First Ban(FBP) - 2019 Q1 - Quarterly Report

FORM 10-Q Cover Page First BanCorp. filed its Quarterly Report on Form 10-Q for the period ended March 31, 2019, confirming its status as a large accelerated filer - First BanCorp. filed its Quarterly Report on Form 10-Q for the period ended March 31, 2019. The registrant is a large accelerated filer and is not a shell company[2] | Indicator | Value | | :--- | :--- | | Commission File Number | 001-14793 | | State of Incorporation | Puerto Rico | | Registrant's Telephone Number | (787) 729-8200 | | Common Stock Outstanding (as of April 30, 2019) | 217,330,841 shares | INDEX PAGE This page provides an index to the contents of the Quarterly Report on Form 10-Q Forward Looking Statements This section contains forward-looking statements subject to safe harbor provisions, cautioning readers about inherent risks and uncertainties - This section contains forward-looking statements subject to safe harbor provisions, cautioning readers not to place undue reliance on them as they involve risks, uncertainties, estimates, and assumptions that are difficult to predict[7] - Key risk factors include changes in economic and business conditions (especially post-natural disasters), the pace of economic recovery in service areas, and uncertainty regarding actions by the Puerto Rico government and PROMESA oversight board - Other risks involve regulatory approvals for dividends, demand for products/services, funding source availability (e.g., brokered CDs), real estate market weakness, changes in accounting standards, and cyber-security risks[7][8] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements of First BanCorp., including statements of financial condition, income, comprehensive income, cash flows, and changes in stockholders' equity, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial items Consolidated Statements of Financial Condition (Unaudited) This statement provides a snapshot of the Corporation's assets, liabilities, and equity at specific points in time | Metric (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $12,376,780 | $12,243,500 | | Total Liabilities | $10,276,323 | $10,198,800 | | Total Stockholders' Equity | $2,100,457 | $2,044,700 | - Total assets increased by $133.2 million from December 31, 2018, to March 31, 2019, primarily driven by an increase in loans, net of allowance for loan and lease losses[9] Consolidated Statements of Income (Unaudited) This statement reports the Corporation's revenues, expenses, and net income over specific periods | Metric (In thousands) | Quarter Ended March 31, 2019 | Quarter Ended March 31, 2018 | | :--- | :--- | :--- | | Total Interest Income | $166,472 | $149,400 | | Total Interest Expense | $26,291 | $24,700 | | Net Interest Income | $140,181 | $124,600 | | Provision for Loan and Lease Losses | $11,820 | $20,500 | | Total Non-interest Income | $22,543 | $22,700 | | Total Non-interest Expenses | $89,972 | $86,000 | | Income Before Income Taxes | $60,932 | $40,900 | | Income Tax Expense | $17,618 | $7,700 | | Net Income | $43,314 | $33,100 | | Net Income Attributable to Common Stockholders | $42,645 | $32,400 | | Basic EPS | $0.20 | $0.15 | | Diluted EPS | $0.20 | $0.15 | - Net income increased by $10.2 million (30.8%) year-over-year, driven by higher net interest income and a lower provision for loan and lease losses, despite an increase in income tax expense[10] Consolidated Statements of Comprehensive Income (Unaudited) This statement presents net income and other comprehensive income, reflecting changes in equity from non-owner sources | Metric (In thousands) | Quarter Ended March 31, 2019 | Quarter Ended March 31, 2018 | | :--- | :--- | :--- | | Net Income | $43,314 | $33,100 | | Other Comprehensive Income (Loss) for the period | $20,510 | ($24,000) | | Total Comprehensive Income | $63,824 | $9,000 | - Total comprehensive income significantly increased to $63.8 million in Q1 2019 from $9.0 million in Q1 2018, primarily due to a positive shift in other comprehensive income from a loss to a gain, driven by unrealized gains on available-for-sale securities[11] Consolidated Statements of Cash Flows (Unaudited) This statement reports the cash inflows and outflows from operating, investing, and financing activities | Cash Flow Activity (In thousands) | Quarter Ended March 31, 2019 | Quarter Ended March 31, 2018 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $82,982 | $95,300 | | Net Cash (Used in) Provided by Investing Activities | ($104,871) | $111,700 | | Net Cash Provided by (Used in) Financing Activities | $25,261 | ($79,700) | | Net Increase in Cash and Cash Equivalents | $3,372 | $127,400 | | Cash and Cash Equivalents at End of Period | $589,575 | $843,800 | - Net cash used in investing activities shifted from a significant inflow in Q1 2018 to an outflow in Q1 2019, primarily due to increased loan originations and purchases. Financing activities also shifted from a net outflow to an inflow[12] Consolidated Statements of Changes in Stockholders' Equity (Unaudited) This statement details the changes in each component of stockholders' equity over specific periods | Equity Component (In thousands) | March 31, 2019 | March 31, 2018 | | :--- | :--- | :--- | | Preferred Stock | $36,104 | $36,100 | | Common Stock Outstanding | $21,733 | $21,600 | | Additional Paid-In-Capital | $938,801 | $936,300 | | Retained Earnings | $1,123,724 | $927,600 | | Accumulated Other Comprehensive Loss, net of tax | ($19,905) | ($44,600) | | Total Stockholders' Equity | $2,100,457 | $1,877,100 | - Total stockholders' equity increased by $223.3 million year-over-year, primarily driven by net income and a significant reduction in accumulated other comprehensive loss[13] Notes to Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures for the financial statements, clarifying accounting policies and specific items NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis for preparing the unaudited consolidated financial statements, confirming conformity with GAAP and SEC regulations. It also details the adoption of several new accounting pronouncements, including those related to leases, callable debt securities, derivatives, tax effects, and credit losses, and discusses upcoming changes for goodwill and fair value measurement - Adopted ASC Topic 842, 'Leases,' in January 2019, resulting in the recognition of $59.6 million in ROU assets and $62.1 million in lease liabilities for operating leases, primarily for branches and ATMs[15][16] - Adopted new guidance on amortization of premiums and discounts on callable debt securities and derivatives and hedging, neither of which had a material effect on financial statements in Q1 2019[18][19] - The CECL model for credit losses (ASC Topic 326) will be effective for SEC filers in fiscal years beginning after December 15, 