10-Q 1 fbp06302016x10q.htm 10Q REPORT  

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

____________

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 2016

 

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

 

For the transition period from ___________________ to ___________________

 

COMMISSION FILE NUMBER 001-14793

 

First BanCorp.

 

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

Puerto Rico

 

66-0561882

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification number)

 

 

 

1519 Ponce de León Avenue, Stop 23

Santurce, Puerto Rico

(Address of principal executive offices)

 

00908

(Zip Code)

 

 

 

 

       (787) 729-8200

 

(Registrant’s telephone number, including area code)

Not applicable

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ    No ¨ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

 

Yesþ   No ¨ 

 

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

 

                             Large accelerated filer ¨                                                                                              Accelerated filer þ 

                              

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes ¨   No þ 

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

 

Common stock: 217,177,665 shares outstanding as of July 29, 2016.

 


 

 

FIRST BANCORP.

INDEX PAGE

 

 

PART I FINANCIAL INFORMATION 

PAGE

Item 1. Financial Statements:

 

Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2016 and December 31, 2015 

 

5

Consolidated Statements of Income (Loss) (Unaudited) – Quarters ended June 30, 2016 and 2015 and six-month periods ended June 30, 2016 and 2015

 

6

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Quarters ended June 30, 2016 and 2015 and six-month periods ended June 30, 2016 and 2015

 

7

Consolidated Statements of Cash Flows (Unaudited) – Six-month periods ended June 30, 2016 and 2015

 

8

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Six-month periods ended June 30, 2016 and 2015

 

9

   Notes to Consolidated Financial Statements (Unaudited)                                              

10

Item 2. Management's Discussion and Analysis of Financial Condition

 

            and Results of Operations                                                                          

77

Item 3. Quantitative and Qualitative Disclosures About Market Risk

136

Item 4. Controls and Procedures

136

 

 

PART II. OTHER INFORMATION

 

Item 1.    Legal Proceedings

137

Item 1A. Risk Factors

137

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

139

Item 3.    Defaults Upon Senior Securities

140

Item 4.    Mine Safety Disclosures 

140

Item 5.    Other Information

140

Item 6.    Exhibits

140

 

 

SIGNATURES           

 

 

2 

 


 

 

Forward Looking Statements

 

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the safe harbors created by such sections.  When used in this Form 10-Q or future filings by First BanCorp. (the “Corporation”) with the U.S. Securities and Exchange Commission (“SEC”), in the Corporation’s press releases or in other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would,” “will allow,” “intends,” “will likely result,” “expect to,” “should,” “anticipate,” “look forward,” “believes,” and other terms of similar meaning or import in connection with any discussion of future operating, financial or other performance are meant to identify “forward-looking statements.”

 

FirstBanCorp. wishes to caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and to advise readers that these forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by us that are difficult to predict.  Various factors, some of which are beyond our control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements.  Factors that might cause such a difference include, but are not limited to, the risks described or referenced below in Item 1A. “Risk Factors,” and the following:

 

·         the ability of the Puerto Rico government or any of its public corporations or other instrumentalities to repay its respective debt obligations, including the effect of recent payment defaults on the Puerto Rico government general obligations, bonds of the Government Development Bank for Puerto Rico (the“GDB”) and certain bonds of government public corporations, and recent and any future downgrades of the long-term and short-term debt ratings of the Puerto Rico government, which could exacerbate Puerto Rico’s adverse economic conditions and, in turn, further adversely impact the Corporation;

 

·         uncertainty as to the ultimate outcomes of actions resulting from the enactment by the U.S. government of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) to address Puerto Rico’s financial problems;

 

·         uncertainty about whether the Corporation will be able to continue to fully comply with the written agreement dated June 3, 2010 (the “Written Agreement”) that the Corporation entered into with the Federal Reserve Bank of New York (the “New York FED” or “Federal Reserve”) that, among other things, requires the Corporation to serve as a source of strength to FirstBank Puerto Rico (“FirstBank” or the “Bank”) and that, except with the consent generally of the New York FED and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), prohibits the Corporation from paying dividends to stockholders or receiving dividends from FirstBank, making payments on trust preferred securities or subordinated debt and incurring, increasing or guaranteeing debt or repurchasing any capital securities and uncertainty whether such consent will be provided for future interest payments on the subordinated debt despite the consent that enabled the Corporation to pay all the accrued but deferred interest payments plus the interest for the second quarter of 2016 on the Corporation’s subordinated debentures associated with its trust preferred securities;

 

·         a decrease in demand for the Corporation’s products and services and lower revenues and earnings because of the continued recession in Puerto Rico;

 

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

 

·         the Corporation’s reliance on brokered CDs to fund operations and provide liquidity;

 

·         the risk of not being able to fulfill the Corporation’s cash obligations or resume paying dividends to the Corporation’s stockholders in the future due to the Corporation’s need to receive approval from the New York FED and the Federal Reserve Board to declare or pay any dividends and to take dividends or any other form of payment representing a reduction in capital from FirstBank or FirstBank’s failure to generate sufficient cash flow to make a dividend payment to the Corporation;

 

·         the weakness of the real estate markets and of the consumer and commercial sectors and their impact on the credit quality of the Corporation’s loans and other assets, which have contributed and may continue to contribute to, among other things, high levels of non-performing assets, charge-offs and provisions for loan and lease losses and may subject the Corporation to further risk from loan defaults and foreclosures;

 

·         the ability of FirstBank to realize the benefits of its deferred tax assets subject to the remaining valuation allowance;

 

·         adverse changes in general economic conditions in Puerto Rico, the U.S., and the U.S. Virgin Islands (“USVI”) and British Virgin Islands (“BVI”), including the interest rate environment, market liquidity, housing absorption rates, real estate prices, and disruptions in the U.S. capital markets, which reduced interest margins and affected funding sources, and has affected

3 

 


 

 

demand for all of the Corporation’s products and services and reduced the Corporation’s revenues and earnings, and the value of the Corporation’s assets, and may continue to have these effects;

 

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

 

·         the risk that additional portions of the unrealized losses in the Corporation’s investment portfolio are determined to be other-than-temporary, including additional impairments on the Puerto Rico government’s obligations;   

 

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

 

·         changes in the fiscal and monetary policies and regulations of the U.S. federal government and the Puerto Rico and other governments, including those determined by the Federal Reserve Board, the New York FED, the Federal Deposit Insurance Corporation (“FDIC”), government-sponsored housing agencies, and regulators in Puerto Rico, the USVI and the BVI;

 

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

 

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

 

·         the impact on the Corporation’s results of operations and financial condition of acquisitions and dispositions;

 

·         a need to recognize impairments on the Corporation’s financial instruments, goodwill or other intangible assets relating to acquisitions;

 

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

 

·         the impact on the Corporation’s businesses, business practices and results of operations of a potential higher interest rate environment; and

 

·         general competitive factors and industry consolidation.

