UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION
Washington, DCD.C. 20549
____________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20182019
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
COMMISSION FILE NUMBER 001-14793
First BanCorp.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Puerto Rico | 66-0561882 | |
(State or other jurisdiction of incorporation or organization) | (
| |
1519 Ponce de León Avenue, Stop 23 Santurce, Puerto Rico (Address of principal executive offices) | 00908 (Zip Code) | |
(787) 729-8200 | ||
(Registrant’s telephone number, including area code) | ||
Not applicable (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act: | ||||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock ($0.10 par value) | FBP | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically 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).
Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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☐ | |
Non-accelerated filer ☐ | Smaller reporting company ☐ | |
Emerging growth company ☐ |
Large accelerated filer ☑ Accelerated filer ☐
Non-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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock: 217,240,844217,359,337 shares outstanding as of October 31, 2018.November 1, 2019.
FIRST BANCORP. INDEX PAGE |
INDEX PAGE
PART I FINANCIAL INFORMATION | PAGE |
Item 1. Financial Statements: | |
Consolidated Statements of Financial Condition (Unaudited) as of September 30, |
|
Consolidated Statements of Income |
|
Consolidated Statements of Comprehensive Income |
|
Consolidated Statements of Cash Flows (Unaudited) – Nine-month periods ended September 30, |
|
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – |
|
Notes to Consolidated Financial Statements (Unaudited) |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
|
Item 4. Controls and Procedures |
|
PART II. OTHER INFORMATION | |
Item 1. Legal Proceedings | 167 |
Item 1A. Risk Factors | 167 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
|
Item 3. Defaults Upon Senior Securities |
|
Item 4. Mine Safety Disclosures |
|
Item 5. Other Information |
|
Item 6. Exhibits |
|
SIGNATURES | |
2
Forward Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the safe harbor created by such sections. When used in this Form 10-Q or future filings by First BanCorp. (the “Corporation,” “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 with the approval of an authorized executive officer, the words or phrases “would,” “intends,” “will, likely result,” “expect,” “should,” “anticipate,” “look forward,” “believes,” and other terms of similar meaning or import in connection with any discussion of future operating, financial or other performance are meant to identify “forward-looking statements.”
First BanCorp. wishes to cautioncautions readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and to advise readers that these forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, estimates, and assumptions by us that are difficult to predict. Various factors, some of which are beyond our control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements.
Factors that could cause actual results to differ from those expressed in the Corporation’s forward-looking statements include, but are not limited to, risks described or referenced below in Part II, Item 1A., “Risk Factors”, below and in Part I, Item 1A., “Risk Factors,” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report on Form 10-K”) and the following:
·changesrisks, uncertainties and other factors related to the proposed acquisition of Banco Santander Puerto Rico (“BSPR”), including the ability to obtain regulatory approvals and meet other closing conditions to the acquisition on a timely basis; the risk that deposit attrition, customer loss and/or revenue loss prior to or following the acquisition may exceed expectations; the risk that significant costs, expenses, and resources associated with or in economicfunding the acquisition may be higher than expected; the ability to successfully complete the integration of systems, procedures, and business conditions, including those caused by pastpersonnel of BSPR into FirstBank Puerto Rico (“FirstBank” or future natural disasters,the “Bank”) to make the transaction economically successful; and the risk that directlythe cost savings and any other synergies from the acquisition may not be fully realized or indirectly affect the financial health of the Corporation’s customer base in the geographic areas we serve;make take longer to realize than expected;
·the actual pace and magnitude of economic recovery in the Corporation’s service areas that were affected by Hurricanes Maria and Irma during 2017 compared to management’s current views on the economic recovery;
·uncertainty as to the ultimate outcomes of actions taken, or those that may be taken, by the Puerto Rico government, or the oversight board established by the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) to address the Commonwealth of Puerto Rico’s financial problems, including the filing of a form of bankruptcy under Title III of PROMESA, which provides a courtcourt-supervised debt restructuring process similar to U.S. bankruptcy protection, andthe designation by the PROMESA oversight board of Puerto Rico municipalities as instrumentalities covered under PROMESA, the effects of measures included in the Puerto Rico government fiscal plan, or any revisions to it, on our clients and loan portfolios;portfolios, and any potential impact from future economic or political developments in Puerto Rico;
·uncertainty about whetherchanges in general economic and business conditions, including those caused by past or future natural disasters, that directly or indirectly affect the Federal Reserve Bankfinancial health of New York ( the “New York FED” or “Federal Reserve”) will continue to provide approvals for receiving dividends from the Corporation’s subsidiary, FirstBank Puerto Rico (“FirstBank” orcustomer base in the “Bank”), or making paymentsgeographic areas we serve;
the actual pace and magnitude of dividends on non-cumulative perpetual preferred stock, or payments on trust preferred securities or subordinated debt, incurring, increasing or guaranteeing debt or repurchasing any capital securities, despiteeconomic recovery in the consentsCorporation’s service areas that have enabled the Corporationwere affected by Hurricanes Irma and Maria during 2017 compared to receive quarterly dividends from FirstBank since the second quarter of 2016, to pay quarterly interest paymentsmanagement’s current views on the Corporation’s subordinated debentures associated with its trust preferred securities sinceeconomic recovery;
uncertainty as to the second quartertiming of 2016, andthe receipt of disaster relief funds allocated to pay monthly dividends on the non-cumulative perpetual preferred stock since December 2016;Puerto Rico;
·a decrease in demand for the Corporation’s products and services, andresulting in lower revenues and earnings because of the continued economic recession in Puerto Rico;
·uncertainty as to the availability of certain funding sources, such as brokered certificates of depositdeposits (“brokered CDs”);
·the Corporation’s reliance on brokered CDs to fund operations and provide liquidity;
·the risk of not being able to fulfill the Corporation’s cash obligations or resume paying dividends to the Corporation’s common stockholders in the future due to the Corporation’s need to receive regulatory approvals to declare or pay any dividends and to take dividends or any other form of payment representing a reduction in capital from FirstBank or FirstBank’s failure to generate sufficient cash flow to make a dividend payment to the Corporation;
·the weakness of the real estate markets and of the consumer and commercial sectors and their impact on the credit quality of the Corporation’s loans and other assets, which have contributed and may continue to contribute to, among other things, highhigher than targeted levels of non-performing assets, charge-offs and provisions for loan and lease losses, and may subject the Corporation to further risk from loan defaults and foreclosures;
·the estimated or actual impact of changes in accounting standards or assumptions in applying those standards, including the new credit loss accounting standard that will be effective in 2020;
3
the ability of FirstBank to realize the benefits of its net deferred tax assets;
3the ability of FirstBank to generate sufficient cash flow to make dividend payments to the Corporation;
·adverse changes in general economic conditions in Puerto Rico, the United States (“U.S.”), the U.S. Virgin Islands (the “USVI”(“USVI”), and the British Virgin Islands (the “BVI”(“BVI”), including the interest rate environment, market liquidity, housing absorption rates, real estate prices, and disruptions in the U.S. capital markets, which may reduce interest margins, affect funding sources and demand for all of the Corporation’s products and services, and may reduce the Corporation’s revenues and earnings and the value of the Corporation’s assets;
·uncertainty related to the likely discontinuation of the London Interbank Offered Rate at the end of 2021;
an adverse change in the Corporation’s ability to attract new clients and retain existing ones;
·the risk that additional portions of the unrealized losses in the Corporation’s investment portfolio are determined to be other-than-temporary, including additional impairments on the Corporation’s remaining $8.1$8.3 million exposure to the Puerto Rico government’s debt securities held as part of the available-for-sale debt securities; securities portfolio;
·uncertainty about legislative, tax or regulatory changes forthat affect financial services companies in Puerto Rico, the U.S., the USVI and the BVI, which could affect the Corporation’s financial condition or performance and could cause the Corporation’s actual results for future periods to differ materially from prior results and anticipated or projected results;
·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 FED,(the “New York 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;
4
the Corporation’s ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, a failure of which could disrupt our business and 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;
·the impact on the Corporation’s results of operations and financial condition of business acquisitions, such as the pending acquisition of BSPR, and dispositions;
·a need to recognize impairments on the Corporation’s financial instruments, goodwill orand other intangible assets relating to business acquisitions;
·the effect of changes in the interest rate scenario on the Corporation’s businesses, business practices and results of operationsoperations;
the risk that the impact of a potential higher interest rate environment;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.
The Corporation does not undertake, and specifically disclaims any obligation, to update any “forward-looking statements” to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by the federal securities laws.
Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017,2018, as well as Part II, Item 1A. Risk1A, “Risk Factors,” in this Quarterly Report on Form 10-Q, for a discussion of suchthese factors and certain risks and uncertainties to which the Corporation is subject.
4
5 |
| |
| ||
|
| September 30, 2018 |
| December 31, 2017 | ||
(In thousands, except for share information) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
Cash and due from banks | $ | 559,182 |
| $ | 705,980 |
Money market investments: |
|
|
|
|
|
Time deposits with other financial institutions |
| 300 |
|
| 3,126 |
Other short-term investments |
| 97,290 |
|
| 7,289 |
Total money market investments |
| 97,590 |
|
| 10,415 |
|
|
|
|
|
|
Investment securities available for sale, at fair value: |
|
|
|
|
|
Securities pledged with creditors’ right to repledge |
| 130,627 |
|
| 350,123 |
Other investment securities available for sale |
| 1,880,594 |
|
| 1,540,893 |
Total investment securities available for sale |
| 2,011,221 |
|
| 1,891,016 |
Investment securities held to maturity, at amortized cost |
|
|
|
|
|
(fair value 2018 - $131,703; 2017- $131,032) |
| 144,799 |
|
| 150,627 |
Equity securities |
| 42,274 |
|
| 43,119 |
Loans, net of allowance for loan and lease losses of $200,563 |
|
|
|
|
|
(2017 - $231,843) |
| 8,516,390 |
|
| 8,618,633 |
Loans held for sale, at lower of cost or market |
| 65,739 |
|
| 32,980 |
Total loans, net |
| 8,582,129 |
|
| 8,651,613 |
|
|
|
|
|
|
Premises and equipment, net |
| 147,154 |
|
| 141,895 |
Other real estate owned (OREO) |
| 135,218 |
|
| 147,940 |
Accrued interest receivable on loans and investments |
| 47,327 |
|
| 57,172 |
Other assets |
| 442,806 |
|
| 461,491 |
Total assets | $ | 12,209,700 |
| $ | 12,261,268 |
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
Non-interest-bearing deposits | $ | 2,321,050 |
| $ | 1,833,665 |
Interest-bearing deposits |
| 6,827,193 |
|
| 7,188,966 |
Total deposits |
| 9,148,243 |
|
| 9,022,631 |
|
|
|
|
|
|
Securities sold under agreements to repurchase |
| 100,000 |
|
| 300,000 |
Advances from the Federal Home Loan Bank (FHLB) |
| 690,000 |
|
| 715,000 |
Other borrowings |
| 184,150 |
|
| 208,635 |
Accounts payable and other liabilities |
| 159,892 |
|
| 145,905 |
Total liabilities |
| 10,282,285 |
|
| 10,392,171 |
|
|
|
|
|
|
STOCKHOLDERSʼ EQUITY |
|
|
|
|
|
Preferred stock, authorized, 50,000,000 shares: |
|
|
|
|
|
Non-cumulative Perpetual Monthly Income Preferred Stock: 22,004,000 |
|
|
|
|
|
shares issued, 1,444,146 shares outstanding, aggregate liquidation value of $36,104 |
| 36,104 |
|
| 36,104 |
Common stock, $0.10 par value, authorized, 2,000,000,000 shares; |
|
|
|
|
|
221,789,509 shares issued (2017 - 220,382,343 shares issued) |
| 22,179 |
|
| 22,038 |
Less: Treasury stock (at par value) |
| (455) |
|
| (410) |
Common stock outstanding, 217,240,844 shares outstanding (2017 - 216,278,040 |
|
|
|
|
|
shares outstanding) |
| 21,724 |
|
| 21,628 |
Additional paid-in capital |
| 938,776 |
|
| 936,772 |
Retained earnings, includes legal surplus reserve of $59,693 |
| 993,698 |
|
| 895,208 |
Accumulated other comprehensive loss, net of tax of $7,752 as of each September 30, 2018 |
|
|
|
|
|
and December 31, 2017 |
| (62,887) |
|
| (20,615) |
Total stockholdersʼ equity |
| 1,927,415 |
|
| 1,869,097 |
Total liabilities and stockholdersʼ equity | $ | 12,209,700 |
| $ | 12,261,268 |
|
|
|
|
|
|
The accompanying notes are an integral part of these statements. |
5FIRST BANCORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
| September 30, 2019 |
| December 31, 2018 | ||
(In thousands, except for share information) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
Cash and due from banks | $ | 878,206 |
| $ | 578,613 |
Money market investments: |
|
|
|
|
|
Time deposits with other financial institutions |
| 300 |
|
| 300 |
Other short-term investments |
| 97,431 |
|
| 7,290 |
Total money market investments |
| 97,731 |
|
| 7,590 |
|
|
|
|
|
|
Investment securities available for sale, at fair value: |
|
|
|
|
|
Securities pledged with creditors’ rights to repledge |
| 131,963 |
|
| 182,735 |
Other investment securities available for sale |
| 1,604,600 |
|
| 1,759,833 |
Total investment securities available for sale |
| 1,736,563 |
|
| 1,942,568 |
Investment securities held to maturity, at amortized cost |
|
|
|
|
|
(fair value 2019 - $115,443; 2018 - $125,658) |
| 138,676 |
|
| 144,815 |
Equity securities |
| 45,228 |
|
| 44,530 |
Loans, net of allowance for loan and lease losses of $165,575 |
|
|
|
|
|
(2018 - $196,362) |
| 8,802,845 |
|
| 8,661,761 |
Loans held for sale, at lower of cost or market |
| 42,470 |
|
| 43,186 |
Total loans, net |
| 8,845,315 |
|
| 8,704,947 |
|
|
|
|
|
|
Premises and equipment, net |
| 151,185 |
|
| 147,814 |
Other real estate owned (“OREO”) |
| 103,033 |
|
| 131,402 |
Accrued interest receivable on loans and investments |
| 47,122 |
|
| 50,365 |
Deferred tax asset, net |
| 273,845 |
|
| 319,851 |
Other assets |
| 213,809 |
|
| 171,066 |
Total assets | $ | 12,530,713 |
| $ | 12,243,561 |
LIABILITIES |
|
|
|
|
|
Non-interest-bearing deposits | $ | 2,270,250 |
| $ | 2,395,481 |
Interest-bearing deposits |
| 6,862,649 |
|
| 6,599,233 |
Total deposits |
| 9,132,899 |
|
| 8,994,714 |
|
|
|
|
|
|
Securities sold under agreements to repurchase |
| 100,000 |
|
| 150,086 |
Advances from the Federal Home Loan Bank (“FHLB”) |
| 740,000 |
|
| 740,000 |
Other borrowings |
| 184,150 |
|
| 184,150 |
Accounts payable and other liabilities |
| 173,069 |
|
| 129,907 |
Total liabilities |
| 10,330,118 |
|
| 10,198,857 |
|
|
|
|
|
|
STOCKHOLDERSʼ EQUITY |
|
|
|
|
|
Preferred stock, authorized, 50,000,000 shares: |
|
|
|
|
|
Non-cumulative Perpetual Monthly Income Preferred Stock: 22,004,000 |
|
|
|
|
|
shares issued, 1,444,146 shares outstanding, aggregate liquidation value of $36,104 |
| 36,104 |
|
| 36,104 |
Common stock, $0.10 par value, authorized, 2,000,000,000 shares; |
|
|
|
|
|
222,103,721 shares issued (2018 - 221,789,509) |
| 22,210 |
|
| 22,179 |
Less: Treasury stock (at par value) |
| (474) |
|
| (455) |
Common stock outstanding, 217,360,587 shares outstanding (2018 - 217,235,140 |
|
|
|
|
|
shares outstanding) |
| 21,736 |
|
| 21,724 |
Additional paid-in capital |
| 940,700 |
|
| 939,674 |
Retained earnings, includes legal surplus reserve of $80,191 |
|
|
|
|
|
as of September 30, 2019 and December 31, 2018 |
| 1,196,931 |
|
| 1,087,617 |
Accumulated other comprehensive income (loss), net of tax of $7,752 as of September 30, 2019 |
|
|
|
|
|
and December 31, 2018 |
| 5,124 |
|
| (40,415) |
Total stockholdersʼ equity |
| 2,200,595 |
|
| 2,044,704 |
Total liabilities and stockholdersʼ equity | $ | 12,530,713 |
| $ | 12,243,561 |
|
|
|
|
|
|
The accompanying notes are an integral part of these statements. |
6
| ||
| ||
|
FIRST BANCORP.
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
(In thousands, except per share information) | |||||||||||
Interest and dividend income: |
|
|
|
|
|
|
|
|
|
|
|
Loans | $ | 139,205 |
| $ | 134,593 |
| $ | 409,918 |
| $ | 398,732 |
Investment securities |
| 15,121 |
|
| 12,109 |
|
| 43,840 |
|
| 39,361 |
Money market investments and interest-bearing cash accounts |
| 3,166 |
|
| 1,293 |
|
| 8,785 |
|
| 2,504 |
Total interest income |
| 157,492 |
|
| 147,995 |
|
| 462,543 |
|
| 440,597 |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| 16,979 |
|
| 16,898 |
|
| 50,924 |
|
| 49,218 |
Securities sold under agreements to repurchase |
| 2,333 |
|
| 2,917 |
|
| 7,173 |
|
| 8,305 |
Advances from FHLB |
| 3,344 |
|
| 3,209 |
|
| 10,126 |
|
| 7,623 |
Other borrowings |
| 2,315 |
|
| 2,139 |
|
| 6,635 |
|
| 6,166 |
Total interest expense | 24,971 |
| 25,163 |
| 74,858 |
| 71,312 | ||||
Net interest income |
| 132,521 |
|
| 122,832 |
|
| 387,685 |
|
| 369,285 |
Provision for loan and lease losses |
| 11,524 |
|
| 75,013 |
|
| 51,604 |
|
| 118,551 |
Net interest income after provision for loan and lease losses | 120,997 |
| 47,819 |
| 336,081 |
| 250,734 | ||||
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees on deposit accounts |
| 5,581 |
|
| 5,797 |
|
| 16,013 |
|
| 17,390 |
Mortgage banking activities |
| 4,551 |
|
| 3,117 |
|
| 13,551 |
|
| 11,579 |
Net gain on sale of investments |
| - |
|
| - |
|
| - |
|
| 371 |
Other-than-temporary impairment (“OTTI”) losses on available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
Total OTTI losses |
| - |
|
| - |
|
| - |
|
| (12,231) |
Portion of OTTI recognized in other comprehensive income (“OCI”) |
| - |
|
| - |
|
| - |
|
| - |
Net impairment losses on available-for-sale debt securities |
| - |
|
| - |
|
| - |
|
| (12,231) |
Gain on early extinguishment of debt |
| - |
|
| 1,391 |
|
| 2,316 |
|
| 1,391 |
Insurance commission income |
| 1,493 |
|
| 1,377 |
|
| 6,628 |
|
| 6,819 |
Other non-interest income |
| 6,898 |
|
| 6,963 |
|
| 23,271 |
|
| 22,118 |
Total non-interest income | 18,523 |
| 18,645 |
| 61,779 |
| 47,437 | ||||
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
Employees’ compensation and benefits |
| 39,243 |
|
| 37,128 |
|
| 119,482 |
|
| 114,190 |
Occupancy and equipment |
| 14,660 |
|
| 13,745 |
|
| 43,511 |
|
| 41,592 |
Business promotion |
| 3,860 |
|
| 3,244 |
|
| 10,452 |
|
| 9,717 |
Professional fees |
| 11,502 |
|
| 12,023 |
|
| 31,755 |
|
| 34,779 |
Taxes, other than income taxes |
| 3,534 |
|
| 3,763 |
|
| 11,027 |
|
| 11,184 |
FDIC deposit insurance |
| 2,067 |
|
| 3,179 |
|
| 7,159 |
|
| 10,671 |
Net loss on OREO and OREO expenses |
| 4,360 |
|
| 1,351 |
|
| 10,205 |
|
| 8,796 |
Credit and debit card processing expenses |
| 4,147 |
|
| 3,737 |
|
| 11,450 |
|
| 10,134 |
Communications |
| 1,642 |
|
| 1,603 |
|
| 4,706 |
|
| 4,774 |
Other non-interest expenses |
| 5,850 |
|
| 5,841 |
|
| 17,361 |
|
| 16,728 |
Total non-interest expenses | 90,865 |
| 85,614 |
| 267,108 |
| 262,565 | ||||
Income (loss) before income taxes |
| 48,655 |
|
| (19,150) |
|
| 130,752 |
|
| 35,606 |
Income tax (expense) benefit |
| (12,332) |
| 8,398 |
|
| (30,249) |
|
| 7,181 | |
Net income (loss) | $ | 36,323 |
| $ | (10,752) |
| $ | 100,503 |
| $ | 42,787 |
Net income (loss) attributable to common stockholders | $ | 35,654 |
| $ | (11,421) |
| $ | 98,496 |
| $ | 40,780 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.16 |
| $ | (0.05) |
| $ | 0.46 |
| $ | 0.19 |
Diluted | $ | 0.16 |
| $ | (0.05) |
| $ | 0.45 |
| $ | 0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements. | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
(In thousands, except per share information) | |||||||||||
Interest and dividend income: |
|
|
|
|
|
|
|
|
|
|
|
Loans | $ | 154,229 |
| $ | 139,205 |
| $ | 453,243 |
| $ | 409,918 |
Investment securities |
| 13,985 |
|
| 15,121 |
|
| 44,723 |
|
| 43,840 |
Money market investments and interest-bearing cash accounts |
| 4,081 |
|
| 3,166 |
|
| 10,311 |
|
| 8,785 |
Total interest income |
| 172,295 |
|
| 157,492 |
|
| 508,277 |
|
| 462,543 |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| 20,341 |
|
| 16,979 |
|
| 56,936 |
|
| 50,924 |
Securities sold under agreements to repurchase |
| 1,320 |
|
| 2,333 |
|
| 5,489 |
|
| 7,173 |
Advances from FHLB |
| 3,878 |
|
| 3,344 |
|
| 11,490 |
|
| 10,126 |
Other borrowings |
| 2,331 |
|
| 2,315 |
|
| 7,210 |
|
| 6,635 |
Total interest expense | 27,870 |
| 24,971 |
| 81,125 |
| 74,858 | ||||
Net interest income |
| 144,425 |
|
| 132,521 |
|
| 427,152 |
|
| 387,685 |
Provision for loan and lease losses |
| 7,398 |
|
| 11,524 |
|
| 31,752 |
|
| 51,604 |
Net interest income after provision for loan and lease losses | 137,027 |
| 120,997 |
| 395,400 |
| 336,081 | ||||
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees on deposit accounts |
| 6,108 |
|
| 5,581 |
|
| 17,711 |
|
| 16,013 |
Mortgage banking activities |
| 4,396 |
|
| 4,551 |
|
| 12,418 |
|
| 13,551 |
Other-than-temporary impairment (“OTTI”) losses on available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
Total OTTI losses |
| (557) |
|
| - |
|
| (557) |
|
| - |
Portion of OTTI recognized in other comprehensive income (“OCI”) |
| 60 |
|
| - |
|
| 60 |
|
| - |
Net impairment losses on available-for-sale debt securities |
| (497) |
|
| - |
|
| (497) |
|
| - |
Gain on early extinguishment of debt |
| - |
|
| - |
|
| - |
|
| 2,316 |
Insurance commission income |
| 1,983 |
|
| 1,493 |
|
| 8,258 |
|
| 6,628 |
Other non-interest income |
| 9,411 |
|
| 6,898 |
|
| 28,277 |
|
| 23,271 |
Total non-interest income | 21,401 |
| 18,523 |
| 66,167 |
| 61,779 | ||||
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
Employees’ compensation and benefits |
| 41,409 |
|
| 39,243 |
|
| 121,518 |
|
| 119,482 |
Occupancy and equipment |
| 15,129 |
|
| 14,660 |
|
| 47,018 |
|
| 43,511 |
Business promotion |
| 4,004 |
|
| 3,860 |
|
| 11,650 |
|
| 10,452 |
Professional fees |
| 12,467 |
|
| 11,502 |
|
| 34,448 |
|
| 31,755 |
Taxes, other than income taxes |
| 3,904 |
|
| 3,534 |
|
| 11,461 |
|
| 11,027 |
FDIC deposit insurance |
| 1,465 |
|
| 2,067 |
|
| 4,645 |
|
| 7,159 |
Net loss on OREO and OREO expenses |
| 2,578 |
|
| 4,360 |
|
| 11,364 |
|
| 10,205 |
Credit and debit card processing expenses |
| 4,764 |
|
| 4,147 |
|
| 12,738 |
|
| 11,450 |
Communications |
| 1,834 |
|
| 1,642 |
|
| 5,300 |
|
| 4,706 |
Other non-interest expenses |
| 5,279 |
|
| 5,850 |
|
| 15,600 |
|
| 17,361 |
Total non-interest expenses | 92,833 |
| 90,865 |
| 275,742 |
| 267,108 | ||||
Income before income taxes |
| 65,595 |
| 48,655 |
|
| 185,825 |
|
| 130,752 | |
Income tax expense |
| 19,268 |
| 12,332 |
|
| 54,897 |
|
| 30,249 | |
Net income | $ | 46,327 |
| $ | 36,323 |
| $ | 130,928 |
| $ | 100,503 |
Net income attributable to common stockholders | $ | 45,658 |
| $ | 35,654 |
| $ | 128,921 |
| $ | 98,496 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.21 |
| $ | 0.16 |
| $ | 0.60 |
| $ | 0.46 |
Diluted | $ | 0.21 |
| $ | 0.16 |
| $ | 0.59 |
| $ | 0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements. | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
67
| ||
| ||
|
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
| September 30, |
| September 30, | ||||||||
|
| 2018 |
|
| 2017 |
| 2018 |
|
| 2017 | |
(In thousands) |
|
| |||||||||
Net income (loss) | $ | 36,323 |
| $ | (10,752) |
| $ | 100,503 |
| $ | 42,787 |
Amount reclassified out of accumulated other comprehensive |
|
|
|
|
|
|
|
|
|
|
|
loss per Accounting Standards Update (“ASU”) 2016-01 |
| - |
|
| - |
|
| 6 |
|
| - |
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on debt securities on which an |
|
|
|
|
|
|
|
|
|
|
|
OTTI has been recognized |
| 62 |
|
| 647 |
|
| 264 |
|
| (1,156) |
Reduction of non-credit OTTI component on securities sold |
| - |
|
| - |
|
| - |
|
| 5,678 |
Reclassification adjustments for net gain included in net income |
| - |
|
| - |
|
| - |
|
| (371) |
Reclassification adjustment for OTTI |
|
|
|
|
|
|
|
|
|
|
|
on debt securities included in net income |
| - |
|
| - |
|
| - |
|
| 12,231 |
All other unrealized holding (losses) gains on available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
securities arising during the period |
| (10,842) |
|
| 3,072 |
|
| (42,542) |
|
| 7,098 |
Other comprehensive (loss) income for the period |
| (10,780) |
|
| 3,719 |
|
| (42,272) |
|
| 23,480 |
Total comprehensive income (loss) | $ | 25,543 |
| $ | (7,033) |
| $ | 58,231 |
| $ | 66,267 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements. | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
| September 30, |
| September 30, | ||||||||
|
| 2019 |
|
| 2018 |
| 2019 |
|
| 2018 | |
(In thousands) |
|
| |||||||||
Net income | $ | 46,327 |
| $ | 36,323 |
| $ | 130,928 |
| $ | 100,503 |
Other comprehensive income (loss) : |
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on debt securities on which an OTTI has been recognized |
| (557) |
|
| 62 |
|
| (488) |
|
| 264 |
Reclassification adjustment for OTTI on debt securities included in net income |
| 497 |
|
| - |
|
| 497 |
|
| - |
All other unrealized holding gains (losses) on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
arising during the period |
| 7,622 |
|
| (10,842) |
|
| 45,530 |
|
| (42,542) |
Other comprehensive income (loss) for the period |
| 7,562 |
|
| (10,780) |
|
| 45,539 |
|
| (42,278) |
Total comprehensive income | $ | 53,889 |
| $ | 25,543 |
| $ | 176,467 |
| $ | 58,225 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements. | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
78
| ||
| ||
|
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine-Month Period Ended | ||||
| September 30, |
| September 30, | ||
| 2018 |
| 2017 | ||
(In thousands) |
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
Net income | $ | 100,503 |
| $ | 42,787 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Depreciation and amortization |
| 11,308 |
|
| 12,263 |
Amortization of intangible assets |
| 2,731 |
|
| 3,325 |
Provision for loan and lease losses |
| 51,604 |
|
| 118,551 |
Deferred income tax expense (benefit) |
| 22,549 |
|
| (18,094) |
Stock-based compensation |
| 4,921 |
|
| 5,423 |
Gain on sale of investments |
| - |
|
| (371) |
OTTI on debt securities |
| - |
|
| 12,231 |
Unrealized gain on derivative instruments |
| (108) |
|
| (272) |
Gain on early extinguishment of debt |
| (2,316) |
|
| (1,391) |
Net gain on sales of premises and equipment and other assets |
| (1,344) |
|
| (146) |
Gain from insurance proceeds |
| (478) |
|
| - |
Net gain on sales of loans |
| (1,281) |
|
| (5,348) |
Net amortization/accretion of premiums, discounts and deferred loan fees and costs |
| (6,027) |
|
| (6,331) |
Originations and purchases of loans held for sale |
| (244,261) |
|
| (257,997) |
Sales and repayments of loans held for sale |
| 265,528 |
|
| 275,855 |
Amortization of broker placement fees |
| 948 |
|
| 1,461 |
Net amortization/accretion of premium and discounts on investment securities |
| 2,187 |
|
| 1,283 |
Decrease (increase) in accrued interest receivable |
| 9,732 |
|
| (4,791) |
(Decrease) increase in accrued interest payable |
| (756) |
|
| 1,030 |
(Increase) decrease in other assets |
| (1,870) |
|
| 5,566 |
Increase in other liabilities |
| 253 |
|
| 9,604 |
Net cash provided by operating activities |
| 213,823 |
|
| 194,638 |
Cash flows from investing activities: |
|
|
|
|
|
Principal collected on loans |
| 1,880,633 |
|
| 1,920,088 |
Loans originated and purchased |
| (1,949,453) |
|
| (2,092,161) |
Proceeds from sales of loans held for investment |
| 55,526 |
|
| 53,245 |
Proceeds from sales of repossessed assets |
| 37,343 |
|
| 28,004 |
Proceeds from sales of available-for-sale securities |
| - |
|
| 23,408 |
Purchases of available-for-sale securities |
| (475,077) |
|
| (53,208) |
Proceeds from principal repayments and maturities of available-for-sale securities |
| 309,994 |
|
| 172,493 |
Proceeds from principal repayments of held-to-maturity securities |
| 5,828 |
|
| 5,563 |
Additions to premises and equipment |
| (16,118) |
|
| (7,607) |
Proceeds from sale of premises and equipment and other assets |
| 2,508 |
|
| 2,040 |
Net redemptions/purchase of other investment securities |
| 1,256 |
|
| (9,127) |
Proceeds from the settlement of insurance claims |
| 7,614 |
|
| - |
Net cash (used in) provided by investing activities |
| (139,946) |
|
| 42,738 |
Cash flows from financing activities: |
|
|
|
|
|
Net increase (decrease) in deposits |
| 117,762 |
|
| (34,754) |
Repayment of securities sold under agreements to repurchase |
| (200,000) |
|
| - |
Net FHLB advances (repayments) proceeds |
| (25,000) |
|
| 245,000 |
Repayment of junior subordinated debentures |
| (21,434) |
|
| (5,930) |
Repurchase of outstanding common stock |
| (2,821) |
|
| (2,176) |
Dividends paid on preferred stock |
| (2,007) |
|
| (2,007) |
Net cash (used in) provided by financing activities |
| (133,500) |
|
| 200,133 |
Net (decrease) increase in cash and cash equivalents |
| (59,623) |
|
| 437,509 |
Cash and cash equivalents at beginning of period |
| 716,395 |
|
| 299,685 |
Cash and cash equivalents at end of period | $ | 656,772 |
| $ | 737,194 |
Cash and cash equivalents include: |
|
|
|
|
|
Cash and due from banks | $ | 559,182 |
| $ | 726,779 |
Money market instruments |
| 97,590 |
|
| 10,415 |
| $ | 656,772 |
| $ | 737,194 |
The accompanying notes are an integral part of these statements. |
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
| Nine-Month Period Ended | ||||
| September 30, |
| September 30, | ||
| 2019 |
| 2018 | ||
(In thousands) |
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
Net income | $ | 130,928 |
| $ | 100,503 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Depreciation and amortization |
| 13,365 |
|
| 11,308 |
Amortization of intangible assets |
| 2,319 |
|
| 2,731 |
Provision for loan and lease losses |
| 31,752 |
|
| 51,604 |
Deferred income tax expense |
| 46,006 |
|
| 22,549 |
Stock-based compensation |
| 2,997 |
|
| 4,921 |
Gain on early extinguishment of debt |
| - |
|
| (2,316) |
OTTI on debt securities |
| 497 |
|
| - |
Unrealized gain on derivative instruments |
| (2,105) |
|
| (108) |
Net gain on sales of premises and equipment and other assets |
| (59) |
|
| (1,344) |
Net gain on sales of loans |
| (6,059) |
|
| (1,281) |
Net amortization/accretion of premiums, discounts and deferred loan fees and costs |
| (5,621) |
|
| (6,027) |
Originations and purchases of loans held for sale |
| (255,020) |
|
| (244,261) |
Sales and repayments of loans held for sale |
| 259,316 |
|
| 265,528 |
Amortization of broker placement fees |
| 557 |
|
| 948 |
Net amortization/accretion of premium and discounts on investment securities |
| 1,084 |
|
| 2,187 |
Decrease in accrued interest receivable |
| 1,767 |
|
| 9,732 |
Increase (decrease) in accrued interest payable |
| 785 |
|
| (756) |
Decrease (increase) in other assets |
| 31,411 |
|
| (2,348) |
(Decrease) increase in other liabilities |
| (18,236) |
|
| 253 |
Net cash provided by operating activities |
| 235,684 |
|
| 213,823 |
Cash flows from investing activities: |
|
|
|
|
|
Principal collected on loans |
| 2,286,139 |
|
| 1,880,633 |
Loans originated and purchased |
| (2,559,616) |
|
| (1,949,453) |
Proceeds from sales of loans held for investment |
| 66,891 |
|
| 55,526 |
Proceeds from sales of repossessed assets |
| 49,105 |
|
| 37,343 |
Purchases of available-for-sale securities |
| (233,316) |
|
| (475,077) |
Proceeds from principal repayments and maturities of available-for-sale securities |
| 483,275 |
|
| 309,994 |
Proceeds from principal repayments of held-to-maturity securities |
| 6,139 |
|
| 5,828 |
Additions to premises and equipment |
| (17,144) |
|
| (16,118) |
Proceeds from sale of premises and equipment and other assets |
| 95 |
|
| 2,508 |
Net redemptions/purchase of other investment securities |
| (680) |
|
| 1,256 |
Proceeds from the settlement of insurance claims |
| 202 |
|
| 7,614 |
Net cash provided by (used in) investing activities |
| 81,090 |
|
| (139,946) |
Cash flows from financing activities: |
|
|
|
|
|
Net increase in deposits |
| 146,526 |
|
| 117,762 |
Repayment of securities sold under agreements to repurchase |
| (50,086) |
|
| (200,000) |
Net FHLB advances repayments |
| - |
|
| (25,000) |
Repayment of junior subordinated debentures |
| - |
|
| (21,434) |
Repurchase of outstanding common stock |
| (1,959) |
|
| (2,821) |
Dividends paid on common stock |
| (19,514) |
|
| - |
Dividends paid on preferred stock |
| (2,007) |
|
| (2,007) |
Net cash provided by (used in) financing activities |
| 72,960 |
|
| (133,500) |
Net increase (decrease) in cash and cash equivalents |
| 389,734 |
|
| (59,623) |
Cash and cash equivalents at beginning of period |
| 586,203 |
|
| 716,395 |
Cash and cash equivalents at end of period | $ | 975,937 |
| $ | 656,772 |
Cash and cash equivalents include: |
|
|
|
|
|
Cash and due from banks | $ | 878,206 |
| $ | 559,182 |
Money market instruments |
| 97,731 |
|
| 97,590 |
| $ | 975,937 |
| $ | 656,772 |
The accompanying notes are an integral part of these statements. |
|
|
|
|
|
|
|
|
|
|
|
89
| ||
| ||
|
FIRST BANCORP.
| Nine-Month Period Ended | ||||
| September 30, |
| September 30, | ||
| 2018 |
| 2017 | ||
(In thousands) |
|
|
|
|
|
|
|
|
|
| |
Preferred Stock | $ | 36,104 |
| $ | 36,104 |
|
|
|
|
|
|
Common Stock outstanding: |
|
|
|
|
|
Balance at beginning of period |
| 21,628 |
|
| 21,745 |
Common stock issued as compensation |
| 27 |
|
| 43 |
Common stock issued for exercised warrants |
| 73 |
|
| - |
Common stock withheld for taxes |
| (43) |
|
| (39) |
Restricted stock grants |
| 40 |
|
| 109 |
Restricted stock forfeited |
| (1) |
|
| (240) |
Balance at end of period |
| 21,724 |
|
| 21,618 |
|
|
|
|
|
|
Additional Paid-In-Capital: |
|
|
|
|
|
Balance at beginning of period |
| 936,772 |
|
| 931,856 |
Stock-based compensation |
| 4,921 |
|
| 5,423 |
Common stock issued for exercised warrants |
| (73) |
|
| - |
Common stock withheld for taxes |
| (2,778) |
|
| (2,136) |
Restricted stock grants |
| (40) |
|
| (109) |
Common stock issued as compensation |
| (27) |
|
| (43) |
Restricted stock forfeited |
| 1 |
|
| 240 |
Balance at end of period |
| 938,776 |
|
| 935,231 |
|
|
|
|
|
|
Retained Earnings: |
|
|
|
|
|
Balance at beginning of period |
| 895,208 |
|
| 830,928 |
Net income |
| 100,503 |
|
| 42,787 |
Dividends on preferred stock |
| (2,007) |
|
| (2,007) |
Amount reclassified from accumulated other comprehensive loss per ASU 2016-01 |
| (6) |
|
| - |
Balance at end of period |
| 993,698 |
|
| 871,708 |
Accumulated Other Comprehensive Income (Loss), net of tax: |
|
|
|
|
|
Balance at beginning of period |
| (20,615) |
|
| (34,390) |
Other comprehensive (loss) income, net of tax |
| (42,272) |
|
| 23,480 |
Balance at end of period |
| (62,887) |
|
| (10,910) |
|
|
|
|
|
|
Total stockholdersʼ equity | $ | 1,927,415 |
| $ | 1,853,751 |
|
|
|
|
|
|
The accompanying notes are an integral part of these statements. |
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
| September 30, |
| September 30, |
| September 30, |
| September 30, | ||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Preferred Stock | $ | 36,104 |
| $ | 36,104 |
| $ | 36,104 |
| $ | 36,104 |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
| 21,733 |
|
| 21,719 |
|
| 21,724 |
|
| 21,628 |
Common stock issued as compensation |
| - |
|
| - |
|
| - |
|
| 27 |
Common stock issued for exercised warrants |
| - |
|
| - |
|
| - |
|
| 73 |
Common stock withheld for taxes |
| (1) |
|
| (1) |
|
| (18) |
|
| (43) |
Restricted stock grants |
| 5 |
|
| 6 |
|
| 31 |
|
| 40 |
Restricted stock forfeited |
| (1) |
|
| - |
|
| (1) |
|
| (1) |
Balance at end of period |
| 21,736 |
|
| 21,724 |
|
| 21,736 |
|
| 21,724 |
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In-Capital: |
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
| 939,769 |
|
| 937,919 |
|
| 939,674 |
|
| 936,772 |
Stock-based compensation |
| 988 |
|
| 938 |
|
| 2,997 |
|
| 4,921 |
Common stock issued for exercised warrants |
| - |
|
| - |
|
| - |
|
| (73) |
Common stock withheld for taxes |
| (53) |
|
| (75) |
|
| (1,941) |
|
| (2,778) |
Restricted stock grants |
| (5) |
|
| (6) |
|
| (31) |
|
| (40) |
Common stock issued as compensation |
| - |
|
| - |
|
| - |
|
| (27) |
Restricted stock forfeited |
| 1 |
|
| - |
|
| 1 |
|
| 1 |
Balance at end of period |
| 940,700 |
|
| 938,776 |
|
| 940,700 |
|
| 938,776 |
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings: |
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
| 1,157,808 |
|
| 958,044 |
|
| 1,087,617 |
|
| 895,208 |
Net income |
| 46,327 |
|
| 36,323 |
|
| 130,928 |
|
| 100,503 |
Dividends on common stock ($0.03 per share for the quarter ended September 30, 2019; |
|
|
|
|
|
|
|
|
|
|
|
$0.09 per share for the nine-month period ended September 30, 2019) |
| (6,535) |
|
| - |
|
| (19,607) |
|
| - |
Dividends on preferred stock |
| (669) |
|
| (669) |
|
| (2,007) |
|
| (2,007) |
Amount reclassified from accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
per Accounting Standards Update No. ("ASU") 2016-01 |
| - |
|
| - |
|
| - |
|
| (6) |
Balance at end of period |
| 1,196,931 |
|
| 993,698 |
|
| 1,196,931 |
|
| 993,698 |
Accumulated Other Comprehensive Income (Loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
| (2,438) |
|
| (52,107) |
|
| (40,415) |
|
| (20,615) |
Amount reclassified out of accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
per ASU 2016-01 |
| - |
|
| - |
|
| - |
|
| 6 |
Other comprehensive income (loss), net of tax |
| 7,562 |
|
| (10,780) |
|
| 45,539 |
|
| (42,278) |
Balance at end of period |
| 5,124 |
|
| (62,887) |
|
| 5,124 |
|
| (62,887) |
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholdersʼ equity | $ | 2,200,595 |
| $ | 1,927,415 |
| $ | 2,200,595 |
| $ | 1,927,415 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements. |
|
|
|
|
|
|
|
|
|
|
|
910
|
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements (unaudited) of First BanCorp. (the “Corporation”) have been prepared in conformity with the accounting policies stated in the Corporation’s Audited Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 20172018 (the “2017“2018 Annual Report on Form 10-K”). Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant to the rules and regulations of the SEC and, accordingly, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2017,2018, which are included in the 20172018 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the statement of financial position, results of operations and cash flows for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.
The results of operations for the quarter and nine-month period ended September 30, 20182019 are not necessarily indicative of the results to be expected for the entire year.
Adoption of New Accounting Requirements and Recently Issued but Not Yet Effective Accounting Requirements
The Financial Accounting Standards Board (“FASB”) has issued the following accounting pronouncements and guidance relevant to the Corporation’s operations:
Revenue Recognition
In May 2014, the FASB updated the Accounting Standards Codification (the “Codification” or the “ASC”) to create a new, principles-based revenue recognition framework. This guidance requires entities to recognize revenues when they transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance describes a 5-step process that entities can apply to achieve the core principle of revenue recognition and requires disclosures sufficient to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and the significant judgments used in determining that information.
The Corporation adopted the guidance on January 1, 2018 using a modified retrospective method, in which the guidance applies to existing contracts in effect at January 1, 2018 and new contracts entered into after this date. Most of the Corporation’s revenue, including net interest income, gain on sale of loans, and mortgage servicing fees is explicitly out of scope of the new revenue recognition guidance. The Corporation conducted an assessment of the revenue streams that were potentially affected by the new guidance and reviewed contracts in scope to ensure compliance with the new guidance.
The Corporation has identified service charges on deposits and related cash management services, insurance commissions, merchant-related income, and card interchange income as its most significant revenue streams within the scope of the standard. For the revenue streams that were found in scope, management reviewed in detail its most significant contracts with corresponding customers. The adoption of this guidance did not have a material effect on the Corporation’s consolidated financial statements. However, additional disclosures required by the standard have been included in Note 23 – Revenue from Contracts with Customers, to the Corporation’s consolidated financial statements.
10
Recognition and Measurement of Financial Assets and Liabilities
In January 2016, the FASB issued ASU 2016-01, to require an entity to: (i) measure equity investments at fair value through net income, with certain exceptions, thus, eliminating eligibility for the available-for-sale category; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price; and (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available-for-sale debt securities in combination with other deferred tax assets. The guidance provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment, adjusted for certain observable price changes. The guidance also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The adoption of this standard during the first quarter of 2018 did not have a material effect on the Corporation’s consolidated financial statements.
Statement of Cash Flows Presentation – Restricted Cash
In August 2016 and November 2016, the FASB updated the Codification to provide specific guidance on the classification and presentation of certain cash payments and cash receipts, including changes in restricted cash, in the statement of cash flows. This guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this update must be applied using a retrospective transition method to each period presented. The Corporation adopted the provisions of this guidance during the first quarter of 2018 without any material effect on the Corporation’s consolidated financial statements.
Income Tax Effect of Intra-Entity Transfers of Assets
In October 2016, the FASB updated the Codification to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. With this update, entities are required to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Under prior GAAP, the recognition of current and deferred income taxes for an intra-entity asset transfer was prohibited until the assets were sold to an outside party. This Update does not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. For example, GAAP requires an entity to disclose a comparison of income tax expense (benefit) with statutory expectations (a rate reconciliation for public entities or a description of the nature of each significant reconciling item for nonpublic entities) and also requires an entity to disclose the types of temporary differences and carryforwards that give rise to a significant portion of deferred income taxes. The Corporation adopted the provisions of this guidance during the first quarter of 2018 without any effect on the Corporation’s consolidated financial statements.
Clarifying what Changes Qualify as a Modification of a Share-Based Payment Award
In May 2017, the FASB updated the Codification to reduce the cost and complexity when applying ASC Topic 718, “Compensation – Stock Compensation” (“ASC Topic 718”), and standardize the practice of applying ASC Topic 718 to financial reporting. ASC Topic 718 prescribes the accounting treatment of a modification in the terms or conditions of a share-based payment award. The guidance clarifies what changes would qualify as a modification. This was done by better defining what does not constitute a modification. In order for a change to a share-based arrangement not to require ASC Topic 718 modification treatment, all of the following must be met: (i) the fair value (or alternative measurement method used) of the modified award must equal the fair value (or alternative measurement method used) of the original award immediately before the original award is modified; (ii) the vesting conditions of the modified award must be the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument must be the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in ASC Topic 718 apply regardless of whether an entity is required to apply modification accounting under this update. The amendments in this update must be applied prospectively to an award modified on or after the adoption date. The Corporation adopted the provisions of this guidance on January 1, 2018 without any effect on the Corporation’s consolidated financial statements. The Corporation’s Omnibus Plan provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, cash-based awards and other stock-based awards. If any change occurs in the future to awards issued under the Omnibus Plan, the Corporation will evaluate it under this guidance.
11
Lease Accounting
In February 2016, the FASB updated the FASB Accounting Standards Codification (“ASC” or the “Codification”) to replace ASC Topic 840, “Leases (Topic 840)” (“ASC Topic 840”), with new guidance for the financial reporting about leasing transactions. Under the new guidance, a lessee will beis required to recognize a right-of-use asset (“ROU”) and a lease liability for leases with lease terms of more than 12 months. ConsistentSimilar with current GAAP, the practice before the adoption of this guidance, a lessee’s recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on itsthe classification of the lease as a finance or operating lease. However, unlike current GAAP,previous guidance, which requiresrequired the recognition of only capital leases on the balance sheet, the guidance will requirerequires both types of leases to be recognized on the balance sheet. The guidance will also requirerequires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information and additional information about the amounts recorded in the financial statements. The FASB issued an update in January 2018 providing an optional transition practical expedient under which an entity need not evaluate under new ASC Topic 842, “Leases” (“ASC Topic 842”), land easements that existed or expired before the entity’s adoption of ASC Topic 842 and were not previously accounted for as leases. In addition, the FASB issued an update in July 2018 that provides entities with an additional and optional transition method that allows entities to applyadopt the transition provisionsnew standard prospectively as of the new leases standard at the adoptioneffective date, instead of at the earliest comparative period presented. If elected,without adjusting comparative periods will continue to be presented in accordance with ASC Topic 840.presented. Also, the amendments provide lessors with a practical expedient, by class of underlying asset, to not separate non lease components, subject to certain circumstances. Also in July 2018, the FASB issued an update that makes various technical corrections to clarify how to apply certain aspects of the new leases standard, such as reassessment of lease classification, variable lease payments that depend on an index or a rate, lease term and purchase options, and certain transition adjustments, among others. The guidance on leases will taketook effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted.
The update is expected to affectaffected the Corporation’s consolidated financial statements since the Corporation has operating and lease arrangements for which it is a lessee. The new standard provides a number of optional practical expedients in transition. The Corporation will electadopted this guidance in 2019, and elected the optional transition method described aboveapproach to initiallynot apply the new leaseslease standard asin comparative periods presented and the package of January 1, 2019. On the other hand,practical expedients, which allows the Corporation does not expect to electreassess prior conclusions about lease classification and initial direct costs. The adoption of this standard in January 2019 resulted in the optional practical expedient provided to lessors. The Corporation expects to recognize lease liabilities of approximately $0.1 billion or 1% of total assets, with a corresponding recognition of ROU assets on itsand lease liabilities for operating leases.
Accounting for Financial Instruments – Credit Losses
In June 2016,leases of $59.6 million and $62.1 million, respectively, with the FASB updatedmost significant impact from recognition of ROU assets and liabilities related to the Codification to introduce new guidanceoperating leases for the accounting for credit losses. The guidance includes an impairment model (known as the current expected credit lossBank’s branches and automated teller machines (“CECL”ATMs”) model) that is based on expected losses rather than incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The CECL model will apply to: (1) financial assets subject to credit losses and measured at amortized cost and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses (“ECL”) should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating ECL. The guidance doesCorporation elected not prescribe a specific method to make the estimate, so its application will require significant judgment.
Generally, upon initial recognition of a financial asset, the estimate of the ECL will be recorded through an allowance for loanrecognize ROU assets and lease losses with an offsetliabilities that arise from short-term leases, primarily related to current earnings. Subsequently, the ECL will need to be reassessed each period, and both negative and positive changes to the estimate will be recognized through an adjustment to the allowance for loan and lease losses and earnings.
The guidance amends the current OTTI model for available-for-sale debt securities. The new available-for-sale debt security model will require an estimate of ECL only when the fair value is below the amortized cost of the asset. The length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer affect the determination of whether a credit loss exists. As such, the new available-for-sale debt security model is not an OTTI model. In addition, credit losses on available-for-sale debt securities will now be limited to the difference between the security’s amortized cost basis and its fair value. The available-for-sale debt security model will also require the use of an allowance to record estimated credit losses (and subsequent recoveries).
12
The purchased financial assets with credit deterioration (“PCD”) model will apply to purchased financial assets (measured at amortized cost or available-for-sale) that have experienced more than insignificant credit deterioration since origination. This represents a change from the scope of what are considered purchased credit-impaired assets under today’s model. In contrast to the accounting for originated or purchased assets that do not qualify as PCD, the initial estimate of expected credit losses for a PCD will be recognized through an allowance for loan and lease losses with an offset to the cost basis of the related financial asset at acquisition (i.e., there will be no effect on net income at initial recognition). Subsequently, the accounting will follow the applicable CECL or available-for-sale debt security impairment model with all adjustments of the allowance for loan and lease losses recognized through earnings. Beneficial interests classified as held-to-maturity or available-for-sale will need to apply the PCD model if the beneficial interest meets the definition of PCD or if there is a significant difference between contractual and expected cash flows at initial recognition.
In general, the new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings as of the beginning of the first period in which the guidance becomes effective. However, prospective application iscertain month-to-month ATM operating leases. Disclosures required for PCD assets previously accounted for under ASC Topic 310-30, “Receivables,” and for debt securities for which an OTTI was recognized prior to the date of adoption.
This guidance also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, public business entities will need to disclose, among other things, the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year).standard have been included in Note 12 - Leases.
The guidance will be effective for public business entities that are SEC filers in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the guidance will be permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
The Corporation has developed an actionable and detailed project plan in order to comply on a timely basis with the implementation of this new accounting framework. The Corporation has created a working group with members from multiple areas across the organization that is responsible for assessing the effect of the standard, evaluating interpretative issues, and evaluating the current credit loss models against the new guidance to determine any necessary changes and other related implementation activities. The working group provides periodic updates to the Corporation’s CECL Management Committee, which has oversight responsibilities for the implementation efforts. The Corporation continues to evaluate the effect that this guidance, including the method of implementation, will have on its consolidated financial statements. The Corporation does not expect to early adopt this guidance.
Subsequent Measurement of Goodwill
In January 2017, the FASB updated the Codification to simplify the subsequent measurement of goodwill by eliminating Step 2 from the current two-step goodwill impairment test. This guidance provides that a goodwill impairment test shall be conducted by comparing the fair value of a reporting unit with its carrying amount. Entities are to recognize an impairment charge for goodwill equal to the excess of the carrying amount over the reporting unit’s fair value. Entities have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The effect of this guidance will depend upon the performance of the reporting units that have goodwill and the market conditions affecting the fair value of each reporting unit going forward.
1311
Amortization of Premiums and Discounts ofon Callable Debt Securities
In March 2017, the FASB updated the Codification to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. With respect to securities held at a discount, the amendments do not require an accounting change; thus, the discount continues to be amortized to maturity. Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date. An entity must have a large number of similar loans to consider estimates of future principal prepayments when applying the interest method. However, an entity that holds an individual callable debt security at a premium may not amortize that premium to the earliest call date. If that callable debt security is subsequently called, the entity records a loss equal to the unamortized premium. The amendments in this update more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. In most cases, market participants price securities to the call date that produces the worst yield when the coupon is above current market rates (that is, the security is trading at a premium) and price securities to maturity when the coupon is below market rates (that is, the security is trading at a discount) in anticipation that the borrower will act in its economic best interest. As a result, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. For public business entities, the amendments in this update are effectivetook effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this guidance isduring the first quarter of 2019, did not expected to have a material effect on the Corporation’s consolidated statement of financial condition or results of operations. As of September 30, 2018,2019, the Corporation had $4.1 million ofdoes not have callable debt securities held at a premium (unamortized premium of $13 thousand).premium.
Derivatives and Hedging
In August 2017, the FASB updated the Codification to: (i) expand hedge accounting for nonfinancial and financial risk components and amend measurement methodologies to more closely align hedge accounting with a company’s risk management activities; (ii) decrease the complexity of preparing and understanding hedge results by eliminating the separate measurement and reporting of hedge ineffectiveness; (iii) enhance transparency, comparability, and understanding of hedge results through enhanced disclosures and a change in the presentation of hedge results to align the effects of the hedging instrument and the hedged item; and (iv) reduce the cost and complexity of applying hedge accounting by simplifying the manner in which assessments of hedge effectiveness may be performed. This update is effectivetook effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The guidance requires companies to apply requirements to existing hedging relationships on the date of adoption, and the effect of the adoption should be reflected as of the beginning of the fiscal year of adoption. In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” to provide further clarification on previously issued updates. This Update addresses the following areas of the guidance: (i) partial-term fair value hedges; (ii) fair value hedge basis adjustments; (iii) not-for-profit entities and private companies; and (v) first-payments-received cash flow hedging. As of September 30, 2018,2019, all of the derivatives held by the Corporation were considered economic undesignated hedges. The adoption of this guidance isduring the first quarter of 2019 did not expected to have a materialan effect on the Corporation’s consolidated statement of financial condition or results of operations.
Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income
In February 2018, the FASB updated the Codification to provide entities with an option to reclassify to retained earnings, tax effects that were stranded in accumulated other comprehensive income, pursuant to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). This guidance is effectivetook effect for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. This guidance maycould be early adopted in any interim or annual period for which financial statements have not yet been issued and applied either in the period of adoption or retrospectively to each period in which the effect of the change in the corporate tax rate in the Tax Act is recognized. The adoption of this guidance willduring the first quarter of 2019 did not have a material effect on the Corporation’s consolidated financial statements.
Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB updated the Codification as part of a simplification initiative to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees and to address and improve aspects of the accounting for non-employee share-based payment transactions. The amendments will be effective for interim and annual reporting periods beginning after December 15, 2018. The adoption of this guidance is not expected to have an effect on the Corporation’s consolidated financial statements.
Accounting for Financial Instruments – Credit Losses
In June 2016, the FASB updated the Codification to introduce new guidance for the accounting for credit losses. The guidance changes the accounting for credit losses measurement on loans and debt securities. For loans and held-to-maturity debt securities, the guidance requires a current expected credit loss (“CECL”) measurement to estimate the allowance for credit losses (“ACL”) for the remaining estimated life of the financial asset (including off-balance sheet credit exposures). The estimate of expected credit losses (“ECL”) should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments.
The guidance eliminates the existing guidance for purchased credit-impaired (“PCI”) loans, but requires an allowance for purchased financial assets with more than insignificant credit deterioration since origination (“PCD”). In addition, the guidance modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit.
1412
In general, the new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings as of the beginning of the first period in which the guidance becomes effective. However, prospective application is required for PCD assets previously accounted for under ASC Topic 310-30, “Receivables,” and for debt securities for which an OTTI was recognized prior to the date of adoption. The new guidance also provides transition relief that allows entities, through an accounting policy election, the choice of either maintaining existing PCI pools at adoption only or doing so at the time of adoption and on an ongoing basis after adoption. Entities that elect to maintain existing PCI pools after adoption would not be able to remove assets from the pool until they are paid off, written off or sold (consistent with the current practice), but would be required to follow the new guidance for purposes of interest income and ACL.
The guidance will be effective for public business entities that are SEC filers in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Corporation plans to adopt this new standard as of January 1, 2020.
The Corporation developed a project plan in order to comply on a timely basis with the implementation of this new CECL impairment model and expects to adopt the guidance in the first quarter of 2020. The implementation process is being conducted by a working group composed of members from multiple areas across the Corporation and includes the selection and development of loss forecasting models, evaluation of technical accounting topics, updates to the Corporation’s allowance documentation, reporting processes and related internal controls, and evaluation of the overall operational readiness for the adoption. The working group provides periodic updates to the Corporation’s CECL Executive Management Committee, which has oversight responsibilities for the implementation efforts. The CECL Executive Management Committee also reports to the Corporation’s Board of Directors Audit Committee progress of the implementation plan.
Currently, the Corporation has substantially completed the development of the loss forecasting models for loan portfolios, as well as for available-for-sale and held-to-maturity debt securities and is in the process of conducting and validating the results of parallel runs, while continuing to develop the policies, systems and controls that will be required to implement the CECL standard. This process is expected to continue for the remainder of 2019.
The Corporation’s current planned approach for estimating ECL for applicable loans and debt securities includes the following key components:
An initial forecast period (“reasonable and supportable period”) of 2 years for Puerto Rico and the Virgin Islands and between 2 and 5 years for the Florida region. This period reflects management’s expectations of losses based on forward-looking economic scenarios over that time.
A historical loss forecast period covering the remaining contractual life, adjusted for prepayments, by portfolio segments and classes of financing receivables based on the change in key historical economic variables during representative historical expansionary and recessionary periods.
A reversion period of up to 3 years, utilizing a straight-line approach and reverting back to the historical macroeconomic mean.
The utilization of discounted cash flow (“DCF”) methods to measure credit impairment for loans modified in a troubled debt restructuring (“TDR”), unless they are collateral dependent and measured based on the fair value of the collateral. The DCF methods will provide the estimated life-time credit losses.
For available-for-sale and held-to-maturity securities, the Corporation will utilize the DCF methods to measure the ACL.
Based on the work completed to date, the Corporation’s loan portfolio and held-to-maturity and available-for-sale debt securities portfolio composition, and reasonable and supportable macroeconomic forecasts as of September 30, 2019, the Corporation expects that the adoption of the CECL standard will result in an overall increase in the ACL, at the adoption date, in a range of 57% to 67% from the reserves for credit losses as of September 30, 2019. The estimate primarily reflects an expected increase for longer duration residential mortgage and consumer loans and, to a lesser extent, the ACL that will be required for the Corporation’s held-to-maturity debt securities. This increase, net of income taxes, would be reflected as a decrease to opening retained earnings at January 1, 2020. The Corporation will continue to evaluate and refine the results of the loss estimates throughout 2019.
13
The ultimate effect of the adoption of the CECL standard on the Corporation’s consolidated financial statements will depend on the size and composition of the Corporation’s loan portfolio and debt securities mix, credit quality, economic conditions and forecasted macroeconomic conditions on the date of adoption, as well as any refinements to the loss models based on continuing reviews of methodologies and assumptions, including the process around qualitative factors, and model validation exercises in process. The Corporation expects to have a cumulative-effect adjustment to retained earnings related to the change in the ACL, which will impact capital. An increase in the ACL will result in a reduction to the Corporation’s and banking subsidiary’s regulatory capital ratios. The Corporation expects to adopt the option that permits institutions to limit the initial regulatory capital day-one impact by allowing a three-year phase in period for this impact, on a straight-line basis. Considering the three-year phase in option allowed by the regulatory framework, and based on the upper point of the above-mentioned impact range, the Corporation’s common equity Tier 1 capital ratio, Tier 1 capital ratio, Total capital ratio, and Leverage ratio would have been lower by 16, 16, 15, and 12 basis points, respectively, as of September 30, 2019, still well in excess of minimum capital ratios.
Subsequent Measurement of Goodwill
In January 2017, the FASB updated the Codification to simplify the subsequent measurement of goodwill by eliminating Step 2 from the current two-step goodwill impairment test. This guidance provides that a goodwill impairment test must be conducted by comparing the fair value of a reporting unit with its carrying amount. Entities must recognize an impairment charge for goodwill equal to the excess of the carrying amount over the reporting unit’s fair value. Entities have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The effect of this guidance will depend upon the performance of the reporting units that have goodwill and the market conditions affecting the fair value of each reporting unit going forward.
Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB updated the Codification and amended ASC Topic 820, “Fair Value Measurement and Disclosures,” to add, remove, and modify fair value measurement disclosuresdisclosure requirements. The disclosure requirements that are removed for public entities include:include disclosure about: (i) transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for determining when transfers between any of the three levels have occurred; and (iii) the valuation processes used for Level 3 measurements. The disclosure requirements that are modified for public entities include: (i) for certain investments in entities that calculate the net asset value, revisions to require disclosures about the timing of liquidation and lapses of redemption restrictions, if the latter has been communicated to the reporting entity; and (ii) revisions to clarify that the disclosure of Level 3 measurement uncertainty disclosure should communicate information about the uncertainty atas of the balance sheet date. The additional or new disclosure requirements include: (i) the changes in unrealized gains and losses for the period must be included in other comprehensive income for recurring Level 3 instruments held atas of the balance sheet date; and (ii) the range and weighted average of significant unobservable inputs used for Level 3 measurements must be disclosed, but adds an entity has the option to disclose other quantitative information in place of the weighted average to the extent that it would be a more reasonable and rational method to reflect the distribution of certain unobservable inputs.
This update is effective for all entities in fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any of the removed or modified disclosures immediately even if adoption of the new disclosures is delayed until the effective date. In the third quarter of 2018, the Corporation early adopted the disclosure requirements that were removed or modified by this guidance.
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service ContractCollaborative Arrangements
In AugustNovember 2018, the FASB amendedissued new guidance to clarify the Codificationinteraction between Collaborative Arrangements (“ASC Topic 808”) and Revenue from Contracts with Customers (“ASC Topic 606”) standards. The guidance (i) clarifies that certain transactions between collaborative arrangement participants should be accounted for under the ASC Topic 606 guidance; (ii) adds unit of account guidance to addressASC Topic 808 to align with ASC Topic 606; and (iii) clarifies presentation guidance for transactions with a customer’s accounting for implementation costs incurred in a cloud computingcollaborative arrangement participant that is a service contract. This update aligns the requirementsnot accounted for capitalizing implementation costs incurred in a hosting arrangement thatunder ASC Topic 606. The guidance is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. The amendments in this update also require the entity to expense the capitalized implementation costs over the term of the hosting arrangement. Expenses related to the capitalized implementation costs will be presented in the same line item in the statement of income as the fees associated with the service of the arrangement and payments for capitalized implementation costs will be classified in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. With this update, the entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.
An entity can choose between prospective and retrospective transition. For the corporation, this guidance will be effective for fiscal yearsannual reporting periods beginning after December 15,1, 2019, andincluding interim reporting periods within. Earlywithin these annual reporting periods, with early adoption is permitted, including in an interim period.permitted. The Corporation does not expect the adoption of this guidance is no expectedstandard to have a material effect on the Corporation’sits consolidated statement of financial condition, results of operations or cash flows.statements.
1514
NOTE 2 – POTENTIAL ACQUISITION OF BANCO SANTANDER PUERTO RICO
On October 21, 2019, the Corporation announced the signing of a stock purchase agreement between FirstBank Puerto Rico (“FirstBank”) and Santander Holdings USA, Inc., pursuant to which FirstBank will acquire Santander Bancorp (“Santander Bancorp”), a wholly-owned subsidiary of Santander Holdings USA, Inc. and the holding company of Banco Santander Puerto Rico (“BSPR”). The purchase price will be a base amount of $425 million, or 117.5% of Santander Bancorp’s consolidated core tangible common equity as of June 30, 2019, which represents of a $63 million premium on the $362 million consolidated core tangible common equity, plus $638 million of Santander Bancorp’s consolidated excess capital as of June 30, 2019 paid at par, in an all cash transaction, subject to adjustment based on Santander Bancorp’s consolidated balance sheet as of the closing of the acquisition (the “Closing”). The transaction is structured as an acquisition of all of the issued and outstanding common stock of Santander Bancorp, the sole shareholder of BSPR, a corporation incorporated under the laws of the Commonwealth of Puerto Rico and sole shareholder of Santander Insurance Agency, Inc. (together with Santander Bancorp and BSPR, collectively the “Acquired Companies”). Immediately following the Closing, Santander Bancorp (a direct wholly-owned subsidiary of FirstBank following the Closing) will merge with and into FirstBank (the “HoldCo Merger”), with FirstBank surviving the HoldCo Merger (the “Surviving Bank”). Immediately following the effectiveness of the HoldCo Merger, BSPR (a direct wholly-owned subsidiary of the Surviving Bank following the effectiveness of the HoldCo Merger) will merge with and into FirstBank, with FirstBank as the surviving entity in the merger.
Prior to the Closing, Santander Holdings USA, Inc., agreed to sell or otherwise transfer to Santander Holdings USA, Inc., any of its affiliates or any other third party (other than any Acquired Company) (i) all non-performing assets (along with all collateral and rights to collection related thereto) of BSPR (the “Non-Performing Assets Transfer”), and (ii) Santander Asset Management, LLC, a limited liability company organized under the laws of the Commonwealth of Puerto Rico and a direct wholly-owned subsidiary of Santander Bancorp (the “Reorganization”). The Closing is conditioned on, among other things, consummation of the Non-Performing Assets Transfer and the Reorganization. The parties are working on a transition loan servicing agreement to have FirstBank service such non-performing assets effective on the Closing Date.
In addition, the parties are working on a plan (the “Transition Plan”) for preparing the Acquired Companies for the transition of their respective business operations, facilities, employees and other assets to FirstBank, including from any dependency or reliance on services, systems or processes provided by Santander Holdings, USA, Inc. or its affiliates, or any of their respective third party service providers to FirstBank effective as of the Closing Date. The Transition Plan will describe the specific mutually agreed tasks, activities, and projects, and the timing for each of the foregoing, to be completed by each party in order to complete such transition in an orderly and efficient manner, as well as such plans and actions as may be required to prepare for the provision of services by Santander Holdings, USA, Inc. or its affiliates to the Acquired Companies or FirstBank, or from the Acquired Companies to Santander Holdings, USA, Inc. or its affiliates. The parties expect to agree on the final Transition Plan within 90 days from the date of the signing of the stock purchase agreement.
The transaction has been unanimously approved by both companies’ Boards of Directors. The transaction is expected to close in the middle of 2020, subject to the satisfaction of customary closing conditions, including receipt of all required regulatory approvals. There can be no assurance that the regulatory approvals received will not contain a condition or requirement that results in a failure to satisfy the conditions to closing set forth in the stock purchase agreement.
For further information, reference is made to the Form 8-K filed by the Company with the SEC on October 22, 2019.
15
NOTE 3 – UPDATE ON EFFECTS OF NATURAL DISASTERS
Two strong hurricanes affected the Corporation’s service areas during September 2017. The following summarizes the more significant continuing financial repercussions of these natural disasters for the Corporation and for its major subsidiary, FirstBank.
Credit Quality and Allowance for Loan and Lease Losses
Relationship officers continued to closely monitor the performance of hurricane-affected commercial loan customers during 2018. Information provided by these commercial loan officers and statistics on the performance of consumer and residential credits were factored into the determination of the allowance for loan and lease losses as of September 30, 2018. Although the identification and evaluation of hurricane-affected credits has been completed, management’s assessment of the hurricanes’ effect is still subject to uncertainties, both those specific to some individual customers, such as the resolution of insurance claims, and those applicable to the overall economic prospects of the hurricane-affected areas as a whole.
During the thirdfirst quarter and nine-month period ended September 30, 2018,of 2019, the Corporation recorded a net loan loss reserve release of approximately $2.8$6.4 million and $11.2 million, respectively, in connection with revised estimates associated with the effects of the hurricanes. The revised estimates were primarily attributable to updated assessments of financial performance and repayment prospects of certain individually-assessed commercial credits, updated payment patterns and probability of default credit risk analyses applied to consumer borrowers, and lower reserve requirements resulting from payments received duringupdated assessments of financial performance and repayment prospects of certain individually-assessed commercial credits.
The significant overall uncertainties in the first nine monthsearly assessments of 2018 that reducedhurricane-related credit losses have been largely addressed and the balance ofhurricanes’ effect on credit quality is now reflected in the consumernormal process for determining the allowance for loan and residential mortgage loan portfolios outstanding on the dates of the hurricanes. In addition, during the third quarter of 2018, consumer loan charge-offs totaling $10.9 million were taken against previously establishedlease losses and not through a separate hurricane-related qualitative reserves. These charge offs were directly linked to the performance of consumer borrowers that were subject to payment deferral programs.reserve.
As of September 30, 2018, the hurricane-related qualitative allowance amounted to $24.9 million (December 31, 2017 - $55.6 million). With the future resolution of uncertainties and the ongoing collection of information on individual commercial customers and statistics on the consumer and residential loan portfolios, the loss estimate will be revised as needed. Refer to Note 8 - Allowance for Loan and Lease Losses, to the consolidated financial statements for information about the determination of the hurricane-related qualitative reserves.
Disaster Response Plan Costs, Casualty Losses and Related Insurance
The Corporation has incurred a variety of costs to operate in disaster response mode, and some facilities and their contents, including certain OREO properties, were damaged by the storms.hurricanes. The Corporation maintains insurance for casualty losses, as well as for reasonable and necessary disaster response costs and certain revenue lost through business interruption. Insurance claim receivables were established for some of the individual costs, when incurred, based on management’s understanding of the underlying coverage and when realization of the claim was deemed probable.
During the first nine monthssecond and third quarters of 2018,2019, the Corporation reached settlementsettlements on certain insurance claims arising from the hurricanes. As a result, the Corporation received insurance proceeds of approximately $6.8$2.1 million, primarily related toinvolving repairs and maintenance costs, incurred on some facilities, including certain OREO properties, and $0.8 millionimpairments related to a loan receivable fully charged-offfacilities in prior periods.the U.S. and British Virgin Islands. The insurance proceeds were recorded against incurred losses or previously-established accounts receivable, or loan recoveries, as applicable.receivable. Insurance recoveries are recorded in the same income statement caption as the incurred losses. Recoveries from insurance proceeds in excess of losses incurred, amounting to $0.5$0.6 million forin the first nine monthssecond quarter of 2018,2019, were recognized as a gain from insurance proceeds and reported as part of “otherOther non-interest income”income in the statementconsolidated statements of income (loss). income.
As of September 30, 2018,2019, the Corporation still had an insurance claim receivable of $4.2$1.3 million (December 31, 2018 - $3.4 million), which is included as part of “other assets”Other assets in the statementconsolidated statements of financial condition. Management also believes that there is a possibility that some gains will be recognized with respect to casualty and lost revenue claims in future periods, but this is contingent on reaching agreementagreements on the Corporation’s claims with the insurance carriers.
Liquidity Management
During the first quarter of 2019, the Corporation recorded a $2.3 million credit against employees’ compensation and benefits expenses related to an employee retention benefit payment (the “Benefit”) received by the Corporation by virtue of the Disaster Tax Relief and Airport Extension Act of 2017, as amended (the “Act”). The Corporation experienced rapid accumulation of deposits after the hurricanesBenefit was available to eligible employers affected by Hurricanes Irma and Maria. An eligible employer, as established in the fourth quarterInternal Revenue Circular Letter No. 18-11 issued by the Puerto Rico Department of Treasury, is an employer that (i) on September 16, 2017 (or September 4, 2017 for Hurricane Irma) was engaged in a trade or business in Puerto Rico; (ii) whose business became inoperable on any day after such date and before January 1, 2018, due to damage caused by Hurricane Irma or Maria; and (iii) continued to pay wages to its eligible employees during the period in which the business was inoperable. For purposes of the income tax return, the Benefit will not affect the Corporation’s right to claim a deduction on wages paid and the first nine monthsamount of 2018. Total depositsthe Benefit will not be treated as of September 30, 2018, excluding brokered CDs, increased $602.4 million from December 31, 2017 and $963.9 million since September 30, 2017. The most significant increase was in non-interest-bearing demand deposits, which grew 27%, or $487.4 million, from December 31, 2017 and 46%, or $734.9 million, since September 30, 2017. Hurricane-related factors, such as the effect of disaster relief funds and settlements of insurance claims, contributed to this growth. Although management expects the balances accumulated by deposit customers in the hurricane-affected areas to reduce over time, it is difficult to predict when and to what degree, and there may be further growth as insurance claims are resolved and additional disaster-recovery funds are distributed.taxable income.
16
NOTE 34 – EARNINGS PER COMMON SHARE
| The calculations of earnings per common share for the quarters and nine-month periods ended September 30, 2018 and 2017 are as follows: | The calculations of earnings per common share for the quarters and nine-month periods ended September 30, 2019 and 2018 are as follows: | ||||||||||||||||||||||
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(In thousands, except per share information) | (In thousands, except per share information) |
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Net income (loss) | $ | 36,323 |
| $ | (10,752) |
| $ | 100,503 |
| $ | 42,787 | |||||||||||||
Net income | Net income | $ | 46,327 |
| $ | 36,323 |
| $ | 130,928 |
| $ | 100,503 | ||||||||||||
Less: Preferred stock dividends | Less: Preferred stock dividends |
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Net income (loss) attributable to common stockholders | $ | 35,654 |
| $ | (11,421) |
| $ | 98,496 |
| $ | 40,780 | |||||||||||||
Net income attributable to common stockholders | Net income attributable to common stockholders | $ | 45,658 |
| $ | 35,654 |
| $ | 128,921 |
| $ | 98,496 | ||||||||||||
Weighted-Average Shares: | Weighted-Average Shares: |
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| 216,149 |
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| 214,187 |
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Average potential dilutive common shares | Average potential dilutive common shares |
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| 537 |
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Average common shares outstanding - assuming dilution | Average common shares outstanding - assuming dilution |
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Earnings per common share: | Earnings per common share: |
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Basic | Basic | $ | 0.16 |
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| $ | 0.19 | Basic | $ | 0.21 |
| $ | 0.16 |
| $ | 0.60 |
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Diluted | Diluted | $ | 0.16 |
| $ | (0.05) |
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| $ | 0.19 | Diluted | $ | 0.21 |
| $ | 0.16 |
| $ | 0.59 |
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Earnings (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares issued and outstanding. Net income (loss) attributable to common stockholders represents net income (loss) 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. Basic weighted-average common shares outstanding exclude unvested shares of restricted stock that do not contain non-forfeitable dividend rights.
Potential dilutive common shares consist of unvested shares of restricted stock that do not contain non-forfeitable dividend rights, performance units that do not contain non-forfeitable dividend rights if the performance condition is met as of the end of the reporting period, and warrants outstanding during the period and common stock issued under the assumed exercise of stock options using the treasury stock method. This method assumes that the potential dilutive common shares are issued and outstanding and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to purchase common stock at the exercise date. The difference between the numbers of potential dilutive shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. UnvestedPotential dilutive common shares of restricted stock andalso 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. 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.
On May 17, 2018, the U.S. Treasury exercised its warrant to purchase 1,285,899 shares of the Corporation’s common stock on a cashless basis, resulting in the issuance of 730,571 shares of common stock.
17
NOTE 45 – 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 effectivethen-effective Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended. The Omnibus Plan provides for equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, cash-based awards and other stock-based awards. The Omnibus Plan authorizes the issuance of up to14,169,807 shares of common stock, subject to adjustments for stock splits, reorganizations and other similar events. As of September 30, 2018, 6,892,8552019, 6,596,393 authorized shares of common stock were available for issuance under the Omnibus Plan. The Corporation’s Board of Directors, based on the recommendation of the Corporation’s Compensation and Benefits Committee, has the power and authority to determine those eligible to receive awards and to establish the terms and conditions of any awards, subject to various limits and vesting restrictions that apply to individual and aggregate awards.
Restricted Stock
Under the Omnibus Plan, the Corporation may grant restricted stock to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While the restricted stock is subject to forfeiture and does not contain non-forfeitable dividend rights, restricted stock participants may exercise full voting rights. The restricted stock granted under the Omnibus Plan is typically subject to a vesting period. During the first nine months of 2018,2019, the Corporation awarded to its independent directors 65,447 51,841 shares of restricted stock that are subject to a one-yearone year vesting period.periods. In addition, during the first nine months of 2018,2019, the Corporation awarded 342,439 262,371 shares of restricted stock to employees; fifty percent (50%(50%) of those shares vest in two years fromon the two-year anniversary of the grant date and the remaining (50%)50% vest in three years fromon the three-year anniversary of the grant date. Included in those 342,439262,371 shares of restricted stock granted during the first nine months of 2019 were 20,447 13,308 shares granted to retirement-eligible employees at the grant date. The total expense determined for the restricted stock awarded to retirement-eligible employees was charged against earnings at the grant date. The fair value of the shares of restricted stock granted in the first nine months of 20182019 was based on the market price of the Corporation’s outstanding common stock on the date of the grant.
| The following table summarizes the restricted stock activity in the first nine months of 2018 under the Omnibus Plan: | The following table summarizes the restricted stock activity in the first nine months of 2019 under the Omnibus Plan: | ||||||||
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Non-vested shares at beginning of year | 1,816,968 |
| $ | 2.76 | ||||||
Unvested shares outstanding at beginning of year | Unvested shares outstanding at beginning of year | 964,110 |
| $ | 4.79 | |||||
Granted | Granted | 407,886 |
| 6.71 | Granted | 314,212 |
| 10.97 | ||
Forfeited | Forfeited | (11,000) |
| 3.65 | Forfeited | (12,750) |
| 8.68 | ||
Vested | Vested | (1,234,180) |
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| 2.45 | Vested | (619,517) |
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| 3.97 |
Non-vested shares at September 30, 2018 | 979,674 |
| $ | 4.79 | ||||||
Unvested shares outstanding as of September 30, 2019 | Unvested shares outstanding as of September 30, 2019 | 646,055 |
| $ | 8.51 | |||||
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18
For the quarter and nine-month period ended September 30, 2018,2019, the Corporation recognized $0.8$0.7 million and $2.7 $2.2 million, respectively, of stock-based compensation expense related to restricted stock awards, compared to $1.0 $0.8 million and $3.0 $2.7 million for the same periods in 2017,2018, respectively. As of September 30, 2018,2019, there was $2.9 $3.3 million of total unrecognized compensation cost related to non-vestedunvested shares of restricted stock. The weighted average period over which the Corporation expects to recognize such cost is 1.41.6 years. The total expense determined for restricted stock awards granted to retirement-eligible employees was charged against earnings at the grant date.
During the first nine months of 2017,2018, the Corporation awarded to its independent directors 140,36065,447 shares of restricted stock that were subject to a one-yearone year vesting period.periods. In addition, during the first nine months of 2017, 2018, the Corporation awarded 951,332 342,439 shares of restricted stock to employees subject to a vesting periodemployees; 50% of two years.those shares vest on the two-year anniversary of the grant date and the remaining 50% vest on the three year anniversary of the grant date. Included in those 951,332342,439 shares of restricted stock were 838,332 20,447 shares granted into retirement-eligible employees at the first quarter of 2017 to certain senior officers consistent with the requirements of the Troubled Asset Relief Program (“TARP”) Interim Final Rule. On May 10, 2017, the United States Department of the Treasury (the “U.S. Treasury”) announced that it had sold all of its remaining 10,291,553 shares of the Corporation’s common stock. As a result of the sale by the U.S. Treasury, the Corporation ceased being subject to the compensation-related restrictions under TARP, which substantially limited the Corporation’s ability to award short-term and long-term incentives to the Corporation’s executives, and the Corporation’s senior officers are no longer subject to the transferability restrictions on their shares of restricted stock. However, since the U.S. Treasury did not recover the full amount of its original investment under TARP, the senior officers forfeited 2,370,571, or 50%, of their outstanding shares of restricted stock, resulting in a reduction in the number of common shares outstanding.grant date.
The Corporation accounted for the restricted stock that it granted in 2017 prior to the U.S. Treasury’s sale of its shares at a discount from the market price of the Corporation’s outstanding common stock on the date of the grant. For the 838,332 shares of restricted stock granted under the TARP requirements, the market price was discounted assuming that 50% of the shares of restricted stock would become freely transferable and the remaining 50% would be forfeited, resulting in a fair value of $2.71 for each share of restricted stock granted under TARP requirements.
Stock-based compensation accounting guidance requires the Corporation to reverse compensation expense for any awards that are forfeited due to employee or director turnover. Quarterly changes in the estimated forfeiture rate may have a significant effect on stock-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period in which the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, 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
18
the estimated forfeiture rate, an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase in the expense recognized in the financial statements. The estimated forfeiture rate did not change as a result of the restricted shares forfeited in connection with the aforementioned U.S. Treasury’s sale of the Corporation’s common stock.
19
Performance Units
Under the Omnibus Plan, the Corporation may award performance units to Omnibus Plan participants. During the first nine months of 2018,2019, the Corporation granted 304,408 200,053 units to executives, with each unit representing the value of one share of the Corporation’s common stock. The performance units granted in 2019 are for the performance period beginning January 1, 20182019 and ending on December 31, 20202021 and are subject to a three-yearthree year requisite service period.periods. These awards do not contain non-forfeitable rights to dividend equivalent amounts and can only be settled in shares of the Corporation’s common stock. Included in those 304,408 performance units were 29,171 units granted to retirement-eligible executives at the grant date. The performance units will vest based on the achievement of a pre-established tangible book value per share target as of December 31, 2020.2021. All of the performance units will vest if performance is at the pre-established performance target level or above. However, the participants may vest on 50% of the awards to the extent that performance is below the target but at 80% of the pre-established performance target level (the 80%“80% minimum threshold)threshold”), which is measured based upon the growth in the tangible book value during the performance cycle. If performance is between the 80% minimum threshold and the pre-established performance target level, the participants will vest on a proportional amount. No performance units will vest if performance is below the 80% minimum threshold.
During the first nine months of 2018, the Corporation awarded 304,408 performance units to executives. The performance units granted in 2018 are for the performance period beginning January 1, 2018 and ending on December 31, 2020 and are subject to three year requisite service periods and a pre-established performance target level as described above.
The fair value of the performance units awarded during the first nine months of 2019 and 2018 was based on the market price of the Corporation’s outstanding common stock on the date of the grant. For the quarter and the first nine months of 2018,nine-month period ended September 30, 2019, the Corporation recognized $0.1 $0.3 million and $0.5 $0.8 million, respectively, of stock-based compensation expense related to performance units.units awards, compared to $0.1 million and $0.5 million for the same periods in 2018, respectively. As of September 30, 2018,2019, there was $1.4 $2.7 million of total unrecognized compensation cost related to unvested performance units that the Corporation expects to recognize over the three-year requisite service period. The total expense determined for the performance units awarded to retirement-eligible executives was charged against earnings at the grant date. 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. A cumulative adjustment to compensation expense is recognized in the current period to reflect any changes in the probability of achievement of the performance goals.
Salary stock
Also, effective April 1, 2013, the Corporation’s Board of Directors determined to increase the salary amounts paid to certain executive officers, primarily by paying the increased salary amounts in the form of shares of the Corporation’s common stock issued under the Omnibus Plan, instead of cash. During the first nine months of 2018, the Corporation issued 268,709 shares of common stock (as compared to 427,940 shares during the first nine months of 2017) with a weighted average market value per share of $6.51(as compared to a weighted average market value of $5.88 during the first nine months of 2017) as salary stock compensation. This resulted in a compensation expense of $1.7 million recorded in 2018 (as compared to $2.5 million during the first nine months of 2017).2018. Effective July 1, 2018, the payment ofCorporation ceased paying additional salary amounts in the form of stock was eliminated in accordance with the previously disclosed revised executive compensation program.
During the first nine months of 2019, the Corporation withheld 96,377 176,015 shares (first nine months of 20172018 – 143,509 336,985shares) of the restricted stock that vested during such period and withheld 96,377 shares from the common stock paid to certain senior officersofficer as additional compensation and 336,985 shares of restricted stock that vested duringin the first nine months of 2018 (first nine months of 2017 – 243,102) to cover employees’ payroll and income tax withholding liabilities; these shares are held as treasury shares. The Corporation paid in cash any fractional share of salary stock to which the officer was entitled. In the consolidated financial statements, the Corporation treats shares withheld for tax purposes as common stock repurchases.
2019
NOTE 56 – INVESTMENT SECURITIES
Investment Securities Available for Sale
The amortized cost, non-credit loss component of OTTI recorded in OCI, gross unrealized gains and losses recorded in OCI, estimated fair value, and weighted-average yield of investment securities available for sale by contractual maturities as of September 30, 20182019 and December 31, 20172018 were as follows:
|
| September 30, 2018 |
| September 30, 2019 | ||||||||||||||||||||||||||||||
|
| Amortized cost |
| Noncredit Loss Component of OTTI Recorded in OCI |
|
|
| Fair value |
|
|
| Amortized cost |
| Noncredit Loss Component of OTTI Recorded in OCI |
|
|
| Fair value |
|
| ||||||||||||||
|
|
|
| Gross Unrealized |
| Weighted- |
|
| Gross Unrealized |
| Weighted- | |||||||||||||||||||||||
|
|
|
| gains |
| losses |
| average yield% |
|
| gains |
| losses |
| average yield% | |||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) |
| (Dollars in thousands) |
| ||||||||||||||||||||||||||||||
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U.S. Treasury securities: | U.S. Treasury securities: |
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| U.S. Treasury securities: |
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| Due within one year | $ | 7,481 |
| $ | - |
| $ | - |
| $ | 55 |
| $ | 7,426 |
| 1.29 | Due within one year | $ | 7,476 |
| $ | - |
| $ | 9 |
| $ | - |
| $ | 7,485 |
| 2.42 |
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U.S. government-sponsored | U.S. government-sponsored |
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| U.S. government-sponsored |
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agencies obligations: |
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| ||||||||||||||||||
agencies' obligations: | agencies' obligations: |
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| |||||||||||||||||
Due within one year | Due within one year |
| 156,575 |
|
| - |
|
| - |
|
| 1,584 |
|
| 154,991 |
| 1.25 | Due within one year |
| 128,376 |
|
| - |
|
| 5 |
|
| 318 |
|
| 128,063 |
| 1.40 |
After 1 to 5 years | After 1 to 5 years |
| 236,368 |
|
| - |
|
| - |
|
| 4,480 |
|
| 231,888 |
| 1.82 | After 1 to 5 years |
| 81,802 |
|
| - |
|
| 422 |
|
| 77 |
|
| 82,147 |
| 2.13 |
After 5 to 10 years | After 5 to 10 years |
| 191,119 |
|
| - |
|
| 47 |
|
| 5,505 |
|
| 185,661 |
| 2.94 | After 5 to 10 years |
| 75,289 |
|
| - |
|
| 588 |
|
| 90 |
|
| 75,787 |
| 2.63 |
After 10 years | After 10 years |
| 43,638 |
|
| - |
|
| - |
|
| 241 |
|
| 43,397 |
| 2.50 | After 10 years |
| 25,819 |
|
| - |
|
| 4 |
|
| 93 |
|
| 25,730 |
| 2.40 |
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|
Puerto Rico government | Puerto Rico government |
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| Puerto Rico government |
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obligations: | obligations: |
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| obligations: |
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|
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|
|
|
|
|
After 5 to 10 years | After 5 to 10 years |
| 4,013 |
|
| - |
|
| 129 |
|
| - |
|
| 4,142 |
| 3.14 | After 5 to 10 years |
| 4,000 |
|
| - |
|
| 245 |
|
| - |
|
| 4,245 |
| 5.12 |
After 10 years | After 10 years |
| 4,111 |
|
| - |
|
| - |
|
| 1,313 |
|
| 2,798 |
| 6.97 | After 10 years |
| 4,280 |
|
| - |
|
| - |
|
| 1,324 |
|
| 2,956 |
| 6.97 |
|
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|
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United States and Puerto Rico | United States and Puerto Rico |
|
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| United States and Puerto Rico |
|
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|
|
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|
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|
|
government obligations | government obligations |
| 643,305 |
|
| - |
|
| 176 |
|
| 13,178 |
|
| 630,303 |
| 2.10 | government obligations |
| 327,042 |
|
| - |
|
| 1,273 |
|
| 1,902 |
|
| 326,413 |
| 2.09 |
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Mortgage-backed securities (“MBS”): | Mortgage-backed securities (“MBS”): |
|
|
|
|
|
|
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|
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|
|
|
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|
|
| Mortgage-backed securities (“MBS”): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac (“FHLMC”) certificates: | Freddie Mac (“FHLMC”) certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Freddie Mac (“FHLMC”) certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years | After 5 to 10 years |
| 96,598 |
|
| - |
|
| 8 |
|
| 3,527 |
|
| 93,079 |
| 2.09 | After 5 to 10 years |
| 78,771 |
|
| - |
|
| 408 |
|
| 242 |
|
| 78,937 |
| 2.08 |
After 10 years | After 10 years |
| 274,233 |
|
| - |
|
| - |
|
| 9,636 |
|
| 264,597 |
| 2.50 | After 10 years |
| 306,008 |
|
| - |
|
| 3,550 |
|
| 778 |
|
| 308,780 |
| 2.53 |
|
|
| 370,831 |
|
| - |
|
| 8 |
|
| 13,163 |
|
| 357,676 |
| 2.39 |
|
| 384,779 |
|
| - |
|
| 3,958 |
|
| 1,020 |
|
| 387,717 |
| 2.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Ginnie Mae (“GNMA”) certificates: | Ginnie Mae (“GNMA”) certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ginnie Mae (“GNMA”) certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year | Due within one year |
| 1 |
|
| - |
|
| - |
|
| - |
|
| 1 |
| 3.40 | |||||||||||||||||
After 1 to 5 years | After 1 to 5 years |
| 160 |
|
| - |
|
| 2 |
|
| - |
|
| 162 |
| 3.52 | After 1 to 5 years |
| 123 |
|
| - |
|
| 2 |
|
| - |
|
| 125 |
| 3.89 |
After 5 to 10 years | After 5 to 10 years |
| 65,411 |
|
| - |
|
| 305 |
|
| 714 |
|
| 65,002 |
| 2.89 | After 5 to 10 years |
| 50,216 |
|
| - |
|
| 599 |
|
| 12 |
|
| 50,803 |
| 2.81 |
After 10 years | After 10 years |
| 122,975 |
|
| - |
|
| 2,962 |
|
| 1,030 |
|
| 124,907 |
| 3.93 | After 10 years |
| 173,707 |
|
| - |
|
| 6,824 |
|
| 249 |
|
| 180,282 |
| 3.47 |
|
|
| 188,546 |
|
| - |
|
| 3,269 |
|
| 1,744 |
|
| 190,071 |
| 3.57 |
|
| 224,047 |
|
| - |
|
| 7,425 |
|
| 261 |
|
| 231,211 |
| 3.32 |
Fannie Mae (“FNMA”) certificates: | Fannie Mae (“FNMA”) certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fannie Mae (“FNMA”) certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
| 379 |
|
| - |
|
| 8 |
|
| - |
|
| 387 |
| 1.91 | ||||||||||||||||||
After 1 to 5 years | After 1 to 5 years |
| 25,872 |
|
| - |
|
| - |
|
| 468 |
|
| 25,404 |
| 2.75 | After 1 to 5 years |
| 19,784 |
|
| - |
|
| 468 |
|
| - |
|
| 20,252 |
| 2.79 |
After 5 to 10 years | After 5 to 10 years |
| 191,965 |
|
| - |
|
| - |
|
| 6,982 |
|
| 184,983 |
| 2.22 | After 5 to 10 years |
| 148,192 |
|
| - |
|
| 1,527 |
|
| 683 |
|
| 149,036 |
| 2.13 |
After 10 years | After 10 years |
| 557,882 |
|
| - |
|
| 1,055 |
|
| 18,909 |
|
| 540,028 |
| 2.65 | After 10 years |
| 543,355 |
|
| - |
|
| 8,333 |
|
| 1,092 |
|
| 550,596 |
| 2.65 |
|
|
| 776,098 |
|
| - |
|
| 1,063 |
|
| 26,359 |
|
| 750,802 |
| 2.55 |
|
| 711,331 |
|
| - |
|
| 10,328 |
|
| 1,775 |
|
| 719,884 |
| 2.55 |
Collateralized mortgage obligations | Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
guaranteed by the FHLMC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
issued or guaranteed by the FHLMC | issued or guaranteed by the FHLMC |
|
|
|
|
|
|
| ` |
|
|
|
|
|
|
|
| |||||||||||||||||
and GNMA: | and GNMA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| and GNMA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years | After 1 to 5 years |
| 7,462 |
|
| - |
|
| 4 |
|
| 10 |
|
| 7,456 |
| 2.91 | After 1 to 5 years |
| 647 |
|
| - |
|
| - |
|
| - |
|
| 647 |
| 2.69 |
After 10 years | After 10 years |
| 59,575 |
|
| - |
|
| 348 |
|
| 81 |
|
| 59,842 |
| 3.07 | After 10 years |
| 58,369 |
|
| - |
|
| 398 |
|
| 130 |
|
| 58,637 |
| 2.90 |
|
|
| 67,037 |
|
| - |
|
| 352 |
|
| 91 |
|
| 67,298 |
| 3.05 |
|
| 59,016 |
|
| - |
|
| 398 |
|
| 130 |
|
| 59,284 |
| 2.89 |
Other mortgage pass-through |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
trust certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Private label MBS: | Private label MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
After 10 years | After 10 years |
| 20,038 |
|
| 5,467 |
|
| - |
|
| - |
|
| 14,571 |
| 4.57 | After 10 years |
| 16,971 |
|
| 5,417 |
|
| - |
|
| - |
|
| 11,554 |
| 4.07 |
Total MBS | Total MBS |
| 1,422,550 |
|
| 5,467 |
|
| 4,692 |
|
| 41,357 |
|
| 1,380,418 |
| 2.70 | Total MBS |
| 1,396,144 |
|
| 5,417 |
|
| 22,109 |
|
| 3,186 |
|
| 1,409,650 |
| 2.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years | After 1 to 5 years |
| 500 |
|
| - |
|
| - |
|
| - |
|
| 500 |
| 2.96 | After 1 to 5 years |
| 500 |
|
| - |
|
| - |
|
| - |
|
| 500 |
| 2.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities | Total investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available for sale | available for sale | $ | 2,066,355 |
| $ | 5,467 |
| $ | 4,868 |
| $ | 54,535 |
| $ | 2,011,221 |
| 2.51 | available for sale | $ | 1,723,686 |
| $ | 5,417 |
| $ | 23,382 |
| $ | 5,088 |
| $ | 1,736,563 |
| 2.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2120
|
| December 31, 2017 |
| December 31, 2018 | ||||||||||||||||||||||||||||||
|
| Amortized cost |
| Noncredit Loss Component of OTTI Recorded in OCI |
| Gross Unrealized |
| Fair value |
|
|
| Amortized cost |
| Noncredit Loss Component of OTTI Recorded in OCI |
| Gross Unrealized |
| Fair value |
|
| ||||||||||||||
|
|
|
|
| Weighted- |
|
| �� | Weighted- | |||||||||||||||||||||||||
|
|
|
| gains |
| losses |
| average yield% |
|
| gains |
| losses |
| average yield% | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
(Dollars in thousands) | (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities: | U.S. Treasury securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Treasury securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| After 1 to 5 years | $ | 7,458 |
| $ | - |
| $ | - |
| $ | 57 |
| $ | 7,401 |
| 1.29 | Due within one year | $ | 7,489 |
| $ | - |
| $ | - |
| $ | 33 |
| $ | 7,456 |
| 1.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
U.S. government-sponsored | U.S. government-sponsored |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. government-sponsored |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agencies obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
agencies' obligations: | agencies' obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
| Due within one year |
| 122,471 |
|
| - |
|
| - |
|
| 319 |
|
| 122,152 |
| 1.06 | Due within one year |
| 191,531 |
|
| - |
|
| - |
|
| 1,908 |
|
| 189,623 |
| 1.28 |
| After 1 to 5 years |
| 309,472 |
|
| - |
|
| 28 |
|
| 3,735 |
|
| 305,765 |
| 1.42 | After 1 to 5 years |
| 184,851 |
|
| - |
|
| 203 |
|
| 2,249 |
|
| 182,805 |
| 2.07 |
| After 5 to 10 years |
| 133,451 |
|
| - |
|
| 117 |
|
| 319 |
|
| 133,249 |
| 2.72 | After 5 to 10 years |
| 195,750 |
|
| - |
|
| 286 |
|
| 1,674 |
|
| 194,362 |
| 2.95 |
| After 10 years |
| 40,769 |
|
| - |
|
| 1 |
|
| 149 |
|
| 40,621 |
| 1.84 | After 10 years |
| 34,627 |
|
| - |
|
| - |
|
| 217 |
|
| 34,410 |
| 2.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico government | Puerto Rico government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Puerto Rico government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations: | obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| After 5 to 10 years |
| 4,071 |
|
| - |
|
| 47 |
|
| - |
|
| 4,118 |
| 3.14 | After 5 to 10 years |
| 4,000 |
|
| - |
|
| 128 |
|
| - |
|
| 4,128 |
| 5.12 |
| After 10 years |
| 3,972 |
|
| - |
|
| - |
|
| 1,277 |
|
| 2,695 |
| 6.97 | After 10 years |
| 4,185 |
|
| - |
|
| - |
|
| 1,361 |
|
| 2,824 |
| 6.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
United States and Puerto Rico | United States and Puerto Rico |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| United States and Puerto Rico |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government obligations | government obligations |
| 621,664 |
|
| - |
|
| 193 |
|
| 5,856 |
|
| 616,001 |
| 1.70 | government obligations |
| 622,433 |
|
| - |
|
| 617 |
|
| 7,442 |
|
| 615,608 |
| 2.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
MBS: | MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates: | FHLMC certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| FHLMC certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| After 5 to 10 years |
| 18,658 |
| - |
| 14 |
| 63 |
| 18,609 |
| 2.14 | After 5 to 10 years |
| 92,149 |
| - |
| 31 |
| 1,850 |
| 90,330 |
| 2.09 | ||||||||
| After 10 years |
| 297,733 |
|
| - |
|
| 217 |
|
| 4,853 |
|
| 293,097 |
| 2.23 | After 10 years |
| 265,624 |
|
| - |
|
| 523 |
|
| 6,699 |
|
| 259,448 |
| 2.52 |
|
|
| 316,391 |
|
| - |
|
| 231 |
|
| 4,916 |
|
| 311,706 |
| 2.23 |
|
| 357,773 |
|
| - |
|
| 554 |
|
| 8,549 |
|
| 349,778 |
| 2.41 |
GNMA certificates: | GNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| GNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| After 1 to 5 years |
| 81 |
|
| - |
|
| 1 |
|
| - |
|
| 82 |
| 3.23 | After 1 to 5 years |
| 176 |
|
| - |
|
| 3 |
|
| - |
|
| 179 |
| 3.43 |
| After 5 to 10 years |
| 69,661 |
|
| - |
|
| 1,244 |
|
| - |
|
| 70,905 |
| 3.05 | After 5 to 10 years |
| 61,604 |
|
| - |
|
| 408 |
|
| 503 |
|
| 61,509 |
| 2.88 |
| After 10 years |
| 145,067 |
|
| - |
|
| 5,910 |
|
| 334 |
|
| 150,643 |
| 3.81 | After 10 years |
| 118,898 |
|
| - |
|
| 2,938 |
|
| 747 |
|
| 121,089 |
| 3.92 |
|
|
| 214,809 |
|
| - |
|
| 7,155 |
|
| 334 |
|
| 221,630 |
| 3.56 |
|
| 180,678 |
|
| - |
|
| 3,349 |
|
| 1,250 |
|
| 182,777 |
| 3.56 |
FNMA certificates: | FNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| FNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| After 1 to 5 years |
| 20,831 |
|
| - |
|
| 294 |
|
| 109 |
|
| 21,016 |
| 2.69 | Due within one year |
| 119 |
|
| - |
|
| 2 |
|
| - |
|
| 121 |
| 2.20 |
| After 5 to 10 years |
| 49,934 |
|
| - |
|
| - |
|
| 818 |
|
| 49,116 |
| 1.83 | After 1 to 5 years |
| 19,798 |
|
| - |
|
| 50 |
|
| 122 |
|
| 19,726 |
| 2.79 |
| After 10 years | 613,129 |
|
| - |
|
| 3,180 |
|
| 6,401 |
|
| 609,908 |
| 2.43 | After 5 to 10 years |
| 165,067 |
|
| - |
|
| 2 |
|
| 3,822 |
|
| 161,247 |
| 2.13 | |
|
|
| 683,894 |
|
| - |
|
| 3,474 |
|
| 7,328 |
|
| 680,040 |
| 2.39 | After 10 years | 543,972 |
|
| - |
|
| 2,211 |
|
| 13,233 |
|
| 532,950 |
| 2.67 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 728,956 |
|
| - |
|
| 2,265 |
|
| 17,177 |
|
| 714,044 |
| 2.55 |
Collateralized mortgage | Collateralized mortgage |
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
| Collateralized mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| obligations issued or guaranteed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| obligations issued or guaranteed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| by the FHLMC and GNMA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| by the FHLMC and GNMA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| After 1 to 5 years |
| 5,918 |
| - |
| 14 |
| - |
| 5,932 |
| 2.21 | After 1 to 5 years |
| 6,530 |
| - |
| 1 |
| 18 |
| 6,513 |
| 3.15 | ||||||||
| After 5 to 10 years |
| 2,556 |
| - |
| 11 |
| - |
| 2,567 |
| 2.23 | After 10 years |
| 59,020 |
|
| - |
|
| 474 |
|
| 60 |
|
| 59,434 |
| 3.22 | ||||
| After 10 years |
| 35,331 |
|
| - |
|
| 231 |
|
| - |
|
| 35,562 |
| 2.22 |
|
| 65,550 |
|
| - |
|
| 475 |
|
| 78 |
|
| 65,947 |
| 3.22 |
|
|
| 43,805 |
|
| - |
|
| 256 |
|
| - |
|
| 44,061 |
| 2.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Other mortgage pass-through |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
trust certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Private label MBS | Private label MBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
| After 10 years |
| 22,791 |
|
| 5,731 |
|
| - |
|
| - |
|
| 17,060 |
| 2.44 | After 10 years |
| 19,340 |
|
| 5,426 |
|
| - |
|
| - |
|
| 13,914 |
| 4.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MBS |
| 1,281,690 |
|
| 5,731 |
|
| 11,116 |
|
| 12,578 |
|
| 1,274,497 |
| 2.54 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total MBS: | Total MBS: |
| 1,352,297 |
|
| 5,426 |
|
| 6,643 |
|
| 27,054 |
|
| 1,326,460 |
| 2.71 | |||||||||||||||||
Other | Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Due within one year |
| 100 |
|
| - |
|
| - |
|
| - |
|
| 100 |
| 1.48 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Equity securities (1) |
| 424 |
|
| - |
|
| - |
|
| 6 |
|
| 418 |
| 2.11 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| After 1 to 5 years |
| 500 |
|
| - |
|
| - |
|
| - |
|
| 500 |
| 2.96 |
Total investment securities | Total investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| available for sale | $ | 1,903,878 |
| $ | 5,731 |
| $ | 11,309 |
| $ | 18,440 |
| $ | 1,891,016 |
| 2.27 | available for sale | $ | 1,975,230 |
| $ | 5,426 |
| $ | 7,260 |
| $ | 34,496 |
| $ | 1,942,568 |
| 2.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | As of January 1, 2018, the Corporation adopted ASU 2016-01, resulting in the reclassification of $0.4 million in equity securities from available-for-sale investment securities to other investment securities. | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2221
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 and the noncredit loss component of OTTI are presented as part of OCI.
