Annual Report • Oct 13, 2023
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Download Source FileUNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-K/A
Amendment No. 1 (Mark one)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year EndedDecember 31, 2022 or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from ___ to _____
COMMISSION FILE NUMBER001-14793
FIRST BANCORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Puerto Rico66-0561882 (State or other jurisdiction of(I.R.S. Employer incorporation or organization)Identification No.)
1519 Ponce de León Avenue, Stop 2300908 San Juan,Puerto Rico(Zip Code)
(Address of principal executive office)
Registrant’s telephone number, including area code:
(787)729-8200
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered Common Stock ($0.10 par value)FBPNew York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes☑No☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes☐No☑ 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☐ ☐Smaller reporting company☐ Emerging growth company☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☑ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐No☑ The aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 2022 (the last trading day of the registrant’s most recently completed second fiscal quarter) was $2,373,329,883based on the closing price of $12.91 per share of the registrant’s common stock on the New York Stock Exchange on June 30, 2022. The registrant had no
nonvoting common equity outstanding as of June 30, 2022. For the purposes of the foregoing calculation only, the registrant has defined affiliates to include (a) the executive officers named in Part III of this Annual Report on Form 10-K; (b) all directors of the registrant; and (c) each shareholder, including the registrant’s employee benefit plans but excluding shareholders that file on Schedule 13G, known to the registrant to be the beneficial owner of 5% or more of the outstanding shares of common stock of the registrant as of June 30, 2022. The registrant’s response to this item is not intended to be an admission that any person is an affiliate of the registrant for any purposes other than this response.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:180,585,944shares as of February 21, 2023.
Portions of the definitive proxy statement relating to the registrant’s annual meeting of stockholders scheduled to be held on May 18, 2023 are incorporated by reference in response to Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K.Documents incorporated by reference:
Explanatory Note
First BanCorp. (the “Corporation”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) solely to correct clerical errors in the EDGARized version of the report titled “Report of the Independent Registered Public Accounting Firm” (the “Audit
Report”) provided by Crowe LLP (“Crowe”) in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed on February 28, 2023 (the “Original Annual Report”). The Audit Report in this Amendment is revised as follows:
the addressee is changed from stockholders to shareholders, the subtitle of the section titled “Critical Audit Matter” is changed from “Allowance for Credit Losses – Model and Macroeconomic Variables” to “Allowance for Credit Losses – Economic Forecasts and Macroeconomic Variables”, and the description of the critical audit matter assessment performed is updated to remove the reference to the model design and construction related to ACL. These revisions were inadvertently omitted in the EDGARized Audit Report included in the Original Annual Report and do not impact the opinion rendered on the financial statements as of December 31, 2022.
Pursuant to Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), this Amendment includes: Item 8 of Part II, “Financial Statements and Supplementary Data” in its entirety and without change from the Original Annual Report other than the corrections of the clerical errors in the Audit Report discussed above; and Item 15 of Part IV, including new certifications by our principal executive officer and principal financial officer.
This Amendment does not change any previously reported financial results or otherwise amend the Original Annual Report as previously filed, except as discussed above. Furthermore, this Amendment does not update or otherwise amend the Original Annual Report as originally filed for changes in events, estimates or other developments subsequent to the date of the filing of the Original Annual Report on February 28, 2023. This Amendment should be read in conjunction with the Original Annual Report and our other filings with the Securities and Exchange Commission.
2
Item 8. Financial Statements and Supplementary Data
FIRST BANCORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS| Report of Independent Registered Public Accounting Firm | | | (PCAOB No. | 173)….………………………….. | 4 |
| --- | --- | --- | --- | --- | --- |
| Management’s Report on Internal Control over Financial Reporting | | | ………………………………………… | | 6 |
| Consolidated Statements of Financial Condition | | ……………………………………………………………... | | | 7 |
| Consolidated Statements of Income | ……...…………………………………………………………………... | | | | 8 |
| Consolidated Statements of Comprehensive (Loss) Income | | | ……...………………………………………..… | | 9 |
| Consolidated Statements of Cash Flows | ……………………………………………………………………… | | | | 10 |
| Consolidated Statements of Changes in Stockholders’ Equity | | | ……………………………………………….. | | 11 |
| Notes to Consolidated Financial Statements | ………………………………………………………………….. | | | | 13 |
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of First BanCorp.
San Juan, Puerto Rico
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial condition of First BanCorp. (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive (loss) income, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
4
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses – Economic Forecasts and Macroeconomic Variables
As described in Notes 1 and 5 to the financial statements, the allowance for credit losses (“ACL”) for loans and finance leases is an accounting estimate of expected credit losses over the contractual life of financial assets carried at amortized cost and off-balancesheet credit exposures.
The calculation of the ACL for loans and finance leases, is primarily measured based on a probability of default / loss given default modeled approach. The estimate of the probability of default and loss given default assumptions uses economic forecasts and relevant current and forward-looking macroeconomic variables, such as: unemployment rate; housing and real estate price indices; interest rates; market risk factors; and gross domestic product, and considers conditions throughout Puerto Rico, the Virgin Islands, and the State of Florida. A significant amount of judgment is required to assess the reasonableness of the selection of economic forecasts and macroeconomic variables. Changes to these assumptions could have a material effect on the Company’s financial results.
The economic forecasts and current and forward-looking macroeconomic variables used contribute significantly to the determination of the ACL for loans and finance leases. We identified the assessment of economic forecasts and relevant macroeconomic variables as a critical audit matter as the impact of these judgments represents a significant portion of the ACL for loans and finance leases and because management’s estimate required especially subjective auditor judgment and significant audit effort, including the need for specialized skill.
The primary procedures we performed to address these critical audit matters included:
●Testing the effectiveness of controls over the evaluation of the selection of economic forecasts and the current and forwardlooking macroeconomic variables, including controls addressing:
oManagement’s review and approval of the economic forecasts and macroeconomic variables.
oManagement’s review of the reasonableness of the results of the selection of economic forecasts and macroeconomic variables used in the calculation.
●Substantively testing management’s process, including evaluating their judgments and assumptions, for economic forecast selection and macroeconomic variables, which included:
oEvaluation of reasonableness of economic forecasts selection.
oEvaluation of the completeness and accuracy of data inputs used as a basis for the adjustments relating to macroeconomic variables.
oEvaluation, with the assistance of professionals with specialized skill and knowledge, of the reasonableness of
management’s judgments related to the economic forecast and macroeconomic variables used in the determination of the ACL for loans. Among other procedures, our evaluation considered, evidence from internal and external sources, loan portfolio performance trends and whether such assumptions were applied consistently period to period.
oAnalytical evaluation of the variables period to period for directional consistency and testing for reasonableness.
/s/Crowe LLP
We have served as the Company’s auditor since 2018.
Fort Lauderdale, Florida February 28, 2023
Stamp No. E511055 of the Puerto Rico Society of Certified Public Accountants was affixed to the record copy of this report.
5
Management’s Report on Internal Control over Financial Reporting
To the Stockholders and Board of Directors of First BanCorp.:
First BanCorp.’s (the “Corporation”) internal control over financial reporting is a process designed and effected by those charged with governance, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Corporation’s internal control over financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management is responsible for establishing and maintaining effective internal control over financial reporting. Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2022, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control- Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2022, the Corporation’s internal control over financial reporting is effective based on the criteria established in Internal Control-Integrated Framework (2013).
The effectiveness of FirstBancorp.’s internal control over financial reporting as of December 31, 2022, has been audited by Crowe LLP, an independent public accounting firm, as stated in their accompanying report dated February 28, 2023.
First BanCorp.
/s/ Aurelio Alemán Aurelio Alemán President and Chief Executive Officer Date: February 28, 2023
/s/ Orlando Berges Orlando Berges Executive Vice President and Chief Financial Officer Date: February 28, 2023
6
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION| | | | | | | | | December 31, 2022 | | December 31, 2021 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| (In thousands, except for share information) | | | | | | | | | | | |
| ASSETS | | | | | | | | | | | |
| Cash and due from banks | | | | | | | | $ | 478,480 | $2,540,376 | |
| Money market investments: | | | | | | | | | | | |
| Time deposits with other financial institutions | | | | | | | | | 300 | | 300 |
| Other short-term investments | | | | | | | | | 1,725 | | 2,382 |
| Total money market investments | | | | | | | | | 2,025 | | 2,682 |
| Available-for-sale debt securities, at fair value: | | | | | | | | | | | |
| Securities pledged with creditors’ rights to repledge | | | | | | | | | 81,103 | | 321,180 |
| Other available-for-sale debt securities | | | | | | | | 5,518,417 | | 6,132,581 | |
| Total available-for-sale debt securities, at fair value (amortized cost 2022 - $ | | | | | 6,398,197 | ; | | | | | |
| 2021 - $ | 6,534,503; allowance for credit losses (“ACL”) of $ | | | 458as of December 31, 2022 | | | | | | | |
| and $1,105 | as of December 31, 2021) | | | | | | | 5,599,520 | | 6,453,761 | |
| Held-to-maturity debt securities, at amortized cost, net of ACL of $ | | | | 8,286 | as of December 31, 2022 and $ | | 8,571 | | | | |
| as of December 31, 2021 (fair value 2022 - $ | | | 427,115; 2021 - $ | 167,147 | ) | | | | 429,251 | | 169,562 |
| Equity securities | | | | | | | | | 55,289 | | 32,169 |
| Total investment securities | | | | | | | | 6,084,060 | | 6,655,492 | |
| Loans, net of ACL of $ | 260,464 | (2021 - $269,030 | ) | | | | | 11,292,361 | | 10,791,628 | |
| Mortgage loans held for sale, at lower of cost or market | | | | | | | | | 12,306 | | 35,155 |
| Total loans, net | | | | | | | | 11,304,667 | | 10,826,783 | |
| Accrued interest receivable on loans and investments | | | | | | | | | 69,730 | | 61,507 |
| Premises and equipment, net | | | | | | | | | 142,935 | | 146,417 |
| Other real estate owned (“OREO”) | | | | | | | | | 31,641 | | 40,848 |
| Deferred tax asset, net | | | | | | | | | 155,584 | | 208,482 |
| Goodwill | | | | | | | | | 38,611 | | 38,611 |
| Other intangible assets | | | | | | | | | 21,118 | | 29,934 |
| Other assets | | | | | | | | | 305,633 | | 234,143 |
| Total assets | | | | | | | | $18,634,484 | | $20,785,275 | |
| LIABILITIES | | | | | | | | | | | |
| Non-interest-bearing deposits | | | | | | | | $6,112,884 | | $7,027,513 | |
| Interest-bearing deposits | | | | | | | | 10,030,583 | | 10,757,381 | |
| Total deposits | | | | | | | | 16,143,467 | | 17,784,894 | |
| Securities sold under agreements to repurchase | | | | | | | | | 75,133 | | 300,000 |
| Advances from the Federal Home Loan Bank ("FHLB") | | | | | | | | | 675,000 | | 200,000 |
| Other borrowings | | | | | | | | | 183,762 | | 183,762 |
| Accounts payable and other liabilities | | | | | | | | | 231,582 | | 214,852 |
| Total liabilities | | | | | | | | 17,308,944 | | 18,683,508 | |
| Commitments and contingencies (See Note 29) | | | | | | | | | (nil) | | (nil) |
| STOCKHOLDERS’ EQUITY | | | | | | | | | | | |
| Common stock, $ | 0.10par value, authorized, | | 2,000,000,000 | shares;223,663,116 | shares issued; | 182,709,059 | | | | | |
| shares outstanding (2021 - | | 201,826,505 | shares outstanding) | | | | | | 22,366 | | 22,366 |
| Additional paid-in capital (See Note 1) | | | | | | | | | 970,722 | | 972,547 |
| Retained earnings, includes legal surplus reserve of $ | | | 168,484 | (2021 - $ | 137,591) | | | 1,644,209 | | 1,427,295 | |
| Treasury stock, at cost | 40,954,057 | shares (2021 - | 21,836,611 | shares) (See Note 1) | | | | | ( 506,979 ) | | ( 236,442 ) |
| Accumulated other comprehensive loss, net of tax of $ | | | 8,468 | as of December 31, 2022 (2021 - $ | | 9,786) | | | ( 804,778 ) | | ( 83,999 ) |
| Total stockholders’ equity | | | | | | | | 1,325,540 | | 2,101,767 | |
| Total liabilities and stockholders’ equity | | | | | | | | $18,634,484 | | $20,785,275 | |
| | | | The accompanying notes are an integral part of these statements. | | | | | | | | |
7
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
202220212020| Interest and dividend income: | | | | | | |
| --- | --- | --- | --- | --- | --- | --- |
| Loans | $ | 747,901 | $ | 719,153 | $ | 631,047 |
| Investment securities | | 102,922 | | 72,893 | | 58,547 |
| Money market investments and interest-bearing cash accounts | | 11,791 | | 2,662 | | 3,388 |
| Total interest and dividend income | | 862,614 | | 794,708 | | 692,982 |
| Interest expense: | | | | | | |
| Deposits | | 46,361 | | 41,482 | | 68,388 |
| Securities sold under agreements to repurchase | | 7,555 | | 9,963 | | 6,645 |
| Advances from FHLB | | 5,136 | | 8,199 | | 11,251 |
| Other borrowings | | 8,269 | | 5,135 | | 6,376 |
| Total interest expense | | 67,321 | | 64,779 | | 92,660 |
| Net interest income | | 795,293 | | 729,929 | | 600,322 |
| Provision for credit losses - expense (benefit): | | | | | | |
| Loans and finance leases | | 25,679 | | ( 61,720 ) | | 168,717 |
| Unfunded loan commitments | | 2,736 | | ( 3,568 ) | | 1,183 |
| Debt securities | | ( 719 ) | | ( 410 ) | | 1,085 |
| Provision for credit losses - expense (benefit) | | 27,696 | | ( 65,698 ) | | 170,985 |
| Net interest income after provision for credit losses | | 767,597 | | 795,627 | | 429,337 |
| Non-interest income: | | | | | | |
| Service charges and fees on deposit accounts | | 37,823 | | 35,284 | | 24,612 |
| Mortgage banking activities | | 15,260 | | 24,998 | | 22,124 |
| Net gain on investment securities | | - | | - | | 13,198 |
| Gain on early extinguishment of debt | | - | | - | | 94 |
| Insurance commission income | | 13,743 | | 11,945 | | 9,364 |
| Card and processing income | | 40,416 | | 36,508 | | 25,609 |
| Other non-interest income | | 15,850 | | 12,429 | | 16,225 |
| Total non-interest income | | 123,092 | | 121,164 | | 111,226 |
| Non-interest expenses: | | | | | | |
| Employees' compensation and benefits | | 206,038 | | 200,457 | | 177,073 |
| Occupancy and equipment | | 88,277 | | 93,253 | | 74,633 |
| Business promotion | | 18,231 | | 15,359 | | 12,145 |
| Professional service fees | | 47,848 | | 59,956 | | 52,633 |
| Taxes, other than income taxes | | 20,267 | | 22,151 | | 17,762 |
| Federal Deposit Insurance Corporation ("FDIC") deposit insurance | | 6,149 | | 6,544 | | 6,488 |
| Net (gain) loss on OREO operations | | ( 5,826 ) | | ( 2,160 ) | | 3,598 |
| Credit and debit card processing expenses | | 22,736 | | 22,169 | | 19,144 |
| Communications | | 8,723 | | 9,387 | | 8,437 |
| Merger and restructuring costs | | - | | 26,435 | | 26,509 |
| Other non-interest expenses | | 30,662 | | 35,423 | | 25,818 |
| Total non-interest expenses | | 443,105 | | 488,974 | | 424,240 |
| Income before income taxes | | 447,584 | | 427,817 | | 116,323 |
| Income tax expense | | 142,512 | | 146,792 | | 14,050 |
| Net income | $ | 305,072 | $ | 281,025 | $ | 102,273 |
| Net income attributable to common stockholders | $ | 305,072 | $ | 277,338 | $ | 99,597 |
| Net income per common share: | | | | | | |
| Basic | $ | 1.60 | $ | 1.32 | $ | 0.46 |
| Diluted | $ | 1.59 | $ | 1.31 | $ | 0.46 |
The accompanying notes are an integral part of these statements.
8
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME| | | Year Ended December 31, | | | |
| --- | --- | --- | --- | --- | --- |
| | 2022 | | 2021 | | 2020 |
| (In thousands) | | | | | |
| Net income | $305,072 | $ | 281,025 | $ | 102,273 |
| Other comprehensive (loss) income, net of tax: | | | | | |
| Available-for-sale debt securities: | | | | | |
| Net unrealized holding (losses) gains on debt securities | ( 718,582 ) | | ( 143,115 ) | | 61,791 |
| Reclassification adjustment for provision for credit loss expense | | - | | - | 368 |
| Reclassification adjustment for net gains included in net income on sales | | - | | - | ( 13,198 ) |
| Defined benefit plans adjustments: | |||||
|---|---|---|---|---|---|
| Net actuarial (loss) gain | ( 2,199 ) | 3,660 | ( 270 ) | ||
| Reclassification adjustment for amortization of net actuarial loss | 2 | 1 | - | ||
| Other comprehensive (loss) income for the year, net of tax | ( 720,779 ) | ( 139,454 ) | 48,691 | ||
| Total comprehensive (loss) income | $( 415,707 ) | $ | 141,571 | $150,964 |
Year Ended December 31,
202220212020 (In thousands)| Defined benefit plans adjustments: | | | | |
| --- | --- | --- | --- | --- |
| Net actuarial (loss) gain | $ | 1,319$ | ( 2,199 )$ | 162 |
| Reclassification adjustment for amortization of net actuarial loss | | ( 1 ) | - | - |
| Total income tax effect of items included in other comprehensive (loss) income | $ | 1,318$ | ( 2,199 )$ | 162 |
The accompanying notes are an integral part of these statements.
9
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
202220212020| (In thousands)Cash flows from operating activities: | | | | | |
| --- | --- | --- | --- | --- | --- |
| Net income | $305,072 | $ | 281,025 | $102,273 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortizationAmortization of intangible assets | 22,2898,816 | | 24,96511,407 | 20,0685,912 | |
| Provision for credit losses - expense (benefit)Deferred income tax expense (benefit) | 27,69654,216 | | 118,323( 65,698 ) | 170,985( 4,371 ) | |
| Stock-based compensationGain on early extinguishment of debt | 5,407 | - | 5,460- | 5,117 | ( 94 ) |
| Gain on sales of investment securitiesUnrealized gain on derivative instruments | ( 1,098 ) | - | ( 4,227 )- | ( 13,198 )( 5,635 ) | |
| Net gain on disposals or sales, and impairments of premises and equipment and other assetsNet gain on sales of loans and valuation adjustments | ( 5,498 ) | ( 706 ) | ( 14,791 )( 32 ) | ( 13,273 )( 215 ) | |
| Net amortization of discounts, premiums, and deferred loan fees and costsOriginations and purchases of loans held for sale | ( 214,962 )( 7,853 ) | | ( 503,200 )( 25,294 ) | ( 648,052 )( 8,602 ) | |
| Sales and repayments of loans held for saleAmortization of broker placement fees | 235,199 | 106 | 528,253218 | 659,349 | 537 |
| Net amortization of premiums and discounts on investment securities(Increase) decrease in accrued interest receivable | ( 11,340 )3,435 | | 26,5497,701 | 19,4106,419 | |
| Increase (decrease) in accrued interest payable(Increase) decrease in other assets | ( 2,437 )1,706 | | 24,344( 2,776 ) | ( 2,990 )( 5,018 ) | |
| Increase (decrease) increase in other liabilities | 20,437 | | ( 12,506 ) | 9,116 | |
| Net cash provided by operating activities | 440,485 | | 399,721 | 297,738 | |
| Cash flows from investing activities:Net (disbursements) repayments on loans held for investment | ( 603,853 ) | | 599,097 | ( 335,152 ) | |
| Proceeds from sales of loans held for investmentProceeds from sales of repossessed assets | 62,16846,281 | | 81,45855,867 | 35,2706,788 | |
| Proceeds from sales of available-for-sale debt securitiesPurchases of available-for-sale debt securities | ( 512,327 ) | - | ( 3,447,921 )- | ( 3,820,148 )1,195,250 | |
| Proceeds from principal repayments and maturities of available-for-sale debt securitiesPurchases of held-to-maturity debt securities | ( 289,784 )626,802 | | 1,445,873- | 1,277,762 | - |
| Proceeds from principal repayments and maturities of held-to-maturity debt securitiesAdditions to premises and equipment | ( 20,459 )32,153 | | ( 13,349 )12,677 | ( 16,070 )6,431 | |
| Proceeds from sales of premises and equipment and other assetsNet (purchases) redemptions of other investments securities | ( 23,637 )1,196 | | 5,322832 | 3,881 | 497 |
| Proceeds from the settlement of insurance claims - investing activitiesNet (payments) cash acquired in acquisition | | -- | ( 3,381 )550 | 406,626 | - |
| Net cash used in investing activitiesCash flows from financing activities: | ( 681,460 ) | | ( 1,262,975 ) | ( 1,238,865 ) | |
| Net (decrease) increase in depositsNet proceeds (repayments) of short-term borrowings | ( 1,706,118 )550,133 | | 2,472,579- | 1,767,441( 35,000 ) | |
| Repayments of long-term borrowingsProceeds from long-term borrowings | ( 500,000 )200,000 | | ( 240,000 )- | ( 95,282 ) | - |
| Proceeds from long-term reverse repurchase agreementsRepurchase of outstanding common stock | ( 277,769 ) | - | ( 216,522 )- | 200,000( 206 ) | |
| Dividends paid on common stockDividends paid on preferred stock | ( 87,824 ) | - | ( 65,021 )( 2,453 ) | ( 43,416 )( 2,676 ) | |
| Redemption of preferred stock- Series A through E | | - | ( 36,104 ) | | - |
| Net cash (used in) provided by financing activities | ( 1,821,578 ) | | 1,912,479 | 1,790,861 | |
| Net (decrease) increase in cash and cash equivalentsCash and cash equivalents at beginning of year | ( 2,062,553 )2,543,058 | | 1,049,2251,493,833 | 849,734644,099 | |
| Cash and cash equivalents at end of year | $480,505 | $ | 2,543,058 | $1,493,833 | |
| Cash and cash equivalents include: | |||
|---|---|---|---|
| Cash and due from banksMoney market instruments | $478,4802,025 | $2,540,3762,682 | $1,433,26160,572 |
| $480,505 | $2,543,058 | $1,493,833 |
The accompanying notes are an integral part of these statements.
10
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31,
202220212020 (In thousands, except per share information)
Preferred Stock:| Balance at beginning of year | $ | -$ | 36,104$ | 36,104 |
| --- | --- | --- | --- | --- |
| Redemption of Series A through E Preferred Stock | | - | ( 36,104 ) | - |
| Balance at end of year | | - | - | 36,104 |
| Common Stock: | |||
|---|---|---|---|
| Balance at beginning of year | 22,366 | 22,303 | 22,210 |
| Common stock issued under stock-based compensation plan | - | 63 | 93 |
| Balance at end of year | 22,366 | 22,366 | 22,303 |
| Additional Paid-In Capital | (See Note 1) | : | |||
|---|---|---|---|---|---|
| Balance at beginning of year | 972,547 | 965,385 | 960,342 | ||
| Stock-based compensation expense | 5,407 | 5,460 | 5,117 | ||
| Common stock reissued/issued under stock-based compensation plan | ( 7,365 ) | ( 63 ) | ( 93 ) | ||
| Restricted stock forfeited | 133 | 531 | 19 | ||
| Issuance costs of Series A through E Preferred Stock redeemed | - | 1,234 | - | ||
| Balance at end of year | 970,722 | 972,547 | 965,385 |
| Retained Earnings: | ||||||
|---|---|---|---|---|---|---|
| Balance at beginning of year | 1,427,295 | 1,215,321 | 1,221,817 | |||
| Impact of adoption of Accounting Standards Codification ("ASC" or "Codification") | ||||||
| Topic 326, "Financial Instruments - Credit Losses" ("ASC 326" or "CECL") | ( 62,322 ) | |||||
| Balance at beginning of period (as adjusted for impact of adoption of ASC 326) | 1,159,495 | |||||
| Net income | 305,072 | 281,025 | 102,273 | |||
| Dividends on common stock (2022 - $ | 0.46per share; 2021 - $ | 0.31per share; 2020 - $ | 0.20per share) | ( 88,158 ) | ( 65,364 ) | ( 43,771 ) |
| Dividends on preferred stock | - | ( 2,453 ) | ( 2,676 ) | |||
| Excess of redemption value over carrying value of Series A through E Preferred Stock redeemed | - | ( 1,234 ) | - | |||
| Balance at end of year | 1,644,209 | 1,427,295 | 1,215,321 |
| Treasury Stock (at cost) | (See Note 1) | : | |||
|---|---|---|---|---|---|
| Balance at beginning of year | ( 236,442 ) | ( 19,389 ) | ( 19,170 ) | ||
| Common stock repurchases (See Note 17) | ( 277,769 ) | ( 216,522 ) | ( 200 ) | ||
| Common stock reissued under stock-based compensation plan | 7,365 | - | - | ||
| Restricted stock forfeited | ( 133 ) | ( 531 ) | ( 19 ) | ||
| Balance at end of year | ( 506,979 ) | ( 236,442 ) | ( 19,389 ) |
| Accumulated Other Comprehensive (Loss) Income, net of tax: | |||||
|---|---|---|---|---|---|
| Balance at beginning of year | ( 83,999 ) | 55,455 | 6,764 | ||
| Other comprehensive (loss) income, net of tax | ( 720,779 ) | ( 139,454 ) | 48,691 | ||
| Balance at end of year | ( 804,778 ) | ( 83,999 ) | 55,455 | ||
| Total stockholders’ equity | $1,325,540 | $2,101,767 | $2,275,179 | ||
| The accompanying notes are an integral part of these statements. |
11
FIRST BANCORP.
INDEX TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS| | | PAGE |
| --- | --- | --- |
| Note 1 – | Nature of Business and Summary of Significant Accounting Policies | 13 |
| Note 2 – | Money Market Investments | 29 |
| Note 3 – | Debt Securities | 30 |
| Note 4 – | Loans Held for Investment | 39 |
| Note 5– | Allowance for Credit Losses for Loans and Finance Leases | 55 |
| Note 6– | Premises and Equipment | 58 |
| Note 7 – | Other Real Estate Owned | 58 |
| Note 8 – | Related-Party Transactions | 59 |
| Note 9– | Goodwill and Other Intangibles | 60 |
| Note 10 – | Non-Consolidated Variable Interest Entities (“VIE”) and Servicing Assets | 62 |
| Note 11 – | Deposits and Related Interest | 67 |
| Note 12 – | Securities Sold Under Agreements to Repurchase | 69 |
| Note 13 – | Advances from the Federal Home Loan Bank (“FHLB”) | 71 |
| Note 14 – | Other Borrowings | 72 |
| Note 15 – | Earnings per Common Share | 73 |
| Note 16 – | Stock-Based Compensation | 74 |
| Note 17 – | Stockholders’ Equity | 76 |
| Note 18 – | Other Comprehensive (Loss) Income | 78 |
| Note 19 – | Employee Benefit Plans | 79 |
| Note 20 – | Other Non-Interest Income | 84 |
| Note 21 – | Other Non-Interest Expenses | 84 |
| Note 22 – | Income Taxes | 85 |
| Note 23 – | Operating Leases | 88 |
| Note 24 – | Derivative Instruments and Hedging Activities | 90 |
| Note 25– | Fair Value | 93 |
| Note 26– | Revenue from Contracts with Customers | 98 |
| Note 27 – | Segment Information | 102 |
| Note 28 – | Supplemental Statement of Cash Flows Information | 105 |
| Note 29 – | Regulatory Matters, Commitments, and Contingencies | 106 |
| Note 30 – | First BanCorp. (Holding Company Only) Financial Information | 109 |
12
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of business First BanCorp. (the “Corporation”) is a publicly owned, Puerto Rico-chartered financial holding company organized under the laws of the Commonwealth of Puerto Rico in 1948. The Corporation is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Through its subsidiaries, including its banking subsidiary, FirstBank Puerto Rico (“FirstBank” or the “Bank”), the Corporation provides full-service commercial and consumer banking services, mortgage banking services, automobile financing, trust services, insurance agency services, and other financial products and services with operations in Puerto Rico, the United States, the U.S. Virgin Islands (the “USVI”), and the British Virgin Islands (the “BVI”). The Corporation has two wholly-owned subsidiaries: FirstBank Puerto Rico (“FirstBank” or the “Bank”), and FirstBank Insurance Agency, Inc. (“FirstBank Insurance Agency”). FirstBank is a Puerto Rico-chartered commercial bank, and FirstBank Insurance Agency is a Puerto Rico-chartered insurance agency. FirstBank is subject to the supervision, examination, and regulation of both the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (the “OCIF”) and the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured through the FDIC Deposit Insurance Fund. FirstBank also operates in the State of Florida, subject to regulation and examination by the Florida Office of Financial Regulation and the FDIC; in the USVI, subject to regulation and examination by the USVI Division of Banking, Insurance, and Financial Regulation; and in the BVI, subject to regulation by the British Virgin Islands Financial Services Commission. The Consumer Financial Protection Bureau (the “CFPB”) regulates FirstBank’s consumer financial products and services. FirstBank Insurance Agency is subject to the supervision, examination, and regulation of the Office of the Insurance Commissioner of the Commonwealth of Puerto Rico and the Division of Banking and Insurance Financial Regulation in the USVI.
FirstBank conducts its business through its main office located in San Juan, Puerto Rico, 59 banking branches in Puerto Rico, eight banking branches in the USVI and the BVI, and nine banking branches in the state of Florida (USA). FirstBank has six wholly-owned subsidiaries with operations in Puerto Rico: First Federal Finance Corp. (d/b/a Money Express La Financiera), a finance company specializing in the origination of small loans with 27 offices in Puerto Rico; First Management of Puerto Rico, a Puerto Rico corporation, which holds tax-exempt assets; FirstBank Overseas Corporation, an international banking entity (an “IBE”) organized under the International Banking Entity Act of Puerto Rico; two companies engaged in the operation of certain real estate properties; and a wholly-owned subsidiary of FirstBank organized in 2022 under the laws of the Commonwealth of Puerto Rico and Act 60 of 2019, which will commence operations in 2023 and will engage in investing and lending transactions. General The accompanying consolidated audited financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”). The following is a description of the Corporation’s most significant accounting policies. Principles of consolidation The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The results of operations of companies or assets acquired are included from the date of acquisition. Statutory business trusts that are wholly-owned by the Corporation and are issuers of trust- preferred securities (“TRuPs”) and entities in which the Corporation has a non-controlling interest, are not consolidated in the Corporation’s consolidated financial statements in accordance with authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) for consolidation of variable interest entities (“VIEs”). See “Variable Interest Entities” below for further details regarding the Corporation’s accounting policy for these entities .
13
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and contingent liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management makes significant estimates in determining the allowance for credit losses (“ACL”), income taxes, as well as fair value measurements of investment securities, goodwill, other intangible assets, pension assets and liabilities, mortgage servicing rights, and loans held for sale. Actual results could differ from those estimates. Change in accounting method Effective on September 30, 2022, the Corporation changed the accounting method for accounting for its treasury stock from a par value to a cost method. The Corporation believes the cost method is preferable as it more accurately reflects in treasury stock the cost of stocks repurchased and it enhances comparability of financial results with other financial institutions. The Corporation reflected the application of this new accounting method retrospectively by adjusting prior period amounts for treasury stock and additional paid-in capital. The retrospective adjustment, which was reflected in the consolidated statements of financial condition and statements of changes in stockholders’ equity, was limited to an increase in the beginning balance of treasury stock at January 1, 2020 of $ 19 million and an increase in additional paid-in capital for the same amount, which was considered immaterial. These adjustments had no impact on previously issued statements of income, comprehensive income, cash flows, and executive compensation and regulatory capital measures. Cash and cash equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash items in transit, and amounts due from the Federal Reserve Bank of New York (the “Federal Reserve” or the “FED”) and other depository institutions. The term also includes money market funds and short-term investments with original maturities of three months or less. Investment securities The Corporation classifies its investments in debt and equity securities into one of four categories: Held-to-maturity — Debt securities that the entity has the intent and ability to hold to maturity. These securities are carried at amortized cost. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold other debt securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has occurred. Trading — Debt securities that are bought and held principally for the purpose of selling them in the near term. These securities are carried at fair value, with unrealized gains and losses reported in earnings. As of December 31, 2022, and 2021, the Corporation did not hold debt securities for trading purposes. Available-for-sale — Debt securities not classified as held-to-maturity or trading. These securities are carried at fair value, with unrealized holding gains and losses, net of deferred taxes, reported in other comprehensive loss (“OCL”) as a separate component of stockholders’ equity. The unrealized holding gains and losses do not affect earnings until they are realized, or an ACL is recorded. Equity securities — Equity securities that do not have readily available fair values are classified as equity securities in the consolidated statements of financial condition. These securities are stated at cost less impairment, if any. This category is principally composed of FHLB stock that the Corporation owns to comply with FHLB regulatory requirements. The realizable value of the FHLB stock equals its cost. Also included in this category are marketable equity securities held at fair value with changes in unrealized gains or losses recorded through earnings in other non-interest income. Premiums and discounts on debt securities are amortized as an adjustment to interest income on investments over the life of the related securities under the interest method without anticipating prepayments, except for mortgage-backed securities (“MBS”) where prepayments are anticipated. Premiums on callable debt securities, if any, are amortized to the earliest call date. Purchases and sales of
14
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
securities are recognized on a trade-date basis, the date the order to buy or sell is executed. Gains and losses on sales are determined using the specific identification method. A debt security is placed on nonaccrual status at the time any principal or interest payment becomes 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income. See Note 3 – Debt Securities for additional information on nonaccrual debt securities. Allowance for Credit Losses – Held-to-Maturity Debt Securities: As of December 31, 2022, the held-to-maturity debt securities portfolio consisted of U.S. government-sponsored entities (“GSEs”) MBS and Puerto Rico municipal bonds. The ACL on held-to-maturity debt securities is based on an expected loss methodology referred to as current expected credit loss (“CECL”) methodology by major security type. Any expected credit loss is provided through the ACL on held-to-maturity debt securities and is deducted from the amortized cost basis of the security so that the statement of financial condition reflects the net amount the Corporation expects to collect. The Corporation does not recognize an ACL for GSEs’ MBS since they are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. For the ACL of held-to-maturity Puerto Rico municipal bonds, the Corporation considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. These Puerto Rico municipal obligations typically are not issued in bearer form, nor are they registered with the Securities and Exchange Commission (“SEC”) and are not rated by external credit agencies. These financing arrangements with Puerto Rico municipalities were issued in bond form and accounted for as securities but underwritten as loans with features that are typically found in commercial loans. Accordingly, similar to commercial loans, an internal risk rating ( i.e ., pass, special mention, substandard, doubtful, or loss) is assigned to each bond at the time of issuance or acquisition and monitored on a continuous basis with a formal assessment completed, at a minimum, on a quarterly basis. The Corporation determines the ACL for held-to-maturity Puerto Rico municipal bonds based on the product of a cumulative probability of default (“PD”) and loss given default (“LGD”), and the amortized cost basis of each bond over its remaining expected life. PD estimates represent the point -in-time as of which the PD is developed, and are updated quarterly based on, among other things, the payment performance experience, financial performance and market value indicators, and current and forecasted relevant forward-looking macroeconomic variables over the expected life of the bonds, to determine a lifetime term structure PD curve. LGD estimates are determined based on, among other things, historical charge-off events and recovery payments (if any), government sector historical loss experience, as well as relevant current and forecasted macroeconomic expectations of variables, such as unemployment rates, interest rates, and market risk factors based on industry performance, to determine a lifetime term structure LGD curve. Under this approach, all future period losses for each instrument are calculated using the PD and LGD loss rates derived from the term structure curves applied to the amortized cost basis of each bond. For the relevant macroeconomic expectations of variables, the methodology considers an initial forecast period (a “reasonable and supportable period”) of two years and a reversion period of up to three years, utilizing a straight-line approach and reverting back to the historical macroeconomic mean. After the reversion period, the Corporation uses a historical loss forecast period covering the remaining contractual life based on the changes in key historical economic variables during representative historical expansionary and recessionary periods. Furthermore, the Corporation periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions; (ii) organization specific risks such as credit concentrations, collateral specific risks, nature and size of the portfolio and external factors that may ultimately impact credit quality, and (iii) other limitations associated with factors such as changes in underwriting and resolution strategies, among others. The Corporation has elected not to measure an ACL on accrued interest related to held-to-maturity debt securities, as uncollectible accrued interest receivables are written off on a timely manner. See Note 3 – Debt Securities for additional information about ACL balances for held-to-maturity debt securities, activity during the period, and information about changes in circumstances that caused changes in the ACL for held-to-maturity debt securities during the years ended December 31, 2022, 2021, and 2020.
