XNYS:FBP First BanCorp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNYS:FBP (First BanCorp): Fair Value Estimate
Premium
XNYS:FBP (First BanCorp): Consider Buying
Premium
XNYS:FBP (First BanCorp): Consider Selling
Premium
XNYS:FBP (First BanCorp): Fair Value Uncertainty
Premium
XNYS:FBP (First BanCorp): Economic Moat
Premium
XNYS:FBP (First BanCorp): Stewardship
Premium
 
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2012

 

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

For the transition period from              to             

COMMISSION FILE NUMBER 001-14793

 

 

FIRST BANCORP.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

 

Puerto Rico    66-0561882

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. employer

identification number)

1519 Ponce de León Avenue, Stop 23

Santurce, Puerto Rico

   00908
(Address of principal executive offices)    (Zip Code)

(787) 729-8200

(Registrant’s telephone number, including area code)

Not applicable

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

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

Common stock: 206,134,458 outstanding as of April 30, 2012.

 

 

 


Table of Contents

FIRST BANCORP.

INDEX PAGE

 

         PAGE  
PART I. FINANCIAL INFORMATION   

Item 1.

 

Financial Statements:

  
 

Consolidated Statements of Financial Condition (Unaudited) as of March 31, 2012 and December  31, 2011

     5   
 

Consolidated Statements of Loss (Unaudited) – Quarters ended March 31, 2012 and March  31, 2011

     6   
 

Consolidated Statements of Comprehensive Loss (Unaudited) – Quarters ended March  31, 2012 and March 31, 2011

     7   
 

Consolidated Statements of Cash Flows (Unaudited) – Quarters ended March 31, 2012 and March  31, 2011

     8   
 

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Quarters ended March 31, 2012 and March 31, 2011

     9   
 

Notes to Consolidated Financial Statements (Unaudited)

     10   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     51   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     96   

Item 4.

 

Controls and Procedures

     96   
PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     97   

Item 1A.

 

Risk Factors

     97   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     97   

Item 3.

 

Defaults Upon Senior Securities

     97   

Item 4.

 

Mine Safety Disclosures

     97   

Item 5.

 

Other Information

     97   

Item 6.

 

Exhibits

     97   

 

SIGNATURES

     98   

 

2


Table of Contents

Forward Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q or future filings by First BanCorp. (the “Corporation”) with the Securities and Exchange Commission (“SEC”), in the Corporation’s press releases or in other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the word or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “should,” “anticipate” and similar expressions are meant to identify “forward-looking statements.”

First BanCorp wishes to caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and represent First BanCorp’s expectations of future conditions or results and are not guarantees of future performance. First BanCorp advises readers that various factors could cause actual results to differ materially from those contained in any “forward-looking statement.” Such factors include, but are not limited to, the following:

 

   

uncertainty about whether the Corporation and FirstBank Puerto Rico (“FirstBank” or “the Bank”) will be able to fully comply with the written agreement dated June 3, 2010 (the “Written Agreement”) that the Corporation entered into with the Federal Reserve Bank of New York (the “FED” or “Federal Reserve”) and the order dated June 2, 2010 (the “FDIC Order”) and together with the Written Agreement, (the “Agreements”) that the Corporation’s banking subsidiary, FirstBank entered into with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF”) that, among other things, require the Bank to maintain certain capital levels and reduce its special mention, classified, delinquent and non-performing assets;

 

   

the risk of being subject to possible additional regulatory actions;

 

   

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

 

   

the Corporation’s reliance on brokered CDs and its ability to obtain, on a periodic basis, approval from the FDIC to issue brokered CDs to fund operations and provide liquidity in accordance with the terms of the FDIC Order;

 

   

the risk of not being able to fulfill the Corporation’s cash obligations or resume paying dividends to the Corporation’s stockholders in the future due to the Corporation’s inability to receive approval from the FED to receive dividends from FirstBank or FirstBank’s failure to generate sufficient cash flow to make a dividend payment to the Corporation;

 

   

the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and their impact on the credit quality of the Corporation’s loans and other assets, including the Corporation’s construction and commercial real estate loan portfolios, which have contributed and may continue to contribute to, among other things, the high levels of non-performing assets, charge-offs and the provision expense and may subject the Corporation to further risk from loan defaults and foreclosures;

 

   

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

 

   

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

 

   

a decrease in demand for the Corporation’s products and services and lower revenues and earnings because of the continued recession in Puerto Rico and the current fiscal problems and budget deficit of the Puerto Rico government;

 

   

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

 

   

uncertainty about the effectiveness of the various actions undertaken to stimulate the U.S. economy and stabilize the U.S. financial markets, and the impact such actions may have on the Corporation’s business, financial condition and results of operations;

 

3


Table of Contents
   

changes in the fiscal and monetary policies and regulations of the federal government, including those determined by the Federal Reserve, the FDIC, government-sponsored housing agencies and local regulators in Puerto Rico and the U.S. and BVI;

 

   

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

 

   

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

 

   

the risk of not being able to recover the assets pledged to Lehman Brothers Special Financing, Inc.;

 

   

the impact to the Corporation’s results of operations and financial condition associated with acquisitions and dispositions;

 

   

a need to recognize additional impairments on financial instruments or goodwill relating to acquisitions;

 

   

risks that downgrades in the credit ratings of the Corporation’s long-term senior debt will adversely affect the Corporation’s ability to access necessary external funds;

 

   

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on the Corporation’s businesses, business practices and cost of operations; and

 

   

general competitive factors and industry consolidation.

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

Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

 

4


Table of Contents

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

(In thousands, except for share information)    March 31, 2012     December 31, 2011  

ASSETS

    

Cash and due from banks

   $ 380,065      $ 206,897   
  

 

 

   

 

 

 

Money market investments:

    

Federal funds sold

     1,069        2,603   

Time deposits with other financial institutions

     955        955   

Other short-term investments

     236,116        236,111   
  

 

 

   

 

 

 

Total money market investments

     238,140        239,669   
  

 

 

   

 

 

 

Investment securities available for sale, at fair value:

    

Securities pledged that can be repledged

     1,169,822        1,167,265   

Other investment securities

     673,662        756,003   
  

 

 

   

 

 

 

Total investment securities available for sale

     1,843,484        1,923,268   
  

 

 

   

 

 

 

Other equity securities

     37,951        37,951   
  

 

 

   

 

 

 

Investment in unconsolidated entities

     36,990        43,401   
  

 

 

   

 

 

 

Loans, net of allowance for loan and lease losses of $483,943 (2011 - $493,917)

     9,811,842        10,065,475   

Loans held for sale, at lower of cost or market

     44,352        15,822   
  

 

 

   

 

 

 

Total loans, net

     9,856,194        10,081,297   
  

 

 

   

 

 

 

Premises and equipment, net

     189,966        194,942   

Other real estate owned

     135,905        114,292   

Accrued interest receivable on loans and investments

     47,840        49,957   

Other assets

     319,088        235,601   
  

 

 

   

 

 

 

Total assets

   $ 13,085,623      $ 13,127,275   
  

 

 

   

 

 

 

LIABILITIES

    

Non-interest-bearing deposits

   $ 761,744      $ 705,789   

Interest-bearing deposits

     9,146,500        9,201,965   
  

 

 

   

 

 

 

Total deposits

     9,908,244        9,907,754   

Securities sold under agreements to repurchase

     1,000,000        1,000,000   

Advances from the Federal Home Loan Bank (FHLB)

     353,440        367,440   

Notes payable (including $16,016 and $15,968 measured at fair value as of March 31, 2012 and December 31, 2011, respectively)

     16,016        23,342   

Other borrowings

     231,959        231,959   

Accounts payable and other liabilities

     142,941        152,636   
  

 

 

   

 

 

 

Total liabilities

     11,652,600        11,683,131   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 22)

    

STOCKHOLDERS’ EQUITY

    

Preferred stock, authorized 50,000,000 shares:

    

Non-cumulative Perpetual Monthly Income Preferred Stock: issued - 22,004,000 shares, outstanding - 2,521,872 shares, aggregate liquidation value of $63,047

     63,047        63,047   

Common stock, $0.10 par value, authorized 2,000,000,000 shares; issued 206,629,311 shares (2011 - 205,794,024 shares issued)

     20,663        20,579   

Less: Treasury stock (at par value)

     (49     (66
  

 

 

   

 

 

 

Common stock outstanding, 206,134,458 shares outstanding (2011 - 205,134,171 shares outstanding)

     20,614        20,513   
  

 

 

   

 

 

 

Additional paid-in capital

     884,938        884,002   

Retained earnings

     444,202        457,384   

Accumulated other comprehensive income, net of tax expense of $7,534 (2011 - $7,751)

