
and payment
of dividends
(
i.e
., that
dividends may
be paid
out only
from the
Corporation’s
capital surplus
or,
in the
absence
of such
excess, from
the Corporation’s
net earnings
for
such fiscal
year
and/or the
preceding
fiscal year).
Furthermore,
the
Federal
Reserve Board’s
regulatory capital
rule (Regulation
Q) limits
the amount
of capital
a bank
holding
company may
distribute
under
certain
circumstances.
Regulation
Q
helps
ensure
banks
maintain
strong
capital
positions
that
will
enable
them
to
continue
lending
to
creditworthy
households
and
businesses
even
after
unforeseen
losses
and
during
severe
economic
downturn.
A
banking
organization must
maintain a capital
conservation buffer
of CET1 capital
in an amount
greater than 2.5%
of total risk
weighted assets
to avoid being subject to limitations on capital distributions.
The
principal
source
of
funds
for
the
Corporation’s
parent
holding
company
is
dividends
declared
and
paid
by
its
subsidiary,
FirstBank. The ability
of FirstBank to declare
and pay dividends on
its capital stock is
regulated by the Puerto
Rico Banking Law,
the
Federal
Deposit
Insurance
Act
(the
“FDIA”),
and
FDIC
regulations.
In
general
terms,
the
Puerto
Rico
Banking
Law
provides
that
when
the
expenditures
of
a
bank
are
greater
than
receipts,
the
excess
of
expenditures
over
receipts
shall
be
charged
against
undistributed profits
of the bank
and the
balance, if
any,
shall be charged
against the required
reserve fund
of the bank.
If the reserve
fund
is not
sufficient
to cover
such
balance
in whole
or
in part,
the outstanding
amount must
be
charged
against the
bank’s
capital
account. The Puerto Rico Banking
Law provides that, until said capital
has been restored to its original
amount and the reserve fund to
20%
of
the
original
capital,
the
bank
may
not
declare
any
dividends.
In
general,
the
FDIA
and
the
FDIC
regulations
restrict
the
payment of
dividends when
a bank
is undercapitalized
(as discussed
in
Prompt
Corrective
Action
pay insurance assessments, or when there are safety and soundness concerns
regarding such bank.
Refer
to
Part
II,
Item
5,
“Market
for
Registrant’s
Common
Equity,
Related
Stockholder
Matters
and
Issuer
Purchases
of
Equity
Securities” of this Annual Report on Form 10-K
for further information on the Corporation’s
distribution of dividends and repurchases
of equity securities.
18
Financial Privacy and Cybersecurity
The
federal
financial
institution
regulations
limit
the
ability
of
banks
and
other
financial
institutions
to
disclose
non-public
information about
consumers to non-affiliated
third parties. These
limitations require
disclosure of privacy
policies to consumers
and,
in
some
circumstances,
allow
consumers
to
prevent
disclosure
of
certain
personal
information
to
a
non-affiliated
third
party.
These
regulations affect how consumer information is used
in diversified financial companies and conveyed to outside vendors.
The
federal
banking
regulators
regularly
issue
guidance
regarding
cybersecurity
intended
to
enhance
cyber
risk
management
standards among financial
institutions. A financial
institution is expected
to establish multiple
lines of defense
and to ensure
their risk
management processes
address the
risk posed
by potential
threats to
the institution.
A financial
institution’s
management is
expected
to
maintain
sufficient
processes
to
effectively
respond
and
recover
the
institution’s
operations
after
a
cyber-attack.
A
financial
institution
is
also
expected
to
develop
appropriate
processes
to
enable
recovery
of
data
and
business
operations
if
a
critical
service
provider
of
the
institution
falls
victim
to
this
type
of
cyber-attack.
The
Corporation’s
Information
Security
Program
reflects
these
requirements.
Limitations on Transactions with Affiliates
and Insiders
Certain transactions between FDIC-insured
banks financial institutions such
as FirstBank and its affiliates
are governed by Sections
23A and
23B of the
Federal Reserve Act
and by
Federal Reserve
Regulation W.
An affiliate
of a bank
is, in general,
any corporation
or entity that controls, is controlled by,
or is under common control with the bank.
In a holding company context, the parent bank holding
company and any companies that are controlled by such
parent bank holding
company are affiliates
of the bank.
Generally,
Sections 23A and
23B of the
Federal Reserve Act
(i) limit the
extent to which
the bank
or
its subsidiaries
may
engage
in
“covered
transactions”
(defined
below)
with
any
one
affiliate
to
an
amount
equal
to 10%
of
such
bank’s
capital stock
and surplus,
and contain
an aggregate
limit on
all such
transactions with
all affiliates
to an
amount equal
to 20%
of such
bank’s
capital stock
and surplus
and (ii) require
that all “covered
transactions” be
on terms
that are substantially
the same, or
at least as favorable to the bank or affiliate,
as those provided to a non-affiliate. The term “covered
transaction” includes the making of
loans,
purchase
of
assets,
issuance
of
a
guarantee,
credit
derivatives,
securities
lending
and
other
similar
transactions
entailing
the
provision of financial
support by the bank
to an affiliate.
In addition, loans or
other extensions of credit
by the bank to
the affiliate are
required to be collateralized in accordance with the requirements set forth in
Section 23A of the Federal Reserve Act.
In
addition,
Sections
22(h)
and
(g)
of
the
Federal
Reserve
Act,
implemented
through
Regulation
O,
place
restrictions
on
commercial bank loans to executive
officers, directors, and principal stockholders
of the bank and its affiliates.
Under Section 22(h) of
the Federal Reserve
Act, bank loans to
a director, an
executive officer,
a greater than 10%
stockholder of the
bank, and certain related
interests of these persons,
may not exceed, together
with all other outstanding
loans to such persons
and affiliated interests,
the bank’s
limit on loans
to one borrower,
which is generally
equal to 15%
of the bank’s
unimpaired capital and
surplus in the
case of loans
that
are not fully secured,
and an additional 10% of
the bank's unimpaired capital
and unimpaired surplus in
the case of loans that
are fully
secured by
readily marketable
collateral having
a market
value at
least equal
to the
amount of
the loan.
Section 22(h)
of the
Federal
Reserve Act also requires
that loans to directors,
executive officers, and
principal stockholders be made
on terms that are substantially
the same
as offered
in comparable
transactions to
other persons
and also
requires prior
board approval
for certain
loans. In
addition,
the
aggregate
amount
of
extensions
of
credit
by
a
bank
to
insiders
cannot
exceed
the
bank’s
unimpaired
capital
and
surplus.
Furthermore, Section 22(g) of the Federal Reserve Act places additional
restrictions on loans to executive officers.
Executive Compensation
The federal banking agencies have
adopted interagency guidance governing
incentive-based compensation programs,
which applies
to
all
banking
organizations
regardless
of
asset
size.
This
guidance
uses
a
principles-based
approach
to
ensure
that
incentive-based
compensation arrangements
appropriately tie
rewards to
longer-term performance
and do
not undermine
the safety
and soundness
of
banking organizations
or create
undue risks
to the
financial system.
The interagency
guidance is
based on
three major
principles: (i)
balanced risk-taking
incentives; (ii) compatibility
with effective
controls and
risk management; and
(iii) strong
corporate governance.
The guidance further provides
that, where appropriate, the
banking agencies will take supervisory
or enforcement action to ensure
that
material deficiencies that pose a threat to the safety and soundness of the
organization are promptly addressed.
In
May
2016,
the
federal
banking
agencies,
along
with
other
federal
regulatory
agencies,
proposed
regulations
(first
proposed
in
2011)
governing
incentive-based
compensation
practices
at
covered
banking
institutions,
which
would
include,
among
others,
all
banking organizations
with assets of
$1 billion
or greater.
These proposed
rules are
intended to
better align
the financial rewards
for
covered
employees
with
an
institution’s
long-term
safety
and
soundness.
Portions
of
these
proposed
rules
would
apply
to
the
Corporation
and
FirstBank.
Those
applicable
provisions
would
generally
(i)
prohibit
types
and
features
of
incentive-based
compensation arrangements that encourage
inappropriate risk because they are “excessive”
or “could lead to material financial
loss” at
the
banking
institution;
(ii)
require
incentive-based
compensation
arrangements
to
adhere
to
three
basic
principles:
(1)
a
balance
19
between risk and reward;
(2) effective risk
management and controls;
and (3) effective
governance; and (iii) require
appropriate board
of directors
(or committee)
oversight
and recordkeeping
and disclosures
to the
banking institution’s
primary regulatory
agency.
The
nature and substance of any final action to adopt these proposed rules, and the
timing of any such action, are not known at this time.
Prompt Corrective Action
The
Prompt
Corrective
Action
(“PCA”)
provisions
of
the
FDIA
require
the
federal
bank
regulatory
agencies
to
take
prompt
corrective action against any insured depository institution
(“institutions”) that are undercapitalized.
The FDIA establishes five capital
categories:
well-capitalized,
adequately
capitalized,
undercapitalized,
significantly
undercapitalized,
and
critically
undercapitalized.
Well-capitalized
institutions significantly exceed the required minimum level
for each relevant capital measure.
A
bank’s
capital
category,
as
determined
by
applying
the
prompt
corrective
action
provisions
of
the
law,
may
not
constitute
an
accurate
representation
of
the
overall
financial
condition
or
prospects
of
a
bank,
such
as
the
Bank,
and
should
be
considered
in
conjunction with other available information regarding the financial condition
and results of operations of the bank.
Deposit Insurance
The
increase
in deposit
insurance coverage
to up
to $250,000
per customer,
the FDIC’s
expanded
authority to
increase insurance
premiums,
as
well
as
the
increase
in
the
number
of
bank
failures
after
the
2008
financial
crisis,
resulted
in
an
increase
in
deposit
insurance assessments
for all
banks, including
FirstBank. The
FDIA further
requires that
the designated
reserve ratio
for the
DIF for
any year
not be
less than
1.35% of
estimated insured
deposits or
the comparable
percentage of
the new
deposit assessment
base.
In
addition, the FDIC must take the
necessary actions for the reserve ratio to
reach 1.35% of estimated insured deposits by September
30,
2020.
The FDIC managed to reach the goal early,
achieving a reserve ratio of 1.36% in September 2018. However,
in the third quarter
of 2020,
the FDIC announced
that the
reserve ratio
of the
DIF fell 9
basis points
between the
first and
second quarters
of 2020,
from
1.39%
to
1.30%.
The
decline
was
attributed
to
an
unprecedented
surge
in
deposits.
The
FDIC approved a
plan
that is
expected
to restore the
DIF to
at least
1.35% within
eight years,
as required
by the
FDIA. Under
the plan,
the FDIC
will maintain
the current
schedules of
assessment
rates
for
all banks; monitor
deposit
balance
trends,
potential
losses and
other
factors
that
affect
the
reserve
ratio; and
provide updates
to its
loss and
income projections
at least
twice a
year.
The FDIC
has also
adopted a
final rule
raising its
industry
target ratio
of reserves
to insured
deposits to
2%, 65
basis points
above the
statutory minimum,
but the
FDIC has
indicated
that it does not project that goal to be met for several years.
FDIC Insolvency Authority
Under Puerto Rico banking laws (discussed
below), the OCIF may appoint the
FDIC as conservator or receiver of
a failed or failing
FDIC-insured Puerto Rican bank,
such as the Bank, and
the FDIA authorizes the FDIC to
accept such an appointment.
In addition, the
FDIC
has
broad
authority
under
the
FDIA
to
appoint
itself
as
conservator
or
receiver
of
a
failed
or
failing
state
bank,
including
a
Puerto Rican
bank. If
the FDIC is
appointed conservator
or receiver
of a
bank upon
the bank’s
insolvency or
the occurrence
of other
events, the
FDIC may sell
or transfer some,
part or all
of a bank’s
assets and liabilities
to another bank,
or liquidate the
bank and pay
out insured depositors, as well as uninsured depositors
and other creditors to the extent of the closed bank’s
available assets. As part of
its insolvency
authority,
the FDIC has
the authority,
among other
things, to
take possession
of and
administer the
receivership estate,
pay out
estate claims,
and repudiate
or disaffirm
certain types
of contracts
to which
the bank
was a
party if
the FDIC
believes such
contract is burdensome and
its disaffirmance will aid
in the administration of
the receivership.
In resolving the estate of
a failed bank,
the
FDIC,
as
receiver,
will
first
satisfy
its
own
administrative
expenses.
The
claims
of
holders
of
U.S.
deposit
liabilities
also
have
priority over those of other general unsecured creditors.
Activities and Investments
The
activities
as
“principal”
of
FDIC-insured,
state-chartered
banks,
such
as
FirstBank,
are
generally
limited
to
those
that
are
permissible for national
banks. Similarly,
under regulations dealing
with equity investments, an
insured state-chartered bank generally
may not directly
or indirectly acquire
or retain any equity
investments of a
type, or in an
amount, that is not
permissible for a national
bank.
Federal Home Loan Bank System
FirstBank is
a member
of the
FHLB system.
The FHLB
system consists
of eleven
regional FHLBs
governed and
regulated by
the
Federal
Housing
Finance
Agency.
The
FHLBs
serve
as
reserve
or
credit
facilities
for
member
institutions
within
their
assigned
regions.
FirstBank is a member
of the FHLB of
New York
and, as such,
is required to
acquire and hold
shares of capital
stock in the
FHLB
of New York
in an amount calculated
in accordance with the
requirements set forth in
applicable laws and regulations.
FirstBank is in
compliance
with
the
stock
ownership
requirements
of
the
FHLB
of
New
York.
All
loans,
advances
and
other
extensions
of
credit
20
made
by the
FHLB to
FirstBank
are secured
by a
portion
of FirstBank’s
mortgage
loan portfolio,
certain other
investments and
the
capital stock of the FHLB held by FirstBank.
Ownership and Control
Because
of
FirstBank’s
status
as
an
FDIC-insured
bank,
as
defined
in
the
Bank
Holding
Company
Act,
the
Corporation,
as
the
owner of
FirstBank’s
common stock,
is subject to
certain restrictions and
disclosure obligations
under various
federal laws, includin
g
the
Bank
Holding
Company
Act
and
the
Change
in
Bank
Control
Act
(the
“CBCA”).
Regulations
adopted
pursuant
to
the
Bank
Holding Company Act and
the CBCA generally require prior
Federal Reserve Board or other
federal banking agency approval or
non-
objection
for an acquisition of control
of an “insured institution”
(as defined in the
Act) or holding company
thereof by any person
(or
persons acting in
concert). Control is deemed
to exist if, among
other things, a person
(or group of persons
acting in concert)
acquires
25% or more
of any class of
voting stock of
an insured institution
or holding company
thereof. Under the
CBCA, control is presumed
to exist
subject to
rebuttal if
a person
(or group
of persons
acting in
concert) acquires
10% or
more of
any class
of voting
stock and
either (i)
the corporation
has registered securities
under Section
12 of
the Exchange Act,
or (ii) no
person (or
group of persons
acting
in
concert)
will own,
control
or
hold
the
power
to
vote
a
greater
percentage
of that
class of
voting
securities
immediately
after
the
transaction. The
concept of acting
in concert is
very broad
and is subject
to certain rebuttable
presumptions, including,
among others,
that relatives,
business partners,
management officials,
affiliates and
others are
presumed to
be acting
in concert
with each
other and
their businesses. The regulations of the FDIC implementing the CBCA are generally
similar to those described above.
The Puerto
Rico Banking
Law requires
the approval
of the
OCIF for
changes in
control of
a Puerto
Rico bank.
See “Puerto
Rico
Banking Law” below for further detail.
Standards for Safety and Soundness
The
FDIA
requires
the
FDIC
and
the
other
federal
bank
regulatory
agencies
to
prescribe
standards
of
safety
and
soundness,
by
regulations or
guidelines, relating
generally to
operations and
management, asset
growth, asset quality,
earnings, stock
valuation, and
compensation.
The
implementing
regulations
and
guidelines
of
the
FDIC
and
the
other
federal
bank
regulatory
agencies
establish
general
standards
relating
to
internal
controls
and
information
systems,
internal
audit
systems,
loan
documentation,
credit
underwriting,
interest
rate
exposure,
asset
growth,
and
compensation,
fees
and
benefits.
In
general,
the
regulations
and
guidelines
require,
among
other
things,
appropriate
systems
and
practices
to
identify
and
manage
the
risks
and
exposures
specified
in
the
guidelines.
The
regulations
and
guidelines
prohibit
excessive
compensation
as
an
unsafe
and
unsound
practice
and
describe
compensation
as
excessive
when
the
amounts
paid
are
unreasonable
or
disproportionate
to
the
services
performed
by
an
executive
officer, employee,
director or principal shareholder.
Failure to comply with these standards can
result in administrative enforcement or
other adverse actions against the bank.
Brokered Deposits
FDIC regulations
adopted
under the
FDIA govern
the receipt
of brokered
deposits by
banks. Well
-capitalized
institutions are
not
subject
to
limitations
on
brokered
deposits,
while
adequately-capitalized
institutions
are
able
to
accept,
renew
or
rollover
brokered
deposits only
with a
waiver from
the FDIC
and subject
to certain
restrictions on
the interest
paid on
such deposits.
Undercapitalized
institutions
are
not
permitted
to
accept
brokered
deposits.
In
October
2020,
the
FDIC
adopted
revisions
to
its
brokered
deposit
regulations that
became effective
on April
1, 2021,
with full
compliance extended
for financial
institutions to
put in
place systems
to
implement
the
new
regulatory
regime
and
to
allow
the
FDIC
to
develop
internal
processes
and
systems
to
ensure
a
consistent
and
robust review process until January 1, 2022.
The Coronavirus Aid, Relief and Economic Security Act (the “ CARES Act of 2020”)
of
2020,
as
amended
by
the
Consolidated
Appropriations
Act,
2021.
The
CARES
Act
of
2020,
as
amended,
includes
numerous
provisions
applicable
to
financial
institutions,
including
(i)
permitting
banks
to
suspend
requirements
under
GAAP
for
loan
modifications to borrowers
affected by COVID-19,
provided that such loans
were not more than
30 days past due
as of December
31,
2019, that
would otherwise
result in
a loan’s
classification as
TDR or
evaluation for
impairment, until
the earlier
of 60
days after
the
termination
date of
the pandemic
emergency
or January
1, 2022
(as amended
and extended),
(ii) permitting
borrowers whose
loans
are
federally
backed
to
request
a
forbearance
for
up
to
180
days,
which
can
be
extended
for
up
to
an
additional
180
days
at
the
borrower’s
timely
request,
without
incurring
fees,
penalties
or
interest
beyond
those
the
borrower
would
have
incurred
had
the
borrower made all scheduled payments, and without exposing
the lender to adverse supervisory action, (iii) as discussed further
above,
permitting financial
institutions that
implement CECL
during the
2020 calendar
year the
option to
delay for
two years
an estimate
of
CECL's effect
on regulatory
capital, relative
to the
incurred loss
methodology's effect
on regulatory
capital, followed
by a
three-year
transition period, and (iv) creation
of the SBA PPP program under
which small businesses may obtain
loans guaranteed by the SBA
to
pay payroll
and group
health costs, salaries
and commissions,
mortgage and
rent payments, utilities,
and interest
and other
qualifying
expenses.
The
SBA
fully-guarantees
SBA
PPP
loans,
and
SBA
PPP
loans
may
be
forgiven
by
the
SBA
so
long
as, during
the
applicable
loan
forgiveness
covered
period, employee
and compensation
levels
of
the
business are
maintained
and
60%
of
the
loan
21
proceeds
are used
for payroll
expenses,
with the
remaining 40%
of the
loan proceeds
used for
other qualifying
expenses. SBA
PPP
loans carry an interest
rate of 1% and have
a two-year term (or five
years for loans originated
after June 5, 2020).
For loans originated
under the
SBA’s
PPP loan
program, interest
and principal
payment on
these loans
were originally
deferred for
six months
following
the
funding
date,
during
which
time
interest
would
continue
to
accrue.
On
October
7,
2020,
the
Paycheck
Protection
Program
Flexibility Act of 2020 (the “Flexibility
Act”) extended the deferral period for borrower
payments of principal, interest, and fees
on all
SBA PPP
loans
to
the
date
that
the
SBA remits
the
borrower’s
loan
forgiveness
amount to
the
lender
(or,
if the
borrower
does
not
apply for
loan forgiveness,
10 months
after the
end of
the borrower’s
loan forgiveness
covered period).
The extension
of the
deferral
period under the
Flexibility Act automatically
applied to all SBA
PPP
loans. The Corporation
has chosen to support
its customers and
the communities
it serves by
participating in
the SBA PPP
loan program
and loan modifications
in compliance
with the provisions
of
the CARES Act of 2020.
COVID-Related Regulatory Activities
19
pandemic.
These
actions
were
generally
designed
to
facilitate
the
ability
of
banks
to
provide
responsible
credit
and
liquidity
to
businesses and
individuals affected
by the COVID-19
pandemic, and mitigate
the distorting effects
under regulatory
capital and other
requirements
resulting
from
the
pandemic.
In
addition
to
the
CECL
regulatory
capital
relief
discussed
above,
the
banking
agencies
adopted regulations
that, among
other things:
neutralized the
regulatory
capital and
liquidity effects
of banks
participating in
certain
COVID-related
Federal
Reserve
liquidity
facilities;
deferred
appraisal
and
valuation
requirements
after
the
closing
of
certain
residential
and
commercial
real
estate
transactions;
provided
temporary
relief
for
banks
from
the
FDIC’s
audit
and
reporting
requirements
for banks
that experienced
large
cash inflows
resulting
from participation
in the
SBA’s
PPP and
other COVID-related
facilities, or
otherwise resulting
from the
effects of
government stimulus
efforts.
These regulatory
actions were
taken in
conjunction
with
federal
financial
regulatory
efforts
to
encourage
banks
and
other
depositories
to
provide
responsible
credit
and
other
financial
assistance to consumers and small businesses in response to the pandemic.
Puerto Rico Banking Law
As
a
commercial
bank
organized
under
the
laws
of
the
Commonwealth
of
Puerto
Rico,
FirstBank
is
subject
to
supervision,
examination and regulation by the
commissioner of OCIF (the “Commissioner”)
pursuant to the Puerto Rico
Banking Law of 1933, as
amended (the “Banking Law”).
The Banking
Law contains various
provisions relating to
FirstBank and its
affairs, including
its incorporation and
organization, the
rights and responsibilities of its
directors, officers and
stockholders and its corporate powers,
lending limitations, capital requirements,
and investment requirements. In addition,
the Commissioner is given extensive rule-making
power and administrative discretion under
the Banking Law.
The Banking Law requires
every bank to maintain
a legal reserve, which shall
not be less than
20% of its demand
liabilities, except
government deposits (federal,
state and municipal) that
are secured by actual
collateral. The reserve is required
to be composed of
any
of
the
following
securities
or
a
combination
thereof:
(i) legal
tender
of
the
United
States;
(ii) checks
on
banks
or
trust
companies
located in any
part of Puerto
Rico that are
to be presented
for collection during
the day following
the day on
which they are
received;
(iii) money deposited
in other
banks provided
said deposits
are authorized
by the
Commissioner and
subject to
immediate collection;
(iv) federal
funds
sold
to any
Federal
Reserve
Bank
and
securities
purchased
under
agreements to
resell
executed
by the
bank
with
such funds
that are
subject to
be repaid
to the
bank on
or before
the close
of the
next
business day;
and
(v) any other
asset that
the
Commissioner identifies from time to time.
Section
17
of
the
Banking
Law
permits
Puerto
Rico
commercial
banks
to
make
loans
to
any
one
person,
firm,
partnership
or
corporation in an aggregate
amount of up to
15% of the sum of:
(i) the bank’s
paid-in capital; (ii) the bank’s
reserve fund; (iii) 50% of
the bank’s
retained earnings, subject
to certain limitations;
and (iv) any other
components that the
Commissioner may determine
from
time to time. If such loans are secured by
collateral worth at least 25% of the amount of the
loan, the aggregate maximum amount may
reach 33.33% of
the sum of
the bank’s
paid-in capital, reserve
fund, 50% of
retained earnings, subject
to certain limitations,
and such
other components
that the
Commissioner may
determine from
time to
time. There
are no
restrictions under
the Banking
Law on
the
amount of loans that
may be wholly secured
by bonds, securities and
other evidences of indebtedness
of the government of
the United
States,
or
of
the
Commonwealth
of
Puerto
Rico,
or
by
bonds,
not
in
default,
of
municipalities
or
instrumentalities
of
the
Commonwealth of Puerto Rico.
The Banking Law
requires that Puerto
Rico commercial banks prepare
each year a balance
summary of their
operations and submit
such balance
summary
for approval
at a
regular meeting
of stockholders,
together with
an explanatory
report thereon.
The Banking
Law also requires
that at least
10% of the
yearly net income
of a Puerto
Rico commercial bank
be credited annually
to a reserve
fund
until such reserve fund is in amount equal to the total paid-in-capital of the bank.
22
The
Banking
Law
also
provides
that
when
the
expenditures
of
a
Puerto
Rico
commercial
bank
are
greater
than
its
receipts,
the
excess
of the expenditures over
receipts must be charged
against the undistributed profits
of the bank, and
the balance, if any,
charged
against
the
reserve
fund,
as a
reduction
thereof.
If
there
is no
reserve
fund
sufficient
to cover
such balance
in
whole or
in part,
the
outstanding amount
must be
charged against
the capital
account and
no dividend
may be declared
until said
capital has
been restored
to its original amount and the amount in the reserve fund equals 20% of
the original capital.
The Finance Board, which
is composed of nine members
from enumerated Puerto Rico
Government agencies, instrumentalities and
public
corporations,
including
the
Commissioner,
has
the
authority
to
regulate
the
maximum
interest
rates
and
finance
charges
that
may be
charged on
loans to
individuals
and unincorporated
businesses in
Puerto Rico.
The current
regulations of
the Finance
Board
provide that the applicable
interest rate on loans
to individuals and unincorporated
businesses, including real estate
development loans
but excluding
certain other personal
and commercial loans
secured by mortgages
on real estate
properties, is
to be determined
by free
competition. Accordingly,
the regulations do
not set a maximum
rate for charges
on retail installment
sales contracts, small
loans, and
credit card purchases. Furthermore, there
is no maximum rate set for installment sales contracts involving
motor vehicles, commercial,
agricultural and industrial equipment, commercial electric appliances and
insurance premiums.
International Banking Center Regulatory Act of Puerto Rico (“IBE Act 52”)
The business and operations
of FirstBank International Branch
(“FirstBank IBE” or the “IBE
division of FirstBank”)
and FirstBank
Overseas Corporation (the IBE
subsidiary of FirstBank) are
subject to supervision and
regulation by the Commissioner.
FirstBank and
FirstBank
Overseas
Corporation
were
created
under
Puerto
Rico
Act
52-1989,
as
amended,
known
as
the
“International
Banking
Center
Regulatory
Act”
(the
IBE
Act
52),
which
provides
for
total
Puerto
Rico
tax
exemption
on
net
income
derived
by
an
IBE
operating in
Puerto Rico
on the specific
activities identified
in the
IBE Act 52.
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. Under
the IBE Act 52, certain
sales, encumbrances, assignments, mergers,
exchanges or transfers of shares,
interests or participation(s) in the
capital
of
an
IBE
may
not be
initiated
without
the
prior
approval
of the
Commissioner.
The
IBE
Act
52
and
the regulations
issued
thereunder
by
the
Commissioner
(the
“IBE
Regulations”)
limit
the
business
activities
that
may
be
carried
out
by
an
IBE.
Such
activities are limited in part to persons and assets located outside of Puerto
Rico.
Pursuant to
the IBE Act
52 and the
IBE Regulations,
each of FirstBank
IBE and FirstBank
Overseas Corporation
must maintain
in
Puerto
Rico
books
and
records
of
its
transactions
in
the
ordinary
course
of
business.
FirstBank
IBE
and
FirstBank
Overseas
Corporation are
also required
thereunder to
submit to
the Commissioner
quarterly and
annual reports
of their
financial condition
and
results of operations, including annual audited financial statements.
The IBE Act
52 empowers
the Commissioner
to revoke
or suspend,
after notice
and hearing, a
license issued thereunder
if, among
other things, the IBE fails to
comply with the IBE Act 52, the IBE
Regulations or the terms of its license,
or if the Commissioner finds
that the business or affairs of the IBE are conducted in a manner
that is not consistent with the public interest.
In 2012, the Puerto Rico
government approved Act Number
273 (“Act 273”).
Act 273 replaces, prospectively,
IBE Act 52 with the
objective of
improving the
conditions for
conducting international
financial transactions
in Puerto Rico.
An IBE
existing on
the date
of approval
of Act
273, such
as FirstBank
IBE and
FirstBank Overseas
Corporation, can
continue operating
under IBE
Act 52,
or,
it
can
voluntarily
convert
to
an
International
Financial
Entity
(“IFE”)
under
Act
273
so
it
may
broaden
its
scope
of
Eligible
IFE
Activities, as defined below,
and obtain a grant of tax exemption under Act 273.
IFEs are
licensed by
the Commissioner,
and authorized
to conduct
certain
Act 273
specified
financial transactions
(“Eligible IFE
Activities”). Once licensed, an
IFE can request a grant
of tax exemption (“Tax
Grant”) from the Puerto
Rico Department of Economic
Development
and Commerce,
which will
enumerate
and secure
the following
tax benefits
provided by
Act 273
as contractual
rights
(
i.e.
, regardless of future changes in Puerto Rico law) for a 15-year period:
(i)
to the IFE:
●
a fixed
4% Puerto Rico income tax rate on the net income derived by the IFE from
its Eligible IFE Activities; and
●
full property and municipal license tax exemptions on such activities.
(ii)
to its shareholders:
●
6% income tax rate on distributions to Puerto Rico resident
shareholders of earnings and profits derived from the
Eligible IFE
Activities; and
●
full Puerto Rico income tax exemption on such distributions to non
-Puerto Rico resident shareholders.
23
The primary purpose of IFEs
is to attract Unites States and
foreign investors to Puerto Rico.
Consequently,
Act 273 authorizes IFEs
to engage
in traditional
banking and
financial transactions,
principally
with non-residents
of Puerto
Rico. Furthermore,
the scope
of
Eligible IFE Activities encompasses a wider variety of transactions
than those previously authorized to IBEs.
Act
187,
as
amended,
enacted
on
November
17,
2015,
requires
an
IBE
to
obtain
from
the
Commissioner
a
Certificate
of
Compliance every two years that certifies its compliance with the provisions
of IBE Act 52.
As
of
the
date
of
the
issuance
of
this
Annual
Report
on
Form
10-K,
FirstBank
IBE
and
FirstBank
Overseas
Corporation
are
operating under IBE Act 52.
Future Legislation and Regulation
Financial
legislation
and
regulation
is
dynamic
in
nature,
and
is
subject
to
regular
changes.
With
the
change
in
presidential
administrations and the assumption
by the Democratic party
of control of Congress,
legislative and regulatory action
of a “regulatory”
nature
is
possible,
although
the
agenda
of
the
Biden
administration
on
financial
services
legislative
and
regulatory
matters
has
not
been
specifically
outlined
at
this
time.
Additional
consumer
protection
laws
may
be
enacted,
and
the
FDIC,
Federal
Reserve,
and
CFPB
have
adopted,
and
may
adopt
in
the
future,
new
regulations
that
address,
among
other
things,
banks’
credit
card,
overdraft,
collection, privacy
and mortgage lending
practices.
Similarly,
changes in
Puerto Rico law
or actions by
the Commissioner
may have
an
impact
on
FirstBank’s
financial
condition
and
activities.
Additional
consumer
protection
regulatory
activity
is
possible
in
the
future.
Any proposals
and legislation,
if finally
adopted and
implemented, could
change banking
laws and
our operating
environment and
that
of
our
subsidiaries
in
ways
that
would
be
substantial
and
unpredictable.
We
cannot
determine
whether
such
proposals
and
legislation will be adopted,
or the ultimate effect
that such proposals and
legislation, if enacted, or
regulations issued to implement
the
same, would have upon our financial condition or results of operations.
Puerto Rico Income Taxes
Under the
Puerto Rico Internal
Revenue Code
of 2011,
as amended (the
“2011 PR
Code”), the
Corporation and
its subsidiaries are
treated
as
separate
taxable
entities
and
are
not
entitled
to
file
consolidated
tax
returns
and,
thus,
the
Corporation
is
generally
not
entitled
to
utilize
losses
from
one
subsidiary
to
offset
gains
in
another
subsidiary.
Accordingly,
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
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.
The
Corporation
has
maintained
an
effective
tax
rate
lower
than
the
maximum
statutory
rate
in
Puerto
Rico,
which
has
resulted
mainly
from
investments
in
government
obligations
and
MBS
exempt
from
U.S.
and
Puerto
Rico
income
taxes
and
from
doing
business through an
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.
United States Income Taxes
As
a
Puerto
Rico
corporation,
First
BanCorp.
is
treated
as
a
foreign
corporation
for
U.S.
and
USVI
income
tax
purposes
and,
accordingly,
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 jurisdictions.
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.
Insurance Operations Regulation
FirstBank Insurance Agency
is registered as an
insurance agency with
the Insurance Commissioner of
Puerto Rico and is subject
to
regulations
issued
by
the
Insurance
Commissioner
and
the
Division
of
Banking
and
Insurance
Financial
Regulation
in
the
USVI
relating
to,
among
other
things,
the
licensing
of
employees
and
sales
and
solicitation
and
advertising
practices,
and
by
the
Federal
Reserve as to certain consumer protection provisions mandated by
the Gramm-Leach-Bliley Act and its implementing regulations.
Mortgage Banking Operations
In
addition
to
FDIC
and
CFPB
regulations,
FirstBank
is
subject
to
the
rules
and
regulations
of
the
FHA,
VA,
FNMA,
FHLMC,
GNMA, and
the U.S.
Department of
Housing and
Urban Development
(“HUD”)
with respect
to originating,
processing,
selling and
servicing mortgage
loans and the
issuance and
sale of MBS.
Those rules
and regulations, among
other things,
prohibit discrimination
and
establish
underwriting
guidelines
that
include
provisions
for
inspections
and
appraisals,
require
credit
reports
on
prospective
borrowers
and
fix
maximum
loan
amounts,
and,
with
respect
to
VA
loans,
fix
maximum
interest
rates.
Moreover,
lenders
such
as
FirstBank are required
annually to submit
audited financial statements
to the FHA, VA,
FNMA, FHLMC, GNMA and
HUD and each
regulatory entity
has its
own financial
requirements. FirstBank’s
affairs are
also subject
to supervision
and examination
by the
FHA,
24
VA,
FNMA,
FHLMC,
GNMA
and
HUD
at
all
times
to
assure
compliance
with
applicable
regulations,
policies
and
procedures.
Mortgage origination activities are subject
to, among other requirements, the Equal
Credit Opportunity Act, TILA and
the RESPA
and
the
regulations
promulgated
thereunder
that,
among
other
things,
prohibit
discrimination
and
require
the
disclosure
of certain
basic
information to
mortgagors concerning
credit terms
and settlement
costs. FirstBank
is licensed
by the
Commissioner under
the Puerto
Rico
Mortgage
Banking
Law,
and,
as
such,
is
subject
to
regulation
by
the
Commissioner,
with
respect
to,
among
other
things,
licensing requirements and the establishment of maximum origination
fees on certain types of mortgage loan products.
25
Item 1A.
Risk Factors
There
follows
a
discussion
about
material
risks
and
uncertainties
that
could
impact
the
Corporation’s
businesses,
results
of
operations
and financial
condition, including
by causing
the Corporation’s
actual results
to differ
materially from
those projected
in
any
forward-looking
statements.
Other
risks
and
uncertainties,
including
those
not
currently
known
to
the
Corporation
or
its
management and those that the Corporation or its management
currently deems to be immaterial, could also affect
the Corporation in a
materially adverse
way in
future periods.
Thus, the
following should
not be
considered a
complete discussion
of all
of the
risks and
uncertainties the Corporation may face. See the discussion
under “Forward-Looking
Statements,”
in this Annual
Report on Form
10-K.
RISKS RELATING
TO THE CORPORATION’S
BUSINESS
Our level of non-performing assets may adversely affect our future results from
operations.
As of December 31, 2021,
we continued to have a
relevant amount of nonaccrual
loans, even though nonaccrual loans
decreased by
$94.4
million
to
$110.7
million
as
of
December
31,
2021,
or
46%,
from
$205.1
million
as
of
December
31,
2020.
Our
nonaccrual
loans represent
approximately 1%
of our
$11.1
billion loan
portfolio as
of December
31, 2021.
Non-performing
assets decreased
by
$135.4 million to $158.1 million as
of December 31, 2021,
or 46%, from $293.5
million as of December
31, 2020. If we
are unable to
effectively maintain the quality
of our loan portfolio, our financial
condition and results of operations
may be materially and adversely
affected.
Certain funding sources may not be available to us and our funding sources may
prove insufficient and/or costly to replace.
FirstBank
relies
primarily
on
customer
deposits,
the
issuance
of
brokered
CDs,
and
advances
from
the
FHLB
of
New
York
to
maintain its lending
activities and to replace
certain maturing liabilities.
As of December 31,
2021, we had $100.4
million in brokered
CDs
outstanding,
representing
approximately
1%
of
our
total
deposits,
and
a
reduction
of
$115.8
million
from
the
year
ended
December
31, 2020.
Approximately
$63.6 million
in brokered
CDs mature
over the
twelve months
ending December
31, 202
2, and
the average
term to
maturity of
the brokered
CDs outstanding
as of
December 31,
2021 was
approximately
1.2 years.
None of
these
CDs
are
callable
at
the
Corporation’s
option.
In
addition,
the
Corporation
had
$200
million
of
FHLB
advances
outstanding
as
of
December 31, 2021 that are scheduled
to mature during 2022.
Although FirstBank has historically
been able to replace maturing deposits
and advances, we may not be
able to replace these funds
in the future if our financial condition or general
market conditions change. If we are unable to maintain access to
funding sources, our
results of operations and liquidity would be adversely affected.
Alternate
sources
of
funding
may
carry
higher
costs
than
sources
currently
utilized.
If
we
are
required
to
rely
heavily
on
more
expensive funding sources, profitability would be adversely affected.
We
may
determine
to
seek
debt
financing
in
the
future
to
achieve
our
long-term
business
objectives.
Additional
borrowings,
if
sought, may not be available to us, or if available,
may not be on acceptable terms. The availability of additional
financing will depend
on
a
variety
of
factors,
such
as
market
conditions,
the
general
availability
of
credit,
our
credit
ratings
and
our
credit
capacity.
In
addition,
FirstBank may seek to sell loans as an additional source of liquidity.
If additional financing sources are unavailable or are not
available on acceptable terms,
our profitability and future prospects could be adversely affected.
We depend
on cash dividends from FirstBank to meet our cash obligations.
As a holding company,
dividends from FirstBank, our banking subsidiary,
have provided a substantial portion of our cash flow used
to
service
the
interest
payments
on
our
TRuPs
and
other
obligations.
FirstBank
is
limited
by
law
in
its
ability
to
make
dividend
payments
and other
distributions
to us
based on
its earnings
and
capital position.
A failure
by
FirstBank
to generate
sufficient
cash
flow to make
dividend payments to
us may have
a negative impact
on our results
of operation
and financial
condition. Also, a
failure
by
the
bank
holding
company
to
access
sufficient
liquidity
resources
to
meet
all
projected
cash
needs
in
the
ordinary
course
of
business may have a detrimental impact on our financial condition and ability
to compete in the market.
Our allowance for credit losses may not be adequate to cover actual losses, and we may be
required to materially increase our
allowance, which may adversely affect our capital
ratios, financial condition and results of operations.
We are subject,
among other things, to the risk of loss from loan
defaults and foreclosures with respect to the loans we originate
and
purchase. We
recognize periodic
credit loss
expenses on
loans, which
leads to
reductions in
our income
from operations,
in order
to
maintain
our ACL
on loans
at a
level that
our management
deems to
be appropriate
based upon
an assessment
of the
quality
of the
loan and
lease portfolios.
Management may
fail to
accurately estimate
the level
of loan
and lease
losses or
may have
to increase
our
credit loss
expense on
loans in
the future
as a
result of
new information
regarding existing
loans, future
increase in
nonaccrual loans
beyond
what
was
forecasted,
foreclosure
actions
and
loan
modifications,
changes
in
current
and
expected
economic
and
other
26
conditions affecting
borrowers or
for other
reasons beyond
our control.
In addition,
the bank
regulatory agencies
periodically review
the
adequacy
of our
ACL on
loans
and
may
require
an
increase in
the
credit loss
expense on
loans or
the recognition
of
additional
classified loans and loan charge-offs, based
on judgments that differ from those of management.
The
level
of
the
allowance
reflects
management’s
estimates
based
upon
various
assumptions
and
judgments
as
to
specific
credit
risks,
its
evaluation
of
industry
concentrations,
loan
loss
experience,
current
loan
portfolio
quality,
present
economic,
political
and
regulatory
conditions,
unidentified
losses
inherent
in
the
current
loan
portfolio
and,
since
the
beginning
of
2020,
reasonable
and
supportable forecasts. The determination of
the appropriate level of the ACL on
loans inherently involves a high degree of
subjectivity
and
requires
management
to make
significant
estimates and
judgments
regarding
current credit
risks and
future
trends, all
of which
may undergo
material changes.
If our
estimates prove
to be
incorrect, our
ACL on
loans may
not be
sufficient to
cover losses
in our
loan portfolio and our credit loss expense on loans could increase substantially.
In addition, any increases in our credit loss expense on
loans or any loan losses in excess of our ACL on loans could have a material
adverse effect on our future capital ratios, financial
condition and results of operations.
The Corporation’s force-placed
insurance policies could be disputed by the customer.
The Corporation
maintains force-placed
insurance policies
that have
been put
into place
when a
borrower’s
insurance policy
on a
property has been
canceled, lapsed or was
deemed insufficient and
the borrower did not
secure a replacement policy.
A borrower may
make
a claim
against the
Corporation
under
such force
-placed insurance
policy and
the failure
of the
Corporation
to resolve
such a
claim
to
the
borrower’s
satisfaction
may
result
in
a
dispute
between
the
borrower
and
the
Corporation,
which
if
not
adequately
resolved, could have an adverse effect on the Corporation
.
Downgrades in our credit ratings could further increase the cost of
borrowing funds.
The
Corporation’s
ability to
access new
non-deposit
sources of
funding
could be
adversely
affected
by downgrades
in our
credit
ratings. The Corporation’s
liquidity is to a
certain extent contingent upon
its ability to obtain
external sources of funding
to finance its
operations. The
Corporation’s
current credit
ratings and
any downgrades
in such
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.
Defective and repurchased loans may harm our business and financial condition.
In
connection
with
the
sale
and
securitization
of
loans,
we
are
required
to
make
a
variety
of
customary
representations
and
warranties relating
to the
loans sold
or securitized.
Our obligations
with respect
to these
representations and
warranties are
generally
outstanding
for
the
life
of
the
loan,
and
relate
to,
among
other
things:
(i)
compliance
with
laws
and
regulations;
(ii)
underwriting
standards; (iii)
the accuracy
of information
in the
loan documents
and loan
files; and
(iv) the
characteristics and
enforceability of
the
loan.
A loan that
does not comply
with the representations
and warranties made
may take longer
to sell, may
impact our ability to
obtain
third-party
financing
for
the
loan,
and
may
not
be
saleable
or
may
be
saleable
only
at
a
significant
discount.
If
such a
loan
is
sold
before
we
detect
non-compliance,
we
may
be
obligated
to repurchase
the
loan
and
bear
any
associated
loss directly,
or
we
may
be
obligated
to
indemnify
the purchaser
against
any
loss,
either
of
which
could
reduce
our cash
available
for
operations
and
liquidity.
Management
believes
that
it has
established
controls
to
ensure
that
loans
are
originated
in
accordance
with
the
secondary
market’s
requirements, but certain employees may make mistakes or may deliberately
violate our lending policies.
Our controls and procedures
may fail or be circumvented,
our risk management policies and
procedures may be inadequate
and
operational risks could adversely affect our consolidated
results of operations.
We
may fail
to identify
and manage
risks related
to a
variety of
aspects of
our business,
including, but
not limited
to, operational
risk,
interest-rate
risk,
trading
risk,
fiduciary
risk,
legal
and
compliance
risk,
liquidity
risk
and
credit
risk.
We
have
adopted
and
periodically
improve
various
controls,
procedures,
policies
and
systems
to
monitor
and
manage
risk.
Any
improvements
to
our
controls, procedures,
policies and
systems, however,
may not
be adequate
to identify
and manage
the risks
in our
various businesses.
If our
risk framework
is ineffective,
either because
it fails to
keep pace
with changes in
the financial
markets or
our businesses or
for
other
reasons,
we
could
incur
losses,
suffer
reputational
damage,
or
find
ourselves
out
of
compliance
with
applicable
regulatory
mandates or expectations.
We may also be
subject to disruptions from external events,
such as natural disasters and cyber-attacks, which could cause delays
or
disruptions
to
operational
functions,
including
information
processing
and
financial
market
settlement
functions.
In
addition,
our
customers,
vendors
and
counterparties
could
suffer
from
such
events.
Should
these
events
affect
us,
or
the
customers,
vendors
or
27
counterparties with
which we
conduct business,
our consolidated
results of
operations could
be negatively
affected. When
we record
balance
sheet
reserves
for
probable
loss
contingencies
related
to
operational
losses,
we
may
be
unable
to
accurately
estimate
our
potential
exposure,
and
any
reserves
we
establish
to
cover
operational
losses
may
not
be
sufficient
to
cover
our
actual
financial
exposure, which
may have
a material
impact on
our consolidated
results of
operations or
financial condition
for the
periods in
which
we recognize the losses.
Our businesses may be adversely affected by litigation.
We
have, in
the past,
been party
to claims
and legal
actions by
our customers,
or subject
to regulatory
supervisory actions
by the
government on
behalf of
customers, relating
to our
performance of
fiduciary or
contractual responsibilities.
In the
past, we
have also
been
subject
to
securities
class
action
litigation
by
our
shareholders
and
we
have
also
faced
employment
lawsuits
and
other
legal
claims. In
any future
claims or
actions, demands
for substantial
monetary damages
may be
asserted against
us, resulting
in financial
liability
or
an
adverse
effect
on
our
reputation
among
investors
or
on
customer
demand
for
our
products
and
services.
A
securities
class
action
suit
against
us
in
the
future
could
result
in
substantial
costs,
potential
liabilities
and
the
diversion
of
management’s
attention
and
resources.
We
may
be
unable
to
accurately
estimate
our
exposure
to
litigation
risk
when
we
record
balance
sheet
reserves
for
probable
loss
contingencies.
As
a
result,
reserves
we
establish
to
cover
any
settlements
or
judgements
may
not
be
sufficient
to cover
our actual
financial
exposure, which
has occurred
in the
past and
may occur
in the
future, resulting
in a
material
adverse impact on our consolidated results of operations or financial condition.
In
the
ordinary
course
of
our
business,
we
are
also
subject
to
various
regulatory,
governmental
and
law
enforcement
inquiries,
investigations
and subpoenas.
These may
be directed
generally to
participants in
the businesses
in which
we are
involved or
may be
specifically directed
at us. In
regulatory enforcement
matters, claims for
disgorgement, the
imposition of
penalties and
the imposition
of other remedial sanctions are possible.
The resolution
of legal
actions or
regulatory
matters, when
unfavorable, has
had, and
could in
the future
have, a
material adverse
effect on our consolidated results of operations for
the quarter in which such actions or matters are resolved or a reserve is established.
Our businesses may be negatively affected by adverse
publicity or other reputational harm.
Our relationships
with many of
our customers
are predicated upon
our reputation
as a fiduciary
and a service
provider that adheres
to
the
highest
standards
of
ethics,
service
quality
and
regulatory
compliance.
Adverse
publicity,
regulatory
actions,
litigation,
operational
failures,
the failure
to meet
customer
expectations
and
other
issues with
respect
to one
or
more of
our
businesses could
materially and
adversely affect
our reputation,
or our
ability to
attract and
retain customers
or obtain
sources of
funding for
the same
or other businesses. Preserving
and enhancing our reputation
also depends on maintaining
systems and procedures that
address known
risks
and
regulatory
requirements,
as
well
as
our
ability
to
identify
and
mitigate
additional
risks
that
arise
due
to
changes
in
our
businesses,
the
market
places
in
which
we
operate,
the
regulatory
environment
and
customer
expectations.
If
we
fail
to
promptly
address matters that bear on our reputation,
our reputation may be materially adversely affected and our
business may suffer.
Any impairment of our goodwill or other intangible assets may adversely affect
our operating results.
If our goodwill or other intangible assets become impaired, we may be
required to record a significant charge to earnings.
Goodwill is
tested for
impairment on
an annual
basis, and
more frequently
if events
or circumstances
lead management
to believe
the values of
goodwill may
be impaired.
Other intangible assets
are amortized
over the projected
useful lives of
the related intangible
asset,
generally
on
a
straight-line
basis,
and
these
assets
are
reviewed
periodically
for
impairment
when
event
or
changes
in
circumstances
indicate
that
the
carrying
amount
may
not
exceed
their
fair
value.
Factors
that
may
be
considered
a
change
in
circumstances
indicating
that
the
carrying
value
of
the
goodwill
or
amortizable
intangible
assets
may
not
be
recoverable
includes
reduced future
cash flow estimates,
decreases in the
current market
price of
our common
shares, negative
information concerning
the
terminal value of similarly situated insured depository institutions
,
and slower growth rates in the industry.
The goodwill
annual impairment
evaluation process
includes a
qualitative assessment
of events
and circumstances
that may
affect
the reporting
unit's fair
value to
determine whether
it was
more likely
than not
that the
fair value
of any
reporting unit
was less
than
it’s
carrying
amount,
including
goodwill.
If
the
result
of
the
qualitative
assessment
indicates
that
it
is
more
likely
than
not
that
the
carrying
value
of
goodwill
exceed
its
fair
value,
a
quantitative
analysis
is
made
to
determine
the
amount
of
goodwill
impairment.
Analyzing
goodwill
includes
consideration
of
various
factors
that
continue
to
rapidly
evolve
and
for
which
significant
uncertainty
remains, including
the impact of
the COVID-19 pandemic
on the economy.
Further weakening
in the economic
environment, such
as
decline in the performance of the reporting
units or other factors, could cause the fair value of one
or more of the reporting units to fall
below
their
carrying
value,
resulting
in
a
goodwill
impairment
charge.
Actual
values may
differ
significantly
from this
assessment.
Such differences
could result in
future impairment of
goodwill that would,
in turn, negatively
impact our results
of operations and
the
reporting
unit to
which the
goodwill relates.
During the
fourth
quarter of
2021, management
performed
a qualitative
analysis of
the
28
carrying
amount
of
goodwill,
and
concluded
that
it
is
more-likely-than-not
that
the
fair
value
of
the
reporting
units
exceeded
its
carrying value.
As of
December 31,
2021, the
book value
of our
goodwill was
$38.6 million,
which was
recorded at
FirstBank.
If an
impairment
determination
is
made
in
a
future
reporting
period,
our
earnings
and
book
value
of
goodwill
will
be
reduced
by
the
amount
of
the
impairment. If an impairment
loss is recorded, it
will have little or no
impact on the tangible book
value of our Common Stock,
or our
regulatory capital
levels, but such
an impairment
loss could significantly
reduce FirstBanks’ earnings
and thereby restrict
FirstBank’s
ability to make dividend payments to us without prior
regulatory approval, because Federal Reserve policy states
that the bank holding
company dividends should be paid from current earnings.
Recognition of deferred tax assets is dependent upon the generation of future taxable
income by the Bank.
As
of
December
31,
2021,
the
Corporation
had
a
deferred
tax
asset
of
$208.5
million
(net
of
a
valuation
allowance
of
$107.3
million,
including
a
valuation
allowance
of
$69.7
million
against the
deferred
tax
assets
of
FirstBank).
Under
Puerto
Rico
law,
the
Corporation
and its
subsidiaries, including
FirstBank, are
treated as
separate taxable
entities and
are not
entitled to
file consolidated
tax
returns.
Accordingly,
to
obtain
a
tax
benefit
from
net
operating
losses
(“NOLs”),
a
particular
subsidiary
must
be
able
to
demonstrate sufficient
taxable income.
To
obtain the
full benefit
of the
applicable deferred
tax asset
attributable to
NOLs, FirstBank
must have sufficient taxable income within
the applicable carryforward period. Pursuant to the 2011
PR Code, the carryforward period
for NOLs
incurred during
taxable years
that commenced
after December
31, 2004
and ended
before January
1, 2013
is 12
years; for
NOLs incurred
during taxable
years commencing
after December
31, 2012,
the carryover
period is
10 years.
Accounting for
income
taxes
requires
that
companies
assess
whether
a
valuation
allowance
should
be
recorded
against
their
deferred
tax
asset based
on
an
assessment of
the amount
of the
deferred tax
asset that
is more
likely than
not to
be realized.
Due to
significant estimates
utilized in
determining
the valuation
allowance and
the potential
for changes
in facts
and circumstances,
in the
future, the
Corporation may
not
be able to reverse the remaining valuation allowance or may need to increase
its current deferred tax asset valuation allowance.
The Corporation’s
judgments regarding
tax accounting
policies and
the resolution
of tax
disputes may
impact the
Corporation’s
earnings and cash
flow, and
changes in the
tax laws of
multiple jurisdictions can
materially affect
our operations, tax
obligations,
and effective tax rate.
Significant
judgment
is
required
in
determining
the
Corporation’s
effective
tax
rate
and
in
evaluating
its
tax
positions.
The
Corporation
provides
for
uncertain
tax
positions
when
such
tax
positions
do
not
meet
the
recognition
thresholds
or
measurement
criteria prescribed by applicable GAAP.
Fluctuations in federal,
state, local, and foreign
taxes or a change
to uncertain tax positions,
including related interest
and penalties,
may impact
the Corporation’s
effective tax
rate. When particular
tax matters arise,
a number
of years
may elapse before
such matters
are audited
and finally
resolved. In
addition,
the Puerto
Rico Department
of Treasury
(“PRTD”),
the U.S.
Internal
Revenue Service
(“IRS”),
and
the
tax
authorities
in
the
jurisdictions
in
which
we
operate
may
challenge
our
tax
positions
and
we
may
estimate
and
provide
for
potential liabilities
that may
arise out
of tax
audits to
the extent
that uncertain
tax positions
fail to
meet the
recognition
standard under
applicable GAAP.
Unfavorable resolution
of any
tax matter
could increase
the effec
tive tax
rate and
could result
in a
material increase in our tax expense. Resolution of a tax issue may require
the use of cash in the year of resolution.
First BanCorp. is subject
to Puerto Rico income
tax on its income
from all sources. FirstBank
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.
The
USVI
jurisdiction
imposes
income
taxes
based
on
the
U.S.
Internal
Revenue
Code
under
the
“mirror
system”
established
by
the
Naval
Service
Appropriations Act of 1922. However,
the USVI jurisdiction also imposes an additional 10% surtax on the USVI tax liability,
if any.
These
tax
laws
are
complex
and
subject
to
different
interpretations.
We
must
make
judgments
and
interpretations
about
the
application
of
these
inherently
complex
tax
laws
when
determining
our
provision
for
income
taxes,
our
deferred
tax
assets
and
liabilities, and
our valuation
allowance. In
addition, legislative
changes, particularly
changes in
tax laws,
could adversely
impact our
results of operations.
Changes in applicable
tax laws in
Puerto Rico, the
U.S., or other
jurisdictions or tax
authorities’ new interpretations
could result in
increases in our overall taxes and the Corporation’s
financial condition or results of operations may be adversely impacted.
Our ability to use our net operating loss (“NOL”) carryforwards may be
limited.
The
Corporation
has
Puerto
Rico,
U.S.
and
USVI
sourced
NOL
carryforwards.
Section
382
of
the
U.S.
Internal
Revenue
Code
(“Section 382”) limits the ability
to utilize U.S. and USVI
NOLs for income tax purposes,
respectively,
at such jurisdictions following
an
event
of
an
ownership
change.
Generally,
an
“ownership
change”
occurs
when
certain
shareholders
increase
their
aggregate
ownership
by
more
than
50
percentage
points
over
their
lowest
ownership
percentage
over
a
three-year
testing
period.
Section
29
1034.04(u)
of the
2011
PR Code
is significantly
similar to
Section 382.
However,
Act 60-2019
amended the
PR Code
to repeal
the
corporate NOL carryover limitations upon change in control for taxable
years beginning after December 31, 2018.
Upon the occurrence of a Section 382 ownership change, the use of
NOLs attributable to the period prior to the ownership change is
subject
to
limitations
and
only
a
portion
of
the
U.S.
and
USVI
NOLs,
as
applicable,
may
be
used
by
the
Corporation
to
offset
the
annual
U.S.
and
USVI
taxable
income,
if
any.
In
2017,
the
Corporation
completed
a
formal
ownership
change
analysis
within
the
meaning of Section 382 covering
a comprehensive period, and concluded
that an ownership change, for U.S. and
USVI purposes only,
had
occurred
during
such
period.
The
Section
382
limitation
has
resulted
in
higher
U.S.
and
USVI
income
tax
liabilities
than
we
would have incurred in the absence of such limitation.
It is possible that
the utilization of our
U.S. and USVI NOLs
could be further
limited due to future
changes in our stock
ownership,
as
a
result
of
either
sales
of
our
outstanding
shares
or
issuances
of
new
shares
that
could
separately
or
cumulatively
trigger
an
ownership
change
and,
consequently,
a
Section
382
limitation.
Any
further
Section
382
limitations
may
result
in
greater
U.S.
and
USVI tax
liabilities than
we would
incur
in the
absence
of such
a limitation
and
any
increased liabilities
could
adversely affect
our
earnings and cash
flow.
We
may be able
to mitigate the adverse
effects associated with
a Section 382
limitation in the U.S.
and USVI
to the extent that we could credit any resulting
additional U.S. and USVI tax liability against our tax
liability in Puerto Rico. However,
our
ability
to
reduce
our
Puerto
Rico
tax
liability
through
such
a
credit
or
deduction
will
depend
on
our
tax
profile
at
each
annual
taxable period, which is dependent on various factors.
RISKS RELATED
TO THE BSPR
ACQUISITION
We may not be able
to realize the anticipated benefits of the BSPR acquisition.
Our future
growth and
profitability depend,
in part,
on the
ability to
successfully manage
the operations
we acquired
in the
BSPR
Acquisition. The
success of
the BSPR Acquisition
will depend
on, among
other things,
the accuracy
of our
assessment of
the quality
of the acquired
assets, and our
ability to realize
anticipated cost savings
and manage the
acquired companies in
a manner that
permits
growth
opportunities
and
does
not
materially
disrupt
our
or
the
acquired
business’s
existing
customer
relationships
and
service
or
result in
decreased revenue
resulting from
any loss
of customers.
The loss of
key employees
in connection
with the
acquisition could
adversely affect our ability to successfully conduct
the combined operations. If we are not able to successfully
achieve our objective to
realize the
anticipated benefits
of the
acquisition and
fully integrate
BSPR’s
business, that
could be
a material
adverse effect
on our
business or financial condition, results of operations, and future prospects.
RISKS RELATING
TO TECHNOLOGY AND CYBERSECURITY
We
must respond to
rapid technological changes,
and these changes
may be more
difficult or expensive
than anticipated.
We
may
also
be
negatively
affected
if
we
fail
to
identify
and
address
operational
risks
associated
with
the
introduction
of
or
changes
to
products and services.
Like
most
financial
institutions,
FirstBank
significantly
depends
on
technology
to
deliver
its
products
and
other
services
and
to
otherwise conduct
business. To
remain technologically
competitive and
operationally efficient,
FirstBank invests
in system
upgrades,
new
technological
solutions,
and
other
technology
initiatives.
If
competitors
introduce
new
products
and
services
embodying
new
technologies,
or if
new industry
standards and
practices emerge,
our existing
product
and service
offerings,
technology and
systems
may become obsolete.
Furthermore, if we fail
to adopt or develop
new technologies or
to adapt our products
and services to emerging
industry
standards, we
may lose
current
and future
customers, which
could have
a material
adverse effect
on our
business, financial
condition and
results of
operations. The
financial services
industry is
changing rapidly
and, in
order to
remain competitive,
we must
continue
to
enhance
and
improve
the
functionality
and
features
of
our
products,
services
and
technologies.
These
changes
may
be
more difficult or expensive to implement than we anticipate.
When
we
launch
a
new
product
or
service,
introduce
a
new
platform
for
the
delivery
or
distribution
of
products
or
services
(including mobile
connectivity and
cloud computing),
or make changes
to an existing
product or service,
we may not
fully appreciate
or
identify
new operational
risks that
may
arise
from those
changes,
or
we may
fail
to
implement
adequate
controls
to mitigate
the
risks
associated
with
those
changes.
Significant
failure
in
this regard
could
diminish
our ability
to
operate
our
business or
result
in
potential
liability
to
our
customers
and
third
parties,
increased
operating
expenses,
weaker
competitive
standing,
and
significant
reputational, legal
and regulatory
costs. Any
of the
foregoing consequences
could materially
and adversely
affect our
businesses and
results of operations.
30
Our operational or security systems or
infrastructure, or those of third parties,
could fail or be breached. Any such
future incidents
could potentially
disrupt our business
and adversely
impact our
results of
operations, liquidity,
and financial
condition, as
well as
cause legal or reputational harm.
The potential
for operational
risk exposure
exists throughout our
business and,
as a result
of our
interactions with, and
reliance on,
third
parties,
is
not
limited
to
our
own
internal
operational
functions.
Our
operational
and
security
systems
and
infrastructure,
including our computer systems,
data management, and internal
processes, as well as those
of third parties that
perform key aspects of
our
business
operations,
such
as
data
processing,
information
security,
recording
and
monitoring
transactions,
online
banking
interfaces and services,
internet connections, and
network access are
integral to our
performance. We
rely on our
employees and third
parties in
our day-to-day
and ongoing
operations,
who may,
because of
human error,
misconduct,
malfeasance,
failure, or
breach of
our or of third-party systems or infrastructure, expose us to risk.
Our ability to
implement backup systems
and other safeguards
with respect to
third-party systems is more
limited than with
respect
to
our
own
systems.
In
addition,
our
financial,
accounting,
data
processing,
backup,
or
other
operating
or
security
systems
and
infrastructure may fail to
operate properly or become
disabled, damaged, or otherwise
compromised as a result of
a number of factors,
including
events that
are wholly
or partially
beyond our
control.
We
may
need to
take our
systems offline
if they
become infected
with malware or a computer
virus or because of another form of
cyberattack. If backup systems are utilized,
they may not process data
as quickly as our primary
systems and some data might
not have been saved to backup
systems, potentially resulting in a temporary
or
permanent loss of such data.
We
frequently update
our systems
to support
our operations
and growth
and to
remain compliant
with applicable
laws, rules,
and
regulations. In
addition, we
review and
strengthen our
security systems
in response
to any
cyber incident.
Such strengthening
entails
significant
costs
and
risks
associated
with
implementing
new
systems
and
integrating
them
with
existing
ones,
including
potential
business
interruptions
and
the
risk
that
this
strengthening
may
not
be
one-hundred
percent
effective.
Implementation
and
testing
of
controls
related
to
our
computer
systems,
security
monitoring,
and
retaining
and
training personnel
required
to
operate our
systems
also entail significant
costs. Such operational
risk exposures could
adversely impact
our operations,
liquidity,
and financial condition,
as well as
cause reputational
harm. In
addition, we may
not have adequate
insurance coverage
to compensate
for losses from
a major
interruption.
Cyber-attacks,
system
risks
and
data
protection
breaches
could
adversely
affect
our
ability
to
conduct
business,
manage
our
exposure to risk or
expand our business, result
in the disclosure or
misuse of confidential
or proprietary information,
increase our
costs to
maintain and
update our
operational
and security
systems and
infrastructure, and
present significant
reputational,
legal
and regulatory costs
.
Our
business
is
highly
dependent
on
the
security,
controls
and
efficacy
of
our
infrastructure,
computer
and
data
management
systems,
as
well
as
those
of
our
customers,
suppliers,
and
other
third
parties.
To
access
our
network,
products
and
services,
our
employees,
customers, suppliers,
and other
third parties,
including downstream
service providers,
the financial
services industry
and
financial
data
aggregators,
with
whom
we
interact,
on
whom
we
rely
or
who
have
access
to
our
customers'
personal
or
account
information, increasingly
use personal mobile
devices or computing
devices that are
outside of our
network and control
environments
and
are
subject
to
their
own
cybersecurity
risks.
Our
business
relies
on
effective
access
management
and
the
secure
collection,
processing,
transmission,
storage and
retrieval
of confidential,
proprietary,
personal and
other
information
in our
computer
and data
management systems and networks,
and in the computer and data management systems and networks of third
parties.
Information
security
risks
for
financial
institutions
have
significantly
increased
in
recent
years,
especially
given
the
increasing
sophistication and activities
of organized
computer criminals, hackers,
and terrorists and
our expansion of
online customer services
to
better meet our customer’s needs. These threats
may derive from fraud or malice on the
part of our employees or third-party providers,
or
may
result
from
human
error
or
accidental
technological
failure.
These
threats
include
cyber-attacks,
such
as
computer
viruses,
malicious
or
destructive
code,
phishing
attacks,
denial
of
service
attacks,
or
other
security
breach
tactics
that
could
result
in
the
unauthorized
release,
gathering,
monitoring,
misuse,
loss,
destruction,
or
theft
of
confidential,
proprietary,
and
other
information,
including
intellectual
property,
of
ours,
our
employees,
our
customers,
or
third
parties,
damages
to
systems,
or
otherwise
material
disruption to our or our customers’ or other third parties’ network
access or business operations, both domestically and internationally.
While
we
maintain
an
Information
Security
Program
that
continuously
monitors
cyber-related
risks
and
ultimately
ensures
protection
for
the
processing,
transmission
and
storage
of confidential,
proprietary,
and other
information
in our
computer
systems,
and networks as well as
vendor management program
to oversee third party and
vendor risks, there is no
guarantee that we will not
be
exposed to or
be affected by
a cybersecurity incident.
Cyber threats are
rapidly changing and
future attacks or
breaches could lead
to
other
security
breaches
of
the networks,
systems,
or
devices
that
our
customers
use
to
access our
integrated
products
and
services,
which,
in
turn,
could
result
in
unauthorized
disclosure,
release,
gathering,
monitoring,
misuse,
loss
or
destruction
of
confidential,
proprietary,
and
other
information
(including
account
data
information)
or
data
security
compromises.
As
cyber
threats
continue
to
evolve, we
may be required
to expend significant
additional resources
to modify or
enhance our protective
measures, investigate,
and
remediate any information security vulnerabilities or incidents and
develop our capabilities to respond and recover.
The full extent of a
31
particular
cyberattack, and
the steps
that the
Corporation may
need to
take to
investigate such
attack, may
not be
immediately clear,
and it
could take
considerable additional
time for us
to determine
the complete
scope of
information compromised,
at which time
the
impact
on the
Corporation and
measures
to recover
and restore
to a
business as
usual state
may be
difficult
to assess.
These factors
may
also
inhibit
our
ability
to
provide
full
and
reliable
information
about
the
cyberattack
to
our
customers,
third-party
vendors,
regulators, and the public.
A successful penetration or circumvention of our system
security, or the systems of
our customers, suppliers, and other third parties,
could cause us serious negative consequences, including significant
operational, reputational, legal, and regulatory costs and concerns.
Any of these
adverse consequences could
adversely impact our
results of operations,
liquidity,
and financial condition.
In addition,
our
insurance
policies
may
not
be
adequate
to
compensate
us
for
the
potential
costs
and
other
losses
arising
from
cyber
attacks,
failures of
information technology
systems, or
security breaches,
and such
insurance policies
may not
be available
to us in
the future
on
economically
reasonable
terms, or
at
all.
Insurers
may
also
deny
us
coverage
as to
any
future
claim.
Any of
these
results
could
harm our growth prospects, financial condition, business, and reputation.
The Corporation
is subject
to stringent
and changing
privacy laws,
regulations, and
standards as
well as
policies, contracts,
and
other
obligations
related
to
data
privacy
and
security.
Our
failure
to
comply
with
privacy
laws and
regulations,
as
well as
other
legal obligations, could have a material adverse effect
on our business.
State,
federal,
and
foreign
governments
are
increasingly
enacting
laws
and
regulations
governing
the
collection,
use,
retention,
sharing,
transfer,
and security
of personally
identifiable information
and data.
A variety
of federal,
state, local,
and foreign
laws and
regulations,
orders,
rules,
codes,
regulatory
guidance,
and
certain
industry
standards
regarding
privacy,
data
protection,
consumer
protection,
information
security,
and
the
processing
of
personal
information
and
other
data
apply
to
our
business.
State
laws
are
changing
rapidly,
and
new
legislation
proposed
or
enacted
in
a
number
of
other
states
imposes,
or
has
the
potential
to
impose,
additional obligations
on companies
that process
confidential, sensitive
and personal
information, and
will continue
to shape
the data
privacy
environment
nationally.
The U.S.
federal
government
is also
significantly
focused on
privacy
matters.
Any failure
by us
or
any of our business partners to comply with applicable laws, rules,
and regulations may result in investigations or actions against us by
governmental entities, private
claims and litigation, fines,
penalties or other liabilities.
Such events may increase
our expenses, expose
us to
liabilities, and
impair our reputation,
which could have
a material
adverse effect
on our business.
While we
aim to comply
with
applicable data
protection laws and
obligations in all
material respects, there
is no assurance
that we will
not be subject
to claims that
we
have
violated
such
laws
and
obligations,
will
be
able
to
successfully
defend
against
such
claims,
or
will
not
be
subject
to
significant fines
and penalties
in the
event of
non-compliance. Additionally,
to the
extent multiple
state-level laws
are introduced
in
the U.S. with
inconsistent or conflicting
standards and there
is no federal
law to preempt
such laws, compliance
with such laws
could
be
difficult
and
costly
to
achieve,
or
impossible
to
achieve,
and
we
could
be
subject
to
fines
and
penalties
in
the
event
of
non-
compliance.
RISKS RELATING
TO THE BUSINESS ENVIRONMENT AND OUR
INDUSTRY
The currently evolving situation related to the ongoing COVID-19 pandemic has
had a
material adverse effect and may
continue to
have a materially
adverse effect
on the Corporation’s
business,
financial
condition
and results
of operations.
The
ongoing
COVID-19
pandemic
created
a
global
public-health
crisis
that
resulted
in
challenging
economic
conditions
for
our
business
and
is
likely
to
continue
to
do
so.
The
economic
impact
of
the
COVID-19
pandemic
has
caused
significant
volatility
and
disruption
in
the
financial
markets
of
Puerto
Rico
and
the
other
markets
in
which
the
Corporation
operates.
The
uncertainty
surrounding
the
future
economic
conditions
has
been
a
challenge
to
management's
ability
of
estimating
the
pandemic's
impact
on
credit quality, revenues,
and assets values.
While many areas of
consumer spending have rebounded
since the initial outbreak
of the COVID-19 pandemic
on March 11,
2020,
new variants of
the virus continue
to emerge, such
as the recent Omicron
variant, which have
resulted in a rapid
increase in infections
and
disruptions
in
the
economic
recovery.
As
of
December
31,
2021,
certain
guidelines
and
executives’
orders,
issued
by
the
governments
in
which
the
Corporation
operates,
remained
in
effect
and
continue
to
impact
how
individuals
interact
and
how
businesses and
the governments
operate. The
operations and
financial results
of the
Corporation have
been and
could continue
to be
adversely affected by some of these guidelines, executives’
orders, and any new strain of the virus.
Considering
the
effects
of
the
COVID-19
pandemic
on
the
economy
and
market
conditions,
the
U.S.
government
and
local
governments have enacted stimulus packages and other programs
and forms of relief, such as the SBA PPP program established
by the
CARES
Act
of
2020.
Loans
that
the
Corporation
grants
under
the
SBA
PPP
are
at
below
market
interest
rates.
The
Corporation’s
participation
in the
SBA PPP,
Main Street
and any
other such
programs or
stimulus packages
may give
rise to
claims, including
by
governments,
regulators,
or
customers
or
through
class action
lawsuits,
or
judgments
against the
Corporation
that
may
result
in
the
payment of
damages or
the imposition
of fines,
penalties or
restrictions by
regulatory authorities,
or result
in reputational
harm. The
32
occurrence
of
any
of
the
foregoing
could
have
a
material
adverse
effect
on
the
Corporation’s
results
of
operations
or
financial
condition.
The Company continues to
follow all safety guidelines
and government mandates
regarding COVID-19 protocols
and vaccinations,
and announced
that all employees,
service providers,
and consultants of
the Corporation must
have the booster
shot of the COVID-19
vaccine
by
March
1,
2022,
with
few
exceptions.
The
extent
to
which
the
COVID-19
pandemic
impacts
our
business,
results
of
operations,
and financial
condition, as
well as
our regulatory
capital and
liquidity ratios,
will depend
on future
developments, which
are
highly
uncertain
and
cannot
be
predicted,
including
the
scope
and
duration
of
the
COVID-19
pandemic
and
actions
taken
by
governmental authorities and other third parties in response to the pandemic
.
The Corporation’s
credit quality
and
the value
of our
portfolio of
Puerto Rico
government
securities has
been and
in the
future
may
be
adversely
affected
by
Puerto
Rico’s
economic
condition,
and
may
be
affected
by
actions
taken
by
the
Puerto
Rico
government
or the PROMESA oversight board to address the ongoing fiscal and economic
challenges in Puerto Rico.
A significant
portion
of the
Corporation’s
business activities
and credit
exposure
is concentrated
in the
Commonwealth of
Puerto
Rico, which has experienced an economic and fiscal crisis for more
than a decade.
In March
2020, on
top of
the hurricanes
and earthquakes
experienced in
2017 and
2020, respectively,
Puerto Rico
confronted the
COVID-19
pandemic,
which created
an unprecedented
public health
crisis. The
COVID-19
pandemic
has been
a devastating
health
crisis for
the Island,
causing over
4,000 deaths
and spikes
in unemployment
due to
impacts on
the tourism
industry and
government
lockdowns
put
in place
to curb
the spread
of the
disease.
The
shock
of the
pandemic
on employment,
and related
local and
federal
stimulus funding, impacted
Puerto Rico’s economy
in a variety of ways.
While economic activity was
severely reduced, extraordinary
unemployment
insurance
and
other
direct
transfer
programs
more
than
offset
the
estimated
income
loss
due
to
less
activity.
As
a
result,
personal
income
has
temporarily
increased
on
a
net
basis.
Puerto
Rico
also
received
additional
federal
support,
with
the
Coronavirus Response and
Relief Supplemental Appropriations
Act (CRRSA) and
American Rescue Plan
(ARP) Act bringing
around
$7
and
$18
billion,
respectively,
in
federal
funding
to be
available
for
recovery
efforts
in 2021.
Significantly,
the ARP
Act
created
new
and
permanent
economic
support
programs
for
Puerto Rico
such
as,
an
expanded
Earned
Income
Tax
Credit
(EITC)
program,
with up
to $600
million
in federal
support,
and permanent
expansion
of eligibility
criteria of
the Child
Tax
Credit (CTC).
Both are
projected
to have
permanent effects
on income
and growth,
and the
EITC expansion
is expected
to support
timely realization
of the
human capital and welfare structural reform benefits.
Based
on
the
most
recent
fiscal
plan
certified
by
the
PROMESA
oversight
board
on
January
27,
2022,
Puerto
Rico’s
real
GNP
decline in
fiscal year
2020 will
be followed
by a
forecasted rebound
in fiscal
year 2021
and fiscal year
2022 as
the full impact
of the
federal economic support takes hold.
However,
there remains
considerable uncertainty
about the
ultimate duration
and magnitude
of the
pandemic with
new variants
of
the virus emerging
and expected to continue
to emerge, and thus
the size of
the associated economic
losses. The 2021 Certified
Fiscal
Plan accounted for the impact of federal funds
granted through several government programs, including
the CARES Act of 2020 and a
$787 million
local package of
direct assistance
to workers
and businesses
(the “Puerto
Rico COVID-19
Stimulus Package”).
Updates
in the 2022
fiscal plan are
limited in scope and
do not revisit the
broad range of
forecasts and assumptions
included in the
2021 fiscal
plan. The 2022 fiscal
plan also incorporates
terms of the confirmed
plan of adjustments, detail
on the use of
funds from the
Municipal
Revenue Collection
Center (CRIM,
by its
Spanish acronym),
and on
the status
of PayGo
payments. Finally,
the plan
includes details
on the
LUMA transaction
and costs
related to
the mobilization
of certain
previous Puerto
Rico Electric
Power Authority
(“PREPA”)
employees
to Commonwealth
agencies as
well as
certain budgetary
decisions and
adjustments that
were part
of the
fiscal year
2022
budget.
Furthermore,
on
January
18, 2022,
U.S.
District Court
of
Puerto
Rico
confirmed
the
Commonwealth
Plan
of
Adjustment,
which
restructures
approximately
$35
billion
of
debt
and
other
claims
against
the
Commonwealth
of
Puerto
Rico,
the
Public
Buildings
Authority (“PBA”),
and the
Employee Retirement
System (“ERS”),
as well
as more
than $50
billion of
unfunded pension
liabilities.
The Plan
of Adjustment
saves Puerto
Rico more
than $50
billion in
debt service
and reduces
outstanding obligations
to just
over $7
billion.
In addition,
the 2021 Certified
Fiscal Plan also
provides a
roadmap for
a series of
fiscal and
structural reforms
in areas such
as: (i)
human
capital
and
labor,
(ii)
ease
of
doing
business,
(iii)
power
sector
reform,
and
(iv)
infrastructure
reform,
and
other
fiscal
measures;
however,
the
certified
fiscal
plan
provides
a
one-year
delay
in
most
categories
of
government
rightsizing
to
allow
the
government
to focus
its efforts
on implementation
of efficiency
reforms.
Also, the
Plan of
Adjustment
includes
a mechanism
to set
aside resources to fund the Puerto Rico’s
pension obligations, which has been historically neglected and underfunded.
As of December
31, 2021, the
Corporation had $360.1
million of direct
exposure to the
Puerto Rico government,
its municipalities
and
public
corporations,
compared
to
$394.8
million
as
of
December
31,
2020.
As
of
December
31,
2021,
approximately
$187.8
million of the
exposure consisted of loans
and obligations of municip
alities in Puerto Rico
that are supported by
assigned property tax
33
revenues
and
for
which,
in
most cases,
the
good
faith,
credit,
and
unlimited
taxing
power of
the
applicable
municipality
have
been
pledged to
their repayment,
and $122.8
million consisted
of municipal
revenue and
special obligation
bonds. Approximately
61% of
the Corporation’s
exposure to
Puerto Rico’s
government consisted
primarily of
senior priority
obligations concentrated
in four
of the
largest
municipalities
in
Puerto
Rico.
The
municipalities
are
required
by
law
to
levy
special
property
taxes
in
such
amounts
as
are
required for the payment of all of their respective general obligation
bonds and notes.
In
addition,
as
of
December
31,
2021,
the
Corporation
had
$92.8
million
in
exposure
to
residential
mortgage
loans
that
are
guaranteed
by
the
Puerto
Rico
Housing
Finance
Authority
(“PRHFA”),
compared
to
$106.5
million
as
of
December
31,
2020.
Residential
mortgage
loans
guaranteed
by
the
PRHFA
are
secured
by
the
underlying
properties
and
the
guarantees
serve
to
cover
shortfalls in collateral in the event of a borrower
default. The Puerto Rico government guarantees up to $75
million of the principal for
all
loans
under
the
mortgage
loan
insurance
program.
According
to
the
most
recently
released
audited
financial
statements
of
the
PRHFA, as of June
30, 2019, the PRHFA’s
mortgage loans insurance program covered loans in an
aggregate amount of approximately
$557 million. The regulations adopted
by the Authority require the establishment
of adequate reserves to guarantee the
solvency of the
mortgage loans
insurance program;
as of
June 30,
2019, the
Authority was
not in
compliance with
the regulations.
At June
30, 2019,
the Authority had an unrestricted deficit of approximately $5.2 million
in the mortgage loans insurance program.
As of December
31, 2021, the
Corporation had
$2.7 billion of
public sector deposits
in Puerto Rico,
compared to $1.8
billion as of
December 31,
2020. Approximately
19% of
the public
sector deposits
as of December
31, 2021
is from municipalities
and municipal
agencies
in
Puerto
Rico
and
81%
is
from
public
corporations,
the
central
government
and
agencies,
and
U.S.
federal
government
agencies in Puerto Rico.
Further deterioration
in economic
activity,
delays in
the receipt
of disaster
relief funds
allocated to
Puerto Rico,
and the
potential
impact on
asset values
resulting from
past or
future natural
disaster events,
when added
to Puerto
Rico’s
ongoing fiscal
crisis, could
materially
adversely affect our business, financial condition, liquidity,
results of operations and capital position.
Difficult market conditions have affected
the financial industry and may adversely affect us in the future.
Given that most of our business is in Puerto Rico and
the U.S. and given the degree of interrelation
between Puerto Rico’s economy
and that
of the
U.S., we
are exposed
to downturns
in the
U.S. economy,
including factors
such as
employment levels
in the
U.S. and
real estate
valuations. The
deterioration of
these conditions
adversely affected
us in
the past
and, in
the future
could adversely
affect
the
credit
performance
of
mortgage
loans,
and
result
in
significant
write-downs
of
asset
values
by
financial
institutions,
including
government-sponsored entities as well as major commercial banks
and investment banks.
In particular, we may face the following
risks:
●
Our
ability
to
assess
the
creditworthiness
of
our
customers
may
be
impaired
if
the
models
and
approaches
we
use
to
select, manage, and underwrite the loans become less predictive of future behaviors.
●
The
models
used
to
estimate
losses
inherent
in
the
credit
exposure,
particularly
those
under
CECL,
require
difficult,
subjective,
and
complex
judgments,
including
forecasts
of
economic
conditions
and
how
these
economic
predictions
might impair the ability of the borrowers to repay
their loans, which may no longer be capable of accurate
estimation and
which may, in turn, impact
the reliability of the models.
●
Our ability
to borrow from
other financial
institutions or
to engage
in sales of
mortgage loans
to third parties
(including
mortgage
loan securitization
transactions with
government-sponsored
entities and
repurchase agreements)
on favorable
terms,
or
at
all,
could
be
adversely
affected
by
further
disruptions
in
the
capital
or
credit
markets
or
other
events,
including deteriorating investor expectations.
●
Competitive
dynamics
in
the
industry
could
change
as
a
result
of
consolidation
of
financial
services
companies
in
connection with current market conditions.
●
Expected
future
regulation
of
our
industry
may
increase
our
compliance
costs
and
limit
our
ability
to
pursue
business
opportunities.
●
There may be downward pressure on our stock price.
Any
future
deterioration
of
economic
conditions
in
the
U.S.
and
disruptions
in
the
financial
markets
could
adversely
affect
our
ability to access capital, our business, financial condition, and results of
operations.
34
Additionally,
the
residential
mortgage
loan
origination
business
is
impacted
by
home
values
and
has
historically
been
cyclical,
enjoying periods of strong growth and profitability followed by periods
of shrinking volumes and industry-wide losses. During periods
of
rising
interest
rates,
the
refinancing
of
many
mortgage
products
tends
to
decrease
as
the
economic
incentives
for
borrowers
to
refinance their existing mortgage loans are reduced.
The actual
rates of delinquencies,
foreclosures, and
losses on loans
have been higher
during the economic
slowdown in the
U.S. in
the late
2000s and
early 2010s
and in
Puerto Rico
since 2006.
Unemployment, volatile
interest rates,
and declines
in housing
prices
have had a
negative effect on
the ability of
borrowers to repay
their mortgage loans.
Any sustained period
of increased delinquencies,
foreclosures,
or
losses could
adversely
affect
our
ability to
sell loans,
the prices
we
receive
for
loans,
the values
of mortgage
loans
held for
sale, or
residual interests
in securitizations,
which could
adversely affect
our financial
condition and
results of
operations. In
addition, any additional material decline in real estate
values would further weaken the loan-to-value
ratios and increase the possibility
of loss if a
borrower defaults. In
such event, we
will be subject to
the risk of loss
on such real estate
arising from borrower
defaults to
the extent not covered by third-party credit enhancement.
Continuation
of
the
economic
slowdown
and
decline
in
the
U.S.
Virgin
Islands
and
British
Virgin
Islands
could
continue
to
harm our results of operations.
For
many
years,
the
USVI
has
been
experiencing
a
number
of
fiscal
and
economic
challenges
that
have
deteriorated
the
overall
financial
and
economic
conditions
in
the
area.
According
to
the
United
States
Bureau
of
Economic
Analysis
(“BEA”),
real
gross
domestic product
(“GDP”) estimates
show that
the economy
grew by
5.7% in
2021 in
contrast to
a decrease
of 3.4
percent in
2020.
Growth
in
2021
reflected
increases
in
all
major
subcomponents,
led
by
personal
consumption
expenditures,
nonresidential
fixed
investment, export, residential
fixed investment and
private inventory investment.
Additionally, disaster-related
insurance payouts and
federal assistance supported
the reconstruction
and major repairs
of businesses and
homes that were
destroyed or heavily
damaged by
two major
hurricanes in
2017. Nevertheless,
the COVID-19
pandemic has
been an
impactful and
unprecedented health
crisis for
the
USVI, causing
numerous deaths
and spikes
in unemployment
due to
impacts on
the tourism
industry and
government lockdowns
put
in place to curb the spread of the disease.
As
a
result
of
the
COVID-19
pandemic,
similar
to
Puerto
Rico,
the
USVI
government
has
been
processing
stimulus
checks
and
unemployment
compensation
checks.
According
to
information
published
by
the
USVI
government,
as
of
January
4,
2022,
the
government
had
issued
53,684
unemployment
insurance
checks
and
an
additional
29,451
Federal
Pandemic
Unemployment
Compensation
checks,
totaling
approximately
$94
million.
In
addition,
as
of
May
16,
2021,
the
government
announced
that
1,620
businesses from Virgin
Islands have been approved for the SBA PPP,
totaling more than $120.3 million.
On December
8, 2021,
Moody’s
Investor Services
(“Moody’s”)
announced the
completion of
its periodic
review of
ratings of
the
Virgin
Islands
Water
and
Power
Authority
(“VI
WAPA”).
The
Caa2
electric
system
revenue
bonds
rating
is
constrained
by
VI
WAPA’s
limited unrestricted
liquidity sources,
unsustainable debt
load and
capital expenditures,
including its
inability to file
audited
financial
statements on
a timely
basis, according
to the
rating
agency.
On May
28, 2020,
Moody’s
announced
the completion
of its
periodic
rating
review
of
the
USVI
government.
Despite
the
recent
improvement
in
the
government’s
liquidity
and
short-term
financial position,
the Caa3 rating
reflects the risk
that the reemergence
of a significant
structural deficit,
combined with the
expected
insolvency of the Government Employees’ Retirement System (“GERS”), will lead
the government to restructure its debt.
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
December 31,
2021, the
Corporation had
$39.2 million
in loans
to USVI
government and
public corporations,
compared to
$61.8 million as of December 31,
2020. As of December 31, 2021,
all loans were currently performing
and up to date on principal
and
interest payments.
With
respect
to
the BVI
region,
the government
has
indicated
that
the economic
impact of
the COVID-19
pandemic
is felt
most
strongly
in
the
tourism
sector,
which
accounts
for
roughly
one
third
of
its
GDP.
Recent
reports
published
by
the
BVI
government
projects
a GDP
decline
of 13%
to 17%
in 2020,
given the
prevailing
conditions in
the tourism
sector.
In the
BVI, the
borders were
closed
to tourism
for approximately
nine
months in
2020 and
was among
the last
to reopen
its border
to commercial
air traffic.
On
December
1,
2020,
the
government
began
its
third
phase
in
the
border
reopening
process
allowing
international
travel
and
the
re-
opening of
the tourism
industry albeit
with strict
restrictions in
place, including
multiple tests
and a
mandatory
four-day quarantine.
Additionally,
seaports in
the BVI
reopened
on April
5, 2021
for international
travel. As
of December
31, 2021,
the Corporation
had
loans
totaling
$142.7
million
with
exposure
to
the
BVI
region,
primarily
residential
mortgage
and
commercial
mortgage
loans,
of
which $15.4 million are in nonaccrual status.
35
Further deterioration
in economic
conditions in
USVI and
the BVI
region could
adversely affect
our business,
financial condition,
liquidity, results of operations
and capital position.
Credit quality may result in additional losses.
Our business depends
on the creditworthiness
of our customers
and counterparties
and the value
of the assets
securing our loans
or
underlying our
investments. A
material decrease
in the
credit quality
of the
customer base
or material
changes in
the risk profile
of a
market, industry
or group of
customers could materially
and adversely affect
our business, financial
condition, allowance levels,
asset
impairments, liquidity,
capital and results of operations.
We
had a
commercial and
construction loan
portfolio held
for investment
in the
amount of
$5.2
billion as
of December
31, 2021.
Due to
their nature,
these loans
entail a
higher credit
risk than
consumer and
residential mortgage
loans, since
they are larger
in size,
concentrate
more
risk
in
a
single
borrower
and
are
generally
more
sensitive
to
economic
downturns.
Furthermore,
in
the
case
of
a
slowdown
in the
real estate
market,
it may
be difficult
to dispose
of the
properties
securing
these loans
upon any
foreclosure of
the
properties. We
may incur losses over
the near term, either because of continued deterioration
in the quality of loans or because of sales
of
problem
loans,
which
would
likely
accelerate
the
recognition
of
losses. Any
such
losses
could
adversely
impact
our
overall
financial performance and results of operations.
Changes in collateral values of properties located in stagnant or distressed
economies may require increased reserves
.
Further
deterioration
of
the
value
of
real
estate
collateral
securing
our
construction,
commercial
and
residential
mortgage
loan
portfolios,
whether
located
in
Puerto
Rico
or
elsewhere,
would
result
in
increased
credit
losses. As
of
December
31,
2021,
approximately
19% and
27% of
our loan
portfolio
held for
investment
consisted
of commercial
mortgage
and residential
real estate
loans, respectively.
Whether the collateral
that underlies our
loans is located
in Puerto Rico, the
USVI, the BVI, or
the U.S. mainland,
the performance
of our
loan portfolio
and the
collateral value
backing the
transactions are
dependent upon
the performance
of, and
conditions within,
each specific
real estate market. Puerto
Rico, where most
of the collateral
is located, has
been through
a period of
sustained recession
since 2006.
Construction
and commercial
loans, mostly
secured by
commercial
and residential
real estate
properties,
entail a
higher
credit risk
than consumer
and residential
mortgage loans
since they
are larger
in size,
may have
less collateral
coverage, concentrate
more risk
in a
single borrower
and are
generally more
sensitive to
economic
downturns. As
of December
31, 2021,
our commercial
mortgage
and
construction
real
estate
loans
held
for
investment
in
Puerto
Rico
amounted
to
$1.7
billion,
or
73%
of
the
total
$2.3
billion
commercial
mortgage
and
construction
real
estate loan
portfolios,
which
constituted
21%
of
the
total
loan
portfolio
held
for
investment.
We
measure credit
losses for
collateral dependent
loans based
on the
fair value
of the
collateral, which
is generally
obtained from
appraisals, adjusted
for undiscounted
selling costs
as appropriate.
Updated appraisals
are obtained
when we
determine that
loans are
collateral
dependent
and
are
updated
annually
thereafter.
In
addition,
appraisals
are
also
obtained
for
certain
residential
mortgage
loans on a spot
basis based on specific
characteristics, such as delinquency
levels, and age of
the appraisal. The appraised
value of the
collateral may decrease, or we may
not be able to recover collateral at
its appraised value. A significant decline
in collateral valuations
for
collateral
dependent
loans
has
required
and,
in
the
future,
may
require,
increases
in
our
credit
loss
expense
on
loans. Any
such
increase would have an adverse effect on our future financial condition
and results of operations.
