# FIRST BANCORP /PR/ (FBP) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FIRST BANCORP /PR/'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1057706/000105770624000004/fbp2023123110k.htm
Accession: 0001057706-24-000004
Filing date: 2024-02-28
Report date: 2023-12-31
Extracted from Item 7 to the first post-MD&A boundary after HTML sanitization.
Confidence: high

Company profile: /company/FBP/
All MD&A years: /company/FBP/mda/
Previous year: /company/FBP/mda/fy2022/ (FY 2022)
Next year: /company/FBP/mda/fy2024/ (FY 2024)

ITEM
 
7.
 
MANAGEMENT’S
 
DISCUSSION
 
AND
 
ANALYSIS
 
OF
 
FINANCIAL
 
CONDITION
 
AND
 
RESULTS
 
OF

OPERATIONS (“MD&A”)

The following MD&A
 
relates to the accompanying
 
audited consolidated financial
 
statements of First BanCorp.
 
(the “Corporation,”

“we,” “us,”
 
“our,”
 
or “First
 
BanCorp.”) and
 
should be
 
read in
 
conjunction
 
with such
 
financial statements
 
and the
 
notes thereto.
 
This

section also
 
presents certain
 
financial measures
 
that are not
 
based on
 
generally accepted
 
accounting principles
 
in the
 
United States
 
of

America
 
(“GAAP”).
 
See
 
“Non-GAAP
 
Financial
 
Measures
 
and
 
Reconciliations”
 
below
 
for
 
information
 
about
 
why
 
non-GAAP

financial measures are
 
presented, reconciliations
 
of non-GAAP financial
 
measures to the
 
most comparable GAAP
 
financial measures,

and references to non-GAAP financial measures reconciliations presented
 
in other sections.

The detailed financial discussion
 
that follows focuses on
 
2023 results compared to
 
2022. For a discussion of
 
2022 results compared

to 2021, see Part I, Item 7,
 
“Management’s Discussion
 
and Analysis of Financial Condition
 
and Results of Operations” included
 
in the

Corporation’s Annual Report
 
on Form 10-K for the year ended December 31, 2022, filed on February
 
28, 2023.

In
 
this
 
discussion
 
and
 
analysis
 
of
 
our
 
financial
 
condition
 
and
 
results
 
of
 
operations,
 
we
 
have
 
included
 
information
 
that
 
may

constitute
 
“forward-looking
 
statements”
 
within
 
the
 
meaning
 
of
 
the
 
safe
 
harbor
 
provisions
 
of
 
Section
 
27A
 
of
 
the
 
Securities
 
Act
 
and

Section 21E
 
of the
 
Exchange Act.
 
Forward-looking statements
 
are not
 
historical facts
 
or statements
 
of current
 
conditions, but
 
instead

represent only our beliefs
 
regarding future events, many
 
of which, by their nature,
 
are inherently uncertain and
 
outside our control. By

identifying
 
these statements
 
for you
 
in this
 
manner,
 
we are
 
alerting you
 
to the
 
possibility that
 
our actual
 
results, financial
 
condition,

liquidity and capital actions may differ materially
 
from the anticipated results, financial condition, liquidity
 
and capital actions in these

forward-looking
 
statements. Important
 
factors
 
that could
 
cause our
 
results, financial
 
condition, liquidity
 
and capital
 
actions to
 
differ

from those in these statements include, among others, those described in
 
“Risk Factors” in Part I, Item 1A of this Form 10-K.

EXECUTIVE SUMMARY

First BanCorp.
 
is a diversified
 
financial holding
 
company headquartered
 
in San Juan,
 
Puerto Rico offering
 
a full range
 
of financial

products to
 
consumers and
 
commercial customers
 
through various
 
subsidiaries. First
 
BanCorp.
 
is the
 
holding company
 
of FirstBank

Puerto
 
Rico
 
(“FirstBank”
 
or the
 
“Bank”)
 
and
 
FirstBank
 
Insurance
 
Agency.
 
Through
 
its wholly
 
-owned
 
subsidiaries,
 
the Corporation

operates
 
in
 
Puerto
 
Rico,
 
the
 
United
 
States
 
Virgin
 
Islands
 
(“USVI”),
 
the
 
British
 
Virgin
 
Islands
 
(“BVI”),
 
and
 
the
 
state
 
of
 
Florida,

concentrating on
 
commercial banking,
 
residential mortgage loans,
 
credit cards, personal
 
loans, small loans,
 
auto loans and
 
leases, and

insurance agency activities.