     20,222        19,198   
  

 

 

   

 

 

 

Total stockholders’ equity

     1,433,023        1,444,144   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 13,085,623      $ 13,127,275   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

5


Table of Contents

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF LOSS

(Unaudited)

 

(In thousands, except per share data)    Quarter Ended  
     March 31,
2012
    March 31,
2011
 

Interest income:

    

Loans

   $ 140,526      $ 157,971   

Investment securities

     11,212        22,623   

Money market investments

     369        309   
  

 

 

   

 

 

 

Total interest income

     152,107        180,903   
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     36,735        54,059   

Securities sold under agreements to repurchase

     8,090        13,136   

Advances from FHLB

     3,241        4,745   

Notes payable and other borrowings

     2,175        2,684   
  

 

 

   

 

 

 

Total interest expense

     50,241        74,624   
  

 

 

   

 

 

 

Net interest income

     101,866        106,279   
  

 

 

   

 

 

 

Provision for loan and lease losses

     36,197        88,732   
  

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     65,669        17,547   
  

 

 

   

 

 

 

Non-interest income:

    

Service charges on deposit accounts

     3,247        3,332   

Other service charges

     1,519        1,718   

Mortgage banking activities

     4,475        6,591   

Net gain on sale of investments

     26        19,341   

Other-than-temporary impairment losses on investment securities:

    

Total other-than-temporary impairment losses

     —          —     

Portion of loss previously recognized in other comprehensive income

     (1,233     —     
  

 

 

   

 

 

 

Net impairment losses on investment securities

     (1,233     —     

Equity in losses of unconsolidated entities

     (6,236     —     

Other non-interest income

     6,677        9,503   
  

 

 

   

 

 

 

Total non-interest income

     8,475        40,485   
  

 

 

   

 

 

 

Non-interest expenses:

    

Employees’ compensation and benefits

     31,611        30,439   

Occupancy and equipment

     15,676        15,250   

Business promotion

     2,547        2,664   

Professional fees

     5,179        5,137   

Taxes, other than income taxes

     3,416        3,255   

Insurance and supervisory fees

     13,008        15,177   

Net loss on real estate owned (REO) operations

     3,443        5,500   

Other non-interest expenses

     10,313        5,444   
  

 

 

   

 

 

 

Total non-interest expenses

     85,193        82,866   
  

 

 

   

 

 

 

Loss before income taxes

     (11,049     (24,834

Income tax expense

     (2,133     (3,586
  

 

 

   

 

 

 

Net loss

   $ (13,182   $ (28,420
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (13,182   $ (35,437
  

 

 

   

 

 

 

Net loss per common share:

    

Basic

   $ (0.06   $ (1.66
  

 

 

   

 

 

 

Diluted

   $ (0.06   $ (1.66
  

 

 

   

 

 

 

Dividends declared per common share

   $ —        $ —     
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

6


Table of Contents

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

     Quarter Ended  
     March 31,
2012
    March 31,
2011
 

Net loss

   $ (13,182   $ (28,420
  

 

 

   

 

 

 

Available-for-sale debt securities on which an other-than-temporary impairment has been recognized:

    

Subsequent unrealized gain on debt securities on which an other-than-temporary impairment has been recognized

     3,397        751   

Reclassification adjustment for other-than-temporary impairment on debt securities included in net income

     (1,233     —     

All other unrealized gains and losses on available-for-sale securities:

    

All other unrealized holding losses arising during the period

     (1,357     (5,932

Reclassification adjustments for net gain included in net income

     —          (48

Net unrealized gains on securities reclassified from held to maturity to available for sale

     —          2,789   

Income tax benefit related to items of other comprehensive income

     217        146   
  

 

 

   

 

 

 

Other comprehensive income (loss) for the period, net of tax

     1,024        (2,294
  

 

 

   

 

 

 

Total comprehensive loss

   $ (12,158   $ (30,714
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

7


Table of Contents

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Quarter Ended  
(In thousands)    March 31,
2012
    March 31,
2011
 

Cash flows from operating activities:

    

Net Loss

   $ (13,182   $ (28,420
  

 

 

   

 

 

 

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

    

Depreciation

     6,440        5,810   

Amortization and impairment of core deposit intangible

     589        589   

Provision for loan and lease losses

     36,197        88,732   

Deferred income tax expense

     714        1,746   

Stock-based compensation recognized

     —          24   

Gain on sale of investments, net

     —          (18,710

Other-than-temporary impairments on investment securities

     1,233        —     

Derivatives instruments and financial liabilities measured at fair value (gain) loss

     (456     518   

Equity in losses of unconsolidated entities

     6,236        —     

Loss (gain) on sale of premises and equipment and other assets

     272        (2,845

Net gain on sale of loans held for investment and impairments

     (132     (5,505

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

     (886     395   

Originations and purchases of loans held for sale

     (69,979     (21,809

Proceeds from sales and repayments of loans held for sale

     96,119        20,427   

Amortization of broker placement fees

     2,774        5,359   

Net amortization of premium and discounts on investment securities

     3,754        1,736   

(Decrease) increase in accrued income tax payable

     (1,787     1,642   

Decrease in accrued interest receivable

     1,617        3,481   

Decrease in accrued interest payable

     (1,198     (22

Decrease (increase) in other assets

     14,041        (2,355

Increase (decrease) in other liabilities

     4,028        (7,145
  

 

 

   

 

 

 

Total adjustments

     99,576        72,068   
  

 

 

   

 

 

 

Net cash provided by operating activities

     86,394        43,648   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Principal collected on loans

     592,965        569,498   

Loans originated

     (457,219     (503,164

Purchases of loans

     (34,899     (32,728

Proceeds from sale of loans held for investment

     5,225        330,978   

Proceeds from sale of repossessed assets

     26,784        21,920   

Proceeds from sale of available-for-sale securities

     —          41,422   

Proceeds from sale of held-to-maturity securities

     —          348,798   

Purchases of securities available for sale

     (164,120     —     

Proceeds from principal repayments and maturities of securities available for sale

     140,442        106,117   

Proceeds from principal repayments and maturities of securities held to maturity

     —          33,726   

Additions to premises and equipment

     (2,744     (3,810

Proceeds from sale of premises and equipment and other assets

     1,008        2,940   

Proceeds from securities litigation settlement and other proceeds

     26        631   

Decrease in other equity securities

     —          4,500   
  

 

 

   

 

 

 

Net cash provided by investing activities

     107,468        920,828   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net decrease in deposits

     (2,745     (348,465

Repayments of medium-term notes

     (6,515     —     

Net FHLB advances paid

     (14,000     (113,000

Proceeds from common stock sold

     1,037        —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (22,223     (461,465
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     171,639        503,011   

Cash and cash equivalents at beginning of period

     446,566        370,283   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 618,205      $ 873,294   
  

 

 

   

 

 

 

Cash and cash equivalents include:

    

Cash and due from banks

   $ 380,065      $ 663,581   

Money market instruments

     238,140        209,713   
  

 

 

   

 

 

 
   $ 618,205      $ 873,294   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

8


Table of Contents

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

     Quarter Ended  
(In thousands)    March 31,
2012
    March 31,
2011
 

Preferred Stock:

    

Balance at beginning of period

   $ 63,047      $ 425,009   

Accretion of preferred stock discount

     —          1,715   
  

 

 

   

 

 

 

Balance at end of period

     63,047        426,724   
  

 

 

   

 

 

 

Common Stock outstanding:

    

Balance at beginning of period

     20,513        2,130   

Common stock sold

     29        —     

Restricted stock grants

     72        —     
  

 

 

   

 

 

 

Balance at end of period

     20,614        2,130   
  

 

 

   

 

 

 

Additional Paid-In-Capital:

    

Balance at beginning of period

     884,002        319,459   

Restricted stock grants

     (72     —     

Common stock sold

     1,008        —     

Stock-based compensation recognized

     —          24   
  

 

 

   

 

 

 

Balance at end of period

     884,938        319,483   
  

 

 

   

 

 

 

Retained Earnings:

    

Balance at beginning of period

     457,384        293,643   

Net loss

     (13,182     (28,420

Accretion of preferred stock discount

     —          (1,715
  

 

 

   

 

 

 

Balance at end of period

     444,202        263,508   
  

 

 

   

 

 

 

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

    

Balance at beginning of period

     19,198        17,718   

Other comprehensive income (loss), net of tax

     1,024        (2,294
  

 

 

   

 

 

 

Balance at end of period

     20,222        15,424   
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 1,433,023      $ 1,027,269   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

9


Table of Contents

FIRST BANCORP.

