| | | The increase in 2009 was $352.1 million compared to $333.4 million and $307.8 million for 2008 and 2007, respectively. The increase in non-interest expenses for 2009, as compared to 2008 was principally attributable to: (i) an increase of $30.5 million in the FDIC deposit insurance premium, including $8.9 million for the special assessment levied by the FDIC in 2009 and increases in regular assessment rates, (ii) a $4.0 million core deposit intangible impairment charge, and (iii) a $1.8 million increase in the reserve for probable losses on outstanding unfunded loan commitments. The aforementioned increases were partially offset by decreases in certain controllable expenses such as: (i) a $9.1 million decrease in employees’ compensation and benefit expenses, due to a lower headcount and reductions in bonuses, incentive compensation and overtime costs, (ii) a $3.4 million decrease in business promotion expenses due to a lower headcount and reductions in bonuses, incentive compensation and overtime costs, (ii) a $3.4 million decrease in business promotion expenses due to a lower54
| | level of marketing activities, and (iii) a $1.1 million decrease in taxes, other than income taxes, driven by a reduction in municipal taxes which are assessed based on taxable gross revenues. |
| | | The increase in non-interest expenses for 2008, as compared to 2007, was principally attributable to: (i) a higher net loss on REO operations that increased to $21.4 million for 2008 from $2.4 million for 2007, driven by a higher inventory of repossessed properties and declining real estate prices, mainly in the U.S. mainland, that have caused write-downs on the value of repossessed properties, and (ii) an increase of $3.4 million in deposit insurance premium expense, as the Corporation used available one-time credits to offset the premium increase in 2007 resulting from a new assessment system adopted by the FDIC, and (iii) higher occupancy and equipment expenses, an increase of $2.9 million tied to the growth of the Corporation’s operations. The Corporation was able to continue the growth of its operations without incurring substantial additional non-interest expenses as reflected by a slight increase of 2% in non-interest expenses, excluding the increase in REO operations losses. Modest increases were observed in occupancy and equipment expenses, an increase of $2.9 million, and in employees’ compensation and benefit, an increase of $1.5 million. Refer to “Non-Interest Expenses”discussion below for additional information. |
For 2009, the Corporation recorded an income tax expense of $4.5 million, compared to an income tax benefit of $31.7 million for 2008. The income tax expense for 2009 mainly resulted from the aforementioned $184.4 million non-cash increase in the valuation allowance for the Corporation’s deferred tax asset. The increase in the valuation allowance was driven by the losses incurred in 2009 that placed FirstBank in a three-year cumulative loss position as of the end of the third quarter of 2009.
• | | For 2008,2010, the Corporation recorded an income tax benefitexpense of $31.7$103.1 million, compared to an income tax expense of $21.6$4.5 million for 2007.2009. The fluctuation wasincrease in 2010 is mainly related to lower taxable income. A significant portion of revenues was derived from tax-exempt assets and operations conducted throughan incremental $93.7 million non-cash charge in the international banking entity, FirstBank Overseas Corporation. Also, the positive fluctuation in financial results was impacted by two transactions: (i) a reversal of $10.6 million of Unrecognized Tax Benefits (“UTBs”) during the secondfourth quarter of 2008 for positions taken on2010 to the valuation allowance of the Bank’s deferred tax asset. | | | | | For 2009, the Corporation recorded an income tax returns dueexpense of $4.5 million, compared to the lapse of the statute of limitations for the 2003 taxable year, and (ii) the recognition of an income tax benefit of $5.4$31.7 million for 2008. The income tax expense for 2009 mainly resulted from the aforementioned $184.4 million non-cash increase in connection with an agreement entered into with the Puerto Rico Departmentvaluation allowance for the Corporation’s deferred tax asset. The increase in the valuation allowance was driven by losses incurred in 2009 that placed FirstBank in a three-year cumulative loss position as of Treasury during the firstend of the third quarter of 2008 that established a multi-year allocation schedule for deductibility of the $74.25 million payment made by the Corporation during 2007 to settle a securities class action suit.2009. |
| | | | Refer to “Income Taxes” discussion below for additional information. | | | • | | Total assets as of December 31, 2010 amounted to $15.6 billion, a decrease of $4.0 billion compared to $19.6 billion as of December 31, 2009. The decrease in total assets was primarily a result of a net decrease of $2.0 billion in the loan portfolio largely attributable to repayments of credit facilities extended to the Puerto Rico government and/or political subdivisions coupled with charge-offs and, to a lesser extent, the sale of non-performing loans during 2010. Also, there was a decrease of $1.6 billion in investment securities driven by sales of $2.3 billion during 2010, mainly U.S. agency MBS, and a decrease of $333.8 million in cash and cash equivalents as the Corporation roll-off maturing brokered CDs and advances from FHLB. The decrease in assets is consistent with the Corporation’s deleveraging, de-risking and balance sheet repositioning strategies, to among other things, preserve its capital position and enhance net interest margins in the future. Refer to the “Financial Condition and Operating Data Analysis” discussion below for additional information. |
Total assets as of December 31, 2009 amounted to $19.6 billion, an increase of $137.2 million compared to $19.5 billion as of December 31, 2008. The Corporation’s loan portfolio increased by $860.9 million (before the allowance for loan and lease losses), driven by new originations, mainly credit facilities extended to the Puerto Rico Government and/or its political subdivisions. Also, an increase of $298.4 million in cash and cash equivalents contributed to the increase in total assets, as the Corporation improved its liquidity position as a precautionary measure given current volatile market conditions. Partially offsetting the increase in loans and liquid assets was a $790.8 million decrease in investment securities, driven by sales and principal repayments of MBS.
As of December 31, 2009, total liabilities amounted to $18.0 billion, an increase of $86.2 million as compared to $17.9 billion as of December 31, 2008. The increase in total liabilities was mainly attributable to an increase of $818 million in short-term advances from the FED and FHLB and an increase of $480 million in non-brokered deposits, partially offset by a decrease of $868.4 million in brokered CDs and a decrease of $344.4 million in repurchase agreements. The Corporation has been reducing the reliance on brokered CDs and is focused on core deposit growth initiatives in all of the markets served.
The Corporation’s stockholders’ equity amounted to $1.6 billion as of December 31, 2009, an increase of $50.9 million compared to the balance as of December 31, 2008, driven by the $400 million investment by the United States Department of the Treasury (the “U.S. Treasury”) in preferred stock of the Corporation through the U.S. Treasury Troubled Asset Relief Program (TARP) Capital Purchase Program. This was partially offset by the net loss of $275.2 million recorded for 2009, dividends paid amounting to $43.1 million in 2009 ($13.0 million on common stock, or $0.14 per share, and $30.1 million on preferred stock) and a $30.9 million decrease in other comprehensive income mainly due to a noncredit-related impairment of
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| • | $31.7 | As of December 31, 2010, total liabilities amounted to $14.5 billion, a decrease of $3.5 billion as compared to $18.0 billion as of December 31, 2009. The decrease in total liabilities was mainly attributable to a $1.7 billion decrease in repurchase agreements driven by the early extinguishment of approximately $1 billion of long-term repurchase agreements as part of the Corporation’s balance sheet repositioning strategies and the nonrenewal of maturing repurchase agreements. Also, there was a decrease of $900 million and $325 million in advances from the FED and from the FHLB, respectively, as well as a decrease of $1.3 billion in brokered CDs. Partially offsetting the aforementioned decreases was an increase of $669.6 million in core deposits. Refer to the “Risk Management — Liquidity Risk and Capital Adequacy” discussion below for additional information about the Corporation’s funding sources. | | | • | | The Corporation’s stockholders’ equity amounted to $1.1 billion as of December 31, 2010, a decrease of $541.1 million compared to the balance as of December 31, 2009, driven by the net loss of $524.3 million for 2010, a decrease of $8.8 million in accumulated other comprehensive income and $8 million of issue costs related to the issuance of new common stock in exchange for $487 million of Series A through E Preferred Stock (the “Exchange Offer”). Although all the regulatory capital ratios exceeded the established “well capitalized” levels at December 31, 2010, due to the Order, FirstBank cannot be treated as a “well-capitalized” institution under regulatory guidance. | | | | | During the third quarter of 2010, the Corporation increased its common equity by issuing common stock in exchange for $487 million, or 89%, of the outstanding Series A through E Preferred Stock and issued a new series of mandatorily convertible preferred stock, the Series G Preferred Stock, in exchange for the $400 million Series F preferred stock held by the United States Department of Treasury (“U.S. Treasury”). As a result of these initiatives, the Corporation’s tangible common equity and Tier 1 common equity ratios as of December 31, 2010 increased to 3.80% and 5.01%, respectively, from 3.20% and 4.10%, respectively, at December 31, 2009. Refer to the “Risk Management — Capital” section below for additional information including further information about these non-GAAP financial measures and the Corporation’s capital plan execution. | | | • | | Total loan production, including purchases, refinancings and draws from existing commitments, for 2010 was $3.0 billion, compared to $4.8 billion for 2009, as the Corporation continues with its targeted lending activities. The decrease in loan production was reflected in almost all portfolios, with the exception of auto financings, but in particular in credit facilities extended to the Puerto Rico and Virgin Islands government. Origination related to government entities amounted to $702.6 million in 2010 compared to $1.8 billion in 2009. Other significant reductions in loan originations were related to the construction and commercial mortgage loan portfolios. | | | | | The increase in loan production in 2009, as compared to 2008, was mainly associated with a $977.9 million increase in commercial loan originations driven by approximately $1.8 billion in credit facilities extended to the Puerto Rico and Virgin Islands Government and/or its political subdivisions. Partially offsetting the increase in the originations of commercial loans was a decrease of $303.3 million in originations of consumer loans and of $98.5 million in residential mortgage loan originations adversely affected by weak economic conditions in Puerto Rico. | | | • | | Total non-performing loans, including non-performing loans held for sale of $159.3 million, were $1.40 billion as of December 31, 2010 compared to $1.56 billion as of December 31, 2009, a decrease of $165.6 million. The decrease was mainly related to charge-offs and sales of approximately $200 million in non-performing loans during 2010. Non-performing construction loans, including non-performing construction loans held for sale of $140.1 million, decreased by $231.1 million, or 36% compared to December, 2009, driven by charge-offs and the sale of $118.4 million of non-performing construction loans during 2010. Charge-offs for non-performing construction loans during 2010 include $89.5 million associated with non-performing construction loans transferred to held for sale. Also key to the improvement in non-performing construction loans was the significant lower level of inflows. The level of inflow, or migration, is an important indication of the future trend of the portfolio. Non-performing residential mortgage loans decreased by $49.5 million, or 11%, mainly due to loans restored to accrual status based on private label MBS.compliance with modified terms as part of the Corporation’s loss mitigation and loans modification program as well as the sale of $23.9 million of non-performing residential mortgage loans. Non-performing C & I |
Total loan production, including purchases and refinancings, for the year ended December 31, 2009 was $4.8 billion compared to $4.2 billion and $4.1 billion for the years ended December 31, 2008 and 2007, respectively. The increase in loan production in 2009, as compared to 2008, was mainly associated with a $977.9 million increase in commercial loan originations driven by approximately $1.7 billion in credit facilities extended to the Puerto Rico Government and/or its political subdivisions. Partially offsetting the increase in the originations of commercial loans was a decrease of $303.3 million in originations of consumer loans and of $98.5 million in residential mortgage loan originations adversely affected by weak economic conditions in Puerto Rico. The increase in loan production in 2008, as compared to 2007, was mainly associated with an increase in commercial loan originations and the purchase of a $218 million auto loan portfolio.
Total non-performing assets as of December 31, 2009 was $1.71 billion compared to $637.2 million as of December 31, 2008. Even though deterioration in credit quality was observed in all of the Corporation’s portfolios, it was more significant in the construction and commercial loan portfolios, which were affected by both the stagnant housing market and further weakening in the economies of the markets served during most of 2009. The increase in non-performing assets was led by an increase of $518.0 million in non-performing construction loans, of which $314.1 million is related to the construction loan portfolio in the Puerto Rico portfolio and $205.2 million is related to construction projects in Florida. Other portfolios that experienced a significant growth in credit risk, mainly in Puerto Rico, include: (i) a $183.0 million increase in non-performing commercial and industrial (“C&I) loans, (ii) a $166.7 million increase in non-performing residential mortgage loans, and (ii) a $110.6 million increase in non-performing commercial mortgage loans. Also, during 2009, the Corporation classified as non-performing investment securities with a book value of $64.5 million that were pledged to Lehman Brothers Special Financing, Inc., in connection with several interest rate swap agreements entered into with that institution. Considering that the investment securities have not yet been recovered by the Corporation, despite its efforts, the Corporation decided to classify such investments as non-performing. Refer to the “Risk Management — Non-accruing and Non-performing Assets” section below for additional information with respect to non-performing assets by geographic areas and recent actions taken by the Corporation to reduce its exposure to troubled loans.
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| | | loans increased by $75.9 million, or 31%, driven by the inflow of five relationships in Puerto Rico in individual amounts exceeding $10 million with an aggregate carrying value of $106.2 million as of December 31, 2010. Non-performing commercial mortgage loans, including non-performing commercial mortgage loans held for sale of $19.2 million, increased by $39.8 million, or 20%, driven by one relationship amounting to $85.7 million placed in non-accruing status due to the borrower’s financial condition, even though most of the loans in the relationship are under 90 days delinquent. The levels of non-accrual consumer loans, including finance leases, remained stable, showing a $0.7 million decrease during 2010. Refer to the “Risk Management — Non-accruing and Non-performing Assets” section below for additional information. |
CRITICAL ACCOUNTING POLICIES AND PRACTICES The accounting principles of the Corporation and the methods of applying these principles conform with generally accepted accounting principles in the United States (“GAAP”). The Corporation’s critical accounting policies relate to the 1) allowance for loan and lease losses; 2) other-than-temporary impairments; 3) income taxes; 4) classification and related values of investment securities; 5) valuation of financial instruments; 6) derivative financial instruments; and 7) income recognition on loans. These critical accounting policies involve judgments, estimates and assumptions made by management that affect the amounts recorded for assets and liabilities and for contingent assets and liabilities disclosed as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from estimates, if different assumptions or conditions prevail. Certain determinations inherently require greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than those originally reported. Allowance for Loan and Lease Losses The Corporation maintains the allowance for loan and lease losses at a level considered adequate to absorb losses currently inherent in the loan and lease portfolio. The allowance for loan and lease losses provides for probable losses that have been identified with specific valuation allowances for individually evaluated impaired loans and for probable losses believed to be inherent in the loan portfolio that have not been specifically identified. The determination of the allowance for loan and lease losses requires significant estimates, including the timing and amounts of expected future cash flows on impaired loans, consideration of current economic conditions, and historical loss experience pertaining to the portfolios and pools of homogeneous loans, all of which may be susceptible to change. The adequacy of the allowance for loan and lease losses is based on judgments related to the credit quality of the loan portfolio. These judgments consider on-going evaluations of the loan portfolio, including such factors as the economic risks associated to each loan class, the financial condition of specific borrowers, the level of delinquent loans, the value of nay collateral and, where applicable, the existence of any guarantees or other documented support. In addition, to the general economic conditions and other factors described above, additional factors also considered include: the impact of changes in the residential real estate value and the internal risk ratings assigned to the loan. Internal risk ratings are assigned to each business loan at the time of approval and are subject to subsequent periodic reviews by the Corporation’s senior management. The allowance for loan and lease losses is reviewed on a quarterly basis as part of the Corporation’s continued evaluation of its asset qualityquality. The allowance for loan and lease losses is increased through a provision for credit losses that is charged to earnings, based on the quarterly evaluation of the factors previously mentioned, and is reduced by charge-offs, net of recoveries. The allowance for loan and lease losses consists of specific reserves related to specific valuations for loans considered to be impaired and general reserves. A specific valuation allowance is established for those commercialloans in the Commercial Mortgage, Construction and real estate loansCommercial and Industrial and Residential Mortgage loan portfolios classified as impaired, primarily when the collateral value of the loan (if the impaired loan is determined to be collateral dependent) or the present value of the expected future cash flows discounted at the loan’s effective rate is lower than the carrying amount of that loan. To compute theThe specific valuation allowance is computed on commercial mortgage, construction, commercial and industrial, and real estate including residential mortgage loans with aindividual principal balancebalances of $1 million or more, TDRs which are individually evaluated, individually as well as smaller residential mortgage loans and home 62
equity lines of credit considered impaired based on their high delinquency and loan-to-value levels. When foreclosure is probable, the impairment measure is measured based on the fair value of the collateral. The fair value of the collateral is generally obtained from appraisals. Updated appraisals are obtained when the Corporation determines that loans are impaired and are generally updated annually thereafter. In addition, appraisals and/or broker price opinions are also obtained for certain residential mortgage loans on a spot basis based on specific characteristics such as delinquency levels, age of the appraisal, and loan-to-value ratios. Deficiencies from theThe excess of the recorded investment in collateral dependent loans over the resulting fair value of the collateral areis charged-off when deemed uncollectible. For residential mortgage loans, since the second quarter of 2010, the determination of reserves included the incorporation of updated loss factors applicable to loans expected to liquidate over the next twelve months considering the expected realization of similar asset values at disposition. For all other loans, which include, small, homogeneous loans, such as auto loans, consumerall classes in the Consumer loans finance lease loans,portfolio, residential mortgages in amounts under $1 million, and commercial and construction loans not considered impaired, or in amounts under $1 million, the Corporation maintains a general valuation allowance. The methodology to computerisk category of these loans is based on the general valuation allowance has not change indelinquency and the past 2 years. The Corporation updates the factors used to compute the reserve factors on a quarterly basis. The general reserve is primarily determined by applying loss factors according to the loan type and assigned risk category (pass, special mention and substandard not impaired; all doubtful loans are considered impaired). The general reserve for consumer loans is based on factors such as delinquency trends, credit bureau score bands, portfolio type, geographical location, bankruptcy trends, recent market transactions, collateral values, and other environmental factors such as economic forecasts. The analysisanalyses of the residential mortgage pools are performed at the individual loan level and then aggregated to determine the expected loss ratio. The model applies risk-adjusted prepayment curves, default curves, and severity curves to each loan in the pool. The severity is affected by the expected house price scenario based on recent house price trends. Default curves are used in the model to determine expected delinquency levels. The risk-adjusted timing of liquidation and associated costs areis used in the model and areis risk-adjusted for the area in which the property is located (Puerto Rico, Florida, or Virgin Islands). For commercial loans, including construction loans, the general reserve is based on historical loss ratios, trends in non-accrual loans, loan type, risk-rating, geographical location, changes in collateral values for collateral dependent loans and gross product or unemploymentmacroeconomic data that correlates to portfolio performance for the geographical region. The methodology of accounting for all probable losses in loans not individually measured for impairment purposes is made in accordance with authoritative accounting guidance that requires that losses be accrued when they are probable of occurring and estimable. 57
The blended general reserve factors utilized for all portfolios increased during 2009 dueCharge-off of Uncollectible Loans —Loan and lease losses are charged-off and recoveries are credited to the continued deteriorationallowance for loan and lease losses. Collateral dependent loans in the economyConstruction, Commercial Mortgage and Commercial and Industrial loan portfolios are charged-off to their fair value when loans are considered impaired. Within the continued increaseconsumer loan portfolio, loans in delinquencies, charge-offs, home values and most other economic indicators utilized. The blended general reserve factor for residential mortgage loans increased from 0.43% in 2008 to 0.91% in 2009. For commercial mortgage loans the blended general reserve factor increased from 0.62% in 2008 to 2.41% in 2009. For C&I loans the blended general reserve factor increased from 1.31% in 2008 to 2.44% in 2009. The construction loans blended general factor increased from 2.18% in 2008 to 9.82% in 2009. The consumerauto and finance leases reserve factor increased from 4.31%classes are reserved at 120 days delinquent and charged-off to their estimated net realizable value when collateral deficiency is deemed uncollectible (i.e. when foreclosure is probable). Within the other consumer loans class, closed-end loans are charged-off when payments are 120 days in 2008arrears and open-end (revolving credit) consumer loans are charged-off when payments are 180 days in arrears. Residential mortgage loans that are 120 days delinquent and with a loan to 4.36%value higher than 60% are charged-off to its fair value. Any loan in 2009.any portfolio may be charged-off or written down to the fair value of the collateral prior to the policies described above if a loss confirming event occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Other-than-temporary impairments On a quarterly basis, the Corporation performs an assessment to determine whether there have been any events or circumstances indicating that a security with an unrealized loss has suffered an other-than-temporary impairment (“OTTI”). A security is considered impaired if the fair value is less than its amortized cost basis. The Corporation evaluates if the impairment is other-than-temporary depending upon whether the portfolio is of fixed income securities or equity securities as further described below. The Corporation employs a systematic methodology that considers all available evidence in evaluating a potential impairment of its investments. The impairment analysis of fixed income securities places special emphasis on the analysis of the cash position of the issuer and its cash and capital generation capacity, which could increase or diminish the issuer’s ability to repay 63
its bond obligations, the length of time and the extent to which the fair value has been less than the amortized cost basis and changes in the near-term prospects of the underlying collateral, if applicable, such as changes in default rates, loss severity given default and significant changes in prepayment assumptions. In light of current volatile economic and financial market conditions, theThe Corporation also takes into consideration the latest information available about the overall financial condition of thean 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. In April 2009, the Financial Accounting StandardStandards Board (“FASB”) amended the OTTI model for debt securities. OTTI losses are recognized in earnings if the Corporation 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 the Corporation does not expect to sell a debt security, expected cash flows to be received are evaluated to 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 is recorded as a component of Net impairment losses on investment securities in the statements of (loss) income, while the remaining portion of the impairment loss is recognized in other comprehensive income, net of taxes. The previous amortized cost basis less the OTTI recognized in earnings is the new amortized cost basis of the investment. The new amortized cost basis is not adjusted for subsequent recoveries in fair value. However, for debt securities for which OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected is accreted as interest income. For further disclosures, refer to Note 4 to the Corporation’s audited financial statements for the year ended December 31, 2010 included in Item 8 of this Form 10-K. Prior to April 1, 2009, an unrealized loss was considered other-than-temporary and recorded in earnings if (i) it was probable that the holder would not collect all amounts due according to contractual terms of the debt security, or (ii) the fair value was below the amortized cost of the security for a prolonged period of time and the Corporation did not have the positive intent and ability to hold the security until recovery or maturity. The impairment model for equity securities was not affected by the aforementioned FASB amendment. The impairment analysis of equity securities is performed and reviewed on an ongoing basis based on the latest financial information and any supporting research report made by a major brokerage firm. This analysis is very subjective and based, among other things, on relevant financial data such as capitalization, cash flow, liquidity, systematic risk, and debt outstanding of the issuer. Management also considers the issuer’s industry trends, the historical performance of the stock, credit ratings as well as the Corporation’s intent to hold the security for an extended period. If management believes there is a low probability of recovering book value in a reasonable time frame, then an impairment will be recorded by writing the security down to market value. As previously mentioned, equity securities are monitored on an ongoing basis but special attention is given to those securities that have experienced a decline in fair value for six months or more. An impairment charge is generally recognized when the fair value of an equity security has remained significantly below cost for a period of twelve consecutive months or more. 58
Income Taxes The Corporation is required to estimate income taxes in preparing its consolidated financial statements. This involves the estimation of current income tax expense together with an assessment of temporary differences resulting from differences in the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require the Corporation to assume certain positions based on its interpretation of current tax regulations. Management assesses the relative benefits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial and regulatory guidance and recognizes tax benefits only when deemed probable. Changes in assumptions affecting estimates may be required in the future and estimated tax liabilities may need to be increased or decreased accordingly. The accrual of tax contingencies is adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. The Corporation’s effective tax rate includes the impact of tax contingencies and changes to such accruals, as considered appropriate by management. When particular matters arise, a number of years may elapse before such matters are audited by the taxing authorities and finally resolved. Favorable resolution of such matters or the expiration of the statute of limitations may result in the release of tax contingencies which are recognized as a reduction to the Corporation’s effective rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective rate and may require the use of cash in the year of resolution. As of December 31, 2009,2010, there were no open income 64
tax investigations. Information regarding income taxes is included in Note 27 to the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K. The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Corporation’s net deferred tax assetsasset assumes that the Corporation will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change, the Corporation may be required to record valuation allowances against its deferred tax assetsasset resulting in additional income tax expense in the consolidated statements of income. Management evaluates its deferred tax assetsasset on a quarterly basis and assesses the need for a valuation allowance, if any. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assetsasset will not be realized. Changes in the valuation allowance from period to period are included in the Corporation’s tax provision in the period of change (see Note 27 to the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K). AccountingIncome tax expense includes Puerto Rico and Virgin Islands income taxes as well as applicable U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, First BanCorp is treated as a foreign corporation for Income Taxes requires companiesU.S. income tax purposes and is generally subject to make adjustmentsUnited States income tax only on its income from sources within the United States or income effectively connected with the conduct of a trade or business within the United States. Any such tax paid is creditable, within certain conditions and limitations, against the Corporation’s Puerto Rico tax liability. The Corporation is also subject to their financial statementsU.S.Virgin Islands taxes on its income from sources within that jurisdiction. Any such tax paid is also creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions and limitations. Under the Puerto Rico Internal Revenue Code of 1994, as amended (the “PR Code”), the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns and, thus, the Corporation is not able to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss, a particular subsidiary must be able to demonstrate sufficient taxable income within the quarter that newapplicable carry forward period (7 years under the PR Code). The PR Code provides a dividend received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations. Dividend payments from a U.S. subsidiary to the Corporation are subject to a 10% withholding tax legislationbased on the provisions of the U.S. Internal Revenue Code. Under the PR Code, First BanCorp is enacted.subject to a maximum statutory tax rate of 39%. In 2009 the Puerto Rico Government approved Act No. 7 (the “Act”), to stimulate Puerto Rico’s economy and to reduce the Puerto Rico Government’s fiscal deficit. The Act imposes a series of temporary and permanent measures, including the imposition of a 5% surtax over the total income tax determined, which is applicable to corporations, among others, whose combined income exceeds $100,000, effectively resulting in an increase in the maximum statutory tax rate from 39% to 40.95% and an increase in the capital gain statutory tax rate from 15% to 15.75%. ThisThese temporary measure ismeasures are effective for tax years that commenced after December 31, 2008 and before January 1, 2012. Also, underThe PR Code also includes an alternative minimum tax of 22% that applies if the Corporation’s regular income tax liability is less than the alternative minimum tax requirements. For 2011 and subsequent years, the maximum marginal corporate income tax rate will be reduced to 30% (25% for taxable years commencing after December 31, 2013 if certain economic conditions are met by the Puerto Rico economy). A corporation may elect for the provisions of the 2010 Code not to apply until 2016. The Corporation has maintained an effective tax rate lower than the maximum statutory rate mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income taxes and by doing business through International Banking Entity (“IBE”) of the Bank (“FirstBank IBE”) and through the Bank’s subsidiary, FirstBank Overseas Corporation, in which the interest income and gain on sales is exempt from Puerto Rico and U.S. income taxation. Under the Act, all IBEsIBE are subject to the special 5% tax on their net income not otherwise subject to tax pursuant to the PR Code. This temporary measure is also effective for tax years that commencecommenced after December 31, 2008 and before January 1, 2012. The effectFirstBank IBE and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico. IBEs that operate as a unit of a higher temporary statutory tax rate over thebank pay income taxes at normal statutory tax rate resulted in an additional income tax benefit of $10.4 million for 2009 that was partially offset by an income tax provision of $6.6 million relatedrates to the special 5% tax onextent that the operations FirstBank Overseas Corporation. For 2007 and 2008,IBEs’ net income exceeds 20% of the maximum marginal corporate income tax rate was 39%.bank’s total net taxable income. 65
The FASB issued authoritative guidance that prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken on income tax returns. Under the authoritative accounting guidance, income tax benefits are recognized and measured upon a two-step model: 1) a tax position must be more likely than not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the benefit recognized in accordance with this model and the tax benefit claimed on a tax return is referred to as an Unrecognized Tax Benefit (“UTB”). The Corporation classifies interest and penalties, if any, related to UTBs as 59
components of income tax expense. Refer to Note 27 of the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K for required disclosures and further information related to this accounting guidance. 60
Investment Securities Classification and Related Values Management determines the appropriate classification of debt and equity securities at the time of purchase. Debt securities are classified as held-to-maturityheld to maturity when the Corporation has the intent and ability to hold the securities to maturity. Held-to-maturity (“HTM”) securities are stated at amortized cost. Debt and equity securities are classified as trading when the Corporation has the intent to sell the securities in the near term. Debt and equity securities classified as trading securities, if any, are reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as HTM or trading, except for equity securities that do not have readily available fair values, are classified as available-for-saleavailable for sale (“AFS”). AFS securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred taxes in accumulated other comprehensive income (a component of stockholders’ equity) and do not affect earnings until realized or are 66
deemed to be other-than-temporarily impaired. Investments in equity securities that do not have publicly and readily determinable fair values are classified as other equity securities in the statement of financial condition and carried at the lower of cost or realizable value. The determinationassessment of fair value applies to certain of the Corporation’s assets and liabilities, including the investment portfolio. Fair values are volatile and are affected by factors such as market interest rates, prepayment speeds and discount rates. Valuation of financial instruments The measurement of fair value is fundamental to the Corporation’s presentation of its financial condition and results of operations. The Corporation holds fixed income and equity securities, derivatives, investments and other financial instruments at fair value. The Corporation holds its investments and liabilities on the statement of financial condition mainly to manage liquidity needs and interest rate risks. A substantial part of these assets and liabilities is reflected at fair value on the Corporation’s financial statements. The Corporation adoptedFASB authoritative guidance issued by the FASB for fair value measurements which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs may be used to measure fair value: | | | Level 1 | | Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
| | | Level 2 | | Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| | | Level 3 | | Valuations are observed from unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following is a description of the valuation methodologies used for instruments measured at fair value: Callable Brokered CDs (Level 2 inputs) The fair value of callable brokered CDs, which are included within deposits and elected to be measured at fair value, is determined using discounted cash flow analyses over the full term of the CDs. The valuation uses a “Hull-White Interest Rate Tree” approach for the CDs with callable option components, an industry-standard approach for valuing instruments with interest rate call options. The model assumes that the embedded options are exercised economically. The fair value of the CDs is computed using the outstanding principal amount. The discount rates used are based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to calibrate the model to current market prices and value the cancellation option in the deposits. The fair value does not incorporate the risk of nonperformance, since the callable brokered
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CDs are participated out by brokers in shares of less than $100,000 and insured by the FDIC. As of December 31, 2009, there were no callable brokered CDs outstanding measured at fair value since they were all called during 2009.
Medium-Term Notes (Level 2 inputs) The fair value of medium-term notes is determined using a discounted cash flow analysis over the full term of the borrowings. This valuation also uses the “Hull-White Interest Rate Tree” approach, an industry standard approach for valuing instruments with interest call options, to value the option components of the term notes. The model assumes that the embedded options are exercised economically. The fair value of medium-term notes is computed using the notional amount outstanding. The discount rates used in the valuations are based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to calibrate the model to current market prices and value the cancellation option in the term notes. For the medium-term notes, the credit risk is measured using the difference in yield curves between swap rates and a yield curve that considers the industry and credit rating of the Corporation as issuer of the note at a tenor comparable to the time to maturity of the note and option. Callable Brokered CDs (Level 2 inputs) In the past, the Corporation also measured at fair value certain callable brokered CDs. All of the brokered CDs measured at fair value were called during 2009. The fair value of callable brokered CDs, which were included within deposits and elected to be measured at fair value, was determined using discounted cash flow analyses over the full term of the CDs. The valuation also used a “Hull-White Interest Rate Tree” approach. The fair value of the CDs was computed using the outstanding principal amount. The discount rates used were based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) was used to calibrate the model to then current market prices and value the cancellation option in the deposits. The fair 67
value did not incorporate the risk of nonperformance, since the callable brokered CDs were participated out by brokers in shares of less than $100,000 and insured by the FDIC. Investment Securities The fair value of investment securities is the market value based on quoted market prices (as is the case with equity securities, U.S. Treasury Notes and non-callable U.S. Agency debt securities), when available, or market prices for identical or comparable assets (as is the case with MBS and callable U.S. agency debt) that are based on observable market parameters including benchmark yields, reported trades, quotes from brokers or dealers, issuer spreads, bids, offers and reference data including market research operations. Observable prices in the market already consider the risk of nonperformance. If listed prices or quotes are not available, fair value is based upon models that use unobservable inputs due to the limited market activity of the instrument (Level 3), as is the case with certain private label mortgage-backed securities held by the Corporation. Unlike U.S. agency mortgage-backed securities, the fair value of these private label securities cannot be readily determined because they are not actively traded in securities markets. Significant inputs used for fair value determination consist of specific characteristics such as information used in the prepayment model, which follows the amortizing schedule of the underlying loans, which is an unobservable input. Private label mortgage-backed securities are collateralized by fixed-rate mortgages on single-family residential properties in the United States and the interest rate is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The market valuation is derived from a model and represents the estimated net cash flows over the projected life of the pool of underlying assets applying a discount rate that reflects market observed floating spreads over LIBOR, with a widening spread bias on a non-rated security andsecurity. The market valuation is derived from a model that utilizes relevant assumptions such as prepayment rate, default rate, and loss severity on a loan level basis. The Corporation modeled the cash flow from the fixed-rate mortgage collateral using a static cash flow analysis according to collateral attributes of the underlying mortgage pool (i.e. loan term, current balance, note rate, rate adjustment type, rate adjustment frequency, rate caps, others) in combination with prepayment forecasts obtained from a commercially available prepayment model (ADCO). The variable cash flow of the security is modeled using the 3-month LIBOR forward curve. Loss assumptions were driven by the combination of default and loss severity estimates, taking into account loan credit characteristics (loan-to-value, state, origination date, property type, occupancy loan purpose, documentation type, debt-to-income ratio, other) to provide an estimate of default and loss severity. Refer to Note 4 of the Corporation’s financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K for additional information. Derivative Instruments The fair value of most of the derivative instruments is based on observable market parameters and takes into consideration the credit risk component of paying counterpartscounterparties when appropriate, except when collateral is pledged. That is, on interest rate swaps, the credit risk of both counterpartscounterparties is included in the valuation; and on options and caps, only the seller’s credit risk is considered. The “Hull-White Interest Rate Tree” approach is used to value the option components of derivative instruments, and discounting of the cash flows is performed using US dollar LIBOR-based discount rates or yield curves that account for the industry sector and the credit rating of the counterparty and/or the Corporation. Derivatives include interest rate swaps used for protection against rising interest rates and, prior to June 30, 2009, included interest rate swaps to economically hedge brokered CDs and medium-term notes. For these interest rate swaps, a credit component is not considered in the valuation since the 62
Corporation fully collateralizes with investment securities any mark-to-market loss with the counterparty and, if there arewere market gains, the counterparty musthad to deliver collateral to the Corporation. Certain derivatives with limited market activity, as is the case with derivative instruments named as “reference caps,” arewere valued using models that consider unobservable market parameters (Level 3). Reference caps arewere used mainly to hedge interest rate risk inherent in private label mortgage-backed securities, thus arewere tied to the notional amount of the underlying fixed-rate mortgage loans originated in the United States. SignificantThe counterparty to these derivative instruments failed on April 30, 2010. The Corporation currently has a claim with the FDIC and the exposure to fair value of $3.0 million was recorded as an accounts receivable. In the past, significant inputs used for fair value determination consistconsisted of specific characteristics such as information used in the prepayment model which followsfollow the amortizing schedule of the underlying loans, which iswas an unobservable input. The valuation 68
model usesused the Black formula, which is a benchmark standard in the financial industry. The Black formula is similar to the Black-Scholes formula for valuing stock options except that the spot price of the underlying is replaced by the forward price. The Black formula uses as inputs the strike price of the cap, forward LIBOR rates, volatility estimates and discount rates to estimate the option value. LIBOR rates and swap rates are obtained from Bloomberg L.P. (“Bloomberg”) every day and are used to build a zero coupon curve based on the Bloomberg LIBOR/Swap curve. The discount factor is then calculated from the zero coupon curve. The cap is the sum of all caplets. For each caplet, the rate is reset at the beginning of each reporting period and payments are made at the end of each period. The cash flow of the caplet is then discounted from each payment date. Derivative Financial Instruments As part of the Corporation’s overall interest rate risk management, the Corporation utilizes derivative instruments, including interest rate swaps, interest rate caps and options to manage interest rate risk. All derivative instruments are measured and recognized on the Consolidated Statements of Financial Condition at their fair value. On the date the derivative instrument contract is entered into, the Corporation may designate the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value” hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge) or (3) as a “standalone” derivative instrument, including economic hedges that the Corporation has not formally documented as a fair value or cash flow hedge. Changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a fair-value hedge, along with changes in the fair value of the hedged asset or liability that is attributable to the hedged risk (including gains or losses on firm commitments), are recorded in current-period earnings as interest income or interest expense depending upon whether an asset or liability is being hedged. Similarly, the changes in the fair value of standalone derivative instruments or derivatives not qualifying or designated for hedge accounting are reported in current-period earnings as interest income or interest expense depending upon whether an asset or liability is being economically hedged. Changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a cash-flow hedge, if any, are recorded in other comprehensive income in the stockholders’ equity section of the Consolidated Statements of Financial Condition until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). As of December 31, 2009 and 2008, all derivatives held by the Corporation were considered economic undesignated hedges recorded at fair value with the resulting gain or loss recognized in current period earnings.
Prior to entering into an accounting hedge transaction or designating a hedge, the Corporation formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for undertaking the hedge transaction. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges, if any, to specific assets and liabilities on the statements of financial condition or to specific firm commitments or forecasted transactions along with a formal assessment at both inception of the hedge and on an ongoing basis as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. The Corporation discontinues hedge accounting prospectively when it determines that the derivative is not effective or will no longer be effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires, is sold, or terminated, or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability as a yield adjustment.
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The Corporation occasionally purchases or originates financial instruments that contain embedded derivatives. At inception of the financial instrument, the Corporation assesses: (1) if the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the financial instrument (host contract), (2) if the financial instrument that embodies both the embedded derivative and the host contract is measured at fair value with changes in fair value reported in earnings, or (3) if a separate instrument with the same terms as the embedded instrument would not meet the definition of a derivative. If the embedded derivative does not meet any of these conditions, it is separated from the host contract and carried at fair value with changes recorded in current period earnings as part of net interest income.
Effective January 1, 2007, the Corporation elected to early adopt authoritative guidance issued by the FASB that allows entities to choose to measure certain financial assets and liabilities at fair value with any changes in fair value reflected in earnings. The Corporation adopted the fair value option for callable fixed-rate medium-term notes and callable brokered certificates of deposit that were hedged with interest rate swaps. One of the main considerations in the determination to adopt the fair value option for these instruments was to eliminate the operational procedures required by the long-haul method of accounting in terms of documentation, effectiveness assessment, and manual procedures followed by the Corporation to fulfill the requirements specified by authoritative guidance issued by the FASB for derivative instruments designated as fair value hedges.
With the Corporation’s elimination of the use of the long-haul method in connection with the adoption of the fair value option, the Corporation no longer amortizes or accretes the basis adjustment for the financial liabilities elected to be measured at fair value. The basis adjustment amortization or accretion is the reversal of the basis differential between the market value and book value recognized at the inception of fair value hedge accounting as well as the change in value of the hedged brokered CDs and medium-term notes recognized since the implementation of the long-haul method. Since the time the Corporation implemented the long-haul method, it had recognized changes in the value of the hedged brokered CDs and medium-term notes based on the expected call date of the instruments. The adoption of the fair value option also required the recognition, as part of the initial adoption adjustment to retained earnings, of all of the unamortized placement fees that were paid to broker counterparties upon the issuance of the elected brokered CDs and medium-term notes. The Corporation previously amortized those fees through earnings based on the expected call date of the instruments. The option of using fair value accounting also requires that the accrued interest be reported as part of the fair value of the financial instruments elected to be measured at fair value.
Income Recognition on Loans Loans are stated at the principal outstanding balance, net of unearned interest, unamortized deferred origination fees and costs and unamortized premiums and discounts. Fees collected and costs incurred in the origination of new loans are deferred and amortized using the interest method or a method which approximates the interest method over the term of the loan as an adjustment to interest yield. Unearned interest on certain personal, auto loans and finance leases is recognized as income under a method which approximates the interest method. When a loan is paid off or sold, any unamortized net deferred fee (cost) is credited (charged) to income. Classes are usually disaggregations of a portfolio. For allowance for loan and lease losses purposes, the Corporation’s portfolios are: Commercial Mortgage, Construction, Commercial and Industrial, Residential Mortgages, and Consumer loans. The classes within the Residential Mortgage are residential mortgages guaranteed by government organization and other loans. The classes within the Consumer portfolio are: auto, finance leases and other consumer loans. Other consumer loans mainly include unsecured personal loans, home equity lines, lines of credits, and marine financing. The Construction, Commercial Mortgage and Commercial and Industrial are not further segmented into classes. Non-Performing and Past Due Loans-Loans on which the recognition of interest income has been discontinued are designated as non-accruing. When loans are placed on non-accruing status, any accrued but uncollected interest income is reversed and charged against interest income. Consumer, construction, commercial and mortgage loansnon-performing. Loans are classified as non-accruingnon-performing when interest and principal have not been received for a period of 90 days or more, orwith the exception of FHA/VA and other guaranteed residential mortgages which continue to accrue interest. Any loan in any portfolio may be placed on non-performing status prior to the policies describe above when there are doubts about the potential to collect all of the principal based on collateral deficiencies or, in other situations, when collection of all of the principal or interest is not expected due to deterioration in the financial condition of the borrower. For all classes within the loan portfolios, when a loan is placed on non-performing status, any accrued but uncollected interest income is reversed and charged against interest income. Interest income on non-accruingnon-performing loans is recognized only to the extent it is received in cash. However, where there is doubt regarding the ultimate collectability of loan principal, all cash thereafter received is applied to reduce the carrying value of such loans (i.e., the cost recovery method). Loans are restored to accrual status only when future payments of interest and principal are reasonably assured. Loan and lease losses are charged and recoveries are credited to the allowance forImpaired Loans-A loan and lease losses. Closed-end personal consumer loans are charged-off when payments are 120 days in arrears. Collateralized auto and finance leases are reserved at 120 days delinquent and charged-off to their estimated net realizable value when collateral deficiency is deemed uncollectible (i.e. when foreclosure is probable). Open-end (revolving credit) consumer loans are charged-off when payments are 180 days in arrears. 64
A loanany class is considered impaired when, based upon current information and events, it is probable that the Corporation will be unable to collect all amounts due (including principal and interest) according to the contractual terms of the loan agreement. The Corporation measures impairment individually for those commercialloans in the Construction, Commercial Mortgage and construction loansCommercial and Industrial portfolios with a principal balance of $1 million or more, including loans for which a charge-off has been recorded based upon the fair value of the underlying collateral, andcollateral. The Corporation also evaluates for impairment purposes certain residential mortgage loans and home equity lines of credit with high delinquency and loan-to-value levels. Interest incomeGenerally, consumer loans within any class are not individually evaluated on a regular basis for impairment except for impaired marine financing loans is recognized based on the Corporation’s policy for recognizing interest on accrualover $1 million and non-accrual loans.home equity lines with high delinquency and loan-to-value levels.
Impaired loans also include loans that have been modified in troubled debt restructurings (“TDRs”) as a concession to borrowers experiencing financial difficulties. Troubled debt restructurings typically result from the Corporation’s loss mitigation activities or programs sponsored by the Federal Government and could include rate reductions, principal forgiveness, forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. Troubled debt restructurings are generally reported as non-performing loans and restored to accrual status when there is a reasonable assurance of repayment and the borrower has made payments over a sustained period, generally six months. However, a loan that has been formally restructured as to 69
be reasonably assured of repayment and of performance according to its modified terms is not placed in non-accruingnon-performing status, provided the restructuring is supported by a current, well documented credit evaluation of the borrower’s financial condition taking into consideration sustained historical payment performance for a reasonable time prior to the restructuring. Interest income on impaired loans in any class is recognized based on the Corporation’s policy for recognizing interest on accrual and non-accrual loans. Loans that are past due 30 days or more as to principal or interest are considered delinquent, with the exception of the residential mortgage, commercial mortgage and construction portfolios that are considered past due when the borrower is in arrears 2 or more monthly payments. Recent Accounting Pronouncements The FASB havehas issued the following accounting pronouncements and guidance relevant to the Corporation’s operations: In May 2008, the FASB issued authoritative guidance on financial guarantee insurance contracts requiring that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This guidance also clarifies how the accounting and reporting by insurance entities applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. FASB authoritative guidance on the accounting for financial guarantee insurance contracts is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities which are effective since the first interim period after the issuance of this guidance. The adoption of this guidance did not have a significant impact on the Corporation’s financial statements.
In June 2008, the FASB issued authoritative guidance for determining whether instruments granted in shared-based payment transactions are participating securities. This guidance applies to entities with outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends. Furthermore, awards with dividends that do not need to be returned to the entity if the employee forfeits the award are considered participating securities. Accordingly, under this guidance unvested share-based payment awards that are considered to be participating securities must be included in the computation of earnings per share (“EPS”) pursuant to the two-class method as required by FASB guidance on earnings per share. FASB guidance on determining whether instruments granted in share based payment transactions are participating securities is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption of this Statement did not have an impact on the Corporation’s financial statements since, as of December 31, 2009, the outstanding unvested shares of restricted stock do not contain rights to nonforfeitable dividends.
In April 2009, the FASB issued authoritative guidance for the accounting of assets acquired and liabilities assumed in a business combination that arise from contingencies. This guidance amends the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination. The guidance carries forward the requirement that acquired contingencies in a business combination be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period. Otherwise, entities would typically account for the acquired contingencies based on a reasonable estimate in accordance with FASB guidance on the accounting for contingencies. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the
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acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this Statement did not have an impact on the Corporation’s financial statements.
In April 2009, the FASB issued authoritative guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This guidance relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the objective of fair value measurement, that is, to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. This guidance is effective for interim and annual reporting periods ending after June 15, 2009 on a prospective basis. The adoption of this Statement did not impact the Corporation’s fair value methodologies on its financial assets and liabilities.
In April 2009, the FASB amended the existing guidance on determining whether an impairment for investments in debt securities is OTTI and requires an entity to recognize the credit component of an OTTI of a debt security in earnings and the noncredit component in other comprehensive income (“OCI”) when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery. This guidance also requires expanded disclosures and became effective for interim and annual reporting periods ending after June 15, 2009. In connection with this guidance, the Corporation recorded $1.3 million for the year ended December 31, 2009 of OTTI charges through earnings that represents the credit loss of available-for-sale private label mortgage-backed securities. This guidance does not amend existing recognition and measurement guidance related to an OTTI of equity securities. The expanded disclosures related to this new guidance are included inNote 4of the Corporation’s financial statements for the year ended December 31, 2009 included in Item 8 of this Form 10-K.
In April 2009, the FASB amended the existing guidance on the disclosure about fair values of financial instruments, which requires entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements. This guidance became effective for interim reporting periods ending after June 15, 2009. The adoption of the amended guidance expanded the Corporation’s interim financial statement disclosures with regard to the fair value of financial instruments.
In May 2009, the FASB issued authoritative guidance on subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance sets forth (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance is effective for interim or annual financial periods ending after June 15, 2009. There are not any material subsequent event that would require further disclosure.
In June 2009, the FASB amended the existing guidance on the accounting for transfers of financial assets, which improvesto improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets;assets, the effects of a transfer on its financial position, financial performance, and cash flows;flows, and a transferor’s continuing involvement, if any, in transferred financial assets. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Subsequently in December 2009, the FASB amended the existing guidance issued in June 2009. Among the most significant changes and additions to this guidance includesare changes to the conditions for sales of a financial assets which objective is to determineasset based on whether a transferor and its consolidated affiliates included in the financial statements have surrendered control over the transferred financial assetsasset or third-partythird party beneficial interests;interest; and the addition of the meaning of the term participating interest, which represents a proportionate (pro rata) ownership interest in an entire financial asset. The Corporation is evaluating the impact the adoption ofadopted the guidance will havewith no material impact on its financial statements. 66
In June 2009, the FASB amended the existing guidance on the consolidation of variable interest, which improvesinterests to improve financial reporting by enterprises involved with variable interest entities and addressesaddress (i) the effects on certain provisions of the amended guidance, as a result of the elimination of the qualifying special-purpose entity concept in the accounting for transfer of financial assets guidance, and (ii) constituent concerns about the application of certain key provisions of the guidance, including those in which the accounting and disclosures do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Subsequently in December 2009, the FASB amended the existing guidance issued in June 2009. Among the most significant changes and additions to thisthe guidance includesis the replacement of the quantitative-basedquantitative based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. The Corporation is evaluating the impact, if any, the adoption of this guidance will have on its financial statements. In June 2009, the FASB issued authoritative guidance on the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification (“Codification”) is the single source of authoritative nongovernmental GAAP. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification project does not change GAAP in any way shape or form; it only reorganizes the existing pronouncements into one single source of U.S. GAAP. This guidance is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded as described in this guidance. All other accounting literature not included in the Codification is nonauthoritative. Following this guidance, the FASB will not issue new guidance in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information aboutadopted the guidance and provide the bases for conclusionswith no material impact on the change(s) in the Codification.
In August 2009, the FASB updated the Codification in connection with the fair value measurement of liabilities to clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:
| 1. | | A valuation technique that uses: |
| a. | | The quoted price of the identical liability when traded as an asset | | | b. | | Quoted prices for similar liabilities or similar liabilities when traded as assets |
| 2. | | Another valuation technique that is consistent with the principles of fair value measurement. Two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. |
The update also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The update also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustment to the quoted price of the asset are required are Level 1 fair value measurements. This update is effective for the first reporting period (including interim periods) beginning after issuance. The adoption of this guidance did not impact the Corporation’s fair value methodologies on its financial liabilities
In September 2009, the FASB updated the Codification to reflect SEC staff pronouncements on earnings-per-share calculations. According to the update, the SEC staff believes that when a public company redeems preferred shares, the difference between the fair value of the consideration transferred to the holders of the preferred stock and the carrying amount on the balance sheet after issuance costs of the preferred stock should be added to or subtracted from net income before doing an earnings per share calculation. The SEC’s staff also thinks it is not appropriate to aggregate preferred shares with different dividend yields when trying to determine whether the “if-converted” method is dilutive to the earnings per-share calculation. As of December 31, 2009, the Corporation has not been involved in a redemption or induced conversion of preferred stock.
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In January 2010, the FASB updated the Codification to provide guidance on accounting for distributions to shareholders with components of stock and cash. This guidance clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend . The new guidance is effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The adoption of this guidance did not impact the Corporation’s financial statements.
In January 2010, the FASB updated the Accounting Standards Codification (“Codification”) to provide guidance to improve disclosure requirements related to fair value measurements and require reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. Currently, entities are only required to disclose activity in Level 3 measurements in the fair-value hierarchy on a net basis. The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. Entities will beare required to separately disclose significant transfers into and out of Level 1 and Level 2 measurements in the fair-value hierarchy and the reasons for the transfers. Significance will be determined based on earnings and total assets or total liabilities or, when changes in fair value are recognized in other comprehensive income, based on total equity. A reporting entity must disclose and consistently follow its policy for determining when transfers between levels are recognized. Acceptable methods for determining when to recognize transfers include: (i) actual date of the 70
event or change in circumstances causing the transfer; (ii) beginning of the reporting period; and (iii) end of the reporting period. Currently, entities are only required to disclose activity in Level 3 measurements in the fair-value hierarchy on a net basis. This guidance will require separate disclosures for purchases, sales, issuances, and settlements of assets. Entities will also have to disclose the reasons for the activity and apply the same guidance on significance and transfer policies required for transfers between Level 1 and 2 measurements. The guidance requires disclosure of fair-value measurements by “class” instead of “major category.” A class is generally a subset of assets and liabilities within a financial statement line item and is based on the specific nature and risks of the assets and liabilities and their classification in the fair-value hierarchy. When determining classes, reporting entities must also consider the level of disaggregated information required by other applicable GAAP. For fair-value measurements using significant observable inputs (Level 2) or significant unobservable inputs (Level 3), this guidance requires reporting entities to disclose the valuation technique and the inputs used in determining fair value for each class of assets and liabilities. If the valuation technique has changed in the reporting period (e.g., from a market approach to an income approach) or if an additional valuation technique is used, entities are required to disclose the change and the reason for making the change. Except for the detailed Level 3 roll forward disclosures, the guidance is effective for annual and interim reporting periods beginning after December 15, 2009 (first quarter of 2010 for public companies with calendar year-ends). The new disclosures about purchases, sales, issuances, and settlements in the roll forward activity for Level 3 fair-valuefair value measurements are effective for interim and annual reporting periods beginning after December 15, 2010 (first quarter of 2011 for public companies with calendar year-ends). Early adoption is permitted. In the initial adoption period, entities are not required to include disclosures for previous comparative periods; however, they are required for periods ending after initial adoption. The Corporation adopted the guidance in the first quarter of 2010 and the required disclosures are presented in Note 29 of the Corporation’s financial statements for the year ended December 31, 2010 included in Item 8 of this Form 10-K. In February 2010, the FASB updated the Codification to provide guidance to improve disclosure requirements related to the recognition and disclosure of subsequent events. The amendment establishes that an entity that either (a) is an SEC filer or (b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets) is required to evaluate subsequent events through the date that the financial statements are issued. If an entity meets neither of those criteria, then it should evaluate subsequent events through the date the financial statements are available to be issued. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. Also, the scope of the reissuance disclosure requirements has been refined to include revised financial statements only. Revised financial statements include financial statements revised either as a result of the correction of an error or retrospective application of GAAP. The guidance in this update was effective on the date of issuance in February. The Corporation has adopted this guidance; refer to Note 36 of the Corporation’s financial statements for the year ended December 31, 2010 included in Item 8 of this Form 10-K for additional information. In February 2010, the FASB updated the Codification to provide guidance on the deferral of consolidation requirements for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. The deferral does not apply in situations in which a reporting entity has the explicit or implicit obligation to fund losses of an entity that could potentially be significant to the entity. The deferral also does not apply to interests in securitization entities, asset-backed financing entities, or entities formerly considered qualifying special purpose entities. In addition, the deferral applies to a reporting entity’s interest in an entity that is required to comply or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities. The guidance also clarifies that for entities that do not qualify for the deferral, related parties should be considered for determining whether a decision maker or service provider fee represents a variable interest. In addition, the requirements for evaluating whether a decision maker’s or service provider’s fee is a variable interest are modified to clarify the impactFASB’s intention that a quantitative calculation should not be the sole basis for this evaluation. The guidance was effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of this guidance willdid not have on itsan impact in the Corporation’s consolidated financial statements. In March 2010, the FASB updated the Codification to provide clarification on the scope exception related to embedded credit derivatives related to the transfer of credit risk in the form of subordination of one financial instrument to another. The transfer of credit risk that is only in the form of subordination of one financial instrument to another (thereby redistributing credit risk) is an embedded derivative feature that should not be subject to potential bifurcation and separate accounting. The amendments address how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, 71
are considered to be embedded derivatives that should not be analyzed under this guidance. The Corporation may elect the fair value option for any investment in a beneficial interest in a securitized financial asset. The guidance is effective for the first fiscal quarter beginning after June 15, 2010. The adoption of this guidance did not have an impact in the Corporation’s consolidated financial statements. In April 2010, the FASB updated the codification to provide guidance on the effects of a loan modification when a loan is part of a pool that is accounted for as a single asset. Modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in this Update are effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively and early application is permitted. The adoption of this guidance did not have an impact in the Corporation’s consolidated financial statements. In July 2010, the FASB updated the codification to expand the disclosure requirements regarding credit quality of financing receivables and the allowance for credit losses. The objectives of the enhanced disclosures are to provide information that will enable readers of financial statements to understand the nature of credit risk in a company’s financing receivables, how that risk is analyzed in determining the related allowance for credit losses and changes to the allowance during the reporting period. An entity should provide disclosures on a disaggregated basis for portfolio segments and classes of financing receivable. The amendments in this Update are effective for both interim and annual reporting periods ending after December 15, 2010, except for that, in January 2011, the FASB temporarily delayed the effective date of the disclosures about troubled debt restructurings for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The Corporation has adopted this guidance; refer to Notes 7 and 8 of the Corporation’s financial statements for the year ended December 31, 2010 included in Item 8 of this Form 10-K. In December 2010, the FASB updated the codification to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. As a result, current GAAP will be improved by eliminating an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. As a result, goodwill impairments may be reported sooner than under current practice. The objective of this Update is to address questions about entities with reporting units with zero or negative carrying amounts because some entities concluded that Step 1 of the test is passed in those circumstances because the fair value of their reporting unit will generally be greater than zero. As a result of that conclusion, some constituents raised concerns that Step 2 of the test is not performed despite factors indicating that goodwill may be impaired. The amendments in this Update do not provide guidance on how to determine the carrying amount or measure the fair value of the reporting unit. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this guidance is not expected to have an impact on the Corporation’s financial statements. In December 2010, the FASB updated the codification to clarify required disclosures of supplementary pro forma information for business combinations. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the year had occurred as of the beginning of the comparable prior annual period only. Additionally, the Update expands disclosures to include a description of the nature and amount of material nonrecurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings. This guidance is effective for reporting periods beginning after December 15, 2010, early adoption is permitted. The Corporation adopted this guidance with no impact on the financial statements. 72
RESULTS OF OPERATIONS Net Interest Income Net interest income is the excess of interest earned by First BanCorp on its interest-earning assets over the interest incurred on its interest-bearing liabilities. First BanCorp’s net interest income is subject to interest rate risk due to the re-pricing and maturity mismatchrelationship of the Corporation’s assets and liabilities. Net interest income for the year ended December 31, 20092010 was $519.0$461.7 million, compared to $519.0 million and $527.9 million for 2009 and $451.0 million for 2008, and 2007, respectively. On an adjusted tax equivalenta tax-equivalent basis and excluding the changes in the fair value of derivative instruments and unrealized gains and losses on liabilities measured at fair value net interest income for the year ended December 31, 20092010 was $567.2$489.8 million, compared to $567.2 million and $579.1 million for 2009 and $475.4 million for 2008, and 2007, respectively. 68
The following tables include a detailed analysis of net interest income. Part I presents average volumes and rates on an adjusted tax equivalenttax-equivalent basis and Part II presents, also on an adjusted tax equivalenttax-equivalent basis, the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Corporation’s net interest income. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in volume multiplied by prior period rates), and (ii) changes in rate (changes in rate multiplied by prior period volumes). Rate-volume variances (changes in rate multiplied by changes in volume) have been allocated to the changes in volume and rate based upon their respective percentage of the combined totals. The net interest income is computed on an adjusted tax equivalenta tax-equivalent basis (for definition and reconciliation of this non-GAAP measure, refer to discussions below) and excluding: (1) the change in the fair value of derivative instruments, and (2) unrealized gains or losses on liabilities measured at fair value. For a definition and reconciliation of this non-GAAP measure, refer to discussions below. 73
Part I | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average volume | | Interest income(1)/ expense | | Average rate(1) | | | Average volume | | Interest income(1) / expense | | Average rate(1) | | Year Ended December 31, | | 2009 | | 2008 | | 2007 | | 2009 | | 2008 | | 2007 | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | 2010 | | 2009 | | 2008 | | 2010 | | 2009 | | 2008 | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Interest-earning assets: | | | Money market & other short-term investments | | $ | 182,205 | | $ | 286,502 | | $ | 440,598 | | $ | 577 | | $ | 6,355 | | $ | 22,155 | | | 0.32 | % | | | 2.22 | % | | | 5.03 | % | | $ | 778,412 | | $ | 182,205 | | $ | 286,502 | | $ | 2,049 | | $ | 577 | | $ | 6,355 | | | 0.26 | % | | | 0.32 | % | | | 2.22 | % | Government obligations(2) | | 1,345,591 | | 1,402,738 | | 2,687,013 | | 54,323 | | 93,539 | | 159,572 | | | 4.04 | % | | | 6.67 | % | | | 5.94 | % | | 1,368,368 | | 1,345,591 | | 1,402,738 | | 32,466 | | 54,323 | | 93,539 | | | 2.37 | % | | | 4.04 | % | | | 6.67 | % | Mortgage-backed securities | | 4,254,044 | | 3,923,423 | | 2,296,855 | | 238,992 | | 244,150 | | 117,383 | | | 5.62 | % | | | 6.22 | % | | | 5.11 | % | | 2,658,279 | | 4,254,044 | | 3,923,423 | | 121,587 | | 238,992 | | 244,150 | | | 4.57 | % | | | 5.62 | % | | | 6.22 | % | Corporate bonds | | 4,769 | | 7,711 | | 7,711 | | 294 | | 570 | | 510 | | | 6.16 | % | | | 7.39 | % | | | 6.61 | % | | 2,000 | | 4,769 | | 7,711 | | 116 | | 294 | | 570 | | | 5.80 | % | | | 6.16 | % | | | 7.39 | % | FHLB stock | | 76,982 | | 65,081 | | 46,291 | | 3,082 | | 3,710 | | 2,861 | | | 4.00 | % | | | 5.70 | % | | | 6.18 | % | | 65,297 | | 76,982 | | 65,081 | | 2,894 | | 3,082 | | 3,710 | | | 4.43 | % | | | 4.00 | % | | | 5.70 | % | Equity securities | | 2,071 | | 3,762 | | 8,133 | | 126 | | 47 | | 3 | | | 6.08 | % | | | 1.25 | % | | | 0.04 | % | | 1,481 | | 2,071 | | 3,762 | | 15 | | 126 | | 47 | | | 1.01 | % | | | 6.08 | % | | | 1.25 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total investments(3) | | 5,865,662 | | 5,689,217 | | 5,486,601 | | 297,394 | | 348,371 | | 302,484 | | | 5.07 | % | | | 6.12 | % | | | 5.51 | % | | 4,873,837 | | 5,865,662 | | 5,689,217 | | 159,127 | | 297,394 | | 348,371 | | | 3.26 | % | | | 5.07 | % | | | 6.12 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage loans | | 3,523,576 | | 3,351,236 | | 2,914,626 | | 213,583 | | 215,984 | | 188,294 | | | 6.06 | % | | | 6.44 | % | | | 6.46 | % | | 3,488,037 | | 3,523,576 | | 3,351,236 | | 207,700 | | 213,583 | | 215,984 | | | 5.95 | % | | | 6.06 | % | | | 6.44 | % | Construction loans | | 1,590,309 | | 1,485,126 | | 1,467,621 | | 52,908 | | 82,513 | | 121,917 | | | 3.33 | % | | | 5.56 | % | | | 8.31 | % | | 1,315,794 | | 1,590,309 | | 1,485,126 | | 33,329 | | 52,908 | | 82,513 | | | 2.53 | % | | | 3.33 | % | | | 5.56 | % | C&I and commercial mortgage loans | | 6,343,635 | | 5,473,716 | | 4,797,440 | | 263,935 | | 314,931 | | 362,714 | | | 4.16 | % | | | 5.75 | % | | | 7.56 | % | | 6,190,959 | | 6,343,635 | | 5,473,716 | | 262,940 | | 263,935 | | 314,931 | | | 4.25 | % | | | 4.16 | % | | | 5.75 | % | Finance leases | | 341,943 | | 373,999 | | 379,510 | | 28,077 | | 31,962 | | 33,153 | | | 8.21 | % | | | 8.55 | % | | | 8.74 | % | | 299,869 | | 341,943 | | 373,999 | | 24,416 | | 28,077 | | 31,962 | | | 8.14 | % | | | 8.21 | % | | | 8.55 | % | Consumer loans | | 1,661,099 | | 1,709,512 | | 1,729,548 | | 188,775 | | 197,581 | | 202,616 | | | 11.36 | % | | | 11.56 | % | | | 11.71 | % | | 1,506,448 | | 1,661,099 | | 1,709,512 | | 174,846 | | 188,775 | | 197,581 | | | 11.61 | % | | | 11.36 | % | | | 11.56 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total loans(4) (5) | | 13,460,562 | | 12,393,589 | | 11,288,745 | | 747,278 | | 842,971 | | 908,694 | | | 5.55 | % | | | 6.80 | % | | | 8.05 | % | | 12,801,107 | | 13,460,562 | | 12,393,589 | | 703,231 | | 747,278 | | 842,971 | | | 5.49 | % | | | 5.55 | % | | | 6.80 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-earning assets | | $ | 19,326,224 | | $ | 18,082,806 | | $ | 16,775,346 | | $ | 1,044,672 | | $ | 1,191,342 | | $ | 1,211,178 | | | 5.41 | % | | | 6.59 | % | | | 7.22 | % | | $ | 17,674,944 | | $ | 19,326,224 | | $ | 18,082,806 | | $ | 862,358 | | $ | 1,044,672 | | $ | 1,191,342 | | | 4.88 | % | | | 5.41 | % | | | 6.59 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing liabilities: | | | Interest-bearing checking accounts | | $ | 866,464 | | $ | 580,572 | | $ | 443,420 | | $ | 19,995 | | $ | 12,914 | | $ | 11,365 | | | 2.31 | % | | | 2.22 | % | | | 2.56 | % | | $ | 1,057,558 | | $ | 866,464 | | $ | 580,572 | | $ | 19,060 | | $ | 19,995 | | $ | 12,914 | | | 1.80 | % | | | 2.31 | % | | | 2.22 | % | Savings accounts | | 1,540,473 | | 1,217,730 | | 1,020,399 | | 19,032 | | 18,916 | | 15,037 | | | 1.24 | % | | | 1.55 | % | | | 1.47 | % | | 1,967,338 | | 1,540,473 | | 1,217,730 | | 24,238 | | 19,032 | | 18,916 | | | 1.23 | % | | | 1.24 | % | | | 1.55 | % | Certificates of deposit | | 1,680,325 | | 1,812,957 | | 1,652,430 | | 50,939 | | 73,466 | | 82,761 | | | 3.03 | % | | | 4.05 | % | | | 5.01 | % | | 1,909,406 | | 1,680,325 | | 1,812,957 | | 44,788 | | 50,939 | | 73,466 | | | 2.35 | % | | | 3.03 | % | | | 4.05 | % | Brokered CDs | | 7,300,696 | | 7,671,094 | | 7,639,470 | | 227,896 | | 318,199 | | 415,287 | | | 3.12 | % | | | 4.15 | % | | | 5.44 | % | | 7,002,343 | | 7,300,696 | | 7,671,094 | | 160,628 | | 227,896 | | 318,199 | | | 2.29 | % | | | 3.12 | % | | | 4.15 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing deposits | | 11,387,958 | | 11,282,353 | | 10,755,719 | | 317,862 | | 423,495 | | 524,450 | | | 2.79 | % | | | 3.75 | % | | | 4.88 | % | | 11,936,645 | | 11,387,958 | | 11,282,353 | | 248,714 | | 317,862 | | 423,495 | | | 2.08 | % | | | 2.79 | % | | | 3.75 | % | Loans payable | | 643,618 | | 10,792 | | — | | 2,331 | | 243 | | — | | | 0.36 | % | | | 2.25 | % | | — | | | 299,589 | | 643,618 | | 10,792 | | 3,442 | | 2,331 | | 243 | | | 1.15 | % | | | 0.36 | % | | | 2.25 | % | Other borrowed funds | | 3,745,980 | | 3,864,189 | | 3,449,492 | | 124,340 | | 148,753 | | 172,890 | | | 3.32 | % | | | 3.85 | % | | | 5.01 | % | | 2,436,091 | | 3,745,980 | | 3,864,189 | | 91,386 | | 124,340 | | 148,753 | | | 3.75 | % | | | 3.32 | % | | | 3.85 | % | FHLB advances | | 1,322,136 | | 1,120,782 | | 723,596 | | 32,954 | | 39,739 | | 38,464 | | | 2.49 | % | | | 3.55 | % | | | 5.32 | % | | 888,298 | | 1,322,136 | | 1,120,782 | | 29,037 | | 32,954 | | 39,739 | | | 3.27 | % | | | 2.49 | % | | | 3.55 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-bearing liabilities(6) | | $ | 17,099,692 | | $ | 16,278,116 | | $ | 14,928,807 | | $ | 477,487 | | $ | 612,230 | | $ | 735,804 | | | 2.79 | % | | | 3.76 | % | | | 4.93 | % | | $ | 15,560,623 | | $ | 17,099,692 | | $ | 16,278,116 | | $ | 372,579 | | $ | 477,487 | | $ | 612,230 | | | 2.39 | % | | | 2.79 | % | | | 3.76 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | $ | 567,185 | | $ | 579,112 | | $ | 475,374 | | | $ | 489,779 | | $ | 567,185 | | $ | 579,112 | | | | | | | | | | | | | | | | | Interest rate spread | | | 2.62 | % | | | 2.83 | % | | | 2.29 | % | | | 2.49 | % | | | 2.62 | % | | | 2.83 | % | Net interest margin | | | 2.93 | % | | | 3.20 | % | | | 2.83 | % | | | 2.77 | % | | | 2.93 | % | | | 3.20 | % |
| | | (1) | | On an adjusted tax-equivalent basis. The adjusted tax-equivalent yield was estimated by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory tax rate as adjusted for changes to enacted tax rates (40.95% for the Corporation’s subsidiaries other than IBEs in 2010 and 2009, 35.95% for the Corporation’s IBEs in 2010 and 2009 and 39% for all subsidiaries in 2008 and 2007)2008) and adding to it the cost of interest-bearing liabilities. The tax-equivalent adjustment recognizes the income tax savings when comparing taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread and net interest margin on a fully tax-equivalent basis. Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons. Changes in the fair value of derivative instruments and unrealized gains or losses on liabilities measured at fair value are excluded from interest income and interest expense because the changes in valuation do not affect interest paid or received. | | (2) | | Government obligations include debt issued by government sponsored agencies. | | (3) | | Unrealized gains and losses in available-for-sale securities are excluded from the average volumes. | | (4) | | Average loan balances include the average of non-accruingnon-performing loans. | | (5) | | Interest income on loans includes $10.7 million, $11.2 million, and $10.2 million for 2010, 2009 and $11.1 million for 2009, 2008, and 2007, respectively, of income from prepayment penalties and late fees related to the Corporation’s loan portfolio. | | (6) | | Unrealized gains and losses on liabilities measured at fair value are excluded from the average volumes. |
6974
Part II | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2009 Compared to 2008 | | 2008 Compared to 2007 | | | 2010 Compared to 2009 | | 2009 Compared to 2008 | | | | Increase (decrease) | | Increase (decrease) | | | Increase (decrease) | | Increase (decrease) | | | | Due to: | | Due to: | | | Due to: | | Due to: | | | | Volume | | Rate | | Total | | Volume | | Rate | | Total | | | Volume | | Rate | | Total | | Volume | | Rate | | Total | | | | (In thousands) | | | (In thousands) | | Interest income on interest-earning assets: | | | Money market & other short-term investments | | $ | (1,724 | ) | | $ | (4,054 | ) | | $ | (5,778 | ) | | $ | (6,082 | ) | | $ | (9,718 | ) | | $ | (15,800 | ) | | $ | 1,745 | | $ | (273 | ) | | $ | 1,472 | | $ | (1,724 | ) | | $ | (4,054 | ) | | $ | (5,778 | ) | Government obligations | | | (3,672 | ) | | | (35,544 | ) | | | (39,216 | ) | | | (80,954 | ) | | 14,921 | | | (66,033 | ) | | 767 | | | (22,624 | ) | | | (21,857 | ) | | | (3,672 | ) | | | (35,544 | ) | | | (39,216 | ) | Mortgage-backed securities | | 19,474 | | | (24,632 | ) | | | (5,158 | ) | | 97,011 | | 29,756 | | 126,767 | | | | (78,371 | ) | | | (39,034 | ) | | | (117,405 | ) | | 19,474 | | | (24,632 | ) | | | (5,158 | ) | Corporate bonds | | | (192 | ) | | | (84 | ) | | | (276 | ) | | — | | 60 | | 60 | | | | (162 | ) | | | (16 | ) | | | (178 | ) | | | (192 | ) | | | (84 | ) | | | (276 | ) | FHLB stock | | 578 | | | (1,206 | ) | | | (628 | ) | | 1,115 | | | (266 | ) | | 849 | | | | (493 | ) | | 305 | | | (188 | ) | | 578 | | | (1,206 | ) | | | (628 | ) | Equity securities | | | (62 | ) | | 141 | | 79 | | | (29 | ) | | 73 | | 44 | | | | (28 | ) | | | (83 | ) | | | (111 | ) | | | (62 | ) | | 141 | | 79 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total investments | | 14,402 | | | (65,379 | ) | | | (50,977 | ) | | 11,061 | | 34,826 | | 45,887 | | | | (76,542 | ) | | | (61,725 | ) | | | (138,267 | ) | | 14,402 | | | (65,379 | ) | | | (50,977 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage loans | | 10,716 | | | (13,117 | ) | | | (2,401 | ) | | 28,173 | | | (483 | ) | | 27,690 | | | | (2,101 | ) | | | (3,782 | ) | | | (5,883 | ) | | 10,716 | | | (13,117 | ) | | | (2,401 | ) | Construction loans | | 4,681 | | | (34,286 | ) | | | (29,605 | ) | | 1,214 | | | (40,618 | ) | | | (39,404 | ) | | | (8,186 | ) | | | (11,393 | ) | | | (19,579 | ) | | 4,681 | | | (34,286 | ) | | | (29,605 | ) | C&I and commercial mortgage loans | | 43,028 | | | (94,024 | ) | | | (50,996 | ) | | 45,020 | | | (92,803 | ) | | | (47,783 | ) | | | (6,528 | ) | | 5,533 | | | (995 | ) | | 43,028 | | | (94,024 | ) | | | (50,996 | ) | Finance leases | | | (2,654 | ) | | | (1,231 | ) | | | (3,885 | ) | | | (477 | ) | | | (714 | ) | | | (1,191 | ) | | | (3,424 | ) | | | (237 | ) | | | (3,661 | ) | | | (2,654 | ) | | | (1,231 | ) | | | (3,885 | ) | Consumer loans | | | (5,466 | ) | �� | | (3,340 | ) | | | (8,806 | ) | | | (2,332 | ) | | | (2,703 | ) | | | (5,035 | ) | | | (17,825 | ) | | 3,896 | | | (13,929 | ) | | | (5,466 | ) | | | (3,340 | ) | | | (8,806 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total loans | | 50,305 | | | (145,998 | ) | | | (95,693 | ) | | 71,598 | | | (137,321 | ) | | | (65,723 | ) | | | (38,064 | ) | | | (5,983 | ) | | | (44,047 | ) | | 50,305 | | | (145,998 | ) | | | (95,693 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest income | | 64,707 | | | (211,377 | ) | | | (146,670 | ) | | 82,659 | | | (102,495 | ) | | | (19,836 | ) | | | (114,606 | ) | | | (67,708 | ) | | | (182,314 | ) | | 64,707 | | | (211,377 | ) | | | (146,670 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense on interest-bearing liabilities: | | | Brokered CDs | | | (14,707 | ) | | | (75,596 | ) | | | (90,303 | ) | | 1,591 | | | (98,679 | ) | | | (97,088 | ) | | | (8,958 | ) | | | (58,310 | ) | | | (67,268 | ) | | | (14,707 | ) | | | (75,596 | ) | | | (90,303 | ) | Other interest-bearing deposits | | 12,285 | | | (27,615 | ) | | | (15,330 | ) | | 21,551 | | | (25,418 | ) | | | (3,867 | ) | | 16,756 | | | (18,636 | ) | | | (1,880 | ) | | 12,285 | | | (27,615 | ) | | | (15,330 | ) | Loans payable | | 8,265 | | | (6,177 | ) | | 2,088 | | 243 | | — | | 243 | | | | (2,606 | ) | | 3,717 | | 1,111 | | 8,265 | | | (6,177 | ) | | 2,088 | | Other borrowed funds | | | (4,439 | ) | | | (19,974 | ) | | | (24,413 | ) | | 18,327 | | | (42,464 | ) | | | (24,137 | ) | | | (46,275 | ) | | 13,321 | | | (32,954 | ) | | | (4,439 | ) | | | (19,974 | ) | | | (24,413 | ) | FHLB advances | | 6,122 | | | (12,907 | ) | | | (6,785 | ) | | 17,599 | | | (16,324 | ) | | 1,275 | | | | (12,516 | ) | | 8,599 | | | (3,917 | ) | | 6,122 | | | (12,907 | ) | | | (6,785 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest expense | | 7,526 | | | (142,269 | ) | | | (134,743 | ) | | 59,311 | | | (182,885 | ) | | | (123,574 | ) | | | (53,599 | ) | | | (51,309 | ) | | | (104,908 | ) | | 7,526 | | | (142,269 | ) | | | (134,743 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in net interest income | | $ | 57,181 | | $ | (69,108 | ) | | $ | (11,927 | ) | | $ | 23,348 | | $ | 80,390 | | $ | 103,738 | | | $ | (61,007 | ) | | $ | (16,399 | ) | | $ | (77,406 | ) | | $ | 57,181 | | $ | (69,108 | ) | | $ | (11,927 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
A portionPortions of the Corporation’s interest-earning assets, mostly investments in obligations of some U.S. Government agencies and sponsored entities, generate interest which is exempt from income tax, principally in Puerto Rico. Also, interest and gains on salesales of investments held by the Corporation’s international banking entities are tax-exempt under the Puerto Rico tax law, except for a temporary 5% tax rate imposed by the Puerto Rico Government on IBEs’ net income effective for years that commenced after December 31, 2008 and before January 1, 2012 (refer to the Income Taxes discussion below for additional information regarding recent legislation that imposes a temporary 5% tax rate on IBEs’ net income)information). To facilitate the comparison of all interest data related to these assets, the interest income has been converted to an adjusted taxable equivalent basis. The tax equivalent yield was estimated by dividing the interest rate spread on exempt assets by 1 less the Puerto Rico statutory tax rate as adjusted for recent changes to enacted tax rates (40.95% for the Corporation’s subsidiaries other than IBEs in 2009,and 35.95% for the Corporation’s IBEs in 2009 and 39% for all subsidiaries in 2008 and 2007)IBEs) and adding to it the average cost of interest-bearing liabilities. The computation considers the interest expense disallowance required by Puerto Rico tax law. Refer to the “Income Taxes” discussion below for additional information of the Puerto Rico tax law. The presentation of net interest income excluding the effects of the changes in the fair value of the derivative instruments and unrealized gains or losses on liabilities measured at fair value (“valuations”) provides additional information about the Corporation’s net interest income and facilitates comparability and analysis. The changes in the fair value of the derivative instruments and unrealized gains or losses on liabilities measured at fair value have no effect on interest due or interest earned on interest-bearing assetsliabilities or interest-bearing liabilities,interest-earning assets, respectively, or on interest payments exchanged with interest rate swap counterparties. 7075
The following table reconciles thenet interest income in accordance with GAAP to net interest income excluding valuations, and to net interest income on an adjusted tax-equivalent basis set forth in Part I aboveand net interest rate spread and net interest margin on a GAAP basis to interest income set forth in the Consolidated Statements of (Loss) Income:these items excluding valuations and on an adjusted tax-equivalent basis: | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | | 2009 | | | 2008 | | | 2007 | | Interest income on interest-earning assets on an adjusted tax-equivalent basis | | $ | 1,044,672 | | | $ | 1,191,342 | | | $ | 1,211,178 | | Less: tax equivalent adjustments | | | (53,617 | ) | | | (56,408 | ) | | | (15,293 | ) | Plus (less): net unrealized gain (loss) on derivatives | | | 5,519 | | | | (8,037 | ) | | | (6,638 | ) | | | | | | | | | | | Total interest income | | $ | 996,574 | | | $ | 1,126,897 | | | $ | 1,189,247 | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year Ended | | | | December 31, 2010 | | | December 31, 2009 | | | December 31, 2008 | | Net Interest Income (in thousands) | | | | | | | | | | | | | Interest Income — GAAP | | $ | 832,686 | | | $ | 996,574 | | | $ | 1,126,897 | | Unrealized loss (gain) on derivative instruments | | | 1,266 | | | | (5,519 | ) | | | 8,037 | | | | | | | | | | | | Interest income excluding valuations | | | 833,952 | | | | 991,055 | | | | 1,134,934 | | Tax-equivalent adjustment | | | 28,406 | | | | 53,617 | | | | 56,408 | | | | | | | | | | | | Interest income on a tax-equivalent basis excluding valuations | | | 862,358 | | | | 1,044,672 | | | | 1,191,342 | | | | | | | | | | | | | | | Interest Expense — GAAP | | | 371,011 | | | | 477,532 | | | | 599,016 | | Unrealized gain (loss) on derivative instruments and liabilities measured at fair value | | | 1,568 | | | | (45 | ) | | | 13,214 | | | | | | | | | | | | Interest expense excluding valuations | | | 372,579 | | | | 477,487 | | | | 612,230 | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income — GAAP | | $ | 461,675 | | | $ | 519,042 | | | $ | 527,881 | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income excluding valuations | | $ | 461,373 | | | $ | 513,568 | | | $ | 522,704 | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income on a tax-equivalent basis excluding valuations | | $ | 489,779 | | | $ | 567,185 | | | $ | 579,112 | | | | | | | | | | | | | | | | | | | | | | | | | Average Balances (in thousands) | | | | | | | | | | | | | Loans and leases | | $ | 12,801,107 | | | $ | 13,460,562 | | | $ | 12,393,589 | | Total securities and other short-term investments | | | 4,873,837 | | | | 5,865,662 | | | | 5,689,217 | | | | | | | | | | | | Average Interest-Earning Assets | | $ | 17,674,944 | | | $ | 19,326,224 | | | $ | 18,082,806 | | | | | | | | | | | | | | | | | | | | | | | | | Average Interest-Bearing Liabilities | | $ | 15,560,623 | | | $ | 17,099,692 | | | $ | 16,278,116 | | | | | | | | | | | | | | | | | | | | | | | | | Average Yield/Rate | | | | | | | | | | | | | Average yield on interest-earning assets — GAAP | | | 4.71 | % | | | 5.16 | % | | | 6.23 | % | Average rate on interest-bearing liabilities — GAAP | | | 2.38 | % | | | 2.79 | % | | | 3.68 | % | | | | | | | | | | | Net interest spread — GAAP | | | 2.33 | % | | | 2.37 | % | | | 2.55 | % | | | | | | | | | | | Net interest margin — GAAP | | | 2.61 | % | | | 2.69 | % | | | 2.92 | % | | | | | | | | | | | | | | | | | | | | | | | | Average yield on interest-earning assets excluding valuations | | | 4.72 | % | | | 5.13 | % | | | 6.28 | % | Average rate on interest-bearing liabilities excluding valuations | | | 2.39 | % | | | 2.79 | % | | | 3.76 | % | | | | | | | | | | | Net interest spread excluding valuations | | | 2.33 | % | | | 2.34 | % | | | 2.52 | % | | | | | | | | | | | Net interest margin excluding valuations | | | 2.61 | % | | | 2.66 | % | | | 2.89 | % | | | | | | | | | | | | | | | | | | | | | | | | Average yield on interest-earning assets on a tax-equivalent basis and excluding valuations | | | 4.88 | % | | | 5.41 | % | | | 6.59 | % | Average rate on interest-bearing liabilities excluding valuations | | | 2.39 | % | | | 2.79 | % | | | 3.76 | % | | | | | | | | | | | Net interest spread on a tax-equivalent basis and excluding valuations | | | 2.49 | % | | | 2.62 | % | | | 2.83 | % | | | | | | | | | | | Net interest margin on a tax-equivalent basis and excluding valuations | | | 2.77 | % | | | 2.93 | % | | | 3.20 | % | | | | | | | | | | |
The following table summarizes the components of the changes in fair values of interest rate swaps and interest rate caps, which are included in interest income: | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | | 2009 | | | 2008 | | | 2007 | | Unrealized gain (loss) on derivatives (economic undesignated hedges): | | | | | | | | | | | | | Interest rate caps | | $ | 3,496 | | | $ | (4,341 | ) | | $ | (3,985 | ) | Interest rate swaps on loans | | | 2,023 | | | | (3,696 | ) | | | (2,653 | ) | | | | | | | | | | | Net unrealized gain (loss) on derivatives (economic undesignated hedges) | | $ | 5,519 | | | $ | (8,037 | ) | | $ | (6,638 | ) | | | | | | | | | | |
The following table summarizes the components of interest expense for the years ended December 31, 2009, 2008 and 2007. As previously stated, the net interest margin analysis excludes the changes in the fair value of derivatives and unrealized gains or losses on liabilities measured at fair value:
| | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | | 2009 | | | 2008 | | | 2007 | | | | | | Interest expense on interest-bearing liabilities | | $ | 460,128 | | | $ | 632,134 | | | $ | 713,918 | | Net interest (realized) incurred on interest rate swaps | | | (5,499 | ) | | | (35,569 | ) | | | 12,323 | | Amortization of placement fees on brokered CDs | | | 22,858 | | | | 15,665 | | | | 9,056 | | Amortization of placement fees on medium-term notes | | | — | | | | — | | | | 507 | | | | | | | | | | | | Interest expense excluding net unrealized loss (gain) on derivatives (economic undesignated hedges) and net unrealized (gain) loss on liabilities measured at fair value, | | | 477,487 | | | | 612,230 | | | | 735,804 | | Net unrealized loss (gain) on derivatives (economic undesignated hedges) and liabilities measured at fair value | | | 45 | | | | (13,214 | ) | | | 4,488 | | Accretion of basis adjustment | | | (2,061 | ) | | | — | | | | (2,061 | ) | | | | | | | | | | | Total interest expense | | $ | 477,532 | | | $ | 599,016 | | | $ | 738,231 | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | | 2010 | | | 2009 | | | 2008 | | Unrealized (loss) gain on derivatives (economic undesignated hedges): | | | | | | | | | | | | | Interest rate caps | | $ | (1,174 | ) | | $ | 3,496 | | | $ | (4,341 | ) | Interest rate swaps on loans | | | (92 | ) | | | 2,023 | | | | (3,696 | ) | | | | | | | | | | | Net unrealized (loss) gain on derivatives (economic undesignated hedges) | | $ | (1,266 | ) | | $ | 5,519 | | | $ | (8,037 | ) | | | | | | | | | | |
7176
The following table summarizes the components of the net unrealized gain and loss on derivatives (economic undesignated hedges) and net unrealized gain and loss on liabilities measured at fair value which are included in interest expense:expense. As previously stated, the net interest margin analysis excludes the changes in the fair value of derivatives and unrealized gains or losses on liabilities measured at fair value: | | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | | 2009 | | | 2008 | | | 2007 | | Unrealized loss (gain) on derivatives (economic undesignated hedges): | | | | | | | | | | | | | Interest rate swaps and other derivatives on brokered CDs | | $ | 5,321 | | | $ | (62,856 | ) | | $ | (66,826 | ) | Interest rate swaps and other derivatives on medium-term notes | | | 199 | | | | (392 | ) | | | 692 | | | | | | | | | | | | Net unrealized loss (gain) on derivatives (economic undesignated hedges) | | | 5,520 | | | | (63,248 | ) | | | (66,134 | ) | | | | | | | | | | | | | | | | | | | | | | | | Unrealized (gain) loss on liabilities measured at fair value: | | | | | | | | | | | | | Unrealized (gain) loss on brokered CDs | | | (8,696 | ) | | | 54,199 | | | | 71,116 | | Unrealized loss (gain) on medium-term notes | | | 3,221 | | | | (4,165 | ) | | | (494 | ) | | | | | | | | | | | Net unrealized (gain) loss on liabilities measured at fair value: | | | (5,475 | ) | | | 50,034 | | | | 70,622 | | | | | | | | | | | | Net unrealized loss (gain) on derivatives (economic undesignated hedges) and liabilities measured at fair value | | $ | 45 | | | $ | (13,214 | ) | | $ | 4,488 | | | | | | | | | | | |
The following table summarizes the components of the accretion of basis adjustment which are included in interest expense in 2007:
| | | | | | | Year Ended December 31, | | | | 2007 | | | | (In thousands) | | Accreation of basis adjustments on fair value hedges: | | | | | Interest rate swaps on brokered CDs | | $ | — | | Interest rate swaps on medium-term notes | | | (2,061 | ) | | | | | Accretion of basis adjustment on fair value hedges | | $ | (2,061 | ) | | | | |
| | | | | | | | | | | | | | | Year Ended December 31, | | (In thousands) | | 2010 | | | 2009 | | | 2008 | | | | | | | | (In thousands) | | | | | | Unrealized loss (gain) on derivatives (economic undesignated hedges): | | | | | | | | | | | | | Interest rate swaps on brokered CDs and options on stock index deposits | | $ | 2 | | | $ | 5,321 | | | $ | (62,856 | ) | Interest rate swaps and other derivatives on medium-term notes | | | (51 | ) | | | 199 | | | | (392 | ) | | | | | | | | | | | Net unrealized (gain) loss on derivatives (economic undesignated hedges) | | | (49 | ) | | | 5,520 | | | | (63,248 | ) | | | | | | | | | | | | | | | | | | | | | | | | Unrealized (gain) loss on liabilities measured at fair value: | | | | | | | | | | | | | Unrealized (gain) loss on brokered CDs | | | — | | | | (8,696 | ) | | | 54,199 | | Unrealized (gain) loss on medium-term notes | | | (1,519 | ) | | | 3,221 | | | | (4,165 | ) | | | | | | | | | | | Net unrealized (gain) loss on liabilities measured at fair value | | | (1,519 | ) | | | (5,475 | ) | | | 50,034 | | | | | | | | | | | | Net unrealized (gain) loss on derivatives (economic undesignated hedges) and liabilities measured at fair value | | $ | (1,568 | ) | | $ | 45 | | | $ | (13,214 | ) | | | | | | | | | | |
Interest income on interest-earning assets primarily represents interest earned on loans receivable and investment securities. Interest expense on interest-bearing liabilities primarily represents interest paid on brokered CDs, branch-based deposits, repurchase agreement, advances from the FHLB and FED repurchase agreements and notes payable. Net interest incurred or realized on interest rate swaps primarily represents net interest exchanged on swaps that economically hedge brokered CDs and medium-term notes.
The amortization of broker placement fees represents the amortization of fees paid to brokers upon issuance of related financial instruments (i.e., brokered CDs not elected for the fair value option). For 2007, the amortization of broker placement fees includes the derecognition of the unamortized balance of placement fees related to a $150 million note redeemed prior to its contractual maturity during the second quarter as well as the amortization of placement fees for brokered CDs not elected for the fair value option.
Unrealized gains or losses on derivatives representsrepresent changes in the fair value of derivatives, primarily interest rate caps and swaps used for protection against rising interest rates and, for 2009 and 2008, mainly related to interest rate swaps that economically hedge liabilities (i.e.,hedged brokered CDs and medium-term notes) or assets (i.e., loansmedium term notes. All interest rate swaps related to brokered CDs were called during the course of 2009 due to the low level of interest rates and, investments).as a consequence, the Corporation exercised its call option on the swapped-to-floating brokered CDs that were recorded at fair value. Unrealized gains or losses on liabilities measured at fair value represents the change in the fair value of such liabilities (medium-term notes and brokered CDs), other than the accrual of interests. For 2007, the basis adjustment represents the basis differential between the market value and the book value of a $150 million medium-term note recognized at the inception of fair value hedge accounting on April 3, 2006, as well as changes in fair value recognized after the inception until the discontinuance of fair value hedge accounting on January 1, 2007, which was amortized or accreted based on the expected maturity of the liability as a yield adjustment. The unamortized balance of the basis adjustment was derecognized as part of the redemption of the $150 million note resulting in an adjustment to earnings of $1.9 million recognized as an accretion of basis adjustment, during the second quarter of 2007.
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Derivative instruments, such as interest rate swaps, are subject to market risk. While the Corporation does have certain trading derivatives to facilitate customer transactions, the Corporation does not utilize derivative instruments for speculative purposes. As of December 31, 2009,2010, most of the interest rate swaps outstanding are used for protection against rising interest rates. In the past, the volume of interest rate swaps was much higher, as they were used to convert the fixed-rate of a large portfolio of brokered CDs, mainly those with long-term maturities, to a variable rate and mitigate the interest rate risk related to variable rate loans. However, most of these interest rate swaps were called during 2009, due to lower interest rate levels. Refer to Note 32 of the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K for further details concerning the notional amounts of derivative instruments and additional information. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on net interest income. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future. 2010 compared to 2009 Net interest income decreased 11% to $461.7 million for 2010 from $519.0 million in 2009. The decrease in net interest income was mainly related to the deleveraging of the Corporation’s balance sheet to preserve its capital position, the adverse impact on net interest margin of maintaining a higher liquidity position and continued pressures from the high level of non-performing loans. Partially offsetting the decrease in average interest-earning assets were reduced funding costs and improved spreads in commercial loans. The average volume of interest-earning assets for 2010 decreased by $1.7 billion compared to 2009. The reduction in average earning assets primarily reflected a decrease of $991.8 million for 2010 in average investment securities and other short term investments, and a decrease of $659.5 million for 2010 in average loans. The 77
decrease is consistent with the Corporation’s deleveraging and balance sheet repositioning strategy for capital preservation purposes, and was achieved mainly by selling investment securities and reducing the loan portfolio via paydowns and charge-offs. The decrease in average securities was driven by the sale of approximately $2.3 billion of investment securities during 2010, mainly U.S. agency MBS, including the sale during the third quarter of 2010 of $1.2 billion of U.S. agency MBS that was matched with the early extinguishment of a matching set of repurchase agreements. Given the Corporation’s balance sheet structure and the shape and level of the yield curve, which in turn is reflected in the valuation of the securities and the repurchase agreements, the Corporation took advantage of market conditions during the third quarter of 2010 and completed the sale of approximately $1.2 billion of MBS that was matched with the early termination of approximately $1.0 billion of repurchase agreements. The cost of the unwinding of the repurchase agreements of $47.4 million offset the gain of $47.1 million realized on the sale of investment securities. The repaid repurchase agreements were scheduled to mature at various dates between January 2011 and October 2012 and had a weighted average cost of 4.30%, which was higher than the average yield of 3.93% on the securities that were sold. This balance sheet re-structuring transaction, through which $1 billion of higher cost liabilities was disposed without material earnings impact in the immediate term, will provide for enhancement of net interest margin in the future, while also improving the Corporation’s leverage ratio. The average volume of all major loan categories, in particular the average volume of construction and commercial loans, decreased for 2010 compared to 2009. The average volume of construction loans decreased by $274.5 million, mainly due to the charge-off activity, repayments and the sale of non-performing credits, including the partial effect of the approximately $118.4 million of non-performing construction loans sold in 2010. The decrease also showed the effect of some very early improvements in residential construction projects in Puerto Rico. On September 2, 2010, the Government of Puerto Rico enacted legislation that provides, among other things, incentives to buyers of residences on the Island. Such measures could result in improvements in the construction lending sector. Refer to the “Financial Condition and Operating Data Analysis — Commercial and Construction Loans” section below for additional information. The decrease in average commercial loans of $152.7 million for 2010, as compared to 2009, was primarily related to both paydowns and charge-offs, including repayments of facilities granted to the Puerto Rico and Virgin Islands governments. The average volume of residential mortgage loans decreased by $35.5 million for 2010, compared to 2009, driven by $174.3 million in sales of performing residential loans in the secondary market, and by charge-offs and paydowns. The average volume of consumer loans (including finance leases) decreased by $196.7 million for 2010, compared to 2009, resulting from paydowns and charge-offs that exceeded new loan originations. As mentioned above, the deleveraging and balance sheet repositioning strategies resulted in a net reduction in securities and loans that have allowed a reduction in average wholesale funding of $2.4 billion for 2010, including repurchase agreements, advances and brokered CDs. The average balance of brokered CDs decreased to $7.0 billion for 2010 from $7.3 billion for 2009. The average balance of interest-bearing deposits, excluding brokered CDs, increased by 20%, or $847.0 million, for 2010, as compared to 2009. Net interest margin on an adjusted tax-equivalent basis and excluding valuations decreased to 2.77% for 2010 from 2.93% for 2009, adversely affected by the maintenance of excess liquidity in the balance sheet due to the current economic environment. Liquidity volumes were significantly higher than normal levels as reflected in average balances in money market and overnight funding of $778.4 million for 2010 compared to $182.2 million for 2009. Also affecting the margin were the lower yields on investments affected by the MBS sales and the approximately $1.6 billion in investment securities called during 2010 that were replaced with lower yielding U.S. agency investment securities. The high volume of non-performing loans continued to pressure net interest margins as interest payments of approximately $6.2 million during 2010 were applied against the related principal balance for loans recorded under the cost-recovery method. Partially offsetting the aforementioned factors was the reduction in funding costs and improved spreads in commercial loans. The overall average cost of funding decreased by 40 basis points for 2010, compared to 2009, as the Corporation benefited from the lower deposit pricing on its core and brokered CDs and from the roll-off and repayments of higher cost funds, such as maturing brokered CDs. The higher yield on commercial loans resulted from a wider LIBOR spread, higher spreads on loan renewals and improved pricing, as the Corporation has been increasing the use of interest rate floors in new commercial loan agreements. 78
On an adjusted tax-equivalent basis and excluding valuations, net interest income decreased by $77.4 million, or 13%, for 2010 compared to 2009. The decrease for 2010 includes a decrease of $25.2 million, compared to 2009, in the tax-equivalent adjustment. The tax-equivalent adjustment increases interest income on tax-exempt securities and loans by an amount which makes tax-exempt income comparable, on a pre-tax basis, to the Corporation’s taxable income as previously stated. The decrease in the tax-equivalent adjustment was mainly related to decreases in the interest rate spread on tax-exempt assets, primarily due to a higher proportion of taxable assets to total interest-earning assets resulting from the maintenance of a higher liquidity position and lower yields on U.S. agency and MBS held by the Bank’s IBE subsidiary. The Corporation replaced securities called and prepayments and sales of MBS with shorter-term securities. 2009 compared to 2008 Net interest income decreased 2% to $519.0 million for 2009 from $527.9 million for 2008, adversely impacted by a 27 basis pointspoint decrease, on an adjusted tax-equivalent basis, in the Corporation’ net interest margin. The decrease in the yield of the Corporation’s average interest-earning assets declined more than the cost of the average interest-bearing liabilities. The yield on interest-earning assets decreased 118 basis points to 5.41% for 2009 from 6.59% for 2008. The decrease was primarily the result of a lower yield on average loans which decreased 125 basis points to 5.55% for 2009 from 6.80% for 2008. The decrease in the yield on average loans was primarily due to the increase in non-accrual loans which resulted in the reversal of accrued interest. Also contributing to a lower yield on average loans was the decline in market interest rates that resulted in reductions in interest income from variable rate loans, primarily commercial and construction loans tied to short-term indexes, even though the Corporation iswas actively increasing spreads on loans renewals. The Corporation increased the use of interest rate floors in new commercial and construction loans agreements and renewals in 2009 to protect net interest margins going forward. The average 3-month LIBOR for 2009 was 0.69% compared to 2.93% for 2008 and the Prime Rate for 2009 was 3.25% compared to an average of 5.08% for 2008. Lower yields were also observed in the investment securities portfolio, driven by the approximately $946 million of U.S. agency debentures called in 2009 and MBS prepayments, which were replaced with lower yielding investments financed with very low-cost sources of funding. The cost of average-interest bearing liabilities decreased 97 basis points to 2.79% for 2009 from 3.76% for 2008, primarily due to the decline in short-term rates and changes in the mix of funding sources. The weighted-average cost of brokered CDs decreased 103 basis points to 3.12% for 2009 from 4.15% for 2008 primarily due to the replacement of maturing or callable brokered CDs that had interest rates above current market rates with shorter-term brokered CDs. Also, as a result of the general decline in market interest rates, lower interest rates were paid on existing customer money market and savings accounts coupled with lower interest rates paid on new deposits. In addition, the Corporation increased the use of short-term advances from the FHLB and the FED. The Corporation increased its short-term borrowings as a measure of interest rate risk management to match the shortening in the average life of the investment portfolio and shifted the funding emphasis to retail depositdeposits to reduce reliance on brokered CDs. Partially offsetting the compression in the net interest margin was an increase of $1.2 billion in average interest-earning assets. The higher volume of average interest-earning assets was driven by the growth of the C&I loan portfolio in Puerto Rico, primarily due to credit facilities extended to the Puerto Rico Government and its political subdivisions. Also, funds obtained through short-term borrowings were invested, in part, in the purchase of investment securities to mitigate the decline in the average yield on securities that resulted from the acceleration of MBS prepayments and calls of U.S. agency debentures. On an adjusted tax-equivalent basis, net interest income decreased by $11.9 million, or 2%, for 2009 compared to 2008. The decrease was principally due to lower yields on earning-assets as described above and a decrease of $2.8 million in the tax-equivalent adjustment. The tax-equivalent adjustment increases interest income on tax-exempt securities and loans by an amount which makes tax-exempt income comparable, on a pre-tax basis, to the Corporation’s taxable income as previously stated. The decrease in the tax-equivalent adjustment was mainly related to decreases in the interest rate spread on tax-exempt assets, mainly due to lower yields on U.S. agency 73
debentures an MBS held by the Corporation’sBank’s IBE subsidiary, as the Corporation replaced securities called and sold as well as prepayments of MBS with shorter-term securities, and due to the decrease in income tax savings on securities held by FirstBank Overseas Corporation resulting from the temporary 5% tax imposed in 2009 to all IBEs (see Income Taxes discussion below). 2008 compared to 2007
Net interest income increased 17% to $527.9 million for 2008 from $451.0 million for 2007. Approximately $14.2 million of the total net interest income increase was related to fluctuations in the fair value of derivative instruments and financial liabilities measured at fair value. The Corporation’s net interest spread and margin for 2008, on an adjusted tax equivalent basis, were 2.83% and 3.20%, respectively, up 54 and 37 basis points from 2007. The increase was mainly associated with a decrease in the average cost of funds resulting from lower short-term interest rates and, to a lesser extent, a higher volume of interest earning assets. During 2008, the target for the Federal Funds rate was lowered from 4.25% to a range of 0% to 0.25% through seven separate actions in an attempt to stimulate the U.S. economy, officially in recession since December 2007. The decrease in funding costs more than offset lower loan yields resulting from the repricing of variable-rate construction and commercial loans tied to short-term indexes and from a higher volume of non-accrual loans.
Average earning assets for 2008 increased by $1.3 billion, as compared to 2007, driven by commercial and residential real estate loan originations, and, to a lesser extent, purchases of loans during 2008 that contributed to a wider spread. In addition, the Corporation purchased approximately $3.2 billion in U.S. government agency fixed-rate MBS having an average yield of 5.44% during 2008, which is higher than the cost of the borrowing required to finance the purchase of such assets, thus contributing to a higher net interest income as compared to 2007. The increase in the loan and MBS portfolio was partially offset by the early redemption, through call exercises, of approximately $1.2 billion of U.S. Agency debentures with an average yield of 5.87% due to the drop in rates in the long end of the yield curve.
On the funding side, the average cost of the Corporation’s interest-bearing liabilities decreased by 117 basis points mainly due to lower short-term rates and the mix of borrowings. The benefit from the decline in short-term rates in 2008 was partially offset by the Corporation’s strategy, in managing its asset/liability position in order to limit the effects of changes in interest rates on net interest income, of reducing its exposure to high levels of market volatility by, among other things, extending the duration of its borrowings and replacing swapped-to-floating brokered CDs that matured or were called (due to lower short-term rates) with brokered CDs not hedged with interest rate swaps. Also, the Corporation has reduced its interest rate risk through other funding sources and by, among other things, entering into long-term and structured repurchase agreements that replaced short-term borrowings. The volume of swapped-to-floating brokered CDs decreased by approximately $3.0 billion to $1.1 billion as of December 31, 2008 from $4.1 billion as of December 31, 2007.
On the asset side, the average yield of the Corporation’s interest-earning assets decreased by 63 basis points driven by lower yields on the variable-rate commercial and construction loan portfolio. The weighted-average yield on loans decreased by 125 basis points during 2008. In the latter part of 2008, the Corporation took initial steps to obtain higher pricing on its variable-rate commercial loan portfolio; however, this effort was severely impacted by significant declines in short-term rates during the last quarter of 2008 (the Prime Rate dropped to 3.25% from 7.25% at December 31, 2007 and 3-month LIBOR closed at 1.43% on December 31, 2008 from 4.70% on December 31, 2007) and, to a lesser extent, by the increase in the volume of non-performing loans. Lower loans yields were partially offset by higher yields on tax-exempt securities such as U.S. agency MBS held by the Corporation’s international banking entity subsidiary.
On an adjusted tax equivalent basis, net interest income increased by $103.7 million, or 22%, for 2008 compared to 2007. The increase was principally due to the lower short-term rates discussed above but also was positively impacted by a $41.1 million increase in the tax-equivalent adjustment. The increase in the tax-equivalent adjustment was mainly related to increases in the interest rate spread on tax-exempt assets due to lower short-term rates and a higher volume of tax-exempt MBS held by the Corporation’s international banking entity subsidiary, FirstBank Overseas Corporation.
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Provision for Loan and Lease Losses The provision for loan and lease losses is charged to earnings to maintain the allowance for loan and lease losses at a level that the Corporation considers adequate to absorb probable losses inherent in the portfolio. The adequacy of the allowance for loan and lease losses is also based upon a number of additional factors including trends in charge-offs and delinquencies, current economic conditions, the fair value of the underlying collateral and the financial condition of the borrowers, and, as such, includes amounts based on judgments and estimates made by the Corporation. Although the Corporation believes that the allowance for loan and lease losses is adequate, factors beyond the Corporation’s control, including factors affecting the economies of Puerto Rico, the United States, the U.S. Virgin Islands and the British Virgin Islands, may contribute to delinquencies and defaults, thus necessitating additional reserves. During 2009,2010, the Corporation recorded a provision for loan and lease losses of $579.9$634.6 million, compared to $579.9 million in 2009 and $190.9 million in 20082008. 2010 compared to 2009 The provision for loans and $120.6lease losses for 2010 of $634.6 million, including $102.9 million associated with loans transferred to held for sale, increased by $54.7 million, or 9%, compared to the provision recorded for 2009. Excluding the provision related to loans transferred to held for sale, the provision decreased by $48.2 million to $531.7 million for 2010. The decrease was mainly related to lower charges to specific reserves for the construction and commercial portfolio, a slower migration of loans to non-performing status and the overall reduction of the loan portfolio. Much of the decrease in the provision is related to the construction loan portfolio in Florida and the commercial and industrial (C&I) loan portfolio in Puerto Rico. The decreases in the provisioning for these portfolios, excluding the provision related to loans transferred to held for sale, were partially offset by an increase in the provision for the residential mortgage loans portfolio affected by increases in historical loss rates and declines in collateral value. The provision to net-charge offs ratio, excluding the provision and net charge-offs of loans transferred to held for sale, of 120% for 2010, compared to 174% for 2009, reflects, among other things, charge-offs recorded during the year that did not require additional provisioning, including certain non-performing loans sold during the year. Expressed as a percent of period-end total loans receivable, the reserve coverage ratio increased to 4.74% at December 31, 2010, compared with 3.79% at December 31, 2009. With respect to the United States loan portfolio, the Corporation recorded a $119.5 million provision for 2010, compared to $188.7 million for 2009. The decrease was mainly related to the construction loan portfolio and reflected lower charges to specific reserves, the slower migration of loans to non-performing status and the overall reduction of the Corporation’s exposure to construction loans in Florida to $78.5 million as of December 31, 2010 from $299.5 million as of December 31, 2009. The provision for construction loans in the United States decreased by $68.4 million for 2010 as the non-performing construction loans portfolio in this region decreased by 79% to $49.6 million, compared to $246.3 million as of December 31, 2009. As of December 31, 2010, approximately $70.9 million, or 90%, of the total exposure to construction loans in Florida was individually measured for impairment. The Corporation halted construction lending in Florida and continues to reduce its credit exposure in this market through the disposition of assets and different loss mitigation initiatives as the end of this difficult economic cycle appears to be approaching. During 2010, the Corporation completed the sale of approximately $206.5 million of non-performing construction and commercial mortgage loans and other non-performing assets in Florida. In terms of geography, the Corporation recorded a $488.0 million provision for loan and lease losses associated with the Puerto Rico’s loan portfolio, including the $102.9 million provision relating to the transfer of loans to held for sale, compared to a provision of $366.0 million in 2007.2009. Excluding the provision relating to the loans transferred to held for sale, the provision in Puerto Rico increased by $19.1 million to $385.1 million for 2010. The increase in the total provision was mainly related to the residential and commercial mortgage loan portfolio, which increased by $47.5 million and $48.8 million, respectively, driven by negative trends in loss rates and falling property values confirmed by recent appraisals and/or broker price opinions. The reserve factors for residential mortgage loans were recalibrated in 2010 as part of further segmentation and analysis of this portfolio for purposes of computing the required specific and general reserves. The review included the incorporation of updated loss factors to loans expected to liquidate considering the expected realization of the values of similar assets at disposition. The provision 80
for construction loans increased by $94.5 million mainly related to higher charges to specific reserves in 2010 and increases to the general reserve factors. This was partially offset by a decrease of $74.0 million in the provision for the C&I loan portfolio attributable to the slower migration of loans to non-performing and/or impaired status, the overall reduction in the C&I portfolio size and the determination that lower reserves were required for certain loans that were individually evaluated for impairment in 2010, based on the underlying value of the collateral, when compared to the reserves required for these loans in periods prior to 2010. Refer to the discussions under “Credit Risk Management” below for an analysis of the allowance for loan and lease losses, non-performing assets, impaired loans and related information, and refer to the discussions under “Financial Condition and Operating Analysis — Loan Portfolio” and under “Risk Management — Credit Risk Management” below for additional information concerning the Corporation’s loan portfolio exposure in the geographic areas where the Corporation does business. 2009 compared to 2008 The increase, as compared to 2008, was mainly related to: | • | | Increases in specific reserves for construction and commercial impaired loans. | | | • | | Increases in non-performing and net charge-offs levels. | | | • | | The migration of loans to higher risk categories, thus requiring higher general reserves. | | | • | | The overall growth of the loan portfolio. |
Even though the deterioration in credit quality was observed in all of the Corporation’s portfolios, it was more significant in the construction and C&I loan portfolios, which were affected by the stagnant housing market and further deterioration in the economies of the markets served. The provision for loan losses for the construction loan portfolio increased by $211.1 million and the provision for the C&I loan portfolio increased by $110.6$108.6 million compared to 2008. This increase accounts for approximately 83%82% of the increase in the provision. As mentioned above, the increase was mainly driven by the migration of loans to higher risk categories, increases in specific reserves for impaired loans, and increases to loss factors used to determine the general reserve to account for negative trends in non-performing loans, charge-offs affected by declines in collateral values and economic indicators. The provision for residential mortgages also increased significantly for 2009, as compared to 2008, an increase of $32 million, as a result of updating general reserve factors and a higher portfolio of delinquent loans evaluated for impairment purposes that was adversely impacted by decreases in collateral values. In terms of geography, the Corporation recorded a $366.0 million provision in 2009 for its loan portfolio in Puerto Rico compared to $125.0 million in 2008, an increase of $241.0 million mainly related to the C&I and construction loans portfolio. The provision for C&I loans in Puerto Rico increased by $116.5$114.8 million and the provision for the construction loan portfolio in Puerto Rico increased by $101.3 million. Rising unemployment and the depressed economy negatively impacted borrowers and was reflected in a persistent decline in the volume of new housing sales and underperformance of important sectors of the economy. With respect to the United States loan portfolio, the Corporation recorded a $188.7 million provision in 2009 compared to a $53.4 million provision in 2008, an increase of $135.3 million mainly related to the construction loan portfolio. The provision for construction loans in the United States increased by $95.0 million compared to 2008, primarily due to charges against specific reserves for impaired construction projects, mainly collateral dependent loans that were charged-off to their collateral value in 2009 (refer to the “Risk Management — Credit Risk Management — Allowance for Loan and Lease Losses and Non-performing Assets” discussion below for additional information about charge-offs recorded in 2009).2009. Impaired loans in the United States increased from $210.1 million at December 31, 2008 to $461.1 million by the end of 2009. As of December 75
31, 2009, approximately 89%, or $265.1 million, of the total exposure to construction loans in Florida was individually measured for impairment. The provision recorded for the loan portfolio in the Virgin Islands amounted to $25.2 million in 2009, an increase of $12.7 million compared to 2008 mainly related to the construction loan portfolio.
Refer to the discussions under “Risk Management — Credit Risk Management — Allowance for Loan and Lease Losses and Non-performing Assets” below for analysis of the allowance for loan and lease losses, non-performing assets, impaired loans and related information.
2008 compared to 2007
The increase, as compared to 2007, was mainly attributable to the significant increase in delinquency levels and increases in specific reserves for impaired commercial and construction loans adversely impacted by deteriorating economic conditions in the United States and Puerto Rico. Also, increases to reserve factors for potential losses inherent in the loan portfolio, higher reserves for the residential mortgage loan portfolio in the U.S. mainland and Puerto Rico and the overall growth of the Corporation’s loan portfolio contributed to higher charges in 2008.
During 2008, the Corporation experienced continued stress in the credit quality of and worsening trends on its construction loan portfolio, in particular, condo-conversion loans affected by the continuing deterioration in the health of the economy, an oversupply of new homes and declining housing prices in the United States. The total exposure of the Corporation to condo-conversion loans in the United States was approximately $197.4 million or less than 2% of the total loan portfolio. A total of approximately $154.4 million of this condo conversion portfolio was considered impaired with a specific reserve of $36.0 million allocated to these impaired loans during 2008. Absorption rates in condo-conversion loans in the United States were low and properties collateralizing some loans originally disbursed as condo-conversion were formally reverted to rental properties with a future plan for the sale of converted units upon an improvement in the United States real estate market. Higher reserves were also necessary for the residential mortgage loan portfolio in the U.S. mainland in light of increased delinquency levels and the decrease in housing prices.
In Puerto Rico, the Corporation’s impaired commercial and construction loan portfolio amounted to approximately $164 million and $106 million, respectively, with specific reserves of $21 million and $19 million, respectively, allocated to these loans during 2008. The Corporation also increased its reserves for the residential mortgage and construction loan portfolio from the 2007 levels to account for the increased credit risk tied to recessionary conditions in Puerto Rico’s economy.
��Refer to the discussions under “Financial Condition and Operating Analysis — Lending Activities” and under “Risk Management — Credit Risk Management” below for additional information concerning the Corporation’s loan portfolio exposure to the geographic areas where the Corporation does business.