Interest rate
shifts, such
as increases
in interest
rates that
may
reduce demand
for mortgage
and other
loans, may
reduce net
interest income.
Shifts in
short-term
interest rates
have
reduced net
interest income
in the
past and,
in the
future, may
reduce net
interest income,
which
is the
principal
component
of our
earnings. Net
interest income
is the
difference
between
the amounts
received by
us on
our
interest-earning assets and the
interest paid by us on
our interest-bearing liabilities. Differences
in the re-pricing structure of
our assets
and liabilities
may result
in changes
in our
profits when
interest rates
change.
For instance,
higher interest
rates increase
the cost
of
mortgage and
other loans
to consumers
and businesses
and may
reduce future
demand for
such loans,
which may
negatively impact
our profits by reducing the amount of loan interest income due to declines
in volume.
Additionally,
basis risk is
the risk of
adverse consequences resulting
from unequal changes
in the difference,
also referred to
as the
“spread” or
basis, between
the rates
for two
or more
different
instruments with
the same
maturity and
occurs when
market rates
for
different financial
instruments or
the indices
used to
price assets and
liabilities change
at different
times or
by different
amounts. For
example, the interest expense
for liability instruments might
not change by the
same amount as interest income
received from loans or
investments.
To
the
extent
that
the
interest
rates
on
loans
and
borrowings
change
at
different
rates
and
by
different
amounts,
the
margin between
our variable rate-based
assets and the cost
of the interest-bearing
liabilities might be
compressed and adversely
affect
net interest income.
36
Accelerated prepayments may adversely affect net interest income.
In
general,
fixed-income
portfolio
yields
decrease
if
pre-payment
amounts
are
invested
at
lower
rates. Net
interest
income
could
also
be
affected
by
prepayments
of
MBS.
Acceleration
in
the
prepayments
of
MBS
would
lower
yields
on
these
securities,
as
the
amortization of
premiums paid
upon the
acquisition of
these securities would
accelerate. Conversely,
acceleration
in the prepayments
of MBS would
increase yields on
securities purchased at
a discount, as
the accretion 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
our
investment in callable securities because decreases in interest rates might
prompt the early redemption of such securities.
The discontinuation of LIBOR could adversely affect
the interest rates we pay or receive, could prompt regulatory questions, result
in costly disputes about relevant alternative interest rates and require costly systems and
analytics changes.
In July
2017, the
United Kingdom’s Financial Conduct Authority (the
“FCA”), which regulates LIBOR, officially announced that
it
intended to
stop persuading
or compelling
banks to submit
information
to the administrator
of LIBOR after
2021. In March
2021, the FCA
confirmed that publication of the
overnight and one
month, three-month, six-month, and twelvemonth U.S. Dollar LIBOR settings will
cease or become
no longer
representative
of the market
the rates
seek to measure
(i.e., non-representative)
immediately
after June
30, 2023,
and all other U.S. Dollar
LIBOR settings,
including the one week
and two-month U.S. Dollar
LIBOR settings,
became non-representative
immediately after December 31, 2021. The Federal Reserve, the Office of
the Comptroller of the Currency,
and the FDIC
also released
supervisory guidance encouraging banks to
cease entering into
new contracts that
use U.S.
Dollar LIBOR as
reference rate as
soon as
practicable and in any event by
December 31, 2021. Banking regulators in the U.S. and
globally have increased regulatory scrutiny
and
intensified
supervisory
focus of
financial
institutions
LIBOR transition
plans, preparations,
and readiness.
Significant amounts of
loans, mortgages,
securities, derivatives, and
other
financial instruments are
referenced to
LIBOR, and
any
inability of
market
participants and
regulators to
successfully introduce benchmark
rates
to
replace
LIBOR
and
implement effective
transitional
arrangements
to address the
discontinuation
of LIBOR could result
in disruption
in the financial
markets. Therefore,
regulators
and market participants
in various jurisdictions
have been working to recommend
alternative
rates to LIBOR for each respective
currency
that are compliant
with the International
Organization
of Securities
Commission’s standards
for transaction-based
benchmarks.
In the U.S.
the Alternative Reference Rate
Committee (“AARC”), a
group of
market participants convened by
the Federal
Reserve, identified the
Secured Overnight
Financing
Rate (“SOFR”)
as its recommended
alternative
to LIBOR. The
Federal Reserve
started publishing
the SOFR
in April 2018. The
SOFR is a
broad measure of the cost
of overnight borrowings collateralized
by Treasury securities in the repurchase
agreement market. During 2021, the ARRC
recommended using the
Chicago Mercantile Exchange Group’s (“CME”) forward-looking
Term
SOFR
rates
for
cash
products
and
derivatives, limited
to
end-users
hedging
cash
products.
An
end-user
is
described
as
any
counterparty
to the underlying
cash product,
such as a
borrower, lender,
or guarantor.
These parties
may enter
into Term SOFR
rates swaps,
caps, swaptions,
or other derivatives
to hedge cash product
exposures.
The market transition
away from LIBOR to an
alternative
reference
rate is complex and could
have a range of adverse effects
on our business, financial
condition, and
results of operations.
In particular, any
such transition
could:
●
Adversely
affect the
interest
rates received
or paid on,
the revenue
and expenses
associated
with or the
value of
the Corporation’s
LIBOR-based assets
and
liabilities, which include
certain variable
rate
loans, primarily
commercial and
construction loans,
private
label
MBSs,
the
Corporation’s
junior
subordinated
debentures,
and
certain
other
financial
arrangements
such
as
derivatives. As of December 31, 2021, the most significant
of the Corporation’s LIBOR-based assets and liabilities
consists of
$2.0
billion of
commercial and
construction loans, $134.4
million of
Puerto Rico
municipalities bonds held
as
part
of
the
Corporation’s
held-to-maturity
investment
securities
portfolio,
and $183.8
million
of junior
subordinated
debentures;
●
Prompt inquiries
or other
actions from
regulators
in respect
of the Corporation’s
preparation
and readiness
for the replacement
of
LIBOR with
an alternative
reference
rate; and
●
Result in
disputes,
litigation
or other actions
with counterparties
regarding
the interpretation
and enforceability
of certain
fallback
language
in LIBOR-based
contracts.
The transition away from LIBOR to an alternative reference
rate will require the transition to, or development of, appropriate
systems
and analytics to effectively
transition the Corporation’s
risk management and other
processes from LIBOR-based
products to those based
on the applicable
alternative
reference
rate, such
as SOFR.
The Corporation
has developed
a LIBOR
Transition Working Group
(“LTWG”)
to
define the
scope and
potential impact
that
the
replacement of
LIBOR
will have
across the
Corporation's LIBOR-based assets and
liabilities outstanding
overseen by the
Corporation’s Management Investments
& Asset-Liability Committee and the Board of
Directors
Asset-Liability
Committee.
The LTWG is composed by officers of the major areas affected,
including: Treasury, Legal,
Corporate Loans,
Credit, Operations,
Systems,
Asset-Liability
Management,
Risk, Accounting,
Financial
Reporting,
Public Relations,
and Strategic
Planning,
which together,
developed a
LIBOR Transition
workplan
and timetable
of
their respective areas;
identifying the systems,
models, and
applications
impacted
by the transition;
and the resources
necessary
for the transition.
As part of
this transition
plan, the
Corporation
started
including fallback
language on new and renewed
contracts tied
to LIBOR to provide for the determination
of an ARR and had adhered to
the
LIBOR
Fallbacks Protocol of
the
International Swaps and
Derivatives Association. In
addition, effective
December 31,
2021
the
37
Corporation discontinued entering into
new
contracts that
use
U.S. Dollar
LIBOR as
the reference
rate. Currently,
the
Corporation is
primarily offering CME’s Term SOFR rate as the ARRs to LIBOR. The Bank may also offer other industry-accepted
benchmark interest
rates
that
can
be
supported for
commercial transactions. The
Corporation continues
working
with
the
update
of
systems, processes,
documentation and models, with additional
updates expected through 2023.There
can be no guarantee that these efforts will successfully
mitigate
the operational
risks associated
with the
transition
away from
LIBOR to
an alternative
reference
rate.
The manner
and impact
of the transition
from LIBOR
to an alternative
reference
rate, as
well as
the effect
of these
developments
on our
funding costs,
loan and
investment
securities
portfolios,
asset-liability
management,
and business,
is uncertain.
We are subject to Environmental,
Social and Governance (ESG) risks that could adversely affect
our reputation and the market
price of our securities.
The Corporation
is subject
to a variety
of risks
arising
from ESG
matters.
ESG matters
include
climate
risk, hiring
practices,
the diversity
of our
work force, and racial and
social justice issues involving our personnel, customers and third parties with whom we
otherwise do
business.
Risks arising
from ESG
matters
may adversely
affect, among
other things,
our reputation
and the
market price
of our securities.
For example,
we may be exposed
to negative
publicity
based on the
identity and
activities
of those to whom
we lend and with
which we
otherwise do
business and
the
public’s
view
of
the
approach and
performance of
our
customers and
business partners
with
respect
to ESG matters.
Any such
negative
publicity
could arise
from adverse
news coverage
in traditional
media and
could also
spread through
the
use of social media platforms.
The Corporation’s relationships
and reputation with
its existing and prospective
customers and third
parties
with which we
do business
could be damaged
if we were to become
the subject
of any such negative
publicity. This,
in turn, could
have an
adverse effect on our ability to
attract and retain customers and employees and could have a negative impact on
our business,
financial
condition and results of operations.
Additionally, concerns over
the
long-term impacts of
climate change
have
led and
will continue
to
lead to
governmental efforts to
mitigate
those
impacts. Consumers
and
businesses also
may
change
their
behavior on
their
own
as
a
result
of
these
concerns. The
Corporation and its customers will need to
respond to new laws
and regulations as well as
consumer and business preferences resulting
from climate
change concerns.
Finally,
shareholders,
customers
and
other
stakeholders
have
begun
to
consider
how
corporations
are
addressing
ESG
issues.
Investor
advocacy
groups,
investment
funds
and
influential
investors
are
also
increasingly
focused
on
these
practices,
especially
as
they
relate
to
the
environment,
health
and
safety,
diversity,
labor
conditions
and
human
rights.
Increased ESG related
compliance costs could
result in increases to
our overall operational
costs.
Failure to adapt to
or comply with regulatory
requirements
or
investor
or
stakeholder
expectations
and
standards
could
negatively
impact
our
reputation,
ability
to
do
business
with
certain
partners,
and
our
stock
price.
New
government
regulations
could
also
result
in
new
or more
stringent
forms
of ESG
oversight
and
expanding mandatory and voluntary reporting, diligence, and disclosure.
Our results of
operations could be
adversely affected
by natural disasters, political
crises, negative global
climate patterns or other
catastrophic events.
Natural
disasters, which
nature and
severity may
be impacted
by climate
change,
such as
hurricanes,
floods, extreme
cold
events
and
other
adverse
weather
conditions;
political
crises,
such
as
terrorist
attacks,
war,
labor
unrest,
other
political
instability,
trade
policies and
sanctions, including
the repercussions
of the
attack by
Russia on
Ukraine; negative
global climate
patterns, especially
in
water
stressed
regions;
or other
catastrophic
events,
such as
fires
or other
disasters
occurring
at our
locations,
whether
occurring
in
Puerto
Rico,
the
U.S.,
or
internationally,
could
cause
a
significant
adverse
effect
on
the
economy
and
disrupt
our
operations.
For
example,
Puerto
Rico
experienced
hurricanes
and
earthquakes
in
2017
and
2020,
which
had
an
adverse
effect
on
our
operations
created
by
decreases
in
loan
demand
and
deposit
level.
Further,
climate
change
may
increase
both
the
frequency
and
severity
of
extreme weather conditions and natural
disasters, which may affect our
business operations, either in a particular
region or globally,
as
well as the
activities of our
customers. The Corporation
is also not able
to predict the
positive or negative
effects that future
events or
changes to the U.S. or global economy,
financial markets, or regulatory and business environment could have on our operations.
Climate change may materially adversely affect the Corporation's
business and results of operations.
Concerns over
the long-term effects
of climate change
have led and
will continue to
lead to governmental
efforts around
the world
to mitigate
those impacts.
Consumers and
businesses also
may
voluntarily
change their
behavior
as a
result of
these concerns.
The
Corporation
and
its
customers
will
need
to
respond
to
new
laws
and
regulations
as
well
as
consumer
and
business
preferences
resulting
from
climate
change
concerns.
The
Corporation
and
its
customers
may
face
cost
increases,
asset
value
reductions
and
operating process
changes. The
impact on
our customers
will likely
vary depending
on their
specific attributes,
including reliance
on
or role in fossil fuel activities. Among the impacts to the Corporation,
we could face reductions in creditworthiness on the part of some
customers
or in
the value
of assets
securing
loans. The
Corporation’s
efforts
to take
these risks
into account
in making
lending and
38
other
decisions,
including
by
increasing
our
business
with
climate-responsible
companies,
may
not
be
effective
in
protecting
the
Corporation from the negative impact of new laws and regulations or changes in
consumer or business behavior.
Labor shortages and constraints in the supply chain could adversely affect
our clients’ operations as well as our operations.
Many sectors
in Puerto Rico,
the United States,
Virgin
Islands and around
the world are
experiencing a shortage
of workers. Many
of our commercial clients have
been impacted by this shortage
along with disruptions and constraints
in the supply chain, which
could
adversely
impact their
operations
and could
lead to
reduced cash
flow and
difficulty
in making
loan repayments.
The Corporation’s
industry has also been affected by the shortage
of workers, with respect to certain roles, as well as increasing
wages for entry level and
certain professional roles.
This may lead to open
positions remaining unfilled for
longer periods of time,
which may affect the
level of
service provided by the Corporation, or a need to increase wages to attract workers.
The failure of other financial institutions could adversely affect
us.
Our ability to engage
in routine financing transactions
could be adversely affected
by future failures of financial
institutions and the
actions and
commercial soundness
of other
financial institutions.
Financial institutions
are interrelated
as a result
of trading,
clearing,
counterparty
and
other relationships.
We
have
exposure
to different
industries
and
counterparties
and
routinely
execute
transactions
with counterparties
in the financial
services industry,
including brokers
and dealers,
commercial banks,
investment banks,
investment
companies and other
institutional clients. In
certain of these transactions,
we are required to
post collateral to
secure the obligations
to
the
counterparties.
In the
event
of
a bankruptcy
or
insolvency
proceeding
involving
one of
such counterparties,
we
may
experience
delays in recovering
the assets posted as
collateral, or we
may incur a
loss to the extent
that the counterparty
was holding collateral in
excess of the obligation to such counterparty or under other circumstances.
In addition, many of these transactions
expose us to credit risk in
the event of a default by our
counterparty or client. The credit
risk
may be exacerbated when
the collateral held by us cannot
be realized or is liquidated
at prices not sufficient
to recover the full amount
of the loan
or derivative
exposure due to
us. Any losses
resulting from
our routine funding
transactions may
materially and adversely
affect our financial condition and results of operations.
RISK RELATING
TO THE REGULATION
OF OUR INDUSTRY
We are subject to certain regulatory
restrictions that may adversely affect our operations.
We
are subject
to supervision
and regulation
by the
Federal Reserve
Board and
the FDIC.
We
are a
bank holding
company and
a
financial holding
company under
the Bank
Holding Company
Act of
1956, as
amended. The
Bank is
also subject
to supervision
and
regulation by the Puerto Rico Office of the Commissioner of Financial
Institutions.
Under
federal
law,
financial
holding
companies
are
permitted
to
engage
in
a
broader
range
of
“financial”
activities
than
those
permitted
to
bank
holding
companies
that
are
not
financial
holding
companies.
A
financial
holding
company
that
ceases
to
meet
certain
standards
is
subject
to
a
variety
of
restrictions,
depending
on
the
circumstances,
including
the
prohibition
from
undertaking
new activities
or acquiring
shares or
control of
other companies.
If we
fail to
comply with
the requirements
from our
regulators,
we
may
become
subject
to
regulatory
enforcement
action
and
other
adverse
regulatory
actions
that
might
have
a
material
and
adverse
effect on our operations.
The FDIC insures
deposits at
FDIC-insured depository
institutions up
to certain limits
(currently,
$250,000 per
depositor account).
The FDIC charges insured
depository institutions premiums to
maintain the DIF.
In the event of a bank
failure, the FDIC takes control
of a failed
bank and, if
necessary,
pays all insured
deposits up to
the statutory deposit
insurance limits using
the resources of
the DIF.
The FDIC
is required
by law to
maintain adequate
funding of
the DIF,
and the
FDIC may
increase premium
assessments to
maintain
such
funding.
The
Dodd-Frank
Wall
Street
Reform
and
Consumer
Protection
Act
(the
“Dodd-Frank
Act”)
requires
the
FDIC
to
increase the DIF’s
reserves against future losses, which
will require institutions with assets
greater than $10 billion, such as
FirstBank,
to bear an increased responsibility for funding the prescribed reserve to
support the DIF.
The
FDIC
may
increase
FirstBank’s
premiums
or
impose
additional
assessments
or
prepayment
requirements
in
the
future.
The
Dodd-Frank Act removed the statutory cap for the reserve ratio, leaving
the FDIC free to set this cap going forward.
Our
compensation
practices
are
subject
to
oversight
by
the
Federal
Reserve
Board
and
the
FDIC.
Any
deficiencies
in
our
compensation
practices
may
be
incorporated
into
our
supervisory
ratings,
which
can
affect
our
ability
to
make
acquisitions
or
perform other actions. In addition,
the regulation of our compensation practices may change in the future.
Our
compensation
practices
are
subject
to
oversight
by
the
Federal
Reserve
Board
and
the
FDIC.
As
discussed
above,
the
Corporation currently
is subject
to the
2010 interagency
guidance governing
the incentive
compensation activities
of regulated
banks
and bank
holding companies.
Our failure
to satisfy
these restrictions
and guidelines
could expose
us to
adverse regulatory
criticism,
39
lowered
supervisory
ratings,
and
restrictions
on
our
operations
and
acquisition
activities.
In
addition,
the
federal
banking
agencies
have
proposed
regulations
under
the
Dodd-Frank
Act
that
place
restrictions
on
the
incentive
compensation
practices
of
banking
organizations with $1 billion or more in assets.
The scope
and content of
the U.S. banking
regulators’ policies on
executive compensation
are continuing
to develop and
are likely
to continue evolving in
the future. It cannot be
determined at this time whether
compliance with such policies
will adversely affect the
ability of the Corporation and its subsidiaries to hire, retain and motivate
their key employees.
We
are
subject
to
regulatory
capital
adequacy
guidelines,
and,
if
we
fail
to
meet
these
guidelines,
our
business
and
financial
condition will be adversely affected.
We
are subject
to stringent
regulatory
capital requirements.
Although
the Corporation
and FirstBank
met general
well-capitalized
capital ratios
as of
December 31,
2021 and
we expect
both companies
will continue
to exceed
the minimum
risk-based and
leverage
capital
ratio
requirements
for
well-capitalized
status
under
the
current
capital
rules,
we
cannot
assure
that
we
will
remain
at
such
levels.
If
we
fail
to
meet
these
minimum
capital
guidelines
and
other
regulatory
requirements,
our
business
and
financial
condition
will
be
materially
and
adversely
affected.
If
we
fail
to
maintain
certain
capital
levels,
or
are
deemed
not
well
managed
under
regulatory
exam
procedures,
or
if
we
experience
certain
regulatory
violations,
our
status
as
a
financial
holding
company,
and
our
ability to offer
certain financial products will be
compromised and our financial
condition and results of operations
could be adversely
affected.
Monetary
policies
and
regulations
of
the
Federal
Reserve
Board
could
adversely
affect
our
business,
financial
condition
and
results of operations.
In addition
to being
affected
by general
economic conditions,
our earnings
and growth
are affected
by the
policies of
the Federal
Reserve Board. An important
function of the Federal
Reserve Board is to regulate
the money supply and
credit conditions. Among the
instruments
used
by
the
Federal
Reserve
Board
to
implement
these
objectives
are
open
market
operations
in
U.S.
government
securities,
adjustments
of
the
discount
rate
and
changes
in
reserve
requirements
for
bank
deposits.
These
instruments
are
used
in
varying combinations to
influence overall economic
growth and the
distribution of credit,
bank loans, investments
and deposits. Their
use also affects interest rates charged on
loans or paid on deposits.
The
monetary
policies
and
regulations
of
the
Federal
Reserve
Board
have
had
a
significant
effect
on
the
operating
results
of
commercial
banks
in
the
past
and
are
expected
to
continue
to
do
so
in
the
future.
The
effects
of
such
policies
upon
our
business,
financial condition and results of operations may be adverse.
We
are
subject
to
numerous
laws
designed
to
protect
consumers,
including
the
Community
Reinvestment
Act
and
fair
lending
laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The
Community
Reinvestment
Act,
the
Equal
Credit
Opportunity
Act,
the
Fair
Housing
Act
and
other
fair
lending
laws
and
regulations impose nondiscriminatory
lending requirements
on financial institutions.
The U.S. Department
of Justice and other
federal
agencies
are
responsible
for
enforcing
these
laws and
regulations.
A
successful
regulatory
challenge
to
an
institution's
performance
under the Community Reinvestment
Act, the Equal Credit
Opportunity Act, the Fair
Housing Act or any
of the other fair lending
laws
and regulations
could result in
a wide variety
of sanctions, including
damages and civil
money penalties, injunctive
relief, restrictions
on mergers and acquisitions
activity, restrictions
on expansion and restrictions on entering
new business lines. Private parties may
also
have the
ability to
challenge an
institution's performance
under fair
lending laws
in private
class action
litigation. Such
actions could
have a material adverse effect on our business, financial
condition and results of operations.
We
face
a
risk
of
noncompliance
and
enforcement
action
related
to
the
Bank
Secrecy
Act
and
other
anti-money
laundering
statutes and regulations.
The
Bank
Secrecy
Act,
the
USA
PATRIOT
Act,
and
other
laws
and
regulations
require
financial
institutions
to
institute
and
maintain
an
effective
anti-money
laundering
program
and
file
suspicious
activity
and
currency
transaction
reports
as
appropriate,
among
other
duties.
The
Financial
Crimes
Enforcement
Network
is
authorized
to
impose
significant
civil
money
penalties
for
violations
of
those
requirements
and
has
recently
engaged
in
coordinated
enforcement
efforts
with
the
individual
federal
banking
regulators, as well
as the U.S. Department
of Justice’s
Drug Enforcement Administra
tion. We
are also subject
to increased scrutiny
of
our compliance with
trade and economic sanctions
requirements and rules
enforced by OFAC.
If our policies, procedures
and systems
are deemed
deficient, we
would be
subject to
liability,
including fines
and regulatory
actions, which
may include
restrictions on
our
ability to pay dividends and the necessity to obtain
regulatory approvals to proceed with certain aspects
of our business plan, including
our acquisition plans. Failure
to maintain and implement adequate
programs to combat money laundering
and terrorist financing could
also have serious reputational
consequences for us. Any
of these results could have
a material adverse effect
on our business, financial
condition and results of operations.
40
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of January 13, 2022, First BanCorp. owned the following three
main offices located in Puerto Rico:
-
Headquarters
–
Located
at
First
Federal
Building,
1519
Ponce
de
León
Avenue,
Santurce,
Puerto
Rico,
a
16-story
office
building. Approximately
51% of
the building,
including 100,000
square feet
underground three
level parking
garage and
an
adjacent parking lot are occupied by the Corporation.
-
Service
Center –
a building
located
on 1130
Muñoz
Rivera Avenue,
Hato Rey,
Puerto
Rico. These
facilities
accommodate
branch
operations,
First
Mortgage,
Collections
and
Loss
Mitigation,
data
processing
and
administrative
and
certain
headquarter offices. The
building houses 180,000
square feet of modern
facilities, over 1,000 employees
from operations, the
FirstBank Insurance
Agency headquarters,
and the
customer service
department. In
addition, it
has parking
for 750
vehicles
and
9
training
rooms,
including
classrooms
for
training
tellers
and
a
computer
room
for
interactive
trainings,
as
well
as
a
spacious cafeteria for employees and customers. This facility is fully occupied
by the Corporation.
-
Consumer Lending
Center –
A three-story
building with
29,000 square
feet and
a three-level
parking garage
located at
876
Muñoz Rivera
Avenue,
Hato Rey,
Puerto Rico. This
facility is fully
occupied by
the Corporation.
Other uses include
a retail
branch, Money Express, Auto Financing and Leasing and a First Insurance
office, among other.
The
Corporation
owns 20
retail branch
es and
77 office
premises and
parking
lots.
It
leases 96
branch
premises,
loan
and
office
centers and other facilities. In certain situations, financial
services such as mortgage and insurance businesses and commercial
banking
services
are
in
the
same
building
or
branch.
All
these
premises
are
in
Puerto
Rico,
Florida,
the
USVI
and
the
BVI.
Management
believes that the Corporation’s properties
are well maintained and are suitable for the Corporation’s
business as presently conducted.
Item 3. Legal Proceedings
Reference
is
made
to
Note
33,
“Regulatory
Matters,
Commitments
and
Contingencies,”
to
the
consolidated
financial
statements
in
Item 8 of this Annual Report on Form 10-K, which is incorporated herein
by reference.
Item 4. Mine Safety Disclosure.
Not applicable.
41
PART
II
Item 5. Market for Registrant’s Common Equity
and Related Stockholder Matters and Issuer Purchases of
Equity Securities
Information about Market and Holders
The Corporation’s
common stock
is traded
on the
New York
Stock Exchange
(“NYSE”) under
the symbol
FBP.
On February
15,
2022, there
were 307 holders
of record
of the Corporation’s
common stock,
not including
beneficial owners
whose shares are
held in
the name of brokers or other nominees.
As
of
December 31,
2021
and
December 31,
2020,
the
Corporation
had
21,836,611
and
4,799,284
shares
held
as treasury
stock,
respectively.
Refer to
“Purchase of
equity securities
by the
issuer and
affiliated
purchasers”
section below
for more
information
on
common stock repurchases during 2021, also held as treasury stock.
Information
regarding transactions
related to
common
stock and
securities authorized
for issuance
under the
Corporation’s
equity
compensation
plan is
set forth
in Note
22 -
“Stock-Based
Compensation”
of the
Notes to
Consolidated
Financial
Statements
and
in
Part III, Item 12 of this Annual Report on Form 10-K.
Dividends
Since
November
2018,
the
Corporation
has
been
making
quarterly
cash
dividend
payments
on
its
shares
of
common
stock.
On
October 22, 2021 the Corporation
announced that it had increased the quarterly
cash dividend payment on common stocks,
from $0.07
to
$0.10
per
share,
commencing
in
the
fourth
quarter
of
2021.
On
February
10,
2022
the
Corporation
announced
that
its
Board
of
Directors declared
a quarterly cash
dividend, of $0.
10 per common
share, payable on
March 11,
2022 to shareholders
of record at
the
close of
business on
February 25,
2022. The
Corporation intends
to continue
to pay quarterly
dividends on
common stock.
However,
the
Corporation’s
common
stock
dividends,
including
the
declaration,
timing
and
amount,
remain
subject
to
consideration
and
approval by the Corporation’s
Board Directors at the relevant
times. On November 30, 2021
(the “Redemption Date”) the Corporation
redeemed
all of
its 1,444,146
outstanding
shares
of
non-convertible,
non-cumulative
perpetual
monthly
income
Series
A through
E
Preferred
Stock
for
its
liquidation
value
of
$25
per
share
or
$36.1
million.
Monthly
dividend
payments
on
non-convertible,
non-
cumulative perpetual monthly income
preferred stock were paid by the
Corporation until the Redemption Date.
Information regarding
restrictions on dividends,
as required by this
Item, is set forth
in Item 1: “Business
– Dividend Restrictions”
and incorporated into
this
Item by reference.
42
The 2011
PR Code, as
amended, requires the
withholding of income
taxes from dividend
income sourced
within Puerto Rico
to be
received
by
any
individual,
resident
of
Puerto
Rico
or
not,
trusts
and
estates
and
by
non-resident
custodians,
partnerships,
and
corporations.
Residents of Puerto Rico
A special tax of 15% withheld at
source is imposed, in lieu of a regular
tax, on any eligible dividends paid to
individuals, trusts, and
estates.
Eligible
dividends
include
dividends
paid
by
a
domestic
Puerto
Rico
corporation.
However,
the
taxpayer
can
perform
an
election to be excluded from the 15% special tax and be taxed at regular
rates. Once this election is made it is irrevocable. The election
allows the
taxpayer to
include in
ordinary income
the eligible
dividends received
and take
a credit
for the
amount of
tax withheld
in
excess, if any.
Individuals that
are residents
of Puerto
Rico are
subject to
an alternative
minimum tax
(“AMT”) on
the AMT
Net Income
if their
regular
tax
liability
is
less
than
the
alternative
minimum
tax
liability.
The
AMT
applies
to
individual
taxpayers
whose
AMT
Net
taxable
income exceeds
$25,000.
The individual
AMT rate
ranges
from 1%
to 24%
depending
on the
AMT Net
Income. The
AMT
Net Income
includes
various categories
of tax-exempt
income and
income subject
to preferential
rates as
provided by
the PR
Code,
such as
dividends on
the Corporation’s
common stock
and long-term
capital gains
recognized on
the disposition
of the Corporation’s
common stock.
Nonresident U.S. Citizens
Dividends paid to a U.S. citizen who is not a resident of Puerto Rico will be subject
to a 15% income tax.
Nonresident U.S. citizens
have the right to partial
or total exemptions when
a Withholding Tax
Exemption Certificate (PR Treasury
Department Form AS 2732)
is properly
completed and
filed with
the Corporation.
The Corporation,
as withholding
agent, is
authorized to
withhold a
tax of
15%
only from the excess of the income paid over the applicable tax-exempt
amount.
Nonresident individuals that are
not US citizens
Dividends paid to any
individual who is not a
citizen of the United States and
who is not a resident
of Puerto Rico will generally
be
subject to a 15% Puerto Rico income tax which will be withheld at source.
Foreign Corporations and Partnerships
Corporations
and partnerships
not organized
under Puerto
Rico
laws that
have
not engaged
in a
trade
or business
in Puerto
Rico
during
the
taxable
year
in
which
the
dividend,
if
any,
is
paid
are
subject
to
the
10%
dividend
tax
withholding.
Corporations
or
partnerships not organized
under the laws of
Puerto Rico that have
engaged in a trade
or business in Puerto
Rico are not subject
to the
10% withholding, but they must declare any dividend as ordinary income
on their Puerto Rico income tax return.
43
Purchase of equity securities by the issuer and affiliated
purchasers
The following
table provides
information relating
to the Corporation’s
purchases of
shares of its
common stock
and redemption
of
its preferred stock in the fourth quarter of 2021.
Approximate Dollar
Total
Number of
That May Yet
be
Shares Purchased
Purchased Under
Average
as Part of Publicly
These Plans or
Total
number of
Price
Announced Plans
Programs
Period
shares purchased
Paid
Or Programs
(In thousands)
(1)
October 1, 2021 to October 31, 2021:
Common Stock
498,917
$
13.67
498,300
November 1, 2021 to November 30, 2021:
Common Stock
2,400,000
14.21
2,400,000
Preferred Stock, Series A
197,386
25.00
197,386
Preferred Stock, Series B
296,146
25.00
296,146
Preferred Stock, Series C
249,852
25.00
249,852
Preferred Stock, Series D
285,522
25.00
285,522
Preferred Stock, Series E
415,240
25.00
415,240
December 1, 2021 to December 31, 2021:
Common Stock
1,720,714
13.35
1,720,714
Total
6,063,777
(2)(3)
6,063,160
$
50,000
(1)
As of December 31,
2021, the Corporation was
authorized to purchase up to
$300 million of the
Corporation’s stock under the
program, that was publicly
announced
on April 26,
2021 and expires
on June 30,
2022, of which
$250 million had
been utilized.
The remaining $50 million
in the table
represents the amount available
to
repurchase shares under
the program as
of December 31,
2021.
The program does not
obligate the Corporation to
acquire any specific
number of shares.
Under the
program,
shares may
be repurchased
through open
market purchases,
accelerated share
repurchases and/or
privately negotiated
transactions, including
under plans
complying with Rule 10b5-1 under the Exchange Act.
(2)
Includes 617 shares of common stock acquired by the Corporation to cover minimum tax withholding obligations upon the vesting
of restricted stock and performance
units.
The
Corporation
intends
to
continue
to
satisfy
statutory
tax
withholding
obligations
in
connection
with
the
vesting
of
outstanding
restricted
stock
and
performance units through the withholding of shares.
(3)
Includes 3,869,014 shares of common stock repurchased in the open market
at an average price of $13.74 for a total purchase price of approximately $53.2 million,
and
750,000 shares of common stock repurchased through privately negotiated transactions at
an average price of $14.33 for a
total purchase price of approximately $10.7
million.
On April
26, 2021,
the Corporation
announced that
its Board
of Directors
approved a
stock repurchase
program, under
which the
Corporation
may repurchase
up to
$300 million
of its
outstanding stock,
including common
and preferred
stock, commencing
in the
second
quarter
of
2021
through
June
30,
2022.
Repurchases
under
the
program
may
be
executed
through
open
market
purchases,
accelerated
share
repurchases
and/or
privately
negotiated
transactions
or
plans,
including
under
plans
complying
with
Rule
10b5-1
under the Exchange Act.
During 2021, the Corporation repurchased
16,740,467 shares of its common stock
for $213.9 million and, as
mentioned
above,
Corporation
redeemed
all of
its outstanding
shares of
non-convertible,
non-cumulative
perpetual
monthly
income
Series A through E Preferred Stock for its liquidation value of $36.1
million.
44
STOCK PERFORMANCE GRAPH
The
following
Performance
Graph
shall
not
be
deemed
incorporated
by
reference
by
any
general
statement
incorporating
by
reference
this Annual
Report
on
Form 10-K
into any
filing under
the
Securities Act
(collectively,
“the
Acts”)
or
the Exchange
Act,
except
to
the
extent
that First
BanCorp.
specifically
incorporates
this
information
by
reference,
and
shall not
otherwise
be
deemed
filed under these Acts.
The
graph
below
compares
the
cumulative
total
stockholder
return
of
First
BanCorp.
during
the
measurement
period
with
the
cumulative
total
return,
assuming
reinvestment
of
dividends
of
the
S&P
500
Index
and the
S&P
Supercom
Banks
Index
(the
“Peer
Group”).
The Performance
Graph assumes
that $100
was invested
on December
31, 2016
in each
of First
BanCorp. common
stock,
the S&P
500 Index
and the
Peer Group.
The comparisons
in this
table are
set forth
in response
to SEC
disclosure requirements,
and
are therefore not intended to forecast or be indicative of future performance
of First BanCorp.’s common
stock.
dividend
reinvestment
since
the
measurement
point,
December 31,
2016
plus
(ii) the
change
in
the
per
share
price
since
the
measurement date, by the share price at the measurement date.
45
Item
6. [Reserved]
46
Item 7. Management’s
Discussion
and Analysis
of Financial
Condition
and Results
of Operations
(“MD&A”)
The following MD&A
relates to the
accompanying audited consolidated
financial statements of
First BanCorp. (the
“Corporation,”
“we,” “us,”
“our,”
or “First
BanCorp.”) and
should be
read in
conjunction
with such
financial statements
and the
notes thereto.
This
section
also
presents
certain
financial
measures
that
are
not
based
on
generally
accepted
accounting
principles
in
the United
States
(“GAAP”).
See “Basis of
Presentation” below
for information
about why the
non-GAAP financial
measures are
being presented
and
the reconciliation of
the non-GAAP financial measures
to the most comparable
GAAP financial measures for
which the reconciliation
is not presented earlier.
The detailed financial discussion that follows focuses on
2021 results compared to 2020.
For a discussion of 2020 results compared
to
2019,
see
Item
7,
Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations
included
in
the
Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2020, which is incorpora
ted herein by reference.
DESCRIPTION OF BUSINESS
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
and
FirstBank
Insurance
Agency.
Through
its wholly
-owned
subsidiaries,
the
Corporation
operates
in
Puerto
Rico,
the
USVI, the BVI, and the state of Florida, concentrating
on commercial banking, residential mortgage loans,
finance leases, credit cards,
personal loans, small loans, auto loans, and insurance agency activities.
SIGNIFICANT EVENTS
Stock Repurchase Program
On April
26, 2021,
the Corporation
announced that
its Board
of Directors
approved a
stock repurchase
program, under
which the
Corporation
may repurchase
up to
$300 million
of its
outstanding stock,
including common
and preferred
stock, commencing
in the
second
quarter of
2021 through
June 30,
2022. During
the year
ended December
31, 2021,
the Corporation
repurchased 16,740,467
shares of
its common
stock for
$213.9 million.
In addition,
on November
30, 2021,
the Corporation
redeemed all
of its
outstanding
shares of
non-convertible, non-cumulative
perpetual monthly
income, Series
A through
E Preferred
Stock for
its liquidation
value of
$36.1 million.
Furthermore,
during the
first quarter
of 2022
the Corporation
repurchased 3,409,697
million shares
of common
stock
for the remaining $50 million authorized under the stock repurchase
program.
COVID-19 Pandemic and Economy
The
ongoing
COVID-19
pandemic
has
caused
unprecedented
and
continuing
uncertainty,
volatility
and
disruption
in
financial
markets
and
in
governmental,
commercial
and
consumer
activity
in
worldwide,
including
in
the
markets
in
which
the
Corporation
operates. In
response, federal,
state, and
local governments
have taken
and continue
to take
actions designed
to mitigate
the effect
of
the virus on
public health and
to address the
economic impact of
the virus. As
restrictive measures were
eased during the
end of 2020
and into 2021, based
upon positive signs of
recovery driven by
vaccination and government
stimulus programs, economic
activity has
improved.
As
of
February
18,
2022,
approximately
6.6
million
vaccines
of
COVID-19
have
been
administered.
Approximately
2.9
million
people
have received
at least
one
dose of
the COVID-19
vaccine and
approximately 2.6
million
people,
or approximately
84.9% of
Puerto Rico’s eligible population,
have completed the vaccination process and 54.3% have received the booster
shot.
The
Corporation
continues
to
operate
consistent
with
guidance
from
federal
and
local
authorities.
The
Corporation’s
banking
branches
are
operating
during
regular
hours
following
health
and
safety
requirements
to
comply
with
federal
and
local
health
mandates, including, among other things, deep cleaning, face mask requirements
,
and strict social distancing measures. On February 8,
2022,
the
Corporation
announced
that
as
part
of
COVID-19
protocols,
all
employees,
service
providers
and
consultants
of
the
Corporation
must
have
the
booster
shot
of
the
COVID-19
vaccine
by
March
1,
2022,
with
few
exceptions.
Additional
vaccine
mandates
have
been announced
in jurisdictions
in which
our businesses
operate.
Adoption
of electronic
channels continues
to grow
significantly during
the ongoing
pandemic,
with active
digital banking
users growing
by 16%
during 2021
while capturing
over 40%
of deposits through digital and self-service channels.
Our
results
of
operations
for the
year
of
2021
continue
to reflect
an
improvement
from
the
disruption
caused
by
the COVID-19
pandemic. However,
we maintain a
cautious view
of the
macroeconomic outlook
due to
continuing uncertainty
regarding the
pace of
recovery
in the
economy and
uncertainty
related to
the COVID-19
pandemic,
including the
emergence
of new
variants of
the virus,
such as
the Omicron
variant, which
appears to
be the
most transmissible
variant to
date. Uncertainties
associated with
the pandemic
include
the
duration
of
the
COVID-19
outbreak
and
any
related
infections,
including
those
from
new
variants
of
the
virus,
the
47
effectiveness of
COVID-19 vaccines,
vaccination rates
among the
population, the
impact on
our customers,
employees,
and vendors,
and the impact to the economy as a whole.
The
CARES
Act
or
“CARES
Act
of
2020”,
as
amended
by
the
Consolidated
Appropriations
Act,
2021,
included
an allocation
of
$659
billion
for
SBA PPP
loans.
SBA
PPP loans
are
forgivable,
in
whole
or in
part,
if the
proceeds
are
used for
payroll and
other
permitted
purposes in
accordance
with the
requirements
of the
program.
These loans
carry a
fixed
rate of
1.00% and
a term
of two
years
(loans
made
before
June
5,
2020)
or
five
years
(loans
made
on
or
after
June
5,
2020),
if
not
forgiven,
in
whole
or
in
part.
Payments are
deferred until either
the date on
which the SBA
remits the amount
of forgiveness proceeds
to the lender
or the date
that
is 10
months after
the last
day of
the covered
period if
the borrower
does not
apply for
forgiveness within
that 10-month
period. On
December
27,
2020,
President
Trump
signed
another
COVID-19
relief
bill
that
extended
and
modified
several
provisions
of
the
program.
This
included
an
additional
allocation
of
$284
billion.
The
SBA
reactivated
the
program
on
January
11,
2021
and
the
program ended on May 31, 2021.
As
of
December
31,
2021,
the
Corporation’s
SBA
PPP
loan
portfolio
amounted
to
$145.0
million,
net
of
unearned
fees
of
$7.9
million.
As applicable,
the unearned
fees are
accreted
into income
based
on the
contractual period
of
two or
five years.
Upon
SBA
forgiveness,
unamortized
fees
are
then
recognized
into
interest
income.
During
the
years
ended
December
31,
2021
and
2020,
the
Corporation
received
forgiveness
remittances
and
consumer
payments
related
to
approximately
$543.6
million
and
$48.9
million,
respectively,
in principal balance of
SBA PPP loans. As
of December 31,
2021, we have processed
forgiveness to approximately
80%
of our customers.
Forgiveness remittances in the year ended 2021 accelerated
the fee income recognition by $13.2 million.
Total
deposits, excluding
brokered deposits
and government
deposits, continued
to increase
and were
$14.2
billion as
of December
31,
2021,
an
increase
of
$1.4
billion
from
December
31,
2020.
In
addition,
government
deposits
increased
by
$1.2
billion
to
$3.3
billion as of December 31, 2021,
compared to $2.1 billion as of December
31, 2020. The strong growth in deposits
continues to reflect
the effect
of government
relief programs
on the
liquidity levels
of our
customers, including
increases in
the balance
of transactional
accounts
of municipalities
in Puerto
Rico and
the local
government
of the
USVI in
connection
with the
American
Rescue Plan
Act
(“ARPA”)
funding for states and local
governments. Our liquidity levels
and capital position remain strong,
with capital ratios that are
well
above
regulatory
requirements.
This
robust
liquidity
and
capital
levels
provide
us
with
significant
flexibility
to
maintain
the
strength
of
our
balance
sheet
and
return
capital
to
shareholders
through
share
repurchases
and
dividend
payments,
subject
to
regulatory considerations.
During
2021
economic
conditions
started
to
show
significant
signs
of
recovery,
which
included
improved
consumer
demand
evidenced by rise
in retail sales, auto
and home sales
and recovery in
the payroll employment
in Puerto Rico
where it reached
98% of
the
pre-pandemic
level. The
early
signs of
economic
recovery have
impacted positively
the
Corporation
which
among
other
things,
during
2021 grew
total loan
originations
by approximately
17% when
compared
to 2020
and
is reflecting
a strong
commercial
loan
pipeline. Additionally,
on January 27,
2022, the PROMESA
oversight board certified
the 2022 Fiscal Plan
for Puerto Rico
(the “2022
Fiscal Plan”).
The 2022
Fiscal Plan reflects
the Commonwealth
Plan of Adjustment
recently confirmed
by the U.S.
District Court for
the District of
Puerto Rico. Relative to
the previous fiscal
plan, the 2022 Fiscal
Plan incorporates a
new set of expenditure
projections
that
factor
in
the
now-established
debt
service
requirements
pursuant
to
the
Plan
of
Adjustment,
as
well
as
additional
investments
enabled
by
the
increased
resources
available
to
the
government.
The
2022
Fiscal
Plan
prioritizes
resource
allocations
across
three
major
themes:
(i)
investing
in
the
operational
capacity
of
the
government
to
deliver
services
with
Civil
Service
Reform,
(ii)
prioritizing obligations to current and future retirees, and (iii) creating
a fiscally responsible post-bankruptcy government.
Integration
of BSPR
During the
year ended
December 31, 2021,
the Corporation completed
the conversion
of all BSPR’s
core systems into
FirstBank’s
systems.
In
conjunction
with
the
conversion
of
BSPR’s
core
systems,
the
Corporation
had
consolidated
a
total
of
nine
banking
branches
and
the
Corporation
decided
late
during
the
fourth
quarter
of
2021
to
consolidate
four
additional
branches,
which
are
expected to be completed during the first half of 2022.
In
addition,
during
the
year
ended
December
31,
2021,
the
Corporation
continued
to
execute
in
reducing
personnel
and
service
contract
expenses
and
completing
other
business
rationalization
activities.
Cumulative
merger
and
restructuring
expenses
of
$64.4
million have been incurred through December
31, 2021, of which $26.4 million
was incurred during 2021. The total amount
of merger
and
restructuring
costs
related
to
the
BSPR acquisition
was
originally
estimated
to
be
approximately
$65
million.
The
Corporation
does not expect any
additional significant merger
and restructuring expenses
during 2022. The Corporation
also has estimated that
the
combined
entities
will
achieve
total
annual
pre-tax
savings
of
approximately
$49
million,
which
are
expected
to
be
fully
realized
during 2022.
LIBOR Transition
Following
the
2017
announcement
by
the
United
Kingdom’s
Financial
Conduct
Authority
(the
“FCA”)
that
it
would
no
longer
compel
participating
banks
to
submit
rates
for
the
London
Interbank
Offered
Rate
(LIBOR)
after
2021,
regulators
and
market
48
participants
in
various
jurisdictions
have
identified
recommended
replacement
rates
for
LIBOR,
and
many
have
published
recommended
conventions to
allow new
and existing
products to
incorporate
fallbacks or
that reference
these Alternative
Reference
Rates
(“ARRs”).
In
March
2021,
the
FCA
confirmed
that
publication
of
the
overnight
and
one
month,
three-month,
six-month
and
twelve-month U.S.
Dollar LIBOR settings
will cease or
become no longer
representative of the
market the rates
seek to measure
(i.e.,
non-representative) immediately after June 30, 2023, and all other
U.S. Dollar LIBOR settings, including the one week and two-month
U.S. Dollar LIBOR settings,
became non-representative
after December 31,
2021. The Federal
Reserve, the Office
of the Comptroller
of
the
Currency,
and
the
FDIC
also
released
supervisory
guidance
encouraging
banks
to
cease
entering
into
new
contracts
that
use
U.S. Dollar
LIBOR as
reference
rate as
soon as
practicable and
in any
event by
December 31,
2021. Banking
regulators in
the U.S.
and
globally
have
increased
regulatory
scrutiny
and
intensified
supervisory
focus
of
financial
institutions
LIBOR
transition
plans,
preparations and readiness.
Significant
amounts
of
financial
instruments
in
the
market
are
referenced
to
U.S.
Dollar
LIBOR,
and
any
inability
of
market
participants
and
regulators
to
successfully
introduce
benchmark
rates
to
replace
LIBOR
and
implement
effective
transitional
arrangements to
address the
discontinuation of
LIBOR could
result in
disruption in
the financial
markets. In
the U.S.,
the Alternative
Reference Rates
Committee (“ARRC”),
a group
of market
participants convened
by the
Federal Reserve,
recommended the
Secured
Overnight Financing
Rate (“SOFR”) as
a replacement
index for U.S.
Dollar LIBOR-indexed
contracts. SOFR is
an overnight
interest
rate based
on U.S.
Dollar Treasury
repurchase agreements.
On March
2, 2020
the New
York
Fed began
daily publication
of 30,
90,
and 180-day compound
historical averages of
SOFR. In addition,
the ARRC has developed
a detailed supporting framework
for using
SOFR, including
tools such
as fallbacks
and recommended
conventions for
new use
of SOFR in
various products.
On July
29, 2021,
the ARRC
formally
recommended the
Chicago Mercantile
Exchange Group’s
(“CME”) forward-looking
Term
SOFR rates
for one
-,
three-,
six-
and
twelve-month
tenors,
marking
the
final
step
in
the
ARRC’s
Paced
Transition
Plan
it
released
in
2017.
The
ARRC
recommended using
the CME’s
Term
SOFR rates
for cash
products and
derivatives, limited
to end-users
hedging cash
products. An
end-user is
described as
any counterparty
to the underlying
cash product,
such as a
borrower,
lender, or
guarantor.
These parties
may
enter into Term
SOFR rates swaps, caps, swaptions,
or other derivatives to
hedge cash product exposures.
The Corporation may offset
such exposure with an upstream dealer.
The
Corporation
continues
to
execute
its
LIBOR
Transition
workplan.
As
part
of
this
transition
plan,
the
Corporation
started
including fallback language on new and renewed
contracts tied to LIBOR to provide for the determination
of an ARR and had adhered
to the LIBOR Fallbacks Protocol of the International
Swaps and Derivatives Association. In addition, effective
December 31, 2021 the
Corporation discontinued entering
into new contracts that
use the use U.S. Dollar
LIBOR as reference rate.
Currently,
the Corporation
is primarily
offering
CME’s
Term
SOFR rate
as the
ARRs to
LIBOR. The
Bank may
also offer
other industry-accepted
benchmark
interest
rates
that
can
be
supported
for
commercial
transactions.
The
Corporation
continues
working
with
the
update
of
systems,
processes, documentation, and models, with additional updates expected
through 2023.
As of
December 31,
2021, the
most significant
of the
Corporation’s
LIBOR-based assets
and liabilities
consists of
$2.0 billion
of
variable rate
commercial and
construction loans,
approximately $58.4
million of
U.S. agencies
debt securities
and private
label MBS
held as part of
the Corporation’s
available-for-sale investment
securities portfolio, $134.4
million of Puerto Rico
municipalities bonds
held
as
part
of
the
Corporation’s
held-to-maturity
investment
securities
portfolio,
and
$183.8
million
of
junior
subordinated
debentures.
The Corporation
is monitoring
the development
and adoption
of SOFR
and
other
credit sensitive
ARRs and
their liquidity
in the
market. The manner and impact
of the transition from LIBOR to
an ARR, as well as the effect
of these developments on our
loans and
investment securities portfolios, asset-liability management, systems, processes,
and business, is uncertain.
49
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:
(i)
the
interest rate environment;
(ii) the volumes, mix,
and composition of interest-earning
assets and (iii) interest-bearing
liabilities; and the
re-pricing characteristics
of these assets
and liabilities.
The Corporation's
results of operations
also depend
on the provision
for credit
losses,
non-interest
expenses
(such
as
personnel,
occupancy,
the
deposit
insurance
premium
and
other
costs),
non-interest
income
(mainly
service
charges
and
fees
on
deposits,
and
insurance
income),
gains
(losses)
on
sales
of
investments,
gains
(losses)
on
mortgage banking activities, and income taxes.
The
Corporation
had
net
income
of
$281.0
million,
or
$1.31
per
diluted
common
share,
for
the
year
ended
December
31,
2021,
compared to
$102.3 million,
or $0.46
per diluted
common share,
for the
year ended
December 31,
2020. The
Corporation completed
the acquisition
of BSPR effective
September 1,
2020.
The Corporation’s
financial statements
for the
year ended
December 31,
2020
include
four
months
of
BSPR’s
operations,
post-acquisition,
which
impacts
the
comparability
of
the
fiscal
year
2021
results
to
the
fiscal year 2020 results.
Other relevant selected financial data for the periods presented is included below:
December 31,
2021
December 31,
2020
Key Performance Indicator:
Return on Average
Assets
1.38
0.67
Return on Average
Total Equity
12.56
4.59
Efficiency Ratio
57.45
59.62
50
The key
drivers of
the Corporation’s
GAAP financial
results for
the year
ended December
31, 202
1, compared
to the
year ended
December 31, 2020, include the following:
●
Net interest income for
the year ended December
31, 2021 was $729.9
million, compared to $600.3
million for the year ended
December
31,
2020.
The increase
was driven
by
a $5.1
billion
increase
in
average
interest-earning
assets reflecting
the
late
third-quarter 2020 acquisition
of BSPR, as well
as higher investment
securities and interest-bearing
cash balances and
a lower
cost
of
deposits.
The
increase
in
net
interest
income
additionally
includes
the
effect
of
approximately
$13.2
million
of
accelerated
deferred
PPP loans
fees
recognized
upon receipt
of forgiveness
payments from
the SBA.
These variances
were
partially offset by the effect of lower market
interest rates on investment yields.
The net
interest margin
decreased by
42 basis
points to
3.73% for
the year
ended December
31, 2021,
compared to
4.15% for
the
year ended
December 31,
2020. The decrease
reflected the impact
of lower
interest rates and
changes in the
balance sheet mix
with a
higher
proportion
of
lower-yielding
assets,
such
as
interest-bearing
cash
deposited
at
the
New
York
Fed
and
investment
securities
from continued
strong deposit growth,
to total interest-earning
assets. The total
average balance
of interest-bearing
cash balances and
investment securities
increased by $3.8 billion
to 42% of
total average interest-earning
assets, compared to
30% in 2020.
In addition,
the proportion
of average
total loan
portfolio balance
to total
average interest-earning
assets in
2021 decreased
to 58%,
compared to
70% in 2020.
See “Net Interest Income” below for additional information.
●
The
provision
for
credit losses
on
loans,
finance
leases, and
debt
securities
decreased
by $236.7
million
to
a net
benefit,
or
provision
recapture,
of $65.7
million
for
the year
ended
December
31,
2021,
compared
to an
expense
of $171.0
million
for
2020. The
variance reflects
the effect
of reserve
releases in
2021, primarily
due to
continued improvements
in the
outlook of
certain
macroeconomic
variables
and
lower
loans
outstanding.
The
expense
recorded
in
2020
included
the
effects
of
significant
reserve
builds due
to the
deterioration
of the
macroeconomic
outlook
as a
result of
the impact
of the
COVID-19
pandemic,
as
well
as
a
charge
of
$38.9
million
related
to the
Day
1
reserves
required
by
the
current
expected
credit
losses
(“CECL”) methodology
for non-PCD
loans and
unfunded lending
commitments acquired
in conjunction
with the
acquisition
of BSPR.
Net
charge-offs
totaled
$55.1
million
for
the
year
ended
December
31,
2021,
or
0.48%
of
average
loans,
an
increase
of
$7.2
million,
compared
to net
charge-offs
of
$47.9 million,
or 0.48%
of average
loans, for
the year
ended December
31, 2020.
Total
net
charge-offs for
the year ended
December 31,
2021 included $23.1
million in net
charge-offs related
to a bulk
sale of $52.5
million of
residential mortgage
nonaccrual loans and
related servicing advance
receivables.
Adjusted for those
net charge-offs,
total net charge-
offs
in 2021
were $32.0
million, or
0.28% of
average loans.
See “Provision
for Credit
Losses” and
“Risk Management”
below for
analyses of the ACL and non-performing assets and related ratios.
●
The Corporation
recorded non-interest
income of
$121.2 million
for the
year ended
December 31,
2021, compared
to $111.2
million
for
2020.
The
increase
was
primarily
related
to:
(i)
a
$21.6
million
total
increase
in
transactional
fee
income
from
service
charges
and
fees
on
deposits,
ATMs
fees,
credit,
and
debit
cards
and
POS
interchange
fees,
and
merchant-related
activities due
to the
effect
of the
BSPR acquisition
as well
as increased
transaction volumes
due to
the adverse
effect
of the
COVID-19 pandemic and related stay-at-home orders
on economic activity in the first half of 2020; (ii)
a $2.9 million increase
in
revenues
from
mortgage
banking
activities
reflecting
both a
higher volume
of loan
sales and
an
increase
in
servicing
fee
income; and (iii)
a $2.6 million increase
in insurance commissions
income driven by
a higher volume of
loan originations and
higher sell of annuities and accidental death policies.
These variances were partially offset
by: (i) a $13.2 million gain on sales
of investment securities recorded in 2020; and (ii) a $5.0
million benefit recorded in 2020 resulting from
the final settlement of
the Corporation’s
business interruption
insurance
claim associated
with lost
profits
caused
by
Hurricanes Irma
and Maria
in
2017. See “Non-Interest Income” below for additional information.
●
Non-interest expenses
for the year
ended December 31,
2021 were
$489.0 million, compared
to $424.2 million
in 2020. Non-
interest
expenses
for
2021
included
$26.4
million
of
merger
and
restructuring
costs
associated
with
the
acquisition
and
integration
of
BSPR, compared
to
$26.5
million
in
2020.
Total
non-interest
expenses
in
2021
also
included
$3.0
million
of
COVID-19
pandemic-related
expenses,
primarily
related
to
additional
cleaning,
safety
materials,
and
security
measures,
compared to
$5.4 million
in 2020.
Total
non-interest expenses
in 2020
are also
net of
a $1.2
million benefit
from hurricane-
related expenses
insurance recoveries.
Adjusted for
the above-mentioned
merger,
COVID-19 expenses,
and hurricane-related
expenses insurance
recoveries, total
non-interest expenses
increased by
$66.1 million
compared to
2020, primarily
related to
incremental expenses
associated with
operations, personnel
and branches
acquired from
BSPR.
See “Non-Interest
Expenses”
below for additional information.
●
For the year ended December 31,
2021, the Corporation recorded an
income tax expense of $146.8 million,
compared to $14.1
million for 2020.
The increase was primarily
related to higher
pre-tax income driven
by credit losses reserve
releases in 2021,
compared to
significant charges
to the provision
recorded during
2020, and a
higher level of
taxable income.
In addition,
the
income tax expense
reported in 2020
was net of
the effect
of an $8.0
million partial reversal
of the Corporation’s
deferred tax
asset valuation allowance.
51
●
As of December
31, 2021, total
assets were approximately
$20.8 billion,
an increase of
$2.0 billion from
December 31, 2020.
The
increase
was
primarily
related
to
a
$1.8
billion
increase
in
investment
securities,
driven
by
purchases
of
U.S.
agencies
MBS and U.S. agencies callable
and bullet debentures, and an increase
of $1.0
billion in cash and cash equivalents
attributable
to the liquidity obtained
from the growth in deposits
and loan repayments.
These variances were partially
offset by a decrease
of $731.8
million in total
loans, consisting of
a $558.2
million decrease
in residential mortgage
loans (including
as a result
of
the
bulk
sale
of
$52.5
million
of
nonaccrual
loans),
and
a
$452.0
million
decrease
in
commercial
and
construction
loans
(including
a
$260.9
million
decrease
in
the
SBA
PPP
loan
portfolio),
partially
offset
by
an
increase
of
$278.4
million
in
consumer loans and finance leases.
See “Financial Condition and Operating Data Analysis” below for
additional information.
●
As
of
December
31,
2021,
total
liabilities
were
$18.7
billion,
an
increase
of
$2.2
billion
from
December
31,
2020.
The
increase
was
mainly
driven
by
a
$2.6
billion
growth
in
total
deposits,
excluding
brokered
deposits,
partially
offset
by
the
repayment at maturity of $240.0 million of FHLB advances and a
$93.8 million decrease in brokered deposits.
The increase of
$2.6 million
in non-brokered
deposits included
a $1.6
billion growth
in demand
deposits, as
well as
a $1.2
billion growth
in
government
deposits,
partially
offset
by
reductions
in
time
deposits.
See
“Risk
Management
–
Liquidity
Risk
and
Capital
Adequacy” below for additional information about the Corporation’s
funding sources.
●
As
of
December
31,
2021,
the
Corporation’s
stockholders’
equity
was
$2.1
billion,
a
decrease
of
$173.4
million
from
December
31,
2020.
The
decrease
was
driven
by
the
approximately
$317.8
million
of
capital
returned
to
the
Corporation’s
stockholders during 2021
consisting of: (i) the repurchase
of 16.7 million shares
of common stock for
a total purchase price of
approximately $213.9 million; (ii) common and preferred
stock dividends totaling $67.8 million; and (iii) the redemption of
all
of its outstanding
shares of Series A
through E Preferred
Stock for its total
liquidation value of
$36.1 million. The
decrease in
total
stockholders’
equity
also
included
the
effect
of
a
$139.5
million
decrease
in
Other
Comprehensive
Income
mostly
attributable to
the decrease
in the
fair value
of available-for-sale
investment securities.
These variances
were partially
offset
by earnings generated
during 2021.
The Corporation
increased
its common
stock dividend twice
during 2021, increasing
the
quarterly
dividend rate
from $0.05
in the
fourth quarter
of 2020
to $0.07
in the
first quarter
of 2021
and $0.10
in the
fourth
quarter of
2021.
The Corporation’s
common
equity tier
1 (“CET1”)
capital, tier
1 capital,
total capital
,
and leverage
ratios
were 17.80%, 17.80%,
20.50%, and 10.14%,
respectively,
as of December
31, 2021, compared
to CET1 capital,
tier 1 capital,
total capital,
and leverage ratios
of 17.31%, 17.61%,
20.37%, and 11.26%,
respectively,
as of December
31, 2020.
See “Risk
Management – Capital” below for additional information.
●
Total
loan
production,
including
purchases,
refinancings,
renewals,
and
draws
from
existing
revolving
and
non-revolving
commitments, but excluding
the utilization activity
on outstanding
credit cards,
was $4.8 billion
for the
year ended
December
31, 2021, compared to $4.2 billion for 2020.
As mentioned above, the Corporation originated
$283.6
million of SBA PPP loans
during 2021, compared to $390.3 million in 2020.
In addition, during the year ended December 31,
2020, the Corporation also
participated in
the Main
Street Lending
Program (“Main
Street”) and
originated approximately $184.4
million of
Main Street
loans.
This program, authorized under
the CARES Act of 2020 and established
by the Federal Reserve, was designed
to support
lending
to
small
and
medium-sized
businesses
that
were
in
sound
financial
condition
before
the
onset
of
the
COVID-19
pandemic. Excluding
SBA PPP
and Main
Street loan
originations, total
loan originations
increased by
$940.9 million
to $4.5
billion in 2021,
compared to $3.6
billion for 2020,
consisting of: (i)
a $510.9
million increase in
commercial and construction
loan originations,
primarily in
the Florida
region; (ii)
a $366.7
million increase
in consumer
loan originations,
predominantly
auto loans and finance leases, reflecting the effect of the disruptions caused by the COVID-19 pandemic-related lockdowns and
quarantines;
and
(iii)
a
$63.3
million
increase
in
residential
mortgage
loan
originations,
benefited
from
a
larger
volume
of
conforming loan
originations and
refinancings driven
by the
effect
of lower
mortgage loan
interest rates
and increased
home
purchase activity during 2021.
●
Total
non-performing
assets
were
$158.1
million
as
of
December
31,
2021,
a
decrease
of
$135.4
million,
or
46%,
from
December
31,
2020.
The
decrease
was
primarily
related
to:
(i)
a
$70.2
million
decrease
in
nonaccrual
residential
mortgage
loans, primarily
as a
result of
the bulk
sale of
$52.5
million of
nonaccrual loans;
(ii) a
$42.2
million decrease
in the
OREO
portfolio balance, including the sale
of two commercial OREO
properties in the Puerto
Rico region totaling $30.7 million;
(iii)
an
$18.3
million
decrease
in
nonaccrual
commercial
and
construction
loans;
and
(iv)
a
$5.8
million
decrease
in
nonaccrual
consumer loans and finance leases.
See “Risk Management – Non-Accruing and Non-Performing Assets” below for additional
information.
●
Adversely classified commercial and construction loans increased by $22.1 million to $177.3 million as of
December 31, 2021,
compared to
December 31,
2020. The
increase was
driven by
the downgrade
of four
commercial relationships
totaling $76.5
million. Partially offset by the upgrades
of two commercial relationship in the Puerto
Rico region totaling $31.3 million,
the sale
of $3.1
million construction
loan in
the Puerto
Rico region
and the
sale of
a $15.1
million classified
commercial loan
in the
Florida
region.
The
Corporation
is
closely
monitoring
its
loan
portfolio
to
identify
potential
at-risk
segments,
payment
performance,
the
need
for
permanent
modifications,
and
the
performance
of
different
sectors
of
the
economy
in
all
of
the
markets where the Corporation
operates.
52
The Corporation’s
financial results for
2021
and 2020 included
the following items
that management believes
are not reflective
of
core
operating
performance,
are
not
expected
to
reoccur
with
any
regularity
or
may
reoccur
at
uncertain
times
and
in
uncertain
amounts (the “Special Items”):
Year
ended December 31, 2021
●
Merger and restructuring
costs of $26.4
million ($16.5 million
after-tax) in connection
with the BSPR acquisition
integration
process
and
related
restructuring
initiatives.
Merger
and
restructuring
costs
in
2021
included
approximately
$6.5
million
related to
the previously
announced Employee
Voluntary
Separation Program
(the “VSP”)
as well
as involuntary
separation
actions
implemented
in
the
Puerto
Rico
region.
In
addition,
these
costs
included
costs
related
to
system
conversions,
accelerated
depreciation
charges
related
to
planned
closures
and
consolidation
of
branches
in
accordance
with
the
Corporation’s integration
and restructuring plan, and other integration related efforts.
●
Costs
of
$3.0
million
($1.9
million
after-tax)
related
to
the
COVID-19
pandemic
response
efforts,
consisting
primarily
of
costs related to additional cleaning, safety materials, and security measures.
Year
ended December 31, 2020
●
Merger
and
restructuring
costs
of
$26.5
million
($16.6
million
after-tax)
in
connection
with
the
acquisition
of
BSPR
and
related
restructuring
initiatives.
Merger
and
restructuring
costs
in
2020
primarily
included
consulting,
legal,
valuation,
and
other
professional
service
fees
associated
with
the
acquisition,
a
VSP
offered
to
eligible
employees,
retention
and
other
compensation bonuses, and expenses related to system conversions
and other integration-related efforts.
●
Gain on
sales of
U.S. agencies
MBS and
U.S Treasury
notes of
$13.2 million.
The gain
on tax-exempt
securities or
realized
at the tax-exempt international banking entity subsidiary level had
no effect on the income tax expense recorded in 2020.
●
Tax benefit of $8.0 million
related to the partial reversal of the deferred tax asset valuation allowance.
●
Costs of
$5.4 million
($3.4 million
after-tax)
related to
the COVID-19
pandemic response
efforts,
primarily costs
related to
additional cleaning, safety materials, and security measures.
●
Gain of $0.1
million realized on
the repurchase
of $0.4 million
of trust-preferred
securities (“TRuPs”).
The gain,
realized at
the holding company level, had no effect on the income tax expense
in 2020.
●
Benefit
of
$6.2
million
($3.8
million
after-tax)
from
insurance
recoveries.
Insurance
recoveries
in
2020
included
a
$5.0
million benefit related
to the final
settlement of the
Corporation’s
business interruption
insurance claim related
to lost profits
caused by Hurricanes Irma and Maria in 2017.
53
The following
table reconciles
for 2021
and 2020
the reported
net income
to adjusted
net income,
a non-GAAP
financial measure
that excludes the Special Items identified above:
Year
Ended December 31,
2021
2020
(In thousands)
Net income, as reported (GAAP)
$
281,025
$
102,273
Adjustments:
Merger and restructuring costs
26,435
26,509
Gain on sales of investment securities
-
(13,198)
Partial reversal of deferred tax asset valuation allowance
-
(8,000)
COVID-19 pandemic-related expenses
2,958
5,411
Gain on early extinguishment of debt
-
(94)
Benefit from hurricane-related insurance recoveries
-
(6,153)
Income tax impact of adjustments
(1)
(11,023)
(9,663)
Adjusted net income (Non-GAAP)
$
299,395
$
97,085
(1)
See "Basis of Presentation" below for the individual tax impact related
to reconciling items
54
CRITICAL ACCOUNTING POLICIES AND PRACTICES
The
accounting
principles
of the
Corporation
and
the
methods
of
applying
these
principles
conform
to
GAAP.
In
preparing
the
consolidated
financial
statements
management
is
required
to
make
estimates,
assumptions,
and
judgments
that
affect
the
amounts
recorded for assets,
liabilities and contingent
liabilities as of
the date of
the financial statements
and the reported
amounts of revenues
and
expenses
during
the
reporting
periods.
The
Corporation’s
critical
accounting
estimates
that
are
particularly
susceptible
to
significant
changes
include:
(i)
the
ACL;
(ii)
valuation
of
financial
instruments;
(iii)
acquired
loans;
and
(iv)
income
taxes.
Actual
results could differ from estimates and assumptions if
different outcomes or conditions prevail.
Allowance for Credit Losses
The Corporation
maintains an ACL
for loans
and finance
leases based upon
management’s
estimate of the
lifetime expected
credit
losses in the loan portfolio, as of the balance sheet date,
excluding loans held for sale. Additionally,
the Corporation maintains an ACL
for
debt
securities
classified
as
either
held-to-maturity
or
available-for-sale,
and
other
off-balance
sheet
credit
exposures
(
e.g.
, unfunded
loan commitments).
For loans
and
finance leases,
unfunded
loan
commitments, and
held-to-maturity
debt
securities,
the
estimate
of
lifetime
credit
losses
includes
the
use
of
quantitative
models
that
incorporate
forward-looking
macroeconomic
scenarios
that
are
applied
over
the
contractual
lives
of
the
portfolios,
adjusted,
as
appropriate,
for
prepayments
and
permitted
extension
options
using
historical
experience.
The
ACL
for
available-for-sale
debt
securities
is
measured
using
a
risk-adjusted
discounted cash flow
approach that also
considers relevant current
and forward-looking economic
variables and the
ACL is limited to
the difference
between the
fair value
of
the security
and its
amortized
cost. Judgment
is specifically
applied
in the
determination of
economic assumptions, the length of
the initial loss forecast period, the
reversion of losses beyond the initial
forecast period, historical
loss expectations, usage of macroeconomic
scenarios, and qualitative factors, which may
not be adequately captured in the
loss model,
as further discussed below.
The macroeconomic
scenarios utilized by
the Corporation include
variables that have
historically been key
drivers of increases and
decreases
in
credit
losses.
These
variables
include,
but
are
not
limited
to,
unemployment
rates,
housing
and
commercial
real
estate
prices, gross domestic
product levels, retail
sales, interest-rate forecasts,
corporate bond spreads,
and changes in
equity market prices.
The
Corporation
derives
the
economic
forecasts
it
uses
in
its
ACL
model
from
Moody's
Analytics.
The
latter
has
a
large
team
of
economists, data-base managers and operational engineers with a history
of producing monthly economic forecasts for over 25 years.
As of December 31, 2021, the Corporation used
the base-case economic scenario from Moody’s
Analytics in its estimation of credit
losses. The Corporation
has currently set
an initial forecast
period (“reasonable
and supportable
period”) of two
years and a
reversion
period of up to three
years, utilizing a straight-line
approach and reverting back
to the historical macroeconomic
mean for Puerto Rico
and the Virgin
Islands regions. For the
Florida region, the methodology
considers a reasonable and
supportable forecast period
and an
implicit
reversion
towards
the historical
trend
that
varies for
each
macroeconomic
variable,
achieving
the steady
state by
year
five.
After the
reversion period,
a historical
loss forecast
period covering
the remaining
contractual life,
adjusted for
prepayments, is
used
based
on
the
change
in
key
historical
economic
variables
during
representative
historical
expansionary
and
recessionary
periods.
Changes in economic forecasts impact
the probability of default (“PD”),
loss-given default (“LGD”), and
exposure at default (“EAD”)
for each instrument,
and therefore influence
the amount of
future cash flows
for each instrument
that the Corporation
does not expect
to collect.
Although
no
one
economic
variable
can
fully
demonstrate
the
sensitivity
of
the
ACL
calculation
to
changes
in
the
economic
variables
used
in
the
model,
the
Corporation
has
identified
certain
economic
variables
that
have
significant
influence
in
the
Corporation’s
model
for
determining
the
ACL.
As
of
December 31,
2021,
the
Corporation’s
ACL
model
considered
the
following
assumptions for key economic variables in the base-case scenario:
●
Average
Commercial
Real Estate
Price Index
year-over-year
appreciation
of approximately
2.90%
in the
first quarter
of
2022,
followed
by
increases
ranging
from
0.52%
–
5.16%
during
the
remainder
of
2022.
The
average
projected
commercial real estate price index appreciation for 2023 is forecasted
at 8.68%.
●
Regional Home
Price Index
in Puerto Rico
(purchase only
prices), year-over-year
increase of
approximately 1.59%
in the
first quarter of 2022,
followed by estimates ranging
from (0.53)% - 2.77%
during the remainder of
2022 and 2023. For the
Florida region
(all transactions, including
refinances), year-over-year
increase of approximately
8.11%, in
the first quarter
of
2022,
followed
by
estimates
ranging
from
(2.42)%
–
2.18%
for
the
Florida
region
during
the
remainder
of 2022
and
2023.
●
Levels
of
regional
unemployment
in
Puerto
Rico
at
approximately
7.60%
in
the
first
quarter
of
2022,
followed
by
improvements
throughout
the
remainder
of
2022
to
an
approximate
level
of
7.32%
by
the
end
of
2022.
For
the
Florida
region and the
U.S. mainland, unemployment
rate of 3.71% and
4.07%, respectively,
in the first
quarter of 2022,
followed
by modest improvements
throughout the
remainder of 2022
to an approximate
level of 2.81%
in Florida and
3.51% in the
55
U.S. mainland by
the end of
2022. The average
unemployment for the
Puerto Rico, Florida
and the U.S.
mainland regions
for 2023 is forecasted at 7.60%, 2.88%,
and 3.49%, respectively.
●
A year-over-year increase in real gross domestic
product (“GDP”) in the U.S. mainland of approximately 5.33%
in the first
quarter of
2022, followed
by increasing
levels of real
GDP growth
between 2.74%
– 4.54% during
the remainder
of 2022
and 2023.
Further,
the
Corporation
periodically
considers
the
need
for
qualitative
adjustments
to
the
ACL.
Qualitative
adjustments
may
be
related to and include, but not be limited to, factors
such as: (i) management’s assessment
of economic forecasts used in the model and
how
those
forecasts
align
with
management’s
overall
evaluation
of
current
and
expected
economic
conditions;
(ii)
organization
specific
risks
such
as
credit
concentrations,
collateral
specific
risks,
nature,
and
size
of
the
portfolio
and
external
factors
that
may
ultimately impact credit
quality,
and (iii) other
limitations associated
with factors such
as changes in
underwriting and loan
resolution
strategies, among
others. The
qualitative factors
that carried the
most significant
weight as of
December 31,
2021 were
the economic
uncertainty
related
to
the
recent
strain
of
the
COVID-19
virus
and
the
potential
lag
of
recovery
in
certain
industries,
such
as
the
transportation
and hospitality
industries,
and loan
modifications related
to commercial
real estate
loans as
a result
of the
COVID-19
situation. The
qualitative factors
applied at
December 31,
2021, and
the importance
and levels of
the qualitative
factors applied,
may
change in future periods
depending on the level
of changes to items such
as the uncertainty of
economic conditions and management's
assessment of
the level of
credit risk within
the loan portfolio
as a result
of such changes,
compared to the
amount of ACL
calculated
by the model. The evaluation of qualitative factors is inherently imprecise
and requires significant management judgment.
The ACL can also be
impacted by factors outside the Corporation’s
control, which include unanticipated
changes in asset quality of
the portfolio, such as increases in risk rating downgrades in our
commercial portfolio, deterioration in borrower delinquencies or credit
scores in our residential real estate and consumer portfolio.
Further, the current fair value of
collateral is utilized to assess the expected
credit losses when a financial asset is considered to be collateral dependent.
It
is
difficult
to
estimate
how
potential
changes
in
any
one
factor
or
input
might
affect
the
overall
ACL
because
management
considers a
wide variety
of factors
and inputs
in estimating
the ACL.
Changes in
the factors
and inputs
considered may
not occur
at
the
same
rate
and
may
not
be
consistent
across
all
geographies
or
product
types,
and
changes
in
factors
and
inputs
may
be
directionally
inconsistent, such
that improvement
in one
factor or
input may
offset
deterioration
in others.
However,
to demonstrate
the
sensitivity
of
credit
loss
estimates
to
macroeconomic
forecasts
as
of
December
31,
2021,
management
compared
the
modeled
estimates under the base scenario against a more
adverse scenario. Under this adverse scenario,
as an example, average unemployment
rate for
the Puerto
Rico region increases
to 8.75%
for year 2022
and 8.24% dur
ing 2023 compared
to 7.38% and
7.60%, respectively
for the same periods, on the base scenario projection.
To
demonstrate the sensitivity
to key economic
parameters used in
the calculation of
our ACL at December
31, 2021, management
calculated the difference
between our quantitative
ACL and this adverse
scenario. Excluding consideration
of qualitative adjustments,
this sensitivity analysis
would result in
a hypothetical increase
in our ACL
of approximately $40
million at December
31, 2021.
This
analysis
relates
only
to
the
modeled
credit
loss estimates
and
is not
intended
to estimate
changes
in
the overall
ACL as
it does
not
reflect
any
potential
changes
in
other
adjustments
to
the
qualitative
calculation,
which
would
also
be
influenced
by
the
judgment
management
applies to
the modeled
lifetime
loss estimates
to reflect
the uncertainty
and imprecision
of these
modeled
lifetime loss
estimates
based
on
current
circumstances
and
conditions.
Recognizing
that
forecasts
of
macroeconomic
conditions
are
inherently
uncertain,
particularly
in
light
of
the
recent
economic
conditions,
management
believes
that
its
process
to
consider
the
available
information
and
associated
risks
and
uncertainties
is
appropriately
governed
and
that
its
estimates
of
expected
credit
losses
were
reasonable and appropriate for the period ended December 31, 2021.
As of
December 31,
2021, the
total ACL
for loans,
held-to-maturity and
available-for-sale
securities, and
off-balance
sheet credit
exposure decreased to $280.2
million, from $401.1 million
as of December 31, 2020.
The ACL reduction of
$120.9 million during the
year
ended
December
31,
2021
consisted
of
net
charge-offs
of
$55.2
million
and
a
provision
for
credit
losses
net
benefit
of
$65.7
million.
The
provision
for
credit
losses
net
benefit
recorded
during
2021
primarily
reflects
an
improvement
in
the
outlook
of
macroeconomic
variables
to
which
the
reserve
is
correlated,
including
improvements
in
the
commercial
real
estate
price
index
and
unemployment rate forecasts, and the overall decrease
in the size of the residential mortgage and the commercial and construction
loan
portfolios.
Our
process
for
determining
the
ACL
is
further
discussed
in
Note
1
–
Nature
of
Business
and
Summary
of
Significant
Accounting Policies, to the
accompanying audited consolidated financial
statements included in Item 8
of this Annual Report on Form
10-K.
56
Valuation
of financial instruments
The measurement
of fair value
is fundamental
to the Corporation’s
presentation of
its financial condition
and results of
operations.
The Corporation
holds debt
and equity
securities, derivatives,
and other
financial instruments
at fair
value. The
Corporation holds
its
investments
and
liabilities
mainly
to manage
liquidity
needs and
interest rate
risks.
The Corporation’s
significant
assets reflected
at
fair value on the Corporation’s financial
statements consisted of available-for-sale investment
securities.
measurements
that
distinguishes
between
market
participant
assumptions
developed
based
on
market
data
obtained
from
sources
independent
of
the
Corporation
(observable
inputs)
and
the
Corporation’s
own
assumptions
about
market
participant
assumptions
developed
based
on
the
best
information
available
in
the
circumstances
(unobservable
inputs).
The
hierarchy
of
inputs
used
in
determining
the
fair
value
maximizes
the
use
of
observable
inputs
and
minimizes
the
use
of
unobservable
inputs
by
requiring
that
observable inputs be
used when available.
The hierarchy level assigned
to each security
in the Corporation’s
investment portfolio was
based on management’s
assessment of the transparency and reliability of the
inputs used to estimate the fair values at the measurement
date. See Note 30
– Fair Value,
to the audited consolidated
financial statements included
in Item 8 of
this Annual Report on
Form 10-
K for additional
information.
The fair
value of
available-for-sale investment
securities was
the market
value based
on quoted
market prices
(as is
the case
with
U.S. Treasury
notes), when
available (Level
1). If
quoted market
prices are
unavailable, the
fair value
is based
on 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 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 U.S.;
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
Corporation models the variable cash flow of the security using the 3-month
LIBOR forward curve.
Under
ASC 326,
adopted on
January
1, 2020,
declines in
fair value
that are
credit-related are
now recorded
on the
balance sheet
through
an
ACL
with
a
corresponding
adjustment
to
earnings
and
declines
that
are
noncredit-related
are
recognized
through
other
comprehensive income/loss.
If the
Corporation intends
to sell a
debt security
in an
unrealized loss
position or
determines that
it is more
likely than
not that
the
Corporation
will be
required
to sell
a debt
security before
it recovers
its amortized
cost basis,
the debt
security is
impaired
and it
is
written down to fair
value with all losses recognized
in earnings.
As of December 31, 2021,
the Corporation did not
intend to sell any
debt securities
in an
unrealized
loss position
and it
is not
more likely
than not
that the
Corporation
will be
required to
sell any
debt
securities before recovery of their amortized cost basis.
For
debt
securities
in
an unrealized
loss position
for
which the
Corporation
does not
intend
to sell
the debt
security
and
it is
not
more likely than
not that the
Corporation will
be required to
sell the debt
security,
the Corporation determines
whether the loss
is due
to
credit-related
factors
or
noncredit-related
factors.
For
debt
securities
in
an
unrealized
loss
position
for
which
the
losses
are
determined to
be the result
of both credit
-related and noncredit-related
factors, the
credit loss is
determined as
the difference
between
the present value of the cash flows expected to be collected, and the amortized
cost basis of the debt security.
Available-for-sale
debt securities
held by
the Corporation
at year-end
primarily consisted
of securities
issued by
U.S. government-
sponsored entities
(“GSEs”), and
the aforementioned
private label
MBS.
Given the
explicit and
implicit guarantees
provided by
the
U.S. federal government, the Corporation believes the credit risk
in securities issued by the GSEs is low.
For the year ended December
31,
2021,
the
Corporation
determined
the
credit
losses
for
private
label
MBS
based
on
a
risk-adjusted
discounted
cash
flow
methodology
that
considers
qualitative
and
quantitative
factors
specific
to
the
instruments,
including
PDs
and
LGDs
that
consider,
among
other
things,
historical
payment
performance,
loan-to-value
attributes,
and
relevant
current
and
forward-looking
macroeconomic
variables,
such
as
regional
unemployment
rates
and
the
housing
price
index
obtained
from
the
economic
scenarios
described in the ACL discussion above.
57
The
Corporation
recognized
a
provision
benefit
on
available-for-sale
debt
securities,
of
$0.1 million
during
the
year
ended
December 31, 2021, compared to $1.6 million provision expense for
the year ended December 31, 2020.
Acquired Loans
Loans
acquired
through
a
purchase
or
a
business
combination
are
recorded
at
their
fair
value
as
of
the
acquisition
date.
The
acquisition method
of accounting
allows for
a measurement
period to
make adjustments
to an
acquisition for
up to
one year
after the
acquisition date
for new
information that
existed at
the acquisition
date but
may not
have been
known or
available at
that time.
The
Corporation
performs
an
assessment
of
acquired
loans
to
first
determine
if
such
loans
have
experienced
more
than
insignificant
deterioration
in credit
quality since
their origination
and thus
should be
classified and
accounted
for as
purchased credit
deteriorated
(“PCD”) loans. For loans that
have not experienced
more than insignificant deterioration
in credit quality since
origination, referred to
as non-PCD loans, the Corporation
records such loans at fair
value, with any resulting
discount or premium accreted
or amortized into
interest income
over the
remaining life
of the
loan using
the interest
method. Additionally,
upon the
purchase or
acquisition of
non-
PCD loans,
the
Corporation
measures
and
records
an
ACL based
on
the Corporation’s
methodology
for
determining
the
ACL.
The
ACL for non-PCD loans is recorded through a charge
to the provision for credit losses in the period in which
the loans were purchased
or acquired.
Acquired loans that
are classified as
PCD are recognized
at fair value.
The ACL estimated
for PCD loans
as of the acquisition
date
is recorded
as a gross
-up of
the loan balance
and the ACL.
Any remaining
discount or
premium after
the gross-up
is then recognized
as an
adjustment to
yield over
the remaining
life of
the loan.
After the
acquisition date,
the accounting
for acquired
loans and
leases,
including
PCD
and
non-PCD
loans,
follows
the
same
accounting
guidance
as
loans
and
leases
originated
by
the
Corporation.
Characteristics
relevant
to
the
classification
of
PCD
loans
include:
delinquency,
payment
history
since
origination,
credit
scores
migration, and/or
other factors
the Corporation
may become
aware of
through its
initial analysis
of acquired
loans that
may indicate
there
has
been
more
than
insignificant
deterioration
in
credit
quality
since
a
loan’s
origination.
In
connection
with
the
BSPR
acquisition
on
September
1,
2020,
the
Corporation
acquired
PCD
loans
and
non-PCD
loans
with
an
aggregate
fair
value
of
approximately $752.8 million and
$1.8 billion, respectively.
The fair value of the
loans acquired from BSPR was estimated
based on a
discounted
cash flow
method under
which the
present value
of the
contractual
cash flows
was calculated
based on
certain valuation
assumptions
such
as
default
rates,
loss
severity,
and
prepayment
rates,
consistent
with
the
Corporation’s
CECL
methodology,
and
discounted using a market
rate of return that accounts
for both the time value
of money and investment
risk factors.
The discount rate
utilized to analyze
fair value considered
the cost of funds
rate, capital charge,
servicing costs, and liquidity
premium, mostly based
on
industry
standards. For
further information,
refer to
Note 2
– Business
Combination
to the
audited consolidated
financial statements
included in Item 8 of this Annual Report on Form 10-K for additional information.
For PCD
loans that,
prior to
the adoption
of CECL,
were classified
as purchased
credit impaired
(“PCI”) loans
and accounted
for
under ASC
Subtopic 310-30,
“Loans and
Debt Securities
Acquired
with Deteriorated
Credit Quality”
(“ASC Subtopic
310-30”), the
Corporation adopted CECL using the prospective
transition approach. As allowed by CECL, the Corporation
elected to maintain pools
of
loans
accounted
for
under
ASC
Subtopic
310-30
as “units
of
accounts,”
conceptually
treating
each
pool
as
a
single
asset.
As
of
December
31,
2021,
such
PCD
loans
consisted
of
$115.1
million
of
residential
mortgage
loans
and
$2.4
million
of
commercial
mortgage loans acquired by
the Corporation as part
of previously completed asset
acquisitions. As the Corporation
elected to maintain
pools of units
of account for
loans previously accounted
for under ASC
Subtopic 310-30,
the Corporation
is not able
to remove loans
from the pools until they are paid off, written
off, or sold (consistent with the Corporation’s
practice prior to adoption of CECL), but is
required
to follow
CECL for
purposes
of the
ACL. Regarding
interest income
recognition for
PCD loans
that existed
at the
time of
adoption of
CECL, the prospective
transition approach
for PCD loans
required by
CECL was applied
at a pool
level, which
froze the
effective interest rate
of the pools as
of January 1, 2020.
According to regulatory guidance,
the determination of nonaccrual
or accrual
status
for
PCD
loans
that
the
Corporation
has
elected
to
maintain
in
previously
existing
pools
pursuant
to
the
policy
election
right
upon
adoption of
CECL should
be made
at the
pool
level, not
the individual
asset level.
In addition,
the guidance
provides
that the
Corporation can continue accruing
interest and not report the
PCD loans as being in
nonaccrual status if the following
criteria are met:
(i) the Corporation can reasonably estimate the timing
and amounts of cash flows expected to be collected,
and (ii) the Corporation did
not acquire the asset primarily for
the rewards of ownership of the underlying
collateral, such as for use in operations
or improving the
collateral
for
resale.
Thus,
the
Corporation
continues
to
exclude
these
pools
of
PCD
loans
from
nonaccrual
loan
statistics.
In
accordance
with
CECL,
the
Corporation
did
not
reassess
whether
modifications
to
individual
acquired
loans
accounted
for
within
pools were TDR as of the date of adoption.
Income Taxes
The Corporation is required to estimate income taxes in preparing
its consolidated financial statements. This involves the estimation
of
current
income
tax
expense
together
with
an
assessment
of
temporary
differences
between
the
carrying
amounts
of
assets
and
liabilities
for
financial
reporting
purposes
and
the
amounts
used
for
income
tax
purposes.
The
determination
of
current
income
tax
expense
involves
estimates
and
assumptions
that
require
the
Corporation
to
assume
certain
positions
based
on
its
interpretation
of
58
current tax regulations. Management assesses the relative benefits
and risks of the appropriate tax treatment of transactions, taking
into
account statutory,
judicial and regulatory
guidance, and recognizes
tax benefits
only when deemed
probable. Changes
in assumptions
affecting estimates
may be required
in the future
and estimated tax
liabilities may need
to be increased
or decreased accordingly.
The
Corporation
adjusts the
accrual of
tax contingencies
in light
of changing
facts and
circumstances, such
as the
progress of
tax audits,
case law
and emergi
ng legislation.
The Corporation’s
effective tax
rate includes
the impact
of tax
contingencies and
changes to
such
accruals,
as
considered
appropriate
by
management.
When
particular
tax
matters
arise,
a
number
of
years
may
elapse
before
such
matters are
audited by
the taxing
authorities and
finally resolved.
Favorable resolution
of such matters
or the
expiration of
the statute
of limitations may result in the release of tax contingencies that
the Corporation recognizes as a reduction to its effective
tax rate in the
year of resolution.
Unfavorable settlement
of any particular
issue could increase
the effective
tax rate and
may require the
use of cash
in the year of resolution.
The
determination
of
deferred
tax
expense
or
benefit
is
based
on
changes
in
the
carrying
amounts
of
assets
and
liabilities
that
generate
temporary differences.
The carrying
value
of the
Corporation’s
net deferred
tax asset
assumes
that the
Corporation
will be
able
to
generate
sufficient
future
taxable
income
based
on
estimates
and
assumptions.
If
these
estimates
and
related
assumptions
change, the
Corporation may
be required
to record valuation
allowances against
its deferred
tax assets, resulting
in additional
income
tax expense
in the
consolidated statements
of income.
Management evaluates
its deferred
tax assets
on a
quarterly basis
and assesses
the need
for a valuation
allowance, if any.
A valuation allowance
is established when
management believes
that it is
more likely
than
not that
some portion
of its
deferred tax
assets will
not be
realized. The
determination of
whether a
valuation allowance
for deferred
tax assets
is appropriate
is subject to
considerable judgment
and requires
the evaluation
of positive
and negative
evidence that
can be
objectively
verified.
Positive
evidence
necessary
to
overcome
the
negative
evidence
includes
whether
future
taxable
income
in
sufficient
amounts
and
character
within
the
carryforward
periods
is available
under
the tax
law.
Consideration
must
be given
to
all
sources
of
taxable
income,
including,
as
applicable,
the
future
reversal
of
existing
temporary
differences,
future
taxable
income
forecasts exclusive
of the
reversal of
temporary
differences and
carryforwards,
and tax
planning strategies.
When negative
evidence
(e.g.,
cumulative
losses
in
recent
years,
history
of
operating
loss
or
tax
credit
carryforwards
expiring
unused)
exists,
more
positive
evidence
than negative
evidence will
be necessary.
The Corporation
has concluded
that based
on the
level of
positive evidence,
it is
more
likely
than not
that the
deferred
tax asset
will be
realized,
net of
the existing
valuation allowances
at December
31,
2021 and
2020. However,
there is
no guarantee
that the
tax benefits
associated with
the deferred
tax assets
will be
fully realized.
The positive
evidence
considered by
management in
arriving at
its conclusion
included factors
such as:
FirstBank’s
four-year
cumulative income
position;
sustained
periods
of
profitability;
management’s
proven
ability
to
forecast
future
income
accurately
and
execute
tax
strategies; forecasts
of future
profitability
under several
potential scenarios
that support
the partial
utilization of
NOLs prior
to their
expiration
from
2022
through
2024;
and
the
utilization
of
NOLs
over
the
past
four-years.
