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LOAN PORTFOLIO
3 Months Ended
Mar. 31, 2018
LOAN PORTFOLIO

NOTE 7 – LOANS HELD FOR INVESTMENT

The following provides information about the loan portfolio held for investment:

As ofAs of
March 31, December 31,
20182017
(In thousands)
Residential mortgage loans, mainly secured by first mortgages$3,267,868$3,290,957
Commercial loans:
Construction loans (1)79,150111,397
Commercial mortgage loans (1)1,552,5031,614,972
Commercial and Industrial loans (2)2,061,7732,083,253
Total Commercial loans3,693,4263,809,622
Finance leases262,863257,462
Consumer loans1,471,7331,492,435
Loans held for investment (2)8,695,8908,850,476
Allowance for loan and lease losses(225,856)(231,843)
Loans held for investment, net$8,470,034$8,618,633
__________
(1)During the first quarter of 2018, the Corporation transferred $57.2 million (net of fair value write-downs of $9.7 million) in non-performing loans to held for sale. Loans transferred to held for sale consisted of a $30.0 million non-performing construction loan (net of a $5.1 million fair value write-down) and two non-performing commercial mortgage loans totaling $27.2 million (net of fair value write-downs of $4.6 million).
(2)As of March 31, 2018 and December 31, 2017, includes $823.2 million and $833.5 million, respectively, of commercial loans that are secured by real estate but are not dependent upon the real estate for repayment.

Loans held for investment on which accrual of interest income had been discontinued were as follows:
As ofAs of
March 31, December 31,
20182017
(In thousands)
Non-performing loans:
Residential mortgage$171,380$178,291
Commercial mortgage (1)115,179156,493
Commercial and Industrial85,32585,839
Construction:
Land14,94915,026
Construction-commercial (1)-35,100
Construction-residential1,2871,987
Consumer:
Auto loans13,45310,211
Finance leases1,8011,237
Other consumer loans8,6035,370
Total non-performing loans held for investment (2)(3)(4)$411,977$489,554
_______________
(1)During the first quarter of 2018, the Corporation transferred $57.2 million (net of fair value write-downs of $9.7 million) in non-performing loans to held for sale. Loans transferred to held for sale consisted of a $30.0 million non-performing construction loan (net of a $5.1 million fair value write-down) and two non-performing commercial mortgage loans totaling $27.2 million (net of fair value write-downs of $4.6 million).
(2)Excludes $64.9 million and $8.3 million of non-performing loans held for sale as of March 31, 2018 and December 31, 2017, respectively.
(3)Amount excludes purchased-credit impaired ("PCI") loans with a carrying value of approximately $155.3 million and $158.2 million as of March 31, 2018 and December 31, 2017, respectively, primarily mortgage loans acquired from Doral Bank in the first quarter of 2015 and from Doral Financial in the second quarter of 2014, as further discussed below. These loans are not considered non-performing due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using an estimated cash flow analysis.
(4)Non-performing loans exclude $366.4 million and $374.7 million of Troubled Debt Restructuring ("TDR") loans that are in compliance with the modified terms and in accrual status as of March 31, 2018 and December 31, 2017, respectively.

During the first quarter of 2018, the Corporation transferred to held for sale three non-performing commercial and construction loans. The aggregate recorded investment in these loans was written down to $57.2 million, which resulted in charge-offs of $9.7 million of which $4.1 million was taken against previously-established reserves for loan losses, resulting in a charge to the provision for loan and lease losses of $5.6 million for the first quarter of 2018. Loans transferred to held for sale consisted of a $30.0 million non-performing construction loan (net of a $5.1 million fair value write-down) and two non-performing commercial mortgage loans totaling $27.2 million (net of fair value write-downs of $4.6 million).

Loans in Process of Foreclosure

As of March 31, 2018, the recorded investment of residential mortgage loans collateralized by residential real estate property that are in the process of foreclosure amounted to $152.3 million, including $22.7 million of loans insured by the FHA or guaranteed by the VA, and $18.2 million of PCI loans. The Corporation commences the foreclosure process on residential real estate loans when a borrower becomes 120 days delinquent in accordance with the guidelines of the Consumer Financial Protection Bureau (CFPB). Foreclosure procedures and timelines vary depending on whether the property is located in a judicial or non-judicial state. Judicial states (Puerto Rico, Florida and USVI) require the foreclosure to be processed through the state’s court while foreclosure in non-judicial states (BVI) is processed without court intervention. Foreclosure timelines vary according to state law and investor guidelines. Occasionally, foreclosures may be delayed due to, among other reasons, mandatory mediations, bankruptcy, court delays and title issues.

