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, 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 registrant 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 Exchange 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: 215,991,652 shares outstanding as of July 31, 2017.

FIRST BANCORP.

INDEX PAGE

PART I FINANCIAL INFORMATION	PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2017 and December 31, 2016	5
Consolidated Statements of Income (Unaudited) – Quarters ended June 30, 2017 and 2016 and six-month periods ended June 30, 2017 and 2016	6
Consolidated Statements of Comprehensive Income (Unaudited) – Quarters ended June 30, 2017 and 2016 and six-month periods ended June 30, 2017 and 2016	7
Consolidated Statements of Cash Flows (Unaudited) – Six-month periods ended June 30, 2017 and 2016	8
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Six-month periods ended June 30, 2017 and 2016	9
Notes to Consolidated Financial Statements (Unaudited)	10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	78
Item 3. Quantitative and Qualitative Disclosures About Market Risk	142
Item 4. Controls and Procedures	142
PART II. OTHER INFORMATION
Item 1.    Legal Proceedings	143
Item 1A. Risk Factors	143
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds	144
Item 3.    Defaults Upon Senior Securities	145
Item 4.    Mine Safety Disclosures	145
Item 5.    Other Information	145
Item 6.    Exhibits	145
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 filing of a form of bankruptcy under Title III of PROMESA that provides a court debt restructuring process similar to U.S. bankruptcy protection and the effect of measures included in the Puerto Rico government fiscal plan to our clients and loan portfolios;

·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 have enabled the Corporation to pay quarterly interest payments on the Corporation’s subordinated debentures associated with its trust preferred securities since the second quarter of 2016, and for future monthly dividends on the 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 Corporation’s remaining $8.0 million Puerto Rico government’s debt securities;

·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;

·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)

	June 30, 2017		December 31, 2016
(In thousands, except for share information)
ASSETS
Cash and due from banks	$	422,150	$	289,591
Money market investments:
Time deposits with other financial institutions		3,125		2,800
Other short-term investments		7,289		7,294
Total money market investments		10,414		10,094
Investment securities available for sale, at fair value:
Securities pledged that can be repledged		350,226		339,390
Other investment securities		1,409,819		1,542,530
Total investment securities available for sale		1,760,045		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 $134,944 (2016- $132,759)		156,049		156,190
Other equity securities		43,072		42,992
Loans, net of allowance for loan and lease losses of $173,485
(2016 - $205,603)		8,687,691		8,681,270
Loans held for sale, at lower of cost or market		37,272		50,006
Total loans, net		8,724,963		8,731,276
Premises and equipment, net		146,586		150,828
Other real estate owned		150,045		137,681
Accrued interest receivable on loans and investments		44,491		45,453
Other assets		455,985		476,430
Total assets	$	11,913,800	$	11,922,455
LIABILITIES
Non-interest-bearing deposits	$	1,578,142	$	1,484,155
Interest-bearing deposits		7,164,751		7,347,050
Total deposits		8,742,893		8,831,205
Securities sold under agreements to repurchase		300,000		300,000
Advances from the Federal Home Loan Bank (FHLB)		675,000		670,000
Other borrowings		216,187		216,187
Accounts payable and other liabilities		119,810		118,820
Total liabilities		10,053,890		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, 219,928,329 shares (2016 - 218,700,394 shares issued)		21,993		21,870
Less: Treasury stock (at par value)		(397)		(125)
Common stock outstanding, 215,963,916, shares outstanding (2016 - 217,446,205
shares outstanding)		21,596		21,745
Additional paid-in capital		933,710		931,856
Retained earnings, includes legal surplus reserve of $52,436		883,129		830,928
Accumulated other comprehensive loss, net of tax of $7,752		(14,629)		(34,390)
Total stockholders' equity		1,859,910		1,786,243
Total liabilities and stockholders' equity	$	11,913,800	$	11,922,455
The accompanying notes are an integral part of these statements.

