10-Q 1 d553592d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

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, 2013

 

¨ 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

  00908
(Address of principal executive offices)   (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  x    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  x    No  ¨

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

Common stock: 206,991,155 shares outstanding as of July 31, 2013.

 

 

 


Table of Contents

FIRST BANCORP.

INDEX PAGE

 

     PAGE  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements:

  

Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2013 and December  31, 2012

     5   

Consolidated Statements of (Loss) Income (Unaudited) – Quarters ended June  30, 2013 and 2012 and six-month periods ended June 30, 2013 and 2012

     6   

Consolidated Statements of Comprehensive (Loss) Income (Unaudited) – Quarters ended June  30, 2013 and 2012 and six-month periods ended June 30, 2013 and 2012

     7   

Consolidated Statements of Cash Flows (Unaudited) – Six-month periods ended June  30, 2013 and 2012

     8   

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Six-month periods ended June 30, 2013 and 2012

     9   

Notes to Consolidated Financial Statements (Unaudited)

     10   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     68   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     123   

Item 4. Controls and Procedures

     123   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     124   

Item 1A. Risk Factors

     124   

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

     128   

Item 3. Defaults Upon Senior Securities

     128   

Item 4. Mine Safety Disclosures

     128   

Item 5. Other Information

     128   

Item 6. Exhibits

     129   

SIGNATURES

  

 

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Forward Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q or future filings by First BanCorp. (the “Corporation”) with the 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 word or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “should,” “anticipate” and similar expressions are meant to identify “forward-looking statements.”

Such “forward-looking statements,” which speak only as of the date made, and various factors, including, but not limited to, the following, could cause actual results to differ materially from those expressed in, or implied by such “forward-looking statements”:

 

   

uncertainty about whether the Corporation and FirstBank Puerto Rico (“FirstBank” or “the Bank”) will be able 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”) and the consent order dated June 2, 2010 (the “FDIC Order”) and together with the Written Agreement, (the “Agreements”) that the Corporation’s banking subsidiary, FirstBank entered into with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF”) that, among other things, require the Bank to maintain certain capital levels and reduce its special mention, classified, delinquent and non-performing assets;

 

   

the risk of being subject to possible additional regulatory actions;

 

   

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

 

   

the Corporation’s reliance on brokered CDs and its ability to obtain, on a periodic basis, approval from the FDIC to issue brokered CDs to fund operations and provide liquidity in accordance with the terms of the FDIC Order;

 

   

the risk of not being able to fulfill the Corporation’s cash obligations or resume paying dividends to the Corporation’s stockholders in the future due to the Corporation’s inability to receive approval from the New York FED or the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) to receive dividends from FirstBank or FirstBank’s failure to generate sufficient cash flow to make a dividend payment to the Corporation;

 

   

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

 

   

the ability of Firstbank to realize the benefit of the deferred tax asset.

 

   

adverse changes in general economic conditions in Puerto Rico, the United States (“U.S.”) and in 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 may reduce interest margins, impact funding sources, and affect demand for all of the Corporation’s products and services and reduce the Corporation’s revenues, earnings, and the value of the Corporation’s assets;

 

   

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

 

   

a decrease in demand for the Corporation’s products and services and lower revenues and earnings because of the continued recession in Puerto Rico, the current fiscal problems and budget deficit of the Puerto Rico government and recent credit downgrades of the Puerto Rico government;

 

   

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;

 

   

uncertainty about the effectiveness of the various actions undertaken to stimulate the U.S. economy and stabilize the U.S. financial markets, and the impact such actions may have on the Corporation’s business, financial condition and results of operations;

 

   

changes in the fiscal and monetary policies and regulations of the federal government, including those determined by the Federal Reserve Board, the 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;

 

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the risk that the FDIC may further 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 additional impairments on financial instruments, goodwill or other intangible assets relating to acquisitions;

 

   

the risks 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 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on the Corporation’s businesses, business practices and cost of operations;

 

   

the risk of losses in the value of investments in unconsolidated entities that the Corporation does not control; and

 

   

general competitive factors and industry consolidation.

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

Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012, 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.

 

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FIRST BANCORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

     June 30, 2013     December 31, 2012  
     (In thousands, except for share information)  

ASSETS

    

Cash and due from banks

   $ 618,593     $ 730,016  
  

 

 

   

 

 

 

Money market investments:

    

Time deposits with other financial institutions

     300       505  

Other short-term investments

     216,074       216,330  
  

 

 

   

 

 

 

Total money market investments

     216,374       216,835  
  

 

 

   

 

 

 

Investment securities available for sale, at fair value:

    

Securities pledged that can be repledged

     1,052,549       1,070,968  

Other investment securities

     938,239       660,109  
  

 

 

   

 

 

 

Total investment securities available for sale

     1,990,788       1,731,077  
  

 

 

   

 

 

 

Other equity securities

     32,321       38,757  
  

 

 

   

 

 

 

Investment in unconsolidated entities

     19,080       23,970  
  

 

 

   

 

 

 

Loans, net of allowance for loan and lease losses of $301,047 (2012 - $435,414)

     9,144,739       9,618,700  

Loans held for sale, at lower of cost or market

     237,583       85,394  
  

 

 

   

 

 

 

Total loans, net

     9,382,322       9,704,094  
  

 

 

   

 

 

 

Premises and equipment, net

     174,429       181,363  

Other real estate owned

     139,257       185,764  

Accrued interest receivable on loans and investments

     54,636       51,671  

Other assets

     175,369       236,194  
  

 

 

   

 

 

 

Total assets

   $ 12,803,169     $ 13,099,741  
  

 

 

   

 

 

 

LIABILITIES

    

Non-interest-bearing deposits

   $ 938,318     $ 837,387  

Interest-bearing deposits

     9,039,327       9,027,159  
  

 

 

   

 

 

 

Total deposits

     9,977,645       9,864,546  

Securities sold under agreements to repurchase

     900,000       900,000  

Advances from the Federal Home Loan Bank (FHLB)

     358,440       508,440  

Other borrowings

     231,959       231,959  

Accounts payable and other liabilities

     112,797       109,773  
  

 

 

   

 

 

 

Total liabilities

     11,580,841       11,614,718  
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

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

    

Non-cumulative Perpetual Monthly Income Preferred Stock: issued - 22,004,000 shares, outstanding 2,521,872 shares, aggregate liquidation value of $63,047

     63,047       63,047  
  

 

 

   

 

 

 

Common stock, $0.10 par value, authorized, 2,000,000,000 shares; issued, 207,514,167 shares (2012 - 206,730,318 shares issued)

     20,751       20,673  

Less: Treasury stock (at par value)

     (53     (49
  

 

 

   

 

 

 

Common stock outstanding, 206,982,105 shares outstanding (2012 - 206,235,465 shares outstanding)

     20,698       20,624  
  

 

 

   

 

 

 

Additional paid-in capital

     886,775       885,754  

Retained earnings

     291,950       487,166  

Accumulated other comprehensive (loss) income, net of tax expense of $8,171 (2012 - $7,749)

     (40,142     28,432  
  

 

 

   

 

 

 

Total stockholders’ equity

     1,222,328       1,485,023  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 12,803,169     $ 13,099,741  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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FIRST BANCORP.

CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(Unaudited)

 

     Quarter Ended     Six-Month Period Ended  
(In thousands, except per share information)    June 30,
2013
    June 30,
2012
    June 30,
2013
    June 30,
2012
 

Interest income:

        

Loans

   $ 147,986     $ 142,239     $ 296,629     $ 282,765  

Investment securities

     12,185       10,957       23,228       22,169  

Money market investments

     499       456       1,038       825  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     160,670       153,652       320,895       305,759  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     23,918       33,489       49,462       70,223  

Securities sold under agreements to repurchase

     6,470       7,028       12,887       15,118  

Advances from FHLB

     1,631       3,028       3,656       6,269  

Notes payable and other borrowings

     1,763       1,402       3,509       3,578  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     33,782       44,947       69,514       95,188  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     126,888       108,705       251,381       210,571  

Provision for loan and lease losses

     87,464       24,884       198,587       61,081  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     39,424       83,821       52,794       149,490  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest (loss) income:

        

Service charges on deposit accounts

     3,098       3,240       6,478       6,487  

Mortgage banking activities

     4,823       4,057       9,403       8,532  

Net (loss) gain on sale of investments (includes $42 accumulated other comprehensive income reclassification for other-than-temporary impairment on equity securities for the quarter and six-month period ended June 30, 2013)

     (42     —         (42     26  

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

        

Total other-than-temporary impairment losses

     —         —         —         —    

Portion of other-than-temporary impairment losses recognized in other comprehensive income

     —         (143     (117     (1,376
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses on available-for-sale debt securities

     —         (143     (117     (1,376

Equity in earnings (losses) of unconsolidated entities

     648       (2,491     (4,890     (8,727

Impairment of collateral pledged to Lehman

     (66,574     —         (66,574     —    

Insurance income

     1,508       1,312       3,528       2,792  

Other non-interest income

     4,876       8,047       14,180       14,763  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest (loss) income

     (51,663     14,022       (38,034     22,497  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expenses:

        

Employees’ compensation and benefits

     33,116       31,101       66,670       62,712  

Occupancy and equipment

     14,946       15,181       30,016       30,857  

Business promotion

     3,831       3,475       7,188       6,022  

Professional fees

     13,735       6,230       24,867       12,299  

Taxes, other than income taxes

     6,239       3,435       9,228       6,851  

Insurance and supervisory fees

     12,699       13,302       25,505       26,310  

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

     14,829       6,786       22,139       10,229  

Credit and debit card processing expenses

     2,281       811       5,358       942  

Communications

     1,885       1,758       3,699       3,479  

Other non-interest expenses

     7,762       4,863       14,663       12,434  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expenses

     111,323       86,942       209,333       172,135  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income before income taxes

     (123,562     10,901       (194,573     (148

Income tax benefit (expense)

     979       (1,545     (643     (3,678
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (122,583   $ 9,356     $ (195,216   $ (3,826
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders

   $ (122,583   $ 9,356     $ (195,216   $ (3,826
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) earnings per common share:

        

Basic

   $ (0.60   $ 0.05     $ (0.95   $ (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.60   $ 0.05     $ (0.95   $ (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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FIRST BANCORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

                                                                                       
     Quarter Ended      Six-Month Period Ended  
(In thousands)    June 30,
2013
    June 30,
2012
     June 30,
2013
    June 30,
2012
 

Net (loss) income

   $ (122,583   $ 9,356      $ (195,216   $ (3,826
  

 

 

   

 

 

    

 

 

   

 

 

 

Available-for-sale debt securities on which other-than-temporary impairment has been recognized:

         

Subsequent unrealized gain on debt securities on which an other-than-temporary impairment has been recognized

     592       2,614        1,435       3,545  

Reclassification adjustment for other-than-temporary impairment on debt securities included in net income

     —         143        117       1,376  

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

         

All other unrealized holding (losses) gains arising during the period

     (60,176     3,498        (69,746     2,141  

Reclassification adjustment for other-than-temporary impairment on equity securities

     42       —          42       —    

Income tax (expense) benefit related to items of other comprehensive income

     (422     133        (422     350  
  

 

 

   

 

 

    

 

 

   

 

 

 

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

     (59,964     6,388        (68,574     7,412  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive loss

   $ (182,547   $ 15,744      $ (263,790   $ 3,586  
  

 

 

   

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six-Month Period Ended  
(In thousands)    June 30,
2013
    June 30,
2012
 

Cash flows from operating activities:

    

Net loss

   $ (195,216   $ (3,826

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation

     11,933       12,435  

Amortization and impairment of intangible assets

     3,039       1,283  

Provision for loan and lease losses

     198,587       61,081  

Deferred income tax (benefit) expense

     (2,154     1,128  

Stock-based compensation

     1,321       192  

Other-than-temporary impairments on debt securities

     117       1,376  

Other-than-temporary impairments on equity securities

     42        —     

Equity in losses of unconsolidated entities

     4,890       8,727  

Impairment of collateral pledged to Lehman

     66,574       —    

Derivative instruments and financial liabilities measured at fair value, gain

     (1,974     (834

Loss on sale of premises and equipment and other assets

     —         254  

Net gain on sale of loans

     (1,304     (1,857

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

     (2,078     (947

Originations and purchases of loans held for sale

     (306,579     (181,181

Sales and repayments of loans held for sale

     259,506       195,956  

Loans held for sale valuation adjustment

     6,103       —    

Amortization of broker placement fees

     4,182       5,307  

Net amortization of premium and discounts on investment securities

     6,713       7,511  

Decrease in accrued income tax payable

     (1,623     (1,088

(Increase) decrease in accrued interest receivable

     (2,965     349  

Increase in accrued interest payable

     1,257       241  

Decrease in other assets

     20,702       15,413  

Increase (decrease) in other liabilities

     16,116       (1,808
  

 

 

   

 

 

 

Net cash provided by operating activities

     87,189       119,712  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Principal collected on loans