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Non-interest Income The following table presents the composition of non-interest income: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Other service charges on loans | | $ | 6,830 | | $ | 6,309 | | $ | 6,893 | | | $ | 7,224 | | $ | 6,830 | | $ | 6,309 | | Service charges on deposit accounts | | 13,307 | | 12,895 | | 12,769 | | | 13,419 | | 13,307 | | 12,895 | | Mortgage banking activities | | 8,605 | | 3,273 | | 2,819 | | | 13,615 | | 8,605 | | 3,273 | | Rental income | | 1,346 | | 2,246 | | 2,538 | | | — | | 1,346 | | 2,246 | | Insurance income | | 8,668 | | 10,157 | | 10,877 | | | 7,752 | | 8,668 | | 10,157 | | Other operating income | | 18,362 | | 18,570 | | 13,595 | | | 20,636 | | 18,362 | | 18,570 | | | | | | | | | | | | | | | | | | | | Non-interest income before net gain (loss) on investments, insurance reimbursement and other agreements related to a contingency settlement, net gain on partial extinguishment and recharacterization of secured commercial loans to local financial institutions and gain on sale of credit card portfolio | | 57,118 | | 53,450 | | 49,491 | | | Non-interest income before net gain on investments and loss on early extinguishment of repurchase agreements | | | 62,646 | | 57,118 | | 53,450 | | | | | | | | | | | | | | | | | | | | Gain on VISA shares and related proceeds | | 3,784 | | 9,474 | | — | | | 10,668 | | 3,784 | | 9,474 | | Net gain on sale of investments | | 83,020 | | 17,706 | | 3,184 | | | 93,179 | | 83,020 | | 17,706 | | OTTI on equity securities and corporate bonds | | | (388 | ) | | | (5,987 | ) | | | (5,910 | ) | | | (603 | ) | | | (388 | ) | | | (5,987 | ) | OTTI on debt securities | | | (1,270 | ) | | — | | — | | | | (582 | ) | | | (1,270 | ) | | — | | | | | | | | | | | | | | | | | Net gain (loss) on investments | | 85,146 | | 21,193 | | | (2,726 | ) | | Insurance reimbursement and other agreements related to a contingency settlement | | — | | — | | 15,075 | | | Gain on partial extinguishment and recharacterization of secured commercial loans to local financial institutions | | — | | — | | 2,497 | | | Gain on sale of credit card portfolio | | — | | — | | 2,819 | | | Net gain on investments | | | 102,662 | | 85,146 | | 21,193 | | | | | | | | | | | | | | Loss on early extinguishment of repurchase agreements | | | | (47,405 | ) | | — | | — | | | | | | | | | | | | | | | | | | | | Total | | $ | 142,264 | | $ | 74,643 | | $ | 67,156 | | | $ | 117,903 | | $ | 142,264 | | $ | 74,643 | | | | | | | | | | | | | | | | |
Non-interest income primarily consists of other service charges on loans; service charges on deposit accounts; commissions derived from various banking, securities and insurance activities; gains and losses on mortgage banking activities; and net gains and losses on investments and impairments. Other service charges on loans consist mainly of service charges on credit card-related activities and other non-deferrable fees (e.g. agent, commitment and drawing fees). Service charges on deposit accounts include monthly fees and other fees on deposit accounts. Income from mortgage banking activities includes gains on sales and securitization of loans and revenues earned for administering residential mortgage loans originated by the Corporation and subsequently sold with servicing retained. In addition, lower-of-cost-or-market valuation adjustments to the Corporation’s residential mortgage loans held for sale portfolio and servicing rights portfolio, if any, are recorded as part of mortgage banking activities. Rental income represents income generated by the Corporation’s subsidiary, First Leasing, on the daily rental of various types of motor vehicles. As part of its strategies to focus on its core business, the Corporation divested its short-term rental business during the fourth quarter of 2009. 77
Insurance income consists of insurance commissions earned by the Corporation’s subsidiary, FirstBank Insurance Agency, Inc., and the Bank’s subsidiary in the U.S. Virgin Islands, FirstBank Insurance V.I., Inc. These subsidiaries offer a wide variety of insurance business. The other operating income category is composed of miscellaneous fees such as debit, credit card and point of sale (POS) interchange fees and check and cash management fees and includes commissions from the Corporation’s broker-dealer subsidiary, FirstBank Puerto Rico Securities. The net gain (loss) on investment securities reflects gains or losses as a result of sales that are consistent with the Corporation’s investment policies as well as other-than-temporary impairmentOTTI charges (OTTI) on the Corporation’s investment portfolio. 82
2010 compared to 2009 Non-interest income decreased $24.4 million, or 17%, to $117.9 million in 2010, primarily reflecting: | ▪ | | Lower gains on sale of investments securities, other than the sale of MBS that was matched with the early termination of repurchase agreements, as the Corporation realized gains of approximately $46.1 million on the sale of approximately $1.2 billion of investment securities, mainly U.S. agency MBS, compared to the $82.8 million gain recorded in 2009. Also, a nominal loss of $0.3 million was recorded in 2010, resulting from a transaction in which the Corporation sold approximately $1.2 billion in MBS, combined with the unwinding of $1.0 billion of repurchase agreements as part of a balance sheet repositioning strategy. | | | ▪ | | A $1.3 million decrease in rental income due to the divestiture of the short-term rental business operated by the Corporation’s subsidiary, First Leasing, during the fourth quarter of 2009. | | | ▪ | | A $0.9 million decrease in income from insurance-related activities. |
Partially offsetting the aforementioned decreases were: | ▪ | | A $6.9 million increase in gains from sales of VISA shares. | | | ▪ | | A $5.0 million increase in income from mortgage banking activities, primarily related to gains (including the recognition of servicing rights) of $12.1 million recorded on the sale of approximately $174.3 million of residential mortgage loans in the secondary market compared to gains of $7.4 million on the sale of approximately $117.0 million of residential mortgage loans during 2009. | | | ▪ | | A $2.1 million increase in broker-dealer income mainly related to bond underwriting fees. |
2009 compared to 2008 Non-interest income increased $67.6 million to $142.3 million forin 2009, primarily reflecting: | §▪ | | A $59.6 million increase in realized gains on the sale of investment securities, primarily reflecting a $79.9 million gain on the sale of MBS (mainly U.S. agency fixed-rate MBS), compared to realized gains on the sale of MBS of $17.7 million in 2008. In an effort to manage interest rate risk, and take advantage of favorable market valuations, approximately $1.8 billion of U.S. agency MBS (mainly 30 Yearyear fixed-rate U.S. agency MBS) were sold in 2009, compared to approximately $526 million of U.S. agency MBS sold in 2008. | | | §▪ | | A $5.3 million increase in gains from mortgage banking activities, due to the increased volume of loan sales and securitizations. Servicing assets recorded at the time of sale amounted to $6.1 million for 2009 compared to $1.6 million for 2008. The increase is mainly related to $4.6 million of capitalized servicing assets in connection with the securitization of approximately $305 million FHA/VA mortgage loans into GNMA MBS. For the first time in several years, the Corporation has been engaged in the securitization of mortgage loans insince early 2009. | | | §▪ | | A $5.6 million decrease in OTTI charges related to equity securities and corporate bonds, partially offset by OTTI charges through earnings of $1.3 million in 2009 related to the credit loss portion of available-for-sale private label MBS. |
Also contributing to the increase in non-interest income was higher fee income, mainly fees on loans and service charges on deposit accounts offset by lower income from insurance activities and a reduction in income from vehicle rental activities. During the first three quarters of 2009, income from rental activities decreased by $0.5 million due to a lower volume of business. A further reduction of $0.4 million was observed in the fourth quarter of 2009, as compared to the comparable period in 2008, mainly related to the disposition of the Corporation’s vehicle rental business early in the quarter, which was partially offset by a $0.2 million gain recorded for the disposition of the business. 2008 compared to 2007
Non-interest income increased 11% to $74.6 million for 2008 from $67.2 million for 2007. The increase was related to a realized gain of $17.7 million on the sale of approximately $526 million of U.S. sponsored agency fixed-rate MBS and to the gain of $9.3 million on the sale of part of the Corporation’s investment in VISA in connection with VISA’s IPO. The announcement of the FED that it will invest up to $600 billion in obligations from U.S. government-sponsored agencies, including $500 billion in MBS backed by FNMA, FHLMC and GNMA, caused a surge in prices and sent mortgage rates down and offered a market opportunity to realize a gain. Higher point of sale (POS) and ATM interchange fee income and an increase in fee income from cash management services provided to corporate customers accounted for approximately $3.9 million of the increase in non-interest income. OTTI charges amounted to $6.0 million in 2008, compared to $5.9 million in 2007. Different from 2007 when impairment charges related exclusively to equity securities, most of the impairment charges in 2008 (approximately $4.2 million) was related to auto industry corporate bonds held by FirstBank Florida. The Corporation’s remaining exposure to auto industry corporate bonds as of December 31, 2008 amounted to $1.5 million, while its exposure to equity securities was approximately $2.2 million. These auto industry corporate bonds were sold in 2009 and a gain of $0.9 million was recorded at the time of sale, while
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the exposure to equity securities was reduced to $1.8 million as of December 31, 2009 after OTTI charges of $0.4 million recorded in 2009
The increase in non-interest income attributable to activities mentioned above was partially offset, when comparing 2008 to 2007, by isolated events such as the $15.1 million income recognition in 2007 for reimbursement of expenses related to the class action lawsuit settled in 2007, and a gain of $2.8 million on the sale of a credit card portfolio and of $2.5 million on the partial extinguishment and recharacterization of a secured commercial loan to a local financial institution that were recognized in 2007.
Non-Interest Expense The following table presents the components of non-interest expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Employees’ compensation and benefits | | $ | 132,734 | | $ | 141,853 | | $ | 140,363 | | | $ | 121,126 | | $ | 132,734 | | $ | 141,853 | | Occupancy and equipment | | 62,335 | | 61,818 | | 58,894 | | | 59,494 | | 62,335 | | 61,818 | | Deposit insurance premium | | 40,582 | | 10,111 | | 6,687 | | | 60,292 | | 40,582 | | 10,111 | | Other taxes, insurance and supervisory fees | | 20,870 | | 22,868 | | 21,293 | | | 21,210 | | 20,870 | | 22,868 | | Professional fees — recurring | | 12,980 | | 12,572 | | 13,480 | | | 18,500 | | 12,980 | | 12,572 | | Professional fees — non-recurring | | 2,237 | | 3,237 | | 7,271 | | | 2,787 | | 2,237 | | 3,237 | | Servicing and processing fees | | 10,174 | | 9,918 | | 6,574 | | | 8,984 | | 10,174 | | 9,918 | | Business promotion | | 14,158 | | 17,565 | | 18,029 | | | 12,332 | | 14,158 | | 17,565 | | Communications | | 8,283 | | 8,856 | | 8,562 | | | 7,979 | | 8,283 | | 8,856 | | Net loss on REO operations | | 21,863 | | 21,373 | | 2,400 | | | 30,173 | | 21,863 | | 21,373 | | Other | | 25,885 | | 23,200 | | 24,290 | | | 23,281 | | 25,885 | | 23,200 | | | | | | | | | | | | | | | | | Total | | $ | 352,101 | | $ | 333,371 | | $ | 307,843 | | | $ | 366,158 | | $ | 352,101 | | $ | 333,371 | | | | | | | | | | | | | | | | |
2010 compared to 2009 Non-interest expense increased by $14.1 million to $366.2 million principally attributable to: | ▪ | | An increase of $19.7 million in the FDIC deposit insurance premium expense, mainly related to increases in premium rates and a higher average volume of deposits. | | | ▪ | | A $8.3 million increase in losses from REO operations due to write-downs to the value of repossessed residential and commercial properties as well as higher costs associated with a larger inventory. | | | ▪ | | A $6.1 million increase in professional fees, attributable in part to higher legal fees related to collections and foreclosure procedures and mortgage appraisals, as well as in the implementation of strategic initiatives. |
Partially offsetting the increases mentioned above: | ▪ | | A $11.6 million decrease in employees’ compensation and benefits from reductions in bonuses and incentive compensation, coupled with the impact of a reduction in headcount. During 2010, the Corporation reduced its headcount by approximately 195 or 7%. | | | ▪ | | The impact in 2009 of a non-recurring $2.6 million charge to property tax expense attributable to the reassessed value of certain properties. | | | ▪ | | A $1.8 million decrease in business promotion expenses due to a lower level of marketing activities. | | | ▪ | | The impact in 2009 of a $4.0 million impairment charge associated with the core deposit intangible asset in the Corporation’s Florida operations included as part of Other expenses in the above table. |
The Corporation intends to continue improving its operating efficiency by further reducing controllable expenses, rationalizing its business operations and enhancing its technological infrastructure through targeted investments. 84
2009 compared to 2008 Non-interest expenses increased $18.7 million to $352.1 million for 2009 primarily reflecting: | §▪ | | An increase of $30.5 million in the FDIC deposit insurance premium, including $8.9 million for the special assessment levied by the FDIC in 2009 and increases in regular assessment rates. The FDIC increased its insurance premium rates tofor banks in 2009 due to losses to the FDIC insurance fund as a result of bank failures during 2008 and 2009, coupled with additional losses that the FDIC projected for the future due to anticipated additional bank failures. | | | §▪ | | A $4.0 million impairment of the core deposit intangible of FirstBank Florida, recorded in 2009 as part of other non-interest expenses. The core deposit intangible represents the value of the premium paid to acquire core deposits of an institution. Core deposit intangible impairment occurs when the present value of expected future earnings attributed to maintaining the core deposit base diminishes.decreases. Factors which contributed to the impairment include deposit run-off and a shift of customers to time certificates. | | | §▪ | | A $1.8 million increase in the reserve for probable losses on outstanding unfunded loan commitments recorded as part of other non-interest expenses. The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance sheetoff-balance-sheet loan commitments at the balance sheet date, and it was mainly related to outstanding construction loans commitments. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included as part of accounts payable and other liabilities in the consolidated statement of financial condition. |
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The aforementioned increases were partially offset by decreases in certain controllable expenses such as: | §▪ | | A $9.1 million decrease in employees’ compensation and benefit expenses, mainly due to a lower headcount and reductions in bonuses, incentive compensation and overtime costs. The number of full time equivalent employees decreased by 163, or 6%, during 2009. | | | §▪ | | A $3.4 million decrease in business promotion expenses due to a lower level of marketing activities. | | | §▪ | | A $1.1 million decrease in taxes, other than income taxes, mainly driven by a decrease in municipal taxes which are assessed based on taxable gross revenues. |
The Corporation continued to reduce costs through corporate-wide efforts to focus on its core business, including cost-cutting initiatives. The efficiency ratio for 2009 was 53.24% compared to 55.33% for 2008.
2008 compared to 2007
Non-interest expenses increased 8% to $333.4 million for 2008 from $307.8 million for 2007. The increase was principally attributable to a higher net loss on REO operations and increases in the deposit insurance premium expense and occupancy and equipment expenses, partially offset by lower professional fees.
The net loss on REO operations increased by approximately $19.0 million for 2008, as compared to the previous year, mainly due to a higher inventory of repossessed properties and declining real estate prices, mainly in the U.S. mainland, that have caused write-downs of the value of repossessed properties. A significant portion of the losses was related to foreclosed properties in Florida, including a $5.3 million write-down to the value of a single foreclosed project in the United States as of December 31, 2008. Higher losses were also observed in Puerto Rico due to a higher inventory and recent trends in sales.
The deposit insurance premium expense increased by $3.4 million as the Corporation used available one-time credits to offset the premium increase in 2007 resulting from a new assessment system adopted by the FDIC and also attributable to the increase in the deposit base.
Occupancy and equipment expenses increased by $2.9 million primarily to support the growth of the Corporation’s operations as well as increases in utility costs.
Employees’compensation and benefit expenses increased by $1.5 million for 2008, as compared to the previous year, primarily due to higher average compensation and related fringe benefits, partially offset by a decrease of $2.8 million in stock-based compensation expenses and the impact in 2007 of the accrual of approximately $3.3 million for a voluntary separation program established by the Corporation as part of its cost saving strategies. The Corporation has been able to continue the growth of its operations without incurring substantial additional operating expenses. The Corporation’s total headcount decreased as compared to December 31, 2007 as a result of the voluntary separation program completed earlier in 2008 and reductions by attrition. These decreases have been partially offset by increases due to the acquisition of the Virgin Islands Community Bank (“VICB”) in the first quarter of 2008 and to reinforcement of audit and credit risk management personnel.
Professional fees decreased by $4.9 million for the 2008 year, as compared to 2007, primarily attributable to lower legal, accounting and consulting fees due to, among other things, the settlement of legal and regulatory matters.
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Income Taxes Income tax expense includes Puerto Rico and Virgin Islands income taxes as well as applicable U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, First BanCorp is treated as a foreign corporation for U.S. income tax purposes and is generally subject to United States income tax only on its income from sources within the United States or income effectively connected with the conduct of a trade or business within the United States. Any such tax paid is creditable, within certain conditions and limitations, against the Corporation’s Puerto Rico tax liability. The Corporation is also subject to U.S. VirginU.S.Virgin Islands taxes on its income from sources within that jurisdiction. Any such tax paid is also creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions and limitations. Under the Puerto Rico Internal Revenue Code of 1994, as amended (“PR(the “PR Code”), the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns and, thus, the Corporation is not able to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss, a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable carry forward period (7 years except for losses incurred during taxable years 2005 through 2012 in which the carryforward period is 10 years). The PR Code provides a dividend received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations. Dividend payments from a U.S. subsidiary to the Corporation are subject to a 10% withholding tax based on the provisions of the U.S. Internal Revenue Code. Under the PR Code, First BanCorp is subject to a maximum statutory tax rate of 39%. In 2009, the Puerto Rico Government approved Act No. 7 (the “Act”), to stimulate Puerto Rico’s economy and to reduce the Puerto Rico Government’s fiscal deficit. The Act imposes a series of temporary and permanent measures, including the imposition of a 5% surtax over the total income tax determined, which is applicable to corporations, among others, whose combined income exceeds $100,000, effectively resulting in an increase in the maximum statutory tax rate from 39% to 40.95% and an increase in the capital gain statutory tax rate from 15% to 15.75%. ThisThese temporary measure ismeasures are effective for tax years that commenced after December 31, 2008 and before January 1, 2012. The PR Code also includes an alternative minimum tax of 22% that applies if the Corporation’s regular income tax liability is less than the alternative minimum tax requirements. The Corporation has maintained an effective tax rate lower than the maximum statutory rate mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income taxes and by doing business through IBEsan International Banking Entity (“IBE”) of the Corporation and the Bank (“FirstBank IBE”) and through the Bank’s subsidiary, FirstBank Overseas Corporation, in which the interest income and gain on sales is exempt from Puerto Rico and U.S. income taxation. Under the Act, all IBEsIBE are subject to athe special 5% tax on their net income not otherwise subject to tax pursuant to the PR Code. This temporary measure is also effective for tax years that commenced after December 31, 2008 and before January 1, 2012. The IBEsFirstBank IBE and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico. IBEs that operate as a unit of a bank pay income taxes at normal rates to the extent that the IBEs’ net income exceeds 20% of the bank’s total net taxable income. On January 31, 2011, the Puerto Rico Government approved Act No. 1 which repealed the 1994 Code and established a new Puerto Rico Internal Revenue Code (the “2010 Code”). The provisions of the 2010 Code are generally applicable to taxable years commencing after December 31, 2010. The matters discussed above are equally applicable under the 2010 Code except that the maximum corporate tax rate has been reduced from 39% (40.95% for calendar years 2009,and 2010) to 30% (25% for taxable years commencing after December 31, 2013 if certain economic conditions are met by the Puerto Rico economy). Corporations are entitled to elect continue to determine its Puerto Rico income tax responsibility for such 5 year period under the provisions of the 1994 Code. 86
For additional information relating to income taxes, see Note 27 to the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K, including the reconciliation of the statutory to the effective income tax rate for 2010, 2009 2008 and 2007.2008. 20092010 compared to 20082009 For 2009,2010, the Corporation recognizedrecorded an income tax expense of $103.1 million compared to an income tax expense of $4.5 million compared to an income tax benefit of $31.7 million for 2008.2009. The fluctuation in income tax expense for 20092010 is mainly resulted fromrelated to an incremental $93.7 million non-cash chargescharge in the fourth quarter of approximately $184.4 million2010 to increase the valuation allowance forof the Corporation’sBank’s deferred tax asset. As of December 31, 2009,2010, the deferred tax asset, net of a valuation allowance of $191.7$445.8 million, amounted to $109.2$9.3 million compared to $128.0$109.2 million as of December 31, 2008.2009. The decrease was mainly associated with the aforementioned $93.7 million charge to increase the valuation allowance of the Bank’s deferred tax asset. Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax assetsasset based on the consideration of all available evidence, using a “more likely than not” realization standard. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. In making such assessment, significant weight is to be given to evidence that can be objectively verified, including both positive and negative evidence. The accounting for income taxes guidance requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversingthe reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance, and recognizedrecognizes tax benefits only when deemed probable.probable of realization. 81
In assessing the weight of positive and negative evidence, a significant negative factor that resulted in the increaseincreases of the valuation allowance was that the Corporation’s banking subsidiary, FirstBank Puerto Rico, wascontinues in a three-year historical cumulative loss position as of the end of the year 2009,2010, mainly as a result of charges to the provision for loan and lease losses especially in the construction portfolio both in Puerto Rico and the United States, resulting fromas a result of the economic downturn.downturn and has projected to be in a loss position in 2011. As of December 31, 2009,2010, management concluded that $109.2$9.3 million of the net deferred tax asset will be realized. The Corporation’s deferred tax assets will be realized. In assessing the likelihood of realizing the deferred tax assets, managementfor which it has considered all four sources of taxable income mentioned above and even though sufficient profits are expected in the next seven years to realized the deferred tax asset, given current uncertain economic conditions, the Company has only relied on tax-planning strategies as the main source of taxable income to realize the deferred tax asset amount. Among the most significant tax-planning strategies identified are: (i) sale of appreciated assets, (ii) consolidation of profitable and unprofitable companies (in Puerto Rico each Company filesnot established a separate tax return; no consolidated tax returns are permitted), and (iii) deferral of deductions without affecting its utilization. Management will continue monitoring the likelihood of realizing the deferred tax assets in future periods. If future events differ from management’s December 31, 2009 assessment, an additional valuation allowance may needrelate to profitable subsidiaries and to amounts that can be established which may have a material adverse effect on the Corporation’s resultsrealized through future reversals of operations. Similarly, toexisting taxable temporary differences. To the extent the realization of a portion, or all, of the tax asset becomes “more likely than not” based on changes in circumstances (such as, improved earnings, changes in tax laws or other relevant changes), a reversal of that portion of the deferred tax asset valuation allowance will then be recorded. 2009 compared to 2008 For 2009, the Corporation recognized an income tax expense of $4.5 million, compared to an income tax benefit of $31.7 million for 2008. The fluctuation in income tax expense for 2009 mainly resulted from non-cash charges of approximately $184.4 million to increase the valuation allowance for the Corporation’s deferred tax asset. As of December 31, 2009, the deferred tax asset, net of a valuation allowance of $191.7 million, amounted to $109.2 million compared to $128.0 million as of December 31, 2008. In assessing the weight of positive and negative evidence, a significant negative factor that resulted in the increase of the valuation allowance was that the Corporation’s banking subsidiary FirstBank Puerto Rico was in a three-year historical cumulative loss as of the end of 2009 mainly as a result of charges to the provision for loan and lease losses, especially in the construction portfolio both in Puerto Rico and the United States, resulting from the economic downturn. The increase in the valuation allowance does not have any impact on the Corporation’s liquidity, nor does such an allowance preclude the Corporation from using tax losses, tax credits or other deferred tax assets in the future. 87
Partially offsetting the impact of the increase in the valuation allowance, was the reversal of approximately $19 million of Unrecognized Tax Benefits (“UTBs”)UTBs as further discussed below. The income tax provision in 2009 was also impacted by adjustments to deferred tax amounts as a result of the aforementioned changes to the PR Code enacted tax rates. The effect of a higher temporary statutory tax rate over the normal statutory tax rate resulted in an additional income tax benefit of $10.4 million for 2009 that was partially offset by an income tax provision of $6.6 million related to the special 5% tax on the operations of FirstBank Overseas Corporation. Deferred tax amounts have been adjusted for the effect of the change in the income tax rate considering the enacted tax rate expected to apply to taxable income in the period in which the deferred tax asset or liability is expected to be settled or realized. During the second quarter of 2009, the Corporation reversed UTBs by $10.8 million and related accrued interest of $5.3 million due to the lapse of the statute of limitations for the 2004 taxable year. Also, in July 2009, the Corporation entered into an agreement with the Puerto Rico Department of the Treasury to conclude an income tax audit and to eliminate all possible income and withholding tax deficiencies related to taxable years 2005, 2006, 2007 and 2008. As a result of such agreement, the Corporation reversed during the third quarter of 2009 the remaining UTBs and related interest by approximately $2.9 million, net of the payment made to the Puerto Rico Department of the Treasury in connection with the conclusion of the tax audit. There were no UTBs outstanding as of December 31, 2009. Refer to Note 27 to the Corporation’s financial statements for the year ended December 31, 2009 included in Item 8 of this Form 10-K for additional information. 2008 compared to 2007
For 2008, the Corporation recognized an income tax benefit of $31.7 million compared to an income tax expense of $21.6 million for 2007. The fluctuation was mainly related to lower taxable income. A significant portion of revenues was derived from tax-exempt assets and operations conducted through the IBE, FirstBank Overseas Corporation. Also, the positive fluctuation in financial results was impacted by two transactions: (i) a reversal of $10.6 million of UTBs during the second quarter of 2008 for positions taken on income tax returns, as explained below, and (ii) the recognition of an income tax benefit of $5.4 million in connection with an agreement entered into with the Puerto Rico Department of Treasury during the first quarter of 2008 that established a multi-year allocation schedule for deductibility of the $74.25 million payment made by the Corporation during 2007 to settle a securities class action suit. Also, higher deferred tax benefits were recorded in connection with a higher provision for loan and lease losses.
During the second quarter of 2008, the Corporation reversed UTBs of approximately $7.1 million and accrued interest of $3.5 million as a result of a lapse of the applicable statute of limitations for the 2003 taxable year.
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OPERATING SEGMENTS Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer of the Corporation and, to a lesser extent, the Board of Directors, the operating segments are driven primarily by the Corporation’s lines of business for its operations in Puerto Rico, the Corporation’s principal market, and by geographic areas for its operations outside of Puerto Rico. As of December 31, 2009,2010, the Corporation had six reportable segments: Consumer (Retail) Banking; Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments; United States operationsoperations; and Virgin Islands operations. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Corporation’s organizational chart, nature of the products, distribution channels and the economic characteristics of the products were also considered in the determination of the reportable segments. For information regarding First BanCorp’s reportable segments, please refer to Note 33 “Segment Information” to the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K. Starting in the fourth quarter of 2009, the Corporation has realigned its reporting segments to better reflect how it views and manages its business. Two additional operating segments were created to evaluate the operations conducted by the Corporation outside of Puerto Rico. Operations conducted in the United States and in the Virgin Islands are now individually evaluated as separate operating segments. This realignment in the segment reporting essentially reflects the effect of restructuring initiatives, including the merger of FirstBank Florida operations with and into FirstBank, and will allow the Corporation to better present the results from its growth focus. Prior to the third quarter of 2009, the operating segments were driven primarily by the Corporation’s legal entities. FirstBank operations conducted in the Virgin Islands and through its loan production office in Miami, Florida were reflected in the Corporation’s then four reportable segments (Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments) while the operations conducted by FirstBank Florida were reported as part of a category named “Other”. In the third quarter of 2009, as a result of the aforementioned merger, the operations of FirstBank Florida were reported as part of the four reportable segments. The change in the fourth quarter reflected a further realignment of the organizational structure as a result of management changes. Prior period amounts have been reclassified to conform to current period presentation. These changes did not have an impact on the previously reported consolidated results of the Corporation.
The accounting policies of the segments are the same as those described in Note 1 — “Nature of Business and Summary of Significant Accounting Policies” to the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K. The Corporation evaluates the performance of the segments based on net interest income, the estimated provision for loan and lease losses, non-interest income and direct non-interest expenses. The segments are also evaluated based on the average volume of their interest-earning assets less the allowance for loan and lease losses. The Treasury and Investment segment lends funds to the Consumer (Retail) Banking, Mortgage Banking and Commercial and Corporate Banking segments to finance their lending activities and borrows funds from those segments.segments and from the United States Operations Segment. The Consumer (Retail) Banking and the United States Operations segment also lendslend funds to other segments. The interest rates charged or credited by Treasury and Investment and the Consumer (Retail) Banking and the United States Operations segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment. Consumer(Retail)Banking The Consumer (Retail) Banking segment mainly consists of the Corporation’s consumer lending and deposit-taking activities conducted mainly through itsFirstBank’s branch network and loan centers in Puerto Rico. Loans to consumers include auto, boat lines of credit,and personal loans and finance leases.lines of credit. Deposit products include interest bearing and non-interest bearing checking and savings accounts, Individual Retirement Accounts (IRA) and retail certificates of deposit. Retail 8388
deposit. Retail deposits gathered through each branch of FirstBank’s retail network serve as one of the funding sources for the lending and investment activities. Consumer lending has been mainly driven by auto loan originations. The Corporation follows a strategy of seeking to provide outstanding service to selected auto dealers that provide the channel for the bulk of the Corporation’s auto loan originations. This strategy is directly linked to our commercial lending activities as the Corporation maintains strong and stable auto floor plan relationships, which are the foundation of a successful auto loan generation operation. The Corporation’s commercial relations with floor plan dealers are strong and directly benefit the Corporation’s consumer lending operation and are managed as part of the consumer banking activities. Personal loans and, to a lesser extent, marine financing and a small revolving credit portfolio also contribute to interest income generated on consumer lending. Credit card accounts are issued under the Bank’sFirstBank’s name through an alliance with FIA Card Services (Bank of America),a nationally recognized financial institution, which bears the credit risk. Management plans to continue to be active in the consumer loans market, applying the Corporation’s strict underwriting standards. Other activities included in this segment are finance leases and insurance activities in Puerto Rico. The highlights of the Consumer (Retail) Banking segment financial results for the year ended December 31, 20092010 include the following: | • | | Segment income before taxes for the year ended December 31, 20092010 was $20.9$23.7 million compared to $21.8$24.2 million and $37.8$27.1 million for the years ended December 31, 20082009 and 2007,2008, respectively. | | | • | | Net interest income for the year ended December 31, 20092010 was $149.6$141.2 million compared to $166.0$133.8 million and $174.3$161.2 million for the years ended December 31, 2009 and 2008, and 2007, respectively. The increase in net interest income was mainly associated with lower interest rates paid on the Bank’s core deposit base. The consumer loan portfolio is mainly composed of fixed-rate loans financed with shorter-term borrowings, thus positively affected by lower deposit costs as well as from a larger core deposit base as amounts charged to other segments increased during 2010. The decrease in net interest income2009, compared to 2008, reflects a diminished consumer loan portfolio due to principal repayments and charge-offs relating to the auto and personal loans portfolio (including finance leases). This portfolio is mainly composed of fixed-rate loans financed with shorter-term borrowings thus positively affected in a declining interest rate scenario; however, this was more than offset by a decrease in the amount credited to this segment for its deposit-taking activities due to the decline in interest rates and the lower volume of loans, resulting in a decrease in net interest income in 2009 as compared to 2008 and in 2008 as compared to 2007.portfolios. | | | • | | The provision for loan and lease losses for 2009 decreased2010 increased by $18.0$5.5 million compared to the same period in 20082009 and increaseddecreased by $6.7$26.5 million when comparing 20082009 with the same period in 2007.2008. The increase in the provision mainly resulted from increases in general reserve factors associated with economic factors. The decrease in the provision for 2009, compared to 2008, was mainly related to the lower amount of the consumer loan portfolio, a relative stability in delinquency and non-performing levels, and a decrease in net charge-offs attributable in part to the changes in underwriting standards implemented since late 2005 and the originationsorigination using these new underwriting standards of new consumer loans to replace maturing consumer loans that had an average life of approximately four years. The increase in 2008, compared to 2007, was due to adjustments to loss factors based on economic indicators. | | | • | | Non-interest income for the year ended December 31, 20092010 was $32.0$28.9 million compared to $35.6$32.0 million and $32.5$35.5 million for the years ended December 31, 20082009 and 2007,2008, respectively. The decrease for 2010 and 2009 as compared to 2008, was mainly related to lower insurance income and a reduction in income from daily vehicle rental activities partially offset by higher service charges on deposit accounts and higher ATM interchange fee income. As part of the Corporation’s strategies to focus on its core business,as the Corporation divested its short-term rental business during the fourth quarter of 2009. The increase for 2008, as comparedLower insurance income and lower credit card related fees also contributed to 2007, was mainly related tothe decrease in non-interest income, partially offset by higher point of sale (POS)service charges on deposit accounts and higher interchanges fee revenue and other ATM interchange fee income caused by a change in the calculation of interchange fees charged between financial institutions in Puerto Rico from a fixed fee calculation to a percentage of the sale calculation since the second half of 2007.income. | | | • | | Direct non-interest expenses for the year ended December 31, 20092010 were $98.3$94.7 million compared to $99.2$95.3 million and $95.2$97.0 million for the years ended December 31, 20082009 and 2007,2008, respectively. The decrease in direct non-interest expenses for 2010, as compared to 2009, was primarily due to a decrease in headcount and reductions in bonuses and overtime costs as well as reduced marketing activities for loan and deposit products and lower occupancy costs, partially offset by an increase in the FDIC insurance premium. The increase for 2009, compared to 2008, was primarily duerelated to reductions in marketing and occupancy expenses, mainly electricity costs, partially offset by the increase in the FDIC insurance premium associated with increases in the regular assessment rates and the special fee levied in 2009. The increase in direct non-interest expenses for 2008, compared to 2007,This was mainly due to increasespartially offset by reduction in compensation marketing collection effortsexpenses, driven by a decrease in headcount and the FDIC insurance premium.reductions in bonuses and overtime costs. |
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Commercial and Corporate Banking The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for the public sector and specializedacross a broad spectrum of industries such asranging from small businesses to large corporate clients. FirstBank has developed expertise in industries including healthcare, tourism, financial institutions, food and beverage, shopping centersincome-producing real estate and middle-market clients.the public sector. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and construction loans, and other products such as cash management and business management services. A substantial portion of thisthe commercial and corporate banking portfolio is secured by the underlying value of the real estate collateral and collateral and the personal guarantees of the borrowers are taken in abundance of caution.borrowers. Although commercial loans involve greater credit risk than a typical residential mortgage loan because they are larger in size and more risk is concentrated in a single borrower, the Corporation has and maintains a credit risk management infrastructure designed to mitigate potential losses associated with commercial lending, including strong underwriting and loan review functions, sales of loan participations and continuous monitoring of concentrations within portfolios. For this segment, the Corporation follows a strategy aimed to cater to customer needs in the commercial loans middle market segment by seeking to build strong relationships and offering financial solutions that meet customers’ unique needs. Starting in 2005, the Corporation expanded its distribution network and participation in the commercial loans middle market segment by focusing on customers with financing needs of up to $5 million. The Corporation established 5 regional offices that provide coverage throughout Puerto Rico. The offices are staffed with sales, marketing and credit officers able to provide a high level of personalized service and prompt decision-making.
The highlights of the Commercial and Corporate Banking segment financial results for the year ended December 31, 20092010 include the following: | • | | Segment loss before taxes for the year ended December 31, 20092010 was $129.8$202.5 million compared to loss of $141.3 million for 2009 and income of $56.9 million and $78.6$51.6 million for the yearsyear ended December 31, 2008 and 2007, respectively.2008. | | | • | | Net interest income for the year ended December 31, 20092010 was $180.3$210.9 million compared to $112.3$187.9 million and $104.8$117.1 million for the years ended December 31, 20082009 and 2007,2008, respectively. The increase in net interest income for 2010, compared to 2009, was mainly related to lower interest rates charged by other business segments due to the overall decrease in the average cost of funding and due to higher spreads on loan renewals and improved pricing. As previously stated, the Corporation has been increasing the use of interest rate floors in new commercial loan agreements. The increase for 2009, compared to 2008, was related to both an increase in the average volume of earning assets driven by new commercial loanloans originations and lower interest rates charged by other business segments due to the decline in short-term interest rates that more than offset lower loan yields due to the significant increase in non-accrual loans and to the repricing at lower rates. However, the Corporation is actively increasing spreads on variable-rate commercial loan renewals given the current market environment. During 2009, the Corporation increased the use of interest rate floors in new commercial and construction loan agreements and renewals to protect net interest margins going forward. The increase in volume of earning assets in 2009 was primarily due to credit facilities extended to the Puerto Rico Government and its political subdivisions. As of December 31, 2009, the Corporation had $1.2 billion outstanding of credit facilities granted to the Puerto Rico Government and its political subdivisions. | | | • | | The provision for loan losses for 20092010 was $273.8$359.4 million compared to $35.5$290.1 million and $12.5$43.3 million for 2009 and 2008, respectively. The increase in 2010 was mainly related to the aforementioned $102.9 million charge to the provision associated with loans transferred to held for sale. Excluding the provision relating to loans transferred to held for sale, the provision decreased by $33.6 million. The decrease was mainly related to a reduction in the provision for the C&I loan portfolio attributable to the slower migration of loans to non-performing and/or impaired status, the overall reduction in the C&I portfolio size and 2007, respectively.the determination that lower reserves were required for certain loans that were individually evaluated for impairment in 2010, based on the underlying value of the collateral, when compared to the reserves required for these loans in periods prior to 2010. The increase in the provision for loan and lease losses for 2009, compared to 2008, was mainly driven by the continuing pressures of a weak Puerto Rico economy and a stagnant housing market that were the main reasons for the increase in non-accrual loans, the migration of loans to higher risk categories (including a significant increase in impaired loans) and the increase in charge-offs. These have resulted in higher specific reserves in 2009 for impaired loans and increases in loss factors used for the determination of the general reserve. Refer to the “Provision for Loan and Lease Losses” discussion above and to the “Risk Management –— Allowance for Loan and Lease Losses and Non-performing Assets” discussion below for additional information with respect to the credit quality of the Corporation’s commercial and construction loan portfolio. The increase in the provision for loan and lease losses for 2008 was mainly driven by the increase in the amount of commercial and construction impaired loans in Puerto Rico due to deteriorating economic conditions. |
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| | • | | Total non-interest income for the year ended December 31, 20092010 amounted to $5.7$9.0 million compared to a non-interest income of $4.6$5.7 million and $6.2$4.6 million for the years ended December 31, 20082009 and 2007,2008, respectively. The increase in non-interest income for 2010, compared to 2009, aswas mainly |
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| | | attributable to fees and commissions earned by broker-dealer activities that were concentrated in providing underwriting and financial advisory services to government entities in Puerto Rico. Also, similar to 2009 compared to 2008, was mainly attributable toan increase in cash management fees from corporate customers and higher non-deferrable loans fees such as agent, commitment and drawing fees from commercial customers. Also, an increase in cash management fees from corporate customers contributed to the increase in non-interest income. The increaseincome in non-interest income for 2008 was mainly attributable to the $2.5 million gain resulting from an agreement entered into with another local financial institution for the partial extinguishment of secured commercial loans extended to such institution. Aside from this transaction, non-interest income for the Commercial and Corporate Banking Segment increased by $0.9 million in connection with higher fees on cash management services provided to corporate customers.2010. | | | • | | Direct non-interest expenses for 20092010 were $41.9$63.0 million compared to $24.5$44.9 million and $20.1$26.7 million for 20082009 and 2007,2008, respectively. The increase for 2010 and 2009 as compared to 2008, was primarily due to the portion of the increase in the FDIC deposit insurance premium allocated to this segment; this was partially offset by reductionsa reduction in compensation expense. The increaseAlso, for 2008, as compared to 2007, was also mainly due to the portion of the increase in the FDIC insurance premium as increase in compensation and a2010 higher loss inlosses on REO operations primarily duecontributed to the increase in expenses due to write-downs and higher costs associated with a larger inventory as well as higher professional service fees and an increase in the volume of repossessed properties and writedowns.provision for unfunded loan commitments. |
Mortgage Banking The Mortgage Banking segment conducts its operations mainly through FirstBank and its mortgage origination subsidiary, FirstMortgage. These operations consist of the origination, sale and servicing of a variety of residential mortgage loans products. Originations are sourced through different channels such as FirstBank branches, mortgage bankers and real estate brokers, and in association with new project developers. FirstMortgage focuses on originating residential real estate loans, some of which conform to Federal Housing Administration (“FHA”), Veterans Administration (“VA”) and Rural Development (“RD”) standards. Loans originated that meet FHA standards qualify for the federal agency’sFHA’s insurance program whereas loans that meet VA and RD standards are guaranteed by their respective federal agencies. Mortgage loans that do not qualify under these programs are commonly referred to as conventional loans. Conventional real estate loans could be conforming and non-conforming. Conforming loans are residential real estate loans that meet the standards for sale under the FNMAFannie Mae (“FNMA”) and FHLMCFreddie Mac (“FHLMC”) programs whereas loans that do not meet thethose standards are referred to as non-conforming residential real estate loans. The Corporation’s strategy is to penetrate markets by providing customers with a variety of high quality mortgage products to serve their financial needs faster and simpler and at competitive prices. The Mortgage Banking segment also acquires and sells mortgages in the secondary markets. Residential real estate conforming loans are sold to investors like FNMA and FHLMC. In December 2008, the Corporation obtained Commitment Authority from GNMA Commitment Authority to issue GNMA mortgage-backed securities. Under this program, insince early 2009, the Corporation securitized and soldhas been securitizing FHA/VA mortgage loan production into the secondary markets.market. The highlights of the Mortgage Banking segment financial results for the year ended December 31, 20092010 include the following: | • | | Segment loss before taxes for the year ended December 31, 20092010 was $38.9 million compared to a loss of $14.3 million compared tofor 2009 and income of $8.3 million and $7.2 million for the yearsyear ended December 31, 2008 and 2007, respectively.2008. | | | • | | Net interest income for the year ended December 31, 20092010 was $39.2$63.8 million compared to $37.3$39.2 million and $27.6$37.3 million for the years ended December 31, 20082009 and 2007,2008, respectively. The increase in net interest income for 2009 and 20082010 was mainly related to the declinedecrease in short-term rates. Thisthe average cost of funding and, to a lesser extent, reductions in non-performing loans levels. The Mortgage banking portfolio is principally composed of fixed-rate residential mortgage loans tied to long-term interest rates that are financed with shorter-term borrowings, thus positively affected in a declining interest rate scenario as the one prevailing in 2010 and 2009. For 2009, and 2008. Thethe increase was also related to a higher portfolio, driven in 2009 by the purchase of approximately $205 million of residential mortgages that previously served as collateral for a commercial loan extended to R&G Financial, a Puerto Rican financial institution. The increase in the portfolio in 2008 was driven by mortgage loan originations. |
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| | • | | The provision for loan and lease losses for the year 20092010 was $29.7$76.9 million compared to $9.0$29.7 million and $1.6$9.0 million for the years ended December 31, 20082009 and 2007,2008, respectively. The increase in 2010 was driven by negative trends in loss rates and falling property values confirmed by recent appraisals |
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| | | and/or broker price opinions. The reserve factors for residential mortgage loans were recalibrated in 2010 as part of further segmentation and analysis of this portfolio for purposes of computing the required specific and general reserves. The review included the incorporation of updated loss factors to loans expected to liquidate considering the expected realization of the values of similar assets at disposition. The increase in 2009, andcompared to 2008 was mainly related to the increase in the volume of non-performing loans due to deteriorating economic conditions in Puerto Rico and an increase in reserve factors to account for the continued recessionary economic conditions and negative loss trends. | | | • | | Non-interest income for the year ended December 31, 20092010 was $8.5$13.2 million compared to $2.7$8.5 million and $2.1$2.7 million for the years ended December 31, 20082009 and 2007,2008, respectively. The increase forin 2010, compared to 2009, was due to gains (including the recognition of servicing rights) of $12.1 million recorded on the sale of approximately $174.3 million of residential mortgage loans in the secondary market compared to gains of $7.4 million on the sale of approximately $117.0 million of residential mortgage loans during 2009. The increase in 2009, as compared to 2008 was driven by approximately $4.6 million of capitalized servicing assets recorded in connection with the securitization of approximately $305 million FHA/VA mortgage loans into GNMA MBS. For the first time in several years, the Corporation was engaged in the securitization of mortgage loans throughoutsince early 2009. The increase for 2008, as compared to 2007, was driven by a higher volume of loan sales in the secondary market. | | | • | | Direct non-interest expenses for 2009in 2010 were $32.3$39.0 million compared to $32.3 million and $22.7 million for 2009 and $20.9 million for 2008, and 2007, respectively. The increase forin 2010 and 2009 as compared to 2008, was also mainly related to the portion of the FDIC deposit insurance premium allocated to this segment, a higher losslosses on REO operations associated with a higher volume of repossessed properties and anwrite-downs to the value of REO properties. An increase in professional service fees. Thefees also contributed to the increase for 2008, asin expenses in 2009 compared to 2007, is related to technology related expenses incurred to improve the servicing of the mortgage loans as well as increases in compensation and, to a lesser extent, higher losses on REO operations in connection with a higher volume of repossessed properties and trends in sales.2008. |
Treasury and Investments The Treasury and Investments segment is responsible for the Corporation’s treasury and investment management functions. In the treasury function, which includes funding and liquidity management, this segment sells funds to the Commercial and Corporate Banking segment, the Mortgage Banking segment, and the Consumer (Retail) Banking segmentssegment to finance their respective lending activities and purchasespurchase funds gathered by those segments.segments and from the United States Operations segment. Funds not gathered by the different business units are obtained by the Treasury Division through wholesale channels, such as brokered deposits, Advances from the FHLB, and repurchase agreements with investment securities, among others. Since the Corporation is a net borrower of funds, the securities portfolio does not result from the investment of excess funds. The securities portfolio is a leverage strategy for the purposes of liquidity management, interest rate management and earnings enhancement. The interest rates charged or credited by Treasury and Investments are based on market rates. The highlights of the Treasury and Investments segment financial results for the year ended December 31, 20092010 include the following: Segment income before taxes for the year ended December 31, 2010 amounted to $18.9 million compared to $171.4 million for 2009 and $142.3 million for the year ended December 31, 2008. Net interest loss for the year ended December 31, 2010 was $30.5 million compared to net interest income of $94.4 million and $123.4 million for the years ended December 31, 2009 and 2008, respectively. The decrease in 2010 was mainly attributed to the deleverage of the investment securities portfolio (refer to the Financial and Operating Data Analysis — Investment Activities discussion below for additional information about investment purchases, sales and calls in 2010), the decrease in the amount credited to this segment due to the reductions in wholesale funding and lower interest rates, and the effect of maintaining higher than historical levels of liquidity, which affected 92
| • | | Segment income before taxes for the year ended December 31, 2009 amounted to $163.1 million compared to $142.3 million for 2008 and of $36.5 million for the years ended December 31, 2007. | | | • | | NetCorporation’s net interest income for the year ended December 31, 2009 was $86.1 million compared to $123.4 million and $46.5 million for the years ended December 31, 2008 and 2007, respectively.margin during 2010. The decrease in 2009, as compared to 2008, was mainly due to the decrease in the amount credited to this segment for its deposit-taking activities due to the decline in interest rates and due to lower yields on investment securities. This was partially offset by reductions in the cost of funding as maturing brokered CDs were replaced with shorter-term CDs at lower prevailing rates and very low-cost sources of funding such as advances from the FED and a higher average volume of investments. Funds obtained through short-term borrowings were invested, in part, in the purchase of investment securities to mitigate the decline in the average yield on securities that resulted from the acceleration of MBS prepayments and calls of U.S. agency debentures (refer to the Financial and Operating Data |
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| | | Analysis — Investment Activities discussion below for additional information about investment purchases, sales and calls in 2009). The decrease in the yield of investments was driven by the approximately $945 million of U.S. agency debentures called in 2009 and MBS prepayments. The variance observed in 2008, as compared to 2007, is mainly related to lower short-term rates and, to a lesser extent, to an increase in the volume of average interest-earning assets. The Corporation’s securities portfolio is mainly composed of fixed-rate U.S. agency MBS and debt securities tied to long-term rates. During 2008, the Corporation purchased approximately $3.2 billion in fixed-rate MBS at an average yield of 5.44%, which was significantly higher than the cost of borrowings used to finance the purchase of such assets. Despite the early redemption by counterparties of approximately $1.2 billion of U.S. agency debentures through call exercises, the lack of liquidity in the financial markets caused several call dates go by in 2008 without issuers actions to exercise call provisions embedded in approximately $945 million of U.S. agency debentures still held by the Corporation as of December 31, 2008. The Corporation benefited from higher than current market yields on these instruments. Also, non-cash gains from changes in the fair value of derivative instruments and liabilities measured at fair value accounted for approximately $14.2 million of the increase in net interest income for 2008 as compared to 2007.debentures. | | | • | | Non-interest income for the year ended December 31, 20092010 amounted to $84.4$55.2 million compared to income of $25.6$84.4 million and losses of $2.2$25.6 million for the years ended December 31, 2009 and 2008, and 2007, respectively. The decrease in 2010, compare to 2009, was mainly related to lower gains on the sale of investment securities as the Corporation realized gains of approximately $46.1 million on the sale of approximately $1.2 billion of investment securities, mainly U.S. agency MBS, compared to the $82.8 million gain recorded in 2009. Also, a nominal loss of $0.3 million was recorded in 2010, resulting from a transaction in which the Corporation sold approximately $1.2 billion in MBS, combined with the unwinding of $1.0 billion of repurchase agreements as part of a balance sheet repositioning strategy. The increase in 2009, as compared to 2008, was driven by a $59.6 million increase in realized gains on the sale of investment securities, primarily reflecting a $79.9 million gain on the sale of MBS (mainly U.S. agency fixed-rate MBS), compared to realized gains on the sale of MBS of $17.7 million in 2008. The positive fluctuation in non-interest income for 2008, as compared to 2007, was related to a realized gain of $17.7 million mainly on the sale of approximately $526 million of U.S. sponsored agency fixed-rate MBS and to the gain of $9.3 million on the sale of part of the Corporation’s investment in VISA in connection with VISA’s IPO. Refer to “Non-interest income” discussion above for additional information. | | | • | | Direct non-interest expenses for 20092010 were $7.4$5.9 million compared to $7.4 million and $6.7 million for 2009 and $7.8 million for 2008, and 2007, respectively. The fluctuations arewere mainly associated towith professional service fees. |
United States Operations The United States operationsOperations segment consists of all banking activities conducted by FirstBank in the United States mainland. The CorporationFirstBank provides a wide range of banking services to individual and corporate customers primarily in the state ofsouthern Florida through its ten branches. Our success in attracting core deposits in Florida has enabled us to become less dependent on brokered deposits. The United States Operations segment offers an array of both retail and commercial banking products and services. Consumer banking products include checking, savings and money market accounts, retail CDs, internet banking services, residential mortgages, home equity loans and lines of credit, automobile loans and credit cards through an alliance with a nationally recognized financial institution, which bears the credit risk. Deposits gathered through FirstBank’s branches and two specialized lending centers. Inin the United States also serve as one of the Corporation originally had an agencyfunding sources for lending office in Miami, Florida. Then, it acquired Coral Gables-based Ponce General (the parent company of Unibank, aand investment activities. The commercial banking services include checking, savings and money market accounts, CDs, internet banking services, cash management services, remote data capture and automated clearing house, or ACH, transactions. Loan products include the traditional commercial and industrial and commercial real estate products, such as lines of credit, term loans bank in 2005) and changed the savings and loan’s name to FirstBank Florida. Those two entities were operated separately. In 2009, the Corporation filed an application with the Office of Thrift Supervision to surrender the Miami-based FirstBank Florida charter and merge its assets into FirstBank Puerto Rico, the main subsidiary of First BanCorp. The Corporation placed the entire Florida operation under the control of a new appointed Executive Vice President. The merger allows the Florida operations to benefit by leveraging the capital position of FirstBank Puerto Rico and thereby provide them with the support necessary to grow in the Florida market.construction loans. The highlights of the United States operations segment financial results for the year ended December 31, 20092010 include the following: | • | | Segment loss before taxes for the year ended December 31, 20092010 was $222.3$145.8 million compared to a loss of $222.3 million and a loss of $62.4 million and $12.1 million for the years ended December 31, 20082009 and 2007,2008, respectively. | | | • | | Net interest income for the year ended December 31, 20092010 was $2.6$15.2 million compared to $28.8$2.6 million and $38.7$28.8 million for the years ended December 31, 2008 and 2007, respectively. The decrease in net interest income for 2009 and 2008, respectively. The increase in 2010 was mainly related to a higher amount of assets financed by a larger core deposit base at lower rates than brokered CDs that funded a portion of assets during 2009 and also due to charges made to operating segments in Puerto Rico. The Corporation reduced the surge in non-performing assets,reliance on brokered CDs during 2010 and, as of December 31, 2010, the entire United States operations are |
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| | | funded by deposits gathered through the branch network in Florida and from advances from the FHLB. Also, lower reversals of interest income due to the lower level of inflows of loans to non-accruing status contributed to the improvement in net interest income. The decrease in net interest income in 2009, compared to 2008, was related to the surge in non-performing assets, mainly construction loans, and a decrease in the volume of average earning-assets partially offset by a lower cost of funding due to the decline in market interest rates that benefit interest rates paid on short-term borrowings. In 2009, the Corporation implemented initiatives to accelerate deposit growth with special emphasis on increasing core deposits and shift away fromdecreasing the use of brokered deposits. Also, the Corporation took actions to reduce its non-performing credits including thethrough sales of certain troubled loans. | | | • | | The provision for loan losses for 20092010 was $188.7$119.5 million compared to $188.7 million and $53.4 million for 2009 and $30.22008, respectively. The decrease in 2010, as compared to 2009, was mainly related to the construction loan portfolio and reflected lower charges to specific reserves, the slower migration of loans to non-performing status and the overall reduction of the Corporation’s exposure to construction loans in Florida. The provision for construction loans in the United States decreased by $68.4 million for 2008 and 2007, respectively.in 2010 as the non-performing construction loans portfolio in this region decreased by 79% to $49.6 million, compared to $246.3 million as of December 31, 2009. The increase in the provision for loan and lease losses forin 2009 was mainly driven by the increase in non-performing loans and the decline in collateral values that has resulted in historical increases in charge-offs levels. Higher delinquency levels and loss trends were accounted for the loss factors used to determine the general reserve. Also, additional charges were necessary because of a higher volume of impaired loans that required specific reserves. Refer to the “Provision for Loan and Lease Losses” discussion above and to the “Risk Management — Allowance for Loan and Lease Losses and Non-performing Assets” discussion below for additional information with respect to the credit quality of the loan portfolio in the United States. The increase in the provision for loan and lease losses for 2008 was mainly driven by higher specific reserves relating to condo-conversion loans due to the deterioration of the real estate market and a slumping economy. | | | • | | Total non-interest income for the year ended December 31, 20092010 amounted to $1.5$0.9 million compared to anon-interest income of $1.5 million and non-interest loss of $3.6 million and non-interest income of $1.2 million for the years ended December 31, 20082009 and 2007,2008, respectively. The increasefluctuations in non-interest income for 2010 and 2009 as comparedwere mainly related to 2008, was mainly attributable tothe sale of corporate bonds in 2009 on which the Corporation realized a gain of $0.9 million on the sale of the entire portfolio ofmillion. With respect to these auto industry corporate bonds, after having takingthe Corporation took impairment charges of $4.2 million on those bonds in 2008. The decrease in non-interest income for 2008 was for the aforementioned impairment charge on corporate bonds and lower service charges on deposit accounts and loan fees. | | | • | | Direct non-interest expenses for 2009in 2010 were $37.7$42.3 million compared to $37.7 million and $34.2 million for 2009 and $21.8 million for 2008, and 2007, respectively. The increase forin 2010 and 2009 as compared to 2008, was primarily due to the increasedriven by increases in the FDIC deposit insurance premium expense, higher losses on REO operations and increases in professional service fees. The increase for 2008, as compared to 2007, was mainly due to a higher lossIn 2009, non-interest expenses included the $4.0 million impairment charge on the core deposit intangible in REO operations, primarily due to write-downs and expenses related to condo-conversion projects.Florida. |
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Virgin Islands Operations The Virgin Islands operations segment consists of all banking activities conducted by FirstBank in the U.S. and British Virgin Islands, including retail and commercial banking services as well as insurance activities. In 2002, after acquiring the Chase Manhattan Bank operations in the Virgin Islands, FirstBank became the largest bank in the Virgin Islands (USVI & BVI), serving St. Thomas, St. Croix, St. John, Tortola and Virgin Gorda, with 16 branches. In 2008, FirstBank acquired the Virgin Island Community Bank (“VICB”) in St. Croix, increasing its customer base and share in this market. The Virgin Islands operations segment is driven by its consumer and commercial lending and deposit-taking activities. Loans to consumers include auto, boat, lines of credit, personal loans and residential mortgage loans. Deposit products include interest bearing and non-interest bearing checking and savings accounts, Individual Retirement Accounts (IRA) and retail certificates of deposit. Retail deposits gathered through each branch serve as the funding sources for the lending activities.
The highlights of the Virgin Islands operations segment financial results for the year ended December 31, 2009 | | The Virgin Islands Operations segment consists of all banking activities conducted by FirstBank in the U.S. and British Virgin Islands, including retail and commercial banking services, with a total of fourteen branches serving St. Thomas, St. Croix, St. John, Tortola and Virgin Gorda. The Virgin Islands Operations segment is driven by its consumer, commercial lending and deposit-taking activities. Since 2005, FirstBank has been the largest bank in the U.S. Virgin Islands measured by total assets. | | | | Loans to consumers include auto, boat, lines of credit, personal loans and residential mortgage loans. Deposit products include interest bearing and non-interest bearing checking and savings accounts, Individual Retirement Accounts (IRA) and retail certificates of deposit. Retail deposits gathered through each branch serve as the funding sources for the lending activities. | | | | The highlights of the Virgin Islands operations segment financial results for the year ended December 31, 2010 include the following: |
| • | | Segment income before taxes for the year ended December 31, 20092010 was $0.8$3.2 million compared to $9.2$0.7 million and $26.3$9.2 million for the years ended December 31, 20082009 and 2007,2008, respectively. | | | • | | Net interest income for the year ended December 31, 20092010 was $61.1$61.2 million compared to $60.0$61.1 million and $59.1$60.0 million for the years ended December 31, 20082009 and 2007,2008, respectively. The |
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| | | increase in net interest income in 2010 and 2009 was primarily due to the decrease in the cost of funding due to maturing CDs renewed at lower prevailing rates and reductions in rates paid on interest-bearing and savings accounts due to the decline in market interest rates. To a lesser, extent, the increase was also due to a higher volume of commercial loans primarily due to approximately $79.8 million in credit facilities extended to the U.S. Virgin Islands Government and political subdivisions in 2009. The increase for 2008, compared to 2007, was also driven by a lower cost of funding. | | | • | | The provision for loan and lease losses for 20092010 increased by $12.7$1.9 million compared to the same period in 20082009 and increased by $10.0$12.7 million when comparing 20082009 with the same period in 2007.2008. The increase in the provision for 2010 was mainly associated with the construction loan portfolio and in particular related with charges to specific reserves of $6.4 million allocated to one construction project classified as impaired loan during 2010. This was partially offset by decreases in general reserve factors allocated to this loan portfolio that incorporate the significantly lower historical charge-offs in this region. The increase in the provision for 2009 was mainly related to the construction and residential and commercial mortgage loans portfolio affected by increases to general reserves to account for higher delinquency levels and a challenging economy. The increase in 2008, compared to 2007, was driven by increases to general reserves for the residential, commercial and commercial mortgage loans portfolio to account for negative trends in the economy. General economic conditions worsened, underscoring the severity of recessionary conditions in the US economy, critically important to the U.S. Virgin Islands as the primary market for visitors, trade and investment. | | | • | | Non-interest income for the year ended December 31, 20092010 was $10.2$10.7 million compared to $9.8$10.2 million and $12.2$9.8 million for the years ended December 31, 2009 and 2008, and 2007, respectively. The increase for 2010, as compared to 2009, was mainly related to higher fees on loans related to credit facilities to the Virgin Islands government. The increase for 2009, as compared to 2008, was mainly related to higher service charges on deposit accounts and higher ATM interchange fee income. The decrease for 2008, as compared to 2007, was mainly related to the impact in 2007 of a $2.8 million gain on the sale of a credit card portfolio. Aside from this transaction, non-interest income increased by $0.4 million primarily due to higher service charges on deposits and higher credit and debit card interchange fee income. | | | • | | Direct non-interest expenses for the year ended December 31, 20092010 were $45.4$41.6 million compared to $48.1$45.4 million and $42.4$48.1 million for the years ended December 31, 2009 and 2008, respectively. The decrease in 2010, as compared to 2009, was mainly due to reductions in compensation, mainly due to headcount, overtime and 2007, respectively.bonuses reductions, and reductions in occupancy costs and business promotion expenses. The decrease in direct operating expenses forin 2009, as compared to 2008, was also primarily due to a decrease in compensation expense, mainly due to headcount, overtime and bonuses reductions. The increase in direct operating expense for 2008, compared to 2007, was mainly due to increases in compensation, depreciation and professional service fees.expense. |
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FINANCIAL CONDITION AND OPERATING DATA ANALYSIS Financial Condition The following table presents an average balance sheet of the Corporation for the following years: | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | | | December 31, | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | ASSETS | | | | | Interest-earning assets: | | | Money market & other short-term investments | | $ | 182,205 | | $ | 286,502 | | $ | 440,598 | | | $ | 778,412 | | $ | 182,205 | | $ | 286,502 | | Government obligations | | 1,345,591 | | 1,402,738 | | 2,687,013 | | | 1,368,368 | | 1,345,591 | | 1,402,738 | | Mortgage-backed securities | | 4,254,044 | | 3,923,423 | | 2,296,855 | | | 2,658,279 | | 4,254,044 | | 3,923,423 | | Corporate bonds | | 4,769 | | 7,711 | | 7,711 | | | 2,000 | | 4,769 | | 7,711 | | FHLB stock | | 76,982 | | 65,081 | | 46,291 | | | 65,297 | | 76,982 | | 65,081 | | Equity securities | | 2,071 | | 3,762 | | 8,133 | | | 1,481 | | 2,071 | | 3,762 | | | | | | | | | | | | | | | | | Total investments | | 5,865,662 | | 5,689,217 | | 5,486,601 | | | 4,873,837 | | 5,865,662 | | 5,689,217 | | | | | | | | | | | | | | | | | | | | Residential mortgage loans | | 3,523,576 | | 3,351,236 | | 2,914,626 | | | 3,488,037 | | 3,523,576 | | 3,351,236 | | Construction loans | | 1,590,309 | | 1,485,126 | | 1,467,621 | | | 1,315,794 | | 1,590,309 | | 1,485,126 | | Commercial loans | | 6,343,635 | | 5,473,716 | | 4,797,440 | | | 6,190,959 | | 6,343,635 | | 5,473,716 | | Finance leases | | 341,943 | | 373,999 | | 379,510 | | | 299,869 | | 341,943 | | 373,999 | | Consumer loans | | 1,661,099 | | 1,709,512 | | 1,729,548 | | | 1,506,448 | | 1,661,099 | | 1,709,512 | | | | | | | | | | | | | | | | | Total loans | | 13,460,562 | | 12,393,589 | | 11,288,745 | | | 12,801,107 | | 13,460,562 | | 12,393,589 | | | | | | | | | | | | | | | | | | | | Total interest-earning assets | | 19,326,224 | | 18,082,806 | | 16,775,346 | | | 17,674,944 | | 19,326,224 | | 18,082,806 | | | | Total non-interest-earning assets(1) | | 480,998 | | 425,150 | | 438,861 | | | 196,098 | | 480,998 | | 425,150 | | | | | | | | | | | | | | | | | Total assets | | $ | 19,807,222 | | $ | 18,507,956 | | $ | 17,214,207 | | | $ | 17,871,042 | | $ | 19,807,222 | | $ | 18,507,956 | | | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | Interest-bearing liabilities: | | | Interest-bearing checking accounts | | $ | 866,464 | | $ | 580,572 | | $ | 443,420 | | | $ | 1,057,558 | | $ | 866,464 | | $ | 580,572 | | Savings accounts | | 1,540,473 | | 1,217,730 | | 1,020,399 | | | 1,967,338 | | 1,540,473 | | 1,217,730 | | Certificates of deposit | | 1,680,325 | | 1,812,957 | | 1,652,430 | | | 1,909,406 | | 1,680,325 | | 1,812,957 | | Brokered CDs | | 7,300,696 | | 7,671,094 | | 7,639,470 | | | 7,002,343 | | 7,300,696 | | 7,671,094 | | | | | | | | | | | | | | | | | Interest-bearing deposits | | 11,387,958 | | 11,282,353 | | 10,755,719 | | | 11,936,645 | | 11,387,958 | | 11,282,353 | | Loans payable(2) | | 643,618 | | 10,792 | | — | | | 299,589 | | 643,618 | | 10,792 | | Other borrowed funds | | 3,745,980 | | 3,864,189 | | 3,449,492 | | | 2,436,091 | | 3,745,980 | | 3,864,189 | | FHLB advances | | 1,322,136 | | 1,120,782 | | 723,596 | | | 888,298 | | 1,322,136 | | 1,120,782 | | | | | | | | | | | | | | | | | Total interest-bearing liabilities | | 17,099,692 | | 16,278,116 | | 14,928,807 | | | 15,560,623 | | 17,099,692 | | 16,278,116 | | Total non-interest-bearing liabilities(3) | | 852,943 | | 796,476 | | 959,361 | | | 863,215 | | 852,943 | | 796,476 | | | | | | | | | | | | | | | | | Total liabilities | | 17,952,635 | | 17,074,592 | | 15,888,168 | | | 16,423,838 | | 17,952,635 | | 17,074,592 | | | | | Stockholders’ equity: | | | Preferred stock | | 909,274 | | 550,100 | | 550,100 | | | 744,585 | | 909,274 | | 550,100 | | Common stockholders’ equity | | 945,313 | | 883,264 | | 775,939 | | | 702,619 | | 945,313 | | 883,264 | | | | | | | | | | | | | | | | | Stockholders’ equity | | 1,854,587 | | 1,433,364 | | 1,326,039 | | | 1,447,204 | | 1,854,587 | | 1,433,364 | | | | | | | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 19,807,222 | | $ | 18,507,956 | | $ | 17,214,207 | | | $ | 17,871,042 | | $ | 19,807,222 | | $ | 18,507,956 | | | | | | | | | | | | | | | | |
| | | (1) | | Includes the allowance for loan and lease losses and the valuation on investment securities available-for-sale. | | (2) | | Consists of short-term borrowings under the FED Discount Window Program. | | (3) | | Includes changes in fair value of liabilities elected to be measured at fair value .value. |
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The Corporation’s total average assets were $19.8$17.9 billion and $18.5$19.8 billion as of December 31, 2010 and 2009, and 2008, respectively, an increasea decrease for 20092010 of $1.3$1.9 billion or 7%9% as compared to 2008.2009. The increasedecrease in average assets was due to: (i) an increasea decrease of $1.1$1.6 billion in average loansmortgage-backed securities primarily driven by new originations,sales of $2.1 billion in particularMBs during 2010, and, to a lesser extent, prepayments, and (ii) a decrease of $659.5 million in average loans reflecting a combination of pay-downs, charge-offs and sales of non-performing credits. The Corporation’s total average liabilities were $16.4 billion and $18.0 billion as of December 31, 2010 and 2009, respectively, a decrease of $1.5 billion or 8% as compared to 2009. The decrease in average liabilities is mainly a result of the Corporation’s decision to deleverage its balance sheet by the roll-off of maturing brokered CDs and advances from FHLB combined with the pay down of the remaining $900 million of FED advances. Also, reflects the impact of certain balance sheet repositioning strategies that include the early cancellation of $1.0 billion of long-term repurchase agreements. Assets Total assets as of December 31, 2010 amounted to $15.6 billion, a decrease of $4.0 billion compared to $19.6 billion as of December 31, 2009. The decrease in total assets was primarily a result of a net decrease of $2.0 billion in the loan portfolio largely attributable to repayments of credit facilities extended to the Puerto Rico Government and itsgovernment and/or political subdivisions coupled with charge-offs and, (ii) an increaseto a lesser extent, the sale of $176.4 million in investment securities mainly due to the purchasenon-performing loans during 2010. Also, there was a decrease of approximately $2.8$1.6 billion in investment securities in 2009 (mainly U.S. agency callable debt securities and U.S. agency MBS) and the securitizationdriven by sales of approximately $305 million FHA/VA loans into GNMA MBS, partially offset by $1.9$2.3 billion in investment securities sold during the year (mainly2010, mainly U.S. agency MBS including $452 million in the last monthand a decrease of the year) and $955 million debt securities called during the year (mainly U.S. agency debentures). The increase in average assets for 2008, as compared to 2007, was also driven by an increase of $1.1 billion in average loans due to loan originations, mainly commercial and residential mortgage loans, and an increase of $202.6 million in investment securities, mainly due to purchases of U.S. agency MBS. The Corporation’s total average liabilities were $18.0 billion and $17.1 billion as of December 31, 2009 and 2008, respectively, an increase of $878.0 million or 5% as compared to 2008. The Corporation has diversified its sources of borrowings including: (i) an increase of $834.2 million in the average balance of advances from the FED and the FHLB, as the Corporation used low-cost sources of funding to match an investment portfolio with a shorter maturity, and (ii) an increase of $105.6 million in average interest-bearing deposits, reflecting increases in core deposits, mainly in money market accounts in Florida. The Corporation’s total average liabilities were $17.1 billion and $15.9 billion as of December 31, 2008 and 2007, respectively, an increase of $1.2 billion or 7% as compared to 2007. The Corporation diversified its sources of borrowings including: (i) an increase of $526.6 million in average interest-bearing deposits, reflecting increases in brokered CDs used to finance lending activities and to increase liquidity levels as a precautionary measure given the volatile economic climate, and increases in deposits from individual, commercial and government sectors, (ii) an increase of $414.7 million in alternative sources such as repurchase agreements that financed the increase in investment securities, and (iii) a combined increase of approximately $408.0 million in advances from FHLB and short-term borrowings from the FED through the Discount Window Program as the Corporation took direct actions to enhance its liquidity position due to the financial market disruptions and to increase its borrowing capacity with the FHLB and the FED, which funds are also used to finance the Corporation’s lending activities.
Assets
Total assets as of December 31, 2009 amounted to $19.6 billion, an increase of $137.2 million compared to $19.5 billion as of December 31, 2008. The Corporation’s loan portfolio increased by $860.9 million (before the allowance for loan and lease losses), driven by new originations, mainly credit facilities extended to the Puerto Rico Government and/or its political subdivisions. Also, an increase of $298.4$333.8 million in cash and cash equivalents contributed to the increase in total assets, as the Corporation improved its liquidity position as a precautionary measure given current volatile market conditions. Partially offsetting the increase in loansroll-off maturing brokered CDs and liquid assets was a $790.8 millionadvances from FHLB. The decrease in investment securities, driven by salesassets is consistent with the Corporation’s deleveraging, de-risking and principal repayments of MBS as well as U.S. agency debt securities called during 2009.balance sheet repositioning strategies, to among other things, preserve its capital position and enhance net interest margins in the future.
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Loans Receivable, including loans held for sale The following table presents the composition of the loan portfolio including loans held for sale as of year-end for each of the last five years. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (In thousands) | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 | | Residential mortgage loans, including loans held for sale | | $ | 3,616,283 | | $ | 3,491,728 | | $ | 3,164,421 | | $ | 2,772,630 | | $ | 2,346,945 | | | Residential mortgage loans | | | $ | 3,417,417 | | $ | 3,595,508 | | $ | 3,481,325 | | $ | 3,143,497 | | $ | 2,737,392 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial loans: | | | Commercial mortgage loans | | 1,590,821 | | 1,535,758 | | 1,279,251 | | 1,215,040 | | 1,090,193 | | | 1,670,161 | | 1,693,424 | | 1,635,978 | | 1,353,439 | | 1,272,076 | | Construction loans | | 1,492,589 | | 1,526,995 | | 1,454,644 | | 1,511,608 | | 1,137,118 | | | 700,579 | | 1,492,589 | | 1,526,995 | | 1,454,644 | | 1,511,608 | | Commercial and Industrial loans | | 5,029,907 | | 3,857,728 | | 3,231,126 | | 2,698,141 | | 2,421,219 | | | 3,861,545 | | 4,927,304 | | 3,757,508 | | 3,156,938 | | 2,641,105 | | Loans to local financial institutions collateralized by real estate mortgages and pass-through trust certificates | | 321,522 | | 567,720 | | 624,597 | | 932,013 | | 3,676,314 | | | 290,219 | | 321,522 | | 567,720 | | 624,597 | | 932,013 | | | | | | | | | | | | | | | | | | | | | | | | | Total commercial loans | | 8,434,839 | | 7,488,201 | | 6,589,618 | | 6,356,802 | | 8,324,844 | | | 6,522,504 | | 8,434,839 | | 7,488,201 | | 6,589,618 | | 6,356,802 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Finance leases | | 318,504 | | 363,883 | | 378,556 | | 361,631 | | 280,571 | | | 282,904 | | 318,504 | | 363,883 | | 378,556 | | 361,631 | | | | | Consumer loans and other loans | | 1,579,600 | | 1,744,480 | | 1,667,151 | | 1,772,917 | | 1,733,569 | | | Consumer loans | | | 1,432,611 | | 1,579,600 | | 1,744,480 | | 1,667,151 | | 1,772,917 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total loans, gross | | 13,949,226 | | 13,088,292 | | 11,799,746 | | 11,263,980 | | 12,685,929 | | | | | | | | | | | | | | | | Total loans held for investment | | | 11,655,436 | | 13,928,451 | | 13,077,889 | | 11,778,822 | | 11,228,742 | | | | | Less: | | | Allowance for loan and lease losses | | | (528,120 | ) | | | (281,526 | ) | | | (190,168 | ) | | | (158,296 | ) | | | (147,999 | ) | | | (553,025 | ) | | | (528,120 | ) | | | (281,526 | ) | | | (190,168 | ) | | | (158,296 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total loans, net | | $ | 13,421,106 | | $ | 12,806,766 | | $ | 11,609,578 | | $ | 11,105,684 | | $ | 12,537,930 | | | Total loans held for investment, net | | | 11,102,411 | | 13,400,331 | | 12,796,363 | | 11,588,654 | | 11,070,446 | | | | | | | | | | | | | | | Loans held for sale (1) | | | 300,766 | | 20,775 | | 10,403 | | 20,924 | | 35,238 | | | | | | | | | | | | | | | Total loan, net | | | $ | 11,403,177 | | $ | 13,421,106 | | $ | 12,806,766 | | $ | 11,609,578 | | $ | 11,105,684 | | | | | | | | | | | | | | |
| | | (1) | | Includes $281.6 million associated with loans transferred to held for sale pursuant to a sale agreement entered into to accelerate the de-risking of the Corporation’s balance sheet. |
Lending Activities As of December 31, 2009,2010, the Corporation’s total loans, increasednet of allowance, decreased by $860.9 million,$2.0 billion, when compared with the balance as of December 31, 2008. The increase in the Corporation’s total loans primarily relates to increases in C&I loans2009. All major loan categories decreased from 2009 levels, driven 97
by internal loan originations, mainlyrepayments of approximately $1.6 billion from credit facilities extended to the Puerto Rico Governmentgovernment as further discussed below, partially offset by repayments andwell as charge-offs of approximately $333.3$609.7 million, recordedpay-downs and sales of loans. As discussed in 2009, mainly fordetail in the executive overview section, during the fourth quarter of 2010, the Corporation transferred loans with an unpaid principal balance of $527 million and a book value of $447 million ($335 million of construction loans, $83 million of commercial mortgage loans and $29 million of commercial and industrial loans) to held for sale. The recorded investment in Florida.the loans was written down to a value of $281.6 million ($207.3 million of construction loans, $53.7 million of commercial mortgage loans and $20.6 million of C&I loans), which resulted in 2010 fourth quarter charge-offs of $165.1 million (a $127.0 million charge to construction loans, a $29.5 million charge to commercial mortgage loans and a $8.6 million charge to commercial and industrial loans). On February 8, 2011, the Corporation entered into a definitive agreement to sell substantially all of the loans transferred to held for sale and, on February 16, 2011, loans with an unpaid principal balance of $510.2 million were sold at a purchase price of $272.2 million. As shown in the table above, the 2009 loan2010 loans held for investment portfolio was comprised of commercial (60%(56%), residential real estate (26%(29%), and consumer and finance leases (14%(15%). Of the total gross loanloans held for investment portfolio of $13.9$11.7 billion as of December 31, 2009,2010, approximately 83% have84% has credit risk concentration in Puerto Rico, 9%8% in the United States (mainly in the state of Florida) and 8% in the Virgin Islands, as shown in the following table.table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Puerto | | Virgin | | United | | | | | Puerto | | Virgin | | United | | | | As of December 31, 2009 | | Rico | | Islands | | States | | Total | | | As of December 31, 2010 | | | Rico | | Islands | | States | | Total | | | | (In thousands) | | | (In thousands) | | Residential real estate loans, including loans held for sale | | $ | 2,790,829 | | $ | 450,649 | | $ | 374,805 | | $ | 3,616,283 | | | Residential mortgage loans | | | $ | 2,651,200 | | $ | 430,949 | | $ | 335,268 | | $ | 3,417,417 | | | | | | | | | | | | | | | | | | | | | | | | Commercial loans: | | | Commercial mortgage loans | | 983,125 | | 73,114 | | 534,582 | | 1,590,821 | | | 1,138,274 | | 67,299 | | 464,588 | | 1,670,161 | | Construction loans (1) | | 998,235 | | 194,813 | | 299,541 | | 1,492,589 | | | Construction loans | | | 437,294 | | 184,762 | | 78,523 | | 700,579 | | Commercial and Industrial loans | | 4,756,297 | | 241,497 | | 32,113 | | 5,029,907 | | | 3,646,586 | | 185,540 | | 29,419 | | 3,861,545 | | Loans to a local financial institution collateralized by real estate mortgages | | 321,522 | | — | | — | | 321,522 | | | 290,219 | | — | | — | | 290,219 | | | | | | | | | | | | | | | | | | | | | Total commercial loans | | 7,059,179 | | 509,424 | | 866,236 | | 8,434,839 | | | 5,512,373 | | 437,601 | | 572,530 | | 6,522,504 | | | | | Finance leases | | 318,504 | | — | | — | | 318,504 | | | 282,904 | | — | | — | | 282,904 | | | | | Consumer loans | | 1,446,354 | | 98,418 | | 34,828 | | 1,579,600 | | | 1,329,603 | | 72,659 | | 30,349 | | 1,432,611 | | | | | | | | | | | | | | | | | | | | | | | | Total loans, gross | | $ | 11,614,866 | | $ | 1,058,491 | | $ | 1,275,869 | | $ | 13,949,226 | | | Total loans held for investment, gross | | | 9,776,080 | | 941,209 | | 938,147 | | 11,655,436 | | | | | Allowance for loan and lease losses | | | (410,714 | ) | | | (27,502 | ) | | | (89,904 | ) | | | (528,120 | ) | | | (443,889 | ) | | | (47,028 | ) | | | (62,108 | ) | | | (553,025 | ) | | | | | | | | | | | | | | | | | | | | Total loans held for investment, net | | | 9,332,191 | | 894,181 | | 876,039 | | 11,102,411 | | | | | Loans held for sale | | | 293,998 | | 6,768 | | — | | 300,766 | | | | $ | 11,204,152 | | $ | 1,030,989 | | $ | 1,185,965 | | $ | 13,421,106 | | | | | | | | | | | | | | | | | | | | | | $ | 9,626,189 | | $ | 900,949 | | $ | 876,039 | | $ | 11,403,177 | | | | | | | | | | | | |
| | | (1) | | Construction loans of Florida operations include approximately $70.4 million of condo-conversion loans, net of charge-offs of $32.4 million. |
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First BanCorp relies primarily on its retail network of branches to originate residential and consumer loans. The Corporation supplements its residential mortgage originations with wholesale servicing released mortgage loan purchases from mortgage bankers. The Corporation manages its construction and commercial loan originations through centralized units and most of its originations come from existing customers as well as through referrals and direct solicitations. For purpose of the following presentation, the Corporation separately presented secured commercial loans to local financial institutions because it believes this approach provides a better representation of the Corporation’s commercial production capacity. The following table sets forth certain additional data (including loan production) related to the Corporation’s loan portfolio net of the allowance for loan and lease losses for the dates indicated: 98
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | For the Year Ended December 31, | | | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 | | | | (In thousands) | | | (In thousands) | | Beginning balance | | $ | 12,806,766 | | $ | 11,609,578 | | $ | 11,105,684 | | $ | 12,537,930 | | $ | 9,556,958 | | | $ | 13,421,106 | | $ | 12,806,766 | | $ | 11,609,578 | | $ | 11,105,684 | | $ | 12,537,930 | | Residential real estate loans originated and purchased | | 591,889 | | 690,365 | | 715,203 | | 908,846 | | 1,372,490 | | | 526,389 | | 591,889 | | 690,365 | | 715,203 | | 908,846 | | Construction loans originated and purchased | | 433,493 | | 475,834 | | 678,004 | | 961,746 | | 1,061,773 | | | 175,260 | | 433,493 | | 475,834 | | 678,004 | | 961,746 | | C&I and Commercial mortgage loans originated and purchased | | 3,153,278 | | 2,175,395 | | 1,898,157 | | 2,031,629 | | 2,258,558 | | | 1,706,604 | | 3,153,278 | | 2,175,395 | | 1,898,157 | | 2,031,629 | | Secured commercial loans disbursed to local financial institutions | | — | | — | | — | | — | | 681,407 | | | Finance leases originated | | 80,716 | | 110,596 | | 139,599 | | 177,390 | | 145,808 | | | 90,671 | | 80,716 | | 110,596 | | 139,599 | | 177,390 | | Consumer loans originated and purchased | | 514,774 | | 788,215 | | 653,180 | | 807,979 | | 992,942 | | | 508,577 | | 514,774 | | 788,215 | | 653,180 | | 807,979 | | | | | | | | | | | | | | | | | | | | | | | | | Total loans originated and purchased | | 4,774,150 | | 4,240,405 | | 4,084,143 | | 4,887,590 | | 6,512,978 | | | 3,007,501 | | 4,774,150 | | 4,240,405 | | 4,084,143 | | 4,887,590 | | | | | Sales and securitizations of loans | | | (464,705 | ) | | | (164,583 | ) | | | (147,044 | ) | | | (167,381 | ) | | | (118,527 | ) | | | (529,413 | ) | | | (464,705 | ) | | | (164,583 | ) | | | (147,044 | ) | | | (167,381 | ) | Repayments and prepayments | | | (3,010,857 | ) | | | (2,589,120 | ) | | | (3,084,530 | ) | | | (6,022,633 | ) | | | (3,803,804 | ) | | | (3,704,221 | ) | | | (3,010,857 | ) | | | (2,589,120 | ) | | | (3,084,530 | ) | | | (6,022,633 | ) | | | | Other (decreases) increases(1) (2) | | | (684,248 | ) | | | (289,514 | ) | | | (348,675 | ) | | | (129,822 | ) | | 390,325 | | | | (791,796 | ) | | | (684,248 | ) | | | (289,514 | ) | | | (348,675 | ) | | | (129,822 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net increase (decrease) | | 614,340 | | 1,197,188 | | 503,894 | | | (1,432,246 | ) | | 2,980,972 | | | Net (decrease) increase | | | | (2,017,929 | ) | | 614,340 | | 1,197,188 | | 503,894 | | | (1,432,246 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance | | $ | 13,421,106 | | $ | 12,806,766 | | $ | 11,609,578 | | $ | 11,105,684 | | $ | 12,537,930 | | | $ | 11,403,177 | | $ | 13,421,106 | | $ | 12,806,766 | | $ | 11,609,578 | | $ | 11,105,684 | | | | | | | | | | | | | | | | | | | | | | | | | Percentage increase (decrease) | | | 4.80 | % | | | 10.31 | % | | | 4.54 | % | | | (11.42 | )% | | | 31.19 | % | | Percentage (decrease) increase | | | | -15.04 | % | | | 4.80 | % | | | 10.31 | % | | | 4.54 | % | | | -11.42 | % |
| | | (1) | | Includes the change in the allowance for loan and lease losses and cancellation of loans due to the repossession of the collateral. | | (2) | | For 2008, is net of $19.6 million of loans from the acquisition of VICB. For 2007, includes the recharacterization of securities collateralized by loans of approximately $183.8 million previously accounted for as a secured commercial loan with R&G Financial. For 2005, includes $470 million of loans acquired as part of the Ponce General acquisition. |
Residential Real Estate Loans As of December 31, 2009,2010, the Corporation’s residential real estate loan portfolio increasedheld for investment decreased by $124.6$178.1 million as compared to the balance as of December 31, 2008. More than 90%2009. The majority of the Corporation’s outstanding balance of residential mortgage loans consists of fixed-rate, fully amortizing, full documentation loans. In accordance with the Corporation’s underwriting guidelines, residential real estate loans are mostly fullfully documented loans, and the Corporation is not actively involved in the origination of negative amortization loans or adjustable-rate mortgage loans. The increasedecrease was drivena combination of loan sales and securitizations that in aggregate amounted to $415.5 million, charge-offs of $62.7 million and pay downs and foreclosures partially offset by a portfolio acquired during the second quarter of 2009 from R&G, a Puerto Rican financial institution, and new loan originations during 2009. The R&G transaction involved the purchase of approximately $205 million of residential mortgage loans that previously served as collateral for a commercial loan extended to R&G. The purchase price of the transaction was retained by the Corporation to fully pay off the commercial loan, thereby significantly reducing the Corporation’s exposure to a single borrower. This acquisition had the effect of improving the Corporation’s regulatory capital ratios due to the lower risk-weighting of the assets acquired. Additionally, net interest income improved since the weighted-average effective yield on the mortgage loans acquired approximated 5.38% (including non-performing loans) compared to a yield of approximately 150 basis points over 3-month LIBOR in the commercial loan to R&G. Partially offsetting the increase driven by the aforementioned transaction and loan originations was the securitization of approximately $305 million of FHA/VA mortgage loans into GNMA MBS. Refer to the “Contractual Obligations and Commitments” discussion below for additional information about outstanding commitments to sell mortgage loans.originations. 94
Residential real estate loan production and purchases for the year ended December 31, 20092010 decreased by $98.5$65.5 million, compared to the same period in 20082009 and decreased by $24.8$98.5 million for 2008,2009, compared to the same period in 2007.2008. The decrease in 2010 and 2009 was primarily due to weak economic conditions reflected in a continued trend of higher unemployment rates affecting consumers. Nevertheless, the Corporation’s residential mortgage loan originations, including purchases of $218.4$181.8 million, amounted to $591.9$526.4 million in 2009. This excludes the aforementioned purchase of approximately $205 million of loans that previously served as collateral for a commercial loan extended to R&G, since the Corporation believes this approach provides a better representation of the Corporation’s residential mortgage loan production capacity.2010. Residential real estate loans represent 12%18% of total loans originated and purchased for 2009.2010. The Corporation’s strategy is to penetrate markets by providing customers with a variety of high quality mortgage products. The Corporation’s residential mortgage loan originations continued to be driven by FirstMortgage, its mortgage loan origination subsidiary. FirstMortgage supplements its internal direct originations through its retail network with an indirect business strategy. The Corporation’s Partners in Business, a division of FirstMortgage, partners with mortgage brokers and small mortgage bankers in Puerto Rico to purchase ongoing mortgage loan production. The slight decrease in mortgage loan production for 2008, as compared to 2007, reflects the lower volume of loans purchased during 2008. Residential mortgage loan purchases during 2008 amounted to $211.8 million, a decrease of approximately $58.7 million from 2007. This was due to the impact in 2007 of a purchase of $72.2 million (mainly FHA loans) from a local financial institution not as part of the ongoing Corporation’s Partners in Business Program discussed above. Meanwhile, internal residential mortgage loan originations increased by $33.9 million for 2008, as compared to 2007, favorably affected by legislation approved by the Puerto Rico Government (Act 197) which provided credits to lenders and borrowers when individuals purchased certain new or existing homes. The credits for lenders and borrowers were as follows: (a) for a new constructed home that would constitute the individual’s principal residence, a credit equal to 20% of the sales price or $25,000, whichever was lower; (b) for new constructed homes that would not constitute the individual’s principal residence, a credit of 10% of the sales price or $15,000, whichever was lower; and (c) for existing homes, a credit of 10% of the sales price or $10,000, whichever was lower.
From the homebuyer’s perspective: (1) the individual could not benefit from the credit twice; (2) the amount of credit granted was credited against the principal amount of the mortgage; (3) the individual had to acquire the property before December 31, 2008; and (4) for new constructed homes constituting the principal residence and existing homes, the individual had to live in it as his or her principal residence for at least three consecutive years. Noncompliance with this requirement will affect only the homebuyer’s credit and not the tax credit granted to the financial institution.
From the financial institution’s perspective: (1) the credit may be used against income taxes, including estimated taxes, for years commencing after December 31, 2007 in three installments, subject to certain limitations, between January 1, 2008 and June 30, 2011; (2) the credit may be ceded, sold or otherwise transferred to any other person; and (3) any tax credit not used in a given tax year, as certified by the Secretary of Treasury, may be claimed as a refund.
Loan originations of the Corporation covered by Act 197 amounted to approximately $90.0 million for 2008.
Commercial and Construction Loans As of December 31, 2009,2010, the Corporation’s commercial and construction loan portfolio increasedheld for investment decreased by $946.6 million,$1.9 billion, as compared to the balance as of December 31, 2008,2009, due mainly to loan originationsrepayments of approximately $1.6 billion from credit facilities extended to the Puerto Rico Government as discussed below, partially offset by the aforementioned unwinding of the commercial loangovernment and/or political subdivisions combined with R&G, principal repayments and net charge-offs of $493.0 million, the sale of approximately $176.1 million mainly associated with various non-performing loans in 2009. A substantial portion of this portfolio is collateralized by real estate.Florida and pay downs. The Corporation’s commercial loans are primarily variablevariable- and adjustable-rate loans. Included in the $493.0 million net charge-offs are $165.1 million associated with loans transferred to held for sale. Approximately $447 million of loans were written down to the value of $281.6 million and transferred to held for sale pursuant to a non-binding letter of intent relating to a strategic sale of loans. The Corporation entered into this transaction to reduce the level of classified and non- 9599
performing assets and reduce its concentration in construction loans. The Corporation completed the sale of these loans on February 16, 2011. Total commercial and construction loans originated amounted to $3.6$1.9 billion for 2009, an increase2010, a decrease of $935.5 million$1.7 billion when compared to originations during 2008.2009. The decrease in commercial and construction loan production for 2010, compared to 2009, was mainly related to credit facilities extended to the Puerto Rico and Virgin Islands government. Origination related to government entities amounted to $702.6 million in 2010 compared to $1.8 billion in 2009. The increase in commercial and construction loan production for 2009, compared to 2008, was mainly driven by approximately $1.7 billion in credit facilities extended to the Puerto Rico Government and/or its political subdivisions. The increase in loan originations related to governmentalgovernment agencies was partially offset by a $118.9 million decrease in commercial mortgage loan originations and a decrease of $179.6 million in floor plan originations. Floor plan lending activities depends on inventory levels (autos) financed and their turnover. The increase in commercial and construction loan production for 2008, compared to 2007, was mainly experienced in Puerto Rico. Commercial loan originations in Puerto Rico increased by approximately $269.8 million for 2008. The increase in commercial loan originations in Puerto Rico was partially offset by lower construction loan originations in the United States, which decreased by $144.7 million for 2008, as compared to 2007, due to the slowdown in the U.S. housing market. As of December 31, 2009,2010, the Corporation had $1.2 billion$325.1 million outstanding of credit facilities granted to the Puerto Rico Government and/or its political subdivisions.subdivisions down from $1.2 billion as of December 31, 2009, and $84.3 million granted to the Virgin Islands government, down from $134.7 million as of December 31, 2009. A substantial portion of these credit facilities are obligations that have a specific source of income or revenues identified for their repayment, such as sales and property taxes collected by the central Government and/or municipalities. 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 utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The Corporation also has loans to various municipalities in Puerto Rico for which the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment. Aside from loans extended to the Puerto Rico Government and its political subdivisions, the largest loan to one borrower as of December 31, 20092010 in the amount of $321.5$290.2 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 on residential and commercial real estate. Although commercial loans involve greater credit risk because they are larger in size and more risk is concentrated in a single borrower, the Corporation has and continues to develop a credit risk management infrastructure that mitigates potential losses associated with commercial lending, including loan review functions, sales of loan participations, and continuous monitoring of concentrations within portfolios.loans.
Construction loans originations decreased by $42.3$258.2 million due to the strategic decision by the Corporation to reduce its exposure to construction projects in both Puerto Rico and the United States. The Corporation’s construction lending volume has been stagnant for the last yeartwo years due to the slowdown in the U.S. housing market and the current economic environment in Puerto Rico. The Corporation has reduced its exposure to condo-conversion loans in its Florida operations and construction loan originations in Puerto Rico are mainly draws from existing commitments. More than 70%95% of the construction loan originations in 20092010 are related to disbursements from previous established commitments. Currentcommitments and new loans are mainly associated with construction loans to individuals. In Puerto Rico, absorption rates on low income residential projects financed by the Corporation showed signs of improvement during 2010 but the market is still under pressure because of an oversupply of housing units compounded by lower demand and diminished consumer purchasing power and confidence. The current unemployment rate in condo-conversionPuerto Rico is close to 15%. During 2010, $227.9 million of commercial construction project were converted to commercial mortgage loans or commercial loans, of which $198.9 million is located in Puerto Rico and $29.0 million in Florida. As a key initiative to increase the United States are lowabsorption rate in residential construction projects, the Corporation has engaged in discussions with developers to review sales strategies and properties collateralizing someprovide additional incentives to supplement the Puerto Rico Government housing stimulus package enacted in September 2010. From September 1, 2010 to June 30, 2011, the Government of these condo-conversion loans have been formally revertedPuerto Rico is providing tax and transaction fees incentives to rental propertiesboth purchasers and sellers (whether a Puerto Rico resident or not) of new and existing residential property, as well as commercial property with a future plan forsales price of no more than $3 million. Among its provisions, the salehousing stimulus package provides various types of converted units upon an improvement in the real estate market. As of December 31, 2009, approximately $60.1 million of loans originally disbursed as condo-conversion construction loans have been formally reverted to income-producing commercial loans, while the repayment of interest on the remaining construction condo-conversion loans is coming principally from rental income and other sources. Given more conservative underwriting standards of banks in general and a reduction in market participants in the lending business, the Corporation believes that the rental market in Florida will grow. As part of the Corporation’s initiative to reduce its exposure to construction projects in Florida, during 2009, the Corporation completed the sales of four non-performing construction loans in Florida totaling approximately $40.4 million. Refer to the discussion under “Risk Management — Credit Risk Management — Allowance for Loan and Lease Losses and Non-performing Assets” below for additional information.property taxes exemptions as well as reduced closing costs, including: | ▪ | | Purchase/Sale of New Residential Property within the Period |
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| | | – Any long term capital gain upon selling new residential property will be 100% exempt from the payment of income taxes. The purchaser will have an exemption for five years on the payment of property taxes. The cost of filing stamps and seals are waived during the period. | | | ▪ | | Purchase/Sale of Existing Residential Property, or Commercial Property with a Sales Price of No More than $3 Million, within the Period (“Qualified Property”) | | | | | – Any long term capital gain upon selling Qualified Property within the Period will be 100% exempt from the payment of income taxes. Fifty percent of the long term capital gain derived from the future sale of the foregoing property will be exempt from the payment of income taxes, including the basic alternative tax and the alternative minimum tax. Fifty percent of the cost of filing stamps and seals are waived during the period. | | | ▪ | | Rental Income from Residential Properties | | | | | – Income derived from the rental of new or existing residential property will be exempt from income taxes for a period of up to 10 calendar years, commencing on January 1, 2011. |
This legislation is aimed to alleviate some of the stress in the construction industry. The construction loan portfolio held for investment in Puerto Rico decreased by $560.9 million during 2010 driven by charge-offs of $216.4 million, including $127.0 million of charge-offs associated with construction loans transferred to held for sale, and the aforementioned conversion of loans to commercial mortgage loans. Loans with a book value of $334 million were written down and transferred to held for sale at a value of $207.3 million; substantially all of these loans were subsequently sold in February, 2011. The composition of the Corporation’s construction loan portfolio held for investment as of December 31, 20092010 by category and geographic location follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Puerto | | Virgin | | United | | | | | Puerto | | Virgin | | United | | | | As of December 31, 2009 | | Rico | | Islands | | States | | Total | | | As of December 31, 2010 | | | Rico | | Islands | | States | | Total | | | | (In thousands) | | | (In thousands) | | Loans for residential housing projects: | | | High-rise(1) | | $ | 202,800 | | $ | — | | $ | 559 | | $ | 203,359 | | | $ | 20,721 | | $ | — | | $ | — | | $ | 20,721 | | Mid-rise(2) | | 100,433 | | 4,471 | | 28,125 | | 133,029 | | | 37,174 | | 4,939 | | 17,690 | | 59,803 | | Single-family detach | | 123,807 | | 4,166 | | 31,186 | | 159,159 | | | 53,960 | | 8,226 | | 10,475 | | 72,661 | | | | | | | | | | | | | | | | | | | | | Total for residential housing projects | | 427,040 | | 8,637 | | 59,870 | | 495,547 | | | 111,855 | | 13,165 | | 28,165 | | 153,185 | | | | | | | | | | | | | | | | | | | | | Construction loans to individuals secured by residential properties | | 11,716 | | 26,636 | | — | | 38,352 | | | 11,786 | | 11,702 | | — | | 23,488 | | Condo-conversion loans | | 10,082 | | — | | 70,435 | | 80,517 | | | 8,684 | | — | | — | | 8,684 | | Loans for commercial projects | | 324,711 | | 117,333 | | 1,535 | | 443,579 | | | 133,099 | | 119,882 | | — | | 252,981 | | Bridge loans — residential | | 56,095 | | — | | 1,285 | | 57,380 | | | 57,083 | | — | | — | | 57,083 | | Bridge loans — commercial | | 3,003 | | 20,261 | | 72,178 | | 95,442 | | | — | | 20,032 | | 12,997 | | 33,029 | | Land loans — residential | | 77,820 | | 20,690 | | 66,802 | | 165,312 | | | 58,029 | | 17,282 | | 24,175 | | 99,486 | | Land loans — commercial | | 61,868 | | 1,105 | | 27,519 | | 90,492 | | | 55,409 | | 2,126 | | 13,246 | | 70,781 | | Working capital | | 29,727 | | 1,015 | | — | | 30,742 | | | 3,092 | | 1,033 | | — | | 4,125 | | | | | | | | | | | | | | | | | | | | | Total before net deferred fees and allowance for loan losses | | 1,002,062 | | 195,677 | | 299,624 | | 1,497,363 | | | 439,037 | | 185,222 | | 78,583 | | 702,842 | | Net deferred fees | | | (3,827 | ) | | | (865 | ) | | | (82 | ) | | | (4,774 | ) | | | (1,743 | ) | | | (460 | ) | | | (60 | ) | | | (2,263 | ) | | | | | | | | | | | | | | | | | | | | Total construction loan portfolio, gross | | 998,235 | | 194,812 | | 299,542 | | 1,492,589 | | | 437,294 | | 184,762 | | 78,523 | | 700,579 | | Allowance for loan losses | | | (100,007 | ) | | | (16,380 | ) | | | (47,741 | ) | | | (164,128 | ) | | | (96,082 | ) | | | (35,709 | ) | | | (20,181 | ) | | | (151,972 | ) | | | | | | | | | | | | | | | | | | | | Total construction loan portfolio, net | | $ | 898,228 | | $ | 178,432 | | $ | 251,801 | | $ | 1,328,461 | | | $ | 341,212 | | $ | 149,053 | | $ | 58,342 | | $ | 548,607 | | | | | | | | | | | | | | | | | | | | |
| | | (1) | | For purposes of the above table, high-rise portfolio is composed of buildings with more than 7 stories, mainly composed of two projects that represent approximately 71% of the Corporation’s total outstanding high-rise residential construction loan portfolio in Puerto Rico. | | (2) | | Mid-rise relates to buildings up to 7 stories. |
The following table presents further information on the Corporation’s construction portfolio as of and for the year ended December 31, 2009:2010: 101
| | | | | | | | | (Dollars in thousands) | | | | | | | | | (Dollars in thousands) | | Total undisbursed funds under existing commitments | | $ | 249,961 | | | $ | 187,568 | | | | | | | | | | | Construction loans in non-accrual status | | $ | 634,329 | | | Construction loans held for investment in non-accrual status (1) | | | $ | 263,056 | | | | | | | | | | | Net charge offs — Construction loans (1)(2) | | $ | 183,600 | | | $ | 313,153 | | | | | | | | | | | Allowance for loan losses — Construction loans | | $ | 164,128 | | | $ | 151,972 | | | | | | | | | | | Non-performing construction loans to total construction loans | | | 42.50 | % | | | 37.55 | % | | | | | | | | | | Allowance for loan losses — construction loans to total construction loans | | | 11.00 | % | | | 21.69 | % | | | | | | | | | | Net charge-offs to total average construction loans (1)(3) | | | 11.54 | % | | | 23.80 | % | | | | | | | |
| | | (1) | | Excludes $140.1 million of non-performing construction loans held for sale as of December 31, 2010 of which approximately $135.3 million was subsequently sold in February, 2011. | | (2) | | Includes charge-offs of $137.4$216.4 million related to construction loans in Puerto Rico (including $127.0 million associated with loans transferred to held for sale),$90.6 million related to construction loans in Florida and $46.2$6.2 million related to construction loans in Puerto Rico.the Virgin Islands. | | (3) | | Net charge-offs to average construction loans ratio excluding charge-offs associated with loans transferred to held for sale was 18.97% |
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As part of the aforementioned agreement to sell loans executed in February 2011, FirstBank will provide an $80 million advance facility to the Joint Venture that acquired the loans to fund unfunded commitments and costs to complete projects under construction sold.
The following summarizes the construction loans for residential housing projects in Puerto Rico segregated by the estimated selling price of the units: | | | | | | | | | (In thousands) | | | | | | Under $300K | | $ | 142,280 | | | $ | 70,237 | | $300K-$600K | | 87,306 | | | Over $600K (1) | | 197,454 | | | $300K- $600k | | | 11,911 | | Over $600k (1) | | | 29,707 | | | | | | | | | | | $ | 427,040 | | | $ | 111,855 | | | | | | | | |
| | | (1) | | Mainly composed of three high-rise projects and one single-family detached project that accounts for approximately 67% and 14%, respectively,66% of the residential housing projects in Puerto Rico.Rico with selling prices over $600k. |
For the majority of the construction loans for residential housing projects in Florida, the estimated selling price of the units is under $300,000.
Consumer Loans and Finance Leases As of December 31, 2009,2010, the Corporation’s portfolio of consumer loanloans and finance leases portfolio decreased by $210.3$182.6 million, as compared to the portfolio balance as of December 31, 2008.2009. This is mainly the result of repayments and charge-offs that on a combined basis more than offset the volume of loan originations during 2009.2010. Nevertheless, the Corporation experienced a decrease in net charge-offs forof consumer loans and finance leases that amounted to $53.9 million for 2010, as compared to $61.1 million for 2009, as compared to $66.4 million for the same period a year ago. The decrease in net charge offs as compared to 2008 is attributable to the relative stability in the credit quality of this portfolio and changes in underwriting standards implemented in late 2005. New originations under these revised standards have an average life of approximately four years.2009. Consumer loan originations are principally driven through the Corporation’s retail network. For the year ended December 31, 2010, consumer loan and finance lease originations amounted to $599.2 million, an increase of $3.8 million or 1% compared to 2009 mainly related to auto financings. For the year ended December 31, 2009, consumer loan and finance lease originations amounted to $595.5 million, a decrease of $303.3 million or 34% compared to 2008 adversely impacted by economic conditions in Puerto Rico and the United States. The increase of $106.0 million in consumer loanStates and finance leases originationsthe impact in 2008 as compared to 2007, was related toof the purchase of a $218 million auto loan portfolio from Chrysler Financial Services Caribbean, LLC (“Chrysler”) in July 2008. Aside from this transaction, the consumer loan production decreased by approximately $112 million, or 14%, for 2008 as compared to 2007 mainly due to adverse economic conditions in Puerto Rico. Unemployment in Puerto Rico reached 13.7% in December 2008, up 2.7% from the prior year, and in 2009 tops 15%. Consumer loan originations are driven by auto loan originations through a strategy of seeking to provide outstanding service to selected auto dealers who provide the channel for the bulk of the Corporation’s auto loan originations. This strategy is directly linked to our commercial lending activities as the Corporation maintains strong and stable auto floor plan relationships, which are the foundation of a successful auto loan generation operation. The Corporation’s commercial relations with floor plan dealers isare strong and directly benefitsbenefit the Corporation’s consumer lending operation. Finance leases are mostly composed of loans to individuals to finance the acquisition of a motor vehicle and typically have five-year terms and are collateralized by a security interest in the underlying assets. Investment Activities 102
As part of its strategy to diversify its revenue sources and maximize its net interest income, First BanCorp maintains an investment portfolio that is classified as available-for-sale or held-to-maturity. The Corporation’s investment portfolioavailable-for-sale and held-to-maturity portfolios as of December 31, 2009 amounted to $4.92010 aggregated $3.2 billion, a reduction of $842.5$1.6 million when compared with the investment portfolio of $5.7to $4.8 billion as of December 31, 2008.2009. The reduction in the investment portfolio was the net result of approximately $1.9$2.1 billion in sales of securities, $955 million in calls ofMBS sold during 2010 (mainly U.S. agency notes and certain obligations of the Puerto Rico Government, and approximately $959 million of mortgage-backed securities prepayments; partly offset with securities purchases of $2.9 billion. Sales of investments securities during 2009 were approximately $1.7 billion in MBS (mainly 30 Year U.S. agency MBS), with a weighted-average yield of 5.49%, $96 million of US Treasury notes with a weighted average yield of 3.54% and $1004.46%, $252 million of Puerto Rico government obligationsU.S. Treasury Notes sold with a weighted average yield of 2.84%, the call of approximately $1.6 billion of investment securities (mainly U.S. agency debt securities) with a weighted average yield of 2.16% and MBS prepayments, partially offset by the purchase of approximately $850 million in aggregate of 2-,3-,5- and 7- year U.S. Treasury Notes with an average yield of 5.50%.
Purchases1.82%, the purchase of investmentapproximately $1.2 billion of debt securities during 2009 mainly consisted of(mainly 2- to 4-year U.S. agency callable debentures having contractual maturities ranging from two to three years (approximately $1.0 billion atdebt securities) with a yield of 1.68% and the purchase of $696 million of MBS with a weighted-average yield of
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2.13%), 7-10 Year U.S. Treasury Notes (approximately $96 million at a weighted-average yield 3.57%. Given the current level of 3.54%) subsequently sold, 15-Year U.S. agency MBS (approximately $1.3 billion at a weighted-average yieldinterest rates and the stage of 3.85%)the economic cycle, coupled with the need of controlling market risk for liquidity considerations, re-investment of securities has been reduced and floating collateralized mortgage obligations issued by GNMA, FNMA and FHLMC (approximately $184 million). Also, during 2009, the Corporation began and completed the securitization of approximately $305 million of FHA/VA mortgage loans into GNMA MBS.done in relatively shorter average term securities.
Over 94%90% of the Corporation’s available-for-sale and held-to-maturity securities portfolio is invested in U.S. Government and Agency debentures and fixed-rate U.S. government sponsored-agency MBS (mainly GNMA, FNMA and FHLMC fixed-rate securities). The Corporation’s investment in equity securities classified as available for sale is minimal.minimal, approximately $0.1 million, which consists of common stock of a financial institution in Puerto Rico. The following table presents the carrying value of investments as of December 31, 20092010 and 2008:2009: | | | | | | | | | | | | | | | | | (In thousands) | | 2009 | | 2008 | | | 2010 | | 2009 | | | | | (In thousands) | | Money market investments | | $ | 24,286 | | $ | 76,003 | | | $ | 115,560 | | $ | 24,286 | | | | | | | | | | | | | | | | Investment securities held-to-maturity, at amortized cost: | | | U.S. Government and agencies obligations | | 8,480 | | 953,516 | | | 8,487 | | 8,480 | | Puerto Rico Government obligations | | 23,579 | | 23,069 | | | 23,949 | | 23,579 | | Mortgage-backed securities | | 567,560 | | 728,079 | | | 418,951 | | 567,560 | | Corporate bonds | | 2,000 | | 2,000 | | | 2,000 | | 2,000 | | | | | | | | | | | | | | | 601,619 | | 1,706,664 | | | 453,387 | | 601,619 | | | | | | | | | | | | | | | | Investment securities available-for-sale, at fair value: | | | U.S. Government and agencies obligations | | 1,145,139 | | — | | | 1,212,067 | | 1,145,139 | | Puerto Rico Government obligations | | 136,326 | | 137,133 | | | 136,841 | | 136,326 | | Mortgage-backed securities | | 2,889,014 | | 3,722,992 | | | 1,395,486 | | 2,889,014 | | Corporate bonds | | — | | 1,548 | | | Equity securities | | 303 | | 669 | | | 59 | | 303 | | | | | | | | | | | | | | | 4,170,782 | | 3,862,342 | | | 2,744,453 | | 4,170,782 | | | | | | | | | | | | | | | | Other equity securities, including $68.4 million and $62.6 million of FHLB stock as of December 31, 2009 and 2008, respectively | | 69,930 | | 64,145 | | | Other equity securities, including $54.6 million and $68.4 million of FHLB stock as of December 31, 2010 and 2009, respectively | | | 55,932 | | 69,930 | | | | | | | | | | | | | Total investments | | $ | 4,866,617 | | $ | 5,709,154 | | | $ | 3,369,332 | | $ | 4,866,617 | | | | | | | | | | | | |
Mortgage-backed securities as of December 31, 20092010 and 2008,2009, consist of: | | | | | | | | | | | | | | | | | (In thousands) | | 2009 | | 2008 | | | 2010 | | 2009 | | Held-to-maturity | | | FHLMC certificates | | $ | 5,015 | | $ | 8,338 | | | $ | 2,569 | | $ | 5,015 | | FNMA certificates | | 562,545 | | 719,741 | | | 416,382 | | 562,545 | | | | | | | | | | | | | | | 567,560 | | 728,079 | | | 418,951 | | 567,560 | | | | | | | | | | | | | Available-for-sale | | | FHLMC certificates | | 722,249 | | 1,892,358 | | | 1,817 | | 722,249 | | GNMA certificates | | 418,312 | | 342,674 | | | 991,378 | | 418,312 | | FNMA certificates | | 1,507,792 | | 1,373,977 | | | 215,059 | | 1,507,792 | | Collateralized Mortgage Obligations issued or guaranteed by FHLMC, FNMA and GNMA | | 156,307 | | — | | | 114,915 | | 156,307 | | Other mortgage pass-through certificates | | 84,354 | | 113,983 | | | 72,317 | | 84,354 | | | | | | | | | | | | | | | 2,889,014 | | 3,722,992 | | | 1,395,486 | | 2,889,014 | | | | | | | | | | | | | Total mortgage-backed securities | | $ | 3,456,574 | | $ | 4,451,071 | | | $ | 1,814,437 | | $ | 3,456,574 | | | | | | | | | | | | |
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The carrying values of investment securities classified as available-for-saleavailable for sale and held-to-maturityheld to maturity as of December 31, 20092010 by contractual maturity (excluding mortgage-backed securities and equity securities) are shown below: | | | | | | | | | | | | | | | | | | | Carrying | | Weighted | | | Carrying | | Weighted | | (Dollars in thousands) | | amount | | average yield % | | | amount | | average yield % | | U.S. Government and agencies obligations | | | Due within one year | | $ | 8,480 | | 0.47 | | | $ | 8,487 | | 0.30 | | Due after ten years | | 1,145,139 | | 2.12 | | | Due after one year through five years | | | 1,212,067 | | 1.25 | | | | | | | | | | | | | | | 1,153,619 | | 2.11 | | | 1,220,554 | | 1.25 | | | | | | | | | | | | | | | | Puerto Rico Government obligations | | | Due within one year | | 11,989 | | 1.82 | | | Due after one year through five years | | 113,487 | | 5.40 | | | 27,290 | | 4.70 | | Due after five years through ten years | | 25,814 | | 5.87 | | | 124,068 | | 5.29 | | Due after ten years | | 8,615 | | 5.47 | | | 9,432 | | 5.86 | | | | | | | | | | | | | | | 159,905 | | 5.21 | | | 160,790 | | 5.22 | | | | | | | | | | | | | Corporate bonds | | | Due after ten years | | 2,000 | | 5.80 | | | 2,000 | | 5.80 | | | | | | | | | | | | | | | | Total | | 1,315,524 | | 2.49 | | | 1,383,344 | | 1.72 | | | | | Mortgage-backed securities | | 3,456,574 | | 4.37 | | | 1,814,437 | | 4.10 | | Equity securities | | 303 | | — | | | 59 | | — | | | | | | | | | | | | | Total investment securities available-for-sale and held-to-maturity | | $ | 4,772,401 | | 3.85 | | | $ | 3,197,840 | | 3.07 | | | | | | | | | | | | |
Total proceeds from the sale of securities during the year ended December 31, 20092010 amounted to approximately $2.4 billion (2009 — $1.9 billion (2008 — $680.0 million)billion). The Corporation realized gross gains of approximately $82.8$93.7 million in 2009 (20082010 (2009 — $17.9$82.8 million), and realized gross losses of approximately $0.2$0.5 million in 2008.2010. There were no realized gross losses in 2009. The Corporation has other equity securities that do not have a readily available fair value. The carrying value of such securities as of December 31, 2010 and 2009 was $1.3 million and 2008 was $1.6 million.million, respectively. During 2009,2010, the Corporation realized a gain of $10.7 million on the sale of Visa Class C shares, while, in 2009, the Corporation realized a $3.8 million gain on the sale of VISA Class A stock. Also, during the first quarter of 2008, the Corporation realized a one-time gain of $9.3 million on the mandatory redemption of part of its investment in VISA, Inc., which completed its IPO in March 2008. For each of the years ended on December 31, 20092010 and 2008,2009, the Corporation recorded OTTI charges of approximately $0.4 million and $1.8 million, respectively, on certain equity securities held in its available-for-sale investment portfolio related to financial institutions in Puerto Rico. Also, OTTI charges of $4.2 million were recorded in 2008 related to auto industry corporate bonds that were subsequently sold in 2009. Management concluded that the declines in value of the securities were other-than-temporary; as such, the cost basis of these securities was written down to the market value as of the date of the analysis and was reflected in earnings as a realized loss. With respect to debt securitites, in 2009,securities, the Corporation recorded OTTI charges through earnings of $0.6 million and $1.3 million for 2010 and 2009, respectively, related to the credit loss portion of available-for-sale private label MBS. Refer to Note 4 to the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K for additional information regarding the Corporation’s evaluation of other-than temporary impairment on held-to-maturity and available-for-sale securities. Net interest income of future periods will be affected by the accelerationCorporation’s decision to deleverage its investment securities portfolio to preserve its capital position and from balance sheet repositioning strategies. Also, net interest income could be affected by prepayments of mortgage-backed securities. Acceleration in the prepayments of mortgage-backed securities experienced duringwould lower yields on these securities, as the year, investments sold,amortization of premiums paid upon acquisition of these securities would accelerate. Conversely, acceleration in the callsprepayments of mortgage-backed securities would increase yields on securities purchased at a discount, as the amortization of the Agency notes, and the subsequent re-investment at lower then current yields.discount would accelerate. These risks are directly linked to future period market interest rate fluctuations. Also, net interest income in future periods might be affected by the Corporation’s investment in callable securities. Approximately $945 million$1.6 billion of investment securities, mainly U.S. Agency debentures, with an average yield of 5.77%2.16% were called during 2009.2010. As of December 31, 2009,2010, the Corporation has approximately $1.1 billion$417.8 million in U.S.debt securities (U.S. agency debenturesand Puerto Rico government securities) with embedded calls and with an average yield of 2.12% (mainly securities with contractual maturities of 2-3 years acquired in 2009)2.28%. These risks are directly linked to future period market interest rate fluctuations. Refer to the “Risk Management” section discussion below for further analysis of the effects of changing interest rates on the Corporation’s net interest income and forof the interest rate risk management strategies followed by the Corporation. Also refer to Note 4 to the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K for additional information regarding the Corporation’s investment portfolio. 100104
Investment Securities and Loans Receivable Maturities The following table presents the maturities or repricing of the loan and investment portfolio as of December 31, 2009:2010: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2-5 Years | | Over 5 Years | | | | | 2-5 Years | | Over 5 Years | | | | | | Fixed | | Variable | | Fixed | | Variable | | | | | Fixed | | Variable | | Fixed | | Variable | | | | | | One Year | | Interest | | Interest | | Interest | | Interest | | | | | One Year | | Interest | | Interest | | Interest | | Interest | | | | | | or Less | | Rates | | Rates | | Rates | | Rates | | Total | | | or Less | | Rates | | Rates | | Rates | | Rates | | Total | | | | (In thousands) | | | (In thousands) | | Investments:(1) | | | Money market investments | | $ | 24,286 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 24,286 | | | $ | 115,560 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 115,560 | | Mortgage-backed securities | | 449,798 | | 676,992 | | — | | 2,329,784 | | — | | 3,456,574 | | | 246,027 | | 5,057 | | — | | 1,563,353 | | — | | 1,814,437 | | Other securities(2) | | 96,957 | | 1,252,700 | | — | | 36,100 | | — | | 1,385,757 | | | 65,725 | | 1,331,200 | | — | | 42,410 | | — | | 1,439,335 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total investments | | 571,041 | | 1,929,692 | | — | | 2,365,884 | | — | | 4,866,617 | | | 427,312 | | 1,336,257 | | — | | 1,605,763 | | — | | 3,369,332 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans:(1)(2)(3) | | | Residential mortgage | | 777,931 | | 376,867 | | — | | 2,461,485 | | — | | 3,616,283 | | | 747,745 | | 267,154 | | — | | 2,421,666 | | — | | 3,436,565 | | C&I and commercial mortgage | | 5,198,518 | | 705,779 | | 222,578 | | 815,375 | | — | | 6,942,250 | | | 4,714,677 | | 533,027 | | 125,951 | | 522,618 | | — | | 5,896,273 | | Construction | | 1,436,136 | | 24,967 | | — | | 31,486 | | — | | 1,492,589 | | | 834,253 | | 11,389 | | — | | 62,207 | | — | | 907,849 | | Finance leases | | 96,453 | | 222,051 | | — | | — | | — | | 318,504 | | | 29,282 | | 253,622 | | — | | — | | — | | 282,904 | | Consumer | | 515,603 | | 1,063,997 | | — | | — | | — | | 1,579,600 | | | 174,367 | | 1,258,244 | | — | | — | | — | | 1,432,611 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total loans(4) | | 8,024,641 | | 2,393,661 | | 222,578 | | 3,308,346 | | — | | 13,949,226 | | | 6,500,324 | | 2,323,436 | | 125,951 | | 3,006,491 | | — | | 11,956,202 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total earning assets | | $ | 8,595,682 | | $ | 4,323,353 | | $ | 222,578 | | $ | 5,674,230 | | $ | — | | $ | 18,815,843 | | | $ | 6,927,636 | | $ | 3,659,693 | | $ | 125,951 | | $ | 4,612,254 | | $ | — | | $ | 15,325,534 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (1) | | Scheduled repayments reported in the maturity category in which the payment is due and variable rates according to repricing frequency. | | (2) | | Equity securities available-for-sale, other equity securities and loans having no stated scheduled of repayment and no stated maturity were included under the “one year or less category”. | | (3) | | Non-accruing loans were included under the “one year or less category”. | | (4) | | Includes loans held for sale of $300.8 million ($207.3 million of construction loans; $74.3 million of C&I and commercial mortgage loans; $19.1 million of residential mortgage loans) under the “one year or less category”. |
Goodwill and other intangible assets Business combinations are accounted for using the purchase method of accounting. Assets acquired and liabilities assumed are recorded at estimated fair value as of the date of acquisition. After initial recognition, any resulting intangible assets are accounted for as follows: Goodwill The Corporation evaluates goodwill for impairment on an annual basis, generally during the fourth quarter, or more often if events or circumstances indicate there may be an impairment. During 2010, the Corporation determined that it was in its best interest to move the annual evaluation date to an earlier date within the fourth quarter; therefore, the Corporation evaluated goodwill for impairment as of October 1, 2010. The change in date provided room for improvement to the testing structure and coordination and was performed in conjunction with the Corporation’s annual budgeting process. Goodwill impairment testing is performed at the segment (or “reporting unit”) level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. The Corporation’s goodwill is mainly related to the acquisition of FirstBank Florida in 2005. Effective July 1, 2009, the operations conducted by FirstBank Florida as a separate entity were merged with and into FirstBank Puerto Rico. The goodwill impairment analysis is a two-step process. The first step (“Step 1”) involves a comparison of the estimated fair value of the reporting unit (FirstBank Florida) to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired. If the carrying value exceeds the 105
estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of the impairment. The second step (Step(“Step 2”) involves calculating an implied fair value of the goodwill for each reporting unit for which the first step indicated a potential impairment. The implied fair value of goodwill is determined in a manner similar to 101
the calculation of the amount of goodwill in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. In determining the fair value of a reporting unit, andwhich is based on the nature of the business and reporting unit’s current and expected financial performance, the Corporation uses a combination of methods, including market price multiples of comparable companies, as well as a discounted cash flow analysis (“DCF”). The Corporation evaluates the results obtained under each valuation methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and appropriate under the circumstances. The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these evaluations include: | • | | a selection of comparable publicly traded companies, based on the nature of the business, location and size; | | | • | | the discount rate applied to future earnings, based on an estimate of the cost of equity; | | | • | | the potential future earnings of the reporting unit; and | | | • | | the market growth and new business assumptions. |
For purposes of the market comparable approach, valuation was determined by calculating median price to book value and price to tangible equity multiples of the comparable companies and appliedapplying these multiples to the reporting unit to derive an implied value of equity. For purposes of the DCF analysis approach, the valuation is based on estimated future cash flows. The financial projections used in the DCF analysis for the reporting unit are based on the most recent available (as of the valuation date). The growth assumptions included in these projections are based on management’s expectations of the reporting unit’s financial prospects as well as particular plans for the entity (i.e. restructuring plans). The cost of equity was estimated using the capital asset pricing model (CAPM) using comparable companies, an equity risk premium, the rate of return of a “riskless” asset, and a size premium. The discount rate was estimated to be 14.014.3 percent. The resulting discount rate was analyzed in terms of reasonability given current market conditions. The Corporation conducted its annual evaluation of goodwill during the fourth quarter of 2009. The Step 1 evaluation of goodwill allocated to the Florida reporting unit, which is one level below the United States business segment, indicated potential impairment of goodwill. The Step 1 fair value for the unit under both valuation approaches (market and DCF) was below the carrying amount of its equity book value as of the valuation date (December 31)(October 1), requiring the completion of Step 2. In accordance with accounting standards, the Corporation performed a valuation of all assets and liabilities of the Florida unit, including any recognized and unrecognized intangible assets, to determine the fair value of net assets. To complete Step 2, the Corporation subtracted from the unit’s Step 1 fair value the determined fair value of the net assets to arrive at the implied fair value of goodwill. The results of the Step 2 analysis indicated that the implied fair value of goodwill of $39.3 million exceeded the goodwill carrying value of $27 million, resulting in no goodwill impairment. The analysis of results for Step 2 indicated that the reduction in the fair value of the reporting unit was mainly attributable to the deteriorated fair value of the loan portfolios and not the fair value of the reporting unit as going concern. The discount in the loan portfolios is mainly attributable to market participants’ expected rates of returns, which affected the market discount on the Florida commercial mortgage and residential mortgage portfolios. The fair value of the loan portfolio determined for the Florida reporting unit represented a discount of 22.5%.$113 million.
