XNYS:FBP First BanCorp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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  ¨    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 July 31, 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 June 30, 2012 and December  31, 2011

   3

Consolidated Statements of Income (Loss) (Unaudited) – Quarters ended June  30, 2012 and June 30, 2011 and a six-month periods ended June 30, 2012 and June 30, 2011

   4

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Quarters ended June  30, 2012 and June 30, 2011 and six-month periods ended June 30, 2012 and June 30, 2011

   5

Consolidated Statements of Cash Flows (Unaudited) – Six-month periods ended June  30, 2012 and June 30, 2011

   6

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Six-month periods ended June 30, 2012 and June 30, 2011

   7

Notes to Consolidated Financial Statements (Unaudited)

   8

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

   51

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   95

Item 4. Controls and Procedures

   95

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

   96

Item 1A. Risk Factors

   96

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


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 to advise readers that various factors, including, but not limited to, the following could cause actual results to differ materially from those expressed in, or implied by such “forward-looking statements.”:

 

   

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 potential 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 environment, market liquidity, housing absorption rates, real estate prices and disruptions in the U.S. capital markets, which may reduce interest margins, impact funding sources, affect demand for all of the Corporation’s products and services and reduce the Corporation’s revenues, earnings and the value of the Corporation’s assets;

 

   

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

 

   

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 condition or performance and could cause the Corporation’s actual results for future periods to differ materially from prior results and anticipated or projected results;

 

   

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;

 

   

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;

 

1


Table of Contents
   

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

 

   

a need to recognize additional impairments on financial instruments, goodwill, or other intangible assets 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 of the “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, as well as, “Part II, Item 1A, Risk Factors” in this quarterly report on Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

 

2


Table of Contents

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

(In thousands, except for share information)    June 30,
2012
    December 31,
2011
 

ASSETS

    

Cash and due from banks

   $ 518,725      $ 206,897   
  

 

 

   

 

 

 

Money market investments:

    

Federal funds sold

     —          2,603   

Time deposits with other financial institutions

     1,055        955   

Other short-term investments

     239,123        236,111   
  

 

 

   

 

 

 

Total money market investments

     240,178        239,669   
  

 

 

   

 

 

 

Investment securities available for sale, at fair value:

    

Securities pledged that can be repledged

     1,066,871        1,167,265   

Other investment securities

     474,654        756,003   
  

 

 

   

 

 

 

Total investment securities available for sale

     1,541,525        1,923,268   
  

 

 

   

 

 

 

Other equity securities

     32,141        37,951   
  

 

 

   

 

 

 

Investment in unconsolidated entities

     34,499        43,401   
  

 

 

   

 

 

 

Loans, net of allowance for loan and lease losses of $457,153 (2011 - $493,917)

     9,838,962        10,065,475   

Loans held for sale, at lower of cost or market

     60,393        15,822   
  

 

 

   

 

 

 

Total loans, net

     9,899,355        10,081,297   
  

 

 

   

 

 

 

Premises and equipment, net

     185,721        194,942   

Other real estate owned

     167,341        114,292   

Accrued interest receivable on loans and investments

     51,958        49,957   

Other assets

     242,207        235,601   
  

 

 

   

 

 

 

Total assets

   $ 12,913,650      $ 13,127,275   
  

 

 

   

 

 

 

LIABILITIES

    

Non-interest-bearing deposits

   $ 776,947      $ 705,789   

Interest-bearing deposits

     9,123,226        9,201,965   
  

 

 

   

 

 

 

Total deposits

     9,900,173        9,907,754   

Securities sold under agreements to repurchase

     900,000        1,000,000   

Advances from the Federal Home Loan Bank (FHLB)

     333,440        367,440   

Notes payable (including $15,968 measured at fair value as of December 31, 2011)

     —          23,342   

Other borrowings

     231,959        231,959   

Accounts payable and other liabilities

     99,119        152,636   
  

 

 

   

 

 

 

Total liabilities

     11,464,691        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

     885,130        884,002   

Retained earnings

     453,558        457,384   

Accumulated other comprehensive income, net of tax expense of $7,401 (2011 - $7,751)

     26,610        19,198   
  

 

 

   

 

 

 

Total stockholders’ equity

     1,448,959        1,444,144   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 12,913,650      $ 13,127,275   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

3


Table of Contents

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

     Quarter Ended     Six-Month Period Ended  
(In thousands, except per share information)    June 30,
2012
    June 30,
2011
    June 30,
2012
    June 30,
2011
 

Interest income:

        

Loans

   $ 142,239      $ 146,314      $ 282,765      $ 304,285   

Investment securities

     10,957        16,687        22,169        39,310   

Money market investments

     456        417        825        726   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     153,652        163,418        305,759        344,321   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     33,489        49,525        70,223        103,584   

Securities sold under agreements to repurchase

     7,028        13,022        15,118        26,158   

Advances from FHLB

     3,028        4,219        6,269        8,964   

Notes payable and other borrowings

     1,402        2,217        3,578        4,901   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     44,947        68,983        95,188        143,607   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     108,705        94,435        210,571        200,714   

