UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

______________

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2017

[   ]         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.

Yes ☑    No  ☐

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

Yes ☑   No ☐

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

Large accelerated filer ☐	Accelerated filer☑
Non-accelerated filer  ☐  (Do not check if a smaller reporting company)	Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registered has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   ☐   No   ☑

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

Common stock:  218,458,532 shares outstanding as of April 28, 2017.

FIRST BANCORP.

INDEX PAGE

PART I. FINANCIAL INFORMATION	PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited) as of March 31, 2017 and December 31, 2016	5
Consolidated Statements of  Income  (Unaudited) – Quarters ended March 31, 2017 and March 31, 2016	6
Consolidated Statements of Comprehensive Income (Unaudited) – Quarters ended March 31, 2017 and March 31, 2016	7
Consolidated Statements of Cash Flows (Unaudited) – Quarters ended March 31, 2017 and March 31, 2016	8
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Quarters ended March 31, 2017 and March 31, 2016	9
Notes to Consolidated Financial Statements (Unaudited)	10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations	72
Item 3. Quantitative and Qualitative Disclosures About Market Risk	130
Item 4. Controls and Procedures	130
PART II. OTHER INFORMATION
Item 1.    Legal Proceedings	131
Item 1A. Risk Factors	131
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds	132
Item 3.    Defaults Upon Senior Securities	133
Item 4.    Mine Safety Disclosures	133
Item 5.    Other Information	133
Item 6.    Exhibits	133
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 harbor 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,” “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.”

First BanCorp. wishes to caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and to advise readers that 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 Part II, Item 1A. “Risk Factors,” and the following:

·uncertainty as to the ultimate outcomes of actions taken, or those that may have to be taken by the Puerto Rico government, or the oversight board established by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) to address Puerto Rico’s financial problems including the recent filing of a form bankruptcy under Title III of PROMESA that provides a court debt restructuring process similar to U.S. bankruptcy protection.

·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 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 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”, referred to together with the New York FED as the “Federal Reserve”), prohibits the Corporation from paying dividends to stockholders or receiving dividends from FirstBank, making payments on trust preferred securities or subordinated debt, 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 consents that enabled the Corporation to pay all the accrued but deferred interest payments plus the interest for the second, third and fourth quarters of 2016, and the first quarter of 2017 on the Corporation’s subordinated debentures associated with its trust preferred securities and for future monthly dividends on its non-cumulative perpetual preferred stock despite the consents that have enabled the Corporation to pay monthly dividends on its non-cumulative perpetual preferred stock since December 2016;

·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 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 common stockholders in the future due to the Corporation’s need to receive regulatory approvals 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;

3

·adverse changes in general economic conditions in Puerto Rico, the United States (“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 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, 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, including changes resulting from the recent U.S. election;

·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;

·uncertainty as to whether FirstBank will be able to satisfy its regulators regarding, among other things, its asset quality, liquidity plans, maintenance of capital levels and compliance with applicable laws, regulations and related requirements; and

·general competitive factors and industry consolidation.

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

Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016, 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)

	March 31, 2017		December 31, 2016
(In thousands, except for share information)
ASSETS
Cash and due from banks	$	414,034	$	289,591
Money market investments:
Time deposits with other financial institutions		2,800		2,800
Other short-term investments		7,288		7,294
Total money market investments		10,088		10,094
Investment securities available for sale, at fair value:
Securities pledged that can be repledged		353,826		339,390
Other investment securities		1,478,155		1,542,530
Total investment securities available for sale		1,831,981		1,881,920
Investment securities held to maturity, at amortized cost:
Securities pledged that can be repledged		-		-
Other investment securities		156,049		156,190
Total investment securities held to maturity, fair value of $136,614 (2016- $132,759)		156,049		156,190
Other equity securities		38,492		42,992
Loans, net of allowance for loan and lease losses of $203,231
(2016 - $205,603)		8,619,118		8,681,270
Loans held for sale, at lower of cost or market		45,906		50,006
Total loans, net		8,665,024		8,731,276
Premises and equipment, net		148,339		150,828
Other real estate owned		137,784		137,681
Accrued interest receivable on loans and investments		41,136		45,453
Other assets		447,471		476,430
Total assets	$	11,890,398	$	11,922,455
LIABILITIES
Non-interest-bearing deposits	$	1,581,086	$	1,484,155
Interest-bearing deposits		7,276,912		7,347,050
Total deposits		8,857,998		8,831,205
Securities sold under agreements to repurchase		300,000		300,000
Advances from the Federal Home Loan Bank (FHLB)		570,000		670,000
Other borrowings		216,187		216,187
Accounts payable and other liabilities		123,196		118,820
Total liabilities		10,067,381		10,136,212
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, 219,783,062 shares (2016 - 218,700,394 shares issued)		21,978		21,870
Less: Treasury stock (at par value)		(135)		(125)
Common stock outstanding, 218,430,573 shares outstanding (2016 - 217,446,205
shares outstanding)		21,843		21,745
Additional paid-in capital		932,964		931,856
Retained earnings, includes legal surplus reserve of $52,436		855,800		830,928
Accumulated other comprehensive loss, net of tax of $7,752		(23,694)		(34,390)
Total stockholders' equity		1,823,017		1,786,243
Total liabilities and stockholders' equity	$	11,890,398	$	11,922,455
The accompanying notes are an integral part of these statements.