PART I – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The Consolidated Financial Statements (unaudited) of First BanCorp. (“First BanCorp” or “the Corporation”) have been prepared in conformity with the accounting policies stated in the Corporation’s Audited Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011. Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant to the rules and regulations of the SEC and, accordingly, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2011, included in the Corporation’s 2011 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the statement of financial position, results of operations and cash flows for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.

The results of operations for the quarter ended March 31, 2012 are not necessarily indicative of the results to be expected for the entire year.

 

10


Table of Contents

Adoption of new accounting requirements and recently issued but not yet effective accounting requirements

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

In April 2011, the FASB updated the Accounting Standards Codification (“Codification”) to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The Board concluded that this criterion is not a determining factor of effective control. Consequently, the amendments in this Update also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. Eliminating the transferor’s ability criterion and related implementation guidance from an entity’s assessment of effective control should improve the accounting for repurchase agreements and other similar transactions. The amendments in this Update are effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Corporation adopted this guidance with no impact on the financial statements.

In May 2011, the FASB updated the Codification to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (IFRSs). The amendments in this Update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements and result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. The amendments in this Update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. The Corporation adopted this guidance in 2012, refer to note 19 for applicable disclosures. The adoption of this guidance did not have a material impact in the Corporation’s consolidated financial position or results of operations.

In June 2011, the FASB updated the Codification to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Under the amendments, an entity has the option to present the total comprehensive income either in a single continuous statement or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. Additionally, this update requires consecutive presentation of the statement of net income and other comprehensive income and requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this Update should be applied retrospectively and are effective for fiscal years beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. Beginning with the financial statements for the quarter and six-month period ended June 30, 2011, the Corporation is following the guidance of separate but consecutive presentation of the statement of net income and the statement of other comprehensive income.

In September 2011, the FASB updated the Codification to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this Update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments in this Update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Corporation is currently evaluating the impact, if any, of the adoption of this guidance on its financial statements.

In December 2011, the FASB updated the Codification to clarify the guidance on the derecognition of in substance real estate in order to resolve the diversity in practice when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. Under the amendments in this Update, when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. That is, even if the reporting entity ceases to have a controlling financial interest, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. The Corporation is currently evaluating the impact, if any, of the adoption of this guidance on its consolidated financial statements.

In December 2011, the FASB updated the Codification to enhance and provided converged disclosures about financial and derivative instruments that are either offset on the balance sheet, or are subject to an enforceable master netting arrangement (or other similar

 

11


Table of Contents

arrangement). Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments in this Update are effective for interim and annual period beginning on or after January 1, 2013. The Corporation is currently evaluating the impact of the adoption of this guidance, if any, on its consolidated financial statements.

2 – EARNINGS PER COMMON SHARE

The calculations of earnings per common share for the quarters ended on March 31, 2012 and 2011 are as follows:

 

    Quarter Ended  
    March 31,
2012
    March 31,
2011
 
    (In thousands, except per share data)  

Net loss:

   

Net loss

  $ (13,182   $ (28,420

Cumulative convertible preferred stock dividend (Series G)

    —          (5,302

Preferred stock discount accretion (Series G)

    —          (1,715
 

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (13,182   $ (35,437
 

 

 

   

 

 

 

Average common shares outstanding

    205,217        21,303   

Average potential common shares

    —          —     
 

 

 

   

 

 

 

Average common shares outstanding- assuming dilution

    205,217        21,303   
 

 

 

   

 

 

 

Basic loss per common share

  $ (0.06   $ (1.66
 

 

 

   

 

 

 

Diluted loss per common share

  $ (0.06   $ (1.66
 

 

 

   

 

 

 

Loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average common shares issued and outstanding. Net loss attributable to common stockholders represents net loss adjusted for preferred stock dividends including dividends declared, and cumulative dividends related to the current dividend period that have not been declared as of the end of the period, and the accretion of discount on preferred stock issuances. Basic weighted average common shares outstanding exclude unvested shares of restricted stock.

Potential common shares consist of common stock issuable under the assumed exercise of stock options, unvested shares of restricted stock, and outstanding warrants using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options, unvested shares of restricted stock, and outstanding warrants that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. For the quarters ended March 31, 2012 and 2011, there were 120,221 and 131,532 outstanding stock options, respectively; warrants outstanding to purchase 1,285,899 and 389,483 shares of common stock, respectively, and 719,500 and 716 unvested shares of restricted stock, respectively, which were excluded from the computation of diluted earnings per common share because their inclusion would have an antidilutive effect.

3 – STOCK-BASED COMPENSATION PLAN

Between 1997 and January 2007, the Corporation had a stock option plan (“the 1997 stock option plan”) that authorized the granting of up to 579,740 options on shares of the Corporation’s common stock to eligible employees. The options granted under the plan could not exceed 20% of the number of common shares outstanding. Each option provides for the purchase of one share of common stock at a price not less than the fair market value of the stock on the date the option was granted. Stock options were fully vested upon grant. The maximum term to exercise the options is ten years. The stock option plan provides for a proportionate adjustment in the exercise price and the number of shares that can be purchased in the event of a stock dividend, stock split, reclassification of stock, merger or reorganization and certain other issuances and distributions such as stock appreciation rights.

Under the 1997 stock option plan, the Compensation and Benefits Committee (the “Compensation Committee”) had the authority to grant stock appreciation rights at any time subsequent to the grant of an option. Pursuant to stock appreciation rights, the optionee surrenders the right to exercise an option granted under the plan in consideration for payment by the Corporation of an amount equal

 

12


Table of Contents

to the excess of the fair market value of the shares of common stock subject to such option surrendered over the total option price of such shares. Any option surrendered is cancelled by the Corporation and the shares subject to the option are not eligible for further grants under the option plan. On January 21, 2007, the 1997 stock option plan expired; all outstanding awards granted under this plan continue in full force and effect, subject to their original terms. No awards for shares could be granted under the 1997 stock option plan as of its expiration.

Stock options outstanding under the 1997 stock option plan as of March 31, 2012 follows:

 

    Quarter Ended
March 31, 2012
 
    Number of
Options
    Weighted-Average
Exercise Price
    Weighted-Average
Remaining
Contractual Term
(Years)
    Aggregate
Intrinsic Value
(In thousands)
 

Beginning of period

    129,934      $ 202.99       

Options expired

    (9,713     140.25       
 

 

 

   

 

 

     

End of period outstanding and exercisable

    120,221      $ 208.08        3.55      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

On April 29, 2008, the Corporation’s stockholders approved the First BanCorp 2008 Omnibus Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides for equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and other stock-based awards. This plan allows the issuance of up to 8,169,807 shares of common stock, subject to adjustments for stock splits, reorganizations and other similar events. The Corporation’s Board of Directors, upon receiving the relevant recommendation of the Compensation Committee, has the power and authority to determine those eligible to receive awards and to establish the terms and conditions of any awards subject to various limits and vesting restrictions that apply to individual and aggregate awards.

Under the Omnibus Plan, late in the first quarter of 2012, the Corporation issued 719,500 shares of restricted stock which will vest based on the employees’ continued service with the Corporation. Fifty percent (50%) of the shares vest in two years from the grant date and the remaining 50% vest in three years from the grant date. Included in the 719,500 shares of restricted stock are 557,000 shares granted to certain senior executive officers consistent with the requirements of the Troubled Asset Relief Program (“TARP”) Interim Final Rule. Notwithstanding the vesting period mentioned above, the employees covered by TARP are restricted from transferring the shares. Specifically, the stock that has otherwise vested may not become transferable at any time earlier than as permitted under the schedule set forth by TARP, which is based on the repayment in 25% increments of the aggregate financial assistance received from the U.S. Department of Treasury (the “Treasury”).

The following table summarizes the restricted stock activity in 2012 under the Omnibus Plan for both executive officers covered by the TARP requirements and other employees:

 

    Quarter Ended
March 31, 2012
 
    Number of
shares of
restricted
stock
    Weighted-Average
Grant Date

Fair Value
 

Non-vested shares at beginning of period

    —        $ —     

Granted

    719,500        2.45   
 

 

 

   

 

 

 

Non-vested shares at March 31, 2012

    719,500      $ 2.45   
 

 

 

   

 

 

 

As of March 31, 2012, there was $1.7 million of total unrecognized compensation cost related to nonvested shares of restricted stock. That cost is expected to be recognized for 50% of the awards over a two year period and the other 50% over a three year period, as if they were multiple awards. No shares of restricted stock were granted or vested during the first quarter of 2011.