2019, and the Corporation does not expect to early adopt it[21][23] NOTE 2 – UPDATE ON EFFECTS OF NATURAL DISASTERS This note summarizes the ongoing financial impact of Hurricanes Irma and Maria from September 2017, focusing on credit quality, allowance for loan and lease losses, and casualty losses and related insurance claims - In Q1 2019, the Corporation recorded a $6.4 million loan loss reserve release due to revised estimates related to hurricane effects, primarily from updated payment patterns and credit risk analyses for consumer and commercial borrowers[28] | Metric (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Insurance Claim Receivable | $2,600 | $3,400 | | Hurricane-related Qualitative Reserve | $12,600 | $19,200 | - A $2.3 million credit was recorded against employees' compensation and benefits expenses in Q1 2019, related to an employee retention benefit received under the Disaster Tax Relief and Airport Extension Act of 2017[29] NOTE 3 – EARNINGS PER COMMON SHARE This note details the calculation of basic and diluted earnings per common share for the quarters ended March 31, 2019, and 2018, outlining the components of net income attributable to common stockholders and weighted-average shares | Metric (In thousands, except per share) | Quarter Ended March 31, 2019 | Quarter Ended March 31, 2018 | | :--- | :--- | :--- | | Net Income Attributable to Common Stockholders | $42,645 | $32,479 | | Weighted-Average Common Shares Outstanding | 216,338 | 214,646 | | Basic EPS | $0.20 | $0.15 | | Diluted EPS | $0.20 | $0.15 | - Basic and diluted EPS increased from $0.15 in Q1 2018 to $0.20 in Q1 2019, reflecting higher net income attributable to common stockholders[30] NOTE 4 – STOCK-BASED COMPENSATION This note describes the Corporation's Omnibus Incentive Plan, detailing the types of equity-based compensation awards, including restricted stock and performance units, and the related compensation expenses recognized - The Omnibus Plan authorizes up to 14,169,807 shares of common stock for equity-based compensation, with 6,632,739 shares available as of March 31, 2019[31] - In Q1 2019, 265,616 shares of restricted stock were granted, and $0.9 million in stock-based compensation expense was recognized for restricted stock awards (down from $1.1 million in Q1 2018)[32][33] - 200,053 performance units were granted in Q1 2019, vesting based on tangible book value per share targets, with $0.1 million in related compensation expense recognized (down from $0.2 million in Q1 2018)[35] NOTE 5 – INVESTMENT SECURITIES This note provides a detailed breakdown of the Corporation's investment securities portfolio, distinguishing between available-for-sale and held-to-maturity categories, and includes an assessment for other-than-temporary impairment (OTTI) | Investment Category (In thousands) | March 31, 2019 (Fair Value) | December 31, 2018 (Fair Value) | | :--- | :--- | :--- | | Total Investment Securities Available for Sale | $1,905,230 | $1,942,568 | | Total Investment Securities Held to Maturity | $123,906 | $125,658 | - Approximately 99% of the available-for-sale portfolio consists of U.S. government and agency debt, with no credit losses expected. No OTTI losses were recorded in Q1 2019 or Q1 2018[41] - Held-to-maturity securities are primarily Puerto Rico Municipal Bonds, with $20.8 million in unrecognized losses as of March 31, 2019, but all were performing and current on payments[22][44] NOTE 6 – EQUITY SECURITIES This note details the Corporation's equity securities, primarily investments in FHLB stock and other equity holdings, and reports related dividend income and marked-to-market gains/losses | Metric (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | FHLB Stock Book Value | $41,900 | $41,900 | | Equity Securities with Readily Determinable Fair Value | $400 | $400 | | Other Equity Securities (Carrying Value) | $2,100 | $2,200 | - Dividend income from FHLB stock was $0.7 million for both Q1 2019 and Q1 2018. A $5 thousand marked-to-market gain was recognized on readily determinable fair value securities in Q1 2019, compared to a $7 thousand loss in Q1 2018[45] NOTE 7 – LOANS HELD FOR INVESTMENT This comprehensive note details the Corporation's loan portfolio held for investment, including its composition, credit quality indicators, nonaccrual and impaired loan status, purchased credit impaired (PCI) loans, loan sales, geographic concentration, and troubled debt restructurings (TDRs) | Loan Category (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Residential Mortgage Loans | $3,126,562 | $3,163,200 | | Commercial Loans | $3,854,962 | $3,750,200 | | Finance Leases | $352,277 | $333,530 | | Consumer Loans | $1,663,015 | $1,611,170 | | Total Loans Held for Investment, Gross | $8,996,816 | $8,858,120 | | Allowance for Loan and Lease Losses | ($183,732) | ($196,360) | | Total Loans Held for Investment, Net | $8,813,084 | $8,661,760 | - Total nonaccrual loans held for investment decreased to $272.8 million as of March 31, 2019, from $316.0 million as of December 31, 2018[48] - Impaired loans with a related specific allowance totaled $50.6 million as of March 31, 2019, down from $54.0 million as of December 31, 2018[56] - PCI loans had a carrying amount of $144.4 million as of March 31, 2019, with an allowance for loan losses of $11.4 million[60] - Total TDR loans held for investment increased to $589.8 million as of March 31, 2019, from $582.6 million as of December 31, 2018, with $485.9 million in accrual status[71][74] NOTE 8 – ALLOWANCE FOR LOAN AND LEASE LOSSES This note details the changes in the allowance for loan and lease losses (ALLL) by loan category, including charge-offs, recoveries, and provisions. It also presents the allocation of ALLL between specific reserves for impaired loans, PCI loans, and general allowances | Metric (In thousands) | Quarter Ended March 31, 2019 | Quarter Ended March 31, 2018 | | :--- | :--- | :--- | | Beginning Balance of ALLL | $196,362 | $231,843 | | Total Provision (Release) | $11,820 | $20,544 | | Total Charge-offs | ($28,360) | ($29,360) | | Total Recoveries | $3,910 | $2,829 | | Net Charge-offs | ($24,450) | ($26,531) | | Ending Balance of ALLL | $183,732 | $225,856 | | ALLL Allocation (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Specific Reserve for Impaired Loans | $50,554 | $53,976 | | Reserve for PCI Loans | $11,354 | $11,354 | | General Allowance | $121,824 | $131,032 | | Total ALLL | $183,732 | $196,362 | - The ALLL to total loans held for investment ratio decreased to 2.04% as of March 31, 2019, from 2.22% as of December 31, 2018[80] NOTE 9 – LOANS HELD FOR SALE This note presents the composition of the Corporation's loans held-for-sale portfolio, detailing the types of loans included and changes during the period | Loan Type (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Residential