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The reduction in the Florida unit Step 1 fair value was offset by a reduction in the fair value of its net assets, resulting in an implied fair value of goodwill that exceeded the recorded book value of goodwill. If the Step 1 fair value of the Florida unit declines further without a corresponding decrease in the fair value of its net assets or if loan discounts improve without a corresponding increase in the Step 1 fair value, the Corporation may be required to 102
record a goodwill impairment charge. The Corporation engaged a third-party valuator to assist management in the annual evaluation of the Florida unit goodwill (including Step 1 and Step 2), including the valuation of loan portfolios as of the December 31October 1 valuation date. In reaching its conclusion on impairment, management discussed with the valuator the methodologies, assumptions and results supporting the relevant values for the goodwill and determined that they were reasonable. The goodwill impairment evaluation process requires the Corporation to make estimates and assumptions with regards to the fair value of the reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact the Corporation’s results of operations and the profitability of the reporting unit where goodwill is recorded. Goodwill was not impaired as of December 31, 20092010 or 2008,2009, nor was any goodwill written-off due to impairment during 2010, 2009 2008 and 2007.2008. Other Intangibles Definite life intangibles, mainly core deposits, are amortized over their estimated life,lives, generally on a straight-line basis, and are reviewed periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Corporation performed impairment tests for the year ended December 31, 2010 and determined that no impairment was needed to be recognized for other intangible assets. As previously discussed, as a result of an impairment evaluation of core deposit intangibles, there was an impairment charge of $4.0 million recorded in 2009 related to core deposits of FirstBank Florida attributable to decreases in the base of acquired core deposits. The Corporation performed impairment tests for the year ended December 31, 2008 and 2007 and determined that no impairment was needed to be recognized for those periods for other intangible assets. RISK MANAGEMENT General Risks are inherent in virtually all aspects of the Corporation’s business activities and operations. Consequently, effective risk management is fundamental to the success of the Corporation. The primary goals of risk management are to ensure that the Corporation’s risk taking activities are consistent with the Corporation’s objectives and risk tolerance and that there is an appropriate balance between risk and reward in order to maximize stockholder value. The Corporation has in place a risk management framework to monitor, evaluate and manage the principal risks assumed in conducting its activities. First BanCorp’s business is subject to eight broad categories of risks: (1) liquidity risk, (2) interest rate risk, (3) market risk, (4) credit risk, (5) operational risk, (6) legal and compliance risk, (7) reputational risk, and (8) contingency risk. First BanCorp has adopted policies and procedures designed to identify and manage risks to which the Corporation is exposed, specifically those relating to liquidity risk, interest rate risk, credit risk, and operational risk. 103
Risk Definition Liquidity Risk Liquidity risk is the risk to earnings or capital arising from the possibility that the Corporation will not have sufficient cash to meet the short-term liquidity demands such as from deposit redemptions or loan commitments. Refer to “—Liquidity and Capital Adequacy” section below for further details. Interest Rate Risk 107
Interest rate risk is the risk to earnings or capital arising from adverse movements in interest rates, refer to “—Interest Rate Risk Management” section below for further details. Market Risk Market risk is the risk to earnings or capital arising from adverse movements in market rates or prices, such as interest rates or equity prices. The Corporation evaluates market risk together with interest rate risk, refer to “—Interest Rate Risk Management” section below for further details. Credit Risk Credit risk is the risk to earnings or capital arising from a borrower’s or a counterparty’s failure to meet the terms of a contract with the Corporation or otherwise to perform as agreed. Refer to “—Credit Risk Management” section below for further details. Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This risk is inherent across all functions, products and services of the Corporation. Refer to “—Operational Risk” section below for further details. Legal and Regulatory Risk Legal and regulatory risk is the risk to earnings and capital arising from the Corporation’s failure to comply with laws or regulations that can adversely affect the Corporation’s reputation and/or increase its exposure to litigation. Reputational Risk Reputational risk is the risk to earnings and capital arising from any adverse impact on the Corporation’s market value, capital or earnings of negative public opinion, whether true or not. This risk affects the Corporation’s ability to establish new relationships or services, or to continue servicing existing relationships. Contingency Risk Contingency risk is the risk to earnings and capital associated with the Corporation’s preparedness for the occurrence of an unforeseen event. Risk Governance The following discussion highlights the roles and responsibilities of the key participants in the Corporation’s risk management framework: 104
Board of Directors The Board of Directors oversees the Corporation’s overall risk governance program with the assistance of the Asset and Liability Committee, Credit Committee and the Audit Committee in executing this responsibility. Asset and Liability Committee The Asset and Liability Committee of the Corporation is appointed by the Board of Directors to assist the Board of Directors in its oversight of the Corporation’s policies and procedures related to asset and liability management relating to funds management, investment management, liquidity, interest rate risk management, capital adequacy and use of derivatives. In doing so, the Committee’s primary general functions involve: 108
| • | | The establishment of a process to enable the recognition, assessment, and management of risks that could affect the Corporation’s assets and liabilities management; | | | • | | The identification of the Corporation’s risk tolerance levels for yield maximization relating to its assets and liabilities; | | | • | | The evaluation of the adequacy and effectiveness of the Corporation’s risk management process relating to the Corporation’s assets and liabilities, including management’s role in that process; and | | | • | | The evaluation of the Corporation’s compliance with its risk management process relating to the Corporation’s assets and liabilities. |
Credit Committee The Credit Committee of the Board of Directors is appointed by the Board of Directors to assist themthe Board of Directors in its oversight of the Corporation’s policies and procedures related to all matters of the Corporation’s lending function. In doing so, the Committee’s primary general functions involve: | • | | The establishment of a process to enable the identification, assessment, and management of risks that could affect the Corporation’s credit management; | | | • | | The identification of the Corporation’s risk tolerance levels related to its credit management; | | | • | | The evaluation of the adequacy and effectiveness of the Corporation’s risk management process related to the Corporation’s credit management, including management’s role in that process; | | | • | | The evaluation of the Corporation’s compliance with its risk management process related to the Corporation’s credit management; and | | | • | | The approval of loans as required by the lending authorities approved by the Board of Directors. |
Audit Committee The Audit Committee of First BanCorp is appointed by the Board of Directors to assist the Board of Directors in fulfilling its responsibility to oversee management regarding: | • | | The conduct and integrity of the Corporation’s financial reporting to any governmental or regulatory body, shareholders, other users of the Corporation’s financial reports and the public; | | | • | | The Corporation’s systems of internal control over financial reporting and disclosure controls and procedures; |
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The qualifications, engagement, compensation, independence and performance of the Corporation’s independent auditors, their conduct of the annual audit of the Corporation’s financial statements, and their engagement to provide any other services;
| | • | | The qualifications, engagement, compensation, independence and performance of the Corporation’s independent auditors, their conduct of the annual audit of the Corporation’s financial statements, and their engagement to provide any other services; | | | • | | The Corporation’s legal and regulatory compliance; | | | • | | The application forimplementation of the Corporation’s related person transaction policy as established by the Board of Directors; | | | • | | The applicationimplementation of the Corporation’s code of business conduct and ethics as established by management and the Board of Directors; and | | | • | | The preparation of the Audit Committee report required to be included in the Corporation’s annual proxy statement by the rules of the Securities and Exchange Commission. |
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The preparation of the Audit Committee report required to be included in the Corporation’s annual proxy statement by the rules of the Securities and Exchange Commission. In performing this function, the Audit Committee is assisted by the Chief Risk Officer (“CRO”), the General Auditor and the Risk Management Council (“RMC”), and other members of senior management. Strategic Planning Committee The Strategic Planning Committee of the Corporation is appointed by the Board of Directors of the Corporation to assist and advise management with respect to, and monitor and oversee on behalf of the Board, corporate development activities not in the ordinary course of the Corporation’s business and strategic alternatives under consideration from time to time by the Corporation, including, but not limited to, acquisitions, mergers, alliances, joint ventures, divestitures, capitalization of the Corporation and other similar corporate transactions. Risk Management CouncilCompliance Committee
The Compliance Committee of the Corporation is appointed by the Board of Directors to assist the Board of the Bank in fulfilling its responsibility to ensure the Corporation and the Bank comply with the provisions of the Order entered into with the FDIC and the OCIF and the Written Agreement entered into with the FED. Once the Agreements are terminated by the FDIC, OCIF and the FED the Committee will cease to exist. Executive Risk Management CouncilCommittee The Executive Risk Management Committee is appointed by the Chief Executive Officer to assist the Corporation in overseeing, and receiving information regarding the Corporation’s policies, procedures and practices related to the Corporation’s risks. In doing so, the Council’s primary general functions involve: | • | | The appointment of persons responsible for the Corporation’s significant risks; | | | • | | The development of the risk management infrastructure needed to enable it to monitor risk policies and limits established by the Board of Directors; | | | • | | The evaluation of the risk management process to identify any gap and the implementation of any necessary control to close such gap; | | | • | | The establishment of a process to enable the recognition, assessment, and management of risks that could affect the Corporation; and | | | • | | The provision to the Board of Directors of appropriate information about the Corporation’s risks. |
Refer to “Interest Rate Risk, Credit Risk, Liquidity, Operational, Legal and Regulatory Risk Management -Operational Risk” discussion below for further details of matters discussed in the Risk Management Council. Other Management Committees As part of its governance framework, the Corporation has various additional risk management related-committees. These committees are jointly responsible for ensuring adequate risk measurement and management in their respective areas of authority. At the management level, these committees include: 106
| (1) | | Management’s Investment and Asset Liability Committee (“MIALCO”) — oversees interest rate and market risk, liquidity management and other related matters. Refer to “—Liquidity Risk and Capital Adequacy and Interest Rate Risk Management” discussions below for further details. | | | (2) | | Information Technology Steering Committee — is responsible for the oversight of and counsel on matters related to information technology including the development of information management policies and procedures throughout the Corporation. | |
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| (3) | | Bank Secrecy Act Committee — is responsible for oversight, monitoring and reporting of the Corporation’s compliance with the Bank Secrecy Act. | | | (4) | | Credit Committees (Delinquency and Credit Management Committee) — oversees and establishes standards for credit risk management processes within the Corporation. The Credit Management Committee is responsible for the approval of loans above an established size threshold. The Delinquency Committee is responsible for the periodic review of (1) past due loans, (2) overdrafts, (3) non-accrual loans, (4) other real estate owned (“OREO”) assets, and (5) the bank’s watch list and non-performing loans. | | | (5) | | Florida Executive Steering Committee — oversees implementation and compliance of policies approved by the Board of Directors and the performance of the Florida region’s operations. The Florida Executive Steering Committee evaluates and monitors interrelated risks related to FirstBank’s operations in Florida. | | | (6) | | Vendor Management Committee — oversees policies, procedures and related practices related to the Corporation’s vendor management efforts. The Vendor Management Committee primarily general functions involve the establishment of a process and procedures to enable the recognition, assessment, management and monitoring of vendor management risks. |
Officers As part of its governance framework, the following officers play a key role in the Corporation’s risk management process: | (1) | | Chief Executive Officer is responsible for the overall risk governance structure of the Corporation. | | | (2) | | Chief Risk Officer is responsible for the oversight of the risk management organization as well as risk governance processes. In addition, the CRO with the collaboration of the Risk Assessment Manager manages the operational risk program. | | | (3) | | ChiefCommercial Credit Risk Officer, and theRetail Credit Risk Officer, Chief Lending Officer and other senior executives, are responsible of managing and executing the Corporation’s credit risk program. | | | (4) | | Chief Financial Officer in combinationtogether with the Corporation’s Treasurer manages the Corporation’s interest rate and market and liquidity risks programs and, together with the Corporation’s Chief Accounting Officer, is responsible for the implementation of accounting policies and practices in accordance with GAAP and applicable regulatory requirements. The Chief Financial Officer is assisted by the Risk Assessment Manager in the review of the Corporation’s internal control over financial reporting. | | | (5) | | Chief Accounting Officer is responsible for the development and implementation of the Corporation’s accounting policies and practices and the review and monitoring of critical accounts and transactions to ensure that they are managed in accordance with GAAP and applicable regulatory requirements. |
Other Officers In addition to a centralized Enterprise Risk Management function, certain lines of business and corporate functions have their own Risk Managers and support staff. The Risk Managers, while reporting directly within their respective line of business or function, facilitate communications with the Corporation’s risk functions and work in partnership with the CRO and CFO to ensure alignment with sound risk management practices and expedite the implementation of the enterprise risk management framework and policies. 107
Liquidity and Capital Adequacy, Interest Rate Risk, Credit Risk, Operational, Legal and Regulatory Risk Management The following discussion highlights First BanCorp’s adopted policies and procedures for liquidity risk, interest rate risk, credit risk, operational risk, legal and regulatory risk. 111
Liquidity Risk and Capital Adequacy Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs for liquidity and accommodate fluctuations in asset and liability levels due to changes in the Corporation’s business operations or unanticipated events. The Corporation manages liquidity at two levels. The first is the liquidity of the parent company, which is the holding company that owns the banking and non-banking subsidiaries. The second is the liquidity of the banking subsidiary. As of December 31, 2010, FirstBank could not pay any dividend to the parent company except upon receipt of prior approval by the FED. The Asset and Liability Committee of the Board of Directors is responsible for establishing the Corporation’s liquidity policy as well as approving operating and contingency procedures, and monitoring liquidity on an ongoing basis. The MIALCO, using measures of liquidity developed by management, which involve the use of several assumptions, reviews the Corporation’s liquidity position on a monthly basis. The MIALCO oversees liquidity management, interest rate risk and other related matters. The MIALCO, which reports to the Board of Directors’ Asset and Liability Committee, is composed of senior management officers, including the Chief Executive Officer, the Chief Financial Officer, the Chief Risk Officer, the Wholesale Banking Executive, the Retail Financial Services & Strategic Planning Director, the Risk Manager of the Treasury and Investments Division, the Asset/Liability Manager, and the Treasurer. The Treasury and Investments Division is responsible for planning and executing the Corporation’s funding activities and strategy; monitorsmonitoring liquidity availability on a daily basis and reviewsreviewing liquidity measures on a weekly basis. The Treasury and Investments Accounting and Operations area of the Comptroller’s Department is responsible for calculating the liquidity measurements used by the Treasury and Investment Division to review the Corporation’s daily and weekly liquidity position.position and on a monthly basis, the Asset/Liability Manager estimates the liquidity gap for longer periods. In order to ensure adequate liquidity through the full range of potential operating environments and market conditions, the Corporation conducts its liquidity management and business activities in a manner that will preserve and enhance funding stability, flexibility and diversity. Key components of this operating strategy include a strong focus on the continued development of customer-based funding, the maintenance of direct relationships with wholesale market funding providers, and the maintenance of the ability to liquidate certain assets when, and if, requirements warrant. The Corporation develops and maintains contingency funding plans. These plans evaluate the Corporation’s liquidity position under various operating circumstances and allow the Corporation to ensure that it will be able to operate through periods of stress when access to normal sources of fundingfunds is constrained. The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, outline actions and procedures for effectively managing through a difficult period, and define roles and responsibilities. In the Contingency Funding Plan, the Corporation stresses the balance sheet and the liquidity position to critical levels that imply difficulties in getting new funds or even maintaining its current funding position, thereby ensuring the ability to honor its commitments, and establishing liquidity triggers monitored by the MIALCO in order to maintain the ordinary funding of the banking business. Three different scenarios are defined in the Contingency Funding Plan: local market event, credit rating downgrade, and a concentration event. They are reviewed and approved annually by the Board of Directors’ Asset and Liability Committee. The Corporation manages its liquidity in a proactive manner, and maintains an adequatea sound liquidity position. Multiple measures are utilized to monitor the Corporation’s liquidity position, including basic surplus and volatile liabilities measures. Among the actions taken in recent months to bolster the liquidity position and to safeguard the Corporation’s access to credit was the posting of additional collateral to the FHLB, thereby increasing borrowing capacity. The Corporation has also maintained the basic surplus (cash, short-term assets minus short-term liabilities, and secured lines of credit) well in excess of the self-imposed minimum limit of 5% of total assets. As of December 31, 2009,2010, the estimated basic surplus ratio ofwas approximately 8.6% included unpledged11%, including un-pledged investment securities, FHLB lines of credit, and cash. AsAt the end of December 31, 2009,the year 2010, the Corporation had $378$453 million available for additional credit on the FHLB linesline of credit. Unpledged liquid securities as of December 31, 20092010 mainly consisted of fixed-rate MBS 108
and U.S. agency debentures totaling approximately $646.9$895 million. The Corporation does not rely on uncommitted inter-bank lines of credit (federal funds lines) to fund its operations and does not include them in the 112
basic surplus computation. As of December 31, 2010, the holding company had $42.4 million of cash and cash equivalents. Cash and cash equivalents at the Bank as of December 31, 2010 were approximately $370.3 million. The Bank has $100 million, $286 million and $7.7 million, in repurchase agreements, FHLB advances and notes payable, respectively, maturing in 2011. In addition, it had $6.3 billion in brokered deposits as of December 31, 2010 of which $3.0 billion mature during 2011. Liquidity at the bank level is highly dependent on bank deposits, which fund 77.71% of the Bank’s assets (or 37.55% excluding brokered CDs). The Corporation has continued to issue brokered CDs pursuant to temporary approvals received from the FDIC to renew or roll over certain amounts of brokered CDs through June 30, 2011. Management cannot be certain it will continue to obtain waivers from the restrictions to issue brokered CDs under the Order to meet its obligations and execute its business plans. Sources of Funding The Corporation utilizes different sources of funding to help ensure that adequate levels of liquidity are available when needed. Diversification of funding sources is of great importance to protect the Corporation’s liquidity from market disruptions. The principal sources of short-term funds are deposits, including brokered CDs, securities sold under agreements to repurchase, and lines of credit with the FHLB and the FED.FHLB. The Asset Liability Committee of the Board of Directors reviews credit availability on a regular basis. The Corporation has also securitized and sold mortgage loans as a supplementary source of funding. CommercialIssuances of commercial paper hashave also in the past provided additional funding. Long-term funding has also been obtained through the issuance of notes and, to a lesser extent, long-term brokered CDs. The cost of these different alternatives, and interest rate risk management strategies, among other things, is taken into consideration. The Corporation is in the process of deleveraging its balance sheet by reducing the amounts of brokered CDs and, during 2010, it repaid the remaining balance of $900 million in FED advances outstanding as of December 31, 2009. The reductions in brokered CDs are consistent with the requirements of the Order that preclude the issuance of brokered CDs without FDIC approval and require a plan to reduce the amount of brokered CDs. The reductions in brokered CDs and FED advances are being partly offset by increases in core deposits. Brokered CDs decreased $1.3 billion to $6.3 billion as of December 31, 2010 from $7.6 billion as of December 31, 2009. At the same time, as the Corporation focuses on reducing its reliance on brokered deposits, it is seeking to add core deposits. The Corporation continues to have the support of creditors, including repurchase agreements counterparties, the FHLB, and other agents such as wholesale funding brokers. While liquidity is an ongoing challenge for all financial institutions, management believes that the Corporation’s available borrowing capacity and efforts to grow deposits will be adequate to provide the necessary funding for the 2011 business plans. Nevertheless, management’s alternative capital preservation strategies can be implemented should adverse liquidity conditions arise. Refer to “Capital” discussion below for additional information about capital raising efforts that would impact capital and liquidity levels. 113
The Corporation’s principal sources of funding are: Deposits The following table presents the composition of total deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted-Average | | | | | Weighted-Average | | | | | | Rate as of | | As of December 31, | | | Rate as of | | As of December 31, | | | | December 31, 2009 | | 2009 | | 2008 | | 2007 | | | December 31, 2010 | | 2010 | | 2009 | | 2008 | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Savings accounts | | | 1.68 | % | | $ | 1,774,273 | | $ | 1,288,179 | | $ | 1,036,662 | | | | 1.31% | | | $ | 1,938,475 | | $ | 1,761,646 | | $ | 1,288,179 | | Interest-bearing checking accounts | | | 1.75 | % | | 985,470 | | 726,731 | | 518,570 | | | | 1.54% | | | 1,012,009 | | 998,097 | | 726,731 | | Certificates of deposit | | | 2.17 | % | | 9,212,282 | | 10,416,592 | | 8,857,405 | | | | 1.94% | | | 8,440,574 | | 9,212,282 | | 10,416,592 | | | | | | | | | | | | | | | | | Interest-bearing deposits | | | 2.06 | % | | 11,972,025 | | 12,431,502 | | 10,412,637 | | | | 1.80% | | | 11,391,058 | | 11,972,025 | | 12,431,502 | | Non-interest-bearing deposits | | 697,022 | | 625,928 | | 621,884 | | | 668,052 | | 697,022 | | 625,928 | | | | | | | | | | | | | | | | | Total | | $ | 12,669,047 | | $ | 13,057,430 | | $ | 11,034,521 | | | $ | 12,059,110 | | $ | 12,669,047 | | $ | 13,057,430 | | | | | | | | | | | | | | | | | | | | Interest-bearing deposits: | | | Average balance outstanding | | $ | 11,387,958 | | $ | 11,282,353 | | $ | 10,755,719 | | | $ | 11,933,822 | | $ | 11,387,958 | | $ | 11,282,353 | | | | | Non-interest-bearing deposits: | | | Average balance outstanding | | $ | 715,982 | | $ | 682,496 | | $ | 563,990 | | | $ | 727,381 | | $ | 715,982 | | $ | 682,496 | | | | | Weighted average rate during the period on interest-bearing deposits(1) | | | 2.79 | % | | | 3.75 | % | | | 4.88 | % | | | 2.08 | % | | | 2.79 | % | | | 3.75 | % |
| | | (1) | | Excludes changes in fair value of callable brokered CDs measured at fair value and changes in the fair value of derivatives that economically hedge brokered CDs . |
Brokered CDs— A large portion of the Corporation’s funding ishas been retail brokered CDs issued by the Bank subsidiary, FirstBank Puerto Rico.FirstBank. Total brokered CDs decreased from $8.4$7.6 billion at year end 2008December 31, 2009 to $7.6$6.3 billion as of December 31, 2009.2010. Although all the regulatory capital ratios exceeded the established “well capitalized” levels at December 31, 2010, because of the Order with the FDIC, FirstBank cannot be treated as a “well capitalized” institution under regulatory guidance and cannot replace maturing brokered CDs without the prior approval of the FDIC. Since the issuance of the Order, the FDIC has granted the Bank temporary waivers to enable it to continue accessing the brokered deposit market through June 30, 2011. The Bank will request approvals for future periods. The Corporation has been partly refinancingusing proceeds from repayments and sales of loans and investments to pay down maturing borrowings, including brokered CDs that matured or were called during 2009 with alternate sources of funding at a lower cost.CDs. Also, the Corporation shifted the funding emphasis to retailsuccessfully implemented its core deposit growth strategy that resulted in an increase of $669.6 million, or 14%, in core deposits to reduce reliance onduring 2010. Core deposits exclude brokered CDs.deposits and public funds. In the event that the Corporation’s Bank subsidiary falls below the ratios of a well-capitalized institution, it faces the risk of not being able to replace funding through this source. Only a well capitalized insured depository institution is allowed to solicit and accept, renew or roll over any brokered deposit without restriction. The Bank currently complies and exceeds the minimum requirements of ratios for a “well-capitalized” institution. As of December 31, 2009, the Bank’s total and Tier I capital exceed by $410 million and $814 million, respectively, the minimum well-capitalized levels. The average remaining term to maturity of the retail brokered CDs outstanding as of
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December 31, 20092010 is approximately 1 year.1.3 years. Approximately 2%4% of the principal value of these certificates is callable at the Corporation’s option. The use of brokered CDs has been particularly important for the growth of the Corporation. The Corporation encounters intense competition in attracting and retaining regular retail deposits in Puerto Rico. The brokered CDs market is very competitive and liquid, and the Corporation has been able to obtain substantial amounts of funding in short periods of time. This strategy enhanceshas enhanced the Corporation’s liquidity position, since the brokered CDs are insured by the FDIC up to regulatory limits, and can be 114
obtained faster and cheaper compared tothan regular retail deposits. The brokered CDs market continuesShould the FDIC fail to be a reliable source to fulfill the Corporation’s needsapprove waivers for the issuancerenewal of new and replacement transactions. Forbrokered CD’s, the year ended December 31, 2009,Corporation would accelerate the deleveraging through a systematic disposition of assets to meet its liquidity needs. During 2010, the Corporation issued $8.3$3.9 billion in brokered CDs (including rolloversto renew maturing brokered CDs having an average coupon of short-term broker CDs and replacement1.22% (all-in cost of 1.53%). Management believes it will continue to obtain waivers from the restrictions in the issuance of brokered CDs called) at an average rate of 0.97% comparedunder the Order to $9.8 billion at an average rate of 3.64% issued in 2008.meet its obligations and execute its business plans. The following table presents a maturity summary of brokered and retail CDs with denominations of $100,000 or higher as of December 31, 2009.2010. | | | | | | | | | | | (In thousands) | | | (In thousands) | | Three months or less | | $ | 1,958,454 | | | $ | 858,478 | | Over three months to six months | | 1,366,163 | | | 697,418 | | Over six months to one year | | 2,258,717 | | | 2,220,987 | | Over one year | | 2,969,471 | | | 3,753,870 | | | | | | | | | Total | | $ | 8,552,805 | | | $ | 7,530,753 | | | | | | | | |
Certificates of deposit in denominations of $100,000 or higher include brokered CDs of $7.6$6.3 billion issued to deposit brokers in the form of large ($100,000 or more) certificates of deposit that are generally participated out by brokers in shares of less than $100,000 and are therefore insured by the FDIC. Certificates of deposit with denominations of $100,000 or higher also include $25.6$26.3 million of deposits through the Certificate of Deposit Account Registry Service (CDARS). In an effort to meet customer needs and provide its customers with the best products and services available, the Corporation’s bank subsidiary, FirstBank Puerto Rico, has joined a program that gives depositors the opportunity to insure their money beyond the standard FDIC coverage. CDARS can offer customers access to FDIC insurance coverage of up to $50 million,beyond the $250 thousand per account without limit, by placing deposits in multiple banks through a single bank gateway, when they enter into the CDARS Deposit Placement Agreement, while earning attractive returns on their deposits. Retail deposits —The Corporation’s deposit products also include regular savings accounts, demand deposit accounts, money market accounts and retail CDs. Total deposits, excluding brokered CDs, increased by $480$692.1 million to $5.8 billion from the balance of $5.1 billion as of December 31, 2008,2009, reflecting increases in core-deposit products such as money market, savings, retail CD and interest-bearing checking accounts. A significant portion of the increase was related to deposits in Puerto Rico, the Corporation’s primary market, reflecting successful marketing campaigns and cross-selling initiatives. The increase was also related to increases in money market accounts and retail CDs in Florida, as management shifted the funding emphasis to retail deposits to reduce reliance on brokered CDs.Florida. Successful marketing campaigns and attractive rates were the main reasonsreason for the increase in Florida. Even thought rates offered in Florida were higher for this product, rates were lower than those offered in Puerto Rico. Refer to Note 1314 in the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K for further details. 110
Refer to the “Net Interest Income” discussion above for information about average balances of interest-bearing deposits, and the average interest rate paid on deposits for the years ended December 31, 2010, 2009 and 2008.
Borrowings As of December 31, 2009,2010, total borrowings amounted to $5.2$2.3 billion as compared to $4.7$5.2 billion and $4.5$4.7 billion as of December 31, 2009 and 2008, and 2007, respectively. 115
The following table presents the composition of total borrowings as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted Average | | | | | Weighted Average | | | | | | Rate as of | | As of December 31, | | | Rate as of | | As of December 31, | | | | December 31, 2009 | | 2009 | | 2008 | | 2007 | | | December 31, 2010 | | 2010 | | 2009 | | 2008 | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Federal funds purchased and securities sold under agreements to repurchase | | | 3.34% | | | $ | 3,076,631 | | $ | 3,421,042 | | $ | 3,094,646 | | | 3.74% | | $ | 1,400,000 | | $ | 3,076,631 | | $ | 3,421,042 | | Loans payable (1) | | | 1.00% | | | 900,000 | | — | | — | | | — | | — | | 900,000 | | — | | Advances from FHLB | | | 3.21% | | | 978,440 | | 1,060,440 | | 1,103,000 | | | 3.33% | | 653,440 | | 978,440 | | 1,060,440 | | Notes payable | | | 4.63% | | | 27,117 | | 23,274 | | 30,543 | | | 5.11% | | 26,449 | | 27,117 | | 23,274 | | Other borrowings | | | 2.86% | | | 231,959 | | 231,914 | | 231,817 | | | 2.91% | | 231,959 | | 231,959 | | 231,914 | | | | | | | | | | | | | | | | | Total (2) | | $ | 5,214,147 | | $ | 4,736,670 | | $ | 4,460,006 | | | $ | 2,311,848 | | $ | 5,214,147 | | $ | 4,736,670 | | | | | | | | | | | | | | | | | | | Weighted-average rate during the period | | | 2.79 | % | | | 3.78 | % | | | 5.06 | % | | | 3.55 | % | | | 2.79 | % | | | 3.78 | % |
| | | (1) | | Advances from the FED under the FED Discount Window Program. | | (2) | | Includes $3.0 billion$644.5 million as of December 31, 20092010 that are tied to variable rates or matured within a year. |
Securities sold under agreements to repurchase—- The Corporation’s investment portfolio is substantially funded with repurchase agreements. Securities sold under repurchase agreements were $1.4 billion as of December 31, 2010, compared with $3.1 billion atas of December 31, 2009, compared with $3.42009. The decrease relates to the Corporation’s balance sheet repositioning strategies as approximately $1.0 billion at December 31, 2008.of repurchase agreements were early terminated and to the Corporation’s decision to deleverage its balance sheet by paying down maturing short-term repurchase agreements. One of the Corporation’s strategies ishas been the use of structured repurchase agreements and long-term repurchase agreements to reduce exposure to interest rate risk by lengthening the final maturities of its liabilities while keeping funding costcosts at reasonable levels. OfAll of the total$1.4 billion of $3.1 billion repurchase agreements outstanding as of December 31, 2009, approximately $2.4 billion2010 consist of structured repo’s and $500 million of long-term repos.repurchase agreements. The access to this type of funding was affected by the liquidity turmoil in the financial markets witnessed in the second half of 2008 and in 2009. Certain counterparties haveare still not been willing to enter into additional repurchase agreements and the capacity to extend the term of maturing repurchase agreements has also been reduced, however,agreements. Nevertheless, in addition to short-term repos, the Corporation has been able to keepmaintain access to credit by using cost effectivecost-effective sources such as FED and FHLB advances. Refer to Note 1516 in the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K for further details about repurchase agreements outstanding by counterparty and maturities. Under the Corporation’s repurchase agreements, as is the case with derivative contracts, the Corporation is required to pledge cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines due to changes in interest rates, a liquidity crisis or any other factor, the Corporation will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. Given the quality of the collateral pledged, recently the Corporation has not experienced significant margin calls from counterparties arising from credit-quality-related write-downs in valuations withand, as of December 31, 2010, it had only $0.95$0.45 million of cash equivalent instruments deposited in connection with collateralized interest rate swap agreements. Advances from the FHLB —The Corporation’s Bank subsidiary is a member of the FHLB system and obtains advances to fund its operations under a collateral agreement with the FHLB that requires the Bank to maintain minimum qualifying mortgages as collateral for advances taken. As of December 31, 20092010 and December 31, 2008,2009, the outstanding balance of FHLB advances was $653.4 million and $978.4 million, and $1.1 billion, respectively. Approximately $653.4$367.4 million of outstanding advances from the FHLB has maturities of over one year. As part of its precautionary initiatives to safeguard access to credit and theobtain low level of interest rates, the Corporation has been increasing its pledging of assets towith the FHLB while at the same time the FHLB has been revising theirits credit guidelines and “haircuts” in the computation of the availability of credit lines. FED Discount window —During 2009, the FED encouraged banks to borrow from the Discount Window in an effort to restore liquidity and calm to the credit markets. As market conditions improved, participating 111116
FED Discount window —FED initiativesfinancial institutions have been asked to ease the credit crisis have included cutsshift to the discount rate, which was lowered from 4.75% to 0.50% through eight separate actions since December 2007,regular funding sources, and adjustments to previous practices to facilitate financing for longer periods. That made the FED Discount Window a viable source of funding given market conditions in 2009. As of December 31, 2009, the Corporation had $900 million outstanding in short-termrepay borrowings such as advances from the FED Discount Window and had collateral pledged related to this credit facility amounted to $1.2 billion, mainly commercial, consumer and mortgage loan.
Credit Lines— TheWindow. During the first half of 2010, the Corporation maintains unsecured and un-committed linesrepaid the remaining balance of credit with other banks. As$900 million in FED advances outstanding as of December 31, 2009, the Corporation’s total unused lines of credit with other banks amounted to $165 million. The Corporation has not used these lines of credit to fund its operations.2009.
Though currently not in use, other sources of short-term funding for the Corporation include commercial paper and federal funds purchased. Furthermore, in previous years the Corporation has entered into several financing transactions to diversify its funding sources, including the issuance of notes payable and Junior subordinated debentures as part of its longer-term liquidity and capital management activities. No assurance can be given that these sources of liquidity will be available and, if available, will be on comparable terms. The Corporation continues to evaluate its financing options, including available options resulting from recent federal government initiatives to deal with the crisis in the financial markets. In 2004, FBP Statutory Trust I, a statutory trust that is wholly owned by the Corporation and not consolidated in the Corporation’s financial statements, sold to institutional investors $100 million of its variable rate trust preferred securities. The proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $3.1 million of FBP Statutory Trust I variable rate common securities, were used by FBP Statutory Trust I to purchase $103.1 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. Also in 2004, FBP Statutory Trust II, a statutory trust that is wholly-owned by the Corporation and not consolidated in the Corporation’s financial statements, sold to institutional investors $125 million of its variable rate trust preferred securities. The proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $3.9 million of FBP Statutory Trust II variable rate common securities, were used by FBP Statutory Trust II to purchase $128.9 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. The trust preferred debentures are presented in the Corporation’s Consolidated Statementconsolidated statement of Financial Conditionfinancial condition as Other Borrowings, net of related issuance costs. The variable rate trust preferred securities are fully and unconditionally guaranteed by the Corporation. The $100 million Junior Subordinated Deferrable Debentures issued by the Corporation in April 2004 and the $125 million issued in September 2004 mature on September 17, 2034 and September 20, 2034, respectively; however, under certain circumstances, the maturity of Junior Subordinated Debentures may be shortened (such shortening would result in a mandatory redemption of the variable rate trust preferred securities). The trust preferred securities, subject to certain limitations, qualify as Tier I regulatory capital under current Federal Reserve rules and regulations. With respect to our $231.9 million of outstanding subordinated debentures, we have provided, within the time frame prescribed by the indentures governing the subordinated debentures, a notice to the trustees of the subordinated debentures of our election to extend the interest payments on the debentures. Under the indentures, we have the right, from time to time, and without causing an event of default, to defer payments of interest on the subordinated debentures by extending the interest payment period at any time and from time to time during the term of the subordinated debentures for up to twenty consecutive quarterly periods. We have elected to defer the interest payments that were due in September and December 2010 and in March 2011 because the Federal Reserve advised us that it would not provide its approval for the payment of interest on these subordinated debentures. The Corporation’s principal uses of funds are the origination of loans and the repayment of maturing deposits and borrowings. Over the last five years, theThe Corporation has committed substantial resources to its mortgage banking subsidiary, FirstMortgage Inc. As a result, the ratio of residential real estate loans as a percentage of total loans receivable havehas increased over time from 14% at December 31, 2004 to 26%29% at December 31, 2009.2010. Commensurate with the increase in its mortgage banking activities, the Corporation has also invested in technology and personnel to enhance the Corporation’s secondary mortgage market capabilities. The enhanced capabilities improve the Corporation’s liquidity profile as they allow the Corporation to derive liquidity, if needed, from the sale of mortgage loans in the secondary market. The U.S. (including Puerto Rico) secondary mortgage market is still highly liquid in large part because of the sale or guarantee programs of the FHA, VA, HUD, FNMA and FHLMC. In December 2008, theThe Corporation obtained from GNMA Commitment Authority to issue GNMA mortgage-backed securities. Undersecurities from GNMA and, under this program, during 2009, the Corporation completed the securitization of approximately $305.4$217.3 million of FHA/VA mortgage loans into GNMA MBS.MBS during 2010. Any regulatory actions affecting GNMA, FNMA or FHLMC could adversely affect the secondary mortgage market. 112117
Impact of Credit Ratings on Access to Liquidity and Valuation of Liabilities The Corporation’s credit as a long-term issuer is currently rated BCCC+ with negative outlook by Standard & Poor’s (“S&P”) and B-CC by Fitch Ratings Limited (“Fitch”); both with negative outlook. . At the FirstBank subsidiary level, long-term senior debt isissuer ratings are currently rated B1B3 by Moody’s Investor Service (“Moodys”Moody’s”), foursix notches below their definition of investment grade; BCCC+ with negative outlook by S&P and B by Fitch, both fiveseven notches below their definition of investment grade.grade, and CC by Fitch, eight notches below their definition of investment grade.. During 2010, the Corporation suffered credit rating downgrades from S&P (from B to CCC+), and Fitch (from B- to CC) rating services. The outlookFirstBank subsidiary also experienced credit rating downgrades in 2010: Moody’s from B1 to B3, S&P from B to CCC+, and Fitch from B to CC. Furthermore, in June 2010 Moody’s placed the Bank on the Bank’s credit ratings from the three rating agencies is negative. “Credit Watch Negative”. The Corporation does not have any outstanding debt or derivative agreements that would be affected by the recent credit downgrades. Furthermore, given our non-reliance on corporate debt or other instruments directly linked in terms of pricing or volume to credit ratings, the liquidity of the Corporation so far has not been affected in any material way by the downgrades. The Corporation’s ability to access new non-deposit sources of funding, however, could be adversely affected by these credit ratings and any additional downgrades. The Corporation’s liquidity is contingent upon its ability to obtain new external sources of funding to finance its operations. AnyThe Corporation’s current credit ratings and any further downgrades in credit ratings can hinder the Corporation’s access to external funding and/or cause external funding to be more expensive, which could in turn adversely affect the results of operations. Also, any changechanges in credit ratings may further affect the fair value of certain liabilities and unsecured derivatives that consider the Corporation’s own credit risk as part of the valuation. Cash Flows Cash and cash equivalents were $704.1$370.3 million and $405.7$704.1 million as of December 31, 20092010 and 2008,2009, respectively. These balances decreased by $333.8 million and increased by $298.4 million and $26.8 million from December 31, 20082009 and 2007,2008, respectively. The following discussion highlights the major activities and transactions that affected the Corporation’s cash flows during 20092010 and 2008.2009. Cash Flows from Operating Activities First BanCorp’s operating assets and liabilities vary significantly in the normal course of business due to the amount and timing of cash flows. Management believes cash flows from operations, available cash balances and the Corporation’s ability to generate cash through short- and long-term borrowings will be sufficient to fund the Corporation’s operating liquidity needs. For the year ended December 31, 2010, net cash provided by operating activities was $237.2 million. Net cash generated from operating activities was higher than net loss reported largely as a result of adjustments for non-cash operating items such as the provision for loan and lease losses partially offset by adjustments to net income from the gain on sale of investments. For the year ended December 31, 2009, net cash provided by operating activities was $243.2 million. Net cash generated from operating activities was higher than net loss reported largely as a result of adjustments for operating items such as the provision for loan and lease losses and non-cash charges recorded to increase the Corporation’s valuation allowance for deferred tax assets. For the year ended December 31, 2008, net cash provided by operating activities was $175.9 million, which was higher than net income, largely as a result of adjustments for operating items such as the provision for loan and lease losses and depreciation and amortization. Cash Flows from Investing Activities The Corporation’s investing activities primarily includerelate to originating loans to be held to maturity and itspurchasing, selling and repayments of available-for-sale and held-to-maturity investment portfolios.securities. For the year ended December 31, 2010, net cash provided by investing activities was $3.0 billion, primarily reflecting proceeds from loans, as well as proceeds from securities sold or called during 2010 and MBS prepayments. Partially offsetting these sources of cash were cash used for loan origination disbursements and certain purchases of available-for-sale securities, as discussed above. 118
For the year ended December 31, 2009, net cash of $381.8 million was used in investing activities, primarily for loan origination disbursements and purchases of available-for-sale investment securities to mitigate in part the impact of the call of investments securities, mainly U.S. Agency debentures, called by counterparties prior to maturity and MBS prepayments. Partially offsetting these uses of cash were proceeds from sales and maturities of available-for-sale securities as well as proceeds from held-to-maturity securities called during 2009, and proceeds from loans and from MBS repayments. 113
For the year ended December 31, 2008, net cash used by investing activities was $2.3 billion, primarily for purchases of available-for-sale investment securities as market conditions presented an opportunity for the Corporation to obtain attractive yields, improve its net interest margin and mitigate the impact of investment securities, mainly U.S. Agency debentures, called by counterparties prior to maturity, for loan originations disbursements and for the purchase of a $218 million auto loan portfolio. Partially offsetting these uses of cash were proceeds from sales and maturities of available-for-sale securities as well as proceeds from held-to-maturity securities called during 2008; proceeds from sales of loans and the gain on the mandatory redemption of part of the Corporation’s investment in VISA, Inc., which completed its initial public offering (IPO) in March 2008.
Cash Flows from Financing Activities The Corporation’s financing activities include primarily include the receipt of deposits and issuance of brokered CDs, the issuance and paymentsrepayments of long-term debt, the issuance of equity instruments and activities related to its short-term funding. In addition, the Corporation paid monthly dividends on its preferred stock and quarterly dividends on its common stock until it announced the suspension of dividends beginning in August 2009. During 2010, net cash used in financing activities was $3.6 billion due to the Corporation’s balance sheet repositioning strategies and deleveraging of the balance sheet, including the early termination of repurchase agreements and related costs and pay down of maturing repurchase agreements as well as advances from the FHLB and the FED and brokered CDs. Partially offsetting these cash reductions was the growth of the core deposit base. For the year ended December 31, 2009, net cash provided by financing activities was $436.9 million due to the investment of $400 million by the U.S. Treasury in preferred stock of the Corporation through the U.S. Treasury TARP Capital Purchase Program and the use of the FED Discount Window Program as a low-cost funding source to finance the Corporation’s investing activities. Partially offsetting these cash proceeds was the payment of cash dividends and pay down of maturing borrowings, in particular brokered CDs and repurchase agreements. For the year ended December 31, 2008, net cash used in financing activities was $2.1 billion due to increases in its deposit base, including brokered CDs to finance lending activities and increase liquidity levels and increases in securities sold under repurchase agreements to finance the Corporation’s securities inventory. Partially offsetting these cash proceeds was the payment of cash dividends.
Capital The Corporation’s stockholders’ equity amounted to $1.6$1.1 billion as of December 31, 2009, an increase2010, a decrease of $50.9$541.1 million compared to the balance as of December 31, 2008,2009, driven by the $400 million investment by the United States Department of the Treasury (the “U.S. Treasury”) in preferred stock of the Corporation through the U.S. Treasury Troubled Asset Relief Program (TARP) Capital Purchase Program. This was partially offset by the net loss of $275.2$524.3 million recorded for 2009, dividends paid amounting to $43.12010, a decrease of $8.8 million in 2009 ($13.0 million in common stock, or $0.14 per share, and $30.1 million in preferred stock) and a $30.9 million decrease inaccumulated other comprehensive income mainly dueand $8 million of issue costs related to a noncredit-related impairment of $31.7 millionthe Exchange Offer. Based on private label MBS. the Agreement with the FED, currently neither First BanCorp, nor FirstBank, is permitted to pay dividends on capital securities without prior approval. For the year ended December 31, 2009, the Corporation declared in aggregate cash dividends of $0.14$2.10 per common share $0.28and $4.20 for 2008, and $0.28 for 2007.2008. Total cash dividends paid on common shares amounted to $13.0 million for 2009 and $25.9 million for 2008,2008. Dividends declared and $24.6 million for 2007. Dividends declaredpaid on preferred stock amounted to $30.1 million in 2009 and $40.3 million in 2008 and 2007. 2008. On July 30, 2009,20, 2010, we exchanged the Corporation announced400,000 shares of the suspension ofSeries F Preferred Stock, that we previously had sold to the U.S. Treasury, plus accrued dividends on commonthe Series F Preferred Stock, for 424,174 shares of the Series G Preferred Stock. Effective June 2, 2010, FirstBank, by and allthrough its outstanding seriesBoard of preferred stock, includingDirectors, entered into the TARP preferred dividends. This suspension was effectiveOrder with the dividends forFDIC (see “Description of Business”). Although all the month of August 2009 onregulatory capital ratios exceeded the Corporation’s five outstanding series of non-cumulative preferred stock and the dividends for the Corporation’s outstanding Series F Cumulative Preferred Stock and the Corporation’s common stock. The Corporation took this prudent action to preserve capital, as the duration and depth of recessionary economic conditions is uncertain, and consistent with federal regulatory guidance. As ofestablished “well capitalized” levels at December 31, 2009, First BanCorp and2010, because of the Order with the FDIC, FirstBank Puerto Rico were in compliance with regulatory capital requirements that were applicable to themcannot be treated as a financial holding company and a state non-member bank, respectively (i.e., total capital and Tier 1 capital to risk-weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to average assets of at least 4%).“well capitalized” institution under regulatory guidance. Set forth below are First BanCorp’s, and FirstBank Puerto Rico’s regulatory capital ratios as of December 31, 20092010 and December 31, 2008,2009, based on existing Federal Reserveestablished FED and Federal Deposit Insurance CorporationFDIC guidelines. Effective July 1, the operations conducted by FirstBank Florida as a separate subsidiary were merged with and into FirstBank Puerto Rico, the Corporation’s main banking
| | | | | | | | | | | | | | | | | | | | | | | Banking Subsidiary | | | First | | | | | | To be well | | Consent Order | | | BanCorp | | FirstBank | | capitalized | | Requirements over time | As of December 31, 2010 | | | | | | | | | | Total capital (Total capital to risk-weighted assets) | | | 12.02 | % | | | 11.57 | % | | | 10.00 | % | | | 12.00 | % | Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) | | | 10.73 | % | | | 10.28 | % | | | 6.00 | % | | | 10.00 | % | Leverage ratio | | | 7.57 | % | | | 7.25 | % | | | 5.00 | % | | | 8.00 | % | | | | | | | | | | | | | | | | | | As of December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total capital (Total capital to risk-weighted assets) | | | 13.44 | % | | | 12.87 | % | | | 10.00 | % | | | 10.00 | % | Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) | | | 12.16 | % | | | 11.70 | % | | | 6.00 | % | | | 6.00 | % | Leverage ratio | | | 8.91 | % | | | 8.53 | % | | | 5.00 | % | | | 5.00 | % |
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subsidiary. As part of the Corporation’s strategic planning it was determined that business synergies would be achieved by merging FirstBank Florida with and into FirstBank Puerto Rico. This reorganization included the consolidation of FirstBank Puerto Rico’s loan production office with the former thrift banking operations of FirstBank Florida. For the last three years prior to July 1, the Corporation conducted dual banking operations in the Florida market. The consolidation of the former thrift banking operations with the loan production office resulted in FirstBank Puerto Rico having a more diversified and efficient banking operation in the form of a branch network in the Florida market. The merger allows the Florida operations to benefit by leveraging the capital position of FirstBank Puerto Rico and thereby provide them with the support necessary to grow in the Florida market.
| | | | | | | | | | | | | | | | | | | Banking Subsidiary | | | First | | | | | | To be well | | | BanCorp | | FirstBank | | capitalized | As of December 31, 2009 | | | | | | | Total capital (Total capital to risk-weighted assets) | | | 13.44 | % | | | 12.87 | % | | | 10.00 | % | Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) | | | 12.16 | % | | | 11.70 | % | | | 6.00 | % | Leverage ratio | | | 8.91 | % | | | 8.53 | % | | | 5.00 | % | | | | | | | | | | | | | | As of December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | Total capital (Total capital to risk-weighted assets) | | | 12.80 | % | | | 12.23 | % | | | 10.00 | % | Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) | | | 11.55 | % | | | 10.98 | % | | | 6.00 | % | Leverage ratio | | | 8.30 | % | | | 7.90 | % | | | 5.00 | % |
The increasedecrease in regulatory capital ratios is mainly related to the $400 million investmentnet loss reported for 2010 that was partially offset by the decrease in risk-weighted assets consistent with the Corporation’s decision to deleverage its balance sheet to preserve its capital position. Significant decreases in risk-weighted assets have been achieved mainly through the non renewal of commercial loans with moderate to high risk weightings, such as temporary loan facilities to the Puerto Rico government and others, and through the charge-offs of portions of loans deemed uncollectible. Also, a reduced volume of loan originations and sales of investments contributed to mitigate, to some extent, the effect of net losses on the capital ratios.
Capital Restructuring Initiatives The Corporation and FirstBank jointly submitted a Capital Plan to the FED and the FDIC in July 2010 and an updated Plan in March 2011. The primary objective of the Capital Plan is to improve the Corporation’s capital structure in order to 1) enhance its ability to operate in the current economic environment, 2) be in a position to continue executing business strategies and return to profitability and 3) achieve certain minimum capital ratios set forth in the FDIC Order over time. The minimum capital ratios established by the FDIC Order for the Bank are 8% for Leverage (Tier 1 Capital to Average Total Assets), 10% for Tier 1 Capital to Risk-Weighted Assets and 12% for Total Capital to Risk-Weighted Assets. In this respect, the Capital Plan identifies specific targeted Leverage, Tier 1 Capital to Risk-Weighted Assets and Total Capital to Risk-Weighted Assets ratios to be achieved by the Bank each calendar quarter until the aforementioned required capital levels are achieved. Although the regulatory capital ratios exceeded the required established minimum capital ratios for “well-capitalized” levels as of December 31, 2010, FirstBank cannot be treated as a “well capitalized” institution under regulatory guidance, while operating under the Order. The July 2010 Capital Plan sets forth the following capital restructuring initiatives as well as various deleveraging strategies: | 1. | | The issuance of shares of the Corporation’s common stock in exchange for the preferred stock held by the U.S. Treasury; | | | 2. | | The issuance of shares of the Corporation’s common stock in exchange for any and all of the Corporation’s outstanding Series A through E Preferred Stock; and | | | 3. | | A $500 million capital raise through the issuance of new common shares for cash. |
During 2010, the Corporation executed the following transactions as part of the implementation of its Capital Plan: | • | | On July 20, 2010, the Corporation issued $424.2 million Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series G in exchange of the $400 million of Fixed Rate Cumulative Perpetual Preferred Stock, Series F that the U.S. Treasury had acquired pursuant to the TARP Capital Purchase Program, and dividends accrued on such stock. Under the terms of the new Series G Preferred Stock, the Corporation obtained a right to compel the conversion of this stock into shares of the Corporation’s common stock, provided that the Corporation meets a number of conditions, including the raising of equity capital in an amount acceptable to the U.S. Treasury. | | | • | | On August 30, 2010, the Corporation completed its offer to issue shares of its common stock in exchange for its outstanding Series A through E Preferred Stock (the “Exchange Offer”), which resulted in the issuance of 15,134,347 new shares of common stock in exchange for 19,482,128 shares of preferred stock with an aggregate liquidation amount of $487 million, or 89% of the outstanding Series A through E preferred stock. | | | • | | On August 24, 2010, the Corporation obtained stockholders’ approval to increase the number of authorized shares of common stock from 750 million to 2 billion and decrease the par value of its common stock from $1.00 to $0.10 per share. |
These approvals and the issuance of common stock in exchange for Series A through E Preferred Stock satisfy all but one of the substantive conditions to the Corporation’s ability to compel the conversion of the 424,174 shares of the new Series G Preferred Stock. The other substantive condition to the Corporation’s ability to compel the conversion of the Series G Preferred Stock is the issuance of a minimum amount of additional capital, subject to terms, other than the price per share, reasonably acceptable to the U.S. Treasury in preferred stockits sole discretion. During the fourth quarter of the Corporation through2010, the U.S. Treasury TARP Capital Purchase Program. Referagreed to Note 23a reduction in the Corporation’s financial statements foramount of the year ended December 31, 2009 includedcapital raise required to satisfy 120
the remaining substantive condition to compel the conversion of the Series G preferred stock into shares of common stock from $500 million stated in Item 8 of this Form 10-K for additional information regarding this issuance. The funds were usedthe Capital Plan submitted to regulators in partJuly 2010 to strengthen the Corporation’s lending programs and ability to support growth strategies that are centered on customers’ needs, including programs to preserve home ownership. Together with private and public sector initiatives, the Corporation looks to support the local economy and the communities it serves during the current economic environment.$350 million. The Corporation is well-capitalized, having sound margins over minimum well-capitalized regulatory requirements. As of December 31, 2009, the total regulatory capital ratio is 13.4% and the Tier 1 capital ratio is 12.2%. This translates to approximately $492 million and $881 million of total capital and Tier 1 capital, respectively, in excessfirst two initiatives of the total capital and Tier 1 capital well capitalized requirements of 10% and 6%, respectively. A key priority forCapital Plan were designed to improve the Corporation is to maintain a sound capital position to absorb any potential future credit losses due to the distressed economic environment and to provide business expansion opportunities. The Corporation’s tangible common equity ratio was 3.20%and Tier 1 common to risk-weighted assets ratios, thus improving the Corporation’s ability to successfully raise additional capital through a sale of its common stock, which is the last component of the Capital Plan. The completion of the Exchange Offer and the issuance of the Series G Preferred Stock to the U.S. Treasury resulted in improvements in the Corporation’s Tangible and Tier 1 common equity ratios to 3.80% and 5.01%, respectively, as of December 31, 2009, compared to 4.87%2010 from 3.20% and 4.10%, respectively, as of December 31, 2008,2009.
In March 2011, the Corporation submitted an updated Capital Plan to the regulators (the “Updated Capital Plan”). The Updated Capital Plan contemplates the $350 million capital raise through the issuance of new common shares for cash, and other actions to further reduce the Corporation’s and the Tier 1 common equity toBank’s risk-weighted assets, ratiostrengthen their capital position and meet the minimum capital ratios required for the Bank under the Order. Among the strategies contemplated in the Updated Capital Plan are further reductions of the Corporation’s loan portfolio and investment portfolio. The Bank expects to be in compliance with the minimum capital ratios under the FDIC Order by June 30, 2011. If the Bank fails to achieve the capital ratios as provided, the FDIC Order provides that, within 45 days of December 31, 2009 was 4.10% comparedbeing out of compliance, the Bank would be required to 5.92% asincrease capital in an amount sufficient to comply with the capital ratios set forth in the approved Capital Plan, or submit to the regulators a contingency plan for the sale, merger, or liquidation of December 31, 2008.the institution in the event the primary sources of capital are not available. Thereafter the FDIC would determine whether and when to initiate an acceptable contingency plan. With respect to the capital raise efforts, the Corporation filed an amended registration statement for a proposed underwritten offering of its common stock with the SEC. The Corporation is working to complete a capital raise to ensure that the projected level of regulatory capital can support its balance sheet over the long-term. As part of the Corporation’s capital raising efforts, the Corporation has been engaged in conversations with a number of entities, including private equity firms. The issuance of additional equity securities in the public markets and other capital management or business strategies could depress the market price of our common stock and result in the dilution of our common stockholders. The tangible common equity ratio and tangible book value per common share are non-GAAP measures generally used by the financial analysts and investment bankerscommunity to evaluate capital adequacy. Tangible common equity is total equity less preferred equity, goodwill and core deposit intangibles. Tangible Assetsassets are total assets less goodwill and core deposit intangibles. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratiosRefer to compare the capital adequacy— Basis of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting methodPresentation — section below for mergers and acquisitions. Neither tangible common equity nor tangible assets or related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names. additional information. The following table is a reconciliation of the Corporation’s tangible common equity and tangible assets for the years ended December 31, 2010 and 2009, and December 31, 2008, respectively.respectively: 115121
| | | | | | | | | | | | | | | | | | | December 31, | | December 31, | | | December 31, | | December 31, | | (In thousands) | | 2009 | | 2008 | | | 2010 | | 2009 | | Total equity — GAAP | | $ | 1,599,063 | | $ | 1,548,117 | | | $ | 1,057,959 | | $ | 1,599,063 | | Preferred equity | | | (928,508 | ) | | | (550,100 | ) | | | (425,009 | ) | | | (928,508 | ) | Goodwill | | | (28,098 | ) | | | (28,098 | ) | | | (28,098 | ) | | | (28,098 | ) | Core deposit intangible | | | (16,600 | ) | | | (23,985 | ) | | | (14,043 | ) | | | (16,600 | ) | | | | | | | | | | | | | | | Tangible common equity | | $ | 625,857 | | $ | 945,934 | | | $ | 590,809 | | $ | 625,857 | | | | | | | | | | | | | | | | Total assets — GAAP | | $ | 19,628,448 | | $ | 19,491,268 | | | $ | 15,593,077 | | $ | 19,628,448 | | Goodwill | | | (28,098 | ) | | | (28,098 | ) | | | (28,098 | ) | | | (28,098 | ) | Core deposit intangible | | | (16,600 | ) | | | (23,985 | ) | | | (14,043 | ) | | | (16,600 | ) | | | | | | | | | | | | | | | Tangible assets | | $ | 19,583,750 | | $ | 19,439,185 | | | $ | 15,550,936 | | $ | 19,583,750 | | | | | | | | | | | | | Common shares outstanding | | 92,542 | | 92,546 | | | 21,304 | | 6,169 | | | | | | | | | | | | | | | | Tangible common equity ratio | | | 3.20 | % | | | 4.87 | % | | | 3.80 | % | | | 3.20 | % | Tangible book value per common share | | $ | 6.76 | | $ | 10.22 | | | $ | 27.73 | | $ | 101.44 | |
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The Tier 1 common equity to risk-weighted assets ratio is calculated by dividing (a) tierTier 1 capital less non-common elements including qualifying perpetual preferred stock and qualifying trust preferred securities, by (b) risk-weighted assets, which assets are calculated in accordance with applicable bank regulatory requirements. The Tier 1 common equity ratio is not required by GAAP or on a recurring basis by applicable bank regulatory requirements. However, this ratio was used by the Federal Reserve in connection with its stress test administeredRefer to the 19 largest U.S. bank holding companies under the Supervisory Capital Assessment Program (“SCAP”), the results— Basis of which were announced on May 7, 2009. Management is currently monitoring this ratio, along with the other ratios set forth in the table above, in evaluating the Corporation’s capital levels.Presentation — section below for additional information. The following table reconciles stockholders’ equity (GAAP) to Tier 1 common equity: | | | | | | | | | | | | | | | | | | | December 31, | | December 31, | | | December 31, | | December 31, | | (In thousands) | | 2009 | | 2008 | | | 2010 | | 2009 | | Total equity — GAAP | | $ | 1,599,063 | | $ | 1,548,117 | | | $ | 1,057,959 | | $ | 1,599,063 | | Qualifying preferred stock | | | (928,508 | ) | | | (550,100 | ) | | | (425,009 | ) | | | (928,508 | ) | Unrealized gain on available-for-sale securities (1) | | | (26,617 | ) | | | (57,389 | ) | | | (17,736 | ) | | | (26,617 | ) | Disallowed deferred tax asset (2) | | | (11,827 | ) | | | (69,810 | ) | | | (815 | ) | | | (11,827 | ) | Goodwill | | | (28,098 | ) | | | (28,098 | ) | | | (28,098 | ) | | | (28,098 | ) | Core deposit intangible | | | (16,600 | ) | | | (23,985 | ) | | | (14,043 | ) | | | (16,600 | ) | Cumulative change gain in fair value of liabilities acounted for under a fair value option | | | (1,535 | ) | | | (3,473 | ) | | | (2,185 | ) | | | (1,535 | ) | Other disallowed assets | | | (24 | ) | | | (508 | ) | | | (226 | ) | | | (24 | ) | | | | | | | | | | | | Tier 1 common equity | | $ | 585,854 | | $ | 814,754 | | | $ | 569,847 | | $ | 585,854 | | | | | | | | | | | | | | | | Total risk-weighted assets | | $ | 14,303,496 | | $ | 13,762,378 | | | $ | 11,372,856 | | $ | 14,303,496 | | | | | | | | | | | | | | | | Tier 1 common equity to risk-weighted assets ratio | | | 4.10 | % | | | 5.92 | % | | | 5.01 | % | | | 4.10 | % |
| | | 1- | | Tier 1 capital excludes net unrealized gains (losses) on available-for-sale debt securities and net unrealized gains on available-for-sale equity securities with readily determinable fair values, in accordance with regulatory risk-based capital guidelines. In arriving at Tier 1 capital, institutions are required to deduct net unrealized losses on available-for-sale equity securities with readily determinable fair values, net of tax. | | 2- | | Approximately $111$13 million of the Corporation’s net deferred tax assets at December 31, 20092010 (December 31, 20082009 — $58$111 million) were included without limitation in regulatory capital pursuant to the risk-based capital guidelines, while approximately $12$0.8 million of such assets at December 31, 20092010 (December 31, 20082009 — $70$12 million) exceeded the limitation imposed by these guidelines and, as “disallowed deferred tax assets,” were deducted in arriving at Tier 1 capital. According to regulatory capital guidelines, the deferred tax assets that are dependent upon future taxable income are limited for inclusion in Tier 1 capital to the lesser of: (i) the amount of such deferred tax asset that the entity expects to realize within one year of the calendar quarter end-date, based on its projected future taxable income for that year or (ii) 10% of the amount of the entity’s Tier 1 capital. Approximately $4$5 million of the Corporation’s other net deferred tax liability at December 31, 20092010 (December 31, 20082009 — $0)$5 million) represented primarily the deferred tax effects of unrealized gains and losses on available-for-sale debt securities, which are permitted to be excluded prior to deriving the amount of net deferred tax assets subject to limitation under the guidelines. |
If the Corporation needs to continue to recognize significant reserves and cannot complete a capital raise, FirstBank may not be able to comply with the minimum capital requirements included in the FDIC Order. Even if the Corporation’s efforts to sell equity are not successful during 2011, the Corporation’s deleverage and contingency strategies contemplated in its Updated Capital Plan would allow the Bank to attain and maintain minimum capital ratios required by the FDIC Order and consistent with the timeline in the Updated Capital Plan. The strategies incorporated into the Updated Capital Plan to meet the minimum capital ratios include the following: Strategies completed during the first quarter of 2011: | • | | Sale of performing first lien residential mortgage loans — The Bank sold approximately $235 million in mortgage loans to another financial institution during February 2011. Proceeds were used to reduce funding sources. | | | • | | Sale of investment securities — The Bank sold approximately $326 million in investment securities during March 2011. Proceeds were used, in part, to reduce funding sources and to support liquidity reserves. | | | • | | The Corporation contributed $22 million of capital to the Bank during March 2011. |
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Strategies completed or expected to be completed by June 30, 2011: | • | | Sale of investment securities — The Bank sold approximately $268 million in investment securities on April 8, 2011. | | | • | | Sale of performing first lien residential mortgage loans- The Bank has entered into a letter of intent to sell approximately $250 million in mortgage loans to another financial institution before June 30, 2011. | | | • | | Sale of participation in commercial loans — The Bank has commenced negotiations to sell approximately $150 million in loan participations to other financial institutions by June 30, 2011. | | | • | | The proceeds received from the above three transactions will be used to reduce funding sources. | | | • | | Non-renewal of maturing government credit facilities of approximately $110 million by June 30, 2011. |
Upon the successful completion of these actions, when combined with the achievement of operating results in line with management’s current expectations, management expects that the Corporation reportedand the Bank will attain the minimum capital ratios set forth in the Updated Capital Plan. However, no assurance can be given that it is planning to conduct an exchange offer under which itthe Corporation and the Bank will be offeringable to exchange newly issued shares of common stockachieve this. In the event the Corporation is unable to complete its capital raising efforts during 2011 and actual credit losses exceed amounts projected, the Updated Capital Plan includes additional actions designed to allow the Bank to maintain the minimum capital ratios for the issued and outstanding shares of publicly held Series A through E Noncumulative Perpetual Monthly Income Preferred Stock, subject to any necessary proration. The exchange offer will be conducted to improve its capital structure given the current economic conditions in the markets in which it operates and the evolving regulatory environment. Through the exchange offer, First BanCorp seeks to improve its tangible and Tier 1 common equity ratios. The Corporation expects to file a registration statement for the exchange offer shortly after the filing of this Form 10-K for fiscal year 2009. Completion of the exchange offer will be subject to certain conditions,foreseeable future, including the consent by common stockholderssale of the issuance of shares of the common stock pursuant to the exchange.additional assets. Off-Balance Sheet Arrangements In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. These transactions are designed to (1) meet the financial needs of customers, (2) manage the Corporation’s credit, market or liquidity risks, (3) diversify the Corporation’s funding sources and (4) optimize capital. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the financial needs of its customers. These financial instruments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval process used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. As of December 31, 2009,2010, commitments to extend credit and commercial and financial standby letters of credit amounted to approximately $1.5 billion$611.8 million and $103.9$156.0 million, respectively. Commitments to extend credit are agreements to lend to customers as long as the conditions established in the contract are met. Generally, the Corporation’s mortgage banking activities do not enter intoinvolve interest rate lock agreements with its prospective borrowers. 117
Contractual Obligations and Commitments The following table presents a detail of the maturities of the Corporation’s contractual obligations and commitments, which consist of CDs, long-term contractual debt obligations, operating leases, commitments to sell mortgage loans and commitments to extend credit: | | | | | | | | | | | | | | | | | | | | | | | | | | | Contractual Obligations and Commitments | | | | | | | | | | | As of December 31, 2009 | | | | | | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | After 5 years | | | | | | | | | | | | (In thousands) | | | | | | | | | | Contractual obligations: | | | | | | | | | | | | | | | | | | | | | Certificates of deposit (1) | | $ | 9,212,283 | | | $ | 6,041,065 | | | $ | 2,835,562 | | | $ | 321,850 | | | $ | 13,806 | | Loans payable | | | 900,000 | | | | 900,000 | | | | — | | | | — | | | | — | | Securities sold under agreements to repurchase | | | 3,076,631 | | | | 676,631 | | | | 1,600,000 | | | | 800,000 | | | | — | | Advances from FHLB | | | 978,440 | | | | 325,000 | | | | 445,000 | | | | 208,440 | | | | — | | Notes payable | | | 27,117 | | | | — | | | | 13,756 | | | | — | | | | 13,361 | | Other borrowings | | | 231,959 | | | | — | | | | — | | | | — | | | | 231,959 | | Operating leases | | | 63,795 | | | | 10,342 | | | | 14,362 | | | | 8,878 | | | | 30,213 | | Other contractual obligations | | | 10,387 | | | | 7,157 | | | | 3,130 | | | | 100 | | | | — | | | | | | | | | | | | | | | | | | Total contractual obligations | | $ | 14,500,612 | | | $ | 7,960,195 | | | $ | 4,911,810 | | | $ | 1,339,268 | | | $ | 289,339 | | | | | | | | | | | | | | | | | | Commitments to sell mortgage loans | | $ | 13,158 | | | $ | 13,158 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Standby letters of credit | | $ | 103,904 | | | $ | 103,904 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commitments to extend credit: | | | | | | | | | | | | | | | | | | | | | Lines of credit | | $ | 1,220,317 | | | $ | 1,220,317 | | | | | | | | | | | | | | Letters of credit | | | 48,944 | | | | 48,944 | | | | | | | | | | | | | | Commitments to originate loans | | | 255,598 | | | | 255,598 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total commercial commitments | | $ | 1,524,859 | | | $ | 1,524,859 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
124
| | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2010 | | | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | After 5 years | | | | (In thousands) | | Contractual obligations: | | | | | | | | | | | | | | | | | | | | | Certificates of deposit | | $ | 8,440,574 | | | $ | 4,356,662 | | | $ | 3,883,237 | | | $ | 186,820 | | | $ | 13,855 | | Securities sold under agreements to repurchase | | | 1,400,000 | | | | 100,000 | | | | 600,000 | | | | 700,000 | | | | — | | Advances from FHLB | | | 653,440 | | | | 286,000 | | | | 367,440 | | | | — | | | | — | | Notes payable | | | 26,449 | | | | 7,742 | | | | 6,865 | | | | — | | | | 11,842 | | Other borrowings | | | 231,959 | | | | — | | | | — | | | | — | | | | 231,959 | | Operating leases | | | 58,973 | | | | 8,600 | | | | 12,418 | | | | 8,009 | | | | 29,946 | | Other contractual obligations | | | 7,131 | | | | 4,776 | | | | 2,255 | | | | 100 | | | | — | | | | | | | | | | | | | | | | | | Total contractual obligations | | $ | 10,818,526 | | | $ | 4,763,780 | | | $ | 4,872,215 | | | $ | 894,929 | | | $ | 287,602 | | | | | | | | | | | | | | | | | | Commitments to sell mortgage loans | | $ | 92,147 | | | $ | 92,147 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Standby letters of credit | | $ | 84,338 | | | $ | 84,338 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commitments to extend credit: | | | | | | | | | | | | | | | | | | | | | Lines of credit | | $ | 422,401 | | | $ | 422,401 | | | | | | | | | | | | | | Letters of credit | | | 71,641 | | | | 71,641 | | | | | | | | | | | | | | Commitments to originate loans | | | 189,437 | | | | 139,437 | | | | 50,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total commercial commitments | | $ | 683,479 | | | $ | 633,479 | | | $ | 50,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (1) | | Includes $7.6 billion of brokered CDs sold by third-party intermediaries in denominations of $100,000 or less, within FDIC insurance limits and $25.6 million in CDARS. |
The Corporation has obligations and commitments to make future payments under contracts, such as debt and lease agreements, and under other commitments to sell mortgage loans at fair value and to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Other contractual obligations result mainly from contracts for the rental and maintenance of equipment. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. There have been no significant or unexpected draws on existing commitments. The funding needs of customers have not significantly changed as a result of the latest market disruptions. In the case of credit cards and personal lines of credit, the Corporation can at any time and without cause cancel the unused credit facility. Lehman Brothers Special Financing, Inc. (“Lehman”) was the counterparty to the Corporation on certain interest rate swap agreements. During the third quarter of 2008, Lehman failed to pay the scheduled net cash settlement due to the Corporation, which constitutesconstituted an event of default under those interest rate swap agreements. The Corporation terminated all interest rate swaps with Lehman and replaced them with other counterparties under similar terms and conditions. In connection with the unpaid net cash settlement due as of December 31, 20092010 under the swap agreements, the Corporation has an unsecured counterparty exposure with Lehman, which filed for bankruptcy on October 3, 2008, of approximately $1.4 million. This exposure was reversedreserved in the third quarter of 2008. The Corporation had pledged collateral of $63.6 million with Lehman to guarantee its performance under the swap agreements in the event payment thereunder was required. The book value of pledged securities with Lehman as of December 31, 20092010 amounted to approximately $64.5 million. The Corporation believes that the securities pledged as collateral should not be part of the Lehman bankruptcy estate given the fact that the posted collateral constituted a performance guarantee under the swap agreements and was not part of a financing agreement, and that ownership of the securities was never transferred to Lehman. Upon termination of the interest rate swap agreements, Lehman’s obligation was to return the collateral to the Corporation. During the fourth quarter of 2009, the Corporation discovered that Lehman Brothers, Inc., acting as agent of Lehman, had deposited the securities in a custodial account at JP Morgan/Morgan Chase, and that, shortly before the filing of 118
the Lehman bankruptcy proceedings, it had provided instructions to have most of the securities transferred to Barclay’sBarclays Capital (“Barclays”) in New York. After Barclay’sBarclays’s refusal to turn over the securities, during December 2009, the Corporation during the month of December 2009, filed a lawsuit against Barclay’s CapitalBarclays in federal court in New York demanding the return of the securities. During February 2010, Barclays filed a motion with the court requesting that the Corporation’s claim be dismissed on the grounds that the allegations of the complaint are not sufficient to justify the granting of the remedies therein sought. Shortly thereafter, the Corporation filed its opposition motion. A hearing on the motions was held in court on April 28, 2010. The court, on that date, after hearing the arguments by both sides, concluded that the Corporation’s equitable-based causes of action, upon which the return of the investment securities is being demanded, contain allegations that sufficiently plead facts warranting the denial of Barclays’ motion to dismiss the Corporation’s claim. Accordingly, the judge ordered the case to proceed to trial. 125
Subsequent to the court decision, the district court judge transferred the case to the Lehman bankruptcy court for trial. While the Corporation believes it has valid reasons to support its claim for the return of the securities, there are no assurances that it will ultimatelythe Corporation may not succeed in its litigation against Barclay’s CapitalBarclays to recover all or a substantial portion of the securities. Upon such transfer, the Bankruptcy court began to entertain the pre-trial procedures including discovery of evidence. In this regard, an initial scheduling conference was held before the United States Bankruptcy Court for the Southern District of New York on November 17, 2010, at which time a proposed case management plan was approved. Discovery has commenced pursuant to that case management plan and is currently scheduled for completion by May 15, 2011, but this timing is subject to adjustment. Additionally, the Corporation continues to pursue its claim filed in January 2009 in the proceedings under the Securities Protection Act with regard to Lehman Brothers Incorporated in Bankruptcy Court, Southern District of New York. The Corporation can provide no assurances that it will be successful in recovering all or substantial portion of the securities through these proceedings. An estimated loss was not accrued as the Corporation is unable to determine the timing of the claim resolution or whether it will succeed in recovering all or a substantial portion of the collateral or its equivalent value. If additional relevant negative relevant facts become available in future periods, a need to recognize a partial or full reserve of this claim may arise. Considering that the investment securities have not yet been recovered by the Corporation, despite its efforts in this regard, the Corporation decided to classify such investments as non-performing during the second quarter of 2009. Interest Rate Risk Management First BanCorp manages its asset/liability position in order to limit the effects of changes in interest rates on net interest income and to maintain stability in theof profitability under varying interest rate environments.scenarios. The MIALCO oversees interest rate risk and focusesbased on its consideration of, among other things, current and expected conditions in world financial markets, competition and prevailing rates in the local deposit market, liquidity, securities market values, recent or proposed changes to the investment portfolio, alternative funding sources and related costs, hedging and the possible purchase of derivatives such as swaps and caps, and any tax or regulatory issues which may be pertinent to these areas. The MIALCO approves funding decisions in light of the Corporation’s overall growth strategies and objectives. The Corporation performs on a quarterly basis a consolidated net interest income simulation analysis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a one-to-five-year time horizon, assuming upward and downward yield curve shifts. The rate scenarios considered in these disclosures reflect gradual upward and downward interest rate movements of 200 basis points, achieved during a twelve-month period. Simulations are carried out in two ways: (1) usingUsing a static balance sheet, as the Corporation had it onof the simulation date, and (2) usingUsing a dynamic balance sheet based on recent patterns and current strategies. The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing structure and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and costs, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may be important in projecting the future growth of net interest income. The Corporation uses a simulation model to project future movements in the Corporation’s balance sheet and income statement. The starting point of the projections generally corresponds to the actual values on the balance sheet on the date of the simulations. These simulations are highly complex, and useare based on many simplifying assumptions that are intended to reflect the general behavior of the Corporationbalance sheet components over the period in question. It is highly unlikely that actual events will match these assumptions in all cases. For this reason, the results of these simulationsforward-looking computations are only approximations of the true sensitivity of net interest income to changes in market interest rates. 119126
The following table presents the results of the simulations as of December 31, 20092010 and 2008.December 31, 2009. Consistent with prior years, these exclude non-cash changes in the fair value of derivatives and liabilities elected to be measured at fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2009 | | December 31, 2008 | | December 31, 2010 | | December 31, 2009 | | | Net Interest Income Risk (Projected for the next 12 months) | | Net Interest Income Risk (Projected for the next 12 months) | | Net Interest Income Risk (Projected for the next 12 months) | | Net Interest Income Risk (Projected for the next 12 months) | | | Static Simulation | | Growing Balance Sheet | | Static Simulation | | Growing Balance Sheet | | Static Simulation | | Growing Balance Sheet | | Static Simulation | | Growing Balance Sheet | (Dollars in millions) | | $ Change | | % Change | | $ Change | | % Change | | $ Change | | % Change | | $ Change | | % Change | | $ Change | | % Change | | $ Change | | % Change | | $ Change | | % Change | | $ Change | | % Change | +200 bps ramp | | $ | 10.6 | | | 2.16 | % | | $ | 16.0 | | | 3.39 | % | | $ | 6.5 | | | 1.39 | % | | $ | 6.4 | | | 1.29 | % | | $ | 24.8 | | | 5.37 | % | | $ | 24.8 | | | 5.60 | % | | $ | 10.6 | | | 2.16 | % | | $ | 16.0 | | | 3.39 | % | -200 bps ramp | | $ | (31.9 | ) | | | (6.53 | )% | | $ | (33.0 | ) | | | (6.98 | )% | | $ | (12.8 | ) | | | (2.77 | )% | | $ | (15.5 | ) | | | (3.15 | )% | | $ | (22.8 | ) | | | (4.94 | )% | | $ | (24.2 | ) | | | (5.48 | )% | | $ | (31.9 | ) | | | (6.53 | )% | | $ | (33.0 | ) | | | (6.98 | )% |
During the past year, theThe Corporation continued managingcontinues to manage its balance sheet structure to control the overall interest rate risk. As partrisk and preserve its capital position. The Corporation continued with a deleveraging and balance sheet repositioning strategy. During 2010, the investment portfolio decreased by approximately $1.6 billion, while the loan portfolio decreased by $2.0 billion. This decrease in assets resulting from the deleveraging strategy allowed a reduction of the strategy,$3.3 billion in wholesale funding since 2009, including FHLB Advances and brokered certificates of deposit. In addition, the Corporation reduced long-term fixed-rate and callable investment securities and increased shorter-duration investment securities. During 2009, MBS prepayments accelerated significantly as a result of the low interest rate environment. Approximately $1.7 billion of Agency MBS were sold during 2009, and $945 million of US Agency debentures were called during 2009. Partial proceeds from these sales and calls, in conjunction with prepayments on mortgage backed securities were re-invested in instruments with shorter durations such as 15-Years US Agency MBS, US Agency callable debentures with contractual maturities ranging from twocontinues to three years, and US Agency floating rate collateral mortgage obligations. In addition, during 2009, the Corporation continuedgrow its core deposit base while adjusting the mix of its funding sources to better match the expected average life of the assets. Taking into consideration the above-mentioned facts for modeling purposes, the net interest income for the next twelve months under a growingnon-static balance sheet scenario, is estimated to increase by $16.0$24.8 million in a gradual parallel upward move of 200 basis points. FollowingIn accordance with the Corporation’s risk management policies, modeling ofthe Corporation modeled the downward “parallel” rates moves by anchoring the short end of the curve (falling rates with a flattening curve) was performed,, even though, given the current level of rates as of December 31, 2009,2010, some market interest ratesrate were projected to be zero. Under this scenario, where a considerable spread compression is projected, net interest income for the next twelve months in a growingnon-static balance sheet scenario is estimated to decrease by $33.0$24.2 million. The Corporation used the gap analysis tool to evaluate the potential effect of rate shocks on net interest income over the selected time-periods. The gap report as of December 31, 2009 showed a positive cumulative gap for 3 month of $2.3 billion and a positive cumulative gap of $254.8 million for 1 year, compared to positive cumulative gaps of $2.1 billion and $1.4 billion for 3 months and 1 year, respectively, as of December 31, 2008. Gap management is a dynamic process, through which the Corporation makes constant adjustments to maintain sound and prudent interest rate risk exposures.
Derivatives.First BanCorp uses derivative instruments and other strategies to manage its exposure to interest rate risk caused by changes in interest rates beyond management’s control. The following summarizes major strategies, including derivative activities, used by the Corporation in managing interest rate risk: Interest rate cap agreements — Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection againstfrom rising interest rates. Specifically, the interest rate on certain private label mortgage pass-through securities and certain of the Corporation’s commercial loans to other financial institutions is generally a variable rate limited to the weighted-average coupon of the pass-through certificate or referenced residential mortgage collateral, less a contractual servicing fee. During the second quarter of 2010, the counterparty for interest rate caps for certain private label MBS was taken over by the FDIC, which resulted in the immediate cancelation of all outstanding commitments, and as a result, interest rate caps with an aggregate notional amount of $108.2 million are no longer considered to be derivative financial instruments. The total exposure to fair value of $3.0 million related to such contracts was reclassified to an account receivable. Interest rate swaps — Interest rate swap agreements generally involve the exchange of fixed and floating-rate interest payment obligations without the exchange of the underlying notional principal amount. As of December 31, 2009,2010, most of the interest rate swaps outstanding are used for protection against rising interest rates. In the past, interest rate swaps volume was much higher since they were used to convert fixed-rate brokered CDs 120
(liabilities), mainly those with long-term maturities, to a variable rate andto mitigate the interest rate risk inherent in variable rate loans. All outstandingof these interest rate swaps related to brokered CDs were called during 2009, in the face of lower interest rate levels, and, as a consequence, the Corporation exercised its call option on the swapped-to-floatingswapped-to- 127
floating brokered CDs. Similar to unrealized gains and losses arising from changes in fair value, net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense depending on whether an asset or liability is being economically hedged. Structured repurchase agreements — The Corporation uses structured repurchase agreements, with embedded call options, to reduce the Corporation’s exposure to interest rate risk by lengthening the contractual maturities of its liabilities, while keeping funding costs low. Another type of structured repurchase agreement includes repurchased agreements with embedded cap corridors; these instruments also provide protection for a rising rate scenario. For detailed information regarding the volume of derivative activities (e.g. notional amounts), location and fair values of derivative instruments in the Statementstatement of Financial Conditionfinancial condition and the amount of gains and losses reported in the Statementstatement of (Loss) Income,(loss) income, refer to Note 32 in the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K. The following tables summarize the fair value changes of the Corporation’s derivatives as well as the source of the fair values: Fair Value Change | | | | | | | | | | | Year ended | | | Year ended | | (In thousands) | | December 31, 2009 | | | December 31, 2010 | | Fair value of contracts outstanding at the beginning of year | | $ | (495 | ) | | $ | (531 | ) | Fair value of new contracts at inception | | | (35 | ) | | Contracts terminated or called during the year | | | (5,198 | ) | | | (2,587 | ) | Changes in fair value during the year | | 5,197 | | | | (1,678 | ) | | | | | | | | Fair value of contracts outstanding as of December 31, 2009 | | $ | (531 | ) | | Fair value of contracts outstanding as of December 31, 2010 | | | $ | (4,796 | ) | | | | | | | |
Source of Fair Value | | | | | | | | | | | | | | | | | | | | | | (In thousands) | | | Payments Due by Period | | | | | | | | | | | | | | | | | | | | | | | | Maturity | | Maturity | | | | | | Payments Due by Period | | | Less Than | | Maturity | | Maturity | | In Excess | | Total | | As of December 31, 2010 | | | One Year | | 1-3 Years | | 3-5 Years | | of 5 Years | | Fair Value | | Pricing from observable market inputs | | | $ | 15 | | $ | (636 | ) | | $ | 23 | | $ | (4,198 | ) | | $ | (4,796 | ) | | | Maturity | | Maturity | | | | | | | | | | | | | | | (In thousands) | | Less Than | | Maturity | | Maturity | | In Excess | | Total | | | As of December 31, 2009 | | One Year | | 1-3 Years | | 3-5 Years | | of 5 Years | | Fair Value | | | Pricing from observable market inputs | | $ | (461 | ) | | $ | 18 | | $ | (636 | ) | | $ | (3,651 | ) | | $ | (4,730 | ) | | Pricing that consider unobservable market inputs | | — | | — | | — | | 4,199 | | 4,199 | | | | | | | | | | | | | | | | | | $ | (461 | ) | | $ | 18 | | $ | (636 | ) | | $ | 548 | | $ | (531 | ) | | | | | | | | | | | | | | |
Derivative instruments, such as interest rate swaps, are subject to market risk. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve as well as the level of interest rates. As of December 31, 20092010 and 2008,2009, all of the derivative instruments held by the Corporation were considered economic undesignated hedges. During 2009, all of the $1.1 billion of interest rate swaps that economically hedgehedged brokered CDs that were outstanding as of December 31, 2008 were called by the counterparties, mainly due to lower levels of 3-month LIBOR. Following the cancellation of the interest rate swaps, the Corporation exercised its call option on the approximately $1.1 billion swapped-to- floatingswapped-to-floating brokered CDs. The Corporation recorded a net loss of $3.5 million in 2009 as a result of these transactions, resulting from the reversal of the cumulative mark-to-market valuation of the swaps and the called brokered CDs called.CDs. Refer to Note 29 of the Corporation’s audited financial statements for the year ended December 31, 20092010 included in Item 8 of this Form 10-K for additional information regarding the fair value determination of derivative instruments. 121
The use of derivatives involves market and credit risk. The market risk of derivatives stems principally from the potential for changes in the value of derivative contracts based on changes in interest rates. The credit risk of 128
derivatives arises from the potential of default from the counterparty. To manage this credit risk, the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. Master netting agreements incorporate rights of set-off that provide for the net settlement of contracts with the same counterparty in the event of default. Currently the Corporation is mostly engaged in derivative instruments with counterparties with a credit rating of single A or better. All of the Corporation’s interest rate swaps are supported by securities collateral agreements, which allow the delivery of securities to and from the counterparties depending on the fair value of the instruments, to minimize credit risk. Set forth below is a detailed analysis of the Corporation’s credit exposure by counterparty with respect to derivative instruments outstanding as of December 31, 20092010 and December 31, 2008.2009. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2010 | | (In thousands) | | As of December 31, 2009 | | | Total | | Accrued | | | | Total | | Accrued | | | | | Exposure at | | Negative | | Total | | interest receivable | | | Exposure at | | Negative | | Total | | interest receivable | | Counterparty | | Rating(1) | | Notional | | Fair Value(2) | | Fair Values | | Fair Value | | (payable) | | | Rating(1) | | Notional | | Fair Value(2) | | Fair Values | | Fair Value | | (payable) | | Interest rate swaps with rated counterparties: | | | | | | | | | | | | | | | | | | | | | | | | JP Morgan | | A+ | | $ | 67,345 | | | $ | 621 | | | $ | (4,304 | ) | | $ | (3,683 | ) | | $ | — | | | A+ | | $ | 42,808 | | $ | 889 | | $ | (4,865 | ) | | $ | (3,976 | ) | | $ | — | | Credit Suisse First Boston | | A+ | | | 49,311 | | | | 2 | | | | (764 | ) | | | (762 | ) | | | — | | | A+ | | 5,493 | | — | | | (327 | ) | | | (327 | ) | | — | | Goldman Sachs | | A | | | 6,515 | | | | 557 | | | | — | | | | 557 | | | | — | | | A | | 6,515 | | 664 | | — | | 664 | | — | | Morgan Stanley | | A | | | 109,712 | | | | 238 | | | | — | | | | 238 | | | | — | | | A | | 108,829 | | 1 | | — | | 1 | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 232,883 | | | | 1,418 | | | | (5,068 | ) | | | (3,650 | ) | | | — | | | 163,645 | | 1,554 | | | (5,192 | ) | | | (3,638 | ) | | — | | | | | | | | | | | | | | | | | | | | | | | | | | Other derivatives (3) | | | | | 284,619 | | | | 4,518 | | | | (1,399 | ) | | | 3,119 | | | | (269 | ) | | 127,837 | | 351 | | | (1,509 | ) | | | (1,158 | ) | | | (140 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | $ | 517,502 | | | $ | 5,936 | | | $ | (6,467 | ) | | $ | (531 | ) | | $ | (269 | ) | | $ | 291,482 | | $ | 1,905 | | $ | (6,701 | ) | | $ | (4,796 | ) | | $ | (140 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2009 | | (In thousands) | | As of December 31, 2008 | | | Total | | Accrued | | | | Total | | Accrued | | | Exposure at | | Negative | | Total | | interest receivable | | | | Exposure at | | Negative | | Total | | interest receivable | | | Counterparty | | Rating(1) | | Notional | | Fair Value(2) | | Fair Values | | Fair Value | | (payable) | | | Rating(1) | | Notional | | Fair Value(2) | | Fair Values | | Fair Value | | (payable) | | Interest rate swaps with rated counterparties: | | | | | | | | | | | | | | | | | | | | | | | | Wachovia | | AA- | | $ | 16,570 | | | $ | 41 | | | $ | — | | | $ | 41 | | | $ | 108 | | | Merrill Lynch | | A | | | 230,190 | | | | 1,366 | | | | — | | | | 1,366 | | | | (106 | ) | | UBS Financial Services, Inc. | | A+ | | | 14,384 | | | | 88 | | | | — | | | | 88 | | | | 179 | | | JP Morgan | | A+ | | | 531,886 | | | | 2,319 | | | | (5,726 | ) | | | (3,407 | ) | | | 1,094 | | | A+ | | $ | 67,345 | | $ | 621 | | $ | (4,304 | ) | | $ | (3,683 | ) | | $ | — | | Credit Suisse First Boston | | A+ | | | 151,884 | | | | 178 | | | | (1,461 | ) | | | (1,283 | ) | | | 512 | | | A+ | | 49,311 | | 2 | | | (764 | ) | | | (762 | ) | | — | | Citigroup | | A+ | | | 295,130 | | | | 1,516 | | | | (1 | ) | | | 1,515 | | | | 2,299 | | | Goldman Sachs | | A | | | 16,165 | | | | 597 | | | | — | | | | 597 | | | | 158 | | | A | | 6,515 | | 557 | | — | | 557 | | — | | Morgan Stanley | | A | | | 107,450 | | | | 735 | | | | — | | | | 735 | | | | 59 | | | A | | 109,712 | | 238 | | — | | 238 | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,363,659 | | | | 6,840 | | | | (7,188 | ) | | | (348 | ) | | | 4,303 | | | 232,883 | | 1,418 | | | (5,068 | ) | | | (3,650 | ) | | — | | | | | | | | | | | | | | | | | | | | | | | | | | Other derivatives (3) | | | | | 332,634 | | | | 1,170 | | | | (1,317 | ) | | | (147 | ) | | | (203 | ) | | 284,619 | | 4,518 | | | (1,399 | ) | | 3,119 | | | (269 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | $ | 1,696,293 | | | $ | 8,010 | | | $ | (8,505 | ) | | $ | (495 | ) | | $ | 4,100 | | | $ | 517,502 | | $ | 5,936 | | $ | (6,467 | ) | | $ | (531 | ) | | $ | (269 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (1) | | Based on the S&P and Fitch Long Term Issuer Credit Ratings. | | (2) | | For each counterparty, this amount includes derivatives with positive fair value excluding the related accrued interest receivable/payable. | | (3) | | Credit exposure with several Puerto Rico counterparties for which a credit rating is not readily available. Approximately | | | | As of December 31, 2009, approximately $4.2 million and $0.8 million of the credit exposure with local companies relates to caps referenced to mortgages bought from R&G Premier Bank asa local financial institution that was taken over by another institution during the second quarter of December 31, 2009 and 2008, respectively.2010 through an FDIC-assisted transaction. |
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A “Hull-White Interest Rate Tree” approach is used to value the option components of derivative instruments. The discounting of the cash flows is performed using US dollar LIBOR-based discount rates or yield curves that account for the industry sector and the credit rating of the counterparty and/or the Corporation. Although most of the derivative instruments are fully collateralized, a credit spread is considered for those that are not secured in full. The cumulative mark-to-market effect of credit risk in the valuation of derivative instruments resulted in an unrealized gain of approximately $0.5$0.8 million as of December 31, 2009,2010, of which an unrealized gain of $0.3 million was recorded in 2010, an unrealized loss of $1.9 million was recorded in 2009 and an unrealized gain of $1.5 million was recorded in 2008 and an unrealized gain of $0.9 million was recorded in 2007. The Corporation compares the valuations obtained with valuations received from counterparties, as an internal control procedure.2008. Credit Risk Management First BanCorp is subject to credit risk mainly with respect to its portfolio of loans receivable and off-balance sheet instruments, mainly derivatives and loan commitments. Loans receivable represents loans that First BanCorp holds for investment and, therefore, First BanCorp is at risk for the term of the loan. Loan commitments represent commitments to extend credit, subject to specific condition, for specific amounts and maturities. These commitments may expose the Corporation to credit risk and are subject to the same review and approval process as for loans. Refer to “Contractual Obligations and Commitments” above for further details. The credit risk of derivatives arises from the potential of the counterparty’s default on its contractual obligations. To manage this credit risk, the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. For further details and information on the Corporation’s derivative credit risk exposure, refer to “—Interest Rate Risk Management” section above. The Corporation manages its credit risk through fundamental portfolio risk management principles including credit policy, underwriting, independent loan review and quality control procedures, statistical analysis, comprehensive financial analysis, and established management committees. The Corporation also employs proactive collection and loss mitigation efforts. Furthermore, there arepersonnel performing structured loan workout functions are responsible for avoiding defaults and minimizing losses upon default forwithin each region and for each business segment. In the case of commercial and industrial, commercial mortgage and costruction loan portfolios, the Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-performing assets through note 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 groupSAG 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 Corporation may also have risk of default in the securities portfolio. The securities held by the Corporation are principally fixed-rate mortgage-backed securities and U.S. Treasury and agency securities. Thus, a substantial portion of these instruments is backed by mortgages, a guarantee of a U.S. government-sponsored entity or backed by the full faith and credit of the U.S. government and is deemed to be of the highest credit quality. Management, comprised of the Corporation’s ChiefCommercial Credit Risk Officer, Retail Credit Risk Officer, Chief Lending Officer and other senior executives, has the primary responsibility for setting strategies to achieve the Corporation’s credit risk goals and objectives. Those goals and objectives are documented in the Corporation’s Credit Policy. Allowance for Loan and Lease Losses and Non-performing Assets Allowance for Loan and Lease Losses The allowance for loan and lease losses represents the estimate of the level of reserves appropriate to absorb inherent credit losses. The amount of the allowance was determined by empirical analysis and judgments regarding the quality of each individual loan portfolio. All known relevant internal and external factors that affected loan collectibility were considered, including analyses of historical charge-off experience, migration patterns, changes in economic conditions, and changes in loan collateral values. For example, factors affecting the economies of Puerto Rico, Florida (USA), the US Virgin Islands’ orIslands and the British Virgin Islands’ economiesIslands may contribute to delinquencies and defaults above the Corporation’s historical loan and lease losses. Such factors are subject to regular review and may 130
change to reflect updated performance trends and expectations, particularly in times of severe stress such as washave been experienced throughout 2009. We believe the process for determining the allowance considers all of the potential factors that could result in credit losses. However, thesince 2008. The process includes judgmental and quantitative elements that may be subject to significant change. There is no certainty that the allowance will be adequate over time to cover credit 123
losses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries or markets. To the extent actual outcomes differ from our estimates, the credit quality of our customer base materially decreases andor the risk profile of a market, industry, or group of customers changes materially, or if the allowance is determined to not be adequate, additional provisionprovisions for credit losses could be required, which could adversely affect our business, financial condition, liquidity, capital, and results of operations in future periods. The allowance for loan and lease losses provides for probable losses that have been identified with specific valuation allowances for individually evaluated impaired loans and for probable losses believed to be inherent in the loan portfolio that have not been specifically identified. Internal risk ratings are assigned to each business loan at the time of approval and are subject to subsequent periodic reviews by the Corporation’s senior management. The allowance for loan and lease losses is reviewed on a quarterly basis as part of the Corporation’s continued evaluation of its asset quality. Refer to “Critical Accounting Policies –— Allowance for Loan and Lease Losses” section above for additional information about the methodology used by the Corporation to determine specific reserves and the general valuation allowance. The reserve coverage for all portfolios increased during 2010 due to the continued increase in charge-offs and the continued pressures on property values and current economic conditions. The allowance for loan losses to total loans for residential mortgage loans increased from 0.87% at December 31, 2009 to 1.82% as of December 31, 2010. The commercial mortgage reserve coverage increased from 4.02% at December 31, 2009 to 6.32% at December 31, 2010. The C&I loans reserve coverage ratio increased from 3.48% at December 31, 2009 to 3.68% at December 31, 2010. The construction loans reserve coverage ratio increased from 11.00% in December, 2009 to 21.69% at December 31, 2010. The consumer and finance leases reserve coverage ratio increased from 4.36% in December 2009 to 4.69% at December 31, 2010. While the amount of impaired loans decreased for most of the portfolio, the higher level of impaired residential mortgage loans is mainly related to the modification of loans through the Home Affordable Modification Program of the Federal government, for which a sustained period of repayment performance under the modified terms was observed. These impaired loans are not necessarily classified as non-performing loans. Substantially all of the Corporation’s loan portfolio is located within the boundaries of the U.S. economy. Whether the collateral is located in Puerto Rico, the U.S. and British Virgin Islands or the U.S. mainland (mainly in the state of Florida), the performance of the Corporation’s loan portfolio and the value of the collateral supporting the transactions are dependent upon the performance of and conditions within each specific area real estate market. Recent economicEconomic reports related to the real estate market in Puerto Rico indicate that the real estate market is experiencing readjustments in value driven by the deteriorated purchasing powerloss of income due to the unemployment of consumers, reduced demand and the general economic conditions. The Corporation sets adequate loan-to-value ratios upon original approval following theits regulatory and credit policy standards. The real estate market for the U.S. Virgin islandsIslands remains fairly stable. In the Florida market, residential real estate has experienced a very slow turnaround.turnover, but the Corporation continues to reduce its credit exposure through disposition of assets and different loss mitigation initiatives as the end of this difficult credit cycle in the Florida region appears to be approaching. As shown in the following table, below, the allowance for loan and lease losses increased to $553.0 million at December 31, 2010, compared with $528.1 million at December 31, 2009, compared with $281.5 million at December 31, 2008. Expressed as a percent of period-end total loans receivable, the ratio increased to 3.79% at December 31, 2009, compared with 2.15% at December 31, 2008.2009. The $246.6$24.9 million increase in the allowance primarily reflected an increaseincreases in specific reserves associated with impaired loans, an increasethe residential and commercial mortgage loan portfolios. The Corporation has continued to build its reserves based on recent appraisals, charge-offs trends and environmental factors. This was partially offset by the release of approximately $62.1 million of the allowance for loan losses associated with risk-grade migrationthe $447 million ($282 million net of charge-offs) of loans transferred to held for sale. These loans were subsequently sold in February 2011 and an increase inimproved the credit quality of the overall portfolio since most of them were non-performing loans, predominantly in the commercial and construction portfolio. The increase is also a result of updating the loss rates factors used to determine the general reserve to account for the increase in net charge-offs, non-performing loans and the stressed economic environment. Refer to the “Provision for Loan and Lease Losses” discussion above for additional information.or adversely classified loans. 124131
The following table sets forth an analysis of the activity in the allowance for loan and lease losses during the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Allowance for loan and lease losses, beginning of year | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | $ | 147,999 | | $ | 141,036 | | | $ | 528,120 | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | $ | 147,999 | | | | | | | | | | | | | | | | | | | | | | | | | Provision (recovery) for loan and lease losses: | | | Residential mortgage | | 45,010 | | 13,032 | | 2,736 | | 4,059 | | 2,759 | | | 93,883 | | 45,010 | | 13,032 | | 2,736 | | 4,059 | | Commercial mortgage | | 71,401 | | 7,740 | | 1,326 | | 3,898 | | 1,133 | | | | 119,815 | (1) | | 73,861 | | 8,269 | | 1,567 | | 3,898 | | Commercial and Industrial | | 146,157 | | 35,561 | | 18,369 | | | (1,662 | ) | | | (5,774 | ) | | | 68,336 | (2) | | 143,697 | | 35,032 | | 18,128 | | | (1,662 | ) | Construction | | 264,246 | | 53,109 | | 23,502 | | 5,815 | | 7,546 | | | | 300,997 | (3) | | 264,246 | | 53,109 | | 23,502 | | 5,815 | | Consumer and finance leases | | 53,044 | | 81,506 | | 74,677 | | 62,881 | | 44,980 | | | 51,556 | | 53,044 | | 81,506 | | 74,677 | | 62,881 | | | | | | | | | | | | | | | | | | | | | | | | | Total provision for loan and lease losses | | 579,858 | | 190,948 | | 120,610 | | 74,991 | | 50,644 | | | 634,587 | | 579,858 | | 190,948 | | 120,610 | | 74,991 | | | | | | | | | | | | | | | | | | | | | | | | | Charged-off: | | | Charge-offs: | | | Residential mortgage | | | (28,934 | ) | | | (6,256 | ) | | | (985 | ) | | | (997 | ) | | | (945 | ) | | | (62,839 | ) | | | (28,934 | ) | | | (6,256 | ) | | | (985 | ) | | | (997 | ) | Commercial mortgage | | | (25,871 | ) | | | (3,664 | ) | | | (1,333 | ) | | | (19 | ) | | | (268 | ) | | | (82,708 | )(4) | | | (25,871 | ) | | | (3,664 | ) | | | (1,333 | ) | | | (19 | ) | Commercial and Industrial | | | (35,696 | ) | | | (25,911 | ) | | | (9,927 | ) | | | (6,017 | ) | | | (8,290 | ) | | | (99,724 | )(5) | | | (35,696 | ) | | | (25,911 | ) | | | (9,927 | ) | | | (6,017 | ) | Construction | | | (183,800 | ) | | | (7,933 | ) | | | (3,910 | ) | | — | | — | | | | (313,511 | )(6) | | | (183,800 | ) | | | (7,933 | ) | | | (3,910 | ) | | — | | Consumer and finance leases | | | (70,121 | ) | | | (73,308 | ) | | | (78,675 | ) | | | (70,176 | ) | | | (42,417 | ) | | | (64,219 | ) | | | (70,121 | ) | | | (73,308 | ) | | | (78,675 | ) | | | (70,176 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | (344,422 | ) | | | (117,072 | ) | | | (94,830 | ) | | | (77,209 | ) | | | (51,920 | ) | | | (623,001 | ) | | | (344,422 | ) | | | (117,072 | ) | | | (94,830 | ) | | | (77,209 | ) | | | | | | | | | | | | | | | | | | | | | | | | Recoveries: | | | Residential mortgage | | 73 | | — | | 1 | | 17 | | — | | | 121 | | 73 | | — | | 1 | | 17 | | Commercial mortgage | | 667 | | — | | — | | — | | 4 | | | 1,288 | | 667 | | — | | — | | — | | Commercial and Industrial | | 1,188 | | 1,678 | | 659 | | 3,491 | | 1,275 | | | 1,251 | | 1,188 | | 1,678 | | 659 | | 3,491 | | Construction | | 200 | | 198 | | 78 | | — | | — | | | 358 | | 200 | | 198 | | 78 | | — | | Consumer and finance leases | | 9,030 | | 6,875 | | 5,354 | | 9,007 | | 5,597 | | | 10,301 | | 9,030 | | 6,875 | | 5,354 | | 9,007 | | | | | | | | | | | | | | | | | | | | | | | | | | | 11,158 | | 8,751 | | 6,092 | | 12,515 | | 6,876 | | | 13,319 | | 11,158 | | 8,751 | | 6,092 | | 12,515 | | | | | | | | | | | | | | | | | | | | | | | | | Net charge-offs | | | (333,264 | ) | | | (108,321 | ) | | | (88,738 | ) | | | (64,694 | ) | | | (45,044 | ) | | | (609,682 | ) | | | (333,264 | ) | | | (108,321 | ) | | | (88,738 | ) | | | (64,694 | ) | | | | | | | | | | | | | | | | | | | | | | | | Other adjustments(1)(7) | | — | | 8,731 | | — | | — | | 1,363 | | | — | | — | | 8,731 | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for loan and lease losses, end of year | | $ | 528,120 | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | $ | 147,999 | | | $ | 553,025 | | $ | 528,120 | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for loan and lease losses to year end total loans receivable | | | 3.79 | % | | | 2.15 | % | | | 1.61 | % | | | 1.41 | % | | | 1.17 | % | | Net charge-offs to average loans outstanding during the period | | | 2.48 | % | | | 0.87 | % | | | 0.79 | % | | | 0.55 | % | | | 0.39 | % | | Provision for loan and lease losses to net charge-offs during the period | | 1.74 | x | | 1.76 | x | | 1.36 | x | | 1.16 | x | | 1.12 | x | | Allowance for loan and lease losses to year end total loans held for investment | | | | 4.74 | % | | | 3.79 | % | | | 2.15 | % | | | 1.61 | % | | | 1.41 | % | Net charge-offs to average loans outstanding during the year | | | | 4.76 | %(8) | | | 2.48 | % | | | 0.87 | % | | | 0.79 | % | | | 0.55 | % | Provision for loan and lease losses to net charge-offs during the year | | | | 1.04 | x(9) | | 1.74 | x | | 1.76 | x | | 1.36 | x | | 1.16 | x |
| | | (1) | | Includes provision of $11.3 million associated with loans transferred to held for sale. | | (2) | | Includes provision of $8.6 million associated with loans transferred to held for sale. | | (3) | | Includes provision of $83.0 million associated with loans transferred to held for sale. | | (4) | | Includes charge-offs of $29.5 million associated with loans transferred to held for sale. | | (5) | | Includes charge-offs of $8.6 million associated with loans transferred to held for sale. | | (6) | | Includes charge-offs of $127.0 million associated with loans transferred to held for sale. | | (7) | | For 2008, carryover of the allowance for loan losses related to the $218 million auto loan portfolio acquired from Chrysler. | | (8) | | For 2005, allowanceIncludes net charge-offs totaling $165.1 million associated with loans transferred to held for sale. Total net charge-offs to average loans, excluding charge-offs associated with loans transferred to held for sale, was 3.60% | | (9) | | Provision for loan and lease losses fromto net charge-offs excluding provision and net charge-offs relating to loans transferred to held for sale was 1.20x for the acquisition of FirstBank Florida.year ended December 31, 2010. |
The following table sets forth information concerning the allocation of the Corporation’s allowance for loan and lease losses by loan category and the percentage of loan balances in each category to the total of such loans as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 | | (In thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Residential mortgage | | $ | 31,165 | | | 26 | % | | $ | 15,016 | | | 27 | % | | $ | 8,240 | | | 27 | % | | $ | 6,488 | | | 25 | % | | $ | 3,409 | | | 18 | % | | $ | 62,330 | | | 29 | % | | $ | 31,165 | | | 26 | % | | $ | 15,016 | | | 27 | % | | $ | 8,240 | | | 27 | % | | $ | 6,488 | | | 25 | % | Commercial mortgage loans | | 63,972 | | | 11 | % | | 17,775 | | | 12 | % | | 13,699 | | | 11 | % | | 13,706 | | | 11 | % | | 9,827 | | | 9 | % | | 105,596 | | | 14 | % | | 67,201 | | | 11 | % | | 18,544 | | | 12 | % | | 13,939 | | | 11 | % | | 13,705 | | | 11 | % | Construction loans | | 164,128 | | | 11 | % | | 83,482 | | | 12 | % | | 38,108 | | | 12 | % | | 18,438 | | | 13 | % | | 12,623 | | | 9 | % | | 151,972 | | | 6 | % | | 164,128 | | | 11 | % | | 83,482 | | | 12 | % | | 38,108 | | | 12 | % | | 18,438 | | | 13 | % | Commercial and Industrial loans (including loans to local financial institutions) | | 186,007 | | | 38 | % | | 74,358 | | | 33 | % | | 63,030 | | | 33 | % | | 53,929 | | | 32 | % | | 58,117 | | | 48 | % | | 152,641 | | | 36 | % | | 182,778 | | | 38 | % | | 73,589 | | | 33 | % | | 62,790 | | | 33 | % | | 53,930 | | | 32 | % | Consumer loans and finance leases | | 82,848 | | | 14 | % | | 90,895 | | | 16 | % | | 67,091 | | | 17 | % | | 65,735 | | | 19 | % | | 64,023 | | | 16 | % | | 80,486 | | | 15 | % | | 82,848 | | | 14 | % | | 90,895 | | | 16 | % | | 67,091 | | | 17 | % | | 65,735 | | | 19 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 528,120 | | | 100 | % | | $ | 281,526 | | | 100 | % | | $ | 190,168 | | | 100 | % | | $ | 158,296 | | | 100 | % | | $ | 147,999 | | | 100 | % | | $ | 553,025 | | | 100 | % | | $ | 528,120 | | | 100 | % | | $ | 281,526 | | | 100 | % | | $ | 190,168 | | | 100 | % | | $ | 158,296 | | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table sets forth information concerning the composition of the Corporation’s allowance for loan and lease losses as of December 31, 20092010 and 20082009 by loan category and by whether the allowance and related provisions were calculated individually or through a general valuation allowance: 125132
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2010 | | | | | | | | | | | | | | | | Residential | | Commercial | | Construction | | Consumer and | | | | Residential Mortgage | | Commercial Mortgage | | C&I | | Construction | | Consumer and | | | (Dollars in thousands) | | Mortgage Loans | | Mortgage Loans | | C&I Loans | | Loans | | Finance Leases | | Total | | Loans | | Loans | | Loans | | Loans | | Finance Leases | | Total | As of December 31, 2009 | | | Impaired loans without specific reserves: | | | Principal balance of loans, net of charge-offs | | $ | 384,285 | | $ | 62,920 | | $ | 48,943 | | $ | 100,028 | | $ | — | | $ | 596,176 | | | $ | 244,648 | | $ | 32,328 | | $ | 54,631 | | $ | 25,074 | | $ | 659 | | $ | 357,340 | | | | | Impaired loans with specific reserves: | | | Principal balance of loans, net of charge-offs | | 60,040 | | 159,284 | | 243,123 | | 597,641 | | — | | 1,060,088 | | | 311,187 | | 150,442 | | 325,206 | | 237,970 | | 1,496 | | 1,026,301 | | Allowance for loan and lease losses | | 2,616 | | 30,945 | | 62,491 | | 86,093 | | — | | 182,145 | | | 42,666 | | 26,869 | | 65,030 | | 57,833 | | 264 | | 192,662 | | Allowance for loan and lease losses to principal balance | | | 4.36 | % | | | 19.43 | % | | | 25.70 | % | | | 14.41 | % | | | 0.00 | % | | | 17.18 | % | | | 13.71 | % | | | 17.86 | % | | | 20.00 | % | | | 24.30 | % | | | 17.65 | % | | | 18.77 | % | | | | Loans with general allowance: | | | Loans with general allowance | | | Principal balance of loans | | 3,151,183 | | 1,368,617 | | 5,059,363 | | 794,920 | | 1,898,104 | | 12,272,187 | | | 2,861,582 | | 1,487,391 | | 3,771,927 | | 437,535 | | 1,713,360 | | 10,271,795 | | Allowance for loan and lease losses | | 28,549 | | 33,027 | | 123,516 | | 78,035 | | 82,848 | | 345,975 | | | 19,664 | | 78,727 | | 87,611 | | 94,139 | | 80,222 | | 360,363 | | Allowance for loan and lease losses to principal balance | | | 0.91 | % | | | 2.41 | % | | | 2.44 | % | | | 9.82 | % | | | 4.36 | % | | | 2.82 | % | | | 0.69 | % | | | 5.29 | % | | | 2.32 | % | | | 21.52 | % | | | 4.68 | % | | | 3.51 | % | | | | Total portfolio, excluding loans held for sale: | | | Total portfolio, excluding loans held for sale | | | Principal balance of loans | | $ | 3,595,508 | | $ | 1,590,821 | | $ | 5,351,429 | | $ | 1,492,589 | | $ | 1,898,104 | | $ | 13,928,451 | | | $ | 3,417,417 | | $ | 1,670,161 | | $ | 4,151,764 | | $ | 700,579 | | $ | 1,715,515 | | $ | 11,655,436 | | Allowance for loan and lease losses | | 31,165 | | 63,972 | | 186,007 | | 164,128 | | 82,848 | | 528,120 | | | 62,330 | | 105,596 | | 152,641 | | 151,972 | | 80,486 | | 553,025 | | Allowance for loan and lease losses to principal balance | | | 0.87 | % | | | 4.02 | % | | | 3.48 | % | | | 11.00 | % | | | 4.36 | % | | | 3.79 | % | | | 1.82 | % | | | 6.32 | % | | | 3.68 | % | | | 21.69 | % | | | 4.69 | % | | | 4.74 | % | | | | As of December 31, 2008 | | | As of December 31, 2009 | | | | | | Impaired loans without specific reserves: | | | Principal balance of loans, net of charge-offs | | $ | 19,909 | | $ | 18,359 | | $ | 55,238 | | $ | 22,809 | | $ | — | | $ | 116,315 | | | $ | 384,285 | | $ | 62,920 | | $ | 48,943 | | $ | 100,028 | | $ | — | | $ | 596,176 | | | | | Impaired loans with specific reserves: | | | Principal balance of loans, net of charge-offs | | — | | 47,323 | | 79,760 | | 257,831 | | — | | 384,914 | | | 60,040 | | 159,284 | | 243,123 | | 597,641 | | — | | 1,060,088 | | Allowance for loan and lease losses | | — | | 8,680 | | 18,343 | | 56,330 | | — | | 83,353 | | | 2,616 | | 30,945 | | 62,491 | | 86,093 | | — | | 182,145 | | Allowance for loan and lease losses to principal balance | | | 0.00 | % | | | 18.34 | % | | | 23.00 | % | | | 21.85 | % | | | 0.00 | % | | | 21.65 | % | | | 4.36 | % | | | 19.43 | % | | | 25.70 | % | | | 14.41 | % | | | 0.00 | % | | | 17.18 | % | | | | Loans with general allowance: | | | Loans with general allowance | | | Principal balance of loans | | 3,461,416 | | 1,470,076 | | 4,290,450 | | 1,246,355 | | 2,108,363 | | 12,576,660 | | | 3,151,183 | | 1,368,617 | | 5,059,363 | | 794,920 | | 1,898,104 | | 12,272,187 | | Allowance for loan and lease losses | | 15,016 | | 9,095 | | 56,015 | | 27,152 | | 90,895 | | 198,173 | | | 28,549 | | 36,256 | | 120,287 | | 78,035 | | 82,848 | | 345,975 | | Allowance for loan and lease losses to principal balance | | | 0.43 | % | | | 0.62 | % | | | 1.31 | % | | | 2.18 | % | | | 4.31 | % | | | 1.58 | % | | | 0.91 | % | | | 2.65 | % | | | 2.38 | % | | | 9.82 | % | | | 4.36 | % | | | 2.82 | % | | | | Total portfolio, excluding loans held for sale: | | | Total portfolio, excluding loans held for sale | | | Principal balance of loans | | $ | 3,481,325 | | $ | 1,535,758 | | $ | 4,425,448 | | $ | 1,526,995 | | $ | 2,108,363 | | $ | 13,077,889 | | | $ | 3,595,508 | | $ | 1,590,821 | | $ | 5,351,429 | | $ | 1,492,589 | | $ | 1,898,104 | | $ | 13,928,451 | | Allowance for loan and lease losses | | 15,016 | | 17,775 | | 74,358 | | 83,482 | | 90,895 | | 281,526 | | | 31,165 | | 67,201 | | 182,778 | | 164,128 | | 82,848 | | 528,120 | | Allowance for loan and lease losses to principal balance | | | 0.43 | % | | | 1.16 | % | | | 1.68 | % | | | 5.47 | % | | | 4.31 | % | | | 2.15 | % | | | 0.87 | % | | | 4.22 | % | | | 3.42 | % | | | 11.00 | % | | | 4.36 | % | | | 3.79 | % |
The following tables show the activity for impaired loans held for investment and related specific reserve during 2009:2010: | | | | | | | | | | | | (In thousands) | | Impaired Loans: | | (In thousands) | | | Balance at beginning of year | | $ | 501,229 | | | $ | 1,656,264 | | Loans determined impaired during the year | | 1,466,805 | | | 902,047 | | Net charge-offs (1) | | | (244,154 | ) | | Loans sold, net of charge-offs of $49.6 million (2) | | | (39,374 | ) | | Loans foreclosed, paid in full and partial payments | | | (28,242 | ) | | Net charge-offs | | | | (566,734 | ) | Loans sold, net of charge-offs of $48.7 million | | | | (138,833 | ) | Impaired loans transferred to held for sale, net of charge offs of $153.9 million | | | | (251,024 | ) | Loans foreclosed, paid in full and partial payments or no longer considered impaired | | | | (218,079 | ) | | | | | | | | Balance at end of year | | $ | 1,656,264 | | | $ | 1,383,641 | | | | | | | | |
| | | (1) | | Approximately $114.2 million, or 47%, is related to construction loans in Florida and $44.6 million, or 18%, is related to construction loans in Puerto Rico. | | (2) | | Related to five construction projects sold in Florida. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2009 | | | | | Year ended December 31, 2010 | | | | Construction | | Commercial | | Commercial Mortgage | | Residential Mortgage | | | | | Residential Mortgage | | Commercial Mortgage | | Commercial | | Construction | | Consumer & | | | | (In thousands) | | Loans | | Loans | | Loans | | Loans | | Total | | | Loans | | Loans | | Loans | | Loans | | Finance Leases | | Total | | Allowance for impaired loans, beginning of period | | $ | 56,330 | | $ | 18,343 | | $ | 8,680 | | $ | — | | $ | 83,353 | | | $ | 2,616 | | $ | 30,945 | | $ | 62,491 | | $ | 86,093 | | $ | — | | $ | 182,145 | | Provision for impaired loans | | 211,658 | | 69,401 | | 43,583 | | 18,304 | | 342,946 | | | 95,132 | | 76,731 | | 97,820 | | 306,949 | | 619 | | 577,251 | | Charge-offs | | | (181,895 | ) | | | (25,253 | ) | | | (21,318 | ) | | | (15,688 | ) | | | (244,154 | ) | | | (55,082 | ) | | | (80,807 | ) | | | (95,281 | ) | | | (335,209 | ) | | | (355 | ) | | | (566,734 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for impaired loans, end of period | | $ | 86,093 | | $ | 62,491 | | $ | 30,945 | | $ | 2,616 | | $ | 182,145 | | | $ | 42,666 | | $ | 26,869 | | $ | 65,030 | | $ | 57,833 | | $ | 264 | | $ | 192,662 | | | | | | | | | | | | | | | | | | | | | | | | | | |
126133
Credit Quality We believe the most meaningful way to assess overall credit quality performance for 2009 is through an analysis of credit quality performance ratios. This approach forms the basis of most of the discussion in the two sections immediately following: Non-accruing and Non-performing assets and Net Charge-Offs and Total Credit Losses. Credit quality performance in 2009 was negativelycontinued to show signs of stabilization, though net charge-offs were adversely impacted by charge-offs associated with loans transferred to held for sale. Net charge-offs increased $276.4 million, or 83%, from the sustained economic weaknessprior year including $165.1 million of charge-offs related to loans transferred to held for sale. Excluding the charge-offs related to the loans transferred to held for sale, total net charge-offs were $444.6 million, representing a $111.4 million increase from the prior year. The year 2010 saw a decline in Puerto Riconon-performing assets of $148.8 million, and the United Statesallowance for loan and lease losses as a percent of total loans held for investment increased to 4.74% as of December 31, 2010 from 3.79% as of December 31, 2009. The decrease in non-performing loans was mainly a function of charge-off activity, problem credit resolutions, including the significant deteriorationsale of the real estate market in Florida, although there werenon-performing loans, positive signs lateresults from loan modifications and, to a lesser extent, loans brought current and a reduction in the year. In addition, we initiated certain actions in 2009 to reduce non-performing credits, including note sales and restructuringmigration of loans into two separate agreement (loan splitting). We anticipate a challenging year in 2010 with regards to credit quality.nonaccrual status compared to the experience of 2009. Non-accruingNon-performing Loans and Non-performing Assets Total non-performing assets consist of non-accruingnon-performing loans, foreclosed real estate and other repossessed properties as well as non-performing investment securities. Non-accruingNon-performing loans are those loans on which the accrual of interest is discontinued. When a loan is placed in non-accruingnon-performing status, any interest previously recognized and not collected is reversed and charged against interest income. Non-accruingNon-performing Loans Policy
Residential Real Estate Loans— The Corporation classifies real estate loans in non-accruingnon-performing status when interest and principal have not been received for a period of 90 days or more.more or on certain loans modified under one of the Corporation’s loss mitigation programs (See Past Due Loans description below). Commercial and Construction Loans— The Corporation places commercial loans (including commercial real estate and construction loans) in non-accruingnon-performing status when interest and principal have not been received for a period of 90 days or more or when there are doubts about the potential to collect all of the principal based on collateral deficiencies or, in other situations, when collection of all of principal or interest is not expected due to deterioration in the financial condition of the borrower. Finance Leases— Finance leases are classified in non-performing status when interest and principal have not been received for a period of 90 days or more. Consumer Loans— Consumer loans are classified in non-performing status when interest and principal have not been received for a period of 90 days or more. Cash payments received on certain loans that are impaired and collateral dependent are recognized when collected in accordance with the contractual terms of the loans. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized on a cash basis (when collected). However, when management believes that the ultimate collectability of principal is in doubt, the cash interest portionreceived is applied to principal. The risk exposure of this portfolio is diversified as to individual borrowers and industries among other factors. In addition, a large portion is secured with real estate collateral. Finance Leases— Finance leases are classified in non-accruing status when interest and principal have not been received for a period of 90 days or more.