The
negative
evidence
considered
by
management
included:
uncertainties
about
the
state
of
the
Puerto
Rico
economy,
including
considerations
relating
to
the
effect
of
hurricane and pandemic
recovery funds together
with Puerto Rico government
debt restructuring and
the ultimate sustainability
of the
latest fiscal plan certified by the PROMESA oversight board.
Refer to Note
28 - Income
Taxes,
to the audited
consolidated financial
statements included
in Item 8
of this Form
10-K for further
information related to Income Taxes.
OTHER ESTIMATES
In addition
to the
critical accounting
estimates we
make in connection
with the
ACL, fair
value measurements,
and the accounting
for income taxes,
goodwill and identifiable
intangible assets, pension
and postretirement benefit
obligations, and provisions
for losses
that
may
arise
from
litigation
and
regulatory
proceedings
(including
governmental
investigations)
are
also
based
on
estimates
and
assumptions.
Goodwill is assessed
for impairment
annually in the
fourth quarter or
more frequently
if events occur
or circumstances change
that
indicate an
impairment may
exist. When
assessing goodwill
for impairment,
first, a
qualitative assessment
can be
made to
determine
whether it is more
likely than not that
the estimated fair value
of a reporting unit
is less than its estimated
carrying value. If the results
of the
qualitative assessment
are not
conclusive, a
quantitative goodwill
test is
performed. Alternatively,
a quantitative
goodwill test
can
be
performed
without
performing
a
qualitative
assessment.
Identifiable
intangible
assets
are
tested
for
impairment
whenever
events or
changes in
circumstances suggest
that an
asset’s
or asset
group’s
carrying value
may not
be fully
recoverable. Judgment
is
required
to
evaluate
whether
indications
of
potential
impairment
have
occurred,
and
to
test
intangible
assets
for
impairment,
if
required. The
amortization of identified
intangible assets recognized
in a business
combination is based
upon the
estimated economic
benefits
to
be
received
over
their
economic
life,
which
is
also
subjective.
Customer
attrition
rates
that
are
based
on
historical
experience
are
used
to
determine
the
estimated
economic
life
of
certain
intangibles
assets,
including
but
not
limited
to,
customers
deposit intangible.
See Note 1 –
Nature of Business
and Summary
of Significant Accounting
Policies, Note 2
– Business Combination
,
and Note 14
–
Goodwill and Other Intangibles, to the audited consolidated
financial statements included in Item 8 of this Annual
Report on Form 10-
K for further information
about goodwill and identifiable
intangible assets, including intangible
assets recorded in connection
with the
acquisition of BSPR.
59
As part of the BSPR acquisition,
the Corporation maintains two frozen
qualified noncontributory defined benefit
pension plans, and
a related
complementary post-retirements
benefits plan
covering medical
benefits and
life insurance
after retirement.
Calculation of
the
obligations
and
related
expenses
under
these
plans
requires
the
use
of
actuarial
valuation
methods
and
assumptions,
which
are
subject
to
management
judgment
and
may
differ
if
different
assumptions
are
used.
See
Note
25
–
Employee
Benefit
Plans,
to
the
audited consolidated financial
statements included in
Item 8 of this
Annual Report on
Form 10-K for disclosures
related to the benefit
plans.
As necessary,
we
also estimate
and
provide
for potential
losses that
may
arise out
of litigation
and
regulatory
proceedings to
the
extent
that
such losses
are
probable
and
can be
reasonably
estimated.
Judgment
is required
in making
these
estimates
and
our
final
liabilities
may
ultimately
be
materially
different.
Our
total
estimated
liability
in
respect
of
litigation
and
regulatory
proceedings
is
determined
on a case-by-case
basis and
represents an
estimate of
probable losses
after considering,
among other
factors, the
progress
of each
case, proceeding
or investigation,
our experience
and the
experience of
others in
similar cases,
proceedings or
investigations,
and the opinions and views of legal counsel.
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 year
ended December
31, 2021
was $729.9
million,
compared to $600.3
million for 2020.
On a tax-equivalent basis
and excluding the
changes in the fair
value of derivative instruments,
net
interest
income
for
the
year
ended
December
31,
2021
was
$753.7
million
compared
to
$621.4
million
for
the
year
ended
December 31, 2020.
The
following
tables
include a
detailed
analysis
of net
interest income
for
the indicated
periods.
Part I
presents
average volumes
(based
on
the
average
daily
balance)
and
rates
on
an
adjusted
tax-equivalent
basis
and
Part
II
presents,
also
on
an
adjusted
tax-
equivalent basis,
the extent
to which
changes in
interest rates
and changes
in the
volume of
interest-related assets
and liabilities
have
affected
the Corporation’s
net interest
income. For
each category
of interest-earning
assets and
interest-bearing
liabilities, the
tables
provide
information
on
changes
in
(i)
volume
(changes
in
volume
multiplied
by
prior
period
rates)
and
(ii)
rate
(changes
in
rate
multiplied by
prior period
volumes). The
Corporation has
allocated rate-volume
variances (changes
in rate
multiplied by
changes in
volume) to either the changes in volume or the changes in rate based upon
the effect of each factor on the combined totals.
Net
interest
income
on
an
adjusted
tax-equivalent
basis and
excluding
the
change
in the
fair
value
of
derivative
instruments
is a
non-GAAP
financial
measure.
For
the
definition
of
this
non-GAAP
financial
measure,
refer
to
the
discussion
in
"Basis
of
Presentation" below.
60
Part I
Average volume
Interest income
(1)
Average rate
(1)
Year Ended December
31,
2021
2020
2021
2020
2021
2020
(Dollars in thousands)
Interest-earning assets:
Money market and other short-term investments
$
2,012,617
$
1,258,683
$
2,662
$
3,388
0.13
%
0.27
%
Government obligations
(2)
2,065,522
878,537
27,058
21,222
1.31
%
2.42
%
MBS
4,064,343
2,236,262
57,159
48,683
1.41
%
2.18
%
FHLB stock
28,208
32,160
1,394
1,959
4.94
%
6.09
%
Other investments
10,254
6,238
61
41
0.59
%
0.66
%
Total investments
(3)
8,180,944
4,411,880
88,334
75,293
1.08
%
1.71
%
Residential mortgage loans
3,277,087
3,119,400
177,747
166,019
5.42
%
5.32
%
Construction loans
181,470
168,967
12,766
9,094
7.03
%
5.38
%
Commercial and Industrial and Commercial Mortgage loans
5,228,150
4,387,419
261,333
214,830
5.00
%
4.90
%
Finance leases
518,757
440,796
38,532
32,515
7.43
%
7.38
%
Consumer loans
2,207,685
1,952,120
239,725
216,263
10.86
%
11.08
%
Total loans
(4)(5)
11,413,149
10,068,702
730,103
638,721
6.40
%
6.34
%
$
19,594,093
$
14,480,582
$
818,437
$
714,014
4.18
%
4.93
%
Interest-bearing liabilities:
Interest-bearing checking accounts
$
3,667,523
$
2,197,980
$
5,776
$
5,933
0.16
%
0.27
%
Savings accounts
4,494,757
3,190,743
6,586
11,116
0.15
%
0.35
%
Retail certificates of deposit ("CDs")
2,636,303
2,741,388
26,138
43,350
0.99
%
1.58
%
Brokered CDs
141,959
357,965
2,982
7,989
2.10
%
2.23
%
Interest-bearing deposits
10,940,542
8,488,076
41,482
68,388
0.38
%
0.81
%
Loans payable
-
8,415
-
21
-
%
0.25
%
Other borrowed funds
484,244
475,492
15,098
13,000
3.12
%
2.73
%
FHLB advances
354,055
505,478
8,199
11,251
2.32
%
2.23
%
Total interest-bearing liabilities
$
11,778,841
$
9,477,461
$
64,779
$
92,660
0.55
%
0.98
%
Net interest income on a tax-equivalent
basis and excluding valuations
$
753,658
$
621,354
Interest rate spread
3.63
%
3.95
%
Net interest margin
3.85
%
4.29
%
(1)
On an adjusted
tax-equivalent basis. The
Corporation estimated the adjusted
tax-equivalent yield by
dividing the interest
rate spread on
exempt assets by
1 less
the Puerto
Rico statutory
tax rate
of 37.5%
and adding
to it
the cost
of interest
-bearing liabilities.
The tax-equivalent
adjustment
recognizes
the income
tax
savings when comparing taxable and tax-exempt assets.
Management believes that it is a standard practice in the banking industry
to present net interest income,
interest
rate
spread
and
net
interest
margin
on
a
fully
tax-equivalent
basis.
Therefore,
management
believes
these
measures
provide
useful
information
to
investors by
allowing
them to
make
peer comparisons.
The Corporation
excludes
changes
in the
fair value
of derivatives
from interest
income and
interest
expense because the changes in valuation do not affect
interest received or paid.
(2)
Government obligations include debt issued by government-sponsored
agencies.
(3)
Unrealized gains and losses on available-for-sale securities
are excluded from the average volumes.
(4)
Average loan balances include
the average of nonaccrual loans.
(5)
Interest income
on loans
includes $10.5
million and
$7.3 million
for the
years ended
December 31,
2021 and
2020, respectively,
of income
from prepayment
penalties and late fees related to the Corporation’s
loan portfolio.
61
Part II
2021 Compared to 2020
Increase (decrease)
Due to:
Volume
Rate
Total
(In thousands)
Interest income on interest-earning assets:
Money market and other short-term investments
$
1,513
$
(2,239)
$
(726)
Government obligations
22,111
(16,275)
5,836
MBS
32,753
(24,277)
8,476
FHLB stock
(223)
(342)
(565)
Other investments
25
(5)
20
Total investments
56,179
(43,138)
13,041
Residential mortgage loans
8,509
3,219
11,728
Construction loans
713
2,959
3,672
Commercial and Industrial and Commercial Mortgage loans
41,940
4,563
46,503
Finance leases
5,789
228
6,017
Consumer loans
28,032
(4,570)
23,462
Total loans
84,983
6,399
91,382
Total interest income
$
141,162
$
(36,739)
$
104,423
Interest expense on interest-bearing liabilities:
Brokered CDs
$
(4,563)
$
(444)
$
(5,007)
Non-brokered interest-bearing deposits
14,669
(36,568)
(21,899)
Loans Payable
(21)
-
(21)
Other borrowed funds
243
1,855
2,098
FHLB advances
(3,438)
386
(3,052)
Total interest expense
6,890
(34,771)
(27,881)
Change in net interest income
$
134,272
$
(1,968)
$
132,304
Portions of the Corporation’s
interest-earning assets, mostly investments
in obligations of some U.S.
government agencies and U.S.
government-sponsored
entities (“GSEs”),
generate interest
that is
exempt from
income tax,
principally in
Puerto Rico.
Also, interest
and gains
on sales of
investments held by
the Corporation’s
international banking
entities (“IBEs”) are
tax-exempt under
Puerto Rico
tax law
(see “Income
Taxes”
below for
additional information).
Management believes
that the
presentation of
interest income
on an
adjusted
tax-equivalent
basis facilitates
the comparison
of all
interest data
related to
these assets.
The Corporation
estimated the
tax
equivalent yield by dividing the interest rate spread on exempt
assets by 1 less the Puerto Rico statutory tax rate (37.5%) and
adding to
it the average
cost of interest-bearing
liabilities. The computation
considers the interest
expense disallowance required
by Puerto Rico
tax law.
Management
believes
that
the
presentation
of
net
interest
income
excluding
the
effects
of
the
changes
in
the
fair
value
of
the
derivative
instruments
(“valuations”)
provides
additional
information
about
the
Corporation’s
net
interest
income
and
facilitates
comparability and analysis from
period to period. The changes
in the fair value of
the derivative instruments have
no effect on interest
due on interest-bearing liabilities or interest earned on interest-earning
assets.
62
interest income on an adjusted tax-equivalent basis for the indicated periods.
The table also reconciles net interest spread and net
interest margin on a GAAP basis to these items excluding valuations, and
on an adjusted tax-equivalent basis:
Year Ended December 31,
2021
2020
(Dollars in thousands)
Interest income - GAAP
$
794,708
$
692,982
Unrealized gain on derivative instruments
(24)
(27)
Interest income excluding valuations
794,684
692,955
Tax-equivalent adjustment
23,753
21,059
Interest income on a tax-equivalent basis
and excluding valuations
818,437
714,014
Interest expense - GAAP
64,779
92,660
Net interest income - GAAP
$
729,929
$
600,322
Net interest income excluding valuations
$
729,905
$
600,295
Net interest income on a tax-equivalent basis
and excluding valuations
$
753,658
$
621,354
Average Balances
Loans and leases
$
11,413,149
$
10,068,702
Total securities, other short-term investments and interest-bearing
cash balances
8,180,944
4,411,880
Average Interest-Earning Assets
$
19,594,093
$
14,480,582
Average Interest-Bearing Liabilities
$
11,778,841
$
9,477,461
Average Yield/Rate
Average yield on interest-earning assets - GAAP
4.06%
4.79%
Average rate on interest-bearing liabilities - GAAP
0.55%
0.98%
Net interest spread - GAAP
3.51%
3.81%
Net interest margin - GAAP
3.73%
4.15%
Average yield on interest-earning assets excluding valuations
4.06%
4.79%
Average rate on interest-bearing liabilities
0.55%
0.98%
Net interest spread excluding valuations
3.51%
3.81%
Net interest margin excluding valuations
3.73%
4.15%
Average yield on interest-earning assets on a tax-equivalent
basis and excluding valuations
4.18%
4.93%
Average rate on interest-bearing liabilities
0.55%
0.98%
Net interest spread on a tax-equivalent basis
and excluding valuations
3.63%
3.95%
Net interest margin on a tax-equivalent basis and excluding
valuations
3.85%
4.29%
63
Interest
income
on
interest-earning
assets
primarily
represents
interest
earned
on
loans
held
for
investment
and
investment
securities.
Interest
expense
on
interest-bearing
liabilities
primarily
represents
interest
paid
on
brokered
CDs,
retail
deposits,
repurchase
agreements, advances from the FHLB, and junior subordinated debentures.
Unrealized
gains or
losses on
derivatives
represent
changes in
the
fair value
of derivatives,
primarily
interest
rate
caps used
for
protection against rising interest rates.
Net
interest
income
amounted
to
$729.9
million
for
the
year
ended
December
31,
2021,
an
increase
of
$129.6
million,
when
compared to $600.3
million for the
year ended December
31, 2020.
The $129.6 million
increase in net
interest income was
primarily
due to:
●
A $47.4 million
increase
in interest
income on
commercial
and construction
loans, mainly
due to an $853.2
million
increase
in the
average balance
of this portfolio
that reflects
the effect of both
loans acquired
in conjunction
with the BSPR acquisition
and SBA
PPP loans originated
through 2020
and 2021. Total discount
accretion
related to
fair value
marks on commercial
and construction
loans acquired
in the BSPR
acquisition
amounted
to $9.2 million
in 2021,
compared
to $5.5 million
in 2020. Additionally,
interest
income
for
2021
includes
$20.9
million
earned
on
SBA
PPP
loans,
including $13.2
million
of
accelerated PPP
loan
fees
recognized upon
receipt of forgiveness
payments in 2021, compared
to $7.5 million interest
income on SBA PPP loans recorded
in 2020. This variance also reflects
the benefit of interest income
of $2.9 million realized from deferred
interest recognized
on a
construction
loan paid-off
in 2021.
These variances
were partially
offset by lower
interest rates.
As of December
31, 2021, the interest
rate on approximately
39% of
the Corporation’s commercial
and construction loans, excluding
SBA PPP loans, was based upon LIBOR indices and 16% was
based upon the Prime rate index.
For the year ended December 31, 2021, the average
one-month LIBOR rate declined
42 basis
points,
the
average three-month
LIBOR
rate
declined 49
basis
points,
and
the
average Prime
rate
declined 29
basis
points
compared
to the
average
rate of
such indices
in 2020.
●
A $29.5 million increase
in interest income
on consumer loans
and finance leases,
mainly due to a $333.5 million
increase in the
average balance
of this portfolio,
largely related to
auto loans and finance
leases. The increase
in the average balance
reflects the
effect of
both consumer
loans acquired
in connection
with the
BSPR acquisition
and organic
growth.
●
A $27.9 million decrease in total interest expense, primarily due to: (i) a $21.9 million decrease in interest expense on interest-
bearing checking, savings and non-brokered time deposits, primarily
related to the effect
of lower rates paid
in response to the
current level of the Federal Fund target
rate that more than offset the effect
of the $2.7 billion increase in average
balance; (ii) a
$5.0 million
decrease
in interest
expense on
brokered
CDs, primarily
related to
the $216.0
million decrease
in the average
balance
in
related deposits; (iii)
a
$3.1 million
decrease in
interest expense on
FHLB advances, primarily related
to
a
$151.4 million
decrease
in
the
average
balance
of
FHLB
advances;
and
(iv)
a
$1.2
million
decrease
in
interest
expense
related
to
the
downward
repricing of
floating-rate junior
subordinated debentures
tied to
the three-month
LIBOR index.
These variances
were partially
offset by
a $3.3 million
increase in interest
expense on
repurchase agreements
primarily related
to the upward
repricing
of
$200
million
repurchase
agreements
(flipper
repos)
for
which
its
interest
rate
changed
early
in
2021
from
variable rates tied to 3-month LIBOR to a fixed rate of 3.90%.
●
A
$
11.3
million increase in
interest income on
residential mortgage loans,
primarily related to
a
$157.7 million
increase the
average
balance of
this portfolio,
primarily
related
to loans
acquired
in the BSPR
acquisition.
●
An $14.3 million increase in interest income on
investment securities,
driven by a
$3.0 billion increase in the average balance,
primarily U.S. agencies
MBS and
debt securities,
partially offset
by higher
premium amortization
expense related
to higher
prepayment rates of U.S. agencies MBS and lower reinvestment yields.
Partially offset by:
●
A $0.7 million decrease
in interest income
from interest-bearing
cash balances,
which consisted
primarily of deposits
maintained
at
the
New
York
Fed.
Balances at
the
New
York
Fed
earned 0.13%
during 2021,
compared to
0.44%
in
2020,
a
decrease
attributable to declines
in the Federal Funds target rate in the latter part of the first quarter of 2020. The adverse effect of lower
rates was
partially
offset by a $753.9
million increase
in the average
balance of
interest-bearing
cash balances,
primarily
related to
the strong
growth in
deposits.
The net
interest margin
decreased by
42 basis
points to
3.73% for
2021, compared
to 4.15%
for 2020.
The decrease
for the
2021
periods was
primarily attributable
to a
higher proportion
of lower-yielding
assets, such
as interest-bearing
cash deposited
at the
New
64
York
Fed and investment securities from
continued strong deposit growth,
to total interest-earning assets. The
total average balance of
interest-bearing
cash
balances
and
investment
securities
increased
by $3.8
billion
to
42%
of
total
average
interest-earning
assets,
compared to 30% for the same period of 2020.
Provision for Credit Losses
The provision for credit
losses consists of provisions for
credit losses on loans and
finance leases, unfunded loan
commitments, and
held-to-maturity and available-for-sale debt securities.
The principal changes in the provision for credit losses by main categories
follow:
Provision for credit losses for
loans and finance leases
The provision for credit losses for loans and finance
leases decreased by $230.4 million to a net benefit of $61.7
million for the year
ended
December 31,
2021,
compared
to
an expense
of $168.7
million
for 2020.
The results
for
the year
ended December
31, 2020
included
a
$37.5
million
Day
1
provision
for
credit
losses
related
to
non-PCD
loans
acquired
in
conjunction
with
the
BSPR
acquisition. Meanwhile, the provision
for credit losses for year 2020 do not
include $28.7 million of reserves established
at acquisition
date for
PCD loans
acquired
in conjunction
with the
BSPR acquisition.
Unlike non-PCD
loans, the
initial ACL
for PCD
loans was
established through an adjustment
to the acquired loan balance
and not through a charge
to the provision for credit
losses in the period
in which the loans were acquired. The variances by major portfolio
category are as follow:
●
Provision for credit losses for
the commercial and construction
loans portfolio was a net
benefit of $65.3 million
for the year
ended December 31,
2021, compared to
an expense of
$89.9 million for
the year ended
December 31, 2020.
The net benefit
recorded
in
2021,
reflects
continued
improvements
in
the
long-term
outlook
of
forecasted
macroeconomic
variables,
primarily
in the
commercial real
estate price
index, and
the overall
decrease in
the size
of this
portfolio in
the Puerto
Rico
region. The significant reserve builds
in the prior year were due to
the deterioration in forecasted economic
conditions due to
the COVID-19 pandemic reflected across multiple sectors with higher
increases in the ACL made for loans in the hospitality,
office and
retail real
estate industries.
The expense
for the year
2020 included
a $13.8 million
Day 1
provision recorded
for
non-PCD commercial and construction loans acquired in conjunction with
the BSPR acquisition.
●
Provision for credit
losses for the
consumer loan and
finance lease portfolio
was $20.6 million
for the year
ended December
31, 2021, compared
to $56.4 million for
the year ended December
31, 2020. The charges
to the provision
in 2021 reflect the
effect of increases
in cumulative historical
charge-off levels related
to the credit card
and personal loan portfolios,
as well as
charges to
the provision
for auto loans
and finance
leases that, among
other things, accounted
for the overall
increase in the
size of
these portfolios.
The significant
reserve builds
in the
prior year
were due
to the
deterioration of
the macroeconomic
outlook as a result of the COVID-19
pandemic primarily reflected in auto loans,
finance leases, and credit card loans,
as well
as
a
$10.1
million
Day
1
provision
recorded
for
non-PCD
consumer
loans
acquired
in
conjunction
with
the
BSPR
acquisition.
●
Provision
for
credit losses
for
the residential
mortgage
loan portfolio
was a
net benefit
of $17.0
million
for the
year ended
December
31,
2021,
compared
to
an
expense
of
$22.4
million
for
the
year
ended
December
31,
2020.
The
net
benefit
recorded
in 2021
reflects the
effect
of both
continued improvements
in the
long-term
outlook
of macroeconomic
variables,
such as regional unemployment rates
and Home Price Index, and the overall
portfolio decrease. The significant reserve builds
in the
prior year
were due
to the
deterioration of
the macroeconomic
outlook
as a
result of
the COVID-19
pandemic
and a
$13.6
million
Day
1
provision
recorded
for
non-PCD
residential
mortgage
loans
acquired
in
conjunction
with
the
BSPR
acquisition.
See
“Risk
Management
–
Credit
Risk
Management”
below
for
an
analysis
of
the
ACL,
non-performing
assets,
and
related
information,
and
see
“Financial
Condition
and
Operating
Data
Analysis
–
Loan
Portfolio
and
Risk
Management
—
Credit
Risk
Management”
below for
additional information
concerning the
Corporation’s
loan
portfolio exposure
in the
geographic
areas where
the Corporation does business.
65
Provision for credit losses for
unfunded loan commitments
The provision for
credit losses for
unfunded commercial and
construction loan commitments
and standby letters
of credit was a
net
benefit of
$3.6 million
for the year
ended December
31, 2021,
compared to
a charge
of $1.2
million recorded
for the
year 2020.
The
net
benefit
recorded
in
2021
periods
was
mainly
related
to
continued
improvements
in
forecasted
macroeconomic
variables.
The
provision
recorded
in
2020
primarily
consisted
of
a
$1.3
million
charge
recorded
in
connection
with
unfunded
loan
commitments
assumed in the BSPR acquisition.
Provision for credit losses for
held-to-maturity and available-for-sale debt
securities
As of
December 31,
2021, the
held-to-maturity
debt securities
portfolio
consisted of
Puerto Rico
municipal bonds.
The provision
for credit losses for
held-to-maturity securities was
a net benefit of
$0.2 million for the
year ended December 31,
2021, compared to a
benefit of
$0.6 million
for year
ended December
31, 2020.
The net
benefit recorded
in 2021
was mainly
related to
improvements in
forecasted macroeconomic variables
and the repayment of
certain bonds, partially
offset by changes
in some issuers’ financial
metrics
based
on
their most
recent
financial
statements.
The
net
benefit
recorded
in 2020
was primarily
related
to the
repayment
of
certain
bonds.
In
the
third
quarter
of
2020,
the
Corporation
recorded
a
$1.3
million
initial
reserve
for
PCD
debt
securities
acquired
in
conjunction
with
the
BSPR acquisition.
Similar
to
PCD loans,
such
initial
reserve
for PCD
debt
securities
acquired
in
conjunction
with
the
BSPR
acquisition
was
not
established
through
a
charge
to
the
provision
for
credit
losses,
but
rather
through
an
initial
adjustment
to
the
debt
securities’
amortized
cost
basis.
Meanwhile,
the
ACL
for
available-for-sale
securities
of
$1.1
million
as
of
December 31, 2021 remained
relatively unchanged since the
beginning of the year.
The Corporation recorded charges
to the provision
for
credit
losses
for
available-for-sale
securities
of
$1.6
million
during
2020.
These
charges
were
in
connection
with
private
label
MBS and a residential mortgage
pass-through MBS issued by
the PRHFA
and resulted from a
decline in the present value
of expected
cash
flows
based
upon
the
performance
of
the
underlying
mortgages
and
the
effect
of
a
deterioration
in
forecasted
economic
conditions due to the COVID-19 pandemic.
66
Non-Interest Income
Year ended
December 31,
2021
2020
(In thousands)
Service charges on deposit accounts
$
35,284
$
24,612
Mortgage banking activities
24,998
22,124
Insurance income
11,945
9,364
Other operating income
48,937
41,834
Non-interest income before net gain on investment securities
and gain on early extinguishment of debt
121,164
97,934
Net gain on sale of investment securities
-
13,198
Gain on early extinguishment of debt
-
94
Total
$
121,164
$
111,226
Non-interest
income
primarily
consists
of
income
from
service
charges
on
deposit
accounts,
commissions
derived
from
various
banking and insurance activities, gains and losses on
mortgage banking activities, interchange and other
fees related to debit and credit
cards, and net gains and losses on investment securities.
Service charges
on deposit
accounts include
monthly fees,
overdraft fees,
and other
fees on
deposit accounts,
as well
as corporate
cash management fees.
Income
from
mortgage
banking
activities
includes
gains
on
sales
and
securitizations
of
loans,
revenues
earned
for
administering
residential
mortgage
loans
originated
by
the
Corporation
and
subsequently
sold
with
servicing
retained,
and
unrealized
gains
and
losses
on
forward
contracts
used
to
hedge
the
Corporation’s
securitization
pipeline.
In
addition,
lower-of-cost-or-market
valuation
adjustments to
the Corporation’s
residential mortgage
loans held-for-sale
portfolio and
servicing rights
portfolio, if
any,
are recorded
as part of mortgage banking activities.
Insurance
income consists
mainly of
insurance
commissions
earned by
the Corporation’s
subsidiary, FirstBank
Insurance
Agency, Inc.
The other operating
income category
is composed of miscellaneous
fees such as debit, credit
card and POS interchange
fees, as well as
contractual
shared
revenues
from merchant
contracts.
The
net gain
(loss)
on investment
securities
reflects
gains or
losses as
a
result
of sales
that
are
consistent with
the
Corporation’s
investment policies.
The gain
on early
extinguishment
of debt
is related
to the
repurchase in
2020 of
$0.4 million
in TRuPs
of FBP
Statutory
Trust
I.
The
Corporation
repurchased
TRuPs
resulted
in
a
commensurate
reduction
in
the
related
amount
of
the
floating
rate
junior
subordinated debentures
(“Subordinated Debt”).
The Corporation’s
purchase price equated
to 75% of
the $0.4 million
par value.
The
25%
discount
resulted
in
a
gain
of
$0.1
million
which
is
reflected
in
the
consolidated
statements
of
income
as
a
Gain
on
early
extinguishment of debt. As of December 31, 2021, the
Corporation still had Subordinated Debt outstanding in
the aggregate amount of
$183.8 million.
67
Non-interest income amounted
to $121.2 million
for the year ended
December 31, 2021, compared
to $111
.2 million for 2020.
The
$10.0 million increase in non-interest income was primarily due
to:
●
A
$10.7
million
increase
in
service
charges
on
deposits
accounts, driven
by
the
income
generated
by
the
acquired
BSPR
operations,
primarily
reflecting
an
increase
in
the
number
of
cash
management
transactions
of
commercial
clients,
and
an
increase in the monthly service fee charged on certain checking
and savings products.
●
A $2.9 million increase in
revenues from mortgage banking activities,
driven by a $2.9 million incre
ase in service fee income
and a $1.8 million
increase in realized gain
on sales of residential
mortgage loans in
the secondary market, partially
offset by
a $1.1 million decrease related to the net change in mark-to-market
gains and losses from both interest rate lock commitments
and
To-Be-Announced
(“TBA”)
MBS
forward
contracts
and
a
$0.9
million
increase
in
net
amortization
and
impairment
charges related to
mortgage servicing rights. Total
loans sold in the secondary
market to U.S. GSEs during
2021 amounted to
$519.6 million,
with a
related net
gain of
$20.0 million
(net of
realized losses
of $0.9
million on
TBA hedges,
compared to
total loans
sold in
the secondary
market in
2020 of
$476.4 million,
with a
related net
gain of
$18.1 million
(net of
realized
losses of $2.0 million on TBA hedges).
●
A
$7.1
million
increase
in
Other
operating
income
in
the
table
above,
primarily
reflecting:
(i)
a
$10.9
million
increase
in
transactional fee
income from credit
and debit
cards, ATMs,
POS, and
merchant-related activity
reflecting both
the effect
of
the BSPR
acquisition
as well
as increased
transaction volumes
due to
the impact
of the
COVID-19
pandemic on
economic
activity
in
2020;
(ii)
a
$1.0
million
increase
in
fees
and
commissions
from
other
banking
services
such
as
wire
transfers,
insurance
referrals,
and
official
checks;
and
(iii)
a
$0.7
million
increase
in
non-deferrable
loan
fees,
such
as
unused
commitment loan
fees. These
variances were
partially offset
by the
effect of
the $5.0
million benefit
recorded in
the second
quarter of 2020
resulting from the
final settlement of
the Corporation’s
business interruption
insurance claim associated
with
lost profits caused by Hurricanes Irma and Maria in 2017.
●
A $2.6
million increase in insurance
income, driven by higher property
insurance commissions, impacted by
a higher volume
of residential
mortgage loan
originations during
2021, when
compared to
2020, and
higher sells
of annuities
and accidental
death policies.
The above-described
increases were
partially offset
by the
effect in
2020 of
a $13.2
million gain
on sales
of investment
securities
consisting
of: (i)
a $13.0
million gain
on sales
of approximately
$392.2
million on
available-for-sale
U.S. agencies
MBS; and
(ii) a
$0.2 million gain on sales of approximately $803.3 million of available
-for-sale U.S. Treasury notes acquired
in the BSPR acquisition.
68
Non-Interest Expenses
The following table presents the components of non-interest expenses for
the indicated periods:
Year
ended December 31,
2021
2020
(In thousands)
Employees' compensation and benefits
$
200,457
$
177,073
Occupancy and equipment
93,253
74,633
FDIC deposit insurance premium
6,544
6,488
Taxes, other than
income taxes
22,151
17,762
Professional fees:
Collections, appraisals and other credit-related fees
4,715
5,563
Outsourced technology services
41,106
33,974
Other professional fees
14,135
13,096
Credit and debit card processing expenses
22,169
19,144
Business promotion
15,359
12,145
Communications
9,387
8,437
Net (gain) loss on OREO and OREO operations expenses
(2,160)
3,598
Merger and restructuring costs
26,435
26,509
Other
35,423
25,818
Total
$
488,974
$
424,240
Non-interest expenses
for the
year ended
December 31,
2021 were
$489.0 million,
compared to
$424.2 million
for the
year ended
December 31, 2020.
Included in non-interest expenses are the following Special Items:
●
Merger and
restructuring costs
associated with
the acquisition
of BSPR of
$26.4 million
in 2021,
compared to
$26.5 million
for 2020. These
costs in 2021 primarily
included charges related
to voluntary and
involuntary employee separation
programs
implemented
in
the
Puerto
Rico
region,
as
well
as
consulting
fees,
expenses
related
to
system
conversions,
and
other
integration related efforts, such
as service contracts cancellation penalties, accelerated
depreciation charges related to
planned
closures,
and consolidation of branches in accordance with the Corporation’s
integration and restructuring plan.
●
COVID-19 pandemic-related expenses of $3.0 million in 2021
,
compared
to
$5.4
million
in
2020.
In
2021
these
costs
primarily
consisted
of:
(i)
expenses
of
$2.6
million
associated
with
cleaning
and
security
protocols,
included
as
part
of
Occupancy and
equipment costs
in the
table above;
(ii) $0.3
million in
sales and
use taxes,
included as
part of
Taxes,
other
than income taxes in the table above;
and (iii) expenses of $0.1 million in
connection with employee-related expenses such
as
expenses for
the administration
and referrals
of COVID-19
tests, recorded
as part
of Employees’
compensation and
benefits
in the table
above.
For the year ended
December 31, 2020, these
costs primarily
consisted of: (i)
expenses of $1.8
million in
connection with bonuses
paid to branch personnel
and other essential employees
for working during the
pandemic, as well as
employee-related expenses
such as
expenses for
the administration
of COVID-19
tests, and
purchases of
personal protective
materials,
recorded
as
part
of
Employees’
compensation
and
benefits
in
the
table
above
;
(ii)
expenses
of
$2.7
million
associated with
cleaning and
security protocols,
included as
part of
Occupancy and
equipment costs
in the
table above;
(iii)
expenses
of
$0.6
million
related
to
communications
established
with
customers,
included
as
part
of
Business
promotion
expenses in the table
above; (iv) $0.3 million
in sales and use
taxes, included as part
of Taxes,
other than income taxes
in the
table above; and (v) $0.1 million in other miscellaneous expenses, included
as part of Other expenses in the table above.
●
Benefit from
hurricane-related expenses
insurance recoveries
recorded as
contra-expense in
2020 amounting
to $1.2 million,
primarily related to repairs and
maintenance expenses, included as
a contra expense of Occupancy
and equipment costs in the
table above.
On
a
non-GAAP
basis,
adjusted
non-interest
expenses,
excluding
the
effect
of
the
Special
Items
mentioned
above,
amounted
to
$459.6 million for 2021, compared
to $393.5 million for 2020.
The $66.1 million increase in adjusted
non-interest expenses primarily
reflects the effect of operations,
personnel, and branches acquired from
BSPR. Some of the most significant variances
in adjusted non-
interest expenses follows:
●
A
$25.1
million
increase
in
adjusted
employees’
compensation
and
benefit
expenses,
primarily
driven
by
incremental
expenses related to personnel retained from the acquisition of BSPR.
69
●
A
$17.9
million
increase
in
adjusted
occupancy
and
equipment
expenses,
primarily related
to
incremental
expenses
associated with
the BSPR
acquired
operations including,
among others,
depreciation, software
maintenance, electricity,
and
rental expenses.
●
A $7.2 million
increase in
adjusted professional
service fees,
including an
increase of
approximately $7.0
million related
to
temporary technology
processing costs of
the acquired BSPR
operations up
to the completion
of system conversions
early in
the third quarter
of 2021, and
a $0.7 million
increase in consulting
and legal fees.
These variances were,
partially offset
by a
$0.5 million decrease in attorneys’ collection fees, appraisals, and other credit-related
fees.
●
A $
9.6
million
increase
in adjusted
Other
non-interest
expense,
in
the table
above, including
a
$5.5
million increase
in
the
amortization
of
intangible
assets, primarily
associated
with
the
intangibles
assets
recognized
in
connection
with
the
BSPR
acquisition,
and
a
$2.8
million
increase
in
insurance
and
supervisory
expenses,
primarily
associated
with
higher
costs
on
insurance policies.
●
A
$4.4
million
increase
in
adjusted
taxes,
other
than
income
taxes
expenses,
primarily
related
to
incremental
municipal
license taxes and property taxes of the acquired operations.
●
A $3.6
million increase
in adjusted
business promotion
expenses, primarily
related to
a $2.4
million increase
in advertising,
marketing, and public relations activities, and a $1.1 million increase in the
cost of the credit card rewards program.
●
A
$3.0
million
increase
in
credit
and
debit
card
processing
expenses, primarily
related
to
incremental
expenses
of
the
acquired
operations
and higher
transaction volumes
due to
the effect
of the
COVID-19 pandemic
on economic
activity last
year.
●
A
$1.0
million
increase
in
communication
expenses, primarily
related
to
incremental
expenses
on
telephone,
data,
and
postage related to the acquired operations.
The above-described increases were
partially offset by a $5.8
million decrease in the net
loss on OREO operations, primarily
due to
higher realized gains on sales of residential and commercial OREO properties.
70
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,
accordingly,
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 jurisdictions.
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
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
NOL, a
particular subsidiary
must be
able to
demonstrate sufficient
taxable income
within the
applicable NOL
carry-forward period.
Pursuant to
the 2011
PR Code, the
carry-forward period
for NOLs incurred
during taxable years
that commenced
after December
31,
2004 and ended before January 1, 2013 is 12 years;
for NOLs incurred during taxable years commencing after
December 31, 2012, the
carryover
period
is
10
years.
The
2011
PR
Code
provides
a
dividend
received
deduction
of
100%
on
dividends
received
from
“controlled” subsidiaries subject to taxation in Puerto Rico and 85% on
dividends received from other taxable domestic corporations.
The
Corporation
has
maintained
an
effective
tax
rate
lower
than
the
maximum
statutory
rate
of
37.5%
mainly
by
investing
in
government
obligations
and
MBS
exempt
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 gains on sales is
exempt from Puerto
Rico income taxation. The
IBE unit 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.
The CARES
Act of
2020 includes
several provisions
to stimulate
the U.S.
economy in
the midst
of the
COVID-19 pandemic.
The
CARES Act
of 2020
includes tax
provisions that
temporarily modified
the taxable
income limitations
for NOL
usage to
offset future
taxable income, NOL
carryback provisions and other
related income and
non-income based tax
laws. Due to the
fact that the COVID-
19
pandemic
is still
ongoing,
the
federal
government
extended
some
of
the
benefits
and
continued
the
economic
stimulus
from
the
CARES Act of 2020. The Corporation
has evaluated such provisions and determined
that the impact of the CARES Act on
the income
tax provision and deferred tax assets as of December 31, 2021 was not significant.
For
the
year
ended
December
31,
2021,
the
Corporation
recorded
an
income
tax
expense
of
$146.8
million
compared
to
$14.1
million
for
2020.
The variances
were
primarily
related
to higher
pre-tax
income driven
by credit
losses reserve
releases in
the
year
ended
December
31,
2021,
compared
to
significant
charges
to
the
provision
recorded
during
2020,
and
a
higher
level
of
taxable
income. The
Corporation’s
effective tax
rate for
2021, excluding
entities from
which a
tax benefit
cannot be
recognized and
discrete
items,
increased
to
33.9%,
compared
to
17%
for
2020.
The
income
tax
expense
reported
in
2020
was
net
of
the
effect
of
an
$8.0
million partial
reversal of the
Corporation’s
deferred tax
asset valuation
allowance recorded after
consideration of
significant positive
evidence on the utilization of NOLs due to the acquisition of BSPR.
Total
deferred
tax
assets
of
FirstBank,
the
banking
subsidiary,
amounted
to
$208.4
million
as
of
December
31,
2021,
net
of
a
valuation
allowance
of
$69.7 million,
compared
to
total deferred
tax asset
of
$329.1
million,
net
of
a
valuation
allowance
of
$59.9
million, as
of December
31, 2020.
The decrease
in deferred
tax assets
was mainly
driven by
the aforementioned
credit losses reserve
releases
and
the
usage
of
net
operating
losses.
The
increase
in
the
valuation
allowance
was
primarily
related
to
the
change
in
the
market
value
of
available-for-sale
securities.
The
Corporation
maintains
a
full
valuation
allowance
for
its
deferred
tax
assets
associated
with
capital
losses
carry
forward.
Therefore,
changes
in
the
unrealized
losses
of
available-for-sale
securities
result
in
a
change in the deferred tax asset and an equal change in the valuation allowance
without having an effect on earnings.
After completion
of the deferred
tax asset
valuation allowance
analysis for
the fourth
quarter of
2021 management
concluded that,
as of
December 31,
2021, it
is more
likely than
not that
FirstBank, will
generate sufficient
taxable income
to realize
$66.3 million
of
its deferred tax assets related to NOLs within the applicable carry-forward
periods.
The
positive evidence
considered
by management
in arriving
at its
conclusion
includes factors
such as:
(i) FirstBank’s
three-year
cumulative
income
position;
(ii)
sustained
periods
of
profitability;
(iii)
management’s
proven
ability
to
forecast
future
income
accurately
and
execute
tax
strategies;
(iv)
forecasts
of
future
profitability
under
several
potential
scenarios
that
support
the
partial
utilization of
NOLs prior
to their
expiration from
2022 through
2024; (v)
and the
utilization of
NOLs over
the past
three-years.
The
negative
evidence
considered
by
management
includes
uncertainties
around
the
state
of
the
Puerto
Rico
economy,
including
considerations on
the impact of
the pandemic recovery
funds together with
the ultimate sustainability
of the latest
fiscal plan certified
by the PROMESA oversight board.
71
Management’s
estimate
of
future
taxable
income
is
based
on
internal
projections
that
consider
historical
performance,
multiple
internal scenarios and
assumptions, as well as
external data that
management believes is
reasonable. If events
are identified that affect
the Corporation’s
ability to utilize
its deferred tax
assets, the analysis
will be updated
to determine if
any adjustments to
the valuation
allowance
are
required.
If
actual
results
differ
significantly
from
the
current
estimates
of
future
taxable
income,
even
if
caused
by
adverse
macro-economic
conditions,
the
remaining
valuation
allowance
may
need
to
be
increased.
Such
an
increase
could
have
a
material
adverse
effect
on
the
Corporation’s
financial
condition
and
results
of
operations.
Conversely,
a
higher
than
projected
proportion
of
taxable
income to
exempt
income
could
lead to
a
higher
usage
of
available NOLs
and
a
lower
amount of
disallowed
NOLs from projected
levels of tax-exempt income,
per the 2011
PR code, which in
turn could result in
further releases to the
deferred
tax valuation
allowance; any
such decreases
could have
a material positive
effect on
the Corporation’s
financial condition
and results
of operations.
As of December
31, 2021, approxima
tely $177.9 million
of the deferred
tax assets of
the Corporation
are attributable to
temporary
differences or tax credit
carryforwards that have no expiration date,
compared to $210.7 million in the
year ended December 31, 2020.
The
valuation
allowance
attributable
to
FirstBank’s
deferred
tax
assets
of
$69.7
million
as
of
December
31,
2021
is
related
to
the
estimated
NOL
disallowance
attributable
to
projected
levels
of
tax-exempt
income,
NOLs
attributable
to
the
Virgin
Islands
jurisdiction,
and
capital
losses. The
remaining
balance
of $37.6
million
of
the
Corporation’s
deferred
tax
asset valuation
allowance
non-attributable to FirstBank is mainly related to NOLs and capital
losses at the holding company level. The Corporation will continue
to
provide
a
valuation
allowance
against
its
deferred
tax
assets
in
each
applicable
tax
jurisdiction
until
the
need
for
a
valuation
allowance is eliminated.
The need for
a valuation allowance
is eliminated when
the Corporation determines
that it is
more likely than
not the
deferred tax
assets will
be realized.
The ability
to recognize
the remaining
deferred tax
assets that
continue to
be subject
to a
valuation allowance
will be evaluated
on a quarterly
basis to determine
if there are
any significant events
that would affect
the ability
to utilize these deferred tax assets.
The Corporation
has U.S.
and USVI
sourced NOL
carryforwards. Section
382 of
the U.S.
Internal Revenue
Code (“Section
382”)
limits the ability
to utilize U.S. and
USVI NOLs for income
tax purposes in
such jurisdictions following
an event that is considered
to
be an “ownership change.”
Generally, an
“ownership change” occurs when
certain shareholders increase their
aggregate ownership by
more
than
50
percentage
points
over
their
lowest
ownership
percentage
over
a
three-year
testing
period.
Upon
the
occurrence
of
a
Section 382
ownership change,
the use
of NOLs
attributable to
the period
prior to
the ownership
change is
subject to
limitations and
only a portion of the U.S. and USVI NOLs may be used by the Corporation
to offset its annual U.S. and USVI taxable income, if any.
In
2017,
the
Corporation
completed
a
formal
ownership
change
analysis
within
the
meaning
of
Section
382
covering
a
comprehensive
period
and
concluded
that
an
ownership
change
had
occurred
during
such
period.
The
Section
382
limitation
has
resulted
in
higher
U.S.
and
USVI
income
tax
liabilities
than
we
would
have
incurred
in
the
absence
of
such
limitation.
The
Corporation has mitigated to an extent the adverse effects
associated with the Section 382 limitation as any such tax paid in
the U.S. or
USVI is
creditable against
Puerto Rico
tax liabilities
or taken
as a
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.
For
2021,
2020
and
2019,
the
Corporation
incurred
an
income
tax
expense
of
approximately
$6.8
million, $4.9 million,
and $4.5 million,
respectively,
related to its U.S.
operations.
The limitation did not
impact the USVI operations
in 2021, 2020, and 2019.
The Corporation
accounts for uncertain
tax positions under
the provisions
of ASC Topic
740. The Corporation’s
policy is to
report
interest and penalties
related to unrecognized
tax benefits in income
tax expense. As
of December 31,
2021, the Corporation
had $0.2
million of
accrued interest
and penalties
related to
uncertain tax
positions in
the amount
of $1.0
million that
it acquired
from BSPR,
which,
if recognized,
would decrease
the
effective
income tax
rate in
future
periods. The
amount
of
unrecognized
tax benefits
may
increase
or
decrease
in
the
future
for
various
reasons,
including
adding
amounts
for
current
tax
year
positions,
expiration
of
open
income
tax returns
due
to the
statute of
limitations,
changes
in management’s
judgment about
the level
of uncertainty,
the status
of
examinations,
litigation, and
legislative activity,
and the
addition or
elimination of
uncertain tax
positions. 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. 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 2017
remain open
to examination.
For Puerto
Rico tax
purposes, all tax years subsequent to 2016 remain open to examination.
72
OPERATING SEGMENTS
Based
upon
the
Corporation’s
organizational
structure
and
the
information
provided
to
the
Chief
Executive
Officer
of
the
Corporation,
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
December
31,
2021,
the
Corporation
had
six
reportable
segments:
Commercial
and
Corporate
Banking;
Consumer
(Retail)
Banking;
Mortgage
Banking;
Treasury
and Investments;
United States operations;
and Virgin
Islands operations.
Management determined
the reportable segments
based
on
the
internal
structure
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
products,
were also considered in the determination of the
reportable segments. For additional information regarding First BanCorp.’s
reportable
segments, please
refer to
Note 36
- Segment
Information, to
the audited
consolidated financial
statements included
in Item
8 of
this
Annual Report on Form 10-K.
The accounting policies of the segments are the same
as those described in Note 1 - Nature of
Business and Summary of Significant
Accounting
Policies,
to
the
audited
consolidated
financial
statements
included
in
Item
8
of
this Annual
Report
on
Form
10-K.
The
Corporation
evaluates
the
performance
of
the
segments
based
on
net
interest
income,
the
provision
for
credit
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
ACL.
For
the
years
ended
December
31,
2021
and
2020,
other
operating
expenses
not
allocated
to
a
particular
segment
amounted
to $192.2
million and
$165.4 million,
respectively.
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.
The
Treasury
and
Investments
segment
lends
funds
to
the
Consumer
(Retail)
Banking,
Mortgage
Banking,
Commercial
and
Corporate
Banking
and United
States operations
segments
to finance
their lending
activities and
borrows
from those
segments. The
Consumer
(Retail)
Banking
segment
also
lends
funds
to
other
segments.
The
Corporation
allocates
the
interest
rates
charged
or
credited by the
Treasury and
Investment and the
Consumer (Retail) Banking
segments 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.
Commercial and Corporate Banking
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.
FirstBank has
developed
expertise in
a wide
variety
of
industries.
The
Commercial
and
Corporate
Banking
segment
offers
commercial
loans,
including
commercial
real
estate
and
construction
loans, as
well as
other products,
such as
cash management
and business
management
services. A
substantial portion
of
the commercial
and corporate
banking portfolio
is secured
by the
underlying real
estate collateral
and the
personal guarantees
of the
borrowers. Since
commercial loans
involve greater
credit risk
than a
typical residential
mortgage loan
because they
are larger
in size
and
more
risk
is
concentrated
in
a
single
borrower,
the
Corporation
has
and
maintains
a
credit
risk
management
infrastructure
designed
to mitigate
potential losses
associated with
commercial lending,
including underwriting
and loan
review functions,
sales of
loan participations, and continuous monitoring of concentrations within
portfolios.
The highlights
of the
Commercial and
Corporate Banking
segment’s
financial results
for the
years ended
December 31,
2021
and
2020 include the following:
●
Segment
income
before
taxes
for
the
year
ended
December
31,
2021
increased
to
$239.3
million,
compared
to
$45.0
million for 2020, for the reasons discussed below.
●
Net
interest
income
for
the year
ended
December
31,
2021
was $191.9
million,
compared
to $135.6
million
for 2020.
The increase in net interest
income was primarily
attributable to the increase
in the average balance
of the loan portfolio,
driven by
the effect
of commercial
loans acquired
in conjunction
with the
BSPR acquisition,
and accelerated
PPP loans
fees recognized upon receipt of forgiveness payments from
the SBA in 2021.
●
For 2021, the provision for
credit losses was a net benefit
of $67.5 million net benefit,
compared to a net charge
of $74.6
million
for
2020.
The
net
benefit
recorded
in
2021
reflects
continued
improvements
in
the
long-term
outlook
of
forecasted macroeconomic
variables, primarily
in the commercial
real estate price
index, and
the overall
decrease in the
size
of
this
portfolio
in
the
Puerto
Rico
region.
The
charge
to
the
provision
in
2020
included
a
$13.8
million
charge
related to the
initial reserves required
for non-PCD commercial loans
acquired in conjunction
with the BSPR acquisition
and higher
reserve builds
reflecting the
effect of
the COVID-19
pandemic on
forecasted macroeconomic
variables used
in the Corporation’s CECL model.
73
●
Total
non-interest income
for the
year ended
December 31,
2021 amounted
to $16.0
million compared
to $12.6
million
for 2020.
The increase was mainly related to a $4.2 million increase in service charges
on deposits, primarily due to cash
management
fee income
from corporate
customers, partially
offset
by the
effect
in 2020
of fee
income of
$0.5 million
recorded in
connection with
participation interests
sold on Main
Street loans
originated in
the Puerto
Rico region,
and a
benefit of approxim
ately $0.8 million
related to the
portion of the
business interruption
insurance recoveries allocated
to
this operating segment.
●
Direct non-interest
expenses for
the year
ended December
31, 2021
were $36.2
million, compared
to $28.6
million for
2020. The increase primarily
reflects the effect
of incremental expenses
related to the acquired
commercial operations of
BSPR, primarily employees’ compensation and professional service fees related
to this operating segment.
Consumer (Retail) Banking
The
Consumer
(Retail)
Banking
segment
consists
of
the
Corporation’s
consumer
lending
and
deposit-taking
activities
conducted
mainly
through
FirstBank’s
branch
network
and
loan
centers
in
Puerto
Rico.
Loans
to
consumers
include
auto,
boat,
and
personal
loans, credit
card loans,
and lines
of credit.
Deposit products
include interest-bearing
and non-interest
bearing checking
and savings
accounts, individual
retirement accounts
(“IRAs”), and
retail CDs.
Retail deposits
gathered through
each branch
of FirstBank’s
retail
network serve as one of the funding sources for the lending and investment
activities.
Consumer lending
historically has
been mainly
driven by
auto loan
originations. The
Corporation follows
a strategy
of seeking
to
provide outstanding service to selected auto dealers that provide the
channel for the bulk of the Corporation’s
auto loan originations.
Personal
loans, credit
cards,
and,
to a
lesser extent,
boat
loans also
contribute
to interest
income
generated
on consumer
lending.
Management
plans
to
continue
to
be
active
in
the
consumer
loan
market,
applying
the
Corporation’s
strict
underwriting
standards.
Other activities included in this segment are finance leases and insurance
activities in Puerto Rico.
The
highlights
of
the
Consumer
(Retail)
Banking
segment’s
financial
results
for
the
years
ended
December
31,
2021
and
2020
include the following:
●
Segment
income
before
taxes
for
the
year
ended
December
31,
2021
increased
to
$165.8
million,
compared
to
$86.4
million for 2020, for the reasons discussed below.
●
Net
interest
income
for
the year
ended
December
31,
2021
was $281.7
million,
compared
to $220.7
million
for 2020.
The
increase
was
mainly
due
to
an
increase
in
the
average
volume
of
consumer
loans
in
Puerto
Rico
that
reflects
the
effect of
both consumer
loans acquired
in conjunction
with the
BSPR acquisition
and organic
growth, as
well as
higher
income
from
funds
loaned
to
other
business
segments
due
to
the
growth
in
non-brokered
deposits,
mainly
demand
deposits, that, among other things, served as a funding source for lending activities
of other operating segments.
●
The
provision
for
credit
losses
for
the
year
ended
December
31,
2021
decreased
by
$33.8
million
to
$20.3
million,
compared to
$54.1 million
for the year
ended
December 31,
2020. The
decrease reflects
the effect
of significant
reserve
builds in
2020 due
to the
deterioration of
the macroeconomic
outlook as
a result
of the
COVID-19 pandemic
primarily
reflected
in
auto
loans,
finance
leases,
and
credit
card
loans,
as
well
as
the
effect
in
2020
of
the
$10.1
million
Day 1
provision recorded for non-PCD consumer loans acquired in conjunction
with the BSPR acquisition.
●
Non-interest income for the
year ended December 31, 2021
was $69.8 million, compared
to $51.0 million for 2020.
The
increase was
primarily
related to
a $6.4
million increase
in service
charges
on deposits
primarily
related to
the income
generated
by
the
acquired
BSPR
operations,
as
well
as
an
increase
in
the
monthly
service
fee
charged
on
certain
checking
and
savings
products.
In
addition,
transaction
fee
income
from
credit
and
debit
cards
and
merchant-related
activities
increased
by
$9.9
million,
and
insurance
commission
income
in
Puerto
Rico
increased
by
$2.4
million,
primarily
related
to an
increased customer
activity as
compared
to year
2020 that
was adversely
affected
by pandemic
stay-at-home orders
and related interruptions.
These variances were
partially offset
by the effect
in 2020 of
a benefit of
approximately
$2.4
million
related
to
the
portion
of
the
business
interruption
insurance
recoveries
allocated
to
this
operating segment.
●
Direct non-interest expenses for
the year ended December
31, 2021 were $165.4 million,
compared to $131.1 million
for
2020.
The
increase
was
primarily
due
to
incremental
expenses
related
to
the
acquired
operations
of
BSPR,
primarily
employees’
compensation,
occupancy
and
equipment,
temporary
technology
processing
costs,
credit
and
debit
cards
processing fees, municipal taxes and core deposit intangible amortization
related to this operating segment.
74
Mortgage Banking
The
Mortgage
Banking
segment
conducts
its
operations
mainly
through
FirstBank.
The
segment’s
operations
consist
of
the
origination, sale, and
servicing of a variety
of residential mortgage loan
products. Originations are
sourced through different
channels,
such
as
FirstBank
branches
and
purchases
from
mortgage
bankers,
and
in
association
with
new
project
developers.
The
mortgage
banking segment
focuses on
originating
residential real
estate loans,
some of
which conform
to the
Federal Housing
Administration
(the
“FHA”),
the
Veterans
Administration
(the
“
VA
”),
and
U.S.
Department
of
Agriculture
Rural
Development
(“RD”)
standards.
Loans originated that meet
the FHA’s
standards qualify for
the FHA’s
insurance program whereas loans
that meet the standards
of the
VA
or the U.S. Department of Agriculture Rural Development (“RD”) are
guaranteed by their respective federal agencies.
Mortgage
loans that
do not
qualify under
the FHA,
VA,
or RD
programs
are referred
to as
conventional
loans. Conventional
real
estate loans can
be conforming or
non-conforming.
Conforming loans are
residential real estate
loans that meet
the standards for
sale
under
the
U.S.
Federal
National
Mortgage
Association
(“FNMA”)
and
the
U.S.
Federal
Home
Loan
Mortgage
Corporation
(“FHLMC”) programs.
Loans that
do not
meet FNMA
or FHLMC
standards are
referred to
as non-conforming
residential real
estate
loans. The
Corporation’s
strategy is
to penetrate
markets by
providing customers
with a
variety of
high quality
mortgage products
to
serve
their
financial
needs
through
a
faster
and
simpler
process
and
at
competitive
prices.
The
Mortgage
Banking
segment
also
acquires and
sells mortgages
in the
secondary markets.
Residential real
estate conforming
loans are
sold to
investors like
FNMA and
FHLMC.
The Corporation has commitment authority to issue GNMA MBS.
The highlights
of the
Mortgage Banking
segment’s
financial results
for the
years ended
December 31,
2021 and
2020 include
the
following:
●
Segment
income
before
taxes
for
the
year
ended
December
31,
2021
increased
to
$115.8
million,
compared
to
$42.5
million for 2020, for the reasons discussed below.
●
Net interest income for
the year ended December
31, 2021 was $104.6
million, compared to
$76.0 million for 2020.
The
increase in
net interest
income was
mainly due
to both
the increase
in the
average balance
of residential
mortgage loans
in the Puerto
Rico region driven
by residential mortgage
loans acquired in
conjunction with the
BSPR acquisition, and
a
decrease in the
cost of funds borrowed
from other segments
resulting from overall
lower short-term market
interest rates
as compared to 2020 overall levels.
●
The provision
for credit losses
for 2021
was a net
benefit of $16.0
million, compared
to an expense
of $22.5 million
for
2020.
The
net
benefit
recorded
in
2021
reflects
the
effect
of
reserve
releases
associated
with
both
continued
improvements
in
the
long-term
outlook
of
macroeconomic
variables,
such
as
regional
unemployment
rates
and
Home
Price
Index,
and
the
overall
portfolio
decrease.
The
significant
reserve
builds
in
the
prior
year
were
due
to
the
deterioration of the
macroeconomic outlook
as a result
of the COVID-19
pandemic and a
$13.6 million Day
1 provision
recorded for non-PCD residential mortgage loans acquired in conjunction
with the BSPR acquisition.
●
Non-interest income for the
year ended December 31, 2021
was $24.3 million, compared
to $22.1 million for 2020.
The
increase
was mainly
due
to a
$1.5
million
increase
in service
fee income
and
a $1.9
million increase
in realized
gains
from sales of
residential mortgage
loans.
These variances were
partially offset
by the effect
in 2020 of
a benefit of
$0.7
million related to the portion of the business interruption insurance
recoveries allocated to this operating segment.
●
Direct non-interest
expenses for
the year
ended December
31, 2021
were $29.1
million, compared
to $33.1
million for
2020.
The decrease
was
mainly
related
to a
$5.4
million decrease
in losses
on
OREO operations,
primarily
related
to
higher
gains realized
on
the sale
of residential
OREO properties,
partially
offset
by the
effect
of incremental
expenses
related to the acquired operations of BSPR, primarily employees’ compensation
related to this operating segment.
Treasury and
Investments
The
Treasury
and
Investments
segment
is
responsible
for
the
Corporation’s
treasury
and
investment
management
functions.
The
treasury function, which
includes funding and
liquidity management, lends
funds to the
Commercial and Corporate
Banking segment,
the Mortgage
Banking segment,
the Consumer
(Retail) Banking
segment,
and the
United States
operations
segment
to finance
their
respective lending
activities and
borrows from
those segments.
The Treasury
function also
obtains funds
through brokered
deposits,
advances from the FHLB, and repurchase agreements involving investment
securities, among other possible funding sources.
The investment function is intended to implement a leverage strategy
for the purposes of liquidity management, interest rate risk
management and earnings enhancement.
The interest rates charged or credited by Treasury
and Investments are based on market rates.
75
The
highlights
of
the
Treasury
and
Investments
segment’s
financial
results
for
the
years
ended
December
31,
2021
and
2020
include the following:
●
Segment
income
before
taxes
for
the
year
ended
December
31,
2021
decreased
to
$55.6
million,
compared
to
$95.4
million for 2020, for the reasons discussed below.
●
Net interest
income for
the year ended
December 31,
2021 was $59.
3
million, compared
to net
interest income
of $87.9
million for 2020.
The decrease was mainly related
to lower income from funds
loaned to other business segments
due to
a higher proportion
of the lending
activities of other
operating segments being
funded by the
growth in demand
deposits
of the
Consumer
(Retail) Banking
operating
segment,
partially offset
by the
overall
increase in
the average
balance
of
U.S. agencies MBS and debt securities.
●
Non-interest income
for the
year ended
December 31,
2021 amounted
to $0.2
million, compared
to non-interest
income
of
$13.7
million
for
2020.
The
variance
primarily
reflects
the
effect
of
the
$13.2
million
gain
realized
on
sales
of
available-for-sale investment securities in 2020.
●
Direct non-interest expenses
for 2021 were $4.1
million, compared to $3.4
million for 2020.
The increase was primarily
reflected in employees’ compensation expense and professional service
fees.
United States Operations
The
United
States Operations
segment
consists of
all banking
activities conducted
by FirstBank
on
the U.S.
mainland.
FirstBank
provides
a
wide
range
of
banking
services
to
individual
and
corporate
customers
primarily
in
southern
Florida
through
11
banking
branches.
The United
States Operations
segment
offers
an array
of both
consumer and
commercial
banking products,
and
services.
Consumer banking
products include
checking, savings
and money
market accounts,
retail CDs,
internet banking
services, residential
mortgages, and
home equity
loans and
lines of
credit. Retail
deposits, as
well as
FHLB advances
and brokered
CDs, allocated
to this
operation serve as funding sources for its lending activities.
The commercial banking services include
checking, savings and money market
accounts, retail CDs, internet banking services,
cash
management services, remote data capture,
and automated clearing house, or ACH, transactions.
Loan products include the traditional
commercial and industrial (“C&I”) and commercial real estate products,
such as lines of credit, term loans, and construction loans.
The highlights of the
United States operations segment’s
financial results for the years
ended December 31, 2021 and
2020, include
the following:
●
Segment
income
before
taxes
for
the
year
ended
December
31,
2021
increased
to
$37.0
million,
compared
to
$12.3
million for 2020, for the reasons discussed below.
●
Net interest income
for the year
ended December 31,
2021 was $66.0
million, compared to
$54.0 million for
2020.
The
increase was mainly due
to a decrease in interest
expense associated with lower
average volumes of FHLB
advances and
brokered
CDs
allocated
to
this
operating
segment,
as
well
as
accelerated
PPP
loan
fees
recognized
upon
receipt
of
forgiveness
payments
from
SBA
in
2021.
These
variances
more
than
offset
the
effect
of
the
downward
repricing
of
variable-rate commercial and construction loans due to lower prevailing market
interest rates during 2021.
●
For 2021, the
provision for
credit losses was
a net benefit
of $1.0 million,
compared to a
net charge
of $12.6 million
for
2020.
The
net
benefit
recorded
in
2021,
reflects
continued
improvements
in
the
long-term
outlook
of
forecasted
macroeconomic variables,
primarily in the
commercial real estate
price index,
and the overall
decrease in the
size of the
residential portfolio
in this
operating segment.
The significant
reserves builds
in the
prior year
reflects the
effect of
the
COVID-19 pandemic on forecasted macroeconomic variables used in
the Corporation’s CECL model.
●
Total non
-interest income for the year
ended December 31, 2021
amounted to $4.0 million,
compared to $4.6 million
for
2020.
The decrease was primarily related to
the effect in 2020 of fee
income of $1.0 million recorded in connection
with
the
sale
of
the
95%
participation
interests
in
Main
Street
loans
originated
in
2020,
partially
offset
by
a
$0.3
million
increase in service fee income.
●
Direct non-interest
expenses for
the year
ended December
31, 2021
were $33.9
million, compared
to $33.8
million for
2020.
The
increase
was
mainly
due
to
a
decrease
in
deferred
loan
origination
costs,
including
the
effect
of
a
lower
volume of SBA
PPP loans originated
in 2021, partially
offset by a
decrease in professional
service fees and
in the FDIC
insurance premium expense allocated to this segment.
76
Virgin
Islands Operations
The Virgin
Islands Operations
segment consists
of all
banking activities
conducted by
FirstBank in
the USVI
and BVI,
including
consumer
and commercial
banking
services,
with
a total
of eight
banking
branches
currently
serving
the islands
in
the USVI
of St.
Thomas,
St.
Croix,
and
St.
John,
and
the
island
of
Tortola
in
the
BVI.
The
Virgin
Islands
Operations
segment
is
driven
by
its
consumer, commercial lending, and deposit
-taking activities.
Loans
to
consumers
include
auto
and
boat
loans,
lines
of
credit,
and
personal
and
residential
mortgage
loans.
Deposit
products
include
interest-bearing
and
non-interest-bearing
checking
and
savings
accounts,
IRAs,
and
retail
CDs.
Retail
deposits
gathered
through each branch serve as the funding sources for its own lending activities.
The
highlights
of
the
Virgin
Islands
operations’
financial
results
for
the
years
ended
December
31,
2021
and
2020
include
the
following:
●
Segment income before
taxes for the year
ended December 31, 2021
increased to $6.5 million,
compared to $0.2 million
for 2020, for the reasons discussed below.
●
Net interest income
for the year
ended December 31,
2021 was $26.4
million, compared to
$26.1 million for
2020.
The
increase in
net interest
income was
primarily related
to the decrease
in the
interest rate
paid on
interest-bearing deposits
attributed to lower market
interest rates, and accelerated
PPP loan fees recognized
upon receipt of forgiveness
payments
from SBA
in 2021,
partially offset
by a
decrease in
the average
balance of
residential mortgage
loans in
this operating
segment.
●
The
Corporation
recognized
a
provision
for
credit
losses
net
benefit
of
$1.3
million
for
the
year
ended
December
31,
2021, compared to
a provision expense of
$4.4 million for 2020.
The variance was
primarily related to reserve
builds in
2020
in
connection
with
the
effect
of
the
COVID-19
pandemic
on
macroeconomic
variables
employed
in
the
Corporation’s CECL model,
primarily for the commercial portfolios.
●
Non-interest
income for
the year
ended December
31, 2021
was $6.9
million, compared
to $7.3
million for
2020.
The
decrease was mainly
related to the
effect in 2020
of a $1.0
million benefit recorded
in connection with
hurricane-related
insurance
recoveries,
primarily
due
to
the
portion
of
the
business
interruption
insurance
recoveries
allocated
to
this
operating
segment.
This
variance
was
partially
offset
by
a
$0.4
million
increase
in
fee-based
income
from
credit
and
debit
cards
as
well
as
merchant-related
activities,
and
a
$0.1
million
increase
in
service
charges
on
deposits,
both
affected in 2020 by disruptions in business activities caused by the
COVID-19 pandemic.
●
Direct non
-interest expenses
for
the year
ended December
31,
2021 were
$28.1
million compared
to $28.8
million
for
2020.
The
decrease
was
mainly
due
to
a
reduction
of
$1.1
million
in
net
OREO
losses,
primarily
related
to
higher
realized gains
on sales
of residential
OREO properties,
and a
decrease of
$0.8 million
in employees’
compensation and
benefits.
These variances
were partially
offset by
accelerated depreciation
charges related
to the
closing of
branches in
the Virgin
Islands region and an increase in professional service fees.
77
FINANCIAL CONDITION AND OPERATING
DATA
ANALYSIS
Financial Condition
December 31,
2021
2020
2019
(In thousands)
ASSETS
Interest-earning assets:
Money market and other short-term investments
$
2,012,617
$
1,258,683
$
649,065
U.S. and Puerto Rico government obligations
2,065,522
878,537
632,959
MBS
4,064,343
2,236,262
1,382,589
FHLB stock
28,208
32,160
40,661
Other investments
10,254
6,238
3,403
Total investments
8,180,944
4,411,880
2,708,677
Residential mortgage loans
3,277,087
3,119,400
3,043,672
Construction loans
181,470
168,967
97,605
Commercial loans
5,228,150
4,387,419
3,731,499
Finance leases
518,757
440,796
370,566
Consumer loans
2,207,685
1,952,120
1,738,745
Total loans
11,413,149
10,068,702
8,982,087
Total interest-earning
assets
19,594,093
14,480,582
11,690,764
Total non-interest-earning
assets
(1)
708,940
752,064
761,370
Total assets
$
20,303,033
$
15,232,646
$
12,452,134
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing checking accounts
$
3,667,523
$
2,197,980
$
1,320,458
Savings accounts
4,494,757
3,190,743
2,377,508
Retail CDs
2,636,303
2,741,388
2,540,289
Brokered CDs
141,959
357,965
500,766
Interest-bearing deposits
10,940,542
8,488,076
6,739,021
Loans payable
-
8,415
-
Other borrowed funds
484,244
475,492
294,798
FHLB advances
354,055
505,478
715,433
Total interest-bearing
liabilities
11,778,841
9,477,461
7,749,252
Total non-interest-bearing
liabilities
(2)
6,285,942
3,525,101
2,542,708
Total liabilities
18,064,783
13,002,562
10,291,960
Stockholders' equity:
Preferred stock
32,938
36,104
36,104
Common stockholders' equity
2,205,312
2,193,980
2,124,070
Stockholders' equity
2,238,250
2,230,084
2,160,174
Total liabilities and stockholders'
equity
$
20,303,033
$
15,232,646
$
12,452,134
_________
(1) Includes, among other things, the ACL on loans and finance leases and debt securities.
(2) Includes, among other things, non-interest-bearing deposits.
78
The Corporation’s
total average assets
were $20.3
billion for the
year ended December
31, 2021, compared
to $15.2 billion
for the
year
ended
December
31,
2020,
an
increase
of
$5.1
billion.
The
variance
primarily
reflects:
(i)
an
increase
of
$3.8
billion
in
the
average
balance
of
investment
securities
and
interest-bearing
cash
balances,
reflecting
both
increased
purchases
of
investment
securities and
growth in
cash balances supported
by strong deposit
growth during
2021; and (ii)
a $1.3 billion
increase in the
average
balance of total
loans, reflecting the
effect of loans
acquired in conjunction
with the BSPR
acquisition,
the volume of SBA
PPP loans
originated in 2020 and 2021, and organic growth of the Corporation’s
consumer loan portfolio.
The
Corporation’s
total
average
liabilities
were
$18.1
billion
as
of
December
31,
2021,
an
increase
of
$5.1
billion
compared
to
December 31, 2020. The
increase was mainly related to
a $2.7 billion increase in
the average balance of non-brokered
interest-bearing
deposits and
a $2.8 million
increase in the
average balance of
non-interest-bearing deposits,
primarily reflecting
the effect of
deposits
assumed in
conjunction with
the BSPR
acquisition, as
well as
the effect
of government
relief programs
on the
liquidity levels
of our
customers,
including
government
entities.
The
aforementioned
variances
were
partially
offset
by
a
$216.0
million
decrease
in
the
average balance of brokered CDs and a $151.4 million decrease in the average balance
of FHLB advances.
Assets
The
Corporation’s
total assets
were $20.8
billion
as of
December 31,
2021, an
increase of
$2.0 billion
from December
31, 2020.
The
increase
was
primarily
related
to
a
$1.8
billion
increase
in
investment
securities,
mainly
driven
by
purchases
of
U.S.
agencies
MBS and
U.S. agencies
callable and
bullet debentures
and an
increase of
$1.0 billion
in cash
equivalents attributable
to the
liquidity
obtained
from the
growth in
deposits and
loan repayments.
These variances
were partially
offset
by a
decrease of
$731.8 million
in
total loans, as further discussed below.
Loans Receivable, including Loans Held for Sale
of each of the last five years:
2021
2020
2019
2018
2017
(In thousands)
Residential mortgage loans
$
2,978,895
$
3,521,954
$
2,933,773
$
3,163,208
$
3,290,957
Commercial loans:
Commercial mortgage loans
2,167,469
2,230,602
1,444,586
1,522,662
1,614,972
Construction loans
138,999
212,500
111,317
79,429
111,397
Commercial and Industrial loans
(1)
2,887,251
3,202,590
2,230,876
2,148,111
2,083,253
Total commercial loans
5,193,719
5,645,692
3,786,779
3,750,202
3,809,622
Consumer loans and finance leases
2,888,044
2,609,643
2,281,653
1,944,713
1,749,897
Total loans held for investment
11,060,658
11,777,289
9,002,205
8,858,123
8,850,476
Less:
Allowance for credit losses for loans and finance
leases
(269,030)
(385,887)
(155,139)
(196,362)
(231,843)
Total loans held for investment, net
10,791,628
11,391,402
8,847,066
8,661,761
8,618,633
Loans held for sale
35,155
50,289
39,477
43,186
32,980
Total loans, net
$
10,826,783
$
11,441,691
$
8,886,543
$
8,704,947
$
8,651,613
(1)
As of December 31, 2021 and 2020, includes $145.0 million and
$406.0 million, respectively, of SBA
PPP loans.
79
As of
December 31,
2021, the
Corporation’s
total loan
portfolio, before
the ACL,
amounted to
$11.1
billion, a
decrease of
$731.8
million
when
compared
to
December
31,
2020. The
decrease
consisted
of
reductions
of
$611.6
million
in
the
Puerto
Rico
region,
$75.1
million
in
the
Virgin
Islands
region,
and
$45.1
million
in
the
Florida
region.
On
a
portfolio
basis,
the
decrease
consisted
of
reductions
of
$558.2
million
in
residential
mortgage
loans
and
$452.0
million
in
commercial
and
construction
loans
(including
a
$261.0 million decrease
in the SBA PPP loan
portfolio), partially offset
by an increase of
$278.4 million in consumer
loans, including
a
$377.1
million
increase
in
auto
loans
and
leases.
As
further
discussed
below,
the
decrease
in
commercial
and
construction
loans
reflects, among other
things, the effect
of the payoff
of loans related
to six large
commercial relationships totaling
$211.1 million
and
the
sale
of
four
criticized
commercial
loan
participations
totaling
$43.1
million
in
the Florida
region. The
decline
in
the
residential
mortgage loan
portfolio reflects
the $52.5
million bulk
sale of
nonaccrual loans,
as well
as repayments
and charge
-offs, which
more
than offset the volume of new loan originations kept on the balance
sheet.
As of December 31,
2021, the loans held
for the Corporation’s
investment portfolio was comprised
of commercial and construction
loans
(47%),
residential
real
estate
loans
(27%),
and
consumer
and
finance
leases
(26%).
Of
the
total
gross
loan
portfolio
held
for
investment
of
$11.1
billion
as
of
December
31,
2021,
the
Corporation
had
credit
risk
concentration
of
approximately
79%
in
the
Puerto Rico region,
18% in the
United States region
(mainly in the
state of Florida),
and 3% in
the Virgin
Islands region, as
shown in
the following table:
As of December 31, 2021
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
Residential mortgage loans
$
2,361,322
$
188,251
$
429,322
$
2,978,895
Commercial mortgage loans
1,635,137
67,094
465,238
2,167,469
Construction loans
38,789
4,344
95,866
138,999
Commercial and Industrial loans
(1)
1,867,082
79,515
940,654
2,887,251
Total commercial
loans
3,541,008
150,953
1,501,758
5,193,719
Consumer loans and finance leases
2,820,102
52,282
15,660
2,888,044
Total loans held
for investment, gross
$
8,722,432
$
391,486
$
1,946,740
$
11,060,658
Loans held for sale
33,002
177
1,976
35,155
Total loans, gross
$
8,755,434
$
391,663
$
1,948,716
$
11,095,813
(1) As of December 31, 2021, includes $145.0 million of SBA PPP loans
consisting of $102.8 million in the Puerto Rico region, $8.2
million in the Virgin Islands region,
and
$34.0 million in the United States region.
As of December 31, 2020
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
Residential mortgage loans
$
2,788,827
$
213,376
$
519,751
$
3,521,954
Commercial mortgage loans
1,793,095
60,129
377,378
2,230,602
Construction loans
73,619
11,397
127,484
212,500
Commercial and Industrial loans
(1)
2,135,291
129,440
937,859
3,202,590
Total commercial
loans
4,002,005
200,966
1,442,721
5,645,692
Consumer loans and finance leases
2,531,206
51,726
26,711
2,609,643
Total loans held
for investment, gross
$
9,322,038
$
466,068
$
1,989,183
$
11,777,289
Loans held for sale
44,994
681
4,614
50,289
Total loans, gross
$
9,367,032
$
466,749
$
1,993,797
$
11,827,578
(1) As of December 31, 2020, includes $406.0 million of SBA PPP loans
consisting of $301.1 million in the Puerto Rico region, $27.4
million in the Virgin Islands region,
and
$77.5 million in the United States region.
First
BanCorp.
relies
primarily
on
its
retail
network
of
branches
to
originate
residential
and
consumer
personal
loans.
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.
80
the ACL on loans and finance leases as of and for the dates indicated:
For the Year
Ended December 31,
2021
2020
2019
2018
2017
(Dollars in thousands)
Beginning balance as of January 1
$
11,441,691
$
8,886,543
$
8,704,947
$
8,651,613
$
8,731,276
Residential real estate loans originated
and purchased
623,290
560,012
491,210
531,971
549,147
Construction loans originated
102,538
126,499
69,440
65,243
58,103
C&I and commercial mortgage loans
originated and purchased
2,994,893
2,751,058
2,411,863
1,737,366
1,729,659
Finance leases originated
240,419
152,254
178,986
164,334
93,670
Consumer loans originated
1,287,487
915,107
1,194,650
991,950
785,516
Total loans originated
and purchased
5,248,627
4,504,930
4,346,149
3,490,864
3,216,095
Loans acquired from BSPR
-
2,514,700
-
-
-
Sales of loans
(620,227)
(657,498)
(433,079)
(420,549)
(375,754)
Repayments and prepayments
(5,495,131)
(3,661,289)
(3,717,874)
(2,959,438)
(2,788,758)
Other increases (decreases)
(1)
251,823
(145,695)
(13,600)
(57,543)
(131,246)
Net (decrease) increase
(614,908)
2,555,148
181,596
53,334
(79,663)
Ending balance as of December 31
$
10,826,783
$
11,441,691
$
8,886,543
$
8,704,947
$
8,651,613
Percentage (decrease) increase
(5.37)%
28.75%
2.09%
0.62%
(0.91)%
_____________
(1)
Includes, among other things, the change in the ACL on loans
and finance leases and cancellation of loans due to the repossession
of the collateral and loans repurchased
Residential Real Estate Loans
As of December
31, 2021,
the Corporation’s
total residential mortgage
loan portfolio,
including held
for sale, decreased
by $558.2
million, as compared
to the balance
as of December
31, 2020. The
decline reflects reductions
in all regions
driven by repayments
and
charge-offs,
which
more than
offset
the volume
of new
loan
originations
kept
on the
balance
sheet. In
addition,
the decrease
in
the
residential mortgage loan portfolio
reflects the sale of $52.5 million
of non-performing residential mortgage
loans. Consistent with the
Corporation’s
strategies, the
residential mortgage
loan portfolio
decreased by
$439.5 million
in the
Puerto Rico
region, $93.1
million
in the Florida region, and $25.6
million in the Virgin
Islands region. Approximately 88%
of the $499.7 million in residential
mortgage
loan
originations
in
the
Puerto
Rico
region
during
2021
consisted
of
conforming
loan
originations
and
refinancings.
Conforming
mortgage
loans
are
generally
originated
with
the
intent
to
sell
in
the
secondary
market
to
GNMA
and
U.S.
government-sponsored
agencies.
The majority
of the
Corporation’s
outstanding balance
of residential
mortgage loans
in the
Puerto Rico
and Virgin
Islands regions
consisted of
fixed-rate loans
that traditionally
carry higher yields
than residential
mortgage loans
in the
Florida region.
In the
Florida
region,
approximately
55%
of
the
residential
mortgage
loan
portfolio
consisted
of
hybrid
adjustable-rate
mortgages.
In
accordance
with the Corporation’s
underwriting guidelines,
residential mortgage
loans are primarily
fully-documented loans,
and the Corporation
does not originate negative amortization loans.
Residential
mortgage
loan
originations
for
the
year
ended
December
31,
2021
amounted
to
$623.3
million,
compared
to
$560.0
million
for 2020.
The increase
in residential
mortgage loan
originations
of $63.3
million reflect
increases
of $96.0
million and
$1.6
million,
in
the
Puerto
Rico
and
Virgin
Islands
regions,
respectively,
partially
offset
by
a
decrease
of
$34.3
million
in
the
Florida
region.
The overall increase
reflects
the effect
of a higher
volume of
refinanced loans and
conforming loan
originations driven
by the
effect of lower mortgage
loan interest rates and increased home
purchase activity,
in particular during the first half
of the year,
and the
effect
in
2020
of
disruptions in the
loan underwriting and
closing processes caused by
the almost
two-month lockdown related to
the
COVID-19 pandemic
that was
implemented
in Puerto
Rico on
March 16,
2020.
81
Commercial and Construction Loans
As of
December 31,
2021, the
Corporation’s
commercial and
construction loan
portfolio decreased
by $452.0
million (including
a
$261.0 million
decrease in
the SBA
PPP loan
portfolio),
to $5.2
billion, as
compared to
the balance
as of
December 31,
2020.
The
decrease
in commercial
and
construction
loans was
primarily
reflected
in the
Puerto
Rico region,
which declined
by $461.0
million
(including a $198.3
million decrease in the
SBA PPP loan portfolio),
as compared to the
balance as of December
31, 2020. Excluding
the $198.3 million
decrease in the SBA
PPP loan portfolio, commercial
and construction loans in
the Puerto Rico region
decreased by
$262.7
million,
driven
by
the
payoff
of
five
large
commercial
mortgage
loan
relationships
totaling
$156.8
million,
a
$22.9
million
decrease
in the
outstanding balance
of loans
extended
to municipalities
and
other government
units, a
$13.8
million decrease
in the
balance of
floor plan
lines of
credit, several
commercial and
industrial term
loans individually
in excess
of $3
million that
were paid
off
during
the
2021
and
totaled
approximately
$26.5
million,
principal
repayments
that
reduced
by
$79.9
million
the
balance
of
revolving lines of credit related to ten commercial and industrial relationships
,
and additional repayments.
In the
Virgin
Islands region,
commercial and
construction loans
decreased by
$50.0 million
(including a
$19.2 million
decrease in
the SBA
PPP loan
portfolio) as
compared to
the balance
as of December
31, 2020.
Excluding the
$19.2 million
decrease in
the SBA
PPP loan portfolio,
commercial and construction
loans in the Virgin
Islands region decreased by
$30.8 million primarily
due to a $6.0
million repayment of a nonaccrual construction loan and the early payoff
of a $23.2 million government loan.
In the
Florida region,
commercial and
construction
loans increased
by $59.0
million (net
of a
$43.5
million
decrease in
the SBA
PPP loan
portfolio).
Excluding the
$43.0
million decrease
in the
SBA PPP
loan
portfolio, commercial
and construction
loans in
the
Florida region increased by $102.5 million, driven by
the origination of several commercial loans individually in excess of $10
million
related
to
thirteen
commercial
and
industrial
relationships
and
totaling
$249.5
million,
partially
offset
by
the
sale
of
four
criticized
commercial loan participations totaling $43.1 million and the early payoff
of a $54.3 million commercial loan.
As mentioned
above, the SBA
reactivated the
PPP in January
2021. The Corporation
originated additional
PPP loans up
to the end
of
the
program
on
May
31,
2021.
As
of
December
31,
2021,
SBA
PPP
loans,
net
of
unearned
fees
of
$7.9
million,
totaled
$145.0
million, compared
to $406.0
million as
of December
31, 2020.
In 2021,
the Corporation
originated $283.6
million in
PPP loans
and
received forgiveness remittances and customer payments
of approximately $543.6 million in the principal balance of PPP loans.
As of
December
31,
2021,
the Corporation
had
$178.4
million
outstanding
in
loans
extended
to
the Puerto
Rico
government,
its
municipalities
and
public
corporations,
compared
to
$201.3
million
as
of
December
31,
2020.
As
of
December
31,
2021,
approximately $100.3 million
consisted of loans
extended to municipalities
in Puerto Rico that
are supported by assigned
property tax
revenues
and
$32.2
million
consisted
of
municipal
special
obligation
bonds.
In
addition
to
loans
extended
to
municipalities,
the
Corporation’s exposure
to the Puerto Rico government
as of December 31, 2021
included $12.5 million in loans granted
to an affiliate
of PREPA
and $33.4 million in loans to an agency of the Puerto Rico central government.
The
Corporation
also
has
credit
exposure
to
USVI
government
entities.
As
of
December
31,
2021,
the
Corporation
had
$39.2
million in
loans to
USVI government
and public
corporations, compared
to $61.8
million as
of December
31, 2020.
All the
amount
outstanding
as
of
December
31,
2021,
is
owed
by
the
public
corporations
of
the
USVI.
As
of
December
31,
2021,
all
loans
were
currently performing and up to date on principal and interest payments.
As
of
December
31,
2021,
the
Corporation’s
total
exposure
to
shared
national
credit
(“SNC”)
loans
(including
unused
commitments)
amounted
to
$918.6
million,
compared
to
$882.9
million
as
of
December
31,
2020.
As
of
December
31,
2021,
approximately
$148.5
million
of
the
SNC
exposure
related
to
the
portfolio
in
Puerto
Rico
region
and
$770.1
million
related
to
the
portfolio in the Florida region.
Commercial
and
construction
loan
originations
(excluding
government
loans)
amounted
to
$3.1
billion
for
the
year
ended
December 31, 2021, compared to $2.8 billion
for 2020. Total commercial
and construction loan originations in 2021 include
SBA PPP
loan originations
of $283.6
million, compared
to $390.2
million in
2020.
Excluding SBA
PPP loans
and the
$184.4 million
of Main
Street
loans
originated
in
2020,
commercial
and
construction
loan
originations
increased
$510.9
million
compared
to
2020.
The
increase consisted of increases
of $184.9 million, $302.6
million, and $23.4 million
in the Puerto Rico, Florida,
and the Virgin
Islands
regions, respectively.
The increase
in 2021
reflects an
increase in
the utilization
of floor
plan and
other commercial
lines of
credit in
the Puerto Rico
region,
as compared to
2020, as well as
a higher volume
of commercial and
industrial loan originations
in the Florida
region. The increase also
reflects
the effect in 2020
of disruptions caused by the
COVID-19 pandemic and related
restrictive measures
on economic activities.
Government
loan
originations
for
2021
amounted
to
$62.8
million,
compared
to
$41.3
million
for
2020.
Government
loan
originations
in
both
years
primarily
consisted
of
the
refinancing
and
renewal
of
certain
facilities
in
both
the
Virgin
Islands
and
the
Puerto
Rico
regions,
as
well
as
the
utilization
of
an
arranged
overdraft
line
of
credit
of
a
government
entity
in
the
Virgin
Islands
region.
82
The
composition
of
the
Corporation’s
construction
loan
portfolio
held
for
investment
as
of
December
31,
2021
and
2020
by
category and geographic location follows:
As of December 31, 2021
Puerto Rico
Virgin Islands
United
States
Total
(In thousands)
Loans for residential housing projects:
Mid-rise
(1)
$
-
$
956
$
-
$
956
Single-family, detached
5,924
-
8,621
14,545
Total for residential housing projects
5,924
956
8,621
15,501
Construction loans to individuals secured by residential properties
48
-
-
48
Loans for commercial projects
27,839
2,251
86,348
116,438
Land loans – residential
4,137
1,137
897
6,171
Land loans – commercial
841
-
-
841
Total construction loan portfolio, gross
38,789
4,344
95,866
138,999
ACL
(942)
(210)
(2,896)
(4,048)
Total construction loan portfolio, net
$
37,847
$
4,134
$
92,970
$
134,951
(1)
Mid-rise relates to buildings of up to 7 stories.
As of December 31, 2020
Puerto Rico
Virgin Islands
United
States
Total
(In thousands)
Loans for residential housing projects:
Mid-rise
(1)
$
116
$
956
$
-
$
1,072
Single-family, detached
14,685
459
4,980
20,124
Total for residential housing projects
14,801
1,415
4,980
21,196
Construction loans to individuals secured by residential properties
48
-
-
48
Loans for commercial projects
48,185
8,635
120,888
177,708
Land loans – residential
5,685
1,347
1,616
8,648
Land loans – commercial
4,900
-
-
4,900
Total construction loan portfolio, gross
73,619
11,397
127,484
212,500
ACL
(1,752)
(880)
(2,748)
(5,380)
Total construction loan portfolio, net
$
71,867
$
10,517
$
124,736
$
207,120
(1)
Mid-rise relates to buildings of up to 7 stories.
The
following
table
presents
further
information
related
to
the
Corporation’s
construction
portfolio
as
of
and
for
the year
ended
December 31, 2021:
(Dollars in thousands)
Total undisbursed funds under existing commitments
$
197,917
Construction loans held for investment in nonaccrual status
$
2,664
Net recoveries - Construction loans
$
76
ACL - Construction loans
$
4,048
Nonaccrual construction loans to total construction loans
1.92
%
ACL of construction loans to total construction loans held
for investment
2.91
%
Net recoveries to total average construction loans
(0.04)
%
83
Consumer Loans and Finance Leases
As of December
31, 2021, the
Corporation’s
consumer loan and
finance lease portfolio
increased by $278.4
million to $2.9
billion,
as compared
to the portfolio
balance of
$2.6 billion
as of December
31, 2020.
The increase
primarily reflects
increases in
auto loans,
and finance leases
which increased by
$275.1 million and
$102.0 million, respectively,
partially offset by
reductions in personal
loans
and credit cards loans of $61.8
million and $29.6 million, respectively.
The growth in consumer loans is
mainly reflected in the Puerto
Rico region and was driven by an increased level of loan originations
.
Originations
of
auto
loans
(including
finance
leases)
in
2021
amounted
to
$932.7
million,
compared
to
$614.9
million
for
2020.
Personal
loan
originations
in
2021,
other
than
credit
card
loans,
amounted
to
$172.7
million,
compared
to
$123.8
million
in
2020. Most of
the increase
in consumer
loan originations
in 2021,
when compared
to 2020,
was in
the Puerto
Rico region,
reflecting
the
effect
in
2020
of
quarantines
and
lockdowns
of
non-essential
businesses
in
connection
with
the
COVID-19
pandemic
during
2020. The utilization activity
on the outstanding
credit card portfolio in
2021
amounted to approximately
$422.5 million, compared
to
$328.7 million in 2020.
Maturities of Loans Receivable
rates:
After One Year
After Five Years
Total Portfolio
One Year or Less
Through Five Years
Through 15 Years
After 15 Years
(In thousands)
Residential mortgage
$
64,573
$
448,302
$
1,323,446
$
1,142,574
$
2,978,895
Construction loans
119,177
17,262
1,907
653
138,999
Commercial mortgage loans
821,786
1,135,248
203,547
6,888
2,167,469
C&I loans
1,156,946
1,389,138
333,884
7,283
2,887,251
Consumer loans
873,285
1,800,464
213,330
965
2,888,044
Total loans
(1)
$
3,035,767
$
4,790,414
$
2,076,114
$
1,158,363
$
11,060,658
__
Amount due in one year or less at:
Amount due after one year:
Total Portfolio
Fixed Interest Rates
Variable Interest Rates
Fixed Interest Rates
Variable Interest Rates
Residential mortgage
$
57,846
$
6,727
$
2,670,020
$
244,302
$
2,978,895
Construction loans
3,442
115,735
4,918
14,904
138,999
Commercial mortgage loans
578,848
242,938
818,898
526,785
2,167,469
C&I loans
258,576
898,370
516,992
1,213,313
2,887,251
Consumer loans
665,193
208,092
2,005,308
9,451
2,888,044
Total loans
(1)
$
1,563,905
$
1,471,862
$
6,016,136
$
2,008,755
$
11,060,658
(1)
Scheduled repayments are included in the maturity category in which the payment is due.