     1,363,136       1,549,244  

Loans originated and purchased

     (1,545,408     (1,633,182

Proceeds from sale of loans held for investment

     296,610       15,001  

Proceeds from sale of repossessed assets

     60,568       46,535  

Purchases of securities available for sale

     (541,910     (317,506

Proceeds from principal repayments and maturities of securities available for sale

     207,810       698,625  

Additions to premises and equipment

     (4,999     (4,494

Proceeds from sale of premises and equipments and other assets

     —         1,026  

Proceeds from securities litigation settlement and other proceeds

     —         26  

Decrease in other equity securities

     6,436       5,810  
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (157,757     361,085  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     108,917       (13,540

Net repayments of securities sold under agreements to repurchase

     —         (100,000

Net FHLB advances paid

     (150,000     (34,000

Repurchase of outstanding common stock

     (233     —    

Repayments of medium-term notes

     —         (21,957

Proceeds from common stock sold

     —         1,037  
  

 

 

   

 

 

 

Net cash used in financing activities

     (41,316     (168,460
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (111,884     312,337  

Cash and cash equivalents at beginning of period

     946,851       446,566  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 834,967     $ 758,903  
  

 

 

   

 

 

 

Cash and cash equivalents include:

    

Cash and due from banks

   $ 618,593     $ 518,725  

Money market instruments

     216,374       240,178  
  

 

 

   

 

 

 
   $ 834,967     $ 758,903  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

     Six-Month Period Ended  
(In thousands)    June 30,
2013
    June 30,
2012
 

Preferred Stock

   $ 63,047     $ 63,047  
  

 

 

   

 

 

 

Common Stock outstanding:

    

Balance at beginning of period

     20,624       20,513  

Common stock issued as compensation

     11       —    

Repurchase of common stock

     (4     —    

Common stock sold

     —         29  

Restricted stock grants

     70       72  

Restricted stock forfeited

     (3     —    
  

 

 

   

 

 

 

Balance at end of period

     20,698       20,614  
  

 

 

   

 

 

 

Additional Paid-In-Capital:

    

Balance at beginning of period

     885,754       884,002  

Restricted stock grants

     (70     (72

Restricted stock forfeited

     3       —    

Common stock sold

     —         1,008  

Stock-based compensation

     1,321       192  

Repurchase of common stock

     (233     —    
  

 

 

   

 

 

 

Balance at end of period

     886,775       885,130  
  

 

 

   

 

 

 

Retained Earnings:

    

Balance at beginning of period

     487,166       457,384  

Net loss

     (195,216     (3,826
  

 

 

   

 

 

 

Balance at end of period

     291,950       453,558  
  

 

 

   

 

 

 

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

    

Balance at beginning of period

     28,432       19,198  

Other comprehensive (loss) income, net of tax

     (68,574     7,412  
  

 

 

   

 

 

 

Balance at end of period

     (40,142     26,610  
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 1,222,328     $ 1,448,959  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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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, 2012. 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, 2012, included in the Corporation’s 2012 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 June 30, 2013 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 December 2011, the FASB updated the Accounting Standards Codification (“the Codification”) to enhance and require converged disclosures about financial and derivative instruments that are either offset on the balance sheet, or are subject to an enforceable master netting arrangement (or other similar arrangement). Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. In January 2013, the FASB updated the Codification to clarify the scope of the disclosure to include only derivatives, including bifurcated embedded derivatives, repurchase agreements, reverse repurchase agreements, and securities lending that are either offset or subject to an enforceable master netting agreement or similar agreement. The amendments in this Update are effective for interim and annual periods beginning on or after January 1, 2013. The Corporation adopted this guidance in 2013. Refer to Note 10 for required disclosures about offsetting assets and liabilities.

In February 2013, the FASB updated the Codification to improve the reporting of reclassifications out of accumulated other comprehensive income (“OCI”). The amendments in this Update seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated OCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated OCI is reclassified to a balance sheet account (for example, inventory) instead of directly to income or expense in the same reporting period. The amendments in this Update are effective prospectively for reporting periods beginning after December 31, 2012. The Corporation adopted this guidance in 2013 with no effect on the Corporation’s financial condition or results of operations since it impacted presentation only. The reclassifications out of accumulated other comprehensive income of the Corporation during the first half of 2013 and 2012 were primarily related to credit losses on debt securities for which other-than-temporary impairment (“OTTI”) was previously recognized. The disclosure of credit losses on debt securities, and required identification in the statement of income (loss), is already required by Accounting Standard Codification (ASC) 320-10-50.

In July 2013, the FASB updated the Codification to add the Fed Funds Effective Swap Rates (or Overnight Index Swap Rate) as a U.S. benchmark interest rate for hedge accounting purposes. Previously, only the direct Treasury obligations of the U.S. government and the London Interbank Offered Rate (LIBOR) swap rate were used. This Update is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this guidance will not have an effect on the Corporation’s financial condition or results of operations as the Corporation’s derivative instruments are not designated or do not qualify for hedge accounting.

In July 2013, the FASB updated the Codification to provide explicit guidelines on how to present an unrecognized tax benefit in a financial statement when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of

the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law

 

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of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments are effective for public entities with fiscal periods beginning after December 15, 2013. Early adoption is permitted. The Corporation is currently evaluating the impact of the adoption of this guidance on its financial statements.

NOTE 2 – EARNINGS PER COMMON SHARE

The calculations of earnings (losses) per common share for the quarters and six-month periods ended June 30, 2013 and 2012 are as follows:

     Quarter Ended      Six-Month Period Ended  
     June 30,
2013
    June 30,
2012
     June 30,
2013
    June 30,
2012
 
     (In thousands, except per share information)  

Net (loss) income

   $ (122,583   $ 9,356      $ (195,216   $ (3,826
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income attributable to common stockholders

   $ (122,583   $ 9,356      $ (195,216   $ (3,826
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted-Average Shares:

         

Basic weighted-average common shares outstanding

     205,490       205,415        205,477       205,316  

Average potential common shares

     —         537        —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted weighted-average number of common shares outstanding

     205,490       205,952        205,477       205,316  
  

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) Earnings per common share:

         

Basic

   $ (0.60   $ 0.05      $ (0.95   $ (0.02
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ (0.60   $ 0.05      $ (0.95   $ (0.02
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares issued and outstanding. Net income (loss) attributable to common stockholders represents net income (loss) adjusted for preferred stock dividends, including dividends declared, cumulative dividends related to the current dividend period that have not been declared as of the end of the period, and the accretion of discount on preferred stock issuances, if any. 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 number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options, unvested shares of restricted stock, and outstanding warrants that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per share. Stock options not included in the computation of outstanding shares because they were antidilutive amounted to 104,499 and 120,221 for the quarters and six-month periods ended June 30, 2013 and 2012, respectively. Warrants outstanding to purchase 1,285,899 shares of common stock for the quarter ended June 30, 2013 and six-month periods ended June 30, 2013 and 2012; and 1,442,427 unvested shares of restricted stock for the quarter and six-month period end June 30, 2013 and 719,500 unvested shares of restricted stock for the six-month period ended June 30, 2012, were excluded from the computation of diluted earnings per share because the Corporation reported a net loss attributable to common stockholders for these periods and their inclusion would have an antidilutive effect.

