10-Q 1 fbp09302018x10q.htm 10-Q  

 

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

____________

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2018

or

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

 

For the transition period from ___________________ to ___________________

 

COMMISSION FILE NUMBER 001-14793

 

First BanCorp.

 

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

Puerto Rico

 

66-0561882

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification number)

 

 

 

1519 Ponce de León Avenue, Stop 23

Santurce, Puerto Rico

(Address of principal executive offices)

 

00908

(Zip Code)

 

 

 

(787) 729-8200

(Registrant’s telephone number, including area code)

Not applicable

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

 

 

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

Yes    No

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

 

Yes   No

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

 

                             Large accelerated filer                                                                                             Accelerated filer

                              

                             Non-accelerated filer                                                                                               Smaller reporting company

                                                                                                                                                                    

                                                                                                                                                                   Emerging growth company   

 

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

 

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

  

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

 

Common stock: 217,240,844 shares outstanding as of October 31, 2018.

 

 


 

 

FIRST BANCORP.

 

INDEX PAGE

 

 

PART I FINANCIAL INFORMATION 

PAGE

Item 1. Financial Statements:

 

Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2018 and December 31, 2017 

 

5

Consolidated Statements of Income (Loss) (Unaudited) – Quarters ended September 30, 2018 and 2017 and nine-month periods ended September 30, 2018 and 2017

 

6

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Quarters ended September 30, 2018 and 2017 and nine-month periods ended September 30, 2018 and 2017

 

7

Consolidated Statements of Cash Flows (Unaudited) – Nine-month periods ended September 30, 2018 and 2017

 

8

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Nine-month periods ended September 30, 2018 and 2017

 

9

   Notes to Consolidated Financial Statements (Unaudited)                                              

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

      92

Item 3. Quantitative and Qualitative Disclosures About Market Risk

165

Item 4. Controls and Procedures

165

 

 

PART II. OTHER INFORMATION

 

Item 1.    Legal Proceedings

167

Item 1A. Risk Factors

167

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

168

Item 3.    Defaults Upon Senior Securities

169

Item 4.    Mine Safety Disclosures 

169

Item 5.    Other Information

169

Item 6.    Exhibits

169

 

 

SIGNATURES           

 

 

2 


 

Forward Looking Statements

 

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

 

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

 

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

 

·     changes in economic and business conditions, including those caused by past or future natural disasters, that directly or indirectly affect the financial health of the Corporation’s customer base in the geographic areas we serve;

 

·     the actual pace and magnitude of economic recovery in the Corporation’s service areas that were affected by Hurricanes Maria and Irma during 2017 compared to management’s current views on the economic recovery;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

3 


 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·     general competitive factors and industry consolidation.

 

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

 

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

  

4 


 

 

FIRST BANCORP.

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

  

 

 

September 30, 2018

 

December 31, 2017

(In thousands, except for share information)

 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and due from banks

$

559,182

 

$

705,980

Money market investments:

 

 

 

 

 

   Time deposits with other financial institutions

 

300

 

 

3,126

   Other short-term investments

 

97,290

 

 

7,289

      Total money market investments

 

97,590

 

 

10,415

 

 

 

 

 

 

Investment securities available for sale, at fair value:

 

 

 

 

 

   Securities pledged with creditors’ right to repledge

 

130,627

 

 

350,123

   Other investment securities available for sale

 

1,880,594

 

 

1,540,893

      Total investment securities available for sale

 

2,011,221

 

 

1,891,016

Investment securities held to maturity, at amortized cost

 

 

 

 

 

 (fair value 2018 - $131,703; 2017- $131,032)

 

144,799

 

 

150,627

Equity securities

 

42,274

 

 

43,119

Loans, net of allowance for loan and lease losses of $200,563

 

 

 

 

 

   (2017 - $231,843)

 

8,516,390

 

 

8,618,633

Loans held for sale, at lower of cost or market

 

65,739

 

 

32,980

      Total loans, net

 

8,582,129

 

 

8,651,613

 

 

 

 

 

 

Premises and equipment, net

 

147,154

 

 

141,895

Other real estate owned (OREO)

 

135,218

 

 

147,940

Accrued interest receivable on loans and investments

 

47,327

 

 

57,172

Other assets

 

442,806

 

 

461,491

      Total assets

$

12,209,700

 

$

12,261,268

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Non-interest-bearing deposits

$

2,321,050

 

$

1,833,665

Interest-bearing deposits

 

6,827,193

 

 

7,188,966

      Total deposits

 

9,148,243

 

 

9,022,631

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

100,000

 

 

300,000

Advances from the Federal Home Loan Bank (FHLB)

 

690,000

 

 

715,000

Other borrowings

 

184,150

 

 

208,635

Accounts payable and other liabilities

 

159,892

 

 

145,905

      Total liabilities

 

10,282,285

 

 

10,392,171

 

 

 

 

 

 

STOCKHOLDERSʼ EQUITY

 

 

 

 

 

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

 

 

 

 

 

Non-cumulative Perpetual Monthly Income Preferred Stock: 22,004,000

 

 

 

 

 

 shares issued, 1,444,146 shares outstanding, aggregate liquidation value of $36,104

 

36,104

 

 

36,104

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

 

 

 

 

 

    221,789,509 shares issued (2017 - 220,382,343 shares issued)

 

22,179

 

 

22,038

Less: Treasury stock (at par value)

 

(455)

 

 

(410)

Common stock outstanding, 217,240,844 shares outstanding (2017 - 216,278,040

 

 

 

 

 

   shares outstanding)

 

21,724

 

 

21,628

Additional paid-in capital

 

938,776

 

 

936,772

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

 

993,698

 

 

895,208

Accumulated other comprehensive loss, net of tax of $7,752 as of each September 30, 2018

 

 

 

 

 

 and December 31, 2017

 

(62,887)

 

 

(20,615)

    Total stockholdersʼ equity

 

1,927,415

 

 

1,869,097

Total liabilities and stockholdersʼ equity

$

12,209,700

 

$

12,261,268

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

5 


 

 

FIRST BANCORP.

