| | The increase in non-interest income in 2008, compared to 2007, was related to a realized gain of $17.7 million on the sale of investment securities (mainly 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 initial public offering (“IPO”). A surge in MBS prices, mainly due to announcements of the Federal Reserve (“FED”) that it will invest up to $600 billion in obligations from U.S. government-sponsored agencies, including $500 billion in MBS, provided an opportunity to realize a gain on the sale of approximately $284 million fixed-rate U.S. agency MBS at a gain of $11.0 million. Early in 2008, a spike and subsequent contraction in yield spread for U.S. agency MBS also provided an opportunity for the sale of approximately $242 million and a realized gain of $6.9 million.47
Higher point of sale (POS) and ATM interchange fee income and an increase in fee income from cash management services provided to corporate customers also contributed to the increase in non-interest income. The increase in non-interest income attributable to these activities was partially offset, when comparing 2008 to 2007, by isolated events such as the $15.1 million income recognition for reimbursement expenses related to the class action lawsuit settled in 2007 (see below), and a gain of $2.8 million on the sale of a credit card portfolio and $2.5 million on the partial extinguishment and recharacterization of a secured commercial loan to a local financial institution that were all recognized in 2007.
The increase in non-interest income in 2007, compared to 2006, was mainly attributable to the income recognition of approximately $15.1 million for reimbursement of expenses, mainly from insurance carriers, related to the settlement of the class action lawsuit brought against the Corporation, a decrease of $9.3 million in other-than-temporary impairment charges related to the Corporation’s equity securities portfolio, the fluctuation resulting from gains and losses recorded on partial repayments of certain secured commercial loans extended to local financial institutions (a gain of $2.5 million recorded in 2007 compared to a loss of $10.6 million recorded in 2006), a higher gain on the sale of its credit card portfolio (a gain of $2.8 million recorded in 2007 compared to $0.5 million recorded in 2006) pursuant to a strategic alliance reached with a U.S. financial institution and higher income from service charges on loans (an increase of $0.9 million or 16% as compared to 2006) due to the increase in the loan portfolio volume driven by new originations.
Refer to “Non-Interest Income”discussion below for additional information.
Non-interest expenses for 2008 were $333.4 million compared to $307.8 million and $288.0 million for 2007 and 2006, respectively. The increase in non-interest expenses for 2008, as compared to 2007, is 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 Federal Deposit Insurance Corporation (“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 has been able to continue the growth of its operations without incurring in substantial additional operating expenses as reflected by a slight increase of 2% in operating expenses, excluding the increase in credit cost. Modest increases were observed in occupancy and equipment expenses, an increase of $2.9 million, and in employees’ compensation and benefits, an increase of $1.5 million.
The increase in non-interest expenses for 2007, as compared to 2006, was mainly due to a $12.8 million increase in employees’ compensation and benefits expense primarily due to increases in the average compensation and related fringe benefits paid to employees, coupled with the accrual of approximately $3.3 million for a voluntary separation program established by the Corporation as part of its cost saving strategies, a $5.1 million increase in the deposit insurance premium expense resulting from changes in the premium calculation by the FDIC, a $4.5 million increase in occupancy and equipment expenses mainly attributable to increases in costs associated with the expansion of the Corporation’s branch network and loan origination offices and an increase of $6.4 million in other operating expenses primarily attributable to a $3.3 million increase related to costs associated with capital raising efforts in 2007 not qualifying for capitalization coupled with increased costs associated with foreclosure actions on the aforementioned troubled loan relationship in Miami, Florida. These factors were partially offset by an $11.3 million decrease in professional fees attributable to the conclusion during 2006 of the Audit Committee’s review and the restatement process.
For 2008, the Corporation recorded an income tax benefit of $31.7 million, compared to an income tax expense of $21.6 million for 2007. The fluctuation is mainly related to lower taxable income. A significant portion of revenues was derived from tax-exempt assets and operations conducted through 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 UTBs during the second quarter of 2008 for positions taken on income tax returns recorded under the provisions of Financial Accounting Standards Board Interpretation No. (“FIN”) 48 due 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 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.
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Income tax expense for the year ended December 31, 2007 was $21.6 million (or 24% of pre-tax earnings) compared to $27.4 million (or 24% of pre-tax earnings) for the year ended December 31, 2006. The decrease in income tax expense in 2007 as compared to 2006 was primarily due to lower taxable income coupled with the effect of a lower statutory tax rate in Puerto Rico for 2007 (39% in 2007 compared to 43.5% in 2006). Refer to “Income Taxes”discussion below for additional information.
• | | Total assets as of December 31, 2008 amounted to $19.5 billion, an increase of $2.3 billion compared to $17.2 billion as of December 31, 2007. The Corporation’s loan portfolio increased by $1.3 billion (before the allowance for loan and lease losses), driven by new originations, mainly commercial and residential mortgage loans and the purchase of a $218 million auto loan portfolio during the third quarter of 2008. Also, the increase in total assets is attributable to the purchase of approximately $3.2 billion of fixed-rate U.S. government agency MBS during the first half of 2008 as market conditions presented an opportunity to obtain attractive yields, improve its net interest margin and replace $1.2 billion of U.S. Agency debentures called by counterparties. The Corporation increased its cash and money market investments by $26.8 million in part as a precautionary measure during the present economic climate. | | • | | As of December 31, 2008, total liabilities amounted to $17.9 billion, an increase of approximately $2.2 billion as compared to $15.8 billion as of December 31, 2007. The increase in total liabilities was mainly attributable to a higher volume of deposits, as the Corporation has been issuing brokered CDs to finance its lending activities and accumulate additional liquidity due to current market volatility, and an increase in repurchase agreements issued to finance the purchase of MBS in the first half of 2008. Total deposits, excluding brokered CDs, increased by $770.1 million from the balance as of December 31, 2007, reflecting increases in deposits from all sectors; including individuals, commercial entities and the government. | | • | | The Corporation’s stockholders’ equity amounted to $1.5 billion as of December 31, 2008, an increase of $126.5 million compared to the balance as of December 31, 2007, driven by net income of $109.9 million recorded for 2008 and a net unrealized gain of $82.7 million on the fair value of available-for-sale securities recorded as part of comprehensive income. The increase in the fair value of MBS was mainly in response to the announcement by the U.S. government that it will invest up to $600 billion in obligations from housing-relatedU.S. government-sponsored agencies, including $500 billion in MBS, backed by FNMA, FHLMCprovided an opportunity to realize a sale of approximately $284 million fixed-rate U.S. agency MBS at a gain of $11.0 million. Early in 2008, a spike and GNMA. Partially offsetting these increases were dividends declared during 2008 amounting to $66.2 million ($25.9 million or $0.28 per common stock and $40.3 millionsubsequent contraction in preferred stock). | | • | | Total loan production, including purchases,yield spread for U.S. agency MBS also provided an opportunity for the year ended December 31, 2008 was $4.2 billion comparedsale of approximately $242 million and a realized gain of $6.9 million. Higher point of sale (POS) and ATM interchange fee income and an increase in fee income from cash management services provided to $4.1 billion and $4.9 billion forcorporate customers also contributed to the years ended December 31, 2007 and 2006, respectively.increase in non-interest income. The increase in non-interest income attributable to these activities was partially offset, when comparing 2008 to 2007, by isolated events such as the $15.1 million income recognition for reimbursement of expenses, mainly from insurance carriers, 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 productionto a local financial institution that were all recognized in 2007. |
| | Refer to “Non-Interest Income” discussion below for additional information. |
Non-interest expenses for 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 54
| | 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, is mainly associated with an increase in commercial loan originations and the purchase ofwas principally attributable to: (i) a $218higher net loss on REO operations that increased to $21.4 million auto loan portfolio. The decrease in loan productionfor 2008 from $2.4 million for 2007, as compared to 2006, was mainly due to decreases in the originationdriven by a higher inventory of residentialrepossessed properties and declining real estate and commercial loans attributable, among other things, to the slowdown in the Puerto Rico and U.S. housing market and to stricter underwriting standards. | | • | | Total non-performing assets as of December 31, 2008 were $637.2 million compared to $439.3 million as of December 31, 2007. The slumping economy and deteriorating housing market in the United States coupled with recessionary conditions in Puerto Rico’s economy, have resulted in higher non-performing balances in all of the Corporation’s loan portfolios. Total non-performing assetsprices, mainly in the U.S. mainland, increased to $104.0 million asthat have caused write-downs on the value of December 31, 2008 from $58.5 million at the end of 2007, up $45.5 million or 78%. All segments were severely affected by the economyrepossessed properties, and housing market crisis in the U.S. with the total variance resulting from: (i) an increase of $13.8 million for residential real estate loans and $3.6 million for foreclosed residential properties; (ii) an increase of $4.1$3.4 million in non-performing construction, land loansdeposit 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 foreclosed condo-conversion projects; (iii) higher occupancy and equipment expenses, an increase of $23.3$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 commercial loans, mainly secured by real estate,non-interest expenses, excluding the increase in REO operations losses. Modest increases were observed in occupancy and (iv)equipment expenses, an increase of $0.7$2.9 million, and in the consumer lending sector.employees’ compensation and benefit, an increase of $1.5 million. Refer to the “Risk Management” “Non-Interest Expenses”discussion below for additional information with respect to dispositions of non-performing assets in the United States during 2008 and further analysis.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, the Corporation recorded 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 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 second quarter of 2008 for positions taken on income tax returns due 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 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. |
| | Refer to “Income Taxes” discussion below for additional information. |
Total non-performing assets inas 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 increasedGovernment and/or its political subdivisions. Also, an increase of $298.4 million in cash and cash equivalents contributed to $512.6the 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, from $362.1driven by the $400 million atinvestment by the endUnited States Department of 2007, up $150.5the 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 42%. The total variance breakdown includes: (i) an$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 4955
| | $31.7 million on private label MBS. |
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 $49.6commercial loans was a decrease of $303.3 million for non-performing residential real estatein originations of consumer loans and $7.6of $98.5 million in foreclosed real estate properties; (ii)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 of $45.6 million in non-performing construction and land loans, and (iii) an increase of $48.0 million in commercial loans. All segmentsloan originations and the purchase of thea $218 million auto loan portfolios were impacted by the current economic crisis. On a positive note,portfolio. Total non-performing consumer assets (including finance leases) remained relatively unchangedas of December 31, 2009 was $1.71 billion compared to December 31, 2007. This portfolio continues to show signs of stability and benefited from changes in underwriting standards implemented in late 2005 and from originations using these new underwriting standards of new consumer loans to replace maturing consumer loans. This portfolio had an average life of approximately four years. The Corporation may experience additional increases in the volume of its non-performing loan portfolio due to Puerto Rico’s current economic recession. During the third quarter of 2007, the Corporation started a loan loss mitigation program providing homeownership preservation assistance. Since the inception of the program in the third quarter of 2007, the Corporation has completed approximately 367 loan modifications with an outstanding balance of approximately $60.0$637.2 million as of December 31, 2008. Of this amount, $53.2Even 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 have been outstanding long enough to be considered for interest accrualin non-performing construction loans, of which $32.8$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 formally returnedrecovered by the Corporation, despite its efforts, the Corporation decided to accruing status after a sustained period of repayments.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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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”) and to general practices within the banking industry.. 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 recorded assets and liabilities and 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 haverequire 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 that management considersconsidered 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 leases portfolio.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 adequacy of 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. Management allocates specific portions of the allowance for loan and lease losses to problem loans that are identified through an asset classification analysis. The portfolios of residential mortgage loans, consumer loans, auto loans and finance leases are individually considered homogeneous and each portfolio is evaluated in as pools of similar loans for impairment. The adequacy of the allowance for loan and lease losses is based upon a number of factors including historical loan and lease loss experience that may not fully represent current conditions inherent in the portfolio. For example, factors affecting the Puerto Rico, Florida (USA), US Virgin Islands’ or British Virgin Islands’ economies may contribute to delinquencies and defaults above the Corporation’s historical loan and lease losses. The Corporation addresses this risk by actively monitoring the delinquency and default experience and by considering current economic and market conditions and their probable impact on the borrowers. Based on the assessments of current conditions, the Corporation makes appropriate adjustments to the historically developed assumptions when necessary to adjust historical factors to account for present conditions. The Corporation also takes into consideration information about trends on non-accrual loans, delinquencies, changes in underwriting policies and other risk characteristics relevant to the particular loan category.quality The Corporation measures impairment individually for those commercial and real estate loans with a principal balance of $1 million or more in accordance with the provisions of SFAS 114, “Accounting by Creditors for Impairment of a Loan” (as amended by SFAS No. 118), and SFAS 5, “Accounting for Contingencies.” A loan is impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. A specific reservevaluation allowance is determinedestablished for those commercial and real estate loans classified as impaired, primarily based on each such loan’swhen 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 interest rate. Ifrate is lower than the carrying amount of that loan. To compute the specific valuation allowance, commercial and real estate, including residential mortgage loans with a principal balance of $1 million or more are evaluated individually as well as smaller residential mortgage loans considered impaired based on their high delinquency and loan-to-value levels. When foreclosure is probable, the creditorimpairment is required to measure the impairmentmeasured 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 updated annually thereafter. In addition, appraisals are also obtained for certain residential mortgage loans on a spot basis selected bybased on specific characteristics such as delinquency levels, age of the appraisal, and loan-to-value ratios. Should there be a deficiency,Deficiencies from the Corporation records a specific allowance for loan losses related to these loans.
As a general procedure, the Corporation internally reviews appraisals on a spot basis as partexcess of the underwriting and approval process. For constructionrecorded investment in collateral dependent loans related toover the Miami Corporate Banking operations, appraisals are reviewed by an outsourced contracted appraiser. Once a loan backed by real estate collateral deteriorates or is accounted for in non-accrual status, a full assessment of theresulting fair value of the collateral is performed. Ifare charged-off when deemed uncollectible.
For all other loans, which include, small, homogeneous loans, such as auto loans, consumer loans, finance lease loans, residential mortgages, and commercial and construction loans not considered impaired or in amounts under $1 million, the Corporation commences litigationmaintains a general valuation allowance. The methodology to collect an outstandingcompute the general valuation allowance has not change in 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, and other environmental factors such as economic forecasts. The analysis 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 are used in the model and are risk-adjusted for the area in which the property is located (Puerto Rico, Florida, or commences foreclosure proceedings against a borrower (which includesVirgin Islands). For commercial loans, including construction loans, the collateral), a new appraisal reportgeneral reserve is requested and the book value is adjusted accordingly, either by a corresponding reserve or a charge-off. The Credit Risk area requests newbased on historical loss ratios, trends in non-accrual loans, loan type, risk-rating, geographical location, changes in collateral appraisalsvalues for impaired collateral dependent loans. In order to determine present market conditionsloans and gross product or unemployment data for the geographical region. The methodology of accounting for all probable losses in Puerto Ricoloans not individually measured for impairment purposes is made in accordance with authoritative accounting guidance that requires losses be accrued when they are probable of occurring and the Virgin Islands, and to gauge property appreciation rates,estimable.
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opinions of value are requested The blended general reserve factors utilized for a sample of delinquent residential real estate loans. The valuation information gathered through these appraisals is consideredall portfolios increased during 2009 due to the continued deterioration in the Corporation’s allowance model assumptions.
Cash payments received on impairedeconomy and the continued increase in delinquencies, charge-offs, home values and most other economic indicators utilized. The blended general reserve factor for residential mortgage loans are recordedincreased from 0.43% in accordance with2008 to 0.91% in 2009. For commercial mortgage loans the contractual terms ofblended general reserve factor increased from 0.62% in 2008 to 2.41% in 2009. For C&I loans the loan.blended general reserve factor increased from 1.31% in 2008 to 2.44% in 2009. The principal portion of the payment is usedconstruction loans blended general factor increased from 2.18% in 2008 to reduce the principal balance of the loan, whereas the interest portion is recognized as interest income. However, when management believes the ultimate collectibility of principal is9.82% in doubt, the interest portion is applied2009. The consumer and finance leases reserve factor increased from 4.31% in 2008 to principal.4.36% in 2009.
Other-than-temporary impairments TheOn a quarterly basis, the Corporation evaluates forperforms 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 debt and equity securities when their fair market value has remained belowamortized cost for six consecutive months or more, or earlier if other factors indicative of potential impairment exist. Investments are considered to be impaired when their cost exceeds fair market value.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 the fixed income investmentssecurities 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.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 the current crisis in thevolatile economic and financial markets,market conditions, the Corporation also takes into consideration the latest information available about the overall financial condition of issuers,the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuersissuer to deal with the present economic climate. In April 2009, the Financial Accounting Standard 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. 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 also considers itsdid not have the positive intent and ability to hold the fixed incomesecurity until recovery or maturity. The impairment model for equity securities until recovery. If management believes, based onwas not affected by the analysis, that the issuer will not be able to service its debt and pay its obligations in a timely manner, the security is written down to the estimated fair value. For securities written down to their estimated fair value, any accrued and uncollected interest is also reversed. Interest income is then recognized when collected. 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 52
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, 2008,2009, there were no open income tax investigations. Information regarding income taxes is included in Note 2527 to the Corporation’s audited financial statements for the year ended December 31, 20082009 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 assets 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 assets resulting in additional income tax expense in the consolidated statements of income. Management evaluates its deferred tax assets 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 assets will not be realized. Changes in valuation allowance from period to period are included in the Corporation’s tax provision in the period of change (see Note 2527 to the Corporation’s audited financial statements for the year ended December 31, 20082009 included in Item 8 of this Form 10-K). SFAS 109, “AccountingAccounting for Income Taxes” requires companies to make adjustments to their financial statements in the quarter that new tax legislation is enacted. In the third quarter of 2005,2009, the Puerto Rico legislature passedGovernment approved Act No. 7 (the “Act”), to stimulate Puerto Rico’s economy and to reduce the governor signed into lawPuerto Rico Government’s fiscal deficit. The Act imposes a series of temporary two-year additionaland permanent measures, including the imposition of a 5% surtax of 2.5%over the total income tax determined, which is applicable to corporations. The surtax was applicable to taxable years after December 31, 2004 and increasedcorporations, among others, whose combined income exceeds $100,000, effectively resulting in an increase in the maximum marginal corporate incomestatutory tax rate from 39% to 41.5% until40.95% and an increase in capital gain statutory tax rate from 15% to 15.75%. This temporary measure is effective for tax years that commenced after December 31, 2006. On May 13, 2006, with an effective date of2008 and before January 1, 2006,2012. Also, under the Government of Puerto Rico signed Law No. 89 which imposed an additional 2.0% incomeAct, all IBEs are subject to the special 5% tax on all companies covered bytheir net income not otherwise subject to tax pursuant to the Puerto Rico Banking Act whichPR Code. This temporary measure is also effective for tax years that commence after December 31, 2008 and before January 1, 2012. 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 $1.7$6.6 million for 2006.related to the special 5% tax on the operations FirstBank Overseas Corporation. For 2007 and 2008, the maximum marginal corporate income tax rate was 39%. The Corporation adopted FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. This Interpretationissued authoritative guidance that prescribes a recognition threshold and measurement attributecomprehensive model for the financial statement recognition, measurement, presentation and measurementdisclosure of aincome tax positionuncertainties with respect to positions taken or expected to be taken inon income tax returns. Under the authoritative accounting guidance, income tax benefits are recognized and measured upon a two-step model: 1) a tax return. This Interpretation also provides guidanceposition must be more likely than not to be sustained based solely on derecognition, classification, interestits technical merits in order to be recognized, and penalties, accounting2) 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 interim periods, disclosure,accordance with this model and transition.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 unrecognized tax portionsUTBs as 59
components of income tax expense. Refer to Note 2527 of the Corporation’s audited financial statements for the year ended December 31, 20082009 included in Item 8 of this Form 10-K for required disclosures and further information related to this accounting pronouncement.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-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 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-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 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 assessmentdetermination 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. 53
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 statement of condition.statements. Effective January 1, 2007,The Corporation adopted authoritative guidance issued by the Corporation elected to early adopt SFAS 157, “Fair Value Measurements.” This StatementFASB 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. SFAS 157This guidance also establishes a fair value hierarchy whichthat requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes threeThree levels of inputs that 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, under SFAS 159, 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 61
CDs are generally participated out by brokers in shares of less than $100,000 and therefore, 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 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. Effective January 1, 2007, the Corporation updated its methodology to calculate the impact of its own credit standing as required by SFAS 157. 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. 54
Investment Securities The fair value of investment securities is the market value based on quoted market prices, when available, or market prices for identical or comparable assets 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. The model usessecurity and utilizes relevant assumptions such as prepayment rate, default rate, and interest rate assumptions that market participants would commonly use for similar mortgage asset classes that are subject to prepayment, credit and interest rate risk.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) and the. The variable cash flow of the security is modeled using the 3-month LIBOR forward curve. The expected foreclosure frequency estimates used inLoss assumptions were driven by the model are based on the 100% Public Securities Association (PSA) Standard Default Assumption (SDA) with acombination of default and loss severity assumption of 10% afterestimates, taking into consideration that the issuer must cover losses upaccount loan credit characteristics (loan-to-value, state, origination date, property type, occupancy loan purpose, documentation type, debt-to-income ratio, other) to 10%provide an estimate of default and loss severity. Refer to Note 4 of the aggregate outstanding balance according to recourse provisions.Corporation’s financial statements for the year ended December 31, 2009 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 counterparts when appropriate.appropriate, except when collateral is pledged. That is, on interest rate swaps, the credit risk of both counterparts 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 USDUS 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 are mainly composed ofinclude 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 are market gains, the counterparty must deliver collateral to the Corporation. Certain derivatives with limited market activity, as is the case with derivative instruments named as “reference caps”,caps,” are valued using models that consider unobservable market parameters (Level 3). Reference caps are used mainly to mainly hedge interest rate risk inherent in private label mortgage-backed securities, thus are tied to the notional amount of the underlying fixed-rate mortgage loans originated in the United States. 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. 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 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 caplet is then discounted from each payment date. 55
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. In accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” allAll 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 under SFAS 133 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). NoneAs of December 31, 2009 and 2008, all derivatives held by the Corporation’s derivative instruments qualifiedCorporation were considered economic undesignated hedges recorded at fair value with the resulting gain or have been designated as a cash flow hedge.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. 63
The Corporation recognizes unrealized gains and losses arising from any changes in fair value of derivative instruments and hedged items, as applicable, as interest income or interest expense depending upon whether an asset or liability is being hedged.
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. Information regarding derivative instruments is included in Note 30 to the Corporation’s audited financial statements for the year ended December 31, 2008 included in Item 8 of this Form 10-K. Effective January 1, 2007, the Corporation elected to early adopt SFAS 159. This Statementauthoritative 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 56
earnings. The Corporation adopted the fair value option may be applied on an instrument-by-instrument basis. The Corporation adopted SFAS 159 for callable fixedfixed-rate medium-term notes and callable brokered CDs (“SFAS 159 liabilities”),certificates of deposit that were hedged with interest rate swaps. From April 3, 2006 to the adoption of SFAS 159, First BanCorp was following the long-haul method of accounting under SFAS 133 for the portfolio of callable interest rate swaps, callable brokered CDs and callable notes. One of the main considerations in the determination to early adopt SFAS 159the 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 SFAS 133.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 SFAS 159,the fair value option, the Corporation no longer amortizes or accretes the basis adjustment for the SFAS 159 liabilities.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 SFAS 159the fair value option also requiresrequired 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. SFAS 159The option of using fair value accounting also establishesrequires that the accrued interest should be reported as part of the fair value of the financial instruments elected to be measured at fair value. Refer to Note 27 to the Corporation’s audited financial statements for the year ended December 31, 2008 included in Item 8 of this Form 10-K. Prior to the implementation of the long-haul method First BanCorp reflected changes in the fair value of those swaps as well as swaps related to certain loans as non-hedging instruments through operations as part of net interest income.
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. 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 loans are classified as non-accruing when interest and principal have not been received for a period of 90 days or more. This policymore 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 the principal or interest is alsonot expected due to deterioration in the financial condition of the borrower. Interest income on non-accruing 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 all impairedreduce the carrying value of such loans based upon an evaluation(i.e., the cost recovery method). Loans are restored to accrual status only when future payments of the risk characteristics of said loans, loss experience, economic conditionsinterest and other pertinent factors.principal are reasonably assured. Loan and lease losses are charged and recoveries are credited to the allowance for loan and lease losses. Closed-end personal consumer loans and leases 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 loan 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 may also classifymeasures impairment individually for those commercial and construction loans in non-accruing status and recognize revenue only when cash payments are received becausewith 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 deteriorationunderlying collateral, and also evaluates for impairment purposes certain residential mortgage loans with high delinquency and loan-to-value levels. Interest income on impaired loans is recognized based on the Corporation’s policy for recognizing interest on accrual and non-accrual loans. Impaired loans also include loans that have been modified in troubled debt restructurings as a concession to borrowers experiencing financial difficulties. Troubled debt restructurings typically result from the financial condition of the borrower and payment in full of principal or interest is not expected. In addition, during the third quarter of 2007, the Corporation started a loanCorporation’s loss mitigation program providing homeownership preservation assistance. Loans modified through this programactivities 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 interestrestored to accrual status when there is recognized on a cash basis. When there is 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-accruing status, provided the loanrestructuring is returnedsupported 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 accruing status.the restructuring. 57
Recent Accounting Pronouncements The Financial Accounting Standards Board (“FASB”) and the Securities Exchange Commission (“SEC”)FASB have issued the following accounting pronouncements and guidance relevant to the Corporation’s operations: In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited. The adoption of this statement did not have an impact on the Corporation’s financial statements, when adopted on January 1, 2009. In December 2007, the FASB issued SFAS 141R, “Business Combinations.” This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. This Statement applies prospectively to 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. An entity may not apply it before that date. The adoption of this statement did not have an impact on the Corporation’s financial statements, when adopted on January 1, 2009.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (b) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Corporation adopted the disclosure framework dictated by this Statement during 2008. Required disclosures are included in Note 30 of the Corporation’s audited financial statements for the year ended December 31, 2008 included in Item 8 of this Form 10-K
In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation ofauthoritative guidance on financial statements of nongovernmental entities that are presented in conformity with GAAP. Prior to the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. (“SAS”) 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” SFAS 162 obviates the need for the guidance applicable to auditors in SAS 69 by identifying the GAAP hierarchy for entities, since entities rather than auditors are responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Any effect of applying the provisions of SFAS 162 should be reported as a change in accounting principle in accordance with SFAS 154, “Accounting Changes and Error Corrections.” SFAS 162 is effective 60 days following the SEC approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles,” which the SEC approved on September 16, 2008. The adoption of SFAS 162 did not impact the Corporation’s current accounting policies or the Corporation’s financial results.
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In May 2008, the FASB issued Staff Position No. (“FSP”) APB 14-1 (“FSP–APB 14-1”). FSP-APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally, FSP-APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP-APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. As of December 31, 2008, the Corporation does not have any convertible debt instrument.
In May 2008, the FASB issued SFAS 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60.” This Statement requiresguarantee 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 Statementguidance also clarifies how SFAS 60the 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. SFAS 163FASB 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. Except for those disclosures, earlier applicationactivities which are effective since the first interim period after the issuance of SFAS 163 is not permitted.this guidance. The Corporation is currently evaluating the possible effect, if any, of the adoption of this statementguidance did not have a significant impact on itsthe Corporation’s financial statements, commencing on January 1, 2009.statements.
In June 2008, the FASB issued FSP No. EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining Whether Instruments Grantedauthoritative guidance for determining whether instruments granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1shared-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 FSP EITF 03-6-1this guidance unvested share-based payment awards that are considered to be participating securities shouldmust be included in the computation of EPSearnings per share (“EPS”) pursuant to the two-class method under SFAS 128. FSP EITF 03-6-1as 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. Early application isThe adoption of this Statement did not permitted. The Corporation is currently evaluating this statement in light ofhave an impact on the recently approved Omnibus Incentive Plan, however,Corporation’s financial statements since, as of December 31, 2008,2009, the outstanding unvested shares of restricted stock do not contain rights to nonforfeitable dividends. In September 2008,April 2009, the FASB issued FSP No. FAS 133-1authoritative guidance for the accounting of assets acquired and FIN 45-4 (“FSP FAS 133-1liabilities assumed in a business combination that arise from contingencies. This guidance amends the provisions related to the initial recognition and FIN 45-4”), “Disclosures about Credit Derivativesmeasurement, subsequent measurement and Certain Guarantees: An Amendmentdisclosure 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 Statement No. 133 and FASB Interpretation No. 45; and Clarificationguidance on the accounting for contingencies. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the 65
acquisition date is on or after the beginning of the Effective Date of FASB Statement No. 161.” FSP FAS 133-1 and FIN 45-4 amends SFAS 133 to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. A seller of credit derivatives must disclose information about its credit derivatives and hybrid instruments that have embedded credit derivatives to enable users of financial statements to assess their potential effect on its financial position, financial performance, and cash flows. As of December 31, 2008, the Corporation is not involved in the credit derivatives market. This FSP also amends FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to require an additional disclosure about the current status of the payment/performance risk of a guarantee. Further, this FSP clarifies the FASB’s intent about the effective date of SFAS 161. This FSP clarifies the FASB’s intent that the disclosures required by SFAS 161 should be provided for anyfirst annual reporting period (annualbeginning on or quarterly interim) beginning after November 15, 2008. The provisions of this FSP that amend SFAS 133 and FIN 45 will be effective for reporting periods (annual or interim) ending after NovemberDecember 15, 2008. The adoption of this pronouncementStatement did not have a significantan impact on the Corporation’s financial statements. In October 2008,April 2009, the FASB issued FSP No. FAS 157-3 (“FSP FAS 157-3”), “Determiningauthoritative guidance for determining fair value when the Fair Valuevolume and level of a Financial Asset Whenactivity for the Market for That Asset Is Not Active.” FSP FAS 157-3 clarifiesasset 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 applicationprice inputs being used represent distressed sales. It reaffirms the objective of SFAS 157 in a marketfair value measurement, that is, notto 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 provides an example to illustrate key considerations in determining the fair value ofvalues when markets have become inactive. This guidance is effective for interim and annual reporting periods ending after June 15, 2009 on a financial asset when the market for that financial asset is not active. This FSP became effective on October 10, 2008 and also applies to prior periods for which financial statements have not been issued.prospective basis. The adoption of this pronouncementStatement did not impact the Corporation’s fair value methodologies on its financial assets. 59
In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” This FSP amends SFAS 140, to require public entities to provide additional disclosures about transfers of financial assets. It also amends FIN 46 (revised December 2003), “Consolidation of Variable Interest Entities,” to require public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. Additionally, this FSP requires certain disclosures to be provided by a public enterprise that is (a) a sponsor of a qualifying special purpose entity (“SPE”) that holds a variable interest in the qualifying SPE but was not the transferor (nontransferor) of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE that holds a significant variable interest in the qualifying SPE but was not the transferor (nontransferor) of financial assets to the qualifying SPE. The disclosures required by this FSP are intended to provide greater transparency to financial statement users about a transferor’s continuing involvement with transferred financial assets and an enterprise’s involvement with variable interest entities and qualifying SPEs. This FSP became effective for the first reporting period (interim or annual) ending after December 15, 2008, with earlier application encouraged. This FSP shall apply for each annual and interim reporting period thereafter. The adoption of this Statement did not have a significant impact on the Corporation’s financial statements as the Corporation is not materially involve in the transfer of financial assets through securitization and asset-backed financing arrangements, nor have involvement with variable interest entities.liabilities.
In JanuaryApril 2009, the FASB issued FSP No. EITF 99-20-1 (“FSP EITF 99-20-1”), “Amendments toamended the Impairment Guidance of EITF Issue No. 99-20.” This FSP amends the impairmentexisting guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination ofdetermining whether an other-than-temporary impairment has occurred. The FSP also retainsfor investments in debt securities is OTTI and emphasizesrequires an entity to recognize the objectivecredit component of an other-than-temporary impairment assessmentOTTI of a debt security in earnings and the related disclosure requirementsnoncredit component in SFAS 115, “Accounting for Certain Investments in Debtother comprehensive income (“OCI”) when the entity does not intend to sell the security and Equity Securities,”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 other related guidance. The FSP 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, 2008,2009. 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 mustdisclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be applied prospectively. Retrospective application toissued. This guidance sets forth (i) the period after the balance sheet date during which management of a priorreporting 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 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash 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 includes changes to the conditions for sales of a financial assets which objective is to determine whether a transferor and its consolidated affiliates included in the financial statements have surrendered control over transferred financial assets or third-party beneficial interests; 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 of the guidance will have on its financial statements. 66
In June 2009, the FASB amended the existing guidance on the consolidation of variable interest, which improves financial reporting by enterprises involved with variable interest entities and addresses (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 this guidance includes 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 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 about the guidance, and provide the bases for conclusions 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 permitted.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 Statementguidance did not haveimpact 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 significantpublic 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. 67
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 on the Corporation’s financial statements. In January 2010, the FASB updated the 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. The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. Entities will be 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 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-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 is evaluating the impact the adoption of this guidance will have on its financial statements. 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 mismatch of the Corporation’s assets and liabilities. Net interest income for the year ended December 31, 20082009 was $527.9$519.0 million, compared to $527.9 million and $451.0 million for 2008 and $443.7 million for 2007, and 2006, respectively. On an adjusted tax equivalent basis and excluding the changes in the fair value of derivative instruments the ineffective portion and the basis adjustment amortization or accretion resulting from fair value hedge accounting in 2006, and unrealized gains and losses on SFAS 159 liabilities measured at fair value, net interest income for the year ended December 31, 20082009 was $579.1$567.2 million, compared to $579.1 million and $475.4 million for 2008 and $529.9 million for 2007, and 2006, respectively. 68
The following tables include a detailed analysis of net interest income. Part I presents average volumes and rates on an adjusted tax equivalent basis and Part II presents, also on an adjusted tax 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. For periods after the adoption of fair value hedge accounting and SFAS 159, theThe net interest income is computed on an adjusted 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, (2) the ineffective portion of designated hedges, (3) the basis adjustment amortization or accretion and (4)(2) unrealized gains or losses on SFAS 60
159 liabilities. For periods prior to the adoption of hedge accounting, the net interest income is computed on an adjusted tax equivalent basis by excluding the impact of the change in theliabilities measured at fair value of derivatives (refer to explanation below regarding changes in the fair value of derivative instruments).value.
Part I | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average volume | | Interest income(1)/ expense | | Average rate(1) | | | Average volume | | Interest income(1)/ expense | | Average rate(1) | | Year Ended December 31, | | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | 2009 | | 2008 | | 2007 | | 2009 | | 2008 | | 2007 | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Interest-earning assets: | | | Money market & other short-term investments | | $ | 286,502 | | $ | 440,598 | | $ | 1,444,533 | | $ | 6,355 | | $ | 22,155 | | $ | 72,755 | | | 2.22 | % | | | 5.03 | % | | | 5.04 | % | | $ | 182,205 | | $ | 286,502 | | $ | 440,598 | | $ | 577 | | $ | 6,355 | | $ | 22,155 | | | 0.32 | % | | | 2.22 | % | | | 5.03 | % | Government obligations(2) | | 1,402,738 | | 2,687,013 | | 2,827,196 | | 93,539 | | 159,572 | | 170,088 | | | 6.67 | % | | | 5.94 | % | | | 6.02 | % | | 1,345,591 | | 1,402,738 | | 2,687,013 | | 54,323 | | 93,539 | | 159,572 | | | 4.04 | % | | | 6.67 | % | | | 5.94 | % | Mortgage-backed securities | | 3,923,423 | | 2,296,855 | | 2,540,394 | | 244,150 | | 117,383 | | 128,096 | | | 6.22 | % | | | 5.11 | % | | | 5.04 | % | | 4,254,044 | | 3,923,423 | | 2,296,855 | | 238,992 | | 244,150 | | 117,383 | | | 5.62 | % | | | 6.22 | % | | | 5.11 | % | Corporate bonds | | 7,711 | | 7,711 | | 8,347 | | 570 | | 510 | | 574 | | | 7.39 | % | | | 6.61 | % | | | 6.88 | % | | 4,769 | | 7,711 | | 7,711 | | 294 | | 570 | | 510 | | | 6.16 | % | | | 7.39 | % | | | 6.61 | % | FHLB stock | | 65,081 | | 46,291 | | 26,914 | | 3,710 | | 2,861 | | 2,009 | | | 5.70 | % | | | 6.18 | % | | | 7.46 | % | | 76,982 | | 65,081 | | 46,291 | | 3,082 | | 3,710 | | 2,861 | | | 4.00 | % | | | 5.70 | % | | | 6.18 | % | Equity securities | | 3,762 | | 8,133 | | 27,155 | | 47 | | 3 | | 350 | | | 1.25 | % | | | 0.04 | % | | | 1.29 | % | | 2,071 | | 3,762 | | 8,133 | | 126 | | 47 | | 3 | | | 6.08 | % | | | 1.25 | % | | | 0.04 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total investments(3) | | 5,689,217 | | 5,486,601 | | 6,874,539 | | 348,371 | | 302,484 | | 373,872 | | | 6.12 | % | | | 5.51 | % | | | 5.44 | % | | 5,865,662 | | 5,689,217 | | 5,486,601 | | 297,394 | | 348,371 | | 302,484 | | | 5.07 | % | | | 6.12 | % | | | 5.51 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential real estate loans | | 3,351,236 | | 2,914,626 | | 2,606,664 | | 215,984 | | 188,294 | | 171,333 | | | 6.44 | % | | | 6.46 | % | | | 6.57 | % | | Residential mortgage loans | | | 3,523,576 | | 3,351,236 | | 2,914,626 | | 213,583 | | 215,984 | | 188,294 | | | 6.06 | % | | | 6.44 | % | | | 6.46 | % | Construction loans | | 1,485,126 | | 1,467,621 | | 1,462,239 | | 82,513 | | 121,917 | | 126,592 | | | 5.56 | % | | | 8.31 | % | | | 8.66 | % | | 1,590,309 | | 1,485,126 | | 1,467,621 | | 52,908 | | 82,513 | | 121,917 | | | 3.33 | % | | | 5.56 | % | | | 8.31 | % | Commercial loans | | 5,473,716 | | 4,797,440 | | 5,593,018 | | 314,931 | | 362,714 | | 401,027 | | | 5.75 | % | | | 7.56 | % | | | 7.17 | % | | 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 | % | Finance leases | | 373,999 | | 379,510 | | 322,431 | | 31,962 | | 33,153 | | 28,934 | | | 8.55 | % | | | 8.74 | % | | | 8.97 | % | | 341,943 | | 373,999 | | 379,510 | | 28,077 | | 31,962 | | 33,153 | | | 8.21 | % | | | 8.55 | % | | | 8.74 | % | Consumer loans | | 1,709,512 | | 1,729,548 | | 1,783,384 | | 197,581 | | 202,616 | | 214,967 | | | 11.56 | % | | | 11.71 | % | | | 12.05 | % | | 1,661,099 | | 1,709,512 | | 1,729,548 | | 188,775 | | 197,581 | | 202,616 | | | 11.36 | % | | | 11.56 | % | | | 11.71 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total loans(4) (5) | | 12,393,589 | | 11,288,745 | | 11,767,736 | | 842,971 | | 908,694 | | 942,853 | | | 6.80 | % | | | 8.05 | % | | | 8.01 | % | | 13,460,562 | | 12,393,589 | | 11,288,745 | | 747,278 | | 842,971 | | 908,694 | | | 5.55 | % | | | 6.80 | % | | | 8.05 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-earning assets | | $ | 18,082,806 | | $ | 16,775,346 | | $ | 18,642,275 | | $ | 1,191,342 | | $ | 1,211,178 | | $ | 1,316,725 | | | 6.59 | % | | | 7.22 | % | | | 7.06 | % | | $ | 19,326,224 | | $ | 18,082,806 | | $ | 16,775,346 | | $ | 1,044,672 | | $ | 1,191,342 | | $ | 1,211,178 | | | 5.41 | % | | | 6.59 | % | | | 7.22 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing liabilities: | | | Interest-bearing checking accounts | | $ | 580,572 | | $ | 443,420 | | $ | 371,422 | | $ | 12,914 | | $ | 11,365 | | $ | 5,919 | | | 2.22 | % | | | 2.56 | % | | | 1.59 | % | | $ | 866,464 | | $ | 580,572 | | $ | 443,420 | | $ | 19,995 | | $ | 12,914 | | $ | 11,365 | | | 2.31 | % | | | 2.22 | % | | | 2.56 | % | Savings accounts | | 1,217,730 | | 1,020,399 | | 1,022,686 | | 18,916 | | 15,037 | | 12,970 | | | 1.55 | % | | | 1.47 | % | | | 1.27 | % | | 1,540,473 | | 1,217,730 | | 1,020,399 | | 19,032 | | 18,916 | | 15,037 | | | 1.24 | % | | | 1.55 | % | | | 1.47 | % | Certificates of deposit | | 9,484,051 | | 9,291,900 | | 10,479,500 | | 391,665 | | 498,048 | | 531,188 | | | 4.13 | % | | | 5.36 | % | | | 5.07 | % | | 1,680,325 | | 1,812,957 | | 1,652,430 | | 50,939 | | 73,466 | | 82,761 | | | 3.03 | % | | | 4.05 | % | | | 5.01 | % | Brokered CDs | | | 7,300,696 | | 7,671,094 | | 7,639,470 | | 227,896 | | 318,199 | | 415,287 | | | 3.12 | % | | | 4.15 | % | | | 5.44 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing deposits | | 11,282,353 | | 10,755,719 | | 11,873,608 | | 423,495 | | 524,450 | | 550,077 | | | 3.75 | % | | | 4.88 | % | | | 4.63 | % | | 11,387,958 | | 11,282,353 | | 10,755,719 | | 317,862 | | 423,495 | | 524,450 | | | 2.79 | % | | | 3.75 | % | | | 4.88 | % | Loans payable | | 10,792 | | — | | — | | 243 | | — | | — | | | 2.25 | % | | — | | — | | | 643,618 | | 10,792 | | — | | 2,331 | | 243 | | — | | | 0.36 | % | | | 2.25 | % | | — | | Other borrowed funds | | 3,864,189 | | 3,449,492 | | 4,543,262 | | 148,753 | | 172,890 | | 223,069 | | | 3.85 | % | | | 5.01 | % | | | 4.91 | % | | 3,745,980 | | 3,864,189 | | 3,449,492 | | 124,340 | | 148,753 | | 172,890 | | | 3.32 | % | | | 3.85 | % | | | 5.01 | % | FHLB advances | | 1,120,782 | | 723,596 | | 273,395 | | 39,739 | | 38,464 | | 13,704 | | | 3.55 | % | | | 5.32 | % | | | 5.01 | % | | 1,322,136 | | 1,120,782 | | 723,596 | | 32,954 | | 39,739 | | 38,464 | | | 2.49 | % | | | 3.55 | % | | | 5.32 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-bearing liabilities(6) | | $ | 16,278,116 | | $ | 14,928,807 | | $ | 16,690,265 | | $ | 612,230 | | $ | 735,804 | | $ | 786,850 | | | 3.76 | % | | | 4.93 | % | | | 4.71 | % | | $ | 17,099,692 | | $ | 16,278,116 | | $ | 14,928,807 | | $ | 477,487 | | $ | 612,230 | | $ | 735,804 | | | 2.79 | % | | | 3.76 | % | | | 4.93 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | $ | 579,112 | | $ | 475,374 | | $ | 529,875 | | | $ | 567,185 | | $ | 579,112 | | $ | 475,374 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate spread | | | 2.83 | % | | | 2.29 | % | | | 2.35 | % | | | 2.62 | % | | | 2.83 | % | | | 2.29 | % | Net interest margin | | | 3.20 | % | | | 2.83 | % | | | 2.84 | % | | | 2.93 | % | | | 3.20 | % | | | 2.83 | % |
| | | (1) | | On an adjusted tax equivalenttax-equivalent basis. The adjusted tax equivalenttax-equivalent yield was estimated by dividing the interest rate spread on exempt assets by (11 less the Puerto Rico statutory tax rate (39%as adjusted for 2008 and 2007, 43.5%changes to enacted tax rates (40.95% for the Corporation’s Puerto Rico banking subsidiarysubsidiaries other than IBEs in 20062009, 35.95% for the Corporation’s IBEs in 2009 and 41.5%39% for all other subsidiaries in 2006))2008 and 2007) and adding to it the cost of interest-bearing liabilities. When adjusted to aThe tax-equivalent adjustment recognizes the income tax equivalent basis, yields onsavings when comparing taxable and exempt assets are comparable.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 (including the ineffective portion after the adoption of hedge accounting in the second quarter of 2006),and unrealized gains or losses on SFAS 159 liabilities and basis adjustment amortization or accretionmeasured 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-accruing loans. | | (5) | | Interest income on loans includes $11.2 million, $10.2 million, and $11.1 million for 2009, 2008 and $14.9 million for 2008, 2007, and 2006, respectively, of income from prepayment penalties and late fees related to the Corporation’s loan portfolio. | | (6) | | Unrealized gains and losses on SFAS 159 liabilities measured at fair value are excluded from the average volumes. |
6169
Part II | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 Compared to 2007 | | 2007 Compared to 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Increase (decrease) | | Increase (decrease) | | | 2009 Compared to 2008 | | 2008 Compared to 2007 | | | | Due to: | | Due to: | | | Increase (decrease) | | Increase (decrease) | | | | Volume | | Rate | | Total | | Volume | | Rate | | Total | | | Due to: | | Due to: | | | | (In thousands) | | | Volume | | Rate | | Total | | Volume | | Rate | | Total | | | | | (In thousands) | | Interest income on interest-earning assets: | | | Money market & other short-term investments | | $ | (6,082 | ) | | $ | (9,718 | ) | | $ | (15,800 | ) | | $ | (50,485 | ) | | $ | (115 | ) | | $ | (50,600 | ) | | $ | (1,724 | ) | | $ | (4,054 | ) | | $ | (5,778 | ) | | $ | (6,082 | ) | | $ | (9,718 | ) | | $ | (15,800 | ) | Government obligations | | | (80,954 | ) | | 14,921 | | | (66,033 | ) | | | (8,259 | ) | | | (2,257 | ) | | | (10,516 | ) | | | (3,672 | ) | | | (35,544 | ) | | | (39,216 | ) | | | (80,954 | ) | | 14,921 | | | (66,033 | ) | Mortgage-backed securities | | 97,011 | | 29,756 | | 126,767 | | | (12,367 | ) | | 1,654 | | | (10,713 | ) | | 19,474 | | | (24,632 | ) | | | (5,158 | ) | | 97,011 | | 29,756 | | 126,767 | | Corporate bonds | | | — | | | 60 | | 60 | | | (41 | ) | | | (23 | ) | | | (64 | ) | | | (192 | ) | | | (84 | ) | | | (276 | ) | | — | | 60 | | 60 | | FHLB stock | | 1,115 | | | (266 | ) | | 849 | | 1,323 | | | (471 | ) | | 852 | | | 578 | | | (1,206 | ) | | | (628 | ) | | 1,115 | | | (266 | ) | | 849 | | Equity securities | | | (29 | ) | | 73 | | 44 | | | (145 | ) | | | (202 | ) | | | (347 | ) | | | (62 | ) | | 141 | | 79 | | | (29 | ) | | 73 | | 44 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total investments | | 11,061 | | 34,826 | | 45,887 | | | (69,974 | ) | | | (1,414 | ) | | | (71,388 | ) | | 14,402 | | | (65,379 | ) | | | (50,977 | ) | | 11,061 | | 34,826 | | 45,887 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential real estate loans | | 28,173 | | | (483 | ) | | 27,690 | | 20,070 | | | (3,109 | ) | | 16,961 | | | Residential mortgage loans | | | 10,716 | | | (13,117 | ) | | | (2,401 | ) | | 28,173 | | | (483 | ) | | 27,690 | | Construction loans | | 1,214 | | | (40,618 | ) | | | (39,404 | ) | | 457 | | | (5,132 | ) | | | (4,675 | ) | | 4,681 | | | (34,286 | ) | | | (29,605 | ) | | 1,214 | | | (40,618 | ) | | | (39,404 | ) | Commercial loans | | 45,020 | | | (92,803 | ) | | | (47,783 | ) | | | (58,602 | ) | | 20,289 | | | (38,313 | ) | | C&I and commercial mortgage loans | | | 43,028 | | | (94,024 | ) | | | (50,996 | ) | | 45,020 | | | (92,803 | ) | | | (47,783 | ) | Finance leases | | | (477 | ) | | | (714 | ) | | | (1,191 | ) | | 5,054 | | | (835 | ) | | 4,219 | | | | (2,654 | ) | | | (1,231 | ) | | | (3,885 | ) | | | (477 | ) | | | (714 | ) | | | (1,191 | ) | Consumer loans | | | (2,332 | ) | | | (2,703 | ) | | | (5,035 | ) | | | (6,396 | ) | | | (5,955 | ) | | | (12,351 | ) | | | (5,466 | ) | �� | | (3,340 | ) | | | (8,806 | ) | | | (2,332 | ) | | | (2,703 | ) | | | (5,035 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total loans | | 71,598 | | | (137,321 | ) | | | (65,723 | ) | | | (39,417 | ) | | 5,258 | | | (34,159 | ) | | 50,305 | | | (145,998 | ) | | | (95,693 | ) | | 71,598 | | | (137,321 | ) | | | (65,723 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest income | | 82,659 | | | (102,495 | ) | | | (19,836 | ) | | | (109,391 | ) | | 3,844 | | | (105,547 | ) | | 64,707 | | | (211,377 | ) | | | (146,670 | ) | | 82,659 | | | (102,495 | ) | | | (19,836 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense on interest-bearing liabilities: | | | Deposits | | 23,142 | | | (124,097 | ) | | | (100,955 | ) | | | (53,151 | ) | | 27,524 | | | (25,627 | ) | | Brokered CDs | | | | (14,707 | ) | | | (75,596 | ) | | | (90,303 | ) | | 1,591 | | | (98,679 | ) | | | (97,088 | ) | Other interest-bearing deposits | | | 12,285 | | | (27,615 | ) | | | (15,330 | ) | | 21,551 | | | (25,418 | ) | | | (3,867 | ) | Loans payable | | 243 | | — | | 243 | | — | | — | | — | | | 8,265 | | | (6,177 | ) | | 2,088 | | 243 | | — | | 243 | | Other borrowed funds | | 18,327 | | | (42,464 | ) | | | (24,137 | ) | | | (54,261 | ) | | 4,082 | | | (50,179 | ) | | | (4,439 | ) | | | (19,974 | ) | | | (24,413 | ) | | 18,327 | | | (42,464 | ) | | | (24,137 | ) | FHLB advances | | 17,599 | | | (16,324 | ) | | 1,275 | | 23,883 | | 877 | | 24,760 | | | 6,122 | | | (12,907 | ) | | | (6,785 | ) | | 17,599 | | | (16,324 | ) | | 1,275 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest expense | | 59,311 | | | (182,885 | ) | | | (123,574 | ) | | | (83,529 | ) | | 32,483 | | | (51,046 | ) | | 7,526 | | | (142,269 | ) | | | (134,743 | ) | | 59,311 | | | (182,885 | ) | | | (123,574 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in net interest income | | $ | 23,348 | | $ | 80,390 | | $ | 103,738 | | $ | (25,862 | ) | | $ | (28,639 | ) | | $ | (54,501 | ) | | $ | 57,181 | | $ | (69,108 | ) | | $ | (11,927 | ) | | $ | 23,348 | | $ | 80,390 | | $ | 103,738 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
A portion 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 sale of investments held by the Corporation’s international banking entities are tax-exempt under the Puerto Rico tax law.law (refer to the Income Taxes discussion below for additional information regarding recent legislation that imposes a temporary 5% tax rate on IBEs’ net income). To facilitate the comparison of all interest data related to these assets, the interest income has been converted to aan adjusted taxable equivalent basis. The tax equivalent yield was estimated by dividing the interest rate spread on exempt assets by (11 less the Puerto Rico statutory tax rate (39%as adjusted for 2008 and 2007, 43.5%recent changes to enacted tax rates (40.95% for the Corporation’s Puerto Rico banking subsidiarysubsidiaries other than IBEs in 20062009, 35.95% for the Corporation’s IBEs in 2009 and 41.5%39% for all other subsidiaries in 2006))2008 and 2007) and adding to it the average cost of interest-bearing liabilities. The computation considers the interest expense disallowance required by Puerto Rico tax law. A significant increase in revenues was observed in connection with the increase in tax-exempt MBS held by the Corporation’s international banking entities. Refer to “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 including the ineffective portion for designated hedges after the adoption of fair value accounting, the basis adjustment amortization or accretion, and unrealized gains or losses on SFAS 159 liabilities measured at fair value 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 the basis adjustment amortization or accretion, and unrealized gains or losses on SFAS 159 liabilities measured at fair value have no effect on interest due or interest earned on interest-bearing assets or interest-bearing liabilities, respectively, or on interest payments exchanged with interest rate swap counterparties. 70
The following table reconciles the interest income on an adjusted tax equivalenttax-equivalent basis set forth in Part I above to interest income set forth in the Consolidated Statements of (Loss) Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | (In thousands) | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | | | | | | | | Interest income on interest-earning assets on an adjusted tax equivalent basis | | $ | 1,191,342 | | $ | 1,211,178 | | $ | 1,316,725 | | | 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 | | | (56,408 | ) | | | (15,293 | ) | | | (27,987 | ) | | | (53,617 | ) | | | (56,408 | ) | | | (15,293 | ) | Less: net unrealized (loss) gain on derivatives (economic undesignated hedges) | | | (8,037 | ) | | | (6,638 | ) | | 75 | | | Plus (less): net unrealized gain (loss) on derivatives | | | 5,519 | | | (8,037 | ) | | | (6,638 | ) | | | | | | | | | | | | | | | | Total interest income | | $ | 1,126,897 | | $ | 1,189,247 | | $ | 1,288,813 | | | $ | 996,574 | | $ | 1,126,897 | | $ | 1,189,247 | | | | | | | | | | | | | | | | |
62
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, | | | Year Ended December 31, | | (In thousands) | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | | | | | | | | Unrealized (loss) gain on derivatives (economic undesignated hedges): | | | Unrealized gain (loss) on derivatives (economic undesignated hedges): | | | Interest rate caps | | $ | (4,341 | ) | | $ | (3,985 | ) | | $ | (472 | ) | | $ | 3,496 | | $ | (4,341 | ) | | $ | (3,985 | ) | Interest rate swaps on corporate bonds | | — | | — | | 27 | | | Interest rate swaps on loans | | | (3,696 | ) | | | (2,653 | ) | | 520 | | | 2,023 | | | (3,696 | ) | | | (2,653 | ) | | | | | | | | | | | | | | | | Net unrealized (loss) gain on derivatives (economic undesignated hedges) | | $ | (8,037 | ) | | $ | (6,638 | ) | | $ | 75 | | | 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 2007 and 2006.2007. As previously stated, the net interest margin analysis excludes the changes in the fair value of derivatives and unrealized gains or losses on SFAS 159 liabilities the ineffective portion of derivative instruments designated asmeasured at fair value hedges under SFAS 133, and the basis adjustment:value: | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | | | | | 2008 | | 2007 | | 2006 | | | Year Ended December 31, | | (In thousands) | | (In thousands) | | | 2009 | | 2008 | | 2007 | | | | | | | Interest expense on interest-bearing liabilities | | $ | 632,134 | | $ | 713,918 | | $ | 757,969 | | | $ | 460,128 | | $ | 632,134 | | $ | 713,918 | | Net interest (realized) incurred on interest rate swaps | | | (35,569 | ) | | 12,323 | | 8,926 | | | | (5,499 | ) | | | (35,569 | ) | | 12,323 | | Amortization of placement fees on brokered CDs | | 15,665 | | 9,056 | | 19,896 | | | 22,858 | | 15,665 | | 9,056 | | Amortization of placement fees on medium-term notes | | — | | 507 | | 59 | | | — | | — | | 507 | | | | | | | | | | | | | | | | | Interest expense excluding net unrealized (gain) loss on derivatives (designated and economic undesignated hedges), net unrealized (gain) loss on SFAS 159 liabilities and accretion of basis adjustment | | 612,230 | | 735,804 | | 786,850 | | | Net unrealized (gain) loss on derivatives (designated and economic undesignated hedges) and SFAS 159 liabilities | | | (13,214 | ) | | 4,488 | | 61,895 | | | 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 | ) | | | (3,626 | ) | | | (2,061 | ) | | — | | | (2,061 | ) | | | | | | | | | | | | | | | | Total interest expense | | $ | 599,016 | | $ | 738,231 | | $ | 845,119 | | | $ | 477,532 | | $ | 599,016 | | $ | 738,231 | | | | | | | | | | | | | | | | |
71
The following table summarizes the components of the net unrealized gain and loss on derivatives (designated and economic(economic undesignated hedges) and net unrealized gain and loss on SFAS 159 liabilities measured at fair value which are included in interest expense: | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2008 | | | 2007 | | | 2006 | | (In thousands) | | (In thousands) | | Unrealized gain on derivatives (designated hedges - - ineffective portion): | | | | | | | | | | | | | Interest rate swaps on brokered CDs | | $ | — | | | $ | — | | | $ | (3,989 | ) | Interest rate swaps on medium-term notes | | | — | | | | — | | | | (720 | ) | | | | | | | | | | | Net unrealized gain on derivatives (designated hedges - - ineffective portion) | | | — | | | | — | | | | (4,709 | ) | | | | | | | | | | | | | | | | | | | | | | | | Unrealized (gain) loss on derivatives (economic undesignated hedges): | | | | | | | | | | | | | Interest rate swaps and other derivatives on brokered CDs | | | (62,856 | ) | | | (66,826 | ) | | | 62,521 | | Interest rate swaps and other derivatives on medium-term notes | | | (392 | ) | | | 692 | | | | 4,083 | | | | | | | | | | | | Net unrealized (gain) loss on derivatives (economic undesignated hedges) | | | (63,248 | ) | | | (66,134 | ) | | | 66,604 | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized (gain) loss on SFAS 159 liabilities: | | | | | | | | | | | | | Unrealized loss on brokered CDs | | | 54,199 | | | | 71,116 | | | | — | | Unrealized gain on medium-term notes | | | (4,165 | ) | | | (494 | ) | | | — | | | | | | | | | | | | Net unrealized loss on SFAS 159 liabilities | | | 50,034 | | | | 70,622 | | | | — | | | | | | | | | | | | Net unrealized (gain) loss on derivatives (designated and economic undesignated hedges) and SFAS 159 liabilities | | $ | (13,214 | ) | | $ | 4,488 | | | $ | 61,895 | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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 | | | | | | | | | | | |
63
The following table summarizes the components of the accretion of basis adjustment which are included in interest expense in 2007 and 2006:2007: | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | | 2007 | | | | (In thousands) | | | (In thousands) | | Accretion of basis adjustments on fair value hedges: | | | Accreation of basis adjustments on fair value hedges: | | | Interest rate swaps on brokered CDs | | $ | — | | $ | — | | $ | (3,576 | ) | | $ | — | | Interest rate swaps on medium-term notes | | — | | | (2,061 | ) | | | (50 | ) | | | (2,061 | ) | | | | | | | | | | | | Accretion of basis adjustment on fair value hedges | | $ | — | | $ | (2,061 | ) | | $ | (3,626 | ) | | $ | (2,061 | ) | | | | | | | | | | | |
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, 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 pay-float swaps that economically hedge (economically or under fair value hedge accounting) 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 under SFAS 159)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 under SFAS 159.option. Unrealized gains or losses on derivatives represent: (1) for economic or undesignated hedges, including derivative instruments economically hedging SFAS 159 liabilities —represents changes in the fair value of derivatives, primarily interest rate swaps, that economically hedge liabilities (i.e., brokered CDs and medium-term notes) or assets (i.e., loans and corporate bonds), and (2) for designated hedges — the ineffectiveness represented by the difference between the changes in the fair value of the derivative instrument (i.e., interest rate swaps) and changes in fair value of the hedged item (i.e., brokered CDs and medium-term notes)investments). Unrealized gains or losses on SFAS 159 liabilities representmeasured 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 which the Corporation elected the fair value option under SFAS 159.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. For 2006, the basis adjustment represents the amortization or accretion of the basis differential between the market value and the book value of the hedged liabilities recognized at the inception of fair value hedge accounting, which was amortized or accreted to interest expense based on the expected maturity of the hedged liabilities as changes in value after the inception of the long-haul method. 72
As shown on the tables above, the results of operations for 2008, 2007, and 2006 were impacted by changes in the valuation of derivative instruments that hedge economically or under fair value designation the Corporation’s brokered CDs and medium-term notes and by unrealized gains and losses on SFAS 159 liabilities. The adoption of fair value hedge accounting during the second quarter of 2006 and SFAS 159, effective January 1, 2007, reduced the earnings volatility caused by fluctuations in the value of derivative instruments.