5

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Quarter Ended
	March 31, 2017		March 31, 2016
(In thousands, except per share information)
Interest and dividend income:
Loans	$	131,442	$	137,033
Investment securities		13,302		12,725
Money market investments		484		1,073
Total interest income	145,228		150,831
Interest expense:
Deposits		15,972		17,257
Securities sold under agreements to repurchase		2,623		5,476
Advances from FHLB		2,122		1,471
Other borrowings		1,962		1,979
Total interest expense	22,679		26,183
Net interest income		122,549		124,648
Provision for loan and lease losses		25,442		21,053
Net interest income after provision for loan and lease losses	97,107		103,595
Non-interest income:
Service charges and fees on deposit accounts		5,790		5,800
Mortgage banking activities		3,616		4,753
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		(12,231)		(1,845)
Portion of other-than-temporary impairment
recognized in other comprehensive income (OCI)		-		(4,842)
Net impairment losses on available-for-sale debt securities		(12,231)		(6,687)
Gain on early extinguishment of debt		-		4,217
Insurance commission income		3,587		3,269
Other non-interest income		7,481		7,109
Total non-interest income	8,243		18,469
Non-interest expenses:
Employees' compensation and benefits		38,653		38,435
Occupancy and equipment		14,088		14,183
Business promotion		3,281		4,003
Professional fees		10,956		10,776
Taxes, other than income taxes		3,676		3,792
Insurance and supervisory fees		4,909		7,343
Net loss on other real estate owned (OREO) and OREO operations		4,076		3,206
Credit and debit card processing expenses		2,831		3,282
Communications		1,543		1,808
Other non-interest expenses		3,869		6,169
Total non-interest expenses	87,882		92,997
Income before income taxes		17,468		29,067
Income tax benefit (expense)		8,073		(5,723)
Net income	$	25,541	$	23,344
Net income attributable to common stockholders	$	24,872	$	23,344
Net income per common share:
Basic	$	0.12	$	0.11
Diluted	$	0.11	$	0.11
Dividends declared per common share	$	-	$	-
The accompanying notes are an integral part of these statements.

6

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Quarter Ended
		March 31,		March 31,
	2017			2016
(In thousands)
Net income	$	25,541	$	23,344
Available-for-sale debt securities on which an other-than-temporary
impairment has been recognized:
Unrealized loss on debt securities on which an
other-than-temporary impairment has been recognized		(2,930)		(998)
Reclassification adjustment for other-than-temporary impairment
on debt securities included in net income		12,231		6,687
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 on available-for-sale securities arising during the period		1,395		24,710
Other comprehensive income for the period		10,696		30,391
Total comprehensive income	$	36,237	$	53,735
The accompanying notes are an integral part of these statements.