 

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NOTE 3 – STOCK-BASED COMPENSATION

Between 1997 and January 2007, the Corporation had the 1997 stock option plan that authorized the granting of up to 579,740 options on shares of the Corporation’s common stock to eligible employees. The options granted under the plan could not exceed 20% of the number of common shares outstanding. The maximum term to exercise these options is 10 years.

On January 21, 2007, the 1997 stock option plan expired; all outstanding awards granted under this plan continue in full force and effect, subject to their original terms. No awards for shares could be granted under the 1997 stock option plan as of its expiration.

The activity of stock options granted under the 1997 stock option plan for the six-month period ended June 30, 2013 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

     113,158     $ 206.96        

Options expired

     (7,795     192.20        

Options cancelled

     (864     222.05        
  

 

 

   

 

 

       

End of period outstanding and exercisable

     104,499     $ 207.94        2.6      $ —    
  

 

 

   

 

 

    

 

 

    

 

 

 

On April 29, 2008, the Corporation’s stockholders approved the First BanCorp. 2008 Omnibus Incentive Plan, as amended (the “Omnibus Plan”). The Omnibus Plan provides for equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and other stock-based awards. The Omnibus Plan authorizes the issuance of up to 8,169,807 shares of common stock, subject to adjustments for stock splits, reorganizations and other similar events. The Corporation’s Board of Directors, upon receiving the relevant recommendation of the Compensation Committee, has the power and authority to determine those eligible to receive awards and to establish the terms and conditions of any awards subject to various limits and vesting restrictions that apply to individual and aggregate awards.

Under the Omnibus Plan, during the second quarter of 2013, the Corporation issued 701,405 shares of restricted stock that will vest based on the employees’ continued service with the Corporation. Fifty percent (50%) of those shares vest in two years from the grant date and the remaining 50% vest in three years from the grant date. Included in those 701,405 shares of restricted stock are 582,905 shares granted to certain senior officers consistent with the requirements of the Troubled Relief Asset Program (“TARP”) Interim Final Rule. Notwithstanding the vesting period mentioned above, the employees covered by TARP are restricted from transferring the shares. 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. Department of Treasury (the “Treasury”).

The fair value of the shares of restricted stock granted in the second quarter of 2013 was based on the market price of the Corporation’s outstanding common stock on the date of the grant of $6.03. For the 582,905 shares of restricted stock granted under the TARP requirements, the market price was discounted due to post-vesting restrictions. For purposes of computing the discount, the Corporation estimated an appreciation of 13% 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 a holding period by the Treasury of its outstanding common stock of the Corporation of 2 years, resulting in a fair value of $3.02 for restricted shares granted under the TARP requirements. Also, the Corporation uses empirical data to estimate employee termination; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.

 

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The following table summarizes the restricted stock activity in 2013 under the Omnibus Plan for both executive officers covered by the TARP requirements and other employees as well as for independent directors:

 

     Six-Month Period  Ended
June 30, 2013
 
     Number of shares
of restricted

stock
    Weighted-Average
Grant Date
Fair Value
 

Non-vested shares at beginning of year

     770,507     $ 2.51  

Granted

     701,405       3.53  

Forfeited

     (29,485     3.64  
  

 

 

   

 

 

 

Non-vested shares at June 30, 2013

     1,442,427     $ 2.99  
  

 

 

   

 

 

 

For the quarter and six-month period ended June 30, 2013, the Corporation recognized $0.4 million and $0.6 million, respectively, of stock-based compensation expense related to restricted stock awards, compared to $0.2 million for the quarter and six-month period ended June 30, 2012. As of June 30, 2013, there was $2.9 million of total unrecognized compensation cost related to nonvested shares of restricted stock. The weighted average period over which the Corporation expects to recognize such cost is 2 years.

During the third quarter of 2012, 51,007 shares of restricted stock were awarded to the Corporation’s independent directors subject to a one-year vesting period. In addition, late in the first quarter of 2012, the Corporation issued 719,500 shares of restricted stock that will vest based on the employees’ continued service with the Corporation. Fifty percent (50%) of those shares vest in two years from the grant date and the remaining 50% percent vest in three years from the grant date. Included in those 719,500 shares of restricted stock are 557,000 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 half of 2012 was based on the market price of the Corporation’s outstanding common stock on the date of the grant of $4.00. For the 557,000 shares of restricted stock granted under the TARP requirements, the market price was discounted due to post-vesting restrictions. For purposes of computing the discount, the Corporation assumed appreciation of 25% in the value of the common stock and a holding period by the Treasury of its outstanding common stock of the Corporation of three years, resulting in a fair value of $2.00 for restricted shares granted under the TARP requirements in 2012.

Stock-based compensation accounting guidance requires the Corporation to develop an estimate of the number of share-based awards that will be forfeited due to employee or director turnover. Quarterly changes in the estimated forfeiture rate may have a significant effect on share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period in which the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease in the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase in the expense recognized in the financial statements. When unvested options or shares of restricted stock are forfeited, any compensation expense previously recognized on the forfeited awards is reversed in the period of the forfeiture. Approximately $0.1 million of compensation expense was reversed in 2013 related to forfeited awards.

Also, under the Omnibus Plan, effective April 1, 2013, the Corporation’s Board of Directors determined to increase the salary amounts paid to certain executive officers for fiscal year 2013 primarily by paying the increased salary amounts in the form of shares of the Corporation’s common stock, instead of cash. During the second quarter of 2013, the Corporation issued 111,929 shares of common stock with a weighted average market value of $6.15 for compensation according to this determination. This resulted in a compensation expense of $0.7 million recorded in the second quarter of 2013.