15
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Allowance for Credit Losses – Available-for-Sale Debt Securities: For available-for-sale debt securities in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value. Any previously recognized ACL should first be written off and the write-down in excess of such ACL would be recorded through a charge to the provision for credit losses. For available -for-sale debt securities that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the cash position of the issuer and its cash and capital generation capacity, which could increase or diminish the issuer’s ability to repay its bond obligations, the extent to which the fair value is less than the amortized cost basis, any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the financial condition of the issuer, credit ratings, the failure of the issuer to make scheduled principal or interest payments, recent legislation and government actions affecting the issuer’s industry, and actions taken by the issuer to deal with the economic climate. The Corporation also takes into consideration changes in the near-term prospects of the underlying collateral of a security, if any, such as changes in default rates, loss severity given default, and significant changes in prepayment assumptions and the level of cash flows generated from the underlying collateral, if any, supporting the principal and interest payments on the debt securities. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and the Corporation records an ACL for the credit loss, limited to the amount by which the fair value is less than the amortized cost basis. The Corporation recognizes in OCL any impairment that has not been recorded through an ACL. Non-credit-related impairments result from other factors, including changes in interest rates. The Corporation records changes in the ACL as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of an available-for-sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. The Corporation has elected not to measure an ACL on accrued interest related to available-for-sale debt securities, as uncollectible accrued interest receivables are written off on a timely manner. Substantially all of the Corporation’s available-for-sale debt securities are issued by GSEs. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. Accordingly, there is a zero-credit loss expectation on these securities. For further information, including the methodology and assumptions used for the discounted cash flow analyses performed on other available-for-sale debt securities such as private label MBS and bonds issued by the Puerto Rico Housing Finance Authority (“PRHFA”), see Note 3 – Debt Securities, and Note 25 – Fair Value. Loans held for investment Loans that the Corporation has the ability and intent to hold for the foreseeable future are classified as held for investment and are reported at amortized cost, net of its ACL. The substantial majority of the Corporation’s loans are classified as held for investment. Amortized cost is the principal outstanding balance, net of unearned interest, cumulative charge -offs, unamortized deferred origination fees and costs, and unamortized premiums and discounts. The Corporation reports credit card loans at their outstanding unpaid principal balance plus uncollected billed interest and fees net of such amounts deemed uncollectible. Interest income is accrued on the unpaid principal balance. Fees collected and costs incurred in the origination of new loans are deferred and amortized using the interest method or a method that approximates the interest method over the term of the loan as an adjustment to interest yield. Unearned interest on certain personal loans, auto loans, and finance leases and discounts and premiums are recognized as income under a method that approximates the interest method. When a loan is paid-off or sold, any remaining unamortized net deferred fees, or costs, discounts and premiums are included in loan interest income in the period of payoff.
16
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Nonaccrual and Past-Due Loans - Loans on which the recognition of interest income has been discontinued are designated as nonaccrual. Loans are classified as nonaccrual when they are 90 days past due for interest and principal, except for residential mortgage loans insured or guaranteed by the Federal Housing Administration (the “FHA”), the Veterans Administration (the “VA”) or the PRHFA, and credit card loans. It is the Corporation’s policy to report delinquent mortgage loans insured by the FHA, or guaranteed by the VA or the PRHFA, as loans past due 90 days and still accruing as opposed to nonaccrual loans since the principal repayment is insured or guaranteed. However, the Corporation discontinues the recognition of income relating to FHA/VA loans when such loans are over 15 months delinquent, taking into consideration the FHA interest curtailment process, and relating to PRHFA loans when such loans are over 90 days delinquent. Credit card loans continue to accrue finance charges and fees until charged off at 180 days. Loans generally may be placed on nonaccrual status prior to when required by the policies described above when the full and timely collection of interest or principal becomes uncertain (generally based on an assessment of the borrower’s financial condition and the adequacy of collateral, if any). When a loan is placed on nonaccrual status, any accrued but uncollected interest income is reversed and charged against interest income and amortization of any net deferred fees is suspended. Interest income on nonaccrual loans is recognized only to the extent it is received in cash. However, when there is doubt regarding the ultimate collectability of loan principal, all cash thereafter received is applied to reduce the carrying value of such loans ( i.e. , the cost recovery method). Under the cost-recovery method, interest income is not recognized until the loan balance has been collected in full, including the charged-off portion. Generally, the Corporation returns a loan to accrual status when all delinquent interest and principal becomes current under the terms of the loan agreement, or after a sustained period of repayment performance ( six months ) and the loan is well secured and in the process of collection, and full repayment of the remaining contractual principal and interest is expected. Loans that are past due 30 days or more as to principal or interest are considered delinquent, with the exception of residential mortgage, commercial mortgage, and construction loans, which are considered past due when the borrower is in arrears on two or more monthly payments. The Corporation has elected not to measure an ACL on accrued interest related to loans held for investment, as uncollectible accrued interest receivables are written off on a timely manner. Loans Acquired – Loans acquired through a purchase or a business combination are recorded at their fair value as of the acquisition date. The Corporation performs an assessment of acquired loans to first determine if such loans have experienced a more than insignificant deterioration in credit quality since their origination and thus should be classified and accounted for as purchased credit deteriorated (“PCD”) loans. For loans that have not experienced a more than insignificant deterioration in credit quality since origination, referred to as non-PCD loans, the Corporation records such loans at fair value, with any resulting discount or premium accreted or amortized into interest income over the remaining life of the loan using the interest method. Additionally, upon the purchase or acquisition of non-PCD loans, the Corporation measures and records an ACL based on the Corporation’s methodology for determining the ACL. The ACL for non-PCD loans is recorded through a charge to the provision for credit losses in the period in which the loans are purchased or acquired. Acquired loans that are classified as PCD are recognized at fair value, which includes any premiums or discounts resulting from the difference between the initial amortized cost basis and the par value. Premiums and non-credit loss related discounts are amortized or accreted into interest income over the remaining life of the loan using the interest method. Unlike non-PCD loans, the initial ACL for PCD loans is established through an adjustment to the acquired loan balance and not through a charge to the provision for credit losses in the period in which the loans are acquired. At acquisition, the ACL for PCD loans, which represents the fair value credit discount, is determined using a discounted cash flow method that considers the PDs and LGDs used in the Corporation’s ACL methodology. Characteristics of PCD loans include the following: delinquency, payment history since origination, credit scores migration and/or other factors the Corporation may become aware of through its initial analysis of acquired loans that may indicate there has been a more than insignificant deterioration in credit quality since a loan’s origination. In connection with the Banco Santander Puerto Rico (“BSPR”) acquisition on September 1, 2020, the Corporation acquired PCD loans with an aggregate fair value at acquisition of approximately $ 752.8 million, and recorded an initial ACL of approximately $ 28.7 million, which was added to the amortized cost of the loans. Subsequent to acquisition, the ACL for both non-PCD and PCD loans is determined pursuant to the Corporation’s ACL methodology in the same manner as all other loans. For PCD loans that prior to the adoption of ASC 326 were classified as purchased credit impaired (“PCI”) loans and accounted for under the FASB Accounting Standards Codification (the “Codification” or “ASC”) Subtopic 310-30, “Accounting for Purchased Loans Acquired with Deteriorated Credit Quality” (ASC Subtopic 310-30), the Corporation adopted ASC 326 using the prospective transition approach. As allowed by ASC 326, the Corporation elected to maintain pools of loans accounted for under ASC Subtopic 310-30 as “units of accounts,” conceptually treating each pool as a single asset. As of December 31, 2022, such PCD loans consisted of $ 101.7 million of residential mortgage loans and $ 1.9 million of commercial mortgage loans acquired by the Corporation as part of acquisitions completed prior to 2020. These previous transactions include a transaction completed on February 27, 2015, in which FirstBank acquired ten Puerto Rico branches of Doral Bank, acquired certain assets, including PCD loans, and assumed deposits, through an alliance with Banco Popular of Puerto Rico, which was the successful lead bidder with the FDIC on the failed Doral Bank, as well as other co-bidders, and the acquisition from Doral Financial in the first quarter of 2014 of all of its rights, title and interest in first and second residential mortgage loans in full satisfaction of secured borrowings owed by such entity to FirstBank. As the
17
FIRST BANCORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Corporation elected to maintain pools of units of account for loans previously accounted for under ASC Subtopic 310-30, the Corporation is not able to remove loans from the pools until they are paid off, written off or sold (consistent with the Corporation’s practice prior to adoption of ASC 326), but is required to follow ASC 326 for purposes of the ACL. Regarding interest income recognition for PCD loans that existed at the time of adoption of ASC 326, the prospective transition approach for PCD loans required by ASC 326 was applied at a pool level, which froze the effective interest rate of the pools as of January 1, 2020. According to regulatory guidance, the determination of nonaccrual or accrual status for PCD loans that the Corporation has elected to maintain in previously existing pools pursuant to the policy election right upon adoption of ASC 326 should be made at the pool level, not the individual asset level. In addition, the guidance provides that the Corporation can continue accruing interest and not report the PCD loans as being in nonaccrual status if the following criteria are met: (i) the Corporation can reasonably estimate the timing and amounts of cash flows expected to be collected, and (ii) the Corporation did not acquire the asset primarily for the rewards of ownership of the underlying collateral, such as use of the collateral in operations or improving the collateral for resale. Thus, the Corporation continues to exclude these pools of PCD loans from nonaccrual loan statistics. In accordance with ASC 326, the Corporation did not reassess whether modifications to individual acquired loans accounted for within pools were troubled debt restructurings (“TDRs”) as of the date of adoption. Charge-off of Uncollectible Loans - Net charge -offs consist of the unpaid principal balances of loans held for investment that the Corporation determines are uncollectible, net of recovered amounts. The Corporation records charge -offs as a reduction to the ACL and subsequent recoveries of previously charged-off amounts are credited to the ACL. The Corporation designates as collateral dependent certain commercial, residential and consumer loans secured by collateral when foreclosure is probable or when repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulties based on its assessment as of the reporting date. Commercial and construction loans are considered collateral dependent when they exhibit specific risk characteristics such as repayment capacity under certain thresholds or credit deterioration. Residential mortgage loans are considered collateral dependent when 180 days or more past due and secured by residential real estate. Moreover, since the ACL of auto loans and finance leases is calculated using either a PD/LGD model or a risk- adjusted discounted cash flow method for loans modified or reasonably expected to be modified in a TDR and performing in accordance with restructured terms, these loans are not considered collateral dependent. The ACL of collateral dependent loans is based on the fair value of the collateral at the reporting date, adjusted for undiscounted estimated costs to sell. Collateral dependent loans in the construction, commercial mortgage, and commercial and industrial (“C&I”) loan portfolios are written down to their net realizable value (fair value of collateral, less estimated costs to sell) when loans are considered to be uncollectible and have balances of $ 0.5 million or more. Within the consumer loan portfolio, closed-end consumer loans are charged off when payments are 120 days in arrears. Open-end (revolving credit) consumer loans, including credit card loans, are charged off when payments are 180 days in arrears. Residential mortgage loans that are 180 days delinquent are reviewed and charged-off, as needed, to the fair value of the underlying collateral less cost to sell. Generally, all loans may be charged off or written down to the fair value of the collateral prior to the application of the policies described above if a loss-confirming event has occurred. Loss- confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, or receipt of an asset valuation indicating a collateral deficiency when the asset is the sole source of repayment. Troubled Debt Restructurings - A restructuring of a loan 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. However, not all loan modifications are TDRs. Modifications resulting in TDRs may include changes to one or more terms of the loan, including but not limited to, a change in interest rate, an extension of the repayment period, a reduction in payment amount, and partial forgiveness or deferment of principal or accrued interest. TDR loans are classified as either accrual or nonaccrual loans. Loans in accrual status may remain in accrual status when their contractual terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, loans on nonaccrual status and restructured as TDRs will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of six months, and there is evidence that such payments can, and are likely to, continue as agreed. A loan that had previously been modified in a TDR and is subsequently refinanced under then-current underwriting standards at a market rate with no concessionary terms is accounted for as a new loan and is no longer reported as a TDR. Refer to Accounting Standards Updates (“ASU”) 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” below for information on the amendments to the TDR guidance that are effective on or after January 1, 2023 .
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Allowance for credit losses for loans and finance leases The ACL for loans and finance leases held for investment is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans. Loans are charged-off against the allowance when management confirms the loan balance is uncollectable. The Corporation estimates the allowance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience is a significant input for the estimation of expected credit losses, as well as adjustments to historical loss information made for differences in current loan-specific risk characteristics, such as any difference in underwriting standards, portfolio mix, delinquency level, or term. Additionally, the Corporation’s assessment involves evaluating key factors, which include credit and macroeconomic indicators, such as changes in unemployment rates, property values, and other relevant factors, to account for current and forecasted market conditions that are likely to cause estimated credit losses over the life of the loans to differ from historical credit losses. Expected credit losses are estimated over the contractual term of the loans, adjusted by prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: the Corporation has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Corporation. The Corporation estimates the ACL primarily based on a PD/LGD modeled approach, or individually primarily for collateral dependent loans and certain TDR loans. The Corporation evaluates the need for changes to the ACL by portfolio segments and classes of loans within certain of those portfolio segments. Factors such as the credit risk inherent in a portfolio and how the Corporation monitors the related quality, as well as the estimation approach to estimate credit losses, are considered in the determination of such portfolio segments and classes. The Corporation has identified the following portfolio segments: ● Residential mortgage – Residential mortgage loans are loans secured by residential real property together with the right to receive the payment of principal and interest on the loan. The majority of the Corporation’s residential loans are fixed-rate first lien closed-end loans secured by 1-4 single-family residential properties. ● Commercial mortgage – Commercial mortgage loans are loans secured primarily by commercial real estate properties for which the primary source of repayment comes from rent and lease payments that are generated by an income-producing property. ● Commercial and Industrial – C&I loans include both unsecured and secured loans for which the primary source of repayment comes from the ongoing operations and activities conducted by the borrower and not from rental income or the sale or refinancing of any underlying real estate collateral; thus, credit risk is largely dependent on the commercial borrower’s current and expected financial condition. The C&I loan portfolio consists of loans granted to large corporate customers as well as middle-market customers across several industries, and the government sector. ● Construction – Construction loans consisted generally of loans secured by real estate made to finance the construction of industrial, commercial, or residential buildings and included loans to finance land development in preparation for erecting new structures. These loans involve an inherently higher level of risk and sensitivity to market conditions. Demand from prospective tenants or purchasers may erode after construction begins because of a general economic slowdown or otherwise. ● Consumer – Consumer loans generally consisted of unsecured and secured loans extended to individuals for household, family, and other personal expenditures, including several classes of products. For purposes of the ACL determination, the Corporation stratifies portfolio segments by two main regions ( i.e., the Puerto Rico/Virgin Islands region and the Florida region). The ACL is measured using a PD/LGD model that is calculated based on the product of a cumulative PD and LGD. PD and LGD estimates are updated quarterly for each loan over the remaining expected life to determine lifetime term structure curves. Under this approach, the Corporation calculates losses for each loan for all future periods using the PD and LGD loss rates derived from the term structure curves applied to the amortized cost basis of the loans, considering prepayments. For residential mortgage loans, the Corporation stratifies the portfolio segment by the following two classes: (i) government- guaranteed residential mortgage loans, and (ii) conventional mortgage loans. Government-guaranteed loans are those originated to qualified borrowers under the FHA and the VA standards. Originated loans that meet the FHA’s standards qualify for the FHA’s insurance program whereas loans that meet the standards of the VA are guaranteed by such entity. No credit losses are determined for loans insured or guaranteed by the FHA or the VA due to the explicit guarantee of the U.S. federal government. On the other hand, an
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ACL is calculated for conventional residential mortgage loans, which are loans that do not qualify under the FHA or VA programs. PD estimates are based on, among other things, historical payment performance and relevant current and forward-looking macroeconomic variables, such as regional unemployment rates. On the other hand, LGD estimates are based on, among other things, historical charge-off events and recovery payments, loan-to-value attributes, and relevant current and forecasted macroeconomic variables, such as the regional housing price index. For commercial mortgage loans, PD estimates are based on, among other things, industry historical loss experience, property type, occupancy, and relevant current and forward-looking macroeconomic variables. On the other hand, LGD estimates are based on historical charge-off events and recovery payments, industry historical loss experience, specific attributes of the loans, such as loan-to- value, debt service coverage ratios, and net operating income, as well as relevant current and forecasted macroeconomic variables expectations, such as commercial real estate price indexes, the gross domestic product (“GDP”), interest rates, and unemployment rates, among others. For C&I loans, PD estimates are based on industry historical loss experience, financial performance and market value indicators, and current and forecasted relevant forward-looking macroeconomic variables. On the other hand, LGD estimates are based on industry historical loss experience, specific attributes of the loans, such as loan to value, as well as relevant current and forecasted expectations for macroeconomic variables, such as unemployment rates, interest rates, and market risk factors based on industry performance and the equity market. For construction loans, PD estimates are based on, among other things, historical payment performance experience, industry historical loss experience, underlying type of collateral, and relevant current and forward-looking macroeconomic variables. On the other hand, LGD estimates are based on historical charge-off events and recovery payments, industry historical loss experience, specific attributes of the loans, such as loan-to-value, debt service coverage ratios, and relevant current and forecasted macroeconomic variables, such as unemployment rates, GDP, interest rates, and real estate price indexes. For consumer loans, the Corporation stratifies the portfolio segment by the following five classes: (i) auto loans; (ii) finance leases; (iii) credit cards; (iv) personal loans; and (v) other consumer loans, such as open-end home equity revolving lines of credit and other types of consumer credit lines, among others. In determining the ACL, management considers consumer loans risk characteristics including, but not limited to, credit quality indicators such as payment performance period, delinquency and original FICO scores. For auto loans and finance leases, PD estimates are based on, among other things, the historical payment performance and relevant current and forward-looking macroeconomic variables, such as regional unemployment rates. On the other hand, LGD estimates are primarily based on historical charge-off events and recovery payments. For the credit card and personal loan portfolios, the Corporation determines the ACL on a pool basis, based on products PDs and LGDs developed considering historical losses for each origination vintage by length of loan terms, by geography, payment performance and by credit score. The PD and LGD for each cohort consider key macroeconomic variables, such as regional GDP, unemployment rates, and retail sales, among others. For the ACL determination of all portfolios, the expectations for relevant macroeconomic variables related to the Puerto Rico and Virgin Islands region consider an initial reasonable and supportable period of two years and a reversion period of up to three years , utilizing a straight-line approach and reverting back to the historical macroeconomic mean. For the Florida region, the methodology considers a reasonable and supportable forecast period and an implicit reversion towards the historical trend that varies for each macroeconomic variable. After the reversion period, a historical loss forecast period covering the remaining contractual life, adjusted for prepayments, is used based on the changes in key historical economic variables during representative historical expansionary and recessionary periods. Furthermore, the Corporation periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, including, but not limited to, expectations about interest rate, inflation, and real estate price levels, as well as labor challenges; (ii) organization specific risks such as credit concentrations, collateral specific risks, nature and size of the portfolio and external factors that may ultimately impact credit quality, and (iii) other limitations associated with factors such as changes in underwriting and loan resolution strategies, among others. In addition to loans previously written down to their respective realizable values, the ACL on loans that have been modified or are reasonably expected to be modified in a TDR and that have balances of $ 0.5 million or more in the case of commercial and construction loans (other than commercial mortgage and construction loans, in which the ACL is based on the fair value of the collateral at the reporting date, adjusted for undiscounted estimated costs to sell) is generally measured using a risk-adjusted discounted cash flow method. Under this approach, all future cash flows (interest and principal) for each loan are adjusted by the PDs and LGDs derived from the term structure curves and prepayments and then discounted at the rate of the loan prior to the restructuring (or at the effective interest rate as of the reporting date for non-TDRs previously written down to their respective realizable values) to
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arrive at the net present value of future cash flows. For credit cards, personal loans, and nonaccrual auto loans and finance leases modified in a TDR, the ACL is measured using the same methodologies as those used for all other loans in those portfolios. See Note 5 – Allowance for Credit Losses for Loans and Finance Leases for additional information about reserve balances for each portfolio segment, activity during the period, and information about changes in circumstances that caused changes in the ACL for loans and finance leases during the year ended December 31, 2022, 2021, and 2020. Refer to ASU 2022-02 discussion below for information on the amendments to the TDR guidance that are effective on or after January 1, 2023. Allowance for credit losses on off-balance sheet credit exposures and other assets The Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit unless the obligation is unconditionally cancellable by the Corporation. The ACL on off- balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. As of December 31, 2022, the off-balance sheet credit exposures primarily consisted of unfunded loan commitments and standby letters of credit for commercial and construction loans. The Corporation utilized the PDs and LGDs derived from the above-explained methodologies for the commercial and construction loan portfolios. Under this approach, all future period losses for each loan are calculated using the PD and LGD loss rates derived from the term structure curves applied to the usage given default exposure. The ACL on off-balance sheet credit exposures is included as part of accounts payable and other liabilities in the consolidated statement of financial condition with adjustments included as part of the provision for credit losses in the consolidated statements of income. See Note 5 – Allowance for Credit Losses for Loans and Finance Leases for additional information about reserve balances for unfunded loan commitments, activity during the period, and information about changes in circumstances that caused changes in the ACL for off-balance sheet credit exposures during the years ended December 31, 2022, 2021 and 2020. The Corporation also estimates expected credit losses for certain accounts receivable, primarily claims from government- guaranteed loans, loan servicing-related receivables, and other receivables. The ACL on other assets measured at amortized cost is included as part of other assets in the consolidated statement of financial condition with adjustments included as part of other non- interest expenses in the consolidated statements of income. As of December 31, 2022 and 2021, the ACL on other assets measured at amortized cost was immaterial. Loans held for sale Loans that the Corporation intends to sell or that the Corporation does not have the ability and intent to hold for the foreseeable future are classified as held-for-sale loans. Loans held for sale are recorded at the lower of cost or fair value less costs to sell. Generally, the loans held-for-sale portfolio consists of conforming residential mortgage loans that will be pooled into Government National Mortgage Association (“GNMA”) MBS, which are then sold to investors, and conforming residential mortgage loans that the Corporation intends to sell to GSEs, such as the Federal National Mortgage Association (“FNMA”) and the U.S. Federal Home Loan Mortgage Corporation (“FHLMC”). Generally, residential mortgage loans held for sale are valued on an aggregate portfolio basis and the value is primarily derived from quotations based on the MBS market. The amount by which cost exceeds market value in the aggregate portfolio of residential mortgage loans held for sale, if any, is accounted for as a valuation allowance with changes therein included in the determination of net income and reported as part of mortgage banking activities in the consolidated statements of income. Loan costs and fees are deferred at origination and are recognized in income at the time of sale and are included in the amortized cost basis when evaluating the need for a valuation allowance. The fair value of commercial and construction loans held for sale, if any, is primarily derived from external appraisals, or broker price opinions that the Corporation considers, with changes in the valuation allowance reported as part of other non-interest income in the consolidated statements of income. In certain circumstances, the Corporation transfers loans from/to held for sale or held for investment based on a change in strategy. If such a change in holding strategy is made, significant adjustments to the loans’ carrying values may be necessary. Reclassifications of loans held for investment to held for sale are made at the amortized cost on the date of transfer and establish a new cost basis upon transfer. Write-downs of loans transferred from held for investment to held for sale are recorded as charge-offs at the time of transfer. Any previously recorded ACL is reversed in earnings after applying the write-down policy. Subsequent changes in value below amortized cost are reflected in non-interest income in the consolidated statements of income. Reclassifications of loans held for sale to held for investment are made at the amortized cost on the transfer date and any previously recorded valuation allowance is reversed in earnings. Upon transfer to held for investment, the Corporation calculates an ACL using the CECL impairment model.
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Transfers and servicing of financial assets and extinguishment of liabilities After a transfer of financial assets in a transaction that qualifies for accounting as a sale, the Corporation derecognizes the financial assets when it has surrendered control and derecognizes liabilities when they are extinguished. A transfer of financial assets in which the Corporation surrenders control over the assets is accounted for as a sale to the extent that consideration other than beneficial interests is received in exchange. The criteria that must be met to determine that the control over transferred assets has been surrendered include the following: (i) the assets must be isolated from creditors of the transferor; (ii) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (iii) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When the Corporation transfers financial assets and the transfer fails any one of the above criteria, the Corporation is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. Servicing assets The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or purchased. In the ordinary course of business, loans are pooled into GNMA MBS for sale in the secondary market or sold to FNMA or FHLMC, with servicing retained. When the Corporation sells mortgage loans, it recognizes any retained servicing right. Mortgage servicing rights (“servicing assets” or “MSRs”) retained in a sale or securitization arise from contractual agreements between the Corporation and investors in mortgage securities and mortgage loans. Under these contracts, the Corporation performs loan-servicing functions in exchange for fees and other remuneration. The MSRs, included as part of other assets in the statements of financial condition, entitle the Corporation to servicing fees based on the outstanding principal balance of the mortgage loans and the contractual servicing rate. The servicing fees are credited to income on a monthly basis when collected and recorded as part of mortgage banking activities in the consolidated statements of income. In addition, the Corporation generally receives other remuneration consisting of mortgagor-contracted fees such as late charges and prepayment penalties, which are credited to income when collected. Considerable judgment is required to determine the fair value of the Corporation’s MSRs. Unlike highly liquid investments, the fair value of MSRs cannot be readily determined because these assets are not actively traded in securities markets. The initial carrying value of an MSR is determined based on its fair value. The Corporation determines the fair value of the MSRs using a discounted static cash flow analysis, which incorporates current market assumptions commonly used by buyers of these MSRs and was derived from prevailing conditions in the secondary servicing market. The valuation of the Corporation’s MSRs incorporates two sets of assumptions: (i) market-derived assumptions for discount rates, servicing costs, escrow earnings rates, floating earnings rates, and the cost of funds; and (ii) market assumptions calibrated to the Corporation’s loan characteristics and portfolio behavior for escrow balances, delinquencies and foreclosures, late fees, prepayments, and prepayment penalties. Once recorded, the Corporation periodically evaluates MSRs for impairment. Impairments are recognized through a valuation allowance for each individual stratum of servicing assets. For purposes of performing the MSR impairment evaluation, the servicing portfolio is stratified on the basis of certain risk characteristics, such as region, terms, and coupons. The Corporation conducts an other-than-temporary impairment analysis to evaluate whether a loss in the value of the MSR in a particular stratum, if any, is other than temporary or not. When the recovery of the value is unlikely in the foreseeable future, a write-down of the MSR in the stratum to its estimated recoverable value is charged to the valuation allowance. Impairment charges are recorded as part of revenues from mortgage banking activities in the consolidated statements of income . The MSRs are amortized over the estimated life of the underlying loans based on an income forecast method as a reduction of servicing income. The income forecast method of amortization is based on projected cash flows. A particular periodic amortization is calculated by applying to the carrying amount of the MSRs the ratio of the cash flows projected for the current period to total remaining net MSR forecasted cash flow. Premises and equipment Premises and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation is provided on the straight-line method over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the leases ( i.e. , the contractual term plus lease renewals that are reasonably assured) or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Costs of renewals and betterments are capitalized. When the Corporation sells or disposes of assets, their
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cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in earnings as part of other non-interest income in the consolidated statements of income. When the asset is no longer used in operations, and the Corporation intends to sell it, the asset is reclassified to other assets held for sale and is reported at the lower of the carrying amount or fair value less cost to sell. Premises and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairments on premises and equipment are included as part of occupancy and equipment expenses in the consolidated statements of income. Operating leases The Corporation, as lessee, determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date, or at acquisition date in case of a business combination. As the rates implicit in the Corporation’s operating leases are not readily determinable, the Corporation generally uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. The incremental borrowing rate is calculated based on fully amortizing secured borrowings. Operating right-of-use (“ROU”) assets are generally recognized based on the amount of the initial measurement of the lease liability. Non-lease components, such as common area maintenance charges, are not considered a part of the gross-up of the ROU asset and lease liability and are recognized as incurred. The Corporation’s leases are primarily related to operating leases for the Bank’s branches. Most of the Corporation’s leases with operating ROU assets have terms of two years to 30 years , some of which include options to extend the leases for up to ten years . The Corporation does not recognize ROU assets and lease liabilities that arise from short-term leases (less than 12 months). Operating lease expense, which is included as part of occupancy and equipment expenses in the consolidated statements of income, is recognized on a straight-line basis over the lease term that is based on the Corporation’s assessment of whether the renewal options are reasonably certain to be exercised. The Corporation includes the ROU assets and lease liabilities as part of other assets and accounts payable and other liabilities, respectively, in the consolidated statements of financial condition. As of December 31, 2022, the Corporation, as lessee, did no t have any leases that qualified as finance leases. Other real estate owned (“OREO”) OREO, which consists of real estate acquired in settlement of loans, is recorded at fair value less estimated costs to sell the real estate acquired. Generally, loans have been written down to their net realizable value prior to foreclosure. Any further reduction to their net realizable value is recorded with a charge to the ACL at the time of foreclosure or within six months. Thereafter, costs of maintaining and operating these properties, losses recognized on the periodic reevaluations of these properties, and gains or losses resulting from the sale of these properties are charged or credited to earnings and are included as part of net gain (loss) on OREO operations in the consolidated statements of income. Appraisals are obtained periodically, generally on an annual basis . Claims arising from FHA/VA government-guaranteed residential mortgage loans Upon the foreclosure on property collateralizing an FHA/VA government-guaranteed residential mortgage loan, the Corporation derecognizes the government-guaranteed mortgage loan and recognizes a receivable as part of other assets in the consolidated statements of condition if the conditions in ASC Subtopic 310-40, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” (ASC Subtopic 310-40) are met. See Note 7– Other Real Estate Owned for information on foreclosures associated to FHA/VA government-guaranteed residential mortgage loans reclassified to other assets as of December 31, 2022 and 2021. Goodwill and other intangible assets Goodwill – Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as business combinations. The Corporation allocates goodwill to the reporting unit(s) that are expected to benefit from the synergies of the business combination. Once goodwill has been assigned to a reporting unit, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. The Corporation tests goodwill for impairment at least annually and more frequently if circumstances exist that indicate a possible reduction in the fair value of a reporting unit below its carrying value. If, after assessing all relevant events or circumstances, the Corporation concludes that it is more-likely-than-not that the fair value of a reporting unit is below its carrying value, then an impairment test is required. In addition to the goodwill recorded at the Commercial and Corporate, Consumer Retail, and Mortgage Banking reporting units in connection with the acquisition of BSPR in 2020, the Corporation’s goodwill is mostly related to the United States (Florida) reporting unit. See Note 9– Goodwill and Other Intangible Assets for information on the qualitative assessment performed by the Corporation during the fourth quarter of 2022.