The following tables show the Corporation’s available-for-sale investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 20182019 and December 31, 2017.2018. The tables also include debt securities for which an OTTI was recognized and only the amount related to a credit loss was recognized in earnings. For unrealized losses for which OTTI was recognized, the related credit loss was charged against the amortized cost basis of the debt security.
|
| As of September 30, 2018 | ||||||||||||||||||||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total |
| As of September 30, 2019 | ||||||||||||||||||||||||||||
|
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
| Less than 12 months |
| 12 months or more |
| Total | ||||||||||||||||||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized | ||||||||||||
| (In thousands) |
|
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | |||||||||||||||||||||
| Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
| |||||||||||||||
| Puerto Rico-government obligations | $ | - |
| $ | - |
| $ | 2,798 |
| $ | 1,313 |
| $ | 2,798 |
| $ | 1,313 | Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Treasury and U.S. government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Puerto Rico-government obligations | $ | - |
| $ | - |
| $ | 2,956 |
| $ | 1,324 |
| $ | 2,956 |
| $ | 1,324 |
| agenciesʼ obligations |
| 251,555 |
|
| 5,585 |
| 366,761 |
| 6,280 |
|
| 618,316 |
| 11,865 | U.S. Treasury and U.S. government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| agenciesʼ obligations |
| 11,789 |
|
| 80 |
| 170,773 |
| 498 |
| 182,562 |
| 578 | ||||
| FNMA |
| 342,334 |
|
| 6,489 |
|
| 369,408 |
|
| 19,870 |
|
| 711,742 |
|
| 26,359 | MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| FHLMC |
| 183,780 |
|
| 3,508 |
|
| 173,733 |
|
| 9,655 |
|
| 357,513 |
|
| 13,163 | FNMA |
| 31,860 |
|
| 141 |
|
| 200,733 |
|
| 1,634 |
|
| 232,593 |
|
| 1,775 |
| GNMA |
| 34,354 |
|
| 491 |
|
| 32,999 |
|
| 1,253 |
|
| 67,353 |
|
| 1,744 | FHLMC |
| 15,054 |
|
| 75 |
|
| 74,495 |
|
| 945 |
|
| 89,549 |
|
| 1,020 |
| Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| GNMA |
| 66,515 |
|
| 151 |
|
| 27,640 |
|
| 110 |
|
| 94,155 |
|
| 261 |
| issued or guaranteed by |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| FHLMC and GNMA |
| 31,963 |
|
| 91 |
|
| - |
|
| - |
|
| 31,963 |
|
| 91 | issued or guaranteed by the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other mortgage pass-through |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| FHLMC and GNMA |
| 14,075 |
|
| 130 |
|
| - |
|
| - |
|
| 14,075 |
|
| 130 |
| trust certificates |
| - |
|
| - |
|
| 14,571 |
|
| 5,467 |
|
| 14,571 |
|
| 5,467 | Private label MBS |
| - |
|
| - |
|
| 11,554 |
|
| 5,417 |
|
| 11,554 |
|
| 5,417 |
|
| $ | 843,986 |
| $ | 16,164 |
| $ | 960,270 |
| $ | 43,838 |
| $ | 1,804,256 |
| $ | 60,002 |
| $ | 139,293 |
| $ | 577 |
| $ | 488,151 |
| $ | 9,928 |
| $ | 627,444 |
| $ | 10,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2017 |
| As of December 31, 2018 | ||||||||||||||||||||||||||||||||
|
| Less than 12 months |
| 12 months or more |
| Total |
| Less than 12 months |
| 12 months or more |
| Total | ||||||||||||||||||||||||
|
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized | ||||||||||||
|
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||||||||
(In thousands) | (In thousands) |
|
| (In thousands) |
|
| ||||||||||||||||||||||||||||||
Debt securities: | Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico-government obligations | Puerto Rico-government obligations | $ | - |
| $ | - |
| $ | 2,695 |
| $ | 1,277 |
| $ | 2,695 |
| $ | 1,277 | Puerto Rico-government obligations | $ | - |
| $ | - |
| $ | 2,824 |
| $ | 1,361 |
| $ | 2,824 |
| $ | 1,361 |
U.S. Treasury and U.S. government | U.S. Treasury and U.S. government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Treasury and U.S. government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agenciesʼ obligations | agenciesʼ obligations |
| 136,459 |
|
| 494 |
|
| 362,050 |
|
| 4,085 |
|
| 498,509 |
|
| 4,579 | agenciesʼ obligations |
| 16,669 |
|
| 77 |
|
| 468,094 |
|
| 6,004 |
|
| 484,763 |
|
| 6,081 |
MBS: | MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA | FNMA |
| 189,699 |
|
| 1,705 |
|
| 274,963 |
|
| 5,623 |
|
| 464,662 |
|
| 7,328 | FNMA |
| 25,079 |
|
| 129 |
|
| 521,871 |
|
| 17,048 |
|
| 546,950 |
|
| 17,177 |
FHLMC | FHLMC |
| 91,174 |
|
| 590 |
|
| 166,331 |
|
| 4,326 |
|
| 257,505 |
|
| 4,916 | FHLMC |
| 3,382 |
|
| 32 |
|
| 263,798 |
|
| 8,517 |
|
| 267,180 |
|
| 8,549 |
GNMA | GNMA |
| 39,145 |
|
| 334 |
|
| - |
|
| - |
|
| 39,145 |
|
| 334 | GNMA |
| 3,364 |
|
| 15 |
|
| 57,535 |
|
| 1,235 |
|
| 60,899 |
|
| 1,250 |
Other mortgage pass-through |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
trust certificates |
| - |
|
| - |
|
| 17,060 |
|
| 5,731 |
|
| 17,060 |
|
| 5,731 | |||||||||||||||||||
Equity securities (1) |
| - |
|
| - |
|
| 407 |
|
| 6 |
|
| 407 |
|
| 6 | |||||||||||||||||||
Collateralized mortgage obligations | Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
issued or guaranteed by the | issued or guaranteed by the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
FHLMC and GNMA | FHLMC and GNMA |
| 16,065 |
|
| 78 |
|
| - |
|
| - |
|
| 16,065 |
|
| 78 | ||||||||||||||||||
Private label MBS | Private label MBS |
| - |
|
| - |
|
| 13,914 |
|
| 5,426 |
|
| 13,914 |
|
| 5,426 | ||||||||||||||||||
|
| $ | 456,477 |
| $ | 3,123 |
| $ | 823,506 |
| $ | 21,048 |
| $ | 1,279,983 |
| $ | 24,171 |
| $ | 64,559 |
| $ | 331 |
| $ | 1,328,036 |
| $ | 39,591 |
| $ | 1,392,595 |
| $ | 39,922 |
|
|
| ||||||||||||||||||||||||||||||||||
| As of January 1, 2018, the Corporation adopted ASU 2016-01, resulting in the reclassification of $0.4 million in equity securities from available-for-sale investment securities to other investment securities. |
|
2322
Assessment for OTTI
Debt securities issued by U.S. government agencies, U.S. government-sponsored entities (“GSEs”), and the U.S. Treasury accounted for approximately 99%99% of the total available-for-sale portfolio as of September 30, 2018,2019, and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation’s OTTI assessment was concentrated mainly on private label MBS, and on Puerto Rico government debt securities, for which credit losses are evaluated on a quarterly basis. The Corporation considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:
·The length of time and the extent to which the fair value has been less than the amortized cost basis;
·Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the financial condition of the issuer, credit ratings, the failure of the issuer to make scheduled principal or interest payments, any recent legislation and government actions affecting the issuer’s industry,industry; and actions taken by the issuer to deal with the present economic climate;
·Changes in the near term prospects of the underlying collateral for a security, if any, such as changes in default rates, loss severity given default, and significant changes in prepayment assumptions; and
·The level of cash flows generated from the underlying collateral, if any, supporting the principal and interest payments of the debt securities.
The Corporation recorded OTTI losses on available-for-sale debt securities as follows:
|
|
|
|
| ||||||||
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
| |
Total OTTI losses | $ | - |
| $ | - |
| $ | - |
| $ | (12,231) | |
Portion of OTTI recognized in OCI |
| - |
|
| - |
|
| - |
|
| - | |
Net impairment losses recognized in earnings (1) | $ | - |
| $ | - |
| $ | - |
| $ | (12,231) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Credit losses on Puerto Rico government debt securities, recorded in the first quarter of 2017. | |||||||||||
|
|
|
|
|
|
| ||||||||
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
| |
Total OTTI losses | $ | (557) |
| $ | - |
| $ | (557) |
| $ | - | |
Portion of OTTI recognized in OCI |
| 60 |
|
| - |
|
| 60 |
|
| - | |
Net impairment losses recognized in earnings (1) | $ | (497) |
| $ | - |
| $ | (497) |
| $ | - | |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Associated with credit losses on private label MBS. | |||||||||||
|
|
2423
The following tables summarize the roll-forward of credit losses on debt securities held by the Corporation for which a portion of an OTTI is recognized in OCI: |
| ||||||||||||||||||||||||
The following tables summarize the roll-forward of credit losses on debt securities held by the Corporation for which a portion of an OTTI was also recognized in OCI as of the indicated dates: | The following tables summarize the roll-forward of credit losses on debt securities held by the Corporation for which a portion of an OTTI was also recognized in OCI as of the indicated dates: |
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Cumulative OTTI credit losses recognized in earnings on securities still held |
|
| Cumulative OTTI credit losses recognized in earnings on securities still held |
| |||||||||||||||||||
|
|
|
|
|
| Credit impairments |
| Credit loss |
|
|
|
|
|
|
|
| Credit impairments |
|
|
| |||||
|
| June 30, |
|
| recognized in earnings on |
| reductions for |
| September 30, |
|
| June 30, |
|
| recognized in earnings on |
| September 30, |
| |||||||
|
| 2018 |
|
| securities that have been |
| securities sold |
| 2018 |
|
| 2019 |
|
| securities that have been |
| 2019 |
| |||||||
|
| Balance |
|
| previously impaired |
| during the period |
| Balance |
|
| Balance |
|
| previously impaired |
| Balance |
| |||||||
(In thousands) | (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
| ||
Available-for-sale securities | Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
| Available-for-sale securities |
|
|
|
|
|
|
| ||||
Private label MBS | Private label MBS | $ | 6,792 |
| $ | - |
| $ | - |
| $ | 6,792 |
| Private label MBS | $ | 6,842 |
| $ | 497 |
| $ | 7,339 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Cumulative OTTI credit losses recognized in earnings on securities still held |
| |||||||
|
|
|
|
| Credit impairments |
|
|
| ||
|
| December 31, |
| recognized in earnings on |
| September 30, |
| |||
|
| 2018 |
| securities that have been |
| 2019 |
| |||
|
| Balance |
| previously impaired |
| Balance |
| |||
(In thousands) |
|
|
|
|
|
|
|
|
| |
Available-for-sale securities |
|
|
|
|
|
|
|
|
| |
Private label MBS | $ | 6,842 |
| $ | 497 |
| $ | 7,339 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Cumulative OTTI credit losses recognized in earnings on securities still held |
| |||||||
|
|
|
|
| Credit impairments |
|
|
| ||
|
| June 30, |
| recognized in earnings |
| September 30, |
| |||
|
| 2018 |
| on securities that have been |
| 2018 |
| |||
|
| Balance |
| previously impaired |
| Balance |
| |||
(In thousands) |
|
|
|
|
|
|
|
|
| |
Available-for-sale securities |
|
|
|
|
|
|
|
|
| |
Private label MBS | $ | 6,792 |
| $ | - |
| $ | 6,792 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Cumulative OTTI credit losses recognized in earnings on securities still held |
| |||||||
|
|
|
|
| Credit impairments |
|
|
| ||
|
| December 31, |
| recognized in earnings |
| September 30, |
| |||
|
| 2017 |
| on securities that have been |
| 2018 |
| |||
|
| Balance |
| previously impaired |
| Balance |
| |||
(In thousands) |
|
|
|
|
|
|
|
|
| |
Available-for-sale securities |
|
|
|
|
|
|
|
|
| |
Private label MBS | $ | 6,792 |
| $ | - |
| $ | 6,792 |
| |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Cumulative OTTI credit losses recognized in earnings on securities still held |
| ||||||||||
|
|
|
|
| Credit impairments |
| Credit loss |
|
|
| |||
|
| December 31, |
| recognized in earnings on |
| reductions for |
| September 30, |
| ||||
|
| 2017 |
| securities that have been |
| securities sold |
| 2018 |
| ||||
|
| Balance |
| previously impaired |
| during the period |
| Balance |
| ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| |
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
| |
Private label MBS | $ | 6,792 |
| $ | - |
| $ | - |
| $ | 6,792 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Cumulative OTTI credit losses recognized in earnings on securities still held |
| ||||||||||
|
|
|
|
| Credit impairments |
|
|
|
|
| |||
|
| June 30, |
| recognized in earnings |
| Credit loss reductions |
| September 30, |
| ||||
|
| 2017 |
| on securities that have been | for securities sold |
| 2017 |
| |||||
|
| Balance |
| previously impaired |
| during the period |
| Balance |
| ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| |
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
| |
Private label MBS | $ | 6,792 |
| $ | - |
| $ | - |
| $ | 6,792 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Cumulative OTTI credit losses recognized in earnings on securities still held |
| ||||||||||
|
|
|
|
| Credit impairments |
|
|
|
|
| |||
|
| December 31, |
| recognized in earnings |
| Credit loss reductions |
| September 30, |
| ||||
|
| 2016 |
| on securities that have been |
| for securities sold |
| 2017 |
| ||||
|
| Balance |
| previously impaired |
| during the period |
| Balance |
| ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| |
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
| |
Puerto Rico government obligations | $ | 22,189 |
| $ | 12,231 |
| $ | (34,420) |
| $ | - |
| |
Private label MBS |
| 6,792 |
|
| - |
|
| - |
|
| 6,792 |
| |
Total OTTI credit losses for available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
| |
debt securities | $ | 28,981 |
| $ | 12,231 |
| $ | (34,420) |
| $ | 6,792 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2524
DuringAs of September 30, 2019, the second quarter of 2017, the Corporation sold for an aggregate of $23.4 million three Puerto Rico governmentCorporation’s available-for-sale debtinvestment securities specificallyportfolio included bonds of the Government Development Bank for Puerto Rico (the “GDB”) and the Puerto Rico Public BuildingsHousing Finance Authority carried on its book(“PRHFA”) at an amortized cost at the time of sale of $23.0 $8.3 million (net of $34.4 million in cumulative OTTI impairment charges)(fair value - $7.2 million). Approximately $12.2 $4.3 million (fair value - $3.0 million) of these bonds consist of a residential pass-through MBS issued by the cumulative OTTI charges on these securities was recorded in the first quarter of 2017.
For the OTTI charge recorded on the Puerto Rico government debt securities in the first quarter of 2017, the Corporation considered the latest available information about the Puerto Rico government’s financial condition, including but not limited to credit, ratings downgrades, revised estimates of recovery rates, and other relevant developments such as government actions, including debt exchange proposals and the fiscal plan publishedPRHFA that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico government in March 2017,2010. This bond was structured as applicable.a zero-coupon bond for the first ten years (up to July 2019). The Corporation applied a discounted cash flow analysis to itsunderlying source of payment of this bond is second mortgage loans in Puerto Rico, not the central government, debt securitiesbut PRHFA provides a guarantee in order to calculate the cash flows expected to be collectedevent of default and to determine if any portionsubsequent foreclosure of the decline in marketunderlying property. Based on the quarterly analyses performed, management concluded that these obligations were not other-than-temporarily impaired as of September 30, 2019. In the event that the second mortgage loans insured by the PRHFA that serve as collateral for the aforementioned residential pass-through MBS default and the collateral is insufficient to satisfy the outstanding balance of this bond, PRHFA’s ability to honor its insurance will depend on, among other factors, the financial condition of PRHFA at the time such obligation become due and payable. A deterioration of the Puerto Rico economy or fiscal health of the PRHFA could further impact the value of these securities, was considered a credit-related OTTI.resulting in losses to the Corporation. The analysis derived an estimate of value based onCorporation does not have the present value of risk-adjusted cash flowsintent to sell these debt securities prior to recovery of the underlying securities and included the following components:amortized cost basis.
·The contractual future cash flows of the bonds were projected based on the key terms as set forth in the official statements for each security. Such key terms included, among others, the interest rate, amortization schedule, if any, and maturity date.
·The risk-adjusted cash flows were calculated based on a probability of default analysis and recovery rate assumptions, including the weighting of different scenarios of ultimate recovery, considering the credit rating of each security. Constant monthly default rates were assumed throughout the life of the bonds, which considered the respective security’s credit rating as of the date of the analysis.
·The adjusted future cash flows were then discounted at the original effective yield of each investment based on the purchase price and expected risk-adjusted future cash flows as of the purchase date of each investment.
The discounted risk-adjusted cash flow analysis for the three Puerto Rico government bonds mentioned above assumed a default probability of 100%, as these three non-performing bonds had been in default since the third quarter of 2016. Based on this analysis, the Corporation recorded in the first quarter of 2017 credit-related OTTI amounting to $12.2 million, assuming recovery rates ranging from 15% to 80% (with a weighted average of 41%).
In addition, the Corporation performed an OTTI assessment on its private label MBS, which are collateralized by fixed-rate mortgages on single-family residential properties in the United States. The interest rate on these private-label MBS is variable, tied to 3-month LIBOR and limited to the weighted-average coupon on the underlying collateral. The underlying mortgages are fixed-rate, single-family loans with original high FICO scores (over 700) and moderate loan-to-value ratios (under 80%), as well as moderate delinquency levels.
Based on the expected cash flows, and since the Corporation does not have the intention to sell the securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, only the credit loss component, if any, is reflected in earnings. Significant assumptions in the valuation of the private label MBS were as follows:
| As of |
| As of | As of |
| As of | ||||||||||
| September 30, 2018 |
| December 31, 2017 | September 30, 2019 |
| December 31, 2018 | ||||||||||
| Weighted |
|
|
| Weighted |
|
| Weighted |
| Range |
| Weighted |
| Range | ||
| Average |
| Range |
| Average |
| Range | Average |
| Minimum | Maximum |
| Average |
| Minimum | Maximum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Discount rate | 14.8% |
| 14.8% |
| 14.0% |
| 14.0% | 13.7% |
| 13.7% | 13.7% |
| 14.5% |
| 14.5% | 14.5% |
Prepayment rate | 11.7% |
| 3.5% - 22.5% |
| 16.4% |
| 12.0% - 29.0% | 7.3% |
| 6.2% | 9.6% |
| 11.4% |
| 3.3% | 20.9% |
Projected Cumulative Loss Rate | 4% |
| 0% - 7.8% |
| 3% |
| 0% - 6.8% | 3.1% |
| 0.0% | 7.8% |
| 3.0% |
| 0.0% | 6.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2625
No OTTI charges on private label MBS were recorded in either the first nine months of 2018 or the first nine months of 2017.
Investments Held to Maturity
The amortized cost, gross unrecognized gains and losses, estimated fair value, weighted-average yield and contractual maturities of investment securities held to maturity as of September 30, 20182019 and December 31, 20172018 were as follows:
|
| September 30, 2018 |
| September 30, 2019 | ||||||||||||||||||||||||||
|
| Amortized cost |
|
|
|
| Fair value |
|
|
| Amortized cost |
|
|
|
| Fair value |
|
| ||||||||||||
|
|
|
| Gross Unrecognized |
|
|
|
|
| Gross Unrecognized |
|
| ||||||||||||||||||
|
|
|
| gains |
| losses |
| Weighted- average yield% | ||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | Amortized cost |
|
| gains |
| losses |
| Fair value |
| Weighted- average yield% | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Puerto Rico Municipal Bonds: | Puerto Rico Municipal Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
| Puerto Rico Municipal Bonds: |
|
|
|
|
|
|
|
| |||||||
| Due within one year | $ | 321 |
| $ | - |
| $ | 7 |
| $ | 314 |
| 6.07 | ||||||||||||||||
| After 1 to 5 years | $ | 6,096 |
| $ | - |
| $ | 364 |
| $ | 5,732 |
| 4.73 | After 1 to 5 years |
| 8,264 |
|
| - |
|
| 628 |
|
| 7,636 |
| 5.40 | ||
| After 5 to 10 years |
| 53,006 |
|
| - |
|
| 3,374 |
|
| 49,632 |
| 5.94 | After 5 to 10 years |
| 56,512 |
|
| - |
|
| 6,817 |
|
| 49,695 |
| 5.94 | ||
| After 10 years |
| 85,697 |
|
| - |
|
| 9,358 |
|
| 76,339 |
| 5.78 | After 10 years |
| 73,579 |
|
| - |
|
| 15,781 |
|
| 57,798 |
| 5.66 | ||
Total investment securities | Total investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
| Total investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| held to maturity | $ | 144,799 |
| $ | - |
| $ | 13,096 |
| $ | 131,703 |
| 5.79 | held to maturity | $ | 138,676 |
| $ | - |
| $ | 23,233 |
| $ | 115,443 |
| 5.76 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 | ||||||||||||
|
| Amortized cost |
|
|
| Fair value |
|
| ||||||
|
|
| Gross Unrecognized |
|
|
| ||||||||
(Dollars in thousands) |
| gains |
| losses |
|
| Weighted- average yield% | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico Municipal Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| After 1 to 5 years | $ | 6,100 |
| $ | - |
| $ | 435 |
| $ | 5,665 |
| 4.79 |
| After 5 to 10 years |
| 53,016 |
|
| - |
|
| 5,360 |
|
| 47,656 |
| 6.00 |
| After 10 years |
| 85,699 |
|
| - |
|
| 13,362 |
|
| 72,337 |
| 5.86 |
Total investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| held to maturity | $ | 144,815 |
| $ | - |
| $ | 19,157 |
| $ | 125,658 |
| 5.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | ||||||||||||
|
| Amortized cost |
|
|
| Fair value |
|
| ||||||
|
|
| Gross Unrecognized |
|
|
| ||||||||
|
|
| gains |
| losses |
|
| Weighted- average yield% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico Municipal Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| After 1 to 5 years | $ | 3,853 |
| $ | - |
| $ | 173 |
| $ | 3,680 |
| 5.38 |
| After 5 to 10 years |
| 39,523 |
|
| - |
|
| 3,048 |
|
| 36,475 |
| 5.28 |
| After 10 years |
| 107,251 |
|
| - |
|
| 16,374 |
|
| 90,877 |
| 4.93 |
Total investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| held to maturity | $ | 150,627 |
| $ | - |
| $ | 19,595 |
| $ | 131,032 |
| 5.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2726
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 havehad been in a continuous unrecognized loss position, as of September 30, 20182019 and December 31, 2017:2018:
| As of September 30, 2018 | As of September 30, 2019 | ||||||||||||||||||||||||||||||||
| Less than 12 months |
| 12 months or more |
| Total | Less than 12 months |
| 12 months or more |
| Total | ||||||||||||||||||||||||
|
|
| Unrecognized |
|
|
| Unrecognized |
|
|
| Unrecognized |
|
| Unrecognized |
|
|
| Unrecognized |
|
|
| Unrecognized | ||||||||||||
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||||||||
|
| (In thousands) |
| (In thousands) | ||||||||||||||||||||||||||||||
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico Municipal Bonds | $ | - |
| $ | - |
| $ | 131,703 |
| $ | 13,096 |
| $ | 131,703 |
| $ | 13,096 | $ | - |
| $ | - |
| $ | 115,443 |
| $ | 23,233 |
| $ | 115,443 |
| $ | 23,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2017 | As of December 31, 2018 | ||||||||||||||||||||||||||||||||
| Less than 12 months |
| 12 months or more |
| Total | Less than 12 months |
| 12 months or more |
| Total | ||||||||||||||||||||||||
|
|
| Unrecognized |
|
|
| Unrecognized |
|
|
| Unrecognized |
|
| Unrecognized |
|
|
| Unrecognized |
|
|
| Unrecognized | ||||||||||||
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||||||||
|
| (In thousands) |
| (In thousands) | ||||||||||||||||||||||||||||||
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico Municipal Bonds | $ | - |
| $ | - |
| $ | 131,032 |
| $ | 19,595 |
| $ | 131,032 |
| $ | 19,595 | $ | - |
| $ | - |
| $ | 125,658 |
| $ | 19,157 |
| $ | 125,658 |
| $ | 19,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation determines the fair market value of Puerto Rico Municipal Bonds based on a discounted cash flow analysis using risk-adjusted discount rates. A security with similar characteristics traded in the open market is used as a proxy for each municipal bond. Then, the cash flow is discounted at the average spread over the discount curve exhibited by the proxy security at the end of each quarter.quarter, plus any corresponding discount rate adjustments to reflect recent transactions or market yield expectations for these type of transactions.
All of the Puerto Rico Municipal Bonds arewere performing and current as to scheduled contractual payments as of September 30, 2018.2019. Approximately 70%70% of the held-to-maturity municipal bonds were issued by three of the largest municipalities in Puerto Rico. The vast majority of revenues of these three municipalities is independent of the Puerto Rico central government. These obligations typically are not issued in bearer form, nor are they registered with the SEC, and are not rated by external credit agencies. In most cases, these bonds have priority over the payment of operating costs and expenses of the municipality, which are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and loans. The Corporation performs periodic credit quality reviews on these issuers. During the third quarter of 2019, the Corporation received scheduled principal payments amounting to approximately $6.0 million from these Puerto Rico Municipal Bonds. Based on the quarterly analysis performed, management concluded that no individual debt security held to maturity was other-than-temporarily impaired as of September 30, 2018.2019.
TheDuring the second quarter of 2019, the PROMESA oversight board has not designated anyannounced the designation of the Puerto Rico’s 78 municipalities as covered entitiesinstrumentalities under PROMESA. However, whileMeanwhile, the latest fiscal plan certified by the PROMESA oversight boarddid not contemplate a restructuring of the debt of Puerto Rico’s municipalities, but the plan did call for the gradual elimination of budgetary subsidies provided to municipalities by the central government. Furthermore, municipalities are also likely to be affected by the negative economic and other effects resulting from expense, revenue or cash management measures taken by the Puerto Rico government to address its fiscal and liquidity shortfalls, or measures included in fiscal plans of other government entities, such as the fiscal plans of the GDBGovernment Development Bank for Puerto Rico (“GDB”) and the Puerto Rico Electric Power Authority (“PREPA”). Given the uncertain effect that the negative fiscal situation of the Puerto Rico central government and the measures taken, or to be taken, by other government entities may have on municipalities, the Corporation cannot be certain whether future impairment charges relating to these securities will be required relating to these securities. in the future.
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 September 30, 20182019 and December 31, 2017,2018, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents.
27
NOTE 6 – OTHER INVESTMENT SECURITIES
Institutions that are members of the FHLB system are required to maintain a minimum investment in FHLB stock. Such minimum investment is calculated as a percentage of aggregate outstanding mortgages, and the FHLB requires an additional investment that is calculated as a percentage of total FHLB advances, letters of credit, and the collateralized portion of outstanding interest-rate swaps. The stock is capital stock issued at $100 par value. Both stock and cash dividends may be received on FHLB stock.
As of September 30, 20182019 and December 31, 2017,2018, the Corporation had investments in FHLB stock with a book value of $39.7 $41.7 million and $40.9 $41.9 million, respectively. Dividend income from FHLB stock for the quarters ended September 30, 2018 and 2017 was $0.7 million and $0.5 million, respectively, and for the nine-month periods ended September 30, 2019 and 2018 and 2017 was $2.0 $0.7 million and $1.5 $2.0 million, respectively.
The FHLB of New York issued the shares of FHLB stock owned by the Corporation. The FHLB of New York is part of the Federal Home Loan Bank System, a national wholesale banking network of 11 regional, stockholder-owned congressionally chartered banks. The FHLBs are all privately capitalized and operated by their member stockholders. The system is supervised by the Federal Housing Finance Agency, which ensuresis intended to ensure 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.
On January 1,As of September 30, 2019 and December 31, 2018, the Corporation adopted ASU 2016-01, resulting in the reclassification ofhas equity securities with a readily determinable fair value of approximately $0.4 $1.4 million from available-for-sale investment securities to other investment securities.and $0.4 million, respectively. During the thirdquarter and nine-month period ended September 30, 2019, the Corporation recognized a marked-to-market loss of $2 thousand and a marked-to-market gain of $10 thousand associated with these securities, respectively, ($3 thousand and $13 thousand marked-to-market losses for the quarter and nine-month period ended September 30, 2018, the Corporation measured these equity securities at fair value through earnings resulting in the recognition of marked-to-market losses of $3 thousand and $13 thousand, respectively,respectively) recorded as part of otherOther non-interest income in the statementconsolidated statements of income.
The In addition, the Corporation hashad other equity securities that do not have readily availablea readily-determinable fair values.value. The aggregate carrying value of such securities as of September 30, 20182019 and December 31, 20172018 was $2.2 million.$2.1 million and $2.2 million, respectively.
NOTE 78 – LOANS HELD FOR INVESTMENT
The following provides information about the loan portfolio held for investment:
|
| As of September 30, |
| As of December 31, | ||
|
| 2018 |
| 2017 | ||
(In thousands) |
| |||||
Residential mortgage loans, mainly secured by first mortgages | $ | 3,207,981 |
| $ | 3,290,957 | |
Commercial loans: |
|
|
|
|
| |
Construction loans (1) |
| 82,862 |
|
| 111,397 | |
Commercial mortgage loans (1) |
| 1,506,502 |
|
| 1,614,972 | |
Commercial and Industrial loans (1)(2) |
| 2,068,256 |
|
| 2,083,253 | |
Total commercial loans |
| 3,657,620 |
|
| 3,809,622 | |
Finance leases |
| 311,180 |
|
| 257,462 | |
Consumer loans |
| 1,540,172 |
|
| 1,492,435 | |
Loans held for investment |
| 8,716,953 |
|
| 8,850,476 | |
Allowance for loan and lease losses |
| (200,563) |
|
| (231,843) | |
Loans held for investment, net | $ | 8,516,390 |
| $ | 8,618,633 | |
|
|
|
|
|
|
|
(1) | During the first nine months 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 non-performing loans to held for sale. Loans transferred to held for sale consisted of non-performing commercial mortgage loans totaling $39.6 million (net of fair value write-downs of $13.8 million), non-performing construction loans totaling $33.0 million (net of fair value write-downs of $6.7 million) and non-performing commercial and industrial loans totaling $1.8 million (net of fair value write-downs of $1.7 million). Approximately $27.2 million of the commercial mortgage loans transferred to loan held for sale were eventually sold during the second quarter and third quarters of 2018. | |||||
(2) | As of September 30, 2018 and December 31, 2017, $802.7 million and $833.5 million, respectively, of commercial loans were secured by real estate but are not dependent upon the real estate for repayment. | |||||
|
| |||||
|
| |||||
|
|
|
|
|
|
|
|
| As of September 30, |
| As of December 31, | ||
|
| 2019 |
| 2018 | ||
(In thousands) |
| |||||
Residential mortgage loans, mainly secured by first mortgages | $ | 2,997,953 |
| $ | 3,163,208 | |
Commercial loans: |
|
|
|
|
| |
Construction loans |
| 108,862 |
|
| 79,429 | |
Commercial mortgage loans |
| 1,439,362 |
|
| 1,522,662 | |
Commercial and Industrial loans (1) |
| 2,222,496 |
|
| 2,148,111 | |
Total commercial loans |
| 3,770,720 |
|
| 3,750,202 | |
Finance leases |
| 391,373 |
|
| 333,536 | |
Consumer loans |
| 1,808,374 |
|
| 1,611,177 | |
Loans held for investment |
| 8,968,420 |
|
| 8,858,123 | |
Allowance for loan and lease losses |
| (165,575) |
|
| (196,362) | |
Loans held for investment, net | $ | 8,802,845 |
| $ | 8,661,761 |
(1)As of September 30, 2019 and December 31, 2018, includes $747.4 million and $796.8 million, respectively, of commercial loans that were secured by real estate but are not dependent upon the real estate for repayment.
2928
Loans held for investment on which accrual of interest income had been discontinued were as follows: | ||||||
|
|
|
|
|
|
|
|
| As of |
| As of | ||
| September 30, |
| December 31, | |||
(In thousands) | 2018 |
| 2017 | |||
Non-performing loans: |
|
|
|
|
| |
| Residential mortgage | $ | 156,685 |
| $ | 178,291 |
| Commercial mortgage (1) |
| 117,397 |
|
| 156,493 |
| Commercial and Industrial (1) |
| 34,551 |
|
| 85,839 |
| Construction: |
|
|
|
|
|
| Land (1) |
| 6,922 |
|
| 15,026 |
| Construction-commercial (1) |
| - |
|
| 35,100 |
| Construction-residential |
| 2,149 |
|
| 1,987 |
| Consumer: |
|
|
|
|
|
| Auto loans |
| 12,258 |
|
| 10,211 |
| Finance leases |
| 1,443 |
|
| 1,237 |
| Other consumer loans |
| 7,963 |
|
| 5,370 |
Total non-performing loans held for investment (2)(3)(4) | $ | 339,368 |
| $ | 489,554 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | During the first nine months 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 non-performing loans to held for sale. Loans transferred to held for sale consisted of non-performing commercial mortgage loans totaling $39.6 million (net of fair value write-downs of $13.8 million), non-performing construction loans totaling $33.0 million (net of fair value write-downs of $6.7 million) and non-performing commercial and industrial loans totaling $1.8 million (net of fair value write-downs of $1.7 million). Approximately $27.2 million of the commercial mortgage loans transferred to loan held for sale were eventually sold during the second quarter and third quarters of 2018. | |||||
(2) | Excludes $44.2 million and $8.3 million of non-performing loans held for sale as of September 30, 2018 and December 31, 2017, respectively. | |||||
(3) | Amount excludes purchased-credit impaired (“PCI”) loans with a carrying value of approximately $149.1 million and $158.2 million as of September 30, 2018 and December 31, 2017, respectively, primarily mortgage loans acquired from Doral Bank in the first quarter of 2015 and from Doral Financial in the second quarter of 2014, as further discussed below. These loans are not considered non-performing due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using an estimated cash flow analysis. | |||||
(4) | Non-performing loans exclude $510.8 million and $374.7 million of Troubled Debt Restructuring (“TDR”) loans that are in compliance with modified terms and in accrual status as of September 30, 2018 and December 31, 2017, respectively. | |||||
|
|
Loans held for investment on which accrual of interest income had been discontinued were as follows: | ||||||
|
|
|
|
|
|
|
|
| As of |
| As of | ||
| September 30, |
| December 31, | |||
(In thousands) | 2019 |
| 2018 | |||
Nonaccrual loans: |
|
|
|
|
| |
| Residential mortgage | $ | 127,040 |
| $ | 147,287 |
| Commercial mortgage |
| 42,525 |
|
| 109,536 |
| Commercial and Industrial |
| 20,725 |
|
| 30,382 |
| Construction: |
|
|
|
|
|
| Land |
| 5,021 |
|
| 6,260 |
| Construction-residential |
| 1,337 |
|
| 2,102 |
| Consumer: |
|
|
|
|
|
| Auto loans |
| 10,511 |
|
| 11,212 |
| Finance leases |
| 1,340 |
|
| 1,329 |
| Other consumer loans |
| 7,728 |
|
| 7,865 |
Total nonaccrual loans held for investment (1)(2)(3) | $ | 216,227 |
| $ | 315,973 | |
|
|
|
|
|
|
|
During the first quarter(1)Excludes $6.9 million and $16.1 million of 2018, the Corporation transferred tononaccrual loans held for sale several non-performing commercialas of September 30, 2019 and construction loans. The aggregate recorded investment in theseDecember 31, 2018, respectively.
(2)Amount excludes purchased-credit impaired (“PCI”) loans with a carrying value of $66.9approximately $139.3 million was written down to $57.2and $146.6 million which resulted in charge-offsas of $9.7 million, of which $4.1 million was taken against previously-established reserves for loan losses, resulting in a charge to the provision for loanSeptember 30, 2019 and lease losses of $5.6 millionDecember 31, 2018, respectively, primarily mortgage loans acquired from Doral Bank in the first quarter of 2018. Subsequent2015 and from Doral Financial in the second quarter of 2014, as further discussed below. These loans are not considered nonaccrual due to the endapplication of the first quarter of 2018,accretion method, under which these loans will accrete interest income over the Corporation sold $27.2 millionremaining life of the loans transferred to held for sale in separate transactionsusing an estimated cash flow analysis.
(3)Nonaccrual loans exclude $399.4 million and a $7.7 million non-performing construction loan held for sale that resulted in the recognition of an additional aggregate net loss of $2.7 million recorded as part of “other non-interest income” in the consolidated statement of income (loss).
In addition, during the third quarter of 2018, the Corporation transferred to held for sale several non-performing commercial and construction loans. The aggregate recorded investment in these loans of $29.7 million was written down to $17.2 million, which resulted in charge-offs of $12.5 $478.9 million of which $2.4 million was taken against previously established reserves for loan losses, resultingTDR loans that were in a charge to the provision for loancompliance with modified terms and lease lossesin accrual status as of $10.1 million in the third quarter of 2018.September 30, 2019 and December 31, 2018, respectively.
Loans in Process of Foreclosure
As of September 30, 2018,2019, the recorded investment of residential mortgage loans collateralized by residential real estate property that arewere in the process of foreclosure amounted to $154.9$166.5 million, including $23.5$41.2 million of loans insured by the FHAU.S. Federal Housing Administration (“FHA”) or guaranteed by the U.S. Veterans Administration (“VA”), and $20.0$19.1 million of PCI loans. The Corporation commences the foreclosure process on residential real estate loans when a borrower becomes 120 days delinquent in accordance with the guidelinesrequirements of the Consumer Financial Protection Bureau (“CFPB”). Foreclosure procedures and timelines vary depending on whether the property is located in a judicial or non-judicial state. Judicial states (i.e.(i.e., Puerto Rico, Florida and the USVI) require the foreclosure to be processed through the state’s court while foreclosure in non-judicial states (i.e.(i.e., the BVI) is processed without court intervention. Foreclosure timelines vary according to statelocal jurisdiction law and investor guidelines. Occasionally, foreclosures may be delayed due to, among other reasons, mandatory mediations, bankruptcy, court delays and title issues.
30
The Corporation’s aging of the loans held for investment portfolio is as follows: | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| Purchased Credit-Impaired Loans |
|
|
|
|
|
|
|
| |||||||
| 30-59 Days Past Due |
| 60-89 Days Past Due |
| 90 days or more Past Due (1)(2)(3) |
| Total Past Due |
|
|
|
| Total loans held for investment |
| 90 days past due and still accruing (1)(2)(3) | ||||||||||
As of September 30, 2018 |
|
|
|
|
|
|
|
| ||||||||||||||||
(In thousands) |
|
|
|
|
| Current |
|
| ||||||||||||||||
Residential mortgage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
FHA/VA government-guaranteed loans (2) (3) (4) | $ | - |
| $ | 3,206 |
| $ | 107,869 |
| $ | 111,075 |
| $ | - |
| $ | 39,696 |
| $ | 150,771 |
| $ | 107,869 | |
Other residential mortgage loans (2)(4) |
| - |
|
| 64,015 |
|
| 171,893 |
|
| 235,908 |
|
| 145,203 |
|
| 2,676,099 |
|
| 3,057,210 |
|
| 15,208 | |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Commercial and Industrial loans |
| 1,729 |
|
| 392 |
|
| 38,998 |
|
| 41,119 |
|
| - |
|
| 2,027,137 |
|
| 2,068,256 |
|
| 4,447 | |
Commercial mortgage loans (4) |
| - |
|
| 1,192 |
|
| 120,456 |
|
| 121,648 |
|
| 3,919 |
|
| 1,380,935 |
|
| 1,506,502 |
|
| 3,059 | |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land (4) |
| - |
|
| 51 |
|
| 6,922 |
|
| 6,973 |
|
| - |
|
| 14,331 |
|
| 21,304 |
|
| - | |
Construction-commercial |
| - |
|
| 1,089 |
|
| - |
|
| 1,089 |
|
| - |
|
| 52,881 |
|
| 53,970 |
|
| - | |
Construction-residential |
| - |
|
| - |
|
| 2,149 |
|
| 2,149 |
|
| - |
|
| 5,439 |
|
| 7,588 |
|
| - | |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Auto loans |
| 35,122 |
|
| 7,047 |
|
| 12,258 |
|
| 54,427 |
|
| - |
|
| 840,801 |
|
| 895,228 |
|
| - | |
Finance leases |
| 5,451 |
|
| 1,839 |
|
| 1,443 |
|
| 8,733 |
|
| - |
|
| 302,447 |
|
| 311,180 |
|
| - | |
Other consumer loans |
| 7,773 |
|
| 4,885 |
|
| 11,673 |
|
| 24,331 |
|
| - |
|
| 620,613 |
|
| 644,944 |
|
| 3,710 | |
Total loans held for investment | $ | 50,075 |
| $ | 83,716 |
| $ | 473,661 |
| $ | 607,452 |
| $ | 149,122 |
| $ | 7,960,379 |
| $ | 8,716,953 |
| $ | 134,293 | |
_____________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(1) | Includes non-performing 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 Corporationʼs 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 non-performing loans since the principal repayment is insured. These balances include $33.9 million of residential mortgage loans insured by the FHA that were over 15 months delinquent, and were no longer accruing interest as of September 30, 2018, taking into consideration the FHA interest curtailment process. | |||||||||||||||||||||||
(3) | As of September 30, 2018, includes $75.9 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans. | |||||||||||||||||||||||
(4) | According to the Corporationʼs 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, other residential mortgage loans, commercial mortgage loans and land loans past due 30-59 days as of September 30, 2018 amounted to $7.0 million, $108.1 million, $4.2 million and $0.1 million, respectively. | |||||||||||||||||||||||
| ||||||||||||||||||||||||
| ||||||||||||||||||||||||
29
As of December 31, 2017 | 30-59 Days Past Due |
| 60-89 Days Past Due |
| 90 days or more Past Due (1)(2)(3) |
|
|
|
|
|
|
|
|
| Total loans held for investment |
| 90 days past due and still accruing (1)(2)(3) | ||||||||||||||||||||||||||||||
The Corporation’s aging of the loans held for investment portfolio is as follows: | The Corporation’s aging of the loans held for investment portfolio is as follows: | ||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| Purchased Credit-Impaired Loans |
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
| 30-59 Days Past Due |
| 60-89 Days Past Due |
| 90 days or more Past Due (1) |
| Total Past Due |
|
|
| Total loans held for investment |
| 90 days past due and still accruing | ||||||||||||||||||||||||||||||||||
As of September 30, 2019 |
|
|
|
| Purchased Credit-Impaired Loans | ||||||||||||||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | 30-59 Days Past Due |
| 60-89 Days Past Due |
| 90 days or more Past Due (1)(2)(3) |
|
| Total Past Due |
| Purchased Credit- Impaired Loans |
|
| Current |
| Total loans held for investment |
| 90 days past due and still accruing (1)(2)(3) |
| Current |
|
| |||||||||||||||||||||||||
Residential mortgage: | Residential mortgage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
FHA/VA government-guaranteed loans (2) (3) (4) | FHA/VA government-guaranteed loans (2) (3) (4) | $ | - |
| $ | 6,792 |
| $ | 102,815 |
| $ | 109,607 |
| $ | - |
| $ | 29,332 |
| $ | 138,939 |
| $ | 102,815 | $ | - |
| $ | 2,081 |
| $ | 86,121 |
| $ | 88,202 |
| $ | - |
| $ | 38,380 | $ | 126,582 | $ | 86,121 | ||
Other residential mortgage loans (2)(4) | Other residential mortgage loans (2)(4) |
| - |
| 92,502 |
| 193,750 |
| 286,252 |
| 153,991 |
|
| 2,711,775 |
| 3,152,018 |
| 15,459 |
| - |
| 67,554 |
| 143,044 |
| 210,598 |
| 135,922 |
| 2,524,851 |
| 2,871,371 |
| 16,004 | |||||||||||||
Commercial: | Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Commercial and Industrial loans | Commercial and Industrial loans |
| 8,971 |
| 576 |
| 88,156 |
| 97,703 |
| - |
|
| 1,985,550 |
| 2,083,253 |
| 2,317 |
| 26,214 |
| 475 |
| 27,351 |
| 54,040 |
| - |
| 2,168,456 |
| 2,222,496 |
| 6,626 | |||||||||||||
Commercial mortgage loans (4) | Commercial mortgage loans (4) |
| - |
| 7,525 |
| 163,180 |
| 170,705 |
| 4,183 |
|
| 1,440,084 |
| 1,614,972 |
| 6,687 |
| 16,761 |
| 781 |
| 45,575 |
| 63,117 |
| 3,330 |
| 1,372,915 |
| 1,439,362 |
| 3,050 | |||||||||||||
Construction: | Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Land (4) | Land (4) |
| - |
| 124 |
| 15,177 |
| 15,301 |
| - |
|
| 11,630 |
| 26,931 |
| 151 |
| - |
| 11 |
| 5,021 |
| 5,032 |
| - |
| 13,205 |
| 18,237 |
| - | |||||||||||||
Construction-commercial | Construction-commercial |
| - |
| - |
| 35,100 |
| 35,100 |
| - |
|
| 41,456 |
| 76,556 |
| - |
| 886 |
| 5,150 |
| - |
| 6,036 |
| - |
| 70,261 |
| 76,297 |
| - | |||||||||||||
Construction-residential | Construction-residential |
| - |
| 95 |
| 1,987 |
| 2,082 |
| - |
|
| 5,828 |
| 7,910 |
| - |
| - |
| - |
| 1,337 |
| 1,337 |
| - |
| 12,991 |
| 14,328 |
| - | |||||||||||||
Consumer: | Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Auto loans | Auto loans |
| 57,560 |
| 23,783 |
| 10,211 |
| 91,554 |
| - |
|
| 752,777 |
| 844,331 |
| - |
| 33,759 |
| 6,748 |
| 10,511 |
| 51,018 |
| - |
| 1,037,032 |
| 1,088,050 |
| - | |||||||||||||
Finance leases | Finance leases |
| 10,549 |
| 3,484 |
| 1,237 |
| 15,270 |
| - |
|
| 242,192 |
| 257,462 |
| - |
| 6,150 |
| 1,232 |
| 1,340 |
| 8,722 |
| - |
| 382,651 |
| 391,373 |
| - | |||||||||||||
Other consumer loans | Other consumer loans |
| 10,776 |
|
| 5,052 |
|
| 9,361 |
|
| 25,189 |
|
| - |
|
| 622,915 |
|
| 648,104 |
|
| 3,991 |
| 8,596 |
|
| 5,625 |
|
| 12,089 |
|
| 26,310 |
|
| - |
|
| 694,014 |
|
| 720,324 |
|
| 4,361 |
Total loans held for investment | Total loans held for investment | $ | 87,856 |
| $ | 139,933 |
| $ | 620,974 |
| $ | 848,763 |
| $ | 158,174 |
| $ | 7,843,539 |
| $ | 8,850,476 |
| $ | 131,420 | $ | 92,366 |
| $ | 89,657 |
| $ | 332,389 |
| $ | 514,412 |
| $ | 139,252 |
| $ | 8,314,756 |
| $ | 8,968,420 |
| $ | 116,162 |
____________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
(1) | Includes non-performing 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 Corporationʼs 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 non-performing loans since the principal repayment is insured. These balances include $29.9 million of residential mortgage loans insured by the FHA that were over 15 months delinquent, and were no longer accruing interest as of December 31, 2017, taking into consideration the FHA interest curtailment process. | ||||||||||||||||||||||||||||||||||||||||||||||
(3) | As of December 31, 2017, includes $62.1 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans. | ||||||||||||||||||||||||||||||||||||||||||||||
(4) | According to the Corporationʼs 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, other residential mortgage loans, commercial mortgage loans, and land loans past due 30-59 days as of December 31, 2017 amounted to $6.0 million, $224.0 million, $9.0 million, and $2.5 million, respectively. | ||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||
(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.
The Corporation’s credit quality indicators by loan type as of September 30, 2018 and December 31, 2017 are summarized below: | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial Credit Exposure - Credit Risk Profile Based on Creditworthiness Category: | |||||||||||||
|
| Substandard |
| Doubtful |
| Loss |
| Total Adversely Classified (1) |
| Total Portfolio | |||||
September 30, 2018 |
|
|
|
| |||||||||||
(In thousands) |
|
| |||||||||||||
Commercial mortgage | $ | 262,519 |
| $ | 7,927 |
| $ | - |
| $ | 270,446 |
| $ | 1,506,502 | |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land |
| 5,658 |
|
| - |
|
| - |
|
| 5,658 |
|
| 21,304 | |
Construction - commercial |
| 3,458 |
|
| - |
|
| - |
|
| 3,458 |
|
| 53,970 | |
Construction - residential |
| 1,194 |
|
| - |
|
| - |
|
| 1,194 |
|
| 7,588 | |
Commercial and Industrial |
| 96,993 |
|
| 4,659 |
|
| 394 |
|
| 102,046 |
|
| 2,068,256 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial Credit Exposure - Credit Risk Profile Based on Creditworthiness Category: | |||||||||||||
|
| Substandard |
| Doubtful |
| Loss |
| Total Adversely Classified (1) |
| Total Portfolio | |||||
December 31, 2017 |
|
|
|
| |||||||||||
(In thousands) |
|
| |||||||||||||
Commercial mortgage | $ | 257,503 |
| $ | 4,166 |
| $ | - |
| $ | 261,669 |
| $ | 1,614,972 | |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land |
| 15,971 |
|
| 490 |
|
| - |
|
| 16,461 |
|
| 26,931 | |
Construction - commercial |
| 35,100 |
|
| - |
|
| - |
|
| 35,100 |
|
| 76,556 | |
Construction - residential |
| 1,987 |
|
| - |
|
| - |
|
| 1,987 |
|
| 7,910 | |
Commercial and Industrial |
| 154,416 |
|
| 3,854 |
|
| 676 |
|
| 158,946 |
|
| 2,083,253 | |
_________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(1) | Excludes non-performing loans held for sale of $44.2 million ($12.4 million commercial mortgage, $30.0 million construction-commercial, and $1.8 million construction-land) and $8.3 million (construction-land) as of September 30, 2018 and December 31, 2017, respectively. |
(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. These balances include $40.1 million of residential mortgage loans insured by the FHA that were over 15 months delinquent, and were no longer accruing interest as of September 30, 2019, taking into consideration FHA interest curtailment process.
(3)As of September 30, 2019, includes $38.0 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.
(4)According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears on two or more monthly payments. FHA/VA government-guaranteed loans, other residential mortgage loans, commercial mortgage loans, and land loans past due 30-59 days as of September 30, 2019 amounted to $6.2 million, $107.8 million, $3.9 million, and $0.1 million respectively.
As of December 31, 2018 | 30-59 Days Past Due |
| 60-89 Days Past Due |
| 90 days or more Past Due (1) |
|
|
|
|
|
|
|
|
|
| Total loans held for investment |
| 90 days past due and still accruing | |||||
(In thousands) |
|
|
|
| Total Past Due |
|
| Purchased Credit- Impaired Loans |
|
| Current |
|
| ||||||||||
Residential mortgage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHA/VA government-guaranteed loans (2) (3) (4) | $ | - |
| $ | 4,183 |
| $ | 104,751 |
| $ | 108,934 |
| $ | - |
| $ | 38,271 |
| $ | 147,205 |
| $ | 104,751 |
Other residential mortgage loans (2)(4) |
| - |
|
| 62,077 |
|
| 161,851 |
|
| 223,928 |
|
| 143,176 |
|
| 2,648,899 |
|
| 3,016,003 |
|
| 14,564 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial loans |
| 2,550 |
|
| 66 |
|
| 35,385 |
|
| 38,001 |
|
| - |
|
| 2,110,110 |
|
| 2,148,111 |
|
| 5,003 |
Commercial mortgage loans (4) |
| - |
|
| 1,038 |
|
| 110,482 |
|
| 111,520 |
|
| 3,464 |
|
| 1,407,678 |
|
| 1,522,662 |
|
| 946 |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land (4) |
| - |
|
| 207 |
|
| 6,327 |
|
| 6,534 |
|
| - |
|
| 13,779 |
|
| 20,313 |
|
| 67 |
Construction-commercial (4) |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 47,965 |
|
| 47,965 |
|
| - |
Construction-residential (4) |
| - |
|
| - |
|
| 2,102 |
|
| 2,102 |
|
| - |
|
| 9,049 |
|
| 11,151 |
|
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto loans |
| 31,070 |
|
| 7,103 |
|
| 11,212 |
|
| 49,385 |
|
| - |
|
| 897,091 |
|
| 946,476 |
|
| - |
Finance leases |
| 5,502 |
|
| 1,362 |
|
| 1,329 |
|
| 8,193 |
|
| - |
|
| 325,343 |
|
| 333,536 |
|
| - |
Other consumer loans |
| 9,898 |
|
| 4,542 |
|
| 11,617 |
|
| 26,057 |
|
| - |
|
| 638,644 |
|
| 664,701 |
|
| 3,752 |
Total loans held for investment | $ | 49,020 |
| $ | 80,578 |
| $ | 445,056 |
| $ | 574,654 |
| $ | 146,640 |
| $ | 8,136,829 |
| $ | 8,858,123 |
| $ | 129,083 |
|
(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. These balances include $51.4 million of residential mortgage loans insured by the FHA that were over 15 months delinquent, and were no longer accruing interest as of December 31, 2018, taking into consideration the FHA interest curtailment process.
(3)As of December 31, 2018, includes $43.6 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.
(4)According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears on two or more monthly payments. FHA/VA government-guaranteed loans, other residential mortgage loans, commercial mortgage loans, and land loans past due 30-59 days as of December 31, 2018 amounted to $5.6 million, $101.4 million, $5.1 million, and $0.2 million, respectively.
3130
The Corporation’s commercial and construction loans credit quality indicators as of September 30, 2019 and December 31, 2018 are summarized below: | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial Credit Exposure - Credit Risk Profile Based on Creditworthiness Category: | ||||||||||||||||
|
|
|
|
| Substandard |
| Doubtful |
| Loss |
| Total Criticized Asset (1) |
| Total Portfolio | |||||
September 30, 2019 | Special Mention |
|
|
|
|
| ||||||||||||
(In thousands) |
|
|
|
|
| |||||||||||||
Commercial mortgage | $ | 8,739 |
| $ | 205,520 |
| $ | - |
| $ | - |
| $ | 214,259 |
| $ | 1,439,362 | |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land |
| - |
|
| 5,938 |
|
| - |
|
| - |
|
| 5,938 |
|
| 18,237 | |
Construction - commercial |
| 6,036 |
|
| - |
|
| - |
|
| - |
|
| 6,036 |
|
| 76,297 | |
Construction - residential |
| - |
|
| 1,337 |
|
| - |
|
| - |
|
| 1,337 |
|
| 14,328 | |
Commercial and Industrial |
| 15,159 |
|
| 32,680 |
|
| 2,405 |
|
| 250 |
|
| 50,494 |
|
| 2,222,496 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial Credit Exposure - Credit Risk Profile Based on Creditworthiness Category: | ||||||||||||||||
|
|
|
|
| Substandard |
| Doubtful |
| Loss |
| Total Criticized Asset (1) |
| Total Portfolio | |||||
December 31, 2018 | Special Mention |
|
|
|
|
| ||||||||||||
(In thousands) |
|
|
|
|
| |||||||||||||
Commercial mortgage | $ | 172,260 |
| $ | 276,935 |
| $ | 1,701 |
| $ | - |
| $ | 450,896 |
| $ | 1,522,662 | |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land |
| - |
|
| 7,407 |
|
| - |
|
| - |
|
| 7,407 |
|
| 20,313 | |
Construction - commercial |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 47,965 | |
Construction - residential |
| - |
|
| 2,102 |
|
| - |
|
| - |
|
| 2,102 |
|
| 11,151 | |
Commercial and Industrial |
| 85,557 |
|
| 45,274 |
|
| 6,114 |
|
| 396 |
|
| 137,341 |
|
| 2,148,111 |
(1)Excludes a nonaccrual commercial mortgage loan held for sale of $6.9 million as of September 30, 2019 and $16.1 million of nonaccrual loans held for sale ($11.4 million commercial mortgage, $3.0 million construction-commercial, and $1.7 million commercial and industrial) as of December 31, 2018.
The Corporation considers a loan as adversely classifieda criticized asset if its risk rating is Special Mention, Substandard, Doubtful or Loss. These categories are defined as follows:
Special Mention – A Special Mention asset has 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 – A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful – Doubtful classifications have all of the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently known facts, conditions and values. A Doubtful classification may be appropriate in cases where significant risk exposures are perceived, but loss cannot be determined because of specific reasonable pending factors, which may strengthen the credit in the near term.
Loss – Assets classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset even though partial recovery may occur in the future. There is little or no prospect for near term improvement and no realistic strengthening action of significance pending.
The Corporation periodically reviews its loans classificationloan classifications 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. In addition, during the renewal and annual review process of applicable credit facilities, the Corporation evaluates the corresponding loan grades.
31
The Corporation has a Loan Review Group thatwhich reports directly to the Corporation’s Risk Management Committee and administratively to the Chief Risk Officer whichand performs annual comprehensive credit process reviews of the Bank’s commercial portfolios. This group evaluates the credit risk profile of portfolios, including the assessment of the risk rating representative of the current credit quality of the loans, and the evaluation of collateral documentation. The monitoring performed by this group contributes to the assessment of 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 control deficienciesany 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 of the Corporation’s Board of Directors.Directors.
The Corporation’s consumer and residential loans credit quality indicators as of September 30, 2019 and December 31, 2018 are summarized below:
|
| Consumer Credit Exposure - Credit Risk Profile Based on Payment Activity | |||||||||||||
|
| Residential Real Estate |
| Consumer | |||||||||||
September 30, 2018 | FHA/VA/ Guaranteed (1) |
| Other residential loans |
| Auto |
| Finance Leases |
| Other Consumer | ||||||
(In thousands) |
|
| |||||||||||||
Performing | $ | 150,771 |
| $ | 2,755,322 |
| $ | 882,970 |
| $ | 309,737 |
| $ | 636,981 | |
Purchased Credit-Impaired (2) |
| - |
|
| 145,203 |
|
| - |
|
| - |
|
| - | |
Non-performing |
| - |
|
| 156,685 |
|
| 12,258 |
|
| 1,443 |
|
| 7,963 | |
Total | $ | 150,771 |
| $ | 3,057,210 |
| $ | 895,228 |
| $ | 311,180 |
| $ | 644,944 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | It is the Corporationʼs policy to report delinquent residential mortgage loans insured by the FHA, guaranteed by the VA, and other government-insured loans as 90 days past-due loans and still accruing as opposed to non-performing loans since the principal repayment is insured. This balance includes $33.9 million of residential mortgage loans insured by the FHA that were over 15 months delinquent, and were no longer accruing interest as of September 30, 2018, taking into consideration the FHA interest curtailment process. | ||||||||||||||
(2) | PCI loans are excluded from non-performing statistics due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses. | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer Credit Exposure - Credit Risk Profile Based on Payment Activity | |||||||||||||
|
|
| Residential Real Estate |
| Consumer | ||||||||||
December 31, 2017 | FHA/VA/ Guaranteed (1) |
| Other residential loans |
| Auto |
| Finance Leases |
| Other Consumer | ||||||
(In thousands) |
|
| |||||||||||||
Performing | $ | 138,939 |
| $ | 2,819,736 |
| $ | 834,120 |
| $ | 256,225 |
| $ | 642,734 | |
Purchased Credit-Impaired (2) |
| - |
|
| 153,991 |
|
| - |
|
| - |
|
| - | |
Non-performing |
| - |
|
| 178,291 |
|
| 10,211 |
|
| 1,237 |
|
| 5,370 | |
Total | $ | 138,939 |
| $ | 3,152,018 |
| $ | 844,331 |
| $ | 257,462 |
| $ | 648,104 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | It is the Corporationʼs policy to report delinquent residential mortgage loans insured by the FHA, guaranteed by the VA, and other government-insured loans as 90 days past-due loans and still accruing as opposed to non-performing loans since the principal repayment is insured. This balance includes $29.9 million of residential mortgage loans insured by the FHA that were over 15 months delinquent, and were no longer accruing interest as of December 31, 2017, taking into consideration the FHA interest curtailment process. | ||||||||||||||
(2) | PCI loans are excluded from non-performing statistics due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses. |
|
| Consumer Credit Exposure - Credit Risk Profile Based on Payment Activity | |||||||||||||
|
| Residential Real Estate |
| Consumer | |||||||||||
September 30, 2019 | FHA/VA/ Guaranteed (1) |
| Other residential loans |
| Auto |
| Finance Leases |
| Other Consumer | ||||||
(In thousands) |
|
| |||||||||||||
Performing | $ | 126,582 |
| $ | 2,608,409 |
| $ | 1,077,539 |
| $ | 390,033 |
| $ | 712,596 | |
Purchased Credit-Impaired (2) |
| - |
|
| 135,922 |
|
| - |
|
| - |
|
| - | |
Nonaccrual |
| - |
|
| 127,040 |
|
| 10,511 |
|
| 1,340 |
|
| 7,728 | |
Total | $ | 126,582 |
| $ | 2,871,371 |
| $ | 1,088,050 |
| $ | 391,373 |
| $ | 720,324 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer Credit Exposure - Credit Risk Profile Based on Payment Activity | |||||||||||||
|
|
| Residential Real Estate |
| Consumer | ||||||||||
December 31, 2018 | FHA/VA/ Guaranteed (1) |
| Other residential loans |
| Auto |
| Finance Leases |
| Other Consumer | ||||||
(In thousands) |
|
| |||||||||||||
Performing | $ | 147,205 |
| $ | 2,725,540 |
| $ | 935,264 |
| $ | 332,207 |
| $ | 656,836 | |
Purchased Credit-Impaired (2) |
| - |
|
| 143,176 |
|
| - |
|
| - |
|
| - | |
Nonaccrual |
| - |
|
| 147,287 |
|
| 11,212 |
|
| 1,329 |
|
| 7,865 | |
Total | $ | 147,205 |
| $ | 3,016,003 |
| $ | 946,476 |
| $ | 333,536 |
| $ | 664,701 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)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 90 days past-due loans and still accruing as opposed to nonaccrual loans since the principal repayment is insured. This balance includes $40.1 million and $51.4 million of residential mortgage loans insured by the FHA that were over 15 months delinquent, and were no longer accruing interest as of September 30, 2019 and December 31, 2018, respectively, taking into consideration the FHA interest curtailment process.
(2)PCI loans are excluded from nonaccrual statistics due to the application of the accretion method, under which these loans accrete interest income over the remaining life of the loans using estimated cash flow analyses.
32
The following tables present, as of the indicated dates, information about impaired loans held for investment, excluding PCI loans, which are reported separately, as discussed below:
Impaired Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
| Impaired Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Impaired Loans |
|
|
|
|
|
|
|
|
| ||||||||||
|
| Impaired Loans - With a Related Specific Allowance |
| With No Related Specific Allowance |
| Impaired Loans Total |
| Impaired Loans - With a Related Specific Allowance |
| With No Related Specific Allowance |
| Impaired Loans Total | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
| Recorded Investment |
| Unpaid Principal Balance |
| Related Specific Allowance |
| Recorded Investment |
| Unpaid Principal Balance |
| Recorded Investment |
| Unpaid Principal Balance |
| Related Specific Allowance | Recorded Investment (1) |
| Unpaid Principal Balance |
| Related Specific Allowance |
| Recorded Investment (1) |
| Unpaid Principal Balance |
| Recorded Investment (1) |
| Unpaid Principal Balance |
| Related Specific Allowance | ||||||||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
As of September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
FHA/VA-Guaranteed loans | $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - | $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
Other residential mortgage loans |
| 291,419 |
|
| 321,120 |
|
| 18,482 |
|
| 117,375 |
|
| 159,220 |
|
| 408,794 |
|
| 480,340 |
|
| 18,482 |
| 271,042 |
|
| 295,465 |
|
| 17,411 |
|
| 110,826 |
|
| 156,829 |
|
| 381,868 |
|
| 452,294 |
|
| 17,411 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Commercial mortgage loans |
| 169,787 |
| 184,019 |
| 17,044 |
| 73,433 |
| 79,245 |
|
| 243,220 |
|
| 263,264 |
|
| 17,044 |
| 34,583 |
| 44,254 |
| 6,962 |
| 45,395 |
| 49,725 |
|
| 79,978 |
|
| 93,979 |
|
| 6,962 | ||||||||
Commercial and Industrial loans |
| 62,361 |
| 74,519 |
| 10,798 |
| 34,793 |
| 52,776 |
|
| 97,154 |
|
| 127,295 |
|
| 10,798 |
| 51,341 |
| 87,027 |
| 7,520 |
| 27,922 |
| 32,854 |
|
| 79,263 |
|
| 119,881 |
|
| 7,520 | ||||||||
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
| 4,972 |
| 5,872 |
| 750 |
| 160 |
| 337 |
|
| 5,132 |
|
| 6,209 |
|
| 750 |
| 2,087 |
| 2,431 |
| 533 |
| 1,943 |
| 2,567 |
|
| 4,030 |
|
| 4,998 |
|
| 533 | ||||||||
Construction-commercial |
| - |
| - |
| - |
| - |
| - |
|
| - |
|
| - |
|
| - |
| - |
| - |
| - |
| - |
| - |
|
| - |
|
| - |
|
| - | ||||||||
Construction-residential |
| 809 |
| 942 |
| 156 |
| 956 |
| 1,531 |
|
| 1,765 |
|
| 2,473 |
|
| 156 |
| 519 |
| 519 |
| 11 |
| 956 |
| 1,531 |
|
| 1,475 |
|
| 2,050 |
|
| 11 | ||||||||
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Auto loans |
| 18,623 |
| 18,623 |
| 3,664 |
| 269 |
| 269 |
|
| 18,892 |
|
| 18,892 |
|
| 3,664 |
| 15,434 |
| 15,407 |
| 3,576 |
| 104 |
| 194 |
|
| 15,538 |
|
| 15,601 |
|
| 3,576 | ||||||||
Finance leases |
| 1,372 |
| 1,372 |
| 122 |
| - |
| - |
|
| 1,372 |
|
| 1,372 |
|
| 122 |
| 1,603 |
| 1,797 |
| 66 |
| - |
| - |
|
| 1,603 |
|
| 1,797 |
|
| 66 | ||||||||
Other consumer loans |
| 9,761 |
|
| 10,498 |
|
| 2,297 |
|
| 1,920 |
|
| 2,281 |
|
| 11,681 |
|
| 12,779 |
|
| 2,297 |
| 8,545 |
|
| 9,569 |
|
| 919 |
|
| 1,070 |
|
| 1,971 |
|
| 9,615 |
|
| 11,540 |
|
| 919 |
| $ | 559,104 |
| $ | 616,965 |
| $ | 53,313 |
| $ | 228,906 |
| $ | 295,659 |
| $ | 788,010 |
| $ | 912,624 |
| $ | 53,313 | $ | 385,154 |
| $ | 456,469 |
| $ | 36,998 |
| $ | 188,216 |
| $ | 245,671 |
| $ | 573,370 |
| $ | 702,140 |
| $ | 36,998 |
(1) Excludes accrued interest receivable. | (1) Excludes accrued interest receivable. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
| Impaired Loans |
|
|
|
|
|
|
|
|
| ||||
|
| Impaired Loans - With a Related Specific Allowance |
| With No Related Specific Allowance |
| Impaired Loans Total | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Recorded Investment (1) |
| Unpaid Principal Balance |
| Related Specific Allowance |
| Recorded Investment (1) |
| Unpaid Principal Balance |
| Recorded Investment (1) |
| Unpaid Principal Balance |
| Related Specific Allowance | ||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHA/VA-Guaranteed loans | $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
Other residential mortgage loans |
| 293,494 |
|
| 325,897 |
|
| 19,965 |
|
| 110,238 |
|
| 148,920 |
|
| 403,732 |
|
| 474,817 |
|
| 19,965 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans |
| 184,068 |
|
| 201,116 |
|
| 17,684 |
|
| 43,358 |
|
| 49,253 |
|
| 227,426 |
|
| 250,369 |
|
| 17,684 |
Commercial and Industrial loans |
| 61,162 |
|
| 76,027 |
|
| 9,693 |
|
| 30,030 |
|
| 48,085 |
|
| 91,192 |
|
| 124,112 |
|
| 9,693 |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
| 2,444 |
|
| 2,923 |
|
| 552 |
|
| 2,431 |
|
| 2,927 |
|
| 4,875 |
|
| 5,850 |
|
| 552 |
Construction-commercial |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Construction-residential |
| 1,718 |
|
| 2,370 |
|
| 208 |
|
| - |
|
| - |
|
| 1,718 |
|
| 2,370 |
|
| 208 |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto loans |
| 17,781 |
|
| 17,781 |
|
| 3,689 |
|
| 250 |
|
| 250 |
|
| 18,031 |
|
| 18,031 |
|
| 3,689 |
Finance leases |
| 1,914 |
|
| 1,914 |
|
| 102 |
|
| 22 |
|
| 22 |
|
| 1,936 |
|
| 1,936 |
|
| 102 |
Other consumer loans |
| 9,291 |
|
| 10,066 |
|
| 2,083 |
|
| 2,068 |
|
| 2,750 |
|
| 11,359 |
|
| 12,816 |
|
| 2,083 |
| $ | 571,872 |
| $ | 638,094 |
| $ | 53,976 |
| $ | 188,397 |
| $ | 252,207 |
| $ | 760,269 |
| $ | 890,301 |
| $ | 53,976 |
(1) Excludes accrued interest receivable. |
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
| Impaired Loans |
|
|
|
|
|
|
|
|
| ||||
|
| Impaired Loans - With a Related Specific Allowance |
| With No Related Specific Allowance |
| Impaired Loans Total | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Recorded Investment |
| Unpaid Principal Balance |
| Related Specific Allowance |
| Recorded Investment |
| Unpaid Principal Balance |
| Recorded Investment |
| Unpaid Principal Balance |
| Related Specific Allowance | ||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHA/VA-Guaranteed loans | $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
Other residential mortgage loans |
| 316,616 |
|
| 349,284 |
|
| 22,086 |
|
| 116,818 |
|
| 154,048 |
|
| 433,434 |
|
| 503,332 |
|
| 22,086 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans |
| 87,814 |
|
| 124,084 |
|
| 9,783 |
|
| 65,100 |
|
| 100,612 |
|
| 152,914 |
|
| 224,696 |
|
| 9,783 |
Commercial and Industrial loans |
| 90,008 |
|
| 112,005 |
|
| 12,359 |
|
| 28,292 |
|
| 31,254 |
|
| 118,300 |
|
| 143,259 |
|
| 12,359 |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
| 11,865 |
|
| 19,973 |
|
| 1,402 |
|
| 48 |
|
| 49 |
|
| 11,913 |
|
| 20,022 |
|
| 1,402 |
Construction-commercial |
| 35,101 |
|
| 38,595 |
|
| 560 |
|
| - |
|
| - |
|
| 35,101 |
|
| 38,595 |
|
| 560 |
Construction-residential |
| 252 |
|
| 355 |
|
| 55 |
|
| - |
|
| - |
|
| 252 |
|
| 355 |
|
| 55 |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto loans |
| 22,338 |
|
| 22,338 |
|
| 3,665 |
|
| 267 |
|
| 267 |
|
| 22,605 |
|
| 22,605 |
|
| 3,665 |
Finance leases |
| 2,184 |
|
| 2,184 |
|
| 104 |
|
| - |
|
| - |
|
| 2,184 |
|
| 2,184 |
|
| 104 |
Other consumer loans |
| 11,084 |
|
| 11,830 |
|
| 1,396 |
|
| 2,521 |
|
| 3,688 |
|
| 13,605 |
|
| 15,518 |
|
| 1,396 |
| $ | 577,262 |
| $ | 680,648 |
| $ | 51,410 |
| $ | 213,046 |
| $ | 289,918 |
| $ | 790,308 |
| $ | 970,566 |
| $ | 51,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average Recorded Investment (1) |
| Interest Income on Accrual Basis |
| Interest Income on Cash Basis |
| Total Interest Income | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHA/VA-Guaranteed loans | $ | - |
| $ | - |
| $ | - |
| $ | - |
Other residential mortgage loans |
| 383,960 |
|
| 4,258 |
|
| 213 |
|
| 4,471 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans |
| 80,966 |
|
| 690 |
|
| 24 |
|
| 714 |
Commercial and Industrial loans |
| 80,879 |
|
| 932 |
|
| 19 |
|
| 951 |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
Land |
| 4,218 |
|
| 18 |
|
| 5 |
|
| 23 |
Construction-commercial |
| - |
|
| - |
|
| - |
|
| - |
Construction-residential |
| 1,476 |
|
| 11 |
|
| - |
|
| 11 |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
Auto loans |
| 16,133 |
|
| 283 |
|
| - |
|
| 283 |
Finance leases |
| 1,666 |
|
| 38 |
|
| - |
|
| 38 |
Other consumer loans |
| 9,898 |
|
| 196 |
|
| 38 |
|
| 234 |
| $ | 579,196 |
| $ | 6,426 |
| $ | 299 |
| $ | 6,725 |
(1) Excludes accrued interest receivable. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average Recorded Investment (1) |
| Interest Income on Accrual Basis |
| Interest Income on Cash Basis |
| Total Interest Income | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHA/VA-Guaranteed loans | $ | - |
| $ | - |
| $ | - |
| $ | - |
Other residential mortgage loans |
| 411,393 |
|
| 4,641 |
|
| 410 |
|
| 5,051 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans |
| 244,802 |
|
| 2,198 |
|
| 656 |
|
| 2,854 |
Commercial and Industrial loans |
| 98,903 |
|
| 557 |
|
| 2 |
|
| 559 |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
Land |
| 5,204 |
|
| 23 |
|
| 5 |
|
| 28 |
Construction-commercial |
| - |
|
| - |
|
| - |
|
| - |
Construction-residential |
| 1,766 |
|
| - |
|
| - |
|
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
Auto loans |
| 19,479 |
|
| 362 |
|
| - |
|
| 362 |
Finance leases |
| 1,444 |
|
| 27 |
|
| - |
|
| 27 |
Other consumer loans |
| 11,925 |
|
| 274 |
|
| 53 |
|
| 327 |
| $ | 794,916 |
| $ | 8,082 |
| $ | 1,126 |
| $ | 9,208 |
(1) Excludes accrued interest receivable. |
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average Recorded Investment |
| Interest Income on Accrual Basis |
| Interest Income on Cash Basis |
| Total Interest Income | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHA/VA-Guaranteed loans | $ | - |
| $ | - |
| $ | - |
| $ | - |
Other residential mortgage loans |
| 411,393 |
|
| 4,641 |
|
| 410 |
|
| 5,051 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans |
| 244,802 |
|
| 2,198 |
|
| 656 |
|
| 2,854 |
Commercial and Industrial loans |
| 98,903 |
|
| 557 |
|
| 2 |
|
| 559 |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
Land |
| 5,204 |
|
| 23 |
|
| 5 |
|
| 28 |
Construction-commercial |
| - |
|
| - |
|
| - |
|
| - |
Construction-residential |
| 1,766 |
|
| - |
|
| - |
|
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
Auto loans |
| 19,479 |
|
| 362 |
|
| - |
|
| 362 |
Finance leases |
| 1,444 |
|
| 27 |
|
| - |
|
| 27 |
Other consumer loans |
| 11,925 |
|
| 274 |
|
| 53 |
|
| 327 |
| $ | 794,916 |
| $ | 8,082 |
| $ | 1,126 |
| $ | 9,208 |
|
|
|
|
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Average Recorded Investment |
| Interest Income on Accrual Basis |
| Interest Income on Cash Basis |
| Total Interest Income | Average Recorded Investment (1) |
| Interest Income on Accrual Basis |
| Interest Income on Cash Basis |
| Total Interest Income | ||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 30, 2017 |
|
|
|
|
|
|
|
| ||||||||||||||
Nine-month Period Ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
FHA/VA-Guaranteed loans | $ | - |
| $ | - |
| $ | - |
| $ | - | $ | - |
| $ | - |
| $ | - |
| $ | - |
Other residential mortgage loans |
| 427,858 |
|
| 4,409 |
|
| 402 |
|
| 4,811 |
| 387,732 |
|
| 12,874 |
|
| 690 |
|
| 13,564 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial mortgage loans |
| 158,438 |
| 764 |
| 85 |
| 849 |
| 83,156 |
|
| 2,047 |
|
| 125 |
| 2,172 | ||||
Commercial and Industrial loans |
| 110,184 |
| 454 |
| 174 |
| 628 |
| 85,027 |
|
| 2,803 |
|
| 91 |
| 2,894 | ||||
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
| 14,634 |
| 122 |
| 9 |
| 131 |
| 4,390 |
|
| 55 |
|
| 23 |
| 78 | ||||
Construction-commercial |
| 35,520 |
| - |
| - |
| - |
| - |
|
| - |
|
| - |
| - | ||||
Construction-residential |
| 252 |
| - |
| - |
| - |
| 1,485 |
|
| 13 |
|
| - |
| 13 | ||||
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Auto loans |
| 24,049 |
| 462 |
| - |
| 462 |
| 17,196 |
|
| 869 |
|
| - |
| 869 | ||||
Finance leases |
| 2,354 |
| 43 |
| - |
| 43 |
| 1,847 |
|
| 106 |
|
| - |
| 106 | ||||
Other consumer loans |
| 14,268 |
|
| 388 |
|
| 40 |
|
| 428 |
| 10,535 |
|
| 621 |
|
| 115 |
|
| 736 |
| $ | 787,557 |
| $ | 6,642 |
| $ | 710 |
| $ | 7,352 | $ | 591,368 |
| $ | 19,388 |
| $ | 1,044 |
| $ | 20,432 |
| ||||||||||||||||||||||
(1) Excludes accrued interest receivable. | (1) Excludes accrued interest receivable. |
|
|
|
|
|
|
|
|
|
|
|
|
| Average Recorded Investment (1) |
| Interest Income on Accrual Basis |
| Interest Income on Cash Basis |
| Total Interest Income | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHA/VA-Guaranteed loans | $ | - |
| $ | - |
| $ | - |
| $ | - |
Other residential mortgage loans |
| 415,561 |
|
| 13,369 |
|
| 1,080 |
|
| 14,449 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans |
| 248,919 |
|
| 2,775 |
|
| 2,038 |
|
| 4,813 |
Commercial and Industrial loans |
| 102,410 |
|
| 1,438 |
|
| 6 |
|
| 1,444 |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
Land |
| 5,260 |
|
| 70 |
|
| 20 |
|
| 90 |
Construction-commercial |
| - |
|
| - |
|
| - |
|
| - |
Construction-residential |
| 1,765 |
|
| - |
|
| - |
|
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
Auto loans |
| 20,527 |
|
| 1,122 |
|
| - |
|
| 1,122 |
Finance leases |
| 1,582 |
|
| 84 |
|
| - |
|
| 84 |
Other consumer loans |
| 12,353 |
|
| 754 |
|
| 127 |
|
| 881 |
| $ | 808,377 |
| $ | 19,612 |
| $ | 3,271 |
| $ | 22,883 |
(1) Excludes accrued interest receivable. |
35
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average Recorded Investment |
| Interest Income on Accrual Basis |
| Interest Income on Cash Basis |
| Total Interest Income | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
Nine-month Period Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHA/VA-Guaranteed loans | $ | - |
| $ | - |
| $ | - |
| $ | - |
Other residential mortgage loans |
| 415,561 |
|
| 13,369 |
|
| 1,080 |
|
| 14,449 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans |
| 248,919 |
|
| 2,775 |
|
| 2,038 |
|
| 4,813 |
Commercial and Industrial loans |
| 102,410 |
|
| 1,438 |
|
| 6 |
|
| 1,444 |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
Land |
| 5,260 |
|
| 70 |
|
| 20 |
|
| 90 |
Construction-commercial |
| - |
|
| - |
|
| - |
|
| - |
Construction-residential |
| 1,765 |
|
| - |
|
| - |
|
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
Auto loans |
| 20,527 |
|
| 1,122 |
|
| - |
|
| 1,122 |
Finance leases |
| 1,582 |
|
| 84 |
|
| - |
|
| 84 |
Other consumer loans |
| 12,353 |
|
| 754 |
|
| 127 |
|
| 881 |
| $ | 808,377 |
| $ | 19,612 |
| $ | 3,271 |
| $ | 22,883 |
|
The following tables show the activity for impaired loans for the quarters and nine-month periods ended September 30, 2019 and 2018: | ||||||||||||||||
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
|
|
|
|
| September 30, |
| September 30, | ||||||||
|
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Impaired Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Balance at beginning of period |
|
|
| $ | 711,828 |
| $ | 740,134 |
| $ | 760,269 |
| $ | 790,308 | ||
Loans determined impaired during the period |
|
|
|
| 9,912 |
|
| 119,064 |
|
| 32,267 |
|
| 214,745 | ||
Charge-offs (1) (2) |
|
|
|
| (4,443) |
|
| (18,035) |
|
| (33,491) |
|
| (48,455) | ||
Loans sold, net of charge-offs |
|
|
|
| - |
|
| - |
|
| - |
|
| (4,121) | ||
Increases to existing impaired loans |
|
|
|
| 125 |
|
| 128 |
|
| 1,740 |
|
| 7,203 | ||
Foreclosures |
|
|
|
| (5,888) |
|
| (8,293) |
|
| (18,822) |
|
| (27,745) | ||
Loans no longer considered impaired |
|
|
|
| (1,378) |
|
| (1,146) |
|
| (2,081) |
|
| (5,086) | ||
Loans transferred to held for sale |
|
|
|
| - |
|
| (16,839) |
|
| - |
|
| (74,052) | ||
Paid in full, partial payments and other (3) |
|
|
|
| (136,786) |
|
| (27,003) |
|
| (166,512) |
|
| (64,787) | ||
Balance at end of period |
|
|
| $ | 573,370 |
| $ | 788,010 |
| $ | 573,370 |
| $ | 788,010 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)For the quarter ended September 30, 2018, includes charge-offs totaling $12.5 million associated with $17.2 million in nonaccrual loans transferred to held for sale in the third quarter of 2018.
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average Recorded Investment |
| Interest Income on Accrual Basis |
| Interest Income on Cash Basis |
| Total Interest Income | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHA/VA-Guaranteed loans | $ | - |
| $ | - |
| $ | - |
| $ | - |
Other residential mortgage loans |
| 431,741 |
|
| 13,170 |
|
| 1,548 |
|
| 14,718 |
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans |
| 176,757 |
|
| 1,621 |
|
| 287 |
|
| 1,908 |
Commercial and Industrial loans |
| 112,642 |
|
| 952 |
|
| 211 |
|
| 1,163 |
Construction: |
|
|
|
|
|
|
|
|
|
|
|
Land |
| 14,800 |
|
| 358 |
|
| 32 |
|
| 390 |
Construction-commercial |
| 36,101 |
|
| - |
|
| - |
|
| - |
Construction-residential |
| 252 |
|
| - |
|
| - |
|
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
Auto loans |
| 25,274 |
|
| 1,357 |
|
| - |
|
| 1,357 |
Finance leases |
| 2,532 |
|
| 140 |
|
| - |
|
| 140 |
Other consumer loans |
| 14,441 |
|
| 1,027 |
|
| 105 |
|
| 1,132 |
| $ | 814,540 |
| $ | 18,625 |
| $ | 2,183 |
| $ | 20,808 |
|
(2)For the nine-month period ended September 30, 2018, includes charge-offs totaling $22.2 million associated with $74.4 million in nonaccrual loans transferred to held for sale during the first nine-months of 2018
(3)For the quarter and nine-month period ended September 30, 2019, includes the payoff of two large commercial mortgage loans totaling $123.9 million.
36
The following tables show the activity for impaired loans and the related specific reserve for the quarters and nine-month periods ended September 30, 2018 and 2017: | ||||||||||||||||
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
|
|
|
|
| September 30, |
| September 30, | ||||||||
|
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Impaired Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Balance at beginning of period |
|
|
| $ | 740,134 |
| $ | 735,625 |
| $ | 790,308 |
| $ | 887,905 | ||
Loans determined impaired during the period |
|
|
|
| 119,064 |
|
| 71,884 |
|
| 214,745 |
|
| 110,488 | ||
Charge-offs (1)(2) |
|
|
|
| (18,035) |
|
| (6,472) |
|
| (48,455) |
|
| (66,959) | ||
Loans sold, net of charge-offs |
|
|
|
| - |
|
| - |
|
| (4,121) |
|
| (53,245) | ||
Increases to existing impaired loans |
|
|
|
| 128 |
|
| 3,215 |
|
| 7,203 |
|
| 4,454 | ||
Foreclosures |
|
|
|
| (8,293) |
|
| (5,657) |
|
| (27,745) |
|
| (36,347) | ||
Loans no longer considered impaired |
|
|
|
| (1,146) |
|
| (542) |
|
| (5,086) |
|
| (3,324) | ||
Loans transferred to held for sale |
|
|
|
| (16,839) |
|
| - |
|
| (74,052) |
|
| - | ||
Paid in full, partial payments and other |
|
|
|
| (27,003) |
|
| (18,794) |
|
| (64,787) |
|
| (63,713) | ||
Balance at end of period |
|
|
| $ | 788,010 |
| $ | 779,259 |
| $ | 788,010 |
| $ | 779,259 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | For the quarter ended September 30, 2018, includes charge-offs totaling $12.5 million associated with the $17.2 million in non-performing loans transferred to held for sale in the third quarter of 2018. | |||||||||||||||
(2) | For the nine-month period ended September 30, 2018, includes charge-offs totaling $22.2 million associated with the $74.4 million in non-performing loans transferred to held for sale during the first nine-months of 2018. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
|
|
|
| September 30, |
| September 30, | ||||||||
| 2018 | 2017 |
| 2018 | 2017 | ||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific Reserve: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balance at beginning of period |
|
|
| $ | 49,514 |
| $ | 40,794 |
| $ | 51,410 |
|
| 64,421 | |
Provision for loan losses |
|
|
|
| 21,821 |
|
| 13,819 |
|
| 50,277 |
|
| 50,014 | |
Net charge-offs |
|
|
|
| (18,022) |
|
| (6,458) |
|
| (48,374) |
|
| (66,280) | |
Balance at end of period |
|
|
| $ | 53,313 |
| $ | 48,155 |
| $ | 53,313 |
| $ | 48,155 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Purchased Credit Impaired Loans (PCI)
PCI Loans
The Corporation acquired PCI loans accounted for under ASC Topic 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC Topic 310-30”), as part of a transaction that closed on February 27, 2015 in which FirstBank acquired 10 Puerto Rico branches of Doral Bank, and acquired certain assets, including PCI loans, and assumed deposits, through an alliance with Banco Popular of Puerto Rico, thatwhich was the successful lead bidder with the FDIC on the failed Doral Bank, as well as other co-bidders. The Corporation also acquired PCI loans in previously completed asset acquisitions that are accounted for under ASC Topic 310-30. These previous transactions include the acquisition from Doral Financial in the second quarter of 2014 of all of its rights, title and interest in first and second residential mortgagesmortgage loans in full satisfaction of secured borrowings owed by such entity to FirstBank.
Under ASC Topic 310-30, the acquired PCI loans were aggregated into pools based on similar characteristics (i.e.(i.e., delinquency status and loan terms). Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Since the loans are accounted for under ASC Topic 310-30, they are not considered non-performingnonaccrual and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The Corporation recognizes additional losses on this portfolio when it is probable that the Corporation will be unable to collect all cash flows expected as of the acquisition date plus additional cash flows expecteddate.
The carrying amounts of PCI loans were as follows: | ||||||
|
| As of | ||||
| September 30, |
| December 31, | |||
| 2019 |
| 2018 | |||
(In thousands) |
|
|
|
|
| |
Residential mortgage loans | $ | 135,922 |
| $ | 143,176 | |
Commercial mortgage loans |
| 3,330 |
|
| 3,464 | |
Total PCI loans | $ | 139,252 |
| $ | 146,640 | |
Allowance for loan losses |
| (11,434) |
|
| (11,354) | |
Total PCI loans, net of allowance for loan losses | $ | 127,818 |
| $ | 135,286 | |
|
|
|
|
|
|
|
The following tables present PCI loans by past due status as of September 30, 2019 and December 31, 2018: | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As of September 30, 2019 | 30-59 Days |
| 60-89 Days |
| 90 days or more |
| Total Past Due |
|
|
|
| Total PCI loans |
| ||||||
|
|
|
|
|
| Current |
|
| |||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans | $ | - |
| $ | 8,495 |
| $ | 25,179 |
| $ | 33,674 |
|
| $ | 102,248 |
| $ | 135,922 |
|
Commercial mortgage loans |
| - |
|
| - |
|
| 2,523 |
|
| 2,523 |
|
|
| 807 |
|
| 3,330 |
|
Total (1) | $ | - |
| $ | 8,495 |
| $ | 27,702 |
| $ | 36,197 |
|
| $ | 103,055 |
| $ | 139,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As of December 31, 2018 | 30-59 Days |
| 60-89 Days |
| 90 days or more |
| Total Past Due |
|
|
|
| Total PCI loans |
| ||||||
|
|
|
|
|
| Current |
|
| |||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans | $ | - |
| $ | 6,979 |
| $ | 26,932 |
| $ | 33,911 |
|
| $ | 109,265 |
| $ | 143,176 |
|
Commercial mortgage loans |
| - |
|
| - |
|
| 2,512 |
|
| 2,512 |
|
|
| 952 |
|
| 3,464 |
|
Total (1) | $ | - |
| $ | 6,979 |
| $ | 29,444 |
| $ | 36,423 |
|
| $ | 110,217 |
| $ | 146,640 |
|
(1)According to be collected arising from changesthe Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage and commercial mortgage loans are considered past due when the borrower is in estimates after the acquisition date.arrears two or more monthly payments. PCI residential mortgage loans past due 30-59 days as of September 30, 2019 and December 31, 2018, amounted to $11.4 million and $11.6 million, respectively. No PCI commercial mortgage loans were 30-59 days past due as of September 30, 2019 and December 31, 2018.
The carrying amounts of PCI loans were as follows: | ||||||
|
| As of | ||||
| September 30, |
| December 31, | |||
| 2018 |
| 2017 | |||
(In thousands) |
|
|
|
|
| |
Residential mortgage loans | $ | 145,203 |
| $ | 153,991 | |
Commercial mortgage loans |
| 3,919 |
|
| 4,183 | |
Total PCI loans | $ | 149,122 |
| $ | 158,174 | |
Allowance for loan losses |
| (11,354) |
|
| (11,251) | |
Total PCI loans, net of allowance for loan losses | $ | 137,768 |
| $ | 146,923 | |
|
|
|
|
|
|
|
The following tables present PCI loans by past due status as of September 30, 2018 and December 31, 2017: | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
As of September 30, 2018 | 30-59 Days |
| 60-89 Days |
| 90 days or more |
| Total Past Due |
|
|
|
| Total PCI loans |
| |||||||
|
|
|
|
|
| Current |
|
| ||||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Residential mortgage loans | $ | - |
| $ | 7,823 |
| $ | 28,179 |
| $ | 36,002 |
|
| $ | 109,201 |
| $ | 145,203 |
| |
Commercial mortgage loans |
| - |
|
| - |
|
| 2,960 |
|
| 2,960 |
|
|
| 959 |
|
| 3,919 |
| |
Total (1) | $ | - |
| $ | 7,823 |
| $ | 31,139 |
| $ | 38,962 |
|
| $ | 110,160 |
| $ | 149,122 |
| |
_____________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(1) | According to the Corporationʼs delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage and commercial mortgage loans are considered past due when the borrower is in arrears two or more monthly payments. PCI residential mortgage loans past due 30-59 days as of September 30, 2018 amounted to $12.3 million. No PCI commercial mortgage loan was 30-59 days past due as of September 30, 2018. | |||||||||||||||||||
|
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
As of December 31, 2017 | 30-59 Days |
| 60-89 Days |
| 90 days or more |
| Total Past Due |
|
|
|
| Total PCI loans |
| |||||||
|
|
|
|
|
| Current |
|
| ||||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Residential mortgage loans | $ | - |
| $ | 16,600 |
| $ | 26,471 |
| $ | 43,071 |
|
| $ | 110,920 |
| $ | 153,991 |
| |
Commercial mortgage loans |
| - |
|
| 355 |
|
| 2,834 |
|
| 3,189 |
|
|
| 994 |
|
| 4,183 |
| |
Total (1) | $ | - |
| $ | 16,955 |
| $ | 29,305 |
| $ | 46,260 |
|
| $ | 111,914 |
| $ | 158,174 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | According to the Corporationʼs delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage and commercial mortgage loans are considered past due when the borrower is in arrears two or more monthly payments. PCI residential mortgage loans and commercial mortgage loans past due 30-59 days as of December 31, 2017 amounted to $28.1 million and $0.2 million, respectively. | |||||||||||||||||||
|
|
3837
Initial Fair Value and Accretable Yield of PCI Loans
At acquisition of the PCI loans, the Corporation estimated the cash flows the Corporation expected to collect on the loans. Under the accounting guidance for PCI loans, the difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. This difference is neither accreted into income nor recorded on the Corporation’s consolidated statements of financial condition. The excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans, using the effective-yield method.
Changes in Accretable Yield of Acquired PCI Loans
Subsequent to the acquisition of PCI loans, the Corporation is required to periodically evaluate its estimate of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications from non-accretable yield to accretable yield. Increases in the cash flows expected to be collected will generally result in an increase in interest income over the remaining life of the loan or pool of loans. Decreases in expected cash flows due to further credit deterioration will generally result in an impairment charge recognized in the Corporation’s provision for loan and lease losses, resulting in an increase to the allowance for loan and lease losses. As of each September 30, 2019 and December 31, 2018, the reserve related to PCI loans acquired from Doral Financial in 2014 and from Doral Bank in 2015 amounted to $11.4 million.million.
Changes in the accretable yield of PCI loans for the quarters and nine-month periods ended September 30, 2018 and 2017 were as follows: | ||||||||||||||||||||||
Changes in the accretable yield of PCI loans for the quarters and nine-month periods ended September 30, 2019 and 2018 were as follows: | Changes in the accretable yield of PCI loans for the quarters and nine-month periods ended September 30, 2019 and 2018 were as follows: | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | Quarter Ended |
| Nine-Month Period Ended | ||||||||||||||||
| September 30, |
| September 30, |
| September 30, |
| September 30, | September 30, |
| September 30, |
| September 30, |
| September 30, | ||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period | $ | 98,489 |
| $ | 108,971 |
| $ | 103,682 |
| $ | 116,462 | $ | 88,695 |
| $ | 98,489 |
| $ | 93,493 |
| $ | 103,682 |
Accretion recognized in earnings |
| (2,524) |
|
| (2,656) |
|
| (7,717) |
|
| (8,177) |
| (2,309) |
|
| (2,524) |
|
| (7,107) |
|
| (7,717) |
Reclassification (to) from non-accretable |
| - |
|
| - |
|
| - |
|
| (1,970) | |||||||||||
Balance at end of period | $ | 95,965 |
| $ | 106,315 |
| $ | 95,965 |
| $ | 106,315 | $ | 86,386 |
| $ | 95,965 |
| $ | 86,386 |
| $ | 95,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the carrying amount of PCI loans accounted for pursuant to ASC Topic 310-30 were as follows: | |||||||||||||
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
|
| September 30, 2019 |
| September 30, 2018 |
| September 30, 2019 |
| September 30, 2018 | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| |
Balance at beginning of period | $ | 141,706 |
| $ | 152,242 |
| $ | 146,640 |
| $ | 158,174 | ||
Accretion |
| 2,309 |
|
| 2,524 |
|
| 7,107 |
|
| 7,717 | ||
Collections |
| (3,652) |
|
| (4,835) |
|
| (11,752) |
|
| (12,590) | ||
Foreclosures |
| (1,111) |
|
| (809) |
|
| (2,743) |
|
| (4,179) | ||
Ending balance | $ | 139,252 |
| $ | 149,122 |
| $ | 139,252 |
| $ | 149,122 | ||
Allowance for loan losses |
| (11,434) |
|
| (11,354) |
|
| (11,434) |
|
| (11,354) | ||
Ending balance, net of allowance for loan losses | $ | 127,818 |
| $ | 137,768 |
| $ | 127,818 |
| $ | 137,768 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the carrying amount of PCI loans accounted for pursuant to ASC Topic 310-30 were as follows: | |||||||||||||
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
|
| September 30, 2018 |
| September 30, 2017 |
| September 30, 2018 |
| September 30, 2017 | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| |
Balance at beginning of period | $ | 152,242 |
| $ | 160,368 |
| $ | 158,174 |
| $ | 165,818 | ||
Accretion |
| 2,524 |
|
| 2,656 |
|
| 7,717 |
|
| 8,177 | ||
Collections |
| (4,835) |
|
| (4,225) |
|
| (12,590) |
|
| (13,327) | ||
Foreclosures |
| (809) |
|
| (1,005) |
|
| (4,179) |
|
| (2,874) | ||
Ending balance | $ | 149,122 |
| $ | 157,794 |
| $ | 149,122 |
| $ | 157,794 | ||
Allowance for loan losses |
| (11,354) |
|
| (10,235) |
|
| (11,354) |
|
| (10,235) | ||
Ending balance, net of allowance for loan losses | $ | 137,768 |
| $ | 147,559 |
| $ | 137,768 |
| $ | 147,559 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the allowance for loan losses related to PCI loans were as follows: | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
|
| September 30, 2019 |
| September 30, 2018 |
| September 30, 2019 |
| September 30, 2018 | ||||
(In thousands) |
|
| |||||||||||
Balance at beginning of period | $ | 11,434 |
| $ | 11,354 |
| $ | 11,354 |
| $ | 11,251 | ||
Provision for loan losses |
| - |
|
| - |
|
| 80 |
|
| 103 | ||
Balance at the end of period |
| $ | 11,434 |
| $ | 11,354 |
| $ | 11,434 |
| $ | 11,354 |
Changes in the allowance for loan losses related to PCI loans were as follows: | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
|
| September 30, 2018 |
| September 30, 2017 |
| September 30, 2018 |
| September 30, 2017 | ||||
(In thousands) |
|
| |||||||||||
Balance at beginning of period | $ | 11,354 |
| $ | 9,446 |
| $ | 11,251 |
| $ | 6,857 | ||
Provision for loan losses |
| - |
|
| 789 |
|
| 103 |
|
| 3,378 | ||
Balance at the end of period |
| $ | 11,354 |
| $ | 10,235 |
| $ | 11,354 |
| $ | 10,235 |
The outstanding principal balance of PCI loans, including amounts charged off by the Corporation, amounted to $184.2$171.5 million as of September 30, 20182019 (compared to - $196.6 $181.1 million as of December 31, 2017)2018).
4039
Purchases and Sales of Loans
During the first nine months of 2018,2019, the Corporation purchased $39.3$13.4 million of residential mortgage loans as part of a strategic program to purchase ongoing residential mortgage loan production from mortgage bankers in Puerto Rico. In general, the loans purchased from mortgage bankers were conforming residential mortgage loans. Purchases of conforming residential mortgage loans provide the Corporation the flexibility to retain or sell the loans, including through securitization transactions, depending upon the Corporation’s interest rate risk management strategies. When the Corporation sells such loans, it generally keeps the servicing of the loans.
In the ordinary course of business, the Corporation sells residential mortgage loans (originated or purchased) to GNMA and government-sponsored entities (“GSEs”),GSEs, such as FNMA and FHLMC, which generally securitize the transferred loans into MBS for sale into the secondary market. During the first nine months of 2018,2019, the Corporation sold $181.2$173.4 million of FHA/VA mortgage loans to GNMA, which packaged them into MBS. Also, during the first nine months of 2018,2019, the Corporation sold approximately $78.9$93.8 million of performing residential mortgage loans to FNMA and FHLMC. The Corporation’s continuing involvement in these sold loans consists primarily of servicing the loans. In addition, the Corporation agreed to repurchase loans whenif 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.(i.e., ensuring that the mortgage was properly underwritten according to established guidelines). The total amount of loans sold in the secondary market included $9.8 million of seasoned residential mortgage loans sold to FNMA in the second quarter of 2018.
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“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 September 30, 20182019 and December 31, 2017,2018, rebooked GNMA delinquent loans included in the residential mortgage loan portfolio amounted to $75.9 $38.0 million and $62.1 $43.6 million, respectively.
During the first nine months of 20182019 and 2017,2018, the Corporation repurchased, pursuant to its repurchase option with GNMA, $11.0$22.5 million and $24.7$11.0 million, respectively, of loans previously sold to GNMA. The principal balance of these loans is fully guaranteed and the risk of loss related to the repurchased loans is generally limited to the difference between the delinquent interest payment advanced to GNMA, which is computed at the loan’s interest rate, and the interest payments reimbursed by FHA, which are computed at a pre-determined debenture rate. Repurchases of GNMA loans allow the Corporation, among other things, to maintain acceptable delinquency rates on outstanding GNMA pools and remain as a seller and servicer in good standing with GNMA. During the fourth quarter of 2017, the Corporation requested and received approval from GNMAHistorically, losses for the exclusion of loans in the areas affected by Hurricanes Irma and Maria from calculations of delinquency and default ratios established in the GNMA Mortgage-Backed Securities Guide. The Corporation generally remediates any breachviolations of representations and warranties, related toand on optional repurchases of GNMA delinquent loans, have been immaterial and no provision has been made at the underwritingtime of such loans according to established GNMA guidelines without incurring losses. The Corporation’s estimate of losses related to breaches in representations and warranties is zero as of September 30, 2018.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 $0.1$64 thousand and $0.1 million and $27 thousand during the first nine months of 20182019 and 2017,2018, respectively. The Corporation’s risk of loss with respect to these loans is also minimal as these repurchased loans are generally performing loans with documentation deficiencies.
In addition, during the first nine months of 2019, the Corporation sold $4.8 million in nonaccrual commercial loans held for sale. Also, during the first nine months of 2019, the Corporation sold three commercial and industrial loan participations in Puerto Rico totaling $48.2 million.
During the first nine months of 2018, the Corporation purchased a $21.4$21.4 million commercial and industrial loan participation. Also, during the first nine months of 2018, the Corporation sold a $5.6$5.6 million commercial and industrial adversely-classified loan in Puerto Rico, (recordingrecording a charge-off of $1.3 million),$1.3 million, a $9.2$9.2 million commercial and industrial loan participation in the Florida region, and $34.9 $34.9 million in non-performingnonaccrual commercial and construction loans in Puerto Rico, as further discussed above.Rico.
Sale of the Puerto Rico Electric Power Authority (“PREPA”) Loan
During the first quarter of 2017, the Corporation received an unsolicited offer and sold its outstanding participation in the PREPA line of credit with a book value of $64 million at the time of sale (principal balance of $75 million), thereby reducing its direct exposure to the Puerto Rico government. A specific reserve of approximately $10.2 million had been allocated to this loan. Gross proceeds of $53.2 million from the sale resulted in an incremental loss of $0.6 million recorded as a charge to the provision for loan and lease losses in the first quarter of 2017.
4140
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 of $8.7$9.0 billion as of September 30, 2018,2019, credit risk concentration was approximately 74%74% in Puerto Rico, 20%21% in the United States, and 6%5% in the USVI and BVI.
As of September 30, 2018,2019, the Corporation had $68.5$57.8 million outstanding in loans extended to the Puerto Rico government, its municipalities and public corporations, compared to $55.9 $61.6 million as of December 31, 2017.2018. Approximately $47.2$43.8 million of the outstanding loans as of September 30, 20182019 consisted of loans extended to municipalities in Puerto Rico, which in most cases are supported by assigned property tax revenues. The vast majority of revenues of the municipalities included in the Corporation’s loan portfolio are independent of the Puerto Rico central government. These municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and notes. Late in 2015, the GDB and the Municipal Revenue Collection Center (“CRIM”) signed and perfected a deed of trust. Through this deed, the GDB, as fiduciary, is bound to keep the CRIM funds separate from any other deposits and must distribute the funds pursuant to applicable law. The CRIM funds are deposited at another commercial depository financial institution in Puerto Rico. In addition to loans extended to municipalities, the Corporation’s exposure to the Puerto Rico government as of September 30, 20182019 included a $6.7 million loan extended to a unit of the central government, and a $14.7 $14.0 million loan granted to an affiliate of PREPA.
In addition, as of September 30, 2018,2019, the Corporation had $113.3 $108.0 million in exposure to residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority.PRHFA, compared to $112.1 million as of December 31, 2018. Residential mortgage loans guaranteed by the Puerto Rico Housing Finance AuthorityPRHFA 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$75 million of the principal under the mortgage loan insurance program. According to the most recently-released audited financial statements of the Puerto Rico Housing Finance Authority,PRHFA, as of June 30, 2016, the Puerto Rico Housing Finance Authority’sPRHFA’s mortgage loans insurance program covered loans in an aggregate of approximately $576$576 million. The regulations adopted by the Puerto Rico Housing Finance AuthorityPRHFA require the establishment of adequate reserves to guarantee the solvency of the mortgage loan insurance fund. As of June 30, 2016, the most recent date as to which information is available, the Puerto Rico Housing Finance AuthorityPRHFA had a restricted net position for such purposes of approximately $77.4 $77.4 million.
The Corporation also has credit exposure to USVI government entities. As of September 30, 2018,2019, the Corporation had $69.4 $61.1 million in loans to USVI government instrumentalities and public corporations, compared to $70.4 $55.8 million as of December 31, 2017.2018. Of the amount outstanding as of September 30, 2018,2019, public corporations of the USVI owed approximately $46.1$37.9 million and an independent instrumentality of the USVI government owed approximately $23.2$23.2 million. As of September 30, 2018,2019, all loans were currently performing and up to date on principal and interest payments.
The Corporation cannot predict at this time the ultimate effect that the current fiscal situation and political environment of the Commonwealth of Puerto Rico, the uncertainty about the ultimate outcomes of the debt restructuring process, the various legislative and other measures adopted and to be adopted by the Puerto Rico government and the PROMESA oversight board in response to such fiscal situation, and Hurricane Mariathe uncertainty about the timing of the receipt of disaster relief funds, will have on the Puerto Rico economy, the Corporation’s clients, and the Corporation’s financial condition and results of operations.
Troubled Debt Restructurings
The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico that is similar to the U.S. government’s Home Affordable Modification Program guidelines. Depending upon the nature of borrowers’ financial condition, restructurings or loan modifications through this program, as well as other restructurings of individual commercial, commercial mortgage, construction, and residential mortgage loans, fit the definition of a TDR. A restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms that bring a defaulted loan current and provide sustainable affordability. Changes may include, among others, the extension of the maturity of the loan and modifications of the loan rate. As of September 30, 2018,2019, the Corporation’s total TDR loans held for investment of $625.7$495.8 million consisted of $340.3$320.7 million of residential mortgage loans, $79.7$68.4 million of commercial and industrial loans, $169.2$75.8 million of commercial mortgage loans, $5.8$4.4 million of construction loans, and $30.7 $26.4 million of consumer loans. Outstanding unfunded commitments on TDR loans amounted to $0.4 $1.7 million as of September 30, 2018.2019.
4241
The Corporation’s loss mitigation programs for residential mortgage and consumer loans can provide for one or a combination of the following: movement of interest past due to the end of the loan, extension of the loan term, deferral of principal payments and reduction of interest rates either permanently or for a period of up to six years (increasing back in step-up rates). Additionally, in certain cases, the restructuring may provide for the forgiveness of contractually-due principal or interest. Uncollected interest is added to the end of the loan term at the time of the restructuring and not recognized as income until collected or when the loan is paid off. These programs are available only to those borrowers who have defaulted, or are likely to default, permanently on their loanloans and would lose their homes in a foreclosure action absent some lender concession. Nevertheless, if the Corporation is not reasonably assured that the borrower will comply with its contractual commitment, properties are foreclosed.
Prior to permanently modifying a loan, the Corporation may enter into trial modifications with certain borrowers. Trial modifications generally represent a six-month period during which the borrower makes monthly payments under the anticipated modified payment terms prior to a formal modification. Upon successful completion of a trial modification, the Corporation and the borrower enter into a permanent modification. TDR loans that are participating in or that have been offered a binding trial modification are classified as TDRs when the trial offer is made and continue to be classified as TDRs regardless of whether the borrower enters into a permanent modification. As of September 30, 2018,2019, the Corporation classified as TDRs an additional $5.5$2.7 million of residential mortgage loans as TDRs that were participating in or had been offered a trial modification.
For the commercial real estate, commercial and industrial, and construction loan portfolios, at the time of a restructuring, the Corporation determines, on a loan-by-loan basis, whether a concession was granted for economic or legal reasons related to the borrower’s financial difficulty. Concessions granted for loans in these portfolios could include: reductions in interest rates to rates that are considered below market; extension of repayment schedules and maturity dates beyond original contractual terms; waivers of borrower covenants; forgiveness of principal or interest; or other contractual changes that are considered to be concessions. The Corporation mitigates loan defaults for these loan portfolios through its collection function. The function’s objective is to minimize both early stage delinquencies and losses upon default of loans in these portfolios. In the case of the commercial and industrial, commercial mortgage, and construction loan portfolios, the Corporation’s Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of OREO.
In addition, the Corporation extends, renews, and restructures loans with satisfactory credit profiles. Many commercial loan facilities are structured as lines of credit, which generally have one-year terms and, therefore, are required to be renewed annually. Other facilities may be restructured or extended from time to time based upon changes in the borrower’s business needs, use of funds, 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.