 

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

Quarter Ended

 

Nine-Month Period Ended

 

September 30,

 

September 30,

 

2018

 

2017

 

2018

 

2017

(In thousands, except per share information)

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

   Loans

$

139,205

 

$

134,593

 

$

409,918

 

$

398,732

   Investment securities

 

15,121

 

 

12,109

 

 

43,840

 

 

39,361

   Money market investments and interest-bearing cash accounts

 

3,166

 

 

1,293

 

 

8,785

 

 

2,504

      Total interest income

 

157,492

 

 

147,995

 

 

462,543

 

 

440,597

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

   Deposits

 

16,979

 

 

16,898

 

 

50,924

 

 

49,218

   Securities sold under agreements to repurchase

 

2,333

 

 

2,917

 

 

7,173

 

 

8,305

   Advances from FHLB

 

3,344

 

 

3,209

 

 

10,126

 

 

7,623

   Other borrowings

 

2,315

 

 

2,139

 

 

6,635

 

 

6,166

      Total interest expense

24,971

 

25,163

 

74,858

 

71,312

         Net interest income

 

132,521

 

 

122,832

 

 

387,685

 

 

369,285

Provision for loan and lease losses

 

11,524

 

 

75,013

 

 

51,604

 

 

118,551

Net interest income after provision for loan and lease losses

120,997

 

47,819

 

336,081

 

250,734

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

   Service charges and fees on deposit accounts

 

5,581

 

 

5,797

 

 

16,013

 

 

17,390

   Mortgage banking activities

 

4,551

 

 

3,117

 

 

13,551

 

 

11,579

   Net gain on sale of investments

 

-

 

 

-

 

 

-

 

 

371

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

 

 

 

 

 

 

 

 

 

 

 

      Total OTTI losses

 

-

 

 

-

 

 

-

 

 

(12,231)

      Portion of OTTI recognized in other comprehensive income (“OCI”)

 

-

 

 

-

 

 

-

 

 

-

   Net impairment losses on available-for-sale debt securities

 

-

 

 

-

 

 

-

 

 

(12,231)

   Gain on early extinguishment of debt

 

-

 

 

1,391

 

 

2,316

 

 

1,391

   Insurance commission income

 

1,493

 

 

1,377

 

 

6,628

 

 

6,819

   Other non-interest income

 

6,898

 

 

6,963

 

 

23,271

 

 

22,118

      Total non-interest income

18,523

 

18,645

 

61,779

 

47,437

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

   Employees’ compensation and benefits

 

39,243

 

 

37,128

 

 

119,482

 

 

114,190

   Occupancy and equipment

 

14,660

 

 

13,745

 

 

43,511

 

 

41,592

   Business promotion

 

3,860

 

 

3,244

 

 

10,452

 

 

9,717

   Professional fees

 

11,502

 

 

12,023

 

 

31,755

 

 

34,779

   Taxes, other than income taxes

 

3,534

 

 

3,763

 

 

11,027

 

 

11,184

   FDIC deposit insurance

 

2,067

 

 

3,179

 

 

7,159

 

 

10,671

   Net loss on OREO and OREO expenses

 

4,360

 

 

1,351

 

 

10,205

 

 

8,796

   Credit and debit card processing expenses

 

4,147

 

 

3,737

 

 

11,450

 

 

10,134

   Communications

 

1,642

 

 

1,603

 

 

4,706

 

 

4,774

   Other non-interest expenses

 

5,850

 

 

5,841

 

 

17,361

 

 

16,728

      Total non-interest expenses

90,865

 

85,614

 

267,108

 

262,565

Income (loss) before income taxes

 

48,655

 

 

(19,150)

 

 

130,752

 

 

35,606

Income tax (expense) benefit

 

(12,332)

 

8,398

 

 

(30,249)

 

 

7,181

Net income (loss)

$

36,323

 

$

(10,752)

 

$

100,503

 

$

42,787

Net income (loss) attributable to common stockholders

$

35,654

 

$

(11,421)

 

$

98,496

 

$

40,780

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

   Basic

$

0.16

 

$

(0.05)

 

$

0.46

 

$

0.19

   Diluted

$

0.16

 

$

(0.05)

 

$

0.45

 

$

0.19

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

 

 

 

 

6 


 

 

FIRST BANCORP.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

Quarter Ended

 

Nine-Month Period Ended

 

September 30,

 

September 30,

 

 

2018

 

 

2017

 

2018

 

 

2017

(In thousands)

 

 

Net income (loss)

$

36,323

 

$

(10,752)

 

$

100,503

 

$

42,787

Amount reclassified out of accumulated other comprehensive

 

 

 

 

 

 

 

 

 

 

 

     loss per Accounting Standards Update (“ASU”) 2016-01

 

-

 

 

-

 

 

6

 

 

-

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

         Unrealized gain (loss) on debt securities on which an

 

 

 

 

 

 

 

 

 

 

 

          OTTI has been recognized

 

62

 

 

647

 

 

264

 

 

(1,156)

      Reduction of non-credit OTTI component on securities sold

 

-

 

 

-

 

 

-

 

 

5,678

      Reclassification adjustments for net gain included in net income

 

-

 

 

-

 

 

-

 

 

(371)

      Reclassification adjustment for OTTI

 

 

 

 

 

 

 

 