 

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

 

Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015, as well as “Part II, Item 1A, Risk Factors” in this quarterly report on Form 10-Q, for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

4 

 


 

 

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

  

June 30, 2016

  

December 31, 2015

(In thousands, except for share information)

  

  

  

  

  

ASSETS

  

  

  

  

  

Cash and due from banks

$

 617,827 

  

$

 532,985 

Money market investments:

  

  

  

  

  

   Time deposits with other financial institutions

  

 2,800 

  

  

 3,000 

   Other short-term investments

  

 207,287 

  

  

 216,473 

      Total money market investments

  

 210,087 

  

  

 219,473 

Investment securities available for sale, at fair value:

  

  

  

  

  

   Securities pledged that can be repledged

  

 780,895 

  

  

 793,562 

   Other investment securities

  

 1,222,154 

  

  

 1,092,833 

      Total investment securities available for sale

  

 2,003,049 

  

  

 1,886,395 

Investment securities held to maturity, at amortized cost:

  

  

  

  

  

   Securities pledged that can be repledged

  

 - 

  

  

 - 

   Other investment securities

  

 161,342 

  

  

 161,483 

      Total investment securities held to maturity

  

 161,342 

  

  

 161,483 

Other equity securities

  

 32,379 

  

  

 32,169 

Loans, net of allowance for loan and lease losses of $234,454

  

  

  

  

  

   (2015 - $240,710)

  

 8,636,293 

  

  

 8,871,672 

Loans held for sale, at lower of cost or market

  

 37,958 

  

  

 35,869 

      Total loans, net

  

 8,674,251 

  

  

 8,907,541 

Premises and equipment, net

  

 155,608 

  

  

 161,016 

Other real estate owned

  

 139,159 

  

  

 146,801 

Accrued interest receivable on loans and investments

  

 45,984 

  

  

 48,697 

Other assets

  

 469,016 

  

  

 476,459 

      Total assets

$

 12,508,702 

  

$

 12,573,019 

LIABILITIES

  

  

  

  

  

Non-interest-bearing deposits

$

 1,409,072 

  

$

 1,336,559 

Interest-bearing deposits

  

 7,815,947 

  

  

 8,001,565 

      Total deposits

  

 9,225,019 

  

  

 9,338,124 

Securities sold under agreements to repurchase

  

 700,000 

  

  

 700,000 

Advances from the Federal Home Loan Bank (FHLB)

  

 455,000 

  

  

 455,000 

Other borrowings

  

 216,187 

  

  

 226,492 

Accounts payable and other liabilities

  

 126,043 

  

  

 159,269 

      Total liabilities

  

 10,722,249 

  

  

 10,878,885 

STOCKHOLDERS' EQUITY

  

  

  

  

  

Preferred stock, authorized, 50,000,000 shares:

  

  

  

  

  

Non-cumulative Perpetual Monthly Income Preferred Stock: issued 22,004,000

  

  

  

  

  

 shares, outstanding 1,444,146 shares, aggregate liquidation value of $36,104

  

 36,104 

  

  

 36,104 

Common stock, $0.10 par value, authorized, 2,000,000,000 shares; 

  

  

  

  

  

    issued, 218,278,207 shares (2015 - 216,051,128 shares issued)

  

 21,828 

  

  

 21,605 

Less: Treasury stock (at par value)

  

(115)

  

  

(96)

Common stock outstanding, 217,129,074 shares outstanding (2015 - 215,088,698

  

  

  

  

  

   shares outstanding)

  

 21,713 

  

  

 21,509 

Additional paid-in capital

  

 928,900 

  

  

 926,348 

Retained earnings, includes legal surplus reserve of $42,798

  

 783,219 

  

  

 737,922 

Accumulated other comprehensive income (loss), net of tax of $7,752

  

 16,517 

  

  

 (27,749) 

    Total stockholders' equity

  

 1,786,453 

  

  

 1,694,134 

      Total liabilities and stockholders' equity

$

 12,508,702 

  

$

 12,573,019 

  

  

  

  

  

  

The accompanying notes are an integral part of these statements.

5 

 


 

 

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

  

Quarter Ended

  

Six-Month Period Ended

  

June 30,

  

June 30,

  

2016 

  

2015 

  

2016 

  

2015 

  

  

  

  

  

  

  

  

  

  

  

  

(In thousands, except per share information)

  

  

  

  

  

  

  

  

  

  

  

  

Interest and dividend income:

  

  

  

  

  

  

  

  

  

  

  

   Loans

$

 132,111 

  

$

 137,997 

  

$

 267,250 

  

$

 275,497 

   Investment securities

  

 13,552 

  

  

 13,125 

  

  

 28,171 

  

  

 27,573 

   Money market investments

  

 1,271 

  

  

 510 

  

  

 2,344 

  

  

 1,047 

      Total interest income

 146,934 

  

 151,632 

  

 297,765 

  

 304,117 

Interest expense:

  

  

  

  

  

  

  

  

  

  

  

   Deposits

  

 17,224 

  

  

 16,980 

  

  

 34,481 

  

  

 34,674 

   Securities sold under agreements to repurchase

  

 6,029 

  

  

 5,388 

  

  

 11,505 

  

  

 11,781 

   Advances from FHLB

  

 1,471 

  

  

 944 

  

  

 2,942 

  

  

 1,878 

   Other borrowings

  

 1,982 

  

  

 1,843 

  

  

 3,961 

  

  

 3,660 

      Total interest expense

 26,706 

  

 25,155 

  

 52,889 

  

 51,993 

         Net interest income

  

 120,228 

  

  

 126,477 

  

  

 244,876 

  

  

 252,124 

Provision for loan and lease losses

  

 20,986 

  

  

 74,266 

  

  

 42,039 

  

  

 107,236 

Net interest income after provision for loan and lease losses

 99,242 

  

 52,211 

  

 202,837 

  

 144,888 

Non-interest income:

  

  

  

  

  

  

  

  

  

  

  

   Service charges and fees on deposit accounts

  

 5,618 

  

  

 5,219 

  

  