43
Selected information on TDR loans held for investment that included the recorded investment by loan class and modification type is summarized in the following tables. This information reflects all TDRs held for investment: | |||||||||||||||||||||
|
|
|
|
| |||||||||||||||||
|
| September 30, 2018 | |||||||||||||||||||
| Interest rate below market |
| Maturity or term extension |
| Combination of reduction in interest rate and extension of maturity |
| Forgiveness of principal and/or interest |
| Forbearance Agreement |
| Other (1) |
| Total | ||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Troubled Debt Restructurings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Non - FHA/VA residential mortgage loans | $ | 24,053 |
| $ | 11,496 |
| $ | 245,022 |
| $ | - |
| $ | 158 |
| $ | 59,540 |
| $ | 340,269 | |
Commercial Mortgage loans (2) |
| 4,400 |
|
| 30,980 |
|
| 124,493 |
|
| - |
|
| - |
|
| 9,332 |
|
| 169,205 | |
Commercial and Industrial loans (3) |
| 688 |
|
| 19,963 |
|
| 13,323 |
|
| - |
|
| 4,225 |
|
| 41,512 |
|
| 79,711 | |
Construction loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land |
| 16 |
|
| 104 |
|
| 2,016 |
|
| - |
|
| - |
|
| 339 |
|
| 2,475 | |
Construction-commercial (4) |
| - |
|
| 3,102 |
|
| - |
|
| - |
|
| - |
|
| 217 |
|
| 3,319 | |
Construction-residential |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - | |
Consumer loans - Auto |
| - |
|
| 1,627 |
|
| 11,066 |
|
| - |
|
| - |
|
| 6,199 |
|
| 18,892 | |
Finance leases |
| - |
|
| 116 |
|
| 1,256 |
|
| - |
|
| - |
|
| - |
|
| 1,372 | |
Consumer loans - Other |
| 1,299 |
|
| 1,398 |
|
| 5,772 |
|
| 228 |
|
| - |
|
| 1,780 |
|
| 10,477 | |
Total Troubled Debt Restructurings | $ | 30,456 |
| $ | 68,786 |
| $ | 402,948 |
| $ | 228 |
| $ | 4,383 |
| $ | 118,919 |
| $ | 625,720 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Other concessions granted by the Corporation included deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation, or a combination of the concessions listed in the table. | ||||||||||||||||||||
(2) | Excludes commercial mortgage TDR loans held for sale amounting to $3.6 million as of September 30, 2018. | ||||||||||||||||||||
(3) | Excludes commercial and industrial TDR loans held for sale amounting to $0.9 million as of September 30, 2018. | ||||||||||||||||||||
(4) | Excludes a construction TDR loan held for sale of $27.0 million as of September 30, 2018. | ||||||||||||||||||||
|
|
42
Selected information on all of the Corporation's TDR loans held for investment based on the recorded investment by loan class and modification type is summarized in the following tables as of the indicated dates. This information reflects all of the Corporation's TDRs held for investment: | Selected information on all of the Corporation's TDR loans held for investment based on the recorded investment by loan class and modification type is summarized in the following tables as of the indicated dates. This information reflects all of the Corporation's TDRs held for investment: | |||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| December 31, 2017 |
| As of September 30, 2019 | ||||||||||||||||||||||||||||||||||||||
|
| 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 |
| 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) | (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings: | Troubled Debt Restructurings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Troubled Debt Restructurings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Non - FHA/VA residential mortgage loans | Non - FHA/VA residential mortgage loans | $ | 25,964 |
| $ | 8,318 |
| $ | 267,578 |
| $ | - |
| $ | - |
| $ | 62,070 |
| $ | 363,930 | Non - FHA/VA residential mortgage loans | $ | 20,686 |
| $ | 11,751 |
| $ | 226,625 |
| $ | - |
| $ | 143 |
| $ | 61,522 |
| $ | 320,727 |
Commercial Mortgage loans |
| 6,563 |
|
| 2,094 |
|
| 31,870 |
|
| - |
|
| - |
|
| 10,285 |
| 50,812 | |||||||||||||||||||||||
Commercial Mortgage loans (2) | Commercial Mortgage loans (2) |
| 3,840 |
| 1,788 |
| 41,741 |
| 24 |
| 19,919 |
| 8,488 |
| 75,800 | |||||||||||||||||||||||||||
Commercial and Industrial loans | Commercial and Industrial loans |
| 2,510 |
|
| 20,648 |
|
| 16,049 |
|
| - |
|
| 6,623 |
|
| 48,282 |
| 94,112 | Commercial and Industrial loans |
| 603 |
| 16,939 |
| 12,337 |
| 151 |
| 699 |
| 37,713 |
| 68,442 | |||||||
Construction loans: | Construction loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Construction loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Land | Land |
| 18 |
|
| 3,941 |
|
| 2,186 |
|
| - |
|
| - |
|
| 331 |
| 6,476 | Land |
| 25 |
| 2,022 |
| 1,630 |
| - |
| - |
| 243 |
| 3,920 | |||||||
Construction-commercial | Construction-commercial |
| - |
|
| - |
|
| - |
|
| 35,100 |
|
| - |
|
| - |
| 35,100 | Construction-commercial |
| - |
| - |
| - |
| - |
| - |
| - |
| - | |||||||
Construction-residential | Construction-residential |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 217 |
| 217 | Construction-residential |
| - |
| 519 |
| - |
| - |
| - |
| - |
| 519 | |||||||
Consumer loans - Auto | Consumer loans - Auto |
| - |
|
| 1,347 |
|
| 14,233 |
|
| - |
|
| - |
|
| 7,025 |
| 22,605 | Consumer loans - Auto |
| - |
| 1,061 |
| 8,262 |
| - |
| - |
| 6,215 |
| 15,538 | |||||||
Finance leases | Finance leases |
| - |
|
| 238 |
|
| 1,946 |
|
| - |
|
| - |
|
| - |
| 2,184 | Finance leases |
| - |
| 49 |
| 1,216 |
| - |
| - |
| 338 |
| 1,603 | |||||||
Consumer loans - Other | Consumer loans - Other |
| 892 |
|
| 2,097 |
|
| 6,891 |
|
| 217 |
|
| - |
|
| 1,686 |
|
| 11,783 | Consumer loans - Other |
| 1,484 |
|
| 1,360 |
|
| 4,990 |
|
| 231 |
|
| - |
|
| 1,224 |
|
| 9,289 |
Total Troubled Debt Restructurings | Total Troubled Debt Restructurings | $ | 35,947 |
| $ | 38,683 |
| $ | 340,753 |
| $ | 35,317 |
| $ | 6,623 |
| $ | 129,896 |
| $ | 587,219 | Total Troubled Debt Restructurings | $ | 26,638 |
| $ | 35,489 |
| $ | 296,801 |
| $ | 406 |
| $ | 20,761 |
| $ | 115,743 |
| $ | 495,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
(1) | Other concessions granted by the Corporation included deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation or a combination of the concessions listed in the table. | |||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 the concessions listed in the table.
(2)Excludes commercial mortgage TDR loans held for sale amounting to $6.9 million as of September 30, 2019.
|
| As of December 31, 2018 | |||||||||||||||||||
| Interest rate below market |
| Maturity or term extension |
| Combination of reduction in interest rate and extension of maturity |
| Forgiveness of principal and/or interest |
| Forbearance Agreement |
| Other (1) |
| Total | ||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Troubled Debt Restructurings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Non - FHA/VA residential mortgage loans | $ | 22,729 |
| $ | 11,586 |
| $ | 239,348 |
| $ | - |
| $ | 145 |
| $ | 60,094 |
| $ | 333,902 | |
Commercial Mortgage loans (2) |
| 3,966 |
|
| 2,005 |
|
| 122,709 |
|
| - |
|
| - |
|
| 9,269 |
|
| 137,949 | |
Commercial and Industrial loans (3) |
| 664 |
|
| 19,769 |
|
| 13,323 |
|
| - |
|
| 2,673 |
|
| 38,492 |
|
| 74,921 | |
Construction loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land |
| 16 |
|
| 2,524 |
|
| 1,933 |
|
| - |
|
| - |
|
| 292 |
|
| 4,765 | |
Construction-commercial |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - | |
Construction-residential |
| - |
|
| 545 |
|
| - |
|
| - |
|
| - |
|
| 217 |
|
| 762 | |
Consumer loans - Auto |
| - |
|
| 1,517 |
|
| 10,085 |
|
| - |
|
| - |
|
| 6,429 |
|
| 18,031 | |
Finance leases |
| - |
|
| 101 |
|
| 1,186 |
|
| - |
|
| - |
|
| 648 |
|
| 1,935 | |
Consumer loans - Other |
| 1,396 |
|
| 1,236 |
|
| 5,651 |
|
| 275 |
|
| - |
|
| 1,824 |
|
| 10,382 | |
Total Troubled Debt Restructurings | $ | 28,771 |
| $ | 39,283 |
| $ | 394,235 |
| $ | 275 |
| $ | 2,818 |
| $ | 117,265 |
| $ | 582,647 |
(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 the concessions listed in the table.
(2)Excludes commercial mortgage TDR loans held for sale amounting to $11.1 million as of December 31, 2018.
(3)Excludes commercial and industrial TDR loans held for sale amounting to $0.9 million as of December 31, 2018.
4443
| The following table presents the Corporationʼs TDR loans held for investment activity: | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||||
| September 30, |
| September 30, | |||||||||||||
|
|
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Beginning balance of TDRs |
| $ | 557,196 |
|
| $ | 568,543 |
| $ | 587,219 |
|
| $ | 647,048 | ||
New TDRs |
|
| 107,357 |
|
|
| 29,101 |
|
| 164,004 |
|
|
| 83,368 | ||
Increases to existing TDRs |
|
| 78 |
|
|
| 2,650 |
|
| 6,924 |
|
|
| 3,404 | ||
Charge-offs post modification (1)(2)(3) |
|
| (7,549) |
|
|
| (2,949) |
|
| (25,336) |
|
|
| (26,976) | ||
Sales, net of charge-offs |
|
| - |
|
|
| - |
|
| - |
|
|
| (53,245) | ||
Foreclosures |
|
| (4,898) |
|
|
| (3,564) |
|
| (15,700) |
|
|
| (24,085) | ||
TDR transferred to held for sale, net of charge-offs |
|
| (4,541) |
|
|
| - |
|
| (34,541) |
|
|
| - | ||
Paid-off, partial payments and other |
|
| (21,923) |
|
|
| (7,986) |
|
| (56,850) |
|
|
| (43,719) | ||
Ending balance of TDRs |
| $ | 625,720 |
|
| $ | 585,795 |
| $ | 625,720 |
|
| $ | 585,795 | ||
|
|
|
|
|
|
|
|
| ||||||||
(1) | The quarter ended September 30, 2018 includes charge-offs of $3.4 million associated with $4.5 million in commercial loans transferred to held for sale. | |||||||||||||||
(2) | The nine-month period ended September 30, 2018 includes charge-offs totaling $8.5 million associated with $34.5 in million commercial and construction loans transferred to held for sale. | |||||||||||||||
(3) | The nine-month period ended September 30, 2017 includes a charge-off of $10.7 million related to the sale of the PREPA credit line. |
| The following table presents the Corporation's TDR loans held for investment activity: | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||||
| September 30, |
| September 30, | |||||||||||||
|
|
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Beginning balance of TDRs |
| $ | 582,389 |
|
| $ | 557,196 |
| $ | 582,647 |
|
| $ | 587,219 | ||
New TDRs |
|
| 22,111 |
|
|
| 107,357 |
|
| 54,531 |
|
|
| 164,004 | ||
Increases to existing TDRs |
|
| 125 |
|
|
| 78 |
|
| 1,647 |
|
|
| 6,924 | ||
Charge-offs post modification (1) (2) |
|
| (2,505) |
|
|
| (7,549) |
|
| (7,418) |
|
|
| (25,336) | ||
Foreclosures |
|
| (2,716) |
|
|
| (4,898) |
|
| (9,637) |
|
|
| (15,700) | ||
TDRs transferred to held for sale, net of charge-off |
|
| - |
|
|
| (4,541) |
|
| - |
|
|
| (34,541) | ||
Paid-off, partial payments and other (3) |
|
| (103,566) |
|
|
| (21,923) |
|
| (125,932) |
|
|
| (56,850) | ||
Ending balance of TDRs |
| $ | 495,838 |
|
| $ | 625,720 |
| $ | 495,838 |
|
| $ | 625,720 |
(1)For the quarter ended September 30, 2018 includes charge-offs of $3.4 million associated with $4.5 million commercial loans transferred to held for sale.
(2)For the nine-month period ended September 30, 2018 includes charge-offs of $8.5 million associated with $34.5 million of commercial and construction loans transferred to held for sale.
(3)For the quarter and nine-month period ended September 30, 2019, includes the payoff of a $92.4 million commercial mortgage loan.
TDR loans are classified as either accrual or nonaccrual loans. Loans in accrual status may remain in accrual status when their contractual terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, loans on nonaccrual status and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of six months, and there is evidence that such payments can, and are likely to, continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of the restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Loan modifications increase the Corporation’s interest income by returning a non-performingnonaccrual loan to performing status, if applicable, increase cash flows by providing for payments to be made by the borrower, and limit increases in foreclosure and OREO costs. A TDR loan that specifies an interest rate that at the time of the restructuring is greater than or equal to the rate the Corporation is willing to accept for a new loan with comparable risk may not be reported as a TDR or an impaired loan in the calendar years subsequent to the restructuring, if it is in compliance with its modified terms. The Corporation did not remove any loans from the TDR classification during the first nine months of 20182019 and 2017,2018, other than a $9.9 million loan refinanced at market terms as the borrower was no longer experiencing financial difficulties and the refinancing does not contain any concession to the borrower. This refinancing was included as part of “paid-off,“Paid-off, partial payments and other” in the above table.
45
table for the quarter and nine-month period ended September 2018.
The following table provides a breakdown of the TDR loans held for investment by those in accrual and nonaccrual status: |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| As of September 30, 2018 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| Accrual |
| Nonaccrual (1) |
| Total TDRs | |||
(In thousands) |
|
|
|
|
|
|
|
| |
Non-FHA/VA residential mortgage loans | $ | 270,067 |
| $ | 70,202 |
| $ | 340,269 | |
Commercial Mortgage loans (2) |
| 146,293 |
|
| 22,912 |
|
| 169,205 | |
Commercial and Industrial loans (3) |
| 70,416 |
|
| 9,295 |
|
| 79,711 | |
Construction loans: |
|
|
|
|
|
|
|
| |
Land |
| 1,080 |
|
| 3,939 |
|
| 5,019 | |
Construction-commercial (4) |
| - |
|
| - |
|
| - | |
Construction-residential |
| - |
|
| 775 |
|
| 775 | |
Consumer loans - Auto | 12,541 |
|
| 6,350 |
|
| 18,891 | ||
Finance leases | 1,273 |
|
| 99 |
|
| 1,372 | ||
Consumer loans - Other |
| 9,176 |
|
| 1,302 |
|
| 10,478 | |
Total Troubled Debt Restructurings | $ | 510,846 |
| $ | 114,874 |
| $ | 625,720 | |
|
|
|
|
|
|
|
|
|
|
(1) | Included in non-accrual loans are $20.7 million in loans that were performing under the terms of the restructuring agreement but are reported in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and are deemed fully collectible. | ||||||||
(2) | Excludes commercial mortgage TDR loans held for sale amounting to $3.6 million as of September 30, 2018. | ||||||||
(3) | Excludes commercial and industrial TDR loans held for sale amounting to $0.9 million as of September 30, 2018. | ||||||||
(4) | Excludes a construction TDR loan held for sale of $27.0 million as of September 30, 2018. |
44
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2017 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| Accrual |
| Nonaccrual (1) |
| Total TDRs | |||
(In thousands) |
|
|
|
|
|
|
|
| |
Non-FHA/VA residential mortgage loans | $ | 280,729 |
| $ | 83,201 |
| $ | 363,930 | |
Commercial Mortgage loans |
| 23,329 |
|
| 27,483 |
|
| 50,812 | |
Commercial and Industrial loans |
| 41,536 |
|
| 52,576 |
|
| 94,112 | |
Construction loans: |
|
|
|
|
|
|
|
| |
Land |
| 1,291 |
|
| 5,185 |
|
| 6,476 | |
Construction-commercial |
| - |
|
| 35,100 |
|
| 35,100 | |
Construction-residential |
| - |
|
| 217 |
|
| 217 | |
Consumer loans - Auto |
| 15,548 |
|
| 7,057 |
|
| 22,605 | |
Finance leases |
| 1,968 |
|
| 216 |
|
| 2,184 | |
Consumer loans - Other |
| 10,294 |
|
| 1,489 |
|
| 11,783 | |
Total Troubled Debt Restructurings | $ | 374,695 |
| $ | 212,524 |
| $ | 587,219 | |
|
|
|
|
|
|
|
|
|
|
(1) | Included in non-accrual loans are $88.6 million in loans that were performing under the terms of the restructuring agreement but are reported in non-accrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and are deemed fully collectible. |
46
The following tables provide a breakdown of the TDR loans held for investment by those in accrual and nonaccrual status as of the indicated dates: |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| As of September 30, 2019 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| Accrual |
| Nonaccrual (1) |
| Total TDRs | |||
(In thousands) |
|
|
|
|
|
|
|
| |
Non-FHA/VA residential mortgage loans | $ | 266,592 |
| $ | 54,135 |
| $ | 320,727 | |
Commercial mortgage loans (2) |
| 50,045 |
|
| 25,755 |
|
| 75,800 | |
Commercial and Industrial loans |
| 62,041 |
|
| 6,401 |
|
| 68,442 | |
Construction loans: |
|
|
|
|
|
|
|
| |
Land |
| 849 |
|
| 3,071 |
|
| 3,920 | |
Construction-commercial |
| - |
|
| - |
|
| - | |
Construction-residential |
| 519 |
|
| - |
|
| 519 | |
Consumer loans - Auto | 9,452 |
|
| 6,086 |
|
| 15,538 | ||
Finance leases | 1,599 |
|
| 4 |
|
| 1,603 | ||
Consumer loans - Other |
| 8,327 |
|
| 962 |
|
| 9,289 | |
Total Troubled Debt Restructurings | $ | 399,424 |
| $ | 96,414 |
| $ | 495,838 | |
|
|
|
|
|
|
|
|
|
|
(1)Included in nonaccrual loans are $20.5 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.
(2)Excludes commercial mortgage TDR loans held for sale amounting to $6.9 million as of September 30, 2019.
| As of December 31, 2018 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| Accrual |
| Nonaccrual (1) |
| Total TDRs | |||
(In thousands) |
|
|
|
|
|
|
|
| |
Non-FHA/VA residential mortgage loans | $ | 271,766 |
| $ | 62,136 |
| $ | 333,902 | |
Commercial mortgage loans (2) |
| 116,830 |
|
| 21,119 |
|
| 137,949 | |
Commercial and Industrial loans (3) |
| 66,603 |
|
| 8,318 |
|
| 74,921 | |
Construction loans: |
|
|
|
|
|
|
|
| |
Land |
| 1,071 |
|
| 3,694 |
|
| 4,765 | |
Construction-commercial |
| - |
|
| - |
|
| - | |
Construction-residential |
| - |
|
| 762 |
|
| 762 | |
Consumer loans - Auto |
| 11,842 |
|
| 6,189 |
|
| 18,031 | |
Finance leases |
| 1,791 |
|
| 144 |
|
| 1,935 | |
Consumer loans - Other |
| 9,025 |
|
| 1,357 |
|
| 10,382 | |
Total Troubled Debt Restructurings | $ | 478,928 |
| $ | 103,719 |
| $ | 582,647 | |
|
|
|
|
|
|
|
|
|
|
(1)Included in nonaccrual loans are $17.7 million in loans that are performing under the terms of the restructuring agreement but are reported in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and are deemed fully collectible.
(2)Excludes commercial mortgage TDR loans held for sale amounting to $11.1 million as of December 31, 2018.
(3)Excludes commercial and industrial TDR loans held for sale amounting to $0.9 million as of December 31, 2018.
45
TDR loans exclude restructured residential mortgage loans that are government-guaranteed (e.g.(e.g., FHA/VA loans) totaling $60.7$60.4 million as of September 30, 20182019 (compared with $62.1$60.5 million as of December 31, 2017)2018). The Corporation excludes FHA/VA guaranteed loans from TDR loan statistics given that, in the event that the borrower defaults on the loan, the principal and interest (at the specified debenture rate) are guaranteed by the U.S. government; therefore, the risk of loss on these types of loans is very low. The Corporation does not consider loans with U.S. federal government guarantees to be impaired loans for the purpose of calculating the allowance for loan and lease losses.
Loan modifications that are considered TDR loans completed during the quarters and nine-month periods ended September 30, 20182019 and 2017,2018 were as follows:
| Quarter Ended September 30, 2018 | Quarter Ended September 30, 2019 | ||||||||||||
| Number of contracts |
| Pre-modification Outstanding Recorded Investment |
| Post-Modification Outstanding Recorded Investment | Number of contracts |
| Pre-modification Outstanding Recorded Investment |
| Post-Modification Outstanding Recorded Investment | ||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage loans | 27 |
| $ | 6,316 |
| $ | 5,729 | 21 |
| $ | 2,233 |
| $ | 2,115 |
Commercial Mortgage loans | 4 |
|
| 96,088 |
|
| 95,867 | |||||||
Commercial mortgage loans | 5 |
|
| 17,344 |
|
| 17,282 | |||||||
Commercial and Industrial loans | 2 |
|
| 2,800 |
|
| 2,786 | 1 |
|
| 236 |
|
| 236 |
Construction loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction-residential | 1 |
|
| 587 |
|
| 558 | |||||||
Land | - |
|
| - |
|
| - | |||||||
Consumer loans - Auto | 74 |
|
| 1,281 |
|
| 1,281 | 70 |
|
| 1,205 |
|
| 1,206 |
Finance leases | 5 |
|
| 82 |
|
| 80 | 12 |
|
| 202 |
|
| 202 |
Consumer loans - Other | 198 |
|
| 1,038 |
|
| 1,056 | 263 |
|
| 1,048 |
|
| 1,070 |
Total Troubled Debt Restructurings | 311 |
| $ | 108,192 |
| $ | 107,357 | 372 |
| $ | 22,268 |
| $ | 22,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine-Month Period Ended September 30, 2018 | Nine-Month Period Ended September 30, 2019 | ||||||||||||
| Number of contracts |
| Pre-modification Outstanding Recorded Investment |
| Post-Modification Outstanding Recorded Investment | Number of contracts |
| Pre-modification Outstanding Recorded Investment |
| Post-Modification Outstanding Recorded Investment | ||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage loans | 70 |
| $ | 10,958 |
| $ | 10,277 | 87 |
| $ | 9,585 |
| $ | 9,280 |
Commercial Mortgage loans | 9 |
|
| 138,599 |
|
| 138,390 | |||||||
Commercial mortgage loans | 11 |
|
| 40,374 |
|
| 38,136 | |||||||
Commercial and Industrial loans | 8 |
|
| 8,850 |
|
| 8,496 | 7 |
|
| 439 |
|
| 438 |
Construction loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land | 1 |
|
| 97 |
|
| 97 | 4 |
|
| 118 |
|
| 117 |
Construction-residential | 1 |
|
| 587 |
|
| 558 | |||||||
Consumer loans - Auto | 195 |
|
| 3,206 |
|
| 3,200 | 208 |
|
| 3,327 |
|
| 3,294 |
Finance leases | 5 |
|
| 82 |
|
| 80 | 33 |
|
| 646 |
|
| 643 |
Consumer loans - Other | 565 |
|
| 2,857 |
|
| 2,906 | 585 |
|
| 2,581 |
|
| 2,623 |
Total Troubled Debt Restructurings | 854 |
| $ | 165,236 |
| $ | 164,004 | 935 |
| $ | 57,070 |
| $ | 54,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4746
| Quarter Ended September 30, 2017 | Quarter Ended September 30, 2018 | ||||||||||||
| Number of contracts |
| Pre-Modification Outstanding Recorded Investment |
| Post-Modification Outstanding Recorded Investment | Number of contracts |
| Pre-Modification Outstanding Recorded Investment |
| Post-Modification Outstanding Recorded Investment | ||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage loans | 25 |
| $ | 3,358 |
| $ | 3,358 | 27 |
| $ | 6,316 |
| $ | 5,729 |
Commercial Mortgage loans | 4 |
|
| 2,569 |
|
| 2,318 | |||||||
Commercial mortgage loans | 4 |
|
| 96,088 |
|
| 95,867 | |||||||
Commercial and Industrial loans | 8 |
|
| 21,079 |
|
| 21,019 | 2 |
|
| 2,800 |
|
| 2,786 |
Construction loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land | 1 |
|
| 18 |
|
| 18 | - |
|
| - |
|
| - |
Construction-residential | 1 |
|
| 587 |
|
| 558 | |||||||
Consumer loans - Auto | 109 |
|
| 1,568 |
|
| 1,568 | 74 |
|
| 1,281 |
|
| 1,281 |
Finance leases | 5 |
|
| 82 |
|
| 80 | |||||||
Consumer loans - Other | 199 |
|
| 796 |
|
| 820 | 198 |
|
| 1,038 |
|
| 1,056 |
Total Troubled Debt Restructurings | 346 |
| $ | 29,388 |
| $ | 29,101 | 311 |
| $ | 108,192 |
| $ | 107,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine-Month Period Ended September 30, 2017 | Nine-Month Period Ended September 30, 2018 | ||||||||||||
| Number of contracts |
| Pre-Modification Outstanding Recorded Investment |
| Post-Modification Outstanding Recorded Investment | Number of contracts |
| Pre-Modification Outstanding Recorded Investment |
| Post-Modification Outstanding Recorded Investment | ||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage loans | 113 |
| $ | 17,585 |
| $ | 17,349 | 70 |
| $ | 10,958 |
| $ | 10,277 |
Commercial Mortgage loans | 12 |
|
| 25,274 |
|
| 24,783 | |||||||
Commercial mortgage loans | 9 |
|
| 138,599 |
|
| 138,390 | |||||||
Commercial and Industrial loans | 13 |
|
| 32,153 |
|
| 32,093 | 8 |
|
| 8,850 |
|
| 8,496 |
Construction loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land | 2 |
|
| 43 |
|
| 46 | 1 |
|
| 97 |
|
| 97 |
Construction-residential | 1 |
|
| 587 |
|
| 558 | |||||||
Consumer loans - Auto | 383 |
|
| 5,741 |
|
| 5,741 | 195 |
|
| 3,206 |
|
| 3,200 |
Finance leases | 22 |
|
| 548 |
|
| 548 | 5 |
|
| 82 |
|
| 80 |
Consumer loans - Other | 602 |
|
| 2,756 |
|
| 2,808 | 565 |
|
| 2,857 |
|
| 2,906 |
Total Troubled Debt Restructurings | 1,147 |
| $ | 84,100 |
| $ | 83,368 | 854 |
| $ | 165,236 |
| $ | 164,004 |
|
|
| ||||||||||||
|
|
|
4847
Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-performingnonaccrual loan. Recidivism on a modified loan occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The Corporation considers a loan to have defaulted if the borrower has failed to make payments of either principal, interest, or both for a period of 90 days or more.
Loan modifications considered TDR loans that defaulted during the quarters and nine-month periods ended September 30, 20182019 and 2017,2018, and had become TDR during the 12-months preceding the default date, were as follows:
| Quarter Ended September 30, | Quarter Ended September 30, | ||||||||||||||||
| 2018 |
| 2017 | 2019 |
| 2018 | ||||||||||||
| Number of contracts |
| Recorded Investment |
| Number of contracts |
| Recorded Investment | Number of contracts |
| Recorded Investment |
| Number of contracts |
| Recorded Investment | ||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage loans | 3 |
| $ | 338 |
| 16 |
| $ | 1,795 | 5 |
| $ | 1,706 |
| 3 |
| $ | 338 |
Consumer loans - Auto | 34 |
| 559 |
| 4 |
| 59 | 50 |
| 856 |
| 34 |
| 559 | ||||
Consumer loans - Other | 18 |
| 59 |
| 53 |
| 223 | 18 |
| 72 |
| 18 |
| 59 | ||||
Total | 55 |
| $ | 956 |
| 73 |
| $ | 2,077 | 73 |
| $ | 2,634 |
| 55 |
| $ | 956 |
| Nine-Month Period Ended September 30, | ||||||||
| 2019 |
| 2018 | ||||||
| Number of contracts |
| Recorded Investment |
| Number of contracts |
| Recorded Investment | ||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage loans | 8 |
| $ | 1,890 |
| 13 |
| $ | 1,406 |
Consumer loans - Auto | 99 |
|
| 1,624 |
| 67 |
|
| 1,096 |
Consumer loans - Other | 52 |
|
| 176 |
| 57 |
|
| 213 |
Finance leases | - |
|
| - |
| 1 |
|
| 22 |
Total | 159 |
| $ | 3,690 |
| 138 |
| $ | 2,737 |
| Nine-Month Period Ended September 30, | ||||||||
| 2018 |
| 2017 | ||||||
| Number of contracts |
| Recorded Investment |
| Number of contracts |
| Recorded Investment | ||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Non-FHA/VA residential mortgage loans | 13 |
| $ | 1,406 |
| 38 |
| $ | 4,686 |
Commercial Mortgage loans | - |
|
| - |
| 1 |
|
| 57 |
Consumer loans - Auto | 67 |
|
| 1,096 |
| 13 |
|
| 189 |
Consumer loans - Other | 57 |
|
| 213 |
| 99 |
|
| 387 |
Finance leases | 1 |
|
| 22 |
| - |
|
| - |
Total | 138 |
| $ | 2,737 |
| 151 |
| $ | 5,319 |
4948
For certain TDR loans, the Corporation splits the loans into two new notes, A and B notes. The A note is restructured to comply with the Corporation’s lending standards at current market rates, and is tailored to suit the customer’s ability to make timely interest and principal payments. The B note includes the granting of the concession to the borrower and varies by situation. The B note is fully charged off but the borrower’s obligation is not forgiven, to the borrower, and any payments that are collected are accounted for as recoveries.recoveries of previous charged-off amounts. A partial charge-off may be recorded if the B note is collateral dependent and the source of repayment is independent of Note A. At the time of the restructuring, the A note is identified and classified as a TDR loan. If the loan performs for at least six months according to the modified terms, the A note may be returned to accrual status. The borrower’s payment performance prior to the restructuring is included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of the restructuring. In the periods following the calendar year in which a loan is restructured, the A note may no longer be reported as a TDR loan if it is in accrual status, is in compliance with its modified terms, and yields a market rate (as determined and documented at the time of the restructuring).
The following table providestables provide additional information about the volume of this type of loan restructuring as of September 30, 20182019 and 20172018 and the effect on the allowance for loan and lease losses in the first nine months of 20182019 and 2017:2018:
| September 30, 2018 |
|
| September 30, 2017 | |
(In thousands) |
|
|
|
|
|
Principal balance deemed collectible at end of period | $ | 65,706 |
| $ | 35,603 |
Amount charged off | $ | 1,137 |
| $ | - |
Charges (release) to the provision for loan losses | $ | 1,407 |
| $ | (1,080) |
Allowance for loan losses at end of period | $ | 4,116 |
| $ | 4,061 |
|
|
|
|
|
|
| |
(In thousands) | September 30, 2019 |
| September 30, 2018 | |||
Beginning balance | $ | 33,840 |
| $ | 35,577 | |
New TDR loan splits |
| 20,059 |
|
| 32,104 | |
Paid-off and partial payments |
| (1,315) |
|
| (1,975) | |
Ending balance | $ | 52,584 |
| $ | 65,706 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) | September 30, 2019 |
| September 30, 2018 | |||
Allowance for loan losses at the beginning of the year | $ | 473 |
| $ | 3,846 | |
Charges to the provision for loan losses |
| 3,304 |
|
| 1,407 | |
Net charge-offs |
| - |
|
| (1,137) | |
Allowance for loan losses at the end of the year | $ | 3,777 |
| $ | 4,116 |
Approximately $63.1$41.0 million of the loans restructured using the A/B note restructure workout strategy were in accrual status as of September 30, 2018.2019. These loans continue to be individually evaluated for impairment purposes.
5049
NOTE 89 – ALLOWANCE FOR LOAN AND LEASE LOSSES
The changes in the allowance for loan and lease losses were as follows: | The changes in the allowance for loan and lease losses were as follows: | The changes in the allowance for loan and lease losses were as follows: | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial & Industrial Loans |
| Construction Loans |
| Consumer Loans |
| Total |
| Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial & Industrial Loans |
| Construction Loans |
| Consumer Loans |
| Total | ||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
Quarter ended September 30, 2019 | Quarter ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
(In thousands) | (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Quarter ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Allowance for loan and lease losses: | Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Beginning balance | Beginning balance | $ | 55,130 |
| $ | 48,718 |
| $ | 44,000 |
| $ | 3,949 |
| $ | 70,238 |
| $ | 222,035 | Beginning balance | $ | 48,284 |
| $ | 46,373 |
| $ | 21,644 |
| $ | 3,026 |
| $ | 52,684 |
| $ | 172,011 |
Charge-offs | Charge-offs |
| (8,316) |
|
| (9,850) |
|
| (2,242) |
|
| (2,192) |
|
| (13,712) |
|
| (36,312) | Charge-offs |
| (5,288) |
| (813) |
| (387) |
| (68) |
| (12,708) |
| (19,264) | |||||
Recoveries | Recoveries |
| 833 |
|
| 291 |
|
| 127 |
|
| 14 |
|
| 2,051 |
|
| 3,316 | Recoveries |
| 874 |
| 96 |
| 1,826 |
| 279 |
| 2,355 |
| 5,430 | |||||
Provision |
| 360 |
|
| 10,111 |
|
| 2,281 |
|
| 1,308 |
|
| (2,536) |
|
| 11,524 | |||||||||||||||||||
Provision (release) | Provision (release) |
| 2,162 |
| (808) |
| (5,465) |
| (178) |
| 11,687 |
| 7,398 | |||||||||||||||||||||||
Ending balance | Ending balance | $ | 48,007 |
| $ | 49,270 |
| $ | 44,166 |
| $ | 3,079 |
| $ | 56,041 |
| $ | 200,563 | Ending balance | $ | 46,032 |
| $ | 44,848 |
| $ | 17,618 |
| $ | 3,059 |
| $ | 54,018 |
| $ | 165,575 |
Ending balance: specific reserve for impaired loans | Ending balance: specific reserve for impaired loans | $ | 18,482 |
| $ | 17,044 |
| $ | 10,798 |
| $ | 906 |
| $ | 6,083 |
| $ | 53,313 | Ending balance: specific reserve for impaired loans | $ | 17,411 |
| $ | 6,962 |
| $ | 7,520 |
| $ | 544 |
| $ | 4,561 |
| $ | 36,998 |
Ending balance: purchased credit-impaired loans (1) | $ | 10,954 |
| $ | 400 |
| $ | - |
| $ | - |
| $ | - |
| $ | 11,354 | |||||||||||||||||||
Ending balance: PCI loans (1) | Ending balance: PCI loans (1) | $ | 11,063 |
| $ | 371 |
| $ | - |
| $ | - |
| $ | - |
| $ | 11,434 | ||||||||||||||||||
Ending balance: general allowance | Ending balance: general allowance | $ | 18,571 |
| $ | 31,826 |
| $ | 33,368 |
| $ | 2,173 |
| $ | 49,958 |
| $ | 135,896 | Ending balance: general allowance | $ | 17,558 |
| $ | 37,515 |
| $ | 10,098 |
| $ | 2,515 |
| $ | 49,457 |
| $ | 117,143 |
Loans held for investment: | Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance | Ending balance | $ | 3,207,981 |
| $ | 1,506,502 |
| $ | 2,068,256 |
| $ | 82,862 |
| $ | 1,851,352 |
| $ | 8,716,953 | Ending balance | $ | 2,997,953 |
| $ | 1,439,362 |
| $ | 2,222,496 |
| $ | 108,862 |
| $ | 2,199,747 |
| $ | 8,968,420 |
Ending balance: impaired loans | Ending balance: impaired loans | $ | 408,794 |
| $ | 243,220 |
| $ | 97,154 |
| $ | 6,897 |
| $ | 31,945 |
| $ | 788,010 | Ending balance: impaired loans | $ | 381,868 |
| $ | 79,978 |
| $ | 79,263 |
| $ | 5,505 |
| $ | 26,756 |
| $ | 573,370 |
Ending balance: purchased credit-impaired loans | $ | 145,203 |
| $ | 3,919 |
| $ | - |
| $ | - |
| $ | - |
| $ | 149,122 | |||||||||||||||||||
Ending balance: PCI loans | Ending balance: PCI loans | $ | 135,922 |
| $ | 3,330 |
| $ | - |
| $ | - |
| $ | - |
| $ | 139,252 | ||||||||||||||||||
Ending balance: loans with general allowance | Ending balance: loans with general allowance | $ | 2,653,984 |
| $ | 1,259,363 |
| $ | 1,971,102 |
| $ | 75,965 |
| $ | 1,819,407 |
| $ | 7,779,821 | Ending balance: loans with general allowance | $ | 2,480,163 |
| $ | 1,356,054 |
| $ | 2,143,233 |
| $ | 103,357 |
| $ | 2,172,991 |
| $ | 8,255,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial & Industrial Loans |
| Construction Loans |
| Consumer Loans |
| Total |
| Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial & Industrial Loans |
| Construction Loans |
| Consumer Loans |
| Total | ||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
Nine-Month Period Ended September 30, 2019 | Nine-Month Period Ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
(In thousands) | (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
| ||||||
Nine-Month Period Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Allowance for loan and lease losses: | Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Beginning balance | Beginning balance | $ | 58,975 |
| $ | 48,493 |
| $ | 48,871 |
| $ | 4,522 |
| $ | 70,982 |
| $ | 231,843 | Beginning balance | $ | 50,794 |
| $ | 55,581 |
| $ | 32,546 |
| $ | 3,592 |
| $ | 53,849 |
| $ | 196,362 |
Charge-offs | Charge-offs |
| (17,231) |
|
| (20,557) |
|
| (9,282) |
|
| (8,187) |
|
| (38,111) |
|
| (93,368) | Charge-offs |
| (16,229) |
| (14,901) |
| (7,056) |
| (347) |
| (37,004) |
| (75,537) | |||||
Recoveries | Recoveries |
| 1,857 |
|
| 378 |
|
| 1,565 |
|
| 165 |
|
| 6,519 |
|
| 10,484 | Recoveries |
| 2,080 |
| 314 |
| 3,196 |
| 629 |
| 6,779 |
| 12,998 | |||||
Provision |
| 4,406 |
|
| 20,956 |
|
| 3,012 |
|
| 6,579 |
|
| 16,651 |
|
| 51,604 | |||||||||||||||||||
Provision (release) | Provision (release) |
| 9,387 |
| 3,854 |
| (11,068) |
| (815) |
| 30,394 |
| 31,752 | |||||||||||||||||||||||
Ending balance | Ending balance | $ | 48,007 |
| $ | 49,270 |
| $ | 44,166 |
| $ | 3,079 |
| $ | 56,041 |
| $ | 200,563 | Ending balance | $ | 46,032 |
| $ | 44,848 |
| $ | 17,618 |
| $ | 3,059 |
| $ | 54,018 |
| $ | 165,575 |
Ending balance: specific reserve for impaired loans | Ending balance: specific reserve for impaired loans | $ | 18,482 |
| $ | 17,044 |
| $ | 10,798 |
| $ | 906 |
| $ | 6,083 |
| $ | 53,313 | Ending balance: specific reserve for impaired loans | $ | 17,411 |
| $ | 6,962 |
| $ | 7,520 |
| $ | 544 |
| $ | 4,561 |
| $ | 36,998 |
Ending balance: purchased credit-impaired loans (1) | $ | 10,954 |
| $ | 400 |
| $ | - |
| $ | - |
| $ | - |
| $ | 11,354 | |||||||||||||||||||
Ending balance: PCI loans (1) | Ending balance: PCI loans (1) | $ | 11,063 |
| $ | 371 |
| $ | - |
| $ | - |
| $ | - |
| $ | 11,434 | ||||||||||||||||||
Ending balance: general allowance | Ending balance: general allowance | $ | 18,571 |
| $ | 31,826 |
| $ | 33,368 |
| $ | 2,173 |
| $ | 49,958 |
| $ | 135,896 | Ending balance: general allowance | $ | 17,558 |
| $ | 37,515 |
| $ | 10,098 |
| $ | 2,515 |
| $ | 49,457 |
| $ | 117,143 |
Loans held for investment: | Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance | Ending balance | $ | 3,207,981 |
| $ | 1,506,502 |
| $ | 2,068,256 |
| $ | 82,862 |
| $ | 1,851,352 |
| $ | 8,716,953 | Ending balance | $ | 2,997,953 |
| $ | 1,439,362 |
| $ | 2,222,496 |
| $ | 108,862 |
| $ | 2,199,747 |
| $ | 8,968,420 |
Ending balance: impaired loans | Ending balance: impaired loans | $ | 408,794 |
| $ | 243,220 |
| $ | 97,154 |
| $ | 6,897 |
| $ | 31,945 |
| $ | 788,010 | Ending balance: impaired loans | $ | 381,868 |
| $ | 79,978 |
| $ | 79,263 |
| $ | 5,505 |
| $ | 26,756 |
| $ | 573,370 |
Ending balance: purchased credit-impaired loans | $ | 145,203 |
| $ | 3,919 |
| $ | - |
| $ | - |
| $ | - |
| $ | 149,122 | |||||||||||||||||||
Ending balance: PCI loans | Ending balance: PCI loans | $ | 135,922 |
| $ | 3,330 |
| $ | - |
| $ | - |
| $ | - |
| $ | 139,252 | ||||||||||||||||||
Ending balance: loans with general allowance | Ending balance: loans with general allowance | $ | 2,653,984 |
| $ | 1,259,363 |
| $ | 1,971,102 |
| $ | 75,965 |
| $ | 1,819,407 |
| $ | 7,779,821 | Ending balance: loans with general allowance | $ | 2,480,163 |
| $ | 1,356,054 |
| $ | 2,143,233 |
| $ | 103,357 |
| $ | 2,172,991 |
| $ | 8,255,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5150
|
| Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial & Industrial Loans |
| Construction Loans |
| Consumer Loans |
| Total |
| Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial & Industrial Loans |
| Construction Loans |
| Consumer Loans |
| Total | ||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
Quarter ended September 30, 2018 | Quarter ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
(In thousands) | (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Quarter ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Allowance for loan and lease losses: | Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Beginning balance | Beginning balance | $ | 40,587 |
| $ | 38,576 |
| $ | 42,082 |
| $ | 3,736 |
| $ | 48,504 |
| $ | 173,485 | Beginning balance | $ | 55,130 |
| $ | 48,718 |
| $ | 44,000 |
| $ | 3,949 |
| $ | 70,238 |
| $ | 222,035 |
Charge-offs |
| (7,177) |
|
| (266) |
|
| (738) |
|
| (47) |
|
| (11,141) |
|
| (19,369) | |||||||||||||||||||
Charge-offs (2) | Charge-offs (2) |
| (8,316) |
| (9,850) |
| (2,242) |
| (2,192) |
| (13,712) |
| (36,312) | |||||||||||||||||||||||
Recoveries | Recoveries |
| 321 |
|
| 43 |
|
| 114 |
|
| 16 |
|
| 1,247 |
|
| 1,741 | Recoveries |
| 833 |
| 291 |
| 127 |
| 14 |
| 2,051 |
| 3,316 | |||||
Provision (release) |
| 23,321 |
|
| 17,590 |
|
| (1,079) |
|
| 242 |
|
| 34,939 |
|
| 75,013 | |||||||||||||||||||
Provision (2) | Provision (2) |
| 360 |
| 10,111 |
| 2,281 |
| 1,308 |
| (2,536) |
| 11,524 | |||||||||||||||||||||||
Ending balance | Ending balance | $ | 57,052 |
| $ | 55,943 |
| $ | 40,379 |
| $ | 3,947 |
| $ | 73,549 |
| $ | 230,870 | Ending balance | $ | 48,007 |
| $ | 49,270 |
| $ | 44,166 |
| $ | 3,079 |
| $ | 56,041 |
| $ | 200,563 |
Ending balance: specific reserve for impaired loans | Ending balance: specific reserve for impaired loans | $ | 19,417 |
| $ | 10,456 |
| $ | 11,240 |
| $ | 1,865 |
| $ | 5,177 |
| $ | 48,155 | Ending balance: specific reserve for impaired loans | $ | 18,482 |
| $ | 17,044 |
| $ | 10,798 |
| $ | 906 |
| $ | 6,083 |
| $ | 53,313 |
Ending balance: purchased credit-impaired loans (1) | $ | 9,863 |
| $ | 372 |
| $ | - |
| $ | - |
| $ | - |
| $ | 10,235 | |||||||||||||||||||
Ending balance: PCI loans (1) | Ending balance: PCI loans (1) | $ | 10,954 |
| $ | 400 |
| $ | - |
| $ | - |
| $ | - |
| $ | 11,354 | ||||||||||||||||||
Ending balance: general allowance | Ending balance: general allowance | $ | 27,772 |
| $ | 45,115 |
| $ | 29,139 |
| $ | 2,082 |
| $ | 68,372 |
| $ | 172,480 | Ending balance: general allowance | $ | 18,571 |
| $ | 31,826 |
| $ | 33,368 |
| $ | 2,173 |
| $ | 49,958 |
| $ | 135,896 |
Loans held for investment: | Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance | Ending balance | $ | 3,274,340 |
| $ | 1,601,638 |
| $ | 2,144,236 |
| $ | 129,460 |
| $ | 1,727,540 |
| $ | 8,877,214 | Ending balance | $ | 3,207,981 |
| $ | 1,506,502 |
| $ | 2,068,256 |
| $ | 82,862 |
| $ | 1,851,352 |
| $ | 8,716,953 |
Ending balance: impaired loans | Ending balance: impaired loans | $ | 425,835 |
| $ | 153,875 |
| $ | 110,939 |
| $ | 50,373 |
| $ | 38,237 |
| $ | 779,259 | Ending balance: impaired loans | $ | 408,794 |
| $ | 243,220 |
| $ | 97,154 |
| $ | 6,897 |
| $ | 31,945 |
| $ | 788,010 |
Ending balance: purchased credit-impaired loans | $ | 153,609 |
| $ | 4,185 |
| $ | - |
| $ | - |
| $ | - |
| $ | 157,794 | |||||||||||||||||||
Ending balance: PCI loans | Ending balance: PCI loans | $ | 145,203 |
| $ | 3,919 |
| $ | - |
| $ | - |
| $ | - |
| $ | 149,122 | ||||||||||||||||||
Ending balance: loans with general allowance | Ending balance: loans with general allowance | $ | 2,694,896 |
| $ | 1,443,578 |
| $ | 2,033,297 |
| $ | 79,087 |
| $ | 1,689,303 |
| $ | 7,940,161 | Ending balance: loans with general allowance | $ | 2,653,984 |
| $ | 1,259,363 |
| $ | 1,971,102 |
| $ | 75,965 |
| $ | 1,819,407 |
| $ | 7,779,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial & Industrial Loans |
| Construction Loans |
| Consumer Loans |
| Total |
| Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial & Industrial Loans |
| Construction Loans |
| Consumer Loans |
| Total | ||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
Nine-Month Period Ended September 30, 2018 | Nine-Month Period Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
(In thousands) | (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Nine-Month Period Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Allowance for loan and lease losses: | Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Beginning balance | Beginning balance | $ | 33,980 |
| $ | 57,261 |
| $ | 61,953 |
| $ | 2,562 |
| $ | 49,847 |
| $ | 205,603 | Beginning balance | $ | 58,975 |
| $ | 48,493 |
| $ | 48,871 |
| $ | 4,522 |
| $ | 70,982 |
| $ | 231,843 |
Charge-offs |
| (22,369) |
|
| (32,123) |
|
| (19,168) |
|
| (705) |
|
| (33,386) |
|
| (107,751) | |||||||||||||||||||
Charge-offs (2) | Charge-offs (2) |
| (17,231) |
| (20,557) |
| (9,282) |
| (8,187) |
| (38,111) |
| (93,368) | |||||||||||||||||||||||
Recoveries | Recoveries |
| 1,961 |
|
| 151 |
|
| 5,613 |
|
| 594 |
|
| 6,148 |
|
| 14,467 | Recoveries |
| 1,857 |
| 378 |
| 1,565 |
| 165 |
| 6,519 |
| 10,484 | |||||
Provision (release) |
| 43,480 |
|
| 30,654 |
|
| (8,019) |
|
| 1,496 |
|
| 50,940 |
|
| 118,551 | |||||||||||||||||||
Provision (2) | Provision (2) |
| 4,406 |
| 20,956 |
| 3,012 |
| 6,579 |
| 16,651 |
| 51,604 | |||||||||||||||||||||||
Ending balance | Ending balance | $ | 57,052 |
| $ | 55,943 |
| $ | 40,379 |
| $ | 3,947 |
| $ | 73,549 |
| $ | 230,870 | Ending balance | $ | 48,007 |
| $ | 49,270 |
| $ | 44,166 |
| $ | 3,079 |
| $ | 56,041 |
| $ | 200,563 |
Ending balance: specific reserve for impaired loans | Ending balance: specific reserve for impaired loans | $ | 19,417 |
| $ | 10,456 |
| $ | 11,240 |
| $ | 1,865 |
| $ | 5,177 |
| $ | 48,155 | Ending balance: specific reserve for impaired loans | $ | 18,482 |
| $ | 17,044 |
| $ | 10,798 |
| $ | 906 |
| $ | 6,083 |
| $ | 53,313 |
Ending balance: purchased credit-impaired loans (1) | $ | 9,863 |
| $ | 372 |
| $ | - |
| $ | - |
| $ | - |
| $ | 10,235 | |||||||||||||||||||
Ending balance: PCI loans (1) | Ending balance: PCI loans (1) | $ | 10,954 |
| $ | 400 |
| $ | - |
| $ | - |
| $ | - |
| $ | 11,354 | ||||||||||||||||||
Ending balance: general allowance | Ending balance: general allowance | $ | 27,772 |
| $ | 45,115 |
| $ | 29,139 |
| $ | 2,082 |
| $ | 68,372 |
| $ | 172,480 | Ending balance: general allowance | $ | 18,571 |
| $ | 31,826 |
| $ | 33,368 |
| $ | 2,173 |
| $ | 49,958 |
| $ | 135,896 |
Loans held for investment: | Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance | Ending balance | $ | 3,274,340 |
| $ | 1,601,638 |
| $ | 2,144,236 |
| $ | 129,460 |
| $ | 1,727,540 |
| $ | 8,877,214 | Ending balance | $ | 3,207,981 |
| $ | 1,506,502 |
| $ | 2,068,256 |
| $ | 82,862 |
| $ | 1,851,352 |
| $ | 8,716,953 |
Ending balance: impaired loans | Ending balance: impaired loans | $ | 425,835 |
| $ | 153,875 |
| $ | 110,939 |
| $ | 50,373 |
| $ | 38,237 |
| $ | 779,259 | Ending balance: impaired loans | $ | 408,794 |
| $ | 243,220 |
| $ | 97,154 |
| $ | 6,897 |
| $ | 31,945 |
| $ | 788,010 |
Ending balance: purchased credit-impaired loans | $ | 153,609 |
| $ | 4,185 |
| $ | - |
| $ | - |
| $ | - |
| $ | 157,794 | |||||||||||||||||||
Ending balance: PCI loans | Ending balance: PCI loans | $ | 145,203 |
| $ | 3,919 |
| $ | - |
| $ | - |
| $ | - |
| $ | 149,122 | ||||||||||||||||||
Ending balance: loans with general allowance | Ending balance: loans with general allowance | $ | 2,694,896 |
| $ | 1,443,578 |
| $ | 2,033,297 |
| $ | 79,087 |
| $ | 1,689,303 |
| $ | 7,940,161 | Ending balance: loans with general allowance | $ | 2,653,984 |
| $ | 1,259,363 |
| $ | 1,971,102 |
| $ | 75,965 |
| $ | 1,819,407 |
| $ | 7,779,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Refer to Note 7- Loans Held For Investment-PCI Loans, for a detail of changes in the allowance for loan losses related to PCI loans. |
(1)Refer to Note. 8 - Loans Held for Investment - PCI Loans for a detail of changes in the allowance for loan losses related to PCI loans.
(2)During the third quarter of 2018, the Corporation transferred to held for sale $17.2 million (net of fair value write downs of $12.5 million) in nonaccrual loans to held for sale. Approximately $2.4 million of the $12.5 million in charge-offs recorded on the transfer was taken against previously established reserves for loan leases, resulting in a charge to the provision of $10.1 million for the third quarter of 2018. Loans transferred to held for sale in the third quarter of 2018 consisted of $3.0 million in nonaccrual construction loans (net of fair value write downs of $1.6 million), $12.4 million in nonaccrual commercial mortgage loans (net of fair value write downs of $9.2 million), and $1.8 million in nonaccrual commercial and industrial loans (net of fair value write-downs of $1.7 million). In addition, during the first quarter of 2018, the Corporation transferred to held for sale $57.2 million (net of fair value write-downs of $9.7 million) in nonaccrual loans to held for sale. Approximately $4.1 million of the $9.7 million in charge-offs recorded on the transfer was taken against previously-established reserves for loan losses, resulting in a charge to the provision of $5.6 million for the first quarter of 2018. Loans transferred to held for sale in the first quarter of 2018 consisted of a $30.0 million nonaccrual construction loan (net of a $5.1 million fair value write-down) and two nonaccrual commercial mortgage loans totaling $27.2 million (net of fair value write-downs of $4.6 million).
5251
The tables below present the allowance for loan and lease losses and the carrying value of loans by portfolio segment as of September 30, 2018 and December 31, 2017: |
| |||||||||||||||||||||||||||||||||||||
The tables below present the allowance for loan and lease losses and the carrying value of loans by portfolio segment as of September 30, 2019 and December 31, 2018: | The tables below present the allowance for loan and lease losses and the carrying value of loans by portfolio segment as of September 30, 2019 and December 31, 2018: |
| ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
As of September 30, 2018 | Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial & Industrial Loans |
|
|
| Consumer Loans |
|
|
|
| |||||||||||||||||||||||||
As of September 30, 2019 | Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial and Industrial Loans |
|
|
| Consumer Loans |
|
|
| ||||||||||||||||||||||||||
|
| Construction Loans |
|
|
|
|
|
| Construction Loans |
|
|
| ||||||||||||||||||||||||||
(Dollars in thousands) | Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial & Industrial Loans |
|
|
| Consumer Loans | Total |
|
| Consumer Loans | Total |
| |||||||||||||||||||||||
Impaired loans without specific reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Principal balance of loans, net of charge-offs |
| $ | 1,116 |
| $ | 2,189 | $ | 228,906 |
| $ | 110,826 |
| $ | 45,395 |
| $ | 27,922 |
| $ | 2,899 |
| $ | 1,174 | $ | 188,216 |
| ||||||||||||
Impaired loans with specific reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Principal balance of loans, net of charge-offs |
| 291,419 |
|
| 169,787 |
|
| 62,361 |
|
| 5,781 |
|
| 29,756 |
|
| 559,104 |
|
| 271,042 |
|
| 34,583 |
|
| 51,341 |
|
| 2,606 |
|
| 25,582 |
|
| 385,154 |
| ||
Allowance for loan and lease losses |
| 18,482 |
|
| 17,044 |
|
| 10,798 |
|
| 906 |
|
| 6,083 |
|
| 53,313 |
|
| 17,411 |
|
| 6,962 |
|
| 7,520 |
|
| 544 |
|
| 4,561 |
|
| 36,998 |
| ||
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
balance |
| 6.34 | % |
| 10.04 | % |
| 17.32 | % |
| 15.67 | % |
| 20.44 | % |
|
| 9.54 | % |
| 6.42 | % |
| 20.13 | % |
| 14.65 | % |
| 20.87 | % |
| 17.83 | % |
|
| 9.61 | % |
PCI loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Carrying value of PCI loans |
| 145,203 |
|
| 3,919 |
|
| - |
|
| - |
|
| - |
|
| 149,122 |
| $ | 135,922 |
| $ | 3,330 |
| $ | - |
| $ | - |
| $ | - |
| $ | 139,252 |
| ||
Allowance for PCI loans |
| 10,954 |
|
| 400 |
|
| - |
|
| - |
|
| - |
|
| 11,354 |
|
| 11,063 |
|
| 371 |
|
| - |
|
| - |
|
| - |
| 11,434 |
| |||
Allowance for PCI loans to carrying value |
| 7.54 | % |
| 10.21 | % |
| - |
|
| - |
|
| - |
|
| 7.61 | % |
| 8.14 | % |
| 11.14 | % |
|
|
|
|
|
|
| 8.21 | % | |||||
Loans with general allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Principal balance of loans |
| 2,653,984 |
|
| 1,259,363 |
|
| 1,971,102 |
|
| 75,965 |
|
| 1,819,407 |
|
| 7,779,821 |
| $ | 2,480,163 |
| $ | 1,356,054 |
| $ | 2,143,233 |
| $ | 103,357 |
| $ | 2,172,991 |
| $ | 8,255,798 |
| ||
Allowance for loan and lease losses |
| 18,571 |
|
| 31,826 |
|
| 33,368 |
|
| 2,173 |
|
| 49,958 |
|
| 135,896 |
|
| 17,558 |
|
| 37,515 |
|
| 10,098 |
|
| 2,515 |
|
| 49,457 |
|
| 117,143 |
| ||
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
balance |
| 0.70 | % |
| 2.53 | % |
| 1.69 | % |
| 2.86 | % |
| 2.75 |
| % |
| 1.75 | % |
| 0.71 | % |
| 2.77 | % |
| 0.47 | % |
| 2.43 | % |
| 2.28 |
| % |
| 1.42 | % |
Total loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans | $ | 3,207,981 |
| $ | 1,506,502 |
| $ | 2,068,256 |
| $ | 82,862 |
| $ | 1,851,352 |
| $ | 8,716,953 |
| $ | 2,997,953 |
| $ | 1,439,362 |
| $ | 2,222,496 |
| $ | 108,862 |
| $ | 2,199,747 |
| $ | 8,968,420 |
| ||
Allowance for loan and lease losses |
| 48,007 |
|
| 49,270 |
|
| 44,166 |
|
| 3,079 |
|
| 56,041 |
|
| 200,563 |
|
| 46,032 |
|
| 44,848 |
|
| 17,618 |
|
| 3,059 |
|
| 54,018 |
|
| 165,575 |
| ||
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
balance (1) |
| 1.50 | % |
| 3.27 | % |
| 2.14 | % |
| 3.72 | % |
| 3.03 |
| % |
| 2.30 | % |
| 1.54 | % |
| 3.12 | % |
| 0.79 | % |
| 2.81 | % |
| 2.46 |
| % |
| 1.85 | % |
|
|
| ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
As of December 31, 2017 | Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial & Industrial Loans |
|
|
| Consumer Loans |
|
|
| ||||||||||||||||||||||||
As of December 31, 2018 | Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial and Industrial Loans |
|
|
| Consumer Loans |
|
|
| ||||||||||||||||||||||||
|
| Construction Loans |
|
|
|
| Construction Loans |
|
|
| ||||||||||||||||||||||||||
(Dollars in thousands) | Residential Mortgage Loans |
| Commercial Mortgage Loans |
| Commercial & Industrial Loans |
| Total | Consumer Loans | Total |
|
| Consumer Loans | Total |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Impaired loans without specific reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Principal balance of loans, net of charge-offs | $ | 116,818 |
| $ | 65,100 |
| $ | 28,292 |
| $ | 48 |
| $ | 2,788 |
| $ | 213,046 |
| $ | 110,238 |
| $ | 43,358 |
| $ | 30,030 |
| $ | 2,431 |
| $ | 2,340 |
| $ | 188,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with specific reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans, net of charge-offs |
| 316,616 |
|
| 87,814 |
|
| 90,008 |
|
| 47,218 |
|
| 35,606 |
|
| 577,262 |
|
| 293,494 |
|
| 184,068 |
|
| 61,162 |
|
| 4,162 |
|
| 28,986 |
|
| 571,872 |
|
Allowance for loan and lease losses |
| 22,086 |
|
| 9,783 |
|
| 12,359 |
|
| 2,017 |
|
| 5,165 |
|
| 51,410 |
|
| 19,965 |
|
| 17,684 |
|
| 9,693 |
|
| 760 |
|
| 5,874 |
|
| 53,976 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance |
| 6.98 | % |
| 11.14 | % |
| 13.73 | % |
| 4.27 | % |
| 14.51 | % |
| 8.91 | % |
| 6.80 | % |
| 9.61 | % |
| 15.85 | % |
| 18.26 | % |
| 20.26 | % |
| 9.44 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
PCI loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Carrying value of PCI loans |
| 153,991 |
|
| 4,183 |
|
| - |
|
| - |
|
| - |
|
| 158,174 |
| $ | 143,176 |
| $ | 3,464 |
| $ | - |
| $ | - |
| $ | - |
| $ | 146,640 |
|
Allowance for PCI loans |
| 10,873 |
| 378 |
| - |
| - |
| - |
| 11,251 |
|
| 10,954 |
| 400 |
| - |
| - |
| - |
| 11,354 |
| ||||||||||
Allowance for PCI loans to carrying value |
| 7.06 | % |
| 9.04 | % |
| - |
|
| - |
|
| - |
|
| 7.11 | % |
| 7.65 | % |
| 11.55 | % |
|
|
|
|
|
|
|
|
|
| 7.74 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Loans with general allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans |
| 2,703,532 |
|
| 1,457,875 |
|
| 1,964,953 |
|
| 64,131 |
|
| 1,711,503 |
|
| 7,901,994 |
| $ | 2,616,300 |
| $ | 1,291,772 |
| $ | 2,056,919 |
| $ | 72,836 |
| $ | 1,913,387 |
| $ | 7,951,214 |
|
Allowance for loan and lease losses |
| 26,016 |
|
| 38,332 |
|
| 36,512 |
|
| 2,505 |
|
| 65,817 |
|
| 169,182 |
|
| 19,875 |
|
| 37,497 |
|
| 22,853 |
|
| 2,832 |
|
| 47,975 |
|
| 131,032 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance |
| 0.96 | % |
| 2.63 | % |
| 1.86 | % |
| 3.91 | % |
| 3.85 | % |
| 2.14 | % |
| 0.76 | % |
| 2.90 | % |
| 1.11 | % |
| 3.89 | % |
| 2.51 | % |
| 1.65 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans | $ | 3,290,957 |
| $ | 1,614,972 |
| $ | 2,083,253 |
| $ | 111,397 |
| $ | 1,749,897 |
| $ | 8,850,476 |
| $ | 3,163,208 |
| $ | 1,522,662 |
| $ | 2,148,111 |
| $ | 79,429 |
| $ | 1,944,713 |
| $ | 8,858,123 |
|
Allowance for loan and lease losses |
| 58,975 |
|
| 48,493 |
|
| 48,871 |
|
| 4,522 |
|
| 70,982 |
|
| 231,843 |
|
| 50,794 |
|
| 55,581 |
|
| 32,546 |
|
| 3,592 |
|
| 53,849 |
|
| 196,362 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance (1) |
| 1.79 | % |
| 3.00 | % |
| 2.35 | % |
| 4.06 | % |
| 4.06 | % |
| 2.62 | % |
| 1.61 | % |
| 3.65 | % |
| 1.52 | % |
| 4.52 | % |
| 2.77 | % |
| 2.22 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
__________ | ||||||||||||||||||||||||||||||||||||
(1) Loans used in the denominator include PCI loans of $149.1 million and $158.2 million as of September 30, 2018 and December 31, 2017, respectively. However, the Corporation separately tracks and reports PCI loans and excludes these loans from the amounts of non-performing loans, impaired loans, TDRs and non-performing assets. |
53
As(1)Loans used in the denominator include PCI loans of $139.3 million and $146.6 million as of September 30, 2019 and December 31, 2018, respectively. However, the Corporation maintained a $0.4 millionseparately tracks and reports PCI loans and excludes these loans from the amounts of nonaccrual loans, impaired loans, TDRs and non-performing assets.
52
During 2019, the Corporation reduced to 0 the reserve for unfunded loan commitments (compared to $0.7a reserve of $0.4 million as of December 31, 2017), mainly related to outstanding commitments on floor plan revolving lines of credit.2018). The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance sheet loan commitments to borrowers that are experiencing financial difficulties at the balance sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included as part of accountsAccounts payable and other liabilities in the consolidated statements of financial condition and any changechanges to the reserve is included as part of other non-interest expenses in the consolidated statements of income.
During the second quarter of 2018, the Corporation implemented certain enhancements to the methodology for the calculation of the allowance for commercial loans, which include, among others, a revised procedure whereby historical loss rates for each commercial loan regulatory-based credit risk category (i.e., pass, special mention, substandard, and doubtful) are now calculated using the historical charge-offs and portfolio balances over their average loss emergence period (the “raw loss rate”) for each credit risk classification. However, when not enough loss experience is observed in a particular risk-rated category and the calculation results in a loss rate for such risk-rated category that is lower than the loss rate of a less severe risk-rated category, the Corporation now uses the loss rate of such less severe category.
As a result of these revisions, the Corporation’s method for determining the allowance for loan losses differs from the method that it used as of March 31, 2018, which was to allocate historical losses and portfolio balances of special mention loans to pass or substandard categories based on the historical proportion of loans in this risk category that ultimately cured or became uncollectible, and the method that it used as of December 31, 2017, which was to use blended loss rates for commercial loans risk-rated special mention, substandard, and doubtful.
In addition, during the second quarter of 2018, the Corporation implemented refinements to the measurement of qualitative factors in the estimation process of the allowance for loan losses for commercial and consumer loans, primarily consisting of the incorporation of a basis point adjustment derived from the difference between the average raw loss rate and the highest loss rates observed during a look-back period that management determined was appropriate to use for each region to identify any relevant effect during an economic cycle.
Although the net effect of these refinements was immaterial to the total provision expense, on a portfolio basis, these enhancements resulted in a $1.6 million decrease in the provision for commercial and construction loans, offset by a $1.6 million increase in the provision for consumer loans in the second quarter of 2018.
54
Hurricane-Related Qualitative Allowance for Loan and Lease Losses
As described in Note 2 – Update on Effects of Natural Disasters, two strong hurricanes affected the Corporation’s service areas during September 2017. These hurricanes caused widespread property damage, flooding, power outages, and water and communication service interruptions, and severely disrupted normal economic activity in the affected areas. During the third quarter of 2017, the Corporation recorded a $66.5 million charge to the provision related to the establishment of qualitative reserves associated with the effects of Hurricanes Irma and Maria. Models were developed based on a regression modeling approach in which relationships between portfolio-level loss rates and key economic indicators were derived based on historical behavior. Accordingly, the qualitative reserves were determined based on the estimated effect that the hurricanes could have on employment levels and economic activity in the Corporation’s service areas, and the time that it could take for the affected regions to return to a more normalized operating environment. For large commercial and construction loan relationships, loan officers performed individual reviews of the effect of the hurricanes on these borrowers’ sources of repayments. These large relationships were analyzed and divided into three hurricane-affected categories (i.e., Low, Medium and High). This stratification was used to stress the general reserve loss factors applicable to these loans to reflect higher default probabilities than those reflected in the historical data. For commercial and construction loans not individually reviewed, as well as residential and consumer loans, the hurricane-related qualitative reserves were determined following the above-mentioned qualitative hurricane-related model, with resulting loss factors applied to the overall performing balance of each portfolio.
Relationship officers have continued to closely monitor the performance of hurricane-affected commercial loan customers during 2018. Information provided by these commercial loan officers, including information derived from regularly scheduled annual reviews, and statistics on the performance of consumer and residential credits were factored into the determination of the allowance for loan and lease losses as of September 30, 2018. Although the identification and evaluation of hurricane-affected credits has been completed, management’s assessment of the hurricanes’ effect is still subject to uncertainties, both those specific to some individual customers, such as the resolution of insurance claims, and those applicable to the overall economic prospects of the hurricane-affected areas as a whole. During the third quarter of 2018, the Corporation performed additional procedures to evaluate the adequacy of the qualitative reserves, including the consideration of updated payment patterns and probability of default credit risk analyses applied to consumer loan borrowers subject to payment deferral programs that expired early in 2018.
During the third quarter and nine-month period ended September 30, 2018, the Corporation recorded a net loan loss reserve release of $2.8 million and $11.2 million, respectively, in connection with revised estimates associated with the effects of the hurricanes. In addition to the above-mentioned updated assessments of financial performance and repayment prospects of certain individually-assessed commercial credits and updated payment patterns and probability of default credit risk analyses applied to consumer borrowers that were subject to payment deferral programs, the reserve releases in 2018 reflect the effect of payments received during the first nine months of 2018 that reduced the balance of the consumer and residential mortgage loan portfolios outstanding on the dates of the hurricanes. In addition, approximately $10.9 million of the consumer loan charge-offs recorded in the third quarter and first nine months of 2018 were taken against previously-established hurricane-related qualitative reserves associated with Hurricanes Irma and Maria. As of September 30, 2018, the hurricane-related qualitative allowance amounted to $24.9 million. With the ongoing collection of information on individual commercial customers and statistics on the consumer and residential mortgage loans portfolios, the loss estimate will be revised as needed.
55
NOTE 910 – LOANS HELD FOR SALE
The Corporation’s loans held-for-sale portfolio as of the dates indicated was composed of:
|
|
|
|
|
|
| ||||||||
|
| September 30, 2018 |
| December 31, 2017 |
|
| September 30, 2019 |
| December 31, 2018 |
| ||||
(In thousands) | (In thousands) |
|
| (In thousands) |
|
| ||||||||
Residential mortgage loans | Residential mortgage loans | $ | 21,562 |
| $ | 24,690 |
| Residential mortgage loans | $ | 35,564 |
| $ | 27,075 |
|
Construction loans | Construction loans |
| 30,015 |
|
| 8,290 |
| Construction loans |
| - |
|
| 3,015 |
|
Commercial and Industrial loans (1) | Commercial and Industrial loans (1) |
| 1,790 |
|
| - |
| Commercial and Industrial loans (1) |
| - |
|
| 1,725 |
|
Commercial mortgage loans (1) | Commercial mortgage loans (1) |
| 12,372 |
|
| - |
| Commercial mortgage loans (1) |
| 6,906 |
|
| 11,371 |
|
Total | Total | $ | 65,739 |
| $ | 32,980 |
| Total | $ | 42,470 |
| $ | 43,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | During the first nine months 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 non-performing loans to held for sale. Loans transferred to held for sale consisted of non-performing commercial mortgage loans totaling $39.6 million (net of fair value write-downs of $13.8 million), non-performing construction loans totaling $33.0 million (net of fair value write-downs of $6.7 million) and non-performing commercial and industrial loans totaling $1.8 million (net of fair value write-downs of $1.7 million). Approximately $27.2 million of the commercial mortgage loans transferred to loan held for sale were eventually sold during the second quarter and third quarters of 2018. In addition, during the third quarter of 2018, the Corporation sold the non-performing construction loan that was outstanding as of December 31, 2017 that was carried at a book value of $7.7 million at the time of sale. |
| ||||||||||||
|
|
| ||||||||||||
|
|
| ||||||||||||
|
|
|
(1)During the first quarter of 2019, the Corporation completed the sale of $4.8 million in nonaccrual loans held for sale ($3.7 million commercial mortgage and $1.1 million commercial and industrial).
NOTE 10 11 –OTHER REAL ESTATE OWNED
The following table presents OREO inventory as of the dates indicated: | The following table presents OREO inventory as of the dates indicated: | The following table presents OREO inventory as of the dates indicated: | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |
|
| September 30, |
|
| December 31, |
| September 30, |
| December 31, | |||
|
| 2018 |
| 2017 |
| 2019 |
| 2018 | ||||
(In thousands) | (In thousands) |
|
| (In thousands) |
|
| ||||||
OREO | OREO |
|
|
|
|
| OREO |
|
|
|
| |
OREO balances, carrying value: | OREO balances, carrying value: |
|
|
|
|
| OREO balances, carrying value: |
|
|
|
| |
Residential (1) | Residential (1) | $ | 49,287 |
| $ | 54,381 | Residential (1) | $ | 46,046 |
| $ | 49,239 |
Commercial | Commercial |
| 75,292 |
|
| 82,871 | Commercial |
| 47,914 |
| 71,838 | |
Construction | Construction |
| 10,639 |
|
| 10,688 | Construction |
| 9,073 |
|
| 10,325 |
Total | Total | $ | 135,218 |
| $ | 147,940 | Total | $ | 103,033 |
| $ | 131,402 |
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
| ||||||
(1) Excludes $14.5 million and $21.3 million as of September 30, 2018 and December 31, 2017, respectively, of foreclosures that meet the conditions of ASC Topic 310-40 and are presented as a receivable (other assets) in the statement of financial condition. | ||||||||||||
|
| |||||||||||
|
|
(1)Excludes $16.4 million and $14.4 million as of September 30, 2019 and December 31, 2018, respectively, of foreclosures that meet the conditions of ASC Topic 310-40 and are presented as a receivable (other assets) in the statement of financial condition.
5653
NOTE 12 –LEASES
The Corporation’s operating leases are primarily related to the Corporation’s branches and leased commercial space for ATMs. Our leases have terms of two to thirty years, some of which include options to extend the leases for up to seven years. As of September 30, 2019, the Corporation did not have a lease that qualifies as a finance lease. The Corporation includes the operating lease ROU asset and operating lease liability as part of Other assets and Account payables and other liabilities, respectively, in the consolidated statements of financial condition.
Operating lease cost for the quarter and nine-month period ended September 30, 2019 amounted to $2.8 million and $8.0 million, respectively.
Supplemental balance sheet information related to leases is as follows: | |||
|
| As of | |
|
| September 30, | |
|
| 2019 | |
(Dollars in thousands) |
|
| |
|
|
|
|
Operating lease ROU asset | $ | 63,343 | |
Operating lease liability | $ | 66,177 | |
Operating lease weighted-average remaining lease term (in years) |
| 11.0 | |
Operating lease weighted-average discount rate |
| 3.29% | |
|
|
|
|
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 is as follows: | |||
|
| Nine-month period ended | |
|
| September 30, | |
|
| 2019 | |
(In thousands) |
|
| |
|
|
|
|
Operating cash flow from operating leases (1) | $ | 7,619 | |
ROU assets obtained in exchange for operating lease liabilities (2) |
| 8,139 |
(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.
Maturities under lease liabilities as of September 30, 2019, were as follows: | ||
|
|
|
| Amount | |
(In thousands) |
|
|
|
|
|
2019 | $ | 2,552 |
2020 |
| 10,290 |
2021 |
| 9,643 |
2022 |
| 8,629 |
2023 |
| 6,943 |
2024 and later years |
| 41,367 |
Total lease payments |
| 79,424 |
Less: imputed interest |
| (13,247) |
Total present value of lease liability | $ | 66,177 |
54
NOTE 1113 – 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 September 30, 20182019 and December 31, 2017,2018, all derivatives held by the Corporation were considered economic undesignated hedges. These undesignated hedges wereare recorded at fair value with the resulting gain or loss recognized in current earnings.
The following summarizes the principal derivative activities used by the Corporation in managing interest rate risk:
Interest rate cap agreements - Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value 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 contractsContracts - Forward contracts are primarily sales of to-be-announced (“TBA”) MBS that will settle over the standard delivery date and do not qualify as “regular way” security trades. Regular-way security trades are contracts that have no net settlement provision and no market mechanism to facilitate net settlement and that provide for delivery of a security within the time frame generally established by regulations or conventions in the market-placemarket place or exchange in which the transaction is being executed. The forward sales are considered derivative instruments that need to be marked-to-market. Thesemarked to market. The Corporation uses these securities are used to economically hedge the FHA/VA residential mortgage loan securitizations of the mortgage-banking operations. Also reportedThe Corporation also reports as forward contracts arethe mandatory mortgage loan sales commitments enteredthat it enters into with GSEs that require or permit net settlement via a pair-off transaction or the payment of a pair-off fee. Unrealized gains (losses) are recognized as part of mortgageMortgage banking activities in the consolidated statementsstatement of income.
Interest Rate Lock Commitments – Interest rate lock commitments are agreements under which the Corporation agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Under the agreement, the Corporation commits to lend funds to a potential borrower, generally on a fixed rate basis, regardless of whether interest rates change in the market.
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.
The following table summarizes the notional amounts of all derivative instruments: |
|
|
| |||
|
|
|
|
|
|
|
|
| Notional Amounts (1) | ||||
|
| As of |
| As of | ||
|
| September 30, |
| December 31, | ||
|
| 2018 |
| 2017 | ||
(In thousands) |
| |||||
Undesignated economic hedges: |
|
|
|
|
| |
Interest rate contracts: |
|
|
|
|
| |
Written interest rate cap agreements | $ | 89,510 |
| $ | 91,010 | |
Purchased interest rate cap agreements |
| 89,510 |
|
| 91,010 | |
Forward Contracts: |
|
|
|
|
| |
Sale of TBA GNMA MBS pools |
| 28,000 |
|
| 26,000 | |
Forward loan sales commitments |
| 5,005 |
|
| - | |
| $ | 212,025 |
| $ | 208,020 | |
|
|
|
|
|
|
|
(1) | Notional amounts are presented on a gross basis with no netting of offsetting exposure positions. |
|
|
|
5755
The following table summarizes for derivative instruments their fair values and location in the consolidated statements of financial condition: | |||||||||||||||||||||
The following table summarizes the notional amounts of all derivative instruments as of the indicated dates: | The following table summarizes the notional amounts of all derivative instruments as of the indicated dates: |
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Asset Derivatives |
| Liability Derivatives |
| Notional Amounts (1) | ||||||||||||||||
| Statement of |
| September 30, |
| December 31, |
|
|
| September 30, |
| December 31, |
| As of |
| As of | ||||||
| Financial |
| 2018 |
| 2017 |
|
|
| 2018 |
| 2017 |
| September 30, |
| December 31, | ||||||
| Condition Location |
| Fair Value |
| Fair Value |
| Statement of Financial Condition Location |
| Fair Value |
| Fair Value |
| 2019 |
| 2018 | ||||||
(In thousands) |
| (In thousands) |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Undesignated economic hedges: |
|
|
|
|
|
|
|
|
|
|
| Undesignated economic hedges: |
|
|
|
|
| ||||
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
| Interest rate contracts: |
|
|
|
|
| ||||
Written interest rate cap agreements | Other assets |
| $ | - |
| $ | - |
| Accounts payable and other liabilities |
| $ | 815 |
| $ | 305 | Written interest rate cap agreements | $ | 21,010 |
| $ | 68,510 |
Purchased interest rate cap agreements | Other assets |
| 815 |
|
| 305 |
| Accounts payable and other liabilities |
|
| - |
|
| - | Purchased interest rate cap agreements |
| 21,010 |
|
| 68,510 | |
Interest rate lock commitments | Interest rate lock commitments |
| 9,917 |
|
| 11,722 | |||||||||||||||
Forward Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Forward Contracts: |
|
|
|
|
| |
Sales of TBA GNMA MBS pools | Other assets |
| 116 |
|
| 7 |
| Accounts payable and other liabilities |
|
| 20 |
|
| 19 | |||||||
Sale of TBA GNMA MBS pools | Sale of TBA GNMA MBS pools |
| 30,000 |
| 33,000 | ||||||||||||||||
Forward loan sales commitments | Other assets |
|
| - |
|
| - |
| Accounts payable and other liabilities |
|
| - |
|
| - | Forward loan sales commitments |
| 6,012 |
|
| 6,339 |
|
|
| $ | 931 |
| $ | 312 |
|
|
| $ | 835 |
| $ | 324 |
| $ | 87,949 |
| $ | 188,081 |
(1)Notional amounts are presented on a gross basis with no netting of offsetting exposure positions.
56
The following table summarizes the effect of derivative instruments on the consolidated statements of income: | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Loss) or Gain |
| (Loss) or Gain | ||||||||||||
| Location of (Loss) or Gain |
| Quarter Ended |
| Nine-Month Period Ended | ||||||||||||
| Recognized in Statement |
| September 30, |
| September 30, | ||||||||||||
| of Income on Derivatives |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) | ||||||||||||||
UNDESIGNATED ECONOMIC HEDGES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written and purchased interest rate cap agreements | Interest income - Loans |
| $ | - |
| $ | (1) |
| $ | - |
| $ | (2) | ||||
Forward contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of TBA GNMA MBS pools | Mortgage Banking Activities |
|
| - |
|
| - |
|
| - |
|
| - | ||||
Forward loan sales commitments | Mortgage Banking Activities |
|
| 211 |
|
| (34) |
|
| 108 |
|
| 274 | ||||
Total (loss) gain on derivatives |
|
| $ | 211 |
| $ | (35) |
| $ | 108 |
| $ | 272 |
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 | ||||||||||||
| Statement of |
| September 30, |
| December 31, |
|
|
| September 30, |
| December 31, | ||||
| Financial |
| 2019 |
| 2018 |
|
|
| 2019 |
| 2018 | ||||
| Condition Location |
| Fair Value |
| Fair Value |
| Statement of Financial Condition Location |
| Fair Value |
| Fair Value | ||||
(In thousands) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undesignated economic hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written interest rate cap agreements | Other assets |
| $ | - |
| $ | - |
| Accounts payable and other liabilities |
| $ | 9 |
| $ | 617 |
Purchased interest rate cap agreements | Other assets |
|
| 10 |
|
| 623 |
| Accounts payable and other liabilities |
|
| - |
|
| - |
Interest rate lock commitments | Other assets |
|
| 273 |
|
| 383 |
| Accounts payable and other liabilities |
|
| - |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of TBA GNMA MBS pools | Other assets |
|
| 1 |
|
| - |
| Accounts payable and other liabilities |
|
| 174 |
|
| 383 |
Forward loan sales commitments | Other assets |
|
| 20 |
|
| 12 |
| Accounts payable and other liabilities |
|
| - |
|
| - |
|
|
| $ | 304 |
| $ | 1,018 |
|
|
| $ | 183 |
| $ | 1,000 |
The following table summarizes the effect of derivative instruments on the consolidated statements of income for the indicated periods: | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Loss) or Gain |
| (Loss) or Gain | ||||||||
| Location of Unrealized Gain (Loss) |
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
| Recognized in Statement |
| September 30, |
| September 30, | ||||||||
| of Income on Derivatives |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) | ||||||||||
UNDESIGNATED ECONOMIC HEDGES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Written and purchased interest rate cap agreements | Interest income - Loans |
| $ | (1) |
| $ | - |
| $ | (5) |
| $ | - |
Interest rate lock commitments | Mortgage Banking Activities |
|
| 15 |
|
| - |
|
| 145 |
|
| - |
Forward contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of TBA GNMA MBS pools | Mortgage Banking Activities |
|
| 214 |
|
| 211 |
|
| 210 |
|
| 108 |
Forward loan sales commitments | Mortgage Banking Activities |
|
| - |
|
| - |
|
| 8 |
|
| - |
Total (loss) gain on derivatives |
|
| $ | 228 |
| $ | 211 |
| $ | 358 |
| $ | 108 |
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 effectimpact 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 September 30, 2018,2019, the Corporation had not entered into any derivative instrument containing credit-risk-related contingent features.
5857
NOTE 1214 – OFFSETTING OF ASSETS AND LIABILITIES
The Corporation enters into master agreements with counterparties, primarily related to derivatives and repurchase agreements, that may allow for netting of exposures in the event of default. In an event of default, each party has a right of set-off against the other party for amounts owed under the related agreement and any other amount or obligation owed inwith respect ofto any other agreement or transaction between them. The following table presentstables present information about the offsetting of financial assets and liabilities as well as derivative assets and liabilities:liabilities as of the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Financial Assets and Derivative Assets | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross Amounts Not Offset in the Statement of Financial Position |
|
|
| ||||
|
|
|
|
|
|
| Net Amounts of Assets Presented in the Statement of Financial Position |
|
|
|
|
|
|
|
|
| |
| Gross Amounts of Recognized Assets |
| Gross Amounts Offset in the Statement of Financial Position |
|
|
|
|
|
|
|
| ||||||
|
|
|
| Financial Instruments |
| Cash Collateral |
|
| |||||||||
As of September 30, 2018 |
|
|
|
|
| Net Amount | |||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
| |||||||||||||||
Derivatives | $ | 815 |
| $ | - |
| $ | 815 |
| $ | - |
| $ | (815) |
| $ | - |
Securities purchased under agreements to resell |
| 200,000 |
|
| (200,000) |
|
| - |
|
| - |
|
| - |
|
| - |
Total | $ | 200,815 |
| $ | (200,000) |
| $ | 815 |
| $ | - |
| $ | (815) |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross Amounts Not Offset in the Statement of Financial Position |
|
|
| ||||
|
|
|
|
|
|
| Net Amounts of Assets Presented in the Statement of Financial Position |
|
|
|
|
|
|
|
|
| |
| Gross Amounts of Recognized Assets |
| Gross Amounts Offset in the Statement of Financial Position |
|
|
|
|
|
|
|
| ||||||
|
|
|
| Financial Instruments |
| Cash Collateral |
|
| |||||||||
As of December 31, 2017 |
|
|
|
|
| Net Amount | |||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
| |||||||||||||||
Derivatives | $ | 305 |
| $ | - |
| $ | 305 |
| $ | (305) |
| $ | - |
| $ | - |
Securities purchased under agreements to resell |
| 200,000 |
|
| (200,000) |
|
| - |
|
| - |
|
| - |
|
| - |
Total | $ | 200,305 |
| $ | (200,000) |
| $ | 305 |
| $ | (305) |
| $ | - |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Financial Assets and Derivative Assets | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross Amounts Not Offset in the Statement of Financial Position |
|
|
| ||||
|
|
|
|
|
|
| Net Amounts of Assets Presented in the Statement of Financial Position |
|
|
|
|
|
|
|
|
| |
| Gross Amounts of Recognized Assets |
| Gross Amounts Offset in the Statement of Financial Position |
|
|
|
|
|
|
|
| ||||||
|
|
|
| Financial Instruments |
| Cash Collateral |
|
| |||||||||
As of September 30, 2019 |
|
|
|
|
| Net Amount | |||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
| |||||||||||||||
Derivatives | $ | 10 |
| $ | - |
| $ | 10 |
| $ | - |
| $ | (10) |
| $ | - |
Securities purchased under agreements to resell |
| 200,000 |
|
| (200,000) |
|
| - |
|
| - |
|
| - |
|
| - |
Total | $ | 200,010 |
| $ | (200,000) |
| $ | 10 |
| $ | - |
| $ | (10) |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross Amounts Not Offset in the Statement of Financial Position |
|
|
| ||||
|
|
|
|
|
|
| Net Amounts of Assets Presented in the Statement of Financial Position |
|
|
|
|
|
|
|
|
| |
| Gross Amounts of Recognized Assets |
| Gross Amounts Offset in the Statement of Financial Position |
|
|
|
|
|
|
|
| ||||||
|
|
|
| Financial Instruments |
| Cash Collateral |
|
| |||||||||
As of December 31, 2018 |
|
|
|
|
| Net Amount | |||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
| |||||||||||||||
Derivatives | $ | 623 |
| $ | - |
| $ | 623 |
| $ | - |
| $ | (623) |
| $ | - |
Securities purchased under agreements to resell |
| 200,000 |
|
| (200,000) |
|
| - |
|
| - |
|
| - |
|
| - |
Total | $ | 200,623 |
| $ | (200,000) |
| $ | 623 |
| $ | - |
| $ | (623) |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Offsetting of Financial Liabilities and Derivative Liabilities | Offsetting of Financial Liabilities and Derivative Liabilities | Offsetting of Financial Liabilities and Derivative Liabilities | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Gross Amounts Not Offset in the Statement of Financial Position |
|
|
|
|
|
|
|
|
|
|
| Gross Amounts Not Offset in the Statement of Financial Position |
|
| ||||||||||
|
|
|
|
|
|
| Net Amounts of Liabilities Presented in the Statement of Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Amounts of Liabilities Presented in the Statement of Financial Position |
|
|
|
|
|
|
|
| ||||
| Gross Amounts of Recognized Liabilities |
| Gross Amounts Offset in the Statement of Financial Position |
|
|
|
|
|
|
|
| Gross Amounts of Recognized Liabilities |
| Gross Amounts Offset in the Statement of Financial Position |
|
|
|
|
|
|
| |||||||||||||
|
|
| Financial Instruments |
| Net Amounts of Liabilities Presented in the Statement of Financial Position | Cash Collateral |
|
|
| Financial Instruments |
| Net Amounts of Liabilities Presented in the Statement of Financial Position | Cash Collateral |
|
| |||||||||||||||||||
As of September 30, 2018 |
| Net Amounts of Liabilities Presented in the Statement of Financial Position | Net Amount | |||||||||||||||||||||||||||||||
As of September 30, 2019 | Gross Amounts of Recognized Liabilities |
| Gross Amounts Offset in the Statement of Financial Position |
| Financial Instruments |
| Cash Collateral | Net Amounts of Liabilities Presented in the Statement of Financial Position | Net Amount | |||||||||||||||||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Description |
|
|
| |||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase | $ | 300,000 |
| $ | (200,000) |
| $ | 100,000 |
| $ | (100,000) |
| $ | - |
| $ | - | $ | 300,000 |
| $ | (200,000) |
| $ | 100,000 |
| $ | (100,000) |
| $ | - | - | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Gross Amounts Not Offset in the Statement of Financial Position |
|
|
|
|
|
|
|
|
|
|
| Gross Amounts Not Offset in the Statement of Financial Position |
|
| ||||||||||
|
|
|
|
|
|
| Net Amounts of Liabilities Presented in the Statement of Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Amounts of Liabilities Presented in the Statement of Financial Position |
|
|
|
|
|
|
|
| ||||
| Gross Amounts of Recognized Liabilities |
| Gross Amounts Offset in the Statement of Financial Position |
|
|
|
|
|
|
|
| Gross Amounts of Recognized Liabilities |
| Gross Amounts Offset in the Statement of Financial Position |
|
|
|
|
|
|
| |||||||||||||
|
|
| Financial Instruments |
| Net Amounts of Liabilities Presented in the Statement of Financial Position | Cash Collateral |
|
|
| Financial Instruments |
| Net Amounts of Liabilities Presented in the Statement of Financial Position | Cash Collateral |
|
| |||||||||||||||||||
As of December 31, 2017 |
| Net Amounts of Liabilities Presented in the Statement of Financial Position | Net Amount | |||||||||||||||||||||||||||||||
As of December 31, 2018 | Gross Amounts of Recognized Liabilities |
| Gross Amounts Offset in the Statement of Financial Position |
| Financial Instruments |
| Cash Collateral | Net Amounts of Liabilities Presented in the Statement of Financial Position | Net Amount | |||||||||||||||||||||||||
(In thousands) |
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Description |
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Securities sold under agreements to repurchase | $ | 500,000 |
| $ | (200,000) |
| $ | 300,000 |
| $ | (300,000) |
| $ | - |
| $ | - | $ | 350,086 |
| $ | (200,000) |
| $ | 150,086 |
| $ | (150,086) |
| $ | - | - | ||
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6059
NOTE 1315 – GOODWILL AND OTHER INTANGIBLES
Goodwill as of September 30, 20182019 and December 31, 20172018 amounted to $28.1$28.1 million, recognized as part of “Other Assets”Other assets in the consolidated statements of financial condition. The Corporation conducted its annual evaluation of goodwill and other intangibles during the fourth quarter of 2017.2018. The Corporation’s goodwill is related to the acquisition of FirstBank Florida in 2005.U.S. (Florida) reporting unit.
There have been no significant events related to the Florida reporting unit that could indicate potential goodwill impairment since the date of the last evaluation; therefore, no goodwill impairment evaluation was performed during the first nine months of 2018.2019. Goodwill and other indefinite life intangibles are reviewed at least annually for impairment.
In connection with the acquisition of the FirstBank-branded credit card loan portfolio, in the second quarter of 2012, the Corporation recognized a purchased credit card relationship intangible of $24.5 million ($4.1 million as of September 30, 2019 and $5.7 million as of December 31, 2018), which is being amortized over the remaining estimated life of 3.12.1 years on an accelerated basis based on the estimated attrition rate of the purchased credit card accounts, which reflects the pattern in whichCorporation’s estimate that it will realize the economic benefits of the intangible asset are consumed. These benefits are consumed as the revenue stream generated by the cardholder relationship is realized.
The core deposit intangible includesof $3.7 million (December 31, 2018 - $4.3 million) primarily consists of the core deposit acquired in the February 2015 Doral Bank transaction, which amounted to $3.3 million as of September 30, 2018.transaction.
In the first quarter of 2016, FirstBank Insurance Agency acquired certain insurance customer accounts and related customer records and recognized an insurance customer relationship intangible of $1.1 million (compared to $0.7($0.5 million as of September 30, 2019 and $0.6 million as of December 31, 2018), which is being amortized over the next 4.3 years on a straight-line basis.. The acquired accounts have a direct relationship to the previous mortgage loan portfolio acquisitions from Doral Bank and Doral Financial in 2015 and 2014.
61
| The following table shows the gross amount and accumulated amortization of the Corporation’s intangible assets recognized as part of Other Assets in the consolidated statements of financial condition: | |||||
|
|
|
|
|
|
|
|
| As of |
| As of | ||
|
| September 30, |
| December 31, | ||
|
| 2018 |
| 2017 | ||
(Dollars in thousands) |
|
|
|
|
| |
Core deposit intangible: |
|
|
|
|
| |
Gross amount | $ | 51,664 |
| $ | 51,664 | |
Accumulated amortization (1) |
| (47,079) |
|
| (46,186) | |
Net carrying amount | $ | 4,585 |
| $ | 5,478 | |
|
|
|
|
|
|
|
Remaining amortization period |
| 6.3 years |
|
| 7.0 years | |
|
|
|
|
|
|
|
Purchased credit card relationship intangible: |
|
|
|
|
| |
Gross amount | $ | 24,465 |
| $ | 24,465 | |
Accumulated amortization (2) |
| (18,189) |
|
| (16,465) | |
Net carrying amount | $ | 6,276 |
| $ | 8,000 | |
|
|
|
|
|
|
|
Remaining amortization period |
| 3.1 years |
|
| 3.9 years | |
|
|
|
|
|
|
|
Insurance customer relationship intangible: |
|
|
|
|
| |
Gross amount | $ | 1,067 |
| $ | 1,067 | |
Accumulated amortization (3) |
| (406) |
|
| (292) | |
Net carrying amount | $ | 661 |
| $ | 775 | |
|
|
|
|
|
|
|
Remaining amortization period |
| 4.3 years |
|
| 5.0 years | |
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|
|
(1) | For the quarter and nine-month period ended September 30, 2018, the amortization expense of core deposit intangibles amounted to $0.3 million and $0.9 million, respectively (2017 - $0.4 million and $1.3 million, respectively). | |||||
(2) | For the quarter and nine-month period ended September 30, 2018, the amortization expense of the purchased credit card relationship intangible amounted to $0.6 million and $1.7 million, respectively (2017 - $0.6 million and $1.9 million, respectively). | |||||
(3) | For the quarter and nine-month period ended September 30, 2018, the amortization expense of the insurance customer relationship intangible amounted to $38 thousand and $0.1 million, respectively (2017 - $38 thousand and $0.1 million, respectively). |
60
The estimated aggregate annual amortization expense related to the intangible assets for future periods is as follows: | ||||
|
|
|
|
|
|
|
| Amount |
|
|
|
| (In thousands) |
|
| 2018 | $ | 860 |
|
| 2019 |
| 3,088 |
|
| 2020 |
| 2,851 |
|
| 2021 |
| 2,658 |
|
| 2022 |
| 915 |
|
| 2023 and after |
| 1,150 |
|
|
|
|
|
|
62
The following table shows the gross amount and accumulated amortization of the Corporation’s intangible assets recognized as part of Other assets in the consolidated statements of financial condition as of the indicated dates:
|
| As of |
| As of | ||
|
| September 30, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
(Dollars in thousands) |
|
|
|
|
| |
Core deposit intangible: |
|
|
|
|
| |
Gross amount | $ | 51,664 |
| $ | 51,664 | |
Accumulated amortization (1) |
| (47,969) |
|
| (47,329) | |
Net carrying amount | $ | 3,695 |
| $ | 4,335 | |
|
|
|
|
|
|
|
Remaining amortization period (in years) |
| 5.3 |
|
| 6.0 | |
|
|
|
|
|
|
|
Purchased credit card relationship intangible: |
|
|
|
|
| |
Gross amount | $ | 24,465 |
| $ | 24,465 | |
Accumulated amortization (2) |
| (20,328) |
|
| (18,763) | |
Net carrying amount | $ | 4,137 |
| $ | 5,702 | |
|
|
|
|
|
|
|
Remaining amortization period (in years) |
| 2.1 |
|
| 2.9 | |
|
|
|
|
|
|
|
Insurance customer relationship intangible: |
|
|
|
|
| |
Gross amount | $ | 1,067 |
| $ | 1,067 | |
Accumulated amortization (3) |
| (559) |
|
| (445) | |
Net carrying amount | $ | 508 |
| $ | 622 | |
|
|
|
|
|
|
|
Remaining amortization period (in years) |
| 3.3 |
|
| 4.0 |
(1)For the quarter and nine-month period ended September 30, 2019, the amortization expense of core deposit intangibles amounted to $0.2 million and $0.6 million, respectively (2018 - $0.3 million and $0.9 million, respectively).
(2)For the quarter and nine-month period ended September 30, 2019, the amortization expense of the purchased credit card relationship intangible amounted to $0.5 million and $1.6 million, respectively (2018 - $0.6 million and $1.7 million, respectively).
(3)For the quarter and nine-month period ended September 30, 2019, the amortization expense of the insurance customer relationship intangible amounted to $38 thousand and $0.1 million, respectively (2018 - $38 thousand and $0.1 million, respectively).
The estimated aggregate annual amortization expense related to the intangible assets for future periods is as follows as of September 30, 2019: | ||||
|
|
|
|
|
|
|
| Amount |
|
|
|
| (In thousands) |
|
| 2019 | $ | 769 |
|
| 2020 |
| 2,851 |
|
| 2021 |
| 2,658 |
|
| 2022 |
| 915 |
|
| 2023 |
| 622 |
|
| 2024 and after |
| 525 |
|
|
|
|
|
|
61
NOTE 1416 – NON CONSOLIDATED VARIABLE INTEREST ENTITIES (“VIE”) AND SERVICING ASSETS
The Corporation transfers residential mortgage loans in sale or securitization transactions in which it has continuing involvement, including servicing responsibilities and guarantee arrangements. All such transfers have been accounted for as sales as required by applicable accounting guidance.
When evaluating the need to consolidate counterparties to which the Corporation has transferred assets, or with which the Corporation has entered into other transactions, the Corporation first determines if the counterparty is an entity for which a variable interest exists. If no scope exception is applicable and a variable interest exists, the Corporation then evaluates if it is the primary beneficiary of the VIE and whether the entity should be consolidated or not.
Below is a summary of transfers of financial assets totransactions with VIEs for which the Corporation has retained some level of continuing involvement:
GNMA
The Corporation typically transfers first lien residential mortgage loans in conjunction with GNMA securitization transactions in which the loans are exchanged for cash or securities that are readily redeemed for cash proceeds and servicing rights. The securities issued through these transactions are guaranteed by the issuer and, under seller/servicer agreements, the Corporation is required to service the loans in accordance with the issuers’ servicing guidelines and standards. As of September 30, 2018,2019, the Corporation serviced loans securitized through GNMA with a principal balance of $1.7$1.8 billion.
Trust-Preferred Securities
In 2004, FBP Statutory Trust I, a financing trust that is wholly owned by the Corporation, sold to institutional investors $100$100 million of its variable-rate trust-preferred securities.securities (“TRuPs”). FBP Statutory Trust I used the proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $3.1$3.1 million of FBP Statutory Trust I variable-rate common securities, to purchase $103.1$103.1 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. Also in 2004, FBP Statutory Trust II, a financing trust that is wholly owned by the Corporation, sold to institutional investors $125 million of its variable-rate trust-preferred securities.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$128.9 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. The debentures are presented in the Corporation’s consolidated statement of financial condition as Other Borrowings, net of related issuance costs. The variable-rate trust-preferred securitiesTRuPs are fully and unconditionally guaranteed by the Corporation. The Junior Subordinated Deferrable Debentures issued by the Corporation in April 2004 and September 2004 mature on June 17, 2034 and September 20, 2034, respectively; however, under certain circumstances, the maturity of Junior Subordinated Deferrable Debentures may be shortened (such shortening would result in a mandatory redemption of the variable-rate trust-preferred securities)TRuPs).
During the first quarter of 2018, the Corporation completed the repurchase of $23.8$23.8 million of trust preferred securitiesTRuPs of the FBP Statutory Trust I that were auctioned in a public sale at which the Corporation was invited to participate. The Corporation repurchased and cancelled the repurchased trust preferred securities,TRuPs, which resulted in a commensurate reduction in the related Floating Rate Junior Subordinated Debenture.Debentures. The Corporation’s winning bid equated to 90%90% of the $23.8 million par value. The 10%10% discount resulted in a gain of approximately $2.3 million, which is reflected in the statementconsolidated statements of income as a “GainGain on early extinguishment of debt.”
The Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act eliminated certain trust-preferred securitiesTRuPs 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. During the second quarter of 2016, the Corporation, having received approval from the Federal Reserve, paid $31.2$31.2 million for all of the accrued but deferred interest payments plus the interest for the second quarter of 2016 on the Corporation’s subordinated debentures associated with its trust preferred securities.TRuPs. Subsequently, the Corporation has received quarterly approvals that have enabled it to makemade scheduled quarterly interest payments.payments on the subordinated debentures. As of September 30, 2018,2019, the Corporation was current on all interest payments due on its subordinated debt. In October 2017, the New York FED terminated the formal written agreement (the “Written Agreement”) entered into on June 3, 2010 between theThe Corporation and the Reserve Bank. However, the Corporation has agreed with its regulators to continueis no longer required to obtain the approval of the Federal Reserve Bank before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or trust-preferredtrust preferred securities, incurring or guaranteeing debt or purchasing or redeeming any corporate stock. The Corporation has received approval to make the subordinated debentures’ quarterly payment for December 2018.
6362
Grantor TrustsPrivate 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 (the “Grantor Trusts”(“private label MBS”). The seller initially provided the servicing for a fee, which is senior to the obligations to pay trust certificateprivate label MBS holders. The seller then entered into a sales agreement through which it sold and issued the trust certificatesthese private label MBS in favor of the Corporation’s banking subsidiary. Currently, the Bank is the sole owner of the trust certificates;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. The trust certificatesThese private label MBS are variable-rate securities indexed to 90-day LIBOR plus a spread. The principal payments from the underlying loans are remitted to a paying agent (servicer), who then remits interest to the Bank. Interest income is shared to a certain extent with the FDIC, which has an interest only strip (“IO”) tied to the cash flows of the underlying loans and is entitled to receive the excess of the interest income less a servicing fee over the variable rate income that the Bank earns on the securities. This IO is limited to the weighted-average coupon on the securities. The FDIC became the owner of the IO upon its intervention of the seller, a failed financial institution. No recourse agreement exists, and the Bank, as athe sole holder of the certificates,securities, absorbs all risks from losses on non-accruing loans and repossessed collateral. As of September 30, 2018,2019, the amortized cost and fair value of the Grantor Truststhese private label MBS amounted to $20.0$17.0 million and $14.6$11.6 million, respectively, with a weighted average yield of 4.57%4.07%, which is included as part of the Corporation’s available-for-sale investment securities portfolio. As described in Note 6 above, the Corporation recorded a $0.5 million OTTI charge on these private label MBS during the third quarter of 2019.
Investment in unconsolidated entity
On February 16, 2011, FirstBank sold an asset portfolio consisting of performing and non-performingnonaccrual construction, commercial mortgage and commercial and industrial loans with an aggregate book value of $269.3 $269.3 million to CPG/GS, an entity organized under the laws of the Commonwealth of Puerto Rico and majority owned by PRLP Ventures LLC (“PRLP”), a company created by Goldman, Sachs & Co. and Caribbean Property Group. In connection with the sale, the Corporation received $88.5$88.5 million in cash and a 35%35% interest in CPG/GS, and made a loan in the amount of $136.1 million representing seller financing provided by FirstBank. The loan matured in February 2018 and was refinanced and consolidated with other outstanding loans of CPG/GS in the second quarter of 2018. As of September 30, 2018 the carrying amount of the refinanced loanand was $8.4 million, which was includedpaid in the Corporation’s commercial mortgage loans held for investment portfolio. This loan has a three-year maturity, bears a fixed-interest rate, and is primarily secured by income-producing real estate properties and certain residential units.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.
Cash proceeds received by CPG/GS have been firsthas used cash proceeds on the loan to cover operating expenses and debt service payments, including those related to the refinanced loan described above, which must be substantially repaid before proceeds can be used for other purposes, including the return of capital to both PRLP and FirstBank.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 12%12%, which has not occurred, resulting in FirstBank’s interest in CPG/GS being subordinate to PRLP’s interest. CPG/GS will then begin to make payments pro rata to PRLP and FirstBank, 35%35% and 65%65%, respectively, until FirstBank has achieved a 12%12% 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 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.
The Corporation sells residential mortgage loans to GNMA, which generally securitizes the transferred loans into mortgage-backed securities.MBS. Also, certain conventional conforming loans are sold to FNMA or FHLMC with servicing retained. The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or purchased. Servicing assets are included as part of Other assets in the consolidated statements of financial condition.
The changes in servicing assets are shown below: |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(In thousands) | 2018 |
| 2017 |
| 2018 |
| 2017 |
| |||||
|
|
| |||||||||||
Balance at beginning of period | $ | 27,191 |
| $ | 26,502 |
| $ | 25,255 |
| $ | 26,244 |
| |
Capitalization of servicing assets |
| 1,003 |
|
| 833 |
|
| 3,028 |
|
| 2,757 |
| |
Amortization |
| (722) |
|
| (775) |
|
| (2,188) |
|
| (2,342) |
| |
Adjustment to fair value |
| (65) |
|
| (690) |
|
| 1,265 |
|
| (1,047) |
| |
Other (1) |
| 186 |
|
| 129 |
|
| 233 |
|
| 387 |
| |
Balance at end of period | $ | 27,593 |
| $ | 25,999 |
| $ | 27,593 |
| $ | 25,999 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Amount represents the adjustment to fair value related to the repurchase of loans serviced for others. |
|
|
|
|
|
|
The changes in servicing assets are shown below for the indicated periods: |
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(In thousands) | 2019 |
| 2018 |
| 2019 |
| 2018 |
| |||||
|
|
| |||||||||||
Balance at beginning of period | $ | 27,231 |
| $ | 27,191 |
| $ | 27,428 |
| $ | 25,255 |
|
6463
Capitalization of servicing assets |
| 986 |
|
| 1,003 |
|
| 2,855 |
|
| 3,028 |
| |
Amortization |
| (1,290) |
|
| (722) |
|
| (3,266) |
|
| (2,188) |
| |
Temporary impairment (charges) recoveries , net |
| (53) |
|
| (65) |
|
| (73) |
|
| 1,265 |
| |
Other (1) |
| - |
|
| 186 |
|
| (70) |
|
| 233 |
| |
Balance at end of period | $ | 26,874 |
| $ | 27,593 |
| $ | 26,874 |
| $ | 27,593 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amount represents adjustments related to the repurchase of loans serviced for others. |
|
Impairment charges are recognized through a valuation allowance for each individual stratum of servicing assets. The valuation allowance is adjusted to reflect the amount, if any, by which the cost basis of the servicing asset for a given stratum of loans being serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized.