Provision for loan and lease losses

     24,884        59,184        61,081        147,916   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     83,821        35,251        149,490        52,798   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Service charges on deposit accounts

     3,240        3,054        6,487        6,386   

Other service charges

     1,226        1,456        2,745        3,174   

Mortgage banking activities

     4,057        9,336        8,532        15,927   

Net gain on sale of investments

     —          21,949        26        41,290   

Other-than-temporary impairment losses on investment securities:

        

Total other-than-temporary impairment losses

     —          —          —          —     

Portion of loss previously recognized in other comprehensive income

     (143     (607     (1,376     (607
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses on investment securities

     (143     (607     (1,376     (607

Loss on early extinguishment of borrowings

     —          (1,823     —          (1,823

Equity in losses of unconsolidated entities

     (2,491     (1,536     (8,727     (1,536

Other non-interest income

     8,133        7,033        14,810        16,536   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     14,022        38,862        22,497        79,347   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expenses:

        

Employees’ compensation and benefits

     31,101        29,407        62,712        59,846   

Occupancy and equipment

     15,181        15,603        30,857        30,853   

Business promotion

     3,475        3,628        6,022        6,292   

Professional fees

     5,322        6,072        10,501        11,209   

Taxes, other than income taxes

     3,435        3,278        6,851        6,533   

Insurance and supervisory fees

     13,302        14,404        26,310        29,581   

Net loss on real estate owned (REO) operations

     6,786        5,971        10,229        11,471   

Other non-interest expenses

     8,340        8,068        18,653        13,512   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expenses

     86,942        86,431        172,135        169,297   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     10,901        (12,318     (148     (37,152

Income tax expense

     (1,545     (2,606     (3,678     (6,192
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 9,356      $ (14,924   $ (3,826   $ (43,344
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ 9,356      $ (22,205   $ (3,826   $ (57,642
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share:

        

Basic

   $ 0.05      $ (1.04   $ (0.02   $ (2.71
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.05      $ (1.04   $ (0.02   $ (2.71
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

4


Table of Contents

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

     Quarter Ended     Six-Month Period Ended  
(In thousands)    June 30,
2012
    June 30,
2011
    June 30,
2012
    June 30,
2011
 

Net income (loss)

   $ 9,356      $ (14,924   $ (3,826   $ (43,344
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     2,900        1,907        6,297        2,658   

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

     (143     (607     (1,376     (607

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

        

All other unrealized holding gains arising during the period

     3,498        17,225        2,141        11,293   

Reclassification adjustments for net gain included in net income

     —          (21,901     —          (21,949

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

     133        587        350        733   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     6,388        (2,789     7,412        (5,083
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 15,744      $ (17,713   $ 3,586      $ (48,427
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

5


Table of Contents

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six-Month Period Ended  
(In thousands)    June 30, 2012     June 30, 2011  

Cash flows from operating activities:

    

Net loss

   $ (3,826   $ (43,344
  

 

 

   

 

 

 

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

    

Depreciation

     12,435        12,082   

Amortization of core deposit intangible

     1,177        1,177   

Amortization of purchased credit card relationship intangible

     106        —     

Provision for loan and lease losses

     61,081        147,916   

Deferred income tax expense

     1,128        3,565   

Stock-based compensation recognized

     192        46   

Gain on sale of investments, net

     —          (40,611

Loss on early extinguishment of borrowings

     —          1,823   

Other-than-temporary impairments on investment securities

     1,376        607   

Equity in losses of unconsolidated entities

     8,727        1,536   

Derivatives instruments and financial (gain) loss

     (834     1,448   

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

     254        (2,845

Net gain on sale of loans held for investment and impairments

     (243     (12,955

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

     (947     (873

Originations and purchases of loans held for sale

     (181,181     (47,237

Proceeds from sales and repayments of loans held for sale

     194,342        49,618   

Amortization of broker placement fees

     5,307        9,542   

Net amortization of premium and discounts on investment securities

     7,511        2,038   

(Decrease) increase in accrued income tax payable

     (1,088     1,816   

Decrease in accrued interest receivable

     349        7,342   

Increase in accrued interest payable

     241        1,948   

Decrease (increase) in other assets

     15,413        (14,503

Decrease in other liabilities

     (1,808     (5,382
  

 

 

   

 

 

 

Total adjustments

     122,959        118,098   
  

 

 

   

 

 

 

Net cash provided by operating activities

     119,712        74,754   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Principal collected on loans

     1,549,244        1,186,329   

Loans originated

     (1,165,202     (985,980

Purchases of loans

     (467,980     (70,459

Proceeds from sale of loans held for investment

     15,001        670,230   

Proceeds from sale of repossessed assets

     46,535        49,363   

Proceeds from sale of available-for-sale securities

     —          487,054   

Proceeds from sale of held-to-maturity securities

     —          348,750   

Purchases of securities available for sale

     (317,506     (532,727

Proceeds from principal repayments and maturities of securities available for sale