The amounts provided do not reflect prepayment assumptions related to the loan portfolio.
84
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 December
31, 2021
amounted to $6.5
billion, a $1.8
billion increase
from December
31, 2020. The
increase was mainly
driven by
purchases
of
approximately
$3.4
billion
of
U.S.
agencies
MBS and
U.S.
agencies
callable
and
bullet
debentures,
partially
offset
by
prepayments of
$1.1 billion
of U.S. agencies
MBS, approximately
$267.8 million
of U.S. agencies
bonds that
matured or were
called
prior to maturity
during 2021, and
a $143.1 million decrease
in the fair value
of available-for-sale investment
securities attributable to
changes in
market interest
rates. Long-term
market interest
remain at
low levels
but are
expected to
increase during
2022 and
2023,
which
could
impact
prepayment
speed
and
valuation
of
the
investment
portfolio.
These
risks
are
directly
linked
to
future
period
market interest rate fluctuations.
As
of
December
31,
2021,
approximately
99%
of
the
Corporation’s
available-for-sale
securities
portfolio
was
invested
in
U.S.
government
and
agencies
debentures
and
fixed-rate
GSEs’
MBS
(mainly
GNMA,
FNMA,
and
FHLMC
fixed-rate
securities).
In
addition, as
of December
31, 2021,
the Corporation
held a
bond issued
by the
PRHFA,
classified as
available for
sale, specifically
a
residential pass-through
MBS in
the aggregate
amount of
$3.6 million
(fair value
- $2.9
million). This
residential pass-through
MBS
issued
by
the
PRHFA
is
collateralized
by
certain
second
mortgages
originated
under
a
program
launched
by
the
Puerto
Rico
government
in
2010
and
had
an
unrealized
loss
of
$0.7
million
as
of
December
31,
2021,
of
which
$0.3
million
is
due
to
credit
deterioration
and
was charged
against
earnings through
an ACL
during
2020.
Due to
deterioration
in the
delinquency
status of
the
underlying second mortgage loans of this MBS issued by the PRHFA,
the Corporation classified the investment in nonaccrual status in
the second quarter of 2021.
As of December
31, 2021,
the Corporation’s
held-to-maturity investment
securities portfolio,
before the
ACL, amounted
to $178.1
million, compared to $189.5 million
as of December 31, 2020.
As of December 31, 2021, the
ACL for held-to-maturity debt
securities
was $8.6
million, down
$0.2 million
from $8.8
million as of
December 31,
2020. Held-to-maturity
investment securities
consisted of
financing
arrangements
with
Puerto
Rico
municipalities
issued
in
bond
form,
which
the
Corporation
accounts
for
as securities,
but
which were underwritten as loans with
features that are typically found in commercial
loans. These obligations typically are
not issued
in
bearer
form,
are
not
registered
with
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,
in
most
cases,
are
supported
by
assigned
property
tax
revenues.
Approximately
73% of
the Corporation’s
municipality
bonds consisted
of obligations
issued by
four of
the largest
municipalities
in
Puerto Rico.
The municipalities are
required by law
to levy special
property taxes
in such amounts
as are required
for the payment
of
all of their
respective general obligation
bonds and loans.
Given the uncertainties
as to the effects
that the fiscal
position of the
Puerto
Rico central government,
the COVID-19 pandemic,
and the measures taken,
or to be taken,
by other government entities
may have on
municipalities, the Corporation cannot be certain whether
future charges to the ACL on these securities will be required.
See
“Risk Management
–
Exposure
to Puerto
Rico
Government”
below
for
information
and
details
about
the Corporation’s
total
direct exposure to the Puerto Rico government, including municipalities
.
The following table presents the carrying values of investments as of the indicated
dates:
December 31,
December 31,
2021
2020
(In thousands)
Money market investments
$
2,682
$
60,572
Investment securities available for sale, at fair value:
U.S. government and agencies obligations
2,405,468
1,187,674
Puerto Rico government obligations
2,850
2,899
MBS
4,044,443
3,455,796
Other
1,000
650
Total investment
securities available for sale, at fair value
6,453,761
4,647,019
Investment securities held to maturity,
at amortized cost:
Puerto Rico municipal bonds
178,133
189,488
ACL for held-to-maturity debt securities
(8,571)
(8,845)
169,562
180,643
Equity securities, including $21.5 million and $31.2 million of FHLB stock
as of December 31, 2021 and 2020, respectively
32,169
37,588
Total money market
investments and investment securities
$
6,658,174
$
4,925,822
85
MBS as of the indicated dates consisted of:
December 31,
December 31,
2021
2020
(In thousands)
Available for
sale:
FHLMC certificates
$
1,418,670
$
1,149,871
GNMA certificates
388,344
699,492
FNMA certificates
1,704,585
1,320,281
Collateralized mortgage obligations issued or
guaranteed by FHLMC, FNMA or GNMA
525,610
277,724
Private label MBS
7,234
8,428
Total MBS
$
4,044,443
$
3,455,796
December 31, 2021 by contractual maturity (excluding MBS) are shown
below:
Carrying
Amount
Weighted-Average
Yield %
(In thousands)
U.S. government and agencies obligations:
Due after one year through five years
$
1,996,352
0.61
Due after five years through ten years
393,104
0.90
Due after ten years
16,012
0.63
2,405,468
0.66
Puerto Rico government and municipalities obligations:
Due within one year
2,995
5.39
Due after one year through five years
14,785
2.35
Due after five years through ten years
90,584
4.25
Due after ten years
72,619
3.87
180,983
3.96
Other investment securities
Due within one year
500
0.72
Due after one year through five years
500
0.84
1,000
0.78
Total
2,587,451
0.89
MBS
4,044,443
1.26
ACL on held-to-maturity debt securities
(8,571)
-
Total investment
securities available for sale and held to maturity
$
6,623,323
1.11
Net
interest
income
of
future
periods
could
be
affected
by
prepayments
of
MBS.
Any
acceleration
in
the
prepayments
of
MBS
would lower yields
on these securities,
since the amortization
of premiums paid
upon acquisition of
these securities would
accelerate.
Conversely,
acceleration
of
the
prepayments
of
MBS
would
increase
yields
on
securities
purchased
at
a
discount,
since
the
amortization of
the discount
would accelerate.
These risks
are directly
linked to
future period
market interest
rate fluctuations.
Also,
net
interest
income
in
future
periods
might
be
affected
by
the
Corporation’s
investment
in
callable
securities.
As
of
December
31,
2021,
the Corporation
had approximately
$2.0 billion
in debt
securities (U.S.
agencies
government
securities)
with embedded
calls,
primarily purchased at par
or at a discount, and
with an average yield
of 0.66%. See “Risk Management”
below for further analysis of
the
effects
of
changing
interest
rates
on
the
Corporation’s
net
interest
income
and
the
Corporation’s
interest
rate
risk
management
strategies.
Also
refer
to
Note
5
–
Investment
Securities,
to
the
audited
consolidated
financial
statements
included
in
Item
8
of
this
Annual Report on Form 10-K, for additional information regarding
the Corporation’s investment portfolio.
86
RISK MANAGEMENT
General
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 11 broad categories
of risks: (i) liquidity risk; (ii) interest rate risk; (iii)
market risk; (iv) credit risk; (v) operational risk;
(vi) legal and regulatory risk; (vii) reputational risk; (viii)
model risk; (ix) capital risk;
(x) strategic
risk; and
(xi) information
technology risk.
First BanCorp.
has adopted
policies and
procedures
designed to
identify and
manage the risks to which the Corporation is exposed.
Risk Definition
Liquidity Risk
Liquidity risk is the risk to earnings or capital arising from the possibility that the
Corporation will not have sufficient cash to meet
its short-term liquidity demands, such as from deposit redemptions or loan
commitments. See Liquidity Risk and Capital Adequacy
below for further details.
Interest Rate Risk
Interest rate risk is the risk arising from adverse movements in interest rates. See
Interest Rate Risk Management
details.
Market Risk
Market
risk
is
the
risk
arising
from
adverse
movements
in
market
rates
or
prices,
such
as
interest
rates
or
equity
prices.
The
Corporation
evaluates
market
risk
together
with
interest
rate
risk.
Both
changes
in
market
values
and
changes
in
interest
rates
are
evaluated and forecasted.
See
Interest Rate Risk Management
Credit Risk
Credit risk
is the
risk arising
from a
borrower’s or
a counterparty’s
failure to
meet the
terms of
a contract
with the
Corporation or
otherwise to perform as agreed. See
Credit Risk Management
Operational Risk
controls,
information
systems,
employees
and
operating
processes.
It
also
includes
risks
associated
with
the
Corporation’s
preparedness
for
the
occurrence
of
an
unforeseen
event.
This
risk
is
inherent
across
all
functions,
products,
and
services
of
the
Corporation. See
Operational Risk
Legal and Regulatory Risk
Legal
and
regulatory
risk is
the risk
arising
from
the Corporation’s
failure
to comply
with laws
or
regulations
that can
adversely
affect the Corporation’s
reputation and/or increase its exposure to litigation or penalties.
Reputational Risk
Reputational
risk
is
the
risk
arising
from
any
adverse
effect
on
the
Corporation’s
market
value,
capital,
or
earnings
arising
from
negative public opinion,
whether true or not.
This risk affects the
Corporation’s
ability to establish new
relationships or services,
or to
continue servicing existing relationships.
Model Risk
Model risk
is the potential
for adverse
consequences from
decisions based
upon incorrect
or misused
model outputs
and reports
or
based upon
an incomplete or
inaccurate model.
The use of
models exposes the
Corporation to some
level of model
risk. Model errors
87
can
contribute
to
incorrect
valuations
and
lead
to
operational
errors,
inappropriate
business
decisions,
or
incorrect
financial
entries.
The Corporation seeks to reduce model risk through rigorous model identification
and validation.
Capital Risk
Capital risk
is the
risk that
the Corporation
may lose
value on
its capital
or have
an inadequate
capital plan,
which would
result in
insufficient capital
resources to meet
minimum regulatory
requirements (the Corporation’s
authority to operate
as a bank is dependent
upon the maintenance of adequate capital resources), support its credit rating,
or support its growth and strategic options.
Strategic Risk
Strategic
risk
is
the
risk
arising
from
adverse
business
decisions,
poor
implementation
of
business
decisions,
or
lack
of
responsiveness
to
changes
in
the
banking
industry,
and
operating
environment.
This
risk
is
a
function
of
the
compatibility
of
the
Corporation’s strategic
goals, the business strategies
developed to achieve
those goals, the resources deployed
against these goals, and
the quality of implementation.
Information Technology
Risk
Information technology
risk is
the risk
arising from
the loss of
confidentiality,
integrity,
or availability
of information
systems and
risk
of
cyber
incidents
or
data
breaches.
It
includes
business
risks
associated
with
the
use,
ownership,
operation,
involvement,
influence, and adoption of information technology within the Corporation.
Risk Governance
The
following
discussion
highlights
the
roles
and
responsibilities
of
the
key
participants
in
the
Corporation’s
risk
management
framework:
Board of Directors
The
Board
of Directors
oversees the
Corporation’s
overall
risk governance
program
with the
assistance
of the
Board
committees
discussed below.
Risk Committee
The Board of
Directors of the Corporation
appoints the Risk Committee
to assist the Board
in fulfilling its responsibility
to oversee
the
Corporation’s
management
of
its
company-wide
risk
management
framework.
The
committee’s
role
is
one
of
oversight,
recognizing
that management
is responsible
for designing,
implementing,
and maintaining
an effective
risk management
framework.
The committee’s primary
responsibilities are to:
●
Review and discuss management’s
assessment of the Corporation’s
aggregate enterprise-wide profile
and the alignment of the
Corporation’s risk profile with
the Corporation’s strategic plan,
goals, and objectives;
●
Review and recommend to the Board the parameters and establishment of
the Corporation’s risk tolerance and risk
appetite;
●
Receive
reports
from
management
and,
if
appropriate,
other
Board
committees,
regarding
the
Corporation’s
policies
and
procedures
related
to
the
Corporation’s
adherence
to
risk
limits
and
its
established
risk
tolerance
and
risk
appetite
or
on
selected risk topics;
●
Oversee the strategies,
policies, procedures, and
systems established by
management to identify,
assess, measure, and
manage
the
major
risks
facing
the
Corporation,
which
may
include
an
overview
of
the
Corporation’s
credit
risk,
operational
risk,
technology risk,
compliance risk,
interest rate
risk, liquidity
risk, market
risk, and
reputational risk,
as well
as management’s
capital management, planning,
and process;
●
Oversee management’s activities with
respect to capital planning, including stress testing and model risk;
●
Review and discuss with management risk assessments for new products
and services; and
●
Oversee the Corporation’s regulatory
compliance.
88
Asset and Liability Committee
The
Board of
Directors
appoints the
Asset and
Liability
Committee
to assist
the Board
in its
oversight
of the
Corporation’s
asset
and liability
management policies
related to
the management
of the
Corporation’s
funds, investments,
liquidity,
and interest
rate risk,
and the use of derivatives. In doing so, the committee’s
primary functions involve:
●
The establishment of a process to enable the identification, assessment, and
management of risks that could affect the
Corporation’s assets and liabilities management;
●
The identification of the Corporation’s
risk tolerance levels for yield maximization relating to its assets and liabilities
management; and
●
The evaluation of the adequacy,
effectiveness,
and compliance with the Corporation’s
risk management process relating to
the Corporation’s assets and liabilities management,
including management’s role in
that process.
Credit Committee
The Board of Directors appoints the Credit Committee to assist the
Board in its oversight of the Corporation’s
policies related to the
Corporation’s lending function,
hereafter “Credit Management.” The committee’s
primary responsibilities are to:
●
Review the quality of the Corporation’s
credit portfolio and the trends affecting that portfolio;
●
Oversee the effectiveness and administration of credit-related
policies;
●
Approve loans as required by the lending authorities approved by
the Board; and
●
Report to the Board regarding Credit Management.
Audit Committee
The
Board
of
Directors
appoints
the
Audit
Committee
to
assist
the
Board
of
Directors
in
fulfilling
its
responsibility
to
oversee
management regarding:
●
The
conduct
and
integrity
of
the
Corporation’s
financial
reporting
to
any
governmental
or
regulatory
body,
stockholders,
other users of the Corporation’s financial
reports and the public;
●
The performance of the Corporation’s
internal audit function;
●
The Corporation’s internal
control over financial reporting and disclosure controls and procedures;
●
The
qualifications,
engagement,
compensation,
independence,
and
performance
of
the
Corporation’s
independent
auditors,
their
conduct
of
the
annual
audit
of
the
Corporation’s
financial
statements,
and
their
engagement
to
provide
any
other
services;
●
The application of the Corporation’s
related parties transaction policy as established by the Board of Directors;
●
The
application
of
the
Corporation’s
code
of
business
conduct
and
ethics
as
established
by
management
and
the
Board
of
Directors;
●
The preparation
of the
Audit Committee
report required
to be
included
in the
proxy statement
for the
Corporation’s
annual
stockholders’ meeting by the rules of the SEC; and
●
Oversee the Corporation’s legal risk.
89
Corporate Governance and Nominating Committee
The
Board
of Directors
appoints the
Corporate
Governance
and
Nominating
Committee
to develop,
review,
and assess
corporate
governance principles.
The Corporate
Governance and
Nominating Committee
is responsible
for director
succession, orientation
and
compensation,
identifying
and
recommending
new
director
candidates,
overseeing
the
evaluation
of
the
Board
and
management,
recommending
to
the
Board
the
designation
of
a
candidate
to
hold
the
position
of
the
Chairman
of
the
Board,
and
directing
and
overseeing
the
Corporation’s
executive
succession
plan.
In
addition,
the
Corporate
Governance
and
Nominating
Committee
is
responsible for overseeing the Corporation’s
ESG policies.
Compensation and Benefits Committee
The
Board
of
Directors
appoints
the
Compensation
and
Benefits
Committee
to
oversee
compensation
policies
and
practices
including
the
evaluation
and
recommendation
to
the
Board
of
the
proper
and
competitive
salaries
and
incentive
compensation
programs of
the executive
officers and
key employees
of the
Corporation. The
Committee recommends
guidelines and
principles for
compensation
programs of
executive officers
and key
employees of
the Corporation,
including establishing
a clear
link between
pay
and performance and safeguards against the encouragement of excessive risk-taking.
Trust Committee
The
Board
of
Directors
of
the
Bank
appoints
the
Trust
Committee
to
assist
the
Board
of
Directors
in
fulfilling
its
oversight
responsibilities with respect to the Trust
Department and its fiduciary responsibilities. The
Trust Committee’s
main responsibilities are
to
ensure
proper
exercise
of
the
fiduciary
powers
of
the
Bank
and
to
review
the
activities
of
the
Trust
Department.
The
Trust
Committee shall have jurisdiction over all aspects of the Trust
Department and may act on behalf of the Board of Directors.
Management Roles and Responsibilities
While
the
Board
of
Directors
has
the
responsibility
to
oversee
the
risk
governance
program,
management
is
responsible
for
implementing
the necessary
policies and
procedures,
and internal
controls. To
carry out
these responsibilities,
the Corporation
has a
clearly
defined
risk governance
culture. To
ensure that
risk management
is communicated
at all
levels of
the Corporation,
and each
area understands
its specific
role, the
Corporation has
established several
management level
committees to
support risk
oversight, as
follows:
Executive Risk Management Committee
The
Executive
Risk
Management
Committee
is
responsible
for
exercising
oversight
of
information
regarding
First
BanCorp.’s
enterprise
risk
management
framework,
including
the
significant
policies,
procedures,
and
practices
employed
to
manage
the
identified
risk
categories
(credit
risk,
operational
risk,
legal
and
regulatory
risk,
reputational
risk,
model
risk,
and
capital
risk).
In
carrying
out
its
oversight
responsibilities,
each
committee
member
is
entitled
to
rely
on
the
integrity
and
expertise
of
those
people
providing
information
to
the committee
and
on
the
accuracy
and
completeness
of
such
information,
absent
actual
knowledge
of
an
inaccuracy.
The
Chief
Executive
Officer
appoints
the
Executive
Risk Management
Committee
and members
of
the Corporation’s
senior
and
executive management have
the opportunity to
share their insights about
the types of risks
that could impede
the Corporation’s
ability
to achieve
its business
objectives. The
Chief Risk
Officer
of the
Corporation directs
the agenda
for
the meetings
and the
Enterprise
Risk Management
(“ERM”) and
Operational Risk
Director serves
as secretary
of the
committee and
maintains the
minutes on
behalf
of the committee. The General Auditor also participates of the committee as an
observer.
The
committee
provides
assistance
and
support
to
the
Chief
Risk
Officer
to
promote
effective
risk
management
throughout
the
Corporation.
The
Chief
Risk
Officer
and
the
ERM
and
Operational
Risk
Director
report
to
the
Committee
matters
related
to
the
enterprise risk management framework of the Corporation, including, but not
limited to:
●
The risk governance structure;
●
The risk competencies of the Corporation;
●
The Corporation’s risk appetite
statement and risk tolerance; and
●
The risk management
strategy and associated risk
management initiatives and
how both support
the business strategy
and business model of the Corporation.
90
Other Management Committees
As
part
of
its
governance
framework,
the
Corporation
has
various
additional
risk
management
related-committees.
These
committees are
jointly responsible
for ensuring
adequate risk
measurement and
management in
their respective
areas of authority.
At
the management level, these committees include:
●
Management’s
Investment and
Asset Liability Committee
(the
“MIALCO”) – oversees
interest rate
and market
risk, liquidity
management
and
other
related
matters.
Refer
to
Liquidity
Risk
and
Capital
Adequacy
and
Interest
Rate
Risk
Management
below for further details.
●
Information Technology
Steering Committee –
oversees and counsels
on matters related
to information
technology and cyber
security, including
the development of information management policies and procedures
throughout the Corporation.
●
Bank Secrecy Act Committee – oversees, monitors,
and reports on the Corporation’s compliance
with the Bank Secrecy Act.
●
Credit Committees (consisting
of a Credit Management
Committee and a
Delinquency Committee) –
oversees and establishes
standards for credit
risk management processes
within the Corporation.
The Credit Management
Committee is responsible
for
the approval
of loans
above an
established size
threshold. The
Delinquency Committee
is responsible
for the
periodic review
of
(i) past-due
loans, (ii)
overdrafts,
(iii)
non-accrual
loans, (iv)
OREO assets,
and
(v)
the Bank’s
internal
credit-risk
rating
classification.
●
Vendor
Management
Committee
–
oversees
policies,
procedures,
and
related
practices
related
to
the
Corporation’s
vendor
management
efforts.
The
Vendor
Management
Committee’s
primary
functions
involve
the
establishment
of
processes
and
procedures to enable the recognition, assessment, management,
and monitoring of vendor management risks.
●
ESG
Committee
–
primarily
responsible
for
driving
the
Corporation’s
ESG
policies,
strategy
and
reporting
regularly
to
the
Corporate Governance and Nominating
Committee. The ESG Committee aligns
priorities and initiatives for
the year, provides
strategy recommendations and leads the reporting process on ESG related topics.
●
The Community
Reinvestment Act
Executive Committee
– oversees,
monitors,
and reports
on the
Corporation’s
compliance
with
Community
Reinvestment
Act
regulatory
requirements.
The
Bank
is
committed
to
developing
and
implementing
programs and products that
increase access to credit and
create a positive impact
on low and moderate
income individuals and
communities.
●
Anti-Fraud
Committee
–
oversees
the
Corporation’s
policies,
procedures
and
related
practices
relating
to
the
Corporation’s
anti-fraud measures.
●
Regulatory
Compliance
Committee
–
oversees
the
Corporation’s
Regulatory
Compliance
Management
System.
The
Regulatory
Compliance
Committee
reviews
and
discusses
any
regulatory
compliance
laws
and
regulations
that
impact
performance
of
regulatory
compliance
policies,
programs
and
procedures.
The
Regulatory
Compliance
Committee
also
ensures the coordination of regulatory compliance requirements throughout
departments and business units.
●
Regulatory Reporting Committee
– oversees and
assists the senior
officers in fulfilling
their responsibility for oversight
of the
accuracy
and
timeliness
of
the
required
regulatory
reports
and
related
policies
and
procedures,
addresses
changes
and/or
concerns
communicated
by
the
regulators,
and
addresses
issues
identified
during
the
regulatory
reporting
process.
The
Regulatory
Reporting
Committee
oversees,
and
updates,
as
necessary,
the
established
controls
and
procedures
designed
to
ensure that information in regulatory reports is recorded, processed, and
accurately reported and on a timely basis.
●
Complaints
Management
Committee
–
assists
in
overseeing
the
complaint
management
process
implemented
across
the
Corporation
within
the
Corporation’s
three
marketplaces;
Puerto
Rico,
the
Virgin
Islands,
and
Florida.
The
Complaints
Management
Committee
supports
the
Corporation’s
complaints
management
program
relating
to
resolution
of
complaints
within the
lines of
business. When
appropriate, the
Complaints Management
Committee evaluates
existing corrective
actions
within the lines of business related to complaints and complaint management practices
within those business units.
●
Project
Portfolio
Management
Committee
–
reviews
and
oversees
the
performance
of
the
portfolio
and
individual
projects
during
the
Project
Management
Cycle
(Initiation,
Planning,
Execution,
Control
&
Monitoring,
and
Closing).
The
Project
Portfolio
Management
Committee
balances
conflicting
demands
between
projects,
decides
on
priorities
assigned
to
each
project
based on
organizational
priorities
and
capacity,
and oversees
project
budgets, risks,
and
actions taken
to control
and
mitigate risks.
91
●
Current Expected Credit Losses (“CECL”)
Committee – oversees the Corporation’s
requirements for the calculation of CECL,
including the implementation
of new models,
if necessary,
selection of vendors
and monitoring of the
guidance from different
regulatory
agencies
with
regards
to
CECL
requirements.
The
CECL
Committee
reviews
estimated
credit
loss
inputs,
key
assumptions, and
qualitative overlays.
In addition,
the Committee
approves the
determination of
reasonable and
supportable
periods
used
with
respect
to macroeconomic
forecasts,
and
the
historical
loss reversion
method
and
parameters.
The CECL
Committee reports to the Audit Committee the results of the ACL each reporting
period.
●
Capital Planning
Committee –
oversees the
Capital Planning
Process and
is responsible
for operating
in accordance
with the
Capital
Policy
and
ensuring
compliance
with
its
guidelines.
The
Capital
Planning
Committee
develops
and
proposes
to
the
Board
changes
to
the
Capital
Policy
and
the
capital
plan
targets,
limits,
performance
metrics,
internal
stress
testing
and
guidelines for Capital Management Activities.
●
Business Continuity – responsible
to create governance
and planning structure that
will enable FirstBank to
craft an enterprise
Business Continuity
Management (BCM)
program that
ensures the
Bank is able
to continue business
operations after a
major
disruption occurs.
●
Emergency Committee
– Responsible to activate
and emergency or
disaster recovery procedure
to ensure the safety
of Bank’s
personnel and the continuity of critical Bank services.
Officers
As part of its governance framework, the following officers
play a key role in the Corporation’s risk
management process:
●
The Chief Executive
Officer (“CEO”) is
responsible for the
overall risk governance
structure of the Corporation.
The CEO is
ultimately responsible for business strategies, strategic objectives, risk management
priorities, and policies.
●
The
Chief Operating
Officer
(“COO”)
manages
the Corporation’s
operational
framework,
including
information
technology
(“IT”),
facilities,
banking
operations,
corporate
security,
and
enterprise
architecture.
The
COO
oversees
the
effective
and
efficient execution of the various technology initiatives
to support the Corporation’s growth and
improve overall efficiency.
●
The Chief Risk Officer
(“CRO”) is responsible for
the oversight of the
risk management of the
Corporation as well as
the risk
governance
processes.
The
CRO, together
with
the
ERM
and
Operational
Risk Director,
monitor
key
risks
and
manage the
operational
risk
program.
The
CRO
provides
the
leadership
and
strategy
for
the
Corporation’s
risk
management
and
monitoring
activities and
is responsible
for the
oversight
of regulatory
compliance, loan
review,
model risk,
and operational
risk
management.
The
CRO
supervises
talent
management
efforts,
maintains
adequate
succession
planning
practices
and
promotes
employee
engagement.
The
Human
Resources
Director
supports
the
CRO
in
the
human
capital
and
talent
management efforts.
●
Chief Credit Officer, Portfolio
Risk Manager, Loan Review Manager
and other Senior Executives are responsible for
managing and executing the Corporation’s
credit risk program.
●
The
Chief
Financial
Officer
(“CFO”),
together
with
the
Corporation’s
Treasurer
and
the
Asset
and
Liability
Management
(“ALM”) Director,
and Financial Risk Manager manage
the Corporation’s
interest rate and market and
liquidity risk programs
and,
together
with
the
Chief
Accounting
Officer
and
the
Corporate
Controller,
are
responsible
for
the
implementation
of
accounting
policies
and
practices
in
accordance
with
GAAP
and
applicable
regulatory
requirements.
The
ERM
and
Operational
Risk
Director
assists
the
CFO
in
the
review
of
the
Corporation’s
internal
control
over
financial
reporting
and
disclosure controls and procedures.
●
The
Chief
Accounting
Officer
and
the
Corporate
Controller
is
responsible
for
the
development
and
implementation
of
the
Corporation’s
accounting policies
and practices
and the
review and
monitoring of
critical accounts
and transactions
to ensure
that they are reported in accordance with GAAP and applicable regulatory
requirements.
●
The
Strategic
Planning
Director
is
responsible
for
the
development
of
the
Corporation’s
strategic
and
business
plan,
by
coordinating
and
collaborating
with
the
executive
team
and
all
corporate
bodies
concerned
with
the
strategic
and
business
planning process.
●
The Investors Relations and Capital Planning
Officer is responsible for improving
the effective communication with
investors,
while
enhancing
the
Corporation’s
capital
plan
based
on
the
stress
test
processes
and
proactively
managing
capital.
The
Investor
Relations
and
Capital
Planning
Officer
works
with
the
Treasury,
ALM
and
Financial
Analysis,
Corporate
Credit
92
Risk,
and
Strategic
Planning
units
in
order
to
follow
a
holistic
approach
to
proactively
manage
risk
and
returns
for
shareholders under the stress testing framework.
●
The ERM and Operational Risk Director is responsible for
driving the identification, assessment, measurement, mitigation
and
monitoring of key risks throughout the Corporation. The ERM and
Operational Risk Director promotes and instills a culture of
risk
control,
identifies
and
monitors
the
resolution
of
major
and
critical
operational
risk
issues
across
the
Corporation,
and
serves
as
a
key
advisor
to
business
executives
with
regards
to
risk
exposure
to
the
organization,
corrective
actions
and
corporate
policies
and
best
practices
to
mitigate
risks.
The
Financial
and
Model
Risk
Manager,
IT
Risk
Manager,
Retail
Quality Assurance Manager,
Regulatory Affairs
Manager and Corporate
Risk Managers assist
the ERM and
Operational Risk
Director in the monitoring of key risks and oversight of risk management
practices.
●
The
Compliance
Director
is
responsible
for
oversight
of
regulatory
compliance.
The
Compliance
Director
maintains
an
inventory of applicable regulations, implements an enterprise-wide
compliance risk assessment, and monitors compliance with
significant
regulations.
The Compliance
Director
is responsible
for
building
awareness
of,
and
educating
business units
and
subsidiaries on, regulatory risks.
●
The General
Counsel is
responsible
for
the oversight
of legal
risks, including
matters such
as contract
structuring,
litigation
risk,
and
all
legal-related
aspects.
The
Corporate
Affairs
Officer
assists
the
General
Counsel
with
various
legal
areas,
including, but not limited, to SEC reporting matters, insurance coverage
and liability, and contract
structuring.
●
The Chief
Information
Officer
(“CIO”)
is responsible
for overseeing
technology
services provided
by IT
vendors including:
(i) the
fulfillment of
contractual obligations
and responsibilities;
(ii) the
development
of policies
and standards
related to
the
technology;
(iii)
services
provided;
(iv)
billing
and
invoice
processing;
(v)
Service
Level
Agreement
(SLA)
metrics
and
compliance; and vi) the Business Continuity Strategy.
●
The Corporate
Security Officer
(“CSO”) is
responsible for
the oversight
of information
security policies
and procedures,
and
the ongoing
monitoring
of existing
and new
vendors’ due
diligence for
information security.
In addition,
the CSO
identifies
risk factors, and determines solutions to security needs.
Liquidity Risk and Capital Adequacy,
Interest Rate Risk, Credit Risk, Operational Risk,
Legal and Compliance Risk and
Concentration Risk Management
The
following
discussion
highlights
First
BanCorp.’s
adopted
policies
and
procedures
for
liquidity
risk
and
capital
adequacy,
interest rate risk, credit risk, operational risk, legal and compliance risk,
and concentration risk.
Liquidity Risk and Capital Adequacy
Liquidity
risk
involves
the
ongoing
ability
to
accommodate
liability
maturities
and
deposit
withdrawals,
fund
asset growth
and
business operations,
and meet
contractual obligations
through unconstrained
access to funding
at reasonable
market rates. Liquidity
management
involves
forecasting
funding
requirements
and
maintaining
sufficient
capacity
to
meet
liquidity
needs
and
accommodate
fluctuations
in
asset
and
liability
levels
due
to
changes
in
the
Corporation’s
business
operations
or
unanticipated
events.
The Corporation
manages liquidity
at two
levels. The
first is
the liquidity
of the
parent company,
which is
the holding
company
that owns
the banking
and non-banking
subsidiaries.
The second
is the
liquidity of
the banking
subsidiary.
During the
year
ended
December 31, 2021, the
Corporation continued to pay
quarterly interest payments on
the subordinated debentures
associated with its
TRuPs, the
monthly dividend
income on
its non-cumulative
perpetual monthly
income preferred
stock, and
quarterly dividends
on
its
common
stock.
In
addition, since
the
inception of
the
$300
million stock
repurchase program through
December 31,
2021, the
Corporation has repurchased 16.74 million
shares at
a
cost of
$213.9 million and
redeemed all of
its outstanding shares of
Series A
through E
Preferred
Stock for
its liquidation
value of
$36.1 million.
The
Asset
and
Liability
Committee
of
the
Corporation’s
Board
of
Directors
is
responsible
for
overseeing
management’s
establishment
of
the
Corporation’s
liquidity
policy,
as
well
as
approving
operating
and
contingency
procedures
and
monitoring
liquidity on an ongoing basis. The
MIALCO, which reports to the Board
of Directors’ Asset and Liability Committee,
uses measures
of liquidity developed by management that involve
the use of several assumptions to review the Corporation’s
liquidity position on a
monthly basis. The MIALCO oversees liquidity management, interest
rate risk, and other related matters.
The MIALCO is composed of
senior management officers,
including the Chief Executive Officer,
the Chief Financial Officer,
the
Chief Risk
Officer,
the Business
Group
Director,
the Strategy
Management Director,
the Treasury
and Investments
Risk Manager,
the Financial Planning and ALM Director
,
and the Treasurer.
The Treasury and Investments
Division is responsible for planning and
93
executing the Corporation’s
funding activities and strategy,
monitoring liquidity availability on
a daily basis, and reviewing liquidity
measures
on
a
weekly
basis.
The
Treasury
and
Investments
Accounting
and
Operations
area
of
the
Comptroller’s
Department
is
responsible
for
calculating
the liquidity
measurements
used
by
the
Treasury
and
Investment
Division
to
review
the
Corporation’s
liquidity
position
on
a
monthly
basis.
The
Financial
Planning
and
ALM
Division
is
responsible
to
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
is
intended
to
preserve
and
enhance
funding
stability,
flexibility,
and
diversity.
Key
components
of
this
operating
strategy
include
a
strong
focus
on
the
continued
development
of
customer-based
funding, the
maintenance
of direct
relationships with
wholesale
market funding
providers, and
the maintenance
of
the ability to liquidate certain assets when, and if, requirements warrant.
The
Corporation
develops
and
maintains
contingency
funding
plans.
These
plans
evaluate
the
Corporation’s
liquidity
position
under various
operating circumstances
and are
designed to
help ensure
that the
Corporation will
be able
to operate
through periods
of stress when
access to normal
sources of funds
is constrained. The
plans project funding
requirements during
a potential period
of
stress, specify and
quantify sources of
liquidity,
outline actions and
procedures for effectively
managing liquidity through
a difficult
period, and define
roles and responsibilities
for the Corporation’s
employees. Under the
contingency funding plans,
the Corporation
stresses the
balance sheet
and the liquidity
position to
critical levels
that mimic
difficulties in
generating funds
or even maintaining
the current
funding position
of the
Corporation and
the Bank
and are
designed to
help ensure
the ability
of the
Corporation and
the
Bank to honor
their respective commitments.
The Corporation has
established liquidity
triggers that the
MIALCO monitors in
order
to
maintain
the
ordinary
funding
of
the
banking
business.
The
MIALCO
developed
contingency
funding
plans
for
the
following
three scenarios:
a credit
rating downgrade,
an economic
cycle downturn
event, and
a concentration
event. The
Board of
Directors’
Asset and Liability Committee reviews and approves these plans on an annual
basis.
The Corporation
manages its
liquidity in
a proactive
manner,
in an
effort to
maintain a
sound liquidity
position. It
uses multiple
measures
to
monitor
the
liquidity
position,
including
core
liquidity,
basic
liquidity,
and
time-based
reserve
measures.
As
of
December 31,
2021, the
estimated core
liquidity reserve
(which includes
cash and
free liquid
assets) was
$5.6 billion,
or 27.0%
of
total
assets,
compared
to
$4.1
billion,
or
21.6%
of
total
assets
as
of
December
31,
2020.
The
basic
liquidity
ratio
(which
adds
available secured lines of credit to the core liquidity)
was approximately 32.7% of total assets as of December 31,
2021, compared to
27.9% of total
assets as of
December
31, 2020.
As of December
31, 2021, the
Corporation had $1.2
billion available
for additional
credit from the
FHLB. Unpledged liquid
securities, mainly fixed-rate
MBS and U.S. agency
debentures, amounted to
approximately
$3.1
billion as of
December 31, 2021.
The Corporation does
not rely on
uncommitted inter-bank
lines of credit
(federal funds lines)
to fund its
operations and does
not include them
in the basic liquidity
measure. As of
December 31, 2021,
the holding company
had
$20.8
million
of
cash
and
cash
equivalents.
Cash
and
cash
equivalents
at
the
Bank
level
as
of
December
31,
2021
were
approximately $2.5
billion. The Bank
had $100.4
million in brokered
CDs as of
December 31, 2021,
of which approximately
$63.6
million
mature
over
the
next
twelve
months.
In
addition,
the
Corporation
had
non-maturity
brokered
deposits
totaling
$247.5
million as of
December 31, 2021.
Liquidity at the
Bank level is
highly dependent
on bank deposits,
which fund
86% of the
Bank’s
assets (or 85%, excluding brokered CDs).
Furthermore, as
a provider of
financial services,
the Corporation routinely
enters into commitments
with off-balance
sheet risk to
meet the
financial needs
of its
customers. These
financial instruments
may include
loan commitments
and standby
letters of
credit.
These
commitments
are
subject
to
the
same
credit
policies
and
approval
processes
used
for
on-balance
sheet
instruments.
These
instruments involve, to varying degrees,
elements of credit and interest rate risk
in excess of the amount recognized in
the statements
of financial
condition. As
of December
31, 2021,
the Corporation’s
commitments to
extend credit
amounted to
approximately $2.3
billion,
of
which
$1.2
billion
related
to
credit
card
loans.
Commercial
and
financial
standby
letters
of
credit
amounted
to
approximately $151.1 million. Commitments
to extend credit are agreements
to lend to a customer
as long as there is
no violation of
any
condition
established
in
the
contract.
Since
certain
commitments
are
expected
to
expire
without
being
drawn
upon,
the
total
commitment
amount
does
not
necessarily
represent
future
cash
requirements.
For
most
of
the
commercial
lines
of
credit,
the
Corporation
has
the
option
to
reevaluate
the
agreement
prior
to
additional
disbursements.
There
have
been
no
significant
or
unexpected draws
on existing
commitments. In
the case
of credit
cards and
personal lines
of credit,
the Corporation
can cancel
the
unused credit facility at any time and without cause.
The
Corporation
engages
in
the ordinary
course
of business
in
other
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 and thus,
affecting the Corporation’s
liquidity position.
These transactions are
designed to (i)
meet the financial needs
of
customers, (ii) manage the
Corporation’s credit,
market and liquidity risks, (iii)
diversify the Corporation’s
funding sources, and (iv)
optimize capital.
In addition to the
aforementioned off-balance
sheet debt obligations
and unfunded commitments
to extend credit,
the Corporation
has obligations and commitments to make future
payments under contracts, amounting to approximately
$3.3 billion as of December
31,
2021.
Our
material
cash requirements
comprise
primarily
of
contractual
obligations
to
make
future
payments
related
to
time
94
deposits,
short-term
borrowings,
long-term
debt,
and
operating
lease
obligations.
We
also
have
other
contractual
cash
obligations
related
to
certain
binding
agreements
we
have
entered
into
for
services
including,
outsourcing
of
technology
services,
security,
advertising and
other services
which are
not material
to our
liquidity needs.
We
currently anticipate
that our
available funds,
credit
facilities, and cash flow from operations will be sufficient
to meet our operational cash needs for the foreseeable future.
Off-balance sheet
transactions are continuously
monitored to consider
their potential impact
to our liquidity
position and changes
are applied to the balance between sources and uses of funds as deemed appropriate
to maintain a sound liquidity position.
Sources of Funding
The
Corporation
utilizes
different
sources
of
funding
to
help
ensure
that
adequate
levels
of
liquidity
are
available
when
needed.
Diversification of
funding sources is
of great importance
to protect the
Corporation’s
liquidity from market
disruptions. The principal
sources
of
short-term
funds
are
deposits,
including
brokered
deposits,
securities
sold
under
agreements
to
repurchase,
and
lines
of
credit with the FHLB.
The Asset and Liability Committee
reviews credit availability on
a regular basis. The Corporation has
also sold mortgage loans as
a
supplementary source
of funding and
participates in the
Borrower-in-Custody (“BIC”)
Program of the
FED. The Corporation
has also
obtained long-term funding in the past through the issuance of notes
and long-term brokered CDs.
As of December
31, 2021,
the amounts of
brokered CDs had
decreased by
$115.8 million
to $100.4
million from brokered
CDs of
$216.2 million
as of
December 31,
2020.
Non-maturity brokered
deposits, such
as money
market accounts
maintained by
a deposit
broker,
increased in
2021 by
$22.0 million
to $247.5
million as
of December
31, 2021.
Consistent with
its strategy,
the Corporation
has
been
seeking
to
add
core
deposits.
As
of
December
31,
2021,
the
Corporation’s
deposits,
excluding
brokered
deposits
and
government deposits,
increased by $1.4 billion to $14.2
billion, compared to $12.8 billion as of
December 31, 2020. This increase
was
primarily reflected in both commercial and retail demand deposits, partially
offset by a decrease in retail CDs.
The
Corporation
continues
to
have
access
to
financing
through
counterparties
to
repurchase
agreements,
the
FHLB,
and
other
agents, such
as wholesale funding
brokers. While liquidity
is an ongoing
challenge for all
financial institutions,
management believes
that
the
Corporation’s
available
borrowing
capacity
and
efforts
to
grow
retail
deposits
will
be
adequate
to
provide
the
necessary
funding for the Corporation’s business
plans in the foreseeable future.
95
The Corporation’s principal
sources of funding are discussed below:
Deposits
The following table presents the composition of total deposits as of the indicated
dates:
Weighted Average
Cost as of
As of December 31,
December 31, 2021
2021
2020
(Dollars in thousands)
Interest-bearing savings accounts
0.14%
$
4,729,387
$
4,088,969
Interest-bearing checking accounts
0.15%
3,492,645
3,651,806
CDs
0.86%
2,535,349
3,030,485
Interest-bearing deposits
0.31%
10,757,381
10,771,260
Non-interest-bearing deposits
7,027,513
4,546,123
Total
$
17,784,894
$
15,317,383
Interest-bearing deposits:
Average balance
outstanding
$
10,940,542
$
8,488,076
Non-interest-bearing deposits:
Average balance
outstanding
$
6,063,715
$
3,318,945
Weighted average
rate during
the period on interest-bearing deposits
0.38%
0.81%
Estimate of
Uninsured
Deposits
-
At December
31,
2021 and
2020,
the estimated
amount of
uninsured
deposits totaled
$8.9
billion
and $6.8
billion, respectively,
generally representing
the portion
of deposits
in domestic
offices that
exceed the
FDIC insurance
limit
of $250,000
and amounts
in any
other uninsured
deposit account.
The amount
of uninsured
deposits is
calculated based
on the
same
methodologies and assumptions used for our bank regulatory reporting
requirements.
(over $250,000) and other time deposits that are otherwise uninsured
as of December 31, 2021:
(In thousands)
3 months
or less
3 months to
6 months
6 months to
1 year
Over 1
year
Total
U.S. time deposits in excess of FDIC insurance
limits
(1)
$
233,079
$
104,043
$
184,501
$
179,085
$
700,708
Other uninsured deposits
$
23,378
$
9,911
$
14,881
$
4,917
$
53,087
(1)
Exclude $100.4 million
of CDs
issued to deposit
brokers in the
form of large
certificates of deposits
that are generally
participated out
by brokers in
shares of less
than the FDIC
insurance limit.
Brokered
CDs
to $216.2 million as of December 31, 2020.
The average remaining term to maturity of the brokered CDs outstanding
as of December 31, 2021 was approximately 1.2 years.
The
use
of
brokered
CDs
has
historically
been
an
additional
source
of
funding
for
the
Corporation.
It
provides
an
additional
efficient
channel
for
funding diversification
and
interest
rate management.
Brokered
CDs are
insured
by
the FDIC
up to
regulatory
limits; and can
be obtained faster than
regular retail deposits.
In addition, the
Corporation may obtain
funds from brokers deposited
in
non-maturity money market accounts tied to short-term money market rates
such as the Federal funds rate.
Government deposits
in transactional accounts and $173.7 million
in time deposits), compared to $1.8 billion
as of December 31, 2020. Approximately
19%
of
the
public
sector
deposits
as
of
December
31,
2021
was
from
municipalities
and
municipal
agencies
in
Puerto
Rico
and
81%
was from
public
corporations,
the
central
government
and
agencies,
and
U.S.
federal
government
agencies
in
Puerto
Rico.
The
increase was primarily
related to the
funding of
certain operational
reserve accounts
of PREPA
to operate
Puerto Rico’s
electric grid,
as well as
increases in the
balance of transactional
deposit accounts of
certain municipalities in
connection with the
American Rescue
Plan Act (“ARPA”)
funding for states and local governments.
96
In
addition,
as
of
December
31,
2021,
the
Corporation
had
$568.4
million
of
government
deposits
in
the
Virgin
Islands
region
(December
31,
2020
- $280.2
million)
and
$9.6
million
in
the
Florida
region.
(December
31,
2020
-
$9.7
million).
The increase
in
government deposits in
the Virgin
Islands region also
reflects the effect
of ARPA
federal funds received
by the central
government in
the second quarter of 2021.
Retail deposits
– The
Corporation’s
deposit products
also include
regular savings
accounts, demand
deposit accounts,
money market
accounts,
and
retail
CDs.
Total
deposits,
excluding
brokered
deposits
and
government
deposits,
increased
by
$1.4
billion
to
$14.2
billion from
a balance of
$12.8 billion as
of December 31,
2020, reflecting
increases of $1.1
billion in the
Puerto Rico region,
$196.2
million
in
the
Florida
region,
and
$98.1
million
in
the
Virgin
Islands
region.
On
a
deposit
type
basis,
the
increase
was
primarily
reflected
in both
commercial
and
retail demand
deposits,
partially
offset
by a
decrease
in retail
CDs. The
BSPR system
conversion
resulted in a
net reclassification
of approximately
$724 million
in balances from
interest-bearing demand
deposits, and certain
saving
products, to non-interest-bearing products at the time of conversion on July
12, 2021.
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 years ended December 31, 2021 and 2020.
97
Borrowings
as of December 31, 2020.
Weighted Average
Rate as of
As of December 31,
December 31, 2021
2021
2020
(Dollars in thousands)
Securities sold under agreements
3.35%
$
300,000
$
300,000
Advances from FHLB
2.16%
200,000
440,000
Other borrowings
2.80%
183,762
183,762
Total
$
683,762
$
923,762
Weighted average
rate during
2.78%
2.47%
Securities
sold
under
agreements
to
repurchase
-
The
Corporation’s
investment
portfolio
is
funded
in
part
with
repurchase
agreements.
The
Corporation’s
outstanding
securities
sold
under
repurchase
agreements
amounted
to
$300
million
as
of
each
of
December 31,
2021 and
2020, respectively.
One of the
Corporation’s
strategies has
been the
use of
structured repurchase
agreements
and
long-term
repurchase
agreements
to
reduce
liquidity
risk
and
manage
exposure
to
interest
rate
risk
by
lengthening
the
final
maturities
of
its
liabilities
while
keeping
funding
costs
at
reasonable
levels.
In
addition
to
these
repurchase
agreements,
the
Corporation
has
been
able
to
maintain
access
to
credit
by
using
cost-effective
sources
such
as
FHLB
advances.
See
Note
18
–
Securities Sold Under Agreements to Repurchase, in the accompanying
audited consolidated financial statements included in Item 8 of
this Form 10-K, for further details about repurchase agreements outstanding
by counterparty and maturities.
Under the Corporation’s
repurchase agreements, as
is the case with
derivative contracts,
the Corporation is
required to pledge
cash
or qualifying securities to meet margin requirements.
To the extent that the value
of securities previously pledged as collateral declines
due to changes in interest
rates, a liquidity crisis or
any other factor, the
Corporation is required to deposit
additional cash or securities
to meet its margin requirements, thereby adversely affecting
its liquidity.
Given
the
quality
of
the
collateral
pledged,
the
Corporation
has
not
experienced
margin
calls
from
counterparties
arising
from
credit-quality-related write-downs in valuations.
Advances from
the FHLB –
The Bank is
a member of
the FHLB system
and obtains advances
to fund its
operations under a
collateral
agreement with the FHLB that requires the Bank to maintain
qualifying mortgages
and/or investments as collateral for advances taken.
As of
December 31,
2021, the
outstanding balance
of long-term
fixed rate
FHLB advances
was $200.0
million, compared
to $440.0
million as of
December 31, 2020.
As of December
31, 2021, the
Corporation had $1.2
billion available for
additional credit on
FHLB
lines of credit.
Trust-Preferred
Securities
–
In
2004,
FBP
Statutory
Trust
I,
a
statutory
trust
that
is
wholly-owned
by
the
Corporation
and
not
consolidated
in
the
Corporation’s
financial
statements,
sold
to
institutional
investors
$100
million
of
its
variable-rate
TRuPs.
FBP
Statutory Trust
I used
the proceeds
of the
issuance, together
with the
proceeds of
the purchase
by the
Corporation of
$3.1 million
of
FBP Statutory
Trust
I
variable
rate
common
securities, to
purchase
$103.1
million
aggregate
principal
amount
of the
Corporation’s
junior subordinated deferrable debentures.
Also
in
2004,
FBP
Statutory
Trust
II,
a
statutory
trust
that
is
wholly-owned
by
the
Corporation
and
not
consolidated
in
the
Corporation’s
financial statements,
sold to institutional
investors $125
million of its
variable-rate TRuPs.
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 subordinated debentures
are presented in
the Corporation’s
consolidated statements of
financial condition as
other borrowings.
The variable-rate TRuPs are fully and unconditionally
guaranteed by the Corporation. The $100 million
junior subordinated deferrable
debentures
issued
by
the
Corporation
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
98
shortened (such shortening would result in a mandatory
redemption of the variable-rate TRuPs). The Collins Amendment of the Dodd-
Frank
Act
eliminated
certain
TRuPs
from
Tier
1
Capital.
Bank
holding
companies,
such
as
the
Corporation,
were
required
to
fully
phase out
these instruments
from Tier
I capital
by January
1, 2016;
however,
they may
remain in
Tier 2
capital until
the instruments
are redeemed or mature.
As of
each of
December 31,
2021
and 2020,
the Corporation
had subordinated
debentures outstanding
in the
aggregate amount
of
$183.8
million.
As
of
December
31,
2021,
the
Corporation
was
current
on
all
interest
payments
due
related
to
its
subordinated
debentures.
Other Sources of
Funds and Liquidity
maturing deposits and borrowings.
In connection with its mortgage banking
activities, the Corporation has invested
in technology and
personnel to enhance the Corporation’s
secondary mortgage market capabilities.
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,
U.S. Department
of Housing
and
Urban Development
(“HUD”), FNMA, and
FHLMC. During
the year
ended December 31,
2021, the
Corporation sold approximately
$191.4
million of FHA/VA
mortgage loans to GNMA, which packages them into MBS.
In
addition,
the
FED
has
taken
several
steps to
promote
economic
and
financial
stability
in
response
to
the significant
economic
disruption
caused by
the COVID-19
pandemic.
These
actions are
intended
to stimulate
economic
activity
by reducing
interest
rates
and provide
liquidity to
financial markets
so that
participants have
access to
needed funding.
Federal funds
target rate
remained at
a
range of
0% to
0.25%, making
the Primary
Credit FED
Discount Window
Program a
cost-efficient
contingent source
of funding
for
the Corporation given
the highly-volatile market
conditions. Although
currently not in
use, as of
December 31, 2021,
the Corporation
had approximately $1.2 billion available for funding under the FED’s
BIC Program.
Effect of Credit Ratings on Access to Liquidity
The
Corporation’s
liquidity
is
contingent
upon
its
ability
to
obtain
external
sources
of
funding
to
finance
its
operations.
The
Corporation’s
current credit
ratings and any
downgrade in credit
ratings can hinder
the Corporation’s
access to new
forms of external
funding
and/or
cause
external
funding
to
be
more
expensive,
which
could,
in
turn,
adversely
affect
its
results
of
operations.
Also,
changes in
credit ratings
may further
affect the
fair value
of unsecured
derivatives whose
value takes
into account
the Corporation’s
own credit risk.
The Corporation
does not
have any
outstanding debt
or derivative
agreements that
would be
affected by
credit rating
downgrades.
Furthermore, given the Corporation’s
non-reliance on corporate debt or
other instruments directly linked in
terms of pricing or volume
to credit
ratings, the
liquidity of
the Corporation
has not been
affected in
any material
way by downgrades.
The Corporation’s
ability
to access new non-deposit sources of funding, however,
could be adversely affected by credit downgrades.
As of
the date
hereof,
the Corporation’s
credit as
a long-term
issuer is
rated
B+ by
S&P and
BB by
Fitch. As
of the
date hereof,
FirstBank’s
credit ratings
as a
long-term
issuer are
B1 by
Moody’s,
four notches
below their
definition
of investment
grade;
BB by
S&P,
two
notches
below
their
definition
of
investment
grade;
and
BB
by
Fitch,
two
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 $2.5
billion as of
December 31, 2021,
an increase of
$1.0 billion when
compared to the
balance as
of December
31, 2020.
The following
discussion highlights
the major
activities and
transactions that
affected
the Corporation’s
cash
flows during 2021 and 2020:
Cash Flows from Operating Activities
First BanCorp.’s
operating assets and
liabilities vary significantly
in the normal course
of business due to
the amount and timing
of
cash flows.
Management believes
that cash
flows from
operations, available
cash balances,
and the
Corporation’s
ability to
generate
cash through
short and long-term
borrowings will be
sufficient to
fund the Corporation’
s
operating liquidity
needs for the
foreseeable
future.
For the years ended December
31, 2021 and 2020, net
cash provided by operating activities
was $399.7 million and
$297.7 million,
respectively.
Net cash generated
from operating
activities was higher
than reported
net income,
largely as
a result of
adjustments for
99
items such as deferred
income tax, depreciation,
and amortization, as
well as the cash
generated from sales of
loans held for sale,
and,
in 2020, the provision for credit losses expense.
Cash Flows from Investing Activities
The Corporation’s
investing activities primarily
relate to originating
loans to be
held for investment,
as well as
purchasing, selling,
and
repaying
available-for-sale
and
held-to-maturity investment
securities. For
the year
ended
December
31, 2021,
net cash
used in
investing
activities
was
$1.3
billion,
primarily
due
to
purchases
of
U.S.
agencies
investment
securities
and
liquidity
used
to
fund
commercial and
consumer loan
originations, partially
offset by
principal collected
on loans
and U.S.
agencies MBS
prepayments,
as
well as proceeds from U.S. agencies bonds called prior to
maturity, the bulk sale of
residential mortgage nonaccrual loans, and the sale
of criticized commercial and construction loans
.
For the year
ended December 31,
2020, net cash
used in investing
activities was $1.2
billion, primarily
resulting from purchases
of
U.S.
agencies,
MBS and
the funding
of
commercial
and
consumer
loan
originations,
partially
offset
by principal
collected
on loans
and
on
U.S. agencies
MBS prepayments,
proceeds from
U.S. agencies
bonds
that matured
or were
called
prior
to maturity,
and
the
excess of cash acquired in the BSPR acquisition over the cash consideration
paid at closing.
The Corporation’s
financing activities
primarily
include the
receipt of
deposits and
the issuance
of brokered
CDs, the
issuance of
and payments
on long-term
debt, the
issuance of
equity instruments,
return of
capital, and
activities related
to its
short-term funding.
For
the
year
ended
December 31,
2021,
net
cash
provided
by
financing
activities
was $1.9
billion,
mainly
reflecting an
increase
in
non-brokered deposits, partially offset
by dividends paid on common and preferred
stock, repurchases of common and preferred
stock,
and repayment of matured FHLB advances and brokered CDs.
For the
year ended
December 31,
2020, net
cash provided by
financing activities
was $1.8
billion, mainly
reflecting an
increase in
non-brokered
deposits
and,
to
a
lesser
extent,
proceed
from
the
early
cancellation
of
long-term
reverse
repurchase
agreements
that
were previously
offset against
variable-rate repurchase
agreements, partially
offset by
dividends paid
on common and
preferred stock
and repayment of matured FHLB advances.
100
Capital
As of December 31, 2021, the Corporation’s
stockholders’ equity was $2.1 billion, a decrease
of $173.4 million from December 31,
2020. The decrease
was driven by
the approximately $317.8
million of capital
returned to the
Corporation’s
stockholders during 2021
consisting of:
(i) the
repurchase of
16.7 million
shares of
common stock
for a
total purchase
price of
approximately $213.9
million;
(ii) common
and preferred
stock dividends
totaling $67.8
million; and
(iii) the
redemption of
all of
its outstanding
shares of
Series A
through E
Preferred Stock
for its total
liquidation value
of $36.1
million. The
decrease in
total stockholders’
equity also
included the
effect of
a $139.5
million decrease
in Other
Comprehensive Income
mostly attributable
to the
decrease in
the fair
value of
available-
for-sale investment
securities. These variances
were partially offset
by earnings generated
during 2021.
The Corporation
increase its
common stock dividend
twice during 2021,
increasing the quarterly
dividend rate from
$0.05 in the fourth
quarter of 2020
to $0.07 in
the first
quarter of
2021 and
$0.10 in
the fourth
quarter of
2021.
The Corporation
intends to continue
to pay
quarterly dividends
on
common
stock.
The
Corporation’s
common
stock
dividends,
including
the
declaration,
timing
and
amount,
remain
subject
to
the
consideration and approval by the Corporation’s
Board of Directors at the relevant times.
On April
26, 2021,
the Corporation
announced that
its Board
of Directors
approved a
stock repurchase
program, under
which the
Corporation may
repurchase up
to $300 million
of its outstanding
stock, commencing
in the second
quarter of
2021 through June
30,
2022.
Repurchases
under
the
program
may
be
executed
through
open
market
purchases,
accelerated
share
repurchases,
and/or
privately
negotiated
transactions
or
plans,
including
under
plans
complying
with
Rule
10b5-1
under
the
Exchange
Act.
The
Corporation’s
stock
repurchase
program
will
be
subject
to
various
factors,
including
the
Corporation’s
capital
position,
liquidity,
financial performance and
alternative uses of capital, stock
trading price, and
general market conditions.
The repurchase program may
be modified,
extended, suspended,
or terminated
at any
time at the
Corporation’s
discretion and
includes the
redemption of
the $36.1
million
in
outstanding
shares
of
the
Corporation’s
Series
A
through
E
Noncumulative
Perpetual
Monthly
Income
Preferred
Stock.
The Corporation’s
share repurchase program
does not obligate
it to acquire
any specific number
of shares.
As of December
31, 2021,
the
Corporation
had
remaining
authorization
to repurchase
approximately
$50
million
of common
stock under
the
stock repurchase
program.
During
the first
quarter
of 2022,
the Corporation
repurchased
3.4
million
shares of
common
stock for
the
remaining $50
million
authorized under the aforementioned
$300 million stock repurchase
program.
The Parent Company has
no operations and depends
on
dividends,
distributions
and
other
payments
from
its
subsidiaries
to
fund
dividend
payments,
stock
repurchases,
and
to
fund
all
payments on its obligations, including debt obligations.
Set forth below are First BanCorp.'s and FirstBank's regulatory capital
ratios as of December 31, 2021 and 2020:
Banking Subsidiary
To be well
capitalized -
thresholds
First BanCorp.
FirstBank
(1)
As of December 31,
2021
Total capital ratio (Total
capital to risk-weighted assets)
20.50%
20.23%
10.00%
CET1 capital ratio
17.80%
18.12%
6.50%
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)
17.80%
19.03%
8.00%
Leverage ratio
10.14%
10.85%
5.00%
Banking Subsidiary
To be well
capitalized -
thresholds
First BanCorp.
FirstBank
(1)
As of December 31, 2020
Total capital ratio (Total
capital to risk-weighted assets)
20.37%
19.91%
10.00%
CET1 capital ratio
17.31%
16.05%
6.50%
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)
17.61%
18.65%
8.00%
Leverage ratio
11.26%
11.92%
5.00%
(1)
As permitted by the regulatory capital framework, the Corporation
elected to delay for two years the day-one impact related to
the adoption of CECL on January 1, 2020
plus 25% of the change in the ACL from January 1, 2020 to
December 31, 2021. Such effects, will be phased
in at 25% per year beginning on January 1, 2022.
101
The
Corporation
and
FirstBank
compute
risk-weighted
assets
using
the
standardized
approach
required
by
U.S.
Basel
III
capital
rules (“Basel
III rules”).
The Basel
III rules
require the
Corporation to
maintain an
additional capital
conservation buffer
of 2.5%
of
additional
CET1 capital
to avoid
limitations
on both
(i) capital
distributions
(
e.g.
, repurchases
of
capital instruments,
dividends
and
interest
payments
on
capital
instruments),
and
(ii)
discretionary
bonus
payments
to
executive
officers
and
heads
of
major
business
lines.
Under
the
Basel
III
rules,
in
order
to
be
considered
adequately
capitalized
and
not
subject
to
the
above
noted
limitations,
the
Corporation is
required to
maintain: (i) a
minimum CET1
capital to risk-weighted
assets ratio of
at least 4.5%,
plus the 2.5%
“capital
conservation buffer,”
resulting in a required
minimum CET1 capital
ratio of at
least 7%; (ii) a
minimum ratio of
total Tier 1
capital to
risk-weighted assets of at least
6.0%, plus the 2.5%
capital conservation buffer,
resulting in a required minimum
Tier 1 capital ratio
of
8.5%;
(iii)
a
minimum
ratio
of
total
Tier
1
plus
Tier
2
capital
to
risk-weighted
assets
of
at
least
8.0%,
plus
the
2.5%
capital
conservation buffer,
resulting in
a required
minimum total
capital ratio
of 10.5%;
and (iv)
a required
minimum leverage
ratio of
4%,
calculated as the ratio of Tier 1 capital to average
on-balance sheet (non-risk adjusted) assets.
As part
of its
response to
the impact
of COVID-19,
on March
31, 2020,
the federal
banking agencies
issued an
interim final
rule
that
provided
the
option
to
temporarily
delay
the
effects
of
CECL
on
regulatory
capital
for
two
years,
followed
by
a
three-year
transition period.
The interim final
rule provides that,
at the election
of a qualified
banking organization,
the initial impact
to retained
earnings
related
to
the
adoption
of
CECL
plus 25%
of
the
change
in
the
ACL
(excluding
PCD
loans)
from
January
1,
2020
to
December
31,
2021
will
be
delayed
for
two
years
and
phased-in
at 25%
per
year
beginning
on
January
1,
2022
over
a
three-year
period,
resulting
in
a
total
transition
period
of
five
years.
Accordingly,
as
of
December
31,
2021,
the
capital
measures
of
the
Corporation and
the Bank
shown in the
table above
excluded $64.8 million
that represents the
initial impact
to retained
earnings plus
25% of the increase in the ACL (as defined in the interim final rule)
from January 1, 2020 to December 31, 2021. The federal financial
regulatory agencies may
take other measures
affecting regulatory capital
to address the COVID-19
pandemic, although the
nature and
impact of such measures cannot be predicted at this time.
The tangible common
equity ratio and
tangible book value
per common share
are non-GAAP financial
measures generally used
by
the
financial
community
to
evaluate
capital
adequacy.
Tangible
common
equity
is
total equity
less
preferred
equity,
goodwill,
core
deposit intangibles,
purchased credit card
relationship intangible
assets and insurance
customer relationship
intangible asset. Tangible
assets
are
total
assets
less
intangible
assets
such
as
goodwill,
core
deposit
intangibles,
purchased
credit
card
relationships
and
insurance customer asset relationships. See “Basis of Presentation”
below for additional information.
102
The
following
table
is
a
reconciliation
of
the
Corporation’s
tangible
common
equity
and
tangible
assets,
non-GAAP
financial measures, to total equity and total assets, respectively,
as of December 31, 2021 and 2020, respectively:
December 31,
December 31,
(In thousands, except ratios and per share information)
2021
2020
Total equity
- GAAP
$
2,101,767
$
2,275,179
Preferred equity
-
(36,104)
Goodwill
(38,611)
(38,632)
Purchased credit card relationship intangible
(1,198)
(4,733)
Core deposit intangible
(28,571)
(35,842)
Insurance customer relationship intangible
(165)
(318)
Tangible common
equity
$
2,033,222
$
2,159,550
Total assets - GAAP
$
20,785,275
$
18,793,071
Goodwill
(38,611)
(38,632)
Purchased credit card relationship intangible
(1,198)
(4,733)
Core deposit intangible
(28,571)
(35,842)
Insurance customer relationship intangible
(165)
(318)
Tangible assets
$
20,716,730
$
18,713,546
Common shares outstanding
201,827
218,235
Tangible common
equity ratio
9.81%
11.54%
Tangible book
value per common share
$
10.07
$
9.90
The Banking Law
of the Commonwealth of
Puerto Rico requires that
a minimum of 10%
of FirstBank’s
net income for the
year be
transferred
to a
legal surplus
reserve
until such
surplus
equals the
total of
paid-in-capital on
common and
preferred stock.
Amounts
transferred
to
the
legal
surplus
reserve
from
retained
earnings
are
not
available
for
distribution
to
the
Corporation,
including
for
payment
as dividends
to the
stockholders,
without
the prior
consent
of the
Puerto Rico
Commissioner
of Financial
Institutions.
The
Puerto Rico Banking Law
provides that, when the
expenditures of a Puerto
Rico commercial bank are
greater than receipts, the excess
of
the
expenditures
over
receipts
must
be
charged
against
the
undistributed
profits
of
the
bank,
and
the
balance,
if
any,
must
be
charged against
the legal
surplus reserve,
as a
reduction thereof.
If the
legal surplus
reserve is
not sufficient
to cover
such balance
in
whole or
in part,
the outstanding
amount must
be charged
against the
capital account
and the
Bank cannot
pay dividends
until it
can
replenish the
legal surplus
reserve to
an amount
of at
least 20% of
the original
capital contributed.
During the
years ended
December
31, 2021 and
2020, the Corporation
transferred $28.3 million
and $11.7
million, respectively,
to the legal
surplus reserve. FirstBank’s
legal
surplus
reserve,
included
as
part
of
retained
earnings
in
the
Corporation’s
consolidated
statements
of
financial
condition,
amounted to $137.6 and $109.3 million as of December 31, 2021
and 2020, respectively.
103
First
BanCorp
manages
its
asset/liability
position
to
limit
the
effects
of
changes
in
interest
rates
on
net
interest
income
and
to
maintain a stable
level of profitability under
varying interest rate scenarios.
The MIALCO oversees
interest rate risk, and,
in doing so,
the
MIALCO assesses,
among
other things,
current and
expected conditions
in world
financial markets,
competition and
prevailing
rates in the local deposit market, liquidity,
the pipeline of loan originations, securities market values, recent
or proposed changes to the
investment
portfolio,
alternative
funding
sources and
related
costs,
hedging
and
the possible
purchase
of derivatives,
such
as swaps
and caps, and any
tax or regulatory issues
which may be pertinent
to these areas. The
MIALCO approves funding
decisions in light of
the Corporation’s overall strategies
and objectives.
On a monthly
and/or 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 and
assumes upward and
downward yield curve
shifts. The rate
scenarios considered in
these simulations reflect
gradual
upward
and
downward
interest
rate
movements
of
200
basis
points
during
a
twelve-month
period.
The
Corporation
carries
out
the
simulations in two ways:
(1) Using a static balance sheet, as the Corporation had on the simulation date,
and
(2) Using a dynamic balance sheet based on recent patterns and current
strategies.
The balance
sheet is
divided into
groups of
assets and
liabilities by
maturity or
re-pricing structure
and their
corresponding interest
yields and
costs. As interest
rates rise or
fall, these
simulations incorporate
expected future
lending rates,
current and
expected future
funding sources
and costs,
the possible
exercise of
options, changes
in prepayment
rates, deposit
decay and
other factors,
which may
be important in projecting net interest income.
The Corporation uses
a simulation model
to project future movements
in the Corporation’s
balance sheet and
income statement. The
starting point of the projections corresponds to the actual values on
the balance sheet on the date of the simulations.
These
simulations
are
highly complex
and
are based
on many
assumptions
that are
intended
to reflect
the general
behavior
of
the
balance sheet components over
the period in question.
It is unlikely that actual
events will match these
assumptions in most cases.
For
this reason,
the results of
these forward-looking
computations are only
approximations of the
true sensitivity of
net interest income
to
changes in
market interest
rates. The
Corporation uses
several benchmarks
and market rate
curves in
the modeling
process, primarily
the
LIBOR/SWAP
curve,
Prime
Rate,
Treasury,
FHLB
rates,
brokered
CDs
rates,
repurchase
agreements
rates
and
the
30
years
mortgage commitment rate.
As
of
December
31,
2021,
the
Corporation
forecasted
the
12-month
net
interest
income
assuming
January
31,
2022
interest
rate
curves remain constant. Then,
net interest income was estimated
under rising and falling rates
scenarios. For rising rates
scenarios, the
Corporation
assumed
a
gradual
(ramp)
parallel
upward
shift
of
the
yield
curve
during
the
first
twelve
months
(the
“+200
ramp”
scenario). Conversely,
for the falling rates scenario,
it assumed a gradual (ramp) parallel downward
shift of the yield curves during
the
first
twelve
months
(the
“-200 ramp”
scenario).
However,
given
the current
low levels
of
interest
rates
and rate
compression
in
the
short term, along
with the current yield
curve slope, a
full downward shift
of 200 basis points
would represent an
unrealistic scenario.
Therefore,
under
the
falling
rate
scenario,
rates
move
downward
up
to
200
basis
points,
but
without
reaching
zero.
The
resulting
scenario shows interest rates close to zero in most cases, reflecting a flattening
yield curve instead of a parallel downward scenario.
The
Libor/Swap
curve
for
January
2022,
as
compared
to
December
2020,
reflected
a
27
basis
points
increase
in
the
short-term
horizon, between
one to 12
months, while market
rates increased by
126 basis points
in the medium
term, that is
between two
to five
years. In the
long-term, that is
over a five-year-time
horizon, market rates
increased by 93
basis points, as
compared to December
31,
2020
levels.
A
similar
pattern
on
market
rates
changes
were
observed
in
the
Treasury
curve
for
the
short,
medium,
and
long-term
horizons mentioned above with
a 26 basis points increase
in the short-term horizon, 123
basis points increase in the
medium term, and
65 basis points increase in the long-term horizon.
104
exclude non-cash changes in the fair value of derivatives:
December 31, 2021
December 31, 2020
Net Interest Income Risk
Net Interest Income Risk
(Projected for the next 12 months)
(Projected for the next 12 months)
Static Simulation
Growing Balance Sheet
Static Simulation
Growing Balance Sheet
(Dollars in millions)
Change
% Change
Change
% Change
Change
% Change
Change
% Change
+ 200 bps ramp
$
34.5
4.81
%
$
39.1
5.17
%
$
32.3
4.53
%
$
36.0
4.96
%
- 200 bps ramp
$
(12.2)
(1.70)
%
$
(13.5)
(1.78)
%
$
(12.1)
(1.69)
%
$
(13.9)
(1.91)
%
The Corporation continues
to manage
its balance
sheet structure
to control
and limit
the overall
interest rate
risk. As
of December
31,
2021,
the
simulations
showed
that
the
Corporation
continues
to
maintain
an
asset-sensitive
position.
The
Corporation
has
continued repositioning the balance
sheet and improving the
funding mix, mainly driven
by increasing the average
balance of interest-
bearing deposits
with low-rate
elasticity and non
-interest-bearing deposits,
and reductions
in brokered
CDs, time deposits,
and FHLB
Advances.
The above-mentioned
growth in
deposits, along
with proceeds
from loan
repayments, U.S.
agency bonds
that matured
or
were
called
prior
to
maturity
and
prepayments
of
US
agency
MBS,
that
have
been
reinvested
contributed
to
fund
the
continued
increase in the investment securities portfolio, while maintaining higher
liquidity levels.
balances
with
short
term
repricing,
an
increase
in
the
investment
securities
portfolio
balance,
lower
prepayment
cash
flows
in
the
investment securities portfolio
due to the level
of securities purchased
during 2021 under a
low interest rate
environment as compared
to the higher
rates forecasted in
the short, medium
and long-term tenors,
and lower balances in
certificate of deposits.
The decrease in
net interest
income sensitivity
for the
-200bps ramp
under the
growing balance
sheet scenario
was driven
by the
current low
level of
interest
rates
that
resulted
in
reduced
prepayments
in
the
investment
securities
portfolio
lower
impact
from
short
term
repricing
categories.
Also, as
a result
of this
lower
rate environment,
near
floor levels,
a full
down parallel
movement of
-200bps will
not be
possible.
the
next
12
months
under
a
growing
balance
sheet
scenario
was
estimated
to
increase
by
$39.1
million
in
the
rising
rate
scenario,
compared to an
estimated increase of
$36.0 million as
of December 31,
2020.
Under the falling
rate, growing balance
sheet scenario,
the
net
interest
income
was
estimated
to
decrease
by
$13.5
million,
compared
to
an
estimated
decrease
of
$13.9
million
as
of
December 31, 2020,
reflecting the effect
of current low levels
of market interest
rates on the base
scenario and the model
assumptions
for the falling rate scenarios described above (i.e., no negative interest rates
modeled).
105
Derivatives
First
BanCorp.
uses derivative
instruments
and
other
strategies
to
manage
its exposure
to
interest
rate
risk
caused
by
changes
in
interest rates beyond management’s
control.
The following summarizes major strategies, including derivative activities
that the Corporation uses in managing interest rate risk:
Interest Rate
Cap Agreements
a contractual
rate. The
value of
the interest
rate cap
increases as
the reference
interest rate
rises. The
Corporation enters
into interest
rate cap agreements for protection from rising interest rates.
Forward Contracts
“regular-way”
security
trades.
Regular-way
security
trades
are
contracts
that
have
no
net
settlement
provision
and
no
market
mechanism
to
facilitate
net
settlement
and
that
provide
for
delivery
of
a
security
within
the
timeframe
generally
established
by
regulations
or
conventions
in
the
market-place
or
exchange
in
which
the
transaction
is
being
executed.
The
forward
sales
are
considered derivative
instruments that
need to be
marked-to-market. The
Corporation uses
these securities
to economically
hedge the
FHA/VA
residential
mortgage
loan
securitizations
of
the
mortgage-banking
operations.
The
Corporation
also
reports
as
forward
contracts the
mandatory mortgage
loan sales
commitments entered
into with
GSEs that
require or
permit net
settlement via
a pair-off
transaction
or
the
payment
of
a
pair-off
fee.
Unrealized
gains
(losses)
are
recognized
as
part
of
mortgage
banking
activities
in
the
consolidated statements of income.
Interest
Rate
Lock
Commitments
credit to
a borrower
under certain
specified terms
and conditions
in which
the interest
rate and
the maximum
amount of
the loan
are
set prior
to funding.
Under each
agreement, the
Corporation commits
to lend
funds to
a potential
borrower generally
on a
fixed rate
basis, regardless of whether interest rates change in the market.
Interest rate
swaps
agreement between
two entities to
exchange cash flows
in the future.
The agreements acquired
from BSPR consist
of the Corporation
offering
borrower-facing
derivative
products using
a “back-to-back”
structure in
which the
borrower-facing
derivative transaction
is
paired with
an identical,
offsetting transaction
with an
approved dealer-counterparty.
By using
a back-to-back
trading structure,
both
the commercial
borrower and
the Corporation
are largely
insulated from
market risk
and volatil
ity.
The agreements
set the
dates on
which the cash flows
will be paid and
the manner in which the
cash flows will be
calculated. The fair value
s
of interest rate swaps
are
recorded as components
of other assets
in the Corporation’s
consolidated statements
of financial condition.
Changes in the
fair values
of
interest
rate
swaps,
which
occur
due
to
changes
in
interest
rates,
are
recorded
in
the
consolidated
statements
of
income
as
a
component of interest income on loans.
For detailed information regarding
the volume of derivative activities (
e.g.
, notional amounts), location
and fair values of derivative
instruments
in
the
consolidated
statements
of
financial
condition
and
the
amount
of
gains
and
losses
reported
in
the
consolidated
statements of
income, see
Note 34
- Derivative
Instruments and
Hedging
Activities, to
the audited
consolidated financial
statements
included in Item 8 of this Annual Report on Form 10-K.
106
The following tables summarize the fair value changes in the Corporation’s
derivatives, as well as the sources of the fair values, as of
or for the indicated dates or periods:
Asset Derivatives
Liability Derivatives
Year
Ended
Year
Ended
(In thousands)
December 31, 2021
December 31, 2021
Fair value of contracts outstanding at the beginning of the year
$
2,482
$
(1,920)
Changes in fair value during the year
(977)
742
Fair value of contracts outstanding as of December 31, 2021
$
1,505
$
(1,178)
Sources of Fair Value
Payment due by Period
Maturity
Less Than
One Year
Maturity
1-3 Years
Maturity
3-5 Years
Maturity in
Excess of 5
Years
Total Fair
Value
(In thousands)
As of December 31, 2021
Pricing from observable market inputs
- Asset Derivatives
$
399
$
8
$
-
$
1,098
$
1,505
Pricing from observable market inputs - Liability Derivatives
(78)
(8)
-
(1,092)
(1,178)
$
321
$
-
$
-
$
6
$
327
Derivative instruments,
such as
interest rate
caps, are
subject to
market risk.
As is
the case
with investment
securities, the
market
value
of
derivative
instruments
is
largely
a
function
of the
financial
market’s
expectations
regarding
the future
direction
of
interest
rates.
Accordingly,
current
market
values
are
not
necessarily
indicative
of
the
future
impact
of
derivative
instruments
on
earnings.
This will depend, in part, on the level of interest rates, as well as the expectations
for rates in the future.
As
of
December
31,
2021
and
2020,
the
Corporation
considered
all
of
its
derivative
instruments
to
be
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
that it
considers
to be
of good
credit
standing,
enters
into
master
netting
agreements
whenever
possible
and,
when
appropriate,
obtains
collateral.
Master
netting
agreements
incorporate
rights
of
set-off
that
provide
for
the
net
settlement
of
contracts
with
the
same
counterparty
in
the
event
of
default.
107
Credit Risk
Management
First BanCorp.
is subject to credit
risk mainly with
respect to its portfolio
of loans receivable
and off-balance-sheet
instruments,
mainly
loan commitments.
Loans receivable
represents loans
that First BanCorp.
holds for investment
and, therefore,
First BanCorp. is at risk for
the term of the loan. Loan commitments represent commitments
to extend credit, subject to specific conditions,
for specific amounts and
maturities. These commitments
may expose the Corporation to credit risk and are subject
to the same review and approval process as for
loans made by
the Bank. See
“Liquidity Risk and Capital Adequacy” above for
further details. The Corporation manages its credit risk
through its
credit policy,
underwriting,
independent
loan review
and quality
control
procedures,
statistical
analysis,
comprehensive
financial
analysis,
and
established
management
committees.
The
Corporation
also
employs
proactive
collection
and
loss
mitigation
efforts.
Furthermore, personnel
performing structured
loan workout functions are responsible
for mitigating defaults and minimizing
losses upon
default
within
each
region
and
for
each
business
segment. In
the
case
of
the
commercial and
industrial, commercial
mortgage and
construction
loan portfolios,
the Special Asset
Group (“SAG”)
focuses on strategies
for the accelerated
reduction of
non-performing
assets
through note
sales, short sales,
loss mitigation programs,
and sales of OREO. In addition to the management
of the resolution process
for
problem loans, the SAG oversees collection
efforts for all loans to prevent migration to the nonaccrual and/or adversely
classified status.
The SAG
utilizes
relationship
officers,
collection
specialists
and attorneys.
The Corporation
may also
have risk
of default
in the securities
portfolio.
The securities
held
by the Corporation
are principally
fixed-rate
U.S. agencies MBS and U.S. Treasury and agencies securities.
Thus, a substantial portion
of these instruments is backed
by mortgages, a
guarantee
of a U.S.
GSE or the
full faith
and credit
of the U.S.
government.
Management, consisting of the
Corporation’s Commercial Credit Risk
Officer, Retail
Credit Risk Officer,
Chief Credit Officer,
and
other senior executives, has the primary responsibility
for setting strategies to achieve the Corporation’s credit risk goals and objectives.
Management
has documented
these goals
and objectives
in the
Corporation’s
Credit Policy.
Allowance
for Credit
Losses and
Non-performing
Assets
Allowance
for Credit
Losses
for Loans
and Finance
Leases
The ACL
for loans
and finance
leases represents
the estimate
of the
level of
reserves appropriate
to absorb
expected credit
losses
over the estimated life of
the loans. The amount of the allowance
is determined using relevant available
information, from internal and
external sources, relating
to past events, current
conditions, and reasonable
and supportable forecasts.
Historical credit loss experience
is
a
significant
input
for
the
estimation
of
expected
credit
losses,
as
well
as
adjustments
to
historical
loss
information
made
for
differences in current loan-specific
risk characteristics, such as differences
in underwriting standards, portfolio mix,
delinquency level,
or
term.
Additionally,
the
Corporation’s
assessment
involves
evaluating
key
factors,
which
include
credit
and
macroeconomic
indicators,
such as
changes in
unemployment
rates, property
values, and
other relevant
factors to
account for
current and
forecasted
market conditions
that are
likely to
cause estimated
credit losses over
the life
of the
loans to differ
from historical
credit losses.
Such
factors are
subject to
regular review
and may
change to
reflect updated
performance trends
and expectations,
particularly in
times of
severe stress. The
process includes judgments
and quantitative elements
that may be
subject to significant
change. The ACL
for loans
and finance leases is reviewed at least on a quarterly basis as part of the Corporation’s
continued evaluation of its asset quality.
As
of
December
31,
2021,
the
ACL
for
loans
and
finance
leases
was
$269.0
million,
down
$116.9
million
from
December
31,
2020.
The
decrease
in
the
ACL
for
loans
and
finance
leases
primarily
reflects
an
improvement
in
the
outlook
of
macroeconomic
variables to
which the
reserve is
correlated,
as well
as charge-offs
taken against
the previously-established
$20.9 million
reserve for
residential
mortgage
nonaccrual
loans
sold
in
the
third
quarter
of
2021.
Refer
to
Note
1
–
Nature
of
Business
and
Summary
of
Significant Accounting Policies, in the audited consolidated financial
statements included in Item 8 of this Annual Report on
Form 10-
K, for additional information for description of the methodologies used
by the Corporation to determine the ACL.
The ratio
of the
ACL for
loans and
finance leases
to total
loans held
for investment
decreased to
2.43% as
of December
31, 2021,
compared to
3.28% as
of December
31, 2020.
On a
non-GAAP basis,
excluding SBA
PPP loans,
the ratio
of the
ACL for
loans and
finance leases to adjusted total
loans held for investment was 2.46%
as of December 31, 2021, compared
to 3.39% as of December 31,
2020.
For
the
definition
and
reconciliation
of
this
non-GAAP
financial
measure,
refer
to
the
discussion
in
“Basis
of
Presentation”
below. An explanation
of the change for each portfolio follows:
●
The
ACL
to
total
loans
ratio
for
the
residential
mortgage
portfolio
decreased
from
3.42%
as
of
December
31,
2020
to
2.51% as of
December 31, 2021.
The reduction is mainly
related to the bulk
sale of residential mortgage
nonaccrual in the
third quarter, as well as reductions related to
the improvement in the outlook of macroeconomic variables.
●
The
ACL to
total
loans
ratio
for
the
commercial
mortgage
portfolio
decreased
from
4.90% as
of
December
31,
2020
to
2.43%
as of December 31, 2021,
primarily reflecting an improvement
in the outlook of macroeconomic
variables to which
108
the
reserve
is
correlated,
including
improvements
in
the
commercial
real
estate
price
index
and
unemployment
rate
forecasts.
●
The ACL to total
loans ratio for the
commercial and industrial portfolio
increased slightly from 1.18%
as of December 31,
2020
to
1.19%
as
of
December
31,
2021.
On
a
non-GAAP
basis,
excluding
SBA
PPP
loans,
the
ratio
of
the
ACL
for
commercial
and
industrial
loans
to
adjusted
total
commercial
and
industrial
loans
held
for
investment
was
1.25%
as
of
December 31, 2021, compared
to 1.36% as of December
31, 2020, primarily reflecting the
effect of an improvement
in the
outlook
of
macroeconomic
variables
to
which
the
reserve
is
correlated,
including
improvements
in
unemployment
rate
forecasts and overall continued growth of gross domestic product
in the U.S. mainland.
●
The ACL
to total
loans ratio
for the
construction loan
portfolio increased
from 2.53%
as of
December 31,
2020 to
2.91%
as
of
December
31,
2021,
primarily
reflecting
the
effect
of
updated
borrowers’
financial
metrics,
partially
offset
by
the
release of the
reserve previously-established
for the $6.0
million nonaccrual construction
loan repaid in
the first quarter
of
2021.
●
The ACL to
total loans ratio
for the consumer
loan portfolio decreased
from 4.33% as
of December
31, 2020
to 3.57% as
of
December
31,
2021,
primarily
related
to
improvements
in
macroeconomic
variables,
as
well
as
the
shift
in
the
composition
of
this
portfolio
that
experienced
increases
in auto
loans
and
finance
leases
and
reductions
in
personal
and
small loan portfolios that carried a higher ACL coverage.
The ratio
of the
total ACL
for loans
and finance
leases to
nonaccrual
loans held
for investment
was 242.99%
as of
December 31,
2021, compared to 188.16% as of December 31, 2020.
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 Corporation’s
loan portfolio and
the value of
the collateral supporting
the transactions are
dependent upon the
performance of and
conditions
within each
specific area’s
real estate
market. The
Corporation believes
it sets
adequate loan-to-value
ratios following
its
regulatory and credit policy standards.
As shown
in the
following
table, the
ACL for
loans and
finance leases
amounted
to $269.0
million as
of December
31,
2021, or
2.43% of
total loans,
compared with
$385.9 million,
or 3.28%
of total
loans, as
of December
31, 2020.
See “Results
of Operation
-
Provision for Credit Losses” above for additional information.
109
The following table sets forth an analysis of the activity in the ACL for loans and finance
leases during the periods indicated:
Year Ended December
31,
2021
2020
2019
2018
2017
(Dollars in thousands)
Allowance for credit losses for loans and finance leases,
beginning of year
$
385,887
$
155,139
$
196,362
$
231,843
$
205,603
Impact of adopting CECL
-
81,165
-
-
-
Initial allowance on PCD loans
-
28,744
-
-
-
Provision for credit losses - (benefit) expense:
Residential mortgage
(1)
(16,957)
22,427
14,091
13,202
50,744
Commercial mortgage
(2)
(55,358)
81,125
(1,697)
23,074
30,054
Commercial and Industrial
(3)
(8,549)
6,627
(13,696)
(8,440)
1,018
Construction
(4)
(1,408)
2,105
(1,496)
7,032
4,835
Consumer and finance leases
(5)
20,552
56,433
43,023
24,385
57,603
Total provision for credit losses
- (benefit) expense
(6)
(61,720)
168,717
40,225
59,253
144,254
Charge-offs:
Residential mortgage
(33,294)
(11,017)
(22,742)
(24,775)
(28,186)
Commercial mortgage
(1,494)
(3,330)
(15,088)
(23,911)
(39,092)
Commercial and Industrial
(1,887)
(3,634)
(7,206)
(9,704)
(19,855)
Construction
(87)
(76)
(391)
(8,296)
(3,607)
Consumer and finance leases
(43,948)
(46,483)
(52,160)
(50,106)
(44,030)
Total charge offs
(80,710)
(64,540)
(97,587)
(116,792)
(134,770)
Recoveries:
Residential mortgage
4,777
1,519
2,663
3,392
2,437
Commercial mortgage
281
1,936
398
7,925
270
Commercial and Industrial
6,776
3,192
3,554
1,819
5,755
Construction
163
184
665
334
732
Consumer and finance leases
13,576
9,831
8,859
8,588
7,562
Total recoveries
25,573
16,662
16,139
22,058
16,756
Net charge-offs
(55,137)
(47,878)
(81,448)
(94,734)
(118,014)
Allowance for credit losses for loans and finance leases,
end of year
$
269,030
$
385,887
$
155,139
$
196,362
$
231,843
Allowance for credit losses for loans and finance leases to
year-end total
loans held for investment
2.43%
3.28%
1.72%
2.22%
2.62%
Net charge-offs to average loans outstanding
during the year
0.48%
0.48%
0.91%
1.09%
1.33%
Provision for credit losses - (benefit) expense for loans and
finance leases to net charge-offs
during the year
-1.12x
3.52x
0.49x
0.63x
1.22x
Provision for credit losses - (benefit) expense for loans and
finance leases to net charge-offs
during the year, excluding the effect of
the hurricane-related reserve releases/charges
in 2019, 2018 and 2017 (7)
-1.12x
3.52x
0.57x
0.80x
0.62x
(1)
Net of a $0.4 million net loan loss reserve release for the year ended December 31,
2018 associated with revised estimates of the effects of Hurricanes Irma and Maria. For
the year ended December
31, 2017, includes a charge to the provision of $14.6 million associated with the effects
of Hurricanes Irma and Maria.
(2)
Net of a $1.9 million net loan loss reserve release for the year ended December 31,
2018 associated with revised estimates of the effects of Hurricanes Irma and Maria. For
the year ended December
31, 2017, includes a charge to the provision of $12.1 million associated with the effects
of Hurricanes Irma and Maria.
(3)
Net of loan loss reserve releases
of $3.4 million and $5.5
million for the years ended December
31, 2019 and 2018, respectively,
associated with revised estimates of the effects
of Hurricanes Irma
and Maria. For the year ended December 31, 2017, includes a charge to the provision of $15.9 million
associated with the effects of Hurricanes Irma and Maria.
(4)
Net of a $0.7 million net loan loss reserve release for the year ended December 31,
2018 associated with revised estimates of the effects of Hurricanes Irma and Maria. For
the year ended December
31, 2017, includes a charge to the provision of $3.7 million associated with the effects
of Hurricanes Irma and Maria.
(5)
Net of loan reserve releases of
$3.0 million and $8.4 million
for the years ended December 31,
2019 and 2018, respectively,
associated with revised estimates of
the effects of Hurricanes
Irma and
Maria. For the year ended December 31, 2017, includes a charge to the provision of $25.0
million associated with the effects of Hurricanes Irma and Maria.
(6)
Net of loan reserve releases of $6.4 million and $16.9
million for the years ended December 31, 2019 and 2018,
respectively, associated with revised estimates
of the effects of Hurricanes Irma and
Maria. For the year ended December 31, 2017, includes a provision of $71.3 million associated with the effects
of Hurricanes Irma and Maria.
(7)
Non-GAAP financial measure, see "Basis of Presentation" below for a reconciliation of this measure.