The Corporation’s aging of the loans held for investment portfolio is as follows:
As of March 31, 2018
30-59 Days Past Due60-89 Days Past Due90 days or more Past Due (1)Total Past Due Purchased Credit-Impaired Loans Current Total loans held for investment90 days past due and still accruing
(In thousands)
Residential mortgage:
FHA/VA and other government-guaranteed
loans (2)(3)(4)$-$3,665$107,693$111,358$-$35,927$147,285$107,693
Other residential mortgage loans (4)-57,505186,535244,040151,0672,725,4763,120,58315,155
Commercial:
Commercial and Industrial loans 13,1372,41986,095101,651-1,960,1222,061,773770
Commercial mortgage loans (4)-49,807119,156168,9634,2141,379,3261,552,5033,977
Construction:
Land (4)-1217,10817,120-9,33026,4502,159
Construction-commercial-1,012-1,012-45,22746,239-
Construction-residential (4)--2,4882,488-3,9736,4611,201
Consumer:
Auto loans32,4387,89113,45353,782-784,711838,493-
Finance leases5,8432,2161,8019,860-253,003262,863-
Other consumer loans13,7014,57710,43428,712-604,528633,2401,831
Total loans held for investment$65,119$129,104$544,763$738,986$155,281$7,801,623$8,695,890$132,786
_____________
(1)Includes non-performing loans and accruing loans that are contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges and fees until charged-off at 180 days.
(2)It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past-due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $30.6 million of residential mortgage loans insured by the FHA or guaranteed by the VA that are over 15 months delinquent, and are no longer accruing interest as of March 31, 2018.
(3)As of March 31, 2018, includes $73.3 million of defaulted loans collateralizing Government National Mortgage Association ("GNMA") securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.
(4)According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears two or more monthly payments. FHA/VA and other government-guaranteed loans, other residential mortgage loans, commercial mortgage loans, land loans, and construction-residential loans past due 30-59 days as of March 31, 2018 amounted to $6.8 million, $122.0 million, $5.2 million, $0.6 million, and $0.2 million respectively.

As of December 31, 2017
30-59 Days Past Due60-89 Days Past Due90 days or more Past Due (1)Total Past Due Purchased Credit- Impaired Loans Current Total loans held for investment90 days past due and still accruing (2) (3)
(In thousands)
Residential mortgage:
FHA/VA and other government-guaranteed
loans (2)(3)(4)$-$6,792$102,815$109,607$-$29,332$138,939$102,815
Other residential mortgage loans (4)-92,502193,750286,252153,9912,711,7753,152,01815,459
Commercial:
Commercial and Industrial loans8,97157688,15697,703-1,985,5502,083,2532,317
Commercial mortgage loans (4)-7,525163,180170,7054,1831,440,0841,614,9726,687
Construction:
Land (4)-12415,17715,301-11,63026,931151
Construction-commercial --35,10035,100-41,45676,556-
Construction-residential-951,9872,082-5,8287,910-
Consumer:
Auto loans57,56023,78310,21191,554-752,777844,331-
Finance leases10,5493,4841,23715,270-242,192257,462-
Other consumer loans10,7765,0529,36125,189-622,915648,1043,991
Total loans held for investment$87,856$139,933$620,974$848,763$158,174$7,843,539$8,850,476$131,420
____________
(1)Includes non-performing loans and accruing loans that are contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges and fees until charged-off at 180 days.
(2)It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past-due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $29.9 million of residential mortgage loans insured by the FHA or guaranteed by the VA that are over 15 months delinquent, and are no longer accruing interest as of December 31, 2017.
(3)As of December 31, 2017, includes $62.1 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.
(4)According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears on two or more monthly payments. FHA/VA and other government-guaranteed loans, other residential mortgage loans, commercial mortgage loans, and land loans past due 30-59 days as of December 31, 2017 amounted to $6.0 million, $224.0 million, $9.0 million, and $2.5 million, respectively.

The Corporation’s credit quality indicators by loan type as of March 31, 2018 and December 31, 2017 are summarized below:
Commercial Credit Exposure-Credit Risk Profile Based on Creditworthiness Category:
SubstandardDoubtfulLossTotal Adversely Classified (1)Total Portfolio
March 31, 2018
(In thousands)
Commercial mortgage$269,926$2,117$-$272,043$1,552,503
Construction:
Land15,971391-16,36226,450
Construction-commercial----46,239
Construction-residential1,287--1,2876,461
Commercial and Industrial144,2057,745729152,6792,061,773
Commercial Credit Exposure-Credit Risk Profile Based on Creditworthiness Category:
SubstandardDoubtfulLossTotal Adversely Classified (1)Total Portfolio
December 31, 2017
(In thousands)
Commercial mortgage$257,503$4,166$-$261,669$1,614,972
Construction:
Land15,971490-16,46126,931
Construction-commercial 35,100--35,10076,556
Construction-residential1,987--1,9877,910
Commercial and Industrial154,4163,854676158,9462,083,253
_________
(1) Excludes non-peforming loans held for sale of $64.9 million ($27.2 million commercial mortgage, $30.0 million construction-commercial, and $7.7 million construction-land) and $8.3 million (construction-land) as of March 31, 2018 and December 31, 2017, respectively.

The Corporation considers a loan as adversely classified if its risk rating is Substandard, Doubtful or Loss. These categories are defined as follows:

SubstandardA Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

DoubtfulDoubtful classifications have all of the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently known facts, conditions and values. A Doubtful classification may be appropriate in cases where significant risk exposures are perceived, but loss cannot be determined because of specific reasonable pending factors, which may strengthen the credit in the near term.

LossAssets classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset even though partial recovery may occur in the future. There is little or no prospect for near term improvement and no realistic strengthening action of significance pending.