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Other Intangible Assets – The Corporation’s other intangible assets primarily relate to core deposits. The Corporation amortizes core deposit intangibles based on the projected useful lives of the related deposits, generally on a straight-line basis, and reviews these assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not exceed their fair value. Securities purchased and sold under agreements to repurchase The Corporation accounts for securities purchased under resale agreements and securities sold under repurchase agreements as collateralized financing transactions. Generally, the Corporation records these agreements at the amount at which the securities were purchased or sold. The Corporation monitors the fair value of securities purchased and sold, and obtains collateral from, or returns it to, the counterparties when appropriate. These financing transactions do not create material credit risk given the collateral involved and the related monitoring process. The Corporation sells and acquires securities under agreements to repurchase or resell the same or similar securities. Generally, similar securities are securities from the same issuer, with identical form and type, similar maturity, identical contractual interest rates, similar assets as collateral, and the same aggregate unpaid principal amount. The counterparty to certain agreements may have the right to repledge the collateral by contract or custom. The Corporation presents such assets separately in the consolidated statements of financial condition as securities pledged with creditors’ rights to repledge. Repurchase and resale activities may be transacted under legally enforceable master repurchase agreements that give the Corporation, in the event of default by the counterparty, the right to liquidate securities held and to offset receivables and payables with the same counterparty. The Corporation offsets repurchase and resale transactions with the same counterparty in the consolidated statements of financial condition where it has such a legally enforceable right under a master netting agreement, the intention of setoff is existent, the transactions have the same maturity date, and the amounts are determinable. From time to time, the Corporation modifies repurchase agreements to take advantage of prevailing interest rates. Following applicable GAAP guidance, if the Corporation determines that the debt under the modified terms is substantially different from the original terms, the modification must be accounted for as an extinguishment of debt. The Corporation considers modified terms to be substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 % different from the present value of the remaining cash flows under the terms of the original instrument. The new debt instrument will be initially recorded at fair value, and that amount will be used to determine the debt extinguishment gain or loss to be recognized through the consolidated statements of income and the effective rate of the new instrument. If the Corporation determines that the debt under the modified terms is not substantially different, then the new effective interest rate is determined based on the carrying amount of the original debt instrument. The Corporation has determined that none of the repurchase agreements modified in the past were substantially different from the original terms, and, therefore, these modifications were not accounted for as extinguishments of debt . Income taxes The Corporation uses the asset and liability method for the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income at the time of enactment of such change in tax rates. Any interest or penalties due for payment of income taxes are included in the provision for income taxes. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. In making such assessment, significant weight is given to evidence that can be objectively verified, including both positive and negative evidence. The authoritative guidance for accounting for income taxes requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, tax planning strategies and future taxable income, exclusive of the impact of the reversal of temporary differences and carryforwards. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions considering statutory, judicial, and regulatory guidance. See Note 22 – Income Taxes for additional information. Under the authoritative accounting guidance, income tax benefits are recognized and measured based on a two-step analysis: i) a tax position must be more likely than not to be sustained based solely on its technical merits in order to be recognized; and ii) the benefit is measured at the largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between a benefit not recognized in accordance with this analysis and the tax benefit claimed on a tax return is referred to as an Unrecognized Tax Benefit. The Corporation releases income tax effects from OCL as pension and postretirement liabilities are extinguished.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Stock repurchases Treasury shares are recorded at their reacquisition cost, as a reduction of stockholders’ equity in the consolidated statements of financial condition. When reissuing treasury shares for the granting of stock-based compensation awards, treasury stock is reduced by the cost allocated to such stock and additional paid-in capital is credited for gains and debited for losses when treasury stock is reissued at prices that differ from the reacquisition cost. Stock-based compensation Compensation cost is recognized in the financial statements for all share-based payment grants. The First BanCorp. Omnibus Incentive Plan, as amended (the “Omnibus Plan”) provides for equity-based and non-equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, other stock-based awards and cash-based awards. The compensation cost for an award, determined based on the estimate of the fair value at the grant date (considering forfeitures and any post-vesting restrictions), is recognized over the period during which an employee or director is required to provide services in exchange for an award, which is the vesting period, taking into account the retirement eligibility of the award. Stock-based compensation accounting guidance requires the Corporation to reverse compensation expense for any awards that are forfeited due to employee or director turnover. Changes in the estimated forfeiture rate may have a significant effect on stock-based compensation as the Corporation recognizes the effect of adjusting the rate for all expense amortization in the period in which the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, an adjustment is made to increase the estimated forfeiture rate, which will decrease the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, an adjustment is made to decrease the estimated forfeiture rate, which will increase the expense recognized in the financial statements. For additional information regarding the Corporation’s equity-based compensation and awards granted, see Note 16 – Stock-Based Compensation. Comprehensive (loss) income Comprehensive (loss) income for First BanCorp. includes net income, as well as changes in unrealized gains (losses) on available- for-sale debt securities and change in unrecognized pension and post-retirement costs, net of estimated tax effects. Pension and other postretirement benefits The Corporation maintains two frozen qualified noncontributory defined benefit pension plans (the “Pension Plans”) (including a complementary postretirement benefits plan covering medical benefits and life insurance after retirement) that it assumed in the BSPR acquisition. Pension costs are computed on the basis of accepted actuarial methods and are charged to current operations. Net pension costs are based on various actuarial assumptions regarding future experience under the plan, which include costs for services rendered during the period, interest costs and return on plan assets, as well as deferral and amortization of certain items such as actuarial gains or losses. The funding policy is to contribute to the plan, as necessary, to provide for services to date and for those expected to be earned in the future. To the extent that these requirements are fully covered by assets in the plan, a contribution may not be made in a particular year. The cost of postretirement benefits, which is determined based on actuarial assumptions and estimates of the costs of providing these benefits in the future, is accrued during the years that the employee renders the required service. The guidance for compensation retirement benefits of ASC Topic 715, “Retirement Benefits,” requires the recognition of the funded status of each defined pension benefit plan, retiree health care plan and other postretirement benefit plans on the statement of financial condition. In addition, the Corporation maintains contributory retirement plans covering substantially all employees. Employer contributions to the plan are charged to current earnings as part of employees’ compensation and benefits expenses in the consolidated statements of income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Segment information The Corporation reports financial and descriptive information about its reportable segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. The Corporation’s management determined that the segregation that best fulfills the segment definition described above is by lines of business for its operations in Puerto Rico, the Corporation’s principal market, and by geographic areas for its operations outside of Puerto Rico. As of December 31, 2022, the Corporation had the following six operating segments that are all reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments; United States Operations; and Virgin Islands Operations. See Note 27 – Segment Information for additional information. Valuation of financial instruments The measurement of fair value is fundamental to the Corporation’s presentation of its financial condition and results of operations. The Corporation holds debt and equity securities, derivatives, and other financial instruments at fair value. The Corporation holds its investments and liabilities mainly to manage liquidity needs and interest rate risks. A meaningful part of the Corporation’s total assets is reflected at fair value on the Corporation’s financial statements. The FASB’s authoritative guidance for fair value measurement defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance also establishes a fair value hierarchy for classifying financial instruments. The hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable.
Under the fair value accounting guidance, an entity has the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at the inception of the contract and, thereafter, to reflect any changes in fair value in current earnings. The Corporation did not make any fair value option election as of December 31, 2022 or 2021. See Note 25 – Fair Value for additional information. Revenue from contract with customers See Note 26 – Revenue from Contracts with Customers, for a detailed description of the Corporation’s policies on the recognition and presentation of revenues from contracts with customers, including the income recognition for the insurance agency commissions’ revenue. Earnings per common share Basic earnings per share is calculated by dividing net income attributable to common stockholders by the weighted-average number of common shares issued and outstanding. Net income attributable to common stockholders represents net income adjusted for any preferred stock dividends, including any preferred stock dividends declared but not yet paid, and any cumulative preferred stock dividends related to the current dividend period that have not been declared as of the end of the period. Basic weighted-average common shares outstanding excludes unvested shares of restricted stock that do not contain non-forfeitable dividend rights. The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the number of weighted- average common shares is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued, referred to as potential common shares. Potential dilutive common shares consist of unvested shares of restricted stock that do not contain non-forfeitable dividend rights, warrants outstanding during the period, and common stock issued under the assumed exercise of stock options, if any, using the treasury stock method. This method assumes that the potential dilutive common shares are issued and outstanding and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to purchase common stock at the exercise date. The difference between the number of potential dilutive shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Unvested shares of restricted stock, stock options, and warrants outstanding during the period, if any, that result in lower potential dilutive shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. Potential dilutive common shares also include performance units that do not contain non-forfeitable dividend rights if the performance condition is met as of the end of the reporting period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Accounting Standards Adopted in 2022 ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”, which was effective upon the issuance of this ASU in December 2022, extends the sunset (or expiration date) of ASC Topic 848 from December 31, 2022 to December 31, 2024. Notwithstanding, the Corporation expects to follow the provisions of the LIBOR Act for the transition of any residual exposure after June 30, 2023. The Corporation was not impacted by the adoption of the following ASUs during 2022: ● ASU 2021-05, “Leases (Topic 842): Lessors – Certain Leases with Variable Lease Payments” ● ASU 2021-04, “Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a Consensus of the Emerging Issues Task Force)” ● ASU 2020-06, “Debt – Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in an Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Recently Issued Accounting Standards Not Yet Effective or Not Yet Adopted
Standard Description Effective Date Effect on the financial statements ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” In June 2022, the FASB issued ASU 2022-03 which, among other things, clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account and, therefore, is not considered in measuring fair value; and introduces new disclosure requirements for equity securities subject to contractual sale restrictions. January 1, 2024. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Corporation is evaluating the impact that this ASU will have on its financial statements and disclosures. The Corporation does not expect to be materially impacted by the adoption of this ASU during the first quarter of 2024. ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” In March 2022, the FASB issued ASU 2022-02 which eliminates the TDRs recognition and measurement guidance. As such, the requirement to use a discounted cash flow method for TDRs that involve a concession that can only be captured by means of this method is no longer required and the consideration of reasonably expected TDRs is eliminated from ASC Topic 326. In addition, the ASU enhances disclosure requirements for loan restructurings by creditors made to borrowers experiencing financial difficulty for which the terms of the receivables have been modified, regardless of whether the refinancing is accounted for as a new loan, and amends the guidance on vintage disclosures to require disclosure of gross write-offs by year of origination. January 1, 2023, unless early adopted in which case the amendments should be applied as of the beginning of the fiscal year that includes the interim period The Corporation adopted the amendments of this update during the first quarter of 2023 using a modified retrospective transition method with respect to the portion of the standard that relates to the recognition and measurement of TDRs (i.e. adjustments to the ACL that had been calculated using a discounted cash flow methodology for loans modified as a TDR prior to the adoption of these amendments). As of January 1, 2023, the Corporation recorded a cumulative effect adjustment of $ 1 million, after-tax, as a reduction to retained earnings. In addition, the Corporation performed the necessary data updates to comply with the enhanced disclosure requirements. ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method” In March 2022, the FASB issued ASU 2022-01 which, among others, expands the current last-of- layer method to allow multiple hedged layers and the scope of the portfolio layer method to non- prepayable financial assets. January 1, 2023, unless early adopted in which case the amendments should be applied as of the beginning of the fiscal year that includes the interim period The Corporation does not expect to be impacted by the amendments of this update since it does not apply fair value hedge accounting to any of its derivatives. ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers” In October 2021, the FASB issued ASU 2021-08 which, among others, requires that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 and provides certain practical expedients. January 1, 2023, unless early adopted in which case the amendments should be applied as of the beginning of the fiscal year that includes the interim period The Corporation will consider these amendments on business combinations completed on or after the adoption date.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 2 – MONEY MARKET . INVESTMENTS
Money market investments are composed of time deposits, overnight deposits with other financial institutions, and other short-term investments with original maturities of three months or less. Money market investments as of December 31, 2022 and 2021 were as follows:
2022 2021 (Dollars in thousands) Time deposits with other financial institutions (1) (2) $ 300 $ 300 Overnight deposits with other financial institutions (3) 541 1,200 Other short-term investments (4) 1,184 1,182 $ 2,025 $ 2,682 (1) Consists of time deposits segregated for compliance with the Puerto Rico International Banking Law. (2) Interest rate of 0.40 % and 0.05 % as of December 31, 2022 and 2021, respectively. (3) Weighted-average interest rate of 4.33 % and 0.07 % as of December 31, 2022 and 2021, respectively. (4) Weighted-average interest rate of 0.14 % and 0.15 % as of December 31, 2022 and 2021, respectively.
As of December 31, 2022, the Corporation had $ 0.5 million (2021 - $ 1.2 million) in money market investments pledged as collateral as part of margin calls associated to derivative contracts.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 3 – DEBT SECURITIES Available-for-Sale Debt Securities The amortized cost, gross unrealized gains and losses recorded in OCL, ACL, estimated fair value, and weighted-average yield of available-for-sale debt securities by contractual maturities as of December 31, 2022 were as follows:
December 31, 2022 Amortized cost (1) Gross ACL Fair value Unrealized Weighted- Gains Losses average yield% (Dollars in thousands) U.S. Treasury securities: Due within one year $ 7,493 $ - $ 309 $ - $ 7,184 0.22 After 1 to 5 years 141,366 - 9,675 - 131,691 0.70 U.S. GSEs' obligations: Due within one year 129,018 - 4,036 - 124,982 0.32 After 1 to 5 years 2,395,273 22 227,724 - 2,167,571 0.83 After 5 to 10 years 56,251 13 7,670 - 48,594 1.54 After 10 years 12,170 36 - - 12,206 4.62 Puerto Rico government obligations: After 10 years (2) 3,331 - 755 375 2,201 - United States and Puerto Rico government obligations 2,744,902 71 250,169 375 2,494,429 0.83 MBS: FHLMC certificates: After 1 to 5 years 4,235 - 169 - 4,066 2.33 After 5 to 10 years 204,085 - 19,061 - 185,024 1.55 After 10 years 1,092,289 - 186,558 - 905,731 1.38 1,300,609 - 205,788 - 1,094,821 1.41 GNMA certificates: Due within one year 5 - - - 5 1.73 After 1 to 5 years 15,508 - 622 - 14,886 2.00 After 5 to 10 years 45,322 1 3,809 - 41,514 1.31 After 10 years 232,632 51 27,169 - 205,514 2.47 293,467 52 31,600 - 261,919 2.27 FNMA certificates: After 1 to 5 years 9,685 - 521 - 9,164 1.76 After 5 to 10 years 400,223 - 36,871 - 363,352 1.70 After 10 years 1,186,635 124 186,757 - 1,000,002 1.38 1,596,543 124 224,149 - 1,372,518 1.46 Collateralized mortgage obligations issued or guaranteed by the FHLMC, FNMA and GNMA ("CMOs"): After 1 to 5 years 30,578 - 4,463 - 26,115 2.43 After 10 years 423,695 - 80,271 - 343,424 1.38 454,273 - 84,734 - 369,539 1.45 Private label: After 10 years 7,903 - 2,026 83 5,794 6.83 Total MBS 3,652,795 176 548,297 83 3,104,591 1.52 Other Due within one year 500 - - - 500 0.84 Total available-for-sale debt securities $ 6,398,197 $ 247 $ 798,466 $ 458 $ 5,599,520 1.22 (1) Excludes accrued interest receivable on available-for-sale debt securities that totaled $ 11.1 million as of December 31, 2022 reported as part of accrued interest receivable on loans and investment securities in the consolidated statements of financial condition, and excluded from the estimate of credit losses. (2) Consists of a residential pass-through MBS issued by the PRHFA that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico government in 2010. During 2021, the Corporation placed this instrument in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The amortized cost, gross unrealized gains and losses recorded in OCL, ACL, estimated fair value, and weighted-average yield of available-for-sale debt securities by contractual maturities as of December 31, 2021 were as follows:
December 31, 2021 Amortized cost (1) Gross ACL Fair value Unrealized Weighted- Gains Losses average yield% (Dollars in thousands) U.S. Treasury securities: After 1 to 5 years $ 149,660 $ 59 $ 1,233 $ - $ 148,486 0.68 U.S. GSEs' obligations: After 1 to 5 years 1,877,181 240 29,555 - 1,847,866 0.60 After 5 to 10 years 403,785 175 10,856 - 393,104 0.90 After 10 years 15,788 224 - - 16,012 0.63 Puerto Rico government obligations: After 10 years (2) 3,574 - 416 308 2,850 - United States and Puerto Rico government obligations 2,449,988 698 42,060 308 2,408,318 0.67 MBS: FHLMC certificates: After 1 to 5 years 2,811 119 - - 2,930 2.65 After 5 to 10 years 193,234 2,419 1,122 - 194,531 1.29 After 10 years 1,240,964 3,748 23,503 - 1,221,209 1.18 1,437,009 6,286 24,625 - 1,418,670 1.20 GNMA certificates: Due within one year 2 - - - 2 1.32 After 1 to 5 years 16,714 572 - - 17,286 2.90 After 5 to 10 years 27,271 80 139 - 27,212 0.51 After 10 years 338,927 7,091 2,174 - 343,844 1.45 382,914 7,743 2,313 - 388,344 1.45 FNMA certificates: Due within one year 4,975 21 - - 4,996 2.03 After 1 to 5 years 21,337 424 - - 21,761 2.87 After 5 to 10 years 298,771 4,387 1,917 - 301,241 1.41 After 10 years 1,389,381 8,953 21,747 - 1,376,587 1.21 1,714,464 13,785 23,664 - 1,704,585 1.27 CMOs: After 1 to 5 years 24,007 1 778 - 23,230 1.31 After 5 to 10 years 14,316 97 - - 14,413 0.76 After 10 years 500,811 290 13,134 - 487,967 1.23 539,134 388 13,912 - 525,610 1.22 Private label: After 10 years 9,994 - 1,963 797 7,234 2.21 Total MBS 4,083,515 28,202 66,477 797 4,044,443 1.26 Other Due within one year 500 - - - 500 0.72 After 1 to 5 years 500 - - - 500 0.84 1,000 - - - 1,000 0.78 Total available-for-sale debt securities $ 6,534,503 $ 28,900 $ 108,537 1,105 $ 6,453,761 1.03 (1) Excludes accrued interest receivable on available-for-sale debt securities that totaled $ 10.1 million as of December 31, 2021 reported as part of accrued interest receivable on loans and investment securities in the consolidated statements of financial condition, and excluded from the estimate of credit losses. (2) Consists of a residential pass-through MBS issued by the PRHFA that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico government in 2010. During 2021, the Corporation placed this instrument in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Maturities of available-for-sale debt securities are based on the period of final contractual maturity. Expected maturities might differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted-average yield on available-for-sale debt securities is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gain or loss on available-for-sale debt securities is presented as part of other comprehensive (loss) income.
The following tables show the fair value and gross unrealized losses of the Corporation’s available-for-sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2022 and 2021. The tables also include debt securities for which an ACL was recorded.
As of December 31, 2022 Less than 12 months 12 months or more Total Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses (In thousands) Debt securities: U.S. Treasury and U.S. GSEs' obligations $ 298,313 $ 18,057 $ 2,174,724 $ 231,357 $ 2,473,037 $ 249,414 Puerto Rico government obligations - - 2,201 755 (1) 2,201 755 MBS: FHLMC 263,184 45,776 831,637 160,012 1,094,821 205,788 GNMA 74,829 3,433 179,854 28,167 254,683 31,600 FNMA 424,178 51,289 938,625 172,860 1,362,803 224,149 CMOs 54,688 6,788 314,851 77,946 369,539 84,734 Private label - - 5,794 2,026 (1) 5,794 2,026 $ 1,115,192 $ 125,343 $ 4,447,686 $ 673,123 $ 5,562,878 $ 798,466 (1) Unrealized losses do not include the credit loss component recorded as part of the ACL. As of December 31, 2022, PRHFA bond and private label MBS had an ACL of $ 0.4 million and $ 0.1 million, respectively. As of December 31, 2021 Less than 12 months 12 months or more Total Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses (In thousands) Debt securities: U.S. Treasury and U.S. GSEs' obligations $ 1,717,340 $ 25,401 $ 606,179 $ 16,243 $ 2,323,519 $ 41,644 Puerto Rico government obligations - - 2,850 416 (1) 2,850 416 MBS: FHLMC 986,345 16,144 221,896 8,481 1,208,241 24,625 GNMA 194,271 1,329 41,233 984 235,504 2,313 FNMA 1,237,701 19,843 112,559 3,821 1,350,260 23,664 CMOs 466,004 13,552 16,656 360 482,660 13,912 Private label - - 7,234 1,963 (1) 7,234 1,963 $ 4,601,661 $ 76,269 $ 1,008,607 $ 32,268 $ 5,610,268 $ 108,537 (1) Unrealized losses do not include the credit loss component recorded as part of the ACL. As of December 31, 2021, PRHFA bond and private label MBS had an ACL of $ 0.3 million and $ 0.8 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
There were no sales of available-for-sale debt securities during the years ended December 31, 2022 and 2021. During the year ended December 31, 2020, proceeds from sales of available-for-sale debt securities amounted to $ 1.2 billion, including gross realized gains of $ 13.3 million and gross realized losses of $ 0.1 million. The $ 13.2 million net gain was realized on tax-exempt securities or was realized at the tax-exempt international banking entity subsidiary, which had no effect in the income tax expense recorded during the year ended December 31, 2020. Assessment for Credit Losses Debt securities issued by U.S. government agencies, U.S. GSEs, and the U.S. Treasury, including notes and MBS, accounted for substantially all of the total available-for -sale portfolio as of December 31, 2022, and the Corporation expects no credit losses on these securities, given the explicit and implicit guarantees provided by the U.S. federal government. Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Corporation does not have the intent to sell these U.S. government and agencies debt securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Corporation does not consider impairments on these securities to be credit related as of December 31, 2022. The Corporation’s credit loss assessment was concentrated mainly on private label MBS and on Puerto Rico government debt securities, for which credit losses are evaluated on a quarterly basis. The Corporation’s available-for-sale MBS portfolio included private label MBS with a fair value of $ 5.8 million, which had unrealized losses of approximately $ 2.1 million as of December 31, 2022, of which $ 0.1 million is due to credit deterioration and is part of the ACL. 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 collateral is fixed-rate, single-family residential mortgage loans in the United States with original FICO scores over 700 and moderate loan-to-value ratios (under 80%), as well as moderate delinquency levels. As of December 31, 2022, the Corporation did not have the intent to sell these securities and determined that it is likely that it will not be required to sell the securities before anticipated recovery. The Corporation determined the ACL for private label MBS based on a risk- adjusted discounted cash flow methodology that considers the structure and terms of the instruments. The Corporation utilized PDs and LGDs that considered, among other things, historical payment performance, loan-to-value attributes, and relevant current and forward-looking macroeconomic variables, such as regional unemployment rates and the housing price index. Under this approach, expected cash flows (interest and principal) were discounted at the Treasury yield curve as of the reporting date. Significant assumptions in the valuation of the private label MBS were as follows:
As of As of December 31, 2022 December 31, 2021 Weighted Range Weighted Range Average Minimum Maximum Average Minimum Maximum Discount rate 16.2 % 16.2 % 16.2 % 12.9 % 12.9 % 12.9 % Prepayment rate 11.8 % 1.5 % 15.2 % 15.2 % 7.6 % 24.9 % Projected Cumulative Loss Rate 5.6 % 0.3 % 15.6 % 7.6 % 0.2 % 15.7 %
The Corporation evaluates if a credit loss exists, primarily by monitoring adverse variances in the present value of expected cash flows. As of December 31, 2022, the ACL for these private label MBS was $ 0.1 million, compared to $ 0.8 million as of December 31, 2021.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2022, the Corporation’s available-for-sale debt securities portfolio also included a residential pass-through MBS issued by the PRHFA, collateralized by certain second mortgages, with a fair value of $ 2.2 million, which had an unrealized loss of approximately $ 1.1 million. Approximately $ 0.4 million of the unrealized losses was due to credit deterioration and is part of the ACL. The underlying second mortgage loans were originated under a program launched by the Puerto Rico government in 2010. This residential pass-through MBS was structured as a zero-coupon bond for the first ten years (up to July 2019). The underlying source of repayment on this residential pass-through MBS are second mortgage loans in Puerto Rico. PRHFA, not the Puerto Rico government, provides a guarantee in the event of default and subsequent foreclosure of the properties underlying the second mortgage loans. During 2021, the Corporation placed this instrument in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral. The Corporation determined the ACL on this instrument based on a discounted cash flow methodology that considered the structure and terms of the debt security. The Corporation utilized PDs and LGDs that considered, among other things, historical payment performance, loan-to-value attributes, and relevant current and forward-looking macroeconomic variables, such as regional unemployment rates, the housing price index, and expected recovery from the PRHFA guarantee. Under this approach, expected cash flows (interest and principal) were discounted at the Treasury yield curve plus a spread as of the reporting date and compared to the amortized cost. In the event that the second mortgage loans default and the collateral is insufficient to satisfy the outstanding balance of this residential pass-through MBS, PRHFA’s ability to honor its insurance will depend on, among other factors, the financial condition of PRHFA at the time such obligation becomes due and payable. Further deterioration of the Puerto Rico economy or fiscal health of the PRHFA could impact the value of these securities, resulting in additional losses to the Corporation. As of December 31, 2022, the Corporation did not have the intent to sell this security and determined that it was likely that it will not be required to sell the security before its anticipated recovery. The following tables present a roll-forward by major security type for the years ended December 31, 2022, 2021, and 2020 of the ACL on available-for-sale debt securities:
Year Ended December 31, 2022 Private label MBS Puerto Rico Government Obligations Total (In thousands) Beginning balance $ 797 $ 308 $ 1,105 Provision for credit losses - (benefit) expense ( 501 ) 67 ( 434 ) Net charge-offs ( 213 ) - ( 213 ) ACL on available-for-sale debt securities $ 83 $ 375 $ 458 Year Ended December 31, 2021 Private label MBS Puerto Rico Government Obligations Total (In thousands) Beginning balance $ 1,002 $ 308 $ 1,310 Provision for credit losses - (benefit) ( 136 ) - ( 136 ) Net charge-offs ( 69 ) - ( 69 ) ACL on available-for-sale debt securities $ 797 $ 308 $ 1,105 Year Ended December 31, 2020 Private label MBS Puerto Rico Government Obligations Total (In thousands) Beginning balance $ - $ - $ - Provision for credit losses - expense 1,333 308 1,641 Net charge-offs ( 331 ) - ( 331 ) ACL on available-for-sale debt securities $ 1,002 $ 308 $ 1,310
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) During 2022, the Corporation recognized $ 86.1 million of interest income on available-for-sale debt securities (2021 - $ 62.7 million; 2020 - $ 49.0 million), of which $ 40.7 million was exempt (2021 - $ 25.7 million; 2020 - $ 38.5 million). The exempt securities primarily relate to MBS and government obligations held by IBEs (as defined in the International Banking Entity Act of Puerto Rico), whose interest income and sales are exempt from Puerto Rico income taxation under that act.
Held-to-Maturity Debt Securities The amortized cost, gross unrecognized gains and losses, estimated fair value, ACL, weighted-average yield and contractual maturities of held-to-maturity debt securities as of December 31, 2022 and 2021 were as follows :
December 31, 2022 Amortized cost (1) Gross Unrecognized Fair value Weighted- Gains Losses ACL average yield% (Dollars in thousands) Puerto Rico municipal bonds: Due within one year $ 1,202 $ - $ 15 $ 1,187 $ 2 5.20 After 1 to 5 years 42,530 886 1,076 42,340 656 6.34 After 5 to 10 years 55,956 3,182 360 58,778 3,243 6.29 After 10 years 66,022 - 1,318 64,704 4,385 7.10 Total Puerto Rico municipal bonds 165,710 4,068 2,769 167,009 8,286 6.62 MBS: FHLMC certificates: After 5 to 10 years $ 21,443 $ - $ 746 $ 20,697 $ - 3.03 After 10 years 19,362 - 888 18,474 - 4.21 40,805 - 1,634 39,171 - 3.59 GNMA certificates: ` After 10 years 19,131 - 943 18,188 - 3.35 FNMA certificates: After 1 to 5 years 9,621 - 396 9,225 - 3.48 After 10 years 72,347 - 3,155 69,192 - 4.14 81,968 - - 3,551 78,417 - 4.06 CMOs After 10 years 129,923 - 5,593 124,330 - 3.24 Total MBS 271,827 - 11,721 260,106 - 3.55 Total held-to-maturity debt securities $ 437,537 $ 4,068 $ 14,490 $ 427,115 $ 8,286 4.71 (1) Excludes accrued interest receivable on held-to-maturity debt securities that totaled $ 5.5 million as of December 31, 2022, was reported as part of accrued interest receivable on loans and investment securities in the consolidated statements of financial condition, and is excluded from the estimate of credit losses.
December 31, 2021 Amortized cost (1) Gross Unrecognized Fair value Weighted- Gains Losses ACL average yield% (Dollars in thousands) Puerto Rico municipal bonds: Due within one year $ 2,995 $ 5 $ - $ 3,000 $ 70 5.39 After 1 to 5 years 14,785 526 156 15,155 347 2.35 After 5 to 10 years 90,584 1,555 3,139 89,000 3,258 4.25 After 10 years 69,769 - 9,777 59,992 4,896 4.06 Total held-to-maturity debt securities $ 178,133 $ 2,086 $ 13,072 $ 167,147 $ 8,571 4.04 (1) Excludes accrued interest receivable on held-to-maturity debt securities that totaled $ 3.4 million as of December 31, 2021, was reported as part of accrued interest receivable on loans and investment securities in the consolidated statements of financial condition, and is excluded from the estimate of credit losses.
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During 2022, the Corporation purchased approximately $ 289.9 million of GSEs’ MBS, which were classified as held-to-maturity debt securities. The following tables show the Corporation’s held-to-maturity debt securities ’ fair value and gross unrecognized losses, aggregated by category and length of time that individual securities had been in a continuous unrecognized loss position, as of December 31, 2022 and 2021, including debt securities for which an ACL was recorded:
As of December 31, 2022 Less than 12 months 12 months or more Total Unrecognized Unrecognized Unrecognized Fair Value Losses Fair Value Losses Fair Value Losses (In thousands) Debt securities: Puerto Rico municipal bonds $ - $ - $ 98,797 $ 2,769 $ 98,797 $ 2,769 MBS: FHLMC certificates 39,171 1,634 - - 39,171 1,634 GNMA certificates 18,188 943 - - 18,188 943 FNMA certificates 78,417 3,551 - - 78,417 3,551 CMOs 124,330 5,593 - - 124,330 5,593 Total held-to-maturity debt securities $ 260,106 $ 11,721 $ 98,797 $ 2,769 $ 358,903 $ 14,490 As of December 31, 2021 Less than 12 months 12 months or more Total Unrecognized Unrecognized Unrecognized Fair Value Losses Fair Value Losses Fair Value Losses (In thousands) Debt securities: Puerto Rico municipal bonds $ - $ - $ 140,732 $ 13,072 $ 140,732 $ 13,072
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation classifies the held-to-maturity debt securities portfolio into the following major security types: MBS issued by GSEs and Puerto Rico municipal bonds. As of December 31, 2022, all of the MBS included in the held-to-maturity debt securities portfolio were issued by GSEs. The Corporation does not recognize an ACL for these securities since they are highly rated by major rating agencies and have a long history of no credit losses. In the case of Puerto Rico municipal bonds, the Corporation determines the ACL based on the product of a cumulative PD and LGD, and the amortized cost basis of the bonds over their remaining expected life as described in Note 1 – Nature of Business and Summary of Significant Accounting Policies. The Corporation performs periodic credit quality reviews on these issuers. All of the Puerto Rico municipal bonds were current as to scheduled contractual payments as of December 31, 2022. The Puerto Rico municipal bonds had an ACL of $ 8.3 million as of December 31, 2022, down $ 0.3 million from $ 8.6 million as of December 31, 2021, mostly related to a reduction in qualitative reserves driven by improvements in the underlying financial information of certain issuers during 2022. The following table presents the activity in the ACL for held-to-maturity debt securities by major security type for the years ended December 31, 2022, 2021 and 2020:
Puerto Rico Municipal Bonds Year Ended December 31, 2022 December 31, 2021 December 31, 2020 (In thousands) Beginning Balance $ 8,571 $ 8,845 $ - Impact of adopting ASC 326 - - 8,134 Initial allowance on PCD debt securities - - 1,269 Provision for credit losses - (benefit) ( 285 ) ( 274 ) ( 558 ) ACL on held-to-maturity debt securities $ 8,286 $ 8,571 $ 8,845
During the second quarter of 2019, the oversight board established by Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) announced the designation of Puerto Rico’s 78 municipalities as covered instrumentalities under PROMESA. Municipalities may be affected by the negative economic and other effects resulting from expense, revenue, or cash management measures taken by the Puerto Rico government to address its fiscal situation, or measures included in fiscal plans of other government entities, and, more recently, by the effect of the COVID-19 pandemic on the Puerto Rico and global economy. Given the inherent uncertainties about the fiscal situation of the Puerto Rico central government, the COVID-19 pandemic, and the measures taken, or to be taken, by other government entities in response to economic and fiscal challenges on municipalities, the Corporation cannot be certain whether future charges to the ACL on these securities will be required. From time to time, the Corporation has securities held to maturity with an original maturity of three months or less that are considered cash and cash equivalents and are classified as money market investments in the consolidated statements of financial condition. As of December 31, 2022 and 2021, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents. During 2022, the Corporation recognized $ 15.5 million of interest income on held-to-maturity debt securities (2021 - $ 8.8 million; 2020 - $ 7.6 million), of which $ 15.4 million was exempt (2021 - $ 8.8 million; 2020 - $ 7.6 million). The exempt securities primarily relate to MBS held by IBEs (as defined in the International Banking Entity Act of Puerto Rico), whose interest income and sales are exempt from Puerto Rico income taxation under that act; and tax-exempt Puerto Rico municipal bonds.
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Credit Quality Indicators: The held-to-maturity debt securities portfolio consisted of GSEs ’ MBS and financing arrangements with Puerto Rico municipalities issued in bond form. As previously mentioned, the Corporation expects no credit losses on GSEs MBS. The Puerto Rico municipal bonds are accounted for as securities but are underwritten as loans with features that are typically found in commercial loans. Accordingly, the Corporation monitors the credit quality of these municipal bonds through the use of internal credit-risk ratings, which are generally updated on a quarterly basis. The Corporation considers a municipal bond as a criticized asset if its risk rating is Special Mention, Substandard, Doubtful, or Loss. Puerto Rico municipal bonds that do not meet the criteria for classification as criticized assets are considered to be pass-rated securities. The asset categories are defined below: Pass – Assets classified as pass have a well-defined primary source of repayment, with no apparent risk, strong financial position, minimal operating risk, profitability, liquidity and strong capitalization and include assets categorized as watch. Assets classified as watch have acceptable business credit, but borrowers ’ operations, cash flow or financial condition evidence more than average risk and requires additional level of supervision and attention from loan officers. Special Mention – Special Mention assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Corporation’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Corporation to sufficient risk to warrant adverse classification. Substandard – Substandard assets are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful – Doubtful classifications have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently known facts, conditions and values. A Doubtful classification may be appropriate in cases where significant risk exposures are perceived, but loss cannot be determined because of specific reasonable pending factors, which may strengthen the credit in the near term. Loss – Assets classified as 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 Puerto Rico municipal bonds to evaluate if they are properly classified, and to measure credit losses on these securities. The frequency of these reviews will depend on the amount of the aggregate outstanding debt, and the risk rating classification of the obligor. The Corporation has a Loan Review Group that reports directly to the Corporation’s Risk Management Committee and administratively to the Chief Risk Officer. The Loan Review Group performs annual comprehensive credit process reviews of the Bank’s commercial loan portfolios, including the above-mentioned Puerto Rico municipal bonds accounted for as held-to-maturity debt securities. The objective of these loan reviews is to assess accuracy of the Bank’s determination and maintenance of loan risk rating and its adherence to lending policies, practices and procedures. The monitoring performed by this group contributes to the assessment of compliance with credit policies and underwriting standards, the determination of the current level of credit risk, the evaluation of the effectiveness of the credit management process, and the identification of any deficiency that may arise in the credit- granting process. Based on its findings, the Loan Review Group recommends corrective actions, if necessary, that help in maintaining a sound credit process. The Loan Review Group reports the results of the credit process reviews to the Risk Management Committee.
