STOCK-BASED COMPENSATION

6 Months Ended

Jun. 30, 2017

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 six-month period ended June 30, 2017 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	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 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 14,169,807 shares of common stock, subject to adjustments for stock splits, reorganizations, and other similar events. As of June 30, 2017, 7,984,812 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 half 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 half of 2017, the Corporation awarded 951,332 shares of restricted stock to employees subject to a vesting period of two years. Included in those 951,332 shares of restricted stock were 838,332 shares granted in the first quarter of 2017 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, subject to limits on value and certain vesting and non-transferability requirements. On May 10, 2017, the United States Department of U.S. Treasury (the “U.S. Treasury”) announced that it sold all of its remaining 10,291,553 shares of the Corporation’s common stock. As a result of the U.S. Treasury’s sale, the Corporation is no longer subject to the compensation-related restrictions under TARP, which substantially limited the Corporation’s ability to award short-term and long-term incentives to the Corporation’s executives, and the transferability restrictions on the shares of restricted stock held by the senior officers subject to the restrictions lapsed. However, since the U.S. Treasury did not recover the full amount of its original investment under TARP, 2,370,571 outstanding shares of restricted stock held by senior officers were forfeited, resulting in a reduction in the number of common shares outstanding. The U.S. Treasury continues to hold a warrant to purchase 1,285,899 shares of the Corporation’s common stock.

The fair value of the shares of restricted stock granted in the first half 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 the TARP requirements, the market price was discounted assuming that 50% of the shares of restricted stock would become freely transferable and the remaining 50% would be forfeited, resulting in a fair value of $2.71 for each share of restricted stock granted under TARP requirements. Since the assumption was correct, the forfeiture resulting from the U.S. Treasury’s sale did not have an impact in the Corporation’s operating results. 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.

	The following table summarizes the restricted stock activity in the first half of 2017 under the Omnibus Plan:

		Six-Month Period Ended
		June 30, 2017

		Number of shares		Weighted-Average
		of restricted		Grant Date
		stock		Fair Value

Non-vested shares at beginning of year		4,178,791	$	2.58
Granted		954,976		3.04
Forfeited (1)		(2,383,571)		2.30
Vested (2)		(916,044)		3.34
Non-vested shares at June 30, 2017		1,834,152	$	2.79

(1)	Includes 2,370,571 of outstanding shares of restricted stock, subject to TARP requirements, that were forfeited as a result of the U.S. Treasury's sale of its remaining shares of the Corporation's common stock.
(2)	Includes 743,021 shares of restricted stock released from TARP restrictions.

For the quarter and six-month period ended June 30, 2017, the Corporation recognized $1.0 million and $2.0 million, respectively, of stock-based compensation expense related to restricted stock awards, compared to $1.0 million and $1.9 million for the same periods in 2016, respectively. As of June 30, 2017, there was $4.4 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 1.4 years.

During the first half of 2016, the Corporation awarded 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 were 1,546,137 shares granted to certain senior officers consistent with the requirements of TARP. As explained above, the Corporation is no longer subject to the compensation-related restrictions under TARP as a result of the U.S. Treasury’s sale of its remaining shares of the Corporation’s common stock.

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 the post-vesting restrictions. For purposes of determining the awards’ fair value, the Corporation assumed that 50% of the shares of restricted stock would become freely transferable and the remaining 50% will be forfeited, resulting in a fair value of $1.43 for restricted shares granted under the 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. The estimated forfeiture rate did not change as a result of the restricted shares forfeited in connection with the aforementioned U.S. Treasury’s sale of the Corporation’s common stock.

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 2017, the Corporation issued 272,959 shares of common stock (first half of 2016 – 441,942 shares) with a weighted average market value of $5.94 (first half of 2016 – $3.20) as salary stock compensation. This resulted in a compensation expense of $1.6 million recorded in the first half of 2017 (first half of 2016 – $1.4 million).

For the first half of 2017, the Corporation withheld 90,973 shares (first half of 2016 – 134,949 shares) from the common stock paid to certain senior officers as additional compensation and 235,680 shares of restricted stock that vested during the first half of 2017 (first half of 2016 – 51,754) 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.

On June 29, 2017, the Corporation’s Board of Directors upon the recommendation of the Corporation’s Compensation and Benefits Committee, approved a new executive compensation program that, as of July 1, 2017, applies to the Corporation’s executive officers as a result of the aforementioned sale by the U.S. Treasury of its remaining shares of the Corporation’s common stock. The new compensation program for executive officers maintains the current levels of cash salary through calendar year 2017. The payment of additional salary amounts currently paid in the form of stock will continue through the second quarter of 2018 and will be eliminated at such time.

In addition, as a long-term incentive, the new compensation program provides a variable pay opportunity for long-term performance through a combination of performance shares and restricted stock. The aggregate value of the performance shares and restricted stock will be determined based upon a qualitative assessment of the achievement by executives of their individual goals for the prior year and at three different possible aggregate equity valuation levels (minimum threshold, target and maximum). The Corporation’s Board of Directors has determined that 60% of the long-term incentive award value based upon prior year performance will be in performance shares and 40% will be in restricted stock with the following terms:

Performance Shares— the payout of the performance shares will depend upon the achievement of a pre-established corporate tangible book value per share goal at the end of a three-year period. All of the performance shares will vest if performance is at the pre-established performance goal level or above. To the extent that performance is below the target but at or above a pre-defined minimum threshold, a proportionate amount of the performance shares will vest. No performance shares will vest if performance is below the threshold.

Restricted Stock—Restricted stock will vest over a three-year period as follows: fifty percent (50%) of the shares will vest on the second anniversary date of the grant of the award and the remaining fifty percent (50%) will vest on the third anniversary date of the grant of the award.

The first awards of performance shares are expected to be made in early 2018.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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