110
category and the percentage of loan balances in each category to the total of
such loans as of the dates indicated:
As of December 31,
2021
2020
2019
2018
2017
Amount
Loan
portfolio
to total
loans
Amount
Loan
portfolio
to total
loans
Amount
Loan
portfolio
to total
loans
Amount
Loan
portfolio
to total
loans
Amount
Loan
portfolio
to total
loans
(Dollars in thousands)
Residential mortgage loans
$
74,837
27%
$
120,311
30%
$
44,806
33%
$
50,794
36%
$
58,975
37%
Commercial mortgage loans
52,771
20%
109,342
19%
39,194
16%
55,581
17%
48,493
18%
Construction loans
4,048
1%
5,380
2%
2,370
1%
3,592
1%
4,522
1%
Commercial and Industrial loans
34,284
26%
37,944
27%
15,198
25%
32,546
24%
48,871
24%
Consumer loans and finance leases
103,090
26%
112,910
22%
53,571
25%
53,849
22%
70,982
20%
$
269,030
100%
$
100%
$
100%
$
100%
$
100%
December 31, 2021 and 2020 by loan category:
As of December 31, 2021
Residential
Mortgage Loans
Commercial
Mortgage Loans
C&I Loans
Consumer and
Finance Leases
Construction
Loans
(Dollars in thousands)
Total
Total loans held for investment:
$
2,978,895
$
2,167,469
$
2,887,251
$
138,999
$
2,888,044
$
11,060,658
74,837
52,771
34,284
4,048
103,090
269,030
2.51
%
2.43
%
1.19
%
2.91
%
3.57
%
2.43
%
As of December 31, 2020
Residential
Mortgage Loans
Commercial
Mortgage Loans
C&I Loans
Consumer and
Finance Leases
Construction
Loans
(Dollars in thousands)
Total
Total loans held for investment:
$
3,521,954
$
2,230,602
$
3,202,590
$
212,500
$
2,609,643
$
11,777,289
120,311
109,342
37,944
5,380
112,910
385,887
3.42
%
4.90
%
1.18
%
2.53
%
4.33
%
3.28
%
111
Allowance
for Credit
Losses for
Unfunded
Loan Commitments
The Corporation
estimates
expected
credit losses
over the
contractual
period in
which the
Corporation
is exposed
to credit
risk as a
result
of a contractual obligation to extend credit, such as pursuant to unfunded loan commitments
and standby letters of credit for commercial
and
construction loans, unless
the
obligation is
unconditionally cancellable by
the
Corporation. The
ACL
for
off-balance sheet
credit
exposures is
adjusted as a
provision
for credit loss
expense. As
of December 31,
2021, the ACL for
off-balance
sheet credit
exposures was
$1.5
million, down
$3.6
million from
$5.1
million as
of
December 31,
2020.
The
decrease was
mainly
related to
improvements in
forecasted
macroeconomic
variables.
Allowance for Credit Losses for Held-to-Maturity
Debt Securities
As of December
31, 2021, the
held-to-maturity
securities
portfolio
consisted
of Puerto Rico
municipal
bonds. As of
December 31,
2021,
the ACL for
held-to-maturity
debt securities
was $8.6
million,
down $0.2
million from
$8.8 million
as of December
31, 2020.
The decrease
was mainly
related to
improvements in forecasted macroeconomic variables and the
repayment of certain
bonds during 2021,
partially
offset by
increases
related
to changes
in some
issuers’
financial
metrics
based on
their most
recent financial
statements.
Allowance
for Credit
Losses for
Available-for-Sale
Debt Securities
As of December 31, 2021, the
ACL for available-for-sale debt securities
was $1.1 million, down $0.2 million from $1.3 million as of
December
31, 2020.
Nonaccrual Loans and Non-performing Assets
Total
non-performing assets
consist of
nonaccrual loans
(generally loans
held
for
investment or
loans
held
for
sale
on
which
the
recognition
of interest
income was
discontinued
when the
loan became
90 days past
due or earlier
if the full
and timely
collection
of interest
or principal
is uncertain),
foreclosed
real estate and
other repossessed
properties,
and non-performing
investment
securities,
if any. When a
loan is placed in
nonaccrual status, any interest previously
recognized and not collected is reversed and charged against interest income.
Cash payments received
are recognized when
collected in accordance
with the contractual
terms of the loans. The principal
portion of the
payment is used to
reduce the principal balance of the loan, whereas the
interest portion is recognized on a cash basis
(when collected).
However,
when
management believes
that
the
ultimate
collectability of
principal is
in
doubt,
the
interest
portion
is
applied
to
the
outstanding principal.
The risk exposure of this portfolio is diversified as to individual borrowers and industries, among other factors.
In
addition,
a large portion
is secured
with real
estate collateral.
Nonaccrual Loans Policy
Residential Real Estate Loans
interest and principal for a period of 90 days or more.
Commercial
and
Construction
Loans
construction loans) in nonaccrual
status when it has not
received interest and principal
for a period of 90
days or more or when
it does
not expect to collect all of the principal or interest due to deterioration in the financial
condition of the borrower.
Finance Leases
a period of 90 days or more.
Consumer Loans
for a period of 90 days or more. Credit card loans continue to accrue finance
charges and fees until charged-off at 180
days delinquent.
Purchased Credit
Deteriorated Loans
— For PCD loans
the nonaccrual status
is determined in
the same manner
as for other loans,
except for PCD loans that
prior to the adoption of
CECL were classified as purchased
credit impaired (“PCI”) loans
and accounted for
under
ASC Subtopic
310-30, “Receivables
– Loans
and Debt
Securities Acquired
with Deteriorated
Credit Quality”
(ASC Subtopic
310-30). As allowed by CECL,
the Corporation elected to maintain
pools of loans accounted for under
ASC Subtopic 310-30 as “units
of
accounts,”
conceptually
treating
each
pool
as
a
single
asset.
Regarding
interest
income
recognition,
the
prospective
transition
approach
for
PCD
loans
was
applied
at
a
pool
level
which
froze
the
effective
interest
rate
of
the
pools
as
of
January
1,
2020.
According
to
regulatory
guidance,
the
determination
of
nonaccrual
or
accrual
status
for
PCD
loans
with
respect
to
which
the
Corporation
has
made
a
policy
election
to
maintain
previously
existing
pools
upon
adoption
of
CECL
should
be
made
at
the
pool
level,
not
the
individual
asset
level.
In
addition,
the
guidance
provides
that
the
Corporation
can
continue
accruing
interest
and
not
report
the PCD
loans as
being
in nonaccrual
status if
the following
criteria
are met:
(i) the
Corporation
can reasonably
estimate the
timing and amounts of
cash flows expected to
be collected, and (ii)
the Corporation did not
acquire the asset primarily
for the rewards
of ownership
of the
underlying collateral,
such as
the use
in operations
or improving
the collateral
for resale.
Thus, the
Corporation
continues to exclude these pools of PCD loans from nonaccrual loan statistics.
112
Other Real Estate Owned
OREO acquired
in settlement of
loans is carried
at fair value
less estimated costs
to sell off
the real estate.
Appraisals are obtained
periodically, generally
on an annual basis.
Other Repossessed Property
The
other
repossessed
property
category
generally
included
repossessed
boats
and
autos
acquired
in
settlement
of
loans.
Repossessed boats and autos are recorded at the lower of cost or estimated fair
value.
Other Non-Performing Assets
This
category
consisted
of a
residential
pass-through
MBS
issued
by
the
PRHFA placed
in
non-performing
status
in
the
second
quarter of 2021 based on the delinquency status of the underlying second
mortgage loans.
Loans Past-Due 90 Days and Still Accruing
These are accruing loans
that are contractually delinquent
90 days or more. These
past-due loans are either
current as to interest but
delinquent
as to
the payment
of
principal
or are
insured
or guaranteed
under
applicable FHA,
VA
,
or
other
government-guaranteed
programs for residential mortgage loans. Furthermore,
as required by instructions in regulatory reports, loans past due
90 days and still
accruing
include
loans
previously
pooled
into
GNMA
securities
for
which
the
Corporation
has
the
option
but
not
the
obligation
to
repurchase loans
that meet
GNMA’s
specified delinquency
criteria (
e.g.
, borrowers
fails to
make any
payment for
three consecutive
months).
For accounting
purposes, these
GNMA loans
subject to
the repurchase
option are
required to
be reflected
on the
financial
statements with an offsetting liability.
TDRs are
classified
as either
accrual
or nonaccrual
loans. A
loan
on nonaccrual
status and
restructured
as a
TDR will
remain
on
nonaccrual
status until
the borrower
has proven
the ability
to perform
under the
modified structure,
generally
for a
minimum
of six
months,
and there
is evidence
that
such payments
can and
are
likely
to continue
as agreed.
The Corporation
considers performance
prior to the restructuring, or significant events that coincide with the
restructuring, in assessing whether the borrower can meet the new
terms,
which
may
result
in
the
loan
being
returned
to
accrual
status
at
the
time
of
the
restructuring
or
after
a
shorter
performance
period. If
the borrower’s
ability to
meet the
revised payment
schedule is
uncertain, the
loan remains
classified as
a nonaccrual
loan.
For a discussion of permissible
loan modifications under the
amended CARES Act of 2020
for loans otherwise eligible for
TDR, refer
to
Note
1
–
Nature
of
Business
and
Summary
of
Significant
Accounting
Policies,
to
the
audited
consolidated
financial
statements
included in Item 8 of this Form 10-K.
113
The following table presents non-performing assets as of the dates indicated:
December 31,
December 31,
December 31,
December 31,
December 31,
2021
2020
2019
2018
2017
(Dollars in thousands)
Nonaccrual loans held for investment:
Residential mortgage
$
55,127
$
125,367
$
121,408
$
147,287
$
178,291
Commercial mortgage
(1)
25,337
29,611
40,076
109,536
156,493
Commercial and Industrial
(1)
17,135
20,881
18,773
30,382
85,839
Construction
(1)
2,664
12,971
9,782
8,362
52,113
Consumer and finance leases
10,454
16,259
20,629
20,406
16,818
Total nonaccrual loans held for investment
(1)
110,717
205,089
210,668
315,973
489,554
OREO
40,848
83,060
101,626
131,402
147,940
Other repossessed property
3,687
5,357
5,115
3,576
4,802
Other assets
2,850
-
-
-
-
Total non-performing assets,
excluding nonaccrual
loans held for sale
158,102
293,506
317,409
450,951
642,296
Nonaccrual loans held for sale
(1)
-
-
-
16,111
8,290
Total non-performing assets,
including nonaccrual loans held for sale
(3)(4)
$
158,102
$
293,506
$
317,409
$
467,062
$
650,586
Past due loans 90 days and still accruing
(5)(6)
$
115,448
$
146,889
$
135,490
$
158,527
$
160,725
Non-performing assets to total assets
0.76
%
1.56
%
2.52
%
3.81
%
5.31
%
Nonaccrual loans held for investment to
total loans held for investment
1.00
%
1.74
%
2.34
%
3.57
%
5.53
%
Allowance for credit losses for loans and finance leases
$
269,030
$
385,887
$
155,139
$
196,362
$
231,843
Allowance for credit losses for loans and finance leases
to total nonaccrual loans held for investment
242.99
%
188.16
%
73.64
%
62.15
%
47.36
%
Allowance for credit losses for loans and finance leases to
total nonaccrual loans held for investment,
excluding residential real estate loans
483.95
%
484.04
%
173.81
%
116.41
%
74.48
%
(1)
During the first and
third quarters of 2018,
the Corporation transferred $74.4
million (net of
fair value write-downs
of $22.2 million recorded
at the time of
transfers) in nonaccrual
loans to held for
sale. Loans transferred
to held for sale
consisted of nonaccrual
commercial mortgage loans
totaling $39.6 million
(net of fair
value write-downs of
$13.8 million),
nonaccrual construction loans
totaling $33.0 million (net
of fair value write-downs
of $6.7 million) and
nonaccrual commercial and
industrial loans totaling $1.8
million (net of fair
value write-downs of $1.7 million). These loans were eventually
sold or paid in full during 2019 and 2018.
(2)
Residential pass-through
MBS issued
by the
PRHFA
held as
part of
the available-for
-sale investment
securities portfolio
with an
amortized cost
of $3.6
million recorded
on the
Corporation's books at its fair value of $2.9 million.
(3)
Excludes PCD loans
previously accounted for
under ASC Subtopic
310-30 for which
the Corporation made
the accounting policy
election of maintaining
pools of loans
accounted
for under ASC
Subtopic 310-30
as “units of
account” both at
the time of
adoption of
CECL on January
1, 2020 and
on an ongoing
basis for credit
loss measurement.
These loans
accrete interest
income based
on the
effective interest
rate of
the loan
pools determined
at the
time of
adoption of
CECL and
will continue
to be
excluded from
nonaccrual loan
statistics as long as
the Corporation can reasonably
estimate the timing and
amount of cash flows
expected to be collected
on the loan pools.
The amortized cost of
such loans as of
December 31, 2021, 2020, 2019, 2018 and 2017 amounted to $117.5
million, $130.9 million, $136.7 million, $146.6
million and $158.2 million, respectively.
(4)
Nonaccrual loans exclude
$363.4 million, $393.3
million, $398.3 million,
$478.9 million and
$374.7 million of
TDR loans that
were in compliance
with the modified
terms and in
accrual status as of December 31, 2021, 2020, 2019, 2018
and 2017, respectively.
(5)
It is
the Corporation's
policy to
report delinquent
residential mortgage
loans insured
by the
FHA, guaranteed
by the
VA,
and other
government-insured loans
as loans
past-due 90
days and still accruing as opposed
to nonaccrual loans since the principal repayment
is insured. The Corporation continues accruing
interest on these loans until they have
passed the
15 months delinquency mark, taking into consideration
the FHA interest curtailment process.
These balances include $46.6 million of residential
mortgage loans insured by the FHA
that were over 15 months delinquent as of December 31, 2021.
(6)
These include rebooked
loans, which were previously
pooled into GNMA securities,
amounting to $7.2
million, $10.7 million, $35.3
million, $43.6 million, and
$62.1 million as of
December 31,
2021, 2020,
2019, 2018,
and 2017,
respectively.
Under the
GNMA program,
the Corporation
has the
option but
not the
obligation to
repurchase loans
that meet
GNMA’s
specified delinquency criteria. For accounting purposes,
the loans subject to the repurchase option are required
to be reflected on the financial statements
with an offsetting
liability.
114
The following table shows non-performing assets by geographic segment
as of the indicated dates:
December 31,
December 31,
December 31,
December 31,
December 31,
2021
2020
2019
2018
2017
(Dollars in thousands)
Puerto Rico:
Nonaccrual loans held for investment:
Residential mortgage
$
39,256
$
101,763
$
97,214
$
120,707
$
147,852
Commercial mortgage
(1)
15,503
18,733
23,963
44,925
128,232
Commercial and Industrial
(2)
14,708
18,876
16,155
26,005
79,809
Construction
(3)
1,198
5,323
2,024
6,220
14,506
Consumer and finance leases
10,177
15,081
19,483
19,366
16,122
Total nonaccrual loans held for investment
80,842
159,776
158,839
217,223
386,521
OREO
36,750
78,618
96,585
124,124
140,063
Other repossessed property
3,456
5,120
4,810
3,357
4,723
Other assets
(4)
2,850
-
-
-
-
Total non-performing assets, excluding nonaccrual loans
123,898
243,514
260,234
344,704
531,307
Nonaccrual loans held for sale
(1) (2) (3)
-
-
-
16,111
8,290
Total non-performing assets, including nonaccrual
held for sale
(5)
$
123,898
$
243,514
$
260,234
$
360,815
$
539,597
Past-due loans 90 days and still accruing
(6)
$
114,001
$
144,619
$
129,463
$
153,269
$
151,724
Virgin Islands:
Nonaccrual loans held for investment:
Residential mortgage
$
8,719
$
9,182
$
10,903
$
12,106
$
22,110
Commercial mortgage
9,834
10,878
16,113
19,368
25,309
Commercial and Industrial
1,476
1,444
2,303
4,377
6,030
Construction
(7)
1,466
7,648
7,758
2,142
37,607
Consumer
144
354
467
710
281
Total nonaccrual loans held for investment
21,639
29,506
37,544
38,703
91,337
OREO
3,450
4,411
4,909
6,704
6,306
Other repossessed property
187
109
146
76
26
Total non-performing assets
$
25,276
$
34,026
$
42,599
$
45,483
$
97,669
Past-due loans 90 days and still accruing
$
1,265
$
2,020
$
5,898
$
5,258
$
9,001
United States:
Nonaccrual loans held for investment:
Residential mortgage
$
7,152
$
14,422
$
13,291
$
14,474
$
8,329
Commercial mortgage
-
-
-
45,243
2,952
Commercial and Industrial
951
561
315
-
-
Consumer
133
824
679
330
415
Total nonaccrual loans held for investment
8,236
15,807
14,285
60,047
11,696
OREO
648
31
132
574
1,571
Other repossessed property
44
128
159
143
53
Total non-performing assets
$
8,928
$
15,966
$
14,576
$
60,764
$
13,320
Past-due loans 90 days and still accruing
$
182
$
250
$
129
$
-
$
-
(1)
During 2018, the Corporation transferred to
held for sale nonaccrual commercial mortgage
loans in the Puerto Rico region totaling $39.6
million (net of fair value write-downs
of $13.8 million
recorded at the time of transfers). These loans were eventually
sold or paid in full during 2019 and 2018.
(2)
During 2018,
the Corporation
transferred to
held for
sale nonaccrual
commercial and
industrial loans
in the
Puerto Rico
region totaling
$1.8 million
(net of
fair value
write-downs of
$1.7
million). The commercial and industrial loans transferred to held for
sale were eventually sold during the first quarter of 2019.
(3)
During 2018, the Corporation transferred to held for sale
a $3.0 million nonaccrual construction loan in the Puerto
Rico region (net of $1.6 million fair value write-down).
This loan was paid in
full in 2019.
(4)
Residential pass-through MBS
issued by the
PRHFA held
as part of
the available-for-sale
investment securities portfolio
with an amortized
cost of $3.6
million recorded on
the Corporation's
books at its fair value of $2.9 million.
(5)
Excludes PCD loans
previously accounted
for under ASC
Subtopic 310-30
for which the
Corporation made the
accounting policy
election of maintaining
pools of loans
accounted for
under
ASC Subtopic 310-30 as “units
of account” both at the
time of adoption of CECL on
January 1, 2020 and on
an ongoing basis for credit loss
measurement. These loans accrete
interest income
based on the effective interest
rate of the loan pools determined at
the time of adoption of CECL and will
continue to be excluded from nonaccrual
loan statistics as long as the
Corporation can
reasonably estimate
the timing
and amount
of cash flows
expected to
be collected on
the loan pools.
The amortized
cost of such
loans as of
December 31, 2021,
2020, 2019,
2018 and 2017
amounted to $117.5 million, $130.9 million,
$136.7 million, $146.6 million and $158.2 million, respectively.
(6)
These include rebooked
loans, which were previously
pooled into GNMA securities,
amounting to $7.2 million,
$10.7 million, $35.3
million, $43.6 million, and
$62.1 million as of
December
31,
2021,
2020,
2019,
2018,
and
2017,
respectively.
Under
the
GNMA program,
the
Corporation
has
the
option but
not
the
obligation
to
repurchase
loans
that
meet
GNMA’s
specified
delinquency criteria. For accounting purposes, the loans subject
to the repurchase option are required to be reflected on the financial
statements with an offsetting liability.
(7)
During
2018,
the
Corporation
transferred
to
held
for
sale
a
$30.0
million
nonaccrual
construction
loan
in
the
Virgin
Islands
region
(net
of
a
$5.1
million
fair
value
write-down).
The
construction loans transferred to held for sale was eventually
sold during the fourth quarter of 2018.
115
Total
nonaccrual
loans
were
$110.7
million
as
of
December
31,
2021.
This
represents
a
decrease
of
$94.4
million
from
$205.1
million as
of December
31, 2020.
The decrease
was primarily
related to
a $70.2
million reduction
in nonaccrual
residential mortgage
loans,
driven
by the
bulk
sale of
$52.5
million
of
nonaccrual residential
mortgage
loans
during
the
third
quarter
of
2021 as
further
described
below.
In
addition,
there
was
an
$18.3
million
decrease
in
nonaccrual
commercial
and
construction
nonaccrual
loans,
including through the repayment of
a $6.0 million construction loan relationship
in the Virgin
Islands region, the sale of a
$3.1 million
construction
loans
in
the
Puerto
Rico
region,
and
other
large
repayments
as
explained
below,
and
a
$5.8
million
decrease
in
nonaccrual consumer loans.
Nonaccrual commercial
mortgage loans decreased
by $4.3 million
to $25.3 million
as of December
31, 2021 from
$29.6 million as
of
December
31,
2020.
The
decrease
was
primarily
related
to
collections
of
approximately
$4.3
million
during
2021,
including
the
payoff of
two commercial mortgage
loan in the
Puerto Rico region
amounting to $2.4
million, charge-offs
and the transfer
of loans to
OREO,
partially
offset
by
inflows.
Total
inflows
of
nonaccrual
commercial
mortgage
loans
were
$5.1
million
for
the
year
ended
December 31, 2021, compared to $1.9 million for 2020.
Nonaccrual
commercial
and
industrial
loans
decreased
by
$3.8
million
to
$17.1
million
as
of
December
31,
2021
from
$20.9
million as of December 31, 2020. The decrease was mainly
related to collections of approximately $6.5 million during
2021, including
a paydown that reduced
by $1.4 million the carrying
value of a nonaccrual
commercial and industrial loan
in the Puerto Rico region, a
$1.2 million nonaccrual commercial and industrial
loan paid off in the Puerto Rico region,
and the transfer of loans to OREO, partially
offset
by
inflows.
Total
inflows of
nonaccrual
commercial
and
industrial
loans
were
$4.4
million
for
the
year
ended December
31,
2021, compared to $11.4 million for 2020.
Nonaccrual construction
loans decreased
by $10.3
million to
$2.7 million
as of
December 31,
2021, compared
to $13.0
million as
of
December
31,
2020.
The
decrease
was
primarily
related
to
the
aforementioned
$6.0
million
repayment
of
a
construction
loan
relationship in the Virgin
Islands region and the sale of a $3.1 million loan in the Puerto Rico region.
116
indicated periods:
Commercial
Mortgage
Commercial &
Industrial
Construction
Total
(In thousands)
Year ended
December 31, 2021
Beginning balance
$
29,611
$
20,881
$
12,971
$
63,463
Plus:
Additions to nonaccrual
5,090
4,367
23
9,480
Less:
Loans returned to accrual status
(2,376)
(752)
(319)
(3,447)
Nonaccrual loans transferred to OREO
(1,011)
(1,441)
(252)
(2,704)
Nonaccrual loans charge-offs
(1,433)
(629)
(86)
(2,148)
Loan collections and others
(4,326)
(6,471)
(6,585)
(17,382)
Reclassification
(218)
1,180
-
962
Nonaccrual loans sold, net of charge offs
-
-
(3,088)
(3,088)
Ending balance
$
25,337
$
17,135
$
2,664
$
45,136
Commercial
Mortgage
Commercial &
Industrial
Construction
Total
(In thousands)
Year ended
December 31, 2020
Beginning balance
$
40,076
$
18,773
$
9,782
$
68,631
Plus:
Additions to nonaccrual
1,875
11,367
3,691
16,933
Less:
Loans returned to accrual status
(1,838)
(1,291)
-
(3,129)
Nonaccrual loans transferred to OREO
(126)
(263)
-
(389)
Nonaccrual loans charge-offs
(3,327)
(3,600)
(75)
(7,002)
Loan collections and others
(6,373)
(4,781)
(427)
(11,581)
Reclassification
(676)
676
-
-
Ending balance
$
29,611
$
20,881
$
12,971
$
63,463
117
Nonaccrual residential
mortgage loans
decreased by
$70.3 million
to $55.1
million as
of December
31, 2021,
compared to
$125.4
million
as
of
December
31,
2020.
The
decrease
was
driven
by
the
aforementioned
bulk
sale
of
$52.5
million
of
nonaccrual
loans,
loans brought current and
restored to accrual status, as
well as collections, including
the repayment of two large
nonaccrual residential
mortgage
loans totaling
$3.9 million,
partially
offset
by
inflows. The
inflows
of nonaccrual
residential
mortgage
loans during
2021
were $33.5 million, a decrease of $0.2 million, compared to inflows of $33.7 million
for 2020.
During
the
third
quarter
of
2021,
the
Corporation
sold
$52.5
million
of
non-performing
residential
mortgage
loans
and
related
servicing
advances
of
$2.0
million.
The
Corporation
received
$31.5
million,
or
58%
of
book
value
before
reserves,
for
the
$54.5
million
of non
-performing
loans and
related
servicing
advances.
Approximately
$20.9
million
of reserves
had
been allocated
to
the
loans
sold.
The
transaction
resulted
in
total
net
charge-offs
of
$23.1
million
and
an
additional
loss
of
approximately
$2.1
million
recorded
as
a
charge
to
the
provision
for
credit
losses
in
the
third
quarter. The
Corporation's
primary
goal
with
respect
to
this
transaction was to accelerate the disposition of non-performing
assets.
The following table presents the activity of residential nonaccrual loans
held for investment for the indicated periods:
Year
ended
Year
ended
December 31, 2021
December 31, 2020
(In thousands)
Beginning balance
$
125,367
$
121,408
Additions to nonaccrual
33,543
33,735
Loans returned to accrual status
(15,918)
(12,719)
Nonaccrual loans transferred to OREO
(8,058)
(4,248)
Nonaccrual loans charge-offs
(26,735)
(7,206)
Loan collections and others
(20,595)
(5,603)
Reclassification
(962)
-
Nonaccrual loans sold, net of charge-offs
(31,515)
-
Ending balance
$
55,127
$
125,367
The amount
of nonaccrual
consumer loans,
including finance
leases, decreased
by $5.8
million to
$10.5
million as
December 31,
2021, compared to
$16.2 million as
of December 31,
2020. The decrease
was primarily in
auto loans, small
loans, and finance
leases,
driven by
collections and
charge-offs recorded
in 2021,
partially offset
by inflows.
The inflows
of nonaccrual
consumer loans
during
the year ended December 31, 2021
amounted to $37.6 million compared to inflows of $42.1 million in 2020.
As of
December
31,
2021,
approximately
$23.8
million
of the
loans
placed
in nonaccrual
status,
mainly
commercial
loans, were
current,
or
had
delinquencies
of
less
than
90
days
in
their
interest
payments,
including
$13.5
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.
carrying value
of $37.3
million as
of December
31, 2021, mainly
nonaccrual construction
and commercial
loans, was applied
against
the related principal balances under the cost-recovery method.
118
Total
loans
in
early
delinquency
(
i.e.
, 30-89
days
past
due
loans,
as defined
in
regulatory
report
instructions)
amounted
to
$90.3
million as of December 31,
2021, a decrease of $58.5
million compared to $148.8 million
as of December 31, 2020.
The variances by
major portfolio categories follow:
●
Residential mortgage
loans in
early delinquency
decreased by
$32.3 million
to $34.2
million as
of December
31, 2021,
and
consumer
loans
in
early
delinquency
decreased
by
$6.3
million
to
$49.4
million
as
of
December
31,
2021.
The
decreases
reflect
the
combination
of
loans
brought
current
during
the
year
ended
December
31,
2021
and
loans
that
migrated
to
nonaccrual status.
●
Commercial and construction loans in early delinquency decreased
by $19.2
million to $6.7 million as of December 31, 2021,
the decrease was primarily related to the refinancing of two matured
commercial loans.
In addition,
the Corporation provides
homeownership preservation
assistance to its
customers through
a loss mitigation
program in
Puerto Rico. Depending
upon the nature
of borrower’s
financial condition,
restructurings or loan
modifications through
this program,
as
well
as
other
restructurings
of
individual
commercial,
commercial
mortgage,
construction,
and
residential
mortgage
loans
fit
the
definition of
a TDR.
A restructuring
of a
debt constitutes
a TDR
if the
creditor,
for economic
or legal
reasons related
to the
debtor’s
financial difficulties,
grants a
concession to
the debtor
that it
would not
otherwise consider.
Modifications involve
changes in
one or
more of
the loan
terms that
bring a
defaulted loan
current and
provide sustainable
affordability.
Changes may
include, among
others,
the extension
of the
maturity of
the loan
and modifications
of the
loan rate.
See Note
8 –
Loans Held
for Investment,
to the
audited
consolidated
financial
statements
included
in
Item
8
of
this
Annual
Report
on
Form
10-K,
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,
a
loan
on
nonaccrual
status
and
restructured
as
a
TDR
will
remain
on
nonaccrual
status until
the borrower
has proven
the ability
to perform
under the
modified structure,
generally
for a
minimum
of six
months, and
there is evidence
that such payments
can, and are
likely to, continue
as agreed. Performance
prior to the
restructuring, or
significant events that coincide with the restructuring,
are included in assessing whether the borrower can meet
the new terms and may
result
in
the
loan
being
returned
to
accrual
status
at
the
time
of
the
restructuring
or
after
a
shorter
performance
period.
If
the
borrower’s
ability
to
meet
the
revised
payment
schedule
is
uncertain,
the
loan
remains
classified
as
a
nonaccrual
loan.
Loan
modifications
increase the
Corporation’s
interest income
by returning
a nonaccrual
loan to
performing
status, if
applicable,
increase
cash flows by providing for payments to be made by the borrower,
and limit increases in foreclosure and OREO costs.
119
The following table provides a breakdown between accrual and nonaccrual TDRs as of the indicated date:
As of December 31, 2021
(In thousands)
Accrual
Nonaccrual
(1)
Total TDRs
Conventional residential mortgage loans
$
237,627
$
20,946
$
258,573
Construction loans
1,845
458
2,303
Commercial mortgage loans
52,873
15,960
68,833
Commercial and Industrial loans
59,792
10,628
70,420
Consumer loans:
Auto loans
4,208
3,076
7,284
Finance leases
975
-
975
Personal loans
973
1
974
Credit cards
2,583
-
2,583
Consumer loans - Other
2,518
275
2,793
Total Troubled
Debt Restructurings
$
363,394
$
51,344
$
414,738
(1)
Included in nonaccrual loans are $13.5 million in loans that
are performing under the terms of the restructuring agreement but
are reported in nonaccrual status
until the restructured loans meet the criteria of sustained
payment performance under the revised terms for reinstatement
to accrual status and are deemed fully
collectible.
Under the provisions
of the CARES
Act of 2020,
as amended by
the Consolidated Appropriations
Act, 2021 enacted
on December
27, 2020,
financial institutions
may permit
loan modifications
for borrowers
affected by
the COVID-19
pandemic through
January 1,
2022
without categorizing
the modifications
as TDRs, as
long as the
loans meet certain
conditions, including
the requirement that
the
loan
was
not
more
than
30
days
past
due
as
of
December
31,
2019.
As
of
December
31,
2021,
commercial
loans
totaling
$342.4
million,
or 3.10%
of the
balance of
the total
loan portfolio
held
for
investment, were
permanently
modified under
the provisions
of
Section 4013
of the
CARES Act
of 2020,
as amended
by Division
N, Title
V,
Section 541
of the
Consolidated
Appropriations
Act.
These
permanent
modifications
primarily
relate
to
commercial
borrowers
in
industries
with
longer
expected
recovery times,
mostly
hospitality,
retail
and
entertainment
industries.
With
respect
to
temporary
deferred
repayment
arrangements
established
in
2020
to
assist borrowers
affected by
the COVID-19
pandemic, as
of December
31, 2021,
all loans
previously modified
under such
programs
have completed their deferral period.
120
The OREO portfolio, which is
part of non-performing assets, decreased
by $42.2 million to $40.8 million
as of December 31, 2021,
compared
to
$83.0
million
as
of
December
31,
2020.
The
following
tables
show
the
composition
of
the
OREO
portfolio
as
of
December 31,
2021 and
2020, as
well as
the activity
of the
OREO portfolio
by geographic
area during
the year
ended December
31,
2021:
OREO Composition by Region
As of December 31,
2021
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
28,396
$
489
$
648
$
29,533
Commercial
4,521
2,810
-
7,331
Construction
3,833
151
-
3,984
$
36,750
$
3,450
$
648
$
40,848
As of December 31, 2020
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
31,517
$
870
$
31
$
32,418
Commercial
41,176
3,180
-
44,356
Construction
5,925
361
-
6,286
$
78,618
$
4,411
$
31
$
83,060
OREO Activity by Region
For the year ended December 31, 2021
(In thousands)
Puerto Rico
Virgin Islands
Florida
Consolidated
Beginning Balance
$
78,618
$
4,411
$
31
$
83,060
Additions
17,798
669
882
19,349
Sales
(52,649)
(1,540)
(265)
(54,454)
Write-down adjustments
(7,017)
(90)
-
(7,107)
Ending Balance
$
36,750
$
3,450
$
648
$
40,848
121
Net Charge-offs and Total
Credit Losses
million, or
0.48% of
average loans,
for the
year ended
December 31,
2020.
The bulk
sale of
nonaccrual
residential mortgage
loans
added $23.1
million
in net
charge-off
for the
year ended
December 31,
2021.
Excluding the
effect of
net charge
-offs related
to the
bulk sale, total net charge-offs in 2021 were $32.0
million, or 0.28% of average loans.
residential mortgage
loans, compared
to $9.5
million, or
0.30% of
average residential
mortgage loans,
for the
year ended
December
31, 2020. Excluding
the effect of net
charge-offs related
to the bulk sale, residential
mortgage loans net charge
-offs for the year
ended
December
31,
2021
were
$5.4
million,
or
0.17%
of
average
residential
mortgage
loans.
Approximately
$5.7
million
in
charge-offs
during
2021 resulted
from valuations
of collateral
dependent
residential
mortgage loans
given high
delinquency
levels, compared
to
$7.9 million in
2020. Also, the overall
level of charge-offs
for the portfolio decreased
during 2021 as
compared to 2020, as
a result of
improvements
in
the
credit
quality
indicators
for
the
residential
mortgage
loan
portfolio.
In
addition,
the
residential
mortgage
net
charge-offs
related to
foreclosures amounted
to $2.8
million during
the year
ended December
31, 2021,
compared to
$1.6 million
for
the same period of 2020, partially offsetting the aforementioned
decreases.
Commercial mortgage
loan net charge
-offs were
$1.2 million, or
0.06% of average
commercial mortgage
loans, for the
year ended
December
31,
2021
compared
to
$1.4
million,
or
0.08%
of
average
commercial
mortgage
loans,
for
the
year
ended
December
31,
2020.
Commercial
and
industrial
loans
net
recoveries
for
the
year
ended
December
31,
2021
were
$4.9
million,
or
0.16%
of
average
commercial
and industrial
loans, compared
to net
charge-offs
of $0.4
million, or
0.02% of
average commercial
and industrial
loans,
for
2020.
Commercial
and
industrial
loan
loss
net
recoveries
for
2021
included
a
$5.2
million
recovery
in
connection
with
the
paydown of a nonaccrual commercial and industrial loan participation in
the Puerto Rico region.
Construction loans net recoveries for
the year ended December 31, 2021
were $0.1 million, or 0.04%
of average construction loans,
compared to net recoveries of $0.1 million, or 0.06% of average construction
loans, for 2020.
Net
charge-offs
of
consumer
loans
and
finance
leases
for
the
year
ended
December
31,
2021
were
$30.4
million,
or
1.11%
of
average
consumer loans
and finance
leases, compared
to $36.7
million, or
1.53% of
average consumer
loans and
finance leases,
for
2020. The decrease in 2021 was primarily reflected in the auto loans,
finance leases and small personal loans portfolios.
The following table shows the ratios of net charge-offs
(or recoveries) to average loans by loan category for the last five
years:
For the year ended December 31,
2021
2020
2019
2018
2017
Residential mortgage
(1)
0.87
%
0.30
%
0.66
%
0.67
%
0.79
%
Commercial mortgage
0.06
%
0.08
%
0.97
%
1.03
%
2.42
%
Commercial and Industrial
(0.16)
%
0.02
%
0.16
%
0.38
%
0.66
%
Construction
(0.04)
%
(0.06)
%
(0.28)
%
6.75
%
2.05
%
Consumer loans and finance leases
1.11
%
1.53
%
2.05
%
2.31
%
2.12
%
Total loans
(1)
0.48
%
0.48
%
0.91
%
1.09
%
1.33
%
(1)
For the year ended December 31,
2021, includes net charge-offs totaling
$23.1 million associated with the bulk
sale of residential nonaccrual loans and
related servicing advance
receivables. Excluding net
charge-offs associated
with the bulk
sale, residential
mortgage and total
net charge
offs to related
average loans
for the year
ended 2021 was
0.17%
and 0.28%, respectively.
122
The following table presents net charge-offs
(or recoveries) to average loans held in various portfolios by geographic segment for the
last five years:
December 31,
December 31,
December 31,
December 31,
December 31,
2021
2020
2019
2018
2017
PUERTO RICO:
Residential mortgage
(1)
1.09
%
0.39
%
0.89
%
0.86
%
1.05
%
Commercial mortgage
0.08
%
0.26
%
0.36
%
1.23
%
3.36
%
Commercial and Industrial
(0.30)
%
-
%
0.39
%
0.56
%
0.96
%
Construction
(0.05)
%
(0.11)
%
0.54
%
6.18
%
6.38
%
Consumer and finance leases
1.10
%
1.51
%
2.05
%
2.31
%
2.14
%
Total loans
(1)
0.59
%
0.62
%
1.05
%
1.28
%
1.74
%
VIRGIN ISLANDS:
Residential mortgage
0.06
%
0.17
%
0.30
%
0.48
%
0.11
%
Commercial mortgage
(0.23)
%
(0.18)
%
(0.25)
%
(0.14)
%
(0.13)
%
Commercial and Industrial
-
%
-
%
(1.60)
%
0.16
%
(0.01)
%
Construction
-
%
(0.04)
%
(0.13)
%
14.00
%
(0.99)
%
Consumer and finance leases
1.16
%
0.65
%
1.35
%
2.70
%
1.77
%
Total loans
0.13
%
0.13
%
(0.11)
%
1.49
%
0.10
%
FLORIDA:
Residential mortgage
(0.01)
%
-
%
(0.03)
%
0.02
%
0.04
%
Commercial mortgage
(0.01)
%
(0.48)
%
2.67
%
0.72
%
(0.01)
%
Commercial and Industrial
0.10
%
0.04
%
-
%
0.01
%
-
%
Construction
(0.04)
%
(0.05)
%
(0.79)
%
(0.84)
%
(0.74)
%
Consumer and finance leases
2.15
%
4.35
%
2.98
%
1.75
%
1.69
%
Total loans
0.07
%
-
%
0.65
%
0.22
%
0.06
%
(1)
For
the
year
ended
December
31,
2021,
includes
net
charge-offs
totaling
$23.1
million
associated
with
the
bulk
sale
of
residential
nonaccrual
loans
and
related
servicing
advance
receivables. Excluding net
charge-offs associated
with the bulk sale,
residential mortgage and
total net charge
offs to related
average loans for the
year ended 2021 was
0.21% and 0.34%,
respectively.
123
The above
ratios are
not necessarily
indicative of
the results
expected in
subsequent periods.
Total
net charge
-offs plus
losses on
OREO
operations
for
the
year
ended
December
31,
2021
amounted
to
$53.0
million,
or
0.46%
of
average
loans
and
repossessed
assets, compared to losses of $51.5 million, or a loss rate of 0.51%, for the year
ended December 31, 2020.
The following table presents information about the OREO inventory
and credit losses for the periods indicated:
Year Ended
2021
2020
(Dollars in thousands)
OREO
OREO balances, carrying value:
Residential
$
29,533
$
32,418
Commercial
7,331
44,356
Construction
3,984
6,286
Total
$
40,848
$
83,060
OREO activity (number of properties):
Beginning property inventory
513
697
Properties acquired
167
120
Properties disposed
(262)
(304)
Ending property inventory
418
513
Average holding period (in days)
Residential
700
626
Commercial
2,018
2,170
Construction
2,115
2,151
Total average holding period (in days)
1,075
1,566
OREO operations gain (loss):
Market adjustments and gains (losses) on sale:
Residential
$
4,166
$
(29)
Commercial
(1,182)
(886)
Construction
820
(484)
Total gains (losses) on sales
3,804
(1,399)
Other OREO operations expenses
(1,644)
(2,199)
Net Gain (Loss) on OREO operations
$
2,160
$
(3,598)
(CHARGE-OFFS) RECOVERIES
Residential charge-offs, net
$
(28,517)
$
(9,498)
Commercial recoveries (charge-offs), net
3,676
(1,836)
Construction recoveries, net
76
108
Consumer and finance leases charge-offs, net
(30,372)
(36,652)
Total charge-offs, net
(55,137)
(47,878)
TOTAL CREDIT LOSSES
(1)
$
(52,977)
$
(51,476)
LOSS RATIO PER CATEGORY
(2)
:
Residential
0.74%
0.30%
Commercial
-0.05%
0.06%
Construction
-0.48%
0.21%
Consumer
1.11%
1.53%
TOTAL CREDIT LOSS RATIO
(3)
0.46%
0.51%
(1)
(2)
Calculated as net charge-offs plus market adjustments, impairments (net of insurance
recoveries), and gains (losses) on sale of
OREO divided by average loans and repossessed assets.
(3)
124
Operational Risk
The
Corporation
faces
ongoing
and
emerging
risk
and
regulatory
pressure
related
to
the
activities
that
surround
the
delivery
of
banking
and
financial
products.
Coupled
with
external
influences,
such
as
market
conditions,
security
risks,
and
legal
risks,
the
potential for
operational and
reputational loss
has increased.
To
mitigate and
control operational
risk, the
Corporation has
developed,
and continues to
enhance, specific internal
controls, policies, and procedures
that are designed to
identify and manage operational
risk
at
appropriate
levels
throughout
the
organization.
The
purpose
of
these
mechanisms
is
to
provide
reasonable
assurance
that
the
Corporation’s business operations
are functioning within the policies and limits established by management.
The
Corporation
classifies operational
risk
into
two
major
categories:
business-specific
and
corporate-wide
affecting
all business
lines.
For
business
specific
risks,
a
risk
assessment
group
works
with
the
various
business
units
to
ensure
consistency
in
policies,
processes
and
assessments.
With
respect
to
corporate-wide
risks,
such
as
information
security,
business
recovery,
and
legal
and
compliance, the
Corporation has specialized
groups, such
as the Legal
Department, Information
Security,
Corporate Compliance,
and
Operations. These groups
assist the lines of
business in the
development and implementation
of risk management
practices specific to
the needs of the business groups.
Legal and Compliance Risk
Legal and compliance risk includes
the risk of noncompliance with applicable
legal and regulatory requirements, the
risk of adverse
legal
judgments
against
the
Corporation,
and
the
risk
that
a
counterparty’s
performance
obligations
will
be
unenforceable.
The
Corporation
is
subject
to
extensive
regulation
in
the
different
jurisdictions
in
which
it
conducts
its
business,
and
this
regulatory
scrutiny has
been significantly
increasing over
the years.
The Corporation
has established,
and continues
to enhance,
procedures that
are designed
to ensure
compliance with
all applicable
statutory,
regulatory
and any
other legal
requirements.
The Corporation
has a
Compliance
Director
who
reports
to
the
Chief
Risk
Officer
and
is
responsible
for
the
oversight
of
regulatory
compliance
and
implementation
of an
enterprise-wide compliance
risk assessment
process.
The Compliance
division
has officer
roles in
each major
business area with direct reporting responsibilities to the Corporate Compliance
Group.
Concentration Risk
The Corporation conducts
its operations in
a geographically concentrated
area, as its main
market is Puerto
Rico. Of the total
gross
loan portfolio
held for investment
of $11.1
billion as of
December 31, 2021,
the Corporation had
credit risk of
approximately 79%
in
the Puerto Rico region, 18% in the United States region, and 3% in the Virgin
Islands region.
Update on the Puerto Rico Fiscal Situation
A significant
portion
of the
Corporation’s
business activities
and credit
exposure
is concentrated
in the
Commonwealth of
Puerto
Rico, which has experienced an economic and fiscal crisis for more
than a decade.
Economic Indicators
According to
the latest
revised estimates
published by
the Puerto
Rico Planning
Board (“PRPB”)
in July
2021, Puerto
Rico’s
real
gross national product
(“GNP”) grew by 1.8%
during fiscal year
2019 (previously at
1.5%). Also, the
PRPB published its
preliminary
real
GNP
estimate
for
fiscal
year
2020,
suggesting
that
the
Puerto
Rico
economy
contracted
by
3.2%.
According
to the
PRPB,
the
economic
growth
seen
during fiscal
year
2019
primarily
reflects the
economic
stimulus generated
by
the
influx of
federal
recovery
funds in response to
the natural disasters that affected
Puerto Rico in September
2017, while the contraction
experienced in fiscal year
2020 was primarily driven by the adverse impact of the COVID-19
pandemic and the related mandatory restrictions.
Fiscal Plan
On
January
27,
2022,
the
PROMESA
oversight
board
certified
the
2022
Fiscal
Plan
for
Puerto
Rico.
Similar
to
previous
fiscal
plans,
the
2022
Fiscal
Plan
incorporates
updated
information
related
to
the
macroeconomic
environment,
as
well
as
government
revenues,
expenditures,
structural
reform
efforts,
and
recent
increases
in
federal
funding.
More
importantly,
the
2022
Fiscal
Plan
reflects the Commonwealth
Plan of Adjustment
recently confirmed by
the U.S. District Court
for the District
of Puerto Rico.
Relative
to the
previous
fiscal plan,
the 2022
Fiscal Plan
incorporates a
new set
of expenditure
projections that
factor in
the now-established
debt
service
requirements
pursuant
to
the
Plan of
Adjustment,
as well
as additional
investments
enabled
by the
increased resources
available
to
the
government.
The
2022
Fiscal
Plan
prioritizes
resource
allocations
across
three
major
themes:
(i)
investing
in
the
operational capacity of
the government to deliver
services with Civil Service
Reform, (ii) prioritizing
obligations to current
and future
retirees, and (iii) creating a fiscally responsible post-bankruptcy government.
The
2022
Fiscal
Plan
contains
an
updated
macroeconomic
forecast
that
reflects
the
adverse
impact
of
the
pandemic-induced
recession at
the end of
fiscal year
2020, followed
by a
forecasted rebound
and recovery
in fiscal years
2021 through
2023. Similar
to
125
the
previous
fiscal
plan,
the
2022
Fiscal
Plan
incorporates
a
real
growth
series
that
was
adjusted
for
the
short-term
income
effects
resulting
from
the
extraordinary
unemployment
insurance
and
other
pandemic-related
direct
transfer
programs.
Specifically,
the
revised fiscal plan
estimates that Puerto
Rico’s GNP
will grow by
5.2% in the
current fiscal year
2022, followed by
a 0.6% growth
in
fiscal year
2023.
Excluding
the effect
on household
income from
the unprecedented
pandemic-related
federal government
stimulus,
the 2022 Fiscal Plan estimates that real GNP growth would be 2.6% and 0.9% in
fiscal years 2022 and 2023, respectively.
Over the
past few
years, Puerto
Rico has
received an
infusion of
historical levels
of federal
support, creating
new opportunities
to
address
high
priority
needs.
The
2022
Fiscal
Plan
projects
that
approximately
$84
billion
of
disaster
relief
funding
in
total,
from
federal and
private sources,
will be disbursed
in the reconstruction
process over a
period of 18
years (2018 to
2035). Moreover,
since
the previous
fiscal plan
was certified
in 2021,
the Commonwealth’s
available resources
have significantly
increased principally
as a
result
of
two
major
developments:
(i)
incremental
federal
funding
for
health
care
as
a
result
of
the
recent
guidance
issued
by
the
Centers for
Medicare and
Medicaid Services
(“CMS”), which
increases the
federal funding
cap by
over $2
billion per
year,
and (ii)
improved local
revenue collections
as a
result of
a better-than-expected
recovery,
increased local
consumption and
economic activity
enabled by
enhanced income
support programs
(e.g. incremental
funding of
approximately $460
million for
the Nutrition
Assistance
Program). The 2022
Fiscal Plan provides
a roadmap to take
maximum advantage of
this unique opportunity,
create an environment
of
fiscal stability,
and develop the
conditions for long-term
growth and
economic development.
Nonetheless, the fiscal
plan continues to
underline the need to implement structural reforms to maximize the positive
impact of federal recovery funds.
Debt Restructuring
After more
than four years
since the
Commonwealth entered
Title III,
on January
18, 2022,
the U.S.
District Court
for the
District
of
Puerto
Rico
(the
“Court”)
issued
an
order
to
confirm
the PoA
to
restructure
approximately
$35
billion
of
debt
and
other
claims
against the
Commonwealth of
Puerto Rico,
the PBA,
and the
ERS; and
more than
$50 billion
of pension
liabilities. According
to the
PROMESA
oversight
board,
the
Plan
of
Adjustment
provides
a
one-time
cash
payment
to
creditors,
as
well
as
the
issuance
of
approximately $7.4
billion in new
debt and
contingent value
instruments (“CVIs”),
among other
items. In
addition, the PoA
provides
certain
Commonwealth
employees
with
various
benefits.
Confirmation
of
the
PoA
marks
a
major
milestone
in
the
overall
debt
restructuring process and creates a foundation for Puerto Rico’s
recovery and economic growth.
Key pending debt restructurings include
the PREPA,
for which the PROMESA oversight board
said in a status report filed with
the
Court
on
January
19,
2021,
that
it
intends
to
move
forward
with
the
settlement
set
forth
in
the
Restructuring
Support
Agreement
(“RSA”)
and
will
continue
efforts
to
propose
a
plan
of
adjustment
for
PREPA
by
the
end
of
March
2022;
however,
such
date
is
dependent
on
certain
factors
outside
the
government
parties’
control
that
might
push
the
filing
of
a
plan
into
the
second
quarter
of
2022.
Exposure to the Puerto Rico Government
As of December
31, 2021, the Corporation
had $360.1 million of
direct exposure to
the Puerto Rico government,
its municipalities,
and
public
corporations,
compared
to
$394.8
million
as
of
December
31,
2020.
As
of
December
31,
2021,
approximately
$187.8
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,
and $122.8
million consisted
of municipal
revenue and
special obligation
bonds.
Approximately 61%
of
the Corporation’s
exposure to
Puerto Rico’s
government consisted
primarily of
senior priority
obligations concentrated
in four
of the
largest
municipalities
in
Puerto
Rico.
The
municipalities
are
required
by
law
to
levy
special
property
taxes
in
such
amounts
as
are
required for the payment
of all of their respective
general obligation bonds
and notes. Furthermore, municipalities
are also likely to be
affected
by
the
negative
economic
and
other
effects
resulting
from
the
COVID-19
pandemic,
as
well
as
expense,
revenue,
or
cash
management measures
taken to
address the
Puerto Rico
government’s
fiscal problems
and measures
included in
fiscal plans
of other
government
entities.
In
addition
to
municipalities,
the
total
direct
exposure
also
included
$12.5
million
in
loans
to
an
affiliate
of
PREPA,
$33.4 million
in loans
to an
agency of
the Puerto
Rico central
government,
and obligations
of the
Puerto Rico
government,
specifically a residential
pass-through MBS issued
by the PRHFA,
at an amortized
cost of $3.6 million
as part of its available-for
-sale
investment securities portfolio (fair value of $2.9 million as of December
31, 2021).
126
The
following
table
details
the
Corporation’s
total
direct
exposure
to
Puerto
Rico
government
obligations
according
to
their
maturities:
As of December 31,
2021
Investment
Portfolio
Total
(Amortized cost)
Loans
Exposure
(In thousands)
Puerto Rico Housing Finance Authority:
$
3,574
$
-
$
3,574
Total
Puerto Rico Housing Finance Authority
3,574
-
3,574
Puerto Rico public corporation:
-
3,454
3,454
-
29,988
29,988
Total Puerto Rico public
corporation
-
33,442
33,442
-
12,511
12,511
Total Puerto Rico government
affiliate
-
12,511
12,511
Total
Puerto Rico public corporation and government affiliate
-
45,953
45,953
Municipalities:
2,995
8,052
11,047
14,785
76,336
91,121
90,584
48,075
138,659
69,769
-
69,769
Total
Municipalities
178,133
132,463
310,596
Total
Direct Government Exposure
$
181,707
$
178,416
$
360,123
In
addition,
as
of
December
31,
2021,
the
Corporation
had
$92.8
million
in
exposure
to
residential
mortgage
loans
that
are
guaranteed by
the PRHFA,
a governmental
instrumentality that has
been designated as
a covered entity
under PROMESA (December
31,
2020
-
$106.5 million).
Residential
mortgage
loans guaranteed
by
the
PRHFA
are
secured by
the underlying
properties
and
the
guarantees serve
to cover shortfalls
in collateral in
the event of
a borrower default.
The Puerto Rico
government guarantees
up to $75
million
of
the
principal
for
all
loans
under
the
mortgage
loan
insurance
program.
According
to
the
most
recently
released
audited
financial
statements
of
the
PRHFA,
as
of
June
30,
2019,
the
PRHFA’s
mortgage
loans
insurance
program
covered
loans
in
an
aggregate
amount
of
approximately
$557
million.
The
regulations
adopted
by
the
PRHFA
require
the
establishment
of
adequate
reserves
to
guarantee
the
solvency
of
the
mortgage
loan
insurance
fund.
As
of
June
30,
2019,
the
most
recent
date
as
to
which
information is available,
the PRHFA
was not in
compliance with the regulations
and had an unrestricted
deficit of approximately
$5.2
million in the mortgage loans insurance program.
As of December
31, 2021, the
Corporation had
$2.7 billion of
public sector deposits
in Puerto Rico,
compared to $1.8
billion as of
December
31,
2020.
Approximately
19%
of
the
public
sector
deposits
as
of
December
31,
2021
was
from
municipalities
and
municipal
agencies
in
Puerto
Rico
and
81%
was
from
public
corporations,
the
central
government
and
agencies,
and
U.S.
federal
government agencies in Puerto Rico.
127
Exposure to USVI government
The Corporation has operations in the USVI and has credit exposure
to USVI government entities.
For
many
years,
the
USVI
has
been
experiencing
a
number
of
fiscal
and
economic
challenges
that
have
deteriorated
the
overall
financial and
economic conditions
in the area.
Between 2008 and
2017, the
USVI real GDP
contracted at
a compound annual
growth
rate of -4.2%. On May 26, 2021, the United States Bureau
of Economic Analysis (the “BEA”) released estimates
of GDP estimates for
the
USVI
for
2019.
According
to
the
BEA,
the
USVI’s
real
GDP
increased
2.2%
in
2019.
Also,
the
BEA
revised
the
previously
published real
GDP growth
estimate for
2018 from
1.5% to 1.6%.
Growth in
2019 was
primarily driven
by increases
in private
fixed
investment,
exports
and
consumer
spending.
These
increases
were
partially
offset
by
decreases
in
inventory
investment
and
government spending.
Private fixed investment
doubled from the
previous year,
reflecting growth in
business purchases of
equipment
and
in
construction,
including
homes.
In
addition,
disaster-related
insurance
payouts
and
federal
assistance
supported
the
reconstruction
and
major
repairs
of
businesses
and
homes
that
were
destroyed
or
heavily
damaged
by
the
two
major
hurricanes
in
September 2017.
Although economic
activity in the
USVI showed signs
of improvements during
2018 and 2019,
the economic threat
resulting
from
the
COVID-19
pandemic
is
anticipated
to
diminish
growth
throughout
2020
and
2021.
Notwithstanding,
similar
to
Puerto Rico,
the USVI
has benefited
from the
various rounds
of economic
stimulus programs
deployed by
the Federal
Government.
Overall total pandemic-related relief funding allocated to
the USVI exceeds $1.5 billion.
On
October
28,
2021,
the U.S.
Census
Bureau
released
the 2020
Census
population
and housing
unit
count
for
the USVI.
As of
April
1,
2020,
the
USVI’s
population
was 87,146,
representing
a
18.1%
decline
from
the 2010
Census
population
of 106,405.
The
housing unit count was 57,257 in 2020, representing an increase of 2.4%
from the 2010 Census housing unit count of 55,901.
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.
On
February
8,
2022,
the
Virgin
Islands
Public
Finance
Authority
(“VIPFA”)
issued
a
voluntary
notice
to
inform
that
the
Government of the
Virgin
Islands (the “GVI”)
is evaluating a refinancing
of all the outstanding
matching revenue fund revenue
bonds
issued by
the VIPFA
as part of
a broader
plan to increase
liquidity to
the GVI
in order
to provide
additional dedicated
funding to
the
Employees’
Retirement
System
of
the
Virgin
Islands.
According
to
the
VIPFA,
the
proposed
refinancing
would
be
accomplished
through
a
securitization
of
the
matching
fund
revenues,
with
the
proceeds
of
one
or
more
new
series
of
bonds
(the
“Securitization
Bonds”)
expected
to
be
issued
by
the
Matching
Fund
Special
Purpose
Securitization
Corporation
(the
“Issuer”),
a
special
purpose
vehicle
created
pursuant
to
recently
enacted
legislation.
Such
securitization,
if
pursued,
is
expected
to
include
the
repayment,
refunding or defeasance
of all of the
outstanding matching
fund revenue bonds
through the issuance
of such Securitization
Bonds and
possibly
a
cash
tender
for
the
outstanding
matching
fund
revenue
bonds
and/or
an
exchange
of
such
outstanding
matching
fund
revenue bonds for Securitization Bonds.
As
of
December
31,
2021,
the
Corporation
had
$39.2
million
in
loans
to
USVI
government
instrumentalities
and
public
corporations, compared
to $61.8
million as
of December
31, 2020.
All the
amount outstanding
as of
December 31,
2021, is
owed by
the public
corporations of
the USVI.
As of
December 31,
2021, all
loans were
currently performing
and up
to date
on principal
and
interest payments.
128
BASIS OF PRESENTATION
The Corporation
has included
in this
Form 10-K
the following
financial measures
that are
not recognized
under GAAP,
which are
referred to as non-GAAP financial measures:
1.
Net
interest
income,
interest
rate
spread,
and
net
interest
margin
excluding
the
changes
in
the
fair
value
of
derivative
instruments
and
on
a
tax-equivalent
basis
are
reported
in
order
to
provide
to
investors
additional
information
about
the
Corporation’s
net
interest
income
that
management
uses
and
believes
should
facilitate comparability
and
analysis
of
the
periods presented.
The changes in the
fair value of
derivative instruments have
no effect on
interest due or
interest earned on
interest-bearing
liabilities
or
interest-earning
assets,
respectively.
The
tax-equivalent
adjustment
to
net
interest
income
recognizes
the income
tax savings
when comparing
taxable and
tax-exempt
assets and
assumes a
marginal
income tax
rate.
Income
from tax-exempt
earning assets
is increased
by an
amount equivalent
to the
taxes that
would have
been paid
if this
income
had
been
taxable
at
statutory
rates.
Management
believes
that
it
is
a
standard
practice
in
the
banking
industry
to
present net
interest income,
interest rate spread,
and net interest
margin on
a fully tax-equivalent
basis. This
adjustment puts
all earning assets, most notab
ly tax-exempt securities and tax-exempt
loans, on a common basis that
facilitates comparison of
results to
the results
of peers.
See “Results
of Operations
- Net
Interest
Income”
above for
the table
that reconciles
the net
interest
income
calculated
and
presented
in
accordance
with
GAAP
with
the
non-GAAP
financial
measure
“net
interest
income excluding
fair value
changes and
on a tax-equivalent
basis.” The table
also reconciles
net interest
spread and
margin
calculated and
presented in
accordance with
GAAP with
the non-GAAP
financial measures
“net interest
spread and
margin
excluding fair value changes and on a tax-equivalent basis.”
2.
The
tangible
common
equity
ratio
and
tangible
book
value
per
common
share
are
non-GAAP
financial
measures
that
management believes
are generally
used by
the financial
community to
evaluate capital
adequacy.
Tangible
common equity
is
total
equity
less
preferred
equity,
goodwill,
core
deposit
intangibles,
and
other
intangibles,
such
as
the
purchased
credit
card relationship
intangible and the
insurance customer
relationship intangible.
Tangible
assets are total
assets less goodwill,
core
deposit
intangibles,
and
other
intangibles,
such
as
the
purchased
credit
card
relationship
intangible
and
the
insurance
customer
relationship
intangible.
Management
and
many
stock
analysts
use
the
tangible
common
equity
ratio
and
tangible
book
value
per
common
share
in
conjunction
with
more
traditional
bank
capital
ratios
to
compare
the
capital
adequacy
of
banking organizations with
significant amounts of goodwill
or other intangible assets,
typically stemming from
the use of the
purchase method
of accounting for
mergers and
acquisitions. Accordingly,
the Corporation
believes that
disclosures of
these
financial measures
may be
useful to
investors. Neither
tangible common
equity nor
tangible assets,
or the
related measures,
should be
considered in
isolation or
as a
substitute for
stockholders’
equity,
total assets,
or any
other measure
calculated in
accordance
with
GAAP.
Moreover,
the
manner
in
which
the
Corporation
calculates
its
tangible
common
equity,
tangible
assets, and
any other
related measures
may differ
from that
of other
companies reporting
measures with
similar names.
See
“Risk Management – Capital” above for a reconciliation of the Corporation’s
tangible common equity and tangible assets.
3.
ACL
for
loans
and
finance
leases
to
adjusted
total
loans
held
for
investment
ratio
is
a
non-GAAP
financial
measure
that
excludes SBA PPP
loans amounting
to $145.0 million
and $406.0 million
as of December 31, 2021
and December 31,
2020,
respectively.
The SBA PPP loans
are fully-guaranteed
by the SBA, and
the principal amount
of the loans
may be forgiven
in
full
or
in
part,
thus
presenting
less credit
risk
than
a
non-SBA
PPP
loan.
Management
believes
the
use
of
this non
-GAAP
measure
provides
additional
understanding
when
assessing
the
Corporation’s
reserve
coverage
and
facilitates
comparison
with other periods. See below for
the reconciliation of the GAAP ratio
of ACL for loans and finance
leases to total loans held
for investment to the Non-GAAP ratio of the ACL for loans and finance leases to adjusted
total loans held for investment.
4.
Adjusted
provision
for
credit losses
for
loans
and
finance
leases to
net
charge-offs
ratio is
a
non-GAAP
financial
measure
that
excludes
the
effect
related
to
the
net
loan
loss reserve
release
of
$6.4
million
and
$16.9
million
recorded
in
the years
ended December 31, 2019
and 2018, respectively,
and the $71.3 million charge
to the provision for the
year ended December
31, 2017, resulting from
revised estimates of the qualitative
reserve associated with the
effects of Hurricanes Irma
and Maria.
Management believes
that this
information helps
investors understand
the adjusted
measure without
regard to
items that
are
not expected
to reoccur
with any
regularity or
may reoccur
at uncertain
times and
in uncertain
amounts on
reported
results
and facilitates comparisons with
other periods.
See below for the reconciliation
of the GAAP ratio of
the provision for credit
losses for
loans and
finance leases
to net
charge-offs
to the
Non-GAAP
ratio of
the adjusted
provision
for credit
losses for
loans and finance leases to net charge-offs.
5.
To
supplement
the
Corporation’s
financial
statements
presented
in
accordance
with
GAAP,
the
Corporation
uses,
and
believes that investors would benefit
from disclosure of, non-GAAP financial measures
that reflect adjustments to net income
and non
-interest expenses
to exclude
items that
management
identifies as
Special Items
because management
believes they
are not
reflective of
core operating
performance, are
not expected
to reoccur with
any regularity or
may reoccur
at uncertain
times
and
in
uncertain
amounts.
This
Form
10-K
includes
the
following
non-GAAP
financial
measures
for
the
year
ended
December 31, 2021 and 2020 that reflect the described items that were excluded
for one of those reasons.
129
Adjusted net income reflects the effect of the following
exclusions:
●
Merger and restructuring costs of $26.4 million and $26.5
million recorded in 2021 and 2020, respectively,
related
to transaction costs and restructuring initiatives in connection with the
acquisition of BSPR.
●
COVID-19 pandemic-related expenses of $3.0 million and $5.4 million
in 2021 and 2020, respectively.
●
Gains of $13.2 million on the sales of U.S. agencies MBS and U.S. Treasury
notes recorded in 2020.
●
The $8.0 million benefit related to the partial reversal of the deferred tax
asset valuation allowance recorded during
2020.
●
Total benefit of $6.2
million recorded in 2020 resulting from hurricane-related insurance recoveries.
●
Gain of $0.1 million on the repurchase of $0.4 million in TRuPs in 2020 reflected
in the statement of income as
Gain on early extinguishment of debt.
●
The tax-related effects of all the pre-tax items mentioned in the
above bullets as follows:
−
Tax
benefit
of
$9.9
million
for
both
years
2021
and
2020,
related
to
merge
and
restructuring
costs
in
connection with the acquisition of BSPR (calculated based on the statutory
tax rate of 37.5%).
−
Tax
benefit
of
$1.1
million
and
$2.0
million
in
2021
and
2020,
respectively,
in
connection
with
the
COVID-19 pandemic-related expenses (calculated based on the statutory
tax rate of 37.5%)
−
No tax expense was recorded for the gain on sales of U.S. agencies MBS and U.S. Treasury
Notes in 2020.
−
Tax
expense
of
$2.3
million
in
2020
related
to
the
benefit
of
hurricane-related
insurance
recoveries
(calculated based on the statutory tax rate of 37.5%).
−
The
gains
realized
on
the
repurchase
of
TRuPs
in
2020
recorded
at
the
holding
company
level,
had
no
effect on the income tax expense in 2020.
See “Overview of Results
of Operations”
above for the reconciliation
of the non-GAAP financial
measure “adjusted
net income” to the
GAAP financial
measure.
130
Adjusted non-interest expenses -
The
following tables reconcile for
the years
ended December 31,
2021 and
2020 the
GAAP non-
interest expenses
to
adjusted non-interest expenses,
which is
a
non-GAAP financial measure
that
excludes the
relevant Special
Items
discussed
above:
2021
Non-Interest
Expenses
(GAAP)
Merger and
Restructuring
Costs
COVID 19
Pandemic-Related
Expenses
Adjusted (Non-
GAAP)
(In thousands)
Non-interest expenses
$
488,974
$
26,435
$
2,958
$
459,581
Employees' compensation and benefits
200,457
-
67
200,390
Occupancy and equipment
93,253
-
2,601
90,652
Business promotion
15,359
-
22
15,337
Professional service fees
59,956
-
-
59,956
Taxes, other than income taxes
22,151
-
261
21,890
FDIC deposit insurance
6,544
-
-
6,544
Net gain on OREO and OREO expenses
(2,160)
-
-
(2,160)
Credit and debit card processing expenses
22,169
-
-
22,169
Communications
9,387
-
-
9,387
Merger and restructuring costs
26,435
26,435
-
-
Other non-interest expenses
35,423
-
7
35,416
2020
Non-Interest
Expenses
(GAAP)
Merger and
Restructuring
Costs
COVID 19
Pandemic-Related
Expenses
Hurricane-
Related Insurance
Recoveries
Adjusted
(Non-GAAP)
(In thousands)
Non-interest expenses
$
424,240
$
26,509
$
5,411
$
(1,153)
$
393,473
Employees' compensation and benefits
177,073
-
1,772
-
175,301
Occupancy and equipment
74,633
-
2,713
(789)
72,709
Business promotion
12,145
-
581
(184)
11,748
Professional service fees
52,633
-
8
(180)
52,805
Taxes, other than income taxes
17,762
-
274
-
17,488
FDIC deposit insurance
6,488
-
-
-
6,488
Net loss on OREO and OREO expenses
3,598
-
-
-
3,598
Credit and debit card processing expenses
19,144
-
-
-
19,144
Communications
8,437
-
16
-
8,421
Merger and restructuring costs
26,509
26,509
-
-
-
Other non-interest expenses
25,818
-
47
-
25,771
131
Allowance for
credit losses
on loans and finance
leases to adjusted
total loans
held for investment
ratio – The following
tables reconcile
the “ACL for loans and finance leases to total loans held for investment ratio,” the GAAP financial
measure, to the non-GAAP financial
measure “ACL for loans and finance
leases to adjusted total
loans held for investment
ratio,” as of December 31, 2021 and 2020, and the
“provision for
credit losses
for loans and finance
leases to net charge-offs
ratio,” the GAAP financial
measure, to the non-GAAP
financial
measure “adjusted
provision
for credit losses
for loans and
finance leases
to net charge-offs
ratio,” for
the years ended
December
31, 2021,
2020 and
2019:
Allowance for Credit Losses for Loans and Finance Leases
to Loans Held for Investment
(GAAP to Non-GAAP reconciliation)
As of December 31, 2021
Allowance for Credit Losses for
Loans Held for
Investment
Loans and Finance Leases
(In thousands)
Allowance for credit losses for loans and finance leases and
loans held for investment (GAAP)
$
269,030
$
11,060,658
-
145,019
Allowance for credit losses for loans and finance leases and adjusted
loans held for investment,
$
269,030
$
10,915,639
Allowance for credit losses for loans and finance leases to loans
held for investment (GAAP)
2.43
%
Allowance for credit losses for loans and finance leases to adjusted
loans held for investment,
2.46
%
Allowance for Credit Losses for Loans and Finance Leases
to Loans Held for Investment
(GAAP to Non-GAAP reconciliation)
As of December 31, 2020
Allowance for Credit Losses for
Loans Held for
Investment
Loans and Finance Leases
(In thousands)
Allowance for credit losses for loans and finance leases and
loans held for investment (GAAP)
$
385,887
$
11,777,289
-
405,953
Allowance for credit losses for loans and finance leases and adjusted
loans held for investment,
$
385,887
$
11,371,336
Allowance for credit losses for loans and finance leases to loans
held for investment (GAAP)
3.28
%
Allowance for credit losses for loans and finance leases to adjusted
loans held for investment,
3.39
%
132
Provision for credit losses - (benefit) expense
Finance Leases to Net Charge-Offs
(GAAP to Non GAAP reconciliation)
Year Ended
December 31, 2021
December 31, 2020
December 31, 2019
Provision for Credit
Losses - (benefit)
expense
Net Charge-
Offs
Provision for Credit
Losses - (benefit)
expense
Net Charge-Offs
Provision for Credit
Losses - (benefit)
expense
Net Charge-Offs
(In thousands)
Provision for credit losses - (benefit) expense and net charge-offs (GAAP)
$
(61,720)
$
55,137
$
40,225
$
81,448
$
59,253
$
94,734
Less Special Item:
Hurricane-related qualitative reserve release (provision)
-
-
6,425
-
16,943
-
Provision for credit losses - (benefit) expense and net charge-offs,
excluding special item (Non-GAAP)
$
(61,720)
$
55,137
$
46,650
$
81,448
$
76,196
$
94,734
Provision for credit losses - (benefit) expense to net charge-offs (GAAP)
-111.94
%
49.39
%
62.55
%
Provision for credit losses - (benefit) expense to net charge-offs,
excluding special items (Non-GAAP)
-111.94
%
57.28
%
80.43
%
Management
believes that
the presentation
of adjusted
net income,
adjusted non-interest
expenses
and
adjustments to
the various
components of
non-interest expenses,
the ratio
of allowance
for credit
losses to
adjusted total
loans held
for investment,
and the
ratio
of adjusted
provision for
credit losses
for loans
and finance
leases to
net charge
-offs 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.
CEO and CFO Certifications
First BanCorp.’s Chief Executive
Officer and Chief Financial Officer have
filed with the SEC certifications required by Section 302
and Section 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2,
32.1 and 32.2 to this Annual Report on Form 10-K.
In addition, in 2021, First BanCorp’s
Chief Executive Officer provided to the NYSE his annual certification,
as required for all
NYSE listed companies, that he was not aware of any violation by the Corporation
of the NYSE corporate governance listing
standards.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
The information required
herein is incorporated by
reference to the
information included under the
sub-caption “Interest Rate Risk
Management” in Item
7 “Management’s
Discussion and Analysis of
Financial Condition and
Results of Operations,”
of this Form 10-
K.
133
Item 8. Financial Statements and Supplementary Data
FIRST BANCORP.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
)
……………………………..
134
…………………………………………
137
……………………………………………………………...
138
139
140
………………………………………………………………………
141
………………………………………………..
142
…………………………………………………………………..
143
134
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors
Santurce, Puerto Rico
Opinions on the Financial Statements and Internal Control
over Financial Reporting
We
have audited
the accompanying
consolidated statement of
financial condition
of First BanCorp.
(the "Company")
as of December
31, 2021
and 2020,
the related
consolidated
statements of
income, comprehensive
income, cash
flows, and
changes in
stockholders’
equity
for each
of the
years in
the three-year
period ended
December
31, 2021,
and the
related
notes (collectively
referred
to as
the
"financial statements"). We
also have audited the
Company’s internal
control over financial reporting
as of December 31,
2021, based
criteria established
in Internal
Control –
Integrated Framework:
(2013) issued
by the
Committee of
Sponsoring Organizations
of the
Treadway Commission (COSO).
In our opinion,
the financial statements
referred to above
present fairly,
in all material
respects, the financial
position of the
Company
as of
December 31,
2021 and
2020, and
the results
of its
operations and
its cash
flows for
each of
the years
in the
three-year period
ended December
31, 2021 in
conformity with
accounting principles
generally accepted
in the United
States of America.
Also, in our
opinion, the Company maintained,
in all material respects, effective
internal control over financial
reporting as of December
31, 2021,
based on criteria established in Internal Control – Integrated Framework:
(2013) issued by COSO.
Change in Accounting Principle
As
discussed
in
Notes
1
and
9
to
the
financial
statements,
the
Company
has
changed
its
method
of
accounting
for
credit
losses
effective
January 1,
2020 due
to the
adoption of
Financial Accounting
Standards Board
(FASB)
Accounting Standards
Codifications
No. 326,
Financial Instruments
– Credit
Losses (Topic
326). The
Company adopted
the new
credit loss
standard using
the modified
retrospective
method
such
that
prior
period
amounts
are
not
adjusted
and
continue
to
be
reported
in
accordance
with
previously
applicable generally accepted accounting principles.
Basis for Opinions
The
Company’s
management
is
responsible
for
these
financial
statements,
for
maintaining
effective
internal
control
over
financial
reporting,
and
for
its
assessment
of
the
effectiveness
of
internal
control
over
financial
reporting,
included
in
the
accompanying
Management’s
Report
on
Internal
Control
over
Financial
Reporting. Our
responsibility is
to
express
an
opinion
on
the
Company’s
financial statements and
an opinion
on the
Company’s internal
control over
financial reporting based
on our
audits.
We
are a
public
accounting firm
registered with
the Public
Company Accounting
Oversight Board
(United States)
("PCAOB") and
are required
to
be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities
and Exchange
Commission and
the PCAOB.
We conducted
our audits in accordance with the
standards of the PCAOB. Those standards require
that we plan and perform the audits
to obtain reasonable
assurance about whether
the financial statements are
free of material misstatement,
whether due to error
or fraud,
and whether effective internal control over financial reporting
was maintained in all material respects.
135
Our
audits
of
the
financial
statements
included
performing
procedures
to
assess
the
risks
of
material
misstatement
of
the
financial
statements, whether due to error or fraud,
and performing procedures that respond to
those risks. Such procedures included examining,
on
a
test basis,
evidence
regarding
the
amounts
and
disclosures
in
the
financial
statements.
Our
audits
also
included
evaluating
the
accounting
principles
used
and
significant
estimates
made
by
management,
as
well
as
evaluating
the
overall
presentation
of
the
financial statements. Our audit
of internal control over
financial reporting included obtaining
an understanding of internal control
over
financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design
and operating effectiveness
of internal
control based
on the assessed
risk. Our
audits also
included performing
such other
procedures as
we considered
necessary
in the circumstances.
We believe that our audits
provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s
internal control over financial reporting is a
process designed to provide reasonable assurance
regarding the reliability of
financial reporting and
the preparation of
financial statements for
external purposes in
accordance with
generally accepted accounting
principles.
A
company’s
internal
control
over
financial
reporting
includes
those
policies
and
procedures
that
(1)
pertain
to
the
maintenance
of
records
that,
in
reasonable
detail,
accurately
and
fairly
reflect
the
transactions
and
dispositions
of
the
assets
of
the
company; (2) provide
reasonable assurance that
transactions are recorded
as necessary to permit
preparation of financial
statements in
accordance with
generally accepted
accounting principles,
and that
receipts and
expenditures of
the company
are being
made only
in
accordance
with
authorizations
of
management
and
directors
of
the
company;
and
(3)
provide
reasonable
assurance
regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s
assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections
of any evaluation
of effectiveness to
future periods are
subject to the
risk that controls
may become inadequate
because of
changes in
conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Critical Audit Matters
The
critical
audit
matter
communicated
below
is a
matter
arising
from
the
current
period
audit
of
the
financial
statements
that
was
communicated or required
to be communicated
to the audit
committee and that:
(1) relates to accounts
or disclosures that
are material
to the financial
statements and (2)
involved our especially
challenging, subjective,
or complex judgments.
The communication of
the
critical
audit
matter
does
not
alter
in
any
way
our
opinion
on
the
financial
statements,
taken
as
a
whole,
and
we
are
not,
by
communicating
the
critical
audit
matter
below,
providing
a
separate
opinion
on
the
critical
audit
matter
or
on
the
accounts
or
disclosures to which it relates.
Allowance for Credit Losses – Model and Forecast of Macroeconomic Variables
As described
in Notes
1 and
9 to
the financial
statements, the
allowance for
credit losses
(“ACL”) for
loans and
finance leases
is an
accounting
estimate
of
expected
credit
losses
over
the
contractual
life
of
financial
assets
carried
at
amortized
cost
and
off-balance-
sheet credit exposures.
The calculation
of the
ACL for
loans and
finance leases,
is primarily
measured based
on a
probability of
default /
loss given
default
modeled approach. A significant
amount of judgment was required
when assessing the reasonableness and
quality of the model design
and
construction,
including
whether
the
models
were
relevant
to
the
Company’s
loan
portfolio
and
were
suitable
for
use.
Additionally,
the estimate
of the
probability of
default and
loss given
default assumptions
uses relevant
current and
forward-looking
macroeconomic variables,
such as:
unemployment rate;
housing and
real estate
price indices;
interest rates;
market risk
factors; and
gross domestic
product, and
considers conditions
throughout Puerto
Rico, the
Virgin
Islands,
and the
State of
Florida. A
significant
amount of
judgment is required
to assess the
reasonableness of
the macroeconomic variables.
Changes in the
model design as
well as
changes to these assumptions could have a material effect on the
Company’s financial results.
136
The
model
and
the
current
and
forward-looking
macroeconomic
variables
used
contribute
significantly
to
the
determination
of
the
ACL for
loans and
finance leases.
We
identified the
assessment of
the model
design and
construction and
the assessment
of relevant
macroeconomic
variables
as a
critical audit
matter as
the impact
of these
judgments
represents a
significant
portion
of the
ACL for
loans
and
finance
leases
and
because
management’s
estimate
required
especially
subjective
auditor
judgment
and
significant
audit
effort, including the need for specialized skill.
The primary procedures we performed to address these critical audit matters included:
●
Testing
the
effectiveness
of
controls
over
the
evaluation
of
the
conceptual
design
and
construction
of
the
models
and
the
evaluation of the current and forward-looking macroeconomic variables,
including controls addressing:
o
Management’s review and
approval of the models and methodologies used to establish the ACL.
o
Management’s review and
approval of the macroeconomic variables.
o
Management’s review of the reasonableness
of the results of the macroeconomic variables used in the calculation.
o
Management’s review of
the results of the third-party model validations.
●
Substantively
testing
management’s
process,
including
evaluating
their
judgments
and
assumptions,
for
assessing
the
conceptual design and construction of the models and for developing the
macroeconomic variables, which included:
o
Evaluation,
with
the
assistance
of
professionals
with
specialized
skill
and
knowledge,
of
the
reasonableness
of
management’s judgments related
to the conceptual design and construction of the models.
o
Evaluation
of
the
completeness
and
accuracy
of
data
inputs
used
as
a
basis
for
the
adjustments
relating
to
macroeconomic variables.
o
Evaluation,
with
the
assistance
of
professionals with
specialized
skill
and
knowledge,
of
the
reasonableness of
management’s
judgments
related
to the macroeconomic
variables
used in the
determination
of the ACL
for loans.
Among
other procedures, our
evaluation considered, evidence from internal and
external sources, loan
portfolio performance
trends
and whether
such assumptions
were applied
consistently
period
to period.
o
Analytical evaluation of the variables period to period for directional consistency
and testing for reasonableness.
/s/
We have served
as the Company’s auditor since 2018.
March 1, 2022
Stamp No. E413192 of the Puerto Rico
Society of Certified Public Accountants
was affixed to the record copy of this report.
137
Management’s Report on Internal Control
over Financial Reporting
To the Stockholders
and Board of Directors of First BanCorp.:
First BanCorp.’s
(the “Corporation”)
internal control
over financial
reporting is
a process
designed
and effected
by those
charged
with
governance,
management,
and
other
personnel,
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
and the preparation of reliable
financial statements in accordance
with accounting principles generally
accepted in the United States of
America
(“GAAP”).
The
Corporation’s
internal
control
over
financial
reporting
includes
those
policies
and
procedures
that:
(1) pertain to the
maintenance of records
that, in reasonable detail,
accurately and fairly reflect
the transactions and dispositions
of the
assets
of
the
Corporation;
(2) provide
reasonable
assurance
that
transactions
are
recorded
as
necessary
to
permit
the
preparation
of
financial
statements
in
accordance
with
GAAP,
and
that
receipts
and
expenditures
of
the
Corporation
are
being
made
only
in
accordance
with
authorizations
of
management
and
directors
of
the
Corporation;
and
(3) provide
reasonable
assurance
regarding
prevention,
or timely
detection and
correction
of unauthorized
acquisition,
use, or
disposition of
the Corporation’s
assets that
could
have a material effect on the financial statements.
Because of
its inherent
limitations, internal
control over
financial reporting
may not
prevent, or
detect and
correct misstatements.
Also,
projections
of
any
evaluation
of
effectiveness
to
future
periods
are
subject
to
the
risk
that
controls
may
become
inadequate
because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.
Management
is
responsible
for
establishing
and
maintaining
effective
internal
control
over
financial
reporting.
Management
assessed
the
effectiveness
of
the
Corporation’s
internal
control
over
financial
reporting
as
of
December 31,
2021,
based
on
the
framework
set
forth
by
the
Committee
of
Sponsoring
Organizations
of
the
Treadway
Commission
(COSO)
in
Internal
Control-
Integrated
Framework
(2013).
Based
on
that
assessment,
management
concluded
that,
as
of
December
31,
2021,
the
Corporation’s
internal control over financial reporting is effective based
on the criteria established in Internal Control-Integrated Framework (2013).
audited by CROWE LLP,
an independent public accounting firm, as stated in their
accompanying report dated March 1, 2022.
First BanCorp.
138
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2021
December 31, 2020
(In thousands, except for share information)
ASSETS
Cash and due from banks
$
$
Money market investments:
Time deposits with other financial institutions
Other short-term investments
Total money market investments
Investment securities available for sale, at fair value:
Securities pledged with creditors’ rights to repledge
Other investment securities available for sale
Total investment securities available for sale, at fair value (amortized cost 2021 - $
;
2020 - $
; allowance for credit losses of $
December 31, 2020)
Investment securities held to maturity, at amortized cost, net of allowance for credit losses
of $
;
2020 - $
)
Equity securities
Loans, net of allowance for credit losses of $
)
Loans held for sale, at lower of cost or market
Total loans, net
Premises and equipment, net
Other real estate owned (“OREO”)
Accrued interest receivable on loans and investments
Deferred tax asset, net
Goodwill
Intangible assets
Other assets
Total assets
$
$
LIABILITIES
Non-interest-bearing deposits
$
$
Interest-bearing deposits
Total deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Other borrowings
Accounts payable and other liabilities
Total liabilities
STOCKHOLDERS’ EQUITY
Preferred stock, authorized,
Non-cumulative Perpetual Monthly Income Preferred Stock:
;
as of December 31, 2020 (See Note 23)
Common stock, $
Less: Treasury stock (at par value)
(
2,183
)
(
480
)
Common stock outstanding,
(2020 -
Additional paid-in capital
Retained earnings, includes legal surplus reserve of $
)
Accumulated other comprehensive (loss) income, net of tax of $
$
)
(
83,999
)
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
The accompanying notes are an integral part of these statements.
139
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2021
2020
2019
(In thousands, except per share information)
Interest and dividend income:
$
$
$
Interest expense:
Provision for credit losses - (benefit) expense:
(
61,720
)
(
3,568
)
(
412
)
(
410
)
(
65,698
)
Non-interest income:
(
497
)
Non-interest expenses:
(
2,160
)
Income before income taxes
Income tax expense
Net income
$
$
$
Net income attributable to common stockholders
$
$
$
Net income per common share:
$
$
$
$
$
$
The accompanying notes are an integral part of these statements.
140
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended
December 31,
2021
2020
2019
(In thousands)
Net income
$
$
$
Other comprehensive (loss) income, net of tax:
Debt securities:
Unrealized gain on debt securities for which credit losses have been recognized
Reclassification adjustment for credit losses - (benefit) expense on debt securities included in net
income
(
136
)
Reclassification adjustment for net gains included in net income on sales of
available-for-sale debt securities with no credit losses previously recognized
(
13,198
)
All other unrealized holding (losses) gains on available-for-sale debt securities
(
144,396
)
Defined benefit plans adjustments:
Net actuarial gain (loss)
(
270
)
Other comprehensive (loss) income for the year, net of tax
(
139,454
)
Total comprehensive income
$
$
$
Year Ended
December 31,
2021
2020
2019
(In thousands)
Income tax effect of items included in other comprehensive (loss) income:
Debt securities:
Unrealized gain on debt securities for which credit losses have been recognized
$
$
$
Reclassification adjustment for credit losses - (benefit) expense on debt securities included in net
Reclassification adjustments for net gain included in net income on sales of
available-for-sale debt securities with no credit losses previously recognized
All other unrealized holding
(losses) gains on available-for-sale debt securities
Defined benefit plans adjustments:
Net actuarial gain (loss)
(
162
)
Total income tax effect of items included in other comprehensive (loss) income
$
$
(
162
)
$
The accompanying notes are an integral part of these statements.
141
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2021
2020
2019
(In thousands)
Cash flows from operating activities:
$
$
$
Adjustments to reconcile net income to net cash provided by operating
activities:
(
65,698
)
(
4,371
)
(
94
)
(
13,198
)
(
4,227
)
(
5,635
)
(
2,934
)
(
32
)
(
215
)
(
14,791
)
(
13,273
)
(
10,446
)
(
25,294
)
(
8,602
)
(
8,117
)
(
503,200
)
(
648,052
)
(
362,612
)
(
1,971
)
(
2,776
)
(
2,990
)
(
5,018
)
(
12,506
)
(
4,590
)
Cash flows from investing activities:
(
335,152
)
(
341,870
)
(
3,447,921
)
(
3,820,148
)
(
765,432
)
(
13,349
)
(
16,070
)
(
22,478
)
(
3,381
)
(
1,262,975
)
(
1,238,865
)
(
342,968
)
Cash flows from financing activities:
(
35,000
)
(
15,086
)
(
240,000
)
(
95,282
)
(
205,000
)
(
216,522
)
(
206
)
(
1,959
)
(
65,021
)
(
43,416
)
(
30,356
)
(
2,453
)
(
2,676
)
(
2,676
)
(
36,104
)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
$
$
Cash and cash equivalents include:
$
$
$
$
$
$
The accompanying notes are an integral part of these statements.
142
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY
Year Ended December 31,
2021
2020
2019
(In thousands, except per share information)
Preferred Stock:
$
$
$
(
36,104
)
-
-
Common stock outstanding:
(
1,695
)
(
5
)
(
18
)
(
8
)
(
1
)
Additional paid-in capital:
(
214,827
)
(
201
)
(
1,941
)
(
33
)
(
90
)
(
31
)
(
2
)
(
30
)
Retained earnings:
(
62,322
)
(
65,364
)
(
43,771
)
(
30,501
)
(
2,453
)
(
2,676
)
(
2,676
)
(
1,234
)
Accumulated other comprehensive (loss) income, net of tax:
(
40,415
)
(
139,454
)
(
83,999
)
$
$
$
The accompanying notes are an integral part of these statements.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS
143
NOTE 1
–
NATURE OF BUSINESS
AND SUMMARY
OF SIGNIFICANT
ACCOUNTING
POLICIES
Nature of business
First
BanCorp.
(the
“Corporation”)
is
a
publicly
owned,
Puerto
Rico-chartered
financial
holding
company
that
is
subject
to
regulation,
supervision,
and
examination
by the
Board
of Governors
of the
Federal
Reserve
System
(the “Federal
Reserve
Board”).
The Corporation is a full service
provider of financial services and products
with operations in Puerto Rico, the
United States, the U.S.
Virgin Islands
(the “USVI”), and the British Virgin
Islands (the “BVI”).
The Corporation
provides a
wide range
of financial
services for
retail, commercial,
and institutional
clients.
The Corporation
has
two
wholly-owned
subsidiaries:
FirstBank
Puerto
Rico
(“FirstBank”
or
the
“Bank”),
and
FirstBank
Insurance
Agency,
Inc.
(“FirstBank Insurance Agency”).
FirstBank is a Puerto
Rico-chartered commercial bank,
and FirstBank Insurance
Agency is a Puerto
Rico-chartered
insurance
agency.
FirstBank
is
subject
to
the
supervision,
examination,
and
regulation
of
both
the
Office
of
the
Commissioner
of
Financial
Institutions
of
the
Commonwealth
of
Puerto
Rico
(the
“OCIF”)
and
the
Federal
Deposit
Insurance
Corporation
(“FDIC”).
Deposits
are
insured
through
the
FDIC
Deposit
Insurance
Fund.
FirstBank
also
operates
in
the
State
of
Florida,
subject to
regulation
and
examination
by the
Florida
Office
of Financial
Regulation
and
the FDIC,
in the
USVI, subject
to
regulation
and examination
by the
United
States Virgin
Islands Banking
Board, and
in the
BVI, subject
to regulation
by the
British
Virgin
Islands
Financial
Services
Commission.
The
Consumer
Financial
Protection
Bureau
(the
“CFPB”)
regulates
FirstBank’s
consumer financial products and services.
FirstBank Insurance Agency
is subject to the supervision,
examination, and regulation of
the Office of the
Insurance Commissioner
of the Commonwealth of Puerto Rico and the Division of Banking and Insurance
Financial Regulation in the USVI.
Effective
September 1,
2020, FirstBank
completed the
acquisition of Santander
Bancorp, a
wholly-owned subsidiary
of Santander
Holdings
USA, Inc.
and
the holding
company of
Banco Santander
Puerto Rico
(“BSPR”),
pursuant
to a
Stock Purchase
Agreement
dated
as
of
October
21,
2019,
by
and
among
FirstBank
and
Santander
Holdings,
USA,
Inc.
(the
“Stock
Purchase
Agreement”).
Immediately following the closing
of the transaction, Santander
Bancorp was merged with
and into FirstBank (the
“HoldCo Merger”),
with FirstBank surviving the HoldCo Merger.
Immediately following the effectiveness of the
HoldCo Merger, BSPR was
merged with
and into FirstBank,
with FirstBank as
the surviving entity
in the merger.
Refer to Note
2 – Business
Combination, to the
consolidated
financial statements for more information about this acquisition.
FirstBank conducts its
business through its
main office located
in San Juan, Puerto
Rico,
banking
branches
in
the
USVI
and
the
BVI,
and
owned
subsidiaries
with
operations
in
Puerto
Rico:
First
Federal
Finance
Corp.
(d/b/a
Money
Express
La Financiera),
a
finance
company specializing in the origination
of small loans with
corporation,
which
holds
tax-exempt
assets;
FirstBank
Overseas
Corporation,
an
international
banking
entity
(an
“IBE”)
organized
under
the International
Banking
Entity
Act of
Puerto
Rico;
and
one dormant
company formerly
engaged
in the
operation
of certain
OREO property.
General
description of the Corporation’s most
significant accounting policies.
Principles of consolidation
The
consolidated
financial
statements
include
the
accounts
of
the
Corporation
and
its
subsidiaries.
All
significant
intercompany
balances
and
transactions
have
been
eliminated
in
consolidation.
The
results
of
operations
of
companies
or
assets
acquired
are
included
from
the
date
of
acquisition.
Statutory
business
trusts
that
are
wholly-owned
by
the
Corporation
and
are
issuers
of
trust-
preferred
securities
(“TRuPs”)
and
entities
in
which
the
Corporation
has
a
non-controlling
interest,
are
not
consolidated
in
the
Corporation’s
consolidated
financial
statements
in
accordance
with
authoritative
guidance
issued
by
the
FASB
for
consolidation
of
variable
interest
entities
(“VIE”).