Consumer Loans— Consumer loans are classified in non-accruing status when interest and principal have not been received for a period of 90 days or more.
Other Real Estate Owned (OREO) OREO acquired in settlement of loans is carried at the lower of cost (carrying value of the loan) or fair value less estimated costs to sell off the real estate at the date of acquisition (estimated realizable value). 127
Other Repossessed Property The other repossessed property category includes repossessed boats and autos acquired in settlement of loans. Repossessed boats and autos are recorded at the lower of cost or estimated fair value. 134
Investment Securities This category presents investment securities reclassified to non-accruingnon-accrual status, at their book value. Past Due Loans over 90 days and still accruing Past due loansThese are accruing loans which are contractually delinquent 90 days or more. PastThese past due loans are either current as to interest but delinquent in the payment of principal or are insured or guaranteed under applicable FHA and VA programs.
During the third quarter of 2007, theThe Corporation started ahas in place loan loss mitigation programprograms providing homeownership preservation assistance. Loans modified through this program are reported as non-performing loans and interest is recognized on a cash basis. When there is reasonable assurance of repayment and the borrower has made payments over a sustained period, the loan is returned to accruingaccrual status.
The following table presents non-performing assets as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Non-accruing loans: | | | Non-performing loans held for investment: | | | Residential mortgage | | $ | 441,642 | | $ | 274,923 | | $ | 209,077 | | $ | 114,828 | | $ | 54,777 | | | $ | 392,134 | | $ | 441,642 | | $ | 274,923 | | $ | 209,077 | | $ | 114,828 | | Commercial mortgage | | 196,535 | | 85,943 | | 46,672 | | 38,078 | | 15,273 | | | 217,165 | | 196,535 | | 85,943 | | 46,672 | | 38,078 | | Commercial and Industrial | | 241,316 | | 58,358 | | 26,773 | | 24,900 | | 18,582 | | | 317,243 | | 241,316 | | 58,358 | | 26,773 | | 24,900 | | Construction | | 634,329 | | 116,290 | | 75,494 | | 19,735 | | 1,959 | | | 263,056 | | 634,329 | | 116,290 | | 75,494 | | 19,735 | | Finance leases | | 5,207 | | 6,026 | | 6,250 | | 8,045 | | 3,272 | | | 3,935 | | 5,207 | | 6,026 | | 6,250 | | 8,045 | | Consumer | | 44,834 | | 45,635 | | 48,784 | | 46,501 | | 40,459 | | | 45,456 | | 44,834 | | 45,635 | | 48,784 | | 46,501 | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,563,863 | | 587,175 | | 413,050 | | 252,087 | | 134,322 | | | | | | | | | | | | | | | | Total non-performing loans held for investment | | | 1,238,989 | | 1,563,863 | | 587,175 | | 413,050 | | 252,087 | | | | | | | | | | | | | | | REO | | 69,304 | | 37,246 | | 16,116 | | 2,870 | | 5,019 | | | 84,897 | | 69,304 | | 37,246 | | 16,116 | | 2,870 | | Other repossessed property | | 12,898 | | 12,794 | | 10,154 | | 12,103 | | 9,631 | | | 14,023 | | 12,898 | | 12,794 | | 10,154 | | 12,103 | | Investment securities(1) | | 64,543 | | — | | — | | — | | — | | | 64,543 | | 64,543 | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | Total non-performing assets | | $ | 1,710,608 | | $ | 637,215 | | $ | 439,320 | | $ | 267,060 | | $ | 148,972 | | | Total non-performing assets, excluding loans held for sale | | | 1,402,452 | | 1,710,608 | | 637,215 | | 439,320 | | 267,060 | | Non-performing loans held for sale | | | 159,321 | | — | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | Total non-performing assets, including loans held for sale | | | $ | 1,561,773 | | $ | 1,710,608 | | $ | 637,215 | | $ | 439,320 | | $ | 267,060 | | | | | | | | | | | | | | | Past due loans 90 days and still accruing | | $ | 165,936 | | $ | 471,364 | | $ | 75,456 | | $ | 31,645 | | $ | 27,501 | | | $ | 144,113 | | $ | 165,936 | | $ | 471,364 | | $ | 75,456 | | $ | 31,645 | | | | | Non-performing assets to total assets | | | 8.71 | % | | | 3.27 | % | | | 2.56 | % | | | 1.54 | % | | | 0.75 | % | | | 10.02 | %(2) | | | 8.71 | % | | | 3.27 | % | | | 2.56 | % | | | 1.54 | % | | | | Non-accruing loans to total loans receivable | | | 11.23 | % | | | 4.49 | % | | | 3.50 | % | | | 2.24 | % | | | 1.06 | % | | | | | Non-performing loans held for investment to total loans held for investment | | | | 10.63 | % | | | 11.23 | % | | | 4.49 | % | | | 3.50 | % | | | 2.24 | % | Allowance for loan and lease losses | | $ | 528,120 | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | $ | 147,999 | | | $ | 553,025 | | $ | 528,120 | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | | | | Allowance to total non-accruing loans | | | 33.77 | % | | | 47.95 | % | | | 46.04 | % | | | 62.79 | % | | | 110.18 | % | | | | | Allowance to total non-accruing loans, excluding residential real estate loans | | | 47.06 | % | | | 90.16 | % | | | 93.23 | % | | | 115.33 | % | | | 186.06 | % | | Allowance to total non-performing loans held for investment | | | | 44.64 | % | | | 33.77 | % | | | 47.95 | % | | | 46.04 | % | | | 62.79 | % | Allowance to total non-performing loans held for investment, excluding residential real estate loans | | | | 65.30 | % | | | 47.06 | % | | | 90.16 | % | | | 93.23 | % | | | 115.33 | % |
| | | (1) | | Collateral pledged with Lehman Brothers Special Financing, Inc. | | (2) | | Non-performing assets, excluding non-performing loans held for sale, to total assets, excluding non-performing loans transferred to held for sale, was 9.09% as of December 31, 2010 |
135
The following table shows non-performing assets by geographic segment: | | | | | | | | | | | | | | | | | | | | | | | December 31, | | | December 31, | | | December 31, | | | December 31, | | | December 31, | | (Dollars in thousands) | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | | Puerto Rico: | | | | | | | | | | | | | | | | | | | | | Non-performing loans held for investment: | | | | | | | | | | | | | | | | | | | | | Residential mortgage | | $ | 330,737 | | | $ | 376,018 | | | $ | 244,843 | | | $ | 195,278 | | | $ | 108,177 | | Commercial mortgage | | | 177,617 | | | | 128,001 | | | | 61,459 | | | | 43,649 | | | | 34,422 | | Commercial and Industrial | | | 307,608 | | | | 229,039 | | | | 54,568 | | | | 24,357 | | | | 19,934 | | Construction | | | 196,948 | | | | 385,259 | | | | 71,127 | | | | 25,506 | | | | 19,342 | | Finance leases | | | 3,935 | | | | 5,207 | | | | 6,026 | | | | 6,250 | | | | 8,045 | | Consumer | | | 43,241 | | | | 40,132 | | | | 40,313 | | | | 42,779 | | | | 42,101 | | | | | | | | | | | | | | | | | | Total non-performing loans held for investment | | | 1,060,086 | | | | 1,163,656 | | | | 478,336 | | | | 337,819 | | | | 232,021 | | | | | | | | | | | | | | | | | | REO | | | 67,488 | | | | 49,337 | | | | 22,012 | | | | 13,593 | | | | 1,974 | | Other repossessed property | | | 13,839 | | | | 12,634 | | | | 12,221 | | | | 9,399 | | | | 11,743 | | Investment securities | | | 64,543 | | | | 64,543 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | Total non-performing assets, excluding loans held for sale | | $ | 1,205,956 | | | $ | 1,290,170 | | | $ | 512,569 | | | $ | 360,811 | | | $ | 245,738 | | Non-performing loans held for sale | | | 159,321 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | Total non-performing assets, including loans held for sale | | $ | 1,365,277 | | | $ | 1,290,170 | | | $ | 512,569 | | | $ | 360,811 | | | $ | 245,738 | | | | | | | | | | | | | | | | | | Past due loans 90 days and still accruing | | $ | 142,756 | | | $ | 128,016 | | | $ | 220,270 | | | $ | 73,160 | | | $ | 28,520 | | | | | | | | | | | | | | | | | | | | | | | Virgin Islands: | | | | | | | | | | | | | | | | | | | | | Non-performing loans held for investment: | | | | | | | | | | | | | | | | | | | | | Residential mortgage | | $ | 9,655 | | | $ | 9,063 | | | $ | 8,492 | | | $ | 6,004 | | | $ | 4,317 | | Commercial mortgage | | | 7,868 | | | | 11,727 | | | | 1,476 | | | | 1,887 | | | | 2,076 | | Commercial and Industrial | | | 6,078 | | | | 8,300 | | | | 2,055 | | | | 2,131 | | | | 2,325 | | Construction | | | 16,473 | | | | 2,796 | | | | 4,113 | | | | 3,542 | | | | 393 | | Consumer | | | 927 | | | | 3,540 | | | | 3,688 | | | | 5,186 | | | | 4,089 | | | | | | | | | | | | | | | | | | Total non-performing loans held for investment | | | 41,001 | | | | 35,426 | | | | 19,824 | | | | 18,750 | | | | 13,200 | | | | | | | | | | | | | | | | | | REO | | | 2,899 | | | | 470 | | | | 430 | | | | 777 | | | | 896 | | Other repossessed property | | | 108 | | | | 221 | | | | 388 | | | | 494 | | | | 281 | | | | | | | | | | | | | | | | | | Total non-performing assets, excluding loans held for sale | | $ | 44,008 | | | $ | 36,117 | | | $ | 20,642 | | | $ | 20,021 | | | $ | 14,377 | | Non-performing loans held for sale | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | Total non-performing assets, including loans held for sale | | $ | 44,008 | | | $ | 36,117 | | | $ | 20,642 | | | $ | 20,021 | | | $ | 14,377 | | | | | | | | | | | | | | | | | | Past due loans 90 days and still accruing | | $ | 1,358 | | | $ | 23,876 | | | $ | 27,471 | | | $ | 998 | | | $ | 3,125 | | | | | | | | | | | | | | | | | | | | | | | Florida: | | | | | | | | | | | | | | | | | | | | | Non-performing loans held for investment: | | | | | | | | | | | | | | | | | | | | | Residential mortgage | | $ | 51,742 | | | $ | 56,561 | | | $ | 21,588 | | | $ | 7,795 | | | $ | 2,334 | | Commercial mortgage | | | 31,680 | | | | 56,807 | | | | 23,007 | | | | 1,136 | | | | 1,580 | | Commercial and Industrial | | | 3,557 | | | | 3,977 | | | | 1,736 | | | | 285 | | | | 2,641 | | Construction | | | 49,635 | | | | 246,274 | | | | 41,050 | | | | 46,446 | | | | — | | Consumer | | | 1,288 | | | | 1,162 | | | | 1,634 | | | | 819 | | | | 311 | | | | | | | | | | | | | | | | | | Total non-performing loans held for investment | | | 137,902 | | | | 364,781 | | | | 89,015 | | | | 56,481 | | | | 6,866 | | | | | | | | | | | | | | | | | | REO | | | 14,510 | | | | 19,497 | | | | 14,804 | | | | 1,746 | | | | — | | Other repossessed property | | | 76 | | | | 43 | | | | 185 | | | | 261 | | | | 79 | | | | | | | | | | | | | | | | | | Total non-performing assets, excluding loans held for sale | | $ | 152,488 | | | $ | 384,321 | | | $ | 104,004 | | | $ | 58,488 | | | $ | 6,945 | | Non-performing loans held for sale | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | Total non-performing assets, including loans held for sale | | $ | 152,488 | | | $ | 384,321 | | | $ | 104,004 | | | $ | 58,488 | | | $ | 6,945 | | | | | | | | | | | | | | | | | | Past due loans 90 days and still accruing | | $ | — | | | $ | 14,044 | | | $ | 223,623 | | | $ | 1,298 | | | | | |
Total non-performing assets asloans, including non-performing loans held for sale of $159.3 million, were $1.40 billion, down from $1.56 billion at December 31, 2009 was $1.71 billion compared to $637.2 million asprimarily resulting from charge-offs and sales of December 31, 2008. Even though deterioration in credit quality was observed in all of the Corporation’s portfolios, it was more significant in the construction and commercial loan portfolios, which were affected by both the stagnant housing market and further weakening in the economies of the markets served during most of 2009. The increase in non-performing assets was led by an increase of $518.0approximately $200 million in non-performing construction loans during 2010. Total non-performing loans held for investment, which exclude non-performing loans held for sale, were $1.24 billion at December 31, 2010, which represented 10.63% of which $314.1total loans held for investment. This was down $324.9 million, is related to the construction loan portfolio in Puerto Rico portfolio and $205.2 million is related to construction projects in Florida. Other portfolios that experienced a significant growth in credit risk, mainly in Puerto Rico, include: (i) a $183.0 million increaseor 21%, from $1.56 billion, or 11.23% of total loans held for investment, at December 31, 2009. The decrease in non-performing commercial and industrial (“C&I”) loans (ii) a $166.7 million increase inheld for investment during 2010 primarily reflected the transfer of non-performing residential mortgage loans and (ii) a $110.6 million increase in non-performing commercial mortgage loans. Also, during 2009, the Corporation classified as non-performing investment securitiesinto held for sale. Non-performing loans with a book value of $64.5$263 million that were pledgedwritten down to Lehman Brothers Special Financing, Inc.a value of $159.3 million ($140.1 million construction loans and $19.2 million commercial mortgage loans) and transferred to held for sale. Also contributing to the decrease were further declines in construction as well as reductions in residential and consumer non-performing loans partially offset by increases in commercial mortgage and C&I non-performing loans. Non-performing construction loans, including non-performing construction loans held for sale of $140.1 million, decreased by $231.1 million, or 36%, in connection with several interest rate swap agreements entered into with that institution. Considering thatdriven by charge-offs, the investment securities have not yet been recovered by the Corporation, despite its efforts in this regard, thesale of $118.4 million of non-performing construction loans during 2010, problem credit resolutions (including restructured loans), and paydowns. The 128136
Corporation decided to classify such investments as non-performing. It is important to note that although theredecrease was a significant increase in non-performing assets from December 31, 2008, to December 31,2009, there was a slower growth ratemainly in the 2009 fourth quarter as compared to all previous quarters in 2009 as a result of actions taken by the Corporation including note sales, restructuring of loans into two separate agreements (loan splitting) and restructured loans restored to accrual status after a sustained period of repayment and that have been deemed collectible.
TotalUnited States where non-performing construction loans increased by $518.0decreased $196.6 million or 80% from December 31, 2008. The non-performing construction loans in Puerto Rico increased by $314.1 million in 2009 primarily related to residential housing projects. There were 10 relationships greater than $10 million in non-accrual status as of December 31, 2009, compared to two as of December 31, 2008, including $123.8 million on two high-rise residential projects.
Non-performing construction loans in Florida increased by $205.2 million from December 31, 2008. There were five relationships in the state of Florida greater than $10 million totaling $186.8$246.3 million as of December 31, 2009 compared to one relationship of $11.1$49.6 million as ofat December 31, 2008. Most2010. The decrease was driven by sales of the non-performing loans in Florida are related to condo-conversion and residential housing projects affected by low absorption rates. Even though a significant increase was observed from 2008 to 2009, there was a decrease experienced in the last quarter of 2009 mainly due to note sales and loans restructured into two notes. During the fourth quarter of 2009, the Corporation completed the sales$116.6 million of non-performing construction loans in Florida totaling approximately $40.4 million and also completedproblem credit resolution, including the restructuring of condo-conversiona $19.7 million loan that has been formally restructured so as to be reasonably assured of principal and interest repayment and of performance according to its modified terms. The Corporation restructured the loan by splitting it into two separate notes. The first note for $17 million was placed in accruing status as the borrower has exhibited a period of sustained performance and the second note for $2.7 million was charged-off. The sales were part of the Corporation’s ongoing efforts to reduce its non-performing assets through its Special Assets Group. Key to the improvement in non-performing construction loans withwas the significant lower level of inflows. The level of inflow, or migration, is an aggregate book valueimportant indication of $38.1 million.the future trend of the portfolio.
Non-performing construction loans in Puerto Rico, including $140.1 million non-performing construction loans held for sale, decreased by $48.2 million from December 2009 driven by charge-offs, including charge-offs of $89.5 million associated with loans transferred to held for sale and paydowns on residential housing projects. The Corporation experienced increases in absorption rates for its residential housing projects in Puerto Rico, reflecting a combination of factors, including low interest rates, incentives by home developers, reduced unit prices and the impact of the Puerto Rico Government housing stimulus package enacted in September 2010. As previously reported, from September 1, 2010 to June 30, 2011, the Government of Puerto Rico is providing tax and transaction fees incentives to both purchasers and sellers (whether a Puerto Rico resident or not) of new and existing residential property, as well as commercial property, with a sales price of no more than $3 million. Among its significant provisions, the housing stimulus package provides various types of income and property tax exemptions as well as reduced closing costs. This legislation should help to alleviate some of the stress in the construction industry. Refer to “Financial Condition and Operating Data Analysis — Loan Portfolio — Commercial and Construction Loans” discussion above for additional information about the main provisions of the housing stimulus package. Partially offsetting the decrease in non-performing construction loans in 2010 was the inflow of loans into non-accrual status primarily driven by four relationships in excess of $10 million, mainly in connection with residential housing projects. In the Virgin Islands, decreased by $1.3 million. The C&Ithe non-performing loansconstruction loan portfolio increased by $183.0$13.7 million, fromdriven by a $10.0 million relationship engaged in the development of a residential real estate project.
Non-performing residential mortgage loans decreased by $49.5 million, or 11%, as compared to the balance at December 31, 2008. Non-performing C&I loans2010. The decrease was primarily in Puerto Rico increased by $174.5connection with the bulk sale of $23.9 million reflecting the sustained economic weakness that affected several industries such as food and beverage, accommodation, financial and printing. There were four relationships greater than $10 million as of December 31, 2009 totaling $101.8 million that entered into non-accrual status during 2009 and accounted for 55% of the increase. C&I non-performing loans in Florida and Virgin Islands were more stable with increases of $2.2 million and $6.2 million, respectively, from December 31, 2008. Total non-performing commercial mortgage loans increased by $110.6 million from December 31, 2008. Non-performing commercial mortgage loans in Puerto Rico increased by $66.5 million spread across several industries. In Florida, non-performing commercial mortgage loans increased by $33.8 million from December 31, 2008, including a single rental-property relationship of $11.4 million. Non-performing commercialresidential mortgage loans in the Virgin Islands increased by $10.3 million.
In many cases, commercialfourth quarter of 2010, and construction loans were placed on non-accrual status even though the loan was less than 90 days past due in their interest payments. At the close of 2009, approximately $229.4 million of loans placed in non-accrual status, mainly construction and commercial loans, were current or had delinquencies less than 90 days in their interest payments. Further, collections are being recorded on a cash basis through earnings, or on a cost-recovery basis, as conditions warrant. In Florida, as sales of units within condo-conversion projects continue to lag, some borrowers reverted to rental projects. For several of these loans, cash collections cover interest, property taxes, insurance and other operating costs associated with the projects.
During the year ended December 31, 2009, interest income of approximately $4.7 milliondeclines related to $761.5 million of non-performing loans, mainly non-performing construction and commercial loans, was applied against the related principal balances under the cost-recovery method. The Corporation will continue to evaluate restructuring alternatives to mitigate losses and enable borrowers to repay their loans under revised terms in an effort to preserve the valueloan modifications combined with charge-offs. Most of the Corporation’s interests over the long-term.
Non-performingdecrease was in Puerto Rico where non-performing residential mortgage loans increaseddecreased by $166.7$45.3 million, during 2009, mainly attributableor 12%, compared to the Puerto Rico portfolio, which has been adversely affected by the continued trendDecember, 2009. Approximately $291.1 million, or 74% of higher unemployment rates affecting consumers and includes $36.9 million related to loans acquired in the previously explained transaction with R&G. Thetotal non-performing residential mortgage loan portfolio in Puerto Rico increased by $131.2 million during 2009.loans, have been written down to their net realizable value. The Corporation continues to address loss mitigation and loan modifications by offering alternatives to
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avoid foreclosures through internal programs and programs sponsored by the Federal Government. In Florida, non-performing residential mortgage loans increaseddecreased by $35.0$4.8 million from December 31, 2008, however, a2010. The decrease was observed in the last quartermainly due to modified loans that have been restored to accrual status after a sustained repayment performance (generally six months) and are deemed collectible. During 2009, the non-performingNon-performing residential mortgage loan portfolioloans in the Virgin Islands increased by $0.6 million.million Non-performing commercial mortgage loans, including $19.2 million associated with loans transferred to held for sale, increased by $39.8 million from 2009, primarily in the Puerto Rico region, as the Florida region reflected a decrease. Total non-performing commercial mortgage loans in Puerto Rico increased primarily due to one relationship amounting to $85.7 million placed in non-accruing status during the fourth quarter of 2010 due to the borrower’s financial condition, even though most of the loans in the relationship are under 90 days delinquent. Partially offsetting this increase in Puerto Rico were two relationships amounting to $12.5 million in the aggregate becoming current and for which the Corporation expects to collect principal and interest in full pursuant to the terms of the loans. Non-performing commercial mortgage loans in Florida decreased by $25.1 million driven by sales of $55.8 million during 2010. Total non-accrual commercial mortgage loans in the Virgin Islands decreased by $3.9 million mainly attributable to restoration to accrual status of a $3.8 million loan based on its compliance with performance terms and debt service capacity. C&I non-performing loans increased by $75.9 million, or 31%, during 2010. The consumer and finance leases non-performing loan portfolio remained relatively flat at $50.0increase was driven by the inflow of five relationships in Puerto Rico in individual amounts exceeding $10 million with an aggregate carrying 137
value of $106.2 million as of December 31, 2009 when compared2010. This was partially offset by net charge-offs, including a charge-off of $15.3 million relating to $51.7one relationship based on its financial condition, a charge-off of $15.0 million asassociated with a loan extended to a local financial institution in Puerto Rico, and, to a lesser extent, payments received and applied to non-performing loans and by a $27.4 million non-performing loan paid-off during the fourth quarter of December 31, 2008.2010. In the United States and the Virgin Islands, C&I non-performing loans decreased by $0.4 million and $2.2 million, respectively. The levels of non-accrual consumer loans, including finance leases, remained stable showing a $0.7 million decrease during 2010, mainly related to auto financings in the Virgin Islands. This portfolio showed signs of stability and benefited from changes in underwriting standards implemented in late 2005. The consumer loan portfolio, with an average life of approximately four years, has been replenished by new originations under the revised standards. At December 31, 2010, approximately $233.3 million of the loans placed in non-accrual status, mainly construction and commercial loans, were current, or had delinquencies of less than 90 days in their interest payments, including $61.2 million of restructured loans maintained in nonaccrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status. Collections are being recorded on a cash basis through earnings, or on a cost-recovery basis, as conditions warrant. During the year ended December 31, 2010, interest income of approximately $6.2 million related to non-performing loans with a carrying value of $721.1 million as of December 31, 2010, mainly non-performing construction and commercial loans, was applied against the related principal balances under the cost-recovery method. The allowance to non-performing loans ratio as of December 31, 20092010 was 33.77%44.64%, compared to 47.95%33.77% as of December 31, 2008.2009. The decreaseincrease in the ratio is attributable in part to non-performing collateral dependent loans that are evaluated individually for impairment that, after charge-offs, reflected limited impairment or no impairment at all, and other impaired loans that did not require specific reservesincreases in the allowance based on collateral values or cash flows projections analyses performed. Also 17% of the increaseincreases in non-performingreserve factors for classified loans since December 31, 2008 is relatedand additional charges to residential mortgage loans, mainly in Puerto Rico, where the Corporation’s loan loss experience has been comparatively low due to, among other things, the Corporation’s conservative underwriting practices and loan-to-value ratios, thus requiring a lower general reserve as compared to other portfolios. specific reserves. As of December 31, 2009,2010, approximately $517.7$445.3 million, or 33%36%, of total non-performing loans held for investment have been charged-off to their net realizable value as set forth below:shown in the following table. | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential | | | Commercial | | | | | | | Construction | | | Consumer and | | | | | (Dollars in thousands) | | Mortgage Loans | | | Mortgage Loans | | | C&I Loans | | | Loans | | | Finance Leases | | | Total | | As of December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | Non-performing loans charged-off to realizable value | | $ | 320,224 | | | $ | 38,421 | | | $ | 19,244 | | | $ | 139,787 | | | $ | — | | | $ | 517,676 | | Other non-performing loans | | | 121,418 | | | | 158,114 | | | | 222,072 | | | | 494,542 | | | | 50,041 | | | | 1,046,187 | | | | | | | | | | | | | | | | | | | | | Total non-performing loans | | $ | 441,642 | | | $ | 196,535 | | | $ | 241,316 | | | $ | 634,329 | | | $ | 50,041 | | | $ | 1,563,863 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance to non-performing loans | | | 7.06 | % | | | 32.55 | % | | | 77.08 | % | | | 25.87 | % | | | 165.56 | % | | | 33.77 | % | Allowance to non-performing loans, excluding non-performing loans charged-off to realizable value | | | 25.67 | % | | | 40.46 | % | | | 83.76 | % | | | 33.19 | % | | | 165.56 | % | | | 50.48 | % | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-performing loans charged-off to realizable value | | $ | 19,909 | | | $ | 8,852 | | | $ | 9,890 | | | $ | 1,810 | | | $ | — | | | $ | 40,461 | | Other non-performing loans | | | 255,014 | | | | 77,091 | | | | 48,468 | | | | 114,480 | | | | 51,661 | | | | 546,714 | | | | | | | | | | | | | | | | | | | | | Total non-performing loans | | $ | 274,923 | | | $ | 85,943 | | | $ | 58,358 | | | $ | 116,290 | | | $ | 51,661 | | | $ | 587,175 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance to non-performing loans | | | 5.46 | % | | | 20.68 | % | | | 127.42 | % | | | 71.79 | % | | | 175.95 | % | | | 47.95 | % | Allowance to non-performing loans, excluding non-performing loans charged-off to realizable value | | | 5.89 | % | | | 23.06 | % | | | 153.42 | % | | | 72.92 | % | | | 175.95 | % | | | 51.49 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Residential | | | Commercial | | | | | | | Construction | | | Consumer and | | | | | (Dollars in thousands) | | Mortgage Loans | | | Mortgage Loans | | | C&I Loans | | | Loans | | | Finance Leases | | | Total | | As of December 31, 2010 | | | | | | | | | | | | | | | | | | | | | | | | | Non-performing loans, excluding loans held for sale, charged-off to realizable value | | $ | 291,118 | | | $ | 20,239 | | | $ | 101,151 | | | $ | 32,139 | | | $ | 659 | | | $ | 445,306 | | Other non-performing loans, excluding loans held for sale | | | 101,016 | | | | 196,926 | | | | 216,092 | | | | 230,917 | | | | 48,732 | | | | 793,683 | | | | | | | | | | | | | | | | | | | | | Total non-performing loans, excluding loans held for sale | | $ | 392,134 | | | $ | 217,165 | | | $ | 317,243 | | | $ | 263,056 | | | $ | 49,391 | | | $ | 1,238,989 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance to non-performing loans, excluding loans held for sale | | | 15.90 | % | | | 48.62 | % | | | 48.11 | % | | | 57.77 | % | | | 162.96 | % | | | 44.64 | % | Allowance to non-performing loans, excluding loans held for sale and non-performing loans charged-off to realizable value | | | 61.70 | % | | | 53.62 | % | | | 70.64 | % | | | 65.81 | % | | | 165.16 | % | | | 69.68 | % | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-performing loans, excluding loans held for sale, charged-off to realizable value | | $ | 320,224 | | | $ | 38,421 | | | $ | 19,244 | | | $ | 139,787 | | | $ | — | | | $ | 517,676 | | Other non-performing loans, excluding loans held for sale | | | 121,418 | | | | 158,114 | | | | 222,072 | | | | 494,542 | | | | 50,041 | | | | 1,046,187 | | | | | | | | | | | | | | | | | | | | | Total non-performing loans, excluding loans held for sale | | $ | 441,642 | | | $ | 196,535 | | | $ | 241,316 | | | $ | 634,329 | | | $ | 50,041 | | | $ | 1,563,863 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance to non-performing loans, excluding loans held for sale | | | 7.06 | % | | | 34.19 | % | | | 75.74 | % | | | 25.87 | % | | | 165.56 | % | | | 33.77 | % | Allowance to non-performing loans, excluding loans held for sale and non-performing loans charged-off to realizable value | | | 25.67 | % | | | 42.50 | % | | | 82.31 | % | | | 33.19 | % | | | 165.56 | % | | | 50.48 | % |
The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico and through programs sponsored by the Federal Government. Due to the nature of the borrower’sDepending upon borrowers financial condition, the restructurerestructurings or loan modificationmodifications through thesethis program as well as other restructurings of individual commercial, commercial mortgage, loans, construction loans and residential mortgagesmortgage loans in the U.S. mainland fit the definition of Troubled Debt Restructuring (“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 loansloan and modifications of the loan rate. As of December 31, 2009,2010, the Corporation’s TDR loans consisted of $124.1$261.2 million of residential mortgage loans, $42.1$37.2 million commercial and industrial loans, $68.1$112.4 million commercial mortgage loans and $101.7$28.5 million of construction loans. From the $336.0$439 million total TDR loans, approximately $130.4$224 million are in compliance with 138
modified terms, $23.8$54 million are 30-89 days delinquent and $181.8$161 million are classified as non-accrual as of December 31, 2009.2010. 130
Included in the $101.7$112.4 million of constructioncommercial mortgage TDR loans are certain impaired condo-conversion loansis one loan restructured into two separate agreements (loan splitting) in the fourth quarter of 2009. Each of these loans were2010. This loan was restructured into two notes:notes; one that represents the portion of the loan that is expected to be fully collected along with contractual interest and the second note that represents the portion of the original loan that was charged-off. The renegotiationsrenegotiation of these loans have beenthis loan was made after analyzing the borrowersborrowers’ and guarantorsguarantors’ capacity to serverepay the debt and ability to perform under the modified terms. As part of the renegotiation of the loans, the first note of each loan have beenwas placed on a monthly payment schedule that amortizeamortizes the debt over 2530 years at a market rate of interest. An interest rate reductionThe second note for $2.7 million was granted forfully charged-off. The carrying value of the second note. The following tables provide additional information about the volumenote deemed collectible amounted to $17.0 million as of this type of loan restructuringsDecember 31, 2010 and the effect oncharge-off recorded prior to the allowance forrestructure amounted to $11.3 million. The loan and lease losseswas placed in 2009. | | | | | | | (In thousands) | | Principal balance deemed collectible | | $ | 22,374 | | | | | | Amount charged-off | | $ | (29,713 | ) | | | | |
| | | | | Specific Reserve: | | (In thousands) | | Balance at beginning of year | | $ | 14,375 | | Provision for loan losses | | | 17,213 | | Charge-offs | | | (29,713 | ) | | | | | Balance at end of year | | $ | 1,875 | | | | | |
The loans comprisingaccruing status as the $22.4 million that have been deemed collectible continueborrower has exhibited a period of sustained performance but continues to be individually evaluated for impairment purposes. These transactions contributedpurposes, and a specific reserve of $2.0 million was allocated to a $29.9 million decrease in non-performing loans during the last quarter of 2009.
Past due and still accruing loans, which are contractually delinquent 90 days or more, amounted to $165.9 millionthis loan as of December 31, 2009 (2008 — $471.4 million)2010.
The REO portfolio, which is part of which $71.1non-performing assets, increased by $15.6 million, are governmentmainly in Puerto Rico, reflecting increases in both commercial and residential properties, partially offset by sales of REO properties in Florida. Consistent with the Corporation’s assessment of the value of properties and current and future market conditions, management is executing strategies to accelerate the sale of the real estate acquired in satisfaction of debt. During 2010, the Corporation sold approximately $65.2 million of REO properties ($43.8 million in Florida, $21.1 million in Puerto Rico and $0.3 million in the Virgin Islands). The over 90-day delinquent, but still accruing, loans, excluding loans guaranteed loans.by the U.S. Government, decreased to $62.8 million, or 0.54% of total loans held for investment, at December 31, 2010 from $96.7 million, or 0.69% of total loans held for investment, at December 31, 2009. Net Charge-Offs and Total Credit Losses The Corporation’sTotal net charge-offs for 20092010 were $609.7 million, or 4.76% of average loans. This was up $276.4 million, or 83%, from $333.3 million, or 2.48%, in 2009. The increase includes $165.1 million associated with loans transferred to held for sale. Excluding the charge-offs related to loans transferred to held for sale, net charge-offs in 2010 were $444.6 million. Total construction net charge-offs in 2010 were $313.2 million, or 23.80% of average loans, compared to $108.3up from $183.6 million, or 0.87%11.54% of average loans in 2009. The increase of $129.6 million includes $127.0 million associated with construction loans transferred to held for 2008.sale in Puerto Rico. Excluding the net charge-offs related to construction loans transferred to held for sale, net charge-offs for 2010 were $186.2 million. Construction loan charge-offs have been significantly impacted by individual loan charge-offs in excess of $10 million coupled with charge-offs related to loans sold. There were six loan relationships with charge-offs in excess of $10 million for 2010 that accounted for $86.3 million of total construction loans charge offs. Construction loans net charge-offs in Puerto Rico were $216.4 million, including $37.2 million in charge-offs associated with three relationships in excess of $10 million mainly related to high-rise residential projects and the $127.0 million associated with loans transferred to held for sale. Construction loans net charge-offs in the United States amounted to $90.6 million, of which $45.4 million are related to loans sold during the period at a significant discount as part of the Corporation’s de-risking strategies. The significant increase is mainly dueCorporation continued its ongoing management efforts including obtaining updated appraisals for the collateral for impaired loans and assessing a project’s status within the context of market environment expectations; generally, appraisal updates are requested annually. This portfolio remains susceptible to the continued deterioration in the collateral values of construction loans, primarily in the Florida region. Florida’s economy has been hampered by a deterioratingongoing housing market sincedisruptions, particularly in Puerto Rico. In the second half of 2007. The overbuilding in the face of waning demand, among other things, caused a decline in the housing prices. The Corporation had been obtaining appraisals and increasing its reserve, as necessary, with expectations for a gradual housing market recovery. Nonetheless, the passage of time increased the possibility that the recovery of the market will not be in the near term. For these reasons, the Corporation decided to charge-off during 2009 collateral deficiencies for a significant amount of impaired collateral dependent loansUnited States, based on current appraisals obtained. The deficienciesthe portfolio management process, including charge-off activity over the past year and several sales of problem credits, the credit issues in this portfolio have been substantially addressed. As of December 31, 2010, the collateral raised doubts about the potentialconstruction loan portfolio in Florida amounted to collect the principal.$78.5 million, compared to $299.5 million as of December 31, 2009. The Corporation is engaged in continuous efforts to identify alternatives that enable borrowers to repay their loans and protectwhile protecting the Corporation’s investment. Total constructioninvestments. Construction loan net charge-offs in 2009the Virgin Islands were $183.6$6.2 million or 11.54% of average loans, up from $7.7 million, or 0.52% of average loans in 2008. Condo-conversion and residential development projects in Florida represent a significant portion of the losses. There were $137.4 million in net-charge offs in 2009for 2010, almost entirely related to construction projectsa residential project that was placed in Florida. Approximately $79.2 millionnon-accruing status in the third quarter of the charge-offs for 2009 was recorded in connection with loans sold and loan split type of restructuring. Net charge-offs of $46.2 million were recorded in connection with the construction loan portfolio in Puerto Rico, mainly residential housing projects. We continued our ongoing portfolio management efforts, including obtaining updated appraisals on properties and assessing a project status within the context of market environment expectations.2010.
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Total commercial mortgage net charge-offs in 20092010 were $81.4 million, or 5.02% of average loans, up from $25.2 million, or 1.64% of average loans upin 2009. The increase includes $29.5 million associated with commercial mortgage loans transferred to held for sale in Puerto Rico. Other charge-offs were mainly from $3.7Florida loans, which account for $39.7 million or 0.27% of average loans in 2008. The charge-offs in 2009 were spread through several loans, distributed across our geographic markets. Commercialtotal commercial mortgage net charge-offs, including $34.8 million on loans sold during 2010. C&I loans net charge-offs in 2010 were $98.5 million, or 2.16%, almost entirely related to the Puerto Rico portfolio, compared to the $34.5 million, or 0.72% of related loans, recorded in 2009. The increase from the prior year includes $8.6 million associated with C&I loans transferred to held for 2009sale in Puerto Rico were $7.9Rico. Also, there was a $15.3 million charge-off in 2010 associated with one non-performing loan based on the United States $15.2financial condition of the borrower and a $15.0 million and $2.1charge-off associated with a loan extended to R&G Financial that was adequately reserved prior to 2010. The Corporation also recognized a $7.7 million charge-off on a participation in the Virgin Islands. 131
Totala syndicated non-performing loan. Remaining C&I net charge-offs in 20092010 were $34.5 million, or 0.72% of average loans, up from $24.2 million, or 0.59% of average loansconcentrated in 2008. C&I loans net charge-offsPuerto Rico, where they were distributed across several industries, principally in Puerto Rico. C&I net charge-offs for 2009 in Puerto Rico were $32.8 million, in the United States $0.6 million and $1.1 million in the Virgin Islands. In assessing C&I net charge-offs trends, it is helpfulwith two relationships, each with an individual charge-off amounting to understand the process of how these loans are treated as they deteriorate over time. Reserves for loans are established at origination consistent with the level of risk associated with the original underwriting. If the quality of a commercial loan deteriorates, it migrates to a lower quality risk rating as a result of our normal portfolio management process, and a higher reserve amount is assigned. As a part of our normal portfolio management process, the loan is reviewed and reserves are increased as warranted. Charge-offs, if necessary, are generally recognized in a period after the reserves were established. If the previously established reserves exceed that needed to satisfactorily resolve the problem credit, a reduction in the overall level of the reserve could be recognized. In summary, if loan quality deteriorates, the typical credit sequence for commercial loans are periods of reserve building, followed by periods of higher net charge-offs as previously established reserves are utilized. Additionally, it is helpful to understand that increases in reserves either precede or are in conjunction with increases in impaired commercial loans. When a credit is classified as impaired, it is evaluated for specific reserves or charged-off.$6.6 million.
Residential mortgage net charge-offs were $62.7 million, or 1.80% of related average loans. This was up from $28.9 million, or 0.82% of related average loansbalances in 2009. This was up from $6.3Net charge-offs for 2010 include $7.8 million or 0.19%associated with the aforementioned $23.9 million bulk sale of related average balances in 2008.non-performing residential mortgage loans. The higher loss level for 2009 was a result of negative trendsis mainly related to reductions in delinquency levels.property values. Approximately $15.7$40.1 million in charge-offs for 2009 ($7.129.2 million in Puerto Rico, and $8.5$10.3 million in Florida)Florida and $0.6 million in the Virgin Islands) resulted from valuations for impairment purposes of residential mortgage loan portfolios withconsidered homogeneous given high delinquency and loan-to-value levels, compared to $1.8$15.7 million recorded in 2008. Total residential mortgage loan portfolios evaluated for impairment purposes2009 ($7.1 million in Puerto Rico, $8.5 million in Florida and charged-off to their net realizable value amounted to $320.2$0.1 million as of December 31, 2009. This amount represents approximately 73% of the total non-performing residential mortgage loan portfolio outstanding as of December 31, 2009.in Virgin Islands). Net charge-offs for residential mortgage loans also includes $11.2include $10.0 million related to loans foreclosed, during 2009, up from $3.9compared to $11.2 million recorded for loans foreclosed in 2008. Consistent with the Corporation’s assessment of the value of properties, current and future market conditions, management is executing strategies to accelerate the sale of the real estate acquired in satisfaction of debt (REO). The ratio of net charge-offs to average loans on the Corporation’s residential mortgage loan portfolio of 0.82% for 2009 is lower than the approximately 2.4% average charge-off rate for commercial banks in the U.S. mainland for the third quarter of 2009 as per statistical releases published by the Federal Reserve on its website.2009. Net charge-offs of consumer loans and finance leases in 20092010 were $61.1$53.9 million or 3.05% of related average loans, compared to net charge-offs of $66.4$61.1 million or 3.19%for 2009. Net charge-offs as a percentage of related average loans decreased to 2.98% from 3.05% for 2008.2009. Performance of this portfolio on both an absolute and relative basisterms continued to be consistent with ourmanagement’s views regarding the underlying quality of the portfolio. The 2009 level of delinquencies has improved compared with 2008 levels, further supporting our view of stable performance going forward. The following table presents charge-offs to average loans held in portfolio:
| | | | | | | | | | | | | | | | | | | | | | | Year Ended | | | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | Residential mortgage | | | 0.82 | % | | | 0.19 | % | | | 0.03 | % | | | 0.04 | % | | | 0.05 | % | Commercial mortgage | | | 1.64 | % | | | 0.27 | % | | | 0.10 | % | | | 0.00 | % | | | 0.03 | % | Commercial and Industrial | | | 0.72 | % | | | 0.59 | % | | | 0.26 | % | | | 0.06 | % | | | 0.11 | % | Construction | | | 11.54 | % | | | 0.52 | % | | | 0.26 | % | | | 0.00 | % | | | 0.00 | % | Consumer and finance leases | | | 3.05 | % | | | 3.19 | % | | | 3.48 | % | | | 2.90 | % | | | 2.06 | % | Total loans | | | 2.48 | % | | | 0.87 | % | | | 0.79 | % | | | 0.55 | % | | | 0.39 | % |
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The following table shows net charge-offs to average loans ratio by loan categories for the last five years. by | | | | | | | | | | | | | | | | | | | | | | | For the year ended December 31, | | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 | Residential mortgage | | | 1.80% | (1) | | | 0.82 | % | | | 0.19 | % | | | 0.03 | % | | | 0.04 | % | Commercial mortgage | | | 5.02% | (2) | | | 1.64 | % | | | 0.27 | % | | | 0.10 | % | | | 0.00 | % | Commercial and Industrial | | | 2.16% | (3) | | | 0.72 | % | | | 0.59 | % | | | 0.26 | % | | | 0.06 | % | Construction | | | 23.80% | (4) | | | 11.54 | % | | | 0.52 | % | | | 0.26 | % | | | 0.00 | % | Consumer loans and finance leases | | | 2.98% | | | | 3.05 | % | | | 3.19 | % | | | 3.48 | % | | | 2.90 | % | Total loans | | | 4.76% | (5) | | | 2.48 | % | | | 0.87 | % | | | 0.79 | % | | | 0.55 | % |
| | | (1) | | Includes net charge-offs totaling $7.8 million associated with non-performing residential mortgage loans sold in a bulk sale. | | (2) | | Includes net charge-offs totaling $29.5 million associated with loans transferred to held for sale. Commercial mortgage net charge-offs to average loans, excluding charge-offs associated with loans transferred to held for sale, was 3.38%. | | (3) | | Includes net charge-offs totaling $8.6 million associated with loans transferred to held for sale. Commercial and Industrial net charge-offs to average loans, excluding charge-offs associated with loans transferred to held for sale, was 1.98%. | | (4) | | Includes net charge-offs totaling $127.0 million associated with loans transferred to held for sale.Construction net charge-offs to average loans, excluding charge-offs associated with loans transferred to held for sale, was 18.93%. | | (5) | | Includes net charge-offs totaling $165.1 million associated with loans transferred to held for sale. Total net charge-offs to average loans, excluding charge-offs associated with loans transferred to held for sale, was 3.60%. |
The following table presents net charge-offs to average loans held in portfolio by geographic segment: | | | | | | | | | | | | | Year Ended | | | | | | | | | | | December 31, | | December 31, | | | December 31, 2009 | | December 31, 2008 | | 2010 | | 2009 | PUERTO RICO: | | | | | | Residential mortgage | | | 0.64 | % | | | 0.20 | % | | | 1.79 | %(1) | | | 0.64 | % | | | | Commercial mortgage | | | 0.82 | % | | | 0.37 | % | | | 3.90 | %(2) | | | 0.82 | % | | | | Commercial and Industrial | | | 0.72 | % | | | 0.32 | % | | | 2.27 | %(3) | | | 0.72 | % | | | | Construction | | | 4.88 | % | | | 0.19 | % | | | 23.57 | %(4) | | | 4.88 | % | | | | Consumer and finance leases | | | 2.93 | % | | | 3.10 | % | | | 2.99 | % | | | 2.93 | % | | | | Total loans | | | 1.44 | % | | | 0.82 | % | | | 4.26 | %(5) | | | 1.44 | % | | | | VIRGIN ISLANDS: | | | | | | Residential mortgage | | | 0.08 | % | | | 0.02 | % | | | 0.18 | % | | | 0.08 | % | | | | Commercial mortgage | | | 2.79 | % | | | 0.00 | % | | | 0.00 | % | | | 2.79 | % | | | | Commercial and Industrial | | | 0.59 | % | | | 6.73 | % | | | -0.44 | %(6) | | | 0.59 | % | | | | Construction | | | 0.00 | % | | | 0.00 | % | | | 3.16 | % | | | 0.00 | % | | | | Consumer and finance leases | | | 3.50 | % | | | 3.54 | % | | | 2.01 | % | | | 3.50 | % | | | | Total loans | | | 0.73 | % | | | 1.48 | % | | | 0.75 | % | | | 0.73 | % | | | | FLORIDA: | | | | | | Residential mortgage | | | 2.84 | % | | | 0.30 | % | | | 3.88 | % | | | 2.84 | % | | | | Commercial mortgage | | | 3.02 | % | | | 0.09 | % | | | 8.23 | % | | | 3.02 | % | | | | Commercial and Industrial | | | 1.87 | % | | | 6.58 | % | | | 4.80 | % | | | 1.87 | % | | | | Construction | | | 29.93 | % | | | 1.08 | % | | | 44.65 | % | | | 29.93 | % | | | | Consumer and finance leases | | | 7.33 | % | | | 5.88 | % | | | 5.26 | % | | | 7.33 | % | | | | Total loans | | | 11.70 | % | | | 0.86 | % | | | 13.35 | % | | | 11.70 | % |
| | | (1) | | Total credit losses (equal toIncludes net charge-offs plus losses on REO operations)totaling $7.8 million associated with non-performing residential mortgage loans sold in a bulk sale. | | (2) | | Includes net charge-offs totaling $29.5 million associated with loans transferred to held for 2009 amounted to $355.1 million, or 2.62%sale. Commercial mortgage net charge-offs to average loans, excluding charge-offs associated with loans transferred to held for sale in Puerto Rico, was 1.24%. | | (3) | | Includes net charge-offs totaling $8.6 million associated with loans transferred to held for sale. Commercial and repossessed assets, respectively,Industrial net charge-offs to average loans, excluding charge-offs associated with loans transferred to held for sale in contrastPuerto Rico, was 2.08%. | | (4) | | Includes net charge-offs totaling $127.0 million associated with loans transferred to credit losses of $129.7held for sale.Construction net charge-offs to average loans, excluding charge-offs associated with loans transferred to held for sale in Puerto Rico, was 15.27%. | | (5) | | Includes net charge-offs totaling $165.1 million or a loss rate of 1.04%,associated with loans transferred to held for 2008. In addition, theresale. Total net charge-offs to average loans, excluding charge-offs associated with loans transferred to held for sale in Puerto Rico, was a $1.8 million increase2.83%. | | (6) | | For the year ended December 31, 2010 recoveries in commercial and industrial loans in the reserve for probable losses on outstanding unfunded loan commitments.Virgin Islands exceeded charge-offs. |
Total credit losses (equal to net charge-offs plus losses on REO operations) for 2010 amounted to $639.9 million, or 4.96% to average loans and repossessed assets, respectively, in contrast to credit losses of $355.1 million, or a loss rate of 2.62%, for 2009. Excluding the $165.1 million of charge-offs associated with loans transferred to held for sale, total credit losses for 2010 amounted to $474.8 million or 3.81% to average loans and repossessed assets. 133141
The following table presents a detail of the REO inventory and credit losses for the periods indicated: | | | | | | | | | | | | | | | | | | | Year Ended | | | Year Ended | | | | December 31, | | | December 31, | | | | 2009 | | 2008 | | | 2010 | | 2009 | | | | (Dollars in thousands) | | | (Dollars in thousands) | | REO | | | REO balances, carrying value: | | | Residential | | $ | 35,778 | | $ | 20,265 | | | $ | 56,210 | | $ | 35,778 | | Commercial | | 19,149 | | 2,306 | | | 22,634 | | 19,149 | | Condo-conversion projects | | 8,000 | | 9,500 | | | — | | 8,000 | | Construction | | 6,377 | | 5,175 | | | 6,053 | | 6,377 | | | | | | | | | | | | | Total | | $ | 69,304 | | $ | 37,246 | | | $ | 84,897 | | $ | 69,304 | | | | | | | | | | | | | | | | REO activity (number of properties): | | | Beginning property inventory, | | 155 | | 87 | | | 449 | | 155 | | Properties acquired | | 295 | | 169 | | | 96 | | 295 | | Properties disposed | | | (165 | ) | | | (101 | ) | | | (66 | ) | | | (165 | ) | | | | | | | | | | | | Ending property inventory | | 285 | | 155 | | | 479 | | 285 | | | | | | | | | | | | | | | | Average holding period (in days) | | | Residential | | 221 | | 160 | | | 255 | | 221 | | Commercial | | 170 | | 237 | | | 311 | | 170 | | Condo-conversion projects | | 643 | | 306 | | | — | | 643 | | Construction | | 330 | | 145 | | | 469 | | 330 | | | | | | | | | | | | | | | 266 | | 200 | | | 285 | | 266 | | | | | REO operations (loss) gain: | | | Market adjustments and (losses) gain on sale: | | | | | | Residential | | $ | (9,613 | ) | | $ | (3,521 | ) | | $ | (9,120 | ) | | $ | (9,613 | ) | Commercial | | | (1,274 | ) | | | (1,402 | ) | | | (8,591 | ) | | | (1,274 | ) | Condo-conversion projects | | | (1,500 | ) | | | (5,725 | ) | | | (2,274 | ) | | | (1,500 | ) | Construction | | | (1,977 | ) | | | (347 | ) | | | (1,473 | ) | | | (1,977 | ) | | | | | | | | | | | | | | | (14,364 | ) | | | (10,995 | ) | | | (21,458 | ) | | | (14,364 | ) | | | | | | | | | | | | | | | Other REO operations expenses | | | (7,499 | ) | | | (10,378 | ) | | | (8,715 | ) | | | (7,499 | ) | | | | | | | | | | | | Net Loss on REO operations | | $ | (21,863 | ) | | $ | (21,373 | ) | | $ | (30,173 | ) | | $ | (21,863 | ) | | | | | | | | | | | | | | | CHARGE-OFFS | | | Residential charge-offs, net | | | (28,861 | ) | | | (6,256 | ) | | | (62,718 | ) | | | (28,861 | ) | | | | Commercial charge-offs, net | | | (59,712 | ) | | | (27,897 | ) | | | (179,893 | ) | | | (59,712 | ) | | | | Construction charge-offs, net | | | (183,600 | ) | | | (7,735 | ) | | | (313,153 | ) | | | (183,600 | ) | | | | Consumer and finance leases charge-offs, net | | | (61,091 | ) | | | (66,433 | ) | | | (53,918 | ) | | | (61,091 | ) | | | | | | | | | | | | Total charge-offs, net | | | (333,264 | ) | | | (108,321 | ) | | | (609,682 | ) | | | (333,264 | ) | | | | | | | | | | | | | | TOTAL CREDIT LOSSES (1) | | $ | (355,127 | ) | | $ | (129,694 | ) | | $ | (639,855 | ) | | $ | (355,127 | ) | | | | | | | | | | | | | | | LOSS RATIO PER CATEGORY (2): | | | Residential | | | 1.08 | % | | | 0.29 | % | | | 2.03 | % | | | 1.08 | % | Commercial | | | 0.96 | % | | | 0.53 | % | | | 3.04 | % | | | 0.96 | % | Construction | | | 11.65 | % | | | 0.92 | % | | | 23.88 | % | | | 11.65 | % | Consumer | | | 3.04 | % | | | 3.18 | % | | | 2.96 | % | | | 3.04 | % | | | | TOTAL CREDIT LOSS RATIO (3) | | | 2.62 | % | | | 1.04 | % | | | 4.96 | % | | | 2.62 | % |
| | | (1) | | Equal to REO operations (losses) gains plus Charge-offs, net. | | (2) | | Calculated as net charge-offs plus market adjustments and gains (losses) on sale of REO divided by average loans and repossessed assets. | | (3) | | Calculated as net charge-offs plus net loss on REO operations divided by average loans and repossessed assets. |
Operational Risk The Corporation faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and financial products. Coupled with external influences such as market conditions, security risks, and legal risk, the potential for operational and reputational loss has increased. In order to mitigate and control operational risk, the Corporation has developed, and continues to enhance, specific internal controls, policies and 134142
procedures that are designated to identify and manage operational risk at appropriate levels throughout the organization. The purpose of these mechanisms is to provide reasonable assurance that the Corporation’s business operations are functioning within the policies and limits established by management. The Corporation classifies operational risk into two major categories: business specific and corporate-wide affecting all business lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes and assessments. With respect to corporate-wide risks, such as information security, business recovery, and legal and compliance, the Corporation has specialized groups, such as the Legal Department, Information Security, Corporate Compliance, Information Technology and Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of the business groups. Legal and Compliance Risk Legal and compliance risk includes the risk of non-compliance with applicable legal and regulatory requirements, the risk of adverse legal judgments against the Corporation, and the risk that a counterparty’s performance obligations will be unenforceable. The Corporation is subject to extensive regulation in the different jurisdictions in which it conducts its business, and this regulatory scrutiny has been significantly increasing over the last several years. The Corporation has established and continues to enhance procedures based on legal and regulatory requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. The Corporation has a Compliance Director who reports to the Chief Risk Officer and is responsible for the oversight of regulatory compliance and implementation of an enterprise-wide compliance risk assessment process. The Compliance division has officer roles in each major business areas with direct reporting relationships to the Corporate Compliance Group. Concentration Risk The Corporation conducts its operations in a geographically concentrated area, as its main market is Puerto Rico. However, the Corporation has diversified its geographical risk as evidenced by its operations in the Virgin Islands and in Florida. As of December 31, 2010, the Corporation had $325.1 million outstanding of credit facilities granted to the Puerto Rico Government and/or its political subdivisions down from $1.2 billion as of December 31, 2009, and $84.3 million granted to the Virgin Islands government, down from $134.7 million as of December 31, 2009. A substantial portion of these credit facilities are obligations that have a specific source of income or revenues identified for their repayment, such as property taxes collected by the central Government and/or municipalities. 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 utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The Corporation also has loans to various municipalities in Puerto Rico for which the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment. Aside from loans extended to the Puerto Rico Government and its political subdivisions, the largest loan to one borrower as of December 31, 2010 in the amount of $290.2 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. Of the total gross loan held for investment portfolio of $11.7 billion as of December 31, 2010, approximately 84% have credit risk concentration in Puerto Rico, 8% in the United States and 8% in the Virgin Islands. Impact of Inflation and Changing Prices The financial statements and related data presented herein have been prepared in conformity with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. 143
Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a greater impact on a financial institution’s performance than the effects of general levels of inflation. Interest rate movements are not necessarily correlated with changes in the prices of goods and services. Concentration RiskBasis of Presentation
The Corporation conducts its operationshas included in this Form 10-K the following non-GAAP financial measures: (i) the calculation of net interest income, interest rate spread and net interest margin rate on a geographically concentrated area,tax- equivalent basis and excluding changes in the fair value of derivative instruments and certain financial liabilities, (ii) the calculation of the tangible common equity ratio and the tangible book value per common share, (iii) the Tier 1 common equity to risk-weighted assets ratio, and (iv) certain other financial measures adjusted to exclude amounts associated with loans transferred to held for sale resulting from the execution of an agreement providing for the strategic sale of loans. Substantially all of the loans transferred to held for sale were sold in February 2011. Investors should be aware that non-GAAP measures have inherent limitations and should be read only in conjunction with the Corporation’s consolidated financial data prepared in accordance with GAAP. Net interest income, interest rate spread and net interest margin are reported on a tax-equivalent basis and excluding changes in the fair value (“valuations”) of derivative instruments and financial liabilities elected to be measured at fair value. The presentation of net interest income excluding valuations provides additional information about the Corporation’s net interest income and facilitates comparability and analysis. The changes in the fair value of derivative instruments and unrealized gains and losses on liabilities measured at fair value have no effect on interest due or interest earned on interest-bearing liabilities or interest-earning assets, respectively. The tax-equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a marginal income tax rate. Income from tax-exempt earning assets is increased by an amount equivalent to the taxes that would have been paid if this income had been taxable at statutory rates. Management believes that it is a standard practice in the banking industry to present net interest income, interest rate spread and net interest margin on a fully tax equivalent basis. This adjustment puts all earning assets, most notably tax-exempt securities and certain loans, on a common basis that facilitates comparison of results to results of peers. Refer toNet Interest Incomediscussion above for the table that reconciles the non-GAAP financial measure “net interest income on a tax-equivalent basis and excluding fair value changes” with net interest income calculated and presented in accordance with GAAP. The table also reconciles the non-GAAP financial measures “net interest spread and margin on a tax-equivalent basis and excluding fair value changes” with net interest spread and margin calculated and presented in accordance with GAAP. The tangible common equity ratio and tangible book value per common share are non-GAAP measures generally used by the financial community to evaluate capital adequacy. Tangible common equity is total equity less preferred equity, goodwill and core deposit intangibles. Tangible assets are total assets less goodwill and core deposit intangibles. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method of accounting for mergers and acquisitions. Neither tangible common equity nor tangible assets, or related measures should be considered in isolation or as its main market is Puerto Rico. However,a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation continues diversifyingcalculates its geographical risk as evidencedtangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names. Refer to SectionLiquidity and Capital Adequacy, Interest Rate Risk, Credit Risk, Operational, Legal and Regulatory Risk Management- Capitalabove for a reconciliation of the Corporation’s tangible common equity and tangible assets. The Tier 1 common equity to risk-weighted assets ratio is calculated by dividing (a) tier 1 capital less non-common elements including qualifying perpetual preferred stock and qualifying trust preferred securities by (b) risk-weighted assets, which assets are calculated in accordance with applicable bank regulatory requirements. The Tier 1 common equity ratio is not required by GAAP or on a recurring basis by applicable bank regulatory requirements. However, this ratio was used by the Federal Reserve in connection with its operations in the Virgin Islands and in Florida. As of December 31, 2009, the Corporation had $1.2 billion outstanding of credit facilities grantedstress test administered to the Puerto Rico Government and/or its political subdivisions. A substantial portion19 largest U.S. bank holding companies under the Supervisory Capital Assessment Program, the results of these credit facilities are obligations that have a specific source of income or revenues identified for their repayment, such as sales and property taxes collected by the central Government and/or municipalities. Another portion of these obligations consist of loans to public corporations that obtain revenues from rates charged for services or products, such as electric power utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The Corporation also has loans to various municipalities in Puerto Rico for which the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment.
Aside from loans extended to the Puerto Rico Government and its political subdivisions, the largest loan to one borrower as of December 31, 2009 in the amount of $321.5 million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. This commercial loan is secured by individual mortgage loans on residential and commercial real estate. Of the total gross loan portfolio of $13.9 billion as of December 31, 2009, approximately 83% has credit risk concentration in Puerto Rico, 9% in the United States and 8% in the Virgin Islands.were
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announced on May 7, 2009. Management is currently monitoring this ratio, along with the other ratios discussed above, in evaluating the Corporation’s capital levels and believes that, at this time, the ratio may be of interest to investors. Refer to SectionLiquidity and Capital Adequacy, Interest Rate Risk, Credit Risk, Operational, Legal and Regulatory Risk Management- Capitalabove for a reconciliation of stockholders’ equity (GAAP) to Tier 1 common equity. To supplement the Corporation’s financial statements presented in accordance with GAAP, the Corporation provides additional measures of net income (loss), provision for loan and lease losses, provision for loan and lease losses to net charge-offs, net charge-offs, and net charge-offs to average loans to exclude amounts associated with the transfer of $447 million of loans to held for sale. In connection with the transfer, the Corporation charged-off $165.1 million and recognized an additional provision for loan and lease losses of $102.9 million. Management believes that these non-GAAP measures enhance the ability of analysts and investors to analyze trends in the Corporation’s business and to better understand the performance of the Corporation. In addition, the Corporation may utilize these non-GAAP financial measures as a guide in its budgeting and long-term planning process. Any analysis of these non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP. A reconciliation of these non-GAAP measures with the most directly comparable financial measures calculated in accordance with GAAP follows: | | | | | | | Net Loss (Non-GAAP to | | | | GAAP reconciliation) | | | | Year ended | | | | December 31, 2010 | | (In thousands, except per share information) | | Net Loss | | Net loss, excluding special items (Non-GAAP) | | $ | (421,370 | ) | | | | | | Special items: | | | | | Loans transferred to held for sale (1) | | | (102,938 | ) | | | | | | Exchange transactions | | | — | | | | | | | | | | | Net Income (loss ) | | $ | (524,308 | ) | | | | |
1- In the fourth quarter 2010, the Corporation recorded a charge of $102.9 million to the provision for loan and lease losses associated with $447 million of loans transferred to held for sale. 145
| | | | | | | | | | | Provision for Loan and Lease Losses, Net | | | | Charge-Offs, Provision for Loans and | | | | Lease Losses to Net Charge-Offs, and | | | | Net Charge-Offs to Average Loans (Non- | | | | GAAP to GAAP reconciliation) | | | | Year ended | | | | December 31, 2010 | | | | Provision for Loan | | | | | (In thousands) | | and Lease Losses | | | Net Charge-Offs | | Provision for loan and lease losses and net charge-offs, excluding special items (Non-GAAP) | | $ | 531,649 | | | $ | 444,625 | | | | | | | | | | | Special items: | | | | | | | | | Loans transferred to held for sale (1) | | | 102,938 | | | | 165,057 | | | | | | | | | | Provision for loan and lease losses and net charge-offs (GAAP) | | $ | 634,587 | | | $ | 609,682 | | | | | | | | | | Provision for loan and lease losses to net charge-offs, excluding special items (Non-GAAP) | | | 119.57 | % | | | | | | | | | | | | | Provision for loan and lease losses to net charge-offs (GAAP) | | | 104.08 | % | | | | | | | | | | | | | Net charge-offs to average loans, excluding special items (Non-GAAP) | | | 3.60 | % | | | | | | | | | | | | | Net charge-offs to average loans (GAAP) | | | 4.76 | % | | | | | | | | | | | | |
| | | 1- | | In the fourth quarter 2010, the Corporation recorded a charge of $102.9 million to the provision for loan and lease losses and charge-offs of $165.1 million associated with $447 million of loans transferred to held for sale. |
Selected Quarterly Financial Data Financial data showing results of the 20092010 and 20082009 quarters is presented below. In the opinion of management, all adjustments necessary for a fair presentation have been included. These results are unaudited. | | | | | | | | | | | | | | | | | | | 2009 | | | March 31 | | June 30 | | September 30 | | December 31 | | | (Dollar in thousands, except for per share results) | Interest income | | $ | 258,323 | | | $ | 252,780 | | | $ | 242,022 | | | $ | 243,449 | | Net interest income | | | 121,598 | | | | 131,014 | | | | 129,133 | | | | 137,297 | | Provision for loan losses | | | 59,429 | | | | 235,152 | | | | 148,090 | | | | 137,187 | | Net income (loss) | | | 21,891 | | | | (78,658 | ) | | | (165,218 | ) | | | (53,202 | ) | Net income (loss) attributable to common stockholders | | | 6,773 | | | | (94,825 | ) | | | (174,689 | ) | | | (59,334 | ) | Earnings (loss) per common share-basic | | $ | 0.07 | | | $ | (1.03 | ) | | $ | (1.89 | ) | | $ | (0.64 | ) | Earnings (loss) per common share-diluted | | $ | 0.07 | | | $ | (1.03 | ) | | $ | (1.89 | ) | | $ | (0.64 | ) |
| | | | | | | | | | | | | | | | | | | 2010 | | | March 31 | | June 30 | | September 30 | | December 31 | | | (In thousands, except for per share results) | Interest income | | $ | 220,988 | | | $ | 214,864 | | | $ | 204,028 | | | $ | 192,806 | | Net interest income | | | 116,863 | | | | 119,062 | | | | 113,702 | | | | 112,048 | | Provision for loan losses | | | 170,965 | | | | 146,793 | | | | 120,482 | | | | 196,347 | | Net loss | | | (106,999 | ) | | | (90,640 | ) | | | (75,233 | ) | | | (251,436 | ) | Net (loss) income attributable to common stockholders-basic | | | (113,151 | ) | | | (96,810 | ) | | | 357,787 | | | | (269,871 | ) | Net (loss) income attributable to common stockholders-diluted | | | (113,151 | ) | | | (96,810 | ) | | | 363,413 | | | | (269,871 | ) | (Loss) earnings per common share-basic | | $ | (18.34 | ) | | $ | (15.70 | ) | | $ | 31.30 | | | $ | (12.67 | ) | (Loss) earnings per common share-diluted | | $ | (18.34 | ) | | $ | (15.70 | ) | | $ | 4.20 | | | $ | (12.67 | ) |
| | | | | | | | | | | | | | | | | | | 2008 | | | March 31 | | June 30 | | September 30 | | December 31 | | | (Dollar in thousands, except for per share results) | Interest income | | $ | 279,087 | | | $ | 276,608 | | | $ | 288,292 | | | $ | 282,910 | | Net interest income | | | 124,458 | | | | 134,606 | | | | 144,621 | | | | 124,196 | | Provision for loan losses | | | 45,793 | | | | 41,323 | | | | 55,319 | | | | 48,513 | | Net income | | | 33,589 | | | | 32,994 | | | | 24,546 | | | | 18,808 | | Net income attributable to common stockholders | | | 23,520 | | | | 22,925 | | | | 14,477 | | | | 8,739 | | Earnings per common share-basic | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.16 | | | $ | 0.09 | | Earnings per common share-diluted | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.16 | | | $ | 0.09 | |
| | | | | | | | | | | | | | | | | | | 2009 | | | March 31 | | June 30 | | September 30 | | December 31 | | | (In thousands, except for per share results) | Interest income | | $ | 258,323 | | | $ | 252,780 | | | $ | 242,022 | | | $ | 243,449 | | Net interest income | | | 121,598 | | | | 131,014 | | | | 129,133 | | | | 137,297 | | Provision for loan losses | | | 59,429 | | | | 235,152 | | | | 148,090 | | | | 137,187 | | Net income (loss) | | | 21,891 | | | | (78,658 | ) | | | (165,218 | ) | | | (53,202 | ) | Net income (loss) attributable to common stockholders | | | 6,773 | | | | (94,825 | ) | | | (174,689 | ) | | | (59,334 | ) | Earnings (loss) per common share-basic | | $ | 1.05 | | | $ | (16.03 | ) | | $ | (28.35 | ) | | $ | (9.62 | ) | Earnings (loss) per common share-diluted | | $ | 1.05 | | | $ | (16.03 | ) | | $ | (28.35 | ) | | $ | (9.62 | ) |
Fourth Quarter Financial SummarySome infrequent transactions that significantly affected quarterly periods of 2010 and 2009 include:
The financial results§ During the third quarter of 2010, the successful completion of the issuance of Series G Preferred Stock in exchange for the fourth quarter of 2009, as compared to the same period in 2008, were principally impacted$400 million Series F preferred stock held by the following items on a pre-tax basis:
| — | | Net interest income increased 11% to $137.3 million for the fourth quarterU.S. Treasury, and the issuance of 2009 from $124.2 million for the fourth quarter of 2008. Net interest income for the fourth quarter of 2009 includes a net unrealized gain of $2.5 million, compared to a net unrealized loss of $5.3 million for the fourth quarter of 2008, a positive fluctuation of $7.8 million, related to the changes in valuation of derivatives instruments that enonomically hedge the Corporation’s brokered CDs and medium term notes and unrealized gains and losses on liabilities measured at fair value. Compared with the fourth quarter of 2008, net interest income, excluding fair value adjustments on derivatives and financial liabilities measured at fair value, increased $5.3 million, or 4%. The Corporation benefited from lower funding costs related to continued low levels of interest rates and the mix of financing sources. Lower interest rate levels was reflected in the pricing of newly issued brokered CDs at rates significantly lower than rate levels for prior year’s fourth quarter. The average cost of brokered CDs decreased by 154 basis points from 4.06% for the fourth quarter of 2008 to 2.52% for the fourth quarter of 2009. Also, the Corporation was able to reduce the average cost of its core deposits from 2.83% for prior year’s fourth quarter to 1.95% for the fourth quarter of 2009. The decrease in funding costs was partially offset by a significant increase in non-performing loans and the repricing of floating-rate commercial and construction loans at lower rates due to decreases in market interest rates such as three-month LIBOR and the Prime rate, even though the Corporation is actively increasing spreads on loan renewals. The increase in net interest income was also associated with an increase of $429.6 million of interest-earning assets, over the prior year’s fourth quarter. The increase in interest-earnings assets was driven by a higher average loans volume, which increased by $847 million, driven by additional credit facilities extended to the Government of Puerto Rico. Partially offsetting the increase in average loans was a decrease in average investments of $417 million, driven mostly by the sales of approximately $1.7 billion of Agency MBS and calls of approximately $945 million of U.S. Agency debt securities that were more than purchases made during 2009. |
| — | | Non-interest income increased to $38.8 million for the fourth quarter of 2009 from $19.4 million for prior year’s fourth quarter. The variance is mainly related to a realized gain of $24.4 million on the sale of U.S. Agency MBS versus a realized gain on the sale of MBS of $11.0 million in prior year’s fourth quarter. The |
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| | | recent drop in mortgage pre-payments, as well as future pre-payment estimates, could result in the extension of the MBS portfolio’s average life, which in turn would shift the balance sheet’s interest rate gap position. In an effort to manage such risk, and take advantage of market opportunities, approximately $460 million of U.S. Agency MBS ( mainly 30 Year fixed rate MBS with an aggregate weighted average rate of 5.33%) were sold in the fourth quarter of 2009, compared to approximately $284 million of U.S. Agency MBS sold in the prior year’s fourth quarter. The realized gain on the sale of MBS during the fourth quarter of 2008 was partially offset by other-than-temporary impairment charges of $4.8 million related to auto industry corporate bonds and certain equity securities. There were no other-than- temporary impairments charges during the fourth quarter of 2009. | | | — | | The provision for loan and lease losses amounted to $137.3 million, or 170% of net charge-offs, for the fourth quarter of 2009 compared to $48.5 million, or 172% of net charge-offs, for the fourth quarter of 2008. The increase, as compared to the fourth quarter of 2008, was mainly attributable to the significant increase in non-performing loans, increases in specific reserves for impaired commercial and construction loans, and the overall growth of the loan portfolio. Also, the migration of loans to higher risk categories and increases to loss factors used to determine the general reserve allowance contributed to the higher provision. The increase in loss factors was necessary to account for higher charge-offs and delinquency levels as well as for worsening trends in economic conditions in Puerto Rico and the United States. | | | — | | Non-interest expenses increased 2% to $88.8 million from $87.0 million for the fourth quarter of 2008. The increase in the non-interest expense for the fourth quarter 2009, as compared to prior year’s fourth quarter, was principally attributable to an increase of $11.5 million in the FDIC deposit insurance premium, which was partly related to increases in regular assessment rates by the FDIC in 2009. The aforementioned increase was partially offset by decreases in certain expenses such as: (i) a $5.3 million decrease in employees’ compensation and benefit expenses, due to a lower headcount and reductions in bonuses, incentive compensation and overtime costs, and (ii) a $4.5 million decrease in net loss on REO operations, mainly due to lower write-downs and expenses in the U.S. mainland. | common stock in exchange for $487 million of Series A through E Preferred Stock resulted in a favorable impact to net income available to common stockholders of $440.5 million. Some infrequent transactions that affected quarterly periods shown§ During the fourth quarter of 2010, the transfer of $447 million of loans, including $263 million of non-performing loans, to held for sale, resulted in the above table include: (i)charge off of $165.1 million and the recognition of an additional provision for loan and lease losses of $102.9 million. On February 16, 2011, the Corporation sold substantially all of these loans.
§ During the fourth quarter of 2010, the exchange agreement with the U.S. Treasury was amended and a non-cash adjustment of $11.3 million was recorded as an acceleration of the Series G Preferred Stock discount accretion, which adversely affected the loss per share during the fourth quarter. § During the fourth quarter of 2010, an incremental $93.7 million non-cash charge to the valuation allowance of the Bank’s deferred tax asset. § During the third quarter of 2009, the recognition of non-cash charges of approximately $152.2 million to increase the valuation allowance for the Corporation’s deferred tax asset in the third quarter of 2009; (ii) the ecording of $8.9 million in the second quarter of 2009 for the accrual of the special assessment levied by the FDIC; (iii) the impairment of the core deposit intangible of FirstBank Florida for $4.0 million recorded in the first quarter of 2009; (iv) the reversal of $10.8 million of UTBs and related accrued interest of $3.5 million during the second quarter of 2009 for positions taken on income taxes returns due to the lapse of the statute of limitations for the 2004 taxable year; (v) the reversal of $2.9 million of UTBs, net of a payment made to the Puerto Rico Department of Treasury, in connection with the conclusion of an income tax audit related to the 2005, 2006, 2007 and 2008 taxable years; (vi)years affect net loss during the reversal of $10.6 million of UTBs duringthird quarter. § During the second quarter of 20082009, the recording of $8.9 million for positions taken on income tax returns due to the lapseaccrual of the statutespecial assessment levied by the FDIC and the reversal of limitations for$10.8 million of UTBs and related accrued interest of $3.5 million affected net loss during the 2003 taxable year; (vii) the gain of $9.3 million on the mandatory redemption of a portion of the Corporation’s investment in VISA as part of VISA’s IPO insecond quarter. § During the first quarter of 2008 and (viii)2009, the impairment of the core deposit intangible of FirstBank Florida for $4.0 million adversely affect the net income tax benefit of $5.4 million recorded induring the first quarter of 2008 in connection with an agreement entered into with the Puerto Rico Department of Treasury that established a multi-year allocation schedule for deductibility of the $74.25 million payment made by the Corporation during 2007 to settle a securities class action suit.quarter. Changes in Internal ControlsControl over Financial Reporting Refer to Item 9A. CEO and CFO Certifications First BanCorp’s Chief Executive Officer and Chief Financial Officer have filed with the Securities and Exchange Commission the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibit 31.1 and 31.2 to this Annual Report on Form 10-K and the certifications required by Section III(b)(4) of the Emergency Stabilization Act of 2008 as Exhibit 99.1 and 99.2 to this Annual Report on Form 10-K. 137
In addition, in 2009,2010, First BanCorp’s Chief Executive Officer certified to the New York Stock Exchange that he was not aware of any violation by the Corporation of the NYSE corporate governance listing standards. Item 7A. Quantitative and Qualitative Disclosures about Market Risk | | | Item 7A. | | Quantitative and Qualitative Disclosures about Market Risk |
The information required herein is incorporated by reference to the information included under the sub caption “Interest Rate Risk Management” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in this Form 10-K. Item 8. Financial Statements and Supplementary Data | | | Item 8. | | Financial Statements and Supplementary Data |
The consolidated financial statements of First BanCorp, together with the report thereon of PricewaterhouseCoopers LLP, First BanCorp’s independent registered public accounting firm, are included herein beginning on page F-1 of this Form 10-K. 147
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | | | Item 9. | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None. Item 9A. Controls and Procedures | | | Item 9A. | | Controls and Procedures |
Disclosure Controls and Procedures First BanCorp’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of First BanCorp’s disclosure controls and procedures as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our CEO and CFO concluded that, as of December 31, 2009,2010, the Corporation’s disclosure controls and procedures were effective and provide reasonable assurance that the information required to be disclosed by the Corporation in reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and reported to the Corporation’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting Our management’s report on Internal Control over Financial Reporting is set forth in Item 8 and incorporated herein by reference. The effectiveness of the Corporation’s internal control over financial reporting as of December 31, 20092010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report as set forth in Item 8. Changes in Internal Control over Financial Reporting There have been no changes to the Corporation’s internal control over financial reporting during our most recent quarter ended December 31, 20092010 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. Item 9B. Other Information. | | | Item 9B. | | Other Information. |
None. 138148
PART III Item 10. | | | Item 10. | | Directors, Executive Officers and Corporate Governance |
Information about the Board of Directors The current members of the Board of Directors (the “Board”) of the Corporation are listed below. They have provided the following information about their principal occupation, business experience and other matters. The members of the Board are also the members of the Board of Directors of the Bank. The information presented below regarding the time of service on the Board includes terms concurrently served on the Board of Directors of the Bank. Aurelio Alemán-Bermúdez, 52 President and Chief Executive Officer Information in response to this Item is incorporated herein by reference to the sections entitled “Information with Respect to Nominees forPresident and Chief Executive Officer since September 2009. Director of First BanCorp and FirstBank Puerto Rico since September 2005. Chairman of the Board of Directors and CEO of First Federal Finance Corporation d/b/a Money Express, FirstMortgage, Inc., FirstExpress, Inc., FirstBank Puerto Rico Securities Corp., and First Management of Puerto Rico, and CEO of FirstBank Insurance Agency, Inc. and First Resolution Company. Senior Executive OfficersVice President and Chief Operating Officer from October 2005 to September 2009. Executive Vice President responsible for consumer banking and auto financing of FirstBank between 1998 and 2009. From April 2005 to September 2009, also responsible for the retail banking distribution network, First Mortgage and FistBank Virgin Islands operations. President of First Federal Finance Corporation d/b/a Money Express from 2000 to 2005. President of FirstBank Insurance Agency, Inc. from 2001 to 2005. President of First Leasing & Rental Corp. from 1999 to June 2007. From 1996 to 1998, Vice President of CitiBank, N.A., responsible for wholesale and retail automobile financing and retail mortgage business. Vice President of Chase Manhattan Bank, N.A., responsible for banking operations and technology for Puerto Rico and the Eastern Caribbean region from 1990 to 1996. Jorge L. Díaz-Irizarry, 56 Executive Vice President and member of the Board of Directors of Empresas Díaz, Inc. from 1981 to present, and Executive Vice President and Director of Betteroads Asphalt Corporation, Betterecycling Corporation, and Coco Beach Development Corporation, and its subsidiaries. Member of the Chamber of Commerce of Puerto Rico, the Association of General Contractors of Puerto Rico and the U.S. National Association of General Contractors; member of the Board of Trustees of Baldwin School of Puerto Rico. Director since 1998. José L. Ferrer-Canals, 51 Doctor of Medicine in private urology practice since 1992. Member of the Board of Directors of Aspenall Energies since February 2009. Director of Global Petroleum Environmental Technologies of Puerto Rico Corp. since February 2010. Commissioned captain in the United States Air Force Reserve March 1991 and honorably discharged with rank of Major in 2005. Member of the Alpha Omega Alpha Honor Medical Society since induction in 1986. Member of the Board of Directors of the American Cancer Society, Puerto Rico Chapter, from 1999 to 2003. Member of the Board of Directors of the American Red Cross, Puerto Rico Chapter, from 2005 to November 2009. Obtained a Master of Business Administration degree from the University of New Orleans. Director since 2001. Frank Kolodziej-Castro, 68 President and Chief Executive Officer of the following related companies: Centro Tomográfico de Puerto Rico, Inc. since 1978; Somascan, Inc. since 1983; Instituto Central de Diagnóstico, Inc. since 1991; Advanced Medical Care, Inc. since 1994; Somascan Plaza, Inc. and Plaza MED, Inc. since 1997; International Cyclotrons, Inc. since 2004; and Somascan Cardiovascular since January 2007. Pioneer in the Caribbean in the areas of Computerized Tomography (CT), Digital Angiography (DSA), Magnetic Resonance Imaging (MRI), and PET/CT-16 (Positron Emission Tomography). Mr. Kolodziej was previously a member of the Board of Directors of the Corporation” “Corporate from 1988 to 1993 and has been a Director since July 2007. 149
José Menéndez-Cortada, 63 Chairman of the Board Director and Vice President at Martínez-Alvarez, Menéndez-Cortada & Lefranc-Romero, PSC, (a full service firm specializing in Commercial, Real Estate and Construction Law) in charge of the corporate and tax divisions until 2009. Joined firm in 1977. Tax Manager at PriceWaterhouse Coopers, LLP until 1976. Served as Counsel to the Board of Bermudez & Longo, S.E. since 1985, director of Tasis Dorado School since 2002, director of the Homebuilders Association of Puerto Rico since 2002, trustee of the Luis A. Ferré Foundation, Inc. (Ponce Art Museum) since 2002 and co-chairman of the audit committee of that foundation since 2009. Director since April 2004. Chairman of the Board of Directors since September 2009. Served as Lead Independent Director between February 2006 and September 2009. Héctor M. Nevares-La Costa, 60 President and CEO of Suiza Dairy from 1982 to 1998. Served in additional executive capacities since 1973. Member of the Board of Directors of Dean Foods Co. since 1995, where he also serves on the Audit Committee. Board member of V. Suarez & Co., a local food distributor, and Suiza Realty SE, a local housing developer. Served on the boards of The Government Development Bank for Puerto Rico (1989-1993) and Indulac (1982-2002). In the non-profit sector, he is a Board member of Caribbean Preparatory School and Corporación para el Desarrollo de la Península de Cantera. Served on the Board of Directors of FirstBank from 1993 to 2002 and has been a Director since July 2007. Fernando Rodríguez-Amaro, 62 Has been with RSM ROC & Company since 1980, and prior thereto, served as Audit Manager with Arthur Andersen & Co. from June 1971 to October 1980. He has worked with clients in the banking, insurance, manufacturing, construction, government, advertising, radio broadcasting and services industries. He is a Certified Public Accountant, Certified Fraud Examiner and Certified Valuation Analyst, and is certified in Financial Forensics. Managing Partner and Partner in the Audit and Accounting Division of RSM ROC & Company. Member of the Board of Trustees of Sacred Heart University of Puerto Rico since August 2003, serving as member of the Executive Committee and Chairman of the Audit Committee since 2004. Member of the Board of Trustees of Colegio Puertorriqueño de Niñas since 1996, and also as a member of the Board of Directors from 1998 to 2004 and, since late 2008. Director since November 2005. José F. Rodríguez-Perelló, 61 President of L&R Investments, Inc., a privately owned local investment company, from May 2005 to present. Vice-Chairman and member of the Board of Directors of the Government Development Bank for Puerto Rico from March 2005 to December 2006. Member of the Board of Directors of “Fundación Chana & Samuel Levis” from 1998 to 2007. Partner, Executive Vice-president and member of the Board of Directors of Ledesma & Rodríguez Insurance Group, Inc. from 1990 to 2005. President of Prudential Bache PR, Inc., a wholly-owned subsidiary of Prudential Bache Group, from 1980 to 1990. Director since July 2007. Sharee Ann Umpierre-Catinchi, 51 Doctor of Medicine. Associate Professor at the University of Puerto Rico’s Department of Obstetrics and Gynecology since 1993. Director of the Division of Gynecologic Oncology of the University of Puerto Rico’s School of Medicine since 1993. Board Certified by the National Board of Medical Examiners, American Board of Obstetrics and Gynecology and the American Board of Obstetrics and Gynecology, Division of Gynecologic Oncology. Director since 2003. Information about Executive Officers Who Are Not Directors The executive officers of the Corporation and FirstBank who are not directors are listed below. 150
Orlando Berges-González, 52 Executive Vice President and Chief Financial Officer Executive Vice President and Chief Financial Officer of the Corporation since August 1, 2009. Mr. Berges-González has over 30 years of experience in the financial, administration, public accounting and business sectors. Mr. Berges-González served as Executive Vice President of Administration of Banco Popular de Puerto Rico from May 2004 until May 2009, responsible for supervising the finance, operations, real estate, and administration functions in both the Puerto Rico and U.S. markets. Mr. Berges-González also served as Executive Vice President and Chief Financial, Operations and Administration Officer of Banco Popular North America from January 1998 to September 2001, and as Regional Manager of a branch network of Banco Popular de Puerto Rico from October 2001 to April 2004. Mr. Berges-González is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants and of the Puerto Rico Society of Certified Public Accountants. Director of First Leasing and Rental Corporation, First Federal Finance Corporation d/b/a Money Express, FirstMortgage, FirstBank Overseas Corp., First Insurance Agency, Inc., First Express, Inc., FirstBank Puerto Rico Securities Corp., First Management of Puerto Rico, and FirstBank Insurance Agency, Inc., Grupo Empresas Servicios Financieros, and First Resolution Company. Calixto García-Vélez, 42 Executive Vice President, Florida Region Executive Mr. García-Vélez has been Executive Vice President and FirstBank Florida Regional Executive since March 2009. Mr. García-Vélez was most recently President and CEO of Doral Bank and EVP and President of the Consumer Banking Division of Doral Financial Corp in Puerto Rico. He was a member of Doral Bank’s Board of Directors. He held those positions from September 2006 to November 2008. Mr. García-Vélez served as President of West Division of Citibank, N.A., responsible for the Bank’s businesses in California and Nevada from 2005 to August 2006. From 2003 to 2006 he served as Business Manager for Citibank’s South Division where he was responsible for Florida, Texas, Washington, D.C., Virginia, Maryland and Puerto Rico. Mr. García-Vélez had served as President of Citibank, Florida from 1999 to 2003. During his tenure, he served on the Boards of Citibank F.S.B. and Citibank West, F.S.B. Ginoris Lopez-Lay, 42 Executive Vice President and Retail and Business Banking Executive Executive Vice President of Retail and Business Banking since March 2010, responsible for the retail banking services as well as commercial services for the business banking segment. Joined First BanCorp in 2006 as Senior Vice President, leading the Retail Financial Services Division and establishing the Strategic Planning Department. Ms. Lopez-Lay worked at Banco Popular Puerto Rico as Senior Vice President and Manager of the Strategic Planning and Marketing Division from 1996 to 2005. Other positions held at Banco Popular, since joining in 1989, included Vice President of Strategic Planning and Financial Analyst of the Finance and Strategic Planning Group. Member of the Board of Directors (since 2001) and Vice Chairman (since 2005) of the Center for the New Economy, and was advisor to the Board of Trustees of the Sacred Heart University from 2003 to 2004. Emilio Martinó-Valdés, 60 Executive Vice President and Chief Lending Officer Chief Lending Officer and Executive Vice President of FirstBank since October 2005. Senior Vice President and Credit Risk Manager of FirstBank from June 2002 to October 2005. Staff Credit Executive for FirstBank’s Corporate and Commercial Banking business components since November 2004. First Senior Vice President of Banco Santander Puerto Rico; Director for Credit Administration, Workout and Loan Review, from 1997 to 2002. Senior Vice President for Risk Area in charge of Workout, Credit Administration, and Portfolio Assessment for Banco Santander Puerto Rico from 1996 to 1997. Deputy Country Senior Credit Officer for Chase Manhattan Bank Puerto Rico from 1986 to 1991. Director of First Mortgage, Inc. since October 2009. Lawrence Odell, 62 Executive Vice President, General Counsel and Secretary Executive Vice President, General Counsel and Secretary since February 2006. Senior Partner at Martínez Odell & Calabria since 1979. Over 30 years of experience in specialized legal issues related to banking, corporate finance and international corporate transactions. Served as Secretary of the Board of Pepsi-Cola Puerto Rico, Inc. from 1992 151
to 1997. Served as Secretary to the Board of Directors of BAESA, S.A. from 1992 to 1997. Director of FirstBank Puerto Rico Securities Corp. and First Management of Puerto Rico since March 2009. Cassan Pancham, 50 Executive Vice President and Eastern Caribbean Region Executive Executive Vice President of FirstBank since October 2005. First Senior Vice President, Eastern Caribbean Region of FirstBank from October 2002 until October 2005. Director and President of FirstExpress, Inc., and First Insurance Agency, Inc since 2005. Director of FirstMortgage since February 2010. Held the following positions at JP Morgan Chase Bank Eastern Caribbean Region Banking Group: Vice President and General Manager from December 1999 to October 2002; Vice President, Business, Professional and Consumer Executive from July 1998 to December 1999; Deputy General Manager from March 1999 to December 1999; and Vice President, Consumer Executive, from December 1997 to 1998. Member of the Governing Board of Directors of the Virgin Islands Port Authority since June 2007 and Chairman from January 2008 through January 2011. Director of FirstMortgage, Inc., First Insurange Agency, Inc., First Express, Inc., FirstBank Insurance Agency, Inc. and FirstBank Puerto Rico Securities Corp. Dacio A. Pasarell-Colón, 61 Executive Vice President and Banking Operations Executive Executive Vice President and Banking Operations Executive since September 2002. Over 27 years of experience at Citibank N.A. in Puerto Rico, which included the following positions: Vice President, Retail Bank Manager, from 2000 to 2002; Vice President and Chief Financial Officer from 1998 to 2000; Vice President, Head of Operations in 1998; Vice President Mortgage and Automobile Financing; Product Manager, Latin America from 1996 to 1998; Vice President, Mortgage and Automobile Financing Product Manager for Puerto Rico from 1986 to 1996. President of Citiseguros PR, Inc. from 1998 to 2001. Chairman of Ponce General Corporation and Director of FirstBank Florida from April 2005 until July 2009. Nayda Rivera-Batista, 37 Executive Vice President, Chief Risk Officer and Assistant Secretary of the Board of Directors Executive Vice President and since January 2008. Senior Vice President and Chief Risk Officer since April 2006. Senior Vice President and General Auditor from July 2002 to April 2006. She is a Certified Public Accountant, Certified Internal Auditor and Certified in Financial Forensics. More than 15 years of combined work experience in public company, auditing, accounting, financial reporting, internal controls, corporate governance, risk management and regulatory compliance. Served as a member of the Board of Trustees of the Bayamón Central University from January 2005 to January 2006. Joined the Corporation in 2002. Director of FirstMortgage, FirstBank Overseas Corp., and FirstBank Puerto Rico Securities Corp since October 2009. Certain Other Officers Víctor M. Barreras-Pellegrini, 42 Senior Vice President and Treasurer Senior Vice President and Treasurer since July 2006. Previously held various positions with Banco Popular de Puerto Rico from January 1992 to June 2006; including Fixed-Income Portfolio Manager in the Popular Asset Management division from 1998 to 2006 and Investment Officer in the Treasury division from 1995 to 1998. Director of FirstBank Overseas Corp. and First Mortgage since August 2006. Has 18 years of experience in banking and investments and holds the Chartered Financial Analyst designation. He is also member and Treasurer of the Board of Directors of Make-A-Wish Foundation — P.R. Chapter. Joined the Corporation in 2006. Pedro Romero-Marrero, 37 Senior Vice President and Chief Accounting Officer Senior Vice President and Chief Accounting Officer since August 2006. Senior Vice President and Comptroller from May 2005 to August 2006. Vice President and Assistant Comptroller from December 2002 to May 2005. He is a Certified Public Accountant with a Master of Science in Accountancy and has technical expertise in management reporting, financial analysis, corporate tax, internal controls and compliance with US GAAP, SEC rules and Sarbanes Oxley. Has more than twelve years of experience in accounting including big four public accounting firm, banking and financial services. Joined the Corporation in December 2002. 152
The Corporation’s By-laws provide that each officer shall be elected annually at the first meeting of the Board of Directors after the annual meeting of stockholders and that each officer shall hold office until his or her successor has been duly elected and qualified or until his or her death, resignation or removal from office. Involvement in Certain Legal Proceedings There are no legal proceedings to which any director or executive officer is a party adverse to the Corporation or has a material interest adverse to the Corporation. Section 16(A) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2010, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% stockholders were complied with, except that Messrs. Jorge Diaz Irizarry, Hector M. Nevares-La Costa, José Menéndez-Cortada, and Dacio Pasarell and Dr. Sharee Ann Umpierre-Catinchi each filed one (1) late Form 4 relating to common stock acquired in exchange for shares of the Corporation’s Preferred Stock pursuant to the Corporation’s Preferred Stock Exchange Offer completed on August 30, 2010. Corporate Governance and Related Matters”Matters General The following discussion summarizes various corporate governance matters including director independence, board and “Section 16(a) Beneficial Ownership Reporting Compliance” containedcommittee structure, function and composition, and governance charters, policies and procedures. Our Corporate Governance Guidelines and Principles; the charters of the Audit Committee, the Compensation and Benefits Committee, the Corporate Governance and Nominating Committee, the Credit Committee, the Asset/Liability Committee, the Compliance Committee and the Strategic Planning Committee; the Corporation’s Code of Ethical Conduct, the Corporation’s Code of Ethics for CEO and Senior Financial Officers and the Independence Principles for Directors are available through our web site at www.firstbankpr.com, under “Investor Relations / Governance Documents.” Our stockholders may obtain printed copies of these documents by writing to Lawrence Odell, Secretary of the Board of Directors, at First BanCorp, 1519 Ponce de León Avenue, Santurce, Puerto Rico 00908. Code of Ethics In October 2008, we adopted a new Code of Ethics for CEO and Senior Financial Officers (the “Code”). The Code applies to each officer of the Corporation or its affiliates having any or all of the following responsibilities and/or authority, regardless of formal title: the president, the chief executive officer, the chief financial officer, the chief accounting officer, the controller, the treasurer, the tax manager, the general counsel, the general auditor, any assistant general counsel responsible for finance matters, any assistant controller and any regional or business unit financial officer. The Code states the principles to which senior financial officers must adhere in order to act in a manner consistent with the highest moral and ethical standards. The Code imposes a duty to avoid conflicts of interest and to comply with the laws and regulations that apply to the Corporation and its subsidiaries, among other matters. Only the Board, or a duly authorized committee of the Board, may grant waivers from compliance with this Code. Any waiver of any part of the Code will be promptly disclosed to stockholders on our website at www.firstbankpr.com. Neither the Audit Committee nor the General Counsel received any requests for waivers under the Code in 2010. 153
We also adopted a Code of Ethical Conduct that is applicable to all employees and Directors of the Corporation and all of its subsidiaries, which is designed to maintain a high ethical culture in the Corporation. The Code of Ethical Conduct addresses, among other matters, conflicts of interest, operational norms and confidentiality of our and our customers’ information. Independence of the Board of Directors The Board annually evaluates the independence of its members based on the criteria for determining independence identified by the NYSE, the SEC and our Independence Principles for Directors. Our Corporate Governance Guidelines and Principles requires that a majority of the Board be composed of directors who meet the requirements for independence established in our Independence Principles for Directors, which incorporates the independence requirements established by the NYSE and the SEC. The Board has concluded that the Corporation has a majority of independent directors. The Board has determined that Messrs. José L. Ferrer-Canals, Jorge L. Díaz-Irizarry, Fernando Rodríguez-Amaro, José Menéndez-Cortada, Héctor M. Nevares-La Costa, Frank Kolodziej-Castro and José Rodríguez-Perelló and Dr. Sharee Ann Umpierre-Catinchi are independent under the Independence Principles for Directors, taking into account the matters discussed under “Certain Transactions and Related Person Transactions.” Mr. Aurelio Alemán-Bermúdez, President and Chief Executive Officer, is not considered to be independent as he is a management Board member. During 2010, the independent directors usually met in executive sessions without management present on days when there were regularly scheduled Board meetings. In addition, non-management directors separately met two (2) times during 2010 with José Menéndez-Cortada, Chairman of the Board, leading the meetings. Communications with the Board Stockholders or other interested parties who wish to communicate with the Board may do so by writing to the Chairman of the Board in care of the Office of the Corporate Secretary at the Corporation’s headquarters, 1519 Ponce de León Avenue, Santurce, Puerto Rico 00908 or by e-mail to directors@firstbankpr.com. Communications may also be made by calling the following telephone number: 1-787-729-8109. Communications related to accounting, internal accounting controls or auditing matters will be referred to the Chair of the Audit Committee. Depending upon the nature of other concerns, it may be referred to our Internal Audit Department, the Legal or Finance Department, or any other appropriate department. As they deem necessary or appropriate, the Chairman of the Board or the Chair of the Audit Committee may direct that certain concerns communicated to them be presented to the Audit Committee or the Board, or that they receive special treatment, including through the retention of outside counsel or other outside advisors. Board Meetings The Board is responsible for directing and overseeing the business and affairs of the Corporation. The Board represents the Corporation’s stockholders and its primary purpose is to build long-term stockholder value. The Board meets on a regularly scheduled basis during the year to review significant developments affecting the Corporation and to act on matters that require Board approval. It also holds special meetings when an important matter requires Board action between regularly scheduled meetings. The Board met twenty-one (21) times during fiscal year 2010. Each member of the Board participated in at least 75% of the Board meetings held during fiscal year 2010 except for Mr. Frank Kolodziej who was not able to attend certain meetings because of health related reasons. While we have not adopted a formal policy with respect to directors’ attendance at annual meetings of stockholders, we encourage our directors to attend such meetings. All of the Corporation’s directors attended the 2010 annual meeting of stockholders. Board Committees The Board has seven standing committees: the Audit Committee, the Compensation and Benefits Committee, the Corporate Governance and Nominating Committee, the Asset/Liability Committee, the Credit Committee, the Strategic Planning Committee and the Compliance Committee. In addition, from time to time and as it deems appropriate, the Board may also establish ad-hoc committees, which are to be created for a one-time purpose to focus on examining a specific subject or matter. These ad-hoc committees are to be created with a deadline by which they must complete their work, or will expire. The only ad-hoc committee during 2010 was the Capital Committee. The members of the committees are appointed and removed by the Board, which also appoints a chair for each 154
committee. The functions of those committees, their current members and the number of meetings held during 2010 are set forth below. Each member of the Board participated in at least 75% of the aggregate of the total number of meetings held by all committees of the Board on which he/she served (during the periods that he/she served) during fiscal year 2010 except for Mr. Frank Kolodziej who was not able to attend certain meetings because of health related reasons. Audit Committee The Audit Committee charter provides that this Committee is to be composed of at least three outside directors who meet the independence criteria established by the NYSE, the SEC and our Independence Principles for Directors. As set forth in the Audit Committee charter, the Audit Committee represents and assists the Board in fulfilling its responsibility to oversee management regarding (i) the conduct and integrity of our financial reporting to any governmental or regulatory body, shareholders, other users of our financial reports and the public; (ii) the performance of our internal audit function; (iii) our systems of internal control over financial reporting and disclosure controls and procedures; (iv) the qualifications, engagement, compensation, independence and performance of our independent auditors, their conduct of the annual audit of our financial statements, and their engagement to provide any other services; (v) our legal and regulatory compliance; (vi) the application of our related person transaction policy as established by the Board; (vii) the application of our codes of business conduct and ethics as established by management and the Board; and (viii) the preparation of the audit committee report required to be included in our annual proxy statement by the rules of the SEC. The current members of this Committee are Messrs. Fernando Rodríguez-Amaro, Chairman since January 2006, José Ferrer-Canals and Héctor M. Nevares-La Costa. Each member of the Audit Committee is financially literate, knowledgeable and qualified to review financial statements. The “audit committee financial expert” designated by the Board is Fernando Rodríguez-Amaro. The Audit Committee met a total of eighteen (18) times during 2010. Compensation and Benefits Committee The Compensation and Benefits Committee charter provides that the Committee is to be composed of a minimum of three directors who meet the independence criteria established by the NYSE and our Independence Principles for Directors. In addition, the members of the Committee are independent as defined in Rule 16b-3 under the Exchange Act. The Committee is responsible for the oversight of our compensation policies and practices including the evaluation and recommendation to the Board of the proper and competitive salaries and competitive incentive compensation programs of the executive officers and key employees of the Corporation. The responsibilities and duties of the Committee include the following: | • | | Review and approve the annual goals and objectives relevant to compensation of the chief executive officer and other executive officers, as well as the various elements of the compensation paid to the executive officers. | | | • | | Evaluate the performance of the chief executive officer and other executive officers in light of the agreed upon goals and objectives and recommend to the Board the appropriate compensation levels of the chief executive officer and other executive officers based on such evaluation. | | | • | | Establish and recommend to the Board for its approval the salaries, short-term incentive awards (including cash incentives) and long-term incentives awards (including equity-based incentives) of the chief executive officer, other executive officers and selected senior executive officers. | | | • | | Evaluate and recommend to the Board for its approval severance arrangements and employment contracts for executive officers and selected senior executives. | | | • | | Review and discuss with management our Compensation Discussion and Analysis for inclusion in our annual proxy statement. | | | • | | During the period of our participation in the U.S. Treasury Troubled Asset Relief Program Capital Purchase Program, take necessary actions to comply with any applicable laws, rules and regulations related to the Capital Purchase Program, including, without limitation, a risk assessment of the our compensation arrangements and the inclusion of a certification of that assessment in the Compensation Discussion and Analysis in our annual proxy statement. |
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Periodically review the operation of the Corporation’s overall compensation program for key employees and evaluate its effectiveness in promoting stockholder value and corporate objectives. The Committee has the sole authority to engage outside consultants to assist it in determining appropriate compensation levels for the chief executive officer, other executive officers, and selected senior executives and to set fees and retention arrangements for such consultants. The Committee has full access to any relevant records of the Corporation and may request any employee of the Corporation or other person to meet with the Committee or its consultants. The current members of this committee are Dr. Sharee Ann Umpierre-Catinchi, Chairperson since August 2006, and Messrs. Jorge Díaz-Irizarry and Frank Kolodziej (who was appointed to the committee on January 25, 2011). José L. Ferrer-Canals was also a member of the committee during 2010 through January 25, 2011. The Compensation and Benefits Committee met a total of two (2) times during fiscal year 2010. Corporate Governance and Nominating Committee The Corporate Governance and Nominating Committee charter provides that the Committee is to be composed of a minimum of three directors who meet the independence criteria established by the NYSE, the SEC and our Independence Principles for Directors. The responsibilities and duties of the Committee include, among others, the following: | • | | Annually review and make any appropriate recommendations to the Board for further developments and modifications to the corporate governance principles applicable to the Corporation. | | | • | | Develop and recommend to the Board the criteria for Board membership. | | | • | | Identify, screen and review individuals qualified to serve as directors, consistent with qualifications or criteria approved by the Board (including evaluation of incumbent directors for potential re-nomination); and recommend to the Board candidates for: (i) nomination for election or re-election by the shareholders; and (ii) any Board vacancies that are to be filled by the Board. | | | • | | Review annually the relationships between directors, the Corporation and members of management and recommend to the Board whether each director qualifies as “independent” based on the criteria for determining independence identified by the NYSE, the SEC and the Corporation’s Independence Principles for Directors. | | | • | | As vacancies or new positions occur, recommend to the Board the appointment of members to the standing committees and the committee chairs and review annually the membership of the committees, taking account of both the desirability of periodic rotation of committee members and the benefits of continuity and experience in committee service. | | | • | | Recommend to the Board on an annual basis, or as vacancies occur, one member of the Board to serve as Chairperson (who also may be the Chief Executive Officer). | | | • | | Evaluate and advise the Board whether the service by a director on the board of another company or a not-for-profit organization might impede the director’s ability to fulfill his or her responsibilities to the Corporation. | | | • | | Have sole authority to retain and terminate outside consultants or search firms to advise the Committee regarding the identification and review of board candidates, including sole authority to approve such consultant’s or search firm’s fees, and other retention terms. | | | • | | Review annually our Insider Trading Policy to ensure continued compliance with applicable legal standards and corporate best practices. In connection with its annual review of the Insider Trading Policy, the Committee also reviews the list of executive officers subject to Section 16 of the Exchange Act, and the list of affiliates subject to the trading windows contained in the Policy. | | | • | | Develop, with the assistance of management, programs for director orientation and continuing director education. | | | • | | Direct and oversee our executive succession plan, including succession planning for all executive officer positions and interim succession for the chief executive officer in the event of an unexpected occurrence. | | | • | | Provide oversight of our policies and practices with respect to corporate social responsibility, including environmentally sustainable solutions. |
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Consistent with the foregoing, take such actions as it deems necessary to encourage continuous improvement of, and foster adherence to, our corporate governance policies, procedures and practices at all levels and perform other corporate governance oversight functions as requested by the Board. The current members of this committee are Messrs. José Menéndez-Cortada, Chairman of the Committee since October 27, 2009, José L. Ferrer-Canals, and Jorge Díaz-Irizarry (who was appointed to the committee on January 25, 2011). Frank Kolodziej-Castro was also a member of the committee during 2010 through January 25, 2011. The Corporate Governance and Nominating Committee met a total of three (3) times during fiscal year 2010. Identifying and Evaluating Nominees for Directors The Board of Directors, acting through the Corporate Governance and Nominating Committee, is responsible for assembling for stockholder consideration a group of nominees that, taken together, have the experience, qualifications, attributes, and skills appropriate for functioning effectively as a board. The Nominating Committee regularly reviews the composition of the Board in light of the Corporation’s changing requirements, its assessment of the Board’s performance, and the inputs of stockholders and other key constituencies. The Corporate Governance and Nominating Committee looks for certain characteristics common to all Board members, including integrity, strong professional reputation and record of achievement, constructive and collegial personal attributes, and the ability and commitment to devote sufficient time and energy to Board service. In addition, the Corporate Governance and Nominating Committee seeks to include on the Board a complementary mix of individuals with diverse backgrounds and skills reflecting the broad set of challenges that the Board confronts. These individual qualities can include matters like experience in our industry, technical experience, leadership experience, and relevant geographical experience. In fulfilling these responsibilities regarding Board membership, the Board adopted thePolicy Regarding Selection of Directors,which sets forth the Corporate Governance and Nominating Committee’s responsibility with respect to the identification and recommendation to the Board of qualified candidates for Board membership, which is to be based primarily on the following criteria: | • | | Judgment, character, integrity, expertise, skills and knowledge useful to the oversight of our business; | | | • | | Diversity of viewpoints, backgrounds, experiences and other demographics; | | | • | | Business or other relevant experience; and | | | • | | The extent to which the interplay of the candidate’s expertise, skills, knowledge and experience with that of other Board members will build a Board that is effective, collegial and responsive to the needs of the Corporation. |