Changes in the impairment allowance were as follows: |
|
|
|
|
| |||||||||||||||||||
Changes in the impairment allowance were as follows for the indicated periods: | Changes in the impairment allowance were as follows for the indicated periods: |
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Quarter Ended |
| Nine-Month Period Ended |
| Quarter Ended |
| Nine-Month Period Ended |
| ||||||||||||||||
| September 30, |
| September 30, |
| September 30, |
| September 30, |
| ||||||||||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||||||
(In thousands) |
|
| ||||||||||||||||||||||
Balance at beginning of period | $ | 56 |
| $ | 197 |
| $ | 1,451 |
| $ | 461 |
| $ | 50 |
| $ | 56 |
| $ | 30 |
| $ | 1,451 |
|
Temporary impairment charges |
| 65 |
|
| 690 |
|
| 102 |
|
| 1,047 |
|
| 54 |
|
| 65 |
|
| 78 |
|
| 102 |
|
OTTI of servicing assets |
| - |
|
| - |
|
| (65) |
|
| (621) |
|
| - |
|
| - |
|
| - |
|
| (65) |
|
Recoveries |
| - |
|
| - |
|
| (1,367) |
|
| - |
|
| (1) |
|
| - |
|
| (5) |
|
| (1,367) |
|
Balance at end of period | $ | 121 |
| $ | 887 |
| $ | 121 |
| $ | 887 |
| $ | 103 |
| $ | 121 |
| $ | 103 |
| $ | 121 |
|
|
|
|
|
|
| The components of net servicing income are shown below: |
|
|
|
|
| ||||||||||||||||||||
The components of net servicing income, includes as part of Mortgage banking activities in the consolidated statements of income, are shown below for the indicated periods: | The components of net servicing income, includes as part of Mortgage banking activities in the consolidated statements of income, are shown below for the indicated periods: |
| ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Quarter Ended |
| Nine-Month Period Ended |
|
| Quarter Ended |
| Nine-Month Period Ended |
| ||||||||||||||||
|
| September 30, |
| September 30, |
|
| September 30, |
| September 30, |
| ||||||||||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) | (In thousands) |
| (In thousands) |
| ||||||||||||||||||||||
Servicing fees | Servicing fees | $ | 2,084 |
| $ | 1,898 |
| $ | 6,262 |
| $ | 5,897 |
| Servicing fees | $ | 2,166 |
| $ | 2,084 |
| $ | 6,333 |
| $ | 6,262 |
|
Late charges and prepayment penalties | Late charges and prepayment penalties |
| 114 |
|
| 103 |
|
| 380 |
|
| 340 |
| Late charges and prepayment penalties |
| 144 |
|
| 114 |
|
| 455 |
|
| 380 |
|
Adjustment for loans repurchased | Adjustment for loans repurchased |
| 186 |
|
| 129 |
|
| 233 |
|
| 387 |
| Adjustment for loans repurchased |
| - |
|
| 186 |
|
| (70) |
|
| 233 |
|
Other | Other |
| (8) |
|
| - |
|
| (8) |
|
| (35) |
| Other |
| - |
|
| (8) |
|
| (15) |
|
| (8) |
|
Servicing income, gross | Servicing income, gross |
| 2,376 |
|
| 2,130 |
|
| 6,867 |
|
| 6,589 |
| Servicing income, gross |
| 2,310 |
|
| 2,376 |
|
| 6,703 |
|
| 6,867 |
|
Amortization and impairment of servicing assets | Amortization and impairment of servicing assets |
| (787) |
|
| (1,464) |
|
| (923) |
|
| (3,389) |
| Amortization and impairment of servicing assets |
| (1,343) |
|
| (787) |
|
| (3,339) |
|
| (923) |
|
Servicing income, net | Servicing income, net | $ | 1,589 |
| $ | 666 |
| $ | 5,944 |
| $ | 3,200 |
| Servicing income, net | $ | 967 |
| $ | 1,589 |
| $ | 3,364 |
| $ | 5,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6564
The Corporation’s servicing assets 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 ranged as follows: | ||||||||||
The Corporation’s servicing assets 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 ranged as follows for the indicated periods: | The Corporation’s servicing assets 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 ranged as follows for the indicated periods: | |||||||||
|
|
|
|
|
|
|
|
| ||
| Maximum |
| Minimum | |||||||
Nine-Month Period Ended September 30, 2019: |
|
|
|
|
| |||||
Constant prepayment rate: |
|
|
|
| ||||||
Government-guaranteed mortgage loans | 6.4 | % |
| 6.2 | % | |||||
Conventional conforming mortgage loans | 6.9 | % |
| 6.7 | % | |||||
Conventional non-conforming mortgage loans | 9.3 | % |
| 8.9 | % | |||||
Discount rate: |
|
|
|
| ||||||
Government-guaranteed mortgage loans | 12.0 | % |
| 12.0 | % | |||||
Conventional conforming mortgage loans | 10.0 | % |
| 10.0 | % | |||||
Conventional non-conforming mortgage loans | 14.3 | % |
| 14.3 | % | |||||
| Maximum |
| Minimum |
|
|
|
| |||
Nine-Month Period Ended September 30, 2018: |
|
|
|
|
|
|
|
|
| |
Constant prepayment rate: |
|
|
|
|
|
|
|
| ||
Government-guaranteed mortgage loans | 5.9 | % |
| 5.6 | % | 5.9 | % |
| 5.6 | % |
Conventional conforming mortgage loans | 6.4 | % |
| 6.2 | % | 6.4 | % |
| 6.2 | % |
Conventional non-conforming mortgage loans | 9.8 | % |
| 9.1 | % | 9.8 | % |
| 9.1 | % |
Discount rate: |
|
|
|
|
|
|
|
| ||
Government-guaranteed mortgage loans | 12.0 | % |
| 12.0 | % | 12.0 | % |
| 12.0 | % |
Conventional conforming mortgage loans | 10.0 | % |
| 10.0 | % | 10.0 | % |
| 10.0 | % |
Conventional non-conforming mortgage loans | 14.3 | % |
| 14.3 | % | 14.3 | % |
| 14.3 | % |
|
|
|
|
|
|
|
|
| ||
Nine-Month Period Ended September 30, 2017: |
|
|
|
| ||||||
Constant prepayment rate: |
|
|
|
| ||||||
Government-guaranteed mortgage loans | 6.2 | % |
| 6.0 | % | |||||
Conventional conforming mortgage loans | 6.7 | % |
| 6.3 | % | |||||
Conventional non-conforming mortgage loans | 9.5 | % |
| 9.1 | % | |||||
Discount rate: |
|
|
|
| ||||||
Government-guaranteed mortgage loans | 12.0 | % |
| 12.0 | % | |||||
Conventional conforming mortgage loans | 10.0 | % |
| 10.0 | % | |||||
Conventional non-conforming mortgage loans | 14.3 | % |
| 14.3 | % | |||||
|
|
|
|
|
The weighted averages of the key economic assumptions that the Corporation used in its valuation model and the sensitivity of the current fair value to immediate 10%10% and 20%20% adverse changes in those assumptions for mortgage loans as of September 30, 20182019 were as follows:
| (Dollars in thousands) | (Dollars in thousands) | ||||
Carrying amount of servicing assets | $ | 27,593 |
| $ | 26,874 |
|
Fair value | $ | 32,304 |
| $ | 30,318 |
|
Weighted-average expected life (in years) |
| 8.45 |
|
| 8.24 |
|
|
|
|
|
|
|
|
Constant prepayment rate (weighted-average annual rate) |
| 6.14% |
|
| 6.61 | % |
Decrease in fair value due to 10% adverse change | $ | 774 |
| $ | 762 |
|
Decrease in fair value due to 20% adverse change | $ | 1,516 |
| $ | 1,490 |
|
|
|
|
|
|
|
|
Discount rate (weighted-average annual rate) |
| 11.25% |
|
| 11.27 | % |
Decrease in fair value due to 10% adverse change | $ | 1,613 |
| $ | 1,409 |
|
Decrease in fair value due to 20% adverse change | $ | 3,088 |
| $ | 2,706 |
|
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship between the change in assumption and the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the servicing asset is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the sensitivities.sensitivities.
6665
The following table summarizes deposit balances as of the dates indicated: | The following table summarizes deposit balances as of the dates indicated: | The following table summarizes deposit balances as of the dates indicated: | ||||||||
| September 30, |
|
| December 31, | September 30, |
|
| December 31, | ||
| 2018 |
| 2017 | 2019 |
| 2018 | ||||
(In thousands) |
|
| ||||||||
Type of account: |
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing checking accounts | $ | 2,321,050 |
| $ | 1,833,665 | $ | 2,270,250 |
| $ | 2,395,481 |
Savings accounts |
| 2,371,390 |
|
| 2,401,385 |
| 2,414,232 |
|
| 2,334,949 |
Interest-bearing checking accounts |
| 1,414,267 |
|
| 1,207,511 |
| 1,384,383 |
|
| 1,304,043 |
Certificates of deposit |
| 2,367,795 |
|
| 2,429,585 |
| 2,581,012 |
|
| 2,404,644 |
Brokered certificates of deposit (CDs) |
| 673,741 |
|
| 1,150,485 |
| 483,022 |
|
| 555,597 |
Total | $ | 9,148,243 |
| $ | 9,022,631 | $ | 9,132,899 |
| $ | 8,994,714 |
|
|
|
|
|
|
Brokered CDs mature as follows: | ||
| September 30, | |
| 2019 | |
(In thousands) |
| |
|
|
|
Three months or less | $ | 70,091 |
Over three months to six months |
| 61,136 |
Over six months to one year |
| 115,072 |
Over one year to three years |
| 211,148 |
Over three years to five years |
| 19,628 |
Over five years |
| 5,947 |
Total | $ | 483,022 |
|
The following were the components of interest expense on deposits for the periods indicated: |
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2019 |
|
| 2018 |
| 2019 |
|
| 2018 | ||
(In thousands) |
|
|
| ||||||||
Interest expense on deposits | $ | 20,159 |
| $ | 16,709 |
| $ | 56,385 |
| $ | 49,983 |
Accretion of premium from acquisition |
| (2) |
|
| (2) |
|
| (6) |
|
| (7) |
Amortization of broker placement fees |
| 184 |
|
| 272 |
|
| 557 |
|
| 948 |
Total interest expense on deposits | $ | 20,341 |
| $ | 16,979 |
| $ | 56,936 |
| $ | 50,924 |
Brokered CDs mature as follows: | ||
|
|
|
| September 30, | |
| 2018 | |
(In thousands) |
| |
|
|
|
Three months or less | $ | 180,112 |
Over three months to six months |
| 85,996 |
Over six months to one year |
| 103,513 |
Over one year to three years |
| 249,270 |
Over three years to five years |
| 53,469 |
Over five years |
| 1,381 |
Total | $ | 673,741 |
|
The following are the components of interest expense on deposits: |
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2018 |
|
| 2017 |
| 2018 |
|
| 2017 | ||
(In thousands) |
|
|
| ||||||||
Interest expense on deposits | $ | 16,709 |
| $ | 16,453 |
| $ | 49,983 |
| $ | 47,804 |
Accretion of premium from acquisition |
| (2) |
|
| (9) |
|
| (7) |
|
| (47) |
Amortization of broker placement fees |
| 272 |
|
| 454 |
|
| 948 |
|
| 1,461 |
Interest expense on deposits | $ | 16,979 |
| $ | 16,898 |
| $ | 50,924 |
| $ | 49,218 |
6766
NOTE 1618 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (repurchase agreements) as of the dates indicated consisted of the following: | ||||||
|
|
|
|
| ||
| September 30, 2018 |
| December 31, 2017 | |||
(Dollars in thousands) |
|
|
|
|
| |
Short-term fixed-rate repurchase agreement with a rate of 1.53% | $ | - |
| $ | 100,000 | |
Long-term fixed-rate repurchase agreements, |
|
|
|
|
| |
interest rate of 2.26% (2017-1.96% to 2.26%) (1)(2) |
| 100,000 |
|
| 200,000 | |
|
| $ | 100,000 |
| $ | 300,000 |
|
|
|
|
|
|
|
(1) | Reported net of securities purchased under agreements to repurchase (reverse repurchase agreements) by counterparty, when applicable, pursuant to ASC Topic 210-20-45-11. | |||||
(2) | During the third quarter of 2018, the call option on a $100 million repurchase agreement that carried a cost of 1.96% was exercised. Subsequent to September 30, 2018, the lender had the option to call another repurchase agreement, which was not exercised. | |||||
|
|
|
|
|
|
|
Securities sold under agreements to repurchase (repurchase agreements) as of the dates indicated consisted of the following: | ||||||
|
|
|
|
| ||
| September 30, 2019 |
| December 31, 2018 | |||
(Dollars in thousands) |
|
|
|
|
| |
Short-term fixed-rate repurchase agreement (1) | $ | - |
| $ | 50,086 | |
Long-term fixed-rate repurchase agreements (2)(3)(4) |
| 100,000 |
|
| 100,000 | |
|
| $ | 100,000 |
| $ | 150,086 |
|
|
|
|
|
|
|
Repurchase agreements mature as follows: | ||||
|
|
|
|
|
|
|
| September 30, 2018 | |
|
|
| (In thousands) | |
|
|
|
|
|
| Three to four years | $ | 100,000 | |
|
|
|
|
|
|
|
|
|
|
(1)Interest rate of 2.85%.
(3)Reported net of securities purchased under agreements to repurchase (reverse repurchase agreements) by counterparty, when applicable, pursuant to ASC Topic 210-20-45-11, “Balance Sheet – Offsetting – Repurchase and Reverse Repurchase Agreements.”.
(4)Subsequent to September 30, 2019, the lender has not exercised its call option on this callable repurchase agreement.
Repurchase agreements mature as follows as of the indicated date: | ||||
|
|
|
|
|
|
|
| September 30, 2019 | |
|
|
| (In thousands) | |
|
|
|
|
|
| One to three years | $ | 100,000 | |
|
|
|
|
|
|
|
|
|
|
As of September 30, 20182019 and December 31, 2017,2018, the securities underlying such agreements were delivered to the dealers with which the repurchase agreements were transacted.
Repurchase agreements as of September 30, 2018, grouped by counterparty, were as follows: |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
|
|
| Weighted-Average |
|
|
| Counterparty |
| Amount |
| Maturity (In Months) |
| |
|
|
|
|
|
|
|
|
|
|
| JP Morgan Chase |
| $ | 100,000 |
| 40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements as of September 30, 2019, grouped by counterparty, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
|
|
| Weighted-Average |
|
|
| Counterparty |
| Amount |
| Maturity (In Months) |
| |
|
|
|
|
|
|
|
|
|
|
| JP Morgan Chase |
| $ | 100,000 |
| 28 |
|
|
|
|
|
|
|
|
|
|
6867
NOTE 1719 – ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB)
The following is a summary of the advances from the FHLB: | ||||||
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
| (Dollars in thousands) | 2018 |
| 2017 | ||
|
|
|
|
|
|
|
| Long-term fixed-rate advances from FHLB, with a weighted-average |
|
|
|
|
|
| interest rate of 1.92% (2017 - 1.91%) | $ | 690,000 |
| $ | 715,000 |
|
|
|
|
|
|
|
The following is a summary of the advances from the FHLB as of the indicated dates: | ||||||
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
| (In thousands) | 2019 |
| 2018 | ||
|
|
|
|
|
|
|
| Long-term Fixed-rate advances from FHLB (1) | $ | 740,000 |
| $ | 740,000 |
|
|
|
|
|
|
|
Advances from FHLB mature as follows: | |||
|
|
|
|
|
|
| |
|
|
|
|
|
| September 30, 2018 | |
| (In thousands) |
|
|
| Over one to three months | $ | 70,000 |
| Over one to three years |
| 420,000 |
| Over three to four years |
| 200,000 |
| Total | $ | 690,000 |
|
|
|
|
(1)Weighted-average interest rate of 2.07%
Advances from FHLB mature as follows as of the indicated date: | |||
|
|
|
|
|
|
| |
|
| As of | |
|
| September 30, 2019 | |
| (In thousands) |
|
|
| Within one month | $ | 100,000 |
| Over one to three months |
| 105,000 |
| Over six months to one year |
| 45,000 |
| Over one to three years |
| 490,000 |
| Total | $ | 740,000 |
|
|
|
|
As of September 30, 2018,2019, the Corporation used $167.0$252.0 million in letters of credit issued by the FHLB as pledges for public deposits in the Virgin Islands and had additional capacity of approximately $503.6$358.1 million on this credit facility based on collateral pledged at the FHLB, including a haircut reflecting the perceived risk associated with the collateral.
Other borrowings, as of the indicated dates, consisted of:
|
| September 30, |
| December 31, | ||
|
| 2018 |
| 2017 | ||
|
| (In thousands) | ||||
Junior subordinated debentures due in 2034, |
|
|
|
|
| |
interest-bearing at a floating rate of 2.75% |
|
|
|
|
| |
over 3-month LIBOR (5.08% as of September 30, 2018 |
|
|
|
|
| |
and 4.35% as of December 31, 2017) (1) | $ | 65,593 |
| $ | 90,078 | |
Junior subordinated debentures due in 2034, |
|
|
|
|
| |
interest-bearing at a floating rate of 2.50% |
|
|
|
|
| |
over 3-month LIBOR (4.84% as of September 30, 2018 |
|
|
|
|
| |
and 4.12% as of December 31, 2017) |
| 118,557 |
|
| 118,557 | |
| $ | 184,150 |
| $ | 208,635 | |
|
|
|
|
|
|
|
(1) Refer to Note 14 - Non-Consolidated Variable Interest Entities (“VIE”) and Servicing Assets-Trust-Preferred Securities, for additional information about the Corporation's repurchase and cancellation in the first quarter of 2018 of $23.8 million in trust-preferred securities associated with these junior subordinated debentures. |
|
| September 30, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
|
| (In thousands) | ||||
Floating rate junior subordinated debentures (FBP Statutory Trust I) (1) | $ | 65,593 |
| $ | 65,593 | |
Floating rate junior subordinated debentures (FBP Statutory Trust II) (2) |
| 118,557 |
|
| 118,557 | |
| $ | 184,150 |
| $ | 184,150 |
(1)Amount represents junior subordinated interest-bearing debentures due in 2034 with a floating interest rate of 2.75 over 3-month LIBOR (4.89% as of September 30, 2019 and 5.54% as of December 31, 2018).
(2)Amount represents junior subordinated interest-bearing debentures due in 2034 with a floating interest rate of 2.50 over 3-month LIBOR (4.66% as of September 30, 2019 and 5.29% as of December 31, 2018).
6968
NOTE 1921 – STOCKHOLDERS’ EQUITY
Common Stock
As of September 30, 20182019 and December 31, 2017,2018, the Corporation had 2,000,000,000 authorized shares of common stock with a par value of $0.10 $0.10 per share. As of September 30, 20182019 and December 31, 2017,2018, there were 222,103,721 and 221,789,509 and 220,382,343 shares issued, respectively, and 217,240,844 217,360,587 and 216,278,040 217,235,140 shares outstanding, respectively. Refer to Note 45 – Stock Based Compensation, for information about transactions related to common stock under the Omnibus Plan.
On May 17, 2018, the U.S. Treasury exercised its warrant to purchase 1,285,899 shares ofJuly 31, 2019, the Corporation’s stockBoard of Directors, after receiving regulatory approval, declared a quarterly cash dividend of $0.03 per common share that was paid on a cashless basis resulting inSeptember 13, 2019 to shareholders of record on August 29, 2019. For the issuance of 730,571 quarter and nine-month period ended September 30, 2019, total cash dividends declared on shares of common stock amounted to $6.5 million and $19.6 million, respectively. The Corporation intends to continue to pay quarterly dividends on common stock. As mentioned above, the use of 555,328 sharesCorporation is no longer required to coverobtain the strike priceapproval of the transaction. Cash paid in lieu of fractional shares was $6.58.Federal Reserve Bank before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or trust preferred securities, incurring or guaranteeing debt or purchasing or redeeming any corporate stock.
Preferred Stock
The Corporation has 50,000,000 authorized shares of preferred stock with a par value of $1.00,$1.00, redeemable at the Corporation’s option, subject to certain terms. This stock may be issued in series and the shares of each series have such rights and preferences as are fixed by the Board of Directors when authorizing the issuance of that particular series. As of September 30, 2018,2019, the Corporation has five outstanding series of non-convertible, non-cumulative preferred stock: 7.125%7.125% non-cumulative perpetual monthly income preferred stock, Series A; 8.35%8.35% non-cumulative perpetual monthly income preferred stock, Series B; 7.40%7.40% non-cumulative perpetual monthly income preferred stock, Series C; 7.25%7.25% non-cumulative perpetual monthly income preferred stock, Series D; and 7.00%7.00% non-cumulative perpetual monthly income preferred stock, Series E. The liquidation value per share is $25.$25.
Effective January 17, 2012, the Corporation delisted all of its outstanding series of non-convertible, non-cumulative preferred stock from the New York Stock Exchange. The Corporation has not arranged for listing and/or registration on another national securities exchange or for quotation of the Series A through E Preferred Stock in a quotation medium. In December 2016, for the first time since July 2009, the Corporation paid dividends on its non-cumulative perpetual monthly income preferred stock, after receiving regulatory approval. Since then, the Corporation has continued to pay monthly dividend payments on the non-cumulative perpetual monthly income preferred stock. The Corporation intends to request approval in future periods to continue monthly dividend payments on the non-cumulative perpetual monthly income preferred stock. The Corporation has received regulatory approval to pay the monthly dividends on the Corporation’s Series A through E Preferred Stock through December 2018.
On October 3, 2017, the Federal Reserve terminated the Written Agreement entered into on June 3, 2010 between the Corporation and the Federal Reserve. However, the Corporation has agreed with its regulators to continue to obtain approval before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or trust preferred securities, incurring or guaranteeing debt or purchasing or redeeming any corporate stock.
During the first nine months of 20182019 and 2017,2018, the Corporation withheld an aggregate of 433,362176,015 shares and 336,985433,362 shares, respectively, of the restricted stock that vested during the first nine months of 2019 and 2018, and common stock paid to certain senior officers as additional compensation and restricted stock that vested during the first nine months ofin 2018, and 2017 to cover employees’ payroll and income tax withholding liabilities; these shares are held as treasury stock. As mentioned above, effective July 1, 2018, the Corporation ceased paying additional salary amounts in the form of stock. As of September 30, 2018,2019 and December 31, 2017,2018, the Corporation had 4,548,6654,743,134 and 4,104,3034,554,369 shares held as treasury stock, respectively.
69
FirstBank Statutory Reserve (Legal Surplus)
The Banking Law of the Commonwealth of Puerto Rico requires that a minimum of 10%10% of FirstBank’s net income for the year be transferred to a legal surplus reserve until such surplus equals the total of paid-in-capital on common and preferred stock. Amounts transferred to the legal surplus reserve from the retainedRetained earnings account are not available for distribution to the Corporation, including for payment as dividends to the stockholders, without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The Puerto Rico Banking Law provides that, when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over receipts must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the legal surplus reserve, as a reduction thereof. If there is no legal surplus reserve sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the capital account and the Bank cannot pay dividends until it can replenish the legal surplus reserve to an amount of at least 20%20% of the original capital contributed. During the fourth quarter of 2017, $7.3 2018, the Corporation transferred $20.5 million was transferred to the legal surplus reserve. FirstBank’s legal surplus reserve, included as part of retainedRetained earnings in the Corporation’s consolidated statements of financial condition, amounted to $59.7$80.2 million as of September 30, 2018.2019. There were no0 transfers to the legal surplus reserve during the first nine months of 2018. 2019.
70
NOTE 2022 - 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 generally not entitled to file consolidated tax returns and, thus, the Corporation is generally not entitled to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss (“NOL”), a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL carry-forward period. 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 allows an entity organized as a limited liability company to elect to become a non-taxable “pass-through” entity and utilize losses to offset income from other “pass-through” entities, subject to certain limitations, with the remaining net income passing-through to its partner entities. The 2011 PR Code also provides a dividend received deduction of 100%100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85%85% on dividends received from other taxable domestic corporations.
On MarchDecember 10, 2018, the Governor of Puerto Rico signed into law Act 257 (“Act 257”) to amend some of the provisions of the 2011 PR Code, as amended. Act 257 introduced various changes to the income tax regime in the case of individuals and corporations, and the sales and use taxes, which took effect on January 1, 2019, including, among others, (i) a reduction in the Puerto Rico maximum corporate tax rate from 39% to 37.5%; (ii) an increase in the net operating and capital losses usage limitation from 80% to 90%; (iii) amendments to the provisions related to “pass-through” entities that provide that corporations that own 50% or more of a partnership will not be able to claim a current or carryover non-partnership NOL deduction against a partnership distributable share, adversely impacting a tax action taken in 2017 for FirstBank Insurance under which the Corporation completed the applicable regulatory filings to change the tax status of its subsidiary, First Federal Finance, from a taxable corporation to a non-taxable “pass-through” entity. This election allows the Corporation to realize tax benefits of its deferred tax assets associated with pass-through ordinary net operating losses available at the banking subsidiary, FirstBank, which were subject to a full valuation allowance as of December 31, 2016, against now pass-through ordinary income from this profitable subsidiary.
On March 1, 2017, the Corporation also completed the applicable regulatory filings to change the tax status of its subsidiary, FirstBank Insurance, from a taxable corporation to a non-taxable “pass-through” entity. This election allows the Corporationwas previously allowed to offset pass-through income projected to be earned by FirstBank Insurance with net operating losses available at the Holding Company level.holding company level; and (iv) other limitations on certain deductions, such as meals and entertainment deductions.
The Corporation has maintained an effective tax rate lower than the maximum statutory rate, 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 gain on sales is exempt from Puerto Rico income taxation. The IBE and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico on the specific activities identified in the IBE Act. An IBE that operates as a unit of a bank pays income taxes at the corporate standard rates to the extent that the IBE’s net income exceeds 20%20% of the bank’s total net taxable income.
For the third quarter and first nine months of 2018,2019, the Corporation recorded an income tax expense of $19.3 million and $54.9 million, respectively, compared to $12.3 million and $30.2 million, respectively, compared to income tax benefits of $8.4 million and $7.2 million for the comparable periods in 2017.2018. The variance in the income tax expense for the third quarter and first nine months of 2018, as compared to the tax benefit for the same period in 2017, primarily reflects the effect of the tax benefit recorded in the third quarter of 2017 in connection with hurricane-related losses, and a higher effective tax rate in 2018 driven by a higher proportion of taxable to exempt income. The variance for the first nine-months of 2018, as2019, when compared to the same periodperiods in 2017,2018, was mostly attributable to the aforementioned tax benefitprimarily related to hurricane-related losses and the $13.2 million tax benefit recorded in the first quarter of 2017 as a result of the above-discussed change in tax status of certain subsidiaries from taxable corporations to limited liability companies that have elected to be treated as partnerships for income tax purposes in Puerto Rico. A higher effective tax rate also contributed for the variance in the income tax expense for the first nine months of 2018 as compared to the same period in 2017.pre-tax income.
70
For the nine-month period ended September 30, 2018,2019, the Corporation calculated the provision for income taxes by applying the estimated annual effective tax rate for the full fiscal year to ordinary income or loss. In the computation of the consolidated worldwide annual estimated effective tax rate, ASC Topic 740-270, “Income Taxes-Interim Reporting,”Taxes” (“ASC Topic 740-270”), requires the exclusion of legal entities with pre-tax losses from which a tax benefit cannot be recognized. The Corporation’s estimated annual effective tax rate in the first nine months of 2018,2019, excluding entities from which a tax benefit cannot be recognized and discrete items, was 26%29%, compared to 20%26% for the first nine months of 2017. The higher effective tax rate for 2018 was driven by a higher proportion of taxable to exempt income.2018. The estimated annual effective tax rate, including all entities, for 2019 was 30% (29% excluding discrete items), compared to 24% for the first nine months of 2018 was 24% (25%(25% excluding discrete items, primarily the tax benefit resulting from the excess tax benefit recognized during the first quarter of 2018 upon the vesting of shares granted under the Corporation’s stock-based compensation plan), compared to -2% for the first nine months of 2017 (21% excluding discrete items, primarily the tax benefit resulting from the previously mentioned change in the tax status of two subsidiaries)items).
71
The Corporation’s net deferred tax asset amounted to $272.3$273.8 million as of September 30, 2018,2019, net of a valuation allowance of $183.2$87.2 million, and management concluded, based upon the assessment of all positive and negative evidence, that it is more likely than not that the Corporation will generate sufficient taxable income within the applicable NOL carry-forward periods to realize such amount. The net deferred tax asset of the Corporation’s banking subsidiary, FirstBank, amounted to $272.2$273.7 million as of September 30, 2018,2019, net of a valuation allowance of $142.2$56.2 million, compared to a net deferred tax asset of $294.7$319.8 million, net of a valuation allowance of $150.7$68.1 million, as of December 31, 2017.2018.
DuringThe Corporation has U.S. and USVI sourced NOL carryforwards. Section 382 of the third quarterU.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 of the U.S. Internal Revenue Code (“Section 382”) covering a comprehensive period, and concluded that an ownership change had occurred during such period. Section 382 limits the ability to utilize U.S. and USVI NOLs for income tax purposes at such jurisdictions following an event of an ownership change. The Section 382 limitation has resulted in higher U.S. and USVI income tax liabilities than we would have incurincurred in the absence of such limitation. For the third quarter and first nine months of 2018, and mainly as a result of the Section 382 limitation, theThe Corporation incurred an income tax expense of approximately $1.2 million and $3.8 million, respectively, related to its U.S. operations, compared to the $1.6 million expense recorded for the third quarter and first nine months of 2017. The limitation did not result in an increased income tax expense for the USVI operations in the first nine months of 2018 or comparable 2017 period. Prospectively, the Corporation expects that it will be able to mitigatehas mitigated to an extent the adverse effects associated with the Section 382 limitation as any such tax paid in the U.S. or USVI couldcan be 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 the third quarter and nine-month period ended September 30, 2019, the Corporation incurred an income tax expense of approximately $1.2 million and $3.5 million, respectively, related to its U.S. operations, compared to $1.2 million and $3.8 million, respectively, for the comparable periods in 2018. The limitation did not impact the USVI operations for the third quarter and nine-month periods ended September 30, 2019 and 2018.
As of September 30, 2018,2019, the Corporation did not have Unrecognized Tax Benefits recorded on its books. The Corporation classifies all interest and penalties, if any, related to tax uncertainties as income tax expense. Audit periods remain open for review until the statute of limitations has passed. The statute of limitations under the 2011 PR Code is four years; the statute of limitations for U.S. and USVI income tax purposes is three years after a tax return is due or filed, whichever is later, for each.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 20132014 remain open to examination. For Puerto Rico tax purposes, all tax years subsequent to 20122014 remain open to examination.
On December 22, 2017, the United States president signed H.R.1, The Tax Cuts and Jobs Acts, effective January 1, 2018, which includes an overhaul of individual, business and international taxes and has affected our branch operations in the U.S. and the USVI. The bill includes measures reducing corporate taxes from 35% to 21%, a repeal of the corporate alternative minimum tax regime, changes to business deductions and NOLs, a 15.5% tax on mandatory repatriation of liquid assets, 10% tax on base erosion payments, and a minimum 10.5% tax on inclusion of global intangible low-tax income by U.S. shareholders, among other significant changes. The main provisions affecting our operations in the U.S. and the USVI in the first nine months of 2018 include: the change in tax rate to 21%, the limitation to the amount certain financial institutions may deduct for premiums paid to the FDIC, and changes in permanent differences, such as meals and entertainment deductions. Other significant provisions, such as the base erosion and anti-abuse tax, do not affect the Corporation’s U.S. and USVI branch operations since these operations’ receipts do not exceed the annual threshold of U.S. effectively connected gross receipts.
7271
NOTE 2123 – OTHER COMPREHENSIVE LOSSINCOME (LOSS)
The following table presents changes in accumulated other comprehensive loss for the quarters and nine-month periods ended September 30, 2018 and 2017: | ||||||||||||||||||||||
The following table presents changes in Accumulated other comprehensive income (loss) for the quarters and nine-month periods ended September 30, 2019 and 2018: | The following table presents changes in Accumulated other comprehensive income (loss) for the quarters and nine-month periods ended September 30, 2019 and 2018: | |||||||||||||||||||||
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| Changes in Accumulated Other Comprehensive Loss by Component (1) | Changes in Accumulated Other Comprehensive Income (Loss) by Component (1) | ||||||||||||||||||||
| Quarter ended |
| Nine-month period | Quarter ended |
| Nine-month period ended | ||||||||||||||||
| September 30, |
| September 30, |
| September 30, |
| September 30, | September 30, |
| September 30, |
| September 30, |
| September 30, | ||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||||
(In thousands) |
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|
|
| ||||||||||||||||||
Unrealized net holding losses on debt securities |
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|
|
Beginning balance | $ | (52,107) |
| $ | (14,625) |
| $ | (20,609) |
| $ | (34,383) | $ | (2,438) |
| $ | (52,107) |
| $ | (40,415) |
| $ | (20,609) |
Other comprehensive (loss) income |
| (10,780) |
|
| 3,719 |
|
| (42,278) |
|
| 11,617 | |||||||||||
Amounts reclassified from accumulated comprehensive loss |
| - |
|
| - |
|
| - |
|
| 11,860 | |||||||||||
Other comprehensive income (loss) |
| 7,562 |
|
| (10,780) |
|
| 45,539 |
|
| (42,278) | |||||||||||
Ending balance | $ | (62,887) |
| $ | (10,906) |
| $ | (62,887) |
| $ | (10,906) | $ | 5,124 |
| $ | (62,887) |
| $ | 5,124 |
| $ | (62,887) |
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Unrealized holding losses on equity securities |
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|
|
Beginning balance | $ | - |
| $ | (4) |
| $ | (6) |
| $ | (7) | $ | - |
| $ | - |
| $ | - |
| $ | (6) |
Reclassification to retained earnings per ASU 2016-01 |
| - |
|
| - |
|
| 6 |
|
| - |
| - |
|
| - |
|
| - |
|
| 6 |
Other comprehensive income |
| - |
|
| - |
|
| - |
|
| 3 |
| - |
|
| - |
|
| - |
|
| - |
Ending balance | $ | - |
| $ | (4) |
| $ | - |
| $ | (4) | $ | - |
| $ | - |
| $ | - |
| $ | - |
______________________ |
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(1) All amounts presented are net of tax. | (1) All amounts presented are net of tax. | (1) All amounts presented are net of tax. |
The following table presents the amounts reclassified out of each component of Accumulated other comprehensive income during the quarters and nine-month periods ended September 30, 2019 and 2018: | |||||||||||||
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| Reclassifications Out of Accumulated Other Comprehensive Income | ||||||||||
|
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| Quarter ended |
| Nine-month period ended | ||||||||
|
|
| September 30, |
| September 30, | ||||||||
| Affected Line Item in the Consolidated Statements of Income |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
(In thousands) |
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|
| |||||||||
Unrealized holding losses on debt securities |
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OTTI on debt securities | Net impairment losses |
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| on available-for-sale |
|
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|
|
|
|
|
|
| debt securities |
| $ | (497) |
| $ | - |
| $ | (497) |
| $ | - |
| Income tax |
|
| - |
|
| - |
|
| - |
|
| - |
| Total, net of tax |
| $ | (497) |
| $ | - |
| $ | (497) |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss during the quarters and nine-month periods ended September 30, 2018 and 2017: | |||||||||||||
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|
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|
|
|
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| Reclassifications Out of Accumulated Other Comprehensive Loss | ||||||||||
|
|
| Quarter ended |
| Nine-month period ended | ||||||||
|
|
| September 30, |
| September 30, | ||||||||
| Affected Line Item in the Consolidated Statements of Income |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
(In thousands) |
|
|
|
| |||||||||
Unrealized holding losses on debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss) on sale of debt securities | Net gain on sale of |
|
|
|
|
|
|
|
|
|
|
|
|
| investments |
| $ | - |
| $ | - |
| $ | - |
| $ | 371 |
OTTI on debt securities | Net impairment losses |
|
|
|
|
|
|
|
|
|
|
|
|
| on available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
| debt securities |
|
| - |
|
| - |
|
| - |
|
| (12,231) |
| Total before tax |
| $ | - |
| $ | - |
| $ | - |
| $ | (11,860) |
| Income tax |
|
| - |
|
| - |
|
| - |
|
| - |
| Total, net of tax |
| $ | - |
| $ | - |
| $ | - |
| $ | (11,860) |
|
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|
|
7372
NOTE 2224 – FAIR VALUE
Fair Value Measurement
The FASB authoritative guidance for fair value measurement defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance also establishes a fair value hierarchy for classifying financial instruments. The hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. Three levels of inputs may be used to measure fair value:
Level 1 | Valuations of Level 1 assets and liabilities are obtained from readily-available pricing sources for market transactions involving identical assets or liabilities. Level 1 assets and liabilities include equity securities that trade in an active exchange market, as well as certain U.S. Treasury and other U.S. government and agency securities and corporate debt securities that are traded by dealers or brokers in active markets. |
Level 2 | Valuations of Level 2 assets and liabilities are based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include (i) 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 | Valuations of Level 3 assets and liabilities are based on unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined by using pricing models for which the determination of fair value requires significant management judgments as to the estimation. |
Financial Instruments Recorded at Fair Value on a Recurring Basis
Investment securities available for sale and marketable equity securities held at fair value
The fair value of investment securities was the market value based on quoted market prices (as is the case with Treasury notes, and non-callable U.S. Agency debt securities)securities, and equity securities with readily determinable fair values), when available (Level 1), or, when available, market prices for identical or comparable assets (as is the case with MBS and callable U.S. agency debt) that are based on observable market parameters, including benchmark yields, reported trades, quotes from brokers or dealers, issuer spreads, bids, offers and reference data, including market research operations (Level 2). Observable prices in the market already consider the risk of nonperformance. If listed prices or quotes are not available, fair value is based upon discounted cash flow models that use unobservable inputs due to the limited market activity of the instrument, as is the case with certain private label MBS held by the Corporation (Level 3).
Derivative instruments
The fair value of most of the Corporation’s derivative instruments is based on observable market parameters and takes into consideration the credit risk component of paying counterparties, when appropriate. On interest caps, only the seller’s credit risk is considered. The caps were valued using a discounted cash flow approach based on the related LIBOR and swap rate for each cash flow.
A credit spread is considered for those derivative instruments that are not secured. The cumulative mark-to-market effect of credit risk in the valuation of derivative instruments for the quarters and nine-month periods ended September 30, 20182019 and 20172018 was immaterial.
74
Assets and liabilities measured at fair value on a recurring basis are summarized below: | |||||||||||||||||||||||
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| As of September 30, 2018 |
| As of December 31, 2017 | ||||||||||||||||||||
| Fair Value Measurements Using |
| Fair Value Measurements Using | ||||||||||||||||||||
(In thousands) | Level 1 |
| Level 2 |
| Level 3 |
| Assets/Liabilities at Fair Value |
| Level 1 |
| Level 2 |
| Level 3 |
| Assets/Liabilities at Fair Value | ||||||||
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Assets: |
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Securities available for sale : |
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Equity securities (1) | $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | 418 |
| $ | - |
| $ | - |
| $ | 418 |
U.S. Treasury Securities |
| 7,426 |
|
| - |
|
| - |
|
| 7,426 |
|
| 7,401 |
|
| - |
|
| - |
|
| 7,401 |
Noncallable U.S. agency debt securities |
| - |
|
| 341,720 |
|
| - |
|
| 341,720 |
|
| - |
|
| 361,971 |
|
| - |
|
| 361,971 |
Callable U.S. agency debt securities and MBS |
| - |
|
| 1,640,064 |
|
| - |
|
| 1,640,064 |
|
| - |
|
| 1,497,253 |
|
| - |
|
| 1,497,253 |
Puerto Rico government obligations |
| - |
|
| 4,142 |
|
| 2,798 |
|
| 6,940 |
|
| - |
|
| 4,118 |
|
| 2,695 |
|
| 6,813 |
Private label MBS |
| - |
|
| - |
|
| 14,571 |
|
| 14,571 |
|
| - |
|
| - |
|
| 17,060 |
|
| 17,060 |
Other investments |
| - |
|
| - |
|
| 500 |
|
| 500 |
|
| - |
|
| - |
|
| 100 |
|
| 100 |
Equity securities (1) |
| 411 |
|
| - |
|
| - |
|
| 411 |
|
| - |
|
| - |
|
| - |
|
| - |
Derivatives, included in assets: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased interest rate cap agreements |
| - |
|
| 815 |
|
| - |
|
| 815 |
|
| - |
|
| 305 |
|
| - |
|
| 305 |
Forward contracts |
| - |
|
| 116 |
|
| - |
|
| 116 |
|
| - |
|
| 7 |
|
| - |
|
| 7 |
Liabilities: |
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Derivatives, included in liabilities: |
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Written interest rate cap agreements |
| - |
|
| 815 |
|
| - |
|
| 815 |
|
| - |
|
| 305 |
|
| - |
|
| 305 |
Forward contracts |
| - |
|
| 20 |
|
| - |
|
| 20 |
|
| - |
|
| 19 |
|
| - |
|
| 19 |
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(1) As of January 1, 2018, the Corporation adopted ASU 2016-01, resulting in the reclassification of equity securities from available-for-sale investment securities to other investment securities. As of December 31, 2017, equity securities had a net unrealized loss of $6 thousand. | |||||||||||||||||||||||
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73
75
Assets and liabilities measured at fair value on a recurring basis as of the indicated dates are summarized below: | |||||||||||||||||||||||
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| As of September 30, 2019 |
| As of December 31, 2018 | ||||||||||||||||||||
| 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 | ||||||||
|
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|
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|
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Assets: |
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|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
Securities available for sale: |
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|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities | $ | 7,485 |
| $ | - |
| $ | - |
| $ | 7,485 |
| $ | 7,456 |
| $ | - |
| $ | - |
| $ | 7,456 |
Noncallable U.S. agency debt securities |
| - |
|
| 208,302 |
|
| - |
|
| 208,302 |
|
| - |
|
| 319,124 |
|
| - |
|
| 319,124 |
Callable U.S. agency debt securities and MBS |
| - |
|
| 1,501,521 |
|
| - |
|
| 1,501,521 |
|
| - |
|
| 1,594,622 |
|
| - |
|
| 1,594,622 |
Puerto Rico government obligations |
| - |
|
| 4,245 |
|
| 2,956 |
|
| 7,201 |
|
| - |
|
| 4,128 |
|
| 2,824 |
|
| 6,952 |
Private label MBS |
| - |
|
| - |
|
| 11,554 |
|
| 11,554 |
|
| - |
|
| - |
|
| 13,914 |
|
| 13,914 |
Other investments |
| - |
|
| - |
|
| 500 |
|
| 500 |
|
| - |
|
| - |
|
| 500 |
|
| 500 |
Equity securities |
| 1,435 |
|
| - |
|
| - |
|
| 1,435 |
|
| 418 |
|
| - |
|
| - |
|
| 418 |
Derivatives, included in assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased interest rate cap agreements |
| - |
|
| 10 |
|
| - |
|
| 10 |
|
| - |
|
| 623 |
|
| - |
|
| 623 |
Interest rate lock commitments |
| - |
|
| 273 |
|
| - |
|
| 273 |
|
| - |
|
| 383 |
|
| - |
|
| 383 |
Forward contracts |
| - |
|
| 1 |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| - |
|
| - |
Forward loan sales commitments |
| - |
|
| 20 |
|
| - |
|
| 20 |
|
| - |
|
| 12 |
|
| - |
|
| 12 |
Liabilities: |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
Derivatives, included in liabilities: |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written interest rate cap agreements |
| - |
|
| 9 |
|
| - |
|
| 9 |
|
| - |
|
| 617 |
|
| - |
|
| 617 |
Forward contracts |
| - |
|
| 174 |
|
| - |
|
| 174 |
|
| - |
|
| 383 |
|
| - |
|
| 383 |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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74
The table below presents a reconciliation of the beginning and ending balances of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters and nine-month periods ended September 30, 20182019 and 2017.2018.
|
| Quarter Ended September 30, |
| Quarter Ended September 30, | ||||||||
|
| 2018 |
| 2017 |
| 2019 |
| 2018 | ||||
Level 3 Instruments Only | Level 3 Instruments Only | Securities |
| Securities | Level 3 Instruments Only | Securities |
| Securities | ||||
(In thousands) | (In thousands) | Available For Sale(1) |
| Available For Sale(1) | (In thousands) | Available For Sale(1) |
| Available For Sale(1) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance | Beginning balance | $ | 17,829 |
| $ | 19,771 | Beginning balance | $ | 15,906 |
| $ | 17,829 |
Total gains (realized/unrealized): |
|
|
|
| ||||||||
Total gains (losses) (realized/unrealized): | Total gains (losses) (realized/unrealized): |
|
|
|
| |||||||
Included in earnings | Included in earnings |
| (497) |
| - | |||||||
Included in other comprehensive income | Included in other comprehensive income |
| 35 |
| 1,754 | Included in other comprehensive income |
| 15 |
| 35 | ||
Purchases | Purchases |
| 500 |
| - | Purchases |
| - |
| 500 | ||
Principal repayments and amortization | Principal repayments and amortization |
| (495) |
|
| (1,186) | Principal repayments and amortization |
| (414) |
|
| (495) |
Ending balance | Ending balance | $ | 17,869 |
| $ | 20,339 | Ending balance | $ | 15,010 |
| $ | 17,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Amounts mostly related to private label MBS. | Amounts mostly related to private label MBS. | ||||||||||
|
| |||||||||||
|
|
|
| Nine-Month Period Ended September 30, |
| Nine-Month Period Ended September 30, | ||||||||||||||
|
| 2018 |
| 2017 |
| 2019 |
| 2018 | ||||||||||
Level 3 Instruments Only | Level 3 Instruments Only | Securities |
| Securities | Level 3 Instruments Only | Securities |
| Securities | ||||||||||
(In thousands) | (In thousands) | Available For Sale(1) |
| Available For Sale(1) | (In thousands) | Available For Sale(1) |
| Available For Sale(1) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance | Beginning balance | $ | 19,855 |
| $ | 22,914 | Beginning balance | $ | 17,238 |
| $ | 19,855 | ||||||
Total gains (realized/unrealized): | Total gains (realized/unrealized): |
|
|
|
| Total gains (realized/unrealized): |
|
|
|
| ||||||||
Included in earnings | Included in earnings |
| (497) |
| - | |||||||||||||
Included in other comprehensive income | Included in other comprehensive income |
| 228 |
| 2,500 | Included in other comprehensive income |
| 46 |
| 228 | ||||||||
Purchases | Purchases |
| 500 |
| - | Purchases |
| - |
| 500 | ||||||||
Principal repayments and amortization | Principal repayments and amortization |
| (2,714) |
|
| (5,075) | Principal repayments and amortization |
| (1,777) |
|
| (2,714) | ||||||
Ending balance | Ending balance | $ | 17,869 |
| $ | 20,339 | Ending balance | $ | 15,010 |
| $ | 17,869 | ||||||
|
|
|
|
|
|
| ||||||||||||
| Amounts mostly related to private label MBS. |
|
|
|
|
|
| |||||||||||
| | | Amounts mostly related to private label MBS. | |||||||||||||||
|
|
7675
The tables below present qualitative information for significant assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of September 30, 2018 and December 31, 2017: | ||||||||
|
|
|
|
|
|
|
|
|
| September 30, 2018 | |||||||
(In thousands) | Fair Value |
| Valuation Technique |
| Unobservable Input |
| Range | |
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: | ||||||||
|
|
|
|
|
|
|
|
|
Private label MBS | $ | 14,571 |
| Discounted cash flows |
| Discount rate |
| 14.8% |
|
|
|
|
|
| Prepayment rate |
| 3.5% - 22.5% (Weighted Average 11.7%) |
|
|
|
|
|
| Projected Cumulative Loss Rate |
| 0.0% - 7.8% (Weighted Average 4%) |
|
|
|
|
|
|
|
|
|
Puerto Rico government obligations |
| 2,798 |
| Discounted cash flows |
| Discount rate |
| 5.90% |
|
|
|
|
|
| Prepayment rate |
| 3.00% |
|
|
|
|
|
|
|
|
|
The tables below present qualitative information for significant assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of September 30, 2019 and December 31, 2018: |
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2019 |
|
| ||||||||
| Fair Value |
| Valuation Technique |
| Unobservable Input |
| Range |
| Weighted Average | ||
(Dollars in thousands) |
|
|
| Minimum | Maximum |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Private label MBS | $ | 11,554 |
| Discounted cash flows |
| Discount rate |
| 13.7% | 13.7% |
| 13.7% |
|
|
|
|
|
| Prepayment rate |
| 6.2% | 9.6% |
| 7.3% |
|
|
|
|
|
| Projected Cumulative Loss Rate |
| 0.0% | 7.8% |
| 3.1% |
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico government obligations |
| 2,956 |
| Discounted cash flows |
| Discount rate |
| 7.1% | 7.1% |
| 7.1% |
|
|
|
|
|
| Prepayment rate |
| 3.0% | 3.0% |
| 3.0% |
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 |
|
| ||||||||
| Fair Value |
| Valuation Technique |
| Unobservable Input |
| Range |
| Weighted Average | ||
(Dollars in thousands) |
|
|
| Minimum | Maximum |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Private label MBS | $ | 13,914 |
| Discounted cash flows |
| Discount rate |
| 14.5% | 14.5% |
| 14.5% |
|
|
|
|
|
| Prepayment rate |
| 3.3% | 20.9% |
| 11.4% |
|
|
|
|
|
| Projected Cumulative Loss Rate |
| 0.0% | 6.8% |
| 3.0% |
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico government obligations |
| 2,824 |
| Discounted cash flows |
| Discount rate |
| 6.3% | 6.3% |
| 6.3% |
|
|
|
|
|
| Prepayment rate |
| 3.0% | 3.0% |
| 3.0% |
| ||||||||
|
|
|
|
|
|
|
|
|
| December 31, 2017 | |||||||
(In thousands) | Fair Value |
| Valuation Technique |
| Unobservable Input |
| Range | |
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: | ||||||||
|
|
|
|
|
|
|
|
|
Private label MBS | $ | 17,060 |
| Discounted cash flows |
| Discount rate |
| 14.0% |
|
|
|
|
|
| Prepayment rate |
| 12.0% - 29.0% (Weighted Average 16.4%) |
|
|
|
|
|
| Projected Cumulative Loss Rate |
| 0.0% - 6.8% (Weighted Average 3.0%) |
|
|
|
|
|
|
|
|
|
Puerto Rico government obligations |
| 2,695 |
| Discounted cash flows |
| Discount rate |
| 6.61% |
|
|
|
|
|
| Prepayment rate |
| 3.00% |
|
|
|
|
|
|
|
|
|
76
77
Information about Sensitivity to Changes in Significant Unobservable Inputs
Private label MBS: The significant unobservable inputs in the valuation include probability of default, the loss severity assumption, and prepayment rates. Shifts in those inputs would result in different fair value measurements. Increases in the probability of default, loss severity assumptions, and prepayment rates in isolation would generally result in an adverse effect on the fair value of the instruments. Meaningful and possible shifts of each input were modeled to assess the effect on the fair value estimation.
Puerto Rico Government Obligations: The significant unobservable input used in the fair value measurement is the assumed prepayment rate of the underlying residential mortgage loans that collateralize these obligations, thatwhich are guaranteed by the Puerto Rico Housing Finance Authority.PRHFA. A significant increase (decrease) in the assumed rate would lead to a higher (lower) fair value estimate. The fair value of these bonds was based on a discounted cash flow analysis that contemplates the credit quality of the holder of second mortgages and a discount for liquidity constraints on the bonds considering the absence of an active market for them. Due to the guarantee of the Puerto Rico Housing Finance AuthorityPRHFA and other applicable contractual safeguards, no additional credit spread is applied for servicesdebt service default.
There were noThe table below summarizes changes in unrealized gains and losses recorded in earnings for the quarters and nine-month periods ended September 30, 20182019 and 20172018 for Level 3 assets and liabilities that wereare still held at the end of each period.period:
| Quarter Ended September 30, |
| Nine-Month Period Ended September 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
| Changes in Unrealized Losses |
| Changes in Unrealized Losses |
| Changes in Unrealized Losses |
| Changes in Unrealized Losses | ||||
Level 3 Instruments Only | Securities Available for Sale |
| 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: |
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses on available-for-sale investment |
|
|
|
|
|
|
|
|
|
|
|
securities (credit component) | $ | (497) |
| $ | - |
| $ | (497) |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.(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.(e.g., goodwill and loans).
As of September 30, 2018, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table: | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
As of September 30, 2019, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table: | As of September 30, 2019, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table: | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| (Losses) Gains recorded for the Quarter Ended |
| (Losses) Gains recorded for the Nine-Month Period Ended |
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Carrying value as of September 30, 2018 |
| September 30, 2018 |
| September 30, 2018 |
| Carrying value as of September 30, 2019 |
| Losses recorded for the Quarter Ended September 30, 2019 |
| Losses recorded for the Nine-Month Period Ended September 30, 2019 | ||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
|
|
|
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
|
|
|
|
|
| ||||||
(In thousands) | (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
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|
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|
|
|
|
|
| ||||
Loans receivable (1) | Loans receivable (1) | $ | - |
| $ | - |
| $ | 442,248 |
| $ | (7,967) |
| $ | (20,622) | Loans receivable (1) | $ | - |
| $ | - |
| $ | 211,406 |
| $ | (6,221) |
| $ | (14,546) |
OREO (2) | OREO (2) |
| - |
|
| - |
|
| 135,218 |
|
| (3,244) |
|
| (9,817) | OREO (2) |
| - |
|
| - |
|
| 103,033 |
|
| (1,311) |
|
| (5,513) |
Loans held for sale (3) | Loans held for sale (3) |
| - |
|
| - |
|
| 44,177 |
|
| (10,102) |
|
| (14,642) | Loans held for sale (3) |
| - |
|
| - |
|
| 6,906 |
|
| - |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
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|
|
| Consists mainly of impaired commercial and construction loans. The impairments were generally measured based on the fair value of the collateral. The fair values were derived from external appraisals that 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. | ||||||||||||||
| Consists mainly of impaired commercial and construction loans. The impairments were generally measured based on the fair value of the collateral. The fair values were derived from external appraisals that 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. | The fair values were derived 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. | ||||||||||||||||||||||||||||
| The fair values were derived 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. | Nonaccrual commercial mortgage loan transferred to held for sale in 2018 and still in inventory at period end. The value of this loan was primarily derived from broker price opinions that the Corporation considered. | ||||||||||||||||||||||||||||
(3) | The value of these loans was primarily derived from both external appraisals, adjusted for specific characteristics of the loans, and, for the $17.2 million in non-performing loans transferred to held for sale in the third quarter of 2018, from broker price opinions that the Corporation considered. |
7877
As of September 30, 2017, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table: | ||||||||||||||||||||||||||||||
As of September 30, 2018, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table: | As of September 30, 2018, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table: | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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| |||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
| Losses recorded |
| Losses recorded | ||
|
|
|
|
|
|
|
|
|
|
| (Losses) recorded for the Quarter Ended |
| (Losses) recorded for the Nine-Month Period |
|
|
|
|
|
|
|
|
|
|
| for the Quarter Ended |
|
| for the Nine-Month Period Ended | ||
|
| Carrying value as of September 30, 2017 |
| September 30, 2017 |
| September 30, 2017 |
| Carrying value as of September 30, 2018 |
| September 30, 2018 |
| September 30, 2018 | ||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
|
|
|
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
|
|
|
|
|
| ||||||
(In thousands) | (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans receivable (1) | Loans receivable (1) | $ | - |
| $ | - |
| $ | 374,740 |
| $ | (686) |
| $ | (23,467) | Loans receivable (1) | $ | - |
| $ | - |
| $ | 442,248 |
| $ | (7,967) |
| $ | (20,622) |
OREO (2) | OREO (2) |
| - |
|
| - |
|
| 152,977 |
|
| (818) |
|
| (7,563) | OREO (2) |
| - |
|
| - |
|
| 135,218 |
|
| (3,244) |
|
| (9,817) |
Mortgage servicing rights (3) |
| - |
|
| - |
|
| 25,999 |
|
| (690) |
|
| (1,047) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Loans held for sale (3) | Loans held for sale (3) |
| - |
|
| - |
|
| 44,177 |
|
| (10,102) |
|
| (14,642) | |||||||||||||||
| Consists mainly of impaired commercial and construction loans. The impairments were generally measured based on the fair value of the collateral. The fair values were derived from external appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g., absorption rates), which are not market observable. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
| The fair values were derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g., absorption rates and net operating income of income producing properties), which are not market observable. Losses were related to market valuation adjustments after the transfer of the loans to the OREO portfolio. | Consists mainly of impaired commercial and construction loans. The impairments were generally measured based on the fair value of the collateral. The fair values were derived from external appraisals that 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. | ||||||||||||||||||||||||||||
| Fair value adjustments to the mortgage servicing rights were mainly due to assumptions associated with mortgage prepayments rates. The Corporation carries its mortgage servicing rights at the lower of cost or market, measured at fair value on a non-recurring basis. Assumptions for the value of mortgage servicing rights include: Prepayment Rate of 6.41%, Discount Rate of 11.22%. | The fair values were derived 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. | ||||||||||||||||||||||||||||
(3) | The value of these loans was primarily derived from external appraisals, adjusted for specific characteristics of the loans. |
Qualitative information regarding the fair value measurements for Level 3 financial instruments as of September 30, | |||
September 30, | |||
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 |
7978
The following tables present the carrying value, estimated fair value and estimated fair value level of the hierarchy of financial instruments as of September 30, 2018 and December 31, 2017: | ||||||||||||||||||||||||||||
The following tables present the carrying value, estimated fair value and estimated fair value level of the hierarchy of financial instruments as of September 30, 2019 and December 31, 2018: | The following tables present the carrying value, estimated fair value and estimated fair value level of the hierarchy of financial instruments as of September 30, 2019 and December 31, 2018: | |||||||||||||||||||||||||||
|
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|
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|
|
|
|
|
| Total Carrying Amount in Statement of Financial Condition September 30, 2018 |
| Fair Value Estimate September 30, 2018 |
| Level 1 |
| Level 2 |
| Level 3 | Total Carrying Amount in Statement of Financial Condition September 30, 2019 |
| Fair Value Estimate September 30, 2019 |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||||
|
|
|
|
|
|
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|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
| ||||
|
|
|
|
|
|
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|
|
|
|
|
|
| ||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks and money |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
market investments (amortized cost) | $ | 656,772 |
| $ | 656,772 |
| $ | 656,772 |
| $ | - |
| $ | - | $ | 975,937 |
| $ | 975,937 |
| $ | 975,937 |
| $ | - |
| $ | - |
Investment securities available |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for sale (fair value) |
| 2,011,221 |
|
| 2,011,221 |
|
| 7,426 |
|
| 1,985,926 |
|
| 17,869 |
| 1,736,563 |
|
| 1,736,563 |
|
| 7,485 |
|
| 1,714,068 |
|
| 15,010 |
Investment securities held to maturity (amortized cost) |
| 144,799 |
|
| 131,703 |
|
| - |
|
| - |
|
| 131,703 |
| 138,676 |
|
| 115,443 |
|
| - |
|
| - |
|
| 115,443 |
Equity Securities (fair value) |
| 42,274 |
|
| 42,274 |
|
| 411 |
|
| 41,863 |
|
| - |
| 45,228 |
|
| 45,228 |
|
| 1,435 |
|
| 43,793 |
|
| - |
Loans held for sale (lower of cost or market) |
| 65,739 |
|
| 65,907 |
|
| - |
|
| 21,730 |
|
| 44,177 |
| 42,470 |
|
| 43,299 |
|
| - |
|
| 36,393 |
|
| 6,906 |
Loans held for investment (amortized cost) |
| 8,716,953 |
|
|
|
|
|
|
|
|
|
|
|
|
| 8,968,420 |
|
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan and lease losses |
| (200,563) |
|
|
|
|
|
|
|
|
|
|
|
|
| (165,575) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment, net of allowance | $ | 8,516,390 |
|
| 8,174,205 |
|
| - |
|
| - |
|
| 8,174,205 | $ | 8,802,845 |
|
| 8,532,241 |
|
| - |
|
| - |
|
| 8,532,241 |
Derivatives, included in assets (fair value) |
| 931 |
|
| 931 |
|
| - |
|
| 931 |
|
| - |
| 304 |
|
| 304 |
|
| - |
|
| 304 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (amortized cost) |
| 9,148,243 |
|
| 9,151,666 |
|
| - |
|
| 9,151,666 |
|
| - |
| 9,132,899 |
|
| 9,153,256 |
|
| - |
|
| 9,153,256 |
|
| - |
Securities sold under agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to repurchase (amortized cost) |
| 100,000 |
|
| 121,047 |
|
| - |
|
| 121,047 |
|
| - |
| 100,000 |
|
| 122,652 |
|
| - |
|
| 122,652 |
|
| - |
Advances from FHLB (amortized cost) |
| 690,000 |
|
| 673,788 |
|
| - |
|
| 673,788 |
|
| - |
| 740,000 |
|
| 744,298 |
|
| - |
|
| 744,298 |
|
| - |
Other borrowings (amortized cost) |
| 184,150 |
|
| 175,480 |
|
| - |
|
| - |
|
| 175,480 |
| 184,150 |
|
| 182,587 |
|
| - |
|
| - |
|
| 182,587 |
Derivatives, included in liabilities (fair value) |
| 835 |
|
| 835 |
|
| - |
|
| 835 |
|
| - |
| 183 |
|
| 183 |
|
| - |
|
| 183 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Carrying Amount in Statement of Financial Condition December 31, 2017 |
| Fair Value Estimate December 31, 2017 |
| Level 1 |
| Level 2 |
| Level 3 | Total Carrying Amount in Statement of Financial Condition December 31, 2018 |
| Fair Value Estimate December 31, 2018 |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||||
|
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|
(In thousands) |
|
|
|
|
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|
|
|
|
|
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|
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|
| ||||
|
|
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|
|
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|
|
|
| ||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks and money |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
market investments (amortized cost) | $ | 716,395 |
| $ | 716,395 |
| $ | 716,395 |
| $ | - |
| $ | - | $ | 586,203 |
| $ | 586,203 |
| $ | 586,203 |
| $ | - |
| $ | - |
Investment securities available |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for sale (fair value) |
| 1,891,016 |
|
| 1,891,016 |
|
| 7,819 |
|
| 1,863,342 |
|
| 19,855 |
| 1,942,568 |
|
| 1,942,568 |
|
| 7,456 |
|
| 1,917,874 |
|
| 17,238 |
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
held to maturity (amortized cost) |
| 150,627 |
|
| 131,032 |
|
| - |
|
| - |
|
| 131,032 | ||||||||||||||
Investment securities held to maturity (amortized cost) |
| 144,815 |
|
| 125,658 |
|
| - |
|
| - |
|
| 125,658 | ||||||||||||||
Equity securities (fair value) |
| 43,119 |
|
| 43,119 |
|
| - |
|
| 43,119 |
|
| - |
| 44,530 |
|
| 44,530 |
|
| 418 |
|
| 44,112 |
|
| - |
Loans held for sale (lower of cost or market) |
| 32,980 |
|
| 34,979 |
|
| - |
|
| 25,237 |
|
| 9,742 |
| 43,186 |
|
| 43,831 |
|
| - |
|
| 27,720 |
|
| 16,111 |
Loans held for investment (amortized cost) |
| 8,850,476 |
|
|
|
|
|
|
|
|
|
|
|
|
| 8,858,123 |
|
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan and lease losses |
| (231,843) |
|
|
|
|
|
|
|
|
|
|
|
|
| (196,362) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment, net of allowance | $ | 8,618,633 |
|
| 8,372,865 |
|
| - |
|
| - |
|
| 8,372,865 | $ | 8,661,761 |
|
| 8,213,144 |
|
| - |
|
| - |
|
| 8,213,144 |
Derivatives, included in assets (fair value) |
| 312 |
|
| 312 |
|
| - |
|
| 312 |
|
| - |
| 1,018 |
|
| 1,018 |
|
| - |
|
| 1,018 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (amortized cost) |
| 9,022,631 |
|
| 9,026,600 |
|
| - |
|
| 9,026,600 |
|
| - |
| 8,994,714 |
|
| 9,005,679 |
|
| - |
|
| 9,005,679 |
|
| - |
Securities sold under |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase (amortized cost) |
| 300,000 |
|
| 325,913 |
|
| - |
|
| 325,913 |
|
| - |
| 150,086 |
|
| 169,366 |
|
| - |
|
| 169,366 |
|
| - |
Advances from FHLB (amortized cost) |
| 715,000 |
|
| 707,272 |
|
| - |
|
| 707,272 |
|
| - |
| 740,000 |
|
| 730,253 |
|
| - |
|
| 730,253 |
|
| - |
Other borrowings (amortized cost) |
| 208,635 |
|
| 189,424 |
|
| - |
|
| - |
|
| 189,424 |
| 184,150 |
|
| 177,201 |
|
| - |
|
| - |
|
| 177,201 |
Derivatives, included in liabilities (fair value) |
| 324 |
|
| 324 |
|
| - |
|
| 324 |
|
| - |
| 1,000 |
|
| 1,000 |
|
| - |
|
| 1,000 |
|
| - |
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, deposits base, and other customer relationship intangibles, are not considered financial instruments and are not included above. Accordingly, this fair value information is not intended to, and does not, represent the Corporation’s underlying value. Many of these assets and liabilities subject to the disclosure requirements are not actively traded, requiring management to estimate fair values. These estimates necessarily involve the use of 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.
8079
NOTE 2325 – REVENUE FROM CONTRACTS WITH CUSTOMERS
As noted in Note 1 – Basis of Presentation and Significant Accounting Policies, the Corporation adopted the provisions of ASU 2014-09,“Revenue from Contracts with Customers (Topic 606)” (“ASC Topic 606”), on January 1, 2018. Results for reporting periods beginning after December 31, 2017 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with ASC Topic 605, “Revenue Recognition.”
Revenue Recognition
In accordance with ASC Topic 606, “Revenues from Contracts with Customers,” revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration to which the Corporation expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of 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, and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Corporation then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Disaggregation of Revenue
The following table summarizes the Corporation’s revenue, which includes net interest income on financial instruments and non-interest income, disaggregated by type of service and business segmentssegment for the quarterquarters and nine-month periodperiods ended September 30, 2019 and 2018:
(In thousands) | (In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | ||||||||||||||||||||||||||||
Quarter ended September 30, 2019: | Quarter ended September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net interest income (1) | Net interest income (1) | $ | 16,991 |
| $ | 62,164 |
| $ | 25,699 |
| $ | 18,147 |
| $ | 14,977 |
| $ | 6,447 |
| $ | 144,425 | |||||||||||||||||||||
Service charges and fees on deposit accounts | Service charges and fees on deposit accounts |
| - |
|
| 3,771 |
|
| 1,443 |
|
| - |
|
| 172 |
|
| 722 |
|
| 6,108 | |||||||||||||||||||||
Insurance commissions | Insurance commissions |
| - |
|
| 1,854 |
|
| - |
|
| - |
|
| 22 |
|
| 107 |
|
| 1,983 | |||||||||||||||||||||
Merchant-related income | Merchant-related income |
| - |
|
| 1,017 |
|
| 271 |
|
| - |
|
| - |
|
| 310 |
|
| 1,598 | |||||||||||||||||||||
Credit and debit card fees | Credit and debit card fees |
| - |
|
| 4,897 |
|
| 283 |
|
| - |
|
| 212 |
|
| 525 |
|
| 5,917 | |||||||||||||||||||||
Other service charges and fees | Other service charges and fees |
| 67 |
|
| 828 |
|
| 300 |
|
| - |
|
| 169 |
|
| 76 |
|
| 1,440 | |||||||||||||||||||||
Not in scope of ASC Topic 606 (1) | Not in scope of ASC Topic 606 (1) |
| 4,333 |
|
| 338 |
|
| 34 |
|
| (433) |
|
| 65 |
|
| 18 |
|
| 4,355 | |||||||||||||||||||||
Total non-interest income | Total non-interest income |
| 4,400 |
|
| 12,705 |
|
| 2,331 |
|
| (433) |
|
| 640 |
|
| 1,758 |
|
| 21,401 | |||||||||||||||||||||
Total Revenue | Total Revenue | $ | 21,391 |
| $ | 74,869 |
| $ | 28,030 |
| $ | 17,714 |
| $ | 15,617 |
| $ | 8,205 |
| $ | 165,826 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
(In thousands) | (In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | (In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | ||||||||||||||
Quarter ended September 30, 2018: | Quarter ended September 30, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter ended September 30, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (1) | Net interest income (1) | $ | 19,593 |
| $ | 59,835 |
| $ | 19,711 |
| $ | 11,282 |
| $ | 15,080 |
| $ | 7,020 |
| $ | 132,521 | Net interest income (1) | $ | 19,593 |
| $ | 59,835 |
| $ | 19,711 |
| $ | 11,282 |
| $ | 15,080 |
| $ | 7,020 |
| $ | 132,521 |
Service charges and fees on deposit accounts | Service charges and fees on deposit accounts |
| - |
|
| 3,420 |
|
| 1,312 |
|
| - |
|
| 141 |
|
| 697 |
|
| 5,570 | Service charges and fees on deposit accounts |
| - |
|
| 3,420 |
|
| 1,312 |
|
| - |
|
| 141 |
|
| 697 |
|
| 5,570 |
Insurance commissions | Insurance commissions |
| - |
|
| 1,392 |
|
| - |
|
| - |
|
| 20 |
|
| 82 |
|
| 1,494 | Insurance commissions |
| - |
|
| 1,392 |
|
| - |
|
| - |
|
| 20 |
|
| 82 |
|
| 1,494 |
Merchant-related income | Merchant-related income |
| - |
|
| 1,003 |
|
| 205 |
|
| - |
|
| - |
|
| 198 |
|
| 1,406 | Merchant-related income |
| - |
|
| 1,003 |
|
| 205 |
|
| - |
|
| - |
|
| 198 |
|
| 1,406 |
Credit and debit card fees | Credit and debit card fees |
| - |
|
| 4,325 |
|
| 310 |
|
| - |
|
| 157 |
|
| 492 |
|
| 5,284 | Credit and debit card fees |
| - |
|
| 4,325 |
|
| 310 |
|
| - |
|
| 157 |
|
| 492 |
|
| 5,284 |
Other service charges and fees | Other service charges and fees |
| 135 |
|
| 1,798 |
|
| 180 |
|
| - |
|
| 247 |
|
| 100 |
|
| 2,460 | Other service charges and fees |
| 135 |
|
| 1,798 |
|
| 180 |
|
| - |
|
| 247 |
|
| 100 |
|
| 2,460 |
Not in scope of Topic 606 (1) |
| 4,417 |
|
| 385 |
|
| (2,692) |
|
| 151 |
|
| 59 |
|
| (11) |
|
| 2,309 | ||||||||||||||||||||||
Total non-interest income (loss) |
| 4,552 |
|
| 12,323 |
|
| (685) |
|
| 151 |
|
| 624 |
|
| 1,558 |
|
| 18,523 | ||||||||||||||||||||||
Total Revenue | $ | 24,145 |
| $ | 72,158 |
| $ | 19,026 |
| $ | 11,433 |
| $ | 15,704 |
| $ | 8,578 |
| $ | 151,044 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
(In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | |||||||||||||||||||||||||||||
Nine-month period ended September 30, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Net interest income (1) | $ | 60,900 |
| $ | 166,022 |
| $ | 59,074 |
| $ | 36,243 |
| $ | 43,525 |
| $ | 21,921 |
| $ | 387,685 | ||||||||||||||||||||||
Service charges and fees on deposit accounts |
| - |
|
| 9,864 |
|
| 3,634 |
|
| - |
|
| 417 |
|
| 2,087 |
|
| 16,002 | ||||||||||||||||||||||
Insurance commissions |
| - |
|
| 6,154 |
|
| - |
|
| - |
|
| 65 |
|
| 410 |
|
| 6,629 | ||||||||||||||||||||||
Merchant-related income |
| - |
|
| 2,612 |
|
| 567 |
|
| - |
|
| - |
|
| 591 |
|
| 3,770 | ||||||||||||||||||||||
Credit and debit card fees |
| - |
|
| 12,790 |
|
| 901 |
|
| - |
|
| 436 |
|
| 1,552 |
|
| 15,679 | ||||||||||||||||||||||
Other service charges and fees |
| 189 |
|
| 3,409 |
|
| 784 |
|
| 71 |
|
| 1,226 |
|
| 451 |
|
| 6,130 | ||||||||||||||||||||||
Not in scope of Topic 606 (1) |
| 13,113 |
|
| 675 |
|
| (3,101) |
|
| 2,529 |
|
| 348 |
|
| 5 |
|
| 13,569 | ||||||||||||||||||||||
Not in scope of ASC Topic 606 (1) | Not in scope of ASC Topic 606 (1) |
| 4,417 |
|
| 385 |
|
| (2,692) |
|
| 151 |
|
| 59 |
|
| (11) |
|
| 2,309 | |||||||||||||||||||||
Total non-interest income | Total non-interest income |
| 13,302 |
|
| 35,504 |
|
| 2,785 |
|
| 2,600 |
|
| 2,492 |
|
| 5,096 |
|
| 61,779 | Total non-interest income |
| 4,552 |
|
| 12,323 |
|
| (685) |
|
| 151 |
|
| 624 |
|
| 1,558 |
|
| 18,523 |
Total Revenue | Total Revenue | $ | 74,202 |
| $ | 201,526 |
| $ | 61,859 |
| $ | 38,843 |
| $ | 46,017 |
| $ | 27,017 |
| $ | 449,464 | Total Revenue | $ | 24,145 |
| $ | 72,158 |
| $ | 19,026 |
| $ | 11,433 |
| $ | 15,704 |
| $ | 8,578 |
| $ | 151,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Most of the Corporation’s revenue is not within the scope of ASU No. 2014-09, Revenue from Contracts with Customers. The guidance explicitly excludes net interest income from financial assets and liabilities, as well as other noninterest income from loans, leases, investment securities and derivative financial instruments. |
8180
(In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | ||||||||
Nine-month period ended September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net interest income (1) | $ | 52,051 |
| $ | 185,914 |
| $ | 69,171 |
| $ | 52,804 |
| $ | 47,328 |
| $ | 19,884 |
| $ | 427,152 | |
Service charges and fees on deposit accounts |
| - |
|
| 10,704 |
|
| 4,355 |
|
| - |
|
| 458 |
|
| 2,194 |
|
| 17,711 | |
Insurance commissions |
| - |
|
| 7,799 |
|
| - |
|
| - |
|
| 51 |
|
| 408 |
|
| 8,258 | |
Merchant-related income |
| - |
|
| 2,953 |
|
| 467 |
|
| - |
|
| - |
|
| 789 |
|
| 4,209 | |
Credit and debit card fees |
| - |
|
| 14,040 |
|
| 927 |
|
| - |
|
| 561 |
|
| 1,561 |
|
| 17,089 | |
Other service charges and fees |
| 141 |
|
| 2,651 |
|
| 1,042 |
|
| - |
|
| 526 |
|
| 875 |
|
| 5,235 | |
Not in scope of ASC Topic 606 (1) |
| 12,114 |
|
| 1,091 |
|
| 355 |
|
| (287) |
|
| 346 |
|
| 46 |
|
| 13,665 | |
Total non-interest income |
| 12,255 |
|
| 39,238 |
|
| 7,146 |
|
| (287) |
|
| 1,942 |
|
| 5,873 |
|
| 66,167 | |
Total Revenue | $ | 64,306 |
| $ | 225,152 |
| $ | 76,317 |
| $ | 52,517 |
| $ | 49,270 |
| $ | 25,757 |
| $ | 493,319 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | ||||||||
Nine-month period ended September 30, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net interest income (1) | $ | 60,900 |
| $ | 166,022 |
| $ | 59,074 |
| $ | 36,243 |
| $ | 43,525 |
| $ | 21,921 |
| $ | 387,685 | |
Service charges and fees on deposit accounts |
| - |
|
| 9,864 |
|
| 3,634 |
|
| - |
|
| 417 |
|
| 2,087 |
|
| 16,002 | |
Insurance commissions |
| - |
|
| 6,154 |
|
| - |
|
| - |
|
| 65 |
|
| 410 |
|
| 6,629 | |
Merchant-related income |
| - |
|
| 2,612 |
|
| 567 |
|
| - |
|
| - |
|
| 591 |
|
| 3,770 | |
Credit and debit card fees |
| - |
|
| 12,790 |
|
| 901 |
|
| - |
|
| 436 |
|
| 1,552 |
|
| 15,679 | |
Other service charges and fees |
| 189 |
|
| 3,409 |
|
| 784 |
|
| 71 |
|
| 1,226 |
|
| 451 |
|
| 6,130 | |
Not in scope of ASC Topic 606 (1) |
| 13,113 |
|
| 675 |
|
| (3,101) |
|
| 2,529 |
|
| 348 |
|
| 5 |
|
| 13,569 | |
Total non-interest income |
| 13,302 |
|
| 35,504 |
|
| 2,785 |
|
| 2,600 |
|
| 2,492 |
|
| 5,096 |
|
| 61,779 | |
Total Revenue | $ | 74,202 |
| $ | 201,526 |
| $ | 61,859 |
| $ | 38,843 |
| $ | 46,017 |
| $ | 27,017 |
| $ | 449,464 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 noninterest income from loans, leases, investment securities and derivative financial instruments. |
81
For the nine-month periodperiods ended September 30, 2019 and 2018, substantially all of the Corporation’s revenue underwithin the scope of ASC Topic 606 was related to performance obligations satisfied at a point in time.
The following is a discussion of the Corporation’s revenues that are within 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, non-sufficient fund fees, dormant fees and monthly service charges. Such fees are recognized concurrently with the event on a daily basis or on a monthly basis depending upon the customer’s cycle date. These depository arrangements are considered day-to-day contracts that do not extend beyond the services performed, as customers have the right to terminate these contracts with no penalty or, if any, nonsubstantive penalties. As a consequence, the income recognition under the standard is not different from the Corporation’s practice before the adoption of this guidance.
Insurance Commissions
For insurance commissions, which include regular and contingent commissions paid to the Corporation’s insurance agency, the agreements contain a performance obligation related to the sale/issuance of the policy and ancillary administrative post-issuance support. The performance obligation will beare satisfied aswhen the policies are issued, and revenue will beis recognized at that point in time. In addition, contingent commission income was found to be constrained, as defined under the new standard. Contingent commission income will beis included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or payments are received, which is consistent withreceived. For the Corporation’s practice beforequarter and nine-month period ended September 30, 2019, the adoptionCorporation recognized revenue of this guidance. For$0.3 million and $3.0 million, respectively, at the time that payments were confirmed and constraints were released, compared to zero and $2.4 million for the quarter and nine-month period ended September 30, 2018, the Corporation recognized revenue of $2.4 million as payments were received and constraints were released.respectively.
Merchant-related Income
For merchant-related income, the determination of which included the consideration of a 2015 sale of merchant contracts that involved sales of point of sale (“POS”) terminals and entry into a marketing alliance under a revenue-sharing agreement, the Corporation concluded that control of the POS terminals and merchant contracts was transferred to the customer at the contract’s inception. With respect to the related revenue-sharing agreement, the Corporation satisfies the marketing alliance performance obligation over the life of the contract, and the associated transaction price is recognized as the entity performs and any constraints over the variable consideration are resolved. There was no material change in the timing or measurement of revenues. The overall effect on an ongoing basis of the new revenue guidance, as compared the Corporation’s practice before the adoption of this guidance, is expected to be immaterial.
Credit and Debit Card Fees
Credit and debit card fees primarily represent revenues earned from interchange fees and ATM fees. Interchange and network revenues are earned on credit and debit card transactions conducted with payment networks. ATM fees are primarily earned as a result of surcharges assessed to non-FirstBank customers who use a FirstBank ATM. Such fees are generally recognized concurrently with the delivery of services on a daily basis. As a consequence, the income recognition is unchanged from the Corporation’s practice before the adoption of this guidance.
Other Fees
Other fees primarily include revenues generated from wire transfers, lockboxes, and bank issuances of checks. Such fees are recognized concurrently with the event or on a monthly basis.
82
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. As mentioneddiscussed above, during 2015, the Bank entered into a long-term strategic marketing alliance with another entity to which the Bank sold its merchant contracts portfolio and related POS terminals. Merchant services are marketed through FirstBank’s branches and offices in Puerto Rico and the Virgin Islands. Under the marketing and referralrevenue-sharing agreement, FirstBank shares with this entity revenues generated by the merchant contracts over the term of the 10-year agreement. As of September 30, 2018,2019, and December 31, 2017,2018, this contract liability amounted to $2.2$1.8 million and $2.4 $2.1 million, respectively, which will be recognized over the remaining term of the contract. For the quarterquarters and nine-month period ended September 30, 2019 and 2018, the Corporation recognized revenue and its contract liabilities decreased by approximately $0.1$0.1 million and $0.2$0.2 million, respectively, due to the completion of performance over time. There were no changes in contract liabilities due to changes in transaction price estimates.
A contract asset is the right to consideration for transferred goods or services when the amount is conditioned on something other than the passage of time. As of September 30, 2018,2019 and December 31, 2017,2018, 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 September 30, 2018.2019. 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.
NOTE 2426 – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
Supplemental statement of cash flows information is as follows:
| Nine-Month Period Ended September 30, | Nine-Month Period Ended September 30, | ||||||||
| 2018 |
| 2017 | 2019 |
| 2018 | ||||
| (In thousands) | (In thousands) | ||||||||
|
|
|
|
|
|
|
|
| ||
Cash paid for: |
|
|
|
|
|
|
|
| ||
Interest on borrowings | $ | 74,674 |
| $ | 68,869 | $ | 79,789 |
| $ | 74,674 |
Income tax |
| 5,290 |
| 3,205 |
| 10,238 |
| 5,290 | ||
Operating cash flow from operating leases |
| 7,619 |
| - | ||||||
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
| ||
Additions to OREO |
| 36,378 |
| 46,648 |
| 29,670 |
| 36,378 | ||
Additions to auto and other repossessed assets |
| 40,873 |
| 33,113 |
| 34,497 |
| 40,873 | ||
Capitalization of servicing assets |
| 3,028 |
| 2,757 |
| 2,855 |
| 3,028 | ||
Loan securitizations |
| 181,169 |
| 200,236 |
| 173,428 |
| 181,169 | ||
Loans held for investment transferred to held for sale |
| 90,319 |
| - |
| 20,928 |
| 90,319 | ||
Loans held for sale transferred to held for investment |
| 2,179 |
| 10,289 |
| - |
| 2,179 | ||
Property plant and equipment transferred to other assets |
| - |
| 1,185 | ||||||
|
|
|
|
| ||||||
|
|
|
|
| ||||||
ROU asset obtained in exchange for operating lease liabilities |
| 8,139 |
| - | ||||||
Adoption of lease accounting standard: |
|
|
|
| ||||||
ROU assets operating leases |
| 57,178 |
| - | ||||||
ROU liabilities operating leases |
| 59,818 |
| - |
83
NOTE 2527 – SEGMENT INFORMATION
Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer of the Corporation and, to a lesser extent, the Board of Directors 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 September 30, 2018,2019, the Corporation had six6 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 reportingstructure used to evaluate performance and to assess where to allocate resources. Other factors, such as the Corporation’s organizational chart, nature of the products, distribution channels, and the economic characteristics of the product,products, were also considered in the determination of the reportable segment.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 also lends funds to the Commercial and Corporate Banking, Mortgage Banking and Consumer (Retail) Banking segments to finance their lending resourcesactivities and borrows from those segments. The Consumer (Retail) Banking and the United States Operations segments also lend funds to the other segments. The interest rates charged or credited by Treasury and Investments, the Consumer (Retail) Banking, and the United States Operations segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment. The United States Operations segment consists of all banking activities conducted by FirstBank in the United States mainland, including commercial and retail banking services. The Virgin Islands Operations segment consists of all banking activities conducted by the Corporation in the USVI and BVI, including commercial and retail banking services.
The accounting policies of the segments are the same as those referred to in Note 1, – “Nature of Business and Summary of Significant Accounting Policies,” in the audited consolidated financial statements of the Corporation for the year ended December 31, 2018, which are included in the 20172018 Annual Report on Form 10-K.
The Corporation evaluates the performance of the segments based on net interest income, the provision for loan and lease losses, non-interest income, and direct non-interest expenses. The segments are also evaluated based on the average volume of their interest-earning assets less the allowance for loan and lease losses.
84
The following table presents information about the reportable segments: | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | |||||||
For the quarter ended September 30, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income | $ | 31,746 |
| $ | 46,052 |
| $ | 34,644 |
| $ | 15,911 |
| $ | 21,227 |
| $ | 7,912 |
| $ | 157,492 |
Net (charge) credit for transfer of funds |
| (12,153) |
|
| 20,947 |
|
| (14,933) |
|
| 6,446 |
|
| (307) |
|
| - |
|
| - |
Interest expense |
| - |
|
| (7,164) |
|
| - |
|
| (11,075) |
|
| (5,840) |
|
| (892) |
|
| (24,971) |
Net interest income |
| 19,593 |
|
| 59,835 |
|
| 19,711 |
|
| 11,282 |
|
| 15,080 |
|
| 7,020 |
|
| 132,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision) release for loan and lease losses |
| 635 |
|
| 2,485 |
|
| (10,684) |
|
| - |
|
| (5,130) |
|
| 1,170 |
|
| (11,524) |
Non-interest income (loss) |
| 4,552 |
|
| 12,323 |
|
| (685) |
|
| 151 |
|
| 624 |
|
| 1,558 |
|
| 18,523 |
Direct non-interest expenses |
| (12,001) |
|
| (28,210) |
|
| (7,911) |
|
| (878) |
|
| (8,279) |
|
| (7,194) |
|
| (64,473) |
Segment income | $ | 12,779 |
| $ | 46,433 |
| $ | 431 |
| $ | 10,555 |
| $ | 2,295 |
| $ | 2,554 |
| $ | 75,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets | $ | 2,248,691 |
| $ | 1,645,170 |
| $ | 2,486,910 |
| $ | 2,637,825 |
| $ | 1,752,007 |
| $ | 527,468 |
| $ | 11,298,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
(In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | |||||||
For the quarter ended September 30, 2017: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income | $ | 32,317 |
| $ | 43,769 |
| $ | 31,083 |
| $ | 13,374 |
| $ | 18,446 |
| $ | 9,006 |
| $ | 147,995 |
Net (charge) credit for transfer of funds |
| (11,268) |
|
| 9,351 |
|
| (8,748) |
|
| 11,198 |
|
| (533) |
|
| - |
|
| - |
Interest expense |
| - |
|
| (6,520) |
|
| - |
|
| (12,924) |
|
| (4,932) |
|
| (787) |
|
| (25,163) |
Net interest income |
| 21,049 |
|
| 46,600 |
|
| 22,335 |
|
| 11,648 |
|
| 12,981 |
|
| 8,219 |
|
| 122,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
| (20,495) |
|
| (33,067) |
|
| (13,621) |
|
| - |
|
| (789) |
|
| (7,041) |
|
| (75,013) |
Non-interest income |
| 2,908 |
|
| 11,242 |
|
| 1,014 |
|
| 1,459 |
|
| 697 |
|
| 1,325 |
|
| 18,645 |
Direct non-interest expenses |
| (8,174) |
|
| (27,193) |
|
| (8,102) |
|
| (1,014) |
|
| (7,605) |
|
| (7,254) |
|
| (59,342) |
Segment (loss) income | $ | (4,712) |
| $ | (2,418) |
| $ | 1,626 |
| $ | 12,093 |
| $ | 5,284 |
| $ | (4,751) |
| $ | 7,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets | $ | 2,434,963 |
| $ | 1,758,653 |
| $ | 2,477,266 |
| $ | 2,228,990 |
| $ | 1,581,726 |
| $ | 602,366 |
| $ | 11,083,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
The following table presents information about the reportable segments for the indicated periods: | The following table presents information about the reportable segments for the indicated periods: | |||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
(In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | ||||||||||||||
Nine-Month Period Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
For the quarter ended September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Interest income | $ | 95,927 |
| $ | 132,652 |
| $ | 102,255 |
| $ | 45,593 |
| $ | 61,634 |
| $ | 24,482 |
| $ | 462,543 | $ | 30,091 |
| $ | 55,772 |
| $ | 39,146 |
| $ | 15,671 |
| $ | 24,229 |
| $ | 7,386 |
| $ | 172,295 |
Net (charge) credit for transfer of funds |
| (35,027) |
| 54,233 |
| (43,181) |
| 25,125 |
| (1,150) |
| - |
| - |
| (13,100) |
| 16,557 |
| (13,447) |
| 11,411 |
| (1,421) |
| - |
| - | ||||||||||||
Interest expense |
| - |
|
| (20,863) |
|
| - |
|
| (34,475) |
|
| (16,959) |
|
| (2,561) |
|
| (74,858) |
| - |
|
| (10,165) |
|
| - |
|
| (8,935) |
|
| (7,831) |
|
| (939) |
|
| (27,870) |
Net interest income |
| 60,900 |
|
| 166,022 |
|
| 59,074 |
|
| 36,243 |
|
| 43,525 |
|
| 21,921 |
|
| 387,685 |
| 16,991 |
|
| 62,164 |
|
| 25,699 |
|
| 18,147 |
|
| 14,977 |
|
| 6,447 |
|
| 144,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
| (4,004) |
| (16,011) |
| (19,744) |
| - |
| (8,186) |
| (3,659) |
| (51,604) | ||||||||||||||||||||||||||
(Provision) release for loan and lease losses |
| (2,134) |
| (11,187) |
| 5,677 |
| - |
| (1,462) |
| 1,708 |
| (7,398) | ||||||||||||||||||||||||||
Non-interest income (loss) |
| 4,400 |
| 12,705 |
| 2,331 |
| (433) |
| 640 |
| 1,758 |
| 21,401 | ||||||||||||||||||||||||||
Direct non-interest expenses |
| (7,768) |
|
| (30,282) |
|
| (8,256) |
|
| (740) |
|
| (8,496) |
|
| (7,105) |
|
| (62,647) | ||||||||||||||||||||
Segment income | $ | 11,489 |
| $ | 33,400 |
| $ | 25,451 |
| $ | 16,974 |
| $ | 5,659 |
| $ | 2,808 |
| $ | 95,781 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Average earnings assets | $ | 2,141,383 |
| $ | 2,009,060 |
| $ | 2,487,409 |
| $ | 2,485,141 |
| $ | 1,963,559 |
| $ | 466,707 |
| $ | 11,553,259 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
(In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | |||||||||||||||||||||||||||
For the quarter ended September 30, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Interest income | $ | 31,746 |
| $ | 46,052 |
| $ | 34,644 |
| $ | 15,911 |
| $ | 21,227 |
| $ | 7,912 |
| $ | 157,492 | ||||||||||||||||||||
Net (charge) credit for transfer of funds |
| (12,153) |
| 20,947 |
| (14,933) |
| 6,446 |
| (307) |
| - |
| - | ||||||||||||||||||||||||||
Interest expense |
| - |
|
| (7,164) |
|
| - |
|
| (11,075) |
|
| (5,840) |
|
| (892) |
|
| (24,971) | ||||||||||||||||||||
Net interest income |
| 19,593 |
|
| 59,835 |
|
| 19,711 |
|
| 11,282 |
|
| 15,080 |
|
| 7,020 |
|
| 132,521 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
(Provision) release for loan and lease losses |
| 635 |
| 2,485 |
| (10,684) |
| - |
| (5,130) |
| 1,170 |
| (11,524) | ||||||||||||||||||||||||||
Non-interest income |
| 13,302 |
| 35,504 |
| 2,785 |
| 2,600 |
| 2,492 |
| 5,096 |
| 61,779 |
| 4,552 |
| 12,323 |
| (685) |
| 151 |
| 624 |
| 1,558 |
| 18,523 | ||||||||||||
Direct non-interest expenses |
| (30,192) |
|
| (84,173) |
|
| (22,710) |
|
| (2,777) |
|
| (24,768) |
|
| (22,224) |
|
| (186,844) |
| (12,001) |
|
| (28,210) |
|
| (7,911) |
|
| (878) |
|
| (8,279) |
|
| (7,194) |
|
| (64,473) |
Segment income | $ | 40,006 |
| $ | 101,342 |
| $ | 19,405 |
| $ | 36,066 |
| $ | 13,063 |
| $ | 1,134 |
| $ | 211,016 | $ | 12,779 |
| $ | 46,433 |
| $ | 431 |
| $ | 10,555 |
| $ | 2,295 |
| $ | 2,554 |
| $ | 75,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets | $ | 2,269,960 |
| $ | 1,601,812 |
| $ | 2,546,090 |
| $ | 2,597,967 |
| $ | 1,734,970 |
| $ | 546,610 |
| $ | 11,297,409 | $ | 2,248,691 |
| $ | 1,645,170 |
| $ | 2,486,910 |
| $ | 2,637,825 |
| $ | 1,752,007 |
| $ | 527,468 |
| $ | 11,298,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
(In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | |||||||||||||||||||||||||||
Nine-Month Period Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Interest income | $ | 99,361 |
| $ | 130,055 |
| $ | 90,858 |
| $ | 41,788 |
| $ | 50,910 |
| $ | 27,625 |
| $ | 440,597 | ||||||||||||||||||||
Net (charge) credit for transfer of funds |
| (34,466) |
| 20,799 |
| (27,071) |
| 41,858 |
| (1,120) |
| - |
| - | ||||||||||||||||||||||||||
Interest expense |
| - |
|
| (18,603) |
|
| - |
|
| (36,842) |
|
| (13,499) |
|
| (2,368) |
|
| (71,312) | ||||||||||||||||||||
Net interest income |
| 64,895 |
|
| 132,251 |
|
| 63,787 |
|
| 46,804 |
|
| 36,291 |
|
| 25,257 |
|
| 369,285 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Provision for loan and lease losses |
| (40,598) |
| (47,976) |
| (20,906) |
| - |
| (885) |
| (8,186) |
| (118,551) | ||||||||||||||||||||||||||
Non-interest income |
| 11,258 |
| 37,224 |
| 2,972 |
| (10,273) |
| 1,776 |
| 4,480 |
| 47,437 | ||||||||||||||||||||||||||
Direct non-interest expenses |
| (27,675) |
|
| (82,677) |
|
| (27,240) |
|
| (3,190) |
|
| (23,579) |
|
| (20,922) |
|
| (185,283) | ||||||||||||||||||||
Segment income | $ | 7,880 |
| $ | 38,822 |
| $ | 18,613 |
| $ | 33,341 |
| $ | 13,603 |
| $ | 629 |
| $ | 112,888 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Average earnings assets | $ | 2,469,037 |
| $ | 1,771,376 |
| $ | 2,500,180 |
| $ | 2,176,164 |
| $ | 1,492,727 |
| $ | 609,765 |
| $ | 11,019,249 |
(In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | |||||||
Nine-Month Period Ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income | $ | 91,493 |
| $ | 158,548 |
| $ | 114,643 |
| $ | 47,553 |
| $ | 73,350 |
| $ | 22,690 |
| $ | 508,277 |
Net (charge) credit for transfer of funds |
| (39,442) |
|
| 54,743 |
|
| (45,472) |
|
| 34,403 |
|
| (4,232) |
|
| - |
|
| - |
Interest expense |
| - |
|
| (27,377) |
|
| - |
|
| (29,152) |
|
| (21,790) |
|
| (2,806) |
|
| (81,125) |
Net interest income |
| 52,051 |
|
| 185,914 |
|
| 69,171 |
|
| 52,804 |
|
| 47,328 |
|
| 19,884 |
|
| 427,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision) release for loan and lease losses |
| (9,241) |
|
| (28,982) |
|
| 12,253 |
|
| - |
|
| (7,764) |
|
| 1,982 |
|
| (31,752) |
Non-interest income (loss) |
| 12,255 |
|
| 39,238 |
|
| 7,146 |
|
| (287) |
|
| 1,942 |
|
| 5,873 |
|
| 66,167 |
Direct non-interest expenses |
| (25,810) |
|
| (88,533) |
|
| (26,457) |
|
| (2,031) |
|
| (25,641) |
|
| (22,090) |
|
| (190,562) |
Segment income | $ | 29,255 |
| $ | 107,637 |
| $ | 62,113 |
| $ | 50,486 |
| $ | 15,865 |
| $ | 5,649 |
| $ | 271,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets | $ | 2,182,680 |
| $ | 1,914,372 |
| $ | 2,509,611 |
| $ | 2,429,576 |
| $ | 1,935,768 |
| $ | 470,236 |
| $ | 11,442,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
(In thousands) | Mortgage Banking |
| Consumer (Retail) Banking |
| Commercial and Corporate |
| Treasury and Investments |
| United States Operations |
| Virgin Islands Operations |
| Total | |||||||
Nine-Month Period Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income | $ | 95,927 |
| $ | 132,652 |
| $ | 102,255 |
| $ | 45,593 |
| $ | 61,634 |
| $ | 24,482 |
| $ | 462,543 |
Net (charge) credit for transfer of funds |
| (35,027) |
|
| 54,233 |
|
| (43,181) |
|
| 25,125 |
|
| (1,150) |
|
| - |
|
| - |
Interest expense |
| - |
|
| (20,863) |
|
| - |
|
| (34,475) |
|
| (16,959) |
|
| (2,561) |
|
| (74,858) |
Net interest income |
| 60,900 |
|
| 166,022 |
|
| 59,074 |
|
| 36,243 |
|
| 43,525 |
|
| 21,921 |
|
| 387,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
| (4,004) |
|
| (16,011) |
|
| (19,744) |
|
| - |
|
| (8,186) |
|
| (3,659) |
|
| (51,604) |
Non-interest income |
| 13,302 |
|
| 35,504 |
|
| 2,785 |
|
| 2,600 |
|
| 2,492 |
|
| 5,096 |
|
| 61,779 |
Direct non-interest expenses |
| (30,192) |
|
| (84,173) |
|
| (22,710) |
|
| (2,777) |
|
| (24,768) |
|
| (22,224) |
|
| (186,844) |
Segment income (loss) | $ | 40,006 |
| $ | 101,342 |
| $ | 19,405 |
| $ | 36,066 |
| $ | 13,063 |
| $ | 1,134 |
| $ | 211,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets | $ | 2,269,960 |
| $ | 1,601,812 |
| $ | 2,546,090 |
| $ | 2,597,967 |
| $ | 1,734,970 |
| $ | 546,610 |
| $ | 11,297,409 |
85
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals: | ||||||||||||||||||||||||||
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals for the indicated periods: | The following table presents a reconciliation of the reportable segment financial information to the consolidated totals for the indicated periods: | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
| Quarter Ended |
| Nine-Month Period Ended |
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||||||||||
|
|
| September 30, |
| September 30, |
|
| September 30, |
| September 30, | ||||||||||||||||
|
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income : | Net income : |
|
|
|
|
|
|
|
|
| Net income : |
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total income for segments and other | Total income for segments and other |
| $ | 75,047 |
| $ | 7,122 |
| $ | 211,016 |
| $ | 112,888 | Total income for segments and other |
| $ | 95,781 |
| $ | 75,047 |
| $ | 271,005 |
| $ | 211,016 |
Other operating expenses (1) | Other operating expenses (1) |
|
| (26,392) |
| (26,272) |
| (80,264) |
| (77,282) | Other operating expenses (1) |
|
| (30,186) |
| (26,392) |
| (85,180) |
| (80,264) | ||||||
Income (loss) before income taxes |
|
| 48,655 |
| (19,150) |
|
| 130,752 |
| 35,606 | ||||||||||||||||
Income tax (expense) benefit |
|
| (12,332) |
| 8,398 |
| (30,249) |
| 7,181 | |||||||||||||||||
Total consolidated net income (loss) |
| $ | 36,323 |
| $ | (10,752) |
| $ | 100,503 |
| $ | 42,787 | ||||||||||||||
Income before income taxes | Income before income taxes |
|
| 65,595 |
| 48,655 |
|
| 185,825 |
| 130,752 | |||||||||||||||
Income tax expense | Income tax expense |
|
| 19,268 |
| 12,332 |
| 54,897 |
| 30,249 | ||||||||||||||||
Total consolidated net income | Total consolidated net income |
| $ | 46,327 |
| $ | 36,323 |
| $ | 130,928 |
| $ | 100,503 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Average assets: | Average assets: |
|
|
|
|
|
|
|
|
| Average assets: |
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total average earning assets for segments | Total average earning assets for segments |
| $ | 11,298,071 |
| $ | 11,083,964 |
| $ | 11,297,409 |
| $ | 11,019,249 | Total average earning assets for segments |
| $ | 11,553,259 |
| $ | 11,298,071 |
| $ | 11,442,243 |
| $ | 11,297,409 |
Average non-earning assets | Average non-earning assets |
|
| 929,362 |
| 900,334 |
| 945,671 |
| 896,071 | Average non-earning assets |
|
| 933,250 |
| 929,362 |
| 964,799 |
| 945,671 | ||||||
Total consolidated average assets | Total consolidated average assets |
| $ | 12,227,433 |
| $ | 11,984,298 |
| $ | 12,243,080 |
| $ | 11,915,320 | Total consolidated average assets |
| $ | 12,486,509 |
| $ | 12,227,433 |
| $ | 12,407,042 |
| $ | 12,243,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
(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. | |||||||||||||||||||||||||
(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. | (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. | |||||||||||||||||||||||||
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86
NOTE 2628 – REGULATORY MATTERS, COMMITMENTS AND CONTINGENCIES
The Corporation and FirstBank are each subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Corporation’s financial statements and activities. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s and FirstBank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts and classificationsclassification are also subject to qualitative judgments and adjustment by the regulators with respect to minimum capital requirements, components, risk weightings, and other factors.
On October 3, 2017, the New York FED terminated the Written Agreement entered into on June 3, 2010 between the Corporation and the New York FED. However, the Corporation has agreed with the New York FED to continue to obtain the approval of the New York FED before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or trust preferred securities, incurring or guaranteeing debt or purchasing or redeeming any corporate stock.
Although the Corporation and FirstBank became subject to the U.S. Basel III capital rules (“Basel III rules”) beginning on January 1, 2015, certain requirementselements of the Basel III rules are being phased-in over several years and, in general, will be fully effective as of January 1, 2019. Certain elements of the new rules have been deferred by the federal banking agencies. The Corporation and FirstBank compute risk-weighted assets using the Standardized Approach required by the Basel III rules.
The Basel III rules require the Corporation to maintain an additional capital conservation buffer of 2.5%2.5% to avoid limitations on both (i) capital distributions (e.g.(e.g., repurchases of capital instruments, dividends and interest payments on capital instruments), and (ii) discretionary bonus payments to executive officers and heads of major business lines. The phase-in of the capital conservation buffer began on January 1, 2016 with a first year requirement of 0.625%0.625% of additional Common Equity Tier 1 Capital (“CET1”), which is beingwas progressively increased over a four-year period, increasing by that same percentage amount on each subsequent January 1 until it reachesreached the fully phased-in 2.5% CET1 requirement on January 1, 2019.
Under the fully phased-in Basel III rules, in order to be considered adequately capitalized and not subject to the above-described limitations, the Corporation will beis required to maintain: (i) a minimum CET1 capital to risk-weighted assets ratio of at least 4.5%4.5%, plus the 2.5% capital“capital conservation buffer,” resulting in a required minimum CET1 ratio of at least 7%,7%; (ii) a minimum ratio of total Tier 1 capital to risk-weighted assets of at least 6.0%6.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum Tier 1 capital ratio of 8.5%,8.5%; (iii) a minimum ratio of total Tier 1 plus Tier 2 capital to risk-weighted assets of at least 8.0%8.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum total capital ratio of 10.5%,10.5%; and (iv) a required minimum leverage ratio of 4%4%, calculated as the ratio of Tier 1 capital to average on-balance sheet (non-risk adjusted) assets.
87
In addition, as required under the Basel III rules, the Corporation’s trust preferred securities (“TRuPs”)TRuPs were fully phased outphased-out from Tier 1 capital as of January 1, 2016. However, the Corporation’s TRuPs may continue to be included in Tier 2 capital until the instruments are redeemed or mature.
On November 21, 2017, theThe Federal Reserve Board, the FDIC, and the Office of the Comptroller of the Currency finalized an extension(collectively “the agencies”) have issued several rulemakings over the last two years to simplify certain aspects of the phase-in ofcapital rule. For example, the capital rule included transitional arrangements for certain Basel IIIrequirements. Under such transitional arrangements in the capital rules for banks not using the Basel advanced approaches. The extension, which was effective January 1, 2018, pauses the full transition to the Basel III treatmentrule, any amount of mortgage servicing assets, certaintemporary difference deferred tax assets, and investments in the capital of unconsolidated financial institutions that a banking organization did not deduct from common equity tier 1 capital was risk weighted at 100 percent until January 1, 2018. In 2017, the agencies adopted a transition rule to allow non-advanced approaches banking organizations, such as the Corporation and minority interests, pendingFirstBank, to continue to apply the banking agencies’ broader efforts, announcedtransition treatment in Septembereffect in 2017 to simplify(including the 100 percent risk weight for mortgage servicing assets, temporary difference deferred tax assets, and significant investments in the capital of unconsolidated financial institutions) while the agencies considered the simplifications proposal.
On July 9, 2019, the agencies adopted a final rule that supersedes the regulatory capital transition rules and eliminates the transition provisions that applyare no longer operative. The final rule will be generally effective April 1, 2020 and eliminates: (i) the 10 percent common equity tier 1 capital deduction threshold, which applies individually to banking organizationsholdings of mortgage servicing assets, temporary difference deferred tax assets, and significant investments in the capital of unconsolidated financial institutions in the form of common stock; (ii) the 15 percent common equity tier 1 capital deduction threshold, which applies to the aggregate amount of such items; (iii) the 10 percent threshold for non-significant investments, which applies to holdings of regulatory capital of unconsolidated financial institutions; and (iv) the deduction treatment for significant investments in the capital of unconsolidated financial institutions that are not subject toin the advancedform of common stock. Instead of the current capital rule's treatments for mortgage servicing assets, temporary difference deferred tax assets, and investments in the capital of unconsolidated financial institutions, the final rule requires non-advanced approaches capital rules. Because the advanced approaches capital rules apply to banking organizations with more than $250 billionto deduct from common equity tier 1 capital any amount of mortgage servicing assets, temporary difference deferred tax assets, and investments in total consolidatedthe capital of unconsolidated financial institutions that individually exceeds 25 percent of common equity tier 1 capital of the banking organization (the 25 percent common equity tier 1 capital deduction threshold). The final rule retains the deferred requirement that a banking organization must apply a 250 percent risk weight to non-deducted mortgage servicing assets or at least $10 billion in total on-balance sheet foreign exposure, the extension relief applies broadly to community, midsize, and regional banks, including the Corporation and FirstBank.temporary difference deferred tax assets.
Please refer to the discussion in “Part I, – Item 1, – Business – Supervision and Regulation,” included in the 20172018 Annual Report on Form 10-K for a more complete discussion of supervision and regulatory matters and activities that affect the Corporation and its subsidiaries.
87
subsidiaries; also refer to Note 1 for a preliminary estimate of the effect of the adoption of CECL in the regulatory capital ratios.