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. The Corporation’s derivativesAs of December 31, 2009, most of the interest rate swaps outstanding are mainly composedused for protection against rising interest rates. In the past, the volume of interest rate swaps that arewas much higher, as they were used to 64
convert the fixed interest payment on itsfixed-rate of a large portfolio of brokered CDs, mainly those with long-term maturities, to a variable rate and medium-term notesmitigate the interest rate risk related to variable payments (receive fixed/pay floating).rate loans. However, most of these interest rate swaps were called during 2009, due to lower interest rate levels. Refer to Note 3032 of the Corporation’s audited financial statements for the year ended December 31, 20082009 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 levelexpectations for rates in the future. 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 points 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 is actively increasing spreads on loans renewals. The Corporation increased the use of interest rates.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 to 2.79% for 2009 from 3.76% for 2008, primarily due to the decline 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 deposit to reduce reliance on brokered CDs. Partially offsetting the compression in 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’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 iswas related to fluctuations in the fair value of derivative instruments and financial liabilities elected to be measured at fair value under SFAS 159.value. The Corporation’s net interest spread and margin for 2008, on an adjusted tax equivalent basis, for 2008 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, to 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 has decreased by approximately $3.0 billion to $1.1 billion as of December 31, 2008 from $4.1 billion a year ago. This strategy has better positioned the Corporation for possible adverse changes in interest rates in the future.as of December 31, 2007. On the asset side, the average yield onof 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 ana lesser extent, by the increase in the volume of non-performing loans. Lower loanloans 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. Expected acceleration in MBS prepayments in 2009 may require the reinvestment of proceeds at lower prevailing rates, but the Corporation will strive to protect the net interest rate spread through its re-investment strategy and through new loan originations. 65
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 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 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. 2007 compared to 2006
Net interest income increased to $451.0 million for 2007 from $443.7 million in 2006. The increase in net interest income for 2007, as compared to 2006, was mainly driven by the effect in 2006 earnings of unrealized non-cash losses related to changes in the fair value of derivative instruments prior to the implementation of fair value hedge accounting using the long-haul method on April 3, 2006. During the first quarter of 2006, the Corporation recorded changes in the fair value of derivative instruments as non-hedging instruments through operations recording unrealized losses of $69.7 million for derivatives as part of interest expense. The adoption of fair value hedge accounting in the second quarter of 2006 and the adoption of SFAS 159 in 2007 reduced the accounting volatility that previously resulted from the accounting asymmetry created by accounting for the financial liabilities at amortized cost and the derivatives at fair value. The change in the valuation of derivative instruments, the net unrealized loss on SFAS 159 liabilities, the basis adjustment and the ineffective portion on designated hedges recorded as part of net interest income (“the valuation changes”) resulted in a net non-cash loss of $9.1 million for 2007, compared to a net unrealized loss of $58.2 million for 2006.
For the year ended December 31, 2007, net interest income on an adjusted tax equivalent basis decreased 10% as compared to the previous year from $529.9 million to $475.4 million. Net interest income on an adjusted tax equivalent basis excludes the valuation changes. The decrease in net interest income on an adjusted tax equivalent basis was mainly driven by the continued pressure of the flattening of the yield curve during most of 2007 and the decrease in the average volume of interest-earning assets primarily due to the repayment of approximately $2.4 billion received from a local financial institution reducing the balance of its secured commercial loan with the Corporation during the latter part of the second quarter of 2006. This partially extinguished secured commercial loan yielded 150 basis points over 3-month LIBOR. The repayment caused a reduction in net interest income of approximately $15.0 million when comparing results for the year ended December 31, 2007 to previous year results. Furthermore, the adjusted tax equivalent basis includes an adjustment that 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. The tax equivalent adjustment declined to $15.3 million for 2007 from $28.0 million for 2006 mainly due to the decrease in the interest rate spread on tax-exempt assets resulting from the sustained flatness of the yield curve as well as changes in the proportion of tax-exempt assets to total assets and changes in the statutory income tax rate in Puerto Rico.
Notwithstanding the decrease in adjusted tax equivalent net interest income in absolute terms, the Corporation was able to maintain its net interest margin on an adjusted tax equivalent basis at a relatively stable level. Net interest margin for the year ended December 31, 2007 was 2.83%, compared to 2.84% for the previous year reflecting the effect of the Corporation’s decision to deleverage its balance sheet as well as the effect of the steepened yield curve during the last quarter of 2007. During the second half of 2007, the Corporation sold approximately $556 million and $400 million of low-yielding mortgage-backed securities and U.S. Treasury investments, respectively, and used the proceeds in part to pay down high cost borrowings as they matured. The Corporation re-invested approximately $566 million in higher-yielding U.S. Agency mortgage-backed securities. The Corporation was able to mitigate the pressure of the sustained flatness of the yield curve during most of 2007 by the redemption of its $150 million medium-term notes which carried a cost higher than the overall cost of funding and by the increase in the amount of structured repos entered into by the Corporation which price below LIBOR or are structured to lock-in interest rates that are lower than yields on the securities serving as collateral for an extended period.
Total interest income on an adjusted tax equivalent basis decreased by $105.5 million, mainly due to a decrease in average interest-earning assets. The Corporation’s average interest-earning assets decreased by $1.9 billion or
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10% for 2007 compared to 2006. For the investment portfolio, the decrease in average volume was mainly driven by the use of short-term investments to repay short-term brokered CDs as these matured and the sale of low-yield mortgage-backed securities and U.S. government obligations representing a decrease of approximately $70.0 million in interest income on investments. After receiving the repayment of $2.4 billion from a local financial institution, the Corporation invested the proceeds in money market investments. During the second half of 2006, the Corporation used part of the proceeds to repay short-term brokered certificates of deposit, mainly issued in 2006, as these matured. For the loan portfolio, the decrease in average volume, was mainly driven by the aforementioned payment of $2.4 billion received in 2006 from a local financial institution reducing the balance of a secured commercial loan, partially offset by loan originations that resulted in increases in the average balance of the residential, construction and consumer loan portfolios. Declining loan yields on the Corporation’s residential, construction and consumer loan portfolios attributable to the increase in the balance of non-performing loans also adversely affected interest income during 2007.
The Corporation’s total interest expense, excluding changes in the fair value of derivatives and the ineffective portion and basis adjustment amortization or accretion, decreased by $51.0 million or 6% in 2007 compared to 2006. The decrease in interest expense was due to the deleverage of the Corporation’s balance sheet by selling low-yielding investment securities and using part of the proceeds to pay down high cost borrowings as they matured. This was partially offset by a higher average cost of borrowings due to higher short-term interest rates experienced during most of 2007 as compared to 2006. During 2007, as compared to 2006, the average volume of deposits decreased by $1.1 billion and the related average rate increased by 25 basis points, the average volume of other borrowed funds decreased by $1.1 billion and the related average rate increased by 10 basis points and the average volume of FHLB advances increased by $450.2 million and the related average rate increased by 31 basis points. The decrease in the average volume of interest-bearing liabilities resulted in a decrease in total interest expense due to volume of $83.5 million that was partially offset by the increase in the average cost of funds which resulted in an increase in interest expense due to rate of $32.5 million.
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 historical loantrends in charge-offs and lease loss experience,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, (principally the state of Florida), the U.S. Virgin Islands and the British Virgin Islands, may contribute to delinquencies and defaults, thus necessitating additional reserves. During 2008,2009, the Corporation provided $190.9 millionrecorded a provision for loan and lease losses of $579.9 million, compared to $190.9 million in 2008 and $120.6 million in 2007. 2009 compared to 2008 The increase, as compared to $120.62008, 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 million compared to 2008. This increase accounts for approximately 83% 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 20072008, an increase of $241.0 million mainly related to the C&I and $75.0construction loans portfolio. The provision for C&I loans in Puerto Rico increased by $116.5 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). 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 2006.2009, 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, and non-performing assets, impaired loans and related ratios.information. 2008 compared to 2007 The increase, as compared to 2007, iswas 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 67
exposure of the Corporation to condo-conversion loans in the United States iswas approximately $197.4 million or less than 2% of the total loan portfolio. A total of approximately $154.4 million of this condo-conversioncondo conversion portfolio iswas considered impaired under SFAS 114 with a specific reserve of $36.0 million allocated to these impaired loans during 2008. Current absorptionAbsorption rates in condo-conversion loans in the United States arewere low and properties collateralizing some loans originally disbursed as condo-conversion have beenwere 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. As of December 31, 2008, approximately $47.8 million of loans originally disbursed as condo-conversion construction loans have been reverted to income-producing commercial loans. 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. The Corporation’s loan portfolio in the United States mainland, mainly in the state of Florida, totals $1.5 billion, or 11% of the total loan portfolio. 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, which are expected to continue at least through the remainder of 2009. The Puerto Rico housing market has not seen the dramatic decline in housing prices that is affecting the U.S. mainland; however, there has been a lower demand for houses due to diminished consumer purchasing power and confidence.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. 2007 compared to 2006
First BanCorp’s provision for loan and lease losses for the year ended December 31, 2007 increased by $45.6 million, or 61%, compared to 2006. The increase in the provision was primarily due to deterioration in the credit quality of the Corporation’s loan portfolio associated with the weakening economic conditions in Puerto Rico and the slowdown in the United States housing sector. In particular, the increase was mainly related to specific and general provisions related to the construction loan portfolio of the Corporation’s Corporate Banking operations in Miami, Florida and increases in the general reserves allocated to the consumer loan portfolio.
During the third quarter of 2007, the Corporation recorded an impairment of $8.1 million on four condo-conversion loans, with an aggregate principal balance of $60.5 million at the time of the impairment evaluation, extended to a single borrower through its Corporate banking operations in Miami, Florida based on an updated impairment analysis that incorporated new appraisals. The increase in non-accrual loans and charge-offs during 2007, other than the aforementioned troubled loan relationship, as compared to 2006, was attributable to weak economic conditions in Puerto Rico. Puerto Rico is in the midst of a recession caused by, among other things, higher utilities prices, higher taxes, government budgetary imbalances, and higher levels of oil prices.
The above-mentioned troubled relationship comprised four condo-conversion loans that the Corporation had placed in non-accrual status during the second and third quarters of 2007. For the third quarter of 2007, the Corporation updated the impairment analysis on the relationship and requested new appraisals that reflected collateral deficiency as compared to the Corporation’s recorded investment in the loans. The aggregate unpaid principal balance of the relationship classified as non-accrual decreased to $46.4 million as of December 31, 2007, net of a charge-off of $3.3 million recorded to this relationship in the fourth quarter of 2007. The charge-off was recorded at the time of sale of one of the loans in the relationship. This sale was made at a price that exceeded the recorded investment in the loan (loan receivable less specific reserve) by approximately $1 million.
In 2008, the Corporation sold another of the impaired loans with a carrying value of $21.8 million for $22.5 million. The other two loans were foreclosed during 2008 and one of the projects with a carrying value of $3.8 million was sold in the fourth quarter of 2008 and a $0.4 million loss was recorded on the sale. The Corporation expects to complete the sale of the last remaining foreclosed condo-conversion project of the aforementioned troubled relationship in the U.S. mainland in the first half of 2009.
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Non-interest Income The following table presents the composition of non-interest income: | | | | | | | | | | | | | | | | 2008 | | 2007 | | 2006 | | | | | | | | | | | | | | | | (In thousands) | | | 2009 | | 2008 | | 2007 | | | | | (In thousands) | | Other service charges on loans | | $ | 6,309 | | $ | 6,893 | | $ | 5,945 | | | $ | 6,830 | | $ | 6,309 | | $ | 6,893 | | Service charges on deposit accounts | | 12,895 | | 12,769 | | 12,591 | | | 13,307 | | 12,895 | | 12,769 | | Mortgage banking activities | | 3,273 | | 2,819 | | 2,259 | | | 8,605 | | 3,273 | | 2,819 | | Rental income | | 2,246 | | 2,538 | | 3,264 | | | 1,346 | | 2,246 | | 2,538 | | Insurance income | | 10,157 | | 10,877 | | 11,284 | | | 8,668 | | 10,157 | | 10,877 | | Other operating income | | 18,570 | | 13,595 | | 14,327 | | | 18,362 | | 18,570 | | 13,595 | | | | | | | | | | | | | | | | | | | | 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 | | 53,450 | | 49,491 | | 49,670 | | | 57,118 | | 53,450 | | 49,491 | | | | | | | | | | | | | | | | | | | | Gain on VISA shares and other proceeds | | 9,474 | | — | | — | | | Gain on VISA shares and related proceeds | | | 3,784 | | 9,474 | | — | | Net gain on sale of investments | | 17,706 | | 3,184 | | 7,057 | | | 83,020 | | 17,706 | | 3,184 | | Impairment on investments | | | (5,987 | ) | | | (5,910 | ) | | | (15,251 | ) | | OTTI on equity securities and corporate bonds | | | | (388 | ) | | | (5,987 | ) | | | (5,910 | ) | OTTI on debt securities | | | | (1,270 | ) | | — | | — | | | | | | | | | | | | | | | | | Net gain (loss) on investments | | 21,193 | | | (2,726 | ) | | | (8,194 | ) | | 85,146 | | 21,193 | | | (2,726 | ) | Insurance reimbursement and other agreements related to a contingency settlement | | — | | 15,075 | | — | | | — | | — | | 15,075 | | Gain on partial extinguishment and recharacterization of secured commercial loans to local financial institutions | | — | | 2,497 | | | (10,640 | ) | | — | | — | | 2,497 | | Gain on sale of credit card portfolio | | — | | 2,819 | | 500 | | | — | | — | | 2,819 | | | | | | | | | | | | | | | | | | | | Total | | $ | 74,643 | | $ | 67,156 | | $ | 31,336 | | | $ | 142,264 | | $ | 74,643 | | $ | 67,156 | | | | | | | | | | | | | | | | |
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.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, and Rental Corporation, on the 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.fees and includes commissions from the Corporation’s broker-dealer subsidiary, FirstBank Puerto Rico Securities. 69
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 impairment charges (OTTI) on the Corporation’s investment portfolio. 2009 compared to 2008 Non-interest income increased $67.6 million to $142.3 million for 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 Year 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 in 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 iswas 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 to the lowest levels since February 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. Other-than-temporary impairmentOTTI 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) werewas 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 78
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 as described below.2007. 2007 compared to 2006
First BanCorp’s non-interest income for 2007 amounted to $67.2 million, compared to $31.3 million for 2006. The increase in non-interest income was mainly attributable to income recognition of approximately $15.1 million for agreements reached with insurance carriers and former executives for reimbursement of expenses related to the settlement of the class action lawsuit brought against the Corporation coupled with lower other-than-temporary impairment charges on certain of the Corporation’s equity securities portfolio, as compared to 2006. For 2007, other-than-temporary impairment charges on equity securities decreased by $9.3 million, as compared to impairment charges recognized for 2006. Also, a net change of $13.1 million in net gains and losses related to partial repayments of certain secured commercial loans extended to local financial institutions (2007-net gain of $2.5 million; 2006—net loss of $10.6 million), a higher gain on the sale of its credit card portfolio and higher income from service charges on loans contributed to the increase in non-interest income during 2007 as compared to 2006.
During 2006, the Corporation recorded a net loss of $10.6 million on the partial extinguishment of a secured commercial loan extended to a local financial institution as a result of a series of credit agreements reached with Doral to formally document as secured borrowings the loan transfers between the parties that previously had been accounted for erroneously as sales. The terms of the credit agreements specified: (1) a floating interest payment based on a spread over 90-day LIBOR subject to a cap; (2) an amortization schedule tied to the scheduled amortization of the underlying mortgage loans subject to a maximum maturity of 10 years; (3) mandatory prepayments as a result of actual prepayments from the underlying mortgages; and (4) an option to Doral to prepay the loan without penalty at any time.
On May 31, 2006, First BanCorp received a cash payment from Doral, substantially reducing the balance of approximately $2.9 billion in secured commercial loans to approximately $450 million as of that date. In connection with the repayment, the Corporation and Doral entered into a sharing agreement on May 25, 2006 with respect to certain profits or losses that Doral would incur as part of the sales of the mortgages that previously collateralized the commercial loans. First BanCorp agreed to reimburse Doral for 40% of the net losses incurred by Doral as a result of sales or securitization of the mortgages, subject to certain conditions and subject to a maximum reimbursement of $9.5 million, which would be reduced proportionately to the extent that Doral did not sell the mortgages. As a result of the loss sharing agreement and the extinguishment of the secured commercial loans by Doral, the Corporation
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recorded a net loss of $10.6 million, composed of losses realized as part of the loss sharing agreement and the difference between the carrying value of the loans and the net payment received from Doral.
In connection with the repayment, Doral and First BanCorp also agreed to share the profits, if any, received from any subsequent sales or securitization of the mortgage loans, in the same proportion that the Corporation shared in the losses, subject to a maximum of $9.5 million.
During the first quarter of 2007, the Corporation entered into various agreements with R&G Financial Corporation (“R&G Financial”) relating to prior transactions accounted for as commercial loans secured by mortgage loans and pass-through trust certificates from R&G Financial subsidiaries. First, through a mortgage payment agreement, R&G Financial paid the Corporation approximately $50 million to reduce the commercial loan that R&G Premier Bank, R&G Financial’s banking subsidiary, had outstanding with the Corporation. In addition, the remaining balance of the loans secured by mortgage loans of approximately $271 million was re-documented as a secured loan from the Corporation to R&G Financial. The terms of the credit agreement specified: (1) a floating interest payment based on a spread over 90-day LIBOR; (2) repayment of the loan in arrears in sixty equal consecutive monthly installments of principal (scheduled amortization plus any unscheduled principal recoveries) and interest maturing on February 22, 2012; (3) delivery by R&G Financial to the Corporation and maintenance at all times of a first priority security interest with a collateral value as a percentage of loans of 103% for FHA/VA mortgage loans, 105% for conventional conforming mortgage loans and 111% of conventional non-conforming mortgage loans; and (4) R&G Financial may, at its option, prepay the loan without premium or penalty. Second, R&G Financial and the Corporation amended various agreements involving, as of the date of the transaction, approximately $183.8 million of securities collateralized by loans that were originally sold through five grantor trusts. The modifications to the original agreements allow the Corporation to treat these transactions as “true sales” for accounting and legal purposes and recharacterize the loans as securities collateralized by loans. As a result of the agreements and the partial extinguishment of the secured commercial loan, the Corporation recorded a net gain of $2.5 million related to the difference between the carrying value of the loans, the net payment received and the fair value of the securities received from R&G Financial.
For 2007, the Corporation recorded a gain of $2.8 million on the sale of the credit card portfolio pursuant to a strategic alliance reached with a U.S. financial institution, compared to a gain of $0.5 million recorded in 2006.
Higher income from service charges on loans, which increased by $0.9 million or 16% as compared to 2006, was due to the increase in the loan portfolio volume driven by new originations. Loan originations for 2007 amounted to $4.1 billion.
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Non-Interest Expense The following table presents the components of non-interest expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | Employees’ compensation and benefits | | $ | 141,853 | | $ | 140,363 | | $ | 127,523 | | | $ | 132,734 | | $ | 141,853 | | $ | 140,363 | | Occupancy and equipment | | 61,818 | | 58,894 | | 54,440 | | | 62,335 | | 61,818 | | 58,894 | | Deposit insurance premium | | 10,111 | | 6,687 | | 1,614 | | | 40,582 | | 10,111 | | 6,687 | | Other taxes, insurance and supervisory fees | | 22,868 | | 21,293 | | 17,881 | | | 20,870 | | 22,868 | | 21,293 | | Professional fees — recurring | | 12,572 | | 13,480 | | 11,455 | | | 12,980 | | 12,572 | | 13,480 | | Professional fees — non-recurring | | 3,237 | | 7,271 | | 20,640 | | | 2,237 | | 3,237 | | 7,271 | | Servicing and processing fees | | 9,918 | | 6,574 | | 7,297 | | | 10,174 | | 9,918 | | 6,574 | | Business promotion | | 17,565 | | 18,029 | | 17,672 | | | 14,158 | | 17,565 | | 18,029 | | Communications | | 8,856 | | 8,562 | | 9,165 | | | 8,283 | | 8,856 | | 8,562 | | Net loss on REO operations | | 21,373 | | 2,400 | | 18 | | | 21,863 | | 21,373 | | 2,400 | | Other | | 23,200 | | 24,290 | | 20,258 | | | 25,885 | | 23,200 | | 24,290 | | | | | | | | | | | | | | | | | Total | | $ | 333,371 | | $ | 307,843 | | $ | 287,963 | | | $ | 352,101 | | $ | 333,371 | | $ | 307,843 | | | | | | | | | | | | | | | | |
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 to 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. 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 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 iswas 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 onof the value of repossessed properties. A significant portion of the losses iswas related to foreclosed properties from the Corporate Banking operations in Miami,Florida, including a $5.3 million write-down to the value of the last remaininga single foreclosed project in the United States as of December 31, 2008 which is expected to be sold in the first half of 2009.2008. 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. On February 27, 2009, the FDIC approved an emergency special assessment of 20 cents per $100 insured deposits that would be collected in the third quarter of 2009 and agreed to increase fees it will begin charging banks in April to a range of 12 cents to 16 cents per $100 deposit. The Corporation expects an estimated charge of approximately $25 million resulting from the emergency special assessment in 2009 and an increase of approximately $13 million in the deposit insurance premium expense for 2009, as compared to 2008, as a result of the increase in the regular assessment rate. 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 benefitsbenefit 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 in substantial additional operating expenses. The Corporation’s total headcount has 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. 72
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. 80
2007 compared to 2006
The Corporation’s non-interest expenses for 2007 increased by $19.9 million, or 7%, compared to 2006. The increase in non-interest expenses was mainly due to increases in employees’ compensation and benefits as well as deposit insurance premium expenses, occupancy and equipment expenses, other taxes and insurance fees, partially offset by a decrease in professional fees.
Employees’ compensation and benefits expenses for 2007 increased by $12.8 million, or 10%, compared to 2006. The increase in employees’ compensation and benefits expenses was primarily due to increases in the average compensation and related fringe benefits paid to employees coupled with the accrual of approximately $3.3 million for a voluntary separation program established by the Corporation as part of its cost saving strategies.
For the year ended December 31, 2007, the deposit insurance premium expense increased by $5.1 million, as compared to 2006. The increase in the deposit insurance premium expense was due to changes in the premium calculation adopted by the FDIC during 2007.
Occupancy and equipment expenses for 2007 increased by $4.5 million, or 8%, compared to 2006. The increase in occupancy and equipment expenses in 2007 is mainly attributable to increases in costs associated with the expansion of the Corporation’s branch network and loan origination offices.
Other taxes, insurance and supervisory fees increased by $3.4 million, or 19%, compared to 2006 due to a higher expense related to prepaid municipal and property taxes recorded during 2007.
For 2007, other expenses increased by $6.4 million, or 32%, compared to 2006. The increase in other expenses for 2007 was mainly due to a $3.3 million increase related to costs associated with capital raising efforts in 2007 not qualifying for capitalization coupled with increased costs associated with foreclosure actions on the aforementioned troubled loan relationship in Miami, Florida.
Professional fees decreased during 2007 by $11.3 million, or 35%, compared to 2006. The decrease was primarily attributable to lower legal, accounting and consulting fees due to the conclusion during the third quarter of 2006 of the internal review conducted by the Corporation’s Audit Committee and the restatement process.
Income Tax ProvisionTaxes 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, withwithin 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 thisthat jurisdiction. Any such tax paid is 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 Code”), First BanCorp is subject to a maximum statutory tax rate of 39%, except that in 2005 and 2006 an additional transitory tax rate of 2.5% was signed into law by. In 2009 the Governor of Puerto Rico. In August 2005, the Government of 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 transitoryseries of temporary and permanent measures, including the imposition of a 5% surtax over the total income tax rate of 2.5% that increaseddetermined, 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 39.0%39% to 41.5% for a two-year period. On May 13, 2006, with40.95% and an effective date of January 1, 2006, the Governor of Puerto Rico approved an additional transitory tax rate of 2.0% applicable only to companies covered by the Puerto Rico Banking Act, as amended, such as FirstBank, which raised the maximumincrease in capital gain statutory tax rate from 15% to 43.5%15.75%. This temporary measure is effective for the 2006 taxable year.tax years that commenced after December 31, 2008 and before January 1, 2012. The PR Code also includes an alternative minimum tax 73
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 IBEs of the Corporation and the Bank 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 IBEs are subject to a 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 IBEs 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. For additional information relating to income taxes, see Note 2527 to the Corporation’s audited financial statements for the year ended December 31, 20082009 included in Item 8 of this Form 10-K, including the reconciliation of the statutory to the effective income tax rate for 2009, 2008 and 2007. 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. Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax assets 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 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 recognized tax benefits only when deemed probable. 81
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 the year 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. As of December 31, 2009, management concluded that $109.2 million of the deferred tax assets will be realized. In assessing the likelihood of realizing the deferred tax assets, management 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 files 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 need to be established which may have a material adverse effect on the Corporation’s results of operations. Similarly, 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 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. Partially offsetting the impact of the increase in the valuation allowance, was the reversal of approximately $19 million of Unrecognized Tax Benefits (“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 2006.2008. 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 iswas 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, recorded under the provisions of FIN 48, 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 byof 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. The amounts of UTBs may increase or decrease in the future for various reasons, including changes in the amounts for current tax year positions, the expiration of open income tax returns due to the statute 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. For the outstanding UTBs of $22.4 million (including $6.8 million of accrued interest), the Corporation cannot make any reasonable reliable estimate of the timing of future cash flows or changes, if any, associated with such obligations. As of December 31, 2008, the Corporation evaluated its ability to realize the deferred tax asset and concluded, based on the evidence available, that it is more likely than not that some of the deferred tax asset will not be realized and thus, established a valuation allowance of $7.3 million, compared to a valuation allowance amounting to $4.9 million as of December 31, 2007. As of December 31, 2008, the deferred tax asset, net of the valuation allowance of $7.3 million, amounted to approximately $128.0 million compared to $90.1 million as of December 31, 2007.
For additional information relating to income taxes, refer to Note 25 of the Corporation’s audited financial statements for the year ended December 31, 2008 included in Item 8 of this Form 10-K.
2007 compared to 2006
For the year ended December 31, 2007, the Corporation recognized an income tax expense of $21.6 million, compared to $27.4 million in 2006. The decrease in income tax expense was mainly due to lower taxable income coupled with the effect of a lower statutory tax rate in Puerto Rico for 2007 (39% in 2007 compared to 43.5% in 2006). As of December 31, 2007, the Corporation evaluated its ability to realize the deferred tax asset and concluded, based on the evidence available, that it is more likely than not that some of the deferred tax asset will not be realized and thus, established a valuation allowance of $4.9 million, compared to a valuation allowance amounting to $6.1 million as of December 31, 2006. As of December 31, 2007, the deferred tax asset, net of the valuation allowance of $4.9 million, amounted to approximately $90.1 million compared to $162.1 million as of December 31, 2006. The significant
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decrease in the deferred tax asset is due to the reversal during the third quarter of 2007 of the deferred tax asset related to the class action lawsuit contingency of $74.25 million recorded as of December 31, 2005 and due to the tax impact of the adoption of SFAS 159, on January 1, 2007, of approximately $58.7 million. The Corporation reached an agreement with the lead class action plaintiff during 2007 and payments totaling the previously reserved amount of $74.25 million were made.
OPERATING SEGMENTS Based upon the Corporation’s organizational structure and the information provided to the Chief Operating Decision MakerExecutive Officer of the Corporation and, to a lesser extent, to the Board of Directors, the operating segments are driven primarily by the Corporation’s legal entities.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, 2008,2009, the Corporation had foursix reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; and Treasury and Investments. There is also an Other category reflecting other legal entities reported separately on a combined basis.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. For information regarding First BanCorp’s reportable segments, please refer to Note 3133 “Segment Information” to the Corporation’s audited financial statements for the year ended December 31, 20082009 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, 20082009 included in Item 8 of this Form 10-K. The Corporation evaluates the performance of the segments based on net interest income, after 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 loanslends 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. The Consumer (Retail) Banking segment also loanslends funds to other segments. The interest rates charged or credited by Treasury and Investment and the Consumer (Retail) Banking 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 Other category is mainly composed of the operations of FirstBank Florida as well as finance leases and insurance and other miscellaneous products that were adversely affected by deteriorating economic conditions. This category, in particular FirstBank Florida was negatively impacted by the increase in the provision for loan and lease losses due to the deterioration in the credit quality of this portfolio and declining prices in the real estate market in the United States. In addition, an other-than-temporary impairment charges of $4.2 million were recorded in connection with auto industry corporate bonds held by FirstBank Florida. Consumer(Retail)Banking The Consumer (Retail) Banking segment mainly consists of the Corporation’s consumer lending and deposit-taking activities conducted mainly through its branch network and loan centers.centers in Puerto Rico. Loans to consumers include auto, boat, lines of credit, personal loans and personal loans.finance leases. Deposit products include interest bearing and non-interest bearing checking and savings accounts, Individual Retirement Accounts (IRA) and retail certificates of deposit. Retail 83
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 providingseeking 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 CorporationCorporation’s commercial relations with floor plan dealers isare strong and directly benefitsbenefit the Corporation’s consumer lending operation and are managed as part of the consumer banking activities. 75
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 which are issued under the Bank’s name through an alliance with FIA Card Services (Bank of America), whowhich bears the credit risk, grew more than 100% from December 31, 2007.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, 20082009 include the following: | • | | Segment income before taxes for the year ended December 31, 20082009 was $46.7$20.9 million compared to $82.9$21.8 million and $139.6$37.8 million for the years ended December 31, 20072008 and 2006,2007, respectively. | | | • | | Net interest income for the year ended December 31, 20082009 was $173.0$149.6 million compared to $205.3$166.0 million and $238.5$174.3 million for the years ended December 31, 20072008 and 2006,2007, respectively. The decrease in net interest income reflects a diminished consumer loan portfolio due to principal repayments and charge-offs relating to the auto and personal loans portfolio coupled with the sale of approximately $15.6 million during 2007 of the Corporation’s credit card portfolio.(including finance leases). This portfolio is mainly composed of fixed-rate loans financed with shorter-term borrowings;borrowings thus positively affected in a declining interest rate scenario,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. | | | • | | The provision for loan and lease losses for 20082009 decreased by $4.3$18.0 million compared to the same period in 20072008 and increased by $20.2$6.7 million when comparing 20072008 with the same period in 2006.2007. The decrease in 2008, as compared to 2007, isthe provision 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 originations using these new underwriting standards of new consumer loans to replace maturing consumer loans. This portfolioloans that had an average life of approximately four years. The increase in the provision for loan and lease losses for 2007,2008, compared to 2006,2007, was mainly due to a higher general reserve for the Puerto Rico consumer loan portfolio, particularly auto loans, as a result of weakadjustments to loss factors based on economic conditions in Puerto Rico. Increasing trends in non-performing loans and charge-offs experienced during 2007 and 2006 were affected by the fiscal and economic situation of Puerto Rico. Puerto Rico has been in the midst of a recession since the third quarter of 2005.indicators. | | | • | | Non-interest income for the year ended December 31, 20082009 was $28.8$32.0 million compared to $27.3$35.6 million and $23.5$32.5 million for the years ended December 31, 2008 and 2007, respectively. The decrease for 2009, as compared to 2008, was mainly related to lower insurance income and 2006, respectively.a reduction in income from 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, the Corporation divested its short-term rental business during the fourth quarter of 2009. The increase for 2008, as compared to 2007, iswas mainly related to higher point of sale (POS) and 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. The increase in non-interest income for 2007, as compared to 2006, was driven by a gain on sale of a credit card portfolio of $2.8 million. | | | • | | Direct non-interest expenses for the year ended December 31, 20082009 were $103.8$98.3 million compared to $94.1$99.2 million and $86.9$95.2 million for the years ended December 31, 2008 and 2007, respectively. The decrease in direct non-interest expenses for 2009, as compared to 2008, was primarily due to reductions in marketing and 2006, respectively.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 operating expensenon-interest expenses for 2008, compared to 2007, was mainly due to increases in compensation, marketing collection efforts and in the FDIC insurance premium. The increase for 2007, as compared to 2006, was mainly due to increases in employees’ compensation and benefits and occupancy and equipment. The increase in employees’ compensation and benefits was mainly from increases in the headcount in the Corporation’s retail bank branch network coupled with increases in average salary and employee benefits to support the growth of the segment. |
Commercial and Corporate Banking The Commercial and Corporate Banking segment consists of the Corporation’s lending and other services for the public sector and specialized industries such as healthcare, tourism, financial institutions, food and beverage, shopping centers and middle-market clients. The Commercial and Corporate Banking segment offers commercial 76
loans, including commercial real estate and construction loans, and other products such as cash management and business management services. A substantial portion of this portfolio is secured either by the underlying value of the real estate collateral, and collateral and the personal guarantees of the borrowers are taken in abundance of caution. 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 an effectivea 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 buildingseeking 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, 20082009 include the following: | • | | Segment incomeloss before taxes for the year ended December 31, 20082009 was $21.2$129.8 million compared to $77.8income of $56.9 million and $123.8$78.6 million for the years ended December 31, 20072008 and 2006,2007, respectively. | | | • | | Net interest income for the year ended December 31, 20082009 was $136.9$180.3 million compared to $135.9$112.3 million and $154.7$104.8 million for the years ended December 31, 20072008 and 2006,2007, respectively. The increase in net interest income for 2009 and 2008, as compared to 2007, iswas related to both an increase in the average volume of earning assets driven by new commercial loan originations and lower interest rates charged by other business segments due to the decline in short-term interest rates in 2008 that more than offset lower loan yields due to the repricing of this portfolio and thesignificant increase in non-accrual loans. Also,loans and to the repricing at lower rates. However, the Corporation has took initial steps to obtain a higher pricingis actively increasing spreads on its variable-rate commercial loan portfoliorenewals given the current market environment. The decreaseDuring 2009, the Corporation increased the use of interest rate floors in new commercial and construction loan agreements and renewals to protect net interest income for 2007, compared to 2006, was mainly driven by a decreasemargins going forward. The increase in the average volume of interest-earning assets. The decrease in the segment’s average volume of interest-earningearning assets was mainlyprimarily due to credit facilities extended to the substantial partial repaymentPuerto Rico Government and its political subdivisions. As of $2.4December 31, 2009, the Corporation had $1.2 billion received from Doral in May 2006 that reducedoutstanding of credit facilities granted to the segment’s outstanding secured commercial loan from local financial institutions. The repayment also reduced the Corporation’s loans-to-one borrower exposure.Puerto Rico Government and its political subdivisions. | | | • | | The provision for loan and lease losses for 20082009 was $78.8$273.8 million compared to $41.2$35.5 million and $7.9$12.5 million for 20072008 and 2006,2007, respectively. The increase in the provision for loan and lease losses for 20082009 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 relating tofor impaired loans and increases in loss factors used for the condo-conversion loan portfoliodetermination of the Corporation’s Corporate Banking operation in Miami, Florida. The increase was also related to the increase in the amount of commercial and construction impaired loans in Puerto Rico due to deteriorating economic conditions.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 2007, compared to 2006,the provision for loan and lease losses for 2008 was mainly driven by higher general reserves on the Corporate Banking operations construction loan portfolio in Miami, Florida due to the slowdown of the U.S. housing market, an $8.1 million charge due to the collateral impairment on the previously discussed troubled loan relationship, and to the increase in the loan portfolio.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, 20082009 amounted to $4.6$5.7 million compared to a non-interest income of $6.3$4.6 million and non-interest loss of $6.1$6.2 million for the years ended December 31, 20072008 and 20062007, respectively. The fluctuationincrease in non-interest income for 2009, as compared to 2008, was mainly attributable to 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 increase in non-interest income for 2008 and 2007 was mainly attributable to the impact on earnings of agreements$2.5 million gain resulting from an agreement entered into with otheranother local financial institutionsinstitution for the partial extinguishment of secured commercial loans extended to such institutions (a gain of $2.5institution. Aside from this transaction, non-interest income for the Commercial and Corporate Banking Segment increased by $0.9 million recorded in 2007connection with higher fees on cash management services provided to corporate customers. | | | • | | Direct non-interest expenses for 2009 were $41.9 million compared to $24.5 million and $20.1 million for 2008 and 2007, respectively. The increase for 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 reductions in compensation expense. The increase 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 a higher loss in REO operations, primarily due to the increase in the volume of $10.6 million recorded in 2006). Asiderepossessed properties and writedowns. |
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from these transactions, 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.
Direct non-interest expenses for 2008 were $41.6 million compared to $23.2 million and $16.9 million for 2007 and 2006, respectively. The increase for 2008, as compared to 2007, was mainly due to a higher loss in REO operations, primarily expenses and write-downs related to foreclosed condo-conversion projects in Miami, Florida. Refer to “Non-interest expenses” discussion above for additional information. The increase in direct operating expenses for 2007, as compared to 2006, was mainly due to increases in employees’ compensation due to increases in average salary and employee benefits and increases in REO operations losses associated with the aforementioned troubled loan relationship in Miami coupled with the expense allocated to this segment related to the FDIC insurance premium expense.
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 loanloans products. Originations are sourced through different channels such as branches, mortgage brokersbankers 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’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 FNMA and FHLMC programs whereas loans that do not meet the 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 from GNMA, Commitment Authority to issue GNMA mortgage-backed securities. Under this program, in 2009, the Corporation will begin securitizingsecuritized and sellingsold FHA/VA mortgage loan production into the secondary markets. The highlights of the Mortgage Banking segment financial results for the year ended December 31, 20082009 include the following: | • | | Segment incomeloss before taxes for the year ended December 31, 20082009 was $16.9$14.3 million compared to $18.6income of $8.3 million and $24.4$7.2 million for the years ended December 31, 20072008 and 2006,2007, respectively. | | | • | | Net interest income for the year ended December 31, 20082009 was $47.2$39.2 million compared to $39.0$37.3 million and $43.4$27.6 million for the years ended December 31, 20072008 and 2006,2007, respectively. The increase in net interest income for 2009 and 2008 as compared to 2007, iswas mainly related to the decline in short-term rates during 2008.rates. This portfolio is principally composed of fixed-rate residential mortgage loans tied to long-term interest rates that are financed with shorter-term borrowings;borrowings, thus positively affected in a declining interest rate scenario as the one prevailing in 2009 and 2008. The increase in 2008 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. The decrease in net interest income for 2007, as compared to 2006, was principally due to declining loan yields on the residential mortgage loan portfolio resulting from the increase in non-performing loans. | |
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| • | | The provision for loan and lease losses for the year 20082009 was $9.8$29.7 million compared to $1.6$9.0 million and $4.0$1.6 million for the years ended December 31, 20072008 and 2006,2007, respectively. The increase in 2009 and 2008 as compared to 2007, 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 the increase in charge-offs. The decrease in 2007, asnegative loss trends. |
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compared to 2006, was due to the fact that after a detailed review of the residential mortgage loan portfolio in 2006, the Corporation determined that it needed to increase its allowance for loan and lease losses based on the deterioration of the economic conditions in Puerto Rico and the increase in the home price index in Puerto Rico. The Corporation continues to update the analysis on a yearly basis, and in 2007 the Corporation obtained similar results than in 2006. As a consequence, the Corporation determined that the allowance for loan losses for the residential mortgage loan portfolio was at an adequate level.
| | • | | Non-interest income for the year ended December 31, 20082009 was $3.4$8.5 million compared to $3.0$2.7 million and $2.5$2.1 million for the years ended December 31, 2008 and 2007, and 2006, respectively. The increase for 2009, as compared to 2008 was driven by approximately $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 was engaged in the securitization of mortgage loans throughout 2009. The increase for 2008, as compared to 2007, was driven by a higher volume of loan sales in the secondary market. The increase for 2007, as compared to 2006, was driven by higher service charges on loans associated with the growth in the residential mortgage loan portfolio coupled with a negative lower-of-cost-or-market adjustment of $1.0 million recorded in 2006 to the loans-held-for-sale portfolio. | | | • | | Direct non-interest expenses for 20082009 were $23.9$32.3 million compared to $21.8$22.7 million and $17.5$20.9 million for 2008 and 2007, respectively. The increase for 2009, as compared to 2008, was also mainly related to the portion of the FDIC deposit insurance premium allocated to this segment, a higher loss on REO operations associated with a higher volume of repossessed properties and 2006, respectively.an increase in professional service fees. The increase for 2008, as 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 recent trends in sales. The increase in direct operating expenses for 2007, as compared to 2006, was mainly due to increases in employees’ average salary compensation and higher employer benefits. The Corporation has committed substantial resources to this segment during the past 4 years. |
Treasury and Investments The Treasury and Investments segment is responsible for the Corporation’s treasury and investment portfoliomanagement functions. In the treasury function, which includes funding and treasury functions designed to manage and enhance liquidity. Thisliquidity management, this segment sells funds to the Commercial and Corporate Banking, Mortgage Banking, and Consumer (Retail) Banking segments to finance their lending activities and also purchases funds gathered by those segments. 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, 20082009 include the following: | • | | Segment income before taxes for the year ended December 31, 20082009 amounted to $106.3$163.1 million compared to losses$142.3 million for 2008 and of $14.5 million and $79.2$36.5 million for the years ended December 31, 2007 and 2006, respectively.2007. | | | • | | Net interest income for the year ended December 31, 20082009 was $87.2$86.1 million compared to a loss of $4.5$123.4 million and a loss of $63.2$46.5 million for the years ended December 31, 2008 and 2007, respectively. 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 2006, respectively.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 iswas 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 has caused several call dates go by in 2008 without counterpartiesissuers 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 has benefited from higher than current market yields on these instruments. Also, non-cash gains from changes in the fair value of derivative instruments and SFAS 159 liabilities measured at fair value accounted for approximately $14.2 million of the increase in net interest income for 2008 as compared to 2007. The lower net interest loss for 2007 was caused by the effect in 2006 earnings of non-cash losses from changes in the fair value of derivative instruments prior to the implementation of the long-haul method of accounting on April 3, |
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2006. During the first quarter of 2006, the Corporation recorded unrealized losses of $69.7 million for derivatives as part of interest expense. The adoption of fair value hedge accounting in the second quarter of 2006 and the adoption of SFAS 159 in 2007 reduced the accounting volatility that previously resulted from the accounting asymmetry created by accounting for the financial liabilities at amortized cost and the derivatives at fair value.
| | • | | Non-interest income for the year ended December 31, 20082009 amounted to $25.8$84.4 million compared to aincome of $25.6 million and losses of $2.2 million and of $8.3 million for the years ended December 31, 2008 and 2007, and 2006, respectively. 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 earningsnon-interest income for 2008, as compared to 2007, was related to the aforementioneda 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. The decrease in non-interest loss for 2007 was driven by lower other-than-temporary impairment charges in the Corporation’s equity securities portfolio, which decreased by $9.3 million as compared to 2006. | | | • | | Direct non-interest expenses for 20082009 were $6.7$7.4 million compared to $6.7 million and $7.8 million for 2008 and $7.72007, respectively. The fluctuations are mainly associated to professional service fees. |
United States Operations The United States operations segment consists of all banking activities conducted by FirstBank in the United States mainland. The Corporation provides a wide range of banking services to individual and corporate customers in the state of Florida through its ten branches and two specialized lending centers. In the United States, the Corporation originally had an agency lending office in Miami, Florida. Then, it acquired Coral Gables-based Ponce General (the parent company of Unibank, a savings and 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. The highlights of the United States operations segment financial results for the year ended December 31, 2009 include the following: | • | | Segment loss before taxes for the year ended December 31, 2009 was $222.3 million compared to loss of $62.4 million and $12.1 million for the years ended December 31, 2008 and 2007, respectively. | | | • | | Net interest income for the year ended December 31, 2009 was $2.6 million compared to $28.8 million and 2006,$38.7 million for the years ended December 31, 2008 and 2007, respectively. The decrease in net interest income for 2009 and 2008 was related to the surge in non-performing assets, |
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| | | 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 from brokered deposits. Also, the Corporation took actions to reduce its non-performing credits including the sales of certain troubled loans. | | | • | | The provision for loan losses for 2009 was $188.7 million compared to $53.4 million and $30.2 million for 2008 and 2007, respectively. The increase in the provision for loan and lease losses for 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, 2009 amounted to $1.5 million compared to a non-interest loss of $3.6 million and non-interest income of $1.2 million for the years ended December 31, 2008 and 2007, respectively. The increase in non-interest income for 2009, as compared to 2008, was mainly attributable to a gain of $0.9 million on the sale of the entire portfolio of auto industry corporate bonds after having taking 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 2009 were $37.7 million compared to $34.2 million and $21.8 million for 2008 and 2007, respectively. The increase for 2009, as compared to 2008, was primarily due to the increase in the FDIC deposit insurance premium, and professional service fees. The increase for 2008, as compared to 2007, was mainly due to a higher loss in REO operations, primarily due to write-downs and expenses related to condo-conversion projects. |
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 include the following: | • | | Segment income before taxes for the year ended December 31, 2009 was $0.8 million compared to $9.2 million and $26.3 million for the years ended December 31, 2008 and 2007, respectively. | | | • | | Net interest income for the year ended December 31, 2009 was $61.1 million compared to $60.0 million and $59.1 million for the years ended December 31, 2008 and 2007, respectively. The |
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| | | increase in net interest income 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 2009 increased by $12.7 million compared to the same period in 2008 and increased by $10.0 million when comparing 2008 with the same period in 2007. 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, 2009 was $10.2 million compared to $9.8 million and $12.2 million for the years ended December 31, 2008 and 2007, respectively. 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 associatedrelated to lower professionalthe 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 fees.charges on deposits and higher credit and debit card interchange fee income. | | | • | | Direct non-interest expenses for the year ended December 31, 2009 were $45.4 million compared to $48.1 million and $42.4 million for the years ended December 31, 2008 and 2007, respectively. The decrease in direct operating expenses for 2009, as compared to 2008, was primarily due to a decrease in compensation expense, mainly due to headcount, overtime and bonuses reductions. The increase in direct operating expensesexpense for 2007,2008, compared to 20062007, was mainly due to increases in employees’ compensation, depreciation and benefits.professional service fees. |
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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, | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | ASSETS | | | Interest-earning assets: | | | Money market & other short-term investments | | $ | 286,502 | | $ | 440,598 | | $ | 1,444,533 | | | $ | 182,205 | | $ | 286,502 | | $ | 440,598 | | Government obligations | | 1,402,738 | | 2,687,013 | | 2,827,196 | | | 1,345,591 | | 1,402,738 | | 2,687,013 | | Mortgage-backed securities | | 3,924,990 | | 2,296,855 | | 2,540,394 | | | 4,254,044 | | 3,923,423 | | 2,296,855 | | Corporate bonds | | 6,144 | | 7,711 | | 8,347 | | | 4,769 | | 7,711 | | 7,711 | | FHLB stock | | 65,081 | | 46,291 | | 26,914 | | | 76,982 | | 65,081 | | 46,291 | | Equity securities | | 3,762 | | 8,133 | | 27,155 | | | 2,071 | | 3,762 | | 8,133 | | | | | | | | | | | | | | | | | Total investments | | 5,689,217 | | 5,486,601 | | 6,874,539 | | | 5,865,662 | | 5,689,217 | | 5,486,601 | | | | | | | | | | | | | | | | | | | | Residential real estate loans | | 3,351,236 | | 2,914,626 | | 2,606,664 | | | Residential mortgage loans | | | 3,523,576 | | 3,351,236 | | 2,914,626 | | Construction loans | | 1,485,126 | | 1,467,621 | | 1,462,239 | | | 1,590,309 | | 1,485,126 | | 1,467,621 | | Commercial loans | | 5,473,716 | | 4,797,440 | | 5,593,018 | | | 6,343,635 | | 5,473,716 | | 4,797,440 | | Finance leases | | 373,999 | | 379,510 | | 322,431 | | | 341,943 | | 373,999 | | 379,510 | | Consumer loans | | 1,709,512 | | 1,729,548 | | 1,783,384 | | | 1,661,099 | | 1,709,512 | | 1,729,548 | | | | | | | | | | | | | | | | | Total loans(1) | | 12,393,589 | | 11,288,745 | | 11,767,736 | | | 13,460,562 | | 12,393,589 | | 11,288,745 | | | | | | | | | | | | | | | | | | | | Total interest-earning assets | | 18,082,806 | | 16,775,346 | | 18,642,275 | | | 19,326,224 | | 18,082,806 | | 16,775,346 | | | | | Total non-interest-earning assets(2)(1) | | 425,150 | | 438,861 | | 540,636 | | | 480,998 | | 425,150 | | 438,861 | | | | | | | | | | | | | | | | | Total assets | | $ | 18,507,956 | | $ | 17,214,207 | | $ | 19,182,911 | | | $ | 19,807,222 | | $ | 18,507,956 | | $ | 17,214,207 | | | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | Interest-bearing liabilities: | | | Interest-bearing checking accounts | | $ | 580,572 | | $ | 443,420 | | $ | 371,422 | | | $ | 866,464 | | $ | 580,572 | | $ | 443,420 | | Savings accounts | | 1,217,730 | | 1,020,399 | | 1,022,686 | | | 1,540,473 | | 1,217,730 | | 1,020,399 | | Certificate of deposit | | 9,484,051 | | 9,291,900 | | 10,479,500 | | | Certificates of deposit | | | 1,680,325 | | 1,812,957 | | 1,652,430 | | Brokered CDs | | | 7,300,696 | | 7,671,094 | | 7,639,470 | | | | | | | | | | | | | | | | | Interest-bearing deposits | | 11,282,353 | | 10,755,719 | | 11,873,608 | | | 11,387,958 | | 11,282,353 | | 10,755,719 | | Loans payable(3) | | 10,792 | | — | | — | | | Loans payable(2) | | | 643,618 | | 10,792 | | — | | Other borrowed funds | | 3,864,189 | | 3,449,492 | | 4,543,262 | | | 3,745,980 | | 3,864,189 | | 3,449,492 | | FHLB advances | | 1,120,782 | | 723,596 | | 273,395 | | | 1,322,136 | | 1,120,782 | | 723,596 | | | | | | | | | | | | | | | | | Total interest-bearing liabilities | | 16,278,116 | | 14,928,807 | | 16,690,265 | | | 17,099,692 | | 16,278,116 | | 14,928,807 | | Total non-interest-bearing liabilities(4) | | 796,476 | | 959,361 | | 1,294,563 | | | Total non-interest-bearing liabilities(3) | | | 852,943 | | 796,476 | | 959,361 | | | | | | | | | | | | | | | | | Total liabilities | | 17,074,592 | | 15,888,168 | | 17,984,828 | | | 17,952,635 | | 17,074,592 | | 15,888,168 | | | | | Stockholders’ equity: | | | Preferred stock | | 550,100 | | 550,100 | | 550,100 | | | 909,274 | | 550,100 | | 550,100 | | Common stockholders’ equity | | 883,264 | | 775,939 | | 647,983 | | | 945,313 | | 883,264 | | 775,939 | | | | | | | | | | | | | | | | | Stockholders’ equity | | 1,433,364 | | 1,326,039 | | 1,198,083 | | | 1,854,587 | | 1,433,364 | | 1,326,039 | | | | | | | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 18,507,956 | | $ | 17,214,207 | | $ | 19,182,911 | | | $ | 19,807,222 | | $ | 18,507,956 | | $ | 17,214,207 | | | | | | | | | | | | | | | | |
| | | (1) | | Includes the average balance of non-accruing loans. | | (2) | | Includes the allowance for loan and lease losses and the valuation on investment securities available-for-sale. | | (3)(2) | | Consists of short-term borrowings under the FED Discount Window Program. | | (4)(3) | | Includes changes in fair value onof liabilities elected to be measured at fair value under SFAS 159.. |
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The Corporation’s total average assets were $18.5$19.8 billion and $17.2$18.5 billion as of December 31, 2009 and 2008, and 2007, respectively;respectively, an increase for 20082009 of $1.3 billion or 8%7% as compared to 2007.2008. The increase in average assets was due to :to: (i) an increase of $1.1 billion in average loans driven by new originations, in particular credit facilities extended to the Puerto Rico Government and its political subdivisions, and (ii) an increase of $176.4 million in investment securities mainly due to the purchase of approximately $2.8 billion in investment securities in 2009 (mainly U.S. agency callable debt securities and U.S. agency MBS) and the securitization of approximately $305 million FHA/VA loans into GNMA MBS, partially offset by $1.9 billion in investment securities sold during the year (mainly U.S. agency MBS, including $452 million in the last month 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 (ii) an increase of $202.6 million in investment securities, mainly due to the purchasepurchases of approximately $3.2 billion in MBS during 2008, partially offset by $1.2 billion U.S. agency debentures called during the year.MBS. The decrease inCorporation’s total average assets for 2007,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 2006, was due to deleveraging2008. The Corporation has diversified its sources of the balance sheet. In particular, the Corporation made useborrowings including: (i) an increase of short-term money market investments to pay down brokered certificates deposits and repurchase agreements as they matured and sold lower yielding U.S. Treasury and mortgage-backed securities. The$834.2 million in the average balance of advances from the commercial loan portfolio decreased by $795.6 million due to the repayment of $2.4 billion received from a local financial institution in May 2006FED and the partial extinguishmentFHLB, as the Corporation used low-cost sources of $50funding to match an investment portfolio with a shorter maturity, and (ii) an increase of $105.6 million and the recharacterization of approximately $183.8 million of secured commercial loans extended to R&G Financial in February 2007. 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 has 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 currentvolatile 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 has takentook direct actions to enhance its liquidity position due to the financial market disruptions and increasedto increase its borrowing capacity with the FHLB and the FED, which funds are also used to finance the Corporation’s lending activities. The decrease in average liabilities for 2007, as compared to 2006, was driven by a lower average balance of brokered CDs and repurchase agreements due to the deleveraging of the Corporation’s balance sheet. In addition, the redemption of the Corporation’s $150 million medium-term notes during the second quarter of 2007, which carried a cost higher than the overall cost of funding, contributed to the decrease in average liabilities in 2007. These reductions were partially offset by a higher average volume of advances from FHLB. Assets Total assets as of December 31, 20082009 amounted to $19.5$19.6 billion, an increase of $2.3 billion$137.2 million compared to total assets$19.5 billion as of December 31, 2007.2008. The Corporation’s loan portfolio increased by $1.3 billion$860.9 million (before the allowance for loan and lease losses), driven by new originations, mainly commercialcredit facilities extended to the Puerto Rico Government and/or its political subdivisions. Also, an increase of $298.4 million in cash and residential mortgage loans and the purchase of a $218 million auto loan portfolio during the third quarter of 2008. Also,cash equivalents contributed to the increase in total assets, is attributable toas the purchase of approximately $3.2 billion of fixed-rate U.S. government agency MBS during the first half of 2008 as market conditions presented an opportunity to obtain attractive yields, improveCorporation improved its net interest margin and replace $1.2 billion of U.S. Agency debentures called by counterparties. The Corporation increased its cash and money market investments by $26.8 million in partliquidity 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 well as U.S. agency debt securities called during the present economic climate.2009. 8292
Loans Receivable 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) | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | Residential real estate loans, including loans held for sale | | $ | 3,491,728 | | $ | 3,164,421 | | $ | 2,772,630 | | $ | 2,346,945 | | $ | 1,322,650 | | | Residential mortgage loans, including loans held for sale | | | $ | 3,616,283 | | $ | 3,491,728 | | $ | 3,164,421 | | $ | 2,772,630 | | $ | 2,346,945 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial loans: | | | Commercial real estate loans | | 1,535,758 | | 1,279,251 | | 1,215,040 | | 1,090,193 | | 690,900 | | | Commercial mortgage loans | | | 1,590,821 | | 1,535,758 | | 1,279,251 | | 1,215,040 | | 1,090,193 | | Construction loans | | 1,526,995 | | 1,454,644 | | 1,511,608 | | 1,137,118 | | 398,453 | | | 1,492,589 | | 1,526,995 | | 1,454,644 | | 1,511,608 | | 1,137,118 | | Commercial loans | | 3,857,728 | | 3,231,126 | | 2,698,141 | | 2,421,219 | | 1,871,851 | | | Commercial and Industrial loans | | | 5,029,907 | | 3,857,728 | | 3,231,126 | | 2,698,141 | | 2,421,219 | | Loans to local financial institutions collateralized by real estate mortgages and pass-through trust certificates | | 567,720 | | 624,597 | | 932,013 | | 3,676,314 | | 3,841,908 | | | 321,522 | | 567,720 | | 624,597 | | 932,013 | | 3,676,314 | | | | | | | | | | | | | | | | | | | | | | | | | Total commercial loans | | 7,488,201 | | 6,589,618 | | 6,356,802 | | 8,324,844 | | 6,803,112 | | | 8,434,839 | | 7,488,201 | | 6,589,618 | | 6,356,802 | | 8,324,844 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Finance leases | | 363,883 | | 378,556 | | 361,631 | | 280,571 | | 212,234 | | | 318,504 | | 363,883 | | 378,556 | | 361,631 | | 280,571 | | | | | Consumer loans | | 1,744,480 | | 1,667,151 | | 1,772,917 | | 1,733,569 | | 1,359,998 | | | Consumer loans and other loans | | | 1,579,600 | | 1,744,480 | | 1,667,151 | | 1,772,917 | | 1,733,569 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total loans, gross | | 13,088,292 | | 11,799,746 | | 11,263,980 | | 12,685,929 | | 9,697,994 | | | 13,949,226 | | 13,088,292 | | 11,799,746 | | 11,263,980 | | 12,685,929 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less: | | | Allowance for loan and lease losses | | | (281,526 | ) | | | (190,168 | ) | | | (158,296 | ) | | | (147,999 | ) | | | (141,036 | ) | | | (528,120 | ) | | | (281,526 | ) | | | (190,168 | ) | | | (158,296 | ) | | | (147,999 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total loans, net | | $ | 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 | | | | | | | | | | | | | | | | | | | | | | | | |
Lending Activities GrossAs of December 31, 2009, the Corporation’s total loans increased by $1.3 billion in 2008, or 11%,$860.9 million, when compared to 2007 primarily due to anwith the balance as of December 31, 2008. The increase in the Corporation’s commercial and residential mortgage loan portfoliostotal loans primarily relates to increases in C&I loans driven by new originations.internal loan originations, mainly to the Puerto Rico Government as further discussed below, partially offset by repayments and charge-offs of approximately $333.3 million recorded in 2009, mainly for construction loans in Florida. As shown in the table above, the 20082009 loan portfolio was comprised of commercial (57%(60%), residential real estate (27%(26%), and consumer and finance leases (16%(14%). Of the total gross loansloan portfolio of $13.1$13.9 billion for 2008,as of December 31, 2009, approximately 81%83% have credit risk concentration in Puerto Rico, 11%9% in the United States and 8% in the Virgin Islands, as shown in the following table. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Puerto | | Virgin | | United | | | | | Puerto | | Virgin | | United | | | | As of December 31, 2008 | | Rico | | Islands | | States | | Total | | | As of December 31, 2009 | | | Rico | | Islands | | States | | Total | | | | (In thousands) | | | (In thousands) | | Residential real estate loans, including loans held for sale | | $ | 2,637,210 | | $ | 447,216 | | $ | 407,302 | | $ | 3,491,728 | | | $ | 2,790,829 | | $ | 450,649 | | $ | 374,805 | | $ | 3,616,283 | | | | | | | | | | | | | | | | | | | | | | | | Commercial real estate loans | | 977,700 | | 78,511 | | 479,547 | | 1,535,758 | | | Commercial mortgage loans | | | 983,125 | | 73,114 | | 534,582 | | 1,590,821 | | Construction loans (1) | | 834,817 | | 175,405 | | 516,773 | | 1,526,995 | | | 998,235 | | 194,813 | | 299,541 | | 1,492,589 | | Commercial loans | | 3,648,823 | | 172,356 | | 36,549 | | 3,857,728 | | | Loans to local financial institutions collateralized by real estate mortgages | | 567,720 | | — | | — | | 567,720 | | | Commercial and Industrial loans | | | 4,756,297 | | 241,497 | | 32,113 | | 5,029,907 | | Loans to a local financial institution collateralized by real estate mortgages | | | 321,522 | | — | | — | | 321,522 | | | | | | | | | | | | | | | | | | | | | Total commercial loans | | 6,029,060 | | 426,272 | | 1,032,869 | | 7,488,201 | | | 7,059,179 | | 509,424 | | 866,236 | | 8,434,839 | | | | | Finance leases | | 363,883 | | — | | — | | 363,883 | | | 318,504 | | — | | — | | 318,504 | | | | | Consumer loans | | 1,571,335 | | 129,305 | | 43,840 | | 1,744,480 | | | 1,446,354 | | 98,418 | | 34,828 | | 1,579,600 | | | | | | | | | | | | | | | | | | | | | | | | Total loans, gross | | $ | 10,601,488 | | $ | 1,002,793 | | $ | 1,484,011 | | $ | 13,088,292 | | | $ | 11,614,866 | | $ | 1,058,491 | | $ | 1,275,869 | | $ | 13,949,226 | | | | | Allowance for loan and lease losses | | | (203,233 | ) | | | (9,712 | ) | | | (68,581 | ) | | | (281,526 | ) | | | (410,714 | ) | | | (27,502 | ) | | | (89,904 | ) | | | (528,120 | ) | | | | | | | | | | | | | | | | | | | | | | $ | 10,398,255 | | $ | 993,081 | | $ | 1,415,430 | | $ | 12,806,766 | | | $ | 11,204,152 | | $ | 1,030,989 | | $ | 1,185,965 | | $ | 13,421,106 | | | | | | | | | | | | | | | | | | | | |
| | | (1) | | Construction loan portfolio in the United States includesloans of Florida operations include approximately $197.4$70.4 million of loans originally disbursed as condo-conversion loans, net of which $154.4 million is considered impaired ascharge-offs of December 31, 2008 with a specific reserve of $36.0$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 small 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 purposespurpose of the following presentation, the Corporation separately presented separatelysecured 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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | | For the Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | | | (In thousands) | | | (In thousands) | | Beginning balance | | $ | 11,609,578 | | $ | 11,105,684 | | $ | 12,537,930 | | $ | 9,556,958 | | $ | 6,914,677 | | | $ | 12,806,766 | | $ | 11,609,578 | | $ | 11,105,684 | | $ | 12,537,930 | | $ | 9,556,958 | | Residential real estate loans originated and purchased | | 690,365 | | 715,203 | | 908,846 | | 1,372,490 | | 765,486 | | | 591,889 | | 690,365 | | 715,203 | | 908,846 | | 1,372,490 | | Construction loans originated and purchased | | 475,834 | | 678,004 | | 961,746 | | 1,061,773 | | 309,053 | | | 433,493 | | 475,834 | | 678,004 | | 961,746 | | 1,061,773 | | Commercial loans originated and purchased | | 2,175,395 | | 1,898,157 | | 2,031,629 | | 2,258,558 | | 1,014,946 | | | C&I and Commercial mortgage loans originated and purchased | | | 3,153,278 | | 2,175,395 | | 1,898,157 | | 2,031,629 | | 2,258,558 | | Secured commercial loans disbursed to local financial institutions | | — | | — | | — | | 681,407 | | 2,228,056 | | | — | | — | | — | | — | | 681,407 | | Finance leases originated | | 110,596 | | 139,599 | | 177,390 | | 145,808 | | 116,200 | | | 80,716 | | 110,596 | | 139,599 | | 177,390 | | 145,808 | | Consumer loans originated and purchased | | 788,215 | | 653,180 | | 807,979 | | 992,942 | | 746,113 | | | 514,774 | | 788,215 | | 653,180 | | 807,979 | | 992,942 | | | | | | | | | | | | | | | | | | | | | | | | | Total loans originated and purchased | | 4,240,405 | | 4,084,143 | | 4,887,590 | | 6,512,978 | | 5,179,854 | | | 4,774,150 | | 4,240,405 | | 4,084,143 | | 4,887,590 | | 6,512,978 | | | | | Sales and securitizations of loans | | | (164,583 | ) | | | (147,044 | ) | | | (167,381 | ) | | | (118,527 | ) | | | (180,818 | ) | | | (464,705 | ) | | | (164,583 | ) | | | (147,044 | ) | | | (167,381 | ) | | | (118,527 | ) | Repayments and prepayments | | | (2,589,120 | ) | | | (3,084,530 | ) | | | (6,022,633 | ) | | | (3,803,804 | ) | | | (2,263,043 | ) | | | (3,010,857 | ) | | | (2,589,120 | ) | | | (3,084,530 | ) | | | (6,022,633 | ) | | | (3,803,804 | ) | | | | Other (decreases) increases(1) (2) | | | (289,514 | ) | | | (348,675 | ) | | | (129,822 | ) | | 390,325 | | | (93,712 | ) | | | (684,248 | ) | | | (289,514 | ) | | | (348,675 | ) | | | (129,822 | ) | | 390,325 | | | | | | | | | | | | | | | | | | | | | | | | | Net increase (decrease) | | 1,197,188 | | 503,894 | | | (1,432,246 | ) | | 2,980,972 | | 2,642,281 | | | 614,340 | | 1,197,188 | | 503,894 | | | (1,432,246 | ) | | 2,980,972 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending 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 | | | | | | | | | | | | | | | | | | | | | | | | | Percentage increase (decrease) | | | 10.31 | % | | | 4.54 | % | | | (11.42 | )% | | | 31.19 | % | | | 38.21 | % | | | 4.80 | % | | | 10.31 | % | | | 4.54 | % | | | (11.42 | )% | | | 31.19 | % |
| | | (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 in 2008.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, the Corporation’s residential real estate loan portfolio increased by $124.6 million as compared to the balance as of December 31, 2008. More than 90% 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 full documented loans, and the Corporation is not actively involved in the origination of negative amortization loans or adjustable-rate mortgage loans. The increase was driven 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. 94
Residential real estate loan production and purchases for the year ended December 31, 20082009 decreased by $24.8$98.5 million, compared to the same period in 20072008 and decreased by $193.6$24.8 million for 2007,2008, compared to the same period in 2006.2007. The decrease in 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 million, amounted to $591.9 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. Residential real estate loans represent 12% of total loans originated and purchased for 2009. 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 athe 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 iswas 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 below.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 providesprovided credits to lenders and borrowers when individuals purchasepurchased certain new or existing homes. The credits for lenders and borrowers were as follows: (a) for a new constructed home that willwould constitute the individual’s principal residence, a credit equal to 20% of the sales price or $25,000, whichever iswas lower; (b) for new constructed homes that willwould not constitute the individual’s principal residence, a credit of 10% of the sales price or $15,000, whichever iswas lower; and (c) for existing homes, a credit of 10% of the sales price or $10,000, whichever iswas lower. From the homebuyer’s perspective: (1) the individual maycould not benefit from the credit no more than twice; (2) the amount of credit granted will bewas credited against the principal amount of the mortgage; (3) the individual musthad to acquire the property before December 31, 2008; and (4) for new constructed homes constituting the principal residence and existing homes, the individual musthad to live in it as his or her principal residence for at least three 84
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. Residential real estate loans represent 16% of total loans originated and purchased for 2008, with the residential mortgage loans balance increasing by $327.3 million, from $3.2 billion in 2007 to $3.5 billion in 2008. 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. FirstMortgage’s multi-channel strategy has proven to be effective in capturing business. The decrease in mortgage loan production for 2007, as compared to 2006, was attributable to deteriorating economic conditions in Puerto Rico, the slowdown in the United States housing market and stricter underwriting standards. The Corporation decided to make certain adjustments to its underwriting standards designed to enhance the credit quality of its mortgage loan portfolio, in light of worsening macroeconomic conditions in Puerto Rico.