 11,418 

  

  

 9,774 

   Mortgage banking activities

  

 4,893 

  

  

 4,763 

  

  

 9,646 

  

  

 8,381 

   Net gain on sale of investments

  

 - 

  

  

 - 

  

  

 8 

  

  

 - 

   Other-than-temporary impairment (OTTI) losses on available-for-sale debt securities:

  

  

  

  

  

  

  

  

  

  

  

      Total other-than-temporary impairment losses

  

 - 

  

  

 (29,521) 

  

  

 (1,845) 

  

  

 (29,521) 

      Portion of other-than-temporary impairment

  

  

  

  

  

  

  

  

  

  

  

         recognized in other comprehensive income (OCI)

  

 - 

  

  

 16,424 

  

  

 (4,842) 

  

  

 16,268 

   Net impairment losses on available-for-sale debt securities

  

 - 

  

  

 (13,097) 

  

  

(6,687)

  

  

 (13,253) 

   Gain on early extinguishment of debt

  

 - 

  

  

 - 

  

  

 4,217 

  

  

 - 

   Insurance commission income

  

 1,542 

  

  

 1,522 

  

  

 4,811 

  

  

 4,544 

   Bargain purchase gain

  

 - 

  

  

 - 

  

  

 - 

  

  

 13,443 

   Other non-interest income

  

 7,725 

  

  

 8,263 

  

  

 14,834 

  

  

 16,510 

      Total non-interest income

 19,778 

  

 6,670 

  

38,247 

  

 39,399 

Non-interest expenses:

  

  

  

  

  

  

  

  

  

  

  

   Employees' compensation and benefits

  

 37,401 

  

  

 37,945 

  

  

 75,836 

  

  

 73,599 

   Occupancy and equipment

  

 13,043 

  

  

 15,059 

  

  

 27,226 

  

  

 29,408 

   Business promotion

  

 4,048 

  

  

 3,934 

  

  

 8,051 

  

  

 6,802 

   Professional fees

  

 11,327 

  

  

 19,005 

  

  

 22,103 

  

  

 34,223 

   Taxes, other than income taxes

  

 3,756 

  

  

 3,131 

  

  

 7,548 

  

  

 6,132 

   Insurance and supervisory fees

  

 7,066 

  

  

 6,796 

  

  

 14,409 

  

  

 13,656 

   Net loss on other real estate owned (OREO) and OREO operations

  

 3,325 

  

  

 4,874 

  

  

 6,531 

  

  

 7,502 

   Credit and debit card processing expenses

  

 3,274 

  

  

 3,945 

  

  

 6,556 

  

  

 7,902 

   Communications

  

 1,725 

  

  

 2,045 

  

  

 3,533 

  

  

 3,653 

   Other non-interest expenses

  

 4,579 

  

  

 6,065 

  

  

 10,748 

  

  

 11,650 

      Total non-interest expenses

 89,544 

  

 102,799 

  

 182,541 

  

 194,527 

Income (loss) before income taxes

  

 29,476 

  

  

 (43,918) 

  

  

58,543 

  

  

 (10,240) 

Income tax (expense) benefit

  

(7,523)

  

  

9,844 

  

  

(13,246)

  

  

1,812 

Net income (loss)

$

 21,953 

  

$

 (34,074) 

  

$

45,297 

  

$

 (8,428) 

Net income (loss) attributable to common stockholders

$

 21,953 

  

$

 (34,074) 

  

$

45,297 

  

$

 (8,428) 

Net income (loss) per common share:

  

  

  

  

  

  

  

  

  

  

  

   Basic

$

 0.10 

  

$

 (0.16) 

  

$

0.21 

  

$

 (0.04) 

   Diluted

$

 0.10 

  

$

 (0.16) 

  

$

0.21 

  

$

 (0.04) 

Dividends declared per common share

$

 - 

  

$

 - 

  

$

 - 

  

$

 - 

  

  

  

  

  

  

  

  

  

  

  

  

The accompanying notes are an integral part of these statements.

6 

 


 

 

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

  

Quarter Ended

  

Six-Month Period Ended

  

June 30, 2016

  

June 30, 2015

  

June 30, 2016

  

June 30, 2015

(In thousands)

  

  

Net income (loss)

$

 21,953 

  

$

 (34,074) 

  

$

 45,297 

  

$

 (8,428) 

Available-for-sale debt securities on which an other-than-temporary

  

  

  

  

  

  

  

  

  

  

  

   impairment has been recognized:

  

  

  

  

  

  

  

  

  

  

  

      Unrealized gain on debt securities on which an

  

  

  

  

  

  

  

  

  

  

  

          other-than-temporary impairment has been recognized

  

 2,453 

  

  

 683 

  

  

 1,455 

  

  

 1,372 

      Reclassification adjustment for other-than-temporary impairment

  

  

  

  

  

  

  

  

  

  

  

          on debt securities included in net income

  

 - 

  

  

 13,097 

  

  

 6,687 

  

  

 13,253 

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

  

  

  

  

  

  

  

  

  

  

  

      Reclassification adjustments for net gain included in net income

  

 - 

  

  

 - 

  

  

 (8) 

  

  

 - 

All other unrealized holding gains (losses) on

  

  

  

  

  

  

  

  

  

  

  

    available-for-sale securities arising during the period

  

 11,422 

  

  

 (23,948) 

  

  

 36,132 

  

  

 (17,653) 

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

  

 13,875 

  

  

 (10,168) 

  

  

 44,266 

  

  

 (3,028) 

         Total comprehensive income (loss)

$

 35,828 

  

$

 (44,242) 

  

$

89,563 

  

$

 (11,456) 

  

  

  

  

  

  

  

  

  

  

  

  

The accompanying notes are an integral part of these statements.