The regulatory capital positions of the Corporation and FirstBank as of September 30, 2018 and December 31, 2017 were as follows: | ||||||||||||||||
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| Regulatory Requirements | |||||||||||||
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| Actual |
| For Capital Adequacy Purposes |
| To be Well-Capitalized-General Thresholds | |||||||||
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| Amount |
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| Amount |
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| Amount |
| Ratio | |||
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(Dollars in thousands) |
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As of September 30, 2018 |
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Total Capital (to |
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Risk-Weighted Assets) |
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First BanCorp. | $ | 2,081,558 |
| 23.85% |
| $ | 698,271 |
| 8.0% |
|
| N/A |
| N/A | ||
FirstBank | $ | 2,039,091 |
| 23.36% |
| $ | 698,276 |
| 8.0% |
| $ | 872,845 |
| 10.0% | ||
Common Equity Tier 1 Capital |
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(to Risk-Weighted Assets) |
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First BanCorp. | $ | 1,756,702 |
| 20.13% |
| $ | 392,778 |
| 4.5% |
|
| N/A |
| N/A | ||
FirstBank | $ | 1,620,964 |
| 18.57% |
| $ | 392,780 |
| 4.5% |
| $ | 567,350 |
| 6.5% | ||
Tier I Capital (to |
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Risk-Weighted Assets) |
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First BanCorp. | $ | 1,792,806 |
| 20.54% |
| $ | 523,704 |
| 6.0% |
|
| N/A |
| N/A | ||
FirstBank | $ | 1,928,964 |
| 22.10% |
| $ | 523,707 |
| 6.0% |
| $ | 698,276 |
| 8.0% | ||
Leverage ratio |
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First BanCorp. | $ | 1,792,806 |
| 14.85% |
| $ | 483,056 |
| 4.0% |
|
| N/A |
| N/A | ||
FirstBank | $ | 1,928,964 |
| 15.99% |
| $ | 482,619 |
| 4.0% |
| $ | 603,274 |
| 5.0% | ||
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As of December 31, 2017 |
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Total Capital (to |
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Risk-Weighted Assets) |
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First BanCorp. | $ | 1,989,873 |
| 22.53% |
| $ | 706,432 |
| 8.0% |
|
| N/A |
| N/A | ||
FirstBank | $ | 1,947,627 |
| 22.06% |
| $ | 706,218 |
| 8.0% |
| $ | 882,772 |
| 10.0% | ||
Common Equity Tier 1 Capital |
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(to Risk-Weighted Assets) |
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First BanCorp. | $ | 1,674,164 |
| 18.96% |
| $ | 397,368 |
| 4.5% |
|
| N/A |
| N/A | ||
FirstBank | $ | 1,562,431 |
| 17.70% |
| $ | 397,248 |
| 4.5% |
| $ | 573,802 |
| 6.5% | ||
Tier I Capital (to |
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Risk-Weighted Assets) |
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First BanCorp. | $ | 1,675,282 |
| 18.97% |
| $ | 529,824 |
| 6.0% |
|
| N/A |
| N/A | ||
FirstBank | $ | 1,835,445 |
| 20.79% |
| $ | 529,663 |
| 6.0% |
| $ | 706,218 |
| 8.0% | ||
Leverage ratio |
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First BanCorp. | $ | 1,675,282 |
| 14.03% |
| $ | 477,643 |
| 4.0% |
|
| N/A |
| N/A | ||
FirstBank | $ | 1,835,445 |
| 15.39% |
| $ | 477,056 |
| 4.0% |
| $ | 596,320 |
| 5.0% | ||
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88
88
The regulatory capital positions of the Corporation and FirstBank as of September 30, 2019 and December 31, 2018 were as follows: | ||||||||||||||||
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| Regulatory Requirements | |||||||||||||
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| Actual |
| For Capital Adequacy Purposes |
| To be Well-Capitalized-General Thresholds | |||||||||
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| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | |||
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(Dollars in thousands) |
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As of September 30, 2019 |
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Total Capital (to |
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Risk-Weighted Assets) |
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First BanCorp. | $ | 2,255,216 |
| 25.27% |
| $ | 713,860 |
| 8.0% |
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| N/A |
| N/A | ||
FirstBank | $ | 2,211,861 |
| 24.78% |
| $ | 714,181 |
| 8.0% |
| $ | 892,726 |
| 10.0% | ||
Common Equity Tier 1 Capital |
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(to Risk-Weighted Assets) |
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First BanCorp. | $ | 1,928,388 |
| 21.61% |
| $ | 401,546 |
| 4.5% |
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| N/A |
| N/A | ||
FirstBank | $ | 1,791,714 |
| 20.07% |
| $ | 401,727 |
| 4.5% |
| $ | 580,272 |
| 6.5% | ||
Tier I Capital (to |
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Risk-Weighted Assets) |
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First BanCorp. | $ | 1,964,492 |
| 22.02% |
| $ | 535,395 |
| 6.0% |
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| N/A |
| N/A | ||
FirstBank | $ | 2,099,714 |
| 23.52% |
| $ | 535,636 |
| 6.0% |
| $ | 714,181 |
| 8.0% | ||
Leverage ratio |
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First BanCorp. | $ | 1,964,492 |
| 16.04% |
| $ | 489,879 |
| 4.0% |
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| N/A |
| N/A | ||
FirstBank | $ | 2,099,714 |
| 17.16% |
| $ | 489,492 |
| 4.0% |
| $ | 611,865 |
| 5.0% | ||
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As of December 31, 2018 |
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Total Capital (to |
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Risk-Weighted Assets) |
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First BanCorp. | $ | 2,118,940 |
| 24.00% |
| $ | 706,418 |
| 8.0% |
|
| N/A |
| N/A | ||
FirstBank | $ | 2,075,894 |
| 23.51% |
| $ | 706,426 |
| 8.0% |
| $ | 883,032 |
| 10.0% | ||
Common Equity Tier 1 Capital |
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(to Risk-Weighted Assets) |
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First BanCorp. | $ | 1,792,880 |
| 20.30% |
| $ | 397,360 |
| 4.5% |
|
| N/A |
| N/A | ||
FirstBank | $ | 1,656,563 |
| 18.76% |
| $ | 397,365 |
| 4.5% |
| $ | 573,971 |
| 6.5% | ||
Tier I Capital (to |
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Risk-Weighted Assets) |
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First BanCorp. | $ | 1,828,984 |
| 20.71% |
| $ | 529,814 |
| 6.0% |
|
| N/A |
| N/A | ||
FirstBank | $ | 1,964,563 |
| 22.25% |
| $ | 529,819 |
| 6.0% |
| $ | 706,426 |
| 8.0% | ||
Leverage ratio |
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First BanCorp. | $ | 1,828,984 |
| 15.37% |
| $ | 475,924 |
| 4.0% |
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| N/A |
| N/A | ||
FirstBank | $ | 1,964,563 |
| 16.53% |
| $ | 475,490 |
| 4.0% |
| $ | 594,362 |
| 5.0% | ||
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89
The Corporation enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and commitments to sell mortgage loans at fair value.credit. As of September 30, 2018,2019, commitments to extend credit amounted to approximately $1.3 billion, of which $664.4$665.2 million relatesrelated to credit card loans. Commercial and Financialfinancial standby letters of credit amounted to approximately $72.5$98.5 million. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to making additional disbursements. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any time and without cause.
As of September 30, 2018,2019, 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 cases, mattersproceedings, claims and proceedings,other loss contingencies utilizing the latest information available. For cases, matterslegal proceedings, claims and proceedingsother 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 cases, matters orlegal 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 cases, matters,proceedings, claims and proceedingsother loss contingencies is inherently uncertain, based on information currently available, Managementmanagement believes that the final disposition of the Corporation’s legal cases, matters or proceedings, claims and other loss contingencies, to the extent not previously provided for, will not have a material negative adverse effect on the Corporation’s consolidated financial position as a whole.
If management believes that, based on available information, it is at least reasonably possible that a material loss (or additional material loss in excess of any accrual) will be incurred in connection with any legal actions,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 September 30, 2018,2019, no such disclosures were necessary. However, in the event
90
Set forth below is a description of unexpected future developments, it is possible that the ultimate resolution of these cases, matters and proceedings, if unfavorable, may be material to the Corporation’s consolidated financial position on a particular period.significant legal proceedings:
Ramírez Torres, et al. v. Banco Popular de Puerto Rico, et al.FirstBank Puerto Rico has beenwas named Defendanta defendant in this Class Action Complaint,a punitive class action complaint (the “Complaint”), filed ofin February 17, 2017 at the Court of First Instance in San Juan, Puerto Rico. The Complaint seekssought damages and preliminary injunctive relief on behalf of the purported class (“Plaintiffs”) against FirstBank, Banco Popular de Puerto Rico and other financial institutions with insurance agency subsidiaries in Puerto Rico.Rico (“Defendants”). Plaintiffs allegealleged that Defendants havehad been unjustly enriched by failing to reimburse them for "good experience" commissions allegedly paid by Antilles Insurance Company and Puerto Rico Home Insurance Company. OnIn March 30, 2017, FirstBank Puerto Rico filed a Motion to Dismiss and a Motion for Declaratory Judgment and Third PartyThird-Party Complaint (the “Third-Party Complaint”) against Antilles Insurance Company and the Insurance Commissioner's Office. All of the other Defendants filed Motionsmotions to Dismiss.dismiss the Complaint and opposed the request for preliminary injunctive relief. Antilles Insurance Company filed a Motionmotion against the Third PartyThird-Party Complaint filed by FirstBank, Puerto Rico, which FirstBank Puerto Rico opposed. The Insurance Commissioner's Office filed a Motion for Summary Judgment. OnIn July 28, 2017, the Court issued a Judgment granting the Motions to Dismiss filed by Defendants and dismissing the Complaint with prejudice, except the Third PartyThird-Party Complaint filed by FirstBank, Puerto Rico which was dismissed without prejudice. OnIn August 30, 2017, Plaintiffs filed an Appealappeal before the Puerto Rico Court of Appeals and FirstBank Puerto Ricoand the other Defendants filed its Oppositiontheir Oppositions to Plaintiffs Appeal. OnPlaintiffs’ appeal. In March 20, 2018, the Court of Appeals entered a Judgment revoking the lower court judgment. Oriental Bankcourt’s Judgment. One Defendant filed for Reconsideration,reconsideration, which was denied. Alldenied, and all the other Defendants filed writstheir respective Petitions of Certiorari before the Puerto Rico Supreme Court, on May 29, 2018. On June 26, 2018, the Puerto Rico Supreme Court issued Resolutions denying all writs of Certiorari filed by Defendants. Oriental Bank and Banco Popular were the only two banks thatwhich also denied review. Defendants subsequently filed for reconsideration. All Motions for Reconsideration were denied, on October 10, 2018. Oriental Bank filed a Second Motion for Reconsideration on October 12, 2018. Therefore,and the case will not bewas remanded to the Court of First Instance for the continuation of proceedings until Puerto Rico Supremeproceedings. A Class certification hearing scheduled for May 2, 2019 was changed to a status hearing. Parties discussed their respective positions, specifically that prior to any other hearing, it was imperative that the Court issues resolutionresolved FirstBank’s motion seeking Declaratory Judgment. Memorandums of law regarding Oriental Bank’s Second Motionthe validity of the Antilles Insurance policy endorsement were filed on June 3, 2019 in compliance with a court order. A preliminary injunction hearing was held in September 2019. Following the hearing, Plaintiffs sought to voluntarily dismiss the Complaint against FirstBank and FirstBank Insurance Agency with prejudice and FirstBank agreed to voluntarily dismiss its Third-Party Complaint against Antilles Insurance Company and the Insurance Commissioner's Office without prejudice. Joint motions for Reconsideration. the voluntary dismissal of said complaints were filed. On September 12, 2019, the Court entered judgment dismissing the Complaint and Third-Party Complaint as requested by the parties.
8991
NOTE 2729 – FIRST BANCORP. (HOLDING COMPANY ONLY) FINANCIAL INFORMATION
The following condensed financial information presents the financial position of the Holding Company only as of September 30, 20182019 and December 31, 20172018, and the results of its operations for the quarters and nine-month periods ended September 30, 20182019 and 2017.2018.
Statements of Financial Condition | Statements of Financial Condition | Statements of Financial Condition | ||||||||
(Unaudited) | (Unaudited) | |||||||||
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| As of September 30, |
| As of December 31, | As of September 30, |
| As of December 31, | ||||
| 2018 |
| 2017 | 2019 |
| 2018 | ||||
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(In thousands) |
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Assets |
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Cash and due from banks | $ | 20,940 |
| $ | 20,864 | $ | 20,047 |
| $ | 10,984 |
Money market investments |
| 6,111 |
| 6,111 |
| 6,211 |
| 6,111 | ||
Other investment securities |
| 285 |
| 285 |
| 285 |
| 285 | ||
Loans held for investment, net |
| - |
| 191 | ||||||
Investment in FirstBank Puerto Rico, at equity |
| 2,062,908 |
| 2,028,641 | ||||||
Investment in FirstBank Insurance Agency, at equity |
| 16,738 |
| 12,400 | ||||||
Investment in First Bank Puerto Rico, at equity |
| 2,335,304 |
| 2,179,655 | ||||||
Investment in First Bank Insurance Agency, at equity |
| 23,770 |
| 17,780 | ||||||
Investment in FBP Statutory Trust I |
| 1,963 |
| 2,698 |
| 1,963 |
| 1,963 | ||
Investment in FBP Statutory Trust II |
| 3,561 |
| 3,561 |
| 3,561 |
| 3,561 | ||
Other assets |
| 2,329 |
|
| 3,799 |
| 4,667 |
|
| 12,219 |
Total assets | $ | 2,114,835 |
| $ | 2,078,550 | $ | 2,395,808 |
| $ | 2,232,558 |
Liabilities and Stockholdersʼ Equity |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
| ||
Other borrowings | $ | 184,150 |
| $ | 208,635 | $ | 184,150 |
| $ | 184,150 |
Accounts payable and other liabilities |
| 3,270 |
|
| 818 |
| 11,063 |
|
| 3,704 |
Total liabilities |
| 187,420 |
|
| 209,453 |
| 195,213 |
|
| 187,854 |
Stockholdersʼ equity |
| 1,927,415 |
|
| 1,869,097 |
| 2,200,595 |
|
| 2,044,704 |
Total liabilities and stockholdersʼ equity | $ | 2,114,835 |
| $ | 2,078,550 | $ | 2,395,808 |
| $ | 2,232,558 |
9092
Statements of Income (Loss) |
| |||||||||||||||||||||||
Statements of Income | Statements of Income |
| ||||||||||||||||||||||
(Unaudited) | (Unaudited) |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Quarter Ended |
| Nine-Month Period Ended |
| Quarter Ended |
| Nine-Month Period Ended |
| ||||||||||||||||
| September 30, |
| September 30, |
| September 30, |
| September 30, |
| ||||||||||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||||||
| (In thousands) | |||||||||||||||||||||||
(In thousands) |
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Interest income on money market investments | $ | 5 |
| $ | 5 |
| $ | 15 |
| $ | 15 |
| $ | 44 |
| $ | 5 |
| $ | 189 |
| $ | 15 |
|
Interest income on loans |
| 105 |
| - |
| 105 |
| - |
|
| - |
| 105 |
| - |
| 105 |
| ||||||
Dividend income from banking subsidiary |
| 2,900 |
| 1,800 |
| 28,284 |
| 5,400 |
| |||||||||||||||
Dividend income from non-banking subsidiaries |
| - |
| 3,000 |
| - |
| 3,000 |
| |||||||||||||||
Dividend income from banking subsidiaries |
| 7,750 |
| 2,900 |
| 28,500 |
| 28,284 |
| |||||||||||||||
Other income |
| 70 |
|
| 68 |
|
| 203 |
|
| 195 |
|
| 70 |
|
| 70 |
|
| 216 |
|
| 203 |
|
|
| 3,080 |
|
| 4,873 |
|
| 28,607 |
|
| 8,610 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7,864 |
|
| 3,080 |
|
| 28,905 |
|
| 28,607 |
|
Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Other borrowings |
| 2,315 |
| 2,139 |
| 6,635 |
| 6,166 |
|
| 2,331 |
| 2,315 |
| 7,210 |
| 6,635 |
| ||||||
Other operating expenses |
| 624 |
|
| 814 |
|
| 1,851 |
|
| 2,480 |
|
| 644 |
|
| 624 |
|
| 1,749 |
|
| 1,851 |
|
|
| 2,939 |
|
| 2,953 |
|
| 8,486 |
|
| 8,646 |
|
| 2,975 |
|
| 2,939 |
|
| 8,959 |
|
| 8,486 |
|
Gain on early extinguishment of debt |
| - |
|
| - |
|
| - |
|
| 2,316 |
| ||||||||||||
Income before income taxes and equity |
|
|
|
|
|
|
|
|
| |||||||||||||||
in undistributed earnings of subsidiaries |
| 4,889 |
| 141 |
| 19,946 |
| 22,437 |
| |||||||||||||||
Income tax provision |
| 1,037 |
| - |
| 2,376 |
| - |
| |||||||||||||||
Equity in undistributed earnings of subsidiaries |
| 42,475 |
|
| 36,182 |
|
| 113,358 |
|
| 78,066 |
| ||||||||||||
Net income | $ | 46,327 |
| $ | 36,323 |
| $ | 130,928 |
| $ | 100,503 |
| ||||||||||||
Other comprehensive income (loss), net of tax |
| 7,562 |
|
| (10,780) |
|
| 45,539 |
|
| (42,272) |
| ||||||||||||
Comprehensive income | $ | 53,889 |
| $ | 25,543 |
| $ | 176,467 |
| $ | 58,231 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Gain on early extinguishment of debt |
| - |
| 1,391 |
| 2,316 |
| 1,391 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Income before income taxes and equity |
|
|
|
|
|
|
|
|
| |||||||||||||||
in undistributed earnings (losses) of subsidiaries |
| 141 |
| 3,311 |
| 22,437 |
| 1,355 |
| |||||||||||||||
Income tax expense |
| - |
| (45) |
| - |
| (45) |
| |||||||||||||||
Equity in undistributed earnings (losses) of subsidiaries |
| 36,182 |
|
| (14,018) |
|
| 78,066 |
|
| 41,477 |
| ||||||||||||
Net income (loss) | $ | 36,323 |
| $ | (10,752) |
| $ | 100,503 |
| $ | 42,787 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Other Comprehensive (loss) income, net of tax |
| (10,780) |
|
| 3,719 |
|
| (42,272) |
|
| 23,480 |
| ||||||||||||
Comprehensive income (loss) | $ | 25,543 |
| $ | (7,033) |
| $ | 58,231 |
| $ | 66,267 |
| ||||||||||||
|
|
The Corporation has performed an evaluation of events occurringsubsequent to September 30, 2018;2019; management has determined that, other than the execution of the stock purchase agreement to acquire BSPR, which is disclosed on Note 2 above, there were no events occurring in this period that require disclosure in or adjustment to the accompanying financial statements.
9193
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
SELECTED FINANCIAL DATA | SELECTED FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
| SELECTED FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
| ||
|
|
| Quarter ended |
|
| Nine-Month Period Ended |
|
| Quarter ended |
| Nine-Month Period Ended | |||||||||||||||
(In thousands, except for per share and financial ratios) | September 30, |
| September 30, | |||||||||||||||||||||||
(In thousands, except for per share data and financial ratios) | (In thousands, except for per share data and financial ratios) | September 30, |
| September 30, | ||||||||||||||||||||||
|
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||||
Condensed Income Statements: | Condensed Income Statements: |
|
|
|
|
|
|
|
|
|
|
| Condensed Income Statements: |
|
|
|
|
|
|
|
|
|
|
| ||
| Total interest income | $ | 157,492 |
| $ | 147,995 |
| $ | 462,543 |
| $ | 440,597 | Total interest income | $ | 172,295 |
| $ | 157,492 |
| $ | 508,277 |
| $ | 462,543 | ||
| Total interest expense |
| 24,971 |
|
| 25,163 |
|
| 74,858 |
|
| 71,312 | Total interest expense |
| 27,870 |
|
| 24,971 |
|
| 81,125 |
|
| 74,858 | ||
| Net interest income |
| 132,521 |
|
| 122,832 |
|
| 387,685 |
|
| 369,285 | Net interest income |
| 144,425 |
|
| 132,521 |
|
| 427,152 |
|
| 387,685 | ||
| Provision for loan and lease losses |
| 11,524 |
|
| 75,013 |
|
| 51,604 |
|
| 118,551 | Provision for loan and lease losses |
| 7,398 |
|
| 11,524 |
|
| 31,752 |
|
| 51,604 | ||
| Non-interest income |
| 18,523 |
|
| 18,645 |
|
| 61,779 |
|
| 47,437 | Non-interest income |
| 21,401 |
|
| 18,523 |
|
| 66,167 |
|
| 61,779 | ||
| Non-interest expenses |
| 90,865 |
|
| 85,614 |
|
| 267,108 |
|
| 262,565 | Non-interest expenses |
| 92,833 |
|
| 90,865 |
|
| 275,742 |
|
| 267,108 | ||
| Income (loss) before income taxes |
| 48,655 |
|
| (19,150) |
|
| 130,752 |
|
| 35,606 | Income before income taxes |
| 65,595 |
|
| 48,655 |
|
| 185,825 |
|
| 130,752 | ||
| Income tax (expense) benefit |
| (12,332) |
|
| 8,398 |
|
| (30,249) |
|
| 7,181 | Income tax expense |
| 19,268 |
|
| 12,332 |
|
| 54,897 |
|
| 30,249 | ||
| Net income (loss) |
| 36,323 |
|
| (10,752) |
|
| 100,503 |
|
| 42,787 | Net income |
| 46,327 |
|
| 36,323 |
|
| 130,928 |
|
| 100,503 | ||
| Net income (loss) attributable to common stockholders |
| 35,654 |
|
| (11,421) |
|
| 98,496 |
|
| 40,780 | Net income attributable to common stockholders |
| 45,658 |
|
| 35,654 |
|
| 128,921 |
|
| 98,496 | ||
Per Common Share Results: | Per Common Share Results: |
|
|
|
|
|
|
|
|
|
|
| Per Common Share Results: |
|
|
|
|
|
|
|
|
|
|
| ||
| Net earnings (loss) per common share-basic | $ | 0.16 |
| $ | (0.05) |
| $ | 0.46 |
| $ | 0.19 | Net earnings per common share-basic | $ | 0.21 |
| $ | 0.16 |
| $ | 0.60 |
| $ | 0.46 | ||
| Net earnings (loss) per common share-diluted | $ | 0.16 |
| $ | (0.05) |
| $ | 0.45 |
| $ | 0.19 | Net earnings per common share-diluted | $ | 0.21 |
| $ | 0.16 |
| $ | 0.59 |
| $ | 0.45 | ||
| Cash dividends declared | $ | - |
| $ | - |
| $ | - |
| $ | - | Cash dividends declared | $ | 0.03 |
| $ | - |
| $ | 0.09 |
| $ | - | ||
| Average shares outstanding |
| 216,149 |
|
| 214,187 |
|
| 215,516 |
|
| 213,812 | Average shares outstanding |
| 216,690 |
|
| 216,149 |
|
| 216,569 |
|
| 215,516 | ||
| Average shares outstanding diluted |
| 216,775 |
|
| 214,187 |
|
| 216,584 |
|
| 216,134 | Average shares outstanding diluted |
| 217,227 |
|
| 216,775 |
|
| 217,053 |
|
| 216,584 | ||
| Book value per common share | $ | 8.71 |
| $ | 8.41 |
| $ | 8.71 |
| $ | 8.41 | Book value per common share | $ | 9.96 |
| $ | 8.71 |
| $ | 9.96 |
| $ | 8.71 | ||
| Tangible book value per common share (1) | $ | 8.52 |
| $ | 8.21 |
| $ | 8.52 |
| $ | 8.21 | Tangible book value per common share (1) | $ | 9.79 |
| $ | 8.52 |
| $ | 9.79 |
| $ | 8.52 | ||
Selected Financial Ratios (In Percent): | Selected Financial Ratios (In Percent): |
|
|
|
|
|
|
|
|
|
|
| Selected Financial Ratios (In Percent): |
|
|
|
|
|
|
|
|
|
|
| ||
Profitability: | Profitability: |
|
|
|
|
|
|
|
|
|
|
| Profitability: |
|
|
|
|
|
|
|
|
|
|
| ||
| Return on Average Assets |
| 1.18 |
|
| (0.36) |
|
| 1.10 |
|
| 0.48 | Return on Average Assets |
| 1.47 |
|
| 1.18 |
|
| 1.41 |
|
| 1.10 | ||
| Interest Rate Spread |
| 4.13 |
|
| 4.03 |
|
| 4.09 |
|
| 4.11 | Interest Rate Spread |
| 4.42 |
|
| 4.13 |
|
| 4.42 |
|
| 4.09 | ||
| Net Interest Margin |
| 4.54 |
|
| 4.33 |
|
| 4.48 |
|
| 4.40 | Net Interest Margin |
| 4.89 |
|
| 4.54 |
|
| 4.90 |
|
| 4.48 | ||
| Interest Rate Spread - tax equivalent basis (2) |
| 4.32 |
|
| 4.16 |
|
| 4.27 |
|
| 4.26 | Interest Rate Spread - tax equivalent basis (2) |
| 4.59 |
|
| 4.32 |
|
| 4.60 |
|
| 4.27 | ||
| Net Interest Margin - tax equivalent basis (2) |
| 4.73 |
|
| 4.47 |
|
| 4.66 |
|
| 4.55 | Net Interest Margin - tax equivalent basis (2) |
| 5.06 |
|
| 4.73 |
|
| 5.08 |
|
| 4.66 | ||
| Return on Average Total Equity |
| 7.69 |
|
| (2.28) |
|
| 7.28 |
|
| 3.11 | Return on Average Total Equity |
| 8.39 |
|
| 7.69 |
|
| 8.19 |
|
| 7.28 | ||
| Return on Average Common Equity |
| 7.84 |
|
| (2.32) |
|
| 7.43 |
|
| 3.18 | Return on Average Common Equity |
| 8.53 |
|
| 7.84 |
|
| 8.33 |
|
| 7.43 | ||
| Average Total Equity to Average Total Assets |
| 15.32 |
|
| 15.63 |
|
| 15.07 |
|
| 15.42 | Average Total Equity to Average Total Assets |
| 17.55 |
|
| 15.32 |
|
| 17.22 |
|
| 15.07 | ||
| Tangible common equity ratio (1) |
| 15.22 |
|
| 14.63 |
|
| 15.22 |
|
| 14.63 | Tangible common equity ratio (1) |
| 17.03 |
|
| 15.22 |
|
| 17.03 |
|
| 15.22 | ||
| Dividend payout ratio |
| - |
|
| - |
|
| - |
|
| - | Dividend payout ratio |
| 14.24 |
|
| - |
|
| 15.12 |
|
| - | ||
| Efficiency ratio (3) |
| 60.16 |
|
| 60.51 |
|
| 59.43 |
|
| 63.01 | Efficiency ratio (3) |
| 55.98 |
|
| 60.16 |
|
| 55.90 |
|
| 59.43 | ||
Asset Quality: | Asset Quality: |
|
|
|
|
|
|
|
|
|
|
| Asset Quality: |
|
|
|
|
|
|
|
|
|
|
| ||
| Allowance for loan and lease losses to total loans held for investment |
| 2.30 |
|
| 2.60 |
|
| 2.30 |
|
| 2.60 | Allowance for loan and lease losses to total loans held for investment |
| 1.85 |
|
| 2.30 |
|
| 1.85 |
|
| 2.30 | ||
| Net charge-offs (annualized) to average loans (4) |
| 1.52 |
|
| 0.80 |
|
| 1.27 |
|
| 1.40 | Net charge-offs (annualized) to average loans (4) |
| 0.61 |
|
| 1.52 |
|
| 0.93 |
|
| 1.27 | ||
| Provision for loan and lease losses to net charge-offs |
| 34.93 |
|
| 425.54 |
|
| 62.26 |
|
| 127.09 | Provision for loan and lease losses to net charge-offs |
| 53.48 |
|
| 34.93 |
|
| 50.77 |
|
| 62.26 | ||
| Non-performing assets to total assets (4) |
| 4.28 |
|
| 5.26 |
|
| 4.28 |
|
| 5.26 | Non-performing assets to total assets (4) |
| 2.65 |
|
| 4.28 |
|
| 2.65 |
|
| 4.28 | ||
| Non-performing loans held for investment to total loans held for investment (4) |
| 3.89 |
|
| 5.33 |
|
| 3.89 |
|
| 5.33 | Nonaccrual loans held for investment to total loans held for investment (4) |
| 2.41 |
|
| 3.89 |
|
| 2.41 |
|
| 3.89 | ||
| Allowance to total non-performing loans held for investment (4) |
| 59.10 |
|
| 48.80 |
|
| 59.10 |
|
| 48.80 | Allowance to total nonaccrual loans held for investment (4) |
| 76.57 |
|
| 59.10 |
|
| 76.57 |
|
| 59.10 | ||
| Allowance to total non-performing loans held for investment, |
|
|
|
|
|
|
|
|
|
|
| Allowance to total nonaccrual loans held for investment, |
|
|
|
|
|
|
|
|
|
|
| ||
| excluding residential real estate loans |
| 109.79 |
|
| 78.37 |
|
| 109.79 |
|
| 78.37 | excluding residential real estate loans |
| 185.65 |
|
| 109.79 |
|
| 185.65 |
|
| 109.79 | ||
Other Information: | Other Information: |
|
|
|
|
|
|
|
|
|
|
| Other Information: |
|
|
|
|
|
|
|
|
|
|
| ||
| Common Stock Price: End of period | $ | 9.10 |
| $ | 5.12 |
| $ | 9.10 |
| $ | 5.12 | Common Stock Price: End of period | $ | 9.98 |
| $ | 9.10 |
| $ | 9.98 |
| $ | 9.10 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of September 30, 2018 |
| As of December 31, 2017 |
|
|
|
|
|
|
|
| As of September 30, 2019 |
| As of December 31, 2018 |
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: | Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
| Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total loans, including loans held for sale | $ | 9,010,890 |
| $ | 8,901,309 |
|
|
|
|
|
| |
| Loans, including loans held for sale | $ | 8,782,692 |
| $ | 8,883,456 |
|
|
|
|
|
| Allowance for loan and lease losses |
| 165,575 |
|
| 192,362 |
|
|
|
|
|
| ||
| Allowance for loan and lease losses |
| 200,563 |
|
| 231,843 |
|
|
|
|
|
| Money market and investment securities |
| 2,018,198 |
|
| 2,139,503 |
|
|
|
|
|
| ||
| Money market and investment securities |
| 2,295,884 |
|
| 2,095,177 |
|
|
|
|
|
| Intangible assets |
| 36,438 |
|
| 38,757 |
|
|
|
|
|
| ||
| Intangible assets |
| 39,620 |
|
| 42,351 |
|
|
|
|
|
| Deferred tax asset, net |
| 273,845 |
|
| 319,851 |
|
|
|
|
|
| ||
| Deferred tax asset, net |
| 272,261 |
|
| 294,809 |
|
|
|
|
|
| Total assets |
| 12,530,713 |
|
| 12,243,561 |
|
|
|
|
|
| ||
| Total assets |
| 12,209,700 |
|
| 12,261,268 |
|
|
|
|
|
| Deposits |
| 9,132,899 |
|
| 8,994,714 |
|
|
|
|
|
| ||
| Deposits |
| 9,148,243 |
|
| 9,022,631 |
|
|
|
|
|
| Borrowings |
| 1,024,150 |
|
| 1,074,236 |
|
|
|
|
|
| ||
| Borrowings |
| 974,150 |
|
| 1,223,635 |
|
|
|
|
|
| Total preferred equity |
| 36,104 |
|
| 36,104 |
|
|
|
|
|
| ||
| Total preferred equity |
| 36,104 |
|
| 36,104 |
|
|
|
|
|
| Total common equity |
| 2,159,367 |
|
| 2,049,015 |
|
|
|
|
|
| ||
| Total common equity |
| 1,954,198 |
|
| 1,853,608 |
|
|
|
|
|
| Accumulated other comprehensive income (loss), net of tax |
| 5,124 |
|
| (40,415) |
|
|
|
|
|
| ||
| Accumulated other comprehensive loss, net of tax |
| (62,887) |
|
| (20,615) |
|
|
|
|
|
| Total equity |
| 2,200,595 |
|
| 2,044,704 |
|
|
|
|
|
| ||
| Total equity |
| 1,927,415 |
|
| 1,869,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
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|
|
|
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| (1) | Non-GAAP financial measures. See "Risk Management - Capital" below for additional information about the components and a reconciliation of these measures. | ||||||||||||||||||||||||
| (2) | On a tax-equivalent basis and excluding the changes in fair value of derivative instruments. See "Results of Operations - Net Interest Income" below for a reconciliation of these non-GAAP financial measures. | ||||||||||||||||||||||||
| (3) | Non-interest expenses to the sum of net interest income and non-interest income. | ||||||||||||||||||||||||
| (4) | Loans used in the denominator in calculating each of these ratios include purchased credit-impaired ("PCI") loans. However, the Corporation separately tracks and reports PCI loans and excludes these from non-performing loan and non-performing asset amounts. | ||||||||||||||||||||||||
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(1)Non-GAAP financial measures (as defined below). Refer to "Capital" below for additional information about the components and a reconciliation of these measures.
(2)On a tax-equivalent basis and excluding the changes in fair value of derivative instruments (see "Net Interest Income" below for a reconciliation of these non-GAAP financial measures).
(3)Non-interest expenses to the sum of net interest income and non-interest income.
(4)Loans used in the denominator in calculating each of these ratios include purchased credit-impaired ("PCI") loans. However, the Corporation separately tracks and reports PCI loans and excludes these from nonaccrual loan and non-performing asset amounts.
9294
The following MD&A relates to the accompanying unaudited consolidated financial statements of First BanCorp. (the “Corporation” or “First BanCorp.”) and should be read in conjunction with such financial statements and the notes thereto. This section also presents certain financial measures that are not based on generally accepted accounting principles in the United States (“GAAP”). See “Risk Management - Basis of Presentation” below for information about why the non-GAAP financial measures are being presented and the reconciliation of the non-GAAP financial measures for which the reconciliation is not presented earlier.
EXECUTIVE SUMMARY
First BanCorp. is a diversified financial holding company headquartered in San Juan, Puerto Rico offering a full range of financial products to consumers and commercial customers through various subsidiaries. First BanCorp. is the holding company (the “Holding Company”) of FirstBank Puerto Rico (“FirstBank” or the “Bank”) and FirstBank Insurance Agency. Through its wholly-owned subsidiaries, the Corporation operates offices in Puerto Rico, the United States Virgin Islands (the “USVI”) and British Virgin Islands (the “BVI”), and the State of Florida (USA), concentrating on commercial banking, residential mortgage loan originations, finance leases, credit cards, personal loans, small loans, auto loans, and insurance agency activities.
SIGNIFICANT EVENTS
On October 21, 2019, the Corporation announced the signing of a stock purchase agreement for FirstBank to acquire Santander Bancorp, the holding company of Banco Santander Puerto Rico (“BSPR”). The purchase price will be a base amount of $425 million, which represents a $63 million premium on the $362 million of Santander Bancorp’s consolidated core tangible common equity as of June 30, 2019, plus $638 million of Santander Bancorp’s consolidated excess capital as of June 30, 2019 paid at par, in an all cash transaction, subject to adjustment based on Santander Bancorp’s consolidated balance sheet as of the closing of the acquisition. The transaction is structured as an acquisition of all of the issued and broker-dealer activities.outstanding common stock of Santander Bancorp, the sole shareholder of BSPR, immediately followed by the merger of BSPR and its holding company into FirstBank, with FirstBank being the surviving entity. As part of the transaction, FirstBank will also acquire the operations of Santander Insurance Agency, Inc., a wholly owned subsidiary of BSPR.
As of June 30, 2019, BSPR had $6.2 billion of assets, $3.1 billion of loans, and $5.0 billion of deposits and operated a branch network of 27 locations spanning 15 municipalities across Puerto Rico. As part of the transaction, FirstBank will not assume any of BSPR’s non-performing assets. The Corporation believes that the acquisition will significantly improve its scale and competitiveness in Puerto Rico, while enhancing its funding and risk profile and expanding its talent bench across retail, commercial business banking, and risk management functions. In addition, the Corporation believes the acquisition will result in cost savings and other potential synergies.
The stock purchase agreement has been unanimously approved by the Corporation’s and FirstBank’s Boards of Directors. The transaction is subject to the satisfaction of customary closing conditions, including receipt of all required regulatory approvals, and is expected to close in the middle of 2020. The Corporation expects to incur in restructuring charges of approximately $76 million expected to be phased-in 50% at closing with the remainder of the charges to be incurred in 2021. See "Note 2 - Potential Acquisition of Banco Santander Puerto Rico" to the accompanying unaudited consolidated financial statements for additional information.
OVERVIEW OF RESULTS OF OPERATIONS
First BanCorp.'s results of operations depend primarily on its net interest income, which is the difference between the interest income earned on its interest-earning assets, including investment securities and loans, and the interest expense incurred on its interest-bearing liabilities, including deposits and borrowings. Net interest income is affected by various factors, including: the interest rate scenario; the volumes, mix and composition of interest-earning assets and interest-bearing liabilities; and the re-pricing characteristics of these assets and liabilities. The Corporation's results of operations also depend on the provision for loan and lease losses, non-interest expenses (such as personnel, occupancy, the deposit insurance premium and other costs), non-interest income (mainly service charges and fees on deposits, and insurance income), gains (losses) on sales of investments, gains (losses) on mortgage banking activities, and income taxes.
The Corporation had netnet income of $46.3 million, or $0.21 per diluted common share, for the quarter ended September 30, 2019, compared to $36.3 million, or $0.16 per diluted common share, for the quarter ended September 30, 2018, compared to a net loss of $10.8 million, or $0.05 per diluted common share, for the same period in 2017. 2018.
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The key drivers of the Corporation’s GAAP financial results for the quarter ended September 30, 2018,2019, compared to the same period in 2017,2018, include the following:
·Net interest income increased by $9.7$11.9 million to $132.5$144.4 million for the quarter ended September 30, 2018,2019, compared to $122.8$132.5 million for the same period in 2017.2018. The increase in net interest income was driven primarily by: (i) a $3.0$9.5 million increase in interest income on investment securities,consumer loans, mainly due to a $342.8 million increase in the average balance of this portfolio, primarily due to the gradual reinvestmentgrowth in the average balance of liquidity in higher-yielding U.S. agencies debtauto loans, finance leases, and mortgage-backed securities;personal loans; and (ii) a $2.9$7.5 million increase in interest income on commercial and construction loans, primarily associated withdue to growth in the upwardaverage balance of the performing commercial portfolio and, the effect in the third quarter of 2019 of a $3.0 million accelerated discount accretion from the payoff of a commercial mortgage loan. These increases were partially offset by: (i) a $2.9 million increase in total interest expense, driven by the effect of higher market interest rates on the cost of retail and brokered CDs, partially offset by the decline of $261.4 million in the average balance of brokered CDs and the downward repricing of variable-rate commercial loans; (iii)variable rate repurchase agreements and subordinated debentures; and (ii) a $2.3$2.0 million increasedecrease in interest income on consumerresidential mortgage loans, primarilymainly due to an $81.4a $146.6 million increasedecrease in the average balance of this portfolio and a lower amount of inflows of consumer loans to non-performing status; and (iv) a $1.8 million increase in interest income from interest-bearing cash balances, primarily deposits maintained at the Federal Reserve Bank of New York (“New York FED”), due to both a higher average balance of interest-bearing cash and increases in the Federal Funds target rate.portfolio.
The net interest margin increased to 4.54%4.89% for the third quarter of 2018,2019, compared to 4.33%4.54% for the same period a year ago, primarily related to an increase in the upward repricingproportion of variable rate commercialhigher-yielding loans, such as consumer loans, to total interest-earning assets, an improved funding mix driven by the increase in the proportion of interest-earning assets funded by the growth in non-interest-bearing deposits, and reductions in brokered certificates of deposit (“CDs”), repurchase agreements, and subordinated debentures, liquidity reinvested in higher-yielding investment securities, and the effectaforementioned $3.0 million accelerated discount accretion from the payoff of a lower amountcommercial mortgage loan, which increased the net interest margin by approximately 10 basis points in the third quarter of inflows of consumer and residential mortgage loans to non-performing status.2019. See “Results of Operations - Net Interest Income” below for additional information.
·The provision for loan and lease losses decreased by $63.5$4.1 million to $11.5$7.4 million for the third quarter of 2018,2019, compared to $75.0$11.5 million for the same period in 2017.2018. The decrease was driven by the effecta $6.5 million net loan loss reserve release for commercial and construction loans in the third quarter of 2017 of2019, primarily related to lower historical loss rates for commercial and industrial loans, the establishmentupgrade in the credit risk classification of a $66.5large commercial and industrial loan, and loan loss recoveries. In contrast, during the third quarter of 2018, the Corporation recognized a $13.7 million qualitative reserve related toprovision that included the initial loss estimateeffect of the impact of Hurricanes Irma and Maria, partially offset by a $10.1 million charge related to the provision associated with $17.3 million in non-performingseveral nonaccrual commercial and construction loans transferred to held for sale during such period. This variance was partially offset by a $14.2 million increase in the third quarter of 2018.
Net charge-offs totaled $33.0 millionprovision for the third quarter of 2018, or 1.52% of total averageconsumer loans, on an annualized basis, compared to $17.6 million, or 0.80% of average loans for the same period in 2017. The increase primarily reflectsreflecting the effect in the third quarter of 2018 of charge-offs amounting to $12.5of approximately $10.9 million on consumer loans taken against previously established qualitative reserves associated with Hurricane Maria and Irma as well as a $2.2 million release of hurricane-related qualitative reserves for consumer loans. In addition, the provision for residential mortgage loans increased by $1.8 million.
Net charge-offs totaled $13.8 million for the third quarter of 2019, or 0.57%0.61% of total average loans on an annualized basis, compared to $33.0 million, or 1.52% of average loans, for the same period in 2018. Net charge-offs for the third quarter of 2018 included approximately $12.5 million of charge-offs taken on nonaccrual commercial and construction loans transferred to held for sale during such period. Excluding the effect of charge-offs taken on loans transferred to held for sale.sale, there was a $2.3 million net decrease in commercial and construction loan net charge-offs, reflecting the effect of a $1.7 million loan loss recovery recorded in the third quarter of 2019 associated with a commercial and industrial loan fully charged off in prior periods. In addition, there were decreases of $3.1 million in residential mortgage loan net charge-offs and $1.3 million in consumer loan net charge-offs. See “Results of Operations - Provision“Provision for Loan and Lease Losses” and
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“Risk Management – Allowance for Loan and Lease Losses and Non-Performing Assets”“Risk Management” below for an analysis of the allowance for loan and lease losses and non-performing assets and related ratios.
·The Corporation recorded non-interest income of $21.4 million for the third quarter of 2019, compared to $18.5 million for the third quarter of 2018, compared to $18.6 million for the same period in 2017.2018. The decrease in non-interest incomeincrease was primarily due to a $2.7 million net loss from sales of $24.5 million of non-performing commercial and construction loans held for sale in the third quarter of 2018, anddriven by the effect in the third quarter of 20172018 of a $1.4$2.7 million gain on the repurchase and cancellationloss from sales of $7.3$24.5 million in trust-preferred securities. These variancesnonaccrual commercial and construction loans held for sale. In addition, during the third quarter of 2019, there were partially offset by a $1.4increases of $0.7 million increase in revenues from mortgage banking activities, a $1.1 million increase in transaction fee income from credit and debit card interchange fees, $0.5 million in insurance commission income, and merchant-related transactions,$0.5 million in fee income from service charges on deposits, compared to the third quarter of 2018. These variances were partially offset by a $0.5 million gainother-than-temporary impairment (“OTTI”) charge on private label mortgage-backed securities (“MBS”) recorded in the third quarter of 2019 and the effect in the third quarter of 2018 of both a $0.5 million gain on the sale of fixed assets of a closedrelocated banking branch in Puerto Rico and a $0.5 million gain from hurricane-related insurance proceeds in the third quarter of 2018. See “Results of Operation - Non-Interest Income” below for additional information. proceeds.
·
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Non-interest expenses for the third quarter of 20182019 were $90.9$92.8 million, compared to $85.6$90.9 million for the same period in 2017.2018. The increase was driven by: (i) a $3.0 million increase in losses on other real estate owned (“OREO”) operations, primarily reflecting a $1.4 million increase in adverse fair value adjustments and $0.8 million in lower income recognized from rental payments associated with income-producing commercial properties; (ii) a $2.1$2.2 million increase in employees’ compensation and benefitsbenefit expenses reflecting, among other things, the effect in the third quarter of 2017 of expected insurance recoveries of $1.4 million associated with payroll costs incurred when Hurricanes Irma and Maria precluded employees from working in 2017, and a $0.9 million increaseprimarily related to salary merit increases and other adjustments resulting fromrelated to the annual salarycompensation review process that took effect in July 2018;2019, a higher headcount and related higher matching contributions to the employees’ retirement plan, and an increase in the employees’ medical insurance expense; (ii) a $1.0 million increase in professional fees, primarily related to outsourced technology fees and an increase in legal fees associated with strategic projects, including costs related to the aforementioned stock purchase agreement for the acquisition of BSPR; and (iii) a $1.1$0.5 million increase in advertising, public relations, promotionsoccupancy and sponsorship activities.
equipment costs, primarily in depreciation and amortization expenses. These increases were partially offset by a $1.1$1.8 million decrease in the Federal Deposit Insurance Corporation (“FDIC”) insurance premium expense reflecting, among other things, the effect of improved core earnings trends, reductions in brokered CDs, higher liquidity levels tiedlosses from OREO operations, primarily due to lower write-downs to the growth in non-interest bearing deposits, and an improvement in the risk profilevalue of the Bank’s balance sheet, and (ii) a $0.5 million decrease in professional service fees.OREO properties. See “Results of Operation - Non-Interest“Non-Interest Expenses” below for additional information.
·For the third quarter of 2018,2019, the Corporation recorded an income tax expense of $12.3$19.3 million, compared to an income tax benefit of $8.4$12.3 million for the same period in 2017. 2018. The variance reflects the effectincrease was driven by higher pre-tax earnings generated in the third quarter of 20172019 and, to a lesser extent, an increase in the effective tax rate attributable to a higher proportion of a tax benefit resulting from the establishment of a qualitative allowance for loans and lease losses associated with Hurricanes Irma and Maria. taxable to exempt income in 2019. The Corporation’s estimated annual effective tax rate for the first nine months of 2018,2019, excluding entities from which a tax benefit cannot be recognized and discrete items, was 26%29%, compared to 20%26% for the first nine months of 2017.2018. The estimated annual effective tax rate, including all entities for 2018,2019, was 24% (25%30% (29% excluding discrete items), compared to -2%24% for the first nine months of 2017 (21%2018 (25% excluding discrete items, primarily the tax benefit resulting from the change in the tax status of certain subsidiaries discussed below)items). As of September 30, 2018,2019, the Corporation had a net deferred tax asset of $272.3$273.8 million (net of a valuation allowance of $183.2 million)$87.2 million, including a valuation allowance of $56.2 million against the deferred tax assets of the Corporation’s banking subsidiary, FirstBank). See “Results of Operation - Income“Income Taxes” below for additional information.
·As of September 30, 2018,2019, total assets were $12.2$12.5 billion, a decreasean increase of $51.6$287.2 million from December 31, 2017.2018. The decrease primarily reflectsincrease was mainly due to a $100.8$389.7 million decreaseincrease in cash and cash equivalents, driven by proceeds from U.S. agency bonds that matured or were called prior to maturity and prepayments of U.S. agency MBS that have not yet been reinvested, as well as cash provided from operating activities in the first nine months of 2019, a $109.6 million increase in total loans, reflecting reductionsand a $63.3 million increase related to the recognition of $107.1a right-of-use asset for operating leases in accordance with the adoption of the Accounting Standards Update No. (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The $109.6 million and $51.9increase in total loans reflects a growth of $97.6 million in the Puerto Rico region and Virgin Islands regions, respectively, partially offset by a $58.3$21.3 million increase in the Florida region, partially offset by a $9.3 million decrease in the Virgin Islands region. TheOn a portfolio basis, the increase consisted of growth of $255.0 million in consumer loans, and $11.3 million in commercial and construction loans, despite the repayment of certain large criticized commercial mortgage loans and net of an $87.9 million decrease in nonaccrual commercial and construction loans. The increase in these loan portfolio decreased by $116.2 million reflecting the effect of thirteen large commercial loans totaling $135.4 million paid off during 2018, the sale of five large commercial loans totaling $49.7 million, significant payments received, including payments that reduced the outstanding balance of three commercial lines of credit in Puerto Rico by $23.9 million, and charge-offs taken in 2018 (including charge-offs totaling $22.2 million taken on non-performing loans transferred to held for sale during 2018),portfolios was partially offset by new loan originationsa $156.8 million decrease in both Florida and Puerto Rico regions. In addition, the residential mortgage loan portfolio decreased by $86.1 million, including the effect of a $9.8 million sale of seasoned residential mortgage loans in the secondary market. portfolio.
These variancesincreases were partially offset by a $101.5$211.4 million increase in consumer loans, primarily auto and personal loans in Puerto Rico.
In addition, the balance of in cash and cash equivalents decreased by $59.6 million, largely driven by liquidity used for the repayment of $477.7 million of maturing brokered CDs, the repayment of $200 million of repurchase agreements, the repurchase of $23.8 million of trust preferred securities, the repayment of a $25.0 million advance from the Federal Home Loan Bank of New York (“FHLB”), and liquidity reinvested in higher-yielding U.S. agencies debt and mortgage-backed securities, partially offset by liquidity obtained from the growth in non-interest bearing deposits.
The aforementioned decreases were partially offset by a $113.5 million increasedecrease in total investment securities, driven by purchasesprepayments of U.S. agencies debtagency MBS and mortgage-backed securities totaling $424.9 million, partially offset by prepayments of
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$145.2 million of U.S. agencies pass-through residential mortgage-backed securities, $97.5 million of U.S. agencies’ debt securitiesbonds that matured during 2018, andor were called prior to maturity. In addition, there was a $42.3$46.0 million decrease in the fair value of available for sale investment securities.
net deferred tax asset and a $28.4 million decrease in the OREO portfolio balance. See “Financial Condition and Operating Data Analysis – Assets”Analysis” below for additional information.
·As of September 30, 2018,2019, total liabilities were $10.3 billion, a decreasean increase of $109.9$131.3 million from December 31, 2017.2018. The decreaseincrease was mainly due to: (i) a $476.7$159.1 million decreaseincrease in government deposits, a $51.6 million increase in non-government deposits, excluding brokered CDs, (ii)and a $66.2 million increase related to the repaymenteffect of $200 millionthe liability for operating leases recorded in connection with the adoption of repurchase agreements, (iii)ASU 2016-02 in 2019. These increases were partially offset by the repayment at maturity of a $25.0$50.1 million advance from the FHLB, and (iv) theshort-term repurchase of $23.8 million of trust-preferred securities. These reductions were partially offset by a $358.6 million increase in deposits, excluding government deposits and brokered CDs, primarily reflected in non-interest-bearing deposits,agreement and a $242.8$72.6 million increasedecrease in government deposits. Hurricane-related factors, such as the effect of disaster relief funds and settlements of insurance claims, contributed to this growth in core deposits.brokered CDs. See “Risk Management -– Liquidity Risk and Capital Adequacy” below for additional information about the Corporation’s funding sources.
·As of September 30, 2018,2019, the Corporation’s stockholders’ equity was $1.9$2.2 billion, an increase of $58.3$155.9 million from December 31, 2017.2018. The increase was mainly driven by the earnings generated in the first nine months of 2018, partially offset by the decrease2019 and a $45.5 million increase in the fair value of available-for-sale investment securities recorded as part of otherOther comprehensive loss. income, partially offset by common and preferred stock dividends declared in the first nine months of 2019 totaling $21.6 million. The Corporation’s Total Capital, Common Equity Tier 1 Capital, Tier 1 Capital and Leverage ratios calculated under the Basel III rules as in effect were 23.85%25.27%, 20.13%21.61%, 20.54%22.02%, and 14.85%16.04%, respectively, as of September 30, 2018,2019, compared to Total Capital, Common Equity Tier 1 Capital, Tier 1 Capital and Leverage ratios of 22.53%24.00%, 18.96%20.30%, 18.97%20.71%, and 14.03%15.37%, respectively, as of December 31, 2017. 2018. See “Risk Management -– Capital” below for additional information.
·
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Total loan production, including purchases, refinancings, renewals and draws from existing revolving and non-revolving commitments, was $794.6 million for the quarter ended September 30, 2018,but excluding the utilization activity on outstanding credit cards, was $1.0 billion for the quarter ended September 30, 2019, compared to $589.7$809.6 million for the same period in 2017. Total2018. The increase primarily resulted from a $212.7 million increase in commercial and construction loan originations in the Puerto Rico region, of $646.1 million for the third quarter of 2018 increased by $229.1 million compared with the third quarter of 2017. The growthincluding both an increase in new loan originations and a higher dollar amount of refinancings and renewals in the Puerto Rico region consisted of increases of $100.0 million, $94.7 million and $34.4 million in commercial, consumer, and residential mortgage loan originations, respectively. In addition, total loan originations in the Virgin Islands of $19.3 million for the third quarter of 2018 increased by $11.2 million compared to the third quarter of 2017. Total loan originations in the Florida region decreased by $35.4 million to $129.2 million for the third quarter of 2018, primarily reflected in lower commercial and residential mortgage loan originations. 2019.
·Total non-performing assets were $522.8$332.1 million as of September 30, 2018,2019, a decrease of $127.8$135.0 million from December 31, 2017.2018. The decrease was mainly dueprimarily attributable to: (i) the restorationrepayment of a $31.5 million nonaccrual commercial mortgage loan in the Florida region, the largest nonaccrual loan in the portfolio; (ii) a $12.9 million reduction related to accrual statusthe split loan restructuring of two largea commercial mortgage loan in the Puerto Rico region; (iii) charge-offs on nonaccrual commercial and constructions loans totaling $69.7amounting to $21.6 million, (ii)including a charge-off of $11.4 million on the aforementioned nonaccrual commercial mortgage loan repaid in the Florida region; (iv) a $20.2 million decrease in nonaccrual residential mortgage loans; (v) sales and repayments of $34.9 million of non-performingnonaccrual commercial and construction loans held for sale (iii)totaling $9.2 million during the first nine months of 2019; (vi) additional collections on nonaccrual commercial and construction non-performing loans of $27.2approximately $12.0 million (iv) commercialduring the first nine months of 2019; and construction non-performing loan charge-offs totaling $36.5 million, (v)(vii) a $21.6$0.8 million decrease in residential non-performing loans, and (vi)nonaccrual consumer loans. In addition, there was a $12.7$28.4 million decrease in the balance of the OREO properties portfolio, balance. These variances were partially offset byincluding as a result of the inflowsale of two largea $10.8 million commercial mortgage loans totaling $68.4 million tied to a legacy commercial loan relationship that operatesOREO property in both the Floridathird quarter of 2019. See “Risk Management – Non-Accruing and Puerto Rico regions with independent sources of repayment. Non-Performing Assets” below for additional information.
·Adversely classified commercial and construction loans, including loans held for sale, decreased by $55.4$101.0 million to $427.0$255.0 million as of September 30, 2018,2019, compared to $356.0 million as of December 31, 2018. The decrease was driven primarily by the saleaforementioned payoff of four largea $31.5 million nonaccrual commercial and construction loans totaling $40.5 million,mortgage loan in the Florida region, the upgrade in the credit risk classification of several commercial loans totaling $79.0$20.8 million, andcharge-offs, collections, and charge-offs recorded during the first nine months of 2018. These variances were partially offset by the downgrade in the credit risk classification of three large commercial loans totaling $108.7 million, including the aforementioned $68.4reduction of $9.2 million in two large commercial mortgagerelated to sales and repayments of nonaccrual loans classified as non-performing during 2018. held for sale.
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The Corporation’s financial results for the third quarter and first nine months of 20182019 and 20172018 included the following items that management believes are not reflective of core operating performance, are not expected to reoccur with any regularity or may reoccur at uncertain times and in uncertain amounts (the “Special Items”):
Quarter and Nine-Month Period Ended September 30, 2019
A $3.0 million ($1.8 million after-tax) positive effect in earnings related to the accelerated discount accretion from the payoff of an acquired commercial mortgage loan in the third quarter of 2019.
Benefits of $0.4 million ($0.2 million after-tax) and $1.2 million ($0.7 million after-tax) for the third quarter and nine-month period ended September 30, 2019, respectively, resulting from hurricane-related insurance recoveries related to repairs and maintenance costs, and impairments associated with facilities in the Virgin Islands.
A $0.5 million OTTI charge on private label MBS recorded in the tax-exempt international banking entity subsidiary in the third quarter of 2019.
Benefit of $0.8 million ($0.5 million after-tax) for the second quarter of 2019 resulting from hurricane-related insurance recoveries related to repairs and maintenance costs, and impairments, associated with facilities in the British Virgin Islands.
Net loan loss reserve release of $6.4 million ($4.0 million after-tax) for the first quarter of 2019 in connection with revised estimates of the qualitative reserves associated with the effects of Hurricanes Maria and Irma, primarily related to consumer and commercial loans. See “Provision for Loan and Lease Losses” below for additional information.
Expense recovery of $2.3 million recorded in the first quarter of 2019 related to an employee retention benefit payment (the “Benefit”) received by the Bank by virtue of the Disaster Tax Relief and Airport Extension Act of 2017, as amended (the “Disaster Tax Relief Act”). The Benefit was recorded as an offset to employees’ compensation and benefits expenses and is not treated as taxable income by virtue of the Disaster Tax Relief Act.
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Quarter and Nine-Month Period Ended September 30, 2018
·Net loan loss reserve releases of $2.8 million ($1.7 million after-tax) for the third quarter of 2018 and $11.2 million ($6.9 million after-tax) for the first nine months of 2018 in connection with revised estimates of the qualitative reserves associated with the effects of Hurricanes Maria and Irma. See “Results of Operations - Provision“Provision for Loan and Lease Losses” below for additional information.
·Gain of $0.5 million ($0.3 million after-tax) recorded in the third quarter of 2018 resulting from hurricane-related insurance proceeds in excess of fixed-asset impairment charges.
·Hurricane-related expenses of $0.5 million ($0.3 million after-tax) for the third quarter of 2018 and $2.8 million ($1.7 million after-tax) for the first nine months of 2018.
·Gain of $2.3 million recorded in the first quarter of 2018 on the repurchase and cancellation of $23.8 million in variable rate trust-preferred securities (“TRuPs”), reflected in the consolidated statementstatements of income (loss) as “GainGain on early extinguishment of debt.” The gain, realized at the holding company level, had no effect on the income tax expense in 2018. See “Results of Operation - Non-Interest“Non-Interest Income” below for additional information.
QuarterThe following table reconciles for the third quarter and Nine-Month Period Ended September 30, 2017first nine months of 2019 and 2018 the reported net income to adjusted net income, a non-GAAP financial measure that excludes the Special Items identified above:
·Charge
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Net income, as reported (GAAP) | $ | 46,327 |
| $ | 36,323 |
| $ | 130,928 |
| $ | 100,503 | |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
| |
Accelerated discount accretion due to early payoff of acquired loan |
| (2,953) |
|
| - |
|
| (2,953) |
|
| - | |
Hurricane-related loan loss reserve release |
| - |
|
| (2,781) |
|
| (6,425) |
|
| (11,245) | |
Benefit from hurricane-related insurance recoveries |
| (379) |
|
| (478) |
|
| (1,199) |
|
| (478) | |
Hurricane-related expenses |
| - |
|
| 533 |
|
| - |
|
| 2,783 | |
OTTI on debt securities |
| 497 |
|
| - |
|
| 497 |
|
| - | |
Employee retention benefit - Disaster Tax Relief Act |
| - |
|
| - |
|
| (2,317) |
|
| - | |
Gain on early extinguishment of debt |
| - |
|
| - |
|
| - |
|
| (2,316) | |
Income tax impact of adjustments (1) |
| 1,250 |
|
| 1,063 |
|
| 3,967 |
|
| 3,486 | |
Adjusted net income (Non-GAAP) (2) | $ | 44,742 |
| $ | 34,660 |
| $ | 122,498 |
| $ | 92,733 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)See "Basis of Presentation" below for the individual tax impact related to each reconciling item.
(2)The Corporation is no longer considering the effect of loans transferred to held for sale as a Special Item, and, thus, this effect is no longer presented as an adjustment from GAAP to non-GAAP financial measures, such as adjusted net income, adjusted provision for loan and lease losses, of $66.5 million ($40.6 million after-tax) relatedand adjusted provision to the establishment of qualitative reserves associated with the effects of Hurricanes Irma and Maria in the third quarter of 2017.
·Hurricane-related expenses of $0.6 million ($0.4 million after-tax) recorded in the third quarter of 2017.
·Expected insurance recoveries of $1.7 million for compensation and rental costs that the Corporation incurred when Hurricanes Irma and Maria precluded employees from working during September 2017.
·Gain of $1.4 million recorded in the third quarter of 2017 on the repurchase and cancellation of $7.3 million in trust-preferred securities, reflected in the statement of income (loss) as “Gain on early extinguishment of debt.” The gain, realized at the Holding Company level, had no effect on the income tax expense in 2017. Refer to the Non-Interest Income discussion below for additional information. See “Results of Operation - Non-Interest Income” below for additional information.
·Costs of $0.1 million for the third quarter of 2017 and $0.4 million for the first nine months of 2017 associated with secondary offerings of the Corporation’s common stock by certain stockholders, which were completed in the first and third quarters of 2017. The costs, incurred at the Holding Company level, had no effect on the income tax expense in 2017.
·Partial recovery of $0.4 million of previously recorded other-than-temporary impairment (“OTTI”) charges on non-performing bonds of the Government Development Bank for Puerto Rico (the “GDB”) and the Puerto Rico Public Buildings Authority sold in the second quarter of 2017, reflected in the statement of income (loss) as part of “Net gain on sale of investments.” No tax expense was recognized for the recovery on the sale of bonds in 2017.
·Tax benefit of $13.2 million recorded in the first quarter of 2017 associated with the change in tax status of certain subsidiaries from taxable corporations to limited liability companies that make an election to be treated as partnerships for income tax purposes in Puerto Rico. See “Results of Operations - Income Taxes” below for additional information.
·OTTI charge of $12.2 million recorded in the first quarter of 2017 on the aforementioned non-performing bonds of the GDB and the Puerto Rico Public Buildings Authority. No tax benefit was recognized for the OTTI charge in 2017.
96
net-charge-offs ratio.
The following table reconciles for the third quarter and first nine months of 2018 and 2017 the reported net income (loss) to adjusted net income, a non-GAAP financial measure that excludes the Special Items identified above: | |||||||||||
| Quarter ended September 30, |
| Nine-month period ended September 30, | ||||||||
|
| ||||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported (GAAP) | $ | 36,323 |
| $ | (10,752) |
| $ | 100,503 |
| $ | 42,787 |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
Hurricane-related loan loss reserve (release) provision |
| (2,781) |
|
| 66,490 |
|
| (11,245) |
|
| 66,490 |
Hurricane related gain from insurance proceeds |
| (478) |
|
| - |
|
| - |
|
| - |
Hurricane-related expenses |
| 533 |
|
| 599 |
|
| 2,783 |
|
| 599 |
Hurricane-related idle time payroll and rental costs expected insurance recoveries |
| - |
|
| (1,662) |
|
| - |
|
| (1,662) |
Recovery of previously recorded OTTI charges on Puerto Rico |
|
|
|
|
|
|
|
|
|
|
|
government debt securities sold |
| - |
|
| - |
|
| - |
|
| (371) |
Gain on repurchase and cancellation of trust preferred securities |
| - |
|
| (1,391) |
|
| (2,316) |
|
| (1,391) |
Income tax benefit related to change in tax-status of certain subsidiaries |
| - |
|
| - |
|
| - |
|
| (13,161) |
OTTI on debt securities |
| - |
|
| - |
|
| - |
|
| 12,231 |
Secondary offering costs |
| - |
|
| 118 |
|
| - |
|
| 392 |
Income tax impact of adjustments (1) |
| 1,063 |
|
| (26,048) |
|
| 4,203 |
|
| (26,165) |
Adjusted net income (Non-GAAP) (2) | $ | 34,660 |
| $ | 27,354 |
| $ | 93,928 |
| $ | 79,749 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) See "Basis of Presentation" for the individual tax impact for each reconciling item. |
|
|
|
|
|
| |||||
(2) The Corporation is no longer considering the effect of loans transferred to held for sale as a special item, and, thus, this effect is no longer presented as an adjustment from GAAP to non-GAAP financial measures such as adjusted net income and adjusted provision to net-charge-offs ratio. |
99
97
Critical Accounting Policies and Practices
The accounting principles of the Corporation and the methods of applying these principles conform to GAAP. The Corporation’s critical accounting policies relate to: 1) the allowance for loan and lease losses; 2) OTTI; 3) income taxes; 4) the classification and values of financial instruments; 5) income recognition on loans; 6) loans acquired; and 7) loans held for sale. These critical accounting policies involve judgments, estimates and assumptions made by management that affect the amounts recorded for assets, liabilities and contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from estimates, if different assumptions or conditions prevail. Certain determinations inherently require greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than those originally reported.
The Corporation’s critical accounting policies are described in Part II, Item 7, “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Practices,” included in First BanCorp.’s Annual Report on Form 10-K for the fiscal year ended December 31, 20172018 (the “2017“2018 Annual Report on Form 10-K”). There have not been any material changes in the Corporation’s critical accounting policies since December 31, 2017.2018.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the excess of interest earned by First BanCorp. on its interest-earning assets over the interest incurred on its interest-bearing liabilities. First BanCorp.’s net interest income is subject to interest rate risk due to the repricing and maturity mismatch of the Corporation’s assets and liabilities. Net interest income for the quarter and nine-month period ended September 30, 20182019 was $144.4 million and $427.2 million, respectively, compared to $132.5 million and $387.7 million, respectively, compared to $122.8 million and $369.3 million for the comparable periods in 2017.2018. On a tax-equivalent basis and excluding the changes in the fair value of derivative instruments, net interest income for the quarter and nine-month period ended September 30, 20182019 was $149.4 million and $442.4 million, respectively, compared to $137.9 million and $403.0 million, respectively, compared to $126.6 million and $382.2 million for the comparable periods in 2017.2018.
The following tables include a detailed analysis of net interest income.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, information is provided relating toon changes in (i) volume (changes in volume multiplied by prior period rates) and (ii) rate (changes in rate multiplied by prior period volumes). Rate-volume variances (changes in rate multiplied by changes in volume) have been allocated to either the changes in volume andor the changes in rate based upon their respective percentagethe effect of each factor on the combined totals.
100
The net interest income is computed on an adjusted tax-equivalent basis and excluding the change in the fair value of derivative instruments. AFor the definition and a reconciliation of this non-GAAP financial measure, refer to the discussion in “Basis of Presentation” below.
Part I |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Average Volume |
| Interest income (1) / expense |
| Average Rate (1) | ||||||||||||
| Quarter ended September 30, | 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
| |||||||||||||||
| Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Money market and other short-term investments | $ | 762,934 |
| $ | 661,374 |
| $ | 4,081 |
| $ | 3,166 |
| 2.12 | % |
| 1.90 | % |
| Government obligations (2) |
| 588,287 |
|
| 785,400 |
|
| 6,752 |
|
| 7,174 |
| 4.55 | % |
| 3.62 | % |
| MBS |
| 1,295,189 |
|
| 1,402,554 |
|
| 9,820 |
|
| 11,219 |
| 3.01 | % |
| 3.17 | % |
| Federal Home Loan Bank ("FHLB") stock |
| 41,779 |
|
| 39,778 |
|
| 660 |
|
| 687 |
| 6.27 | % |
| 6.85 | % |
| Other investments |
| 3,395 |
|
| 3,042 |
|
| 7 |
|
| 5 |
| 0.82 | % |
| 0.65 | % |
| Total investments (3) |
| 2,691,584 |
|
| 2,892,148 |
|
| 21,320 |
|
| 22,251 |
| 3.14 | % |
| 3.05 | % |
| Residential mortgage loans |
| 3,018,603 |
|
| 3,165,250 |
|
| 40,610 |
|
| 42,601 |
| 5.34 | % |
| 5.34 | % |
| Construction loans |
| 104,816 |
|
| 122,186 |
|
| 1,691 |
|
| 1,233 |
| 6.40 | % |
| 4.00 | % |
| Commercial and Industrial and Commercial mortgage loans |
| 3,748,186 |
|
| 3,576,886 |
|
| 55,543 |
|
| 48,269 |
| 5.88 | % |
| 5.35 | % |
| Finance leases |
| 378,866 |
|
| 295,866 |
|
| 7,192 |
|
| 5,575 |
| 7.53 | % |
| 7.48 | % |
| Consumer loans |
| 1,776,254 |
|
| 1,516,432 |
|
| 50,904 |
|
| 42,976 |
| 11.37 | % |
| 11.24 | % |
| Total loans (4) (5) |
| 9,026,725 |
|
| 8,676,620 |
|
| 155,940 |
|
| 140,654 |
| 6.85 | % |
| 6.43 | % |
| Total interest-earning assets | $ | 11,718,309 |
| $ | 11,568,768 |
| $ | 177,260 |
| $ | 162,905 |
| 6.00 | % |
| 5.59 | % |
| Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Brokered CDs | $ | 502,569 |
| $ | 763,988 |
| $ | 2,843 |
| $ | 3,495 |
| 2.24 | % |
| 1.81 | % |
| Other interest-bearing deposits |
| 6,290,767 |
|
| 6,050,621 |
|
| 17,498 |
|
| 13,484 |
| 1.10 | % |
| 0.88 | % |
| Other borrowed funds |
| 284,150 |
|
| 323,280 |
|
| 3,651 |
|
| 4,648 |
| 5.10 | % |
| 5.70 | % |
| FHLB advances |
| 741,522 |
|
| 692,174 |
|
| 3,878 |
|
| 3,344 |
| 2.07 | % |
| 1.92 | % |
| Total interest-bearing liabilities | $ | 7,819,008 |
| $ | 7,830,063 |
| $ | 27,870 |
| $ | 24,971 |
| 1.41 | % |
| 1.27 | % |
| Net interest income |
|
|
|
|
|
| $ | 149,390 |
| $ | 137,934 |
|
|
|
|
|
|
| Interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
| 4.59 | % |
| 4.32 | % |
| Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
| 5.06 | % |
| 4.73 | % |
|
| Average Volume |
| Interest income (1) / expense |
| Average Rate (1) | ||||||||||||
| Nine-Month Period Ended September 30, | 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
| |||||||||||||||
| Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Money market and other short-term investments | $ | 615,499 |
| $ | 686,886 |
| $ | 10,350 |
| $ | 8,809 |
| 2.25 | % |
| 1.71 | % |
| Government obligations (2) |
| 690,566 |
|
| 801,954 |
|
| 21,482 |
|
| 20,470 |
| 4.16 | % |
| 3.41 | % |
| MBS |
| 1,304,777 |
|
| 1,325,780 |
|
| 32,033 |
|
| 32,669 |
| 3.28 | % |
| 3.29 | % |
| FHLB stock |
| 41,809 |
|
| 40,505 |
|
| 2,013 |
|
| 2,036 |
| 6.44 | % |
| 6.72 | % |
| Other investments |
| 3,169 |
|
| 2,795 |
|
| 20 |
|
| 9 |
| 0.84 | % |
| 0.43 | % |
| Total investments (3) |
| 2,655,820 |
|
| 2,857,920 |
|
| 65,898 |
|
| 63,993 |
| 3.32 | % |
| 2.99 | % |
| Residential mortgage loans |
| 3,071,624 |
|
| 3,195,572 |
|
| 123,779 |
|
| 128,793 |
| 5.39 | % |
| 5.39 | % |
| Construction loans |
| 94,075 |
|
| 120,734 |
|
| 4,531 |
|
| 3,261 |
| 6.44 | % |
| 3.61 | % |
| Commercial and Industrial and Commercial mortgage loans |
| 3,760,878 |
|
| 3,630,655 |
|
| 163,518 |
|
| 141,807 |
| 5.81 | % |
| 5.22 | % |
| Finance leases |
| 360,429 |
|
| 276,158 |
|
| 20,313 |
|
| 15,136 |
| 7.54 | % |
| 7.33 | % |
| Consumer loans |
| 1,705,150 |
|
| 1,492,579 |
|
| 145,459 |
|
| 124,907 |
| 11.41 | % |
| 11.19 | % |
| Total loans (4) (5) |
| 8,992,156 |
|
| 8,715,698 |
|
| 457,600 |
|
| 413,904 |
| 6.80 | % |
| 6.35 | % |
| Total interest-earning assets | $ | 11,647,976 |
| $ | 11,573,618 |
| $ | 523,498 |
| $ | 477,897 |
| 6.01 | % |
| 5.52 | % |
| Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Brokered CDs | $ | 511,567 |
| $ | 892,980 |
| $ | 8,312 |
| $ | 11,715 |
| 2.17 | % |
| 1.75 | % |
| Other interest-bearing deposits |
| 6,166,594 |
|
| 6,051,197 |
|
| 48,624 |
|
| 39,209 |
| 1.05 | % |
| 0.87 | % |
| Other borrowed funds |
| 298,277 |
|
| 373,639 |
|
| 12,699 |
|
| 13,808 |
| 5.69 | % |
| 4.94 | % |
| FHLB advances |
| 740,513 |
|
| 707,308 |
|
| 11,490 |
|
| 10,126 |
| 2.07 | % |
| 1.91 | % |
| Total interest-bearing liabilities | $ | 7,716,951 |
| $ | 8,025,124 |
| $ | 81,125 |
| $ | 74,858 |
| 1.41 | % |
| 1.25 | % |
| Net interest income |
|
|
|
|
|
| $ | 442,373 |
| $ | 403,039 |
|
|
|
|
|
|
| Interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
| 4.60 | % |
| 4.27 | % |
| Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
| 5.08 | % |
| 4.66 | % |
(1)On an adjusted tax-equivalent basis. The adjusted tax-equivalent yield was estimated by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory tax rate of 37.5% (39% for the quarter and nine-month period ended September 30, 2018) 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 presented below.a standard practice in the banking industry to present net interest income, interest rate spread and net interest margin on a fully tax-equivalent basis. Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons. Changes in the fair value of derivatives are excluded from interest income and interest expense because the changes in valuation do not affect interest received or paid.
98(2)Government obligations include debt issued by government-sponsored agencies.
(3)Unrealized gains and losses on available-for-sale securities are excluded from the average volumes.
(4)Average loan balances include the average of nonaccrual loans.
(5)Interest income on loans includes $2.4 million and $1.8 million for the quarters ended September 30, 2019 and 2018, respectively, and $6.7 million and $5.7 million for the nine-month periods ended September 30, 2019 and 2018, respectively, of income from prepayment penalties and late fees related to the Corporation’s loan portfolio.
Part I |
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| |
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
| Average Volume |
| Interest income (1) / expense |
| Average Rate (1) | ||||||||||||
| Quarter ended September 30, | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
| (Dollars in thousands) |
|
| |||||||||||||||
|
|
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|
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|
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|
|
|
|
|
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|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
| Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Money market & other short-term investments | $ | 661,374 |
| $ | 428,639 |
| $ | 3,166 |
| $ | 1,293 |
| 1.90 | % |
| 1.20 | % |
| Government obligations (2) |
| 785,400 |
|
| 657,119 |
|
| 7,174 |
|
| 4,487 |
| 3.62 | % |
| 2.71 | % |
| Mortgage-backed securities |
| 1,402,554 |
|
| 1,264,155 |
|
| 11,219 |
|
| 9,594 |
| 3.17 | % |
| 3.01 | % |
| FHLB stock |
| 39,778 |
|
| 42,682 |
|
| 687 |
|
| 511 |
| 6.85 | % |
| 4.75 | % |
| Other investments |
| 3,042 |
|
| 2,703 |
|
| 5 |
|
| 2 |
| 0.65 | % |
| 0.29 | % |
| Total investments (3) |
| 2,892,148 |
|
| 2,395,298 |
|
| 22,251 |
|
| 15,887 |
| 3.05 | % |
| 2.63 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Residential mortgage loans |
| 3,165,250 |
|
| 3,263,348 |
|
| 42,601 |
|
| 43,132 |
| 5.34 | % |
| 5.24 | % |
| Construction loans |
| 122,186 |
|
| 134,842 |
|
| 1,233 |
|
| 1,219 |
| 4.00 | % |
| 3.59 | % |
| Commercial and Industrial and Commercial mortgage loans |
| 3,576,886 |
|
| 3,726,341 |
|
| 48,269 |
|
| 45,273 |
| 5.35 | % |
| 4.82 | % |
| Finance leases |
| 295,866 |
|
| 244,149 |
|
| 5,575 |
|
| 4,346 |
| 7.48 | % |
| 7.06 | % |
| Consumer loans |
| 1,516,432 |
|
| 1,486,726 |
|
| 42,976 |
|
| 41,927 |
| 11.24 | % |
| 11.19 | % |
| Total loans (4) (5) |
| 8,676,620 |
|
| 8,855,406 |
|
| 140,654 |
|
| 135,897 |
| 6.43 | % |
| 6.09 | % |
| Total interest-earning assets | $ | 11,568,768 |
| $ | 11,250,704 |
| $ | 162,905 |
| $ | 151,784 |
| 5.59 | % |
| 5.35 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Brokered CDs | $ | 763,988 |
| $ | 1,244,355 |
| $ | 3,495 |
| $ | 4,711 |
| 1.81 | % |
| 1.50 | % |
| Other interest-bearing deposits |
| 6,050,621 |
|
| 5,904,022 |
|
| 13,484 |
|
| 12,187 |
| 0.88 | % |
| 0.82 | % |
| Other borrowed funds |
| 323,280 |
|
| 515,202 |
|
| 4,648 |
|
| 5,056 |
| 5.70 | % |
| 3.89 | % |
| FHLB advances |
| 692,174 |
|
| 740,663 |
|
| 3,344 |
|
| 3,209 |
| 1.92 | % |
| 1.72 | % |
| Total interest-bearing liabilities | $ | 7,830,063 |
| $ | 8,404,242 |
| $ | 24,971 |
| $ | 25,163 |
| 1.27 | % |
| 1.19 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income |
|
|
|
|
|
| $ | 137,934 |
| $ | 126,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
| 4.32 | % |
| 4.16 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
| 4.73 | % |
| 4.47 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average Volume |
| Interest income (1) / expense |
| Average Rate (1) | ||||||||||||
| Nine-Month Period Ended September 30, | 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
| |||||||||||||||
|
|
|
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Money market & other short-term investments | $ | 686,886 |
| $ | 334,964 |
| $ | 8,809 |
| $ | 2,504 |
| 1.71 | % |
| 1.00 | % |
| Government obligations (2) |
| 801,954 |
|
| 694,701 |
|
| 20,470 |
|
| 13,382 |
| 3.41 | % |
| 2.58 | % |
| Mortgage-backed securities |
| 1,325,780 |
|
| 1,296,979 |
|
| 32,669 |
|
| 33,697 |
| 3.29 | % |
| 3.47 | % |
| FHLB stock |
| 40,505 |
|
| 39,843 |
|
| 2,036 |
|
| 1,460 |
| 6.72 | % |
| 4.90 | % |
| Other investments |
| 2,795 |
|
| 2,701 |
|
| 9 |
|
| 6 |
| 0.43 | % |
| 0.30 | % |
| Total investments (3) |
| 2,857,920 |
|
| 2,369,188 |
|
| 63,993 |
|
| 51,049 |
| 2.99 | % |
| 2.88 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Residential mortgage loans |
| 3,195,572 |
|
| 3,265,031 |
|
| 128,793 |
|
| 131,090 |
| 5.39 | % |
| 5.37 | % |
| Construction loans |
| 120,734 |
|
| 139,829 |
|
| 3,261 |
|
| 3,821 |
| 3.61 | % |
| 3.65 | % |
| Commercial and Industrial and Commercial mortgage loans |
| 3,630,655 |
|
| 3,737,072 |
|
| 141,807 |
|
| 130,035 |
| 5.22 | % |
| 4.65 | % |
| Finance leases |
| 276,158 |
|
| 239,418 |
|
| 15,136 |
|
| 12,993 |
| 7.33 | % |
| 7.26 | % |
| Consumer loans |
| 1,492,579 |
|
| 1,479,026 |
|
| 124,907 |
|
| 124,533 |
| 11.19 | % |
| 11.26 | % |
| Total loans (4) (5) |
| 8,715,698 |
|
| 8,860,376 |
|
| 413,904 |
|
| 402,472 |
| 6.35 | % |
| 6.07 | % |
| Total interest-earning assets | $ | 11,573,618 |
| $ | 11,229,564 |
| $ | 477,897 |
| $ | 453,521 |
| 5.52 | % |
| 5.40 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Brokered CDs | $ | 892,980 |
| $ | 1,321,853 |
| $ | 11,715 |
| $ | 14,211 |
| 1.75 | % |
| 1.44 | % |
| Other interest-bearing deposits |
| 6,051,197 |
|
| 5,899,081 |
|
| 39,209 |
|
| 35,007 |
| 0.87 | % |
| 0.79 | % |
| Other borrowed funds |
| 373,639 |
|
| 515,855 |
|
| 13,808 |
|
| 14,471 |
| 4.94 | % |
| 3.75 | % |
| FHLB advances |
| 707,308 |
|
| 659,253 |
|
| 10,126 |
|
| 7,623 |
| 1.91 | % |
| 1.55 | % |
| Total interest-bearing liabilities | $ | 8,025,124 |
| $ | 8,396,042 |
| $ | 74,858 |
| $ | 71,312 |
| 1.25 | % |
| 1.14 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income |
|
|
|
|
|
| $ | 403,039 |
| $ | 382,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
| 4.27 | % |
| 4.26 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
| 4.66 | % |
| 4.55 | % |
|
|
|
|
|
|
|
|
|
|
Part II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter ended September 30, |
| Nine-Month Period Ended September 30, | ||||||||||||||
|
| 2019 compared to 2018 |
| 2019 compared to 2018 | ||||||||||||||
|
| Increase (decrease) |
| Increase (decrease) | ||||||||||||||
|
| Due to: |
| Due to: | ||||||||||||||
| (In thousands) | Volume |
| Rate |
| Total |
| Volume |
| Rate |
| Total | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income on interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Money market and other short-term investments | $ | 519 |
| $ | 396 |
| $ | 915 |
| $ | (1,063) |
| $ | 2,604 |
| $ | 1,541 |
| Government obligations |
| (2,017) |
|
| 1,595 |
|
| (422) |
|
| (3,164) |
|
| 4,176 |
|
| 1,012 |
| MBS |
| (832) |
|
| (567) |
|
| (1,399) |
|
| (516) |
|
| (120) |
|
| (636) |
| FHLB stock |
| 33 |
|
| (60) |
|
| (27) |
|
| 64 |
|
| (87) |
|
| (23) |
| Other investments |
| 1 |
|
| 1 |
|
| 2 |
|
| 1 |
|
| 10 |
|
| 11 |
| Total investments |
| (2,296) |
|
| 1,365 |
|
| (931) |
|
| (4,678) |
|
| 6,583 |
|
| 1,905 |
| Residential mortgage loans |
| (1,973) |
|
| (18) |
|
| (1,991) |
|
| (4,995) |
|
| (19) |
|
| (5,014) |
| Construction loans |
| (224) |
|
| 682 |
|
| 458 |
|
| (1,007) |
|
| 2,277 |
|
| 1,270 |
| Commercial and Industrial and Commercial mortgage loans |
| 2,386 |
|
| 4,888 |
|
| 7,274 |
|
| 5,225 |
|
| 16,486 |
|
| 21,711 |
| Finance leases |
| 1,575 |
|
| 42 |
|
| 1,617 |
|
| 4,738 |
|
| 439 |
|
| 5,177 |
| Consumer loans |
| 7,441 |
|
| 487 |
|
| 7,928 |
|
| 18,092 |
|
| 2,460 |
|
| 20,552 |
| Total loans |
| 9,205 |
|
| 6,081 |
|
| 15,286 |
|
| 22,053 |
|
| 21,643 |
|
| 43,696 |
| Total interest income |
| 6,909 |
|
| 7,446 |
|
| 14,355 |
|
| 17,375 |
|
| 28,226 |
|
| 45,601 |
| Interest expense on interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Brokered CDs |
| (1,329) |
|
| 677 |
|
| (652) |
|
| (5,611) |
|
| 2,208 |
|
| (3,403) |
| Other interest-bearing deposits |
| 553 |
|
| 3,461 |
|
| 4,014 |
|
| 761 |
|
| 8,654 |
|
| 9,415 |
| Other borrowed funds |
| (531) |
|
| (466) |
|
| (997) |
|
| (3,003) |
|
| 1,894 |
|
| (1,109) |
| FHLB advances |
| 248 |
|
| 286 |
|
| 534 |
|
| 490 |
|
| 874 |
|
| 1,364 |
| Total interest expense |
| (1,059) |
|
| 3,958 |
|
| 2,899 |
|
| (7,363) |
|
| 13,630 |
|
| 6,267 |
| Change in net interest income | $ | 7,968 |
| $ | 3,488 |
| $ | 11,456 |
| $ | 24,738 |
| $ | 14,596 |
| $ | 39,334 |
|
99
Part II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter ended September 30, |
| Nine-Month Period Ended September 30, | ||||||||||||||
|
| 2018 compared to 2017 |
| 2018 compared to 2017 | ||||||||||||||
|
| Increase (decrease) |
| Increase (decrease) | ||||||||||||||
|
| Due to: |
| Due to: | ||||||||||||||
| (In thousands) | Volume |
| Rate |
| Total |
| Volume |
| Rate |
| Total | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income on interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Money market & other short-term investments | $ | 900 |
| $ | 973 |
| $ | 1,873 |
| $ | 3,751 |
| $ | 2,554 |
| $ | 6,305 |
| Government obligations |
| 984 |
|
| 1,703 |
|
| 2,687 |
|
| 2,282 |
|
| 4,806 |
|
| 7,088 |
| Mortgage-backed securities |
| 1,088 |
|
| 537 |
|
| 1,625 |
|
| 732 |
|
| (1,760) |
|
| (1,028) |
| FHLB stock |
| (41) |
|
| 217 |
|
| 176 |
|
| 25 |
|
| 551 |
|
| 576 |
| Other investments |
| - |
|
| 3 |
|
| 3 |
|
| - |
|
| 3 |
|
| 3 |
| Total investments |
| 2,931 |
|
| 3,433 |
|
| 6,364 |
|
| 6,790 |
|
| 6,154 |
|
| 12,944 |
| Residential mortgage loans |
| (1,300) |
|
| 769 |
|
| (531) |
|
| (2,799) |
|
| 502 |
|
| (2,297) |
| Construction loans |
| (120) |
|
| 134 |
|
| 14 |
|
| (516) |
|
| (44) |
|
| (560) |
| Commercial and Industrial and Commercial mortgage loans |
| (1,888) |
|
| 4,884 |
|
| 2,996 |
|
| (3,957) |
|
| 15,729 |
|
| 11,772 |
| Finance leases |
| 963 |
|
| 266 |
|
| 1,229 |
|
| 2,012 |
|
| 131 |
|
| 2,143 |
| Consumer loans |
| 841 |
|
| 208 |
|
| 1,049 |
|
| 1,140 |
|
| (766) |
|
| 374 |
| Total loans |
| (1,504) |
|
| 6,261 |
|
| 4,757 |
|
| (4,120) |
|
| 15,552 |
|
| 11,432 |
| Total interest income |
| 1,427 |
|
| 9,694 |
|
| 11,121 |
|
| 2,670 |
|
| 21,706 |
|
| 24,376 |
| Interest expense on interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Brokered CDs |
| (1,997) |
|
| 781 |
|
| (1,216) |
|
| (5,129) |
|
| 2,633 |
|
| (2,496) |
| Other interest-bearing deposits |
| 308 |
|
| 989 |
|
| 1,297 |
|
| 921 |
|
| 3,281 |
|
| 4,202 |
| Other borrowed funds |
| (2,304) |
|
| 1,896 |
|
| (408) |
|
| (4,634) |
|
| 3,971 |
|
| (663) |
| FHLB advances |
| (220) |
|
| 355 |
|
| 135 |
|
| 587 |
|
| 1,916 |
|
| 2,503 |
| Total interest expense |
| (4,213) |
|
| 4,021 |
|
| (192) |
|
| (8,255) |
|
| 11,801 |
|
| 3,546 |
| Change in net interest income | $ | 5,640 |
| $ | 5,673 |
| $ | 11,313 |
| $ | 10,925 |
| $ | 9,905 |
| $ | 20,830 |
|
Portions of the Corporation’s interest-earning assets, mostly investments in obligations of some U.S. government agencies and sponsoredU.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 the Puerto Rico tax law (see “Income Taxes” below for additional information). To facilitate the comparison of all interest data related to these assets, the interest income has been converted to an adjusted taxabletax equivalent basis. The tax equivalent yield was estimated by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory tax rate (39.0%)(37.5% for 2019 and 39% for 2018) and adding to it the average cost of interest-bearing liabilities. The computation considers the interest expense disallowance required by Puerto Rico tax law.
TheManagement 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.analysis from period to period. The changes in the fair value of the derivative instruments have no effect on interest due or interest earned on interest-bearing liabilities or interest-earning assets, respectively.
100
The following table reconciles net interest income in accordance with GAAP to net interest income, excluding valuations, and net interest income on an adjusted tax-equivalent basis. The table also reconciles net interest spread and net interest margin on a GAAP basis to these items excluding valuations and on an adjusted tax-equivalent basis: | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||||||
(Dollars in thousands) | September 30, 2018 |
| September 30, 2017 |
| September 30, 2018 |
| September 30, 2017 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income - GAAP | $ | 157,492 |
|
| $ | 147,995 |
|
| $ | 462,543 |
|
| $ | 440,597 |
|
Unrealized loss on derivative instruments |
| - |
|
|
| - |
|
|
| - |
|
|
| 1 |
|
Interest income excluding valuations |
| 157,492 |
|
|
| 147,995 |
|
|
| 462,543 |
|
|
| 440,598 |
|
Tax-equivalent adjustment |
| 5,413 |
|
|
| 3,789 |
|
|
| 15,354 |
|
|
| 12,923 |
|
Interest income on a tax-equivalent basis excluding valuations |
| 162,905 |
|
|
| 151,784 |
|
|
| 477,897 |
|
|
| 453,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense - GAAP |
| 24,971 |
|
|
| 25,163 |
|
|
| 74,858 |
|
|
| 71,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income - GAAP | $ | 132,521 |
|
| $ | 122,832 |
|
| $ | 387,685 |
|
| $ | 369,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income excluding valuations - Non-GAAP | $ | 132,521 |
|
| $ | 122,832 |
|
| $ | 387,685 |
|
| $ | 369,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a tax-equivalent basis excluding valuations - Non-GAAP | $ | 137,934 |
|
| $ | 126,621 |
|
| $ | 403,039 |
|
| $ | 382,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases | $ | 8,676,620 |
|
| $ | 8,855,406 |
|
| $ | 8,715,698 |
|
| $ | 8,860,376 |
|
Total securities, other short-term investments and interest-bearing cash balances |
| 2,892,148 |
|
|
| 2,395,298 |
|
|
| 2,857,920 |
|
|
| 2,369,188 |
|
Average Interest-Earning Assets | $ | 11,568,768 |
|
| $ | 11,250,704 |
|
| $ | 11,573,618 |
|
| $ | 11,229,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Interest-Bearing Liabilities | $ | 7,830,063 |
|
| $ | 8,404,242 |
|
| $ | 8,025,124 |
|
| $ | 8,396,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Yield/Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average yield on interest-earning assets - GAAP |
| 5.40 | % |
|
| 5.22 | % |
|
| 5.34 | % |
|
| 5.25 | % |
Average rate on interest-bearing liabilities - GAAP |
| 1.27 | % |
|
| 1.19 | % |
|
| 1.25 | % |
|
| 1.14 | % |
Net interest spread - GAAP |
| 4.13 | % |
|
| 4.03 | % |
|
| 4.09 | % |
|
| 4.11 | % |
Net interest margin - GAAP |
| 4.54 | % |
|
| 4.33 | % |
|
| 4.48 | % |
|
| 4.40 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average yield on interest-earning assets excluding valuations - Non-GAAP |
| 5.40 | % |
|
| 5.22 | % |
|
| 5.34 | % |
|
| 5.25 | % |
Average rate on interest-bearing liabilities |
| 1.27 | % |
|
| 1.19 | % |
|
| 1.25 | % |
|
| 1.14 | % |
Net interest spread excluding valuations - Non-GAAP |
| 4.13 | % |
|
| 4.03 | % |
|
| 4.09 | % |
|
| 4.11 | % |
Net interest margin excluding valuations - Non-GAAP |
| 4.54 | % |
|
| 4.33 | % |
|
| 4.48 | % |
|
| 4.40 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average yield on interest-earning assets on a tax-equivalent basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and excluding valuations - Non-GAAP |
| 5.59 | % |
|
| 5.35 | % |
|
| 5.52 | % |
|
| 5.40 | % |
Average rate on interest-bearing liabilities |
| 1.27 | % |
|
| 1.19 | % |
|
| 1.25 | % |
|
| 1.14 | % |
Net interest spread on a tax-equivalent basis and excluding valuations - Non-GAAP |
| 4.32 | % |
|
| 4.16 | % |
|
| 4.27 | % |
|
| 4.26 | % |
Net interest margin on a tax-equivalent basis and excluding valuations - Non-GAAP |
| 4.73 | % |
|
| 4.47 | % |
|
| 4.66 | % |
|
| 4.55 | % |
102
101The following table reconciles net interest income in accordance with GAAP to net interest income, excluding valuations, and net interest income on an adjusted tax-equivalent basis for the indicated periods. The table also reconciles net interest spread and net interest margin on a GAAP basis to these items excluding valuations and on an adjusted tax-equivalent basis:
| Quarter Ended |
| Nine-Month Period Ended | ||||||||||||
(Dollars in thousands) | September 30, 2019 |
| September 30, 2018 |
| September 30, 2019 |
| September 30, 2018 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income - GAAP | $ | 172,295 |
|
| $ | 157,492 |
|
| $ | 508,277 |
|
| $ | 462,543 |
|
Unrealized loss on derivative instruments |
| 1 |
|
|
| - |
|
|
| 6 |
|
|
| - |
|
Interest income excluding valuations |
| 172,296 |
|
|
| 157,492 |
|
|
| 508,283 |
|
|
| 462,543 |
|
Tax-equivalent adjustment |
| 4,964 |
|
|
| 5,413 |
|
|
| 15,215 |
|
|
| 15,354 |
|
Interest income on a tax-equivalent basis excluding valuations |
| 177,260 |
|
|
| 162,905 |
|
|
| 523,498 |
|
|
| 477,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense - GAAP |
| 27,870 |
|
|
| 24,971 |
|
|
| 81,125 |
|
|
| 74,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income - GAAP | $ | 144,425 |
|
| $ | 132,521 |
|
| $ | 427,152 |
|
| $ | 387,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income excluding valuations - Non-GAAP | $ | 144,426 |
|
| $ | 132,521 |
|
| $ | 427,158 |
|
| $ | 387,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a tax-equivalent basis excluding valuations - Non-GAAP | $ | 149,390 |
|
| $ | 137,934 |
|
| $ | 442,373 |
|
| $ | 403,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases | $ | 9,026,725 |
|
| $ | 8,676,620 |
|
| $ | 8,992,156 |
|
| $ | 8,715,698 |
|
Total securities, other short-term investments and interest-bearing cash balances |
| 2,691,584 |
|
|
| 2,892,148 |
|
|
| 2,655,820 |
|
|
| 2,857,920 |
|
Average Interest-Earning Assets | $ | 11,718,309 |
|
| $ | 11,568,768 |
|
| $ | 11,647,976 |
|
| $ | 11,573,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Interest-Bearing Liabilities | $ | 7,819,008 |
|
| $ | 7,830,063 |
|
| $ | 7,716,951 |
|
| $ | 8,025,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Yield/Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average yield on interest-earning assets - GAAP |
| 5.83 | % |
|
| 5.40 | % |
|
| 5.83 | % |
|
| 5.34 | % |
Average rate on interest-bearing liabilities - GAAP |
| 1.41 | % |
|
| 1.27 | % |
|
| 1.41 | % |
|
| 1.25 | % |
Net interest spread - GAAP |
| 4.42 | % |
|
| 4.13 | % |
|
| 4.42 | % |
|
| 4.09 | % |
Net interest margin - GAAP |
| 4.89 | % |
|
| 4.54 | % |
|
| 4.90 | % |
|
| 4.48 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average yield on interest-earning assets excluding valuations - Non-GAAP |
| 5.83 | % |
|
| 5.40 | % |
|
| 5.83 | % |
|
| 5.34 | % |
Average rate on interest-bearing liabilities |
| 1.41 | % |
|
| 1.27 | % |
|
| 1.41 | % |
|
| 1.25 | % |
Net interest spread excluding valuations - Non-GAAP |
| 4.42 | % |
|
| 4.13 | % |
|
| 4.42 | % |
|
| 4.09 | % |
Net interest margin excluding valuations - Non-GAAP |
| 4.89 | % |
|
| 4.54 | % |
|
| 4.90 | % |
|
| 4.48 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average yield on interest-earning assets on a tax-equivalent basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and excluding valuations - Non-GAAP |
| 6.00 | % |
|
| 5.59 | % |
|
| 6.01 | % |
|
| 5.52 | % |
Average rate on interest-bearing liabilities |
| 1.41 | % |
|
| 1.27 | % |
|
| 1.41 | % |
|
| 1.25 | % |
Net interest spread on a tax-equivalent basis and excluding valuations - Non-GAAP |
| 4.59 | % |
|
| 4.32 | % |
|
| 4.60 | % |
|
| 4.27 | % |
Net interest margin on a tax-equivalent basis and excluding valuations - Non-GAAP |
| 5.06 | % |
|
| 4.73 | % |
|
| 5.08 | % |
|
| 4.66 | % |
103
Interest income on interest-earning assets primarily represents interest earned on loans held for investment and investment securities.
Interest expense on interest-bearing liabilities primarily represents interest paid on brokered CDs, branch-basedretail deposits, repurchase agreements, advances from the FHLB and junior subordinated debentures.
Unrealized gains or losses on derivatives represent changes in the fair value of derivatives, primarily interest rate caps used for protection against rising interest rates.
For the quarter and nine-month period ended September 30, 2018,2019, net interest income increased $9.7$11.9 million to $132.5$144.4 million, and $18.4$39.5 million to $387.7$427.2 million, respectively, compared to the same periods in 2017.2018. The $9.7$11.9 million increase in net interest income for the third quarter of 2018,2019, compared to the same period in 2017,2018, was primarily due to:
·A $3.0$9.5 million increase in interest income on investment securities, primarilyconsumer loans, mainly due to a $266.7$342.8 million increase in the average balance of U.S. agencies debtthis portfolio, primarily due to the growth in the average balance of auto loans, finance leases, and mortgage-backed securities. Thepersonal loans and, to a lesser extent, higher average volume reflects the gradual reinvestment of liquidity in higher-yielding securities, including the effect of purchases during the first nine months of 2018 of $424.9 million of U.S. agencies debt and mortgage-backed securities with an average yield of 3.08%.yields on new loan originations.
·A $2.9$7.5 million increase in interest income on commercial and construction loans, primarily associated with the upward repricing of variable-rate commercial loans.
·A $2.3 million increase in interest income on consumer loans, primarily due to an $81.4 million increasethe growth in the average balance of thisthe performing commercial loan portfolio and a lower amount of inflows of consumer loans to non-performing status duringthe effect in the third quarter of 2018 as compared with2019 of a $3.0 million accelerated discount from the same periodpayoff of a year ago.commercial mortgage loan.
·A $1.8$0.9 million increase in interest income from interest-bearing cash balances due to both an increase of $141.5$103.4 million in the average balance of deposits maintained at the New York FED and increases in thea higher average Federal Funds target rate. A growth in non-interest-bearing deposits provided higher liquidity levels inrate during the third quarter of 2018, as compared to the same period a year ago. In addition, the Federal Funds target rate has increased four times since the end of the third quarter of 2017 from a range of 1.00%-1.25% to its current range of 2.00%-2.25%.
·A $0.2 million decrease in interest expense, primarily due to a decrease of $574.1 million in the average balance of interest-bearing liabilities, primarily brokered CDs and repurchase agreements. Over the last 12 months, the Corporation repaid $680.8 million of maturing brokered CDs with an all-in cost of 1.33% and new issuances amounted to $98.2 million with an all-in cost of 1.81%. While the Corporation continues to reduce its reliance on brokered CDs, it is increasing the core deposit base. For the third quarter of 2018, the average balance of non-brokered interest-bearing-deposits increased by $146.6 million and the average balance of non-interest-bearing deposits increased by $745.5 million, as2019 compared to the same period in 2017. In addition, during the third quarter of 2017, the Corporation repaid at maturity2018.
Partially offset by:
A $2.9 million increase in total interest expense, primarily reflecting: (i) a $100$4.0 million repurchase agreement that carried a cost of 3.11% and an additional $100 million repurchase agreement carried at a cost of 1.96% was repaid in the third quarter of 2018. The decreaseincrease in interest expense attributable to lower average balances of brokered CDs and borrowings was partially offseton non-brokered interest-bearing deposits, driven by the effect of higher market interest rates on the cost of retail CDs commercial money market accounts tiedand saving deposits and, to variable short-terma lesser extent, the increase of $240.1 million in the average balance of non-brokered interest-bearing deposits and (ii) a $0.5 million increase in interest rates,expense on FHLB advances, primarily related to the higher average cost of new FHLB advances obtained since the end of the third quarter of 2018, as compared to FHLB advances that matured during such period. The increases were partially offset by: (i) a $0.7 million decrease in interest expense on brokered CDs, primarily related to a $261.4 million decrease in the average balance of brokered CDs that more than offset higher costs of new issuances and (ii) a $1.0 million decrease in interest expense on repurchase agreements that reflects both the effect of a $100 million repurchase agreement that was called prior to maturity during the third quarter of 2018 that carried a cost of 1.96% and the downward repricing of variable-rate repurchase agreementsagreements. Over the last 12 months, the Corporation repaid $370.2 million of matured brokered CDs with an all-in cost of 1.64%, and subordinated debentures. new issuances amounted to $179.2 million with an all-in cost of 2.63%.
Partially offset by:
·A $0.5$2.0 million decrease in interest income on residential mortgage loans, primarily associated with a $98.1$146.6 million decrease in the average balance of this portfolio,portfolio.
A $1.1 million decrease in interest income on investment securities, primarily due to a $298.5 million decrease in the average balance of U.S. agency bonds and MBS, partially offset by a lower amountapproximately $0.7 million of inflowsaccelerated discount accretions related to $129.0 million of residential mortgage loansU.S. agency bonds that were called prior to non-performing status duringmaturity in the third quarter of 2018 as compared with the same period a year ago.2019.
The $18.4$39.5 million increase in net interest income for the first nine months of 2018,2019, compared to the same period in 2017,2018, was primarily due to:
·An $11.0 million increase in interest income on commercial and construction loans, primarily associated with the upward repricing of variable rate commercial loans.
·A $6.3 million increase in interest income from interest-bearing cash balances due to both an increase of $276.2 million in the average balance of deposits maintained at the New York FED and the aforementioned increases in the Federal Funds target rate.
102
·A $4.5 million increase in interest income on investment securities, primarily due to the gradual reinvestment of liquidity in higher-yielding U.S. agencies debt securities. The average balance of investment securities, primarily U.S. agencies debt and mortgage-backed securities, increased by $136.8 million in the first nine months of 2018, as compared to the same period a year ago.
·A $2.5$25.7 million increase in interest income on consumer loans, mainlyprimarily due to a $50.3$296.8 million increase in the average balance of this portfolio in the first nine months of 2018,2019, as compared to the same period in 2017,2018, primarily due to the growth in the average balance of auto loans, finance leases, and finance leases. personal loans, and, to a lesser extent, higher yields on new loan originations.
104
A $22.6 million increase in interest income on commercial and construction loans, primarily attributable to higher average short-term market interest rates during 2019, compared to the 2018 first nine-month level, which was reflected in both the upward repricing of variable-rate commercial loans and higher yields on new loan originations during the first half of 2019 and the second half of 2018. In addition, there was an increase of $103.6 million in the aggregate average balance of these portfolios, net of reductions in nonaccrual commercial and construction loans. Interest income on commercial and construction loans for the first nine months of 2019, included the aforementioned $3.0 million accelerated discount accretion from the payoff of a large commercial mortgage loan.
A $1.5 million increase in interest income from interest-bearing cash balances, primarily deposits maintained at the New York FED, due to higher Federal Funds target rates during the first nine months of 2019, compared to levels in the first nine months of 2018.
A $0.9 million increase in interest income on investment securities, primarily due to accelerated discount accretions of $1.0 million related to U.S. agency bonds called prior to maturity and an increase of approximately $0.2 million related to the upward repricing of certain variable-rate Puerto Rico municipal bonds held by the Corporation and accounted for as held-to-maturity securities.
Partially offset by:
·A $3.5$6.3 million increase in interest expense driven by: (i) a $4.2$9.4 million increase in interest expense on non-brokered interest-bearing deposits, driven by higher market interest rates on the cost of retail CDs and commercial money market accounts tied to variable short-term interest rates,savings deposits and (ii) a $2.5$1.4 million increase in interest expense on FHLB advances, reflectingprimarily related to the higher average cost of new FHLB advances obtained since the end of the third quarter of 2018, as compared to the average cost of FHLB advances that matured during such period, and an increase of $48.1 million in the average balance and the effect of a higher reliance in the use of short-term advances during 2017.balance. The aforementioned increases were partially offset by a $2.5$3.5 million decrease in interest expense on brokered CDs, primarily related to a $428.9$381.4 million decrease in the average balance that more than offset higher costs of new issuances in the first nine months of 2017. There were no new brokered CDs issued during 2018. issuances.
·A $2.2$5.0 million decrease in interest income on residential mortgage loans, primarily associated with a $69.5$123.9 million decrease in the average balance of this portfolio.
The net interest margin increased by 2135 basis points to 4.54%4.89% for the third quarter of 2018,2019, compared to the same period in 2017,2018, and increased by 842 basis points to 4.48%4.90% for the first nine months of 2018,2019, compared to the same period in 2017.2018. The increase was primarily driven by the upward repricing of variable rate commercial loans, the gradual reinvestment of liquidity in higher-yielding securities, andhigher loan yields, an improved funding mix, driven by the increase in the proportion of interest-earning assets funded by thea growth in non-interest-bearing deposits. deposits, and an increase in the proportion of higher-yielding loans, such as consumer loans, to total interest-earning assets. The higher yield on commercial and construction loans includes the effect of the $3.0 million accelerated discount accretion from the payoff of a large commercial mortgage loan, which increased the net interest margin by approximately 10 basis points in the third quarter of 2019 and 3 basis points in the first nine months of 2019. The average balance of non-interest bearing deposits increased by $170.5 million to $2.3 billion for the first nine months of 2019, compared to $2.2 billion for the nine months of 2018.
On an adjusted tax-equivalent basis, net interest income for the quarter ended September 30, 20182019 increased by $11.3$11.5 million to $137.9$149.4 million, compared to the same period in 2017,2018, and by $20.8$39.3 million to $403.0$442.4 million for the first nine months of 2018,2019, compared to the same period in 2017. In addition to the facts discussed above, the increase in the third quarter of 2018, as compared to the same period in 2017, also includes an increase of $1.6 million in the tax-equivalent adjustment related to the increased interest income of tax-exempt U.S. agencies’ debt and mortgage-backed securities. For the first nine months of 2018, the tax equivalent adjustment increased by $2.4 million, as compared to the same period in 2017. 2018.
Provision for Loan and Lease Losses
The provision for loan and lease losses is charged to earnings to maintain the allowance for loan and lease losses at a level that the Corporation considers adequate to absorb probable incurred losses inherent in the portfolio. The adequacy of the allowance for loan and lease losses is also based upon a number of additional factors, including trends in charge-offs and delinquencies, current economic conditions, the fair value of the underlying collateral and the financial condition of the borrowers, and, as such, includes amounts based on judgments and estimates made by the Corporation. Important factors that influence this judgment are re-evaluated on a quarterly basis to respond to changing conditions.
105
As described in Note 2 – Update3, “Update on Effects of Natural Disasters, in the consolidated financial statements,” two strong hurricanes affected the Corporation’s service areas during September 2017. These hurricanes caused widespread property damage, flooding, power outages, and water and communication service interruptions, and severely disrupted normal economic activity in the affected areas. During the thirdfirst quarter of 2017, the Corporation recorded a $66.5 million charge to the provision related to the establishment of qualitative reserves associated with the effects of Hurricanes Irma and Maria. Models were developed based on a regression modeling approach in which relationships between portfolio-level loss rates and key economic indicators were derived based on historical behavior. Accordingly, the qualitative reserves were determined based on the estimated effect that the hurricanes could have on employment levels and economic activity in the Corporation’s service areas, and the time that it could take for the affected regions to return to a more normalized operating environment. For large commercial and construction loan relationships, loan officers performed individual reviews of the effect of the hurricanes on these borrowers’ sources of repayments. These large relationships were analyzed and divided into three hurricane-affected categories (i.e., Low, Medium and High). This stratification was used to stress the general reserve loss factors applicable to these loans to reflect higher default probabilities than those reflected in the historical data. For commercial and construction loans not individually reviewed, as well as residential and consumer loans, the hurricane-related qualitative reserves were determined following the above-mentioned qualitative hurricane-related model with resulting loss factors applied to the overall performing balance of each portfolio.
103
Relationship officers have continued to closely monitor the performance of hurricane-affected commercial loan customers during 2018. Information provided by these commercial loan officers, including information derived from regularly scheduled annual reviews, and statistics on the performance of consumer and residential credits were factored into the determination of the allowance for loan and lease losses as of September 30, 2018. Although the identification and evaluation of hurricane-affected credits has been completed, management’s assessment of the hurricanes’ effect is still subject to uncertainties, both those specific to some individual customers, such as the resolution of insurance claims, and those applicable to the overall economic prospects of the hurricane-affected areas as a whole. During the third quarter of 2018, the Corporation performed additional procedures to evaluate the adequacy of the qualitative reserves, including the consideration of updated payment patterns and probability of default credit risk analyses applied to consumer loan borrowers subject to payment deferral programs that expired early in 2018.