See
“Variable
Interest
Entities”
below
for
further
details
regarding
the
Corporation’s
accounting
policy for these entities
.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
144
Use of estimates in the preparation of financial statements
The
preparation
of
financial
statements
in
conformity
with GAAP
requires
management
to
make
estimates
and
assumptions
that
affect
the reported
amounts of
assets, liabilities,
and contingent
liabilities as
of the
date of
the financial
statements, and
the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and cash equivalents
For purposes of
reporting cash
flows, cash and
cash equivalents include
cash on hand,
cash items in
transit, and
amounts due
from
the Federal Reserve Bank of New York
(the “Federal Reserve” or the “FED”) and other
depository institutions. The term also includes
money market funds and short-term investments with original maturities of
three months or less.
Investment securities
The Corporation classifies its investments in debt and equity securities into one
of four categories:
Held-to-maturity
amortized
cost.
The
Corporation
may
not
sell
or
transfer
held-to-maturity
securities
without
calling
into
question
its
intent
to
hold other debt securities to
maturity, unless
a nonrecurring or unusual event
that could not have been reasonably
anticipated has
occurred.
Trading
carried at fair value,
with unrealized
gains and losses reported
in earnings. As of December
31, 2021, and 2020, the Corporation
did
not hold
investment
securities
for trading
purposes.
Available-for-sale
holding
gains
and
losses, net
of
deferred taxes,
reported
in
other
comprehensive income
(“OCI”)
as
a
separate
component of
stockholders’
equity. The unrealized
holding gains
and losses do
not affect earnings
until they are
realized,
or an allowance
for credit
losses (“ACL”)
is recorded.
Equity
securities
consolidated statements
of financial condition. These securities are stated at
the lower of
cost or
realizable value. This category is
principally
composed of FHLB
stock that the Corporation
owns to comply with
FHLB regulatory
requirements.
The realizable
value
of
the
stock
equals
its
cost.
Also
included in
this
category are
marketable equity
securities held
at
fair
value
with
changes
in
unrealized
gains or
losses recorded
through
earnings.
Premiums
and
discounts
on
debt
securities
are
amortized
as an
adjustment
to
interest
income
on
investments
over
the life
of
the
related securities
under the
interest method
without anticipating
prepayments, except
for mortgage-backed
securities (“MBS”)
where
prepayments are anticipated. Premiums on
callable debt securities, if any,
are amortized to the earliest call date.
Purchases and sales of
securities are recognized on a trade-date basis. Gains and losses on sales are determined
using the specific identification method.
A debt
security
is placed
on nonaccrual
status at
the time
any
principal
or interest
payment
becomes 90 days
delinquent.
Interest
accrued
but not
received
for a
security
placed
on non-accrual
is reversed
against interest
income. As
of December
31,
2021,
a $
million
residential
pass-through
MBS
issued
by
the
Puerto
Rico
Housing
Finance
Authority
(“PRHFA”)
that
is
collateralized
by
certain second mortgages
origination under a
program launched by
the Puerto Rico
government in 2010,
is in nonaccrual
status based
on
the
delinquency
status
of
the
underlying
second
mortgage
loans
collateral.
December 31, 2020.
Allowance
for
Credit
Losses
–
Held-to-Maturity
Debt
Securities:
The
Corporation
measures
expected
credit
losses
on
held-to-
maturity securities by major
security type. As of December 31,
2021, the held-to-maturity securities portfolio
consisted of Puerto Rico
municipal
bonds
totaling
$
%
of
the
held-to-maturity
municipal
bonds
were
issued
by
four
of
the
largest
municipalities
in
Puerto
Rico.
The
vast
majority
of
revenue
for
these
four
municipalities
is
independent
of
the
Puerto
Rico
central government.
These obligations typically are not issued
in bearer form, nor are they registered
with the Securities and Exchange
Commission
(“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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
145
The
ACL
for
the
held-to-maturity
Puerto
Rico
municipal
bonds
of
$
considers
historical
credit
loss
information
that
is
adjusted
for
current
conditions
and
reasonable
and
supportable
forecasts.
These
financing arrangements
with Puerto
Rico municipalities
were issued
in bond
form and accounted
for as securities
but underwritten
as
loans with features that are
typically found in commercial
loans. Accordingly,
similar to commercial loans, an
internal risk rating (
i.e
.,
pass, special mention,
substandard, doubtful, or loss)
is assigned to each bond
at the time of issuance
or acquisition, and monitored
on
a continuous
basis with a
formal assessment completed,
at a minimum,
on a quarterly
basis. The Corporation
determines the ACL
for
held-to-maturity
Puerto
Rico
municipal
bonds
based
on
the
product
of
a
cumulative
probability
of
default
(“PD”)
and
loss
given
default (“LGD”),
and the amortized
cost basis of
each bond over
its remaining expected
life. PD estimates
represent the point
-in-time
as
of
which
the
PD
is
developed,
and
are
updated
quarterly
based
on,
among
other
things,
the
payment
performance
experience,
financial
performance
and
market
value
indicators,
and
current
and
forecasted
relevant
forward-looking
macroeconomic
variables
over the
expected life
of the
bonds,
to determine
a lifetime
term structure
PD curve.
LGD estimates are
determined based
on, among
other
things,
historical
charge-off
events
and
recovery
payments
(if
any),
government
sector
historical
loss
experience,
as
well
as
relevant current
and forecasted
macroeconomic expectations
of variables,
such as unemployment
rates, interest
rates, and
market risk
factors based on industry
performance, to determine a
lifetime term structure LGD
curve. Under this approach,
all future period losses
for each
instrument are
calculated using
the PD
and LGD
loss rates
derived
from the
term structure
curves applied
to the
amortized
cost
basis
of
each
bond.
For
the
relevant
macroeconomic
expectations
of
variables,
the
methodology
considers
an
initial
forecast
period
(a
“reasonable
and
supportable
period”)
of
approach and
reverting back
to the
historical macroeconomic
mean. After
the reversion
period, the
Corporation uses
a historical
loss
forecast period covering the remaining contractual
life based on the changes in key historical
economic variables during representative
historical expansionary and recessionary periods. Furthermore, the
Corporation
periodically
considers
the need
for qualitative
adjustments
to the ACL. Qualitative adjustments
may be related to and include, but not be limited
to, factors such as: (i) management’s
assessment of
economic forecasts
used
in
the
model
and
how
those
forecasts align
with
management’s overall
evaluation of
current and
expected
economic conditions;
(ii) organization specific
risks such as credit concentrations,
collateral specific
risks, nature and size of the portfolio
and
external factors
that
may
ultimately impact
credit
quality,
and
(iii)
other
limitations associated
with
factors
such
as
changes
in
underwriting
and loan
resolution
strategies,
among others.
Prior to
the implementation
of ASU
2016-13, “Financial
Instruments
– Credit
Losses (Topic
326): Measurement
of Credit
Losses
on
Financial
Instruments,”
(“ASC 326”
or
“CECL”)
on
January
1,
2020,
the
Corporation
evaluated
its
held-to-maturity
investment
securities
portfolio
on
a
quarterly
basis
for
indicators
of
other-than-temporary
impairment
(“OTTI”).
The
Corporation
assessed
whether
OTTI
had
occurred,
the
credit
portion
of
the
OTTI
was
recognized
in
noninterest
income
while
the
noncredit
portion
was
recognized in OCI.
In determining the
credit portion, the
Corporation used a
discounted cash flow
analysis which included
evaluating
the timing and amount of the expected cash flow.
The
Corporation
has
elected
not
to
measure
an
allowance
for
credit
losses
on
accrued
interest
related
to
held-to-maturity
debt
securities, as uncollectible accrued
interest receivables are written off
on a timely manner.
Refer to Note
5 - Investment
Securities
to the
consolidated financial
statements for additional
information
about reserve balances
for held-to-maturity
debt securities,
activity during the
period, and information about changes in
circumstances that caused changes in
the ACL
for held-to-maturity debt securities during the
years
ended December
31, 2021
and 2020.
Allowance for Credit
Losses – Available
-for-Sale Debt
Securities:
For available-for-sale
debt securities
in an unrealized
loss position,
the Corporation first
assesses whether it
intends to
sell, or
it is
more likely
than not
that it
will be
required to
sell, the
security before
recovery of
its amortized
cost basis.
If either of
the criteria
regarding
intent or
requirement
to sell is
met, the security’s
amortized
cost basis
is
written
off
to
fair
value
through
earnings.
For
available-for-sale debt
securities that
do
not
meet
the
aforementioned criteria, the
Corporation evaluates
whether the
decline
in
fair
value
has
resulted from
credit
losses
or
other
factors. In
making
this
assessment,
management considers the cash position of the issuer and
its cash and
capital generation capacity, which could increase or diminish the
issuer’s ability
to repay its bond obligations,
the extent to which the fair
value is 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
economic
climate. The
Corporation also
takes
into
consideration changes in the near-term prospects of
the underlying collateral of 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
on the debt securities.
If this assessment
indicates that a credit
loss exists,
the present value of cash
flows expected to be collected from the
security is compared to the amortized cost basis of
the security. If
the
present value
of cash flows
expected to
be collected
is less than
the amortized
cost basis,
a credit loss
exists and
the Corporation
records an
ACL for the credit loss, limited
to the amount by which the fair
value is less than the amortized
cost basis. The Corporation
recognizes
in
OCI any impairment
that has
not been
recorded
through
an ACL.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
146
The Corporation records
changes in
the ACL
as a
provision for (or
reversal of)
credit loss
expense. Losses are
charged against the
allowance when
management believes the
uncollectibility of an
available-for-sale security is
confirmed or
when
either of
the
criteria
regarding intent or requirement to sell is met.
The Corporation
has elected
not
to measure
an allowance
for
credit losses
on
accrued
interest related to available-for-sale securities, as uncollectible accrued interest
receivables are written off on a timely manner.
Approximately 99%
of
the
Corporation’s available-for-sale investment securities
are
issued by
U.S.
government-sponsored entities
(“GSEs”).
These securities
are either
explicitly
or implicitly
guaranteed
by the U.S. government
and have a long
history of
no credit losses.
For
further information, including
the
methodology and
assumptions used
for
the
discounted cash
flow
analyses performed
on
other
available-for-sale
investment
securities
such as private
label MBS
and bonds
issued by
the PRHFA, refer
to Note 5
– Investment
Securities,
and Note
30 – Fair
Value, to the consolidated
financial
statements
Prior to the implementation
of CECL on January
1, 2020, the
Corporation
evaluated
its available-for-sale
investment
securities
portfolio
in accordance with the methodology specified above paragraph except that the credit portion of the OTTI was recognized in noninterest
income and
reduced the
amortized
cost basis
of the security.
Any subsequent
increase
in the expected
cash flows
would be
recognized
as an
adjustment
to interest
income.
Loans held for investment
Loans that the
Corporation has
the ability and
intent to hold
for the foreseeable
future are classified
as held
for investment
and are
reported
at amortized
cost, net
of its
ACL. The
substantial majority
of the
Corporation’s
loans are
classified as
held for
investment.
Amortized cost is the principal outstanding balance,
net of unearned interest, cumulative charge
-offs, unamortized deferred origination
fees
and
costs,
and
unamortized
premiums
and
discounts.
The
Corporation
reports
credit
card
loans
at
their
outstanding
unpaid
principal balance plus uncollected
billed interest and fees
net of such amounts
deemed uncollectible. Interest
income is accrued on
the
unpaid
principal
balance.
Fees
collected
and
costs
incurred
in
the
origination
of
new
loans
are
deferred
and
amortized
using
the
interest
method
or
a
method
that
approximates
the
interest
method
over
the
term
of
the
loan
as
an
adjustment
to
interest
yield.
Unearned
interest
on
certain
personal
loans,
auto
loans,
and
finance
leases
and
discounts
and
premiums
are
recognized
as
income
under a
method that
approximates the
interest method.
When a
loan is paid-off
or sold,
any remaining
unamortized net
deferred fees,
or costs, discounts and premiums are included in loan interest income in
the period of payoff.
Nonaccrual
and
Past-Due
Loans
nonaccrual.
Loans
are
classified
as
nonaccrual
when
they
are
mortgage loans insured or guaranteed
by the Federal Housing Administration
(the “FHA”), the Veterans
Administration (the “VA”)
or
the
PRHFA,
and
credit
card
loans.
It
is
the
Corporation’s
policy
to
report
delinquent
mortgage
loans
insured
by
the
FHA,
or
guaranteed by
the VA
or the
PRHFA,
as loans
past due
repayment is insured or guaranteed. However,
the Corporation discontinues the recognition of income
relating to FHA/VA
loans when
such
loans
are
over
loans when
such loans are
over
and
timely
collection
of
interest
or
principal
becomes
uncertain
(generally
based
on
an
assessment
of
the
borrower’s
financial
condition
and
the
adequacy
of
collateral,
if
any).
When
a
loan
is
placed
on
nonaccrual
status,
any
accrued
but
uncollected
interest
income is reversed and charged
against interest income and amortization of
any net deferred fees is suspended.
The amount of accrued
interest
reversed
against
interest
income
totaled
$
income on nonaccrual loans is recognized only to the extent it is received in cash.
However, when there is doubt regarding the ultimate
collectability of loan
principal, all cash
thereafter received is
applied to reduce
the carrying value of
such loans (
i.e.
, the cost recovery
method). Under
the cost-recovery
method, interest
income is
not recognized
until the
loan balance
is reduced
to zero.
Generally,
the
Corporation
returns
a
loan
to
accrual
status
when
all delinquent
interest
and
principal
becomes
current
under
the
terms
of
the
loan
agreement,
or
after
a
sustained
period
of
repayment
performance
(
)
and
the
loan
is
well
secured
and
in
the
process
of
collection, and full
repayment of the
remaining contractual principal
and interest is expected.
Loans that are
past due 30
days or more
as
to
principal
or
interest
are
considered
delinquent,
with
the
exception
of
residential
mortgage,
commercial
mortgage,
and
construction
loans,
which
are
considered
past
due
when
the
borrower
is
in
arrears
on
two
or
more
monthly
payments.
The
Corporation
has
elected
not
to
measure
an
allowance
for
credit
losses
on
accrued
interest
related
to
loans
held
for
investment,
as
uncollectible accrued interest receivables are written off
on a timely manner.
Loans Acquired
–
Loans acquired through a purchase
or a business combination
are recorded at their fair
value as of the acquisition
date.
The
Corporation
performs
an
assessment
of
acquired
loans
to
first
determine
if
such
loans
have
experienced
more
than
insignificant deterioration
in credit
quality since
their origination
and thus
should be
classified and
accounted for
as purchased
credit
deteriorated
(“PCD”)
loans.
For
loans
that
have
not
experienced
more
than
insignificant
deterioration
in
credit
quality
since
origination,
referred
to as
non-PCD loans,
the
Corporation
records
such loans
at fair
value,
with any
resulting
discount or
premium
accreted
or
amortized
into
interest
income
over
the
remaining
life
of
the
loan
using
the
interest
method.
Additionally,
upon
the
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
147
purchase or acquisition of non-PCD loans,
the Corporation measures and records
an ACL based on the Corporation’s
methodology for
determining
the
ACL.
The
ACL for
non-PCD
loans
is
recorded
through
a
charge
to
the
provision
for
credit
losses
in
the
period
in
which the loans are purchased or acquired.
Acquired
loans
that
are
classified
as
PCD
are
recognized
at
fair
value,
which
includes
any
resulting
premiums
or
discounts.
Premiums and non-credit loss related
discounts are amortized or accreted
into interest income over the remaining
life of the loan using
the interest
method. Unlike
non-PCD loans,
the initial
ACL for
PCD loans
is established
through an
adjustment to
the acquired
loan
balance and
not through
a charge
to the
provision for
credit losses in
the period
in which
the loans
were acquired.
At acquisition,
the
ACL for PCD loans, which
represents the fair value
credit discount, is determined
using a discounted cash
flow method that considers
the PDs and
LGDs used in
the Corporation’s
ACL methodology.
Characteristics of PCD
loans include:
delinquency,
payment history
since
origination,
credit
scores
migration
and/or
other
factors
the
Corporation
may
become
aware
of
through
its
initial
analysis
of
acquired
loans
that
may
indicate
there
has
been
more
than insignificant
deterioration
in
credit
quality
since
a
loan’s
origination.
In
connection
with
the
BSPR
acquisition
on
September
1,
2020,
the
Corporation
acquired
PCD
loans
with
an
aggregate
fair
value
at
acquisition
of
approximately
$
amortized cost of the loans.
Subsequent
to
acquisition,
the
ACL
for
both
non-PCD
and
PCD
loans
is
determined
pursuant
to
the
Corporation’s
ACL
methodology in the same manner as all other loans.
For PCD loans
that prior to
the adoption of
ASC 326 were
classified as purchased
credit impaired (“PCI”)
loans and accounted
for
under
the
Financial
Accounting
Standards
Board
(“FASB”)
Accounting
Standards
Codification
(the
“Codification”
or
“ASC”)
Subtopic
310-30,
“Accounting
for
Purchased
Loans
Acquired
with
Deteriorated
Credit
Quality”
(ASC
Subtopic
310-30),
the
Corporation adopted ASC 326 using
the prospective transition approach.
As allowed by ASC 326,
the Corporation elected to maintain
pools of
loans accounted
for under ASC
Subtopic 310-30
as “units of
accounts,” conceptually
treating each
pool as a
single asset. As
of
December
31,
2021,
such
PCD
loans
consisted
of
$
mortgage loans
acquired by
the Corporation
as part of
previously completed
asset acquisitions.
These previous
transactions include
a
transaction completed
on February
27, 2015,
in which
FirstBank acquired
ten Puerto
Rico branches
of Doral
Bank, acquired
certain
assets, including
PCD loans, and
assumed deposits, through
an alliance with
Banco Popular of
Puerto Rico, which
was the successful
lead bidder
with the
FDIC on
the failed
Doral
Bank, as
well as
other co-bidders,
and the acquisition
from Doral
Financial in
the first
quarter
of
2014
of
all
of
its
rights,
title
and
interest
in
first
and
second
residential
mortgage
loans
in
full
satisfaction
of
secured
borrowings owed
by such
entity to
FirstBank. As
the Corporation
elected to
maintain pools
of units
of account
for loans
previously
accounted for under
ASC Subtopic 310-30,
the Corporation is
not able to
remove loans from
the pools until
they are paid
off, written
off or
sold (consistent with
the Corporation’s
practice prior to
adoption of
ASC 326), but
is required
to follow ASC
326 for purposes
of the
ACL. Regarding
interest income
recognition
for PCD
loans that
existed at
the time
of adoption
of ASC
326,
the prospective
transition approach for PCD loans
required by ASC 326 was
applied at a pool level,
which froze the effective
interest rate of the pools
as
of
January
1,
2020.
According
to
regulatory
guidance,
the
determination
of
nonaccrual
or
accrual
status
for
PCD
loans
that
the
Corporation
has
elected
to
maintain
in
previously
existing
pools
pursuant
to
the
policy
election
right
upon
adoption
of
ASC
326
should be
made at
the pool
level, not
the individual
asset level.
In addition,
the guidance
provides that
the Corporation
can continue
accruing interest
and not
report the
PCD loans
as being
in nonaccrual
status if
the following
criteria are
met: (i)
the Corporation
can
reasonably estimate
the timing
and amounts
of cash
flows expected
to be
collected, and
(ii) the
Corporation did
not acquire
the asset
primarily
for
the
rewards
of
ownership
of
the
underlying
collateral,
such
as
use
of
the
collateral
in
operations
or
improving
the
collateral
for
resale.
Thus,
the
Corporation
continues
to
exclude
these
pools
of
PCD
loans
from
nonaccrual
loan
statistics.
In
accordance with
ASC 326,
the Corporation
did not
reassess whether
modifications to
individual acquired
loans accounted
for within
pools were TDR as of the date of adoption.
Charge-off
of Uncollectible
Loans -
Corporation
determines are
uncollectible,
net of
recovered amounts.
The Corporation
records charge
-offs as
a reduction
to the
ACL
and subsequent recoveries of previously charged-off
amounts are credited to the ACL.
Effective
April 1,
2021, the
Corporation
updated
its policies
regarding
the timing
of recognition
of auto
loans and
small personal
loans charge
-offs. The
update requires
the Corporation
to charge-off
auto loans,
finance leases,
and small
personal loans,
or portions
of
such
loans,
classified
as
“loss”
when
the
loan
becomes
reserved the portion
of auto loans
and finance leases
deemed “loss” once
they were
to their
net realizable
value when
the collateral
deficiency was deemed
uncollectible (i.e.,
when foreclosure/repossession
is probable)
or when
the loan
was
“loss”
when
they
were
supported by the fact that the majority of consumer
loans that become
the
borrower
has
demonstrated
an
inability
or
lack
of
willingness
to
meet
their
obligation
of
making
timely
payments
to
cure
the
delinquency. At the
time the Corporation implemented
the update to the charge-off policy in the second
quarter of 2021, the amount of
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
148
loans determined
to be
classified as
“loss” amounted
to $
million of
such charge
-off exceeded
existing reserves
at the
time the
Corporation implemented
the policy
update. This
update to
the
policy
did
not
have
an
impact
on
the
approach
the
Corporation
uses
to
estimate
the
ACL
for
auto
loans,
finance
leases,
or
small
personal loans.
Collateral dependent loans in
the construction, commercial
mortgage, and commercial and
industrial loan portfolios are
charged off
to their net
realizable value (fair
value of collateral,
less estimated costs to
sell) when loans
are considered to
be uncollectible. Within
the
consumer
loan
portfolio,
closed-end
consumer
loans
are
charged
off
when
payments
are
finance lease
and small
personal loans
as discussed
above.
Open-end
(revolving credit)
consumer loans,
including credit
card loans,
are
charged
off
when
payments
are
charged-off, as needed,
to the fair value of the underlying
collateral less cost to sell. Generally,
all loans may be charged
off or written
down to the
fair value of
the collateral prior
to the application
of the policies described
above if a loss-confirming
event has occurred.
Loss-confirming events include, but
are not limited to, bankruptcy (unsecured),
continued delinquency,
or receipt of an asset valuation
indicating a collateral deficiency when the asset is the sole source of repayment.
Troubled
Debt
Restructurings
economic
or legal
reasons related
to the
debtor’s
financial difficulties,
grants
a concession
to the
debtor that
it would
not
otherwise
consider.
TDR loans
are classified
as either
accrual
or nonaccrual
loans. Loans
in accrual
status may
remain
in accrual
status when
their contractual terms have been
modified in a TDR if the loans
had demonstrated performance prior to the
restructuring and payment
in
full
under
the
restructured
terms
is
expected.
Otherwise,
loans
on
nonaccrual
status
and
restructured
as
TDRs
will
remain
on
nonaccrual
status until
the borrower
has proven
the ability
to perform
under the
modified structure,
generally
for a
minimum
of
six
months, and there is evidence that such payments can, and are likely to, continue
as agreed.
The Corporation
removes loans
from TDR
classification, consistent
with applicable
authoritative accounting
guidance, only
when
the following two circumstances are met:
●
The loan is in compliance with the terms of the restructuring agreement; and
●
The
loan
yields
a
market
interest
rate
at
the
time
of
the
restructuring.
In
other
words,
the
loan
was
restructured
with
an
interest rate
equal to
or greater
than what
the Corporation
would have
been willing
to accept
at the
time of
the restructuring
for a new loan with comparable risk.
If
both
conditions
are
met,
the
loan
can
be
removed
from
the
TDR
classification
in
calendar
years
after
the
year
in
which
the
restructuring
took
place.
A
loan
that
had
previously
been
modified
in
a
TDR
and
is
subsequently
refinanced
under
then-current
underwriting
standards
at
a market
rate
with
no
concessionary
terms
is
accounted
for
as
a
new
loan
and
is
no
longer
reported
as
a
TDR.
The
ACL on
a TDR
loan
is generally
measured
using
a
discounted
cash flow
method,
as further
explained
below,
where
the
expected
future
cash
flows
are
discounted
at
the
rate
of
the
loan
prior
to
the
restructuring.
For
credit
cards,
personal
loans,
and
nonaccrual auto loans
and finance leases modified
in a TDR, the
ACL is measured using
the same methodologies
as those used for
all
other loans in those portfolios.
Loans individually
evaluated for
credit
loss determination
ACL
determination
when,
based
upon
current
information
and
events,
including
consideration
of
internal
credit
risk
ratings,
the
Corporation assesses
that it is
probable that
it will be
unable to
collect all amounts
due (including
principal and
interest) according
to
the contractual terms of the
loan agreement, primarily collateral dependent
commercial and construction loans, or
loans that have been
modified or are
reasonably expected to
be modified in
a TDR (except for
credit cards, personal
loans and nonaccrual
auto loans). The
Corporation
individually
evaluates
loans
having
balances
of
$
construction,
commercial
mortgage,
and
commercial
and
industrial
loan
portfolios.
The
Corporation
also
evaluates
individually
for
ACL
purposes
certain
residential
mortgage
loans
and
home
equity
lines
of
credit
with
high
delinquency
levels.
Interest
income
on
loans
individually
evaluated
for
ACL
determination
is
recognized
based
on
the
Corporation’s
policy
for
recognizing
interest
on
accrual and nonaccrual loans.
Collateral
dependent
loans
-
The
Corporation
elected the
practical
expedient
allowed by
ASC 326
for loans
for which
it expects
repayment
to
be
provided
substantially
through
the
operation
or
sale
of
the
collateral
when
the
borrower
is
experiencing
financial
difficulties
based
on
the
Corporation’s
assessment
as
of
the
reporting
date.
Accordingly,
when
the
Corporation
determines
that
foreclosure is probable, expected credit losses on collateral dependent
loans are based on the fair value of the collateral at the reporting
date, adjusted for undiscounted selling costs as appropriate.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
149
Allowance for credit losses for loans and finance leases
The ACL
for
loans and
finance leases
held
for
investment
is a
valuation
account
that is
deducted
from the
loans’
amortized
cost
basis
to
present
the
net
amount
expected
to
be
collected
on
loans.
Loans
are
charged-off
against
the
allowance
when
management
confirms the uncollectibility of a loan balance.
The Corporation
estimates the
allowance using
relevant available
information,
from internal
and external
sources, relating
to past
events,
current
conditions,
and
reasonable
and
supportable
forecasts.
Historical
credit
loss
experience
is
a
significant
input
for
the
estimation of expected
credit losses, as
well as adjustments
to historical loss
information made for
differences in
current loan-specific
risk
characteristics,
such
as
any
difference
in
underwriting
standards,
portfolio
mix,
delinquency
level,
or
term.
Additionally,
the
Corporation’s
assessment
involves
evaluating
key
factors,
which
include
credit
and
macroeconomic
indicators,
such
as
changes
in
unemployment rates, property values, and other relevant
factors, to account for current and forecasted market
conditions that are likely
to cause
estimated credit
losses over
the life
of the
loans to
differ
from historical
credit losses.
Expected
credit
losses are
estimated
over the contractual term
of the loans, adjusted by
prepayments when appropriate.
The contractual term excludes
expected extensions,
renewals, and
modifications unless
either of
the following
applies: the
Corporation has
a reasonable
expectation at
the reporting
date
that a
TDR will
be executed
with an
individual borrower
or the
extension or
renewal options
are included
in the original
or modified
contract at the reporting date and are not unconditionally cancellable by
the Corporation.
The Corporation estimates the ACL
primarily based on a PD/LGD modeled
approach, or individually for collateral dependent
loans
and certain TDR
loans. The Corporation
evaluates the need
for changes
to the ACL
by portfolio segments
and classes of
loans within
certain of those portfolio
segments. Factors such as the
credit risk inherent in
a portfolio and how the Corporation
monitors the related
quality, as well as the estimation
approach to estimate credit losses, are considered in the determination
of such portfolio segments and
classes. The Corporation has identified the following portfolio segments and
measures the ACL using the following methods:
Residential mortgage
– Residential mortgage
loans are loans secured by residential
real property together
with the right to receive the
payment of principal
and interest on the loan.
The majority of the Corporation’s
residential
loans are first lien closed-end
loans secured
by 1-4 single-family
residential
properties.
As of December
31, 2021, the Corporation’s
outstanding
balance of residential
mortgages in
the
Puerto
Rico
and
Virgin
Islands
regions
were
mainly
fixed-rate loans,
while
in
the
Florida
region
approximately
%
of
the
residential
mortgage
loan
portfolio
consisted
of
hybrid
adjustable
rate
mortgages.
For
purposes
of
the
ACL
determination,
the
Corporation stratifies
the portfolio by two main regions (
i.e.,
following
two
classes:
(i)
government-guaranteed residential mortgage
loans,
and
(ii)
conventional mortgage
loans.
Government-
guaranteed
loans are
those originated
to qualified
borrowers
under the
FHA and the
VA standards. Originated
loans that
meet the FHA’s
standards qualify
for the FHA’s
insurance program
whereas loans that meet
the standards of the VA are guaranteed by such entity. No
credit losses are
determined for loans insured or
guaranteed by the
FHA or
the VA
due to
the explicit guarantee of
the U.S.
federal
government. Residential
mortgage loans that do not qualify under the FHA or VA
programs are referred to as conventional
residential
mortgage
loans.
For conventional
residential
mortgage
loans, the
Corporation
calculates
the ACL using
a PD/LGD
modeled approach,
or individually
for
collateral
dependent loans
with high delinquency
levels or loans
that have been
modified or are
reasonably
expected to
be modified in a
TDR. The ACL
for residential
mortgage
loans measured
using a PD/LGD
model is
calculated
based on
the product
of PD, LGD,
and the
amortized cost basis
determined for each
loan over
the remaining
expected life of
the loan,
considering prepayments. PD estimates
represent
the point-in-time
as of which
the PD is developed
for each residential
mortgage loan,
updated quarterly
based on,
among other
things,
historical
payment
performance
and
relevant
current
and
forward-looking
macroeconomic
variables,
such
as
regional
unemployment rates, over the expected life of the loans to
determine a lifetime term structure PD curve. The Corporation determines
LGD estimates based
on, among other things,
historical
charge-off events and
recovery payments,
loan-to-value
attributes,
and relevant
current and forecasted macroeconomic
variables, such as the regional housing
price index, to determine a lifetime term structure
LGD
curve. Under
this approach, the
Corporation calculates losses for
each loan
for
all future
periods using
the PD
and LGD
loss rates
derived from the term structure curves applied to
the amortized cost basis of
the loans, considering prepayments. For loans that have
been modified or
are reasonably expected to
be modified in
a
TDR and
loans previously written-down to their
respective realizable
values,
the
Corporation determines
the
ACL
based
on
a
risk-adjusted discounted
cash
flow
methodology using
PDs
and
LGDs
developed as explained
above. Under this approach,
all future cash flows (interest
and principal) for each loan
are adjusted by the PDs
and LGDs derived from the term structure
curves and prepayments
and then discounted at the effective
interest rate as of the reporting
date (or original rate
for TDRs) to arrive at the net present
value of future cash flows.
For these loans, the estimated
credit loss amount
recorded in a period represents the excess of the carrying
amount of the loan, net of any charge-off, over the net present value of cash
flows resulting
from the model.
Residential
mortgage loans
that are
and are individually
reviewed
and charged-off,
as needed,
to the
fair value
of the collateral
less cost
to sell.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
150
Commercial mortgage
primary source
of repayment
comes from rent
and lease payments
that are generated
by an income-producing
property. For purposes
of
the ACL determination,
the Corporation stratifies
the portfolio by two main regions
(i.e., the Puerto
Rico/Virgin Islands region
and the
Florida region).
An internal risk
rating (i.e.,
pass, special mention,
substandard,
doubtful, or loss)
is assigned to each loan
at the time of
origination
and monitored
on a continuous
basis with
a formal
assessment
completed
quarterly, at
a minimum.
For commercial
mortgage
loans, the
Corporation
calculates
the ACL using
a PD/LGD modeled
approach,
or individually
for those
loans that
meet the
definition
of
collateral dependent
loans
or
loans
that
have
been
modified or
are
reasonably expected
to
be
modified in
a
TDR.
The
ACL
for
commercial
mortgage loans
measured using
a PD/LGD model is
calculated
based on the product
of a cumulative
PD and LGD, and the
amortized cost basis
determined for each
loan over
the remaining
expected life of
the loan,
considering prepayments. PD estimates
represent the point-in-time as of
which the PD
is developed for each
commercial mortgage loan, updated quarterly based on, among
other things, the payment performance experience, industry historical loss experience, property
type, occupancy, and relevant
current
and forward-looking
macroeconomic
variables over the expected
life of the loans to determine a lifetime term structure
PD curve. The
Corporation
determines
LGD estimates
based on historical
charge-off events
and recovery
payments,
industry
historical
loss experience,
specific attributes
of the loans,
such as loan-to-value,
debt service coverage
ratios, and net operating
income, as well as relevant
current
and
forecasted macroeconomic
variables
expectations, such
as
commercial
real
estate
price
indexes,
the
gross
domestic
product
(“GDP”), interest
rates, and
unemployment
rates, among
others, to determine
a lifetime term
structure LGD
curve. Under
this approach,
the Corporation calculates
losses for each loan for all future periods using the PD and
LGD loss rates derived from the term structure
curves applied to
the amortized cost basis
of the
loans, considering prepayments. The ACL for
collateral dependent loans, including
loans modified or reasonably
expected to be modified in a TDR, is determined
based on the fair value of the collateral at the reporting
date, adjusted
for undiscounted
selling costs
as appropriate.
Commercial and Industrial
source of
repayment
comes from
the ongoing
operations
and activities
conducted
by the borrower
and not from
rental income
or the sale
or refinancing of any underlying real estate collateral; thus, credit risk is largely dependent on the commercial borrower’s
current and
expected
financial
condition.
As of December
31, 2021,
the C&I
loan portfolio
consisted
of loans
granted
to large
corporate
customers
as
well as
middle-market customers across several industries, and
the government sector.
For purposes
of
the ACL
determination, the
Corporation
stratifies
the C&I loan
portfolio
by two main
regions (
i.e.,
internal risk rating
(
i.e.,
monitored
on a continuous
basis with
a formal
assessment
completed
quarterly, at
a minimum.
For C&I loans,
the Corporation
calculates
the ACL using a PD/LGD
modeled approach,
or, in some cases, based
on a risk-adjusted
discounted
cash flow method
or the fair value
of the collateral. The ACL for
C&I loans measured using
a PD/LGD model is calculated
based on the product of a cumulative
PD and
LGD, and the amortized
cost basis determined
for each loan over the remaining
expected life
of the loan, considering
prepayments.
PD
estimates represent
the point-in-time as
of which the PD is developed
for each C&I loan, updated
quarterly based
on industry historical
loss experience,
financial
performance
and market
value indicators,
and current
and forecasted
relevant
forward-looking
macroeconomic
variables
over the expected
life of the
loans to
determine
a lifetime
term structure
PD curve.
The Corporation
determines
LGD estimates
based on historical
charge-off events
and recovery payments,
industry historical
loss experience,
specific attributes
of the loans, such as
loan to value,
as well as
relevant
current and
forecasted
expectations
for macroeconomic
variables,
such as,
unemployment
rates, interest
rates, and market risk factors based on industry
performance and the equity market,
to determine a lifetime term structure
LGD curve.
Under this approach,
the Corporation
calculates
losses for
each loan for
all future
periods using
the PD and LGD
loss rates
derived from
the term
structure
curves applied
to the amortized
cost basis
of the loans,
considering
prepayments.
The Corporation
determines
the ACL
for those C&I loans that it
has determined, based upon current information
and events, that it is probable that the Corporation will be
unable to collect all
amounts due according
to the
contractual terms, and for any
non-collateral dependent C&I loans that have been
modified or are reasonably expected to be modified in a TDR, based on a
risk-adjusted
discounted cash flow methodology
using PDs
and LGDs developed as explained
above. Under this approach,
the Corporation
adjusts all future cash
flows (interest
and principal) for
each loan
by the PDs
and LGDs
derived from
the term
structure
curves and
prepayments
and then
discount
the adjusted
cash flows
at the
effective interest
rate as of the
reporting
date (original
rate for TDRs)
to arrive at
the net present
value of future
cash flows
and the ACL
is calculated as the
excess of the amortized
cost basis over
the net present
value of future cash
flows. The ACL for collateral
dependent
C&I
loans
is
determined based
on
the
fair
value
of
the
collateral at
the
reporting date,
adjusted for
undiscounted selling
costs
as
appropriate.
Construction
–
construction of
industrial, commercial, or
residential buildings
and
included
loans
to
finance
land
development in
preparation for
erecting new
structures. These
loans involve
an
inherently higher
level of
risk
and
sensitivity to
market conditions.
Demand from
prospective tenants or
purchasers may
erode after
construction begins because
of
a
general economic
slowdown or
otherwise. For
purposes of
the
ACL
determination, the
Corporation stratifies the
construction loan
portfolio by
two
main
regions (
i.e.,
Rico/Virgin Island region and the Florida region). An internal risk rating (
i.e.,
assigned to
each loan
at the time
of origination
and monitored
on a continuous
basis with
a formal assessment
completed,
at a minimum,
on a quarterly
basis. For construction
loans, the Corporation
calculates
the ACL using
a PD/LGD modeled
approach,
or individually
for
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
151
those loans that
meet the
definition of collateral dependent loans or
loans that have
been modified or
are reasonably expected to
be
modified
in
a
TDR.
The
ACL
for
construction loans
measured using
a
PD/LGD
model
is
calculated based
on
the
product
of
a
cumulative
PD and LGD,
and the amortized
cost basis
determined
for each
loan over
the remaining
expected
life of the
loan, considering
prepayments.
PD estimates represent the point-in-time as of which
the PD
is developed for each
construction loan, updated quarterly
based
on,
among
other
things,
historical payment
performance experience,
industry historical
loss
experience, underlying
type
of
collateral,
and relevant
current and
forward-looking
macroeconomic
variables
over the remaining
expected life
of the loans
to determine
a
lifetime term
structure PD
curve. The
Corporation determines LGD
estimates based
on
historical charge-off events
and
recovery
payments, industry historical loss experience, specific attributes of the loans, such
as loan-to-value, debt service coverage ratios, and
relevant current
and forecasted
macroeconomic
variables,
such as unemployment
rates, GDP, interest
rates, and
real estate
price indexes,
to determine a
lifetime term structure LGD curve. Under
this approach, the Corporation calculates losses for each
loan for all
future
periods using
the
PD
and
LGD
loss rates
derived from
the
term
structure curves
applied to
the
amortized cost
basis of
the
loans,
considering
prepayments.
The ACL for collateral
dependent loans,
including loans
modified or reasonably
expected to be modified
in a
TDR, is
determined
based on
the fair
value of
the collateral
at the reporting
date, adjusted
for undiscounted
selling
costs as
appropriate.
Consumer
As of December 31, 2021, consumer loans generally consisted of unsecured and secured loans extended to individuals
for household, family, and other personal expenditures,
including several classes
of products. For purposes of the ACL determination,
the Corporation
stratifies
the portfolio
by two main
regions (
i.e.,
following five classes: (i) auto
loans; (ii) finance leases; (iii)
credit cards; (iv) personal loans; and
(v) other
consumer loans, such as
open-end home
equity revolving
lines of
credit and
other types
of
consumer credit
lines, among
others.
In
determining the
ACL,
management
considers consumer
loans
risk
characteristics including
but
not
limited
to
credit
quality
indicators such
as
payment
performance
period,
delinquency
and original
FICO scores.
For auto
loans and finance leases, the
Corporation calculates the ACL using a
PD/LGD modeled approach, or individually for loans
modified or reasonably expected to
be modified in
a TDR
and performing in accordance with
restructured terms. The ACL for
auto
loans and
finance leases
measured
using a PD/LGD
model is
calculated
based on
the product
of a PD,
LGD, and
the amortized
cost basis
determined
for each
loan over
the remaining
expected
life of the
loan, considering
prepayments.
PD estimates
represent
the point-in-time
as of which the PD is
developed
for each loan,
updated quarterly
based on, among
other things,
the historical
payment performance
and
relevant current
and forward-looking
macroeconomic
variables,
such as regional
unemployment
rates, over
the expected
life of the
loans
to determine a
lifetime term structure PD curve. The
Corporation determines
LGD estimates primarily based on historical charge-off
events and recovery
payments to determine
a lifetime term structure
LGD curve. Under
this approach,
the Corporation
calculates
losses
for each loan
for all future
periods using
the PD and LGD
loss rates
derived from
the term structure
curves applied
to the amortized
cost
basis of
the loans, considering prepayments. For loans modified or
reasonably expected to be
modified in a
TDR and
performing in
accordance with restructured terms, the Corporation
determines the ACL based on
a risk-adjusted discounted cash flow methodology
using PDs and LGDs
developed as
explained
above. Under
this approach,
all future cash
flows (interest
and principal)
for each loan are
adjusted by the
PDs and LGDs
derived from
the term structure
curves and prepayments
and then discounted
at the effective
interest rate
of the loan prior
to the restructuring
to arrive at the
net present
value of future
cash flows and
the ACL is calculated
as the excess
of the
amortized
cost basis
over the
net present
value of
future cash
flows for
each loan.
For the credit card
and personal
loan portfolios,
the Corporation
determines
the ACL on a pool basis,
based on products
PDs and LGDs
developed
considering
historical
losses for
each origination
vintage by
length of
loan terms,
by geography, payment
performance
and by
credit score. The
PD and LGD for each cohort
consider key macroeconomic
variables,
such as regional
GDP, unemployment rates,
and
retail sales, among
others. Under this
approach, all future period
losses for
each instrument are
calculated using the
PDs and
LGDs
applied to
the amortized
cost basis
of the loans,
considering
prepayments.
In
addition, home equity
lines of
credit that
are
reviewed
and charged-off,
as needed,
to the
fair value
of the collateral.
For
the
ACL
determination
of
all
portfolios,
the
expectations
for
relevant
macroeconomic
variables
related
to
the
Puerto
Rico/Virgin
Islands
region
consider
an
initial
reasonable
and
supportable
period
of
to
methodology considers
a reasonable
and supportable
forecast period
and an
implicit reversion
towards the
historical trend
that varies
for
each
macroeconomic
variable,
achieving
the
steady
state
by
year
.
After
the
reversion
period,
a
historical
loss
forecast
period
covering the
remaining contractual
life, adjusted
for prepayments,
is used
based on
the changes
in key
historical economic
variables
during representative historical expansionary and recessionary periods.
Furthermore, the Corporation periodically
considers the need for qualitative adjustments to the ACL.
Qualitative adjustments
may be
related to
and include,
but not be limited
to factors
such as: (i)
management’s assessment
of economic
forecasts
used in the
model and how
those forecasts align with management’s overall evaluation of current and expected economic conditions; (ii) organization specific risks
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
152
such as credit
concentrations,
collateral
specific risks,
nature and
size of the portfolio
and external
factors that
may ultimately
impact credit
quality, and (iii)
other limitations
associated
with factors
such as
changes in
underwriting
and loan
resolution
strategies,
among others.
Prior to the implementation
of CECL on January 1,
2020, the ACL for loans
and finance lease was subject
to the guidance included
in ASC
310 and
ASC 450.
Under the
guidance, the
Corporation was
required to
use an
incurred loss
methodology to
estimate credit
losses that were estimated to be incurred in the loan portfolio and
that could ultimately materialize into confirmed losses in
the form of
charge-offs.
The
incurred
loss
methodology
was
a
backward-looking
approach
to
loss
recognition
and
based
on
the
concept
of
a
triggering
event
having
taken
place,
causing
a
loss
to
be
inherent
within
the
portfolio.
This
methodology
under
ASC
450
was
predicated
on
a
loss
emergence
period
that
was
applied
at
a
portfolio
level.
Consideration
of
forward
looking
macro-economic
expectations
was
not
permitted
under
this
allowance
methodology.
Additionally,
loans
that
were
identified
as
impaired
under
the
definition
of
ASC
310,
were
required
to
be
assessed
on
an
individual
basis.
The
ACL
and
resulting
provision
expense
levels
for
comparative periods prior to 2020 presented in this document were estimated in accordance
with these requirements.
Refer to
Note 9
– Allowance for
Credit Losses for Loans and
Finance Leases, to the
consolidated financial statements
for additional
information about reserve
balances for
each portfolio, activity
during the
period, and
information about changes in
circumstances that
caused changes
in the ACL
for loans
and finance
leases during
the year
ended December
31, 2021
and 2020.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures and
Other Assets
The Corporation estimates expected
credit losses over the contractual period
in which the Corporation is exposed
to credit risk via a
contractual
obligation
to
extend
credit
unless
the
obligation
is
unconditionally
cancellable
by
the
Corporation.
The
ACL
on
off-
balance sheet
credit exposures is
adjusted as a
provision for credit
loss expense. The
estimate includes consideration
of the likelihood
that funding
will occur and
an estimate of
expected credit
losses on commitments
expected to be
funded over its
estimated life.
As of
December 31,
2021, the
off-balance sheet
credit exposures
primarily consisted
of unfunded
loan commitments
and standby
letters of
credit
for
commercial
and
construction
loans.
The
Corporation
utilized
the
PDs
and
LGDs
derived
from
the
above-explained
methodologies
for
the
commercial
and
construction
loan
portfolios.
Under
this
approach,
all
future
period
losses
for
each
loan
are
calculated using
the PD
and LGD
loss rates
derived from
the term
structure curves
applied to
the usage
given default
exposure.
The
ACL on off-balance sheet
credit exposures is included as
part of accounts payable and
other liabilities in the consolidated
statement of
financial condition with adjustments included as part of the provision for credit loss expense
in the consolidated statements of income.
Refer to
Note 9
– Allowance for
Credit Losses for Loans and
Finance Leases, to the
consolidated financial
statements for additional
information
about
reserve
balances
for
unfunded
loan
commitments, activity
during
the
period,
and
information
about
changes
in
circumstances
that caused
changes
in the
ACL for
off-balance
sheet credit
exposures
during the
years
ended December
31, 2021
and 2020.
The
Corporation
also
estimates
expected
credit
losses
for
certain
accounts
receivable,
primarily
claims
from
government-
guaranteed
loans,
loan
servicing-related
receivables,
and
other
receivables.
The
ACL
on other
assets
measured
at
amortized
cost
is
included
as part
of other
assets in
the
consolidated
statement of
financial
condition
with adjustments
included
as part
of other
non-
interest expenses in the consolidated statements of income.
Loans held for sale
Loans
that the
Corporation
intends to
sell or
that
the Corporation
does not
have
the ability
and
intent to
hold
for the
foreseeable
future are classified as held-for-sale
loans. Loans held for
sale are recorded at the
lower of aggregate cost or
fair value.
Generally,
the
loans held-for-sale
portfolio consists of
conforming residential
mortgage loans
that the Corporation
intends to
sell to the
Government
National
Mortgage
Association
(“GNMA”)
and
GSEs,
such as
the
Federal
National
Mortgage
Association
(“FNMA”)
and
the U.S.
Federal
Home
Loan
Mortgage
Corporation
(“FHLMC”).
Generally,
residential
mortgage
loans
held
for
sale
are
valued
on
an
aggregate
portfolio
basis
and
the
value
is
primarily
derived
from
quotations
based
on
the
MBS
market.
The
amount by
which
cost
exceeds market
value in
the aggregate
portfolio of
loans held
for sale,
if any,
is accounted
for as
a valuation
allowance with
changes
therein included in
the determination of
net income and
reported as part
of mortgage banking
activities in the
consolidated statements
of
income.
Loan
costs
and
fees
are
deferred
at
origination
and
are
recognized
in
income
at
the
time
of
sale.
The
fair
value
of
commercial and construction
loans held for sale, if
any, is
primarily derived from
external appraisals, or broker
price opinions that
the
Corporation
considers,
with
changes
in
the
valuation
allowance
reported
as
part
of
other
non-interest
income
in
the
consolidated
statements of income.
In certain circumstances,
the Corporation transfers
loans from/to held
for sale or held
for investment based
on a change
in strategy.
If such a
change in holding
strategy is made, significant
adjustments to the loans’
carrying values may
be necessary.
Reclassifications
of loans held
for investment to held
for sale are made
at the amortized
cost on the date
of transfer and
establish a new cost
basis upon
transfer.
Write-downs of
loans transferred from
held for investment
to held for
sale are recorded
as charge-offs at
the time of
transfer.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
153
Subsequent
changes
in
value
below
amortized
cost
are
reflected
in
non-interest
income
in
the
consolidated
statements
of
income.
Reclassifications of loans held for sale to held for investment are made at the
amortized cost on the transfer date.
Transfers and servicing of financial assets and extinguishment
of liabilities
After a transfer of
financial assets in a
transaction that qualifies
for accounting as
a sale, the Corporation
derecognizes the financial
assets when it has surrendered control and derecognizes liabilities when they
are extinguished.
A transfer of financial
assets in which the
Corporation surrenders control
over the assets is
accounted for as
a sale to the extent
that
consideration other
than beneficial
interests is
received in
exchange.
The criteria
that must
be met
to determine
that the
control over
transferred assets
has been surrendered
include: (i) the
assets must be
isolated from
creditors of the
transferor; (ii) the
transferee must
obtain the
right (free
of conditions
that constrain
it from
taking advantage
of that
right) to
pledge or
exchange the
transferred assets;
and
(iii) the transferor
cannot maintain
effective
control over
the transferred
assets through
an agreement
to repurchase
them before
their maturity.
When the
Corporation transfers
financial assets
and the
transfer fails
any one
of the
above criteria,
the Corporation
is
prevented from derecognizing the transferred financial assets and
the transaction is accounted for as a secured borrowing.
Servicing assets
The Corporation recognizes
as separate assets the
rights to service
loans for others,
whether those servicing
assets are originated
or
purchased.
In the
ordinary course
of business,
the Corporation
sells residential
mortgage loans
(originated or
purchased)
to GNMA,
which generally
securitizes the
transferred loans
into MBS for
sale into
the secondary
market. Also,
certain conventional
conforming
loans are
sold to
FNMA or
FHLMC,
with servicing
retained.
When the
Corporation sells
mortgage loans,
it recognizes
any retained
servicing right, based on its fair value.
Mortgage
servicing
rights
(“servicing
assets”
or
“MSRs”)
retained
in
a
sale
or
securitization
arise
from
contractual
agreements
between the Corporation
and investors in mortgage
securities and mortgage
loans. The value of
MSRs is derived from
the net positive
cash
flows
associated
with
the
servicing
contracts.
Under
these
contracts,
the
Corporation
performs
loan-servicing
functions
in
exchange
for
fees
and
other
remuneration.
The
servicing
functions
typically
include:
collecting
and
remitting
loan
payments,
responding
to
borrower
inquiries,
accounting
for
principal
and
interest,
holding
custodial
funds
for
payment
of
property
taxes
and
insurance premiums,
supervising
foreclosures
and property
dispositions, and
generally
administering
the loans.
The MSRs,
included
as
part
of
other
assets
in
the
statements
of
financial
condition,
entitle
the
Corporation
to
servicing
fees
based
on
the
outstanding
principal
balance
of
the
mortgage
loans
and
the
contractual
servicing
rate.
The
servicing
fees
are
credited
to
income
on
a
monthly
basis when
collected
and
recorded
as part
of mortgage
banking
activities
in
the
consolidated
statements
of
income.
In addition,
the
Corporation
generally
receives
other
remuneration
consisting
of
mortgagor-contracted
fees
such
as
late
charges
and
prepayment
penalties, which are credited to income when collected.
Considerable
judgment
is
required
to
determine
the
fair
value
of
the
Corporation’s
MSRs.
Unlike
highly
liquid
investments,
the
market
value
of
MSRs
cannot
be
readily
determined
because
these
assets
are
not
actively
traded
in
securities
markets.
The
initial
carrying
value
of
an
MSR
is
generally
determined
based
on
its
fair
value.
The
Corporation
determines
the
fair
value
of
the
MSRs
based
on
a
combination
of
market
information
on
trading
activity
(MSR
trades
and
broker
valuations),
benchmarking
of
servicing
assets (valuation
surveys), and
cash flow
modeling. The
valuation of
the Corporation’s
MSRs incorporates
two sets
of assumptions:
(i) market-derived assumptions for discount
rates, servicing costs, escrow
earnings rates, floating
earnings rates, and the cost
of funds;
and
(ii) market
assumptions
calibrated
to
the
Corporation’s
loan
characteristics
and
portfolio
behavior
for
escrow
balances,
delinquencies and foreclosures, late fees, prepayments, and prepayment
penalties.
Once recorded,
the Corporation periodically
evaluates
MSRs for impairment.
Impairment occurs
when the current
fair value of
the
MSR is
less than
its carrying
value. If
an MSR
is impaired,
the impairment
is recognized
in current-period
earnings and
the carrying
value of
the MSR is
adjusted through
a valuation
allowance. If the
value of
the MSR subsequently
increases, the recovery
in value is
recognized in
current period
earnings and
the carrying
value of
the MSR
is adjusted
through a
reduction in
the valuation
allowance.
For
purposes
of
performing
the
MSR
impairment
evaluation,
the
servicing
portfolio
is
stratified
on
the
basis
of
certain
risk
characteristics,
such as region, terms, and coupons.
The Corporation conducts an OTTI
analysis to evaluate whether a loss in
the value
of the MSR in a particular
stratum, if any,
is other than temporary or not.
When the recovery of the value
is unlikely in the foreseeable
future,
a
write-down
of
the
MSR
in
the
stratum
to
its
estimated
recoverable
value
is
charged
to
the
valuation
allowance.
As
of
December 31, 2021, the aggregate carrying value of the MSRs amounted
to $
The
MSRs
are
amortized
over
the
estimated
life
of
the
underlying
loans
based
on
an
income
forecast
method
as
a
reduction
of
servicing income.
The income forecast
method of amortization
is based on
projected cash flows.
A particular periodic
amortization is
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
154
calculated
by
applying
to
the
carrying
amount
of
the
MSRs
the
ratio
of
the
cash
flows
projected
for
the
current
period
to
total
remaining net MSR forecasted cash flow.
Premises and equipment
Premises
and
equipment
are
carried
at
cost,
net
of
accumulated
depreciation
and
amortization.
Depreciation
is
provided
on
the
straight-line method
over the
estimated useful
life of
each type
of asset.
Amortization of
leasehold improvements
is computed
over
the terms
of the
leases (
i.e.
, the
contractual term
plus lease
renewals that
are reasonably
assured) or
the estimated
useful lives
of the
improvements, whichever
is shorter.
Costs of
maintenance and
repairs that
do not
improve or
extend the
life of
the respective
assets
are expensed
as incurred.
Costs of
renewals and
betterments are
capitalized. When
the Corporation
sells or
disposes of
assets, their
cost and related
accumulated depreciation
are removed from
the accounts and
any gain or
loss is reflected
in earnings as
part of other
non-interest
income
in
the
consolidated
statements
of
income.
When
the
asset
is
no
longer
used
in
operations,
and
the Corporation
intends to
sell it,
the asset
is reclassified
to other
assets held
for sale
and is
reported at
the lower
of the
carrying amount
or fair
value
less cost to sell.
Leases
recognized
based
on
the
present
value
of
the
remaining
lease
payments,
discounted
using
the
discount
rate
for
the
lease
at
the
commencement
date,
or
at
acquisition
date
in
case
of
a
business
combination.
As
the
rates
implicit
in
the
Corporation’s
operating
leases are
not readily
determinable,
the Corporation
generally uses
an incremental
borrowing
rate based
on information
available
at
the commencement
date to
determine the
present value
of future
lease payments.
Operating right-of-use
(“ROU”) assets
and finance
lease assets
are generally
recognized
based on
the amount
of the
initial measurement
of the
lease liability.
The Corporation’s
leases
are primarily related
to operating leases for
the Bank’s
branches and automated
teller machines (“ATMs”).
Most of the Corporation’s
leases with
operating
ROU assets
have terms
of
, some
of which
include options
to extend
the leases
for up
to
.
The Corporation does not recognize ROU assets and lease liabilities that arise from
short-term leases, primarily related to
certain
month-to-month
ATM
operating
leases.
As
of
December
31,
2021,
the
Corporation
did
t have
a
lease
that
qualifies
as a
finance lease.
Lease expense is
recognized on
a straight-line basis over
the lease term.
The Corporation
includes the lease ROU
asset
and
lease
liability
as
part
of
other
assets
and
accounts
payable
and
other
liabilities,
respectively,
in
the
consolidated
statements
of
financial condition.
Other real estate owned
OREO, which
consists of
real estate
acquired in
settlement of
loans, is
recorded at
fair value
minus estimated
costs to
sell the
real
estate acquired.
Generally,
loans have
been
written down
to their
net realizable
value
prior
to
foreclosure.
Any further
reduction
to
their
net
realizable
value
is
recorded
with
a
charge
to
the
ACL
at
the
time
of
foreclosure
or
shortly
thereafter.
Thereafter,
gains
or
losses resulting from the
sale of these properties and
losses recognized on the
periodic reevaluations of these
properties are credited or
charged to
earnings and are
included as part
of net loss
on OREO and
OREO expenses in
the consolidated statements
of income. The
cost of
maintaining and
operating these
properties is
expensed as
incurred. The
Corporation estimates
fair values
primarily based
on
appraisals, when available, and periodically reviews and updates the
net realizable value.
Business Combinations
The
Corporation
accounts
for
acquisitions
in
accordance
with
the
ASC
Topic
No.
805,
“Business
Combination”
(“ASC
805”).
Under ASC 805,
a business combination
is defined as a
transaction or other event
in which an acquirer
obtains control of
one or more
businesses.
In
addition,
under
ASC
805,
a
business
is
considered
to
be
an
integrated
set
of
activities
and
assets
capable
of
being
conducted and managed for the purpose of providing a return
in the form of dividends, lower costs, or other economic benefits
directly
to investors
or other
owners, members,
or participants.
If the net
assets acquired
meet the
definition of
a business
and the
transaction
meets the
definition of
a business
combination in
ASC 805,
the transaction
is accounted
for using
the acquisition
method pursuant
to
ASC 805.
Under the acquisition method, the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree
are recorded
at their
estimated fair
values as
of the
date of
acquisition.
The acquisition
date is
the date
the acquirer
obtains control.
Goodwill is recognized
as the excess
of the sum
of the consideration
transferred, plus
the fair value
of any non
-controlling interest
in
the
acquiree,
over
the fair
value
of the
net assets
acquired
and
liabilities
assumed
as of
the acquisition
date.
The Corporation
has
a
measurement
period,
in
which
it
may
retrospectively
adjust
the
initially
recorded
fair
values
to
reflect
new
information
obtained
during the
measurement period
that, if
known, would
have affected
the acquisition
date fair
value measurements.
This measurement
period cannot be more
than one year after the
acquisition date and ends
as soon as the acquirer
(i) receives the information
it had been
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
155
seeking about facts and
circumstances that existed as of
the acquisition date or
(ii) learns that it cannot
obtain further information. The
Corporation
determined
that
the
aforementioned
acquisition
of
BSPR,
completed
on
September
1,
2020,
constituted
a
business
combination
as defined
by
ASC 805.
Refer
to
Note
2
-
Business
Combination,
to
the
consolidated
financial
statements
for
further
discussion of the BSPR acquisition and its impact on the Corporation’s
financial statements.
Goodwill and other intangible assets
Goodwill
-
Goodwill
represents
the
cost
in
excess
of
the
fair
value
of
net
assets
acquired
(including
identifiable
intangibles)
in
transactions accounted
for as
business combinations.
The Corporation
allocates goodwill
to the
reporting unit(s)
that are
expected to
benefit from
the synergies
of the
business combination.
Once goodwill
has been
assigned to
a reporting
unit, it
no longer
retains its
association with
a particular
acquisition, and
all of
the activities within
a reporting
unit, whether
acquired or
internally generated,
are
available to
support the
value of
the goodwill.
The Corporation
tests goodwill
for impairment
at least
annually as
of October
1st of
each year
and more
frequently if
circumstances exist
that indicate
a possible
reduction in
the fair
value of
a reporting
unit below
its
carrying
value. If,
after assessing
all relevant
events or
circumstances,
the Corporation
concludes
that it
is more-likely-than-not
that
the fair
value
of a
reporting
unit is
below
its carrying
value, then
an impairment
test is
required.
Every other
year or
when
deemed
necessary by
any particular
economic or Corporation
specific circumstances,
the Corporation
bypasses the qualitative
assessment and
proceeds directly
to a
quantitative analysis.
In addition
to the
goodwill recorded
at the
Commercial and
Corporate, Consumer
Retail,
and
Mortgage
Banking
reporting
units
in
connection
with
the
acquisition
of
BSPR
in
2020,
the
Corporation’s
goodwill
is
mostly
related to the United States (Florida) reporting unit.
Management performed
a qualitative
analysis over
the carrying
amount of
each relevant
reporting units’
goodwill as
of December
31,
2021
and
concluded
that
it
is
more-likely-than-not
that
the
fair
value
of
the
reporting
units
exceeded
its
carrying
value.
With
respect to the
goodwill of the
Florida reporting unit
,
this assessment involved
identifying the inputs
and assumptions that
most affects
fair value,
evaluating the
significance of
all identified
relevant events
and circumstances
that affect
fair value
of the
reporting
entity
and
weighing
such
factors
to
determine
if
it
is
more
likely
than
not
that
the
fair
value
of
the
reporting
unit
was
greater
than
it’s
carrying amount.
In the qualitative assessment of the Florida reporting
unit,
the Corporation evaluated events and circumstances that could
impact the
fair value including the following:
●
Macroeconomic conditions, such as improvement or deterioration
in general economic conditions;
●
Industry and market considerations;
●
Interest rate fluctuations;
●
Overall financial performance of the entity;
●
Performance of industry peers over the last year; and
●
Recent market transactions.
Similarly,
evaluation
for
goodwill
associated
with
the
acquisition
of
BSPR
focused
on
a
qualitative
assessment
of
the
overall
performance
of
the
banking
reporting
unit
and
outlook
of
the
macroeconomic
conditions
for
the
reporting
unit.
Management
considered positive
and negative
evidence obtained
during the
evaluation of
significant events
and circumstances
and evaluated
such
information
to
conclude
that
it is
more
likely
than
not
that the
reporting
unit’s
fair value
is greater
than
it’s
carrying
amount;
thus,
quantitative tests were
not required.
Ultimately,
the Corporation determined
that goodwill was
t impaired
as of December
31, 2021
or 2020.
The
Corporation’s
other
intangible
assets
primarily
relate
to
core
deposits.
The
Corporation
amortizes
core
deposit
intangibles
based on
the projected
useful lives
of the
related deposits,
generally on
a straight-line
basis, and
reviews these
assets periodically
for
impairment
when event
or changes
in circumstances
indicate that
the carrying
amount may
not exceed
their fair
value. The
carrying
value of core deposit intangible assets amounted to $
Securities purchased and sold under agreements to repurchase
The
Corporation
accounts
for
securities
purchased
under
resale
agreements
and
securities
sold
under
repurchase
agreements
as
collateralized financing
transactions. Generally,
the Corporation
records these
agreements at
the amount
at which
the securities
were
purchased or
sold. The
Corporation monitors
the fair
value of
securities purchased
and sold,
and obtains
collateral from,
or returns
it
to,
the counterparties
when
appropriate.
These financing
transactions
do not
create material
credit risk
given
the collateral
involved
and the related monitoring process.
The Corporation sells and acquires
securities under agreements to repurchase or
resell the same or
similar
securities.
Generally,
similar
securities
are
securities
from
the
same
issuer,
with
identical
form
and
type,
similar
maturity,
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
156
identical
contractual
interest rates,
similar assets
as collateral,
and the
same aggregate
unpaid
principal amount.
The counterparty
to
certain agreements may have the right to repledge the collateral by
contract or custom. The Corporation presents such assets separately
in
the
consolidated
statements
of
financial
condition
as
securities
pledged
with
creditors’
rights
to
repledge.
Repurchase
and
resale
activities may be
transacted under
legally enforceable
master repurchase
agreements that give
the Corporation, in
the event of
default
by
the
counterparty,
the
right
to
liquidate
securities
held
and
to
offset
receivables
and
payables
with
the
same
counterparty.
The
Corporation offsets repurchase
and resale transactions with the same
counterparty in the consolidated statements
of financial condition
where it has such a legally enforceable right under a master netting agreement
and the transactions have the same maturity date.
From
time
to
time,
the
Corporation
modifies
repurchase
agreements
to
take
advantage
of
prevailing
interest
rates.
Following
applicable
GAAP guidance,
if
the
Corporation determines
that
the debt
under
the modified
terms
is substantially
different
from
the
original terms,
the modification
must be accounted
for as an
extinguishment of
debt. The
Corporation considers
modified terms
to be
substantially different
if the present
value of
the cash flows
under the
terms of the
new debt instrument
is at least
% different
from
the
present
value
of
the
remaining
cash
flows
under
the
terms
of
the
original
instrument.
The
new
debt
instrument
will be
initially
recorded
at fair
value, and
that amount
will be
used to
determine
the debt
extinguishment
gain or
loss to
be recognized
through
the
consolidated statements
of income
and the
effective rate
of the
new instrument.
If the
Corporation determines
that the
debt under
the
modified
terms is
not
substantially
different,
then
the
new effective
interest
rate
is determined
based on
the
carrying amount
of
the
original
debt
instrument.
The
Corporation
has
determined
that
none
of
the
repurchase
agreements
modified
in
the
past
were
substantially different from the original terms, and,
therefore, these modifications were not accounted for as extinguishments of debt.
Rewards liability
The
Corporation
offers
products,
primarily
credit
cards,
that
offer
various
rewards
to
reward
program
members,
such
as
airline
tickets, cash, or
merchandise, based
on account
activity.
The Corporation
generally recognizes the
cost of rewards
as part of
business
promotion
expenses when
the rewards
are earned
by the
customer and,
at that
time, records
the corresponding
reward liability.
The
Corporation
determines
the
reward
liability
based
on
points
earned
to
date
that
the
Corporation
expects
to
be
redeemed
and
the
average
cost
per
point
redemption.
The
reward
liability
is
reduced
as
points
are
redeemed.
In
estimating
the
reward
liability,
the
Corporation considers historical
reward redemption behavior,
the terms of the
current reward program,
and the card
purchase activity.
The reward liability
is sensitive to
changes in the
reward redemption
type and redemption
rate, which is
based on the
expectation that
the
vast
majority
of
all points
earned
will eventually
be
redeemed.
The reward
liability,
which
is included
in other
liabilities in
the
consolidated statements of financial condition, totaled $
Income taxes
The Corporation
uses the
asset and
liability method
for the recognition
of deferred
tax assets and
liabilities for
the expected
future
tax consequences
of events
that have
been recognized
in the
Corporation’s
financial statements
or tax
returns.
Deferred income
tax
assets
and
liabilities
are
determined
for
differences
between
the
financial
statement
and
tax
bases
of
assets
and
liabilities
that
will
result in taxable
or deductible amounts
in the future.
The computation is
based on enacted
tax laws and
rates applicable to
periods in
which
the
temporary
differences
are
expected
to
be
recovered
or
settled.
Valuation
allowances
are
established,
when
necessary,
to
reduce deferred
tax assets
to the
amount that
is more
likely than
not to
be realized.
In making
such assessment,
significant weight
is
given
to
evidence
that
can
be
objectively
verified,
including
both
positive
and
negative
evidence.
The
authoritative
guidance
for
accounting
for
income
taxes
requires
the
consideration
of
all
sources
of
taxable
income
available
to
realize
the
deferred
tax
asset,
including
the
future
reversal
of
existing
temporary
differences,
tax
planning
strategies
and
future
taxable
income,
exclusive
of
the
impact of
the reversal
of temporary
differences
and carryforwards.
In estimating
taxes, management
assesses the
relative
merits and
risks
of
the
appropriate
tax
treatment
of
transactions
considering
statutory,
judicial,
and
regulatory
guidance.
Refer
to
Note
28
–
Income Taxes, to
the consolidated financial statements,
for additional information.
Under
the authoritative
accounting guidance,
income tax
benefits are
recognized and
measured based
on a
two-step analysis:
i) a
tax
position
must
be
more
likely than
not
to be
sustained
based solely
on
its technical
merits
in
order
to
be recognized;
and
ii)
the
benefit
is
measured
at
the
largest
dollar
amount
of
that
position
that
is
more
likely
than
not
to
be
sustained
upon
settlement.
The
difference between
a benefit not
recognized in
accordance with
this analysis
and the
tax benefit
claimed on
a tax return
is referred
to
as an Unrecognized
Tax Benefit
(“UTB”).
The Corporation classifies interest
and penalties, if
any, related
to UTBs as components
of
income
tax
expense.
As of
December
31,
2021,
the
Corporation
had
UTBs in
an
aggregate
amount
of $
from BSPR, which, if recognized, would decrease the effective income
tax rate in future periods.
The Corporation
release income tax
effects from
OCI as investments
securities available for
sale are sold
or mature and
as pension
and post-retirement liabilities are extinguished.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
157
Treasury stock
The
Corporation
accounts
for
treasury
stock
at
par
value.
Under
this
method,
the
treasury
stock
account
is
increased
by
the
par
value of each share of
common stock reacquired.
Any excess amount paid per
share over the par value is
debited to additional paid-in
capital. Any remaining excess is charged to retained earnings.
Stock-based compensation
Compensation cost is
recognized in the financial
statements for all share-based
payment grants.
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-effective
Section 162(m) of the U.S. Internal Revenue
Code of 1986, as amended. The Omnibus Plan provides
for equity-based and
non-equity-based compensation incentives
(the “awards”) through the
grant of
stock options, stock appreciation rights, restricted stock,
restricted
stock
units,
performance
shares,
other
stock-based
awards
and
cash-based
awards.
The
compensation cost
for
an
award,
determined
based on the estimate
of the fair value
at the grant
date (considering
forfeitures
and any post-vesting
restrictions),
is recognized
over the
period during
which an
employee
or director
is required
to provide
services
in exchange
for an award,
which is
the vesting
period.
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 share-
based compensation, as
the effect
of
adjusting the rate
for all
expense amortization is recognized in
the period
in which
the forfeiture
estimate changes.
If the actual forfeiture rate is higher than the estimated
forfeiture rate, 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. For
additional information regarding the
Corporation’s equity-based compensation and
awards
granted,
refer to
Note 22
– Stock-Based
Compensation,
to the
consolidated
financial
statements.
Comprehensive income
Comprehensive
income
for
First BanCorp.
includes
net
income,
as well
as
change
in
unrealized
gain
(loss)
on
available-for-sale
securities and change in unrecognized pension and post retirement costs, net
of estimated tax effects.
Pension and Postretirement Benefit Obligations
The Corporation
maintains two
frozen qualified
noncontributory defined
benefit pension
plans (the
“Pension Plans”)
(including a
complementary
post-retirements
benefits
plan
covering
medical
benefits
and
life
insurance
after
retirement)
that
it
assumed
in
the
BSPR acquisition.
based on
various actuarial
assumptions regarding
future experience
under the
plan, which
include costs
for services
rendered during
the
period,
interest
costs
and
return
on
plan
assets,
as
well
as
deferral
and
amortization
of
certain
items
such
as
actuarial
gains
or
losses.
The funding
policy is to
contribute to
the plan,
as necessary,
to provide
for services
to date and
for those expected
to be earned
in
the future. To
the extent that these
requirements are fully
covered by assets in
the plan, a contribution
may not be made
in a particular
year.
The
cost
of
postretirement
benefits,
which
is determined
based on
actuarial
assumptions
and
estimates
of
the
costs of
providing
these benefits in the future, is accrued during the years that the employee
renders the required service.
The
guidance
for
compensation
retirement
benefits
of
ASC
Topic
715,
“Retirement
Benefits,”
requires
the
recognition
of
the
funded status
of each
defined pension
benefit plan,
retiree health
care plan
and other
postretirement benefit
plans on
the statement
of
financial condition
.
Segment information
The Corporation reports financial and
descriptive information about its reportable
segments. Operating segments are
components of
an
enterprise
about
which
separate
financial
information
is available
that
is evaluated
regularly
by management
in
deciding
how
to
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
158
allocate resources
and in assessing
performance.
The Corporation’s
management determined
that the segregation
that best fulfills
the
segment definition described above
is by 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 December
31, 2021, the
Corporation had
the following
segments
that
are
all
reportable
segments:
Commercial
and
Corporate
Banking;
Mortgage
Banking;
Consumer
(Retail)
Banking;
Treasury
and Investments;
United States
Operations; and
Virgin
Islands Operations.
Refer to
Note 36
– Segment
Information, to
the
consolidated financial statements, for additional information.
Valuation
of financial instruments
The measurement
of fair value
is fundamental
to the Corporation’s
presentation of
its financial condition
and results of
operations.
The Corporation
holds debt
and equity
securities, derivatives,
and other
financial instruments
at fair
value. The
Corporation holds
its
investments and liabilities
mainly to manage liquidity
needs and interest
rate risks. A meaningful
part of the Corporation’s
total assets
is reflected at fair value on the Corporation’s
financial statements.
The FASB’s
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
Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities
that the reporting entity has the
ability to access at the measurement date.
Level 2
Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either
directly or
indirectly, such
as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; 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 3
Valuations
are based on unobservable inputs that are supported by little or no market activity and
that are significant to the
fair value of the assets or liabilities.
Under the
fair value accounting
guidance, an
entity has the
irrevocable option
to elect, on
a contract-by-contract
basis, to measure
certain financial assets and
liabilities at fair value
at the inception of
the contract and, thereafter,
to reflect any changes
in fair value in
current earnings.
The Corporation
did not
make any
fair value
option election
as of
December 31,
2021 or
2020. See
Note 30
– Fair
Value,
to the consolidated financial statements, for additional information.
Revenue from contract with customers
recognition
and
presentation
of
revenues
from
contracts
with
customers,
including
the
income
recognition
for
the insurance
agency
commissions’ revenue.
Earnings per common share
Earnings per share-basic is calculated
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
preferred
stock
dividends
declared
but
not
yet
paid,
and
any
cumulative
preferred
stock
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
excludes
unvested
shares
of
restricted
stock
that
do
not
contain
non-forfeitable
dividend
rights.
The
computation of diluted earnings per share is similar to the computation
of basic earnings per share except that the number of weighted-
average
common
shares
is
increased
to
include
the
number
of
additional
common
shares
that
would
have
been
outstanding
if
the
dilutive common shares had been issued, referred to as potential common shares.
Potential dilutive
common shares
consist of
unvested shares
of restricted
stock that
do not
contain non-forfeitable
dividend rights,
warrants
outstanding
during
the
period,
and
common
stock
issued
under
the
assumed
exercise
of
stock
options,
if
any,
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
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
159
the
exercise
date.
The
difference
between
the
number
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,
stock
options,
and
warrants
outstanding
during
the
period
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. Potential
dilutive common
shares also
include performance
units that
do not
contain non-forfeitable dividend rights if the performance condition
is met as of the end of the reporting period.
Accounting Standards Adopted in 2021
Income Tax Simplification
In December 2019, the
FASB issued
new guidance to simplify the
accounting for income taxes by removing certain exceptions to the
general principles and
the
accounting related to
areas such
as
franchise taxes,
step-up in
tax
basis, goodwill,
separate entity
financial
statements, and interim
recognition of enactment of
tax laws
or rate
changes. For
public business entities, the
standard took effect
for
annual reporting
periods beginning
after December
15, 2020, including
interim reporting
periods within
those fiscal
years. The adoption
of
this guidance
during the
first quarter
of 2021
did not
have an
effect
on the Corporation’s
consolidated
financial
statements.
Accounting
for Equity
Securities
and Certain
Derivatives
In January 2020,
the FASB
issued new guidance to
clarify the accounting for equity
securities under ASC Topic
321, “Investments –
Equity Securities” (“ASC 321”); investments accounted for
under the
equity method of
accounting in ASC
Topic
323, “Investments –
Equity Method and
Joint Ventures”;
and the
accounting for certain forward
contracts and purchased options accounted for
under ASC
Topic
815, “Derivatives and Hedging”
(“ASC 815”). The
guidance clarifies that an
entity should consider observable transactions that
result in
either applying
or discontinuing
the equity
method of
accounting
for the
purpose of
applying
the measurement
alternative
provided
by ASC 321, which
allows certain equity
securities without
a readily determinable
fair value to be measured at cost,
less any impairment.
When an entity accounts
for an investment
in equity securities
under the measurement
alternative
and is required
to transition
to the equity
method of accounting because
of an observable transaction,
it should remeasure the investment
at fair value immediately
before applying
the equity
method of
accounting. Likewise, when an
entity accounts for
an investment in
equity securities under the
equity method of
accounting and is required
to transition to ASC 321 because
of an observable transaction,
it should remeasure
the investment at fair
value
immediately after discontinuing
the equity method of accounting. These amendments
align the accounting for equity securities
under the
measurement
alternative
with that of other
equity securities
accounted
for under ASC 321,
reducing diversity
in accounting
outcomes. The
guidance also clarifies
that, when determining
the accounting for nonderivative
forward contracts
and purchased options,
an entity should
not consider whether the
underlying securities would be accounted for under
the equity method or
fair value option upon
settlement or
exercise. These instruments
will not fail to meet the scope of ASC
815-10 solely because the securities
would be accounted for under
the
equity method upon settlement of the
contract or exercise of the
option. For public business entities, the standard took effect for annual
reporting periods beginning after December 15,
2020, including interim reporting periods within those fiscal years. The adoption of this
guidance
during the
first quarter
of 2021
did not
have an
effect on
the Corporation’s
consolidated
financial
statements.
Reference Rate
Reform
In March 2020,
the FASB issued new
accounting
guidance related
to the effects
of the reference
rate reform
on financial
reporting
(“ASC
Topic 848”). The
guidance
provides
optional
expedients
and exceptions
to applying
GAAP to contract
modifications
that replace
an interest
rate
impacted by
reference rate
reform (e.g., LIBOR) with
a
new
alternative reference rate.
The
guidance is
applicable to
investment
securities, receivables, loans,
debt,
leases, derivatives
and
hedge
accounting elections
and
other
contractual arrangements.
In
January
2021, the FASB
issued an
update which refines the
scope of
ASC Topic
848 and
clarifies some of
its guidance as
part of
the FASB’s
monitoring of global reference
rate reform activities.
The update permits entities
to elect certain optional
expedients and exceptions
when
accounting for derivative contracts and certain hedging
relationships affected by changes in
the interest rates
used for
discounting cash
flows, for computing variation margin settlements, and for
calculating price alignment interest in connection with reference rate reform
activities
under way
in global
financial
markets.
The guidance,
may be adopted
on any date
on or after
March 12,
2020. However,
the relief
is temporary
and generally
cannot be applied
to contract
modifications
that occur
after December
31, 2022 or
hedging relationships
entered
into or
evaluated after that
date. As
of
the date
hereof, the
Corporation has made
limited contract modification in connection with
the
reference
rate reform.
Other Accounting
Standard
Codification
Improvements
On
October 15,
2020, ASU
2020-08, “Codification Improvements to Subtopic 310-20,
Receivables –
Nonrefundable Fees and
Other
Costs,” to clarify that
for each reporting
period an entity should
reevaluate whether
a callable debt security’s
amortized cost
basis exceeds
the amount repayable
by the issuer at the next call date.
For public business
entities, the
guidance took effect
for fiscal years, and interim
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
160
periods
within
those
fiscal
years,
beginning after
December 15,
2020.
The
adoption of
this
guidance did
not
have
an
effect
on
the
Corporation’s
consolidated
financial
statements.
On October
29, 2020,
the FASB issued
ASU 2020-10,
“Codification
Improvements.”
The amendments
in this ASU
affect a wide
range of
codification
topics and are
separated
into two sections:
B and C. The Section
B amendments
improve codification
consistency
by ensuring
that all guidance
that requires
or provides
an option
for an entity
to provide
information
in the notes
to financial
statements
or on the
face of
the financial statements
appears in the applicable
disclosure section
as well as the other presentation
matters sections,
reducing the chance
that the
requirement would be
missed. These
amendments are not
expected to
change current practice.
The amendments in
Section C
clarify guidance
for
more
consistent application. Section
C
addresses retirement
benefits (Topic
715),
interim reporting
(Topic
270),
receivables
(Topic 310), guarantees
(Topic 460), income
taxes (Topic 470),
and imputation
of interest
(Topic 835), among
other topics.
For
public business
entities
the amendments
are effective
for annual
periods
beginning
after December
15, 2020.
The adoption
of this guidance
during the
fourth quarter
of 2021
did not
have an
effect on
the Corporation’s
consolidated
financial
statements.
Recently
Issued Accounting
Standards
Not Yet Effective
or Not Yet Adopted
On
May
3,
2021,
the
FASB
issued
ASU
2021-04,
“Earnings Per
Share
(Topic
260),
Debt
–
Modifications and
Extinguishments
(Subtopic 470-50), Compensation
– Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s
Own Equity
(Subtopic 815-40):
Issuer’s Accounting
for Certain Modifications
or Exchanges of Freestanding
Equity-Classified
Written Call Options
(a
Consensus of the
Emerging Issues Task
Force).” The ASU
was issued to
clarify and reduce diversity in
practices for modification and
exchanges
of freestanding
equity-classified
written
call options
(for example,
warrants)
that remain
equity classified
after the
exchange.
The
amendments do not
apply to modifications
or exchanges of financial
instruments
within another
topic (for example,
Topic 718). The ASU
provides guidance on how to measure the effect
of the modification or exchange and how that effect
should be recognized. The ASU is
effective for all entities for fiscal years beginning
after December 15, 2021, including
interim periods within those
fiscal years. An entity
should apply the amendments prospectively
to modifications or exchanges
occurring on or after the effective date. The Corporation does
not expect
that the
amendments
of this
update will
have a material
effect on
its consolidated
financial
statements.
In
July
2021,
the
FASB
updated the
Codification and
amended ASC
Topic
842,
“Leases,” to
require lessors
to
classify leases
as
operating leases if they have variable lease payments that do
not depend on
an index or
rate and would have
selling losses if they were
classified as sales-type
or direct financing
leases. When a lease is classified
as operating, the
lessor does not recognize
a net investment in
the lease,
does not derecognize
the underlying
asset, and,
therefore,
does not recognize
a selling
profit or
loss. The
leased asset
continues
to
be subject
to the measurement
and impairment
requirements
under other
applicable
GAAP before
and after
the lease
transaction.
For public
business entities, the
amendment will
be
effective for
annual reporting periods
beginning after
December 15,
2021, including
interim
periods within
those fiscal
years. Early
adoption
is permitted.
The Corporation
does not
expect that
the amendments
of this
update will
have
a material
effect on
its consolidated
financial
statements.
On
October 28,
2021,
the
FASB
issued ASU
2021-08, “Business
Combinations (Topic
805): Accounting
for
Contract Assets
and
Contract Liabilities
From Contracts With Customers,” to address diversity
in practice and inconsistency
related to how revenue contracts
with customers acquired
in a business combination
are accounted for. The amendments
require that the acquirer
recognizes and measures
contract assets
and contract
liabilities
acquired
in a business
combination
in accordance
with Topic 606.
At the acquisition
date, an acquirer
should account
for the related revenue
contracts in
accordance
with Topic 606 as if it had originated
the contracts.
The ASU also provides
certain practical expedients for acquirers when recognizing and measuring acquired contract assets and
contract liabilities from revenue
contracts in a business combination and applies to contract assets and contract liabilities from other contracts to which the provisions of
Topic 606 apply. For public business entities,
the amendments
are effective for fiscal
years beginning
after December 15, 2022,
including
interim periods
within those
fiscal years.
The Corporation
does not expect
that the
amendments
of this update
will have
a material
effect on
its consolidated
financial
statements.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
161
NOTE 2 – BUSINESS
COMBINATION
Effective
as
of
,
the
Corporation
completed
the
acquisition
of
.
The
acquisition
of
BSPR
expands
the
Corporation’s
presence
in Puerto
Rico, increases
its operational
scale and
strengthens
its competitiveness
in consumer,
commercial,
business
banking,
and
residential
lending.
The acquisition
also
allowed
the
Corporation to
increase
its deposit
base
at a
lower
cost,
which enhances FirstBank’s funding
and risk profile.
The
Corporation
accounted
for
the
acquisition
as
a
business
combination
in
accordance
with
ASC
805.
Accordingly,
the
Corporation recorded the
assets and liabilities assumed,
as of the date of
the acquisition, at their
respective fair values and
allocated to
goodwill the
excess of
the purchase price
consideration over
the fair
value of
the net
assets acquired.
The determination
of fair
value
required
management
to
make
estimates
about
discount
rates,
future
expected
cash
flows,
market
conditions
at
the
time
of
the
acquisition,
and
other
future
events
that
are
highly
subjective
in
nature
and
subject
to
change.
Fair
value
estimates
related
to
the
acquired
assets
and
liabilities
were
subject
to
adjustment
for
up
to
one
year
after
the
closing
date
of
the
acquisition
as
additional
information
relative
to the
closing date
fair values
becomes available
and such
information
is considered
final, whichever
is earlier.
Since
the
acquisition,
the
Corporation
adjusted
the
original
fair
value
estimates
and
goodwill
by
approximately
$
Substantially
all
of
the
$
closing
purchase price
adjustments to
account for
differences
between
BSPR’s
actual excess
capital at
closing date
compared to
the
BSPR’s excess capital
amount used for the preliminary
closing statement at the acquisition date.
During August 2021, the Corporation
finalized its fair value analysis of the acquired assets and assumed liabilities associated
with this acquisition.
The
following
table
summarizes
the
purchase
price
consideration
and
estimated
fair
values
of
assets
acquired
and
liabilities
assumed from BSPR as of September 1, 2020 under the acquisition method
of accounting:
Fair Value
as Originally
Measurement Period
Fair Value
as
(In thousands)
Recorded
Adjustments
Remeasured
Total purchase price
consideration
$
$
$
Fair value of assets acquired:
Cash and cash equivalents
$
$
$
Investment securities
(
390
)
(
488
)
(
216
)
Premises and equipment, net
Intangible assets
Other assets
(
195
)
Total assets and identifiable
Fair value of liabilities assumed:
Deposits
$
$
$
Other liabilities
Total liabilities assumed
Fair value of net assets and identifiable
(
828
)
Goodwill
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
162
The
application
of
the
acquisition
method
of
accounting
resulted
in
goodwill
of
$
$
.
million,
and
purchased
credit
card
relationships
of
$
statement of financial
condition.
Goodwill recognized in
this transaction is
not deductible for
income tax purposes.
Refer to Note
14 – Goodwill, to the consolidated financial statements
,
for additional information about goodwill and other
intangibles recognized
as part of the transaction.
Fair Value
of Identifiable Assets Acquired and Liabilities Assumed
The methods used to determine the fair values of the significant identifiable
assets and liabilities assumed are described below:
Cash and cash
equivalents
- Cash and cash
equivalents include cash
and due from
banks, and interest-earning
deposits with banks
and the Federal Reserve
System. The Corporation
determined that the fair
values
of financial instruments that
are short-term or re-
price frequently and that have little, or no risk approximate the carrying
values.
Investment
securities
available
for
sale
and
held
to
maturity
-
The
fair
values
of
securities
available
for
sale
were
based
on
observable inputs
obtained from
market transactions
in similar
securities.
The fair
value of
held to
maturity securities
acquired in
the BSPR acquisition,
consisting of Puerto
Rico municipal bonds,
was determined based
on the discounted
cash flow method
used
for the
valuation of
loans described
below.
These held
to maturity
securities were
identified as
PCD debt
securities at
acquisition
and
had
a
fair
value
of
$
established an
initial ACL
for PCD
debt securities
of $
that is attributable to credit losses, through an adjustment to the acquired debt
securities amortized cost and the ACL.
Loans –
The Corporation calculated the fair value of loans acquired in the BSPR acquisition
using an income approach.
Under this
approach, fair value is measured
by the present value of
the net economic benefits to
be received over the life
of the loan.
The fair
value
was
estimated
based
on
a
discounted
cash
flow
method
under
which
the
present
value
of
the
contractual
cash
flows
was
calculated
based
on
certain
valuation
assumptions
such
as default
rates,
loss
severity,
and
prepayment
rates,
consistent
with
the
Corporation’s
CECL methodology,
and discounted
using
a market
rate of
return
that accounts
for both
the time
value of
money
and
investment
risk
factors.
The
discount
rate
utilized
to
analyze
fair
value
considered
the
cost
of
funds
rate,
capital
charge,
servicing
costs,
and
liquidity
premium,
mostly
based
on
industry
standards.
The
Corporation
segmented
the
loan
portfolio
into
two groups:
non-PCD loans
and PCD
loans.
Then loans
within each
group were
pooled based
on similar
characteristics, such
as
loan
type
(
i.e.
,
residential
mortgage,
commercial
and
industrial,
and
consumer
loans),
credit
scores,
loan-to-value,
fixed
or
adjustable
interest rates,
and
credit risk
ratings.
The Corporation
valued
commercial
mortgage loans
at the
loan
level. Non-PCD
loans and
PCD loans
had a
fair value
of $
balance
of
$
carryover of
the ACL
that had
been previously
recorded by
BSPR. The
Corporation recorded
an initial
ACL of
$
non-PCD
loans
(including
unfunded
commitments)
through
an
increase
to
the
provision
for
credit
losses.
The
Corporation
established an initial ACL for PCD loans of $
Core
deposit
intangible
(“CDI”)
characteristics of
the deposit
relationships, including
customer attrition,
deposit interest
rates and
maintenance costs,
and costs
of
alternative
funding
using
the
discounted
cash
flow
approach.
Under
this
method,
the
value
of
the
core
deposit
intangible
was
measured by
the present
value of
the difference,
or spread,
between the
ongoing cost
of the
acquired deposit
base and
the cost
of
the next best
alternative source of
funding, to be
amortized using a
straight-line method
over a weighted
average useful life
of
years.
Purchased
credit card
receivable
intangible (“PCCR”)
in the
business combination.
The Corporation
computed the
fair value
using a
multi-period cash
flow model,
which it
discounted
using an
appropriate risk-adjusted
discount rate.
This measure
of fair
value requires
considerable judgments
about future
events,
including customer retention and
attrition estimates. The fair value
is amortized using an accelerated
method over a useful life of
years.
Deposits
-
amount
payable
on
demand
at
the
reporting
date.
In
determining
the
fair
value
of
certificates
of
deposit,
the
cash
flows
of
the
contractual
interest
payments
during
the
specific
period
of
the
certificates
of
deposit
and
scheduled
principal
payout
were
discounted
to present
value
at market-based
interest rates.
The fair
value is
amortized over
a weighted
average useful
life of
years based on the maturity buckets for the time deposits established in the
valuation determination.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
163
Merger and Restructuring Costs
Upon
completion
of
the
acquisition,
the
Corporation
began
to
integrate
BSPR’s
operations
into
FirstBank’s
operations.
As
of
December 31,
2021, the
Corporation has
completed all
systems integration
efforts and
finalized personnel
and functions
integrations.
Acquisition and
restructuring costs
are expensed
as incurred.
To
the extent
there are
additional costs
associated with
the integration,
the
costs
will
be
recognized
based
on
the
nature
and
timing
of
these
integration
actions.
The
Corporation
recognized
cumulative
acquisition
expenses
of
$
incurred during the years
ended December 31, 2021,
2020 and 2019, respectively.
Acquisition, integration, and
restructuring expenses
were
included
in
merger
and
restructuring
costs
in
the
consolidated
statements
of
income,
and
consisted
primarily
of
legal
fees,
severance
and
personnel-related
costs,
service
contracts
cancellation
penalties,
valuation
services,
systems
conversion,
and
other
integration efforts, as well
as accelerated depreciation
charges related to planned
closures and consolidation of
branches in accordance
with the Corporation’s integration
and restructuring plan.
NOTE 3 – RESTRICTIONS
ON CASH AND
DUE FROM
BANKS
The Corporation’s
bank subsidiary,
FirstBank, is
required by
law to
maintain minimum
average weekly
reserve balances
to cover
demand deposits.