  

  

  

  

  

  

  

  

  

  

  

  

7 

 


 

 

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Unaudited) 

  

Six-Month Period Ended

  

June 30,

  

June 30,

  

2016 

  

2015 

(In thousands)

  

  

  

  

  

Cash flows from operating activities:

  

  

  

  

  

   Net income (loss)

$

45,297 

  

$

 (8,428) 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

  

  

  

  

  

   Depreciation and amortization

  

 9,015 

  

  

 10,561 

   Amortization of intangible assets

  

 2,442 

  

  

 2,491 

   Provision for loan and lease losses

  

 42,039 

  

  

 107,236 

   Deferred income tax expense

  

11,972 

  

  

 2,683 

   Stock-based compensation

  

 3,346 

  

  

 3,043 

   Gain on sales of investments

  

 (8) 

  

  

 - 

   Bargain purchase gain

  

 - 

  

  

 (13,443) 

   Gain on early extinguishment of debt

  

 (4,217) 

  

  

 - 

   Other-than-temporary impairments on debt securities

  

 6,687 

  

  

 13,253 

   Unrealized loss (gain) on derivative instruments

  

243 

  

  

(182)

   Net gain on disposition of premises and equipment and other assets

  

(686)

  

  

 (178) 

   Net gain on sales of loans

  

(5,089)

  

  

(3,157)

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

  

(4,624)

  

  

 (2,217) 

   Originations and purchases of loans held for sale

  

(220,056)

  

  

(213,586)

   Sales and repayments of loans held for sale

  

 224,765 

  

  

 210,394 

   Amortization of broker placement fees

  

 1,645 

  

  

 2,504 

   Net amortization/accretion of premium and discounts on investment securities

  

 1,898 

  

  

 3,803 

   Decrease in accrued interest receivable

  

2,713 

  

  

313 

   (Decrease) increase in accrued interest payable

  

 (26,580) 

  

  

1,737 

   Decrease (increase) in other assets

  

 2,816 

  

  

 (627) 

   (Decrease) increase in other liabilities

  

 (11,414) 

  

  

 16,523 

        Net cash provided by operating activities

  

 82,204 

  

  

 132,723 

  

  

  

  

  

  

Cash flows from investing activities:

  

  

  

  

  

   Principal collected on loans

  

 1,494,316 

  

  

 1,563,520 

   Loans originated and purchased

  

(1,321,511)

  

  

(1,437,877)

   Proceeds from sales of loans held for investment

  

 - 

  

  

 107,702 

   Proceeds from sales of repossessed assets

  

 27,674 

  

  

 33,720 

   Proceeds from sales of available-for-sale securities

  

 14,990 

  

  

 - 

   Purchases of available-for-sale securities

  

(279,500)

  

  

(158,932)

   Purchase of securities held to maturity

  

 - 

  

  

 (4,530) 

   Proceeds from principal repayments and maturities of available-for-sale securities

  

 183,570 

  

  

 141,226 

   Proceeds from principal repayments and maturities of held-to-maturity securities

  

 141 

  

  

 142 

   Additions to premises and equipment

  

(5,280)

  

  

(6,161)

   Purchases of other equity securities

  

 (210) 

  

  

 (400) 

   Proceeds from sale of premises and equipment and other assets

  

 2,250 

  

  

 2,511 

   Net cash received from acquisition

  

 - 

  

  

 217,659 

   Net cash outflows from purchase/sale of insurance contracts

  

 (960) 

  

  

        Net cash provided by investing activities

  

115,480 

  

  

 458,580 

  

  

  

  

  

  

Cash flows from financing activities:

  

  

  

  

  

   Net decrease in deposits

  

 (114,613) 

  

  

(504,270)

   Change in securities sold under agreements to repurchase

  

 - 

  

  

 (200,000) 

   Repurchase of outstanding common stock

  

(590)

  

  

 (738) 

   Repayment of junior subordinated debentures

  

 (7,025) 

  

  

 - 

        Net cash used in financing activities

  

(122,228)

  

  

 (705,008) 

  

  

  

  

  

  

Net increase (decrease) in cash and cash equivalents

  

75,456 

  

  

 (113,705) 

Cash and cash equivalents at beginning of period

  

 752,458 

  

  

 796,108 

Cash and cash equivalents at end of period

$

 827,914 

  

$

 682,403 

  

  

  

  

  

  

Cash and cash equivalents include:

  

  

  

  

  

   Cash and due from banks

$

 617,827 

  

$

 462,934 

   Money market instruments

  

 210,087 

  

  

 219,469 

  

$

 827,914 

  

$

 682,403 

The accompanying notes are an integral part of these statements.

  

  

  

  

  

  

  

  

  

  

  

8 

 


 

 

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

  

Six-Month Period Ended

  

June 30,

  

June 30,

  

2016 

  

2015 

(In thousands)

  

  

  

  

  

  

  

  

  

  

Preferred Stock

$

 36,104 

  

$

 36,104 

  

  

  

  

  

  

Common Stock outstanding:

  

  

  

  

  

Balance at beginning of period

  

 21,509 

  

  

 21,298 

Common stock issued as compensation

  

 44 

  

  

 17 

Common stock withheld for taxes

  

 (19) 

  

  

 (12) 

Common stock issued in exchange for trust preferred securities

  

 - 

  

  

 85 

Restricted stock grants

  

 179 

  

  

 83 

Restricted stock forfeited

  

 - 

  

  

 (2) 

      Balance at end of period

  

 21,713 

  

  

 21,469 

  

  

  

  

  

  

Additional Paid-In-Capital:

  

  

  

  

  

Balance at beginning of period

  

 926,348 

  

  

 916,067 

Stock-based compensation

  

 3,346 

  

  

 3,043 

Common stock withheld for taxes

  

 (571) 

  

  

 (726) 

Common stock issued in exchange for trust preferred securities

  

 - 

  

  

 5,543 

Restricted stock grants

  

 (179) 

  

  

 (83) 

Common stock issued as compensation

  

 (44) 

  

  

 (17) 

Restricted stock forfeited

  

 - 

  

  

 2 

      Balance at end of period

  

 928,900 

  

  

 923,829 

  

  

  

  

  

  

Retained Earnings:

  

  

  

  

  

Balance at beginning of period

  

 737,922 

  

  

 716,625 

Net income (loss)

  

 45,297 

  

  

 (8,428) 

      Balance at end of period

  

 783,219 

  

  

 708,197 

  

  

  

  

  

  

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

  

  

  

  

  

 Balance at beginning of period

  

 (27,749) 

  

  

 (18,351) 

 Other comprehensive income (loss), net of tax

  

44,266 

  

  

 (3,028) 

      Balance at end of period

  

16,517 

  

  

 (21,379) 

  

  

  

  

  

  

         Total stockholders' equity

$

 1,786,453 

  

$

 1,668,220 

  

  

  

  

  

  

The accompanying notes are an integral part of these statements.

  

  

  

  

  

9 

 


 

 

FIRST BANCORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

                            

The Consolidated Financial Statements (unaudited) of First BanCorp. (the “Corporation”) have been prepared in conformity with the accounting policies stated in the Corporation’s Audited Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015. Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted from these statements pursuant to the rules and regulations of the SEC and, accordingly, these financial statements should be read  in conjunction with the Audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2015, which are included in the Corporation’s 2015 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the statement of financial position, results of operations and cash flows for the interim periods have been reflected. All intercompany accounts and transactions have been eliminated in consolidation.