 

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NOTE 4 – INVESTMENT SECURITIES

Investment Securities Available for Sale

The amortized cost, non-credit loss component of OTTI recorded in OCI, gross unrealized gains and losses recorded in OCI, approximate fair value, weighted average yield and contractual maturities of investment securities available for sale as of June 30, 2013 and December 31, 2012 were as follows:

 

    June 30, 2013     December 31, 2012  
    Amortized
cost
    Noncredit
Loss
Component
of OTTI
Recorded in
OCI
    Gross
Unrealized
    Fair value     Weighted
average
yield%
    Amortized
cost
    Noncredit
Loss
Component
of OTTI
Recorded in
OCI
    Gross
Unrealized
    Fair value     Weighted
average
yield%
 
        gains     losses             gains     losses      
    (Dollars in thousands)  

U.S. Treasury securities:

                       

Due within one year

  $ 7,493     $ —       $ 1     $ —       $ 7,494       0.12     $ 7,497     $ —       $ 2     $ —       $ 7,499       0.17  

Obligations of U.S. government-sponsored agencies:

                       

After 1 to 5 years

    50,000       —         —         1,449       48,551       1.05       25,650       —         7       —         25,657       0.35  

After 5 to 10 years

    214,297       —         —         11,115       203,182       1.31       214,323       —         8       415       213,916       1.31  

Puerto Rico government obligations:

                       

Due within one year

    10,000       —         —         15       9,985       3.50       —         —         —         —         —         —    

After 1 to 5 years

    —         —         —         —         —         —         10,000       —         —         —         10,000       3.50  

After 5 to 10 years

    39,771       —         —         2,434       37,337       4.49       39,753       —         —         553       39,200       4.49  

After 10 years

    21,163       —         2       1,062       20,103       5.79       21,099       —         948       47       22,000       5.78  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

United States and Puerto Rico government obligations

    342,724       —         3       16,075       326,652       1.96       318,322       —         965       1,015       318,272       1.97  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Mortgage-backed securities:

                       

FHLMC certificates:

                       

Due within one year

    —         —         —         —         —         —         63       —         —         —         63       3.34  

After 10 years

    327,918       —         156       6,378       321,696       2.11       125,747       —         3,430       —         129,177       2.13  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    327,918       —         156       6,378       321,696       2.11       125,810       —         3,430       —         129,240       2.13  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

GNMA certificates:

                       

After 1 to 5 years

    113       —         6       —         119       3.54       143       —         7       —         150       3.57  

After 5 to 10 years

    698       —         40       —         738       2.79       479       —         37       —         516       3.52  

After 10 years

    473,109       —         24,211       —         497,320       3.82       564,376       —         39,630       —         604,006       3.98  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    473,920       —         24,257       —         498,177       3.82       564,998       —         39,674       —         604,672       3.98  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

FNMA certificates:

                       

Due within one year

    —         —         —         —         —         —         119       —         —         —         119       2.93  

After 1 to 5 years

    1,720       —         83       —         1,803       4.91       2,270       —         149       —         2,419       4.88  

After 5 to 10 years

    8,902       —         489       —         9,391       4.08       10,963       —         874       —         11,837       3.91  

After 10 years

    804,859       —         2,815       20,385       787,289       2.29       602,623       —         10,638       —         613,261       2.49  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    815,481       —         3,387       20,385       798,483       2.32       615,975       —         11,661       —         627,636       2.52  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Collateralized mortgage obligations issued or guaranteed by the FHLMC:

                       

After 1 to 5 years

    175       —         —         1       174       3.01       —         —         —         —         —         —    

After 5 to 10 years

    —         —         —         —         —         —         301       —         —         1       300       3.01  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    175       —         —         1       174       3.01       301       —         —         1       300       3.01  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Other mortgage pass-through trust certificates:

                       

Over 5 to 10 years

    136       —         1       —         137       7.27       143       —         1       —         144       7.27  

After 10 years

    62,369       16,935       —         —         45,434       2.29       69,269       18,487       —         —         50,782       2.29  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    62,505       16,935       1       —         45,571       2.29       69,412       18,487       1       —         50,926       2.29  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total mortgage-backed securities

    1,679,999       16,935       27,801       26,764       1,664,101       2.70       1,376,496       18,487       54,766       1       1,412,774       3.07  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Equity securities (without contractual maturity) (1)

    35       —         —         —         35       —         77       —         —         46       31       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total investment securities available for sale

  $ 2,022,758     $ 16,935     $ 27,804     $ 42,839     $ 1,990,788       2.57     $ 1,694,895     $ 18,487     $ 55,731     $ 1,062     $ 1,731,077       2.87  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(1) Represents common shares of another financial institution in Puerto Rico.

 

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Table of Contents

Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted average yield on investment securities available for sale is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gain or loss on securities available for sale and the noncredit loss component of OTTI are presented as part of OCI.

The following tables show the Corporation’s available-for-sale investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2013 and December 31, 2012. It also includes debt securities for which an OTTI was recognized and only the amount related to a credit loss was recognized in earnings. Unrealized losses for which OTTI had been recognized have been reduced by any subsequent recoveries in fair value.

 

     As of June 30, 2013  
     Less than 12 months      12 months or more      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (In thousands)  

Debt securities:

                 

Puerto Rico government obligations

   $ 66,473      $ 3,511      $ —        $ —        $ 66,473      $ 3,511  

US government agencies obligations

     251,733        12,564        —          —          251,733        12,564  

Mortgage-backed securities:

                 

FNMA

     749,766        20,385        —          —          749,766        20,385  

FHLMC

     271,651        6,378        —          —          271,651        6,378  

Collateralized mortgage obligations issued or guaranteed by FHLMC

     174        1        —          —          174        1  

Other mortgage pass-through trust certificates

     —          —          45,434        16,935        45,434        16,935  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,339,797      $ 42,839      $ 45,434      $ 16,935      $ 1,385,231      $ 59,774  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     As of December 31, 2012  
     Less than 12 months      12 months or more      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (In thousands)  

Debt securities:

                 

Puerto Rico government obligations

   $ 41,243      $ 600      $ —        $ —        $ 41,243      $ 600  

US government agencies obligations

     183,709        415        —          —          183,709        415  

Mortgage-backed securities:

                 

Collateralized mortgage obligations issued or guaranteed by FHLMC

     300        1        —          —          300        1  

Other mortgage pass-through trust certificates

     —          —          50,782        18,487        50,782        18,487  

Equity securities

     31        46        —          —          31        46  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 225,283      $ 1,062      $ 50,782      $ 18,487      $ 276,065      $ 19,549  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Assessment for OTTI

On a quarterly basis, the Corporation performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered an OTTI. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Corporation to assess whether the unrealized loss is other than temporary.

OTTI losses must be recognized in earnings if an investor has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.