     698,625        150,049   

Proceeds from principal repayments and maturities of securities held to maturity

     —          33,726   

Additions to premises and equipment

     (4,494     (6,359

Proceeds from sale of premises and equipment and other assets

     1,026        2,940   

Proceeds from securities litigation settlement and other proceeds

     26        679   

Decrease in other equity securities

     5,810        13,680   
  

 

 

   

 

 

 

Net cash provided by investing activities

     361,085        1,347,275   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net decrease in deposits

     (13,540     (996,792

Net repayments and cancellation costs of securities sold under agreements to repurchase

     (100,000     (201,575

Net FHLB advances paid and cancellation costs

     (34,000     (233,248

Repayments of medium-term notes

     (21,957     (7,000

Proceeds from common stock sold

     1,037        —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (168,460     (1,438,615
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     312,337        (16,586

Cash and cash equivalents at beginning of period

     446,566        370,283   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 758,903      $ 353,697   
  

 

 

   

 

 

 

Cash and cash equivalents include:

    

Cash and due from banks

   $ 518,725      $ 239,488   

Money market instruments

     240,178        114,209   
  

 

 

   

 

 

 
   $ 758,903      $ 353,697   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

     Six-Month Period Ended  
     June 30,
2012
    June 30,
2011
 
(In thousands)             

Preferred Stock:

    

Balance at beginning of period

   $ 63,047      $ 425,009   

Accretion of preferred stock discount

     —          3,694   
  

 

 

   

 

 

 

Balance at end of period

     63,047        428,703   
  

 

 

   

 

 

 

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

     192        46   
  

 

 

   

 

 

 

Balance at end of period

     885,130        319,505   
  

 

 

   

 

 

 

Retained Earnings:

    

Balance at beginning of period

     457,384        293,643   

Net loss

     (3,826     (43,344

Accretion of preferred stock discount

     —          (3,694
  

 

 

   

 

 

 

Balance at end of period

     453,558        246,605   
  

 

 

   

 

 

 

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

    

Balance at beginning of period

     19,198        17,718   

Other comprehensive income (loss), net of tax

     7,412        (5,083
  

 

 

   

 

 

 

Balance at end of period

     26,610        12,635   
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 1,448,959      $ 1,009,578   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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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. (“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 and six-month period ended June 30, 2012 are not necessarily indicative of the results to be expected for the entire year.

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

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

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

 

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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 will incorporate this guidance into the annual goodwill impairment evaluation process.

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 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 periods 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.

In July 2012, the FASB updated the Codification to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this Update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, 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 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 and six-month periods ended on June 30, 2012 and 2011 are as follows:

 

    Quarter Ended     Six-Month Period
Ended
 
    June 30,
2012
    June 30,
2011
    June 30,
2012
    June 30,
2011
 
    (In thousands, except per share
information)
 

Net Income (Loss):

       

Net Income (Loss):

  $ 9,356      $ (14,924   $ (3,826   $ (43,344

Cumulative convertible preferred stock dividends (Series G)

    —          (5,302     —          (10,604

Preferred stock discount accretion (Series G)

    —          (1,979     —          (3,694
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

  $ 9,356      $ (22,205   $ (3,826   $ (57,642
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-Average Shares:

       

Basic weighted-average common shares outstanding

    205,415        21,303        205,316        21,303   

Average potential common shares

    537        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted-average number of common shares outstanding

    205,952        21,303        205,316        21,303   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) per common share:

       

Basic

  $ 0.05      $ (1.04   $ (0.02   $ (2.71

Diluted

  $ 0.05      $ (1.04   $ (0.02   $ (2.71

Earning (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average common shares issued and outstanding. Net income (loss) attributable to common stockholders represents net income (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.

 

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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. Stock options not included in the computation of outstanding shares because they were antidilutive amounted to 120,221 and 129,934 for the quarters and six-month periods ended June 30, 2012 and 2011, respectively. Warrants outstanding to purchase 1,285,899 shares of common stock for the six-month period ended June 30, 2012 and 389,483 shares of common stock for the quarter and six-month period ended June 30, 2011, and 719,500 unvested shares of restricted stock for the six-month period ended June 30, 2012 and 716 unvested shares of restricted stock for the quarter and six-month period ended June 30, 2011, were excluded from the computation of diluted earnings per common share because the Corporation reported a net loss attributable to common stockholders and their inclusion would have an antidilutive effect.

3 – STOCK-BASED COMPENSATION

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 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.

The activity of stock options for the six-month period ended June 30, 2012 is set forth below:

 

     Six-month Period Ended
June 30, 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         3.3       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

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.

 

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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:

 

     Six-month Period Ended
June 30, 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 June 30, 2012

     719,500       $ 2.45   
  

 

 

    

 

 

 

For the quarter and six-month period ended June 30, 2012, the Corporation recognized $0.2 million of stock-based compensation expense related to the aforementioned restricted stock awards. For the quarter and six-month period ended June 30, 2011, the Corporation recognized $23,333 and $46,666 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. As of June 30, 2012, there was $1.5 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 the next 1.75 years and the other 50% over the next 2.75 years, as if they were multiple awards. No shares of restricted stock were granted or vested during the first half of 2011.