 

 

 

          on debt securities included in net income

 

-

 

 

-

 

 

-

 

 

12,231

        All other unrealized holding (losses) gains on available-for-sale

 

 

 

 

 

 

 

 

 

 

 

        securities arising during the period

 

(10,842)

 

 

3,072

 

 

(42,542)

 

 

7,098

     Other comprehensive (loss) income for the period

 

(10,780)

 

 

3,719

 

 

(42,272)

 

 

23,480

         Total comprehensive income (loss)

$

25,543

 

$

(7,033)

 

$

58,231

 

$

66,267

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

 

 

 

 

7 


 

 

FIRST BANCORP.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  

 

Nine-Month Period Ended

 

September 30,

 

September 30,

 

2018

 

2017

(In thousands)

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

   Net income

$

100,503

 

$

42,787

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

 

 

 

 

 

   Depreciation and amortization

 

11,308

 

 

12,263

   Amortization of intangible assets

 

2,731

 

 

3,325

   Provision for loan and lease losses

 

51,604

 

 

118,551

   Deferred income tax expense (benefit)

 

22,549

 

 

(18,094)

   Stock-based compensation

 

4,921

 

 

5,423

   Gain on sale of investments

 

-

 

 

(371)

   OTTI on debt securities

 

-

 

 

12,231

   Unrealized gain on derivative instruments

 

(108)

 

 

(272)

   Gain on early extinguishment of debt

 

(2,316)

 

 

(1,391)

   Net gain on sales of premises and equipment and other assets

 

(1,344)

 

 

(146)

Gain from insurance proceeds

 

(478)

 

 

-

   Net gain on sales of loans

 

(1,281)

 

 

(5,348)

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

 

(6,027)

 

 

(6,331)

   Originations and purchases of loans held for sale

 

(244,261)

 

 

(257,997)

   Sales and repayments of loans held for sale

 

265,528

 

 

275,855

   Amortization of broker placement fees

 

948

 

 

1,461

   Net amortization/accretion of premium and discounts on investment securities

 

2,187

 

 

1,283

   Decrease (increase) in accrued interest receivable

 

9,732

 

 

(4,791)

   (Decrease) increase in accrued interest payable

 

(756)

 

 

1,030

   (Increase) decrease in other assets

 

(1,870)

 

 

5,566

   Increase in other liabilities

 

253

 

 

9,604

        Net cash provided by operating activities

 

213,823

 

 

194,638

Cash flows from investing activities:

 

 

 

 

 

   Principal collected on loans

 

1,880,633

 

 

1,920,088

   Loans originated and purchased

 

(1,949,453)

 

 

(2,092,161)

   Proceeds from sales of loans held for investment

 

55,526

 

 

53,245

   Proceeds from sales of repossessed assets

 

37,343

 

 

28,004

   Proceeds from sales of available-for-sale securities

 

-

 

 

23,408

   Purchases of available-for-sale securities

 

(475,077)

 

 

(53,208)

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

 

309,994

 

 

172,493

   Proceeds from principal repayments of held-to-maturity securities

 

5,828

 

 

5,563

   Additions to premises and equipment

 

(16,118)

 

 

(7,607)

   Proceeds from sale of premises and equipment and other assets

 

2,508

 

 

2,040

   Net redemptions/purchase of other investment securities

 

1,256

 

 

(9,127)

   Proceeds from the settlement of insurance claims

 

7,614

 

 

-

        Net cash (used in) provided by investing activities

 

(139,946)

 

 

42,738

Cash flows from financing activities:

 

 

 

 

 

   Net increase (decrease) in deposits

 

117,762

 

 

(34,754)

   Repayment of securities sold under agreements to repurchase

 

(200,000)

 

 

-

   Net FHLB advances (repayments) proceeds

 

(25,000)

 

 

245,000

   Repayment of junior subordinated debentures

 

(21,434)

 

 

(5,930)

   Repurchase of outstanding common stock

 

(2,821)

 

 

(2,176)

   Dividends paid on preferred stock

 

(2,007)

 

 

(2,007)

        Net cash (used in) provided by financing activities

 

(133,500)

 

 

200,133

Net (decrease) increase in cash and cash equivalents

 

(59,623)

 

 

437,509

Cash and cash equivalents at beginning of period

 

716,395

 

 

299,685

Cash and cash equivalents at end of period

$

656,772

 

$

737,194

Cash and cash equivalents include:

 

 

 

 

 

   Cash and due from banks

$

559,182

 

$

726,779

   Money market instruments

 

97,590

 

 

10,415

 

$

656,772

 

$

737,194

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

 

 

 

8 


 

 

FIRST BANCORP.

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

Nine-Month Period Ended

 

September 30,

 

September 30,

 

2018

 

2017

(In thousands)

 

 

 

 

 

 

 

 

 

 

Preferred Stock

$

36,104

 

$

36,104

 

 

 

 

 

 

Common Stock outstanding:

 

 

 

 

 

Balance at beginning of period

 

21,628

 

 

21,745

Common stock issued as compensation

 

27

 

 

43

Common stock issued for exercised warrants

 

73

 

 

-

Common stock withheld for taxes

 

(43)

 

 

(39)

Restricted stock grants

 

40

 

 

109

Restricted stock forfeited

 

(1)

 

 

(240)

      Balance at end of period

 

21,724

 

 

21,618

 

 

 

 

 

 

Additional Paid-In-Capital:

 

 

 

 

 

Balance at beginning of period

 

936,772

 

 

931,856

Stock-based compensation

 

4,921

 

 

5,423

Common stock issued for exercised warrants

 

(73)

 

 

-

Common stock withheld for taxes

 

(2,778)

 

 

(2,136)