 

During the second quarter of 2016, the Corporation reviewed its historical accounting treatment as loans for its $161.3 million of financing arrangements with Puerto Rico municipalities issued in bond form, but underwritten as loans with features that are typically found in commercial loan transactions. This review came as a result of the recent determination of the Federal Reserve Board that the transactions must be treated for regulatory reporting purposes as investment securities.  The Puerto Rico Municipal Finance Act (the “Act”) requires the designation of financing arrangements obtained by municipalities with maturities greater than 8 years as “special obligation bonds” subject to specific provisions under the Act.  The Corporation has concluded that the impact of accounting for the transactions as investment securities rather than loans does not have a material effect on previously reported results of operations, financial condition, or cash flows and, accordingly, these financing arrangements are now accounted for and reported as held-to-maturity investment securities and not as loans as of June 30, 2016 and for prior periods.

 

The results of operations for the quarter and six-month period ended June 30, 2016 are not necessarily indicative of the results to be expected for the entire year. 

 

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

 

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

 

In June 2014, the FASB updated the Accounting Standards Codification (the “Codification” or the “ASC”) to provide guidance for determining compensation cost when an employee’s compensation award is eligible to vest regardless of whether the employee is rendering service on the date the performance target is achieved. This Update is effective for annual and interim periods beginning after December 15, 2015. The adoption of this guidance did not have an impact on the Corporation’s financial statements.

 

In November 2014, the FASB updated the Codification to clarify how current GAAP should be interpreted in evaluating the economic characteristics and risk of a host contract in a hybrid financial instrument that is issued in the form of a share. In addition, the Update was issued to clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (that is, the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. The effects of initially adopting this Update should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective. Retrospective application is permitted to all relevant prior periods. This Update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this guidance did not have an impact on the Corporation’s financial statements.

 

In January 2015, the FASB updated the Codification to eliminate from GAAP the concept of extraordinary items as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative).  Under current GAAP, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. In order to be classified as an extraordinary item, the event or transaction must be: (i) unusual in nature and (ii) infrequent in occurrence.  Before the Update was issued, an entity was required to segregate these items from the results of ordinary operations and show the items separately in the income statement, net of tax, after income from continuing operations. This Update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this guidance did not have an impact on the Corporation’s financial statements.

 

In February 2015, the FASB updated the Codification to eliminate the deferral of the requirements of Accounting Standards Update (“ASU”) No. 2009-17 for certain interests in investment funds and provide a scope for exception for certain investments in money market funds. While the Update is aimed at asset managers, it will affect all reporting entities involved with limited partnerships or similar entities. In some cases, consolidation conclusions will change. In other cases, reporting entities will need to provide additional

10 

 


 

 

disclosure about entities that currently are not considered Variable Interest Entities (“VIEs”) but will be considered VIEs under the new guidance when they have a variable interest in those VIEs.  Regardless of whether conclusions change or additional disclosure requirements are triggered, reporting entities will need to re-evaluate limited partnerships and similar entities for consolidation and revise their documentation. For public business entities, the Update is effective for annual and interim periods beginning after December 15, 2015. A reporting entity must apply the amendments retrospectively. The adoption of this guidance did not have an impact on the Corporation’s financial statements.

 

In April 2015, the FASB updated the Codification to clarify that customers should determine whether a cloud computing arrangement includes the license of software by applying the same guidance cloud service providers use to make this determination. Examples of cloud computing arrangements include software as a service, platform as a service, infrastructure as a service and other hosting arrangements. If a hosting arrangement includes a software license for internal use software, the software license should be accounted for by the customer under ASC 350-40. A license of software other than internal use software would be accounted for by the customer under other GAAP (e.g., a research and development cost and software to be sold, leased or otherwise marketed). A software license included in a hosting arrangement would be accounted for separately from any service contract in the arrangement. Hosting arrangements that do not include software licenses should be accounted for as service contracts. The Update also eliminates the existing requirement for customers to account for software licenses they acquire by analogizing to the guidance on leases. Instead, customers will account for software licenses that are in the scope of ASC 350-40 in the same manner as licenses of other intangible assets. Entities have the option of applying the guidance (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. Entities that elect prospective application are required to disclose the reason for the change in accounting principle, the transition method, and a description of the financial statement line items affected by the change. Entities that elect retrospective application must disclose the information required by ASC 250. For public business entities, the guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. The adoption of this guidance did not have an impact on the Corporation’s financial statements.

 

In May 2015, the FASB updated the Codification to provide guidance on disclosures for investments in certain entities that calculate net asset value (NAV) per share (or its equivalent). This Update removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and modifies certain disclosure requirements. This guidance is effective for interim and annual reporting periods in fiscal years beginning after December 31, 2015, and requires retrospective adoption. The adoption of this pronouncement did not have an impact on the Corporation’s financial statements.

 

   In September 2015, the FASB updated the Codification to simplify the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. This Update allows the acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer must record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Also, this Update requires entities to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. Prior to this Update, GAAP required that, during the measurement period, the acquirer retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. The acquirer also had to revise comparative information for prior periods presented in financial statements as needed, including revising depreciation, amortization, or other income effects as a result of changes made to provisional amounts. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not been issued. The adoption of this guidance did not have an impact on the Corporation’s financial statements.

 

  In March 2016, the FASB updated the Codification to simplify certain aspects of the accounting for share-based payment transactions. The main provisions in this Update include: (i) recognition of all tax benefits and tax deficiencies (including tax benefits of dividends on share-base payment awards) as income tax expense or benefit in the income statement, (ii) classification of the excess tax benefit along with other income tax cash flows as an operating activity, (iii) an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur, (iv) a threshold to qualify for equity classification which permits withholding up to the maximum statutory tax rates in the applicable jurisdictions, and (v) classification of cash paid by an employer as a financing activity when the payment results from the withholding of shares for tax withholding purposes. In addition to those simplifications, the amendments eliminate the guidance in ASC 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Corporation is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

 

11 

 


 

 

In March 2016, the FASB updated the Codification to require an equity method investor to add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. Also, this Update requires that an entity that has an available-for sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Corporation is currently evaluating the impact of the adoption of this guidance, if any, on its consolidated financial statements.