The fair value of the shares of restricted stock granted was based on the market price of the Corporation’s outstanding common stock on the date of the grant, $4.00. For the 557,000 shares of restricted stock granted under the TARP requirements, the market price was discounted due to post-vesting restrictions. For purposes of computing the discount, the Corporation assumes a common stock appreciation of 25% and a holding period by the Treasury of its outstanding common stock of the Corporation of 3 years, resulting in a fair value of $2.00 for restricted shares granted under the TARP requirements. Also, the Corporation uses empirical data to estimate employee termination, separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.

 

13


Table of Contents

No compensation cost has been recognized yet in the consolidated statement of loss for these awards in 2012. For the quarter ended March 31, 2011, the Corporation recognized $23,333 of stock based compensation related to 720 shares of restricted stock granted in 2008 to members of the Board of Directors that vested in the fourth quarter of 2011.

Stock-based compensation accounting guidance requires the Corporation to develop an estimate of the number of share-based awards that will be forfeited due to employee or director turnover. Quarterly changes in the estimated forfeiture rate may have a significant effect on share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period in which the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. When unvested options or shares of restricted stock are forfeited, any compensation expense previously recognized on the forfeited awards is reversed in the period of the forfeiture.

4 – INVESTMENT SECURITIES

Investment Securities Available for Sale

The amortized cost, non-credit loss component of other-than-temporary impairment (“OTTI”) on securities with changes in fair value recorded in other comprehensive income (“OCI”), gross unrealized gains and losses recorded in OCI, approximate fair value, weighted-average yield and contractual maturities of investment securities available for sale as of March 31, 2012 and December 31, 2011 were as follows:

 

    March 31, 2012     December 31, 2011  
          Non-Credit
Loss
Component
of OTTI
    Gross           Weighted           Non-Credit
Loss
Component
of OTTI
    Gross           Weighted  
    Amortized     Recorded     Unrealized     Fair     average     Amortized     Recorded     Unrealized     Fair     average  
    cost     in OCI     gains     losses     value     yield%     cost     in OCI     gains     losses     value     yield%  
    (Dollars in thousands)  

U.S. Treasury securities:

                       

Due within one year

  $ 375,137      $ —        $ 2      $ 18      $ 375,121        0.16      $ 476,665      $ —        $ 327      $ —        $ 476,992        0.34   

Obligations of U.S. Government sponsored agencies:

                       

Due within one year

    300,071        —          424        —          300,495        1.15        300,381        —          1,204        —          301,585        1.15   

Puerto Rico Government obligations:

                       

Due within one year

    8,560        —          57        —          8,617        4.20        8,560        —          110        —          8,670        4.20   

After 1 to 5 years

    9,600        —          165        —          9,765        5.41        70,590        —          171        1        70,760        2.63   

After 5 to 10 years

    118,977        —          590        —          119,567        4.94        118,186        —          76        13        118,249        5.07   

After 10 years

    23,394        —          836        —          24,230        5.77        24,154        —          781        1        24,934        5.74   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

United States and Puerto Rico Government obligations

    835,739        —          2,074        18        837,795        1.45        998,536        —          2,669        15        1,001,190        1.47   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Mortgage-backed securities:

                       

FHLMC certificates:

                       

Due within one year

    625        —          5        —          630        3.68        —          —          —          —          —          —     

After 1 to 5 years

    —          —          —          —          —          —          928        —          8        —          936        3.67   

After 10 years

    100,307        —          329        11        100,625        2.41        24,974        —          238        —          25,212        2.59   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    100,932        —          334        11        101,255        2.42        25,902        —          246        —          26,148        2.62   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

GNMA certificates:

                       

After 1 to 5 years

    175        —          9        —          184        3.80        179        —          9        —          188        3.88   

After 5 to 10 years

    541        —          44        —          585        4.10        596        —          47        —          643        4.09   

After 10 years

    684,765        —          43,373        —          728,138        4.00        717,237        —          43,938        —          761,175        3.98   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    685,481        —          43,426        —          728,907        4.00        718,012        —          43,994        —          762,006        3.98   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

FNMA certificates:

                       

After 1 to 5 years

    724        —          29        —          753        3.81        1,019        —          42        —          1,061        3.82   

After 5 to 10 years

    17,353        —          915        —          18,268        3.99        18,826        —          1,007        —          19,833        3.97   

After 10 years

    92,931        —          3,107        10        96,028        3.80        47,485        —          3,285        —          50,770        5.46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    111,008        —          4,051        10        115,049        3.83        67,330        —          4,334        —          71,664        5.02   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Other mortgage pass-through trust certificates:

                       

After 10 years

    81,043        31,951        10,537        —          59,629        2.48        85,014        31,951        8,143        —          61,206        2.19   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total mortgage-backed securities

    978,464        31,951        58,348        21        1,004,840        3.69        896,258        31,951        56,717        —          921,024        3.85   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Corporate bonds:

                       

After 10 years

    1,447        434        —          230        783        5.80        1,447        434        —          —          1,013        5.80   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Equity securities (without contractual maturity) (1)

    77        —          —          11        66        —          77        —          —          36        41        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total investment securities available for sale

  $ 1,815,727      $ 32,385      $ 60,422      $ 280      $ 1,843,484        2.66      $ 1,896,318      $ 32,385      $ 59,386      $ 51      $ 1,923,268        2.60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(1) Represents common shares of another financial institution in Puerto Rico.

Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options as was the case with approximately $101 million of Puerto Rico Government Obligations called during the first quarter of 2012. The weighted-average yield on investment securities available-for-sale is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gain or loss on securities available-for-sale and the non-credit loss component of OTTI are presented as part of OCI.

 

14


Table of Contents

The following tables show the Corporation’s available-for-sale investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2012 and December 31, 2011. The table also includes debt securities for which an OTTI was recognized and only the amount related to a credit loss was recognized in earnings. Unrealized losses for which OTTI had been recognized have been reduced by any subsequent recoveries in fair value:

 

     As of March 31, 2012  
     Less than 12 months      12 months or more      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (In thousands)  

Debt securities:

                 

U.S. Government agencies obligations

   $ 367,622       $ 18       $ —         $ —         $ 367,622       $ 18   

Mortgage-backed securities:

                 

FNMA

     47,761         10         —           —           47,761         10   

FHLMC

     29,969         11         —           —           29,969         11   

Other mortgage pass-through trust certificates

     —           —           59,454         21,414         59,454         21,414   

Corporate bonds

     —           —           783         664         783         664   

Equity securities

     66         11         —           —           66         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 445,418       $ 50       $ 60,237       $ 22,078       $ 505,655       $ 22,128   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2011  
     Less than 12 months      12 months or more      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (In thousands)  

Debt securities:

                 

Puerto Rico Government obligations

   $   15,982       $ 15       $ —         $ —         $   15,982       $ 15   

Mortgage-backed securities:

                 

Other mortgage pass-through trust certificates

     —           —           61,017         23,809         61,017         23,809   

Corporate bonds

     —           —           1,013         434         1,013         434   

Equity securities

     41         36         —           —           41         36   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16,023       $ 51       $ 62,030       $ 24,243       $ 78,053       $ 24,294   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total proceeds from the sale of securities available for sale during the quarter ended March 31, 2011 amounted to approximately $41.4 million, none in the first quarter of 2012.

Assessment for OTTI

On a quarterly basis, the Corporation performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered an OTTI. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Corporation to assess whether the unrealized loss is other-than-temporary.

OTTI losses must be recognized in earnings if an investor has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.

An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of an OTTI, if any, is recorded as a component of net impairment losses on investment securities in the accompanying consolidated statements of loss, while the remaining portion of the impairment loss is recognized in OCI, provided the Corporation does not intend to sell the underlying debt security and it is “more likely than not” that the Corporation will not have to sell the debt security prior to recovery.

Debt securities issued by U.S. government agencies, government-sponsored entities and the U.S. Treasury accounted for more than 87% of the total available-for-sale portfolio as of March 31, 2012 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation’s assessment was concentrated mainly on private label mortgage-backed securities with an amortized cost of $81 million and in the Corporation’s $1.4 million investment in a collateralized debt obligation transaction for which credit losses are evaluated on a quarterly basis. The Corporation considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

 

   

The length of time and the extent to which the fair value has been less than the amortized cost basis.

 

15


Table of Contents
   

Changes in the near term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions;

 

   

The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

 

   

Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.

No OTTI losses on available-for-sale debt securities were recorded during the quarter ended March 31, 2011.