Restricted stock grants

 

(40)

 

 

(109)

Common stock issued as compensation

 

(27)

 

 

(43)

Restricted stock forfeited

 

1

 

 

240

      Balance at end of period

 

938,776

 

 

935,231

 

 

 

 

 

 

Retained Earnings:

 

 

 

 

 

Balance at beginning of period

 

895,208

 

 

830,928

Net income

 

100,503

 

 

42,787

Dividends on preferred stock

 

(2,007)

 

 

(2,007)

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

 

(6)

 

 

-

      Balance at end of period

 

993,698

 

 

871,708

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

 

 

 

 

 

 Balance at beginning of period

 

(20,615)

 

 

(34,390)

 Other comprehensive (loss) income, net of tax

 

(42,272)

 

 

23,480

      Balance at end of period

 

(62,887)

 

 

(10,910)

 

 

 

 

 

 

         Total stockholdersʼ equity

$

1,927,415

 

$

1,853,751

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

9 


 

 

FIRST BANCORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

                            

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

 

The results of operations for the quarter and nine-month period ended September 30, 2018 are not necessarily indicative of the results to be expected for the entire year. 

 

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

 

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

 

Revenue Recognition

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

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

 

The Corporation has identified service charges on deposits and related cash management services, insurance commissions, merchant-related income, and card interchange income as its most significant revenue streams within the scope of the standard.  For the revenue streams that were found in scope, management reviewed in detail its most significant contracts with corresponding customers. The adoption of this guidance did not have a material effect on the Corporation’s consolidated financial statements. However, additional disclosures required by the standard have been included in Note 23 – Revenue from Contracts with Customers, to the Corporation’s consolidated financial statements.

 

 

 

10 


 

Recognition and Measurement of Financial Assets and Liabilities

 

In January 2016, the FASB issued ASU 2016-01, to require an entity to: (i) measure equity investments at fair value through net income, with certain exceptions, thus, eliminating eligibility for the available-for-sale category; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price; and (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available-for-sale debt securities in combination with other deferred tax assets. The guidance provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment, adjusted for certain observable price changes. The guidance also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The adoption of this standard during the first quarter of 2018 did not have a material effect on the Corporation’s consolidated financial statements.

 

Statement of Cash Flows Presentation – Restricted Cash

 

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

 

Income Tax Effect of Intra-Entity Transfers of Assets

 

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

 

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

 

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

 

 

 

11 


 

Lease Accounting

 

       In February 2016, the FASB updated the Codification to replace ASC 840, “Leases (Topic 840)” (“ASC Topic 840”), with new guidance for the financial reporting about leasing transactions. Under the new guidance, a lessee will be required to recognize a right-of-use asset (“ROU”) and a lease liability for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires the recognition of only capital leases on the balance sheet, the guidance will require both types of leases to be recognized on the balance sheet. The guidance will also require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information and additional information about the amounts recorded in the financial statements. The FASB issued an update in January 2018 providing an optional transition practical expedient under which an entity need not evaluate under new ASC Topic 842, “Leases” (“ASC Topic 842”), land easements that existed or expired before the entity’s adoption of ASC Topic 842 and were not previously accounted for as leases. In addition, the FASB issued an update in July 2018 that provides entities with an additional and optional transition method that allows entities to apply the transition provisions of the new leases standard at the adoption date, instead of at the earliest comparative period presented. If elected, comparative periods will continue to be presented in accordance with ASC Topic 840. Also, the amendments provide lessors with a practical expedient, by class of underlying asset, to not separate non lease components, subject to certain circumstances. Also in July 2018, the FASB issued an update that makes various technical corrections to clarify how to apply certain aspects of the new leases standard such as reassessment of lease classification, variable lease payments that depend on an index or a rate, lease term and purchase options, and certain transition adjustments, among others. The guidance on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted.

 

The update is expected to affect the Corporation’s consolidated financial statements since the Corporation has operating and lease arrangements for which it is a lessee. The Corporation will elect the optional transition method described above to initially apply the new leases standard as of January 1, 2019. On the other hand, the Corporation does not expect to elect the optional practical expedient provided to lessors. The Corporation expects to recognize lease liabilities of approximately $0.1 billion or 1% of total assets, with a corresponding recognition of ROU assets on its operating leases.

  

Accounting for Financial Instruments – Credit Losses

 

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

 

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

 

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

 

 

 

12 


 

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

 

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

 

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

 

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

 

The Corporation has developed an actionable and detailed project plan in order to comply on a timely basis with the implementation of this new accounting framework. The Corporation has created a working group with members from multiple areas across the organization that is responsible for assessing the effect of the standard, evaluating interpretative issues, and evaluating the current credit loss models against the new guidance to determine any necessary changes and other related implementation activities. The working group provides periodic updates to the Corporation’s CECL Management Committee, which has oversight responsibilities for the implementation efforts. The Corporation continues to evaluate the effect that this guidance, including the method of implementation, will have on its consolidated financial statements. The Corporation does not expect to early adopt this guidance.

 

Subsequent Measurement of Goodwill

 

    In January 2017, the FASB updated the Codification to simplify the subsequent measurement of goodwill by eliminating Step 2 from the current two-step goodwill impairment test. This guidance provides that a goodwill impairment test shall be conducted by comparing the fair value of a reporting unit with its carrying amount. Entities are to recognize an impairment charge for goodwill equal to the excess of the carrying amount over the reporting unit’s fair value. Entities have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The effect of this guidance will depend upon the performance of the reporting units that have goodwill and the market conditions affecting the fair value of each reporting unit going forward.