The Corporation has not been active in subprime or adjustable rate mortgage loans (“ARMs”), nor has it been exposed to collateral debt obligations or other types of exotic products that aggravated the current global financial crisis. More than 90% of the Corporation’s outstanding balance in its residential mortgage loan portfolio consists of fixed-rate, fully amortizing, full documentation loans.
Commercial and Construction Loans In recent years,As of December 31, 2009, the Corporation has emphasizedCorporation’s commercial lending activities and continuesconstruction loan portfolio increased by $946.6 million, as compared to penetrate this market.the balance as of December 31, 2008, due mainly to loan originations to the Puerto Rico Government as discussed below, partially offset by the aforementioned unwinding of the commercial loan with R&G, principal repayments and net charge-offs in 2009. A substantial portion of this portfolio is collateralized by real estate. The Corporation’s commercial loans are primarily variable and adjustable-rate loans. 95
Total commercial and construction loans originated amounted to $2.7$3.6 billion for 2008,2009, an increase of $75.1$935.5 million when compared to originations during 2007,2008. The increase in commercial and construction loan production for total2009, 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 governmental agencies was partially offset by a $118.9 million decrease in commercial mortgage loan portfoliooriginations and a decrease of $7.5 billion at December 31, 2008. As a result of new originations net of prepayments$179.6 million in floor plan originations. Floor plan lending activities depends on inventory levels (autos) financed and maturities, the commercial loans balance, excluding secured commercial loans to local financial institutions, increased by $0.9 billion, from $6.0 billion as of December 31, 2007 to $6.9 billion as of December 31, 2008.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. Commercial originations include floor plan lending activities which depends on inventory levels (autos) financed and their turnover. Floor plan originations amounted to approximately $729.5 million for the 2008 year, compared to $729.3 million for 2007. 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 marketmarket. As of December 31, 2009, the Corporation had $1.2 billion outstanding of credit facilities granted to the Puerto Rico Government and/or its political subdivisions. 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 the strategic decisionproperty 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 reduce its exposure to condo-conversion loans in its Miami Corporate Banking operations. Also, there was a decrease in construction loan originationsvarious municipalities in Puerto Rico duefor which the good faith, credit and unlimited taxing power of the applicable municipality have been pledged to current weakening economic conditions.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. 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 an effectivea credit risk management infrastructure that mitigates potential losses associated with commercial lending, including strong underwriting and loan review functions, sales of loan participations, and continuous monitoring of concentrations within portfolios. 85
The Corporation’s commercialConstruction loans are primarily variable and adjustable rate loans. Commercial loan originations come from existing customers as well as through referrals and direct solicitations. Thedecreased by $42.3 million due to the strategic decision by the Corporation follows a strategy aimed to caterreduce its exposure to customer needsconstruction projects in the commercial loans middle-market segment by building strong relationships and offering financial solutions that meet customers’ unique needs. The Corporation has expanded its distribution network and participation in the commercial loans middle-market segment by focusing on customers with financing needs in amounts of up to $5 million. The Corporation has 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 Corporation’s largest concentration as of December 31, 2008 in the amount of $348.8 million is with one mortgage originator inboth Puerto Rico Doral. Together withand the Corporation’s next largest loan concentration of $218.9 million with another mortgage originator in Puerto Rico, R&G Financial, the Corporation’s total loans granted to these mortgage originators amounted to $567.7 million as of December 31, 2008. These commercial loans are secured by individual mortgage loans on residential and commercial real estate. In December 2005, the Corporation obtained a waiver from the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico with respect to the statutory limit for individual borrowers (loan-to-one borrower limit). However, as of December 31, 2008, the outstanding balance of the R&G Financial relationship was under the loan-to-one borrower limit for secured loans of approximately $331 million.
United States. The Corporation’s construction lending volume has decreasedbeen stagnant for the last year 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 Miami Corporate BankingFlorida operations and is closely evaluating market conditions and opportunitiesconstruction loan originations in Puerto Rico.Rico are mainly draws from existing commitments. More than 70% of the construction loan originations in 2009 are related to disbursements from previous established commitments. Current absorption rates in condo-conversion loans in the United States are low and properties collateralizing some of these condo-conversion loans have been 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. As of December 31, 2008,2009, approximately $47.8$60.1 million of loans originally disbursed as condo-conversion construction loans have been formally reverted to income-producing commercial loans.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 the banks in general and a reduction ofin market participants in the lending business, the Corporation believes that the rental market in Florida will growgrow. 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 rental properties will hold their values.Lease Losses and Non-performing Assets” below for additional information. 8696
The composition of the Corporation’s construction loan portfolio as of December 31, 20082009 by category and geographic location follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Puerto | | Virgin | | United | | | | | Puerto | | Virgin | | United | | | | As of December 31, 2008 | | Rico | | Islands | | States | | Total | | | As of December 31, 2009 | | | Rico | | Islands | | States | | Total | | | | (In thousands) | | | (In thousands) | | Loans for residential housing projects: | | | High-rise(1) | | $ | 183,910 | | $ | — | | $ | 559 | | $ | 184,469 | | | $ | 202,800 | | $ | — | | $ | 559 | | $ | 203,359 | | Mid-rise(2) | | 108,143 | | 5,977 | | 56,235 | | 170,355 | | | 100,433 | | 4,471 | | 28,125 | | 133,029 | | Single-family detach | | 108,294 | | 2,675 | | 40,844 | | 151,813 | | | 123,807 | | 4,166 | | 31,186 | | 159,159 | | | | | | | | | | | | | | | | | | | | | Total for residential housing projects | | 400,347 | | 8,652 | | 97,638 | | 506,637 | | | 427,040 | | 8,637 | | 59,870 | | 495,547 | | | | | | | | | | | | | | | | | | | | | Construction loans to individuals secured by residential properties | | 15,442 | | 37,729 | | — | | 53,171 | | | 11,716 | | 26,636 | | — | | 38,352 | | Condo-conversion loans(3) | | — | | — | | 197,384 | | 197,384 | | | 10,082 | | — | | 70,435 | | 80,517 | | Loans for commercial projects | | 215,456 | | 92,032 | | 18,806 | | 326,294 | | | 324,711 | | 117,333 | | 1,535 | | 443,579 | | Bridge and Land loans | | 176,088 | | 37,846 | | 203,162 | | 417,096 | | | Bridge loans — residential | | | 56,095 | | — | | 1,285 | | 57,380 | | Bridge loans — commercial | | | 3,003 | | 20,261 | | 72,178 | | 95,442 | | Land loans — residential | | | 77,820 | | 20,690 | | 66,802 | | 165,312 | | Land loans — commercial | | | 61,868 | | 1,105 | | 27,519 | | 90,492 | | Working capital | | 31,213 | | — | | — | | 31,213 | | | 29,727 | | 1,015 | | — | | 30,742 | | | | | | | | | | | | | | | | | | | | | Total before net deferred fees and allowance for loan losses | | 838,546 | | 176,259 | | 516,990 | | 1,531,795 | | | 1,002,062 | | 195,677 | | 299,624 | | 1,497,363 | | Net deferred fees | | | (3,729 | ) | | | (854 | ) | | | (217 | ) | | | (4,800 | ) | | | (3,827 | ) | | | (865 | ) | | | (82 | ) | | | (4,774 | ) | | | | | | | | | | | | | | | | | | | | Total construction loan portfolio, gross | | 834,817 | | 175,405 | | 516,773 | | 1,526,995 | | | 998,235 | | 194,812 | | 299,542 | | 1,492,589 | | Allowance for loan losses | | | (28,310 | ) | | | (1,494 | ) | | | (53,678 | ) | | | (83,482 | ) | | | (100,007 | ) | | | (16,380 | ) | | | (47,741 | ) | | | (164,128 | ) | | | | | | | | | | | | | | | | | | | | Total construction loan portfolio, net | | $ | 806,507 | | $ | 173,911 | | $ | 463,095 | | $ | 1,443,513 | | | $ | 898,228 | | $ | 178,432 | | $ | 251,801 | | $ | 1,328,461 | | | | | | | | | | | | | | | | | | | | |
| | | (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 74%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. | | (3) | | During 2008, approximately $47.8 million of loans originally disbursed as condo-conversion construction loans have been formally reverted to income-producing loans and included as part of the commercial real estate portfolio. |
The following table presents further information on the Corporation’s construction portfolio as of and for the year ended December 31, 2008:2009: | | | | | | | | | (Dollars in thousands) | | | | | | Total undisbursed funds under existing commitments | | $ | 514,018 | | | $ | 249,961 | | | | | | | | | | | | Construction loans in non-accrual status | | $ | 116,290 | | | $ | 634,329 | | | | | | | | | | | | Net charge offs — Construction loans (1) | | $ | 7,735 | | | $ | 183,600 | | | | | | | | | | | | Allowance for loan losses — Construction loans | | $ | 83,482 | | | $ | 164,128 | | | | | | | | | | | | Non-performing construction loans to total construction loans | | | 7.62 | % | | | 42.50 | % | | | | | | | | | | | Allowance for loan losses — construction loans to total construction loans | | | 5.47 | % | | | 11.00 | % | | | | | | | | | | | Net charge-offs to total average construction loans (1) | | | 0.52 | % | | | 11.54 | % | | | | | | | |
| | | (1) | | Includes charge-offs of $6.2$137.4 million related to the repossession and sale of impairedconstruction loans in the Miami Corporate Banking operations.Florida and $46.2 million related to construction loans in Puerto Rico. |
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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 | | $ | 88,404 | | | $ | 142,280 | | $300K-$600K | | 171,118 | | | 87,306 | | Over $600K(1) | | 140,825 | | | 197,454 | | | | | | | | | | | $ | 400,347 | | | $ | 427,040 | | | | | | | | |
| | | (1) | | Mainly composed of three high-rise projects and one single-family detached project that accounts for approximately 67% and 14%, respectively, of the residential housing projects in Puerto Rico. |
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, the Corporation’s consumer loan and finance leases portfolio decreased by $210.3 million, as compared to the portfolio balance as of December 31, 2008. 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. Nevertheless, the Corporation experienced a decrease in net charge-offs for consumer loans and finance leases that amounted 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. Consumer loan originations are principally driven through the Corporation’s retail network. For the year ended December 31, 2008,2009, consumer loan and finance lease originations amounted to $788.2$595.5 million, ana 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 $135.0$106.0 million or 21% compared to 2007. The increase in consumer loan and finance leases originations in 2008, as compared to 2007, was related to 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 $83$112 million, or 13%14%, for 2008 as compared to 87
2007 mainly due to adverse economic conditions in Puerto Rico. Unemployment in Puerto Rico reached 13.1%13.7% in December 2008, up 2.6%2.7% from the prior year.year, and in 2009 tops 15%. Consumer loan originations are driven by auto loan originations through a strategy of providingseeking 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 CorporationCorporation’s commercial relations with floor plan dealers is strong and directly benefits the Corporation’s consumer lending operation. Finance Leases Originations of finance leases which are mostly composed of loans to individuals to finance the acquisition of a motor vehicle decreased by $29.0 million or 21% to $110.6 million during 2008 compared to 2007, also affected by adverse economic conditions in Puerto Rico. These leasesand typically have five-year terms and are collateralized by a security interest in the underlying assets.
Investment Activities 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 portfolio as of December 31, 20082009 amounted to $5.7$4.9 billion, an increasea reduction of $897.7$842.5 million when compared with the investment portfolio of $4.8$5.7 billion as of December 31, 2007.2008. The increasereduction in the investment securities resulted mainly fromportfolio was the previously discussed purchasenet result of approximately $3.2$1.9 billion in sales of securities, $955 million in calls of U.S. government-sponsored agency fixed-rate MBS duringnotes and certain obligations of the first half of 2008 as market conditions presented an opportunity for the Corporation to obtain attractive yields, improve its net interest marginPuerto Rico Government, and mitigate the impact of $1.2 billion U.S. Agency debentures called by counterparties. The Corporation also sold approximately $526$959 million of MBS in 2008 given a surge in prices, in particular after the announcementmortgage-backed securities prepayments; partly offset with securities purchases of the FED that it will invest up to $600 billion in obligations from U.S. government-sponsored agencies, including $500$2.9 billion. Sales of investments securities during 2009 were approximately $1.7 billion in MBS backed by FNMA, FHLMC(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 GNMA.$100 million of Puerto Rico government obligations with an average yield of 5.50%. Total purchasesPurchases of investment securities excluding those invested on a short-term basis (money market investments) during 2008 amounted2009 mainly consisted of U.S. agency callable debentures having contractual maturities ranging from two to approximately $3.4three years (approximately $1.0 billion and were composed mainly of mortgage-backed securities in the amount of $3.2 billion withat a weighted-average couponyield of 5.44% 98
2.13%), 7-10 Year U.S. Treasury bills with original maturities over 3 months in the amount of $161.1Notes (approximately $96 million withat a weighted-average couponyield of 1.09% ($152.7 million already expired as3.54%) subsequently sold, 15-Year U.S. agency MBS (approximately $1.3 billion at a weighted-average yield of December 31, 2008)3.85%) and floating collateralized mortgage obligations fromissued by GNMA, FNMA and FHLMC (approximately $184 million). Also, during 2009, the Puerto Rico governmentCorporation began and completed the securitization of approximately $114.3$305 million with a weighted-average coupon of 5.47%.FHA/VA mortgage loans into GNMA MBS. Over 90%94% 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 FNMA and FHLMC fixed-rate securities). As of December 31, 2008, the Corporation had $4.0 billion and $925 million in FNMA and FHLMC mortgage-backed securities and debt securities, respectively, representing 87% of the total investment portfolio. The Corporation’s investment in equity securities is minimal, and it does not own any equity or debt securities of U.S. financial institutions that recently failed.minimal. 88
The following table presents the carrying value of investments as of December 31, 20082009 and 2007:2008: | | | | | | | | | | | | 2008 | | 2007 | | | | | | | | | | (In thousands) | | (In thousands) | | | 2009 | | 2008 | | Money market investments | | $ | 76,003 | | $ | 183,136 | | | $ | 24,286 | | $ | 76,003 | | | | | | | | | | | | | | | | Investment securities held-to-maturity: | | | Investment securities held-to-maturity, at amortized cost: | | | U.S. Government and agencies obligations | | 953,516 | | 2,365,147 | | | 8,480 | | 953,516 | | Puerto Rico Government obligations | | 23,069 | | 31,222 | | | 23,579 | | 23,069 | | Mortgage-backed securities | | 728,079 | | 878,714 | | | 567,560 | | 728,079 | | Corporate bonds | | 2,000 | | 2,000 | | | 2,000 | | 2,000 | | | | | | | | | | | | | | | 1,706,664 | | 3,277,083 | | | 601,619 | | 1,706,664 | | | | | | | | | | | | | | | | Investment securities available-for-sale: | | | Investment securities available-for-sale, at fair value: | | | U.S. Government and agencies obligations | | — | | 16,032 | | | 1,145,139 | | — | | Puerto Rico Government obligations | | 137,133 | | 24,521 | | | 136,326 | | 137,133 | | Mortgage-backed securities | | 3,722,992 | | 1,239,169 | | | 2,889,014 | | 3,722,992 | | Corporate bonds | | 1,548 | | 4,448 | | | — | | 1,548 | | Equity securities | | 669 | | 2,116 | | | 303 | | 669 | | | | | | | | | | | | | | | 3,862,342 | | 1,286,286 | | | 4,170,782 | | 3,862,342 | | | | | | | | | | | | | | | | Other equity securities, including $62.6 million and $63.4 million of FHLB stock as of December 31, 2008 and 2007, respectively | | 64,145 | | 64,908 | | | 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 | | | | | | | | | | | | | Total investments | | $ | 5,709,154 | | $ | 4,811,413 | | | $ | 4,866,617 | | $ | 5,709,154 | | | | | | | | | | | | |
Mortgage-backed securities as of December 31, 20082009 and 2007,2008, consist of: | | | | | | | | | | | | | | | | | (In thousands) | | 2008 | | 2007 | | | 2009 | | 2008 | | Held-to-maturity | | | FHLMC certificates | | $ | 8,338 | | $ | 11,274 | | | $ | 5,015 | | $ | 8,338 | | FNMA certificates | | 719,741 | | 867,440 | | | 562,545 | | 719,741 | | | | | | | | | | | | | | | 728,079 | | 878,714 | | | 567,560 | | 728,079 | | | | | | | | | | | | | Available-for-sale | | | FHLMC certificates | | 1,892,358 | | 158,953 | | | 722,249 | | 1,892,358 | | GNMA certificates | | 342,674 | | 44,340 | | | 418,312 | | 342,674 | | FNMA certificates | | 1,373,977 | | 902,198 | | | 1,507,792 | | 1,373,977 | | Mortgage pass-through certificates | | 113,983 | | 133,678 | | | Collateralized Mortgage Obligations issued or guaranteed by FHLMC, FNMA and GNMA | | | 156,307 | | — | | Other mortgage pass-through certificates | | | 84,354 | | 113,983 | | | | | | | | | | | | | | | 3,722,992 | | 1,239,169 | | | 2,889,014 | | 3,722,992 | | | | | | | | | | | | | Total mortgage-backed securities | | $ | 4,451,071 | | $ | 2,117,883 | | | $ | 3,456,574 | | $ | 4,451,071 | | | | | | | | | | | | |
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The carrying values of investment securities classified as available-for-sale and held-to-maturity as of December 31, 20082009 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 | | $ | 8,455 | | 1.07 | | | $ | 8,480 | | 0.47 | | Due after ten years | | 945,061 | | 5.77 | | | 1,145,139 | | 2.12 | | | | | | | | | | | | | | | 953,516 | | 5.73 | | | 1,153,619 | | 2.11 | | | | | | | | | | | | | | | | Puerto Rico Government obligations | | | Due within one year | | 4,639 | | 6.18 | | | 11,989 | | 1.82 | | Due after one year through five years | | 110,404 | | 5.41 | | | 113,487 | | 5.40 | | Due after five years through ten years | | 24,444 | | 5.84 | | | 25,814 | | 5.87 | | Due after ten years | | 20,715 | | 5.35 | | | 8,615 | | 5.47 | | | | | | | | | | | | | | | 160,202 | | 5.49 | | | 159,905 | | 5.21 | | | | | | | | | | | | | | | | Corporate bonds | | | Due after five years through ten years | | 241 | | 7.70 | | | Due after ten years | | 3,307 | | 6.66 | | | 2,000 | | 5.80 | | | | | | | | | | | 3,548 | | 6.73 | | | | | | | | | | | | | | | | | Total | | 1,117,266 | | 5.70 | | | 1,315,524 | | 2.49 | | | | | Mortgage-backed securities | | 4,451,071 | | 5.30 | | | 3,456,574 | | 4.37 | | Equity securities | | 669 | | 2.38 | | | 303 | | — | | | | | | | | | | | | | Total investment securities — available-for-sale and held-to-maturity | | $ | 5,569,006 | | 5.38 | | | Total investment securities available-for-sale and held-to-maturity | | | $ | 4,772,401 | | 3.85 | | | | | | | | | | | | |
Total proceeds from the sale of securities during the year ended December 31, 20082009 amounted to approximately $680.0 million (2007$1.9 billion (2008 — $960.8$680.0 million). The Corporation realized gross gains of approximately $17.9$82.8 million (2007in 2009 (2008 — $5.1$17.9 million), and realized gross losses of approximately $0.2 million (2007 — $1.9 million).in 2008. 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, 2009 and 2008 was $1.6 million. During 2009, the Corporation realized a gain of $3.8 million 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. DuringFor the yearyears ended on December 31, 2009 and 2008, the Corporation recorded other-than-temporary impairmentsOTTI charges of approximately $6.0$0.4 million (2007 — $5.9 million)and $1.8 million, respectively, on certain corporate bonds and equity securities held in its available-for-sale portfolio. Of the $6.0investment portfolio related to financial institutions in Puerto Rico. Also, OTTI charges of $4.2 million other-than-temporary impairmentswere recorded in 2008 approximately $4.2 million is related to auto industry corporate bonds held by FirstBank Florida.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 analysesanalysis and was reflected in earnings as a realized loss. TheWith respect to debt securitites, in 2009, the Corporation recorded OTTI charges through earnings of $1.3 million related to the credit loss portion of available-for-sale private label MBS. Refer to Note 4 to the Corporation’s remaining exposure to auto industry corporate bonds as offinancial statements for the year ended December 31, 2008 amounted to $1.5 million. The2009 included in Item 8 of this Form 10-K for additional information regarding the Corporation’s evaluation of other-than temporary impairment losses in 2007 were related to equityon held-to-maturity and available-for-sale securities. Net interest income of future periods maywill be affected by the acceleration in prepayments of mortgage-backed securities. Acceleration insecurities experienced during the prepayments of mortgage-backed securities would lower yields on securities purchased at a premium, asyear, investments sold, the amortization of premiums paid upon acquisition of these securities would accelerate. Conversely, acceleration in the prepayments of mortgage-backed securities would increase yields on securities purchased at a discount, as the amortizationcalls of the discount would accelerate.Agency notes, and the subsequent re-investment at lower then current yields. Also, net interest income in future periods might be affected by the Corporation’s investment in callable securities. Approximately $1.2 billion$945 million of U.S. Agency debentures with an average yield of 5.87%5.77% were called during 2008. However, given market opportunities, the Corporation bought U.S. government-sponsored agencies MBS amounting to $3.2 billion at an average yield of 5.44% during 2008, which is significantly higher than the cost of borrowings used to finance the purchase of such assets.2009. As of December 31, 2008,2009, the Corporation has approximately $0.9$1.1 billion in U.S. agency debentures with embedded calls. Lower reinvestment ratescalls and a time lag between calls, prepayments and/or the maturitywith an average yield of investments and actual reinvestment2.12% (mainly securities with contractual maturities of proceeds into new investments might affect net interest income2-3 years acquired in the future.2009). 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 for 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, 20082009 included in Item 8 of this Form 10-K for additional information regarding the Corporation’s investment portfolio. 90100
Investment Securities and Loans Receivable Maturities The following table presents the maturities or repricing of the loan and investment portfolio as of December 31, 2008:2009: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | $ | 76,003 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 76,003 | | | $ | 24,286 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 24,286 | | Motgage-backed securities | | 336,564 | | 635,863 | | — | | 3,478,644 | | — | | 4,451,071 | | | Mortgage-backed securities | | | 449,798 | | 676,992 | | — | | 2,329,784 | | — | | 3,456,574 | | Other securities(2) | | 77,623 | | 110,623 | | — | | 993,834 | | — | | 1,182,080 | | | 96,957 | | 1,252,700 | | — | | 36,100 | | — | | 1,385,757 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total investments | | 490,190 | | 746,486 | | — | | 4,472,478 | | — | | 5,709,154 | | | 571,041 | | 1,929,692 | | — | | 2,365,884 | | — | | 4,866,617 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans:(1)(2)(3) | | | Residential real estate | | 635,283 | | 374,381 | | — | | 2,482,064 | | — | | 3,491,728 | | | Commercial and commercial real estate | | 4,898,543 | | 521,715 | | 364,443 | | 176,505 | | — | | 5,961,206 | | | Residential mortgage | | | 777,931 | | 376,867 | | — | | 2,461,485 | | — | | 3,616,283 | | C&I and commercial mortgage | | | 5,198,518 | | 705,779 | | 222,578 | | 815,375 | | — | | 6,942,250 | | Construction | | 1,481,557 | | 23,218 | | — | | 22,220 | | — | | 1,526,995 | | | 1,436,136 | | 24,967 | | — | | 31,486 | | — | | 1,492,589 | | Finance leases | | 100,706 | | 263,177 | | — | | — | | — | | 363,883 | | | 96,453 | | 222,051 | | — | | — | | — | | 318,504 | | Consumer | | 612,766 | | 1,113,256 | | — | | 18,458 | | — | | 1,744,480 | | | 515,603 | | 1,063,997 | | — | | — | | — | | 1,579,600 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total loans | | 7,728,855 | | 2,295,747 | | 364,443 | | 2,699,247 | | — | | 13,088,292 | | | 8,024,641 | | 2,393,661 | | 222,578 | | 3,308,346 | | — | | 13,949,226 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total earning assets | | $ | 8,219,045 | | $ | 3,042,233 | | $ | 364,443 | | $ | 7,171,725 | | $ | — | | $ | 18,797,446 | | | $ | 8,595,682 | | $ | 4,323,353 | | $ | 222,578 | | $ | 5,674,230 | | $ | — | | $ | 18,815,843 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (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”. |
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, or more often if events or circumstances indicate there may be an impairment. 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 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 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 and 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 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 nature of 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 applied 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 (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 14.0 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), 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 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%. The reduction in 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 31 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 reporting unit where goodwill is recorded. Goodwill was not impaired as of December 31, 2009 or 2008, nor was any goodwill written-off due to impairment during 2009, 2008 and 2007. Other Intangibles Definite life intangibles, mainly core deposits, are amortized over their estimated life, 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. 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) reputationreputational 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 91
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. ReputationReputational Risk
ReputationReputational 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: 92
| • | | 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 them 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; | | | • | | theThe Corporation’s systems of internal control over financial reporting and disclosure controls and procedures; | | | • | | 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; | |
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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 Corporation’s legal and regulatory compliance; | | | • | | The application for the Corporation’s related person transaction policy as established by the Board of Directors; | | | • | | The application 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. |
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. 93
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 Council The Risk Management Council 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 owners ofpersons responsible for the Corporation’s significant Corporation’s 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 | | | • | | Ensure thatThe provision to the Board of Directors receivesof 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. | | | (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) — overseeoversees and establishestablishes 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. |
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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 and Chief Operating Officer areis 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) | | Chief Credit Risk Officer and the Chief Lending Officer are responsible of managing the Corporation’s credit risk program. | | | (4) | | Chief Financial Officer in combination with the Corporation’s Treasurer, manages the Corporation’s interest rate and market and liquidity risks programs and, in combinationtogether 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 forin 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 orand 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. 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 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 nonbankingnon-banking subsidiaries. The second is the liquidity of the banking subsidiaries.subsidiary. 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 Operating Officer, the Chief Risk Officer, the Wholesale 95
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; monitors liquidity availability on a daily basis and reviews 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 liquidity position. 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, maintainingthe maintenance of direct relationships with wholesale market funding providers, and maintainingthe maintenance of the ability to liquidate certain assets when, and if, requirements warrant. The Corporation develops and maintains contingency funding plans for both, the parent company and bank liquidity positions.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 funding 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 aan adequate 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 a 5%the self-imposed minimum limit amount overof 5% of total assets. As of December 31, 2008,2009, the estimated basic surplus ratio of approximately 11.2%8.6% included un-pledged assets,unpledged investment securities, FHLB lines of credit, collateral pledged at the FED Discount Window Program, and cash. Un-pledged assetsAs of December 31, 2009, the Corporation had $378 million available for additional credit on FHLB lines of credit. Unpledged liquid securities as of December 31, 2008 are2009 mainly composedconsisted of Puerto Rico Government fixed-rate MBS 108
and U.S. Agency fixed-rateagency debentures and MBS totaling $925.5 million, which can be sold under agreements to repurchase.approximately $646.9 million. The Corporation does not rely on uncommitted inter-bank lines of credit (federal funds lines) to fund its operations;operations and does not include them in the basic surplus computation. The financial market disruptions that began in 2007, and became exacerbated in 2008, continued to impact the financial services sector and may affect access to regular and customary sources of funding, including repurchase agreements, as counterparties may not be willing to enter into additional agreements in order to protect their liquidity. However, the Corporation has taken direct actions to enhance its liquidity positions and to safeguard its access to credit. Such initiatives include, among other things, the posting of additional collateral and thereby increasing its borrowing capacity with the FHLB and the FED through the Discount Window Program, the issuance of additional brokered CDs to increase its liquidity levels and the extension of its borrowing maturities to reduce exposure to high levels of market volatility. The Corporation understands that current conditions of liquidity and credit limitations could continue to be observed well into 2009. Thus, the Corporation will continue to monitor the different alternatives available under programs announced by the FED and the FDIC such as the Term Auction Facility (TAF) for short-term loans and has decided to continue its participation in the FDIC’s voluntary Temporary Liquidity Guarantee Program. This program insures 100% of deposits that are held in non-interest bearing deposit transaction accounts and guarantees newly issued senior unsecured debt of banks, under certain conditions. 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 Discount Window Program, and other unsecured lines established with financial institutions.FED. The CreditAsset Liability Committee of the Board of Directors reviews credit availability on a regular basis. In the past, theThe Corporation has also securitized and sold mortgage loans as a supplementary source of funding. Commercial paper has also in the past provided additional funding. Long-term funding as well as long-term fundinghas also been obtained through the issuance 96
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. Recent initiatives by the FED to ease the credit crisis have included, among other things, cuts to the discount rate, the availability of the Term Auction Facility (“TAF”) to provide short-term loans to banks and expanding the qualifying collateral it will lend against, to include commercial paper. The FDIC also raised the cap on deposit insurance coverage from $100,000 to $250,000 until December 31, 2009. These actions made the federal government a viable source of funding in the current environment. 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, 2008 | | 2008 | | 2007 | | 2006 | | | December 31, 2009 | | 2009 | | 2008 | | 2007 | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Savings accounts | | | 1.98 | % | | $ | 1,288,179 | | $ | 1,036,662 | | $ | 984,332 | | | | 1.68 | % | | $ | 1,774,273 | | $ | 1,288,179 | | $ | 1,036,662 | | Interest-bearing checking accounts | | | 2.09 | % | | 726,731 | | 518,570 | | 433,278 | | | | 1.75 | % | | 985,470 | | 726,731 | | 518,570 | | Certificates of deposits | | | 3.94 | % | | 10,416,592 | | 8,857,405 | | 8,795,692 | | | Certificates of deposit | | | | 2.17 | % | | 9,212,282 | | 10,416,592 | | 8,857,405 | | | | | | | | | | | | | | | | | Interest-bearing deposits | | | 3.63 | % | | 12,431,502 | | 10,412,637 | | 10,213,302 | | | | 2.06 | % | | 11,972,025 | | 12,431,502 | | 10,412,637 | | Non-interest-bearing deposits | | 625,928 | | 621,884 | | 790,985 | | | 697,022 | | 625,928 | | 621,884 | | | | | | | | | | | | | | | | | Total | | $ | 13,057,430 | | $ | 11,034,521 | | $ | 11,004,287 | | | $ | 12,669,047 | | $ | 13,057,430 | | $ | 11,034,521 | | | | | | | | | | | | | | | | | | | | Interest-bearing deposits: | | | | | | Average balance outstanding | | $ | 11,282,353 | | $ | 10,755,719 | | $ | 11,873,608 | | | $ | 11,387,958 | | $ | 11,282,353 | | $ | 10,755,719 | | | | | Non-interest-bearing deposits: | | | | | | Average balance outstanding | | $ | 682,496 | | $ | 563,990 | | $ | 771,343 | | | $ | 715,982 | | $ | 682,496 | | $ | 563,990 | | | | | Weighted average rate during the period on interest-bearing deposits(1) | | | 3.75 | % | | | 4.88 | % | | | 4.63 | % | | | 2.79 | % | | | 3.75 | % | | | 4.88 | % |
| | | (1) | | Excludes changes in fair value of callable brokered CDs elected to be measured at fair value under SFAS 159 and changes in the fair value of derivatives that economically hedge (economically or under fair value hedge accounting) brokered CDs and the basis adjustment.. |
Brokered CDs— A large portion of the Corporation’s funding is retail brokered CDs issued by the Bank subsidiary, FirstBank Puerto Rico. Total brokered CDs increaseddecreased from $7.2$8.4 billion at year end 20072008 to $8.4$7.6 billion as of December 31, 2008.2009. The Corporation has been issuingpartly refinancing brokered CDs that matured or were called during 2009 with alternate sources of funding at a lower cost. Also, the Corporation shifted the funding emphasis to finance its lending activities, pay off repurchase agreements issuedretail deposits to finance the purchase of MBS in the first half of 2008, accumulate additional liquidity due to current market volatility, and extend the maturity of its borrowings.reduce reliance on brokered CDs. 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” institutioninstitution. As of December 31, 2009, the Bank’s total and does not foresee falling below required levels to issue brokered deposits.Tier I capital exceed by $410 million and $814 million, respectively, the minimum well-capitalized levels. The average term to maturity of the retail brokered CDs outstanding as of 109
December 31, 20082009 is approximately 2.5 years.1 year. Approximately 24%2% 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 97
funding in short periods of time. This strategy enhances the Corporation’s liquidity position, since the brokered CDs are insured by the FDIC up to regulatory limits and can be obtained faster and cheaper compared to regular retail deposits. Demand forThe brokered CDs has recently increased asmarket continues to be a resultreliable source to fulfill the Corporation’s needs for the issuance of the move by investors from riskier investments, such as equities, to federally guaranteed instruments such as brokered CDsnew and the recent increase in FDIC deposit insurance from $100,000 to $250,000.replacement transactions. For the year ended December 31, 2008,2009, the Corporation issued $9.8$8.3 billion in brokered CDs (including rolloverrollovers of short-term broker CDs and replacement of brokered CDs called) at an average rate of 0.97% compared to $4.3$9.8 billion for 2007.at an average rate of 3.64% issued in 2008. The following table presents a maturity summary of brokered and retail CDs with denominations of $100,000 or higher as of December 31, 2008.2009. | | | | | | | | | | | (In thousands) | | | (In thousands) | | Three months or less | | $ | 1,763,086 | | | $ | 1,958,454 | | Over three months to six months | | 1,065,688 | | | 1,366,163 | | Over six months to one year | | 2,304,775 | | | 2,258,717 | | Over one year | | 4,485,993 | | | 2,969,471 | | | | | | | | | Total | | $ | 9,619,542 | | | $ | 8,552,805 | | | | | | | | |
Certificates of deposit in denominations of $100,000 or higher include brokered CDs of $8.4$7.6 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 also include $25.6 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, 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. The Corporation experiencedTotal deposits, excluding brokered CDs, increased by $480 million from the balance as of December 31, 2008, reflecting increases in all sectors including individuals, businesscore-deposit products such as savings and government (mainly certificates issued to agenciesinterest-bearing checking accounts. A significant portion of the Government ofincrease was related to deposits in Puerto Rico, and to Government agencies in the Virgin Islands)Corporation’s primary market, reflecting successful directmarketing campaigns and cross-selling strategies.initiatives. The increase was also related to increases in money market accounts in Florida, as management shifted the funding emphasis to retail deposits to reduce reliance on brokered CDs. Successful marketing campaigns and attractive rates were the main reasons 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 1213 in the Corporation’s audited financial statements for the year ended December 31, 20082009 included in Item 8 of this Form 10-K for further details. 110
Borrowings As of December 31, 2008,2009, total borrowings amounted to $4.7$5.2 billion as compared to $4.5$4.7 billion and $4.7$4.5 billion as of December 31, 20072008 and 2006,2007, respectively. 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, 2008 | | 2008 | | 2007 | | 2006 | | | December 31, 2009 | | 2009 | | 2008 | | 2007 | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Federal funds purchased and securities sold under agreements to repurchase | | | 3.85 | % | | $ | 3,421,042 | | $ | 3,094,646 | | $ | 3,687,724 | | | | 3.34% | | | $ | 3,076,631 | | $ | 3,421,042 | | $ | 3,094,646 | | Loans payable (1) | | | | 1.00% | | | 900,000 | | — | | — | | Advances from FHLB | | | 3.09 | % | | 1,060,440 | | 1,103,000 | | 560,000 | | | | 3.21% | | | 978,440 | | 1,060,440 | | 1,103,000 | | Notes payable | | | 5.08 | % | | 23,274 | | 30,543 | | 182,828 | | | | 4.63% | | | 27,117 | | 23,274 | | 30,543 | | Other borrowings | | | 4.28 | % | | 231,914 | | 231,817 | | 231,719 | | | | 2.86% | | | 231,959 | | 231,914 | | 231,817 | | | | | | | | | | | | | | | | | Total (1) | | $ | 4,736,670 | | $ | 4,460,006 | | $ | 4,662,271 | | | Total (2) | | | $ | 5,214,147 | | $ | 4,736,670 | | $ | 4,460,006 | | | | | | | | | | | | | | | | | Weighted-average rate during the period | | | 3.78 | % | | | 5.06 | % | | | 4.99 | % | | | 2.79 | % | | | 3.78 | % | | | 5.06 | % |
| | | (1) | | Advances from the FED under the FED Discount Window Program. | | (2) | | Includes $1.6$3.0 billion as of December 31, 2008 which2009 that are tied to variable rates or matured within a year. |
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Securities sold under agreements to repurchase— The growth of the Corporation’s investment portfolio is substantially funded with repurchase agreements. Securities sold under repurchase agreements were $3.1 billion at December 31, 2009, compared with $3.4 billion at December 31, 2008, compared with $2.9 billion at December 31, 2007.2008. One of the Corporation’s strategies is 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 cost at reasonable levels. Of the total of $3.4$3.1 billion repurchase agreements outstanding as of December 31, 2008,2009, approximately $2.4 billion consist of structured reposrepo’s and $600$500 million of long-term repos. The access to this type of funding has beenwas affected by the current liquidity problemsturmoil in the financial markets as certainwitnessed in the second half of 2008 and in 2009. Certain counterparties arehave not been willing to enter into additional repurchase agreements and the capacity to extend the term of maturing repurchase agreements has also been reduced.reduced, however, the Corporation has been able to keep access to credit by using cost effective sources such as FED and FHLB advances. Refer to Note 1315 in the Corporation’s audited financial statements for the year ended December 31, 20082009 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 depositpledge cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines because ofdue 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 didhas not experienceexperienced significant margin calls from counterparties recently arising from writedownscredit-quality-related write-downs in valuations.valuations with only $0.95 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, 20082009 and 2007,December 31, 2008, the outstanding balance of FHLB advances was $978.4 million and $1.1 billion.billion, respectively. Approximately $678.4$653.4 million of outstanding advances from the FHLB maturedhas maturities over one year. As part of its precautionary initiatives to safeguard access to credit and the low level of interest rates, the Corporation increasedhas been increasing its capacity underpledging of assets to the FHLB, while at the same time the FHLB has been revising their credit facilities by posting additional collateralguidelines and as“haircuts” in the computation of December 31, 2008, it had $729 million available for additional borrowings.availability of credit lines. 111
FED Discount window —FED initiatives to ease the credit crisis have included cuts to the discount rate, which was lowered from 4.75% to 0.50% through eight separate actions since December 2007, and adjustments to previous practices to facilitate financing for longer periods. This makesThat made the FED Discount Window a viable source of funding given current market conditions. The Corporation has pledged U.S. government agency fixed-rate MBS on this short-term borrowing channel and recently has increased its capacity by posting additional collateral withconditions in 2009. As of December 31, 2009, the FED. The Corporation had $479$900 million available for use throughoutstanding in short-term borrowings from the FED Discount Window Program and no amount outstanding as of December 31, 2008. Furthermore, FirstBank requested approval and began procedures for compliance with requirements for participation in the Borrower-in-Custody Program (“BIC”). Through the BIC program a broad range of loans (includinghad collateral pledged related to this credit facility amounted to $1.2 billion, mainly commercial, consumer and mortgages) may be pledged and borrowed against it through the Discount Window. In January 2009, the Bank received approval for participation in the program and began utilizing it as an additional source of funding. Over $2.0 billion of loans are in the process of selection and eligibility qualification for pledging under the program.mortgage loan. Credit Lines— The Corporation maintains unsecured and un-committed lines of credit with other banks. As of December 31, 2008,2009, the Corporation’s total unused lines of credit with other banks amounted to $220$165 million. The Corporation has not used these lines of credit.credit to fund its operations. 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 in previous years 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. AmongNo 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 funding sources are notes payablefinancing options, including available options resulting from recent federal government initiatives to deal with a carrying value of $23.3 million as of December 31, 2008.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 99
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 (which(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 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. The Corporation’s principal uses of funds are the origination of loans and the repayment of maturing brokered CDsdeposits and borrowings. Over the last fourfive years, the Corporation has committed substantial resources to its mortgage banking subsidiary, FirstMortgage, Inc. As a result, residential real estate loans as a percentage of total loans receivable have increased over time from 14% at December 31, 2004 to 27%26% at December 31, 2008.2009. 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 it allowsthey allow the Corporation to derive liquidity, if needed, from the sale of mortgage loans in the secondary market. Recent disruptions in the credit markets and a reduced investors’ demand for mortgage debt have adversely affected the liquidity of the secondary mortgage markets. 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 connection with the placement of FNMA and FHLMC into conservatorship by the U.S. Treasury in September 2008, the Treasury entered into agreements to invest up to approximately $100 billion in each agency. In December 2008, the Corporation obtained from GNMA Commitment Authority to issue GNMA mortgage-backed securities for approximately $50.5 million.securities. Under this program, during 2009, the Corporation will begin securitizing and sellingcompleted the securitization of approximately $305.4 million of FHA/VA mortgage loan productionloans into GNMA MBS. Any regulatory actions affecting GNMA, FNMA or FHLMC could adversely affect the secondary markets.mortgage market.
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Credit Ratings FirstBank’sThe Corporation’s credit as a long-term issuer is currently rated B by Standard & Poor’s (“S&P”) and B- by Fitch Ratings Limited (“Fitch”); both with negative outlook. At the FirstBank subsidiary level, long-term senior debt rating is currently rated Ba1B1 by Moody’s Investor Service (“Moodys”), four notches below their definition of investment grade; B by S&P, and BB+B by Standard & Poor’s (“S&P”), one notch underFitch, both five notches below their definition of investment grade. Fitch Ratings Ltd. (“Fitch”) has ratedThe outlook on the Corporation’s long-term senior debt a rating of BB, which is two notches under investment grade. However, theBank’s credit ratings outlook for Moody’s and S&P are stable while Fitch’sfrom the three rating agencies is negative. The Corporation does not have any outstanding debt or derivative agreements that would be affected by athe recent credit downgrade.downgrades. The Corporation’s liquidity is contingent upon its ability to obtain external sources of funding to finance its operations. Any futurefurther 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 change in credit ratings may affect the fair value of certain liabilities and unsecured derivatives whichthat consider the Corporation’s own credit risk as part of the valuation. 100
Cash Flows Cash and cash equivalents was $405.7were $704.1 million and $378.9$405.7 million as of December 31, 20082009 and 2007,2008, respectively. These balances increased by $66.2$298.4 million and decreased by $189.9$26.8 million from December 31, 20072008 and 2006,2007, respectively. The following discussion highlights the major activities and transactions that affected the Corporation’s cash flows during 20082009 and 2007.2008. 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, 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. Net cash generated from operating activitiesmillion, 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. For the year ended December 31, 2007, net cash provided by operating activities was $60.3 million, which was lower than net income as a result of: (i) the monetary payment of $74.25 million during the third quarter of 2007 for the settlement of the class action brought against the Corporation relating to the accounting for mortgage-related transactions that led to the restatement of financial statements for years 2000 through 2004, and (ii) non-cash adjustments, including the accretion and discount amortizations associated to the Corporation’s investment portfolio. Cash Flows from Investing Activities The Corporation’s investing activities primarily include originating loans to be held to maturity and its available-for-sale and held-to-maturity investment portfolios. For the year ended December 31, 2008,2009, net cash of $2.3 billion$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 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 investmentsinvestment 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. For the year ended December 31, 2007, net cash used by investing activities was $136.6 million, also due to loan origination disbursements and purchases of mortgage loans as well as purchases of investment securities.
Cash Flows from Financing Activities The Corporation’s financing activities primarily include the receipt of deposits and issuance of brokered CDs, the issuance and payments of long-term debt, the issuance of equity instruments and activities related to its short-term funding. In addition, the Corporation payspaid monthly dividends on its preferred stock and quarterly dividends on its common stock. Instock until it announced the suspension of dividends beginning in August 2009. 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 provided byused 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. 101
In 2007, net cash used in financing activities was $113.5 million due to a net decrease in securities sold under repurchase agreements aligned with the Corporation’s decrease in investment securities that resulted from maturities and prepayments received and the Corporation’s decision back in 2007 to de-leverage its investment portfolio in order to protect earnings from margin erosions under a flat-to-inverted yield curve scenario; the early redemption of a $150 million medium-term note during the second quarter of 2007 and the payment of cash dividends. Partially offsetting these uses of cash were proceeds from the issuance of brokered CDs and additional advances from the FHLB used in part to pay down repurchase agreements and notes payable and proceeds from the issuance of 9.250 million common shares in a private placement.
Capital The Corporation’s stockholders’ equity amounted to $1.5$1.6 billion as of December 31, 2008,2009, an increase of $126.5$50.9 million compared to the balance as of December 31, 2007,2008, 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 incomeloss of $109.9$275.2 million recorded for 20082009, dividends paid amounting to $43.1 million in 2009 ($13.0 million in common stock, or $0.14 per share, and $30.1 million in preferred stock) and a net unrealized gain$30.9 million decrease in other comprehensive income mainly due to a noncredit-related impairment of $82.7$31.7 million on the fair value of available-for-sale securities recorded as part of comprehensive income. The increase in the fair value of MBS was mainly in response to the announcement by the U.S. government that it will invest up to $600 billion in obligations from housing-related government-sponsored agencies, including $500 billion in MBS backed by FNMA, FHLMC and GNMA. Partially offsetting these increases were dividends declared during 2008 amounting to $66.2 million.private label MBS. For each of the yearsyear ended on December 31, 2008, 2007 and 2006,2009, the Corporation declared in aggregate cash dividends of $0.28$0.14 per common share.share, $0.28 for 2008, and $0.28 for 2007. Total cash dividends paid on common shares amounted to $13.0 million for 2009, $25.9 million for 2008, (or a 37% dividend payout ratio),and $24.6 million for 2007 (or a 88% dividend payout ratio) and $23.3 million for 2006 (or a 53% dividend payout ratio).2007. Dividends declared on preferred stock amounted to $30.1 million in 2009 and $40.3 million in 2008 2007 and 2006.2007. On July 30, 2009, the Corporation announced the suspension of dividends on common and all its outstanding series of preferred stock, including the TARP preferred dividends. 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 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 of December 31, 2008,2009, First BanCorp and FirstBank Puerto Rico and FirstBank Florida were in compliance with regulatory capital requirements that were applicable to them as a financial holding company and a state non-member bank, and a thrift, 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%). Set forth below are First BanCorp’s, and FirstBank Puerto Rico’s and FirstBank Florida’s regulatory capital ratios as of December 31, 20082009 and December 31, 2007,2008, based on existing Federal Reserve FDIC and OTSFederal Deposit Insurance Corporation 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 114
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 Subsidiaries | | Banking Subsidiary | | | First | | FirstBank | | To be well | | 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 | % | | | BanCorp | | FirstBank | | Florida | | capitalized | | As of December 31, 2008 | | | | | | Total capital (Total capital to risk-weighted assets) | | | 12.80 | % | | | 12.23 | % | | | 13.53 | % | | | 10.00 | % | | | 12.80 | % | | | 12.23 | % | | | 10.00 | % | Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) | | | 11.55 | % | | | 10.98 | % | | | 12.43 | % | | | 6.00 | % | | | 11.55 | % | | | 10.98 | % | | | 6.00 | % | Leverage ratio (1) | | | 8.30 | % | | | 7.90 | % | | | 8.78 | % | | | 5.00 | % | | | | | As of December 31, 2007 | | | | | | Total capital (Total capital to risk-weighted assets) | | | 13.86 | % | | | 13.23 | % | | | 10.92 | % | | | 10.00 | % | | Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) | | | 12.61 | % | | | 11.98 | % | | | 10.42 | % | | | 6.00 | % | | Leverage ratio (1) | | | 9.29 | % | | | 8.85 | % | | | 7.79 | % | | | 5.00 | % | | Leverage ratio | | | | 8.30 | % | | | 7.90 | % | | | 5.00 | % |
| | | (1) | | Tier 1 capital to average assets for First BanCorp and FirstBank and Tier 1 Capital to adjusted total assets
for FirstBank Florida. |
The decreaseincrease in regulatory capital ratios is mainly related to the increase$400 million investment by the U.S. Treasury in preferred stock of the Corporation through the U.S. Treasury TARP Capital Purchase Program. Refer to Note 23 in the volumeCorporation’s financial statements for the year ended December 31, 2009 included in Item 8 of risk-weighted assets driven bythis Form 10-K for additional information regarding this issuance. The funds were used in part to strengthen the aforementioned purchases of MBSCorporation’s lending programs and a higher commercialability to support growth strategies that are centered on customers’ needs, including programs to preserve home ownership. Together with private and consumer loan portfolio.public sector initiatives, the Corporation looks to support the local economy and the communities it serves during the current economic environment. The Corporation is well capitalized and positioned to manage economic downturns. Thewell-capitalized, having sound margins over minimum well-capitalized regulatory requirements. As of December 31, 2009, the total regulatory capital ratio of 12.8%is 13.4% and the Tier 1 capital ratio of 11.6% as of December 31, 2008is 12.2%. This translates intoto approximately $386$492 million and $764$881 million of total capital and Tier 1 capital, respectively, in excess of the total capital and Tier 1 capital well capitalized requirements of 10% and 6%, respectively. A key priority for 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% as of December 31, 2009, compared to 4.87% as of December 31, 2008, and the Tier 1 common equity to risk-weighted assets ratio as of December 31, 2009 was 4.10% compared to 5.92% as of December 31, 2008. The tangible common equity ratio and tangible book value per common share are non-GAAP measures generally used by financial analysts and investment bankers 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 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. The following table is a reconciliation of the Corporation’s tangible common equity and tangible assets for the years ended December 31, 2009 and December 31, 2008, respectively. 102115
| | | | | | | | | | | December 31, | | | December 31, | | (In thousands) | | 2009 | | | 2008 | | Total equity — GAAP | | $ | 1,599,063 | | | $ | 1,548,117 | | Preferred equity | | | (928,508 | ) | | | (550,100 | ) | Goodwill | | | (28,098 | ) | | | (28,098 | ) | Core deposit intangible | | | (16,600 | ) | | | (23,985 | ) | | | | | | | | | | | | | | | | | Tangible common equity | | $ | 625,857 | | | $ | 945,934 | | | | | | | | | | | | | | | | | | Total assets — GAAP | | $ | 19,628,448 | | | $ | 19,491,268 | | Goodwill | | | (28,098 | ) | | | (28,098 | ) | Core deposit intangible | | | (16,600 | ) | | | (23,985 | ) | | | | | | | | | | | | | | | | | Tangible assets | | $ | 19,583,750 | | | $ | 19,439,185 | | | | | | | | | Common shares outstanding | | | 92,542 | | | | 92,546 | | | | | | | | | | | | | | | | | | Tangible common equity ratio | | | 3.20 | % | | | 4.87 | % | Tangible book value per common share | | $ | 6.76 | | | $ | 10.22 | |
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 stress test administered to the 19 largest U.S. bank holding companies under the Supervisory Capital Assessment Program (“SCAP”), the results 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. The following table reconciles stockholders’ equity (GAAP) to Tier 1 common equity: | | | | | | | | | | | December 31, | | | December 31, | | (In thousands) | | 2009 | | | 2008 | | Total equity — GAAP | | $ | 1,599,063 | | | $ | 1,548,117 | | Qualifying preferred stock | | | (928,508 | ) | | | (550,100 | ) | Unrealized gain on available-for-sale securities (1) | | | (26,617 | ) | | | (57,389 | ) | Disallowed deferred tax asset (2) | | | (11,827 | ) | | | (69,810 | ) | Goodwill | | | (28,098 | ) | | | (28,098 | ) | Core deposit intangible | | | (16,600 | ) | | | (23,985 | ) | Cumulative change gain in fair value of liabilities acounted for under a fair value option | | | (1,535 | ) | | | (3,473 | ) | Other disallowed assets | | | (24 | ) | | | (508 | ) | | | | | | | | Tier 1 common equity | | $ | 585,854 | | | $ | 814,754 | | | | | | | | | | | | | | | | | | Total risk-weighted assets | | $ | 14,303,496 | | | $ | 13,762,378 | | | | | | | | | | | | | | | | | | Tier 1 common equity to risk-weighted assets ratio | | | 4.10 | % | | | 5.92 | % |
| | | 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 million of the Corporation’s deferred tax assets at December 31, 2009 (December 31, 2008 — $58 million) were included without limitation in regulatory capital pursuant to the risk-based capital guidelines, while approximately $12 million of such assets at December 31, 2009 (December 31, 2008 — $70 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 million of the Corporation’s other net deferred tax liability at December 31, 2009 (December 31, 2008 — $0) 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. |
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TheOn February 1, 2010, the Corporation recently announced, similar to a number of the largest and well-capitalized banks in the United States,reported that it is participating in the U.S. Treasury Department’s Capital Purchase Program (“CPP”). Early in 2009, the Corporation completed the sale of 400,000planning to conduct an exchange offer under which it will be offering to exchange newly issued shares of newlycommon stock for the issued preferred stock valued at $400 million and a warrant to purchase up to 5,842,259outstanding shares of the Corporation’s common stock at an exercise price of $10.27 per share,publicly held Series A through E Noncumulative Perpetual Monthly Income Preferred Stock, subject to the standard terms and conditions for all participants in the CPP. Including thisany necessary proration. The exchange offer will be conducted to improve its capital raise, the Corporation’s total regulatory capital ratio would have been close to 15.7% as of December 31, 2008, or approximately $785 million in excess of the well-capitalized requirement, and the Tier 1 capital ratio would have been close to 14.5% or approximately $1.1 billion in excess of the well-capitalized requirement. The Corporation will use this excess capital to further strengthen its ability to support growth strategies that are centered on the needs of its customers and, together with private and public sector initiatives, support the local economy and the communities it serves duringstructure given the current economic conditions in the markets in which it operates and the evolving regulatory environment. ReferThrough the exchange offer, First BanCorp seeks to Item 5improve 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 additional information regarding this issuance.fiscal year 2009. Completion of the exchange offer will be subject to certain conditions, including the consent by common stockholders of the issuance of shares of the common stock pursuant to the exchange. 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, 2008,2009, commitments to extend credit and commercial and financial standby letters of credit amounted to approximately $1.5 billion and $102.2$103.9 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 into interest rate lock agreements with its prospective borrowers. 103117
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, other contractual obligations, commitments to sell mortgage loans and commitments to extend credit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Contractual Obligations and Commitments | | | Contractual Obligations and Commitments | | | | | | As of December 31, 2008 | | | As of December 31, 2009 | | | | | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | After 5 years | | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | After 5 years | | | | (In thousands) | | | (In thousands) | | Contractual obligations (1): | | | Contractual obligations: | | | Certificates of deposit (2)(1) | | $ | 10,416,592 | | $ | 5,765,792 | | $ | 2,937,391 | | $ | 624,837 | | $ | 1,088,572 | | | $ | 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 | | 3,421,042 | | 533,542 | | 1,287,500 | | 900,000 | | 700,000 | | | 3,076,631 | | 676,631 | | 1,600,000 | | 800,000 | | — | | Advances from FHLB | | 1,060,440 | | 382,000 | | 411,000 | | 267,440 | | — | | | 978,440 | | 325,000 | | 445,000 | | 208,440 | | — | | Notes payable | | 23,274 | | — | | 6,888 | | 6,245 | | 10,141 | | | 27,117 | | — | | 13,756 | | — | | 13,361 | | Other borrowings | | 231,914 | | — | | — | | — | | 231,914 | | | 231,959 | | — | | — | | — | | 231,959 | | Operating leases | | 51,415 | | 7,669 | | 10,946 | | 7,473 | | 25,327 | | | 63,795 | | 10,342 | | 14,362 | | 8,878 | | 30,213 | | Other contractual obligations | | 42,461 | | 22,557 | | 16,879 | | 3,025 | | — | | | 10,387 | | 7,157 | | 3,130 | | 100 | | — | | | | | | | | | | | | | | | | | | | | | | | | | Total contractual obligations | | $ | 15,247,138 | | $ | 6,711,560 | | $ | 4,670,604 | | $ | 1,809,020 | | $ | 2,055,954 | | | $ | 14,500,612 | | $ | 7,960,195 | | $ | 4,911,810 | | $ | 1,339,268 | | $ | 289,339 | | | | | | | | | | | | | | | | | | | | | | | | | Commitments to sell mortgage loans | | $ | 50,500 | | $ | 50,500 | | | $ | 13,158 | | $ | 13,158 | | | | | | | | | | | | | Standby letters of credit | | $ | 102,178 | | $ | 102,178 | | | $ | 103,904 | | $ | 103,904 | | | | | | | | | | | | | Commitments to extend credit: | | | Lines of credit | | $ | 914,374 | | $ | 914,374 | | | $ | 1,220,317 | | $ | 1,220,317 | | Letters of credit | | 33,632 | | 33,632 | | | 48,944 | | 48,944 | | Commitments to originate loans | | 518,281 | | 518,281 | | | 255,598 | | 255,598 | | | | | | | | | | | | | Total commercial commitments | | $ | 1,466,287 | | $ | 1,466,287 | | | $ | 1,524,859 | | $ | 1,524,859 | | | | | | | | | | | | |
| | | (1) | | $22.4 million of tax liability, including accrued interest of $6.8 million, associated with unrecognized tax benefits under FIN 48 has been excluded due to the high degree of uncertainty regarding the timing of future cash outflows associated with such obligations. | | (2) | | Includes $8.4$7.6 billion of brokered CDs generally sold by third-party intermediaries in denominations of $100,000 or less, within FDIC insurance limits.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 commitments 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 patterns of the 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 constitutes 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, 2009 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 reversed 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, 2009 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, was not part of a financing agreement, and 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/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’s Capital in New York. After Barclay’s refusal to turn over the securities, the Corporation, during the month of December 2009, filed a lawsuit against Barclay’s Capital in federal court in New York demanding the return of the securities. 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 ultimately succeed in its litigation against Barclay’s Capital to recover all or a substantial portion of the securities. 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 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 the profitability under varying interest rate environments. The MIALCO oversees interest rate risk and meetings focusfocuses on, among other things, current and expected conditions in world financial markets, competition and prevailing rates in the local deposit market, liquidity, unrealized gains and losses in securities market values, recent or proposed changes to the investment portfolio, alternative funding sources and theirrelated 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. 104
The Corporation performs on a quarterly basis a consolidated net interest income simulation analysis on a consolidated basis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a one-year and a five-yearone-to-five-year time horizon, assuming 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) | | using a static balance sheet as the Corporation had on the simulation date, and | | | (2) | | using a growing (1) using a static balance sheet as the Corporation had it on the simulation date, and (2) using a dynamic balance sheet based on recent growth 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 ofon the balance sheet on the date of the simulations. For the December 31, 2007 simulation and based on the significant downward shift in rates experienced at the beginning of 2008, the Corporation’s MIALCO decided to update the rates as of the end of January 2008 and use these as the starting point for the projections. These simulations are highly complex, and use many simplifying assumptions that are intended to reflect the general behavior of the Corporation over the period in question. There can be no assuranceIt is highly unlikely that actual events will match these assumptions in all cases. For this reason, the results of these simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates. 119
The following table presents the results of the simulations as of December 31, 20082009 and 2007.2008. Consistent with prior years, these exclude non-cash changes in the fair value of derivatives and SFAS 159 liabilities:liabilities measured at fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2008 | | December 31, 2007 | | December 31, 2009 | | December 31, 2008 | | | 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 | | $ | 6.5 | | | 1.39 | % | | $ | 6.4 | | | 1.29 | % | | $ | (8.1 | ) | | | (1.64 | )% | | $ | (8.4 | ) | | | (1.66 | )% | | $ | 10.6 | | | 2.16 | % | | $ | 16.0 | | | 3.39 | % | | $ | 6.5 | | | 1.39 | % | | $ | 6.4 | | | 1.29 | % | -200 bps ramp | | $ | (12.8 | ) | | | (2.77 | )% | | $ | (15.5 | ) | | | (3.15 | )% | | $ | (13.2 | ) | | | (2.68 | )% | | $ | (13.2 | ) | | | (2.60 | )% | | $ | (31.9 | ) | | | (6.53 | )% | | $ | (33.0 | ) | | | (6.98 | )% | | $ | (12.8 | ) | | | (2.77 | )% | | $ | (15.5 | ) | | | (3.15 | )% |
TheDuring the past year, the Corporation has pursued during 2008continued managing its balance sheet structure to control the overall interest rate risk. As part of the strategy, 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 reducing the low interest rate risk exposureenvironment. 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 the re-pricing structure gaps between the assetsconjunction 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 two to three years, and liabilities and to maintain interestUS Agency floating rate risk within the established policy target levels. Interest rate risk, as measured by the sensitivity of net interest income to shifts in rates, changed when compared to December 31, 2007.collateral mortgage obligations. In order to reduce the exposure to high levels of market volatility,addition, during 2008,2009, the Corporation has been extendingcontinued adjusting the maturitymix of its funding sources by, among other things, entering into long-term repurchase agreements and issuing brokered CDs with longer terms. Also,to better match the Corporation increased the loan portfolio by approximately $1.3 billion since December 31, 2007, the increase was mainly driven by commercial loans tied to short-term LIBOR repricing and 30 years fixed-rate mortgage loans. During the first 12 monthsexpected average life of the income simulation, under a parallel falling rates scenario, net interest income is expected to compress. The Corporation’s loan and investment portfolio is subject to prepayment risk, which results from the ability of a third party to repay their debt obligations prior to maturity. In a declining rate scenario, the prepayment risk in the Corporation’s U.S. government agency fixed-rate MBS portfolio is expected to increase substantially, combined with the callable feature of the U.S. agency debentures that would shorten the duration of the assets with the potential of triggering the call options; which could lead to reinvestment of proceeds from called securities in lower yielding assets. Due to current market conditions and the drop in the long end of the yield curve during 2008, the probability of exercise of the embedded calls on approximately $945 million of U.S. Agency debentures has increased and is expected to be effective in both, the base and falling rates scenarios; this, despite the fact that the lack of liquidity in the financial markets has caused several call dates go by during 2008 without the embedded calls being exercised.