The following table summarizes the roll-forward of credit losses on debt securities held by the Corporation for which a portion of an OTTI is recognized in OCI:

 

    Quarter ended March 31,  
    2012     2011  
(In thousands)            

Credit losses at the beginning of the period

  $ 3,823      $ 1,852   

Additions:

   

Credit losses on debt securities for which an OTTI was previously recognized (1)

    1,233        —     
 

 

 

   

 

 

 

Ending balance of credit losses on debt securities held for which a portion of an OTTI was recognized in OCI

  $ 5,056      $ 1,852   
 

 

 

   

 

 

 

 

(1) Related to private label MBS.

During the first quarter of 2012, a $1.2 million credit related impairment loss is related to Private label MBS, which are collateralized by fixed-rate mortgages on single family residential properties in the United States. The interest rate on these private-label MBS is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The underlying mortgages are fixed-rate single family loans with original high FICO scores (over 700) and moderate original loan-to-value ratios (under 80%), as well as moderate delinquency levels.

Based on the expected cash flows derived from the model, and since the Corporation does not have the intention to sell the securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, only the credit loss component was reflected in earnings. Significant assumptions in the valuation of the private label MBS as of March 31, 2012 and December 31, 2011 were as follow:

 

    March 31, 2012   December 31, 2011
    Weighted
Average
    Range   Weighted
Average
    Range

Discount rate

    14.5   14.5%     14.5   14.5%

Prepayment rate

    28   18.80% - 39.44%     27   21.33% - 37.97%

Projected Cumulative Loss Rate

    7   1.36% - 15.71%     6   1.94% - 11.89%

No OTTI losses on equity securities held in the available-for-sale investment portfolio were recognized for the first quarter of 2012 or 2011.

5 – OTHER EQUITY SECURITIES

Institutions that are members of the Federal Home Loan Bank (“FHLB”) system are required to maintain a minimum investment in FHLB stock. Such minimum is calculated as a percentage of aggregate outstanding mortgages, and an additional investment is required that is calculated as a percentage of total FHLB advances, letters of credit, and the collateralized portion of interest-rate swaps outstanding. The stock is capital stock issued at $100 par value. Both stock and cash dividends may be received on FHLB stock.

 

16


Table of Contents

As of March 31, 2012 and December 31, 2011, the Corporation had investments in FHLB stock with a book value of $36.7 million. The net realizable value is a reasonable proxy for the fair value of these instruments. Dividend income from FHLB stock for the quarters ended March 31, 2012 and 2011 amounted to $0.4 million and $0.7 million, respectively.

The FHLB stocks owned by the Corporation are issued by the FHLB of New York and by the FHLB of Atlanta. Both Banks are part of the Federal Home Loan Bank System, a national wholesale banking network of 12 regional, stockholder-owned congressionally chartered banks. The Federal Home Loan Banks are all privately capitalized and operated by their member stockholders. The system is supervised by the Federal Housing Finance Agency, which ensures that the Home Loan Banks operate in a financially safe and sound manner, remain adequately capitalized and able to raise funds in the capital markets, and carry out their housing finance mission.

The Corporation has other equity securities that do not have a readily available fair value. The carrying value of such securities as of March 31, 2012 and December 31, 2011 was $1.3 million.

6 – LOANS HELD FOR INVESTMENT

The following is a detail of the loan portfolio held for investment:

 

    March 31,
2012
    December 31,
2011
 
    (In thousands)  

Residential mortgage loans, mainly secured by first mortgages

  $ 2,799,224      $ 2,873,785   
 

 

 

   

 

 

 

Commercial loans:

   

Construction loans

    399,056        427,863   

Commercial mortgage loans

    1,500,746        1,565,411   

Commercial and Industrial loans

    3,774,913        3,856,695   

Loans to local financial institutions collateralized by real estate mortgages

    269,020        273,821   
 

 

 

   

 

 

 

Commercial loans

    5,943,735        6,123,790   
 

 

 

   

 

 

 

Finance leases

    242,228        247,003   
 

 

 

   

 

 

 

Consumer loans

    1,310,598        1,314,814   
 

 

 

   

 

 

 

Loans held for investment

    10,295,785        10,559,392   

Allowance for loan and lease losses

    (483,943     (493,917
 

 

 

   

 

 

 

Loans held for investment, net

  $ 9,811,842      $ 10,065,475   
 

 

 

   

 

 

 

 

17


Table of Contents

Loans held for investment on which accrual of interest income had been discontinued as of March 31, 2012 and December 31, 2011 were as follows:

 

(Dollars in thousands)    March 31,
2012
     December 31,
2011
 

Non-performing loans:

     

Residential mortgage

   $ 341,188       $ 338,208   

Commercial mortgage

     244,391         240,414   

Commercial and Industrial

     263,604         270,171   

Construction

     231,071         250,022   

Consumer:

     

Auto loans

     18,616         19,641   

Finance leases

     3,387         3,485   

Other consumer loans

     17,156         16,421   
  

 

 

    

 

 

 

Total non-performing loans held for investment

   $ 1,119,413       $ 1,138,362   
  

 

 

    

 

 

 

The Corporation’s aging of the loans held for investment portfolio as of March 31, 2012 and December 31, 2011, follows:

 

As of March 31, 2012

(Dollars in thousands)

  30-59 Days
Past Due
    60-89 Days
Past Due
    90 days or more
Past Due (1)
    Total Past
Due
    Current     Total loans
held for
investment
    90 days past
due and still
accruing
 

Residential mortgage:

             

FHA/VA and other government guaranteed loans (2) (3)

  $ —        $ 18,186      $ 83,995      $ 102,181      $ 126,132      $ 228,313      $ 83,995   

Other residential mortgage loans (3)

    —          95,969        356,845        452,814        2,118,097        2,570,911        15,657   

Commercial:

             

Commercial & Industrial loans

    27,140        7,373        287,489        322,002        3,721,931        4,043,933        23,885   

Commercial mortgage loans (3)

    —          17,394        245,980        263,374        1,237,372        1,500,746        1,589   

Construction loans (3)

    —          533        239,136        239,669        159,387        399,056        8,065   

Consumer:

             

Auto loans

    61,801        17,069        18,616        97,486        840,753        938,239        —     

Finance leases

    11,451        3,447        3,387        18,285        223,943        242,228        —     

Other consumer loans

    9,439        4,062        17,156        30,657        341,702        372,359        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held for investment

  $ 109,831      $ 164,033      $ 1,252,604      $ 1,526,468      $ 8,769,317      $ 10,295,785      $ 133,191   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes non-performing loans and accruing loans which are contractually delinquent 90 days or more (i.e. FHA/VA and other guaranteed loans).
(2) As of March 31, 2012, includes $54.9 million of defaulted loans collateralizing Ginnie Mae (“GNMA”) securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.
(3) 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, residential mortgage, commercial mortgage and construction loans are considered past due when the borrower is in arrears 2 or more monthly payments.

 

As of December 31, 2011

(Dollars in thousands)

  30-59 Days
Past Due
    60-89 Days
Past Due
    90 days or more
Past Due (1)
    Total Past
Due
    Current     Total loans
held for
investment
    90 days past
due and still
accruing
 

Residential mortgage:

             

FHA/VA and other government guaranteed loans (2) (3)

  $ —        $ 17,548      $ 85,188      $ 102,736      $ 165,417      $ 268,153      $ 85,188   

Other residential mortgage loans (3)

    —          90,274        350,495        440,769        2,164,863        2,605,632        12,287   

Commercial:

             

Commercial & Industrial loans

    27,674        10,714        294,723        333,111        3,797,405        4,130,516        24,552   

Commercial mortgage loans (3)

    —          8,891        240,414        249,305        1,316,106        1,565,411        —     

Construction loans (3)

    —          8,211        258,811        267,022        160,841        427,863        8,789   

Consumer:

             

Auto loans

    61,265        18,963        19,641        99,869        837,697        937,566        —     

Finance leases

    11,110        4,172        3,485        18,767        228,236        247,003        —     

Other consumer loans

    10,170        4,699        16,421        31,290        345,958        377,248        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held for investment

  $ 110,219      $ 163,472      $ 1,269,178      $ 1,542,869      $ 9,016,523      $ 10,559,392      $ 130,816   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes non-performing loans and accruing loans which are contractually delinquent 90 days or more (i.e. FHA/VA and other guaranteed loans).
(2) As of December 31, 2011, includes $66.4 million of defaulted loans collateralizing Ginnie Mae (“GNMA”) securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.
(3) 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, residential mortgage, commercial mortgage and construction loans are considered past due when the borrower is in arrears 2 or more monthly payments.

The Corporation’s primary lending area is Puerto Rico. The Corporation’s Puerto Rico banking subsidiary, FirstBank, also lends in the U.S. and British Virgin Islands markets and in the United States (principally in the state of Florida). Of the total gross loans held for investment portfolio of $10.3 billion as of March 31, 2012, approximately 84% have credit risk concentration in Puerto Rico, 8% in the United States and 8% in the Virgin Islands.