5

FIRST BANCORP.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Quarter Ended				Six-Month Period Ended
	June 30,				June 30,
	2017		2016		2017		2016
(In thousands, except per share information)
Interest and dividend income:
Loans	$	132,697	$	132,111	$	264,139	$	267,250
Investment securities		13,950		13,552		27,252		28,171
Money market investments		727		1,271		1,211		2,344
Total interest income		147,374		146,934		292,602		297,765
Interest expense:
Deposits		16,348		17,224		32,320		34,481
Securities sold under agreements to repurchase		2,765		6,029		5,388		11,505
Advances from FHLB		2,292		1,471		4,414		2,942
Other borrowings		2,065		1,982		4,027		3,961
Total interest expense	23,470		26,706		46,149		52,889
Net interest income		123,904		120,228		246,453		244,876
Provision for loan and lease losses		18,096		20,986		43,538		42,039
Net interest income after provision for loan and lease losses	105,808		99,242		202,915		202,837
Non-interest income:
Service charges and fees on deposit accounts		5,803		5,618		11,593		11,418
Mortgage banking activities		4,846		4,893		8,462		9,646
Net gain on sale of investments		371		-		371		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		1,855		1,542		5,442		4,811
Other non-interest income		7,674		7,725		15,155		14,834
Total non-interest income	20,549		19,778		28,792		38,247
Non-interest expenses:
Employees' compensation and benefits		38,409		37,401		77,062		75,836
Occupancy and equipment		13,759		13,043		27,847		27,226
Business promotion		3,192		4,048		6,473		8,051
Professional fees		11,800		11,327		22,756		22,103
Taxes, other than income taxes		3,745		3,756		7,421		7,548
Insurance and supervisory fees		4,855		7,066		9,764		14,409
Net loss on other real estate owned (OREO) and OREO operations		3,369		3,325		7,445		6,531
Credit and debit card processing expenses		3,566		3,274		6,397		6,556
Communications		1,628		1,725		3,171		3,533
Other non-interest expenses		4,746		4,579		8,615		10,748
Total non-interest expenses	89,069		89,544		176,951		182,541
Income before income taxes		37,288		29,476		54,756		58,543
Income tax expense		(9,290)		(7,523)		(1,217)		(13,246)
Net income	$	27,998	$	21,953	$	53,539	$	45,297
Net income attributable to common stockholders	$	27,329	$	21,953	$	52,201	$	45,297
Net income per common share:
Basic	$	0.13	$	0.10	$	0.24	$	0.21
Diluted	$	0.13	$	0.10	$	0.24	$	0.21
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				Six-Month Period Ended
	June 30,				June 30,
		2017		2016	2017			2016
(In thousands)
Net income	$	27,998	$	21,953	$	53,539	$	45,297
Available-for-sale debt securities on which an other-than-temporary
impairment has been recognized:
Unrealized gain (loss) on debt securities on which an
other-than-temporary impairment has been recognized		1,127		2,453		(1,803)		1,455
Reduction of non-credit OTTI component on securities sold		5,678		-		5,678		-
Reclassification adjustments for net gain included in net income		(371)		-		(371)		-
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		2,631		11,422		4,026		36,132
Other comprehensive income for the period		9,065		13,875		19,761		44,266
Total comprehensive income	$	37,063	$	35,828	$	73,300	$	89,563
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,
	2017		2016
(In thousands)
Cash flows from operating activities:
Net income	$	53,539	$	45,297
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,230		9,015
Amortization of intangible assets		2,242		2,442
Provision for loan and lease losses		43,538		42,039
Deferred income tax expense		728		11,972
Stock-based compensation		3,599		3,346
Gain on sales of investments		(371)		(8)
Other-than-temporary impairments on debt securities		12,231		6,687
Gain on early extinguishment of debt		-		(4,217)
Unrealized (gain) loss on derivative instruments		(307)		243
Net gain on sales of premises and equipment and other assets		(133)		(686)