The amount
of those
minimum average
weekly reserve
balances for
the period
that ended
December 31, 2021
was
$
banks as well as other highly liquid securities are used to cover the required average reserve
balances.
As of December
31, 2021, and
as required
by the Puerto
Rico International
Banking Law,
the Corporation
maintained $
time deposits,
which were
considered restricted
assets related
to FirstBank
Overseas Corporation,
an international
banking entity
that
is a subsidiary of FirstBank.
NOTE 4 – MONEY
MARKET INVESTMENTS
Money market investments are composed of time deposits,
overnight deposits with other financial institutions,
and other short-term
investments with original maturities of three months or less.
Money market investments as of December 31, 2021 and 2020 were as follows:
2021
2020
(Dollars in thousands)
Time deposits with other financial institutions
(1) (2)
$
$
Overnight deposits with other financial institutions
(3)
Other short-term investments
(4)
$
$
(1)
Consists of restricted time deposits required by the Puerto Rico International
Banking Law.
(2)
Weighted-average interest rate
of
% and
% as of December 31, 2021 and 2020, respectively.
(3)
Weighted-average interest rate
of
% and
% as of December 31, 2021 and 2020, respectively.
(4)
Weighted-average interest rate
of
% and
% as of December 31, 2021 and 2020, respectively.
As of December 31, 2021 and 2020, the Corporation had
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
164
NOTE 5 – INVESTMENT
SECURITIES
Investment Securities Available
for Sale
The amortized
cost, gross
unrealized gains
and losses
recorded in
OCI, ACL,
estimated fair
value, and
weighted-average yield
of
investment securities available for sale by contractual maturities as of December
31, 2021 were as follows:
December 31,
2021
Amortized cost
Gross
ACL
Fair value
Unrealized
Weighted-
Gains
Losses
average
yield%
(Dollars in thousands)
U.S. Treasury securities:
After 1 to 5 years
$
$
$
$
$
U.S. government-sponsored
agencies' obligations:
After 1 to 5 years
After 5 to 10 years
After 10 years
Puerto Rico government obligations:
(1)
United States and Puerto Rico
government obligations
MBS:
FHLMC certificates:
After 1 to 5 years
After 5 to 10 years
After 10 years
GNMA certificates:
Due within one year
After 1 to 5 years
After 5 to 10 years
After 10 years
FNMA certificates:
Due within one year
After 1 to 5 years
After 5 to 10 years
After 10 years
issued or guaranteed by the FHLMC
FNMA and GNMA:
After 1 to 5 years
After 5 to 10 years
After 10 years
Private label:
Total MBS
Other
Total investment securities
available for sale
$
$
$
$
$
(1)
Consists of a residential pass-through
MBS issued by the
PRHFA that
is collateralized by certain
second mortgages originated
under a program launched
by the Puerto Rico
government
in
2010.
During the
second
quarter of
2021,
the
Corporation
placed
this
instrument
in
nonaccrual
status
based
on
this
delinquency
status
of the
underlying
second
mortgage
loans
collateral.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
165
The amortized
cost, gross
unrealized gains
and losses
recorded in
OCI, ACL,
estimated fair
value, and
weighted-average yield
of
investment securities available for sale by contractual maturities as of December
31, 2020 were as follows:
December 31, 2020
Amortized cost
Gross
ACL
Fair value
Unrealized
Weighted-
Gains
Losses
average
yield%
(Dollars in thousands)
U.S. Treasury securities:
Due within one year
$
$
$
$
$
U.S. government-sponsored
Puerto Rico government obligations:
(1)
United States and Puerto Rico
MBS:
After 1 to 5 years
After 5 to 10 years
After 10 years
Due within one year
After 1 to 5 years
After 5 to 10 years
After 10 years
After 1 to 5 years
After 5 to 10 years
After 10 years
Collateralized mortgage obligations
issued or guaranteed by the FHLMC,
FNMA and GNMA:
After 1 to 5 years
After 5 to 10 years
After 10 years
Private label:
Total MBS
Other
After 1 to 5 years
Total investment securities
available for sale
$
$
$
$
(1)
Consists of a residential pass-through
MBS issued by the
PRHFA that is
collateralized by certain second
mortgages originated under a
program launched by the Puerto
Rico government
in 2010.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
166
Maturities
of
MBS
are
based
on
the
period
of
final
contractual
maturity.
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 is presented as part of OCI.
The aggregate
amortized cost
and approximate
market value
of investment
securities available
for sale
as of
December 31,
2021
by contractual maturity are shown below:
Amortized Cost
Fair Value
(Dollars in thousands)
United States and Puerto Rico government obligations, and
$
$
MBS and collateralized mortgage obligations
(1)
$
$
(1) The expected maturities of MBS and collateralized mortgage
obligations may differ from their contractual maturities
because they may be subject to prepayments.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
167
The following
tables show
the fair
value and
gross unrealized
losses of
the Corporation’s
available-for-sale
investment securities,
aggregated by
investment category
and length of
time that individual
securities have
been in a
continuous unrealized
loss position, as
of December 31, 2021 and December 31, 2020. The tables also include debt
securities for which an ACL was recorded.
As of December 31, 2021
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
Fair Value
Fair Value
Fair Value
(In thousands)
Debt securities:
$
$
$
$
$
$
MBS:
$
$
$
$
$
$
As of December 31, 2020
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
Fair Value
Fair Value
Fair Value
(In thousands)
Debt securities:
$
$
$
$
$
$
MBS:
$
$
$
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
168
There were no sales
of securities available
for sale during the
year ended December
31, 2021. During the
year ended December 31,
2020, proceeds from
sales of available-for-sale
investment securities amounted
to $
million and
gross realized
losses of
$
the tax-exempt
international banking entity
subsidiary,
which had no
effect in
the income tax
expense recorded
during the year
ended
December 31, 2020.
Assessment for Credit Losses
Debt securities
issued by
U.S. government
agencies,
U.S. GSEs,
and
the U.S.
Treasury,
including
notes and
MBS, accounted
for
approximately
% of the
total available-for-sale
portfolio as of
December 31,
2021 and 2020,
and the Corporation
expects no
credit
losses on
these securities,
given the
explicit and
implicit guarantees
provided by
the U.S.
federal government.
Because the
decline in
fair value is attributable to
changes in interest rates, and
not credit quality,
and because the Corporation does
not have the intent to
sell
these
U.S.
government
and
agencies
debt
securities
and
it
is
likely
that
it
will
not
be
required
to
sell
the
securities
before
their
anticipated recovery,
the Corporation
does not
consider impairments
on these
securities to
be credit
related as
of December
31, 2021
and 2020.
The Corporation’s
credit loss
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’s
available-for-sale
MBS
portfolio
included
private
label
MBS
with
a
fair
value
of
$
unrealized
losses of
approximately
$
part of the ACL.
of December
31, 2021, the
Corporation did not
have the intent
to sell these
securities and determined
that it was
likely that it
will not
be required
to sell
the securities
before anticipated
recovery.
The Corporation
determined the
ACL for
private label
MBS based
on a
risk-adjusted
discounted
cash flow
methodology
that
considers
the
structure
and
terms of
the
instruments.
The
Corporation
utilized
PDs and LGDs that considered,
among other things, historical payment
performance, loan-to-value attributes,
and relevant current and
forward-looking macroeconomic variables,
such as regional unemployment
rates and the housing price
index. Under this approach,
all
future cash
flows (interest
and principal)
from the underlying
collateral loans,
adjusted by prepayments
and the PDs
and LGDs,
were
discounted at the effective
interest rate as of the reporting date.
Significant assumptions in the valuation
of the private label MBS were
as follows:
As of
As of
December 31,
2021
December 31,
2020
Weighted
Range
Weighted
Range
Average
Minimum
Maximum
Average
Minimum
Maximum
Discount rate
Prepayment rate
Projected Cumulative Loss Rate
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
169
The Corporation
evaluates if
a credit
loss exists,
primarily
by monitoring
adverse variances
in the
present value
of expected
cash
flows. As of December
31, 2021, the ACL for
these private label MBS
was $
December 31, 2020.
through
MBS
issued
by
the
PRHFA,
collateralized
by
certain
second
mortgages,
with
a
fair
value
of
$
unrealized loss of
approximately $
is part of
the ACL. The
underlying second
mortgage loans were
originated under
a program launched
by the Puerto
Rico government
in
2010.
This
residential
pass-through
MBS
was
structured
as
a
zero-coupon
bond
for
the
first
ten
years
(up
to
July
2019).
The
underlying
source
of
repayment
on
this
residential
pass-through
MBS
is
second
mortgage
loans
in
Puerto
Rico.
PRHFA,
not
the
Puerto
Rico
government,
provides
a
guarantee
in
the
event
of
default
and
subsequent
foreclosure
of
the
properties
underlying
the
second mortgage
loans. During
the second
quarter of
2021, the
Corporation placed
this instrument
in nonaccrual
status based
on the
delinquency status of
the underlying second
mortgage loans collateral.
The Corporation determined
the ACL on
this instrument based
on
a
risk-adjusted
discounted
cash
flow
methodology
that
considered
the
structure
and
terms
of
the
underlying
collateral.
The
Corporation utilized PDs and LGDs
that considered, among other
things, historical payment performance,
loan-to value attributes,
and
relevant
current
and
forward-looking
macroeconomic
variables,
such
as
regional
unemployment
rates,
the
housing
price
index,
and
expected recovery
from the PRHFA
guarantee. Under
this approach, all
future cash flows
(interest and principal)
from the underlying
collateral loans, adjusted by
prepayments and the PDs and
LGDs, were discounted at
the internal rate of return
as of the reporting date
and compared to
the amortized cost.
In the event
that the second
mortgage loans default
and the collateral
is insufficient to
satisfy the
outstanding
balance
of
this
residential
pass-through
MBS,
PRHFA’
s
ability
to
honor
its
insurance
will
depend
on,
among
other
factors,
the financial
condition of
PRHFA
at the
time
such obligation
becomes due
and payable.
Further deterioration
of the
Puerto
Rico
economy
or
fiscal
health
of
the
PRHFA
could
impact
the
value
of
these
securities,
resulting
in
additional
losses
to
the
Corporation. As
of December
31, 2021,
the Corporation
did not
have the
intent to
sell this
security and
determined that
it was
likely
that it will not be required to sell the security before its anticipated recovery
.
Accrued interest
receivable on
available-for-sale
debt securities
totaled $
December 31, 2020) and is excluded from the estimate of credit losses.
debt securities available-for-sale:
Year
Ended December 31, 2021
Private label MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
$
$
Provision for credit losses - (benefit)
(
136
)
(
136
)
Net charge-offs
(
69
)
(
69
)
$
$
$
Year
Ended December 31, 2020
Private label MBS
Puerto Rico
Government
Obligations
Total
(In thousands)
Beginning balance
$
$
$
Provision for credit losses
Net charge-offs
(
331
)
(
331
)
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
170
During the year ended December 31, 2019, the Corporation recorded OTTI losses on
available-for-sale debt securities as follows:
2019
(In thousands)
Total OTTI losses
$
(
557
)
Portion of OTTI recognized in OCI
Net impairment losses recognized in earnings
(1)
$
(
497
)
(1)
Prior to the adoption of CECL on January 1, 2020, credit-related impairment recognized in earnings was reported as
part of
net gain
(loss) on
investment securities in
the consolidated statements
of income
rather than
as a
provision
for credit losses.
Investments Held to Maturity
The
amortized
cost,
gross
unrecognized
gains
and
losses,
estimated
fair
value,
ACL,
weighted-average
yield
and
contractual
maturities of investment securities held to maturity as of December 31,
2021 and December 31, 2020 were as follows
:
December 31, 2021
Amortized cost
Fair value
Gross Unrecognized
Weighted-
(Dollars in thousands)
Gains
Losses
ACL
average yield%
Puerto Rico municipal bonds:
$
$
$
$
$
Total investment
securities
held to maturity
$
$
$
$
$
December 31, 2020
Amortized cost
Fair value
Gross Unrecognized
Weighted-
(Dollars in thousands)
Gains
Losses
ACL
average yield%
Puerto Rico municipal bonds:
$
$
$
$
$
Total investment
securities
held to maturity
$
$
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
171
The following tables
show the Corporation’s
held-to-maturity investments’
fair value and gross
unrecognized losses, aggregated
by
investment category and
length of time that
individual securities had been
in a continuous unrecognized
loss position, as of
December
31, 2021 and December 31, 2020, including debt securities for which
an ACL was recorded:
As of December 31, 2021
Less than 12 months
12 months or more
Total
Unrecognized
Unrecognized
Unrecognized
Fair Value
Fair Value
Fair Value
(In thousands)
Debt securities:
$
$
$
$
$
$
As of December 31, 2020
Less than 12 months
12 months or more
Total
Unrecognized
Unrecognized
Unrecognized
Fair Value
Fair Value
Fair Value
(In thousands)
Debt securities:
$
$
$
$
$
$
The Corporation
determines the
ACL of
Puerto Rico
municipal bonds
based on
the product
of a
cumulative PD
and LGD, and
the
amortized
cost
basis of
the
bonds
over
their
remaining
expected
life
as described
in
Note
1
–
Nature
of
Business
and
Summary
of
Significant Accounting Policies, above.
The Corporation
performs periodic
credit quality
reviews on
these issuers.
All of
the Puerto
Rico municipal
bonds were
current as
to
scheduled
contractual
payments
as
of
December
31,
2021.
The
Puerto
Rico
municipal
bonds
had
an
ACL
of
$
December 31, 2021, down $
in forecasted
macroeconomic variables
and the repayment
of certain bonds
during the year
ended December 31,
2021, partially offset
by changes
in some issuers’
financial metrics
based on
their most recent
financial statements.
The ACL
recorded as
of December
31,
2020
included
the
initial
ACL
for
held-to-maturity
securities
of
$
million initial ACL established
for PCD debt securities with
a fair value of $
million
net
release
of
the
initial
reserves
recorded
during
2020.
In
accordance
with
the
Corporation’s
policy,
accrued
interest
receivable
on
held-to-maturity
debt
securities
that
totaled
$
2020) and was excluded from the estimate of credit losses.
December 31, 2021 and 2020:
Puerto Rico Municipal Bonds
Year
Ended
December 31, 2021
December 31, 2020
(In thousands)
Beginning Balance
$
$
Impact of adopting ASC 326
Initial allowance on PCD debt securities
Provision for credit losses - (benefit)
(
274
)
(
558
)
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
172
During the
second quarter
of 2019,
the oversight
board established
by PROMESA
announced
the designation
of Puerto
Rico’s
78
municipalities
as
covered
instrumentalities
under
PROMESA.
Municipalities
may
be
affected
by
the
negative
economic
and
other
effects
resulting
from
expense,
revenue,
or
cash
management
measures
taken
by
the
Puerto
Rico
government
to
address
its
fiscal
situation,
or
measures
included
in
fiscal
plans
of
other
government
entities,
and,
more
recently,
by
the
effect
of
the
COVID-19
pandemic on the Puerto Rico and global
economy. Given
the inherent uncertainties about the fiscal
situation of the Puerto Rico central
government,
the
COVID-19
pandemic,
and
the
measures
taken,
or
to
be
taken,
by
other
government
entities
in
response
to
the
COVID-19 pandemic
on municipalities,
the Corporation
cannot be
certain whether
future charges
to the
ACL on these
securities will
be required.
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
are
classified
as
money
market
investments
in
the
consolidated
statements
of
financial
condition. As of
December 31,
2021, and
2020, the
Corporation had
no outstanding
securities held
to maturity
that were classified
as
cash and cash equivalents.
Credit Quality Indicators:
The held-to-maturity
investment securities
portfolio consisted
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. Accordingly,
the Corporation
monitors the
credit quality
of Puerto
Rico municipal
bonds
held-to-maturity
through the
use of
internal
credit-risk
ratings,
which
are
generally
updated
on
a
quarterly
basis.
The
Corporation
considers
a
debt
security
held-to-
maturity as a criticized asset
if its risk rating
is Special Mention, Substandard,
Doubtful,
or Loss. Puerto Rico municipal
bonds that do
not meet
the criteria
for classification
as criticized
assets are
considered
to be
pass-rated
securities. The
asset categories
are defined
below:
Pass –
Assets classified
as pass
have
a well-defined
primary source
of repayment,
with no
apparent risk,
strong financial
position,
minimal operating
risk, profitability,
liquidity and
strong capitalization
and include
assets categorized
as watch.
Assets classified
as
watch have
acceptable business
credit,
but borrowers
operations,
cash flow
or financial
condition evidence
more than
average
risk
and requires additional level of supervision and attention from Loan Officers.
Special Mention
– Special
Mention assets
have potential
weaknesses that
deserve management’s
close attention.
If left uncorrected,
these potential weaknesses
may result in deterioration
of the repayment prospects
for the asset or
in the Corporation’s
credit position
at
some
future
date.
Special
Mention
assets
are
not
adversely
classified
and
do
not
expose
the
Corporation
to
sufficient
risk
to
warrant adverse classification.
Substandard – Substandard
assets are 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
the
weaknesses
inherent
in
those
classified
Substandard
with
the
added
characteristic
that
the
weaknesses
make
collection
or
liquidation
in
full
highly
questionable
and
improbable,
based
on
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.
The Corporation
periodically reviews its
assets to evaluate
if they are
properly classified, and
to determine impairment,
if any.
The
frequency
of
these
reviews
will
depend
on
the
amount
of
the
aggregate
outstanding
debt,
and
the
risk
rating
classification
of
the
obligor.
The
Corporation
has
a
Loan
Review
Group
that
reports
directly
to
the
Corporation’s
Risk
Management
Committee
and
administratively
to
the
Chief
Risk
Officer.
The
Loan
Review
Group
performs
annual
comprehensive
credit
process
reviews
of
the
Bank’s
commercial
loan
portfolios,
including
the
above-mentioned
Puerto
Rico
municipal
bonds
accounted
for
as
held-to-maturity
securities. The objective
of these loan
reviews is assess
accuracy
of the Bank’s
determination and maintenance
of loan risk
rating and
its adherence
to lending
policies, practices
and procedures.
The monitoring
performed by
this group
contributes to
the assessment
of
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
173
compliance with
credit policies
and underwriting
standards, the
determination of
the current
level of
credit risk,
the evaluation
of the
effectiveness of
the credit
management process,
and the
identification of
any deficiency
that may
arise in
the credit-granting
process.
Based on
its findings,
the Loan
Review Group
recommends corrective
actions,
if necessary,
that
help
in maintaining
a sound
credit
process. The Loan Review Group reports the results of the credit process reviews to
the Risk Management Committee.
The
following
table
summarizes
the
amortized
cost
of
the
Puerto
Rico
Municipal
Bonds,
which
are
the
Corporation’s
only
debt
securities held-to-maturity,
as of December 31, 2021
and 2020, aggregated by credit quality indicator:
Held to Maturity
Puerto Rico Municipal Bonds
December 31,
December 31
(In thousands)
2021
2020
Risk Ratings:
$
$
$
$
2021 and 2020. A security is considered to be past due once it is
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
174
NOTE 6 – EQUITY 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
mortgage
related
assets,
and
the
FHLB
requires
an
additional
investment that
is calculated
as a
percentage of
total FHLB
advances and
letters of
credit, if
any.
The FHLB
stock represents
capital
stock issued at $
As of
December 31,
2021 and
2020, the
Corporation had
investments in
FHLB stock
carried at
a cost
of $
million, respectively.
Dividend income
from FHLB
stock for
the years
ended December
31, 2021,
2020, and
2019 amounted
to $
million, $
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
eleven
regional,
stockholder-owned
congressionally
chartered
banks. The
FHLBs are
all privately
capitalized and
operated by
their member
stockholders. The
system is
supervised by
the Federal
Housing
Finance
Agency,
which
requires
that
the
FHLBs
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.
approximately
$
marked-to-market loss of
$
consolidated statements of income,
compared to a $
thousand
marked-to-market
gain for
the year
ended December
2019. In
addition,
the Corporation
has other
equity securities
that do
not have
a readily-determinable
fair value.
The carrying
value of such
securities as of
December 31,
2021 and
2020 was $
and $
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
175
NOTE 7 – INTEREST AND DIVIDEND INCOME ON INVESTMENT
SECURITIES, MONEY MARKET INVESTMENTS
AND INTEREST-BEARING CASH ACCOUNTS
The following
provides information
about interest
on investments,
interest-bearing
cash accounts,
and FHLB dividend
income:
Year Ended
December 31,
2021
2020
2019
(In thousands)
MBS:
$
$
$
(1)
Puerto Rico government obligations, U.S. Treasury securities, and U.S.
(1)
Other investment securities (including FHLB dividends)
Total interest income on
investment securities
Interest on money market investments and interest-bearing cash accounts:
Total interest income on money market
investments and interest-bearing cash accounts
Total interest and
dividend income on investment securities, money market
$
$
$
(1)
Primarily MBS and government obligations held by International Banking
Entities (as defined in the International Baking Entity Act
of Puerto Rico), whose interest income and sales are
exempt from Puerto Rico income taxation under that act,
as well as tax-exempt Puerto Rico municipal bonds held as part
of the held-to-maturity investment securities portfolio.
The following table summarizes the components of interest and dividend
income on investments:
Year Ended
December 31,
2021
2020
2019
(In thousands)
Interest income on investment securities, money
market investments, and interest-bearing cash accounts
$
$
$
Dividends on FHLB stock
Dividends on other equity securities
Total interest income
and dividends on investments
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
176
NOTE 8 – LOANS HELD FOR INVESTMENT
The following
provides information
about the loan
portfolio held
for investment
as of the indicated
dates:
As of December 31,
As of December 31,
2021
2020
(In thousands)
Residential mortgage loans, mainly secured by first mortgages
$
$
Construction loans
Commercial mortgage loans
C&I loans
(1) (2)
Consumer loans
(3)
ACL on loans and finance leases
(
269,030
)
(
385,887
)
Loans held for investment, net
$
$
(1)
As of December 31, 2021 and 2020, includes $
(2)
As of each December 31, 2021 and 2020, includes
$
estate for repayment.
(3)
Includes accretable fair value net purchase discounts of $
As
of
December 31,
2021,
and
2020,
the
Corporation
had
net
deferred
origination
costs
on
its
loan
portfolio
amounting
to
$
million
and
$
December 31, 2021 and 2020, respectively.
As of
December 31,
2021,
the Corporation
was
servicing
residential
mortgage
loans owned
by others
in an
aggregate
amount
of
$
of December 31, 2021 (2020 — $
Various
loans, mainly secured by first mortgages,
were assigned as collateral for CDs, individual
retirement accounts, and advances
from
the
FHLB.
Total
loans
pledged
as
collateral
amounted
to
$
respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
177
The following
tables present
by portfolio
classes the
amortized cost
basis of
loans on
nonaccrual status
and loans
past
due
90
days
or
more
and
still
accruing
as
of
December
31,
2021
and
the
interest
income
recognized
on
nonaccrual loans for the years ended December 31, 2021 and 2020:
As of December 31, 2021
Year Ended
December 31,
2021
Year Ended
December 31,
2020
Puerto Rico and Virgin Islands region
Nonaccrual
Loans with No
ACL
Nonaccrual
Loans with
ACL
Total
Nonaccrual
Loans
(2)
Loans Past Due
90 days or
more and Still
Accruing
(2)(3)
Interest Income
Recognized on
Nonaccrual
Loans
Interest Income
Recognized on
Nonaccrual
Loans
(In thousands)
Residential mortgage loans, mainly secured
by first mortgages:
FHA/VA government
-guaranteed
$
$
$
$
$
Conventional residential mortgage loans
Construction loans
Commercial mortgage loans
C&I loans
Consumer Loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
Total loans held for investment
(1)
$
$
$
$
$
$
(1)
Nonaccrual loans exclude $
(2)
Nonaccrual loans exclude PCD loans previously accounted
for under ASC Subtopic 310-30 for which the Corporation
made the accounting policy election of
maintaining pools of loans
accounted for under ASC
Subtopic 310-30 as “units
of account” both at the time
of adoption of CECL on
January 1, 2020 and
on
an ongoing basis for credit loss
measurement. These loans accrete interest
income based on the effective
interest rate of the loan pools determined
at the time
of adoption
of CECL
and will
continue to
be excluded
from nonaccrual
loan statistics
as long
as the
Corporation can
reasonably estimate
the timing
and
amount of cash flows expected
to be collected on the
loan pools. The amortized cost
of such loans as of
December 31, 2021 was $
of such loans
contractually past due
90 days or
more, amounting to
$
million as of
December 31, 2021
($
loans and $
million commercial mortgage loans), is presented in the
loans past due 90 days or more and still accruing category in the
table above.
(3)
These include rebooked
loans, which were
previously pooled into
GNMA securities amounting
to $
program,
the
Corporation
has
the
option
but
not
the
obligation
to
repurchase
loans
that
meet
GNMA’s
specified
delinquency
criteria.
For
accounting
purposes, the loans subject
to the repurchase option
are required to be
reflected on the financial
statements with an offsetting
liability. During
the year ended
December 31, 2021, the Corporation repurchased, pursuant
to the aforementioned repurchase option, $
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
178
As of December 31, 2021
Year Ended
December 31,
2021
Year Ended
December 31,
2020
Florida region
Nonaccrual
Loans with No
ACL
Nonaccrual
Loans with
ACL
Total
Nonaccrual
Loans
Loans Past Due
90 days or
more and Still
Accruing
Interest Income
Recognized on
Nonaccrual
Loans
Interest Income
Recognized on
Nonaccrual
Loans
(In thousands)
Residential mortgage loans, mainly secured
by first mortgages:
FHA/VA government
-guaranteed
$
$
$
$
$
$
Conventional residential mortgage loans
Construction loans
Commercial mortgage loans
C&I loans
Consumer Loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
Total loans held for investment
(1)
$
$
$
$
$
$
(1)
Nonaccrual loans exclude $
As of December 31, 2021
Year Ended
December 31,
2021
Year Ended
December 31,
2020
Total
Nonaccrual
Loans with No
ACL
Nonaccrual
Loans with
ACL
Total
Nonaccrual
Loans
Loans Past Due
90 days or
more and Still
Accruing
(2)(3)
Interest Income
Recognized on
Nonaccrual
Loans
Interest Income
Recognized on
Nonaccrual
Loans
(In thousands)
Residential mortgage loans, mainly secured
by first mortgages:
FHA/VA government
-guaranteed
$
$
$
$
$
$
Conventional residential mortgage loans
Construction loans
Commercial mortgage loans
C&I loans
Consumer Loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
Total loans held for investment
(1)
$
$
$
$
$
$
(1)
Nonaccrual loans exclude $
(2)
Nonaccrual loans excludes PCD loans previously accounted
for under ASC Subtopic 310-30 for which
the Corporation made the accounting policy election
of maintaining pools of loans accounted for under
ASC Subtopic 310-30 as “units of account” both at
the time of adoption of CECL on January 1,
2020 and
on an ongoing basis for credit
loss measurement. These
loans accrete interest income based
on the effective interest rate
of the loan pools determined
at the
time of adoption
of CECL and
will continue
to be excluded
from nonaccrual
loan statistics
as long as
the Corporation can
reasonably estimate
the timing
and amount of
cash flows expected
to be collected
on the loan
pools. The amortized
cost of such
loans as of
December 31, 2021
was $
portion of such loans contractually
past due 90 days or more,
amounting to $"
million as of December 31,
2021 ($
" million conventional residential
mortgage loans
and $
above.
(3)
These
include
rebooked
loans,
which
were
previously
pooled
into
GNMA
securities,
amounting
to
$
GNMA
program,
the
Corporation
has
the
option
but
not
the
obligation
to
repurchase
loans
that
meet
GNMA’s
specified
delinquency
criteria.
For
accounting purposes, these loans
subject to the repurchase option
are required to be
reflected on the financial
statements with an offsetting
liability. During
the year ended December 31, 2021, the Corporation
repurchased, pursuant to the aforementioned repurchase
option, $
GNMA.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
179
The following
tables present
by portfolio
classes the
amortized
cost basis
of loans
on nonaccrual
status and
loans past
due 90
days or more and still accruing as of December 31, 2020:
As of December 31, 2020
Puerto Rico and Virgin Islands region
Nonaccrual Loans with No
ACL
Nonaccrual Loans with ACL
Total Nonaccrual Loans
(2)
Loans Past Due 90 days or
more and Still Accruing
(2)(3)
(In thousands)
Residential mortgage loans, mainly secured
by first mortgages:
FHA/VA government
-guaranteed
$
$
$
$
Conventional residential mortgage loans
Construction loans
Commercial mortgage loans
C&I loans
Consumer Loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
Total loans held for investment
(1)
$
$
$
$
(1)
Nonaccrual loans exclude $
(2)
Excludes PCD loans previously accounted
for under ASC Subtopic 310-30 for
which the Corporation made the accounting
policy election of maintaining pools
of loans accounted
for under ASC Subtopic
310-30 as “units
of account” both at
the time of adoption
of CECL on January
1, 2020 and on
an ongoing basis
for credit loss measurement.
These loans
accrete interest
income based
on the effective
interest rate
of the
loan pools
determined at
the time of
adoption of
CECL and
will continue
to be
excluded from
nonaccrual loan
statistics as long as the Corporation can
reasonably estimate the timing and amount
of cash flows expected to be collected
on the loan pools. The amortized cost
of such loans as of
December 31,
2020 was
$
conventional residential
mortgage loans
and $
above.
(3)
These
include
loans
rebooked,
which
were
previously
pooled
into
GNMA
securities
amounting
to
$
Corporation
has
the
option
but
not
the
obligation to
repurchase
loans
that
meet
GNMA’s
specified
delinquency
criteria.
For
accounting
purposes,
these
loans
subject
to
the
repurchase option
are required
to be
reflected on
the financial
statements with
an offsetting
liability.
During the
year ended
December 31,
2020, the
Corporation repurchased,
pursuant to the aforementioned repurchase option, $
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
180
As of December 31, 2020
Florida region
Nonaccrual Loans with No
ACL
Nonaccrual Loans with ACL
Total Nonaccrual Loans
Loans Past Due 90 days or
more and Still Accruing
(In thousands)
Residential mortgage loans, mainly secured
by first mortgages:
FHA/VA government
-guaranteed
$
$
$
$
Conventional residential mortgage loans
Construction loans
Commercial mortgage loans
C&I loans
Consumer Loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
Total loans held for investment
(1)
$
$
$
$
(1)
Nonaccrual loans exclude $
As of December 31, 2020
Total
Nonaccrual Loans with No
ACL
Nonaccrual Loans with ACL
Total Nonaccrual Loans
Loans Past Due 90 days or
more and Still Accruing
(2)(3)
(In thousands)
Residential mortgage loans, mainly secured
by first mortgages:
FHA/VA government
-guaranteed
$
$
$
$
Conventional residential mortgage loans
Construction loans
Commercial mortgage loans
C&I loans
Consumer Loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
Total loans held for investment
(1)
$
$
$
$
(1)
Nonaccrual loans exclude $
(2)
Excludes PCD loans previously accounted
for under ASC Subtopic 310-30 for
which the Corporation made the accounting
policy election of maintaining pools
of loans accounted
for under ASC Subtopic
310-30 as “units
of account” both at
the time of adoption
of CECL on January
1, 2020 and on
an ongoing basis
for credit loss measurement.
These loans
accrete interest
income based
on the effective
interest rate
of the
loan pools
determined at
the time of
adoption of
CECL and
will continue
to be
excluded from
nonaccrual loan
statistics as long as the Corporation can
reasonably estimate the timing and amount
of cash flows expected to be collected
on the loan pools. The amortized cost
of such loans as of
December 31,
2020 was
$
conventional residential
mortgage loans
and $
above.
(3)
These
include
rebooked
loans
,
which
were
previously
pooled
into
GNMA
securities
amounting
to
$
Corporation
has
the
option
but
not
the
obligation to
repurchase
loans
that
meet
GNMA’s
specified
delinquency
criteria.
For
accounting
purposes,
these
loans
subject
to
the
repurchase option
are required
to be
reflected on
the financial
statements with
an offsetting
liability.
During the
year ended
December 31,
2020, the
Corporation repurchased,
pursuant to the aforementioned repurchase option, $
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
181
When a
loan
is placed
on nonaccrual
status, any
accrued but
uncollected
interest income
is reversed
and
charged
against interest
income
and the
amortization of
any net
deferred fees
is suspended.
The amount
of accrued
interest reversed
against interest
income
totaled $
As of
December 31,
2021, the
recorded investment
on residential
mortgage loans
collateralized by
residential real
estate property
that were in
the process of
foreclosure amounted
to $
by
the
VA,
and
$
Corporation made
the accounting
policy election
of maintaining
pools of
loans previously
accounted for
under ASC 310
-30 as
“units
of account.”
The Corporation
commences the
foreclosure process
on residential
real estate
loans when
a borrower
becomes
delinquent,
in accordance
with the
requirements
of the
CFPB. Foreclosure
procedures
and timelines
vary depending
on whether
the
property is located in a judicial or
non-judicial state. Judicial states
(i.e.,
be processed
through the
state’s
court while
foreclosure in
non-judicial
states (
i.e.,
Foreclosure timelines
vary according to
local jurisdiction
law and investor
guidelines. Occasionally,
foreclosures may
be delayed due
to, among other reasons, mandatory mediations, bankruptcy,
court delays, and title issues.
The Corporation’s aging of the loan portfolio
held for investment by portfolio classes as of December 31, 2021 is as follows:
As of December 31, 2021
Puerto Rico and Virgin Islands region
30-59 Days
Past Due
60-89 Days
Past Due
90 days or
more Past
Due
(1)(2)(3)
Total Past
Due
Current
Total loans
held for
investment
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
(2) (3) (4)
$
$
$
$
$
$
(4)
Commercial loans:
(4)
Consumer loans:
$
$
$
$
$
$
(1)
Includes nonaccrual loans
and accruing loans
that were 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,
guaranteed by the VA,
and other government-insured
loans as past-due
loans 90
days and still
accruing as opposed
to nonaccrual loans
since the principal repayment
is insured. The
Corporation continues accruing
interest on these
loans until they
have passed
the 15 months delinquency mark, taking into
consideration the FHA interest curtailment process.
These balances include $
FHA that were over 15 months delinquent.
(3)
As of December
31, 2021, includes $
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
government-guaranteed loans,
conventional residential
mortgage loans,
and commercial
mortgage loans
past due
30-59 days,
but less
than two payments in arrears, as of December 31, 2021 amounted
to $
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
182
As of December 31, 2021
Florida region
30-59 Days
Past Due
60-89 Days
Past Due
90 days or
more Past
Due
(1) (2)
Total Past
Due
Current
Total loans
held for
investment
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
(2)
$
$
$
$
$
$
(3)
Commercial loans:
Consumer loans:
$
$
$
$
$
$
(1)
Includes nonaccrual loans and accruing loans that were contractually
delinquent 90 days or more (i.e., FHA/VA
guaranteed loans).
(2)
It is
the Corporation's
policy to
report delinquent
residential mortgage
loans insured
by the
FHA, guaranteed
by the
VA,
and other
government-insured loans
as past-due
loans 90 days
and still accruing
as opposed
to nonaccrual
loans since
the principal repayment
is insured.
The Corporation
continues accruing
interest on these
loans until
they have passed the 15 months
delinquency mark, taking into consideration
the FHA interest curtailment process.
Florida region were over 15 months delinquent as of December
31, 2021.
(3)
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.
Conventional
residential
mortgage
loans
past
due
30-59
days,
but
less
than
two
payments
in
arrears,
as
of
December 31, 2021 amounted to $
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
183
As of December 31, 2021
Total
30-59 Days
Past Due
60-89 Days
Past Due
90 days or
more Past
Due
(1)(2)(3)
Total Past
Due
Current
Total loans held
for investment
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
(2) (3) (4)
$
$
$
$
$
$
(4)
Commercial loans:
(4)
Consumer loans:
$
$
$
$
$
$
(1)
Includes nonaccrual loans
and accruing loans
that were 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, guaranteed by
the VA,
and other government-insured
loans as past-due
loans 90
days and still
accruing as opposed
to nonaccrual loans
since the principal
repayment is insured.
The Corporation continues
accruing interest on
these loans until
they have passed
the 15 months delinquency mark,
taking into consideration the FHA interest
curtailment process. These balances include
$
FHA that were over 15 months delinquent.
(3)
As of December
31, 2021, includes $
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
government-guaranteed loans,
conventional residential
mortgage loans,
and commercial
mortgage loans
past due
30-59 days,
but less
than two payments in arrears, as of December 31, 2021 amounted
to $
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
184
The Corporation’s aging of the loan portfolio
held for investment by portfolio classes as of December 31, 2020 is as
follows:
As of December 31, 2020
Puerto Rico and Virgin Islands region
30-59 Days
Past Due
60-89 Days
Past Due
90 days or
more Past
Due
(1)(2)(3)
Total Past
Due
Current
Total loans
held for
investment
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
(2) (3) (4)
$
$
$
$
$
$
Commercial loans:
(4)
(4)
Consumer loans:
$
$
$
$
$
$
(1)
Includes
nonaccrual
loans
and
accruing loans
that
were 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, guaranteed
by the
VA,
and other
government-insured loans
as past-due
loans 90 days
and still accruing
as opposed
to nonaccrual
loans since
the principal repayment
is insured.
The Corporation
continues accruing
interest on these
loans until
they have
passed the
15 months
delinquency mark,
taking into
consideration the
FHA interest
curtailment process.
These balances
include $
mortgage loans insured by the FHA that were over 15 months delinquent.
(3)
As of
December 31,
2020, includes
$
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
government-guaranteed loans, conventional residential mortgage
loans, commercial mortgage loans, and
construction loans
past due 30-59
days, but less
than two payments
in arrears,
as of December
31, 2020 amounted
to $
million, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
185
As of December 31, 2020
Florida region
30-59 Days
Past Due
60-89 Days
Past Due
90 days or
more Past
Due
(1) (2)
Total Past
Due
Current
Total loans
held for
investment
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
(2) (3)
$
$
$
$
$
$
(3)
Commercial loans:
Consumer loans:
$
$
$
$
$
$
(1)
Includes nonaccrual loans and accruing loans that were contractually
delinquent 90 days or more (
i.e
., FHA/VA
guaranteed loans).
(2)
It is
the Corporation's
policy to
report delinquent
residential mortgage
loans insured
by the
FHA, guaranteed
by the
VA,
and other
government-insured loans
as past-due
loans 90 days
and still accruing
as opposed
to nonaccrual
loans since
the principal repayment
is insured.
The Corporation
continues accruing
interest on these
loans until
they have passed the 15 months
delinquency mark, taking into consideration
the FHA interest curtailment process.
No residential mortgage loans insured by
the FHA in the
Florida region were over 15 months delinquent as of December
31, 2020.
(3)
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
government-guaranteed loans and conventional
residential mortgage loans past
due 30-59 days, but less
than two payments in arrears, as of December 31, 2020 amounted
to $
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
186
As of December 31, 2020
Total
30-59 Days
Past Due
60-89 Days
Past Due
90 days or
more Past
Due
(1)(2)(3)
Total Past
Due
Current
Total loans held
for investment
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
$
$
$
$
$
$
Commercial loans:
(4)
(4)
Consumer loans:
$
$
$
$
$
$
(1)
Includes nonaccrual loans
and accruing loans
that were 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,
guaranteed by the VA,
and other government-insured
loans as past-due loans
90 days and
still accruing as
opposed to nonaccrual
loans since the
principal repayment is
insured. The Corporation
continues accruing interest
on these loans
until they have
passed the
15 months
delinquency mark,
taking into
consideration the
FHA interest
curtailment process.
These balances
include $
insured by the FHA that were over 15 months delinquent.
(3)
As
of December
31,
2020,
includes
$
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
government-guaranteed loans, conventional
residential mortgage loans, commercial mortgage
loans, and construction
loans
past
due
30-59
days,
but
less
than
two
payments
in
arrears,
as
of
December
31,
2020
amounted
to
$
respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
187
Credit Quality Indicators:
The Corporation
categorizes
loans into
risk categories
based on
relevant information
about the
ability of
the borrowers
to service
their debt such
as: current financial
information, historical payment
experience, credit documentation,
public information,
and current
economic trends, among other
factors.
The Corporation analyzes non-homogeneous
loans, such as commercial mortgage,
commercial
and industrial,
and construction
loans individually
to classify the
loans’
credit risk. As
mentioned above,
the Corporation periodically
reviews its commercial
and construction loan classifications
to evaluate if they
are properly classified. The frequency
of these reviews
will depend
on the
amount of
the aggregate
outstanding debt,
and the
risk rating
classification of
the obligor.
In addition,
during the
renewal
and
annual
review
process
of
applicable
credit
facilities,
the
Corporation
evaluates
the
corresponding
loan
grades.
The
Corporation
uses
the
same
definition
for
risk
ratings
as
those
described
for
Puerto
Rico
municipal
bonds
accounted
for
as
held-to-
maturity securities,
as discussed in Note 5 – Investment Securities, above.
For residential mortgage and consumer loans, the Corporation also evaluates
credit quality based on its interest accrual status.
Based
on the
most
recent analysis
performed,
the
amortized
cost
of commercial
and construction
loans by
portfolio
classes and
by
origination
year
based
on
the
internal
credit-risk
category
as
of
December
31,
2021
and
the
amortized
cost
of
commercial
and
construction loans by portfolio classes based on the internal credit-risk
category as of December 31, 2020 was as follows:
As of December 31,
2021
Puerto Rico and Virgin Islands region
Term Loans
As of December 31, 2020
Amortized Cost Basis by Origination Year
(1)
(In thousands)
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
CONSTRUCTION
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
COMMERCIAL MORTGAGE
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
COMMERCIAL AND INDUSTRIAL
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
188
As of December 31,
2021
Term Loans
As of December 31, 2020
Florida region
Amortized Cost Basis by Origination Year
(1)
(In thousands)
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
CONSTRUCTION
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
COMMERCIAL MORTGAGE
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
COMMERCIAL AND INDUSTRIAL
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
189
As of December 31,
2021
Total
Term Loans
As of December 31, 2020
Amortized Cost Basis by Origination Year (1)
(In thousands)
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
CONSTRUCTION
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
COMMERCIAL MORTGAGE
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
COMMERCIAL AND INDUSTRIAL
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
190
The
following
table
presents
the
amortized
cost
of
residential
mortgage
loans
by
origination
year
based
on
accrual
status
as
of
December 31, 2021, and the amortized cost of residential mortgage loans by accrual
status of December 31, 2020:
As of December 31,
2021
As of
December 31,
2020
Term Loans
Amortized Cost Basis by Origination Year (1)
(In thousands)
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
Puerto Rico and Virgin Islands Region:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total FHA/VA
government-guaranteed loans
$
$
$
$
$
$
$
$
$
Conventional residential mortgage loans:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total conventional residential mortgage loans
$
$
$
$
$
$
$
$
$
Total:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total residential mortgage loans in Puerto Rico and
Virgin Islands Region
$
$
$
$
$
$
$
$
$
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
191
As of December 31,
2021
As of
December 31,
2020
Term Loans
Amortized Cost Basis by Origination Year (1)
(In thousands)
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
Florida Region:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total FHA/VA
government-guaranteed loans
$
$
$
$
$
$
$
$
$
Conventional residential mortgage loans:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total conventional residential mortgage loans
$
$
$
$
$
$
$
$
$
Total:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total residential mortgage loans in Florida region
$
$
$
$
$
$
$
$
$
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
192
As of December 31,
2021
As of
December 31,
2020
Term Loans
Amortized Cost Basis by Origination Year (1)
(In thousands)
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
Total:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total FHA/VA
government-guaranteed loans
$
$
$
$
$
$
$
$
$
Conventional residential mortgage loans:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total conventional residential mortgage loans
$
$
$
$
$
$
$
$
$
Total:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total residential mortgage loans
$
$
$
$
$
$
$
$
$
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
193
The following table
presents the amortized
cost of consumer
loans by origination
year based on
accrual status as of
December 31,
2021, and the amortized cost of consumer loans by accrual status of December 31,
2020:
As of December 31,
2021
As of
December 31,
2020
Term Loans
Amortized Cost Basis by Origination Year (1)
(In thousands)
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
Puerto Rico and Virgin Islands Regions:
Auto loans:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total auto loans
$
$
$
$
$
$
$
$
$
Finance leases:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total finance leases
$
$
$
$
$
$
$
$
$
Personal loans:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total personal loans
$
$
$
$
$
$
$
$
$
Credit cards:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total credit cards
$
$
$
$
$
$
$
$
$
Other consumer loans:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total other consumer loans
$
$
$
$
$
$
$
$
$
Total:
Performing
Non-Performing
Total consumer loans in Puerto Rico and Virgin
Islands region
$
$
$
$
$
$
$
$
$
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
194
As of December 31,
2021
As of
December 31,
2020
Term Loans
Amortized Cost Basis by Origination Year (1)
(In thousands)
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
Florida Region:
Auto loans:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total auto loans
$
$
$
$
$
$
$
$
$
Finance leases:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total finance leases
$
$
$
$
$
$
$
$
$
Personal loans:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total personal loans
$
$
$
$
$
$
$
$
$
Credit cards:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total credit cards
$
$
$
$
$
$
$
$
$
Other consumer loans:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total other consumer loans
$
$
$
$
$
$
$
$
$
Total:
Performing
Non-Performing
Total consumer loans in Florida region
$
$
$
$
$
$
$
$
$
(1)
Excludes accrued interest receivable.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
195
As of December 31,
2021
As of
December 31,
2020
Term Loans
Amortized Cost Basis by Origination Year (1)
(In thousands)
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
Total:
Auto loans:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total auto loans
$
$
$
$
$
$
$
$
$
Finance leases:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total finance leases
$
$
$
$
$
$
$
$
$
Personal loans:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total personal loans
$
$
$
$
$
$
$
$
$
Credit cards:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total credit cards
$
$
$
$
$
$
$
$
$
Other consumer loans:
Accrual Status:
Performing
$
$
$
$
$
$
$
$
$
Non-Performing
Total other consumer loans
$
$
$
$
$
$
$
$
$
Total:
Performing
Non-Performing
Total consumer loans
$
$
$
$
$
$
$
$
$
(1)
Excludes accrued interest receivable.
Accrued interest
receivable on
loans totaled
$
is
reported
as
part
of
accrued
interest
receivable
on
loans
and
investment
securities
in
the
consolidated
statements
of
financial
condition, and is excluded from the estimate of credit losses.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
196
The following tables present information about collateral dependent loans
that were individually evaluated for purposes of
determining the ACL as of QtrEndCYYear
and 2020:
As of December 31, 2021
Collateral Dependent Loans - With
Allowance
Collateral Dependent
Loans - With No
Related Allowance
Collateral Dependent Loans - Total
Puerto Rico and Virgin Islands region
Amortized Cost
Related Allowance
Amortized Cost
Amortized Cost
Related Allowance
(In thousands)
Residential mortgage loans:
FHA/VA government
-guaranteed loans
$
$
$
$
$
Conventional residential mortgage loans
Commercial loans:
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
$
$
$
$
$
As of December 31, 2021
Collateral Dependent Loans - With
Allowance
Collateral Dependent
Loans - With No
Related Allowance
Collateral Dependent Loans - Total
Florida region
Amortized Cost
Related Allowance
Amortized Cost
Amortized Cost
Related Allowance
(In thousands)
Residential mortgage loans:
FHA/VA government
-guaranteed loans
$
$
$
$
$
Conventional residential mortgage loans
Commercial loans:
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
$
$
$
$
$
As of December 31, 2021
Collateral Dependent Loans - With
Allowance
Collateral Dependent
Loans - With No
Related Allowance
Collateral Dependent Loans - Total
Total
Amortized Cost
Related Allowance
Amortized Cost
Amortized Cost
Related Allowance
(In thousands)
Residential mortgage loans:
FHA/VA government
-guaranteed loans
$
$
$
$
$
Conventional residential mortgage loans
Commercial loans:
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
$
$
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
197
As of December 31, 2020
Collateral Dependent Loans - With
Allowance
Collateral Dependent
Loans - With No
Related Allowance
Collateral Dependent Loans - Total
Puerto Rico and Virgin Islands region
Amortized Cost
Related Allowance
Amortized Cost
Amortized Cost
Related Allowance
(In thousands)
Residential mortgage loans:
FHA/VA government
-guaranteed loans
$
$
$
$
$
Conventional residential mortgage loans
Commercial loans:
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
$
$
$
$
$
As of December 31, 2020
Collateral Dependent Loans - With
Allowance
Collateral Dependent
Loans - With No
Related Allowance
Collateral Dependent Loans - Total
Florida region
Amortized Cost
Related Allowance
Amortized Cost
Amortized Cost
Related Allowance
(In thousands)
Residential mortgage loans:
FHA/VA government
-guaranteed loans
$
$
$
$
$
Conventional residential mortgage loans
Commercial loans:
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
$
$
$
$
$
As of December 31, 2020
Collateral Dependent Loans - With
Allowance
Collateral Dependent
Loans - With No
Related Allowance
Collateral Dependent Loans - Total
Total
Amortized Cost
Related Allowance
Amortized Cost
Amortized Cost
Related Allowance
(In thousands)
Residential mortgage loans:
FHA/VA government
-guaranteed loans
$
$
$
$
$
Conventional residential mortgage loans
Commercial loans:
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
$
$
$
$
$
14,071
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
198
The
underlying
collateral
for
residential
mortgage
and
consumer
collateral
dependent
loans consisted
of
single-family
residential
properties,
and for
commercial and
construction loans
consisted primarily
of office
buildings, multifamily
residential properties,
and
retail establishments.
The weighted-average
loan-to-value coverage
for collateral
dependent loans
as of December
31, 2021 was
%
compared
to
%
as
of
December
31,
2020.
There
were
no
significant
changes
in
the
extent
to
which
collateral
secures
the
Corporation’s collateral dependent
financial assets during the year ended December 31, 2021.
PCD and PCI Loans
Prior to
the adoption
of ASC
326, the
Corporation accounted
for PCI
loans and
income recognition
thereunder in
accordance with
ASC
Subtopic
310-30.
PCI
loans
are
loans
that
as
of
the
date
of
their
acquisition
have
experienced
deterioration
in
credit
quality
between origination and
acquisition and for which
it was probable at acquisition
that not all contractually
required payments would be
collected. Following the adoption of ASC 326 on January 1, 2020, the
Corporation analyzes acquired loans for more-than-insignificant
deterioration in credit
quality since their
origination in accordance
with ASC 326.
Such loans are
classified as PCD
loans. Please also
see
Note
1
–
Nature
of
Business
and
Summary
of
Significant
Accounting
Policies,
above,
for
more
information
concerning
the
Corporation’s accounting
for PCD loans.
Prior to
the adoption
of ASC 326,
the Corporation
identified the
amount by
which the undiscounted
expected future
cash flows
on
PCI loans exceeded the
estimated fair value of
the loan on the date
of acquisition as the “accretable
yield,” representing the
amount of
estimated
future
interest
income
on
the
loan.
The
amount
of
accretable
yield
was
re-measured
at
each
financial
reporting
date,
representing
the difference
between the
remaining undiscounted
expected cash
flows and
the
then-current
carrying value
of the
PCI
loan.
Following
the
adoption
of
ASC
326,
the
Corporation
accounts
for
interest
income
on
PCD
loans
using
the
interest
method,
whereby any purchase
non-credit discounts or
premiums are accreted
or amortized into
interest income as
an adjustment of
the loan’s
yield.
Upon the
adoption of
ASC 326,
acquired loans
classified as
PCD are
recorded at
an initial
amortized cost,
which is
comprised of
the purchase price of the loans (or initial fair value)
and the initial ACL determined for the loans, which
represents the fair value credit
discount, and any resulting premium or discount related to factors other
than credit.
Purchases and Sales of Loans
During the years
ended December 31,
2021, 2020, and
2019, the Corporation
purchased C&I loan
participations of $
$
$
in
Puerto
Rico,
compared
to
purchases
of
$
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 right
to service the loans.
In the ordinary
course of business,
the Corporation
sells residential mortgage
loans (originated or
purchased) to GNMA
and GSEs,
such
as FNMA
and
FHLMC,
which
generally
securitize
the transferred
loans into
MBS for
sale into
the secondary
market.
During
2021, the Corporation sold
$
of $
million of
performing residential
mortgage loans
to FNMA
and FHLMC,
compared to
sales of
$
the
years
ended
December
31,
2020
and
2019,
respectively.
The
Corporation’s
continuing
involvement
with
the
loans
that
it
sells
consists
primarily
of
servicing
the
loans.
In
addition,
the
Corporation
agrees
to
repurchase
loans
if
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
December
31,
2021
and
2020,
rebooked
GNMA delinquent
loans that
were included
in the
residential mortgage
loan portfolio
amounted to
$
million, respectively.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
199
During
the
years
ended
December
31,
2021,
2020,
and
2019,
the
Corporation
repurchased,
pursuant
to
the
aforementioned
repurchase
option,
$
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.
On May 14, 2020,
in response to the
national emergency
declared by the
U.S. President related
to the COVID-
19 pandemic,
GNMA announced
a temporary
relief that
excludes any
new borrower
delinquencies, occurring
on or
after April
2020,
from
the
calculation
of
delinquency
and
default
ratios
established
in
the
GNMA
MBS
guide.
This
exclusion
was
extended
automatically
to
issuers
that
were
compliant
with
GNMA
delinquency
rate
thresholds
as
reflected
by
their
April
2020
investor
accounting report,
reflecting March
2020 servicing
data. The
exemptions and
delinquent loan
exclusions will
automatically expire
on
July
31,
2022,
unless
earlier
rescinded
or
extended
by
GNMA,
or
the
end
of
the
national
emergency,
whichever
comes
earlier.
Historically,
losses
for
violations
of
representations
and
warranties,
and
on
optional
repurchases
of
GNMA
delinquent
loans,
have
been immaterial and no provision has been made at the time of sale.
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 $
the years
ended December
31, 2021,
2020, and
2019, 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.
The
Corporation
participates
in
the
Main
Street
Lending
program
established
by
the
FED
under
the
CARES
Act
of
2020,
as
amended,
to
support
lending
to
small
and
medium-sized
businesses
that
were
in
sound
financial
condition
before
the
onset
of
the
COVID-19 pandemic.
Under this
program, the
Corporation originates
loans to
borrowers meeting
the terms
and requirements
of the
program, including requirements as
to eligibility,
use of proceeds and
priority, and
sells a 95% participation interest
in these loans to a
special purpose
vehicle
(the “Main
Street SPV”)
organized
by the
FED to
purchase the
participation
interests from
eligible lenders,
including the
Corporation. During
the fourth
quarter of
2020, the
Corporation originated
million in principal amount and sold participation interests totaling $
During
the
year
ended
December
31,
2021,
four
criticized
commercial
loan
participations
in
the
Florida
region
totaling
$
million were sold. In addition, the Corporation sold a $
In addition,
during the
third quarter
of 2021,
the Corporation
sold $
related
servicing
advances
of
$
%
of
book
value
before
reserves,
for
the
$
the loans
sold. The
transaction resulted
in total
net charge-offs
of $
recorded as charge to the provision for credit losses in the third
quarter of 2021.
Loan Portfolio Concentration
The Corporation’s
primary
lending area
is Puerto
Rico. The
Corporation’s
banking subsidiary,
FirstBank, 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
portfolio of
$
% in
Puerto Rico,
% in
the U.S.,
and
% in
the USVI and BVI.
As of
December
31,
2021,
the Corporation
had
$
municipalities
and
public
corporations,
compared
to
$
approximately
$
assigned
property
tax
revenues,
and
$
municipalities included in the
Corporation’s loan
portfolio are independent of
budgetary subsidies provided by
the Puerto Rico central
government.
These
municipalities
are
required
by
law
to
levy
special
property
taxes
in
such
amounts
as
are
required
to
satisfy
the
payment
of
all of
their respective
general
obligation
bonds and
notes. Late
in 2015,
the
Government
Development
Bank for
Puerto
Rico (“GDB”)
and the
Municipal Revenue
Collection Center
(“CRIM”) signed
and perfected
a deed
of trust.
Through this
deed, the
Puerto Rico Fiscal
Agency and
Financial Advisory
Authority,
as fiduciary,
is bound to
keep the CRIM
funds separate
from any other
deposits and
must distribute
the funds
pursuant
to applicable
law.
The CRIM
funds
are deposited
at another
commercial depository
financial
institution
in
Puerto
Rico.
In
addition
to
loans
extended
to
municipalities,
the
Corporation’s
exposure
to
the
Puerto
Rico
government as of December 31, 2021 included $
agency of the Puerto Rico central government.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
200
In
addition,
as
of
December
31,
2021,
the
Corporation
had
$
guaranteed
by the
PRHFA,
a government
instrumentality that
has been
designated as
a covered
entity under
PROMESA (December
31,
2020
-
$
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
for
all
loans
under
the
mortgage
loan
insurance
program.
According
to
the
most
recently-released
audited
financial
statements
of
the
PRHFA,
as
of
June
30,
2019,
the
PRHFA’s
mortgage
loans
insurance
program
covered
loans
in
an
aggregate
amount
of
approximately
$557
million.
The
regulations
adopted
by
the
PRHFA,
requires
the
establishment
of
adequate
reserves to
guarantee
the solvency
of the
mortgage loans
insurance program
.
As of
June 30,
2019, the
most recent
date as
of which
information is available, the
PRHFA had
an unrestricted deficit of
approximately $5.2 million with
respect to required reserves for
the
mortgage loan insurance program.
The
Corporation
cannot
predict
at
this
time
the
ultimate
effect
on
the
Puerto
Rico
economy,
the
Corporation’s
clients,
and
the
Corporation’s
financial
condition
and
results
of
operations
of
the
financial
situation
of
the
Commonwealth
of
Puerto
Rico,
the
uncertainty
about
the
ultimate
effect
of
the
Puerto
Rico’s
government
debt
adjustment
plan
recently
approved
by
the
U.S.
District
Court
for
the District
of
Puerto
Rico,
and
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.
The
Corporation
also
has
credit
exposure
to
USVI
government
entities.
As
of
December
31,
2021,
the
Corporation
had
$
million in
loans to
USVI government
public corporations,
compared to
$
2021,
all
loans
were
currently
performing
and
up
to
date
on
principal
and
interest
payments.
The
USVI
has
been
experiencing
a
number of fiscal
and economic challenges
that could adversely
affect the
ability of its
public corporations
to service their
outstanding
debt obligations.
Troubled Debt
Restructurings
The
Corporation
provides
homeownership
preservation
assistance
to
its
customers
through
a
loss
mitigation
program
in
Puerto
Rico.
Depending
upon
the nature
of
a
borrower’s
financial
condition,
restructurings
or
loan
modifications
through
this program,
as
well as other restructurings
of individual C&I, 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
December 31, 2021,
the Corporation’s
total TDR loans
held
for
investment
of
$
million of
commercial mortgage
loans, $
2021 and 2020, the Corporation has committed to lend up to an additional
$
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
principal at
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 loans
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,
the property is 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
December
31,
2021,
the
Corporation
included
as
TDRs
$
residential mortgage loans 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
the original
contractual terms;
waivers of
borrower
covenants;
forgiveness
of
principal
or
interest;
or
other
contractual
changes
that
are
considered
to
be
concessions.
The
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
201
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, require annual
renewals. Other facilities
may be
restructured or
extended from
time to
time based
upon changes
in the
borrower’s business
needs, use
of funds, and
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 to be concessions, and the loans
continue to be recorded as
performing.
Under the provisions
of the CARES
Act of 2020,
as amended by
the Consolidated Appropriations
Act, 2021 enacted
on December
27, 2020,
financial institutions
may permit
loan modifications
for borrowers
affected by
the COVID-19
pandemic through
January 1,
2022 without
categorizing the modifications
as TDRs, as
long as the
loan meets certain
conditions, including
the requirement that
the
loan
was
not
more
than
30
days
past
due
as
of
December
31,
2019.
As
of
December
31,
2021,
commercial
loans
totaling
$
million, or
% of
the balance
of the
total loan
portfolio held
for investment,
were modified
under the
aforementioned provisions.
These
modifications
on
commercial
loans
were
primarily
related
to
borrowers
in
industries
with
longer
expected
recovery
times,
mostly
hospitality,
retail
and
entertainment
industries,
and
consisted
of
providing
deferrals
of
principal
payments
and
interest
rate
adjustments
for
an
extended
period
of
time,
typically
12
months.
With
respect
to
temporary
deferred
repayment
arrangements
established in 2020
to assist borrowers
affected by
the COVID-19
pandemic, as of
December 31, 2021,
all loans previously
modified
under such programs have completed their deferral period.
Selected information on the Corporation’s
TDR loans held for investment based on the amortized cost by loan class and modification
type is summarized in the following tables as of the indicated dates:
As of December 31,
2021
Puerto Rico and Virgin Islands region
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)
TDRs:
Conventional residential mortgage loans
$
$
$
$
$
$
$
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
Total TDRs in Puerto Rico and Virgin Islands region
$
$
$
$
$
$
$
(1)
Other concessions granted by the Corporation include 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 two or more of the concessions
listed in the table. Amounts included in Other that represent a
combination of concessions are excluded from the amounts
reported
in the column for such individual concessions.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
202
As of December 31,
2021
Florida region
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)
TDRs:
Conventional residential mortgage loans
$
$
$
$
$
$
$
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
$
$
$
$
$
$
$
(1)
Other concessions granted by the Corporation include 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 two or more of the concessions
listed in the table. Amounts included in Other that represent a
combination of concessions are excluded from the amounts
reported
in the column for such individual concessions.
As of December 31,
2021
Total
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)
TDRs:
Conventional residential mortgage loans
$
$
$
$
$
$
$
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
$
$
$
$
$
$
$
(1)
Other concessions granted by the
Corporation include 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 two or more
of the concessions listed in the table. Amounts included
in Other that represent a combination of
concessions are excluded from the amounts reported
in the column for such individual concessions.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
203
As of December 31,
2020
Puerto Rico and Virgin Islands region
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)
TDRs:
Conventional residential mortgage loans
$
$
$
$
$
$
$
Construction loans
3,423
Commercial mortgage loans
C&I loans
Consumer loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
Total TDRs in Puerto Rico and Virgin Islands region
$
$
$
$
$
$
$
(1)
Other concessions granted by the
Corporation include 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 two or more
of the concessions listed in the table. Amounts included
in Other that represent a combination of
concessions are excluded from the amounts reported
in the column for such individual concessions.
As of December 31,
2020
Florida region
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)
TDRs:
Conventional residential mortgage loans
$
$
$
$
$
$
$
Construction loans
-
Commercial mortgage loans
C&I loans
Consumer loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
$
$
$
$
$
$
$
(1)
Other concessions granted by the Corporation include 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 two or more of the concessions
listed in the table. Amounts included in Other that represent a
combination of concessions are excluded from the amounts
reported
in the column for such individual concessions.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
204
As of December 31,
2020
Total
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)
TDRs:
Conventional residential mortgage loans
$
$
$
$
$
$
$
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
Auto loans
Finance leases
Personal loans
Credit cards
Other consumer loans
$
$
$
$
$
$
$
(1)
Other concessions granted by the Corporation include 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 two or more of the concessions
listed in the table. Amounts included in Other that represent a
combination of concessions are excluded from the amounts
reported
in the column for such individual concessions.
The following table presents the Corporation’s
TDR loans held for investment activity for the indicated periods:
Year
Ended
Year
Ended
Year
Ended
December 31,
2021
December 31,
2020
December 31, 2019
(In thousands)
Beginning balance of TDRs
$
$
$
New TDRs
Increases to existing TDRs
Charge-offs post-modification
(1)
(
17,434
)
(
11,122
)
(
10,342
)
Sales, net of charge-offs
(
17,492
)
Foreclosures
(
3,117
)
(
2,015
)
(
12,872
)
Removed from the TDR classification
(
8,001
)
Paid-off, partial payments and other
(2)
(
52,724
)
(
37,992
)
(
136,709
)
$
$
$
(1)
For the year ended December
31, 2021, includes charge-offs
totaling $
of nonaccrual residential mortgage loans.
(2)
For the year ended December 31, 2019, includes the payoff
of a $
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,
a
loan
on
nonaccrual
status
and
restructured
as
a
TDR
will
remain
on
nonaccrual
status until
the borrower
has proven
the ability
to perform
under
the modified
structure, generally
for a
minimum
of
, and there
is evidence that
such payments can,
and are likely
to, continue as
agreed. Performance
prior to the
restructuring, or
significant events that coincide with the restructuring,
are included in assessing whether the borrower can
meet the new terms and may
result
in
the
loan
being
returned
to
accrual
status
at
the
time
of
the
restructuring
or
after
a
shorter
performance
period.
If
the
borrower’s
ability
to
meet
the
revised
payment
schedule
is
uncertain,
the
loan
remains
classified
as
a
nonaccrual
loan.
Loan
modifications
increase the
Corporation’s
interest income
by returning
a nonaccrual
loan to
performing
status, if
applicable,
increase
cash flows
by providing
for payments
to be
made by
the borrower,
and limit
increases in
foreclosure and
OREO costs.
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 loan in
the calendar years subsequent
to the restructuring, if
it is in
compliance with
its modified
terms. During
the year
ended December
31, 2021,
the Corporation
removed $
the TDR classification as the borrower was no longer experiencing
financial difficulties, the outstanding loans are at market
terms, and
did not
contain any
concession to
the borrowers.
The Corporation
did not remove
any loans from
the TDR classification
during 2020
and 2019.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
205
The following tables provide a breakdown of the TDR loans held for investment portfolio
by those in accrual and nonaccrual status as
of the indicated dates:
December 31, 2021
Puerto Rico and
Virgin Islands region
Florida region
Total
Accrual
Nonaccrual
Total TDRs
Accrual
Nonaccrual
Total TDRs
Accrual
Nonaccrual
(1)
Total TDRs
(In thousands)
Conventional residential mortgage loans
$
$
$
$
$
$
$
$
$
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
$
$
$
$
$
$
$
$
$
(1)
Included in nonaccrual loans
are $
the criteria of sustained payment performance under the revised
terms for reinstatement to accrual status and are deemed
fully collectible.
December 31, 2020
Puerto Rico and
Virgin Islands region
Florida region
Total
Accrual
Nonaccrual
Total TDRs
Accrual
Nonaccrual
Total TDRs
Accrual
Nonaccrual
(1)
Total TDRs
(In thousands)
Conventional residential mortgage loans
$
$
$
$
$
$
$
$
$
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
$
$
$
$
$
$
$
$
$
(1)
Included in nonaccrual
loans are $
the criteria of sustained payment performance under the revised
terms for reinstatement to accrual status and are deemed
fully collectible.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
206
TDR
loans
exclude
restructured
residential
mortgage
loans
that
are
government-guaranteed
(
e.g.
,
FHA/VA
loans)
totaling
$
million
as
of
December
31,
2021
(compared
with
$
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.
Loan modifications that are considered TDR loans completed during 2021, 2020
and 2019 were as follows:
Year Ended December 31, 2021
Puerto Rico and Virgin Islands region
Florida region
Total
Number of
contracts
Pre-
modification
Amortized
Cost
Post-
modification
Amortized
Cost
Number of
contracts
Pre-
modification
Amortized
Cost
Post-
modification
Amortized
Cost
Number of
contracts
Pre-
modification
Amortized
Cost
Post-
modification
Amortized
Cost
(Dollars in thousands)
TDRs:
Conventional residential mortgage loans
$
$
$
$
$
$
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
$
$
$
$
$
$
Year Ended December 31, 2020
Puerto Rico and Virgin Islands region
Florida region
Total
Number of
contracts
Pre-
modification
Amortized
Cost
Post-
modification
Amortized
Cost
Number of
contracts
Pre-
modification
Amortized
Cost
Post-
modification
Amortized
Cost
Number of
contracts
Pre-
modification
Amortized
Cost
Post-
modification
Amortized
Cost
(Dollars in thousands)
TDRs:
Conventional residential mortgage loans
$
$
$
$
$
$
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
$
$
$
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
207
Year Ended December 31, 2019
Puerto Rico and Virgin Islands region
Florida region
Total
Number of
contracts
Pre-
modification
Amortized
Cost
Post-
modification
Amortized
Cost
Number of
contracts
Pre-
modification
Amortized
Cost
Post-
modification
Amortized
Cost
Number of
contracts
Pre-
modification
Amortized
Cost
Post-
modification
Amortized
Cost
(Dollars in thousands)
TDRs:
Conventional residential mortgage loans
$
$
$
$
$
$
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
$
$
$
$
$
$
Recidivism,
or
the
borrower
defaulting
on
its
obligation
pursuant
to
a
modified
loan,
results
in
the
loan
once
again
becoming
a
nonaccrual 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
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
208
Loan
modifications
considered
TDR
loans
that
defaulted
during
the
years
ended
December
31,
2021,
2020,
and
2019,
and
had
become TDR loans during the 12-months preceding the default date, were
as follows:
Year Ended December 31,
2021
2020
2019
Puerto Rico and Virgin Islands region
Number of
contracts
Amortized Cost
Number of
contracts
Amortized Cost
Number of
contracts
Amortized Cost
(Dollars in thousands)
Conventional residential mortgage loans
$
$
$
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
$
$
$
Year Ended December 31,
2021
2020
2019
Florida region
Number of
contracts
Amortized Cost
Number of
contracts
Amortized Cost
Number of
contracts
Amortized Cost
(Dollars in thousands)
Conventional residential mortgage loans
$
$
$
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
$
$
$
Year Ended December 31,
2021
2020
2019
Total
Number of
contracts
Amortized Cost
Number of
contracts
Amortized Cost
Number of
contracts
Amortized Cost
(Dollars in thousands)
Conventional residential mortgage loans
$
$
$
Construction loans
Commercial mortgage loans
C&I loans
Consumer loans:
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
209
NOTE 9 – ALLOWANCE
FOR CREDIT LOSSES FOR LOANS AND FINANCE LEASES
The following table presents the activity in the ACL on loans and finance leases by
portfolio segment for the
indicated periods:
Residential
Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial
Loans
Consumer
Loans
Total
Year Ended December
31,
2021
(In thousands)
ACL:
Beginning balance
$
$
$
$
$
$
Provision for credit losses - (benefit) expense
(
16,957
)
(
1,408
)
(
55,358
)
(
8,549
)
(
61,720
)
Charge-offs
(
33,294
)
(
87
)
(
1,494
)
(
1,887
)
(
43,948
)
(
80,710
)
Recoveries
Ending balance
$
$
$
$
$
$
Residential
Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial
Loans
Consumer
Loans
Total
Year Ended December
31,
2020
(In thousands)
ACL:
Beginning balance, prior to adoption of CECL
$
$
$
$
$
$
Impact of adopting CECL
(
19,306
)
Allowance established for acquired PCD loans
Provision for credit losses
(1)
Charge-offs
(
11,017
)
(
76
)
(
3,330
)
(
3,634
)
(
46,483
)
(
64,540
)
Recoveries
$
$
$
$
$
$
Residential
Mortgage
Loans
Construction
Loans
Commercial
Mortgage
Commercial &
Industrial
Loans
Consumer
Loans
Total
Year Ended December
31, 2019
(In thousands)
ACL:
Beginning balance
$
$
$
$
$
$
Provision for credit losses - expense (benefit)
(
1,496
)
(
1,697
)
(
13,696
)
Charge-offs
(
22,742
)
(
391
)
(
15,088
)
(
7,206
)
(
52,160
)
(
97,587
)
Recoveries
$
$
$
$
$
$
(1)
Includes a $
non-PCD residential mortgage loans; (ii) a $
and (iv) a $
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
210
The
Corporation
estimates
the
ACL
following
the
methodologies
described
in
Note
1,
–
Basis
of
Presentation
and
Significant
Accounting Policies,
above for each
portfolio segment.
As of each
of the years
ended December
31, 2021, and
2020, the Corporation
used the base-case
economic scenario
from Moody’s
Analytics to estimate
the ACL.
As of
December 31,
2021, the baseline
scenario
continues to
show a
more favorable
economic scenario
and modest
improvements in
projected unemployment
rates, and
commercial
real
estate
price
index
when
compared
to
forecast
of
December
31,
2020.
The
U.S.
mainland
average
forecasted
commercial
price
index included in
the 2021 forecast is
an appreciation of
5.68% for the next
two years, compared
to an average contraction
of 11.36%
in
the
forecast
of
December
31,
2020,
for
the
years
2021
and
2022.
The
current
average
forecasted
Puerto
Rico,
Florida
and
U.S.
mainland unemployment rate for the year 2022
is now 7.38%, 3.15% and 3.71%, respectively,
compared to 8.12%, 6.14%, and 6.20%,
respectively,
in
the
forecast
of
December
31,
2020,
showing
an
improvement
in
all
three
regions.
Expectations
for
2023,
for
these
macroeconomic variables also present a favorable outlook over the
forecasted period.
As
of
December
31,
2021,
the
ACL
for
loans
and
finance
leases
was
$
2020,
driven
by
positive
changes
in
the
outlook
of
macroeconomic
assumptions
to
which
the
reserve
is
correlated.
The
ACL
for
commercial
and
construction
loans
decreased
by
$
continued
improvements
in
the
outlook
of
macroeconomic
variables,
including
improvements
in
the
commercial
real
estate
price
index
and unemployment
rate forecasts,
the overall
decline in
the size
of these
portfolios,
and
the effect
of a
$
recovery
recorded
in
2021
in
connection
with
a
paydown
of
a
nonaccrual
commercial
and
industrial
loan.
In
addition,
there
was
a
$
decrease
in the
ACL for
consumer
loans consisted
of net
charge-offs
of $
card loans, partially offset
by charges to the
provision of $
the portfolio of auto loans and
finance leases and increases in cumulative
historical charge-off
levels for personal loans and credit
card
loans. The
decrease in
the ACL
for residential
mortgage loans
consisted of
net charge-offs
of $
are related
to charge-offs
recognized as
part of
the bulk
sale of
nonaccrual residential
mortgage loans
and related
servicing advances
during the
third quarter
of 2021, and
a benefit, or
provision recapture,
of $
the
outlook
of
macroeconomic
variables,
such
as
regional
unemployment
rate
and
Home
Price
Index,
and
the
overall
portfolio
decrease. For
those loans
where the
ACL was
determined based
on a
discounted cash
flow model,
the change
in the
ACL due
to the
passage of time is recorded as part of the provision for credit losses.
Total
net
charge-offs
increased
$
%,
in
2021.
The
variance
consisted
of
a
$
mortgage
net
charge-offs,
driven
by
the
$
residential mortgage
loans, partially
offset by
a $
million loan loss recovery recorded in connection with the paydown of
a nonaccrual commercial and industrial loans.
As of
December 31,
2020, the
ACL for
loans and
finance leases
was $
driven
by
the
$
establishment
of a
$
net charge-offs
of $
2019.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
211
The
tables
below
present
the
ACL
related
to
loans
and
finance
leases
and
the
carrying
values
of
loans
by
portfolio
segment
as
of
December 31, 2021 and December 31, 2020:
As of December 31,
2021
Residential
Mortgage Loans
Construction
Loans
Commercial
Mortgage
Consumer
Loans
Commercial and
Industrial Loans
(1)
(Dollars in thousands)
Total
Total loans held for investment:
$
$
$
$
$
$
%
%
%
%
%
%
As of December 31, 2020
Residential
Mortgage Loans
Construction
Loans
Commercial
Mortgage Loans
Consumer
Loans
Commercial and
Industrial Loans
(1)
(Dollars in thousands)
Total
Total loans held for investment:
Amortized cost of loans
$
$
$
$
$
$
Allowance for credit losses
Allowance for credit losses to
amortized cost
%
%
%
%
%
%
____________
(1)
As of December 31,
2021 and December 31, 2020, includes $
In
addition,
the
Corporation
estimates
expected
credit
losses
over
the
contractual
period
in
which
the
Corporation
is
exposed
to
credit
risk
via
a
contractual
obligation
to
extend
credit,
such
as
unfunded
loan
commitments
and
standby
letters
of
credit
for
commercial and construction loans,
unless the obligation is unconditionally
cancellable by the Corporation. The
Corporation estimates
the ACL for
these off-balance sheet
exposures following
the methodology described
in Note 1
- Basis of
Presentation and
Significant
Accounting Policies,
above. As
of December
31, 2021,
the ACL
for off-balance
sheet credit
exposures was
$
million
from
$
macroeconomic variables.
The
following
table
presents
the
activity
in
the
ACL
for
unfunded
loan
commitments
and
standby
letters
of
credit
for
the
years
ended December 31, 2021, 2020 and 2019:
Year
Ended
December 31,
2021
2020
2019
(In thousands)
Beginning Balance
$
$
$
Impact of adopting CECL
Provision for credit losses - (benefit)
(
3,568
)
(
412
)
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
212
NOTE 10 – LOANS HELD FOR SALE
The Corporation’s loans held-for-sale
portfolio as of the dates indicated was composed of:
December 31,
2021
2020
(In thousands)
Residential mortgage loans
$
$
NOTE 11
–
OTHER REAL ESTATE
OWNED
The following table presents the OREO inventory as of the dates indicated:
December 31,
(In thousands)
2021
2020
OREO
OREO balances, carrying value:
Residential
(1)
$
$
Commercial
Construction
Total
$
$
(1)
Excludes $
“Reclassification of Residential Real Estate Collateralized Consumer
Mortgage Loans upon Foreclosure,” and are presented
as a receivable as part of
other assets in the consolidated statements of financial condition.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
213
NOTE 12 – RELATED
-PARTY
TRANSACTIONS
The Corporation granted loans to
its directors, executive officers,
and certain related individuals or
entities in the ordinary course
of
business. The movement and balance of these loans were as follows:
Amount
(In thousands)
Balance at December 31,
2019
$
New loans
Payments
(
953
)
Other changes
Balance at December 31,
2020
New loans
Payments
(
108
)
Other changes
Balance at December 31,
2021
$
These loans
were made
subject to
the provisions
of the
Federal Reserve’s
Regulation O
- “Loans
to Executive
Officers, Directors
and
Principal
Shareholders
of
Member
Banks,”
which
governs
the
permissible
lending
relationships
between
a
financial
institution
and its executive officers, directors, principal
shareholders, their families,
and related parties.
Amounts related to changes in the status
of those who are considered
related parties are reported as other
changes in the table above,
which, for 2021, was mainly related
to the
addition of three new executive officers and the departure
of one executive officer.
From
time
to
time,
the
Corporation,
in
the
ordinary
course
of
its
business,
obtains
services
from
related
parties
or
makes
contributions to non-profit organizations that have some association
with the Corporation.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
214
NOTE 13 – PREMISES AND EQUIPMENT
Premises and equipment comprise:
Useful Life Range In Years
As of December 31,
Minimum
Maximum
2021
2020
(Dollars in thousands)
Buildings and improvements
$
$
Leasehold improvements
Furniture and equipment
Accumulated depreciation and amortization
(
251,659
)
(
318,659
)
Land
Projects in progress
$
$
Depreciation
and
amortization
expense
amounted
to
$
December 31, 2021, 2020, and 2019, respectively.
During the year ended December 31, 2021 the
Corporation received insurance proceeds of $
collection of an insurance claim associated with a damage property.
This amount is included as part of other non-interest income in the
consolidated statements of income.
During
2020,
the
Corporation
received
insurance
proceeds
of
$
interruption insurance claim
related to lost profits caused
by Hurricanes Irma and
Maria. This amount is included
as part of other non-
interest
income
in
the
consolidated
statements
of
income.
In addition,
during
2020,
the Corporation
received
insurance proceeds
of
$
occupancy and equipment costs.
insurance proceeds were
recorded against impairment
losses. Insurance recoveries
in excess of
losses amounted $
and were
recorded as a
gain from insurance
proceeds and
reported as part
of other non-interest
income in
the consolidated
statements
of income.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
215
NOTE 14 – GOODWILL AND OTHER INTANGIBLES
Goodwill
as
of
each
December
31,
2021
and
December
31,
2020
amounted
to
$
Corporation’s
goodwill includes
$
in
connection
with
the
acquisition
of
BSPR
on
September
1,
2020.
The
Corporation’s
policy
is
to
assess
goodwill
and
other
intangibles for
impairment on
an annual
basis during
the fourth
quarter of
each year,
and more
frequently if
events or
circumstances
lead management
to believe
that the
values of
goodwill or
other
intangibles may
be impaired.
During the
fourth quarter
of 2021,
as
part
of
its
annual
evaluation,
the
Corporation
performed
a
qualitative
assessment
to
determine
if
a
goodwill
impairment
test
was
necessary.
This assessment involved
identifying the inputs
and assumptions that
most affects fair
value, evaluating the
significance of
all identified relevant
events and circumstances that
affect fair value
of the reporting entity
and evaluating such
factors to determine if
a
positive
assertion
can
be
made
that
it
is
more
likely
than
not
that
the
fair
value
of
the
reporting
unit
is
greater
than
its
carrying
amount. As
of December
31, 2021,
the Corporation
concluded that
it is more
-likely-than-not that
the fair
value of
the reporting
units
exceeded its carrying value. As a result,
The
changes
in
the
carrying
amount
of
goodwill
attributable
to
operating
segments
are
reflected
in
the
following
table.
The
adjustments for
the years
ended December
31, 2020
and 2021
are measurement
period adjustments,
primarily related
to post
closing
purchase price
adjustments to
account for
differences between
BSPR’s
actual excess
capital at
closing date
compared to
the BSPR’s
excess capital amount
used for the
preliminary closing statement
at acquisition date.
During the third quarter
of 2021, the Corporation
finalized its fair values analysis of the acquired assets and assumed liabilities associated with
the BSPR acquisition.
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial
and Corporate
Banking
United States
Operations
Total
(In thousands)
Goodwill, January 1, 2020
$
$
$
$
$
Merger and acquisitions
Adjustments
Goodwill, December 31, 2020
$
$
$
$
$
Adjustments
(
148
)
(
21
)
Goodwill, December 31, 2021
$
$
$
$
$
The Corporation
had other
intangible assets
of $
intangibles,
$
intangibles.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
216
The
following
table
shows
the
gross
amount
and
accumulated
amortization
of the
Corporation’s
other
intangible
assets as
of
the
indicated dates:
Year Ended December 31, 2021
Core deposit intangible
Purchased credit card
relationship intangible
Insurance customer
relationship intangible
Total
(In thousands)
Gross amount of intangible assets:
$
$
$
$
(1)
Accumulated amortization:
(
51,254
)
(
23,532
)
(
749
)
(
75,535
)
(
7,719
)
(
3,535
)
(
153
)
(
11,407
)
(
58,973
)
(
27,067
)
(
902
)
(
86,942
)
Net intangible assets
$
$
$
$
Remaining amortization period (in years)
(1)
Measurement adjustment relates to fair value estimate update performed within 1 year of the closing date of the BSPR acquisition, in accordance with ASC 805.
Year Ended December 31, 2020
Core deposit intangible
Purchased credit card
relationship intangible
Insurance customer
relationship intangible
Total
(In thousands)
Gross amount of intangible assets:
$
$
$
$
Accumulated amortization:
(
48,176
)
(
20,850
)
(
597
)
(
69,623
)
(
3,078
)
(
2,682
)
(
152
)
(
5,912
)
(
51,254
)
(
23,532
)
(
749
)
(
75,535
)
Net intangible assets
$
$
$
$
Remaining amortization period (in years)
Year Ended December 31, 2019
Core deposit intangible
Purchased credit card
relationship intangible
Insurance customer
relationship intangible
Total
(In thousands)
Gross amount of intangible assets:
$
$
$
$
Accumulated amortization:
(
47,329
)
(
18,763
)
(
445
)
(
66,537
)
(
847
)
(
2,087
)
(
152
)
(
3,086
)
(
48,176
)
(
20,850
)
(
597
)
(
69,623
)
Net intangible assets
$
$
$
$
Remaining amortization period (in years)
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
217
The Corporation amortizes
core deposit intangibles
and customer relationship
intangibles based on
the projected useful lives
of the
related deposits in the
case of core deposit
intangibles, and over the
projected useful lives of
the related client relationships
in the case
of customer relationship intangibles. As
mentioned above, the Corporation analyzes
core deposit intangibles and customer
relationship
intangibles
annually
for
impairment,
or
sooner
if
events
and
circumstances
indicate
possible
impairment.
Factors
that
may
suggest
impairment include
customer attrition
and run-off.
Management is
unaware of
any events
and/or circumstances
that would
indicate a
possible impairment to the core deposit intangibles or customer relationship
intangibles as of December 31, 2021.
The estimated aggregate annual amortization expense related to the intangible
assets for future periods was as follows as of December
31, 2021:
Amount
(In thousands)
2022
$
2023
2024
2025
2026
2027 and after
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
218
NOTE 15 – 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
whether
it
is
the
primary beneficiary of the VIE and whether the entity should be consolidated
or not.
Below is a summary of transactions with VIEs for which the Corporation has retained
some level of continuing involvement:
Trust-Preferred
Securities
In
2004,
FBP
Statutory
Trust
I,
a
financing
trust
that
is
wholly
owned
by
the
Corporation,
sold
to
institutional
investors
$
million of its
variable-rate trust-preferred
securities (“TRuPs”). FBP
Statutory Trust
I used the proceeds
of the issuance, together
with
the proceeds of
the purchase by the
Corporation of $
$
Statutory Trust II, a financing trust
that is wholly owned by the Corporation, sold to institutional
investors $
rate TRuPs. FBP Statutory Trust
II used the proceeds of the issuance,
together with the proceeds of the purchase
by the Corporation of
$
Corporation’s
Junior
Subordinated
Deferrable
Debentures.
The
debentures,
net
of
related
issuance
costs,
are
presented
in
the
Corporation’s
consolidated
statements
of
financial
condition
as
other
borrowings.
The
variable-rate
TRuPs
are
fully
and
unconditionally
guaranteed
by
the
Corporation.
which resulted in
a commensurate reduction
in the related Floating
Rate Junior Subordinated
Debentures. The Corporation’s
purchase
price equated
to
% of
the $
% discount
resulted in
a gain
of approximately
$
reflected in
the consolidated
statements of income
as gain on
early extinguishment
of debt. As
of each
December 31,
2021 and 2020,
the Corporation had subordinated debentures outstanding in the aggregate
amount of $
The
Collins
Amendment
to
the
Dodd-Frank
Act
eliminated
certain
TRuPs
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
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.
As
of
December
31,
2021,
the
Corporation
was
current
on
all
interest
payments
due
on
its
subordinated debt.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
219
Private Label MBS
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
(“private
label
MBS”).
The
seller
initially
provided
the
servicing for
a fee, which
is senior to
the obligations to
pay private label
MBS holders. The
seller then entered
into a sales
agreement
through which
it sold
and issued
these private
label MBS
in favor
of the
Corporation’s
banking subsidiary,
FirstBank. Currently,
the
Bank is
the sole
owner of
these private
label MBS;
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. These
private label
MBS are variable
-rate
securities indexed
to
(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
of
the
underlying mortgage
loans. 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
securities, absorbs
all risks
from losses
on non-accruing
loans and
repossessed
collateral.
As
of
December
31,
2021,
the
amortized
cost
and
fair
value
of
these
private
label
MBS
amounted
to
$
million
and
$
%,
which
is
included
as
part
of
the
Corporation’s
available-for-sale
investment
securities
portfolio.
As
described
in
Note
5
–
Investment
Securities,
above,
the
ACL
on
these
private
label MBS amounted to $
Investment in unconsolidated entity
On
February
16,
2011,
FirstBank
sold
an
asset
portfolio
consisting
of
performing
and
nonaccrual
construction,
commercial
mortgage, and commercial
and industrial loans
with an aggregate
book value of
$
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 $
and a
% interest in
CPG/GS and
made a loan
in the
amount of
$
The loan was
refinanced and consolidated
with other outstanding
loans of CPG/GS
in the second
quarter of 2018
and was paid
in full
in
October
2019.
FirstBank’s
equity
interest
in CPG/GS
is
accounted
for under
the equity
method.
FirstBank
recorded
a
loss on
its
interest in
CPG/GS in
2014 that
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.
CPG/GS
used
cash
proceeds
of
the
aforementioned
seller-financed
loan
to
cover
operating
expenses
and
debt
service
payments,
including those
related to
the loan
that was paid
off in
October 2019.
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
%, 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,
%
and
%,
respectively,
until
FirstBank
has
achieved
a
%
return
on
its
invested
capital
and
the
aggregate amount of distributions is equal to FirstBank’s
capital contributions to CPG/GS.
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
whether
it is
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 affect the
entity’s economic
performance and the
obligation to absorb
losses of, or the right
to receive
benefits from, CPG/GS
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 or influence
the loan portfolio, foreclosure proceedings,
or the construction and sale
of the property; therefore, the
Bank concluded that it is not
the
primary beneficiary of CPG/GS.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
220
Servicing Assets (MSRs)
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
GNMA
and,
under
seller/servicer
agreements,
the
Corporation
is
required
to
service
the
loans
in
accordance
with
the
issuers’
servicing
guidelines
and
standards.
As
of
December
31,
2021,
the
Corporation
serviced
loans securitized
through
GNMA with
a principal
balance
of $
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. MSRs are included
as part of other
assets in the consolidated
statements of
financial condition.
The changes in MSRs are shown below for the indicated periods:
Year
Ended December 31,
2021
2020
2019
(In thousands)
Balance at beginning of year
$
$
$
Purchases of servicing assets
(1)
Capitalization of servicing assets
Amortization
(
7,215
)
(
5,777
)
(
4,592
)
Temporary impairment
recoveries (charges), net
(
206
)
(
43
)
Other
(2)
(
188
)
(
353
)
(
70
)
Balance at end of year
$
$
$
(1)
Represents MSRs acquired in the BSPR acquisition.
(2)
Amount represents adjustments related to the repurchase
of loans serviced for others, including MSRs related to loans
previously serviced for BSPR
and eliminated as part of the acquisition in the third quarter
of 2020.
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 for the indicated
periods:
Year
Ended December 31,
2021
2020
2019
(In thousands)
Balance at beginning of year
$
$
$
Temporary impairment
charges
OTTI of servicing assets
(
77
)
Recoveries
(
124
)
(
95
)
(
35
)
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
221
The components of net servicing income, included as part of mortgage banking
activities in the consolidated
statements of income, are shown below for the indicated periods:
Year
Ended December 31,
2021
2020
2019
(In thousands)
Servicing fees
$
$
$
Late charges and prepayment penalties
Adjustment for loans repurchased
(
188
)
(
353
)
(
70
)
Other
(
1
)
(
15
)
Amortization and impairment of servicing assets
(
7,091
)
(
5,983
)
(
4,635
)
$
$
$
The Corporation’s MSRs are subject
to prepayment and interest rate risks. Key economic assumptions used in
determining the fair value at the time of sale of the related mortgages for the
indicated periods ranged as follows:
Maximum
Minimum
Year
Ended December 31, 2021
Constant prepayment rate:
%
%
%
%
%
%
Discount rate:
%
%
%
%
%
%
Year
Ended December 31, 2020
Constant prepayment rate:
%
%
%
%
%
%
Discount rate:
%
%
%
%
%
%
Year
Ended December 31, 2019
Constant prepayment rate:
%
%
%
%
%
%
Discount rate:
%
%
%
%
%
%
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
222
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
% and
% adverse changes
in those assumptions
for mortgage loans
as of December
31, 2021 and
2020 were as follows:
December 31,
December 31,
2021
2020
(In thousands)
Carrying amount of servicing assets
$
$
Fair value
$
$
Weighted-average
expected life (in years)
Constant prepayment rate (weighted-average annual
rate)
%
%
$
$
$
$
Discount rate (weighted-average annual rate)
%
%
$
$
$
$
.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
223
NOTE 16 – DEPOSITS AND RELATED
INTEREST
The following table summarizes deposit balances as of the indicated dates:
December 31,
2021
2020
(In thousands)
Type of account and interest rate:
Non-interest-bearing deposit accounts
$
$
Interest-bearing savings accounts
Interest-bearing checking accounts
Certificates of deposit
Brokered CDs
$
$
The
weighted-average
interest
rate
on
total
interest-bearing
deposits
as
of
December 31,
2021
and
2020
was
%
and
%,
respectively.