The Corporate Governance and Nominating Committee does not have a specific diversity policy with respect to the director nomination process. Rather, this Committee considers diversity in the broader sense of how a candidate’s viewpoints, experience, skills, background and other demographics could assist the Board in light of the Board’s composition at the time. The Committee gives appropriate consideration to candidates for Board membership nominated by stockholders and evaluates such candidates in the same manner as candidates identified by the Committee. The Committee may use outside consultants to assist in identifying candidates. Members of the Committee discuss and evaluate possible candidates in detail prior to recommending them to the Board. The Committee is also responsible for initially assessing whether a candidate would be an “independent” director under the requirements for independence established in our Independence Principles for Directors of First BanCorp’s definitive Proxy StatementBanCorp and applicable rules and regulations (an “Independent Director”). The Board, taking into consideration the recommendations of the Committee, is responsible for selecting the nominees for election to the Board by the stockholders and for appointing directors to the Board to fill vacancies, with primary emphasis on the criteria set forth above. The Board, taking into consideration the assessment of the Committee, also makes a determination as to whether a nominee or appointee would be an Independent Director. 157
Asset/Liability Committee In 2008, the Board revised its committee structure and resolved to segregate the Asset/Liability Risk Committee’s responsibilities into two separate committees; the Credit Committee and the Asset/Liability Committee. The Asset/Liability Committee’s charter provides that that Committee is to be composed of a minimum of three directors who meet the independence criteria established by the NYSE, the SEC, and our Independence Principles for Directors, and also include the Corporation’s Chief Executive Officer, Chief Financial Officer, Treasurer and Chief Risk Officer. Under the terms of its charter, the Asset/Liability Committee assists the Board in its oversight of our policies and procedures related to asset and liability management, including (i) funds management, (ii) investment management, (iii) liquidity, (iv) interest rate risk management, (v) capital adequacy, and (vi) the use of derivatives (the “ALM”). In doing so, the committee’s primary functions involve: | • | | The establishment of a process to enable the identification, assessment and management of risks that could affect the Corporation’s ALM; | | | • | | The identification of the Corporation’s risk tolerance levels for yield maximization related to its ALM; | | | • | | The evaluation of the adequacy and effectiveness of the Corporation’s risk management process related to the Corporation’s ALM, including management’s role in that process; and | | | • | | The evaluation of the Corporation’s compliance with its risk management process related to the Corporation’s ALM. |
The current director members of this committee are Messrs. José Rodríguez-Perelló, appointed Chairman in May 2008, Aurelio Alemán-Bermúdez, José Menéndez-Cortada, Héctor M. Nevares-La Costa and Jorge Díaz-Irizarry. The Asset/Liability Committee met a total of four (4) times during fiscal year 2010. Credit Committee The Credit Committee’s charter provides that this Committee is to be composed of a minimum of three directors who meet the independence criteria established by the NYSE, the SEC and our Independence Principles for Directors, and also include our Chief Executive Officer, Chief Lending Officer and Corporate Wholesale Banking Executive. Under the terms of its charter, the Credit Committee assists the Board in its oversight of our policies and procedures related to all matters of our lending function, hereafter “Credit Management.” In doing so, this Committee’s primary functions involve: | • | | The establishment of a process to enable the identification, assessment and management of risks that could affect our Credit Management; | | | • | | The identification of our risk tolerance levels related to our Credit Management; | | | • | | The evaluation of the adequacy and effectiveness of our risk management process related to our Credit Management, including management’s role in that process; | | | • | | The evaluation of our compliance with our risk management process related to our Credit Management; and | | | • | | The approval of loans as required by the lending authorities approved by the Board. |
The current director members of this Committee are Messrs. José Menéndez-Cortada, Chairman since January 25, 2011, Aurelio Alemán-Bermúdez, Héctor M. Nevares-La Costa and José Rodríguez-Perelló. Jorge Díaz-Irizarry was also a member and the Chairman of the committee during 2010 through January 25, 2011. The Credit Committee met a total of twenty (20) times during fiscal year 2010. Strategic Planning Committee On October 27, 2009, the Board approved the formation of the Strategic Planning Committee. This Committee was established to assist and advise management with respect to, and monitor and oversee on behalf of the Board, corporate development activities not in the ordinary course of our business and strategic alternatives under consideration from time to time by the Corporation, including, but not limited to, acquisitions, mergers, alliances, joint ventures, divestitures, the capitalization of the Corporation and other similar corporate transactions. The Strategic Planning Committee charter provides that this Committee is to be composed of a minimum of three directors who meet the independence criteria established by the NYSE, the SEC and the Corporation’s 158
Independence Principles for Directors. The responsibilities and duties of the Committee include, among others, the following: | • | | Review with management and assist in the development, adoption and execution of the Corporation’s strategies and strategic plans on a continual basis and provide recommendations to the Board for modifications as deemed necessary, based on the changing needs of corporate stakeholders (e.g., stockholders, customers, debt investors, etc.), changes in the Corporation’s external environment (e.g., markets, competition, regulatory, etc.) and internal situations that may affect the strategy of the Corporation; | | | • | | Oversee and facilitate the Corporation’s review and assessment of external developments and factors impacting the Corporation’s strategies and execution against the Corporation’s strategic plans and participate in periodic reviews with management of the same; | | | • | | Review the Bank’s Strategic Business Plan; | | | • | | Facilitate an annual strategic planning session of the Board; | | | • | | Review and recommend to the full Board certain strategic decisions regarding expansion or exit from existing lines of business or countries and entry into new lines of business or countries and the financing of such transactions, including: (i) mergers, acquisitions, takeover bids, sales of assets and arrangements; (ii) joint ventures and strategic alliances; (iii) divestitures; (iv) financing arrangements in connection with corporate transactions; (v) development of longer-term strategy relating to growth by acquisitions; and (vi) other similar corporate transactions; and | | | • | | Review, approve for presentation and make recommendations to the full Board of Directors with respect to capital structures and polices, including: (i) capitalization of the Corporation; (ii) dividend policy; and (iii) exchange listing requirements, appointment of corporate agents and offering terms of corporate securities, as appropriate. |
The current director members of this committee are Messrs. Héctor M. Nevares-La Costa, Chairman since October 27, 2009, Aurelio Alemán-Bermúdez, José Menéndez-Cortada (member since January 25, 2011) and José Rodríguez-Perelló. Frank Kolodziej-Castro was also a member of the committee during 2010 through January 25, 2011. In addition, Messrs. Orlando Berges-González and Lawrence Odell are management members of the committee. The Strategic Committee met a total of five (5) times during fiscal year 2010. Capital Committee On January 15, 2010, the Board created the Capital Committee, an ad-hoc committee composed entirely of directors who do not own preferred stock for purposes of overseeing the Corporation’s proposal to undertake an exchange offer pursuant to which the Corporation would offer to holders of registered preferred stock shares of Common Stock in exchange for their preferred stock. The Capital Committee was responsible for evaluating and approving the terms and conditions of the exchange offer transaction and reporting to the Board. The Committee was granted full power to determine the terms and conditions of the exchange offer. Upon completion of the exchange offer, the Capital Committee finished its work. The members of this committee were Messrs. Fernando Rodríguez-Amaro, Chairman since inception, Aurelio Alemán-Bermúdez, Frank Kolodziej-Castro, José Rodríguez-Perelló and José L. Ferrer-Canals. The Capital Committee met a total of eleven (11) times during fiscal year 2010. Compliance Committee On June 22, 2010, the Board approved the formation of the Compliance Committee. This committee was established to assist the Board of the Bank in fulfilling its responsibility to ensure compliance by the Corporation and the Bank with the provisions of the Consent Order entered into with the FDIC and the OCIF pursuant to which the Bank agreed to take certain actions designed to improve the financial condition of the Bank. In addition, the Committee assists the Board of the Corporation in fulfilling its responsibility with respect to compliance with the Written Agreement entered into with the Federal Reserve. Once the Agreements are terminated by the FDIC, OCIF and the FED the Committee will cease to exist. 159
The Compliance Committee charter provides that the committee is to be composed of at least three directors who meet the independence criteria established by the NYSE, the SEC and the Corporation’s Independence Principles for Directors. The responsibilities and duties of the Compliance Committee include, among others, the following: | • | | The Committee shall meet, review and approve the action plan and timeline developed by management to comply with the provisions of the Agreements. | | | • | | The Committee shall monitor implementation of action plans developed with respect to compliance with the provision of the Agreements and correction of apparent violations or contravention included in the most recent examination reports. | | | • | | The Committee shall assure that all deliverables pursuant to the Agreements that require Board approval are presented timely to the Boards to comply with the required timeframes established in the Agreements. | | | • | | The Committee is authorized to carry out these activities and other actions reasonably related to the Committee’s purpose or assigned by the Boards. | | | • | | The Committee shall assure that all deliverables pursuant to the Agreements shall have been delivered to the Regional Director of the FDIC, the Commissioner of Financial Institutions of Puerto Rico and the Director of the FED in a timely manner in compliance with the required timeframes established in the Agreements. |
The current director members of this committee are Messrs. Fernando Rodríguez-Amaro, Chairman, José Menéndez-Cortada and José Rodríguez-Perelló. The Compliance Committee met a total of eight (8) times during fiscal year 2010. | | | Item 11. | | Executive Compensation. |
Compensation Discussion and Analysis The Compensation Discussion and Analysis (“CD&A”) describes the objectives of the Corporation’s executive compensation program, the process for determining executive officer compensation, and the elements of the compensation of the Corporation’s President and Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and the next three highest paid executive officers of the Corporation (together the “Named Executives”). The executive compensation program is administered by the Compensation and Benefits Committee (the “Compensation Committee”). The Compensation Committee reviews and recommends to the Board the annual goals and objectives relevant to the CEO. The Compensation Committee is also responsible for evaluating and recommending to the Board the base salaries, annual incentives and long-term equity incentive awards for the CEO, executive vice presidents and other selected officers of the Corporation. Executive Compensation Policy The Corporation has in place an executive compensation structure designed to help attract, motivate, reward and retain highly qualified executives. The compensation programs are designed to fairly reflect, in the judgment of the Compensation Committee, the Corporation’s performance, and the responsibilities and personal performance of the individual executives, while assuring that the compensation reflects principles of sound risk management and performance metrics consistent with long-term contributions to sustained profitability, as well as fidelity to the values and expected conduct. To support those goals, the Corporation’s policy is to provide its Named Executives with a competitive base salary, a short-term annual incentive, a long-term equity incentive and other fringe benefits. The annual incentive and the long-term equity incentive, which are the variable components of total compensation, are based on specific performance metrics that vary by participant. The annual incentive incorporates metrics that are tailored to an executive’s responsibilities and consider corporate, business unit/area and individual performance. The long-term incentive is driven by corporate performance. In light of the Corporation’s participation in the U.S. Treasury Troubled Asset Relief Capital Purchase Program (the “Capital Purchase Program” or “CPP”), the Corporation became subject to certain executive compensation restrictions under the Emergency Economic Stabilization Act of 2008 (“EESA”), as amended by the American Reinvestment and Recovery Act of 2009 (“ARRA”) and the rules and regulations promulgated thereunder, under 160
U.S. Treasury regulations and under the contract pursuant to which the Corporation sold preferred stock to the U.S. Treasury. Those restrictions apply to what the U.S. Treasury refers to as the Corporation’s Senior Executive Officers (the “Named Executives”), which are the Named Executives as defined under SEC regulations. For 2010, because of the Corporation’s participation in the CPP, the Compensation and Benefits Committee operated the executive compensation program in a significantly different fashion than in prior years. Specifically, under the CPP, the Corporation: | • | | must prohibit the payment or accrual of any bonus payments to the Corporation’s Named Executives and the 10 next most highly-compensated employees (“MHCEs”), except for (a) long-term restricted stock if it satisfies the following requirements: (i) the value of the grant may not exceed one-third of the amount of the employee’s annual compensation calculated in the fiscal year in which the compensation is granted, (ii) no portion of the grant may vest before two years after the grant date and (iii) the grant must be subject to a further restriction on transfer or payment in accordance with the repayment of TARP funds; or (b) bonus payments required to be paid pursuant to written employment agreements executed on or before February 11, 2009; | | | • | | cannot make any “golden parachute payments” to its Named Executive or the next five MHCEs; | | | • | | must require that any bonus, incentive and retention payments made to the Named Executives and the next 20 MHCEs are subject to recovery if based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate; | | | • | | must prohibit any compensation plan that would encourage manipulation of reported earnings; | | | • | | at least every six months must discuss, evaluate and review with the senior risk officers any risks (including long-term and short-term risks) that could threaten the value of the Corporation; and | | | • | | must make annual disclosures to the U.S. Treasury of, among other information, perquisites whose total value during the year exceeds $25,000 for any of the Named Executives or 10 next MHCEs, a narrative description of the amount and nature of those perquisites, and a justification for offering them. |
TARP Related Actions — Amendments to Executive Compensation Program As required by ARRA, a number of amendments were made to our executive compensation program; these are: | • | | Bonuses and other incentive payments to Named executives and the next ten (10) MHCEs have been prohibited during the TARP period. | | | • | | Employment agreements were amended to provide that benefits to the executives shall be construed and interpreted at all times that the U.S. Treasury maintains any debt or equity investment in the Corporation in a manner consistent with EESA and ARRA, and all such agreements shall be deemed to have been amended as determined by the Corporation so as to comply with the restrictions imposed by EESA and ARRA. | | | • | | The change of control provisions previously applicable to Named Executives and the next five (5) MHCEs have been suspended during the TARP period. | | | • | | A recovery or “clawback” acknowledgment has been signed by the Named executives and the next twenty (20) MHCEs under which they acknowledge, understand and agree to the return of any bonus payment or awards made during the TARP period based upon materially inaccurate financial statements or performance metrics. | | | • | | There were no bonus payments to any such officers or employees during 2010. |
To the extent the Corporation repays the TARP investment in the future, the Corporation anticipates a complete re-evaluation of base salaries and short-term and long-term incentive programs to ensure they align strategically with the needs of the business and the competitive market at that time. Pay for Performance The Corporation has a performance-oriented executive compensation program that is designed to support its corporate strategic goals, including growth in earnings and growth in stockholder value. The compensation structure reflects the belief that executive compensation must, to a large extent, be at risk where the amount earned depends on achieving rigorous corporate, business unit and individual performance objectives designed to enhance 161
stockholder value. To the extent the Corporation resumes paying bonuses in the future, actual incentive payouts will be larger if superior target performance is achieved and smaller if target performance is not achieved. Market Competitiveness Historically, the Corporation has targeted total compensation, including base salaries, annual target incentive opportunities, and long-term target incentive opportunities including equity-based incentives, at the 75th percentile of compensation paid by similarly-sized companies. We believe that targeting the 75th percentile of compensation paid to the peer group is appropriate given the degree of difficulty in achieving our performance targets, as demonstrated by the fact that, in 2010, the Corporation did not achieve the specified level of financial performance required to make awards of equity, as discussed below. An additional consideration relates to the challenges of attracting and retaining talent. While the philosophy has been to set total compensation for executives at the 75th percentile of compensation paid by a peer group of banks, the Corporation will also assess competitive or recruiting pressures in the market for executive talent. These pressures potentially may threaten the ability to retain key executives. The Board will exercise its discretion in adjusting compensation targets as necessary and appropriate to address these risks. In 2010, the Corporation did not base compensation on an analysis of compensation paid by a peer group because of the restrictions that the Corporation agreed to in connection with its 2010 Annual Meetingsale of stockholders (the “Proxy Statement”)preferred stock to the U.S. Treasury and because the Corporation did not achieve the performance target that would have enabled it to make equity grants. When the Corporation used a peer group for compensation purposes, which it expects to do again in the future as part of the process of reviewing the Corporation’s compensation plans, it will identify the members of the peer group based on appropriate factors, which may include, but are not limited to, factors such as industry, asset size and location. We will continue to monitor market competitive levels and, if permissible under our agreement with the U.S. Treasury, the Compensation Committee will make adjustments as appropriate to align executive officer pay with our stated pay philosophy and desire to drive a strong performance oriented culture. In light of the constraints we and many of our peers face under ARRA, we believe the market will continue to change quickly and we will monitor these changes to ensure our programs allow us to continue to attract and retain top talent and reward for strong performance and value creation. Compensation Review Process The Compensation Committee typically reviews and recommends to the Board the base salaries, short-term incentive awards and long-term incentive awards of the CEO and other selected senior executives in the first quarter of each year with respect to performance results for the preceding year. The Corporation’s President and CEO, following the compensation structure approved by the Board, makes recommendations concerning the amount of compensation to be awarded to executive officers, excluding himself. The CEO does not participate in the Compensation Committee’s deliberations or decisions. The Compensation Committee reviews and considers his recommendations and makes a final determination. In making its determinations, the Compensation Committee reviews the Corporation’s performance as a whole and the performance of the executives as it relates to the accomplishment of the goals and objectives set forth for management for the year, together with any such goals that have been established for the relevant lines of business of the Corporation. Role of the Compensation Consultant The role of the outside compensation consultants is to assist the Compensation Committee in analyzing executive pay packages and contracts, perform executive compensation reviews including market competitive assessments and develop executive compensation recommendations for the Compensation Committee’s consideration. Through September 21, 2009, the Compensation Committee retained Mercer as its independent executive compensation consultants. Following this period, the Committee decided to engage Compensation Advisory Partners (“CAP”) as the consultant when the lead consultant on the Mercer engagement left Mercer to form CAP. CAP provides advice to the Committee on executive and director compensation. During 2010, CAP did not provided any other services to the Corporation. 162
Elements of Executive Compensation The elements of the Corporation’s regular total compensation program (not all elements of which are currently active because of the TARP requirements) and the objectives of each element are identified below: | • | | Base salary | | | • | | Annual incentives | | | • | | Long-term equity incentives | | | • | | Other compensation |
Each element of the compensation structure is intended to support and promote the following results and behavior: | • | | Reward for strong performance | | | • | | Attract and retain the talent needed to execute our strategy and ultimately deliver value to stockholders | | | • | | Deliver a compensation package that is competitive with the market and commensurate with the performance delivered |
Base Salary Base salary is the basic element of direct cash compensation, designed to reward individual performance and level of experience. In setting the base salary, the Board takes into consideration the experience, skills, knowledge and responsibilities required of the Named Executives in their roles, the individual’s achievement of pre-determined goals and objectives, the Corporation’s performance and marketplace salary data to help ensure that base salaries of the Corporation’s Named Executives are within competitive practices relative to the base salaries of comparable executive officers in peer group companies. The Board seeks to maintain base salaries that are competitive with the marketplace, to allow it to attract and retain executive talent. Considering the economic conditions and performance of the Corporation during 2010, the base salaries of the Named Executives were not increased during 2010. In addition, during 2009 the Corporation expanded to all employees of the Corporation the salary freeze applicable to employees whose base salary exceeded $50,000. During 2010, the Corporation continued with such salary freeze applicable to all employees. The base salaries of Messrs. Aurelio Alemán-Bermúdez, President and Chief Executive Officer, and. Lawrence Odell, Executive Vice President and General Counsel, have not been adjusted since 2005 and 2006, respectively. Annual Incentive Generally, the annual incentive element of the Corporation’s executive compensation program is designed to provide cash bonuses to executive officers who generate strong corporate financial performance and, therefore, seeks to link the payment of cash bonuses to the achievement of key strategic, operational and financial performance objectives. Other criteria, besides financial performance, may include objectives and goals that may not involve actions that specifically and directly relate to financial matters, but the resolutions of which would necessarily protect the financial soundness of the Corporation. In light of the restrictions imposed under the CPP, this component of compensation is suspended during the TARP period. No incentive bonus has been or will be earned or paid to our Named Executives and the next ten most highly compensated employees during that period, although Christmas bonuses, which are paid to all employees in nominal amounts, have been paid also to the Named Executive Officers. Furthermore, in light of the limitations imposed by the CPP and considering the continuing worsening economic conditions which affected the performance of the Corporation, during 2010 the Corporation has limited cash incentives to those employees who exceeded and consistently demonstrated exceptional performance. Long-Term Equity Incentive The long-term equity incentive executive compensation structure approved by the Board provides a variable pay opportunity for long-term performance through a combination of restricted stock and stock option grants designed to reward overall corporate performance. The award is intended to align the interests of the Named Executives directly to the interests of the stockholder and is an important retention tool for the Corporation. Generally, the compensation structure contemplates long-term incentives that are awarded in equal values in the form of stock options and 163
performance-accelerated restricted stock. Stock option grants are awarded based on overall individual performance and shares of performance-accelerated restricted stock are awarded if a minimum of 80% of the respective year’s after tax adjusted net income target is achieved. Notwithstanding the foregoing, under the CPP the Corporation’s incentive program for Named Executives is solely allowed in the form of restricted stock. In accordance with CPP limitations, the Named Executives were eligible for a long-term restricted stock grant of up to one-third of their total annual compensation. Such restricted stock requires a minimum vesting period of two years after the grant date and is subject to transferability restrictions thereafter as required by EESA, so long as CPP obligations remain outstanding (shares may become transferable in 25% increments as the CPP funds are repaid by the Corporation). During 2010, no restricted stock awards were granted due to the Corporation’s financial performance and the continued worsening economic conditions which affected the performance of the Corporation,. In addition, in light of the restrictions imposed under the CPP, the stock option component of compensation is suspended during the TARP period. Other Compensation The use of personal benefits and perquisites as an element of compensation in the Corporation’s 2010 executive compensation program is extremely limited. The Named Executives may also be provided with a corporate-owned automobile, club memberships and a life insurance policy of $1,000,000 ($500,000 in excess of other employees). Like all other employees, the Named Executives may participate in the Corporation’s defined contribution retirement plan (including the Corporation’s match) and group medical and dental plans and receive long-term and short-term disability, health care, and group life insurance benefits. In addition, the CEO is provided with personal security and a chauffeur solely for business purposes. Tabular Executive Compensation Disclosure Summary Compensation Table The Summary Compensation Table set forth below discloses compensation for the Named Executives of the Corporation, FirstBank or its subsidiaries. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-Equity | | Nonqualified | | | | | | | | | | | | | | | | | | | | | | | | | | | Incentive Plan | | Deferred | | All Other | | | | | | | | | Salary | | Bonus | | Stock Awards | | Option Awards | | Compensation | | Compensation | | Compensation | | Total | Name and Principal Position | | Year | | ($) (a) | | ($) (b) | | ($) | | ($) | | ($) (c) | | ($) | | ($) (d) | | ($) | Aurelio Alemán-Bermúdez | | | 2010 | | | | 750,000 | | | | 1,200 | | | | — | | | | — | | | | — | | | | — | | | | 59,538 | | | | 810,738 | | President and | | | 2009 | | | | 778,846 | | | | 2,200 | | | | — | | | | — | | | | — | | | | — | | | | 30,170 | | | | 811,216 | | Chief Executive Officer | | | 2008 | | | | 750,000 | | | | 2,200 | | | | — | | | | — | | | | 748,952 | | | | — | | | | 18,646 | | | | 1,519,798 | | Orlando Berges-González (e) | | | 2010 | | | | 600,000 | | | | 1,200 | | | | — | | | | — | | | | — | | | | — | | | | 12,686 | | | | 613,886 | | Executive Vice President and | | | 2009 | | | | 387,692 | | | | 2,200 | | | | — | | | | — | | | | — | | | | — | | | | 7,619 | | | | 397,511 | | Chief Fiancial Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Lawrence Odell (f) | | | 2010 | | | | 720,100 | | | | 1,200 | | | | — | | | | — | | | | — | | | | — | | | | 5,713 | | | | 727,013 | | Executive Vice President, | | | 2009 | | | | 720,100 | | | | 2,200 | | | | — | | | | — | | | | — | | | | — | | | | 5,130 | | | | 727,430 | | General Counsel and Secretary of the | | | 2008 | | | | 720,100 | | | | 2,200 | | | | — | | | | — | | | | 437,563 | | | | — | | | | 7,043 | | | | 1,166,906 | | Board of Directors | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Victor Barreras-Pellegrini | | | 2010 | | | | 468,000 | | | | 1,200 | | | | — | | | | — | | | | — | | | | — | | | | 19,816 | | | | 489,016 | | Senior Vice President and Treasurer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Calixto García-Vélez (g) | | | 2010 | | | | 400,000 | | | | 1,200 | | | | — | | | | — | | | | — | | | | — | | | | 72,584 | | | | 473,784 | | Executive Vice President and | | | 2009 | | | | 325,897 | | | | 202,200 | | | | — | | | | — | | | | — | | | | — | | | | 50,467 | | | | 578,564 | | Florida Region Executive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (a) | | Includes regular base pay before payroll deductions for years 2008, 2009 and 2010. Year 2009 was a “pay period leap year” which means that there were 27 bi-weekly paydays instead of 26; hence employees received more cash compensation during the year than payable based on their annual based salary rates. |
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| | | (b) | | The column includes the Christmas bonus and discretionary performance bonus payments. The Christmas bonus is a non-discriminatory broad-based benefit offered to all employees, under which the Corporation paid during 2010 six percent (6%) of the employees’ base salary up to $1,200 and six percent (6%) of the employees’ base salary up to $2,200 during 2008 and 2009. In addition, this column includes a signing bonus of $200,000, permitted by ARRA provision, given to Mr. García-Vélez during 2009 upon his retention as executive vice president. Additional information regarding his employment can be found below in footnote (g) of this section. | | (c) | | The amounts in this column represent the payments made to Named Executives relating to the short-term annual incentive component of total executive compensation. In 2010 and 2009, based on TARP restrictions, the compensation program for Named Executives was limited to base salary and restricted stock. Non-equity compensation includes the short-term annual incentive related to 2008 performance. The short-term annual incentive was determined as a percentage of base salary using metrics against which performance is measured. | | (d) | | Set forth below is a breakdown of all other compensation (i.e., personal benefits): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Company- | | | | | | | | | | | | | | | | | | | | | | | owned | | Car | | 1165(e) Plan | | | | | | Memberships & | | Utility & home | | | | | | | | | | | Vehicles | | Allowance | | Contribution | | Security | | Dues | | maintenance | | Other | | Total | Name and Principal Position | | Year | | ($) | | | | | | ($) (a) | | ($) | | ($) | | ($) (b) | | ($) (c) | | ($) | Aurelio Alemán-Bermúdez | | | 2010 | | | | 6,347 | | | | — | | | | 2,000 | | | | 43,928 | | | | 6,465 | | | | — | | | | 798 | | | | 59,538 | | | | | 2009 | | | | 4,722 | | | | — | | | | 4,154 | | | | 13,528 | | | | 6,968 | | | | — | | | | 798 | | | | 30,170 | | | | | 2008 | | | | 8,701 | | | | — | | | | 5,600 | | | | — | | | | 3,547 | | | | — | | | | 798 | | | | 18,646 | | Orlando Berges-González | | | 2010 | | | | 5,849 | | | | — | | | | 346 | | | | — | | | | 5,693 | | | | — | | | | 798 | | | | 12,686 | | | | | 2009 | | | | 3,298 | | | | — | | | | — | | | | — | | | | 3,789 | | | | — | | | | 532 | | | | 7,619 | | Lawrence Odell | | | 2010 | | | | 4,915 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 798 | | | | 5,713 | | | | | 2009 | | | | 4,332 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 798 | | | | 5,130 | | | | | 2008 | | | | 6,245 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 798 | | | | 7,043 | | Victor Barreras-Pellegrini | | | 2010 | | | | — | | | | 13,200 | | | | 2,250 | | | | — | | | | 4,366 | | | | — | | | | — | | | | 19,816 | | Calixto García-Vélez | | | 2010 | | | | 3,817 | | | | — | | | | 786 | | | | — | | | | 3,832 | | | | 62,949 | | | | 1,200 | | | | 72,584 | | | | | 2009 | | | | 2,051 | | | | — | | | | 720 | | | | — | | | | 5,000 | | | | 42,696 | | | | — | | | | 50,467 | |
| | | (a) | | Includes the Corporation’s contribution to the executive’s participation in the Defined Contribution Retirement Plan. | | (b) | | This column includes relocation expenses paid to Mr. García-Vélez as a result of his employment as executive vice president of the Florida operations, his relocation package included housing and utilities allowance and travel expenses. | | (c) | | Other compensation for the three fiscal years includes the amount of the life insurance policy premium paid by the Corporation in excess of the $500,000 life insurance policy available to all employees. | | (e) | | On May 7, 2009, the Corporation entered into a three-year employment agreement with Mr. Berges-González which became effective May 11, 2009, relating to the services of Mr. Berges-González as Executive Vice President of the Corporation and, upon Mr. Fernando Scherrer’s resignation, to assume the role of Chief Financial Officer. The employment agreement has automatic one-year extensions unless the Corporation or Mr. Berges-González provides prior notice that the employment agreement will not be extended. Under the terms of the employment agreement, Mr. Berges-González is entitled to receive annually a base salary of $600,000 plus an annual bonus opportunity based upon Mr. Berges-González’s |
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| | | | | achievement of predetermined business objectives. In addition, Mr. Berges-González is entitled to use a company-owned automobile, participate in the Corporation’s stock incentive, retirement, and other plans, and receive other benefits granted to employees and executives of the Corporation. Pursuant to ARRA provisions the bonus component of Mr. Berges’ compensation package has been prohibited during the TARP period. | | (f) | | In February 2006, the Corporation entered into an employment agreement with Mr. Lawrence Odell and, at the same time, entered into a services agreement with the Law Firm where he is a partner, relating to the services of Mr. Odell as Executive Vice President and General Counsel of the Corporation. Mr. Odell receives a nominal base salary of $100.00 a year and the opportunity to receive an annual performance bonus based upon his achievement of predetermined business objectives. The services agreement provides for monthly payments to the Law Firm of $60,000, which has been taken into consideration in determining Mr. Odell’s salary and has been included as such in the Summary Compensation Table for years 2008, 2009 and 2010. In addition, Mr. Odell’s employment agreement provides that, on each anniversary of the date of commencement, the term of such agreement is automatically extended for an additional one (1) year period beyond the then-effective expiration date. The services agreement had a term of four years expiring on February 14, 2010. In light of the automatic extension of Mr. Odell’s employment agreement, on January 29, 2010, the Board has extended the term of the services agreement, most recently for a term through February 14, 2012, unless earlier terminated. | | (g) | | In March 2009, the Corporation hired Mr. Calixto García-Vélez’s as Executive Vice-President and Florida Division Executive with responsibilities for the Corporation’s Florida operations. Under the terms of Mr. García-Vélez’s employment offer, Mr. García-Vélez receives a base salary of not less than $400,000 a year and a guaranteed sign-on bonus of $200,000. The sign-on bonus payment is included in the bonus section of the Summary Compensation Table for 2009. |
Grants of Plan-Based Awards Due to the Corporation’s financial performance during 2010, non-equity and equity incentive award opportunities were not achieved and no grants of plan-based awards were made, specifically: | • | | No cash awards were made due to TARP restrictions, | | | • | | No restricted stock awards were made due to the Corporation not achieving at least 80% of prior year’s earnings, and | | | • | | No stock options were granted due to restrictions under TARP. |
Outstanding Equity Awards at Fiscal Year End The following table sets forth certain information with respect to the unexercised options held by Named Executives as of December 31, 2010. 166
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | OptionAwards | | Stock Awards | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incentive | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Plan | | Incentive | | | | | | | | | | | Equity | | | | | | | | | | | | | | | | | | Awards: | | Plan | | | | | | | | | | | Incentive | | | | | | | | | | | | | | | | | | Number of | | Awards: | | | | | | | | | | | Plan | | | | | | | | | | | | | | | | | | Unearned | | Market or | | | | | | | | | | | Awards: | | | | | | | | | | | | | | | | | | Shares, | | Payout | | | | | | | Number | | Number | | | | | | | | | | | | | | | | | | Unit or | | Value of | | | Number | | of | | of | | | | | | | | | | Number | | | | | | Other | | Unearned | | | of | | Securities | | Securities | | | | | | | | | | of | | | | | | Rights | | Shares, | | | Securities | | Underlying | | Underlying | | | | | | | | | | Shares | | Market Value | | that | | that | | | Underlying | | Unexercised | | Unexercised | | | | | | | | | | or Units | | of Shares or | | have | | have | | | Options | | Options | | Unearned | | Option | | Option | | of Stock | | Units of Stock | | not | | not | | | (#) | | (#) | | Options | | Exercise | | Expiration | | that have | | that have | | Vested | | Vested | Name (a) | | Exercisable | | Unexercisable | | (#) | | Price ($) | | Date | | not vested | | not vested | | (#) | | ($) | Aurelio Alemán-Bermúdez | | | 6,000 | | | | — | | | | — | | | | 140.15 | | | | 2/26/2012 | | | | — | | | | — | | | | — | | | | — | | | | | 4,000 | | | | — | | | | — | | | | 192.20 | | | | 2/25/2013 | | | | — | | | | — | | | | — | | | | — | | | | | 4,800 | | | | — | | | | — | | | | 321.75 | | | | 2/20/2014 | | | | — | | | | — | | | | — | | | | — | | | | | 4,800 | | | | — | | | | — | | | | 358.80 | | | | 2/22/2015 | | | | — | | | | — | | | | — | | | | — | | | | | 10,000 | | | | — | | | | — | | | | 190.20 | | | | 1/24/2016 | | | | — | | | | — | | | | — | | | | — | | | | | 10,000 | | | | — | | | | — | | | | 138.00 | | | | 1/21/2017 | | | | — | | | | — | | | | — | | | | — | | Lawrence Odell | | | 6,666 | | | | — | | | | — | | | | 189.60 | | | | 2/15/2016 | | | | — | | | | — | | | | — | | | | — | | | | | 5,000 | | | | — | | | | — | | | | 138.00 | | | | 1/21/2017 | | | | — | | | | — | | | | — | | | | — | | Victor Barreras-Pellegrini | | | 3,333 | | | | — | | | | — | | | | 133.50 | | | | 7/10/2016 | | | | — | | | | — | | | | — | | | | — | | | | | 1,333 | | | | — | | | | — | | | | 138.00 | | | | 1/21/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | (a) | | Messrs. Berges-González and García-Vélez did not have unexercised options as of December 31, 2010. |
Options Exercised and Stock Vested Table During 2010, no stock options were exercised by the Named Executives. Pension Benefits The Corporation does not have a defined benefit or pension plan in place for the Named Executives. Defined Contribution Retirement Plan The Named Executives are eligible to participate in the Corporation’s Defined Contribution Retirement Plan pursuant to Section 1165(e) of the Puerto Rico Internal Revenue Code (“PRIRC”), which provides retirement, death, disability and termination of employment benefits. The Defined Contribution Retirement Plan complies with the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Retirement Equity Act of 1984, as amended (“REA”). An individual account is maintained for each participant and benefits are paid based solely on the amount of each participant’s account. The Named Executives may defer up to $9,000 of their annual salary into the Defined Contribution Retirement Plan on a pre-tax basis as employee salary savings contributions. Each year the Corporation will make a contribution equal to 25% of the first 4% of each participating employee’s contribution; no match is provided for contributions in excess of 4% of compensation. Corporate contributions are made to employees with a minimum of one year of service. At the end of the fiscal year, the Corporation may, but is not obligated to, make additional contributions in an amount determined by the Board; however, the maximum of any additional contribution in any year may not exceed 15% of the total compensation of the Named Executives and no basic monthly or additional annual matches need be made in years during which the Corporation incurs a loss. 167
Non-Qualified Deferred Compensation The Corporation’s Deferred Compensation Plan was terminated by unanimous consent of the plan participants during 2009 in accordance with the provisions of the plan. During 2010, the Corporation did not have a Deferred Compensation Plan in place for the Named Executives. Employment Contracts, Termination of Employment and Change in Control Arrangements Employment Agreements. The following table discloses information regarding the employment agreements entered into with the Named Executives. | | | | | | | | | | | Name (a) | | Effective Date | | Current Base Salary | | Term of Years | Aurelio Alemán-Bermúdez | | 2/24/1998 | | $ | 750,000 | | | | 4 | | Orlando Berges-González | | 5/11/2009 | | $ | 600,000 | | | | 3 | | Lawrence Odell (b) | | 2/15/2006 | | $ | 720,100 | | | | 4 | | Victor Barreras-Pellegrini | | 7/6/2006 | | $ | 468,000 | | | | 3 | |
| | | (a) | | In connection with the Corporation’s participation in the Capital Purchase Program, (i) the Corporation amended its compensation, bonus, incentive and other benefit plans, arrangements and agreements (including severance and employment agreements), to the extent necessary to be in compliance with the executive compensation and corporate governance requirements of Section 111(b) of the EESA and applicable guidance or regulations issued by the U.S. Treasury on or prior to January 16, 2009 and (ii) each Named Executive, as defined in the Capital Purchase Program, executed a written waiver releasing the U.S. Treasury and the Corporation from any claims that such officers may otherwise have as a result of the Corporation’s amendment of such arrangements and agreements to be in compliance with Section 111(b) of EESA. Until such time as U.S. Treasury ceases to own any equity securities of the Corporation acquired pursuant to the Capital Purchase Program, the Corporation must maintain compliance with these requirements. | | (b) | | Mr. Odell’s employment agreement provides that, on each anniversary of the date of commencement, the term of such agreement is automatically extended for an additional one (1) year period beyond the then-effective expiration date. The Services Agreement entered into with the Law Firm in February 2006 in connection with the Corporation’s execution of Mr. Odell’s employment agreement had a term of four years expiring on February 14, 2010. In light of the automatic extension of Mr. Odell’s employment agreement, the Board has extended the term of the services agreement, most recently for a term through February 14, 2012, unless earlier terminated. |
The agreements provide that on each anniversary of the date of commencement of each agreement the term of such agreement shall be automatically extended for an additional one (1) year period beyond the then-effective expiration date, unless either party receives written notice that the agreement shall not be further extended. Under the employment agreements with Messrs. Alemán-Bermúdez and Odell, the Board may terminate the contracting officer at any time; however, unless such termination is for cause, the contracting officer will be entitled to a severance payment of four (4) times his/her annual base salary (base salary defined as $450,000 in the case of Mr. Odell), less all required deductions and withholdings, which payment shall be made semi-monthly over a period of one year. The employment agreements with Mr. Berges-González’s and Mr. Barreas-Pellegrini provide for severance payments in an amount prorated to cover the remaining balance of the three (3) year employment agreement term times his base salary, unless such termination is for cause. With respect to a termination for cause, “cause” is defined to include personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty, intentional failure to perform stated duties, material violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order or any material breach of any provision of the employment agreement. 168
In the event of a “change in control” of the Corporation during the term of the current employment agreements, the executive is entitled to receive a lump sum severance payment equal to his or her then current base annual salary (base salary defined as $450,000 in the case of Mr. Odell) plus (i) the highest cash performance bonus received by the executive in any of the four (4) fiscal years prior to the date of the change in control (three (3) years in the case of Mr. Orlando Berges-González and Mr. Barreras-Pellegrini) and (ii) the value of any other benefits provided to the executive during the year in which the change in control occurs, multiplied by four (4) (three (3) in the case of Mr. Berges-González and Mr. Barreras-Pellegrini). Termination of employment is not a requirement for a change in control severance payment under the employment agreements of Messrs. Alemán-Bermúdez, Odell and Barreras-Pellegrini. With respect to Mr. Berges-González’s employment agreement, which was executed during 2009, Mr. Berges-González would be entitled to a severance payment due to a change in control if he is terminated within two years following the change of control. This change is consistent with the Board’s new policy relating to employment contracts, under which all new employment contracts shall not have a term of more than 3 years and must require termination of employment in the event of a severance payment occurring with a change in control. Pursuant to the employment agreements, a “change in control” is deemed to have taken place if a third person, including a group as defined in Section 13(d)(3) of the Exchange Act, becomes the beneficial owner of shares of the Corporation having 25% or more of the total number of votes which may be cast for the election of directors of the Corporation, or which, by cumulative voting, if permitted by the Corporation’s charter or By-laws, would enable such third person to elect 25% or more of the directors of the Corporation; or if, as a result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, the persons who were directors of the Corporation before any such transaction cease to constitute a majority of the Board of the Corporation or any successor institution. The following table describes and quantifies the benefits and compensation to which the Named Executives would have been entitled under existing plans and arrangements if their employment had terminated on December 31, 2010, based on their compensation and services on that date. The amounts shown in the table do not include payments and benefits available generally to salaried employees upon termination of employment, such as accrued vacation pay, distribution from the 1165(e) plan, insurance benefits, or any death, disability or post-retirement welfare benefits available under broad-based employee plans. | | | | | | | | | | | | | | | | | | | | | Death, Disability, Termination Without | | | | | | | | | Name | | Cause and Change in Control | | Severance ($) (a) | | Disability Benefits ($) | | Insurance Benefit ($) | | Total ($) | Aurelio Alemán-Bermúdez | | Death (b) | | | — | | | | — | | | | 500,000 | | | | 500,000 | | | | Permanent Disability (c) | | | — | | | | 1,800,000 | | | | — | | | | 1,800,000 | | | | Termination without cause | | | 3,000,000 | | | | — | | | | — | | | | 3,000,000 | | | | Change in Control | | | 6,287,540 | | | | — | | | | — | | | | 6,287,540 | | Orlando Berges-González | | Death (b) | | | — | | | | — | | | | 500,000 | | | | 500,000 | | | | Permanent Disability (c) | | | — | | | | 1,080,000 | | | | — | | | | 1,080,000 | | | | Termination without cause | | | 1,671,898 | | | | — | | | | — | | | | 1,671,898 | | | | Change in Control | | | 1,845,810 | | | | — | | | | — | | | | 1,845,810 | | Lawrence Odell | | Death (b) | | | — | | | | — | | | | 500,000 | | | | 500,000 | | | | Permanent Disability (c) | | | — | | | | 1,080,000 | | | | — | | | | 1,080,000 | | | | Termination without cause | | | 1,800,000 | | | | — | | | | — | | | | 1,800,000 | | | | Change in Control | | | 3,573,104 | | | | — | | | | — | | | | 3,573,104 | | Victor Barreras-Pellegrini | | Death (b) | | | — | | | | — | | | | — | | | | — | | | | Permanent Disability (c) | | | — | | | | — | | | | — | | | | — | | | | Termination without cause | | | 1,327,993 | | | | — | | | | — | | | | 1,327,993 | | | | Change in Control | | | 1,954,848 | | | | — | | | | — | | | | 1,954,848 | | Calixto Garcia-Vélez | | Death (b) | | | — | | | | — | | | | 500,000 | | | | 500,000 | | | | Permanent Disability (c) | | | — | | | | — | | | | — | | | | — | | | | Termination without cause | | | — | | | | — | | | | — | | | | — | | | | Change in Control | | | — | | | | — | | | | — | | | | — | |
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| | | (a) | | As described above in connection with the Corporation’s participation in the CPP in January 2009, the Corporation amended its compensation, bonus, incentive and other benefit plans, arrangements and agreements (including severance and employment agreements), to the extent necessary to be in compliance with the executive compensation and corporate governance requirements of Section 111(b) of the EESA and applicable guidance or regulations issued in connection with the CPP; these amendments have not been taken into consideration when quantifying the benefits and compensation to which the Named Executives would have been entitled to receive under this column if their employment had terminated on December 31, 2010. Notwithstanding the amounts included in this column, during the period in which any obligation arising from the U.S. Treasury’s financial assistance remains outstanding, the Corporation is prohibited from making certain severance payments in connection with the departure of the Named Executives from the Corporation for any reason, including due to a change in control, other than a payment for services performed or benefits accrued. The rules under ESSA exclude from this prohibition qualified retirement plans, payments due to an employee’s death or disability and severance payments required by state statute or foreign law. | | (b) | | Amount includes life insurance benefits in excess of those amounts available generally to other employees. | | (c) | | If the executive becomes disabled or incapacitated for a number of consecutive days exceeding those to which the executive is entitled as sick-leave and it is determined that the executive will continue to temporarily be unable to perform his/her duties, the executive will receive 60% of his/her compensation exclusive of any other benefits he/she is entitled to receive under the corporate-wide plans and programs available to other employees. If it is determined that the executive is permanently disabled, the executive will receive 60% of his/her compensation for the remaining term of the employment agreement. The executive will be considered “permanently disabled” if absent due to physical or mental illness on a full time basis for three consecutive months. Amount includes disability benefits in excess of those amounts available generally to other employees. |
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Compensation Committee Report Overview of risk and compensation plans.As stated in the Compensation Discussion and Analysis, the Corporation believes it should have sound compensation practices that fairly reward the exceptional employees, and exceptional efforts by those employees, while assuring that their compensation reflects principles of risk management and performance metrics that promote long-term contributions to sustained profitability, as well as fidelity to the values and rules of conduct expected of them. We are committed to continually evaluating and improving our compensation programs through: | • | | Frequent self-examination of the impact of our compensation practices on the Corporation’s risk profile, as well as evaluation of our practices against emerging industry-wide practices; | | | • | | Systematic improvement of our compensation principles and practices, ensuring that our compensation practices improve the Corporation’s overall safety and soundness; and | | | • | | Continuing development of compensation practices that provide a strategic advantage to the Corporation and provide value for all stakeholders. |
Risk-avoidance assessment of compensation plans.As an integral part of the 2010 compensation process, the Compensation Committee directed the Chief Risk Officer (CRO) to conduct a review of risk in the Corporation’s compensation programs, examining three issues: (1) whether the compensation of the Named Executives encourages them to take unnecessary and excessive risks that threaten the value of the Corporation; (2) whether the Corporation’s employee compensation plans pose unnecessary risks to the Corporation; and (3) whether there was any need to eliminate any features of these plans to the extent that they encouraged the manipulation of reported earnings of the Corporation to enhance the compensation of any employee. The Compensation Committee provided substantial oversight, review and direction throughout the process described below. The review focused on the structure of the awards to the Named Executives who were eligible for cash salary, incentive awards, and long-term restricted stock. The review also included all other short-term cash incentive plans under which employees of the Corporation and its subsidiaries are compensated. The only such plans were short-term cash incentive plans. The risk-avoidance analysis of the Corporation’s compensation arrangements and programs for Named Executives and employees focused on elements of the compensation plans that may have the potential to affect the behavior of employees with respect to their job-related responsibilities, or might directly impact the financial condition of the Corporation. The assessment encompassed the identification of the various elements of the Corporation’s compensation plans, the identification of the principal risks to the Corporation that may be relevant for each element, and the identification of the mitigating factors for those risks. Among the elements considered in the assessment were: (i) the performance metrics and targets related to individual business units and strategic goals related to deposit growth, enhancement of the Corporation’s asset quality and risk profile, product and geography expansion, achievement of strategies to strengthen the Corporation’s capital position, and net income targets, (ii) timing of pay out, and (iii) pay mix. Each element may present different risks to the Corporation; however, each has risk mitigating factors and many have no potential to encourage the manipulation of reported earnings. In the risk-avoidance assessment, management concluded that the Corporation’s compensation plans are not reasonably likely to have a material adverse effect on the Corporation. Management believes that, in order to give rise to a material adverse effect on the Corporation, a compensation plan must provide benefits of sufficient size to be material to the Corporation or it must motivate individuals at the Corporation who are in a position to have a material impact on the Corporation to behave in a manner that is materially adverse to the Corporation. While the analysis revealed that the Named Executives compensation arrangements and the employee compensation programs do not encourage them to take unnecessary or excessive risks or to manipulate reported earnings and that all reasonable efforts have been undertaken to ensure that these compensation plans do not encourage senior management or Named Executives or other employees to take unnecessary and excessive risks in running their businesses or business support functions, the Corporation continues to enhance and strengthen the control framework surrounding all of its compensation programs. Some of the actions being taken include the consolidation of similar incentive plans to streamline the compensation process, as well as expand the use of 171
scorecards incorporating corporate performance metrics for the different positions eligible to participate in the compensation programs. As mentioned above, the evaluation of the compensation programs revealed that they do not encourage Named Executives or other employees to take unnecessary and excessive risks that may threaten the value of the Corporation. The evaluation concluded that the compensation plans, in conjunction with internal controls, have distinct features that discourage and mitigate unnecessary or excessive risks, including the following: | • | | The Corporation has historically assessed the competitiveness of its executive compensation structure through internal research and external studies conducted by independent compensation consultants taking into consideration survey and proxy data. | | | • | | The compensation structure is based on a pay for performance methodology. The compensation depends on multiple performance factors based on the Corporation, business unit and individual achieving performance objectives designed to enhance stockholder value. Actual incentive payouts are larger if superior target performance is achieved and smaller if target performance is not achieved. | | | • | | The compensation structure has a balance between performance objectives and risk management measures to prevent the taking of excessive risks. | | | • | | The Corporation’s risk management structure, including policies and procedures, provides for the ability to anticipate, identify, measure, monitor and control risks faced by the Bank. The adequacy of the internal controls and risk management structure is continuously evaluated by internal and external examiners. | | | • | | The cash incentive plan imposes a specific target dollar maximum amount for each Named Executives. The equity incentive plan imposes grant limits that apply on an individual basis. | | | • | | The equity incentive plan by itself provides for downside leverage if the stock does not perform well. | | | • | | Shares that may be granted under the stock award program vest ratably over a 4-year period following year 3 for a total vesting period of 7 years. Vesting acceleration provisions impose target performance goals tied to the earning per share that needs to be met. | | | • | | The internal control structure provides for rigorous oversight of the lending and other applicable areas. |
As part of the process to review the Corporation’s compensation plans with the CRO every six months, the Compensation Committee will analyze the 2011 incentive compensation arrangements as they are established and will continue to ensure that the Corporation complies with those provisions of the EESA or any other law or regulation related to compensation arrangements applicable to financial institutions participating in the CPP. Committee Certifications.The Committee certifies that (1) it has reviewed with the Corporation’s CRO the Named Executives compensation plans and has made all reasonable efforts to ensure that such plans do not encourage Named Executives to take unnecessary and excessive risks that threaten the value of the Corporation; (2) it has reviewed with the CRO the Corporation’s employee compensation plans and has made all reasonable efforts to limit any unnecessary risks those plans pose to the Corporation, and (3) it has reviewed the Corporation’s employee compensation plans to eliminate any features of these plans that would encourage the manipulation of reported earnings of the Corporation to enhance the compensation of any employee. The Committee reviewed and discussed the Compensation Discussion and Analysis with members of senior management and, based on this review, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Corporation’s annual report on Form 10-K and proxy statement on Schedule 14A filed with the Securities and Exchange Commission within 120 days of the close of First BanCorp’s 2009 fiscal year.Commission. Sharee Ann Umpierre-Catinchi (Chairperson)Jorge Díaz-IrizarryFrank Kolodziej 172
Item 11. Executive Compensation
Information in response to this Item is incorporated herein by reference to the sections entitled “Compensation Committee Interlocks and Insider Participation” “Compensation
The Corporation’s Compensation and Benefits Committee during fiscal year 2010 consisted of Directors,” “Compensation Discussiondirectors Sharee Ann Umpierre-Catinchi, Chairperson since August 2006, Jorge L. Díaz-Irizarry, and Analysis,” “CompensationJosé L. Ferrer-Canals (member through January 25, 2011). The current members of Compensation and Benefits Committee Report”are Messrs. Sharee Ann Umpierre-Catinchi, Jorge Díaz-Irizarry and “TabularFrank Kolodziej (who was appointed to the committee on January 25, 2011). No Executive Officer of the Corporation serves on any board of directors or compensation committee of any entity whose board members or management serves on the Corporation’s Board or on the Corporation’s Compensation Disclosure”and Benefits Committee. Other than as disclosed in the Certain Relationships and Related Transactions section of this Form 10-K, none of the members of the Compensation and Benefits Committee had any relationship with the Corporation requiring disclosure under Item 404 of the SEC Regulation S-K. Compensation of Directors Non-management directors of the Corporation receive an annual retainer and compensation for attending meetings of the Board but not for attending meetings of the Board of Directors of the Bank when such meetings are held on the same day on which a Board meeting of the Corporation is held. Directors who are also officers of the Corporation, of FirstBank or of any other subsidiary do not receive fees or other compensation for service on the Board, the Board of Directors of FirstBank, or the Board of Directors of any other subsidiary or any of their committees. Accordingly, Mr. Aurelio Alemán-Bermúdez, who was a director during 2010, is not included in the table set forth below because he was an employee at the same time and, therefore, received no compensation for his services as a director. In 2007, the Compensation and Benefits Committee retained Mercer (US) Inc., an outside compensation consultant, to provide services as compensation consultants. Mercer performed a director compensation review to assess the competitiveness of the Corporation’s Board compensation strategy for its non-management directors and provided recommendations in terms of structure and amount of compensation. As a result, in January 2008, the Board approved a compensation structure for non-management directors of the Corporation, which became effective in February 2008. Under the terms of the structure, each director receives an annual retainer of $30,000 and the Chair of the Audit Committee receives an additional annual retainer of $25,000. The retainers are payable in cash on a monthly basis over a twelve-month period. The director compensation structure also considered the receipt of an annual equity award of $35,000 payable in the form of restricted stock, although this was not paid in 2010. In addition, all meeting fees were reduced to $1,000 for each Board or Committee meeting attended, which is also payable in cash. In December 2008, an annual equity award was granted under the terms and provisions of the First BanCorp’s Proxy Statement.BanCorp 2008 Omnibus Incentive Plan, which was approved by the stockholders of the Corporation at the 2008 Annual Meeting of Stockholders, and pursuant to the provisions of the Corporation’s Policy Regarding the Granting of Equity-Based Compensation Awards approved by the Board in October 2008. Considering worsening economic conditions which have affected the performance of the Corporation, during 2009 and 2010 the Board has determined to defer annual equity awards for a later time; hence, equity award have not been granted since 2008. In October 2009, the Compensation and Benefits Committee retained the services of Compensation Advisory Partners LLC, an independent executive compensation consulting firm, who preformed an analysis of the Corporation’s peer group and examined pay practices in the broader financial services industry to determine a competitive compensation level for the non-management chairman of the Board. Based upon the analysis, the Compensation and Benefits Committee recommended to the Board and the Board approved an annual cash retainer for the non-management chairman of $82,500. The Corporation reimburses Board members for travel, lodging and other reasonable out-of-pocket expenses in connection with attendance at Board and committee meetings or performance of other services for the Corporation in their capacities as directors. The Compensation and Benefits Committee will periodically review market data in order to determine the appropriate level of compensation for maintaining a competitive director compensation structure necessary to attract and retain qualified candidates for board service. 173
The following table sets forth all the compensation that the Corporation paid to non-management directors during fiscal year 2010: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in Pension | | | | | | | | | | | | | | | | | | | | | | | Value and | | | | | | | Fees | | | | | | | | | | | | | | Nonqualified | | | | | | | Earned or | | | | | | | | | | Non -Equity | | Deferred | | | | | | | Paid in | | Stock | | Option | | Incentive Plan | | Compensation | | All Other | | | | | Cash | | Awards | | Awards | | Compensation | | Earnings | | Compensation | | Total | Name | | ($) | | ($)(a) | | ($) | | ($) | | ($) | | ($) | | ($) | | Jorge Díaz-Irizarry | | | 80,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 80,000 | | José Ferrer-Canals | | | 88,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 88,000 | | Frank Kolodziej-Castro | | | 62,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 62,000 | | José Menéndez-Cortada | | | 176,500 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 176,500 | | Héctor M. Nevares-La Costa | | | 98,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 98,000 | | Fernando Rodríguez-Amaro | | | 110,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 110,000 | | José Rodríguez-Perelló | | | 104,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 104,000 | | Sharee Ann Umpierre-Catinchi | | | 57,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 57,000 | |
| | | (a) | | Does not include unvested portion of restricted stock granted to all incumbent directors in December 2008 of which 1,342 shares of Common Stock vested on December 1, 2010, and 1,343 will vest on December 1, 2011. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters InformationSecurity Ownership of Certain Beneficial Owners and Management
The following tables sets forth certain information as of March 15, 2011, unless otherwise specified, with respect to shares of our Common Stock and preferred stock beneficially owned (unless otherwise indicated in responsethe footnotes) by: (1) each person known to us to be the beneficial owner of more than 5% of our Common or Preferred Stock; (2) each director, each director nominee and each executive officer named in the Summary Compensation Table in this Item is incorporated hereinProxy Statement (the “Named Executive Officers”); and (3) all directors and executive officers as a group. This information has been provided by referenceeach of the directors and executive officers at our request or derived from statements filed with the SEC pursuant to Section 13(d) or 13(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Beneficial ownership of securities, as shown below, has been determined in accordance with applicable guidelines issued by the SEC. Beneficial ownership includes the possession, directly or indirectly, through any formal or informal arrangement, either individually or in a group, of voting power (which includes the power to vote, or to direct the voting of, such security) and/or investment power (which includes the power to dispose of, or to direct the disposition of, such security). As of March 15, 2010, directors and executive officers of the Corporation do not own shares of the Corporation’s Preferred Stock as all directors and executive officers participated in the Corporation’s Preferred Stock exchange offer pursuant to which they received Common Stock in exchange for their shares of Preferred Stock outstanding prior to the section entitled “Beneficialcompletion of the exchange offer. The Corporation does not have knowledge of any current beneficial owner of more than 5% of the Corporation’s Preferred Stock. 174
(1) Beneficial Owners of More Than 5% of our Common Stock: | | | | | | | | | | | Amount and Nature of | | Percent of | Name and Address of Beneficial Owner | | Beneficial Ownership | | Class (a) | United States Departmetn of the Treasury | | | 29,634,531 | (b) | | | 58.18 | % | 1500 Pennsylvania Avenue Northwest | | | | | | | | | Washington D.C., District of Columbia 20229 | | | | | | | | | | UBS AG | | | 2,403,742 | (c) | | | 11.28 | % | Bahnhofstrasse 45 | | | | | | | | | PO Box CH-8021 | | | | | | | | | Zurich, Switzerland | | | | | | | | | | BlackRock, Inc. | | | 1,249,514 | (d) | | | 5.87 | % | 40 East 52nd Street | | | | | | | | | New York, NY 10022 | | | | | | | | |
| | | (a) | | Based on 21,303,669 shares of Common Stock outstanding as of March 15, 2011. | | (b) | | On January 16, 2009, we entered into a Letter Agreement (the “Letter Agreement”) with the U.S. Treasury pursuant to which we sold 400,000 shares of Series F Preferred Stock to the U.S. Treasury, along with a warrant to purchase 389,483 shares of Common Stock, equivalent to 1.80% of our outstanding shares of Common Stock if it were issued as of March 15, 2011, at an initial exercise price of $154.05 per share, which is subject to certain anti-dilution and other adjustments. Subsequently, on July 20, 2010, the Corporation exchanged the Series F Preferred Stock, plus accrued dividends on the Series F Preferred Stock, for 424,174 shares of a new series of mandatorily convertible preferred stock (the “Series G Preferred Stock”) and amended the warrant issued on January 16, 2009. The U.S. Treasury, and any subsequent holder of the Series G Preferred Stock, has the right to convert the Series G Preferred Stock into the Corporation’s common stock at any time. In addition, the Corporation has the right to compel the conversion of the Series G Preferred Stock into shares of common stock under certain conditions and, unless earlier converted, is automatically convertible into common stock on the seventh anniversary of their issuance. The Series G Preferred Stock is convertible into 29,245,047 million shares of common stock upon the mandatory conversion based on an initial conversion rate of 68.9459 shares of Common Stock for each share of Series G Preferred Stock. The warrant, which expires 10 years from July 20, 2010, may be exercised, in whole or in part, at any time or from time to time by the U.S. Treasury. | | (c) | | Based solely on a Schedule 13G filed with the SEC on January 31, 2011 in which UBS AG reported aggregate beneficial ownership of 2,403,742 (36,056,133 pre-reverse stock split) shares or 11.28% of the Corporation outstanding common stock as of December 31, 2010. UBS AG reported that it possessed sole voting power and sole dispositive power over 524,990 (7,874,854 pre-reverse stock split) shares and shared voting power and shared dispositive power over 516,195 (7,742,936 pre-reverse stock split) and 1,878,752 (28,181,279 pre-reverse stock split) shares, respectively. The shares reported by UBS AG have been adjusted retroactively to reflect the 1-for-15 reverse stock split effected on January 7, 2011. | | (d) | | Based solely on a Schedule 13G filed with the SEC on January 21, 2011 in which BlackRock, Inc. reported aggregate beneficial ownership of 1,249,514 (18,742,709 pre-reverse stock split) shares or 5.87% of the Corporation outstanding common stock as of December 31, 2010. BlackRock, Inc. reported that it possessed sole voting power and sole dispositive power over 1,249,514 (18,742,709 pre-reverse stock split) shares. The shares reported by BlackRock, Inc. have been adjusted retroactively to reflect the 1-for-15 reverse stock split effected on January 7, 2011. |
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(2) Beneficial Ownership of Securities” in First BanCorp’s Proxy Statement.Directors, Director Nominees and Executive Officers: | | | | | | | | | | | Amount and Nature of | | Percent of | Name of Beneficial Owner | | Beneficial Ownership (a) | | Class* | Directors | | | | | | | | | Aurelio Alemán-Bermúdez, President & Chief Executive Officer | | | 52,933 | | | | | * | José Menéndez-Cortada, Chairman of the Board | | | 10,827 | | | | | * | Jorge L. Díaz-Irizarry | | | 5,851 | (b) | | | | * | José Ferrer-Canals | | | 368 | | | | | * | Sharee Ann Umpierre-Catinchi | | | 76,913 | (c) | | | | * | Fernando Rodríguez-Amaro | | | 2,146 | | | | | * | Héctor M. Nevares-La Costa | | | 449,014 | (d) | | | 2.11 | % | Frank Kolodziej-Castro | | | 184,165 | | | | | * | José F. Rodríguez-Perelló | | | 21,605 | | | | | * | | | | | | | | | | Executive Officers | | | | | | | | | Orlando Berges-González, Executive Vice President & Chief Financial Officer | | | 666 | | | | | * | Lawrence Odell, Executive Vice President, General Counsel & Secretary | | | 14,999 | | | | | * | Victor Barreras-Pellegrini, Treasurer & Senior VP | | | 4,666 | | | | | * | Calixto García-Vélez, Executive Vice President | | | — | | | | | * | All current directors and NEOs, Executive Officers, Treasurer and the Chief Accounting Officer as a group (19 persons as a group) | | | 859,689 | | | | 4.02 | % |
| | | * | | Represents less than 1% of our outstanding common stock. | | (a) | | For purposes of this table, “beneficial ownership” is determined in accordance with Rule 13d-3 under the Exchange Act, pursuant to which a person or group of persons is deemed to have “beneficial ownership” of a security if that person has the right to acquire beneficial ownership of such security within 60 days. Therefore, it includes the number of shares of Common Stock that could be purchased by exercising stock options that were exercisable as of March 15, 2011 or within 60 days after that date, as follows: Mr. Alemán-Bermúdez, 39,600; Mr. Odell, 11,666 and Mr. Barreras-Pellegrini 4,666 and all current directors and executive officers as a group, 81,860. Also, it includes shares granted under the First BanCorp 2008 Omnibus Incentive Plan, subject to transferability restrictions and/or forfeiture upon failure to meet vesting conditions, as follows: Mr. Menéndez-Cortada, 268; Mr. Díaz-Irizarry, 268; Mr. Ferrer-Canals, 268; Ms. Umpierre-Catinchi, 268; Mr. Rodríguez-Amaro, 268; Mr. Nevares-La Costa, 268; Mr. Kolodziej-Castro, 268; and Mr. Rodríguez-Perelló, 268. The amount does not include shares of Common Stock represented by units in a unitized stock fund under our Defined Contribution Plan. | | (b) | | This amount includes 1,497 shares owned separately by his spouse. | | (c) | | This amount includes 600 shares owned jointly with her spouse. |
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| | | (d) | | This amount includes 283,272 shares owned by Mr. Nevares-La Costa’s father over which Mr. Nevares-La Costa has voting and investment power as attorney-in-fact. |
Equity Compensation Plan Information | | | | | | | | | | | | | | | | | | | | | | | Number of Securities | | | | | | | | Weighted-Average | | | Remaining Available for | | | | Number of Securities | | | Exercise Price of | | | Future Issuance Under | | | | to be Issued Upon | | | Outstanding | | | Equity Compensation | | | | Exercise of Outstanding | | | Options, warrants | | | Plans (Excluding Securities | | | | Options | | | and rights | | | Reflected in Column (A)) | | Plan category | | (A) | | | (B) | | | (C) | | | Equity compensation plans approved by stockholders: | | | 131,532 | (1) | | $ | 202.91 | | | | 251,189 | (2) | Equity compensation plans not approved by stockholders | | | N/A | | | | N/A | | | | N/A | | | | | | | | | | | | Total | | | 131,532 | | | $ | 202.91 | | | | 251,189 | | | | | | | | | | | |
| | | (1) | | Stock options granted under the 1997 stock option plan which expired on January 21, 2007. All outstanding awards under the stock option plan continue in full forth and effect, subject to their original terms and the shares of common stock underlying the options are subject to adjustments for stock splits, reorganization and other similar events. | | (2) | | Securities available for future issuance under the First BanCorp 2008 Omnibus Incentive Plan (the “Omnibus Plan”) approved by stockholder on April 29, 2008. 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 253,333 shares of common stock, subject to adjustments for stock splits, reorganization and other similar events. |
Item 13. Certain Relationships and Related Transactions, and Director Independence Information in response to this Item is incorporated herein by reference to the sections entitled “CertainCertain Relationships and Related Person Transactions”Transactions
We review all transactions and “Corporaterelationships in which the Corporation and any of its directors, director nominees, executive officers, security holders who are known to the Corporation to own of record or beneficially more than five percent of any class of the Corporation’s voting securities and any immediate family member of any of the foregoing persons are participants to determine whether such persons have a direct or indirect material interest. In addition, our Corporate Governance Guidelines and Principles and Code of Ethics for CEO and Senior Financial Officers require our directors, executive officers and principal financial officers to report to the Board or the Audit Committee any situation that could be perceived as a conflict of interest. In addition, applicable law and regulations require that all loans or extensions of credit to executive officers and directors be made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons (unless the loan or extension of credit is made under a benefit program generally available to all employees and does not give preference to any insider over any other employee) and must not involve more than the normal risk of repayment or present other unfavorable features. Pursuant to Regulation O adopted by the Federal Reserve Board, any extension of credit to an executive officer, director, or principal stockholder, including any related interest of such persons (collectively an “Insider”), when aggregated with all other loans or lines of credit to that Insider: (a) exceeds 5% of the Bank’s capital and unimpaired surplus or $25,000, whichever is greater, or (b) exceeds (in any case) $500,000, must be approved in advance by the majority of the entire Board, excluding the interested party. During 2007, the Board adopted a Related Matters”Person Transaction Policy (the “Policy”) that addresses the reporting, review and approval or ratification of transactions with related persons, which include a director, a director nominee, an executive officer of the Corporation, a security holder who is known to the Corporation to own of record or beneficially more than five percent of any class of the Corporation’s voting securities, and an immediate family 177
member of any of the foregoing (together the “Related Person”). The policy is not designed to prohibit related person transactions; rather, it is to provide for timely internal reporting of such transactions and appropriate review, appropriate approval or rejection, oversight and public disclosure of them. For purposes of the Policy, a “related person transaction” is a transaction or arrangement or series of transactions or arrangements in First BanCorp’s Proxy Statement.which the Corporation participates (whether or not the Corporation is a party), the amount involved exceeds $120,000, and a Related Person has a direct or indirect material interest. A Related Person’s interest in a transaction or arrangement is presumed material to such person unless it is clearly incidental in nature or has been determined in accordance with the policy to be immaterial in nature. A transaction in which any subsidiary of the Corporation or any other company controlled by the Corporation participates shall be considered a transaction in which the Corporation participates. Examples of related person transactions generally include sales, purchases or other transfers of real or personal property, use of property and equipment by lease or otherwise, services received or furnished and the borrowing and lending of funds, as well as guarantees of loans or other undertakings and the employment by the Corporation of an immediate family member of a Related Person or a change in the terms or conditions of employment of such an individual that is material to such individual. However, the policy contains a list of categories of transactions that will not be considered related person transactions for purposes of the Policy given their nature, size and/or degree of significance to the Corporation, and therefore, need not be brought to the Audit Committee for their review and approval or ratification. Any director, director nominee or executive officer who intends to enter into a related person transaction is required to disclose that intention and all material facts with respect to such transaction to the General Counsel, and any officer or employee of the Corporation who intends to cause the Corporation to enter into any related person transaction must disclose that intention and all material facts with respect to the transaction to his or her superior, who is responsible for seeing that such information is reported to the General Counsel. The General Counsel is responsible for determining whether a transaction may meet the requirements of a related person transaction requiring review under the Related Transaction Policy, and, upon such determination, must report the material facts respecting the transaction and the Related Person’s interest in such transaction to the Audit Committee for their review and approval or ratification. Any related party transaction in which the General Counsel has a direct or indirect interest is evaluated directly by the Audit Committee. If a member of the Audit Committee has an interest in a related person transaction and the number of Audit Committee members available to review and approve the transaction is less than two members after such committee member recluses himself or herself from consideration of the transaction, the transaction must instead be reviewed by an ad hoc committee of at least two independent directors designated by the Board. The Audit Committee may delegate its authority to review, approve or ratify specified related person transactions or categories of related person transactions when the Audit Committee determines that such action is warranted. Annually, the Audit Committee must review any previously approved or ratified related person transaction that is continuing (unless the amount involved in the uncompleted portion of the transaction is less than $120,000) and determine, based on the then existing facts and circumstances, including the Corporation’s existing contractual or other obligations, if it is in the best interests of the Corporation to continue, modify or terminate the transaction. The Audit Committee has the authority to (i) determine categories of related person transactions that are immaterial and not required to be individually reported to, reviewed by, and/or approved or ratified by the Audit Committee and (ii) approve in advance categories of related person transactions that need not be individually reported to, reviewed by, and/or approved or ratified by the Audit Committee but may instead be reported to and reviewed by the Audit Committee collectively on a periodic basis, which must be at least annually. The Audit Committee must notify the Board on a quarterly basis of all related person transactions approved or ratified by the Audit Committee. In connection with approving or ratifying a related person transaction, the Audit Committee (or its delegate), in its judgment, must consider in light of the relevant facts and circumstances whether or not the transaction is in, or not inconsistent with, the best interests of the Corporation, including consideration of the following factors to the extent pertinent: 178
| • | | the position or relationship of the Related Person with the Corporation; | | | • | | the materiality of the transaction to the Related Person and the Corporation, including the dollar value of the transaction, without regard to profit or loss; | | | • | | the business purpose for and reasonableness of the transaction, based on a consideration of the alternatives available to the Corporation for attaining the purposes of the transaction; | | | • | | whether the transaction is comparable to a transaction that could be available on an arm’s-length basis or is on terms that the Corporation offers generally to persons who are not Related Persons; | | | • | | whether the transaction is in the ordinary course of the Corporation’s business and was proposed and considered in the ordinary course of business; and | | | • | | the effect of the transaction on the Corporation’s business and operations, including on the Corporation’s internal control over financial reporting and system of disclosure controls and procedures, and any additional conditions or controls (including reporting and review requirements) that should be applied to such transaction. |
During fiscal year 2010, directors and officers and persons or entities related to such directors and officers were customers of and had transactions with the Corporation and/or its subsidiaries. All such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time they were made for comparable transactions with persons not related the Corporation, and did not involve more than the normal risk of collectibility or present other unfavorable features. During 2010, the Corporation engaged, in the ordinary course of business, the legal services of Martínez Odell & Calabria. Lawrence Odell, General Counsel of the Corporation since February 2006, is a partner at Martínez Odell & Calabria (the “Law Firm”). On January 31, 2011, the Corporation approved an amendment to the agreement (the “Services Agreement”) it entered into with the Law Firm in February 2006 in connection with the Corporation’s execution of an employment agreement with Lawrence Odell relating to his retention as Executive Vice President and General Counsel of the Corporation and its subsidiaries. Mr. Odell’s employment agreement provides that, on each anniversary of the date of commencement, the term of such agreement is automatically extended for an additional one (1) year period beyond the then-effective expiration date and that Mr. Odell will remain a partner at the Law Firm during the term of his employment. The Services Agreement provides for the payment by the Corporation to the Law Firm of $60,000 per month as consideration for the services rendered to the Corporation by Mr. Odell. The Services Agreement had a term of four years expiring on February 14, 2010. In light of the automatic extension of Mr. Odell’s employment agreement, the Corporation amended the Services Agreement on January 29, 2010 for purposes of extending its term from February 14, 2010 until February 14, 2011 and further amended it on January 31, 2011 for purposes of further extending its term through February 14, 2012, unless earlier terminated. The Corporation has also hired the Law Firm to be the corporate and regulatory counsel to it and FirstBank. In 2010, the Corporation paid $1,584,258 to the Law Firm for its legal services and $720,000 to the Law Firm in accordance with the terms of the Services Agreement. The engagement of the Law Firm and extension of the Services Agreement have been approved annually by the Audit Committee as required by the Policy. During 2003, the Corporation entered into a loan agreement with HB Construction Developers and Arturo Díaz-Irizarry, the sole owner of HB Construction Developers and brother of director Jorge Díaz-Irizarry. The loan was made to provide funds for the interim financing to finish the development of 124 low income housing units at the residential project to be known as Haciendas de Borinquén in Lares, Puerto Rico. The loan was made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time it was made for comparable transactions with persons not related to the Corporation, and did not involve more than the normal risk of collectibility or present other unfavorable features. In July 2005, the loan was classified as past due at the time of its maturity. The largest amount of the loan outstanding during fiscal 2010 was $248,171. As of February 15, 2011, the amount of the loan outstanding was $248,171. During 2010 and through February 15, 2011, $11,603 of interest has been paid, at an interest rate of 4.25%. During such period, no principal has been repaid. During 2007, the Corporation entered into a loan agreement with Elmaria Homes, Corp and Ernesto Rodríguez-Alzugaray, the owner of a third of Elmaria Homes, Corp and brother of director Fernando Rodríguez-Amaro. The loan was made to provide funds for the interim financing to finish the development of 64 apartments at the residential condominium project known as Elmaria Condominium in Río Piedras, Puerto Rico. The original maturity date of June 15, 2008 was extended to December 1, 2010. The loan was made in the ordinary course of business on 179
substantially the same terms, including interest rates and collateral, as those prevailing at the time it was made for comparable transactions with persons not related to the Corporation, and did not involve more than the normal risk of collectibility or present other unfavorable features. In the first quarter of 2009, the Corporation classified this loan in non-accruing status because of concerns about the financial condition of the borrower. The largest amount of the loan outstanding during fiscal 2010 was $7,965,025. As of February 15, 2011, the amount of the loan outstanding was $6,365,001. During 2010 and through February 15, 2011, no principal and interest was paid on the loan. On February 16, 2011, the Corporation entered into a definitive agreement to sell substantially all of the loans that it had transferred to held for sale as of December 31, 2010; the loan to Elmaria Homes, Corp. was sold in such transaction. During 2010, the Corporation and its subsidiaries engaged, in the ordinary course of business, the services of Tactical Media, a diversified media company with operations in Puerto Rico that is partially owned by Mr. Ángel Álvarez-Freiría, son of Mr. Ángel Álvarez-Pérez, an individual know to the Corporation to be have been a beneficial owner of more than five percent of the Corporation’s Common Stock during 2010. Total fees paid during 2010 to Tactical Media amounted to $308,560. The engagement of Tactical Media was approved by the Audit Committee as required by the Policy. Item 14. Principal AccountantAccounting Fees and Services. InformationAudit Fees
The total fees paid or accrued by the Corporation for professional services rendered by the external auditors for the years ended December 31, 2009 and 2010 were $1,660,220 and $1,903,537, respectively, distributed as follows: •Audit Fees:$1,560,220 for the audit of the financial statements and internal control over financial reporting for the year ended December 31, 2009; and $1,806,437 for the audit of the financial statements and internal control over financial reporting for the year ended December 31, 2010. •Audit-Related Fees: $100,000 in response2009 and $97,100 in 2010 for other audit-related fees, which consisted mainly of the audits of employee benefit plans. •Tax Fees:none in 2009 and none in 2010. •All Other Fees:none in 2009 and none in 2010. The Audit Committee has established controls and procedures that require the pre-approval of all audits, audit-related and permissible non-audit services provided by the independent registered public accounting firm in order to this Item is incorporated hereinensure that the rendering of such services does not impair the auditor’s independence. The Audit Committee may delegate to one or more of its members the authority to pre-approve any audit, audit-related or permissible non-audit services, and the member to whom such delegation was made must report any pre-approval decisions at the next scheduled meeting of the Audit Committee. Under the pre-approval policy, audit services for the Corporation are negotiated annually. In the event that any additional audit services not included in the annual negotiation of services are required by referencethe Corporation, an amendment to the section entitled “Audit Fees” in First BanCorp’s Proxy Statement.existing engagement letter or an additional proposed engagement letter is obtained from the independent registered public accounting firm and evaluated by the Audit Committee or the member(s) of the Audit Committee with authority to pre-approve such services. PART IV Item 15. Exhibits, Financial Statement Schedules (a) List of documents filed as part of this report. (1) Financial Statements. The following consolidated financial statements of First BanCorp, together with the report thereon of First BanCorp’s independent registered public accounting firm, PricewaterhouseCoopers LLP, dated March 1, 2010,April 15, 2011, are included herein beginning on page F-1: 180
| – | – | Report of Independent Registered Public Accounting Firm. | | | – | – | Consolidated Statements of Financial Condition as of December 31, 20092010 and 2008.2009. | | | – | – | Consolidated Statements of (Loss) Income for Each of the Three Years in the Period Ended December 31, 2009.2010. |
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| | – | – | Consolidated Statements of Changes in Stockholders’ Equity for Each of the Three Years in the Period Ended December 31, 2009.2010. | | | – | – | Consolidated Statements of Comprehensive (Loss) Income for each of the Three Years in the Period Ended December 31, 2009.2010. | | | – | – | Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2009.2010. | | | – | – | Notes to the Consolidated Financial Statements. |
(2) Financial statement schedules. All financial schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits listed below are filed herewith as part of this Form 10-K or are incorporated herein by reference. Index to Exhibits:Exhibits | | | No. | | Exhibit | 3.1 | | Restated Articles of Incorporation (1) | | | | 3.2 | | By-LawsCertificate of First BanCorp (1)Amendment of the Certificate of Incorporation (2) | | | | 3.3 | | By-Laws of First BanCorp (3) | | | | 3.4 | | Certificate of Designation creating the 7.125% non-cumulative perpetual monthly income preferred stock, Series A (2)(4) | | | | 3.43.5 | | Certificate of Designation creating the 8.35% non-cumulative perpetual monthly income preferred stock, Series B (3)(5) | | | | 3.53.6 | | Certificate of Designation creating the 7.40% non-cumulative perpetual monthly income preferred stock, Series C (4)(6) | | | | 3.63.7 | | Certificate of Designation creating the 7.25% non-cumulative perpetual monthly income preferred stock, Series D (5)(7) | | | | 3.73.8 | | Certificate of Designation creating the 7.00% non-cumulative perpetual monthly income preferred stock, Series E (6)(8) | | | | 3.83.9 | | Certificate of Designation creating the fixed-rate cumulative perpetual preferred stock, Series F (7)(9) | | | | 4.03.10 | | FormCertificate of Common Stock Certificate(9)Designation creating the fixed-rate cumulative perpetual preferred stock, Series G (10) | | | | 3.11 | | First Amendment to Certificate of Designation creating the fixed rate cumulative mandatorily convertible preferred stock, Series G (11) | | | | 4.1 | | Form of Common Stock Certificate (12) | | | | 4.2 | | Form of Stock Certificate for 7.125% non-cumulative perpetual monthly income preferred stock, Series A (2)(13) | | | | 4.24.3 | | Form of Stock Certificate for 8.35% non-cumulative perpetual monthly income preferred stock, Series B (3)(14) | | | | 4.34.4 | | Form of Stock Certificate for 7.40% non-cumulative perpetual monthly income preferred stock, Series C (4)(15) | | | | 4.44.5 | | Form of Stock Certificate for 7.25% non-cumulative perpetual monthly income preferred stock, Series D (5)(16) |
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| | | 4.5No. | | Exhibit | 4.6 | | Form of Stock Certificate for 7.00% non-cumulative perpetual monthly income preferred stock, Series E (10) | | | | 4.6 | | Form of Stock Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series F (1)(17) | | | | 4.7 | | Form of Stock Certificate for fixed rate cumulative preferred stock, Series F (18) | | | | 4.8 | | Warrant dated January 16, 2009 to purchase shares of First BanCorp (8)(19) | | | | 4.84.9 | | Amended and Restated Warrant dated July 7, 2010 to purchase shares of First BanCorp (20) | | | | 4.10 | | Letter Agreement, dated January 16, 2009, including Securities Purchase Agreement — Standard Terms attached thereto as Exhibit A, between First BanCorp and the United States Department of the Treasury (14)(21) | | | | 10.1 | | FirstBank’s 1997 Stock Option Plan(11)Plan (22) | | | | 10.2 | | First BanCorp’s 2008 Omnibus Incentive Plan(12)Plan (23) |
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| | | No. | | Exhibit | 10.3 | | Investment agreementAgreement between The Bank of Nova Scotia and First BanCorp dated as of February 15, 2007, including the Form of Stockholder Agreement(13)Agreement (24) | | | | 10.4 | | EmploymentAmendment No. 1 to Stockholder Agreement, – Aurelio Alemán(11)dated as of October 13, 2010, by and between First BanCorp and The Bank of Nova Scotia (25) | | | | 10.5 | | Amendment No. 1 to EmploymentExchange Agreement, – Aurelio Alemán(15)dated as of July 7, 2010, by and between First BanCorp and the United States Department of the Treasury (26) | | | | 10.6 | | First Amendment No. 2 to EmploymentExchange Agreement, – Aurelio Alemándated as of December 1, 2010, by and between First BanCorp and the United States Department of the Treasury (27) | | | | 10.7 | | Employment Agreement – Randolfo Rivera(11)Consent Order, dated June 2, 2010 between FirstBank Puerto Rico and the Federal Deposit Insurance Corporation (28) | | | | 10.8 | | Amendment No. 1 to EmploymentWritten Agreement, – Randolfo Rivera (15)dated June 3, 2010, between First BanCorp and the Federal Reserve Bank of New York (29) | | | | 10.9 | | Amendment No. 2 to Employment Agreement – Randolfo Rivera— Aurelio Alemán (30) | | | | 10.10 | | Amendment No. 1 to Employment Agreement – Lawrence Odell(16)— Aurelio Alemán (31) | | | | 10.11 | | Amendment No. 12 to Employment Agreement – Lawrence Odell(16)— Aurelio Alemán (32) | | | | 10.12 | | Amendment No. 2 to Employment Agreement –— Lawrence Odell(15)Odell (33) | | | | 10.13 | | Amendment No. 31 to Employment Agreement –— Lawrence Odell (34) | | | | 10.14 | | Amendment No. 2 to Employment Agreement – Orlando Berges(17)— Lawrence Odell (35) | | | | 10.15 | | ServiceAmendment No. 3 to Employment Agreement Martinez— Lawrence Odell & Calabria(16)(36) | | | | 10.16 | | Employment Agreement — Orlando Berges (37) | | | | 10.17 | | Service Agreement Martinez Odell & Calabria (38) | | | | 10.18 | | Amendment No. 1 to Service Agreement Martinez Odell & Calabria(16)Calabria (39) | | | | 10.1710.19 | | Amendment No. 2 to Service Agreement Martinez Odell & Calabria (40) | | | | 10.20 | | Amendment No. 3 to Service Agreement Martinez Odell & Calabria | | | | 10.21 | | Form of Restricted Stock Agreement (41) | | | | 10.22 | | Form of Stock Option Agreement for Officers and Other Employees (42) | | | | 12.1 | | Ratio of Earnings to Fixed Charges | | | | 12.2 | | Ratio of Earnings to Fixed Charges and Preference Dividends | | | | 14.1 | | Code of Ethics for CEO and Senior Financial Officers (1)(43) | | | | 21.1 | | List of First BanCorp’s subsidiaries | | | | 31.1 | | Section 302 Certification of the CEO | | | | 31.2 | | Section 302 Certification of the CFO | | | | 32.1 | | Section 906 Certification of the CEO | | | | 32.2 | | Section 906 Certification of the CFO | | | | 99.1 | | Certification of the CEO Pursuant to Section III(b)(4) of the Emergency Stabilization Act of 2008 and 31 CFR § 30.15 |
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| | | No. | | Exhibit | 99.2 | | Certification of the CFO Pursuant to Section III(b)(4) of the Emergency Stabilization Act of 2008 and 31 CFR § 30.15 | | | | 99.3 | | Policy Statement and Standards of Conduct for Members of Board of Directors, Executive Officers and Principal Shareholders(18)Shareholders (44) | | | | 99.4 | | Independence Principles for Directors of First BanCorp (19)(45) |
| | | (1) | | Incorporated by reference from Exhibit 3.1 of the Form S-1/A filed by the Corporation on August 24, 2010. | | (2) | | Incorporated by reference from Exhibit 3.1 of the Form 8-K filed by the Corporation on January 10, 2011. | | (3) | | Incorporated by reference from Exhibit 3.3 of the Form 8-K filed by the Corporation on April 4, 2011. | | (4) | | Incorporated by reference from Exhibit 4(B) of the Form S-3 filed by the Corporation on March 30, 1999. | | (5) | | Incorporated by reference from Exhibit 4(B) of the Form S-3 filed by the Corporation on September 8, 2000. | | (6) | | Incorporated by reference from Exhibit 4(B) of the Form S-3 filed by the Corporation on May 18, 2001. | | (7) | | Incorporated by reference from Exhibit 4(B) of the Form S-3/A filed by the Corporation on January 16, 2002. | | (8) | | Incorporated by reference from Exhibit 3.3 of the Form 8-A filed by the Corporation on September 26, 2003. | | (9) | | Incorporated by reference from Exhibit 3.1 of the Form 8-K filed by the Corporation on January 20, 2009. | | (10) | | Incorporated by reference from Exhibit 10.3 of the Form 8-K filed by the Corporation on July 7, 2010. | | (11) | | Incorporated by reference from Exhibit 3.1 of the Form 8-K filed by the Corporation on December 2, 2010. | | (12) | | Incorporated by reference from Exhibit 4 of the Form S-4 filed by the Corporation on April 15, 1998. | | (13) | | Incorporated by reference from Exhibit 4(A) of the Form S-3 filed by the Corporation on March 30, 1999. | | (14) | | Incorporated by reference from Exhibit 4(A) of the Form S-3 filed by the Corporation on September 8, 2000. | | (15) | | Incorporated by reference from Exhibit 4(A) of the Form S-3 filed by the Corporation on May 18, 2001. | | (16) | | Incorporated by reference from Exhibit 4(A) of the Form S-3 filed by the Corporation on January 16, 2002. | | (17) | | Incorporated by reference from Exhibit 4.1 of the Form 8-K filed by the Corporation on September 5, 2003. | | (18) | | Incorporated by reference from Exhibit 4.6 of the Form 10-K for the fiscal year ended December 31, 2008 filed by the Corporation on March 2, 2009. | | (2)(19) | | Incorporated by reference to First BanCorp’s registration statement on Form S-3 filed by the Corporation on March 30, 1999. | | (3) | | Incorporated by reference to First BanCorp’s registration statement on Form S-3 filed by the Corporation on September 8, 2000. | | (4) | | Incorporated by reference to First BanCorp’s registration statement on Form S-3 filed by the Corporation on May 18, 2001. | | (5) | | Incorporated by reference to First BanCorp’s registration statement on Form S-3/A filed by the Corporation on January 16, 2002. |
141
| | | (6) | | Incorporated by reference to Form 8-A filed by the Corporation on September 26, 2003. | | (7) | | Incorporated by reference tofrom Exhibit 3.1 from4.1 to the Form 8-K filed by the Corporation on January 20, 2009. | | (8)(20) | | Incorporated by reference from Exhibit 10.2 to the Form 8-K filed by the Corporation on July 7, 2010. | | (21) | | Incorporated by reference from Exhibit 4.1 from10.1 to the Form 8-K filed by the Corporation on January 20, 2009. | | (9)(22) | | Incorporated by reference from Registration statement on Form S-4 filed by the Corporation on April 15, 1998 | | (10) | | Incorporated by referenceExhibit 10.2 to Exhibit 4.1 from the Form 8-K filed by the Corporation on September 5, 2003. | | (11) | | Incorporated by reference from the Form 10-K for the fiscal year ended December 31, 1998 filed by the Corporation on March 26, 1999. | | (12)(23) | | Incorporated by reference tofrom Exhibit 10.1 fromto the Form 10-Q for the quarter ended March 31, 2008 filed by the Corporation on May 12, 2008. |
183
| | | (13)(24) | | Incorporated by reference tofrom Exhibit 10.01 fromto the Form 8-K filed by the Corporation on February 22, 2007. | | (14)(25) | | Incorporated by reference tofrom Exhibit 10.1 fromto the Form 8-K filed by the Corporation on January 20, 2009.November 24, 2010. | | (15)(26) | | Incorporated by reference from Exhibit 10.1 to the Form 8-K filed by the Corporation on July 7, 2010. | | (27) | | Incorporated by reference from Exhibit 10.1 to the Form 8-K filed by the Corporation on December 2, 2010. | | (28) | | Incorporated by reference from Exhibit 10.1 to the Form 8-K filed by the Corporation on June 4, 2010. | | (29) | | Incorporated by reference from Exhibit 10.2 to the Form 8-K filed by the Corporation on June 4, 2010. | | (30) | | Incorporated by reference from Exhibit 10.6 to the Form 10-K for the fiscal year ended December 31, 1998 filed by the Corporation on March 26, 1999. | | (31) | | Incorporated by reference from Exhibit 10.2 to the Form 10-Q for the quarter ended March 31, 2009 filed by the Corporation on May 11, 2009. | | (16)(32) | | Incorporated by reference from Exhibit 10.6 to the Form 10-K for the fiscal year ended December 31, 2009 | | | | filed by the Corporation on March 2, 2010. | | (33) | | Incorporated by reference from Exhibit 10.4 to the Form 10-K for the fiscal year ended December 31, 2005 filed by the Corporation on February 9, 2007. | | (17)(34) | | Incorporated by reference from Exhibit 10.5 to the Form 10-K for the fiscal year ended December 31, 2005 filed by the Corporation on February 9, 2007. | | (35) | | Incorporated by reference from Exhibit 10.4 to the Form 10-Q for the quarter ended March 31, 2009 filed by the Corporation on May 11, 2009. | | (36) | | Incorporated by reference from Exhibit 10.13 to the Form 10-K for the fiscal year ended December 31, 2009 filed by the Corporation on March 2, 2010. | | (37) | | Incorporated by reference from Exhibit 10.1 to the Form 10-Q for the quarter ended June 30, 2009 filed by the Corporation on August 11, 2009. | | (18)(38) | | Incorporated by reference from Exhibit 10.7 to the Form 10-K for the fiscal year ended December 31, 2005 filed by the Corporation on February 9, 2007. | | (39) | | Incorporated by reference from Exhibit 10.8 to the Form 10-K for the fiscal year ended December 31, 2005 filed by the Corporation on February 9, 2007. | | (40) | | Incorporated by reference from Exhibit 10.17 to the Form 10-K for the fiscal year ended December 31, 2009 filed by the Corporation on March 2, 2010. | | (41) | | Incorporated by reference from Exhibit 10.23 to the Form S-1/A filed by the Corporation on July 16, 2010. | | (42) | | Incorporated by reference from Exhibit 10.24 to the Form S-1/A filed by the Corporation on July 16, 2010. | | (43) | | Incorporated by reference from Exhibit 3.2 of the Form 10-K for the fiscal year ended December 31, 2008 filed by the Corporation on March 2, 2009. | | (44) | | Incorporated by reference from Exhibit 14.3 of the Form 10-K for the fiscal year ended December 31, 2003 filed by the Corporation on March 15, 2004. |
184
| | | (19)(45) | | Incorporated by reference from Exhibit 14.4 of the Form 10-K for the fiscal year ended December 31, 2007 filed by the Corporation on February 29, 2008. |
142185
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 the Corporation has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. | | | | | | | |
FIRST BANCORP. | | | | | | | | | | | | By: | | /s/ Aurelio Alemán | | Date: 3/1/10 | | | Aurelio Alemán | | | | | President and Chief Executive Officer | | | | Date: 4/15/11 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | | | | | |
/s/ Aurelio Alemán | | | | Date: 3/1/10 | | | | | Date: 4/15/11 | President and Chief Executive Officer | | | | | | | | | | /s/ Orlando Berges | | | | Date: 3/1/10 | | | | | Date: 4/15/11 | Executive Vice President and | | | | | Chief Financial Officer | | | | | | | | | | /s/ José Menéndez-Cortada | | | | Date: 3/1/10 | José Menéndez-Cortada, Director and | | | | Date: 4/15/11 | Chairman of the Board | | | | | | | | | | /s/ Fernando Rodríguez-Amaro | | | | Date: 3/1/10 | Fernando Rodríguez Amaro, | | | | Date: 4/15/11 | Director | | | | | | | | | | /s/ Jorge L. Díaz | | | | Date: 3/1/10 | | | | | Date: 4/15/11 | | | | | | /s/ Sharee Ann Umpierre-Catinchi | | | | Date: 3/1/10 | Sharee Ann Umpierre-Catinchi, | | | | Date: 4/15/11 | Director | | | | | | | | | | /s/ José L. Ferrer-Canals | | | | Date: 3/1/10 | José L. Ferrer-Canals, Director | | | | Date: 4/15/11 | | | | | | /s/ Frank Kolodziej | | | | Date: 3/1/10 | Frank Kolodziej, Director | | | | Date: 4/15/11 | | | | | | /s/ Héctor M. Nevares | | | | Date: 3/1/10 | Héctor M. Nevares, Director | | | | Date: 4/15/11 |
143186
| | | | | |
/s/ José F. Rodríguez | | | | Date: 3/1/10 | José F. Rodríguez, Director | | | | Date: 4/15/11 | | | | | | /s/ Pedro Romero Pedro Romero, CPA | | | | Date: 3/1/104/15/11 | Senior Vice President and | | | | | Chief Accounting Officer | | | | |
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TABLE OF CONTENTS | | | |
First BanCorp Index to Consolidated Financial Statements | | F-1 | | | F-1F-2 | | | F-2F-3 | | | F-4F-5 | | | F-5F-6 | | | F-6F-7 | | | F-7F-8 | | | F-8F-9 | | | F-9F-10 |
F-1
Management’s Report on Internal Control Over Financial Reporting To the Board of Directors and Stockholders of First BanCorp: The management of First BanCorpBanCorp’s (the Corporation) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 and for our assessment of internal control over financial reporting. The Corporation’s“Corporation”) internal control over financial reporting is a process effected by those charged with governance, management, and other personnel and designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and includes controls over the preparation ofregulatory financial statements prepared in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C),which are intended to comply with the requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;Corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP and financial statements for regulatory reporting purposes, and that receipts and expenditures of the companyCorporation are being made only in accordance with authorizations of management and directors of the company;Corporation; and (iii) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the company’sCorporation’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies orand procedures may deteriorate. The management of First BanCorpthe Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 and for our assessment of internal control over financial reporting. Management has assessed the effectiveness of the Corporation’s internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C), as of December 31, 2009. In making this assessment,2010, based on the Corporation used the criteriaframework set forth by the Committee of the Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, management has concluded that, the Corporation maintained effective internal control over financial reporting as of December 31, 2009. The effectiveness of2010, the Corporation’s internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) is effective based on the criteria established in Internal-Control Integrated Framework.
Management’s assessment of the effectiveness of internal control over financial reporting, including controls over the preparation of regulatory financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C), as of December 31, 20092010, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.dated April 15, 2011. | | | | | |
| | /s/ Aurelio AlemánAurelio Alemán | | | | | President and Chief Executive Officer | | | | | Date: April 15, 2011 | | | | | | | | | | | | /s/ Aurelio Alemán Orlando Berges | | | Aurelio Alemán | | | President and Chief Executive Officer | | | | | | /s/ Orlando Berges | | | | Orlando Berges | | | | | Executive Vice President and Chief Financial Officer | | | | | Date: April 15, 2011 | | |
F-1F-2
PricewaterhouseCoopers LLP 254 Muñoz Rivera Avenue BBVA Tower, 9th Floor Hato Rey, PR 00918 Telephone (787) 754-9090 Facsimile (787) 766-1094 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of First BanCorp In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of (loss) income, comprehensive (loss) income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of First BanCorp and its subsidiaries (the “Corporation”) at December 31, 20092010 and 2008,2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20092010 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009,2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Corporation’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As discussed in Note 1 to the consolidated financial statements, the Corporation changed the manner in which it accounts for uncertain tax positions and the manner in which it accounts for the financial assets and liabilities at fair value in 2007. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management’s assessment and our audit of First BanCorp’s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that F-2
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. F-3
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP San Juan, Puerto Rico
March 1, 2010April 15, 2011 CERTIFIED PUBLIC ACCOUNTANTS (OF PUERTO RICO) License No. 216 Expires Dec. 1, 20102013 Stamp 23896622493832 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report F-3
FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION | | | | | | | | | | | December 31, 2009 | | | December 31, 2008 | | | | (In thousands, except for share information) | | ASSETS | | | | | | | | | | | | | | | | | | Cash and due from banks | | $ | 679,798 | | | $ | 329,730 | | | | | | | | | | | | | | | | | | Money market investments: | | | | | | | | | Federal funds sold | | | 1,140 | | | | 54,469 | | Time deposits with other financial institutions | | | 600 | | | | 600 | | Other short-term investments | | | 22,546 | | | | 20,934 | | | | | | | | | Total money market investments | | | 24,286 | | | | 76,003 | | | | | | | | | Investment securities available for sale, at fair value: | | | | | | | | | Securities pledged that can be repledged | | | 3,021,028 | | | | 2,913,721 | | Other investment securities | | | 1,149,754 | | | | 948,621 | | | | | | | | | Total investment securities available for sale | | | 4,170,782 | | | | 3,862,342 | | | | | | | | | Investment securities held to maturity, at amortized cost: | | | | | | | | | Securities pledged that can be repledged | | | 400,925 | | | | 968,389 | | Other investment securities | | | 200,694 | | | | 738,275 | | | | | | | | | Total investment securities held to maturity, fair value of $621,584 (2008 - $1,720,412) | | | 601,619 | | | | 1,706,664 | | | | | | | | | Other equity securities | | | 69,930 | | | | 64,145 | | | | | | | | | | | | | | | | | | Loans, net of allowance for loan and lease losses of $528,120 (2008 - $281,526) | | | 13,400,331 | | | | 12,796,363 | | Loans held for sale, at lower of cost or market | | | 20,775 | | | | 10,403 | | | | | | | | | Total loans, net | | | 13,421,106 | | | | 12,806,766 | | | | | | | | | Premises and equipment, net | | | 197,965 | | | | 178,468 | | Other real estate owned | | | 69,304 | | | | 37,246 | | Accrued interest receivable on loans and investments | | | 79,867 | | | | 98,565 | | Due from customers on acceptances | | | 954 | | | | 504 | | Other assets | | | 312,837 | | | | 330,835 | | | | | | | | | Total assets | | $ | 19,628,448 | | | $ | 19,491,268 | | | | | | | | | | | | | | | | | | LIABILITIES | | | | | | | | | | | | | | | | | | Deposits: | | | | | | | | | Non-interest-bearing deposits | | $ | 697,022 | | | $ | 625,928 | | Interest-bearing deposits (including $0 and $1,150,959 measured at fair value as of December 31, 2009 and December 31, 2008, respectively) | | | 11,972,025 | | | | 12,431,502 | | | | | | | | | Total deposits | | | 12,669,047 | | | | 13,057,430 | | | | | | | | | | | Loans payable | | | 900,000 | | | | — | | Securities sold under agreements to repurchase | | | 3,076,631 | | | | 3,421,042 | | Advances from the Federal Home Loan Bank (FHLB) | | | 978,440 | | | | 1,060,440 | | Notes payable (including $13,361 and $10,141 measured at fair value as of December 31, 2009 and December 31, 2008, respectively) | | | 27,117 | | | | 23,274 | | Other borrowings | | | 231,959 | | | | 231,914 | | Bank acceptances outstanding | | | 954 | | | | 504 | | Accounts payable and other liabilities | | | 145,237 | | | | 148,547 | | | | | | | | | Total liabilities | | | 18,029,385 | | | | 17,943,151 | | | | | | | | | | | | | | | | | | Commitments and contingencies (Notes 28, 31 and 34) | | | | | | | | | | | | | | | | | | STOCKHOLDERS’ EQUITY | | | | | | | | | Preferred stock, authorized 50,000,000 shares: issued and outstanding 22,404,000 shares (2008 - 22,004,000) at an aggregate liquidation value of $950,100 (2008 - $550,100) | | | 928,508 | | | | 550,100 | | | | | | | | | Common stock, $1 par value, authorized 250,000,000 shares; issued 102,440,522 (2008 - 102,444,549) | | | 102,440 | | | | 102,444 | | Less: Treasury stock (at cost) | | | (9,898 | ) | | | (9,898 | ) | | | | | | | | Common stock outstanding, 92,542,722 shares outstanding (2008 - 92,546,749) | | | 92,542 | | | | 92,546 | | | | | | | | | Additional paid-in capital | | | 134,223 | | | | 108,299 | | Legal surplus | | | 299,006 | | | | 299,006 | | Retained earnings | | | 118,291 | | | | 440,777 | | Accumulated other comprehensive income, net of tax expense of $4,628 (2008 - $717) | | | 26,493 | | | | 57,389 | | | | | | | | | Total stockholders’ equity | | | 1,599,063 | | | | 1,548,117 | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 19,628,448 | | | $ | 19,491,268 | | | | | | | | |
The accompanying notes are an integral part of these statements.