 

In June 2016, the FASB updated the Codification and issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.

The new model, referred to as the current expected credit losses (CECL) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses (ECL) should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating ECL. The ASU does not prescribe a specific method to make the estimate so its application will require significant judgment.

Generally, upon initial recognition of a financial asset the estimate of the ECL will be recorded through an allowance for loan and lease losses with an offset to current earnings. Subsequently, the ECL will need to be assessed each period, and both negative and positive changes to the estimate will be recognized through an adjustment to the allowance for loan and lease losses and earnings.

The ASU amends the current available-for-sale security other-than-temporary impairment (OTTI) model for debt securities. The new available-for-sale debt security model will require an estimate of ECL only when the fair value is below the amortized cost of the asset. The length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists. As such, the new available-for-sale debt security model is not an OTTI model. In addition, credit losses on available-for-sale debt securities will now be limited to the difference between the security’s amortized cost basis and its fair value. The available-for-sale debt security model will also require the use of an allowance to record estimated credit losses (and subsequent recoveries).

The purchased financial assets with credit deterioration (PCD) model applies to purchased financial assets (measured at amortized cost or available-for-sale) that have experienced more than insignificant credit deterioration since origination. This represents a change from the scope of what are considered purchased credit-impaired assets under today’s model. In contrast to the accounting for originated or purchased assets that do not qualify as PCD, the initial estimate of expected credit losses for a PCD would be recognized through an allowance for loan and lease losses with an offset to the cost basis of the related financial asset at acquisition (i.e., there is no impact to net income at initial recognition). Subsequently, the accounting will follow the applicable CECL or available-for-sale debt security impairment model with all adjustments of the allowance for loan and lease losses recognized through earnings. Beneficial interests classified as held-to-maturity or available-for-sale will need to apply the PCD model if the beneficial interest meets the definition of PCD or if there is a significant difference between contractual and expected cash flows at initial recognition.

 

In general, the new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings as of the beginning of the first period in which the guidance becomes effective. However, prospective application is required for PCD assets previously accounted for under ASC 310-30 and for debt securities for which an other-than-temporary impairment was recognized prior to the date of adoption.

 

ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year).

 

     The ASU will be effective for public business entities that are SEC filers in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application of the guidance will be permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Corporation is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

12 

 


 

 

NOTE 2 – EARNINGS PER COMMON SHARE

 

  

    The calculations of earnings (loss) per common share for the quarters and six-month periods ended June 30, 2016 and 2015 are as follows:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quarter Ended

  

Six-Month Period Ended

  

  

June 30,

  

June 30,

  

  

2016 

  

2015 

  

2016 

  

2015 

  

  

  

  

  

  

  

  

  

  

  

  

  

(In thousands, except per share information)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 Net income (loss)

$

 21,953 

  

$

 (34,074) 

  

$

45,297 

  

$

 (8,428) 

 Net income (loss) attributable to common stockholders

$

 21,953 

  

$

 (34,074) 

  

$

 45,297 

  

$

 (8,428) 

Weighted-Average Shares:

  

  

  

  

  

  

  

  

  

  

  

   Average common shares outstanding

  

 212,768 

  

  

 211,247 

  

  

 212,558 

  

  

 210,968 

   Average potential dilutive common shares

  

 3,155 

  

  

 - 

  

  

 2,040 

  

  

 - 

   Average common shares outstanding- assuming dilution

  

 215,923 

  

  

 211,247 

  

  

 214,598 

  

  

 210,968 

 Earnings (loss) per common share:

  

  

  

  

  

  

  

  

  

  

  

   Basic

$

 0.10 

  

$

 (0.16) 

  

$

0.21 

  

$

 (0.04) 

   Diluted

$

 0.10 

  

$

 (0.16) 

  

$

0.21 

  

$

 (0.04) 

  

  

 

Earnings per common share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares issued and outstanding. Net income attributable to common stockholders represents net income adjusted for any preferred stock dividends, including any dividends declared and any cumulative dividends related to the current dividend period that have not been declared as of the end of the period.

    

    Potential common shares consist of common stock issuable under the assumed exercise of stock options, unvested shares of restricted stock, and outstanding warrants using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options, unvested shares of restricted stock, and outstanding warrants that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. Stock options not included in the computation of outstanding shares because they were antidilutive amounted to 39,855 and 69,848 as of June 30, 2016 and 2015, respectively. Warrants outstanding to purchase 1,285,899 shares of common stock and 2,939,794 unvested shares of restricted stock were excluded from the computation of diluted earnings per share for the quarter and six-month period ended June 30, 2015 because the Corporation reported a net loss attributable to common stockholders for the periods and their inclusion would have an antidilutive effect.

13 

 


 

 

NOTE 3 – STOCK-BASED COMPENSATION

 

  As of January 21, 2007, the Corporation’s 1997 stock option plan expired and no additional awards could be granted under that plan. All outstanding awards granted under this plan have continued in full force and effect since then, subject to their original terms. No awards of shares could be granted under the 1997 stock option plan as of its expiration.

 

    The activity of stock options granted under the 1997 stock option plan for the six-month period ended June 30, 2016 is set forth below:

  

  

  

  

  

  

  

  

Weighted-Average

  

  

  

  

  

  

  

  

  

Remaining

  

  

Aggregate

  

Number of

  

  

Weighted-Average

  

Contractual Term

  

  

Intrinsic Value

  

Options

  

Exercise Price

  

(Years)

  

(In thousands)

Beginning of period outstanding and

  

  

  

  

  

  

  

  

  

     exercisable

 69,848 

  

$

 160.30 

  

  

  

  

  

Options expired

(29,993)

  

  

 190.07 

  

  

  

  

  

End of period outstanding and exercisable

 39,855 

  

$

 137.89 

  

 0.5 

  

$

 - 

  

  

  

  

  

  

  

  

  

  

 

 On May 24, 2016, the Corporation’s stockholders approved the amendment and restatement of the First BanCorp 2008 Omnibus Incentive Plan, as amended (the “Omnibus Plan”), to, among other things, increase the number of shares of Common Stock reserved for issuance under the Omnibus Plan, to extend the term of the Omnibus Plan to May 24, 2026 and to re-approve the material terms of the performance goals under the Omnibus Plan for purposes of Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended. 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, cash-based awards and other stock-based awards. The Omnibus Plan authorizes the issuance of up to 7,335,928 shares of common stock, subject to adjustments for stock splits, reorganizations, and other similar events. The Corporation’s Board of Directors, upon receiving the relevant recommendation of the Compensation Committee, has the power and authority to determine those eligible to receive awards and to establish the terms and conditions of any awards, subject to various limits and vesting restrictions that apply to individual and aggregate awards.