7

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Quarter Ended
	March 31, 2017		March 31, 2016
(In thousands)
Cash flows from operating activities:
Net income	$	25,541	$	23,344
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,141		4,588
Amortization of intangible assets		1,121		1,214
Provision for loan and lease losses		25,442		21,053
Deferred income tax (benefit) expense		(6,016)		3,635
Stock-based compensation		1,734		1,557
Gain on sales of investments		-		(8)
Other-than-temporary impairments on debt securities		12,231		6,687
Gain on early extinguishment of debt		-		(4,217)
Unrealized loss on derivative instruments		57		153
Loss on sales of premises and equipment and other assets		9		-
Net gain on sales of loans		(1,472)		(2,488)
Net amortization/accretion of premiums, discounts, and deferred loan fees and costs		(2,031)		(2,343)
Originations and purchases of loans held for sale		(81,389)		(107,034)
Sales and repayments of loans held for sale		86,924		108,615
Amortization of broker placement fees		527		858
Net amortization/accretion of premium and discounts on investment securities		461		447
Decrease in accrued interest receivable		3,413		3,806
Increase in accrued interest payable		174		2,257
Decrease in other assets		5,419		3,320
Increase (decrease) in other liabilities		8,517		(11,167)
Net cash provided by operating activities		84,803		54,277
Cash flows from investing activities:
Principal collected on loans		669,615		735,660
Loans originated and purchased		(704,175)		(627,105)
Proceeds from sales of loans held for investment		53,245		-
Proceeds from sales of repossessed assets		12,159		12,375
Proceeds from sales of available-for-sale securities		-		14,990
Purchases of available-for-sale securities		(5,003)		(62,770)
Proceeds from principal repayments and maturities of available-for-sale securities		53,830		62,418
Proceeds from principal repayments and maturities of held-to-maturity securities		141		141
Additions to premises and equipment		(2,840)		(3,006)
Proceeds from sale of premises and equipment and other assets		637		-
Net redemptions (purchases) of other equity securities		4,500		(141)
Purchase of insurance contracts		-		(1,067)
Net cash provided by investing activities		82,109		131,495
Cash flows from financing activities:
Net increase in deposits		58,722		95,879
Net FHLB advances paid		(100,000)		-
Dividends paid on preferred stock		(669)		-
Repurchase of outstanding common stock		(528)		(259)
Repayment of junior subordinated debentures		-		(7,025)
Net cash (used in) provided by  financing activities		(42,475)		88,595
Net increase in cash and cash equivalents		124,437		274,367
Cash and cash equivalents at beginning of period		299,685		752,458
Cash and cash equivalents at end of period	$	424,122	$	1,026,825
Cash and cash equivalents include:
Cash and due from banks	$	414,034	$	813,732
Money market instruments		10,088		213,093
	$	424,122	$	1,026,825
The accompanying notes are an integral part of these statements.

8

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

	Quarter Ended
	March 31,		March 31,
	2017		2016
(In thousands)
Preferred Stock	$	36,104	$	36,104
Common Stock outstanding:
Balance at beginning of period		21,745		21,509
Common stock issued as compensation		14		25
Common stock withheld for taxes		(11)		(12)
Restricted stock grants		95		179
Balance at end of period		21,843		21,701
Additional Paid-In-Capital:
Balance at beginning of period		931,856		926,348
Stock-based compensation		1,734		1,557
Common stock withheld for taxes		(517)		(247)
Restricted stock grants		(95)		(179)
Common stock issued as compensation		(14)		(25)
Balance at end of period		932,964		927,454
Retained Earnings:
Balance at beginning of period		830,928		737,922
Net income		25,541		23,344
Dividends on preferred stock		(669)		-
Balance at end of period		855,800		761,266
Accumulated Other Comprehensive Income (Loss), net of tax:
Balance at beginning of period		(34,390)		(27,749)
Other comprehensive income, net of tax		10,696		30,391
Balance at end of period		(23,694)		2,642
Total stockholders' equity	$	1,823,017	$	1,749,167
The accompanying notes are an integral part of these statements.

9

FIRST BANCORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 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, 2016. 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, 2016, which are included in the Corporation’s 2016 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the statement of financial position, results of operations and cash flows for the interim periods have been reflected. All significant intercompany accounts and transactions have been eliminated in consolidation.