As of December 31, 2022 and 2021, all Puerto Rico municipal bonds classified as held-to-maturity were classified as Pass. No held-to-maturity debt securities were on nonaccrual status, 90 days past due and still accruing, or past due as of December 31, 2022 and 2021. A security is considered to be past due once it is 30 days contractually past due under the terms of the agreement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 4 – LOANS HELD FOR INVESTMENT The following table provides information about the loan portfolio held for investment by portfolio segment and disaggregated by geographic locations as of the indicated dates:
As of December 31, As of December 31, 2022 2021 (In thousands) Puerto Rico and Virgin Islands region: Residential mortgage loans, mainly secured by first mortgages $ 2,417,900 $ 2,549,573 Construction loans 34,772 43,133 Commercial mortgage loans 1,834,204 1,702,231 C&I loans 1,860,109 1,946,597 Consumer loans 3,317,489 2,872,384 Loans held for investment $ 9,464,474 $ 9,113,918 Florida region: Residential mortgage loans, mainly secured by first mortgages $ 429,390 $ 429,322 Construction loans 98,181 95,866 Commercial mortgage loans 524,647 465,238 C&I loans 1,026,154 940,654 Consumer loans 9,979 15,660 Loans held for investment $ 2,088,351 $ 1,946,740 Total: Residential mortgage loans, mainly secured by first mortgages $ 2,847,290 $ 2,978,895 Construction loans 132,953 138,999 Commercial mortgage loans 2,358,851 2,167,469 C&I loans (1) 2,886,263 2,887,251 Consumer loans 3,327,468 2,888,044 Loans held for investment (2) 11,552,825 11,060,658 ACL on loans and finance leases ( 260,464 ) ( 269,030 ) Loans held for investment, net $ 11,292,361 $ 10,791,628 (1) As of December 31, 2022 and 2021, includes $ 838.5 million and $ 952.1 million, respectively, of commercial loans that were secured by real estate and the primary source of repayment at origination was not dependent upon the real estate. (2) Includes accretable fair value net purchase discounts of $ 29.3 million and $ 35.3 million as of December 31, 2022 and 2021, respectively.
As of December 31, 2022, and 2021, the Corporation had net deferred origination costs on its loan portfolio amounting to $ 11.2 million and $ 4.3 million, respectively. The total loan portfolio is net of unearned income of $ 103.4 million and $ 79.0 million as of December 31, 2022 and 2021, respectively, of which $ 99.2 million and $ 75.8 million are related to finance leases as of December 31, 2022 and 2021, respectively. As of December 31, 2022, the Corporation was servicing residential mortgage loans owned by others in an aggregate amount of $ 3.9 billion (2021 — $ 4.0 billion), and commercial loan participations owned by others in an aggregate amount of $ 305.1 million as of December 31, 2022 (2021 — $ 383.5 million). Various loans, mainly secured by first mortgages, were assigned as collateral for time deposits accounts, public funds, borrowings, and related unused commitments. Total loans carrying value pledged as collateral amounted to $ 4.3 billion and $ 4.1 billion as of December 31, 2022 and 2021, respectively. As of December 31, 2022, loans pledged as collateral include $ 2.2 billion of pledged collateral related to the Borrower-in-Custody Program (the “BIC Program”) of the FED which remained undrawn and $ 1.8 billion of loans pledged to the FHLB, compared to $ 2.1 billion and $ 1.8 billion, respectively, as of December 31, 2021.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Corporation’s aging of the loan portfolio held for investment, as well as information about nonaccrual loans with no ACL by portfolio classes as of December 31, 2022 and 2021 are as follows:
As of December 31, 2022 Days Past Due and Accruing Current 30-59 60-89 90+ (1) (2) (3) Nonaccrual (4) (5) Total loans held for investment Nonaccrual Loans with no ACL (6) (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government-guaranteed loans (1) (3) (7) $ 67,116 $ - $ 2,586 $ 48,456 $ - $ 118,158 $ - Conventional residential mortgage loans (2) (7) 2,643,909 - 25,630 16,821 42,772 2,729,132 2,292 Commercial loans: Construction loans 130,617 - - 128 2,208 132,953 977 Commercial mortgage loans (2) (7) 2,330,094 300 2,367 3,771 22,319 2,358,851 15,991 C&I loans 2,868,989 1,984 1,128 6,332 7,830 2,886,263 3,300 Consumer loans: Auto loans 1,740,271 40,039 7,089 - 10,672 1,798,071 2,136 Finance leases 707,646 7,148 1,791 - 1,645 718,230 330 Personal loans 346,366 3,738 1,894 - 1,248 353,246 - Credit cards 301,013 3,705 2,238 4,775 - 311,731 - Other consumer loans 141,687 1,804 1,458 - 1,241 146,190 - Total loans held for investment $ 11,277,708 $ 58,718 $ 46,181 $ 80,283 $ 89,935 $ 11,552,825 $ 25,026 (1) It is the Corporation's policy to report delinquent FHA/VA government-guaranteed residential mortgage loans as past-due loans 90 days and still accruing as opposed to nonaccrual loans. The Corporation continues accruing interest on these loans until they have passed the 15 months delinquency mark, taking into consideration the FHA interest curtailment process. These balances include $ 28.2 million of residential mortgage loans guaranteed by the FHA that were over 15 months delinquent. (2) Includes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans as “units of account” both at the time of adoption of CECL on January 1, 2020 and on an ongoing basis for credit loss measurement. These loans will continue to be excluded from nonaccrual loan statistics as long as the Corporation can reasonably estimate the timing and amount of cash flows expected to be collected on the loan pools. The portion of such loans contractually past due 90 days or more, amounting to $ 12.0 million as of December 31, 2022 ($ 11.0 million conventional residential mortgage loans and $ 1.0 million commercial mortgage loans), is presented in the loans past due 90 days or more and still accruing category in the table above. (3) Include rebooked loans, which were previously pooled into GNMA securities, amounting to $ 10.3 million as of December 31, 2022. Under the GNMA program, the Corporation has the option but not the obligation to repurchase loans that meet GNMA’s specified delinquency criteria. For accounting purposes, these loans subject to the repurchase option are required to be reflected on the financial statements with an offsetting liability. (4) Nonaccrual loans in the Florida region amounted to $ 8.3 million as of December 31, 2022, primarily nonaccrual residential mortgage loans. (5) Nonaccrual loans exclude $ 328.1 million of TDR loans that were in compliance with modified terms and in accrual status as of December 31, 2022. (6) Includes $ 0.3 million of nonaccrual C&I loans with no ACL in the Florida region as of December 31, 2022. (7) According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears on two or more monthly payments. FHA/VA government-guaranteed loans, conventional residential mortgage loans, and commercial mortgage loans past due 30-59 days, but less than two payments in arrears, as of December 31, 2022 amounted to $ 6.1 million, $ 65.2 million, and $ 1.6 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2021 Days Past Due and Accruing Current 30-59 60-89 90+ (1)(2)(3) Nonaccrual (4) (5) Total loans held for investment Nonaccrual Loans with no ACL (6) (In thousands) Residential mortgage loans, mainly secured by first mortgages: FHA/VA government-guaranteed loans (1) (3) (7) $ 57,522 $ - $ 2,355 $ 65,515 $ - $ 125,392 $ - Conventional residential mortgage loans (2) (7) 2,738,111 - 31,832 28,433 55,127 2,853,503 3,689 Commercial loans: Construction loans 136,317 18 - - 2,664 138,999 1,000 Commercial mortgage loans (2) (7) 2,129,375 2,402 436 9,919 25,337 2,167,469 8,289 C&I loans 2,858,397 2,047 1,845 7,827 17,135 2,887,251 11,393 Consumer loans: Auto loans 1,533,445 26,462 4,949 - 6,684 1,571,540 3,146 Finance leases 568,606 4,820 713 - 866 575,005 196 Personal loans 310,390 3,299 1,285 - 1,208 316,182 - Credit cards 282,179 3,158 1,904 2,985 - 290,226 - Other consumer loans 130,588 1,996 811 - 1,696 135,091 20 Total loans held for investment $ 10,744,930 $ 44,202 $ 46,130 $ 114,679 $ 110,717 $ 11,060,658 $ 27,733 (1) It is the Corporation's policy to report delinquent FHA/VA government-guaranteed residential mortgage loans as past-due loans 90 days and still accruing as opposed to nonaccrual loans. The Corporation continues accruing interest on these loans until they have passed the 15 months delinquency mark, taking into consideration the FHA interest curtailment process. These balances include $ 46.6 million of residential mortgage loans guaranteed by the FHA that were over 15 months delinquent. (2) Includes PCD loans previously accounted for under ASC Subtopic 310-30 for which the Corporation made the accounting policy election of maintaining pools of loans as “units of account” both at the time of adoption of CECL on January 1, 2020 and on an ongoing basis for credit loss measurement. These loans will continue to be excluded from nonaccrual loan statistics as long as the Corporation can reasonably estimate the timing and amount of cash flows expected to be collected on the loan pools. The portion of such loans contractually past due 90 days or more, amounting to $ 20.6 million as of December 31, 2021 ($ 19.1 million conventional residential mortgage loans and $ 1.5 million commercial mortgage loans), is presented in the loans past due 90 days or more and still accruing category in the table above. (3) Include rebooked loans, which were previously pooled into GNMA securities, amounting to $ 7.2 million as of December 31, 2021. Under the GNMA program, the Corporation has the option but not the obligation to repurchase loans that meet GNMA’s specified delinquency criteria. For accounting purposes, these loans subject to the repurchase option are required to be reflected on the financial statements with an offsetting liability. (4) Nonaccrual loans in the Florida region amounted to $ 8.2 million as of December 31, 2021, primarily nonaccrual residential mortgage loans. (5) Nonaccrual loans exclude $ 363.4 million of TDR loans that were in compliance with modified terms and in accrual status as of December 31, 2021. (6) Includes $ 0.5 million of nonaccrual C&I loans with no ACL in the Florida region as of December 31, 2021. (7) According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears on two or more monthly payments. FHA/VA government-guaranteed loans, conventional residential mortgage loans, and commercial mortgage loans past due 30-59 days, but less than two payments in arrears, as of December 31, 2021 amounted to $ 6.1 million, $ 66.0 million, and $ 0.7 million, respectively.
When a loan is placed on nonaccrual status, any accrued but uncollected interest income is reversed and charged against interest income and the amortization of any net deferred fees is suspended. The amount of accrued interest reversed against interest income totaled $ 1.7 million, $ 2.0 million and $ 1.9 million for the years ended December 31, 2022, 2021, and 2020, respectively. For the years ended December 31, 2022, 2021, and 2020, the cash interest income recognized on nonaccrual loans amounted to $ 1.5 million, $ 2.3 million, and $ 2.0 million, respectively. As of December 31, 2022, the recorded investment on residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure amounted to $ 72.4 million, including $ 29.4 million of FHA/VA government-guaranteed mortgage loans, and $ 10.0 million of PCD loans acquired prior to the adoption, on January 1, 2020, of CECL. The Corporation commences the foreclosure process on residential real estate loans when a borrower becomes 120 days delinquent. Foreclosure procedures and timelines vary depending on whether the property is located in a judicial or non-judicial state. Occasionally, foreclosures may be delayed due to, among other reasons, mandatory mediations, bankruptcy, court delays, and title issues.
Credit Quality Indicators: The Corporation categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes non-homogeneous loans, such as commercial mortgage, C&I, and construction loans individually to classify the loans’ credit risk. As mentioned above, the Corporation periodically reviews its commercial and construction loans to evaluate if they are properly classified. The frequency of these reviews will depend on the amount of the aggregate outstanding debt, and the risk rating classification of the obligor. In addition, during the renewal and annual review process of applicable credit facilities, the Corporation evaluates the corresponding loan grades. The Corporation uses the same definition for risk ratings as those described for Puerto Rico municipal bonds accounted for as held-to-maturity debt securities, as discussed in Note 3 – Debt Securities. For residential mortgage and consumer loans, the Corporation also evaluates credit quality based on its interest accrual status.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Based on the most recent analysis performed, the amortized cost of commercial and construction loans by portfolio classes and by origination year based on the internal credit-risk category as of December 31, 2022 and the amortized cost of commercial and construction loans by portfolio classes based on the internal credit-risk category as of December 31, 2021 was as follows:
As of December 31, 2022 Puerto Rico and Virgin Islands region Term Loans As of December 31, 2021 Amortized Cost Basis by Origination Year (1) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Total (In thousands) CONSTRUCTION Risk Ratings: Pass $ 9,463 $ 18,385 $ - $ - $ - $ 4,031 $ - $ 31,879 $ 38,066 Criticized: Special Mention - - - - - - - - 765 Substandard - - - - - 2,893 - 2,893 4,302 Doubtful - - - - - - - - - Loss - - - - - - - - - Total construction loans $ 9,463 $ 18,385 $ - $ - $ - $ 6,924 $ - $ 34,772 $ 43,133 COMMERCIAL MORTGAGE Risk Ratings: Pass $ 391,589 $ 141,456 $ 363,115 $ 296,954 $ 193,795 $ 267,793 $ 1,026 $ 1,655,728 $ 1,395,569 Criticized: Special Mention 1,198 - 3,583 6,919 12,042 121,673 - 145,415 259,263 Substandard 135 - - 2,819 - 30,107 - 33,061 47,399 Doubtful - - - - - - - - - Loss - - - - - - - - - Total commercial mortgage loans $ 392,922 $ 141,456 $ 366,698 $ 306,692 $ 205,837 $ 419,573 $ 1,026 $ 1,834,204 $ 1,702,231 C&I Risk Ratings: Pass $ 297,932 $ 195,460 $ 184,856 $ 315,987 $ 88,484 $ 179,201 $ 527,652 $ 1,789,572 $ 1,852,552 Criticized: Special Mention 138 912 - 500 9,867 2,631 29,176 43,224 32,650 Substandard 203 351 1,324 14,119 725 10,238 353 27,313 61,395 Doubtful - - - - - - - - - Loss - - - - - - - - - Total C&I loans $ 298,273 $ 196,723 $ 186,180 $ 330,606 $ 99,076 $ 192,070 $ 557,181 $ 1,860,109 $ 1,946,597 (1) Excludes accrued interest receivable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2022 Term Loans As of December 31, 2021 Florida region Amortized Cost Basis by Origination Year (1) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Total (In thousands) CONSTRUCTION Risk Ratings: Pass $ 48,536 $ 42,841 $ - $ 14 $ - $ - $ 6,790 $ 98,181 $ 95,866 Criticized: Special Mention - - - - - - - - - Substandard - - - - - - - - - Doubtful - - - - - - - - - Loss - - - - - - - - - Total construction loans $ 48,536 $ 42,841 $ - $ 14 $ - $ - $ 6,790 $ 98,181 $ 95,866 COMMERCIAL MORTGAGE Risk Ratings: Pass $ 176,131 $ 70,525 $ 41,413 $ 54,839 $ 71,404 $ 70,316 $ 18,556 $ 503,184 $ 404,304 Criticized: Special Mention - - 6,986 13,309 - - - 20,295 60,618 Substandard - - 1,168 - - - - 1,168 316 Doubtful - - - - - - - - - Loss - - - - - - - - - Total commercial mortgage loans $ 176,131 $ 70,525 $ 49,567 $ 68,148 $ 71,404 $ 70,316 $ 18,556 $ 524,647 $ 465,238 C&I Risk Ratings: Pass $ 277,637 $ 163,210 $ 77,027 $ 223,504 $ 66,484 $ 35,028 $ 136,261 $ 979,151 $ 826,823 Criticized: Special Mention - - - 5,974 - 11,931 - 17,905 49,946 Substandard - - 267 24,852 - 3,678 301 29,098 63,885 Doubtful - - - - - - - - - Loss - - - - - - - - - Total C&I loans $ 277,637 $ 163,210 $ 77,294 $ 254,330 $ 66,484 $ 50,637 $ 136,562 $ 1,026,154 $ 940,654 (1) Excludes accrued interest receivable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2022 Total Term Loans As of December 31, 2021 Amortized Cost Basis by Origination Year (1) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Total (In thousands) CONSTRUCTION Risk Ratings: Pass $ 57,999 $ 61,226 $ - $ 14 $ - $ 4,031 $ 6,790 $ 130,060 $ 133,932 Criticized: Special Mention - - - - - - - - 765 Substandard - - - - - 2,893 - 2,893 4,302 Doubtful - - - - - - - - - Loss - - - - - - - - - Total construction loans $ 57,999 $ 61,226 $ - $ 14 $ - $ 6,924 $ 6,790 $ 132,953 $ 138,999 COMMERCIAL MORTGAGE Risk Ratings: Pass $ 567,720 $ 211,981 $ 404,528 $ 351,793 $ 265,199 $ 338,109 $ 19,582 $ 2,158,912 $ 1,799,873 Criticized: Special Mention 1,198 - 10,569 20,228 12,042 121,673 - 165,710 319,881 Substandard 135 - 1,168 2,819 - 30,107 - 34,229 47,715 Doubtful - - - - - - - - - Loss - - - - - - - - - Total commercial mortgage loans $ 569,053 $ 211,981 $ 416,265 $ 374,840 $ 277,241 $ 489,889 $ 19,582 $ 2,358,851 $ 2,167,469 C&I Risk Ratings: Pass $ 575,569 $ 358,670 $ 261,883 $ 539,491 $ 154,968 $ 214,229 $ 663,913 $ 2,768,723 $ 2,679,375 Criticized: Special Mention 138 912 - 6,474 9,867 14,562 29,176 61,129 82,596 Substandard 203 351 1,591 38,971 725 13,916 654 56,411 125,280 Doubtful - - - - - - - - - Loss - - - - - - - - - Total C&I loans $ 575,910 $ 359,933 $ 263,474 $ 584,936 $ 165,560 $ 242,707 $ 693,743 $ 2,886,263 $ 2,887,251 (1) Excludes accrued interest receivable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables present the amortized cost of residential mortgage loans by portfolio classes and by origination year based on accrual status as of December 31, 2022, and the amortized cost of residential mortgage loans by portfolio classes based on accrual status as of December 31, 2021:
As of December 31, 2022 As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (1) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Total (In thousands) Puerto Rico and Virgin Islands Region: FHA/VA government-guaranteed loans Accrual Status: Performing $ 700 $ 693 $ 802 $ 1,407 $ 3,784 $ 110,030 $ - $ 117,416 $ 124,652 Non-Performing - - - - - - - - - Total FHA/VA government-guaranteed loans $ 700 $ 693 $ 802 $ 1,407 $ 3,784 $ 110,030 $ - $ 117,416 $ 124,652 Conventional residential mortgage loans: Accrual Status: Performing $ 172,628 $ 75,397 $ 31,885 $ 47,911 $ 72,285 $ 1,864,907 $ - $ 2,265,013 $ 2,376,946 Non-Performing - 35 - 219 279 34,938 - 35,471 47,975 Total conventional residential mortgage loans $ 172,628 $ 75,432 $ 31,885 $ 48,130 $ 72,564 $ 1,899,845 $ - $ 2,300,484 $ 2,424,921 Total: Accrual Status: Performing $ 173,328 $ 76,090 $ 32,687 $ 49,318 $ 76,069 $ 1,974,937 $ - $ 2,382,429 $ 2,501,598 Non-Performing - 35 - 219 279 34,938 - 35,471 47,975 Total residential mortgage loans in Puerto Rico and Virgin Islands Region $ 173,328 $ 76,125 $ 32,687 $ 49,537 $ 76,348 $ 2,009,875 $ - $ 2,417,900 $ 2,549,573 (1) Excludes accrued interest receivable.
As of December 31, 2022 As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (1) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Total (In thousands) Florida Region: FHA/VA government-guaranteed loans Accrual Status: Performing $ - $ - $ - $ - $ - $ 742 $ - $ 742 $ 740 Non-Performing - - - - - - - - - Total FHA/VA government-guaranteed loans $ - $ - $ - $ - $ - $ 742 $ - $ 742 $ 740 Conventional residential mortgage loans: Accrual Status: Performing $ 82,968 $ 49,479 $ 31,405 $ 31,144 $ 37,268 $ 189,083 $ - $ 421,347 $ 421,430 Non-Performing - - - 272 477 6,552 - 7,301 7,152 Total conventional residential mortgage loans $ 82,968 $ 49,479 $ 31,405 $ 31,416 $ 37,745 $ 195,635 $ - $ 428,648 $ 428,582 Total: Accrual Status: Performing $ 82,968 $ 49,479 $ 31,405 $ 31,144 $ 37,268 $ 189,825 $ - $ 422,089 $ 422,170 Non-Performing - - - 272 477 6,552 - 7,301 7,152 Total residential mortgage loans in Florida region $ 82,968 $ 49,479 $ 31,405 $ 31,416 $ 37,745 $ 196,377 $ - $ 429,390 $ 429,322 (1) Excludes accrued interest receivable.
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As of December 31, 2022 As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (1) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Total (In thousands) Total: FHA/VA government-guaranteed loans Accrual Status: Performing $ 700 $ 693 $ 802 $ 1,407 $ 3,784 $ 110,772 $ - $ 118,158 $ 125,392 Non-Performing - - - - - - - - - Total FHA/VA government-guaranteed loans $ 700 $ 693 $ 802 $ 1,407 $ 3,784 $ 110,772 $ - $ 118,158 $ 125,392 Conventional residential mortgage loans: Accrual Status: Performing $ 255,596 $ 124,876 $ 63,290 $ 79,055 $ 109,553 $ 2,053,990 $ - $ 2,686,360 $ 2,798,376 Non-Performing - 35 - 491 756 41,490 - 42,772 55,127 Total conventional residential mortgage loans $ 255,596 $ 124,911 $ 63,290 $ 79,546 $ 110,309 $ 2,095,480 $ - $ 2,729,132 $ 2,853,503 Total: Accrual Status: Performing $ 256,296 $ 125,569 $ 64,092 $ 80,462 $ 113,337 $ 2,164,762 $ - $ 2,804,518 $ 2,923,768 Non-Performing - 35 - 491 756 41,490 - 42,772 55,127 Total residential mortgage loans $ 256,296 $ 125,604 $ 64,092 $ 80,953 $ 114,093 $ 2,206,252 $ - $ 2,847,290 $ 2,978,895 (1) Excludes accrued interest receivable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables present the amortized cost of consumer loans by portfolio classes and by origination year based on accrual status as of December 31, 2022, and the amortized cost of consumer loans by portfolio classes based on accrual status as of December 31, 2021:
As of December 31, 2022 As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (1) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Total (In thousands) Puerto Rico and Virgin Islands Regions: Auto loans: Accrual Status: Performing $ 674,145 $ 510,950 $ 254,196 $ 206,345 $ 99,008 $ 39,138 $ - $ 1,783,782 $ 1,556,097 Non-Performing 1,666 2,140 1,596 2,508 1,385 1,301 - 10,596 6,684 Total auto loans $ 675,811 $ 513,090 $ 255,792 $ 208,853 $ 100,393 $ 40,439 $ - $ 1,794,378 $ 1,562,781 Finance leases: Accrual Status: Performing $ 292,995 $ 192,435 $ 88,196 $ 81,186 $ 48,332 $ 13,441 $ - $ 716,585 $ 574,139 Non-Performing 176 253 305 219 384 308 - 1,645 866 Total finance leases $ 293,171 $ 192,688 $ 88,501 $ 81,405 $ 48,716 $ 13,749 $ - $ 718,230 $ 575,005 Personal loans: Accrual Status: Performing $ 175,875 $ 55,993 $ 29,320 $ 53,911 $ 22,838 $ 13,727 $ - $ 351,664 $ 314,867 Non-Performing 348 249 135 289 112 115 - 1,248 1,208 Total personal loans $ 176,223 $ 56,242 $ 29,455 $ 54,200 $ 22,950 $ 13,842 $ - $ 352,912 $ 316,075 Credit cards: Accrual Status: Performing $ - $ - $ - $ - $ - $ - $ 311,731 $ 311,731 $ 290,226 Non-Performing - - - - - - - - - Total credit cards $ - $ - $ - $ - $ - $ - $ 311,731 $ 311,731 $ 290,226 Other consumer loans: Accrual Status: Performing $ 79,630 $ 21,488 $ 9,345 $ 11,941 $ 4,030 $ 3,761 $ 8,921 $ 139,116 $ 126,734 Non-Performing 409 201 61 119 20 241 71 1,122 1,563 Total other consumer loans $ 80,039 $ 21,689 $ 9,406 $ 12,060 $ 4,050 $ 4,002 $ 8,992 $ 140,238 $ 128,297 Total: Performing $ 1,222,645 $ 780,866 $ 381,057 $ 353,383 $ 174,208 $ 70,067 $ 320,652 $ 3,302,878 $ 2,862,063 Non-Performing 2,599 2,843 2,097 3,135 1,901 1,965 71 14,611 10,321 Total consumer loans in Puerto Rico and Virgin Islands region $ 1,225,244 $ 783,709 $ 383,154 $ 356,518 $ 176,109 $ 72,032 $ 320,723 $ 3,317,489 $ 2,872,384 (1) Excludes accrued interest receivable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2022 As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (1) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Total (In thousands) Florida Region: Auto loans: Accrual Status: Performing $ - $ - $ - $ 305 $ 2,333 $ 979 $ - $ 3,617 $ 8,759 Non-Performing - - - - 36 40 - 76 - Total auto loans $ - $ - $ - $ 305 $ 2,369 $ 1,019 $ - $ 3,693 $ 8,759 Finance leases: Accrual Status: Performing $ - $ - $ - $ - $ - $ - $ - $ - $ - Non-Performing - - - - - - - - - Total finance leases $ - $ - $ - $ - $ - $ - $ - $ - $ - Personal loans: Accrual Status: Performing $ 254 $ 71 $ 9 $ - $ - $ - $ - $ 334 $ 107 Non-Performing - - - - - - - - - Total personal loans $ 254 $ 71 $ 9 $ - $ - $ - $ - $ 334 $ 107 Credit cards: Accrual Status: Performing $ - $ - $ - $ - $ - $ - $ - $ - $ - Non-Performing - - - - - - - - - Total credit cards $ - $ - $ - $ - $ - $ - $ - $ - $ - Other consumer loans: Accrual Status: Performing $ 49 $ 231 $ 464 $ - $ 39 $ 2,588 $ 2,462 $ 5,833 $ 6,661 Non-Performing - - - - - 21 98 119 133 Total other consumer loans $ 49 $ 231 $ 464 $ - $ 39 $ 2,609 $ 2,560 $ 5,952 $ 6,794 Total: Performing $ 303 $ 302 $ 473 $ 305 $ 2,372 $ 3,567 $ 2,462 $ 9,784 $ 15,527 Non-Performing - - - - 36 61 98 195 133 Total consumer loans in Florida region $ 303 $ 302 $ 473 $ 305 $ 2,408 $ 3,628 $ 2,560 $ 9,979 $ 15,660 (1) Excludes accrued interest receivable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2022 As of December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (1) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Total (In thousands) Total: Auto loans: Accrual Status: Performing $ 674,145 $ 510,950 $ 254,196 $ 206,650 $ 101,341 $ 40,117 $ - $ 1,787,399 $ 1,564,856 Non-Performing 1,666 2,140 1,596 2,508 1,421 1,341 - 10,672 6,684 Total auto loans $ 675,811 $ 513,090 $ 255,792 $ 209,158 $ 102,762 $ 41,458 $ - $ 1,798,071 $ 1,571,540 Finance leases: Accrual Status: Performing $ 292,995 $ 192,435 $ 88,196 $ 81,186 $ 48,332 $ 13,441 $ - $ 716,585 $ 574,139 Non-Performing 176 253 305 219 384 308 - 1,645 866 Total finance leases $ 293,171 $ 192,688 $ 88,501 $ 81,405 $ 48,716 $ 13,749 $ - $ 718,230 $ 575,005 Personal loans: Accrual Status: Performing $ 176,129 $ 56,064 $ 29,329 $ 53,911 $ 22,838 $ 13,727 $ - $ 351,998 $ 314,974 Non-Performing 348 249 135 289 112 115 - 1,248 1,208 Total personal loans $ 176,477 $ 56,313 $ 29,464 $ 54,200 $ 22,950 $ 13,842 $ - $ 353,246 $ 316,182 Credit cards: Accrual Status: Performing $ - $ - $ - $ - $ - $ - $ 311,731 $ 311,731 $ 290,226 Non-Performing - - - - - - - - - Total credit cards $ - $ - $ - $ - $ - $ - $ 311,731 $ 311,731 $ 290,226 Other consumer loans: Accrual Status: Performing $ 79,679 $ 21,719 $ 9,809 $ 11,941 $ 4,069 $ 6,349 $ 11,383 $ 144,949 $ 133,395 Non-Performing 409 201 61 119 20 262 169 1,241 1,696 Total other consumer loans $ 80,088 $ 21,920 $ 9,870 $ 12,060 $ 4,089 $ 6,611 $ 11,552 $ 146,190 $ 135,091 Total: Performing $ 1,222,948 $ 781,168 $ 381,530 $ 353,688 $ 176,580 $ 73,634 $ 323,114 $ 3,312,662 $ 2,877,590 Non-Performing 2,599 2,843 2,097 3,135 1,937 2,026 169 14,806 10,454 Total consumer loans $ 1,225,547 $ 784,011 $ 383,627 $ 356,823 $ 178,517 $ 75,660 $ 323,283 $ 3,327,468 $ 2,888,044 (1) Excludes accrued interest receivable.
Accrued interest receivable on loans totaled $ 53.1 million as of December 31, 2022 ($ 48.1 million as of December 31, 2021), was reported as part of accrued interest receivable on loans and investment securities in the consolidated statements of financial condition and is excluded from the estimate of credit losses.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following tables present information about collateral dependent loans that were individually evaluated for purposes of determining the ACL as of December 31, 2022 and 2021 :
As of December 31, 2022 Collateral Dependent Loans - With Allowance Collateral Dependent Loans - With No Related Allowance Collateral Dependent Loans - Total Amortized Cost Related Allowance Amortized Cost Amortized Cost Related Allowance (In thousands) Residential mortgage loans: Conventional residential mortgage loans $ 36,206 $ 2,571 $ - $ 36,206 $ 2,571 Commercial loans: Construction loans - - 956 956 - Commercial mortgage loans 2,466 897 62,453 64,919 897 C&I loans 1,513 322 17,590 19,103 322 Consumer loans: Personal loans 56 1 64 120 1 Other consumer loans 207 29 - 207 29 $ 40,448 $ 3,820 $ 81,063 $ 121,511 $ 3,820
As of December 31, 2021 Collateral Dependent Loans - With Allowance Collateral Dependent Loans - With No Related Allowance Collateral Dependent Loans - Total Amortized Cost Related Allowance Amortized Cost Amortized Cost Related Allowance (In thousands) Residential mortgage loans: Conventional residential mortgage loans $ 51,771 $ 3,966 $ 781 $ 52,552 $ 3,966 Commercial loans: Construction loans - - 1,797 1,797 - Commercial mortgage loans 9,908 1,152 56,361 66,269 1,152 C&I loans 5,781 670 34,043 39,824 670 Consumer loans: Personal loans 78 1 - 78 1 Other consumer loans 782 98 - 782 98 $ 68,320 $ 5,887 $ 92,982 $ 161,302 $ 5,887
The allowance related to collateral dependent loans reported in the tables above includes qualitative adjustments applied to the loan portfolio that consider possible changes in circumstances that could ultimately impact credit losses and might not be reflected in historical data or forecasted data incorporated in the quantitative models. The underlying collateral for residential mortgage and consumer collateral dependent loans consisted of single-family residential properties, and for commercial and construction loans consisted primarily of office buildings, multifamily residential properties, and retail establishments. The weighted-average loan-to- value coverage for collateral dependent loans as of December 2022 decreased to 70 %, compared to 78 % as of December 31, 2021, mainly driven by the payoff of a $ 16.2 million C&I loan in the Puerto Rico region that had a loan-to-value ratio of 116 %.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Purchases and Sales of Loans In the ordinary course of business, the Corporation enters into securitization transactions and whole loan sales with GNMA and GSEs, such as FNMA and FHLMC. During the years ended December 31, 2022, 2021, and 2020, loans pooled into GNMA MBS amounted to approximately $ 144.5 million, $ 190.8 million and $ 219.6 million, respectively, of which the Corporation recognized a net gain on sale of $ 4.2 million, $ 8.8 million, and $ 9.9 million for the years ended December 31, 2022, 2021, and 2020, respectively. Also, during the years ended December 31, 2022, 2021, and 2020, the Corporation sold approximately $ 93.8 million, $ 328.2 million, and $ 255.0 million, respectively, of performing residential mortgage loans to FNMA and FHLMC, of which the Corporation recognized a net gain on sale of $ 4.2 million, $ 11.4 million, and $ 8.3 million for the years ended December 31, 2022, 2021, and 2020, respectively. The Corporation’s continuing involvement with the loans that it sells consists primarily of servicing the loans. In addition, the Corporation agrees to repurchase loans if it breaches any of the representations and warranties included in the sale agreement. These representations and warranties are consistent with the GSEs’ selling and servicing guidelines (i.e., ensuring that the mortgage was properly underwritten according to established guidelines). For loans pooled into GNMA MBS, the Corporation, as servicer, holds an option to repurchase individual delinquent loans issued on or after January 1, 2003 when certain delinquency criteria are met. This option gives the Corporation the unilateral ability, but not the obligation, to repurchase the delinquent loans at par without prior authorization from GNMA. Since the Corporation is considered to have regained effective control over the loans, it is required to recognize the loans and a corresponding repurchase liability regardless of its intent to repurchase the loans. As of December 31, 2022 and 2021, rebooked GNMA delinquent loans that were included in the residential mortgage loan portfolio amounted to $ 10.4 million and $ 7.2 million, respectively. During the years ended December 31, 2022, 2021, and 2020, the Corporation repurchased, pursuant to the aforementioned repurchase option, $ 8.2 million, $ 1.1 million, and $ 55.0 million, respectively, of loans previously pooled into GNMA MBS. 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. Historically, losses on these repurchases of GNMA delinquent loans have been immaterial and no provision has been made at the time of sale. Loan sales to FNMA and FHLMC are without recourse in relation to the future performance of the loans. The Corporation repurchased at par loans previously sold to FNMA and FHLMC in the amount of $ 0.4 million, $ 0.3 million, and $ 42 thousand during the years ended December 31, 2022, 2021, and 2020, 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. During the year ended December 31, 2022, the Corporation sold a $ 35.2 million C&I loan participation in the Puerto Rico region and a $ 23.9 million criticized C&I loan participation in the Florida region. Also, during the year ended December 31, 2021, a $ 3.1 million construction loan in the Puerto Rico region and four criticized commercial loan participations in the Florida region totaling $ 43.1 million were sold. Further, during the third quarter of 2021, the Corporation sold $ 52.5 million of non-performing residential mortgage loans and related servicing advances of $ 2.0 million. The Corporation received $ 31.5 million, or 58 % of book value before reserves, for the $ 54.5 million of non-performing loans and related servicing advances. Approximately $ 20.9 million of reserves had been allocated to the loans sold. The transaction resulted in total net charge-offs of $ 23.1 million and an additional loss of approximately $ 2.1 million recorded as charge to the provision for credit losses in the third quarter of 2021. Finally, the Corporation participated in the Main Street Lending program established by the FED under the CARES Act of 2020, as amended, to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Under this program, the Corporation originated loans to borrowers meeting the terms and requirements of the program, including requirements as to eligibility, use of proceeds and priority, and sold a 95% participation interest in these loans to a special purpose vehicle (the “Main Street SPV”) organized by the FED to purchase the participation interests from eligible lenders, including the Corporation. During the fourth quarter of 2020, the Corporation originated 23 loans under this program totaling $ 184.4 million in principal amount and sold participation interests totaling $ 175.1 million to the Main Street SPV. During the years ended December 31, 2022, 2021, and 2020, the Corporation purchased C&I loan participations in the Florida region totaling $ 135.4 million, $ 174.7 million, and $ 40.0 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Loan Portfolio Concentration The Corporation’s primary lending area is Puerto Rico. The Corporation’s banking subsidiary, FirstBank, also lends in the USVI and BVI markets and in the United States (principally in the state of Florida). Of the total gross loans held for investment portfolio of $ 11.6 billion as of December 31, 2022, credit risk concentration was approximately 79 % in Puerto Rico, 18 % in the U.S., and 3 % in the USVI and BVI. As of December 31, 2022, the Corporation had $ 169.8 million outstanding in loans extended to the Puerto Rico government, its municipalities and public corporations, compared to $ 178.4 million as of December 31, 2021. As of December 31, 2022, approximately $ 102.7 million consisted of loans extended to municipalities in Puerto Rico that are general obligations supported by assigned property tax revenues, and $ 28.9 million of loans which are supported by one or more specific sources of municipal revenues. The vast majority of revenues of the municipalities included in the Corporation’s loan portfolio are independent of budgetary subsidies provided by the Puerto Rico central government. These municipalities are required by law to levy special property taxes in such amounts as are required to satisfy the payment of all of their respective general obligation bonds and notes. In addition to loans extended to municipalities, the Corporation’s exposure to the Puerto Rico government as of December 31, 2022 included $ 10.8 million in loans granted to an affiliate of the Puerto Rico Electric Power Authority (“PREPA”) and $ 27.4 million in loans to an agency of the Puerto Rico central government. In addition, as of December 31, 2022, the Corporation had $ 84.7 million in exposure to residential mortgage loans that are guaranteed by the PRHFA, a government instrumentality that has been designated as a covered entity under PROMESA, compared to $ 92.8 million as of December 31, 2021. Residential mortgage loans guaranteed by the PRHFA are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. The Corporation also has credit exposure to USVI government entities. As of December 31, 2022, the Corporation had $ 38.0 million in loans to USVI government public corporations, compared to $ 39.2 million as of December 31, 2021. As of December 31, 2022, all loans were currently performing and up to date on principal and interest payments.