 

18


Table of Contents

As of March 31, 2012, the Corporation had $342.3 million outstanding in credit facilities granted to the Puerto Rico Government and/or its political subdivisions, down from $360.1 million as of December 31, 2011, and $142.0 million granted to the Virgin Islands government, up from $139.4 million as of December 31, 2011. A substantial portion of these credit facilities consist of loans to the central Government. Another portion of these obligations consists of loans to public corporations that obtain revenues from rates charged for services or products, such as electric power and water utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The Corporation also has loans to various municipalities in Puerto Rico for which the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment.

Aside from loans extended to the Puerto Rico Government and its political subdivision, the largest loan to one borrower as of March 31, 2012 in the amount of $269.0 million is with one mortgage originator in Puerto Rico. This commercial loan is secured by individual real-estate loans, mostly 1-4 residential mortgage loans.

7 – ALLOWANCE FOR LOAN AND LEASE LOSSES AND IMPAIRED LOANS

The changes in the allowance for loan and lease losses for the periods ended March 31, 2012 and 2011 were as follows:

 

(Dollars in thousands)   Residential
Mortgage Loans
    Commercial
Mortgage Loans
    Commercial &
Industrial Loans
    Construction
Loans
    Consumer
Loans
    Total  

March 31, 2012

           

Allowance for loan and lease losses:

           

Beginning balance

  $ 68,678      $ 108,992      $ 164,490      $ 91,386      $ 60,371      $ 493,917   

Charge-offs

    (5,858     (3,624     (13,491     (17,543     (10,487     (51,003

Recoveries

    127        30        822        2,151        1,702        4,832   

Provision

    2,336        1,578        20,158        7,716        4,409        36,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 65,283      $ 106,976      $ 171,979      $ 83,710      $ 55,995      $ 483,943   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: specific reserve for impaired loans

  $ 47,105      $ 57,932      $ 67,248      $ 46,796      $ 5,495      $ 224,576   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: general allowance

  $ 18,178      $ 49,044      $ 104,731      $ 36,914      $ 50,500      $ 259,367   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivables:

           

Ending balance

  $ 2,799,224      $ 1,500,746      $ 4,043,933      $ 399,056      $ 1,552,826      $ 10,295,785   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: impaired loans

  $ 600,651      $ 367,533      $ 261,438      $ 222,599      $ 24,811      $ 1,477,032   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans with general allowance

  $ 2,198,573      $ 1,133,213      $ 3,782,495      $ 176,457      $ 1,528,015      $ 8,818,753   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollars in thousands)   Residential
Mortgage Loans
    Commercial
Mortgage Loans
    Commercial &
Industrial Loans
    Construction
Loans
    Consumer
Loans
    Total  

March 31, 2011

           

Allowance for loan and lease losses:

           

Beginning balance

  $ 62,330      $ 105,596      $ 152,641      $ 151,972      $ 80,486      $ 553,025   

Charge-offs

    (5,404     (31,171     (16,344     (19,165     (11,969     (84,053

Recoveries

    243        67        56        1,927        1,698        3,991   

Provision

    6,327        13,381        41,486        22,463        5,075        88,732   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 63,496      $ 87,873      $ 177,839      $ 157,197      $ 75,290      $ 561,695   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: specific reserve for impaired loans

  $ 43,295      $ 29,610      $ 81,989      $ 98,167      $ 415      $ 253,476   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: general allowance

  $ 20,201      $ 58,263      $ 95,850      $ 59,030      $ 74,875      $ 308,219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivables:

           

Ending balance

  $ 2,896,692      $ 1,588,768      $ 4,262,660      $ 682,245      $ 1,659,410      $ 11,089,775   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: impaired loans

  $ 566,270      $ 232,054      $ 395,979      $ 365,412      $ 2,407      $ 1,562,122   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans with general allowance

  $ 2,330,422      $ 1,356,714      $ 3,866,681      $ 316,833      $ 1,657,003      $ 9,527,653   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchases of loans of $42.0 million during the first quarter of 2012 were consistent with a strategic program established by the Corporation in 2005 to purchase ongoing residential mortgage loan production from mortgage bankers in Puerto Rico. Generally, 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 whether the Corporation wants to retain high yielding loans and improve net interest margins or generate profits by selling loans. When the Corporation sells such loans, it generally keeps the servicing of the loans. The Corporation sold approximately $46.9 million of performing residential mortgage loans in the secondary market to FNMA and FHLMC during the first quarter of 2012. Also, the Corporation securitized approximately $54.3 million of FHA/VA mortgage loans into GNMA mortgage-backed securities during the first quarter of 2012.

The allowance for impaired loans is part of the allowance for loan and lease losses. The allowance for impaired loans covers those loans for which management has determined that it is probable that the debtor will be unable to pay all the amounts due in accordance with the contractual terms of the loan agreement, and does not necessarily represent loans for which the Corporation will incur a loss.

 

19


Table of Contents

Information regarding impaired loans for the periods ended March 31, 2012 and December 31, 2011 was as follows:

 

(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

As of March 31, 2012

              

With no related allowance recorded:

              

FHA/VA Guaranteed loans

   $ —         $ —         $ —         $ —         $ —     

Other residential mortage loans

     185,194         201,403         —           183,138         2,486   

Commercial:

              

Commercial mortgage loans

     53,854         57,863         —           35,827         223   

Commercial & Industrial Loans

     10,356         16,333         —           25,404         6   

Construction Loans

     37,895         49,851         —           33,826         23   

Consumer:

              

Auto loans

     —           —           —           —           —     

Finance leases

     —           —           —           —           —     

Other consumer loans

     3,139         3,467         —           2,989         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 290,438       $ 328,917       $ —         $ 281,184       $ 2,767   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

FHA/VA Guaranteed loans

   $ —         $ —         $ —         $ —         $ —     

Other residential mortage loans

     415,457         463,349         47,105         419,399         2,718   

Commercial:

              

Commercial mortgage loans

     313,679         361,271         57,932         199,046         1,898   

Commercial & Industrial Loans

     251,082         352,562         67,248         237,327         650   

Construction Loans

     184,704         299,832         46,796         334,316         97   

Consumer:

              

Auto loans

     9,897         9,953         3,964         9,304         163   

Finance leases

     2,143         2,143         57         1,974         52   

Other consumer loans

     9,632         9,728         1,474         9,655         276   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,186,594       $ 1,498,838       $ 224,576       $ 1,211,021       $ 5,854   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

FHA/VA Guaranteed loans

   $ —         $ —         $ —         $ —         $ —     

Other residential mortage loans

     600,651         664,752         47,105         602,537         5,204   

Commercial:

              

Commercial mortgage loans

     367,533         419,134         57,932         234,873         2,121   

Commercial & Industrial Loans

     261,438         368,895         67,248         262,731         656   

Construction Loans

     222,599         349,684         46,796         368,142         120   

Consumer:

              

Auto loans

     9,897         9,953         3,964         9,304         163   

Finance leases

     2,143         2,143         57         1,974         52   

Other consumer loans

     12,771         13,195         1,474         12,644         305   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,477,032       $ 1,827,756       $ 224,576       $ 1,492,205       $ 8,621   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents
(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

As of December 31, 2011

        

With no related allowance recorded:

        

FHA/VA Guaranteed loans

   $ —         $ —         $ —     

Other residential mortage loans

     181,081         192,757         —     

Commercial:

        

Commercial mortgage loans

     13,797         15,283         —     

Commercial & Industrial Loans

     40,453         45,948         —     

Construction Loans

     33,759         45,931         —     

Consumer:

        

Auto loans

     —           —           —     

Finance leases

     —           —           —     

Other consumer loans

     2,840         3,846         —     
  

 

 

    

 

 

    

 

 

 
   $ 271,930       $ 303,765       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

FHA/VA Guaranteed loans

   $ —         $ —         $ —     

Other residential mortage loans

     423,340         465,495         48,566   

Commercial:

        

Commercial mortgage loans

     354,954         383,890         59,167   

Commercial & Industrial Loans

     223,572         316,641         58,652   

Construction Loans

     213,388         344,035         44,768   

Consumer:

        

Auto loans

     8,710         8,710         1,039   

Finance leases

     1,804         1,804         41   

Other consumer loans

     9,678         9,678         2,669   
  

 

 

    

 

 

    

 

 

 
   $ 1,235,446       $ 1,530,253       $ 214,902   
  

 

 

    

 

 

    

 

 

 

Total:

        

FHA/VA Guaranteed loans

   $ —         $ —         $ —     

Other residential mortage loans

     604,421         658,252         48,566   

Commercial:

        

Commercial mortgage loans

     368,751         399,173         59,167   

Commercial & Industrial Loans

     264,025         362,589         58,652   

Construction Loans

     247,147         389,966         44,768   

Consumer:

        

Auto loans

     8,710         8,710         1,039   

Finance leases

     1,804         1,804         41   

Other consumer loans

     12,518         13,524         2,669   
  

 

 

    

 

 

    

 

 

 
   $ 1,507,376       $ 1,834,018       $ 214,902   
  

 

 

    

 

 

    

 

 

 

Interest income of approximately $11.4 million was recognized on impaired loans for the quarter ended March 31, 2011. The average recorded investment in impaired loans for the first quarter of 2011 was $1.5 billion.