Mortgage Loans | $25,794 | $27,070 | | Commercial Mortgage Loans | $7,381 | $11,370 | | Total Loans Held for Sale | $33,175 | $43,180 | - The loans held for sale portfolio decreased by $10.0 million, primarily due to the sale of $4.8 million in nonaccrual commercial loans held for sale in Q1 2019[83] NOTE 10 – OTHER REAL ESTATE OWNED This note provides the carrying value and composition of the Corporation's Other Real Estate Owned (OREO) inventory | OREO Type (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Residential | $50,076 | $49,230 | | Commercial | $68,904 | $71,830 | | Construction | $10,736 | $10,320 | | Total OREO | $129,716 | $131,400 | - Total OREO balances decreased slightly by $1.7 million from December 31, 2018, to March 31, 2019[84] NOTE 11 – LEASES This note provides supplemental financial information related to the Corporation's operating leases, including right-of-use assets, lease liabilities, weighted-average lease terms, and discount rates, following the adoption of ASC 842 | Metric (In thousands) | March 31, 2019 | | :--- | :--- | | Operating Lease Right-of-Use Asset | $57,170 | | Operating Lease Liability | $59,810 | | Operating Lease Weighted-Average Remaining Lease Term | 11.6 years | | Operating Lease Weighted-Average Discount Rate | 3.36% | | Cash Paid for Operating Leases | $2,740 | | Lease Maturity (In thousands) | Amount | | :--- | :--- | | 2019 | $7,050 | | 2020 | $8,840 | | 2021 | $8,060 | | 2022 | $7,040 | | 2023 | $5,420 | | 2024 and later years | $36,450 | | Total Lease Payments | $72,880 | | Less: Imputed Interest | ($13,060) | | Total Present Value of Lease Liability | $59,810 | NOTE 12 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES This note describes the Corporation's use of derivative instruments, such as interest rate cap agreements, forward contracts, and interest rate lock commitments, to manage interest rate risk. It summarizes their notional amounts, fair values, and impact on the consolidated statements of income - All derivatives held by the Corporation as of March 31, 2019, and December 31, 2018, were considered economic undesignated hedges, recorded at fair value with gains/losses recognized in current earnings[89] - Notional amounts of undesignated economic hedges totaled $175.4 million as of March 31, 2019, down from $188.1 million as of December 31, 2018[89] | Derivative Type (In thousands) | March 31, 2019 Fair Value (Asset) | December 31, 2018 Fair Value (Asset) | | :--- | :--- | :--- | | Purchased Interest Rate Cap Agreements | $334 | $623 | | Interest Rate Lock Commitments | $247 | $383 | | Forward Loan Sales Commitments | $17 | $12 | | Total Derivative Assets | $598 | $1,018 | | Derivative Type (In thousands) | March 31, 2019 Fair Value (Liability) | December 31, 2018 Fair Value (Liability) | | :--- | :--- | :--- | | Written Interest Rate Cap Agreements | $332 | $617 | | Sales of TBA GNMA MBS Pools | $256 | $383 | | Total Derivative Liabilities | $588 | $1,000 | NOTE 13 – OFFSETTING OF ASSETS AND LIABILITIES This note provides information on the offsetting of financial assets and liabilities, particularly derivatives and repurchase agreements, under master netting arrangements, which allow for netting of exposures in the event of default | Description (In thousands) | Gross Amounts of Recognized Assets | Gross Amounts Offset | Net Amounts Presented | | :--- | :--- | :--- | :--- | | Derivatives (March 31, 2019) | $334 | $0 | $334 | | Securities Purchased Under Agreements to Resell (March 31, 2019) | $200,000 | ($200,000) | $0 | | Derivatives (December 31, 2018) | $623 | $0 | $623 | | Securities Purchased Under Agreements to Resell (December 31, 2018) | $200,000 | ($200,000) | $0 | | Description (In thousands) | Gross Amounts of Recognized Liabilities | Gross Amounts Offset | Net Amounts Presented | | :--- | :--- | :--- | :--- | | Securities Sold Under Agreements to Repurchase (March 31, 2019) | $300,000 | ($200,000) | $100,000 | | Securities Sold Under Agreements to Repurchase (December 31, 2018) | $350,086 | ($200,000) | $150,086 | NOTE 14 – GOODWILL AND OTHER INTANGIBLES This note provides details on the Corporation's goodwill and other intangible assets, including their carrying amounts, amortization, and remaining estimated useful lives | Intangible Asset (In thousands) | March 31, 2019 Net Carrying Amount | December 31, 2018 Net Carrying Amount | Remaining Amortization Period | | :--- | :--- | :--- | :--- | | Goodwill | $28,100 | $28,100 | Indefinite | | Core Deposit Intangible | $4,096 | $4,330 | 5.8 years | | Purchased Credit Card Relationship Intangible | $5,180 | $5,700 | 2.6 years | | Insurance Customer Relationship Intangible | $584 | $620 | 3.8 years | | Estimated Annual Amortization Expense (In thousands) | | :--- | | 2019: $2,289 | | 2020: $2,851 | | 2021: $2,658 | | 2022: $915 | NOTE 15 – NON-CONSOLIDATED VARIABLE INTEREST ENTITIES ("VIE") AND SERVICING ASSETS This note discusses the Corporation's involvement with non-consolidated Variable Interest Entities (VIEs) and its servicing assets, detailing transactions with GNMA, Trust-Preferred Securities, Grantor Trusts, and an unconsolidated investment entity, along with the accounting for servicing assets - The Corporation serviced $1.8 billion in loans securitized through GNMA as of March 31, 2019[98] - Subordinated debentures related to Trust-Preferred Securities amounted to $184.2 million as of March 31, 2019, with regulatory approval for quarterly interest payments through December 2019[99][100] - The Bank is the sole owner of trust certificates from Grantor Trusts, with an amortized cost of $18.8 million and fair value of $13.4 million as of March 31, 2019[101] - The investment in CPG/GS, an unconsolidated VIE, has a zero carrying amount as the Bank is not the primary beneficiary and has no obligation to provide further financial support[102] | Servicing Asset Metric (In thousands) | Quarter Ended March 31, 2019 | Quarter Ended March 31, 2018 | | :--- | :--- | :--- | | Balance at Beginning of Period | $27,428 | $25,255 | | Capitalization of Servicing Assets | $868 | $887 | | Amortization | ($810) | ($737) | | Temporary Impairment (Charges) Recoveries, Net | ($20) | $713 | | Balance at End of Period | $27,431 | $26,135 | NOTE 16 – DEPOSITS This note provides a summary of the Corporation's deposit balances by type of account and details the maturity profile of brokered certificates of deposit (CDs), along with the components of interest expense on deposits | Deposit Type (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Non-interest Bearing Checking Accounts | $2,494,787 | $2,395,480 | | Savings Accounts | $2,338,499 | $2,334,940 | | Interest-bearing Checking Accounts | $1,266,592 | $1,304,040 | | Certificates of Deposit | $2,461,302 | $2,404,640 | | Brokered Certificates of Deposit (CDs) | $509,654 | $555,590 | | Total Deposits | $9,070,834 | $8,994,700 | | Brokered CD Maturity (In thousands) | March 31, 2019 | | :--- | :--- | | Three months or less | $42,890 | | Over three months to six months | $60,690 | | Over six months to one year | $131,330 | | One to three years | $241,660 | | Three to five years | $33,060 | | Total | $509,650 | - Total deposits increased by $76.1 million, primarily driven by growth in non-interest bearing checking accounts and certificates of deposit, partially offset by a decrease in brokered CDs[106] NOTE 17 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE This note details the Corporation's outstanding securities sold under agreements to repurchase (repurchase agreements), including their interest rates, maturities, and counterparty information | Repurchase Agreement Type (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Short-term fixed-rate (2.85% interest) | $0 | $50,080 | | Long-term fixed-rate (2.26% interest) | $100,000 | $100,000 | | Total | $100,000 | $150,080 | - Total repurchase agreements decreased by $50.1 million due to the repayment of a short-term agreement. The remaining $100 million matures in one to three years with JP Morgan Chase as the counterparty[107][108] NOTE 18 – ADVANCES FROM THE FEDERAL HOME LOAN BANK This note summarizes the Corporation's advances from the Federal Home Loan Bank (FHLB), including their outstanding balance, weighted-average interest rate, and maturity profile | Metric (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Long-term fixed-rate advances (2.07% WA interest rate) | $740,000 | $740,000 | | Total FHLB Advances | $740,000 | $740,000 | | FHLB Advance Maturity (In thousands) | March 31, 2019 | | :--- | :--- | | Over six months to one year | $205,000 | | Over one to three years | $335,000 | | Over three to four years | $200,000 | | Total | $740,000 | - As of March 31, 2019, the Corporation had an additional capacity of approximately $455.4 million on its FHLB credit facility[109] NOTE 19 – OTHER BORROWINGS This note details the Corporation's other borrowings, specifically junior subordinated debentures, including their floating interest rates and maturity dates | Borrowing Type (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Junior subordinated debentures due 2034 (2.75% over 3-month LIBOR) | $65,593 | $65,590 | | Junior subordinated debentures due 2034 (2.50% over 3-month LIBOR) | $118,557 | $118,550 | | Total Other Borrowings | $184,150 | $184,150 | - The total amount of junior subordinated debentures remained constant at $184.15 million, with current interest rates of 5.36% and 5.13% respectively, as of March 31, 2019[109] NOTE 20 – STOCKHOLDERS' EQUITY This note provides detailed information on the components of stockholders' equity, including common stock, preferred stock, treasury stock, and the FirstBank Statutory Reserve, along with dividend declarations and regulatory approvals - Common stock outstanding was 217,331,577 shares as of March 31, 2019. A quarterly cash dividend of $0.03 per common share was paid on March 15, 2019, totaling $6.5 million[111] - The Corporation has five outstanding series of non-convertible, non-cumulative preferred stock, with regulatory approval to pay monthly dividends through December 2019[112] - Treasury stock held for tax withholding liabilities amounted to 4,723,548 shares as of March 31, 2019[113] - FirstBank's legal surplus reserve, included in retained earnings, was $80.2 million as of March 31, 2019, with no transfers during Q1 2019[115] NOTE 21 - INCOME TAXES This note details the Corporation's income tax expense, effective tax rates, and deferred tax assets, considering Puerto Rico, USVI, and U.S. federal and state taxes. It also discusses the impact of Act 257 changes to the Puerto Rico Internal Revenue Code and Section 382 limitations on NOLs | Metric (In thousands) | Quarter Ended March 31, 2019 | Quarter Ended March 31, 2018 | | :--- | :--- | :--- | | Income Tax Expense | $17,618 | $7,800 | - The increase in income tax expense was primarily due to higher taxable income in Q1 2019[116] - The estimated annual effective tax rate (including all entities) for 2019 was 29% (26% excluding discrete items), up from 19% (23% excluding discrete items) in Q1 2018[116][118] - Net deferred tax asset amounted to $306.0 million as of March 31, 2019, net of a $95.6 million valuation allowance[118] - Act 257, effective January 1, 2019, reduced Puerto Rico's maximum corporate tax rate to 37.5% and increased NOL usage limitation to 90%, but adversely impacted the ability to offset pass-through income with holding company NOLs[116] NOTE 22 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) This note presents the changes in accumulated other comprehensive loss, primarily driven by unrealized net holding gains or losses on debt securities, for the quarters ended March 31, 2019, and 2018 | Metric (In thousands) | Quarter Ended March 31, 2019 | Quarter Ended March 31, 2018 | | :--- | :--- | :--- | | Beginning Balance (Unrealized net holding losses on debt securities) | ($40,415) | ($20,600) | | Other Comprehensive Income (Loss) | $20,510 | ($24,000) | | Ending Balance (Unrealized net holding losses on debt securities) | ($19,905) | ($44,600) | - Accumulated other comprehensive loss improved significantly from ($40.4 million) at the beginning of Q1 2019 to ($19.9 million) at the end, primarily due to $20.5 million in other comprehensive income[120] NOTE 23 – FAIR VALUE This note defines the fair value measurement hierarchy (Level 1, 2, and 3) and provides detailed fair value information for financial instruments, including investment securities and derivative instruments, both on a recurring and non-recurring basis. It also discusses the sensitivity of Level 3 measurements to unobservable inputs - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (unobservable inputs)[121][122][123] - As of March 31, 2019, Level 3 assets measured at fair value on a recurring basis totaled $16.7 million, primarily consisting of private label MBS and Puerto Rico government obligations[127] - Impairment or valuation adjustments for assets recognized at fair value on a non-recurring basis in Q1 2019 included $8.86 million for loans receivable and $2.64 million for OREO[133] | Financial Instrument (In thousands) | Carrying Amount (March 31, 2019) | Fair Value (March 31, 2019) | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | :--- | | Investment Securities Available for Sale | $1,905,230 | $1,905,230 | $7,485 | $1,881,039 | $16,706 | | Investment Securities Held to Maturity | $144,673 | $123,906 | $0 | $0 | $123,906 | | Loans Held for Investment, Net | $8,813,084 | $8,329,345 | $0 | $0 | $8,329,345 | | Deposits | $9,070,834 | $9,073,967 | $0 | $9,073,967 | $0 | NOTE 24 – REVENUE FROM CONTRACTS WITH CUSTOMERS