Troubled Debt Restructurings The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program. Depending upon the nature of a borrower’s financial condition, restructurings or loan modifications through this program, as well as other restructurings of individual C&I, commercial mortgage, construction, and residential mortgage loans, fit the definition of a TDR. As of December 31, 2022, the Corporation’s total TDR loans held for investment amounted to $ 366.7 million, of which $ 328.1 million were in accruing status. See Note 1 – Nature of Business and Summary Significant of Accounting Policies, for information on when the Corporation classifies TDR loans as either accrual or nonaccrual loans. The total TDR loans held for investment consisted of $ 240.6 million of residential mortgage loans, $ 49.6 million of C&I loans, $ 63.3 million of commercial mortgage loans, $ 1.2 million of construction loans, and $ 12.0 million of consumer loans. As of December 31, 2022, the Corporation included as TDRs $ 0.7 million of residential mortgage loans that were participating in or had been offered a trial modification, which generally represents a six-month period during which the borrower makes monthly payments under the anticipated modified payment terms prior to a formal modification. TDR loans exclude restructured residential mortgage loans that are government-guaranteed (e.g., FHA/VA loans) totaling $ 53.9 million as of December 31, 2022, compared with $ 57.6 million as of December 31, 2021. As of December 31, 2022, the Corporation has committed to lend up to an additional $ 4 thousand on TDR consumer loans.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables present TDR loans completed during 2022, 2021 and 2020:
Year Ended December 31, 2022 Interest rate below market Maturity or term extension Combination of reduction in interest rate and extension of maturity Forgiveness of principal and/or interest Other (1) Total (In thousands) Conventional residential mortgage loans $ 433 $ 1,551 $ 242 $ - $ 4,874 $ 7,100 Construction loans - - - - - - Commercial mortgage loans - 245 5,178 - 467 5,890 C&I loans 2,402 - 618 825 1,083 4,928 Consumer loans: Auto loans 2,877 232 345 - - 3,454 Finance leases - 573 - - 18 591 Personal loans 99 171 105 - 19 394 Credit cards (2) - - - - 816 816 Other consumer loans 112 272 16 43 - 443 Total TDRs $ 5,923 $ 3,044 $ 6,504 $ 868 $ 7,277 $ 23,616 (1) Other concessions granted by the Corporation include payment plans under judicial stipulation or loss mitigation programs, or a combination of two or more of the concessions listed in the table. Amounts included in Other that represent a combination of concessions are excluded from the amounts reported in the column for such individual concessions. (2) Concession consists of reduction in interest rate and revocation of revolving line privileges.
Year Ended December 31, 2021 Interest rate below market Maturity or term extension Combination of reduction in interest rate and extension of maturity Forgiveness of principal and/or interest Other (1) Total (In thousands) Conventional residential mortgage loans $ 365 $ 859 $ 2,647 $ - $ 3,723 $ 7,594 Construction loans - - - - - - Commercial mortgage loans - - 10,586 - 637 11,223 C&I loans - 300 9,100 - 508 9,908 Consumer loans: Auto loans 1,888 433 277 - - 2,598 Finance leases - 645 26 - 26 697 Personal loans 13 60 387 - 44 504 Credit cards (2) - - - - 1,426 1,426 Other consumer loans 110 79 - 77 - 266 Total TDRs $ 2,376 $ 2,376 $ 23,023 $ 77 $ 6,364 $ 34,216 (1) Other concessions granted by the Corporation include payment plans under judicial stipulation or loss mitigation programs, or a combination of two or more of the concessions listed in the table. Amounts included in Other that represent a combination of concessions are excluded from the amounts reported in the column for such individual concessions. (2) Concession consists of reduction in interest rate and revocation of revolving line privileges.
Year Ended December 31, 2020 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) Conventional residential mortgage loans $ 18 $ 545 $ 2,044 $ - $ - $ 5,700 $ 8,307 Construction loans - - - - - - - Commercial mortgage loans - - 271 - - 553 824 C&I loans 31 - 4,107 - 18,386 - 22,524 Consumer loans: Auto loans 1,902 413 275 - - 33 2,623 Finance leases - 408 - - - - 408 Personal loans 38 74 145 - - 48 305 Credit cards (2) - - - - - 783 783 Other consumer loans 219 83 24 219 - - 545 Total TDRs $ 2,208 $ 1,523 $ 6,866 $ 219 $ 18,386 $ 7,117 $ 36,319 (1) Other concessions granted by the Corporation include payment plans under judicial stipulation or loss mitigation programs, or a combination of two or more of the concessions listed in the table. Amounts included in Other that represent a combination of concessions are excluded from the amounts reported in the column for such individual concessions. (2) Concession consists of reduction in interest rate and revocation of revolving line privileges.
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Year Ended December 31, 2022 2021 2020 Number of contracts Pre-modification Amortized Cost Post-modification Amortized Cost Number of contracts Pre-modification Amortized Cost Post-modification Amortized Cost Number of contracts Pre-modification Amortized Cost Post-modification Amortized Cost (Dollars in thousands) Conventional residential mortgage loans 68 $ 7,165 $ 7,100 66 $ 7,687 $ 7,594 103 $ 9,027 $ 8,307 Construction loans - - - - - - - - - Commercial mortgage loans 3 5,897 5,890 7 11,285 11,223 5 824 824 C&I loans 17 5,156 4,928 6 10,031 9,908 14 22,544 22,524 Consumer loans: Auto loans 168 3,404 3,454 134 2,601 2,598 163 2,635 2,623 Finance leases 33 592 591 42 692 697 29 408 408 Personal loans 26 366 394 46 497 504 30 306 305 Credit Cards 170 815 816 246 1,426 1,426 159 783 783 Other consumer loans 115 434 443 65 266 266 145 613 545 Total TDRs 600 $ 23,829 $ 23,616 612 $ 34,485 $ 34,216 648 $ 37,140 $ 36,319
Loan modifications considered TDR loans that defaulted (failure by the borrower to make payments of either principal, interest, or both for a period of 90 days or more) during 2022, 2021 and 2020, and had become TDR loans during the 12-months preceding the default date, were as follows:
Year Ended December 31, 2022 2021 2020 Number of contracts Amortized Cost Number of contracts Amortized Cost Number of contracts Amortized Cost (Dollars in thousands) Conventional residential mortgage loans 2 $ 124 - $ - 4 $ 465 Construction loans - - - - - - Commercial mortgage loans - - - - - - C&I loans - - - - 3 124 Consumer loans: Auto loans 96 2,049 92 1,625 55 947 Finance leases 1 16 - - 1 5 Personal loans - - 1 1 1 7 Credit cards 28 156 24 126 23 93 Other consumer loans 8 30 11 45 58 209 Total 135 $ 2,375 128 $ 1,797 145 $ 1,850
For certain TDR loans, the Corporation splits the loans into two new notes (the “Note A” and the “Note B”). 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, unless it is collateral-dependent and the source of repayment is independent of the A Note in which case a partial charge -off may be recorded. At the time of the restructuring, the A Note is identified and classified as a TDR loan. During 2022, 2021, and 2020, there were no new Note A and B restructurings.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 5 – ALLOWANCE FOR CREDIT LOSSES FOR LOANS AND FINANCE LEASES
The following tables present the activity in the ACL on loans and finance leases by portfolio segment for the indicated periods: Residential Mortgage Loans Construction Loans Commercial Mortgage Commercial & Industrial Loans Consumer Loans Total Year Ended December 31, 2022 (In thousands) ACL: Beginning balance $ 74,837 $ 4,048 $ 52,771 $ 34,284 $ 103,090 $ 269,030 Provision for credit losses - (benefit) expense ( 8,734 ) ( 2,342 ) ( 18,994 ) ( 1,770 ) 57,519 25,679 Charge-offs ( 6,890 ) ( 123 ) ( 85 ) ( 2,067 ) ( 48,165 ) ( 57,330 ) Recoveries 3,547 725 1,372 2,459 14,982 23,085 Ending balance $ 62,760 $ 2,308 $ 35,064 $ 32,906 $ 127,426 $ 260,464
Residential Mortgage Loans Construction Loans Commercial Mortgage Commercial & Industrial Loans Consumer Loans Total Year Ended December 31, 2021 (In thousands) ACL: Beginning balance $ 120,311 $ 5,380 $ 109,342 $ 37,944 $ 112,910 $ 385,887 Provision for credit losses - (benefit) expense ( 16,957 ) ( 1,408 ) ( 55,358 ) ( 8,549 ) 20,552 ( 61,720 ) Charge-offs ( 33,294 ) ( 87 ) ( 1,494 ) ( 1,887 ) ( 43,948 ) ( 80,710 ) Recoveries 4,777 163 281 6,776 13,576 25,573 Ending balance $ 74,837 $ 4,048 $ 52,771 $ 34,284 $ 103,090 $ 269,030
Residential Mortgage Loans Construction Loans Commercial Mortgage Commercial & Industrial Loans Consumer Loans Total Year Ended December 31, 2020 (In thousands) ACL: Beginning balance, prior to adoption of CECL $ 44,806 $ 2,370 $ 39,194 $ 15,198 $ 53,571 $ 155,139 Impact of adopting CECL 49,837 797 ( 19,306 ) 14,731 35,106 81,165 Allowance established for acquired PCD loans 12,739 - 9,723 1,830 4,452 28,744 Provision for credit losses - expense (1) 22,427 2,105 81,125 6,627 56,433 168,717 Charge-offs ( 11,017 ) ( 76 ) ( 3,330 ) ( 3,634 ) ( 46,483 ) ( 64,540 ) Recoveries 1,519 184 1,936 3,192 9,831 16,662 Ending balance $ 120,311 $ 5,380 $ 109,342 $ 37,944 $ 112,910 $ 385,887 (1) Includes a $ 37.5 million charge related to the establishment of the initial reserves for non-PCD loans acquired in conjunction with the BSPR acquisition consisting of: (i) a $ 13.5 million charge related to non-PCD residential mortgage loans; (ii) a $ 9.2 million charge related to non-PCD commercial mortgage loans, (iii) a $ 4.6 million charge related to non-PCD C&I loans, and (iv) a $ 10.2 million charge related to non-PCD consumer loans.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Corporation estimates the ACL following the methodologies described in Note 1 – Nature of Business and Summary of Significant Accounting Policies, above, for each portfolio segment. During 2022, the Corporation applied probability weights to the baseline and alternative downside economic scenarios to estimate the ACL with the baseline scenario carrying the highest weight. In weighting these macroeconomic scenarios, the Corporation applied judgment based on a variety of factors such as economic uncertainties associated to the continued conflict in Ukraine, the overall inflationary environment and a potential slowdown in economic activity as a result of the FED’s policy actions to control inflationary economic conditions. For periods prior to 2022, the Corporation calculated the ACL using the baseline scenario. As of December 31, 2022, the ACL for loans and finance leases was $ 260.5 million, down approximately $ 8.5 million from December 31, 2021. The ACL reduction for commercial and construction loans was $ 20.8 million during 2022, primarily reflecting reduced COVID-19 uncertainties, particularly on loans in the hotel, transportation and entertainment industries; and, to a lesser extent, the effect during the second half of 2022 of reserve releases totaling $ 4.8 million associated with two adversely classified loans that were paid off or sold, partially offset by an increase in the size of the loan portfolio. In addition, there was an ACL reduction of $ 12.0 million for residential mortgage loans, partially offset by a $ 24.3 million increase in the ACL for consumer loans. The net reduction in the ACL for residential mortgage loans was primarily driven by the overall decrease in the size of this portfolio and, to a lesser extent, a decrease in qualitative adjustments due to improvements in underlying portfolio metrics. The ACL increase for consumer loans consisted of charges to the provision of $ 57.5 million recorded in 2022 mainly due to a deterioration in the outlook of certain macroeconomic variables, such as the regional unemployment rate, and an increasing trend in delinquency and charge-off levels in the consumer loan portfolios. For those loans where the ACL was determined based on a discounted cash flow model, the change in the ACL due to the passage of time is recorded as part of the provision for credit losses. Total net charge-offs decreased by $ 20.9 million to $ 34.2 million, when compared to 2021. The variance consisted of a $ 25.2 million decrease in net charge-offs on residential mortgage loans, of which $ 23.1 million was related to charge-offs recognized as part of the bulk sale of nonaccrual residential mortgage loans and related servicing advances during the third quarter of 2021; partially offset by a $ 2.8 million increase in net charge-offs on consumer and finance leases, primarily in the personal loans portfolio, and a $ 1.5 million decrease in net recoveries in the commercial and construction loan portfolios.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The tables below present the ACL related to loans and finance leases and the carrying values of loans by portfolio segment as of December 31, 2022 and 2021: As of December 31, 2022 Residential Mortgage Loans Construction Loans Commercial Mortgage Loans Commercial and Industrial Loans (1) Consumer Loans Total (Dollars in thousands) Total loans held for investment: Amortized cost of loans $ 2,847,290 $ 132,953 $ 2,358,851 $ 2,886,263 $ 3,327,468 $ 11,552,825 Allowance for credit losses 62,760 2,308 35,064 32,906 127,426 260,464 Allowance for credit losses to amortized cost 2.20 % 1.74 % 1.49 % 1.14 % 3.83 % 2.25 %
As of December 31, 2021 Residential Mortgage Loans Construction Loans Commercial Mortgage Loans Commercial and Industrial Loans (1) Consumer Loans Total (Dollars in thousands) Total loans held for investment: Amortized cost of loans $ 2,978,895 $ 138,999 $ 2,167,469 $ 2,887,251 $ 2,888,044 $ 11,060,658 Allowance for credit losses 74,837 4,048 52,771 34,284 103,090 269,030 Allowance for credit losses to amortized cost 2.51 % 2.91 % 2.43 % 1.19 % 3.57 % 2.43 % (1) As of December 31, 2022 and 2021, includes $ 6.8 million and $ 145.0 million of SBA PPP loans, respectively, which require no ACL as these loans are 100% guaranteed by the SBA.
In addition, the Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, such as unfunded loan commitments and standby letters of credit for commercial and construction loans, unless the obligation is unconditionally cancellable by the Corporation. See Note 29 – Regulatory Matters, Commitments, and Contingencies for information on off -balance sheet exposures as of December 31, 2022 and 2021. The Corporation estimates the ACL for these off-balance sheet exposures following the methodology described in Note 1 – Nature of Business and Summary of Accounting Policies. As of December 31, 2022, the ACL for off-balance sheet credit exposures increased to $ 4.3 million, from $ 1.5 million as of December 31, 2021, mainly driven by an increase in the balance of unfunded loan commitments principally due to newly originated facilities which remained undrawn as of December 31, 2022. The following table presents the activity in the ACL for unfunded loan commitments and standby letters of credit for the years ended December 31, 2022, 2021 and 2020:
Year Ended December 31, 2022 2021 2020 (In thousands) Beginning Balance $ 1,537 $ 5,105 $ - Impact of adopting CECL - - 3,922 Provision for credit losses - expense (benefit) 2,736 ( 3,568 ) 1,183 Ending balance $ 4,273 $ 1,537 $ 5,105
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 6 – PREMISES AND EQUIPMENT Premises and equipment comprise:
Useful Life Range In Years As of December 31, Minimum Maximum 2022 2021 (Dollars in thousands) Buildings and improvements 10 35 $ 135,802 $ 138,524 Leasehold improvements 1 10 76,390 79,419 Furniture, equipment and software 2 10 155,567 148,171 367,759 366,114 Accumulated depreciation and amortization ( 264,233 ) ( 251,659 ) 103,526 114,455 Land 24,485 23,873 Projects in progress 14,924 8,089 Total premises and equipment, net $ 142,935 $ 146,417
Depreciation and amortization expense amounted to $ 22.3 million, $ 25.0 million, and $ 20.1 million for the years ended December 31, 2022, 2021, and 2020, respectively. During the year ended December 31, 2021, the Corporation received insurance proceeds of $ 0.6 million related to the settlement and collection of an insurance claim associated with a damaged property. This amount is included as part of other non-interest income in the consolidated statements of income. During the year ended December 31, 2020, the Corporation received insurance proceeds of $ 5.0 million resulting from the final settlement of the business interruption insurance claim related to lost profits caused by Hurricanes Irma and Maria. This amount is included as part of other non-interest income in the consolidated statements of income. In addition, during 2020, the Corporation received insurance proceeds of $ 1.2 million related to hurricane-related expenses claims recorded as a contra-account of non-interest expenses, primarily consisting of occupancy and equipment costs. See Note 25 - Fair Value for information on write-downs recorded on long-lived assets held for sale as of December 31, 2022. Also, see Note 20 – Other Non-Interest Income for gains on sales of fixed assets recognized during the years ended December 31, 2022, 2021, and 2020.
NOTE 7 – OTHER REAL ESTATE OWNED
The following table presents the OREO inventory as of the indicated dates: December 31, 2022 2021 (In thousands) OREO OREO balances, carrying value: Residential (1) $ 24,025 $ 29,533 Commercial 5,852 7,331 Construction 1,764 3,984 Total $ 31,641 $ 40,848 (1) Excludes $ 23.5 million and $ 22.2 million as of December 31, 2022 and 2021, respectively, of foreclosures that meet the conditions of ASC Subtopic 310-40 and are presented as a receivable as part of other assets in the consolidated statements of financial condition.
See Note 25 - Fair Value for information on write-downs recorded on OREO properties during the years ended December 31, 2022, 2021, and 2020.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 8 – RELATED-PARTY TRANSACTIONS The Corporation has granted loans to its directors, executive officers, and certain related individuals or entities in the ordinary course of business. The movement and balance of these loans were as follows:
Amount (In thousands) Balance at December 31, 2020 (1) $ 504 New loans 286 Payments ( 108 ) Other changes 261 Balance at December 31, 2021 (1) 943 New loans 89 Payments ( 149 ) Balance at December 31, 2022 (1) $ 883 (1) Includes loans granted to related parties which were then sold in the secondary market.
These loans were made subject to the provisions of the Federal Reserve’s Regulation O - “Loans to Executive Officers, Directors and Principal Shareholders of Member Banks,” which governs the permissible lending relationships between a financial institution and its executive officers, directors, principal shareholders, their families, and related parties. Amounts related to changes in the status of those who are considered related parties are reported as other changes in the table above, which, for 2021, was mainly related to the addition of three new executive officers and the departure of one executive officer. There were no changes in the status of related parties during 2022. From time to time, the Corporation, in the ordinary course of its business, obtains services from related parties or makes contributions to non-profit organizations that have some association with the Corporation.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 9 – GOODWILL AND OTHER INTANGIBLES Goodwill Goodwill as of each of December 31, 2022 and December 31, 2021 amounted to $ 38.6 million. The Corporation’s policy is to assess goodwill and other intangibles for impairment on an annual basis during the fourth quarter of each year, and more frequently if events or circumstances lead management to believe that the values of goodwill or other intangibles may be impaired. During the fourth quarter of 2022, management performed a qualitative analysis over the carrying amount of each relevant reporting units’ goodwill and concluded that it is more-likely-than-not that the fair value of the reporting units exceeded their carrying value. This assessment involved identifying the inputs and assumptions that most affect fair value, including evaluating significant and relevant events impacting each reporting entity, and evaluating such factors to determine if a positive assertion can be made that it is more- likely-than-not that the fair value of the reporting units exceeded their carrying amount. In the qualitative assessment performed for each reporting unit, the Corporation evaluated events and circumstances that could impact the fair value including the following: ● Macroeconomic conditions, such as improvement or deterioration in general economic conditions; ● Industry and market considerations; ● Interest rate fluctuations; ● Overall financial performance of the entity; ● Performance of industry peers over the last year; and ● Recent market transactions. Management considered positive and negative evidence obtained during the evaluation of significant events and circumstances and evaluated such information to conclude that it is more likely than not that the reporting unit’s fair value is greater than their carrying amount; thus, quantitative tests were not required. As a result, no impairment charges for goodwill were recorded during the year ended December 31, 2022. There were no changes in the carrying amount of goodwill during the year ended December 31, 2022. The changes in the carrying amount of goodwill attributable to operating segments are reflected in the following table:
Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Banking United States Operations Total (In thousands) Goodwill, January 1, 2020 $ - $ 1,406 $ - $ 26,692 $ 28,098 Merger and acquisitions (1) 574 794 4,935 - 6,303 Measurement period adjustment (1) (2) 385 533 3,313 - 4,231 Goodwill, December 31, 2020 $ 959 $ 2,733 $ 8,248 $ 26,692 $ 38,632 Measurement period adjustment (1) (2) 53 74 ( 148 ) - ( 21 ) Goodwill, December 31, 2021 $ 1,012 $ 2,807 $ 8,100 $ 26,692 $ 38,611 (1) Recognized in connection with the BSPR acquisition on September 1, 2020. (2) Relates to the fair value estimate update performed within one year of the closing of the BSPR acquisition, in accordance with ASC Topic 805, "Business Combinations"("ASC 805").
Merger and Restructuring Costs – BSPR Acquisition In connection with the BSPR acquisition on September 1, 2020, the Corporation recognized acquisition expenses of $ 26.4 million and $ 26.5 million during the years ended December 31, 2021 and 2020, respectively. No acquisition expenses were recognized during the year ended December 31, 2022. Acquisition, integration, and restructuring expenses were included in merger and restructuring costs in the consolidated statements of income, and consisted primarily of legal fees, severance and personnel-related costs, service contracts cancellation penalties, valuation services, systems conversion, and other integration efforts, as well as accelerated depreciation charges related to planned closures and consolidation of branches in accordance with the Corporation’s integration and restructuring plan.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Other Intangible Assets The following table shows the gross amount and accumulated amortization of the Corporation’s intangible assets subject to amortization as of the indicated dates:
As of As of December 31, December 31, 2022 2021 (Dollars in thousands) Core deposit intangible: Gross amount $ 87,544 $ 87,544 Accumulated amortization ( 66,644 ) ( 58,973 ) Net carrying amount $ 20,900 $ 28,571 Remaining amortization period (in years) 7.0 8.0 Purchased credit card relationship intangible: Gross amount $ 3,800 $ 3,800 Accumulated amortization ( 3,595 ) ( 2,602 ) Net carrying amount $ 205 $ 1,198 Remaining amortization period (in years) 0.7 1.7 Insurance customer relationship intangible: Gross amount $ 1,067 $ 1,067 Accumulated amortization ( 1,054 ) ( 902 ) Net carrying amount $ 13 $ 165 Remaining amortization period (in years) 0.1 1.1
During the years ended December 31, 2022, 2021, and 2020, the Corporation recognized $ 8.8 million, $ 11.4 million, and $ 5.9 million, respectively, in amortization expense on its other intangibles subject to amortization. The Corporation amortizes core deposit intangibles and customer relationship intangibles based on the projected useful lives of the related deposits in the case of core deposit intangibles, and over the projected useful lives of the related client relationships in the case of customer relationship intangibles. The Corporation analyzes core deposit intangibles and customer relationship intangibles annually for impairment, or sooner if events and circumstances indicate possible impairment. Factors that may suggest impairment include customer attrition and run-off. Management is unaware of any events and/or circumstances that would indicate a possible impairment to the core deposit intangibles or customer relationship intangibles as of December 31, 2022. The estimated aggregate annual amortization expense related to the intangible assets subject to amortization for future periods was as follows as of December 31, 2022:
(In thousands) 2023 $ 7,736 2024 6,416 2025 3,509 2026 872 2027 872 2028 and after 1,713
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 10 – NON-CONSOLIDATED VARIABLE INTEREST ENTITIES (“VIE”) AND SERVICING ASSETS The Corporation transfers residential mortgage loans in sale or securitization transactions in which it has continuing involvement, including servicing responsibilities and guarantee arrangements. All such transfers have been accounted for as sales as required by applicable accounting guidance. When evaluating the need to consolidate counterparties to which the Corporation has transferred assets, or with which the Corporation has entered into other transactions, the Corporation first determines if the counterparty is an entity for which a variable interest exists. If no scope exception is applicable and a variable interest exists, the Corporation then evaluates whether it is the primary beneficiary of the VIE and whether the entity should be consolidated or not. Below is a summary of transactions with VIEs for which the Corporation has retained some level of continuing involvement: Trust-Preferred Securities In April 2004, FBP Statutory Trust I, a financing trust that is wholly owned by the Corporation, sold to institutional investors $ 100 million of its variable -rate 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. In September 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 TRuPs. FBP Statutory Trust II used the proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $ 3.9 million of FBP Statutory Trust II variable-rate common securities, to purchase $ 128.9 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. The debentures, net of related issuance costs, are presented in the Corporation’s consolidated statements of financial condition as other borrowings. The variable-rate TRuPs are fully and unconditionally guaranteed by the Corporation. The Junior Subordinated Deferrable Debentures 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 TRuPs). As of each of December 31, 2022 and 2021, these Junior Subordinated Deferrable Debentures amounted to $ 183.8 million. During the third quarter of 2020, the Corporation completed the repurchase of $ 0.4 million of TRuPs of the FBP Statutory Trust I, which resulted in a commensurate reduction in the related Floating Rate Junior Subordinated Debentures. The Corporation’s purchase price equated to 75 % of the $ 0.4 million par value. The 25 % discount resulted in a gain of approximately $ 0.1 million. This gain is reflected in the consolidated statements of income as gain on early extinguishment of debt. The Collins Amendment to the Dodd -Frank Wall Street Reform and Consumer Protection Act eliminated certain TRuPs from Tier 1 capital; however, these instruments may remain in Tier 2 capital until the instruments are redeemed or mature. Under the indentures, the Corporation has the right, from time to time, and without causing an event of default, to defer payments of interest on the Junior Subordinated Deferrable Debentures by extending the interest payment period at any time and from time to time during the term of the subordinated debentures for up to twenty consecutive quarterly periods. As of December 31, 2022, the Corporation was current on all interest payments due on its subordinated debt.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Private Label MBS During 2004 and 2005, an unaffiliated party, referred to in this subsection as the seller, established a series of statutory trusts to effect the securitization of mortgage loans and the sale of trust certificates (“private label MBS”). The seller initially provided the servicing for a fee, which is senior to the obligations to pay private label MBS holders. The seller then entered into a sales agreement through which it sold and issued the private label MBS in favor of the Corporation’s banking subsidiary, FirstBank. Currently, the Bank is the sole owner of these private label MBS; the servicing of the underlying residential mortgages that generate the principal and interest cash flows is performed by another third party, which receives a servicing fee. These private label MBS are variable-rate securities indexed to 3-month 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 mortgage loans. The FDIC became the owner of the IO upon its intervention of the seller, a failed financial institution. No recourse agreement exists, and the Bank, as the sole holder of the securities, absorbs all risks from losses on non-accruing loans and repossessed collateral. As of December 31, 2022, the amortized cost and fair value of these private label MBS amounted to $ 7.9 million and $ 5.8 million, respectively, with a weighted average yield of 6.83 %, which is included as part of the Corporation’s available-for-sale debt securities portfolio. As described in Note 3 – Debt Securities, the ACL on these private label MBS amounted to $ 0.1 million as of December 31, 2022. Investment in Unconsolidated Entity On February 16, 2011, FirstBank sold an asset portfolio consisting of performing and nonaccrual construction, commercial mortgage, and C&I loans with an aggregate book value of $ 269.3 million to CPG/GS, an entity organized under the laws of the Commonwealth of Puerto Rico and majority owned by PRLP Ventures LLC (“PRLP”), a company created by Goldman, Sachs & Co. and Caribbean Property Group. In connection with the sale, the Corporation received $ 88.5 million in cash and a 35 % interest in CPG/GS, and made a loan in the amount of $ 136.1 million representing seller financing provided by FirstBank. The loan was refinanced and consolidated with other outstanding loans of CPG/GS in the second quarter of 2018 and was paid in full in October 2019. FirstBank’s equity interest in CPG/GS is accounted for under the equity method. FirstBank recorded a loss on its interest in CPG/GS in 2014 that reduced to zero the carrying amount of the Bank’s investment in CPG/GS. No negative investment needs to be reported as the Bank has no legal obligation or commitment to provide further financial support to this entity; thus, no further losses have been or will be recorded on this investment. CPG/GS used cash proceeds of the aforementioned seller-financed loan to cover operating expenses and debt service payments, including those related to the loan that was paid off in October 2019. FirstBank will not receive any return on its equity interest until PRLP receives an aggregate amount equivalent to its initial investment and a priority return of at least 12 %, which has not occurred, resulting in FirstBank’s interest in CPG/GS being subordinate to PRLP’s interest. CPG/GS will then begin to make payments pro rata to PRLP and FirstBank, 35 % and 65 %, respectively, until FirstBank has achieved a 12 % return on its invested capital and the aggregate amount of distributions is equal to FirstBank’s capital contributions to CPG/GS. The Bank has determined that CPG/GS is a VIE in which the Bank is not the primary beneficiary. In determining the primary beneficiary of CPG/GS, the Bank considered applicable guidance that requires the Bank to qualitatively assess the determination of whether it is the primary beneficiary (or consolidator) of CPG/GS based on whether it has both the power to direct the activities of CPG/GS that most significantly affect the entity’s economic performance and the obligation to absorb losses of, or the right to receive benefits from, CPG/GS that could potentially be significant to the VIE. The Bank determined that it does not have the power to direct the activities that most significantly impact the economic performance of CPG/GS as it does not have the right to manage or influence the loan portfolio, foreclosure proceedings, or the construction and sale of the property; therefore, the Bank concluded that it is not the primary beneficiary of CPG/GS.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Servicing Assets (MSRs) The Corporation typically transfers first lien residential mortgage loans in conjunction with GNMA securitization transactions in which the loans are exchanged for cash or securities that are readily redeemed for cash proceeds and servicing rights. The securities issued through these transactions are guaranteed by GNMA and, under seller/servicer agreements, the Corporation is required to service the loans in accordance with the issuers’ servicing guidelines and standards. As of December 31, 2022, the Corporation serviced loans securitized through GNMA with a principal balance of $ 2.1 billion. 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. MSRs are included as part of other assets in the consolidated statements of financial condition. The changes in MSRs are show below for the indicated dates:
Year Ended December 31, 2022 2021 2020 (In thousands) Balance at beginning of year $ 30,986 $ 33,071 $ 26,762 Purchases of servicing assets (1) - - 7,781 Capitalization of servicing assets 3,122 5,194 4,864 Amortization ( 4,978 ) ( 7,215 ) ( 5,777 ) Temporary impairment recoveries (charges), net 66 124 ( 206 ) Other (2) ( 159 ) ( 188 ) ( 353 ) Balance at end of year $ 29,037 $ 30,986 $ 33,071 (1) Represents MSRs acquired in the BSPR acquisition. (2) Mainly represents adjustments related to the repurchase of loans serviced for others, including MSRs related to loans previously serviced for BSPR and eliminated as part of the acquisition in the third quarter of 2020.