The results of operations for the quarter ended March 31, 2017 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 May 2014, the FASB updated the Accounting Standards Codification (the “Codification” or the “ASC”) to create a new, principle-based revenue recognition framework. The Update is the culmination of efforts by the FASB and the International Accounting Standards Board to develop a common revenue standard for GAAP and International Financial Reporting Standards. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance describes a 5-step process that entities can apply to achieve the core principle of revenue recognition and requires disclosures sufficient to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and the significant judgments used in determining that information. The new framework is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those reporting periods, as a result of the FASB’s amendment to the standard to defer the effective date by one year.  Early adoption is permitted for interim periods beginning after December 15, 2016. While the new guidance does not apply to revenue associated with loans or securities, the Corporation has been working to identify the impact on fees and other non-interest revenues within the scope of the new guidance and assess the related revenues to determine if any accounting or internal control changes will be required for the new provisions. While the Corporation has not yet identified any material changes in the timing of revenue recognition, the Corporation review is ongoing.

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 rate 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. 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 adopted the provisions during the first quarter of 2017 without any material impact on the Corporation’s consolidated financial statements.

In March 2016, the FASB updated the Codification to require an equity method investor to add the cost of acquiring an 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

10

interest or degree of influence that result in the adoption of the equity method. Early application is permitted. The adoption of this guidance during the first quarter of 2017 did not have an impact on the Corporation’s consolidated financial statements.

   In October 2016, the FASB updated the Codification to modify the criteria used by a reporting entity when determining if it is the primary beneficiary of a variable interest entity (“VIE”) when the entities are under common control and the reporting entity has indirect interests in the VIE through related parties. If the reporting entity meets the first criteria in that it has the power to direct the activities of the VIE that are most significant to its economic performance, it is required to consider all interests held indirectly through related entities on a proportionate basis in determining if it meets the second criterion, that is, the obligation to absorb losses of the VIE, or the right to receive benefits from it that are potentially significant to the VIE. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance did not have an impact on the Corporation’s consolidated financial statements.

     In March 2017, the FASB updated the Codification to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. With respect to securities held at a discount, the amendments do not require an accounting change; thus, the discount continues to be amortized to maturity. Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date. An entity must have a large number of similar loans to consider estimates of future principal prepayments when applying the interest method. However, an entity that holds an individual callable debt security at a premium may not amortize that premium to the earliest call date. If that callable debt security is subsequently called, the entity records a loss equal to the unamortized premium. The amendments in this Update more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. In most cases, market participants price securities to the call date that produces the worst yield when the coupon is above current market rates (that is, the security is trading at a premium) and price securities to maturity when the coupon is below market rates (that is, the security is trading at a discount) in anticipation that the borrower will act in its economic best interest. As a result, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Corporation is currently evaluating the impact of the adoption of this guidance, if any, on its consolidated financial statements.

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NOTE 2 – EARNINGS PER COMMON SHARE

	The calculations of earnings per common share for the quarters ended on March 31, 2017 and 2016 are as follows:
		Quarter Ended
		March 31,		March 31,
		2017		2016
(In thousands, except per share information)
Net income		$	25,541	$	23,344
Less: Preferred stock dividends			(669)		-
Net income attributable to common stockholders		$	24,872	$	23,344
Weighted-Average Shares:
	Average common shares outstanding		213,340		212,348
	Average potential dilutive common shares		4,033		926
	Average common shares outstanding-assuming dilution		217,373		213,274
Earnings per common share:
	Basic	$	0.12	$	0.11
	Diluted	$	0.11	$	0.11

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.  Basic weighted-average common shares outstanding exclude unvested shares of restricted stock.

Potential common shares consist of common stock issuable under the assumed exercise of stock options, unvested shares of restricted stock, and outstanding warrants using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from the exercise, in addition to the amount of compensation cost attributable to future services, are used to purchase common stock at the exercise date. The difference between the numbers 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. There were no stock options outstanding as of March 31, 2017.  Stock options not included in the computation of outstanding shares because they were antidilutive amounted to 39,855 as of March 31, 2016.

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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 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. During the first quarter of 2017, all of the remaining outstanding awards granted under the 1997 stock option plan expired. 