During the third quarter and nine-month period ended September 30, 2018,2019, the Corporation recorded a net loan loss reserve release of $2.8approximately $6.4 million and $11.2 million, respectively, in connection with revised estimates associated with the effects of the hurricanes. In additionApproximately $3.0 million of the $6.4 million reserve release recorded in the first quarter of 2019 was attributable to the above-mentioned updated assessments of financial performance and repayment prospects of certain individually-assessed commercial credits and updated payment patterns and probability of default credit risk analyses applied to consumer borrowers that were subject to payment deferral programs thethat expired early in 2018. In addition, there was a $3.4 million reserve releasesrelease recorded in 2018 reflect the effect of payments received during the first nine monthsquarter of 2018 that reduced2019 associated with the balanceresolution of uncertainties surrounding the consumerrepayment prospects of a hurricane-affected commercial customer. The significant overall uncertainties in the early assessments of hurricane-related credit losses have been largely addressed and residential mortgagethe hurricanes’ effect on credit quality is now reflected in the normal process for determining the allowance for loan portfolios outstanding onand lease losses and not through a separate hurricane-related qualitative reserve. For the dates of the hurricanes. As ofquarter and nine-month period ended September 30, 2018, the Corporation recorded net loan loss reserve releases of $2.8 million and $11.2 million, respectively, related to revised estimates of the hurricane-related qualitative allowance amountedreserves. The methodologies that the Corporation used to $24.9 million. Withdetermine the ongoing collectionhurricane-related qualitative estimate and for the review of informationindividual large commercial credits are discussed in detail in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” in the Corporation’s audited consolidated financial statements for the year ended December 31, 2018, which are included in the 2018 Annual Report on individual commercial customers and statistics on the consumer and residential mortgage loan portfolios, the loss estimate will be revised as needed. Form 10-K.
On a non-GAAP basis, excluding the effectaforementioned effects of the reserve releasereleases associated with revised estimates of the hurricane-related qualitative allowance inreserves, the provision for loan and lease losses of $7.4 million for the third quarter of 2018 and2019 decreased by $6.9 million, as compared to the establishmentadjusted provision of the hurricane-related qualitative reserve in$14.3 million for the third quarter of 2017,2018. The $6.9 million decrease in the adjusted provision for loan and lease losses increasedwas driven by $5.8the following factors:
A $6.5 million net loan loss reserve release for commercial and construction loans in the third quarter of 2019, compared to a $14.3 million adjusted provision charge in the third quarter of 2018. The $6.5 million net loan loss reserve release in the third quarter of 2019 was primarily due to: (i) approximately $4.2 million of net loan loss reserve releases related to both lower historical loss rates, primarily for the commercial and industrial loan portfolio, and the upgrade in the credit risk classification of a large commercial and industrial loan; (ii) a $2.6 million release associated with the early payoff of two large criticized commercial mortgage loans; and (iii) a $1.7 million loan loss recovery associated with a commercial and industrial loan fully charged-off in prior periods. The $14.3 million adjusted provision recorded in the third quarter of 2018 as compared toincluded the provisioneffect of $8.5 million for the third quarter of 2017. The $5.8 million increase in the adjusted provision was driven by:
·A $24.4 million increase in the adjusted provision for commercial and construction loans, primarily due to a $10.1 million charge related to non-performingseveral nonaccrual commercial and construction loans transferred to held for sale in the third quarter of 2018 and the effect in the third quarter of 2017 of reserve releases of approximately $10.1 million primarily attributable to both lower specific reserve requirements on certain impaired commercial and industrial loans and improvements in historical loss rates used for the general reserve calculation. During the third quarter of 2018, the Corporation transferred to held for sale several non-performing commercial and construction loans.during such period. The aggregate recorded investment in these transferred loans of $29.8 million was written down to $17.3 million, which resulted in charge-offs of $12.5 million and the aforementioned incremental loss of $10.1 million reflectedrecorded in the provision for loan and lease losses for the third quarter of 2018. .
Partially offset by:
·A $9.4$12.1 million decreaseincrease in the adjusted provision for consumer loans, as approximately $10.9 million ofprimarily reflecting the consumer loan charge-offs recordedeffect in the third quarter of 2018 of the approximately $10.9 million of consumer loan charge-offs that were taken against previously-established qualitative reserves associated with Hurricanes Irma and Maria. These charge-offs were directly linked to the performance of consumer borrowers that were subject to payment deferral programs.
·A $9.2 million decrease In addition, there were increases associated with the overall increase in the adjustedsize of this portfolio during 2019.
A $1.8 million increase in the provision for residential mortgage loans, mainly reflecting less favorable downward adjustments to the reserve related to the declinechanges in non-performingvolume, severity of past due loans, and delinquency loan levels, the overall decrease in the size of this portfolio, and a decrease in required reserves for troubled debt restructured mortgage loans.
On a non-GAAP basis, excluding the effect of reserve releases associated with revised estimates of the hurricane-related qualitative allowance in the first nine months of 2018 and the establishment of the hurricane-related qualitative reserve in the third quarter of 2017, the adjusted provision for loan and lease losses of $62.8 million for the first nine months of 2018 increased by $10.7 millionloans, as compared to the adjusted provision of $52.1 million for the first nine months of 2017. The $10.7 million increase in the adjusted provision was driven by:
·A $40.0 million increase in the adjusted provision for commercial and construction loans, driven by $15.7 million in charges to the provision related to loans transferred to held for sale during 2018 (including a charge of approximately $5.6 million related to non-performing loans transferred to held for sale in the first quarter of 2018 that were subsequently sold during the second and third quarters of 2018). In addition, the higher adjusted provision for commercial and construction loans reflects the effect of charges to the provision totaling $11.1 million associated with the downgrade in the credit risk classification of two large commercial relationships in 2018, and the effect in 2017 of a $4.2 million recovery on a previously charged-off commercial loan in Puerto Rico, partially offset by a $1.6 million decrease related to refinements to both the determination of the historical loss rates and the measurement of qualitative factors used in the estimation process of the general reserve for commercial loans, as further discussed below.
104
Partially offset by:
·A $25.0 million decrease in the adjusted provision for residential mortgage loans, reflecting lower charge-off levels, a decline in non-performing and delinquency loan levels, the overall decrease in the size of this portfolio, the effect in 2017 of adjustments to the loss severity estimates used in the calculation of the general reserve, and the decrease in required reserves for troubled debt restructured mortgage loans.
·A $4.2 million decrease in the adjusted provision for consumer loans, primarily reflecting the above-mentioned effect of approximately $10.9 million of consumer loan charge-offs recorded in the third quarter of 2018 taken against previously-established qualitative reserves associated with Hurricanes Irma and Maria, partially offset by the increase in size of the auto and finance leases portfolio, the effect of refinements discussed below in the measurement of qualitative factors used in the determination of the general reserve of consumer loans implemented in the second quarter of 2018, and the effect in 2017 of a loan loss recovery of $1.2 million on the sale of certain credit card loans that had been fully charged-off in prior periods.2018.
During the second quarter of 2018, and as part of the Corporation’s plan to remediate a material weakness identified in the preparation of financial statements included in the 2017Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017, an independent third party engaged by the Corporation completed its assessment of the commercial allowance for loan losses framework and the appropriateness of assumptions used in the analysis. The Corporation reviewed the assessment and decided to implement certain enhancements, which include, among others, a revised procedure whereby historical loss rates for each commercial loan regulatory-based credit risk category (i.e.(i.e., pass, special mention, substandard, and doubtful) are now calculated using the historical charge-offs and portfolio balances over their average loss emergence period (the “raw loss rate”) for each credit risk classification. However, when not enough loss experience is observed in a particular risk-rated category and the calculation results in a loss rate for such risk-rated category that is lower than the loss rate of a less severe risk-rated category, the Corporation now uses the loss rate of such less severe category. Accordingly, during the second quarter of 2018, the Corporation applied the raw loss rate determined for loans rated pass to the commercial real estate loans rated special mention, instead of the lower raw loss rate that resulted for the special mention category.
106
As of March 31, 2018, the historical losses and portfolio balances of special mention loans were allocated to pass or substandard categories based on the historical proportion of loans in this risk category that ultimately cured or resulted in being uncollectible.
In addition, during the second quarter of 2018, the Corporation implemented refinements to the measurement of qualitative factors in the estimation process of the allowance for loan losses for commercial and consumer loans, primarily consisting of the incorporation of a basis point adjustment derived from the difference between the average raw loss rate and the highest loss rates observed during a look-back period that management determined was appropriate to use for each region to identify any relevant effect during an economic cycle.
Although the net effect of these refinements was immaterial to the total provision expense in 2018, on a portfolio basis these enhancements resulted in a $1.6 million decrease in the provision for commercial and construction loans in the second quarter of 2018, offset by a $1.6 million increase in the provision for consumer loans.
On a non-GAAP basis, excluding the aforementioned effects of reserve releases associated with the hurricane-related qualitative reserves, the adjusted provision for loan and lease losses decreased by $24.6 million to $38.2 million for the first nine months of 2019, as compared to the adjusted provision of $62.8 million for the first nine months of 2018. The $24.7 million decrease in the adjusted provision for loan and lease losses was driven by the following factors:
An $4.6 million net loan loss reserve release for commercial and construction loans in the first nine months of 2019, compared to a $37.2 million adjusted provision in the first nine months of 2018. The $4.6 million net loan loss reserve release in the first nine months of 2019 was primarily due to: (i) approximately $3.5 million of net loan loss reserve releases related to lower historical loss rates and (ii) loan loss recoveries of approximately $4.1 million associated with commercial and construction loans that were fully charged-off in prior periods. The $37.2 million adjusted provision recorded in the first nine months of 2018 included the effect of $15.7 million in charges related to several nonaccrual commercial and construction loans transferred to held for sale during such period. The aggregate recorded investment in these transferred loans of $96.6 million was written down to $74.4 million, which resulted in charge-offs of $22.2 million and the aforementioned incremental losses of $15.7 million recorded in the first nine months of 2018. In addition, the provision for the first nine months of 2018 included charges totaling $11.1 million related to the downgrade of three large commercial loans totaling $110.3 million in 2018.
Partially offset by:
A $4.6 million increase in the adjusted provision for residential mortgage loans, mainly reflecting less favorable downward adjustments to the reserve related to changes in volume, severity of past due loans, and troubled debt restructured loans, as compared to adjustments recorded in the first nine months of 2018, and the effect of updated appraisals in 2019 indicating lower collateral values.
A $12.5 million increase in the adjusted provision for consumer loans primarily reflecting the above-mentioned effect of approximately $10.9 million of consumer loan charge-offs recorded in the third quarter of 2018 taken against previously-established qualitative reserves associated with Hurricanes Irma and Maria, partially offset by the increase in size of the auto and finance leases portfolio, and the effect of refinements discussed below in the measurement of qualitative factors used in the determination of the general reserve of consumer loans implemented in the second quarter of 2018.
See “Basis of Presentation” below for a reconciliation of the GAAP provision for loan and lease losses to the non-GAAP adjusted provision for loan and lease losses excluding the effectseffect of the hurricane-related reserve releases in 2018 and the establishment of the hurricane-related qualitative reserve in 2017.releases. Also see “Risk Management -– Credit Risk Management” below for an analysis of the allowance for loan and lease losses, non-performing assets, impaired loans and related information, and see “Financial Condition and Operating Data Analysis – Loan Portfolio” as well as “RiskPortfolio 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.
105
Non-Interest Income |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended September 30, |
| Nine-Month Period Ended September 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
| (In thousands) |
|
| |||||||||
|
|
|
| |||||||||
| Service charges on deposit accounts | $ | 5,581 |
| $ | 5,797 |
| $ | 16,013 |
| $ | 17,390 |
| Mortgage banking activities |
| 4,551 |
|
| 3,117 |
|
| 13,551 |
|
| 11,579 |
| Insurance income |
| 1,493 |
|
| 1,377 |
|
| 6,628 |
|
| 6,819 |
| Other operating income |
| 6,898 |
|
| 6,963 |
|
| 23,271 |
|
| 22,118 |
| Non-interest income before net gain (loss) on investment securities |
|
|
|
|
|
|
|
|
|
|
|
| and gain on early extinguishment of debt |
| 18,523 |
|
| 17,254 |
|
| 59,463 |
|
| 57,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net gain on sale of investments securities |
| - |
|
| - |
|
| - |
|
| 371 |
| OTTI on debt securities |
| - |
|
| - |
|
| - |
|
| (12,231) |
| Net gain (loss) on investments securities |
| - |
|
| - |
|
| - |
|
| (11,860) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gain on early extinguishment of debt |
| - |
|
| 1,391 |
|
| 2,316 |
|
| 1,391 |
| Total | $ | 18,523 |
| $ | 18,645 |
| $ | 61,779 |
| $ | 47,437 |
107
Non-Interest Income |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended September 30, |
| Nine-Month Period Ended September 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
| (In thousands) |
|
| |||||||||
|
|
|
| |||||||||
| Service charges on deposit accounts | $ | 6,108 |
| $ | 5,581 |
| $ | 17,711 |
| $ | 16,013 |
| Mortgage banking activities |
| 4,396 |
|
| 4,551 |
|
| 12,418 |
|
| 13,551 |
| Insurance income |
| 1,983 |
|
| 1,493 |
|
| 8,258 |
|
| 6,628 |
| Other operating income |
| 9,411 |
|
| 6,898 |
|
| 28,277 |
|
| 23,271 |
| Non-interest income before gain (loss) on |
|
|
|
|
|
|
|
|
|
|
|
| investments and impairments and |
|
|
|
|
|
|
|
|
|
|
|
| gain on early extinguishment of debt |
| 21,898 |
|
| 18,523 |
|
| 66,664 |
|
| 59,463 |
| Net gain on sale of investments securities |
| - |
|
| - |
|
| - |
|
| - |
| OTTI on debt securities |
| (497) |
|
| - |
|
| (497) |
|
| - |
| Net (loss) gain on investments securities |
| (497) |
|
| - |
|
| (497) |
|
| - |
| Gain on early extinguishment of debt |
| - |
|
| - |
|
| - |
|
| 2,316 |
| Total | $ | 21,401 |
| $ | 18,523 |
| $ | 66,167 |
| $ | 61,779 |
106108
Non-interest income primarily consists of income from service charges on deposit accounts, commissions derived from various banking securities and insurance activities, gains and losses on mortgage banking activities, interchange and other fees related to debit and credit cards, and net gains and losses on investments and impairments.
Service charges on deposit accounts include monthly fees, overdraft fees, and other fees on deposit accounts, as well as corporate cash management fees.
Income from mortgage banking activities includes gaingains on sales and securitizationsecuritizations of loans, revenues earned for administering residential mortgage loans originated by the Corporation and subsequently sold with servicing retained, and unrealized gains and losses on forward contracts used to hedge the Corporation’s securitization pipeline. In addition, lower-of-cost-or-market valuation adjustments to the Corporation’s residential mortgage loans held-for-sale portfolio and servicing rights portfolio, if any, are recorded as part of mortgage banking activities.
Insurance income consists mainly of insurance commissions earned by the Corporation’s subsidiary, FirstBank Insurance Agency, Inc.
The other operating income category is composed of miscellaneous fees such as debit, credit card and point of sale (“POS”) interchange fees, as well as contractual shared revenues from merchant contracts sold in 2015.
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 as well as OTTI charges on the Corporation’s investment portfolio.
The gain on early extinguishment of debt is related to the repurchase and cancellation of $23.8 million and $7.3 million in trust-preferred securities of FBP Statutory Trust I in the first quarter of 2018 and third quarter of 2017, respectively.$23.8 million in TRuPs of FBP Statutory Trust I that were auctioned in a public sale at which the Corporation was invited to participate. The Corporation repurchased and cancelled the repurchased trust-preferred securities, which resultedTRuPs, resulting in a commensurate reduction in the related Floating Rate Junior Subordinated Debentures.amount of the floating rate junior subordinated debentures. The Corporation’s purchase pricewinning bid equated to 90% of the $23.8 million par value of the trust-preferred securities repurchased in the first quarter of 2018 and the purchase price equated to 81% of the $7.3 million par value of the trust-preferred securities repurchased in the third quarter of 2017.value. The 10% discount for the trust-preferred securities repurchased in the first quarter of 2018 resulted in a gain of $2.3 million, and the 19% discount for the trust-preferred securities repurchased in the third quarter of 2017, plus accrued interest, resulted in a gain of $1.4 million. These gains arewhich is reflected in the statementconsolidated statements of operationsincome as a “GainGain on early extinguishment of debt.” As of September 30, 2018,2019, the Corporation still had Floating Rate Junior Subordinated Debenturesfloating rate junior subordinated debentures (“subordinated debt”) outstanding in the aggregate amount of $184.2 million.
Non-interest income for the third quarter of 2018 was $18.52019 amounted to $21.4 million, compared to $18.6$18.5 million for the same period in 2017.2018. The $0.1$2.9 million decreaseincrease in non-interest income was primarily duerelated to:
·A $2.72.5 million net loss from salesincrease in Other operating income in the table above, primarily related to: (i) the effect in the third quarter of 2018 of $25.5a $2.7 million net loss from sales of $24.5 million of non-performingnonaccrual commercial and construction loans held for sale included as part of “Other operating income”and (ii) a $0.7 million increase in the table above.
·The effecttransaction fee income from credit and debit card interchange fees due to higher transaction volumes in the third quarter of 2017 of the $1.4 million gain on the repurchase and cancellation of $7.3 million in trust preferred securities.
Partially2019. These variances were partially offset by:
·A $1.4 million increase in revenues from mortgage banking activities driven by the effect in the third quarter of 20172018 of both a $0.7 million adjustment to increase the valuation allowance of mortgage servicing rights, and a $0.5 million increase in gain on sales of residential mortgage loans. Total loans sold in the secondary market to U.S government-sponsored entities amounted to $89.2 million with a related net gain of $3.0 million, including gains of $0.2 million on To-Be-Announced mortgage-backed securities (“TBA”) hedges, in the third quarter of 2018, compared to total loans sold in the secondary market of $85.1 million with a related net gain of $2.4 million, net of TBA hedges losses of $0.3 million, in the third quarter of 2017. In addition, servicing fees increased by $0.2 million in the third quarter of 2018 when compared to the same period of 2017.
·A $1.0 million increase in transaction fee income from ATM, POS, credit and debit card interchange fees, and merchant-related transactions included as part of “Other operating income” in the table above.
·A $0.5 million gain from hurricane-related insurance proceeds, included as part of “Other operating income” in the table above.
·A $0.5 million gain on the sale of fixed assets of a relocated banking branch in Puerto Rico included as part of “Other operating income” in the table above.
107
and a $0.5 million gain from hurricane-related insurance proceeds.
·
A $0.2$0.5 million increase in certain non-deferrable loan fees, suchservice charges on deposits, primarily related to an increase in returned items and overdraft transactions, as unused commitment fees. well as an increase in the number of cash management transactions of commercial clients.
Non-interest income for the nine-month period ended September 30, 2018 amounted to $61.8 million, compared to $47.4 million for the same period in 2017. The $14.4A $0.5 million increase in non-interestinsurance commission income, was primarily due to:including $0.3 million of contingent commissions recognized by the insurance agency in the third quarter of 2019.
·The effect in 2017 of the $12.2Partially offset by:
A $0.5 million OTTI charge on three Puerto Rico Government debt securities held by the Corporation as part of its available-for-sale securities portfolio, specifically the aforementioned bonds of the GDB and the Puerto Rico Public Buildings Authority soldprivate label MBS recorded in the secondthird quarter of 2017.2019.
·A $1.9$0.2 million increasedecrease in revenues from mortgage banking activities, driven by a net variance of $2.3 millionprimarily related to adjustments recorded against the valuation allowance of mortgage servicing rights. During the first nine months of 2018, the valuation allowance ofa $0.8 million increase in mortgage servicing rights was reduced by $1.3 million compared to temporary impairments on servicing rights of $1.0 million recorded for the same period in 2017. In addition, servicing fees increased by $0.4 million. These variances wereamortization expense, partially offset by a $0.8$0.5 million decreaseincrease in gain on salerealized gains from sales of residential mortgage loans.loans and a $0.1 million increase in servicing fees collected. Total loans sold in the secondary market to U.SU.S. government-sponsored entities (“GSEs”), amounted to $260.1$92.4 million with a related net gain of $7.6$3.2 million, including gainsnet of $1.0realized losses of $0.5 million on TBATo-Be-Announced (“TBA”) hedges insettled during the first nine monthsthird quarter of 2018,2019, compared to total loans sold in the secondary market of $269.7$89.2 million with a related net gain of $8.4$2.7 million, net of realized losses of $23 thousand on TBA hedges lossessettled during the third quarter of $1.02018.
109
Non-interest income for the nine-month period ended September 30, 2019 amounted to $66.2 million, compared to $61.8 million for the same period in the first nine months of 2017.2018. The total amount of loans sold in the secondary market in 2018 included $9.8 million of seasoned residential mortgage loans sold to Fannie Mae that resulted in a gain of $0.2 million.
·A $1.2$4.4 million increase in “Othernon-interest income was primarily due to:
A $5.0 million increase in Other operating income”income in the table above, primarily reflecting:related to: (i) the aforementioned effect in 2018 of the $2.7 million net loss from sales of nonaccrual commercial and construction loans held for sale; (ii) a $1.9 million increase in transaction fee income from ATM, POS, credit and debit card interchange fees, andas well as merchant-related transactions; (ii)activities, due to higher transaction volumes; (iii) the effect in 2018 of a $1.2$0.6 million lower of cost or market adjustment recorded to reduce the carrying value of a construction loan held for sale; (iv) a $0.2 million increase in non-deferrable loans fees; and (v) a $0.2 million gain recorded on the sale of $4.8 million in nonaccrual commercial loans held for sale in the first quarter of 2019. These variances were partially offset by the effect of a $1.3 million gain from sales of fixed assets, primarily assets of relocated or closed banking branches in Florida and Puerto Rico; (iii)Rico, during the $0.5 million gain from hurricane-related proceeds recorded in thesecond and third quarterquarters of 2018; and (iv) a $0.22018.
A $1.6 million increase in certain non-deferrable loans fees such as unused commitment fees. These variances were partially offset by the $2.7 million net loss from sales in the third quarter of 2018 of $25.5 million of non-performing commercial and construction loans held for sale. insurance commission income.
·A $0.9$1.7 million increase in gainsservice charges on early extinguishmentdeposits, primarily related to the increase in returned items and overdraft transactions, as well as an increase in the number of debt. Duringcash management transactions of commercial clients.
Partially offset by:
The effect in 2018 of the first quarter of 2018, the Corporation recorded a $2.3 million gain recorded on the repurchase and cancellation of $23.8 million in trust-preferred securities,TRuPs.
A $1.1 million decrease in revenues from mortgage banking activities, driven by the effect in the first nine months of 2018 of adjustments totaling $1.3 million recorded to decrease the valuation allowance relating to mortgage servicing rights and a $1.3 million increase in the mortgage servicing rights amortization expense. These variances were partially offset by an increase of $1.2 million in realized gains from sales of residential mortgage loans. Total loans sold in the secondary market to U.S. GSEs amounted to $267.3 million with a related net gain of $8.7 million, net of realized losses of $1.6 million on TBA hedges settled during the first nine months of 2019, compared to total loans sold in the secondary market of $260.1 million with a $1.4related gain of $7.5 million, gainincluding realized gains of $0.8 million on TBA hedges settled during the repurchase and cancellationfirst nine months of $7.32018.
A $0.5 million in trust preferred securitiesOTTI charge on private labels MBS recorded in the third quarter of 2017.2019.
Partially offset by:
·A $1.4 million decrease in service charges on deposits, primarily related to a decrease in overdraft and returned items transactions.
·The aforementioned effect in 2017 of the $0.4 million partial recovery of previously recorded OTTI charges on non-performing bonds of the GDB and the Puerto Rico Public Buildings Authority sold in the second quarter of 2017.
108
Non-Interest Expenses |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the components of non-interest expenses: | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended September 30, |
| Nine-Month Period Ended September 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Employees' compensation and benefits | $ | 39,243 |
| $ | 37,128 |
| $ | 119,482 |
| $ | 114,190 |
| Occupancy and equipment |
| 14,660 |
|
| 13,745 |
|
| 43,511 |
|
| 41,592 |
| FDIC deposit insurance |
| 2,067 |
|
| 3,179 |
|
| 7,159 |
|
| 10,671 |
| Taxes, other than income taxes |
| 3,534 |
|
| 3,763 |
|
| 11,027 |
|
| 11,184 |
| Professional fees: |
|
|
|
|
|
|
|
|
|
|
|
| Collections, appraisals and other credit-related fees |
| 2,150 |
|
| 2,295 |
|
| 5,399 |
|
| 6,819 |
| Outsourcing technology services |
| 5,215 |
|
| 5,403 |
|
| 15,465 |
|
| 16,155 |
| Other professional fees |
| 4,137 |
|
| 4,325 |
|
| 10,891 |
|
| 11,805 |
| Credit and debit card processing expenses |
| 4,147 |
|
| 3,737 |
|
| 11,450 |
|
| 10,134 |
| Business promotion |
| 3,860 |
|
| 3,244 |
|
| 10,452 |
|
| 9,717 |
| Communications |
| 1,642 |
|
| 1,603 |
|
| 4,706 |
|
| 4,774 |
| Net loss on OREO and OREO operations |
| 4,360 |
|
| 1,351 |
|
| 10,205 |
|
| 8,796 |
| Other |
| 5,850 |
|
| 5,841 |
|
| 17,361 |
|
| 16,728 |
| Total | $ | 90,865 |
| $ | 85,614 |
| $ | 267,108 |
| $ | 262,565 |
110
Non-Interest Expenses |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the components of non-interest expenses for the indicated periods: | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended September 30, |
| Nine-Month Period Ended September 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Employees' compensation and benefits | $ | 41,409 |
| $ | 39,243 |
| $ | 121,518 |
| $ | 119,482 |
| Occupancy and equipment |
| 15,129 |
|
| 14,660 |
|
| 47,018 |
|
| 43,511 |
| FDIC deposit insurance premium |
| 1,465 |
|
| 2,067 |
|
| 4,645 |
|
| 7,159 |
| Taxes, other than income taxes |
| 3,904 |
|
| 3,534 |
|
| 11,461 |
|
| 11,027 |
| Professional fees: |
|
|
|
|
|
|
|
|
|
|
|
| Collections, appraisals and other credit-related fees |
| 1,797 |
|
| 2,150 |
|
| 5,460 |
|
| 5,399 |
| Outsourced technology services |
| 6,206 |
|
| 5,215 |
|
| 17,524 |
|
| 15,465 |
| Other professional fees |
| 4,464 |
|
| 4,137 |
|
| 11,464 |
|
| 10,891 |
| Credit and debit card processing expenses |
| 4,764 |
|
| 4,147 |
|
| 12,738 |
|
| 11,450 |
| Business promotion |
| 4,004 |
|
| 3,860 |
|
| 11,650 |
|
| 10,452 |
| Communications |
| 1,834 |
|
| 1,642 |
|
| 5,300 |
|
| 4,706 |
| Net loss on OREO and OREO operations |
| 2,578 |
|
| 4,360 |
|
| 11,364 |
|
| 10,205 |
| Other |
| 5,279 |
|
| 5,850 |
|
| 15,600 |
|
| 17,361 |
| Total | $ | 92,833 |
| $ | 90,865 |
| $ | 275,742 |
| $ | 267,108 |
109111
Non-interest expenses for the third quarter of 20182019 were $90.9$92.8 million, compared to $85.6$90.9 million for the same period in 2017.2018. The $5.3$1.9 million increase in non-interest expenses was mainly due to:
·A $3.0$2.2 million increase in employees’ compensation and benefits, primarily related to salary merit increases and other adjustments related to the annual compensation review process that took effect in July 2019, a higher headcount and related higher matching contributions to the employees’ retirement plan and an increase in the employee’s medical insurance expense.
A $1.0 million increase in professional fees, mainly due to a $1.0 million increase in outsourced technology services fees and a $0.6 million increase in legal fees, primarily associated with strategic projects, including costs related to the aforementioned stock purchase agreement for the acquisition of BSPR. These variances were partially offset by a $0.6 million decrease in attorneys’ collection fees.
A $0.6 million increase in credit and debit card processing expenses, primarily due to higher EMV chip card transaction volumes.
A $0.5 million increase in occupancy and equipment expenses, primarily related to a $1.4 million increase in depreciation and amortization expenses, including software license fees, partially offset by hurricane-related insurance recoveries of $0.4 million recorded in the third quarter of 2019 related to repairs and maintenance costs incurred in prior periods on facilities affected by Hurricane Irma in the Virgin Islands and the effect in the third quarter of 2018 of hurricane-related expenses of approximately $0.4 million.
A $0.4 million increase in taxes, other than income taxes, reflecting higher expenses for municipal, personal property, and sales and use taxes.
Partially offset by:
A $1.8 million decrease in losses from OREO operations, primarily reflecting a $1.4$1.7 million increasedecrease in adverse fair value adjustments to the value of OREO properties and $0.8 million in lower income recognized from rental payments associated with income-producing commercial properties.
·A $2.1 million increase in employees’ compensation and benefits expenses, primarily reflecting, among other things, the effect in the third quarter of 2017 of expected insurance recoveries of $1.4 million in connection with payroll costs incurred when Hurricane Irma and Maria precluded employees from working, a $0.9 million increase related to salary merit increases and other adjustments resulting from the annual salary review process that took effect in July 2018, and a $0.9 million increase in bonuses and incentive-based compensation, partially offset by a $1.4 million decrease associated with the discontinuance of both salary amounts paid in the form of shares to certain executive officers and the cash transition award paid to certain senior officers in accordance with the existing executive compensation program.
·A $0.9 million increase in occupancy and equipment expenses, primarily related to hurricane-related expenses of $0.4 million recorded in the third quarter of 2018, a $0.3 million increase in the amortization expense of software licenses, and a $0.2 million increase in insurance-related expenses.
·A $0.6 million increase in business promotion expenses, primarily related to a $1.1 million increase in advertising, public relations, promotions and sponsorship activities, partially offset by the effect in the third quarter of 2017 of $0.6 million of expenses incurred in connection with relief efforts and assistance to employees and communities after the passage of Hurricanes Irma and Maria.
·A $0.4 million increase in credit and debit card processing expenses, mainly due to higher transaction volumes.
Partially offset by:
·A $1.1 million decrease in the FDIC insurance premium expense, reflecting, among other things, the effect of improved core earnings trends and reductions in brokered CDs, higher liquidity levels tied to the growth in non-interest-bearing deposits, and an improvement in the risk profile of the Bank’s balance sheet.CDs.
·A $0.5$0.6 million decrease in professional serviceOther in the table above, primarily reflecting, among other things, decreases of $0.2 million in supervisory assessments fees, mainly related to reductions$0.1 million in attorneys’ collection feessupplies and outsourcing fees related to network services. printing and $0.1 million in the amortization expense of intangible assets.
110112
Non-interest expenses for the first nine months of 20182019 were $267.1$275.7 million, compared to $262.6$267.1 million for the same period in 2017.2018. The $4.5$8.6 million increase in non-interest expenses was principally attributable to:
·A $5.3 million increase in employees’ compensation and benefits expenses, primarily associated with salary merit increases and adjustments related to the Corporation’s annual salary review process and a higher headcount. In addition, there was a $1.9 million increase in bonus and incentive-based compensation.
·A $1.9$3.5 million increase in occupancy and equipment expenses, primarily related to hurricane-relateda $4.3 million increase in depreciation and amortization expenses, amountingincluding software licenses fees reflecting the effect of certain projects placed in production related to, among other things, enhancements to the technology infrastructure, including online banking, data security, ERP system matters, and modeling and data management software that support the implementation of new accounting pronouncements, a $0.4 million increase related to a write-down of previously capitalized costs associated with changes in the scope and requirements of a technology-related project, a $0.5 million increase in electricity-related expenses, and a $0.4 million increase in insurance-related expenses. These increases were partially offset by the effect in 2018 of approximately $2.5 million recorded in the first nine months of 2018,hurricane-related expenses, mostly attributable to repairs and security matters.
·A $1.4$2.7 million increase in losses from OREO operations, professional fees, reflecting, among other things, an increase of $2.1 million in outsourced technology service fees and $1.4 million in legal and audit-related fees. These variances were partially offset by a $0.3$0.9 million decrease in consulting fees.
A $2.0 million increase in adverse fair valueemployees’ compensation and benefits, primarily related to salary merit increases and other adjustments related to the value of OREO properties,annual review compensation processes that took effect in July 2019 and 2018, a $0.3higher headcount, and a $1.3 million increase in OREO operating expenses, including insurance, taxes and maintenance fees, and a $0.2matching contributions to the employees’ retirement plan. These increases were partially offset by the effect in the first quarter of 2019 of the $2.3 million increaseexpense recovery related to lower income recognized from rental payments associatedthe Benefit available to eligible employers under the Disaster Tax Relief Act. In addition, there was a $1.7 million decrease in stock-based compensation as the Corporation ceased paying additional salary amounts in the form of stock in accordance with income-producing commercial properties.the previously-disclosed revised executive compensation program in effect since July 1, 2018.
·A $1.3 million increase in credit and debit card processing expenses, mainly relateddue to higher transaction volumes.
·A $0.7$1.2 million increase in business promotion expenses, primarily reflecting a $1.1$0.8 million increase related to advertising, public relations, promotions and sponsorshipin sponsorship-related activities and a $0.3$0.2 million increase in the estimated cost of the credit card rewards program,charitable contributions.
A $1.2 million increase in losses from OREO operations, primarily related to a $1.7 million decrease in income recognized from rental payments associated with income-producing properties and a $0.6 million increase in OREO operating expenses, primarily insurance, repairs and maintenance fees. These variances were partially offset by lower write downs to the $0.6 millionvalue of expenses incurred in the third quarter of 2017 associated with with relief efforts and assistance to employees and communities after the passage of Hurricanes Irma and Maria.OREO properties.
·A $0.6 million increase in “Other operating expenses”communication expenses, primarily related to higher telephone, data connection and postage expenses.
A $0.4 million increase in taxes, other than income taxes, primarily related to higher expenses for sales taxes.
Partially offset by:
A $2.5 million decrease in the FDIC insurance premium expense, reflecting, among other things, the effect of improved earnings trends and reductions in brokered CDs.
A $1.8 million decrease in Other in the table above, primarily reflecting: (i) a $0.8 million decrease in local supervisory assessments; (ii) a $0.4 million decrease in the amountamortization of reserve releases related to unfunded loan commitments recorded in the first nine months of 2018, as compared to the same period in 2017; (ii) a $0.2 million increase in data processing fees;intangible assets; and (iii) a $0.2 million increase in supplies and printing expenses. printing.
Partially offset by:
·A $3.5 million decrease in the FDIC insurance premium expense, as further explained above.
·A $3.0 million decrease in total professional service fees, primarily reflecting lower attorneys’ collection fees and legal expenses, as well as lower outsourcing technology services expenses.
111113
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 generally not entitled to file consolidated tax returns and, thus, the Corporation is generally not entitled to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss (“NOL”), a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL carry-forward period. 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 allows an entity organized as a limited liability company to elect to become a non-taxable “pass-through” entity and utilize losses to offset income from other “pass-through” entities, subject to certain limitations, with the remaining net income passing-through to its partner entities. The 2011 PR Code also provides a dividend received deduction of 100%100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85%85% on dividends received from other taxable domestic corporations.
On MarchDecember 10, 2018, the Governor of Puerto Rico signed into law Act 257 (“Act 257”) to amend some of the provisions of the 2011 PR Code, as amended. Act 257 introduced various changes to the income tax regime in the case of individuals and corporations, and the sales and use taxes, which took effect on January 1, 2019, including, among others, (i) a reduction in the Puerto Rico maximum corporate tax rate from 39% to 37.5%; (ii) an increase in the net operating and capital losses usage limitation from 80% to 90%; (iii) amendments to the provisions related to “pass-through” entities that provide that corporations that own 50% or more of a partnership will not be able to claim a current or carryover non-partnership NOL deduction against a partnership distributable share, adversely impacting a tax action taken in 2017 for FirstBank Insurance under which the Corporation completed the applicable regulatory filings to change the tax status of its subsidiary, First Federal Finance, from a taxable corporation to a non-taxable “pass-through” entity. This election allows the Corporation to realize tax benefits of its deferred tax assets associated with pass-through ordinary net operating losses available at the banking subsidiary, FirstBank, which were subject to a full valuation allowance as of December 31, 2016, against now pass-through ordinary income from this profitable subsidiary.
On March 1, 2017, the Corporation also completed the applicable regulatory filings to change the tax status of its subsidiary, FirstBank Insurance, from a taxable corporation to a non-taxable “pass-through” entity. This election allows the Corporationwas previously allowed to offset pass-through income projected to be earned by FirstBank Insurance with net operating losses available at the Holding Company level.holding company level; and (iv) other limitations on certain deductions, such as meals and entertainment deductions.
The Corporation has maintained an effective tax rate lower than the maximum statutory rate, 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 gain on sales is exempt from Puerto Rico income taxation. The IBE and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico on the specific activities identified in the IBE Act. An IBE that operates as a unit of a bank pays income taxes at the corporate standard rates to the extent that the IBE’s net income exceeds 20%20% of the bank’s total net taxable income.
For the third quarter and first nine months of 2018,2019, the Corporation recorded an income tax expense of $19.3 million and $54.9 million, respectively, compared to $12.3 million and $30.2 million, respectively, compared to income tax benefits of $8.4 million and $7.2 million for the comparable periods in 2017.2018. The variance in the income tax expense for the third quarter and first nine months of 2018, as2019, when compared to the tax benefit for the same period in 2017, primarily reflects the effect of the tax benefit recorded in the third quarter of 2017 in connection with hurricane-related losses, and a higher effective tax rateperiods in 2018, driven bywas primarily related to a higher proportion of taxable to exempt income. The variance for the first nine months of 2018, as compared to the same period in 2017, was mostly attributable to the aforementioned tax benefit related to hurricane-related losses and the $13.2 million tax benefit recorded in the first quarter of 2017 as a result of the above-discussed change in tax status of certain subsidiaries from taxable corporations to limited liability companies that have elected to be treated as partnerships for income tax purposes in Puerto Rico. A higher effective tax rate also contributed for the variance in the income tax expense for the first nine-months of 2018 as compared to the same period in 2017.
For the nine-month period ended September 30, 2018,2019, the Corporation calculated the provision for income taxes by applying the estimated annual effective tax rate for the full fiscal year to ordinary income or loss. In the computation of the consolidated worldwide annual estimated effective tax rate, ASC Topic 740-270, “Income Taxes-Interim Reporting,”Taxes” (“ASC Topic 740-270”), requires the exclusion of legal entities with pre-tax losses from which a tax benefit cannot be recognized. The Corporation’s estimated annual effective tax rate in the first nine months of 2018,2019, excluding entities from which a tax benefit cannot be recognized and discrete items, was 26%29% compared to 20%26% for the first nine months of 2017. The higher effective tax rate for 2018 was driven by a higher proportion of taxable to exempt income.2018. The estimated annual effective tax rate, including all entities, for 2019 was 30% (29% excluding discrete items), compared to 24% for the first nine months of 2018 was 24% (25% excluding discrete items, primarily the tax benefit resulting from the excess tax benefit recognized during the first quarter of 2018 upon the vesting of shares granted under the Corporation’s stock-based compensation plan), compared to -2% for the first nine months of 2017 (21% excluding discrete items, primarily the tax benefit resulting from the previously mentioned change in the tax status of two subsidiaries)items).
112
The Corporation’s net deferred tax asset amounted to $272.3$273.8 million as of September 30, 2018,2019, net of a valuation allowance of $183.2$87.2 million, and management concluded, based upon the assessment of all positive and negative evidence, that it is more likely than not that the Corporation will generate sufficient taxable income within the applicable NOL carry-forward periods to realize such amount. The net deferred tax asset of the Corporation’s banking subsidiary, FirstBank, amounted to $272.2$273.7 million as of September 30, 2018,2019, net of a valuation allowance of $142.2$56.2 million, compared to a net deferred tax asset of $294.7$319.8 million, net of a valuation allowance of $150.7$68.1 million, as of December 31, 2017.2018.
The Corporation has U.S. and USVI sourced NOL carryforwards. Section 382 of the third quarterU.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 of the U.S. Internal Revenue Code (“Section 382”) covering a comprehensive period, and concluded that an ownership change had occurred during such period. Section 382 limits the ability to utilize U.S. and USVI NOLs for income tax purposes at such jurisdictions following an event of an ownership change. The Section 382 limitation has resulted in higher U.S. and USVI income tax liabilities than we would have incurincurred in the absence of such limitation. For the third quarter and first nine months of 2018, and mainly as a result of the Section 382 limitation, theThe Corporation incurred an income tax expense of approximately $1.2 million and $3.8 million, respectively, related to its U.S. operations, compared to the $1.6 million expense recorded for the third quarter and first nine months of 2017. The limitation did not result in an increased income tax expense for the USVI operations in the first nine months of 2018 or comparable 2017 period. Prospectively, the Corporation expects that it will be able to mitigatehas mitigated to an extent the adverse effects associated with the Section 382 limitation as any such tax paid in the U.S. or USVI couldcan be 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 the third quarter and nine-month period ended September 30, 2019, the Corporation incurred an income tax expense of approximately $1.2 million and $3.5 million, respectively, related to its U.S. operations, compared to $1.2 million and $3.8 million, respectively, for the comparable periods in 2018. The limitation did not impact the USVI operations for the third quarter and nine-month periods ended September 30, 2019 and 2018.
AsFINANCIAL CONDITION AND OPERATING DATA ANALYSIS
Assets
The Corporation’s total assets were $12.5 billion as of September 30, 2018, the Corporation did not have Unrecognized Tax Benefits recorded on its books.2019, an increase of $287.2 million from December 31, 2018. The Corporation classifies all interestincrease was mainly due to a $389.7 million increase in cash and penalties, if any, related to tax uncertainties as income tax expense. Audit periods remain open for review until the statute of limitations has passed. The statute of limitations under the 2011 PR Code is four years; the statute of limitations for U.S. and USVI income tax purposes is three years after a tax return is due or filed, whichever is later, for each. The completion of an audit by the taxing authorities or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Corporation’s liability for income taxes. Any such adjustment could be material to the results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. For U.S. and USVI income tax purposes, all tax years subsequent to 2013 remain open to examination. For Puerto Rico tax purposes, all tax years subsequent to 2012 remain open to examination.
On December 22, 2017, the United States president signed H.R.1, The Tax Cuts and Jobs Acts, effective January 1, 2018, which includes an overhaul of individual, business and international taxes and has affected our branch operations in the U.S. and the USVI. The bill includes measures reducing corporate taxes from 35% to 21%, a repeal of the corporate alternative minimum tax regime, changes to business deductions and NOLs, a 15.5% tax on mandatory repatriation of liquid assets, 10% tax on base erosion payments, and a minimum 10.5% tax on inclusion of global intangible low-tax income by U.S. shareholders,cash equivalents attributable, among other significant changes. The main provisions affecting our operations in thethings, to proceeds from U.S. agency bonds that matured or were called prior to maturity and the USVIprepayments of U.S. agency MBS that have not yet been reinvested, as well as cash provided by operating activities in the first nine months of 2018 include:2019. In addition, the changeincrease, as further discussed below, reflected a $109.6 million increase in tax rate to 21%,total loans, and the limitation to the amount certain financial institutions may deduct for premiums paid to the FDIC, and changes in permanent differences, such as meals and entertainment deductions. Other significant provisions, such as the base erosion and anti-abuse tax, do not affect the Corporation’s U.S. and USVI branch operations since these operations’ receipts do not exceed the annual threshold of U.S. effectively connected gross receipts.
On April 16, 2018, the Governor of Puerto Rico filed a bill to amend the 2011 Puerto Rico Tax Code, as amended (HB 1544). The proposed bill included, among other things, changes to the maximum corporate income tax rate and a gradual eliminationeffect of the businessrecognition of a right-of-use asset for operating leases, amounting to business sales and use tax (“B2B SUT”). In October 2018, the Governor of Puerto Rico, after reaching a consensus with the Puerto Rico House of Representatives and the Senate, provided an update on certain amendments to the bill. On October 30, 2018, the House of Representatives approved the amended bill under which, for taxable years beginning after December 31, 2018, the maximum corporate tax rate will be reduced to 37.5% and increases the yearly utilization of NOL’s to 90% of taxable income from the current 80%. Beginning on March 1, 2018, services provided by taxpayers with a volume of business of $200,000 or less will be exempted from the B2B SUT. The bill was approved the Senate with several amendments, though, preserving the relevant provisions of tax rate and NOL as approved by the House of Representatives. The bill is now under the House of Representative’s consideration. On November 6, 2018 the executive Director of the PROMESA oversight board met with the Puerto Rico Secretary of Treasury, the Speaker of the House of Representatives and the President of the Senate to discuss the amendments approved by the Legislature and consistency with the approved fiscal plan. A reduction in the corporate income tax rates to 37.5%, if such would have occurred$63.3 million as of September 30, 2018, would have reduced2019, in connection with the Corporation’sadoption of the Financial Accounting Standards Board’s Accounting Standards Update No. (“ASU”) 2016-02, “Leases (Topic 842),” in the first quarter of 2019. These increases were partially offset by a $211.4 million decrease in total investment securities, driven by prepayments of U.S. agency MBS and approximately $305.9 million of U.S. agency bonds that matured or were called prior to maturity. In addition, there was a $46.0 million decrease in the net deferred tax asset by approximately $10 million with a corresponding charge to income tax expense.
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FINANCIAL CONDITION AND OPERATING DATA ANALYSIS
Assets
The Corporation’s total assets were $12.2 billion as of September 30, 2018, a decrease of $51.6 million from December 31, 2017. The decrease, as further discussed below, was mainly due to a $100.8 million decrease in total loans (before the allowance for loan and lease losses), a $59.6 million decrease in cash and cash equivalents, largely driven by liquidity used to repay maturing brokered CDs and borrowings, and a $12.7$28.4 million decrease in the OREO portfolio balance.
These variances were partially offset by a $113.5 increase in investments securities during the first nine months of 2018, driven by purchases of U.S. agencies’ debt and mortgage-backed securities totaling $424.9 million, partially offset by U.S. agencies pass-through residential mortgage-backed securities prepayments, the maturity during 2018 of certain U.S. agency callable debentures, and the decrease in the fair value of available-for-sale investment securities, as further discussed below.
Loan Portfolio | Loan Portfolio |
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The following table presents the composition of the Corporation’s loan portfolio, including loans held for sale, as of the dates indicated: | The following table presents the composition of the Corporation’s loan portfolio, including loans held for sale, as of the dates indicated: | The following table presents the composition of the Corporation’s loan portfolio, including loans held for sale, as of the dates indicated: | ||||||||||
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| December 31, |
| September 30, |
| December 31, | ||||
(In thousands) | (In thousands) | 2018 |
| 2017 | (In thousands) | 2019 |
| 2018 | ||||
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Residential mortgage loans | Residential mortgage loans | $ | 3,207,981 |
| $ | 3,290,957 | Residential mortgage loans | $ | 2,997,953 |
| $ | 3,163,208 |
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Commercial loans: | Commercial loans: |
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| Commercial loans: |
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Commercial mortgage loans | Commercial mortgage loans |
| 1,506,502 |
| 1,614,972 | Commercial mortgage loans |
| 1,439,362 |
| 1,522,662 | ||
Construction loans | Construction loans |
| 82,862 |
| 111,397 | Construction loans |
| 108,862 |
| 79,429 | ||
Commercial and Industrial loans (1) |
| 2,068,256 |
| 2,083,253 | ||||||||
Commercial and Industrial loans | Commercial and Industrial loans |
| 2,222,496 |
| 2,148,111 | |||||||
Total commercial loans | Total commercial loans |
| 3,657,620 |
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| 3,809,622 | Total commercial loans |
| 3,770,720 |
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| 3,750,202 |
Finance leases | Finance leases |
| 311,180 |
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| 257,462 | Finance leases |
| 391,373 |
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| 333,536 |
Consumer loans | Consumer loans |
| 1,540,172 |
| 1,492,435 | Consumer loans |
| 1,808,374 |
| 1,611,177 | ||
Total loans held for investment | Total loans held for investment |
| 8,716,953 |
| 8,850,476 | Total loans held for investment |
| 8,968,420 |
| 8,858,123 | ||
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Less: | Less: |
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| Less: |
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Allowance for loan and lease losses | Allowance for loan and lease losses |
| (200,563) |
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| (231,843) | Allowance for loan and lease losses |
| (165,575) |
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| (196,362) |
Total loans held for investment, net | Total loans held for investment, net | $ | 8,516,390 |
| $ | 8,618,633 | Total loans held for investment, net | $ | 8,802,845 |
| $ | 8,661,761 |
Loans held for sale | Loans held for sale |
| 65,739 |
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| 32,980 | Loans held for sale |
| 42,470 |
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| 43,186 |
Total loans, net | Total loans, net | $ | 8,582,129 |
| $ | 8,651,613 | Total loans, net | $ | 8,845,315 |
| $ | 8,704,947 |
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(1) | During the first nine months 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 non-performing loans to held for sale. Loans transferred to held for sale consisted of non-performing commercial mortgage loans totaling $39.6 million (net of fair value write-downs of $13.8 million), non-performing construction loans totaling $33.0 million (net of fair value write-downs of $6.7 million) and non-performing commercial and industrial loans totaling $1.8 million (net of fair value write-downs of $1.7 million). Approximately $27.2 million of the commercial mortgage loans transferred to loan held for sale were eventually sold during the second and third quarters of 2018. | |||||||||||
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114115
As of September 30, 2018,2019, the Corporation’s total loan portfolio, before allowance, amounted to $8.8$9.0 billion, down $100.8an increase of $109.6 million when compared to December 31, 2017.2018. The declineincrease consisted of reductions of $107.1a $97.6 million and $51.9 millionincrease in the Puerto Rico region and Virgin Islands regions, respectively, partially offset by a $58.3$21.3 million increase in the Florida region, partially offset by a $9.3 million decrease in the Virgin Islands region. On a portfolio basis, the increase consisted of a $255.0 million increase in consumer loans, and an $11.3 million increase in commercial and construction loans, partially offset by a $156.8 million decrease in the residential mortgage loan portfolio.
The increase in total loans in the Puerto Rico region consisted of a $266.4 million growth in consumer loans, partially offset by a reduction of $128.4 million in residential mortgage loans and a $40.4 million decrease in commercial and constructions loans. The decrease reflectsin commercial and construction loans was mainly related to the effectearly payoff of thirteentwo large criticized commercial mortgage loans paid off during 2018 totaling $135.4$120.4 million, the sale of five largethree commercial and industrial loan participations totaling $48.2 million, sales and repayments of nonaccrual commercial and construction loans held for sale totaling $49.7$9.2 million, significant payments received, including payments that reduced the outstanding balance of three commercial lines of credit in Puerto Rico by $23.9 million, and charge-offs takenrecorded in 2018,the first nine months of 2019. These variances were partially offset by new loancertain large originations in both Florida and Puerto Rico regions. Approximately $40.5 million of the $49.7 million commercial and construction loans sold during the first nine months of 2018 consisted of adversely classified2019, including $94.3 million increase resulting from two new commercial mortgage loans, solda $29.1 million increase in the Puerto Rico region. In addition,balance of floor plan credit facilities, and the residential mortgage loan portfolio decreased by $86.1 million, including the effectrefinancing of a $9.8loan that resulted in an increase of $21.9 million sale of seasonedin the exposure to a commercial mortgage relationship. The decrease in residential mortgage loans in Puerto Rico primarily reflects the secondary market. These variances wereeffect of collections, charge-offs and approximately $25.8 million of foreclosures recorded in the first nine months of 2019, which more than offset the volume of non-conforming residential mortgage loan originations aligned, in part, with the strategy of reducing the volume of residential mortgage loans. The increase in consumer loans was driven by new loan originations.
The increase in total loans in the Florida region consisted of a $45.7 million growth in commercial and construction loans, despite the resolution of a $42.9 million nonaccrual commercial mortgage loan for which a $31.5 million payment was received and an $11.4 million charge-off was recorded in the first nine months of 2019, partially offset by reductions of $13.4 million in consumer loans and $11.0 million in residential mortgage loans. In recent years, the Corporation has invested in facilities, increased its resources dedicated to commercial and corporate banking functions and invested in a technology platform in Florida as the Corporation expects to achieve continued growth in this region.
The decrease in total loans in the Virgin Islands region consisted of a $17.4 million decrease in residential mortgage loans, partially offset by a $101.5$6.0 million increase in commercial and construction loans and a $2.1 million increase in consumer loans. The increase in commercial and construction loans primarily autowas driven by the origination of a $4.6 million commercial and personal loansindustrial term loan in Puerto Rico. the first quarter of 2019.
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As shown in the table above, as of September 30, 2018,2019, the loans held-for-investmentheld for investment portfolio was comprised of commercial and construction loans (42%), residential real estate loans (37%(33%), and consumer and finance leases (21%(25%). Of the total gross loan portfolio held for investment of $8.7$9.0 billion as of September 30, 2018, approximately 74%2019, the Corporation had credit risk concentration of approximately 74% in Puerto Rico, 20%21% in the United States (mainly in the state of Florida), and 6%5% in the Virgin Islands, as shown in the following table:
As of September 30, 2018 | Puerto Rico |
| Virgin Islands |
| United States |
| Total | |||||||||||||||
As of September 30, 2019 | Puerto Rico |
| Virgin Islands |
| United States |
| Total | |||||||||||||||
(In thousands) |
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Residential mortgage loans | $ | 2,346,273 |
| $ | 257,716 |
| $ | 603,992 |
| $ | 3,207,981 | $ | 2,182,413 |
| $ | 235,164 |
| $ | 580,376 |
| $ | 2,997,953 |
Commercial mortgage loans |
| 1,024,792 |
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| 80,025 |
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| 401,685 |
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| 1,506,502 |
| 975,883 |
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| 68,914 |
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| 394,565 |
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| 1,439,362 |
Construction loans |
| 26,240 |
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| 11,186 |
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| 45,436 |
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| 82,862 |
| 31,189 |
| 12,739 |
| 64,934 |
| 108,862 | |||
Commercial and Industrial loans |
| 1,342,841 |
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| 110,857 |
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| 614,558 |
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| 2,068,256 |
| 1,353,520 |
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| 106,110 |
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| 762,866 |
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| 2,222,496 |
Total commercial loans |
| 2,393,873 |
|
| 202,068 |
|
| 1,061,679 |
|
| 3,657,620 |
| 2,360,592 |
|
| 187,763 |
|
| 1,222,365 |
|
| 3,770,720 |
Finance leases |
| 311,180 |
|
| - |
|
| - |
|
| 311,180 |
| 391,373 |
| - |
| - |
| 391,373 | |||
Consumer loans |
| 1,436,483 |
|
| 45,848 |
|
| 57,841 |
|
| 1,540,172 |
| 1,714,247 |
|
| 48,942 |
|
| 45,185 |
|
| 1,808,374 |
Total loans held for investment, gross | $ | 6,487,809 |
| $ | 505,632 |
| $ | 1,723,512 |
| $ | 8,716,953 | $ | 6,648,625 |
| $ | 471,869 |
| $ | 1,847,926 |
| $ | 8,968,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Loans held for sale |
| 38,502 |
|
| 27,000 |
|
| 237 |
|
| 65,739 |
| 35,056 |
|
| - |
|
| 7,414 |
|
| 42,470 |
Total loans | $ | 6,526,311 |
| $ | 532,632 |
| $ | 1,723,749 |
| $ | 8,782,692 | |||||||||||
Total loans, gross | $ | 6,683,681 |
| $ | 471,869 |
| $ | 1,855,340 |
| $ | 9,010,890 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
As of December 31, 2017 | Puerto Rico |
| Virgin Islands |
| United States |
| Total | |||||||||||||||
As of December 31, 2018 | Puerto Rico |
| Virgin Islands |
| United States |
| Total | |||||||||||||||
(In thousands) |
|
|
|
| ||||||||||||||||||
Residential mortgage loans | $ | 2,413,379 |
| $ | 282,738 |
| $ | 594,840 |
| $ | 3,290,957 | $ | 2,313,230 |
| $ | 252,363 |
| $ | 597,615 |
| $ | 3,163,208 |
Commercial mortgage loans |
| 1,127,409 |
|
| 95,464 |
|
| 392,099 |
|
| 1,614,972 |
| 1,014,023 |
|
| 74,585 |
|
| 434,054 |
|
| 1,522,662 |
Construction loans |
| 41,511 |
|
| 43,314 |
|
| 26,572 |
|
| 111,397 |
| 26,069 |
| 11,303 |
| 42,057 |
| 79,429 | |||
Commercial and Industrial loans |
| 1,373,714 |
|
| 116,323 |
|
| 593,216 |
|
| 2,083,253 |
| 1,351,661 |
| 95,900 |
| 700,550 |
| 2,148,111 | |||
Total commercial loans |
| 2,542,634 |
|
| 255,101 |
|
| 1,011,887 |
|
| 3,809,622 |
| 2,391,753 |
|
| 181,788 |
|
| 1,176,661 |
|
| 3,750,202 |
Finance leases |
| 257,462 |
|
| - |
|
| - |
|
| 257,462 |
| 333,536 |
| - |
| - |
| 333,536 | |||
Consumer loans |
| 1,389,560 |
|
| 46,412 |
|
| 56,463 |
|
| 1,492,435 |
| 1,505,720 |
|
| 46,838 |
|
| 58,619 |
|
| 1,611,177 |
Total loans held for investment, gross | $ | 6,603,035 |
| $ | 584,251 |
| $ | 1,663,190 |
| $ | 8,850,476 | $ | 6,544,239 |
| $ | 480,989 |
| $ | 1,832,895 |
| $ | 8,858,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Loans held for sale |
| 30,397 |
|
| 325 |
|
| 2,258 |
|
| 32,980 |
| 41,794 |
|
| 199 |
|
| 1,193 |
|
| 43,186 |
Total loans | $ | 6,633,432 |
| $ | 584,576 |
| $ | 1,665,448 |
| $ | 8,883,456 | |||||||||||
Total loans, gross | $ | 6,586,033 |
| $ | 481,188 |
| $ | 1,834,088 |
| $ | 8,901,309 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115117
Residential Real Estate Loans
As of September 30, 2018,2019, the Corporation’s residential mortgage loan portfolio held for investment decreased by $83.0$165.3 million, as compared to the balance as of December 31, 2017, mainly resulting from activities2018, reflecting reductions in Puerto Rico and the Virgin Islandsall regions as principal repayments, charge-offs and $29.4 million of foreclosures recorded in the first nine months of 2018 exceeded the volume of new loans originated and held for investment purposes.non-conforming residential mortgage loan originations. The residential mortgage loan portfolio held for investment decreased by $130.8 million in the Puerto Rico, and $17.2 million in each of the Virgin Islands and Florida regions, decreasedrespectively. Approximately 83% of the $289.3 million in residential mortgage loans originated in Puerto Rico during the first nine months of 2018 by $67.1 million2019 consisted of conforming loan originations and $25.0 million, respectively, partially offset by an increase of $9.2 million in the Florida region. The increase in the Florida region was achieved despite the sale of $9.8 million of seasoned residential mortgage loans to FNMA in the second quarter of 2018.refinancings.
The majority of the Corporation’s outstanding balance of residential mortgage loans in Puerto Rico and the Virgin Islands consisted of fixed-rate loans that traditionally carried higher yields than residential mortgage loans in Florida. In the Florida region, approximately 57% of the residential mortgage loan portfolio consisted of adjustable-rate mortgages. In accordance with the Corporation’s underwriting guidelines, residential mortgage loans are mostly fully documentedprimarily fully-documented loans, and the Corporation does not originate negative amortization loans.
Commercial and Construction Loans
As of September 30, 2018,2019, the Corporation’s commercial and construction loan portfolio, including loans held for sale, decreasedincreased by $116.1$11.3 million to $3.7$3.8 billion, as compared to the balance as of December 31, 2017. The decrease was mainly related to2018. In the thirteen large commercial loans paid off during 2018 totaling $135.4 million, significant payments received, including payments that reduced the outstanding balance of three commercial lines of credit in Puerto Rico by $23.9 million, the sale of five largeFlorida region, commercial and construction loans totaling $49.7increased by $45.7 million, (including $40.5 million of adversely classified commercial and construction loans), and charge-offs taken in 2018, including $22.2 million of fair value write-downs relatedmainly attributable to non-performing loans transferred to held for sale. These variances were partially offset by new loan originations, in bothdespite the Florida and Puerto Rico regions.
aforementioned resolution of a $42.9 million nonaccrual commercial mortgage loan. The commercial and construction loan portfolio including loans held for sale, decreasedin the Virgin Islands region increased by $139.9 million$6.0 million. As explained above, the decrease in the Puerto Rico region driven by sixof $40.4 million was mainly related to the early payoff of two large criticized commercial mortgage loans totaling $57.8$120.4 million, paid off during 2018, the aforementioned significant repayments that reduced the outstanding balancesale of three commercial linesand industrial loan participations totaling $48.2 million, sales and repayments of credit in Puerto Rico by $23.9 million, the sale of four large adversely-classified commercial loans totaling $40.5 million, and charge-offs, including $17.1 million of fair value write-downs related to non-performing loans transferred to held for sale. In the Virgin Islands,nonaccrual commercial and construction loans decreased by $26.0 million, driven by a $6.7 million commercial mortgage loan paid off during 2018, collections of $3.0 million and fair value write-down of $5.1 million recorded on a construction loan transferred to held for sale totaling $9.2 million, and charge-offs recorded in the first quarternine months of 2018, and a $1.0 million decrease in the outstanding principal balance of loans granted to government entities. In Florida, total commercial and construction loans grew2019, partially offset by $49.8 million, despite the effect of sixcertain large loans paid offoriginations during the first nine months of 2018 totaling $70.92019, including $94.3 million in two new commercial mortgage loans, a $29.1 million increase in the balance of floor plan credit facilities, and the salerefinancing of a $9.2loan that resulted in an increase of $21.9 million in the exposure to a commercial loan participation.mortgage relationship.
As of September 30, 2018,2019, the Corporation had $68.5$57.8 million outstanding in loans extended to the Puerto Rico government, its municipalities and public corporations, compared to $55.9$61.6 million as of December 31, 2017.2018. Approximately $47.2$43.8 million of the outstanding loans as of September 30, 20182019 consisted of loans extended to municipalities in Puerto Rico, which in most cases are supported by assigned property tax revenues. The vast majority of revenues of the municipalities included in the Corporation’s loan portfolio are independent of the Puerto Rico central government. These municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and notes. Late in 2015, the GDBGovernment Development Bank for Puerto Rico (the “GDB”) and the Municipal Revenue Collection Center (“CRIM”) signed and perfected a deed of trust. Through this deed, the GDB, as fiduciary, is bound to keep the CRIM funds separate from any other deposits and must distribute the funds pursuant to applicable law. The CRIM funds are deposited at another commercial depository financial institution in Puerto Rico. In addition to loans extended to municipalities, the Corporation’s exposure to the Puerto Rico government as of September 30, 20182019 included a $6.7 million loan extended to a unit of the central government and a $14.7$14.0 million loan granted to an affiliate of the Puerto Rico Electric Power Authority (“PREPA”).
The Corporation also has credit exposure to USVI government entities. As of September 30, 2018,2019, the Corporation had $69.4$61.1 million in loans to USVI government instrumentalities and public corporations, compared to $70.4$55.8 million as of December 31, 2017.2018. Of the amount outstanding as of September 30, 2018,2019, public corporations of the USVI owed approximately $46.1$37.9 million and an independent instrumentality of the USVI government owed approximately $23.2 million. As of September 30, 2018,2019, all loans were currently performing and up to date with their respectiveon principal and interest payments.
Furthermore, as of September 30, 2018, the Corporation had loans granted to the hotel industry in Puerto Rico that were formerly guaranteed by the TDF with an aggregate book value of $29.0 million, compared to $70.8 million as of December 31, 2017. Historically, the borrower and the operations of the underlying collateral of these loans have been the primary sources of repayment and the TDF, which is a subsidiary of the GDB, provided a secondary guarantee for payment performance. As part of agreements executed in the second quarter of 2017 and in the first quarter of 2018, the TDF paid $7.6 million and $4.0 million, respectively, to
116118
honor a portion of its guarantee on these loans. As provided in the agreements, the cash payments received by the Corporation released the TDF from its liability as a guarantor of these loans. In addition, the GDB agreed to issue to the Bank a fixed income financial instrument pursuant to the GDB’s Restructuring Support Agreement approved by the PROMESA oversight board. During 2018, the Corporation sold two of these three commercial mortgage loans that carried a book value of $27.2 million at the time of sale. In addition, in the second quarter of 2018, the Corporation completed the split loan restructuring of the largest of these three facilities. This loan relationship was restructured using the A/B note workout strategy in which note A, with an outstanding balance of $29.0 million as of September 30, 2018, was underwritten to comply with the Corporation’s lending standards at current market rates. The A note was restored to accrual status at the time of the restructuring in the second quarter, in consideration of the borrower’s sustained historical repayment performance before the restructuring that demonstrated its ability to make timely interest and principal payments under the restructured terms. The B note consists of amounts mostly charged-off in prior periods and is fully charged-off as of September 30, 2018. The sale, cash collections, and the loans split restructuring resulted in a $70.8 million reduction in non-performing assets during 2018.
As of September 30, 2018,2019, the Corporation’s total exposure to shared national credit (“SNC”) loans (including unused commitments) amounted to $768.5$787.4 million. As of September 30, 2018,2019, approximately $263.0$170.7 million of the SNC exposure related to the portfolio in Puerto Rico and $505.5$617.0 million related to the portfolio in the Florida region.
The composition of the Corporationʼs construction loan portfolio held for investment as of September 30, 2018 by category and geographic location follows: | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
| Puerto Rico |
| Virgin Islands |
| United States |
| Total | ||||
(In thousands) |
|
| |||||||||
Loans for residential housing projects: |
|
|
|
|
|
|
|
|
|
|
|
Mid-rise (1) | $ | 558 |
| $ | 956 |
| $ | - |
| $ | 1,514 |
Single-family, detached |
| 465 |
|
| 1,017 |
|
| 3,248 |
|
| 4,730 |
Total for residential housing projects |
| 1,023 |
|
| 1,973 |
|
| 3,248 |
|
| 6,244 |
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans to individuals secured by residential properties |
| 361 |
|
| 991 |
|
| - |
|
| 1,352 |
Loans for commercial projects (2) |
| 9,373 |
|
| 5,728 |
|
| 38,878 |
|
| 53,979 |
Land loans - residential |
| 9,289 |
|
| 2,497 |
|
| 3,310 |
|
| 15,096 |
Land loans - commercial (3) |
| 6,231 |
|
| - |
|
| - |
|
| 6,231 |
Total before net deferred fees and allowance for loan losses | $ | 26,277 |
| $ | 11,189 |
| $ | 45,436 |
| $ | 82,902 |
Net deferred fees |
| (37) |
|
| (3) |
|
| - |
|
| (40) |
Total construction loan portfolio, gross |
| 26,240 |
|
| 11,186 |
|
| 45,436 |
|
| 82,862 |
Allowance for loan losses |
| (2,444) |
|
| (619) |
|
| (17) |
|
| (3,080) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Construction Loan Portfolio, net (2) | $ | 23,796 |
| $ | 10,567 |
| $ | 45,419 |
| $ | 79,782 |
____________________ | |||||||||||
(1) Mid-rise relates to buildings of up to seven stories. | |||||||||||
(2) Excludes a construction-commercial loan held for sale of $27.0 million in the Virgin Islands. | |||||||||||
(3) Excludes a land-commercial loan held for sale of $3.0 million in Puerto Rico. | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The composition of the Corporationʼs construction loan portfolio held for investment as of September 30, 2019 by category and geographic location follows: | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
| Puerto Rico |
| Virgin Islands |
| United States |
| Total | ||||
(Dollars in thousands) |
|
| |||||||||
Loans for residential housing projects: |
|
|
|
|
|
|
|
|
|
|
|
Mid-rise (1) | $ | 519 |
| $ | 955 |
| $ | - |
| $ | 1,474 |
Single-family, detached |
| - |
|
| 1,312 |
|
| 10,426 |
|
| 11,738 |
Total for residential housing projects |
| 519 |
|
| 2,267 |
|
| 10,426 |
|
| 13,212 |
Construction loans to individuals secured by residential properties |
| 109 |
|
| 1,007 |
|
| - |
|
| 1,116 |
Loans for commercial projects |
| 17,609 |
|
| 7,637 |
|
| 51,051 |
|
| 76,297 |
Land loans - residential |
| 7,549 |
|
| 1,828 |
|
| 3,457 |
|
| 12,834 |
Land loans - commercial |
| 5,403 |
|
| - |
|
| - |
|
| 5,403 |
Total construction loan portfolio, gross |
| 31,189 |
|
| 12,739 |
|
| 64,934 |
|
| 108,862 |
Allowance for loan losses |
| (2,326) |
|
| (724) |
|
| (9) |
|
| (3,059) |
Total Construction Loan Portfolio, net | $ | 28,863 |
| $ | 12,015 |
| $ | 64,925 |
| $ | 105,803 |
| |||||||||||
(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 nine-month period ended September 30, 2019: | |||||
|
|
|
|
|
|
| (Dollars in thousands) |
|
|
| |
|
| Total undisbursed funds under existing commitments | $ | 130,077 |
|
|
| Construction loans held for investment in nonaccrual status | $ | 6,358 |
|
|
| Net charge-offs (recoveries) - Construction loans | $ | (282) |
|
|
| Allowance for loan losses - Construction loans | $ | 3,059 |
|
|
| Nonaccrual construction loans to total construction loans, including held for sale |
| 5.84% |
|
|
| Allowance for loan losses - construction loans to total construction loans held for investment |
| 2.81% |
|
|
| Net charge-offs (annualized) to total average construction loans (1) |
| -0.40% |
|
|
|
| |||
|
| (1) Loan loss recoveries exceeded charge-offs during the first nine months of 2019. |
|
117119
The following table presents further information related to the Corporation’s construction portfolio as of and for the nine-month period ended September 30, 2018: | |||||
|
|
|
|
|
|
| (In thousands) |
|
|
| |
|
| Total undisbursed funds under existing commitments | $ | 112,820 |
|
|
|
|
|
|
|
|
| Construction loans held for investment in non-accrual status | $ | 9,071 |
|
|
|
|
|
|
|
|
| Construction loans held for sale in non-accrual status | $ | 30,015 |
|
|
|
|
|
|
|
|
| Net charge offs - Construction loans | $ | 8,022 |
|
|
|
|
|
|
|
|
| Allowance for loan losses - Construction loans | $ | 3,079 |
|
|
|
|
|
|
|
|
| Non-performing construction loans to total construction loans, including held for sale |
| 34.63% |
|
|
|
|
|
|
|
|
| Allowance for loan losses - construction loans to total construction loans held for investment |
| 3.72% |
|
|
|
|
|
|
|
|
| Net charge-offs (annualized) to total average construction loans |
| 8.86% |
|
|
|
|
|
|
|
The following summarizes the construction loans for residential housing projects in Puerto Rico segregated by the estimated selling price of the units: | |||
|
|
|
|
| (In thousands) |
| |
|
|
|
|
Under $300k | $ | 558 |
|
Over $600k (1) |
| 465 |
|
| $ | 1,023 |
|
_____________ | |||
(1) One residential housing project in Puerto Rico. | |||
|
118
Consumer Loans and Finance Leases
As of September 30, 2018,2019, the Corporation’s consumer loan and finance lease portfolio increased by $101.5$255.0 million to $1.9$2.2 billion, as compared to the portfolio balance as of December 31, 2017.2018. The increase primarily reflects increases in auto loans, finance leases, personal loans, and personalcredit card loans, which increased by $50.9$141.6 million, $53.7$57.8 million, $42.3 million, and $21.6$20.6 million, respectively, partially offset by reductions of $18.2 million, $3.2 million and $2.4 million in credit card, boat loans and home equity lines of credit and boat loans of $4.4 million and $3.1 million, respectively. The increase was primarily associated with a higher level of consumer loan originations in the Puerto Rico region during the first nine months of 2018.2019.
Loan Production
First BanCorp. relies primarily on its retail network of branches to originate residential and consumer loans. The Corporation supplements its residential mortgage originations with wholesale servicing released mortgage loan purchases from mortgage bankers. The Corporation manages its construction and commercial loan originations through centralized units and most of its originations come from existing customers, as well as through referrals and direct solicitations.
The following table provides a breakdown of First BanCorp.’s loan production, including purchases, refinancings, renewals and draws from existing revolving and non-revolving commitments, for the periods indicated:
| Quarter Ended September 30, |
| Nine-Month Period Ended September 30, | ||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
| (In thousands) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate | $ | 142,086 |
| $ | 112,120 |
| $ | 403,204 |
| $ | 456,291 |
Commercial and industrial and commercial mortgage |
| 400,335 |
|
| 334,885 |
|
| 1,112,687 |
|
| 1,397,755 |
Construction |
| 23,057 |
|
| 10,605 |
|
| 42,690 |
|
| 45,602 |
Finance leases |
| 49,196 |
|
| 21,472 |
|
| 118,207 |
|
| 71,641 |
Consumer |
| 266,596 |
|
| 186,917 |
|
| 698,405 |
|
| 631,933 |
Total loan production | $ | 881,270 |
| $ | 665,999 |
| $ | 2,375,193 |
| $ | 2,603,222 |
|
| Quarter Ended September 30, |
| Nine-Month Period Ended September 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
(In thousands) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate | $ | 119,427 |
| $ | 142,086 |
| $ | 360,707 |
| $ | 403,204 |
Commercial and industrial and commercial mortgage |
| 667,901 |
|
| 415,335 |
|
| 1,685,915 |
|
| 1,127,687 |
Construction |
| 13,082 |
|
| 23,057 |
|
| 41,998 |
|
| 42,690 |
Finance leases |
| 44,830 |
|
| 49,196 |
|
| 129,541 |
|
| 118,207 |
Consumer |
| 304,794 |
|
| 266,596 |
|
| 890,514 |
|
| 698,405 |
Total loan production | $ | 1,150,034 |
| $ | 896,270 |
| $ | 3,108,675 |
| $ | 2,390,193 |
|
120
The Corporation is experiencing continued loan demand and has continued its targeted origination strategy. During the quarter and nine-month period ended September 30, 2018,2019, total loan originations, including purchases, refinancings, and draws from existing revolving and non-revolving commitments, amounted to approximately $881.3 million$1.2 billion and $2.4$3.1 billion, respectively, compared to $666.0$896.3 million and $2.6$2.4 billion, respectively, for the comparable periods in 2017. 2018.
Residential mortgage loan originations and purchases for the quarter and nine-month period ended September 30, 20182019 amounted to $119.4 million and $360.7 million, respectively, compared to $142.1 million and $403.2 million, respectively, compared to $112.1 million and $456.3 million, respectively, for the comparable periods in 2017.2018. These statistics include purchases from mortgage bankers of $9.6$4.0 million and $39.3$13.4 million for the quarter and nine-month period ended September 30, 2018,2019, respectively, compared to $16.5$9.6 million and $48.9$39.3 million, respectively, for the comparable periods in 2017.2018. The increasedecrease in residential mortgage loan originations and purchases of $30.0$22.7 million in the third quarter of 2018,2019, as compared to the same period of 2017,2018, reflects declines of approximately $16.3 million $4.0 million, and $2.4 million in the Puerto Rico, Florida, and the Virgin Islands regions, respectively. For the nine-month period ended September 30, 2019, the decrease includes a reduction of $26.7 million, $11.5 million, and $4.3 million in the Puerto Rico, Florida, and Virgin Islands regions, respectively.
Commercial and construction loan originations (excluding government loans) for the third quarter of 2019 and 2018 amounted to $679.2 million and $419.8 million, respectively, while the originations for the nine-month periods ended September 30, 2019 and 2018 amounted to $1.7 billion and $1.1 billion, respectively. The increase in the third quarter of 2019, compared to the same period in 2018, reflects increases of approximately $227.7 million and $34.4 million and $2.2 million in the Puerto Ricoand the Virgin Islands,Florida regions, respectively, partially offset by a $6.6decrease of $2.5 million decrease in the FloridaVirgin Islands region. For the nine-month period ended September 30, 2019, the increase of $582.8 million, compared to the same period in 2018, the decreasereflects increases of $53.1$468.5 million, includes reductions of $54.0$107.2 million, and $1.9$7.0 million in Florida and Virgin Islands, respectively, partially offset by a $2.8 million increase in the Puerto Rico, region. LoanFlorida, and the Virgin Islands regions, respectively.
Government loan originations for the quarter and nine-month period ended September 30, 2019 amounted to $1.7 million and $9.4 million, respectively, compared to $18.6 million and $34.6 million, respectively, for the comparable periods in 2018. Government loan originations in those periods were mainly related to the prior yearutilization of an arranged overdraft line of credit of a government entity in the Virgin Islands region and the origination, in the third quarter were adversely affected by disruptionsof 2018, of a $15.0 million loan extended to a municipality in economic activity associated with Hurricanes Irma and Maria, primarily in the Puerto Rico region. Rico.
Originations of auto loans (including finance leases) for the quarter and nine-month period ended September 30, 20182019 amounted to $183.7 million and $519.7 million, respectively, compared to $166.4 million and $408.8 million, respectively, compared to $82.8 million and $304.6 million, respectively, for the comparable periods in 2017.2018. The increases were primarily reflected inattributable to the Puerto Rico region, withwhich had increases of $81.4$23.8 million and $103.3$125.1 million for the third quarter and nine-month period ended September 30, 2018,2019, respectively, compared to the same periods in 2017.2018. Personal loan originations, other than credit cards, for the quarter and nine-month period ended September 30, 20182019 amounted to $61.6 million and $204.1 million, respectively, compared to $62.8 million and $160.3 million, respectively, compared to $49.3 million and $159.3 million, respectively, for the comparable periods in 2017.2018. Most of the increase in personal loan originations for the nine-month period ended September 30, 2019 was reflected in the Puerto Rico region. The utilization activity on the outstanding credit card portfolio for the quarter and nine-month period ended September 30, 20182019 amounted to approximately $86.7$104.4 million and $247.5$296.2 million, respectively, compared to $76.3$86.7 million and $239.7$247.5 million, respectively, for the comparable periods in 2017.2018.
Commercial and construction loan originations (excluding government loans) for the third quarter of 2018 and 2017 amounted to $404.8 million and $345.5 million, respectively, while the originations for the nine-month periods ended September 30, 2018 and 2017 amounted to $1.1 billion and $1.4 billion, respectively. The increase in the third quarter of 2018, compared to the same period in 2017, reflects an increase of approximately $85.0 million and $3.3 million in the Puerto Rico and Virgin Islands regions, respectively, partially offset by a $29.0 million decrease in the Florida region. Loan originations volume in the third quarter of 2017 was adversely
119
affected by the drop in business activity after the hurricanes. For the nine-month period ended September 30, 2018, the decrease reflects the impact in 2017 of the refinancing and renewal of five large commercial loans in Puerto Rico totaling $248.9 million and a decrease of $60.2 million in commercial and construction loan originations in the Florida region.
Government loan originations for the quarter and nine-month period ended September 30, 2018 amounted to $18.6 million and $34.6 million, respectively, mainly related to the origination in the third quarter of 2018 of a $15.0 million loan extended to a municipality in Puerto Rico and the utilization of an overdraft line of credit of a government entity in the Virgin Islands region. No government loans were originated during the first nine months of 2017.
Investment Activities
As part of its liquidity, revenue diversification and interest rate risk management strategies, First BanCorp. maintains an investment portfolio that is classified as available for sale or held to maturity. The Corporation’s total available-for-sale investment securities portfolio as of September 30, 20182019 amounted to $2.0$1.7 billion, a $120.2decrease of $206.0 million increase from December 31, 2017.2018. The increasedecrease was mainly driven by purchases$305.9 million of U.S. agencies’ debtagency bonds that matured or were called prior to maturity and mortgage-backed securities totaling $424.9prepayments of $167.8 million (average yield of 3.08%),U.S. agency MBS and bonds, partially offset by prepaymentspurchases of $145.2$225.9 million of U.S. agencies’ pass-through residential mortgage-backed securities,agency MBS and bonds during the maturity during 2018first nine months of $97.5 million of U.S. agencies debt securities,2019 and a $42.3$45.5 million decreaseincrease in the fair value of available-for-saleavailable-for sale investment securities. securities primarily attributable to changes in market interest rates.
As of September 30, 2018,2019, approximately 99% of the Corporation’s available-for-sale securities portfolio was invested in U.S. Governmentgovernment and agency debentures and fixed-rate U.S. government-sponsored agenciesgovernment sponsored-agency MBS (mainly GNMA, FNMAGinnie Mae (“GNMA”), Fannie Mae (“FNMA”) and FHLMCFreddie Mac (“FHLMC”) fixed-rate securities).
As In addition, as of September 30, 2018,2019, the Corporation owned bonds of the Puerto Rico Housing Finance Authority (“PRHFA”), classified as available for sale, in the aggregate amount of $8.1$8.3 million, carried on the Corporation’s books at their aggregate fair value of $6.9$7.2 million. Approximately $4.3 million which were current(fair value - $3.0 million) of these bonds consisted of a residential pass-through mortgage-backed security issued by the PRHFA that is collateralized by second mortgages originated under a program launched by the Puerto Rico government in 2010. This bond was structured as a zero-coupon bond for the first ten years (up to contractual payments as of September 30, 2018.July 2019). See "Note 6 – Investment Securities" to the accompanying unaudited consolidated financial statements for additional information.
121
As of September 30, 2018,2019, the Corporation’s held-to-maturity investment securities portfolio amounted to $144.8$138.7 million, down $5.8$6.1 million from December 31, 2017.2018. Held-to-maturity investment securities consisted of financing arrangements with Puerto Rico municipalities issued in bond form, which are accounted for as securities, but wereare underwritten as loans with features that are typically found in commercial loans. These obligations typically are not issued in bearer form, are not registered with the SEC, and are not rated by external credit agencies. These bonds have seniority to the payment of operating costs and expenses of the municipality and are supported by assigned property tax revenues. Approximately 70% of the Corporation’s municipality bonds consisted of obligations issued by three of the largest municipalities in Puerto Rico. TheseThe 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. During the third quarter of 2019, the Corporation received scheduled principal payments amounting to approximately $6.0 million from these Puerto Rico municipal bonds.
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.government, including the municipalities.
The following table presents the carrying value of investments as of the indicated dates: | |||||
|
|
|
|
|
|
|
|
|
| ||
| September 30, |
| December 31, | ||
| 2019 |
| 2018 | ||
(In thousands) |
|
| |||
|
|
|
|
|
|
Money market investments | $ | 97,731 |
| $ | 7,590 |
|
|
|
|
|
|
Investment securities available for sale, at fair value: |
|
|
|
|
|
U.S. government and agency obligations |
| 319,212 |
|
| 608,656 |
Puerto Rico government obligations |
| 7,201 |
|
| 6,952 |
MBS |
| 1,409,650 |
|
| 1,326,460 |
Other |
| 500 |
|
| 500 |
Total investment securities available for sale, at fair value |
| 1,736,563 |
|
| 1,942,568 |
Investment securities held-to-maturity, at amortized cost: |
|
|
|
|
|
Puerto Rico municipal bonds |
| 138,676 |
|
| 144,815 |
|
|
|
|
|
|
Equity securities, including $41.7 million and $41.9 million of FHLB stock |
|
|
|
|
|
as of September 30, 2019 and December 31, 2018, respectively |
| 45,228 |
|
| 44,530 |
Total money market investments and investment securities | $ | 2,018,198 |
| $ | 2,139,503 |
|
|
|
|
|
|
MBS as of the indicated dates consisted of: | |||||
|
|
|
|
|
|
|
|
|
| ||
| September 30, |
| December 31, | ||
(In thousands) | 2019 |
| 2018 | ||
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
FHLMC certificates | $ | 387,717 |
| $ | 349,778 |
GNMA certificates |
| 231,211 |
|
| 182,777 |
FNMA certificates |
| 719,884 |
|
| 714,044 |
Collateralized mortgage obligations issued or |
|
|
|
|
|
guaranteed by FHLMC and GNMA |
| 59,284 |
|
| 65,947 |
Private label MBS |
| 11,554 |
|
| 13,914 |
Total MBS | $ | 1,409,650 |
| $ | 1,326,460 |
120122
The following table presents the carrying value of investments as of the indicated dates: | |||||
|
|
|
|
|
|
|
|
|
| ||
| September 30, |
| December 31, | ||
| 2018 |
| 2017 | ||
(In thousands) |
|
| |||
|
|
|
|
|
|
Money market investments | $ | 97,590 |
| $ | 10,415 |
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale, at fair value: |
|
|
|
|
|
U.S. government and agencies obligations |
| 623,363 |
|
| 609,188 |
Puerto Rico government obligations |
| 6,940 |
|
| 6,813 |
Mortgage-backed securities |
| 1,380,418 |
|
| 1,274,497 |
Other |
| 500 |
|
| 518 |
Total investment securities available for sale, at fair value |
| 2,011,221 |
|
| 1,891,016 |
|
|
|
|
|
|
Investment securities held-to-maturity, at amortized cost: |
|
|
|
|
|
Puerto Rico Municipal Bonds |
| 144,799 |
|
| 150,627 |
|
|
|
|
|
|
Other investment securities, including $39.7 million and $40.9 million of FHLB stock |
|
|
|
|
|
as of September 30, 2018 and December 31, 2017, respectively |
| 42,274 |
|
| 43,119 |
Total money market investments and investment securities | $ | 2,295,884 |
| $ | 2,095,177 |
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities as of the indicated dates consisted of: | |||||
|
|
|
|
|
|
|
|
|
| ||
| September 30, |
| December 31, | ||
(In thousands) | 2018 |
| 2017 | ||
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
FHLMC certificates | $ | 357,676 |
| $ | 311,706 |
GNMA certificates |
| 190,071 |
|
| 221,630 |
FNMA certificates |
| 750,802 |
|
| 680,040 |
Collateralized mortgage obligations issued or |
|
|
|
|
|
guaranteed by FHLMC and GNMA |
| 67,298 |
|
| 44,061 |
Other mortgage pass-through certificates |
| 14,571 |
|
| 17,060 |
Total mortgage-backed securities | $ | 1,380,418 |
| $ | 1,274,497 |
The carrying values of investment securities classified as available for sale and held to maturity as of September 30, 2019 by contractual maturity (excluding MBS) are shown below: | |||||
|
|
|
|
|
|
| Carrying |
| Weighted | ||
(Dollars in thousands) | Amount |
| Average Yield % | ||
|
|
|
|
|
|
U.S. government and agency obligations |
|
|
|
|
|
Due within one year | $ | 135,548 |
| 1.46 |
|
Due after one year through five years |
| 82,147 |
| 2.13 |
|
Due after five years through ten years |
| 75,787 |
| 2.63 |
|
Due after ten years |
| 25,730 |
| 2.40 |
|
|
| 319,212 |
| 1.98 |
|
|
|
|
|
|
|
Puerto Rico government and municipalities obligations |
|
|
|
|
|
Due within one year |
| 321 |
| 6.07 |
|
Due after one year through five years |
| 8,264 |
| 5.40 |
|
Due after five years through ten years |
| 60,757 |
| 5.89 |
|
Due after ten years |
| 76,535 |
| 5.73 |
|
|
| 145,877 |
| 5.78 |
|
|
|
|
|
|
|
Other Investment Securities |
|
|
|
|
|
Due after one year through five years |
| 500 |
| 2.96 |
|
Total |
| 465,589 |
| 3.18 |
|
|
|
|
|
|
|
MBS |
| 1,409,650 |
| 2.68 |
|
|
|
|
|
|
|
Total investment securities available for sale and held to maturity | $ | 1,875,239 |
| 2.81 |
|
|
|
121123
The carrying values of investment securities classified as available for sale and held to maturity as of September 30, 2018 by contractual maturity (excluding mortgage-backed securities) are shown below: | |||||
|
|
|
|
|
|
| Carrying |
| Weighted | ||
(Dollars in thousands) | Amount |
| Average Yield % | ||
|
|
|
|
|
|
U.S. government and agencies obligations |
|
|
|
|
|
Due within one year | $ | 162,417 |
| 1.25 |
|
Due after one year through five years |
| 231,888 |
| 1.82 |
|
Due after five years through ten years |
| 185,661 |
| 2.94 |
|
Due after ten years |
| 43,397 |
| 2.50 |
|
|
| 623,363 |
| 2.06 |
|
|
|
|
|
|
|
Puerto Rico government and municipalities obligations |
|
|
|
|
|
Due after one year through five years |
| 6,096 |
| 4.73 |
|
Due after five years through ten years |
| 57,148 |
| 5.74 |
|
Due after ten years |
| 88,495 |
| 5.83 |
|
|
| 151,739 |
| 5.75 |
|
|
|
|
|
|
|
Other Investment Securities |
|
|
|
|
|
Due after one year through five years |
| 500 |
| 2.96 |
|
Total |
| 775,602 |
| 2.77 |
|
|
|
|
|
|
|
Mortgage-backed securities |
| 1,380,418 |
| 2.70 |
|
|
|
|
|
|
|
Total investment securities available for sale and held to maturity | $ | 2,156,020 |
| 2.73 |
|
|
|
122
Net interest income of future periods could be affected by prepayments of mortgage-backed securities.MBS. Any acceleration in the prepayments of mortgage-backed securitiesMBS would lower yields on these securities, as the amortization of premiums paid upon acquisition of these securities would accelerate. Conversely, acceleration of the prepayments of mortgage-backed securitiesMBS would increase yields on securities purchased at a discount, as the amortization of the discount would accelerate. These risks are directly linked to future period market interest rate fluctuations. Also, net interest income in future periods might be affected by the Corporation’s investment in callable securities. As of September 30, 2018,2019, the Corporation had approximately $278.4$107.7 million in debt securities (U.S. agenciesagency and Puerto Rico government securities) with embedded calls and with an average yield of 2.69%2.60%. See “Risk Management” below for further analysis of the effects of changing interest rates on the Corporation’s net interest income and of the interest rate risk management strategies followed by the Corporation. Also seerefer to Note 5, “Investment6 – Investment Securities,” to the accompanying unaudited consolidated financial statements for additional information regarding the Corporation’s investment portfolio.
RISK MANAGEMENT
Risks are inherent in virtually all aspects of the Corporation’s business activities and operations. Consequently, effective risk management is fundamental to the success of the Corporation. The primary goals of risk management are to ensure that the Corporation’s risk-taking actie 30vitiesactivities are consistent with the Corporation’s objectives and risk tolerance, and that there is an appropriate balance between risk and reward in order to maximize stockholder value.
The Corporation has in place a risk management framework to monitor, evaluate and manage the principal risks assumed in conducting its activities. First BanCorp.’s business is subject to eleven broad categories of risks: (1) liquidity risk; (2) interest rate risk; (3) market risk; (4) credit risk; (5) operational risk; (6) legal and compliance risk; (7) reputational risk; (8) model risk; (9) capital risk; (10) strategic risk; and (11) information technology risk. First BanCorp. has adopted policies and procedures designed to identify and manage the risks to which the Corporation is exposed.
The Corporation’s risk management policies are described below as well as in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of the 20172018 Annual Report on Form 10-K.
Liquidity Risk and Capital Adequacy
Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet liquidity needs and accommodate fluctuations in asset and liability levels due to changes in the Corporation’s business operations or unanticipated events.
The Corporation manages liquidity at two levels. The first is the liquidity of the parent company, which is the holding company that owns the banking and non-banking subsidiaries. The second is the liquidity of the banking subsidiary. As of September 30,, 2018, 2019, FirstBank could not pay any dividend to the holding company, except upon receipt of required regulatory approvals. During the fourth quarter of 2018, the Corporation reinstated quarterly dividend payments on its common stock. During the first nine months of 2018,2019, the Corporation continued to pay quarterly interest payments on the subordinated debentures associated with its trust preferred securities andTRuPs, the monthly dividend income on its non-cumulative perpetual monthly income preferred stock, and quarterly dividends on its common stock pursuant to regulatory approvals.
The Asset and Liability Committee of the Board of Directors is responsible for establishing the Corporation’s liquidity policy, as well as approving operating and contingency procedures and monitoring liquidity on an ongoing basis. The Management Investment and Asset Liability Committee (the “MIALCO”), using measures of liquidity developed by management that involve the use of several assumptions, reviews the Corporation’s liquidity position on a monthly basis. The MIALCO oversees liquidity management, interest rate risk and other related matters.
123124
The MIALCO, which reports to the Board of Directors’ Asset and Liability Committee, is composed of senior management officers, including the Chief Executive Officer, the Chief Financial Officer, the Chief Risk Officer, the Retail Financial Services Director, the Risk Manager of the Treasury and Investments Division, the Financial Analysis and Asset/Liability Director and the Treasurer. The Treasury and Investments Division is responsible for planning and executing the Corporation’s funding activities and strategy, monitoring liquidity availability on a daily basis, and reviewing liquidity measures on a weekly basis. The Treasury and Investments Accounting and Operations area of the Comptroller’s Department is responsible for calculating the liquidity measurements used by the Treasury and Investment Division to review the Corporation’s liquidity position on a monthly basis. The Financial Analysis and Asset/Liability Director estimates the liquidity gap for longer periods.
To ensure adequate liquidity through the full range of potential operating environments and market conditions, the Corporation conducts its liquidity management and business activities in a manner that will preserve and enhance funding stability, flexibility and diversity. Key components of this operating strategy include a strong focus on the continued development of customer-based funding, the maintenance of direct relationships with wholesale market funding providers, and the maintenance of the ability to liquidate certain assets when, and if, requirements warrant.
The Corporation develops and maintains contingency funding plans. These plans evaluate the Corporation’s liquidity position under various operating circumstances and are designed to help ensure that the Corporation will be able to operate through periods of stress when access to normal sources of funds is constrained. The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, outline actions and procedures for effectively managing liquidity through a difficult period, and define roles and responsibilities.responsibilities for the Corporation’s employees. Under the contingency funding plan, the Corporation stresses the balance sheet and the liquidity position to critical levels that implymimic difficulties in getting newgenerating funds or even maintaining the current funding position of the Corporation and the Bank and are designed to help ensure the ability of the Corporation and the Bank to honor its respective commitments, andcommitments. The Corporation has established liquidity triggers monitored bythat the MIALCO monitors in order to maintain the ordinary funding of the banking business. Four different scenarios are defined in theThe MIALCO developed contingency funding plan:plans for the following four scenarios: local market event, credit rating downgrade, an economic cycle downturn event, and a concentration event. They are reviewed and approved annually by the Board of Directors’ Asset and Liability Committee.
The Corporation manages its liquidity in a proactive manner and believes that it maintains a sound liquidity position. It uses multiple measures to monitor the liquidity position, including core liquidity, basic liquidity, and time-based reserve measures. As of September 30, 2018,2019, the estimated core liquidity reserve (which includes cash and free liquid assets) was $2.0 billion, or 16.8%15.9% of total assets, compared to $1.9 billion, or 15.6% of total assets as of December 31, 2017.2018. The basic liquidity ratio (which adds available secured lines of credit to the core liquidity) was approximately 20.9%18.8% of total assets, as of September 30, 2019, compared to 21.2%19.0% of total assets as of December 31, 2017. The increase in core liquidity was largely driven by the aforementioned deposit build-up experienced after the hurricanes.2018. As of September 30, 2018,2019, the Corporation had $503.6$360.8 million available for additional credit from the FHLB of New York.FHLB. Unpledged liquid securities as of September 30,, 2018, 2019, mainly fixed-rate MBS and U.S. agencies’agency debentures, amounted to approximately $1.3$0.9 billion. The Corporation does not rely on uncommitted inter-bank lines of credit (federal funds lines) to fund its operations and does not include them in the basic liquidity measure. As of September 30, 2018,2019, the holding company had $27.1$26.3 million of cash and cash equivalents. Cash and cash equivalents at the Bank level as of September 30, 20182019 were approximately $649.9$969.0 million. The Bank had $673.7$483.0 million in brokered CDs as of September 30, 2018,2019, of which approximately $369.6$246.3 million mature over the next twelve months. Liquidity at the Bank level is highly-dependenthighly dependent on bank deposits, which fund 75%73% of the Bank’s assets (or 70%,69% excluding brokered CDs).
124125
Sources of Funding
The Corporation utilizes different sources of funding to help ensure that adequate levels of liquidity are available when needed. Diversification of funding sources is of great importance to protect the Corporation’s liquidity from market disruptions. The principal sources of short-term funds are deposits, including brokered CDs, securities sold under agreements to repurchase, and lines of credit with the FHLB.
The Asset Liability Committee of the Board of Directors reviews credit availability on a regular basis. The Corporation has also sold mortgage loans as a supplementary source of funding. Long-term funding has also been obtained in the past through the issuance of notes and long-term brokered CDs. The cost of these different alternatives, among other things, is taken into consideration.
The Corporation has continued reducing the amounts of its outstanding brokered CDs. As of September 30, 2018, theThe amount of brokered CDs had decreased $476.7by $72.6 million to $673.7$483.0 million from $1.2 billionas of September 30, 2019, compared to $555.6 million as of December 31, 2017.2018. At the same time as the Corporation focuses on reducing its reliance on brokered CDs, it is seeking to add core deposits. During the first nine months of 2018,2019, the Corporation increased non-brokered deposits, excluding brokered CDs and government deposits, by $358.6$51.6 million to $7.6 billion, as further discussed below.
The Corporation continues to have access to financing through counterparties to repurchase agreements, the FHLB, and other agents, such as wholesale funding brokers. While liquidity is an ongoing challenge for all financial institutions, management believes that the Corporation’s available borrowing capacity and efforts to grow retail deposits will be adequate to provide the necessary funding for the Corporation’s business plans in the foreseeable future.
The Corporation’s principal sources of funding are:
Brokered CDs– Historically, a large portion of the Corporation’s funding has been brokered CDs issued by FirstBank. Total brokered CDs decreased during the first nine months of 20182019 by $476.7$72.6 million to $673.7$483.0 million as of September 30, 2018.2019.
The average remaining term to maturity of the retail brokered CDs outstanding as of September 30, 20182019 was approximately 1.21.3 years.
The use of brokered CDs has historically been important for the growth of the Corporation. The Corporation encounters intense competition in attracting and retaining regular retail deposits in Puerto Rico. The brokered CD market is very competitive and liquid, and has enabled the Corporation to obtain substantial amounts of funding in short periods of time. This strategy has enhanced the Corporation’s liquidity position, since brokered CDs are insured by the FDIC up to regulatory limits and can be obtained faster than regular retail deposits.
The following table presents contractual maturities of time deposits with denominations of $100,000 or higher as of September 30, 2018: | |||||
|
|
| Total |
| |
|
|
| (In thousands) |
| |
|
|
|
|
| |
| Three months or less | $ | 409,945 |
| |
| Over three months to six months |
| 329,741 |
| |
| Over six months to one year |
| 559,790 |
| |
| Over one year |
| 986,949 |
| |
| Total | $ | 2,286,425 |
|
126
The following table presents contractual maturities of time deposits with denominations of $100,000 or higher as of September 30, 2019: | |||||
|
|
| Total |
| |
|
|
| (In thousands) |
| |
|
|
|
|
| |
| Three months or less | $ | 358,942 |
| |
| Over three months to six months |
| 316,234 |
| |
| Over six months to one year |
| 566,420 |
| |
| Over one year |
| 1,087,396 |
| |
| Total | $ | 2,328,992 |
|
Certificates of depositCDs in denominations of $100,000 or higher include brokered CDs of $673.7$483.0 million issued to deposit brokers in the form of large certificates of depositCDs that are generally participated out by brokers in sharesamounts of less than the FDIC insurance limit.
Government deposits – As of September 30, 2018,2019, the Corporation had $694.6$768.2 million of Puerto Rico public sector deposits ($588.0638.1 million in transactional accounts and $106.6$130.1 million in time deposits), compared to $490.3$677.3 million as of December 31, 2017.2018. Approximately 37%39% is from municipalities and municipal agencies in Puerto Rico and 63%61% is from public corporations and the centralPuerto Rico government and agencies. Most of the increase in 2018 was related to higher balances in transactional deposit accounts of certain municipalities in Puerto Rico.
In addition, as of September 30, 2018,2019, the Corporation had $201.1$291.7 million of government deposits in the Virgin Islands, compared to $162.6$223.4 million as of December 31, 2017.2018.
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Retail deposits – The Corporation’s deposit products also include regular savingsavings accounts, demand deposit accounts, money market accounts and retail CDs. Total deposits,Deposits, excluding brokered CDs and government deposits, increased by $358.6$51.6 million to $7.6 billion from the balanceas of $7.2September 30, 2019, compared to $7.5 billion as of December 31, 2017. The higher balance reflects increases2018, reflecting an increase of $290.1 million and $100.7$82.9 million in the Puerto Rico region, partially offset by decreases of $23.7 million in the Florida region and $7.6 million in the Virgin Islands respectively, partially offset by a $31.2 million decrease in Florida. After the hurricanes and during the fourth quarter of 2017 and the first nine months of 2018, the Corporation experienced rapid accumulation of deposits. Total deposits as of September 30, 2018, excluding brokered CDs and government deposits, increased $358.6 million from December 31, 2017 and $735.7 million since September 30, 2017.region. The most significant increase was in non-interest-bearing demand deposits, which grew 27%, or $487.4 million, between December 31, 2017 and September 30, 2018, and 46%, or $734.9 million, between September 30, 2017 and September 30, 2018. Hurricane-related factors, such as the effect of disaster relief funds and settlement of insurance claims, contributed to this growth. Although management expects the balances accumulated by deposit customers in the hurricane-affected areasPuerto Rico region reflects, among other things, a growth of $173.2 million in time deposits.
Refer to reduce over time, it is difficult to predict when and to what degree, and there may be further growth as insurance claims are resolved and additional disaster-recovery funds are distributed. See Note 15, “Deposits,” in the consolidated financial statements for further details.
See “Results of Operations – Net Interest Income”Income above for information about average balances of interest-bearing deposits, and the average interest rate paid on deposits for the quarters and nine-month periods ended September 30, 20182019 and 2017.2018.
Securities sold under agreements to repurchase - The Corporation’s investment portfolio is funded in part with repurchase agreements. The Corporation’s outstanding securities sold under repurchase agreements amounted to $300.0 million as of September 30, 2018,2019, compared to $500$350.1 million as of December 31, 2017. The Corporation repaid in2018. During the first quarter of 20182019, the Corporation repaid a $100$50.1 million short-term repurchase agreement carried at a cost of 1.53%. In addition, during the third quarter of 2018, the Corporation repaid a $100 million long-term repurchase agreement called before its contractual maturity and carried at a cost of 1.96%2.85%. 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 16, “Securities18 – Securities Sold Under Agreements to Repurchase,” in to the accompanying unaudited consolidated financial statements for further details about repurchase agreements outstanding by counterparty and maturities.
As of September 30, 2018,2019, the Corporation had $200 million of reverse repurchase agreements with a counterparty under a master netting arrangement that provides for a right of setoff that meets the conditions of ASC Topic 210-20-45-11, “Balance Sheet – Offsetting – Repurchase and Reverse Repurchase Agreements,” for a net presentation. These repurchase agreements and reverse repurchase agreements are presented net on the consolidated statementstatements of financial condition.
Under the Corporation’s repurchase agreements, as is the case with derivative contracts, the Corporation is required to pledge cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines due to changes in interest rates, a liquidity crisis or any other factor, the Corporation is required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity.
Given the quality of the collateral pledged, the Corporation has not experienced margin calls from counterparties arising from credit-quality-related write-downs in valuations.
Advances from the FHLB – The Bank is a member of the FHLB system and obtains advances to fund its operations under a collateral agreement with the FHLB that requires the Bank to maintain qualifying mortgages and/or investments as collateral for advances taken. As of each of September 30, 2019 and December 31, 2018, the outstanding balance of FHLB advances was $690.0 million, compared to $715.0 million as of December 31, 2017. During the third quarter of 2018, the Corporation repaid at maturity a $25.0 million fixed-rate advance from the FHLB carried at a cost of 1.79%.$740.0 million. As of September 30, 2018,2019, the Corporation had $503.6$360.8 million available for additional credit on FHLB lines of credit.
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Trust-Preferred Securities – In 2004, FBP Statutory Trust I, a statutory trust that is wholly-owned by the Corporation and not consolidated in the Corporation’s financial statements, sold to institutional investors $100 million of its variable-rate trust-preferred securities.TRuPs. FBP Statutory Trust I used the proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $3.1 million of FBP Statutory Trust I variable rate common securities, to purchase $103.1 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures.junior subordinated deferrable debentures.
Also in 2004, FBP Statutory Trust II, a statutory trust that is wholly-owned by the Corporation and not consolidated in the Corporation’s financial statements, sold to institutional investors $125 million of its variable-rate trust-preferred securities.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.junior subordinated deferrable debentures.
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The trust-preferred debentures are presented in the Corporation’s consolidated statement of financial condition as Other Borrowings.borrowings. The variable-rate trust-preferred securitiesTRuPs are fully and unconditionally guaranteed by the Corporation. The $100 million Junior Subordinated Deferrable Debenturesjunior subordinated deferrable debentures issued by the Corporation in April 2004 and the $125 million issued in September 2004 mature on June 17, 2034 and September 20, 2034, respectively; however, under certain circumstances, the maturity of the subordinated debentures may be shortened (such shortening would result in a mandatory redemption of the variable-rate trust-preferred securities)TRuPs). The Collins Amendment of the Dodd-Frank Act eliminated certain trust-preferred securitiesTRuPs from Tier 1 Capital. Bank holding companies, such as the Corporation, were required to fully phase out these instruments from Tier I capital by January 1, 2016; however, they may remain in Tier 2 capital until the instruments are redeemed or mature.
As mentioned above, during the first quarter of 2018, the Corporation completed the repurchase of $23.8 million of trust-preferred securities of the FBP Statutory Trust I that were being auctioned in a public sale at which the Corporation was invited to participate. The Corporation repurchased and cancelled the repurchased trust-preferred securities, which resulted in a commensurate reduction in the related subordinated debenture. As of September 30, 2019 and December 31, 2018, the Corporation still had subordinated debentures outstanding in the aggregate amount of $184.2 million.
During the second quarter of 2016, the Corporation received approval from the Federal Reserve and paid $31.2 million for all the accrued but deferred interest payments, plus the interest for the 2016 second quarter, on the Corporation’s junior subordinated deferrable debentures associated with its trust-preferred securities.TRuPs. Subsequently, the Corporation has received quarterly regulatory approvals and made scheduled quarterly interest payments.payments on the subordinated debentures. As of September 30, 2018,2019, the Corporation was current on all interest payments due related to its subordinated debentures. On October 3, 2017,The Corporation is no longer required to obtain the New York FED terminated the Written Agreement entered into on June 3, 2010 between the Corporation andapproval of the Federal Reserve. However, the Corporation has agreed with its regulators to continue to obtain approvalReserve Bank before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or trust-preferredtrust preferred securities, incurring or guaranteeing debt or purchasing or redeeming any corporate stock. The Corporation has received approval to make the subordinated debenture quarterly payment for December 31, 2018. The Corporation intends to request approval for future periods to continue regularly-scheduled quarterly payments.
Other Sources of Funds and Liquidity - The Corporation’s principal uses of funds are for the origination of loans and the repayment of maturing deposits and borrowings. 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. Federal Housing Administration (“FHA”), U.S. Veterans Administration (“VA”), U.S. Department of Housing and Urban Development (“HUD”), FNMA and FHLMC. During the first nine months of 2018,2019, the Corporation sold approximately $181.2$173.4 million of FHA/VA mortgage loans to GNMA, which packages them into mortgage-backed securities.MBS. Any regulatory actions affecting GNMA, FNMA or FHLMC could adversely affect the secondary mortgage market.