March 31, 2018Consumer Credit Exposure-Credit Risk Profile Based on Payment Activity
Residential Real-EstateConsumer
FHA/VA/ Guaranteed (1)Other residential loansAutoFinance LeasesOther Consumer
(In thousands)
Performing$147,285$2,798,136$825,040$261,062$624,637
Purchased Credit-Impaired (2)-151,067---
Non-performing-171,38013,4531,8018,603
Total$147,285$3,120,583$838,493$262,863$633,240
(1) It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as 90 days past-due loans and still accruing as opposed to non-performing loans since the principal repayment is insured. This balance includes $30.6 million of residential mortgage loans insured by the FHA or guaranteed by the VA, which are over 15 months delinquent, and are no longer accruing interest as of March 31, 2018.
(2)PCI loans are excluded from non-performing statistics due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.
December 31, 2017Consumer Credit Exposure-Credit Risk Profile Based on Payment Activity
Residential Real-EstateConsumer
FHA/VA/ Guaranteed (1)Other residential loansAutoFinance LeasesOther Consumer
(In thousands)
Performing$138,939$2,819,736$834,120$256,225$642,734
Purchased Credit-Impaired (2)-153,991---
Non-performing-178,29110,2111,2375,370
Total$138,939$3,152,018$844,331$257,462$648,104
(1)It is the Corporation's policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as 90 days past due loans and still accruing as opposed to non-performing loans since the principal repayment is insured. This balance includes $29.9 million of residential mortgage loans insured by the FHA or guaranteed by the VA that are over 15 months delinquent, and are no longer accruing interest as of December 31, 2017.
(2)PCI loans are excluded from non-performing statistics due to the application of the accretion method, under which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

The following tables present information about impaired loans held for investment, excluding PCI loans, which are reported separately as discussed below:
Impaired Loans
Recorded InvestmentUnpaid Principal BalanceRelated Specific AllowanceAverage Recorded InvestmentInterest Income Recognized On Accrual BasisInterest Income Recognized On Cash Basis
(In thousands)
As of March 31, 2018
With no related specific allowance recorded:
FHA/VA-Guaranteed loans$-$ - $-$-$-$-
Other residential mortgage loans94,817126,672-95,274723170
Commercial:
Commercial mortgage loans60,81199,837-61,4458237
Commercial and Industrial loans24,71227,679-24,82524611
Construction:
Land------
Construction-commercial------
Construction-residential------
Consumer:
Auto loans387387-3942-
Finance leases------
Other consumer loans2,2663,051-2,3272917
$182,993$257,626$-$184,265$1,082$235
With a related specific allowance recorded:
FHA/VA-Guaranteed loans$-$-$-$-$-$-
Other residential mortgage loans322,793359,04822,546324,1103,654231
Commercial:
Commercial mortgage loans101,315117,83813,451102,30466147
Commercial and Industrial loans95,066117,40014,37592,38230220
Construction:
Land11,81520,0011,43211,864258
Construction-commercial------
Construction-residential25235552252--
Consumer:
Auto loans20,42420,4243,37920,943397-
Finance leases1,8761,876841,95835-
Other consumer loans9,74610,0921,6119,91328327
$563,287$647,034$56,930$563,726$5,357$333
Total:
FHA/VA-Guaranteed loans$-$-$-$-$-$-
Other residential mortgage loans417,610485,72022,546419,3844,377401
Commercial:
Commercial mortgage loans162,126217,67513,451163,74974384
Commercial and Industrial loans119,778145,07914,375117,20754831
Construction:
Land11,81520,0011,43211,864258
Construction-commercial------
Construction-residential25235552252--
Consumer:
Auto loans20,81120,8113,37921,337399-
Finance leases1,8761,876841,95835-
Other consumer loans12,01213,1431,61112,24031244
$746,280$904,660$56,930$747,991$6,439$568

Impaired Loans
Recorded InvestmentUnpaid Principal BalanceRelated Specific AllowanceAverage Recorded Investment
(In thousands)
As of December 31, 2017
With no related specific allowance recorded:
FHA/VA-Guaranteed loans$-$-$-$-
Other residential mortgage loans116,818154,048-120,241
Commercial:
Commercial mortgage loans65,100100,612-86,563
Commercial and Industrial loans28,29231,254-28,567
Construction:
Land4849-48
Construction-commercial----
Construction-residential----
Consumer:
Auto loans267267-290
Finance leases----
Other consumer loans2,5213,688-2,745
$213,046$289,918$-$238,454
With a related specific allowance recorded:
FHA/VA-Guaranteed loans$-$-$-$-
Other residential mortgage loans316,616349,28422,086318,606
Commercial:
Commercial mortgage loans87,814124,0849,78393,720
Commercial and Industrial loans90,008112,00512,35992,666
Construction:
Land11,86519,9731,40214,126
Construction-commercial35,10138,59556035,996
Construction-residential25235555252
Consumer:
Auto loans22,33822,3383,66524,328
Finance leases2,1842,1841042,428
Other consumer loans11,08411,8301,39611,579
$577,262$680,648$51,410$593,701
Total:
FHA/VA-Guaranteed loans$-$-$-$-
Other residential mortgage loans433,434503,33222,086438,847
Commercial:
Commercial mortgage loans152,914224,6969,783180,283
Commercial and Industrial loans118,300143,25912,359121,233
Construction:
Land11,91320,0221,40214,174
Construction-commercial35,10138,59556035,996
Construction-residential25235555252
Consumer:
Auto loans22,60522,6053,66524,618
Finance leases2,1842,1841042,428
Other consumer loans13,60515,5181,39614,324
$790,308$970,566$51,410$832,155
Interest income of approximately $6.9 million ($6.4 million on an accrual basis and $0.5 million on a cash basis) was recognized on impaired loans for the first quarter of 2017.