Impairment charges are recognized through a valuation allowance for each individual stratum of servicing assets. The valuation allowance is adjusted to reflect the amount, if any, by which the cost basis of the servicing asset for a given stratum of loans being serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized. Changes in the impairment allowance were as follows for the indicated periods:
Year Ended December 31, 2022 2021 2020 (In thousands) Balance at beginning of year $ 78 $ 202 $ 73 Temporary impairment charges - - 301 OTTI of servicing assets - - ( 77 ) Recoveries ( 66 ) ( 124 ) ( 95 ) Balance at end of year $ 12 $ 78 $ 202
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The components of net servicing income, included as part of mortgage banking activities in the consolidated statements of income, are shown below for the indicated periods:
Year Ended December 31, 2022 2021 2020 (In thousands) Servicing fees $ 11,096 $ 12,176 $ 9,268 Late charges and prepayment penalties 823 697 570 Adjustment for loans repurchased ( 159 ) ( 188 ) ( 353 ) Other - ( 1 ) - Servicing income, gross 11,760 12,684 9,485 Amortization and impairment of servicing assets ( 4,912 ) ( 7,091 ) ( 5,983 ) Servicing income, net $ 6,848 $ 5,593 $ 3,502
The Corporation’s MSRs are subject to prepayment and interest rate risks. Key economic assumptions used in determining the fair value at the time of sale of the related mortgages for the indicated periods ranged as follows:
Weighted Average Maximum Minimum Year Ended December 31, 2022 Constant prepayment rate: Government-guaranteed mortgage loans 6.7 % 18.3 % 4.8 % Conventional conforming mortgage loans 7.4 % 18.4 % 3.4 % Conventional non-conforming mortgage loans 6.0 % 21.9 % 3.6 % Discount rate: Government-guaranteed mortgage loans 11.7 % 12.0 % 11.5 % Conventional conforming mortgage loans 9.7 % 10.0 % 9.5 % Conventional non-conforming mortgage loans 12.5 % 14.5 % 11.5 % Year Ended December 31, 2021 Constant prepayment rate: Government-guaranteed mortgage loans 6.2 % 17.1 % 3.7 % Conventional conforming mortgage loans 6.2 % 18.2 % 2.8 % Conventional non-conforming mortgage loans 6.4 % 14.5 % 4.4 % Discount rate: Government-guaranteed mortgage loans 12.0 % 12.0 % 12.0 % Conventional conforming mortgage loans 10.0 % 10.0 % 10.0 % Conventional non-conforming mortgage loans 12.8 % 14.5 % 12.0 % Year Ended December 31, 2020 Constant prepayment rate: Government-guaranteed mortgage loans 6.1 % 16.0 % 3.9 % Conventional conforming mortgage loans 6.3 % 19.0 % 3.0 % Conventional non-conforming mortgage loans 6.3 % 18.0 % 4.3 % Discount rate: Government-guaranteed mortgage loans 12.0 % 12.0 % 12.0 % Conventional conforming mortgage loans 10.0 % 10.0 % 10.0 % Conventional non-conforming mortgage loans 12.3 % 14.5 % 12.0 %
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The weighted averages of the key economic assumptions that the Corporation used in its valuation model and the sensitivity of the current fair value to immediate 10 % and 20 % adverse changes in those assumptions for mortgage loans as of December 31, 2022 and 2021 were as follows:
December 31, December 31, 2022 2021 (In thousands) Carrying amount of servicing assets $ 29,037 $ 30,986 Fair value $ 44,710 $ 42,132 Weighted-average expected life (in years) 7.80 7.96 Constant prepayment rate (weighted-average annual rate) 6.40 % 6.55 % Decrease in fair value due to 10% adverse change $ 1,048 $ 1,027 Decrease in fair value due to 20% adverse change $ 2,054 $ 2,011 Discount rate (weighted-average annual rate) 10.69 % 11.17 % Decrease in fair value due to 10% adverse change $ 1,925 $ 1,852 Decrease in fair value due to 20% adverse change $ 3,704 $ 3,561
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 MSR 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 .
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 11 – DEPOSITS AND RELATED INTEREST
The following table summarizes deposit balances as of the indicated dates: December 31, 2022 2021 (In thousands) Type of account and interest rate: Non-interest-bearing deposit accounts $ 6,112,884 $ 7,027,513 Interest-bearing saving accounts 3,902,888 4,729,387 Interest-bearing checking accounts 3,770,993 3,492,645 Certificates of deposit ("CDs") 2,250,876 2,434,932 Brokered CDs 105,826 100,417 Total $ 16,143,467 $ 17,784,894
The weighted-average interest rate on total interest-bearing deposits as of December 31, 2022 and 2021 was 1.03 % and 0.31 %, respectively. As of December 31, 2022, the aggregate amount of unplanned overdrafts of demand deposits that were reclassified as loans amounted to $ 1.7 million (2021 - $ 1.6 million). Pre-arranged overdrafts lines of credit, also reported as loans, amounted to $ 24.5 million as of December 31, 2022 (2021 - $ 24.2 million).
The following table presents the contractual maturities of CDs, including brokered CDs, as of December 31, 2022: Total (In thousands) Three months or less $ 640,532 Over three months to six months 288,407 Over six months to one year 593,915 Over one year to two years 517,970 Over two years to three years 178,158 Over three years to four years 38,952 Over four years to five years 92,103 Over five years 6,665 Total $ 2,356,702
Total U.S. time deposits with balances of more than $250,000 amounted to $ 1.0 billion for each of the years ended December 31, 2022 and 2021. This amount does not include brokered CDs that are generally participated out by brokers in shares of less than the FDIC insurance limit. As of December 31, 2022, unamortized broker placement fees amounted to $ 0.3 million (2021 - $ 0.2 million), which are amortized over the contractual maturity of the brokered CDs under the interest method.
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Brokered CDs mature as follows: December 31, 2022 (In thousands) Three months or less $ 42,681 Over six months to one year 12,986 Over one year to three years 35,440 Over three years to five years 14,719 Total $ 105,826
As of December 31, 2022, deposit accounts issued to government agencies amounted to $ 2.8 billion (2021 - $ 3.3 billion). These deposits are insured by the FDIC up to the applicable limits. The uninsured portions were collateralized by securities and loans with an amortized cost of $ 3.1 billion (2021 - $ 3.4 billion) and an estimated market value of $ 2.7 billion (2021 - $ 3.3 billion). In addition to securities and loans, as of December 31, 2022, the Corporation used $ 200.0 million in letters of credit issued by the FHLB as pledges for public deposits in the Virgin Islands. As of December 31, 2022, the Corporation had $ 2.3 billion of government deposits in Puerto Rico (2021 - $ 2.7 billion), $ 442.8 million in the Virgin Islands (2021 - $ 568.4 million) and $ 11.6 million in Florida (2021 - $ 9.6 million).
A table showing interest expense on deposits for the indicated periods follows: Year Ended December 31, 2022 2021 2020 (In thousands) Interest-bearing checking accounts $ 15,568 $ 5,776 $ 5,933 Savings 11,191 6,586 11,116 CDs 18,102 26,138 43,350 Brokered CDs 1,500 2,982 7,989 Total $ 46,361 $ 41,482 $ 68,388
The total interest expense on deposits included the amortization of broker placement fees related to brokered CDs amounting to $ 0.1 million, $ 0.2 million, and $ 0.5 million for 2022, 2021 and 2020, respectively. Total interest expense also included $ 0.5 million, $ 1.3 million and $ 1.0 million for 2022, 2021, and 2020, respectively, for the accretion of premiums related to time deposits assumed in the BSPR acquisition.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 12 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase (repurchase agreements) as of the indicated dates consisted of the following:
December 31, 2022 2021 (In thousands) Short-term Fixed-rate repurchase agreements (1) $ 75,133 $ - Long-term Fixed-rate repurchase agreements (2) - 300,000 $ 75,133 $ 300,000 (1) Weighted-average interest rate of 4.55 % as of December 31, 2022. (2) Weighted-average interest rate of 3.35 % as of December 31, 2021. During the first quarter of 2021, the interest rate related to securities sold under agreement to repurchase totaling $ 200 million changed from a variable rate (3-month LIBOR plus 130 to 132 basis points) to a fixed rate of 3.90 % after the end of a pre-specified lockout period.
Of the $ 300.0 million in long-term repurchase agreements outstanding as of December 31, 2021, $ 100.0 million matured and were repaid in the first quarter of 2022 and the remaining $ 200.0 million were repaid prior to maturity upon the exercise of the counterparty’s call option in the fourth quarter of 2022. In addition, the Corporation added $ 75.1 million in short-term repurchase agreements reflecting actions taken as part of management’s liquidity and funding needs. Repurchase agreements mature as follows as of the indicated date:
December 31, 2022 (In thousands) Within one month $ 25,133 Over one month to three months 50,000 Total $ 75,133
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The following securities were sold under agreements to repurchase: As of December 31, 2022 Underlying Securities Amortized Cost of Underlying Securities Balance of Borrowing Approximate Fair Value of Underlying Securities Weighted Average Interest Rate of Security (Dollars in thousands) U.S. government-sponsored agencies $ 60,081 $ 50,134 $ 54,093 0.62 % MBS 29,959 24,999 27,010 2.08 % Total $ 90,040 $ 75,133 $ 81,103 Accrued interest receivable $ 137
As of December 31, 2021 Underlying Securities Amortized Cost of Underlying Securities Balance of Borrowing Approximate Fair Value of Underlying Securities Weighted Average Interest Rate of Security (Dollars in thousands) U.S. government-sponsored agencies $ - $ - $ - - % MBS 319,225 300,000 321,180 1.33 % Total $ 319,225 $ 300,000 $ 321,180 Accrued interest receivable $ 599
As of December 31, 2022 and 2021, the securities underlying such agreements were delivered to the dealers with which the repurchase agreements were transacted. In accordance with the master agreements, in the event of default, repurchase agreements have a right of set-off against the other party for amounts owed under the related agreement and any other amount or obligation owed with respect to any other agreement or transaction between them. As of December 31, 2022 and 2021, repurchase agreements were fully collateralized and not offset in the consolidated statements of financial condition. See Note 24 – Derivative Instruments and Hedging Activities for information on rights of set-off associated to economic undesignated hedges. The maximum aggregate balance of repurchase agreements outstanding at any month-end during each of the year ended December 31, 2022 and 2021 was $ 300.0 million. The average balance during 2022 was $ 194.9 million (2021 - $ 300.5 million). Repurchase agreements as of December 31, 2022, grouped by counterparty, were as follows:
Weighted-Average Counterparty Amount Maturity (In Months) (Dollars in thousands) JP Morgan Chase $ 75,133 1
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 13 – ADVANCES FROM THE FEDERAL HOME LOAN BANK (“FHLB”)
The following is a summary of the advances from the FHLB as of the indicated dates: December 31, December 31, 2022 2021 (In thousands) Short-term Fixed -rate advances from FHLB (1) $ 475,000 $ - Long-term Fixed -rate advances from FHLB (2) 200,000 200,000 $ 675,000 $ 200,000 (1) Weighted-average interest rate of 4.56 % as of December 31, 2022. (2) Weighted-average interest rate of 4.25 % and 2.16 % as of December 31, 2022 and 2021, respectively.
Advances from FHLB mature as follows as of the indicated date: December 31, 2022 (In thousands) Within one month $ 350,000 Over one to three months 125,000 Over three to five years 200,000 Total $ 675,000
The $ 200.0 million in FHLB advances outstanding as of December 31, 2021 matured and were repaid during the third quarter of 2022. In addition, during the fourth quarter of 2022, the Corporation added $ 475.0 million of short-term FHLB advances and $ 200.0 million of long-term FHLB advances. The maximum aggregate balance of advances from the FHLB outstanding at any month-end during the years ended December 31, 2022 and 2021 was $ 675.0 million and $ 440.0 million, respectively. The total average balance of FHLB advances during 2022 was $ 179.5 million (2021 - $ 354.1 million). The Corporation receives advances and applies for the issuance of letters of credit from the FHLB under an Advances, Collateral Pledge, and Security Agreement (the “Collateral Agreement”), which requires the Corporation to maintain a minimum of qualifying mortgage collateral or Treasury or U.S. agencies MBS collateral, as applicable. The amount of collateral required for an advance incorporates a collateral discount or “haircut,” which is incorporated into the member’s pledge and determined by the FHLB. Haircut refers to the percentage by which an asset’s market value is reduced for the purpose of collateral levels. As of December 31, 2022 and 2021, the estimated value of specific mortgage loans pledged as collateral amounted to $ 1.3 billion and $ 1.4 billion, respectively, as computed by the FHLB for collateral purposes, which represents a haircut of 14 % and 17 % as of December 31, 2022 and 2021, respectively. The carrying value of such loans as of December 31, 2022 amounted to $ 1.8 billion (2021 - $ 1.8 billion). As of December 31, 2022, the estimated value of U.S. government-sponsored agencies’ obligations and U.S. agencies MBS pledged as collateral amounted to $ 238.1 million. As of December 31, 2022, the Corporation had additional capacity of approximately $ 644.2 million on this credit facility based on collateral pledged at the FHLB, adjusted by a haircut reflecting the perceived risk associated with the collateral. Advances may be repaid prior to maturity, in whole or in part, at the option of the borrower upon payment of any applicable fee specified in the contract governing such advance. In calculating the fee, due consideration is given to (i) all relevant factors, including, but not limited to, any and all applicable costs of repurchasing and/or prepaying any associated liabilities and/or hedges entered into with respect to the applicable advance; (ii) the financial characteristics, in their entirety, of the advance being prepaid; and (iii), in the case of adjustable-rate advances, the expected future earnings of the replacement borrowing as long as the replacement borrowing is at least equal to the original advance’s par value and the replacement borrowing’s tenor is at least equal to the remaining maturity of the prepaid advance.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 14 – OTHER BORROWINGS Junior Subordinated Debentures Junior subordinated debentures, as of the indicated dates, consisted of:
December 31, December 31, (In thousands) 2022 2021 Floating rate junior subordinated debentures (FBP Statutory Trust I) (1) (3) $ 65,205 $ 65,205 Floating rate junior subordinated debentures (FBP Statutory Trust II) (2)(3) 118,557 118,557 $ 183,762 $ 183,762 (1) Amount represents junior subordinated interest-bearing debentures due in 2034 with a floating interest rate of 2.75 % over 3-month LIBOR ( 7.49 % as of December 31, 2022 and 2.97 % as of December 31, 2021). (2) Amount represents junior subordinated interest-bearing debentures due in 2034 with a floating interest rate of 2.50 % over 3-month LIBOR ( 7.25 % as of December 31, 2022 and 2.71 % as of December 31, 2021). (3) See Note 10 - Non-Consolidated Variable Interest Entities and Servicing Assets for additional information on the nature and terms of these debentures.
Loans Payable The Corporation participates in the BIC Program of the FED. Through the BIC Program, a broad range of loans (including commercial, consumer, and residential mortgages) may be pledged as collateral for borrowings through the FED Discount Window. As of December 31, 2022, pledged collateral that is related to this credit facility amounted to $ 2.2 billion, mainly commercial, consumer, and residential mortgage loans, which after a margin “haircut” to discount the value of collateral pledged, represents approximately $ 1.3 billion of credit availability under this program. The FED Discount Window program provides the opportunity to access a low-rate short-term source of funding in a high volatility market environment. There were no outstanding borrowings under the FED Discount Window as of December 31, 2022 and 2021.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 15 – EARNINGS PER COMMON . SHARE
The calculations of earnings per common share for the years ended December 31, 2022, 2021, and 2020 are as follows: Year Ended December 31, 2022 2021 2020 (In thousands, except per share information) Net income $ 305,072 $ 281,025 $ 102,273 Less: Preferred stock dividends - ( 2,453 ) ( 2,676 ) Less: Excess of redemption value over carrying value of Series A through E Preferred Stock redeemed - ( 1,234 ) - Net income attributable to common stockholders $ 305,072 $ 277,338 $ 99,597 Weighted-Average Shares: Average common shares outstanding 190,805 210,122 216,904 Average potential dilutive common shares 1,163 1,178 764 Average common shares outstanding - assuming dilution 191,968 211,300 217,668 Earnings per common share: Basic $ 1.60 $ 1.32 $ 0.46 Diluted $ 1.59 $ 1.31 $ 0.46
Earnings per common share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares issued and outstanding. Net income attributable to common stockholders represents net income adjusted for any preferred stock dividends, including any dividends declared but not yet paid, and any cumulative dividends related to the current dividend period that have not been declared as of the end of the period. For 2021, net income attributable to common stockholders was also adjusted due to the one -time effect to retained earnings of the excess of the redemption value paid over the carrying value of the Series A through E Preferred Stock redeemed as discussed in Note 17 – Stockholders’ Equity. Basic weighted-average common shares outstanding exclude unvested shares of restricted stock that do not contain non-forfeitable dividend rights. Potential dilutive common shares consist of unvested shares of restricted stock that do not contain non-forfeitable dividend rights using the treasury stock method. This method assumes that proceeds equal to the amount of compensation cost attributable to future services is used to repurchase shares on the open market at the average market price for the period. The difference between the number of potential dilutive shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Unvested shares of restricted stock outstanding during the period that result in lower potentially dilutive shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. There were no antidilutive shares of common stock during the years ended December 31, 2022, 2021 and 2020. Potential dilutive common shares also include performance units that do not contain non-forfeitable dividend rights if the performance condition is met as of the end of the reporting period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 16 – STOCK-BASED . COMPENSATION
On April 29, 2008, the Corporation’s stockholders approved the Omnibus Plan. An amended and restated Omnibus Plan was subsequently approved by the Corporation’s stockholders on May 24, 2016 to, among other things, increase the number of shares of common stock reserved for issuance under the Omnibus Plan, extend the term of the Omnibus Plan to May 24, 2026 and re-approve the material terms of the performance goals under the Omnibus Plan for purposes of the then-effective Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended. The Omnibus Plan provides for equity-based and non equity-based compensation incentives (the “awards”). The Omnibus Plan authorizes the issuance of up to 14,169,807 shares of common stock, subject to adjustments for stock splits, reorganizations and other similar events. As of December 31, 2022, there were 3,830,165 authorized shares of common stock available for issuance under the Omnibus Plan. The Corporation’s Board of Directors, based on the recommendation of the Corporation’s Compensation and Benefits Committee, has the power and authority to determine those eligible to receive awards and to establish the terms and conditions of any awards, subject to various limits and vesting restrictions that apply to individual and aggregate awards. Restricted Stock Under the Omnibus Plan, the Corporation may grant restricted stock to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While the restricted stock is subject to forfeiture and does not contain non-forfeitable dividend rights, participants may exercise full voting rights with respect to the shares of restricted stock granted to them. The fair value of the shares of restricted stock granted was based on the market price of the Corporation’s common stock on the date of the respective grant. The shares of restricted stocks granted to employees are subject to the following vesting period: fifty percent ( 50 %) of 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. The shares of restricted stock granted to directors are generally subject to vesting on the one-year anniversary of the grant date. Common shares issued during the year ended December 31, 2022 in connection with restricted stock awards were reissued from treasury shares.
The following table summarizes the restricted stock activity under the Omnibus Plan during the years ended December 31, 2022 and 2021: 2022 2021 Number of Weighted- Number of Weighted- shares of Average shares of Average restricted Grant Date restricted Grant Date stock Fair Value stock Fair Value Unvested shares outstanding at beginning of year 1,148,775 $ 6.61 1,320,723 $ 5.74 Granted (1) 327,195 13.21 324,360 11.47 Forfeited ( 15,108 ) 8.79 ( 82,486 ) 6.42 Vested ( 522,371 ) 6.13 ( 413,822 ) 7.69 Unvested shares outstanding at end of year 938,491 $ 9.14 1,148,775 $ 6.61 (1) For the year ended December 31, 2022, includes 27,529 shares of restricted stock awarded to independent directors and 299,666 shares of restricted stock awarded to employees, of which 6,084 shares were granted to retirement-eligible employees and thus charged to earnings as of the grant date. Includes for the year ended December 31, 2021, 29,291 shares of restricted stock awarded to independent directors and 295,069 shares of restricted stock awarded to employees, of which 19,804 shares were granted to retirement-eligible employees and thus charged to earnings as of the grant date.
For the years ended December 31, 2022, 2021, and 2020, the Corporation recognized $ 3.7 million, $ 3.5 million, and $ 3.2 million, respectively, of stock-based compensation expense related to restricted stock awards. As of December 31, 2022, there was $ 3.8 million of total unrecognized compensation cost related to unvested shares of restricted stock that the Corporation expects to recognize over a weighted average period of 1.5 years.
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Performance Units Under the Omnibus Plan, the Corporation may award performance units to participants, with each unit representing the value of one share of the Corporation’s common stock. These awards, which are granted to executives, do not contain non-forfeitable rights to dividend equivalent amounts and can only be settled in shares of the Corporation’s common stock. The performance units will vest on the third anniversary of the effective date of the awards, subject to the achievement of a pre-established tangible book value per share target, adjusted for certain allowable non-recurring transactions. All the performance units will vest if performance is at the pre- established performance target level or above at the end of a three-year performance period. However, the participants may vest with respect to 50% of the awards to the extent that performance is below the target but not less than 80% of the pre-established performance target level (the “80% minimum 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. The performance units granted during the year ended December 31, 2022 are for the performance period beginning January 1, 2022 and ending on December 31, 2024. The following table summarizes the performance units activity under the Omnibus Plan during the years ended December 31, 2022 and 2021:
Year Ended Year Ended (Number of units) December 31, 2022 December 31, 2021 Performance units at beginning of year 814,899 1,006,768 Additions 166,669 160,485 Vested (1) ( 189,645 ) ( 304,408 ) Forfeited - ( 47,946 ) Performance units as of December 31, 2022 791,923 814,899 (1) Units vested during 2022 are related to performance units granted in 2019 that met the pre-established target and were settled with shares of common stock reissued from treasury shares. Units vested during 2021 are related to performance units granted in 2018 that met the pre-established target and were settled with new shares of common stock.
The fair values of the performance units awarded were based on the market price of the Corporation’s common stock on the respective date of the grant. For the years ended December 31, 2022, 2021, and 2020, the Corporation recognized $ 1.7 million, $ 2.0 million, and $ 1.8 million, respectively, of stock-based compensation expense related to performance units. As of December 31, 2022, there was $ 2.5 million of total unrecognized compensation cost related to unvested performance units that the Corporation expects to recognize over the next three years. The total amount of compensation expense recognized reflects management’s assessment of the probability that the pre-established performance goal will be achieved. The Corporation will recognize a cumulative adjustment to compensation expense in the then-current period to reflect any changes in the probability of achievement of the performance goals. Other awards Under the Omnibus Plan, the Corporation may grant shares of unrestricted stock to plan participants. During the third quarter of 2020, the Corporation granted to its independent directors 19,157 shares of unrestricted stock that were fully vested at the time of the grant date. For the year ended December 31, 2020, the Corporation recognized $ 0.1 million of stock-based compensation expense related to unrestricted stock awards. There were no grants of unrestricted stock in 2022 and 2021. Shares withheld During the year ended December 31, 2022, the Corporation withheld 205,807 shares (2021 – 214,374 shares) of the restricted stock that vested during such period to cover the officers’ payroll and income tax withholding liabilities; these shares are held as treasury shares. The Corporation paid in cash any fractional share of salary stock to which an officer was entitled. In the consolidated financial statements, the Corporation presents shares withheld for tax purposes as common stock repurchases.
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NOTE 17 – STOCKHOLDERS’ EQUITY Stock Repurchase Programs During the first quarter of 2022 the Corporation completed the $ 300 million stock repurchase program approved by the Board of Directors on April 26, 2021 by purchasing though open market transactions 3,409,697 shares of common stock at an average price of $ 14.66 for a total purchase price of approximately $ 50 million. On April 27, 2022, the Corporation announced that its Board of Directors approved a stock repurchase program, under which the Corporation may repurchase up to $ 350 million of its outstanding common stock, which commenced in the second quarter of 2022. Repurchases under the program may be executed through open market purchases, accelerated share repurchases and/or privately negotiated transactions or plans, including plans complying with Rule 10b5-1 under the Exchange Act. The Corporation’s common stock repurchase program is subject to various factors, including the Corporation’s capital position, liquidity, financial performance and alternative uses of capital, stock trading price, and general market conditions. The repurchase program may be modified, suspended, or terminated at any time at the Corporation’s discretion. The program does not obligate the Corporation to acquire any specific number of shares and does not have an expiration date. Under this stock repurchase program, the Corporation repurchased during the year ended December 31, 2022, 16,003,674 shares of common stock through open market transactions at an average purchase price of $ 14.06 per share for a total price of approximately $ 225 million. As of December 31, 2022, the Corporation has remaining authorization to repurchase approximately $ 125 million of common stock. During the year ended December 31, 2022, First BanCorp. repurchased 19,413,371 shares for a total purchase price of approximately $ 275 million under all stock repurchase programs. The shares received are held as treasury stock. Common Stock
The following table shows the change in shares of common stock outstanding for the years ended December 31, 2022, 2021 and 2020: Total Number of Shares 2022 2021 2020 Common stock outstanding, beginning balance 201,826,505 218,235,064 217,359,337 Common stock repurchased (1) ( 19,619,178 ) ( 16,954,841 ) ( 51,814 ) Common stock reissued/issued under stock-based compensation plan 516,840 628,768 930,627 Restricted stock forfeited ( 15,108 ) ( 82,486 ) ( 3,086 ) Common stock outstanding, ending balances 182,709,059 201,826,505 218,235,064 (1) For 2022, 2021 and 2020 includes 205,807 , 214,374 and 51,814 shares, respectively, of common stock surrender to cover officers' payroll and income taxes.
For the years ended December 31, 2022, 2021 and 2020, total cash dividends declared on shares of common stock amounted to $ 88.2 million, $ 65.4 million, and $ 43.8 million, respectively. On February 9, 2023 the Corporation announced that its Board of Directors had declared a quarterly cash dividend of $ 0.14 per common share, which represents an increase of 17 % or $ 0.02 per common share compared to its most recent dividend paid in December 2022. The dividend is payable on March 10, 2023 to shareholders of record at the close of business on February 24, 2023 . The Corporation intends to continue to pay quarterly dividends on common stock. However, the Corporation’s common stock dividends, including the declaration, timing, and amount, remain subject to consideration and approval by the Corporation’s Board Directors at the relevant times.
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Preferred Stock The Corporation has 50,000,000 authorized shares of preferred stock with a par value of $ 1.00 , redeemable at the Corporation’s option, subject to certain terms. This stock may be issued in series and the shares of each series have such rights and preferences as are fixed by the Board of Directors when authorizing the issuance of that particular series. On November 30, 2021, the Corporation redeemed all of its 1,444,146 then outstanding shares of Series A through E Preferred Stock for its liquidation value of $ 25 per share totaling $ 36.1 million. The difference between the liquidation value and net carrying value was $ 1.2 million, which was recorded as a reduction to retained earnings in 2021. The redeemed preferred stock shares were not listed on any securities exchange or automated quotation system. No shares of preferred stock have been subsequently issued or were outstanding during the year ended December 31, 2022. For the years ended December 31, 2021 and 2020, total cash dividends paid on shares of preferred stock amounted to $ 2.5 million and $ 2.7 million, respectively. Treasury Stock
The following table shows the change in shares of treasury stock for the years ended December 31, 2022, 2021 and 2020. Total Number of Shares 2022 2021 2020 Treasury stock, beginning balance 21,836,611 4,799,284 4,744,384 Common stock repurchased (1) 19,619,178 16,954,841 51,814 Common stock reissued under stock-based compensation plan ( 516,840 ) - - Restricted stock forfeited 15,108 82,486 3,086 Treasury stock, ending balances 40,954,057 21,836,611 4,799,284 (1) For 2022, 2021 and 2020 includes 205,807 , 214,374 and 51,814 shares, respectively, of common stock surrender to cover officers' payroll and income taxes.
FirstBank Statutory Reserve (Legal Surplus) The Puerto Rico Banking Law of 1933, as amended (the “Puerto Rico Banking Law”), requires that a minimum of 10 % of FirstBank’s net income for the year be transferred to a legal surplus reserve until such surplus equals the total of paid-in-capital on common and preferred stock. Amounts transferred to the legal surplus reserve from retained earnings are not available for distribution to the Corporation without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The Puerto Rico Banking Law provides that, when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over receipts must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the legal surplus reserve, as a reduction thereof. If the legal surplus reserve is not sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the capital account and the Bank cannot pay dividends until it can replenish the legal surplus reserve to an amount of at least 20% of the original capital contributed. During the years ended December 31, 2022 and 2021, $ 30.9 million and $ 28.3 million, respectively, was transferred to the legal surplus reserve. FirstBank’s legal surplus reserve, included as part of retained earnings in the Corporation’s consolidated statements of financial condition, amounted to $ 168.5 million and $ 137.6 million as of December 31, 2022 and 2021, respectively.
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NOTE 18 – OTHER COMPREHENSIVE (LOSS) INCOME The following table presents change in accumulated other comprehensive (loss) income for the years ended December 31, 2022, 2021, and 2020:
Changes in Accumulated Other Comprehensive (Loss) Income by Component (1) Year ended December 31, 2022 2021 2020 (In thousands) Unrealized net holding (losses) gains on available-for-sale debt securities: Beginning balance $ ( 87,390 ) $ 55,725 $ 6,764 Other comprehensive (loss) income ( 718,582 ) ( 143,115 ) 48,961 Ending balance $ ( 805,972 ) $ ( 87,390 ) $ 55,725 Adjustment of pension and postretirement benefit plans: Beginning balance $ 3,391 $ ( 270 ) $ - Other comprehensive (loss) income ( 2,197 ) 3,661 ( 270 ) Ending balance $ 1,194 $ 3,391 $ ( 270 ) ________ (1) All amounts presented are net of tax.
The following table presents the amounts reclassified out of each component of accumulated other comprehensive (loss) income for the years ended December 31, 2022, 2021, and 2020:
Reclassifications Out of Accumulated Other Comprehensive (Loss) Income Affected Line Item in the Consolidated Statements of Income Year ended December 31, 2022 2021 2020 (In thousands) Unrealized net holding (losses) gains on available-for-sale debt securities: Realized gain on sales Net gain on investment securities $ - $ - $ ( 13,198 ) Adjustment of pension and postretirement benefit plans: Amortization of net loss Other expenses 3 1 - Total before tax $ 3 $ 1 $ ( 13,198 ) Income tax expense ( 1 ) - - Total, net of tax $ 2 $ 1 $ ( 13,198 )
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NOTE 19 – EMPLOYEE BENEFIT PLANS The Corporation maintains two frozen qualified noncontributory defined benefit pension plans (the “Pension Plans”), and a related complementary post-retirement benefit plan (the “Postretirement Benefit Plan”) covering medical benefits and life insurance after retirement that it obtained in the BSPR acquisition on September 1, 2020. One defined benefit pension plan covers substantially all of BSPR’s former employees who were active before January 1, 2007, while the other defined benefit pension plan covers personnel of an institution previously acquired by BSPR. Benefits are based on salary and years of service. The accrual of benefits under the Pension Plans is frozen to all participants. The Corporation requires recognition of a plan’s overfunded and underfunded status as an asset or liability with an offsetting adjustment to accumulated other comprehensive loss (income) pursuant to the ASC Topic 715, Compensation-Retirement Benefits. The following table presents the changes in projected benefit obligation and changes in plan assets for the years ended December 31, 2022 and 2021:
December 31, 2022 December 31, 2021 (In thousands) Changes in projected benefit obligation: Projected benefit obligation at the beginning of period, defined benefit pension plans $ 97,867 $ 108,253 Interest cost 2,614 2,473 Actuarial gain (1) ( 21,265 ) ( 6,699 ) Benefits paid ( 5,708 ) ( 6,160 ) Projected benefit obligation at the end of period, pension plans $ 73,508 $ 97,867 Projected benefit obligation, other postretirement benefit plan 182 195 Projected benefit obligation at the end of period $ 73,690 $ 98,062 Changes in plan assets: Fair value of plan assets at the beginning of period $ 103,487 $ 105,963 Actual return on plan assets - (loss) gain ( 20,590 ) 3,684 Benefits paid ( 5,708 ) ( 6,160 ) Fair value of pension plan assets at the end of period (2) $ 77,189 $ 103,487 Net asset, pension plans 3,681 5,620 Net benefit obligation, other postretirement benefit plan ( 182 ) ( 195 ) Net asset $ 3,499 $ 5,425 (1) Significant components of the Pension Plans’ actuarial gain that changed the benefit obligation were mainly related to updates in discount rates. (2) Other postretirement plan did not contain any assets as of December 31, 2022 and 2021.