 

21


Table of Contents

The following tables show the activity for impaired loans and the related specific reserve during the three-month period ended March 31, 2012:

 

     March 31, 2012  
     (In thousands)  

Impaired Loans:

  

Balance at beginning of period

   $ 1,507,376   

Loans determined impaired during the period

     98,275   

Net charge-offs

     (38,139

Increases to impaired loans (disbursements)

     4,918   

Foreclosures

     (41,018

Loans no longer considered impaired

     (25,913

Paid in full or partial payments

     (28,467
  

 

 

 

Balance at end of period

   $ 1,477,032   
  

 

 

 

 

     March 31, 2012  
     (In thousands)  

Specific Reserve:

  

Balance at beginning of period

   $   214,902   

Provision for loan losses

     47,813   

Net charge-offs

     (38,139
  

 

 

 

Balance at end of period

   $ 224,576   
  

 

 

 

The Corporation’s credit quality indicators by loan type as of March 31, 2012 and December 31, 2011 are summarized below:

 

    Commercial Credit Exposure-Credit risk Profile based on  Creditworthiness category:  
March 31, 2012   Substandard     Doubtful     Loss     Total Adversely Classified     Total Portfolio  
    (In thousands)  

Commercial Mortgage

  $ 440,949      $ 10,101      $ —        $ 451,050      $ 1,500,746   

Construction

    224,665        38,432        605        263,702        399,056   

Commercial and Industrial

    437,215        51,681        1,837        490,733        4,043,933   

 

    Commercial Credit Exposure-Credit risk Profile based on  Creditworthiness category:  
December 31, 2011   Substandard     Doubtful     Loss     Total Adversely Classified     Total Portfolio  
    (In thousands)  

Commercial Mortgage

  $ 414,355      $ 8,462      $ —        $ 422,817      $ 1,565,411   

Construction

    247,560        32,059        2,916        282,535        427,863   

Commercial and Industrial

    457,927        31,100        1,373        490,400        4,130,516   

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

Substandard – A 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.

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

Loss – Assets classified 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 it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. There is little or no prospect for near term improvement and no realistic strengthening action of significance pending.

 

22


Table of Contents
March 31, 2012   Consumer Credit Exposure-Credit risk Profile based on payment activity  
    Residential Real-Estate     Consumer  
    FHA/VA/Guaranteed     Other residential loans     Auto     Finance Leases     Other Consumer  
    (In thousands)  

Performing

  $ 228,313      $ 2,229,723      $ 919,623      $ 238,841      $ 355,203   

Non-performing

    —          341,188        18,616        3,387        17,156   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 228,313      $ 2,570,911      $ 938,239      $ 242,228      $ 372,359   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

December 31, 2011   Consumer Credit Exposure-Credit risk Profile based on payment activity  
    Residential Real-Estate     Consumer  
    FHA/VA/Guaranteed     Other residential loans     Auto     Finance Leases     Other Consumer  
    (In thousands)  

Performing

  $ 268,153      $ 2,267,424      $ 917,925      $ 243,518      $ 360,827   

Non-performing

    —          338,208        19,641        3,485        16,421   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 268,153      $ 2,605,632      $ 937,566      $ 247,003      $ 377,248   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico and in accordance with the 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 in the U.S. mainland fit the definition of Troubled debt restructurings (“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 the refinancing of any past-due amounts, including interest and escrow, the extension of the maturity of the loan and modifications of the loan rate. As of March 31, 2012, the Corporation’s total TDR loans of $853.6 million consisted of $386.3 million of residential mortgage loans, $113.8 million of commercial and industrial loans, $223.6 million of commercial mortgage loans, $108.0 million of construction loans and $21.9 million of consumer loans. Outstanding unfunded commitments on TDR loans amounted to $3.7 million as of March 31, 2012.

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 for a significant period of time, and reduction of interest rates either permanently (up to 2010) or for a period of up to two years (step-up rates). Additionally, in remote 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 to only those borrowers who have defaulted, or are likely to default, permanently on their loan and would lose their homes in foreclosure action absent some lender concession. Notwithstanding, if the Corporation is not reasonably assured that the borrower will comply with its contractual commitment, properties are foreclosed.

In addition to residential loans modified in TDRs described above, the Corporation also enters into trial modifications with certain borrowers. Trial modifications generally represent a three month period whereby the borrower makes monthly payments under the anticipated modified payment terms prior to a formal modification. Trial modifications lasting more than three months are considered TDRs. Upon successful completion of a trial modification, the Corporation and the borrower enter into a permanent modification where the terms of the loan are formally modified. Approximately 79% of all loans that entered into a trial modification during the last twelve months became permanent modifications as of March 31, 2012. Substantially all permanent modifications are considered TDRs and are included in the TDR disclosures herein. As of March 31, 2012, the Corporation had 202 loans that were in trial modifications and were not considered TDRs, with an unpaid principal balance of $30.8 million and a carrying value of $28.4 million.

For the commercial real estate, commercial and industrial, and the construction portfolios, at the time of the 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 commercial loans could include: reductions in interest rates to rates that are considered below market; extension of repayment schedules and maturity dates beyond original contractual terms; waiving of borrower covenants; forgiveness of principal or interest; or other contract changes that would be considered a concession. The Corporation mitigates loan defaults for its commercial loan portfolios through its collections function. The function’s objective is to minimize both early stage delinquencies and losses upon default of commercial loans. In the case of C&I, commercial mortgage and construction loan portfolios, the 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 REO. In addition to the management of the resolution process for problem loans, the SAG oversees collection efforts for all loans to prevent migration to the non-performing and/or adversely classified status. The SAG utilizes relationship officers, collection specialists and attorneys. In the case of residential construction projects, the workout function monitors project specifics, such as project management and marketing, as deemed necessary. The SAG utilizes its collections infrastructure of workout collection officers, credit work-out specialists, in-house legal counsel, and third party consultants. In the case of residential construction projects and large commercial loans, the function also utilizes third-party specialized consultants to monitor the residential and commercial construction projects in terms of construction, marketing and sales,

 

23


Table of Contents

and restructuring of large commercial loans. In addition, the Corporation extends, renews and restructures loans with satisfactory credit profiles. Many commercial loan facilities are structured as lines of credit, which are mainly one year in term 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 TDRs that includes the recorded investment by loan class and modification type is summarized in the following table. This information reflects all TDRs at March 31, 2012:

 

    March 31, 2012  
(In thousands)   Interest
rate below
market
    Maturity
or term
extension
    Combination
of reduction
in interest
rate and
extension of
maturity
    Forgiveness
of

Principal
and/or
interest
    Forbearance
Agreement  (1)
    Other (2)     Total  

Troubled Debt Restructurings

             

Non- FHA/VA Residential Mortgage loans

  $ 9,722      $ 3,885      $ 336,096      $ —        $ —        $ 36,587      $ 386,290   

Commercial Mortgage Loans

    73,723        18,466        118,820        838        —          11,772        223,619   

Commercial & Industrial Loans

    21,856        12,792        20,053        7,537        12,514        39,063        113,815   

Construction Loans

    6,338        724        4,112        —          90,851        5,990        108,015   

Consumer Loans - Auto

    —          1,224        7,266        —          —          1,408        9,898   

Finance Leases

    —          2,143        —          —          —          —          2,143   

Consumer Loans - Other

    773        574        4,921        27        —          3,549        9,844   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Troubled Debt Restructurings

  $ 112,412      $ 39,808      $ 491,268      $ 8,402      $ 103,365      $ 98,369      $ 853,624   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Mainly related to one construction relationship amounting to $73.1 million.
(2) Other concessions granted by the Corporation include 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 activity for the quarter ended March 31, 2012:

 

(In thousands)    Quarter ended
March 31, 2012
 

Beginning Balance of TDRs

   $ 820,499   

New TDRs

     68,268   

Increases to existing TDRs (disbursements)

     9,675   

Charge-offs post modification

     (7,700

Foreclosures

     (9,007

Removed from TDR classification

     (5,059

Paid-off and partial payments

     (23,052
  

 

 

 

Ending balance of TDRs

   $ 853,624   
  

 

 

 

TDRs are classified as either accrual or nonaccrual loans. A loan 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 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 loans being returned to accrual 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 Corporation’s interest income by returning a non-performing loan to performing status, if applicable, and increase cash flows by providing for payments to be made by the borrower, and avoid increases in foreclosure and real estate owned (“REO”) costs. The Corporation continues to consider a modified loan as an impaired loan for purposes of estimating the allowance for loan and lease losses. 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. During the quarter ended March 31, 2012, $5.1 million were removed from the TDR classification, as reflected in the table above.