The following table shows the activity for impaired loans and the related specific reserve during the first quarter of 2018 and 2017:
Quarter ended
March 31, 2018March 31, 2017
Impaired Loans:(In thousands)
Balance at beginning of period$790,308$887,905
Loans determined impaired during the period61,40819,628
Charge-offs (1) (2)(17,213)(17,404)
Loans sold, net of charge-offs(4,121)(53,245)
Increases to existing impaired loans6,998541
Foreclosures(11,675)(9,457)
Loans no longer considered impaired(1,507)(892)
Loans transferred to held for sale(57,213)-
Paid in full or partial payments(20,705)(19,878)
Balance at end of period$746,280$807,198
(1)The first quarter of 2018 includes charge-offs totaling $9.7 million associated with the $57.2 million in non-performing loans transferred to held for sale.
(2) The first quarter of 2017 includes a charge-off of $10.7 million related to the sale of the PREPA credit line as further discussed below.

Quarter ended
March 31, 2018March 31, 2017
Specific Reserve:(In thousands)
Balance at beginning of period$51,410$64,421
Provision for loan losses22,70318,862
Net charge-offs(17,183)(16,972)
Balance at end of period$56,930$66,311

Purchased Credit Impaired Loans (PCI)

The Corporation acquired PCI loans accounted for under ASC 310-30 as part of a transaction that closed on February 27, 2015 in which FirstBank acquired 10 Puerto Rico branches of Doral Bank, and acquired certain assets, including PCI loans, and assumed deposits, through an alliance with Banco Popular of Puerto Rico, that was the successful lead bidder with the FDIC on the failed Doral Bank, as well as other co-bidders. The Corporation also acquired PCI loans in previously completed asset acquisitions that are accounted for under ASC 310-30. These previous transactions include the acquisition from Doral Financial in the second quarter of 2014 of all its rights, title and interest in first and second residential mortgages loans in full satisfaction of secured borrowings owed by such entity to FirstBank.

Under ASC 310-30, the acquired PCI loans were aggregated into pools based on similar characteristics (i.e. delinquency status and loan terms). Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Since the loans are accounted for under ASC 310-30, they are not considered non-performing and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The Corporation recognizes additional losses on this portfolio when it is probable that the Corporation will be unable to collect all cash flows expected as of the acquisition date plus additional cash flows expected to be collected arising from changes in estimates after the acquisition date.

The carrying amounts of PCI loans were as follows:
As of
March 31, December 31,
20182017
(In thousands)
Residential mortgage loans$151,067$153,991
Commercial mortgage loans4,2144,183
Total PCI loans$155,281$158,174
Allowance for loan losses(11,251)(11,251)
Total PCI loans, net of allowance for loan losses$144,030$146,923

The following tables present PCI loans by past due status as of March 31, 2018 and December 31, 2017:
As of March 31, 201830-59 Days 60-89 Days 90 days or more Total Past Due Total PCI loans
Current
(In thousands)
Residential mortgage loans $-$8,291$27,025$35,316$115,751$151,067
Commercial mortgage loans--3,2343,2349804,214
Total (1)$-$8,291$30,259$38,550$116,731$155,281
_____________
(1)According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage and commercial mortgage loans are considered past due when the borrower is in arrears two or more monthly payments. PCI residential mortgage loans and commercial mortgage loans past due 30-59 days as of March 31, 2018 amounted to $13.5 million and $0.2 million, respectively.
As of December 31, 201730-59 Days 60-89 Days 90 days or more Total Past Due Total PCI loans
Current
(In thousands)
Residential mortgage loans $-$16,600$26,471$43,071$110,920$153,991
Commercial mortgage loans-3552,8343,1899944,183
Total (1)$-$16,955$29,305$46,260$111,914$158,174
_____________
(1)According to the Corporation's delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage and commercial mortgage loans are considered past due when the borrower is in arrears two or more monthly payments. PCI residential mortgage loans and commercial mortgage loans past due 30-59 days as of December 31, 2017 amounted to $28.1 million and $0.2 million, respectively

Initial Fair Value and Accretable Yield of PCI Loans

At acquisition, the Corporation estimated the cash flows the Corporation expected to collect on PCI loans. Under the accounting guidance for PCI loans, the difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. This difference is neither accreted into income nor recorded on the Corporation’s consolidated statements of financial condition. The excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans, using the effective-yield method.

Changes in Accretable Yield of Acquired Loans

Subsequent to the acquisition of loans, the Corporation is required to periodically evaluate its estimate of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications from non-accretable yield to accretable yield. Increases in the cash flows expected to be collected will generally result in an increase in interest income over the remaining life of the loan or pool of loans. Decreases in expected cash flows due to further credit deterioration will generally result in an impairment charge recognized in the Corporation’s provision for loan and lease losses, resulting in an increase to the allowance for loan and lease losses. As of March 31, 2018, the reserve related to PCI loans acquired from Doral Financial in 2014 and from Doral Bank in 2015 amounted to $11.3 million.

Changes in the accretable yield of PCI loans for the quarters ended March 31, 2018 and 2017 were as follows:
March 31, 2018March 31, 2017
(In thousands)
Balance at beginning of period$103,682$116,462
Accretion recognized in earnings(2,623)(2,797)
Balance at end of period$101,059$113,665

Changes in the carrying amount of loans accounted for pursuant to ASC 310-30 were as follows:
Quarter ended Quarter ended
March 31, 2018March 31, 2017
(In thousands)
Balance at beginning of period $158,174$165,818
Accretion 2,6232,797
Collections (3,396)(4,593)
Foreclosures(2,120)(922)
Ending balance $155,281$163,100
Allowance for loan losses(11,251)(6,857)
Ending balance, net of allowance for loan losses$144,030$156,243

Changes in the allowance for loan losses related to PCI loans were as follows:
Quarter ended Quarter ended
March 31, 2018March 31, 2017
(In thousands)
Balance at beginning of period $11,251$6,857
Provision for loan losses--
Balance at the end of period$11,251$6,857

The outstanding principal balance of PCI loans, including amounts charged off by the Corporation, amounted to $192.0 million as of March 31, 2018 (December 31, 2017- $196.6 million).