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Taking into consideration the aforementionedabove-mentioned facts for modeling purposes, the purposenet interest income for the next twelve months under a growing balance sheet scenario is estimated to increase by $16.0 million in a gradual parallel upward move of 200 basis points. Following the Corporation’s risk management policies, modeling of 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, some market interest rates 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 growing balance sheet scenario is estimated to decrease by $15.5 million in a parallel downward move of 200 basis points, and the change for the same period, is an increase of $6.4 million in a parallel upward move of 200 basis points. As noted, the impact of the callability feature in the Agency Securities combined with the prepayment risk of the loan and investment portfolio, and the re-investment of those securities into lower yielding assets could result in a shift in the Corporation’s interest rate risk exposure from being in a liability sensitive position to an asset sensitive position for the first twelve months of the simulation horizon. Assuming parallel shifts in interest rates, the Corporation’s net interest income would continue to increase in rising rate scenarios and reduce in falling rate scenarios over a five-year modeling horizon.$33.0 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.time-periods. The gap report as of December 31, 20082009 showed a positive cumulative gap for 3 month of $2.1$2.3 billion and a positive cumulative gap of $1.4 billion$254.8 million for 1 year, compared to negativepositive cumulative gaps of $2.3$2.1 billion and $1.6$1.4 billion for 3 months and 1 year, respectively, as of December 31, 2007.2008. 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 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. Since a substantial portion of the Corporation’s loans, mainly commercial loans, yield variable rates, the interest rate swaps are utilized to convert fixed-rate brokered CDs (liabilities), mainly those with long-term maturities, to a variable rate and mitigate the interest rate risk inherent in these variable rate loans.
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 to protectfor protection against 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. 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, 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 and mitigate the interest rate risk inherent in variable rate loans. All outstanding 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. 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 Statement of Financial Condition and the amount of gains and losses reported in the Statement of (Loss) Income, refer to Note 3032 in the Corporation’s audited financial statements for the year ended December 31, 20082009 included in Item 8 of this Form 10-K. 106
The following tables summarize the fair value changes onof the Corporation’s derivatives as well as the source of the fair values: Fair Value Change | | | | | | | | | | | | Year ended | | (In thousands) | | December 31, 2008 | | | December 31, 2009 | | | | | | | Fair value of contracts outstanding at the beginning of year | | $ | (52,451 | ) | | $ | (495 | ) | Fair value of new contracts at inception | | | (3,255 | ) | | | (35 | ) | Contracts terminated or called during the year | | 37,235 | | | | (5,198 | ) | Changes in fair value during the year | | 17,976 | | | 5,197 | | | | | | | | | Fair value of contracts outstanding as of December 31, 2008 | | $ | (495 | ) | | Fair value of contracts outstanding as of December 31, 2009 | | | $ | (531 | ) | | | | | | | |
Source of Fair Value | | | | | | | | | | | | | | | | | | | | | | | | Payments Due by Period | | | | | | | | | | | | | | | | | | | | | | | | Maturity | | Maturity | | | | | Payments Due by Period | | | | Less Than | | Maturity | | Maturity | | In Excess | | Total | | | Maturity | | Maturity | | | | (In thousands) | | One Year | | 1-3 Years | | 3-5 Years | | of 5 Years | | Fair Value | | | Less Than | | Maturity | | Maturity | | In Excess | | Total | | As of December 31, 2008 | | | | | | As of December 31, 2009 | | | One Year | | 1-3 Years | | 3-5 Years | | of 5 Years | | Fair Value | | Pricing from observable market inputs | | $ | — | | $ | (1,008 | ) | | $ | (577 | ) | | $ | 330 | | $ | (1,255 | ) | | $ | (461 | ) | | $ | 18 | | $ | (636 | ) | | $ | (3,651 | ) | | $ | (4,730 | ) | Pricing that consider unobservable market inputs | | — | | — | | — | | 760 | | 760 | | | — | | — | | — | | 4,199 | | 4,199 | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | — | | $ | (1,008 | ) | | $ | (577 | ) | | $ | 1,090 | | $ | (495 | ) | | $ | (461 | ) | | $ | 18 | | $ | (636 | ) | | $ | 548 | | $ | (531 | ) | | | | | | | | | | | | | | | | | | | | | | | |
Derivative instruments, such as interest rate swaps, are subject to market risk. The Corporation’s derivatives are mainly composed of interest rate swaps that are used to convert the fixed interest payment on its brokered CDs and medium-term notes to variable payments (receive fixed/pay floating). 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. Effective January 1, 2007, the Corporation decided to early adopt SFAS 159 for its callable brokered CDs and certain fixed medium-term notes that were hedged with interest rate swaps. One of the main considerations to early adopt SFAS 159 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 SFAS 133. As of December 31, 2009 and 2008, all of the derivative instruments held by the Corporation were considered economic undesignated hedges. During 2008, approximately $3.02009, all of the $1.1 billion of interest rate swaps that economically hedge brokered CDs that were outstanding as of December 31, 2008 were called by the counterparties, mainly due to the decreaselower levels of 3-month LIBOR. Following the cancellation of the interest rate swaps, the Corporation exercised its call option on the approximately $2.9$1.1 billion swapped-to-floatingswapped-to- floating brokered CDs. The Corporation recorded a net unrealized gainloss of $4.1$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. Refer to Note 2729 of the Corporation’s audited financial statements for the year ended December 31, 20082009 included in Item 8 of this Form 10-K for additional information regarding the fair value determination of derivative instruments. 107121
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 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, 20082009 and 2007.December 31, 2008. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2008 | | | (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: | | | | | | | | | | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2007 | | | (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 | | AA- | | $ | 1,353,290 | | $ | 18 | | $ | (19,766 | ) | | $ | (19,748 | ) | | $ | 3,334 | | | A+ | | | 531,886 | | | | 2,319 | | | | (5,726 | ) | | | (3,407 | ) | | | 1,094 | | Wachovia | | AA- | | 23,655 | | — | | | (365 | ) | | | (365 | ) | | 144 | | | Credit Suisse First Boston | | | A+ | | | 151,884 | | | | 178 | | | | (1,461 | ) | | | (1,283 | ) | | | 512 | | Citigroup | | | A+ | | | 295,130 | | | | 1,516 | | | | (1 | ) | | | 1,515 | | | | 2,299 | | Goldman Sachs | | | A | | | 16,165 | | | | 597 | | | | — | | | | 597 | | | | 158 | | Morgan Stanley | | AA- | | 193,170 | | 4,737 | | | (2,591 | ) | | 2,146 | | 264 | | | A | | | 107,450 | | | | 735 | | | | — | | | | 735 | | | | 59 | | Goldman Sachs | | AA- | | 45,490 | | 2,297 | | | (398 | ) | | 1,899 | | 257 | | | Citigroup | | AA- | | 795,971 | | 5 | | | (9,042 | ) | | | (9,037 | ) | | 2,693 | | | UBS Financial Services, Inc. | | AA | | 90,016 | | — | | | (928 | ) | | | (928 | ) | | 245 | | | Lehman Brothers | | A+ | | 1,077,045 | | 5 | | | (14,768 | ) | | | (14,763 | ) | | 2,748 | | | Credit Suisse First Boston | | A+ | | 183,393 | | 36 | | | (1,785 | ) | | | (1,749 | ) | | 12 | | | Merrill Lynch | | A+ | | 577,088 | | 10 | | | (7,503 | ) | | | (7,493 | ) | | | (1,488 | ) | | Bank of Montreal | | A+ | | 9,825 | | — | | | (36 | ) | | | (36 | ) | | 45 | | | Bear Stearns | | A | | 74,400 | | 2,305 | | | (875 | ) | | 1,430 | | 79 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,423,343 | | 9,413 | | | (58,057 | ) | | | (48,644 | ) | | 8,333 | | | | | | 1,363,659 | | | | 6,840 | | | | (7,188 | ) | | | (348 | ) | | | 4,303 | | | | | | | | | | | | | | | | | | | | | | | | | | Other derivatives(3) | | 351,217 | | 5,288 | | | (9,095 | ) | | | (3,807 | ) | | 431 | | | | | | 332,634 | | | | 1,170 | | | | (1,317 | ) | | | (147 | ) | | | (203 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 4,774,560 | | $ | 14,701 | | $ | (67,152 | ) | | $ | (52,451 | ) | | $ | 8,764 | | | | | $ | 1,696,293 | | | $ | 8,010 | | | $ | (8,505 | ) | | $ | (495 | ) | | $ | 4,100 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (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 local companiesPuerto Rico counterparties for which a credit rating is not readily available. | | | | Approximately $0.8$4.2 million and $5.1$0.8 million of the credit exposure with local companies relates to caps referenced to mortgages bought from R&G Premier Bank as of December 31, 20082009 and 2007,2008, respectively. |
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 constitutes an event of default under these interest rate swap agreements. The Corporation terminated all interest rate swaps with Lehman and replaced them with another counterparty under similar terms and
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conditions. In connection with A “Hull-White Interest Rate Tree” approach is used to value the unpaid netoption components of derivative instruments. The discounting of the cash settlement dueflows 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 million as of December 31, 2009, of which an unrealized loss of $1.9 million was recorded in 2009, an unrealized gain of $1.5 million was recorded in 2008 under the swap agreements, the Corporation hasand an unsecured counterparty exposure with Lehman, which filed for bankruptcy on October 3, 2008,unrealized gain of approximately $1.4 million. This exposure has been reserved as of December 31, 2008.$0.9 million was recorded in 2007. The Corporation had pledged collateralcompares the valuations obtained with Lehman to guarantee its performance under the swap agreements in the event payment thereunder was required. The market value of pledged securities with Lehmanvaluations received from counterparties, as of December 31, 2008 amounted to approximately $62 million. The position of the Corporation with respect to the recovery of the collateral, after discussion with its outside legal counsel, is that at all times title to the collateral has been vested in the Corporation and that, therefore, this collateral should not, for any purpose, be considered property of the bankruptcy estate available for distribution among Lehman’s creditors. On January 30, 2009, the Corporation filed a customer claim with the trustee and at this time 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. As additional relevant facts become available in future periods, a need to recognize a partial or full reserve of this claim may arise.an internal control procedure.
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 conditions,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, comprehensive financial analysis, and an established delinquency committee.management committees. The Corporation also employs proactive collection and loss mitigation efforts. Also,Furthermore, there are Loan Workoutstructured loan workout functions responsible for avoiding defaults and minimizing losses upon default of commercialfor each region and construction loans.for each business segment. The group 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’s Credit Committee,Management, comprised of the Corporation’s Chief 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. TheseThose 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 provision for loan and lease losses is charged to earnings to maintain the allowance for loan and lease losses at arepresents the estimate of the level that the Corporation considers adequateof reserves appropriate to absorb probable losses inherent in the portfolio. Management allocates specific portionscredit losses. The amount of the allowance forwas determined by judgments regarding the quality of each individual loan portfolio. All known relevant internal and lease losses to problem loansexternal factors that are identified through an asset classification analysis. The adequacyaffected loan collectibility were considered, including analyses of the allowance forhistorical charge-off experience, migration patterns, changes in economic conditions, and changes in loan and lease losses is based upon a number of factors including historical loan and lease loss experience that may not fully represent current conditions inherent in the portfolio.collateral values. For example, factors affecting the Puerto Rico, Florida (USA), US Virgin Islands’ or British Virgin Islands’ economies may contribute to delinquencies and defaults above the Corporation’s historical loan and lease losses. The Corporation addresses this risk by actively monitoringSuch factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of severe stress such as was experienced throughout 2009. We believe the delinquencyprocess for determining the allowance considers all of the potential factors that could result in credit losses. However, the process includes judgmental and default experience and by considering current economic and market conditions and their probable impact on the borrowers. Based on the assessment of current conditions, the Corporation makes appropriate adjustmentsquantitative elements that may be subject to the historically developed assumptions when necessary to adjust historical factors to account for present conditions. The Corporation also takes into consideration information about trends on non-accrual loans, delinquencies, changes in underwriting policies, and other risk characteristics relevant to the particular loan category and delinquencies. Although management believessignificant change. There is no certainty that the allowance for loan and lease losses iswill be adequate factors beyond the Corporation’sover time to cover credit 109123
control, including factorslosses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries or markets. To the economiesextent actual outcomes differ from our estimates, the credit quality of Puerto Rico,our customer base materially decreases and the United States (principallyrisk profile of a market, industry, or group of customers changes materially, or if the stateallowance is determined to not be adequate, additional provision for credit losses could be required, which could adversely affect our business, financial condition, liquidity, capital, and results of Florida),operations in future periods. Refer to “Critical Accounting Policies – Allowance for Loan and Lease Losses” section above for additional information about the U.S.VI or British VI may contribute to delinquencies and defaults, thus necessitating additional reserves.
For small, homogeneous loans, including residential mortgage loans, auto loans, consumer loans, finance lease loans, and commercial and construction loans in amounts under $1.0 million,methodology used by the Corporation evaluates ato determine specific allowance based on average historical loss experience for each corresponding type of loans and market conditions. The methodology of accounting for all probable losses is made in accordance with the guidance provided by SFAS 5, “Accounting for Contingencies.”
The Corporation measures impairment individually for those commercial and real estate loans with a principal balance of $1 million or more in accordance with the provisions of SFAS 114. A loan is impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. A specific reserve is determined for those commercial and real estate loans classified as impaired, primarily based on each such loan’s collateral value (if collateral dependent) or the present value of expected future cash flows discounted at the loan’s effective interest rate. If foreclosure is probable, the creditor is required to measure the impairment 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 for certain loans on a spot basis selected by specific characteristics such as delinquency levels, age of the appraisal, and loan-to-value ratios. Should there be a deficiency, the Corporation records a specific allowance for loan losses related to these loans.
As a general procedure, the Corporation internally reviews appraisals on a spot basis as part of the underwriting and approval process. For construction loans related to the Miami Corporate Banking operations, appraisals are reviewed by an outsourced contracted appraiser. Once a loan backed by real estate collateral deteriorates or is accounted for in non-accrual status, a full assessment of the value of the collateral is performed. If the Corporation commences litigation to collect an outstanding loan or commences foreclosure proceedings against a borrower (which includes the collateral), a new appraisal report is requestedreserves and the book value is adjusted accordingly, either by a corresponding reserve or a charge-off.
The Credit Risk area requests new collateral appraisals for impaired collateral dependent loans. In order to determine present market conditions in Puerto Rico and the Virgin Islands, and to gauge property appreciation rates, opinions of value are requested for a sample of delinquent residential real estate loans. Thegeneral valuation information gathered through these appraisals is considered in the Corporation’s allowance model assumptions.allowance.
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. 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 backingsupporting the transactions are dependent upon the performance of and conditions within each specific area real estate market. Recent economic reports related to the real estate market in Puerto Rico indicate that certain pockets of the real estate market are subject tois experiencing readjustments in value driven by the deteriorated purchasing power of the consumers and general economic conditions. The Corporation is protected by healthysets adequate loan-to-value ratios set upon original approval and driven byfollowing the Corporation’s regulatory and credit policy standards. The real estate market for the U.S. Virgin islands remains fairly stable. In the Florida market, residential real estate has experienced a very slow turnaround. As shown in the following table below, the allowance for loan and lease losses increased to $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. The $246.6 million increase in the allowance primarily reflected an increase in specific reserves associated with impaired loans, an increase associated with risk-grade migration and an increase in 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. 110124
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, | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Allowance for loan and lease losses, beginning of year | | $ | 190,168 | | $ | 158,296 | | $ | 147,999 | | $ | 141,036 | | $ | 126,378 | | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | $ | 147,999 | | $ | 141,036 | | Provision for loan and lease losses | | 190,948 | | 120,610 | | 74,991 | | 50,644 | | 52,799 | | | | | | | | | | | | | | | | | | | | | | | | | | Loans charged-off: | | | Residential real estate | | | (6,256 | ) | | | (985 | ) | | | (997 | ) | | | (945 | ) | | | (254 | ) | | Commercial | | | (29,575 | ) | | | (11,260 | ) | | | (6,036 | ) | | | (8,558 | ) | | | (5,848 | ) | | Provision (recovery) for loan and lease losses: | | | Residential mortgage | | | 45,010 | | 13,032 | | 2,736 | | 4,059 | | 2,759 | | Commercial mortgage | | | 71,401 | | 7,740 | | 1,326 | | 3,898 | | 1,133 | | Commercial and Industrial | | | 146,157 | | 35,561 | | 18,369 | | | (1,662 | ) | | | (5,774 | ) | Construction | | | (7,933 | ) | | | (3,910 | ) | | — | | — | | | (342 | ) | | 264,246 | | 53,109 | | 23,502 | | 5,815 | | 7,546 | | Finance leases | | | (10,583 | ) | | | (10,393 | ) | | | (5,721 | ) | | | (2,748 | ) | | | (2,894 | ) | | Consumer | | | (62,725 | ) | | | (68,282 | ) | | | (64,455 | ) | | | (39,669 | ) | | | (34,704 | ) | | Recoveries | | 8,751 | | 6,092 | | 12,515 | | 6,876 | | 5,901 | | | Consumer and finance leases | | | 53,044 | | 81,506 | | 74,677 | | 62,881 | | 44,980 | | | | | | | | | | | | | | | Total provision for loan and lease losses | | | 579,858 | | 190,948 | | 120,610 | | 74,991 | | 50,644 | | | | | | | | | | | | | | | Charged-off: | | | Residential mortgage | | | | (28,934 | ) | | | (6,256 | ) | | | (985 | ) | | | (997 | ) | | | (945 | ) | Commercial mortgage | | | | (25,871 | ) | | | (3,664 | ) | | | (1,333 | ) | | | (19 | ) | | | (268 | ) | Commercial and Industrial | | | | (35,696 | ) | | | (25,911 | ) | | | (9,927 | ) | | | (6,017 | ) | | | (8,290 | ) | Construction | | | | (183,800 | ) | | | (7,933 | ) | | | (3,910 | ) | | — | | — | | Consumer and finance leases | | | | (70,121 | ) | | | (73,308 | ) | | | (78,675 | ) | | | (70,176 | ) | | | (42,417 | ) | | | | | | | | | | | | | | | | | | (344,422 | ) | | | (117,072 | ) | | | (94,830 | ) | | | (77,209 | ) | | | (51,920 | ) | | | | | | | | | | | | | | Recoveries: | | | Residential mortgage | | | 73 | | — | | 1 | | 17 | | — | | Commercial mortgage | | | 667 | | — | | — | | — | | 4 | | Commercial and Industrial | | | 1,188 | | 1,678 | | 659 | | 3,491 | | 1,275 | | Construction | | | 200 | | 198 | | 78 | | — | | — | | Consumer and finance leases | | | 9,030 | | 6,875 | | 5,354 | | 9,007 | | 5,597 | | | | | | | | | | | | | | | | | | 11,158 | | 8,751 | | 6,092 | | 12,515 | | 6,876 | | | | | | | | | | | | | | | | | | | | | | | | | Net charge-offs | | | (108,321 | ) | | | (88,738 | ) | | | (64,694 | ) | | | (45,044 | ) | | | (38,141 | ) | | | (333,264 | ) | | | (108,321 | ) | | | (88,738 | ) | | | (64,694 | ) | | | (45,044 | ) | | | | | | | | | | | | | | | | | | | | | | | | Other adjustments(1) | | 8,731 | | — | | — | | 1,363 | | — | | | — | | 8,731 | | — | | — | | 1,363 | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for loan and lease losses, end of year | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | $ | 147,999 | | $ | 141,036 | | | $ | 528,120 | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | $ | 147,999 | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for loan and lease losses to year end total loans receivable | | | 2.15 | % | | | 1.61 | % | | | 1.41 | % | | | 1.17 | % | | | 1.46 | % | | | 3.79 | % | | | 2.15 | % | | | 1.61 | % | | | 1.41 | % | | | 1.17 | % | Net charge-offs to average loans outstanding during the period | | | 0.87 | % | | | 0.79 | % | | | 0.55 | % | | | 0.39 | % | | | 0.48 | % | | | 2.48 | % | | | 0.87 | % | | | 0.79 | % | | | 0.55 | % | | | 0.39 | % | Provision for loan and lease losses to net charge-offs during the period | | 1.76 | x | | 1.36 | x | | 1.16 | x | | 1.12 | x | | 1.38 | x | | 1.74 | x | | 1.76 | x | | 1.36 | x | | 1.16 | x | | 1.12 | x |
| | | (1) | | For 2008, carryover of the allowance for loan losses related to the $218 million auto loan portfolio acquired from Chrysler. | | | | For 2007,2005, allowance for loan losses from the acquisition of FirstBank Florida. |
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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | (In thousands) | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | | (Dollars in thousands) | | Residential real estate | | $ | 15,016 | | | | 27 | % | | $ | 8,240 | | | | 27 | % | | $ | 6,488 | | | | 25 | % | | $ | 3,409 | | | | 18 | % | | $ | 1,595 | | | | 14 | % | Commercial real estate loans | | | 17,775 | | | | 12 | % | | | 13,699 | | | | 11 | % | | | 13,706 | | | | 11 | % | | | 9,827 | | | | 9 | % | | | 8,958 | | | | 7 | % | Construction loans | | | 83,482 | | | | 12 | % | | | 38,108 | | | | 12 | % | | | 18,438 | | | | 13 | % | | | 12,623 | | | | 9 | % | | | 5,077 | | | | 4 | % | Commercial loans (including loans to local financial institutions) | | | 74,358 | | | | 33 | % | | | 63,030 | | | | 33 | % | | | 53,929 | | | | 32 | % | | | 58,117 | | | | 48 | % | | | 70,906 | | | | 59 | % | Consumer loans (1) | | | 90,895 | | | | 16 | % | | | 67,091 | | | | 17 | % | | | 65,735 | | | | 19 | % | | | 64,023 | | | | 16 | % | | | 54,500 | | | | 16 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 281,526 | | | | 100 | % | | $ | 190,168 | | | | 100 | % | | $ | 158,296 | | | | 100 | % | | $ | 147,999 | | | | 100 | % | | $ | 141,036 | | | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | (In thousands) | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | | (Dollars in thousands) | | Residential mortgage | | $ | 31,165 | | | | 26 | % | | $ | 15,016 | | | | 27 | % | | $ | 8,240 | | | | 27 | % | | $ | 6,488 | | | | 25 | % | | $ | 3,409 | | | | 18 | % | Commercial mortgage loans | | | 63,972 | | | | 11 | % | | | 17,775 | | | | 12 | % | | | 13,699 | | | | 11 | % | | | 13,706 | | | | 11 | % | | | 9,827 | | | | 9 | % | Construction loans | | | 164,128 | | | | 11 | % | | | 83,482 | | | | 12 | % | | | 38,108 | | | | 12 | % | | | 18,438 | | | | 13 | % | | | 12,623 | | | | 9 | % | 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 | % | Consumer loans and finance leases | | | 82,848 | | | | 14 | % | | | 90,895 | | | | 16 | % | | | 67,091 | | | | 17 | % | | | 65,735 | | | | 19 | % | | | 64,023 | | | | 16 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 528,120 | | | | 100 | % | | $ | 281,526 | | | | 100 | % | | $ | 190,168 | | | | 100 | % | | $ | 158,296 | | | | 100 | % | | $ | 147,999 | | | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table sets forth information concerning the composition of the Corporation’s allowance for loan and lease losses as of December 31, 2009 and 2008 by loan category and by whether the allowance and related provisions were calculated individually or through a general valuation allowance: 125
| | | | | | | | | | | | | | | | | | | | | | | | | | | Residential | | Commercial | | | | | | Construction | | Consumer and | | | (Dollars in thousands) | | Mortgage Loans | | Mortgage Loans | | C&I 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | Impaired loans with specific reserves: | | | | | | | | | | | | | | | | | | | | | | | | | Principal balance of loans, net of charge-offs | | | 60,040 | | | | 159,284 | | | | 243,123 | | | | 597,641 | | | | — | | | | 1,060,088 | | Allowance for loan and lease losses | | | 2,616 | | | | 30,945 | | | | 62,491 | | | | 86,093 | | | | — | | | | 182,145 | | Allowance for loan and lease losses to principal balance | | | 4.36 | % | | | 19.43 | % | | | 25.70 | % | | | 14.41 | % | | | 0.00 | % | | | 17.18 | % | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | Allowance for loan and lease losses | | | 28,549 | | | | 33,027 | | | | 123,516 | | | | 78,035 | | | | 82,848 | | | | 345,975 | | Allowance for loan and lease losses to principal balance | | | 0.91 | % | | | 2.41 | % | | | 2.44 | % | | | 9.82 | % | | | 4.36 | % | | | 2.82 | % | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | Allowance for loan and lease losses | | | 31,165 | | | | 63,972 | | | | 186,007 | | | | 164,128 | | | | 82,848 | | | | 528,120 | | Allowance for loan and lease losses to principal balance | | | 0.87 | % | | | 4.02 | % | | | 3.48 | % | | | 11.00 | % | | | 4.36 | % | | | 3.79 | % | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | Impaired loans without specific reserves: | | | | | | | | | | | | | | | | | | | | | | | | | Principal balance of loans, net of charge-offs | | $ | 19,909 | | | $ | 18,359 | | | $ | 55,238 | | | $ | 22,809 | | | $ | — | | | $ | 116,315 | | | | | | | | | | | | | | | | | | | | | | | | | | | Impaired loans with specific reserves: | | | | | | | | | | | | | | | | | | | | | | | | | Principal balance of loans, net of charge-offs | | | — | | | | 47,323 | | | | 79,760 | | | | 257,831 | | | | — | | | | 384,914 | | Allowance for loan and lease losses | | | — | | | | 8,680 | | | | 18,343 | | | | 56,330 | | | | — | | | | 83,353 | | Allowance for loan and lease losses to principal balance | | | 0.00 | % | | | 18.34 | % | | | 23.00 | % | | | 21.85 | % | | | 0.00 | % | | | 21.65 | % | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | Allowance for loan and lease losses | | | 15,016 | | | | 9,095 | | | | 56,015 | | | | 27,152 | | | | 90,895 | | | | 198,173 | | Allowance for loan and lease losses to principal balance | | | 0.43 | % | | | 0.62 | % | | | 1.31 | % | | | 2.18 | % | | | 4.31 | % | | | 1.58 | % | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | Allowance for loan and lease losses | | | 15,016 | | | | 17,775 | | | | 74,358 | | | | 83,482 | | | | 90,895 | | | | 281,526 | | Allowance for loan and lease losses to principal balance | | | 0.43 | % | | | 1.16 | % | | | 1.68 | % | | | 5.47 | % | | | 4.31 | % | | | 2.15 | % |
The following tables show the activity for impaired loans and related specific reserve during 2009: | | | | | Impaired Loans: | | (In thousands) | | Balance at beginning of year | | $ | 501,229 | | Loans determined impaired during the year | | | 1,466,805 | | 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 | ) | | | | | Balance at end of year | | $ | 1,656,264 | | | | | |
| | | (1) | | Includes lease financing |
First BanCorp’s allowance for loan and lease losses was $281.5 million as of December 31, 2008, compared to $190.2 million as of December 31, 2007 and $158.3 million as of December 31, 2006. The provision for loan and lease losses for the year ended December 31, 2008 amounted to $190.9 million, compared to $120.6 million and $75.0 million for 2007 and 2006, respectively. The increase is mainly attributable to the significant increaseApproximately $114.2 million, or 47%, is related to construction loans in Florida and $44.6 million, or 18%, is related to construction loans 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. The Corporation experienced continued stress in the credit quality of and worsening trends on its construction loan portfolio, in particular, condo-conversion loans in the U.S. mainland (mainly in the state of Florida) affected by the continuing deterioration in the health of the economy, an oversupply of new homes and declining housing prices in the United States. To a lesser extent, the Corporation also increased its reserve factors for the residential mortgage and construction loan portfolio from the 2007 level to account for the increased credit risk tied to recessionary conditions in Puerto Rico’s economy, which are expected to continue at least through the remainder of 2009. The Puerto Rico housing market has not seen the dramatic decline in housing prices that is affecting the U.S. mainland; however, there has been a lower demand for houses due to diminished consumer purchasing power and confidence. The Corporation also does business in the Eastern Caribbean Region. Growth in this region has been fueled by an expansion in the construction, residential mortgage and small loan business sectors. Refer to “Provision and Allowance for Loan and Lease Losses” and “Lending Activities — Commercial and
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Construction Loans” above and “Non-Accruing and Non-performing Assets” below for specific details about troubled loan relationships and the exposure to the geographic segments where the Corporation operates and detailed information about the Corporation’s construction loan portfolio.
During 2008, the Corporation identified several commercial and construction loans amounting to $414.9 million that it determined should be classified as impaired, of which $382.0 million have a specific reserve of $82.9 million. Approximately $154.4 million of the $351.5 million commercial and construction loans that were determined to be impaired during 2008 are related to the Miami Corporate Banking operations condo-conversion loans, which has a related specific reserve of $36.0 million.
Meanwhile, the Corporation’s impaired loans decreased by approximately $64.1 million during 2008, principally as a result of: (i) the foreclosure of two condo-conversion loans related to a troubled relationship in the Corporation’s Miami Corporate Banking Operations, with an aggregate principal balance of approximately $22.4 million and a related impairment reserve of $4.2 million, and (ii) the sale for $22.5 million, in the first half of 2008, of a condo-conversion loan that carried a principal balance of approximately $24.1 million and a related impairment reserve of $2.4 million related to the same troubled relationship in Miami. One of the foreclosed condo-conversion projects, with a carrying value of $3.8 million, was sold in the latter part of 2008 and a loss of $0.4 million was recorded. The Corporation expects to complete the sale of the last remaining foreclosed condo-conversion project in the U.S. mainland in the first half of 2009 and a write-down of $5.3 million to the value of this property was recorded for the fourth quarter of 2008. Other decreases in impaired loans may include loans paid in full, loans no longer considered impaired and loans charged-off.
The Corporation continues its constant monitoring of its construction and commercial loan portfolio on the U.S. mainland and obtained new appraisals during 2008 for approximately 91% of the condo-conversion loans in its Miami Corporate Banking operations.
Credit Losses
For 2008, total net charge-offs amounted to $108.3 million, or 0.87% of average loans, compared to $88.7 million or 0.79% for 2007 mainly related to the commercial and residential mortgage loan portfolios. The commercial portfolio in Puerto Rico has been adversely impacted by the deteriorating economic conditions while recent trends in real estate prices affected the residential mortgage loan portfolio. Although affected by the slow real estate market, the rate of losses on the Corporation’s residential real estate portfolio remains low. The ratio of net charge-offs to average loans on the Corporation’s residential mortgage loan portfolio was 0.19% and 0.03% for the years ended December 31, 2008 and 2007, respectively, significantly lower than in the U.S. mainland.
Commercial net charge-offs were significantly impacted by a $9.1 million charge-off, in the second quarter of 2008, related to a participation in a commercial loan in the U.S. Virgin Islands sold during the third quarter of 2008.
An increase in net charge-offs for construction loans was also observed in 2008 in connection with the repossession and sale of loans from the aforementioned troubled relationship in the Corporate Banking operations in Miami, Florida that accounted for $6.2 million of the charge-offs recorded in 2008.
Despite increases in the latter part of the year, the Corporation experienced a decrease in net charge-offs for consumer loans which amounted to $57.3 million for 2008, as compared to $64.3 million for 2007, attributable in part to the changes in underwriting standards implemented since late 2005 and the originations using these new underwriting standards of new consumer loans to replace maturing consumer loans that had an average life of approximately four years.
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The following table presents annualized charge-offs to average loans held-in-portfolio by geographic segment:
| | | | | | | | | | | December 31, 2008 | | December 31, 2007 | PUERTO RICO: | | | | | | | | | | | | | | | | | | Residential mortgage loans | | | 0.20 | % | | | 0.04 | % | Commercial loans | | | 0.33 | % | | | 0.24 | % | Construction loans | | | 0.19 | % | | | 0.09 | % | Consumer loans(1) | | | 3.10 | % | | | 3.61 | % | Total loans | | | 0.82 | % | | | 0.91 | % | | | | | | | | | | VIRGIN ISLANDS: | | | | | | | | | | | | | | | | | | Residential mortgage loans | | | 0.02 | % | | | 0.00 | % | Commercial loans | | | 4.46 | % | | | 0.11 | % | Construction loans | | | 0.00 | % | | | 0.00 | % | Consumer loans | | | 3.54 | % | | | 2.19 | % | Total loans | | | 1.48 | % | | | 0.38 | % | | | | | | | | | | UNITED STATES: | | | | | | | | | | | | | | | | | | Residential mortgage loans | | | 0.30 | % | | | 0.02 | % | Commercial loans | | | 0.58 | % | | | 0.00 | % | Construction loans | | | 1.08 | % | | | 0.44 | % | Consumer loans | | | 5.88 | % | | | 2.60 | % | Total loans | | | 0.86 | % | | | 0.29 | % |
| | | (1) | | Includes Lease Financing. |
Total credit losses (equal to net charge-offs plus net gains and losses on REO operations) amounted to $129.7 million or a loss rate of 1.04% for 2008 compared to a loss of $91.1 million or a loss rate of 0.81% for 2007. A significant portion of the increase during 2008 is attributable to higher REO operating expenses and write-downs to the value of foreclosed condo-conversion projects in the United States.
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The following table presents a detail of the REO inventory and credit losses for the last two years:
Credit Loss Performance
| | | | | | | | | | | Year Ended | | | | December 31, | | | | 2008 | | | 2007 | | | | (Dollars in thousands) | | REO | | | | | | | | | REO balances, carrying value: | | | | | | | | | Residential | | $ | 20,265 | | | $ | 9,717 | | Commercial | | | 2,306 | | | | 4,727 | | Condo-conversion projects | | | 9,500 | | | | — | | Construction | | | 5,175 | | | | 1,672 | | | | | | | | | Total | | $ | 37,246 | | | $ | 16,116 | | | | | | | | | | | | | | | | | | REO activity (number of properties): | | | | | | | | | Beginning property inventory, | | | 87 | | | | 44 | | Properties acquired | | | 169 | | | | 74 | | Properties disposed | | | (101 | ) | | | (31 | ) | | | | | | | | Ending property inventory | | | 155 | | | | 87 | | | | | | | | | | | | | | | | | | Average holding period (in days) | | | | | | | | | Residential | | | 160 | | | | 208 | | Commercial | | | 237 | | | | 59 | | Condo-conversion projects | | | 306 | | | | — | | Construction | | | 145 | | | | 76 | | | | | | | | | | | | 200 | | | | 150 | | | | | | | | | | | REO operations (losses) gains: | | | | | | | | | Market adjustments and (losses) gains on sale: | | | | | | | | | | | | | | | | | | Residential | | $ | (3,521 | ) | | $ | (97 | ) | Commercial | | | (1,402 | ) | | | (33 | ) | Condo-conversion projects | | | (5,725 | ) | | | — | | Construction | | | (347 | ) | | | 164 | | | | | | | | | | | | (10,995 | ) | | | 34 | | | | | | | | | | | | | | | | | | Other REO operations expenses | | | (10,378 | ) | | | (2,434 | ) | | | | | | | | Net Loss on REO operations | | $ | (21,373 | ) | | $ | (2,400 | ) | | | | | | | | CHARGE-OFFS | | | | | | | | | Residential charge-offs, net | | | (6,256 | ) | | | (984 | ) | | | | | | | | | | Commercial charge-offs, net | | | (27,897 | ) | | | (10,596 | ) | | | | | | | | | | Construction charge-offs, net | | | (7,735 | ) | | | (3,832 | ) | | | | | | | | | | Consumer and finance leases charge-offs, net | | | (66,433 | ) | | | (73,326 | ) | | | | | | | | | | | | | | | | | Total charge-offs, net | | | (108,321 | ) | | | (88,738 | ) | | | | | | | | | | | | | | | | | TOTAL CREDIT LOSSES (1) | | $ | (129,694 | ) | | $ | (91,138 | ) | | | | | | | | | | | | | | | | | LOSS RATIO PER CATEGORY (2): | | | | | | | | | | | | | | | | | | Residential | | | 0.29 | % | | | 0.04 | % | Commercial | | | 0.53 | % | | | 0.22 | % | Construction | | | 0.92 | % | | | 0.25 | % | Consumer | | | 3.18 | % | | | 3.46 | % | | | | | | | | | | TOTAL CREDIT LOSS RATIO (3) | | | 1.04 | % | | | 0.81 | % |
| | | (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.Related to five construction projects sold in Florida. |
| | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2009 | | | | | | | Construction | | | Commercial | | | Commercial Mortgage | | | Residential Mortgage | | | | | (In thousands) | | Loans | | | Loans | | | Loans | | | Loans | | | Total | | Allowance for impaired loans, beginning of period | | $ | 56,330 | | | $ | 18,343 | | | $ | 8,680 | | | $ | — | | | $ | 83,353 | | Provision for impaired loans | | | 211,658 | | | | 69,401 | | | | 43,583 | | | | 18,304 | | | | 342,946 | | Charge-offs | | | (181,895 | ) | | | (25,253 | ) | | | (21,318 | ) | | | (15,688 | ) | | | (244,154 | ) | | | | | | | | | | | | | | | | | Allowance for impaired loans, end of period | | $ | 86,093 | | | $ | 62,491 | | | $ | 30,945 | | | $ | 2,616 | | | $ | 182,145 | | | | | | | | | | | | | | | | | |
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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 negatively impacted by the sustained economic weakness in Puerto Rico and the United States and the significant deterioration of the real estate market in Florida, although there were positive signs late in the year. In addition, we initiated certain actions in 2009 to reduce non-performing credits, including note sales and restructuring of loans into two separate agreement (loan splitting). We anticipate a challenging year in 2010 with regards to credit quality. Non-accruing and Non-performing Assets Total non-performing assets are the sumconsist of non-accruing loans, foreclosed real estate and other repossessed properties.properties as well as non-performing investment securities. Non-accruing loans are those loans as toon which the accrual of interest is no longer being recognized.discontinued. When loans fall intoa loan is placed in non-accruing status, allany interest previously accruedrecognized and uncollected interestnot collected is reversed and charged against interest income. Non-accruing Loans Policy Residential Real Estate Loans— The Corporation classifies real estate loans in non-accruing status when interest and principal have not been received for a period of 90 days or more. Commercial and Construction Loans— The Corporation places commercial loans (including commercial real estate and construction loans) in non-accruing status when interest and principal have not been received for a period of 90 days or more.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. 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 interest portion 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. Investment Securities This category presents investment securities reclassified to non-accruing status, at their book value. Past Due Loans Past due loans are accruing loans which are contractually delinquent 90 days or more. 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. The Corporation may also classify loans in non-accruing status and recognize revenue only when cash payments are received because of the deterioration in the financial condition of the borrower and payment in full of principal or interest is not expected. During the third quarter of 2007, the Corporation started a loan loss mitigation program 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 accruing status.
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The following table presents non-performing assets as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | | | (Dollars in thousands) | | | (Dollars in thousands) | | Non-accruing loans: | | | Residential real estate | | $ | 274,923 | | $ | 209,077 | | $ | 114,828 | | $ | 54,777 | | $ | 31,577 | | | Commercial and commercial real estate | | 144,301 | | 73,445 | | 62,978 | | 33,855 | | 31,675 | | | Residential mortgage | | | $ | 441,642 | | $ | 274,923 | | $ | 209,077 | | $ | 114,828 | | $ | 54,777 | | Commercial mortgage | | | 196,535 | | 85,943 | | 46,672 | | 38,078 | | 15,273 | | Commercial and Industrial | | | 241,316 | | 58,358 | | 26,773 | | 24,900 | | 18,582 | | Construction | | 116,290 | | 75,494 | | 19,735 | | 1,959 | | 779 | | | 634,329 | | 116,290 | | 75,494 | | 19,735 | | 1,959 | | Finance leases | | 6,026 | | 6,250 | | 8,045 | | 3,272 | | 2,212 | | | 5,207 | | 6,026 | | 6,250 | | 8,045 | | 3,272 | | Consumer | | 45,635 | | 48,784 | | 46,501 | | 40,459 | | 25,422 | | | 44,834 | | 45,635 | | 48,784 | | 46,501 | | 40,459 | | | | | | | | | | | | | | | | | | | | | | | | | | | 587,175 | | 413,050 | | 252,087 | | 134,322 | | 91,665 | | | 1,563,863 | | 587,175 | | 413,050 | | 252,087 | | 134,322 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other real estate owned(1) | | 37,246 | | 16,116 | | 2,870 | | 5,019 | | 9,256 | | | REO | | | 69,304 | | 37,246 | | 16,116 | | 2,870 | | 5,019 | | Other repossessed property | | 12,794 | | 10,154 | | 12,103 | | 9,631 | | 7,291 | | | 12,898 | | 12,794 | | 10,154 | | 12,103 | | 9,631 | | Investment securities(1) | | | 64,543 | | — | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | Total non-performing assets | | $ | 637,215 | | $ | 439,320 | | $ | 267,060 | | $ | 148,972 | | $ | 108,212 | | | $ | 1,710,608 | | $ | 637,215 | | $ | 439,320 | | $ | 267,060 | | $ | 148,972 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Past due loans | | $ | 471,364 | | $ | 75,456 | | $ | 31,645 | | $ | 27,501 | | $ | 18,359 | | | Past due loans 90 days and still accruing | | | $ | 165,936 | | $ | 471,364 | | $ | 75,456 | | $ | 31,645 | | $ | 27,501 | | | | | Non-performing assets to total assets | | | 3.27 | % | | | 2.56 | % | | | 1.54 | % | | | 0.75 | % | | | 0.69 | % | | | 8.71 | % | | | 3.27 | % | | | 2.56 | % | | | 1.54 | % | | | 0.75 | % | | | | Non-accruing loans to total loans receivable | | | 4.49 | % | | | 3.50 | % | | | 2.24 | % | | | 1.06 | % | | | 0.95 | % | | | 11.23 | % | | | 4.49 | % | | | 3.50 | % | | | 2.24 | % | | | 1.06 | % | | | | Allowance for loan and lease losses | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | $ | 147,999 | | $ | 141,036 | | | $ | 528,120 | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | $ | 147,999 | | | | | Allowance to total non-accruing loans | | | 47.95 | % | | | 46.04 | % | | | 62.79 | % | | | 110.18 | % | | | 153.86 | % | | | 33.77 | % | | | 47.95 | % | | | 46.04 | % | | | 62.79 | % | | | 110.18 | % | | | | Allowance to total non-accruing loans, excluding residential real estate loans | | | 90.16 | % | | | 93.23 | % | | | 115.33 | % | | | 186.06 | % | | | 234.72 | % | | | 47.06 | % | | | 90.16 | % | | | 93.23 | % | | | 115.33 | % | | | 186.06 | % |
| | | (1) | | As of December 31, 2008, other real estate owned include approximately $14.8 million of foreclosed properties in the U.S. mainland.Collateral pledged with Lehman Brothers Special Financing, Inc. |
Total non-performing assets increased by $197.9 million, or 45%, from $439.3 million as of December 31, 20072009 was $1.71 billion compared to $637.2 million as of December 31, 2008. The slumping economy and deteriorating housing marketEven though deterioration in the United States coupled with recessionary conditions in Puerto Rico’s economy, have resulted in higher non-performing balancescredit quality was observed in all of the Corporation’s portfolios, it was more significant in the construction and commercial loan portfolios. With regardsportfolios, 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 United Statesconstruction loan portfolio totalin 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 in this regard, the
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Corporation decided to classify such investments as non-performing. It is important to note that although there was a significant increase in non-performing assets from December 31, 2008, to December 31,2009, there was a slower growth rate 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. Total non-performing construction loans increased by $518.0 million from December 31, 2008. The non-performing construction loans in Puerto Rico increased by $314.1 million in 2009 primarily related to $104.0residential 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 million as of December 31, 2008 from $58.5 million at the end of 2007, up $45.5 million or 78%. All segments were severely affected by the economy and housing market crisis in the U.S. with the total variance resulting from: (i) an increase of $13.8 million for residential real estate loans and $3.6 million for foreclosed residential properties; (ii) an increase of $4.1 million in non-performing construction, land loans and foreclosed condo-conversion projects; (iii) an increase of $23.3 million in commercial loans, mainly secured by real estate, and (iv) an increase of $0.7 million in the consumer lending sector. Despite the overall increase, during 2008 the Corporation disposed of approximately $25.6 million of non-performing assets in the U.S. by: (i) the sale in the first half of 2008 for $22.5 million of one impaired condo-conversion loan in a troubled relationship in its Miami Corporate Banking operations with a carrying value of $21.8 million, and (ii) the sale during the fourth quarter of 2008 of repossessed real estate with a carrying value of $3.8 million that previously served as collateral for another condo conversion loan of the same troubled relationship and for which a loss of $0.4 million was recorded. The Corporation expects to complete the sale of the last remaining foreclosed condo-conversion project in the U.S. mainland in the first half of 2009. A write-down of $5.3 million to the value of this property was recorded for the fourth quarter of 2008. The Corporation has incurred in total expenditures, including legal fees, maintenance fees and property taxes, in connection with the resolution of the above mentioned impaired relationship that caused the foreclosures in Miami amounting to approximately $8.2 million since 2007, of which $6.1 million were incurred during 2008.
Non-performing assets in Puerto Rico increased to $512.6 million as of December 31, 2008 from $362.1 million at the end of 2007, up $150.5 million or 42%. The total variance breakdown includes: (i) an increase of $49.6 million for non-performing residential real estate loans and $7.6 million in foreclosed real estate properties; (ii) an increase of $45.6 million in non-performing construction and land loans, and (iii) an increase of $48.0 million in commercial loans. All segments of the loan portfolios were impacted by the current economic crisis. On a positive
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note, non-performing consumer assets (including finance leases) remained relatively unchanged2009 compared to December 31, 2007 balances.
In Puerto Rico, the increase in non-performing construction loans is principally related to two loans with an aggregate outstanding balanceone relationship of $32.3 million extended for the development of residential projects placed in non-accrual status in light of lower than expected demand due to a diminished consumer purchasing power and general economic conditions, which in turn affected the borrowers’ cash flow position. The construction loan portfolio is affected by the deterioration in the economy because the underlying loans’ repayment capacity is dependent on the ability to attract buyers and maintain housing prices. The largest non-accrual commercial loan amounted to $7.7 million and was placed in non-accrual status during the fourth quarter of 2008 after it was formally restructured.
Despite the increase in absolute numbers, the non-performing to total residential mortgage loan ratio for the Puerto Rico portfolio only increased 1% since the end of 2007. The relative stability of non-performing residential loans in Puerto Rico reflects, to some extent, the positive impact of loans modified through the loan loss mitigation program. Since the inception of the program in the third quarter of 2007, the Corporation has completed approximately 367 loan modifications with an outstanding balance of approximately $60.0$11.1 million as of December 31, 2008. Of this amount, $53.2Most 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 of non-performing construction loans in Florida totaling approximately $40.4 million and also completed the restructuring of condo-conversion loans with an aggregate book value of $38.1 million.
Non-performing construction loans in the Virgin Islands decreased by $1.3 million. The C&I non-performing loans portfolio increased by $183.0 million from December 31, 2008. Non-performing C&I loans in Puerto Rico increased by $174.5 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 commercial mortgage loans in the Virgin Islands increased by $10.3 million. In many cases, commercial 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 million 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 value of the Corporation’s interests over the long-term. Non-performing residential mortgage loans increased by $166.7 million during 2009, mainly attributable to the Puerto Rico portfolio, which has been adversely affected by the continued trend of higher unemployment rates affecting consumers and includes $36.9 million related to loans acquired in the previously explained transaction with R&G. The non-performing residential mortgage loan portfolio in Puerto Rico increased by $131.2 million during 2009. The Corporation continues to address loss mitigation and loan modifications by offering alternatives to 129
avoid foreclosures through internal programs and programs sponsored by the Federal Government. In Florida, non-performing residential mortgage loans increased by $35.0 million from December 31, 2008, however, a decrease was observed in the last quarter due to modified loans that have been outstanding long enoughrestored to be considered for interest accrual of which $32.8 million have been formally returned to accruing status after a sustained period of repayments. Historically,repayment performance (generally six months) and are deemed collectible. During 2009, the Corporation has experienced a low rate of losses on its residential real estate portfolio, given that the real estate market in Puerto Rico has not shown notable declines in the market value of properties in almost four decades, overall comfortable loan-to-value ratios, and the limited amount of construction considering Puerto Rico is an island with finite land resources. The net charge-offs to average loans ratio on the Corporation’snon-performing residential mortgage loan portfolio in the Virgin Islands increased by $0.6 million.