 

24


Table of Contents

The following table provides a breakdown between accrual and nonaccrual status of TDRs as of March 31, 2012:

 

     March 31, 2012  
(In thousands)    Accrual      Nonaccrual  (1)      Total TDRs  

Non- FHA/VA Residential Mortgage loans

   $ 281,832       $ 104,458       $ 386,290   

Commercial Mortgage Loans

     123,381         100,238         223,619   

Commercial & Industrial Loans

     18,751         95,064         113,815   

Construction Loans

     2,188         105,827         108,015   

Consumer Loans - Auto

     5,851         4,047         9,898   

Finance Leases

     2,054         89         2,143   

Consumer Loans - Other

     7,692         2,152         9,844   
  

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings

   $ 441,749       $ 411,875       $ 853,624   
  

 

 

    

 

 

    

 

 

 

 

(1) Included in non-accrual loans are $186.5 million in loans that are performing under the terms of the restructuring agreement but are reported in non-accrual until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and there is no doubt about full collectibility.

TDRs exclude restructured mortgage loans that are government guaranteed (i.e. FHA/VA loans) totaling $87.3 million. The Corporation excludes government guaranteed loans from TDRs given that in the event that the borrower defaults on the loan, the principal and interest 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 government guarantees to be impaired loans for the purpose of calculating the allowance for loan and lease losses.

Loan modifications that are considered TDRs completed during the quarters ended March 31, 2012 and 2011 were as follows:

 

    Quarter ended March 31, 2012  
(Dollars in thousands)   Number of contracts     Pre-modification
Outstanding Recorded
Investment
    Post-Modification Outstanding
Recorded Investment
 

Troubled Debt Restructurings

     

Non- FHA/VA Residential Mortgage loans

    155      $ 24,792      $ 25,095   

Commercial Mortgage Loans

    15        13,290        13,326   

Commercial & Industrial Loans

    31        28,147        24,890   

Construction Loans

    1        724        724   

Consumer Loans - Auto

    154        1,796        1,796   

Finance Leases

    32        619        619   

Consumer Loans - Other

    297        1,818        1,818   
 

 

 

   

 

 

   

 

 

 

Total Troubled Debt Restructurings

    685      $ 71,186      $ 68,268   
 

 

 

   

 

 

   

 

 

 

 

    Quarter ended March 31, 2011  
(Dollars in thousands)   Number of contracts     Pre-modification
Outstanding Recorded
Investment
    Post-Modification Outstanding
Recorded Investment
 

Troubled Debt Restructurings

     

Non- FHA/VA Residential Mortgage loans

    267      $ 44,844      $ 46,825   

Commercial Mortgage Loans

    28        94,802        66,900   

Commercial & Industrial Loans

    27        61,802        20,272   

Construction Loans

    1        176        222   

Consumer Loans - Auto

    224        2,785        2,814   

Finance Leases

    23        414        427   

Consumer Loans - Other

    356        2,929        2,959   
 

 

 

   

 

 

   

 

 

 

Total Troubled Debt Restructurings

    926      $ 207,752      $ 140,419   
 

 

 

   

 

 

   

 

 

 

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 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.

 

25


Table of Contents

Loan modifications considered troubled debt restructurings that defaulted during the periods ended March 31, 2012 and March 31, 2011 and had been modified in a TDR during the 12-months preceding the default date were as follows:

 

    Quarter ended March 31, 2012  
    Number of contracts     Recorded Investment  

Non- FHA/VA Residential Mortgage loans

    53      $ 7,356   

Commercial Mortgage Loans

    4        2,047   

Commercial & Industrial Loans

    3        5,894   

Construction Loans

    —          —     

Consumer Loans - Auto

    —          —     

Consumer Loans - Other

    —          —     

Finance Leases

    2        67   
 

 

 

   

 

 

 

Total

    62      $ 15,364   
 

 

 

   

 

 

 

 

    Quarter ended March 31, 2011  
    Number of contracts     Recorded Investment  

Non- FHA/VA Residential Mortgage loans

    40      $ 7,342   

Commercial Mortgage Loans

    4        542   

Commercial & Industrial Loans

    —          —     

Construction Loans

    —          —     

Consumer Loans - Auto

    —          —     

Consumer Loans - Other

    —          —     

Finance Leases

    —          —     
 

 

 

   

 

 

 

Total

    44      $ 7,884   
 

 

 

   

 

 

 

For certain TDRs, 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 restructuring, the A note is identified and classified as a TDR. 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 are included in assessing whether the borrower can meet the new terms and may result in that the loans be returned to accrual status at the time of restructuring. In the periods following the calendar year in which a loan was restructured, the Note A may no longer be reported as a TDR if it is on accrual, is in compliance with its modified terms, and yields a market rate (as determined and documented at the time of the restructure)

The recorded investment in loans restructured using the A/B note restructure workout strategy was approximately $126.4 million at March 31, 2012. 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 quarter of 2012:

 

     (In thousands)  

Principal balance deemed collectible at end of period

   $ 126,415   
  

 

 

 

Amount charged-off

   $ 1,949   
  

 

 

 

Charges to the provision for loan losses

   $ 1,051   
  

 

 

 

Allowance for loan losses as of December 31, 2011

   $ 4,971   
  

 

 

 

 

26


Table of Contents

Of the loans comprising the $126.4 million that have been deemed collectible, approximately $105.8 million were placed in accruing status as the borrowers have exhibited a period of sustained performance. These loans continue to be individually evaluated for impairment purposes.

As of March 31, 2012, the Corporation maintains a $2.8 million reserve for unfunded loan commitments mainly related to outstanding construction loans commitments. The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance sheet loan commitments at the balance sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included as part of accounts payable and other liabilities in the consolidated statement of financial condition.

8 – LOANS HELD FOR SALE

As of March 31, 2012 and December 31, 2011, the Corporation’s loans held for sale portfolio was composed of:

 

     March 31,
2012
     December 31,
2011
 
     (In thousands)  

Residential mortgage loans

   $ 44,352       $ 11,058   

Construction loans

     —           4,764   
  

 

 

    

 

 

 

Total

   $ 44,352       $ 15,822   
  

 

 

    

 

 

 

9 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

One of the market risks facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of the Corporation’s assets or liabilities and the risk that net interest income from its loan and investment portfolios will be adversely affected by changes in interest rates. The overall objective of the Corporation’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

The Corporation designates a derivative as a fair value hedge, cash flow hedge or as an economic undesignated hedge when it enters into the derivative contract. As of March 31, 2012 and December 31, 2011, all derivatives held by the Corporation were considered economic undesignated hedges. These undesignated hedges are recorded at fair value with the resulting gain or loss recognized in current earnings.

The following summarizes the principal derivative activities used by the Corporation in managing interest rate risk:

Interest rate cap agreements – Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection from rising interest rates. Specifically, the interest rate on certain of the Corporation’s commercial loans to other financial institutions is generally a variable rate limited to the weighted-average coupon of the referenced residential mortgage collateral, less a contractual servicing fee. During the second quarter of 2010, the counterparty for interest rate caps for certain private label MBS was taken over by the FDIC, which resulted in the immediate cancelation of all outstanding commitments, and as a result, interest rate caps with a notional amount of $87.0 million are no longer considered to be derivative financial instruments. The total exposure to fair value of $3.0 million related to such contracts was reclassified to an account receivable.

Interest rate swaps – Interest rate swap agreements generally involve the exchange of fixed and floating-rate interest payment obligations without the exchange of the underlying notional principal amount. As of March 31, 2012 and December 31, 2011, most of the interest rate swaps outstanding are used for protection against rising interest rates. Similar to unrealized gains and losses arising from changes in fair value, net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense depending on whether an asset or liability is being economically hedged.

Indexed options</