 

 

 

13 


 

Amortization of Premiums and Discounts of Callable Debt Securities

 

In March 2017, the FASB updated the Codification to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. With respect to securities held at a discount, the amendments do not require an accounting change; thus, the discount continues to be amortized to maturity. Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date. An entity must have a large number of similar loans to consider estimates of future principal prepayments when applying the interest method. However, an entity that holds an individual callable debt security at a premium may not amortize that premium to the earliest call date. If that callable debt security is subsequently called, the entity records a loss equal to the unamortized premium. The amendments in this update more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. In most cases, market participants price securities to the call date that produces the worst yield when the coupon is above current market rates (that is, the security is trading at a premium) and price securities to maturity when the coupon is below market rates (that is, the security is trading at a discount) in anticipation that the borrower will act in its economic best interest. As a result, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this guidance is not expected to have a material effect on the Corporation’s consolidated statement of financial condition or results of operations. As of September 30, 2018, the Corporation had $4.1 million of callable debt securities held at a premium (unamortized premium of $13 thousand).

 

Derivatives and Hedging

 

     In August 2017, the FASB updated the Codification to: (i) expand hedge accounting for nonfinancial and financial risk components and amend measurement methodologies to more closely align hedge accounting with a company’s risk management activities; (ii) decrease the complexity of preparing and understanding hedge results by eliminating the separate measurement and reporting of hedge ineffectiveness; (iii) enhance transparency, comparability, and understanding of hedge results through enhanced disclosures and a change in the presentation of hedge results to align the effects of the hedging instrument and the hedged item; and (iv) reduce the cost and complexity of applying hedge accounting by simplifying the manner in which assessments of hedge effectiveness may be performed. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The guidance requires companies to apply requirements to existing hedging relationships on the date of adoption, and the effect of the adoption should be reflected as of the beginning of the fiscal year of adoption. As of September 30, 2018, all of the derivatives held by the Corporation were considered economic undesignated hedges. The adoption of this guidance is not expected to have a material effect on the Corporation’s consolidated statement of financial condition or results of operations.

 

Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income

 

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

 

Improvements to Nonemployee Share-Based Payment Accounting

 

     In June 2018, the FASB updated the Codification as part of a simplification initiative to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees and to address and improve aspects of the accounting for non-employee share-based payment transactions. The amendments will be effective for interim and annual reporting periods beginning after December 15, 2018. The adoption of this guidance is not expected to have an effect on the Corporation’s consolidated financial statements.

 

 

 

14 


 

Changes to the Disclosure Requirements for Fair Value Measurement

 

     In August 2018, the FASB updated the Codification and amended ASC Topic 820, “Fair Value Measurement and Disclosures,” to add, remove, and modify fair value measurement disclosures requirements.  The disclosure requirements that are removed for public entities include: (i) transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for determining when transfers between any of the three levels have occurred; and (iii) the valuation processes used for Level 3 measurements. The disclosure requirements that are modified for public entities include: (i) for certain investments in entities that calculate the net asset value, revisions to require disclosures about the timing of liquidation and lapses of redemption restrictions, if the latter has been communicated to the reporting entity; and (ii) revisions to clarify that the Level 3 measurement uncertainty disclosure should communicate information about the uncertainty at the balance sheet date.  The additional or new disclosure requirements include: (i) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 instruments held at the balance sheet date; and (ii) the range and weighted average of significant unobservable inputs used for Level 3 measurements, but adds an option to disclose other quantitative information in place of the weighted average to the extent that it would be a more reasonable and rational method to reflect the distribution of certain unobservable inputs.

 

    This update is effective for all entities in fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any of the removed or modified disclosures immediately even if adoption of the new disclosures is delayed until the effective date. In the third quarter of 2018, the Corporation early adopted the disclosure requirements that were removed or modified by this guidance.

 

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract

 

    In August 2018, the FASB amended the Codification to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract.  This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. The amendments in this update also require the entity to expense the capitalized implementation costs over the term of the hosting arrangement. Expenses related to the capitalized implementation costs will be presented in the same line item in the statement of income as the fees associated with the service of the arrangement and payments for capitalized implementation costs will be classified in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. With this update, the entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.

 

      An entity can choose between prospective and retrospective transition. For the corporation, this guidance will be effective for fiscal years beginning after December 15, 2019, and interim periods within. Early adoption is permitted, including in an interim period.  The adoption of this guidance is no expected to have a material effect on the Corporation’s consolidated statement of financial condition, results of operations or cash flows.

15 


 

NOTE 2 – UPDATE ON EFFECTS OF NATURAL DISASTERS

 

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

Credit Quality and Allowance for Loan and Lease Losses

Relationship officers continued to closely monitor the performance of hurricane-affected commercial loan customers during 2018. Information provided by these commercial loan officers and statistics on the performance of consumer and residential credits were factored into the determination of the allowance for loan and lease losses as of September 30, 2018. Although the identification and evaluation of hurricane-affected credits has been completed, management’s assessment of the hurricanes’ effect is still subject to uncertainties, both those specific to some individual customers, such as the resolution of insurance claims, and those applicable to the overall economic prospects of the hurricane-affected areas as a whole. During the third quarter and nine-month period ended September 30, 2018, the Corporation recorded a net loan loss reserve release of approximately $2.8 million and $11.2 million, respectively, in connection with revised estimates associated with the effects of the hurricanes. The revised estimates were primarily attributable to updated assessments of financial performance and repayment prospects of certain individually-assessed commercial credits, updated payment patterns and probability of default credit risk analyses applied to consumer borrowers, and lower reserve requirements resulting from payments received during the first nine months of 2018 that reduced the balance of the consumer and residential mortgage loan portfolios outstanding on the dates of the hurricanes. In addition, during the third quarter of 2018, consumer loan charge-offs totaling $10.9 million were taken against previously established hurricane-related qualitative reserves. These charge offs were directly linked to the performance of consumer borrowers that were subject to payment deferral programs.