The consumer and finance leases non-performing loan portfolio remained relatively flat at $50.0 million as of December 31, 2009 when compared to $51.7 million as of December 31, 2008. 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. The allowance to non-performing loans ratio as of December 31, 2009 was 0.19%33.77%, compared to 47.95% as of December 31, 2008. The decrease 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 reserves based on collateral values or cash flows projections analyses performed. Also 17% of the increase in non-performing loans since December 31, 2008 is related 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 0.03%loan-to-value ratios, thus requiring a lower general reserve as compared to other portfolios. As of December 31, 2009, approximately $517.7 million, or 33%, of total non-performing loans have been charged-off to their net realizable value as set forth below: | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | % |
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’s financial condition, the restructure or loan modification through these program as well as other restructurings of individual commercial, commercial mortgage loans, construction loans and residential mortgages 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 loans and modifications of the loan rate. As of December 31, 2009, the Corporation’s TDR loans consisted of $124.1 million of residential mortgage loans, $42.1 million commercial and industrial loans, $68.1 million commercial mortgage loans and $101.7 million of construction loans. From the $336.0 million total TDR loans, approximately $130.4 million are in compliance with modified terms, $23.8 million are 30-89 days delinquent, and $181.8 million are classified as non-accrual as of December 31, 2009. 130
Included in the $101.7 million of construction TDR loans are certain impaired condo-conversion loans restructured into two separate agreements (loan splitting) in the fourth quarter of 2009. Each of these loans were 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 renegotiations of these loans have been made after analyzing the borrowers and guarantors capacity to serve 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 been placed on a monthly payment that amortize the debt over 25 years at a market rate of interest. An interest rate reduction was granted for the year endedsecond note. The following tables provide additional information about the volume of this type of loan restructurings and the effect on December 31, 2007, significantly lower thanthe allowance for loan and lease losses 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 comprising the United States mainland market.$22.4 million that have been deemed collectible continue to be individually evaluated for impairment purposes. These transactions contributed 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 $471.4$165.9 million as of December 31, 2008 (20072009 (2008 — $75.5$471.4 million) of which $71.1 million are government guaranteed loans. Net Charge-Offs and Total Credit Losses The Corporation’s net charge-offs for 2009 were $333.3 million, or 2.48%, most of them relatedaverage loans compared to matured$108.3 million or 0.87% of average loans for 2008. The significant increase is mainly due to the continued deterioration in the collateral values of construction loans, accordingprimarily in the Florida region. Florida’s economy has been hampered by a deteriorating housing market since 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 contractual terms but arecharge-off during 2009 collateral deficiencies for a significant amount of impaired collateral dependent loans based on current with respectappraisals obtained. The deficiencies in the collateral raised doubts about the potential to interest payments. Acollect the principal. The Corporation is engaged in continuous efforts to identify alternatives that enable borrowers to repay their loans and protect the Corporation’s investment. Total construction net charge-offs in 2009 were $183.6 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 these matured construction loansthe losses. There were already renewed$137.4 million in net-charge offs in 2009 related to construction projects in Florida. Approximately $79.2 million 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 Corporation expects to completeconstruction 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 renewal process for the remaining portion in the first halfcontext of 2009.market environment expectations. In viewTotal commercial mortgage net charge-offs in 2009 were $25.2 million, or 1.64% of current conditionsaverage loans, up from $3.7 million, or 0.27% of average loans in 2008. The charge-offs in 2009 were spread through several loans, distributed across our geographic markets. Commercial mortgage net charge-offs for 2009 in Puerto Rico were $7.9 million, in the United States housing market$15.2 million and weakening economic conditions$2.1 million in the Virgin Islands. 131
Total C&I net charge-offs in 2009 were $34.5 million, or 0.72% of average loans, up from $24.2 million, or 0.59% of average loans in 2008. C&I loans net charge-offs 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 Corporation may experience further deteriorationUnited States $0.6 million and $1.1 million in the Virgin Islands. In assessing C&I net charge-offs trends, it is helpful 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. Residential mortgage net charge-offs were $28.9 million, or 0.82% of related average loans in 2009. This was up from $6.3 million, or 0.19% of related average balances in 2008. The higher loss level for 2009 was a result of negative trends in delinquency levels. Approximately $15.7 million in charge-offs for 2009 ($7.1 million in Puerto Rico and $8.5 million in Florida) resulted from valuations, for impairment purposes, of residential mortgage loan portfolios with high delinquency and loan-to-value levels, compared to $1.8 million recorded in 2008. Total residential mortgage loan portfolios evaluated for impairment purposes and charged-off to their net realizable value amounted to $320.2 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. Net charge-offs for residential mortgage loans also includes $11.2 million related to loans foreclosed during 2009, up from $3.9 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. Net charge-offs of consumer loans and finance leases in 2009 were $61.1 million, or 3.05% of related average loans, compared to net charge-offs of $66.4 million, or 3.19% of related average loans for 2008. Performance of this portfolio on both an absolute and relative basis continued to be consistent with our 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 particularportfolio: | | | | | | | | | | | | | | | | | | | | | | | 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 presents net charge-offs to average loans held in portfolio by geographic segment: | | | | | | | | | | | December 31, 2009 | | December 31, 2008 | PUERTO RICO: | | | | | | | | | | | | | | | | | | Residential mortgage | | | 0.64 | % | | | 0.20 | % | | | | | | | | | | Commercial mortgage | | | 0.82 | % | | | 0.37 | % | | | | | | | | | | Commercial and Industrial | | | 0.72 | % | | | 0.32 | % | | | | | | | | | | Construction | | | 4.88 | % | | | 0.19 | % | | | | | | | | | | Consumer and finance leases | | | 2.93 | % | | | 3.10 | % | | | | | | | | | | Total loans | | | 1.44 | % | | | 0.82 | % | | | | | | | | | | VIRGIN ISLANDS: | | | | | | | | | | | | | | | | | | Residential mortgage | | | 0.08 | % | | | 0.02 | % | | | | | | | | | | Commercial mortgage | | | 2.79 | % | | | 0.00 | % | | | | | | | | | | Commercial and Industrial | | | 0.59 | % | | | 6.73 | % | | | | | | | | | | Construction | | | 0.00 | % | | | 0.00 | % | | | | | | | | | | Consumer and finance leases | | | 3.50 | % | | | 3.54 | % | | | | | | | | | | Total loans | | | 0.73 | % | | | 1.48 | % | | | | | | | | | | FLORIDA: | | | | | | | | | | | | | | | | | | Residential mortgage | | | 2.84 | % | | | 0.30 | % | | | | | | | | | | Commercial mortgage | | | 3.02 | % | | | 0.09 | % | | | | | | | | | | Commercial and Industrial | | | 1.87 | % | | | 6.58 | % | | | | | | | | | | Construction | | | 29.93 | % | | | 1.08 | % | | | | | | | | | | Consumer and finance leases | | | 7.33 | % | | | 5.88 | % | | | | | | | | | | Total loans | | | 11.70 | % | | | 0.86 | % |
| | | | | Total credit losses (equal to net charge-offs plus losses on REO operations) for 2009 amounted to $355.1 million, or 2.62% to average loans and repossessed assets, respectively, in contrast to credit losses of $129.7 million, or a loss rate of 1.04%, for 2008. In addition, there was a $1.8 million increase in the reserve for probable losses on outstanding unfunded loan commitments. |
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The following table presents a detail of the commercialREO inventory and construction loan portfolio.credit losses for the periods indicated: | | | | | | | | | | | Year Ended | | | | December 31, | | | | 2009 | | | 2008 | | | | (Dollars in thousands) | | REO | | | | | | | | | REO balances, carrying value: | | | | | | | | | Residential | | $ | 35,778 | | | $ | 20,265 | | Commercial | | | 19,149 | | | | 2,306 | | Condo-conversion projects | | | 8,000 | | | | 9,500 | | Construction | | | 6,377 | | | | 5,175 | | | | | | | | | Total | | $ | 69,304 | | | $ | 37,246 | | | | | | | | | | | | | | | | | | REO activity (number of properties): | | | | | | | | | Beginning property inventory, | | | 155 | | | | 87 | | Properties acquired | | | 295 | | | | 169 | | Properties disposed | | | (165 | ) | | | (101 | ) | | | | | | | | Ending property inventory | | | 285 | | | | 155 | | | | | | | | | | | | | | | | | | Average holding period (in days) | | | | | | | | | Residential | | | 221 | | | | 160 | | Commercial | | | 170 | | | | 237 | | Condo-conversion projects | | | 643 | | | | 306 | | Construction | | | 330 | | | | 145 | | | | | | | | | | | | 266 | | | | 200 | | | | | | | | | | | REO operations (loss) gain: | | | | | | | | | Market adjustments and (losses) gain on sale: | | | | | | | | | | | | | | | | | | Residential | | $ | (9,613 | ) | | $ | (3,521 | ) | Commercial | | | (1,274 | ) | | | (1,402 | ) | Condo-conversion projects | | | (1,500 | ) | | | (5,725 | ) | Construction | | | (1,977 | ) | | | (347 | ) | | | | | | | | | | | (14,364 | ) | | | (10,995 | ) | | | | | | | | | | | | | | | | | Other REO operations expenses | | | (7,499 | ) | | | (10,378 | ) | | | | | | | | Net Loss on REO operations | | $ | (21,863 | ) | | $ | (21,373 | ) | | | | | | | | | | | | | | | | | CHARGE-OFFS | | | | | | | | | Residential charge-offs, net | | | (28,861 | ) | | | (6,256 | ) | | | | | | | | | | Commercial charge-offs, net | | | (59,712 | ) | | | (27,897 | ) | | | | | | | | | | Construction charge-offs, net | | | (183,600 | ) | | | (7,735 | ) | | | | | | | | | | Consumer and finance leases charge-offs, net | | | (61,091 | ) | | | (66,433 | ) | | | | | | | | Total charge-offs, net | | | (333,264 | ) | | | (108,321 | ) | | | | | | | | | TOTAL CREDIT LOSSES (1) | | $ | (355,127 | ) | | $ | (129,694 | ) | | | | | | | | | | | | | | | | | LOSS RATIO PER CATEGORY (2): | | | | | | | | | Residential | | | 1.08 | % | | | 0.29 | % | Commercial | | | 0.96 | % | | | 0.53 | % | Construction | | | 11.65 | % | | | 0.92 | % | Consumer | | | 3.04 | % | | | 3.18 | % | | | | | | | | | | TOTAL CREDIT LOSS RATIO (3) | | | 2.62 | % | | | 1.04 | % |
| | | (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 134
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, 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 RegulatoryCompliance Risk Legal and regulatorycompliance 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 117
obligations will be unenforceable. The Corporation is subject to extensive regulation in the different jurisdictions in which it conducts itits 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. 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. 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 Risk The Corporation conducts its operations in a geographically concentrated area, as its main market is Puerto Rico. However, the Corporation continues diversifying its geographical risk as evidenced by its operations in the Virgin Islands and through FirstBankin Florida. As of December 31, 2009, the Corporation had $1.2 billion outstanding of credit facilities granted to the Puerto Rico Government and/or its political subdivisions. 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 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’sCorporation 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 concentrationloan to one borrower as of December 31, 20082009 in the amount of $348.8$321.5 million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. Together with the Corporation’s next largestThis commercial loan concentration of $218.9 million with another mortgage originator in Puerto Rico, R&G Financial, the Corporation’s total loans granted to these mortgage originators amounted to $567.7 million as of December 31, 2008. These commercial loans areis secured by individual mortgage loans on residential and commercial real estate. In December 2005, the Corporation obtained a waiver from the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico with respect to the statutory limit for individual borrowers (loan-to-one borrower limit). Of the total gross loan portfolio including loans held for sale, of $13.1$13.9 billion as of December 31, 2008,2009, approximately 81% have83% has credit risk concentration in Puerto Rico, 11%9% in the United States and 8% in the Virgin Islands. 135
Selected Quarterly Financial Data Financial data showing results of the 20082009 and 20072008 quarters is presented below. In the opinion of management, all adjustments necessary for a fair presentation have been included. These results are unaudited. 118
| | | | | | | | | | | | | | | | | | | 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 | ) |
| | | | | | | | | | | | | | | | | | | 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 | |
| | | | | | | | | | | | | | | | | | | 2007 | | | March 31 | | June 30 | | September 30 | | December 31 | | | (Dollar in thousands, except for per share results) | Interest income | | $ | 298,585 | | | $ | 305,871 | | | $ | 295,931 | | | $ | 288,860 | | Net interest income | | | 117,435 | | | | 117,215 | | | | 105,029 | | | | 111,337 | | Provision for loan losses | | | 24,914 | | | | 24,628 | | | | 34,260 | | | | 36,808 | | Net income | | | 22,832 | | | | 23,795 | | | | 14,142 | | | | 7,367 | | Net income (loss) attributable to common stockholders | | | 12,763 | | | | 13,726 | | | | 4,073 | | | | (2,702 | ) | Earnings (loss) per common share-basic | | $ | 0.15 | | | $ | 0.16 | | | $ | 0.05 | | | $ | (0.03 | ) | Earnings (loss) per common share-diluted | | $ | 0.15 | | | $ | 0.16 | | | $ | 0.05 | | | $ | (0.03 | ) |
Fourth Quarter Financial Summary The financial results for the fourth quarter of 2008,2009, as compared to the same period in 2007,2008, were principally impacted by the following items on a pre-tax basis: | –— | | Net interest income increased 12%11% to $137.3 million for the fourth quarter of 2009 from $124.2 million for the fourth quarter of 2008 from $111.3 million in2008. Net interest income for the fourth quarter of 2007.2009 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 short-termfunding costs related to continued low levels of interest rates on its interest-bearing liabilities as compared toand the mix of financing sources. Lower interest rate levels duringwas 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 2007. Net interest spread and margin on a tax equivalent basis were 2.71% and 3.06%, respectively, up 39 and 21 basis points2008 to 2.52% for the fourth quarter of 2009. Also, the Corporation was able to reduce the average cost of its core deposits from the2.83% for prior year’s fourth quarter. During 2008, the targetquarter to 1.95% for the Federal Funds rate was lowered from 4.25% to a rangefourth quarter of 0% to 0.25% through seven separate actions in an attempt to stimulate the U.S. economy, officially in recession since December 2007.2009. The decrease in funding costs associated with lower short-term interest rates was partially offset by lower loan yields due toa significant increase in non-performing loans and the repricing of variable-ratefloating-rate commercial and construction and commercial loans tiedat lower rates due to short-term indexesdecreases in market interest rates such as three-month LIBOR and the significant increase inPrime rate, even though the volume of non-accrual loans.Corporation is actively increasing spreads on loan renewals. The increase in net interest income was also associated with an increase of $2.3 billion$429.6 million of interest-earning assets, over the prior year’s fourth quarter. AverageThe increase in interest-earnings assets was driven by a higher average loans volume, which increased by $1.4 billion,$847 million, driven by internal originations,additional credit facilities extended to the Government of Puerto Rico. Partially offsetting the increase in particular commercialaverage loans was a decrease in average investments of $417 million, driven mostly by the sales of approximately $1.7 billion of Agency MBS and residential real estate loans, and to a lesser extent,calls of approximately $945 million of U.S. Agency debt securities that were more than purchases of loansmade during 2008 that contributed to a wider spread.2009. | |
| –— | | Non-interest income increased to $19.4$38.8 million for the fourth quarter of 20082009 from $16.5$19.4 million for theprior year’s fourth quarter of 2007.quarter. The variance is mainly related to a realized gain of $11.0$24.4 million on the sale of certain U.S. sponsored agency fixed-rateAgency MBS during the fourth quarter of 2008, compared toversus a realized gain of $4.7 million on the sale of investment securities recordedMBS 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 2007. The surge in MBS prices, responding2009, compared to the U.S. government announcement that it will invest in MBS, offered a market opportunity to realize a gain on the sale of approximately $284 million fixed-rateof U.S. agencyAgency MBS that carried a weighted average yield of 5.35%.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. Other-than-temporary impairmentThere were no other-than- temporary impairments charges on investment securities amounted to $0.7 million forduring the fourth quarter of 2007.2009. | | | –— | | 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 compared to $36.8 million, or 153% of net charge-offs, for the fourth quarter of 2007.2008. The increase, as compared to the fourth quarter of 2007, is2008, was mainly attributable to the significant increase in delinquency levels andnon-performing loans, 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 |
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| | | residential mortgage loan portfolio in the U.S. mainland and Puerto Rico and the overall growth of the Corporation’s loan portfolioportfolio. 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 chargesprovision. The increase in 2008.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 9%2% to $87.0$88.8 million from $80.1$87.0 million for the fourth quarter of 2007. This2008. The increase isin 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 higher$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, that increased by approximately $8.0 millionmainly due to $9.3 million for the fourth quarter of 2008 as compared to $1.3 million for the fourth quarter of 2007, partially offset by lower professional service feeswrite-downs and business promotion expenses and a decrease in employee compensation and benefit expenses. The increase in REO operations losses was driven by declining real estate prices, mainly in the U.S. mainland, that have caused write-downs on the value of repossessed properties. Partially offsetting higher losses on REO operations was a decrease of $1.2 million in professional service fees, a decrease of $0.8 million in business promotion expenses and a decrease of $1.7 million in employees’ compensation and benefit expenses.mainland. |
Contrary to positive comparisons against 2007 results, a compression in net interest margin was observed in the fourth quarter of 2008, compared to the previous trailing quarter ended on September 30, 2008, mainly associated with a higher overall cost of funding. Net interest income of $124.2 million for the fourth quarter of 2008 decreased by $20.4 million compared to the third quarter of 2008. The Corporation, in managing its asset/liability position in order to limit the effects of changes in interest rates on net interest income, has been 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 at higher current spreads. 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 interest rate risk management strategy contributed in part to an increase in the overall cost of funding of 22 basis points, from 3.53% to 3.75%, even though market interest rates declined in the fourth quarter of 2008, but left the Corporation better positioned for possible adverse changes in interest rates in the future. Also contributing to the higher cost of funds is the fact that new brokered CDs issued during the fourth quarter carry a fixed-interest rate set on a wider spread over LIBOR than the spread of interest rate swaps that hedged the brokered CDs replaced. The volume of swapped-to-floating brokered CDs has decreased by $397 million since the end of the third quarter of 2008 and approximately $3.0 billion to $1.1 billion as of December 31, 2008 from $4.1 billion a year ago. The Corporation has taken initial steps to mitigate this anticipated increase in the cost of funding with a higher pricing on its variable-rate commercial loan portfolio; however, this effort was severely impacted by significant declines in short-term rates during the quarter (the Prime Rate dropped to 3.25% from 5.00% and 3-month LIBOR closed at 1.43% on December 31, 2008 from 4.05% on September 30, 2008) and, to an extent, by the increase in the volume of non-performing loans. The weighted-average yield of loans on a tax equivalent basis decreased from 6.62% to 6.57%.
The Corporation expects the overall cost of funds to decrease in the first quarter of 2009. The main reasons supporting the lower costs expectation are: the reduction of the high level of liquidity that has been maintained in the fourth quarter of 2008 amid the liquidity crisis in the capital markets, the lower interest rates in absolute terms in the current rate environment and expectations to remain at relatively low levels throughout the first quarter, and lower short-term brokered CDs rate spreads over LIBOR rates, which have been tightening since the turn of the year. The Corporation expects to refinance approximately $1.4 billion of $1.9 billion brokered CDs maturing, or that could be redeemed in the first quarter of 2009 with various sources of funding, including advances from the Federal Home Loan Bank and for the Federal Reserve Bank, brokered CDs, repurchase agreements and core deposits.
Some infrequent transactions that affected quarterly periods shown in the above table include: (i) 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) the reversal of $10.6 million of UTBs during the second quarter of 2008 for positions taken on income tax returns recorded under the provisions of FIN 48 due to the lapse of the statute of limitations for the 2003; (ii)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 in the first quarter of 2008 and (viii) the income tax benefit of $5.4 million also recorded in 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; (iii) the income recognition of approximately $15.1 million in the third quarter of 2007 for reimbursement of expenses, mainly from insurance carriers, related to the settlement of the class action lawsuit brought against the Corporation; and (iv) the 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 recorded in the first quarter of 2007.suit. 120
Changes in Internal Controls 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 2008,2009, 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 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 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 121
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, 2008,2009, 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, 20082009 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, 20082009 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. Item 9B. Other Information. None. 122138
PART III Item 10. Directors, Executive Officers and Corporate Governance Information in response to this Item is incorporated herein by reference to the sections entitled “Information with Respect to Nominees for Director of First BanCorp and Executive Officers of the Corporation,” “Corporate Governance and Related Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in First BanCorp’s definitive Proxy Statement for use in connection with its 20092010 Annual Meeting of stockholders (the “Proxy Statement”) to be filed with the Securities and Exchange Commission within 120 days of the close of First BanCorp’s 20082009 fiscal year. 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 of Directors,” “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Tabular Executive Compensation Disclosure” in First BanCorp’s Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information in response to this Item is incorporated herein by reference to the section entitled “Beneficial Ownership of Securities” in First BanCorp’s Proxy Statement. 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 “Certain Relationships and Related Person Transactions” and “Corporate Governance and Related Matters” in First BanCorp’s Proxy Statement. Item 14. Principal Accountant Fees and Services. Information in response to this Item is incorporated herein by reference to the section entitled “Audit Fees” in First BanCorp’s Proxy Statement. 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 2, 2009,1, 2010, are included herein beginning on page F-1: | – | | Report of Independent Registered Public Accounting Firm. | | | – | | Consolidated Statements of Financial Condition as of December 31, 20082009 and 2007.2008. | | | – | | Consolidated Statements of (Loss) Income for Each of the Three Years in the Period Ended December 31, 2008.2009. | |
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| – | | Consolidated Statements of Changes in Stockholders’ Equity for Each of the Three Years in the Period Ended December 31, 2008.2009. |
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| | – | | Consolidated Statements of Comprehensive (Loss) Income for each of the Three Years in the Period Ended December 31, 2008.2009. | | | – | | Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2008.2009. | | | – | | 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: | | | No. | | Exhibit | 3.1 | | Articles of Incorporation (1) | | | | 3.2 | | By-Laws of First BanCorp (1) | | | | 3.3 | | Certificate of Designation creating the 7.125% non-cumulative perpetual monthly income preferred stock, Series A (1)(2) | | | | 3.4 | | Certificate of Designation creating the 8.35% non-cumulative perpetual monthly income preferred stock, Series B (2)(3) | | | | 3.5 | | Certificate of Designation creating the 7.40% non-cumulative perpetual monthly income preferred stock, Series C (3)(4) | | | | 3.6 | | Certificate of Designation creating the 7.25% non-cumulative perpetual monthly income preferred stock, Series D (4)(5) | | | | 3.7 | | Certificate of Designation creating the 7.00% non-cumulative perpetual monthly income preferred stock, Series E (5)(6) | | | | 3.8 | | Certificate of Designation creating the fixed-rate cumulative perpetual preferred stock, Series F (6) | | | | 3.9 | | Warrant dated January 16, 2009 to purchase shares of First BanCorp (7) | | | | 4.0 | | Form of Common Stock Certificate (8)Certificate(9) | | | | 4.1 | | Form of Stock Certificate for 7.125% non-cumulative perpetual monthly income preferred stock, Series A (1)(2) | | | | 4.2 | | Form of Stock Certificate for 8.35% non-cumulative perpetual monthly income preferred stock, Series B (2)(3) | | | | 4.3 | | Form of Stock Certificate for 7.40% non-cumulative perpetual monthly income preferred stock, Series C (3)(4) | | | | 4.4 | | Form of Stock Certificate for 7.25% non-cumulative perpetual monthly income preferred stock, Series D (4)(5) | | | | 4.5 | | Form of Stock Certificate for 7.00% non-cumulative perpetual monthly income preferred stock, Series E (9)(10) | | | | 4.6 | | Form of Stock Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series F (1) | | | | 4.7 | | Warrant dated January 16, 2009 to purchase shares of First BanCorp (8) | | | | 4.8 | | 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) | | | | 10.1 | | FirstBank’s 19871997 Stock Option Plan (10)Plan(11) | | | | 10.2 | | FirstBank’s 1997 Stock Option Plan (10) | | | | 10.3 | | First BanCorp’s 2008 Omnibus Incentive Plan (11) | | | | 10.4 | | Investment agreement between The Bank of Nova Scotia and First BanCorp dated as of February 15, 2007 (12) | | | | 10.5 | | Purchase Agreement dated as of January 16, 2009 between First BanCorp and the United States Department of the Treasury (13)Plan(12) |
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| | | No. | | Exhibit | 10.610.3 | | Investment agreement between The Bank of Nova Scotia and First BanCorp dated February 15, 2007, including the Form of Stockholder Agreement(13) | | | | 10.4 | | Employment Agreement — Luis M. Beauchamp (10)– Aurelio Alemán(11) | | | | 10.5 | | Amendment No. 1 to Employment Agreement – Aurelio Alemán(15) | | | | 10.6 | | Amendment No. 2 to Employment Agreement – Aurelio Alemán | | | | 10.7 | | Employment Agreement — Aurelio Alemán (10)– Randolfo Rivera(11) | | | | 10.8 | | Amendment No. 1 to Employment Agreement —– Randolfo Rivera (10)(15) | | | | 10.9 | | Amendment No. 2 to Employment Agreement — Lawrence Odell (14)– Randolfo Rivera | | | | 10.10 | | Amendment to Employment Agreement —– Lawrence Odell (14)Odell(16) | | | | 10.11 | | Amendment No. 1 to Employment Agreement — Fernando Scherrer (14)– Lawrence Odell(16) | | | | 10.12 | | ServiceAmendment No. 2 to Employment Agreement Martinez Odell & Calabria (14)– Lawrence Odell(15) | | | | 10.13 | | Amendment No. 3 to Employment Agreement – Lawrence Odell | | | | 10.14 | | Employment Agreement – Orlando Berges(17) | | | | 10.15 | | Service Agreement Martinez Odell & Calabria(16) | | | | 10.16 | | Amendment No. 1 to Service Agreement Martinez Odell & Calabria(16) | | | | 10.17 | | Amendment No. 2 to Service Agreement Martinez Odell & Calabria (14) | | | | 12.1 | | Ratio of Earnings to Fixed Charges and Preference Dividends | | | | 14.1 | | Code of Ethics for CEO and Senior Financial Officers | | | | 14.2 | | Policy Statement and Standards of Conduct for Members of Board of Directors, Executive Officers and Principal Shareholders(15) | | | | 14.3 | | Independence Principles for Directors of First BanCorp (16) (1) | | | | 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 | | | | 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) | | | | 99.4 | | Independence Principles for Directors of First BanCorp (19) |
| | | (1) | | Incorporated by reference from the Form 10-K for the year ended December 31, 2008 filed by the Corporation on March 2, 2009. | | (2) | | Incorporated by reference to First BanCorp’s registration statement on Form S-3 filed by the Corporation on March 30, 1999. | | (2)(3) | | Incorporated by reference to First BanCorp’s registration statement on Form S-3 filed by the Corporation on September 8, 2000. | | (3)(4) | | Incorporated by reference to First BanCorp’s registration statement on Form S-3 filed by the Corporation on May 18, 2001. | | (4)(5) | | Incorporated by reference to First BanCorp’s registration statement on Form S-3/A filed by the Corporation on January 16, 2002. |
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| | | (5)(6) | | Incorporated by reference to Form 8-A filed by the Corporation on September 26, 2003. | | (6)(7) | | Incorporated by reference to Exhibit 3.1 from the Form 8-K filed by the Corporation on January 20, 2009. | | (7)(8) | | Incorporated by reference to Exhibit 4.1 from the Form 8-K filed by the Corporation on January 20, 2009. | | (8)(9) | | Incorporated by reference from Registration statement on Form S-4 filed by the Corporation on April 15, 1998.1998 | | (9)(10) | | Incorporated by reference to Exhibit 4.1 from the Form 8-K filed by the Corporation on September 5, 2003. | | (10)(11) | | Incorporated by reference from the Form 10-K for the year ended December 31, 1998 filed by the Corporation on March 26, 1999. | | (11)(12) | | Incorporated by reference to Exhibit 10.1 from the Form 10-Q for the quarter ended March 31, 2008 filed by the Corporation on May 12, 2008. | | (12)(13) | | Incorporated by reference to Exhibit 10.110.01 from the Form 8-K filed by the Corporation on February 22, 2007. | | (13)(14) | | Incorporated by reference to Exhibit 10.1 from the Form 8-K filed by the Corporation on January 20, 2009. |
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| | | (14)(15) | | Incorporated by reference from the Form 10-Q for the quarter ended March 31, 2009 filed by the Corporation on May 11, 2009. | | (16) | | Incorporated by reference from the Form 10-K for the year ended December 31, 2005 filed by the Corporation on February 9, 2007. | | (15)(17) | | Incorporated by reference from the Form 10-Q for the quarter ended June 30, 2009 filed by the Corporation on August 11, 2009. | | (18) | | Incorporated by reference from the Form 10-K for the year ended December 31, 2003 filed by the Corporation on March 15, 2004. | | (16)(19) | | Incorporated by reference from the Form 10-K for the year ended December 31, 2007 filed by the Corporation on February 29, 2008. |
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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/ Luis M. Beauchamp | | Aurelio Alemán | | Date: 3/2/091/10 | | | | | | | | | | Luis M. Beauchamp, Chairman, | | Aurelio Alemán | | | | | President and Chief Executive Officer | | | | |
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/ Luis M. BeauchampLuis M. Beauchamp Aurelio Alemán | | | | Date: 3/2/091/10 | Chairman, | | | | | President and Chief Executive Officer | | | | | | | | | | /s/ Aurelio AlemánAurelio Alemán Orlando Berges | | | | Date: 3/2/09 | Senior Executive Vice President and | | | | | Chief Operating Officer | | | | | | | | | 1/10 | /s/ Fernando Scherrer Fernando Scherrer,Orlando Berges, CPA | | | | Date: 3/2/09 | Executive Vice President and | | | | | Chief Financial Officer | | | | | | | | | | /s/ José Menéndez-Cortada | | | | Date: 3/1/10 | José Menéndez-Cortada, Director and | | | | | Chairman of the Board | | | | | | | | | | /s/ Fernando Rodríguez-Amaro | | | | Date: 3/1/10 | Fernando Rodríguez Amaro, | | | | Date: 3/2/09 | Director | | | | | | | | | | /s/ Jorge L. Díaz | | | | Date: 3/1/10 | | | | | Date: 3/2/09 | | | | | | /s/ Sharee Ann Umpierre-Catinchi | | | | Date: 3/1/10 | Sharee Ann Umpierre-Catinchi, | | | | Date: 3/2/09 | Director | | | | | | | | | | /s/ José TeixidorJosé Teixidor, Director L. Ferrer-Canals | | | | Date: 3/2/09 | | | | | 1/10 | /s/ José L. Ferrer-Canals José L. Ferrer-Canals, Director | | | | Date: 3/2/09 | | | | | | /s/ José Menéndez-CortadaJosé Menéndez-Cortada, Lead | | | | Date: 3/2/09 | Director | | | | | | | | | | /s/ Frank Kolodziej | | | | Date: 3/1/10 | Frank Kolodziej, Director | | | | Date: 3/2/09 | | | | | | /s/ Héctor M. Nevares | | | | Date: 3/1/10 | Héctor M. Nevares, Director | | | | Date: 3/2/09 |
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| | | | | /s/ José F. Rodríguez | | | | Date: 3/1/10 | José F. Rodríguez, Director | | | | Date: 3/2/09 | | | | | | /s/ Pedro Romero Pedro Romero, CPA | | | | Date: 3/2/091/10 | Senior Vice President and | | | | | Chief Accounting Officer | | | | |
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TABLE OF CONTENTS | | | First BanCorp Index to Consolidated Financial Statements | | | | | F-1 | | | F-2 | | | F-4 | | | F-5 | | | F-6 | | | F-7 | | | F-8 | | | F-9 |
Management’s Report on Internal Control Over Financial Reporting To the Board of Directors and Stockholders of First BanCorp: The management of First BanCorp (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 internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of 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 of financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) 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; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP, 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. 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. The management of First BanCorp has assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2008.2009. In making this assessment, the Corporation used the criteria set forth by the Committee of the Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2008.2009. The effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2008,2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. | | | | | | | | | /s/ Luis M. BeauchampLuis M. Beauchamp | Aurelio Alemán | | | | Chairman of the Board, President | Aurelio Alemán | | | | President and Chief Executive Officer | | | | | | | /s/ Orlando Berges | | | | /s/ Fernando ScherrerFernando Scherrer | Orlando Berges | | | | Executive Vice President | | | | | and Chief Financial Officer | | |
F-1
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, 20082009 and 2007,2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20082009 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, 2008,2009, 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 adopted in 2007 Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”, Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” and Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Liabilities Including an amendment of FASB Statement No. 115”. In addition, the Corporation changed the manner in which it accounts for share-based compensationuncertain tax positions and the manner in 2006.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-2
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 2, 20091, 2010
CERTIFIED PUBLIC ACCOUNTANTS (OF PUERTO RICO) License No. 216 Expires Dec. 1, 2010 Stamp 23871942389662 of the P.R. Society of Certified Public Accountants has been
Affixedaffixed to the file copy of this report F-3
FIRST BANCORP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION | | | | | | | | | | | | | | | | | (In thousands, except for share information) | | December 31, 2008 | | December 31, 2007 | | | | | | December 31, 2009 | | December 31, 2008 | | | | | (In thousands, except for share information) | | ASSETS | | | | | | Cash and due from banks | | $ | 329,730 | | $ | 195,809 | | | $ | 679,798 | | $ | 329,730 | | | | | | | | | | | | | | | | Money market investments: | | | Federal funds sold | | 54,469 | | 7,957 | | | 1,140 | | 54,469 | | Time deposits with other financial institutions | | 600 | | 26,600 | | | 600 | | 600 | | Other short-term investments | | 20,934 | | 148,579 | | | 22,546 | | 20,934 | | | | | | | | | | | | | Total money market investments | | 76,003 | | 183,136 | | | 24,286 | | 76,003 | | | | | | | | | | | | | Investment securities available for sale, at fair value: | | | Securities pledged that can be repledged | | 2,913,721 | | 789,271 | | | 3,021,028 | | 2,913,721 | | Other investment securities | | 948,621 | | 497,015 | | | 1,149,754 | | 948,621 | | | | | | | | | | | | | Total investment securities available for sale | | 3,862,342 | | 1,286,286 | | | 4,170,782 | | 3,862,342 | | | | | | | | | | | | | Investment securities held to maturity, at amortized cost: | | | Securities pledged that can be repledged | | 968,389 | | 2,522,509 | | | 400,925 | | 968,389 | | Other investment securities | | 738,275 | | 754,574 | | | 200,694 | | 738,275 | | | | | | | | | | | | | Total investment securities held to maturity, fair value of $1,720,412(2007 - $3,261,934) | | 1,706,664 | | 3,277,083 | | | Total investment securities held to maturity, fair value of $621,584 (2008 - $1,720,412) | | | 601,619 | | 1,706,664 | | | | | | | | | | | | | Other equity securities | | 64,145 | | 64,908 | | | 69,930 | | 64,145 | | | | | | | | | | | | | | | | Loans, net of allowance for loan and lease losses of $281,526(2007 – $190,168) | | 12,796,363 | | 11,588,654 | | | 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 | | 10,403 | | 20,924 | | | 20,775 | | 10,403 | | | | | | | | | | | | | Total loans, net | | 12,806,766 | | 11,609,578 | | | 13,421,106 | | 12,806,766 | | | | | | | | | | | | | Premises and equipment, net | | 178,468 | | 162,635 | | | 197,965 | | 178,468 | | Other real estate owned | | 37,246 | | 16,116 | | | 69,304 | | 37,246 | | Accrued interest receivable on loans and investments | | 98,565 | | 107,979 | | | 79,867 | | 98,565 | | Due from customers on acceptances | | 504 | | 747 | | | 954 | | 504 | | Other assets | | 330,835 | | 282,654 | | | 312,837 | | 330,835 | | | | | | | | | | | | | Total assets | | $ | 19,491,268 | | $ | 17,186,931 | | | $ | 19,628,448 | | $ | 19,491,268 | | | | | | | | | | | | | | | | LIABILITIES | | | | | | Deposits: | | | Non-interest-bearing deposits | | $ | 625,928 | | $ | 621,884 | | | $ | 697,022 | | $ | 625,928 | | Interest-bearing deposits (including $1,150,959 and $4,186,563 measured at fair value as of December 31, 2008 and December 31, 2007, respectively) | | 12,431,502 | | 10,412,637 | | | 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 | | 13,057,430 | | 11,034,521 | | | 12,669,047 | | 13,057,430 | | Federal funds purchased and securities sold under agreements to repurchase | | 3,421,042 | | 3,094,646 | | | | | | Loans payable | | | 900,000 | | — | | Securities sold under agreements to repurchase | | | 3,076,631 | | 3,421,042 | | Advances from the Federal Home Loan Bank (FHLB) | | 1,060,440 | | 1,103,000 | | | 978,440 | | 1,060,440 | | Notes payable (including $10,141 and $14,306 measured at fair value as of December 31, 2008 and December 31, 2007, respectively) | | 23,274 | | 30,543 | | | 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 | | 231,914 | | 231,817 | | | 231,959 | | 231,914 | | Bank acceptances outstanding | | 504 | | 747 | | | 954 | | 504 | | Accounts payable and other liabilities | | 148,547 | | 270,011 | | | 145,237 | | 148,547 | | | | | | | | | | | | | Total liabilities | | 17,943,151 | | 15,765,285 | | | 18,029,385 | | 17,943,151 | | | | | | | | | | | | | | | | Commitments and contingencies (Notes 26, 29 and 32) | | | Commitments and contingencies (Notes 28, 31 and 34) | | | | | | STOCKHOLDERS’ EQUITY | | | Preferred stock, authorized 50,000,000 shares: issued and outstanding 22,004,000 shares at $25 liquidation value per share | | 550,100 | | 550,100 | | | 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 102,444,549 as of December 31, 2008 (2007 – 102,402,306) | | 102,444 | | 102,402 | | | Less: Treasury stock (at par value) | | | (9,898 | ) | | | (9,898 | ) | | 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, 92,546,749 as of December 31, 2008 (2007 – 92,504,506) | | 92,546 | | 92,504 | | | Common stock outstanding, 92,542,722 shares outstanding (2008 - 92,546,749) | | | 92,542 | | 92,546 | | | | | | | | | | | | | Additional paid-in capital | | 108,299 | | 108,279 | | | 134,223 | | 108,299 | | Legal surplus | | 299,006 | | 286,049 | | | 299,006 | | 299,006 | | Retained earnings | | 440,777 | | 409,978 | | | 118,291 | | 440,777 | | Accumulated other comprehensive income (loss), net of tax expense (benefit) of $717 (2007 - ($227)) | | 57,389 | | | (25,264 | ) | | Accumulated other comprehensive income, net of tax expense of $4,628 (2008 - $717) | | | 26,493 | | 57,389 | | | | | | | | | | | | | Total stockholders’ equity | | 1,548,117 | | 1,421,646 | | | 1,599,063 | | 1,548,117 | | | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 19,491,268 | | $ | 17,186,931 | | | $ | 19,628,448 | | $ | 19,491,268 | | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. F-4
FIRST BANCORP CONSOLIDATED STATEMENTS OF (LOSS) INCOME | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands, except per share data) | | | (In thousands, except per share data) | | Interest income: | | | Loans | | $ | 835,501 | | $ | 901,941 | | $ | 936,052 | | | $ | 741,535 | | $ | 835,501 | | $ | 901,941 | | Investment securities | | 285,041 | | 265,275 | | 281,847 | | | 254,462 | | 285,041 | | 265,275 | | Money market investments | | 6,355 | | 22,031 | | 70,914 | | | 577 | | 6,355 | | 22,031 | | | | | | | | | | | | | | | | | Total interest income | | 1,126,897 | | 1,189,247 | | 1,288,813 | | | 996,574 | | 1,126,897 | | 1,189,247 | | | | | | | | | | | | | | | | | | | | Interest expense: | | | Deposits | | 414,838 | | 528,740 | | 605,033 | | | 314,487 | | 414,838 | | 528,740 | | Loans payable | | 243 | | — | | — | | | 2,331 | | 243 | | — | | Federal funds purchased and securities sold under agreements to repurchase | | 133,690 | | 148,309 | | 195,328 | | | 114,651 | | 133,690 | | 148,309 | | Advances from FHLB | | 39,739 | | 38,464 | | 13,704 | | | 32,954 | | 39,739 | | 38,464 | | Notes payable and other borrowings | | 10,506 | | 22,718 | | 31,054 | | | 13,109 | | 10,506 | | 22,718 | | | | | | | | | | | | | | | | | Total interest expense | | 599,016 | | 738,231 | | 845,119 | | | 477,532 | | 599,016 | | 738,231 | | | | | | | | | | | | | | | | | Net interest income | | 527,881 | | 451,016 | | 443,694 | | | 519,042 | | 527,881 | | 451,016 | | | | | | | | | | | | | | | | | | | | Provision for loan and lease losses | | 190,948 | | 120,610 | | 74,991 | | | 579,858 | | 190,948 | | 120,610 | | | | | | | | | | | | | | | | | | | | Net interest income after provision for loan and lease losses | | 336,933 | | 330,406 | | 368,703 | | | 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 | | 6,309 | | 6,893 | | 5,945 | | | 6,830 | | 6,309 | | 6,893 | | Service charges on deposit accounts | | 12,895 | | 12,769 | | 12,591 | | | 13,307 | | 12,895 | | 12,769 | | Mortgage banking activities | | 3,273 | | 2,819 | | 2,259 | | | 8,605 | | 3,273 | | 2,819 | | Net gain (loss) on investments and impairments | | 21,193 | | | (2,726 | ) | | | (8,194 | ) | | Net gain (loss) on partial extinguishment and recharacterization of secured commercial loans to local financial institutions | | — | | 2,497 | | | (10,640 | ) | | 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 | | 2,246 | | 2,538 | | 3,264 | | | 1,346 | | 2,246 | | 2,538 | | Gain on sale of credit card portfolio | | — | | 2,819 | | 500 | | | — | | — | | 2,819 | | Insurance reimbursements and other agreements related to a contingency settlement | | — | | 15,075 | | — | | | — | | — | | 15,075 | | Other non-interest income | | 28,727 | | 24,472 | | 25,611 | | | 27,030 | | 28,727 | | 24,472 | | | | | | | | | | | | | | | | | Total non-interest income | | 74,643 | | 67,156 | | 31,336 | | | 142,264 | | 74,643 | | 67,156 | | | | | | | | | | | | | | | | | | | | Non-interest expenses: | | | Employees’ compensation and benefits | | 141,853 | | 140,363 | | 127,523 | | | 132,734 | | 141,853 | | 140,363 | | Occupancy and equipment | | 61,818 | | 58,894 | | 54,440 | | | 62,335 | | 61,818 | | 58,894 | | Business promotion | | 17,565 | | 18,029 | | 17,672 | | | 14,158 | | 17,565 | | 18,029 | | Professional fees | | 15,809 | | 20,751 | | 32,095 | | | 15,217 | | 15,809 | | 20,751 | | Taxes, other than income taxes | | 16,989 | | 15,364 | | 12,428 | | | 15,847 | | 16,989 | | 15,364 | | Insurance and supervisory fees | | 15,990 | | 12,616 | | 7,067 | | | 45,605 | | 15,990 | | 12,616 | | Net loss on real estate owned (REO) operations | | 21,373 | | 2,400 | | 18 | | | 21,863 | | 21,373 | | 2,400 | | Other non-interest expenses | | 41,974 | | 39,426 | | 36,720 | | | 44,342 | | 41,974 | | 39,426 | | | | | | | | | | | | | | | | | Total non-interest expenses | | 333,371 | | 307,843 | | 287,963 | | | 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 | ) | | | | | | | | | | Income before income taxes | | 78,205 | | 89,719 | | 112,076 | | | Income tax benefit (provision) | | 31,732 | | | (21,583 | ) | | | (27,442 | ) | | Net (loss) income | | | $ | (275,187 | ) | | $ | 109,937 | | $ | 68,136 | | | | | | | | | | | | | | | | | Preferred stock dividends and accretion of discount | | | 46,888 | | 40,276 | | 40,276 | | | | | | | | | | | Net income | | $ | 109,937 | | $ | 68,136 | | $ | 84,634 | | | Net (loss) income attributable to common stockholders | | | $ | (322,075 | ) | | $ | 69,661 | | $ | 27,860 | | | | | | | | | | | | | | | | | Dividends to preferred stockholders | | 40,276 | | 40,276 | | 40,276 | | | | | | | | | | | | Net income attributable to common stockholders | | $ | 69,661 | | $ | 27,860 | | $ | 44,358 | | | | | | | | | | | | Net income per common share: | | | Net (loss) income per common share: | | | Basic | | $ | 0.75 | | $ | 0.32 | | $ | 0.54 | | | $ | (3.48 | ) | | $ | 0.75 | | $ | 0.32 | | | | | | | | | | | | | | | | | Diluted | | $ | 0.75 | | $ | 0.32 | | $ | 0.53 | | | $ | (3.48 | ) | | $ | 0.75 | | $ | 0.32 | | | | | | | | | | | | | | | | | Dividends declared per common share | | $ | 0.28 | | $ | 0.28 | | $ | 0.28 | | | $ | 0.14 | | $ | 0.28 | | $ | 0.28 | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. F-5
FIRST BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | Cash flows from operating activities: | | | Net income | | $ | 109,937 | | $ | 68,136 | | $ | 84,634 | | | Net (loss) income | | | $ | (275,187 | ) | | $ | 109,937 | | $ | 68,136 | | | | | | | | | | | | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | Depreciation | | 19,172 | | 17,669 | | 16,810 | | | 20,774 | | 19,172 | | 17,669 | | Amortization of core deposit intangibles | | 3,603 | | 3,294 | | 3,385 | | | Amortization and impairment of core deposit intangible | | | 7,386 | | 3,603 | | 3,294 | | Provision for loan and lease losses | | 190,948 | | 120,610 | | 74,991 | | | 579,858 | | 190,948 | | 120,610 | | Deferred income tax (benefit) provision | | | (38,853 | ) | | 13,658 | | | (31,715 | ) | | Deferred income tax expense (benefit) | | | 16,054 | | | (38,853 | ) | | 13,658 | | Stock-based compensation recognized | | 9 | | 2,848 | | 5,380 | | | 92 | | 9 | | 2,848 | | Gain on sale of investments, net | | | (27,180 | ) | | | (3,184 | ) | | | (7,057 | ) | | | (86,804 | ) | | | (27,180 | ) | | | (3,184 | ) | Other-than-temporary impairments on available-for-sale securities | | 5,987 | | 5,910 | | 15,251 | | | 1,658 | | 5,987 | | 5,910 | | Derivative instruments and hedging activities (gain) loss | | | (26,425 | ) | | 6,134 | | 61,820 | | | | (15,745 | ) | | | (26,425 | ) | | 6,134 | | Net gain on sale of loans and impairments | | | (2,617 | ) | | | (2,246 | ) | | | (1,690 | ) | | | (7,352 | ) | | | (2,617 | ) | | | (2,246 | ) | Net (gain) loss on partial extinguishment and recharacterization of secured commercial loans to local financial institutions | | — | | | (2,497 | ) | | 10,640 | | | 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 | | | (1,083 | ) | | | (663 | ) | | | (2,568 | ) | | 606 | | | (1,083 | ) | | | (663 | ) | Net increase in mortgage loans held for sale | | | (6,194 | ) | | — | | — | | | | (21,208 | ) | | | (6,194 | ) | | — | | Amortization of broker placement fees | | 15,665 | | 9,563 | | 19,955 | | | 22,858 | | 15,665 | | 9,563 | | Accretion of basis adjustments on fair value hedges | | — | | | (2,061 | ) | | | (3,626 | ) | | — | | — | | | (2,061 | ) | Net accretion of premium and discounts on investment securities | | | (7,828 | ) | | | (42,026 | ) | | | (35,933 | ) | | 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 | ) | | | (500 | ) | | — | | — | | | (2,819 | ) | Decrease in accrued income tax payable | | | (13,348 | ) | | | (3,419 | ) | | | (39,702 | ) | | | (19,408 | ) | | | (13,348 | ) | | | (3,419 | ) | Decrease (increase) in accrued interest receivable | | 9,611 | | 4,397 | | | (8,813 | ) | | (Decrease) increase in accrued interest payable | | | (31,030 | ) | | | (13,808 | ) | | 33,910 | | | (Increase) decrease in other assets | | | (14,959 | ) | | 4,408 | | 12,089 | | | (Decrease) increase in other liabilities | | | (9,501 | ) | | | (123,611 | ) | | 14,451 | | | 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 | | 65,977 | | | (7,843 | ) | | 137,078 | | | 518,436 | | 65,977 | | | (7,843 | ) | | | | | | | | | | | | | | | | | | | Net cash provided by operating activities | | 175,914 | | 60,293 | | 221,712 | | | 243,249 | | 175,914 | | 60,293 | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | Principal collected on loans | | 2,588,979 | | 3,084,530 | | 6,022,633 | | | 3,010,435 | | 2,588,979 | | 3,084,530 | | Loans originated | | | (3,796,234 | ) | | | (3,813,644 | ) | | | (4,718,928 | ) | | | (4,429,644 | ) | | | (3,796,234 | ) | | | (3,813,644 | ) | Purchases of loans | | | (419,068 | ) | | | (270,499 | ) | | | (168,662 | ) | | Purchase of loans | | | | (190,431 | ) | | | (419,068 | ) | | | (270,499 | ) | Proceeds from sale of loans | | 154,068 | | 150,707 | | 169,422 | | | 43,816 | | 154,068 | | 150,707 | | Proceeds from sale of repossessed assets | | 76,517 | | 52,768 | | 50,896 | | | 78,846 | | 76,517 | | 52,768 | | Purchases of servicing assets | | | (621 | ) | | | (1,851 | ) | | | (1,156 | ) | | Purchase of servicing assets | | | — | | | (621 | ) | | | (1,851 | ) | Proceeds from sale of available-for-sale securities | | 679,955 | | 959,212 | | 232,483 | | | 1,946,434 | | 679,955 | | 959,212 | | Purchases of securities held to maturity | | | (8,540 | ) | | | (511,274 | ) | | | (447,483 | ) | | | (8,460 | ) | | | (8,540 | ) | | | (511,274 | ) | Purchases of securities available for sale | | | (3,468,093 | ) | | | (576,100 | ) | | | (225,373 | ) | | | (2,781,394 | ) | | | (3,468,093 | ) | | | (576,100 | ) | Principal repayments and maturities of securities held to maturity | | 1,586,799 | | 623,374 | | 574,797 | | | Principal repayments of securities available for sale | | 332,419 | | 214,218 | | 217,828 | | | 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 | | | (32,830 | ) | | | (24,642 | ) | | | (55,524 | ) | | | (40,271 | ) | | | (32,830 | ) | | | (24,642 | ) | Proceeds from redemption of other investment securities | | 9,474 | | — | | — | | | Decrease (increase) in other equity securities | | 875 | | | (23,422 | ) | | 2,208 | | | 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 | | — | | — | | | — | | 5,154 | | — | | | | | | | | | | | | | | | | | Net cash (used in) provided by investing activities | | | (2,291,146 | ) | | | (136,623 | ) | | 1,653,141 | | | Net cash used in investing activities | | | | (381,793 | ) | | | (2,291,146 | ) | | | (136,623 | ) | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | Net increase (decrease) in deposits | | 1,924,312 | | 59,499 | | | (1,550,714 | ) | | Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements | | 326,396 | | | (593,078 | ) | | | (1,146,158 | ) | | 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 | | | (42,560 | ) | | 543,000 | | 54,000 | | | | (82,000 | ) | | | (42,560 | ) | | 543,000 | | Repayments of notes payable and other borrowings | | — | | | (150,000 | ) | | — | | | — | | — | | | (150,000 | ) | Dividends paid | | | (66,181 | ) | | | (64,881 | ) | | | (63,566 | ) | | | (43,066 | ) | | | (66,181 | ) | | | (64,881 | ) | Issuance of common stock | | — | | 91,924 | | — | | | — | | — | | 91,924 | | Issuance of preferred stock and associated warrant | | | 400,000 | | — | | — | | Exercise of stock options | | 53 | | — | | 19,756 | | | — | | 53 | | — | | Other financing activities | | | 8 | | — | | — | | | | | | | | | | | | | | | | | Net cash provided by (used in) financing activities | | 2,142,020 | | | (113,536 | ) | | | (2,686,682 | ) | | 436,895 | | 2,142,020 | | | (113,536 | ) | | | | | | | | | | | | | | | | | | | Net increase (decrease) in cash and cash equivalents | | 26,788 | | | (189,866 | ) | | | (811,829 | ) | | 298,351 | | 26,788 | | | (189,866 | ) | | | | Cash and cash equivalents at beginning of year | | 378,945 | | 568,811 | | 1,380,640 | | | 405,733 | | 378,945 | | 568,811 | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents at end of year | | $ | 405,733 | | $ | 378,945 | | $ | 568,811 | | | $ | 704,084 | | $ | 405,733 | | $ | 378,945 | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents include: | | | Cash and due from banks | | $ | 329,730 | | $ | 195,809 | | $ | 112,341 | | | $ | 679,798 | | $ | 329,730 | | $ | 195,809 | | Money market instruments | | 76,003 | | 183,136 | | 456,470 | | | 24,286 | | 76,003 | | 183,136 | | | | | | | | | | | | | | | | | | | $ | 405,733 | | $ | 378,945 | | $ | 568,811 | | | $ | 704,084 | | $ | 405,733 | | $ | 378,945 | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. F-6
FIRST BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | Preferred Stock | | $ | 550,100 | | $ | 550,100 | | $ | 550,100 | | | 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 | | 92,504 | | 83,254 | | 80,875 | | | 92,546 | | 92,504 | | 83,254 | | Issuance of common stock | | — | | 9,250 | | — | | | — | | — | | 9,250 | | Common stock issued under stock option plan | | 6 | | — | | 2,379 | | | — | | 6 | | — | | Restricted stock grants | | 36 | | — | | — | | | — | | 36 | | — | | Restricted stock forfeited | | | | (4 | ) | | — | | — | | | | | | | | | | | | | | | | | Balance at end of year | | 92,546 | | 92,504 | | 83,254 | | | 92,542 | | 92,546 | | 92,504 | | | | | | | | | | | | | | | | | | | | Additional Paid-In-Capital: | | | Balance at beginning of year | | 108,279 | | 22,757 | | — | | | 108,299 | | 108,279 | | 22,757 | | Issuance of common stock | | — | | 82,674 | | — | | | — | | — | | 82,674 | | Issuance of common stock warrants | | | 25,820 | | — | | — | | Shares issued under stock option plan | | 47 | | — | | 17,377 | | | — | | 47 | | — | | Stock-based compensation recognized | | 9 | | 2,848 | | 5,380 | | | 92 | | 9 | | 2,848 | | Restricted stock grants | | | (36 | ) | | — | | — | | | — | | | (36 | ) | | — | | Restricted stock forfeited | | | 4 | | — | | — | | Other | | | 8 | | — | | — | | | | | | | | | | | | | | | | | Balance at end of year | | 108,299 | | 108,279 | | 22,757 | | | 134,223 | | 108,299 | | 108,279 | | | | | | | | | | | | | | | | | | | | Legal Surplus: | | | Balance at beginning of year | | 286,049 | | 276,848 | | 265,844 | | | 299,006 | | 286,049 | | 276,848 | | Transfer from retained earnings | | 12,957 | | 9,201 | | 11,004 | | | — | | 12,957 | | 9,201 | | | | | | | | | | | | | | | | | Balance at end of year | | 299,006 | | 286,049 | | 276,848 | | | 299,006 | | 299,006 | | 286,049 | | | | | | | | | | | | | | | | | | | | Retained Earnings: | | | Balance at beginning of year | | 409,978 | | 326,761 | | 316,697 | | | 440,777 | | 409,978 | | 326,761 | | Net income | | 109,937 | | 68,136 | | 84,634 | | | Net (loss) income | | | | (275,187 | ) | | 109,937 | | 68,136 | | Cash dividends declared on common stock | | | (25,905 | ) | | | (24,605 | ) | | | (23,290 | ) | | | (12,966 | ) | | | (25,905 | ) | | | (24,605 | ) | Cash dividends declared on preferred stock | | | (40,276 | ) | | | (40,276 | ) | | | (40,276 | ) | | | (30,106 | ) | | | (40,276 | ) | | | (40,276 | ) | Cumulative adjustment for accounting change (adoption of FIN 48) | | — | | | (2,615 | ) | | — | | | Cumulative adjustment for accounting change (adoption of SFAS No. 159) | | — | | 91,778 | | — | | | 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 | ) | | | (11,004 | ) | | — | | | (12,957 | ) | | | (9,201 | ) | | | | | | | | | | | | | | | | Balance at end of year | | 440,777 | | 409,978 | | 326,761 | | | 118,291 | | 440,777 | | 409,978 | | | | | | | | | | | | | | | | | | | | Accumulated Other Comprehensive Income (Loss), net of tax: | | | Balance at beginning of year | | | (25,264 | ) | | | (30,167 | ) | | | (15,675 | ) | | 57,389 | | | (25,264 | ) | | | (30,167 | ) | Other comprehensive gain (loss), net of tax | | 82,653 | | 4,903 | | | (14,492 | ) | | Other comprehensive (loss) income, net of tax | | | | (30,896 | ) | | 82,653 | | 4,903 | | | | | | | | | | | | | | | | | Balance at end of year | | 57,389 | | | (25,264 | ) | | | (30,167 | ) | | 26,493 | | 57,389 | | | (25,264 | ) | | | | | | | | | | | | | | | | | | | Total stockholders’ equity | | $ | 1,548,117 | | $ | 1,421,646 | | $ | 1,229,553 | | | $ | 1,599,063 | | $ | 1,548,117 | | $ | 1,421,646 | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. F-7
FIRST BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2008 | | | 2007 | | | 2006 | | | | (In thousands) | | Net income | | $ | 109,937 | | | $ | 68,136 | | | $ | 84,634 | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive gain (loss): | | | | | | | | | | | | | Unrealized gain (loss) on securities: | | | | | | | | | | | | | Unrealized holding gain (loss) arising during the period | | | 95,316 | | | | 2,171 | | | | (22,891 | ) | Less: Reclassification adjustments for net (gain) loss and other-than-temporary impairments included in net income | | | (11,719 | ) | | | 2,726 | | | | 8,194 | | Income tax (expense) benefit related to items of other comprehensive income | | | (944 | ) | | | 6 | | | | 205 | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive gain (loss) for the period, net of tax | | | 82,653 | | | | 4,903 | | | | (14,492 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | $ | 192,590 | | | $ | 73,039 | | | $ | 70,142 | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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 | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. F-8
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 — Nature of Business and Summary of Significant Accounting Policies The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with prevailing practices within the financial services industry.. 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. 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, 2008,2009, the Corporation controlled fourthree wholly-owned subsidiaries: FirstBank Puerto Rico (“FirstBank” or the “Bank”), FirstBank Insurance Agency, Inc.(“FirstBank Insurance Agency”), and Grupo Empresas de Servicios Financieros (d/b/a “PR Finance Group”) and Ponce General Corporation (“Ponce General”). FirstBank is a Puerto Rico-chartered commercial bank, FirstBank Insurance Agency is a Puerto Rico-chartered insurance agency and PR Finance Group is a domestic corporation and Ponce General is the holding company of a federally chartered stock savings and loan association in Florida (USA), FirstBank Florida.corporation. 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, and is subject to regulation and examination by the United States Virgin Islands Banking Board, and in the British Virgin Islands, operations are subject to regulation by the British Virgin Islands Financial Services Commission. FirstBank Insurance Agency is subject to the supervision, examination and regulation by 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 Florida is subject to the supervision, examination and regulation of the Office of Thrift Supervision (the “OTS”). As of December 31, 2008, FirstBank conducted its business through its main office located in San Juan, Puerto Rico, forty-eight full service banking branches in Puerto Rico, sixteen branches in the United States Virgin Islands (USVI) and British Virgin Islands (BVI) and a loan production officeten branches in Miami,the state of Florida (USA). FirstBank had foursix wholly-owned subsidiaries with operations in Puerto Rico: First Leasing and Rental Corporation, a vehicle leasing and daily rental company with ninetwo offices in Puerto Rico; First Federal Finance Corp. (d/b/a Money Express La Financiera), a finance company specializedspecializing in the origination of small loans with thirty-seventwenty-seven offices in Puerto Rico; First Mortgage, Inc. (“First Mortgage”), a residential mortgage loan origination company with thirty-sixthirty-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 fourthree offices that sells insurance products in the USVI; First Express, a finance company specializing in the origination of small loans with fourthree offices in the USVI; and First Trade, Inc., which is inactive.
The Corporation also operates in the United States mainland through its federally chartered stock savings and loan association FirstBank Florida and through its loan production office located in Miami, Florida. FirstBank Florida provides a wide range of banking services to individual and corporate customers through its nine branches in the U.S. mainland.
F-9
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 provisionsFinancial Accounting Standards Board (“FASB”) for consolidation of Financial Interpretation No. (“FIN”) 46R, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51”.variable interest entities. Reclassifications For purposes of comparability, certain prior period amounts have been reclassified to conform to the 20082009 presentation. 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 as ofat 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, 20082009 and 2007,2008, 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.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, 20082009 and 2007,2008, the Corporation did not hold investment securities for trading purposes. Available-for-sale— Securities not classified as held-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.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-interestnon-interest income as net gain (loss)impairment losses on investments and impairments.investment securities. 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 TheOn a quarterly basis, the Corporation evaluates for impairmentperforms 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 debt and equity securities when their fair market value has remained belowamortized cost for six consecutive months or more, or earlier if other factors indicative of potential impairment exist. Investments are considered to be impaired when their cost exceeds fair market value.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 the fixed income investmentssecurities 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.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 the current crisis in thevolatile economic and financial markets,market conditions, the Corporation also takes into consideration the latest information available about the overall financial condition of issuers,an issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuersissuer 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 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 also considers itsdid not have the positive intent and ability to hold the fixed incomesecurity until recovery or maturity. The impairment model for equity securities until recovery. If management believes, based onwas not affected by the analysis, that the issuer will not be able to service its debt and pay its obligations in a timely manner, the security is written down to the estimated fair value. For securities written down to their estimated fair value, any accrued and uncollected interest is also reversed. Interest income is then recognized when collected. 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. 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 loans are classified as non-accruing when interest and principal have not been received for a period of 90 days or more. This policymore 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 the principal or interest is alsonot expected due to deterioration in the financial condition of the borrower. Interest income on non-accruing 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 all impairedreduce the carrying value of such loans based upon an evaluation(i.e., the cost recovery method). Loans are restored to accrual status only when future payments of the risk characteristics of said loans, loss experience, economic conditionsinterest and other pertinent factors.principal are reasonably assured. Loan and lease losses are charged and recoveries are credited to the allowance for loan and lease losses. Closed-end personal consumer loans and leases are charged-off when payments are F-11
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 loan 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 may also classifymeasures impairment individually for those commercial and construction loans in non-accruing status and recognize revenue only when cash payments are received becausewith 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 deteriorationunderlying collateral, and also evaluates for impairment purposes certain residential mortgage loans with high delinquency and loan-to-value levels. Interest income on impaired loans is recognized based on the Corporation’s policy for recognizing interest on accrual and non-accrual loans. Impaired loans also include loans that have been modified in troubled debt restructurings as a concession to borrowers experiencing financial difficulties. Troubled debt restructurings typically result from the financial condition of the borrower and payment in full of principal or interest is not expected. In addition, during the third quarter of 2007, the Corporation started a loanCorporation’s loss mitigation program providing homeownership preservation assistance. Loans modified through this programactivities 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 interestrestored to accrual status when there is recognized on a cash basis. When there is 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-accruing status, provided the loanrestructuring is returnedsupported 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 accruing status.the restructuring. 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. As of December 31, 2008 and 2007, the aggregate fair value of loans held for sale exceeded their cost. Allowance for loan and lease losses The Corporation maintains the allowance for loan and lease losses at a level that management considersconsidered adequate to absorb losses currently inherent in the loansloan and leaseslease portfolio. The methodology used to establish the allowance for loan and lease losses is based on Statementprovides 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 Financial Accounting Standard No. (“SFAS”) 114, “Accountingapproval and are subject to subsequent periodic reviews by Creditors for Impairment of a Loan” (as amended by SFAS No. 118), and SFAS 5, “Accounting for Contingencies.” Under SFAS 114, commercial loans over a predefined amount are identified for impairment evaluation on an individual basis. F-12
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) the Corporation’s senior management. The adequacy of 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. Management allocates specific portions of the allowance for loan and lease losses to problem loans that are identified through an asset classification analysis. The portfolios of residential mortgage loans, consumer loans, auto loans and finance leases are individually considered homogeneous and each portfolio is evaluated in as pools of similar loans for impairment. The adequacy of the allowance for loan and lease losses is based upon a number of factors including historical loan and lease loss experience that may not fully represent current conditions inherent in the portfolio. For example, factors affecting the Puerto Rico, Florida (USA), US Virgin Islands’ or British Virgin Islands’ economies may contribute to delinquencies and defaults above the Corporation’s historical loan and lease losses. The Corporation addresses this risk by actively monitoring the delinquency and default experience and by considering current economic and market conditions and their probable impact on the borrowers. Based on the assessment of current conditions, the Corporation makes appropriate adjustments to the historically developed assumptions when necessary to adjust historical factors to account for present conditions. The Corporation also takes into consideration information about trends on non-accrual loans, delinquencies, changes in underwriting policies, and other risk characteristics relevant to the particular loan category. The Corporation measures impairment individually for those commercial and real estate loans with a principal balance of $1 million or more in accordance with the provisions of SFAS 114. A loan is impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. A specific reservevaluation allowance is determinedestablished for those commercial and real estate loans classified as impaired, primarily based on each such loan’swhen 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 interest rate. Ifrate is lower than the carrying amount of that loan. To compute the specific valuation allowance, commercial and real estate, including residential mortgage loans with a principal balance of $1 million or more are evaluated individually as well as smaller residential mortgage loans considered impaired based on their high delinquency and loan-to-value levels. When foreclosure is probable, the creditorimpairment is required to measure the impairmentmeasured 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 updated annually thereafter. In addition, appraisals are also obtained for certain residential mortgage loans on a spot basis selected bybased on specific characteristics such as delinquency levels, age of the appraisal, and loan-to-value ratios. Should there be a deficiency,Deficiencies from the Corporation records a specific allowance for loan losses related to these loans.
As a general procedure, the Corporation internally reviews appraisals on a spot basis as partexcess of the underwriting and approval process. For constructionrecorded investment in collateral dependent loans related toover the Miami Corporate Banking operations, appraisals are
F-12
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reviewed by an outsourced contracted appraiser. Once a loan backed by real estate collateral deteriorates or is accounted for in non-accrual status, a full assessment of theresulting fair value of the collateral is performed. Ifare charged-off when deemed uncollectible.
For all other loans, which include, small, homogeneous loans, such as auto loans, consumer loans, finance lease loans, residential mortgages, and commercial and construction loans not considered impaired or in amounts under $1 million, the Corporation commences litigationmaintains a general valuation allowance. The methodology to collect an outstandingcompute the general valuation allowance has not change in 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, and other environmental factors such as economic forecasts. The analysis 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 are used in the model and are risk-adjusted for the area in which the property is located (Puerto Rico, Florida, or commences foreclosure proceedings against a borrower (which includesVirgin Islands). For commercial loans, including construction loans, the collateral), a new appraisal reportgeneral reserve is requested and the book value is adjusted accordingly, either by a corresponding reserve or a charge-off. The Credit Risk area requests newbased on historical loss ratios, trends in non-accrual loans, loan type, risk-rating, geographical location, changes in collateral appraisalsvalues for impaired collateral dependent loans. In order to determine present market conditionsloans and gross product or unemployment data for the geographical region. The methodology of accounting for all probable losses in Puerto Rico and the Virgin Islands, and to gauge property appreciation rates, opinions of value are requestedloans not individually measured for a sample of delinquent residential real estate loans. The valuation information gathered through these appraisalsimpairment purposes is considered in the Corporation’s allowance model assumptions.