Purchases and Sales of Loans

During the first quarter of 2018, the Corporation purchased $14.5 million of residential mortgage loans consistent with a strategic program to purchase ongoing residential mortgage loan production from mortgage bankers in Puerto Rico. In general, the loans purchased from mortgage bankers were conforming residential mortgage loans. Purchases of conforming residential mortgage loans provide the Corporation the flexibility to retain or sell the loans, including through securitization transactions, depending upon the Corporation’s interest rate risk management strategies. When the Corporation sells such loans, it generally keeps the servicing of the loans.

In the ordinary course of business, the Corporation sells residential mortgage loans (originated or purchased) to GNMA and government-sponsored entities (“GSEs”), such as FNMA and FHLMC, which generally securitize the transferred loans into mortgage-backed securities for sale into the secondary market. During the first quarter of 2018, the Corporation sold $54.4 million of FHA/VA mortgage loans to GNMA, which packaged them into mortgage-backed securities. Also during the first quarter of 2018, the Corporation sold approximately $20.1 million of performing residential mortgage loans to FNMA and FHLMC. The Corporation’s continuing involvement in these sold loans consists primarily of servicing the loans. In addition, the Corporation agreed to repurchase loans when it breaches any of the representations and warranties included in the sale agreement. These representations and warranties are consistent with the GSEs’ selling and servicing guidelines (i.e., ensuring that the mortgage was properly underwritten according to established guidelines).

For loans sold to GNMA, the Corporation holds an option to repurchase individual delinquent loans issued on or after January 1, 2003 when the borrower fails to make any payment for three consecutive months. This option gives the Corporation the ability, but not the obligation, to repurchase the delinquent loans at par without prior authorization from GNMA.

Under ASC Topic 860, Transfer and Servicing, once the Corporation has the unilateral ability to repurchase the delinquent loan, it is considered to have regained effective control over the loan and is required to recognize the loan and a corresponding repurchase liability on the balance sheet regardless of the Corporation’s intent to repurchase the loan. As of March 31, 2018 and December 31, 2017, rebooked GNMA delinquent loans included in the residential mortgage loan portfolio amounted to $73.3 million and $62.1 million, respectively.

During the first quarters of 2018 and 2017, the Corporation repurchased, pursuant to its repurchase option with GNMA, $1.1 million and $10.7 million, respectively, of loans previously sold to GNMA. The principal balance of these loans is fully guaranteed and the risk of loss related to the repurchased loans is generally limited to the difference between the delinquent interest payment advanced to GNMA, which is computed at the loan’s interest rate, and the interest payments reimbursed by FHA, which are computed at a pre-determined debenture rate. Repurchases of GNMA loans allow the Corporation, among other things, to maintain acceptable delinquency rates on outstanding GNMA pools and remain as a seller and servicer in good standing with GNMA. During the fourth quarter of 2017, the Corporation requested and received approval from GNMA for the exclusion of loans in the areas affected by Hurricanes Irma and Maria from calculations of delinquency and default ratios established in the GNMA Mortgage-Backed Securities Guide. The Corporation generally remediates any breach of representations and warranties related to the underwriting of such loans according to established GNMA guidelines without incurring losses. The Corporation does not maintain a liability for estimated losses as a result of breaches in representations and warranties.

Loan sales to FNMA and FHLMC are without recourse in relation to the future performance of the loans. The Corporation repurchased at par loans previously sold to FNMA and FHLMC in the amount of $3 thousand and $6 thousand during the first quarters of 2018 and 2017, respectively. The Corporation’s risk of loss with respect to these loans is also minimal as these repurchased loans are generally performing loans with documentation deficiencies.

In addition, during the first quarter of 2018, the Corporation sold a $5.6 million commercial and industrial adversely-classified loan in Puerto Rico, recording a charge-off of $1.3 million, and a $9.2 million commercial and industrial loan participation in the Florida region.

Sale of the Puerto Rico Electric Power Authority (“PREPA) Loan

During the first quarter of 2017, the Corporation received an unsolicited offer and sold its outstanding participation in the PREPA line of credit with a book value of $64 million at the time of sale (principal balance of $75 million), thereby reducing its direct exposure to the Puerto Rico government.  A specific reserve of approximately $10.2 million had been allocated to this loan.  Gross proceeds of $53.2 million from the sale resulted in an incremental loss of $0.6 million recorded as a charge to the provision for loan and lease losses in the first quarter of 2017.

Loan Portfolio Concentration

The Corporation’s primary lending area is Puerto Rico. The Corporation’s banking subsidiary, First Bank, also lends in the USVI and BVI markets and in the United States (principally in the state of Florida). Of the total gross loans held for investment of $8.7 billion as of March 31, 2018, credit risk concentration was approximately 75% in Puerto Rico, 19% in the United States, and 6% in the USVI and BVI.