The weighted-average discount rate used to determine the benefit obligation as of December 31, 2022 and 2021, was 5.43 % and 2.77 %, respectively. The discount rate is estimated as the single equivalent rate such that the present value of the plan’s projected benefit obligation cash flows using the single rate equals the present value of those cash flows using the above mean actuarial yield curve. In developing the expected long-term rate of return assumption, the Corporation evaluated input from a consultant and the Corporation’s long-term inflation assumptions and interest rate scenarios. Projected returns are based on the same asset categories as the plan using well-known broad indexes. Expected returns are based on historical returns with adjustments to reflect a more realistic future return. The Corporation anticipated that the Plan’s portfolio would generate a long-term rate of return of 4.80 % and 4.43 % as of December 31, 2022 and 2021. Adjustments are done by categories, taking into consideration current and future market conditions. The Corporation also considered historical returns on its plan assets to review the expected rate of return. The investment policy statement for the Pension Plans includes the following: (i) liability hedging assets to reduce funded status risk, (ii) diversified return seeking assets to reduce equity risk, and (iii) establishes different glidepaths specific for each plan to systematically reduce risk as the funded status improves.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table presents information for the plans with a projected benefit obligation and accumulated benefit obligation in excess of plan assets for the years ended December 31, 2022 and 2021: December 31, 2022 December 31, 2021 (In thousands) Projected benefit obligation $ 48,501 $ 195 Accumulated benefit obligation 48,501 195 Fair value of plan assets $ 46,398 $ -
The following table presents the components of net periodic benefit for the years ended December 31, 2022 and 2021, and for the period from September 1, 2020 to December 31, 2020:
Affected Line Item Period from in the Consolidated September 1, 2020 to Statements of Income December 31, 2022 December 31, 2021 December 31, 2020 (In thousands) Net periodic benefit, pension plans: Interest cost Other expenses $ 2,614 $ 2,473 $ 900 Expected return on plan assets Other expenses ( 4,158 ) ( 4,523 ) ( 2,062 ) Net periodic benefit, pension plans ( 1,544 ) ( 2,050 ) ( 1,162 ) Net periodic cost, postretirement plan Other expenses 8 6 2 Net periodic benefit $ ( 1,536 ) $ ( 2,044 ) $ ( 1,160 )
The following table presents the weighted-average assumptions used to determine the net periodic benefit for the pension and other postretirement benefit plans for the years ended December 31, 2022 and 2021, and for the period from September 1, 2020 to December 31, 2020:
Period from September 1, 2020 to December 31, 2022 December 31, 2021 December 31, 2020 Discount rate 2.77 % 2.36 % 2.53 % Expected return on plan assets 4.43 % 5.99 % 5.98 %
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following table presents the changes in pre-tax accumulated other comprehensive income (loss) of the Pension Plans and Postretirement Benefit Plan as of December 31, 2022, 2021, and 2020: December 31, 2022 December 31, 2021 Period from September 1, 2020 to December 31, 2020 (In thousands) Accumulated other comprehensive income (loss) at beginning of period, pension plans $ 5,457 $ ( 404 ) $ - Net (loss) gain ( 3,483 ) 5,861 ( 404 ) Accumulated other comprehensive income (loss) at end of period, pension plans 1,974 5,457 ( 404 ) Accumulated other comprehensive loss at end of period, postretirement plan ( 61 ) ( 29 ) ( 28 ) Accumulated other comprehensive income (loss) at end of period $ 1,913 $ 5,428 $ ( 432 )
The following are the pre-tax amounts recognized in accumulated other comprehensive (loss) income for the years ended December 31, 2022 and 2021, and for the period from September 1, 2020 to December 31, 2020:
December 31, 2022 December 31, 2021 Period from September 1, 2020 to December 31, 2020 (In thousands) Net actuarial (loss) gain, pension plans $ ( 3,483 ) $ 5,861 $ ( 404 ) Net actuarial loss, other postretirement benefit plan ( 35 ) ( 2 ) ( 28 ) Amortization of net loss 3 1 - Net amount recognized $ ( 3,515 ) $ 5,860 $ ( 432 )
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The Pension Plans asset allocations as of December 31, 2022 and 2021 by asset category are as follows: December 31, 2022 December 31, 2021 Asset category Investment in funds 97 % 98 % Other 3 % 2 % 100 % 100 %
As of December 31, 2022 and 2021, substantially all of the plan assets of $ 77.2 million and $ 103.5 million, respectively, were invested in common collective trusts, which primarily consist of equity securities, mortgage-backed securities, corporate bonds and U.S. Treasuries. The portfolios in both plans have been measured at fair value using the net asset value per unit as a practical expedient as permitted by ASC Topic 820 and, accordingly, have not been classified in the fair value hierarchy as of December 31, 2022. Determination of Fair Value The following is a description of the valuation inputs and techniques used to measure the fair value of pension plan assets: Investment in Funds - Investment in common collective trusts have been measured at fair value using the net assets value per unit practical expedient and, accordingly, have not been classified in the fair value hierarchy. Fair value is based on the calculated net asset value of shares held by the Plan as reported by the sponsor of the funds. Interest-Bearing Deposits - Interest-bearing deposits consist of money market accounts with short-term maturities and, therefore, the carrying value approximates fair value.
The Corporation does no t expect to contribute to the Pension Plans during 2023. The Corporation’s investment policy with respect to the Corporation’s Pension Plans is to optimize, without undue risk, the total return on investment of the Plan assets after inflation, within a framework of prudent and reasonable portfolio risk. The investment portfolio is diversified in multiple asset classes to reduce portfolio risk, and assets may be shifted between asset classes to reduce volatility when warranted by projections of the economic and/or financial market environment, consistent with Employee Retirement Income Security Act of 1974, as amended (ERISA). As circumstances and market conditions change, the Corporation’s target asset allocations may be amended to reflect the most appropriate distribution given the new environment, consistent with the investment objectives. Expected future benefit payments for the plans are as follows:
Amount (Dollars in thousands) 2023 $ 6,436 2024 6,292 2025 5,985 2026 5,999 2027 5,860 2028 through 2031 27,411 $ 57,983
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Defined Contribution Plan In addition, FirstBank provides contributory retirement plans pursuant to Section 1081.01 of the Puerto Rico Internal Revenue Code of 2011 (the “2011 PR Code”) for Puerto Rico employees and Section 401(k) of the U.S. Internal Revenue Code for USVI and U.S. employees (the “Plans”). All of the Corporation’s full-time employees are eligible to participate in the Plans after completion of three months of service for purposes of making elective deferral contributions and one year of service for purposes of sharing in the Bank’s matching, qualified matching, and qualified non-elective contributions. The Bank contributes a matching contribution of fifty cents for every dollar up to the first 6 % of the participants’ eligible compensation that a participant contributes to the Plan on a pre- tax basis. The matching contribution of fifty cents for every dollar of the employee’s contribution is comprised of: (i) twenty-five cents for every dollar of the employee’s contribution up to 6% of the employee’s eligible compensation to be paid to the Plan as of each bi-weekly payroll; and (ii) an additional twenty-five cents for every dollar of the employee’s contribution up to 6% of the employee’s eligible compensation to be deposited as a lump sum subsequent to the Plan Year. Puerto Rico employees were permitted to contribute up to $ 15,000 for each of the years ended December 31, 2022, 2021 and 2020 (USVI and U.S. employees - $ 20,500 for 2022, $ 19,500 for 2021 and $ 19,500 for 2020). Additional contributions to the Plans may be voluntarily made by the Bank as determined by its Board of Directors. No additional discretionary contributions were made for the years ended December 31, 2022, 2021, and 2020. The Bank had total plan expenses of $ 3.5 million for the year ended December 31, 2022 (2021 - $ 3.5 million; 2020 - $ 3.0 million). On September 1, 2020, the Bank completed the acquisition of Santander Bancorp, a wholly-owned subsidiary of Santander Holdings USA, Inc. and the holding company of BSPR. Prior to the acquisition date, BSPR was the sponsor of the Banco Santander de Puerto Rico Employees’ Savings Plan (“the Santander Plan”). Effective on September 1, 2020, the Bank became the sponsor of the Santander Plan. Overall responsibility for administrating the Santander Plan rests with the Plan’s Administration Committee. Effective December 31, 2020, the Santander Plan was merged with the Plans. The contributory savings plan assumed in the BSPR acquisition also provided for matching contribution up to 6 % of the employee’s compensation.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 20 – OTHER NON-INTEREST INCOME
A detail of other non-interest income is as follows for the indicated periods: Year Ended December 31, 2022 2021 2020 (In thousands) Non-deferrable loan fees $ 3,167 $ 2,990 $ 3,750 Mail and cable transmission commissions 3,100 3,116 2,540 Gain from insurance proceeds - 550 5,000 Net (loss) gain on equity securities ( 522 ) ( 102 ) 38 Gain from sales of fixed assets 924 32 215 Other 9,181 5,843 4,682 Total $ 15,850 $ 12,429 $ 16,225
NOTE 21 – OTHER NON-INTEREST EXPENSES
A detail of other non-interest expenses is as follows for the indicated periods: Year Ended December 31, 2022 2021 2020 (In thousands) Supplies and printing $ 1,505 $ 1,830 $ 2,391 Amortization of intangible assets 8,816 11,407 5,912 Servicing and processing fees 5,343 5,121 4,696 Insurance and supervisory fees 9,354 9,098 6,324 Provision for operational losses 2,518 5,069 3,390 Other 3,126 2,898 3,105 Total $ 30,662 $ 35,423 $ 25,818
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NOTE 22 – 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, FirstBank 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 2011 PR Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns and, thus, the Corporation is generally not entitled to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss (“NOL”), a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL carry-forward period. Pursuant to the 2011 PR Code, the carry-forward period for NOLs incurred during taxable years that commenced after December 31, 2004 and ended before January 1, 2013 is 12 years; for NOLs incurred during taxable years commencing after December 31, 2012, the carryover period is 10 years. The 2011 PR Code provides a dividend received deduction of 100 % on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85 % on dividends received from other taxable domestic corporations. The Corporation has maintained an effective tax rate lower than the Puerto Rico maximum statutory rate of 37.5 % mainly by investing in government obligations and MBS exempt from U.S. and Puerto Rico income taxes and by doing business through an IBE unit of the Bank, and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose interest income and gains on sales are exempt from Puerto Rico income taxation. The IBE unit and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico on the specific activities identified in the IBE Act. An IBE that operates as a unit of a bank pays income taxes at the corporate standard rates to the extent that the IBE’s net income exceeds 20 % of the bank’s total net taxable income. The components of income tax expense are summarized below for the indicated periods:
Year Ended December 31, 2022 2021 2020 (In thousands) Current income tax expense $ 88,296 $ 28,469 $ 18,421 Deferred income tax expense: Reversal of deferred tax asset valuation allowance - - ( 8,000 ) Other deferred income tax expense 54,216 118,323 3,629 Total income tax expense $ 142,512 $ 146,792 $ 14,050
The differences between the income tax expense applicable to income before the provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico were as follows for the indicated periods: Year Ended December 31, 2022 2021 2020 Amount % of Pretax Income Amount % of Pretax Income Amount % of Pretax Income (Dollars in thousands) Computed income tax at statutory rate $ 167,844 37.5 % $ 160,431 37.5 % $ 43,621 37.5 % Federal and state taxes 10,268 2.2 % 7,014 1.6 % 4,944 4.2 % Benefit of net exempt income ( 31,266 ) ( 7.0 ) % ( 20,717 ) ( 4.8 ) % ( 26,780 ) ( 23.0 ) % Disallowed NOL carryforward resulting from net exempt income 14,221 3.2 % 8,791 2.0 % 9,054 7.8 % Deferred tax valuation allowance ( 8,410 ) ( 1.9 ) % ( 13,572 ) ( 3.2 ) % ( 12,095 ) ( 10.4 ) % Share-based compensation windfall ( 1,492 ) ( 0.3 ) % ( 1,044 ) ( 0.2 ) % 157 0.1 % Other permanent differences ( 7,647 ) ( 1.7 ) % ( 1,185 ) ( 0.3 ) % ( 387 ) ( 0.3 ) % Tax return to provision adjustments ( 519 ) ( 0.1 ) % ( 406 ) ( 0.1 ) % 597 0.5 % Other-net ( 487 ) ( 0.1 ) % 7,480 1.7 % ( 5,061 ) ( 4.3 ) % Total income tax expense $ 142,512 31.8 % $ 146,792 34.2 % $ 14,050 12.1 %
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Significant components of the Corporation's deferred tax assets and liabilities as of December 31, 2022 and 2021 were as follows: December 31, 2022 2021 (In thousands) Deferred tax asset: NOL and capital losses carryforward $ 72,485 $ 137,860 Allowance for credit losses 104,014 105,917 Alternative Minimum Tax credits available for carryforward 40,823 37,361 Unrealized loss on OREO valuation 6,462 7,703 Settlement payment-closing agreement 7,031 7,031 Legal and other reserves 6,345 4,576 Reserve for insurance premium cancellations 781 881 Differences between the assigned values and tax bases of assets and liabilities recognized in purchase business combinations 5,665 8,926 Unrealized loss on available-for-sale debt securities, net 100,776 14,181 Other 7,722 4,420 Total gross deferred tax assets $ 352,104 $ 328,856 Deferred tax liabilities: Servicing assets 9,786 10,510 Pension Plan assets 719 2,035 Other 509 506 Total gross deferred tax liabilities 11,014 13,051 Valuation allowance ( 185,506 ) ( 107,323 ) Net deferred tax asset $ 155,584 $ 208,482
Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax asset based on an assessment of the amount of the deferred tax asset that is “more likely than not” to be realized. Valua tion allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. Management assesses the valuation allowance recorded against deferred tax assets at each reporting date. The determ ination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, and tax planning strategies. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions considering statutory, judicial, and regulatory guidance. The net deferred tax asset of the Corporation’s banking subsidiary, FirstBank, amounted to $ 155.6 million as of December 31, 2022, net of a valuation allowance of $ 149.5 million, compared to a net deferred tax asset of $ 208.4 million, net of a valuation allowance of $ 69.7 million, as of December 31, 2021. The decrease in the deferred tax assets was mainly driven by the usage of NOLs. The increase in the valuation allowance during 2022 was primarily related to the change in the market value of available-for- sale debt securities. The Corporation maintains a full valuation allowance for its deferred tax assets associated with capital losses carry forward and unrealized losses of available-for-sale debt securities. Thus, the change in the market value of available-for-sale debt securities resulted in a change in the deferred tax asset and an equal change in the valuation allowance without impacting earnings.
Management’s estimate of future taxable income is based on internal projections that consider historical performance, multiple internal scenarios and assumptions, as well as external data that management believes is reasonable. If events are identified that affect the Corporation’s ability to utilize its deferred tax assets, the analysis will be updated to determine if any adjustments to the valuation allowance are required. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the remaining valuation allowance may need to be increased. Such an increase could have a material adverse effect on the Corporation’s financial condition and results of operations.
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As of December 31, 2022, approximately $ 279.9 million of the deferred tax assets of the Corporation are attributable to temporary differences or tax credit carryforwards that have no expiration date, compared to $ 177.9 million in 2021. The valuation allowance attributable to FirstBank’s deferred tax assets of $ 149.5 million as of December 31, 2022 is related to the change in the market value of available-for-sale debt securities, NOLs attributable to the Virgin Islands jurisdiction, and capital losses. The remaining balance of $ 36.0 million of the Corporation’s deferred tax asset valuation allowance non-attributable to FirstBank is mainly related to NOLs and capital losses at the holding company level. The Corporation will continue to provide a valuation allowance against its deferred tax assets in each applicable tax jurisdiction until the need for a valuation allowance is eliminated. The need for a valuation allowance is eliminated when the Corporation determines that it is more likely than not the deferred tax assets will be realized. The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation allowance will be evaluated on a quarterly basis to determine if there are any significant events that would affect the ability to utilize these deferred tax assets. As of December 31, 2022, of the $ 72.5 million of NOL and capital losses carryforward, $ 61.2 million, which are fully valued, have expiration dates ranging from year 2023 through year 2037. From this amount, approximately $ 30.5 million expires in year 2023 and are not expected to be realized. 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. The Section 382 limitation has resulted in higher U.S. and USVI income tax liabilities that we would have incurred in the absence of such limitation. The Corporation has mitigated to an extent the adverse effects associated with the Section 382 limitation as any such tax paid in the U.S. or USVI can 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 2022, 2021 and 2020, the Corporation incurred current income tax expense of approximately $ 10.3 million, $ 6.8 million and $ 4.9 million, respectively, related to its U.S. operations. The limitation did not impact the USVI operations in 2022, 2021 and 2020. On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law in the United States. The IRA includes various tax provisions, including a 1% excise tax on stock repurchases, and a 15% corporate alternative minimum tax that generally applies to U.S. corporations with average adjusted financial statement income over a three-year period in excess of $1 billion. The legislation did not have an effect on the Corporation’s effective tax rate in 2022 and is not expected to have a material impact on our 2023 financial results, including on our annual estimated effective tax rate or on our liquidity. The Corporation accounts for uncertain tax positions under the provisions of ASC Topic 740. The Corporation’s policy is to report interest and penalties related to unrecognized tax positions in income tax expense. As of December 31, 2022, the Corporation had $ 0.2 million of accrued interest and penalties related to uncertain tax positions in the amount of $ 1.0 million that it acquired from BSPR, which, if recognized, would decrease the effective income tax rate in future periods. During 2022, a $ 0.4 million benefit was recognized as a result of the expiration of uncertain tax positions acquired from BSPR. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons, including adding amounts for current tax year positions, expiration of open income tax returns due to the statute of limitations, changes in management’s judgment about the level of uncertainty, the status of examinations, litigation and legislative activity, and the addition or elimination of uncertain tax positions. The statute of limitations under the 2011 PR code is four years after a tax return is due or filed, whichever is later; the statute of limitations for U.S. and USVI income tax purposes is three years after a tax return is due or filed, whichever is later. The completion of an audit by the taxing authorities or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Corporation’s liability for income taxes. Any such adjustment could be material to the results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. For U.S. and USVI income tax purposes, all tax years subsequent to 2018 remain open to examination. For Puerto Rico tax purposes, all tax years subsequent to 2017 remain open to examination.
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NOTE 23 – OPERATING LEASES
The Corporation accounts for its leases in accordance with ASC 842 “Leases” (“ASC Topic 842). The Corporation’s operating leases are primarily related to the Corporation’s branches. Our leases mainly have terms ranging from two years to 30 years , some of which include options to extend the leases for up to ten years . Liabilities to make future lease payments are recorded in accounts payable and other liabilities, while right-of-use (“ROU”) assets are recorded in other assets in the Corporation’s consolidated statements of financial condition. As of December 31, 2022 and 2021, the Corporation did not classify any of its leases as a finance lease. Operating lease cost for the year ended December 31, 2022 amounted to $ 18.4 million (2021 - $ 18.2 million; 2020 - $ 13.8 million), and is recorded in occupancy and equipment in the consolidated statements of income. Supplemental balance sheet information related to leases as of the indicated dates was as follows:
As of As of December 31, December 31, 2022 2021 (Dollars in thousands) ROU asset $ 78,855 $ 90,319 Operating lease liability $ 81,954 $ 93,772 Operating lease weighted-average remaining lease term (in years) 7.5 8.0 Operating lease weighted-average discount rate 2.37 % 2.24 %
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. See Note 1 – Nature of Business and Summary of Significant Accounting Policies for information on how the Corporation determines its incremental borrowing rate.
Supplemental cash flow information related to leases was as follows: Year Ended Year Ended Year Ended December 31, December 31, December 31, 2022 2021 2020 (In thousands) Operating cash flow from operating leases (1) $ 18,202 $ 19,328 $ 13,464 ROU assets obtained in exchange for operating lease liabilities (2) (3) $ 5,744 $ 5,833 $ 1,328 (1) Represents cash paid for amounts included in the measurement of operating lease liabilities. (2) Represents non-cash activity and, accordingly, is not reflected in the consolidated statements of cash flows. For the year ended December 31, 2020 excludes $ 52.1 million ROU assets and related liabilities assumed in the BSPR acquisition. (3) For the year ended December 31, 2022 and 2021 excludes $ 3.0 million and $ 1.3 million, respectively, of lease terminations. For the year ended December 31, 2020, there were no lease terminations.
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Maturities under operating lease liabilities as of December 31, 2022, were as follows: Amount (In thousands) 2023 $ 16,763 2024 16,008 2025 15,096 2026 14,025 2027 5,929 2028 and after 23,025 Total lease payments 90,846 Less: imputed interest ( 8,892 ) Total present value of lease liability $ 81,954
Leases Not Yet Commenced As of December 31, 2022, the Corporation has additional operating leases that were signed but have not yet commenced with an undiscounted contract amount of $ 1.1 million, which will have lease terms ranging from five to ten years .
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NOTE 24 – 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. As of December 31, 2022 and 2021, all derivatives held by the Corporation were considered economic undesignated hedges. The Corporation records these undesignated hedges at fair value with the resulting gain or loss recognized in current earnings. The following summarizes the principal derivative activities used by the Corporation in managing interest rate risk: Interest Rate Cap Agreements – 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 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 marketplace or exchange in which the transaction is being executed. The forward sales are considered derivative instruments that need to be marked to market. The Corporation uses these securities to economically hedge the FHA/VA residential mortgage loan securitizations of the mortgage banking operations. The Corporation also reports as forward contracts the mandatory mortgage loan sales commitments that it enters into with GSEs that require or permit net settlement via a pair-off transaction or the payment of a pair-off fee. Unrealized gains (losses) are recognized as part of mortgage banking activities in the consolidated statements of income . Interest Rate Lock Commitments – Interest rate lock commitments are agreements under which the Corporation agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Under the agreement, the Corporation commits to lend funds to a potential borrower, generally on a fixed rate basis, regardless of whether interest rates change in the market. Interest Rate Swaps – The Corporation acquired interest rate swaps as a result of the acquisition of BSPR. An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreements acquired from BSPR consist of the Corporation offering borrower-facing derivative products using a “back-to-back” structure in which the borrower-facing derivative transaction is paired with an identical, offsetting transaction with an approved dealer-counterparty. By using a back-to-back trading structure, both the commercial borrower and the Corporation are largely insulated from market risk and volatility. The agreements set the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. The fair values of these swaps are recorded as components of other assets or accounts payable and other liabilities in the Corporation’s consolidated statements of financial condition. Changes in the fair values of interest rate swaps, which occur due to changes in interest rates, are recorded in the consolidated statements of income as a component of interest income on loans. To satisfy the needs of its customers, the Corporation may enter into non-hedging transactions. In these transactions, the Corporation generally participates as a buyer in one of the agreements and as a seller in the other agreement under the same terms and conditions. In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument.
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The following table summarizes for derivative instruments their notional amounts, fair values and location in the consolidated statements of financial condition as of the indicated dates: Asset Derivatives Liability Derivatives Notional Amounts (1) Statements of Financial Condition Location Fair Value Statements of Financial Condition Location Fair Value December 31, December 31, December 31, 2022 2021 2022 2021 2022 2021 (In thousands) Undesignated economic hedges: Interest rate contracts: Interest rate swap agreements $ 9,290 $ 12,588 Other assets $ 313 $ 1,098 Accounts payable and other liabilities $ 278 $ 1,092 Written interest rate cap agreements 14,500 14,500 Other assets - - Accounts payable and other liabilities 197 8 Purchased interest rate cap agreements 14,500 14,500 Other assets 199 8 Accounts payable and other liabilities - - Interest rate lock commitments 3,225 12,097 Other assets 63 379 Accounts payable and other liabilities - - Forward Contracts: Sales of TBA GNMA MBS pools 11,000 27,000 Other assets 58 - Accounts payable and other liabilities 1 78 Forward loan sales commitments - 12,668 Other assets - 20 Accounts payable and other liabilities - - $ 52,515 $ 93,353 $ 633 $ 1,505 $ 476 $ 1,178 (1) Notional amounts are presented on a gross basis with no netting of offsetting exposure positions.
The following table summarizes the effect of derivative instruments on the consolidated statements of income for the indicated periods: Gain (or Loss) Location of Gain (Loss) Year ended on Derivative Recognized in December 31, Statements of Income 2022 2021 2020 (In thousands) Undesignated economic hedges: Interest rate contracts: Interest rate swap agreements Interest income - loans $ 28 $ 24 $ 27 Written and purchased interest rate cap agreements Interest income - loans 2 - - Interest rate lock commitments Mortgage banking activities ( 322 ) ( 687 ) 576 Forward contracts: Sales of TBA GNMA MBS pools Mortgage banking activities 135 114 ( 54 ) Forward loan sales commitments Mortgage banking activities ( 20 ) - ( 37 ) Total (loss) gain on derivatives $ ( 177 ) $ ( 549 ) $ 512
Derivative instruments are subject to market risk. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, and the level of interest rates, as well as the expectations for rates in the future. As of December 31, 2022 and 2021, the Corporation had not entered into any derivative instrument containing credit -risk-related contingent features.
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Credit and Market Risk of Derivatives The Corporation uses derivative instruments to manage interest rate risk. By using derivative instruments, the Corporation is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the Corporation’s fair value gain on the derivative. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty owes the Corporation which, therefore, creates a credit risk for the Corporation. When the fair value of a derivative instrument contract is negative, the Corporation owes the counterparty. The Corporation minimizes its credit risk in derivative instruments by entering into transactions with reputable broker dealers ( i.e., financial institutions) that are reviewed periodically by the Management Investment and Asset Liability Committee of the Corporation (the “MIALCO”) and by the Board of Directors. The Corporation also has a policy of requiring that all derivative instrument contracts be governed by an International Swaps and Derivatives Association Master Agreement, which includes a provision for netting. The Corporation has a policy of diversifying derivatives counterparties to reduce the consequences of counterparty default. The cumulative mark -to-market effect of credit risk in the valuation of derivative instruments in 2022, 2021 and 2020 was immaterial. Market risk is the adverse effect that a change in interest rates or implied volatility rates has on the value of a financial instrument. The Corporation manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. In accordance with the master agreements, in the event of default, each party has a right of set-off against the other party for amounts owed under the related agreement and any other amount or obligation owed with respect to any other agreement or transaction between them. As of December 31, 2022 and 2021, derivatives were overcollateralized. See Note 12 – Securities Sold Under Agreements to Repurchase for information on rights of set-off associated to assets sold under agreements to repurchase.
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NOTE 25 – FAIR VALUE Fair Value Measurement ASC Topic 820, “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 assets and liabilities, which is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. One of three levels of inputs may be used to measure fair value: Level 1 Valuations of Level 1 assets and liabilities are obtained from readily-available pricing sources for market transactions involving identical assets or liabilities in active markets. Level 2 Va luations 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 3 Va luations 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 judgment as to the estimation. Financial Instruments Recorded at Fair Value on a Recurring Basis Debt securities available for sale and marketable equity securities held at fair value The fair value of investment securities was based on unadjusted quoted market prices (as is the case with U.S. Treasury securities and equity securities with readily determinable fair values), when available (Level 1), or market prices for comparable assets (as is the case with U.S. agencies MBS and U.S. agency debt securities) that are based on observable market parameters, including benchmark yields, reported trades, quotes from brokers or dealers, issuer spreads, bids, offers and reference data, including market research operations, when available (Level 2). Observable prices in the market already consider the risk of nonperformance. If listed prices or quotes are not available, fair value is based upon discounted cash flow models that use unobservable inputs due to the limited market activity of the instrument, as is the case with certain private label MBS held by the Corporation (Level 3). Derivative instruments 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 Corporation valued the interest rate swaps and caps using a discounted cash flow approach based on the related LIBOR and swap forward rate for each cash flow.
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Assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2022 and 2021: As of December 31, 2022 As of December 31, 2021 Fair Value Measurements Using Fair Value Measurements Using Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total (In thousands) Assets: Debt securities available for sale: U.S. Treasury securities $ 138,875 $ - $ - $ 138,875 $ 148,486 $ - $ - $ 148,486 Noncallable U.S. agencies debt securities - 389,787 - 389,787 - 285,028 - 285,028 Callable U.S. agencies debt securities - 1,963,566 - 1,963,566 - 1,971,954 - 1,971,954 MBS - 3,098,797 5,794 (1) 3,104,591 - 4,037,209 7,234 (1) 4,044,443 Puerto Rico government obligations - - 2,201 2,201 - - 2,850 2,850 Other investments - - 500 500 - - 1,000 1,000 Equity securities 4,861 - - 4,861 5,378 - - 5,378 Derivative assets - 633 - 633 - 1,505 - 1,505 Liabilities: Derivative liabilities - 476 - 476 - 1,178 - 1,178 (1) Related to private label MBS.
The table below presents a reconciliation of the beginning and ending balances of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2022, 2021, and 2020: 2022 2021 2020 Level 3 Instruments Only Securities Available for Sale (1) Securities Available for Sale (1) Securities Available for Sale (1) (In thousands) Beginning balance $ 11,084 $ 11,977 $ 14,590 Total gains (losses): Included in other comprehensive income (unrealized) ( 401 ) 1,281 2,403 Included in earnings (unrealized) (2) 434 136 ( 1,641 ) BSPR securities acquired - - 150 Purchases - 1,000 - Principal repayments and amortization ( 2,622 ) ( 3,310 ) ( 3,525 ) Ending balance $ 8,495 $ 11,084 $ 11,977 _______ (1) Amounts mostly related to private label MBS. (2) Changes in unrealized gains included in earnings were recognized within provision for credit losses - expense (benefit) and relate to assets still held as of the reporting date.
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The tables below present quantitative information for significant assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2022 and 2021: December 31, 2022 Fair Value Valuation Technique Unobservable Input Range Weighted Average Minimum Maximum (Dollars in thousands) Available-for-sale debt securities: Private label MBS $ 5,794 Discounted cash flows Discount rate 16.2 % 16.2 % 16.2 % Prepayment rate 1.5 % 15.2 % 11.8 % Projected cumulative loss rate 0.3 % 15.6 % 5.6 % Puerto Rico government obligations $ 2,201 Discounted cash flows Discount rate 12.9 % 12.9 % 12.9 % Projected cumulative loss rate 19.3 % 19.3 % 19.3 %
December 31, 2021 Fair Value Valuation Technique Unobservable Input Range Weighted Average Minimum Maximum (Dollars in thousands) Available-for-sale debt securities: Private label MBS $ 7,234 Discounted cash flows Discount rate 12.9 % 12.9 % 12.9 % Prepayment rate 7.6 % 24.9 % 15.2 % Projected cumulative loss rate 0.2 % 15.7 % 7.6 % Puerto Rico government obligations $ 2,850 Discounted cash flows Discount rate 6.6 % 8.4 % 7.9 % Projected cumulative loss rate 8.6 % 8.6 % 8.6 %
Information about Sensitivity to Changes in Significant Unobservable Inputs Private label MBS: The significant unobservable inputs in the valuation include probability of default, the loss severity assumption, and prepayment rates. Shifts in those inputs would result in different fair value measurements. Increases in the probability of default, loss severity assumptions, and prepayment rates in isolation would generally result in an adverse effect on the fair value of the instruments. The Corporation modeled meaningful and possible shifts of each input to assess the effect on the fair value estimation. Puerto Rico Government Obligations: The significant unobservable input used in the fair value measurement is the assumed loss rate of the underlying residential mortgage loans that collateralize these obligations, which are guaranteed by the PRHFA. A significant increase (decrease) in the assumed rate would lead to a (lower) higher fair value estimate. The fair value of these bonds was based on a discounted cash flow methodology that considers the structure and terms of the debt security. The Corporation utilizes PDs and LGDs that consider, among other things, historical payment performance, loan-to value attributes, and relevant current and forward- looking macroeconomic variables, such as regional unemployment rates, the housing price index, and expected recovery of the PRHFA guarantee. Under this approach, expected cash flows (interest and principal) are discounted at the Treasury yield curve plus a spread as of the reporting date and compared to the amortized cost.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Additionally, fair value is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP.
As of December 31, 2022, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a non- recurring basis and still held at December 31, 2022, as shown in the following table: Carrying value as of December 31, Related to losses recorded for the Year Ended December 31, 2022 2021 2020 2022 2021 2020 (In thousands) Level 3: Loans receivable (1) $ 11,437 $ 31,534 $ 74,197 $ ( 736 ) $ ( 5,466 ) $ ( 13,737 ) OREO (2) 5,461 9,126 50,248 ( 917 ) ( 48 ) ( 1,837 ) Premises and equipment (3) 1,242 - - ( 218 ) - - Level 2: Loans held for sale $ 12,306 $ - $ - $ ( 106 ) $ - $ - (1) Consists mainly of collateral dependent commercial and construction loans. The Corporation generally measured losses based on the fair value of the collateral. The Corporation derived the fair values from external appraisals that took into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g., absorption rates), which are not market observable. (2) The Corporation derived the fair values from appraisals that took into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g., absorption rates and net operating income of income producing properties), which are not market observable. Losses were related to market valuation adjustments after the transfer of the loans to the OREO portfolio. (3) Relates to a banking facility reclassified to held-for-sale and measured at the fair value of the collateral.
Qualitative information regarding the fair value measurements for Level 3 financial instruments as of December 31, 2022 are as follows: December 31, 2022 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 Premises and equipment Market External appraised value
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The following tables present the carrying value, estimated fair value and estimated fair value level of the hierarchy of financial instruments as of December 31, 2022 and 2021: Total Carrying Amount in Statement of Financial Condition as of December 31, 2022 Fair Value Estimate as of December 31, 2022 Level 1 Level 2 Level 3 (In thousands) Assets: Cash and due from banks and money market investments (amortized cost) $ 480,505 $ 480,505 $ 480,505 $ - $ - Available-for-sale debt securities (fair value) 5,599,520 5,599,520 138,875 5,452,150 8,495 Held-to-maturity debt securities (amortized cost) 437,537 Less: ACL on held-to-maturity debt securities ( 8,286 ) Held-to-maturity debt securities, net of ACL $ 429,251 427,115 - 260,106 167,009 Equity securities (amortized cost) 50,428 50,428 - 50,428 (1) - Other equity securities (fair value) 4,861 4,861 4,861 - - Loans held for sale (lower of cost or market) 12,306 12,306 - 12,306 - Loans held for investment (amortized cost) 11,552,825 Less: ACL for loans and finance leases ( 260,464 ) Loans held for investment, net of ACL $ 11,292,361 11,106,809 - - 11,106,809 MSRs (amortized cost) 29,037 44,710 - - 44,710 Derivative assets (fair value) (2) 633 633 - 633 - Liabilities: Deposits (amortized cost) $ 16,143,467 $ 16,139,937 $ - $ 16,139,937 $ - Securities sold under agreements to repurchase (amortized cost) 75,133 75,230 - 75,230 - Advances from FHLB (amortized cost) 675,000 674,596 - 674,596 - Other borrowings (amortized cost) 183,762 187,246 - - 187,246 Derivative liabilities (fair value) (2) 476 476 - 476 - (1) Includes FHLB stock with a carrying value of $ 42.9 million, which are considered restricted. (2) Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.
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Total Carrying Amount in Statement of Financial Condition as of December 31, 2021 Fair Value Estimate as of December 31, 2021 Level 1 Level 2 Level 3 (In thousands) Assets: Cash and due from banks and money market investments (amortized cost) $ 2,543,058 $ 2,543,058 $ 2,543,058 $ - $ - Available-for-sale debt securities (fair value) 6,453,761 6,453,761 148,486 6,294,191 11,084 Held-to-maturity debt securities (amortized cost) 178,133 Less: ACL on held-to-maturity debt securities ( 8,571 ) Held-to-maturity debt securities, net of ACL $ 169,562 167,147 - - 167,147 Equity securities (amortized cost) 26,791 26,791 - 26,791 (1) - Other equity securities (fair value) 5,378 5,378 5,378 - - Loans held for sale (lower of cost or market) 35,155 36,147 - 36,147 - Loans held for investment (amortized cost) 11,060,658 Less: ACL for loans and finance leases ( 269,030 ) Loans held for investment, net of ACL $ 10,791,628 10,900,400 - - 10,900,400 MSRs (amortized cost) 30,986 42,132 - - 42,132 Derivative assets (fair value) (2) 1,505 1,505 - 1,505 - Liabilities: Deposits (amortized cost) $ 17,784,894 $ 17,800,706 $ - $ 17,800,706 $ - Securities sold under agreements to repurchase (amortized cost) 300,000 322,105 - 322,105 - Advances from FHLB (amortized cost) 200,000 202,044 - 202,044 - Other borrowings (amortized cost) 183,762 177,689 - - 177,689 Derivative liabilities (fair value) (2) 1,178 1,178 - 1,178 - '(1) Includes FHLB stock with a carrying value of $ 21.5 million, which are considered restricted. (2) Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.