Cash payments received on impaired loans are recordedmade in accordance with the contractual termsauthoritative accounting guidance that requires losses be accrued when they are probable of the loan. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized as interest income. However, when management believes the ultimate collectibility of principal is in doubt, the interest portion is applied to principal.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 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. SFAS 140, “Accounting for Transfer and Servicing of Financial Assets and Liabilities — a Replacement of SFAS No. 125,” sets forth theThe criteria that must be met forto determine that the control over transferred assets to be considered to havehas been surrendered, which includes: (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 before their maturity. When the Corporation transfers financial assets and the transfer fails any one of the SFAS 140above 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 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 the retained interests, based on their relative fair values. 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 relative 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, float earnings rate and 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. 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. F-13
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 testevaluates goodwill for impairment on an annual basis, as of December 31, or more often if events or circumstances indicate there may be an impairment. 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 test.process. The first step used to identify potential impairment,(“Step 1”) involves comparinga comparison of the subsidiary estimated fair value of the reporting unit (FirstBank Florida) to its carrying value, including goodwill. If the estimated fair value of a subsidiaryreporting unit exceeds its carrying value, goodwill is considered not to beconsidered impaired. If the carrying value exceeds 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 goodwill.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 calculated 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.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 and 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 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 nature of 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 applied 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 (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 14.0 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), 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 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%. 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 based on a discounted cash flows analysis and also considers a market methodology using tangiblethat exceeded the recorded book value multiples of peers.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 31 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 reporting unit where goodwill is recorded. Goodwill was not impaired as of December 31, 2009 or 2008, nor was any goodwill written-off due to impairment during 2009, 2008 and 2007. F-16
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Other Intangibles Definite life intangibles, mainly core deposits, are amortized over their estimated life, 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. 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 yearsyear ended December 31, 2008 2007 and 20062007 and determined that no impairment was needed to be recognized for those periods for goodwill and other intangible assets. For further disclosures, refer to Note 11 to the consolidated financial statements. Securities sold under agreements to repurchase 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 F-14
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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 27 to the consolidated financial statements for additional information. TheEffective January 1, 2007, the Corporation adopted Financial Accounting Standards Board Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation ofauthoritative guidance issued by the FASB Statement No. 109,” effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. This Interpretationthat prescribes a recognition threshold and measurement attributecomprehensive model for the financial statement recognition, measurement, presentation and measurementdisclosure of aincome tax positionuncertainties with respect to positions taken or expected to be taken inon income tax returns. Under the authoritative accounting guidance, income tax benefits are recognized and measured upon a two-step model: 1) a tax return. This Interpretation also provides guidanceposition must be more likely than not to be sustained based solely on derecognition, classification, interestits technical merits in order to be recognized, and penalties, accounting2) 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 interim periods, disclosure,accordance with this model and transition.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 unrecognized tax portionsUTBs as components of income tax expense. Refer to Note 2527 for required disclosures and further information related to this accounting pronouncement.information. F-15F-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 Between 1997 and 2007, the Corporation had a stock option plan (the “1997(“the 1997 stock option plan”) covering certaineligible employees. On January 1, 2006, theThe Corporation adopted SFAS 123 (Revised), “Accountingaccounted for Stock-Based Compensation,”stock options using the “modified prospective” method. Under thisthe modified prospective method, and sincecompensation cost is recognized in the financial statements for all previously issued stock options were fully vested at the time of adoption, the Corporation expenses the fair value of all employee stock optionsshare-based payments granted after January 1, 2006 (which is the same as under the prospective method).2006. The 1997 stock option plan expired in the first quarter of 2007; 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, 243 shares of restricted stock under the Omnibus Plan to the Corporation’s independent directors. Shares of restricted stock are measured based on the fair market values of the underlying stocksstock at the grant date under SFAS 123R.dates. The restrictions on such restricted stock award will lapse ratably on an annual basis over a three-year period. SFAS 123RStock-based compensation accounting guidance requires the Corporation to develop an estimate of the pre-vestingnumber 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 grants that are forfeited prior to vesting beginning on the grant date and to true-up forfeiture estimates through the vesting date so that compensationall expense amortization is recognized only for grants that vest.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 grantsoptions or shares of restricted stock are forfeited, any compensation expense previously recognized on the forfeited grantsawards is reversed in the period of the forfeiture. Accordingly, periodic compensation expense includes adjustments for actual and estimated pre-vesting forfeitures and changes in the estimated pre-vesting forfeiture rate. For additional information regarding the Corporation’s equity-based compensation refer to Note 20.22. Comprehensive income Comprehensive income for First BanCorp includes net income and the unrealized gain (loss) on available-for-sale securities, available-for-sale, net of estimated tax effect. Segment Information The Corporation reports financial and descriptive information about its reportable segments (see Note 33). 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 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 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; 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”. 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. In accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), allAll 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 under SFAS 133 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 F-16
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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). NoneAs of December 31, 2009 and 2008, all derivatives held by the Corporation’s derivative instruments qualifiedCorporation were considered economic undesignated hedges recorded at fair value with the resulting gain or have been designated as a cash flow hedge.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. The Corporation recognizes unrealized gains and losses arising from any changes in fair value of derivative instruments and hedged items, as applicable, as interest income or interest expense depending upon whether an asset or liability is being hedged. 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. Information regarding derivative instruments is included in Note 3032 to the Corporation’s auditedconsolidated financial statements.
Effective January 1, 2007, the Corporation elected to early adopt SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This Statementauthoritative 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 may be applied on an instrument-by-instrument basis. The Corporation adopted SFAS 159 for callable fixedfixed-rate medium-term notes and callable brokered certificates of deposit (“SFAS 159 liabilities”), that were hedged with interest rate swaps. From April 3, 2006 to the adoption of SFAS 159, First BanCorp was following the long-haul method of accounting under SFAS 133, for the portfolio of callable interest rate swaps, callable brokered certificates of deposit (“CDs”) and callable notes. One of the main considerations in the determination to early adopt SFAS 159the 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 SFAS 133.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 SFAS 159,the fair value option, the Corporation no longer amortizes or accretes the basis adjustment for the SFAS 159 liabilities.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 SFAS 159the fair value option also requiresrequired 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. SFAS 159The option of using fair value accounting also establishesrequires that the accrued interest should be reported as part of the fair value of the financial instruments elected to be measured at fair value. Refer to Note 2729 to the audited consolidated financial statements for additional information. F-17
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Prior to the implementation of the long-haul method First BanCorp reflected changes in the fair value of those swaps as well as swaps related to certain loans as non-hedging instruments through operations as part of net interest income.
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 statement of condition.statements. Effective January 1, 2007, the Corporation elected to early adopt SFAS 157, “Fair Value Measurements.” This Statementadopted 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. SFAS 157This guidance also establishes a fair value hierarchy whichthat requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes threeThree levels of inputs that 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, under SFAS 159, 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 generally participated out by brokers in shares of less than $100,000 and therefore insured by the FDIC. As of December 31, F-20
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 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. Effective January 1, 2007, the Corporation updated its methodology to calculate the impact of its own credit standing as required by SFAS 157. 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. F-18
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investment Securities The fair value of investment securities is the market value based on quoted market prices, when available, or market prices for identical or comparable assets 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. The model usessecurity and utilizes relevant assumptions such as prepayment rate, default rate, and interest rate assumptions that market participants would commonly use for similar mortgage asset classes that are subject to prepayment, credit and interest rate risk.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) and the. The variable cash flow of the security is modeled using the 3-month LIBOR forward curve. The expected foreclosure frequency estimates used inLoss assumptions were driven by the model are based on the 100% Public Securities Association (PSA) Standard Default Assumption (SDA) with acombination of default and loss severity assumption of 10% afterestimates, taking into consideration that the issuer must cover losses upaccount loan credit characteristics (loan-to-value, state, origination date, property type, occupancy loan purpose, documentation type, debt-to-income ratio, other) to 10%provide an estimate of the aggregate outstanding balance accordingdefault and loss severity. Refer to recourse provisions.Note 4 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 counterparts when appropriate.appropriate, except when collateral is pledged. That is, on interest rate swaps, the credit risk of both counterparts 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 USDUS 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 are mainly composed ofinclude 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 are market gains, the counterparty must deliver collateral to the Corporation. F-21
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Certain derivatives with limited market activity, as is the case with derivative instruments named as “reference caps”,caps,” are valued using models that consider unobservable market parameters (Level 3). Reference caps are used mainly to mainly hedge interest rate risk inherent in private label mortgage-backed securities, thus are tied to the notional amount of the underlying fixed-rate mortgage loans originated in the United States. 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. 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 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 caplet is then discounted from each payment date. F-19
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Advertising costs Advertising costs for all reporting periods are expensed as incurred. Earnings per common share Earnings per share-basic is calculated by dividing income attributable to common stockholders by the weighted average number of outstanding common shares. 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, and 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, and 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. Recently issued accounting pronouncements The Financial Accounting Standards Board (“FASB”) and the Securities Exchange Commission (“SEC”)FASB have issued the following accounting pronouncements and guidance relevant to the Corporation’s operations: In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited. The adoption of this statement did not have an impact on the Corporation’s financial statements, when adopted on January 1, 2009. In December 2007, the FASB issued SFAS 141R, “Business Combinations.” This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. This Statement applies prospectively to 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. An
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FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
entity may not apply it before that date. The adoption of this statement did not have an impact on the Corporation’s financial statements, when adopted on January 1, 2009.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (b) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Corporation adopted the disclosure framework dictated by this Statement during 2008. Required disclosures are included in Note 30 – “Derivative Instruments and Hedging Activities.”
In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation ofauthoritative guidance on financial statements of nongovernmental entities that are presented in conformity with GAAP. Prior to the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. (“SAS”) 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” SFAS 162 obviates the need for the guidance applicable to auditors in SAS 69 by identifying the GAAP hierarchy for entities, since entities rather than auditors are responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Any effect of applying the provisions of SFAS 162 should be reported as a change in accounting principle in accordance with SFAS 154, “Accounting Changes and Error Corrections.” SFAS 162 is effective 60 days following the SEC approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles,” which the SEC approved on September 16, 2008. The adoption of SFAS 162 did not impact the Corporation’s current accounting policies or the Corporation’s financial results.
In May 2008, the FASB issued Staff Position No. (“FSP”) APB 14-1 (“FSP–APB 14-1”). FSP-APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally, FSP-APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP-APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. As of December 31, 2008, the Corporation does not have any convertible debt instrument.
In May 2008, the FASB issued SFAS 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60.” This Statement requiresguarantee 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 Statementguidance also clarifies how SFAS 60the 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. SFAS 163FASB authoritative
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FIRST BANCORP 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. Except for those disclosures, earlier applicationactivities which are effective since the first interim period after the issuance of SFAS 163 is not permitted.this guidance. The Corporation is currently evaluating the possible effect, if any, of the adoption of this statementguidance did not have a significant impact on itsthe Corporation’s financial statements, commencing on January 1, 2009.statements. In June 2008, the FASB issued FSP EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining Whether Instruments Grantedauthoritative guidance for determining whether instruments granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1shared-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 FSP EITF 03-6-1this guidance unvested share-based payment awards that are considered to be participating securities shouldmust be included in the computation of EPSearnings per share (“EPS”) pursuant to the two-class method under SFAS 128. FSP EITF 03-6-1as 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. Early applicationThe 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 permitted.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 F-21F-23
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) is currently evaluating this statement in lightguidance became effective for interim reporting periods ending after June 15, 2009. The adoption of the recently approved Omnibus Incentive Plan, however, asamended guidance expanded the Corporation’s interim financial statement disclosures with regard to the fair value of December 31, 2008, the outstanding unvested shares of restricted stock do not contain rights to nonforfeitable dividends.financial instruments.
In September 2008,May 2009, the FASB issued FSP No. FAS 133-1authoritative guidance on subsequent events, which establishes general standards of accounting for and FIN 45-4 (“FSP FAS 133-1disclosure 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 FIN 45-4”), “Disclosures(iii) the disclosures that an entity should make about Credit Derivativesevents 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 improves the relevance, representational faithfulness, and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarificationcomparability of the Effective Date of FASB Statement No. 161.” FSP FAS 133-1 and FIN 45-4 amends SFAS 133 to require disclosures by sellers of credit derivatives, including credit derivatives embeddedinformation that a reporting entity provides in its financial statements about a hybrid instrument. A seller of credit derivatives must disclose information about its credit derivatives and hybrid instruments that have embedded credit derivatives to enable userstransfer of financial statements to assess their potential effectassets; the effects of a transfer on its financial position, financial performance, and cash flows. As of December 31, 2008, the Corporationflows; and a transferor’s continuing involvement, if any, in transferred financial assets. This guidance is not involved in the credit derivatives market. This FSP also amends FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to require an additional disclosure about the current statuseffective as of the payment/performance riskbeginning of a guarantee. Further, this FSP clarifies the FASB’s intent about the effective date of SFAS 161. This FSP clarifies the FASB’s intent that the disclosures required by SFAS 161 should be provided for anyeach reporting entity’s first annual reporting period (annual or quarterly interim) beginningthat begins after November 15, 2008. The provisions of this FSP2009, for interim periods within that amend SFAS 133first annual reporting period and FIN 45 will be effective for interim and annual reporting periods (annualthereafter. Subsequently in December 2009, the FASB amended the existing guidance issued in June 2009. Among the most significant changes and additions to this guidance includes changes to the conditions for sales of a financial assets which objective is to determine whether a transferor and its consolidated affiliates included in the financial statements have surrendered control over transferred financial assets or interim) ending after November 15, 2008.third-party beneficial interests; 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 of this pronouncement did notthe guidance will have a significant impact on the Corporation’sits financial statements. In October 2008,June 2009, the FASB amended the existing guidance on the consolidation of variable interest, which improves financial reporting by enterprises involved with variable interest entities and addresses (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 this guidance includes 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 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 FSP No. FAS 157-3authoritative guidance on the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification (“FSP FAS 157-3”Codification”), “Determining is the Fair Valuesingle 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 F-24
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions 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 Financial Asset Whenquoted price in an active market for the Market for That Asset Is Not Active.” FSP FAS 157-3 clarifies the application of SFAS 157 in a market thatidentical liability is not active and provides an exampleavailable, a reporting entity is required to illustrate key considerations in determiningmeasure 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 financial asset whenliability, 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 that financialthe 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 not active. This FSP became effective on October 10, 2008 and also applies to prior periods for which financial statements have not been issued.the first reporting period (including interim periods) beginning after issuance. The adoption of this pronouncementguidance did not impact the Corporation’s fair value methodologies on its financial assets.liabilities. In December 2008,September 2009, the FASB issued FSP No. FAS 140-4updated 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 FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfersthe carrying amount on the balance sheet after issuance costs of Financial Assets and Intereststhe 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 Variable Interest Entities.” This FSP amends SFAS 140, to require public entitiesa redemption or induced conversion of preferred stock. In January 2010, the FASB updated the Codification to provide additional disclosures about transfersguidance on accounting for distributions to shareholders with components of financial assets. It also amends FIN 46 (revised December 2003), “Consolidationstock and cash. This guidance clarifies that the stock portion of Variable Interest Entities,”a distribution to require public enterprises, including sponsorsshareholders that haveallows them to elect to receive cash or stock with a variable interestpotential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. Additionally, this FSP requires certain disclosures to be provided by a public enterpriseshare issuance that is (a)reflected in EPS prospectively and is not a sponsor of a qualifying special purpose entity (“SPE”) that holds a variable interest in the qualifying SPE but was not the transferor (nontransferor) of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE that holds a significant variable interest in the qualifying SPE but was not the transferor (nontransferor) of financial assets to the qualifying SPE.stock dividend. The disclosures required by this FSP are intended to provide greater transparency to financial statement users about a transferor’s continuing involvement with transferred financial assets and an enterprise’s involvement with variable interest entities and qualifying SPEs. This FSP becamenew guidance is effective for the first reporting period (interiminterim and annual periods ending on or annual) ending after December 15, 2008, with earlier application encouraged.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 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. The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. Entities will be 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 FSP shallguidance will require separate disclosures for purchases, sales, issuances, and settlements of assets. Entities will also have to F-25
FIRST BANCORP 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 period thereafter.periods beginning after December 15, 2009 (first quarter of 2010 for public companies with calendar year-ends). The adoption of this Statement did not have a significant impact on the Corporation’s financial statements as the Corporation is not materially involvenew disclosures about purchases, sales, issuances, and settlements in the transfer of financial assets through securitization and asset-backed financing arrangements, nor have involvement with variable interest entities. In January 2009, the FASB issued FSP No. EITF 99-20-1 (“FSP EITF 99-20-1”), “Amendments to the Impairment Guidance of EITF Issue No. 99-20.” This FSP amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS 115, “Accountingroll forward activity for Certain Investments in Debt and Equity Securities,” and other related guidance. The FSP becameLevel 3 fair-value measurements are effective for interim and annual reporting periods endingbeginning after December 15, 2008, and must be applied prospectively. Retrospective application2010 (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 a prior interim or annual reporting periodinclude disclosures for previous comparative periods; however, they are required for periods ending after initial adoption. The Corporation is not permitted. Theevaluating the impact the adoption of this Statement did notguidance will have a significant impact on the Corporation’sits financial statements.
F-22F-26
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 coverscovered December 31, 20082009 was $233.7$91.3 million (2007(2008 — $220$233.7 million). As of December 31, 20082009 and 2007,2008, 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, 20082009 and 2007,2008, and as required by the Puerto Rico International Banking Law, the Corporation maintained separately for two of its international banking entities (IBEs), $600,000 in time deposits, which were considered restricted assets equally split between the two IBEs. 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, 20082009 and 20072008 were as follows: | | | | | | | | | | | 2008 | | | 2007 | | | | Balance | | | | (Dollars in thousands) | | Federal funds sold, interest 0.01% (2007 - 4.05%) | | $ | 54,469 | | | $ | 7,957 | | Time deposits with other financial institutions, interest 1.05% (2007-weighted-average interest rate of 3.92%) | | | 600 | | | | 26,600 | | Other short-term investments, weighted-average interest rate of 0.21% (2007-weighted-average interest rate of 3.86%) | | | 20,934 | | | | 148,579 | | | | | | | | | | | $ | 76,003 | | | $ | 183,136 | | | | | | | | |
| | | | | | | | | | | 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 | | | | | | | | |
As of December 31, 2009, $0.95 million of the Corporation’s money market investments was pledged as collateral for interest rate swaps. As of December 31, 2008, and 2007, none of the Corporation’s money market investments were pledged. F-23F-27
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 4 — Investment Securities Investment Securities Available-for-SaleAvailable for Sale The amortized cost, non-credit loss component of OTTI securities recorded in OCI, gross unrealized gains and losses recorded in OCI, approximate fair value, weighted-average yield and contractual maturities of investment securities available-for-saleavailable for sale as of December 31, 20082009 and 20072008 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2008 | | December 31, 2007 | | | December 31, 2009 | | | | | | Gross | | Weighted | | Gross | | Weighted | | | Non-Credit | | December 31, 2008 | | | | Amortized | | Unrealized | | Fair | | average | | Amortized | | Unrealized | | Fair | | average | | | Loss Component | | Gross | | Weighted | | Gross | | Weighted | | | | cost | | gains | | losses | | value | | yield% | | cost | | gains | | losses | | value | | yield% | | | Amortized | | of OTTI | | Unrealized | | Fair | | average | | Amortized | | Unrealized | | Fair | | average | | | | (Dollars in thousands) | | | cost | | Recorded in OCI | | gains | | losses | | value | | yield% | | cost | | gains | | losses | | value | | yield% | | U.S. Treasury and Obligations of U.S. Government sponsored agencies: | | | After 5 to 10 years | | $ | — | | $ | — | | $ | — | | $ | — | | — | | $ | 6,975 | | $ | 26 | | $ | — | | $ | 7,001 | | 6.05 | | | After 10 years | | — | | — | | — | | — | | — | | 8,984 | | 47 | | — | | 9,031 | | 6.21 | | | | | | (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 | | $ | — | | $ | — | | $ | — | | $ | — | | — | | | | | Puerto Rico Government obligations: | | | Due within one year | | 4,593 | | 46 | | — | | 4,639 | | 6.18 | | — | | — | | — | | — | | — | | | 12,016 | | — | | 1 | | 28 | | 11,989 | | 1.82 | | 4,593 | | 46 | | — | | 4,639 | | 6.18 | | After 1 to 5 years | | 110,624 | | 259 | | 479 | | 110,404 | | 5.41 | | 13,947 | | 141 | | 347 | | 13,741 | | 4.99 | | | 113,232 | | — | | 302 | | 47 | | 113,487 | | 5.40 | | 110,624 | | 259 | | 479 | | 110,404 | | 5.41 | | After 5 to 10 years | | 6,365 | | 283 | | 128 | | 6,520 | | 5.80 | | 7,245 | | 247 | | 99 | | 7,393 | | 5.67 | | | 6,992 | | — | | 328 | | 90 | | 7,230 | | 5.88 | | 6,365 | | 283 | | 128 | | 6,520 | | 5.80 | | After 10 years | | 15,789 | | 45 | | 264 | | 15,570 | | 5.30 | | 3,416 | | 37 | | 66 | | 3,387 | | 5.64 | | | 3,529 | | — | | 91 | | — | | 3,620 | | 5.42 | | 15,789 | | 45 | | 264 | | 15,570 | | 5.30 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | United States and Puerto Rico Government obligations | | 137,371 | | 633 | | 871 | | 137,133 | | 5.44 | | 40,567 | | 498 | | 512 | | 40,553 | | 5.62 | | | 1,275,346 | | — | | 6,284 | | 165 | | 1,281,465 | | 2.44 | | 137,371 | | 633 | | 871 | | 137,133 | | 5.44 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities: | | | FHLMC certificates: | | | Due within one year | | 37 | | — | | — | | 37 | | 5.94 | | 98 | | 1 | | — | | 99 | | 5.50 | | | — | | — | | — | | — | | — | | — | | 37 | | — | | — | | 37 | | 5.94 | | After 1 to 5 years | | 157 | | 2 | | — | | 159 | | 7.07 | | 640 | | 20 | | — | | 660 | | 7.01 | | | 30 | | — | | — | | — | | 30 | | 5.54 | | 157 | | 2 | | — | | 159 | | 7.07 | | After 5 to 10 years | | 31 | | 3 | | — | | 34 | | 8.40 | | — | | — | | — | | — | | — | | | — | | — | | — | | — | | — | | — | | 31 | | 3 | | — | | 34 | | 8.40 | | After 10 years | | 1,846,386 | | 45,743 | | 1 | | 1,892,128 | | 5.46 | | 158,070 | | 235 | | 111 | | 158,194 | | 5.60 | | | 705,818 | | — | | 18,388 | | 1,987 | | 722,219 | | 4.66 | | 1,846,386 | | 45,743 | | 1 | | 1,892,128 | | 5.46 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,846,611 | | 45,748 | | 1 | | 1,892,358 | | 5.46 | | 158,808 | | 256 | | 111 | | 158,953 | | 5.61 | | | 705,848 | | — | | 18,388 | | 1,987 | | 722,249 | | 4.66 | | 1,846,611 | | 45,748 | | 1 | | 1,892,358 | | 5.46 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | GNMA certificates: | | | Due within one year | | 45 | | 1 | | — | | 46 | | 5.72 | | — | | — | | — | | — | | — | | | — | | — | | — | | — | | — | | — | | 45 | | 1 | | — | | 46 | | 5.72 | | After 1 to 5 years | | 180 | | 6 | | — | | 186 | | 6.71 | | 496 | | 8 | | — | | 504 | | 6.48 | | | 69 | | — | | 3 | | — | | 72 | | 6.56 | | 180 | | 6 | | — | | 186 | | 6.71 | | After 5 to 10 years | | 566 | | 9 | | — | | 575 | | 5.33 | | 708 | | 6 | | 5 | | 709 | | 6.01 | | | 808 | | — | | 39 | | — | | 847 | | 5.47 | | 566 | | 9 | | — | | 575 | | 5.33 | | After 10 years | | 331,594 | | 10,283 | | 10 | | 341,867 | | 5.38 | | 42,665 | | 582 | | 120 | | 43,127 | | 5.93 | | | 407,565 | | — | | 10,808 | | 980 | | 417,393 | | 5.12 | | 331,594 | | 10,283 | | 10 | | 341,867 | | 5.38 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 332,385 | | 10,299 | | 10 | | 342,674 | | 5.38 | | 43,869 | | 596 | | 125 | | 44,340 | | 5.94 | | | 408,442 | | — | | 10,850 | | 980 | | 418,312 | | 5.12 | | 332,385 | | 10,299 | | 10 | | 342,674 | | 5.38 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FNMA certificates: | | | After 1 to 5 years | | 53 | | 5 | | — | | 58 | | 10.20 | | 34 | | 1 | | — | | 35 | | 7.08 | | | — | | — | | — | | — | | — | | — | | 53 | | 5 | | — | | 58 | | 10.20 | | After 5 to 10 years | | 269,716 | | 4,678 | | — | | 274,394 | | 4.96 | | 289,125 | | 138 | | 750 | | 288,513 | | 4.93 | | | 101,781 | | — | | 3,716 | | 91 | | 105,406 | | 4.55 | | 269,716 | | 4,678 | | — | | 274,394 | | 4.96 | | After 10 years | | 1,071,521 | | 28,005 | | 1 | | 1,099,525 | | 5.60 | | 608,942 | | 5,290 | | 582 | | 613,650 | | 5.65 | | | 1,374,533 | | — | | 30,629 | | 2,776 | | 1,402,386 | | 4.51 | | 1,071,521 | | 28,005 | | 1 | | 1,099,525 | | 5.60 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,341,290 | | 32,688 | | 1 | | 1,373,977 | | 5.47 | | 898,101 | | 5,429 | | 1,332 | | 902,198 | | 5.42 | | | 1,476,314 | | — | | 34,345 | | 2,867 | | 1,507,792 | | 4.51 | | 1,341,290 | | 32,688 | | 1 | | 1,373,977 | | 5.47 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage pass-through certificates: | | | | | | Collateralized Mortgage Obligations issued or guaranteed by FHLMC, FNMA and GNMA: | | | After 10 years | | 144,217 | | 2 | | 30,236 | | 113,983 | | 5.43 | | 162,082 | | 3 | | 28,407 | | 133,678 | | 6.14 | | | 156,086 | | — | | 633 | | 412 | | 156,307 | | 0.99 | | — | | — | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities | | 3,664,503 | | 88,737 | | 30,248 | | 3,722,992 | | 5.46 | | 1,262,860 | | 6,284 | | 29,975 | | 1,239,169 | | 5.55 | | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate bonds: | | | After 5 to 10 years | | 241 | | — | | — | | 241 | | 7.70 | | 1,300 | | — | | 198 | | 1,102 | | 7.70 | | | — | | — | | — | | — | | — | | — | | 241 | | — | | — | | 241 | | 7.70 | | After 10 years | | 1,307 | | — | | — | | 1,307 | | 7.97 | | 4,412 | | — | | 1,066 | | 3,346 | | 7.97 | | | — | | — | | — | | — | | — | | — | | 1,307 | | — | | — | | 1,307 | | 7.97 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate bonds | | 1,548 | | — | | — | | 1,548 | | 7.93 | | 5,712 | | — | | 1,264 | | 4,448 | | 7.91 | | | — | | — | | — | | — | | — | | — | | 1,548 | | — | | — | | 1,548 | | 7.93 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity securities (without contractual maturity) | | 814 | | — | | 145 | | 669 | | 2.38 | | 2,638 | | — | | 522 | | 2,116 | | — | | | | | | Equity securities (without contractual maturity) (1) | | | 427 | | — | | 81 | | 205 | | 303 | | — | | 814 | | — | | 145 | | 669 | | 2.38 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total investment securities available for sale | | $ | 3,804,236 | | $ | 89,370 | | $ | 31,264 | | $ | 3,862,342 | | 5.46 | | $ | 1,311,777 | | $ | 6,782 | | $ | 32,273 | | $ | 1,286,286 | | 5.55 | | | $ | 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (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. 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 isand the non-credit loss component of OTTI are presented as part of accumulated other comprehensive income.OCI. F-24F-28
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, 2008,2009, by contractual maturity, are shown below: | | | | | | | | | | | | | | | | | | | Amortized Cost | | Fair Value | | | Amortized Cost | | Fair Value | | | | (In thousands) | | | (In thousands) | | Within 1 year | | $ | 4,675 | | $ | 4,722 | | | $ | 12,016 | | $ | 11,989 | | After 1 to 5 years | | 111,014 | | 110,807 | | | 1,252,908 | | 1,258,728 | | After 5 to 10 years | | 276,919 | | 281,764 | | | 109,581 | | 113,483 | | After 10 years | | 3,410,814 | | 3,464,380 | | | 2,764,729 | | 2,786,279 | | | | | | | | | | | | | Total | | 3,803,422 | | 3,861,673 | | | 4,139,234 | | 4,170,479 | | | | | Equity securities | | 814 | | 669 | | | 427 | | 303 | | | | | | | | | | | | | | | | Total investment securities available for sale | | $ | 3,804,236 | | $ | 3,862,342 | | | $ | 4,139,661 | | $ | 4,170,782 | | | | | | | | | | | | |
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, 20082009 and 2007: | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | 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 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2007 | | | | 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 | | $ | — | | | $ | — | | | $ | 13,648 | | | $ | 512 | | | $ | 13,648 | | | $ | 512 | | Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | FHLMC | | | 48,202 | | | | 40 | | | | 3,436 | | | | 71 | | | | 51,638 | | | | 111 | | GNMA | | | 625 | | | | 11 | | | | 26,887 | | | | 114 | | | | 27,512 | | | | 125 | | FNMA | | | 285,973 | | | | 274 | | | | 221,902 | | | | 1,058 | | | | 507,875 | | | | 1,332 | | Mortgage pass-through certificates | | | 133,337 | | | | 28,407 | | | | — | | | | — | | | | 133,337 | | | | 28,407 | | Corporate bonds | | | — | | | | — | | | | 4,448 | | | | 1,264 | | | | 4,448 | | | | 1,264 | | Equity securities | | | 1,384 | | | | 522 | | | | — | | | | — | | | | 1,384 | | | | 522 | | | | | | | | | | | | | | | | | | | | | | | $ | 469,521 | | | $ | 29,254 | | | $ | 270,321 | | | $ | 3,019 | | | $ | 739,842 | | | $ | 32,273 | | | | | | | | | | | | | | | | | | | | |
The Corporation’s investment2008. It also includes debt securities portfolio is comprised principally of (i) fixed-rate mortgage-backed securities issued or guaranteed by FNMA, GNMA or FHLMCfor which an OTTI was recognized and other securities secured by mortgage loans (ii) U.S. Treasury and agency securities and obligations ofonly the Puerto Rico Government. Thus, payment of substantial portion of these instruments is either guaranteed or secured by mortgages together with a guarantee of U.S. government-sponsored entity or is backed by the full faith and credit of the U.S. or Puerto Rico Government. In connection with the placement of FNMA and FHLMC into conservatorship by the U.S. Treasury in September 2008, the Treasury committed to invest as much as $200 billion in preferred stock and extend credit through 2009 to keep the agencies solvent and operating and to, among other things, protect debt and mortgage-backed securities of
F-25
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the agencies. Furthermore, the announcement of the Federal Reserve that it will invest up to $600 billion in obligations from U.S. government-sponsored agencies, including $500 billion in mortgage-backed securities backed by FNMA, FHLMC and GNMA has caused a surge in prices, since the latter part of 2008. Principal and interest on these securities are deemed recoverable. The unrealized losses in the available-for-sale portfolio as of December 31, 2008 are substantiallyamount related to certain private label mortgage-backed securities due to increasesa credit loss was recognized in the discount rate used to value such instruments resulting from lack of liquidity and credit concerns in the U.S. mortgage loan market. Refer to Note 1 for additional information with respect to the methodology to determine the fair value of the private label mortgage-backed securities. The underlying mortgages are fixed-rate single family loans with high weighted-average FICO scores (over 700) and moderate loan-to-value ratios (under 80%), as well as moderate delinquency levels. Principal and interest cash flow expectations have not changed to a material degree and are expected to cover the carrying amount of these mortgage-backed securities. Private label mortgage-backed securities relates to mortgage pass-through certificates bought from R&G Financial Corporation (“R&G Financial”). R&G Financial must cover losses up to 10% of the aggregate outstanding balance according to recourse provisions included in the agreements. The Corporation’s investment in equity securities is minimal and it does not own any equity securities of U.S. financial institutions that recently failed in the midst of the current market turmoil. The Corporation’s policy is to review its investment portfolio for possible other-than-temporary impairment at least quarterly. As of December 31, 2008, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments; as a result, there is no other-than-temporary impairment.earnings:
During the year ended December 31, 2008, the Corporation recorded other-than-temporary impairments of approximately $6.0 million (2007 — $5.9 million, 2006 — $15.3 million) on certain corporate bonds and equity securities held in its available-for-sale portfolio. Of the $6.0 million other-than-temporary impairments recorded in 2008 approximately $4.2 million relates to auto industry corporate bonds held by FirstBank Florida. 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 analyses and reflected in earnings as a realized loss. The Corporation’s remaining exposure to auto industry corporate bonds as of December 31, 2008 amounted to $1.5 million. | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | |
Total proceeds from the sale of securities during the year ended December 31, 2008 amounted to approximately $680.0 million (2007 — $960.8 million, 2006 — $232.5 million). The Corporation realized gross gains of approximately $17.9 million (2007 — $5.1 million, 2006 — $7.3 million), and realized gross losses of approximately $0.2 million (2007 — $1.9 million, 2006 — $0.2 million). | | | | | | | | | | | | | | | | | | | | | | | | | | | 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-26F-29
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Investments Held-to-MaturityHeld to Maturity The amortized cost, gross unrealized gains and losses, approximate fair value, weighted-average yield and contractual maturities of investment securities held-to-maturityheld to maturity as of December 31, 20082009 and 20072008 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2008 | | December 31, 2007 | | | December 31, 2009 | | December 31, 2008 | | | | 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 | | $ | 8,455 | | $ | 34 | | $ | — | | $ | 8,489 | | 1.07 | | $ | 254,882 | | $ | 369 | | $ | 24 | | $ | 255,227 | | 4.14 | | | $ | 8,480 | | $ | 12 | | $ | — | | $ | 8,492 | | 0.47 | | $ | 8,455 | | $ | 34 | | $ | — | | $ | 8,489 | | 1.07 | | | | | Obligations of other U.S. Government sponsored agencies: | | | After 10 years | | 945,061 | | 5,281 | | 728 | | 949,614 | | 5.77 | | 2,110,265 | | 1,486 | | 2,160 | | 2,109,591 | | 5.82 | | | — | | — | | — | | — | | — | | 945,061 | | 5,281 | | 728 | | 949,614 | | 5.77 | | Puerto Rico Government obligations: | | | After 5 to 10 years | | 17,924 | | 480 | | 97 | | 18,307 | | 5.85 | | 17,302 | | 541 | | 107 | | 17,736 | | 5.85 | | | 18,584 | | 564 | | 93 | | 19,055 | | 5.86 | | 17,924 | | 480 | | 97 | | 18,307 | | 5.85 | | After 10 years | | 5,145 | | 35 | | — | | 5,180 | | 5.50 | | 13,920 | | — | | 256 | | 13,664 | | 5.50 | | | 4,995 | | 77 | | — | | 5,072 | | 5.50 | | 5,145 | | 35 | | — | | 5,180 | | 5.50 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | United States and Puerto Rico Government obligations | | 976,585 | | 5,830 | | 825 | | 981,590 | | 5.73 | | 2,396,369 | | 2,396 | | 2,547 | | 2,396,218 | | 5.64 | | | United States and Puerto | | | Rico Government obligations | | | 32,059 | | 653 | | 93 | | 32,619 | | 4.38 | | 976,585 | | 5,830 | | 825 | | 981,590 | | 5.73 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities: | | | FHLMC certificates: | | | After 1 to 5 years | | 8,338 | | 71 | | 5 | | 8,404 | | 3.83 | | — | | — | | — | | — | | — | | | 5,015 | | 78 | | — | | 5,093 | | 3.79 | | 8,338 | | 71 | | 5 | | 8,404 | | 3.83 | | After 5 to 10 years | | — | | — | | — | | — | | — | | 11,274 | | — | | 116 | | 11,158 | | 3.65 | | | | | | FNMA certificates: | | | After 1 to 5 years | | 7,567 | | 88 | | — | | 7,655 | | 3.85 | | — | | — | | — | | — | | — | | | 4,771 | | 100 | | — | | 4,871 | | 3.87 | | 7,567 | | 88 | | — | | 7,655 | | 3.85 | | After 5 to 10 years | | 686,948 | | 9,227 | | — | | 696,175 | | 4.46 | | 69,553 | | — | | 1,067 | | 68,486 | | 4.30 | | | 533,593 | | 19,548 | | — | | 553,141 | | 4.47 | | 686,948 | | 9,227 | | — | | 696,175 | | 4.46 | | After 10 years | | 25,226 | | 247 | | 25 | | 25,448 | | 5.31 | | 797,887 | | 61 | | 13,785 | | 784,163 | | 4.42 | | | 24,181 | | 479 | | — | | 24,660 | | 5.30 | | 25,226 | | 247 | | 25 | | 25,448 | | 5.31 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities | | 728,079 | | 9,633 | | 30 | | 737,682 | | 4.48 | | 878,714 | | 61 | | 14,968 | | 863,807 | | 4.40 | | | 567,560 | | 20,205 | | — | | 587,765 | | 4.49 | | 728,079 | | 9,633 | | 30 | | 737,682 | | 4.48 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate bonds: | | | After 10 years | | 2,000 | | — | | 860 | | 1,140 | | 5.80 | | 2,000 | | — | | 91 | | 1,909 | | 5.80 | | | 2,000 | | — | | 800 | | 1,200 | | 5.80 | | 2,000 | | — | | 860 | | 1,140 | | 5.80 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total investment securities held-to-maturity | | $ | 1,706,664 | | $ | 15,463 | | $ | 1,715 | | $ | 1,720,412 | | 5.19 | | $ | 3,277,083 | | $ | 2,457 | | $ | 17,606 | | $ | 3,261,934 | | 5.31 | | | $ | 601,619 | | $ | 20,858 | | $ | 893 | | $ | 621,584 | | 4.49 | | $ | 1,706,664 | | $ | 15,463 | | $ | 1,715 | | $ | 1,720,412 | | 5.19 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 $945 million of U.S. government agency debt securities called during 2009. The aggregate amortized cost and approximate market value of investment securities held-to-maturityheld to maturity as of December 31, 2008,2009, by contractual maturity are shown below: | | | | | | | | | | | | | | | | | | | Amortized Cost | | Fair Value | | | Amortized Cost | | Fair Value | | | | (In thousands) | | | (In thousands) | | Within 1 year | | $ | 8,455 | | $ | 8,489 | | | $ | 8,480 | | $ | 8,492 | | After 1 to 5 years | | 15,905 | | 16,059 | | | 9,786 | | 9,964 | | After 5 to 10 years | | 704,872 | | 714,482 | | | 552,177 | | 572,196 | | After 10 years | | 977,432 | | 981,382 | | | 31,176 | | 30,932 | | | | | | | | | | | | | Total investment securities held to maturity | | $ | 1,706,664 | | $ | 1,720,412 | | | $ | 601,619 | | $ | 621,584 | | | | | | | | | | | | |
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 Statements of Financial Condition. As of December 31, 2009 and 2008, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents. The following table sets forth the securities held to maturity with an original maturity of three months or less outstanding as of December 31, 2007. F-27F-30
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | | | | | | | | | | | | | | | | | December 31, 2007 | | | | | | | | Gross | | | | | | | Amortized | | | Unrealized | | | Fair | | | | Cost | | | Gains | | | Losses | | | Value | | | | | | | | (In thousands) | | | | | | U.S. government and U.S. government sponsored agencies: | | | | | | | | | | | | | | | | | Due within 30 days | | $ | 45,994 | | | $ | 3 | | | $ | — | | | $ | 45,997 | | After 30 days up to 60 days | | | 21,932 | | | | 1 | | | | 10 | | | | 21,923 | | After 30 days up to 90 days | | | 79,191 | | | | 41 | | | | — | | | | 79,232 | | | | | | | | | | | | | | | | | $ | 147,117 | | | $ | 45 | | | $ | 10 | | | $ | 147,152 | | | | | | | | | | | | | | |
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, 20082009 and 2007:2008: | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2007 | | | | 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 | | $ | 616,572 | | | $ | 1,568 | | | $ | 24,469 | | | $ | 592 | | | $ | 641,041 | | | $ | 2,160 | | U.S. Treasury Notes | | | 24,697 | | | | 24 | | | | — | | | | — | | | | 24,697 | | | | 24 | | Puerto Rico Government obligations | | | 13,664 | | | | 256 | | | | 4,200 | | | | 107 | | | | 17,864 | | | | 363 | | Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | FHLMC | | | — | | | | — | | | | 11,158 | | | | 116 | | | | 11,158 | | | | 116 | | FNMA | | | — | | | | — | | | | 849,341 | | | | 14,852 | | | | 849,341 | | | | 14,852 | | Corporate Bonds | | | 1,909 | | | | 91 | | | | — | | | | — | | | | 1,909 | | | | 91 | | | | | | | | | | | | | | | | | | | | | | | $ | 656,842 | | | $ | 1,939 | | | $ | 889,168 | | | $ | 15,667 | | | $ | 1,546,010 | | | $ | 17,606 | | | | | | | | | | | | | | | | | | | | |
Assessment for OTTI Held-to-maturity securities inOn 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 position as of December 31, 2008 are primarily fixed-rate mortgage-backed securities and U.S. agency securities.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 vast majority of them are ratedaccounting literature requires the equivalent of AAA by major rating agencies. TheCorporation 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 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 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 new 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% of the total available-for-sale and held-to-maturity portfolio as of December 31, 20082009 and no credit losses are substantiallyexpected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation’s assessment was concentrated mainly on private label MBS of approximately $117 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 year ended December 31, 2009, the Corporation recorded OTTI losses on available-for-sale debt securities as follows: | | | | | | | Private label MBS | | (In thousands) | | 2009 | | Total other-than-temporary impairment losses | | | (33,012 | ) | Unrealized other-than-temporary impairment losses recognized in OCI (1) | | | 31,742 | | | | | | Net impairment losses recognized in earnings (2) | | $ | (1,270 | ) | | | | |
| | | (1) | | Represents the noncredit component impact of the OTTI on private label MBS | | (2) | | Represents the credit component of the OTTI on private label MBS |
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 marketcredit 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. Private label MBS are collateralized by fixed-rate mortgages on single-family residential properties in the United States and the interest rate fluctuationsis variable, tied to 3-month LIBOR and limited to some extent credit spread widening.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 “Investment Securities Available for Sale” discussion above for additional information regarding government-sponsored agencies. At this time,methodology used to determine the fair value of private label MBS. 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 the intentsufficient capital and abilityliquidity to hold these investmentssecurities until maturity,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, 2009 were as follow: | | | | | | | | | | | Weighted | | | | | Average | | Range | Discount rate | | | 15 | % | | | 15 | % | Prepayment rate | | | 21 | % | | | 13.06% – 50.25 | % | Projected Cumulative Loss Rate | | | 4 | % | | | 0.22% – 10.56 | % |
For the years ended December 31, 2009 and principal2008, the Corporation recorded OTTI of approximately $0.4 million and interest are deemed recoverable.$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 2009 amounted to approximately $1.9 billion (2008 — $680.0 million). The impairment is considered temporary.following table summarizes the realized gains and losses on sales of securities available for sale for the years indicated: | | | | | | | | | | | Year ended December 31, | | (In thousands) | | 2009 | | | 2008 | | Realized gains | | $ | 82,772 | | | $ | 17,896 | | Realized losses | | | — | | | | (190 | ) | | | | | | | | Net realized security gains | | $ | 82,772 | | | $ | 17,706 | | | | | | | | |
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 F-28
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | 2007 | | 2009 | | 2008 | | | Amortized | | Amortized | | | | Amortized | | Amortized | | | | | Cost | | Fair Value | | Cost | | Fair Value | | Cost | | Fair Value | | Cost | | Fair Value | | | (In thousands) | | | (In thousands) | | FHLMC | | $ | 1,862,939 | | $ | 1,908,024 | | $ | 1,203,395 | | $ | 1,201,817 | | | $ | 1,350,291 | | $ | 1,369,535 | | $ | 1,862,939 | | $ | 1,908,024 | | GNMA | | 332,385 | | 342,674 | | 43,869 | | 44,340 | | | 474,349 | | 483,964 | | 332,385 | | 342,674 | | FNMA | | 2,978,102 | | 3,025,549 | | 2,700,600 | | 2,691,192 | | | 2,629,187 | | 2,684,065 | | 2,978,102 | | 3,025,549 | | FHLB | | 20,000 | | 20,058 | | 283,035 | | 282,800 | | | RG Crown Mortgage Loan Trust | | 143,921 | | 113,685 | | 161,744 | | 133,337 | | |
F-33
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, 20082009 and 2007,2008, the Corporation had investments in FHLB stock with a book value of $62.6$68.4 million ($54 million FHLB-New York and $63.4$14.4 million FHLB-Atlanta) and $62.6 million, respectively. The net realizable value is a reasonable proxy for the fair value of these instruments. Dividend income from FHLB stock for 2009, 2008 2007 and 20062007 amounted to $3.1 million, $3.7 million and $2.9 million, respectively. The FHLB stocks owned by the Corporation are issued by the FHLB of New York and $2.0by 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, 20082009 and 20072008 was $1.6 million. During 2009, the Corporation realized a gain of $3.8 million 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. F-29F-34
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, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | Interest on money market investments: | | | Taxable | | $ | 1,369 | | $ | 4,805 | | $ | 21,816 | | | $ | 568 | | $ | 1,369 | | $ | 4,805 | | Exempt | | 4,986 | | 17,226 | | 49,098 | | | 9 | | 4,986 | | 17,226 | | | | | | | | | | | | | | | | | | | 6,355 | | 22,031 | | 70,914 | | | 577 | | 6,355 | | 22,031 | | | | | | | | | | | | | | | | | | | | Mortgage-backed securities: | | | Taxable | | 2,517 | | 2,044 | | 3,121 | | | 30,854 | | 2,517 | | 2,044 | | Exempt | | 199,875 | | 110,816 | | 121,687 | | | 172,923 | | 199,875 | | 110,816 | | | | | | | | | | | | | | | | | | | | 203,777 | | 202,392 | | 112,860 | | | | 202,392 | | 112,860 | | 124,808 | | | | | | | | | | | | | | | | | | PR Government obligations, U.S. Treasury securities and U.S. Government agencies: | | | Taxable | | 3,657 | | — | | — | | | 2,694 | | 3,657 | | — | | Exempt | | 74,667 | | 148,986 | | 154,079 | | | 44,510 | | 74,667 | | 148,986 | | | | | | | | | | | | | | | | | | | 78,324 | | 148,986 | | 154,079 | | | 47,204 | | 78,324 | | 148,986 | | | | | | | | | | | | | | | | | | | | Equity securities: | | | Taxable | | 38 | | — | | 274 | | | 69 | | 38 | | — | | Exempt | | 6 | | 3 | | 76 | | | 37 | | 6 | | 3 | | | | | | | | | | | | | | | | | | | | 106 | | 44 | | 3 | | | | 44 | | 3 | | 350 | | | | | | | | | | | | | | | | | | Other investment securities (including FHLB dividends): | | | Taxable | | 4,281 | | 3,426 | | 2,579 | | | 3,375 | | 4,281 | | 3,426 | | Exempt | | — | | — | | 31 | | | — | | — | | — | | | | | | | | | | | | | | | | | | | 4,281 | | 3,426 | | 2,610 | | | 3,375 | | 4,281 | | 3,426 | | | | | | | | | | | | | | | | | | | | Total interest and dividends on investments | | $ | 291,396 | | $ | 287,306 | | $ | 352,761 | | | $ | 255,039 | | $ | 291,396 | | $ | 287,306 | | | | | | | | | | | | | | | | |
F-35
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, | | | | 2008 | | | 2007 | | | 2006 | | | | | | | | (In thousands) | | | | | | Interest income on investment securities and money market investments | | $ | 291,732 | | | $ | 287,990 | | | $ | 350,750 | | Dividends on FHLB stock | | | 3,710 | | | | 2,861 | | | | 2,009 | | Net interest settlement on interest rate caps and swaps | | | 237 | | | | — | | | | (25 | ) | | | | | | | | | | | Interest income excluding unrealized (loss) gain on derivatives (economic hedges) | | | 295,679 | | | | 290,851 | | | | 352,734 | | Unrealized (loss) gain on derivatives (economic hedges) from interest rate caps and interest rate swaps on corporate bonds | | | (4,283 | ) | | | (3,545 | ) | | | 27 | | | | | | | | | | | | Total interest income and dividends on investments | | $ | 291,396 | | | $ | 287,306 | | | $ | 352,761 | | | | | | | | | | | |
F-30
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | 2007 | | | | | | | | (In thousands) | | | | | | Interest income on investment securities and money market investments | | $ | 248,563 | | | $ | 291,732 | | | $ | 287,990 | | Dividends on FHLB stock | | | 3,082 | | | | 3,710 | | | | 2,861 | | Net interest settlement on interest rate caps | | | — | | | | 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 | ) | | | | | | | | | | | Total interest income and dividends on investments | | $ | 255,039 | | | $ | 291,396 | | | $ | 287,306 | | | | | | | | | | | |
Note 7 — Loans Receivable The following is a detail of the loan portfolio: | | | | | | | | | | | | | | | | | | | December 31, | | | December 31, | | | | 2008 | | 2007 | | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Residential real estate loans, mainly secured by first mortgages | | $ | 3,481,325 | | $ | 3,143,497 | | | Residential mortgage loans, mainly secured by first mortgages | | | $ | 3,595,508 | | $ | 3,481,325 | | | | | | | | | | | | | | | | Commercial loans: | | | Construction loans | | 1,526,995 | | 1,454,644 | | | 1,492,589 | | 1,526,995 | | Commercial mortgage loans | | 1,535,758 | | 1,279,251 | | | 1,590,821 | | 1,535,758 | | Commercial loans | | 3,857,728 | | 3,231,126 | | | Commercial and Industrial loans(1) | | | 5,029,907 | | 3,857,728 | | Loans to local financial institutions collateralized by real estate mortgages | | 567,720 | | 624,597 | | | 321,522 | | 567,720 | | | | | | | | | | | | | Commercial loans | | 7,488,201 | | 6,589,618 | | | 8,434,839 | | 7,488,201 | | | | | | | | | | | | | | | | Finance leases | | 363,883 | | 378,556 | | | 318,504 | | 363,883 | | | | | | | | | | | | | | | | Consumer loans | | 1,744,480 | | 1,667,151 | | | 1,579,600 | | 1,744,480 | | | | | | | | | | | | | | | | Loans receivable | | 13,077,889 | | 11,778,822 | | | 13,928,451 | | 13,077,889 | | | | | Allowance for loan and lease losses | | | (281,526 | ) | | | (190,168 | ) | | | (528,120 | ) | | | (281,526 | ) | | | | | | | | | | | | | | | Loans receivable, net | | 12,796,363 | | 11,588,654 | | | 13,400,331 | | 12,796,363 | | | | | Loans held for sale | | 10,403 | | 20,924 | | | 20,775 | | 10,403 | | | | | | | | | | | | | Total loans | | $ | 12,806,766 | | $ | 11,609,578 | | | $ | 13,421,106 | | $ | 12,806,766 | | | | | | | | | | | | |
| | | (1) | | As of December 31, 2009, includes $1.2 billion of commercial loans that are secured by real estate but are not dependent upon the real estate for repayment. |
As of December 31, 20082009 and 2007,2008, the Corporation had a net deferred origination feefees on its loan portfolio amounting to $3.7$5.2 million and $3.9$3.7 million, respectively. Total loan portfolio is net of unearned income of $62.6$49.0 million and $71.3$62.6 million as of December 31, 20082009 and 2007,2008, respectively. As of December 31, 2008,2009, loans forin which the accrual of interest income hashad been discontinued amounted to $587.2 million (2007$1.6 billion (2008 — $413.1$587.2 million). If these loans were accruing interest, the additional interest income realized would have been $57.9 million (2008 — $29.7 million (2007million; 2007 — $22.7 million; 2006 — $14.1 million). Past due and still accruing loans, which are contractually delinquent 90 days or more, amounted to $471.4$165.9 million as of December 31, 2008 (20072009 (2008 — $75.5$471.4 million), most of them related to matured construction loans according to contractual terms but are current with respect to interest payments. A significant portion of these matured construction loans were already renewed in 2009 and the Corporation expects to complete the renewal process for the remaining portion in the first half of 2009.. As of December 31, 2008,2009, the Corporation was servicing residential mortgage loans owned by others aggregating $826.9 million (2007$1.1 billion (2008 — $759.2$826.9 million) and construction and commercial loans owned by others aggregating $123.4 million (2008 — $74.5 million (2007million). F-36
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — $15.5 million).(Continued) As of December 31, 2008,2009, the Corporation was servicing commercial loan participations owned by others aggregating $235.0 million (2008 — $191.2 million (2007 — $176.3 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 $2.5$1.9 billion as of December 31, 2008 (20072009 (2008 — $2.2$2.5 billion). The Corporation’s primary lending area is Puerto Rico. The Corporation’s Puerto Rico banking subsidiary, First Bank, 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 loan portfolio including loans held for sale, aggregating $13.1of $13.9 billion as of December 31, 2008,2009, approximately 81% has a83% have credit risk concentration in Puerto Rico, 11%9% in the United States and 8% in the Virgin Islands. F-31
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As of December 31, 2009, the Corporation had $1.2 billion outstanding of credit facilities granted to the Puerto Rico Government and/or its political subdivisions. 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.
The Corporation’sAside from loans extended to the Puerto Rico Government and its political subdivisions, the largest concentrationloan to one borrower as of December 31, 20082009 in the amount of $348.8$321.5 million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. Together with the Corporation’s next largestThis commercial loan concentration of $218.9 million with another mortgage originator in Puerto Rico, R&G Financial, the Corporation’s total loans granted to these mortgage originators amounted to $567.7 million as of December 31, 2008. These commercial loans areis secured by individual mortgage 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 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 loan, thereby significantly reducing the Corporation’s exposure to a single borrower. Note 8 — Allowance for loan and lease losses The changes in the allowance for loan and lease losses were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | Balance at beginning of year | | $ | 190,168 | | $ | 158,296 | | $ | 147,999 | | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | Provision for loan and lease losses | | 190,948 | | 120,610 | | 74,991 | | | 579,858 | | 190,948 | | 120,610 | | Losses charged against the allowance | | | (117,072 | ) | | | (94,830 | ) | | | (77,209 | ) | | | (344,422 | ) | | | (117,072 | ) | | | (94,830 | ) | Recoveries credited to the allowance | | 8,751 | | 6,092 | | 12,515 | | | 11,158 | | 8,751 | | 6,092 | | Other adjustments(1) | | 8,731 | | — | | — | | | — | | 8,731 | | — | | | | | | | | | | | | | | | | | Balance at end of year | | $ | 281,526 | | $ | 190,168 | | $ | 158,296 | | | $ | 528,120 | | $ | 281,526 | | $ | 190,168 | | | | | | | | | | | | | | | | |
| | | (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 substantial loss. As of December 31, 2009, 2008 2007 and 20062007, impaired loans and their related allowance were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | (In thousands) | | Impaired loans | | $ | 501,229 | | $ | 151,818 | | $ | 63,022 | | | Impaired loans with valuation allowance | | 384,914 | | 66,941 | | 63,022 | | | Impaired loans with valuation allowance, net of charge-offs | | | $ | 1,060,088 | | $ | 384,914 | | $ | 66,941 | | Impaired loans without valuation allowance, net of charge-offs | | | 596,176 | | 116,315 | | 84,877 | | | | | | | | | | | Total impaired loans | | | $ | 1,656,264 | | $ | 501,229 | | $ | 151,818 | | | | | | | | | | | | | | Allowance for impaired loans | | 83,353 | | 7,523 | | 9,989 | | | 182,145 | | 83,353 | | 7,523 | | | | | During the year: | | | | | | Average balance of impaired loans | | 302,439 | | 116,362 | | 54,083 | | | 1,022,051 | | 302,439 | | 116,362 | | | | | Interest income recognized on impaired loans | | 22,168 | | 6,588 | | 3,239 | | | Interest income recognized on impaired loans (1) | | | 21,160 | | 12,974 | | 6,588 | |
| | | (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 related specific reserve during 2009: | | | | | Impaired Loans: | | (In thousands) | | Balance at beginning of year | | $ | 501,229 | | Loans determined impaired during the year | | | 1,466,805 | | 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 | ) | | | | | Balance at end of year | | $ | 1,656,264 | | | | | |
| | | (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 | | | | | |
During 2008,The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico and through programs sponsored by the Corporation identified severalFederal Government. Due to the nature of the borrower’s financial condition, the restructure or loan modification through these program as well as other restructurings of individual commercial, andcommercial mortgage loans, construction loans amountingand residential mortgages 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 $414.9 millionthe debtor’s financial difficulties grants a concession to the debtor that it determined should be classified as impaired,would not otherwise consider. Modifications involve changes in one or more of which $382.0 million hadthe loan terms that bring a specific reservedefaulted loan current and provide sustainable affordability. Changes may include the refinancing of $82.9 million. Approximately $154.4any past-due amounts, including interest and escrow, the extension of the maturity of the loans and modifications of the loan rate. As of December 31, 2009, the Corporation’s TDR loans consisted of $124.1 million of the $351.5residential mortgage loans, $42.1 million commercial and industrial loans, $68.1 million commercial mortgage loans and $101.7 million of construction loans. Outstanding unfunded loan commitments on TDR loans that were determinedamounted to be impaired during 2008 are related to the Miami Corporate Banking operations condo-conversion loans, which has a related specific reserve$1.3 million as of $36.0 million. Meanwhile, the Corporation’s impaired loans decreased by approximately $64.1 million during 2008, principally as a result of: (i) the foreclosure of two condo-conversion loans related to a troubled relationship in the Corporation’s Miami Corporate Banking Operations, with an aggregate principal balance of approximately $22.4 million and a related impairment reserve of $4.2 million, and (ii) the sale for $22.5 million, in the first half of 2008, of a condo-conversion loan that carried a principal balance of approximately $24.1 million and a related impairment reserve of $2.4 million related to the same troubled relationship in Miami. One of the foreclosed condo-conversion projects, with a carrying value of $3.8 million, was sold in the latter part of 2008 and a loss of $0.4 million was recorded. The Corporation expects to complete the sale of the last remaining foreclosed condo-conversion project inDecember 31, 2009.
F-32F-38
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) the U.S. mainland Included in the first half$101.7 million of 2009 and a write-down of $5.3 million to the value of this property was recorded forconstruction TDR loans are certain impaired condo-conversion loans restructured into two separate agreements (loan splitting) in the fourth quarter of 2008. Other decreases2009. Each of these loans were 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 renegotiations of these loans have been made after analyzing the borrowers and guarantors capacity to serve 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 been placed on a monthly payment that amortize the debt over 25 years at a market rate of interest. An interest rate reduction was granted for the second note. The following tables provide additional information about the volume of this type of loan restructurings and the effect on the allowance for loan and lease losses in impaired2009.
| | | �� | | | | (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 may includecomprising the $22.4 million that have been deemed collectible continue to be individually evaluated for impairment purposes. These transactions contributed to a $29.9 million decrease in non-performing loans paid in full, loans no longer considered impaired and loans charged-off.during the last quarter of 2009. Note 9 — 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, 2006 | | $ | 118,853 | | | Balance at December 31, 2007 | | | $ | 182,573 | | New loans | | | 44,963 | | Payments | | | | (48,380 | ) | Other changes | | | — | | | | | | | | | | Balance at December 31, 2008 | | | 179,156 | | | | | | | | | | New loans | | 82,611 | | | 3,549 | | Payments | | | (20,934 | ) | | | (6,405 | ) | Other changes | | 2,043 | | | | (152,130 | ) | | | | | | | | Balance at December 31, 2007 | | 182,573 | | | | | | | | New loans | | 44,963 | | | Payments | | | (48,380 | ) | | Other changes | | — | | | Balance at December 31, 2009 | | | $ | 24,170 | | | | | | | | | Balance at December 31, 2008 | | $ | 179,156 | | | | | | | |
These loans do not involve more than normal risk of collectibility 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, mainly due to new directors and executive officers.the resignation of an independent director in 2009. 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. Note 10 — Premises and Equipment
Premises and equipment is comprised of:
| | | | | | | | | | | | | | | Useful Life | | | Year Ended December 31, | | | | In Years | | | 2008 | | | 2007 | | | | | | | | (Dollars in thousands) | | Buildings and improvements | | | 10-40 | | | $ | 84,282 | | | $ | 80,044 | | Leasehold improvements | | | 1-15 | | | | 52,945 | | | | 41,328 | | Furniture and equipment | | | 3-10 | | | | 119,419 | | | | 107,373 | | | | | | | | | | | | | | | | | | | | 256,646 | | | | 228,745 | | | | | | | | | | | | | | | Accumulated depreciation | | | | | | | (133,109 | ) | | | (116,213 | ) | | | | | | | | | | | | | | | | | | | 123,537 | | | | 112,532 | | | | | | | | | | | | | | | Land | | | | | | | 24,791 | | | | 21,867 | | Projects in progress | | | | | | | 30,140 | | | | 28,236 | | | | | | | | | | | | | Total premises and equipment, net | | | | | | $ | 178,468 | | | $ | 162,635 | | | | | | | | | | | | |
Depreciation and amortization expense amounted to $19.2 million, $17.7 million and $16.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.