 

As of September 30, 2018, the hurricane-related qualitative allowance amounted to $24.9 million (December 31, 2017 - $55.6 million). With the future resolution of uncertainties and the ongoing collection of information on individual commercial customers and statistics on the consumer and residential loan portfolios, the loss estimate will be revised as needed. Refer to Note 8 - Allowance for Loan and Lease Losses, to the consolidated financial statements for information about the determination of the hurricane-related qualitative reserves.

 

Disaster Response Plan Costs, Casualty Losses and Related Insurance

      The Corporation has incurred a variety of costs to operate in disaster response mode, and some facilities and their contents, including certain OREO properties, were damaged by the storms.  The Corporation maintains insurance for casualty losses, as well as for reasonable and necessary disaster response costs and certain revenue lost through business interruption. Insurance claim receivables were established for some of the individual costs, when incurred, based on management’s understanding of the underlying coverage and when realization of the claim was deemed probable. During the first nine months of 2018, the Corporation reached settlement on certain insurance claims arising from the hurricanes. As a result, the Corporation received insurance proceeds of approximately $6.8 million, primarily related to repairs and maintenance costs incurred on some facilities, including certain OREO properties, and $0.8 million related to a loan receivable fully charged-off in prior periods. The insurance proceeds were recorded against incurred losses, previously-established accounts receivable, or loan recoveries, as applicable. Insurance recoveries are recorded in the same income statement caption as the incurred losses. Recoveries from insurance proceeds in excess of losses incurred, amounting to $0.5 million for the first nine months of 2018, were recognized as a gain from insurance proceeds and reported as part of “other non-interest income” in the statement of income (loss). As of September 30, 2018, the Corporation still had an insurance claim receivable of $4.2 million, included as part of “other assets” in the statement of financial condition. Management also believes that there is a possibility that some gains will be recognized with respect to casualty and lost revenue claims in future periods, but this is contingent on reaching agreement on the Corporation’s claims with the insurance carriers.

Liquidity Management  

 

The Corporation experienced rapid accumulation of deposits after the hurricanes in the fourth quarter of 2017 and the first nine months of 2018.  Total deposits as of September 30, 2018, excluding brokered CDs, increased $602.4 million from December 31, 2017 and $963.9 million since September 30, 2017.  The most significant increase was in non-interest-bearing demand deposits, which grew 27%, or $487.4 million, from December 31, 2017 and 46%, or $734.9 million, since September 30, 2017.  Hurricane-related factors, such as the effect of disaster relief funds and settlements of insurance claims, contributed to this growth.  Although management expects the balances accumulated by deposit customers in the hurricane-affected areas to reduce over time, it is difficult to predict when and to what degree, and there may be further growth as insurance claims are resolved and additional disaster-recovery funds are distributed.

   

16 


 

NOTE 3 – EARNINGS PER COMMON SHARE

 

 

    The calculations of earnings per common share for the quarters and nine-month periods ended September 30, 2018 and 2017 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Nine-Month Period Ended

 

 

September 30,

 

September 30,

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except per share information)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net income (loss)

$

36,323

 

$

(10,752)

 

$

100,503

 

$

42,787

 Less: Preferred stock dividends

 

(669)

 

 

(669)

 

 

(2,007)

 

 

(2,007)

 Net income (loss) attributable to common stockholders

$

35,654

 

$

(11,421)

 

$

98,496

 

$

40,780

Weighted-Average Shares:

 

 

 

 

 

 

 

 

 

 

 

   Average common shares outstanding

 

216,149

 

 

214,187

 

 

215,516

 

 

213,812

   Average potential dilutive common shares

 

626

 

 

-

 

 

1,068

 

 

2,322

   Average common shares outstanding - assuming dilution

 

216,775

 

 

214,187

 

 

216,584

 

 

216,134

 Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

   Basic

$

0.16

 

$

(0.05)

 

$

0.46

 

$

0.19

   Diluted

$

0.16

 

$

(0.05)

 

$

0.45

 

$

0.19

 

 

 

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

 

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

 

On May 17, 2018, the U.S. Treasury exercised its warrant to purchase 1,285,899 shares of the Corporation’s common stock on a cashless basis, resulting in the issuance of 730,571 shares of common stock.

  

17 


 

NOTE 4 – STOCK-BASED COMPENSATION.

 

  On May 24, 2016, the Corporation’s stockholders approved the amendment and restatement of the First BanCorp. Omnibus Incentive Plan, as amended (the “Omnibus Plan”), to, among other things, increase the number of shares of common stock reserved for issuance under the Omnibus Plan, extend the term of the Omnibus Plan to May 24, 2026 and re-approve the material terms of the performance goals under the Omnibus Plan for purposes of the then effective Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended. The Omnibus Plan provides for equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, cash-based awards and other stock-based awards. The Omnibus Plan authorizes the issuance of up to  14,169,807 shares of common stock, subject to adjustments for stock splits, reorganizations, and other similar events. As of September 30, 2018, 6,892,855 authorized shares of common stock were available for issuance under the Omnibus Plan. The Corporation’s Board of Directors, based on the recommendation of the Corporation’s Compensation and Benefits Committee, has the power and authority to determine those eligible to receive awards and to establish the terms and conditions of any awards, subject to various limits and vesting restrictions that apply to individual and aggregate awards.