   

  Under the Omnibus Plan, during the first half of 2016, the Corporation issued 1,786,137 shares of restricted stock to employees subject to a vesting period of two years. Included in those 1,786,137 shares of restricted stock are 1,546,137 shares granted to certain senior officers consistent with the requirements of the Troubled Asset Relief Program (“TARP”) Interim Final Rule, which permit TARP recipients to grant “long-term restricted stock” without violating the prohibition on paying or accruing a bonus payment provided that: (i) the value of the grant may not exceed one-third of the amount of the employee’s annual compensation, (ii) no portion of the grant may vest before two years after the grant date, and (iii) the grant must be subject to a further restriction on transfer or payment as described below. Specifically, the stock that has otherwise vested may not become transferable at any time earlier than as permitted under the schedule set forth by TARP, which is based on the repayment in 25% increments of the aggregate financial assistance received from the U.S. Treasury. Hence, notwithstanding the vesting period mentioned above, the senior officers covered by TARP are restricted from transferring the shares. The U.S. Treasury confirmed that, effective March 2014, it has recovered more than 25% of its investment in First BanCorp. Therefore, the restriction on transfer relating to 25% of the shares granted under TARP requirements were released.

 

    The fair value of the shares of restricted stock granted in the first half of 2016 was based on the market price of the Corporation’s outstanding common stock on the date of the grant. For the 1,546,137 shares of restricted stock granted under the TARP requirements, the market price was discounted due to TARP transferability restrictions. For purposes of determining the awards’ fair value, the Corporation estimated an appreciation of 14% in the value of the common stock using the Capital Asset Pricing Model as a basis of what would be a market participant’s expected return on the Corporation’s stock and assumed that the U.S. Treasury would hold the common stock of the Corporation that it currently owns for a period not to exceed two years, resulting in a fair value of $1.43 for each share of restricted stock granted under the TARP requirements. Also, the Corporation used empirical data to estimate employee terminations; separate groups of employees that have similar historical exercise behavior were considered separately for valuation purposes.

 

14 

 


 

 

    The following table summarizes the restricted stock activity in the first half of 2016 under the Omnibus Plan for both executive officers covered by the TARP requirements and other employees as well as for the independent directors:

  

  

  

  

  

  

  

  

Six-Month Period Ended

  

  

June 30, 2016

  

  

  

  

  

  

  

  

  Number of shares

  

  

Weighted-Average

  

  

of restricted

  

  

Grant Date

  

  

stock

  

  

 Fair Value

  

  

  

  

  

  

  

Non-vested shares at beginning of year

 2,968,461 

  

$

 3.34 

  

Granted

 1,786,137 

  

  

 1.62 

  

Forfeited

 (1,000) 

  

  

 6.03 

  

Vested

(468,391)

  

  

 3.78 

  

Non-vested shares at June 30, 2016

 4,285,207 

  

$

 2.57 

  

  

  

  

  

  

  

 

   For the quarter and six-month period ended June 30, 2016, the Corporation recognized $1.0  million and $1.9 million, respectively, of stock-based compensation expense related to restricted stock awards, compared to $1.0 million and $2.0 million for the same periods in 2015. As of June 30, 2016, there was $4.9 million of total unrecognized compensation cost related to nonvested shares of restricted stock. The weighted average period over which the Corporation expects to recognize such cost is 1.7 years.

 

   During the first half of 2015, 30,068 shares of restricted stock were awarded to one of the Corporation’s independent directors subject to vesting periods that range from 1 to 5 years. In addition, during the first half of 2015, the Corporation issued 793,964 shares of restricted stock to employees and independent directors subject to vesting periods that range from 3 months to 3 years. Included in those 793,964 shares of restricted stock are 615,464 shares granted to certain senior officers consistent with the requirements of TARP. The employees covered by TARP are restricted from transferring the shares, subject to certain conditions as explained above.

 

   The fair value of the shares of restricted stock granted in the first six months of 2015 was based on the market price of the Corporation’s outstanding common stock on the date of the grant. For the 615,464 shares of restricted stock granted under the TARP requirements, the market price was discounted due to the post-vesting restrictions. For purposes of computing the discount, the Corporation estimated an appreciation of 14% in the value of the common stock using the Capital Asset Pricing Model as a basis of what would be a market participant’s expected return on the Corporation’s stock and assumed that the U.S. Treasury would hold the common stock of the Corporation that it owned as of the date of the grants for a period not to exceed one year, resulting in a fair value of $3.18 for restricted shares granted under the TARP requirements.

 

Stock-based compensation accounting guidance requires the Corporation to reverse compensation expense for any awards that were forfeited due to employee or director turnover. Approximately $5 thousand and $36 thousand of compensation expense was reversed during the first half of 2016 and 2015, respectively, related to forfeited awards.

 

   Also, under the Omnibus Plan, effective April 1, 2013, the Corporation’s Board of Directors determined to increase the salary amounts paid to certain executive officers primarily by paying the increased salary amounts in the form of shares of the Corporation’s common stock, instead of cash. During the first half of 2016, the Corporation issued 441,942 shares of common stock (first half of 2015 – 168,265 shares) with a weighted average market value of $3.20 (first half of 2015 – $6.20) as salary stock compensation. This resulted in a compensation expense of $1.4 million recorded in the first half of 2016 (first half of 2015 – $1.0 million). 

 

For the first half of 2016, the Corporation withheld 134,949 shares (first half of 2015 – 56,486 shares) from the common stock paid to certain senior officers as additional compensation and 51,754 shares of restricted stock that vested during the first half of 2016 (first half of 2015 – 61,372) to cover employees’ payroll and income tax withholding liabilities; these shares are held as treasury shares. The Corporation paid any fractional share of salary stock that the officer was entitled to in cash. In the consolidated financial statements, the Corporation treats shares withheld for tax purposes as common stock repurchases.