F-33F-39
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 10 — Premises and Equipment Premises and equipment is comprised of: | | | | | | | | | | | | | | | | | | | As of December 31, | | | | Useful Life | | | 2009 | | | 2008 | | | | In Years | | | (Dollars in thousands) | | Buildings and improvements | | | 10 - 40 | | | $ | 90,158 | | | $ | 84,282 | | Leasehold improvements | | | 1 - 15 | | | | 57,522 | | | | 52,945 | | Furniture and equipment | | | 3 - 10 | | | | 123,582 | | | | 119,419 | | | | | | | | | | | | | | | | | | | | 271,262 | | | | 256,646 | | | | | | | | | | | | | | | Accumulated depreciation | | | | | | | (155,459 | ) | | | (133,109 | ) | | | | | | | | | | | | | | | | | | | 115,803 | | | | 123,537 | | | | | | | | | | | | | | | Land | | | | | | | 28,327 | | | | 24,791 | | Projects in progress | | | | | | | 53,835 | | | | 30,140 | | | | | | | | | | | | | Total premises and equipment, net | | | | | | $ | 197,965 | | | $ | 178,468 | | | | | | | | | | | | |
Depreciation and amortization expense amounted to $20.8 million, $19.2 million and $17.7 million for the years ended December 31, 2009, 2008 and 2007, respectively. Note 11 — Goodwill and Other Intangibles Goodwill as of December 31, 20082009 and 20072008 amounted to $28.1 million, recognized as part of “Other Assets”. NoThe Corporation’s conducted its annual evaluation of goodwill and intangible during the fourth quarter of 2009. The Step 1 evaluation of goodwill of the Florida reporting unit indicated potential impairment of goodwill; however, impairment was recognizednot indicated based upon the results of the Step 2 analysis. Goodwill was not impaired as of December 31, 2009 or 2008, nor was any goodwill written-off due to impairment during 2009, 2008 2007 or 2006.and 2007. Refer to Note 1 for additional details about the methodology used for the goodwill impairment analysis. As of December 31, 2008,2009, the gross carrying amount and accumulated amortization of core deposit intangibles was $45.8$41.8 million and $21.8$25.2 million, respectively, recognized as part of “Other Assets” in the Consolidated Statements of Financial Condition (December 31, 20072008 — $41.2$45.8 million and $18.3$21.8 million, respectively). The increase in the gross amount from December 2007 relates to the acquisition of the Virgin Islands Community Bank (“VICB”) on January 28, 2008. For the year ended December 31, 2008,2009, the amortization expense of core deposit intangibles amounted to $3.4 million (2008 — $3.6 million (2007million; 2007 — $3.3 million; 2006 — $3.4 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 and recorded as part of other non-interest expenses in the Statement of (Loss) Income. The following table presents the estimated aggregate annual amortization expense of the core deposit intangibles:intangible: | | | | | | | | | | | Amount | | Amount | | | (In thousands) | | (In thousands) | 2009 | | $ | 3,493 | | | 2010 | | 2,757 | | | $ | 2,557 | | 2011 | | 2,757 | | | 2,522 | | 2012 | | 2,688 | | | 2,522 | | 2013 and thereafter | | 12,291 | | | 2013 | | | 2,522 | | 2014 and thereafter | | | 6,477 | |
F-40
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 12 — 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, | | | | 2009 | | | 2008 | | | 2007 | | | | (In thousands) | | Balance at beginning of year | | $ | 8,151 | | | $ | 7,504 | | | $ | 5,317 | | Capitalization of servicing assets | | | 6,072 | | | | 1,559 | | | | 1,285 | | Servicing assets purchased | | | — | | | | 621 | | | | 1,962 | | Amortization | | | (2,321 | ) | | | (1,533 | ) | | | (1,060 | ) | | | | | | | | | | | Balance before valuation allowance at end of year | | | 11,902 | | | | 8,151 | | | | 7,504 | | Valuation allowance for temporary impairment | | | (745 | ) | | | (751 | ) | | | (336 | ) | | | | | | | | | | | Balance at end of year | | $ | 11,157 | | | $ | 7,400 | | | $ | 7,168 | | | | | | | | | | | |
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 | | | | | | | | | | | |
F-41
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 ranged as follows | | | | | | | | | | | Maximum | | Minimum | 2009: | | | | | | | | | Constant prepayment rate: | | | | | | | | | Government guaranteed mortgage loans | | | 24.8 | % | | | 14.3 | % | Conventional conforming mortgage loans | | | 21.9 | % | | | 16.4 | % | Conventional non-conforming mortgage loans | | | 20.1 | % | | | 12.8 | % | Discount rate: | | | | | | | | | Government guaranteed mortgage loans | | | 13.6 | % | | | 11.8 | % | Conventional conforming mortgage loans | | | 9.3 | % | | | 9.2 | % | Conventional non-conforming mortgage loans | | | 13.2 | % | | | 13.1 | % | | | | | | | | | | 2008: | | | | | | | | | Constant prepayment rate: | | | | | | | | | Government guaranteed mortgage loans | | | 22.1 | % | | | 13.6 | % | Conventional conforming mortgage loans | | | 17.7 | % | | | 10.2 | % | Conventional non-conforming mortgage loans | | | 14.5 | % | | | 9.0 | % | Discount rate: | | | | | | | | | Government guaranteed mortgage loans | | | 10.5 | % | | | 10.1 | % | Conventional conforming mortgage loans | | | 9.3 | % | | | 9.3 | % | Conventional non-conforming mortgage loans | | | 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 | % |
At December 31, 2009, 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, were as follows: | | | | | (Dollars in thousands) | | | | | Carrying amount of servicing assets | | $ | 11,157 | | Fair value | | $ | 12,920 | | Weighted-average expected life (in years) | | | 6.6 | | | | | | | Constant prepayment rate (weighted-average annual rate) | | | 15.4 | % | Decrease in fair value due to 10% adverse change | | $ | 745 | | Decrease in fair value due to 20% adverse change | | $ | 1,388 | | | | | | | Discount rate (weighted-average annual rate) | | | 11.10 | % | Decrease in fair value due to 10% adverse change | | $ | 149 | | Decrease in fair value due to 20% adverse change | | $ | 632 | |
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. F-42
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 13 — Deposits and Related Interest Deposits and related interest consist of the following: | | | | | | | | | | | December 31, | | | | 2008 | | | 2007 | | | | (In thousands) | | Type of account and interest rate: | | | | | | | | | Non-interest bearing checking accounts | | $ | 625,928 | | | $ | 621,884 | | Savings accounts – 0.80% to 3.75% (2007 - 0.60% to 5.00%) | | | 1,288,179 | | | | 1,036,662 | | Interest bearing checking accounts – 0.75% to 3.75% (2007 - 0.40% to 5.00%) | | | 726,731 | | | | 518,570 | | Certificates of deposit – 0.75% to 7.00% (2007 - 0.75% to 7.00%) | | | 1,986,770 | | | | 1,680,344 | | Brokered certificates of deposit(1) - 2.15% to 6.00% (2007 - 3.20% to 6.50%) | | | 8,429,822 | | | | 7,177,061 | | | | | | | | | | | $ | 13,057,430 | | | $ | 11,034,521 | | | | | | | | |
| | | | | | | | | | | 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 $1,150,959$0 and $4,186,563$1,150,959 measured at fair value as of December 31, 20082009 and 2007,2008, respectively. |
The weighted average interest rate on total deposits as of December 31, 2009 and 2008 was 2.06% and 2007 was 3.63 % and 4.73%3.63%, respectively. As of December 31, 2008,2009, the aggregate amount of overdrafts in demand deposits that were reclassified as loans amounted to $16.5 million (2008 — $12.8 million (2007 — $13.6 million). F-34
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents a summary of CDs, including brokered CDs, with a remaining term of more than one year as of December 31, 2008:2009: | | | | | | | Total | | | (In thousands) | Over one year to two years | | | $ 2,393,370 | | Over two years to three years | | | 544,021 | | Over three years to four years | | | 373,355 | | Over four years to five years | | | 251,482 | | Over five years | | | 1,088,572 | | | | | | | Total | | | $ 4,650,800 | | | | | | |
| | | | | | | Total | | | | (In thousands) | | Over one year to two years | | $ | 1,786,651 | | Over two years to three years | | | 1,048,911 | | Over three years to four years | | | 279,467 | | Over four years to five years | | | 42,382 | | Over five years | | | 13,806 | | | | | | Total | | $ | 3,171,217 | | | | | |
As of December 31, 2008,2009, CDs in denominations of $100,000 or higher amounted to $9.6$8.6 billion (2007(2008 — $8.1$9.6 billion) including brokered CDs of $8.4$7.6 billion (2007(2008 — $7.2$8.4 billion) at a weighted average rate of 4.03% (20072.13% (2008 — 5.20%4.03%) 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, 2008,2009, unamortized broker placement fees amounted to $21.6$23.2 million (2007(2008 — $4.4$21.6 million), which are amortized over the contractual maturity of the brokered CDs under the interest method. The volumeDuring 2009, all of the $1.1 billion of brokered CDs measured at fair value under SFAS 159 has decreased by approximately $3.0 billion to $1.1 billion as ofthat were outstanding at December 31, 2008 from $4.1 billion as of December 31, 2007 as thewere 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 prevailing short-term interest rates. Mostlevels 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, under SFAS 159, causing the increase in the unamortized balance of broker placement fees. As of December 31, 2008,2009, deposit accounts issued to government agencies with a carrying value of $564.3$447.5 million (2007(2008 — $347.8$564.3 million) were collateralized by securities and loans with an amortized cost of $600.5$539.1 million (2007(2008 — $356.4$600.5 million) and estimated market value of $604.6$541.9 million (2007(2008 — $356.8$604.6 million), and by municipal obligations with a carrying value and estimated market value of $32.4$66.3 million (20072008 — $30.5$32.4 million). A table showing interest expense on deposits follows:
| | | | | | | | | | | | | | | Year Ended December 31, | | | | 2008 | | | 2007 | | | 2006 | | | | (In thousands) | | Interest-bearing checking accounts | | $ | 12,914 | | | $ | 11,365 | | | $ | 5,919 | | Savings | | | 18,916 | | | | 15,037 | | | | 12,970 | | Certificates of deposit | | | 73,744 | | | | 82,767 | | | | 80,284 | | Brokered certificates of deposit | | | 309,264 | | | | 419,571 | | | | 505,860 | | | | | | | | | | | | Total | | $ | 414,838 | | | $ | 528,740 | | | $ | 605,033 | | | | | | | | | | | |
The interest expense on deposits includes the valuation to market of interest rate swaps that hedge brokered CDs (economically or under fair value hedge accounting), the related interest exchanged, the amortization of broker placement fees, the amortization of basis adjustment and changes in fair value of callable brokered CDs elected for the fair value option under SFAS 159 (“SFAS 159 brokered CDs”).
F-35F-43
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) A table showing interest expense on deposits follows: | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2009 | | | 2008 | | | 2007 | | | | (In thousands) | | Interest-bearing checking accounts | | $ | 19,995 | | | $ | 12,914 | | | $ | 11,365 | | Savings | | | 19,032 | | | | 18,916 | | | | 15,037 | | Certificates of deposit | | | 50,939 | | | | 73,466 | | | | 82,761 | | Brokered certificates of deposit | | | 224,521 | | | | 309,542 | | | | 419,577 | | | | | | | | | | | | Total | | $ | 314,487 | | | $ | 414,838 | | | $ | 528,740 | | | | | | | | | | | |
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. The following are the components of interest expense on deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | Interest expense on deposits | | $ | 407,830 | | $ | 515,394 | | $ | 530,181 | | | $ | 295,004 | | $ | 407,830 | | $ | 515,394 | | Amortization of broker placement fees(1) | | 15,665 | | 9,056 | | 19,896 | | | 22,858 | | 15,665 | | 9,056 | | | | | | | | | | | | | | | | | Interest expense on deposits excluding net unrealized (gain) loss on derivatives and SFAS 159 brokered CDs | | 423,495 | | 524,450 | | 550,077 | | | Net unrealized (gain) loss on derivatives and SFAS 159 brokered CDs | | | (8,657 | ) | | 4,290 | | 58,532 | | | Accretion of basis adjustment on fair value hedges | | — | | — | | | (3,576 | ) | | 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 | | | | | | | | | | | | | | | | | Total interest expense on deposits | | $ | 414,838 | | $ | 528,740 | | $ | 605,033 | | | $ | 314,487 | | $ | 414,838 | | $ | 528,740 | | | | | | | | | | | | | | | | |
| | | (1) | | For 2008 and 2007, relatesRelated to brokered CDs not elected for themeasured at fair value option under SFAS 159.value. |
Total interest expense on deposits includes net cash settlements on interest rate swaps that economically hedge (economically or under fair value hedge accounting) brokered CDs that for the year ended December 31, 20082009 amounted to net interest realized of $5.5 million (2008 — net interest realized of $35.6 million (2007million; 2007 — net interest incurred of $12.3 million; 2006 — net interest incurred of $8.9 million). Note 13 — Federal Funds Purchased14 —Loans Payable As of December 31, 2009, loans payable consisted of $900 million in short-term borrowings under the FED Discount Window Program bearing interest at 1.00%. The Corporation participates in the Borrower-in-Custody (“BIC”) Program of the FED. Through the BIC Program, a broad range of loans (including commercial, consumer and Securitiesmortgages) may be pledged as collateral for borrowings through the FED Discount Window. As of December 31, 2009 collateral pledged related to this credit facility amounted to $1.2 billion, mainly commercial, consumer and mortgage loan . Note 15 —Securities Sold Under Agreements to Repurchase Federal funds purchased and securitiesSecurities sold under agreements to repurchase (repurchase agreements) consist of the following: | | | | | | | | | | | December, 31 | | | | 2008 | | | 2007 | | | | (Dollars in thousands) | | Federal funds purchased, interest ranging from 4.50% to 5.12% | | $ | — | | | $ | 161,256 | | Repurchase agreements, interest ranging from 2.29% to 5.39% (2007 - 3.26% to 5.67%) (1) | | | 3,421,042 | | | | 2,933,390 | | | | | | | | | Total | | $ | 3,421,042 | | | $ | 3,094,646 | | | | | | | | |
| | | | | | | | | | | 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 | | | | | | | | |
| | | (1) | | As of December 31, 2008,2009, includes $1.4 billion with an average rate of 4.36%4.29%, which lenders have the right to call before their contractual maturities at various dates beginning on January 30, 2009February 1, 2010 |
The weighted-average interest rates on federal funds purchased and repurchase agreements as of December 31, 2009 and 2008 were 3.34% and 2007 were 3.85% and 4.47%, respectively. Federal funds purchased and Accrued interest payable on repurchase agreements matureamounted to $18.1 million and $21.2 million as follows:
| | | | | | | December 31, 2008 | | | | (In thousands) | | One to thirty days | | $ | 333,542 | | Over thirty to ninety days | | | — | | Over ninety days to one year | | | 200,000 | | One to three years | | | 1,287,500 | | Three to five years | | | 900,000 | | Over five years | | | 700,000 | | | | | | Total | | $ | 3,421,042 | | | | | |
of December 31, 2009 and 2008, respectively.F-36F-44
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Repurchase agreements mature as follows: | | | | | | | December 31, 2009 | | | | (In thousands) | | One to thirty days | | $ | 196,628 | | Over thirty to ninety days | | | 380,003 | | Over ninety days to one year | | | 100,000 | | One to three years | | | 1,600,000 | | Three to five years | | | 800,000 | | | | | | Total | | $ | 3,076,631 | | | | | |
The following securities were sold under agreements to repurchase: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2008 | | | December 31, 2008 | | | | 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 | | $ | 1,984,596 | | $ | 1,759,948 | | $ | 1,984,356 | | | 5.83 | % | | U.S. Treasury securities and obligations of other | | | U.S. Government Sponsored Agencies | | | $ | 511,621 | | $ | 459,289 | | $ | 514,796 | | | 5.77 | % | Mortgage-backed securities | | 1,323,226 | | 1,173,442 | | 1,317,523 | | | 5.06 | % | | 3,299,221 | | 2,961,753 | | 3,376,421 | | | 5.34 | % | | | | | | | | | | | | | | | | Total | | $ | 3,307,822 | | $ | 2,933,390 | | $ | 3,301,879 | | | $ | 3,810,842 | | $ | 3,421,042 | | $ | 3,891,217 | | | | | | | | | | | | | | | | | | | | Accrued interest receivable | | $ | 28,253 | | | $ | 20,856 | | | | | | | | |
The maximum aggregate balance outstanding at any month-end during 20082009 was $4.1 billion (2007(2008 — $3.7$4.1 billion). The average balance during 20082009 was $3.6 billion (2007(2008 — $3.1$3.6 billion). The weighted average interest rate during 2009 and 2008 was 3.22% and 2007 was 3.71% and 4.74%, respectively. As of December 31, 20082009 and 2007,2008, the securities underlying such agreements were delivered to the dealers with which the repurchase agreements were transacted. Repurchase agreements as of December 31, 2008,2009, grouped by counterparty, were as follows: | | | | | | | | | | | | | | | | | (Dollars in thousands) | | | | | Weighted-Average | | | | Weighted-Average | | | Counterparty | | Amount | | Maturity (In Months) | | | Amount | | Maturity (In Months) | | Morgan Stanley | | $ | 478,600 | | 27 | | | Credit Suisse First Boston | | 1,167,442 | | 31 | | | $ | 1,051,731 | | 24 | | Citigroup Global Markets | | | 600,000 | | 38 | | Barclays Capital | | | 500,000 | | 24 | | JP Morgan Chase | | 575,000 | | 33 | | | 475,000 | | 27 | | Barclays Capital | | 500,000 | | 36 | | | Dean Witter / Morgan Stanley | | | 349,900 | | 27 | | UBS Financial Services, Inc. | | 100,000 | | 43 | | | 100,000 | | 31 | | Citigroup Global Markets | | 600,000 | | 50 | | | | | | | | | | | | | | $ | 3,421,042 | | | $ | 3,076,631 | | | | | | | | | | |
F-37F-45
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 1416 — Advances from the Federal Home Loan Bank (FHLB) Following is a detailsummary of the advances from the FHLB: | | | | | | | | | | | December, 31 | | | December, 31 | | | | 2008 | | | 2007 | | | | (Dollars in thousands) | | Advances from FHLB with maturities ranging from November 17, 2008 to December 15, 2008, tied to 3-month LIBOR, with an average interest rate of 4.99% | | $ | — | | | $ | 400,000 | | Fixed-rate advances from FHLB with maturities ranging from January 5, 2009 to October 6, 2013 (2007 - January 2, 2008 to May 21, 2013), with an average interest rate of 3.09% (2007 - 4.58%) | | | 1,060,440 | | | | 703,000 | | | | | | | | | Total | | $ | 1,060,440 | | | $ | 1,103,000 | | | | | | | | |
| | | | | | | | | | | 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 | | | | | | | | |
Advances from FHLB mature as follows: | | | | | | | | | | | December, 31 | | | December, 31 | | | | 2008 | | | 2009 | | | | (In thousands) | | | (In thousands) | | One to thirty days | | $ | 270,000 | | | $ | 5,000 | | Over thirty to ninety days | | 50,000 | | | 13,000 | | Over ninety days to one year | | 62,000 | | | 307,000 | | One to three years | | 411,000 | | | 445,000 | | Three to five years | | 267,440 | | | 208,440 | | | | | | | | | Total | | $ | 1,060,440 | | | $ | 978,440 | | | | | | | | |
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, 2008,2009, the estimated value of specific mortgage loans pledged as collateral amounted to $1.7$1.1 billion (2007(2008 — $1.5$1.7 billion), as computed by the FHLB for collateral purposes. The carrying value of such loans as of December 31, 20082009 amounted to $2.4$1.8 billion (2007(2008 — $2.2$2.4 billion). In addition, securities with an approximate estimated value of $5.6$4.1 million (2007(2008 — $0.8$5.6 million) and a carrying value of $5.7$4.1 million (2007 - - $0.8(2008 — $5.7 million) were pledged to the FHLB. As of December 31, 2008,2009, the Corporation had additional capacity of approximately $729$378 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 purposespurpose 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 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-38F-46
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 1517 —Notes Payable Notes payable consist of: | | | | | | | | | | | | | | | | | | | December 31, | | | December 31, | | | | 2008 | | 2007 | | | 2009 | | 2008 | | | | (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, 2008 and December 31, 2007) maturing on October 18, 2019, measured at fair value under SFAS 159 | | $ | 10,141 | | $ | 14,306 | | | 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 | | | | | Dow Jones Industrial Average (DJIA) linked principal protected notes: | | | | | | Series A maturing on February 28, 2012 | | 6,245 | | 7,845 | | | 6,542 | | 6,245 | | | | | Series B maturing on May 27, 2011 | | 6,888 | | 8,392 | | | 7,214 | | 6,888 | | | | | | | | | | | | | | | $ | 23,274 | | $ | 30,543 | | | $ | 27,117 | | $ | 23,274 | | | | | | | | | | | | |
Note 1618 — Other Borrowings Other borrowings consist of: | | | | | | | | | | | December 31, | | | | 2008 | | | 2007 | | | | (Dollars in thousands) | | Junior subordinated debentures due in 2034, interest-bearing at a floating-rate of 2.75% over 3-month LIBOR (4.62% as of December 31, 2008 and 7.74% as of December 31, 2007) | | $ | 103,048 | | | $ | 102,951 | | | | | | | | | | | Junior subordinated debentures due in 2034, interest-bearing at a floating-rate of 2.50% over 3-month LIBOR (4.00% as of December 30, 2008 and 7.43% as of December 31, 2007) | | | 128,866 | | | | 128,866 | | | | | | | | | | | $ | 231,914 | | | $ | 231,817 | | | | | | | | |
| | | | | | | | | | | 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 1719 — Unused Lines of Credit The Corporation maintains unsecured uncommitted lines of credit with other banks. As of December 31, 2008,2009, the Corporation’s total unused lines of credit with these banks amounted to $220$165 million (2007-$129(2008 — $220 million). As of December 31, 2008,2009, 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 (2007-$424.2 million) and an available line of credit with the FHLB-Atlanta of approximately $102.1 million. In addition, the Corporation had additional capacity of approximately $479 million through the Federal Reserve (FED) Discount Window Program based on collateral pledged at the FED, including the haircut.. F-39F-47
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 1820 — Earnings per Common Share The calculations of earnings per common share for the years ended December 31, 2009, 2008 2007 and 20062007 follow: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands, except per share data) | | | (In thousands, except per share data) | | Net Income: | | | Net income | | $ | 109,937 | | $ | 68,136 | | $ | 84,634 | | | Net (Loss) Income: | | | Net (loss) income | | | $ | (275,187 | ) | | $ | 109,937 | | $ | 68,136 | | Less: Preferred stock dividends(1) | | | (40,276 | ) | | | (40,276 | ) | | | (40,276 | ) | | | (42,661 | ) | | | (40,276 | ) | | | (40,276 | ) | Less: Preferred stock discount accretion | | | | (4,227 | ) | | — | | — | | | | | | | | | | | | | | | | | Net income attributable to common stockholders | | $ | 69,661 | | $ | 27,860 | | $ | 44,358 | | | Net (loss) income attributable to common stockholders | | | $ | (322,075 | ) | | $ | 69,661 | | $ | 27,860 | | | | | | | | | | | | | | | | | | | | Weighted-Average Shares: | | | Basic weighted-average common shares outstanding | | 92,508 | | 86,549 | | 82,835 | | | 92,511 | | 92,508 | | 86,549 | | Average potential common shares | | 136 | | 317 | | 303 | | | — | | 136 | | 317 | | | | | | | | | | | | | | | | | Diluted weighted-average number of common shares outstanding | | 92,644 | | 86,866 | | 83,138 | | | 92,511 | | 92,644 | | 86,866 | | | | | | | | | | | | | | | | | | | | Earnings per common share: | | | (Loss) Earnings per common share: | | | Basic | | $ | 0.75 | | $ | 0.32 | | $ | 0.54 | | | $ | (3.48 | ) | | $ | 0.75 | | $ | 0.32 | | | | | | | | | | | | | | | | | Diluted | | $ | 0.75 | | $ | 0.32 | | $ | 0.53 | | | $ | (3.48 | ) | | $ | 0.75 | | $ | 0.32 | | | | | | | | | | | | | | | | |
| | | (1) | | For the year ended December 31, 2009, preferred stock dividends include $12.6 million of Series F Preferred Stock cumulative preferred |
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 are computed by dividing net (loss) income attributable to common stockholders by the weighted average common shares issued and outstanding. Net (loss) income attributable 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. Basic weighted-averageweighted 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, and 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 attributedattributable 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, and 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 inon earnings per share. For the year ended December 31, 2009, there were 2,481,310 outstanding stock options, warrants outstanding to purchase 5,842,259 shares of common stock related to the TARP Capital Purchase Program and 32,216 shares of restricted stock 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 (2007-2,046,562; 2006-2,346,494) weighted-average outstanding stock options, which were excluded from the computation of dilutive earnings per share because they were antidilutive.since their inclusion would have an antidilutive effect on earnings per share. Note 1921 — Regulatory Capital Requirements 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 Tier 1 capital to total average assets (leverage ratio) and ratios of Tier 1 and total capital to 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 vary from 0% to 100%200% depending on the nature of the asset. As of December 31, 20082009 the Corporation was in compliance with the minimum regulatory capital requirements. As of December 31, 20082009 and 2007,2008, the Corporation and each of its subsidiary banks were categorized as “well-capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since December 31, 20082009 that management believes have changed any subsidiary bank’s capital category. The Corporation’s and its banking subsidiary’s regulatory capital positions 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-40F-49
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Corporation’s and its banking subsidiary’s regulatory capital positions 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, 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 | % | FirstBank Florida | | $ | 90,269 | | | | 13.53 | % | | $ | 53,387 | | | | 8 | % | | $ | 66,734 | | | | 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 | % | FirstBank Florida | | $ | 82,946 | | | | 12.43 | % | | $ | 26,694 | | | | 4 | % | | $ | 40,040 | | | | 6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Leverage ratio(1) | | | | | | | | | | | | | | | | | | | | | | | | | 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 | % | FirstBank Florida | | $ | 82,946 | | | | 8.78 | % | | $ | 37,791 | | | | 4 | % | | $ | 47,238 | | | | 5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | At December 31, 2007 | | | | | | | | | | | | | | | | | | | | | | | | | Total Capital (to Risk-Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,735,644 | | | | 13.86 | % | | $ | 1,001,582 | | | | 8 | % | | | N/A | | | | N/A | | FirstBank | | $ | 1,570,982 | | | | 13.23 | % | | $ | 949,858 | | | | 8 | % | | $ | 1,187,323 | | | | 10 | % | FirstBank Florida | | $ | 69,446 | | | | 10.92 | % | | $ | 50,878 | | | | 8 | % | | $ | 63,598 | | | | 10 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Tier I Capital (to Risk-Weighted Assets) | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,578,998 | | | | 12.61 | % | | $ | 500,791 | | | | 4 | % | | | N/A | | | | N/A | | FirstBank | | $ | 1,422,375 | | | | 11.98 | % | | $ | 474,929 | | | | 4 | % | | $ | 712,394 | | | | 6 | % | FirstBank Florida | | $ | 66,240 | | | | 10.42 | % | | $ | 25,439 | | | | 4 | % | | $ | 38,159 | | | | 6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Leverage ratio(1) | | | | | | | | | | | | | | | | | | | | | | | | | First BanCorp | | $ | 1,578,998 | | | | 9.29 | % | | $ | 679,516 | | | | 4 | % | | | N/A | | | | N/A | | FirstBank | | $ | 1,422,375 | | | | 8.85 | % | | $ | 643,065 | | | | 4 | % | | $ | 803,831 | | | | 5 | % | FirstBank Florida | | $ | 66,240 | | | | 7.79 | % | | $ | 33,999 | | | | 4 | % | | $ | 42,499 | | | | 5 | % |
| | | (1) | | Tier I Capital to average assets for First BanCorp and FirstBank and Tier I Capital to adjusted total assets for FirstBank Florida. |
Note 2022 — Stock Option Plan Between 1997 and January 2007, the Corporation had a stock option plan (“the 1997 stock option plan”) covering certain employees. This plan allowed forthat authorized the granting of up to 8,696,112 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 issuance.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 F-41
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
appreciation rights to an executive officer. 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 grantsgranted under this plan continue to be in full force and effect, subject to their original terms. AllNo awards for shares that remained available for grantscould be granted under the 1997 stock option plan were cancelled.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 3,800,000 shares of common stock, subject to adjustments for stock splits, reorganization and other similar events. The Corporation’s Board of Directors, upon receiving the relevant recommendation of the Compensation Committee, has the power and authority to determine those eligible to receive awards and to establish the terms and conditions of any awards subject to various limits and vesting restrictions that apply to individual and aggregate awards. 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, pursuant to its independent director compensation plan, the Corporation granted 36,243 shares of restricted stock with a fair value of $8.69 under the Omnibus Plan to the Corporation’s independent directors. The restrictions on suchfollowing table shows the activity of restricted stock award lapse ratably on an annual basis over a three-year period commencing on December 1,during 2009. | | | | | | | 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 yearyears ended December 31, 2009 and 2008, the Corporation recognized $92,361 and $8,750, respectively, of stock-based compensation expense related to the aforementioned restricted stock award.awards. The total unrecognized compensation cost related to these non-vested restricted stocksshares was $306,250$213,889 as of December 31, 20082009 and is expected to be recognized over the next 2.9 years.1.9 year. The Corporation accountedaccounts for stock options using the “modified prospective” method upon adoption of SFAS 123R, “Share-Based Payment.”method. There were no stock options granted during 2008.2009 and 2008, therefore no compensation associated with stock options was recorded in those years. The compensation expense associated with stock options for the 2007 and 2006 year was approximately $2.8 million and $5.4 million, respectively.million. All employee stock options granted during 2007 and 2006 were fully vested at the time of grant. F-50
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) SFAS 123RStock-based compensation accounting guidance requires the Corporation to develop an estimate of the number of share-based awards which 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. There were no forfeiture adjustments in 2008 for the unvested shares of restricted stock. 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, 4,027 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, 20082009 is set forth below: | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2008 | | | | | | | | | | | | Weighted- | | | | | | | | | | | | | | | Average | | | Aggregate | | | | | | | | Weighted- | | | Remaining | | | Intrinsic | | | | Number of | | | Average | | | Contractual | | | Value (In | | | | Options | | | Exercise Price | | | Term (Years) | | | thousands) | | Beginning of year | | | 4,136,910 | | | $ | 12.60 | | | | | | | | | | Options exercised | | | (6,000 | ) | | | 8.85 | | | | | | | | | | Options cancelled | | | (220,000 | ) | | | 8.87 | | | | | | | | | | | | | | | | | | | | | | | | | End of period outstanding and exercisable | | | 3,910,910 | | | $ | 12.82 | | | | 6.2 | | | $ | 4,146 | | | | | | | | | | | | | | |
F-42
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2009 | | | | | | | | | | | | Weighted- | | | | | | | | | | | | | | | Average | | | Aggregate | | | | | | | | Weighted- | | | Remaining | | | Intrinsic | | | | Number of | | | Average | | | Contractual | | | Value (In | | | | Options | | | Exercise Price | | | Term (Years) | | | thousands) | | Beginning of year | | | 3,910,910 | | | $ | 12.82 | | | | | | | | | | Options cancelled | | | (1,429,600 | ) | | | 11.69 | | | | | | | | | | | | | | | | | | | | | | | | | End of period outstanding and exercisable | | | 2,481,310 | | | $ | 13.46 | | | | 5.2 | | | $ | — | | | | | | | | | | | | | | |
The fair value of options granted in 2007, and 2006, which was estimated using the Black-Scholes option pricing method, and the assumptions used are as follows: | | | | | | | | | | | | | | | 2007 | | 2006 | | 2007 | Weighted-average stock price at grant date and exercise price | | $ | 9.20 | | $ | 12.21 | | | $ | 9.20 | | Stock option estimated fair value | | $ | 2.40 - $2.45 | | $ | 2.89 - $4.60 | | | $ | 2.40 - $2.45 | | Weighted-average estimated fair value | | $ | 2.43 | | $ | 4.36 | | | $ | 2.43 | | Expected stock option term (years) | | 4.31 - 4.59 | | 4.22 - 4.31 | | | 4.31 - 4.59 | | Expected volatility | | | 32 | % | | | 39% - 46 | % | | | 32 | % | Weighted-average expected volatility | | | 32 | % | | | 45 | % | | | 32 | % | Expected dividend yield | | | 3.0 | % | | | 2.2% - 3.2 | % | | | 3.0 | % | Weighted-average expected dividend yield | | | 3.0 | % | | | 2.3 | % | | | 3.0 | % | Risk-free interest rate | | | 5.1 | % | | | 4.7% - 5.6 | % | | | 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. TheCash proceeds from 6,000 options exercised duringin 2008 amounted to approximately $53,000 and did not have any intrinsic value and the cash proceeds from these options were approximately $53,000.value. No stock options were exercised during 2009 or 2007. Cash proceeds from options exercised during 2006 amounted to $19.8 million. The total intrinsic value of options exercised during 2006 was approximately $10.0 million. Note 2123 — Stockholders’ Equity Common stock The Corporation has 250,000,000 authorized shares of common stock with a par value of $1 per share. As of December 31, 2008,2009, there were 102,444,549 (2007102,440,522 (2008 — 102,402,306)102,444,549) shares issued and 92,546,749 (200792,542,722 (2008 — 92,504,506)92,546,749) shares outstanding. On August 24, 2007, First BanCorp entered into a Stockholder Agreement relating to its sale in a private placement of 9,250,450 shares or 10% of 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 per common stock (“Common Stock”)share which was paid on March 31, 2009 to The Bankcommon stockholders of Nova Scotia (“Scotiabank”), a large financial institution with operations around the world, at a price of $10.25 per share pursuant to the terms of an Investment Agreement, dated Februaryrecord on March 15, 2007 (the “Investment Agreement”). The net proceeds to First BanCorp after discounts and expenses were $91.9 million. The securities sold to Scotiabank were issued pursuant to the exemption from registration in Section 4(2) of the Securities Act of 1933, as amended. Pursuant to the Investment Agreement, Scotiabank had the right to require the Corporation to register the Common Stock for resale by Scotiabank, or successor owners of the Common Stock,2009 and in accordance with such right,May 2009 declared a second quarter dividend of $0.07 per common share which was paid on February 13,June 30, 2009 to common stockholders of record on June 15, 2009. On July 30, 2009, the Corporation registeredannounced the resale of such shares. Scotiabank is entitled to an observer at meetings of the Board of Directors of First BanCorp, including any committee meetings of the Board of Directors of First BanCorp subject to certain limitations. The observer has no voting rights. The Corporation issued 6,000 sharessuspension of common stock during 2008 (2006 — 2,379,000) as partand preferred dividends effective with the preferred dividend for the month of the exercise of stock options granted under the Corporation’s stock-based compensation plan. No shares of common stock were issued during 2007 under the Corporation’s stock-based compensation plan.August 2009.
On December 1, 2008, the Corporation granted 36,243 shares of restricted stock under the Omnibus Plan to the Corporation’s independent directors.directors, 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. The shares of restricted stock may vest more quickly in the event of death, disability, retirement, or a change in control. Based 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 F-43
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued
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 not be paid until restrictions lapse. The holder of restricted stocks has the right to vote the shares. Stock repurchase plan and treasury 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 holds them as treasury stock. No shares of common stock were repurchased during 20082009 and 20072008 by the Corporation. As of December 31, 20082009 and 2007,2008, of the total amount of common stock repurchased in prior years, 9,897,800 shares were held as treasury stock and were available for general corporate purposes. Preferred stock The Corporation has 50,000,000 authorized shares of non-cumulative and non-convertible 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. During 2008 and 2007 the Corporation did not issue preferred stock. As of December 31, 2008,2009, the Corporation has five outstanding series of non convertiblenon-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. 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 each2009, 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, 2007the 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 has 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 5,842,259 shares of the Corporation’s common stock at an exercise price of $10.27 per share. The Corporation registered the Series F Preferred Stock, the Warrant and 2006the shares of common stock underlying the Warrant for sale under the Securities Act of 1933. The Corporation recorded 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. The preferred shares were valued using a discounted cash flow analysis and applying a discount rate of 10.9%. The difference from the par amount of the preferred shares is accreted to preferred stock over five 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 F Preferred Stock qualifies as Tier 1 regulatory capital. Cumulative dividends on the Series F 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 F Preferred Stock ranks pari passu with the Corporation’s existing Series A through E, in terms of dividend payments and distributions upon liquidation, dissolution and winding up of the Corporation. The Purchase Agreement relating to this issuance contains limitations on 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), of common stock prior to October 14, 2008, which is $0.07 per share. For the year ended December 31, 2009, preferred stock dividends of Series F Preferred Stock amounted to $40.3 million.$19.2 million, including $12.6 million of cumulative preferred dividends not declared as of the end of the period. On January 16,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 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 | | | — | | making the payment of dividends on common stock more expensive. |
As mentioned above, on July 30, 2009, the Corporation entered into a Letter Agreementannounced the suspension of dividends for common and all its outstanding series of preferred stock. This suspension was effective with the United States Departmentdividends for the month of August 2009, on the Corporation’s five outstanding series of non-cumulative preferred stock and dividends for the Corporation’s outstanding Series F Cumulative Preferred Stock and the Corporation’s common stock. As a result of the Treasury (“Treasury”) pursuant to which Treasury invested $400,000,000 in preferred stockdividend suspension, the terms of the Corporation under the Treasury’s Troubled Asset Relief Program Capital Purchase Program. For further detailsSeries F Cumulative Preferred Stock include limitations on the transaction, refer to Note 34 — Subsequent Events.resumption of the payment of cash dividends and purchases of outstanding shares of common and preferred stock. 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. Dividends
On June 30, 2008, the Corporation announced that the Federal Reserve Bank of New York, under the delegated authority of the Board of Governors of the Federal Reserve System, terminated the Order to Cease and Desist dated March 16, 2006, relating to the mortgage-related transactions with other financial institutions, after completing its examination of the Corporation.
During the effectiveness of the Consent Orders, the Corporation had to request and obtain written approval from the Federal Reserve Board for the payment of dividends by the Corporation to the holders of its preferred stock, common stock and trust preferred stock. The Corporation has taken the required actions, including a substantial reduction of the credit risk concentration in connection with certain loans outstanding to two large mortgage originators in Puerto Rico to levels acceptable to regulatory agencies and within parameters set forth in the policies adopted by the Corporation.
F-44F-53
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 2224 — 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 $8,000 for 2008, $9,000 for 2009 and 2010, $10,000 for 2011 and 2012 and $12,000 beginning on January 1, 2013 ($15,500 for 2008 and $16,50016,500 for 2009 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 $1.5$1.6 million for the year ended December 31, 2009, $1.5 million for 2008 and $1.4 million for each of the years ended December 31, 2007 and 2006.2007. FirstBank Florida provides 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 are eligible to participate in the Plan after six months of service. Under the provisions of the Plan, FirstBank Florida contributes 100% of the first 3% of the participant’s contribution and 50% of the next 2% participant’s contribution up to a maximum of 3%4% of the participant’s compensation. Participants are permitted to contribute up to 18% of their annual compensation, limited to $16,500 per year (participants over 50 years of age are permitted an additional $5,000$5,500 contribution). FirstBank Florida had total plan expenses of approximately $151,000 for 2009, approximately $157,000 for 2008 and approximately $114,000 for 2007 and approximately $87,000 for 2006.2007. Note 2325 — Other Non-interest Income A detail of other non-interest income follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | Other commissions and fees | | $ | 420 | | $ | 273 | | $ | 1,470 | | | $ | 469 | | $ | 420 | | $ | 273 | | Insurance income | | 10,157 | | 10,877 | | 11,284 | | | 8,668 | | 10,157 | | 10,877 | | Other | | 18,150 | | 13,322 | | 12,857 | | | 17,893 | | 18,150 | | 13,322 | | | | | | | | | | | | | | | | | Total | | $ | 28,727 | | $ | 24,472 | | $ | 25,611 | | | $ | 27,030 | | $ | 28,727 | | $ | 24,472 | | | | | | | | | | | | | | | | |
Note 2426 — Other Non-interest Expenses A detail of other non-interest expenses follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | Servicing and processing fees | | $ | 9,918 | | $ | 6,574 | | $ | 7,297 | | | $ | 10,174 | | $ | 9,918 | | $ | 6,574 | | Communications | | 8,856 | | 8,562 | | 9,165 | | | 8,283 | | 8,856 | | 8,562 | | Depreciation and expenses on revenue — earning equipment | | 2,227 | | 2,144 | | 2,455 | | | 1,341 | | 2,227 | | 2,144 | | Supplies and printing | | 3,530 | | 3,402 | | 3,494 | | | 3,073 | | 3,530 | | 3,402 | | Core deposit intangible impairment | | | 3,988 | | — | | — | | Other | | 17,443 | | 18,744 | | 14,309 | | | 17,483 | | 17,443 | | 18,744 | | | | | | | | | | | | | | | | | Total | | $ | 41,974 | | $ | 39,426 | | $ | 36,720 | | | $ | 44,342 | | $ | 41,974 | | $ | 39,426 | | | | | | | | | | | | | | | | |
F-45F-54
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 2527 — 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, withwithin 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 thisthat 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%, except that in years 2005 and 2006, an additional transitory tax rate of 2.5% was signed into law by. In 2009 the Governor of Puerto Rico. In August 2005, the Government of 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 transitoryseries of temporary and permanent measures, including the imposition of a 5% surtax over the total income tax rate of 2.5% that increaseddetermined, 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 39.0%39% to 41.5% for a two-year period.40.95% and an increase in capital gain statutory tax rate from 15% to 15.75%. This law wastemporary measure is effective for taxabletax years beginningthat commenced after December 31, 20042008 and ending on or before December 31, 2006. Accordingly, the Corporation recorded an additional current income tax provision of $2.8 million during the year ended December 31, 2006. Deferred tax amounts were adjusted for the effect of the change in the income 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. In addition, on May 13, 2006, with an effective date of January 1, 2006, the Governor of Puerto Rico approved an additional transitory tax rate of 2.0% applicable only to companies covered by the Puerto Rico Banking Act as amended, such as FirstBank, which raised the maximum statutory tax rate to 43.5% for taxable years commenced during calendar year 2006. This law was effective for taxable years beginning after December 31, 2005 and ending on or before December 31, 2006. Accordingly, the Corporation recorded an additional current income tax provision of $1.7 million during the year ended December 31, 2006.2012. 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 Entities (“IBEs”) of the Corporation and the Bank 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 IBEs 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 IBEs 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. 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 FirstBank Overseas Corporation. The components of income tax expense for the years ended December 31 are summarized below: | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2008 | | | 2007 | | | 2006 | | | | (In thousands) | | Current income tax expense | | $ | (7,121 | ) | | $ | (7,925 | ) | | $ | (59,157 | ) | Deferred income tax benefit (expense) | | | 38,853 | | | | (13,658 | ) | | | 31,715 | | | | | | | | | | | | Total income tax benefit (expense) | | $ | 31,732 | | | $ | (21,583 | ) | | $ | (27,442 | ) | | | | | | | | | | |
| | | | | | | | | | | | | | | 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-46F-55
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | % 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 | | $ | (30,500 | ) | | | (39.0 | )% | | $ | (34,990 | ) | | | (39.0 | )% | | $ | (46,512 | ) | | | (41.5 | )% | | $ | 110,832 | | | 40.95 | % | | $ | (30,500 | ) | | | (39.0 | )% | | $ | (34,990 | ) | | | (39.0 | )% | Federal and state taxes | | | — | | | | — | | | | (227 | ) | | | (0.3 | )% | | | (1,657 | ) | | | (1.5 | )% | | | (311 | ) | | | (0.1 | )% | | — | | | 0.0 | % | | | (227 | ) | | | (0.3 | )% | Non-tax deductible expenses | | — | | | 0.0 | % | | | (1,111 | ) | | | (1.2 | )% | | | (2,232 | ) | | | (2.0 | )% | | — | | | 0.0 | % | | — | | | 0.0 | % | | | (1,111 | ) | | | (1.2 | )% | Benefit of net exempt income | | 49,799 | | | 63.7 | % | | 23,974 | | | 26.7 | % | | 34,601 | | | 30.9 | % | | 52,293 | | | 19.3 | % | | 49,799 | | | 63.7 | % | | 23,974 | | | 26.7 | % | Deferred tax valuation allowance | | | (2,446 | ) | | | (3.1 | )% | | 1,250 | | | 1.4 | % | | | (3,209 | ) | | | (2.9 | )% | | | (184,397 | ) | | | (68.1 | )% | | | (2,446 | ) | | | (3.1 | )% | | 1,250 | | | 1.4 | % | 2% temporary tax applicable to banks | | — | | | 0.0 | % | | — | | | 0.0 | % | | | (1,704 | ) | | | (1.5 | )% | | Net operating loss carry forward | | | (402 | ) | | | (0.5 | )% | | | (7,003 | ) | | | (7.8 | )% | | — | | | 0.0 | % | | — | | | 0.0 | % | | | (402 | ) | | | (0.5 | )% | | | (7,003 | ) | | | (7.8 | )% | Reversal of Unrecognized Tax Benefits (FIN 48) | | 10,559 | | | 13.5 | % | | — | | | 0.0 | % | | — | | | 0.0 | % | | Reversal of Unrecognized Tax Benefits | | | 18,515 | | | 6.8 | % | | 10,559 | | | 13.5 | % | | — | | | 0.0 | % | Settlement payment — closing agreement | | 5,395 | | | 6.9 | % | | — | | | 0.0 | % | | — | | | 0.0 | % | | — | | | 0.0 | % | | 5,395 | | | 6.9 | % | | — | | | 0.0 | % | Other-net | | | (673 | ) | | | (0.8 | )% | | | (3,476 | ) | | | (3.9 | )% | | | (6,729 | ) | | | (6.0 | )% | | | (1,466 | ) | | | (0.5 | )% | | | (673 | ) | | | (0.8 | )% | | | (3,476 | ) | | | (3.9 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total income tax benefit (provision) | | $ | 31,732 | | | 40.7 | % | | $ | (21,583 | ) | | | (24.1 | )% | | $ | (27,442 | ) | | | (24.5 | )% | | Total income tax (provision) benefit | | | $ | (4,534 | ) | | | (1.7 | )% | | $ | 31,732 | | | 40.7 | % | | $ | (21,583 | ) | | | (24.1 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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, 20082009 and 20072008 were as follows: | | | | | | | | | | | | | | | | | | | December 31, | | | December 31, | | | | 2008 | | 2007 | | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Deferred tax asset: | | | Allowance for loan and lease losses | | $ | 106,879 | | $ | 74,118 | | | $ | 212,933 | | $ | 106,879 | | Unrealized losses on derivative activities | | 1,912 | | 4,358 | | | 1,028 | | 1,912 | | Deferred compensation | | 682 | | 1,301 | | | 41 | | 682 | | Legal reserve | | 211 | | 123 | | | 500 | | 211 | | Reserve for insurance premium cancellations | | 679 | | 711 | | | 649 | | 679 | | Net operating loss and donation carryforward available | | 1,286 | | 7,198 | | | 68,572 | | 1,286 | | Impairment on investments | | 5,910 | | 4,205 | | | 4,622 | | 5,910 | | Tax credits available for carryforward | | 5,409 | | 7,117 | | | 3,838 | | 5,409 | | Unrealized net loss on available-for-sale securities | | 22 | | 333 | | | 20 | | 22 | | Realized loss on investments | | 136 | | — | | | 142 | | 136 | | Settlement payment — closing agreement | | 9,652 | | — | | | 7,313 | | 9,652 | | Interest expense accrual — FIN 48 | | 2,658 | | — | | | Interest expense accrual — Unrecognized Tax Benefits | | | — | | 2,658 | | Other reserves and allowances | | 7,010 | | 3,490 | | | 12,665 | | 7,010 | | | | | | | | | | | | | Deferred tax asset | | 142,446 | | 102,954 | | | 312,323 | | 142,446 | | | | | Deferred tax liability: | | | Unrealized gain on available-for-sale securities | | 716 | | — | | | 4,629 | | 716 | | Differences between the assigned values and tax bases of assets and liabilities recognized in purchase business combinations | | 4,715 | | 4,885 | | | 3,015 | | 4,715 | | Unrealized gain on other investments | | 578 | | 582 | | | 468 | | 578 | | Other | | 1,123 | | 2,446 | | | 3,342 | | 1,123 | | | | | | | | | | | | | Deferred tax liability | | 7,132 | | 7,913 | | | 11,454 | | 7,132 | | | | | Valuation allowance | | | (7,275 | ) | | | (4,911 | ) | | | (191,672 | ) | | | (7,275 | ) | | | | | | | | | | | | | | | Deferred income taxes, net | | $ | 128,039 | | $ | 90,130 | | | $ | 109,197 | | $ | 128,039 | | | | | | | | | | | | |
In assessingFor 2009, the realizabilityCorporation recorded 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 mainly resulted from a $184.4 million non-cash increase of the valuation allowance for the Corporation’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 management considers whether it is more likely than not that some portion or allin the future. As of December 31, 2009, the deferred tax assets will not be realized. The ultimate realizationasset, net of deferred tax assets is dependent upon the generationa valuation allowance of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal$191.7 million, amounted to $109.2 million compared to $128.0 million as of deferred tax liabilities, projected future taxableDecember 31, 2008. F-47F-56
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Accounting for income and tax planning strategies in making this assessment. Ataxes requires that companies assess whether a valuation allowance of $7.3 million and $4.9 million is reflected in 2008 and 2007, respectively, related toshould be recorded against their deferred tax assets arising from temporary differences for which the Corporation could not determine the likelihood of its realization. Basedbased on the informationconsideration of all available including projections for future taxable income over the periods in whichevidence, using a “more likely than not” realization standard. The valuation allowance should be sufficient to reduce the deferred tax assets are deductible, management believes itasset 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 Corporation willconsideration of all sources of taxable income available to realize all other items comprising the net 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 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 the year 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. As of December 31, 20082009, management concluded that $109.2 million of the deferred tax assets will be realized. In assessing the likelihood of realizing the deferred tax assets, management has considered all four sources of taxable income mentioned above and 2007. The amounteven 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 files 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 need to be established which may have a material adverse effect on the Corporation’s results of operations. Similarly, 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 considered realizable, however, couldvaluation allowance will then be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.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%15.75% capital gain tax rate, and is included in accumulated other comprehensive income as part of stockholders’ equity. The Corporation adopted FIN 48 asAt December 31, 2009, the Corporation’s deferred tax asset related to loss and other carry-forwards was $74 million. This was comprised of January 1, 2007. FIN 48net operating loss carry-forward of $68.1 million, which will begin expiring in 2016, an alternative minimum tax credit carry-forward of $1.6 million, an extraordinary tax credit carryover of $3.8 million, and a charitable contribution carry-forward of $0.5 million which will begin expiring in 2014. In June 2006, 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 FIN 48,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 FIN 48this model and the tax benefit claimed on a tax return is referred to as an unrecognizedUTB. 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 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 benefit (“UTB”). 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. 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 Corporation’s UTBs amounted to $15.6 million (excluding accrued interest), all of which would, if recognized, affect the Corporation’s effective tax rate.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 classifiesclassified all interest and penalties, if any, related to tax uncertainties as income tax expense. As of December 31, 2008, and 2007, the Corporation’s accrual for interest that relaterelates to tax uncertainties amounted to $6.8 million and $8.6 million, respectively.million. As of December 31, 2008, and 2007 there is no need to accrue for the payment of penalties. For the yearsyear ended on December 31, 2008 and 2007,2009, the total amount of accrued interest recognizedreversed by the Corporation as part ofthrough income tax expense related to tax uncertainties was $1.7 million and $2.3 million, respectively. The beginning UTB balance of $22.1 million reconciles to the December 31, 2008 balance in the following table. | | | | | Reconciliation of the Change in Unrecognized Tax Benefits | | | | | (In thousands) | | | | | Balance at beginning of year | | $ | 22,147 | | Increases related to positions taken during prior years | | | 511 | | Expiration of statute of limitations | | | (7,058 | ) | | | | | Balance at end of year | | $ | 15,600 | | | | | |
$6.8 million. The amount of UTBs may increase or decrease in the future 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. As reflected in the table above, during 2008, the Corporation reversed UTBs by 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. For the remaining outstanding UTBs, the Corporation cannot make any reasonable reliable estimate of the timing of future cash flows or changes, if any, associated with such obligations. The Corporation’s liability for income taxes includes the liability for UTBs and interest which relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has expired. The statute of limitations under the PR Code is 4 years; and under the applicable law for Virgin Islands and U.S. income tax purposes is 3 years after a tax return is due or filed, whichever is later. The completion of an audit by the taxing authorities or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Corporation’s liability for income taxes. Any such adjustment could be material to results of
F-48
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. All tax years subsequent to 2003 remain open to examination under the PR Code and taxable years subsequent to 2004 remain open to examination for Virgin Islands and U.S. income tax purposes.
Note 2628 — Lease Commitments As of December 31, 2008,2009, certain premises are leased with terms expiring through the year 2022.2034. 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, 2008,2009, the obligation under various leases follows: | | | | | | | | | | | Amount | | | Amount | | | | (In thousands) | | | (In thousands) | | 2009 | | $ | 7,669 | | | 2010 | | 6,192 | | | $ | 10,342 | | 2011 | | 4,754 | | | 7,680 | | 2012 | | 4,141 | | | 6,682 | | 2013 | | 3,332 | | | 4,906 | | 2014 and later years | | 25,327 | | | 2014 | | | 3,972 | | 2015 and later years | | | 30,213 | | | | | | | | | Total | | $ | 51,415 | | | $ | 63,795 | | | | | | | | |
Rental expense included in occupancy and equipment expense was $11.6$11.8 million in 2008 (20072009 (2008 — $11.2$11.6 million; 20062007 — $10.2$11.2 million). Note 2729 — Fair Value As discussed in Note 1 — “Nature of Business and Summary of Significant Accounting Policies”, effective January 1,In February 2007, the Corporation adopted SFAS 157,FASB issued authoritative guidance which provides a framework for measuring fair value under GAAP. The Corporation also adopted SFAS 159 effective January 1, 2007. SFAS 159 generally 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 (“SFAS 159 liabilities”) on the adoption date.notes.