An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of an OTTI, if any, is recorded as a component of net impairment losses on investment securities in the accompanying consolidated statements of income (loss), while the remaining portion of the impairment loss is recognized in OCI, provided the Corporation does not intend to sell the underlying debt security and it is “more likely than not” that the Corporation will not have to sell the debt security prior to recovery.

Debt securities issued by U.S. government agencies, government-sponsored entities and the U.S. Treasury accounted for approximately 94% of the total available-for-sale portfolio as of June 30, 2013 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation’s assessment was concentrated mainly on private label mortgage-backed securities with an amortized cost of $62.4 million for which credit losses are evaluated on a quarterly basis. The Corporation considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

 

   

The length of time and the extent to which the fair value has been less than the amortized cost basis;

 

   

Changes in the near term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default, and significant changes in prepayment assumptions;

 

   

The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

 

   

Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.

The Corporation recorded OTTI losses on available-for-sale debt securities as follows:

 

     Private Label MBS     Private Label MBS  
     Quarter ended June 30,     Six-Month Period Ended
June 30,
 
     2013      2012     2013     2012  

(In thousands)

         

Total other-than-temporary impairment losses

   $ —        $ —       $ —       $ —    

Credit loss on debt securities for which an OTTI was not previously recognized

         

Portion of other-than-temporary impairment losses recognized in OCI

     —          (143     (117     (1,376
  

 

 

    

 

 

   

 

 

   

 

 

 

Net impairment losses recognized in earnings

   $ —        $ (143   $ (117   $ (1,376
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table summarizes the roll-forward of credit losses on debt securities held by the Corporation for which a portion of an OTTI is recognized in OCI:

 

     Quarter ended June 30,      Six-month period ended June 30,  
     2013      2012      2013      2012  

(In thousands)

           

Credit losses at the beginning of the period

   $ 5,389      $ 5,056      $ 5,272      $ 3,823  

Additions:

           

Credit losses on debt securities for which an OTTI was previously recognized

     —          143        117        1,376  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance of credit losses on debt securities held for which a portion of an OTTI was recognized in OCI

   $ 5,389      $ 5,199      $ 5,389      $ 5,199  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the first half of 2013, the $0.1 million credit related impairment loss was related to private label MBS, which are collateralized by fixed-rate mortgages on single-family, residential properties in the United States. The interest rate on these private-label MBS is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The underlying mortgages are fixed-rate single-family loans with original high FICO scores (over 700) and moderate original loan-to-value ratios (under 80%), as well as moderate delinquency levels.

Based on the expected cash flows derived from the model, and since the Corporation does not have the intention to sell the securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, only the credit loss component was reflected in earnings. Significant assumptions in the valuation of the private label MBS were as follows:

 

     June 30, 2013    December 31, 2012
     Weighted
Average
   

Range

   Weighted
Average
   

Range

Discount rate

     14.5   14.5%      14.5   14.5%

Prepayment rate

     31   18.84% - 100%      32   21.85% - 69.97%

Projected Cumulative Loss Rate

     6.4   0.65% - 40.18%      8   0.73% - 38.79%

The Corporation recorded OTTI losses of $42,000 on equity securities held in the available-for-sale investment portfolio in the second quarter and first half of 2013. No OTTI losses on equity securities were recognized in the quarter and six-month period ended June 30, 2012.

As of June 30, 2013, the Corporation held approximately $70.9 million of Puerto Rico government obligations. The Commonwealth of Puerto Rico credit rating was downgraded by Moody’s Investor Service (“Moody’s”) in December 2012 to Baa3 with a negative outlook, with various factors noted, including the lack of clear growth catalysts, the fiscal budget deficits, and the financial condition of the public sector employee pension plans, which are significantly underfunded. In addition, in March 2013, Standard & Poor’s (“S&P”) downgraded the Commonwealth of Puerto Rico rating to BBB-, one step from junk status, with a negative outlook. S&P based the decision on the result of an estimated fiscal 2013 budget gap, which S&P views as significantly larger than originally budgeted. Also in March 2013, Fitch Ratings downgraded its rating on $10.6 billion of Puerto Rico general obligation bonds by two notches, to BBB- minus from BBB- plus, saying the Commonwealth was facing a large budget imbalance caused by a weak economy and revenues. These downgrades could have an adverse impact on economic conditions, but their ultimate impact is unpredictable and may not be immediately apparent. The Puerto Rico government approved a budget for fiscal year 2014 to reduce its general fund deficit, including new tax measures expected to result in additional revenues.

NOTE 5 – OTHER EQUITY SECURITIES

Institutions that are members of the FHLB system are required to maintain a minimum investment in FHLB stock. Such minimum is calculated as a percentage of aggregate outstanding mortgages, and an additional investment is required that is calculated as a percentage of total FHLB advances, letters of credit, and the collateralized portion of interest-rate swaps outstanding. The stock is capital stock issued at $100 par value. Both stock and cash dividends may be received on FHLB stock.

As of June 30, 2013 and December 31, 2012, the Corporation had investments in FHLB stock with a book value of $31.0 million and $37.5 million, respectively. The net realizable value is a reasonable proxy for the fair value of these instruments. Dividend income from FHLB stock for the quarter and six-month period ended June 30, 2013 was $0.3 million and $0.7 million, respectively, compared to$ 0.4 million and $0.8 million for the comparable periods in 2012.

 

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Table of Contents

The shares of FHLB stock owned by the Corporation are issued by the FHLB of New York and by the FHLB of Atlanta. Both Banks are part of the Federal Home Loan Bank System, a national wholesale banking network of 12 regional, stockholder-owned congressionally chartered banks. The Federal Home Loan Banks are all privately capitalized and operated by their member stockholders. The system is supervised by the Federal Housing Finance Agency, which ensures that the Home Loan Banks operate in a financially safe and sound manner, remain adequately capitalized and able to raise funds in the capital markets, and carry out their housing finance mission.

The Corporation has other equity securities that do not have a readily available fair value. The carrying value of such securities as of June 30, 2013 and December 31, 2012 was $1.3 million.