15 

 


 

 

NOTE 4 – INVESTMENT SECURITIES

 

Investment Securities Available for Sale

   

 The amortized cost, non-credit loss component of other-than-temporary impairment (“OTTI”) recorded in other comprehensive income (“OCI”), gross unrealized gains and losses recorded in OCI, approximate fair value, and weighted average yield of investment securities available for sale by contractual maturities as of June 30, 2016 and December 31, 2015 were as follows:

 

  

  

June 30, 2016

  

  

Amortized cost

  

Noncredit Loss Component of OTTI Recorded in OCI

  

  

  

Fair value

  

Weighted average yield%

  

  

  

Gross Unrealized

  

  

  

  

  

  

gains

  

losses

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(Dollars in thousands)

U.S. Treasury securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Due within one year

$

 7,519 

  

$

 - 

  

$

 4 

  

$

 - 

  

$

 7,523 

  

 0.57 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Obligations of U.S.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  government-sponsored

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

   agencies:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

   Due within one year

  

 14,628 

  

  

 - 

  

  

 16 

  

  

 - 

  

  

 14,644 

  

 0.68 

   After 1 to 5 years

  

 461,198 

  

  

 - 

  

  

 4,172 

  

  

 - 

  

  

 465,370 

  

 1.29 

   After 5 to 10 years

  

 30,037 

  

  

 - 

  

  

 1,018 

  

  

 - 

  

  

 31,055 

  

 2.16 

   After  10 years

  

 45,465 

  

  

 - 

  

  

 60 

  

  

 35 

  

  

 45,490 

  

 0.87 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Puerto Rico government

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    obligations:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

   After 1 to 5 years

  

 21,423 

  

  

 9,785 

  

  

 - 

  

  

 - 

  

  

 11,638 

  

 4.38 

   After 5 to 10 years

  

 845 

  

  

 - 

  

  

 1 

  

  

 - 

  

  

 846 

  

 5.20 

   After 10 years

  

 21,178 

  

  

 3,706 

  

  

 169 

  

  

 1,578 

  

  

 16,063 

  

 5.38 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

United States and Puerto Rico

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

   government obligations

  

 602,293 

  

  

 13,491 

  

  

 5,440 

  

  

 1,613 

  

  

 592,629 

  

 1.54 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Mortgage-backed securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 FHLMC certificates:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    After 5 to 10 years

  

 298 

  

  

 - 

  

  

 31 

  

  

 - 

  

  

 329 

  

 4.95 

    After 10 years

  

 266,916 

  

  

 - 

  

  

 5,730 

  

  

 - 

  

  

 272,646 

  

 2.16 

  

  

  

 267,214 

  

  

 - 

  

  

 5,761 

  

  

 - 

  

  

 272,975 

  

 2.17 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

GNMA certificates:            

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    Due within one year

  

 2 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 2 

  

 1.72 

    After 1 to 5 years

  

 91 

  

  

 - 

  

  

 3 

  

  

 - 

  

  

 94 

  

 4.34 

    After 5 to 10 years

  

 105,841 

  

  

 - 

  

  

 2,951 

  

  

 - 

  

  

 108,792 

  

 3.06 

    After 10 years

  

 150,109 

  

  

 - 

  

  

 14,007 

  

  

 1 

  

  

 164,115 

  

 4.38 

  

  

  

 256,043 

  

  

 - 

  

  

 16,961 

  

  

 1 

  

  

 273,003 

  

 3.83 

 FNMA certificates:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    After 1 to 5 years

  

 24,726 

  

  

 - 

  

  

 45 

  

  

 85 

  

  

 24,686 

  

 1.55 

    After 5 to 10 years

  

 21,300 

  

  

 - 

  

  

 1,089 

  

  

 - 

  

  

 22,389 

  

 2.73 

    After 10 years

  

 715,204 

  

  

 - 

  

  

 18,185 

  

  

 - 

  

  

 733,389 

  

 2.34 

    

  

  

 761,230 

  

  

 - 

  

  

 19,319 

  

  

 85 

  

  

 780,464 

  

 2.33 

Collateralized mortgage

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    obligations issued or guaranteed by

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    the FHLMC and GNMA:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    After 5 to 10 years

  

 19,854 

  

  

 - 

  

  

 14 

  

  

 24 

  

  

 19,844 

  

 1.12 

   After 10 years

  

 39,843 

  

  

 - 

  

  

 2 

  

  

 45 

  

  

 39,800 

  

 1.14 

  

  

  

 59,697 

  

  

 - 

  

  

 16 

  

  

 69 

  

  

 59,644 

  

 1.13 

Other mortgage pass-through

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

     trust certificates:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

   After 5 to 10 years

  

 84 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 84 

  

 7.20 

   After 10 years

  

 31,708 

  

  

 7,976 

  

  

 - 

  

  

 - 

  

  

 23,732 

  

 2.34 

  

  

  

 31,792 

  

  

 7,976 

  

  

 - 

  

  

 - 

  

  

 23,816 

  

 2.34 

Total mortgage-backed

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    securities

  

 1,375,976 

  

  

 7,976 

  

  

 42,057 

  

  

 155 

  

  

 1,409,902 

  

 2.52 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    After 1 to 5 years

  

 100 

  

  

 - 

  

  

 - 

  

  

 - 

  

  

 100 

  

 1.50 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Equity Securities (1)

  

 410 

  

  

 - 

  

  

 8 

  

  

 - 

  

  

 418 

  

 2.13 

  

  

  

Total investment securities

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    available for sale

$

 1,978,779 

  

$

 21,467 

  

$

 47,505 

  

$

 1,768 

  

$

 2,003,049 

  

 2.22 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Equity securities consisted of investment in a Community Reinvestment Act Qualified Investment Fund.

  

  

 

16 

 


 

 

  

  

December 31, 2015

  

  

Amortized cost

  

Noncredit Loss Component of OTTI Recorded in OCI

  

  

  

Fair value

  

Weighted average yield%

  

  

  

  

Gross Unrealized

  

  

  

  

  

  

gains

  

losses

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

U.S. Treasury securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

After 1 to 5 years

$

 7,530 

  

$

 - 

  

$

 - 

  

$

 33 

  

$

 7,497 

  

 0.57 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Obligations of U.S.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    government-sponsored

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    agencies:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

   Due within one year

  

 14,624 

  

  

 - 

  

  

 4 

  

  

 10 

  

  

 14,618 

  

 0.68 

  

   After 1 to 5 years

  

 384,323 

  

  

 - 

  

  

 174 

  

  

 4,305 

  

  

 380,192 

  

 1.32 

  

   After 5 to 10 years

  

 58,150 

  

  

 - 

  

  

 343 

  

  

 242 

  

  

 58,251 

  

 2.34 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Puerto Rico Government

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

    obligations:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

   After 1 to 5 years

  

 25,663 

  

  

 14,662