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 SFAS 159.the fair value option. F-58
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Opening Statement of | | | Opening Statement of | | | | Ending Statement of | | | | | Financial Condition | | | Ending Statement of | | Financial Condition | | | | Financial Condition | | Net Increase in | | as of January 1, 2007 | | | Financial Condition | | Net Increase in | | as of January 1, 2007 | | | | as of December 31, 2006 | | Retained Earnings | | (After Adoption of | | | as of December 31, 2006 | | Retained Earnings | | (After Adoption of | | Transition Impact | | (Prior to Adoption) (1) | | Upon Adoption | | Fair Value Option) | | | (Prior to Adoption) (1) | | Upon Adoption | | Fair Value Option) | | | | (In thousands) | | | (In thousands) | | Callable brokered CDs | | $ | | (4,513,020 | ) | | $ | 149,621 | | $ | (4,363,399 | ) | | $ | (4,513,020 | ) | | $ | 149,621 | | $ | (4,363,399 | ) | Medium-term notes | | | (15,637 | ) | | 840 | | | (14,797 | ) | | | (15,637 | ) | | 840 | | | (14,797 | ) | | | | | | | | Cumulative-effect adjustment (pre-tax) | | 150,461 | | | 150,461 | | Tax impact | | | (58,683 | ) | | | | (58,683 | ) | | | | | | | | | Cumulative-effect adjustment (net of tax), increase to retained earnings | | $ | 91,778 | | | 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 liabilities that were hedged with interest rate swaps that were previously designated for fair value hedge accountingaccounting. As of December 31, 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 recorded in accordance with SFAS 133.notes payable. As of December 31, 2008, and 2007, these liabilities recognized at fair value also included callable brokered CDs with an aggregate fair value of $1.15 billion and $4.19 billion, respectively and a principal balance of $1.13 billion, and $4.20 billion, respectively, recorded in interest-bearing deposits, and certain medium-term notes with a fair value of $10.1 million and $14.31 million, respectively, and a principal balance of $15.44 million, respectively, recorded in notes payable.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 SFAS 159 liabilities.liabilities measured at fair value. Electing the fair value option allows the Corporation to eliminate the burden of complying with the requirements for hedge accounting under SFAS 133 (e.g., documentation and effectiveness assessment) without introducing earnings volatility. Interest rate risk on the callable brokered CDs and medium-term notes measured at fair value under SFAS 159 continues to bewas economically hedged with callable interest rate swaps, with the same terms and conditions.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 and notes payable because these are not hedged by derivatives. F-49
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CallableMedium-term notes and callable brokered CDs and medium-term notes for which the Corporation has elected the fair value option arewere priced using observable market data in the institutional markets. Fair Value Measurement SFAS 157The 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. SFAS 157This 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. The standard describes threeThree levels of inputs that 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. |
| | | 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 forto be |
F-59
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | | | measured at fair value option under SFAS 159)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. |
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. F-50
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the estimated fair value and carrying value of financial instruments as of December 31, 20082009 and 2007.December 31, 2008. | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | 12/31/2008(1) | | 12/31/2008(2) | | 12/31/2007(1) | | 12/31/2007(2) | | 12/31/2009 | | 12/31/2009 | | 12/31/2008 | | 12/31/2008 | | | | (In thousands) | | (In thousands) | | Assets: | | | Cash and due from banks and money market investments | | $ | 405,733 | | $ | 405,733 | | $ | 378,945 | | $ | 378,980 | | | $ | 704,084 | | $ | 704,084 | | $ | 405,733 | | $ | 405,733 | | Investment securities available for sale | | 3,862,342 | | 3,862,342 | | 1,286,286 | | 1,286,286 | | | 4,170,782 | | 4,170,782 | | 3,862,342 | | 3,862,342 | | Investment securities held to maturity | | 1,706,664 | | 1,720,412 | | 3,277,083 | | 3,261,934 | | | 601,619 | | 621,584 | | 1,706,664 | | 1,720,412 | | Other equity securities | | 64,145 | | 64,145 | | 64,908 | | 64,908 | | | 69,930 | | 69,930 | | 64,145 | | 64,145 | | Loans receivable, including loans held for sale | | 13,088,292 | | 11,799,746 | | | 13,949,226 | | 13,088,292 | | Less: allowance for loan and lease losses | | | (281,526 | ) | | | (190,168 | ) | | | | (528,120 | ) | | | (281,526 | ) | | | | | | | | | | | | | Loans, net of allowance | | 12,806,766 | | 12,416,603 | | 11,609,578 | | 11,513,064 | | | 13,421,106 | | 12,811,010 | | 12,806,766 | | 12,416,603 | | | | | | | | | | | | | Derivatives, included in assets | | 8,010 | | 8,010 | | 14,701 | | 14,701 | | | 5,936 | | 5,936 | | 8,010 | | 8,010 | | | | | Liabilities: | | | Deposits | | 13,057,430 | | 13,221,026 | | 11,034,521 | | 11,030,229 | | | 12,669,047 | | 12,801,811 | | 13,057,430 | | 13,221,026 | | Federal funds purchased and securities sold under agreements to repurchase | | 3,421,042 | | 3,655,652 | | 3,094,646 | | 3,137,094 | | | Loans payable | | | 900,000 | | 900,000 | | — | | — | | Securities sold under agreements to repurchase | | | 3,076,631 | | 3,242,110 | | 3,421,042 | | 3,655,652 | | Advances from FHLB | | 1,060,440 | | 1,079,298 | | 1,103,000 | | 1,107,347 | | | 978,440 | | 1,025,605 | | 1,060,440 | | 1,079,298 | | Notes payable | | 23,274 | | 18,755 | | 30,543 | | 30,043 | | | Notes Payable | | | 27,117 | | 25,716 | | 23,274 | | 18,755 | | Other borrowings | | 231,914 | | 81,170 | | 231,817 | | 217,908 | | | 231,959 | | 80,267 | | 231,914 | | 81,170 | | Derivatives, included in liabilities | | 8,505 | | 8,505 | | 67,151 | | 67,151 | | | 6,467 | | 6,467 | | 8,505 | | 8,505 | |
| | | (1) | | This column discloses carrying amount, information required annually by SFAS 107. | | (2) | | This column discloses fair value estimates required annually by SFAS 107. |
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: F-60
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Asset/Liabilities Measured at Fair Value on a Recurring Basis | | | As of December 31, 2008 | | | | | | As of December 31, 2007 | | | | | Fair Value Measurements Using | | | | | | Fair Value Measurements Using | | | | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | | (In thousands) | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Investment securities available for sale(1) | | $ | 2,217 | | | $ | 3,746,142 | | | $ | 113,983 | | | $ | 3,862,342 | | | $ | 22,596 | | | $ | 1,130,012 | | | $ | 133,678 | | | $ | 1,286,286 | | Derivatives, included in assets(1) | | | — | | | | 7,250 | | | | 760 | | | | 8,010 | | | | — | | | | 9,598 | | | | 5,103 | | | | 14,701 | | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Callable brokered CDs(2) | | | — | | | | 1,150,959 | | | | — | | | | 1,150,959 | | | | — | | | | 4,186,563 | | | | — | | | | 4,186,563 | | Notes payable(2) | | | — | | | | 10,141 | | | | — | | | | 10,141 | | | | — | | | | 14,306 | | | | — | | | | 14,306 | | Derivatives, included in liabilities(1) | | | — | | | | 8,505 | | | | — | | | | 8,505 | | | | — | | | | 67,151 | | | | — | | | | 67,151 | |
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 to Election of the Fair Value Option | | | | | | | | | | | | Total | | | | | | | | | | | | Changes in Fair Value | | | | Unrealized Gains and | | | Unrealized Losses and | | | Unrealized Gains (Losses) | | | | 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 | | $ | (2,068 | ) | | $ | — | | | $ | (2,068 | ) | Medium-term notes | | | — | | | | (4,069 | ) | | | (4,069 | ) | | | | | | | | | | | | | $ | (2,068 | ) | | $ | (4,069 | ) | | $ | (6,137 | ) | | | | | | | | | | |
| | | (1) | | CarriedChanges 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 prior toare recorded in interest expense in the adoptionConsolidated Statements of SFAS 159. | | (2) | | Amounts represent item for which the Corporation has elected the fair value option under SFAS 159.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 | | | | | | | | | | | | | | | | to Election of the Fair Value Option | | | 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 | | | | 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 under the provisions of SFAS 159 isare 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 | | | 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 | | | 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 | | $ | (298,641 | ) | | $ | — | | $ | (298,641 | ) | | $ | (298,641 | ) | | $ | — | | $ | (298,641 | ) | Medium-term notes | | — | | | (294 | ) | | | (294 | ) | | — | | | (294 | ) | | | (294 | ) | | | | | | | | | | | | | | | | | | $ | (298,641 | ) | | $ | (294 | ) | | $ | (298,935 | ) | | $ | (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 under the provisions of SFAS 159 isare recorded in interest expense in the Consolidated Statements of Income based on such instruments contractual coupons. |
F-51F-62
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The table below presents a reconciliation offor all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2009, 2008 and 2007. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Fair Value Measurements | | Total Fair Value Measurements | | | | | Total Fair Value Measurements | | Total Fair Value Measurements | | Total Fair Value Measurements | | | | (Year Ended December 31, 2008) | | (Year Ended December 31, 2007) | | | | | (Year Ended December 31, 2009) | | (Year Ended December 31, 2008) | | (Year Ended December 31, 2007) | | Level 3 Instruments Only | | 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) | | Beginning balance | | $ | 5,102 | | $ | 133,678 | | $ | 9,087 | | $ | 370 | | | $ | 760 | | $ | 113,983 | | $ | 5,102 | | $ | 133,678 | | $ | 9,087 | | $ | 370 | | Total gains or (losses) (realized/unrealized): | | | Included in earnings | | | (4,342 | ) | | — | | | (3,985 | ) | | — | | | 3,439 | | | (1,270 | ) | | | (4,342 | ) | | — | | | (3,985 | ) | | — | | Included in other comprehensive income | | — | | | (1,830 | ) | | — | | | (28,407 | ) | | — | | | (2,610 | ) | | — | | | (1,830 | ) | | — | | | (28,407 | ) | New instruments acquired | | — | | — | | — | | 182,376 | | | — | | — | | — | | — | | — | | 182,376 | | Principal repayments and amortization | | — | | | (17,865 | ) | | — | | | (20,661 | ) | | — | | | (25,749 | ) | | — | | | (17,865 | ) | | — | | | (20,661 | ) | Transfers in and/or out of Level 3 | | — | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance | | $ | 760 | | $ | 113,983 | | $ | 5,102 | | $ | 133,678 | | | $ | 4,199 | | $ | 84,354 | | $ | 760 | | $ | 113,983 | | $ | 5,102 | | $ | 133,678 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (1) | | Amounts related to the valuation of interest rate cap agreements which were carried at fair value prior to the adoption of SFAS 159.agreements. | | (2) | | Amounts mostly related to certain private label mortgage-backed securities which were carried at fair value prior to the adoption of SFAS 159.securities. |
The table below summarizes changes in unrealized gains and losses recorded in earnings for the years ended December 31, 20082009 and 20072008 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 | | | | | (Year Ended December 31, 2009) | | (Year Ended December 31, 2008) | | (Year Ended December 31, 2007) | | | | | | | | | | | | Securities | | Securities | | Securities | | Level 3 Instruments Only | | Changes in Unrealized Losses | | Changes in Unrealized Losses | | | Available | | Available | | Available | | (In thousands) | | (Year Ended December 31, 2008) | | | (Year Ended December 31, 2007) | | | Derivatives | | For Sale | | Derivatives | | For Sale | | Derivatives | | For Sale | | Changes in unrealized losses relating to assets still held at reporting date(1) (2): | | | Changes in unrealized losses relating to assets still held at reporting date(1): | | | | | Interest income on loans | | $ | (59 | ) | | $ | (440 | ) | | $ | 45 | | $ | — | | $ | (59 | ) | | $ | — | | $ | (440 | ) | | $ | — | | Interest income on investment securities | | | (4,283 | ) | | | (3,545 | ) | | 3,394 | | — | | | (4,283 | ) | | — | | | (3,545 | ) | | — | | Net impairment losses on investment securities (credit component) | | | — | | | (1,270 | ) | | — | | — | | — | | — | | | | | | | | | | | | | | | | | | | | | | | $ | (4,342 | ) | | $ | (3,985 | ) | | $ | 3,439 | | $ | (1,270 | ) | | $ | (4,342 | ) | | $ | — | | $ | (3,985 | ) | | $ | — | | | | | | | | | | | | | | | | | | | | |
| | | (1) | | Amount represents valuationUnrealized losses of interest rate cap agreements which were carried at fair value prior to the adoption of SFAS 159. | | (2) | | Unrealized loss of$2.6 million, $1.8 million and $28.4 million on Level 3 available for saleavailable-for-sale securities was recognized as part of other comprehensive income for the years ended December 31, 2009, 2008 and 2007, respectively. |
F-52
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additionally, fair value is used on a non-recurringno-recurring basis to evaluate certain assets in accordance with GAAP. Adjustments to fair value usually result from the application of lower-of-cost-or marketlower-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, 2008,2009, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table: | | | | | | | | | | | | | | | | | | | | | | | | Valuation | | | | | | | | | | | | | | | | | | | | | allowance as of | | Losses recorded for | | Losses recorded for | | | December 31, | | the Year Ended | | the Year Ended | | | Carrying value as of December 31, 2008 | | 2008 | | December 31, 2008 | | Carrying value as of December 31, 2009 | | December 31, 2009 | | | Level 1 | | Level 2 | | Level 3 | | | Level 1 | | Level 2 | | Level 3 | | | | (In thousands) | | (In thousands) | Loans receivable (1) | | $ | — | | $ | — | | $ | 209,900 | | $ | 50,512 | | $ | 51,037 | | | $ | — | | $ | — | | $ | 1,103,069 | | $ | 144,024 | | Other Real Estate Owned (2) | | — | | — | | 37,246 | | 11,961 | | 7,698 | | | — | | — | | 69,304 | | 8,419 | | Core deposit intangible (3) | | | — | | — | | 6,683 | | 3,988 | | Loans held for sale (4) | | | — | | 20,775 | | — | | 58 | |
| | | (1) | | Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral in accordance with the provisions of SFAS 114.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 observableobservable. | | (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 have become significantassumptions 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
FIRST BANCORP 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 | | | Carrying value as of December 31, 2008 | | December 31, 2008 | | | Level 1 | | Level 2 | | Level 3 | | | | | | | (In thousands) | Loans receivable (1) | | $ | — | | | $ | — | | | $ | 209,900 | | | $ | 51,037 | | Other Real Estate Owned (2) | | | — | | | | — | | | | 37,246 | | | | 7,698 | |
| | | (1) | | Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value determination.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 Other Real Estate Owned (“OREO”)OREO portfolio. |
As of December 31, 2007, no impairment or valuation adjustment was recognizedadjustments were recorded for assets recognized at fair value on a non-recurring basis except for certain loans as shown in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Valuation | | | | | | | | | | | | | | | | | allowance as of | | Losses recorded for | | | | | | | | | | | | | | | December 31, | | the Year Ended | | | Carrying value as of December 31, 2007 | | 2007 | | December 31, 2007 | | | Level 1 | | Level 2 | | Level 3 | | | | | | | | | | | (In thousands) | Loans receivable (1) | | $ | — | | | $ | 59,418 | | | $ | — | | | $ | 7,523 | | | $ | 5,187 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 thatfor 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 amountamounts 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. Investment securities available for sale and held to maturity The fair value of investment securities is the market value based on quoted market prices, when available, or market prices for identical or comparable assets 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. Refer to NoteNotes 1 and 4 for additional information about the fair value of instruments with limited market activity.private label mortgage-backed securities. F-64
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 Federal Home Loan Bank (FHLB)FHLB regulatory requirements. Their realizable value equals their cost. F-53
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)cost as these shares can be freely redeemed at par.
Loans receivable, including loans held for sale The fair value of all loans was estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality and with adjustments that the Corporation’s Managementmanagement 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 valuevalues of performing fixed-rate and adjustable-rate loans waswere 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 payment assumptions were considered for non-residential loans. For residential mortgage loans, prepayment estimates were based on prepayment experiences 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. 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 risk. Low market liquidity resulted in wider market spreads, which adversely affected the fair value of the Corporation’s loans at December 31, 2008.liquidity. For impaired collateral dependent loans, the impairment was primarily measured based on the fair value of the collateral, (if collateral dependent), which is derived from appraisals that take into consideration prices in observable transactions involving similar assets in similar locations, in accordance with the provisions of SFAS 114.locations. 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. 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 callable 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, for those 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.prices. The fair value does not incorporate the risk of nonperformance, since the callable brokered CDs are generally participated out by brokers in shares of less than $100,000 and insured by the FDIC. Refer Loans payable Loans payable consisted of short-term borrowings under the FED Discount Window Program. Due to Note 1 for additional information.the short-term nature of these borrowings, their outstanding balances are estimated to be the fair value. Federal funds purchased and securitiesSecurities sold under agreements to repurchase
Federal funds purchased and someSome 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 December 31, 2008.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, or using indications of the fair value of similar transactions. The cash flows assumedassume 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. F-54
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 counterparts when appropriate.appropriate, except when collateral is pledged. That is, on interest rate swaps, the credit risk of both counterparts 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 USDUS 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 are mainly composed ofinclude 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 iswas 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 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,” are valued using models that consider unobservable market parameters (Level 3). Reference caps are used mainly to hedge interest rate risk inherent in private label mortgage-backed securities, thus are tied to the notional amount of the underlying fixed-rate mortgage loans originated in the United States. 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. 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 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. 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 $2.4$0.5 million as of December 31, 2008,2009, of which an unrealized loss of $1.9 million was recorded in 2009, an unrealized gain of $1.5 million was recorded in 2008 and an unrealized gain of $0.9 million was recorded in 2007. Certain derivatives with limited market activity, as is the case with derivative instruments named as “reference caps”, are valued using models that consider unobservable market parameters. Refer to Note 1 for additional information about the fair value of derivatives with limited market activity.
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 Swapswap 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 gainloss 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 $4.1$3.1 million and $1.6for 2009, compared to an unrealized gain of $4.1 million for 2008 and 2007, respectively.an unrealized gain of $1.6 million for 2007. The cumulative mark-to-market unrealized gain on the medium-term notes since the adoption of SFAS 159measured at fair value attributable to credit risk amounted to $5.7$2.6 million as of December 31, 2008.2009. Other borrowings Other borrowings consist of junior subordinated debentures. The market valueProjected cash flows from the debentures were discounted using the LIBOR yield curve plus a credit spread. This credit spread was based on market prices observedestimated using the difference in yield curves between Swap rates and a yield curve that considers the market. F-55
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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.
Note 2830 — Supplemental Cash Flow Information Supplemental cash flow information follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | Year Ended December 31, | | | 2008 | | 2007 | | 2006 | | 2009 | | 2008 | | 2007 | | | (In thousands) | | (In thousands) | Cash paid for: | | | | | | Interest on borrowings | | $ | 687,668 | | $ | 721,545 | | $ | 720,439 | | | $ | 494,628 | | $ | 687,668 | | $ | 721,545 | | Income tax | | 3,435 | | 10,142 | | 91,779 | | | 7,391 | | 3,435 | | 10,142 | | | | | Non-cash investing and financing activities: | | | | | | Additions to other real estate owned | | 61,571 | | 17,108 | | 2,989 | | | 98,554 | | 61,571 | | 17,108 | | Additions to auto repossessions | | 87,116 | | 104,728 | | 113,609 | | | 80,568 | | 87,116 | | 104,728 | | Capitalization of servicing assets | | 1,559 | | 1,285 | | 1,121 | | | 6,072 | | 1,559 | | 1,285 | | Loan securitizations | | | 305,378 | | — | | — | | Recharacterization of secured commercial loans as securities collateralized by loans | | — | | 183,830 | | — | | | — | | — | | 183,830 | | Non-cash acquisition of mortgage loans that previously served as collateral of a commercial loan to a local financial institution | | | 205,395 | | — | | — | |
On January 28, 2008, the Corporation completed the acquisition of VICBVirgin 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 2931 — 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, | | | 2008 | | 2007 | | 2009 | | 2008 | | | (In thousands) | | (In thousands) | Financial instruments whose contract amounts represent credit risk: | | | Commitments to extend credit: | | | To originate loans | | $ | 518,281 | | $ | 455,136 | | | $ | 255,598 | | $ | 518,281 | | Unused credit card lines | | 22 | | 19 | | | — | | 22 | | Unused personal lines of credit | | 50,389 | | 61,731 | | | 33,313 | | 50,389 | | Commercial lines of credit | | 863,963 | | 1,109,661 | | | 1,187,004 | | 863,963 | | Commercial letters of credit | | 33,632 | | 41,478 | | | 48,944 | | 33,632 | | | | | Standby letters of credit | | 102,178 | | 112,690 | | | 103,904 | | 102,178 | | | | | Commitments to sell loans | | 50,500 | | 11,801 | | | 13,158 | | 50,500 | |
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 F-67
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 conditionconditions 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. The funding needs patterns of the customers have not significantly changed as a result of the latest market disruptions in 2008. 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. 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. F-56
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 as,as of December 31, 20082009 and 2007,2008, was not significant. In December 2008, theThe Corporation obtained from GNMA, Commitment Authority to issue GNMA mortgage-backed securities for approximately $50.5 million.securities. Under this program, as of December 31, 2009, the Corporation will begin securitizing and sellinghad securitized approximately $305.4 million of FHA/VA mortgage loan production at fair value into the secondary markets.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 constitutes an event of default under thesethose interest rate swap agreements. The Corporation terminated all interest rate swaps with Lehman and replaced them with another counterpartyother counterparties under similar terms and conditions. In connection with the unpaid net cash settlement due as of December 31, 2008,2009 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 has beenwas reserved asin the third quarter of December 31, 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 marketbook value of pledged securities with Lehman as of December 31, 20082009 amounted to approximately $62$64.5 million. The position ofCorporation believes that the Corporation with respect to the recovery of the collateral, after discussion with its outside legal counsel, is that at all times title to the collateral has been vested in the Corporation and that, therefore, thissecurities pledged as collateral should not for any purpose, be considered propertypart of the Lehman bankruptcy estate available for distribution amonggiven the fact that the posted collateral constituted a performance guarantee under the swap agreements, was not part of a financing agreement, and ownership of the securities was never transferred to Lehman. Upon termination of the interest rate swap agreements, Lehman’s creditors. On January 30,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/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’s Capital in New York. After Barclay’s refusal to turn over the securities, the Corporation, during the month of December 2009, filed a customerlawsuit against Barclay’s Capital in federal court in New York demanding the return of the securities. 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 ultimately succeed in its litigation against Barclay’s Capital to recover all or a substantial portion of the securities. 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 trustee and at this timesecurities 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. AsIf 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 3032 — 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 to 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 primarily to the values of its brokered CDsmedium-term notes and medium-term notes.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, 20082009 and 2007,2008, 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 most of the principal derivative activities used by the Corporation in managing interest rate risk: 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. Since a substantial portion of the Corporation’s loans, mainly commercial loans, yield variable rates, interest rate swaps are utilized to convert fixed-rate brokered CDs (liabilities), mainly those with long-term maturities, to a variable rate and mitigate the interest rate risk inherent in these variable rate loans. 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.
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 to protectfor protection against 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. F-57
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSInterest rate swaps — (Continued)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, 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 and mitigate the interest rate risk inherent in variable rate loans. However, most of these interest rate swaps 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 thea 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 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. Effective January 1, 2007, the Corporation adopted SFAS 159 for its callable brokered CDs and a portion of its callable fixed medium-term notes that were hedged with interest rate swaps following fair value hedge accounting under SFAS 133. Interest rate risk on the callable brokered CDs and medium-term notes elected for the fair value option under SFAS 159 continues to be economically hedged with callable interest rate swaps. The following table summarizes the notional amounts of all derivative instruments as of December 31, 20082009 and December 31, 2007:2008: | | | | | | | | | | | Notional Amounts | | | | As of | | | As of | | | | December 31, | | | December 31, | | | | 2008 | | | 2007 | | | | | | | (In thousands) | | Economic undesignated hedges: | | | | | | | | | | | | | | | | | | Interest rate contracts: | | | | | | | | | Interest rate swap agreements used to hedge fixed-rate brokered CDs, notes payable and loans | | $ | 1,184,820 | | | $ | 4,244,473 | | Written interest rate cap agreements | | | 128,043 | | | | 128,075 | | Purchased interest rate cap agreements | | | 276,400 | | | | 294,982 | | | | | | | | | | | Equity contracts: | | | | | | | | | Embedded written options on stock index deposits and notes payable | | | 53,515 | | | | 53,515 | | Purchased options used to manage exposure to the stock market on embedded stock index options | | | 53,515 | | | | 53,515 | | | | | | | | | | | $ | 1,696,293 | | | $ | 4,774,560 | | | | | | | | |
F-58
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | | | | | | | | | Notional Amounts | | | | As of | | | As of | | | | December 31, | | | December 31, | | | | 2009 | | | 2008 | | | | (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 | | Written interest rate cap agreements | | | 102,521 | | | | 128,043 | | Purchased interest rate cap agreements | | | 228,384 | | | | 276,400 | | | | | | | | | | | Equity contracts: | | | | | | | | | Embedded written options on stock index deposits and notes payable | | | 53,515 | | | | 53,515 | | Purchased options used to manage exposure to the stock market on embedded stock index options | | | 53,515 | | | | 53,515 | | | | | | | | | | | $ | 517,502 | | | $ | 1,696,293 | | | | | | | | |
The following table summarizes the fair value of derivative instruments and the location in the Statement of Financial Condition as of December 31, 20082009 and 2007:2008: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | 2008 | | 2007 | | Statement of | | 2008 | | 2007 | | | Statement of | | 2009 | | 2008 | | Statement of | | 2009 | | 2008 | | | | 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 | | $ | 5,649 | | $ | 213 | | Accounts payable and other liabilities | | $ | 7,188 | | $ | 58,057 | | | Other assets | | $ | 319 | | $ | 5,649 | | Accounts payable and other liabilities | | $ | 5,068 | | $ | 7,188 | | Written interest rate cap agreements | | Other assets | | — | | — | | Accounts payable and other liabilities | | 3 | | 47 | | | Other assets | | — | | — | | Accounts payable and other liabilities | | 201 | | 3 | | Purchased interest rate cap agreements | | Other assets | | 764 | | 5,149 | | Accounts payable and other liabilities | | — | | — | | | Other assets | | 4,423 | | 764 | | Accounts payable and other liabilities | | — | | — | | | | | | | | | Equity contracts: | | | | | | | Embedded written options on stock index deposits | | Other assets | | — | | — | | Interest-bearing deposits | | 241 | | 4,375 | | | Other assets | | — | | — | | Interest-bearing deposits | | 14 | | 241 | | Embedded written options on stock index notes payable | | Other assets | | — | | — | | Notes payable | | 1,073 | | 4,673 | | | Other assets | | — | | — | | Notes payable | | 1,184 | | 1,073 | | Purchased options used to manage exposure to the stock market on embedded stock index options | | Other assets | | 1,597 | | 9,339 | | Accounts payable and other liabilities | | — | | — | | | Other assets | | 1,194 | | 1,597 | | Accounts payable and other liabilities | | — | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 8,010 | | $ | 14,701 | | $ | 8,505 | | $ | 67,152 | | | | | $ | 5,936 | | $ | 8,010 | | | | $ | 6,467 | | $ | 8,505 | | | | | | | | | | | | | | | | | | | | | | | | |
F-59F-70
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table summarizes the effect of derivative instruments on the Statement of Income for the years ended December 31, 2009, 2008 2007 and 2006:2007: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized Gain or (Loss) | | | Gain or (Loss) | | | | Location of Unrealized Gain or (Loss) | | Year Ended December 31, | | | Location of Gain or (Loss) | | Year Ended December 31, | | | | Recognized in Income on Derivatives | | 2008 | | 2007 | | 2006 | | | Recognized in Income on Derivatives | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | ECONOMIC UNDESIGNATED HEDGES: | | | | | | | Interest rate contracts: | | | | | | | Interest rate swap agreements used to hedge fixed-rate: | | | | | | | Brokered CDs | | Interest expense — Deposits | | $ | 63,132 | | $ | 66,617 | | $ | (62,521 | ) | | Interest expense - Deposits | | $ | (5,236 | ) | | $ | 63,132 | | $ | 66,617 | | Notes payable | | Interest expense — Notes payable and other borrowings | | 124 | | 1,440 | | | (4,083 | ) | | Interest expense - Notes payable and other borrowings | | 3 | | 124 | | 1,440 | | Loans | | Interest income — Loans | | | (3,696 | ) | | | (2,653 | ) | | 520 | | | Interest income - Loans | | 2,023 | | | (3,696 | ) | | | (2,653 | ) | Corporate bonds | | Interest income — Investment Securities | | — | | — | | 27 | | | | | | | | | | Written and purchased interest rate cap agreements — mortgage-backed securities | | Interest income — Investment Securities | | | (4,283 | ) | | | (3,546 | ) | | — | | | Written and purchased interest rate cap agreements — loans | | Interest income — Loans | | | (58 | ) | | | (439 | ) | | | (472 | ) | | 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 | ) | Equity contracts: | | | | | | | Embedded written and purchased options on stock index deposits | | Interest expense — Deposits | | | (276 | ) | | 209 | | — | | | Interest expense - Deposits | | | (85 | ) | | | (276 | ) | | 209 | | Embedded written and purchased options on stock index notes payable | | Interest expense — Notes payable and other borrowings | | 268 | | | (71 | ) | | — | | | Interest expense - Notes payable and other borrowings | | | (202 | ) | | 268 | | | (71 | ) | | | | | | | | | | | | | | | | | | | Total (loss) gain on derivatives | | | | | $ | (1 | ) | | $ | 55,211 | | $ | 61,557 | | | | | | 55,211 | | 61,557 | | | (66,529 | ) | | | | | | | | | | | | | | | | | | | | | | | | | DERIVATIVES IN FAIR VALUE HEDGE RELATIONSHIP: | | | | | Interest rate contracts: | | | | | Interest rate swap agreements used to hedge fixed-rate (1): | | | | | Brokered CDs | | Interest expense — Deposits | | — | | — | | 7,565 | | | Notes payable | | Interest expense — Notes payable and other borrowings | | — | | — | | 770 | | | | | | | | | | | | | | | | | | — | | — | | 8,335 | | | | | | | | | | | | | | Total Unrealized Gain (Loss) on Derivatives | | | | $ | 55,211 | | $ | 61,557 | | $ | (58,194 | ) | | | | | | | | | | | | |
| | | (1) | | For 2006, represents the ineffective portion resulting from the gain or loss on derivatives offset by the gain or loss on the hedged liability plus the accretion of the basis adjustment of fair value hedges. |
Derivative instruments, such as interest rate swaps, are subject to market risk. The Corporation’s derivatives are mainly composed of interest rate swaps that are used to convert the fixed interest payment on its brokered CDs and medium-term notes to variable payments (receive fixed/pay floating). 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 level of interest rates.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 (economically or under a fair value hedge relationship for 2006) are partially offset by unrealized gains and losses on the valuation of such economically hedged liabilities.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, | | | 2008 | | 2007 | | 2009 | | 2008 | | | Gain | | (Loss) Gain | | Net Unrealized | | Gain | | (Loss) Gain | | Net Unrealized | | Loss | | Gain (Loss) | | Net | | Gain | | (Loss) Gain | | Net | (In thousands) | | on Derivatives | | on SFAS 159 liabilities | | Gain | | on Derivatives | | on SFAS 159 liabilities | | (Loss) / Gain | | on Derivatives | | on liabilities measured at fair value | | Gain (Loss) | | on Derivatives | | on liabilities measured at fair value | | Gain | Interest expense — Deposits | | $ | 62,856 | | $ | (54,199 | ) | | $ | 8,657 | | $ | 66,826 | | $ | (71,116 | ) | | $ | (4,290 | ) | | $ | (5,321 | ) | | $ | 8,696 | | $ | 3,375 | | $ | 62,856 | | $ | (54,199 | ) | | $ | 8,657 | | Interest expense — Notes payable and other borrowings | | 392 | | 4,165 | | 4,557 | | 1,369 | | 494 | | 1,863 | | | Interest expense — Notes payable and Other Borrowings | | | | (199 | ) | | | (3,221 | ) | | | (3,420 | ) | | 392 | | 4,165 | | 4,557 | |
From April 3, 2006 to January 1, 2007, the implementation dateA summary of SFAS 159, the Corporation followed the long-haul method of accounting under SFAS 133 for its portfolio of callable interest rate swaps callable brokered CDsas of December 31, 2009 and callable notes. The long-haul method requires periodic assessment of hedge effectiveness and measurement of ineffectiveness. The ineffectiveness results to the extent that changes in the fair value of a derivative do not offset changes in the fair value of the hedged item. For derivative instruments that were designated and qualified as a fair value hedge in 2006, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk were recognized in current earnings. The Corporation included the gain or loss on the2008 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-60F-71
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) hedged item (callable brokered CDs and medium-term notes) in the same line item as the offsetting loss or gain on the related interest rate swaps as follows:
| | | | | | | | | | | | | | | | | | | Unrealized Loss | | | | | Unrealized Gain | | on hedged | | Ineffective | Income Statement Classification | | on Snaps | | liabilities | | Portion – gain | Interest expense — Deposits | | $ | 78,896 | | | $ | (74,907 | ) | | $ | 3,989 | | Interest expense -Notes payable and other borrowings | | | 3,179 | | | | (2,459 | ) | | | 720 | |
Prior to the implementation of the long-haul method, First BanCorp reflected changes in the fair value of those swaps as well as swaps related to certain loans as non-hedging instruments through operations as part of net interest income.
A summary of interest rate swaps as of December 31, 2008 and 2007 follows:
| | | | | | | | | | | As of | | As of | | | December 31, | | December 31, | | | 2008 | | 2007 | | | (Dollars in thousands) | Pay fixed/receive floating (generally used to economically hedge variable rate loans): | | | | | | | | | Notional amount | | $ | 78,855 | | | $ | 80,212 | | Weighted-average receive rate at period end | | | 3.21 | % | | | 7.09 | % | Weighted-average pay rate at period end | | | 6.75 | % | | | 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 | | $ | 1,105,965 | | | $ | 4,164,261 | | Weighted-average receive rate at period end | | | 5.30 | % | | | 5.26 | % | Weighted-average pay rate at period end | | | 3.09 | % | | | 5.07 | % | Floating rates range from 2 basis points to 54 basis points over 3-month LIBOR | | | | | | | | |
The changes in notional amount of interest rate swaps outstanding during the years ended December 31, 20082009 and 20072008 follows: | | | | | | | Notional Amount | | | | (In thousands) | | Pay-fixed and receive-floating swaps: | | | | | Balance as of December 31, 2006 | | $ | 80,720 | | Cancelled and matured contracts | | | (508 | ) | New contracts | | | — | | | | | | Balance as of December 31, 2007 | | | 80,212 | | Cancelled and matured contracts | | | (1,357 | ) | New contracts | | | — | | | | | | Balance as of December 31, 2008 | | $ | 78,855 | | | | | | | | | | | Receive-fixed and pay floating swaps: | | | | | Balance as of December 31, 2006 | | $ | 4,802,370 | | Cancelled and matured contracts | | | (638,109 | ) | New contracts | | | — | | | | | | Balance as of December 31, 2007 | | | 4,164,261 | | Cancelled and matured contracts | | | (3,426,519 | ) | New contracts | | | 368,222 | | | | | | Balance as of December 31, 2008 | | $ | 1,105,964 | | | | | |
F-61
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | | | | | 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 2008, approximately $3.0the 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 $2.9$1.1 billion swapped-to-floating brokered CDs. The Corporation recorded a net gain in earningsloss of $4.1$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 December 31, 2008,2009, 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 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, 2008 was $52.5 million and $54.2 million, respectively (2008 — $93.2 million and $91.7 million, respectively (2007 — $255 million and $253 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 $8.0$5.9 million (2007(2008 — $14.7$8.0 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 3231 for additional information). There were no credit losses associated with derivative instruments classified as designated hedges or undesignated economic hedges recognized in 20072009 or 2006.2007. As of December 31, 2008,2009, the Corporation had a total net interest settlement payable of $0.3 million (2008 — net interest settlement receivable of $4.1 million (2007 — $8.4 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. F-62
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3133 — Segment Information Based upon the Corporation’s organizational structure and the information provided to the Chief Operating Decision MakerExecutive Officer of the Corporation and, to a lesser extent, the Board of Directors, the operating segments are driven primarily by the Corporation’s legal entities.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, 2008,2009, the Corporation had foursix reportable segments: Commercial and Corporate Banking; Mortgage Banking; Consumer (Retail) Banking; and Treasury and Investments. There is also an Other category reflecting other legal entities reported separately on aggregate basis.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 the public sector and specialized and middle-market clients.clients and 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. 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 orand mortgage brokers.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 InvestmentInvestments segment is responsible for the Corporation’s investment portfolio and treasury functions executed to manage and enhance liquidity. This segment loanslends funds to the Commercial and Corporate Banking, Mortgage Banking and Consumer (Retail) Banking segments to finance their lending activities and borrows from those segments. The Consumer (Retail) Banking segment also loanslends funds to other segments. The interest rates charged or credited by Treasury and Investments and the Consumer (Retail) Banking 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 Other category is mainly composedUnited 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 finance leases and other products.activities. 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, after 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. F-63
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents information about the reportable segments (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage | | | Consumer | | | Commercial and | | | Treasury and | | | | | | | | | | Banking | | | (Retail) Banking | | | Corporate | | | Investments | | | Other | | | Total | | For the year ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | | Interest income | | $ | 188,385 | | | $ | 172,082 | | | $ | 348,469 | | | $ | 288,585 | | | $ | 129,376 | | | $ | 1,126,897 | | Net (charge) credit for transfer of funds | | | (141,174 | ) | | | 77,952 | | | | (211,526 | ) | | | 285,820 | | | | (11,072 | ) | | | — | | Interest expense | | | — | | | | (77,060 | ) | | | — | | | | (487,211 | ) | | | (34,745 | ) | | | (599,016 | ) | | | | | | | | | | | | | | | | | | | | Net interest income | | | 47,211 | | | | 172,974 | | | | 136,943 | | | | 87,194 | | | | 83,559 | | | | 527,881 | | | | | | | | | | | | | | | | | | | | | Provision for loan and lease losses | | | (9,849 | ) | | | (51,317 | ) | | | (78,826 | ) | | | — | | | | (50,956 | ) | | | (190,948 | ) | Non-interest income | | | 3,439 | | | | 28,843 | | | | 4,648 | | | | 25,771 | | | | 11,942 | | | | 74,643 | | Direct non-interest expenses | | | (23,883 | ) | | | (103,790 | ) | | | (41,599 | ) | | | (6,713 | ) | | | (44,524 | ) | | | (220,509 | ) | | | | | | | | | | | | | | | | | | | | Segment income | | $ | 16,918 | | | $ | 46,710 | | | $ | 21,166 | | | $ | 106,252 | | | $ | 21 | | | $ | 191,067 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average earnings assets | | $ | 2,942,444 | | | $ | 1,812,438 | | | $ | 6,089,807 | | | $ | 5,583,681 | | | $ | 1,377,522 | | | $ | 17,805,892 | | | | | | | | | | | | | | | | | | | | | | | | | | | For the year ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | | Interest income | | $ | 165,159 | | | $ | 184,353 | | | $ | 425,109 | | | $ | 284,165 | | | $ | 130,461 | | | $ | 1,189,247 | | Net (charge) credit for transfer of funds | | | (126,145 | ) | | | 101,391 | | | | (289,201 | ) | | | 336,150 | | | | (22,195 | ) | | | — | | Interest expense | | | — | | | | (80,404 | ) | | | — | | | | (624,840 | ) | | | (32,987 | ) | | | (738,231 | ) | | | | | | | | | | | | | | | | | | | | Net interest income (loss) | | | 39,014 | | | | 205,340 | | | | 135,908 | | | | (4,525 | ) | | | 75,279 | | | | 451,016 | | | | | | | | | | | | | | | | | | | | | Provision for loan and lease losses | | | (1,645 | ) | | | (55,633 | ) | | | (41,176 | ) | | | — | | | | (22,156 | ) | | | (120,610 | ) | Non-interest income (loss) | | | 3,019 | | | | 27,314 | | | | 3,778 | | | | (2,161 | ) | | | 17,634 | | | | 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 | | | (21,816 | ) | | | (94,122 | ) | | | (23,161 | ) | | | (7,842 | ) | | | (45,409 | ) | | | (192,350 | ) | | | | | | | | | | | | | | | | | | | | Segment income (loss) | | $ | 18,572 | | | $ | 82,899 | | | $ | 77,846 | | | $ | (14,528 | ) | | $ | 25,348 | | | $ | 190,137 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average earnings assets | | $ | 2,558,779 | | | $ | 1,824,661 | | | $ | 5,471,097 | | | $ | 5,401,148 | | | $ | 1,312,669 | | | $ | 16,568,354 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage | | Consumer | | Commercial and | | Treasury and | | | | | | | Mortgage | | Consumer | | Commercial and | | Treasury and | | United States | | Virgin Islands | | | | (In thousands) | | | Banking | | (Retail) Banking | | Corporate | | Investments | | Operations | | Operations | | Total | | For the year ended December 31, 2009: | | | Interest income | | | $ | 156,729 | | $ | 210,102 | | $ | 239,399 | | $ | 251,949 | | $ | 67,936 | | $ | 70,459 | | $ | 996,574 | | Net (charge) credit for transfer of funds | | | | (117,486 | ) | | 205 | | | (59,080 | ) | | 176,361 | | — | | — | | — | | Interest expense | | | — | | | (60,661 | ) | | — | | | (342,161 | ) | | | (65,360 | ) | | | (9,350 | ) | | | (477,532 | ) | | | Banking | | (Retail) Banking | | Corporate | | Investments | | Other | | Total | | | | | | | | | | | | | | | | | For the year ended December 31, 2006: | | | Net interest income | | | 39,243 | | 149,646 | | 180,319 | | 86,149 | | 2,576 | | 61,109 | | 519,042 | | | | | | | | | | | | | | | | | | | Provision for loan and lease losses | | | | (29,717 | ) | | | (62,457 | ) | | | (273,822 | ) | | — | | | (188,651 | ) | | | (25,211 | ) | | | (579,858 | ) | Non-interest income | | | 8,497 | | 32,003 | | 5,695 | | 84,369 | | 1,460 | | 10,240 | | 142,264 | | Direct non-interest expenses | | | | (32,314 | ) | | | (98,263 | ) | | | (41,948 | ) | | | (7,416 | ) | | | (37,704 | ) | | | (45,364 | ) | | | (263,009 | ) | | | | | | | | | | | | | | | | | | Segment (loss) income | | | $ | (14,291 | ) | | $ | 20,929 | | $ | (129,756 | ) | | $ | 163,102 | | $ | (222,319 | ) | | $ | 774 | | $ | (181,561 | ) | | | | | | | | | | | | | | | | | | | | | Average earnings assets | | | $ | 2,654,504 | | $ | 2,109,602 | | $ | 5,974,950 | | $ | 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 | | Net (charge) credit for transfer of funds | | | | (119,257 | ) | | 3,573 | | | (175,454 | ) | | 291,138 | | — | | — | | — | | Interest expense | | | — | | | (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 | | Provision for loan and lease losses | | | | (8,997 | ) | | | (80,506 | ) | | | (35,504 | ) | | — | | | (53,406 | ) | | | (12,535 | ) | | | (190,948 | ) | Non-interest income (loss) | | | 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 | ) | | | | | | | | | | | | | | | | | | Segment income (loss) | | | $ | 8,287 | | $ | 21,839 | | $ | 56,874 | | $ | 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 | | | | | For the year ended December 31, 2007: | | | Interest income | | $ | 148,811 | | $ | 201,609 | | $ | 472,179 | | $ | 350,038 | | $ | 116,176 | | $ | 1,288,813 | | | $ | 133,068 | | $ | 238,874 | | $ | 335,625 | | $ | 284,155 | | $ | 121,897 | | $ | 75,628 | | $ | 1,189,247 | | Net (charge) credit for transfer of funds | | | (105,431 | ) | | 108,979 | | | (317,446 | ) | | 334,149 | | | (20,251 | ) | | — | | | | (105,459 | ) | | | (794 | ) | | | (230,777 | ) | | 370,451 | | | (33,421 | ) | | — | | — | | Interest expense | | — | | | (72,128 | ) | | — | | | (747,402 | ) | | | (25,589 | ) | | | (845,119 | ) | | — | | | (63,807 | ) | | — | | | (608,119 | ) | | | (49,734 | ) | | | (16,571 | ) | | | (738,231 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | 43,380 | | 238,460 | | 154,733 | | | (63,215 | ) | | 70,336 | | 443,694 | | | 27,609 | | 174,273 | | 104,848 | | 46,487 | | 38,742 | | 59,057 | | 451,016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Provision for loan and lease losses | | | (3,988 | ) | | | (35,482 | ) | | | (7,936 | ) | | — | | | (27,585 | ) | | | (74,991 | ) | | | (1,643 | ) | | | (73,799 | ) | | | (12,465 | ) | | — | | | (30,174 | ) | | | (2,529 | ) | | | (120,610 | ) | Non-interest income (loss) | | 2,471 | | 23,543 | | 4,590 | | | (8,313 | ) | | 19,685 | | 41,976 | | | 2,124 | | 32,529 | | 3,737 | | | (2,161 | ) | | 1,167 | | 12,188 | | 49,584 | | Net gain on partial extinguishment of secured commercial loans to a local financial institution | | — | | — | | | (10,640 | ) | | — | | — | | | (10,640 | ) | | Net gain on partial extinguishment and recharacterization of secured commercial loans to a local financial institution | | | — | | — | | 2,497 | | — | | — | | — | | 2,497 | | Direct non-interest expenses | | | (17,450 | ) | | | (86,905 | ) | | | (16,917 | ) | | | (7,677 | ) | | | (43,890 | ) | | | (172,839 | ) | | | (20,890 | ) | | | (95,169 | ) | | | (20,056 | ) | | | (7,842 | ) | | | (21,848 | ) | | | (42,407 | ) | | | (208,212 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment income (loss) | | $ | 24,413 | | $ | 139,616 | | $ | 123,830 | | $ | (79,205 | ) | | $ | 18,546 | | $ | 227,200 | | | $ | 7,200 | | $ | 37,834 | | $ | 78,561 | | $ | 36,484 | | $ | (12,113 | ) | | $ | 26,309 | | $ | 174,275 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average earnings assets | | $ | 2,283,683 | | $ | 1,919,083 | | $ | 6,298,326 | | $ | 6,787,581 | | $ | 1,156,712 | | $ | 18,445,385 | | | $ | 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, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | Net income: | | | Total income for segments and other | | $ | 191,067 | | $ | 190,137 | | $ | 227,200 | | | Net (loss) income: | | | Total (loss) income for segments and other | | | $ | (181,561 | ) | | $ | 176,120 | | $ | 174,275 | | Other Income | | — | | 15,075 | | — | | | — | | — | | 15,075 | | Other operating expenses | | | (112,862 | ) | | | (115,493 | ) | | | (115,124 | ) | | | (89,092 | ) | | | (97,915 | ) | | | (99,631 | ) | | | | | | | | | | | | | | | | Income before income taxes | | 78,205 | | 89,719 | | 112,076 | | | | (270,653 | ) | | 78,205 | | 89,719 | | Income tax benefit (expense) | | 31,732 | | | (21,583 | ) | | | (27,442 | ) | | Income tax (expense) benefit | | | | (4,534 | ) | | 31,732 | | | (21,583 | ) | | | | | | | | | | | | | | | | Total consolidated net income | | $ | 109,937 | | $ | 68,136 | | $ | 84,634 | | | Total consolidated net (loss) income | | | $ | (275,187 | ) | | $ | 109,937 | | $ | 68,136 | | | | | | | | | | | | | | | | | | | | Average assets: | | | Total average earning assets for segments | | $ | 17,805,892 | | $ | 16,568,354 | | $ | 18,445,385 | | | $ | 19,016,520 | | $ | 17,805,892 | | $ | 16,568,354 | | Average non-earning assets | | 702,064 | | 645,853 | | 737,526 | | | 790,702 | | 702,064 | | 645,853 | | | | | | | | | | | | | | | | | Total consolidated average assets | | $ | 18,507,956 | | $ | 17,214,207 | | $ | 19,182,911 | | | $ | 19,807,222 | | $ | 18,507,956 | | $ | 17,214,207 | | | | | | | | | | | | | | | | |
The following table presents revenues and selected balance sheet data by geography based on the location in which the transaction is originated: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | Revenues: | | | Puerto Rico | | $ | 1,026,188 | | $ | 1,045,523 | | $ | 1,107,451 | | | Puerto Rico(1) | | | $ | 988,743 | | $ | 1,026,188 | | $ | 1,045,523 | | United States | | 91,473 | | 123,064 | | 133,083 | | | 69,396 | | 91,473 | | 123,064 | | Other | | 83,879 | | 87,816 | | 79,615 | | | Virgin Islands | | | 80,699 | | 83,879 | | 87,816 | | | | | | | | | | | | | | | | | Total consolidated revenues | | $ | 1,201,540 | | $ | 1,256,403 | | $ | 1,320,149 | | | $ | 1,138,838 | | $ | 1,201,540 | | $ | 1,256,403 | | | | | | | | | | | | | | | | | | | | Selected Balance Sheet Information: | | | Total assets: | | | Puerto Rico | | $ | 16,824,168 | | $ | 14,633,217 | | $ | 14,688,754 | | | $ | 16,843,767 | | $ | 16,824,168 | | $ | 14,633,217 | | United States | | 1,619,280 | | 1,540,808 | | 1,742,243 | | | 1,716,694 | | 1,619,280 | | 1,540,808 | | Other | | 1,047,820 | | 1,012,906 | | 959,259 | | | Virgin Islands | | | 1,067,987 | | 1,047,820 | | 1,012,906 | | | | | Loans: | | | Puerto Rico | | $ | 10,601,488 | | $ | 9,413,118 | | $ | 8,777,267 | | | $ | 11,614,866 | | $ | 10,601,488 | | $ | 9,413,118 | | United States | | 1,484,011 | | 1,448,613 | | 1,594,141 | | | 1,275,869 | | 1,484,011 | | 1,448,613 | | Other | | 1,002,793 | | 938,015 | | 892,572 | | | Virgin Islands | | | 1,058,491 | | 1,002,793 | | 938,015 | | | | | Deposits: | | | Puerto Rico(1) | | $ | 11,423,019 | | $ | 9,484,103 | | $ | 9,318,931 | | | Puerto Rico | | | $ | 10,497,646 | | $ | 10,746,688 | | $ | 8,776,874 | | United States | | 567,423 | | 532,684 | | 580,917 | | | 1,252,977 | | 1,243,754 | | 1,239,913 | | Other | | 1,066,988 | | 1,017,734 | | 1,104,439 | | | Virgin Islands | | | 918,424 | | 1,066,988 | | 1,017,734 | |
| | | (1) | | Includes brokered certificatesFor 2007, Revenues of deposit used to fund activities conducted in Puerto Rico andoperations include $15.1 million related to reimbursement of expenses, mainly from insurance carriers, related to a class action lawsuit settled in the United States.2007. |
F-65F-75
FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 3234 — Litigations As of December 31, 2008,2009, 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 3335 — 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, 20082009 and 2007,2008, and the results of its operations and cash flows for the years ended on December 31, 2009, 2008 2007 and 2006.2007. Statements of Financial Condition | | | | | | | | | | | | | | | | | | | As of December 31, | | | As of December 31, | | | | 2008 | | 2007 | | | 2009 | | 2008 | | | | (In thousands) | | | (In thousands) | | Assets | | | Cash and due from banks | | $ | 58,075 | | $ | 43,519 | | | $ | 55,423 | | $ | 58,075 | | Money market instruments | | 300 | | 46,293 | | | Money market investments | | | 300 | | 300 | | Investment securities available for sale, at market: | | | Mortgage-backed securities | | — | | 41,234 | | | Equity investments | | 669 | | 2,117 | | | 303 | | 669 | | Other investment securities | | 1,550 | | 1,550 | | | 1,550 | | 1,550 | | Loans receivable, net | | — | | 2,597 | | | Investment in FirstBank Puerto Rico, at equity | | 1,574,940 | | 1,457,899 | | | Investment in FirstBank Insurance Agency, at equity | | 5,640 | | 4,632 | | | Investment in First Bank Puerto Rico, at equity | | | 1,754,217 | | 1,574,940 | | Investment in First Bank Insurance Agency, at equity | | | 6,709 | | 5,640 | | Investment in Ponce General Corporation, at equity | | 123,367 | | 106,120 | | | — | | 123,367 | | Investment in PR Finance, at equity | | 2,789 | | 2,979 | | | 3,036 | | 2,789 | | Accrued interest receivable | | — | | 376 | | | 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 | | 6,596 | | 1,503 | | | 3,194 | | 6,596 | | | | | | | | | | | | | Total assets | | $ | 1,780,885 | | $ | 1,717,778 | | | $ | 1,831,691 | | $ | 1,780,885 | | | | | | | | | | | | | | | | Liabilities & Stockholders’ Equity | | | Liabilities: | | | Other borrowings | | $ | 231,914 | | $ | 282,567 | | | $ | 231,959 | | $ | 231,914 | | Accounts payable and other liabilities | | 854 | | 13,565 | | | 669 | | 854 | | | | | | | | | | | | | Total liabilities | | 232,768 | | 296,132 | | | 232,628 | | 232,768 | | | | | | | | | | | | | | | | Stockholders’ equity | | 1,548,117 | | 1,421,646 | | | 1,599,063 | | 1,548,117 | | | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 1,780,885 | | $ | 1,717,778 | | | $ | 1,831,691 | | $ | 1,780,885 | | | | | | | | | | | | |
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FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Statements of (Loss) Income | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | Income: | | | Interest income on investment securities | | $ | 727 | | $ | 3,029 | | $ | 349 | | | $ | — | | $ | 727 | | $ | 3,029 | | Interest income on other investments | | 1,144 | | 1,289 | | 175 | | | 38 | | 1,144 | | 1,289 | | Interest income on loans | | — | | 631 | | 3,987 | | | — | | — | | 631 | | Dividend from FirstBank Puerto Rico | | 81,852 | | 79,135 | | 107,302 | | | Dividend from First Bank Puerto Rico | | | 46,562 | | 81,852 | | 79,135 | | Dividend from other subsidiaries | | 4,000 | | 1,000 | | 14,500 | | | 1,000 | | 4,000 | | 1,000 | | Other income | | 408 | | 565 | | 543 | | | 496 | | 408 | | 565 | | | | | | | | | | | | | | | | | | | 88,131 | | 85,649 | | 126,856 | | | 48,096 | | 88,131 | | 85,649 | | | | | | | | | | | | | | | | | | | | Expense: | | | Notes payable and other borrowings | | 13,947 | | 18,942 | | 18,189 | | | 8,315 | | 13,947 | | 18,942 | | Interest on funding to subsidiaries | | 550 | | 3,319 | | 4,186 | | | — | | 550 | | 3,319 | | (Recovery) provision for loan losses | | | (1,398 | ) | | 1,300 | | | (71 | ) | | — | | | (1,398 | ) | | 1,300 | | Other operating expenses | | 1,961 | | 2,844 | | 5,390 | | | 2,698 | | 1,961 | | 2,844 | | | | | | | | | | | | | | | | | | | 15,060 | | 26,405 | | 27,694 | | | 11,013 | | 15,060 | | 26,405 | | | | | | | | | | | | | | | | | | | | Net loss on investments and impairments | | | (1,824 | ) | | | (6,643 | ) | | | (12,525 | ) | | | (388 | ) | | | (1,824 | ) | | | (6,643 | ) | | | | | | | | | | | | | | | | | | | Net loss on partial extinguishment and recharacterization of secured commercial loans to a local financial institution | | — | | | (1,207 | ) | | — | | | — | | — | | | (1,207 | ) | | | | | | | | | | | | | | | | | | | Income before income taxes and equity in undistributed earnings (losses) of subsidiaries | | 71,247 | | 51,394 | | 86,637 | | | Income before income taxes and equity in undistributed (losses) earnings of subsidiaries | | | 36,695 | | 71,247 | | 51,394 | | | | | �� | | Income tax (provision) benefit | | | (543 | ) | | | (1,714 | ) | | 1,381 | | | | | | Equity in undistributed earnings (losses) of subsidiaries | | 39,233 | | 18,456 | | | (3,384 | ) | | Income tax provision | | | | (6 | ) | | | (543 | ) | | | (1,714 | ) | Equity in undistributed (losses) earnings of subsidiaries | | | | (311,876 | ) | | 39,233 | | 18,456 | | | | | | | | | | | | | | | | | | | | Net income | | 109,937 | | 68,136 | | 84,634 | | | Net (loss) income | | | | (275,187 | ) | | 109,937 | | 68,136 | | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss), net of tax | | 82,653 | | 4,903 | | | (14,492 | ) | | Other comprehensive (loss) income, net of tax | | | | (30,896 | ) | | 82,653 | | 4,903 | | | | | | | | | | | | | | | | | Comprehensive income | | $ | 192,590 | | $ | 73,039 | | $ | 70,142 | | | Comprehensive (loss) income | | | $ | (306,083 | ) | | $ | 192,590 | | $ | 73,039 | | | | | | | | | | | | | | | | |
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FIRST BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Statements of Cash Flows | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | | | (In thousands) | | | (In thousands) | | Cash flows from operating activities: | | | Net Income | | $ | 109,937 | | $ | 68,136 | | $ | 84,634 | | | Net (loss) income | | | $ | (275,187 | ) | | $ | 109,937 | | $ | 68,136 | | | | | | | | | | | | | | | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | (Recovery) provision for loan losses | | | (1,398 | ) | | 1,300 | | | (71 | ) | | — | | | (1,398 | ) | | 1,300 | | Deferred income tax provision (benefit) | | 543 | | 1,714 | | | (2,572 | ) | | Deferred income tax provision | | | 3 | | 543 | | 1,714 | | Stock-based compensation recognized | | 7 | | — | | — | | | 71 | | 7 | | — | | Equity in undistributed (earnings) losses of subsidiaries | | | (39,233 | ) | | | (18,456 | ) | | 3,384 | | | Net loss (gain) on sale of investment securities | | — | | 733 | | | (2,726 | ) | | Equity in undistributed losses (earnings) of subsidiaries | | | 311,876 | | | (39,233 | ) | | | (18,456 | ) | Net loss on sale of investment securities | | | — | | — | | 733 | | Loss on impairment of investment securities | | 1,824 | | 5,910 | | 15,251 | | | 388 | | 1,824 | | 5,910 | | Net loss on partial extinguishment and recharacterization of secured commercial loans to a local financial institution | | — | | 1,207 | | — | | | — | | — | | 1,207 | | Accretion of discount on investment securities | | | (33 | ) | | | (197 | ) | | — | | | — | | | (33 | ) | | | (197 | ) | Net (increase) decrease in other assets | | | (3,542 | ) | | 52,515 | | | (52,372 | ) | | Net increase (decrease) in other liabilities | | 245 | | | (72,639 | ) | | 2,544 | | | Net decrease (increase) in other assets | | | 3,399 | | | (3,542 | ) | | 52,515 | | Net (decrease) increase in other liabilities | | | | (144 | ) | | 245 | | | (72,639 | ) | | | | | | | | | | | | | | | | Total adjustments | | | (41,587 | ) | | | (27,913 | ) | | | (36,562 | ) | | 315,593 | | | (41,587 | ) | | | (27,913 | ) | | | | | | | | | | | | | | | | | | | Net cash provided by operating activities | | 68,350 | | 40,223 | | 48,072 | | | 40,406 | | 68,350 | | 40,223 | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | Capital contribution to subsidiaries | | | (37,786 | ) | | — | | — | | | | (400,000 | ) | | | (37,786 | ) | | — | | Principal collected on loans | | 3,995 | | 1,622 | | 9,824 | | | — | | 3,995 | | 1,622 | | Purchases of securities available for sale | | — | | — | | | (460 | ) | | — | | — | | — | | Sales, principal repayments and maturity of available-for-sale and held-to-maturity securities | | 1,582 | | 11,403 | | 5,461 | | | — | | 1,582 | | 11,403 | | Other investing activities | | — | | 437 | | — | | | — | | — | | 437 | | | | | | | | | | | | | | | | | Net cash (used in) provided by investing activities | | | (32,209 | ) | | 13,462 | | 14,825 | | | | (400,000 | ) | | | (32,209 | ) | | 13,462 | | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | Proceeds from purchased funds and other short-term borrowings | | — | | — | | 123,247 | | | — | | — | | — | | Repayments of purchased funds and other short-term borrowings | | | (1,450 | ) | | | (5,800 | ) | | | (130,522 | ) | | — | | | (1,450 | ) | | | (5,800 | ) | Issuance of common stock | | — | | 91,924 | | — | | | — | | — | | 91,924 | | Exercise of stock options | | 53 | | — | | 19,756 | | | — | | 53 | | — | | Issuance of preferred stock | | | 400,000 | | — | | — | | Cash dividends paid | | | (66,181 | ) | | | (64,881 | ) | | | (63,566 | ) | | | (43,066 | ) | | | (66,181 | ) | | | (64,881 | ) | Other financing activities | | | 8 | | — | | — | | | | | | | | | | | | | | | | | Net cash (used in) provided by financing activities | | | (67,578 | ) | | 21,243 | | | (51,085 | ) | | Net cash provided by (used in) financing activities | | | 356,942 | | | (67,578 | ) | | 21,243 | | | | | | | | | | | | | | | | | | | | Net (decrease) increase in cash and cash equivalents | | | (31,437 | ) | | 74,928 | | 11,812 | | | | (2,652 | ) | | | (31,437 | ) | | 74,928 | | | | | Cash and cash equivalents at the beginning of the year | | 89,812 | | 14,884 | | 3,072 | | | 58,375 | | 89,812 | | 14,884 | | | | | | | | | | | | | | | | | Cash and cash equivalents at the end of the year | | $ | 58,375 | | $ | 89,812 | | $ | 14,884 | | | $ | 55,723 | | $ | 58,375 | | $ | 89,812 | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents include: | | | Cash and due from banks | | 58,075 | | 43,519 | | 14,584 | | | Money market instruments | | 300 | | 46,293 | | 300 | | | Cash and due form banks | | | 55,423 | | 58,075 | | 43,519 | | Money market investments | | | 300 | | 300 | | 46,293 | | | | | | | | | | | | | | | | | | | $ | 58,375 | | $ | 89,812 | | $ | 14,884 | | | $ | 55,723 | | $ | 58,375 | | $ | 89,812 | | | | | | | | | | | | | | | | |
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FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 34 — Subsequent Events
On January 16, 2009, the Corporation entered into a Letter Agreement with the United States Department of the Treasury (“Treasury”) pursuant to which Treasury invested $400,000,000 in preferred stock of the Corporation under the Treasury’s Troubled Asset Relief Program Capital Purchase Program. Under the Letter Agreement, which incorporates the Securities Purchase Agreement — Standard Terms (the “Purchase Agreement”), the Corporation issued and sold to Treasury (1) 400,000 shares of the Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series F, $1,000 liquidation preference per share (the “Series F Preferred Stock”), and (2) a warrant dated January 16, 2009 (the “Warrant”) to purchase 5,842,259 shares of the Corporation’s common stock (the “Warrant shares”) at an exercise price of $10.27 per share. The exercise price of the Warrant was determined based upon the average of the closing prices of the Corporation’s common stock during the 20-trading day period ended December 19, 2008, the last trading day prior to the date the Corporation’s application to participate in the program was preliminarily approved.
The Series F Preferred Stock qualifies as Tier 1 regulatory capital. Cumulative dividends on the Series F Preferred Stock will 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 F Preferred Stock will rank pari passu with the Corporation’s existing 7.125% Noncumulative Perpetual Monthly Income Preferred Stock, Series A, 8.35% Noncumulative Perpetual Monthly Income Preferred Stock, Series B, 7.40% Noncumulative Perpetual Monthly Income Preferred Stock, Series C, 7.25% Noncumulative Perpetual Monthly Income Preferred Stock, Series D, and 7.00% Noncumulative Perpetual Monthly Income Preferred Stock, Series E, in terms of dividend payments and distributions upon liquidation, dissolution and winding up of the Corporation. The Purchase Agreement contains limitations on 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), of common stock prior to October 14, 2008, which is $0.07 per share. The ability of the Corporation to purchase, redeem or otherwise acquire for consideration, any shares of its common stock, preferred stock or trust preferred securities will be subject to restrictions outlined in the Purchase Agreement. These restrictions will terminate on the earlier of (a) January 16, 2012 and (b) the date on which the Series F Preferred Stock is redeemed in whole or Treasury transfers all of the Series F Preferred Stock to third parties that are not affiliates of Treasury.
The shares of Series F Preferred Stock are non-voting, other than having class voting rights on certain matters that could adversely affect the Series F Preferred Stock.
As per the Purchase Agreement, prior to January 16, 2012, the Corporation may redeem, subject to the approval of the Board of Governors of the Federal Reserve System, the shares of Series F Preferred Stock only with proceeds from one or more “Qualified Equity Offerings,” as such term is defined in the Certificate of Designations. After January 16, 2012, the Corporation may redeem, subject to the approval of the Board of Governors of the Federal Reserve System, in whole or in part, out of funds legally available therefore, the shares of Series F Preferred Stock then outstanding. Pursuant to the recently enacted American Recovery and Reinvestment Act of 2009, subject to consultation with the appropriate Federal banking agency, the Secretary of Treasury may permit a TARP recipient to repay any financial assistance previously provided under TARP without regard as to whether the financial institution has replaced such funds from any other source.
Until such time as Treasury ceases to own any debt or equity securities of the Corporation acquired pursuant to the Purchase Agreement, the Corporation must comply with Section 111(b) of the Emergency Economic Stability Act of 2008 and applicable guidance or regulations issued by the Secretary of Treasury on or prior to January 16, 2009, relating to executive compensation and corporate governance requirements.
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.
None of the shares of Series F Preferred Stock, the Warrant, or the Warrant shares are subject to any contractual restriction on transfer, except that Treasury may not transfer or exercise an aggregate of more than one-half of the
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FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Warrant shares prior to the earlier of the date on which the Corporation receives proceeds from one or more Qualified Equity Offerings in an aggregate amount of at least $400,000,000 and December 31, 2009.
The Series F Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. On February 13, 2009, the Corporation filed a Form S-3 registering the resale of the shares of Series F Preferred Stock, the Warrant and the Warrant shares, and the sale of the Warrant shares by the Corporation to purchasers of the Warrant.
Under the terms of the Purchase Agreement, (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 Emergency Economic Stability Act of 2008 and applicable guidance or regulations issued by the Secretary of Treasury on or prior to January 16, 2009 and (ii) each Senior Executive Officer, as defined in the Purchase Agreement, executed a written waiver releasing 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). Until such time as Treasury ceases to own any debt or equity securities of the Corporation acquired pursuant to the Purchase Agreement, the Corporation must maintain compliance with these requirements.
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 February 28, 2009); | | | – | | 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 potentially more expensive. |
In addition, the net income available to common stockholders will be affected by the declaration of dividends of approximately $20.0 million on an annualized basis and non-cash amortization of the preferred stock’s discount, of approximately $5.4 million on an annual basis for 2009, as a result of this issuance.
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