Significant Events

Economy and Market Volatility

The
 
Federal
 
Reserve
 
Board
 
has
 
implemented
 
monetary
 
policies
 
designed
 
to
 
curb
 
inflation.
 
On
 
January
 
11,
 
2024
 
the
 
Federal

Reserve Board published
 
the core Personal
 
Consumption Expenditures Price
 
Index over the
 
last 12 months,
 
which showed that
 
the all

items
 
index
 
increased
 
2.9
 
percent
 
before
 
seasonal
 
adjustment.
 
Other
 
recent
 
indicators
 
suggest
 
that
 
economic
 
activity
 
has
 
been

expanding. For 2023 as
 
a whole, GDP has expanded
 
at 3.1%. Although still strong,
 
the labor market remains
 
tight as payroll job
 
gains

have been well below those seen in 2022. In January 2024, the national unemployment
 
rate was 3.7% for the third month in a row.

Following
 
its
 
January
 
31,
 
2024
 
meeting,
 
the
 
Federal
 
Reserve
 
Board
 
announced
 
its
 
decision
 
to
 
leave
 
the
 
federal
 
funds
 
rate

unchanged,
 
at a
 
target
 
rate of
 
5.25% to
 
5.50%. The
 
Federal Reserve
 
Board commentary
 
suggested
 
that its
 
policy rate
 
is likely
 
at its

peak and
 
that, if
 
the economy
 
continues to
 
evolve as
 
expected, it
 
will likely
 
be dialing
 
back policy
 
restraint at
 
some point
 
this year.

Notwithstanding, it does not expect to reach such level of confidence by
 
the time of the March 2024 meeting.

The Corporation closed an unprecedented and challenging year for
 
the banking industry with strong financial performance and solid

loan
 
growth.
 
Core
 
deposits,
 
other
 
than
 
government
 
and
 
brokered,
 
contracted
 
due
 
to
 
the
 
use
 
of
 
excess
 
liquidity
 
across
 
all
 
market

segments. Although
 
the Corporation
 
is seeing
 
an expected
 
correction
 
in the
 
credit cycle
 
of the
 
consumer lending
 
business driven
 
by

lower
 
levels
 
of
 
excess
 
liquidity
 
and
 
inflationary
 
pressures,
 
the
 
Corporation
 
expects
 
its
 
ample
 
reserve
 
coverage
 
levels
 
and
 
risk

management framework to withstand the impact of any additional credit
 
deterioration during 2024.

For 2024, the Corporation expects a reduction in the overall
 
average cost of its deposits as interest rates start to decrease
 
but expects

to continue to
 
be impacted by the
 
shift from non-interest-bearing
 
deposits to interest-bearing
 
deposits, though at
 
a lower degree. Also,

the
 
Corporation
 
expects
 
some
 
reductions
 
in
 
deposit
 
balances
 
due
 
to
 
the
 
customers’
 
use
 
of
 
their
 
excess
 
liquidity,
 
which
 
could
 
be

replaced with
 
wholesale funding
 
sources. Assuming
 
no meaningful
 
changes to
 
deposit balances,
 
the Corporation
 
expects net
 
interest

income
 
to
 
improve
 
in
 
2024
 
since
 
approximately
 
$1
 
billion
 
in
 
expected
 
cash
 
inflows
 
from
 
the
 
repayments
 
and
 
maturities
 
of
 
the

investment portfolio, which is yielding less than 1.5%, will fund
 
loan growth or be reinvested in higher yielding securities.

42

The Corporation remains
 
confident that the economic
 
prospects of Puerto Rico,
 
its primary market,
 
driven by a strong
 
labor market

and
 
an
 
unprecedented
 
level
 
of
 
federal
 
support,
 
will
 
support
 
the
 
Corporation
 
in
 
continuing
 
to
 
have
 
a
 
strong
 
financial
 
performance,

sustainable levels of loan growth, and any additional credit deterioration
 
contained.