This note outlines the Corporation's revenue recognition policies under ASC Topic 606, detailing the five-step model and providing a disaggregation of revenue by type of service and business segment. It also describes specific revenue streams like service charges, insurance commissions, and credit/debit card fees, and discusses contract balances - Revenue is recognized when control of promised goods or services is transferred to customers, following a five-step model[136] - Substantially all revenue within the scope of ASC Topic 606 for Q1 2019 and Q1 2018 was related to performance obligations satisfied at a point in time[138] | Revenue Type (In thousands) | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Interest Income | $140,180 | $124,690 | | Service Charges and Fees on Deposit Accounts | $5,710 | $5,080 | | Insurance Commission Income | $4,250 | $3,350 | | Merchant-related Income | $1,290 | $990 | | Credit and Debit Card Fees | $5,400 | $5,090 | | Other Non-interest Income | $4,350 | $6,000 | | Total Revenue | $162,720 | $147,470 | - A contract liability of $2.0 million (down from $2.1 million in Q4 2018) related to a long-term strategic marketing alliance is recognized over the remaining term of the contract[145] NOTE 25 – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION This note provides additional details on cash flows, including cash paid for interest and income taxes, and significant non-cash investing and financing activities for the quarters ended March 31, 2019, and 2018 | Cash Flow Item (In thousands) | Quarter Ended March 31, 2019 | Quarter Ended March 31, 2018 | | :--- | :--- | :--- | | Cash Paid for Interest on Borrowings | $25,368 | $24,350 | | Cash Paid for Income Tax | $3,412 | $0 | | Additions to OREO (Non-cash) | $12,264 | $15,860 | | Loan Securitizations (Non-cash) | $51,034 | $54,380 | | Right-of-Use Assets Operating Leases (Non-cash) | $57,178 | $0 | | Right-of-Use Liabilities Operating Leases (Non-cash) | $59,818 | $0 | - The adoption of the lease accounting standard in Q1 2019 resulted in significant non-cash recognition of right-of-use assets ($57.2 million) and liabilities ($59.8 million)[147] NOTE 26 – SEGMENT INFORMATION This note identifies the Corporation's six reportable segments: Commercial and Corporate Banking, Mortgage Banking, Consumer (Retail) Banking, Treasury and Investments, United States Operations, and Virgin Islands Operations. It provides financial information for each segment, including interest income, net interest income, provision for loan losses, non-interest income, and direct non-interest expenses - The Corporation's segments are evaluated based on net interest income, provision for loan and lease losses, non-interest income, and direct non-interest expenses[148] - For Q1 2019, Consumer (Retail) Banking generated the highest segment income at $36.7 million, followed by Commercial and Corporate Banking at $22.5 million[149] | Segment (In thousands) | Q1 2019 Segment Income | Q1 2018 Segment Income | | :--- | :--- | :--- | | Mortgage Banking | $6,462 | $17,188 | | Consumer (Retail) Banking | $36,725 | $30,285 | | Commercial and Corporate Banking | $22,512 | $6,665 | | Treasury and Investments | $16,146 | $13,948 | | United States Operations | $4,016 | $5,385 | | Virgin Islands Operations | $1,344 | ($4,399) | NOTE 27 – REGULATORY MATTERS, COMMITMENTS AND CONTINGENCIES This note discusses the regulatory capital requirements for First BanCorp. and FirstBank under Basel III rules, including minimum capital ratios and the capital conservation buffer. It also addresses the Corporation's legal proceedings and off-balance sheet commitments - The Corporation and FirstBank are subject to Basel III capital rules, with the capital conservation buffer fully phased-in as of January 1, 2019[151] - Regulatory approvals are still required for paying dividends, receiving dividends from the Bank, and making payments on subordinated debt or TRuPs[152] | Regulatory Capital Ratio (First BanCorp.) | March 31, 2019 (Actual) | December 31, 2018 (Actual) | | :--- | :--- | :--- | | Total Capital Ratio | 24.10% | 24.00% | | Common Equity Tier 1 Capital Ratio | 20.44% | 20.30% | | Tier 1 Capital Ratio | 20.84% | 20.71% | | Leverage Ratio | 15.46% | 15.37% | - Commitments to extend credit amounted to approximately $1.3 billion as of March 31, 2019, with $655.5 million related to credit card loans. Commercial and financial standby letters of credit totaled $41.5 million[155] NOTE 28 – FIRST BANCORP. (HOLDING COMPANY ONLY) FINANCIAL INFORMATION This note provides condensed financial information for First BanCorp. as a holding company only, including its balance sheet, income statement, and comprehensive income, separate from its consolidated subsidiaries | Metric (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $2,294,934 | $2,232,500 | | Total Liabilities | $194,477 | $187,800 | | Stockholders' Equity | $2,100,457 | $2,044,700 | | Income Statement (In thousands) | Quarter Ended March 31, 2019 | Quarter Ended March 31, 2018 | | :--- | :--- | :--- | | Total Income | $9,680 | $21,652 | | Total Expense | $3,022 | $2,681 | | Net Income | $43,314 | $33,148 | | Comprehensive Income | $63,824 | $9,095 | - Holding company net income increased to $43.3 million in Q1 2019 from $33.1 million in Q1 2018, despite a decrease in dividend income from banking subsidiaries[159] NOTE 29 – SUBSEQUENT EVENTS This note states that management has evaluated events occurring after March 31, 2019, and determined that no events require disclosure or adjustment to the accompanying financial statements - No subsequent events requiring disclosure or adjustment were identified after March 31, 2019[160] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on First BanCorp.'s financial condition and results of operations for the quarter ended March 31, 2019, compared to the same period in 2018. It covers an executive summary, overview of results, critical accounting policies, detailed analysis of income statement components, financial condition, and various risk management aspects EXECUTIVE SUMMARY This summary introduces First BanCorp. as a diversified financial holding company and outlines its core business activities and geographic presence - First BanCorp. is a diversified financial holding company offering a full range of financial products through subsidiaries in Puerto Rico, USVI, BVI, and Florida, concentrating on commercial banking, residential mortgage, finance leases, credit cards, personal loans, small loans, auto loans, and insurance[164] OVERVIEW OF RESULTS OF OPERATIONS This section provides a high-level summary of the Corporation's financial performance, highlighting key income statement and balance sheet changes | Metric (In millions) | Q1 2019 | Q1 2018 | YoY Change | | :--- | :--- | :--- | :--- | | Net Income | $43.3 | $33.1 | +$10.2 | | Diluted EPS | $0.20 | $0.15 | +$0.05 | | Net Interest Income | $140.2 | $124.7 | +$15.5 | | Provision for Loan and Lease Losses | $11.8 | $20.5 | -$8.7 | | Non-interest Income | $22.5 | $22.8 | -$0.3 | | Non-interest Expenses | $90.0 | $86.0 | +$4.0 | | Income Tax Expense | $17.6 | $7.8 | +$9.8 | | Total Assets (as of March 31/Dec 31) | $12,376.8 | $12,243.5 | +$133.3 | | Total Liabilities (as of March 31/Dec 31) | $10,276.3 | $10,198.8 | +$77.5 | | Stockholders' Equity (as of March 31/Dec 31) | $2,100.5 | $2,044.7 | +$55.8 | | Total Loan Production | $881.5 | $606.3 | +$275.2 | | Total Non-performing Assets (as of March 31/Dec 31) | $414.9 | $467.1 | -$52.2 | - Net interest income increased by $15.5 million, driven by higher interest income on commercial, construction, and consumer loans, and investment securities, partially offset by increased interest expense[165] - Provision for loan and lease losses decreased by $8.7 million, primarily due to a $19.1 million decrease in commercial and construction loan provision, including $6.4 million reserve releases related to hurricane effects[166] - Special Items for Q1 2019 included a positive $6.4 million ($4.0 million after-tax) loan loss reserve release and a $2.3 million expense recovery from an employee retention benefit[169] CRITICAL ACCOUNTING POLICIES AND PRACTICES This section highlights the Corporation's key accounting policies that require significant management judgment and estimates - The Corporation's critical accounting policies, including those for allowance for loan and lease losses, OTTI, income taxes, and financial instrument classification, involve significant management judgments and estimates. No material changes to these policies have occurred since December 31, 2018[172] RESULTS OF OPERATIONS This section provides a detailed analysis of the Corporation's financial performance, breaking down key components of the income statement Net Interest Income This section analyzes the Corporation's net interest income, interest rate spread, and net interest margin, detailing the impact of changes in interest rates and asset/liability volumes. It also provides a reconciliation of GAAP to non-GAAP tax-equivalent measures | Metric (In thousands) | Q1 2019 | Q1 2018 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income (GAAP) | $140,181 | $124,693 | +$15,488 | | Net Interest Margin (GAAP) | 4.92% | 4.40% | +0.52% | | Net Interest Income (Tax-Equivalent, Non-GAAP) | $145,507 | $129,471 | +$16,036 | | Net Interest Margin (Tax-Equivalent, Non-GAAP) | 5.11% | 4.57% | +0.54% | - The $15.5 million increase in net interest income was primarily driven by an $8.5 million increase in commercial and construction loan interest income, a $7.5 million increase in consumer loan interest income, and a $2.0 million increase in investment securities interest income[181] - These increases were partially offset by a $1.6 million increase in total interest expense due to higher market interest rates on deposits and borrowings, and a $1.5 million decrease in residential mortgage loan interest income[181] - The net interest margin increased by 52 basis points to 4.92%, attributed to upward repricing of variable-rate commercial loans, improved funding mix, and a higher proportion of consumer loans[181] Provision for Loan and Lease Losses This section discusses the factors influencing the provision for loan and lease losses, including the impact of hurricane-related reserve releases and changes in credit quality for various loan portfolios. It also provides a reconciliation of GAAP to non-GAAP adjusted provision | Metric (In thousands) | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Provision for Loan and Lease Losses (GAAP) | $11,820 | $20,544 | | Hurricane-related Loan Loss Reserve Release | ($6,425) | ($6,407) | | Adjusted Provision for Loan and Lease Losses (Non-GAAP) | $18,245 | $26,951 | - The GAAP provision decreased by $8.7 million, primarily due to a $19.9 million positive variance in commercial and construction loans, reflecting reserve releases and lower charges[183] - This was partially offset by a $6.2 million increase in residential mortgage loan provision due to lower collateral values and increased foreclosures, and a $5.1 million increase in consumer loan provision due to higher net charge-offs[183] Non-Interest Income This section analyzes the composition and changes in non-interest income, including service charges on deposit accounts, mortgage banking activities, insurance income, and other operating income, highlighting key drivers for the period | Non-Interest Income Component (In thousands) | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Service Charges on Deposit Accounts | $5,716 | $5,088 | | Mortgage Banking Activities | $3,627 | $4,165 | | Insurance Income | $4,250 | $3,355 | | Other Operating Income | $8,950 | $7,860 | | Gain on Early Extinguishment of Debt | $0 | $2,316 | | Total Non-Interest Income | $22,543 | $22,784 | - Total non-interest income decreased by $0.3 million, primarily due to the absence of a $2.3 million gain on early extinguishment of debt (TRuPs repurchase) recorded in Q1 2018 and a $0.5 million decrease in mortgage banking activities[186] - These decreases were partially offset by a $1.1 million increase in 'Other operating income' (driven by higher transaction fees and a gain on loan sales) and a $0.9 million increase in insurance income[186] Non-Interest Expenses This section provides a detailed breakdown of non-interest expenses and explains the drivers of changes, including employees' compensation and benefits, occupancy and equipment, FDIC deposit insurance, professional fees, and net loss on OREO operations | Non-Interest Expense Component (In thousands) | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Employees' Compensation and Benefits | $39,296 | $40,680 | | Occupancy and Equipment | $16,055 | $15,100 | | FDIC Deposit Insurance Premium | $1,698 | $2,640 | | Net Loss on OREO and OREO Operations | $3,743 | $190 | | Business Promotion | $3,706 | $2,570 | | Total Non-Interest Expenses | $89,972 | $86,020 | - Total non-interest expenses increased by $4.0 million, mainly due to a $3.6 million increase in OREO losses (adverse fair value adjustments and lower rental income), a $1.1 million increase in business promotion, and a $1.0 million increase in occupancy and equipment costs[189] - These increases were partially offset by a $1.4 million decrease in employees' compensation and benefits (due to a $2.3 million expense recovery from an employee retention benefit and lower stock-based compensation) and a $1.0 million decrease in FDIC insurance premium[189] Income Taxes This section discusses the Corporation's income tax expense, effective tax rates, and deferred tax assets, taking into account various tax jurisdictions (Puerto Rico, USVI, U.S. federal/state) and the impact of recent tax law changes and NOL limitations | Metric (In thousands) | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Income Tax Expense | $17,618 | $7,800 | | Net Deferred Tax Asset (as of March 31/Dec 31) | $306,000 | $319,800 | | Valuation Allowance (as of March 31/Dec 31) | $95,600 | $68,100 | - Income tax expense increased significantly due to higher pre-tax earnings and a higher estimated effective tax rate for 2019[191] - The estimated annual effective tax rate (including all entities) for 2019 was 29% (26% excluding discrete items), compared to 19% (23% excluding discrete items) for Q1 2018[191][193] - Net deferred tax asset amounted to $306.0 million as of March 31, 2019, net of a $95.6 million valuation allowance[193] - Act 257, effective January 1, 2019, reduced Puerto Rico's maximum corporate tax rate to 37.5% and increased NOL usage limitation to 90%, but adversely impacted the ability to offset pass-through income with holding company NOLs[191] FINANCIAL CONDITION AND OPERATING DATA ANALYSIS This section analyzes the Corporation's balance sheet, focusing on assets, liabilities, and equity, and discusses key operating data Assets This section provides an overview of the Corporation's total assets and the primary drivers of changes, including loans and investment securities - Total assets increased by $133.2 million to $12.4 billion as of March 31, 2019, primarily due to a $128.7 million increase in total loans and a $57.2 million increase from the recognition of right-of-use assets for operating leases[195] - This increase was partially offset by a $37.6 million decrease in total investment securities, driven by MBS prepayments and a called U.S. agency note[195] Loan Portfolio This section provides a detailed analysis of the Corporation's loan portfolio, including its composition by type and geographic region, and discusses changes in residential, commercial, construction, and consumer loan segments, as well as overall loan production | Loan Category (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Residential Mortgage Loans | $3,126,562 | $3,163,200 | | Commercial Loans | $3,854,962 | $3,750,200 | | Finance Leases | $352,277 | $333,530 | | Consumer Loans | $1,663,015 | $1,611,170 | | Total Loans Held for Investment, Gross | $8,996,816 | $8,858,120 | | Loans Held for Sale | $33,175 | $43,180 | | Total Loans, Gross | $9,029,991 | $8,901,300 | - Total loan portfolio increased by $128.7 million, with growth in Puerto Rico ($74.1 million), Florida ($50.3 million), and Virgin Islands ($4.3 million)[197] - Commercial and construction loans grew by $96.0 million, and consumer loans by $70.6 million, partially offset by a $37.9 million decrease in residential mortgage loans[199] - Credit risk concentration was 74% in Puerto Rico, 21% in the United States, and 5% in the Virgin Islands as of March 31, 2019[201] Investment Activities This section details the Corporation's investment portfolio, including available-for-sale and held-to-maturity securities, their composition, and changes. It also highlights exposure to Puerto Rico government obligations and MBS | Investment Category (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Money Market Investments | $7,737 | $7,590 | | Investment Securities Available for Sale | $1,905,230 | $1,942,560 | | Investment Securities Held-to-Maturity | $144,673 | $144,800 | | Equity Securities | $44,438 | $44,530 | | Total Money Market Investments and Investment Securities | $2,102,078 | $2,139,500 | - Total available-for-sale investment securities decreased by $37.3 million, mainly due to U.S. agency MBS prepayments and a called U.S. agency note, partially offset by a $20.5 million increase in fair value[209] - Approximately 99% of the available-for-sale portfolio is in U.S. government and agency debt. Held-to-maturity securities are primarily Puerto Rico Municipal Bonds ($144.7 million)[209] RISK MANAGEMENT This section describes the Corporation's strategies and policies for identifying, measuring, monitoring, and controlling various financial and operational risks Liquidity Risk and Capital Adequacy This section details the Corporation's liquidity management framework, including forecasting funding requirements, maintaining funding stability, and contingency plans. It also discusses various funding sources, the impact of credit ratings on liquidity, cash flow activities, and capital adequacy - The Corporation manages liquidity at both the holding company and banking subsidiary levels, with regulatory approvals required for dividends and subordinated debt payments[215] - Estimated core liquidity reserve was $1.9 billion (15.2% of total assets) as of March 31, 2019, and the basic liquidity ratio was 18.9% of total assets[216] - Unpledged liquid securities amounted to approximately $1.2 billion as of March 31, 2019[216] | Funding Source (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Brokered CDs | $509,700 | $555,600 | | Government Deposits | $684,200 | $677,300 | | Retail Deposits (non-brokered, non-government) | $7,700,000 | $7,500,000 | | Securities Sold Under Repurchase Agreements | $300,000 | $350,100 | | FHLB Advances | $740,000 | $740,000 | | Subordinated Debentures | $184,200 | $184,200 | - The Corporation's credit ratings (B+ by S&P, B by Fitch for long-term issuer) could affect access to new non-deposit funding sources, but have not materially impacted liquidity due to non-reliance on directly linked instruments[221][223] Off -Balance Sheet Arrangements This section describes the Corporation's off-balance sheet financial transactions, primarily commitments to extend credit and standby letters of credit, which are used to meet customer needs and manage risk - Commitments to extend credit amounted to approximately $1.3 billion as of March 31, 2019, with $655.5 million related to credit card loans[234] - Commercial and financial standby letters of credit totaled approximately $41.5 million[234] Contractual Obligations and Commitments This section presents a detailed table of the maturities of the Corporation's contractual obligations and commitments, including certificates of deposit, debt obligations, and various credit commitments | Contractual Obligation (In thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Certificates of Deposit | $2,970,956 | $1,647,076 | $996,828 | $325,284 | $1,700 | | Securities Sold Under Repurchase Agreements | $100,000 | $0 | $100,000 | $0 | $0 | | Advances from FHLB | $740,000 | $205,000 | $335,000 | $200,000 | $0 | | Other Borrowings | $184,150 | $0 | $0 | $0 | $184,150 | | Operating Leases | $72,886 | $7,050 | $16,908 | $12,474 | $36,450 | | Total Contractual Obligations | $4,067,992 | $1,859,126 | $1,448,736 | $537,758 | $222,300 | | Commitments to Extend Credit (Total Commercial) | $1,312,636 | $1,124,682 | $0 | $0 | $0 | Interest Rate Risk Management This section describes how First BanCorp. manages interest rate risk through its asset/liability position, net interest income simulation analysis, and the use of derivative instruments like interest rate caps and forward contracts - The Corporation performs quarterly net interest income simulation analyses over a one-to-five-year horizon, assuming upward and downward yield curve shifts of 200 basis points[237] - As of March 31, 2019, simulations showed an asset-sensitive position, with projected 12-month net interest income increasing by $18.3 million in a rising rate scenario and decreasing by $15.2 million in a falling rate scenario (non-static balance sheet)[238] - Derivative instruments, including interest rate caps and forward contracts, are used as undesignated economic hedges to manage interest rate risk[238] Credit Risk Management This section outlines First BanCorp.'s approach to managing credit risk across its loan portfolio and off-balance-sheet instruments. It details policies, underwriting, loan review, collection efforts, and the Special Asset Group's role in mitigating defaults and losses. It also provides extensive data on the allowance for loan and lease losses, non-performing assets, and net charge-offs - Credit risk is managed through credit policy, underwriting, independent loan review, quality control, statistical analysis, and proactive collection/loss mitigation efforts[241] - The Special Asset Group (SAG) focuses on accelerating the reduction of non-performing assets through note sales, short sales, loss mitigation, and OREO sales[241] | Metric (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Allowance for Loan and Lease Losses (ALLL) | $183,732 | $196,362 | | ALLL to Total Loans Held for Investment | 2.04% | 2.22% | | Total Non-performing Assets (NPA) | $414,907 | $467,062 | | NPA to Total Assets | 3.35% | 3.81% | | Nonaccrual Loans Held for Investment | $272,778 | $315,973 | | ALLL to Total Nonaccrual Loans Held for Investment | 67.36% | 62.15% | | Net Charge-offs (annualized) to Average Loans | 1.10% | 1.21% | - Total non-performing assets decreased by $52.2 million, primarily due to a $12.9 million reduction from a commercial mortgage loan restructuring, a $15.2 million decrease in nonaccrual residential mortgage loans, and sales/repayments of nonaccrual loans held for sale[258] Operational Risk This section describes the Corporation's strategy for mitigating and controlling operational risk through internal controls, policies, and procedures, categorizing risks into business-specific and corporate-wide - The Corporation uses internal controls, policies, and procedures to identify and manage operational risk, classifying it into business-specific and corporate-wide categories (e.g., information security, business recovery, legal and compliance)[272] Legal and Compliance Risk This section explains the Corporation's management of legal and compliance risk, which includes noncompliance with regulations, adverse legal judgments, and unenforceable counterparty obligations, emphasizing established procedures and oversight - Legal and compliance risk is managed through established procedures based on legal and regulatory requirements, with a Compliance Director overseeing enterprise-wide compliance risk assessment[273] Concentration Risk This section discusses the geographic concentration of the Corporation's operations and credit exposure, highlighting its main market in Puerto Rico and diversification into the Virgin Islands and Florida - The Corporation's primary market is Puerto Rico, with 74% of its gross loan portfolio held for investment concentrated there, diversified by operations in the Virgin Islands (5%) and the United States (21%)[274] Update to the Puerto Rico Fiscal Situation This section provides an update on the economic and fiscal conditions in Puerto Rico, including key economic indicators, projections from the 2019 Proposed Fiscal Plan, recent legal developments regarding the PROMESA oversight board, and the Corporation's direct and indirect exposure to the Puerto Rico and USVI governments - Puerto Rico's GNP is projected to grow by 4.1%, 3.8%, and 1.5% for fiscal years 2019, 2020, and 2021, respectively, based on an assumption of over $81 billion in disaster relief funding[275] - The 2019 Proposed Fiscal Plan includes structural reforms and fiscal measures projected to drive $7.5 billion in increased revenues and reduced expenditures through fiscal year 2024[278] - The PROMESA oversight board's constitutional appointment was challenged, leading to a petition for review by the U.S. Court of Appeals and presidential nominations for the board members[279] | Exposure (In millions) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Direct Exposure to Puerto Rico Government | $213.5 | $214.6 | | Loans to USVI Government Entities | $61.6 | $55.8 | | Puerto Rico Public Sector Deposits | $684.2 | $677.3 | Basis of Presentation This section explains the non-GAAP financial measures used in the report, including net interest income on a tax-equivalent basis, tangible common equity ratio, adjusted provision for loan and lease losses, and adjusted net income. It provides the rationale for their use and reconciliations to GAAP measures - Non-GAAP measures like tax-equivalent net interest income, tangible common equity ratio, adjusted provision for loan losses, and adjusted net income are used to provide additional information and facilitate comparability[287][288][289][291][292][293][294][295][296][297][298] - Adjusted net income excludes special items such as hurricane-related loan loss reserve releases, employee retention benefits, hurricane-related expenses, and gains on early extinguishment of debt, along with their tax impacts[287][288][289][291][292][293][294][295][296][297][298](index=298&type=chunk] | Metric (In thousands) | Q1 2019 (GAAP) | Q1 2019 (Adjusted Non-GAAP) | | :--- | :--- | :--- | | Net Income | $43,314 | $36,981 | | Provision for Loan and Lease Losses | $11,820 | $18,245 | | Provision for Loan and Lease Losses to Net Charge-offs | 48.34% | 74.62% | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the market risk disclosures provided within Item 2, 'Management's Discussion and Analysis of Financial Condition and Results of Operations,' for information regarding the Corporation's exposure to market risk - Information regarding market risk is incorporated by reference from the 'Risk Management' section within Item 2 of this report[304] Item 4. Controls and Procedures This section addresses the effectiveness of the Corporation's disclosure controls and procedures and reports on any changes to internal control over financial reporting Disclosure Control and Procedures This section confirms the effectiveness of the Corporation'