Although currently not in use, other potential sources of short-term funding for the Corporation include commercial paper and federal funds purchased. Furthermore, in previous years, the Corporation entered into several financing transactions to diversify its funding sources, including the issuance of notes payable and, as noted above, junior subordinated debentures, as part of its longer-term liquidity and capital management activities. No assurance can be given that these sources of liquidity will be available in the future and, if available, will be on comparable terms. terms or terms favorable to the Corporation.
Effect of Credit Ratings on Access to Liquidity
The Corporation’s liquidity is contingent upon its ability to obtain external sources of funding to finance its operations. The Corporation’s current credit ratings and any further downgrade in credit ratings can hinder the Corporation’s access to new forms of external funding and/or cause external funding to be more expensive, which could in turn adversely affect results of operations. Also, changes in credit ratings may further affect the fair value of unsecured derivatives that considerwhose value takes into account the Corporation’s own credit risk as part of the valuation.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
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to credit ratings, the liquidity of the Corporation so far has not been affected in any material way by downgrades. The Corporation’s ability to access new non-deposit sources of funding, however, could be adversely affected by credit downgrades.
As of September 30, 2018,the date hereof, the Corporation’s credit as a long-term issuer wasis currently rated B+ by S&P and B-B+ by Fitch. AtAs of the FirstBank subsidiary level,date hereof, FirstBank’s credit as a long-term issuer ratings as of September 30, 2018 were Caa1are B3 by Moody’s, sevensix notches below their definition of investment grade, B+grade; BB- by S&P, fourthree notches below their definition of investment grade,grade; and B-B+ by Fitch, sixfour notches below their definition of investment grade. The Corporation’s credit ratings are dependent on a number of factors, both quantitative and
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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 $656.8$975.9 million as of September 30, 2018, a decrease2019, an increase of $59.6$389.7 million when compared to the balance as of December 31, 2017.2018. The following discussion highlights the major activities and transactions that affected the Corporation’s cash flows during the first nine months of 20182019 and 2017: 2018.
Cash Flows from Operating Activities
First BanCorp.’s operating assets and liabilities vary significantly in the normal course of business due to the amount and timing of cash flows. Management believes that cash flows from operations, available cash balances and the Corporation’s ability to generate cash through short- and long-term borrowings will be sufficient to fund the Corporation’s operating liquidity needs for the foreseeable future.
For the first nine months of 20182019 and 2017,2018, net cash provided by operating activities was $235.7 million and $213.8 million, and $194.6 million, respectively.respectively. Net cash generated from operating activities was higher than reported net income, largely as a result of adjustments for items such as the provision for loan and lease losses, depreciation and amortization, and impairments, as well as the cash generated from sales of loans held for sale.
Cash Flows from Investing Activities
The Corporation’s investing activities primarily relate to originating loans to be held for investment, and theas well as purchasing, selling and repaying of available-for-sale and held-to-maturity investment securities. For the nine-month period ended September 30, 2019, net cash provided by investing activities was $81.1 million, primarily due to principal collected on loans and on U.S. agency bonds matured or called prior to maturity, as well as U.S. agency MBS prepayments, partially offset by liquidity used to fund commercial and consumer loan originations.
For the nine-month period ended September 30, 2018, net cash used in investing activities was $139.9 million, primarily reflecting the effect of purchases of U.S. agencies’ debtagency bonds and mortgage-backed securities,MBS, partially offset by U.S. agenciesagency MBS prepayments and proceeds from the aforementioned sales of adversely-classified commercial loans and seasoned residential mortgage loans.
For the nine-month period ended September 30, 2017, net cash provided by investing activities was $42.7 million, primarily reflecting U.S. agencies MBS prepayments and proceeds from the sale of the PREPA credit line with a book value of $64 million at the time of sale and the non-performing bonds of the GDB and the Puerto Rico Public Buildings Authority with an aggregate book value of $23 million at the time of sale.
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Cash Flows from Financing Activities
The Corporation’s financing activities primarily include the receipt of deposits and the issuance of brokered CDs, the issuance of and payments on long-term debt, the issuance of equity instruments and activities related to its short-term funding. For the first nine months of 2019, net cash provided by financing activities was $73.0 million, mainly reflecting the increase in non-brokered deposits, partially offset by the repayment of a matured short-term repurchase agreement in the amount of $50.1 million and dividends paid on common and preferred stock.
During the nine-month period ended September 30, 2018, net cash used by financing activities was $133.5 million, mainly reflecting the effect of the repayment of maturing brokered CDs and borrowings, partially offset by the increase in non-brokered deposits.
For the nine-month period ended September 30, 2017, net cash provided by financing activities was $200.1 million, mainly due to temporary funding obtained through short-term FHLB advances in anticipation of a potential increase in short-term liquidity requirements of customers resulting from Hurricanes Irma and Maria in the third quarter of 2017, and the increase in non-brokered deposits, partially offset by the repayment of maturing brokered CDs, dividends paid on preferred stock, and the cash used for the repurchase and cancellation of trust preferred securities.
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Capital
Capital
As of September 30, 2018,2019, the Corporation’s stockholders’ equity was $1.9$2.2 billion, an increase of $58.3$155.9 million from December 31, 2017.2018. The increase was mainly driven by the earnings generated in the first nine months of 2018, partially offset by2019 and the decrease$45.5 million increase in the fair value of available-for-sale investment securities recorded as part of otherOther comprehensive loss. On December 31, 2016, forincome, partially offset by common and preferred stock dividends declared in the first time since July 2009,nine months of 2019 totaling $21.6 million. On October 25, 2019, the Corporation announced that its Board of Directors declared a quarterly cash dividend of $0.05 per common share, which represents an increase of $0.02 per common share compared to its most recent dividend paid dividends on itsSeptember 13, 2019. The dividend is payable on December 13, 2019 to shareholders of record at the close of business on November 29, 2019. The Corporation intends to continue to pay monthly dividend payments on non-cumulative perpetual monthly income preferred stock after receiving regulatory approval. Since then, the Corporation has continued to pay monthly dividend paymentsand quarterly dividends on the non-cumulative perpetual monthly income preferredcommon stock. As mentioned above, on October 3, 2017,the Corporation is no longer required to obtain the approval of the Federal Reserve terminated the Written Agreement entered into on June 3, 2010 between the Corporation and the Federal Reserve. However, the Corporation has agreed with its regulators to continue to obtain approvalBank before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or trust-preferredtrust preferred securities, incurring or guaranteeing debt or purchasing or redeeming any corporate stock. The Corporation received regulatory approvals to pay the monthly dividends on the Corporation’s Series A through E Preferred Stock through December 2018. The Corporation intends to request approval in future periods to continue to pay monthly dividend payments on the non-cumulative perpetual monthly income preferred stock.
Set forth below are First BanCorp.ʼs and FirstBankʼs regulatory capital ratios as of September 30, 2019 and December 31, 2018: | ||||||||
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| Banking Subsidiary | |||
| First BanCorp. |
| FirstBank | To be well capitalized - General thresholds | ||||
|
|
| Fully |
|
|
| Fully |
|
|
|
| Phased-in |
|
|
| Phased-in |
|
As of September 30, 2019 | Actual |
| Pro-forma (1) |
| Actual |
| Pro-forma (1) |
|
Total capital ratio (Total capital to risk-weighted assets) | 25.27% |
| 24.85% |
| 24.78% |
| 24.36% | 10.00% |
Common Equity Tier 1 capital ratio |
|
|
|
|
|
|
|
|
(Common equity Tier 1 capital to risk-weighted assets) | 21.61% |
| 21.23% |
| 20.07% |
| 19.71% | 6.50% |
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) | 22.02% |
| 21.62% |
| 23.52% |
| 23.10% | 8.00% |
Leverage ratio | 16.04% |
| 16.04% |
| 17.16% |
| 17.16% | 5.00% |
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|
|
|
|
|
| Banking Subsidiary | |||
| First BanCorp. |
| FirstBank | To be well capitalized - General thresholds | ||||
|
|
| Fully |
|
|
| Fully |
|
|
|
| Phased-in |
|
|
| Phased-in |
|
As of December 31, 2018 | Actual |
| Pro-forma (1) |
| Actual |
| Pro-forma (1) |
|
Total capital ratio (Total capital to risk-weighted assets) | 24.00% |
| 23.50% |
| 23.51% |
| 23.02% | 10.00% |
Common Equity Tier 1 capital ratio |
|
|
|
|
|
|
|
|
(Common equity Tier 1 capital to risk-weighted assets) | 20.30% |
| 19.86% |
| 18.76% |
| 18.35% | 6.50% |
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) | 20.71% |
| 20.26% |
| 22.25% |
| 21.76% | 8.00% |
Leverage ratio | 15.37% |
| 15.37% |
| 16.53% |
| 16.53% | 5.00% |
| ||||||||
(1) Certain adjustments required under Basel III rules were phased-in through the end of 2018, although certain elements of the Basel III rules were deferred by the federal banking agencies until April 1, 2020, as further discussed below. The ratios shown in this column were calculated assuming fully phased-in adjustments as if they were effective as of September 30, 2019 and December 31, 2018. |
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Set forth below are First BanCorp.ʼs and FirstBankʼs regulatory capital ratios as of September 30, 2018 and December 31, 2017: | ||||||||
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| Banking Subsidiary | |||
|
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|
|
|
| |||
| First BanCorp. |
| FirstBank | To be well capitalized - General thresholds | ||||
|
|
| Fully |
|
|
| Fully |
|
As of September 30, 2018 | Actual |
| Phased-in (1) |
| Actual |
| Phased-in (1) |
|
Total capital ratio (Total capital to risk-weighted assets) | 23.85% |
| 23.30% |
| 23.36% |
| 22.83% | 10.00% |
Common Equity Tier 1 capital ratio |
|
|
|
|
|
|
|
|
(Common equity Tier 1 capital to risk-weighted assets) | 20.13% |
| 19.64% |
| 18.57% |
| 18.12% | 6.50% |
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) | 20.54% |
| 20.04% |
| 22.10% |
| 21.57% | 8.00% |
Leverage ratio | 14.85% |
| 14.85% |
| 15.99% |
| 15.99% | 5.00% |
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| Banking Subsidiary | |||
|
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| |||
| First BanCorp. |
| FirstBank | To be well capitalized - General thresholds | ||||
|
|
| Fully |
|
|
| Fully |
|
As of December 31, 2017 | Actual |
| Phased-in (1) |
| Actual |
| Phased-in (1) |
|
Total capital ratio (Total capital to risk-weighted assets) | 22.53% |
| 21.99% |
| 22.06% |
| 21.53% | 10.00% |
Common Equity Tier 1 capital ratio |
|
|
|
|
|
|
|
|
(Common equity Tier 1 capital to risk-weighted assets) | 18.96% |
| 18.09% |
| 17.70% |
| 16.86% | 6.50% |
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) | 18.97% |
| 18.49% |
| 20.79% |
| 20.26% | 8.00% |
Leverage ratio | 14.03% |
| 14.01% |
| 15.39% |
| 15.37% | 5.00% |
| ||||||||
(1) Certain adjustments required under Basel III rules will be phased-in through the end of 2018 although certain elements of the Basel III rules have recently been deferred by the federal banking agencies. The ratios shown in this column were calculated assuming a fully phased-in adjustments as if they were effective as of September 30, 2018 and December 31, 2017. |
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Although the Corporation and FirstBank became subject to the Basel III rules beginning on January 1, 2015, certain requirementselements of the Basel III rules are being phased-in over several years and, in general, were intended to be fully effective as of January 1, 2019. Certain elements of the new rules have been deferred by the federal banking agencies. The Corporation and FirstBank compute risk-weighted assets using the Standardized Approach required by the Basel III rules.
The Basel III rules require the Corporation to maintain an additional capital conservation buffer of 2.5% of additional Common Equity Tier 1 Capital (“CET1”) to avoid limitations on both (i) capital distributions (e.g.(e.g., repurchases of capital instruments, dividends and interest payments on capital instruments) and (ii) discretionary bonus payments to executive officers and heads of major business lines. The phase-in of the capital conservation buffer began on January 1, 2016 with a first year requirement of 0.625% of additional Common Equity Tier 1 capital (“CET1”), which is being progressively increased by that same percentage amount on each subsequent January 1 until it reaches the fully phased-in 2.5% CET1 requirement on January 1, 2019.
Under the fully phased-in Basel III rules, in order to be considered adequately capitalized and not subject to the above described limitations, the Corporation will beis required to maintain: (i) a minimum CET1 capital to risk-weighted assets ratio of at least 4.5%, plus the 2.5% “capital conservation buffer,” resulting in a required minimum CET1 ratio of at least 7%,; (ii) a minimum ratio of total Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum Tier 1 capital ratio of 8.5%,; (iii) a minimum ratio of total Tier 1 plus Tier 2 capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum total capital ratio of 10.5%,; and (iv) a required minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average on-balance sheet (non-risk adjusted) assets.
In addition, as required under the Basel III rules, the Corporation’s trust-preferred securities (“TRUPs”)TRuPs were fully phased outphased-out from Tier 1 capital onas of January 1, 2016. However, the Corporation’s TRUPsTRuPs may continue to be included in Tier 2 capital until the instruments are redeemed or mature.
On November 21, 2017, theThe Federal Reserve Board, the FDIC, and the Office of the Comptroller of the Currency finalized an extension(collectively “the agencies”) have issued several rulemakings over the last two years to simplify certain aspects of the phase-in of certain Basel III capital rules for banks not using the Basel advanced approaches capital rule. The extension, which was effective on January 1, 2018, pausesFor example, the full transition ofcapital rule included transitional arrangements for certain requirements. Under such transitional arrangements in the Basel III treatmentcapital rule, any amount of mortgage servicing assets, certaintemporary difference deferred tax assets, and investments in the capital of unconsolidated financial institutions that a banking organization did not deduct from common equity tier 1 capital was risk weighted at 100 percent until January 1, 2018. In 2017, the agencies adopted a rule (transition rule) to allow non-advanced approaches banking organizations, such as the Corporation and minority interests, pendingFirstBank, to continue to apply the banking agencies’ broader efforts, announcedtransition treatment in Septembereffect in 2017 to simplify(including the 100 percent risk weight for mortgage servicing assets, temporary difference deferred tax assets, and significant investments in the capital of unconsolidated financial institutions) while the agencies considered the simplifications proposal.
On July 9, 2019, the agencies adopted a final rule that supersedes the regulatory capital transition rules and eliminates the transition provisions that applyare no longer operative. The final rule will be generally effective April 1, 2020 and eliminates: (i) the 10 percent common equity tier 1 capital deduction threshold, which applies individually to banking organizationsholdings of mortgage servicing assets, temporary difference deferred tax assets, and significant investments in the capital of unconsolidated financial institutions in the form of common stock; (ii) the 15 percent common equity tier 1 capital deduction threshold, which applies to the aggregate amount of such items; (iii) the 10 percent threshold for non-significant investments, which applies to holdings of regulatory capital of unconsolidated financial institutions; and (iv) the deduction treatment for significant investments in the capital of unconsolidated financial institutions that are not subject toin the advancedform of common stock. Instead of the current capital rule's treatments of mortgage servicing assets, temporary difference deferred tax assets, and investments in the capital of unconsolidated financial institutions, the final rule requires non-advanced approaches capital rules. Because the advanced approaches capital rules apply to banking organizations with more than $250 billionto deduct from common equity tier 1 capital any amount of mortgage servicing assets, temporary difference deferred tax assets, and investments in the capital of unconsolidated financial institutions that individually exceed 25 percent of common equity tier 1 capital of the banking organization (the 25 percent common equity tier 1 capital deduction threshold). The final rule retains the deferred requirement that a banking organization must apply a 250 percent risk weight to non-deducted mortgage servicing assets or foreign bank subsidiaries with more than $10 billion in assets, the extension relief applies broadly to community, midsize,temporary difference deferred tax assets. The table above presents, on a pro-forma basis, regulatory capital ratios incorporating changes required by this final rule as if they were effective as of September 30, 2019 and regional banks, including the Corporation and FirstBank.December 31, 2018.
The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures generally used by the financial community to evaluate capital adequacy. Tangible common equity is total equity less preferred equity, goodwill, core deposit intangibles, purchased credit card relationship assets and insurance customer relationship intangible assets.asset. Tangible assets are total assets less intangible assets such as goodwill, core deposit intangibles, purchased credit card relationshiprelationships and insurance customer relationship intangible assets.asset relationships. See “Basis of Presentation” below for additional information.
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The following table is a reconciliation of the Corporation’s tangible common equity and tangible assets as of September 30, 2018 and December 31, 2017, respectively: | ||||||
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| September 30, |
| December 31, | ||
| (In thousands, except ratios and per share information) | 2018 |
| 2017 | ||
|
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|
|
|
|
|
| Total equity - GAAP | $ | 1,927,415 |
| $ | 1,869,097 |
| Preferred equity |
| (36,104) |
|
| (36,104) |
| Goodwill |
| (28,098) |
|
| (28,098) |
| Purchased credit card relationship intangible |
| (6,276) |
|
| (8,000) |
| Core deposit intangible |
| (4,585) |
|
| (5,478) |
| Insurance customer relationship intangible |
| (661) |
|
| (775) |
|
|
|
|
|
|
|
| Tangible common equity | $ | 1,851,691 |
| $ | 1,790,642 |
|
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|
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|
|
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|
|
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| Total assets - GAAP | $ | 12,209,700 |
| $ | 12,261,268 |
| Goodwill |
| (28,098) |
|
| (28,098) |
| Purchased credit card relationship intangible |
| (6,276) |
|
| (8,000) |
| Core deposit intangible |
| (4,585) |
|
| (5,478) |
| Insurance customer relationship intangible |
| (661) |
|
| (775) |
| Tangible assets | $ | 12,170,080 |
| $ | 12,218,917 |
| Common shares outstanding |
| 217,241 |
|
| 216,278 |
|
|
|
|
|
|
|
| Tangible common equity ratio |
| 15.22% |
|
| 14.65% |
| Tangible book value per common share | $ | 8.52 |
| $ | 8.28 |
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| (1) In May 2017, the U.S. Treasury sold its remaining shares of common stock in First BanCorp. As a result, senior officers forfeited approximately 2.4 million of restricted shares that they held. |
131
On May 17, 2018, the U.S. Department of the Treasury fully exercised its warrant to purchase 1,285,899 shares of the Corporation’s common stock on a cashless basis, resulting in the issuance of 730,571 shares of common stock.
132
The following table is a reconciliation of the Corporation’s tangible common equity and tangible assets as of September 30, 2019 and December 31, 2018, respectively: | ||||||
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|
|
|
| September 30, |
| December 31, | ||
| (In thousands, except ratios and per share information) | 2019 |
| 2018 | ||
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|
| Total equity - GAAP | $ | 2,200,595 |
| $ | 2,044,704 |
| Preferred equity |
| (36,104) |
|
| (36,104) |
| Goodwill |
| (28,098) |
|
| (28,098) |
| Purchased credit card relationship intangible |
| (4,137) |
|
| (5,702) |
| Core deposit intangible |
| (3,695) |
|
| (4,335) |
| Insurance customer relationship intangible |
| (508) |
|
| (622) |
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|
|
| Tangible common equity | $ | 2,128,053 |
| $ | 1,969,843 |
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| Total assets - GAAP | $ | 12,530,713 |
| $ | 12,243,561 |
| Goodwill |
| (28,098) |
|
| (28,098) |
| Purchased credit card relationship intangible |
| (4,137) |
|
| (5,702) |
| Core deposit intangible |
| (3,695) |
|
| (4,335) |
| Insurance customer relationship intangible |
| (508) |
|
| (622) |
| Tangible assets | $ | 12,494,275 |
| $ | 12,204,804 |
| Common shares outstanding |
| 217,361 |
|
| 217,235 |
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|
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| Tangible common equity ratio |
| 17.03% |
|
| 16.14% |
| Tangible book value per common share | $ | 9.79 |
| $ | 9.07 |
| ||||||
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| (1) In May 2017, the U.S. Treasury sold its remaining shares of common stock in First BanCorp. As a result, senior officers forfeited approximately 2.4 million of restricted shares that they held. |
132
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 accountreserve from the retainedRetained earnings account are not available for distribution to the Corporation, including for payment as dividends to the stockholders, without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The Puerto Rico Banking Law provides that, when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over receipts must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the legal surplus reserve, as a reduction thereof. If there is no legal surplus reserve sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the capital account and the Bank cannot pay dividends until it can replenish the legal surplus reserve to an amount equal toof at least 20% of the original capital contributed. During the fourth quarter of 2017, $7.32018, $20.5 million was transferred to the legal surplus reserve. FirstBank’s legal surplus reserve, included as part of retainedRetained earnings in the Corporation’s consolidated statements of financial condition, amounted to $59.7 $80.2 million as of September 30, 2018.2019. There were no transfers to the legal surplus reserve during the first nine months of 2018.2019.
Off -Balance Sheet Arrangements
In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different from the full contract or notional amount of the transaction. These transactions are designed to (1) meet the financial needs of customers, (2) manage the Corporation’s credit, market and liquidity risks, (3) diversify the Corporation’s funding sources, and (4) optimize capital.
As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the financial needs of its customers. These financial instruments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval processprocesses used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. As of September 30, 2018,2019, the Corporation’s commitments to extend credit amounted to approximately $1.2$1.3 billion, of which $664.4$665.2 million related to credit card loans. Commercial and financial standby letters of credit amounted to approximately $72.5$98.5 million. Commitments to extend credit are agreements to lend to customers as long as the conditions established in the contract are met.
Contractual Obligations, Commitments and Contingencies | Contractual Obligations, Commitments and Contingencies | Contractual Obligations, Commitments and Contingencies | ||||||||||||||||||||||||||
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The following table presents information about the maturities of the Corporation’s contractual obligations and commitments, which consist of CDs, long-term contractual debt obligations, commitments to sell mortgage loans and commitments to extend credit: | The following table presents information about the maturities of the Corporation’s contractual obligations and commitments, which consist of CDs, long-term contractual debt obligations, commitments to sell mortgage loans and commitments to extend credit: | The following table presents information about the maturities of the Corporation’s contractual obligations and commitments, which consist of CDs, long-term contractual debt obligations, commitments to sell mortgage loans and commitments to extend credit: | ||||||||||||||||||||||||||
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| Contractual Obligations and Commitments | Contractual Obligations and Commitments | ||||||||||||||||||||||||||
| As of September 30, 2018 | As of September 30, 2019 | ||||||||||||||||||||||||||
| Total |
| Less than 1 year |
| 1-3 years |
| 3-5 years |
| After 5 years | Total |
| Less than 1 year |
| 1-3 years |
| 3-5 years |
| After 5 years | ||||||||||
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(In thousands) |
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Contractual obligations: |
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Certificates of deposit | $ | 3,041,536 |
| $ | 1,744,721 |
| $ | 966,784 |
| $ | 325,828 |
| $ | 4,203 | $ | 3,064,034 |
| $ | 1,665,432 |
| $ | 1,107,768 |
| $ | 283,716 |
| $ | 7,118 |
Securities sold under agreements to repurchase (1) |
| 100,000 |
| - |
| - |
| 100,000 |
| - |
| 100,000 |
| - |
| 100,000 |
| - |
| - | ||||||||
Advances from FHLB |
| 690,000 |
| 70,000 |
| 420,000 |
| 200,000 |
| - |
| 740,000 |
| 250,000 |
| 490,000 |
| - |
| - | ||||||||
Other borrowings |
| 184,150 |
| - |
| - |
| - |
| 184,150 |
| 184,150 |
| - |
| - |
| - |
| 184,150 | ||||||||
Operating leases |
| 79,424 |
| 10,273 |
| 18,845 |
| 13,758 |
| 36,548 | ||||||||||||||||||
Total contractual obligations | $ | 4,015,686 |
| $ | 1,814,721 |
| $ | 1,386,784 |
| $ | 625,828 |
| $ | 188,353 | $ | 4,167,608 |
| $ | 1,925,705 |
| $ | 1,716,613 |
| $ | 297,474 |
| $ | 227,816 |
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Commitments to sell mortgage loans | $ | 5,005 |
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| $ | 6,012 |
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Standby letters of credit | $ | 2,580 |
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| $ | 4,229 |
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Commitments to extend credit: |
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Lines of credit | $ | 1,101,074 |
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| $ | 1,161,990 |
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Letters of credit |
| 69,907 |
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| 94,266 |
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Construction undisbursed funds |
| 112,820 |
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| 130,077 |
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Total commercial commitments | $ | 1,283,801 |
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| $ | 1,386,333 |
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(1) Reported net of reverse repurchase agreement by counterparty, when applicable, pursuant to ASC Topic 210-20-45-11. | (1) Reported net of reverse repurchase agreement by counterparty, when applicable, pursuant to ASC Topic 210-20-45-11. | (1) Reported net of reverse repurchase agreement by counterparty, when applicable, pursuant to ASC Topic 210-20-45-11. |
133
The Corporation has obligations and commitments to make future payments under contracts, such as debt and lease agreements, and under other commitments to sell mortgage loans at fair value and to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Other contractual obligations result mainly from contracts for the rental and maintenance of equipment. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. There have been no significant or unexpected draws on existing commitments. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any time and without cause.
Interest Rate Risk Management
First BanCorp. manages its asset/liability position in order to limit the effects of changes in interest rates on net interest income and to maintain stability of profitability under varying interest rate scenarios. The MIALCO oversees interest rate risk, and, in doing so, the MIALCO assesses, among other things, current and expected conditions in world financial markets, competition and prevailing rates in the local deposit market, liquidity, the pipeline of loan originations, securities market values, recent or proposed changes to the investment portfolio, alternative funding sources and related costs, hedging and the possible purchase of derivatives, such as swaps and caps, and any tax or regulatory issues that may be pertinent to these areas. The MIALCO approves funding decisions in light of the Corporation’s overall strategies and objectives.
On a quarterly basis, the Corporation performs a consolidated net interest income simulation analysis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a one-to-five-year time horizon and assume upward and downward yield curve shifts. The rate scenarios considered in these simulations reflect gradual upward and downward interest rate movements of 200 basis points during a twelve-month period. Simulations are carried out in two ways:
(1) Using a static balance sheet, as the Corporation had on the simulation date, and
(2) Using a dynamic balance sheet based on recent patterns and current strategies.
The balance sheet is divided into groups of assets and liabilities by maturity or re-pricing structure and their corresponding interest rate yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and costs, the possible exercise of options, changes in prepayment rates, deposit decay and other factors, which may be important in projecting net interest income.
The Corporation uses a simulation model to project future movements in the Corporation’s balance sheet and income statement. The starting point of the projections corresponds to the actual values on the balance sheet on the date of the simulations.
These simulations are highly complex, and are based on many assumptions that are intended to reflect the general behavior of the balance sheet components over the period in question. It is unlikely that actual events will match these assumptions in most cases. For this reason, the results of these forward-looking computations are only approximations of the true sensitivity of net interest income to changes in market interest rates. Several benchmark and market rate curves were used in the modeling process, primarily the LIBOR/SWAP curve, Prime, Treasury, FHLB rates, brokered CD rates, repurchase agreements rates and the mortgage commitment rate of 30 years.
As of September 30, 2018,2019, the 12-month net interest income iswas forecasted assuming the September 30, 20182019 interest rate curves remain constant. Then, net interest income iswas estimated under rising and falling rate scenarios. For the rising rate scenario, a gradual (ramp) parallel upward shift of the yield curve iswas assumed during the first 12 months (the “+200 ramp” scenario). Conversely, for the falling rate scenario, a gradual (ramp) parallel downward shift of the yield curve iswas assumed during the first 12 months (the “-200 ramp” scenario). However, given the current low levels of interest rates, along with the current yield curve slope, a full downward shift of 200 basis points would represent an unrealistic scenario. Therefore, under the falling rate scenario, rates move downward up toby as much as 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 September 30, 2018,2019, as compared to December 2017,2018, reflected a 7577 basis points increasereduction in the short-term horizon, between 1 to 12 months, while market rates increasedalso decreased by 87105 basis points in the medium term, that is, between 2 to 5 years. In the long-term, that is, over a 5-year time5-year-time horizon, market rates increaseddecreased by 72113 basis points, causing a more flattened yield curve. The U.S. Treasury curve in the short-term increaseddecreased by 8368 basis points and in the medium-term horizon increaseddecreased by 8293 basis points, as compared to the December 20172018 end of month levels. The long-term horizon increaseddecreased by 5595 basis points as compared to December 20172018 end of month levels.
134
The following table presents the results of the simulations as of September 30, 2018 and December 31, 2017. Consistent with prior years, these exclude non-cash changes in the fair value of derivatives: | |||||||||||||||||||||||
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| September 30, 2018 |
| December 31, 2017 | ||||||||||||||||||||
| Net Interest Income Risk |
| Net Interest Income Risk | ||||||||||||||||||||
| (Projected for the next 12 months) |
| (Projected for the next 12 months) | ||||||||||||||||||||
| Static Simulation |
| Growing Balance Sheet |
| Static Simulation |
| Growing Balance Sheet | ||||||||||||||||
(Dollars in millions) | Change |
| % Change |
| Change |
| % Change |
| Change |
| % Change |
| Change |
| % Change | ||||||||
+ 200 bps ramp | $ | 14.0 |
| 2.57 | % |
| $ | 17.0 |
| 2.96 | % |
| $ | 18.0 |
| 3.55 | % |
| $ | 17.5 |
| 3.42 | % |
- 200 bps ramp | $ | (14.0) |
| (2.57) | % |
| $ | (18.2) |
| (3.16) | % |
| $ | (14.6) |
| (2.89) | % |
| $ | (17.7) |
| (3.47) | % |
134
The following table presents the results of the simulations as of September 30, 2019 and December 31, 2018. Consistent with prior years, these exclude non-cash changes in the fair value of derivatives: | |||||||||||||||||||||||
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| September 30, 2019 |
| December 31, 2018 | ||||||||||||||||||||
| Net Interest Income Risk |
| Net Interest Income Risk | ||||||||||||||||||||
| (Projected for the next 12 months) |
| (Projected for the next 12 months) | ||||||||||||||||||||
| Static Simulation |
| Growing Balance Sheet |
| Static Simulation |
| Growing Balance Sheet | ||||||||||||||||
(Dollars in millions) | Change |
| % Change |
| Change |
| % Change |
| Change |
| % Change |
| Change |
| % Change | ||||||||
+ 200 bps ramp | $ | 18.6 |
| 3.41 | % |
| $ | 17.8 |
| 3.06 | % |
| $ | 5.7 |
| 1.05 | % |
| $ | 8.7 |
| 1.50 | % |
- 200 bps ramp | $ | (24.9) |
| (4.55) | % |
| $ | (26.1) |
| (4.49) | % |
| $ | (7.2) |
| (1.31) | % |
| $ | (9.1) |
| (1.57) | % |
The Corporation continues to manage its balance sheet structure to control the overall interest rate risk. As of September 30, 2018,2019, the simulations showed that the Corporation maintainedcontinues to maintain an asset-sensitive position. The Corporation has continued repositioning the balance sheet and improving the funding mix, driven by an increase in the average balance of non-interest-bearinginterest-bearing deposits with low rate elasticity, and reductions in brokered CDs and short-term repurchase agreements and other borrowings.agreements. The above-mentioned growth in non-interest-bearing deposits, along with proceeds from US agencies mortgage-backed securitiesagency MBS and loan repayments, and proceeds from U.S. agency bonds that matured or were called prior to maturity during the first nine months of 2019 that have not been yet reinvested, has helped the Corporation continue to maintain highfund the continued increases in the consumer loan portfolio, while maintaining higher liquidity levels.
Taking into consideration the above-mentioned facts for modeling purposes, the net interest income for the next 12 months under a non-staticgrowing balance sheet scenario iswas estimated to increase by $17.0$17.8 million in the rising rate scenario when compared against the Corporation’s flat or unchanged interest rate forecast scenario. Under the falling rate, non-staticgrowing balance sheet scenario, the net interest income iswas estimated to decrease by $18.2 million.$26.1 million.
Derivatives
First BanCorp. uses derivative instruments and other strategies to manage its exposure to interest rate risk caused by changes in interest rates that are beyond management’s control.
The following summarizes major strategies, including derivative activities that the Corporation uses in managing interest rate risk:
Interest rate cap agreements - Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value of the interest rate cap increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection from rising interest rates.
Forward Contracts - Forward contracts are sales of TBAs that will settle over the standard delivery date and do not qualify as “regular-way” security trades. Regular-way security trades are contracts that have no net settlement provision and no market mechanism to facilitate net settlement and 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. TheseThe Corporation uses these securities are used to economically hedge the FHA/VA residential mortgage loan securitizations of the mortgage-banking operations. Also reportedThe Corporation also reports as forward contracts arethe mandatory mortgage loan sales commitments enteredthat it enters into with the 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 mortgageMortgage banking activities in the consolidated statements of income.
Interest Rate Lock Commitments – Interest rate lock commitments are agreements under which the Corporation agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Under the agreement, the Corporation commits to lend funds to a potential borrower, generally on a fixed rate basis, regardless of whether interest rates change in the market.
For detailed information regarding the volume of derivative activities (e.g.(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 11, “Derivative13 – Derivative Instruments and Hedging Activities” in the accompanying consolidated unaudited financial statements.
135
The following tables summarize the fair value changes in the Corporation’s derivatives, as well as the sources of the fair values: | |||||
| Asset Derivatives |
| Liability Derivatives | ||
| Nine-Month Period Ended |
| Nine-Month Period Ended | ||
(In thousands) | September 30, 2018 |
| September 30, 2018 | ||
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Fair value of contracts outstanding as of the beginning of the period | $ | 312 |
| $ | (324) |
Changes in fair value during the period |
| 619 |
|
| (511) |
Fair value of contracts outstanding as of September 30, 2018 | $ | 931 |
| $ | (835) |
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135
Sources of Fair Value |
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| Maturity by Period |
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| Maturity Less Than One Year |
| Maturity 1-3 Years |
| Maturity 3-5 Years |
| Maturity in Excess of 5 Years |
| Total Fair Value |
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(In thousands) |
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As of September 30, 2018 |
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Pricing from observable market inputs - Asset Derivatives |
|
| $ | 116 |
| $ | 815 |
| $ | - |
| $ | - |
| $ | 931 |
| ||
Pricing from observable market inputs - Liability Derivatives |
|
| (20) |
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| (815) |
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| - |
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| - |
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| (835) |
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| $ | 96 |
| $ | - |
| $ | - |
| $ | - |
| $ | 96 |
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136
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 | ||
| Nine-Month Period Ended |
| Nine-Month Period Ended | ||
(In thousands) | September 30, 2019 |
| September 30, 2019 | ||
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Fair value of contracts outstanding as of the beginning of the period | $ | 1,018 |
| $ | (1,000) |
Changes in fair value during the period |
| (714) |
|
| 817 |
Fair value of contracts outstanding as of September 30, 2019 | $ | 304 |
| $ | (183) |
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Sources of Fair Value |
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| Payment Due by Period |
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| Maturity Less Than One Year |
| Maturity 1-3 Years |
| Maturity 3-5 Years |
| Maturity in Excess of 5 Years |
| Total Fair Value |
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(In thousands) |
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As of September 30, 2019 |
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Pricing from observable market inputs - Asset Derivatives |
|
| $ | 294 |
| $ | - |
| $ | 10 |
| $ | - |
| $ | 304 |
| ||
Pricing from observable market inputs - Liability Derivatives |
|
| (174) |
|
| - |
|
| (9) |
|
| - |
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| (183) |
| |||
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| $ | 120 |
| $ | - |
| $ | 1 |
| $ | - |
| $ | 121 |
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|
136
Derivative instruments, such as interest rate caps, are subject to market risk. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the mostin part, on the level of interest rates, as well as the expectations for rates in the future.
As of September 30, 20182019 and December 31, 2017,2018, all of the derivative instruments held by the Corporation were considered undesignated economic hedges.
The use of derivatives involves market and credit risk. The market risk of derivatives stems principally from the potential for changes in the value of derivative contracts based on changes in interest rates. The credit risk of derivatives arises from the potential for default of the counterparty. To manage this credit risk, the Corporation deals with counterparties that it considers to be of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral.Master netting agreements incorporate rights of set-off that provide for the net settlement of contracts with the same counterparty in the event of default.
Credit Risk Management
First BanCorp. is subject to credit risk mainly with respect to its portfolio of loans receivable and off-balance-sheet instruments, mainly derivatives and loan commitments. Loans receivable represents loans that First BanCorp. holds for investment and, therefore, First BanCorp. is at risk for the term of the loan. Loan commitments represent commitments to extend credit, subject to specific conditions, for specific amounts and maturities. These commitments may expose the Corporation to credit risk and are subject to the same review and approval process as for loans made by the Bank. See “Contractual Obligations Commitments and Contingencies”Commitments” above for further details. The credit risk of derivatives arises from the potential that the counterparty will default on its contractual obligations. 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. For further details and information on the Corporation’s derivative credit risk exposure, see “Interest Rate Risk Management,” above. The Corporation manages its credit risk through its credit policy, underwriting, independent loan review and quality control procedures, statistical analysis, comprehensive financial analysis, and established management committees. The Corporation also employs proactive collection and loss mitigation efforts. Furthermore, personnel performing structured loan workout functions are responsible for mitigating defaults and minimizing losses upon default within each region and for each business segment. In the case of the commercial and industrial (“C&I”), commercial mortgage and construction loan portfolios, the Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of OREO. In addition to the management of the resolution process for problem loans, the SAG oversees collection efforts for all loans to prevent migration to the non-performingnonaccrual and/or adversely classified status. The SAG utilizes relationship officers, collection specialists and attorneys. In the case of residential construction projects, the workout function monitors project specifics, such as project management and marketing, as deemed necessary.
The Corporation may also have risk of default in the securities portfolio. The securities held by the Corporation are principally fixed-rate U.S. agencies mortgage-backed securitiesagency MBS and U.S. Treasury and agency securities. Thus, a substantial portion of these instruments is backed by mortgages, a guarantee of a U.S. government-sponsored entityGSE or the full faith and credit of the U.S. government.
Management, consisting of the Corporation’s Commercial Credit Risk Officer, Retail Credit Risk Officer, Chief Lending Officer and other senior executives, has the primary responsibility for setting strategies to achieve the Corporation’s credit risk goals and objectives. These goals and objectives are documented in the Corporation’s Credit Policy.
Allowance for Loan and Lease Losses and Non-Performing Assets
Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents the estimate of the level of reserves appropriate to absorb inherent incurred credit losses. The amount of the allowance is determined by empirical analysis and judgments regarding the quality of each individual loan portfolio. All known relevant internal and external factors that affect loan collectability are considered, including analyses of historical charge-off experience, migration patterns, changes in economic conditions, and changes in loan collateral values. For example, factors affecting the economies of Puerto Rico, Florida (USA), the USVI and the BVI may contribute to delinquencies and defaults above the Corporation’s historical loan and lease losses.loss experience. 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.
137
The allowance for loan and lease losses provides for probable incurred losses that have been identified with specific valuation allowances for individually evaluated impaired loans and probable incurred losses believed to be inherent in the loan portfolio that have not been specifically identified. An internal risk rating is assigned to each business loan at the time of approval and is subject to subsequent periodic reviews by the Corporation’s senior management. The allowance for loan and lease losses is reviewed on a quarterly basis as part of the Corporation’s continued evaluation of its asset quality.
137
Hurricanes Maria and Irma caused widespread property damage, flooding, power outages, and water and communication services interruptions, and severely disrupted normal economic activity in the affected areas. Damages associated with these hurricane-related events have had and may continue to have significant short-term economic repercussions, both positive and negative, for the Corporation’s commercial and individual loan customers in the most severely affected parts of Puerto Rico and the Virgin Islands. The methodologies used by the Corporation to determine the hurricane-related qualitative reserve estimate and for the review of individual large commercial credits are discussed in detail in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” in the audited consolidated financial statements for the year ended December 31, 2017, which are included in the 2017 Annual Report on Form 10-K, and in “Results of Operations – Provision for Loan and Lease Losses” above. With the ongoing collection of information on individual commercial customers and statistics on the consumer and residential loan portfolios, the loss estimate was revised during 2018 and will be revised in the future as needed.
The ratio of the allowance for loan and lease losses to total loans held for investment was 2.30%decreased to 1.85% as of September 30, 2018,2019, compared to 2.62%2.22% as of December 31, 2017.2018. The change for each portfolio follows:
·The allowance to total loans ratio for the residential mortgage loan portfolio decreased from 1.79%1.61% as of December 31, 20172018 to 1.50%1.54% as of September 30, 2018,2019, primarily due to lower non-performingnonaccrual and delinquency loan levels.
·The allowance to total loans ratio for the commercial mortgage portfolio increaseddecreased from 3.00%3.65% as of December 31, 20172018 to 3.27%3.12% as of September 30, 2018, driven by2019 reflecting, among other things, the effectresolution of the downgradea large nonaccrual commercial mortgage loan in the credit risk classificationFlorida region that resulted in a charge-off of three$11.4 million taken against a previously-established specific reserve and the payoff of certain large criticized loans totaling $108.7 million. in the third quarter of 2019.
·The allowance to total loans ratio for the C&I portfolio decreased from 2.35%1.52% as of December 31, 20172018 to 2.14%0.79% as of September 30, 2018,2019, reflecting the effect of a $4.0$3.4 million net loan loss reserve release related to revised estimates of the reserve associated with the effectsresolution of Hurricanes Maria and Irma, primarily due to updated assessments aboutuncertainties surrounding the performance and repayment prospects of certain individually assesseda hurricane-affected commercial loanscustomer, a charge-off of $5.7 million taken in the first quarter of 2019 on a C&I loan in Puerto Rico against a previously-established specific reserve, and charge-offs taken against previously-established reserves. lower historical loss rates.
·The allowance to total loans ratio for the construction loan portfolio decreased from 4.06%4.52% as of December 31, 20172018 to 3.72%2.81% as of September 30, 2018, reflecting the effect2019, primarily as a result of a $0.7 million net loan loss reserve release related to revised estimateshigher proportion of the reserve associated with the effects of Hurricanes Maria and Irma, primarily due to updated assessments about the performance and repayment prospects of certainFlorida construction loans derived from regularly scheduled annual reviews.to total construction loans. The historical loss rates applied to the construction portfolio in the Florida region are generally lower than rates applied to the construction loan portfolio in the Puerto Rico region.
·The allowance to total loans ratio for the consumer loan portfolio decreased from 4.06%2.77% as of December 31, 20172018 to 3.03%2.46% as of September 30, 2018,2019, reflecting, among other things, the effect in the first quarter of both $10.92019 of a $3.0 million release of consumer loan charge-offs taken against previously-established hurricane-related qualitative reserves andthe hurricane-related qualitative reserve releases of $4.2 million release resulting from payments received during 2018 that reduced the balance of the consumer loan portfolio outstanding on the dates of the hurricanes and updated payment patterns and credit risk analyses applied to consumer borrowers that were subject to payment deferral programs that expired early in 2018.
As discussed above, the significant overall uncertainties that complicated management’s early assessments of hurricane-related credit losses have been largely addressed and the hurricanes’ effect on credit quality is now reflected in the normal process for determining the allowance for loan and lease losses and not through a separate hurricane-related qualitative reserve.
The ratio of the total allowance to non-performingnonaccrual loans held for investment was 59.10%76.57% as of September 30, 20182019, compared to 47.36%62.15% as of December 31, 2017, reflecting the effect of the $150.2 million decrease in non-performing loans held for investment, driven by the aforementioned transfers to held for sale of non-performing commercial and construction loans totaling $74.4 million (net of fair value write-downs of $22.2 million), including $27.2 million in non-performing commercial mortgage loans that were eventually sold. 2018.
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 USVI and BVI 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 real estate market in Puerto Rico experienced readjustments in value driven by reduced demand and general adverse economic conditions that were exacerbated by the effect of Hurricanes Maria and Irma.conditions. The Corporation sets adequate loan-to-value ratios following its regulatory and credit policy standards.
138
As shown in the following table, the allowance for loan and lease losses amounted to $200.6$165.6 million as of September 30, 2018,2019, or 2.30%1.85% of total loans, compared with $231.8$196.4 million, or 2.62%2.22% of total loans, as of December 31, 2017. 2018. See “Results of OperationsOperation - Provision for Loan and Lease Losses” above for additional information.information.
|
| Quarter Ended |
|
| Nine-Month Period Ended |
|
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| ||||||||||
(Dollars in thousands) | 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| |||||
|
|
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses, beginning of period | $ | 172,011 |
|
| $ | 222,035 |
|
| $ | 196,362 |
|
| $ | 231,843 |
|
| |
Provision (release) for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Residential Mortgage (1) |
| 2,162 |
|
|
| 360 |
|
|
| 9,387 |
|
|
| 4,406 |
|
| |
Commercial Mortgage (2) |
| (808) |
|
|
| 10,111 |
|
|
| 3,854 |
|
|
| 20,956 |
|
| |
Commercial and Industrial (3) |
| (5,465) |
|
|
| 2,281 |
|
|
| (11,068) |
|
|
| 3,012 |
|
| |
Construction (4) |
| (178) |
|
|
| 1,308 |
|
|
| (815) |
|
|
| 6,579 |
|
| |
Consumer and Finance Leases (5) |
| 11,687 |
|
|
| (2,536) |
|
|
| 30,394 |
|
|
| 16,651 |
|
| |
Total provision for loan and lease losses (6) |
| 7,398 |
|
|
| 11,524 |
|
|
| 31,752 |
|
|
| 51,604 |
|
| |
Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Residential Mortgage |
| (5,288) |
|
|
| (8,316) |
|
|
| (16,229) |
|
|
| (17,231) |
|
| |
Commercial Mortgage |
| (813) |
|
|
| (9,850) |
|
|
| (14,901) |
|
|
| (20,557) |
|
| |
Commercial and Industrial |
| (387) |
|
|
| (2,242) |
|
|
| (7,056) |
|
|
| (9,282) |
|
| |
Construction |
| (68) |
|
|
| (2,192) |
|
|
| (347) |
|
|
| (8,187) |
|
| |
Consumer and Finance Leases |
| (12,708) |
|
|
| (13,712) |
|
|
| (37,004) |
|
|
| (38,111) |
|
| |
Total charge-offs |
| (19,264) |
|
|
| (36,312) |
|
|
| (75,537) |
|
|
| (93,368) |
|
| |
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Residential Mortgage |
| 874 |
|
|
| 833 |
|
|
| 2,080 |
|
|
| 1,857 |
|
| |
Commercial Mortgage |
| 96 |
|
|
| 291 |
|
|
| 314 |
|
|
| 378 |
|
| |
Commercial and Industrial |
| 1,826 |
|
|
| 127 |
|
|
| 3,196 |
|
|
| 1,565 |
|
| |
Construction |
| 279 |
|
|
| 14 |
|
|
| 629 |
|
|
| 165 |
|
| |
Consumer and Finance Leases |
| 2,355 |
|
|
| 2,051 |
|
|
| 6,779 |
|
|
| 6,519 |
|
| |
Total recoveries |
| 5,430 |
|
|
| 3,316 |
|
|
| 12,998 |
|
|
| 10,484 |
|
| |
Net charge-offs |
| (13,834) |
|
|
| (32,996) |
|
|
| (62,539) |
|
|
| (82,884) |
|
| |
Allowance for loan and lease losses, end of period | $ | 165,575 |
|
| $ | 200,563 |
|
| $ | 165,575 |
|
| $ | 200,563 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses to period end total loans held for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
investment |
| 1.85 | % |
|
| 2.30 | % |
|
| 1.85 | % |
|
| 2.30 | % |
| |
Net charge-offs (annualized) to average loans outstanding during the period |
| 0.61 | % |
|
| 1.52 | % |
|
| 0.93 | % |
|
| 1.27 | % |
| |
Provision for loan and lease losses to net charge-offs during the period |
| 0.53x |
|
|
| 0.35x |
|
|
| 0.51x |
|
|
| 0.62x |
|
| |
Provision for loan and lease losses to net charge-offs during the period, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
excluding effect of the hurricane-related qualitative reserve releases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
in the third quarter of 2018 and nine-month periods ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
2019 and 2018 (7) |
| 0.53x |
|
|
| 0.43x |
|
|
| 0.61x |
|
|
| 0.76x |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
|
| Quarter Ended |
|
| Nine-Month Period Ended |
|
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| ||||||||||
(Dollars in thousands) | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| |||||
|
|
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses, beginning of period | $ | 222,035 |
|
| $ | 173,485 |
|
| $ | 231,843 |
|
| $ | 205,603 |
|
| |
Provision (release) for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Residential Mortgage (1) |
| 360 |
|
|
| 23,321 |
|
|
| 4,406 |
|
|
| 43,480 |
|
| |
Commercial Mortgage (2) |
| 10,111 |
|
|
| 17,590 |
|
|
| 20,956 |
|
|
| 30,654 |
|
| |
Commercial and Industrial (3) |
| 2,281 |
|
|
| (1,079) |
|
|
| 3,012 |
|
|
| (8,019) |
|
| |
Construction (4) |
| 1,308 |
|
|
| 242 |
|
|
| 6,579 |
|
|
| 1,496 |
|
| |
Consumer and Finance Leases (5) |
| (2,536) |
|
|
| 34,939 |
|
|
| 16,651 |
|
|
| 50,940 |
|
| |
Total provision for loan and lease losses (6) |
| 11,524 |
|
|
| 75,013 |
|
|
| 51,604 |
|
|
| 118,551 |
|
| |
Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Residential Mortgage |
| (8,316) |
|
|
| (7,177) |
|
|
| (17,231) |
|
|
| (22,369) |
|
| |
Commercial Mortgage |
| (9,850) |
|
|
| (266) |
|
|
| (20,557) |
|
|
| (32,123) |
|
| |
Commercial and Industrial |
| (2,242) |
|
|
| (738) |
|
|
| (9,282) |
|
|
| (19,168) |
|
| |
Construction |
| (2,192) |
|
|
| (47) |
|
|
| (8,187) |
|
|
| (705) |
|
| |
Consumer and Finance Leases |
| (13,712) |
|
|
| (11,141) |
|
|
| (38,111) |
|
|
| (33,386) |
|
| |
Total charge offs |
| (36,312) |
|
|
| (19,369) |
|
|
| (93,368) |
|
|
| (107,751) |
|
| |
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Residential Mortgage |
| 833 |
|
|
| 321 |
|
|
| 1,857 |
|
|
| 1,961 |
|
| |
Commercial Mortgage |
| 291 |
|
|
| 43 |
|
|
| 378 |
|
|
| 151 |
|
| |
Commercial and Industrial |
| 127 |
|
|
| 114 |
|
|
| 1,565 |
|
|
| 5,613 |
|
| |
Construction |
| 14 |
|
|
| 16 |
|
|
| 165 |
|
|
| 594 |
|
| |
Consumer and Finance Leases |
| 2,051 |
|
|
| 1,247 |
|
|
| 6,519 |
|
|
| 6,148 |
|
| |
Total recoveries |
| 3,316 |
|
|
| 1,741 |
|
|
| 10,484 |
|
|
| 14,467 |
|
| |
Net Charge-Offs |
| (32,996) |
|
|
| (17,628) |
|
|
| (82,884) |
|
|
| (93,284) |
|
| |
Allowance for loan and lease losses, end of period | $ | 200,563 |
|
| $ | 230,870 |
|
| $ | 200,563 |
|
| $ | 230,870 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses to period end total loans held for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
investment |
| 2.30 | % |
|
| 2.60 | % |
|
| 2.30 | % |
|
| 2.60 | % |
| |
Allowance for loan and lease losses, excluding the $24.9 million hurricane-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
qualitative allowance, to period end total loans held for investment (7) |
| 2.02 | % |
|
| 2.60 | % |
|
| 2.02 | % |
|
| 2.60 | % |
| |
Net charge-offs (annualized) to average loans outstanding during the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
period |
| 1.52 | % |
|
| 0.80 | % |
|
| 1.27 | % |
|
| 1.40 | % |
| |
Provision for loan and lease losses to net charge-offs during the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
period |
| 0.35x |
|
|
| 4.26x |
|
|
| 0.62x |
|
|
| 1.27x |
|
| |
Provision for loan and lease losses to net charge-offs during the period, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
excluding the effect of the hurricane-related reserve releases (7) |
| 0.43x |
|
|
| 0.48x |
|
|
| 0.76x |
|
|
| 0.62x |
|
| |
___________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1)Net of |
|
|
|
|
|
|
|
|
|
|
|
|
139
The following table sets forth information concerning the allocation of the allowance for loan and lease losses by loan category and the percentage of loan balances in each category to the total of such loans as of the dates indicated: | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of |
| As of |
| ||||||||
| September 30, 2018 |
| December 31, 2017 |
| ||||||||
(In thousands) | Amount |
| Percent of loans in each category to total loans |
| Amount |
| Percent of loans in each category to total loans | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans | $ | 48,007 |
|
| 37% |
| $ | 58,975 |
|
| 37 | % |
Commercial mortgage loans |
| 49,270 |
|
| 17% |
|
| 48,493 |
|
| 18 | % |
Construction loans |
| 3,079 |
|
| 1% |
|
| 4,522 |
|
| 1 | % |
Commercial and Industrial loans |
| 44,166 |
|
| 24% |
|
| 48,871 |
|
| 24 | % |
Consumer loans and finance leases |
| 56,041 |
|
| 21% |
|
| 70,982 |
|
| 20 | % |
| $ | 200,563 |
|
| 100% |
| $ | 231,843 |
|
| 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
See "Results of Operations - Provision for Loan and Lease Losses" above for information about enhancements to the |
| |||||||||||
methodology to calculate the allowance for loan and lease losses implemented in the second quarter of 2018. |
|
The following table sets forth information concerning the composition of the Corporation's allowance for loan and lease losses as of September 30, 2018 and December 31, 2017 by loan category and by whether the allowance and related provision were calculated individually or through a general valuation allowance. |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
As of September 30, 2018 | Residential Mortgage Loans |
| Commercial Mortgage Loans |
|
|
|
|
| Consumer and Finance Leases |
|
|
|
| ||||||
|
|
|
|
| Construction Loans |
|
|
|
|
| |||||||||
(Dollars in thousands) |
|
| C&I Loans |
|
|
|
| Total |
| ||||||||||
Impaired loans without specific reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans, net of charge-offs | $ | 117,375 |
| $ | 73,433 |
| $ | 34,793 |
| $ | 1,116 |
| $ | 2,189 |
|
| $ | 228,906 |
|
Impaired loans with specific reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans, net of charge-offs |
| 291,419 |
|
| 169,787 |
|
| 62,361 |
|
| 5,781 |
|
| 29,756 |
|
|
| 559,104 |
|
Allowance for loan and lease losses |
| 18,482 |
|
| 17,044 |
|
| 10,798 |
|
| 906 |
|
| 6,083 |
|
|
| 53,313 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance |
| 6.34 | % |
| 10.04 | % |
| 17.32 | % |
| 15.67 | % |
| 20.44 | % |
|
| 9.54 | % |
PCI loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of PCI loans |
| 145,203 |
|
| 3,919 |
|
| - |
|
| - |
|
| - |
|
|
| 149,122 |
|
Allowance for PCI loans |
| 10,954 |
|
| 400 |
|
| - |
|
| - |
|
| - |
|
|
| 11,354 |
|
Allowance for PCI loans to carrying value |
| 7.54 | % |
| 10.21 | % |
| - |
|
| - |
|
| - |
|
|
| 7.61 | % |
Loans with general allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans |
| 2,653,984 |
|
| 1,259,363 |
|
| 1,971,102 |
|
| 75,965 |
|
| 1,819,407 |
|
|
| 7,779,821 |
|
Allowance for loan and lease losses |
| 18,571 |
|
| 31,826 |
|
| 33,368 |
|
| 2,173 |
|
| 49,958 |
|
|
| 135,896 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance |
| 0.70 | % |
| 2.53 | % |
| 1.69 | % |
| 2.86 | % |
| 2.75 | % |
|
| 1.75 | % |
Total loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans | $ | 3,207,981 |
| $ | 1,506,502 |
| $ | 2,068,256 |
| $ | 82,862 |
| $ | 1,851,352 |
|
| $ | 8,716,953 |
|
Allowance for loan and lease losses |
| 48,007 |
|
| 49,270 |
|
| 44,166 |
|
| 3,079 |
|
| 56,041 |
|
|
| 200,563 |
|
Allowance for loan and lease losses to principal balance (1) |
| 1.50 | % |
| 3.27 | % |
| 2.14 | % |
| 3.72 | % |
| 3.03 | % |
|
| 2.30 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Residential Mortgage Loans |
| Commercial Mortgage Loans |
|
|
|
|
| Consumer and Finance Leases |
|
|
| ||||||
|
|
|
|
| Construction Loans |
|
|
|
| |||||||||
(Dollars in thousands) |
|
| C&I Loans |
|
|
| Total |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| �� |
|
|
Impaired loans without specific reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans, net of charge-offs | $ | 116,818 |
| $ | 65,100 |
| $ | 28,292 |
| $ | 48 |
| $ | 2,788 |
| $ | 213,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with specific reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans, net of charge-offs |
| 316,616 |
|
| 87,814 |
|
| 90,008 |
|
| 47,218 |
|
| 35,606 |
|
| 577,262 |
|
Allowance for loan and lease losses |
| 22,086 |
|
| 9,783 |
|
| 12,359 |
|
| 2,017 |
|
| 5,165 |
|
| 51,410 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance |
| 6.98 | % |
| 11.14 | % |
| 13.73 | % |
| 4.27 | % |
| 14.51 | % |
| 8.91 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCI loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of PCI loans |
| 153,991 |
|
| 4,183 |
|
| - |
|
| - |
|
| - |
|
| 158,174 |
|
Allowance for PCI loans |
| 10,873 |
|
| 378 |
|
| - |
|
| - |
|
| - |
|
| 11,251 |
|
Allowance for PCI loans to carrying value |
| 7.06% |
|
| 9.04% |
|
| - |
|
| - |
|
| - |
|
| 7.11 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with general allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans |
| 2,703,532 |
|
| 1,457,875 |
|
| 1,964,953 |
|
| 64,131 |
|
| 1,711,503 |
|
| 7,901,994 |
|
Allowance for loan and lease losses |
| 26,016 |
|
| 38,332 |
|
| 36,512 |
|
| 2,505 |
|
| 65,817 |
|
| 169,182 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance |
| 0.96 | % |
| 2.63 | % |
| 1.86 | % |
| 3.91 | % |
| 3.85 | % |
| 2.14 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans | $ | 3,290,957 |
| $ | 1,614,972 |
| $ | 2,083,253 |
| $ | 111,397 |
| $ | 1,749,897 |
| $ | 8,850,476 |
|
Allowance for loan and lease losses |
| 58,975 |
|
| 48,493 |
|
| 48,871 |
|
| 4,522 |
|
| 70,982 |
|
| 231,843 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance (1) |
| 1.79 | % |
| 3.00 | % |
| 2.35 | % |
| 4.06 | % |
| 4.06 | % |
| 2.62 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Loans used in the denominator include PCI loans of $149.1 million and $158.2 million as of September 30 2018 and December 31, 2017, respectively. However, the | ||||||||||||||||||
Corporation separately tracks and reports PCI loans and excludes these loans from the amounts of non-performing loans, impaired loans, TDRs and non-performing assets. |
140
The following tables show the activity for impaired loans held for investment and the related specific reserve during the quarters and nine-month periods ended September 30, 2018 and 2017: | ||||||||||||
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| (In thousands) |
| (In thousands) | ||||||||
| Impaired Loans: |
|
|
|
|
|
|
|
|
|
|
|
| Balance as of beginning of period | $ | 740,134 |
| $ | 735,625 |
| $ | 790,308 |
| $ | 887,905 |
| Loans determined impaired during the period |
| 119,064 |
|
| 71,884 |
|
| 214,745 |
|
| 110,488 |
| Charge-offs (1)(2)(3) |
| (18,035) |
|
| (6,472) |
|
| (48,455) |
|
| (66,959) |
| Loans sold, net of charge-offs |
| - |
|
| - |
|
| (4,121) |
|
| (53,245) |
| Increases to existing impaired loans |
| 128 |
|
| 3,215 |
|
| 7,203 |
|
| 4,454 |
| Foreclosures |
| (8,293) |
|
| (5,657) |
|
| (27,745) |
|
| (36,347) |
| Loans no longer considered impaired |
| (1,146) |
|
| (542) |
|
| (5,086) |
|
| (3,324) |
| Loans transferred to held for sale |
| (16,839) |
|
| - |
|
| (74,052) |
|
| - |
| Paid in full, partial payments and other |
| (27,003) |
|
| (18,794) |
|
| (64,787) |
|
| (63,713) |
| Balance as of end of period | $ | 788,010 |
| $ | 779,259 |
| $ | 788,010 |
| $ | 779,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | For the quarter ended September 30, 2018, includes charge-offs totaling $12.5 million associated with the $17.2 million in non-performing loans transferred to held for sale in the third quarter of 2018. | |||||||||||
(2) | For the nine-month period ended September 30, 2018, includes charge-offs totaling $22.2 million associated with the $74.4 million in non-performing loans transferred to held for sale during the first nine-months of 2018. | |||||||||||
(3) | For the nine-month period ended September 30, 2017, includes a charge-off of $10.7 million related to the sale of the PREPA credit line. | |||||||||||
|
|
| Quarter Ended |
|
| Nine-Month Period Ended | ||||||
|
| September 30, |
| September 30, | ||||||||
|
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| (In thousands) |
| (In thousands) | ||||||||
| Specific Reserve: |
|
|
|
|
|
|
|
|
|
|
|
| Balance as of beginning of period | $ | 49,514 |
| $ | 40,794 |
| $ | 51,410 |
| $ | 64,421 |
| Provision for loan losses |
| 21,821 |
|
| 13,819 |
|
| 50,277 |
|
| 50,014 |
| Net charge-offs |
| (18,022) |
|
| (6,458) |
|
| (48,374) |
|
| (66,280) |
| Balance as of end of period | $ | 53,313 |
| $ | 48,155 |
| $ | 53,313 |
| $ | 48,155 |
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
In addition, as of September 30, 2018, the Corporation maintained a $0.4 million net loan loss reserve release for unfundedthe nine-month period ended September 30, 2018 associated with revised estimates of the effects of Hurricanes Irma and Maria.
(2)Net of a $1.9 million net loan commitments, mainlyloss reserve release for the nine-month period ended September 30, 2018 associated with the revised estimates of the effects of Hurricanes Irma and Maria.
(3)Net of loan loss reserve releases of $3.4 million and $4.0 million for the nine-month periods ended September 30, 2019 and 2018, respectively, associated with estimates of the effects of Hurricanes Irma and Maria.
(4)Net of $0.6 million and $0.7 million net loan loss reserve release for the third quarter and nine-month period ended September 30, 2018, respectively, associated with revised estimates of the effects of Hurricanes Irma and Maria.
(5)Net of a $2.2 million net loan loss reserve release for the third quarter ended September 30, 2018, and net loan loss reserve releases of $3.0 million and $4.2 million for the nine-month periods ended September 30, 2019 and 2018, respectively, associated with revised estimates of the effects of Hurricanes Irma and Maria.
(6)Net of loan loss reserve releases of $2.8 million for the third quarter ended September 30, 2018, and net loan loss reserve releases of $6.4 million and $11.2 million for the nine-month periods ended September 30, 2019 and 2018, respectively, associated with revised estimates of the effects of Hurricanes Irma and Maria.
(7)Non-GAAP financial measure, see "Basis of Presentation" below for a reconciliation of this measure.
139
The following table sets forth information concerning the allocation of the allowance for loan and lease losses by loan category and the percentage of loan balances in each category to the total of such loans as of the dates indicated: | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of |
| As of |
| ||||||||
| September 30, 2019 |
| December 31, 2018 |
| ||||||||
(Dollars in thousands) | Amount |
| Percent of loans in each category to total loans |
| Amount |
| Percent of loans in each category to total loans | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans | $ | 46,032 |
|
| 33 | % | $ | 50,794 |
|
| 36 | % |
Commercial mortgage loans |
| 44,848 |
|
| 16 | % |
| 55,581 |
|
| 17 | % |
Construction loans |
| 3,059 |
|
| 1 | % |
| 3,592 |
|
| 1 | % |
Commercial and Industrial loans |
| 17,618 |
|
| 25 | % |
| 32,546 |
|
| 24 | % |
Consumer loans and finance leases |
| 54,018 |
|
| 25 | % |
| 53,849 |
|
| 22 | % |
| $ | 165,575 |
|
| 100 | % | $ | 196,362 |
|
| 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
140
The following table sets forth information concerning the composition of the Corporation's allowance for loan and lease losses as of September 30, 2019 and December 31, 2018 by loan category and by whether the allowance and related provision were calculated individually or through a general valuation allowance. |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
As of September 30, 2019 | Residential Mortgage Loans |
| Commercial Mortgage Loans |
|
|
|
|
| Consumer and Finance Leases |
|
|
|
| ||||||
|
|
|
|
| Construction Loans |
|
|
|
|
| |||||||||
(Dollars in thousands) |
|
| C&I Loans |
|
|
|
| Total |
| ||||||||||
Impaired loans without specific reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans, net of charge-offs | $ | 110,826 |
| $ | 45,395 |
| $ | 27,922 |
| $ | 2,899 |
| $ | 1,174 |
|
| $ | 188,216 |
|
Impaired loans with specific reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans, net of charge-offs |
| 271,042 |
|
| 34,583 |
|
| 51,341 |
|
| 2,606 |
|
| 25,582 |
|
|
| 385,154 |
|
Allowance for loan and lease losses |
| 17,411 |
|
| 6,962 |
|
| 7,520 |
|
| 544 |
|
| 4,561 |
|
|
| 36,998 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance |
| 6.42 | % |
| 20.13 | % |
| 14.65 | % |
| 20.87 | % |
| 17.83 | % |
|
| 9.61 | % |
PCI loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of PCI loans | $ | 135,922 |
| $ | 3,330 |
| $ | - |
| $ | - |
| $ | - |
|
| $ | 139,252 |
|
Allowance for PCI loans |
| 11,063 |
|
| 371 |
|
| - |
|
| - |
|
| - |
|
|
| 11,434 |
|
Allowance for PCI loans to carrying value |
| 8.14 | % |
| 11.14 | % |
| - |
|
| - |
|
| - |
|
|
| 8.21 | % |
Loans with general allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans | $ | 2,480,163 |
| $ | 1,356,054 |
| $ | 2,143,233 |
| $ | 103,357 |
| $ | 2,172,991 |
|
| $ | 8,255,798 |
|
Allowance for loan and lease losses |
| 17,558 |
|
| 37,515 |
|
| 10,098 |
|
| 2,515 |
|
| 49,457 |
|
|
| 117,143 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance |
| 0.71 | % |
| 2.77 | % |
| 0.47 | % |
| 2.43 | % |
| 2.28 | % |
|
| 1.42 | % |
Total loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans | $ | 2,997,953 |
| $ | 1,439,362 |
| $ | 2,222,496 |
| $ | 108,862 |
| $ | 2,199,747 |
|
| $ | 8,968,420 |
|
Allowance for loan and lease losses |
| 46,032 |
|
| 44,848 |
|
| 17,618 |
|
| 3,059 |
|
| 54,018 |
|
|
| 165,575 |
|
Allowance for loan and lease losses to principal balance (1) |
| 1.54 | % |
| 3.12 | % |
| 0.79 | % |
| 2.81 | % |
| 2.46 | % |
|
| 1.85 | % |
As of December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Residential Mortgage Loans |
| Commercial Mortgage Loans |
|
|
|
|
| Consumer and Finance Leases |
|
|
| ||||||
|
|
|
|
| Construction Loans |
|
|
|
| |||||||||
(Dollars in thousands) |
|
| C&I Loans |
|
|
| Total |
| ||||||||||
Impaired loans without specific reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans, net of charge-offs | $ | 110,238 |
| $ | 43,358 |
| $ | 30,030 |
| $ | 2,431 |
| $ | 2,340 |
| $ | 188,397 |
|
Impaired loans with specific reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans, net of charge-offs |
| 293,494 |
|
| 184,068 |
|
| 61,162 |
|
| 4,162 |
|
| 28,986 |
|
| 571,872 |
|
Allowance for loan and lease losses |
| 19,965 |
|
| 17,684 |
|
| 9,693 |
|
| 760 |
|
| 5,874 |
|
| 53,976 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance |
| 6.80 | % |
| 9.61 | % |
| 15.85 | % |
| 18.26 | % |
| 20.26 | % |
| 9.44 | % |
PCI loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of PCI loans | $ | 143,176 |
| $ | 3,464 |
| $ | - |
| $ | - |
| $ | - |
| $ | 146,640 |
|
Allowance for PCI loans |
| 10,954 |
|
| 400 |
|
| - |
|
| - |
|
| - |
|
| 11,354 |
|
Allowance for PCI loans to carrying value |
| 7.65% |
|
| 11.55% |
|
| - |
|
| - |
|
| - |
|
| 7.74 | % |
Loans with general allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans | $ | 2,616,300 |
| $ | 1,291,772 |
| $ | 2,056,919 |
| $ | 72,836 |
| $ | 1,913,387 |
| $ | 7,951,214 |
|
Allowance for loan and lease losses |
| 19,875 |
|
| 37,497 |
|
| 22,853 |
|
| 2,832 |
|
| 47,975 |
|
| 131,032 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance |
| 0.76 | % |
| 2.90 | % |
| 1.11 | % |
| 3.89 | % |
| 2.51 | % |
| 1.65 | % |
Total loans held for investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance of loans | $ | 3,163,208 |
| $ | 1,522,662 |
| $ | 2,148,111 |
| $ | 79,429 |
| $ | 1,944,713 |
| $ | 8,858,123 |
|
Allowance for loan and lease losses |
| 50,794 |
|
| 55,581 |
|
| 32,546 |
|
| 3,592 |
|
| 53,849 |
|
| 196,362 |
|
Allowance for loan and lease losses to principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance (1) |
| 1.61 | % |
| 3.65 | % |
| 1.52 | % |
| 4.52 | % |
| 2.77 | % |
| 2.22 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Loans used in the denominator include PCI loans of $139.3 million and $146.6 million as of September 30, 2019 and December 31, 2018, respectively. However, the | ||||||||||||||||||
Corporation separately tracks and reports PCI loans and excludes these loans from the amounts of nonaccrual loans, impaired loans, TDRs and non-performing assets. |
141
The following tables show the activity for impaired loans held for investment during the quarters and nine-month periods ended September 30, 2019 and 2018: | ||||||||||||
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| (In thousands) |
| (In thousands) | ||||||||
| Impaired Loans: |
|
|
|
|
|
|
|
|
|
|
|
| Balance as of beginning of period | $ | 711,828 |
| $ | 740,134 |
| $ | 760,269 |
| $ | 790,308 |
| Loans determined impaired during the period |
| 9,912 |
|
| 119,064 |
|
| 32,267 |
|
| 214,745 |
| Charge-offs (1) (2) |
| (4,443) |
|
| (18,035) |
|
| (33,491) |
|
| (48,455) |
| Loans sold, net of charge-offs |
| - |
|
| - |
|
| - |
|
| (4,121) |
| Increases to existing impaired loans |
| 125 |
|
| 128 |
|
| 1,740 |
|
| 7,203 |
| Foreclosures |
| (5,888) |
|
| (8,293) |
|
| (18,822) |
|
| (27,745) |
| Loans no longer considered impaired |
| (1,378) |
|
| (1,146) |
|
| (2,081) |
|
| (5,086) |
| Loans transferred to held for sale |
| - |
|
| (16,839) |
|
| - |
|
| (74,052) |
| Paid in full, partial payments and other (3) |
| (136,786) |
|
| (27,003) |
|
| (166,512) |
|
| (64,787) |
| Balance as of end of period | $ | 573,370 |
| $ | 788,010 |
| $ | 573,370 |
| $ | 788,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | For the nine-month period ended September 30, 2018, includes charge-offs totaling $9.7 million associated with the transfer to held for sale of $57.2 million in nonaccrual loans. | |||||||||||
(2) | For the nine-month period ended September 30, 2018, includes charge-offs totaling $22.2 million associated with the transfer to held for sale of $74.4 million in nonaccrual loans | |||||||||||
(3) | For the quarter and nine-month period ended September 30, 2019, includes the payoff of two large commercial mortgage loans totaling $123.9 million. |
Refer to Note 1 – Basis of Presentation and Significant Accounting Policies to the accompanying unaudited consolidated financial statements included in this Form 10-Q for an update on the Corporation’s implementation efforts related to outstanding commitments on floor plan revolving lines of credit. The reserve for unfunded loan commitments is anthe current expected credit loss model (“CECL”) and preliminary estimate of the losses inherent in off-balance sheet loan commitments to borrowers that are experiencing financial difficulties aseffect of the balance sheet date. The reserve for unfunded loan commitments is included as partadoption of accounts payable and other liabilities in the consolidated statements of financial condition and any change to the reserve is included as part of other non-interest expenses in the consolidated statements of income (loss). CECL accounting requirements.
Non-Performing142
Nonaccrual Loans and Non-performing AssetAssets
Total non-performing assets consist of non-performingnonaccrual loans (generally loans held for investment or loans held for sale on which the recognition of interest income has beenwas 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.securities, if any. When a loan is placed in non-performingnonaccrual status, any interest previously recognized and not collected is reversed and charged against interest income.
Non-Performing Loans Policy
Residential Real Estate Loans — The Corporation classifies real estate loans in non-performing status when interest and principal have not been received for a period of 90 days or more.
Commercial and Construction Loans — The Corporation places commercial loans (including commercial real estate and construction loans) in non-performing status when interest and principal have not been received for a period of 90 days or more or when collection of all of the principal or interest is not expected due to deterioration in the financial condition of the borrower.
Finance Leases — Finance leases are classified in non-performing status when interest and principal have not been received for a period of 90 days or more.
Consumer Loans — Consumer loans are classified in non-performing status when interest and principal have not been received for a period of 90 days or more. Credit card loans continue to accrue finance charges and fees until charged-off at 180 days delinquent.
Purchased Credit Impaired Loans — PCI loans were recorded at fair value at acquisition. Since the initial fair value of these loans included an estimate of credit losses expected to be realized over the remaining lives of the loans, the subsequent accounting for PCI loans differs from the accounting for non-PCI loans. The Corporation, therefore, separately tracks and reports PCI loans and excludes these from the amounts of non-performing loans, impaired loans, TDR loans, and non-performing assets.
Cash payments received on certain loans that are impaired and collateral-dependentcollateral dependent are recognized when collected in accordance with the contractual terms of the loans. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized on a cash basis (when collected). However, when management believes that the ultimate collectability of principal is in doubt, the interest portion is applied to the outstanding principal. The risk exposure of this portfolio is diversified as to individual borrowers and industries, among other factors. In addition, a large portion is secured with real estate collateral.
Nonaccrual Loans Policy
Residential Real Estate Loans — The Corporation generally classifies real estate loans in nonaccrual status when interest and principal have not been received for a period of 90 days or more.
Commercial and Construction Loans — The Corporation places commercial loans (including commercial real estate and construction loans) in nonaccrual status when interest and principal have not been received for a period of 90 days or more or when collection of all of the principal or interest is not expected due to deterioration in the financial condition of the borrower.
Finance Leases — Finance leases are classified in nonaccrual status when interest and principal have not been received for a period of 90 days or more.
Consumer Loans — Consumer loans are classified in nonaccrual status when interest and principal have not been received for a period of 90 days or more. Credit card loans continue to accrue finance charges and fees until charged-off at 180 days delinquent.
Purchased Credit Impaired Loans — PCI loans are recorded at fair value at acquisition. Since the initial fair value of these loans included an estimate of credit losses expected to be realized over the remaining lives of the loans, the subsequent accounting for PCI loans differs from the accounting for non-PCI loans. Therefore, the Corporation separately tracks and reports PCI loans and excludes these from the amounts of nonaccrual loans, impaired loans, TDR loans, and non-performing assets.
Other Real Estate Owned
OREO acquired in settlement of loans is carried at the lower of cost (carrying value of the loan) or fair value less estimated costs to sell off the real estate. Appraisals are obtained periodically, generally, on an annual basis.
Other Repossessed Property
The other repossessed property category generally includes repossessed boats and autos acquired in settlement of loans. Repossessed boats and autos are recorded at the lower of cost or estimated fair value.
Loans Past-Due Loans 90 daysDays and still accruingStill 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. Past due loansLoans past-due 90 days and still accruing also include PCI loans with individual delinquencies over 90 days, primarily related to mortgage loans acquired from Doral Bank in 2015 and from Doral Financial in 2014.
TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual 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
142
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 loansloan 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.
The following table presents non-performing assets as of the dates indicated: |
| |||||||
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||||
(Dollars in thousands) | 2018 |
| 2017 | |||||
|
|
|
|
|
|
|
|
|
Non-performing loans held for investment: |
|
|
|
|
|
|
| |
Residential mortgage | $ | 156,685 |
|
| $ | 178,291 |
| |
Commercial mortgage (1) |
| 117,397 |
|
|
| 156,493 |
| |
Commercial and Industrial (1) |
| 34,551 |
|
|
| 85,839 |
| |
Construction (1) |
| 9,071 |
|
|
| 52,113 |
| |
Finance leases |
| 1,443 |
|
|
| 1,237 |
| |
Consumer |
| 20,221 |
|
|
| 15,581 |
| |
Total non-performing loans held for investment (1) | $ | 339,368 |
|
| $ | 489,554 |
| |
OREO |
| 135,218 |
|
|
| 147,940 |
| |
Other repossessed property |
| 3,992 |
|
|
| 4,802 |
| |
Total non-performing assets, excluding loans held for sale | $ | 478,578 |
|
| $ | 642,296 |
| |
Non-performing loans held for sale (1) |
| 44,177 |
|
|
| 8,290 |
| |
Total non-performing assets, including loans held for sale (2) (3) | $ | 522,755 |
|
| $ | 650,586 |
| |
|
|
|
|
|
|
|
|
|
Past due loans 90 days and still accruing (4) (5) | $ | 165,432 |
|
| $ | 160,725 |
| |
Non-performing assets to total assets |
| 4.28 | % |
|
| 5.31 | % | |
Non-performing loans held for investment to total loans held for investment |
| 3.89 | % |
|
| 5.53 | % | |
Allowance for loan and lease losses | $ | 200,563 |
|
| $ | 231,843 |
| |
Allowance to total non-performing loans held for investment (6) |
| 59.10 | % |
|
| 47.36 | % | |
Allowance to total non-performing loans held for investment, |
|
|
|
|
|
|
| |
excluding residential real estate loans (7) |
| 109.79 | % |
|
| 74.48 | % | |
|
|
|
|
|
|
|
|
|
___________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
The following table shows non-performing assets by geographic region: | ||||||
|
|
|
|
|
|
|
| September 30, |
| December 31, | |||
(Dollars in thousands) | 2018 |
| 2017 | |||
Puerto Rico: |
|
|
|
|
| |
Non-performing loans held for investment: |
|
|
|
|
| |
Residential mortgage | $ | 127,772 |
| $ | 147,852 | |
Commercial mortgage (1) |
| 49,254 |
|
| 128,232 | |
Commercial and Industrial (2) |
| 29,974 |
|
| 79,809 | |
Construction (3) |
| 6,530 |
|
| 14,506 | |
Finance leases |
| 1,443 |
|
| 1,237 | |
Consumer |
| 19,225 |
|
| 14,885 | |
Total non-performing loans held for investment |
| 234,198 |
|
| 386,521 | |
|
|
|
|
|
|
|
OREO |
| 127,478 |
|
| 140,063 | |
Other repossessed property |
| 3,793 |
|
| 4,723 | |
Total non-performing assets, excluding loans held for sale | $ | 365,469 |
| $ | 531,307 | |
Non-performing loans held for sale (1) (2) (3) |
| 17,177 |
|
| 8,290 | |
Total non-performing assets, including loans held for sale (4) | $ | 382,646 |
| $ | 539,597 | |
Past due loans 90 days and still accruing (5) | $ | 162,065 |
| $ | 151,724 | |
|
|
|
|
|
|
|
Virgin Islands: |
|
|
|
|
| |
Non-performing loans held for investment: |
|
|
|
|
| |
Residential mortgage | $ | 15,280 |
| $ | 22,110 | |
Commercial mortgage |
| 19,891 |
|
| 25,309 | |
Commercial and Industrial |
| 4,577 |
|
| 6,030 | |
Construction (6) |
| 2,541 |
|
| 37,607 | |
Consumer |
| 651 |
|
| 281 | |
Total non-performing loans held for investment |
| 42,940 |
|
| 91,337 | |
|
|
|
|
|
|
|
OREO |
| 7,074 |
|
| 6,306 | |
Other repossessed property |
| 54 |
|
| 26 | |
Total non-performing assets | $ | 50,068 |
| $ | 97,669 | |
Non-performing loans held for sale (6) |
| 27,000 |
|
| - | |
Total non-performing assets | $ | 77,068 |
| $ | 97,669 | |
Past due loans 90 days and still accruing | $ | 3,367 |
| $ | 9,001 | |
|
|
|
|
|
|
|
United States: |
|
|
|
|
| |
Non-performing loans held for investment: |
|
|
|
|
| |
Residential mortgage | $ | 13,633 |
| $ | 8,329 | |
Commercial mortgage |
| 48,252 |
|
| 2,952 | |
Consumer |
| 345 |
|
| 415 | |
Total non-performing loans held for investment |
| 62,230 |
|
| 11,696 | |
|
|
|
|
|
|
|
OREO |
| 666 |
|
| 1,571 | |
Other repossessed property |
| 145 |
|
| 53 | |
Total non-performing assets | $ | 63,041 |
| $ | 13,320 | |
Past due loans 90 days and still accruing | $ | - |
| $ | - | |
____________ | ||||||
(1) | During the first nine months of 2018, the Corporation transferred to held for sale non-performing commercial mortgage loans in Puerto Rico totaling $39.6 million (net of fair value write-downs of $13.8 million recorded at the time of transfers). Approximately $27.2 million of the commercial mortgage loans transferred to held for sale were eventually sold during the second and third quarters of 2018. | |||||
(2) | During the first nine months of 2018, the Corporation transferred to held for sale non-performing commercial and industrial loans in Puerto Rico totaling $1.8 million (net of fair value write-downs of $1.7 million). | |||||
(3) | During the first nine months of 2018, the Corporation transferred to held for sale a $3.0 million non-performing construction loan in Puerto Rico (net of a $1.6 million fair value write-down). | |||||
(4) | Purchased credit impaired loans accounted for under ASC Topic 310-30 of $149.1 million and $158.2 million as of September 30, 2018 and December 31, 2017, respectively, are excluded and not considered non-performing due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using an estimated cash flow analysis. | |||||
(5) | Amount includes purchased credit impaired loans with individual delinquencies over 90 days and still accruing with a carrying value as of September 30, 2018 and December 31, 2017 of approximately $31.1 million and $29.3 million, respectively, primarily related to loans acquired from Doral Bank in the first quarter of 2015 and from Doral Financial in the second quarter of 2014. | |||||
(6) | During the first nine months of 2018, the Corporation transferred to held for sale a $30.0 million non-performing construction loan in the Virgin Islands (net of a $5.1 million fair value write-down). Collections after the transfer of the loan to held for sale reduced the carrying value of the loan to $27.0 million as of September 30, 2018. |
The following table presents non-performing assets as of the dates indicated: |
| |||||||
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||||
(Dollars in thousands) | 2019 |
| 2018 | |||||
|
|
|
|
|
|
|
|
|
Nonaccrual loans held for investment: |
|
|
|
|
|
|
| |
Residential mortgage | $ | 127,040 |
|
| $ | 147,287 |
| |
Commercial mortgage |
| 42,525 |
|
|
| 109,536 |
| |
Commercial and Industrial |
| 20,725 |
|
|
| 30,382 |
| |
Construction |
| 6,358 |
|
|
| 8,362 |
| |
Finance leases |
| 1,340 |
|
|
| 1,329 |
| |
Consumer |
| 18,239 |
|
|
| 19,077 |
| |
Total nonaccrual loans held for investment | $ | 216,227 |
|
| $ | 315,973 |
| |
OREO |
| 103,033 |
|
|
| 131,402 |
| |
Other repossessed property |
| 5,932 |
|
|
| 3,576 |
| |
Total non-performing assets, excluding nonaccrual loans held for sale | $ | 325,192 |
|
| $ | 450,951 |
| |
Nonaccrual loans held for sale |
| 6,906 |
|
|
| 16,111 |
| |
Total non-performing assets, including nonaccrual loans held for sale (1) (2) | $ | 332,098 |
|
| $ | 467,062 |
| |
|
|
|
|
|
|
|
|
|
Past due loans 90 days and still accruing (3) (4) | $ | 144,787 |
|
| $ | 158,257 |
| |
Non-performing assets to total assets |
| 2.65 | % |
|
| 3.81 | % | |
Nonaccrual loans held for investment to total loans held for investment |
| 2.41 | % |
|
| 3.57 | % | |
Allowance for loan and lease losses | $ | 165,575 |
|
| $ | 196,362 |
| |
Allowance to total nonaccrual loans held for investment |
| 76.57 | % |
|
| 62.15 | % | |
Allowance to total nonaccrual loans held for investment, |
|
|
|
|
|
|
| |
excluding residential real estate loans |
| 185.65 | % |
|
| 116.41 | % | |
|
|
|
|
|
|
|
|
|
(1)PCI loans accounted for under ASC Topic 310-30 of $139.3 million and $146.6 million as of September 30, 2019 and December 31, 2018, respectively, are excluded and not considered nonaccrual due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using an estimated cash flow analysis.
(2)Nonaccrual loans exclude $399.4 million and $478.9 million of TDR loans that were in compliance with the modified terms and in accrual status as of September 30, 2019 and December 31, 2018, respectively.
(3)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. These balances include $40.1 million of residential mortgage loans insured by the FHA that were over 15 months delinquent, and were no longer accruing interest as of September 30, 2019, taking into consideration the FHA interest curtailment process.
(4)Amount includes PCI loans with individual delinquencies over 90 days and still accruing with a carrying value as of September 30, 2019 and December 31, 2018 of approximately $27.7 million and $29.4 million, respectively, primarily related to loans acquired from Doral Bank in the first quarter of 2015 and from Doral Financial in the second quarter of 2014.
144
The following table shows non-performing assets by geographic segment as of the dates indicated: | ||||||
|
|
|
|
|
|
|
| September 30, |
| December 31, | |||
(Dollars in thousands) | 2019 |
| 2018 | |||
Puerto Rico: |
|
|
|
|
| |
Nonaccrual loans held for investment: |
|
|
|
|
| |
Residential mortgage | $ | 104,112 |
| $ | 120,707 | |
Commercial mortgage |
| 25,515 |
|
| 44,925 | |
Commercial and Industrial |
| 17,096 |
|
| 26,005 | |
Construction |
| 4,309 |
|
| 6,220 | |
Finance leases |
| 1,340 |
|
| 1,329 | |
Consumer |
| 16,989 |
|
| 18,037 | |
Total nonaccrual loans held for investment |
| 169,361 |
|
| 217,223 | |
|
|
|
|
|
|
|
OREO |
| 97,520 |
|
| 124,124 | |
Other repossessed property |
| 5,700 |
|
| 3,357 | |
Total non-performing assets, excluding nonaccrual loans held for sale | $ | 272,581 |
| $ | 344,704 | |
Nonaccrual loans held for sale |
| 6,906 |
|
| 16,111 | |
Total non-performing assets, including nonaccrual loans held for sale (1) | $ | 279,487 |
| $ | 360,815 | |
Past due loans 90 days and still accruing (2) | $ | 138,860 |
| $ | 153,269 | |
|
|
|
|
|
|
|
Virgin Islands: |
|
|
|
|
| |
Nonaccrual loans held for investment: |
|
|
|
|
| |
Residential mortgage | $ | 10,041 |
| $ | 12,106 | |
Commercial mortgage |
| 17,010 |
|
| 19,368 | |
Commercial and Industrial |
| 2,347 |
|
| 4,377 | |
Construction |
| 2,049 |
|
| 2,142 | |
Consumer |
| 625 |
|
| 710 | |
Total nonaccrual loans held for investment |
| 32,072 |
|
| 38,703 | |
|
|
|
|
|
|
|
OREO |
| 5,381 |
|
| 6,704 | |
Other repossessed property |
| 128 |
|
| 76 | |
Total non-performing assets | $ | 37,581 |
| $ | 45,483 | |
Past due loans 90 days and still accruing | $ | 5,927 |
| $ | 5,258 | |
|
|
|
|
|
|
|
United States: |
|
|
|
|
| |
Nonaccrual loans held for investment: |
|
|
|
|
| |
Residential mortgage | $ | 12,887 |
| $ | 14,474 | |
Commercial mortgage |
| - |
|
| 45,243 | |
Commercial and Industrial |
| 1,282 |
|
| - | |
Consumer |
| 625 |
|
| 330 | |
Total nonaccrual loans held for investment |
| 14,794 |
|
| 60,047 | |
|
|
|
|
|
|
|
OREO |
| 132 |
|
| 574 | |
Other repossessed property |
| 104 |
|
| 143 | |
Total non-performing assets | $ | 15,030 |
| $ | 60,764 | |
Past due loans 90 days and still accruing | $ | - |
| $ | - |
(1)PCI loans accounted for under ASC Topic 310-30 of $139.3 million and $146.6 million as of September 30, 2019 and December 31, 2018, respectively, are excluded and not considered nonaccrual due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using an estimated cash flow analysis.
(2)Amounts include PCI loans with individual delinquencies over 90 days and still accruing with a carrying value as of September 30, 2019 and December 31, 2018 of approximately $27.7 million and $29.4 million, respectively, primarily related to loans acquired from Doral Bank in the first quarter of 2015 and from Doral Financial in the second quarter of 2014.
145
Total non-performingnonaccrual loans, including non-performingnonaccrual loans held for sale, were $383.5$223.1 million as of September 30, 2018.2019. This represents a decrease of $114.3$109.0 million from $497.8$332.1 million as of December 31, 2017.2018. The decrease in non-performingnonaccrual loans was primarily attributable to: (i) the restoration to accrual status of two large commercial loans totaling $69.7 million, including the split loan restructuringrepayment of a $34$31.5 million nonaccrual commercial mortgage loan; (ii) sales of non-performing commercial and construction loans of $34.9 million; (iii) collections on non-performing commercial and construction loans of $27.2 million, (iv) commercial and construction non-performing loan charge-offs totaling $36.5 million; and (v) a $21.6 million decrease in residential non-performing loans. These variances were partially offset by the inflow of two large commercial mortgage loans totaling $68.4 million tied to a legacy commercial loan relationship that operates in both the Florida and Puerto Rico regions with independent sources of repayment.
Non-performing commercial mortgage loans, including loans held for sale, decreased by $26.7region, the largest nonaccrual loan in the portfolio; (ii) a $12.9 million to $129.8 million as of September 30, 2018 from $156.5 million as of December 31, 2017. The decrease was primarilyreduction related to the split loan restructuring of a $34 million commercial mortgage loan in the Puerto Rico region; (iii) charge-offs on nonaccrual commercial and constructions loans amounting to $21.6 million, including a charge-off of $11.4 million on the aforementioned nonaccrual commercial mortgage loan repaid in the Florida region; (iv) a $20.2 million decrease in nonaccrual residential mortgage loans; (v) sales and repayments of $27.2nonaccrual commercial and construction loans held for sale totaling $9.2 million during the first nine months of non-performing2019; (vi) additional collections on nonaccrual commercial and construction loans of approximately $12.0 million during the first nine months of 2019; and (vii) a $0.8 million decrease in nonaccrual consumer loans.
Nonaccrual commercial mortgage loans, collections on non-performing commercial mortgage loans of $15.7 million, and commercial mortgage non-performing loan charge-offs of $20.6 million. These variances were partially offset by aforementioned inflow in 2018 of two large commercial mortgage loans totaling $68.4 million tied to a legacy commercial loan relationship that operates in both the Florida and Puerto Rico regions. Total inflows of non-performingincluding nonaccrual commercial mortgage loans held for investment amountedsale, decreased by $71.5 million to $78.0$49.4 million as of September 30, 2019 from $120.9 million as of December 31, 2018. The decrease primarily reflects the resolution of a $42.9 million nonaccrual commercial mortgage loan in the Florida region for which a $31.5 million payment was received and an $11.4 million charge-off was recorded in 2019 and a $12.9 million reduction related to the restructuring at maturity of a commercial mortgage loan that financed multiple properties in Puerto Rico. The Bank restructured this loan, which had a book value of $22.4 million as of December 31, 2018, into two separate loans supported by sources of repayment that are independent for each loan: (i) a $10.7 million loan, which is collateral dependent, carries a current market rate of interest, and was placed in accrual status after consideration of the satisfactory historical payment performance of the borrower and the Bank’s assessment of full collectability of principal and interest and (ii) an $11.6 million loan, also collateral dependent, for which the Bank granted a forbearance period and recorded a partial charge-off of $2.1 million at the time of the restructuring supported by a full faith and credit evaluation. The latter, which had a book value of $9.6 million as of September 30, 2019, remained in nonaccrual status as of September 30, 2019. In addition, the decrease reflects the effect of sales and repayments of commercial mortgage nonaccrual loans held for sale totaling $4.4 million during the first nine months of 2019. Total inflows of nonaccrual commercial mortgage loans were $1.2 million for the first nine months of 2018,2019, compared to $27.4$78.0 million for the same period in 2017.2018.
Non-performing Nonaccrual commercial and industrial (“C&I&I”) loans, including non-performingnonaccrual C&I loans held for sale, decreased by $49.5$11.4 million to $36.3$20.7 million as of September 30, 20182019 from $85.8$32.1 million as of December 31, 2017.2018. The decrease was primarily related to charges-offs amounting to $6.9 million, including the restoration to accrual status aforementioned charge-off of $5.7 million taken on a $35.7 million commercial and industrialC&I loan as the borrower has demonstrated sustained performance for an extended period and principal and interest is deemed fully collectible,with a previously-established specific reserve in Puerto Rico, collections on non-performing commercialnonaccrual C&I loans held for investment of $4.4 million during the first nine months of 2019, and industrialsales and repayments of nonaccrual C&I loans of $7.0 million, and commercial and industrial non-performing loan charge-offs of $7.8held for sale totaling $1.7 million. Total inflows of non-performing C&I loans held for investment were $5.0$2.2 million during the first nine months of 2018,2019, compared to $22.5$5.0 million for the same period in 2017.2018.
Non-performingNonaccrual construction loans, including non-performingnonaccrual construction loans held for sale, decreased by $21.3$5.0 million to $39.1$6.4 million as of September 30, 20182019 from $60.4$11.4 million as of December 31, 2017. The decrease was primarily2018, mainly due to the salerepayment of a $7.7$3.0 million non-performingnonaccrual construction loan construction non-performing loan charge-offsheld for sale during the first quarter of $8.2 million, and collections on non-performing construction loans of $4.5 million. Total2019. The inflows of non-performing construction loans held for investment amounted to $1.7 million forduring the first nine months of 2018,2019 amounted to $0.4 million, compared to $1.2inflows of $1.7 million for the same period in 2017. 2018.
The following tables present the activity of commercial and construction non-performingnonaccrual loans held for investment:investment for the indicated periods:
|
|
|
| Commercial Mortgage |
| Commercial & Industrial |
| Construction |
| Total |
|
|
| Commercial Mortgage |
| Commercial & Industrial |
| Construction |
| Total | ||||||||
(In thousands) | (In thousands) |
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
| ||||
Quarter ended September 30, 2018 |
|
|
|
|
|
|
|
| ||||||||||||||||||||
Quarter ended September 30, 2019 | Quarter ended September 30, 2019 |
|
|
|
|
|
|
|
| |||||||||||||||||||
Beginning balance | Beginning balance |
| $ | 142,614 |
| $ | 76,887 |
| $ | 14,148 |
| $ | 233,649 | Beginning balance |
| $ | 77,495 |
| $ | 21,327 |
| $ | 6,936 |
| $ | 105,758 | ||
Plus: | Plus: |
|
|
|
|
|
|
|
|
|
|
| Plus: |
|
|
|
|
|
|
|
|
|
|
| ||||
| Additions to non-performing |
| 2,326 |
| 850 |
| 1,388 |
| 4,564 | Additions to nonaccrual |
| 522 |
| 1,473 |
| 221 |
| 2,216 | ||||||||||
Less: | Less: |
|
|
|
|
|
|
|
|
| Less: |
|
|
|
|
|
|
|
|
| ||||||||
| Loans returned to accrual status |
|
| (243) |
| (34,936) |
| - |
| (35,179) | Loans returned to accrual status |
|
| (721) |
| (1,126) |
| - |
| (1,847) | ||||||||
| Non-performing loans transferred to OREO |
|
| (886) |
| (1,192) |
| (54) |
| (2,132) | Nonaccrual loans transferred to OREO |
|
| (235) |
| - |
| (359) |
| (594) | ||||||||
| Non-performing loan charge-offs |
|
| (9,850) |
| (2,197) |
| (2,193) |
| (14,240) | Nonaccrual loans charge-offs |
|
| (462) |
| (367) |
| (30) |
| (859) | ||||||||
| Loan collections |
|
| (4,192) |
| (3,071) |
| (1,203) |
| (8,466) | Loan collections |
|
| (32,784) |
| (1,872) |
| (410) |
| (35,066) | ||||||||
| Loans transferred to loans held for sale, net of charge-offs |
|
| (12,372) |
|
| (1,790) |
|
| (3,015) |
| (17,177) | Reclassification |
|
| (1,290) |
|
| 1,290 |
|
| - |
| - | ||||
Ending balance | Ending balance |
| $ | 117,397 |
| $ | 34,551 |
| $ | 9,071 |
| $ | 161,019 | Ending balance |
| $ | 42,525 |
| $ | 20,725 |
| $ | 6,358 |
| $ | 69,608 |
145146
|
|
| Commercial Mortgage |
| Commercial & Industrial |
| Construction |
| Total |
|
| Commercial Mortgage |
| Commercial & Industrial |
| Construction |
| Total | ||||||||
(In thousands) | (In thousands) |
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
| ||||
Nine-Month Period Ended September 30, 2018 |
|
|
|
|
|
|
|
| ||||||||||||||||||
Nine-Month Period Ended September 30, 2019 | Nine-Month Period Ended September 30, 2019 |
|
|
|
|
|
|
|
| |||||||||||||||||
Beginning balance | Beginning balance | $ | 156,493 |
| $ | 85,839 |
| $ | 52,113 |
| 294,445 | Beginning balance | $ | 109,536 |
| $ | 30,382 |
| $ | 8,362 |
| 148,280 | ||||
Plus: | Plus: |
|
|
|
|
|
|
|
|
|
| Plus: |
|
|
|
|
|
|
|
|
|
| ||||
| Additions to non-performing |
| 77,991 |
| 4,979 |
| 1,659 |
| 84,629 | Additions to nonaccrual |
| 1,247 |
| 2,210 |
| 364 |
| 3,821 | ||||||||
Less: | Less: |
|
|
|
|
|
|
|
| Less: |
|
|
|
|
|
|
|
| ||||||||
| Loans returned to accrual status |
| (37,996) |
| (37,169) |
| (899) |
| (76,064) | Loans returned to accrual status |
| (12,836) |
| (1,624) |
| (528) |
| (14,988) | ||||||||
| Non-performing loans transferred to OREO |
| (3,204) |
| (2,540) |
| (353) |
| (6,097) | Nonaccrual loans transferred to OREO |
| (1,237) |
| (227) |
| (969) |
| (2,433) | ||||||||
| Non-performing loan charge-offs |
| (20,557) |
| (7,789) |
| (8,154) |
| (36,500) | Nonaccrual loans charge-offs |
| (14,529) |
| (6,941) |
| (146) |
| (21,616) | ||||||||
| Loan collections |
| (15,744) |
| (6,979) |
| (1,499) |
| (24,222) | Loan collections |
| (38,366) |
| (4,365) |
| (725) |
| (43,456) | ||||||||
| Reclassification |
| - |
|
| - |
|
| (781) |
| (781) | Reclassification |
| (1,290) |
|
| 1,290 |
|
| - |
| - | ||||
| Loans transferred to loans held for sale, net of charge-offs |
| (39,586) |
|
| (1,790) |
|
| (33,015) |
| (74,391) | |||||||||||||||
Ending balance | Ending balance | $ | 117,397 |
| $ | 34,551 |
| $ | 9,071 |
| $ | 161,019 | Ending balance | $ | 42,525 |
| $ | 20,725 |
| $ | 6,358 |
| $ | 69,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
| Commercial Mortgage |
| Commercial & Industrial |
| Construction |
| Total |
|
|
| Commercial Mortgage |
| Commercial & Industrial |
| Construction |
| Total | ||||||||
(In thousands) | (In thousands) |
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
| ||||
Quarter ended September 30, 2017 |
|
|
|
|
|
|
|
| ||||||||||||||||||||
Quarter ended September 30, 2018 | Quarter ended September 30, 2018 |
|
|
|
|
|
|
|
| |||||||||||||||||||
Beginning balance | Beginning balance |
| $ | 122,035 |
| $ | 65,575 |
| $ | 47,391 |
| $ | 235,001 | Beginning balance |
| $ | 142,614 |
| $ | 76,887 |
| $ | 14,148 |
| $ | 233,649 | ||
Plus: | Plus: |
|
|
|
|
|
|
|
|
|
|
| Plus: |
|
|
|
|
|
|
|
|
|
|
| ||||
| Additions to non-performing |
| 24,791 |
| 20,933 |
| 114 |
| 45,838 | Additions to nonaccrual |
| 2,326 |
| 850 |
| 1,388 |
| 4,564 | ||||||||||
Less: | Less: |
|
|
|
|
|
|
|
|
| Less: |
|
|
|
|
|
|
|
|
| ||||||||
| Loans returned to accrual status |
|
| (292) |
| (50) |
| - |
| (342) | Loans returned to accrual status |
|
| (243) |
| (34,936) |
| - |
| (35,179) | ||||||||
| Non-performing loans transferred to OREO |
|
| (392) |
| (35) |
| (160) |
| (587) | Nonaccrual loans transferred to OREO |
|
| (886) |
| (1,192) |
| (54) |
| (2,132) | ||||||||
| Non-performing loan charge-offs |
|
| (167) |
| (712) |
| (47) |
| (926) | Nonaccrual loans charge-offs |
|
| (9,850) |
| (2,197) |
| (2,193) |
| (14,240) | ||||||||
| Loan collections |
|
| (8,916) |
| (2,374) |
| (178) |
| (11,468) | Loan collections |
|
| (4,192) |
| (3,071) |
| (1,203) |
| (8,466) | ||||||||
| Reclassification |
|
| - |
|
| 980 |
|
| (400) |
| 580 | Loans transferred to loans held for sale, net of charge-offs |
|
| (12,372) |
|
| (1,790) |
|
| (3,015) |
| (17,177) | ||||
Ending balance | Ending balance |
| $ | 137,059 |
| $ | 84,317 |
| $ | 46,720 |
| $ | 268,096 | Ending balance |
| $ | 117,397 |
| $ | 34,551 |
| $ | 9,071 |
| $ | 161,019 |
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
| Commercial Mortgage |
| Commercial & Industrial |
| Construction |
| Total |
|
| Commercial Mortgage |
| Commercial & Industrial |
| Construction |
| Total | ||||||||
(In thousands) | (In thousands) |
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
| ||||
Nine-Month Period Ended September 30, 2017 |
|
|
|
|
|
|
|
| |||||||||||||||||||
Nine-Month Period Ended September 30, 2018 | Nine-Month Period Ended September 30, 2018 |
|
|
|
|
|
|
|
| ||||||||||||||||||
Beginning balance | Beginning balance |
| $ | 178,696 |
| $ | 146,599 |
| $ | 49,852 |
| $ | 375,147 | Beginning balance | $ | 156,493 |
| $ | 85,839 |
| $ | 52,113 |
| $ | 294,445 | ||
Plus: | Plus: |
|
|
|
|
|
|
|
|
|
|
| Plus: |
|
|
|
|
|
|
|
|
|
| ||||
| Additions to non-performing |
| 27,424 |
| 22,477 |
| 1,205 |
| 51,106 | Additions to nonaccrual |
| 77,991 |
| 4,979 |
| 1,659 |
| 84,629 | |||||||||
Less: | Less: |
|
|
|
|
|
|
|
|
| Less: |
|
|
|
|
|
|
|
| ||||||||
| Loans returned to accrual status |
|
| (2,333) |
| (1,037) |
| (20) |
| (3,390) | Loans returned to accrual status |
| (37,996) |
| (37,169) |
| (899) |
| (76,064) | ||||||||
| Non-performing loans transferred to OREO |
|
| (9,039) |
| (4,263) |
| (342) |
| (13,644) | Nonaccrual loans transferred to OREO |
| (3,204) |
| (2,540) |
| (353) |
| (6,097) | ||||||||
| Non-performing loan charge-offs |
|
| (31,620) |
| (19,065) |
| (705) |
| (51,390) | Nonaccrual loans charge-offs |
| (20,557) |
| (7,789) |
| (8,154) |
| (36,500) | ||||||||
| Loan collections |
|
| (26,183) |
| (8,129) |
| (2,870) |
| (37,182) | Loan collections |
| (15,744) |
| (6,979) |
| (1,499) |
| (24,222) | ||||||||
| Reclassification |
|
| 114 |
|
| 980 |
|
| (400) |
| 694 | Reclassification |
| - |
|
| - |
|
| (781) |
| (781) | ||||
| Non-performing loans sold, net of charge-offs |
|
| - |
|
| (53,245) |
|
| - |
|
| (53,245) | Loans transferred to loans held for sale, net of charge-offs |
| (39,586) |
|
| (1,790) |
|
| (33,015) |
| (74,391) | |||
Ending balance | Ending balance |
| $ | 137,059 |
| $ | 84,317 |
| $ | 46,720 |
| $ | 268,096 | Ending balance | $ | 117,397 |
| $ | 34,551 |
| $ | 9,071 |
| $ | 161,019 |
146147
The following tables present the activity of commercial and construction non-performing loans held for sale: | |||||||||||||||||||||
The following tables present the activity of commercial and construction nonaccrual loans held for sale for the indicated periods: | The following tables present the activity of commercial and construction nonaccrual loans held for sale for the indicated periods: | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| Commercial Mortgage |
| Commercial & Industrial |
| Construction |
|
| Total |
|
|
| Commercial Mortgage |
| |||||
(In thousands) | (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
|
|
|
| |||
Quarter ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Quarter ended September 30, 2019 | Quarter ended September 30, 2019 |
|
|
| |||||||||||||||||
Beginning balance | Beginning balance |
| $ | 16,814 |
| $ | - |
| $ | 37,732 |
| $ | 54,546 | Beginning balance |
| $ | 7,144 |
| |||
Plus: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Loans transferred from held for investment |
| 12,372 |
|
| 1,790 |
|
| 3,015 |
|
| 17,177 | |||||||||
Less: | Less: |
|
|
|
|
|
|
|
|
|
|
|
| Less: |
|
|
|
| |||
| Loan collections |
|
| - |
|
| - |
|
| (3,000) |
|
| (3,000) | Loan collections |
|
| (238) |
| |||
| Non-performing loans sold |
|
| (16,814) |
|
| - |
|
| (7,732) |
|
| (24,546) | ||||||||
Ending balance | Ending balance |
| $ | 12,372 |
| $ | 1,790 |
| $ | 30,015 |
| $ | 44,177 | Ending balance |
| $ | 6,906 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
|
|
| Commercial Mortgage | �� | Commercial & Industrial |
| Construction |
|
| Total | ||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Nine-Month Period Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Beginning balance |
| $ | - |
| $ | - |
| $ | 8,290 |
| $ | 8,290 | |||||||||
Plus: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Loans transferred from held for investment |
| 39,586 |
|
| 1,790 |
|
| 33,015 |
|
| 74,391 | |||||||||
Less: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Loan collections |
|
| - |
|
| - |
|
| (3,000) |
|
| (3,000) | ||||||||
| Lower of cost or market adjustment |
|
| - |
|
| - |
|
| (558) |
|
| (558) | ||||||||
| Non-performing loans sold |
|
| (27,214) |
|
| - |
|
| (7,732) |
|
| (34,946) | ||||||||
Ending balance |
| $ | 12,372 |
| $ | 1,790 |
| $ | 30,015 |
| $ | 44,177 |
|
|
|
| Construction |
|
|
|
|
|
| Commercial Mortgage |
| Commercial & Industrial |
| Construction |
|
| Total | |||||
(In thousands) | (In thousands) |
|
|
|
|
|
| (In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| |||
Quarter ended September 30, 2017 |
|
|
|
|
| ||||||||||||||||||
Nine-Month Period Ended September 30, 2019 | Nine-Month Period Ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Beginning balance | Beginning balance |
| $ | 8,079 |
|
|
| Beginning balance |
| $ | 11,371 |
| $ | 1,725 |
| $ | 3,015 |
| $ | 16,111 | |||
Plus: |
|
|
|
|
|
| |||||||||||||||||
Less: | Less: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| Loan collections and other |
|
| (752) |
|
| (662) |
|
| (3,015) |
|
| (4,429) | ||||||||||
| Increase to existing construction loans held for sale |
| 211 |
|
|
| Nonaccrual loans sold |
|
| (3,713) |
|
| (1,063) |
|
| - |
|
| (4,776) | ||||
Ending balance | Ending balance |
| $ | 8,290 |
|
|
| Ending balance |
| $ | 6,906 |
| $ | - |
| $ | - |
| $ | 6,906 | |||
|
|
|
|
|
|
|
|
| |||||||||||||||
|
|
|
| Construction |
|
|
| ||||||||||||||||
(In thousands) |
|
|
|
|
|
| |||||||||||||||||
Nine-Month Period Ended September 30, 2017 |
|
|
|
|
| ||||||||||||||||||
Beginning balance |
| $ | 8,079 |
|
|
| |||||||||||||||||
Plus: |
|
|
|
|
|
| |||||||||||||||||
| Increase to existing construction loans held for sale |
| 211 |
|
|
| |||||||||||||||||
Ending balance |
| $ | 8,290 |
|
|
|
|
|
|
| Commercial Mortgage |
| Commercial & Industrial |
| Construction |
|
| Total | |||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Quarter ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
| |||
Beginning balance |
| $ | 16,814 |
|
| - |
| $ | 37,732 |
| $ | 54,546 | ||
Plus: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Loans transferred from held for investment |
| 12,372 |
|
| 1,790 |
|
| 3,015 |
|
| 17,177 | ||
Less: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Loan collections |
|
| - |
|
| - |
|
| (3,000) |
|
| (3,000) | |
| Nonaccrual loans sold |
|
| (16,814) |
|
| - |
|
| (7,732) |
|
| (24,546) | |
Ending balance |
| $ | 12,372 |
| $ | 1,790 |
| $ | 30,015 |
| $ | 44,177 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial Mortgage |
| Commercial & Industrial |
| Construction |
|
| Total | |||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Nine-Month Period Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
| |||
Beginning balance |
| $ | - |
|
| - |
| $ | 8,290 |
| $ | 8,290 | ||
Plus: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Loans transferred from held for investment |
| 39,586 |
|
| 1,790 |
|
| 33,015 |
|
| 74,391 | ||
Less: |
|
|
|
|
|
|
|
|
|
|
|
| ||
| Loan collections |
|
| - |
|
| - |
|
| (3,000) |
|
| (3,000) | |
| Lower of cost or market adjustment |
|
| - |
|
| - |
|
| (558) |
|
| (558) | |
| Nonaccrual loans sold |
|
| (27,214) |
|
| - |
|
| (7,732) |
|
| (34,946) | |
Ending balance |
| $ | 12,372 |
| $ | 1,790 |
| $ | 30,015 |
| $ | 44,177 |
147148
Total non-performingnonaccrual commercial and construction loans, including non-performingnonaccrual loans held for sale, with a book value of $205.2$76.5 million as of September 30, 20182019, were being carried (net of reserves and accumulated charge-offs) at 51.7%40.9% of unpaid principal balance.