The activity of stock options granted under the 1997 stock option plan for the quarter ended March 31, 2017 is set forth below:
	Number of Options	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (In thousands)
Beginning of period outstanding
and exercisable	34,989	$	138.00
Options expired	(34,989)		138.00
End of period outstanding and
exercisable	-	$	-	-	$	-

   On May 24, 2016, the Corporation’s stockholders approved the amendment and restatement of the First BanCorp. 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 purpose 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 14,169,807 shares of common stock, subject to adjustments for stock splits, reorganizations, and other similar events. As of March 31, 2017, 5,746,508 shares of common stock were available for issuance under the omnibus plan. The Corporation’s Board of Directors, upon receiving the relevant recommendation of the Corporation’s 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 quarter of 2017, the Corporation awarded 3,644 shares of restricted stock that are subject to a one year vesting period to a new independent director appointed in the first quarter. In addition, during the first quarter of 2017, the Corporation awarded 949,332 shares of restricted stock to employees subject to a vesting period of two years. Included in those 949,332 shares of restricted stock are 838,332 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 restrictions on transfer relating to 25% of certain shares granted under TARP requirements have been released.

     The fair value of the shares of restricted stock granted in the first quarter of 2017 was based on the market price of the Corporation’s outstanding common stock on the date of the grant. For the 838,332 shares of restricted stock granted under TARP requirements, the market price was discounted due to TARP transferability restrictions. For purposes of determining the awards’ fair value, the Corporation considered the recent stock price trends 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 $2.71 for each share of restricted stock granted under 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.

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	The following table summarizes the restricted stock activity in the first quarter of 2017 under the Omnibus Plan for both executive officers covered by TARP requirements and other employees as well as for the independent directors:
		Quarter Ended
		March 31, 2017
		Number of
		shares of		Weighted-Average
		restricted		Grant Date
		stock		Fair Value
Non-vested shares at beginning of period		4,178,791	$	2.58
Granted		952,976		3.04
Forfeited		(6,000)		4.42
Vested (1)		(293,019)		4.40
Non-vested shares at March 31, 2017		4,832,748	$	2.90
(1)	Includes 153,864 shares of restricted stock released from TARP restrictions.

    For the each of the quarters ended March 31, 2017 and 2016, the Corporation recognized $0.9 million of stock-based compensation expense related to restricted stock awards. As of March 31, 2017, there was $5.4 million of total unrecognized compensation cost related to non-vested shares of restricted stock. The weighted average period over which the Corporation expects to recognize such cost is 1.6 years.

   During the first quarter of 2016, the Corporation awarded 1,785,137 shares of restricted stock to employees subject to a vesting period of two years. Included in those 1,785,137 shares of restricted stock are 1,546,137 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 quarter 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 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 two years, resulting in a fair value of $1.43 for restricted shares granted under TARP requirements.

    Stock-based compensation accounting guidance requires the Corporation to reverse compensation expense for any awards that are 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 in the expense recognized in the financial statements.  If the actual forfeiture rate is lower than the estimated forfeiture rate, an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase in the expense recognized in the financial statements. 

   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 quarter of 2017, the Corporation issued 135,692 shares of common stock (first quarter of 2016 – 252,841 shares) with a weighted average market value of $6.31 (first quarter of 2016 - $2.70) as salary stock compensation. This resulted in a compensation expense of $0.8 million recorded in the first quarter of 2017 (first quarter of 2016 - $0.7 million).

    For the quarter ended March 31, 2017, the Corporation withheld 45,710 shares (first quarter of 2016 – 79,954 shares) from the common stock paid to certain senior officers as additional compensation and 52,590 shares of the restricted stock that vested during the first quarter of 2017 (first quarter of 2016 – 35,167 shares) 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.

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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 March 31, 2017 and December 31, 2016 were as follows:

		March 31, 2017
		Amortized cost		Noncredit Loss Component of OTTI Recorded in OCI		Gross				Fair value		Weighted-average yield%
						Unrealized
						gains		losses
(Dollars in thousands)
U.S. Treasury securities:
Due within one year		$	7,502	$	-	$	-	$	1	$	7,501	0.57
Obligations of U.S.
government-sponsored
agencies:
Due within one year			50,000		-		-		31		49,969	1.05
After 1 to 5 years			390,440		-		108		2,549		387,999	1.37
After 5 to 10 years			16,943		-		13		258		16,698	1.95
After 10 years			43,345		-		4		188		43,161	1.36
Puerto Rico-government
obligations:
After 1 to 5 years			10,126		3,776		-		-		6,350	-
After 10 years			21,059		1,902		58		1,874		17,341	1.89
United States and Puerto
Rico government
obligations			539,415		5,678		183		4,901		529,019	1.34
Mortgage-backed securities:
FHLMC certificates:
After 5 to 10 years			22,867		-		78		-		22,945	2.15
After 10 years			286,682		-		360		5,304		281,738	2.16
			309,549		-		438		5,304		304,683	2.16
GNMA certificates:
After 1 to 5 years			76		-		2		-		78	3.83
After 5 to 10 years			86,431		-		1,728		-		88,159	3.06
After 10 years			118,596		-		8,589		-		127,185	4.36
			205,103		-		10,319		-		215,422	3.81
FNMA certificates:
Due within one year			98		-		1		-		99	4.48
After 1 to 5 years			20,404		-		476		-		20,880	2.36
After 5 to 10 years			19,785		-		-		257		19,528	2.01
After 10 years			668,295		-		4,680		8,558		664,417	2.36
			708,582		-		5,157		8,815		704,924	2.35
Collateralized mortgage obligations
guaranteed by the FHLMC
and  GNMA
After 5 to 10 years			19,358		-		48		-		19,406	1.63
After 10 years			38,697		-		30		19		38,708	1.65
			58,055		-		78		19		58,114	1.64
Other mortgage pass-through
trust certificates:
After 10 years			26,701		7,393		-		-		19,308	2.41
Total mortgage-backed
securities			1,307,990		7,393		15,992		14,138		1,302,451	2.50
Other
After 1 to 5 years			100		-		-		-		100	1.50
Equity securities  (1)			417		-		-		6		411	2.08
Total investment securities
available for sale		$	1,847,922	$	13,071	$	16,175	$	19,045	$	1,831,981	2.15
(1)	Equity securities consisted of investment in a Community Reinvestment Act Qualified Investment Fund.

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		December 31, 2016
		Amortized cost		Noncredit Loss Component of OTTI Recorded in OCI		Gross				Fair value		Weighted-average yield%
						Unrealized
						gains		losses
(Dollars in thousands)
U.S. Treasury securities:
	Due within one year	$	7,508	$	-	$	1	$	-	$	7,509	0.57
Obligations of U.S.
government-sponsored
agencies:
	After 1 to 5 years		440,438		-		142		2,912		437,668	1.33
	After 5 to 10 years		16,942		-		9		256		16,695	1.91
	After 10 years		44,145		-		8		166		43,987	1.12
Puerto Rico government
obligations:
	After 1 to 5 years		21,422		12,222		-		-		9,200	-
	After 10 years		21,245		2,028		73		1,662		17,628	1.86
United States and Puerto
Rico government
obligations			551,700		14,250		233		4,996		532,687	1.29
Mortgage-backed securities:
FHLMC certificates:
	After 5 to 10 years		5,908		-		72		-		5,980	2.25
	After 10 years		314,906		-		261		5,827		309,340	2.17
			320,814		-		333		5,827		315,320	2.17
GNMA certificates:
	After 1 to 5 years		83		-		3		-		86	3.82
	After 5 to 10 years		91,744		-		1,635		92		93,287	3.06
	After 10 years		123,548		-		9,706		-		133,254	4.36
			215,375		-		11,344		92		226,627	3.81
FNMA certificates:
	Due within one year		152		-		2		-		154	4.71
	After 1 to 5 years		24,409		-		435		-		24,844	2.18
	After 5 to 10 years		17,181		-		-		261		16,920	1.87
	After 10 years		690,625		-		4,136		9,406		685,355	2.35
			732,367		-		4,573		9,667		727,273	2.33
Collateralized mortgage
	obligations issued or
	guaranteed by the FHLMC
	and GNMA:
	After 1 to 5 years		19,851		-		4		31		19,824	1.42
	After 10 years		39,120		-		-		132		38,988	1.44
			58,971		-		4		163		58,812	1.43
Other mortgage pass-through
trust certificates:
	After 10 years		28,815		8,122		-		-		20,693	2.40
Total mortgage-backed
	securities		1,356,342		8,122		16,254		15,749		1,348,725	2.49