 

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Table of Contents

NOTE 6 – LOANS HELD FOR INVESTMENT

The following table provides information about the loan portfolio held for investment:

 

     June 30,     December 31,  
     2013     2012  
     (In thousands)  

Residential mortgage loans, mainly secured by first mortgages

   $ 2,511,206     $ 2,747,217  
  

 

 

   

 

 

 

Commercial loans:

    

Construction loans (1)

     194,912       361,875  

Commercial mortgage loans (1)

     1,916,509       1,883,798  

Commercial and Industrial loans (1) (2)

     2,527,431       2,793,157  

Loans to local financial institutions collateralized by real estate mortgages

     248,360       255,390  
  

 

 

   

 

 

 

Commercial loans

     4,887,212       5,294,220  
  

 

 

   

 

 

 

Finance leases

     241,675       236,926  
  

 

 

   

 

 

 

Consumer loans

     1,805,693       1,775,751  
  

 

 

   

 

 

 

Loans held for investment

     9,445,786       10,054,114  

Allowance for loan and lease losses

     (301,047     (435,414
  

 

 

   

 

 

 

Loans held for investment, net (3)

   $ 9,144,739     $ 9,618,700  
  

 

 

   

 

 

 

 

(1) During the second quarter of 2013, after a comprehensive review of substantially all of the loans in our commercial portfolios, the classification of certain loans was revised to more accurately depict the nature of the underlying loans. This reclassification resulted in a net increase of $269.0 million in commercial mortgage loans, since the principal source of repayment for such loans is derived primarily from the operation of the underlying real estate, with a corresponding decrease of $246.8 million in commercial and industrial loans and a $22.2 million decrease in construction loans. The Corporation evaluated the impact of this reclassification on the provision for loan losses and determined that the effect of this adjustment was not material to any previously reported results.
(2) As of June 30, 2013, includes $1.2 billion of commercial loans that are secured by real estate (owner- occupied commercial loans secured by real estate) but are not dependent upon the real estate for repayment.
(3) During the first half of 2013, the Corporation completed two separate bulk sales of assets including: (i) non-performing residential mortgage loans with a book value before allowance for loan losses of $203.8 million, and (ii) adversely classified loans, mainly commercial loans, with a book value before allowance for loan losses of $211.4 million. In addition the Corporation transferred $181.6 million of commercial non-performing loans to held for sale as further discussed below.

 

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Table of Contents

Loans held for investment on which accrual of interest income had been discontinued were as follows:

 

(In thousands)    June 30,
2013
     December 31,
2012
 

Non-performing loans:

     

Residential mortgage

   $ 133,937      $ 313,626  

Commercial mortgage

     136,737        214,780  

Commercial and Industrial

     131,906        230,090  

Construction

     68,204        178,190  

Consumer:

     

Auto loans

     17,226        19,210  

Finance leases

     2,801        3,182  

Other consumer loans

     15,389        16,483  
  

 

 

    

 

 

 

Total non-performing loans held for investment (1) (2)

   $ 506,200      $ 975,561  
  

 

 

    

 

 

 

 

(1) As of June 30, 2013 and December 31, 2012, excludes $95.0 million and $2.2 million, respectively, in non-performing loans held for sale.
(2) Amount excludes purchased credit impaired (“PCI”) loans with a carrying value of approximately $8.3 million and $10.6 million as of June 30, 2013 and December 31, 2012, respectively, acquired as part of the credit cards portfolio purchased in the second quarter of 2012.

The Corporation’s aging of the loans held for investment portfolio is as follows:

 

As of June 30, 2013

 

(In thousands)

   30-59 Days
Past Due
     60-89 Days
Past Due
     90 days or
more Past

Due (1)
     Total Past
Due (4)
     Purchased
Credit-
Impaired
Loans (4)
     Current      Total loans
held for
investment
     90 days past
due and still
accruing (5)
 

Residential mortgage:

                       

FHA/VA and other government-guaranteed loans (2) (3) (5)

   $ —        $ 10,594      $ 83,214      $ 93,808      $ —        $ 103,678      $ 197,486      $ 83,214  

Other residential mortgage loans (3)

     —          93,136        142,851        235,987        —          2,077,733        2,313,720        8,914  

Commercial:

                       

Commercial and Industrial loans

     11,344        7,011        143,512        161,867        —          2,613,924        2,775,791        11,606  

Commercial mortgage loans (3)

     —          8,803        141,266        150,069        —          1,766,440        1,916,509        4,529  

Construction loans (3)

     —          677        68,333        69,010        —          125,902        194,912        129  

Consumer:

                       

Auto loans

     72,168        21,132        17,226        110,526        —          964,581        1,075,107        —    

Finance leases

     9,286        3,438        2,801        15,525        —          226,150        241,675        —    

Other consumer loans

     11,794        6,972        20,058        38,824        8,285        683,477        730,586        4,669  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held for investment

   $ 104,592      $ 151,763      $ 619,261      $ 875,616      $ 8,285      $ 8,561,885      $ 9,445,786      $ 113,061  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes non-performing loans and accruing loans which are contractually delinquent 90 days or more (i.e., FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges fees until charged-off at 180 days.
(2) As of June 30, 2013, includes $1.6 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.
(3) According to the Corporation’s delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears two or more monthly payments. FHA/VA government guaranteed loans, other residential mortgage loans, commercial mortgage loans and construction loans past due 30-59 days amounted to $24.3 million, $201.5 million, $78.0 million and $2.4 million, respectively.
(4) Purchased credit–impaired loans are excluded from delinquency and non-performing statistics as further discussed below.
(5) It is the Corporation’s policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past-due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $34.1 million of residential mortgage loans insured by the FHA or guaranteed by the VA, which are over 18 months delinquent, and are no longer accruing interest as of June 30, 2013.

 

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Table of Contents

As of December 31, 2012

 

(In thousands)

  30-59 Days
Past Due
    60-89 Days
Past Due
    90 days or
more  Past
Due (1)
    Total Past
Due (4)
    Purchased
Credit-
Impaired
Loans (4)
    Current     Total loans
held for
investment
    90 days past
due and  still
accruing
 

Residential mortgage:

               

FHA/VA and other government-guaranteed loans (2) (3) (5)

  $ —       $ 10,592     $ 93,298     $ 103,890     $ —       $ 104,723     $ 208,613     $ 93,298  

Other residential mortgage loans (3)

    —         83,807       324,965       408,772       —         2,129,832       2,538,604       11,339  

Commercial:

               

Commercial and Industrial loans

    22,323       8,952       258,989       290,264       —         2,758,283       3,048,547       28,899  

Commercial mortgage loans (3)

    —         6,367       218,379       224,746       —         1,659,052       1,883,798       3,599  

Construction loans (3)

    —         843       178,876       179,719       —         182,156       361,875       686  

Consumer:

               

Auto loans

    64,991       15,446       19,210       99,647       —         926,579       1,026,226       —    

Finance leases

    10,938       2,682       3,182       16,802       —         220,124       236,926       —    

Other consumer loans

    12,268       6,850       20,674       39,792       10,602       699,131       749,525       4,191  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held for investment