As of March 31, 2018, the Corporation had $54.8 million outstanding loans extended to the Puerto Rico government, its municipalities and public corporations, compared to $55.9 million as of December 31, 2017. Approximately $33.1 million of the outstanding loans as of March 31, 2018 consisted of loans extended to municipalities in Puerto Rico, which in most cases are supported by assigned property tax revenues.  The vast majority of revenues of the municipalities included in the Corporation’s loan portfolio are independent of the Puerto Rico central government. These municipalities are required by law to levy special property taxes in such amounts as are required for the payment of all of their respective general obligation bonds and notes. Late in 2015, the GDB and the Municipal Revenue Collection Center (“CRIM”) signed and perfected a deed of trust. Through this deed, the GDB, as fiduciary, is bound to keep the CRIM funds separate from any other deposits and must distribute the funds pursuant to applicable law. The CRIM funds are deposited at another commercial depository financial institution in Puerto Rico. In addition to loans extended to municipalities, the Corporation’s exposure to the Puerto Rico government as of March 31, 2018 includes a $6.7 million loan extended to a unit of the central government, and a $15.0 million loan granted to an affiliate of PREPA.

Furthermore, as of March 31, 2018, the Corporation had three loans granted to the hotel industry in Puerto Rico that were previously guaranteed by the Puerto Rico Tourism Development Fund (“TDF”) with an outstanding principal balance of $116.2 million (book value $61.6 million), compared to $120.2 million outstanding (book value of $70.8 million) as of December 31, 2017. Historically, the borrower and the operations of the underlying collateral of these loans have been the primary sources of repayment and the TDF, which is a subsidiary of the GDB, provided a secondary guarantee for payment performance. As part of agreements executed in the second quarter of 2017 and first quarter of 2018, the TDF paid $7.6 million and $4.0 million, respectively, to honor a portion of its guarantee on these loans.  As provided in the agreements, the cash payments received by the Corporation released the TDF from its liability as a guarantor of these loans. All three of the commercial mortgage loans previously guaranteed by the TDF have been classified as non-performing and impaired since the first quarter of 2016, and interest payments have been applied against principal since then. In addition, the GDB agreed to issue to the Bank a fixed income financial instrument pursuant to the GDB’s Restructuring Support Agreement approved by the PROMESA oversight board. During the first quarter of 2018, two of these three commercial mortgage loans, with an aggregate outstanding principal balance of $50.4 million (book value of $27.2 million) were transferred to held for sale.

In addition, the Corporation had $115.9 million in exposure to residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority. Residential mortgage loans guaranteed by the Puerto Rico Housing Finance Authority are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. The Puerto Rico government guarantees up to $75 million of the principal under the mortgage loan insurance program. According to the most recently released audited financial statements of the Puerto Rico Housing Finance Authority, as of June 30, 2015, the Puerto Rico Housing Finance Authority’s mortgage loans insurance program covered loans in an aggregate of approximately $552 million. The regulations adopted by the Puerto Rico Housing Finance Authority require the establishment of adequate reserves to guarantee the solvency of the mortgage loan insurance fund. As of June 30, 2015, the most recent date as to which information is available, the Puerto Rico Housing Finance Authority had a restricted net position for such purposes of approximately $77.4 million.

The Corporation also has credit exposure to USVI government entities. As of March 31, 2018, the Corporation had $76.7 million in loans to USVI government instrumentalities and public corporations, compared to $70.4 million as of December 31, 2017. Of the amount outstanding as of March 31, 2018, public corporations of the USVI owed approximately $53.5 million and an independent instrumentality of the USVI government owed approximately $23.2 million. As of March 31, 2018 all loans were currently performing and up to date on principal and interest payments.

The Corporation cannot predict at this time the ultimate effect that the current fiscal situation of the Commonwealth of Puerto Rico, the uncertainty about the debt restructuring process, the various legislative and other measures adopted and to be adopted by the Puerto Rico government and the PROMESA oversight board in response to such fiscal situation, and Hurricane Maria will have on the Puerto Rico economy, the Corporation’s clients, and the Corporation’s financial condition and results of operations.

Troubled Debt Restructurings

The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico that is similar to the U.S. government’s Home Affordable Modification Program guidelines. Depending upon the nature of borrowers’ financial condition, restructurings or loan modifications through this program, as well as other restructurings of individual commercial, commercial mortgage, construction, and residential mortgage loans, fit the definition of a TDR. A restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms that bring a defaulted loan current and provide sustainable affordability. Changes may include, among others, the extension of the maturity of the loan and modifications of the loan rate. As of March 31, 2018, the Corporation’s total TDR loans held for investment of $572.4 million consisted of $350.0 million of residential mortgage loans, $96.3 million of commercial and industrial loans, $85.8 million of commercial mortgage loans, $6.6 million of construction loans, and $33.7 million of consumer loans. Outstanding unfunded commitments on TDR loans amounted to $1.9 million as of March 31, 2018. In addition, the loans held for sale portfolio includes a $30.0 million TDR construction loan.

The Corporation’s loss mitigation programs for residential mortgage and consumer loans can provide for one or a combination of the following: movement of interest past due to the end of the loan, extension of the loan term, deferral of principal payments and reduction of interest rates either permanently or for a period of up to six years (increasing back in step-up rates). Additionally, in certain cases, the restructuring may provide for the forgiveness of contractually-due principal or interest. Uncollected interest is added to the end of the loan term at the time of the restructuring and not recognized as income until collected or when the loan is paid off. These programs are available only to those borrowers who have defaulted, or are likely to default, permanently on their loan and would lose their homes in a foreclosure action absent some lender concession. Nevertheless, if the Corporation is not reasonably assured that the borrower will comply with its contractual commitment, properties are foreclosed.