F-4
FIRST BANCORP
CONSOLIDATED STATEMENTS OF (LOSS) INCOMEFINANCIAL CONDITION | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | 2007 | | | | (In thousands, except per share data) | | Interest income: | | | | | | | | | | | | | Loans | | $ | 741,535 | | | $ | 835,501 | | | $ | 901,941 | | Investment securities | | | 254,462 | | | | 285,041 | | | | 265,275 | | Money market investments | | | 577 | | | | 6,355 | | | | 22,031 | | | | | | | | | | | | Total interest income | | | 996,574 | | | | 1,126,897 | | | | 1,189,247 | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense: | | | | | | | | | | | | | Deposits | | | 314,487 | | | | 414,838 | | | | 528,740 | | Loans payable | | | 2,331 | | | | 243 | | | | — | | Federal funds purchased and securities sold under agreements to repurchase | | | 114,651 | | | | 133,690 | | | | 148,309 | | Advances from FHLB | | | 32,954 | | | | 39,739 | | | | 38,464 | | Notes payable and other borrowings | | | 13,109 | | | | 10,506 | | | | 22,718 | | | | | | | | | | | | Total interest expense | | | 477,532 | | | | 599,016 | | | | 738,231 | | | | | | | | | | | | Net interest income | | | 519,042 | | | | 527,881 | | | | 451,016 | | | | | | | | | | | | | | | | | | | | | | | | | Provision for loan and lease losses | | | 579,858 | | | | 190,948 | | | | 120,610 | | | | | | | | | | | | | | | | | | | | | | | | | Net interest (loss) income after provision for loan and lease losses | | | (60,816 | ) | | | 336,933 | | | | 330,406 | | | | | | | | | | | | | | | | | | | | | | | | | Non-interest income: | | | | | | | | | | | | | Other service charges on loans | | | 6,830 | | | | 6,309 | | | | 6,893 | | Service charges on deposit accounts | | | 13,307 | | | | 12,895 | | | | 12,769 | | Mortgage banking activities | | | 8,605 | | | | 3,273 | | | | 2,819 | | Net gain on sale of investments | | | 86,804 | | | | 27,180 | | | | 3,184 | | Other-than-temporary impairment losses on investment securities: | | | | | | | | | | | | | Total other-than-temporary impairment losses | | | (33,400 | ) | | | (5,987 | ) | | | (5,910 | ) | Noncredit-related impairment portion on debt securities not expected to be sold (recognized in other comprehensive income) | | | 31,742 | | | | — | | | | — | | | | | | | | | | | | Net impairment losses on investment securities | | | (1,658 | ) | | | (5,987 | ) | | | (5,910 | ) | Net gain on partial extinguishment and recharacterization of a secured commercial loan to a local financial institutions | | | — | | | | — | | | | 2,497 | | Rental income | | | 1,346 | | | | 2,246 | | | | 2,538 | | Gain on sale of credit card portfolio | | | — | | | | — | | | | 2,819 | | Insurance reimbursements and other agreements related to a contingency settlement | | | — | | | | — | | | | 15,075 | | Other non-interest income | | | 27,030 | | | | 28,727 | | | | 24,472 | | | | | | | | | | | | Total non-interest income | | | 142,264 | | | | 74,643 | | | | 67,156 | | | | | | | | | | | | | | | | | | | | | | | | | Non-interest expenses: | | | | | | | | | | | | | Employees’ compensation and benefits | | | 132,734 | | | | 141,853 | | | | 140,363 | | Occupancy and equipment | | | 62,335 | | | | 61,818 | | | | 58,894 | | Business promotion | | | 14,158 | | | | 17,565 | | | | 18,029 | | Professional fees | | | 15,217 | | | | 15,809 | | | | 20,751 | | Taxes, other than income taxes | | | 15,847 | | | | 16,989 | | | | 15,364 | | Insurance and supervisory fees | | | 45,605 | | | | 15,990 | | | | 12,616 | | Net loss on real estate owned (REO) operations | | | 21,863 | | | | 21,373 | | | | 2,400 | | Other non-interest expenses | | | 44,342 | | | | 41,974 | | | | 39,426 | | | | | | | | | | | | Total non-interest expenses | | | 352,101 | | | | 333,371 | | | | 307,843 | | | | | | | | | | | | (Loss) income before income taxes | | | (270,653 | ) | | | 78,205 | | | | 89,719 | | Income tax (expense) benefit | | | (4,534 | ) | | | 31,732 | | | | (21,583 | ) | | | | | | | | | | | Net (loss) income | | $ | (275,187 | ) | | $ | 109,937 | | | $ | 68,136 | | | | | | | | | | | | Preferred stock dividends and accretion of discount | | | 46,888 | | | | 40,276 | | | | 40,276 | | | | | | | | | | | | Net (loss) income attributable to common stockholders | | $ | (322,075 | ) | | $ | 69,661 | | | $ | 27,860 | | | | | | | | | | | | Net (loss) income per common share: | | | | | | | | | | | | | Basic | | $ | (3.48 | ) | | $ | 0.75 | | | $ | 0.32 | | | | | | | | | | | | Diluted | | $ | (3.48 | ) | | $ | 0.75 | | | $ | 0.32 | | | | | | | | | | | | Dividends declared per common share | | $ | 0.14 | | | $ | 0.28 | | | $ | 0.28 | | | | | | | | | | | |
| | | | | | | | | (In thousands, except for share information) | | December 31, 2010 | | | December 31, 2009 | | ASSETS | | | | | | | | | | | | | | | | | | Cash and due from banks | | $ | 254,723 | | | $ | 679,798 | | | | | | | | | | | | | | | | | | Money market investments: | | | | | | | | | Federal funds sold | | | 6,236 | | | | 1,140 | | Time deposits with other financial institutions | | | 1,346 | | | | 600 | | Other short-term investments | | | 107,978 | | | | 22,546 | | | | | | | | | Total money market investments | | | 115,560 | | | | 24,286 | | | | | | | | | | | | | | | | | | Investment securities available for sale, at fair value: | | | | | | | | | Securities pledged that can be repledged | | | 1,344,873 | | | | 3,021,028 | | Other investment securities | | | 1,399,580 | | | | 1,149,754 | | | | | | | | | Total investment securities available for sale | | | 2,744,453 | | | | 4,170,782 | | | | | | | | | | | | | | | | | | Investment securities held to maturity, at amortized cost: | | | | | | | | | Securities pledged that can be repledged | | | 239,553 | | | | 400,925 | | Other investment securities | | | 213,834 | | | | 200,694 | | | | | | | | | Total investment securities held to maturity, fair value of $476,516 (2009 - $621,584) | | | 453,387 | | | | 601,619 | | | | | | | | | | | | | | | | | | Other equity securities | | | 55,932 | | | | 69,930 | | | | | | | | | | | | | | | | | | Loans, net of allowance for loan and lease losses of $553,025 (2009 - $528,120) | | | 11,102,411 | | | | 13,400,331 | | Loans held for sale, at lower of cost or market | | | 300,766 | | | | 20,775 | | | | | | | | | Total loans, net | | | 11,403,177 | | | | 13,421,106 | | | | | | | | | | | | | | | | | | Premises and equipment, net | | | 209,014 | | | | 197,965 | | Other real estate owned | | | 84,897 | | | | 69,304 | | Accrued interest receivable on loans and investments | | | 59,061 | | | | 79,867 | | Due from customers on acceptances | | | 1,439 | | | | 954 | | Other assets | | | 211,434 | | | | 312,837 | | | | | | | | | Total assets | | $ | 15,593,077 | | | $ | 19,628,448 | | | | | | | | | | | | | | | | | | LIABILITIES | | | | | | | | | | | | | | | | | | Deposits: | | | | | | | | | Non-interest-bearing deposits | | $ | 668,052 | | | $ | 697,022 | | Interest-bearing deposits | | | 11,391,058 | | | | 11,972,025 | | | | | | | | | Total deposits | | | 12,059,110 | | | | 12,669,047 | | | | | | | | | | | Loans payable | | | — | | | | 900,000 | | Securities sold under agreements to repurchase | | | 1,400,000 | | | | 3,076,631 | | Advances from the Federal Home Loan Bank (FHLB) | | | 653,440 | | | | 978,440 | | Notes payable (including $11,842 and $13,361 measured at fair value as of December 31, 2010 and December 31, 2009, respectively) | | | 26,449 | | | | 27,117 | | Other borrowings | | | 231,959 | | | | 231,959 | | Bank acceptances outstanding | | | 1,439 | | | | 954 | | Accounts payable and other liabilities | | | 162,721 | | | | 145,237 | | | | | | | | | Total liabilities | | | 14,535,118 | | | | 18,029,385 | | | | | | | | | | | | | | | | | | Commitments and Contingencies (Note 28, 31 and 34) | | | | | | | | | | | | | | | | | | STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | Preferred stock, authorized 50,000,000 shares: issued 22,828,174 (2009 - 22,404,000 shares issued) aggregate liquidation value of $487,221 (2009 - $950,100) | | | | | | | | | Fixed Rate Cumulative Mandatorily Convertible Preferred Stock: issued and outstanding: 424,174 shares | | | 361,962 | | | | — | | Fixed Rate Cumulative Perpetual Preferred Stock: (2009 - issued and outstanding 400,000 shares) | | | — | | | | 378,408 | | Non-cumulative Perpetual Monthly Income Preferred Stock: issued 22,004,000 shares and outstanding 2,521,872 shares (2009 - issued and outstanding: 22,004,000 shares) | | | 63,047 | | | | 550,100 | | Common stock, $0.10 par value (December 31, 2009 - $1 par value), authorized 2,000,000,000 shares; issued 21,963,522 shares (December 31, 2009 - 250,000,000 shares authorized and 6,829,368 shares issued); | | | 2,196 | | | | 6,829 | | Less: Treasury stock (at par value) | | | (66 | ) | | | (660 | ) | | | | | | | | Common stock outstanding, 21,303,669 shares outstanding (December 31, 2009 - 6,169,515 shares outstanding) | | | 2,130 | | | | 6,169 | | | | | | | | | Additional paid-in capital | | | 319,459 | | | | 220,596 | | Legal surplus | | | 299,006 | | | | 299,006 | | (Accumulated deficit) retained earnings | | | (5,363 | ) | | | 118,291 | | Accumulated other comprehensive income, net of tax expense of $5,351 (December 31, 2009 - expense of $4,628) | | | 17,718 | | | | 26,493 | | | | | | | | | Total stockholders’equity | | | 1,057,959 | | | | 1,599,063 | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 15,593,077 | | | $ | 19,628,448 | | | | | | | | |
The accompanying notes are an integral part of these statements. F-5
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS(LOSS) INCOME | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | 2007 | | | | | | | | (In thousands) | | Cash flows from operating activities: | | | | | | | | | | | | | Net (loss) income | | $ | (275,187 | ) | | $ | 109,937 | | | $ | 68,136 | | | | | | | | | | | | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation | | | 20,774 | | | | 19,172 | | | | 17,669 | | Amortization and impairment of core deposit intangible | | | 7,386 | | | | 3,603 | | | | 3,294 | | Provision for loan and lease losses | | | 579,858 | | | | 190,948 | | | | 120,610 | | Deferred income tax expense (benefit) | | | 16,054 | | | | (38,853 | ) | | | 13,658 | | Stock-based compensation recognized | | | 92 | | | | 9 | | | | 2,848 | | Gain on sale of investments, net | | | (86,804 | ) | | | (27,180 | ) | | | (3,184 | ) | Other-than-temporary impairments on available-for-sale securities | | | 1,658 | | | | 5,987 | | | | 5,910 | | Derivative instruments and hedging activities (gain) loss | | | (15,745 | ) | | | (26,425 | ) | | | 6,134 | | Net gain on sale of loans and impairments | | | (7,352 | ) | | | (2,617 | ) | | | (2,246 | ) | Net gain on partial extinguishment and recharacterization of a secured commercial loan to a local financial institution | | | — | | | | — | | | | (2,497 | ) | Net amortization of premiums and discounts and deferred loan fees and costs | | | 606 | | | | (1,083 | ) | | | (663 | ) | Net increase in mortgage loans held for sale | | | (21,208 | ) | | | (6,194 | ) | | | — | | Amortization of broker placement fees | | | 22,858 | | | | 15,665 | | | | 9,563 | | Accretion of basis adjustments on fair value hedges | | | — | | | | — | | | | (2,061 | ) | Net amortization (accretion) of premium and discounts on investment securities | | | 5,221 | | | | (7,828 | ) | | | (42,026 | ) | Gain on sale of credit card portfolio | | | — | | | | — | | | | (2,819 | ) | Decrease in accrued income tax payable | | | (19,408 | ) | | | (13,348 | ) | | | (3,419 | ) | Decrease in accrued interest receivable | | | 18,699 | | | | 9,611 | | | | 4,397 | | Decrease in accrued interest payable | | | (24,194 | ) | | | (31,030 | ) | | | (13,808 | ) | Decrease (increase) in other assets | | | 28,609 | | | | (14,959 | ) | | | 4,408 | | Decrease in other liabilities | | | (8,668 | ) | | | (9,501 | ) | | | (123,611 | ) | | | | | | | | | | | Total adjustments | | | 518,436 | | | | 65,977 | | | | (7,843 | ) | | | | | | | | | | | Net cash provided by operating activities | | | 243,249 | | | | 175,914 | | | | 60,293 | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Principal collected on loans | | | 3,010,435 | | | | 2,588,979 | | | | 3,084,530 | | Loans originated | | | (4,429,644 | ) | | | (3,796,234 | ) | | | (3,813,644 | ) | Purchase of loans | | | (190,431 | ) | | | (419,068 | ) | | | (270,499 | ) | Proceeds from sale of loans | | | 43,816 | | | | 154,068 | | | | 150,707 | | Proceeds from sale of repossessed assets | | | 78,846 | | | | 76,517 | | | | 52,768 | | Purchase of servicing assets | | | — | | | | (621 | ) | | | (1,851 | ) | Proceeds from sale of available-for-sale securities | | | 1,946,434 | | | | 679,955 | | | | 959,212 | | Purchases of securities held to maturity | | | (8,460 | ) | | | (8,540 | ) | | | (511,274 | ) | Purchases of securities available for sale | | | (2,781,394 | ) | | | (3,468,093 | ) | | | (576,100 | ) | Proceeds from principal repayments and maturities of securities held to maturity | | | 1,110,245 | | | | 1,586,799 | | | | 623,374 | | Proceeds from principal repayments of securities available for sale | | | 880,384 | | | | 332,419 | | | | 214,218 | | Additions to premises and equipment | | | (40,271 | ) | | | (32,830 | ) | | | (24,642 | ) | Proceeds from sale/redemption of other investment securities | | | 4,032 | | | | 9,474 | | | | — | | (Increase) decrease in other equity securities | | | (5,785 | ) | | | 875 | | | | (23,422 | ) | Net cash inflow on acquisition of business | | | — | | | | 5,154 | | | | — | | | | | | | | | | | | Net cash used in investing activities | | | (381,793 | ) | | | (2,291,146 | ) | | | (136,623 | ) | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Net (decrease) increase in deposits | | | (393,636 | ) | | | 1,924,312 | | | | 59,499 | | Net increase in loans payable | | | 900,000 | | | | — | | | | — | | Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase | | | (344,411 | ) | | | 326,396 | | | | (593,078 | ) | Net FHLB advances (paid) taken | | | (82,000 | ) | | | (42,560 | ) | | | 543,000 | | Repayments of notes payable and other borrowings | | | — | | | | — | | | | (150,000 | ) | Dividends paid | | | (43,066 | ) | | | (66,181 | ) | | | (64,881 | ) | Issuance of common stock | | | — | | | | — | | | | 91,924 | | Issuance of preferred stock and associated warrant | | | 400,000 | | | | — | | | | — | | Exercise of stock options | | | — | | | | 53 | | | | — | | Other financing activities | | | 8 | | | | — | | | | — | | | | | | | | | | | | Net cash provided by (used in) financing activities | | | 436,895 | | | | 2,142,020 | | | | (113,536 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net increase (decrease) in cash and cash equivalents | | | 298,351 | | | | 26,788 | | | | (189,866 | ) | | | | | | | | | | | | | | Cash and cash equivalents at beginning of year | | | 405,733 | | | | 378,945 | | | | 568,811 | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents at end of year | | $ | 704,084 | | | $ | 405,733 | | | $ | 378,945 | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents include: | | | | | | | | | | | | | Cash and due from banks | | $ | 679,798 | | | $ | 329,730 | | | $ | 195,809 | | Money market instruments | | | 24,286 | | | | 76,003 | | | | 183,136 | | | | | | | | | | | | | | $ | 704,084 | | | $ | 405,733 | | | $ | 378,945 | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year Ended December 31, | | | | 2010 | | | 2009 | | | 2008 | | | | (In thousands, except per share data) | | Interest income: | | | | | | | | | | | | | Loans | | $ | 691,897 | | | $ | 741,535 | | | $ | 835,501 | | Investment securities | | | 138,740 | | | | 254,462 | | | | 285,041 | | Money market investments | | | 2,049 | | | | 577 | | | | 6,355 | | | | | | | | | | | | Total interest income | | | 832,686 | | | | 996,574 | | | | 1,126,897 | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense: | | | | | | | | | | | | | Deposits | | | 248,716 | | | | 314,487 | | | | 414,838 | | Loans payable | | | 3,442 | | | | 2,331 | | | | 243 | | Federal funds purchased and securities sold under agreements to repurchase | | | 83,031 | | | | 114,651 | | | | 133,690 | | Advances from FHLB | | | 29,037 | | | | 32,954 | | | | 39,739 | | Notes payable and other borrowings | | | 6,785 | | | | 13,109 | | | | 10,506 | | | | | | | | | | | | Total interest expense | | | 371,011 | | | | 477,532 | | | | 599,016 | | | | | | | | | | | | Net interest income | | | 461,675 | | | | 519,042 | | | | 527,881 | | | | | | | | | | | | | | | | | | | | | | | | | Provision for loan and lease losses | | | 634,587 | | | | 579,858 | | | | 190,948 | | | | | | | | | | | | | | | | | | | | | | | | | Net interest (loss) income after provision for loan and lease losses | | | (172,912 | ) | | | (60,816 | ) | | | 336,933 | | | | | | | | | | | | | | | | | | | | | | | | | Non-interest income: | | | | | | | | | | | | | Other service charges on loans | | | 7,224 | | | | 6,830 | | | | 6,309 | | Service charges on deposit accounts | | | 13,419 | | | | 13,307 | | | | 12,895 | | Mortgage banking activities | | | 13,615 | | | | 8,605 | | | | 3,273 | | Net gain on sale of investments | | | 103,847 | | | | 86,804 | | | | 27,180 | | Other-than-temporary impairment losses on investment securities: | | | | | | | | | | | | | Total other-than-temporary impairment losses | | | (603 | ) | | | (33,400 | ) | | | (5,987 | ) | Noncredit-related impairment portion on debt securities not expected to be sold (recognized in other comprehensive income) | | | (582 | ) | | | 31,742 | | | | — | | | | | | | | | | | | Net impairment losses on investment securities | | | (1,185 | ) | | | (1,658 | ) | | | (5,987 | ) | Rental income | | | — | | | | 1,346 | | | | 2,246 | | Loss on early extinguishment of repurchase agreements | | | (47,405 | ) | | | — | | | | — | | Other non-interest income | | | 28,388 | | | | 27,030 | | | | 28,727 | | | | | | | | | | | | Total non-interest income | | | 117,903 | | | | 142,264 | | | | 74,643 | | | | | | | | | | | | | | | | | | | | | | | | | Non-interest expenses: | | | | | | | | | | | | | Employees’ compensation and benefits | | | 121,126 | | | | 132,734 | | | | 141,853 | | Occupancy and equipment | | | 59,494 | | | | 62,335 | | | | 61,818 | | Business promotion | | | 12,332 | | | | 14,158 | | | | 17,565 | | Professional fees | | | 21,287 | | | | 15,217 | | | | 15,809 | | Taxes, other than income taxes | | | 14,228 | | | | 15,847 | | | | 16,989 | | Insurance and supervisory fees | | | 67,274 | | | | 45,605 | | | | 15,990 | | Net loss on real estate owned (REO) operations | | | 30,173 | | | | 21,863 | | | | 21,373 | | Other non-interest expenses | | | 40,244 | | | | 44,342 | | | | 41,974 | | | | | | | | | | | | Total non-interest expenses | | | 366,158 | | | | 352,101 | | | | 333,371 | | | | | | | | | | | | (Loss) income before income taxes | | | (421,167 | ) | | | (270,653 | ) | | | 78,205 | | Income tax (expense) benefit | | | (103,141 | ) | | | (4,534 | ) | | | 31,732 | | | | | | | | | | | | Net (loss) income | | $ | (524,308 | ) | | $ | (275,187 | ) | | $ | 109,937 | | | | | | | | | | | | Net (loss) income attributable to common stockholders | | $ | (122,045 | ) | | $ | (322,075 | ) | | $ | 69,661 | | | | | | | | | | | | Net (loss) income per common share: | | | | | | | | | | | | | Basic | | $ | (10.79 | ) | | $ | (52.22 | ) | | $ | 11.30 | | | | | | | | | | | | Diluted | | $ | (10.79 | ) | | $ | (52.22 | ) | | $ | 11.28 | | | | | | | | | | | | Dividends declared per common share | | $ | — | | | $ | 2.10 | | | $ | 4.20 | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. F-6
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYCASH FLOWS | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | 2007 | | | | | | | | (In thousands) | | | | | | Preferred Stock: | | | | | | | | | | | | | Balance at beginning of year | | $ | 550,100 | | | $ | 550,100 | | | $ | 550,100 | | Issuance of preferred stock — Series F | | | 400,000 | | | | — | | | | — | | Preferred stock discount — Series F, net of accretion | | | (21,592 | ) | | | — | | | | — | | | | | | | | | | | | Balance at end of period | | | 928,508 | | | | 550,100 | | | | 550,100 | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock outstanding: | | | | | | | | | | | | | Balance at beginning of year | | | 92,546 | | | | 92,504 | | | | 83,254 | | Issuance of common stock | | | — | | | | — | | | | 9,250 | | Common stock issued under stock option plan | | | — | | | | 6 | | | | — | | Restricted stock grants | | | — | | | | 36 | | | | — | | Restricted stock forfeited | | | (4 | ) | | | — | | | | — | | | | | | | | | | | | Balance at end of year | | | 92,542 | | | | 92,546 | | | | 92,504 | | | | | | | | | | | | | | | | | | | | | | | | | Additional Paid-In-Capital: | | | | | | | | | | | | | Balance at beginning of year | | | 108,299 | | | | 108,279 | | | | 22,757 | | Issuance of common stock | | | — | | | | — | | | | 82,674 | | Issuance of common stock warrants | | | 25,820 | | | | — | | | | — | | Shares issued under stock option plan | | | — | | | | 47 | | | | — | | Stock-based compensation recognized | | | 92 | | | | 9 | | | | 2,848 | | Restricted stock grants | | | — | | | | (36 | ) | | | — | | Restricted stock forfeited | | | 4 | | | | — | | | | — | | Other | | | 8 | | | | — | | | | — | | | | | | | | | | | | Balance at end of year | | | 134,223 | | | | 108,299 | | | | 108,279 | | | | | | | | | | | | | | | | | | | | | | | | | Legal Surplus: | | | | | | | | | | | | | Balance at beginning of year | | | 299,006 | | | | 286,049 | | | | 276,848 | | Transfer from retained earnings | | | — | | | | 12,957 | | | | 9,201 | | | | | | | | | | | | Balance at end of year | | | 299,006 | | | | 299,006 | | | | 286,049 | | | | | | | | | | | | | | | | | | | | | | | | | Retained Earnings: | | | | | | | | | | | | | Balance at beginning of year | | | 440,777 | | | | 409,978 | | | | 326,761 | | Net (loss) income | | | (275,187 | ) | | | 109,937 | | | | 68,136 | | Cash dividends declared on common stock | | | (12,966 | ) | | | (25,905 | ) | | | (24,605 | ) | Cash dividends declared on preferred stock | | | (30,106 | ) | | | (40,276 | ) | | | (40,276 | ) | Cumulative adjustment for accounting change — adoption of accounting for uncertainty in income taxes | | | — | | | | — | | | | (2,615 | ) | Cumulative adjustment for accounting change — adoption of fair value option | | | — | | | | — | | | | 91,778 | | Accretion of preferred stock discount — Series F | | | (4,227 | ) | | | — | | | | — | | Transfer to legal surplus | | | — | | | | (12,957 | ) | | | (9,201 | ) | | | | | | | | | | | Balance at end of year | | | 118,291 | | | | 440,777 | | | | 409,978 | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated Other Comprehensive Income (Loss), net of tax: | | | | | | | | | | | | | Balance at beginning of year | | | 57,389 | | | | (25,264 | ) | | | (30,167 | ) | Other comprehensive (loss) income, net of tax | | | (30,896 | ) | | | 82,653 | | | | 4,903 | | | | | | | | | | | | Balance at end of year | | | 26,493 | | | | 57,389 | | | | (25,264 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total stockholders’ equity | | $ | 1,599,063 | | | $ | 1,548,117 | | | $ | 1,421,646 | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year Ended December 31, | | | | 2010 | | | 2009 | | | 2008 | | | | (In thousands) | | Cash flows from operating activities: | | | | | | | | | | | | | Net (loss) income | | $ | (524,308 | ) | | $ | (275,187 | ) | | $ | 109,937 | | | | | | | | | | | | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation | | | 20,942 | | | | 20,774 | | | | 19,172 | | Amortization and impairment of core deposit intangible | | | 2,557 | | | | 7,386 | | | | 3,603 | | Provision for loan and lease losses | | | 634,587 | | | | 579,858 | | | | 190,948 | | Deferred income tax expense (benefit) | | | 99,206 | | | | 16,054 | | | | (38,853 | ) | Stock-based compensation recognized | | | 93 | | | | 92 | | | | 9 | | Gain on sale of investments, net | | | (103,847 | ) | | | (86,804 | ) | | | (27,180 | ) | Loss on early extinguishment of repurchase agreements | | | 47,405 | | | | — | | | | — | | Other-than-temporary impairments on investment securities | | | 1,185 | | | | 1,658 | | | | 5,987 | | Derivative instruments and hedging activities gain | | | (302 | ) | | | (15,745 | ) | | | (26,425 | ) | Net gain on sale of loans and impairments | | | (5,469 | ) | | | (7,352 | ) | | | (2,617 | ) | Net amortization of premiums and discounts and deferred loan fees and costs | | | (2,063 | ) | | | 606 | | | | (1,083 | ) | Net increase in mortgage loans held for sale | | | (11,229 | ) | | | (21,208 | ) | | | (6,194 | ) | Amortization of broker placement fees | | | 20,758 | | | | 22,858 | | | | 15,665 | | Net amortization (accretion) of premium and discounts on investment securities | | | 7,230 | | | | 5,221 | | | | (7,828 | ) | Increase (decrease) in accrued income tax payable | | | 4,243 | | | | (19,408 | ) | | | (13,348 | ) | Decrease in accrued interest receivable | | | 20,806 | | | | 18,699 | | | | 9,611 | | Decrease in accrued interest payable | | | (8,174 | ) | | | (24,194 | ) | | | (31,030 | ) | Decrease (increase) in other assets | | | 20,261 | | | | 28,609 | | | | (14,959 | ) | Increase (decrease) in other liabilities | | | 13,289 | | | | (8,668 | ) | | | (9,501 | ) | | | | | | | | | | | Total adjustments | | | 761,478 | | | | 518,436 | | | | 65,977 | | | | | | | | | | | | Net cash provided by operating activities | | | 237,170 | | | | 243,249 | | | | 175,914 | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Principal collected on loans | | | 3,716,734 | | | | 3,010,435 | | | | 2,588,979 | | Loans originated | | | (2,729,787 | ) | | | (4,429,644 | ) | | | (3,796,234 | ) | Purchases of loans | | | (155,593 | ) | | | (190,431 | ) | | | (419,068 | ) | Proceeds from sale of loans | | | 223,616 | | | | 43,816 | | | | 154,068 | | Proceeds from sale of repossessed assets | | | 101,633 | | | | 78,846 | | | | 76,517 | | Purchases of servicing assets | | | — | | | | — | | | | (621 | ) | Proceeds from sale of available-for-sale securities | | | 2,358,101 | | | | 1,946,434 | | | | 679,955 | | Purchases of securities held to maturity | | | (8,475 | ) | | | (8,460 | ) | | | (8,540 | ) | Purchases of securities available for sale | | | (2,762,929 | ) | | | (2,781,394 | ) | | | (3,468,093 | ) | Proceeds from principal repayments and maturities of securities held to maturity | | | 153,940 | | | | 1,110,245 | | | | 1,586,799 | | Proceeds from principal repayments and maturities of securities available for sale | | | 2,128,897 | | | | 880,384 | | | | 332,419 | | Additions to premises and equipment | | | (31,991 | ) | | | (40,271 | ) | | | (32,830 | ) | Proceeds from sale/redemption of other investment securities | | | 10,668 | | | | 4,032 | | | | 9,474 | | Decrease (increase) in other equity securities | | | 13,748 | | | | (5,785 | ) | | | 875 | | Net cash inflow on acquisition of business | | | — | | | | — | | | | 5,154 | | | | | | | | | | | | Net cash provided by (used in) investing activities | | | 3,018,562 | | | | (381,793 | ) | | | (2,291,146 | ) | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Net (decrease) increase in deposits | | | (632,382 | ) | | | (393,636 | ) | | | 1,924,312 | | Net (decrease) increase in loans payable | | | (900,000 | ) | | | 900,000 | | | | — | | Net (repayments) proceeds and cancellation costs of securities sold under agreements to repurchase | | | (1,724,036 | ) | | | (344,411 | ) | | | 326,396 | | Net FHLB advances paid | | | (325,000 | ) | | | (82,000 | ) | | | (42,560 | ) | Dividends paid | | | — | | | | (43,066 | ) | | | (66,181 | ) | Issuance of preferred stock and associated warrant | | | — | | | | 400,000 | | | | — | | Exercise of stock options | | | — | | | | — | | | | 53 | | Issuance costs of common stock issued in exchange for preferred stock Series A through E | | | (8,115 | ) | | | — | | | | — | | Other financing activities | | | — | | | | 8 | | | | — | | | | | | | | | | | | Net cash (used in) provided by financing activities | | | (3,589,533 | ) | | | 436,895 | | | | 2,142,020 | | | | | | | | | | | | | Net (decrease) increase in cash and cash equivalents | | | (333,801 | ) | | | 298,351 | | | | 26,788 | | | Cash and cash equivalents at beginning of year | | | 704,084 | | | | 405,733 | | | | 378,945 | | | | | | | | | | | | Cash and cash equivalents at end of year | | $ | 370,283 | | | $ | 704,084 | | | $ | 405,733 | | | | | | | | | | | | Cash and cash equivalents include: | | | | | | | | | | | | | Cash and due from banks | | $ | 254,723 | | | $ | 679,798 | | | $ | 329,730 | | Money market instruments | | | 115,560 | | | | 24,286 | | | | 76,003 | | | | | | | | | | | | | | $ | 370,283 | | | $ | 704,084 | | | $ | 405,733 | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. F-7
FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMECHANGES IN STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | 2007 | | | | (In thousands) | | Net (loss) income | | $ | (275,187 | ) | | $ | 109,937 | | | $ | 68,136 | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized losses on available-for-sale debt securities on which an other-than-temporary impairment has been recognized: | | | | | | | | | | | | | | | | | | | | | | | | | | Noncredit-related impairment portion on debt securities not expected to be sold | | | (31,742 | ) | | | — | | | | — | | Reclassification adjustment for other-than-temporary impairment on debt securities included in net income | | | 1,270 | | | | — | | | | — | | | | | | | | | | | | | | | All other unrealized gains and losses on available-for-sale securities: | | | | | | | | | | | | | All other unrealized holding gains arising during the period | | | 85,871 | | | | 95,316 | | | | 2,171 | | Reclassification adjustments for net gain included in net income | | | (82,772 | ) | | | (17,706 | ) | | | (3,184 | ) | Reclassification adjustments for other-than-temporary impairment on equity securities | | | 388 | | | | 5,987 | | | | 5,910 | | | | | | | | | | | | | | | Income tax (expense) benefit related to items of other comprehensive income | | | (3,911 | ) | | | (944 | ) | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive (loss) income for the year, net of tax | | | (30,896 | ) | | | 82,653 | | | | 4,903 | | | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive (loss) income | | $ | (306,083 | ) | | $ | 192,590 | | | $ | 73,039 | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year Ended December 31, | | | | 2010 | | | 2009 | | | 2008 | | Preferred Stock: | | | | | | | | | | | | | Balance at beginning of year | | $ | 928,508 | | | $ | 550,100 | | | $ | 550,100 | | Issuance of preferred stock — Series F | | | — | | | | 400,000 | | | | — | | Preferred stock discount — Series F | | | — | | | | (25,820 | ) | | | — | | Accretion of preferred stock discount — Series F | | | 2,567 | | | | 4,228 | | | | — | | Exchange of preferred stock- Series A through E | | | (487,053 | ) | | | — | | | | — | | Exchange of preferred stock- Series F | | | (400,000 | ) | | | — | | | | — | | Reversal of unaccreted preferred stock discount- Series F | | | 19,025 | | | | — | | | | — | | Issuance of preferred stock — Series G | | | 424,174 | | | | — | | | | — | | Preferred stock discount — Series G | | | (76,788 | ) | | | — | | | | — | | Accretion of preferred stock discount — Series G | | | 14,576 | | | | — | | | | — | | | | | | | | | | | | Balance at end of year | | | 425,009 | | | | 928,508 | | | | 550,100 | | | | | | | | | | | | | Common Stock outstanding: | | | | | | | | | | | | | Balance at beginning of year | | | 6,169 | | | | 6,169 | | | | 92,504 | | Retroactive application of 1-for-15 reverse stock split | | | — | | | | — | | | | (86,337 | ) | Restricted stock grants | | | — | | | | — | | | | 2 | | Change in par value (from $1.00 to $0.10) | | | (5,552 | ) | | | — | | | | — | | Common stock issued in exchange of Series A through E preferred stock | | | 1,513 | | | | — | | | | — | | | | | | | | | | | | Balance at end of year | | | 2,130 | | | | 6,169 | | | | 6,169 | | | | | | | | | | | | | Additional Paid-In-Capital: | | | | | | | | | | | | | Balance at beginning of year | | | 220,596 | | | | 194,676 | | | | 108,279 | | Retroactive application of 1-for-15 reverse stock split | | | — | | | | — | | | | 86,337 | | Issuance of common stock warrants | | | — | | | | 25,820 | | | | — | | Shares issued under stock option plan | | | — | | | | — | | | | 53 | | Restricted stock grants | | | — | | | | — | | | | (2 | ) | Stock-based compensation recognized | | | 93 | | | | 92 | | | | 9 | | Fair value adjustment on amended common stock warrant | | | 1,179 | | | | — | | | | — | | Common stock issued in exchange of Series A through E preferred stock | | | 89,293 | | | | — | | | | — | | Issuance costs of common stock issued in exchange of Series A through E preferred stock | | | (8,115 | ) | | | — | | | | — | | Reversal of issuance costs of Series A through E preferred stock exchanged | | | 10,861 | | | | — | | | | — | | Change in par value (from $1.00 to $0.10) | | | 5,552 | | | | — | | | | — | | Other | | | — | | | | 8 | | | | — | | | | | | | | | | | | Balance at end of year | | | 319,459 | | | | 220,596 | | | | 194,676 | | | | | | | | | | | | | Legal Surplus: | | | | | | | | | | | | | Balance at beginning of year | | | 299,006 | | | | 299,006 | | | | 286,049 | | Transfer from retained earnings | | | — | | | | — | | | | 12,957 | | | | | | | | | | | | Balance at end of year | | | 299,006 | | | | 299,006 | | | | 299,006 | | | (Accumulated Deficit) Retained Earnings: | | | | | | | | | | | | | Balance at beginning of year | | | 118,291 | | | | 440,777 | | | | 409,978 | | Net (loss) income | | | (524,308 | ) | | | (275,187 | ) | | | 109,937 | | Cash dividends declared on common stock | | | — | | | | (12,965 | ) | | | (25,905 | ) | Cash dividends declared on preferred stock | | | — | | | | (30,106 | ) | | | (40,276 | ) | Accretion of preferred stock discount — Series F | | | (2,567 | ) | | | (4,228 | ) | | | — | | Transfer to legal surplus | | | — | | | | — | | | | (12,957 | ) | Stock dividend granted of Series F preferred stock | | | (24,174 | ) | | | — | | | | — | | Reversal of unacreeted discount- Series F | | | (19,025 | ) | | | — | | | | — | | Preferred Stock discount- Series G | | | 76,788 | | | | — | | | | — | | Fair value adjustment on amended common stock warrant | | | (1,179 | ) | | | — | | | | — | | Excess of carrying amount of Series A though E preferred stock exchanged over fair value of new shares of common stock | | | 385,387 | | | | — | | | | — | | Accretion of preferred stock discount — Series G | | | (14,576 | ) | | | — | | | | — | | | | | | | | | | | | Balance at end of year | | | (5,363 | ) | | | 118,291 | | | | 440,777 | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated Other Comprehensive Income (Loss), net of tax: | | | | | | | | | | | | | Balance at beginning of year | | | 26,493 | | | | 57,389 | | | | (25,264 | ) | Other comprehensive (loss) income, net of tax | | | (8,775 | ) | | | (30,896 | ) | | | 82,653 | | | | | | | | | | | | Balance at end of year | | | 17,718 | | | | 26,493 | | | | 57,389 | | | | | | | | | | | | | Total stockholders’equity | | $ | 1,057,959 | | | $ | 1,599,063 | | | $ | 1,548,117 | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. F-8
FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2010 | | | 2009 | | | 2008 | | | | (In thousands) | | Net (loss) income | | $ | (524,308 | ) | | $ | (275,187 | ) | | $ | 109,937 | | | | | | | | | | | | Unrealized losses on available-for-sale debt securities on which an other-than-temporary impairment has been recognized: | | | | | | | | | | | | | Noncredit-related impairment portion on debt securities not expected to be sold | | | (582 | ) | | | (31,742 | ) | | | — | | Reclassification adjustment for other-than-temporary impairment on debt securities included in net income | | | 582 | | | | 1,270 | | | | — | | | All other unrealized gains and losses on available-for-sale securities: | | | | | | | | | | | | | All other unrealized holding gains arising during the period | | | 85,276 | | | | 85,871 | | | | 95,316 | | Reclassification adjustments for net gain included in net income | | | (93,681 | ) | | | (82,772 | ) | | | (17,706 | ) | Reclassification adjustments for other-than-temporary impairment on equity securities | | | 353 | | | | 388 | | | | 5,987 | | | Income tax expense related to items of other comprehensive income | | | (723 | ) | | | (3,911 | ) | | | (944 | ) | | | | | | | | | | | | Other comprehensive (loss) income for the year, net of tax | | | (8,775 | ) | | | (30,896 | ) | | | 82,653 | | | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive (loss) income | | $ | (533,083 | ) | | $ | (306,083 | ) | | $ | 192,590 | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. F-9
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 — Nature of Business and Summary of Significant Accounting Policies The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The following is a description of First BanCorp’s (“First BanCorp” or “the Corporation”) most significant policies: Nature of business First BanCorp is a publicly-owned, Puerto Rico-chartered financial holding company that is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System.System (the “FED” or “Federal Reserve”). The Corporation is a full service provider of financial services and products with operations in Puerto Rico, the United States and the U.S. and British Virgin Islands. The Corporation provides a wide range of financial services for retail, commercial and institutional clients. As of December 31, 2009,2010, the Corporation controlled threetwo wholly-owned subsidiaries: FirstBank Puerto Rico (“FirstBank” or the “Bank”), and FirstBank Insurance Agency, Inc.(“FirstBank Insurance Agency”) and Grupo Empresas de Servicios Financieros (d/b/a “PR Finance Group”). FirstBank is a Puerto Rico-chartered commercial bank, and FirstBank Insurance Agency is a Puerto Rico-chartered insurance agency and PR Finance Group is a domestic corporation.agency. FirstBank is subject to the supervision, examination and regulation of both the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF”) and the Federal Deposit Insurance Corporation (the “FDIC”). Deposits are insured through the FDIC Deposit Insurance Fund. FirstBank also operates in the state of Florida, (USA), subject to regulation and examination by the Florida Office of Financial Regulation and the FDIC, in the U.S. Virgin Islands, subject to regulation and examination by the United States Virgin Islands Banking Board, and in the British Virgin Islands, subject to regulation by the British Virgin Islands Financial Services Commission. FirstBank Insurance Agency is subject to the supervision, examination and regulation byof the Office of the Insurance Commissioner of the Commonwealth of Puerto Rico. PR Finance Group is subject to the supervision, examination and regulation of the OCIF. FirstBank conducted its business through its main office located in San Juan, Puerto Rico, forty-eight full service banking branches in Puerto Rico, sixteenfourteen branches in the United States Virgin Islands (USVI) and British Virgin Islands (BVI) and ten branches in the state of Florida (USA). FirstBank had sixfive wholly-owned subsidiaries with operations in Puerto Rico: First Leasing and Rental Corporation, a vehicle leasing company with two offices in Puerto Rico; First Federal Finance Corp. (d/b/a Money Express La Financiera), a finance company specializing in the origination of small loans with twenty-seventwenty-six offices in Puerto Rico; First Mortgage, Inc. (“First Mortgage”), a residential mortgage loan origination company with thirty-eight offices in FirstBank branches and at stand alone sites; First Management of Puerto Rico, a domestic corporation; FirstBank Puerto Rico Securities Corp, a broker-dealer subsidiary created in March 2009 and engaged in municipal bond underwriting and financial advisory services on structured financings principally provided to government entities in the Commonwealth of Puerto Rico; and FirstBank Overseas Corporation, an international banking entity organized under the International Banking Entity Act of Puerto Rico. FirstBank had three subsidiaries with operations outside of Puerto Rico: First Insurance Agency VI, Inc., an insurance agency with three offices that sells insurance products in the USVI; First Express, a finance company specializing in the origination of small loans with three offices in the USVI; and First Trade, Inc., which is inactive. On March 2, 2011 the Bank sold substantially all the assets of its Virgin Islands insurance subsidiary, First Insurance Agency VI, to Marshall and Sterling Insurance. Capital and Liquidity The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. Sustained weak economic conditions that have severely affected Puerto Rico and the United States over the last several years have adversely impacted First BanCorp’s and FirstBank’s results of operations and capital levels. The significant loss in 2010, primarily related to credit losses (including losses associated with adversely classified loans and non-performing loans transferred to held for sale), the increase in the deposit insurance premium expense and increases to the deferred tax asset valuation allowance continued to reduce the Corporation’s and the Bank’s capital levels during 2010. As of December 31, 2010, the Corporation’s Total Capital, Tier 1 Capital and Leverage ratios were 12.02%, 10.73% and 7.57%, respectively, down from 13.44%, 12.16% and 8.91%, respectively, as of December 31, 2009. Meanwhile, FirstBank’s Total Capital, Tier 1 Capital and Leverage ratios as of December 31, 2010 were 11.57%, 10.28% and 7.25%, respectively, down from 12.87%, 11.70% and 8.53%, respectively, as of December 31, 2009. F-9F-10
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As described in Note 21, Regulatory Matters, FirstBank is currently operating under a Consent Order ( the “FDIC Order”) with the FDIC and the OCIF and First BanCorp has entered into a Written Agreement (the “Written Agreement” and collectively with the Order the “Agreements”) with the Federal Reserve. The minimum capital ratios established by the FDIC Order for FirstBank are 8% for Leverage (Tier 1 Capital to Average Total Assets), 10% for Tier 1 Capital to Risk-Weighted Assets and 12% for Total Capital to Risk-Weighted Assets. The FDIC Order does not contain a specific date for achieving the minimum capital ratios. The Corporation submitted a Capital Plan to the FED and the FDIC in July 2010. The primary objective of this Capital Plan was to improve the Corporation’s capital structure in order to 1) enhance its ability to operate in the current economic environment, 2) be in a position to continue executing business strategies and return to profitability and 3) achieve certain minimum capital ratios set forth in the FDIC Order over time. The Corporation’s Capital Plan identified specific targeted Leverage, Tier 1 Capital to Risk-Weighted Assets and Total Capital to Risk-Weighted Assets ratios to be achieved by the Bank each calendar quarter until the capital levels required under the FDIC Order are achieved. In December, the Corporation agreed with the regulators to submit an updated Capital Plan (the “Updated Capital Plan”), as soon as the 2010 year-end financial results closing was completed, to incorporate the effect of the loan sale transaction (further discussed below-“reduction in construction loans”). The Updated Capital Plan was submitted to regulators in March 2011 as explained below. Although all of the regulatory capital ratios exceeded the minimum capital ratios for “well-capitalized” levels as of December 31, 2010, FirstBank cannot be treated as a “well capitalized” institution under regulatory guidance, while operating under the FDIC Order. The July 2010 Capital Plan sets forth the following capital restructuring initiatives as well as various deleveraging strategies: | 1. | | The issuance of shares of the Corporation’s common stock in exchange for the preferred stock held by the U.S. Treasury; | | | 2. | | The issuance of shares of the Corporation’s common stock in exchange for any and all of the Corporation’s outstanding Series A through E Preferred Stock; and | | | 3. | | A $500 million capital raise through the issuance of new common shares for cash. |
During 2010, the Corporation executed the following transactions as part of the implementation of its Capital Plan: | • | | On July 20, 2010, the Corporation issued $424.2 million Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series G (the “Series G Preferred Stock”), in exchange of the $400 million of Fixed Rate Cumulative Perpetual Preferred Stock, Series F (the “Series F Preferred Stock”), that the U.S. Treasury had acquired pursuant to the TARP Capital Purchase Program, and dividends accrued on such stock. Under the terms of the new Series G Preferred Stock, the Corporation obtained a right to compel the conversion of the Series G Preferred Stock into shares of the Corporation’s common stock, provided that the Corporation meets a number of conditions, including the raising of equity capital in an amount acceptable to the US Treasury. The Corporation’s conversion right expired on April 7, 2011. The Corporation and the U.S. Treasury agreed on April 11, 2011 to extend the conversion right to October 7, 2011. | | | • | | On August 30, 2010, the Corporation completed its offer to issue shares of its common stock in exchange for its outstanding Series A through E Preferred Stock (the “Exchange Offer”), which resulted in the issuance of 15,134,347 new shares of common stock in exchange for 19,482,128 shares of preferred stock with an aggregate liquidation amount of $487 million, or 89% of the outstanding Series A through E preferred stock. | | | • | | On August 24, 2010, the Corporation obtained stockholders’ approval to increase the number of authorized shares of common stock from 750 million to 2 billion and decrease the par value of its common stock from $1.00 to $0.10 per share. |
These approvals and the issuance of common stock in exchange for Series A through E Preferred Stock satisfy all but one of the substantive conditions to the Corporation’s ability to compel the conversion of the U.S. Treasury’s 424,174 shares of the new Series G Preferred Stock. The other substantive condition to the Corporation’s ability to compel the conversion of the Series G Preferred Stock is the issuance of a minimum amount of additional capital, subject to terms, other than the price per share, reasonably acceptable to the U.S. Treasury in its sole discretion. During the fourth quarter of 2010, the U.S. Treasury agreed to a reduction in the amount of the capital raise required to satisfy the remaining substantive condition to compel the conversion of the Series G Preferred Stock into shares of common stock from the $500 million identified in the Capital Plan submitted to regulators in July 2010 to $350 million. The first two initiatives of the Capital Plan were designed to improve the Corporation’s tangible common equity and Tier 1 common to risk-weighted assets ratios, thus improving the Corporation’s ability to raise additional capital through a sale of its common stock, which is the last component of the Capital Plan. The completion of the Exchange Offer and the issuance of the Series G Preferred Stock to the U.S. Treasury resulted in improvements to the Corporation’s Tangible and Tier 1 common equity ratios to 3.80% and 5.01%, respectively, as of December 31, 2010, from 3.20% and 4.10%, respectively, as of December 31, 2009. The capital transactions completed during the third quarter of 2010 are further discussed in Note 23. F-11
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) During 2010, the Corporation also executed balance sheet repositioning strategies in order to strengthen its capital, ratios, including: | • | | Reduction in the size of the loan portfolio— During 2010, the total loan portfolio decreased by $2.0 billion largely attributable to repayments and non-renewals of commercial loans with moderate to high risk weightings, such as credit facilities extended to the Puerto Rico government and/or political subdivisions, coupled with charge-offs of portions of loans deemed uncollectible or transferred to held for sale, and the sale of performing and non-performing loans during 2010. In addition, a reduced volume of loan originations contributed to this deleveraging strategy. | | | • | | Reduction in construction loan portfolio- In order to improve- its risk profile, the Corporation entered into an agreement to sell loans and transferred during the fourth quarter of 2010 loans with an unpaid principal balance of $527 million and a book value of $447 million to held for sale. This transfer resulted in a loss of $102.9 million, which adversely affected the regulatory capital ratios, but the subsequent sale of substantially all of these loans on February 16, 2011 accelerated the reduction of the balance sheet and improved the Corporation’s risk profile by reducing the level of classified and non-performing assets and the concentration of construction and commercial mortgage loans, which have been the major cause for the Corporation’s higher loan losses over the past two years. | | | • | | Sale of investment securities— Total investment securities decreased by $1.6 billion during 2010 driven by sales of $2.3 billion, mainly of U.S. agency mortgage-backed securities (“MBS”), including a transaction in which the Corporation sold $1.2 billion of MBS, combined with the early extinguishment of $1.0 billion of repurchase agreements as part of the Corporation’s balance sheet repositioning strategies. |
The Corporation is working to complete a capital raise to ensure that the projected level of regulatory capital can support its balance sheet over the long-term. As part of the Corporation’s capital raising efforts, the Corporation has been engaged in conversations with a number of entities, including private equity firms. The issuance of additional equity securities in the public markets and other capital management or business strategies could depress the market price of our common stock and result in the dilution of our common stockholders. In March 2011, the Corporation submitted the Updated Capital Plan to the regulators. The Updated Capital Plan contemplates the $350 million capital raise through the issuance of new common shares for cash, and other actions to further reduce the Corporation’s and the Bank’s risk-weighted assets, strengthen their capital positions and meet the minimum capital ratios required for the Bank under the FDIC Order. Among the strategies contemplated in the Updated Capital Plan are further reduction of the Corporation’s loan portfolio and investment portfolio. The Bank expects to be in compliance with the minimum capital ratios under the FDIC Order by June 30, 2011. If the Bank fails to achieve the capital ratios as provided in the FDIC Order, within 45 days of being out of compliance, the Bank would be required to increase capital in an amount sufficient to comply with the capital ratios set forth in the approved Capital Plan, or submit to the regulators a contingency plan for the sale, merger, or liquidation of the institution in the event the primary sources of capital are not available. Thereafter the FDIC would determine whether and when to initiate an acceptable contingency plan. Should the Corporation’s efforts to raise capital not be completed, the Corporation’s Updated Capital Plan includes other actions which could allow the Bank to attain the minimum capital ratios under the FDIC Order. The strategies incorporated into the Updated Capital Plan to meet the minimum capital ratios include the following: Strategies completed during the first quarter of 2011: | • | | Sale of performing first lien residential mortgage loans — The Bank sold approximately $235 million in mortgage loans to another financial institution during February 2011. Proceeds were used to reduce funding sources. | | | • | | Sale of investment securities — The Bank sold approximately $326 million in investment securities during March 2011. Proceeds were used, in part, to reduce funding and to support liquidity reserves. | | | • | | The Corporation contributed $22 million of capital to the Bank during March 2011. |
Strategies completed or expected to be completed by June 30, 2011: | • | | Sale of investment securities — The Bank sold approximately $268 million in investment securities on April 8, 2011. | | | • | | Sale of performing first lien residential mortgage loans- The Bank has entered into a letter of intent to sell approximately $250 million in mortgage loans to another financial institution before June 30, 2011. |
F-12
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | • | | Sale of participation in commercial loans — The Bank has commenced negotiations to sell approximately $150 million in loan participations to other financial institutions by June 30, 2011. | | | • | | The proceeds received from the above three transactions will be used to reduce funding sources. | | | • | | Non-renewal of maturing government credit facilities of approximately $110 million by June 30, 2011. |
Upon the successful completion of these actions, when combined with the achievement of operating results in line with management’s current expectations, management expects that the Corporation and the Bank will attain the minimum capital ratios set forth in the Updated Capital Plan. However, no assurance can be given that the Corporation and the Bank will be able to achieve this. In the event the Corporation is unable to complete its capital raising efforts during 2011 and actual credit losses exceed amounts projected, the Updated Capital Plan includes additional actions designed to allow the Bank to maintain the minimum capital ratios for the foreseeable future, including the sale of additional assets. Both the Corporation and the Bank actively manage liquidity and cash flow needs. The Corporation does not have any unsecured debt, other than brokered certificates of deposit (“CDs”), maturing during 2011; additionally, it suspended common and preferred dividends to stockholders effective August 2009. As of December 31, 2010, the holding company had $42.4 million of cash and cash equivalents. Cash and cash equivalents at the Bank as of December 31, 2010 were approximately $370.3 million. The Bank has $100 million, $286 million and $7.7 million, in repurchase agreements, FHLB advances and notes payable, respectively, maturing in 2011. In addition, it had $6.3 billion in brokered CDs as of December 31, 2010, of which $3.0 billion mature during 2011. Liquidity at the Bank level is highly dependent on bank deposits, which fund 77.71% of the Bank’s assets (or 37.55% excluding brokered CDs). The Corporation has continued to issue brokered CDs pursuant to approvals received from the FDIC to renew or roll over certain amounts of brokered CDs through June 30, 2011. Management cannot be certain it will continue to obtain waivers from the restrictions to issue brokered CDs under the FDIC Order to meet its obligations and execute its business plans. As of December 31, 2010, the Bank held approximately $895 million of readily pledgeable or sellable investment securities. As previously noted above, the Bank plans to sell certain loans and investments in 2011 that would allow it to meet and maintain minimum capital ratios required by the FDIC Order. Based on current and expected liquidity needs and sources, management expects First BanCorp to be able to meet its obligations for a reasonable period of time. During 2010, the Corporation and the Bank suffered credit downgrades. The Corporation does not have any outstanding debt or derivative agreements that would be affected by the credit downgrades. Furthermore, given our non-reliance on corporate debt or other instruments directly linked in terms of pricing or volume to credit ratings, the liquidity of the Corporation so far has not been affected in any material way by the downgrades. The Corporation’s ability to access new non-deposit funding, however, could be adversely affected by these credit ratings and any additional downgrades. If unanticipated market factors emerge, such as a significant increase in the provision for loan and lease losses, or if the Corporation is unable to raise additional capital or complete identified capital preservation initiatives, successfully execute its strategic operating plans, issue a sufficient amount of brokered CDs or comply with the FDIC Order, its banking regulators could take further action, which could include actions that may have a material adverse effect on the Bank’s business, results of operations and financial position, including the appointment of a conservator or receiver. Principles of consolidation The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Statutory business trusts that are wholly-owned by the Corporation and are issuers of trust preferred securities are not consolidated in the Corporation’s consolidated financial statements in accordance with authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) for consolidation of variable interest entities. Reclassifications For purposes of comparability, certain prior period amounts have been reclassified to conform to the 20092010 presentation. All share and per share amounts of common shares included in the consolidated financial statements have been adjusted to retroactively reflect the 1-for-15 reverse stock split effected January 7, 2011. Refer to Note 23 for additional information. F-13
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and short-term investments with original maturities of three months or less. Securities purchased under agreements to resell The Corporation purchases securities under agreements to resell the same securities. The counterparty retains control over the securities acquired. Accordingly, amounts advanced under these agreements represent short-term loans and are reflected as assets in the statements of financial condition. The Corporation monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral when deemed appropriate. As of December 31, 20092010 and 2008,2009, there were no securities purchased under agreements to resell outstanding. Investment securities The Corporation classifies its investments in debt and equity securities into one of four categories: Held-to-maturity— Securities which the entity has the intent and ability to hold to maturity. These securities are carried at amortized cost. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold other debt securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has occurred. Trading— Securities that are bought and held principally for the purpose of selling them in the near term. These securities are carried at fair value, with unrealized gains and losses reported in earnings. As of December 31, 20092010 and 2008,2009, the Corporation did not hold investment securities for trading purposes. Available-for-sale— Securities not classified as held-to-maturityheld to maturity or trading. These securities are carried at fair value, with unrealized holding gains and losses, net of deferred tax, reported in other comprehensive income as a separate component of stockholders’ equity and do not affect earnings until realized or are deemed to be other-than-temporarily impaired. Other equity securities— Equity securities that do not have readily available fair values are classified as other equity securities in the consolidated statements of financial condition. These securities are stated at the lower of F-10
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
cost or realizable value. This category is principally composed of stock that is owned by the Corporation to comply with Federal Home Loan Bank (FHLB) regulatory requirements. Their realizable value equals their cost. Premiums and discounts on investment securities are amortized as an adjustment to interest income on investments over the life of the related securities under the interest method. Net realized gains and losses and valuation adjustments considered other-than-temporary, if any, related to investment securities are determined using the specific identification method and are reported in non-interest income as net gain (loss) on sale of investments and net impairment losses on investment securities.securities, respectively. Purchases and sales of securities are recognized on a trade-date basis. Evaluation of other-than-temporary impairment (“OTTI”) on held-to-maturity and available-for-sale securities On a quarterly basis, the Corporation performs an assessment to determine whether there have been any events or circumstances indicating that a security with an unrealized loss has suffered OTTI. A security is considered impaired if the fair value is less than its amortized cost basis. The Corporation evaluates if the impairment is other-than-temporary depending upon whether the portfolio isconsists of fixed income securities or equity securities as further described below. The Corporation employs a systematic methodology that considers all available evidence in evaluating a potential impairment of its investments. F-14
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The impairment analysis of fixed income securities places special emphasis on the analysis of the cash position of the issuer and its cash and capital generation capacity, which could increase or diminish the issuer’s ability to repay its bond obligations, the length of time and the extent to which the fair value has been less than the amortized cost basis and changes in the near-term prospects of the underlying collateral, if applicable, such as changes in default rates, loss severity given default and significant changes in prepayment assumptions. In light of current volatile economic and financial market conditions, theThe Corporation also takes into consideration the latest information available about the overall financial condition of an 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. In April 2009, the FASB amended the OTTI model for debt securities. OTTI losses are recognized in earnings if the Corporation 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 the Corporation does not expect to sell a debt security, expected cash flows to be received are evaluated to 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 is recorded as a component of Net impairment losses on investment securities in the statements of (loss) income, while the remaining portion of the impairment loss is recognized in other comprehensive income, net of taxes. The previous amortized cost basis less the OTTI recognized in earnings is the new amortized cost basis of the investment. The new amortized cost basis is not adjusted for subsequent recoveries in fair value. However, for debt securities for which OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected is accreted as interest income. For further disclosures, refer to Note 4 to the consolidated financial statements. Prior to April 1, 2009, an unrealized loss was considered other-than-temporary and recorded in earnings if (i) it was probable that the holder would not collect all amounts due according to the contractual terms of the debt security, or (ii) the fair value was below the amortized cost of the security for a prolonged period of time and the Corporation did not have the positive intent and ability to hold the security until recovery or maturity. The impairment model for equity securities was not affected by the aforementioned FASB amendment. The impairment analysis of equity securities is performed and reviewed on an ongoing basis based on the latest financial information and any supporting research report made by a major brokerage firm. This analysis is very subjective and based, among other things, on relevant financial data such as capitalization, cash flow, liquidity, systematic risk, and debt outstanding of the issuer. Management also considers the issuer’s industry trends, the historical performance of the stock, credit ratings as well as the Corporation’s intent to hold the security for an extended period. If management believes there is a low probability of recovering book value in a reasonable time frame, then an impairment will be recorded by writing the security down to market value. As previously mentioned, equity securities are monitored on an ongoing basis but special attention is given to those securities that have experienced a decline in fair value for six months or more. An impairment charge is generally recognized when the fair value of an equity security has remained significantly below cost for a period of twelve consecutive months or more. F-11
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Loans Loans are stated at the principal outstanding balance, net of unearned interest, unamortized deferred origination fees and costs and unamortized premiums and discounts. Fees collected and costs incurred in the origination of new loans are deferred and amortized using the interest method or a method which approximates the interest method over the term of the loan as an adjustment to interest yield. Unearned interest on certain personal, auto loans and finance leases is recognized as income under a method which approximates the interest method. When a loan is paid off or sold, any unamortized net deferred fee (cost) is credited (charged) to income. Classes are usually disaggregations of a portfolio. For allowance for loan and lease losses purposes, the Corporation’s portfolios are: Commercial Mortgage, Construction, Commercial and Industrial, Residential Mortgages, and Consumer loans. The classes within the Residential Mortgage are residential mortgages guaranteed by government organization and other loans. The classes within the Consumer portfolio are: auto, finance leases and other consumer loans. Other consumer loans mainly include unsecured personal loans, home equity lines, lines of credits, and marine financing. The Construction, Commercial Mortgage and Commercial and Industrial are not further segmented into classes. Non-Performing and Past Due Loans— Loans on which the recognition of interest income has been discontinued are designated as non-accruing. When loans are placed on non-accruing status, any accrued but uncollected interest income is reversed and charged against interest income. Consumer, construction, commercial and mortgage loansnon-performing. Loans are classified as non-accruingnon-performing when interest and principal have not been received for a period of 90 days or more, orwith the exception of FHA/VA and other guaranteed residential mortgages which continue to accrue interest. Any loan in any portfolio may be placed on non-performing status prior to the policies describe above when there are doubts about the potential to collect all of the principal based on collateral deficiencies or, in other situations, when collection of all of the principal or interest is not expected due to deterioration in the financial condition of the borrower. For all classes within the loan portfolios, when a loan is F-15
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) placed on non-performing status, any accrued but uncollected interest income is reversed and charged against interest income. Interest income on non-accruingnon-performing loans is recognized only to the extent it is received in cash. However, where there is doubt regarding the ultimate collectability of loan principal, all cash thereafter received is applied to reduce the carrying value of such loans (i.e., the cost recovery method). Loans are restored to accrual status only when future payments of interest and principal are reasonably assured. Loan and lease losses are charged and recoveries are credited to the allowance forImpaired Loans— A loan and lease losses. Closed-end personal consumer loans are charged-off when payments are 120 days in arrears. Collateralized auto and finance leases are reserved at 120 days delinquent and charged-off to their estimated net realizable value when collateral deficiency is deemed uncollectible (i.e. when foreclosure is probable). Open-end (revolving credit) consumer loans are charged-off when payments are 180 days in arrears. A loanany class is considered impaired when, based upon current information and events, it is probable that the Corporation will be unable to collect all amounts due (including principal and interest) according to the contractual terms of the loan agreement. The Corporation measures impairment individually for those commercialloans in the Construction, Commercial Mortgage and construction loansCommercial and Industrial portfolios with a principal balance of $1 million or more, including loans for which a charge-off has been recorded based upon the fair value of the underlying collateral, andcollateral. The Corporation also evaluates for impairment purposes certain residential mortgage loans and home equity lines of credit with high delinquency and loan-to-value levels. Interest incomeGenerally, consumer loans within any class are not individually evaluated on a regular basis for impairment except for impaired marine financing loans is recognized based on the Corporation’s policy for recognizing interest on accrualover $1 million and non-accrual loans.home equity lines with high delinquency and loan-to-value levels.
Impaired loans also include loans that have been modified in troubled debt restructurings (“TDRs”) as a concession to borrowers experiencing financial difficulties. Troubled debt restructurings typically result from the Corporation’s loss mitigation activities or programs sponsored by the Federal Government and could include rate reductions, principal forgiveness, forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. Troubled debt restructurings are generally reported as non-performing loans and restored to accrual status when there is a reasonable assurance of repayment and the borrower has made payments over a sustained period, generally six months. However, a loan that has been formally restructured as to be reasonably assured of repayment and of performance according to its modified terms is not placed in non-accruingnon-performing status, provided the restructuring is supported by a current, well documented credit evaluation of the borrower’s financial condition taking into consideration sustained historical payment performance for a reasonable time prior to the restructuring. Interest income on impaired loans in any class is recognized based on the Corporation’s policy for recognizing interest on accrual and non-accrual loans. Loans that are past due 30 days or more as to principal or interest are considered delinquent, with the exception of the residential mortgage, commercial mortgage and construction portfolios that are considered past due when the borrower is in arrears 2 or more monthly payments. Charge-off of Uncollectible Loans —Loan and lease losses are charged-off and recoveries are credited to the allowance for loan and lease losses. Collateral dependent loans in the Construction, Commercial Mortgage and Commercial and Industrial loan portfolios are charged-off to their fair value when loans are considered impaired. Within the consumer loan portfolio, loans in the auto and finance leases classes are reserved at 120 days delinquent and charged-off to their estimated net realizable value when collateral deficiency is deemed uncollectible (i.e. when foreclosure is probable). Within the other consumer loans class, closed-end loans are charged-off when payments are 120 days in arrears and open-end (revolving credit) consumer loans are charged-off when payments are 180 days in arrears. Residential mortgage loans that are 120 days delinquent and with a loan to value higher than 60% are charged-off to its fair value. Any loan in any portfolio may be charged-off or written down to the fair value of the collateral prior to the policies described above if a loss confirming event occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Loans held for sale Loans held for sale are stated at the lower-of-cost-or-market. The amount by which cost exceeds market value in the aggregate portfolio of loans held for sale, if any, is accounted for as a valuation allowance with changes therein included in the determination of net income. Allowance for loan and lease losses The Corporation maintains the allowance for loan and lease losses at a level considered adequate to absorb losses currently inherent in the loan and lease portfolio. The allowance for loan and lease losses provides for probable losses that have been identified with specific valuation allowances for individually evaluated impaired loans and for probable losses believed to be inherent in the loan portfolio that have not been specifically identified. The determination of the allowance for loan and lease losses requires significant estimates, including the timing and amounts of expected future cash flows on impaired loans, consideration of current economic conditions, and historical loss experience pertaining to the portfolios and pools of homogeneous loans, all of which may be susceptible to change. F-16
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The adequacy of the allowance for loan and lease losses is based on judgments related to the credit quality of the loan portfolio. These judgments consider on-going evaluations of the loan portfolio, including such factors as the economic risks associated to each loan class, the financial condition of specific borrowers, the level of delinquent loans, the value of nay collateral and, where applicable, the existence of any guarantees or other documented support. In addition, to the general economic conditions and other factors described above, additional factors also considered include: the impact of changes in the residential real estate value and the internal risk ratings assigned to the loan. Internal risk ratings are assigned to each business loan at the time of approval and are subject to subsequent periodic reviews by F-12
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Corporation’s senior management. The allowance for loan and lease losses is reviewed on a quarterly basis as part of the Corporation’s continued evaluation of its asset quality. The allowance for loan and lease losses is increased through a provision for credit losses that is charged to earnings, based on the quarterly evaluation of the factors previously mentioned, and is reduced by charge-offs, net of recoveries. The allowance for loan and lease losses consists of specific reserves related to specific valuations for loans considered to be impaired and general reserves. A specific valuation allowance is established for those commercialloans in the Commercial Mortgage, Construction and real estate loansCommercial and Industrial and Residential Mortgage loan portfolios classified as impaired, primarily when the collateral value of the loan (if the impaired loan is determined to be collateral dependent) or the present value of the expected future cash flows discounted at the loan’s effective rate is lower than the carrying amount of that loan. To compute theThe specific valuation allowance is computed on commercial mortgage, construction, commercial and industrial, and real estate including residential mortgage loans with aindividual principal balancebalances of $1 million or more, TDRs which are individually evaluated, individually as well as smaller residential mortgage loans and home equity lines of credit considered impaired based on their high delinquency and loan-to-value levels. When foreclosure is probable, the impairment measure is measured based on the fair value of the collateral. The fair value of the collateral is generally obtained from appraisals. Updated appraisals are obtained when the Corporation determines that loans are impaired and are generally updated annually thereafter. In addition, appraisals and/or broker price opinions are also obtained for certain residential mortgage loans on a spot basis based on specific characteristics such as delinquency levels, age of the appraisal, and loan-to-value ratios. Deficiencies from theThe excess of the recorded investment in collateral dependent loans over the resulting fair value of the collateral areis charged-off when deemed uncollectible. For residential mortgage loans, since the second quarter of 2010, the determination of reserves included the incorporation of updated loss factors applicable to loans expected to liquidate over the next twelve months considering the expected realization of similar asset values at disposition. For all other loans, which include, small, homogeneous loans, such as auto loans, consumerall classes in the Consumer loans finance lease loans,portfolio, residential mortgages in amounts under $1 million, and commercial and construction loans not considered impaired, or in amounts under $1 million, the Corporation maintains a general valuation allowance. The methodology to computerisk category of these loans is based on the general valuation allowance has not change indelinquency and the past 2 years. The Corporation updates the factors used to compute the reserve factors on a quarterly basis. The general reserve is primarily determined by applying loss factors according to the loan type and assigned risk category (pass, special mention and substandard not impaired; all doubtful loans are considered impaired). The general reserve for consumer loans is based on factors such as delinquency trends, credit bureau score bands, portfolio type, geographical location, bankruptcy trends, recent market transactions, collateral values, and other environmental factors such as economic forecasts. The analysisanalyses of the residential mortgage pools are performed at the individual loan level and then aggregated to determine the expected loss ratio. The model applies risk-adjusted prepayment curves, default curves, and severity curves to each loan in the pool. The severity is affected by the expected house price scenario based on recent house price trends. Default curves are used in the model to determine expected delinquency levels. The risk-adjusted timing of liquidation and associated costs areis used in the model and areis risk-adjusted for the area in which the property is located (Puerto Rico, Florida, or Virgin Islands). For commercial loans, including construction loans, the general reserve is based on historical loss ratios, trends in non-accrual loans, loan type, risk-rating, geographical location, changes in collateral values for collateral dependent loans and gross product or unemploymentmacroeconomic data that correlates to portfolio performance for the geographical region. The methodology of accounting for all probable losses in loans not individually measured for impairment purposes is made in accordance with authoritative accounting guidance that requires that losses be accrued when they are probable of occurring and estimable. Transfers and servicing of financial assets and extinguishment of liabilities After a transfer of financial assets that qualifies for sale accounting, the Corporation derecognizes the financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The transfer of financial assets in which the Corporation surrenders control over the assets is accounted for as a sale to the extent that consideration other than beneficial interests is received in exchange. The criteria that must be met to determine that the control over transferred assets has been surrendered includes:include: (1) the assets must be isolated from creditors of the transferor, (2) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them F-17
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) before their maturity. When the Corporation transfers financial assets and the transfer fails any one of the above criteria, the Corporation is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. Servicing Assets The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or purchased. The Corporation is actively involved in the securitization of pools of FHA-insured and VA-guaranteed mortgages for the issuance of GNMA mortgage-backed securities. Also, certain conventional conforming-loans are sold to FNMA or FHLMC with servicing retained. When the Corporation securitizes or sells F-13
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
mortgage loans, it allocates the cost of the mortgage loans between the mortgage loan pool sold and therecognizes any retained interests,interest, based on their relativeits fair values.value. Servicing assets (“MSRs”) retained in a sale or securitization arise from contractual agreements between the Corporation and investors in mortgage securities and mortgage loans. The value of MSRs is derived from the net positive cash flows associated with the servicing contracts. Under these contracts, the Corporation performs loan servicing functions in exchange for fees and other remuneration. The servicing functions typically include: collecting and remitting loan payments, responding to borrower inquiries, accounting for principal and interest, holding custodial funds for payment of property taxes and insurance premiums, supervising foreclosures and property dispositions, and generally administering the loans. The servicing rights entitle the Corporation to annual servicing fees based on the outstanding principal balance of the mortgage loans and the contractual servicing rate. The servicing fees are credited to income on a monthly basis when collected and recorded as part of mortgage banking activities in the consolidated statements of (loss) income. In addition, the Corporation generally receives other remuneration consisting of mortgagor-contracted fees such as late charges and prepayment penalties, which are credited to income when collected. Considerable judgment is required to determine the fair value of the Corporation’s servicing assets. Unlike highly liquid investments, the market value of servicing assets cannot be readily determined because these assets are not actively traded in securities markets. The initial carrying value of the servicing assets is generally determined based on an allocation of the carrying amount of the loans sold (adjusted for deferred fees and costs related to loan origination activities) and the retained interest (MSRs) based on their relativeits fair value. The fair value of the MSRs is determined based on a combination of market information on trading activity (MSR trades and broker valuations), benchmarking of servicing assets (valuation surveys) and cash flow modeling. The valuation of the Corporation’s MSRs incorporates two sets of assumptions: (1) market derived assumptions for discount rates, servicing costs, escrow earnings rate, floatrates, floating earnings raterates and the cost of funds and (2) market assumptions calibrated to the Company’s loan characteristics and portfolio behavior for escrow balances, delinquencies and foreclosures, late fees, prepayments and prepayment penalties. Once recorded, MSRs are periodically evaluated for impairment. Impairment occurs when the current fair value of the MSRs is less than its carrying value. If MSRs are impaired, the impairment is recognized in current-period earnings and the carrying value of the MSRs is adjusted through a valuation allowance. If the value of the MSRs subsequently increases, the recovery in value is recognized in current period earnings and the carrying value of the MSRs is adjusted through a reduction in the valuation allowance. For purposes of performing the MSR impairment evaluation, the servicing portfolio is stratified on the basis of certain risk characteristics such as region, terms and coupons. An other-than-temporary impairment analysis is prepared to evaluate whether a loss in the value of the MSRs, if any, is other than temporary or not. When the recovery of the value is unlikely in the foreseeable future, a write-down of the MSRs in the stratum to its estimated recoverable value is charged to the valuation allowance. The servicing assets are amortized over the estimated life of the underlying loans based on an income forecast method as a reduction of servicing income. The income forecast method of amortization is based on projected cash flows. A particular periodic amortization is calculated by applying to the carrying amount of the MSRs the ratio of the cash flows projected for the current period to total remaining net MSR forecasted cash flow. Premises and equipment Premises and equipment are carried at cost, net of accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the leases (contractual term plus lease renewals that are “reasonably assured”) or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Costs of renewals and betterments are capitalized. When assets are sold or disposed of, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in earnings. F-18
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Corporation has operating lease agreements primarily associated with the rental of premises to support the branch network or for general office space. Certain of these arrangements are non-cancelable and provide for rent F-14
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
escalation and renewal options. Rent expense on non-cancelable operating leases with scheduled rent increases is recognized on a straight-line basis over the lease term. Other real estate owned (OREO) Other real estate owned, which consists of real estate acquired in settlement of loans, is recorded at the lower of cost (carrying value of the loan) or fair value minus estimated cost to sell the real estate acquired. Subsequent to foreclosure, gains or losses resulting from the sale of these properties and losses recognized on the periodic reevaluations of these properties are credited or charged to income. The cost of maintaining and operating these properties is expensed as incurred. Goodwill and other intangible assets Business combinations are accounted for using the purchase method of accounting. Assets acquired and liabilities assumed are recorded at estimated fair value as of the date of acquisition. After initial recognition, any resulting intangible assets are accounted for as follows: Goodwill The Corporation evaluates goodwill for impairment on an annual basis, generally during the fourth quarter, or more often if events or circumstances indicate there may be an impairment. During 2010, the Corporation determined that it was in its best interest to move the annual evaluation date to an earlier date within the fourth quarter; therefore, the Corporation evaluated goodwill for impairment as of October 1, 2010. The change in date provided room for improvement to the testing structure and coordination and was performed in conjunction with the Corporation’s annual budgeting process. Goodwill impairment testing is performed at the segment (or “reporting unit”) level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. The Corporation’s goodwill is mainly related to the acquisition of FirstBank Florida in 2005. Effective July 1, 2009, the operations conducted by FirstBank Florida as a separate entity were merged with and into FirstBank Puerto Rico. The goodwill impairment analysis is a two-step process. The first step (“Step 1”) involves a comparison of the estimated fair value of the reporting unit (FirstBank Florida) to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired. If the carrying value exceeds the estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of the impairment. The second step (Step(“Step 2”) involves calculating an implied fair value of the goodwill for each reporting unit for which the first step indicated a potential impairment. The implied fair value of goodwill is determined in a manner similar to the calculation of the amount of goodwill in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. In determining the fair value of a reporting unit, andwhich is based on the nature of the business and reporting unit’s current and expected financial performance, the Corporation uses a combination of methods, including market price multiples of comparable companies, as well as a discounted cash flow analysis (“DCF”). The Corporation evaluates the results obtained under each valuation methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and appropriate under the circumstances. F-15
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these evaluations include: | • | | a selection of comparable publicly traded companies, based on the nature of the business, location and size; | | | • | | the discount rate applied to future earnings, based on an estimate of the cost of equity; | | | • | | the potential future earnings of the reporting unit; and | | | • | | the market growth and new business assumptions. |
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FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) the market growth and new business assumptions. For purposes of the market comparable approach, valuation was determined by calculating median price to book value and price to tangible equity multiples of the comparable companies and appliedapplying these multiples to the reporting unit to derive an implied value of equity. For purposes of the DCF analysis approach, the valuation is based on estimated future cash flows. The financial projections used in the DCF analysis for the reporting unit are based on the most recent available (as of the valuation date). The growth assumptions included in these projections are based on management’s expectations of the reporting unit’s financial prospects as well as particular plans for the entity (i.e. restructuring plans). The cost of equity was estimated using the capital asset pricing model (CAPM) using comparable companies, an equity risk premium, the rate of return of a “riskless” asset, and a size premium. The discount rate was estimated to be 14.014.3 percent. The resulting discount rate was analyzed in terms of reasonability given current market conditions. The Corporation conducted its annual evaluation of goodwill during the fourth quarter of 2009. The Step 1 evaluation of goodwill allocated to the Florida reporting unit, which is one level below the United States business segment, indicated potential impairment of goodwill. The Step 1 fair value for the unit under both valuation approaches (market and DCF) was below the carrying amount of its equity book value as of the valuation date (December 31)(October 1), requiring the completion of Step 2. In accordance with accounting standards, the Corporation performed a valuation of all assets and liabilities of the Florida unit, including any recognized and unrecognized intangible assets, to determine the fair value of net assets. To complete Step 2, the Corporation subtracted from the unit’s Step 1 fair value the determined fair value of the net assets to arrive at the implied fair value of goodwill. The results of the Step 2 analysis indicated that the implied fair value of goodwill of $39.3 million exceeded the goodwill carrying value of $27 million, resulting in no goodwill impairment. The analysis of results for Step 2 indicated that the reduction in the fair value of the reporting unit was mainly attributable to the deteriorated fair value of the loan portfolios and not the fair value of the reporting unit as going concern. The discount in the loan portfolios is mainly attributable to market participants’ expected rates of returns, which affected the market discount on the Florida commercial mortgage and residential mortgage portfolios. The fair value of the loan portfolio determined for the Florida reporting unit represented a discount of 22.5%.$113 million.
The reduction in the Florida unit Step 1 fair value was offset by a reduction in the fair value of its net assets, resulting in an implied fair value of goodwill that exceeded the recorded book value of goodwill. If the Step 1 fair value of the Florida unit declines further without a corresponding decrease in the fair value of its net assets or if loan discounts improve without a corresponding increase in the Step 1 fair value, the Corporation may be required to record a goodwill impairment charge. The Corporation engaged a third-party valuator to assist management in the annual evaluation of the Florida unit goodwill (including Step 1 and Step 2), including the valuation of loan portfolios as of the December 31October 1 valuation date. In reaching its conclusion on impairment, management discussed with the valuator the methodologies, assumptions and results supporting the relevant values for the goodwill and determined that they were reasonable. The goodwill impairment evaluation process requires the Corporation to make estimates and assumptions with regards to the fair value of the reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact the Corporation’s results of operations and the profitability of the reporting unit where goodwill is recorded. Goodwill was not impaired as of December 31, 20092010 or 2008,2009, nor was any goodwill written-off due to impairment during 2010, 2009 2008 and 2007. F-16
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2008.
Other Intangibles Definite life intangibles, mainly core deposits, are amortized over their estimated life,lives, generally on a straight-line basis, and are reviewed periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Corporation performed impairment tests for the year ended December 31, 2010 and determined that no impairment was needed to be recognized for other intangible assets. As a result of an impairment evaluation of core deposit intangibles, there was an impairment charge of $4.0 million recorded in 2009 related to core deposits of FirstBank Florida attributable to decreases in the base of acquired core deposits. The Corporation performed impairment tests for the year ended December 31, 2008 and 2007 and determined that no impairment was needed to be recognized for those periods for other intangible assets. For further disclosures, refer to Note 1112 to the consolidated financial statements. Securities sold under agreements to repurchase F-20
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Corporation sells securities under agreements to repurchase the same or similar securities. Generally, similar securities are securities from the same issuer, with identical form and type, similar maturity, identical contractual interest rates, similar assets as collateral and the same aggregate unpaid principal amount. The Corporation retains control over the securities sold under these agreements. Accordingly, these agreements are considered financing transactions and the securities underlying the agreements remain in the asset accounts. The counterparty to certain agreements may have the right to repledge the collateral by contract or custom. Such assets are presented separately in the statements of financial condition as securities pledged to creditors that can be repledged. Income taxes The Corporation uses the asset and liability method for the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. In making such assessment, significant weight is given to evidence that can be objectively verified, including both positive and negative evidence. The authoritative guidance for accounting for income taxes authoritative guidance requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance, and recognizes tax benefits only when deemed probable. Refer to Note 2728 to the consolidated financial statements for additional information. Effective January 1, 2007, the Corporation adopted authoritative guidance issued by the FASB that prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken on income tax returns. Under the authoritative accounting guidance, income tax benefits are recognized and measured upon a two-step model: 1) a tax position must be more likely than not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the benefit recognized in accordance with this model and the tax benefit claimed on a tax return is referred to as an Unrecognized Tax Benefit (“UTB”). The Corporation classifies interest and penalties, if any, related to UTBs as components of income tax expense. Refer to Note 2728 for required disclosures and further information.
F-17
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Treasury stock The Corporation accounts for treasury stock at par value. Under this method, the treasury stock account is increased by the par value of each share of common stock reacquired. Any excess paid per share over the par value is debited to additional paid-in capital for the amount per share that was originally credited. Any remaining excess is charged to retained earnings. Stock-based compensation Compensation cost is recognized in the financial statements for all share-based payments grants. Between 1997 and 2007, the Corporation had a stock option plan (“the 1997 stock option plan”) covering eligible employees. The Corporation accounted for stock options usingOn January 21, 2007, the “modified prospective” method. Under the modified prospective method, compensation cost is recognized in the financial statements for all share-based payments granted after January 1, 2006. The 1997 stock option plan expired in the first quarter of 2007;expired; all outstanding awards grants under this plan continue to be 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. 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. On December 1, 2008, the Corporation granted 36, 2432,412 shares of restricted stock under the Omnibus Plan to the Corporation’s independent directors.directors, of which 268 were forfeited in 2009. Shares of restricted stock are measured based on the fair market values of the underlying stock at the grant dates. The restrictions on such restricted stock award will lapse ratably on an annual basis over a three-year period.period and 1,424 shares of restricted stock have vested as of December 31, 2010. 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. 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 F-21
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) expense previously recognized on the forfeited awards is reversed in the period of the forfeiture. For additional information regarding the Corporation’s equity-based compensation refer to Note 22. Comprehensive income Comprehensive income for First BanCorp includes net income and the unrealized gain (loss) on available-for-sale securities, net of estimated tax effect. Segment Information The Corporation reports financial and descriptive information about its reportable segments (see Note 33)34). Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. The Corporation’s management determined that the segregation that best fulfills the segment definition described above is by lines of business for its operations in Puerto Rico, the Corporation’s principal market, and by geographic areas for its operations outside of Puerto Rico. Starting in the fourth quarterAs of 2009,December 31, 2010, the Corporation has realigned its reporting segments to better reflect how it views and manages its business. Two additional operating segments were created to evaluate the operations conducted by the Corporation, outside of Puerto Rico. Operations conducted in the United States and in the Virgin Islands are now individually evaluated as separate operating segments. This realignment in the segment reporting essentially reflects the effect of restructuring initiatives, including the merger of FirstBank Florida operations with and into FirstBank, and will allow the Corporation to better present the results from its growth focus. Prior to 2009, the operating segments were driven primarily by the Corporation’s legal entities. FirstBank operations conducted in the Virgin Islands and through its loan production office in Miami, Florida were reflected in the Corporation’s then fourhad six reportable segments (Commercialsegments: Commercial and Corporate Banking; Mortgage Banking; F-18
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consumer (Retail) Banking; Treasury and Investments) while the operations conducted by FirstBank Florida were reported as part of a category named “Other”.Investments; United States Operations and Virgin Islands Operations. Refer to Note 33 for additional information. Derivative financial instruments As part of the Corporation’s overall interest rate risk management, the Corporation utilizes derivative instruments, including interest rate swaps, interest rate caps and options to manage interest rate risk. All derivative instruments are measured and recognized on the Consolidated Statementsconsolidated statements of Financial Conditionfinancial condition at their fair value. On the date the derivative instrument contract is entered into, the Corporation may designate the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value” hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge) or (3) as a “standalone” derivative instrument, including economic hedges that the Corporation has not formally documented as a fair value or cash flow hedge. Changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a fair-value hedge, along with changes in the fair value of the hedged asset or liability that is attributable to the hedged risk (including gains or losses on firm commitments), are recorded in current-period earnings as interest income or interest expense depending upon whether an asset or liability is being hedged. Similarly, the changes in the fair value of standalone derivative instruments or derivatives not qualifying or designated for hedge accounting are reported in current-period earnings as interest income or interest expense depending upon whether an asset or liability is being economically hedged. Changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a cash-flow hedge, if any, are recorded in other comprehensive income in the stockholders’ equity section of the Consolidated Statementsconsolidated statements of Financial Conditionfinancial condition until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). As of December 31, 20092010 and 2008,2009, all derivatives held by the Corporation were considered economic undesignated hedges recorded at fair value with the resulting gain or loss recognized in current period earnings. Prior to entering into an accounting hedge transaction or designating a hedge, the Corporation formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for undertaking the hedge transaction. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges, if any, to specific assets and liabilities on the statements of financial condition or to specific firm commitments or forecasted transactions along with a formal assessment at both inception of the hedge and on an ongoing basis as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. The Corporation discontinues hedge accounting prospectively when itmanagement determines that the derivative is not effective or will no longer be effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires, is sold, or terminated, or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability as a yield adjustment. The Corporation occasionally purchases or originates financial instruments that contain embedded derivatives. At inception of the financial instrument, the Corporation assesses: (1) if the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the financial instrument (host contract), (2) if the financial instrument that embodies both the embedded derivative and the host contract is measured at fair value with changes in fair value reported in earnings, or (3) if a separate instrument with the same terms as the embedded instrument would not meet the definition of a derivative. If the embedded derivative F-22
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) does not meet any of these conditions, it is separated from the host contract and carried at fair value with changes recorded in current period earnings as part of net interest income. Information regarding derivative instruments is included in Note 32 to the Corporation’s consolidated financial statements. Effective January 1, 2007, the Corporation elected to early adopt authoritative guidance issued by the FASB that allows entities to choose to measure certain financial assets and liabilities at fair value with any changes in fair value reflected in earnings. The Corporation adopted the fair value option for callable fixed-rate medium-term notes and callable brokered certificates of deposit that were hedged with interest rate swaps. One of the main considerations in the determination to adopt the fair value option for these instruments was to eliminate the operational procedures required by the long-haul method of accounting in terms of documentation, effectiveness assessment, and manual
F-19
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
procedures followed by the Corporation to fulfill the requirements specified by authoritative guidance issued by the FASB for derivative instruments designated as fair value hedges.
With the Corporation’s elimination of the use of the long-haul method in connection with the adoption of the fair value option, the Corporation no longer amortizes or accretes the basis adjustment for the financial liabilities elected to be measured at fair value. The basis adjustment amortization or accretion is the reversal of the basis differential between the market value and book value recognized at the inception of fair value hedge accounting as well as the change in value of the hedged brokered CDs and medium-term notes recognized since the implementation of the long-haul method. Since the time the Corporation implemented the long-haul method, it had recognized changes in the value of the hedged brokered CDs and medium-term notes based on the expected call date of the instruments. The adoption of the fair value option also required the recognition, as part of the initial adoption adjustment to retained earnings, of all of the unamortized placement fees that were paid to broker counterparties upon the issuance of the elected brokered CDs and medium-term notes. The Corporation previously amortized those fees through earnings based on the expected call date of the instruments. The option of using fair value accounting also requires that the accrued interest be reported as part of the fair value of the financial instruments elected to be measured at fair value. Refer to Note 29 to the consolidated financial statements for additional information.
Valuation of financial instruments The measurement of fair value is fundamental to the Corporation’s presentation of its financial condition and results of operations. The Corporation holds fixed income and equity securities, derivatives, investments and other financial instruments at fair value. The Corporation holds its investments and liabilities on the statement of financial condition mainly to manage liquidity needs and interest rate risks. A substantial part of these assets and liabilities is reflected at fair value on the Corporation’s financial statements. Effective January 1, 2007, the Corporation adoptedThe FASB authoritative guidance issued by the FASB for fair value measurements which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs may be used to measure fair value: | | | |
Level 1 | | Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
| | | Level 2 | | Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| | | Level 3 | | Valuations are observed from unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following is a description of the valuation methodologies used for instruments measured at fair value: Callable Brokered CDs (Level 2 inputs)
The fair value of callable brokered CDs, which are included within deposits and elected to be measured at fair value, is determined using discounted cash flow analyses over the full term of the CDs. The valuation uses a “Hull-White Interest Rate Tree” approach for the CDs with callable option components, an industry-standard approach for valuing instruments with interest rate call options. The model assumes that the embedded options are exercised economically. The fair value of the CDs is computed using the outstanding principal amount. The discount rates used are based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to calibrate the model to current market prices and value the cancellation option in the deposits. The fair value does not incorporate the risk of nonperformance, since the callable brokered CDs are participated out by brokers in shares of less than $100,000 and insured by the FDIC. As of December 31,
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FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2009, there were no callable brokered CDs outstanding measured at fair value since they were all called during 2009.
Medium-Term Notes (Level 2 inputs) The fair value of medium-term notes is determined using a discounted cash flow analysis over the full term of the borrowings. This valuation also uses the “Hull-White Interest Rate Tree” approach, an industry standard approach for valuing instruments with interest call options, to value the option components of the term notes. The model assumes that the embedded options are exercised economically. The fair value of medium-term notes is computed using the notional amount outstanding. The discount rates used in the valuations are based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to calibrate the model to current market prices and value the cancellation option in the term notes. For the medium-term notes, the credit risk is measured using the difference in yield curves between swap rates and a yield curve that considers the industry and credit rating of the Corporation as issuer of the note at a tenor comparable to the time to maturity of the note and option. Callable Brokered CDs (Level 2 inputs) In the past, the Corporation also measured at fair value certain callable brokered CDs. All of the brokered CDs measured at fair value were called during 2009. The fair value of callable brokered CDs, which were included within deposits and elected to be measured at fair value, was determined using discounted cash flow analyses over the full term of the CDs. The valuation also used a “Hull-White Interest Rate Tree” approach. The fair value of the CDs was computed using the outstanding principal amount. The discount rates used were based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) was used to calibrate the model to then current market prices and value the cancellation option in the deposits. The fair value did not incorporate the risk of nonperformance, since the callable brokered CDs were participated out by brokers in shares of less than $100,000 and insured by the FDIC. Investment Securities The fair value of investment securities is the market value based on quoted market prices (as is the case with equity securities, U.S. Treasury Notes and non-callable U.S. Agency debt securities), when available, or market prices for identical or comparable assets (as is the case with MBSs and callable U.S. agency debt) that are based on observable market parameters including benchmark yields, reported trades, quotes from brokers or dealers, issuer spreads, bids, offers and reference data, including market research operations. F-23
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Observable prices in the market already consider the risk of nonperformance. If listed prices or quotes are not available, fair value is based upon models that use unobservable inputs due to the limited market activity of the instrument (Level 3), as is the case with certain private label mortgage-backed securitiesMBS held by the Corporation. Unlike U.S. agency mortgage-backed securities,MBS, the fair value of these private label securities cannot be readily determined because they are not actively traded in securities markets. Significant inputs used for fair value determination consist of specific characteristics such as information used in the prepayment model, which follows the amortizing schedule of the underlying loans, which is an unobservable input. Private label mortgage-backed securitiesMBS are collateralized by fixed-rate mortgages on single-family residential properties in the United States and the interest rate is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The market valuation is derived from a model and represents the estimated net cash flows over the projected life of the pool of underlying assets applying a discount rate that reflects market observed floating spreads over LIBOR, with a widening spread bias on a non-rated security andsecurity. The market valuation is derived from a model that utilizes relevant assumptions such as prepayment rate, default rate, and loss severity on a loan level basis. The Corporation modeled the cash flow from the fixed-rate mortgage collateral using a static cash flow analysis according to collateral attributes of the underlying mortgage pool (i.e. loan term, current balance, note rate, rate adjustment type, rate adjustment frequency, rate caps, others) in combination with prepayment forecasts obtained from a commercially available prepayment model (ADCO). The variable cash flow of the security is modeled using the 3-month LIBOR forward curve. Loss assumptions were driven by the combination of default and loss severity estimates, taking into account loan credit characteristics (loan-to-value, state, origination date, property type, occupancy loan purpose, documentation type, debt-to-income ratio, other) to provide an estimate of default and loss severity. Refer to Note 4 for additional information.information about assumptions used in the valuation of private label MBS. Derivative Instruments The fair value of most of the derivative instruments is based on observable market parameters and takes into consideration the credit risk component of paying counterpartscounterparties when appropriate, except when collateral is pledged. That is, on interest rate swaps, the credit risk of both counterpartscounterparties is included in the valuation; and on options and caps, only the seller’s credit risk is considered. The “Hull-White Interest Rate Tree” approach is used to value the option components of derivative instruments, and discounting of the cash flows is performed using US dollar LIBOR-based discount rates or yield curves that account for the industry sector and the credit rating of the counterparty and/or the Corporation. Derivatives include interest rate swaps used for protection against rising interest rates and, prior to June 30, 2009, included interest rate swaps to economically hedge brokered CDs and medium-term notes. For these interest rate swaps, a credit component is not considered in the valuation since the Corporation fully collateralizes with investment securities any mark-to-market loss with the counterparty and, if there arewere market gains, the counterparty musthad to deliver collateral to the Corporation. F-21
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Certain derivatives with limited market activity, as is the case with derivative instruments named as “reference caps,” arewere valued using models that consider unobservable market parameters (Level 3). Reference caps arewere used mainly to hedge interest rate risk inherent in private label mortgage-backed securities,MBS, thus arewere tied to the notional amount of the underlying fixed-rate mortgage loans originated in the United States. SignificantThe counterparty to these derivative instruments failed on April 30, 2010. The Corporation currently has a claim with the FDIC and the exposure to fair value of $3.0 million was recorded as an accounts receivable. In the past, significant inputs used for fair value determination consistconsisted of specific characteristics such as information used in the prepayment model which followsfollow the amortizing schedule of the underlying loans, which iswas an unobservable input. The valuation model usesused the Black formula, which is a benchmark standard in the financial industry. The Black formula is similar to the Black-Scholes formula for valuing stock options except that the spot price of the underlying is replaced by the forward price. The Black formula uses as inputs the strike price of the cap, forward LIBOR rates, volatility estimates and discount rates to estimate the option value. LIBOR rates and swap rates are obtained from Bloomberg L.P. (“Bloomberg”) every day and are used to build a zero coupon curve based on the Bloomberg LIBOR/Swap curve. The discount factor is then calculated from the zero coupon curve. The cap is the sum of all caplets. For each caplet, the rate is reset at the beginning of each reporting period and payments are made at the end of each period. The cash flow of the caplet is then discounted from each payment date. Income recognition— Insurance agencies business Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later. The Corporation also receives contingent commissions from insurance companies as additional incentive for achieving specified premium volume goals and/or the loss experience of the insurance placed by the Corporation. Contingent commissions from insurance companies are recognized when determinable, which is generally when such commissions are received or when the Corporation receives data from the insurance companies that allows the reasonable estimation of these amounts. The Corporation maintains an allowance to cover commissions that management estimates will be returned upon the cancellation of a policy. F-24
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Advertising costs Advertising costs for all reporting periods are expensed as incurred. Earnings per common share Earnings per share-basic is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of outstanding common shares. 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 discounts on preferred stock issuances. For 2010, the net income (loss) attributable to common stockholders also includes the one-time effect of the issuance of common stock in exchange for shares of the Series A through E preferred stock and the issuance of the new Series G Preferred Stock. These transactions are further discussed in Note 23. The computation of earnings per share-diluted is similar to the computation of earnings per share-basic except that the number of weighted average common shares is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued. 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 in earnings per share. The Series G Preferred Stock is included in the calculation of earnings per share, as all shares are assumed converted at the time of issuance of the Series G Preferred Stock, under the if converted method. The amount of potential common shares is obtained based on the most advantageous conversion rate from the standpoint of the security holder and assuming the Corporation will not be able to compel conversion until the seven-year anniversary, at which date the conversion price would be based on the Corporation’s stock price in the open market and conversion would be based on the full liquidation value of $1,000 per share. Recently issued accounting pronouncements The FASB havehas issued the following accounting pronouncements and guidance relevant to the Corporation’s operations: In May 2008, the FASB issued authoritative guidance on financial guarantee insurance contracts requiring that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This guidance also clarifies how the accounting and reporting by insurance entities applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. FASB authoritative
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
guidance on the accounting for financial guarantee insurance contracts is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities which are effective since the first interim period after the issuance of this guidance. The adoption of this guidance did not have a significant impact on the Corporation’s financial statements.
In June 2008, the FASB issued authoritative guidance for determining whether instruments granted in shared-based payment transactions are participating securities. This guidance applies to entities with outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends. Furthermore, awards with dividends that do not need to be returned to the entity if the employee forfeits the award are considered participating securities. Accordingly, under this guidance unvested share-based payment awards that are considered to be participating securities must be included in the computation of earnings per share (“EPS”) pursuant to the two-class method as required by FASB guidance on earnings per share. FASB guidance on determining whether instruments granted in share based payment transactions are participating securities is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption of this Statement did not have an impact on the Corporation’s financial statements since, as of December 31, 2009, the outstanding unvested shares of restricted stock do not contain rights to nonforfeitable dividends.
In April 2009, the FASB issued authoritative guidance for the accounting of assets acquired and liabilities assumed in a business combination that arise from contingencies. This guidance amends the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination. The guidance carries forward the requirement that acquired contingencies in a business combination be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period. Otherwise, entities would typically account for the acquired contingencies based on a reasonable estimate in accordance with FASB guidance on the accounting for contingencies. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this Statement did not have an impact on the Corporation’s financial statements.
In April 2009, the FASB issued authoritative guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This guidance relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the objective of fair value measurement, that is, to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. This guidance is effective for interim and annual reporting periods ending after June 15, 2009 on a prospective basis. The adoption of this Statement did not impact the Corporation’s fair value methodologies on its financial assets and laibilities.
In April 2009, the FASB amended the existing guidance on determining whether an impairment for investments in debt securities is OTTI and requires an entity to recognize the credit component of an OTTI of a debt security in earnings and the noncredit component in other comprehensive income (“OCI”) when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery. This guidance also requires expanded disclosures and became effective for interim and annual reporting periods ending after June 15, 2009. In connection with this guidance, the Corporation recorded $1.3 million for the year ended December 31, 2009 of OTTI charges through earnings that represents the credit loss of available-for-sale private label mortgage-backed securities. This guidance does not amend existing recognition and measurement guidance related to an OTTI of equity securities. The expanded disclosures related to this new guidance are included inNote 4 — Investment Securities.
In April 2009, the FASB amended the existing guidance on the disclosure about fair values of financial instruments, which requires entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements. This
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
guidance became effective for interim reporting periods ending after June 15, 2009. The adoption of the amended guidance expanded the Corporation’s interim financial statement disclosures with regard to the fair value of financial instruments.
In May 2009, the FASB issued authoritative guidance on subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance sets forth (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance is effective for interim or annual financial periods ending after June 15, 2009. There are not any material subsequent event that would require further disclosure.
In June 2009, the FASB amended the existing guidance on the accounting for transfers of financial assets which improvesto improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets;assets, the effects of a transfer on its financial position, financial performance, and cash flows;flows, and a transferor’s continuing involvement, if any, in transferred financial assets. This guidance iswas effective as of the beginning of each reporting entity’s first annual reporting period that beginsbegan after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Subsequently in December 2009, the FASB amended the existing guidance issued in June 2009. Among the most significant changes and additions to this guidance includesare changes to the conditions for sales of a financial assets which objective is to determineasset based on whether a transferor and its consolidated affiliates included in the financial statements have surrendered control over the transferred financial assetsasset or third-partythird party beneficial interests;interest; and the addition of the meaning of the term participating interest, which represents a proportionate (pro rata) ownership interest in an entire financial asset. The Corporation is evaluating the impact the adoption ofadopted the guidance will havewith no material impact on its financial statements. In June 2009, the FASB amended the existing guidance on the consolidation of variable interest, which improvesinterests to improve financial reporting by enterprises involved with variable interest entities and addressesaddress (i) the effects on certain provisions of the amended guidance, as a result of the elimination of the qualifying special-purpose entity concept in the accounting for transfer of financial assets guidance, and (ii) constituent concerns about the application of certain key provisions of the guidance, including those in which the accounting and disclosures do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This guidance iswas effective as of the beginning of each reporting entity’s first annual reporting period that beginsbegan after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Subsequently in December 2009, the FASB amended the existing guidance issued in June 2009. Among the most significant changes and additions to thisthe guidance includesis the replacement of the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a F-25
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. The Corporation is evaluating the impact, if any, the adoption of this guidance will have on its financial statements. In June 2009, the FASB issued authoritative guidance on the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification (“Codification”) is the single source of authoritative nongovernmental GAAP. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification project does not change GAAP in any way shape or form; it only reorganizes the existing pronouncements into one single source of U.S. GAAP. This guidance is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded as described in this guidance. All other accounting literature not included in the Codification is nonauthoritative. Following this guidance, the FASB will not issue new guidance in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). The FASB will not consider ASUs as
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
authoritative in their own right. ASUs will serve only to update the Codification, provide background information aboutadopted the guidance and provide the bases for conclusionswith no material impact on the change(s) in the Codification.
In August 2009, the FASB updated the Codification in connection with the fair value measurement of liabilities to clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:
| 1. | | A valuation technique that uses: |
| a. | | The quoted price of the identical liability when traded as an asset | | | b. | | Quoted prices for similar liabilities or similar liabilities when traded as assets |
| 2. | | Another valuation technique that is consistent with the principles of fair value measurement. Two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. |
The update also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The update also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustment to the quoted price of the asset are required are Level 1 fair value measurements. This update is effective for the first reporting period (including interim periods) beginning after issuance. The adoption of this guidance did not impact the Corporation’s fair value methodologies on its financial liabilities.
In September 2009, the FASB updated the Codification to reflect SEC staff pronouncements on earnings-per-share calculations. According to the update, the SEC staff believes that when a public company redeems preferred shares, the difference between the fair value of the consideration transferred to the holders of the preferred stock and the carrying amount on the balance sheet after issuance costs of the preferred stock should be added to or subtracted from net income before doing an earnings per share calculation. The SEC’s staff also thinks it is not appropriate to aggregate preferred shares with different dividend yields when trying to determine whether the “if-converted” method is dilutive to the earnings per-share calculation. As of December 31, 2009, the Corporation has not been involved in a redemption or induced conversion of preferred stock.
In January 2010, the FASB updated the Codification to provide guidance on accounting for distributions to shareholders with components of stock and cash. This guidance clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. The new guidance is effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The adoption of this guidance did not impact the Corporation’s financial statements.
In January 2010, the FASB updated the Accounting Standards Codification (“Codification”) to provide guidance to improve disclosure requirements related to fair value measurements and require reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. Currently, entities are only required to disclose activity in Level 3 measurements in the fair-value hierarchy on a net basis. The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. Entities will beare required to separately disclose significant transfers into and out of Level 1 and Level 2 measurements in the fair-value hierarchy and the reasons for the transfers. Significance will be determined based on earnings and total assets or total liabilities or, when changes in fair value are recognized in other comprehensive income, based on total equity. A reporting entity must disclose and consistently follow its policy for determining when transfers between levels are recognized. Acceptable methods for determining when to recognize transfers include: (i) actual date of the event or change in circumstances causing the transfer; (ii) beginning of the reporting period; and (iii) end of the reporting period. Currently, entities are only required to disclose activity in Level 3 measurements in the fair-value hierarchy on a net basis. This guidance will require separate disclosures for purchases, sales, issuances, and settlements of assets. Entities will also have to F-25
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
disclose the reasons for the activity and apply the same guidance on significance and transfer policies required for transfers between Level 1 and 2 measurements. The guidance requires disclosure of fair-value measurements by “class” instead of “major category.” A class is generally a subset of assets and liabilities within a financial statement line item and is based on the specific nature and risks of the assets and liabilities and their classification in the fair-value hierarchy. When determining classes, reporting entities must also consider the level of disaggregated information required by other applicable GAAP. For fair-value measurements using significant observable inputs (Level 2) or significant unobservable inputs (Level 3), this guidance requires reporting entities to disclose the valuation technique and the inputs used in determining fair value for each class of assets and liabilities. If the valuation technique has changed in the reporting period (e.g., from a market approach to an income approach) or if an additional valuation technique is used, entities are required to disclose the change and the reason for making the change. Except for the detailed Level 3 roll forward disclosures, the guidance is effective for annual and interim reporting periods beginning after December 15, 2009 (first quarter of 2010 for public companies with calendar year-ends). The new disclosures about purchases, sales, issuances, and settlements in the roll forward activity for Level 3 fair-valuefair value measurements are effective for interim and annual reporting periods beginning after December 15, 2010 (first quarter of 2011 for public companies with calendar year-ends). Early adoption is permitted. In the initial adoption period, entities are not required to include disclosures for previous comparative periods; however, they arecomparative disclosures will be required for periods ending after initial adoption. The Corporation adopted the guidance in the first quarter of 2010 and the required disclosures are presented in Note 29 — Fair Value.
In February 2010, the FASB updated the Codification to provide guidance to improve disclosure requirements related to the recognition and disclosure of subsequent events. The amendment establishes that an entity that either (a) is an SEC filer or (b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets) is required to evaluate subsequent events through the date that the financial statements are issued. If an entity meets neither of those criteria, then it should evaluate subsequent events through the date the financial statements are available to be issued. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. Also, the scope of the reissuance disclosure requirements has been refined to include revised financial statements only. Revised financial statements include financial statements revised either as a result of the correction of an error or retrospective application of GAAP. The guidance in this update was effective on the date of issuance in February. The Corporation has adopted this guidance; refer to Note 36 — Subsequent events. In February 2010, the FASB updated the Codification to provide guidance on the deferral of consolidation requirements for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. The deferral does not apply in situations in which a reporting entity has the explicit or implicit obligation to fund losses of an entity that could potentially be significant to the entity. The deferral also does not apply to interests in securitization entities, asset-backed financing entities, or entities formerly considered qualifying special purpose entities. In addition, the deferral applies to a reporting entity’s interest in an entity that is required to comply or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities. The guidance also clarifies that for entities that do not qualify for the deferral, related parties should be considered for determining whether a decision maker or service provider fee represents a variable interest. In addition, the requirements for evaluating whether a decision maker’s or service provider’s fee is a variable interest are modified to clarify the impactFASB’s intention that a quantitative calculation should not be the sole basis for this evaluation. The guidance was effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of this guidance willdid not have on itsan impact in the Corporation’s consolidated financial statements. F-26
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) In March 2010, the FASB updated the Codification to provide clarification on the scope exception related to embedded credit derivatives related to the transfer of credit risk in the form of subordination of one financial instrument to another. The transfer of credit risk that is only in the form of subordination of one financial instrument to another (thereby redistributing credit risk) is an embedded derivative feature that should not be subject to potential bifurcation and separate accounting. The amendments address how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed under this guidance. The Corporation may elect the fair value option for any investment in a beneficial interest in a securitized financial asset. The guidance was effective for the first fiscal quarter beginning after June 15, 2010. The adoption of this guidance did not have an impact in the Corporation’s consolidated financial statements. In April 2010, the FASB updated the Codification to provide guidance on the effects of a loan modification when a loan is part of a pool that is accounted for as a single asset. Modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in this Update were effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are applied prospectively and early application was permitted. The adoption of this guidance did not have an impact in the Corporation’s consolidated financial statements. In July 2010, the FASB updated the Codification to expand the disclosure requirements regarding credit quality of financing receivables and the allowance for credit losses. The objectives of the enhanced disclosures are to provide information that will enable readers of financial statements to understand the nature of credit risk in a company’s financing receivables, how that risk is analyzed in determining the related allowance for credit losses and changes to the allowance during the reporting period. An entity should provide disclosures on a disaggregated basis for portfolio segments and classes of financing receivable. The amendments in this Update are effective for both interim and annual reporting periods ending after December 15, 2010, except that, in January 2011, the FASB temporarily delayed the effective date of the disclosures about troubled debt restructurings for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The Corporation has adopted this guidance; refer to Note 8. In December 2010, the FASB updated the Codification to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. As a result, current GAAP will be improved by eliminating an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. As a result, goodwill impairments may be reported sooner than under current practice. The objective of this Update is to address questions about entities with reporting units with zero or negative carrying amounts because some entities concluded that Step 1 of the test is passed in those circumstances because the fair value of their reporting unit will generally be greater than zero. As a result of that conclusion, some constituents raised concerns that Step 2 of the test is not performed despite factors indicating that goodwill may be impaired. The amendments in this Update do not provide guidance on how to determine the carrying amount or measure the fair value of the reporting unit. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this guidance is not expected to have an impact on the Corporation’s financial statements. In December 2010, the FASB updated the Codification to clarify required disclosures of supplementary pro forma information for business combinations. The amendments specify that, if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the year had occurred as of the beginning of the comparable prior annual period only. Additionally, the Update expands disclosures to include a description of the nature and amount of material nonrecurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings. This guidance is effective for reporting periods beginning after December 15, 2010; early adoption is permitted. The Corporation adopted this guidance with no impact on the financial statements. Note 2 — Restrictions on Cash and Due from Banks The Corporation’s bank subsidiary, FirstBank, is required by law as enforced by the OCIF, to maintain minimum average weekly reserve balances to cover demand deposits. The amount of those minimum average reserve balances for the week that covered December 31, 20092010 was F-27
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) $67.8 million (2009 — $91.3 million (2008 — $233.7 million). As of December 31, 20092010 and 2008,2009, the Bank complied with the requirement. Cash and due from banks as well as other short-term, highly liquid securities are used to cover the required average reserve balances. As of December 31, 2009 and 2008,2010, and as required by the Puerto Rico International Banking Law, the Corporation maintained separately for two of its international banking entities (IBEs), $600,000$300,000 in time deposits, which were considered restricted assets equally split between the two IBEs.related to FirstBank Overseas Corporation, an international banking entity acting as a subsidiary of FirstBank. Note 3 — Money Market Investments Money market investments are composed of federal funds sold, time deposits with other financial institutions and short-term investments with original maturities of three months or less. Money market investments as of December 31, 20092010 and 20082009 were as follows: | | | | | | | | | | | 2009 | | | 2008 | | | | Balance | | | | (Dollars in thousands) | | Federal funds sold, interest 0.01% (2008 - 0.01%) | | $ | 1,140 | | | $ | 54,469 | | Time deposits with other financial institutions, weighted-average interest rate 0.24% (2008-interest 1.05%) | | | 600 | | | | 600 | | Other short-term investments, weighted-average interest rate of 0.18% (2008-weighted-average interest rate of 0.21%) | | | 22,546 | | | | 20,934 | | | | | | | | | | | $ | 24,286 | | | $ | 76,003 | | | | | | | | |
| | | | | | | | | | | 2010 | | | 2009 | | | | Balance | | | | (Dollars in thousands) | | Federal funds sold, interest rate of 0.12% (2009 - 0.01%) | | $ | 6,236 | | | $ | 1,140 | | Time deposits with other financial institutions, weighted-average interest rate 0.62% (2009-interest 0.24%) | | | 1,346 | | | | 600 | | Other short-term investments, weighted-average interest rate of 0.34% (2009-weighted-average interest rate of 0.18%) | | | 107,978 | | | | 22,546 | | | | | | | | | | | $ | 115,560 | | | $ | 24,286 | | | | | | | | |
As of December 31, 2010 and 2009, $0.45 million and $0.95 million, respectively, of the Corporation’s money market investments was pledged as collateral for interest rate swaps. As of December 31, 2008, none of the Corporation’s money market investments were pledged. F-27F-28
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 4 — Investment Securities Investment Securities Available for Sale The amortized cost, non-credit loss component of OTTI on securities recorded in OCI,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 December 31, 20092010 and 20082009 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2009 | | | | | December 31, 2010 | | December 31, 2009 | | | | Non-Credit | | December 31, 2008 | | | Non-Credit | | Non-Credit | | | | | | | | Loss Component | | Gross | | Weighted | | Gross | | Weighted | | | Loss Component | | Gross | | Weighted | | Loss Component | | Gross | | Weighted | | | | Amortized | | of OTTI | | Unrealized | | Fair | | average | | Amortized | | Unrealized | | Fair | | average | | | Amortized | | of OTTI | | Unrealized | | Fair | | average | | Amortized | | of OTTI | | Unrealized | | Fair | | average | | | | cost | | Recorded in OCI | | gains | | losses | | value | | yield% | | cost | | gains | | losses | | value | | yield% | | | cost | | Recorded in OCI | | gains | | losses | | value | | yield% | | cost | | Recorded in OCI | | gains | | losses | | value | | yield% | | | | | (Dollars in thousands) | | U.S. Treasury securities: | | | After 1 to 5 years | | | $ | 599,987 | | $ | — | | $ | 8,727 | | $ | — | | $ | 608,714 | | 1.34 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | — | | | | (Dollars in thousands) | | | Obligations of U.S. Government sponsored agencies: | | | After 1 to 5 years | | $ | 1,139,577 | | $ | — | | $ | 5,562 | | $ | — | | $ | 1,145,139 | | 2.12 | | $ | — | | $ | — | | $ | — | | $ | — | | — | | | 604,630 | | — | | 2,714 | | 3,991 | | 603,353 | | 1.17 | | 1,139,577 | | — | | 5,562 | | — | | 1,145,139 | | 2.12 | | | | | Puerto Rico Government obligations: | | | Due within one year | | 12,016 | | — | | 1 | | 28 | | 11,989 | | 1.82 | | 4,593 | | 46 | | — | | 4,639 | | 6.18 | | | — | | — | | — | | — | | — | | — | | 12,016 | | — | | 1 | | 28 | | 11,989 | | 1.82 | | After 1 to 5 years | | 113,232 | | — | | 302 | | 47 | | 113,487 | | 5.40 | | 110,624 | | 259 | | 479 | | 110,404 | | 5.41 | | | 26,768 | | — | | 522 | | — | | 27,290 | | 4.70 | | 113,232 | | — | | 302 | | 47 | | 113,487 | | 5.40 | | After 5 to 10 years | | 6,992 | | — | | 328 | | 90 | | 7,230 | | 5.88 | | 6,365 | | 283 | | 128 | | 6,520 | | 5.80 | | | 104,352 | | — | | 432 | | — | | 104,784 | | 5.18 | | 6,992 | | — | | 328 | | 90 | | 7,230 | | 5.88 | | After 10 years | | 3,529 | | — | | 91 | | — | | 3,620 | | 5.42 | | 15,789 | | 45 | | 264 | | 15,570 | | 5.30 | | | 4,746 | | — | | 21 | | — | | 4,767 | | 6.22 | | 3,529 | | — | | 91 | | — | | 3,620 | | 5.42 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | United States and Puerto Rico Government obligations | | 1,275,346 | | — | | 6,284 | | 165 | | 1,281,465 | | 2.44 | | 137,371 | | 633 | | 871 | | 137,133 | | 5.44 | | | 1,340,483 | | — | | 12,416 | | 3,991 | | 1,348,908 | | 1.65 | | 1,275,346 | | — | | 6,284 | | 165 | | 1,281,465 | | 2.44 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities: | | | FHLMC certificates: | | | Due within one year | | — | | — | | — | | — | | — | | — | | 37 | | — | | — | | 37 | | 5.94 | | | After 1 to 5 years | | 30 | | — | | — | | — | | 30 | | 5.54 | | 157 | | 2 | | — | | 159 | | 7.07 | | | — | | — | | — | | — | | — | | — | | 30 | | — | | — | | — | | 30 | | 5.54 | | After 5 to 10 years | | — | | — | | — | | — | | — | | — | | 31 | | 3 | | — | | 34 | | 8.40 | | | After 10 years | | 705,818 | | — | | 18,388 | | 1,987 | | 722,219 | | 4.66 | | 1,846,386 | | 45,743 | | 1 | | 1,892,128 | | 5.46 | | | 1,716 | | — | | 101 | | — | | 1,817 | | 5.00 | | 705,818 | | — | | 18,388 | | 1,987 | | 722,219 | | 4.66 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 705,848 | | — | | 18,388 | | 1,987 | | 722,249 | | 4.66 | | 1,846,611 | | 45,748 | | 1 | | 1,892,358 | | 5.46 | | | 1,716 | | — | | 101 | | — | | 1,817 | | 5.00 | | 705,848 | | — | | 18,388 | | 1,987 | | 722,249 | | 4.66 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | GNMA certificates: | | | Due within one year | | — | | — | | — | | — | | — | | — | | 45 | | 1 | | — | | 46 | | 5.72 | | | 30 | | — | | — | | — | | 30 | | 6.49 | | — | | — | | — | | — | | — | | — | | After 1 to 5 years | | 69 | | — | | 3 | | — | | 72 | | 6.56 | | 180 | | 6 | | — | | 186 | | 6.71 | | | — | | — | | — | | — | | — | | — | | 69 | | — | | 3 | | — | | 72 | | 6.56 | | After 5 to 10 years | | 808 | | — | | 39 | | — | | 847 | | 5.47 | | 566 | | 9 | | — | | 575 | | 5.33 | | | 1,319 | | — | | 74 | | — | | 1,393 | | 4.80 | | 808 | | — | | 39 | | — | | 847 | | 5.47 | | After 10 years | | 407,565 | | — | | 10,808 | | 980 | | 417,393 | | 5.12 | | 331,594 | | 10,283 | | 10 | | 341,867 | | 5.38 | | | 962,246 | | — | | 31,105 | | 3,396 | | 989,955 | | 4.25 | | 407,565 | | — | | 10,808 | | 980 | | 417,393 | | 5.12 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 408,442 | | — | | 10,850 | | 980 | | 418,312 | | 5.12 | | 332,385 | | 10,299 | | 10 | | 342,674 | | 5.38 | | | 963,595 | | — | | 31,179 | | 3,396 | | 991,378 | | 4.25 | | 408,442 | | — | | 10,850 | | 980 | | 418,312 | | 5.12 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FNMA certificates: | | | After 1 to 5 years | | — | | — | | — | | — | | — | | — | | 53 | | 5 | | — | | 58 | | 10.20 | | | After 5 to 10 years | | 101,781 | | — | | 3,716 | | 91 | | 105,406 | | 4.55 | | 269,716 | | 4,678 | | — | | 274,394 | | 4.96 | | | 75,547 | | — | | 3,987 | | — | | 79,534 | | 4.50 | | 101,781 | | — | | 3,716 | | 91 | | 105,406 | | 4.55 | | After 10 years | | 1,374,533 | | — | | 30,629 | | 2,776 | | 1,402,386 | | 4.51 | | 1,071,521 | | 28,005 | | 1 | | 1,099,525 | | 5.60 | | | 126,847 | | — | | 8,678 | | — | | 135,525 | | 5.51 | | 1,374,533 | | — | | 30,629 | | 2,776 | | 1,402,386 | | 4.51 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,476,314 | | — | | 34,345 | | 2,867 | | 1,507,792 | | 4.51 | | 1,341,290 | | 32,688 | | 1 | | 1,373,977 | | 5.47 | | | 202,394 | | — | | 12,665 | | — | | 215,059 | | 5.13 | | 1,476,314 | | — | | 34,345 | | 2,867 | | 1,507,792 | | 4.51 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Collateralized Mortgage Obligations issued or guaranteed by FHLMC, FNMA and GNMA: | | | After 10 years | | 156,086 | | — | | 633 | | 412 | | 156,307 | | 0.99 | | — | | — | | — | | — | | — | | | 112,989 | | — | | 1,926 | | — | | 114,915 | | 0.99 | | 156,086 | | — | | 633 | | 412 | | 156,307 | | 0.99 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other mortgage pass-through trust certificates: | | | After 10 years | | 117,198 | | 32,846 | | 2 | | — | | 84,354 | | 2.30 | | 144,217 | | 2 | | 30,236 | | 113,983 | | 5.43 | | | 100,130 | | 27,814 | | 1 | | — | | 72,317 | | 2.31 | | 117,198 | | 32,846 | | 2 | | — | | 84,354 | | 2.30 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total mortgage-backed securities | | 2,863,888 | | 32,846 | | 64,218 | | 6,246 | | 2,889,014 | | 4.35 | | 3,664,503 | | 88,737 | | 30,248 | | 3,722,992 | | 5.46 | | | 1,380,824 | | 27,814 | | 45,872 | | 3,396 | | 1,395,486 | | 3.97 | | 2,863,888 | | 32,846 | | 64,218 | | 6,246 | | 2,889,014 | | 4.35 | | | | | | | | | | | | | | | | | | | | | | | Corporate bonds: | | | After 5 to 10 years | | — | | — | | — | | — | | — | | — | | 241 | | — | | — | | 241 | | 7.70 | | | After 10 years | | — | | — | | — | | — | | — | | — | | 1,307 | | — | | — | | 1,307 | | 7.97 | | | | | | | | | | | | | | | | | | | | | | | | Corporate bonds | | — | | — | | — | | — | | — | | — | | 1,548 | | — | | — | | 1,548 | | 7.93 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity securities (without contractual maturity) (1) | | 427 | | — | | 81 | | 205 | | 303 | | — | | 814 | | — | | 145 | | 669 | | 2.38 | | | 77 | | — | | — | | 18 | | 59 | | — | | 427 | | — | | 81 | | 205 | | 303 | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total investment securities available for sale | | $ | 4,139,661 | | $ | 32,846 | | $ | 70,583 | | $ | 6,616 | | $ | 4,170,782 | | 3.76 | | $ | 3,804,236 | | $ | 89,370 | | $ | 31,264 | | $ | 3,862,342 | | 5.46 | | | $ | 2,721,384 | | $ | 27,814 | | $ | 58,288 | | $ | 7,405 | | $ | 2,744,453 | | 2.83 | | $ | 4,139,661 | | $ | 32,846 | | $ | 70,583 | | $ | 6,616 | | $ | 4,170,782 | | 3.76 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (1) | | Represents common shares of other financial institutions 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.options as was the case with approximately $1.6 billion and $945 million of investment securities (mainly U.S. agency debt securities) called during 2010 and 2009, respectively. 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. F-28F-29
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The aggregate amortized cost and approximate market value of investment securities available for sale as of December 31, 2009,2010, by contractual maturity, are shown below: | | | | | | | | | | | | | | | | | | | Amortized Cost | | Fair Value | | | Amortized Cost | | Fair Value | | | | (In thousands) | | | (In thousands) | | Within 1 year | | $ | 12,016 | | $ | 11,989 | | | $ | 30 | | $ | 30 | | After 1 to 5 years | | 1,252,908 | | 1,258,728 | | | 1,231,385 | | 1,239,357 | | After 5 to 10 years | | 109,581 | | 113,483 | | | 181,218 | | 185,711 | | After 10 years | | 2,764,729 | | 2,786,279 | | | 1,308,674 | | 1,319,296 | | | | | | | | | | | | | Total | | 4,139,234 | | 4,170,479 | | | 2,721,307 | | 2,744,394 | | | | | Equity securities | | 427 | | 303 | | | 77 | | 59 | | | | | | | | | | | | | | | | Total investment securities available for sale | | $ | 4,139,661 | | $ | 4,170,782 | | | $ | 2,721,384 | | $ | 2,744,453 | | | | | | | | | | | | |
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 December 31, 20092010 and 2008.2009. It also includes debt securities for which an OTTI was recognized and only the amount related to a credit loss was recognized in earnings: | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2010 | | | | Less than 12 months | | | 12 months or more | | | Total | | | | | | | | Unrealized | | | | | | | Unrealized | | | | | | | Unrealized | | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | | (In thousands) | | Debt securities | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Government agencies obligations | | $ | 249,026 | | | $ | 3,991 | | | $ | — | | | $ | — | | | $ | 249,026 | | | $ | 3,991 | | Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | GNMA | | | 192,799 | | | | 3,396 | | | | — | | | | — | | | | 192,799 | | | | 3,396 | | Other mortgage pass-through trust certificates | | | — | | | | — | | | | 72,101 | | | | 27,814 | | | | 72,101 | | | | 27,814 | | Equity securities | | | 59 | | | | 18 | | | | — | | | | — | | | | 59 | | | | 18 | | | | | | | | | | | | | | | | | | | | | | | $ | 441,884 | | | $ | 7,405 | | | $ | 72,101 | | | $ | 27,814 | | | $ | 513,985 | | | $ | 35,219 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2009 | | | | Less than 12 months | | | 12 months or more | | | Total | | | | | | | | Unrealized | | | | | | | Unrealized | | | | | | | Unrealized | | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | | (In thousands) | | Debt securities | | | | | | | | | | | | | | | | | | | | | | | | | Puerto Rico Government obligations | | $ | 14,760 | | | $ | 118 | | | $ | 9,113 | | | $ | 47 | | | $ | 23,873 | | | $ | 165 | | Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | FHLMC | | | 236,925 | | | | 1,987 | | | | — | | | | — | | | | 236,925 | | | | 1,987 | | GNMA | | | 72,178 | | | | 980 | | | | — | | | | — | | | | 72,178 | | | | 980 | | FNMA | | | 415,601 | | | | 2,867 | | | | — | | | | — | | | | 415,601 | | | | 2,867 | | Collateralized mortgage obligations issued or guaranteed by FHLMC, FNMA and GNMA | | | 105,075 | | | | 412 | | | | — | | | | — | | | | 105,075 | | | | 412 | | Other mortgage pass-through trust certificates | | | — | | | | — | | | | 84,105 | | | | 32,846 | | | | 84,105 | | | | 32,846 | | Equity securities | | | 90 | | | | 205 | | | | — | | | | — | | | | 90 | | | | 205 | | | | | | | | | | | | | | | | | | | | | | | $ | 844,629 | | | $ | 6,569 | | | $ | 93,218 | | | $ | 32,893 | | | $ | 937,847 | | | $ | 39,462 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2008 | | | | Less than 12 months | | | 12 months or more | | | Total | | | | | | | | Unrealized | | | | | | | Unrealized | | | | | | | Unrealized | | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | | | | | | | | | | (In thousands) | | | | | | | | | | Debt securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Puerto Rico Government obligations | | $ | — | | | $ | — | | | $ | 13,288 | | | $ | 871 | | | $ | 13,288 | | | $ | 871 | | Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | FHLMC | | | 68 | | | | 1 | | | | — | | | | — | | | | 68 | | | | 1 | | GNMA | | | 903 | | | | 10 | | | | — | | | | — | | | | 903 | | | | 10 | | FNMA | | | 361 | | | | 1 | | | | 21 | | | | — | | | | 382 | | | | 1 | | Other mortgage pass-through trust certificates | | | — | | | | — | | | | 113,685 | | | | 30,236 | | | | 113,685 | | | | 30,236 | | Equity securities | | | 318 | | | | 145 | | | | — | | | | — | | | | 318 | | | | 145 | | | | | | | | | | | | | | | | | | | | | | | $ | 1,650 | | | $ | 157 | | | $ | 126,994 | | | $ | 31,107 | | | $ | 128,644 | | | $ | 31,264 | | | | | | | | | | | | | | | | | | | | |
F-29F-30
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Investments Held to Maturity The amortized cost, gross unrealized gains and losses, approximate fair value, weighted-average yield and contractual maturities of investment securities held to maturity as of December 31, 20092010 and 20082009 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2009 | | December 31, 2008 | | | December 31, 2010 | | December 31, 2009 | | | | Gross | | Weighted | | Gross | | Weighted | | | Gross | | Weighted | | Gross | | Weighted | | | | Amortized | | Unrealized | | Fair | | average | | Amortized | | Unrealized | | Fair | | average | | | Amortized | | Unrealized | | Fair | | average | | Amortized | | Unrealized | | Fair | | average | | | | cost | | gains | | losses | | value | | yield% | | cost | | gains | | losses | | value | | yield% | | | cost | | gains | | losses | | value | | yield% | | cost | | gains | | losses | | value | | yield% | | | | (Dollars in thousands) | | | (Dollars in thousands) | | U.S. Treasury securities: | | | Due within 1 year | | $ | 8,480 | | $ | 12 | | $ | — | | $ | 8,492 | | 0.47 | | $ | 8,455 | | $ | 34 | | $ | — | | $ | 8,489 | | 1.07 | | | $ | 8,487 | | $ | 5 | | $ | — | | $ | 8,492 | | 0.30 | | $ | 8,480 | | $ | 12 | | $ | — | | $ | 8,492 | | 0.47 | | | | | Obligations of other U.S. Government sponsored agencies: | | | After 10 years | | — | | — | | — | | — | | — | | 945,061 | | 5,281 | | 728 | | 949,614 | | 5.77 | | | Puerto Rico Government obligations: | | | After 5 to 10 years | | 18,584 | | 564 | | 93 | | 19,055 | | 5.86 | | 17,924 | | 480 | | 97 | | 18,307 | | 5.85 | | | 19,284 | | 795 | | — | | 20,079 | | 5.87 | | 18,584 | | 564 | | 93 | | 19,055 | | 5.86 | | After 10 years | | 4,995 | | 77 | | — | | 5,072 | | 5.50 | | 5,145 | | 35 | | — | | 5,180 | | 5.50 | | | 4,665 | | 49 | | — | | 4,714 | | 5.50 | | 4,995 | | 77 | | — | | 5,072 | | 5.50 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | United States and Puerto | | | Rico Government obligations | | 32,059 | | 653 | | 93 | | 32,619 | | 4.38 | | 976,585 | | 5,830 | | 825 | | 981,590 | | 5.73 | | | United States and Puerto Rico Government obligations | | | 32,436 | | 849 | | — | | 33,285 | | 4.36 | | 32,059 | | 653 | | 93 | | 32,619 | | 4.38 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities: | | | FHLMC certificates: | | | After 1 to 5 years | | 5,015 | | 78 | | — | | 5,093 | | 3.79 | | 8,338 | | 71 | | 5 | | 8,404 | | 3.83 | | | 2,569 | | 42 | | — | | 2,611 | | 3.71 | | 5,015 | | 78 | | — | | 5,093 | | 3.79 | | | | | FNMA certificates: | | | After 1 to 5 years | | 4,771 | | 100 | | — | | 4,871 | | 3.87 | | 7,567 | | 88 | | — | | 7,655 | | 3.85 | | | 2,525 | | 130 | | — | | 2,655 | | 3.86 | | 4,771 | | 100 | | — | | 4,871 | | 3.87 | | After 5 to 10 years | | 533,593 | | 19,548 | | — | | 553,141 | | 4.47 | | 686,948 | | 9,227 | | — | | 696,175 | | 4.46 | | | 391,328 | | 21,946 | | — | | 413,274 | | 4.48 | | 533,593 | | 19,548 | | — | | 553,141 | | 4.47 | | After 10 years | | 24,181 | | 479 | | — | | 24,660 | | 5.30 | | 25,226 | | 247 | | 25 | | 25,448 | | 5.31 | | | 22,529 | | 885 | | — | | 23,414 | | 5.33 | | 24,181 | | 479 | | — | | 24,660 | | 5.30 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities | | 567,560 | | 20,205 | | — | | 587,765 | | 4.49 | | 728,079 | | 9,633 | | 30 | | 737,682 | | 4.48 | | | 418,951 | | 23,003 | | — | | 441,954 | | 4.52 | | 567,560 | | 20,205 | | — | | 587,765 | | 4.49 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate bonds: | | | After 10 years | | 2,000 | | — | | 800 | | 1,200 | | 5.80 | | 2,000 | | — | | 860 | | 1,140 | | 5.80 | | | 2,000 | | — | | 723 | | 1,277 | | 5.80 | | 2,000 | | — | | 800 | | 1,200 | | 5.80 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total investment securities held-to-maturity | | $ | 601,619 | | $ | 20,858 | | $ | 893 | | $ | 621,584 | | 4.49 | | $ | 1,706,664 | | $ | 15,463 | | $ | 1,715 | | $ | 1,720,412 | | 5.19 | | | $ | 453,387 | | $ | 23,852 | | $ | 723 | | $ | 476,516 | | 4.51 | | $ | 601,619 | | $ | 20,858 | | $ | 893 | | $ | 621,584 | | 4.49 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 $945 million of U.S. government agency debt securities called during 2009.options. The aggregate amortized cost and approximate market value of investment securities held to maturity as of December 31, 2009,2010, by contractual maturity, are shown below: | | | | | | | | | | | | | | | | | | | Amortized Cost | | Fair Value | | | Amortized Cost | | Fair Value | | | | (In thousands) | | | (In thousands) | | Within 1 year | | $ | 8,480 | | $ | 8,492 | | | $ | 8,487 | | $ | 8,492 | | After 1 to 5 years | | 9,786 | | 9,964 | | | 5,094 | | 5,266 | | After 5 to 10 years | | 552,177 | | 572,196 | | | 410,612 | | 433,353 | | After 10 years | | 31,176 | | 30,932 | | | 29,194 | | 29,405 | | | | | | | | | | | | | Total investment securities held to maturity | | $ | 601,619 | | $ | 621,584 | | | $ | 453,387 | | $ | 476,516 | | | | | | | | | | | | |
From time to time the Corporation has securities held to maturity with an original maturity of three months or less that are considered cash and cash equivalents and classified as money market investments in the Consolidated Statementsconsolidated statements of Financial Condition.financial condition. As of December 31, 20092010 and 2008,2009, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents. F-30F-31
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following tables show the Corporation’s held-to-maturity 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 December 31, 20092010 and 2008:2009: | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2010 | | | | Less than 12 months | | | 12 months or more | | | Total | | | | | | | | Unrealized | | | | | | | Unrealized | | | | | | | Unrealized | | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | | (In thousands) | | Corporate bonds | | $ | — | | | $ | — | | | $ | 1,277 | | | $ | 723 | | | $ | 1,277 | | | $ | 723 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2009 | | | | Less than 12 months | | | 12 months or more | | | Total | | | | | | | | Unrealized | | | | | | | Unrealized | | | | | | | Unrealized | | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | | (In thousands) | | Debt securities | | | | | | | | | | | | | | | | | | | | | | | | | Puerto Rico Government obligations | | $ | — | | | $ | — | | | $ | 4,678 | | | $ | 93 | | | $ | 4,678 | | | $ | 93 | | Corporate bonds | | | — | | | | — | | | | 1,200 | | | | 800 | | | | 1,200 | | | | 800 | | | | | | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | 5,878 | | | $ | 893 | | | $ | 5,878 | | | $ | 893 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2008 | | | | Less than 12 months | | | 12 months or more | | | Total | | | | | | | | Unrealized | | | | | | | Unrealized | | | | | | | Unrealized | | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | Fair Value | | | Losses | | | | (In thousands) | | Debt securities | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Government sponsored agencies | | $ | — | | | $ | — | | | $ | 7,262 | | | $ | 728 | | | $ | 7,262 | | | $ | 728 | | Puerto Rico Government obligations | | | — | | | | — | | | | 4,436 | | | | 97 | | | | 4,436 | | | | 97 | | Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | FHLMC | | | — | | | | — | | | | 600 | | | | 5 | | | | 600 | | | | 5 | | FNMA | | | — | | | | — | | | | 6,825 | | | | 25 | | | | 6,825 | | | | 25 | | Corporate bonds | | | — | | | | — | | | | 1,140 | | | | 860 | | | | 1,140 | | | | 860 | | | | | | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | 20,263 | | | $ | 1,715 | | | $ | 20,263 | | | $ | 1,715 | | | | | | | | | | | | | | | | | | | | |
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 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. Prior to April 1, 2009, unrealized losses that were determined to be temporary were recorded, net of tax, in other comprehensive income for available for saleavailable-for-sale securities, whereas unrealized losses related to held-to-maturity securities determined to be temporary were not recognized. Regardless of whether the security was classified as available for saleavailable-for-sale or held to maturity, unrealized losses that were determined to be other-than-temporary were recorded through earnings. An unrealized loss was considered other-than-temporary if (i) it was probable that the holder would not collect all amounts due according to the contractual terms of the debt security, or (ii) the fair value was below the amortized cost of the debt security for a prolonged period of time and the Corporation did not have the positive intent and ability to hold the security until recovery or maturity. In April 2009, the FASB amended the OTTI model for debt securities. Under the new guidance, 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. Under the newamended guidance, 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. As a result of the Corporation’s adoption of this new guidance, the credit loss component of an OTTI is recorded as a component of Net impairment losses on investment securities in the accompanying consolidated statements of (loss) income, while the remaining portion of the impairment loss is recognized in OCI, provided the F-31
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 94%91% of the total available-for-sale and held-to-maturity portfolio as of December 31, 20092010 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 F-32
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) private label MBS of approximately $117$100 million for which the Corporation evaluates credit losses 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 yearyears ended December 31, 2010 and 2009, the Corporation recorded OTTI losses on available-for-sale debt securities as follows: | | | | | | | | | | | | | | | | Private label MBS | | | Private label MBS | | | 2010 | | 2009 | (In thousands) | | 2009 | | | | | | Total other-than-temporary impairment losses | | | (33,012 | ) | | $ | — | | $ | (33,012 | ) | Unrealized other-than-temporary impairment losses recognized in OCI (1) | | 31,742 | | | | (582 | ) | | 31,742 | | | | | | | | Net impairment losses recognized in earnings (2) | | $ | (1,270 | ) | | $ | (582 | ) | | $ | (1,270 | ) | | | | | | |
| | | (1) | | Represents the noncredit component impact of the OTTI on private label MBSavailable-for-sale debt securities | | (2) | | Represents the credit component of the OTTI on private label MBSavailable-for-sale debt securities |
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: | | | | | (In thousands) | | 2009 | | Credit losses at the beginning of the period | | $ | — | | Additions: | | | | | Credit losses related to debt securities for which an OTTI was not previously recognized | | | 1,270 | | | | | | Ending balance of credit losses on debt securities held for which a portion of an OTTI was recognized in OCI | | $ | 1,270 | | | | | |
As of December 31, 2009, debt securities with OTTI, for which a loss related to credit was recognized in earnings, consisted entirely of private label MBS. Private label MBS are mortgage pass-through certificates bought from R&G Financial Corporation (“R&G Financial”), a Puerto Rican financial institution. During the second quarter
F-32
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of 2009, the Corporation received from R&G Financial a payment of $4.2 million to eliminate the 10% recourse provision contained in the private label MBS. | | | | | | | | | | | 2010 | | | 2009 | | (In thousands) | | | | | | | Credit losses at the beginning of the period | | $ | 1,270 | | | $ | — | | Additions: | | | | | | | | | Credit losses related to debt securities for which an OTTI was not previously recognized | | | — | | | | 1,270 | | Credit losses related to debt securities for which an OTTI was previously recognized | | | 582 | | | | — | | | | | | | | | | | | | | | | | | Ending balance of credit losses on debt securities held for which a portion of an OTTI was recognized in OCI | | $ | 1,852 | | | $ | 1,270 | | | | | | | | |
Private label MBS are collateralized by fixed-rate mortgages on single-familysingle family residential properties in the United States and theStates. 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. Refer to Note 1 for detailed information about the methodology used to determine the fair value of private label MBS. F-33
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 December 31, 2010 and 2009 were as follow: | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2010 | | 2009 | | | Weighted | | | | Weighted | | Weighted | | | | | Average | | Range | | Average | | Range | | Average | | Range | Discount rate | | | 15 | % | | | 15 | % | | | 14.5 | % | | | 14.5 | % | | | 15 | % | | | 15 | % | Prepayment rate | | | 21 | % | | | 13.06% – 50.25 | % | | | 24 | % | | | 18.2% - 43.73 | % | | | 21 | % | | | 13.06% - 50.25 | % | Projected Cumulative Loss Rate | | | 4 | % | | | 0.22% – 10.56 | % | | | 6 | % | | | 1.49% - 16.25 | % | | | 4 | % | | | 0.22% - 10.56 | % |
For each of the years ended December 31, 20092010 and 2008,2009, the Corporation recorded OTTI of approximately $0.4 million and $1.8 million, respectively, on certain equity securities held in its available-for-sale investment portfolio related to financial institutions in Puerto Rico. Also, OTTI of $4.2 million was recorded in 2008 related to auto industry corporate bonds that were subsequently sold in 2009. Management concluded that the declines in value of the securities were other-than-temporary; as such, the cost basis of these securities was written down to the market value as of the date of the analysis and is reflected in earnings as a realized loss. Total proceeds from the sale of securities available for sale during 20092010 amounted to approximately $2.4 billion (2009 — $1.9 billion (2008 — $680.0 million)billion). The following table summarizes the realized gains and losses on sales of securities available for sale for the years indicated: | | | | | | | | | | | | | | | | | | | Year ended December 31, | | | Year ended December 31, | | (In thousands) | | 2009 | | 2008 | | | 2010 | | 2009 | | Realized gains | | $ | 82,772 | | $ | 17,896 | | | $ | 93,719 | | $ | 82,772 | | Realized losses | | — | | | (190 | ) | | | (540 | ) | | — | | | | | | | | | | | | | Net realized security gains | | $ | 82,772 | | $ | 17,706 | | | $ | 93,179 | | $ | 82,772 | | | | | | | | | | | | |
The following table states the name of issuers, and the aggregate amortized cost and market value of the securities of such issuers (includes available-for-sale and held-to-maturity securities), when the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities of the U.S. and P.R. Government. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies that are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer and include debt and mortgage-backed securities. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2009 | | 2008 | | 2010 | | 2009 | | | Amortized | | Amortized | | | | Amortized | | Amortized | | | | | Cost | | Fair Value | | Cost | | Fair Value | | Cost | | Fair Value | | Cost | | Fair Value | | | (In thousands) | | | (In thousands) | FHLMC | | $ | 1,350,291 | | $ | 1,369,535 | | $ | 1,862,939 | | $ | 1,908,024 | | | $ | 71,283 | | $ | 71,784 | | $ | 1,350,291 | | $ | 1,369,535 | | GNMA | | 474,349 | | 483,964 | | 332,385 | | 342,674 | | | 1,020,076 | | 1,048,739 | | 474,349 | | 483,964 | | FNMA | | 2,629,187 | | 2,684,065 | | 2,978,102 | | 3,025,549 | | | 972,573 | | 1,011,393 | | 2,629,187 | | 2,684,065 | | FHLB | | | 240,343 | | 236,560 | | — | | — | |
F-33F-34
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 5 — Other Equity Securities Institutions that are members of the 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 December 31, 20092010 and 2008,2009, the Corporation had investments in FHLB stock with a book value of $68.4$54.6 million ($54 million FHLB-New York and $14.4 million FHLB-Atlanta) and $62.6$68.4 million, respectively. The net realizable value is a reasonable proxy for the fair value of these instruments. Dividend income from FHLB stock for 2010, 2009 2008 and 20072008 amounted to $2.9 million, $3.1 million $3.7 million and $2.9$3.7 million, respectively. The FHLB stocks owned by the Corporation are issued by the FHLB of New York and by the FHLB of Atlanta. Both Banks are part of the Federal Home Loan Bank System, a national wholesale banking network of 12 regional, stockholder-owned congressionally chartered banks. The Federal Home Loan Banks are all privately capitalized and operated by their member stockholders. The system is supervised by the Federal Housing Finance Agency, which ensures that the Home Loan Banks operate in a financially safe and sound manner, remain adequately capitalized and able to raise funds in the capital markets, and carry out their housing finance mission. There is no secondary market for the FHLB stock and it does not have a readily determinable fair value. The stock is a par stock — sold and redeemed at par. It can only be sold to/from the FHLB’s or a member institution. From an OTTI analysis perspective, the relevant consideration for determination is the ultimate recoverability of par value. The economic conditions of late 2008 affected the FHLB’s, resulting in the recording of losses on private-label MBS portfolios. In the midst of the mortgage market crisis the FHLB of Atlanta temporarily suspended dividend payments on their stock in the fourth quarter of 2008 and in the first quarter of 2009. In the second and third quarter of 2009, they were re-instated. The FHLB of NY has not suspended payment of dividends. Third and fourth quarter dividends were reduced, and by the first quarter 2009 they were increased.