 

Restricted Stock

Under the Omnibus Plan, the Corporation may grant restricted stock to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While the restricted stock is subject to forfeiture and does not contain non-forfeitable dividend rights, restricted stock participants may exercise full voting rights. The restricted stock granted under the Omnibus Plan is typically subject to a vesting period. During the first nine months of 2018, the Corporation awarded to its independent directors 65,447 shares of restricted stock that are subject to a one-year vesting period. In addition, during the first nine months of 2018, the Corporation awarded 342,439 shares of restricted stock to employees; fifty percent (50%) of those shares vest in two years from the grant date and the remaining (50%) vest in three years from the grant date. Included in those 342,439 shares of restricted stock were 20,447 shares granted to retirement-eligible employees at the grant date. The fair value of the shares of restricted stock granted in the first nine months of 2018 was based on the market price of the Corporation’s outstanding common stock on the date of the grant.  

  

 

 

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

 

 

 

 

 

 

 

 

Nine-Month Period Ended

 

 

September 30, 2018

 

 

 

 

 

 

 

 

  Number of shares

 

 

Weighted-Average

 

 

of restricted

 

 

Grant Date

 

 

stock

 

 

 Fair Value

 

 

 

 

 

 

Non-vested shares at beginning of year

1,816,968

 

$

2.76

Granted

407,886

 

 

6.71

Forfeited

(11,000)

 

 

3.65

Vested

(1,234,180)

 

 

2.45

Non-vested shares at September 30, 2018

979,674

 

$

4.79

 

 

 

 

 

 

18 


 

For the quarter and nine-month period ended September 30, 2018, the Corporation recognized $0.8 million and $2.7 million, respectively, of stock-based compensation expense related to restricted stock awards, compared to $1.0 million and $3.0 million for the same periods in 2017, respectively. As of September 30, 2018, there was $2.9 million of total unrecognized compensation cost related to non-vested shares of restricted stock. The weighted average period over which the Corporation expects to recognize such cost is 1.4 years. The total expense determined for restricted stock awards granted to retirement-eligible employees was charged against earnings at the grant date.

 

During the first nine months of 2017, the Corporation awarded to its independent directors 140,360 shares of restricted stock subject to a one-year vesting period. In addition, during the first nine months of 2017, the Corporation awarded 951,332 shares of restricted stock to employees subject to a vesting period of two years. Included in those 951,332 shares of restricted stock were 838,332 shares granted in the first quarter of 2017 to certain senior officers consistent with the requirements of the Troubled Asset Relief Program (“TARP”) Interim Final Rule. On May 10, 2017, the United States Department of the Treasury (the “U.S. Treasury”) announced that it had sold all of its remaining 10,291,553 shares of the Corporation’s common stock. As a result of the sale by the U.S. Treasury, the Corporation ceased being subject to the compensation-related restrictions under TARP, which substantially limited the Corporation’s ability to award short-term and long-term incentives to the Corporation’s executives, and the Corporation’s senior officers are no longer subject to the transferability restrictions on their shares of restricted stock. However, since the U.S. Treasury did not recover the full amount of its original investment under TARP, the senior officers forfeited 2,370,571, or 50%, of their outstanding shares of restricted stock, resulting in a reduction in the number of common shares outstanding.

 

The Corporation accounted for the restricted stock that it granted in 2017 prior to the U.S. Treasury’s sale of its shares at a discount from the market price of the Corporation’s outstanding common stock on the date of the grant. For the 838,332 shares of restricted stock granted under the TARP requirements, the market price was discounted assuming that 50% of the shares of restricted stock would become freely transferable and the remaining 50% would be forfeited, resulting in a fair value of $2.71 for each share of restricted stock granted under TARP requirements.

 

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

 

 

 

19 


 

Performance Units

 

Under the Omnibus Plan, the Corporation may award performance units to Omnibus Plan participants.  During the first nine months of 2018, the Corporation granted 304,408 units to executives, with each unit representing the value of one share of the Corporation’s common stock.  The performance units granted are for the performance period beginning January 1, 2018 and ending on December 31, 2020 and are subject to a three-year requisite service period.  These awards do not contain non-forfeitable rights to dividend equivalent amounts and can only be settled in shares of the Corporation’s common stock. Included in those 304,408 performance units were 29,171 units granted to retirement-eligible executives at the grant date.  The performance units will vest based on the achievement of a pre-established tangible book value per share target as of December 31, 2020.  All of the performance units will vest if performance is at the pre-established performance target level or above.  However, the participants may vest on 50% of the awards to the extent that performance is below the target but at 80% of the pre-established performance target level (the 80% minimum threshold), 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 fair value of the performance units awarded during the first nine months of 2018 was based on the market price of the Corporation’s outstanding common stock on the date of the grant.  For the quarter and the first nine months of 2018, the Corporation recognized $0.1 million and $0.5 million, respectively, of stock-based compensation related to performance units. As of September 30, 2018, there was $1.4 million of total unrecognized compensation cost related to unvested performance units that the Corporation expects to recognize over the three-year requisite service period. The total expense determined for the performance units awarded to retirement-eligible executives was charged against earnings at the grant date. The total amount of compensation expense recognized reflects management’s assessment of the probability that the pre-established performance goal will be achieved. A cumulative adjustment to compensation expense is recognized in the current period to reflect any changes in the probability of achievement of the performance goals.

 

Salary stock

    

Also, effective April 1, 2013, the Corporation’s Board of Directors determined to increase the salary amounts paid to certain executive officers, primarily by paying the increased salary amounts in the form of shares of the Corporation’s common stock issued under the Omnibus Plan, instead of cash. During 2018, the Corporation issued 268,709 shares of common stock (as compared to 427,940 shares during the first nine months of 2017) with a weighted average market value of $6.51 (as compared to a weighted average market value of $5.88 during the first nine months of 2017) as salary stock compensation. This resulted in a compensation expense of $1.7 million recorded in 2018 (as compared to $2.5 million during the first nine months of 2017). Effective July 1, 2018, the payment of additional salary amounts in the form of stock was eliminated in accordance with the previously disclosed revised executive compensation program. 