Prior to permanently modifying a loan, the Corporation may enter into trial modifications with certain borrowers. Trial modifications generally represent a six-month period during which the borrower makes monthly payments under the anticipated modified payment terms prior to a formal modification. Upon successful completion of a trial modification, the Corporation and the borrower enter into a permanent modification. TDR loans that are participating in or that have been offered a binding trial modification are classified as TDRs when the trial offer is made and continue to be classified as TDRs regardless of whether the borrower enters into a permanent modification. As of March 31, 2018, the Corporation classified an additional $0.5 million of residential mortgage loans as TDRs that were participating in or had been offered a trial modification.

For the commercial real estate, commercial and industrial, and construction loan portfolios, at the time of a restructuring, the Corporation determines, on a loan-by-loan basis, whether a concession was granted for economic or legal reasons related to the borrower’s financial difficulty. Concessions granted for loans in these portfolios could include: reductions in interest rates to rates that are considered below market; extension of repayment schedules and maturity dates beyond original contractual terms; waivers of borrower covenants; forgiveness of principal or interest; or other contractual changes that would be considered a concession. The Corporation mitigates loan defaults for these loan portfolios through its collection function. The function’s objective is to minimize both early stage delinquencies and losses upon default of loans in these portfolios. In the case of the commercial and industrial, commercial mortgage, and construction loan portfolios, the Corporation’s Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of OREO.

In addition, the Corporation extends, renews, and restructures loans with satisfactory credit profiles. Many commercial loan facilities are structured as lines of credit, which generally have one year terms and, therefore, are required to be renewed annually. Other facilities may be restructured or extended from time to time based upon changes in the borrower’s business needs, use of funds, timing of completion of projects, and other factors. If the borrower is not deemed to have financial difficulties, extensions, renewals, and restructurings are done in the normal course of business and not considered concessions, and the loans continue to be recorded as performing.

Selected information on TDR loans held for investment that includes the recorded investment by loan class and modification type is summarized in the following tables. This information reflects all TDRs held for investment:
March 31, 2018
Interest rate below marketMaturity or term extensionCombination of reduction in interest rate and extension of maturityForgiveness of principal and/or interestForbearance AgreementOther (1)Total
(In thousands)
Troubled Debt Restructurings:
Non- FHA/VA Residential Mortgage loans$24,390$8,396$255,731$-$-$61,463$349,980
Commercial Mortgage loans6,51836,41130,739-2,02010,14685,834
Commercial and Industrial loans2,49720,44815,705-3,19754,41896,265
Construction loans:
Land173,8602,177--3246,378
Construction-commercial (2)-------
Construction-residential-----217217
Consumer loans - Auto-1,23512,944--6,63220,811
Finance leases-1961,680---1,876
Consumer loans - Other9521,7756,356166-1,76611,015
Total Troubled Debt Restructurings (2)$34,374$72,321$325,332$166$5,217$134,966$572,376
(1)Other concessions granted by the Corporation included deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation, or a combination of the concessions listed in the table.
(2)Excludes TDRs held for sale amounting to $30.0 million as of March 31, 2018.

December 31, 2017
Interest rate below marketMaturity or term extensionCombination of reduction in interest rate and extension of maturityForgiveness of principal and/or interestForbearance AgreementOther (1)Total
(In thousands)
Troubled Debt Restructurings:
Non- FHA/VA Residential Mortgage loans$25,964$8,318$267,578$-$-$62,070$363,930
Commercial Mortgage loans6,5632,09431,870--10,28550,812
Commercial and Industrial loans2,51020,64816,049-6,62348,28294,112
Construction loans:
Land183,9412,186--3316,476
Construction-commercial ---35,100--35,100
Construction-residential-----217217
Consumer loans - Auto-1,34714,233--7,02522,605
Finance leases-2381,946---2,184
Consumer loans - Other8922,0976,891217-1,68611,783
Total Troubled Debt Restructurings $35,947$38,683$340,753$35,317$6,623$129,896$587,219
(1)Other concessions granted by the Corporation included deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation, or a combination of the concessions listed in the table.

The following table presents the Corporation's TDR loans held for investment activity:
Quarter Ended
March 31, 2018March 31, 2017
(In thousands)
Beginning Balance of TDRs$587,219$647,048
New TDRs43,41940,899
Increases to existing TDRs6,771424
Charge-offs post modification (1) (2)(9,171)(14,662)
Sales, net of charge-offs-(53,245)
Foreclosures(7,043)(4,371)
TDR transferred to held for sale, net of charge-off(30,000)-
Paid-off and partial payments(18,819)(13,729)
Ending balance of TDRs$572,376$602,364
(1)The first quarter of 2018 includes a charge-off of $5.1 million associated with a $30.0 million construction loan transferred to held for sale.
(2)The first quarter of 2017 includes a charge-off of $10.7 million related to the sale of the PREPA credit line.

TDR loans are classified as either accrual or nonaccrual loans. Loans in accrual status may remain in accrual status when their contractual terms have been modified in a TDR if the loans had demonstrated performance prior to the restructuring and payment in full under the restructured terms is expected. Otherwise, loans on nonaccrual and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure, generally for a minimum of six months, and there is evidence that such payments can, and are likely to, continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of the restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Loan modifications increase the Corporation’s interest income by returning a non-performing loan to performing status, if applicable, increase cash flows by providing for payments to be made by the borrower, and limit increases in foreclosure and OREO costs. A TDR loan that specifies an interest rate that at the time of the restructuring is greater than or equal to the rate the Corporation is willing to accept for a new loan with comparable risk may not be reported as a TDR, or an impaired loan in the calendar years subsequent to the restructuring, if it is in compliance with its modified terms. The Corporation did not remove any loans from the TDR classification during the first quarter of 2018 and 2017.