The fair value of the shares of restricted stock granted in 2012 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.

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.

 

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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 June 30, 2012 and December 31, 2011 were as follows:

 

    June 30, 2012     December 31, 2011  
   

Amortized

   

Non-Credit
Loss
Component
of OTTI

Recorded

    Gross
Unrealized
   

Fair

   

Weighted
average

   

Amortized

   

Non-Credit
Loss
Component
of OTTI

Recorded

    Gross
Unrealized
   

Fair

   

Weighted
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

  $ 373,599      $ —        $ 8      $ 3      $ 373,604        0.16      $ 476,665      $ —        $ 327      $ —        $ 476,992        0.34   

Obligations of U.S. Government sponsored agencies:

                       

Due within one year

    —          —          —          —          —          —          300,381        —          1,204        —          301,585        1.15   

Puerto Rico Government obligations:

                       

Due within one year

    8,310        —          —          —          8,310        4.19        8,560        —          110        —          8,670        4.20   

After 1 to 5 years

    1,600        —          16        —          1,616        4.50        70,590        —          171        1        70,760        2.63   

After 5 to 10 years

    39,736        —          960        —          40,696        4.49        118,186        —          76        13        118,249        5.07   

After 10 years

    18,960        —          865        —          19,825        5.83        24,154        —          781        1        24,934        5.74   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

United States and Puerto Rico Government obligations

    442,205        —          1,849        3        444,051        0.88        998,536        —          2,669        15        1,001,190        1.47   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Mortgage-backed securities:

                       

FHLMC certificates:

                       

Due within one year

    408        —          2        —          410        3.64        —          —          —          —          —          —     

After 1 to 5 years

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

After 10 years

    139,398        —          2,099        —          141,497        2.35        24,974        —          238        —          25,212        2.59   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    139,806        —          2,101        —          141,907        2.36        25,902        —          246        —          26,148        2.62   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

GNMA certificates:

                       

After 1 to 5 years

    176        —          9        —          185        3.65        179        —          9        —          188        3.88   

After 5 to 10 years

    528        —          39        —          567        3.88        596        —          47        —          643        4.09   

After 10 years

    638,741        —          43,250        —          681,991        4.00        717,237        —          43,938        —          761,175        3.98   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    639,445        —          43,298        —          682,743        4.00        718,012        —          43,994        —          762,006        3.98   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

FNMA certificates:

                       

Due within one year

    486        —          19        —          505        3.81        —          —          —          —          —          —     

After 1 to 5 years

    —          —          —          —          —          —          1,019        —          42        —          1,061        3.82   

After 5 to 10 years

    15,803        —          1,103        —          16,906        4.01        18,826        —          1,007        —          19,833        3.97   

After 10 years

    192,012        —          4,979        —          196,991        3.15        47,485        —          3,285        —          50,770        5.46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    208,301        —          6,101        —          214,402        3.21        67,330        —          4,334        —          71,664        5.02   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Other mortgage pass-through trust certificates:

                       

After 10 years

    76,230        31,951        13,287        —          57,566        2.34        85,014        31,951        8,143        —          61,206        2.19   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total mortgage-backed securities

    1,063,782        31,951        64,787        —          1,096,618        3.51        896,258        31,951        56,717        —          921,024        3.85   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Corporate bonds:

                       

After 10 years

    1,449        434        —          223        792        6.71        1,447        434        —          —          1,013        5.80   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Equity securities (without contractual maturity) (1)

    77        —          —          13        64        —          77        —          —          36        41        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total investment securities available for sale

  $ 1,507,513      $ 32,385      $ 66,636      $ 239      $ 1,541,525        2.74      $ 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 $192.9 million of Puerto Rico Government Obligations called during the first half 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.

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 June 30, 2012 and December 31, 2011. It 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 June 30, 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

   $ 148,244       $ 3       $ —         $ —         $ 148,244       $ 3   

Mortgage-backed securities:

                 

Other mortgage pass-through trust certificates

     —           —           57,402         18,664         57,402         18,664   

Corporate bonds

     —           —           792         657         792         657   

Equity securities

     64         13         —           —           64         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 148,308       $ 16       $ 58,194       $ 19,321       $ 206,502       $ 19,337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     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 first half of 2011 amounted to approximately $487.1 million, none in the first half 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 income (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 91% 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 $76 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.

 

   

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.

For the quarter and six-month period ended June 30, 2012 and 2011, the Corporation recorded OTTI losses on available-for-sale debt securities as follows:

 

     Private label
MBS
    Private label
MBS
 
     Quarter ended
June 30,
    Six-month period ended
June 30,
 
     2012     2011     2012     2011  
(In thousands)                         

Total other-than-temporary impairment losses

   $ —        $ —        $ —        $ —     

Portion of loss previously recognized in other comprehensive income

     (143     (607     (1,376     (607
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses recognized in earnings

   $ (143   $ (607   $ (1,376   $ (607
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Table of Contents

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
June 30,
     Six-month period ended
June 30,
 
     2012      2011      2012      2011  
(In thousands)                            

Credit losses at the beginning of the period

   $ 5,056       $ 1,852       $ 3,823       $ 1,852   

Additions:

           

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

     143         607         1,376         607   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 5,199       $ 2,459       $ 5,199       $ 2,459   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Related to private label MBS.