Return of Capital to Shareholders and Dividend
 
Payment Increase

In 2023, the
 
Corporation returned approximately
 
$300 million, or close
 
to 100% of 2023
 
earnings, to its shareholders
 
through $200

million in repurchases of common stock and the payment of approximately
 
$100 million in common stock dividends.

For
 
the
 
year
 
ended
 
December
 
31,
 
2023,
 
the
 
Corporation
 
repurchased
 
14.1
 
million
 
shares of
 
its common
 
stock
 
for
 
a
 
total cost
 
of

$200
 
million.
 
Of
 
this
 
total,
 
$75
 
million
 
of
 
common
 
stock,
 
representing
 
5.1
 
million
 
common
 
shares
 
at
 
a
 
weighted-average
 
price
 
of

$14.76,
 
were
 
repurchased
 
under
 
the
 
$225
 
million
 
stock
 
repurchase
 
program
 
announced
 
on
 
July
 
24,
 
2023
 
(the
 
“2023
 
Repurchase

Plan”). As
 
of February
 
21, 2024,
 
the Corporation has
 
repurchased approximately
 
7.1 million
 
shares of common
 
stock totaling
 
$107.9

million
 
through open
 
market purchases
 
under the
 
2023 Repurchase
 
Plan. With
 
the additional
 
purchases, the
 
Corporation has
 
$117.1

million
 
remaining
 
for
 
share
 
repurchases
 
under
 
the
 
2023
 
Repurchase
 
Plan,
 
which
 
it
 
expects
 
to
 
execute
 
through
 
the
 
end
 
of
 
the
 
third

quarter of 2024.

On February
 
8, 2024,
 
the Corporation’s
 
Board of
 
Directors declared
 
a quarterly
 
cash dividend
 
of $0.16
 
per common
 
share, which

represents
 
an
 
increase
 
of
 
$0.02
 
per
 
common
 
share,
 
or
 
a
 
14%
 
increase,
 
compared
 
to
 
its
 
most
 
recent
 
quarterly
 
dividend
 
paid
 
in

December 2023.
 
The dividend
 
is payable
 
on March
 
8, 2024,
 
to shareholders
 
of record
 
at the close
 
of business
 
on February
 
23, 2024.

The increased quarterly dividend level equates to an annualized dividend
 
of $0.64 per common share.

Legislative and Regulatory

A
 
comprehensive
 
discussion
 
of
 
legislative
 
and
 
regulatory
 
matters
 
affecting
 
us
 
can
 
be
 
found
 
in
 
Part
 
I,
 
Item
 
1,
 
“Business
 
–

Supervision and Regulation” of this Form 10-K.

43

Overview of Results of Operations

The
 
Corporation’s
 
results
 
of operations
 
depend
 
primarily
 
on
 
its
 
net
 
interest
 
income,
 
which
 
is
 
the
 
difference
 
between
 
the
 
interest

income
 
earned
 
on
 
its
 
interest-earning
 
assets,
 
including
 
investment
 
securities
 
and
 
loans,
 
and
 
the
 
interest
 
expense
 
incurred
 
on
 
its

interest-bearing
 
liabilities,
 
including
 
deposits
 
and
 
borrowings.
 
Net
 
interest
 
income
 
is
 
affected
 
by
 
various
 
factors,
 
including
 
the

following:
 
(i)
 
the
 
interest
 
rate
 
environment;
 
(ii)
 
the
 
volumes,
 
mix,
 
and
 
composition
 
of
 
interest-earning
 
assets,
 
and
 
interest-bearing

liabilities; and
 
(iii) the
 
repricing
 
characteristics of
 
these assets
 
and liabilities.
 
The Corporation
 
’s
 
results of
 
operations also
 
depend on

the
 
provision
 
for
 
credit
 
losses,
 
non-interest
 
expenses
 
(such
 
as
 
personnel,
 
occupancy,
 
professional
 
service
 
fees,
 
the
 
FDIC
 
insurance

premium,
 
and
 
other
 
costs),
 
non-interest
 
income
 
(mainly
 
service
 
charges
 
and
 
fees
 
on
 
deposits,
 
cards
 
and
 
processing
 
income,
 
and

insurance income), gains (losses) on mortgage banking activities, and income
 
taxes.