 

For 2018, the Corporation withheld 96,377 shares (first nine months of 2017 – 143,509 shares) from the common stock paid to certain senior officers as additional compensation and 336,985 shares of restricted stock that vested during the first nine months of 2018 (first nine months of 2017 – 243,102) to cover employees’ payroll and income tax withholding liabilities; these shares are held as treasury shares. The Corporation paid in cash any fractional share of salary stock to which the officer was entitled. In the consolidated financial statements, the Corporation treats shares withheld for tax purposes as common stock repurchases.

  

20 


 

NOTE 5 – INVESTMENT SECURITIES

 

Investment Securities Available for Sale

   

  The amortized cost, non-credit loss component of OTTI recorded in OCI, gross unrealized gains and losses recorded in OCI, estimated fair value, and weighted-average yield of investment securities available for sale by contractual maturities as of September 30, 2018 and December 31, 2017 were as follows:

 

 

 

September 30, 2018

 

 

Amortized cost

 

Noncredit Loss Component of OTTI Recorded in OCI

 

 

 

Fair value

 

 

 

 

 

Gross Unrealized

 

 

Weighted-

 

 

 

 

gains

 

losses

 

 

average yield%

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within one year

$

7,481

 

$

-

 

$

-

 

$

55

 

$

7,426

 

1.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 U.S. government-sponsored

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   agencies obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Due within one year

 

156,575

 

 

-

 

 

-

 

 

1,584

 

 

154,991

 

1.25

   After 1 to 5 years

 

236,368

 

 

-

 

 

-

 

 

4,480

 

 

231,888

 

1.82

   After 5 to 10 years

 

191,119

 

 

-

 

 

47

 

 

5,505

 

 

185,661

 

2.94

   After  10 years

 

43,638

 

 

-

 

 

-

 

 

241

 

 

43,397

 

2.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Puerto Rico government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   After 5 to 10 years

 

4,013

 

 

-

 

 

129

 

 

-

 

 

4,142

 

3.14

   After 10 years

 

4,111

 

 

-

 

 

-

 

 

1,313

 

 

2,798

 

6.97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States and Puerto Rico

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   government obligations

 

643,305

 

 

-

 

 

176

 

 

13,178

 

 

630,303

 

2.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities (“MBS”):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Freddie Mac (“FHLMC”) certificates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    After 5 to 10 years

 

96,598

 

 

-

 

 

8

 

 

3,527

 

 

93,079

 

2.09

    After 10 years

 

274,233

 

 

-

 

 

-

 

 

9,636

 

 

264,597

 

2.50

 

 

 

370,831

 

 

-

 

 

8

 

 

13,163

 

 

357,676

 

2.39

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ginnie Mae (“GNMA”) certificates:            

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    After 1 to 5 years

 

160

 

 

-

 

 

2

 

 

-

 

 

162

 

3.52

    After 5 to 10 years

 

65,411

 

 

-

 

 

305

 

 

714

 

 

65,002

 

2.89

    After 10 years

 

122,975

 

 

-

 

 

2,962

 

 

1,030

 

 

124,907

 

3.93

 

 

 

188,546

 

 

-

 

 

3,269

 

 

1,744

 

 

190,071

 

3.57

 Fannie Mae (“FNMA”) certificates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Due within one year

 

379

 

 

-

 

 

8

 

 

-

 

 

387

 

1.91

    After 1 to 5 years

 

25,872

 

 

-

 

 

-

 

 

468

 

 

25,404

 

2.75

    After 5 to 10 years

 

191,965

 

 

-

 

 

-

 

 

6,982

 

 

184,983

 

2.22

    After 10 years

 

557,882

 

 

-

 

 

1,055

 

 

18,909

 

 

540,028

 

2.65

    

 

776,098

 

 

-

 

 

1,063

 

 

26,359

 

 

750,802

 

2.55

Collateralized mortgage obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    guaranteed by the FHLMC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    and GNMA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   After 1 to 5 years

 

7,462

 

 

-

 

 

4

 

 

10

 

 

7,456

 

2.91

   After 10 years

 

59,575

 

 

-

 

 

348

 

 

81

 

 

59,842

 

3.07

 

 

 

67,037

 

 

-

 

 

352

 

 

91

 

 

67,298

 

3.05

Other mortgage pass-through

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     trust certificates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   After 10 years

 

20,038

 

 

5,467

 

 

-

 

 

-

 

 

14,571

 

4.57

Total MBS

 

1,422,550

 

 

5,467

 

 

4,692

 

 

41,357

 

 

1,380,418

 

2.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    After 1 to 5 years

 

500

 

 

-

 

 

-

 

 

-

 

 

500

 

2.96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    available for sale

$

2,066,355

 

$

5,467

 

$

4,868

 

$

54,535

 

$

2,011,221

 

2.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21 


 

 

 

December 31, 2017

 

 

Amortized cost

 

Noncredit Loss Component of OTTI Recorded in OCI

 

Gross Unrealized

 

Fair value

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

gains

 

losses

 

 

average yield%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After 1 to 5 years

$

7,458

 

$

-

 

$

-

 

$

57

 

$

7,401

 

1.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    agencies obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Due within one year

 

122,471

 

 

-

 

 

-

 

 

319

 

 

122,152

 

1.06

 

   After 1 to 5 years

 

309,472

 

 

-

 

 

28

 

 

3,735

 

 

305,765

 

1.42

 

   After 5 to 10 years

 

133,451