As
of
December 31,
2021,
the
aggregate
amount
of
unplanned
overdrafts
of
demand
deposits
that
were
reclassified
as
loans
amounted to $
2021 (2020 - $
The following table presents the contractual maturities of CDs, including brokered CDs, as of December 31, 2021:
Total
(In thousands)
Three months or less
$
Over three months to six months
Over six months to one year
Over one year to two years
Over two years to three years
Over three years to four years
Over four years to five years
Over five years
$
Time
deposits with
balances of
more than
$250,000 amounted
to $
2020.
This
amount
does
not
include
CDs
issued
to
deposit
brokers
in
the
form
of
large
certificates
of
deposits
that
are
generally
participated out
by brokers
in shares
of less
than the
FDIC insurance
limit. As
of December 31,
2021, unamortized
broker placement
fees amounted to
$
interest method.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
224
Brokered CDs mature as follows:
December 31,
2021
(In thousands)
Three months or less
$
Over three months to six months
Over six months to one year
Over one year to three years
Over three years to five years
$
As of
December 31,
2021,
deposit
accounts
issued
to
government
agencies
amounted
to $
deposits are
generally
insured by
the FDIC
up to
the applicable
limits. The
uninsured
portions
were collateralized
by securities
and
loans with
an amortized
cost of
$
As
of
December
31,
2021,
the
Corporation
had
$
million in the Virgin
Islands (2020 - $
A table showing interest expense on deposits for the indicated periods follows:
Year Ended
December 31,
2021
2020
2019
(In thousands)
Interest-bearing checking accounts
$
$
$
Savings
CDs
Brokered CDs
$
$
$
The
total
interest
expense
on deposits
included
the
amortization
of
broker
placement
fees
related
to
brokered
CDs
amounting
to
$
and
$
acquisition. Refer to Note 2 – Business Combination, for additional
information.
NOTE 17 – LOANS PAYABLE
The
Corporation
participates
in
the Borrower-in-Custody
Program
(the
“BIC Program
”) of
the FED.
Through
the
BIC Program,
a
broad
range
of
loans
(including
commercial,
consumer,
and
residential
mortgages)
may
be
pledged
as
collateral
for
borrowings
through the FED Discount Window.
As of December 31, 2021, pledged collateral that is related
to this credit facility amounted to $
billion,
mainly
commercial,
consumer,
and
residential
mortgage
loans,
which
after
a
margin
“haircut”
to
discount
the
value
of
collateral pledged,
represents approximately
$
individuals,
communities,
and
organizations
continuing
to
evolve,
the
Federal
Reserve
has
taken
several
actions
to
support
the
economy and
financial stability
of market
participants including,
among other
things, lowering
the target
range for
the federal
funds
rate and
relaunching
large scale
asset purchases.
The FED
Discount Window
program provided
the opportunity
to access
a low-rate
short-term source of
funding in a high
volatility market environment.
There were
FED Discount Window Program as of
December 31, 2021.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
225
NOTE 18 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (repurchase agreements)
as of the dates indicated consisted of the following:
December 31,
2021
2020
(In thousands)
Long-term repurchase agreement
(1)
$
$
(1)
Weighted-average
interest rate
of
% and
% as of
December 31,
2021 and 2020,
respectively.
During the first
quarter of
2021, the interest
rate related to
securities
sold under agreement to
repurchase totaling $
% after the end
of a prespecified lockout period. As of December 31, 2021,
all of the outstanding securities sold under agreements to repurchase
are tied to fixed interest rates.
Accrued interest
payable on repurchase
agreements amounted
to $
respectively.
Repurchase agreements mature as follows as of the indicated date:
December 31,
2021
(In thousands)
One month to three months
$
Three to five years
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
226
The following securities were sold under agreements to repurchase:
As of December 31,
2021
Amortized
Approximate
Weighted
Cost of
Fair Value
Average
Underlying
Balance of
of Underlying
Interest Rate
Underlying Securities
Borrowing
of Security
(Dollars in thousands)
U.S. government-sponsored agencies
$
$
$
%
MBS
%
$
$
$
Accrued interest receivable
$
As of December 31,
2020
Amortized
Approximate
Weighted
Cost
of
Fair Value
Average
Underlying
Balance of
of Underlying
Interest Rate
Underlying Securities
Borrowing
of Security
(Dollars in thousands)
U.S. government-sponsored agencies
$
$
$
%
MBS
%
$
$
$
Accrued interest receivable
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
227
The maximum
aggregate balance
of repurchase
agreements outstanding
at any
month-end during
2021 was
$
$
during
2021
and
2020
was
%
and
%,
respectively,
considering
negative
market
rates
on
reverse
repurchase
agreements
in
2020.
As
of
December
31,
2021
and
2020,
the
securities
underlying
such
agreements
were
delivered
to
the
dealers
with
which
the
repurchase agreements were transacted.
Repurchase agreements as of December 31, 2021, grouped by
counterparty, were as follows:
Weighted-Average
Counterparty
Amount
Maturity (In Months)
(Dollars in thousands)
JP Morgan Chase
$
Credit Suisse First Boston
Total
$
NOTE 19 – ADVANCES
FROM THE FEDERAL HOME LOAN BANK (FHLB)
The following is a summary of the advances from the FHLB as of the indicated dates:
December 31,
December 31,
2021
2020
(In thousands)
Long-term
-rate advances from FHLB (1)
$
$
(1)
Weighted-average interest rate
of
% and
% as of December 31, 2021 and 2020, respectively.
Advances from FHLB mature as follows as of the indicated date:
December 31, 2021
(In thousands)
Over six months to one year
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
228
The Corporation receives
advances from the
FHLB under an Advances,
Collateral Pledge, and
Security Agreement (the
“Collateral
Agreement”).
The
Collateral
Agreement
requires
the
Corporation
to
maintain
a
minimum
amount
of
qualifying
mortgage
collateral
with a
market
value
of generally
% or
higher than
the outstanding
advances.
As of
December 31,
2021
and 2020,
the estimated
value
of
specific
mortgage
loans
pledged
as
collateral
amounted
to
$
FHLB
for
collateral
purposes.
The
carrying
value
of
such
loans
as
of
December 31,
2021
amounted
to
$
billion). As
of December
31, 2021,
the Corporation
had additional
capacity of
approximately $
on collateral pledged
at the FHLB, including
a haircut reflecting
the perceived risk
associated with the
collateral. Haircut refers
to the
percentage by which
an asset’s
market value is reduced
for the purpose of
collateral levels. Advances
may be repaid prior
to maturity,
in whole or in part, at the option of the borrower
upon payment of any applicable fee specified in the contract
governing such advance.
In calculating the fee,
due consideration is given
to (i) all relevant factors,
including,
but not limited to,
any and all applicable
costs of
repurchasing
and/or
prepaying
any
associated
liabilities
and/or
hedges
entered
into
with
respect
to
the
applicable
advance;
(ii)
the
financial characteristics,
in their entirety,
of the advance
being prepaid; and
(iii), in the
case of adjustable-rate
advances, the expected
future earnings of the replacement
borrowing as long as the replacement
borrowing is at least equal
to the original advance’s
par value
and the replacement borrowing’s
tenor is at least equal to the remaining maturity of the prepaid advance.
NOTE 20 – OTHER BORROWINGS
Other borrowings, as of the indicated dates, consisted of:
December 31,
December 31,
(In thousands)
2021
2020
Floating rate junior subordinated debentures (FBP Statutory Trust
I) (1)
$
$
Floating rate junior subordinated debentures (FBP Statutory Trust
II) (2)
$
$
(1)
Amount represents junior subordinated
interest-bearing debentures due
in 2034 with a floating
interest rate of
% over 3-month LIBOR
(
% as of December
31, 2021 and
% as of December 31, 2020).
(2)
Amount represents junior subordinated
interest-bearing debentures due
in 2034 with a floating
interest rate of
% over 3-month LIBOR
(
% as of December
31, 2021 and
% as of December 31, 2020).
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
229
NOTE 21 –
EARNINGS
PER COMMON
SHARE
The calculations of earnings per common share for the years ended December 31,
2021, 2020, and 2019 are as follows:
Year
Ended December 31,
2021
2020
2019
(In thousands, except per share information)
Net income
$
$
$
Less: Preferred stock dividends
(
2,453
)
(
2,676
)
(
2,676
)
Less: Excess of redemption value over carrying value of Series A through E
(
1,234
)
Net income attributable to common stockholders
$
$
$
Weighted-Average
Shares:
Earnings per common share:
Basic
$
$
$
Diluted
$
$
$
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
but not
yet paid,
and any cumulative
dividends related
to the
current
dividend period that have not been declared as of
the end of the period. For 2021, net income attributable
to common stockholders was
also adjusted due
to the one
-time effect
to retained
earnings of the
excess of the
redemption value
paid over the
carrying value of
the
Series A through E Preferred Stock redeemed
as discussed in Note 23 – Stockholders’ Equity
below. 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
using the
treasury stock
method. This
method assumes
that proceeds
equal to
the amount
of compensation
cost attributable
to future
services
is
used
to
repurchase
shares
on
the
open
market
at
the
average
market
price
for
the
period.
The
difference
between
the
number
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
outstanding
during
the
period
that
result
in
lower potentially
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.
Potential
dilutive
common
shares also include
performance units
that do not
contain non-forfeitable
dividend rights if
the performance
condition is met
as of the
end of the reporting period.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
230
NOTE 22 –
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-effective
Section 162(m)
of the
U.S. Internal
Revenue Code
of
1986,
as
amended.
The
Omnibus
Plan
provides
for
equity-based
and
non
equity-based
compensation
incentives
(the
“awards”)
through the
grant of
stock options,
stock appreciation
rights, restricted
stock, restricted
stock units,
performance shares,
other stock-
based awards,
and cash-based
awards. The
Omnibus Plan
authorizes the
issuance of up
to
to adjustments
for stock
splits,
reorganizations
and other
similar
events.
As of December
31, 2021,
there were
of common stock 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,
participants
may exercise full voting
rights with respect
to the shares of restricted
stock granted to
them.
The restricted stock granted under the Omnibus Plan is typically subject to a vesting period. During the year ended December 31,
2021, the Corporation awarded
to its independent directors
one-year
dates of
grant. In
addition, during the
year
ended December
31,
2021, the
Corporation awarded
employees;
fifty percent
(
%) of those shares
vest on the
two-year
anniversary
of the grant
date and the
remaining
% vest on three-year
anniversary of
the
grant
date.
Included in
those
employees.
The total expense
determined
for the restricted
stock awarded
to retirement-eligible
employees
was charged against
earnings
as
of
the
grant date.
During the
year
ended December
31,
2020,
the
Corporation awarded to
its
independent directors
restricted stock that are
subject to
one-year
shares of
restricted stock to
employees; fifty percent (
%)
of those
shares vest on
the two-year anniversary of
the grant
date and
the
remaining
% vest on
three-year anniversary
of the grant date. Included in
those
granted to retirement-eligible
employees.
The fair value
of the shares
of restricted
stock granted
in 2021 and 2020
was based on
the market
price of
the Corporation’s
outstanding
common stock
on the date
of the respective
grant.
The following table summarizes the restricted stock activity in the year ended
December 31, 2021 under the Omnibus Plan:
2021
Number of
Weighted-
shares of
Average
restricted
Grant Date
stock
Unvested shares outstanding at beginning of year
$
Granted
Forfeited
(
82,486
)
Vested
(
413,822
)
Unvested shares outstanding at end of year
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
231
For the
years ended
December 31,
2021, 2020
and 2019,
the Corporation
recognized $
respectively,
of
stock-based
compensation
expense
related
to
restricted
stock
awards.
As
of
December
31,
2021,
there
was
$
million
of
total
unrecognized
compensation
cost
related
to
unvested
shares
of
restricted
stock.
The
weighted
average
period
over
which the Corporation expects to recognize such cost was
Stock-based compensation
accounting guidance
requires the
Corporation to
reverse compensation
expense for
any awards
that are
forfeited due
to employee
or director
turnover.
Changes in
the estimated
forfeiture rate
may have
a significant
effect on
stock-based
compensation,
as the
Corporation
recognizes
the
effect
of adjusting
the rate
for
all expense
amortization
in the
period
in
which
the
forfeiture estimate is changed. If the actual forfeiture
rate is higher than the estimated forfeiture rate, an
adjustment is made to increase
the
estimated
forfeiture
rate,
which
will
decrease
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
increase
the
expense recognized in the financial statements.
Performance Units
Under the
Omnibus Plan,
the Corporation
may award
performance
units to
Omnibus Plan
participants.
During the
year ended
December
31, 2021,
the Corporation granted
common stock. The performance
units granted in the year ended
December 31, 2021 are for the performance
period beginning
January 1,
2021 and ending on December
31, 2023.
During
the
years
ended
December
31,
2020
and
2019,
the
Corporation
awarded
executives,
respectively.
The performance units will vest
on the third anniversary
of the effective date
of the awards and are
subject to
a pre-established performance target level as described
above.
The following table summarizes the performance units activity during
2021 under the Omnibus Plan:
Year
Ended
(Number of units)
December 31,
2021
Performance units at beginning of year
Additions
Vested
(
304,408
)
Forfeited
(
47,946
)
Performance units as of December 31, 2021
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
232
The fair values
of the performance
units awarded
were based
on the market
price of the
Corporation’s
outstanding
common stock
on the
respective date of
the grant.
For
the years
ended December 31,
2021, 2020,
and 2019,
the Corporation recognized $
million, and
$
was $
over the next three years. The total
amount of compensation
expense recognized
reflects management’s
assessment of the probability
that
the pre-established
performance
goal will
be achieved.
The Corporation
will recognize
a cumulative
adjustment
to compensation
expense
in
the then-current
period to
reflect
any changes
in the
probability
of achievement
of the performance
goals.
Other awards
Under the Omnibus Plan, the Corporation
may grant shares of unrestricted
stock to plan participants.
During the third quarter of 2020,
the Corporation
granted to its independent
directors
For
the
year
ended
December
31,
2020,
the
Corporation recognized
$
unrestricted
stock awards.
There were
Shares withheld
During the
year ended
December 31,
2021, the
Corporation withheld
that vested
during
such period
to cover
the officers’
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 an officer
was entitled. In the
consolidated financial
statements, the Corporation presents shares withheld for tax purposes as common
stock repurchases.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
233
NOTE 23 –
STOCKHOLDERS’
EQUITY
Stock Repurchase Program
On April
26, 2021,
the Corporation
announced that
its Board
of Directors
approved a
stock repurchase
program, under
which the
Corporation may
repurchase up
to $
second
quarter of
2021 through
June 30,
2022. During
the year
ended December
31, 2021,
the Corporation
repurchased
shares of its common stock for $
monthly
income
Series
A
through
E
Preferred
Stock
for
its liquidation
value
of
$
Corporation
to
acquire
any
specific
number
of
shares.
Repurchases
under
the
program
may
be
executed
through
open
market
purchases, accelerated share
repurchases and/or privately
negotiated transactions or
plans, including plans
complying with Rule
10b5-
1
under
the
Exchange
Act.
The
Corporation’s
stock
repurchase
program
is
subject
to
various
factors,
including
the
Corporation’s
capital
position,
liquidity,
financial
performance
and
alternative
uses
of
capital,
stock
trading
price,
and
general
market
conditions.
The repurchase program may be modified, extended, suspended, or terminated
at any time at the Corporation’s discretion.
The
shares
of
common
stock
repurchased
are
held
as
treasury
stock.
As
of
December
31,
2021,
the
Corporation
has
remaining
authorization to repurchase
approximately $
during the first quarter of 2022.
Common Stock
The following table shows the changes in shares of common stock outstanding
for 2021, 2020 and 2019:
2021
2020
2019
Common stock outstanding, beginning balances
Common stock repurchased
(1)
(
16,740,467
)
Common stock issued, net of shares withheld for employee taxes
Restricted stock forfeited
(
82,486
)
(
3,086
)
(
14,000
)
Common stock outstanding, ending balances
(1)
Includes
For
the
years
ended
December
31,
2021,
2020
and
2019,
total
cash
dividends
declared
on
shares
of
common
stock
amounted
to
$
Directors
had
declared
a
quarterly
cash
dividend
of
$
%
or
$
common share
compared to
the dividend
paid in
September 2021.
The dividend
was paid
on December
10, 2021
to shareholders
of
record at the close business
on November 26, 2021. The
Corporation intends to continue
to pay quarterly dividends on
common stock.
However,
the Corporation’s
common stock
dividends, including
the declaration,
timing, and
amount, remain
subject to
consideration
and approval by the Corporation’s
Board Directors at the relevant times.
Preferred Stock
The
Corporation
has
,
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.
On November 30,
2021 the Corporation
redeemed all of its
its liquidation
value of
$
million, which was recorded
as a reduction to
retained earnings in 2021.
For the years ended
December 31, 2021,
2020 and 2019 total
cash dividends paid
on shares of preferred
stock amounted to $
preferred
stock shares
were not
listed on
any securities
exchange or
automated
quotation system.
outstanding as of December 31, 2021.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
234
Treasury stock
During
the
years
ended
December
31,
2021,
2020
and
2019,
the
Corporation
withheld
an
aggregate
of
shares
and
officers’
payroll
and
income
tax
withholding
liabilities;
these
shares
are
held
as
treasury
stock.
Also
held
as
treasury
stock
are
the
2021 and 2020, the Corporation had
FirstBank Statutory Reserve (Legal Surplus)
The Banking Law
of the Commonwealth of
Puerto Rico requires that
a minimum of
% of FirstBank’s
net income for the
year be
transferred
to a
legal surplus
reserve
until such
surplus
equals the
total of
paid-in-capital
on common
and preferred
stock. Amounts
transferred
to
the
legal
surplus
reserve
from
retained
earnings
are
not
available
for
distribution
to
the
Corporation,
including
for
payment
as dividends
to the
stockholders,
without
the prior
consent
of the
Puerto Rico
Commissioner
of Financial
Institutions.
2021
and
2020,
the
Corporation
transferred
$
legal
surplus
reserve,
included
as
part
of
retained
earnings
in
the
Corporation’s
consolidated
statements
of
financial
condition,
amounted to $
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
235
NOTE 24 – OTHER COMPREHENSIVE (LOSS) INCOME
The following table presents changes in accumulated other comprehensive
(loss) income for the years ended December
31, 2021, 2020 and 2019:
Changes in Accumulated Other Comprehensive
(Loss) Income by Component
Year ended
December 31,
2021
2020
2019
(In thousands)
Unrealized net holding gains (losses) on debt
securities:
$
$
$
(
40,415
)
(
143,115
)
$
(
87,390
)
$
$
Adjustment of pension and postretirement
benefit plans:
$
(
270
)
$
$
(
270
)
$
$
(
270
)
$
______________________
(1) All amounts presented are net of tax.
The following table presents the
amounts reclassified out of
each component of accumulated
other comprehensive (loss) income
for the
years ended December 31, 2021, 2020 and 2019:
Reclassifications Out of Accumulated Other Comprehensive (Loss)
Income
Affected Line Item in the
Consolidated Statements of
Income
Year ended
December 31,
2021
2020
2019
(In thousands)
Unrealized net holding gains (losses)
Realized gain on sales
Net gain (loss) on
of debt securities
investments securities
$
$
(
13,198
)
$
Provision for credit losses -
Provision for credit losses
(benefit) expense
(benefit) expense
(
136
)
OTTI on debt securities
Net gain (loss) on
investment securities
Total before tax
$
(
136
)
$
(
11,557
)
$
Income tax expense
Total, net of tax
$
(
136
)
$
(
11,557
)
$
(1)
ASC 326, which became
effective on January 1,
2020, requires credit losses on
available-for-sale debt securities to be
presented as an allowance
rather than as a
write-
down. Thus,
credit losses on
debt securities recorded
prior to
January 1, 2020
are presented as
OTTI on debt
securities while credit
losses on
debt securities recorded
after January 1, 2020 are presented as part of provision for
credit losses.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
236
NOTE 25 – EMPLOYEE BENEFIT PLANS
Defined Benefit Retirement Plans
The Corporation
maintains two frozen
qualified noncontributory
defined benefit
pension plans (the
“Pension Plans”),
and a related
complementary post-retirement
benefit plan covering medical
benefits and life
insurance after retirement,
that it obtained in
the BSPR
acquisition on
September 1,
2020. One
plan covers
substantially all
of BSPR’s
former employees
who were
active before
January 1,
2007, while
the other
plan covers
personnel of
an institution
previously-acquired by
BSPR. Benefits
are based
on salary and
years of
service.
The accrual of benefits under the Pension Plans is frozen to all participants
.
The
Corporation
requires
recognition
of
a
plan’s
overfunded
and
underfunded
status
as
an
asset
or
liability
with
an
offsetting
adjustment
to
accumulated
other
comprehensive
(loss)
income
pursuant
to
the
ASC Topic
715,
Compensation-Retirement
Benefits.
Actuarial gains
or losses, prior-service
costs, and transition
assets or obligations
are recognized as
components of net
periodic benefit
costs.
December 31, 2021
December 31, 2020
(In thousands)
Changes in projected benefit obligation:
Projected benefit obligation at the beginning of period, defined benefit
pension (September 1 for the 2020 period)
$
$
Interest cost
Actuarial (gain) loss
(1)
(
6,699
)
Benefits paid
(
6,160
)
(
1,539
)
Projected benefit obligation at the end of period, pension plans
$
$
Projected benefit obligation, other postretirement benefit plan
Projected benefit obligation at the end of period
$
$
Changes in plan assets:
Fair value of plan assets at the beginning of period (September 1 for the
2020 period)
$
$
Actual return on plan assets
Benefits paid
(
6,160
)
(
1,539
)
Fair value of pension plan assets at the end of period
$
$
Net asset (benefit obligation), pension plans
(
2,290
)
Net benefit obligation, other-postretirement benefit
plan
(
195
)
(
245
)
Net asset (benefit obligation)
$
$
(
2,535
)
(1) Significant components of the Pension Plans’ actuarial gain (loss)
that changed the benefit obligation were mainly related to updates
in discount and mortality rates.
(2) Other post-retirement plan did not contain any assets
as of December 31, 2021 and 2020.
The following are the pre-tax amounts recognized in accumulated other
comprehensive (loss) income:
December 31, 2021
December 31, 2020
(In thousands)
Net actuarial (gain) loss
$
(
5,862
)
$
Amortization of net loss
Net amount recognized
$
(
5,860
)
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
237
The weighted
-average
assumed discount
rate to
determine
the projected
benefit obligations
for the
pension plans
as of
December
31, 2021 was
% compared to
% as of December 31, 2020.
Financial data relative to the Pension Plans and the Post Retirement Benefit Plan
is summarized in the following tables:
Affected Line Item
Period from
in the Consolidated
December 31,
September 1, 2020 to
Statements of Income
2021
December 31, 2020
(In thousands)
Net periodic benefit, pension plans:
Interest cost
Other expenses
$
$
Expected return on plan assets
Other expenses
(
4,523
)
(
2,062
)
Net periodic benefit, pension plans
(
2,050
)
(
1,162
)
Net periodic cost, other-post retirement plan
Other expenses
Net Periodic benefit
$
(
2,045
)
$
(
1,160
)
Pre-tax amounts record in accumulated OCI,
pension
Net actuarial (gain) loss
(
5,861
)
Accumulated other comprehensive income/(loss), end
$
(
5,861
)
$
Accumulated other comprehensive income/(loss), end of
Accumulated other comprehensive income/(loss), end
$
(
5,860
)
$
Total net periodic pension
(income) loss recognized
$
(
7,905
)
$
(
728
)
Weighted average
assumptions used to determine
(1)
Discount rate
Expected return on plan assets
(1)
Other post-retirement plan did not contain any assets as of December
31, 2021 and 2020 and discount rate as of December
31, 2021 and 2020, was
% and
%, respectively.
The discount rate is estimated as
the single equivalent rate such
that the present value of the plan’s
projected benefit obligation cash
flows using the
single rate equals
the present
value of
those cash flows
using the above
mean actuarial
yield curve.
In developing
the
expected
long-term
rate
of
return
assumption,
the
Corporation
evaluated
input
from
a
consultant
and
the
Corporation’s
long-term
inflation assumptions and interest rate scenarios. Projected returns are based
on the same asset categories as the plan using well-known
broad indexes.
Expected returns
are based
by historical
returns with
adjustments to
reflect a
more realistic
future return.
Adjustments
are
done
by
categories,
taking
into
consideration
current
and
future
market
conditions.
The
Corporation
also
considered
historical
returns on
its plan assets
to review
the expected
rate of return.
The Corporation
anticipated that
the Plan’s
portfolio would
generate a
long
term
rate
of
return
of
%
as
of
December
31,
2021.
The
investment
policy
statement
for
the
Pension
Plans
includes:
(i)
liability
hedging
assets
to
reduce
funded
status
risk,
(ii)
diversified
return
seeking
assets
to
reduce
equity
risk,
and
(iii)
establishes
different glidepaths specific for each plan to systematically
reduce risk as the funded status improves.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
238
The following table
presents the changes
in accumulated other
comprehensive (loss) income
of the Pension
Plans and
Postretirement Benefit Plan as of December 31, 2021 and 2020:
December 31, 2021
Period from September
1, 2020 to December 31,
2020
(In thousands)
Accumulated other comprehensive (income)/loss at beginning
$
$
Net (gain) loss
(
5,861
)
Accumulated other comprehensive (income)/loss end of year
(
5,457
)
Accumulated other comprehensive (income)/loss, other-post
Accumulated other comprehensive (gain) loss at end of period
$
(
5,428
)
$
The
following
table
presents
information
for
the
plans
with
a
projected
benefit
obligation
and
accumulated
benefit obligation in excess of plan assets for the year ended December 31, 2021 and 2020:
December 31, 2021
December 31, 2020
(In thousands)
Projected benefit obligation
$
$
Accumulated benefit obligation
Fair value of plan assets
$
$
The Pension Plans asset allocations as of December 31, 2021 and 2020 by asset category
are as follows:
December 31, 2021
December 31, 2020
Asset category
Equity securities
Debt securities
Investment in funds
Other
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
239
The Corporation does not expect to contribute to the Pension Plans during
2022.
The Corporation’s
investment policy
with respect
to the
Corporation’s
Pension
Plans is
to optimize,
without undue
risk, the
total
return
on investment
of the
Plan assets
after inflation,
within
a framework
of prudent
and reasonable
portfolio
risk. The
investment
portfolio
is
diversified
in
multiple
asset
classes
to
reduce
portfolio
risk,
and
assets
may
be
shifted
between
asset
classes
to
reduce
volatility when
warranted by projections
of the economic
and/or financial
market environment,
consistent with
Employee Retirement
Income
Security Act
of 1974,
as amended
(ERISA).
As circumstances
and
market conditions
change,
the Corporation’s
target
asset
allocations
may
be
amended
to reflect
the
most
appropriate
distribution
given
the new
environment,
consistent with
the
investment
objectives.
Expected future benefit payments for the plans are as follows:
Amount
(Dollars in thousands)
2022
$
2023
2024
2025
2026
2027 through 2031
$
As of
December
31,
2021
and 2020,
substantially
all of
the plan
assets of
$
invested in common collective
trusts, which primarily consist of
equity securities, mortgage-backed
securities, corporate bonds and
U.
S. Treasuries.
The portfolios
in both
plans have been
measured at fair
value using the
net asset value
per unit
as a practical
expedient
as permitted by ASC Topic
820, and accordingly,
have not been classified in the fair value hierarchy as of December 31, 2021.
Determination of Fair Value
The valuation process begins
with market quotations for
the individual security.
Since many fixed maturities do
not trade on a daily
basis,
each
asset
class
is
evaluated
on
its
own
based
on
relevant
market
information.
The
market
inputs
utilized
in
the
pricing
evaluation, listed in the approximate
order of priority,
include: benchmark yields, reported trades,
broker/dealer quotes, issuer spreads,
two-sided markets, benchmark
securities, bids, offers,
reference data, and industry
and economic events.
The extent of the
use of each
market input
depends on the
asset class and
the market conditions.
Additional inputs
may be necessary
for some securities.
Some fair
value estimates are determined
from quotes provided by
market makers or broker-dealers
that are considered to
be market participants
and are considered to be an estimate of fair value that is indicative of market
transactions.
The following is a description of the valuation inputs and techniques
used to measure the fair value of pension plan assets:
Investment in
Funds -
Investment in collectible
funds have
been measured
at fair value
using the net
assets value per
unit practical
expedient and, accordingly,
have not been classified in the fair value hierarchy.
Interest-Bearing
Deposits
-
Interest-bearing
deposits consist
of
money
market
accounts with
short-term
maturities and,
therefore,
the carrying value approximates fair value.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
240
Defined Contribution Plan
In
addition,
FirstBank
provides
contributory
retirement
plans
pursuant
to
Section 1081.01
of
the
Puerto
Rico
Internal
Revenue
Code
of 2011
for
Puerto
Rico
employees
and
Section 401(k)
of
the U.S.
Internal Revenue
Code for
USVI
and
U.S. employees
(the
“Plans”).
All employees
are eligible
to participate
in the
Plans after
three months
of service
for purposes
of making
elective deferral
contributions and
one year
of service
for purposes
of sharing
in the
Bank’s
matching, qualified
matching, and
qualified non-elective
contributions.
Under
the
provisions
of
the
Plans,
the
Bank
contributes
%
of
the
first
%
of
the
participant’s
compensation
contributed
to
the
Plans
on
a
pretax
basis,
up
to
an
annual
limit.
2020 and
2019 (USVI
and U.S.
employees -
$
the
Plans
may
be
voluntarily
made
by
the
Bank
as
determined
by
its
Board
of
Directors.
were made for the years ended December 31, 2021, and 2020.
On
September
1,
2020,
the
Bank
completed
the
acquisition
of
Santander
Bancorp,
a
wholly-owned
subsidiary
of
Santander
Holdings USA,
Inc. and
the holding
company of
BSPR. Prior
to the
acquisition date,
BSPR was
the sponsor
of the
Banco Santander
de Puerto Rico Employees’
Savings Plan (“the Santander
Plan”). Effective on
September 1, 2020, the
Bank became the sponsor
of the
Santander Plan. Overall responsibility
for administrating the Santander Plan rests
with the Plan’s Administration
Committee. Effective
December 31, 2020,
the Santander Plan
was merged
with the Plan
(“the Plan Merger”).
The contributory savings
plan assumed in
the
BSPR
acquisition
also
provided
for
matching
contribution
up
to
%
of
the
employee’s
compensation.
The
Bank
had
total
plan
expenses of $
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
241
NOTE 26 – OTHER NON-INTEREST EXPENSES
A detail of other non-interest expenses is as follows for the indicated periods:
Year
Ended December 31,
2021
2020
2019
(In thousands)
Supplies and printing
$
$
$
Amortization of intangible assets
Servicing and processing fees
Insurance and supervisory fees
Provision for operational losses
Other
$
$
$
NOTE 27 – OTHER NON-INTEREST INCOME
A detail of other non-interest income is as follows for the indicated periods:
Year
Ended December 31,
2021
2020
2019
(In thousands)
Non-deferrable loan fees
$
$
$
Merchant-related income
ATM
and Point-of-Sale fees ("POS")
Credit and debit card interchange and other fees
Mail and cable transmission commissions
Gain on sales of commercial and
Gain from insurance proceeds
Other
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
242
NOTE 28 –
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,
accordingly,
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 jurisdictions.
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
not
entitled
to
file
consolidated
tax
returns
and,
thus,
the
Corporation
is
generally
not
entitled to utilize
losses from one
subsidiary to offset
gains in another
subsidiary.
Accordingly,
in order to
obtain a tax
benefit from
a
net operating
loss (“NOL”),
a particular
subsidiary must
be able
to demonstrate
sufficient taxable
income within
the applicable
NOL
carry-forward
period.
Pursuant
to
the
2011
PR
Code,
the
carry-forward
period
for
NOLs
incurred
during
taxable
years
that
commenced
after
December
31,
2004
and
ended
before
January
1,
2013
is
12
years;
for
NOLs
incurred
during
taxable
years
commencing after December 31,
2012, the carryover period is
10 years. The 2011
PR Code provides a dividend
received deduction of
% on
dividends
received
from
“controlled”
subsidiaries
subject
to
taxation
in
Puerto
Rico
and
% on
dividends
received
from
other taxable domestic corporations.
The
Corporation
has
maintained
an
effective
tax
rate
lower
than
the
maximum
statutory
rate
of
37.5%
mainly
by
investing
in
government
obligations
and
MBS
exempt
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 gains on sales is
exempt from Puerto
Rico income taxation. The
IBE unit 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.
The CARES
Act of
2020 includes
several provisions
to stimulate
the U.S.
economy in
the midst
of the
COVID-19 pandemic.
The
CARES Act
of 2020
includes tax
provisions that
temporarily modified
the taxable
income limitations
for NOL
usage to
offset future
taxable income, NOL carryback provisions
and other related income, and non-income
based tax laws. Due to the fact
that the COVID-
19 pandemic
is still
ongoing,
the Federal
Government
extended some
of the
benefits and
continued
the economic
stimulus from
the
CARES Act of 2020. The Corporation has evaluated such provisions
and determined that the impact of the CARES Act of 2020
on the
income tax provision and deferred tax assets as of December 31,
2021 was not significant.
The components of income tax expense are summarized below for
the indicated periods:
Year
Ended December 31,
2021
2020
2019
(In thousands)
Current income tax expense
$
$
$
Deferred income tax expense (benefit):
(
8,000
)
Total income
tax expense
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
243
The differences between the income tax expense applicable to income
before the provision for income taxes and the
amount computed by applying the statutory tax rate in Puerto Rico were as follows
for the indicated periods:
Year Ended
December 31,
2021
2020
2019
Amount
% of Pretax
Income
Amount
% of Pretax
Income
Amount
% of Pretax
Income
(Dollars in thousands)
Computed income tax at statutory rate
$
%
$
%
$
%
Federal and state taxes
%
%
%
Benefit of net exempt income
(
20,717
)
(
4.8
)
%
(
26,780
)
(
23.0
)
%
(
24,811
)
(
10.4
)
%
Disallowed NOL carryforward resulting from
net exempt income
%
%
%
Deferred tax valuation allowance
(
13,572
)
(
3.2
)
%
(
12,095
)
(
10.4
)
%
(
14,108
)
(
5.9
)
%
Share-based compensation windfall
(
1,044
)
(
0.2
)
%
%
(
1,165
)
(
0.5
)
%
Other permanent differences
(
1,185
)
(
0.3
)
%
(
387
)
(
0.3
)
%
(
1,712
)
(
0.7
)
%
Tax return to provision adjustments
(
406
)
(
0.1
)
%
%
%
Other-net
%
(
5,061
)
(
4.3
)
%
%
$
%
$
%
$
%
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and
liabilities for financial reporting purposes and their tax bases. Significant
components of the Corporation's deferred tax
assets and liabilities as of December 31, 2021 and 2020 were as follows:
December 31,
2021
2020
(In thousands)
Deferred tax asset:
$
$
$
$
Deferred tax liabilities:
Valuation
allowance
(
107,323
)
(
101,984
)
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
244
Accounting
for
income
taxes
requires
that
companies
assess
whether
a
valuation
allowance
should
be
recorded
against
their
deferred
tax
asset
based
on
an
assessment
of
the
amount
of
the
deferred
tax
asset
that
is
“more
likely
than
not”
to
be
realized.
Valua
tion allowances
are established,
when necessary,
to reduce
deferred tax
assets to
the amount
that is
more likely
than not
to be
realized. Management
assesses the valuation
allowance recorded
against deferred
tax assets at
each reporting
date. The determina
tion
of whether a
valuation allowance for
deferred tax assets
is appropriate
is subject to considerable
judgment and requires
the evaluation
of
positive
and
negative
evidence
that
can
be
objectively
verified.
Consideration
must
be
given
to
all
sources
of
taxable
income
available to realize
the deferred tax asset,
including, as applicable,
the future reversal
of existing temporary
differences, future
taxable
income forecasts exclusive of the reversal of temporary
differences and carryforwards, and tax planni
ng strategies. In estimating taxes,
management assesses
the relative
merits and
risks of
the appropriate
tax treatment
of transactions
considering statutory,
judicial, and
regulatory guidance.
Total
deferred
tax
assets
of
FirstBank,
the
banking
subsidiary,
amounted
to
$
valuation
allowance
of
$
million, as
of December
31, 2020.
The decrease
in deferred
tax assets
was mainly
driven by
the aforementioned
credit losses reserve
releases and
the usage
of NOLs.
The increase
in the
valuation
allowance was
primarily
related to
the change
in the
market value
of
available-for-sale
securities.
The
Corporation
maintains
a full
valuation
allowance
for
its deferred
tax assets
associated
with
capital
losses carry
forward. Therefore,
changes in
the unrealized
losses of available
-for-sale securities
result in
a change
in the
deferred tax
asset and an equal change in the valuation allowance without having
an effect on earnings.
After completion
of the deferred
tax asset
valuation allowance
analysis for
the fourth
quarter of
2021 management
concluded that,
as of December 31, 2021, it is more likely than not that
FirstBank will generate sufficient taxable income
to realize $
deferred tax assets related to NOLs within the applicable carry-forward
periods.
The
positive
evidence
considered
by
management
in
arriving
at
its
conclusion
includes
factors
such
as:
FirstBank’s
three-year
cumulative income
position; sustained
periods of
profitability; management’s
proven ability
to forecast
future income
accurately and
execute
tax
strategies;
forecasts
of
future
profitability,
under several
potential
scenarios
that
support
the
partial utilization
of
NOLs
prior
to
their
expiration
from
2022
through
2024;
and
the
utilization
of
NOLs
over
the
past
three-years.
The
negative
evidence
considered
by
management
includes:
uncertainties
around
the
state
of
the
Puerto
Rico
economy,
including
considerations
on
the
impact
of the
pandemic
recovery funds
together
with the
ultimate sustainability
of the
latest fiscal
plan
certified
by the
PROMESA
oversight board.
Management’s
estimate
of
future
taxable
income
is
based
on
internal
projections
that
consider
historical
performance,
multiple
internal scenarios and
assumptions, as well as
external data that
management believes is
reasonable. If events
are identified that affect
the Corporation’s
ability to utilize
its deferred tax
assets, the analysis
will be updated
to determine if
any adjustments to
the valuation
allowance
are
required.
If
actual
results
differ
significantly
from
the
current
estimates
of
future
taxable
income,
even
if
caused
by
adverse
macro-economic
conditions,
the
remaining
valuation
allowance
may
need
to
be
increased.
Such
an
increase
could
have
a
material
adverse
effect
on
the
Corporation’s
financial
condition
and
results
of
operations.
Conversely,
a
higher
than
projected
proportion
of
taxable
income to
exempt
income
could
lead to
a
higher
usage
of
available NOLs
and
a
lower
amount of
disallowed
NOLs from projected
levels of tax-exempt income,
per the 2011
PR code, which in
turn could result in
further releases to the
deferred
tax valuation
allowance; any
such decreases
could have
a material positive
effect on
the Corporation’s
financial condition
and results
of operations.
As of December
31, 2021, approximately
$
differences
or
tax
credit
carryforwards
that
have
no
expiration
date,
compared
to
$
attributable to FirstBank’s
deferred tax assets
of $
attributable
to
projected
levels
of
tax-exempt
income,
NOLs
attributable
to
the
Virgin
Islands
jurisdiction,
and
capital
losses.
The
remaining balance of $
related
to
NOLs
and
capital
losses
at
the
holding
company
level.
The
Corporation
will
continue
to
provide
a
valuation
allowance
against its deferred
tax assets in
each applicable
tax jurisdiction until
the need for
a valuation allowance
is eliminated. The
need for a
valuation
allowance
is
eliminated
when
the
Corporation
determines
that
it
is
more
likely
than
not
the
deferred
tax
assets
will
be
realized.
The
ability
to
recognize
the
remaining
deferred
tax
assets
that
continue
to
be
subject
to
a
valuation
allowance
will
be
evaluated on
a quarterly basis
to determine
if there are
any significant events
that would affect
the ability to
utilize these deferred
tax
assets.
The Corporation
has U.S.
and USVI
sourced NOL
carryforwards. Section
382 of
the U.S.
Internal Revenue
Code (“Section
382”)
limits the ability to
utilize U.S. and USVI
NOLs for income tax
purposes in such jurisdictions
following an event that
is considered to
be an “ownership change”.
Generally, an
“ownership change” occurs when
certain shareholders increase their
aggregate ownership by
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
245
more
than
50
percentage
points
over
their
lowest
ownership
percentage
over
a
three-year
testing
period.
Upon
the
occurrence
of
a
Section 382
ownership change,
the use
of NOLs
attributable to
the period
prior to
the ownership
change is
subject to
limitations and
only a portion of the U.S. and USVI NOLs may be used by the Corporation
to offset its annual U.S. and USVI taxable income, if any.
In
2017,
the
Corporation
completed
a
formal
ownership
change
analysis
within
the
meaning
of
Section
382
covering
a
comprehensive
period
and
concluded
that
an
ownership
change
had
occurred
during
such
period.
The
Section
382
limitation
has
resulted
in higher
U.S. and
USVI income
tax liabilities
than the
Corporation
would have
incurred
in the
absence of
such limitation.
The Corporation
has mitigated
to an
extent the
adverse effects
associated with
the Section
382 limitation
as any
such tax
paid in
the
U.S.
or
USVI
is
creditable
against
Puerto
Rico
tax
liabilities
or
taken
as
a
deduction
against
taxable
income.
However,
the
Corporation’s ability to reduce its 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.
For 2021,
2020 and
2019, the
Corporation incurred
an income
tax expense
of
approximately $
the USVI operations in 2021, 2020 and 2019.
The Corporation
accounts for uncertain
tax positions under
the provisions
of ASC Topic
740. The Corporation’s
policy is to
report
interest and penalties
related to unrecognized
tax benefits in income
tax expense. As
of December 31,
2021, the Corporation
had $
million of
accrued interest
and penalties
related to
uncertain tax
positions in
the amount
of $
which,
if recognized,
would decrease
the
effective
income tax
rate in
future
periods. The
amount
of
unrecognized
tax benefits
may
increase
or
decrease
in
the
future
for
various
reasons,
including
adding
amounts
for
current
tax
year
positions,
expiration
of
open
income
tax returns
due
to the
statute of
limitations,
changes
in management’s
judgment about
the level
of uncertainty,
the status
of
examinations,
litigation
and
legislative activity,
and
the addition
or elimination
of uncertain
tax positions.
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. 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 2017
remain open
to examination.
For Puerto
Rico tax
purposes, all tax years subsequent to 2016 remain open to examination.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
246
NOTE 29
–
LEASES
The Corporation
accounts for its
leases in accordance
with ASC 842
“Leases” (“ASC
Topic
842”), which
it adopted on
January 1,
2019. ASC
Topic
842 requires
the Corporation
to record
liabilities for
future lease
obligations as
well as
assets representing
the right
to
use
the underlying
lease
asset. The
Corporation’s
operating
leases are
primarily
related
to
the Corporation’s
branches and
leased
commercial
space
for
ATMs.
Our
leases
mainly
have
terms
ranging
from
,
some
of
which
include
options
to
extend the leases for up to
. Liabilities to make future lease payments are
recorded in accounts payable and other liabilities,
while right-of-use
(“ROU”) assets are
recorded in
other assets in
the Corporation’s
consolidated statements
of financial condition.
As
of December 31, 2021 and 2020, the Corporation did
t have a lease that qualifies as a finance lease.
Operating lease cost for the
year ended December 31, 2021
amounted to $
recorded in occupancy and equipment in the consolidated statement of
income.
Supplemental balance sheet information related to leases as of the indicated dates was as follows:
As of
As of
December 31,
December 31,
2021
2020
(Dollars in thousands)
ROU asset
$
$
Operating lease liability
$
$
Operating lease weighted-average remaining lease term (in years)
Operating lease weighted-average discount rate
Generally,
the
Corporation
cannot
practically
determine
the interest
rate
implicit
in
the lease.
Therefore,
the Corporation
uses
its
incremental borrowing rate as the discount rate for the lease.
Supplemental cash flow information related to leases was as follows:
Year
Ended
Year
Ended
December 31,
December 31,
2021
2020
(In thousands)
Operating cash flow from operating leases
(1)
$
$
ROU assets obtained in exchange for operating lease liabilities
(2)
$
$
(1)
Represents cash paid for amounts included in the measurement of operating
lease liabilities.
(2)
Represents non-cash activity and, accordingly,
is not reflected in the consolidated statements
of cash flows. For the year ended December 31,
2020 excludes $
assets and related liabilities assumed
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
247
Maturities under lease liabilities as of December 31, 2021, were as follows:
Amount
(Dollars in thousands)
2022
$
2023
2024
2025
2026
2027 and after
Total lease payments
Less: imputed interest
(
10,386
)
Total present value
of lease liability
$
NOTE 30 –
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. One of 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) MBS 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
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
by using
pricing models
for
which
the determination
of fair
value
requires
significant management judgment as to the estimation.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
248
Financial Instruments Recorded at Fair Value
on a Recurring Basis
Investment securities available for sale and marketable equity securities held at fair value
non-callable U.S. agencies debt securities, and equity securities with readily determinable
fair values), when available (Level 1), or,
market prices for identical or comparable assets (as is the case with MBS and callable U.S.
agency debt securities) 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,
when available (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).
Derivative instruments
consideration
the
credit
risk
component
of
paying
counterparties,
when
appropriate.
On interest
caps,
only
the
seller's
credit
risk
is
considered.
The Corporation
valued
the caps
using
a discounted
cash flow
approach
based on
the related
LIBOR and
swap rate
for
each cash flow The Corporation
valued the interest rate swaps
using a discounted cash flow
approach based on the
related LIBOR and
swap forward rate for each cash flow.
The
Corporation
considers
a
credit
spread
for
those
derivative
instruments
that
are
not
secured.
The
cumulative
mark-to-market
effect of credit risk in the valuation of derivative instruments
in 2021, 2020 and 2019 was immaterial.
Assets and liabilities measured at fair value on a recurring basis are summarized
below as of December 31, 2021 and 2020:
As of December 31, 2021
As of December 31, 2020
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:
U.S. Treasury securities
$
$
$
$
$
$
$
$
Noncallable U.S. agencies debt securities
Callable U.S. agencies debt securities and MBS
Puerto Rico government obligations
Private label MBS
Other investments
Equity securities
Derivatives, included in assets:
Interest rate swap agreements
Purchased interest rate cap agreements
Forward contracts
Interest rate lock commitments
Forward loan sales commitments
Liabilities:
Derivatives, included in liabilities:
Interest rate swap agreements
Written interest rate cap agreements
Forward contracts
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
249
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 years
ended December
31, 2021,
2020,
and 2019:
2021
2020
2019
Level 3 Instruments Only
Securities Available
for Sale
(1)
Securities Available
for Sale
(1)
Securities Available
for Sale
(1)
(In thousands)
Beginning balance
$
$
$
Total gain (losses) (realized/unrealized):
Included in other comprehensive income
Included in earnings
(
1,641
)
(
497
)
BSPR securities acquired
Purchases
Principal repayments and amortization
(
3,310
)
(
3,525
)
(
2,865
)
Ending balance
$
$
$
___________________
(1)
Amounts mostly related to private label MBS.
The tables below present qualitative information for significant assets measured
at fair value on a recurring basis using
significant unobservable inputs (Level 3) as of December 31, 2021 and 2020:
December 31, 2021
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
(Dollars in thousands)
Minimum
Maximum
Investment securities available-for-sale:
$
Discounted cash flows
Discount rate
Prepayment rate
Projected Cumulative Loss Rate
$
Discounted cash flows
Discount rate
Projected Cumulative Loss Rate
December 31, 2020
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
(Dollars in thousands)
Minimum
Maximum
Investment securities available-for-sale:
$
Discounted cash flows
Discount rate
Prepayment rate
Projected Cumulative Loss Rate
$
Discounted cash flows
Discount rate
Projected Cumulative Loss Rate
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
250
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. The Corporation modeled meaningful and possible
shifts of each input 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
loss rate
of the
underlying
residential
mortgage
loans that
collateralize
these obligations,
which
are guaranteed
by the
PRHFA.
A significant
increase (decrease) in
the assumed rate
would lead to
a (lower) higher
fair value estimate.
The fair value
of these bonds
was based on
a discounted
cash flow
methodology that
considers the
structure and
terms of
the underlying
collateral. The
Corporation utilizes
PDs
and
LGDs
that
consider,
among
other
things,
historical
payment
performance,
loan-to
value
attributes,
and
relevant
current
and
forward-looking
macroeconomic
variables, such
as regional
unemployment
rates, the
housing price
index, and
expected recovery
of
the PRHFA
guarantee. Under this approach,
all future cash flows (interest and
principal) from the underlying
collateral loans, adjusted
by prepayments and the
PDs and LGDs derived from
the above-described methodology,
are discounted at the internal
rate of return as
of the reporting date and compared to the amortized cost.
The table below summarizes changes in unrealized gains and losses recorded in
earnings for the years ended December 31, 2021,
2020 and 2019 for Level 3 assets and liabilities that were still held at the end of each
year:
Changes in Unrealized Losses
Year Ended
December 31,
2021
2020
2019
Level 3 Instruments Only
Securities Available
for Sale
Securities Available
for Sale
Securities Available
for Sale
(In thousands)
Changes in unrealized losses relating to assets
still held at reporting date:
OTTI on available-for-sale investment
securities (credit component)
(1)
$
$
$
(
497
)
Provision for credit losses - benefit (expense)
(2)
(
1,641
)
Total
$
$
(
1,641
)
$
(
497
)
(1)
For years 2021 and
2020, credit-related impairment
recognized in earnings
is classified as
provision for credit losses
due to the Corporation’s
adoption of CECL
on January 1,
2020. For
more information, see Note 1 – “Nature of Business and
Summary Significant of Accounting Policies,” above.
(2)
Prior to the Corporation’s
adoption of CECL on
January 1, 2020, the
provision for credit losses
from debt securities was
not applicable and therefore
no amount is presented
for the prior
period. For more information, see Note 1 – “Nature of Business
and Summary of Significant Accounting Policies,” above.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
251
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
December 31,
2021,
the Corporation
recorded losses
or valuation
adjustments for
assets recognized
at fair
value on
a non-
recurring basis as shown in the following table:
Carrying value as of December 31, 2021
Losses recorded for the Year
Ended
December 31, 2021
Level 1
Level 2
Level 3
(In thousands)
Loans receivable
(1)
$
$
$
$
(
2,959
)
OREO
(
403
)
(1)
Consists mainly of collateral dependent
commercial and construction loans.
The Corporation generally measured losses
on the fair value of the
collateral. The Corporation derived
the fair
values
from
external
appraisals
that
took
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 Corporation
derived the
fair values
from appraisals
that took
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.
As of December 31,
2020, the Corporation recorded losses or valuation adjustments for assets recognized
at fair value on a non-
recurring basis as shown in the following table:
Carrying value as of December 31, 2020
Losses recorded for the Year
Ended
December 31, 2020
Level 1
Level 2
Level 3
(In thousands)
Loans receivable
(1)
$
$
$
$
(
5,675
)
OREO
(2)
(
1,970
)
(1)
Consists mainly
of collateral
dependent commercial
and construction
loans.
The Corporation
generally measured
losses on
the fair value
of the
collateral. The
Corporation derived
the fair
values from external appraisals that took 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 Corporation
derived
the fair
values from
appraisals
that took
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
252
As of December 31, 2019, the Corporation recorded losses or valuation
adjustments for assets recognized at fair value on a
nonrecurring basis as shown in the following table:
Carrying value as of December 31, 2019
Losses recorded for the Year
Ended
December 31, 2019
Level 1
Level 2
Level 3
(In thousands)
Loans receivable
(1)
$
$
$
$
(
18,013
)
OREO
(2)
(
6,572
)
(1)
Consists mainly of collateral dependent
commercial and construction loans.
The Corporation generally measured losses
on the fair value of
the collateral. The Corporation
derived the fair
values
from
external
appraisals
that
took
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 Corporation
derived the
fair values
from appraisals
that took
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.
Qualitative information regarding the fair value measurements for Level 3 financial
instruments as of December 31, 2021 are as
follows:
December 31, 2021
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
The following tables present the carrying value, estimated fair value and estimated
fair value level of the hierarchy of
financial instruments as of December 31, 2021 and 2020:
Total Carrying
Amount in Statement
of Financial Condition
as of December 31,
2021
Fair Value Estimate
as of December 31,
2021
Level 1
Level 2
Level 3
(In thousands)
Assets:
Cash and due from banks and money
$
$
$
$
$
Investment securities available
Investment securities held to maturity (amortized
cost)
Less: allowance for credit losses on
(
8,571
)
Investment securities held to maturity, net of allowance
$
Equity securities (fair value)
Loans held for sale (lower of cost or market)
Loans, held for investment (amortized cost)
Less: allowance for credit losses for loans
and finance leases
(
269,030
)
Loans held for investment, net of allowance
$
Derivatives, included in assets (fair value)
Liabilities:
Deposits
(amortized cost)
$
$
$
$
$
Securities sold under agreements to
Advances from FHLB (amortized cost)
Other borrowings (amortized cost)
Derivatives, included in liabilities (fair
value)
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
253
Total Carrying
Amount in
Statement of Financial
Condition
as of December 31,
2020
Fair Value
Estimate as of
December 31, 2020
Level 1
Level 2
Level 3
(In thousands)
Assets:
Cash and due from banks and money
$
$
$
$
$
Investment securities available
Investment securities held to maturity (amortized
cost)
Less: allowance for credit losses on
(
8,845
)
Investment securities held to maturity, net of allowance
$
Equity securities (fair value)
Loans held for sale (lower of cost or market)
Loans, held for investment (amortized cost)
Less: allowance for credit losses for loans
and finance leases
(
385,887
)
Loans held for investment, net of allowance
$
Derivatives, included in assets (fair value)
Liabilities:
Deposits (amortized cost)
$
$
$
$
$
Securities sold under agreements to
Advances from FHLB (amortized cost)
Other borrowings (amortized cost)
Derivatives, included in liabilities (fair
value)
The short-term nature
of certain assets and
liabilities result in their
carrying value approximating
fair value. These include
cash and
cash
due
from
banks
and
other
short-term
assets,
such
as
FHLB
stock.
Certain
assets,
the
most
significant
being
premises
and
equipment,
mortgage
servicing
rights,
core
deposit,
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
that
are
subject
to
the
disclosure
requirements
are
not
actively
traded, requiring
management to estimate
fair values.
These estimates necessarily
involve the
use of assumptions
and 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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
254
NOTE 31 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
In accordance with
ASC Topic
606, “Revenue from
Contracts with Customers” (“ASC
Topic
606”), revenues are
recognized when
control
of
promised
goods
or
services
is
transferred
to
customers
and
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
ASC
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
ASC Topic
606, the
Corporation assesses
the goods
or services
that
are
promised
within
each
contract,
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
tables summarizes
the Corporation’s
revenue, which
includes net
interest income
on financial
instruments and
non-
interest income, disaggregated by type of service and business segment for
the years ended December 31, 2021, 2020 and 2019:
Year ended December
31, 2021:
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial and
Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
(1)
$
$
$
$
$
$
$
Service charges and fees on deposit accounts
Insurance commissions
Merchant-related income
Credit and debit card fees
Other service charges and fees
Not in scope of ASC Topic
606
Total Revenue
$
$
$
$
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
255
Year ended December
31, 2020:
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial and
Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
$
$
$
$
$
$
$
Service charges and fees on deposit accounts
Insurance commissions
Merchant-related income
Credit and debit card fees
Other service charges and fees
Not in scope of Topic 606
Total Revenue
$
$
$
$
$
$
$
Year ended December
31, 2019:
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial and
Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
Net interest income
(1)
$
$
$
$
$
$
$
Service charges and fees on deposit accounts
Insurance commissions
Merchant-related income
Credit and debit card fees
Other service charges and fees
Not in scope of Topic 606 (1)
(
225
)
(
225
)
Total Revenue
$
$
$
$
$
$
$
(1)
Most of
the Corporation’s
revenue is
not within
the scope
of ASC
Topic
606. The
guidance explicitly
excludes net
interest income
from financial
assets and
liabilities, as well as other non-interest income from loans,
leases, investment securities and derivative financial instruments.
(2)
For the
year ended December
31, 2020, includes
a $
claim
related to
lost
profits caused
by Hurricanes
Irma and
Maria in
2017.
This insurance
recovery is
presented as
part of
other
non-interest income
in the
consolidated statements of income.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
256
For
2021,
2020,
and
2019,
substantially
all
of
the
Corporation’s
revenue
within
the
scope
of
ASC
Topic
606
was
related
to
performance obligations satisfied at a point in time.
The following is a discussion of the revenues under the scope of ASC 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,
insufficient
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.
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
obligations
are
satisfied
when
the policies
are
issued, and
revenue
is recognized
at
that point
in
time.
In
addition,
contingent
commission
income
may
be
considered
to
be
constrained,
as
defined
under
ASC
Topic
606.
Contingent
commission income is 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
.
For the years
ended December
31, 2021, 2020
and 2019,
the
Corporation recognized revenue
at the time that
payments were confirmed
and constraints were
released of $
and $
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 recognizes the
associated transaction price
as the entity
performs and any
constraints over
the variable consideration are resolved.
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.
Other Fees
Other fees primarily
include revenues generated
from wire transfers,
lockboxes, bank
issuances of checks
and trust fees
recognized
from
transfer
paying
agent,
retirement
plan,
and
other
trustee
activities.
Revenues
are
recognized
on
a
recurring
basis
when
the
services are rendered.
Contract Balances
A
contract
liability
is
an
entity’s
obligation
to
transfer
goods
or
services
to
a
customer
in
exchange
for
consideration
from
the
customer.
During
the
year
ended
December
31,
2019,
the Bank
entered
into
a
growth
agreement
with
an
international
card
service
association to
expand the
customer base
and enhance
product offerings.
The primary
performance obligation
of this contract
required
the
Bank
to
either
launch
a
new debit
card
product
by
2021,
or
maintain
a
ratio
of
over
% of
the
portfolio
with
the related
card
service association
by the
year ended
December 31,
2021. In
connection with
this agreement,
the Corporation
recognized a
contract
liability as the revenue is constrained until the fulfillment
of either of the above conditions.
During the year ended December 31, 2021,
the
Bank
successfully
launched
the
new
debit
card
product
required
and
recognized
revenues of
$
addition,
as
discussed
above,
during
2015,
the
Bank
entered
into
a
long-term
strategic
marketing
alliance
under
a
revenue-sharing
agreement
with another
entity to
which the
Bank sold
its merchant
contracts portfolio
and related
POS terminals.
Merchant services
are marketed
through the
Bank’s
branches
and offices
in Puerto
Rico and
the Virgin
Islands.
Under the
revenue-sharing
agreement,
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
257
FirstBank
shares
with
this
entity
revenues
generated
by
the
merchant
contracts
over
the
term
of
the
-year
agreement.
As
of
December 31, 2021
and 2020, the contract
liability amounted to approximately
$
be
recognized
over
the
remaining
term
of
the
contract.
For
the
years
ended
December
31,
2021,
2020,
and
2019,
the
Corporation
recognized
revenue and
its contract
liabilities decreased
by approximately
$
due
to
the
completion
of
performance
over
time.
There
were
no
changes
in
contract
liabilities
due
to
changes
in
transaction
price
estimates.
The following table shows the activity of contract liabilities for the years ended
December 31, 2021, 2020 and 2019:
(In thousands)
2021
2020
2019
Beginning Balance
$
$
$
Plus:
Additions
Less:
Revenue recognized
(
708
)
(
325
)
(
325
)
Ending balance
$
$
$
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
December 31, 2021
and
2020,
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 December
31, 2021.
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
258
NOTE 32 –
SUPPLEMENTAL STATEMENT OF
CASH FLOWS
INFORMATION
Supplemental
statement
of cash
flows information
is as follows
for the
indicated
periods:
Year
Ended December 31,
2021
2020
2019
(In thousands)
Cash paid for:
$
$
$
Non-cash investing and financing activities:
-
Adoption of lease accounting standard:
-
-
Acquisition (see Note 2):
$
-
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
259
NOTE 33 –
REGULATORY MATTERS, COMMITMENTS,
AND CONTINGENCIES
The
Corporation
and
FirstBank
are
each
subject
to
various
regulatory
capital
requirements
imposed
by
the
U.S.
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 classification
are also
subject
to qualitative judgments and
adjustment by the regulators with respect
to minimum capital requirements, components,
risk weightings,
and other factors. As of
December 31, 2021, and 2020,
the Corporation and FirstBank exceeded
the minimum regulatory capital
ratios
for
capital
adequacy
purposes
and
FirstBank
exceeded
the
minimum
regulatory
capital
ratios
to
be
considered
a
well
capitalized
institution under
the regulatory framework
for prompt corrective
action. As of
December 31, 2021,
management does not
believe that
any condition has changed or event has occurred that would have changed
the institution’s status.
The Corporation and FirstBank
compute risk-weighted assets
using the standardized approach
required by the U.S.
Basel III capital
rules (“Basel III rules”).
The
Basel III
rules
require
the
Corporation
to
maintain
an additional
capital
conservation
buffer
of
% to
avoid
limitations on
both (i)
capital distributions
(
e.g.
, repurchases
of capital
instruments,
dividends
and interest payments
on capital
instruments) and
(ii)
discretionary bonus payments to executive officers and
heads of major business lines.
Under
the
Basel
III
rules,
in
order
to
be
considered
adequately
capitalized
and
not
subject
to
the
above
noted
limitations,
the
Corporation
is required
to maintain:
(i) a
minimum Common
Equity Tier
1 (“CET1”)
capital to
risk-weighted assets
ratio of
at least
%, plus the
% “capital conservation
buffer,”
resulting in a
required minimum CET1
capital ratio of
at least
%; (ii) a
minimum
ratio of
total Tier
1 capital
to risk-weighted
assets of
at least
%, plus
the
% capital
conservation buffer,
resulting in
a required
minimum Tier
1 capital ratio
of
%; (iii) a minimum
ratio of total Tier
1 plus Tier
2 capital to
risk-weighted assets of
at least
%,
plus the
% capital
conservation buffer,
resulting in
a required
minimum total
capital ratio
of
%; and
(iv) a
required minimum
leverage ratio of
%, calculated as the ratio of Tier 1 capital to average on-balance
sheet (non-risk adjusted) assets.
As part
of its
response to
the impact
of COVID-19,
on March
31, 2020,
the federal
banking agencies
issued an
interim final
rule
that
provided
the
option
to
temporarily
delay
the
effects
of
CECL
on
regulatory
capital
for
two
years,
followed
by
a
three-year
transition period.
The interim final
rule provides
that, at the
election of
a qualified
banking organization,
the day 1
impact to retained
earnings plus
% of
the change
in the
ACL (excluding
PCD loans)
from January
1, 2020 to
December 31,
2021 will
be delayed
for
two years and phased-in at
% per year beginning on January
1, 2022 over a three-year period, resulting
in a total transition period of
five years. Accordingly,
as of December 31, 2021,
the capital measures of the Corporation
and the Bank excluded
$
phased-in
during
the next
three years)
that
represents
the CECL
day
1
impact
to
retained
earnings
plus
% of
the increase
in
the
allowance
for
credit
losses (as
defined
in
the
interim
final rule)
from
January
1,
2020
to December
31,
2021.
The
federal financial
regulatory agencies may
take other measures
affecting regulatory capital
to address the COVID-19
pandemic, although the
nature and
impact of such measures cannot be predicted at this time.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
260
The regulatory
capital position of
the Corporation and
the Bank as
of December 31,
2021 and 2020,
which reflects the
delay in the
effect of CECL on regulatory capital, were as follows:
Regulatory Requirements
Actual
For Capital Adequacy Purposes
To be Well
-Capitalized
Thresholds
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
As of December 31, 2021
Total Capital (to
$
$
N/A
N/A
$
$
$
CET1 Capital
$
$
N/A
N/A
$
$
$
Tier I Capital (to
$
$
N/A
N/A
$
$
$
Leverage ratio
$
$
N/A
N/A
$
$
$
As of December 31, 2020
Total Capital (to
$
$
N/A
N/A
$
$
$
CET1 Capital
$
$
N/A
N/A
$
$
$
Tier I Capital (to
$
$
N/A
N/A
$
$
$
Leverage ratio
$
$
N/A
N/A
$
$
$
The following table summarizes commitments to extend credit and standby letters of
credit as of the indicated dates:
December 31,
2021
2020
(In thousands)
Financial instruments whose contract amounts represent credit risk:
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
261
The
Corporation’s
exposure
to
credit
loss
in
the
event
of
nonperformance
by
the
other
party
to
the
financial
instrument
on
commitments to extend credit
and standby letters of credit
is represented by the contractual amount
of those instruments. Management
uses the same
credit policies
and approval process
in entering into
commitments and
conditional obligations
as it does
for on-balance
sheet instruments.
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
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.
In
general,
commercial
and
standby
letters
of
credit
are
issued
to
facilitate
foreign
and
domestic
trade
transactions.
Normally,
commercial and standby
letters of credit
are short-term commitments
used to finance
commercial contracts for
the shipment of goods.
The
collateral
for
these
letters
of
credit
includes
cash
or
available
commercial
lines
of
credit.
The
fair
value
of
commercial
and
standby letters
of credit
is based
on the
fees currently
charged for
such agreements,
which, as
of December 31,
2021 and
2020, were
not significant.
The
Corporation
obtained
from
GNMA
commitment
authority
to
issue
GNMA
MBS. Under
this
program,
for
2021,
the
Corporation sold approximately $
As of
December 31,
2021, First
BanCorp. and
its subsidiaries
were defendants
in various
legal proceedings,
claims and
other loss
contingencies
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 proceedings,
claims and other
loss contingencies utilizing
the latest
information
available. For
legal proceedings,
claims and
other loss
contingencies where
it is
both probable
that 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
legal
proceedings,
claims
and
other
loss
contingencies
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
in some
of the
current proceedings
of multiple
defendants 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
proceedings,
claims,
and
other
loss
contingencies
is
inherently
uncertain,
based
on
information
currently
available,
management
believes
that
the
final
disposition
of
the
Corporation’s
legal
proceedings,
claims
and
other
loss
contingencies,
to
the
extent
not
previously
provided
for,
will
not
have
a
material
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 material loss
in
excess
of
any
accrual)
will
be
incurred
in
connection
with
any
legal
contingencies,
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 December 31, 2021, no such disclosures were necessary.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
262
NOTE 34 – 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
December
31,
2021
and
2020,
all
derivatives
held
by
the
Corporation
were
considered
economic
undesignated
hedges.
The
Corporation
records
these
undesignated
hedges
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
contractual rate.
The value of
the interest
rate cap increases
as the
reference interest
rate rises. The
Corporation enters
into interest
rate cap agreements for protection from rising interest rates.
Forward
Contracts
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
marketplace
or
exchange
in
which
the
transaction
is
being
executed.
The forward
sales are
considered
derivative
instruments
that need
to be
marked
to market.
The Corporation
uses these
securities
to
economically
hedge
the
FHA/VA
residential
mortgage
loan
securitizations
of
the mortgage
-banking
operations.
The
Corporation
also
reports
as forward
contracts
the mandatory
mortgage
loan
sales commitments
that
it enters
into with
GSEs that
require or
permit net settlement
via a pair-off
transaction or the
payment of
a pair-off
fee. Unrealized gains
(losses) are recogni
zed
as part of mortgage banking activities in the consolidated statements of
income.
Interest
Rate
Lock
Commitments
credit to a borrower under
certain specified terms and conditions in
which the interest rate and the maxim
um amount of the loan are
set prior to funding.
Under the agreement,
the Corporation commits
to lend funds to
a potential borrower,
generally on a fixed
rate
basis, regardless of whether interest rates change in the market.
Interest rate swaps
agreement
between
two
entities
to
exchange
cash
flows
in
the
future.
The
agreements
acquired
from
BSPR
consist
of
the
Corporation offering
borrower-facing derivative
products using a
“back-to-back” structure
in which the
borrower-facing derivative
transaction is paired
with an identical, offsetting
transaction with an
approved dealer-counterparty.
By using a back-to-back
trading
structure, both
the commercial
borrower and
the Corporation
are largely
insulated from
market risk
and volatility.
The agreements
set the
dates on
which
the cash
flows will
be paid
and
the manner
in which
the cash
flows will
be calculated.
The fair
values of
these swaps
are recorded
as components
of other
assets or
accounts payable
and other
liabilities in
the Corporation’s
consolidated
statements of financial
condition. Changes in
the fair values of
interest rate swaps,
which occur due
to changes in interest
rates, are
recorded in the consolidated statements of income as a component of interest income
on loans.
To
satisfy
the
needs
of
its
customers,
the
Corporation
may
enter
into
non-hedging
transactions.
In
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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
263
The following table summarizes the notional amounts of all derivative instruments as of the
indicated dates:
Notional Amounts
(1)
As of December 31,
2021
2020
(In thousands)
Undesignated economic hedges:
Interest rate contracts:
$
$
Forward Contracts:
$
$
(1) Notional amounts are presented on a gross basis with no netting of offsetting
exposure positions.
The following table summarizes for derivative instruments their fair values and
location in the consolidated statements of financial
condition as of the indicated dates:
Asset Derivatives
Liability Derivatives
Statements of
December 31,
December 31,
December 31,
December 31,
Financial Condition
2021
2020
Statements of
2021
2020
Location
Fair Value
Fair Value
Financial Condition Location
Fair Value
Fair Value
(In thousands)
Undesignated economic hedges:
Interest rate contracts:
Other assets
$
$
Accounts payable and other liabilities
$
$
Other assets
Accounts payable and other liabilities
Other assets
Accounts payable and other liabilities
Other assets
Accounts payable and other liabilities
Forward Contracts:
Other assets
Accounts payable and other liabilities
Other assets
Accounts payable and other liabilities
$
$
$
$
The following table summarizes the effect of derivative instruments
on the consolidated statements of income for the indicated
periods:
Gain (or Loss)
Location of Unrealized Gain (Loss)
Year ended
on Derivative Recognized in
December 31,
Statements of Income
2021
2020
2019
(In thousands)
Undesignated economic hedges:
Interest income - Loans
$
$
$
Interest income - Loans
(
6
)
Mortgage Banking Activities
(
687
)
Mortgage Banking Activities
(
54
)
Mortgage Banking Activities
(
37
)
$
(
550
)
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
264
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
December 31,
2021, the
Corporation had
not entered
into any
derivative instrument
containing credit-risk-related
contingent
features.
Credit and Market Risk of Derivatives
The
Corporation
uses
derivative
instruments
to
manage
interest
rate
risk.
By
using
derivative
instruments,
the
Corporation
is
exposed to
credit and market
risk. If the
counterparty fails to
perform, credit
risk is equal
to the extent
of the Corporation’s
fair value
gain on the derivative.
When the fair value of a derivative instrument contract is positive, this generally
indicates that the counterparty
owes
the
Corporation
which,
therefore,
creates
a
credit
risk
for
the
Corporation.
When
the
fair
value
of
a
derivative
instrument
contract is
negative, the
Corporation owes
the counterparty
and, therefore,
it has
no credit risk.
The Corporation
minimizes its credit
risk in
derivative instruments
by entering
into transactions
with reputable
broker dealers
(
i.e.,
financial institutions)
that are
reviewed
periodically by
the Management Investment
and Asset Liability
Committee of
the Corporation
(the “MIALCO”)
and by the
Board of
Directors.
The
Corporation
also
has
a
policy
of
requiring
that
all
derivative
instrument
contracts
be
governed
by
an
International
Swaps
and
Derivatives
Association
Master
Agreement,
which
includes
a
provision
for
netting.
The
Corporation
has
a
policy
of
diversifying derivatives counterparties to reduce the consequences of counterparty
default.
The
Corporation
had
credit
risk
of
$
with
positive
fair
values.
The
credit
risk
does
not
consider
the
value
of
any
collateral
and
the
effects
of
legally
enforceable
master
netting agreements. There were
Market risk is
the adverse effect
that a change
in interest rates
or implied volatility
rates has on
the value of
a financial instrument.
The Corporation
manages the
market risk
associated with
interest rate
contracts by
establishing and
monitoring limits
as to
the types
and degree of risk that may be undertaken.
The
MIALCO
monitors
the
Corporation’s
derivative
activities
as
part
of
its
risk-management
oversight
of
the
Corporation’s
treasury functions.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
265
NOTE 35 – OFFSETTING OF ASSETS AND LIABILITIES
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 tables present information
about contracts subject to offsetting
provisions related to financial
assets and liabilities as well as derivative assets and liabilities, as of the indicated dates:
Offsetting of Financial Assets and Derivative Assets
As of December 31, 2021
Gross Amounts Not Offset
in the Statement of
Financial Condition
Net Amounts of
Assets Presented in
the Statement of
Financial
Condition
Gross
Amounts of
Recognized
Assets
Gross Amounts
Offset in the
Statement of
Financial
Condition
Financial
Instruments
Cash
Collateral
Net Amount
(In thousands)
Description
Derivatives
$
$
$
$
$
(
8
)
$
As of December 31, 2020
Gross Amounts Not Offset
in the Statement of
Financial Condition
Net Amounts of
Assets Presented in
the Statement of
Financial
Condition
Gross
Amounts of
Recognized
Assets
Gross Amounts
Offset in the
Statement of
Financial
Condition
Financial
Instruments
Cash
Collateral
Net Amount
(In thousands)
Description
Derivatives
$
$
$
$
$
(
89
)
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
266
Offsetting of Financial Liabilities and Derivative Liabilities
As of December 31, 2021
Gross Amounts Not Offset
in the Statement of Financial
Condition
Net Amounts of
Liabilities
Presented in the
Statement of
Financial
Condition
Gross Amounts
of Recognized
Liabilities
Gross
Amounts
Offset in the
Statement of
Financial
Condition
Financial
Instruments
Cash
Collateral
Net
Amount
(In thousands)
Description
Derivatives
$
$
$
$
(
1,170
)
$
$
Securities sold under agreements to repurchase
(
300,000
)
Total
$
$
$
$
(
301,170
)
$
$
As of December 31, 2020
Gross Amounts Not Offset
in the Statement of Financial
Condition
Net Amounts of
Liabilities
Presented in the
Statement of
Financial
Condition
Gross Amounts
of Recognized
Liabilities
Gross
Amounts
Offset in the
Statement of
Financial
Condition
Financial
Instruments
Cash
Collateral
Net
Amount
(In thousands)
Description
Derivatives
$
$
$
$
(
1,919
)
$
$
Securities sold under agreements to repurchase
(
300,000
)
Total
$
$
$
$
(
301,919
)
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
267
NOTE 36 –
SEGMENT
INFORMATION
Based upon
the Corporation’s
organizational
structure and
the information
provided to
the Chief
Executive
Officer,
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
December
31,
2021,
the
Corporation
had
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
structure
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
products,
were
also
considered in the determination of the reportable segments.
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
lends
funds
to
the
Commercial
and
Corporate
Banking,
Mortgage
Banking,
Consumer
(Retail)
Banking,
and
United
States
Operations
segments
to
finance
their
lending
activities
and
borrows
from
those
segments.
The
Consumer
(Retail)
Banking
segment
also
lends
funds to
other segments.
The interest
rates charged
or credited
by the
Treasury
and Investments
and the
Consumer (Retail)
Banking
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 consumer banking
services. The Virgin
Islands Operations segment consists of all
banking activities conducted by the
Corporation in the USVI and BVI, including commercial and consumer
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,” above.
The
Corporation
evaluates
the
performance
of
the
segments
based
on
net
interest
income,
the
provision
for
credit
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 ACL.
The following tables present information about the reportable segments for the indicated periods:
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
For the year ended December 31, 2021:
Interest income
$
$
$
$
$
$
$
Net (charge) credit for transfer of funds
(
39,565
)
(
9,767
)
(
4,214
)
Interest expense
(
28,283
)
(
23,197
)
(
12,013
)
(
1,286
)
(
64,779
)
Net interest income
Provision for credit losses - (benefit) expense
(
16,030
)
(
67,544
)
(
136
)
(
975
)
(
1,335
)
(
65,698
)
Non-interest income
Direct non-interest expenses
$
$
$
$
$
$
$
Average earnings assets
$
$
$
$
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
268
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
For the year ended December 31, 2020:
Interest income
$
$
$
$
$
$
$
Net (charge) credit for transfer of funds
(
52,018
)
(
19,663
)
(
6,164
)
Interest expense
(
38,818
)
(
26,198
)
(
23,980
)
(
3,664
)
(
92,660
)
Net interest income
Provision for credit losses - expense
Non-interest income
Direct non-interest expenses
$
$
$
$
$
$
$
Average earnings assets
$
$
$
$
$
$
$
Mortgage
Banking
Consumer (Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
(In thousands)
For the year ended December 31, 2019:
Interest income
$
$
$
$
$
$
$
Net (charge) credit for transfer of funds
(
52,178
)
(
56,958
)
(
5,016
)
Interest expense
(
38,206
)
(
37,026
)
(
29,851
)
(
3,733
)
(
108,816
)
Net interest income
Provision for credit losses - expense (benefit)
(
17,977
)
(
4,048
)
Non-interest income (loss)
(
225
)
Direct non-interest expenses
$
$
$
$
$
$
$
Average earnings assets
$
$
$
$
$
$
$
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals for the indicated
periods:
Year Ended
December 31,
2021
2020
2019
(In thousands)
Net income:
Total income for segments
$
$
$
Other operating expenses (1)
Income before income taxes
Income tax expense
$
$
$
Average assets:
Total average earning assets for segments
$
$
$
Average non-earning assets
$
$
$
(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.
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
269
The following table presents revenues (interest income plus non-interest income) and selected balance sheet data by geography based on
the location in which the transaction was originated as of indicated dates:
2021
2020
2019
(In thousands)
Revenues:
$
$
$
$
$
$
Selected Balance Sheet Information:
Total assets:
$
$
$
Loans:
$
$
$
Deposits:
$
$
$
(1)
For 2021, 2020, and 2019, includes $
(2)
For 2021, 2020, and 2019 includes $
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
270
NOTE 37-
FIRST BANCORP.
(HOLDING
COMPANY ONLY) FINANCIAL
INFORMATION
The following
condensed financial information
presents the financial
position of
First BanCorp.
at the holding
company level only
as of December 31, 2021
and 2020, and the
results of its operations
and cash flows for
the years ended December
31, 2021, 2020, and
2019:
Statements of Financial Condition
As of December 31,
2021
2020
(In thousands)
Assets
Cash and due from banks
$
$
Money market investments
Other investment securities
Investment in First Bank Puerto Rico, at equity
Investment in First Bank Insurance Agency,
at equity
Investment in FBP Statutory Trust I
Investment in FBP Statutory Trust II
Other assets
$
$
Liabilities and Stockholders' Equity
Liabilities:
Other borrowings
$
$
Accounts payable and other liabilities
Stockholders' equity
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
271
Statements of Income
Year
Ended December 31,
2021
2020
2019
(In thousands)
Income
$
$
$
Expense
Gain on early extinguishment of debt
Income before income taxes and equity
Income tax expense
Equity in undistributed earnings of subsidiaries
Net income
$
$
$
Other comprehensive (loss) income, net of tax
(
139,454
)
Comprehensive income
$
$
$
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS-(Continued)
272
Statements of Cash Flows
Year Ended December 31,
2021
2020
2019
(In thousands)
Cash flows from operating activities:
Net income
$
$
$
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation
Equity in undistributed earnings of subsidiaries
(
162,678
)
(
59,843
)
(
138,925
)
Gain on early extinguishment of debt
(
94
)
Net decrease (increase) in other assets
(
1,514
)
Net increase (decrease) in other liabilities
(
459
)
Net cash provided by operating activities
Cash flows from investing activities:
Return of capital from wholly-owned subsidiaries
(1)
Net cash provided by investing activities
Cash flows from financing activities:
Repurchase of common stock
(
216,522
)
(
206
)
(
1,959
)
Repayment of junior subordinated debentures
(
282
)
Dividends paid on common stock
(
65,021
)
(
43,416
)
(
30,356
)
Dividends paid on preferred stock
(
2,453
)
(
2,676
)
(
2,676
)
Redemption of preferred stock - Series A through E
(
36,104
)
(
320,100
)
(
46,580
)
(
34,991
)
Net increase (decrease) in cash and cash equivalents
(
5,986
)
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of year
$
$
$
Cash and cash equivalents include:
Cash and due from banks
$
$
$
Money market instruments
$
$
$
(1)
During 2021 First Bank of Puerto Rico, a wholly-owned subsidiary of First BanCorp., redeemed $
NOTE 38 –
SUBSEQUENT
EVENTS
subsequent to December 31, 2021; management has determined
that
there
were
no
events occurring
in
this
period that
require disclosure
in
or
adjustment to
the
accompanying financial statements.
273
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosures
Nothing to report.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
First
BanCorp.’s
management,
including
its
Chief
Executive
Officer
and
Chief
Financial
Officer,
evaluated
the
effectiveness
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 the
end of the
period covered by
this Annual Report
on Form 10-K.
Based on this evaluation
as of the period
covered by this Form
10-K,
our
CEO
and
CFO
concluded
that
the
Corporation’s
disclosure
controls
and
procedures
were
effective
and
provide
reasonable
assurance
that the
information
required to
be disclosed
by the
Corporation in
reports that
the Corporation
files or
submits under
the
Exchange
Act
is
recorded,
processed,
summarized
and
reported
within
the
time
periods
specified
in
SEC
rules
and
forms
and
is
accumulated
and
reported
to
the
Corporation’s
management,
including
the
CEO and
CFO, as
appropriate
to
allow
timely
decisions
regarding required disclosure.
Management’s Report on Internal Control
over Financial Reporting
Our management’s
report on Internal
Control over
Financial Reporting
is included
in Item 8
and incorporated
herein by
reference.
Management
has
conducted
an
assessment
of
the
Corporation’s
internal
control
over
financial
reporting
as
of
December
31,
2021
based
on
the
criteria
established
in
Internal
Control
–
Integrated
Framework
(2013
)
issued
by
the
Committee
of
Sponsoring
Organizations
of
the
Treadway
Commission
(COSO).
Based
upon
that
assessment,
management
concluded
that
the
Corporation’s
internal control over financial reporting was effective
as of December 31, 2021.
The effectiveness of the Corporation’s
internal control over financial reporting as of December
31, 2021 has been audited by Crowe
LLP,
an independent registered public accounting firm, as stated in their report
included in Item 8 of this Annual Report Form 10-K.
Changes in Internal Control over Financial Reporting
There
have
been
no
changes
to
the
Corporation’s
internal
control
over
financial
reporting
during
our
most
recent
quarter
ended
December 31,
2021 that
have materially
affected, or
are reasonably likely
to materially
affect, the
Corporation’s
internal control
over
financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
274
PART
III
Item 10. Directors, Executive Officers and Corporate Governance
Information
in response
to this
item is
incorporated
herein by
reference from
the sections
entitled “Information
with Respect
to
Nominees Standing
for Election as
Directors and
with respect to
Executive Officers
of the Corporation,”
“Corporate Governance
and
Related Matters,” “Delinquent
Section 16(A)
Reports” and “Audit
Committee Report”
contained in First
BanCorp.’s
definitive Proxy
Statement
for
use
in
connection
with
its
2022
Annual
Meeting
of
Stockholders
(the
“Proxy
Statement”)
to
be
filed
with
the
SEC
within 120 days of the close of First BanCorp.’s
2021
fiscal year.
Item 11. Executive Compensation.
Interlocks
and
Insider
Participation,”
“Compensation
of
Directors,”
“Compensation
Discussion
and
Analysis,”
“Executive
Compensation
Disclosure”
and
“Compensation
Committee
Report”
in
First
BanCorp.’s
Proxy
Statement
to
be
filed
with
the
SEC
within 120 days of the close of First BanCorp.’s
2021 fiscal year.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
equity compensation plans as of December 31, 2021:
(c)
(a)
(b)
Number of Securities
Remaining Available
for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
warrants and rights
Weighted Average
Exercise Price of
Outstanding Options,
warrants and rights
Plan category
Equity compensation plans, approved by stockholders
814,899
(1)
$
-
4,308,921
(2)
Equity compensation plans
not approved by stockholders
N/A
N/A
N/A
Total
814,899
$
-
4,308,921
(1)
Amount represents
unvested performance-based units
granted to
executives, with
each unit
representing one
share of
the Corporation's
common stock.
Performance
shares
will vest
on the
achievement of
a
pre-established performance
target
goal at
the
end of
a
three-year performance
period.
Refer to
Note 22
- "Stock-Based
Compensation" of the Notes to Consolidated Financial Statements
for more information on performance units.
(2)
April 29, 2008. Most recently,
on May 24, 2016,
the Omnibus Plan was amended
to, among other things, increase
the number of shares of
common stock reserved for
issuance under
the Omnibus
Plan and
extend the
term of
the Omnibus
Plan to
May 24,
2026. The
Omnibus Plan
provides for
equity-based compensation incentives
through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and other stock-based awards. As amended, this
plan provides
for the
issuance of
up to
14,169,807 shares
of
common stock,
subject to
adjustments for
stock splits,
reorganization and
other similar
events. As
of
December 31, 2021, 4,308,921 shares of Common Stock were
available for future issuance under the Omnibus Plan.
Additional information in response to this item is incorporated by reference
from the section entitled “Security Ownership of
Certain Beneficial Owners and Management” in First BanCorp.’s
Proxy Statement to be filed with the SEC within 120 days of the
close of First BanCorp.’s 2021
fiscal year.
Item 13. Certain Relationships and Related Transactions,
and Director Independence
Person Transactions” and “Corporate
Governance and Related Matters” in First BanCorp.’s
Proxy Statement to be filed with the SEC
within 120 days of the close of First BanCorp.’s
2021 fiscal year.
275
Item 14. Principal Accountant Fees and Services.
Audit Fees
Information
in
response
to
this
item
is
incorporated
herein
by
reference
from
the
section
entitled
“Audit
Fees”
and
“Audit
Committee
Report”
in First
BanCorp.’s
Proxy Statement
to be
filed
with the
SEC within
120
days of
the close
of First
BanCorp.’s
2021 fiscal year.
PART
IV
Item 15. Exhibits and Financial Statement Schedules
(1)
Financial Statements.
The
following
consolidated
financial
statements
of
First
BanCorp.,
together
with
the
reports
thereon
of
First
BanCorp.’s
independent registered public
accounting firm, Crowe
LLP (PCAOB ID No.
173),
dated March 1, 202
2, are included
in Item 8 of
this
Annual Report on Form 10-K:
– Report of Crowe LLP,
Independent Registered Public Accounting Firm.
–
Attestation Report of Crowe LLP,
Independent Registered Public Accounting Firm on Internal Control over
Financial
Reporting.
–Consolidated Statements of Financial Condition as of December
31, 2021 and 2020.
–Consolidated Statements of Income for Each of the Three Years
in the Period Ended December 31, 2021.
– Consolidated Statements of Comprehensive Income for Each
of the Three Years
in the Period Ended December 31, 2021.
– Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended December 31, 2021.
– Consolidated Statements of Changes in Stockholders’ Equity for
Each of the Three Years
in the Period Ended December 31,
2021.
– Notes to the Consolidated Financial Statements.
(2) Financial statement schedules.
All financial schedules have been omitted because they are not applicable or
the required information is shown in the financial
statements or notes thereto.
herein by reference.
Item 16. Form 10-K Summary
Not applicable.
276
EXHIBIT INDEX
Exhibit
No.
Description
2.1
(1)
2.2
3.1
3.2
4.1
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
Offer Letter between First BanCorp and Patricia M. Eaves incorporated
by reference from Exhibit 10.1 of the Form 8-K
filed on April 1, 2021.
14.1
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
Inline XBRL Instance Document, filed herewith. The
instance document does not appear in the interactive data file
because
its XBRL tags are embedded within the inline XBRL
document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document, filed herewith
277
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document, filed herewith
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith
101.DEF
Inline XBRL Taxonomy Extension Definitions Linkbase Document, filed herewith
104
The cover page of First BanCorp. Annual Report on Form
10-K for the year ended December 31, 2021, formatted in
Inline
XBRL (included within the Exhibit 101 attachments)
_____________________________
(1) Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant will furnish a copy of any omitted schedule as a supplement to the SEC or its staff upon request.
*Management contract or compensatory plan or agreement.
278
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.
/s/ Aurelio Alemán
Date: 3/1/2022
Aurelio Alemán
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/s/ Aurelio Alemán
Date: 3/1/2022
Aurelio Alemán
President, Chief Executive Officer and Director
/s/ Orlando Berges
Date: 3/1/2022
Orlando Berges, CPA
Executive Vice President
and Chief Financial Officer
/s/ Roberto R. Herencia
Date: 3/1/2022
Roberto R. Herencia,
Director and Chairman of the Board
/s/ Patricia M. Eaves
Date: 3/1/2022
Patricia M. Eaves,
Director
/s/ Luz A. Crespo
Date: 3/1/2022
Luz A. Crespo,
Director
/s/ Juan Acosta-Reboyras
Date: 3/1/2022
Juan Acosta-Reboyras,
Director
/s/ John A. Heffern
Date: 3/1/2022
John A. Heffern,
Director
/s/ Daniel E. Frye
Date: 3/1/2022
Daniel E. Frye,
Director
/s/ Tracey Dedrick
Date: 3/1/2022
Tracey Dedrick,
Director
/s/ Felix Villamil
Date: 3/1/2022
Felix Villamil,
Director
/s/ Said Ortiz
Date: 3/1/2022
Said Ortiz, CPA
Senior Vice President and
Chief Accounting Officer
TABLE OF CONTENTS
Part IPart IIItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Nature Of Business and Summary Of Significant Accounting PoliciesNote 2 Business CombinationNote 3 Restrictions on Cash and Due From BanksNote 4 Money Market InvestmentsNote 5 Investment SecuritiesNote 6 Equity SecuritiesNote 7 Interest and Dividend Income on Investment Securities, Money Market InvestmentsNote 8 Loans Held For InvestmentNote 9 Allowance For Credit Losses For Loans and Finance LeasesNote 10 Loans Held For Sale The Corporation S Loans Held-for-sale Portfolio As Of The Dates Indicated Was Composed Of:Note 10 Loans Held For SaleNote 11 Other Real Estate OwnedNote 12 Related -party TransactionsNote 13 Premises and Equipment Premises and Equipment Comprise:Note 13 Premises and EquipmentNote 14 Goodwill and Other IntangiblesNote 15 Non-consolidated Variable Interest Entities ( Vie ) and Servicing AssetsNote 16 Deposits and Related InterestNote 17 Loans PayableNote 18 Securities Sold Under Agreements To RepurchaseNote 19 Advances From The Federal Home Loan Bank (fhlb)Note 20 Other Borrowings Other Borrowings, As Of The Indicated Dates, Consisted Of:Note 20 Other BorrowingsNote 21 Earnings Per Common ShareNote 22 Stock-based CompensationNote 23 Stockholders EquityNote 24 Other Comprehensive (loss) IncomeNote 25 Employee Benefit PlansNote 26 Other Non-interest ExpensesNote 27 Other Non-interest IncomeNote 28 Income TaxesNote 29 LeasesNote 30 Fair ValueNote 31 Revenue From Contracts with CustomersNote 32 Supplemental Statement Of Cash Flows InformationNote 33 Regulatory Matters, Commitments, and ContingenciesNote 34 Derivative Instruments and Hedging ActivitiesNote 35 Offsetting Of Assets and LiabilitiesNote 36 Segment InformationNote 37- First Bancorp. (holding Company Only) Financial InformationNote 38 Subsequent EventsItem 9. Changes in and Disagreements with Accountants on Accounting andItem 9A. Controls and ProceduresItem 9B. Other InformationItem 9C. Disclosure Regarding Foreign Jurisdictions That Prevent InspectionsPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesItem 16. Form 10-k Summary