The following table provides a breakdown of the TDR loans held for investment by those in accrual and non-accrual status:
As of March 31, 2018
AccrualNon-accrual (1)(2)Total TDRs
(In thousands)
Non-FHA/VA Residential Mortgage loans$272,659$77,321$349,980
Commercial Mortgage loans24,01061,82485,834
Commercial and Industrial loans43,25153,01496,265
Construction loans:
Land1,1975,1816,378
Construction-commercial (2)---
Construction-residential-217217
Consumer loans - Auto14,0826,72920,811
Finance leases1,6532231,876
Consumer loans - Other9,5701,44511,015
Total Troubled Debt Restructurings$366,422$205,954$572,376
(1)Included in non-accrual loans are $53.2 million in loans that are performing under the terms of the restructuring agreement but are reported in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and are deemed fully collectible.
(2)Excludes a $30.0 million non-performing construction loans transferred to held for sale during the first quarter of 2018.

As of December 31, 2017
AccrualNon-accrual (1)Total TDRs
(In thousands)
Non-FHA/VA Residential Mortgage loans$280,729$83,201$363,930
Commercial Mortgage loans23,32927,48350,812
Commercial and Industrial loans41,53652,57694,112
Construction loans:
Land1,2915,1856,476
Construction-commercial-35,10035,100
Construction-residential-217217
Consumer loans - Auto15,5487,05722,605
Finance leases1,9682162,184
Consumer loans - Other10,2941,48911,783
Total Troubled Debt Restructurings$374,695$212,524$587,219
(1)Included in non-accrual loans are $88.6 million in loans that are performing under the terms of the restructuring agreement but are reported in non-accrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and are deemed fully collectible.

TDR loans exclude restructured residential mortgage loans that are guaranteed by the U.S. federal government (i.e., FHA/VA loans) totaling $62.1 million as of March 31, 2018 (December 31, 2017 - $62.1 million). The Corporation excludes FHA/VA guaranteed loans from TDR loan statistics given that, in the event that the borrower defaults on the loan, the principal and interest (at the specified debenture rate) are guaranteed by the U.S. government; therefore, the risk of loss on these types of loans is very low. The Corporation does not consider loans with U.S. federal government guarantees to be impaired loans for the purpose of calculating the allowance for loan and lease losses.

Loan modifications that are considered TDR loans completed during the first quarters of 2018 and 2017 were as follows:
Quarter ended March 31, 2018
Number of contractsPre-modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
(Dollars in thousands)
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans24$2,608$2,614
Commercial Mortgage loans336,74636,758
Commercial and Industrial loans32,5972,582
Consumer loans - Auto45680680
Consumer loans - Other136785785
Total Troubled Debt Restructurings211$43,416$43,419

Quarter ended March 31, 2017
Number of contractsPre-modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
(Dollars in thousands)
Troubled Debt Restructurings:
Non-FHA/VA Residential Mortgage loans40$4,650$4,508
Commercial Mortgage loans622,43822,198
Commercial and Industrial loans310,74810,748
Construction loans:
Land12528
Consumer loans - Auto1522,2472,247
Finance leases8186186
Consumer loans - Other210969984
Total Troubled Debt Restructurings420$41,263$40,899

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-performing loan. Recidivism on a modified loan occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The Corporation considers a loan to have defaulted if the borrower has failed to make payments of either principal, interest, or both for a period of 90 days or more.

Loan modifications considered TDR loans that defaulted during the quarters ended March 31, 2018 and March 31, 2017, and had become TDR during the 12-month period preceding the default date, were as follows:
Quarter ended March 31,
20182017
Number of contractsRecorded InvestmentNumber of contractsRecorded Investment
(Dollars in thousands)
Non-FHA/VA Residential Mortgage loans4$3873$277
Commercial Mortgage loans--157
Consumer loans - Auto223461
Finance leases122--
Consumer loans - Other11541761
Total 18$48625$456

For certain TDR loans, the Corporation splits the loans into two new notes, A and B notes. The A note is restructured to comply with the Corporation’s lending standards at current market rates, and is tailored to suit the customer’s ability to make timely interest and principal payments. The B note includes the granting of the concession to the borrower and varies by situation. The B note is charged off but the obligation is not forgiven to the borrower, and any payments collected are accounted for as recoveries. At the time of the restructuring, the A note is identified and classified as a TDR loan. If the loan performs for at least six months according to the modified terms, the A note may be returned to accrual status. The borrower’s payment performance prior to the restructuring is included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of the restructuring. In the periods following the calendar year in which a loan is restructured, the A note may no longer be reported as a TDR loan if it is in accrual status, is in compliance with its modified terms, and yields a market rate (as determined and documented at the time of the restructuring).

The recorded investment in loans held for investment restructured using the A/B note restructure workout strategy was approximately $35.6 million as of March 31, 2018. The following table provides additional information about the volume of this type of loan restructuring and the effect on the allowance for loan and lease losses in the first quarters of 2018 and 2017:

(In thousands)March 31, 2018March 31, 2017
Principal balance deemed collectible at end of period$35,553$36,564
Amount charged off$-$-
Charges to the provision for loan losses$1,412$915
Allowance for loan losses at end of period$5,258$6,056

Approximately $3.1 million of the loans restructured using the A/B note restructure workout strategy were in accrual status as of March 31, 2018. These loans continue to be individually evaluated for impairment purposes.