During the first half of 2012, a $1.4 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 June 30, 2012 and December 31, 2011 were as follow:

 

     June 30, 2012   December 31, 2011
     Weighted
Average
    Range   Weighted
Average
    Range

Discount rate

     14.5   14.5%     14.5   14.5%

Prepayment rate

     32   23.71% - 42.27%     27   21.33% - 37.97%

Projected Cumulative Loss Rate

     7   1.14% - 15.70%     6   1.94% - 11.89%

No OTTI losses on equity securities held in the available-for-sale investment portfolio were recognized for the first half 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.

As of June 30, 2012 and December 31, 2011, the Corporation had investments in FHLB stock with a book value of $30.8 million and $36.7 million, respectively. The net realizable value is a reasonable proxy for the fair value of these instruments. Dividend income from FHLB stock for the quarter and six-month period ended June 30, 2012 amounted to $0.4 million and $0.8 million, respectively, compared to $0.5 million and $1.2 million for the comparable periods in 2011.

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 June 30, 2012 and December 31, 2011 was $1.3 million.

 

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Table of Contents

6 – LOANS HELD FOR INVESTMENT

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

 

     June 30,
2012
    December 31,
2011
 
     (In thousands)  

Residential mortgage loans, mainly secured by first mortgages

   $ 2,764,066      $ 2,873,785   
  

 

 

   

 

 

 

Commercial loans:

    

Construction loans

     364,934        427,863   

Commercial mortgage loans

     1,479,068        1,565,411   

Commercial and Industrial loans

     3,475,356        3,856,695   

Loans to local financial institutions collateralized by real estate mortgages

     262,563        273,821   
  

 

 

   

 

 

 

Commercial loans

     5,581,921        6,123,790   
  

 

 

   

 

 

 

Finance leases

     240,589        247,003   
  

 

 

   

 

 

 

Consumer loans

     1,709,539        1,314,814   
  

 

 

   

 

 

 

Loans held for investment

     10,296,115        10,559,392   

Allowance for loan and lease losses

     (457,153     (493,917
  

 

 

   

 

 

 

Loans held for investment, net

   $ 9,838,962      $ 10,065,475   
  

 

 

   

 

 

 

Loans held for investment classified as non-performing as of June 30, 2012 and December 31, 2011 were as follows:

 

(Dollars in thousands)    June 30,
2012
     December 31,
2011
 

Non-performing loans:

     

Residential mortgage

   $ 333,043       $ 338,208   

Commercial mortgage

     239,881         240,414   

Commercial and Industrial

     255,253         270,171   

Construction

     202,133         250,022   

Consumer:

     

Auto loans

     17,652         19,641   

Finance leases

     2,829         3,485   

Other consumer loans

     14,897         16,421   
  

 

 

    

 

 

 

Total non-performing loans held for investment (1)

   $ 1,065,688       $ 1,138,362   
  

 

 

    

 

 

 

 

(1) Amounts exclude purchased credit impaired loans with a fair value of approximately $15.0 million acquired as part of a credit card portfolio purchased in the second quarter of 2012 as further discussed below.

 

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Table of Contents

The Corporation’s aging of the loans held for investment portfolio as of June 30, 2012 and December 31, 2011, follows:

 

As of June 30, 2012

(Dollars in thousands)

  30-59
Days
Past Due
    60-89
Days Past
Due
    90 days or
more Past
Due (1)
    Total Past
Due (4)
    Purchased
Credit-
Impaired
Loans (4)
    Current     Total loans
held for
investment
    90 days
past due
and still
accruing (5)
 

Residential mortgage:

               

FHA/VA and other government guaranteed loans (2) (3) (5)

  $ —        $ 12,403      $ 83,511      $ 95,914      $ —        $ 107,779      $ 203,693      $ 83,511   

Other residential mortgage loans (3)

    —          102,224        346,163        448,387        —          2,111,986        2,560,373        13,120   

Commercial:

               

Commercial & Industrial loans

    12,714        17,523        273,156        303,393        —          3,434,526        3,737,919        17,903   

Commercial mortgage loans (3)

    —          16,450        245,894        262,344        —          1,216,724        1,479,068        6,013   

Construction loans (3)

    —          4,691        202,171        206,862        —          158,072        364,934        38   

Consumer:

               

Auto loans

    60,888        17,943        17,652        96,483        —          867,096        963,579        —     

Finance leases

    10,459        3,200        2,829        16,488        —          224,101        240,589        —     

Other consumer loans

    13,918        5,220        14,897        34,035        15,001        696,924        745,960        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held for investment

  $ 97,979      $ 179,654      $ 1,186,273      $ 1,463,906      $ 15,001      $ 8,817,208      $ 10,296,115      $ 120,585   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes non-performing loans and accruing loans which are contractually delinquent 90 days or more (i.e. FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges and fees until charged-off at 180 days.
(2) As of June 30, 2012, includes $5.6 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.
(4) Purchased credit-impaired loans are excluded from delinquency and non-performing statistics as further discussed below.
(5) It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as past due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $32.5 million of residential mortgage loans insured by FHA or guaranteed by the VA, which are over 18 months delinquent, that are no longer accruing interest as of June 30, 2012.