Net gain on sales of loans		(3,696)		(5,089)
Net amortization/accretion of premiums, discounts and deferred loan fees and costs		(4,235)		(4,624)
Originations and purchases of loans held for sale		(182,678)		(220,056)
Sales and repayments of loans held for sale		188,890		224,765
Amortization of broker placement fees		1,007		1,645
Net amortization/accretion of premium and discounts on investment securities		40		1,898
Decrease in accrued interest receivable		10		2,713
Increase (decrease) in accrued interest payable		567		(26,580)
Decrease in other assets		4,225		2,816
Increase (decrease) in other liabilities		4,148		(11,414)
Net cash provided by operating activities		131,574		82,204
Cash flows from investing activities:
Principal collected on loans		1,362,537		1,494,316
Loans originated and purchased		(1,498,967)		(1,321,511)
Proceeds from sales of loans held for investment		53,245		-
Proceeds from sales of repossessed assets		20,999		27,674
Proceeds from sales of available-for-sale securities		23,408		14,990
Purchases of available-for-sale securities		(12,440)		(279,500)
Proceeds from principal repayments and maturities of available-for-sale securities		119,664		183,570
Proceeds from principal repayments and maturities of held-to-maturity securities		141		141
Additions to premises and equipment		(5,269)		(5,280)
Proceeds from sale of premises and equipment and other assets		1,109		2,250
Net purchase/sales of other equity securities		(80)		(210)
Net cash outflows from purchase/sale of insurance contracts		-		(960)
Net cash provided by investing activities		64,347		115,480
Cash flows from financing activities:
Net decrease in deposits		(64,810)		(114,613)
Net FHLB advances proceeds		5,000		-
Dividends paid on preferred stock		(1,338)		-
Repurchase of outstanding common stock		(1,894)		(590)
Repayment of junior subordinated debentures		-		(7,025)
Net cash used in financing activities		(63,042)		(122,228)
Net increase in cash and cash equivalents		132,879		75,456
Cash and cash equivalents at beginning of period		299,685		752,458
Cash and cash equivalents at end of period	$	432,564	$	827,914
Cash and cash equivalents include:
Cash and due from banks	$	422,150	$	617,827
Money market instruments		10,414		210,087
	$	432,564	$	827,914
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,
	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		27		44
Common stock withheld for taxes		(33)		(19)
Restricted stock grants		95		179
Restricted stock forfeited		(238)		-
Balance at end of period		21,596		21,713
Additional Paid-In-Capital:
Balance at beginning of period		931,856		926,348
Stock-based compensation		3,599		3,346
Common stock withheld for taxes		(1,861)		(571)
Restricted stock grants		(95)		(179)
Common stock issued as compensation		(27)		(44)
Restricted stock forfeited		238		-
Balance at end of period		933,710		928,900
Retained Earnings:
Balance at beginning of period		830,928		737,922
Net income		53,539		45,297
Dividends on preferred stock		(1,338)		-
Balance at end of period		883,129		783,219
Accumulated Other Comprehensive Income (Loss), net of tax:
Balance at beginning of period		(34,390)		(27,749)
Other comprehensive income, net of tax		19,761		44,266
Balance at end of period		(14,629)		16,517
Total stockholders' equity	$	1,859,910	$	1,786,453
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, 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 and six-month period ended June 30, 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, principles-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, with certain exceptions provided recently by the SEC staff, 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’s 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 that 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