The
 
Corporation
 
had
 
net
 
income
 
of
 
$302.9
 
million,
 
or
 
$1.71
 
per
 
diluted
 
common
 
share,
 
for
 
the
 
year
 
ended
 
December
 
31,
 
2023,

compared
 
to
 
$305.1
 
million,
 
or
 
$1.59
 
per
 
diluted
 
common
 
share,
 
for
 
the
 
year
 
ended
 
December
 
31,
 
2022.
 
Other
 
relevant
 
selected

financial indicators for the periods presented are included below:

Year
 
Ended December 31,

2023

2022

2021

Key Performance Indicator:

(1)

Return on Average
 
Assets

(2)

1.62

%

1.57

%

1.38

%

Return on Average
 
Common Equity

(3)

21.86

18.66

12.56

Efficiency Ratio

(4)

50.70

48.25

57.45

(1)

These financial ratios are used by management to monitor the Corporation’s
 
financial performance and whether it is using its assets efficiently.

(2)

Indicates how profitable the Corporation is in relation to its total assets
 
and is calculated by dividing net income by its average total
 
assets.

(3)

Measures the Corporation’s performance
 
based on its average common stockholders’ equity and is calculated
 
by dividing net income by its average total common stockholders’
 
equity.

(4)

Measures how much the Corporation incurred to generate a
 
dollar of revenue and is calculated by dividing non-interest expenses
 
by total revenue.

The key
 
drivers of
 
the Corporation’s
 
GAAP financial
 
results for
 
the year
 
ended December
 
31, 2023,
 
compared to
 
the year
 
ended

December 31, 2022, include the following:

●

Net interest
 
income for
 
the year
 
ended December
 
31, 2023
 
increased to
 
$797.1 million,
 
compared to
 
$795.3 million
 
for the

year ended December 31, 2022. The increase in net interest income
 
reflects a 10 basis points increase in net interest margin to

4.22%,
 
which
 
was mainly
 
associated
 
with the
 
effect
 
of both
 
a higher
 
interest rate
 
environment,
 
driving
 
an increase
 
in loan

and investment security yields, and the growth
 
in the consumer loan portfolio, partially offset
 
by higher rates paid on deposits

coupled
 
with
 
a
 
change
 
in
 
the
 
mix
 
of
 
deposit
 
and
 
borrowing
 
composition.
 
See
 
"Net
 
Interest
 
Income"
 
below
 
for
 
additional

information.

●

The provision
 
for credit
 
losses on
 
loans, finance
 
leases, unfunded
 
loan commitments
 
and debt
 
securities for
 
the year
 
ended

December 31,
 
2023 was
 
$60.9 million,
 
compared to
 
$27.7 million
 
for the
 
year ended
 
December 31,
 
2022. The
 
increase was

mainly driven by a
 
combination of loan growth,
 
higher delinquency and historical
 
charge-off levels
 
in the consumer loan
 
and

finance
 
lease
 
portfolios,
 
and
 
the
 
effect
 
in
 
2022
 
of
 
reductions
 
in
 
qualitative
 
reserves
 
associated
 
with
 
reduced
 
uncertainty

around the
 
economic impact
 
of the COVID-19
 
pandemic, particularly
 
on loans in
 
the hotel, transportation
 
and entertainment

industries.

Net charge-offs
 
totaled $67.4
 
million for
 
the year
 
ended December
 
31, 2023,
 
or 0.58%
 
of average
 
loans,
 
compared to
 
$34.2

million,
 
or
 
0.31%
 
of
 
average
 
loans,
 
for
 
the
 
year
 
ended
 
December
 
31,
 
2022,
 
mainly
 
driven
 
by
 
a
 
$29.1
 
million
 
increase
 
in

consumer loans
 
and finance leases
 
net charge-offs.
 
See “Provision for
 
Credit Losses” and
 
“Risk Management”
 
below for the

analysis of the allowance for credit losses (“ACL”) and non-performing
 
assets and related ratios.

●

The Corporation
 
recorded non-interest income
 
of $132.7 million
 
for the year
 
ended December 31,
 
2023, compared to
 
$123.1

million for
 
the year
 
ended December
 
31, 2022.
 