 

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 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 credit quality indicators by loan type as of June 30, 2012 and December 31, 2011 are summarized below:

 

     Commercial Credit Exposure-Credit risk Profile based on
Creditworthiness category:
 
June 30, 2012    Substandard      Doubtful      Loss      Total
Adversely
Classified
     Total
Portfolio
 
                   (In thousands)                

Commercial Mortgage

   $ 406,205       $ 7,964       $ —         $ 414,169       $ 1,479,068   

Construction

     197,541         26,969         605         225,115         364,934   

Commercial and Industrial

     412,921         42,935         1,061         456,917         3,737,919   
     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.

 

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Table of Contents
June 30, 2012    Consumer Credit Exposure-Credit risk Profile based on payment activity  
     Residential Real-Estate      Consumer  
     FHA/VA/
Guaranteed  (1)
     Other
residential
loans
     Auto      Finance
Leases
     Other
Consumer
 
                   (In thousands)                

Performing

   $ 203,693       $ 2,227,330       $ 945,927       $ 237,760       $ 716,062   

Purchased Credit-Impaired

     —           —           —           —           15,001   

Non-performing

     —           333,043         17,652         2,829         14,897   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 203,693       $ 2,560,373       $ 963,579       $ 240,589       $ 745,960   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as past due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $32.5 million of residential mortgage loans insured by FHA or guaranteed by the VA, which are over 18 months delinquent, that are no longer accruing interest as of June 30, 2012.

 

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 following tables present information about impaired loans as of June 30, 2012 and December 31, 2011, excluding purchased credit-impaired loans, which are reported separately and discussed below:

 

Impaired Loans

(Dollars in thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
Quarter to
date
     Interest
Income
Recognized
Year to
date
 

As of June 30, 2012

                 

With no related allowance recorded:

                 

FHA/VA Guaranteed loans

   $ —         $ —         $ —         $ —         $ —         $ —     

Other residential mortgage loans

     184,198         195,354         —           183,917         1,740         3,244   

Commercial:

                 

Commercial mortgage loans

     37,042         41,613         —           39,637         187         361   

Commercial & Industrial Loans

     14,279         35,469         —           18,861         67         91   

Construction Loans

     37,735         49,592         —           36,821         41         92   

Consumer:

                 

Auto loans

     —           —           —           —           —           —     

Finance leases

     —           —           —           —           —           —     

Other consumer loans

     2,804         4,130         —           2,981         25         45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 276,058       $ 326,158       $ —         $ 282,217       $ 2,060       $ 3,833   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                 

FHA/VA Guaranteed loans

   $ —         $ —         $ —         $ —         $ —         $ —     

Other residential mortgage loans

     415,179         456,811         49,111         417,359         2,928         5,251   

Commercial:

                 

Commercial mortgage loans

     324,259         371,586         52,591         326,643         2,358         4,812   

Commercial & Industrial Loans

     244,086         331,411         70,936         242,456         620         1,227   

Construction Loans

     152,338         252,831         34,938         183,783         70         137   

Consumer:

                 

Auto loans

     10,792         10,792         1,349         9,824         185         361   

Finance leases

     1,836         1,836         58         1,981         44         122   

Other consumer loans

     7,946         8,312         877         9,222         385         636   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,156,436       $ 1,433,579       $ 209,860       $ 1,191,268       $ 6,590       $ 12,546   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                 

FHA/VA Guaranteed loans

   $ —         $ —         $ —         $ —         $ —         $ —     

Other residential mortgage loans

     599,377         652,165         49,111         601,276         4,668         8,495   

Commercial:

                 

Commercial mortgage loans

     361,301         413,199         52,591         366,280         2,545         5,173   

Commercial & Industrial Loans

     258,365         366,880         70,936         261,317         687         1,318   

Construction Loans

     190,073         302,423         34,938         220,604         111         229   

Consumer:

                 

Auto loans

     10,792         10,792         1,349         9,824         185         361   

Finance leases

     1,836         1,836         58         1,981         44         122   

Other consumer loans

     10,750         12,442         877         12,203         410         681   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,432,494       $ 1,759,737       $ 209,860       $ 1,473,485       $ 8,650       $ 16,379   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 mortgage 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 mortgage 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 mortgage 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 $9.9 million and $20.2 million was recognized on impaired loans for the second quarter and first half of 2011, respectively.