The financial situation has since shown signs of improvement, and so have the financial results of the FHLB’s. The FHLB of Atlanta reported preliminary financial results with an 11.7% year-over-year increase in net income to $283.5 million for the year ended December 31, 2009, while the FHLB of NY announce a 120% year-over-year increase in net income to $570.8 million for the same period. At December 31, 2009, both Banks met their regulatory capital-to-assets ratios and liquidity requirements.
The FHLB’s primary source of funding is debt obligations, which continue to be rated Aaa and AAA by Moody’s and Standard and Poor’s respectively. The Corporation expects to recover the par value of its investments in FHLB stocks in its entirety, therefore no OTTI is deemed to be required.
The Corporation has other equity securities that do not have a readily available fair value. The carrying value of such securities as of December 31, 2010 and 2009 was $1.3 million and 2008$1.6 million, respectively. An impairment charge of $0.25 million was $1.6 million.recorded in 2010 related to an investment in a failed financial institution in the United States. During 2010 and 2009, the Corporation realized a gainrecognized gains of $10.7 million and $3.8 million, respectively, on the sale of VISA Class A stock. As of December 31, 2009 the Corporation still held 119,234 VISA Class C shares. Also, during the first quarter of 2008, the Corporation realized a one-time gain of $9.3 million on the mandatory redemption of part of its investment in VISA, Inc., which completed its initial public offering (IPO) in March 2008. As of December 31, 2010, the Corporation no longer held any VISA shares. F-34F-35
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 6 — Interest and Dividend on Investments A detail of interest on investments and FHLB dividend income follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Interest on money market investments: | | | Taxable | | $ | 568 | | $ | 1,369 | | $ | 4,805 | | | $ | 1,772 | | $ | 568 | | $ | 1,369 | | Exempt | | 9 | | 4,986 | | 17,226 | | | 277 | | 9 | | 4,986 | | | | | | | | | | | | | | | | | | | 577 | | 6,355 | | 22,031 | | | 2,049 | | 577 | | 6,355 | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities: | | | Taxable | | 30,854 | | 2,517 | | 2,044 | | | 42,722 | | 30,854 | | 2,517 | | Exempt | | 172,923 | | 199,875 | | 110,816 | | | 63,754 | | 172,923 | | 199,875 | | | | | | | | | | | | | | | | | | | 203,777 | | 202,392 | | 112,860 | | | 106,476 | | 203,777 | | 202,392 | | | | | | | | | | | | | | | | | | | | PR Government obligations, U.S. Treasury securities and U.S. Government agencies: | | | PR Government obligations, U.S. Treasury securities and U.S. | | | Government agencies: | | | Taxable | | 2,694 | | 3,657 | | — | | | 7,572 | | 2,694 | | 3,657 | | Exempt | | 44,510 | | 74,667 | | 148,986 | | | 21,667 | | 44,510 | | 74,667 | | | | | | | | | | | | | 47,204 | | 78,324 | | 148,986 | | | | | | | | | | | | | | | | | | 29,239 | | 47,204 | | 78,324 | | | | | | | | | | | Equity securities: | | | Taxable | | 69 | | 38 | | — | | | 15 | | 69 | | 38 | | Exempt | | 37 | | 6 | | 3 | | | — | | 37 | | 6 | | | | | | | | | | | | | 106 | | 44 | | 3 | | | | | | | | | | | | | | | | | | 15 | | 106 | | 44 | | | | | | | | | | | Other investment securities (including FHLB dividends): | | | Taxable | | 3,375 | | 4,281 | | 3,426 | | | 3,010 | | 3,375 | | 4,281 | | Exempt | | — | | — | | — | | | — | | — | | — | | | | | | | | | | | | | | | | | | | 3,375 | | 4,281 | | 3,426 | | | 3,010 | | 3,375 | | 4,281 | | | | | | | | | | | | | | | | | | | | Total interest and dividends on investments | | $ | 255,039 | | $ | 291,396 | | $ | 287,306 | | | $ | 140,789 | | $ | 255,039 | | $ | 291,396 | | | | | | | | | | | | | | | | |
F-35F-36
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table summarizes the components of interest and dividend income on investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Interest income on investment securities and money market investments | | $ | 248,563 | | $ | 291,732 | | $ | 287,990 | | | $ | 139,031 | | $ | 248,563 | | $ | 291,732 | | Dividends on FHLB stock | | 3,082 | | 3,710 | | 2,861 | | | 2,894 | | 3,082 | | 3,710 | | Net interest settlement on interest rate caps | | — | | 237 | | — | | | — | | — | | 237 | | | | | | | | | | | | | | | | | Interest income excluding unrealized gain (loss) on derivatives (economic hedges) | | 251,645 | | 295,679 | | 290,851 | | | Unrealized gain (loss) on derivatives (economic hedges) from interest rate caps | | 3,394 | | | (4,283 | ) | | | (3,545 | ) | | Interest income excluding unrealized (loss) gain on derivatives (economic hedges) | | | 141,925 | | 251,645 | | 295,679 | | Unrealized (loss) gain on derivatives (economic hedges) from interest rate caps | | | | (1,136 | ) | | 3,394 | | | (4,283 | ) | | | | | | | | | | | | | | | | Total interest income and dividends on investments | | $ | 255,039 | | $ | 291,396 | | $ | 287,306 | | | $ | 140,789 | | $ | 255,039 | | $ | 291,396 | | | | | | | | | | | | | | | | |
Note 7 — Loans Receivable The following is a detail of the loan portfolio:portfolio held for investment: | | | | | | | | | | | | | | | | | | | December 31, | | | December 31, | | | | 2009 | | 2008 | | | 2010 | | 2009 | | | | (In thousands) | | | (In thousands) | | Residential mortgage loans, mainly secured by first mortgages | | $ | 3,595,508 | | $ | 3,481,325 | | | $ | 3,417,417 | | $ | 3,595,508 | | | | | | | | | | | | | | | | Commercial loans: | | | Construction loans | | 1,492,589 | | 1,526,995 | | | 700,579 | | 1,492,589 | | Commercial mortgage loans | | 1,590,821 | | 1,535,758 | | | 1,670,161 | | 1,693,424 | | Commercial and Industrial loans(1) | | 5,029,907 | | 3,857,728 | | | 3,861,545 | | 4,927,304 | | Loans to local financial institutions collateralized by real estate mortgages | | 321,522 | | 567,720 | | | 290,219 | | 321,522 | | | | | | | | | | | | | Commercial loans | | 8,434,839 | | 7,488,201 | | | 6,522,504 | | 8,434,839 | | | | | | | | | | | | | | | | Finance leases | | 318,504 | | 363,883 | | | 282,904 | | 318,504 | | | | | | | | | | | | | | | | Consumer loans | | 1,579,600 | | 1,744,480 | | | 1,432,611 | | 1,579,600 | | | | | | | | | | | | | | | | Loans receivable | | 13,928,451 | | 13,077,889 | | | 11,655,436 | | 13,928,451 | | | | | Allowance for loan and lease losses | | | (528,120 | ) | | | (281,526 | ) | | | (553,025 | ) | | | (528,120 | ) | | | | | | | | | | | | | | | Loans receivable, net | | 13,400,331 | | 12,796,363 | | | $ | 11,102,411 | | $ | 13,400,331 | | | | | | | | | Loans held for sale | | 20,775 | | 10,403 | | | | | | | | | | Total loans | | $ | 13,421,106 | | $ | 12,806,766 | | | | | | | | | |
| | | (1)1 - | | As of December 31, 2009,2010, includes $1.2$1.7 billion of commercial loans that are secured by real estate but are not dependent upon the real estate for repayment. |
As of December 31, 20092010 and 2008,2009, the Corporation had net deferred origination fees on its loan portfolio amounting to $5.2$0.7 million and $3.7$5.2 million, respectively. Total loan portfolio is net of unearned income of $49.0$42.7 million and $62.6$49.0 million as of December 31, 2010 and 2009, and 2008, respectively. As of December 31, 2009, loans in which the accrual of interest income had been discontinued amounted to $1.6 billion (2008 — $587.2 million). If these loans were accruing interest, the additional interest income realized would have been $57.9 million (2008 — $29.7 million; 2007 — $22.7 million). Past due and still accruing loans, which are contractually delinquent 90 days or more, amounted to $165.9 million as of December 31, 2009 (2008 — $471.4 million).
As of December 31, 2009, the Corporation was servicing residential mortgage loans owned by others aggregating $1.1 billion (2008 — $826.9 million) and construction and commercial loans owned by others aggregating $123.4 million (2008 — $74.5 million).
F-36F-37
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Loans held for investment on which accrual of interest income had been discontinued as of December 31, 2010 and 2009 were as follows: | | | | | | | | | | | December 31, | | (Dollars in thousands) | | 2010 | | | 2009 | | Non-performing loans: | | | | | | | | | Residential mortgage | | $ | 392,134 | | | | 441,642 | | Commercial mortgage | | | 217,165 | | | | 196,535 | | Commercial and Industrial | | | 317,243 | | | | 241,316 | | Construction | | | 263,056 | | | | 634,329 | | Consumer: | | | | | | | | | Auto loans | | | 25,350 | | | | 27,060 | | Finance leases | | | 3,935 | | | | 5,207 | | Other consumer loans | | | 20,106 | | | | 17,774 | | | | | | | | | Total non-performing loans held for investment(1) | | $ | 1,238,989 | | | $ | 1,563,863 | | | | | | | | |
| | | 1 - | | As of December 31, 2010, excludes $159.3 million in non-performing loans held for sale. |
If these loans were accruing interest, the additional interest income realized would have been $52.7 million (2009 — $57.9 million; 2008 — $29.7 million). The Corporation’s aging of the loans held for investment portfolio as of December 31, 2010, follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | 30-89 days | | | 90 days or more | | | Total | | | 90 days and | | As of December 31, 2010 | | Current | | | Past Due | | | Past Due(1) | | | Portfolio | | | still accruing | | | | (in thousands) | | Residential Mortgage: | | | | | | | | | | | | | | | | | | | | | FHA/VA and other government guaranteed loans(2) | | $ | 136,412 | | | $ | 14,780 | | | $ | 81,330 | | | $ | 232,522 | | | $ | 81,330 | | Other residential mortage loans | | | 2,654,430 | | | | 116,438 | | | | 414,027 | | | | 3,184,895 | | | | 21,893 | | Commercial: | | | | | | | | | | | | | | | | | | | | | Commercial & Industrial Loans | | | 3,701,788 | | | | 98,790 | | | | 351,186 | | | | 4,151,764 | | | | 33,943 | | Commercial Mortgage Loans | | | 1,412,943 | | | | 40,053 | | | | 217,165 | | | | 1,670,161 | | | | — | | Construction Loans | | | 418,339 | | | | 12,236 | | | | 270,004 | | | | 700,579 | | | | 6,948 | | Consumer: | | | | | | | | | | | | | | | | | | | | | Auto | | | 888,720 | | | | 94,906 | | | | 25,350 | | | | 1,008,976 | | | | — | | Finance Leases | | | 258,990 | | | | 19,979 | | | | 3,935 | | | | 282,904 | | | | — | | Other Consumer Loans | | | 379,566 | | | | 23,963 | | | | 20,106 | | | | 423,635 | | | | — | | | | | | | | | | | | | | | | | | Total Loans Receivable | | $ | 9,851,188 | | | $ | 421,145 | | | $ | 1,383,103 | | | $ | 11,655,436 | | | $ | 144,114 | | | | | | | | | | | | | | | | | |
| | | (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, 2010, includes $54.2 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 |
As of December 31, 2010, the Corporation was servicing residential mortgage loans owned by others aggregating $1.4 billion (2009 — $1.1 billion) and construction and commercial loans owned by others aggregating $7.8 million (2009 — $123.4 million). As of December 31, 2009, the Corporation was servicing commercial loan participations owned by others aggregating $235.0$269.9 million (2008(2009 — $191.2$235.0 million). Various loans secured by first mortgages were assigned as collateral for CDs, individual retirement accounts and advances from the Federal Home Loan Bank. The mortgages pledged as collateral amounted to $1.9$2.2 billion as of December 31, 2009 (20082010 (2009 — $2.5$1.9 billion). F-38
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Corporation’s primary lending area is Puerto Rico. The Corporation’s Puerto Rico banking subsidiary, First Bank,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 loanloans held for investment portfolio of $13.9$11.7 billion as of December 31, 2009,2010, approximately 83%84% have credit risk concentration in Puerto Rico, 9%8% in the United States and 8% in the Virgin Islands. As of December 31, 2009,2010, the Corporation had $1.2 billion$325.1 million outstanding of credit facilities granted to the Puerto Rico Government and/or its political subdivisions.subdivisions, down from $1.2 billion as of December 31, 2009, and $84.3 million granted to the Virgin Islands government, down from $134.7 million as of December 31, 2009. A substantial portion of these credit facilities are obligations that have a specific source of income or revenues identified for their repayment, such as sales and property taxes collected by the central Government and/or municipalities. 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 utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The Corporation also has loans to various municipalities in Puerto Rico for which the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to their repayment. Aside from loans extended to the Puerto Rico Government and its political subdivisions, the largest loan to one borrower as of December 31, 20092010 in the amount of $321.5$290.2 million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. This commercial loan is secured by individual mortgagereal-estate loans, on residential and commercial real estate. During the second quarter of 2009, the Corporation completed a transaction with R&G Financial that involved the purchase of approximately $205 million ofmostly 1-4 residential mortgage loans that previously served as collateral for a commercial loan extended to R&G. The purchase price of the transaction was retained by the Corporation to fully pay off the loan, thereby significantly reducing the Corporation’s exposure to a single borrower.loans. Note 8 — Allowance for loanLoan and lease lossesLease Losses and Impaired Loans The changes in the allowance for loan and lease losses for the year ended December 31, 2010 were as follows: | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | 2007 | | | | | | | | (In thousands) | | | | | | Balance at beginning of year | | $ | 281,526 | | | $ | 190,168 | | | $ | 158,296 | | Provision for loan and lease losses | | | 579,858 | | | | 190,948 | | | | 120,610 | | Losses charged against the allowance | | | (344,422 | ) | | | (117,072 | ) | | | (94,830 | ) | Recoveries credited to the allowance | | | 11,158 | | | | 8,751 | | | | 6,092 | | Other adjustments(1) | | | — | | | | 8,731 | | | | — | | | | | | | | | | | | Balance at end of year | | $ | 528,120 | | | $ | 281,526 | | | $ | 190,168 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Residential | | | Commercial | | | Commercial & | | | Construction | | | Consumer | | | | | (Dollars in thousands) | | Mortgage Loans | | | Mortgage Loans | | | Industrial Loans | | | Loans | | | Loans | | | Total | | 2010 | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for loan and lease losses: | | | | | | | | | | | | | | | | | | | | | | | | | Beginning balance | | $ | 31,165 | | | $ | 67,201 | | | $ | 182,778 | | | $ | 164,128 | | | $ | 82,848 | | | $ | 528,120 | | Charge-offs | | | (62,839 | ) | | | (82,708 | ) | | | (99,724 | ) | | | (313,511 | ) | | | (64,219 | ) | | | (623,001 | ) | Recoveries | | | 121 | | | | 1,288 | | | | 1,251 | | | | 358 | | | | 10,301 | | | | 13,319 | | Provision | | | 93,883 | | | | 119,815 | | | | 68,336 | | | | 300,997 | | | | 51,556 | | | | 634,587 | | | | | | | | | | | | | | | | | | | | | Ending balance | | $ | 62,330 | | | $ | 105,596 | | | $ | 152,641 | | | $ | 151,972 | | | $ | 80,486 | | | $ | 553,025 | | | | | | | | | | | | | | | | | | | | | Ending balance: specific reserve for impaired loans | | $ | 43,482 | | | $ | 26,831 | | | $ | 65,030 | | | $ | 57,833 | | | $ | 251 | | | $ | 193,427 | | | | | | | | | | | | | | | | | | | | | Ending balance: general allowance | | $ | 18,848 | | | $ | 78,765 | | | $ | 87,611 | | | $ | 94,139 | | | $ | 80,235 | | | $ | 359,598 | | | | | | | | | | | | | | | | | | | | | Loans receivables: | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance | | $ | 3,417,417 | | | $ | 1,670,161 | | | $ | 4,151,764 | | | $ | 700,579 | | | $ | 1,715,515 | | | $ | 11,655,436 | | | | | | | | | | | | | | | | | | | | | Ending balance: impaired loans | | $ | 556,654 | | | $ | 176,391 | | | $ | 380,005 | | | $ | 262,827 | | | $ | 6,302 | | | $ | 1,382,179 | | | | | | | | | | | | | | | | | | | | | Ending balance: loans with general allowance | | $ | 2,860,763 | | | $ | 1,493,770 | | | $ | 3,771,759 | | | $ | 437,752 | | | $ | 1,709,213 | | | $ | 10,273,257 | | | | | | | | | | | | | | | | | | | | |
There were no significant purchases of loans during 2010. The Corporation did sell certain non-performing loans totaling $200.0 million ($118.4 million construction loans; $56.4 million commercial mortgage loans; $1.3 commercial and industrial loans; and $23.9 million residential mortgage loans), as well as $174.3 million of performing residential mortgage loans in the secondary market to FNMA and FHLMC during 2010. Also, the Corporation securitized approximately $217.3 million of FHA/VA mortgage loan production to GNMA mortgage-backed securities during 2010. During the fourth quarter of 2010, the Corporation transferred $446.7 million of loans to the loans held-for-sale portfolio resulting in total charge-offs of $165.1 million to reduce the loans to lower of cost or market value, of which $102.9 million was charged against the provision for loan and lease losses during the fourth quarter of 2010. F-39
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Changes in the allowance for 2009 and 2008 were as follows: | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | | (In thousands) | | Balance at beginning of year | | $ | 281,526 | | | $ | 190,168 | | Provision for loan and lease losses | | | 579,858 | | | | 190,948 | | Losses charged against the allowance | | | (344,422 | ) | | | (117,072 | ) | Recoveries credited to the allowance | | | 11,158 | | | | 8,751 | | Other adjustments(1) | | | — | | | | 8,731 | | | | | | | | | Balance at end of year | | $ | 528,120 | | | $ | 281,526 | | | | | | | | |
| | | (1) | | Carryover of the allowance for loan losses related to a $218 million auto loan portfolio acquired in the third quarter of 2008. |
F-37
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The allowance for impaired loans is part of the allowance for loan and lease losses. The allowance for impaired loans covers those loans for which management has determined that it is probable that the debtor will be unable to pay all the amounts due in accordance with the contractual terms of the loan agreement, and does not necessarily represent loans for which the Corporation will incur a loss. Information regarding impaired loans for the year ended December 31, 2010 was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Unpaid | | | | | | | Average | | | Interest | | Impaired Loans | | Recorded | | | Principal | | | Related | | | Recorded | | | Income | | (Dollars in thousands) | | Investment | | | Balance | | | Allowance | | | Investment | | | Recognized | | As of December 31, 2010 | | | | | | | | | | | | | | | | | | | | | With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | FHA/VA Guaranteed loans | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Other residential mortage loans | | | 244,648 | | | | 253,636 | | | | — | | | | 302,565 | | | | 8,103 | | Commercial: | | | | | | | | | | | | | | | | | | | | | Commercial mortgage loans | | | 32,328 | | | | 32,868 | | | | — | | | | 32,117 | | | | 1,180 | | Commercial & Industrial Loans | | | 54,631 | | | | 58,927 | | | | — | | | | 74,554 | | | | 892 | | Construction Loans | | | 25,074 | | | | 26,557 | | | | — | | | | 126,841 | | | | 59 | | Consumer: | | | | | | | | | | | | | | | | | | | | | Auto loans | | | — | | | | — | | | | — | | | | — | | | | — | | Finance leases | | | — | | | | — | | | | — | | | | — | | | | — | | Other consumer loans | | | 659 | | | | 1,015 | | | | — | | | | 165 | | | | 2 | | | | | | | | | | | | | | | | | | | | $ | 357,340 | | | $ | 373,003 | | | $ | — | | | $ | 536,242 | | | $ | 10,236 | | | | | | | | | | | | | | | | | | With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | FHA/VA Guaranteed loans | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Other residential mortage loans | | | 311,187 | | | | 350,576 | | | | 42,666 | | | | 215,985 | | | | 5,801 | | Commercial: | | | | | | | | | | | | | | | | | | | | | Commercial mortgage loans | | | 150,442 | | | | 186,404 | | | | 26,869 | | | | 180,504 | | | | 4,179 | | Commercial & Industrial Loans | | | 325,206 | | | | 416,919 | | | | 65,030 | | | | 330,433 | | | | 5,606 | | Construction Loans | | | 237,970 | | | | 323,127 | | | | 57,833 | | | | 481,871 | | | | 1,015 | | Consumer: | | | | | | | | | | | | | | | | | | | | | Auto loans | | | — | | | | — | | | | — | | | | — | | | | — | | Finance leases | | | — | | | | — | | | | — | | | | — | | | | — | | Other consumer loans | | | 1,496 | | | | 1,496 | | | | 264 | | | | 374 | | | | 28 | | | | | | | | | | | | | | | | | | | | $ | 1,026,301 | | | $ | 1,278,522 | | | $ | 192,662 | | | $ | 1,209,167 | | | $ | 16,629 | | | | | | | | | | | | | | | | | | Total: | | | | | | | | | | | | | | | | | | | | | FHA/VA Guaranteed loans | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Other residential mortage loans | | | 555,835 | | | | 604,212 | | | | 42,666 | | | | 518,550 | | | | 13,904 | | Commercial: | | | | | | | | | | | | | | | | | | | | | Commercial mortgage loans | | | 182,770 | | | | 219,272 | | | | 26,869 | | | | 212,621 | | | | 5,359 | | Commercial & Industrial Loans | | | 379,837 | | | | 475,846 | | | | 65,030 | | | | 404,987 | | | | 6,498 | | Construction Loans | | | 263,044 | | | | 349,684 | | | | 57,833 | | | | 608,712 | | | | 1,074 | | Consumer: | | | | | | | | | | | | | | | | | | | | | Auto loans | | | — | | | | — | | | | — | | | | — | | | | — | | Finance leases | | | — | | | | — | | | | — | | | | — | | | | — | | Other consumer loans | | | 2,155 | | | | 2,511 | | | | 264 | | | | 539 | | | | 30 | | | | | | | | | | | | | | | | | | | | $ | 1,383,641 | | | $ | 1,651,525 | | | $ | 192,662 | | | $ | 1,745,409 | | | $ | 26,865 | | | | | | | | | | | | | | | | | |
F-40
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As of December 31, 2009 2008 and 2007,2008 impaired loans and their related allowance were as follows: | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2009 | | 2008 | | 2007 | | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Impaired loans with valuation allowance, net of charge-offs | | $ | 1,060,088 | | $ | 384,914 | | $ | 66,941 | | | $ | 1,060,088 | | $ | 384,914 | | Impaired loans without valuation allowance, net of charge-offs | | 596,176 | | 116,315 | | 84,877 | | | 596,176 | | 116,315 | | | | | | | | | | | | | | | Total impaired loans | | $ | 1,656,264 | | $ | 501,229 | | $ | 151,818 | | | $ | 1,656,264 | | $ | 501,229 | | | | | | | | | | | | | | | | | | Allowance for impaired loans | | 182,145 | | 83,353 | | 7,523 | | | 182,145 | | 83,353 | | | | | During the year: | | | | | | Average balance of impaired loans | | 1,022,051 | | 302,439 | | 116,362 | | | 1,022,051 | | 302,439 | | | | | Interest income recognized on impaired loans (1) | | 21,160 | | 12,974 | | 6,588 | | | 21,160 | | 12,974 | |
| | | (1) | | For 2009 excludes interest income of approximately $4.7 million, related to $761.5 million non-performing loans, that was applied against the related principal balance under the cost-recovery method. |
The following tables show the activity for impaired loans and the related specific reserve during 2009:2010: | | | | | | | | | | | | (In thousands) | | Impaired Loans: | | (In thousands) | | | Balance at beginning of year | | $ | 501,229 | | | $ | 1,656,264 | | Loans determined impaired during the year | | 1,466,805 | | | 902,047 | | Net charge-offs (1) | | | (244,154 | ) | | Loans sold, net of charge-offs of $49.6 million (2) | | | (39,374 | ) | | Loans foreclosed, paid in full and partial payments | | | (28,242 | ) | | Net charge-offs | | | | (566,734 | ) | Loans sold, net of charge-offs of $48.7 million | | | | (138,833 | ) | Impaired loans transferred to held for sale, net of charge offs of $153.9 million | | | | (251,024 | ) | Loans foreclosed, paid in full and partial payments or no longer considered impaired | | | | (218,079 | ) | | | | | | | | Balance at end of year | | $ | 1,656,264 | | | $ | 1,383,641 | | | | | | | | |
| | | | | | | (In thousands) | | Specific Reserve: | | | | | Balance at beginning of year | | $ | 182,145 | | Provision for loan losses | | | 577,251 | | Net charge-offs | | | (566,734 | ) | | | | | Balance at end of year | | $ | 192,662 | | | | | |
The Corporation’s credit quality indicators by loan type as of December 31, 2010 are summarized below: | | | | | | | | | | | Commercial Credit Exposure-Credit risk Profile based | | | on Creditworthiness category: | | | Adversely Classified | | Total Portfolio | | | (In thousands) | Commercial Mortgage | | $ | 353,860 | | | $ | 1,670,161 | | Construction | | | 323,880 | | | | 700,579 | | Commercial and Industrial | | | 558,937 | | | | 4,151,764 | |
| | | (1) | | Approximately $114.2 million, or 47%, is related to construction loans in Florida and $44.6 million, or 18%, is related to construction loans in Puerto Rico. | | (2) | | Related to five construction projects sold in Florida. |
| | | | | Specific Reserve: | | (In thousands) | | Balance at beginning of year | | $ | 83,353 | | Provision for loan losses | | | 342,946 | | Net charge-offs | | | (244,154 | ) | | | | | Balance at end of year | | $ | 182,145 | | | | | |
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 F-41
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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. | | | | | | | | | | | | | | | | | | | | | | | 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 | | $ | 232,522 | | | $ | 2,792,761 | | | $ | 983,626 | | | $ | 278,969 | | | $ | 403,529 | | Non-performing | | | — | | | | 392,134 | | | | 25,350 | | | | 3,935 | | | | 20,106 | | | | | | | | | | | | | | | | | | Total | | $ | 232,522 | | | $ | 3,184,895 | | | $ | 1,008,976 | | | $ | 282,904 | | | $ | 423,635 | | | | | | | | | | | | | | | | | |
The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico and through programs sponsored by the Federal Government. Due toDepending upon the nature of the borrower’sborrowers’ financial condition, the restructurerestructurings or loan modificationmodifications through thesethis program as well as other restructurings of individual commercial, commercial mortgage, loans, construction loans and residential mortgagesmortgage loans in the U.S. mainland fit the definition of Troubled Debt Restructuring (“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 loansloan and modifications of the loan rate. As of December 31, 2009,2010, the Corporation’s TDR loans consisted of $124.1$261.2 million of residential mortgage loans, $42.1$37.2 million commercial and industrial loans, $68.1$112.4 million commercial mortgage loans and $101.7$28.5 million of construction loans. Outstanding unfunded loan commitments on TDR loans amounted to $1.3 million as of December 31, 2009. F-38
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2010.
Included in the $101.7$112.4 million of constructioncommercial mortgage TDR loans are certain impaired condo-conversion loansis one loan restructured into two separate agreements (loan splitting) in the fourth quarter of 2009. Each of these loans were2010. This loan was restructured into two notes; one that represents the portion of the loan that is expected to be fully collected along with contractual interest and the second note that represents the portion of the original loan that was charged-off. The renegotiationsrenegotiation of these loans have beenthis loan was made after analyzing the borrowersborrowers’ and guarantorsguarantors’ capacity to serverepay the debt and ability to perform under the modified terms. As part of the renegotiation of the loans, the first note of each loan have beenwas placed on a monthly payment schedule that amortizeamortizes the debt over 2530 years at a market rate of interest. An interest rate reductionThe second note for $2.7 million was granted forfully charged-off. The carrying value of the second note. The following tables provide additional information about the volumenote deemed collectible amounted to $17.0 million as of this type of loan restructuringsDecember 31, 2010 and the effect oncharge-off recorded prior to the allowance forrestructure amounted to $11.3 million. The loan and lease losseswas placed in 2009. | | | �� | | | | (In thousands) | | Principal balance deemed collectible | | $ | 22,374 | | | | | | Amount charged-off | | $ | (29,713 | ) | | | | |
| | | | | Specific Reserve: | | (In thousands) | | Balance at beginning of year | | $ | 14,375 | | Provision for loan losses | | | 17,213 | | Charge-offs | | | (29,713 | ) | | | | | Balance at end of year | | $ | 1,875 | | | | | |
The loans comprisingaccruing status as the $22.4 million that have been deemed collectible continueborrower has exhibited a period of sustained performance but continues to be individually evaluated for impairment purposes. These transactions contributedpurposes, and a specific reserve of $2.0 million was allocated to a $29.9 million decrease in non-performing loans during the last quarterthis loan as of 2009.December 31, 2010.
F-42
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 9 — Loans Held for Sale As of December 21, 2010 and 2009, the Corporation’s loans held-for-sale portfolio was composed of: | | | | | | | | | | | December 31, | | | | 2010 | | | 2009 | | | | (In thousands) | | Residential mortgage loans | | $ | 19,148 | | | $ | 20,775 | | Construction loans | | | 207,270 | | | | — | | Commercial and Industrial loans | | | 20,643 | | | | — | | Commercial Mortgage loans | | | 53,705 | | | | — | | | | | | | | | Total | | $ | 300,766 | | | $ | 20,775 | | | | | | | | |
Non-performing loans held for sale totaled $159.3 million as of December 31, 2010 ($140.1 million construction loans and $19.2 million of commercial mortgage loans) and $0 as of December 31, 2009. If these loans were accruing interest, the additional interest income realized would have been $13.9 million in 2010. During the fourth quarter of 2010, the Corporation transferred to the held-for-sale portfolio loans with a book value of $447 million. In connection with the transfer, the recorded investment in the loans was written down to a value of $281.6 million, which resulted in charge-offs of $165.1 million. On February 16, 2011, the Corporation completed the sale of substantially all of the held-for-sale portfolio in exchange for cash, a loan receivable and an interest in a joint venture created by Goldman, Sachs & Co. and Caribbean Property Group. The details of the transaction are discussed in Note 36. Note 10 — Related Party Transactions The Corporation granted loans to its directors, executive officers and certain related individuals or entities in the ordinary course of business. The movement and balance of these loans were as follows: | | | | | | | | | | | Amount | | | Amount | | | | (In thousands) | | | (In thousands) | | Balance at December 31, 2007 | | $ | 182,573 | | | New loans | | 44,963 | | | Payments | | | (48,380 | ) | | Other changes | | — | | | | | | | | | | | Balance at December 31, 2008 | | 179,156 | | | $ | 179,156 | | | | | | | | | | New loans | | 3,549 | | | 3,549 | | Payments | | | (6,405 | ) | | | (6,405 | ) | Other changes | | | (152,130 | ) | | | (152,130 | ) | | | | | | | | | | | Balance at December 31, 2009 | | $ | 24,170 | | | 24,170 | | | | | | | | | New loans | | | 9,842 | | Payments | | | | (3,618 | ) | Other changes | | | | (408 | ) | | | | | | | | | Balance at December 31, 2010 | | | $ | 29,986 | | | | | | |
These loans do not involve more than normal risk of collectibilitycollectability and management considers that they present terms that are no more favorable than those that would have been obtained if transactions had been with unrelated parties. The amounts reported as other changes include changes in the status of those who are considered related parties, which, for 2010 was mainly due to the departure of an officer of the Corporation and for 2009 due to the resignation of an independent director in 2009.director. From time to time, the Corporation, in the ordinary course of its business, obtains services from related parties or makes contributions to non-profit organizations that have some association with the Corporation. Management believes the terms of such arrangements are consistent with arrangements entered into with independent third parties. F-39F-43
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 1011 — Premises and Equipment Premises and equipment is comprised of: | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | | Useful Life | | As of December 31, | | | | Useful Life | | 2009 | | 2008 | | | In Years | | 2010 | | 2009 | | | | In Years | | (Dollars in thousands) | | | (Dollars in thousands) | | Buildings and improvements | | 10 - 40 | | $ | 90,158 | | $ | 84,282 | | | 10 - 40 | | $ | 144,599 | | $ | 90,158 | | Leasehold improvements | | 1 - 15 | | 57,522 | | 52,945 | | | 1 - 15 | | 57,034 | | 57,522 | | Furniture and equipment | | 3 - 10 | | 123,582 | | 119,419 | | | 3 - 10 | | 142,407 | | 123,582 | | | | | | | | | | | | | | | 271,262 | | 256,646 | | | 344,040 | | 271,262 | | | | | Accumulated depreciation | | | (155,459 | ) | | | (133,109 | ) | | | (173,801 | ) | | | (155,459 | ) | | | | | | | | | | | | | | 115,803 | | 123,537 | | | 170,239 | | 115,803 | | | | | Land | | 28,327 | | 24,791 | | | 29,395 | | 28,327 | | Projects in progress | | 53,835 | | 30,140 | | | 9,380 | | 53,835 | | | | | | | | | | | | | Total premises and equipment, net | | $ | 197,965 | | $ | 178,468 | | | $ | 209,014 | | $ | 197,965 | | | | | | | | | | | | |
Depreciation and amortization expense amounted to $20.9 million, $20.8 million $19.2 million and $17.7$19.2 million for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. Note 1112 — Goodwill and Other Intangibles Goodwill as of December 31, 20092010 and 20082009 amounted to $28.1 million, recognized as part of “Other Assets”. The Corporation’sCorporation conducted its annual evaluation of goodwill and intangibleintangibles during the fourth quarter of 2009.2010. The evaluation was a two step process. The Step 1 evaluation of goodwill ofallocated to the Florida reporting unit indicated potential impairment of goodwill; however, impairmentgoodwill. The Step 1 fair value for the unit was not indicated based uponbelow the carrying amount of its equity book value as of the October 1, 2010 valuation date, requiring the completion of Step 2. The Step 2 required a valuation of all assets and liabilities of the Florida unit, including any recognized and unrecognized intangible assets, to determine the fair value of net assets. To complete Step 2, the Corporation subtracted from the unit’s Step 1 fair value the determined fair value of the net assets to arrive at the implied fair value of goodwill. The results of the Step 2 analysis.analysis indicated that the implied fair value of goodwill exceeded the goodwill carrying value by $12.3 million, resulting in no goodwill impairment. Goodwill was not impaired as of December 31, 20092010 or 2008,2009, nor was any goodwill written-off due to impairment during 2010, 2009 2008 and 2007.2008. Refer to Note 1 for additional details about the methodology used for the goodwill impairment analysis. As of December 31, 2009,2010, the gross carrying amount and accumulated amortization of core deposit intangibles was $41.8 million and $25.2$27.8 million, respectively, recognized as part of “Other Assets” in the Consolidated Statementsconsolidated statements of Financial Conditionfinancial condition (December 31, 20082009 — $45.8$41.8 million and $21.8$25.2 million, respectively). For the year ended December 31, 2009,2010, the amortization expense of core deposit intangibles amounted to $2.6 million (2009 — $3.4 million (2008million; 2008 — $3.6 million; 2007 — $3.3 million). As a result of an impairment evaluation of core deposit intangibles, there was an impairment charge of $4.0 million recognized during 2009 related to core deposits in FirstBank Florida attributable to decreases in the base of core deposits acquired, andwhich was recorded as part of other non-interest expenses in the Statementstatement of (Loss) Income.(loss) income. F-44
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table presents the estimated aggregate annual amortization expense of the core deposit intangible: | | | | | | | | | | | Amount | | Amount | | | (In thousands) | | (In thousands) | 2010 | | $ | 2,557 | | | 2011 | | 2,522 | | | $ | 2,522 | | 2012 | | 2,522 | | | 2,522 | | 2013 | | 2,522 | | | 2,522 | | 2014 and thereafter | | 6,477 | | | 2014 | | | 2,522 | | 2015 and thereafter | | | 3,955 | |
Note 13 — Non-consolidated Variable Interest Entities and Servicing Assets The Corporation transfers residential mortgage loans in sale or securitization transactions in which it has continuing involvement, including servicing responsibilities and guarantee arrangements. All such transfers have been accounted for as sales as required by applicable accounting guidance. When evaluating transfers and other transactions with Variable Interest Entities (“VIEs”) for consolidation under the recently adopted guidance, the Corporation first determines if the counterparty is an entity for which a variable interest exists. If no scope exception is applicable and a variable interest exists, the Corporation then evaluates if it is the primary beneficiary of the VIE and whether the entity should be consolidated or not. Below is a summary of transfers of financial assets to VIEs for which the Company has retained some level of continuing involvement: Ginnie Mae The Corporation typically transfers first lien residential mortgage loans in conjunction with Ginnie Mae securitization transactions whereby the loans are exchanged for cash or securities that are readily redeemed for cash proceeds and servicing rights. The securities issued through these transactions are guaranteed by the issuer and, as such, under seller/servicer agreements the Corporation is required to service the loans in accordance with the issuers’ servicing guidelines and standards. As of December 31, 2010, the Corporation serviced loans securitized through GNMA with a principal balance of $469.7 million. Trust Preferred Securities In 2004, FBP Statutory Trust I, a financing subsidiary of the Corporation, sold to institutional investors $100 million of its variable rate trust preferred securities. The proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $3.1 million of FBP Statutory Trust I variable rate common securities, were used by FBP Statutory Trust I to purchase $103.1 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. Also in 2004, FBP Statutory Trust II, a statutory trust that is wholly-owned by the Corporation, sold to institutional investors $125 million of its variable rate trust preferred securities. The proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $3.9 million of FBP Statutory Trust II variable rate common securities, were used by FBP Statutory Trust II to purchase $128.9 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. The trust preferred debentures are presented in the Corporation’s consolidated statement of financial condition as Other Borrowings, net of related issuance costs. The variable rate trust preferred securities are fully and unconditionally guaranteed by the Corporation. The $100 million Junior Subordinated Deferrable Debentures issued by the Corporation in April 2004 and the $125 million issued in September 2004 mature on September 17, 2034 and September 20, 2034, respectively; however, under certain circumstances, the maturity of Junior Subordinated Debentures may be shortened (such shortening would result in a mandatory redemption of the variable rate trust preferred securities). The trust preferred securities, subject to certain limitations, qualify as Tier I regulatory capital under current Federal Reserve rules and regulations. The Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act eliminates certain trust preferred securities from Tier 1 Capital, but TARP preferred securities are exempted from this treatment. These “regulatory capital deductions” for trust preferred securities are to be phased in incrementally over a period of 3 years beginning on January 1, 2013. Grantor Trusts During 2004 and 2005, a third party to the Corporation, from now on identified as the seller, established a series of statutory trusts to effect the securitization of mortgage loans and the sale of trust certificates. The seller initially provided the servicing for a fee, F-40F-45
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 12 — which is senior to the obligations to pay trust certificate holders. The seller then entered into a sales agreement through which it sold and issued the trust certificates in favor of the Corporation’s banking subsidiary. Currently, the Bank is the sole owner of the trust certificates; the servicing of the underlying residential mortgages that generate the principal and interest cash flows is performed by the seller, which receives a fee compensation for services provided, the servicing fee. The securities are variable rate securities indexed to the 90-day LIBOR plus a spread. The principal payments from the underlying loans are remitted to a paying agent (the seller) who then remits interest to the Bank; interest income is shared to a certain extent with the FDIC, that has an interest only strip (“IO”) tied to the cash flows of the underlying loans, whereas it is entitled to received the excess of the interest income less a servicing fee over the variable rate income that the Bank earns on the securities. This IO is limited to the weighted average coupon of the securities. The FDIC became the owner of the IO upon the intervention of the seller, a failed financial institution. No recourse agreement exists and the risk from losses on non accruing loans and repossessed collateral is absorbed by the Bank as the 100% holder of the certificates. As of December 31, 2010, the outstanding balance of Grantor Trusts amounted to $100.1 million with a weighted average yield of 2.31%.
Servicing Assets As disclosed in Note 1, the Corporation is actively involved in the securitization of pools of FHA-insured and VA-guaranteed mortgages for issuance of GNMA mortgage-backed securities. Also, certain conventional conforming-loans are sold to FNMA or FHLMC with servicing retained. The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or purchased. The changes in servicing assets are shown below: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Balance at beginning of year | | $ | 8,151 | | $ | 7,504 | | $ | 5,317 | | | $ | 11,902 | | $ | 8,151 | | $ | 7,504 | | Capitalization of servicing assets | | 6,072 | | 1,559 | | 1,285 | | | 6,607 | | 6,072 | | 1,559 | | Servicing assets purchased | | — | | 621 | | 1,962 | | | — | | — | | 621 | | Amortization | | | (2,321 | ) | | | (1,533 | ) | | | (1,060 | ) | | | (2,099 | ) | | | (2,321 | ) | | | (1,533 | ) | Adjustment to servicing assets for loans repurchased (1) | | | | (813 | ) | | — | | — | | | | | | | | | | | | | | | | | Balance before valuation allowance at end of year | | 11,902 | | 8,151 | | 7,504 | | | 15,597 | | 11,902 | | 8,151 | | Valuation allowance for temporary impairment | | | (745 | ) | | | (751 | ) | | | (336 | ) | | | (434 | ) | | | (745 | ) | | | (751 | ) | | | | | | | | | | | | | | | | Balance at end of year | | $ | 11,157 | | $ | 7,400 | | $ | 7,168 | | | $ | 15,163 | | $ | 11,157 | | $ | 7,400 | | | | | | | | | | | | | | | | |
| | | (1) | | Amount represents the adjustment to fair value related to the repurchase of $79.3 million for 2010 in principal balance of loans serviced for others. |
Impairment charges are recognized through a valuation allowance for each individual stratum of servicing assets. The valuation allowance is adjusted to reflect the amount, if any, by which the cost basis of the servicing asset for a given stratum of loans being serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized. Other-than-temporary impairments, if any, are recognized as a direct write-down of the servicing assets. Changes in the impairment allowance were as follows: | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | 2007 | | | | (In thousands) | | Balance at beginning of year | | $ | 751 | | | $ | 336 | | | $ | 57 | | Temporary impairment charges | | | 2,537 | | | | 1,437 | | | | 461 | | Recoveries | | | (2,543 | ) | | | (1,022 | ) | | | (182 | ) | | | | | | | | | | | Balance at end of year | | | 745 | | | | 751 | | | $ | 336 | | | | | | | | | | | |
The components of net servicing income are shown below:
| | | | | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | 2007 | | | | (In thousands) | | Servicing fees | | $ | 3,082 | | | $ | 2,565 | | | $ | 2,133 | | Late charges and prepayment penalties | | | 581 | | | | 513 | | | | 503 | | | | | | | | | | | | Servicing income, gross | | | 3,663 | | | | 3,078 | | | | 2,636 | | Amortization and impairment of servicing assets | | | (2,315 | ) | | | (1,948 | ) | | | (1,339 | ) | | | | | | | | | | | Servicing income, net | | $ | 1,348 | | | $ | 1,130 | | | $ | 1,297 | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year Ended December 31, | | | | 2010 | | | 2009 | | | 2008 | | | | (In thousands) | | Balance at beginning of year | | $ | 745 | | | $ | 751 | | | $ | 336 | | Temporary impairment charges | | | 1,261 | | | | 2,537 | | | | 1,437 | | Recoveries | | | (1,572 | ) | | | (2,543 | ) | | | (1,022 | ) | | | | | | | | | | | Balance at end of year | | $ | 434 | | | $ | 745 | | | $ | 751 | | | | | | | | | | | |
F-41F-46
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The components of net servicing income are shown below: | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2010 | | | 2009 | | | 2008 | | | | (In thousands) | | Servicing fees | | $ | 4,119 | | | $ | 3,082 | | | $ | 2,565 | | Late charges and prepayment penalties | | | 624 | | | | 581 | | | | 513 | | Other(1) | | | (813 | ) | | | — | | | | — | | | | | | | | | | | | Servicing income, gross | | | 3,930 | | | | 3,663 | | | | 3,078 | | Amortization and impairment of servicing assets | | | (1,788 | ) | | | (2,315 | ) | | | (1,948 | ) | | | | | | | | | | | Servicing income, net | | $ | 2,142 | | | $ | 1,348 | | | $ | 1,130 | | | | | | | | | | | |
(1) Amount represents the adjustment to fair value related to the repurchase of $79.3 million for 2010 in principal balance of loans serviced for others. The Corporation’s servicing assets are subject to prepayment and interest rate risks. Key economic assumptions used in determining the fair value at the time of sale rangedof the loans were as followsfollows: | | | | | | | | | | | | | | | | | | | | Maximum | | Minimum | 2010: | | | Constant prepayment rate: | | | Government guaranteed mortgage loans | | | | 12.7 | % | | | 11.2 | % | Conventional conforming mortgage loans | | | | 18.0 | % | | | 14.8 | % | Conventional non-conforming mortgage loans | | | | 14.8 | % | | | 11.5 | % | Discount rate: | | | Government guaranteed mortgage loans | | | | 11.7 | % | | | 10.3 | % | Conventional conforming mortgage loans | | | | 9.3 | % | | | 9.2 | % | Conventional non-conforming mortgage loans | | | | 13.1 | % | | | 13.1 | % | | | Maximum | | Minimum | | 2009: | | | Constant prepayment rate: | | | Government guaranteed mortgage loans | | | 24.8 | % | | | 14.3 | % | | | 24.8 | % | | | 14.3 | % | Conventional conforming mortgage loans | | | 21.9 | % | | | 16.4 | % | | | 21.9 | % | | | 16.4 | % | Conventional non-conforming mortgage loans | | | 20.1 | % | | | 12.8 | % | | | 20.1 | % | | | 12.8 | % | Discount rate: | | | Government guaranteed mortgage loans | | | 13.6 | % | | | 11.8 | % | | | 13.6 | % | | | 11.8 | % | Conventional conforming mortgage loans | | | 9.3 | % | | | 9.2 | % | | | 9.3 | % | | | 9.2 | % | Conventional non-conforming mortgage loans | | | 13.2 | % | | | 13.1 | % | | | 13.2 | % | | | 13.1 | % | | | | 2008: | | | Constant prepayment rate: | | | Government guaranteed mortgage loans | | | 22.1 | % | | | 13.6 | % | | | 22.1 | % | | | 13.6 | % | Conventional conforming mortgage loans | | | 17.7 | % | | | 10.2 | % | | | 17.7 | % | | | 10.2 | % | Conventional non-conforming mortgage loans | | | 14.5 | % | | | 9.0 | % | | | 14.5 | % | | | 9.0 | % | Discount rate: | | | Government guaranteed mortgage loans | | | 10.5 | % | | | 10.1 | % | | | 10.5 | % | | | 10.1 | % | Conventional conforming mortgage loans | | | 9.3 | % | | | 9.3 | % | | | 9.3 | % | | | 9.3 | % | Conventional non-conforming mortgage loans | | | 13.4 | % | | | 13.2 | % | | | 13.4 | % | | 13.2 | % | | | | 2007: | | | Constant prepayment rate: | | | Government guaranteed mortgage loans | | | 17.2 | % | | | 11.0 | % | | Conventional conforming mortgage loans | | | 13.2 | % | | | 8.8 | % | | Conventional non-conforming mortgage loans | | | 13.2 | % | | | 10.6 | % | | Discount rate: | | | Government guaranteed mortgage loans | | | 10.0 | % | | | 10.0 | % | | Conventional conforming mortgage loans | | | 9.0 | % | | | 9.0 | % | | Conventional non-conforming mortgage loans | | | 13.7 | % | | | 13.0 | % | |
F-47
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) At December 31, 2009,2010, fair values of the Corporation’s servicing assets were based on a valuation model that incorporates market driven assumptions, adjusted by the particular characteristics of the Corporation’s servicing portfolio, regarding discount rates and mortgage prepayment rates. The weighted-averages of the key economic assumptions used by the Corporation in its valuation model and the sensitivity of the current fair value to immediate 10 percent and 20 percent adverse changes in those assumptions for mortgage loans at December 31, 2009,2010, were as follows: | | | | | | | | | (Dollars in thousands) | | | Carrying amount of servicing assets | | $ | 11,157 | | | $ | 15,163 | | Fair value | | $ | 12,920 | | | $ | 16,623 | | Weighted-average expected life (in years) | | 6.6 | | | 7.55 | | | | | Constant prepayment rate (weighted-average annual rate) | | | 15.4 | % | | | 13.6 | % | Decrease in fair value due to 10% adverse change | | $ | 745 | | | $ | 816 | | Decrease in fair value due to 20% adverse change | | $ | 1,388 | | | $ | 1,563 | | | | | Discount rate (weighted-average annual rate) | | | 11.10 | % | | | 10.46 | % | Decrease in fair value due to 10% adverse change | | $ | 149 | | | $ | 632 | | Decrease in fair value due to 20% adverse change | | $ | 632 | | | $ | 1,219 | |
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the servicing asset is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the sensitivities. Note 14 — Deposits and Related Interest Deposits and related interest consist of the following: | | | | | | | | | | | December 31, | | | | 2010 | | | 2009 | | | | (In thousands) | | Type of account and interest rate: | | | | | | | | | Non-interest bearing checking accounts | | $ | 668,052 | | | $ | 697,022 | | Savings accounts - 0.50% to 2.27% (2009 - 0.50% to 2.52%) | | | 1,938,475 | | | | 1,761,646 | | Interest bearing checking accounts - 0.50% to 2.27% (2009 - 0.50% to 2.79%) | | | 1,012,009 | | | | 998,097 | | Certificates of deposit - 0.15% to 6.50% (2009 - 0.15% to 7.00%) | | | 2,181,205 | | | | 1,650,866 | | Brokered certificates of deposit - 0.20% to 5.05% (2009 - 0.25% to 5.30% ) | | | 6,259,369 | | | | 7,561,416 | | | | | | | | | | | $ | 12,059,110 | | | $ | 12,669,047 | | | | | | | | |
The weighted average interest rate on total deposits as of December 31, 2010 and 2009 was 1.80% and 2.06%, respectively. As of December 31, 2010, the aggregate amount of overdrafts in demand deposits that were reclassified as loans amounted to $25.9 million (2009 — $16.5 million). F-42F-48
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 13 — Deposits and Related Interest
Deposits and related interest consist of the following:
| | | | | | | | | | | December 31, | | | | 2009 | | | 2008 | | | | (In thousands) | | Type of account and interest rate: | | | | | | | | | Non-interest bearing checking accounts | | $ | 697,022 | | | $ | 625,928 | | Savings accounts - 0.50% to 2.52% (2008 - 0.80% to 3.75%) | | | 1,774,273 | | | | 1,288,179 | | Interest bearing checking accounts - 0.50% to 2.79% (2008 - 0.75% to 3.75% ) | | | 985,470 | | | | 726,731 | | Certificates of deposit - 0.15% to 7.00% (2008 - 0.75% to 7.00%) | | | 1,650,866 | | | | 1,986,770 | | Brokered certificates of deposit(1) - 0.25% to 5.30% (2008 - 2.15% to 6.00%) | | | 7,561,416 | | | | 8,429,822 | | | | | | | | | | | $ | 12,669,047 | | | $ | 13,057,430 | | | | | | | | |
| | | (1) | | Includes $0 and $1,150,959 measured at fair value as of December 31, 2009 and 2008, respectively. |
The weighted average interest rate on total deposits as of December 31, 2009 and 2008 was 2.06% and 3.63%, respectively.
As of December 31, 2009, the aggregate amount of overdrafts in demand deposits that were reclassified as loans amounted to $16.5 million (2008 — $12.8 million).
The following table presents a summary of CDs, including brokered CDs, with a remaining term of more than one year as of December 31, 2009:2010: | | | | | | | | | | | Total | | | Total | | | | (In thousands) | | | (In thousands) | | Over one year to two years | | $ | 1,786,651 | | | $ | 2,652,993 | | Over two years to three years | | 1,048,911 | | | 1,230,244 | | Over three years to four years | | 279,467 | | | 101,381 | | Over four years to five years | | 42,382 | | | 85,439 | | Over five years | | 13,806 | | | 13,855 | | | | | | | | | Total | | $ | 3,171,217 | | | $ | 4,083,912 | | | | | | | | |
As of December 31, 2009,2010, CDs in denominations of $100,000 or higher amounted to $8.6$7.5 billion (2008(2009 — $9.6$8.6 billion) including brokered CDs of $7.6$6.3 billion (2008(2009 — $8.4$7.6 billion) at a weighted average rate of 2.13% (20081.85% (2009 — 4.03%2.13%) issued to deposit brokers in the form of large ($100,000 or more) certificates of deposit that are generally participated out by brokers in shares of less than $100,000. As of December 31, 2009,2010, unamortized broker placement fees amounted to $23.2$22.8 million (2008(2009 — $21.6$23.2 million), which are amortized over the contractual maturity of the brokered CDs under the interest method. During 2009, all of the $1.1 billion of brokered CDs measured at fair value that were outstanding at December 31, 2008 were called. The Corporation exercised its call option on swapped-to-floating brokered CDs after the cancellation of interest rate swaps by counterparties due to lower levels of 3-month LIBOR. Some of these brokered CDs were replaced by new brokered CDs not hedged with interest rate swaps and not measured at fair value, causing the increase in the unamortized balance of broker placement fees. As of December 31, 2009,2010, deposit accounts issued to government agencies with a carrying value of $447.5$470.0 million (2008(2009 — $564.3$447.5 million) were collateralized by securities and loans with an amortized cost of $539.1$555.6 million (2008(2009 — $600.5$539.1 million) and estimated market value of $541.9$569.6 million (2008(2009 — $604.6$541.9 million), and by municipal obligations with a carrying value and estimated market value of $165.3 million (2009 — $66.3 million (2008 — $32.4 million). F-43
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A table showing interest expense on deposits follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Interest-bearing checking accounts | | $ | 19,995 | | $ | 12,914 | | $ | 11,365 | | | $ | 19,060 | | $ | 19,995 | | $ | 12,914 | | Savings | | 19,032 | | 18,916 | | 15,037 | | | 24,238 | | 19,032 | | 18,916 | | Certificates of deposit | | 50,939 | | 73,466 | | 82,761 | | | 44,790 | | 50,939 | | 73,466 | | Brokered certificates of deposit | | 224,521 | | 309,542 | | 419,577 | | | 160,628 | | 224,521 | | 309,542 | | | | | | | | | | | | | | | | | Total | | $ | 314,487 | | $ | 414,838 | | $ | 528,740 | | | $ | 248,716 | | $ | 314,487 | | $ | 414,838 | | | | | | | | | | | | | | | | |
The interest expense on deposits includes the market valuation of interest rate swaps that economically hedge brokered CDs, the related interest exchanged, the amortization of broker placement fees related to brokered CDs not measured at fair value and changes in the fair value of callable brokered CDs measured at fair value. During 2009, all of the $1.1 billion of brokered CDs measured at fair value that were outstanding as of December 31, 2008 were called. The Corporation exercised its call option on swapped-to-floating brokered CDs after the cancellation of interest rate swaps by counterparties due to lower levels of 3-month LIBOR. F-49
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following are the components of interest expense on deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Interest expense on deposits | | $ | 295,004 | | $ | 407,830 | | $ | 515,394 | | | $ | 227,956 | | $ | 295,004 | | $ | 407,830 | | Amortization of broker placement fees(1) | | 22,858 | | 15,665 | | 9,056 | | | 20,758 | | 22,858 | | 15,665 | | | | | | | | | | | | | | | | | Interest expense on deposits excluding net unrealized (gain) loss on derivatives and brokered CDs measured at fair value | | 317,862 | | 423,495 | | 524,450 | | | Net unrealized (gain) loss on derivatives and brokered CDs measured at fair value | | | (3,375 | ) | | | (8,657 | ) | | 4,290 | | | Interest expense on deposits excluding net unrealized loss (gain) on derivatives and brokered CDs measured at fair value | | | 248,714 | | 317,862 | | 423,495 | | Net unrealized loss (gain) on derivatives and brokered CDs measured at fair value | | | 2 | | | (3,375 | ) | | | (8,657 | ) | | | | | | | | | | | | | | | | Total interest expense on deposits | | $ | 314,487 | | $ | 414,838 | | $ | 528,740 | | | $ | 248,716 | | $ | 314,487 | | $ | 414,838 | | | | | | | | | | | | | | | | |
| | | (1) | | Related to brokered CDs not measured at fair value. |
Total interest expense on deposits includes net cash settlements on interest rate swaps that economically hedge brokered CDs that for the yearyears ended December 31, 2009 and 2008 amounted to net interest realized of $5.5 million (2008 — net interest realizedand of $35.6 million; 2007 — net interest incurred of $12.3 million).million, respectively. Note 1415 —Loans Payable As of December 31, 2009, loansLoans payable consisted of $900 million in short-term borrowings under the FED Discount Window Program bearing interest at 1.00%. TheProgram. During the second quarter of 2010, the Corporation participates inrepaid the Borrower-in-Custody (“BIC”) Program ofremaining balance under the FED. Through the BIC Program, a broad range of loans (including commercial, consumer and mortgages) may be pledged as collateral for borrowings through the FED Discount Window. As the capital markets recovered from the crisis witnessed in 2009, the FED gradually reversed its stance back to lender of December 31, 2009 collateral pledged related to this credit facility amounted to $1.2 billion, mainly commercial, consumerlast resort. Advances from the Discount Window are once again discouraged, and mortgage loan .as such, the Corporation no longer uses FED Advances for regular funding needs. Note 1516 —Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase (repurchase agreements) consist of the following: | | | | | | | | | | | December, 31 | | | | 2009 | | | 2008 | | | | (Dollars in thousands) | | Repurchase agreements, interest ranging from 0.23% to 5.39% (2008 - 2.29% to 5.39%) (1) | | $ | 3,076,631 | | | $ | 3,421,042 | | | | | | | | |
| | | | | | | | | | | December, 31 | | | | 2010 | | | 2009 | | | | (Dollars in thousands) | | Repurchase agreements, interest ranging from 0.99% to 4.51% (2009 - 0.23% to 5.39%)(1) | | $ | 1,400,000 | | | $ | 3,076,631 | | | | | | | | |
| | | (1) | | As of December 31, 2009,2010, includes $1.4$1.0 billion with an average rate of 4.29%4.15%, which lenders have the right to call before their contractual maturities at various dates beginning on February 1, 2010January 19, 2011. |
The weighted-average interest rates on repurchase agreements as of December 31, 2010 and 2009 were 3.74% and 2008 were 3.34% and 3.85%, respectively. Accrued interest payable on repurchase agreements amounted to $18.1$8.7 million and $21.2$18.1 million as of December 31, 20092010 and 2008,2009, respectively. F-44F-50
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Repurchase agreements mature as follows: | | | | | | | | | | | December 31, 2009 | | | December 31, 2010 | | | | (In thousands) | | | (In thousands) | | One to thirty days | | $ | 196,628 | | | Over thirty to ninety days | | 380,003 | | | Over ninety days to one year | | 100,000 | | | $ | 100,000 | | One to three years | | 1,600,000 | | | 600,000 | | Three to five years | | 800,000 | | | 700,000 | | | | | | | | | Total | | $ | 3,076,631 | | | $ | 1,400,000 | | | | | | | | |
The following securities were sold under agreements to repurchase: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2009 | | | December 31, 2010 | | | | Amortized | | Approximate | | Weighted | | | Amortized | | Approximate | | Weighted | | | | Cost of | | Fair Value | | Average | | | Cost of | | Fair Value | | Average | | | | Underlying | | Balance of | | of Underlying | | Interest | | | Underlying | | Balance of | | of Underlying | | Interest | | Underlying Securities | | Securities | | Borrowing | | Securities | | Rate of Security | | | Securities | | Borrowing | | Securities | | Rate of Security | | | | (Dollars in thousands) | | | (Dollars in thousands) | | U.S. Treasury securities and obligations of other | | | U.S. Government Sponsored Agencies | | $ | 871,725 | | $ | 794,267 | | $ | 875,835 | | | 2.15 | % | | U.S. Treasury securities and obligations of other U.S. Government Sponsored Agencies | | | $ | 980,103 | | $ | 877,008 | | $ | 989,424 | | | 1.29 | % | Mortgage-backed securities | | 2,504,941 | | 2,282,364 | | 2,560,374 | | | 4.37 | % | | 584,472 | | 522,992 | | 608,273 | | | 4.31 | % | | | | | | | | | | | | | | | | Total | | $ | 3,376,666 | | $ | 3,076,631 | | $ | 3,436,209 | | | $ | 1,564,575 | | $ | 1,400,000 | | $ | 1,597,697 | | | | | | | | | | | | | | | | | | | | Accrued interest receivable | | $ | 13,720 | | | $ | 5,166 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2008 | | | December 31, 2009 | | | | Amortized | | Approximate | | Weighted | | | Amortized | | Approximate | | Weighted | | | | Cost of | | Fair Value | | Average | | | Cost of | | Fair Value | | Average | | | | Underlying | | Balance of | | of Underlying | | Interest | | | Underlying | | Balance of | | of Underlying | | Interest | | Underlying Securities | | Securities | | Borrowing | | Securities | | Rate of Security | | | Securities | | Borrowing | | Securities | | Rate of Security | | | | (Dollars in thousands) | | | (Dollars in thousands) | | U.S. Treasury securities and obligations of other | | | U.S. Government Sponsored Agencies | | $ | 511,621 | | $ | 459,289 | | $ | 514,796 | | | 5.77 | % | | U.S. Treasury securities and obligations of other U.S. Government Sponsored Agencies | | | $ | 871,725 | | $ | 794,267 | | $ | 875,835 | | | 2.15 | % | Mortgage-backed securities | | 3,299,221 | | 2,961,753 | | 3,376,421 | | | 5.34 | % | | 2,504,941 | | 2,282,364 | | 2,560,374 | | | 4.37 | % | | | | | | | | | | | | | | | | Total | | $ | 3,810,842 | | $ | 3,421,042 | | $ | 3,891,217 | | | $ | 3,376,666 | | $ | 3,076,631 | | $ | 3,436,209 | | | | | | | | | | | | | | | | | | | | Accrued interest receivable | | $ | 20,856 | | | $ | 13,720 | | | | | | | | |
The maximum aggregate balance outstanding at any month-end during 20092010 was $4.1$2.9 billion (2008(2009 — $4.1 billion). The average balance during 20092010 was $3.6$2.2 billion (2008(2009 — $3.6 billion). The weighted average interest rate during 2010 and 2009 was 3.82% and 2008 was 3.22% and 3.71%, respectively. As of December 31, 20092010 and 2008,2009, the securities underlying such agreements were delivered to the dealers with which the repurchase agreements were transacted. Repurchase agreements as of December 31, 2009, grouped by counterparty, were as follows:
| | | | | | | | | (Dollars in thousands) | | | | | | Weighted-Average | | Counterparty | | Amount | | | Maturity (In Months) | | Credit Suisse First Boston | | $ | 1,051,731 | | | | 24 | | Citigroup Global Markets | | | 600,000 | | | | 38 | | Barclays Capital | | | 500,000 | | | | 24 | | JP Morgan Chase | | | 475,000 | | | | 27 | | Dean Witter / Morgan Stanley | | | 349,900 | | | | 27 | | UBS Financial Services, Inc. | | | 100,000 | | | | 31 | | | | | | | | | | | | $ | 3,076,631 | | | | | | | | | | | | | |
F-45F-51
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Repurchase agreements as of December 31, 2010, grouped by counterparty, were as follows: | | | | | | | | | (Dollars in thousands) | | | | | | | | | | | | | | Weighted-Average | | Counterparty | | Amount | | | Maturity (In Months) | | UBS Financial Services, Inc. | | $ | 100,000 | | | | 19 | | Barclays Capital | | | 200,000 | | | | 20 | | Credit Suisse First Boston | | | 400,000 | | | | 30 | | Dean Witter / Morgan Stanley | | | 200,000 | | | | 31 | | JP Morgan Chase | | | 200,000 | | | | 39 | | Citigroup Global Markets | | | 300,000 | | | | 40 | | | | | | | | | | | | $ | 1,400,000 | | | | | | | | | | | | | |
Note 1617 — Advances from the Federal Home Loan Bank (FHLB) Following is a summary of the advances from the FHLB: | | | | | | | | | | | December, 31 | | | December, 31 | | | | 2009 | | | 2008 | | | | (Dollars in thousands) | | Fixed-rate advances from FHLB with a weighted-average interest rate of 3.21% (2008 - 3.09%) | | $ | 978,440 | | | $ | 1,060,440 | | | | | | | | |
| | | | | | | | | | | December, 31 | | | December, 31 | | | | 2010 | | | 2009 | | | | (Dollars in thousands) | | Fixed-rate advances from FHLB with a weighted-average interest rate of 3.33% (2009 - 3.21%) | | $ | 653,440 | | | $ | 978,440 | | | | | | | | |
Advances from FHLB mature as follows: | | | | | | | | | | | December, 31 | | | December, 31 | | | | 2009 | | | 2010 | | | | (In thousands) | | | (In thousands) | | One to thirty days | | $ | 5,000 | | | $ | 100,000 | | Over thirty to ninety days | | 13,000 | | | 13,000 | | Over ninety days to one year | | 307,000 | | | 173,000 | | One to three years | | 445,000 | | | 367,440 | | Three to five years | | 208,440 | | | | | | | | | | Total | | $ | 978,440 | | | $ | 653,440 | | | | | | | | |
Advances are received from the FHLB under an Advances, Collateral Pledge and Security Agreement (the “Collateral Agreement”). Under the Collateral Agreement, the Corporation is required to maintain a minimum amount of qualifying mortgage collateral with a market value of generally 125% or higher than the outstanding advances. As of December 31, 2009,2010, the estimated value of specific mortgage loans pledged as collateral amounted to $1.1$1.2 billion (2008(2009 — $1.7$1.1 billion), as computed by the FHLB for collateral purposes. The carrying value of such loans as of December 31, 20092010 amounted to $1.8$1.9 billion (2008(2009 — $2.4$1.8 billion). In addition, securities with an approximate estimated value of $4.1$3.4 million (2008(2009 — $5.6$4.1 million) and a carrying value of $4.1$3.6 million (2008(2009 — $5.7$4.1 million) were pledged to the FHLB. As of December 31, 2009,2010, the Corporation had additional capacity of approximately $378$453 million on this credit facility based on collateral pledged at the FHLB, including a haircut reflecting the perceived risk associated with holding the collateral. Haircut refers to the percentage by which an asset’s market value is reduced for purpose of collateral levels. Advances may be repaid prior to maturity, in whole or in part, at the option of the borrower upon payment of any applicable fee specified in the contract governing such advance. In calculating the fee, due consideration is given to (i) all relevant factors, including but not limited to, any and all applicable costs of repurchasing and/or prepaying any associated liabilities and/or hedges entered into with respect to the applicable advance; and (ii) the financial characteristics, in their entirety, of the advance being prepaid; and (iii), in the case of adjustable-rate advances, the expected future earnings of the replacement borrowing as long as the F-52
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) replacement borrowing is at least equal to the original advance’s par amount and the replacement borrowing’s tenor is at least equal to the remaining maturity of the prepaid advance. F-46
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 1718 — Notes Payable Notes payable consist of: | | | | | | | | | | | | | | | | | | | December 31, | | | December 31, | | | | 2009 | | 2008 | | | 2010 | | 2009 | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Callable step-rate notes, bearing step increasing interest from 5.00% to 7.00% (5.50% as of December 31, 2009 and 2008) maturing on October 18, 2019, measured at fair value | | $ | 13,361 | | $ | 10,141 | | | Callable step-rate notes, bearing step increasing interest from 5.00% to 7.00% (6.00% as of December 31, 2010 and 5.50% as of December 31, 2009) maturing on October 18, 2019, measured at fair value | | | $ | 11,842 | | $ | 13,361 | | | | | Dow Jones Industrial Average (DJIA) linked principal protected notes: | | | | | | Series A maturing on February 28, 2012 | | 6,542 | | 6,245 | | | 6,865 | | 6,542 | | | | | Series B maturing on May 27, 2011 | | 7,214 | | 6,888 | | | 7,742 | | 7,214 | | | | | | | | | | | | | | | $ | 27,117 | | $ | 23,274 | | | $ | 26,449 | | $ | 27,117 | | | | | | | | | | | | |
Note 1819 — Other Borrowings Other borrowings consist of: | | | | | | | | | | | December 31, | | | | 2009 | | | 2008 | | | | (Dollars in thousands) | | Junior subordinated debentures due in 2034, interest-bearing at a floating-rate of 2.75% over 3-month LIBOR (3.00% as of December 31, 2009 and 4.62% as of December 31, 2008) | | $ | 103,093 | | | $ | 103,048 | | | | | | | | | | | Junior subordinated debentures due in 2034, interest-bearing at a floating-rate of 2.50% over 3-month LIBOR (2.75% as of December 31, 2009 and 4.00% as of December 31, 2008) | | | 128,866 | | | | 128,866 | | | | | | | | | | | $ | 231,959 | | | $ | 231,914 | | | | | | | | |
Note 19 — Unused Lines of Credit
The Corporation maintains unsecured uncommitted lines of credit with other banks. As of December 31, 2009, the Corporation’s total unused lines of credit with these banks amounted to $165 million (2008 — $220 million). As of December 31, 2009, the Corporation has an available line of credit with the FHLB-New York guaranteed with excess collateral already pledged, in the amount of $378.6 million (2008 — $626.9 million). | | | | | | | | | | | December 31, | | | | 2010 | | | 2009 | | | | (Dollars in thousands) | | Junior subordinated debentures due in 2034, interest-bearing at a floating-rate of 2.75% over 3-month LIBOR (3.05% as of December 31, 2010 and 3.00% as of December 31, 2009) | | $ | 103,093 | | | $ | 103,093 | | | | | | | | | | | Junior subordinated debentures due in 2034, interest-bearing at a floating-rate of 2.50% over 3-month LIBOR (2.80% as of December 31, 2010 and 2.75% as of December 31, 2009) | | | 128,866 | | | | 128,866 | | | | | | | | | | | $ | 231,959 | | | $ | 231,959 | | | | | | | | |
F-47F-53
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 20 — Earnings per Common Share The calculations of earnings per common share for the years ended December 31, 2010, 2009 2008 and 20072008 follow: | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | 2007 | | | | (In thousands, except per share data) | | Net (Loss) Income: | | | | | | | | | | | | | Net (loss) income | | $ | (275,187 | ) | | $ | 109,937 | | | $ | 68,136 | | Less: Preferred stock dividends(1) | | | (42,661 | ) | | | (40,276 | ) | | | (40,276 | ) | Less: Preferred stock discount accretion | | | (4,227 | ) | | | — | | | | — | | | | | | | | | | | | Net (loss) income attributable to common stockholders | | $ | (322,075 | ) | | $ | 69,661 | | | $ | 27,860 | | | | | | | | | | | | | | | | | | | | | | | | | Weighted-Average Shares: | | | | | | | | | | | | | Basic weighted-average common shares outstanding | | | 92,511 | | | | 92,508 | | | | 86,549 | | Average potential common shares | | | — | | | | 136 | | | | 317 | | | | | | | | | | | | Diluted weighted-average number of common shares outstanding | | | 92,511 | | | | 92,644 | | | | 86,866 | | | | | | | | | | | | | | | | | | | | | | | | | (Loss) Earnings per common share: | | | | | | | | | | | | | Basic | | $ | (3.48 | ) | | $ | 0.75 | | | $ | 0.32 | | | | | | | | | | | | Diluted | | $ | (3.48 | ) | | $ | 0.75 | | | $ | 0.32 | | | | | | | | | | | |
| | | | | | | | | | | | | (In thousands, except per share information) | | Year Ended December 31, | | | | 2010 | | | 2009 | | | 2008 | | Net (loss) income | | $ | (524,308 | ) | | $ | (275,187 | ) | | $ | 109,937 | | Non-cumulative preferred stock dividends (Series A through E) | | | — | | | | (23,494 | ) | | | (40,276 | ) | Cumulative non-convertible preferred stock dividends (Series F) | | | (11,618 | ) | | | (19,167 | ) | | | — | | Cumulative convertible preferred stock dividend (Series G) | | | (9,485 | ) | | | — | | | | — | | Preferred stock discount accretion (Series F and G)(1) | | | (17,143 | ) | | | (4,227 | ) | | | — | | Favorable impact from issuing common stock in exchange for Series A through E preferred stock net of issuance costs(2) (Refer to Note 23) | | | 385,387 | | | | — | | | | — | | Favorable impact from issuing Series G mandatorily convertible preferred stock in exchange for Series F preferred stock(3) (Refer to Note 23) | | | 55,122 | | | | — | | | | — | | | | | | | | | | | | Net (loss) income available to common stockholders | | $ | (122,045 | ) | | $ | (322,075 | ) | | $ | 69,661 | | | | | | | | | | | | | | | | | | | | | | | | | Average common shares outstanding | | | 11,310 | | | | 6,167 | | | | 6,167 | | Average potential common shares | | | — | | | | — | | | | 9 | | | | | | | | | | | | Average common shares outstanding - assuming dilution | | | 11,310 | | | | 6,167 | | | | 6,176 | | | | | | | | | | | | | | | | | | | | | | | | | Basic (loss) earnings per common share | | $ | (10.79 | ) | | $ | (52.22 | ) | | $ | 11.30 | | | | | | | | | | | | Diluted (loss) earnings per common share | | $ | (10.79 | ) | | $ | (52.22 | ) | | $ | 11.28 | | | | | | | | | | | |
| | | (1) | | ForIncludes a non-cash adjustment of $11.3 million for 2010 as an acceleration of the year ended December 31, 2009,Series G preferred stock dividends include $12.6 milliondiscount accretion pursuant to an amendment to the exchange agreement with the U.S. Treasury. | | (2) | | Excess of carrying amount of Series A through E preferred stock exchanged over the fair value of new common shares issued. | | (3) | | Excess of carrying amount of Series F Preferred Stock cumulative preferred stock exchanged and original warrant over the fair value of new Series G preferred stock issued and amended warrant. |
dividends not declared as of the end of the year. Refer to Note 23 for additional information related to the Series F Preferred Stock issued to the U.S. Treasury in connection with the Trouble Asset Relief Program (TARP) Capital Purchase Program.
(Loss) earnings per common share areis computed by dividing net (loss) income attributableavailable to common stockholders by the weighted average common shares issued and outstanding. Net (loss) income attributableavailable to common stockholders represents net (loss) income adjusted for preferred stock dividends including dividends declared, accretion of discount on preferred stock issuances and cumulative dividends related to the current dividend period that have not been declared as of the end of the period.period, and the accretion of discount on preferred stock issuances. For 2010, the net income available to common stockholders also includes the one-time effect of the issuance of common stock in exchange for shares of the Series A through E preferred stock and the issuance of a new Series G Preferred Stock in exchange for the Series F Preferred Stock. The Exchange Offer and the issuance of the Series G Preferred Stock to the U.S. Treasury are discussed in Note 23 to the consolidated financial statements. Basic weighted average common shares outstanding exclude unvested shares of restricted stock. Potential common shares consist of common stock issuable under the assumed exercise of stock options, unvested shares of restricted stock, and outstanding warrants using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options, unvested shares of restricted stock, and outstanding warrants that result in lower potential shares issued than shares purchased under the treasury F-54
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. For the yearyears ended December 31, 2010 and 2009, there were 2,481,310131,532 and 165,420 outstanding stock options, respectively; warrants outstanding to purchase 5,842,259389,483 shares of common stock related to the TARP Capital Purchase Program and 32,216716 and 1,432 unvested shares of restricted stock, respectively, that were excluded from the computation of diluted earnings per common share because the Corporation reported a net loss attributable to common stockholders for the year and their inclusion would have an antidilutive effect. Refer to Note 23 for additional information related to the issuance of the Series F Preferred Stock and Warrants (as hereinafter defined) under the TARP Capital Purchase Program. For the year ended December 31, 2008, there were 2,020,600 weighted-average outstanding stock options, which were excluded from the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. Note 21 — Regulatory Capital RequirementsMatters The Corporation is subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation’s F-48
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings and other factors. Capital standards established by regulations require the Corporation to maintain minimum amounts and ratios of Tierfor Leverage (Tier 1 capital to average total average assets (leverage ratio)assets) and ratios of Tier 1 Capital to Risk-Weighted Assets and total capitalTotal Capital to risk-weighted assets,Risk-Weighted Assets as defined in the regulations. The total amount of risk-weighted assets is computed by applying risk-weighting factors to the Corporation’s assets and certain off-balance sheet items, which generally vary from 0% to 200%100% depending on the nature of the asset. AsEffective June 2, 2010, FirstBank, by and through its Board of Directors, entered into the FDIC Order with the FDIC and the Office of the Commissioner of Financial Institutions of Puerto Rico. This Order provides for various things, including (among other things) the following: (1) having and retaining qualified management; (2) increased participation in the affairs of FirstBank by its board of directors; (3) development and implementation by FirstBank of a capital plan to attain a leverage ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 10% and a total risk-based capital ratio of at least 12%; (4) adoption and implementation of strategic, liquidity and fund management and profit and budget plans and related projects within certain timetables set forth in the Order and on an ongoing basis; (5) adoption and implementation of plans for reducing FirstBank’s positions in certain classified assets and delinquent and non-accrual loans within timeframes set forth in the Order; (6) refraining from lending to delinquent or classified borrowers already obligated to FirstBank on any extensions of credit so long as such credit remains uncollected, except where FirstBank’s failure to extend further credit to a particular borrower would be detrimental to the best interests of FirstBank, and any such additional credit is approved by the FirstBank’s board of directors; (7) refraining from accepting, increasing, renewing or rolling over brokered deposits without the prior written approval of the FDIC; (8) establishment of a comprehensive policy and methodology for determining the allowance for loan and lease losses and the review and revision of FirstBank’s loan policies, including the non-accrual policy; and (9) adoption and implementation of adequate and effective programs of independent loan review, appraisal compliance and an effective policy for managing FirstBank’s sensitivity to interest rate risk. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the FDIC Order. Although all the regulatory capital ratios exceeded the established “well capitalized” levels at December 31, 20092010, because of the FDIC Order with the FDIC, FirstBank cannot be treated as “well capitalized” institution under regulatory guidance. Effective June 3, 2010, First BanCorp entered into the Written Agreement with the FED. The Agreement provides, among other things, that the holding company must serve as a source of strength to FirstBank, and that, except upon consent of the FED, (1) the holding company may not pay dividends to stockholders or receive dividends from FirstBank, (2) the holding company and its nonbank subsidiaries may not make payments on trust preferred securities or subordinated debt, and (3) the holding company cannot incur, increase or guarantee debt or repurchase any capital securities. The Written Agreement also requires that the holding company submit a capital plan which reflects sufficient capital at First BanCorp on a consolidated basis, which must be acceptable to the FED, and follow certain guidelines with respect to the appointment or change in responsibilities of senior officers. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Written Agreement. The Corporation submitted its capital plan setting forth how it plans to improve capital positions to comply with the FDIC Order and the Written Agreement over time. The terms of the Capital Plan, the Corporation’s achievement of various aspects of the Capital Plan and the terms of the Updated Capital Plan are described above in Note 1. In addition to the capital plan, the Corporation was in compliancehas submitted to its regulators a liquidity and brokered deposit plan, including a contingency funding plan, a non-performing asset reduction plan, a budget and profit plan, a strategic plan and a plan for the reduction of classified and special mention assets. Further, the Corporation have reviewed and enhanced the Corporation’s loan review program, various credit policies, the Corporation’s treasury and investments policy, the Corporation’s asset classification and allowance for loan F-55
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) and lease losses and non-accrual policies, the Corporation’s charge-off policy and the Corporation’s appraisal program. The Agreements also require the submission to the regulators of quarterly progress reports. The FDIC Order imposes no other restrictions on the FirstBank’s products or services offered to customers, nor does it or the Written Agreement impose any type of penalties or fines upon FirstBank or the Corporation. Concurrent with the minimum regulatory capital requirements. As of December 31, 2009 and 2008,FDIC Order, the Corporation and each of its subsidiary banks were categorized as “well-capitalized” underFDIC has granted FirstBank temporary waivers to enable it to continue accessing the regulatory frameworkbrokered deposit market through June 30, 2011. FirstBank will request approvals for prompt corrective action. There are no conditions or events since December 31, 2009 that management believes have changed any subsidiary bank’s capital category.future periods.
The Corporation’s and its banking subsidiary’s regulatory capital positions as of December 31, 2010 and 2009 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Regulatory Requirements | | | | | | | | | | | For Capital | | To be | | | Actual | | Adequacy Purposes | | Well-Capitalized | | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | | (Dollars in thousands) | At December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,922,138 | | | | 13.44 | % | | $ | 1,144,280 | | | | 8 | % | | | N/A | | | | N/A | | FirstBank | | $ | 1,838,378 | | | | 12.87 | % | | $ | 1,142,795 | | | | 8 | % | | $ | 1,428,494 | | | | 10 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Tier I Capital (to Risk-Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,739,363 | | | | 12.16 | % | | $ | 572,140 | | | | 4 | % | | | N/A | | | | N/A | | First Bank | | $ | 1,670,878 | | | | 11.70 | % | | $ | 571,398 | | | | 4 | % | | $ | 857,097 | | | | 6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Leverage ratio | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,739,363 | | | | 8.91 | % | | $ | 740,844 | | | | 4 | % | | | N/A | | | | N/A | | FirstBank | | $ | 1,670,878 | | | | 8.53 | % | | $ | 783,087 | | | | 4 | % | | $ | 978,859 | | | | 5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | At December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,762,474 | | | | 12.80 | % | | $ | 1,100,990 | | | | 8 | % | | | N/A | | | | N/A | | FirstBank | | $ | 1,602,538 | | | | 12.23 | % | | $ | 1,048,065 | | | | 8 | % | | $ | 1,310,082 | | | | 10 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Tier I Capital (to Risk-Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,589,854 | | | | 11.55 | % | | $ | 550,495 | | | | 4 | % | | | N/A | | | | N/A | | FirstBank | | $ | 1,438,265 | | | | 10.98 | % | | $ | 524,033 | | | | 4 | % | | $ | 786,049 | | | | 6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Leverage ratio | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,589,854 | | | | 8.30 | % | | $ | 765,935 | | | | 4 | % | | | N/A | | | | N/A | | FirstBank | | $ | 1,438,265 | | | | 7.90 | % | | $ | 728,409 | | | | 4 | % | | $ | 910,511 | | | | 5 | % |
F-49
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Regulatory Requirements | | | | | | | | | | | For Capital | | To be | | Consent Order Capital requirements | | | Actual | | Adequacy Purposes | | Well-Capitalized-Regular Thresholds | | to be achieved over time | | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Ratio | | | (Dollars in thousands) | | | | | At December 31, 2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,366,951 | | | | 12.02 | % | | $ | 909,828 | | | | 8 | % | | | N/A | | | | N/A | | | | N/A | | FirstBank | | $ | 1,315,580 | | | | 11.57 | % | | $ | 909,575 | | | | 8 | % | | $ | 1,136,969 | | | | 10 | % | | | 12 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier I Capital (to Risk-Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,219,854 | | | | 10.73 | % | | $ | 454,914 | | | | 4 | % | | | N/A | | | | N/A | | | | N/A | | FirstBank | | $ | 1,168,523 | | | | 10.28 | % | | $ | 454,788 | | | | 4 | % | | $ | 682,181 | | | | 6 | % | | | 10 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Leverage ratio | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,219,854 | | | | 7.57 | % | | $ | 644,805 | | | | 4 | % | | | N/A | | | | N/A | | | | N/A | | FirstBank | | $ | 1,168,523 | | | | 7.25 | % | | $ | 644,283 | | | | 4 | % | | $ | 805,354 | | | | 5 | % | | | 8 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,922,138 | | | | 13.44 | % | | $ | 1,144,280 | | | | 8 | % | | | N/A | | | | N/A | | | | N/A | | FirstBank | | $ | 1,838,378 | | | | 12.87 | % | | $ | 1,142,795 | | | | 8 | % | | $ | 1,428,494 | | | | 10 | % | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier I Capital (to Risk-Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,739,363 | | | | 12.16 | % | | $ | 572,140 | | | | 4 | % | | | N/A | | | | N/A | | | | N/A | | First Bank | | $ | 1,670,878 | | | | 11.70 | % | | $ | 571,398 | | | | 4 | % | | $ | 857,097 | | | | 6 | % | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Leverage ratio | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,739,363 | | | | 8.91 | % | | $ | 740,844 | | | | 4 | % | | | N/A | | | | N/A | | | | N/A | | FirstBank | | $ | 1,670,878 | | | | 8.53 | % | | $ | 783,087 | | | | 4 | % | | $ | 978,859 | | | | 5 | % | | | N/A | |
Note 22 — Stock Option Plan Between 1997 and January 2007, the Corporation had a stock option plan (“the 1997 stock option plan”) that authorized the granting of up to 8,696,112579,740 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. During the second quarter of 2008, the Compensation Committee approved the grant of stock appreciation rights to an executive officer.officer in connection with stock options granted in 1998. The employee surrendered the right to exercise 120,000 stock options in the form of stock appreciation rights for a payment of $0.2 million. 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. 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 3,800,000253,333 shares of common stock, subject to adjustments for stock splits, reorganizationreorganizations 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 F-56
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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. Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued shares of Common Stock or shares of Common Stock acquired by the Corporation. During the fourth quarter of 2008, the Corporation granted 36,2432,412 shares of restricted stock with a fair value of $8.69$130.35 under the Omnibus Plan to the Corporation’s independent directors. The following table showsOf the activityoriginal 2,412 shares of restricted stock, during 2009.268 were forfeited in the second half of 2009, 1,424 vested and, as of December 31, 2010, 720 remain restricted. | | | | | | | Number of | | | Restricted | | | Shares | Beginning of year | | | 36,243 | | Restricted shares forfeited | | | (4,027 | ) | | | | | | End of period outstanding | | | 32,216 | | | | | | | End of period vested restricted shares | | | 10,739 | | | | | | |
For the years ended December 31, 2010, 2009 and 2008, the Corporation recognized $93,332, $92,361 and $8,750, respectively, of stock-based compensation expense related to the aforementioned restricted stock awards. The total unrecognized compensation cost related to thesethe non-vested restricted shares was $213,889$85,556 as of December 31, 20092010 and is expected to be recognized over the next 1.9 year.eleven months. The Corporation accounts for stock options using the “modified prospective” method. There were no stock options granted during 2010, 2009 and 2008, therefore no compensation associated with stock options was recorded in those years. The compensation expense associated with stock options for the 2007 year was approximately $2.8 million. All employee stock options granted during 2007 were fully vested at the time of grant. F-50
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock-based compensation accounting guidance requires the Corporation to develop an estimate of the number of share-based awards whichthat 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. During 2009, as shown above, 4,027268 unvested shares of restricted stock were forfeited resulting in the reversal of $9,722 of previously recorded stock-based compensation expense. The activity of stock options during the year ended December 31, 20092010 is set forth below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2009 | | | For the Year Ended December 31, 2010 | | | | Weighted- | | | | | Weighted- | | | | | | Average | | Aggregate | | | Weighted- | | Average | | Aggregate | | | | Weighted- | | Remaining | | Intrinsic | | | Average | | Remaining | | Intrinsic | | | | Number of | | Average | | Contractual | | Value (In | | | Number of | | Exercise | | Contractual | | Value (In | | | | Options | | Exercise Price | | Term (Years) | | thousands) | | | Options | | Price | | Term (Years) | | thousands) | | Beginning of year | | 3,910,910 | | $ | 12.82 | | | 165,421 | | $ | 201.90 | | Options cancelled | | | (1,429,600 | ) | | 11.69 | | | | (33,889 | ) | | 198.21 | | | | | | | | | | | | | End of period outstanding and exercisable | | 2,481,310 | | $ | 13.46 | | 5.2 | | $ | — | | | 131,532 | | $ | 202.91 | | 4.53 | | $ | — | | | | | | | | | | | | | | | | | | | | |
The fair value ofNo stock options granted in 2007, which was estimated using the Black-Scholes option pricing method, and the assumptions used are as follows: | | | | | | | 2007 | Weighted-average stock price at grant date and exercise price | | $ | 9.20 | | Stock option estimated fair value | | $ | 2.40 - $2.45 | | Weighted-average estimated fair value | | $ | 2.43 | | Expected stock option term (years) | | | 4.31 - 4.59 | | Expected volatility | | | 32 | % | Weighted-average expected volatility | | | 32 | % | Expected dividend yield | | | 3.0 | % | Weighted-average expected dividend yield | | | 3.0 | % | Risk-free interest rate | | | 5.1 | % |
The Corporation uses empirical research data to estimate option exercises and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected volatility is based on the historical implied volatility of the Corporation’s common stock at each grant date; otherwise, historical volatilities based upon 260 observations (working days) were obtained from Bloomberg L.P. (“Bloomberg”) and used as inputs in the model. The dividend yield is based on the historical 12-month dividend yield observable at each grant date. The risk-free rate for the period is based on historical zero coupon curves obtained from Bloomberg at the time of grant based on the option’s expected term.
exercised during 2010 or 2009. Cash proceeds from 6,000400 options exercised in 2008 amounted to approximately $53,000 and did not have any intrinsic value. No stock options were exercised during 2009 or 2007. Note 23 — Stockholders’ Equity Common stockStock TheAs of December 31, 2010, the Corporation has 250,000,000had 2,000,000,000 authorized shares of common stock with a par value of $1$0.10 per share. As of December 31, 2009,2010, there were 102,440,522 (2008 — 102,444,549)21,963,522 shares issued and 92,542,722 (2008 — 92,546,749)21,303,669 shares outstanding.outstanding compared to 6,829,368 shares issued and 6,169,515 shares outstanding as of December 31, 2009. The increase in common shares is the result of the completion of the Exchange Offer discussed below. In February 2009, the Corporation’s Board of Directors declared a first quarter cash F-51
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
dividend of $0.07$1.05 per common share which was paid on March 31, 2009 to common stockholders of record on March 15, 2009 and in May 2009 declared a second quarter dividend of $0.07$1.05 per common share which was paid on June 30, 2009 to common stockholders of record on June 15, 2009. On July 30, 2009, the Corporation announced the suspension of common and preferred stock dividends effective with the preferred dividend for the month of August 2009. OnAs of December 1, 2008, the Corporation granted 36,24331, 2010, there were 716 shares of restricted stock underoutstanding that are expected to vest in the Omnibus Plan to the Corporation’s independent directors,fourth quarter of which 4,027 were forfeited in 2009 due to the departure of a director. The restrictions on such restricted stock award lapse ratably on an annual basis over a three-year period.2011. The shares of restricted stock may vest more quickly in the event of death, disability, retirement, or a change in control. Based F-57
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) on particular circumstances evaluated by the Compensation Committee as they may relate to the termination of a restricted stock holder, the Corporation’s Board of Directors may, with the recommendation of the Compensation Committee, grant the full vesting of the restricted stock held upon termination of employment. Holders of restricted stock have the right to dividends or dividend equivalents, as applicable, during the restriction period. Such dividends or dividend equivalents will accrue during the restriction period, but will not be paid until restrictions lapse. The holder of restricted stocksstock has the right to vote the shares. Stock repurchase plan and treasury On August 24, 2010, the Corporation’s stockholders approved an additional increase in the Corporation’s common stock
The Corporation has a stock repurchase program under which to 2 billion, up from time to time it repurchases750 million. During the second quarter of 2010, the Corporation’s stockholders had already increased the authorized shares of common stock from 250 million to 750 million. The Corporation’s stockholders also approved on August 24, 2010 a decrease in the open marketpar value of the common stock from $1 per share to $0.10 per share. The decrease in the par value of the Corporation’s common stock had no effect on the total dollar value of the Corporation’s stockholders’ equity. For the year ended December 31, 2010, the Corporation transferred $5.6 million from common stock to additional paid-in capital, which is the product of the number of shares issued and holds them as treasuryoutstanding and the difference between the old par value of $1 and new par value of $0.10, or $0.90.