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, goodwill and other intangible assets, are not considered financial instruments and are not included above. Accordingly, this fair value information is not intended to, and does not, represent the Corporation’s underlying value. Many of these assets and liabilities that are subject to the disclosure requirements are not actively traded, requiring management to estimate fair values. These estimates necessarily involve the use of assumptions and judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.
NOTE 26 – REVENUE FROM CONTRACTS WITH CUSTOMERS Revenue Recognition In accordance with ASC Topic 606, “Revenue from Contracts with Customers” (“ASC Topic 606”), revenues are recognized when control of promised goods or services is transferred to customers and in an amount that reflects the consideration to which the Corporation expects to be entitled in exchange for those goods or services. At contract inception, once the contract is determined to be within the scope of ASC Topic 606, the Corporation assesses the goods or services that are promised within each contract, identifies the respective 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Disaggregation of Revenue The following tables summarize the Corporation’s revenue, which includes net interest income on financial instruments and non- interest income, disaggregated by type of service and business segment for the years ended December 31, 2022, 2021 and 2020:
Year ended December 31, 2022: Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Treasury and Investments United States Operations Virgin Islands Operations Total (In thousands) Net interest income (1) $ 98,920 $ 442,624 $ 109,822 $ 39,600 $ 80,485 $ 23,842 $ 795,293 Service charges and fees on deposit accounts - 21,906 12,412 - 607 2,898 37,823 Insurance commissions - 12,733 - - 15 995 13,743 Merchant-related income - 6,622 1,483 - 74 1,335 9,514 Credit and debit card fees - 29,061 85 - ( 7 ) 1,763 30,902 Other service charges and fees 341 4,558 3,397 - 2,113 684 11,093 Not in scope of ASC Topic 606 (1) 15,609 3,577 812 ( 74 ) 58 35 20,017 Total non-interest income 15,950 78,457 18,189 ( 74 ) 2,860 7,710 123,092 Total Revenue $ 114,870 $ 521,081 $ 128,011 $ 39,526 $ 83,345 $ 31,552 $ 918,385
Year ended December 31, 2021: Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Treasury and Investments United States Operations Virgin Islands Operations Total (In thousands) Net interest income (1) $ 104,638 $ 281,703 $ 191,917 $ 59,331 $ 65,967 $ 26,373 $ 729,929 Service charges and fees on deposit accounts - 20,083 11,807 - 555 2,839 35,284 Insurance commissions - 11,166 - - 114 665 11,945 Merchant-related income - 6,279 1,079 - 51 1,055 8,464 Credit and debit card fees - 26,360 83 - 19 1,602 28,064 Other service charges and fees 771 4,185 2,640 - 1,825 556 9,977 Not in scope of ASC Topic 606 (1) 23,507 1,701 423 227 1,399 173 27,430 Total non-interest income 24,278 69,774 16,032 227 3,963 6,890 121,164 Total Revenue $ 128,916 $ 351,477 $ 207,949 $ 59,558 $ 69,930 $ 33,263 $ 851,093
Year ended December 31, 2020: Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Treasury and Investments United States Operations Virgin Islands Operations Total (In thousands) Net interest income (1) $ 76,025 $ 220,678 $ 135,591 $ 87,879 $ 54,025 $ 26,124 $ 600,322 Service charges and fees on deposit accounts - 13,286 8,026 - 553 2,747 24,612 Insurance commissions - 8,754 - - 52 558 9,364 Merchant-related income - 4,516 478 - 41 809 5,844 Credit and debit card fees - 18,218 62 - 16 1,469 19,765 Other service charges and fees 342 2,900 2,260 184 1,800 1,508 8,994 Not in scope of ASC Topic 606 (1) (2) 21,727 3,288 1,780 13,524 2,168 160 42,647 Total non-interest income 22,069 50,962 12,606 13,708 4,630 7,251 111,226 Total Revenue $ 98,094 $ 271,640 $ 148,197 $ 101,587 $ 58,655 $ 33,375 $ 711,548 (1) Most of the Corporation’s revenue is not within the scope of ASC Topic 606. The guidance explicitly excludes net interest income from financial assets and liabilities, as well as other non-interest income from loans, leases, investment securities and derivative financial instruments. (2) For the year ended December 31, 2020, includes a $ 5.0 million benefit resulting from the final settlement of the Corporation’s business interruption insurance claim related to lost profits caused by Hurricanes Irma and Maria in 2017. This insurance recovery is presented as part of other non-interest income in the consolidated statements of income.
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For 2022, 2021, and 2020, most of the Corporation’s revenue within the scope of ASC Topic 606 was related to performance obligations satisfied at a point in time. The following is a discussion of the revenues under the scope of ASC Topic 606. Service Charges and Fees on Deposit Accounts Service charges and fees on deposit accounts relate to fees generated from a variety of deposit products and services rendered to customers. Charges primarily include, but are not limited to, overdraft fees, insufficient fund fees, dormant fees, and monthly service charges. Such fees are recognized concurrently with the event at the time of occurrence or on a monthly basis, in the case of monthly service charges. These depository arrangements are considered day-to-day contracts that do not extend beyond the services performed, as customers have the right to terminate these contracts with no penalty or, if any, nonsubstantive penalties. Insurance Commissions For insurance commissions, which include regular and contingent commissions paid to the Corporation’s insurance agency, the agreements contain a performance obligation related to the sale/issuance of the policy and ancillary administrative post-issuance support. The performance obligations are satisfied when the policies are issued, and revenue is recognized at that point in time. In addition, contingent commission income may be considered to be constrained, as defined under ASC Topic 606. Contingent commission income is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or payments are received, thus, is recorded in subsequent periods. For the years ended December 31, 2022, 2021 and 2020, the Corporation recognized contingent commission income at the time that payments were confirmed and constraints were released of $ 3.2 million, $ 3.3 million, and $ 3.3 million, respectively, which was related to the volume of insurance policies sold in the prior year. Card and processing income Card and processing income includes merchant-related income, and credit and debit card fees. For merchant-related income, the determination of income recognition included the consideration of a 2015 sale of merchant contracts that involved sales of point of sale (“POS”) terminals and a marketing alliance under a revenue-sharing agreement. The Corporation concluded that control of the POS terminals and merchant contracts was transferred to the customer at the contract’s inception. With respect to the related revenue-sharing agreement, the Corporation satisfies the marketing alliance performance obligation over the life of the contract, and recognizes the associated transaction price as the entity performs and any constraints over the variable consideration are resolved. Credit and debit card fees 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. The Corporation offers products, primarily credit cards, that offer various rewards to reward program members, such as airline tickets, cash, or merchandise, based on account activity. The Corporation generally recognizes the cost of rewards as part of business promotion expenses when the rewards are earned by the customer and, at that time, records the corresponding reward liability. The Corporation determines the reward liability based on points earned to date that the Corporation expects to be redeemed and the average cost per point redemption. The reward liability is reduced as points are redeemed. In estimating the reward liability, the Corporation considers historical reward redemption behavior, the terms of the current reward program, and the card purchase activity. The reward liability is sensitive to changes in the reward redemption type and redemption rate, which is based on the expectation that the vast majority of all points earned will eventually be redeemed. The reward liability, which is included in other liabilities in the consolidated statements of financial condition, totaled $ 9.2 million and $ 8.8 million as of December 31, 2022 and 2021, respectively. Other Fees Other fees primarily include revenues generated from wire transfers, lockboxes, bank issuances of checks and trust fees recognized from transfer paying agent, retirement plan, and other trustee activities. Revenues are recognized on a recurring basis when the services are rendered and are included as part of other non-interest income in the consolidated statements of income.
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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. FirstBank participates in a merchant revenue-sharing agreement with another entity to which the Bank sold its merchant contracts portfolio and related POS terminals and a growth agreement with an international card service association to expand the customer base and enhance product offerings. FirstBank recognizes the revenue under these agreements over time, as the Bank completes its performance obligations. The following table shows the balances of contract liabilities recognized in relation to these agreements and the amount of revenue recognized for the years ended December 31, 2022, 2021 and 2020:
2022 2021 2020 (In thousands) Beginning Balance $ 1,443 $ 2,151 $ 2,476 Less: Revenue recognized ( 602 ) ( 708 ) ( 325 ) Ending balance $ 841 $ 1,443 $ 2,151
As of December 31, 2022 and 2021 there were no contract assets recorded on the Corporation’s consolidated financial statements. Other Except for the contract liabilities noted above, the Corporation did not have any significant performance obligations as of December 31, 2022. 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.
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NOTE 27 – SEGMENT INFORMATION Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer, the operating segments are based primarily on the Corporation’s lines of business for its operations in Puerto Rico, the Corporation’s principal market, and by geographic areas for its operations outside of Puerto Rico. As of December 31, 2022, the Corporation had six reportable segments: Mortgage Banking; Consumer (Retail) Banking; Commercial and Corporate Banking; Treasury and Investments; United States Operations; and Virgin Islands Operations. Management determined the reportable segments based on the internal structure used to evaluate performance and to assess where to allocate resources. Other factors, such as the Corporation’s organizational chart, nature of the products, distribution channels, and the economic characteristics of the products, were also considered in the determination of the reportable segments. The 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 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 Treasury and Investments segment is responsible for the Corporation’s investment portfolio and treasury functions that are executed to manage and enhance liquidity. This segment lends funds to the Commercial and Corporate Banking, the Mortgage Banking, the Consumer (Retail) Banking, and the United States Operations segments to finance their lending activities and borrows from those segments. The Consumer (Retail) Banking segment also lends funds to other segments. The interest rates charged or credited by the Treasury and Investments and the Consumer (Retail) Banking segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment. The United States Operations segment consists of all banking activities conducted by FirstBank in the United States mainland, including commercial and consumer banking services. The Virgin Islands Operations segment consists of all banking activities conducted by the Corporation in the USVI and BVI, including commercial and consumer banking services. The accounting policies of the segments are the same as those referred to in Note 1 – Nature of Business and Summary of Significant Accounting Policies. The Corporation evaluates the performance of the segments based on net interest income, the provision for credit losses, non- interest income and direct non-interest expenses. The segments are also evaluated based on the average volume of their interest- earning assets less the ACL.
The following tables present information about the reportable segments for the indicated periods: Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Banking Treasury and Investments United States Operations Virgin Islands Operations Total (In thousands) For the year ended December 31, 2022: Interest income $ 130,185 $ 302,631 $ 205,888 $ 104,215 $ 94,782 $ 24,913 $ 862,614 Net (charge) credit for transfer of funds ( 31,265 ) 173,917 ( 96,066 ) ( 43,838 ) ( 2,748 ) - - Interest expense - ( 33,924 ) - ( 20,777 ) ( 11,549 ) ( 1,071 ) ( 67,321 ) Net interest income 98,920 442,624 109,822 39,600 80,485 23,842 795,293 Provision for credit losses - (benefit) expense ( 7,643 ) 57,123 ( 20,241 ) ( 434 ) ( 3,073 ) 1,964 27,696 Non-interest income (loss) 15,950 78,457 18,189 ( 74 ) 2,860 7,710 123,092 Direct non-interest expenses 23,049 162,663 37,131 3,702 33,365 27,911 287,821 Segment income $ 99,464 $ 301,295 $ 111,121 $ 36,258 $ 53,053 $ 1,677 $ 602,868 Average earnings assets $ 2,233,245 $ 2,918,800 $ 3,626,107 $ 7,300,208 $ 2,069,030 $ 369,504 $ 18,516,894
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Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Banking Treasury and Investments United States Operations Virgin Islands Operations Total (In thousands) For the year ended December 31, 2021: Interest income $ 144,203 $ 271,127 $ 201,684 $ 67,841 $ 82,194 $ 27,659 $ 794,708 Net (charge) credit for transfer of funds ( 39,565 ) 38,859 ( 9,767 ) 14,687 ( 4,214 ) - - Interest expense - ( 28,283 ) - ( 23,197 ) ( 12,013 ) ( 1,286 ) ( 64,779 ) Net interest income 104,638 281,703 191,917 59,331 65,967 26,373 729,929 Provision for credit losses - (benefit) expense ( 16,030 ) 20,322 ( 67,544 ) ( 136 ) ( 975 ) ( 1,335 ) ( 65,698 ) Non-interest income 24,278 69,774 16,032 227 3,963 6,890 121,164 Direct non-interest expenses 29,125 165,357 36,219 4,093 33,902 28,084 296,780 Segment income $ 115,821 $ 165,798 $ 239,274 $ 55,601 $ 37,003 $ 6,514 $ 620,011 Average earnings assets $ 2,506,365 $ 2,551,278 $ 3,793,945 $ 7,827,326 $ 2,126,528 $ 430,499 $ 19,235,941
Mortgage Banking Consumer (Retail) Banking Commercial and Corporate Banking Treasury and Investments United States Operations Virgin Islands Operations Total (In thousands) For the year ended December 31, 2020: Interest income $ 128,043 $ 240,725 $ 155,254 $ 55,003 $ 84,169 $ 29,788 $ 692,982 Net (charge) credit for transfer of funds ( 52,018 ) 18,771 ( 19,663 ) 59,074 ( 6,164 ) - - Interest expense - ( 38,818 ) - ( 26,198 ) ( 23,980 ) ( 3,664 ) ( 92,660 ) Net interest income 76,025 220,678 135,591 87,879 54,025 26,124 600,322 Provision for credit losses - expense 22,518 54,094 74,607 2,774 12,592 4,400 170,985 Non-interest income 22,069 50,962 12,606 13,708 4,630 7,251 111,226 Direct non-interest expenses 33,054 131,133 28,631 3,449 33,782 28,815 258,864 Segment income $ 42,522 $ 86,413 $ 44,959 $ 95,364 $ 12,281 $ 160 $ 281,699 Average earnings assets $ 2,241,753 $ 2,202,595 $ 3,039,786 $ 4,232,144 $ 2,026,619 $ 458,608 $ 14,201,505
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals for the indicated periods: Year Ended December 31, 2022 2021 2020 (In thousands) Net income: Total income for segments $ 602,868 $ 620,011 $ 281,699 Other operating expenses (1) 155,284 192,194 165,376 Income before income taxes 447,584 427,817 116,323 Income tax expense 142,512 146,792 14,050 Total consolidated net income $ 305,072 $ 281,025 $ 102,273 Average assets: Total average earning assets for segments $ 18,516,894 $ 19,235,941 $ 14,201,505 Average non-earning assets 861,755 1,067,092 1,031,141 Total consolidated average assets $ 19,378,649 $ 20,303,033 $ 15,232,646 (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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table presents revenues (interest income plus non-interest income) and selected balance sheet data by geography based on the location in which the transaction was originated as of indicated dates: 2022 2021 2020 (In thousands) Revenues: Puerto Rico $ 855,441 $ 795,166 $ 678,370 United States 97,642 86,157 88,799 Virgin Islands 32,623 34,549 37,039 Total consolidated revenues $ 985,706 $ 915,872 $ 804,208 Selected Balance Sheet Information: Total assets: Puerto Rico $ 16,020,987 $ 18,175,910 $ 16,091,112 United States 2,213,333 2,189,440 2,117,966 Virgin Islands 400,164 419,925 583,993 Loans: Puerto Rico $ 9,097,013 $ 8,755,434 $ 9,367,032 United States 2,088,351 1,948,716 1,993,797 Virgin Islands 379,767 391,663 466,749 Deposits: Puerto Rico (1) $ 12,933,570 $ 14,113,874 $ 12,338,934 United States (2) 1,623,725 1,928,749 1,622,481 Virgin Islands 1,586,172 1,742,271 1,355,968 (1) For 2022, 2021, and 2020, includes $ 1.4 million, $ 34.2 million, and $ 109.0 million, respectively, of brokered CDs allocated to Puerto Rico operations. (2) For 2022, 2021, and 2020 includes $ 104.4 million, $ 66.2 million, and $ 107.1 million, respectively, of brokered CDs allocated to United States operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 28 – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION Supplemental statement of cash flows information is as follows for the indicated periods:
Year Ended December 31, 2022 2021 2020 (In thousands) Cash paid for: Interest on borrowings $ 65,986 $ 68,668 $ 94,872 Income tax 51,798 15,477 16,713 Operating cash flow from operating leases 18,202 19,328 13,464 Non-cash investing and financing activities: Additions to OREO 15,350 19,348 7,249 Additions to auto and other repossessed assets 45,607 33,408 36,203 Capitalization of servicing assets 3,122 5,194 4,864 Loan securitizations 141,909 191,434 221,491 Loans held for investment transferred to held for sale 4,632 33,010 10,817 Payable related to unsettled purchases of available-for-sale investment securities - - 24,033 ROU asset obtained in exchange for operating lease liabilities 2,733 4,553 1,328 Acquisition (1) : Consideration $ - $ 584 $ 1,280,424 Fair value of assets acquired - 605 5,561,564 Liabilities assumed - - 4,291,674 (1) Recognized in connection with the BSPR acquisition on September 1, 2020.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 29 – REGULATORY MATTERS, COMMITMENTS, AND CONTINGENCIES Regulatory Matters The Corporation and FirstBank are each subject to various regulatory capital requirements imposed by the U.S. federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Corporation’s financial statements and activities. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s and FirstBank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts and classification are also subject to qualitative judgments and adjustment by the regulators with respect to minimum capital requirements, components, risk weightings, and other factors. As of December 31, 2022 and 2021, the Corporation and FirstBank exceeded the minimum regulatory capital ratios for capital adequacy purposes and FirstBank exceeded the minimum regulatory capital ratios to be considered a well capitalized institution under the regulatory framework for prompt corrective action. As of December 31, 2022, management does not believe that any condition has changed or event has occurred that would have changed the institution’s status. The Corporation and FirstBank compute risk-weighted assets using the standardized approach required by the U.S. Basel III capital rules (“Basel III rules”). The Basel III rules require the Corporation to maintain an additional capital conservation buffer of 2.5 % on certain regulatory capital ratios to avoid limitations on both (i) capital distributions ( e.g. , repurchases of capital instruments, dividends and interest payments on capital instruments) and (ii) discretionary bonus payments to executive officers and heads of major business lines. As part of its response to the impact of COVID-19, on March 31, 2020, the federal banking agencies issued an interim final rule that provided the option to temporarily delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule provides that, at the election of a qualified banking organization, the day 1 impact to retained earnings plus 25 % of the change in the ACL (as defined in the final rule) from January 1, 2020 to December 31, 2021 will be delayed for two years and phased-in at 25 % per year beginning on January 1, 2022 over a three-year period, resulting in a total transition period of five years. Accordingly, as of December 31, 2022, the capital measures of the Corporation and the Bank included $ 16.2 million associated with the CECL day one impact to retained earnings plus 25 % of the increase in the ACL (as defined in the interim final rule) from January 1, 2020 to December 31, 2021, and $ 48.6 million remains excluded to be phase-in during the next two years. The federal financial regulatory agencies may take other measures affecting regulatory capital to address the COVID-19 pandemic and related macroeconomic conditions, although the nature and impact of such actions cannot be predicted at this time.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The regulatory capital position of the Corporation and the Bank as of December 31, 2022, and 2021, which reflects the delay in the effect of CECL on regulatory capital, were as follows:
Regulatory Requirements Actual For Capital Adequacy Purposes To be Well -Capitalized Thresholds Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) As of December 31, 2022 Total Capital (to Risk-Weighted Assets) First BanCorp. $ 2,385,866 19.21 % $ 993,405 8.0 % N/A N/A % FirstBank $ 2,346,093 18.90 % $ 993,264 8.0 % $ 1,241,580 10.0 % CET1 Capital (to Risk-Weighted Assets) First BanCorp. $ 2,052,333 16.53 % $ 558,790 4.5 % N/A N/A % FirstBank $ 2,090,832 16.84 % $ 558,711 4.5 % $ 807,027 6.5 % Tier I Capital (to Risk-Weighted Assets) First BanCorp. $ 2,052,333 16.53 % $ 745,054 6.0 % N/A N/A % FirstBank $ 2,190,832 17.65 % $ 744,948 6.0 % $ 993,264 8.0 % Leverage ratio First BanCorp. $ 2,052,333 10.70 % $ 767,075 4.0 % N/A N/A % FirstBank $ 2,190,832 11.43 % $ 766,714 4.0 % $ 958,392 5.0 % As of December 31, 2021 Total Capital (to Risk-Weighted Assets) First BanCorp. $ 2,433,953 20.50 % $ 949,637 8.0 % N/A N/A % FirstBank $ 2,401,390 20.23 % $ 949,556 8.0 % $ 1,186,944 10.0 % CET1 Capital (to Risk-Weighted Assets) First BanCorp. $ 2,112,630 17.80 % $ 534,171 4.5 % N/A N/A % FirstBank $ 2,150,317 18.12 % $ 534,125 4.5 % $ 771,514 6.5 % Tier I Capital (to Risk-Weighted Assets) First BanCorp. $ 2,112,630 17.80 % $ 712,228 6.0 % N/A N/A % FirstBank $ 2,258,317 19.03 % $ 712,167 6.0 % $ 949,556 8.0 % Leverage ratio First BanCorp. $ 2,112,630 10.14 % $ 833,091 4.0 % N/A N/A % FirstBank $ 2,258,317 10.85 % $ 832,773 4.0 % $ 1,040,967 5.0 %
Cash Restrictions The Corporation’s bank subsidiary, FirstBank, is required by the Puerto Rico Banking Law to maintain minimum average weekly reserve balances to cover demand deposits. The amount of those minimum average weekly reserve balances for the period that ended December 31, 2022 was $ 1.1 billion (2021 - $ 1.2 billion). As of December 31, 2022 and 2021, the Bank complied with the requirement. Cash and due from banks as well as other highly liquid securities are used to cover the required average reserve balances. As of December 31, 2022, and as required by the Puerto Rico International Banking Law, the Corporation maintained $ 0.3 million in time deposits, related to FirstBank Overseas Corporation, an international banking entity that is a subsidiary of FirstBank.
Commitments The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Management uses the same credit policies and approval process in entering into commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any time and without cause.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In general, commercial and standby letters of credit are issued to facilitate foreign and domestic trade transactions. Normally, commercial and standby letters of credit are short-term commitments used to finance commercial contracts for the shipment of goods. The collateral for these letters of credit includes cash or available commercial lines of credit. The fair value of commercial and standby letters of credit is based on the fees currently charged for such agreements, which, as of December 31, 2022 and 2021, were not significant.
The following table summarizes commitments to extend credit and standby letters of credit as of the indicated dates: December 31, 2022 2021 (In thousands) Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Construction undisbursed funds $ 170,639 $ 197,917 Unused personal lines of credit 978,219 1,180,824 Commercial lines of credit 761,634 725,259 Letters of credit: Commercial letters of credit 68,647 151,140 Standby letters of credit 9,160 4,342
Contingencies As of December 31, 2022, First BanCorp. and its subsidiaries were defendants in various legal proceedings, claims and other loss contingencies arising in the ordinary course of business. On at least a quarterly basis, the Corporation assesses its liabilities and contingencies in connection with threatened and outstanding legal proceedings, claims and other loss contingencies utilizing the latest information available. For legal proceedings, claims and other loss contingencies where it is both probable that the Corporation will incur a loss and the amount can be reasonably estimated, the Corporation establishes an accrual for the loss. Once established, the accrual is adjusted as appropriate to reflect any relevant developments. For legal proceedings, claims and other loss contingencies where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that some of them are currently in preliminary stages), the existence in some of the current proceedings of multiple defendants whose share of liability has yet to be determined, the numerous unresolved issues in the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, the Corporation’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate. While the final outcome of legal proceedings, claims, and other loss contingencies is inherently uncertain, based on information currently available, management believes that the final disposition of the Corporation’s legal proceedings, claims and other loss contingencies, to the extent not previously provided for, will not have a material adverse effect on the Corporation’s consolidated financial position as a whole. If management believes that, based on available information, it is at least reasonably possible that a material loss (or material loss in excess of any accrual) will be incurred in connection with any legal contingencies, the Corporation discloses an estimate of the possible loss or range of loss, either individually or in the aggregate, as appropriate, if such an estimate can be made, or discloses that an estimate cannot be made. Based on the Corporation’s assessment as of December 31, 2022, no such disclosures were necessary.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 30- FIRST BANCORP. (HOLDING COMPANY ONLY) FINANCIAL INFORMATION The following condensed financial information presents the financial position of First BanCorp. at the holding company level only as of December 31, 2022 and 2021, and the results of its operations and cash flows for the years ended December 31, 2022, 2021, and 2020:
Statements of Financial Condition As of December 31, 2022 2021 (In thousands) Assets Cash and due from banks $ 19,279 $ 20,751 Other investment securities 735 285 Investment in First Bank Puerto Rico, at equity 1,464,026 2,247,289 Investment in First Bank Insurance Agency, at equity 28,770 19,521 Investment in FBP Statutory Trust I 1,951 1,951 Investment in FBP Statutory Trust II 3,561 3,561 Dividends receivable 624 295 Other assets 430 71 Total assets $ 1,519,376 $ 2,293,724 Liabilities and Stockholders' Equity Liabilities: Other borrowings $ 183,762 $ 183,762 Accounts payable and other liabilities 10,074 8,195 Total liabilities 193,836 191,957 Stockholders' equity 1,325,540 2,101,767 Total liabilities and stockholders' equity $ 1,519,376 $ 2,293,724
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Statements of Income Year Ended December 31, 2022 2021 2020 (In thousands) Income Interest income on money market investments $ 79 $ 51 $ 71 Dividend income from banking subsidiaries 368,670 98,060 52,707 Dividend income from non-banking subsidiaries - 30,000 - Other income 248 154 439 Total income 368,997 128,265 53,217 Expense Other borrowings 8,253 5,135 6,355 Other operating expenses 1,730 1,929 2,097 Total expense 9,983 7,064 8,452 Gain on early extinguishment of debt - - 94 Income before income taxes and equity in undistributed earnings of subsidiaries 359,014 121,201 44,859 Income tax expense 3,448 2,854 2,429 Equity in undistributed earnings of subsidiaries (distribution in excess of earnings) ( 50,494 ) 162,678 59,843 Net income $ 305,072 $ 281,025 $ 102,273 Other comprehensive (loss) income, net of tax ( 720,779 ) ( 139,454 ) 48,691 Comprehensive (loss) income $ ( 415,707 ) $ 141,571 $ 150,964
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Statements of Cash Flows Year Ended December 31, 2022 2021 2020 (In thousands) Cash flows from operating activities: Net income $ 305,072 $ 281,025 $ 102,273 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 148 149 231 Equity in undistributed earnings of subsidiaries 50,494 ( 162,678 ) ( 59,843 ) Gain on early extinguishment of debt - - ( 94 ) Net decrease (increase) in other assets ( 688 ) 1,657 ( 1,514 ) Net increase (decrease) in other liabilities 1,545 3,578 ( 459 ) Net cash provided by operating activities 356,571 123,731 40,594 Cash flows from investing activities: Purchase of equity securities ( 450 ) - - Return of capital from wholly-owned subsidiaries (1) 8,000 200,000 - Net cash provided by investing activities 7,550 200,000 - Cash flows from financing activities: Repurchase of common stock ( 277,769 ) ( 216,522 ) ( 206 ) Repayment of junior subordinated debentures - - ( 282 ) Dividends paid on common stock ( 87,824 ) ( 65,021 ) ( 43,416 ) Dividends paid on preferred stock - ( 2,453 ) ( 2,676 ) Redemption of preferred stock - Series A through E - ( 36,104 ) - Net cash used in financing activities ( 365,593 ) ( 320,100 ) ( 46,580 ) Net (decrease) increase in cash and cash equivalents ( 1,472 ) 3,631 ( 5,986 ) Cash and cash equivalents at beginning of the year 20,751 17,120 23,106 Cash and cash equivalents at end of year $ 19,279 $ 20,751 $ 17,120 Cash and cash equivalents include: Cash and due from banks $ 19,279 $ 20,751 $ 10,909 Money market instruments - - 6,211 $ 19,279 $ 20,751 $ 17,120 (1) During 2022, FirstBank of Puerto Rico, a wholly-owned subsidiary of First BanCorp., redeemed 0.3 million shares of its preferred stock for a total price of approximately $ 8.0 million. During 2021, FirstBank of Puerto Rico, a wholly-owned subsidiary of First BanCorp., redeemed 8 million shares of its preferred stock for a total price of approximately $ 200 million.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) List of documents filed as part of this report.
(1)Financial Statements.
The following consolidated financial statements of First BanCorp., together with the reports thereon of First BanCorp.’s independent registered public accounting firm, Crowe LLP (PCAOB ID No. 173), dated February 28, 2023, are included in Item 8 of this Annual Report on Form 10-K/A:
– Report of Crowe LLP, Independent Registered Public Accounting Firm.
– Attestation Report of Crowe LLP, Independent Registered Public Accounting Firm on Internal Control over Financial Reporting.
–Consolidated Statements of Financial Condition as of December 31, 2022 and 2021.
–Consolidated Statements of Income for Each of the Three Years in the Period Ended December 31, 2022.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
– Consolidated Statements of Comprehensive (Loss) Income for Each of the Three Years in the Period Ended December 31, 2022.
– Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2022.
– Consolidated Statements of Changes in Stockholders’ Equity for Each of the Three Years in the Period Ended December 31, 2022.
– Notes to the Consolidated Financial Statements.
(2) Financial statement schedules.
All financial schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(b) Exhibits listed in the Exhibit Index below are filed herewith as part of this Annual Report on Form 10-K/A and are meant to supplement the Exhibits listed and/or filed with the Original Report.
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EXHIBIT INDEX
Exhibit No.Description
3.1Restated Articles of Incorporation, incorporated by reference from Exhibit 3.1 of the Registration Statement on Form S-1/A, filed on October 20, 2011.
3.2Amended and Restated By-Laws, incorporated by reference from Exhibit 3.2 of the Form 8-K, filed on March 31, 2020.
4.1Description of First BanCorp. capital stock, incorporated by reference from Exhibit 4.1 of the Form 10-K for the year ended December 31, 2022, filed on February 28, 2023.
10.1First BanCorp Omnibus Incentive Plan, as amended, incorporated by reference from Exhibit 99.1 of the Form S-8, filed on June 21, 2016.
10.2Form of Restricted Stock Award Agreement, incorporated by reference from Exhibit 10.2 of the Form 10-K for the year ended December 31, 2022, filed on February 28, 2023.
10.3Form of First BanCorp Long-Term Incentive Award Agreement, incorporated by reference from Exhibit 10.1 of the Form 10-Q for the quarter ended March 31, 2018, filed on May 10, 2018.
10.4Employment Agreement between First BanCorp and Aurelio Alemán, incorporated by reference from Exhibit 10.6- of the Form 10-K for the year ended December 31, 1998, filed on March 26, 1999.
10.5Amendment No. 1 to Employment Agreement between First BanCorp and Aurelio Alemán, incorporated by reference from Exhibit 10.2 of the Form 10-Q for the quarter ended March 31, 2009, filed on May 11, 2009.
10.6Amendment No. 2 to Employment Agreement between First BanCorp and Aurelio Alemán, incorporated by reference from Exhibit 10.6 of the Form 10-K for the year ended December 31, 2009, filed on March 2, 2010.
10.7Employment Agreement between First BanCorp and Orlando Berges, incorporated by reference from Exhibit 10.1 of the Form 10-Q for the quarter ended June 30, 2009, filed on August 11, 2009.
10.8Letter Agreement between First BanCorp. and Roberto R. Herencia, incorporated by reference from Exhibit 10.1 of the Form 8-K/A, filed on November 2, 2011.
10.9Offer Letter between First BanCorp and Juan Acosta Reboyras, incorporated by reference from Exhibit 10.1 of the Form 8-K, filed on September 3, 2014.
10.10Offer Letter between First BanCorp and Luz A. Crespo, incorporated by reference from Exhibit 10.1 of the Form 8-K, filed on February 9, 2015.
10.11Offer Letter between First BanCorp and John A. Heffern, incorporated by reference from Exhibit 10.1 of the Form 8-K, filed on November 1, 2017.
10.12Offer Letter between First BanCorp and Daniel E. Frye, incorporated by reference from Exhibit 10.1 of the Form 8-K, filed on August 31, 2018.
10.13Offer Letter between First BanCorp and Félix M. Villamil, incorporated by reference from Exhibit 10.1 of the Form 8-K, filed on November 5, 2020.
10.14Offer Letter between First BanCorp and Patricia M. Eaves, incorporated by reference from Exhibit 10.1 of the Form 8-K, filed on April 1, 2021.
10.15Form of Executive Employment Agreement executed by each executive officer, incorporated by reference from Exhibit 10.1 of the Form 10- Q for the quarter ended June 30, 2018, filed on August 9, 2018.
10.16RevisedNon-Management and Non-EmployeeDirectors of the Board of Directors Compensation Structure, incorporated by reference from Exhibit 10.1 of the Form 10-Q for the quarter ended September 30, 2022, filed on November 8, 2022.
18.1Preferability letter from Crowe, LLP regarding a change in accounting method dated November 8, 2022, incorporated by reference form Exhibit 18 of the Form 10-Q for the quarter ended September 30, 2022, filed on November 8, 2022.
21.1List of First BanCorp’s subsidiaries, incorporated by reference from Exhibit 21.1 of the Form 10-K for the year ended December 31, 2022, filed on February 28, 2023.
23.1Consent of Crowe LLP, incorporated by reference from Exhibit 23.1 of the Form 10-K for the year ended December 31, 2022, filed on February 28, 2023.
31.1CEOCertification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INSInline XBRL Instance Document, filed herewith. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCHInline XBRL Taxonomy Extension Schema Document, filed herewith 101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith 101.LABInline XBRL Taxonomy Extension Label Linkbase Document, filed herewith 101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith 101.DEFInline XBRL Taxonomy Extension Definitions Linkbase Document, filed herewith 104The cover page of First BanCorp. Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL (included within the Exhibit 101 attachments)
_____ Management contract or compensatory plan or agreement.
*Filed herewith.
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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.
By:/s/ Orlando BergesDate: 10/13/2023 Orlando Berges, CPA Executive Vice President and Chief Financial Officer
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