 

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The following tables show the activity for impaired loans and the related specific reserve for the quarter and six-month period ended June 30, 2012:

 

     Quarter
ended
    Six-month
period ended
 
     June 30, 2012  
Impaired Loans:    (In thousands)  

Balance at beginning of period

   $ 1,477,032      $ 1,507,376   

Loans determined impaired during the period

     69,274        167,549   

Net charge-offs

     (38,348     (76,847

Increases to impaired loans (disbursements)

     14,203        19,121   

Foreclosures

     (46,366     (87,384

Loans no longer considered impaired

     (11,005     (36,918

Paid in full or partial payments

     (32,296     (60,763
  

 

 

   

 

 

 

Balance at end of period

   $ 1,432,469      $ 1,432,469   
  

 

 

   

 

 

 
     June 30, 2012  
Specific Reserve:    (In thousands)  

Balance at beginning of period

   $ 224,576      $ 214,902   

Provision for loan losses

     23,632        71,445   

Net charge-offs

     (38,348     (76,487
  

 

 

   

 

 

 

Balance at end of period

   $ 209,860      $ 209,860   
  

 

 

   

 

 

 

Acquired loans including Purchased Credit-Impaired Loans

On May 30, 2012, the Corporation re-entered the credit card business with the acquisition of an approximate $406 million portfolio of FirstBank-branded credit card portfolio from FIA Card Services (FIA). These loans were recorded on the Consolidated Statement of Financial Condition at estimated fair value on acquisition date of $368.9 million. The Corporation concluded that a portion of these loans acquired were purchased credit-impaired (“PCI”) loans. PCI loans are acquired loans with evidence of credit quality deterioration since origination for which it is probable at the date of purchase that the Corporation will be unable to collect all contractually required payments. The loans for which the Corporation concluded were credit impaired had a contractual outstanding unpaid principal and interest balance of $34.6 million and an estimated fair value of $15.7 million. Given the initial fair value of these loans included an estimate of credit losses expected to be realized over the remaining lives of the loans, the Corporation’s subsequent accounting for PCI loans differs from the accounting for non-PCI loans, therefore, the Corporation separately tracks and report PCI loans and exclude these loans from delinquency and nonperforming loan statistics.

Initial Fair value and Accretable Yield of PCI loans

At acquisition, the Corporation estimated the cash flows the Corporation expected to collect on credit card loans acquired with a deteriorated credit quality. Under the accounting guidance for PCI loans, the difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. This difference is neither accreted into income nor recorded on the Corporation’s consolidated Statement of Financial Condition. The excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans, using the effective yield method. The table below displays the contractually required principal and interest, cash flows expected to be collected and fair value at acquisition related to the loans the Corporation acquired. The table also displays the nonaccretable difference and the accretable yield at acquisition.

 

(dollars in thousands)    At acquisition  
     Purchased
Credit-
Impaired
loans
 

Contractually outstanding principal and interest at acquisition

   $ 34,577   

Less: Nonaccretable difference

     (15,408
  

 

 

 

Cash flows expected to be collected at acquisition

     19,169   

Less: Accretable yield

     (3,451
  

 

 

 

Fair value of loans acquired

   $ 15,718   
  

 

 

 

 

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Table of Contents

Outstanding balance and Carrying value of PCI loans

The table below presents the outstanding contractual principal balance and the carrying value of the PCI loans as of June 30, 2012:

 

(Dollars in thousands)    Purchased
Credit-Impaired
 

Contractual balance

   $ 33,883   

Carrying value

     15,001   

Changes in accretable yield of acquired loans

Subsequent to acquisition, the Corporation is required to periodically evaluate its estimate of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and nonaccretable difference or reclassifications from nonaccretable yield to accretable. Increases in the cash flows expected to be collected will generally result in an increase in interest income over the remaining life of the loan or pool of loans. Decreases in expected cash flows due to further credit deterioration will generally result in an impairment charge recognized in the Corporation’s provision for loan and lease losses, resulting in an increase to the allowance for loan losses. During the second quarter of 2012, the Corporation recorded interest income of $0.2 million related to the discount accretion recorded as an adjustment to the yield of the PCI portfolio.

In addition to the credit card portfolio acquired from FIA, the Corporation purchased during the first half of 2012 approximately $95.1 million of residential mortgage loans 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 $100.1 million of performing residential mortgage loans in the secondary market to FNMA and FHLMC during the first half of 2012. Also, the Corporation securitized approximately $108.8 million of FHA/VA mortgage loans into GNMA mortgage-backed securities during the first half of 2012.

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 June 30, 2012, approximately 85% have credit risk concentration in Puerto Rico, 7% in the United States and 8% in the Virgin Islands.

As of June 30, 2012, the Corporation had $148.6 million outstanding of credit facilities granted to the Puerto Rico Government and/or its political subdivisions, down from $360.1 million as of December 31, 2011, and $120.0 million granted to the Virgin Islands government, down from $139.4 million as of December 31, 2011. A substantial portion of these credit facilities consist of 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. 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.