Effective January 7, 2011, the Corporation implemented a one-for-fifteen reverse stock split of all outstanding shares of its common stock. NoAt the Corporation’s Special Meeting of Stockholders held on August 24, 2010, stockholders approved an amendment to the Corporation’s Restated Articles of Incorporation to implement a reverse stock split at a ratio, to be determined by the board in its sole discretion, within the range of one new share of common stock for 10 old shares and one new share for 20 old shares. As authorized, the board elected to effect a reverse stock split at a ratio of one-for-fifteen. The reverse stock split allowed the Corporation to regain compliance with listing standards of the New York Stock Exchange. The one-for-fifteen reverse stock split reduced the number of outstanding shares of common stock were repurchased during 2009 and 2008 by the Corporation. As of December 31, 2009 and 2008, of the total amountfrom 319,557,932 shares to 21,303,669 shares of common stock. All share and per share amounts included in these financial statements have been adjusted to retroactively reflect the 1-for-15 reverse stock repurchased in prior years, 9,897,800 shares were held as treasury stock and were available for general corporate purposes.split. Preferred stockStock The Corporation has 50,000,000 authorized shares of preferred stock with a par value of $1, redeemable at the Corporation’s option subject to certain terms. This stock may be issued in series and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. As of December 31, 2009,2010, the Corporation has five outstanding series of non-convertible non-cumulative preferred stock: 7.125% non-cumulative perpetual monthly income preferred stock, Series A; 8.35% non-cumulative perpetual monthly income preferred stock, Series B; 7.40% non-cumulative perpetual monthly income preferred stock, Series C; 7.25% non-cumulative perpetual monthly income preferred stock, Series D; and 7.00% non-cumulative perpetual monthly income preferred stock, Series E, which trade on the NYSE.E. The liquidation value per share is $25. Annual dividends of $1.75 per share (Series E), $1.8125 per share (Series D), $1.85 per share (Series C), $2.0875 per share (Series B) and $1.78125 per share (Series A) are payable monthly, if declared by the Board of Directors. Dividends declared on the non-convertible non-cumulative preferred stock for 2009, 2008 and 2007 amounted to $23.5 million, $40.3 million and $40.3 million, respectively. In January 2009, in connection with the TARP Capital Purchase Program, established as part of the Emergency Economic Stabilization Act of 2008, the Corporation issued to the U.S. Treasury 400,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series F, $1,000 liquidation preference value per share. The Series F Preferred Stock hashad a call feature after three years. In connection with this investment, the Corporation also issued to the U.S. Treasury a 10-year warrant (the “Warrant”) to purchase 5,842,259389,483 shares of the Corporation’s common stock at an exercise price of $10.27$154.05 per share. The Corporation registered the Series F Preferred Stock, the Warrant and the shares of common stock underlying the Warrant for sale under the Securities Act of 1933. The Corporation recorded in 2009 the total $400 million of the preferred shares and the Warrant at their relative fair values of $374.2 million and $25.8 million, respectively. On July 20, 2010, the Corporation issued 424,174 shares of a new series of preferred stock with a liquidation preference of $1,000 per share, Series G Preferred Stock, to the U.S. Treasury in exchange for all 400,000 shares of the Corporation’s Series F Preferred Stock, beneficially owned and held by the U.S. Treasury, and accrued dividends, as discussed below. Exchange Offer On August 30, 2010, the Corporation completed its offer to issue shares of its common stock in exchange for its outstanding Series A through E Preferred Stock, which resulted in the issuance of 15,134,347 new shares of common stock in exchange for 19,482,128 shares of preferred stock with an aggregate liquidation amount of $487 million, or 89% of the outstanding Series A through E preferred stock. In accordance with the terms of the Exchange Offer, the Corporation used a relevant price of $17.70 per share of its common stock and an exchange ratio of 55% of the preferred stock liquidation preference to determine the number of shares of its common stock issued in exchange for the tendered shares of Series A through E preferred stock. The fair value of the common stock was $6.00 per share, which was the price as of the expiration date of the exchange offer. The carrying (liquidation) value of the Series A through E preferred stock exchanged, or $487.1 million, was reduced and common stock and additional paid-in capital increased in the amount of the fair value of the common stock issued. The Corporation recorded the par amount of the shares issued as common stock ($0.10 per common share) or $1.5 million. The excess of the common stock fair value over the par amount, or $89.3 million, F-58
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) was recorded in additional paid-in capital. The excess of the carrying amount of the shares of preferred stock over the fair value of the shares of common stock, or $385.4 million, was recorded as a reduction to accumulated deficit and an increase in earnings per common share computation. The results of the exchange offer with respect to Series A through E preferred stock were valuedas follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Aggregate | | | | | | | | | | | | | | | | | | | | | | | liquidation | | | | | | | Liquidation | | | Shares of preferred | | | | | | | Shares of preferred | | | preference after | | | | | | | preference per | | | stock outstanding prior | | | Shares of preferred | | | stock outstanding | | | exchange (In | | | Shares of common stock | | Title of Securities | | share | | | to exchange | | | stock exchanged | | | after exchange | | | thousands) | | | issued | | 7.125% Noncumulative Perpetual Monthly Income Preferred Stock, Series A | | $ | 25 | | | | 3,600,000 | | | | 3,149,805 | | | | 450,195 | | | $ | 11,255 | | | | 2,446,872 | | 8.35% Noncumulative Perpetual Monthly Income Preferred Stock, Series B | | $ | 25 | | | | 3,000,000 | | | | 2,524,013 | | | | 475,987 | | | | 11,900 | | | | 1,960,736 | | 7.40% Noncumulative Perpetual Monthly Income Preferred Stock, Series C | | $ | 25 | | | | 4,140,000 | | | | 3,679,389 | | | | 460,611 | | | | 11,515 | | | | 2,858,265 | | 7.25% Noncumulative Perpetual Monthly Income Preferred Stock, Series D | | $ | 25 | | | | 3,680,000 | | | | 3,169,408 | | | | 510,592 | | | | 12,765 | | | | 2,462,098 | | 7.00% Noncumulative Perpetual Monthly Income Preferred Stock, Series E | | $ | 25 | | | | 7,584,000 | | | | 6,959,513 | | | | 624,487 | | | | 15,612 | | | | 5,406,376 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 22,004,000 | | | | 19,482,128 | | | | 2,521,872 | | | $ | 63,047 | | | | 15,134,347 | | | | | | | | | | | | | | | | | | | | | |
Dividends declared on the non-convertible non-cumulative preferred stock in 2009 and 2008 amounted to $23.5 million and $40.3 million, respectively. Consistent with the Corporation’s announcement in July 2009, no dividends have been declared during 2010. The Corporation is currently in the process of voluntarily delisting the remaining Series A through E preferred Stock from the New York Stock Exchange. Exchange Agreement with the U.S. Treasury On July 20, 2010, the Corporation issued $424.2 million Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series G (the “Series G Preferred Stock”), in exchange of the $400 million of Fixed Rate Cumulative Perpetual Preferred Stock, Series F (the “Series F Preferred Stock”), that the U.S. Treasury had acquired pursuant to the TARP Capital Purchase Program, and dividends accrued on such stock. A key benefit of this transaction was obtaining the right, under the terms of the new Series G Preferred Stock, to compel the conversion of this stock into shares of the Corporation’s common stock, provided that the Corporation meets a number of conditions, and by the Treasury and any subsequent holder at any time and, unless earlier converted, is automatically convertible into common stock on the seventh anniversary of issuance. On the seventh anniversary of issuance, each share of the Series G Preferred Stock will mandatorily convert into a number of shares of the Corporation’s common stock equal to a fraction, the numerator of which is $1,000 and the denominator of which is the market price of the Corporation’s common stock on the second trading day preceding the mandatory conversion date, provided, however, holders of the Series G Preferred Stock shall not be entitled to convert shares until the converting holder has first received any applicable regulatory approvals. As mentioned above, on August, 24, 2010, the Corporation obtained its stockholders’ approval to increase the number of authorized shares of common stock from 750 million to 2 billion and decrease the par value of its common stock from $1.00 to $0.10 per share. These approvals and the issuance of common stock in exchange for Series A through E preferred stock satisfy all but one of the substantive conditions to the Corporation’s ability to compel the conversion of the 424,174 shares of the new series of Series G Preferred Stock, issued to the U.S. Treasury. The other substantive condition to the Corporation’s ability to compel the conversion of the Series G Preferred Stock is the issuance of a minimum amount of additional capital, subject to terms, other than the price per share, reasonably acceptable to the U.S. Treasury in its sole discretion. On September 16, 2010, the Corporation filed a registration statement for a proposed underwritten offering of $500 million of its common stock with the SEC. Thereafter, it amended the registration statement to lower the size of the offering to $350 million as a result of the negotiation of an amendment to the exchange agreement with the U.S Treasury, as discussed below. The Corporation accounted for this transaction as an extinguishment of the previously issued Series F Preferred Stock. As a result, the Corporation recorded $424.2 million of the new Series G Preferred Stock, net of a $76.8 million discount and derecognized the carrying value of the Series F Preferred Stock. The excess of the carrying value of the Series F Preferred Stock over the fair value of the Series G Preferred Stock, or $33.6 million, was recorded as a reduction to accumulated deficit. During the fourth quarter of 2010, the U.S. Treasury agreed to a reduction from $500 million to $350 million in the size of the capital raise required to satisfy the remaining substantive condition to compel the conversion of the Series G Preferred Stock owned by the U.S. Treasury into shares of common stock. In connection with the negotiation of this reduction, the Corporation agreed to a reduction in the previously agreed upon discount of the liquidation preference of the Series G Preferred Stock from 35% to 25%, thus, increasing the number of shares of common stock into which the Series G Preferred Stock. Based on an initial conversion rate of F-59
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 68.9465 shares of common stock for each share of Series G Preferred Stock(calculated by dividing $750, or a discount of 25% from the $1,000 liquidation preference per share of Series G Preferred Stock, by the initial conversion price of $10.878 per share, which is subject to adjustment), the number of shares into which the Series G Preferred Stock would be convertible would increase from 25.3 million to 29.2 million shares of common stock. As a result of the change in the discount, a non-cash adjustment of $11.3 million was recorded in the fourth quarter of 2010 as an acceleration of the Series G Preferred Stock discount accretion. The value of the base preferred stock component of the Series G Preferred Stock was determined using a discounted cash flow analysismethod and applying a discount raterate. The cash flows, which consist of 10.9%.the sum of the discounted quarterly dividends plus the principal repayment, were discounted considering the Corporation’s credit rating. The short and long call options were valued using a Cox-Rubinstein binomial option pricing model-based methodology. The valuation methodology considered the likelihood of option conversions under different scenarios, and the valuation interactions of the various components under each scenario. The difference from the par amount of the preferred sharesSeries G Preferred Stock is accreted to preferred stock over five7 years using the interest method with a corresponding adjustment to preferred dividends. The Cox-Rubinstein binomial model was used to estimate the value of the Warrant with a strike price calculated, pursuant to the Securities Purchase Agreement with the U.S. Treasury, based on the average closing prices of the common stock on the 20 trading days ending the last day prior to the date of approval to participate in the Program. No credit risk was assumed given the Corporation’s availability of authorized, but unissued common shares; as well as its intention of reserving sufficient shares to satisfy the exercise of the warrants. The volatility parameter input was the historical 5-year common stock price volatility. F-52
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Series FG Preferred Stock qualifies as Tier 1 regulatory capital. Cumulative dividends on the Series FG Preferred Stock accrue on the liquidation preference amount on a quarterly basis at a rate of 5% per annum for the first five years, and thereafter at a rate of 9% per annum, but will only be paid when, as and if declared by the Corporation’s Board of Directors out of assets legally available therefore. The Series FG Preferred Stock ranks pari passu with the Corporation’s existing Series A through E preferred stock in terms of dividend payments and distributions upon liquidation, dissolution and winding up of the Corporation. The Purchase Agreementexchange agreement relating to thisthe issuance contains limitations onof the Series G Preferred Stock limits the payment of dividends on common stock, including limiting regular quarterly cash dividends to an amount not exceeding the last quarterly cash dividend paid per share, or the amount publicly announced (if lower), ofon common stock prior to October 14, 2008, which is $0.07$1.05 per share. For Additionally, the year ended December 31, 2009, preferred stock dividends of Series F Preferred Stock amountedCorporation issued an amended 10-year warrant (the “Warrant”) to $19.2 million, including $12.6 million of cumulative preferred dividends not declared asthe U.S. Treasury to purchase 389,483 shares of the endCorporation’s common stock at an initial exercise price of $10.878 per share instead of the period. exercise price on the original warrant of $154.05 per share. The Warrant has a 10-year term and is exercisable at any time. The exercise price and the number of shares issuable upon exercise of the Warrant are subject to certain anti-dilution adjustments. The Corporation evaluated the fair market value of the new warrant and recognized a $1.2 million increase in value due to the difference between the fair market value of the new and the old warrant as an increase to additional paid-in capital and an increase to the accumulated deficit. The Cox-Rubinstein binomial model was used to estimate the value of the Warrant. The possible future issuance of equity securities through the exercise of the Warrant could affect the Corporation’s current stockholders in a number of ways, including by: | — | | diluting the voting power of the current holders of common stock (the shares underlying the warrant represent approximately 6% of the Corporation’s shares of common stock as of December 31, 2009); | | | — | | diluting the earnings per share and book value per share of the outstanding shares of common stock; and | | | — | | • diluting the voting power of the current holders of common stock (the shares underlying the warrant represent approximately 2% of the Corporation’s shares of common stock as of December 31, 2010); • diluting the earnings per share and book value per share of the outstanding shares of common stock; and •making the payment of dividends on common stock more expensive. |
As mentioned above, on July 30, 2009, the Corporation announced the suspension of dividends for common and all its outstanding series of preferred stock. This suspension was effective with the dividends for the month of August 2009 on the Corporation’s five outstanding series of non-cumulative preferred stock and dividends foror the Corporation’s then outstanding Series F Cumulative Preferred Stock and the Corporation’s common stock. As a resultPrior to any resumption of the dividend suspension,payment of dividends on or repurchases of any of the remaining outstanding noncumulative preferred stock or common stock, the Corporation must comply with the terms of the Series F CumulativeG Preferred Stock include limitations onStock. In addition, prior to the resumptionrepurchase of any stock for cash, the Corporation must obtain the consent of the payment of cash dividendsU.S. Treasury under certain circumstances. F-60
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Stock repurchase plan and purchases of outstandingtreasury stock The Corporation has a stock repurchase program under which, from time to time, it repurchases shares of common stock in the open market and preferredholds them as treasury stock. No shares of common stock were repurchased during 2010 and 2009 by the Corporation. As of December 31, 2010 and December 31, 2009, of the total amount of common stock repurchased in prior years, 659,853 shares were held as treasury stock and were available for general corporate purposes. Legal surplus The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of FirstBank’s net income for the year be transferred to legal surplus until such surplus equals the total of paid-in-capital on common and preferred stock. Amounts transferred to the legal surplus account from the retained earnings account are not available for distribution to the stockholders. F-53
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 24 — Employees’ Benefit Plan FirstBank provides contributory retirement plans pursuant to Section 1165(e) of the Puerto Rico Internal Revenue Code for Puerto Rico employees and Section 401(k) of the U.S. Internal Revenue Code for U.S.Virgin Islands and U.S. employees (the “Plans”). All employees are eligible to participate in the Plans after three months of service for purposes of making elective deferral contributions and one year of service for purposes of sharing in the Bank’s matching, qualified matching and qualified nonelective contributions. Under the provisions of the Plans, the Bank contributes 25% of the first 4% of the participant’s compensation contributed to the Plans on a pre-tax basis. Participants are permitted to contribute up to $9,000 for 2009 and 2010, $10,000 for 2011 and 2012 and $12,000 beginning on January 1, 2013 ($16,500 for 20092010 for U.S.V.I. and U.S. employees). Additional contributions to the Plans are voluntarily made by the Bank as determined by its Board of Directors. The Bank had a total plan expense of $1.6$0.6 million for the year ended December 31, 2010, $1.6 million for 2009 and $1.5 million for 2008 and $1.4 million for 2007.2008. In the past, FirstBank Florida providesprovided a contributory retirement plan pursuant to Section 401(k) of the U.S. Internal Revenue Code for its U.S. employees (the “Plan”). All employees arewere eligible to participate in the Plan after six months of service. Under the provisions of the Plan, FirstBank Florida contributescontributed 100% of the first 3% of the participant’s contribution and 50% of the next 2% of a participant’s contribution up to a maximum of 4% of the participant’s compensation. Participants are permittedEffective July 1, 2009, the operations conducted by FirstBank Florida as a separate entity were merged with and into FirstBank Puerto Rico, the Plan sponsor. As a result of the merger, the retirement plan provided by FirstBank Florida was merged with and into the FirstBank Plan on April 29, 2010 and all assets of the FirstBank Florida 401(k) plan totaling approximately $2.2 million were transferred to contribute up to $16,500 per year (participants over 50 years of age are permitted an additional $5,500 contribution).the FirstBank Plan. FirstBank Florida had total plan expenses of approximately $151,000 for 2009 and approximately $157,000 for 2008 and approximately $114,000 for 2007.2008. Note 25 — Other Non-interest Income A detail of other non-interest income follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Other commissions and fees | | $ | 469 | | $ | 420 | | $ | 273 | | | Commissions and fees- broker-dealer related | | | $ | 2,544 | | $ | 469 | | $ | 420 | | Insurance income | | 8,668 | | 10,157 | | 10,877 | | | 7,752 | | 8,668 | | 10,157 | | Other | | 17,893 | | 18,150 | | 13,322 | | | 18,092 | | 17,893 | | 18,150 | | | | | | | | | | | | | | | | | Total | | $ | 27,030 | | $ | 28,727 | | $ | 24,472 | | | $ | 28,388 | | $ | 27,030 | | $ | 28,727 | | | | | | | | | | | | | | | | |
F-61
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 26 — Other Non-interest Expenses A detail of other non-interest expenses follows: | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | 2007 | | | | (In thousands) | | Servicing and processing fees | | $ | 10,174 | | | $ | 9,918 | | | $ | 6,574 | | Communications | | | 8,283 | | | | 8,856 | | | | 8,562 | | Depreciation and expenses on revenue — earning equipment | | | 1,341 | | | | 2,227 | | | | 2,144 | | Supplies and printing | | | 3,073 | | | | 3,530 | | | | 3,402 | | Core deposit intangible impairment | | | 3,988 | | | | — | | | | — | | Other | | | 17,483 | | | | 17,443 | | | | 18,744 | | | | | | | | | | | | Total | | $ | 44,342 | | | $ | 41,974 | | | $ | 39,426 | | | | | | | | | | | |
F-54
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2010 | | | 2009 | | | 2008 | | | | (In thousands) | | Servicing and processing fees | | $ | 8,984 | | | $ | 10,174 | | | $ | 9,918 | | Communications | | | 7,979 | | | | 8,283 | | | | 8,856 | | Supplies and printing | | | 2,307 | | | | 3,073 | | | | 3,530 | | Core deposit intangible impairment | | | — | | | | 3,988 | | | | — | | Other | | | 20,974 | | | | 18,824 | | | | 19,670 | | | | | | | | | | | | Total | | $ | 40,244 | | | $ | 44,342 | | | $ | 41,974 | | | | | | | | | | | |
Note 27 — Income Taxes Income tax expense includes Puerto Rico and Virgin Islands income taxes as well as applicable U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, First BanCorp is treated as a foreign corporation for U.S. income tax purposes and is generally subject to United States income tax only on its income from sources within the United States or income effectively connected with the conduct of a trade or business within the United States. Any such tax paid is creditable, within certain conditions and limitations, against the Corporation’s Puerto Rico tax liability. The Corporation is also subject to U.S.Virgin Islands taxes on its income from sources within that jurisdiction. Any such tax paid is also creditable against the Corporation’s Puerto Rico tax liability, subject to certain conditions and limitations. Under the Puerto Rico Internal Revenue Code of 1994, as amended (the “PR Code”), the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns and, thus, the Corporation is not able to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss, a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable carry forward period (7 years under the PR Code). The PR Code provides a dividend received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations. Dividend payments from a U.S. subsidiary to the Corporation are subject to a 10% withholding tax based on the provisions of the U.S. Internal Revenue Code. Under the PR Code, First BanCorp is subject to a maximum statutory tax rate of 39%. In 2009 the Puerto Rico Government approved Act No. 7 (the “Act”), to stimulate Puerto Rico’s economy and to reduce the Puerto Rico Government’s fiscal deficit. The Act imposes a series of temporary and permanent measures, including the imposition of a 5% surtax over the total income tax determined, which is applicable to corporations, among others, whose combined income exceeds $100,000, effectively resulting in an increase in the maximum statutory tax rate from 39% to 40.95% and an increase in the capital gain statutory tax rate from 15% to 15.75%. ThisThese temporary measure ismeasures are effective for tax years that commenced after December 31, 2008 and before January 1, 2012. The PR Code also includes an alternative minimum tax of 22% that applies if the Corporation’s regular income tax liability is less than the alternative minimum tax requirements. The Corporation has maintained an effective tax rate lower than the maximum statutory rate mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income taxes and by doing business through International Banking EntitiesEntity (“IBEs”IBE”) of the Corporation and the Bank (“FirstBank IBE”) and through the Bank’s subsidiary, FirstBank Overseas Corporation, in which the interest income and gain on sales is exempt from Puerto Rico and U.S. income taxation. Under the Act, all IBEsIBE are subject to the special 5% tax on their net income not otherwise subject to tax pursuant to the PR Code. This temporary measure is also effective for tax years that commenced after December 31, 2008 and before January 1, 2012. The IBEsFirstBank IBE and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico. IBEs that operate as a unit of a bank pay income taxes at normal rates to the extent that the IBEs’ net income exceeds 20% of the bank’s total net taxable income. On January 31, 2011, the Puerto Rico Government approved Act No. 1 which repealed the 1994 Code and established a new Puerto Rico Internal Revenue Code (the “2010 Code”). The effectprovisions of a higher temporary statutorythe 2010 Code are generally applicable to taxable years commencing after December 31, 2010. The matters discussed above are equally applicable under the 2010 Code except that the maximum corporate tax rate overhas been reduced from 39% (40.95% for calendar years 2009,and 2010) to 30% (25% for taxable years commencing after December 31, 2013 if certain economic conditions are met by the normal statutory tax rate resulted in an additionalPuerto Rico economy). Corporations are entitled to elect continue to determine its Puerto Rico income tax benefitresponsibility for such 5 year period under the provisions of $10.4 million for 2009 that was partially offset by an income tax provision of $6.6 million related to the special 5% tax on the operations FirstBank Overseas Corporation.1994 Code. F-62
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The components of income tax expense for the years ended December 31 are summarized below: | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | 2007 | | | | | | | | (In thousands) | | | | | | Current income tax benefit (expense) | | $ | 11,520 | | | $ | (7,121 | ) | | $ | (7,925 | ) | Deferred income tax (expense) benefit | | | (16,054 | ) | | | 38,853 | | | | (13,658 | ) | | | | | | | | | | | Total income tax (expense) benefit | | $ | (4,534 | ) | | $ | 31,732 | | | $ | (21,583 | ) | | | | | | | | | | |
F-55
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2010 | | | 2009 | | | 2008 | | | | (In thousands) | | Current income tax (expense) benefit | | $ | (3,935 | ) | | $ | 11,520 | | | $ | (7,121 | ) | Deferred income tax (expense) benefit | | | (99,206 | ) | | | (16,054 | ) | | | 38,853 | | | | | | | | | | | | Total income tax (expense) benefit | | $ | (103,141 | ) | | $ | (4,534 | ) | | $ | 31,732 | | | | | | | | | | | |
The differences between the income tax expense applicable to income before provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | % of | | % of | | % of | | | % of | | % of | | % of | | | | Pre-Tax | | Pre-Tax | | Pre-Tax | | | Pre-Tax | | Pre-Tax | | Pre-Tax | | | | Amount | | Income | | Amount | | Income | | Amount | | Income | | | Amount | | Income | | Amount | | Income | | Amount | | Income | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Computed income tax at statutory rate | | $ | 110,832 | | | 40.95 | % | | $ | (30,500 | ) | | | (39.0 | )% | | $ | (34,990 | ) | | | (39.0 | )% | | $ | 172,468 | | | 40.95 | % | | $ | 110,832 | | | 40.95 | % | | $ | (30,500 | ) | | | (39.0 | )% | Federal and state taxes | | | (311 | ) | | | (0.1 | )% | | — | | | 0.0 | % | | | (227 | ) | | | (0.3 | )% | | | (286 | ) | | | 0.0 | % | | | (311 | ) | | | (0.1 | )% | | — | | | 0.0 | % | Non-tax deductible expenses | | — | | | 0.0 | % | | — | | | 0.0 | % | | | (1,111 | ) | | | (1.2 | )% | | Benefit of net exempt income | | 52,293 | | | 19.3 | % | | 49,799 | | | 63.7 | % | | 23,974 | | | 26.7 | % | | 10,130 | | | 2.4 | % | | 52,293 | | | 19.3 | % | | 49,799 | | | 63.7 | % | Deferred tax valuation allowance | | | (184,397 | ) | | | (68.1 | )% | | | (2,446 | ) | | | (3.1 | )% | | 1,250 | | | 1.4 | % | | | (265,501 | ) | | | (63.0 | )% | | | (184,397 | ) | | | (68.1 | )% | | | (2,446 | ) | | | (3.1 | )% | Net operating loss carry forward | | — | | | 0.0 | % | | | (402 | ) | | | (0.5 | )% | | | (7,003 | ) | | | (7.8 | )% | | — | | | 0.0 | % | | — | | | 0.0 | % | | | (402 | ) | | | (0.5 | )% | Reversal of Unrecognized Tax Benefits | | 18,515 | | | 6.8 | % | | 10,559 | | | 13.5 | % | | — | | | 0.0 | % | | — | | | 0.0 | % | | 18,515 | | | 6.8 | % | | 10,559 | | | 13.5 | % | Settlement payment — closing agreement | | — | | | 0.0 | % | | 5,395 | | | 6.9 | % | | — | | | 0.0 | % | | — | | | 0.0 | % | | — | | | 0.0 | % | | 5,395 | | | 6.9 | % | Non-tax deductible expenses | | | | (6,302 | ) | | | (1.5 | )% | | | (7,648 | ) | | | (2.8 | )% | | | (3,156 | ) | | | (4.0 | )% | Other-net | | | (1,466 | ) | | | (0.5 | )% | | | (673 | ) | | | (0.8 | )% | | | (3,476 | ) | | | (3.9 | )% | | | (13,650 | ) | | | (3.3 | )% | | 6,182 | | | 2.3 | % | | 2,483 | | | 3.2 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total income tax (provision) benefit | | $ | (4,534 | ) | | | (1.7 | )% | | $ | 31,732 | | | 40.7 | % | | $ | (21,583 | ) | | | (24.1 | )% | | $ | (103,141 | ) | | | (24.5 | )% | | $ | (4,534 | ) | | | (1.7 | )% | | $ | 31,732 | | | 40.7 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-63
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Significant components of the Corporation’s deferred tax assets and liabilities as of December 31, 20092010 and 20082009 were as follows: | | | | | | | | | | | | | | | | | | | December 31, | | | December 31, | | | | 2009 | | 2008 | | | 2010 | | 2009 | | | | (In thousands) | | | (In thousands) | | Deferred tax asset: | | | Allowance for loan and lease losses | | $ | 212,933 | | $ | 106,879 | | | $ | 213,044 | | $ | 212,933 | | Unrealized losses on derivative activities | | 1,028 | | 1,912 | | | 472 | | 1,028 | | Deferred compensation | | 41 | | 682 | | | 76 | | 41 | | Legal reserve | | 500 | | 211 | | | 312 | | 500 | | Reserve for insurance premium cancellations | | 649 | | 679 | | | 490 | | 649 | | Net operating loss and donation carryforward available | | 68,572 | | 1,286 | | | 219,963 | | 68,572 | | Impairment on investments | | 4,622 | | 5,910 | | | 4,492 | | 4,622 | | Tax credits available for carryforward | | 3,838 | | 5,409 | | | 3,629 | | 3,838 | | Unrealized net loss on available-for-sale securities | | 20 | | 22 | | | Realized loss on investments | | 142 | | 136 | | | 136 | | 142 | | Settlement payment — closing agreement | | 7,313 | | 9,652 | | | 7,313 | | 7,313 | | Interest expense accrual — Unrecognized Tax Benefits | | — | | 2,658 | | | Unrealized loss on REO valuation | | | 9,652 | | 6,010 | | Other reserves and allowances | | 12,665 | | 7,010 | | | 8,605 | | 6,655 | | | | | | | | | | | | | Deferred tax asset | | 312,323 | | 142,446 | | | 468,184 | | 312,303 | | | | | Deferred tax liability: | | | Unrealized gain on available-for-sale securities | | 4,629 | | 716 | | | Unrealized gain on available-for-sale securities, net | | | 5,348 | | 4,609 | | Differences between the assigned values and tax bases of assets and liabilities recognized in purchase business combinations | | 3,015 | | 4,715 | | | 2,762 | | 3,015 | | Unrealized gain on other investments | | 468 | | 578 | | | 486 | | 468 | | Other | | 3,342 | | 1,123 | | | 4,560 | | 3,342 | | | | | | | | | | | | | Deferred tax liability | | 11,454 | | 7,132 | | | 13,156 | | 11,434 | | | | | Valuation allowance | | | (191,672 | ) | | | (7,275 | ) | | | (445,759 | ) | | | (191,672 | ) | | | | | | | | | | | | | | | Deferred income taxes, net | | $ | 109,197 | | $ | 128,039 | | | $ | 9,269 | | $ | 109,197 | | | | | | | | | | | | |
For 2009,2010, the Corporation recorded an income tax expense of $103.1 million compared to an income tax expense of $4.5 million compared to an income tax benefit of $31.7 million for 2008.2009. The fluctuation in income tax expense for 2010 is mainly resulted from a $184.4related to an incremental $93.7 million non-cash increasecharge in the fourth quarter of 2010 to the valuation allowance forof the Corporation’sBank’s deferred tax asset. The increase in the valuation allowance does not have any impact on the Corporation’s liquidity or cash flow, nor does such an allowance preclude the Corporation from using tax losses, tax credits or other deferred tax assets in the future. As of December 31, 2009,2010, the deferred tax asset, net of a valuation allowance of $191.7$445.8 million, amounted to $109.2$9.3 million compared to $128.0$109.2 million as of December 31, 2008. F-56
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2009. The decrease was mainly associated with the aforementioned $93.7 million charge to increase the valuation allowance of the Bank’s deferred tax asset.
Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax assetsasset based on the consideration of all available evidence, using a “more likely than not” realization standard. The valuation allowance should be sufficientValuation allowances are established, when necessary, to reduce the deferred tax assetassets to the amount that is more likely than not to be realized. In making such assessment, significant weight is to be given to evidence that can be objectively verified, including both positive and negative evidence. The accounting for income taxes guidance requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversingthe reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance, and recognizes tax benefits only when deemed probable of realization. F-64
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) In assessing the weight of positive and negative evidence, a significant negative factor that resulted in the increaseincreases of the valuation allowance was that the Corporation’s banking subsidiary, FirstBank Puerto Rico, wascontinues in a three-year historical cumulative loss position as of the end of the year 2009,2010, mainly as a result of charges to the provision for loan and lease losses especially in the construction portfolio both in Puerto Rico and the United States, resulting fromas a result of the economic downturn.downturn and has projected to be in a loss position in 2011. As of December 31, 2009,2010, management concluded that $109.2$9.3 million of the net deferred tax asset will be realized. The Corporation’s deferred tax assets will be realized. In assessing the likelihood of realizing the deferred tax assets, managementfor which it has considered all four sources of taxable income mentioned above and even though sufficient profits are expected in the next seven years to realized the deferred tax asset, given current uncertain economic conditions, the Company has only relied on tax-planning strategies as the main source of taxable income to realize the deferred tax asset amount. Among the most significant tax-planning strategies identified are: (i) sale of appreciated assets, (ii) consolidation of profitable and unprofitable companies (in Puerto Rico each Company filesnot established a separate tax return; no consolidated tax returns are permitted), and (iii) deferral of deductions without affecting its utilization. Management will continue monitoring the likelihood of realizing the deferred tax assets in future periods. If future events differ from management’s December 31, 2009 assessment, an additional valuation allowance may needrelate to profitable subsidiaries and to amounts that can be established which may have a material adverse effect on the Corporation’s resultsrealized through future reversals of operations. Similarly, toexisting taxable temporary differences. To the extent the realization of a portion, or all, of the tax asset becomes “more likely than not” based on changes in circumstances (such as, improved earnings, changes in tax laws or other relevant changes), a reversal of that portion of the deferred tax asset valuation allowance will then be recorded. The tax effect of the unrealized holding gain or loss on securities available-for-sale, excluding that on securities held by the Corporation’s international banking entities which is exempt, was computed based on a 15.75%15% capital gain tax rate, and is included in accumulated other comprehensive income as part of stockholders’ equity. At December 31, 2009,2010, the Corporation’s gross deferred tax asset related to loss and other carry-forwards was $74$224.9 million. This was comprised of net operating loss carry-forward of $68.1$219.2 million, which will begin expiring in 2016,2019, an alternative minimum tax credit carry-forward of $1.6$1.3 million, an extraordinary tax credit carryover of $3.8$3.6 million, and a charitable contribution carry-forward of $0.5$0.8 million which will begin expiring in 2014.2013. In June 2006, theThe FASB issued authoritative guidance that prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken on income tax returns. Under the authoritative accounting guidance, income tax benefits are recognized and measured based upon a two-step model: 1) a tax position must be more likely than not to be sustained based solely on its technical merits in order to be recognized, and 2) the benefit is measured as the largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the benefit recognized in accordance with this model and the tax benefit claimed on a tax return is referred to as an UTB. During the second quarter of 2009, the Corporation reversed UTBs byof $10.8 million and related accrued interest of $5.3 million due to the lapse of the statute of limitations for the 2004 taxable year. Also, in July 2009, the F-57
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Corporation entered into an agreement with the Puerto Rico Department of the Treasury to conclude an income tax audit and to eliminate all possible income and withholding tax deficiencies related to taxable years 2005, 2006, 2007 and 2008. As a result of such agreement, the Corporation reversed during the third quarter of 2009 the remaining UTBs and related interest by approximately $2.9 million, net of the payment made to the Puerto Rico Department of the Treasury in connection with the conclusion of the tax audit. There were no UTBs outstanding as of December 31, 2010 and 2009. The beginning UTB balance of $15.6 million as of December 31, 2008 (excluding accrued interest of $6.8 million) reconciles to the ending balance in the following table. Reconciliation of the Change in Unrecognized Tax Benefits
| | | | | (In thousands) | | | | | Balance at beginning of year | | $ | 15,600 | | Increases related to positions taken during prior years | | | 173 | | Decreases related to positions taken during prior years | | | (317 | ) | Expiration of statute of limitations | | | (10,733 | ) | Audit settlement | | | (4,723 | ) | | | | | Balance at end of year | | $ | — | | | | | |
The Corporation classified all interest and penalties, if any, related to tax uncertainties as income tax expense. As of December 31, 2008, the Corporation’s accrual for interest that relates to tax uncertainties amounted to $6.8 million. As of December 31, 2008, there is no need to accrue for the payment of penalties. For the year ended on December 31, 2009, the total amount of accrued interest reversed by the Corporation through income tax expense was $6.8 million. The amount of UTBs may increase or decrease for various reasons, including changes in the amounts for current tax year positions, the expiration of open income tax returns due to the expiration of statutes of limitations, changes in management’s judgment about the level of uncertainty, the status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. F-65
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 28 — Lease Commitments As of December 31, 2009,2010, certain premises are leased with terms expiring through the year 2034.2036. The Corporation has the option to renew or extend certain leases beyond the original term. Some of these leases require the payment of insurance, increases in property taxes and other incidental costs. As of December 31, 2009,2010, the obligation under various leases follows: | | | | | | | | | | | Amount | | | Amount | | | | (In thousands) | | | (In thousands) | | 2010 | | $ | 10,342 | | | 2011 | | 7,680 | | | $ | 8,600 | | 2012 | | 6,682 | | | 7,017 | | 2013 | | 4,906 | | | 5,401 | | 2014 | | 3,972 | | | 4,386 | | 2015 and later years | | 30,213 | | | 2015 | | | 3,623 | | 2016 and later years | | | 29,946 | | | | | | | | | Total | | $ | 63,795 | | | $ | 58,973 | | | | | | | | |
Rental expense included in occupancy and equipment expense was $11.8$10.8 million in 2009 (20082010 (2009 — $11.6$11.8 million; 2007 — $11.22008 —$11.6 million). Note 29 — Fair Value In February 2007, theFair Value Option
FASB issued authoritative guidance which permits the measurement of selected eligible financial instruments at fair value at specified election dates. The Corporation elected to adopt the fair value option for certain of its brokered CDs and medium-term notes.value. The following table summarizes the impact of adopting the fair value option for certain brokered CDs and medium-term notes on January 1, 2007. Amounts shown represent the carrying value of the affected instruments before and after the changes in accounting resulting from the adoption of the fair value option. F-58
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | Opening Statement of | | | | Ending Statement of | | | | | | | Financial Condition | | | | Financial Condition | | | Net Increase in | | | as of January 1, 2007 | | | | as of December 31, 2006 | | | Retained Earnings | | | (After Adoption of | | Transition Impact | | (Prior to Adoption) (1) | | | Upon Adoption | | | Fair Value Option) | | | | | | | | (In thousands) | | | | | | Callable brokered CDs | | $ | (4,513,020 | ) | | $ | 149,621 | | | $ | (4,363,399 | ) | Medium-term notes | | | (15,637 | ) | | | 840 | | | | (14,797 | ) | | | | | | | | | | | | | Cumulative-effect adjustment (pre-tax) | | | | | | | 150,461 | | | | | | Tax impact | | | | | | | (58,683 | ) | | | | | | | | | | | | | | | | | Cumulative-effect adjustment (net of tax) increased to retained earnings | | | | | | $ | 91,778 | | | | | | | | | | | | | | | | | |
| | | (1) | | Net of debt issue costs, placement fees and basis adjustment as of December 31, 2006. |
Fair Value Option
Callable Brokered CDs and Certain Medium-Term Notes
The Corporation elected the fair value option for certain financial liabilitiesmedium term notes that were hedged with interest rate swaps that were previously designated for fair value hedge accounting. As of December 31, 2010 and 2009, and December 31, 2008, these liabilities included certain medium-term notes with a fair value of $13.4 million and $10.1 million, respectively, and principal balance of $15.4 million, had a fair value of $11.8 million and $13.4 million, respectively, recorded in notes payable. As of December 31, 2008, liabilities recognized at fair value also included callable brokered CDs with an aggregate fair value of $1.15 billion and principal balance of $1.13 billion, recorded in interest-bearing deposits. Interest paid/accrued on these instruments is recorded as part of interest expense and the accrued interest is part of the fair value of the liabilities measured at fair value.notes. Electing the fair value option allows the Corporation to eliminate the burden of complying with the requirements for hedge accounting (e.g., documentation and effectiveness assessment) without introducing earnings volatility. Interest rate risk on the callable brokered CDs measured at fair value was economically hedged with callable interest rate swaps, with the same terms and conditions, until they were all called during 2009. The Corporation did not elect the fair value option for the vast majority of other brokered CDs because these are not hedged by derivatives. Medium-term notes and callable brokered CDs for which the Corporation elected the fair value option were priced using observable market data in the institutional markets. Callable brokered CDs In the past, the Corporation also measured at fair value callable brokered CDs. All of the brokered CDs measured at fair value were called during 2009. Fair Value Measurement The FASB authoritative guidance for fair value measurement defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs may be used to measure fair value: | | | Level 1 | | Valuations of Level 1 assets and liabilities are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 1 assets and liabilities include equity securities that are traded in an active exchange market, as well as certain U.S. Treasury and other U.S. government and agency securities and corporate debt securities that are traded by dealers or brokers in active markets. |
F-66
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | Level 2 | | Valuations of Level 2 assets and liabilities are based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair value is estimated based on the value of identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and financial liabilities (e.g., callable brokered CDs and medium-term notes elected to be |
F-59
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | measured at fair value) whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. |
| | | Level 3 | | Valuations of Level 3 assets and liabilities are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models for which the determination of fair value requires significant management judgment or estimation. |
For 2010, there have been no transfers into or out of Level 1 and Level 2 measurement of the fair value hierarchy. Estimated Fair Value of Financial Instruments The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Corporation. The estimated fair value is subjective in nature and involves uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. In addition, the fair value estimates are based on outstanding balances without attempting to estimate the value of anticipated future business. The following table presents the estimated fair value and carrying value of financial instruments as of December 31, 20092010 and December 31, 2008.2009. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Carrying | | Total Carrying | | | | | Total Carrying | | Total Carrying | | | | | | Amount in | | Amount in | | | | | Amount in | | Amount in | | | | | | Statement of | | Statement of | | | | | Statement of | | Statement of | | | | | | Financial | | Fair Value | | Financial | | Fair Value | | | Financial | | Fair Value | | Financial | | Fair Value | | | | Condition | | Estimated | | Condition | | Estimated | | | Condition | | Estimated | | Condition | | Estimated | | | | 12/31/2009 | | 12/31/2009 | | 12/31/2008 | | 12/31/2008 | | | 12/31/2010 | | 12/31/2010 | | 12/31/2009 | | 12/31/2009 | | | | (In thousands) | | | (In thousands) | | Assets: | | | Cash and due from banks and money market investments | | $ | 704,084 | | $ | 704,084 | | $ | 405,733 | | $ | 405,733 | | | $ | 370,283 | | $ | 370,283 | | $ | 704,084 | | $ | 704,084 | | Investment securities available for sale | | 4,170,782 | | 4,170,782 | | 3,862,342 | | 3,862,342 | | | 2,744,453 | | 2,744,453 | | 4,170,782 | | 4,170,782 | | Investment securities held to maturity | | 601,619 | | 621,584 | | 1,706,664 | | 1,720,412 | | | 453,387 | | 476,516 | | 601,619 | | 621,584 | | Other equity securities | | 69,930 | | 69,930 | | 64,145 | | 64,145 | | | 55,932 | | 55,932 | | 69,930 | | 69,930 | | Loans receivable, including loans held for sale | | 13,949,226 | | 13,088,292 | | | Loans held for sale | | | 300,766 | | 300,766 | | 20,775 | | 20,775 | | Loans, held for investment | | | 11,655,436 | | 13,928,451 | | Less: allowance for loan and lease losses | | | (528,120 | ) | | | (281,526 | ) | | | | (553,025 | ) | | | (528,120 | ) | | | | | | | | | | | | | Loans, net of allowance | | 13,421,106 | | 12,811,010 | | 12,806,766 | | 12,416,603 | | | Loans held for investment, net of allowance | | | 11,102,411 | | 10,581,221 | | 13,400,331 | | 12,790,235 | | | | | | | | | | | | | Derivatives, included in assets | | 5,936 | | 5,936 | | 8,010 | | 8,010 | | | 1,905 | | 1,905 | | 5,936 | | 5,936 | | | | | Liabilities: | | | Deposits | | 12,669,047 | | 12,801,811 | | 13,057,430 | | 13,221,026 | | | 12,059,110 | | 12,207,613 | | 12,669,047 | | 12,801,811 | | Loans payable | | 900,000 | | 900,000 | | — | | — | | | — | | — | | 900,000 | | 900,000 | | Securities sold under agreements to repurchase | | 3,076,631 | | 3,242,110 | | 3,421,042 | | 3,655,652 | | | 1,400,000 | | 1,513,338 | | 3,076,631 | | 3,242,110 | | Advances from FHLB | | 978,440 | | 1,025,605 | | 1,060,440 | | 1,079,298 | | | 653,440 | | 677,866 | | 978,440 | | 1,025,605 | | Notes Payable | | 27,117 | | 25,716 | | 23,274 | | 18,755 | | | 26,449 | | 24,909 | | 27,117 | | 25,716 | | Other borrowings | | 231,959 | | 80,267 | | 231,914 | | 81,170 | | | 231,959 | | 71,488 | | 231,959 | | 80,267 | | Derivatives, included in liabilities | | 6,467 | | 6,467 | | 8,505 | | 8,505 | | | 6,701 | | 6,701 | | 6,467 | | 6,467 | |
F-67
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Assets and liabilities measured at fair value on a recurring basis, including financial liabilities for which the Corporation has elected the fair value option, are summarized below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 30, 2010 | | As of December 31, 2009 | | | Fair Value Measurements Using | | Fair Value Measurements Using | | | | | | | | | | | | | | | Assets / Liabilities | | | | | | | | | | | | | | Assets / Liabilities | (In thousands) | | Level 1 | | Level 2 | | Level 3 | | at Fair Value | | Level 1 | | Level 2 | | Level 3 | | at Fair Value | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Securities available for sale : | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity securities | | $ | 59 | | | $ | — | | | $ | — | | | $ | 59 | | | $ | 303 | | | $ | — | | | $ | — | | | $ | 303 | | U.S. Treasury Securities | | | 608,714 | | | | — | | | | — | | | | 608,714 | | | | — | | | | — | | | | — | | | | — | | Non-callable U.S. agency debt | | | 304,257 | | | | — | | | | — | | | | 304,257 | | | | — | | | | — | | | | — | | | | — | | Callable U.S. agency debt and MBS | | | — | | | | 1,622,265 | | | | — | | | | 1,622,265 | | | | — | | | | 3,949,799 | | | | — | | | | 3,949,799 | | Puerto Rico Government Obligations | | | — | | | | 134,165 | | | | 2,676 | | | | 136,841 | | | | — | | | | 136,326 | | | | — | | | | 136,326 | | Private label MBS | | | — | | | | — | | | | 72,317 | | | | 72,317 | | | | — | | | | — | | | | 84,354 | | | | 84,354 | | Derivatives, included in assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swap agreements | | | — | | | | 351 | | | | — | | | | 351 | | | | — | | | | 319 | | | | — | | | | 319 | | Purchased interest rate cap agreements | | | — | | | | 1 | | | | — | | | | 1 | | | | — | | | | 224 | | | | 4,199 | | | | 4,423 | | Purchased options used to manage exposure to the stock market on embeded stock indexed options | | | — | | | | 1,553 | | | | — | | | | 1,553 | | | | — | | | | 1,194 | | | | — | | | | 1,194 | | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | Medium-term notes | | | — | | | | 11,842 | | | | — | | | | 11,842 | | | | — | | | | 13,361 | | | | — | | | | 13,361 | | Derivatives, included in liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swap agreements | | | | | | | 5,192 | | | | — | | | | 5,192 | | | | — | | | | 5,068 | | | | — | | | | 5,068 | | Written interest rate cap agreements | | | — | | | | 1 | | | | — | | | | 1 | | | | — | | | | 201 | | | | — | | | | 201 | | Embedded written options on stock index deposits and notes payable | | | — | | | | 1,508 | | | | — | | | | 1,508 | | | | — | | | | 1,198 | | | | — | | | | 1,198 | |
| | | | | | | Changes in Fair Value for the Year Ended December | | | | 31, 2010, for items Measured at Fair Value | | | | Pursuant to Election of the Fair Value Option | | | | Unrealized Gains and Interest Expense | | (In thousands) | | included in Current-Period Earnings (1) | | Medium-term notes | | | 670 | | | | | | | | $ | 670 | | | | | |
| | | (1) | | Changes in fair value for the year ended December 31, 2010 include interest expense on medium-term notes of $0.8 million. Interest expense on medium-term notes that have been elected to be carried at fair value are recorded in interest expense in the Consolidated Statement of (Loss) Income based on their contractual coupons. |
F-60F-68
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2009 | | As of December 31, 2008 | | | Fair Value Measurements Using | | Fair Value Measurements Using | | | | | | | | | | | | | | | Assets / Liabilities | | | | | | | | | | | | | | Assets / Liabilities | (In thousands) | | Level 1 | | Level 2 | | Level 3 | | at Fair Value | | Level 1 | | Level 2 | | Level 3 | | at Fair Value | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Securities available for sale : | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity securities | | $ | 303 | | | $ | — | | | $ | — | | | $ | 303 | | | $ | 669 | | | $ | — | | | $ | — | | | $ | 669 | | Corporate Bonds | | | — | | | | — | | | | — | | | | — | | | | 1,548 | | | | — | | | | — | | | | 1,548 | | U.S. agency debt and MBS | | | — | | | | 3,949,799 | | | | — | | | | 3,949,799 | | | | — | | | | 3,609,009 | | | | — | | | | 3,609,009 | | Puerto Rico Government Obligations | | | — | | | | 136,326 | | | | — | | | | 136,326 | | | | — | | | | 137,133 | | | | — | | | | 137,133 | | Private label MBS | | | — | | | | — | | | | 84,354 | | | | 84,354 | | | | — | | | | — | | | | 113,983 | | | | 113,983 | | Derivatives, included in assets | | | — | | | | 1,737 | | | | 4,199 | | | | 5,936 | | | | — | | | | 7,250 | | | | 760 | | | | 8,010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Callable brokered CDs | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,150,959 | | | | — | | | | 1,150,959 | | Medium-term notes | | | — | | | | 13,361 | | | | — | | | | 13,361 | | | | — | | | | 10,141 | | | | — | | | | 10,141 | | Derivatives, included in liabilities | | | — | | | | 6,467 | | | | — | | | | 6,467 | | | | — | | | | 8,505 | | | | — | | | | 8,505 | |
F-61
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | Changes in Fair Value for the Year Ended | | | | | | | | | | | | | | | | December 31, 2009, for Items Measured at Fair Value Pursuant | | | | Changes in Fair Value for the Year Ended December 31, 2009, for Items Measured at Fair Value Pursuant to Election of the Fair Value Option | | | to Election of the Fair Value Option | | | | Total | | | Total | | | | Changes in Fair Value | | | Changes in Fair Value | | | | Unrealized Gains and | | Unrealized Losses and | | Unrealized Gains (Losses) | | | Unrealized Gains and | | Unrealized Losses and | | Unrealized Gains (Losses) | | | | Interest Expense included | | Interest Expense included | | and Interest Expense | | | Interest Expense included | | Interest Expense included | | and Interest Expense | | | | in Interest Expense | | in Interest Expense | | included in | | | in Interest Expense | | in Interest Expense | | included in | | (In thousands) | | on Deposits(1) | | on Notes Payable(1) | | Current-Period Earnings(1) | | | on Deposits(1) | | on Notes Payable(1) | | Current-Period Earnings(1) | | Callable brokered CDs | | $ | (2,068 | ) | | $ | — | | $ | (2,068 | ) | | $ | (2,068 | ) | | $ | — | | $ | (2,068 | ) | Medium-term notes | | — | | | (4,069 | ) | | | (4,069 | ) | | — | | | (4,069 | ) | | | (4,069 | ) | | | | | | | | | | | | | | | | | | $ | (2,068 | ) | | $ | (4,069 | ) | | $ | (6,137 | ) | | $ | (2,068 | ) | | $ | (4,069 | ) | | $ | (6,137 | ) | | | | | | | | | | | | | | | |
| | | (1) | | Changes in fair value for the year ended December 31, 2009 include interest expense on callable brokered CDs of $10.8 million and interest expense on medium-term notes of $0.8 million. Interest expense on callable brokered CDs and medium-term notes that have been elected to be carried at fair value are recorded in interest expense in the Consolidated Statements of Income based on such instruments contractual coupons. |
| | | | | | | | | | | | | | | | | Changes in Fair Value for the Year Ended | | | | | | | | | | | | | | | | December 31, 2008, for Items Measured at Fair Value Pursuant | | | | Changes in Fair Value for the Year Ended December 31, 2008, for Items Measured at Fair Value Pursuant to Election of the Fair Value Option | | | to Election of the Fair Value Option | | | | Total | | | Total | | | | Changes in Fair Value | | | Changes in Fair Value | | | | Unrealized Losses and | | Unrealized Gains and | | Unrealized (Losses) Gains | | | Unrealized Losses and | | Unrealized Gains and | | Unrealized (Losses) Gains | | | | Interest Expense included | | Interest Expense included | | and Interest Expense | | | Interest Expense included | | Interest Expense included | | and Interest Expense | | | | in Interest Expense | | in Interest Expense | | included in | | | in Interest Expense | | in Interest Expense | | included in | | (In thousands) | | on Deposits(1) | | on Notes Payable(1) | | Current-Period Earnings(1) | | | on Deposits(1) | | on Notes Payable(1) | | Current-Period Earnings(1) | | Callable brokered CDs | | $ | (174,208 | ) | | $ | — | | $ | (174,208 | ) | | $ | (174,208 | ) | | $ | — | | $ | (174,208 | ) | Medium-term notes | | — | | 3,316 | | 3,316 | | | — | | 3,316 | | 3,316 | | | | | | | | | | | | | | | | | | | $ | (174,208 | ) | | $ | 3,316 | | $ | (170,892 | ) | | $ | (174,208 | ) | | $ | 3,316 | | $ | (170,892 | ) | | | | | | | | | | | | | | | |
| | | (1) | | Changes in fair value for the year ended December 31, 2008 include interest expense on callable brokered CDs of $120.0 million and interest expense on medium-term notes of $0.8 million. Interest expense on callable brokered CDs and medium-term notes that have been elected to be carried at fair value are recorded in interest expense in the Consolidated Statements of Income based on such instruments contractual coupons. |
| | | | | | | | | | | | | | | Changes in Fair Value for the Year Ended December 31, 2007, for Items Measured at Fair Value Pursuant to Election of the Fair Value Option | | | | | | | | | | | | Total | | | | | | | | | | | | Changes in Fair Value | | | | Unrealized Losses and | | | Unrealized Gains and | | | Unrealized (Losses) Gains | | | | Interest Expense included | | | Interest Expense included | | | and Interest Expense | | | | in Interest Expense | | | in Interest Expense | | | included in | | (In thousands) | | on Deposits(1) | | | on Notes Payable(1) | | | Current-Period Earnings(1) | | Callable brokered CDs | | $ | (298,641 | ) | | $ | — | | | $ | (298,641 | ) | Medium-term notes | | | — | | | | (294 | ) | | | (294 | ) | | | | | | | | | | | | | $ | (298,641 | ) | | $ | (294 | ) | | $ | (298,935 | ) | | | | | | | | | | |
| | | (1) | | Changes in fair value for the year ended December 31, 2007 include interest expense on callable brokered CDs of $227.5 million and interest expense on medium-term notes of $0.8 million. Interest expense on callable brokered CDs and medium-term notes that have been elected to be carried at fair value are recorded in interest expense in the Consolidated Statements of Income based on such instruments contractual coupons. |
F-62
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2010, 2009 2008 and 2007.2008. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Fair Value Measurements | | Total Fair Value Measurements | | Total Fair Value Measurements | | | Total Fair Value Measurements | | Total Fair Value Measurements | | Total Fair Value Measurements | | | | (Year Ended December 31, 2009) | | (Year Ended December 31, 2008) | | (Year Ended December 31, 2007) | | | (Year Ended December 31, 2010) | | (Year Ended December 31, 2009) | | (Year Ended December 31, 2008) | | Level 3 Instruments Only | | Securities | | Securities | | | | Securities | | | Securities | | Securities | | Securities | | (In thousands) | | Derivatives(1) | | Available For Sale(2) | | Derivatives(1) | | Available For Sale(2) | | Derivatives(1) | | Available For Sale(2) | | | Derivatives(1) | | Available For Sale(2) | | Derivatives(1) | | Available For Sale(2) | | Derivatives(1) | | Available For Sale(2) | | Beginning balance | | $ | 760 | | $ | 113,983 | | $ | 5,102 | | $ | 133,678 | | $ | 9,087 | | $ | 370 | | | $ | 4,199 | | $ | 84,354 | | $ | 760 | | $ | 113,983 | | $ | 5,102 | | $ | 133,678 | | Total gains or (losses) (realized/unrealized): | | | Included in earnings | | 3,439 | | | (1,270 | ) | | | (4,342 | ) | | — | | | (3,985 | ) | | — | | | | (1,152 | ) | | | (582 | ) | | 3,439 | | | (1,270 | ) | | | (4,342 | ) | | — | | Included in other comprehensive income | | — | | | (2,610 | ) | | — | | | (1,830 | ) | | — | | | (28,407 | ) | | — | | 5,613 | | — | | | (2,610 | ) | | — | | | (1,830 | ) | New instruments acquired | | — | | — | | — | | — | | — | | 182,376 | | | — | | 2,584 | | — | | — | | — | | — | | Principal repayments and amortization | | — | | | (25,749 | ) | | — | | | (17,865 | ) | | — | | | (20,661 | ) | | — | | | (16,976 | ) | | — | | | (25,749 | ) | | — | | | (17,865 | ) | Other(1) | | | | (3,047 | ) | | — | | — | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance | | $ | 4,199 | | $ | 84,354 | | $ | 760 | | $ | 113,983 | | $ | 5,102 | | $ | 133,678 | | | $ | — | | $ | 74,993 | | $ | 4,199 | | $ | 84,354 | | $ | 760 | | $ | 113,983 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (1) | | Amounts related to the valuation of interest rate cap agreements. The counterparty to these interest rate cap agreements failed on April 30, 2010 and was acquired by another financial institution through an FDIC assisted transaction. The Corporation currently has a claim with the FDIC. | | (2) | | Amounts mostly related to certain private label mortgage-backed securities. |
F-69
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The table below summarizes changes in unrealized gains and losses recorded in earnings for the years ended December 31, 2010, 2009 and 2008 for Level 3 assets and liabilities that are still held at the end of each year. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Changes in Unrealized Gains (Losses) | | Changes in Unrealized Losses | | Changes in Unrealized Losses | | | Changes in Unrealized Losses | | Changes in Unrealized Gains (Losses) | | Changes in Unrealized Losses | | | | (Year Ended December 31, 2009) | | (Year Ended December 31, 2008) | | (Year Ended December 31, 2007) | | | (Year Ended December 31, 2010) | | (Year Ended December 31, 2009) | | (Year Ended December 31, 2008) | | | | Securities | | Securities | | Securities | | | Securities | | Securities | | Securities | | Level 3 Instruments Only | | Available | | Available | | Available | | | Available | | Available | | Available | | (In thousands) | | Derivatives | | For Sale | | Derivatives | | For Sale | | Derivatives | | For Sale | | | For Sale | | Derivatives | | For Sale | | Derivatives | | For Sale | | Changes in unrealized losses relating to assets still held at reporting date(1): | | | | | | Interest income on loans | | $ | 45 | | $ | — | | $ | (59 | ) | | $ | — | | $ | (440 | ) | | $ | — | | | $ | — | | $ | 45 | | $ | — | | $ | (59 | ) | | $ | — | | Interest income on investment securities | | 3,394 | | — | | | (4,283 | ) | | — | | | (3,545 | ) | | — | | | — | | 3,394 | | — | | | (4,283 | ) | | — | | Net impairment losses on investment securities (credit component) | | — | | | (1,270 | ) | | — | | — | | — | | — | | | | (582 | ) | | — | | | (1,270 | ) | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 3,439 | | $ | (1,270 | ) | | $ | (4,342 | ) | | $ | — | | $ | (3,985 | ) | | $ | — | | | $ | (582 | ) | | $ | 3,439 | | $ | (1,270 | ) | | $ | (4,342 | ) | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (1) | | Unrealized lossesgain of $2.6$5.6 million $1.8 million and $28.4 millionwas recognized on Level 3 available-for-sale securities was recognized as part of other comprehensive income for the year ended December 31, 2010, while unrealized losses of $2.6 million and $1.8 million were recognized for the years ended December 31, 2009 2008 and 2007,2008, respectively. |
Additionally, fair value is used on a no-recurringnon-recurring basis to evaluate certain assets in accordance with GAAP. Adjustments to fair value usually result from the application of lower-of-cost-or-market accounting (e.g., loans held for sale carried at the lower of cost or fair value and repossessed assets) or write-downs of individual assets (e.g., goodwill, loans). As of December 31, 2010, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Losses recorded for | | | Carrying value as of December 31, 2010 | | the Year Ended | | | Level 1 | | Level 2 | | Level 3 | | December 31, 2010 | | | (In thousands) | Loans receivable (1) | | $ | — | | | $ | — | | | $ | 1,261,612 | | | $ | 273,243 | | Other Real Estate Owned (2) | | | — | | | | — | | | | 84,897 | | | | 15,661 | | Loans held for sale (3) | | | — | | | | 19,148 | | | | 281,618 | | | | 103,536 | |
| | | (1) | | Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral. The fair values are derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g. absorption rates), which are not market observable. | | (2) | | The fair value is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g. absorption rates), which are not market observable. Losses are related to market valuation adjustments after the transfer from the loan to the OREO portfolio. | | (3) | | Fair value is primarily derived from quotations based on the mortgage-backed securities market for level 2 assets. Level 3 loans held for sale are associated with the $447 million loans transferred to held for sale during the fourth quarter of 2010 recorded at a value of $281.6 million, or the sales price established for these loans by agreement entered into in February 2011. The Corporation completed the sale of substaintially all of these loans on February 16, 2011. See Note 36. |
F-70
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As of December 31, 2009, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table: | | | | | | | | | | | | | | | | | | | | Losses recorded for | | | | | | | | | | | | | | | | | | | the Year Ended | | Losses recorded for | | | Carrying value as of December 31, 2009 | | December 31, 2009 | | Carrying value as of December 31, 2009 | | the Year Ended | | | Level 1 | | Level 2 | | Level 3 | | | Level 1 | | Level 2 | | Level 3 | | December 31, 2009 | | | (In thousands) | | (In thousands) | Loans receivable (1) | | $ | — | | $ | — | | $ | 1,103,069 | | $ | 144,024 | | | $ | — | | $ | — | | $ | 1,103,069 | | $ | 144,024 | | Other Real Estate Owned (2) | | — | | — | | 69,304 | | 8,419 | | | — | | — | | 69,304 | | 8,419 | | Core deposit intangible (3) | | — | | — | | 6,683 | | 3,988 | | | — | | — | | 6,683 | | 3,988 | | Loans held for sale (4) | | — | | 20,775 | | — | | 58 | | | — | | 20,775 | | — | | 58 | |
| | | (1) | | Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral. The fair values are derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g. absorption rates), which are not market observable. | | (2) | | The fair value is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g. absorption rates), which are not market observable. Losses are related to market valuation adjustments after the transfer from the loan to the Other Real Estate Owned (“OREO”) portfolio. | | (3) | | Amount represents core deposit intangible of First Bank Florida. The impairment was generally measured based on internal information about decreases in the base of core deposits acquired upon the acquisition of First Bank Florida. | | (4) | | Fair value is primarily derived from quotations based on the mortgage-backed securities market. |
F-63
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2008, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table: | | | | | | | | | | | | | | | | | | | | Losses recorded for | | | | | | | | | | | | | | | | | | | the Year Ended | | Losses recorded for | | | Carrying value as of December 31, 2008 | | December 31, 2008 | | Carrying value as of December 31, 2008 | | the Year Ended | | | Level 1 | | Level 2 | | Level 3 | | | Level 1 | | Level 2 | | Level 3 | | December 31, 2008 | | | (In thousands) | | (In thousands) | Loans receivable (1) | | $ | — | | $ | — | | $ | 209,900 | | $ | 51,037 | | | $ | — | | $ | — | | $ | 209,900 | | $ | 51,037 | | Other Real Estate Owned (2) | | — | | — | | 37,246 | | 7,698 | | | — | | — | | 37,246 | | 7,698 | |
| | | (1) | | Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral. The fair values are derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g. absorption rates), which are not market observable. | | (2) | | The fair value is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g. absorption rates), which are not market observable. Valuation allowance is based on market valuation adjustments after the transfer from the loan to the OREO portfolio. |
As of December 31, 2007, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Losses recorded for | | | | | | | | | | | | | | | the Year Ended | | | Carrying value as of December 31, 2007 | | December 31, 2007 | | | Level 1 | | Level 2 | | Level 3 | | | | | | | (In thousands) | Loans receivable (1) | | $ | — | | | $ | 59,418 | | | $ | — | | | $ | 5,187 | |
| | | (1) | | Mainly impaired commercial and construction loans. The impairment was measured based on the fair value of the collateral which was derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations. |
The following is a description of the valuation methodologies used for instruments for which an estimated fair value is presented as well as for instruments for which the Corporation has elected the fair value option. The estimated fair value was calculated using certain facts and assumptions, which vary depending on the specific financial instrument. Cash and due from banks and money market investments The carrying amounts of cash and due from banks and money market investments are reasonable estimates of their fair value. Money market investments include held-to-maturity U.S. Government obligations, which have a contractual maturity of three months or less. The fair value of these securities is based on quoted market prices in active markets that incorporate the risk of nonperformance. F-71
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Investment securities available for sale and held to maturity The fair value of investment securities is the market value based on quoted market prices (as is the case with equity securities, U.S. Treasury notes and non-callable U.S. Agency debt securities), when available, or market prices for identical or comparable assets (as is the case with MBS and callable U.S. agency debt) that are based on observable market parameters including benchmark yields, reported trades, quotes from brokers or dealers, issuer spreads, bids, offers and reference data including market research operations. Observable prices in the market already consider the risk of nonperformance. If listed prices or quotes are not available, fair value is based upon models that use unobservable inputs due to the limited market activity of the instrument, as is the case with certain private label mortgage-backed securities held by the Corporation. Private label MBS are collateralized by fixed-rate mortgages on single-family residential properties in the United States; the interest rate on the securities is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The market valuation represents the estimated net cash flows over the projected life of the pool of underlying assets applying a discount rate that reflects market observed floating spreads over LIBOR, with a widening spread bias on a nonrated security. The market valuation is derived from a model that utilizes relevant assumptions such as prepayment rate, default rate, and loss severity on a loan level basis. The Corporation modeled the cash flow from the fixed-rate mortgage collateral using a static cash flow analysis according to collateral attributes of the underlying mortgage pool (i.e. loan term, current balance, note rate, rate adjustment type, rate adjustment frequency, rate caps, others) in combination with prepayment forecasts obtained from a commercially available prepayment model (ADCO). The variable cash flow of the security is modeled using the 3-month LIBOR forward curve. Loss assumptions were driven by the combination of default and loss severity estimates, taking into account loan credit characteristics (loan-to-value, state, origination date, property type, occupancy loan purpose, documentation type, debt-to-income ratio, other) to provide an estimate of default and loss severity. Refer to NotesNote 1 and Note 4 for additional information about assumptions used in the fair valuevaluation of private label mortgage-backed securities. F-64
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)MBS.
Other equity securities Equity or other securities that do not have a readily available fair value are stated at the net realizable value, which management believes is a reasonable proxy for their fair value. This category is principally composed of stock that is owned by the Corporation to comply with FHLB regulatory requirements. Their realizable value equals their cost as these shares can be freely redeemed at par. Loans receivable, including loans held for sale The fair value of all loans held for investment and for residential loans held for sale was estimated using discounted cash flow analyses, usingbased on interest rates currently being offered for loans with similar terms and credit quality and with adjustments that the Corporation’s management believes a market participant would consider in determining fair value. Loans were classified by type such as commercial, residential mortgage, credit cards and automobile. These asset categories were further segmented into fixed- and adjustable-rate categories. The fair values of performing fixed-rate and adjustable-rate loans were calculated by discounting expected cash flows through the estimated maturity date. Loans with no stated maturity, like credit lines, were valued at book value. Prepayment assumptions were considered for non-residential loans. For residential mortgage loans, prepayment estimates were based on recent historical prepayment experiencesexperience of generic U.S. mortgage-backed securities pools with similar characteristics (e.g. coupon and original term) and adjusted based on the Corporation’s historical data.residential mortgage portfolio. Discount rates were based on the Treasury and LIBOR/Swap Yield Curves at the date of the analysis, and included appropriate adjustments for expected credit losses and liquidity. For impaired collateral dependent loans, the impairment was primarily measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observable transactions involving similar assets in similar locations. For construction, commercial mortgage and commercial loans transferred to held for sale during the fourth quarter of 2010, the fair value equals the established sales price of these loans. The Corporation completed the sale of substantially all of these loans on February 16, 2011. Deposits The estimated fair value of demand deposits and savings accounts, which are deposits with no defined maturities, equals the amount payable on demand at the reporting date. For deposits with stated maturities, but that reprice at least quarterly, the fair value is also estimated to be the recorded amounts at the reporting date. The fair values of retail fixed-rate time deposits, with stated maturities, are based on the present value of the future cash flows expected to be paid on the deposits. The cash flows were based on contractual maturities; no early repayments are assumed. Discount rates were based on the LIBOR yield curve. F-72
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The estimated fair value of total deposits excludes the fair value of core deposit intangibles, which represent the value of the customer relationship measured by the value of demand deposits and savings deposits that bear a low or zero rate of interest and do not fluctuate in response to changes in interest rates. The fair value of brokered CDs, which are included within deposits, is determined using discounted cash flow analyses over the full term of the CDs. The valuation uses a “Hull-White Interest Rate Tree” approach, an industry-standard approach for valuing instruments with interest rate call options. The fair value of the CDs is computed using the outstanding principal amount. The discount rates used are based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to calibrate the model to current market prices. The fair value does not incorporate the risk of nonperformance, since interests in brokered CDs are generally participated outsold by brokers in sharesamounts of less than $100,000 and, therefore, insured by the FDIC. Loans payable Loans payable consisted of short-term borrowings under the FED Discount Window Program. Due to the short-term nature of these borrowings, their outstanding balances are estimated to be the fair value. Securities sold under agreements to repurchase Some repurchase agreements reprice at least quarterly, and their outstanding balances are estimated to be their fair value. Where longer commitments are involved, fair value is estimated using exit price indications of the cost of F-65
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unwinding the transactions as of the end of the reporting period. Securities sold under agreements to repurchase are fully collateralized by investment securities. Advances from FHLB The fair value of advances from FHLB with fixed maturities is determined using discounted cash flow analyses over the full term of the borrowings, using indications of the fair value of similar transactions. The cash flows assume no early repayment of the borrowings. Discount rates are based on the LIBOR yield curve. For advances from FHLB that reprice quarterly, their outstanding balances are estimated to be their fair value. Advances from FHLB are fully collateralized by mortgage loans and, to a lesser extent, investment securities. Derivative instruments The fair value of most of the derivative instruments is based on observable market parameters and takes into consideration the credit risk component of paying counterpartscounterparties when appropriate, except when collateral is pledged. That is, on interest rate swaps, the credit risk of both counterpartscounterparties is included in the valuation; and, on options and caps, only the seller’s credit risk is considered. The “Hull-White Interest Rate Tree” approach is used to value the option components of derivative instruments, and discounting of the cash flows is performed using US dollar LIBOR-based discount rates or yield curves that account for the industry sector and the credit rating of the counterparty and/or the Corporation. Derivatives include interest rate swaps used for protection against rising interest rates and, prior to June 30, 2009, included interest rate swaps to economically hedge brokered CDs and medium-term notes. For these interest rate swaps, a credit component was not considered in the valuation since the Corporation has fully collateralized with investment securities any mark to market loss with the counterparty and, if there were market gains, the counterparty had to deliver collateral to the Corporation. Certain derivatives with limited market activity, as is the case with derivative instruments named as “reference caps,” arewere valued using models that consider unobservable market parameters (Level 3). Reference caps arewere used mainly to hedge interest rate risk inherent in private label mortgage-backed securities,MBS, thus arewere tied to the notional amount of the underlying fixed-rate mortgage loans originated in the United States. SignificantThe counterparty to these derivative instruments failed on April 30, 2010. The Corporation currently has a claim with the FDIC and the exposure to fair value of $3.0 million was recorded as an accounts receivable. In the past, significant inputs used for the fair value determination consistconsisted of specific characteristics such as information used in the prepayment model which followsfollow the amortizing schedule of the underlying loans, which is an unobservable input. The valuation model uses the Black formula, which is a benchmark standard in the financial industry. The Black formula is similar to the Black-Scholes formula for valuing stock options except that the spot price of the underlying is replaced by the forward price. The Black formula uses as inputs the strike price of the cap, forward LIBOR rates, volatility estimates and discount rates to estimate the option value. LIBOR rates and swap rates are obtained from Bloomberg L.P. (“Bloomberg”) every day and build a zero coupon curve based on the Bloomberg LIBOR/Swap curve. The discount factor is then calculated from the zero coupon curve. The cap is the sum of all caplets. For each caplet, the rate is reset at the beginning of each reporting period and payments are made at the end of each period. The cash flow of each caplet is then discounted from each payment date. F-73
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Although most of the derivative instruments are fully collateralized, a credit spread is considered for those that are not secured in full. The cumulative mark-to-market effect of credit risk in the valuation of derivative instruments resulted in an unrealized gain of approximately $0.5$0.8 million as of December 31, 2009,2010, of which an unrealized gain of $0.3 million was recorded in 2010, an unrealized loss of $1.9 million was recorded in 2009 and an unrealized gain of $1.5 million was recorded in 2008 and an unrealized gain of $0.9 million was recorded in 2007.2008. Term notes payable The fair value of term notes is determined using a discounted cash flow analysis over the full term of the borrowings. This valuation also uses the “Hull-White Interest Rate Tree” approach to value the option components of the term notes. The model assumes that the embedded options are exercised economically. The fair value of medium-term notes is computed using the notional amount outstanding. The discount rates used in the valuations are based on US dollar LIBOR and swap rates. At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to calibrate the model to current market prices and value the cancellation option in the term notes. For the medium-term notes, the credit risk is measured using the difference in yield curves between swap rates and a yield curve that considers the industry and credit rating of the Corporation as issuer of the note at a tenor F-66
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
comparable to the time to maturity of the note and option. The net lossgain from fair value changes attributable to the Corporation’s own credit to the medium-term notes for which the Corporation has elected the fair value option amounted to $1.1 million for 2010, compared to an unrealized loss of $3.1 million for 2009 compared toand an unrealized gain of $4.1 million for 2008 and an unrealized gain of $1.6 million for 2007.2008. The cumulative mark-to-market unrealized gain on the medium-term notes, since measured at fair value, attributable to credit risk amounted to $2.6$3.7 million as of December 31, 2009.2010. Other borrowings Other borrowings consist of junior subordinated debentures. Projected cash flows from the debentures were discounted using the LIBOR yield curve plus a credit spread. This credit spread was estimated using the difference in yield curves between Swap rates and a yield curve that considers the industry and credit rating of the Corporation (US Finance BB) as issuer of the note at a tenor comparable to the time to maturity of the debentures. F-74
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 30 — Supplemental Cash Flow Information Supplemental cash flow information follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | Year Ended December 31, | | | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 | | | (In thousands) | | (In thousands) | Cash paid for: | | | Interest on borrowings | | $ | 494,628 | | $ | 687,668 | | $ | 721,545 | | | $ | 358,294 | | $ | 494,628 | | $ | 687,668 | | Income tax | | 7,391 | | 3,435 | | 10,142 | | | 1,248 | | 7,391 | | 3,435 | | | | | Non-cash investing and financing activities: | | | | | | Additions to other real estate owned | | 98,554 | | 61,571 | | 17,108 | | | 113,997 | | 98,554 | | 61,571 | | Additions to auto repossessions | | 80,568 | | 87,116 | | 104,728 | | | 77,754 | | 80,568 | | 87,116 | | Capitalization of servicing assets | | 6,072 | | 1,559 | | 1,285 | | | 6,607 | | 6,072 | | 1,559 | | Loan securitizations | | 305,378 | | — | | — | | | 217,257 | | 305,378 | | — | | Recharacterization of secured commercial loans as securities collateralized by loans | | — | | — | | 183,830 | | | Non-cash acquisition of mortgage loans that previously served as collateral of a commercial loan to a local financial institution | | 205,395 | | — | | — | | | — | | 205,395 | | — | | Loans held for investment transferred to held for sale | | | 281,618 | | — | | — | | Change in par value of common stock | | | 5,552 | | — | | — | | Preferred Stock exchanged for new common stock issued: | | | Preferred stock exchanged (Series A through E) | | | 476,192 | | — | | — | | New common stock issued | | | 90,806 | | — | | — | | Series F preferred stock exchanged for Series G preferred stock: | | | Preferred stock exchanged (Series F) | | | 378,408 | | — | | — | | New Series G preferred stock issued | | | 347,386 | | — | | — | | Fair value adjustment on amended common stock warrant | | | 1,179 | | — | | — | |
On January 28, 2008, the Corporation completed the acquisition of Virgin Islands Community Bank (“VICB”), with operations in St. Croix, U.S. Virgin Islands, at a purchase price of $2.5 million. The Corporation acquired cash of approximately $7.7 million from VICB. Note 31 — Commitments and Contingencies The following table presents a detail of commitments to extend credit, standby letters of credit and commitments to sell loans: | | | | | | | | | | | | | | | | | | | December 31, | | December 31, | | | 2009 | | 2008 | | 2010 | | 2009 | | | (In thousands) | | (In thousands) | Financial instruments whose contract amounts represent credit risk: | | | Commitments to extend credit: | | | To originate loans | | $ | 255,598 | | $ | 518,281 | | | $ | 189,437 | | $ | 255,598 | | Unused credit card lines | | — | | 22 | | | Unused personal lines of credit | | 33,313 | | 50,389 | | | 32,230 | | 33,313 | | Commercial lines of credit | | 1,187,004 | | 863,963 | | | 390,171 | | 1,187,004 | | Commercial letters of credit | | 48,944 | | 33,632 | | | 71,641 | | 48,944 | | | | | Standby letters of credit | | 103,904 | | 102,178 | | | 84,338 | | 103,904 | | | | | Commitments to sell loans | | 13,158 | | 50,500 | | | 92,147 | | 13,158 | |
The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Management F-67F-75
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) those instruments. Management uses the same credit policies and approval process in entering into commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. There have been no significant or unexpected draws on existing commitments. Included in commitments to extend credit is a $50.0 million participation in a loan extended for the construction of a resort facility in Puerto Rico. The Corporation does not expect to disburse this commitment until 2012. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility, at any time and without cause, cancel the unused credit facility.cause. Generally, the Corporation’s mortgage banking activities do not enter into interest rate lock agreements with its prospective borrowers. The amount of any collateral obtained if deemed necessary by the Corporation upon an extension of credit is based on management’s credit evaluation of the borrower. Rates charged on loans that are finally disbursed are the rates being offered at the time the loans are closed; therefore, no fee is charged on these commitments. In general, commercial and standby letters of credit are issued to facilitate foreign and domestic trade transactions. Normally, commercial and standby letters of credit are short-term commitments used to finance commercial contracts for the shipment of goods. The collateral for these letters of credit includes cash or available commercial lines of credit. The fair value of commercial and standby letters of credit is based on the fees currently charged for such agreements, which, ,asas of December 31, 20092010 and 2008,2009, was not significant. The Corporation obtained from GNMA, Commitment Authority to issue GNMA mortgage-backed securities. Under this program, as of December 31, 2009,for 2010, the Corporation had securitized approximately $305.4$217.3 million of FHA/VA mortgage loan production into GNMA mortgage-backed securities. Lehman Brothers Special Financing, Inc. (“Lehman”) was the counterparty to the Corporation on certain interest rate swap agreements. During the third quarter of 2008, Lehman failed to pay the scheduled net cash settlement due to the Corporation, which constitutesconstituted an event of default under those interest rate swap agreements. The Corporation terminated all interest rate swaps with Lehman and replaced them with other counterparties under similar terms and conditions. In connection with the unpaid net cash settlement due as of December 31, 20092010 under the swap agreements, the Corporation has an unsecured counterparty exposure with Lehman, which filed for bankruptcy on October 3, 2008, of approximately $1.4 million. This exposure was reserved in the third quarter of 2008. The Corporation had pledged collateral of $63.6 million with Lehman to guarantee its performance under the swap agreements in the event payment thereunderthere under was required. The book value of pledged securities with Lehman as of December 31, 20092010 amounted to approximately $64.5 million. The Corporation believes that the securities pledged as collateral should not be part of the Lehman bankruptcy estate given the fact that the posted collateral constituted a performance guarantee under the swap agreements and was not part of a financing agreement, and that ownership of the securities was never transferred to Lehman. Upon termination of the interest rate swap agreements, Lehman’s obligation was to return the collateral to the Corporation. During the fourth quarter of 2009, the Corporation discovered that Lehman Brothers, Inc., acting as agent of Lehman, had deposited the securities in a custodial account at JP Morgan/Morgan Chase, and that, shortly before the filing of the Lehman bankruptcy proceedings, it had provided instructions to have most of the securities transferred to Barclay’sBarclays Capital (“Barclays”) in New York. After Barclay’sBarclays’s refusal to turn over the securities, during December 2009, the Corporation during the month of December 2009, filed a lawsuit against Barclay’s CapitalBarclays in federal court in New York demanding the return of the securities. During February 2010, Barclays filed a motion with the court requesting that the Corporation’s claim be dismissed on the grounds that the allegations of the complaint are not sufficient to justify the granting of the remedies therein sought. Shortly thereafter, the Corporation filed its opposition motion. A hearing on the motions was held in court on April 28, 2010. The court, on that date, after hearing the arguments by both sides, concluded that the Corporation’s equitable-based causes of action, upon which the return of the investment securities is being demanded, contain allegations that sufficiently plead facts warranting the denial of Barclays’ motion to dismiss the Corporation’s claim. Accordingly, the judge ordered the case to proceed to trial. Subsequent to the court decision, the district court judge transferred the case to the Lehman bankruptcy court for trial. While the Corporation believes it has valid reasons to support its claim for the return of the securities, there are no assurances that it will ultimatelythe Corporation may not succeed in its litigation against Barclay’s CapitalBarclays to recover all or a substantial portion of the securities. Upon such transfer, the Bankruptcy court began to entertain the pre-trial procedures including discovery of evidence. In this regard, an initial scheduling conference was held before the United States Bankruptcy Court for the Southern District of New York on November 17, 2010, at which time a proposed case management plan was approved. Discovery has commenced pursuant to that case management plan and is currently scheduled for completion by May 15, 2011, but this timing is subject to adjustment. F-76
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Additionally, the Corporation continues to pursue its claim filed in January 2009 in the proceedings under the Securities Protection Act with regard to Lehman Brothers Incorporated in Bankruptcy Court, Southern District of New York. The Corporation can provide no assurances that it will be successful in recovering all or F-68
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
substantial portion of the securities through these proceedings. An estimated loss was not accrued as the Corporation is unable to determine the timing of the claim resolution or whether it will succeed in recovering all or a substantial portion of the collateral or its equivalent value. If additional relevant negative facts become available in future periods, a need to recognize a partial or full reserve of this claim may arise. Considering that the investment securities have not yet been recovered by the Corporation, despite its efforts in this regard, the Corporation decided to classify such investments as non-performing during the second quarter of 2009.
Note 32 — Derivative Instruments and Hedging Activities One of the market risks facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of the Corporation’s assets or liabilities and the risk that net interest income from its loan and investment portfolios will change in response tobe adversely affected by changes in interest rates. The overall objective of the Corporation’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates. The Corporation uses various financial instruments, including derivatives, to manage the interest rate risk primarily related to the values of its medium-term notes and for protection of rising interest rates in connection with private label MBS. The Corporation designates a derivative as a fair value hedge, cash flow hedge or as an economic undesignated hedge when it enters into the derivative contract. As of December 31, 20092010 and 2008,2009, all derivatives held by the Corporation were considered economic undesignated hedges. These undesignated hedges are recorded at fair value with the resulting gain or loss recognized in current earnings. The following summarizes the principal derivative activities used by the Corporation in managing interest rate risk: Interest rate cap agreements — Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection againstfrom rising interest rates. Specifically, the interest rate on certain private label mortgage pass-through securities and certain of the Corporation’s commercial loans to other financial institutions is generally a variable rate limited to the weighted-average coupon of the pass-through certificate or referenced residential mortgage collateral, less a contractual servicing fee. During the second quarter of 2010, the counterparty for interest rate caps for certain private label MBS was taken over by the FDIC, which resulted in the immediate cancelation of all outstanding commitments, and as a result, interest rate caps with a notional amount of $108.2 million are no longer considered to be derivative financial instruments. The total exposure to fair value of $3.0 million related to such contracts was reclassified to an account receivable. Interest rate swaps — Interest rate swap agreements generally involve the exchange of fixed and floating-rate interest payment obligations without the exchange of the underlying notional principal amount. As of December 31, 2009,2010, most of the interest rate swaps outstanding are used for protection against rising interest rates. In the past, interest rate swaps volume was much higher since they were used to convert fixed-rate brokered CDs (liabilities), mainly those with long-term maturities, to a variable rate andto mitigate the interest rate risk inherent in variable rate loans. However, mostAll of these interest rate swaps related to brokered CDs were called during 2009, in the face of lower interest rate levels, and, as a consequence, the Corporation exercised its call option on the swapped-to-floating brokered CDs. Similar to unrealized gains and losses arising from changes in fair value, net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense depending on whether an asset or liability is being economically hedged. Indexed options — Indexed options are generally over-the-counter (OTC) contracts that the Corporation enters into in order to receive the appreciation of a specified Stock Index (e.g., Dow Jones Industrial Composite Stock Index) over a specified period in exchange for a premium paid at the contract’s inception. The option period is determined by the contractual maturity of the notes payable tied to the performance of the Stock Index. The credit risk inherent in these options is the risk that the exchange party may not fulfill its obligation. To satisfy the needs of its customers, the Corporation may enter into non-hedging transactions. On these transactions, generally, the Corporation participates as a buyer in one of the agreements and as a seller in the other agreement under the same terms and conditions. F-69
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic F-77
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument. The following table summarizes the notional amounts of all derivative instruments as of December 31, 20092010 and December 31, 2008:2009: | | | | | | | | | | | | | | | | | | | Notional Amounts | | | Notional Amounts | | | | As of | | As of | | | As of | | As of | | | | December 31, | | December 31, | | | December 31, | | December 31, | | | | 2009 | | 2008 | | | 2010 | | 2009 | | | | (In thousands) | | | (In thousands) | | Economic undesignated hedges: | | | | | | | | Interest rate contracts: | | | Interest rate swap agreements used to hedge fixed-rate brokered CDs, notes payable and loans | | $ | 79,567 | | $ | 1,184,820 | | | Interest rate swap agreements used to hedge loans | | | $ | 41,248 | | $ | 79,567 | | Written interest rate cap agreements | | 102,521 | | 128,043 | | | 71,602 | | 102,521 | | Purchased interest rate cap agreements | | 228,384 | | 276,400 | | | 71,602 | | 228,384 | | | | | Equity contracts: | | | Embedded written options on stock index deposits and notes payable | | 53,515 | | 53,515 | | | 53,515 | | 53,515 | | Purchased options used to manage exposure to the stock market on embedded stock index options | | 53,515 | | 53,515 | | | 53,515 | | 53,515 | | | | | | | | | | | | | | | $ | 517,502 | | $ | 1,696,293 | | | $ | 291,482 | | $ | 517,502 | | | | | | | | | | | | |
The following table summarizes the fair value of derivative instruments and the location in the Statementstatement of Financial Conditionfinancial condition as of December 31, 20092010 and 2008:2009: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Asset Derivatives | | Liability Derivatives | | | Asset Derivatives | | Liability Derivatives | | | | As of December 31, | | As of December 31, | | As of December 31, | | As of December 31, | | | | Statement of | | 2009 | | 2008 | | Statement of | | 2009 | | 2008 | | | Statement of | | 2010 | | 2009 | | Statement of | | 2010 | | 2009 | | | | Financial Condition | | Fair | | Fair | | Financial Condition | | Fair | | Fair | | | Financial Condition | | Fair | | Fair | | Financial Condition | | Fair | | Fair | | | | Location | | Value | | Value | | Location | | Value | | Value | | | Location | | Value | | Value | | Location | | | Value | | Value | | | | (In thousands) | | | (In thousands) | | Economic undesignated hedges: | | | | | | | | | | | | | | Interest rate contracts: | | | | | | | Interest rate swap agreements used to hedge fixed-rate brokered CDs, notes payable and loans | | Other assets | | $ | 319 | | $ | 5,649 | | Accounts payable and other liabilities | | $ | 5,068 | | $ | 7,188 | | | Interest rate swap agreements used to hedge loans | | | Other assets | | $ | 351 | | $ | 319 | | Accounts payable and other liabilities | | $ | 5,192 | | $ | 5,068 | | Written interest rate cap agreements | | Other assets | | — | | — | | Accounts payable and other liabilities | | 201 | | 3 | | | Other assets | | — | | — | | Accounts payable and other liabilities | | 1 | | 201 | | Purchased interest rate cap agreements | | Other assets | | 4,423 | | 764 | | Accounts payable and other liabilities | | — | | — | | | Other assets | | 1 | | 4,423 | | Accounts payable and other liabilities | | — | | — | | | | | | | | | Equity contracts: | | | | | | | Embedded written options on stock index deposits | | Other assets | | — | | — | | Interest-bearing deposits | | 14 | | 241 | | | Other assets | | — | | — | | Interest-bearing deposits | | — | | 14 | | Embedded written options on stock index notes payable | | Other assets | | — | | — | | Notes payable | | 1,184 | | 1,073 | | | Other assets | | — | | — | | Notes payable | | 1,508 | | 1,184 | | Purchased options used to manage exposure to the stock market on embedded stock index options | | Other assets | | 1,194 | | 1,597 | | Accounts payable and other liabilities | | — | | — | | | Other assets | | 1,553 | | 1,194 | | Accounts payable and other liabilities | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 5,936 | | $ | 8,010 | | | | $ | 6,467 | | $ | 8,505 | | | $ | 1,905 | | $ | 5,936 | | $ | 6,701 | | $ | 6,467 | | | | | | | | | | | | | | | | | | | | | | | | |
F-70F-78
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table summarizes the effect of derivative instruments on the Statementstatement of Incomeincome for the years ended December 31, 2010, 2009 2008 and 2007:2008: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gain or (Loss) | | | Gain or (Loss) | | | | Location of Gain or (Loss) | | Year Ended December 31, | | | Location of Gain or (Loss) | | Year Ended December 31, | | | | Recognized in Income on Derivatives | | 2009 | | 2008 | | 2007 | | | Recognized in Income on Derivatives | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | ECONOMIC UNDESIGNATED HEDGES: | | | | | Interest rate contracts: | | | | | Interest rate swap agreements used to hedge fixed-rate: | | | | | Brokered CDs | | Interest expense - Deposits | | $ | (5,236 | ) | | $ | 63,132 | | $ | 66,617 | | | Interest expense - Deposits | | $ | — | | $ | (5,236 | ) | | $ | 63,132 | | Notes payable | | Interest expense - Notes payable and other borrowings | | 3 | | 124 | | 1,440 | | | Interest expense - Notes payable and other borrowings | | — | | 3 | | 124 | | Loans | | Interest income - Loans | | 2,023 | | | (3,696 | ) | | | (2,653 | ) | | Interest income - Loans | | | (92 | ) | | 2,023 | | | (3,696 | ) | | | | | | Written and purchased interest rate cap agreements - - mortgage-backed securities | | Interest income - Investment securities | | 3,394 | | | (4,283 | ) | | | (3,546 | ) | | Written and purchased interest rate cap agreements - - loans | | Interest income - loans | | 102 | | | (58 | ) | | | (439 | ) | | Written and purchased interest rate cap agreements - mortgage-backed securities | | | Interest income - Investment securities | | | (1,136 | ) | | 3,394 | | | (4,283 | ) | Written and purchased interest rate cap agreements - loans | | | Interest income - loans | | | (38 | ) | | 102 | | | (58 | ) | Equity contracts: | | | | | Embedded written and purchased options on stock index deposits | | Interest expense - Deposits | | | (85 | ) | | | (276 | ) | | 209 | | | Interest expense - Deposits | | | (2 | ) | | | (85 | ) | | | (276 | ) | Embedded written and purchased options on stock index notes payable | | Interest expense - Notes payable and other borrowings | | | (202 | ) | | 268 | | | (71 | ) | | Interest expense - Notes payable and other borrowings | | 51 | | | (202 | ) | | 268 | | | | | | | | | | | | | | | | | | Total (loss) gain on derivatives | | | | $ | (1 | ) | | $ | 55,211 | | $ | 61,557 | | | $ | (1,217 | ) | | $ | (1 | ) | | $ | 55,211 | | | | | | | | | | | | | | | | | |
Derivative instruments, such as interest rate swaps, are subject to market risk. As is the case with investment securities, the market value of derivative instruments is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future. The unrealized gains and losses in the fair value of derivatives that economically hedge certain callable brokered CDs and medium-term notes are partially offset by unrealized gains and losses on the valuation of such economically hedged liabilities measured at fair value. The Corporation includes the gain or loss on those economically hedged liabilities (brokered CDs and medium-term notes) in the same line item as the offsetting loss or gain on the related derivatives as set forth below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, | | | | | Year ended December 31, | | 2010 | | 2009 | | 2008 | | | 2009 | | 2008 | | Gain | | Gain (Loss) | | (Loss) Gain | | | | | Loss | | Gain (Loss) | | Net | | Gain | | (Loss) Gain | | Net | | (Loss) gain | | on liabilities | | Net | | Loss | | on liabilities | | Net | | Gain | | on liabilities | | Net | (In thousands) | | on Derivatives | | on liabilities measured at fair value | | Gain (Loss) | | on Derivatives | | on liabilities measured at fair value | | Gain | | on Derivatives | | measured at fair value | | Gain | | on Derivatives | | measured at fair value | | Gain (Loss) | | on Derivatives | | measured at fair value | | Gain | Interest expense — Deposits | | $ | (5,321 | ) | | $ | 8,696 | | $ | 3,375 | | $ | 62,856 | | $ | (54,199 | ) | | $ | 8,657 | | | $ | (2 | ) | | $ | — | | $ | (2 | ) | | $ | (5,321 | ) | | $ | 8,696 | | $ | 3,375 | | $ | 62,856 | | $ | (54,199 | ) | | $ | 8,657 | | Interest expense — Notes payable and Other Borrowings | | | (199 | ) | | | (3,221 | ) | | | (3,420 | ) | | 392 | | 4,165 | | 4,557 | | | 51 | | 1,519 | | 1,570 | | | (199 | ) | | | (3,221 | ) | | | (3,420 | ) | | 392 | | 4,165 | | 4,557 | |
A summary of interest rate swaps as of December 31, 20092010 and 20082009 follows: | | | | | | | | | | | As of | | As of | | | December 31, | | December 31, | | | 2009 | | 2008 | | | (Dollars in thousands) | Pay fixed/receive floating : | | | | | | | | | Notional amount | | $ | 79,567 | | | $ | 81,575 | | Weighted-average receive rate at period end | | | 2.15 | % | | | 3.21 | % | Weighted-average pay rate at period end | | | 6.52 | % | | | 6.75 | % | Floating rates range from 167 to 252 basis points over 3-month LIBOR | | | | | | | | | | | | | | | | | | Receive fixed/pay floating (generally used to economically hedge fixed-rate brokered CDs and notes payable): | | | | | | | | | Notional amount | | $ | — | | | $ | 1,103,244 | | Weighted-average receive rate at period end | | | 0.00 | % | | | 5.30 | % | Weighted-average pay rate at period end | | | 0.00 | % | | | 3.09 | % |
F-71
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in notional amount of interest rate swaps outstanding during the years ended December 31, 2009 and 2008 follows:
| | | | | | | Notional Amount | | | | (In thousands) | | Pay-fixed and receive-floating swaps: | | | | | Balance as of December 31, 2007 | | $ | 82,932 | | Cancelled and matured contracts | | | (1,357 | ) | New contracts | | | — | | | | | | Balance as of December 31, 2008 | | | 81,575 | | Cancelled and matured contracts | | | (2,008 | ) | New contracts | | | — | | | | | | Balance as of December 31, 2009 | | $ | 79,567 | | | | | | | | | | | Receive-fixed and pay floating swaps: | | | | | Balance as of December 31, 2007 | | $ | 4,161,541 | | Cancelled and matured contracts | | | (3,426,519 | ) | New contracts | | | 368,222 | | | | | | Balance as of December 31, 2008 | | | 1,103,244 | | Cancelled and matured contracts | | | (1,103,244 | ) | New contracts | | | — | | | | | | Balance as of December 31, 2009 | | $ | — | | | | | |
During the first half of 2009, all of the $1.1 billion of interest rate swaps that economically hedged brokered CDs that were outstanding as of December 31, 2008 were called by the counterparties, mainly due to lower levels of 3-month LIBOR. Following the cancellation of the interest rate swaps, the Corporation exercised its call option on the approximately $1.1 billion swapped-to-floating brokered CDs. The Corporation recorded a net loss of $3.5 million as a result of these transactions resulting from the reversal of the cumulative mark-to-market valuation of the swaps and the brokered CDs called. | | | | | | | | | | | As of | | As of | | | December 31, | | December 31, | | | 2010 | | 2009 | | | (Dollars in thousands) | Pay fixed/receive floating : | | | | | | | | | Notional amount | | $ | 41,248 | | | $ | 79,567 | | Weighted-average receive rate at period end | | | 2.14 | % | | | 2.15 | % | Weighted-average pay rate at period end | | | 6.83 | % | | | 6.52 | % | Floating rates range from 167 to 252 basis points over 3-month LIBOR | | | | | | | | |
As of December 31, 2009,2010, the Corporation has not entered into any derivative instrument containing credit-risk-related contingent features. Credit and Market Risk of Derivatives The Corporation uses derivative instruments to manage interest rate risk. By using derivative instruments, the Corporation is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the Corporation’s fair value gain in the derivative. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty owes the Corporation and, therefore, creates a credit risk for the Corporation. When the fair value of a derivative instrument contract is F-79
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) negative, the Corporation owes the counterparty and, therefore, it has no credit risk. The Corporation minimizes the credit risk in derivative instruments by entering into transactions with reputable broker dealers (financial institutions) that are reviewed periodically by the Corporation’s Management’s Investment and Asset Liability Committee (MIALCO) and by the Board of Directors. The Corporation also maintains a policy of requiring that all derivative instrument contracts be governed by an International Swaps and Derivatives Association Master Agreement, which includes a provision for netting; most of the Corporation’s agreements with derivative counterparties include bilateral collateral arrangements. The bilateral collateral arrangement permits the counterparties to perform margin calls in the form of cash or securities in the event that the fair market value of the derivative favors either counterparty. The book value and aggregate market value of securities pledged as collateral for interest rate swaps as of December 31, 20082010 was $40.6 million and $42.4 million, respectively (2009 — $52.5 million and $54.2 million, respectively (2008 — $93.2 million and $91.7 million, respectively). The Corporation has a policy of diversifying derivatives counterparties to reduce the risk that any counterparty will default. The Corporation has credit risk of $5.9$1.9 million (2008(2009 — $8.0$5.9 million) related to derivative instruments with positive fair values. The credit risk does not consider the value of any collateral and the effects of legally enforceable master netting agreements. There was a loss of approximately $1.4 million, related to a counterparty that failed to pay a scheduled net cash settlement in 2008 (refer to Note 31 for additional information). There were no credit losses associated with derivative instruments recognized in 20092010 or 2007.2009. As of December 31, 2009,2010, the Corporation had a total net interest settlement payable of $0.3$0.1 million (2008(2009 — net interest settlement receivablepayable of $4.1$0.3 million) related to the swap transactions. The net settlements receivable and net settlements payable on interest F-72
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
rate swaps are included as part of “Other Assets” and “Accounts payable and other liabilities”, respectively, on the Consolidated Statements of Financial Condition. Market risk is the adverse effect that a change in interest rates or implied volatility rates has on the value of a financial instrument. The Corporation manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The Corporation’s derivative activities are monitored by the MIALCO as part of its risk-management oversight of the Corporation’s treasury functions. Note 33 — Segment Information Based upon the Corporation’s organizational structure and the information provided to the Chief Executive Officer of the Corporation and, to a lesser extent, the Board of Directors, the operating segments are driven primarily by the Corporation’s lines of business for its operations in Puerto Rico, the Corporation’s principal market, and by geographic areas for its operations outside of Puerto Rico. As of December 31, 2009,2010, the Corporation had six reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments; United States operations and Virgin Islands operations. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Corporation’s organizational chart, nature of the products, distribution channels and the economic characteristics of the products were also considered in the determination of the reportable segments. Starting in the fourth quarter of 2009, the Corporation has realigned its reporting segments to better reflect how it views and manages its business. Two additional operating segments were created to evaluate the operations conducted by the Corporation, outside of Puerto Rico. Operations conducted in the United States and in the Virgin Islands are now individually evaluated as separate operating segments. This realignment in the segment reporting essentially reflects the effect of restructuring initiatives, including the merger of FirstBank Florida operations with and into FirstBank, and will allow the Corporation to better present the results from its growth focus. Prior to the third quarter of 2009, the operating segments were driven primarily by the Corporation’s legal entities. FirstBank operations conducted in the Virgin Islands and through its loan production office in Miami, Florida were reflected in the Corporation’s then four reportable segments (Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; Treasury and Investments) while the operations conducted by FirstBank Florida were reported as part of a category named “Other”. In the third quarter of 2009, as a result of the aforementioned merger, the operations of FirstBank Florida were reported as part of the four reportable segments. The change in the fourth quarter reflected a further realignment of the organizational structure as a result of management changes. Prior period amounts have been reclassified to conform to current period presentation. These changes did not have an impact on the previously reported consolidated results of the Corporation. The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for large customers represented by specialized and middle-market clients and the public sector. The Commercial and Corporate Banking segment offers commercial loans, including commercial real estate and construction loans, and floor plan financings as well as other products such as cash management and business management services. The Mortgage Banking segment’s operations consist of the origination, sale and servicing of a variety of residential mortgage loans. The Mortgage Banking segment also acquires and sells mortgages in the secondary markets. In addition, the Mortgage Banking segment includes mortgage loans purchased from other local banks and mortgage bankers. The Consumer (Retail) Banking segment consists of the Corporation’s consumer lending and deposit-taking activities conducted mainly through its branch network and loan centers. The Treasury and Investments segment is responsible for the Corporation’s investment portfolio and treasury functions executed to manage and enhance liquidity. This segment lends funds to the Commercial and Corporate Banking, Mortgage Banking and Consumer (Retail) Banking segments to finance their lending activities and borrows from those segments.segments and from the United States Operations segment. The Consumer (Retail) Banking segmentand the United States Operations segments also lendslend funds to other segments. The interest rates charged or credited by Treasury and Investments, and the Consumer (Retail) Banking and the United States Operations segments are allocated based on market rates. The difference between the allocated interest income or expense and the Corporation’s actual net interest income from centralized management of funding costs is reported in the Treasury and Investments segment. The United States operations segment consists of all banking activities conducted by FirstBank in the United States mainland, including commercial and retail banking F-73
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
services. The Virgin Islands operations segment consists of all banking activities conducted by the Corporation in the U.S. and British Virgin Islands, including commercial and retail banking services and insurance activities. F-80
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The accounting policies of the segments are the same as those described in Note 1 — “Nature of Business and Summary of Significant Accounting Policies”. The Corporation evaluates the performance of the segments based on net interest income, the estimated provision for loan and lease losses, non-interest income and direct non-interest expenses. The segments are also evaluated based on the average volume of their interest-earning assets less the allowance for loan and lease losses. The following table presents information about the reportable segments (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage | | Consumer | | Commercial and | | Treasury and | | United States | | Virgin Islands | | | | | Mortgage | | Consumer | | Commercial and | | Treasury and | | United States | | Virgin Islands | | | | (In thousands) | | Banking | | (Retail) Banking | | Corporate | | Investments | | Operations | | Operations | | Total | | | Banking | | (Retail) Banking | | Corporate | | Investments | | Operations | | Operations | | Total | | For the year ended December 31, 2009: | | | For the year ended December 31, 2010: | | | Interest income | | $ | 156,729 | | $ | 210,102 | | $ | 239,399 | | $ | 251,949 | | $ | 67,936 | | $ | 70,459 | | $ | 996,574 | | | $ | 155,058 | | $ | 186,227 | | $ | 233,335 | | $ | 138,695 | | $ | 51,784 | | $ | 67,587 | | $ | 832,686 | | Net (charge) credit for transfer of funds | | | (117,486 | ) | | 205 | | | (59,080 | ) | | 176,361 | | — | | — | | — | | | | (91,280 | ) | | 7,255 | | | (22,430 | ) | | 97,436 | | 9,019 | | — | | — | | Interest expense | | — | | | (60,661 | ) | | — | | | (342,161 | ) | | | (65,360 | ) | | | (9,350 | ) | | | (477,532 | ) | | — | | | (52,306 | ) | | — | | | (266,638 | ) | | | (45,630 | ) | | | (6,437 | ) | | | (371,011 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | 39,243 | | 149,646 | | 180,319 | | 86,149 | | 2,576 | | 61,109 | | 519,042 | | | 63,778 | | 141,176 | | 210,905 | | | (30,507 | ) | | 15,173 | | 61,150 | | 461,675 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Provision for loan and lease losses | | | (29,717 | ) | | | (62,457 | ) | | | (273,822 | ) | | — | | | (188,651 | ) | | | (25,211 | ) | | | (579,858 | ) | | | (76,882 | ) | | | (51,668 | ) | | | (359,440 | ) | | — | | | (119,489 | ) | | | (27,108 | ) | | | (634,587 | ) | Non-interest income | | 8,497 | | 32,003 | | 5,695 | | 84,369 | | 1,460 | | 10,240 | | 142,264 | | | 13,159 | | 28,887 | | 9,044 | | 55,237 | | 896 | | 10,680 | | 117,903 | | Direct non-interest expenses | | | (32,314 | ) | | | (98,263 | ) | | | (41,948 | ) | | | (7,416 | ) | | | (37,704 | ) | | | (45,364 | ) | | | (263,009 | ) | | | (38,963 | ) | | | (94,677 | ) | | | (62,991 | ) | | | (5,876 | ) | | | (42,361 | ) | | | (41,571 | ) | | | (286,439 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment (loss) income | | $ | (14,291 | ) | | $ | 20,929 | | $ | (129,756 | ) | | $ | 163,102 | | $ | (222,319 | ) | | $ | 774 | | $ | (181,561 | ) | | $ | (38,908 | ) | | $ | 23,718 | | $ | (202,482 | ) | | $ | 18,854 | | $ | (145,781 | ) | | $ | 3,151 | | $ | (341,448 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average earnings assets | | $ | 2,654,504 | | $ | 2,109,602 | | $ | 5,974,950 | | $ | 5,831,078 | | $ | 1,449,878 | | $ | 996,508 | | $ | 19,016,520 | | | $ | 2,646,054 | | $ | 1,601,581 | | $ | 5,973,226 | | $ | 4,846,430 | | $ | 1,076,876 | | $ | 975,915 | | $ | 17,120,082 | | | | | For the year ended December 31, 2009: | | | Interest income | | | $ | 156,729 | | $ | 199,580 | | $ | 249,921 | | $ | 251,949 | | $ | 67,936 | | $ | 70,459 | | $ | 996,574 | | Net (charge) credit for transfer of funds | | | | (117,486 | ) | | | (5,160 | ) | | | (61,990 | ) | | 184,636 | | — | | — | | — | | Interest expense | | | — | | | (60,661 | ) | | — | | | (342,161 | ) | | | (65,360 | ) | | | (9,350 | ) | | | (477,532 | ) | | | | | | | | | | | | | | | | | | Net interest income | | | 39,243 | | 133,759 | | 187,931 | | 94,424 | | 2,576 | | 61,109 | | 519,042 | | Provision for loan and lease losses | | | | (29,717 | ) | | | (46,198 | ) | | | (290,081 | ) | | — | | | (188,651 | ) | | | (25,211 | ) | | | (579,858 | ) | Non-interest income | | | 8,497 | | 31,992 | | 5,706 | | 84,369 | | 1,460 | | 10,240 | | 142,264 | | Direct non-interest expenses | | | | (32,314 | ) | | | (95,337 | ) | | | (44,874 | ) | | | (7,416 | ) | | | (37,704 | ) | | | (45,364 | ) | | | (263,009 | ) | | | | | | | | | | | | | | | | | | Segment (loss) income | | | $ | (14,291 | ) | | $ | 24,216 | | $ | (141,318 | ) | | $ | 171,377 | | $ | (222,319 | ) | | $ | 774 | | $ | (181,561 | ) | | | | | | | | | | | | | | | | | | | | | Average earnings assets | | | $ | 2,654,504 | | $ | 1,771,196 | | $ | 6,313,356 | | $ | 5,831,078 | | $ | 1,449,878 | | $ | 996,508 | | $ | 19,016,520 | | | | | For the year ended December 31, 2008: | | | Interest income | | $ | 156,577 | | $ | 225,474 | | $ | 287,708 | | $ | 288,063 | | $ | 95,043 | | $ | 74,032 | | $ | 1,126,897 | | | $ | 156,577 | | $ | 208,204 | | $ | 304,978 | | $ | 288,063 | | $ | 95,043 | | $ | 74,032 | | $ | 1,126,897 | | Net (charge) credit for transfer of funds | | | (119,257 | ) | | 3,573 | | | (175,454 | ) | | 291,138 | | — | | — | | — | | | | (119,257 | ) | | 16,034 | | | (187,915 | ) | | 291,138 | | — | | — | | — | | Interest expense | | — | | | (63,001 | ) | | — | | | (455,802 | ) | | | (66,204 | ) | | | (14,009 | ) | | | (599,016 | ) | | — | | | (63,001 | ) | | — | | | (455,802 | ) | | | (66,204 | ) | | | (14,009 | ) | | | (599,016 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | 37,320 | | 166,046 | | 112,254 | | 123,399 | | 28,839 | | 60,023 | | 527,881 | | | 37,320 | | 161,237 | | 117,063 | | 123,399 | | 28,839 | | 60,023 | | 527,881 | | | | | | | | | | | | | | | | | | | Provision for loan and lease losses | | | (8,997 | ) | | | (80,506 | ) | | | (35,504 | ) | | — | | | (53,406 | ) | | | (12,535 | ) | | | (190,948 | ) | | | (8,997 | ) | | | (72,719 | ) | | | (43,291 | ) | | — | | | (53,406 | ) | | | (12,535 | ) | | | (190,948 | ) | Non-interest income (loss) | | 2,667 | | 35,531 | | 4,591 | | 25,577 | | | (3,570 | ) | | 9,847 | | 74,643 | | | 2,667 | | 35,531 | | 4,591 | | 25,577 | | | (3,570 | ) | | 9,847 | | 74,643 | | Direct non-interest expenses | | | (22,703 | ) | | | (99,232 | ) | | | (24,467 | ) | | | (6,713 | ) | | | (34,236 | ) | | | (48,105 | ) | | | (235,456 | ) | | | (22,703 | ) | | | (96,970 | ) | | | (26,729 | ) | | | (6,713 | ) | | | (34,236 | ) | | | (48,105 | ) | | | (235,456 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment income (loss) | | $ | 8,287 | | $ | 21,839 | | $ | 56,874 | | $ | 142,263 | | $ | (62,373 | ) | | $ | 9,230 | | $ | 176,120 | | | $ | 8,287 | | $ | 27,079 | | $ | 51,634 | | $ | 142,263 | | $ | (62,373 | ) | | $ | 9,230 | | $ | 176,120 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average earnings assets | | $ | 2,492,566 | | $ | 2,185,888 | | $ | 5,086,787 | | $ | 5,583,181 | | $ | 1,515,418 | | $ | 942,052 | | $ | 17,805,892 | | | $ | 2,492,566 | | $ | 1,826,193 | | $ | 5,446,482 | | $ | 5,583,181 | | $ | 1,515,418 | | $ | 942,052 | | $ | 17,805,892 | | | | | For the year ended December 31, 2007: | | | Interest income | | $ | 133,068 | | $ | 238,874 | | $ | 335,625 | | $ | 284,155 | | $ | 121,897 | | $ | 75,628 | | $ | 1,189,247 | | | Net (charge) credit for transfer of funds | | | (105,459 | ) | | | (794 | ) | | | (230,777 | ) | | 370,451 | | | (33,421 | ) | | — | | — | | | Interest expense | | — | | | (63,807 | ) | | — | | | (608,119 | ) | | | (49,734 | ) | | | (16,571 | ) | | | (738,231 | ) | | | | | | | | | | | | | | | | | | | Net interest income | | 27,609 | | 174,273 | | 104,848 | | 46,487 | | 38,742 | | 59,057 | | 451,016 | | | | | | | | | | | | | | | | | | | | Provision for loan and lease losses | | | (1,643 | ) | | | (73,799 | ) | | | (12,465 | ) | | — | | | (30,174 | ) | | | (2,529 | ) | | | (120,610 | ) | | Non-interest income (loss) | | 2,124 | | 32,529 | | 3,737 | | | (2,161 | ) | | 1,167 | | 12,188 | | 49,584 | | | Net gain on partial extinguishment and recharacterization of secured commercial loans to a local financial institution | | — | | — | | 2,497 | | — | | — | | — | | 2,497 | | | Direct non-interest expenses | | | (20,890 | ) | | | (95,169 | ) | | | (20,056 | ) | | | (7,842 | ) | | | (21,848 | ) | | | (42,407 | ) | | | (208,212 | ) | | | | | | | | | | | | | | | | | | | Segment income (loss) | | $ | 7,200 | | $ | 37,834 | | $ | 78,561 | | $ | 36,484 | | $ | (12,113 | ) | | $ | 26,309 | | $ | 174,275 | | | | | | | | | | | | | | | | | | | | | | | Average earnings assets | | $ | 2,140,647 | | $ | 2,207,447 | | $ | 4,363,149 | | $ | 5,400,648 | | $ | 1,561,029 | | $ | 895,434 | | $ | 16,568,354 | | |
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FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table presents a reconciliation of the reportable segment financial information to the consolidated totals: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Net (loss) income: | | | Total (loss) income for segments and other | | $ | (181,561 | ) | | $ | 176,120 | | $ | 174,275 | | | $ | (341,448 | ) | | $ | (181,561 | ) | | $ | 176,120 | | Other Income | | — | | — | | 15,075 | | | Other operating expenses | | | (89,092 | ) | | | (97,915 | ) | | | (99,631 | ) | | | (79,719 | ) | | | (89,092 | ) | | | (97,915 | ) | | | | | | | | | | | | | | | | Income before income taxes | | | (270,653 | ) | | 78,205 | | 89,719 | | | | (421,167 | ) | | | (270,653 | ) | | 78,205 | | Income tax (expense) benefit | | | (4,534 | ) | | 31,732 | | | (21,583 | ) | | | (103,141 | ) | | | (4,534 | ) | | 31,732 | | | | | | | | | | | | | | | | | Total consolidated net (loss) income | | $ | (275,187 | ) | | $ | 109,937 | | $ | 68,136 | | | $ | (524,308 | ) | | $ | (275,187 | ) | | $ | 109,937 | | | | | | | | | | | | | | | | | | | | Average assets: | | | Total average earning assets for segments | | $ | 19,016,520 | | $ | 17,805,892 | | $ | 16,568,354 | | | $ | 17,120,082 | | $ | 19,016,520 | | $ | 17,805,892 | | Average non-earning assets | | 790,702 | | 702,064 | | 645,853 | | | 750,960 | | 790,702 | | 702,064 | | | | | | | | | | | | | | | | | Total consolidated average assets | | $ | 19,807,222 | | $ | 18,507,956 | | $ | 17,214,207 | | | $ | 17,871,042 | | $ | 19,807,222 | | $ | 18,507,956 | | | | | | | | | | | | | | | | |
The following table presents revenues and selected balance sheet data by geography based on the location in which the transaction is originated: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Revenues: | | | Puerto Rico(1) | | $ | 988,743 | | $ | 1,026,188 | | $ | 1,045,523 | | | Puerto Rico | | | $ | 810,623 | | $ | 988,743 | | $ | 1,026,188 | | United States | | 69,396 | | 91,473 | | 123,064 | | | 61,699 | | 69,396 | | 91,473 | | Virgin Islands | | 80,699 | | 83,879 | | 87,816 | | | 78,267 | | 80,699 | | 83,879 | | | | | | | | | | | | | | | | | Total consolidated revenues | | $ | 1,138,838 | | $ | 1,201,540 | | $ | 1,256,403 | | | $ | 950,589 | | $ | 1,138,838 | | $ | 1,201,540 | | | | | | | | | | | | | | | | | | | | Selected Balance Sheet Information: | | | Total assets: | | | Puerto Rico | | $ | 16,843,767 | | $ | 16,824,168 | | $ | 14,633,217 | | | $ | 13,495,003 | | $ | 16,843,767 | | $ | 16,824,168 | | United States | | 1,716,694 | | 1,619,280 | | 1,540,808 | | | 1,133,971 | | 1,716,694 | | 1,619,280 | | Virgin Islands | | 1,067,987 | | 1,047,820 | | 1,012,906 | | | 964,103 | | 1,067,987 | | 1,047,820 | | | | | Loans: | | | Puerto Rico | | $ | 11,614,866 | | $ | 10,601,488 | | $ | 9,413,118 | | | $ | 10,070,078 | | $ | 11,614,866 | | $ | 10,601,488 | | United States | | 1,275,869 | | 1,484,011 | | 1,448,613 | | | 938,147 | | 1,275,869 | | 1,484,011 | | Virgin Islands | | 1,058,491 | | 1,002,793 | | 938,015 | | | 947,977 | | 1,058,491 | | 1,002,793 | | | | | Deposits: | | | Puerto Rico | | $ | 10,497,646 | | $ | 10,746,688 | | $ | 8,776,874 | | | Puerto Rico(1) | | | $ | 9,326,613 | | $ | 10,497,646 | | $ | 10,746,688 | | United States | | 1,252,977 | | 1,243,754 | | 1,239,913 | | | 1,834,788 | | 1,252,977 | | 1,243,754 | | Virgin Islands | | 918,424 | | 1,066,988 | | 1,017,734 | | | 897,709 | | 918,424 | | 1,066,988 | |
| | | (1) | | For 2007, Revenues2010, 2009, and 2008, includes $6.1 billion, $7.2 billion and $7.8 billion, respectively of brokered CDs allocated to the Puerto Rico operations include $15.1 million related to reimbursement of expenses, mainly from insurance carriers, related to a class action lawsuit settled in 2007.operations. |
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FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 34 —��� Litigations As of December 31, 2009,2010, First BanCorp and its subsidiaries were defendants in various legal proceedings arising in the ordinary course of business. Management believes that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations. Note 35 — First BanCorp (Holding Company Only) Financial Information The following condensed financial information presents the financial position of the Holding Company only as of December 31, 20092010 and 2008,2009, and the results of its operations and cash flows for the years ended on December 31, 2010, 2009 2008 and 2007.2008. Statements of Financial Condition | | | | | | | | | | | | | | | | | | | As of December 31, | | | As of December 31, | | | | 2009 | | 2008 | | | 2010 | | 2009 | | | | (In thousands) | | | (In thousands) | | Assets | | | Cash and due from banks | | $ | 55,423 | | $ | 58,075 | | | $ | 42,430 | | $ | 55,423 | | Money market investments | | 300 | | 300 | | | — | | 300 | | Investment securities available for sale, at market: | | | Equity investments | | 303 | | 669 | | | 59 | | 303 | | Other investment securities | | 1,550 | | 1,550 | | | 1,300 | | 1,550 | | Investment in First Bank Puerto Rico, at equity | | 1,754,217 | | 1,574,940 | | | 1,231,603 | | 1,754,217 | | Investment in First Bank Insurance Agency, at equity | | 6,709 | | 5,640 | | | 6,275 | | 6,709 | | Investment in Ponce General Corporation, at equity | | — | | 123,367 | | | Investment in PR Finance, at equity | | 3,036 | | 2,789 | | | — | | 3,036 | | Investment in FBP Statutory Trust I | | 3,093 | | 3,093 | | | 3,093 | | 3,093 | | Investment in FBP Statutory Trust II | | 3,866 | | 3,866 | | | 3,866 | | 3,866 | | Other assets | | 3,194 | | 6,596 | | | 5,395 | | 3,194 | | | | | | | | | | | | | Total assets | | $ | 1,831,691 | | $ | 1,780,885 | | | $ | 1,294,021 | | $ | 1,831,691 | | | | | | | | | | | | | | | | Liabilities & Stockholders’ Equity | | | Liabilities: | | | Other borrowings | | $ | 231,959 | | $ | 231,914 | | | $ | 231,959 | | $ | 231,959 | | Accounts payable and other liabilities | | 669 | | 854 | | | 4,103 | | 669 | | | | | | | | | | | | | Total liabilities | | 232,628 | | 232,768 | | | 236,062 | | 232,628 | | | | | | | | | | | | | | | | Stockholders’ equity | | 1,599,063 | | 1,548,117 | | | 1,057,959 | | 1,599,063 | | | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 1,831,691 | | $ | 1,780,885 | | | $ | 1,294,021 | | $ | 1,831,691 | | | | | | | | | | | | |
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FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Statements of (Loss) Income | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Income: | | | Interest income on investment securities | | $ | — | | $ | 727 | | $ | 3,029 | | | $ | — | | $ | — | | $ | 727 | | Interest income on other investments | | 38 | | 1,144 | | 1,289 | | | 1 | | 38 | | 1,144 | | Interest income on loans | | — | | — | | 631 | | | — | | — | | — | | Dividend from First Bank Puerto Rico | | 46,562 | | 81,852 | | 79,135 | | | 1,522 | | 46,562 | | 81,852 | | Dividend from other subsidiaries | | 1,000 | | 4,000 | | 1,000 | | | 1,400 | | 1,000 | | 4,000 | | Other income | | 496 | | 408 | | 565 | | | 209 | | 496 | | 408 | | | | | | | | | | | | | | | | | | | 48,096 | | 88,131 | | 85,649 | | | 3,132 | | 48,096 | | 88,131 | | | | | | | | | | | | | | | | | | | | Expense: | | | Notes payable and other borrowings | | 8,315 | | 13,947 | | 18,942 | | | 6,956 | | 8,315 | | 13,947 | | Interest on funding to subsidiaries | | — | | 550 | | 3,319 | | | — | | — | | 550 | | (Recovery) provision for loan losses | | — | | | (1,398 | ) | | 1,300 | | | — | | — | | | (1,398 | ) | Other operating expenses | | 2,698 | | 1,961 | | 2,844 | | | 2,645 | | 2,698 | | 1,961 | | | | | | | | | | | | | | | | | | | 11,013 | | 15,060 | | 26,405 | | | 9,601 | | 11,013 | | 15,060 | | | | | | | | | | | | | | | | | | | | Net loss on investments and impairments | | | (388 | ) | | | (1,824 | ) | | | (6,643 | ) | | | (603 | ) | | | (388 | ) | | | (1,824 | ) | | | | | | | | | | | | | | | | | | | Net loss on partial extinguishment and recharacterization of secured commercial loans to a local financial institution | | — | | — | | | (1,207 | ) | | | | | | | | | | | | | | Income before income taxes and equity in undistributed (losses) earnings of subsidiaries | | 36,695 | | 71,247 | | 51,394 | | | (Loss) Income before income taxes and equity in undistributed (losses) earnings of subsidiaries | | | | (7,072 | ) | | 36,695 | | 71,247 | | | | �� | | | Income tax provision | | | (6 | ) | | | (543 | ) | | | (1,714 | ) | | | (8 | ) | | | (6 | ) | | | (543 | ) | | | | Equity in undistributed (losses) earnings of subsidiaries | | | (311,876 | ) | | 39,233 | | 18,456 | | | | (517,228 | ) | | | (311,876 | ) | | 39,233 | | | | | | | | | | | | | | | | | | | | Net (loss) income | | | (275,187 | ) | | 109,937 | | 68,136 | | | | (524,308 | ) | | | (275,187 | ) | | 109,937 | | | | | | | | | | | | | | | | | | | | Other comprehensive (loss) income, net of tax | | | (30,896 | ) | | 82,653 | | 4,903 | | | | (8,775 | ) | | | (30,896 | ) | | 82,653 | | | | | | | | | | | | | | | | | Comprehensive (loss) income | | $ | (306,083 | ) | | $ | 192,590 | | $ | 73,039 | | | $ | (533,083 | ) | | $ | (306,083 | ) | | $ | 192,590 | | | | | | | | | | | | | | | | |
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FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Statements of Cash Flows | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Cash flows from operating activities: | | | Net (loss) income | | $ | (275,187 | ) | | $ | 109,937 | | $ | 68,136 | | | $ | (524,308 | ) | | $ | (275,187 | ) | | $ | 109,937 | | | | | | | | | | | | | | | | | | | | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | (Recovery) provision for loan losses | | — | | | (1,398 | ) | | 1,300 | | | — | | — | | | (1,398 | ) | Deferred income tax provision | | 3 | | 543 | | 1,714 | | | 8 | | 3 | | 543 | | Stock-based compensation recognized | | 71 | | 7 | | — | | | 71 | | 71 | | 7 | | Equity in undistributed losses (earnings) of subsidiaries | | 311,876 | | | (39,233 | ) | | | (18,456 | ) | | 517,228 | | 311,876 | | | (39,233 | ) | Net loss on sale of investment securities | | — | | — | | 733 | | | — | | — | | — | | Loss on impairment of investment securities | | 388 | | 1,824 | | 5,910 | | | 603 | | 388 | | 1,824 | | Net loss on partial extinguishment and recharacterization of secured commercial loans to a local financial institution | | — | | — | | 1,207 | | | Accretion of discount on investment securities | | — | | | (33 | ) | | | (197 | ) | | — | | — | | | (33 | ) | Net decrease (increase) in other assets | | 3,399 | | | (3,542 | ) | | 52,515 | | | Net (decrease) increase in other liabilities | | | (144 | ) | | 245 | | | (72,639 | ) | | Net (increase) decrease in other assets | | | | (2,214 | ) | | 3,399 | | | (3,542 | ) | Net increase (decrease) in other liabilities | | | 3,434 | | | (144 | ) | | 245 | | | | | | | | | | | | | | | | | Total adjustments | | 315,593 | | | (41,587 | ) | | | (27,913 | ) | | 519,130 | | 315,593 | | | (41,587 | ) | | | | | | | | | | | | | | | | | | | Net cash provided by operating activities | | 40,406 | | 68,350 | | 40,223 | | | Net cash (used in) provided by operating activities | | | | (5,178 | ) | | 40,406 | | 68,350 | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | Capital contribution to subsidiaries | | | (400,000 | ) | | | (37,786 | ) | | — | | | — | | | (400,000 | ) | | | (37,786 | ) | Principal collected on loans | | — | | 3,995 | | 1,622 | | | — | | — | | 3,995 | | Purchases of securities available for sale | | — | | — | | — | | | — | | — | | — | | Sales, principal repayments and maturity of available-for-sale and held-to-maturity securities | | — | | 1,582 | | 11,403 | | | — | | — | | 1,582 | | Other investing activities | | — | | — | | 437 | | | — | | — | | — | | | | | | | | | | | | | | | | | Net cash (used in) provided by investing activities | | | (400,000 | ) | | | (32,209 | ) | | 13,462 | | | Net cash used in investing activities | | | — | | | (400,000 | ) | | | (32,209 | ) | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | Proceeds from purchased funds and other short-term borrowings | | — | | — | | — | | | Repayments of purchased funds and other short-term borrowings | | — | | | (1,450 | ) | | | (5,800 | ) | | — | | — | | | (1,450 | ) | Issuance of common stock | | — | | — | | 91,924 | | | Exercise of stock options | | — | | 53 | | — | | | — | | — | | 53 | | Issuance of preferred stock | | 400,000 | | — | | — | | | — | | 400,000 | | — | | Cash dividends paid | | | (43,066 | ) | | | (66,181 | ) | | | (64,881 | ) | | — | | | (43,066 | ) | | | (66,181 | ) | Issuance costs of common stock issued in exchange for preferred stock Series A through E | | | | (8,115 | ) | | Other financing activities | | 8 | | — | | — | | | — | | 8 | | — | | | | | | | | | | | | | | | | | Net cash provided by (used in) financing activities | | 356,942 | | | (67,578 | ) | | 21,243 | | | Net cash (used in) provided by financing activities | | | | (8,115 | ) | | 356,942 | | | (67,578 | ) | | | | | | | | | | | | | | | | | | | Net (decrease) increase in cash and cash equivalents | | | (2,652 | ) | | | (31,437 | ) | | 74,928 | | | | (13,293 | ) | | | (2,652 | ) | | | (31,437 | ) | | | | Cash and cash equivalents at the beginning of the year | | 58,375 | | 89,812 | | 14,884 | | | 55,723 | | 58,375 | | 89,812 | | | | | | | | | | | | | | | | | Cash and cash equivalents at the end of the year | | $ | 55,723 | | $ | 58,375 | | $ | 89,812 | | | $ | 42,430 | | $ | 55,723 | | $ | 58,375 | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents include: | | | Cash and due form banks | | 55,423 | | 58,075 | | 43,519 | | | $ | 42,430 | | $ | 55,423 | | $ | 58,075 | | Money market investments | | 300 | | 300 | | 46,293 | | | — | | 300 | | 300 | | | | | | | | | | | | | | | | | | | $ | 55,723 | | $ | 58,375 | | $ | 89,812 | | | $ | 42,430 | | $ | 55,723 | | $ | 58,375 | | | | | | | | | | | | | | | | |
F-78F-85
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 36 — Subsequent Events On February 16, 2011, the Corporation sold a loan portfolio consisting of performing and non-performing loans with an unpaid principal balance of $510.2 million and a net book value of $269.3 million, at a purchase price of $272.2 million, pursuant to an agreement entered into on February 9, 2011. The loans were sold to a new joint venture company (the “Joint Venture”) organized under the Laws of the Commonwealth of Puerto Rico and majority owned by PRLP Ventures LLC (“PRLP”), a company created by Goldman, Sachs & Co. and Caribbean Property Group (“CPG”), in exchange for $88.4 million in cash; a 35% interest in the Joint Venture, valued at $47.6 million; and $136 million representing seller financing provided by FirstBank, which has a 7-year maturity and bears variable interest at 30-day LIBOR plus 300 basis points and is secured by a pledge of all of the acquiring entity’s assets as well as the PRLP’s 65% ownership interest in the Joint Venture. The Joint Venture will engage CPG Island Servicing, LLC, an affiliate of CPG, to perform the servicing of the loans. CPG is expected to engage Archon Group, L.P. an affiliate of Goldman, Sachs and Co., to perform certain sub-servicing functions. FirstBank will additionally provide an $80 million advance facility to the Joint Venture to fund unfunded commitments and costs to complete projects under construction, of which $40 million were disbursed in the first quarter of 2011, and a $20 million working capital line of credit to fund certain expenses of the Joint Venture. These loans will bear variable interest at 30-day LIBOR plus 300 basis points. The Corporation has determined that the Joint Venture is a variable interest entity (“VIE”) in which the Corporation is not the primary beneficiary. Therefore, the Corporation does not intend to consolidate the Joint Venture with and into its financial statements. In determining the primary beneficiary of the VIE, the Corporation considered applicable guidance which requires the Corporation to qualitatively assess the determination of the primary beneficiary (or consolidator) of the VIE on whether it has both the power to direct the activities of the VIE, through voting rights or similar rights, that most significantly impact the entity’s economic performance; and the obligation to absorb losses of the VIE that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. As a creditor to the Joint Venture, the Corporation has certain rights related to the Joint Venture, however, these are intended to be protective in nature and do not provide the Corporation with the ability to manage the operations of the Joint Venture. The transfer of the financial assets will be accounted for as a sale in the first quarter of fiscal 2011 and the Corporation will recognize the $88 million received in cash, the $136 million note receivable and the $47.6 million investment in the Joint Venture; and de-recognize the loan portfolio sold. On February 18, 2011, the Corporation sold mortgage loans with an unpaid principal balance of $235.2 million to another financial institution in Puerto Rico. The Corporation recognized a gain of approximately $5.4 million associated with this transaction in the first quarter of 2011. On March 7, 2011, consistent with the Corporation’s deleverage strategy included in the Updated Capital Plan submitted to regulators in the first quarter of 2011, the Corporation sold approximately $326 million in U.S. Agency MBS that were intended to be held-to-maturity. The Corporation recognized a gain of approximately $18.6 million associated with this transaction during the first quarter of 2011. On April 8, 2011, the Corporation sold approximately $268 million in U.S. Agency MBS for which an approximate $20 million gain was recognized. The Corporation has performed an evaluation of all other events occurring subsequent to December 31, 2010; management has determined that there are no additional events occurring in this period that required disclosure in or adjustment to the accompanying financial statements. F-86 |