Non-performingNonaccrual residential mortgage loans decreased by $21.6$20.3 million to $156.7$127.0 million as of September 30, 20182019 from $178.3$147.3 million as of December 31, 2017.2018. The decrease was driven primarily by loans brought current, loans transferred to the OREO portfolio, and collections (including two loans individually in excess of $1 million paid-off in the first quarter, which totaled $3.3 million), and charge-offs recordedthat, in the aggregate, offset the inflows in the first nine months of 2019. The inflows of non-performing residential mortgage loans during the first nine months of 2018, partially offset by inflows.2019 amounted to $37.9 million, compared to inflows of $60.2 million for the same period in 2018.
The following tables presents the activity of residential non-performing loans held for investment: |
|
|
| |||||||||||||||||||||||
The following tables presents the activity of residential nonaccrual loans held for investment for the indicated periods: | The following tables presents the activity of residential nonaccrual loans held for investment for the indicated periods: |
|
|
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
| Quarter Ended |
|
| Nine-Month Period Ended |
|
|
| Quarter Ended |
|
| Nine-Month Period Ended | ||||||||||||
|
|
|
| September 30, |
| September 30, |
|
| September 30, |
|
| September 30, | ||||||||||||||
(In thousands) | (In thousands) |
|
| 2018 |
| 2017 |
| 2018 |
|
| 2017 | (In thousands) |
|
| 2019 |
| 2018 |
|
| 2019 |
|
| 2018 | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Beginning balance | Beginning balance |
| $ | 162,539 |
| $ | 155,330 |
| $ | 178,291 |
| $ | 160,867 | Beginning balance |
| $ | 129,501 |
| $ | 162,539 |
| $ | 147,287 |
| $ | 178,291 |
Plus: | Plus: |
|
|
|
|
|
|
|
|
| Plus: |
|
|
|
|
|
|
|
|
|
| |||||
| Additions to non-performing |
|
| 16,480 |
| 41,264 |
| 60,217 |
|
| 90,370 | Additions to nonaccrual |
|
| 14,771 |
| 16,480 |
|
| 37,940 |
|
| 60,217 | |||
Less: | Less: |
|
|
|
|
|
|
|
|
|
| Less: |
|
|
|
|
|
|
|
|
|
|
| |||
| Loans returned to accrual status |
|
| (7,146) |
| (6,300) |
| (38,254) |
|
| (28,589) | Loans returned to accrual status |
|
| (3,091) |
| (7,146) |
|
| (17,129) |
|
| (38,254) | |||
| Non-performing loans transferred to OREO |
|
| (6,302) |
| (5,649) |
| (23,139) |
|
| (24,649) | Nonaccrual loans transferred to OREO |
|
| (5,689) |
| (6,302) |
|
| (17,424) |
|
| (23,139) | |||
| Non-performing loan charge-offs |
|
| (6,027) |
| (4,808) |
| (12,891) |
|
| (14,135) | Nonaccrual loans charge-offs |
|
| (2,990) |
| (6,027) |
|
| (9,854) |
|
| (12,891) | |||
| Loan collections |
|
| (2,859) |
| (727) |
| (8,320) |
|
| (4,640) | Loan collections |
|
| (5,462) |
| (2,859) |
|
| (13,780) |
|
| (8,320) | |||
| Reclassification |
| - |
| (580) |
| 781 |
|
| (694) | Reclassification |
| - |
| - |
|
| - |
|
| 781 | |||||
Ending balance | Ending balance |
| $ | 156,685 |
| $ | 178,530 |
| $ | 156,685 |
| $ | 178,530 | Ending balance |
| $ | 127,040 |
| $ | 156,685 |
| $ | 127,040 |
| $ | 156,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148149
The amount of non-performingnonaccrual consumer loans, including finance leases, increaseddecreased by $4.8$0.8 million during the first nine months of 20182019 to $21.7$19.6 million, compared to $16.8$20.4 million as of December 31, 2017. 2018. The inflows of non-performingnonaccrual consumer loans during the first nine months of 20182019 were $42.1$37.4 million, an increasea decrease of $8.7$4.7 million, compared to inflows of $33.4$42.1 million for the same period in 2017.2018.
As of September 30, 2018,2019, approximately $85.7$33.5 million of the loans placed in non-accrualnonaccrual status, mainly commercial loans, were current, or had delinquencies of less than 90 days in their principal and interest payments, including $20.7$20.5 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.
During the nine-month period ended September 30, 2018,2019, interest income of approximately $3.3$2.3 million related to non-performingnonaccrual loans with a carrying value of $134.5$65.5 million as of September 30, 2018,2019, mainly non-performing construction and commercial loans, was applied against the related principal balances under the cost-recovery method.
As of September 30, 2018, approximately $121.0 million, or 35.7%, of total non-performing loans held for investment had been charged-off to their net realizable value and no specific reserve was allocated, as shown in the following table: |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) | Residential Mortgage Loans |
| Commercial Mortgage Loans |
| C&I Loans |
| Construction Loans |
| Consumer and Finance Leases |
| Total |
| ||||||
As of September 30, 2018 |
|
|
| |||||||||||||||
Non-performing loans held for investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charged-off to realizable value | $ | 72,057 |
| $ | 37,507 |
| $ | 9,601 |
| $ | 1,116 |
| $ | 714 |
| $ | 120,995 |
|
Other non-performing loans held |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for investment |
| 84,628 |
|
| 79,890 |
|
| 24,950 |
|
| 7,955 |
|
| 20,950 |
|
| 218,373 |
|
Total non-performing loans held |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for investment | $ | 156,685 |
| $ | 117,397 |
| $ | 34,551 |
| $ | 9,071 |
| $ | 21,664 |
| $ | 339,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to non-performing loans held for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments |
| 30.64 | % |
| 41.97 | % |
| 127.83 | % |
| 33.94 | % |
| 258.68 | % |
| 59.10 | % |
Allowance to non-performing loans held for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments, excluding non-performing loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charged-off to realizable value |
| 56.73 | % |
| 61.67 | % |
| 177.02 | % |
| 38.71 | % |
| 267.50 | % |
| 91.84 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017 |
|
|
| |||||||||||||||
Non-performing loans held for investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charged-off to realizable value | $ | 76,668 |
| $ | 60,680 |
| $ | 6,872 |
| $ | 48 |
| $ | 843 |
| $ | 145,111 |
|
Other non-performing loans held |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for investment |
| 101,623 |
|
| 95,813 |
|
| 78,967 |
|
| 52,065 |
|
| 15,975 |
|
| 344,443 |
|
Total non-performing loans held |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for investment | $ | 178,291 |
| $ | 156,493 |
| $ | 85,839 |
| $ | 52,113 |
| $ | 16,818 |
| $ | 489,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to non-performing loans held for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments |
| 33.08 | % |
| 30.99 | % |
| 56.93 | % |
| 8.68 | % |
| 422.06 | % |
| 47.36 | % |
Allowance to non-performing loans held for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments, excluding non-performing loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charged-off to realizable value |
| 58.03 | % |
| 50.61 | % |
| 61.89 | % |
| 8.69 | % |
| 444.33 | % |
| 67.31 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019, approximately $78.5 million, or 36.3%, of total nonaccrual loans held for investment, have been charged-off to their net realizable value and no specific reserve was allocated, as shown in the following table: |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) | Residential Mortgage Loans |
| Commercial Mortgage Loans |
| C&I Loans |
| Construction Loans |
| Consumer and Finance Leases |
| Total |
| ||||||
As of September 30, 2019 |
|
|
| |||||||||||||||
Nonaccrual loans held for investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charged-off to realizable value | $ | 60,262 |
| $ | 11,499 |
| $ | 2,956 |
| $ | 2,899 |
| $ | 852 |
| $ | 78,468 |
|
Other nonaccrual loans held |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for investment |
| 66,778 |
|
| 31,026 |
|
| 17,769 |
|
| 3,459 |
|
| 18,727 |
|
| 137,759 |
|
Total nonaccrual loans held |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for investment | $ | 127,040 |
| $ | 42,525 |
| $ | 20,725 |
| $ | 6,358 |
| $ | 19,579 |
| $ | 216,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to nonaccrual loans held for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments |
| 36.23 | % |
| 105.46 | % |
| 85.01 | % |
| 48.11 | % |
| 275.90 | % |
| 76.57 | % |
Allowance to nonaccrual loans held for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments, excluding nonaccrual loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charged-off to realizable value |
| 68.93 | % |
| 144.55 | % |
| 99.15 | % |
| 88.44 | % |
| 288.45 | % |
| 120.19 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018 |
|
|
| |||||||||||||||
Nonaccrual loans held for investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charged-off to realizable value | $ | 60,648 |
| $ | 36,386 |
| $ | 8,440 |
| $ | 2,431 |
| $ | 675 |
| $ | 108,580 |
|
Other nonaccrual loans held |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for investment |
| 86,639 |
|
| 73,150 |
|
| 21,942 |
|
| 5,931 |
|
| 19,731 |
|
| 207,393 |
|
Total nonaccrual loans held |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for investment | $ | 147,287 |
| $ | 109,536 |
| $ | 30,382 |
| $ | 8,362 |
| $ | 20,406 |
| $ | 315,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to nonaccrual loans held for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments |
| 34.49 | % |
| 50.74 | % |
| 107.12 | % |
| 42.96 | % |
| 263.89 | % |
| 62.15 | % |
Allowance to nonaccrual loans held for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments, excluding nonaccrual loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charged-off to realizable value |
| 58.63 | % |
| 75.98 | % |
| 148.33 | % |
| 60.56 | % |
| 272.92 | % |
| 94.68 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149150
Total loans in early delinquency (i.e.(i.e., 30-89 days past due loans, as defined in regulatory report instructions) amounted to $141.6$190.5 million as of September 30, 2018, a decrease2019, an increase of $103.1$53.9 million compared to $244.7$136.6 million as of December 31, 2017.2018. The variances by major portfolio categories follow:
·Consumer loans in early delinquency decreasedincreased by $49.1$2.6 million to $62.1 million as of September 30, 2018, compared to $111.22019 from $59.5 million as of December 31, 2017,2018, and residential mortgage loans in early delinquency decreasedincreased by $40.9$4.9 million to $75.0$78.1 million as of September 30, 2018,2019 from $115.9$73.2 million as of December 31, 2017. These variances primarily reflect both the resumption of payments by clients after the expiration of the three-month payment deferral programs and the classification of loans as non-performing during the first nine months of 2018.
·Commercial and construction loans in early delinquency decreasedincreased by $13.2$46.4 million to $4.5$50.3 million as of September 30, 2018, compared to $17.72019 from $3.9 million as of December 31, 2017,2018, primarily duerelated to loans brought current.that were contractually current as to principal and interest payments but have final balloon payments that are over 30 days past due and are in the process of refinancing.
The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico that is similar to the U.S. government’s Home Affordable Modification Program guidelines. Depending upon the nature of borrowers’ financial condition, restructurings or loan modifications through this program, as well as other restructurings of individual commercial, commercial mortgage, construction, and residential mortgage loans fit the definition of a TDR. A restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms that bring a defaulted loan current and provide sustainable affordability. Changes may include, among others, the extension of the maturity of the loan and modifications of the loan rate. See Note 7, “Loans8 – Loans Held for Investment,” to the accompanying unaudited consolidated financial statements for additional information and statistics about the Corporation’s TDR loans.
TDR loans are classified as either accrual or nonaccrual loans. Loans in accrual status may remain in accrual status when their contractual terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, loans on nonaccrual status and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of six months, and there is evidence that such payments can, and are likely to, continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of the restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a non-accrualnonaccrual loan. Loan modifications increase the Corporation’s interest income by returning a non-performingnonaccrual 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.
150
The following table provides a breakdown between accrual and nonaccrual TDRs: |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
(In thousands) | As of September 30, 2018 | |||||||
|
|
|
|
|
|
|
|
|
| Accrual |
| Nonaccrual (1) |
| Total TDRs | |||
Residential mortgage loans: |
|
|
|
|
|
|
| |
Non-FHA/VA Residential Mortgage loans | $ | 270,067 |
| $ | 70,202 |
| $ | 340,269 |
Commercial Mortgage loans (2) |
| 146,293 |
|
| 22,912 |
|
| 169,205 |
Commercial and Industrial loans (3) |
| 70,416 |
|
| 9,295 |
|
| 79,711 |
Construction loans (4) |
| 1,080 |
|
| 4,714 |
|
| 5,794 |
Consumer loans - Auto |
| 12,541 |
|
| 6,350 |
|
| 18,891 |
Finance leases |
| 1,273 |
|
| 99 |
|
| 1,372 |
Consumer loans - Other |
| 9,176 |
|
| 1,302 |
|
| 10,478 |
Total Troubled Debt Restructurings | $ | 510,846 |
| $ | 114,874 |
| $ | 625,720 |
|
|
|
|
|
|
|
|
|
(1) Included in non-accrual loans are $20.7 million in loans that were performing under the terms of the restructuring agreements but are reported in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and are deemed fully collectible. | ||||||||
(2) Excludes $3.6 million in non-performing commercial mortgage loans transferred to held for sale during 2018. | ||||||||
(3) Excludes $0.9 million in non-performing commercial and industrial loans transferred to held for sale during 2018. | ||||||||
(4) Excludes a $27.0 million non-performing construction loan transferred to held for sale during 2018. |
151
The following table provides a breakdown between accrual and nonaccrual TDRs as of the indicated dates: |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
(In thousands) | As of September 30, 2019 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| Accrual |
| Nonaccrual (1) |
| Total TDRs | |||
Non-FHA/VA Residential Mortgage loans | $ | 266,592 |
| $ | 54,135 |
| $ | 320,727 | |
Commercial mortgage loans (2) |
| 50,045 |
|
| 25,755 |
|
| 75,800 | |
Commercial and Industrial loans |
| 62,041 |
|
| 6,401 |
|
| 68,442 | |
Construction loans |
| 1,368 |
|
| 3,071 |
|
| 4,439 | |
Consumer loans - Auto |
| 9,452 |
|
| 6,086 |
|
| 15,538 | |
Finance leases |
| 1,599 |
|
| 4 |
|
| 1,603 | |
Consumer loans - Other |
| 8,327 |
|
| 962 |
|
| 9,289 | |
Total Troubled Debt Restructurings | $ | 399,424 |
| $ | 96,414 |
| $ | 495,838 | |
|
|
|
|
|
|
|
|
|
|
(1) | Included in nonaccrual loans are $20.5 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. | ||||||||
(2) | Excludes commercial mortgage TDR loans held for sale amounting to $6.9 million as of September 30, 2019. | ||||||||
|
|
The OREO portfolio, which is part of non-performing assets, decreased by $12.7$28.4 million to $135.2$103.0 million as of September 30, 20182019 from $147.9$131.4 million as of December 31, 2017.2018. The following tables show the composition of the OREO portfolio as of September 30, 20182019 and December 31, 2017,2018, as well as the activity during the nine-month period ended September 30, 20182019 of the OREO portfolio by geographic region:
OREO Composition by Region | OREO Composition by Region |
|
|
|
|
|
| OREO Composition by Region |
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) | As of September 30, 2018 |
| As of September 30, 2019 |
| |||||||||||||||||
| Puerto Rico | Virgin Islands | Florida |
| Consolidated |
| Puerto Rico |
| Virgin Islands |
| Florida |
|
| Consolidated |
| ||||||
Residential | $ | 47,337 | $ | 1,416 | $ | 534 | $ | 49,287 |
| $ | 44,620 |
| $ | 1,426 |
| $ | - |
| $ | 46,046 |
|
Commercial |
| 70,233 |
| 4,927 |
| 132 |
| 75,292 |
|
| 44,602 |
|
| 3,180 |
|
| 132 |
|
| 47,914 |
|
Construction |
| 9,908 |
| 731 |
| - |
| 10,639 |
|
| 8,298 |
|
| 775 |
|
| - |
|
| 9,073 |
|
| $ | 127,478 | $ | 7,074 | $ | 666 | $ | 135,218 |
| $ | 97,520 |
| $ | 5,381 |
| $ | 132 |
| $ | 103,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) | As of December 31, 2017 |
| As of December 31, 2018 |
| |||||||||||||||||
| Puerto Rico | Virgin Islands | Florida |
| Consolidated |
| Puerto Rico |
| Virgin Islands |
| Florida |
|
| Consolidated |
| ||||||
Residential | $ | 52,427 | $ | 514 | $ | 1,440 | $ | 54,381 |
| $ | 47,428 |
| $ | 1,369 |
| $ | 442 |
| $ | 49,239 |
|
Commercial |
| 77,812 |
| 4,927 |
| 132 |
| 82,871 |
|
| 67,185 |
|
| 4,521 |
|
| 132 |
|
| 71,838 |
|
Construction |
| 9,823 |
| 865 |
| - |
| 10,688 |
|
| 9,511 |
|
| 814 |
|
| - |
|
| 10,325 |
|
| $ | 140,062 | $ | 6,306 | $ | 1,572 | $ | 147,940 |
| $ | 124,124 |
| $ | 6,704 |
| $ | 574 |
| $ | 131,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO Activity by Region | OREO Activity by Region |
|
|
|
|
|
| OREO Activity by Region |
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) | As of September 30, 2018 |
| Nine-month period ended September 30, 2019 |
| |||||||||||||||||
| Puerto Rico | Virgin Islands | Florida |
| Consolidated |
| Puerto Rico |
| Virgin Islands |
| Florida |
|
| Consolidated |
| ||||||
Beginning Balance | $ | 140,062 | $ | 6,306 | $ | 1,572 | $ | 147,940 |
| $ | 124,124 |
| $ | 6,704 |
| $ | 574 |
| $ | 131,402 |
|
Additions |
| 36,341 |
| 1,273 |
| 619 |
| 38,233 |
|
| 27,616 |
|
| 1,294 |
|
| 759 |
|
| 29,669 |
|
Sales |
| (31,407) |
| (368) |
| (1,481) |
| (33,256) |
|
| (40,561) |
|
| (2,370) |
|
| (1,187) |
|
| (44,118) |
|
Fair value adjustments and impairments |
| (17,518) |
| (137) |
| (44) |
| (17,699) |
| ||||||||||||
Write-down adjustments |
| (13,659) |
|
| (247) |
|
| (14) |
|
| (13,920) |
| |||||||||
Ending Balance | $ | 127,478 | $ | 7,074 | $ | 666 | $ | 135,218 |
| $ | 97,520 |
| $ | 5,381 |
| $ | 132 |
| $ | 103,033 |
|
151152
Net Charge-offs and Total Credit Losses
Net charge-offs totaled $82.9$62.5 million for the first nine months of 2018,2019, or 0.93% of average loans on an annualized basis, compared to $82.9 million, or an annualized 1.27% of average loans, compared to $93.3 million, or an annualized 1.40%, for the same period in 2017. Net2018. The decrease in net charge-offs for the first nine months of 2018 includedprimarily relates to charge-offs totaling $22.2 million associated with the transfer to held for sale of $74.4 million in non-performingnonaccrual commercial and construction loans. Net charge-offsloans for the first nine months of 2017 included a $10.7 million charge-off associated with the sale of the PREPA credit line.2018.
Commercial mortgage loanloans net charge-offs in the first nine months of 2019 were $14.6 million, or an annualized 1.26% of average commercial mortgage loans, compared to $20.2 million, or an annualized 1.71% of average loans, for the first nine months of 2018. Commercial mortgage loans net charge-offs for the first nine months of 2018 were $20.22019 included the aforementioned $11.4 million or an annualized 1.71% of averagecharge-off taken on a commercial mortgage loans, compared to $32.0loan in the Florida region and a $2.1 million or an annualized 2.65%, forcharge-off associated with a split loan restructuring in the first nine months of 2017.Puerto Rico region. Commercial mortgage loan net charge-offs for the first nine months of 2018 included $13.8 million associated with the transfer to held for sale of $39.6 million in non-performingnonaccrual commercial mortgage loans. The decrease, as compared to
Commercial and industrial loans net charge-offs in the first nine months of 2017, was primarily2019 totaled $3.9 million, or an annualized 0.23% of related average loans, compared to $7.7 million, or an annualized 0.50%, for the effect in 2017first nine months of charge-offs totaling $29.7 million taken on commercial mortgages loans previously guaranteed by the TDF.
2018. Commercial and Industrial loanindustrial loans net charge-offs for the first nine months of 2018 totaled $7.72019 included a $5.7 million or an annualized 0.50% of averagecharge-off taken against a previously-established specific reserve associated with a commercial and industrial loans, compared to $13.6loan in the Puerto Rico region and is net of a $1.7 million or an annualized 0.85%, forloan loss recovery in the first nine months of 2017.Virgin Islands region associated with a commercial and industrial loan fully charged-off in prior periods. Commercial and Industrialindustrial loan net charge-offs for the first nine months of 2018 included $1.7 million associated with the transfer to held for sale of $1.8 million in non-performingnonaccrual commercial and industrial loans. Commercial and Industrial loan
Construction loans net charge-offsrecoveries for the first nine months of 2017 included the $10.72019 were $0.3 million, charge-off associated with the saleor an annualized 0.40% of the PREPA credit line.
Constructionrelated average loans, compared to net charge-offs for the first nine months of 2018 were $8.0 million, or an annualized 8.86% of average construction loans, compared to net charge-offs of $0.1 million, or an annualized 0.11%, for the first nine months of 2017.2018. The variance was primarily related to charge-offs totaling $6.7 million related to $33.0 million in non-performingnonaccrual construction loans transferred to held for sale during the first nine months of 2018.
Residential mortgage loans net charge-offs for the first nine months of 20182019 were $14.1 million, or an annualized 0.61% of related average loans, compared to $15.4 million, or an annualized 0.64% of related average residential mortgage loans, compared to $20.4 million, or an annualized 0.83%, for the first nine months of 2017.2018. Approximately $13.1$9.0 million in charge-offs for the first nine months of 20182019 resulted from valuations for impairment purposes of residential mortgage loans considered homogeneous given high delinquency and loan-to-value levels, compared to $13.2$13.1 million for the first nine months of 2017.2018. Net charge-offs on residential mortgage loans also included $2.4 million related to foreclosures for the first nine months of 2018,2019 also included $4.7 million related to foreclosures, compared to $5.7$2.4 million forin the first halfnine months of 2017.2018.
Net charge-offs of consumer loans and finance leases for the first nine months of 20182019 were $31.6$30.2 million, or an annualized 2.38%1.95% of average consumer loans and finance leases, compared to $27.2$31.6 million, or an annualized 2.11%2.38% of average loans, in the first nine months of 2017. The increase primarily reflects adjustments in the auto loan portfolio and also reflects the effect of a loan loss recovery of $1.2 million recorded in 2017 on the sale of certain credit card loans that had been fully charged-off in prior periods.2018. Approximately $10.9 million of the consumer loan charge-offs recorded in 2018 were taken against previously-established hurricane-related qualitative reservereserves associated with Hurricanes Irma and Maria.
The following table presents annualized net charge-offs to average loans held in various portfolio: | ||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
| September 30, 2018 |
| September 30, 2017 |
| September 30, 2018 |
| September 30, 2017 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage | 0.95 | % |
| 0.84 | % |
| 0.64 | % |
| 0.83 | % | |
Commercial mortgage | 2.47 | % |
| 0.06 | % |
| 1.71 | % |
| 2.65 | % | |
Commercial and industrial | 0.42 | % |
| 0.12 | % |
| 0.50 | % |
| 0.85 | % | |
Construction | 7.13 | % |
| 0.09 | % |
| 8.86 | % |
| 0.11 | % | |
Consumer and finance leases | 2.57 | % |
| 2.29 | % |
| 2.38 | % |
| 2.11 | % | |
Total loans | 1.52 | % |
| 0.80 | % |
| 1.27 | % |
| 1.40 | % | |
_______________ |
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| |
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| |||||||||||
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|
|
|
|
|
|
|
The following table presents annualized net charge-offs (recoveries) to average loans held-in-portfolio for the indicated periods: | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||
|
| September 30, 2019 |
| September 30, 2018 |
| September 30, 2019 |
| September 30, 2018 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage | 0.58 | % |
| 0.95 | % |
| 0.61 | % |
| 0.64 | % | |
Commercial mortgage | 0.19 | % |
| 2.47 | % |
| 1.26 | % |
| 1.71 | % | |
Commercial and industrial (1) | (0.26) | % |
| 0.42 | % |
| 0.23 | % |
| 0.50 | % | |
Construction (2) | (0.81) | % |
| 7.13 | % |
| (0.40) | % |
| 8.86 | % | |
Consumer and finance leases | 1.92 | % |
| 2.57 | % |
| 1.95 | % |
| 2.38 | % | |
Total loans | 0.61 | % |
| 1.52 | % |
| 0.93 | % |
| 1.27 | % | |
|
|
|
|
|
|
|
|
|
|
|
| |
(1) For the quarter ended September 30, 2019, recoveries in commercial and industrial loans exceeded charge-offs. | ||||||||||||
(2) | For the quarter and nine-month period ended September 30, 2019, recoveries in construction loans exceeded charge-offs. |
152153
The following table presents annualized net charge-offs (recoveries) to average loans held in various portfolios by geographic region: | ||||||||||||||||||||||||||
The following table presents net charge-offs (recoveries) to average loans held in various portfolios by geographic segment for the indicated periods: | The following table presents net charge-offs (recoveries) to average loans held in various portfolios by geographic segment for the indicated periods: | |||||||||||||||||||||||||
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|
|
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|
|
|
|
|
|
|
|
|
| ||
|
|
| Quarter Ended |
|
| Nine-Month Period Ended |
|
|
| Quarter Ended |
|
| Nine-Month Period Ended |
| ||||||||||||
|
|
| September 30, |
| September 30, |
| September 30, |
| September 30, |
|
| September 30, |
| September 30, |
| September 30, |
| September 30, | ||||||||
|
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||||
PUERTO RICO: | PUERTO RICO: |
|
|
|
|
|
|
|
|
|
|
|
| PUERTO RICO: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage | Residential mortgage |
| 1.17 | % |
| 1.15 | % |
| 0.80 | % |
| 1.11 | % | Residential mortgage |
| 0.78 | % |
| 1.17 | % |
| 0.84 | % |
| 0.80 | % |
Commercial mortgage | Commercial mortgage |
| 3.61 | % |
| 0.09 | % |
| 2.49 | % |
| 3.65 | % | Commercial mortgage |
| 0.31 | % |
| 3.61 | % |
| 0.45 | % |
| 2.49 | % |
Commercial and Industrial | Commercial and Industrial |
| 0.65 | % |
| 0.17 | % |
| 0.73 | % |
| 1.21 | % | Commercial and Industrial |
| 0.07 | % |
| 0.65 | % |
| 0.54 | % |
| 0.73 | % |
Construction | Construction |
| 16.62 | % |
| 0.31 | % |
| 7.48 | % |
| 1.68 | % | Construction |
| (0.15) | % |
| 16.62 | % |
| 0.65 | % |
| 7.48 | % |
Consumer and finance leases | Consumer and finance leases |
| 2.58 | % |
| 2.29 | % |
| 2.39 | % |
| 2.14 | % | Consumer and finance leases |
| 1.91 | % |
| 2.58 | % |
| 1.95 | % |
| 2.39 | % |
Total loans | Total loans |
| 1.94 | % |
| 1.03 | % |
| 1.53 | % |
| 1.83 | % | Total loans |
| 0.91 | % |
| 1.94 | % |
| 1.05 | % |
| 1.53 | % |
VIRGIN ISLANDS: | VIRGIN ISLANDS: |
|
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|
|
|
|
|
|
|
|
|
| VIRGIN ISLANDS: |
|
|
|
|
|
|
|
|
|
|
| |
Residential mortgage | Residential mortgage |
| 0.81 | % |
| (0.01) | % |
| 0.65 | % |
| 0.06 | % | Residential mortgage |
| 0.25 | % |
| 0.81 | % |
| 0.12 | % |
| 0.65 | % |
Commercial mortgage (2) | Commercial mortgage (2) |
| (0.23) | % |
| (0.14) | % |
| (0.16) | % |
| (0.11) | % | Commercial mortgage (2) |
| (0.20) | % |
| (0.23) | % |
| (0.26) | % |
| (0.16) | % |
Commercial and Industrial (3) | Commercial and Industrial (3) |
| (0.03) | % |
| (0.01) | % |
| 0.21 | % |
| (0.01) | % | Commercial and Industrial (3) |
| (6.26) | % |
| (0.03) | % |
| (2.13) | % |
| 0.21 | % |
Construction (4) | Construction (4) |
| 4.42 | % |
| - | % |
| 18.09 | % |
| (1.33) | % | Construction (4) |
| - | % |
| 4.42 | % |
| (0.18) | % |
| 18.09 | % |
Consumer and finance leases | Consumer and finance leases |
| 3.13 | % |
| 2.84 | % |
| 2.66 | % |
| 2.04 | % | Consumer and finance leases |
| 1.29 | % |
| 3.13 | % |
| 1.18 | % |
| 2.66 | % |
Total loans | Total loans |
| 0.94 | % |
| 0.17 | % |
| 1.87 | % |
| 0.05 | % | Total loans |
| (1.18) | % |
| 0.94 | % |
| (0.33) | % |
| 1.87 | % |
FLORIDA: | FLORIDA: |
|
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|
|
|
|
|
|
|
|
| FLORIDA: |
|
|
|
|
|
|
|
|
|
|
| |
Residential mortgage |
| 0.16 | % |
| 0.01 | % |
| 0.02 | % |
| 0.05 | % | ||||||||||||||
Residential mortgage (6) | Residential mortgage (6) |
| (0.01) | % |
| 0.16 | % |
| (0.02) | % |
| 0.02 | % | |||||||||||||
Commercial mortgage | Commercial mortgage |
| (0.01) | % |
| (0.01) | % |
| (0.01) | % |
| (0.01) | % | Commercial mortgage |
| (0.02) | % |
| (0.01) | % |
| 3.40 | % |
| (0.01) | % |
Commercial and Industrial | Commercial and Industrial |
| - | % |
| - | % |
| 0.02 | % |
| - | % | Commercial and Industrial |
| - | % |
| - | % |
| - | % |
| 0.02 | % |
Construction | Construction |
| (0.12) | % |
| (0.18) | % |
| (0.66) | % |
| (0.53) | % | Construction |
| (1.30) | % |
| (0.12) | % |
| (1.07) | % |
| (0.66) | % |
Consumer and finance leases | Consumer and finance leases |
| 2.07 | % |
| 1.93 | % |
| 1.88 | % |
| 1.35 | % | Consumer and finance leases |
| 2.99 | % |
| 2.07 | % |
| 2.57 | % |
| 1.88 | % |
Total loans | Total loans |
| 0.12 | % |
| 0.07 | % |
| 0.06 | % |
| 0.06 | % | Total loans |
| 0.03 | % |
| 0.12 | % |
| 0.83 | % |
| 0.06 | % |
|
|
|
|
|
|
|
|
|
|
|
|
(1)For the quarter ended September 30, 2019, recoveries in construction loans in Puerto Rico exceeded charge-offs.
(2)For the quarters and nine-month periods ended September 30, 2019 and 2018, recoveries in commercial mortgage loans in the Virgin Islands exceeded charge-offs.
(3)For the quarters ended September 30, 2019 and 2018, and for the nine-month period ended September 30, 2019, recoveries in commercial and industrial loans in the Virgin Islands exceeded charge-offs.
(4)For the nine-month period ended September 30, 2019, recoveries in construction loans in the Virgin Islands exceeded charge-offs.
(5)For the quarter and nine-month period ended September 30, 2019, total recoveries in the Virgin Islands exceeded total charge-offs.
(6)For the quarter and nine-month period ended September 30, 2019, recoveries in residential mortgage loans in Florida exceeded charge-offs.
(7)For the quarter ended September 30, 2019, and for the quarter and nine-month period ended September 30, 2018, recoveries in commercial mortgage loans in Florida exceeded charge-offs.
(8)For the quarters and nine-month periods ended September 30, 2019 and 2018, recoveries in construction loans in Florida exceeded charge-offs.
The above ratios are based on annualized charge-offs and are not necessarily indicative of the results expected for the entire year or in subsequent periods.
Total credit losses (equal to net charge-offs plus losses on OREO operations) for the first nine months of 20182019 amounted to $93.1 million, or an annualized 1.49% of average loans and repossessed assets, in contrast to credit losses of $102.1$73.9 million, or a loss rate of 1.62%,1.08% on an annualized basis to average loans and repossessed assets, compared to credit losses of $93.1 million, or a loss rate of 1.49% on an annualized basis, for the same period in 2017.2018.
153
The following table presents information about the OREO inventory and credit losses for the periods indicated: | |||||||||||||||
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|
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|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||||||
| September 30, |
| September 30, | ||||||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
(Dollars in thousands) |
| ||||||||||||||
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OREO |
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OREO balances, carrying value: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential | $ | 49,287 |
|
| $ | 56,993 |
|
| $ | 49,287 |
|
| $ | 56,993 |
|
Commercial |
| 75,292 |
|
|
| 85,194 |
|
|
| 75,292 |
|
|
| 85,194 |
|
Construction |
| 10,639 |
|
|
| 10,790 |
|
|
| 10,639 |
|
|
| 10,790 |
|
Total | $ | 135,218 |
|
| $ | 152,977 |
|
| $ | 135,218 |
|
| $ | 152,977 |
|
OREO activity (number of properties): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning property inventory |
| 755 |
|
|
| 696 |
|
|
| 708 |
|
|
| 626 |
|
Properties acquired |
| 82 |
|
|
| 84 |
|
|
| 301 |
|
|
| 305 |
|
Properties disposed |
| (123) |
|
|
| (43) |
|
|
| (295) |
|
|
| (194) |
|
Ending property inventory |
| 714 |
|
|
| 737 |
|
|
| 714 |
|
|
| 737 |
|
Average holding period (in days) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
| 414 |
|
|
| 361 |
|
|
| 414 |
|
|
| 361 |
|
Commercial |
| 1,255 |
|
|
| 941 |
|
|
| 1,255 |
|
|
| 941 |
|
Construction |
| 1,375 |
|
|
| 1,316 |
|
|
| 1,375 |
|
|
| 1,316 |
|
|
| 958 |
|
|
| 751 |
|
|
| 958 |
|
|
| 751 |
|
OREO operations gain (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market adjustments, impairments (net of insurance recoveries), |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and gains (losses) on sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential | $ | (2,753) |
|
| $ | (328) |
|
| $ | (4,524) |
|
| $ | (2,391) |
|
Commercial |
| 214 |
|
|
| 562 |
|
|
| (2,227) |
|
|
| (4,990) |
|
Construction |
| (403) |
|
|
| (610) |
|
|
| (1,460) |
|
|
| 145 |
|
|
| (2,942) |
|
|
| (376) |
|
|
| (8,211) |
|
|
| (7,236) |
|
Other OREO operations expenses |
| (1,418) |
|
|
| (975) |
|
|
| (1,994) |
|
|
| (1,560) |
|
Net Loss on OREO operations | $ | (4,360) |
|
| $ | (1,351) |
|
| $ | (10,205) |
|
| $ | (8,796) |
|
CHARGE-OFFS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential charge-offs, net |
| (7,483) |
|
|
| (6,856) |
|
|
| (15,374) |
|
|
| (20,408) |
|
Commercial charge-offs, net |
| (11,674) |
|
|
| (847) |
|
|
| (27,896) |
|
|
| (45,527) |
|
Construction charge-offs, net |
| (2,178) |
|
|
| (31) |
|
|
| (8,022) |
|
|
| (111) |
|
Consumer and finance leases charge-offs, net |
| (11,661) |
|
|
| (9,894) |
|
|
| (31,592) |
|
|
| (27,238) |
|
Total charge-offs, net |
| (32,996) |
|
|
| (17,628) |
|
|
| (82,884) |
|
|
| (93,284) |
|
TOTAL CREDIT LOSSES (1) | $ | (37,356) |
|
| $ | (18,979) |
|
| $ | (93,089) |
|
| $ | (102,080) |
|
LOSS RATIO PER CATEGORY (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
| 1.27 | % |
|
| 0.87 | % |
|
| 0.82 | % |
|
| 0.92 | % |
Commercial |
| 1.26 | % |
|
| (0.03) | % |
|
| 1.01 | % |
|
| 1.74 | % |
Construction |
| 7.71 | % |
|
| 3.37 | % |
|
| 9.57 | % |
|
| 0.49 | % |
Consumer |
| 2.57 | % |
|
| 2.28 | % |
|
| 2.37 | % |
|
| 2.10 | % |
TOTAL CREDIT LOSS RATIO (3) |
| 1.83 | % |
|
| 0.86 | % |
|
| 1.49 | % |
|
| 1.62 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Equal to net loss on OREO operations plus charge-offs, net. | |||||||||||||||
(2) Calculated as net charge-offs plus market adjustments and gains (losses) on sales of OREO divided by average loans and repossessed assets. | |||||||||||||||
(3) Calculated as net charge-offs plus net loss on OREO operations divided by average loans and repossessed assets. | |||||||||||||||
|
154
The following table presents information about the OREO inventory and credit losses for the periods indicated: | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarter Ended |
| Nine-Month Period Ended | ||||||||||||
| September 30, |
| September 30, | ||||||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||||
(Dollars in thousands) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO balances, carrying value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential | $ | 46,046 |
|
| $ | 49,287 |
|
| $ | 46,046 |
|
| $ | 49,287 |
|
Commercial |
| 47,914 |
|
|
| 75,292 |
|
|
| 47,914 |
|
|
| 75,292 |
|
Construction |
| 9,073 |
|
|
| 10,639 |
|
|
| 9,073 |
|
|
| 10,639 |
|
Total | $ | 103,033 |
|
| $ | 135,218 |
|
| $ | 103,033 |
|
| $ | 135,218 |
|
OREO activity (number of properties): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning property inventory |
| 712 |
|
|
| 755 |
|
|
| 694 |
|
|
| 708 |
|
Properties acquired |
| 74 |
|
|
| 82 |
|
|
| 395 |
|
|
| 301 |
|
Properties disposed |
| (91) |
|
|
| (123) |
|
|
| (394) |
|
|
| (295) |
|
Ending property inventory |
| 695 |
|
|
| 714 |
|
|
| 695 |
|
|
| 714 |
|
Average holding period (in days) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
| 400 |
|
|
| 414 |
|
|
| 400 |
|
|
| 414 |
|
Commercial |
| 1,700 |
|
|
| 1,255 |
|
|
| 1,700 |
|
|
| 1,255 |
|
Construction |
| 1,554 |
|
|
| 1,375 |
|
|
| 1,554 |
|
|
| 1,375 |
|
Total average holding period (in days) |
| 1,106 |
|
|
| 958 |
|
|
| 1,106 |
|
|
| 958 |
|
OREO operations gain (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market adjustments, impairments (net of insurance recoveries), |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and gains (losses) on sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential | $ | 21 |
|
| $ | (2,753) |
|
| $ | (1,403) |
|
| $ | (4,524) |
|
Commercial |
| (1,263) |
|
|
| 214 |
|
|
| (4,954) |
|
|
| (2,227) |
|
Construction |
| (76) |
|
|
| (403) |
|
|
| (700) |
|
|
| (1,460) |
|
|
| (1,318) |
|
|
| (2,942) |
|
|
| (7,057) |
|
|
| (8,211) |
|
Other OREO operations expenses |
| (1,260) |
|
|
| (1,418) |
|
|
| (4,307) |
|
|
| (1,994) |
|
Net Loss on OREO operations | $ | (2,578) |
|
| $ | (4,360) |
|
| $ | (11,364) |
|
| $ | (10,205) |
|
(CHARGE-OFFS) RECOVERIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential charge-offs, net |
| (4,414) |
|
|
| (7,483) |
|
|
| (14,149) |
|
|
| (15,374) |
|
Commercial charge-offs, net |
| 722 |
|
|
| (11,674) |
|
|
| (18,447) |
|
|
| (27,896) |
|
Construction charge-offs, net |
| 211 |
|
|
| (2,178) |
|
|
| 282 |
|
|
| (8,022) |
|
Consumer and finance leases charge-offs, net |
| (10,353) |
|
|
| (11,661) |
|
|
| (30,225) |
|
|
| (31,592) |
|
Total charge-offs, net |
| (13,834) |
|
|
| (32,996) |
|
|
| (62,539) |
|
|
| (82,884) |
|
TOTAL CREDIT LOSSES (1) | $ | (16,412) |
|
| $ | (37,356) |
|
| $ | (73,903) |
|
| $ | (93,089) |
|
LOSS RATIO PER CATEGORY (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
| 0.57 | % |
|
| 1.27 | % |
|
| 0.66 | % |
|
| 0.82 | % |
Commercial |
| 0.06 | % |
|
| 1.26 | % |
|
| 0.82 | % |
|
| 1.01 | % |
Construction (3) |
| (0.47) | % |
|
| 7.71 | % |
|
| 0.05 | % |
|
| 9.57 | % |
Consumer |
| 1.92 | % |
|
| 2.57 | % |
|
| 1.95 | % |
|
| 2.37 | % |
TOTAL CREDIT LOSS RATIO (4) |
| 0.72 | % |
|
| 1.83 | % |
|
| 1.08 | % |
|
| 1.49 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Equal to net loss on OREO operations plus charge-offs, net. | |||||||||||||||
(2) Calculated as net charge-offs plus market adjustments, impairments, and gains (losses) on sales of OREO divided by average loans and repossessed assets. | |||||||||||||||
(3) For the quarter ended September 30, 2019, recovies of construction loans exceeded charge-offs. | |||||||||||||||
(4) Calculated as net charge-offs plus net loss on OREO operations divided by average loans and repossessed assets. | |||||||||||||||
|
154155
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 last several years. The Corporation has established, and continues to enhance, procedures based on legal and regulatory requirements that are designed to ensure compliance with all applicable statutory and regulatory requirements. The Corporation has a Compliance Director who reports to the Chief Risk Officer and is responsible for the oversight of regulatory compliance and implementation of an enterprise-wide compliance risk assessment process. The Compliance division has officer roles in each major business area with direct reporting relationshipsresponsibilities to the Corporate Compliance Group.
Concentration Risk
The Corporation conducts its operations in a geographically concentrated area, as its main market is Puerto Rico. However, the Corporation has diversified its geographical risk, as evidenced by its operations in the Virgin Islands and in Florida. Of the total gross loan portfolio held for investment of $8.7$9.0 billion as of September 30, 2018,2019, the Corporation had credit risk of approximately 74% has credit risk concentration in Puerto Rico, 20%21% in the United States, and 6%5% in the Virgin Islands.
Update to the Puerto Rico Fiscal Situation
Economy Indicators and Projections
A significant portion of our financial activities and credit exposure is concentrated in the Commonwealth of Puerto Rico, which has been in an economic recession since 2006 that has beenwas exacerbated by the effects of Hurricanes Irma and Maria in 2017. The revised version ofBased on the Newmost recent information available included in the Fiscal Plan submitted by the Puerto Rico government and certified by the PROMESA oversight board in October 2018,on May 9, 2019 (the “New Fiscal Plan”), the Puerto Rico government projects a contractiongrowths in Puerto Rico’s gross national product (“GNP”) of 8.0% for fiscal year 2018, followed by projected growths of 7.9%4.0% and 5.5%1.5% for fiscal years 2019 and 2020, respectively. Such projected growth was based on an assumption that over $82 billionrespectively, and a contraction of disaster relief funding will enter the economy of Puerto Rico from federal and private sources. Of the total disaster relief funding of $82 billion, estimated amounts of approximately $66 billion are to be used0.9% for public assistance, $3 billion for individual assistance, $8 billion for private and business insurance pay outs, and $5 billion is related to other federal funding. On July 30, 2018, HUD approved a $1.5 billion disaster recovery plan submitted by the Puerto Rico government that primarily focuses on the restoration of damaged and destroyed homes, businesses and infrastructure. The disaster recovery action plan includes the following activities: (i) housing ($1 billion) – for rebuilding and repairs of damaged properties, rental assistance, and appliances, (ii) economic revitalization ($145 million) – for eligible businesses to help-revitalize the post-disaster economy, including through grants, and (iii) infrastructure ($100 million) – for repairs of the damaged infrastructure in Puerto Rico.fiscal year 2021.
155
The Puerto Rico Economic Activity Index (the “EDB-EAI”) in August 2019 was 121.1, a decrease of 0.6% compared to August 2018, was 121.9, close to the pre-hurricane levels of 122.1 in August 2017,third negative growth after eleven year-over-year consecutive increments, and had no changea 0.4% increase when compared to July 2018.2019. The EDB-EAI is a coincident index of economic activity for Puerto Rico made up of four indicators (non-farm payroll employment,(cement sales, gasoline consumption, electric power generation cement sales and gasoline consumption)non-farm payroll employment). The cement sales for August 20182019 totaled 1.21.1 million of 94-pound bags, an increase of 0.6%1.3% over the prior month, but an annual decline of 7.3%. Estimated gasoline consumption in August 2019 was 74.4 million gallons, a 7.6% increase when compared with July 2019, and a decrease of 5.5% compared to the same period in 2018. Electric power generation for August 2019 totaled 1,598.4 million kilowatt-hours, an increase of 0.3% over the prior month, and an annual increase of 23.4%. Estimated gasoline consumption in August 2018 was 75.7 million gallons, a 9.2% decrease when compared with July 2018, and a decrease of 4.9% compared to the same period in 2017. Electric power generation for August 2018 totaled 1,519.8 million kilowatt-hours, a decrease of 2.2% over the prior month, and an annual reduction of 10.9%5.1% compared with the same period in 2017. The revised version2018. Total non-farm payroll employment for August 2019 averaged 877,100 employees, a downturn of the New Fiscal Plan projects that the hurricanes will create a spike in inflation0.2% compared to July 2019, but an annual increase of 1.6% compared with the same period in fiscal year 2018, with subsequent average increases of about 1.49% over the next six years, until fiscal year 2023.2018. The seasonally adjusted unemployment rate in Puerto Rico was 7.7% in August 2019, compared to 8.5% in August 2018. The average of the labor force participation rate in Puerto Rico was 44.86% from 1990 until 2018, reaching an all-time high of 49.8% in February 2007 and a record low of 38.50% in October 2017. Based on information published by the United States Department of Labor, the labor force estimate was 1.08 million people as of August 2019, a reduction of 0.13% when compared with August 2018. The New Fiscal Plan projects an 8.4% decline in population over the next six years. The New Fiscal Plan projects that inflation rates will reach 1.09%, 1.43%, 1.47%, 1.46% and 1.47% for fiscal years 2020 through 2024, respectively.
156
Based on information published by the Puerto Rico Treasury, the net revenues of the Puerto Rico government’s General Fund in September 2018,2019 totaled $985.5 million, an increase of $152.5 million or 18.3% when compared with September 2018. The net revenue to 10.6% in September 2017.
GDB Liquidation Plan
On July 14, 2017, the PROMESA oversight board authorizedGeneral Fund for the GDB to pursue the restructuring of its debts under Title VI of PROMESA and conditionally certified the GDB’s Restructuring Support Agreement (“RSA”) under the relevant provisions of Title VI. The PROMESA oversight board’s decision was in response to a request from Puerto Rico’s Fiscal Agency and Financial Advisory Authority, dated June 30, 2017, in which the agency noted that the proposed restructuring, along with certain related settlements contemplated by the RSA, will result in an efficient wind downfirst three months of the GDB’s operations and a comprehensive financial restructuringfiscal year 2019-20 (July – September) was $2.8 billion an increase of $563.4 million or 25.1%, compared with the same period of the GDB’s obligations. The RSA provides for the organized and consensual restructuring of a substantial portion of the GDB’s liabilities, including the GDB public bonds, deposit claims by municipalities and certain non-public entities, and claims under certain GDB-issued letters of credit and guarantees. In exchange for releasing the GDB from liability relating to these claims, the claim-holders will receive new bonds to be issued by a new entity.previous fiscal year.
On April 20, 2018, the PROMESA oversight board approved the new GDB fiscal plan. The new GDB fiscal plan authorizes the recently amended terms of RSA. It also paves the way for the GDB’s operational wind-down, provides for a simplified transaction structure, and ensures equal treatment of creditors. It also offers municipalities offset rights against their deposit claims.
New Fiscal Plan
The New Fiscal Plan approved by the PROMESA oversight board as revised on October 23, 2018, (the “New Fiscal Plan”),May 9, 2019 uses a six-year horizon and projects a six-year cumulativean 8.4% decline in population over the next six years (when compared to Fiscal Year 2018) with the assumption that the low historical rate of 10.7%.immigration in Puerto Rico will continue. In addition, the revised New Fiscal Plan established an annual emergency reserve of $130 million for 10 years. As mentioned above, itThe New Fiscal Plan also assumes $82approximately $83 billion in disaster relief funding and projects thatto create a $30 billiontemporary fiscal surplus will be generated through fiscal year 2033.2024. The New Fiscal Plan includes and maintains a series of structural reforms in areas such as: (i) human capital and labor,labor; (ii) ease of doing business,business; (iii) power sector reform,reform; and (iv) infrastructure reform. The New Fiscal Plan also proposes fiscal measures projectedprojects that around $83 billion of disaster relief funding in total, from federal and private sources, will be disbursed in the reconstruction effort. It will provide funding for individuals (e.g., for the reconstruction of houses, personal expenditures related to drive $12.4 billion in increased revenuesthe hurricane, such as clothing and reduced expenditures through fiscal year 2023supplies) and, project that structural reformsthe public (e.g., for the reconstruction of major infrastructure, roads, and schools), and will drive a cumulative 1.21% increase in growth by Fiscal year 2058.
On May 10, 2018, the Puerto Rico governor, proposedbe used to cover part of the Commonwealth of Puerto Rico’s budget(the “Commonwealth”) share of the cost of disaster relief funding (recipients often must match some portion of federal public assistance spend). Approximately $49 billion of the Commonwealth’s share is estimated to come from the Federal Emergency Management Administration’s Disaster Relief Fund for public assistance, hazard mitigation, mission assignments, and individual assistance. An estimated $8 billion will come from private and business insurance pay outs, and $6 billion is related to other federal funding. The New Fiscal Plan includes approximately $20 billion of funding from the Community Development Block Grants Disaster Relief program (“CDBG”), of which approximately $2.4 billion is estimated to be allocated to offset the Commonwealth’s and its entities’ expected cost-share requirements. This portion of CDBG funding will go towards covering part of the approximate 10% cost share burden on expenditures attributable to the Commonwealth, PREPA, Puerto Rico Aqueduct and Sewer Authority, and the Highways and Transportation Authority from fiscal year 2018-2019. The proposed consolidated budget amounts2019 to $25,323 million and comes from the following sources:
·$8,730 million from General Fund
·$8,106 million from Federal Funds
·$7,455 million from Revenue Funds
·$402 million from Special State Funds
·$630 million from Other Governmental Funds
156
The recommended General Fund budget amounted to $8,730 million, a net decrease of $832 million when compared with the budget approved for the fiscal year 2017-2018. On2025, given statutory requirements regarding the other hand, the Federal Funds includedtimeline of CDBG spending. The New Fiscal Plan also allocates $1.8 billion for Commonwealth-funded cost share, which includes $100 million per year from fiscal year 2020 to fiscal year 2025 to cover local costs in the proposed budget show an increase of $1,773 million or 28% more compared with the budget for fiscal year 2017-2018. However,event that fewer CDBG funds than anticipated become available.
On May 9, 2019, the PROMESA oversight board concludedannounced that it designated all of the island’s 78 municipalities as Covered Territorial Instrumentalities subject to the requirements of PROMESA. A group of 10 municipalities will be used as a pilot for assessing and enhancing municipal financial and budgetary practices, and for developing economic development strategies to address municipal fiscal challenges. As part of the pilot, the 10 municipalities will receive technical assistance from the PROMESA oversight board and participate in working meetings and listening sessions to receive feedback from stakeholders. The 10 municipalities were selected based upon a combination of factors, such as fiscal challenges, impact of the reduction of transfers from the Central Government, and their experience implementing innovative and creative initiatives and collaborating with other municipalities. As of September 30, 2019, the Corporation does not have credit exposure to these 10 municipalities. In addition, the PROMESA oversight board determined that the Governor must provide the PROMESA oversight board with an instrumentality fiscal plan and an instrumentality budget for CRIM.
Fiscal Budget
On July 1, 2019, the PROMESA oversight board announced that it certified a fiscal year 2020 consolidated budget of $20.2 billion, which covers the General Fund, Special Revenue Fund and Federal Funds. The $9.1 billion General Fund, which is the fund the government uses for its day-to-day operations, increases by about 3.4% from the previous fiscal year, reflecting the need to cover healthcare costs in light of the reduction of federal Medicaid appropriations, and an increased focus on public safety. The $3.5 billion in Special Revenue Funds, which is comprised of revenue the government generates from fees and services dedicated to particular uses, reflects a more than 30% increase. The $7.6 billion in Federal Funds, reflecting a more than 17% decline in expected funding from the U.S. Government, primarily as a result of reduced appropriations to fund Puerto Rico’s Medicaid program. The budget includes spending in areas such as healthcare ($4.3 billion), education ($2.9 billion), pension payments (“pay-as-you -go or PayGo”) ($2.6 billion), public safety ($1.1 billion) and employer social security contributions ($46 million).
The government’s payroll expenses under the 2020 consolidated budget decrease 11% across the three funds, to $3.8 billion. The General Fund budget decrease reflects an approximate 10% reduction from the previous year in the government’s back office expenses. The General Fund budget also includes reductions of approximately 30% in professional services expenses and approximately 13% in spending for the Legislature. Moreover, the PROMESA oversight board reduced its own budget by 11% to fund payroll increases for the Department of Health and Emergency Medical Services, as well as funds to cover salary increases for firefighters.
Fiscal Situation Recent Developments
157
Several preliminary agreements have been executed between the PROMESA oversight board and various creditors of the Puerto Rico government, including pensioners and bondholders, including the restructuring of the GDB outstanding note obligations under Title VI of PROMESA, which was completed at a 55% recovery rate. In addition, the COFINA plan of adjustment under Title III proceedings was completed and provides in principle for an aggregate debt reduction of approximately one third of COFINA debt outstanding and savings of $17.5 billion in future debt service payments. Senior COFINA bondholders received a 93% recovery, while junior bondholders received a 53% recovery (an average recovery rate of approximately 70%). The Puerto Rico government and the PROMESA oversight board reached a restructuring agreement with a substantial portion of PREPA bondholders that, if eventually executed, would reduce PREPA’s debt service by approximately $3.0 billion or 40% over the next few years and represent a recovery rate of approximately 67.5%. Other preliminary agreements have been reached for smaller government issuers (i.e. PRIDCO) that include broad debt haircuts, as well as moratoriums on the payment of principal for a period of two years and maturity extensions.
On June 16, 2019, the PROMESA oversight board entered into a plan support agreement (“PSA”) with certain bondholders of the Puerto Rico government that provides a framework for a plan of adjustment to address $35 billion of claims against the Puerto Rico government. The PSA provides for more than a 60% average haircut for all $35 billion claims, a 36% haircut on pre-2012 General Obligation (GO) bonds, and a 27% haircut on Public Building Authority (PBA) bonds. Moreover, the 2012 and 2014 GO bond issuers have a settlement option of receiving a recovery rate of 45% and 35%, respectively. The deal, which has been rejected by the Puerto Rico government, will reduce the amount of Commonwealth-related bonds outstanding to less than $12 billion and will cut debt service payments by half over the next 30 years to $21 billion from $43 billion.
On September 27, 2019, the PROMESA oversight board filed its proposed Plan of Adjustment (“The Plan”) with the U.S. District Court for the District of Puerto Rico, which has jurisdiction over PROMESA, to restructure $35 billion of debt and other claims against the Commonwealth of Puerto Rico, budget for fiscal year 2018-2019 does not complythe Public Building Authority (PBA), and the Employee Retirement System (ERS); and more than $50 billion of pension liabilities. The Plan provides a framework to reduce the Commonwealth of Puerto Rico’s $35 billion of total liabilities – bonds and other claims – by more than 60%, to $12 billion. Combined with the Fiscalrestructuring of COFINA debt earlier in 2019, the Plan seeks to reduce the Commonwealth’s annual debt service to just under 9% of own-source revenues, down from almost 30% of government revenues prior to PROMESA. In addition, the PROMESA oversight board published a comprehensive independent analysis of the Government of Puerto Rico’s pension systems, as required under Section 211 of PROMESA. The report evaluates the fiscal and economic impact of the pension cash flows, including the pension liabilities and funding strategy, sources of funding, existing benefits and their sustainability, and the system’s legal structure and operational arrangements. The Plan seeks reductions from bondholders providing, on average, a more than a 60% blended reduction in total Commonwealth liabilities. In terms of pensions, the Plan establishes an independent pension reserve trust intended to ensure PayGo benefits can be paid regardless of the economic or political situation. It includes an 8.5% pension reduction for retirees earning over $1,200 per month. The Plan, combined with the completed COFINA debt restructuring, would reduce the maximum annual amount of government net-tax supported debt service from $4.2 billion to $1.5 billion. The Plan would reduce the combined debt service of the Commonwealth and COFINA from $82 billion to $44 billion over a 30-year period.
The Plan has five main elements of debt restructuring: (i) the debt of the central government; (ii) claw back claims against the Commonwealth; (iii) PBA bonds; (iv) ERS bonds and (v) general unsecured claims against the Commonwealth, PBA, and ERS and the Commonwealth’s pension liabilities. It includes the following specific recovery terms:
-A 36% reduction for holders of general obligation (“GO”) bonds issued before 2012
-A 28% reduction for holders of PBA bonds issued before 2012
-A 87% reduction for holders of ERS bonds
The Plan also provides an option for holders of bonds issued after 2011, which debt has been challenged as unconstitutional. The settlement offer includes the following terms for settling bondholders:
-A 55% to 65% reduction for holders of challenged GO bonds and Commonwealth guaranteed claims
-A 42% reduction for holders of challenged PBA bonds
The Plan builds on the Plan Support Agreement announced in June and negotiated with holders of approximately $3 billion in claims. As of the Plan filing date, the Plan includes support from holders of approximately $4 billion in claims, representing 54% of claims from PBA bonds issued before 2012 and 22% of all GO and PBA claims, making the Plan Support Agreement effective.
As contemplated in the Plan Support Agreement, the PROMESA oversight board approved on April 19, 2018. On June 29, 2018,and certified the filing of a voluntary petition under PROMESA’s Title III for PBA, to enable the restructuring of the PBA claims through the Plan.
The PROMESA oversight board stated that because ofit hopes the Puerto Rico government’s failureTitle III court will be in position to enact labor reform, includingconfirm the repeal of the law on unjustified work dismissals ( Law 80), it had certified a new revised version of the New Fiscal Plan that reflects, among others changes, a reduction of the projected 30-year surplus of the central government to $14.4 billion from the previous projection between $39 billion to $40 billion, the elimination of Christmas bonuses for public employees, and lower funding for infrastructure and municipalities.in 2020.
Other Developments
158
On June 30, 2018,April 23, 2019, the PROMESA oversight board certifiedfiled a revised budget for fiscal year 2019 that outlines expenditurespetition with the U.S. Court of $8,757 millionAppeals for the General Fund and $20,663 million forFirst Circuit to review the consolidated budget.
On July 5, 2018, the Puerto Rico government filed a lawsuit seeking declaratory judgment that clarifies the PROMESA oversight board’s power over the Commonwealth’s budget.
On August 7, 2018, the U.S. District Judge Laura Taylor Swain ruledCourt ruling on February 15, 2019 that the PROMESA oversight board had been unconstitutionally appointed because its seven members are principal U.S. officers and should have been selected by the U.S. President and confirmed by the U.S. Senate as required by the Appointments Clause. In addition, the PROMESA oversight board requested, pursuant to Federal Rule of Appellate Procedure 41(d), that the Court extend the stay of its mandate, pending the Supreme Court’s final disposition, which allows the members of the PROMESA oversight board to continue operations until May 16, 2019. In the petition, the PROMESA oversight board also requested that the Court resolve the motion by May 3, 2019. While the above-mentioned Court ruling validated the PROMESA oversight board’s actions on Puerto Rico’s bankruptcy-like process under PROMESA, it stayed its ruling for 90 days to give the U.S. Congress the opportunity to either validate the existing board or reconstitute a new one to comply with the Appointments Clause.
On May 6, 2019, a U.S. Appeals Court gave the PROMESA oversight board another 60 days to allow for the constitutional reappointment of its members by President Donald Trump and the Senate with an expiration date of July 15, 2019.
On June 18, 2019, President Donald Trump sent the renominations of the seven (7) board members to the Senate. On the same day, the PROMESA oversight board requested the First Circuit to extend the stay pending its petition to the Supreme Court.
On July 4, 2019, the U.S. Court of Appeals for the First Circuit extended indefinitely the stay that allows the PROMESA oversight board to operate until the U.S. Supreme Court reviews the five cases involving the constitutionality of its members. On October 15, 2019, the U.S. Supreme Court heard oral arguments in the appeal. Although a decision has not been made, the powercourt agreed to enforce fiscal disciplineexpedite the review and decision of the case.
On July 24, 2019, Governor Ricardo Rosello Nevares announced his resignation as the governor of Puerto Rico effective August 2, 2019 at 5:00p.m. The resignation came after 12 days of protests and disruptions due to scandal involving leaked private communications, as well as corruption investigations and arrests within his administration. Consistent with the provisions regarding succession to the governor in the Constitution of Puerto Rico, the Secretary of Justice, Wanda Vazquez was sworn in as the new Governor of Puerto Rico at 5 p.m. on Wednesday, August 7, 2019.
On July 25, 2019, FEMA released a notification under release number HQ-19-078 announcing its decision to reinstate the manual drawdown process for the Commonwealth of Puerto Rico. The letter confirmed that effective immediately, the Commonwealth of Puerto Rico must receive approval from the agency to drawdown all grant funds for hurricanes Irma and Maria. The manual drawdown process will require the Government of Puerto Rico to submit funding drawdown requests on behalf of municipalities and state agencies prior to receiving FEMA grant funding. Additionally, the drawdown request must be accompanied with supporting documentation to certify the amount being requested for drawdown is eligible, allowable, and reasonable and in alignment with federal procurement regulations.
On August 2, 2019, HUD announced that it will appoint a federal financial monitor to oversee the disbursement and use of the nearly $20 billion allocated to Puerto Rico through the budgetary process, but lacks authority to demand changes in law.aforementioned CDBG.
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Exposure to Puerto Rico Government
As of September 30, 2018,2019, the Corporation had $221.4$204.8 million of direct exposure to the Puerto Rico government, its municipalities and public corporations, compared to $214.5$214.6 million as of December 31, 2017.2018. As of September 30, 2018,2019, approximately $192.0$182.5 million of the exposure consisted of loans and obligations of municipalities in Puerto Rico that are supported by assigned property tax revenues and for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment, compared to $184.6$191.9 million as of December 31, 2017.2018. Approximately 75%76% of the Corporation’s municipality exposure consisted primarily of senior priority obligations concentrated in three of the largest municipalities in Puerto Rico. TheseThe 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. TheDuring the second quarter of 2019, the PROMESA oversight board has not designated anyannounced the designation of the Commonwealth’s 78 municipalities as covered entitiesinstrumentalities under PROMESA. However, whileMeanwhile, the revisedlatest fiscal plan certified by the PROMESA oversight board did not contemplate a restructuring of the debt of Puerto Rico’s municipalities but the plan did call for the gradual elimination of budgetary subsidies provided to municipalities. Furthermore, municipalities are also likely to be affected by the negative economic and other effects resulting from expense, revenue or cash management measures taken to address the Puerto Rico government’s fiscal and liquidity shortfalls, as well as measures included in fiscal plans of other government entities. In addition to municipalities, the total direct exposure also included a $6.7 million loan to a unit of the central government, and a $14.7$14.0 million loan to an affiliate of PREPA. The Corporation’s total direct exposure also includedPREPA and obligations of the Puerto Rico government, specifically bonds of the Puerto Rico Housing Finance Authority, at an amortized cost of $8.1$8.3 million as part of its available-for-sale investment securities portfolio which were recorded on its books at a fair(fair value of $6.9$7.2 million as of September 30, 2018.2019).
The following table details the Corporation’s total direct exposure to the Puerto Rico Government as of September 30, 2019 according to their maturities: | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| As of September 30, 2019 | |||||||
|
|
| Investment |
|
|
|
|
|
|
|
| Portfolio |
|
|
|
|
| Total | |
|
|
| (Amortized cost) |
|
| Loans |
|
| Exposure |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
| ||||||||
Puerto Rico Housing Finance Authority: |
|
|
|
|
|
|
|
| |
After 5 to 10 years | $ | 4,000 |
| $ | - |
| $ | 4,000 | |
After 10 years |
| 4,280 |
|
| - |
|
| 4,280 | |
Total Puerto Rico Housing Finance Authority |
| 8,280 |
|
| - |
|
| 8,280 | |
|
|
|
|
|
|
|
|
|
|
Public Corporations: |
|
|
|
|
|
|
|
| |
Affiliate of the Puerto Rico Electric Power Authority: |
|
|
|
|
|
|
|
| |
After 1 to 5 years |
| - |
|
| 13,998 |
|
| 13,998 | |
Total Public Corporations |
| - |
|
| 13,998 |
|
| 13,998 | |
|
|
|
|
|
|
|
|
|
|
Municipalities: |
|
|
|
|
|
|
|
| |
Due within one year |
| 321 |
|
| 21,120 |
|
| 21,441 | |
After 1 to 5 years |
| 8,264 |
|
| 9,209 |
|
| 17,473 | |
After 5 to 10 years |
| 56,512 |
|
| 13,508 |
|
| 70,020 | |
After 10 years |
| 73,579 |
|
| - |
|
| 73,579 | |
Total Municipalities |
| 138,676 |
|
| 43,837 |
|
| 182,513 | |
Total Direct Government Exposure | $ | 146,956 |
| $ | 57,835 |
| $ | 204,791 | |
|
|
157160
The following table details the Corporation’s total direct exposure to the Puerto Rico Government according to their maturities: | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| As of September 30, 2018 | |||||||
|
|
| Investment |
|
|
|
|
|
|
|
| Portfolio |
|
|
|
|
| Total | |
|
|
| (Amortized cost) |
|
| Loans |
|
| Exposure |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
| ||||||||
Central Government: |
|
|
|
|
|
|
|
| |
After 1 to 5 years | $ | - |
| $ | 6,689 |
| $ | 6,689 | |
Total Central Government |
| - |
|
| 6,689 |
|
| 6,689 | |
|
|
|
|
|
|
|
|
|
|
Puerto Rico Housing Finance Authority: |
|
|
|
|
|
|
|
| |
After 5 to 10 years |
| 4,013 |
|
| - |
|
| 4,013 | |
After 10 years |
| 4,111 |
|
| - |
|
| 4,111 | |
Total Puerto Rico Housing Finance Authority |
| 8,124 |
|
| - |
|
| 8,124 | |
|
|
|
|
|
|
|
|
|
|
Public Corporations: |
|
|
|
|
|
|
|
| |
Affiliate of the Puerto Rico Electric Power Authority: |
|
|
|
|
|
|
|
| |
After 1 to 5 years |
| - |
|
| 14,654 |
|
| 14,654 | |
Total Public Corporations |
| - |
|
| 14,654 |
|
| 14,654 | |
|
|
|
|
|
|
|
|
|
|
Municipalities: |
|
|
|
|
|
|
|
| |
After 1 to 5 years |
| 6,096 |
|
| 32,156 |
|
| 38,252 | |
After 5 to 10 years |
| 53,006 |
|
| 15,000 |
|
| 68,006 | |
After 10 years |
| 85,697 |
|
| - |
|
| 85,697 | |
Total Municipalities |
| 144,799 |
|
| 47,156 |
|
| 191,955 | |
Total Direct Government Exposure | $ | 152,923 |
| $ | 68,499 |
| $ | 221,422 | |
|
|
158
In addition, as of September 30, 2018,2019, the Corporation had $113.3$108.0 million in exposure to residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority.PRHFA, compared to $112.1 million as of December 31, 2018. Residential mortgage loans guaranteed by the Puerto Rico Housing Finance AuthorityPRHFA are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. The Puerto Rico government guarantees up to $75 million of the principal under the mortgage loan insurance program. According to the most recently-released audited financial statements of the Puerto Rico Housing Finance Authority,PRHFA, as of June 30, 2016, the Puerto Rico Housing Finance Authority’sPRHFA’s mortgage loans insurance program covered loans in an aggregate amount of approximately $576 million. The regulations adopted by the Puerto Rico Housing Finance AuthorityPRHFA require the establishment of adequate reserves to guarantee the solvency of the mortgage loan insurance fund. As of June 30, 2016, the most recent date as to which information is available, the Puerto Rico Housing Finance AuthorityPRHFA had a restricted net position for such purposes of approximately $77.4 million.
As of September 30, 2018,2019, the Corporation had $694.6$768.2 million of public sector deposits in Puerto Rico, compared to $490.3$677.3 million as of December 31, 2017.2018. Approximately 37%39% is from municipalities and municipal agencies in Puerto Rico and 63%61% is from public corporations and the central government and agencies in Puerto Rico.
Exposure to USVI government
The Corporation has operations in the USVI and has credit exposure to USVI government entities.
The USVI is experiencing a number of fiscal and economic challenges, exacerbated by the impact of Hurricane Irma in the third quarter of 2017, thatand could adversely affect the ability of its public corporations and instrumentalities to service their outstanding debt obligations. Preliminary data released by the U.S. Department of Commerce, Bureau of Economic Analysis, showed that the USVI real GDP decreased by 1.7% in 2017 after increasing 0.9% in 2016. Despite recent improvements in general fund revenues, several challenges remain present, including the need to close the USVI government structural deficit gap, implement measures to address the solvency of the USVI government employee retirement system, and regain access to capital markets at reasonable terms. 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 September 30, 2018,2019, the Corporation had $69.4$61.1 million in loans to USVI government instrumentalities and public corporations, compared to $70.4$55.8 million as of December 31, 2017.2018. Of the amount outstanding as of September 30, 2018,2019, public corporations of the USVI owed approximately $46.1$37.9 million and an independent instrumentality of the USVI government owed approximately $23.2 million. As of September 30, 2018,2019, all loans were currently performing and up to date on principal and interest payments payments. The Corporation cannot predict at this time the ultimate effect that the current fiscal situation of the USVI government will have on the economic activity and the Corporation’s clients. Adverse developments in the economic activity of this region could result in adverse effects on the Corporation’s profitability and credit quality.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in conformity with GAAP, which requires the measurement of the financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a greater impact on a financial institution’s performance than the effects of general levels of inflation. Interest rate movements are not necessarily correlated with changes in the prices of goods and services.
159161
BASIS OF PRESENTATION
The Corporation has included in this Form 10-Q the following financial measures that are not recognized under GAAP, which are referred to as non-GAAP financial measures:
1.Net interest income, interest rate spread, and net interest margin are reported excluding the changes in the fair value of derivative instruments and on a tax-equivalent basis in order to provide to investors additional information about the Corporation’s net interest income that management uses and believes should facilitate comparability and analysis.analysis of the periods presented. The changes in the fair value of derivative instruments have no effect on interest due or interest earned on interest-bearing liabilities or interest-earning assets, respectively. The tax-equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a marginal income tax rate. Income from tax-exempt earning assets is increased by an amount equivalent to the taxes that would have been paid if this income had been taxable at statutory rates. Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread, and net interest margin on a fully tax-equivalent basis. This adjustment puts all earning assets, most notably tax-exempt securities and tax-exempt loans, on a common basis that facilitates comparison of results to the results of peers. See “Results of Operations – Net Interest Income” above for the table that reconciles the non-GAAP financial measure “net interest income excluding fair value changes and on a tax-equivalent basis” with net interest income calculated and presented in accordance with GAAP. The table also reconciles the non-GAAP financial measures “net interest spread and margin excluding fair value changes and on a tax-equivalent basis” with net interest spread and margin calculated and presented in accordance with GAAP.
2.The tangible common equity ratio and tangible book value per common share are non-GAAP financial measures generally used by the financial community to evaluate capital adequacy. Tangible common equity is total equity less preferred equity, goodwill, core deposit intangibles, and other intangibles, such as the purchased credit card relationship intangible asset and the insurance customer relationship intangible.intangible asset. Tangible assets are total assets less goodwill, core deposit intangibles, and other intangibles, such as the purchased credit card relationship intangible asset and the insurance customer relationship intangible.intangible asset. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase method of accounting for mergers and acquisitions. Accordingly, the Corporation believes that disclosure of these financial measures is useful to investors. Neither tangible common equity nor tangible assets, or the related measures, should be considered in isolation or as a substitute for stockholders’ equity, total assets, or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets, and any other related measures may differ from that of other companies reporting measures with similar names. See “Risk Management – Capital” above for a reconciliation of the Corporation’s tangible common equity and tangible assets.
3.Adjusted provision for loan and lease losses and the ratiosratio of the adjusted provision for loan and lease losses to net charge-offs and the adjusted allowance for loan and lease losses to total loans held for investment, are non-GAAP financial measures that exclude the effects related to: (a)to the net loan loss reserve releasesrelease of $6.4 million for the first nine months of 2019, and $2.8 million and $11.2 million recorded infor the third quarter and nine-month period ended September 30, 2018, respectively, and a $66.5 million charge to the provision for loan and lease losses in the quarter and nine-month period ended September 30, 2017 in connection withresulting from revised estimates of the qualitative reserves associated with the effects of Hurricanes Irma and Maria and (b) the qualitative allowancereserve associated with the effects of Hurricanes Maria and Irma of $24.9 million, and $66.5 million as of September 30, 2018 and 2017, respectively.Irma. Management believes that this information helps investors understand the adjusted measures without regard to items that are not expected to reoccur with any regularity or may reoccur at uncertain times and in uncertain amounts on reported results and facilitates comparisons with prior periods. See below for the reconciliation of the adjusted provision for loan and leases losses and the ratio of the adjusted provision for loan and lease losses to net charge-offs.
4.Adjusted net income that excludesreflects the effectseffect of the following exclusions:
The $3.0 million accelerated discount accretion resulting from the early payoff of an acquired commercial mortgage loan in the third quarter of 2019.
The benefit of $0.4 million and $1.2 million for the quarter and nine-month period ended September 30, 2019 resulting from hurricane-related insurance recoveries related to: (a) netto impairments, repairs and maintenance costs incurred on facilities affected by Hurricane Irma in the Virgin Islands.
The gain of $0.5 million recorded in the third quarter of 2018 resulting from hurricane-related insurance proceeds in excess of fixed-asset impairment charges.
162
Net loan loss reserve releases of $6.4 million for the first nine months of 2019, as well as $2.8 million and $11.2 million recordedfor the quarter and nine-month period ended September 30, 2018, respectively, resulting from revised estimates of the hurricane-related qualitative reserves.
The $2.3 million expense recovery recognized in the first quarter of 2019 related to the employee retention benefit payment received by the Bank under the Disaster Tax Relief and Airport Extension Act of 2017, as amended.
Exclusion of hurricane-related expenses of $0.5 million and $2.8 million in the third quarter and nine-month period ended September 30, of 2018, respectively, and a $66.5 million charge to the provision for loan and lease losses in the quarter and nine-month period ended September 30, 2017 in connection with estimates of the qualitative reserves associated with the effects of Hurricanes Irma and Maria; (b) a gain of $0.5 million from hurricane-related insurance proceeds for the quarter and nine-month period ended September 30, 2018; (c) hurricane-related expenses of $0.5 million and $0.6 million for the quarter ended September 30, 2018 and 2017, respectively, and $2.8 million and $0.6 million for the nine-month period ended September 30, 2018 and 2017, respectively; (d) expected insurance recoveries of $1.7 million for the quarter and nine-month period ended September 30, 2017 for employees’ compensation and rental expenses that the Corporation incurred when Hurricanes Irma and Maria precluded employees from working in 2017; (e) a partial recovery of $0.4 million of previously recorded OTTI charges on debt securities for the nine-month period ended September 30, 2017; (f) arespectively.
The gain of $2.3 million for the nine-month period ended September 30, 2018 and a gain of $1.4 million for the quarter and nine-month period ended September 30, 2017 on the repurchase and cancellation of trust-preferred securities; (g)$23.8 million in TRuPs recorded in the first quarter of 2018.
The $0.5 million OTTI chargescharge on debt securitiesprivate label MBS recorded in the third quarter of $12.22019.
The tax-related effects of all the pre-tax items mentioned in the above bullets as follows:
-Tax expense of $1.1 million in the third quarter and first nine months of 2019 related to the accelerated discount accretion from the payoff of an acquired commercial mortgage loan (calculated based on the statutory tax rate of 37.5% for the 2019).
160
nine-month period ended September 30, 2017; (h) costs-Tax expense of $0.1 million and $0.4 million in the third quarter and first nine months of 2019, respectively, and $0.2 million for the third quarter and nine-month period ended September 30, 2017, respectively, associated with secondary offeringsfirst nine months of the Corporation’s common stock by certain stockholders; (i) a tax benefit of $13.2 million recorded for the nine-month period ended September 30, 20172018 related to the change inbenefit of hurricane-related insurance recoveries (calculated based on the statutory tax statusrate of certain subsidiaries from taxable corporations to limited liability companies;37.5% for 2019 and (j) the tax-related effect of all the items mentioned above as follows:39% for 2018).
·
-Tax expense of $2.4 million in the first nine months of 2019 and $1.1 million and $4.4 million in the third quarter and first nine months of 2018, respectively, related to reserve releases associated with the hurricane-related qualitative allowance, and the tax benefit of $25.8 million related to the charge to the provision recorded in the third quarter and first nine months of 2017 associated with the establishment of the qualitative reserve for the effects of Hurricanes Irma and Maria (calculated based on the statutory tax rate of 37.5% for 2019 and 39%) for 2018).
·-Tax expensebenefit of $0.2 million associated with the gain from hurricane-related insurance proceeds recordedand $1.1 million in the third quarter and first nine months of 2018, (calculated based on the statutory tax rate of 39%).
·Tax benefit of $0.2 million for each of the quarters ended September 30, 2018 and 2017, and tax benefit of $1.1 million and $0.2 million for the nine-month period ended September 30, 2018 and 2017, respectively, related toassociated with hurricane-related expenses (calculated based on the statutory tax rate of 39%) for 2018).
·-No tax benefit or expense was recorded for the OTTI charge on gainsprivate label MBS recorded in the third quarter of 2019 at the international banking entity subsidiary level.
-The employee retention benefit recognized in the first quarter of 2019 will not be treated as taxable income by virtue of the Disaster Tax Relief and Airport Extension Act of 2017.
-The gain realized on the repurchase and cancellation of trust-preferred securities and for costs related to the secondary offerings that wereTRuPs in 2018 recorded at the holding company level had no effect on the income tax expense in the first nine months of 2018 and the quarter and nine-month period ended September 30, 2017. In addition. no tax expense/benefit was recorded for the partial recovery of previous OTTI charges on non-performing bonds sold in the first nine months of 2017 and OTTI charges recorded in the first nine months of 2017 on tax-exempt bonds of the GDB and the Puerto Rio Public Buildings Authority. 2018.
Management believes that adjustments to net income of items that are not reflective of core operating performance, are not expected to reoccur with any regularity or may reoccur at uncertain times and in uncertain amounts facilitates comparisons with prior periods and provides an alternate presentation of the Corporation’s performance.
The Corporation uses these non-GAAP financial measures and believes that these non-GAAP financial measures enhance the ability of analysts and investors to analyze trends in the Corporation’s business and understand the performance of the Corporation. In addition, the Corporation may utilize these non-GAAP financial measures as a guide in its budgeting and long-term planning process. Any analysis of these non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP.
163
See “Overview of Results of Operations” above for the reconciliation of the non-GAAP financial measure “adjusted net income” to the GAAP financial measure. The following tables reconcile the non-GAAP financial measures “adjusted provision for loan and lease losses,”losses” and “adjusted provision for loan and lease losses to adjusted net charge-offs” and “adjusted allowance to total loans held for investment, ratio,” to the GAAP financial measures for the third quartersquarter of 2018 and nine-month periods ended September 30,, 2018 2019 and 2017:2018:
Nine-Month Period Ended September 30, 2019 |
| As reported (GAAP) |
| Hurricane-related Qualitative Reserve Release |
| Adjusted (Non-GAAP) |
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Provision for loan and lease losses | $ | 31,752 | $ | 6,425 | $ | 38,177 |
|
Residential mortgage |
| 9,387 |
| - |
| 9,387 |
|
Commercial mortgage |
| 3,854 |
| - |
| 3,854 |
|
Commercial and industrial |
| (11,068) |
| 3,422 |
| (7,646) |
|
Construction |
| (815) |
| - |
| (815) |
|
Consumer |
| 30,394 |
| 3,003 |
| 33,397 |
|
|
|
|
|
|
|
|
|
| ||||||
Quarter ended September 30, 2018 |
| As reported (GAAP) |
| Hurricane-related Qualitative Reserve Release |
| Adjusted (Non-GAAP) |
(Dollars in thousands) |
|
|
|
|
|
|
Provision for loan and lease losses | $ | 11,524 | $ | 2,781 | $ | 14,305 |
Residential mortgage |
| 360 |
| - |
| 360 |
Commercial mortgage |
| 10,111 |
| - |
| 10,111 |
Commercial and industrial |
| 2,281 |
| - |
| 2,281 |
Construction |
| 1,308 |
| 627 |
| 1,935 |
Consumer |
| (2,536) |
| 2,154 |
| (382) |
|
|
|
|
|
|
|
Nine-Month Period ended September 30, 2018 |
| As reported (GAAP) |
| Hurricane-related Qualitative Reserve Release |
| Adjusted (Non-GAAP) |
(Dollars in thousands) |
|
|
|
|
|
|
Provision for loan and lease losses | $ | 51,604 | $ | 11,245 | $ | 62,849 |
Residential mortgage |
| 4,046 |
| 374 |
| 4,780 |
Commercial mortgage |
| 20,956 |
| 1,925 |
| 22,881 |
Commercial and industrial |
| 3,012 |
| 4,020 |
| 7,032 |
Construction |
| 6,579 |
| 729 |
| 7,308 |
Consumer |
| 16,651 |
| 4,197 |
| 20,848 |
|
|
|
|
|
|
|
161164
2018 Third Quarter |
| As reported (GAAP) |
|
| Hurricane-related Qualitative Allowance Release |
| Adjusted (Non-GAAP) |
(Dollars in thousands) |
|
|
|
|
|
|
|
Provision for loan and lease losses | $ | 11,524 |
| $ | 2,781 | $ | 14,305 |
Construction Loans |
| 1,308 |
|
| 627 |
| 1,935 |
Consumer Loans |
| (2,536) |
|
| 2,154 |
| (382) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for Loan and Lease | |||||
| Losses to Net Charge-Offs | |||||
| (GAAP to Non-GAAP reconciliation) | |||||
|
| Nine-Month Period Ended | ||||
|
| September 30, 2019 | ||||
| Provision for Loan |
|
| Net Charge-Offs | ||
| and Lease Losses |
|
| |||
(In thousands) |
|
|
|
|
|
|
Provision for loan and lease losses and net charge-offs (GAAP) | $ | 31,752 |
|
| $ | 62,539 |
Less Special items: |
|
|
|
|
|
|
Hurricane-related qualitative reserve release |
| 6,425 |
|
|
| - |
Provision for loan and lease losses and net charge-offs, |
|
|
|
|
|
|
excluding special items (Non-GAAP) | $ | 38,177 |
|
| $ | 62,539 |
|
|
|
|
|
|
|
Provision for loan and lease losses to net charge-offs (GAAP) |
| 50.77 | % |
|
|
|
Provision for loan and lease losses to net charge-offs, |
|
|
|
|
|
|
excluding special items (Non-GAAP) |
| 61.05 | % |
|
|
|
| |||||||
2017 Third Quarter |
| As reported (GAAP) |
|
| Hurricane-related Provision for Loan and Lease Losses |
| Adjusted (Non-GAAP) |
(Dollars in thousands) |
|
|
|
|
|
|
|
Provision for loan and lease losses | $ | 75,013 |
| $ | (66,490) | $ | 8,523 |
Residential mortgage Loans |
| 23,321 |
|
| (13,717) |
| 9,604 |
Commercial mortgage Loans |
| 17,590 |
|
| (18,095) |
| (505) |
Commercial and industrial Loans |
| (1,079) |
|
| (7,992) |
| (9,071) |
Construction Loans |
| 242 |
|
| (808) |
| (566) |
Consumer Loans |
| 34,939 |
|
| (25,878) |
| 9,061 |
2018 First Nine-Months |
| As reported (GAAP) |
| Hurricane-related Qualitative Allowance Release |
| Adjusted (Non-GAAP) |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses | $ | 51,604 | $ | 11,245 | $ | 62,849 |
|
|
|
Residential mortgage Loans |
| 4,406 |
| 374 |
| 4,780 |
|
|
|
Commercial mortgage Loans |
| 20,956 |
| 1,925 |
| 22,881 |
|
|
|
Commercial and industrial Loans |
| 3,012 |
| 4,020 |
| 7,032 |
|
|
|
Construction Loans |
| 6,579 |
| 729 |
| 7,308 |
|
|
|
Consumer Loans |
| 16,651 |
| 4,197 |
| 20,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 First Nine-Months |
| As reported (GAAP) |
| Hurricane-related Provision for Loan and Lease Losses |
| Adjusted (Non-GAAP) |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
Provision for loan and lease losses | $ | 118,551 | $ | (66,490) | $ | 52,061 |
|
|
Residential mortgage Loans |
| 43,480 |
| (13,717) |
| 29,763 |
|
|
Commercial mortgage Loans |
| 30,654 |
| (18,095) |
| 12,559 |
|
|
Commercial and industrial Loans |
| (8,019) |
| (7,992) |
| (16,011) |
|
|
Construction Loans |
| 1,496 |
| (808) |
| 688 |
|
|
Consumer Loans |
| 50,940 |
| (25,878) |
| 25,062 |
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for Loan and Lease |
|
| Provision for Loan and Lease | |||||||||
| Losses to Net Charge-Offs |
|
| Losses to Net Charge-Offs | |||||||||
| (GAAP to Non-GAAP reconciliation) |
| (GAAP to Non-GAAP reconciliation) | ||||||||||
| Quarter Ended |
|
| Nine-Month Period Ended | |||||||||
| September 30, 2018 |
|
| September 30, 2018 | |||||||||
| Provision for Loan |
| Net Charge-Offs |
| Provision for Loan |
|
| Net Charge-Offs | |||||
| and Lease Losses |
|
| and Lease Losses |
|
| |||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses and net charge-offs (GAAP) | $ | 11,524 |
|
| $ | 32,996 |
| $ | 51,604 |
|
| $ | 82,884 |
Less Special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane-related qualitative reserve release |
| 2,781 |
|
|
| - |
|
| 11,245 |
|
|
| - |
Provision for loan and lease losses and net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding special items (Non-GAAP) | $ | 14,305 |
|
| $ | 32,996 |
| $ | 62,849 |
|
| $ | 82,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses to net charge-offs (GAAP) |
| 34.93 | % |
|
|
|
|
| 62.26 | % |
|
|
|
Provision for loan and lease losses to net charge-offs, |
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding special items (Non-GAAP) |
| 43.35 | % |
|
|
|
|
| 75.83 | % |
|
|
|
|
|
|
|
|
|
|
|
162165
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for Loan and Lease |
| Provision for Loan and Lease | ||||||||||
| Losses to Net Charge-Offs |
| Losses to Net Charge-Offs | ||||||||||
| (GAAP to Non-GAAP reconciliation) |
| (GAAP to Non-GAAP reconciliation) | ||||||||||
| Quarter Ended |
|
| Nine-Month Period Ended | |||||||||
| September 30, 2018 |
|
| September 30, 2018 | |||||||||
| Provision for Loan |
| Net Charge-Offs |
| Provision for Loan |
|
| Net Charge-Offs | |||||
| and Lease Losses |
|
| and Lease Losses |
|
| |||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses and net charge-offs (GAAP) | $ | 11,524 |
|
| $ | 32,996 |
| $ | 51,604 |
|
| $ | 82,884 |
Less special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane-related reserve release |
| 2,781 |
|
|
| - |
|
| 11,245 |
|
|
| - |
Provision for loan and lease losses and net charge-offs, |
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding special items (Non-GAAP) | $ | 14,305 |
|
| $ | 32,996 |
| $ | 62,849 |
|
| $ | 82,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses to net charge-offs (GAAP) |
| 34.93 | % |
|
|
|
|
| 62.26 | % |
|
|
|
Provision for loan and lease losses to net charge-offs, |
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding special items (Non-GAAP) |
| 43.35 | % |
|
|
|
|
| 75.83 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Provision for Loan and Lease |
|
| Provision for Loan and Lease | |||||||||
| Losses to Net Charge-Offs |
|
| Losses to Net Charge-Offs | |||||||||
| (GAAP to Non-GAAP reconciliation) |
| (GAAP to Non-GAAP reconciliation) | ||||||||||
| Quarter Ended |
|
| Nine-Month Period Ended | |||||||||
| September 30, 2017 |
|
| September 30, 2017 | |||||||||
| Provision for Loan |
| Net Charge-Offs |
| Provision for Loan |
|
| Net Charge-Offs | |||||
| and Lease Losses |
|
| and Lease Losses |
|
| |||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses and net charge-offs (GAAP) | $ | 75,013 |
|
| $ | 17,628 |
| $ | 118,551 |
|
| $ | 93,284 |
Less special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane-related provision for loan and lease losses |
| (66,490) |
|
|
| - |
|
| (66,490) |
|
|
| - |
Provision for loan and lease losses and net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding special items (Non-GAAP) | $ | 8,523 |
|
| $ | 17,628 |
| $ | 52,061 |
|
| $ | 93,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses to net charge-offs (GAAP) |
| 425.54 | % |
|
|
|
|
| 127.09 | % |
|
|
|
Provision for loan and lease losses to net charge-offs, excluding special |
|
|
|
|
|
|
|
|
|
|
|
|
|
items (Non-GAAP) |
| 48.35 | % |
|
|
|
|
| 55.81 | % |
|
|
|
|
|
|
|
|
|
|
|
163
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance for Loan and Lease Losses |
|
|
|
|
|
|
|
| |||||
| to Total Loans Held For Investment |
|
|
|
|
|
|
|
| |||||
| (GAAP to Non-GAAP reconciliation) |
|
|
|
|
|
|
|
| |||||
| As of September 30, 2018 |
|
|
|
|
|
|
|
| |||||
| Allowance for Loan |
| Total Loans Held for Investment |
|
|
|
| |||||||
| and Lease Losses |
|
|
|
| |||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses and total loans held for investment (GAAP) | $ | 200,563 |
|
| $ | 8,716,953 |
|
|
|
|
|
|
|
|
Less special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane-related qualitative allowance for loan and lease losses |
| (24,875) |
|
|
| - |
|
|
|
|
|
|
|
|
Allowance for loan and lease losses and total loans held for investment, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding special items (Non-GAAP) | $ | 175,688 |
|
| $ | 8,716,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses to total loans held for investment (GAAP) |
| 2.30 | % |
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses to total loans held for investment, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding special items (Non-GAAP) |
| 2.02 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance for Loan and Lease |
|
|
|
|
|
|
|
| |||||
| Losses to Total Loans Held For Investment |
|
|
|
|
|
|
|
| |||||
| (GAAP to Non-GAAP reconciliation) |
|
|
|
|
|
|
|
| |||||
| As of September 30, 2017 |
|
|
|
|
|
|
|
| |||||
| Allowance for Loan |
| Total Loans Held for Investment |
|
|
|
| |||||||
| and Lease Losses |
|
|
|
| |||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses and total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans held for investment (GAAP) | $ | 230,870 |
|
| $ | 8,877,214 |
|
|
|
|
|
|
|
|
Less special items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane-related qualitative allowance for loan and lease losses |
| (66,490) |
|
|
| - |
|
|
|
|
|
|
|
|
Allowance for loan and lease losses and total loans held for investment, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding special items (Non-GAAP) | $ | 164,380 |
|
| $ | 8,877,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses to total loans held for investment (GAAP) |
| 2.60 | % |
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses to total loans held for investment, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding special items (Non-GAAP) |
| 1.85 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding market risk to which the Corporation is exposed, see the information contained in Part I – Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.”
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
First BanCorp.’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of First BanCorp.’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2018.2019. Based on this evaluation, as of the end of the period covered by this Form 10-Q, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.
Internal Control over Financial Reporting
There have been no changes to the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting, other than as described below under the caption “Remediation of Prior Year Material Weakness.”reporting.
Remediation of Prior Year Material Weakness
Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to ensure timely decisions regarding required disclosures. During the evaluation of disclosure controls and procedures and our internal control over financial reporting as of December 31, 2017, which was conducted during the preparation of our financial statements that were included in the 2017 Annual Report on Form 10-K, management identified a material weakness in internal control over financial reporting relating to management’s review and approval of the appropriateness of certain assumptions used to estimate the allowance for loan losses for commercial loans. Specifically, management’s estimate did not incorporate the actual historical loss rate for loans classified substandard in the commercial loan portfolios, that instead was determined based on a blended loss rate using aggregate historical charge-offs and portfolio balance data for loans rated as special mention, substandard, and doubtful. As a result, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our disclosure controls and procedures and our internal control over financial reporting were ineffective. Upon identification of the material weakness and under the direction of our Chief Executive Officer and Chief Financial Officer, we developed a plan to remediate the material weakness that included the following:
·Implementing a revised procedure to determine the historical loss rates to be applied to the different commercial loan regulatory-based credit risk categories (i.e., pass, special mention, substandard and doubtful).
·Implementing a quarterly sensitivity analysis using actual historical loss rates for loans risk-rated pass, special mention and substandard to compare the results of such sensitivity to the calculated reserves under the revised procedure, and establishing sensitivity thresholds that could trigger further reviews and/or adjustments prior to reaching a conclusion as to the adequacy of the allowance for loan losses for the Corporation’s commercial loan portfolios.
·Engaging an independent third party to assess the allowance framework and the appropriateness of the assumptions used in the analysis.
165166
The Corporation has addressed the material weakness that had been identified as of December 31, 2017 and has strengthened the Corporation’s internal control over financial reporting by implementing enhancements to the methodology related to the calculation of the allowance for commercial loans. During the second quarter of 2018, an independent third party engaged by the Corporation completed its assessment of the framework for the determination of the allowance for loan losses for the commercial loan portfolios and the appropriateness of assumptions used in the analysis. The Corporation reviewed the assessment and decided to implement certain enhancements, which include, among others, a revised procedure whereby historical loss rates for each commercial loan regulatory-based credit risk category (i.e., pass, special mention, substandard, and doubtful) are now calculated using the historical charge-offs and portfolio balances over their average loss emergence period (the “raw loss rate”) for each credit risk classification. However, when not enough loss experience is observed in a particular risk-rated category and the calculation results in a loss rate for such risk-rated category that is lower than the loss rate of a less severe risk-rated category, the Corporation now uses the loss rate of such less severe category. As a result of these revisions, the Corporation’s method for determining the allowance for loan losses differs from the method that it used as of March 31, 2018, which was to allocate historical losses and portfolio balances of special mention loans to pass or substandard categories based on the historical proportion of loans in this risk category that ultimately cured or became uncollectible, and the method that it used as of December 31, 2017, which was to use blended loss rates for commercial loans risk-rated special mention, substandard and doubtful. In addition, as a result of the enhancements incorporated in the second quarter of 2018, the Corporation does not need to conduct the sensitivity analysis that it previously conducted pursuant to the initial remediation plan. To effect these changes, the Corporation updated the underlying process and supporting documentation and has been following the above-described revised procedures since they were adopted in the second quarter of 2018.
The Corporation’s management tested the revised procedures, documentation, and operating effectiveness controls around the calculation of the allowance for loan losses and underlying assumptions during the last two quarters and has discussed these issues and remediation efforts in detail with the Audit Committee of the Corporation’s Board of Directors. Our Chief Executive Officer and our Chief Financial Officer believe that, as a result of the aforementioned changes in internal control over financial reporting, the Corporation has remediated the material weakness.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 1A. RISK FACTORS
The Corporation’s business, operating results and/or the market price of our common and preferred stock may be significantly affected by a number of factors. For a detailed discussion of certain risk factors that could affect the Corporation’s future operations, financial condition or results for future periods, see the risk factors below and in Part I, Item 1A.,1A, “Risk Factors,” in the 20172018 Annual Report on Form 10-K. These risk factors, and others, could also cause actual results to differ materially from historical results or the results contemplated by the forward-looking statements contained in this report. Also refer to the discussion in “Part“Forward Looking Statements” and Part I, Item 2.,2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this report for additional information that may supplement or update the discussion of risk factors in the Corporation’s 20172018 Annual Report on Form 10-K.
There have been no material changes from those risk factors previously disclosed in Part I, Item 1A., “Risk Factors,” in the 2017 Form 10-K. Additional risks and uncertainties that are not currently known to the Corporation or are currently deemed by the Corporation to be immaterial also may materially adversely affect the Corporation’s business, financial condition or results of operations.
Our pending acquisition of Banco Santander Puerto Rico (“BSPR”) exposes us to increased regulatory, business, reputational, and other risks that may adversely affect our business and our future results of operations.
Our pending acquisition of BSPR in an all cash stock purchase, which was announced on October 21, 2019, subjects us to increased risks, including the following:
our ability to obtain all necessary regulatory approvals for the acquisition on terms acceptable to us;
the risk that, during the time period when regulatory approval is being sought, customers of BSPR may establish relationships with different financial institutions or that prospective customers may delay engaging our services or seek alternative financial services;
significant costs, expenses, and resources associated with the acquisition and the diversion of our management’s time and attention that could otherwise have been devoted to our existing operations or to alternative transactions;
the risk that, if the acquisition is completed, the businesses will not be integrated successfully;
the risk that the cost savings and any other synergies from the acquisition may not be fully realized or may take longer to realize than expected; and
potential disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers.
Achieving the anticipated benefits of the BSPR acquisition depends upon obtaining all necessary regulatory approvals. Such regulatory approvals may not be granted on terms that are acceptable to us, or at all. There can be no assurance as to when or whether these regulatory approvals will be received, or the conditions associated with any approval.
The financial services industry in the markets in which we operate is highly competitive. During the time period when regulatory approval is being sought, customers of BSPR may establish relationships with different banks or other financial institutions for a number of reasons, including any expectation of disruptions in customer service or uncertainty regarding how the acquisition will affect them. If that occurs, we may not obtain the number of customers from the acquisition that we currently anticipate obtaining. Further, potential customers may delay or defer engaging the Corporation’s services or may seek out other banks of financial institutions due to the uncertainty of the acquisition of BSPR.
If the necessary regulatory approvals are obtained and the transaction closes, the acquisition will require integration of systems, procedures, and personnel of BSPR into FirstBank. This integration process is complicated and time consuming and may also be disruptive to the customers of BSPR. If the integration process is not conducted successfully and with minimal effect on the acquired business and its customers, the Corporations may lose customers or employees of BSPR, the Corporation may not realize the anticipated economic benefits of the acquisition within the expected time frame, or at all. The Corporation may also experience greater than anticipated customer losses even if the integration process is successful.
The pending acquisition of BSPR has resulted in significant financial, legal and other professional service fees and has required substantial time and attention from our management, all of which could have been devoted to our existing operations or other opportunities. In addition, activities surrounding the satisfaction of all conditions to closing and other obligations under the purchase agreement, and the integration process may result in further significant expenses or may further divert our management’s time and attention. Even if the
167
Corporation is successful in its integration of BSPR, delays in the process could have a material adverse effect on our revenues, expenses, operating results and financial condition.
The Corporation made assumptions and estimates concerning the fair value of assets and liabilities to be acquired in evaluating the potential acquisition and the purchase price. Actual values of these assets and liabilities could differ from the Corporation’s assumptions and estimates, which could result in the Corporation’s inability to achieve the anticipated benefits of the transaction.
Lastly, events outside of our control, including changes in the regulatory environment and laws, as well as economic trends, could adversely affect our ability to realize the expected benefits from this acquisition.
The occurrence of any of these risks could adversely affect our business, revenue, expenses, operating results and financial condition.
Uncertainty as to the Consequences of the Resignation of Puerto Rico’s Governor on the Corporation’s Financial Condition and Results of Operations.
On July 24, 2019, the governor of Puerto Rico, Ricardo Rosello Nevares, resigned his position effective August 2, 2019, in an unprecedented response to 12 days of protests that disrupted the activities of the Puerto Rico government after a leak of communications between the governor and some of his senior advisors that many Puerto Ricans regarded as offensive. The leaks and various arrests relating to allegations of fraud in the days leading up to the governor’s resignation resulted in various resignations by other senior government officials. Consistent with the provisions regarding succession to the governor in the Constitution of Puerto Rico, the Secretary of Justice, Wanda Vazquez was sworn in as the new Governor of Puerto Rico at 5 p.m. Wednesday, August 7, 2019. It is still too early to assess whether the change in the Puerto Rico government’s leadership and the allegations of fraud by Puerto Rico government officials will affect the Commonwealth’s economic or fiscal condition, including its effect on the receipt of federal funding and ongoing debt restructuring efforts pursuant to PROMESA. Deterioration in economic conditions, or any other negative outcome related to the current political environment in Puerto Rico, may adversely affect the Corporation’s financial condition and results of operations.
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
a)Not applicable.
b)Not applicable.
c)Purchase of equity securities by the issuer and affiliated purchasers. The following table provides information relating to the Corporation’s purchases of shares of its common stock in the third quarter of 2018.2019.
|
|
|
|
|
|
|
|
|
|
| Maximum |
|
|
|
|
|
|
|
|
| Total Number of |
|
| Number of Shares |
|
|
|
|
|
|
|
|
| Shares Purchased |
|
| That May Yet be |
|
|
|
|
|
| Average |
|
| as Part of Publicly |
|
| Purchased Under |
|
|
| Total number of |
|
| Price |
|
| Announced Plans |
|
| These Plans or |
|
Period |
| shares purchased (1) |
|
| Paid |
|
| Or Programs |
|
| Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2018 |
| 1,591 |
| $ | 8.15 |
|
| - |
|
| - |
|
August 2018 |
| 411 |
|
| 8.86 |
|
| - |
|
| - |
|
September 2018 |
| 6,550 |
|
| 9.10 |
|
| - |
|
| - |
|
Total |
| 8,552 |
| $ | 8.91 |
|
| - |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Reflects the withholding of shares of common stock to cover minimum tax withholding obligations from the common stock upon vesting of restricted stock. The Corporation intends to continue to satisfy statutory tax withholding obligations in connection with the vesting of outstanding restricted stock through the withholding of shares. |
| |||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Maximum |
|
|
|
|
|
|
|
|
| Total Number of |
|
| Number of Shares |
|
|
|
|
|
|
|
|
| Shares Purchased |
|
| That May Yet be |
|
|
|
|
|
| Average |
|
| as Part of Publicly |
|
| Purchased Under |
|
|
| Total number of |
|
| Price |
|
| Announced Plans |
|
| These Plans or |
|
Period |
| shares purchased (1) |
|
| Paid |
|
| Or Programs |
|
| Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2019 |
| 1,471 |
| $ | 10.93 |
|
| - |
|
| - |
|
August 2019 |
| 586 |
|
| 9.36 |
|
| - |
|
| - |
|
September 2019 |
| 3,131 |
|
| 9.93 |
|
| - |
|
| - |
|
Total |
| 5,188 |
| $ | 10.15 |
|
| - |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Reflects the withholding of shares of common stock to cover minimum tax withholding obligations upon the vesting of restricted stock. The Corporation intends to continue to satisfy statutory tax withholding obligations in connection with the vesting of outstanding restricted stock through the withholding of shares. |
| |||||||||||
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168169
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
See the Exhibit Index below, which is incorporated by reference herein:
Exhibit Index
2.1 | |
31.1 |
|
31.2 |
|
32.1 | |
32.2 | |
| XBRL Instance Document. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. (1) |
101.SCH | XBRL Taxonomy Extension Schema Document (1) |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (1) |
101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document (1) |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document (1) |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (1) |
104 | The cover page of First BanCorp. Quarterly Report on Form 10-Q for the |
(1) | Filed herewith. |
169170
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized:
First BanCorp. | |
Registrant |
Date: November 8, | By: | /s/ Aurelio Alemán |
Aurelio Alemán | ||
President and Chief Executive Officer |
Date: November 8, | By: |
|
Orlando Berges | ||
Executive Vice President and Chief Financial Officer | ||
170171