In addition to loans extended to government entities, the largest loan to one borrower as of June 30, 2012 in the amount of $262.6 million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. This commercial loan is secured by individual real-estate loans, mostly 1-4 residential mortgage loans.

Troubled Debt Restructurings

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 June 30, 2012, the Corporation’s total TDR loans of $861.9 million consisted of $394.4 million of residential mortgage loans, $112.1 million of commercial and industrial loans, $244.4 million of commercial mortgage loans, $90.6 million of construction loans and $20.3 million of consumer loans. Outstanding unfunded commitments on TDR loans amounted to $2.7 million as of June 30, 2012.

 

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Table of Contents

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 82% of all loans that entered into a trial modification during the last twelve months became permanent modifications as of June 30, 2012. Substantially all permanent modifications are considered TDRs and are included in the TDR disclosures herein. As of June 30, 2012, the Corporation had 82 loans that were in trial modifications and were not considered TDRs, with an unpaid principal balance of $13.1 million and a carrying value of $12.3 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, 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 June 30, 2012:

 

(In Thousands)    June 30, 2012  
     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

   $ 12,617       $ 3,966       $ 335,605       $ —         $ —         $ 42,181       $ 394,369   

Commercial Mortgage Loans

     97,173         17,530         117,004         820         —           11,919         244,446   

Commercial & Industrial Loans

     21,469         12,511         20,897         7,421         9,550         40,273         112,121   

Construction Loans

     6,349         1,801         4,997         —           71,490         5,984         90,621   

Consumer Loans - Auto

     —           1,149         7,517         —           —           2,125         10,791   

Finance Leases

     —           1,836         —           —           —           —           1,836   

Consumer Loans - Other

     417         533         5,111         27         —           1,660         7,748   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings

   $ 138,025       $ 39,326       $ 491,131       $ 8,268       $ 81,040       $ 104,142       $ 861,932   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Mainly related to one construction relationship amounting to $60.6 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.

 

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Table of Contents

The following table presents the Corporation’s TDR activity for the quarter and six-month period ended June 30, 2012:

 

(In Thousands)    Quarter
ended
    Six-month
period
ended
 
     June 30, 2012  

Beginning Balance of TDRs

   $ 853,624      $ 820,499   

New TDRs

     57,260        125,528   

Increases to existing TDRs (disbursements)

     6,460        16,135   

Charge-offs post modification

     (17,862     (25,562

Foreclosures

     (19,248     (28,255

Removed from TDR classification

     (1,992     (7,051

Paid-off and partial payments

     (16,310     (39,362
  

 

 

   

 

 

 

Ending balance of TDRs

   $ 861,932      $ 861,932   
  

 

 

   

 

 

 

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 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 six-month period ended June 30, 2012, $7.1 million were removed from the TDR classification, as reflected in the table above.

The following table provides a breakdown between accrual and nonaccrual status of TDRs as of June 30, 2012:

 

(In Thousands)    June 30, 2012  
     Accrual      Nonaccrual  (1)      Total
TDRs
 

Non- FHA/VA Residential Mortgage loans

   $ 284,063       $ 110,306       $ 394,369   

Commercial Mortgage Loans

     146,145         98,301         244,446   

Commercial & Industrial Loans

     20,620         91,501         112,121   

Construction Loans

     2,220         88,401         90,621   

Consumer Loans - Auto

     6,866         3,925         10,791   

Finance Leases

     1,791         45         1,836   

Consumer Loans - Other

     6,461         1,287         7,748   
  

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings

   $ 468,166       $ 393,766       $ 861,932   
  

 

 

    

 

 

    

 

 

 

 

(1) Included in non-accrual loans are $165.3 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 $91.8 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.

 

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Table of Contents

Loan modifications that are considered TDRs completed during the quarter and six-month period ended June 30, 2012 and 2011 were as follows:

 

(Dollars in Thousands)    Quarter ended June 30, 2012  
     Number
of
contracts
     Pre-modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Non- FHA/VA Residential Mortgage loans

     101       $ 16,199       $ 16,247   

Commercial Mortgage Loans

     6         29,646         29,646   

Commercial & Industrial Loans

     5         3,737         3,432   

Construction Loans

     4         4,567         4,557   

Consumer Loans - Auto

     135         1,633         1,590   

Finance Leases

     20         303         303   

Consumer Loans - Other

     226         1,485         1,485   
  

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings

     497       $ 57,570       $ 57,260   
  

 

 

    

 

 

    

 

 

 
(Dollars in Thousands)    Six-month period ended June 30, 2012  
     Number
of
contracts
     Pre-modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Non- FHA/VA Residential Mortgage loans

     256       $ 40,991       $ 41,342   

Commercial Mortgage Loans

     21         42,936         42,972   

Commercial & Industrial Loans

     36         31,884         28,322   

Construction Loans

     5         5,291         5,281   

Consumer Loans - Auto

     289         3,429         3,386   

Finance Leases

     52         922         922   

Consumer Loans - Other

     523         3,303         3,303   
  

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings

     1,182