The increase
 
of $9.6
 
million in
 
non-interest income
 
was mainly
 
driven by
 
a

$3.6
 
million
 
gain
 
recognized
 
from
 
a
 
legal
 
settlement,
 
a
 
$3.5
 
million
 
increase
 
in
 
card
 
and
 
processing
 
income,
 
and
 
a
 
$3.0

million
 
gain
 
related
 
to the
 
sale of
 
banking
 
premise
 
in the
 
Florida
 
region,
 
partially
 
offset
 
by lower
 
revenues from
 
mortgage

banking activities. See “Non-Interest Income”
 
below for additional information.

44

●

The
 
Corporation
 
recorded
 
non-interest
 
expenses
 
of
 
$471.4
 
million
 
for
 
the
 
year
 
ended
 
December
 
31,
 
2023,
 
compared
 
to

$443.1 million for
 
the year ended
 
December 31, 2022.
 
The increase of
 
$28.3 million in
 
non-interest expenses
 
mainly reflects

a $16.8
 
million increase
 
in employees’
 
compensation and
 
benefits expenses,
 
mostly driven
 
by annual
 
salary merit
 
increases

and
 
minimum
 
wage adjustments,
 
and
 
a FDIC
 
special assessment
 
expense
 
of $6.3
 
million. The
 
efficiency
 
ratio for
 
the year

ended
 
December
 
31,
 
2023
 
was
 
50.70%,
 
compared
 
to
 
48.25%
 
for
 
the
 
year
 
ended
 
December
 
31,
 
2022.
 
See
 
“Non-Interest

Expenses” below for additional information.

●

Income tax
 
expense decreased to
 
$94.6 million
 
for the year
 
ended December
 
31, 2023, compared
 
to $142.5 million
 
for 2022

driven by a
 
lower effective
 
tax rate and
 
lower pre-tax income.
 
The Corporation’s
 
annual effective
 
tax rate, excluding
 
entities

with pre-tax
 
losses from which
 
a tax benefit
 
cannot be
 
recognized and
 
discrete items, decreased
 
to 23.5%
 
for the year
 
ended

December 31,
 
2023, compared
 
to 31.2%
 
for 2022. See
 
“Income Taxes”
 
below and
 
Note 22 –
 
“Income Taxes
 
”
 
to the audited

consolidated financial statements included in Part II, Item 8 of this Form
 
10-K for additional information.

●

As of
 
December 31,
 
2023, total
 
assets were
 
approximately $18.9
 
billion, an
 
increase of
 
$275.1 million
 
from December
 
31,

2022,
 
primarily reflecting
 
a $627.7
 
million increase
 
in the
 
total loan
 
portfolio before
 
the ACL and
 
a $182.7
 
million increase

in
 
cash
 
and
 
cash
 
equivalents,
 
partially
 
offset
 
by
 
a
 
$452.4
 
million
 
decrease
 
in
 
total
 
investment
 
securities
 
net
 
of
 
a
 
$165.4

million increase in the fair value of available-for-sale debt
 
securities.

●

As of December
 
31, 2023,
 
total liabilities were
 
$17.4 billion,
 
an increase of
 
$103.0 million
 
from December
 
31, 2022, driven

by
 
a
 
$412.5
 
million
 
increase
 
in
 
total
 
deposits,
 
which
 
includes
 
a
 
$677.5
 
million
 
increase
 
in
 
brokered
 
certificates
 
of
 
deposit

(“CDs”), partially offset
 
by a $272.2 million decrease
 
in borrowings,
 
primarily in short-term borrowings.
 
See “Liquidity Risk

Management”
 
below for additional information about the Corporation’s
 
funding sources and strategy.

●

The Bank’s
 
primary sources of funding
 
are consumer and commercial
 
core deposits, which exclude
 
government deposits and

brokered
 
CDs.
 
As
 
of
 
December
 
31,
 
2023,
 
these
 
core
 
deposits,
 
amounting
 
to
 
$12.6
 
billion,
 
funded
 
66.64%
 
of
 
total
 
assets.

Excluding
 
fully
 
collateralized
 
government
 
deposits,
 
estimated
 
uninsured
 
deposits amounted
 
to $4.4
 
billion
 
as of
 
December

31, 2023. In
 
addition to approximately
 
$2.8 billion in
 
cash and free
 
high-quality liquid
 
assets, the Bank
 
maintains borrowing

capacity
 
at
 
the
 
Federal
 
Home
 
Loan
 
Bank
 
(“FHLB”)
 
and
 
the
 
Federal
 
Reserve
 
Bank
 
of
 
New
 
York
 
’s
 
(the
 
“FED”)
 
Discount

Window.
 