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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 adoption of this guidance is not expected to have a material impact on the Corporation’s statement of financial condition or results of operations. As of June 30, 2017, the Corporation had $4.2 million of callable debt securities held at a premium (unamortized premium of $0.1 million).

   In May 2017, the FASB updated the codification to reduce the cost and complexity when applying ASC Topic 718 and standardize the practice of applying Topic 718 to financial reporting. Topic 718 prescribes the accounting treatment of a modification in the terms or conditions of a share-based payment award. The guidance clarifies what changes would qualify as a modification. This was done by better defining what does not constitute a modification. In order for a change to a share-based arrangement to not require Topic 718 modification treatment, all of the following must be met: (i) the fair value (or alternative measurement method used) of the modified award equals the fair value (or alternative measurement method used) of the original award immediately before the original award is modified, (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under this Update. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The amendments in this Update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Corporation’s Omnibus Plan provides for equity based compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, cash-based awards and other stock-based awards. If any change occurs in the future to the Omnibus Plan, the Corporation will evaluate it under this guidance.

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NOTE 2 – EARNINGS PER COMMON SHARE

	The calculations of earnings per common share for the quarters and six-month periods ended June 30, 2017 and 2016 are as follows:
		Quarter Ended				Six-Month Period Ended
		June 30,				June 30,
		2017		2016		2017		2016
(In thousands, except per share information)
Net income		$	27,998	$	21,953	$	53,539	$	45,297
Less: Preferred stock dividends			(669)		-		(1,338)		-
Net income attributable to common stockholders		$	27,329	$	21,953	$	52,201	$	45,297
Weighted-Average Shares:
Average common shares outstanding			213,900		212,768		213,621		212,558
Average potential dilutive common shares			2,932		3,155		3,482		2,040
Average common shares outstanding- assuming dilution			216,832		215,923		217,103		214,598
Earnings per common share:
Basic		$	0.13	$	0.10	$	0.24	$	0.21
Diluted		$	0.13	$	0.10	$	0.24	$	0.21

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 that do not contain non-forfeitable dividend rights.

    Potential common shares consist of common stock issuable under the assumed exercise of stock options, unvested shares of restricted stock that do not contain non-forfeitable dividend rights, 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 that do not contain non-forfeitable dividend rights, 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 June 30, 2017. Stock options not included in the computation of outstanding shares because they were antidilutive amounted to 39,855 as of June 30, 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 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 to14,169,807shares 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.

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	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 Directorsupon 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.

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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.

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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 June 30, 2017 and December 31, 2016 were as follows:

		June 30, 2017
		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:
	After 1 to 5 years	$	7,443	$	-	$	-	$	12	$	7,431	1.29
Obligations of U.S.
government-sponsored
agencies:
Due within one year			69,976		-		-		107		69,869	1.04
After 1 to 5 years			361,964		-		171		1,875		360,260	1.37
After 5 to 10 years			16,943		-		29		159		16,813	2.00
After  10 years			42,592		-		-		239		42,353	1.60
Puerto Rico government
obligations:
After 10 years			7,980		-		68		2,402		5,646	5.00
United States and Puerto Rico
government obligations			506,898		-		268		4,794		502,372	1.42
Mortgage-backed securities:
FHLMC certificates:
After 5 to 10 years			21,643		-		62		-		21,705	2.18
After 10 years			277,351		-		489		4,054		273,786	2.18
			298,994		-		551		4,054		295,491	2.18
GNMA certificates:
After 1 to 5 years			94		-		2		-		96	3.33
After 5 to 10 years			81,006		-		1,635		-		82,641	3.05
After 10 years			114,213		-		8,175		21		122,367	4.35
			195,313		-		9,812		21		205,104	3.81
FNMA certificates:
Due within one year			52		-		-		-		52	4.04
After 1 to 5 years			16,949		-		475		-		17,424	2.56
After 5 to 10 years			19,418		-		19		191		19,246	2.01
After 10 years			646,918		-		4,548		7,058		644,408	2.38
			683,337		-		5,042		7,249		681,130	2.37
Collateralized mortgage obligations
guaranteed by the FHLMC
and GNMA:
After 5 to 10 years			19,074		-		23		-		19,097	1.87
After 10 years			37,948		-		187		-		38,135	1.89
			57,022		-		210		-		57,232	1.88
Other mortgage pass-through
trust certificates:
After 10 years			24,838		6,637		-		-		18,201	2.40
			24,838		6,637		-		-		18,201	2.40
Total mortgage-backed
securities			1,259,504		6,637		15,615		11,324		1,257,158	2.53
Other
After 1 to 5 years			100		-		-		-		100	1.49
Equity Securities (1)			419		-		-		4		415	2.08
Total investment securities
available for sale		$	1,766,921	$	6,637	$	15,883	$	16,122	$	1,760,045	2.21
(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						Fair value		Weighted-average yield%
						Gross Unrealized
						gains		losses
(Dollars in thousands)
U.S. Treasury securities:
	Due whithin 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