As of
 
December 31,
 
2023,
 
the Corporation
 
had approximately
 
$1.5 billion
 
available for
 
funding under
 
the FED’s

Discount Window and
 
$924.2 million available for
 
additional borrowing capacity on FHLB
 
lines of credit based on
 
collateral

pledged
 
at
 
these
 
entities.
 
On
 
a
 
combined
 
basis,
 
as
 
of
 
December
 
31,
 
2023,
 
the
 
Corporation
 
had
 
$5.2
 
billion,
 
or
 
118%
 
of

estimated
 
uninsured
 
deposits,
 
available
 
to
 
meet
 
liquidity
 
needs.
 
See
 
“Liquidity
 
Risk
 
Management”
 
below
 
for
 
additional

information about the Corporation’s
 
funding sources and strategy.

●

As of
 
December 31,
 
2023, the
 
Corporation’s
 
total stockholders’
 
equity was
 
$1.5 billion,
 
an increase
 
of $172.1
 
million from

December 31, 2022, mainly
 
driven by a $165.4 million increase
 
in the fair value of
 
available-for-sale debt securities recorded

as
 
part
 
of
 
accumulated
 
other
 
comprehensive
 
loss
 
and
 
net
 
income
 
generated
 
in
 
2023,
 
partially
 
offset
 
by
 
$200.0
 
million
 
in

repurchases
 
of
 
common
 
stock
 
and
 
$99.6
 
million
 
in
 
dividends
 
declared
 
in
 
2023.
 
The
 
Corporation’s
 
CET1
 
capital,
 
tier
 
1

capital, total capital,
 
and leverage ratios
 
were 16.10%, 16.10%,
 
18.57%, and 10.78%,
 
respectively,
 
as of December
 
31, 2023,

compared
 
to
 
CET1
 
capital,
 
tier
 
1
 
capital,
 
total
 
capital,
 
and
 
leverage
 
ratios
 
of
 
16.53%,
 
16.53%,
 
19.21%,
 
and
 
10.70%,

respectively, as of
 
December 31, 2022.
 
See “Risk Management – Capital” below for additional information.

●

Total
 
loan
 
production,
 
including
 
purchases,
 
refinancings,
 
renewals,
 
and
 
draws
 
from
 
existing
 
revolving
 
and
 
non-revolving

commitments, decreased
 
by $230.8
 
million to
 
$5.1 billion
 
for the
 
year ended
 
December 31,
 
2023. See
 
“Financial Condition

and Operating Data Analysis” below for additional information.

●

Total
 
non-performing
 
assets were
 
$125.9 million
 
as of
 
December 31,
 
2023, a
 
decrease of
 
$3.3 million,
 
from December
 
31,

2022,
 
primarily
 
related
 
to
 
a
 
decrease
 
of
 
$10.6
 
million
 
in
 
nonaccrual
 
residential
 
mortgage
 
loans,
 
partially
 
offset
 
by
 
a
 
$7.6

million increase in nonaccrual consumer
 
loans, mainly in the auto loan and
 
finance lease portfolios.
 
See “Risk Management –

Nonaccrual Loans and Non-Performing Assets” below for additional information.

●

Adversely
 
classified
 
commercial
 
and
 
construction
 
loans
 
decreased
 
by
 
$26.1
 
million
 
to
 
$67.5
 
million
 
as
 
of
 
December
 
31,

2023,
 
compared to
 
December 31,
 
2022, mainly
 
driven by
 
the payoff
 
of a
 
$24.3 million
 
commercial
 
and industrial
 
(“C&I”)

participated loan in the Florida region.

45

NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS

The Corporation
 
has included
 
in this
 
Form 10-K
 
the following
 
financial measures
 
that are
 
not recognized
 
under GAAP,
 
which are

referred to as non-GAAP financial measures:

Net Interest Income,
 
Interest Rate Spread,
 
and Net Interest Margin, Excluding
 
Valuations
 
,
 
and on a Tax
 
-Equivalent Basis

Net interest
 
income, interest
 
rate spread,
 
and net
 
interest margin,
 
excluding the
 
changes in
 
the fair
 
value of
 
derivative instruments

and on
 
a tax-equivalent
 
basis, are
 
reported in
 
order to
 
provide to
 
investors additional
 
information about
 
the Corporation’s
 
net interest

income
 
that management
 
uses and
 
believes should
 
facilitate comparability and
 
analysis of
 
the periods
 
presented.
 
The changes
 
in the

fair value
 
of derivative
 
instruments have
 
no effect
 
on interest
 
due or
 
interest earned
 
on interest-bearing
 
liabilities or
 
interest-earning

assets, respectively.
 
The tax-equivalent
 
adjustment to
 
net interest
 
income recognizes
 
the income
 
tax savings
 
when comparing
 
taxable

and
 
tax-exempt
 
assets
 
and
 
assumes
 
a
 
marginal
 
income
 
tax
 
rate.
 
Income
 
from
 
tax-exempt
 
earning
 
assets
 
is
 
increased
 
by
 
an
 
amount

equivalent to
 
the taxes
 
that would
 
have been
 
paid if
 
this income
 
had been
 
taxable at
 
statutory rates.
 
Management believes
 
that it
 
is a

standard
 
practice
 
in
 
the banking
 
industry
 
to
 
present
 
net
 
interest
 
income,
 
interest
 
rate
 
spread,
 
and
 
net
 
interest
 
margin
 
on
 
a
 
fully
 
tax-

equivalent basis. This adjustment
 
puts all earning assets, most notably
 
tax-exempt securities and tax-exempt
 
loans, on a common basis

that facilitates comparison of results to the results of peers.

See “Result of Operations
 
– Net Interest Income”
 
below, for
 
the table that reconciles
 
net interest income
 
in accordance with GAAP

to
 
the
 
non-GAAP
 
financial
 
measure
 
of
 
net
 
interest
 
income,
 
excluding
 
valuations,
 
and
 
on
 
a
 
tax-equivalent
 
basis
 
for
 
the
 
indicated

periods. The table also reconciles
 
net interest spread and
 
net interest margin on
 
a GAAP basis to these items
 
excluding valuations, and

on a tax-equivalent basis.

Tangible
 
Common Equity Ratio and Tangible
 
Book Value
 
Per Common Share

The tangible
 
common equity
 
ratio and
 
tangible book
 
value per
 
common share
 
are non-GAAP
 
financial measures
 
that management

believes are generally
 
used by the financial
 
community to evaluate
 
capital adequacy.
 
Tangible
 
common equity is total
 
common equity

less
 
goodwill
 
and
 
other
 
intangibles.
 
Similarly,
 
tangible
 
assets
 
are
 
total
 
assets
 
less
 
goodwill
 
and
 
other
 
intangibles.
 
Management
 
and

many
 
stock
 
analysts
 
use
 
the
 
tangible
 
common
 
equity
 
ratio
 
and
 
tangible
 
book
 
value
 
per
 
common
 
share
 
in
 
conjunction
 
with
 
more

traditional bank capital
 
ratios to compare
 
the capital adequacy
 
of banking organizations
 
with significant
 
amounts of goodwill
 
or other

intangible assets,
 
typically stemming
 
from the
 
use of
 
the purchase
 
method of
 
accounting for
 
mergers
 
and acquisitions.
 
Accordingly,

the Corporation
 
believes that
 
disclosures of
 
these financial
 
measures may
 
be useful to
 
investors. Neither
 
tangible common
 
equity nor

tangible assets, or the related measures,
 
should be considered in isolation or
 
as a substitute for stockholders’ equity,
 
total assets, or any

other measure
 
calculated in
 
accordance with
 
GAAP.
 
Moreover,
 
the manner
 
in which
 
the Corporation
 
calculates its
 
tangible common

equity, tangible assets, and
 
any other related measures may differ from that of other companies reporting
 
measures with similar names.

See “Risk
 
Management –
 
Capital” below
 
for the
 
table that
 
reconciles the
 
Corporation’s
 
total equity
 
and total
 
assets in
 
accordance

with GAAP to
 
the tangible common
 
equity and tangible
 
assets figures used
 
to calculate the
 
non-GAAP financial measures
 
of tangible

common equity ratio and tangible book value per common share.

Adjusted Net Income,
 
Adjusted Non-Interest Income and Adjusted Non-Interest
 
Expenses

To
 
supplement the
 
Corporation’s