  $ 110,520     $ 135,539     $ 1,117,573     $ 1,363,632     $ 10,602     $ 8,679,880     $ 10,054,114     $ 142,012  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes non-performing loans and accruing loans which are contractually delinquent 90 days or more (i.e. FHA/VA guaranteed loans and credit cards). Credit card loans continue to accrue finance charges and fees until charged-off at 180 days.
(2) As of December 31, 2012, includes $14.8 million of defaulted loans collateralizing GNMA securities for which the Corporation has an unconditional option (but not an obligation) to repurchase the defaulted loans.
(3) According to the Corporation’s delinquency policy and consistent with the instructions for the preparation of the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) required by the Federal Reserve Board, residential mortgage, commercial mortgage, and construction loans are considered past due when the borrower is in arrears two or more monthly payments. FHA/VA government guaranteed loans, other residential mortgage loans, commercial mortgage loans, and construction loans past due 30-59 days amounted to $22.2 million, $186.3 million, $164.9 million, and $21.1 million, respectively.
(4) Purchased credit-impaired loans are excluded from delinquency and non-performing statistics as further discussed below.
(5) It is the Corporation’s policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past-due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $35.3 million of residential mortgage loans insured by the FHA or guaranteed by the VA, which are over 18 months delinquent, and are no longer accruing interest as of December 31, 2012.

 

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The Corporation’s credit quality indicators by loan type as of June 30, 2013 and December 31, 2012 are summarized below:

 

     Commercial Credit Exposure-Credit Risk Profile Based on
Creditworthiness category:
 
June 30, 2013    Substandard      Doubtful      Loss      Total
Adversely
Classified
(1)(2)
     Total Portfolio  
     (In thousands)  

Commercial mortgage

   $ 359,947      $ 3,074      $ 137      $ 363,158      $ 1,916,509  

Construction

     78,889        8,686        —          87,575        194,912  

Commercial and Industrial

     200,784        12,379        705        213,868        2,775,791  
    
 
Commercial Credit Exposure-Credit Risk Profile Based on
Creditworthiness category:
  
  
December 31, 2012    Substandard      Doubtful      Loss      Total
Adversely
Classified
(1)(2)
     Total Portfolio  
     (In thousands)  

Commercial mortgage

   $ 401,597      $ 6,867      $ —        $ 408,464      $ 1,883,798  

Construction

     184,977        14,556        605        200,138        361,875  

Commercial and Industrial

     372,100        30,651        1,143        403,894        3,048,547  

 

(1) During the first quarter of 2013, the Corporation completed a bulk sale of assets, mainly commercial adversely classified loans with a book value before allowance for loan losses of $211.4 million and, in addition, transferred $181.6 million of non-performing loans to held for sale as further discussed below.
(2) Excludes $95 million ($38 million commercial mortgage; $57 million construction) and $2.2 million ($1.1 million commercial mortgage and $1.1 million commercial and industrial) as of June 30, 2013 and December 31, 2012, respectively, of non-performing loans held for sale.

The Corporation considers a loan to be adversely classified if its risk rating is Substandard, Doubtful or Loss. These categories are defined as follows:

Substandard- A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful- Doubtful classifications have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. A Doubtful classification may be appropriate in cases where significant risk exposures are perceived, but Loss cannot be determined because of specific reasonable pending factors which may strengthen the credit in the near term.

Loss- Assets classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. There is little or no prospect for near term improvement and no realistic strengthening action of significance pending.

 

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Table of Contents
     Consumer Credit Exposure-Credit Risk Profile  based on payment activity  
     Residential Real-Estate      Consumer  
June 30, 2013    FHA/VA/
Guaranteed (1)
     Other
residential
loans
     Auto      Finance
Leases
     Other
Consumer
 
     (In thousands)  

Performing

   $ 197,486      $ 2,179,783      $ 1,057,881      $ 238,874      $ 706,912  

Purchased Credit-Impaired

     —          —          —          —          8,285  

Non-performing

     —          133,937        17,226        2,801        15,389  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 197,486      $ 2,313,720      $ 1,075,107      $ 241,675      $ 730,586  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) It is the Corporation’s policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $34.1 million of residential mortgage loans insured by the FHA or guaranteed by the VA, which are over 18 months delinquent, and are no longer accruing interest as of June 30, 2013.

 

     Consumer Credit Exposure-Credit Risk Profile based on payment activity  
     Residential Real-Estate      Consumer  
December 31, 2012    FHA/VA/
Guaranteed (1)
     Other
residential
loans
     Auto      Finance
Leases
     Other
Consumer
 
     (In thousands)  

Performing

   $ 208,613      $ 2,224,978      $ 1,007,016      $ 233,744      $ 722,440  

Purchased Credit-Impaired

     —          —          —          —          10,602  

Non-performing

     —          313,626        19,210        3,182        16,483  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 208,613      $ 2,538,604      $ 1,026,226      $ 236,926      $ 749,525  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) It is the Corporation’s policy to report delinquent residential mortgage loans insured by the FHA or guaranteed by the VA as past due loans 90 days and still accruing as opposed to non-performing loans since the principal repayment is insured. These balances include $35.3 million of residential mortgage loans insured by the FHA or guaranteed by the VA, which are over 18 months delinquent, and are no longer accruing interest as of December 31, 2012.

 

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Table of Contents

The following tables present information about impaired loans excluding purchased credit-impaired loans, which are reported separately as discussed below:

 

                            Quarter ended June  30,
2013
    Six-month Period Ended
June 30, 2013
 

Impaired Loans

(In thousands)

  Recorded
Investment
    Unpaid
Principal
Balance
    Related
Specific
Allowance
    Average
Recorded
Investment
    Interest
Income
Recognized
Accrual
Basis
    Interest
Income
Recognized
Cash Basis
    Interest
Income
Recognized
Accrual
Basis
    Interest
Income
Recognized
Cash Basis
 

As of June 30, 2013
With no related allowance recorded:

               

FHA/VA-Guaranteed loans

  $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ —    

Other residential mortgage loans

    137,999       147,773       —         140,066       1,697       226       3,386       548  

Commercial:

               

Commercial mortgage loans

    39,351       41,527       —         39,367       304       74       536       147  

Commercial and Industrial Loans

    27,023       40,677       —         28,391       32       6       43       28  

Construction Loans

    21,716       24,055       —         22,080       10       8       10       12  

Consumer:

               

Auto loans

    —         —         —         —         —         —         —         —    

Finance leases

    —         —         —         —         —         —         —         —    

Other consumer loans

    3,556       5,027       —         2,365       31       20       53       37  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 229,645     $ 259,059     $ —       $ 232,269     $ 2,074     $ 334     $ 4,028     $ 772  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With an allowance recorded:

               

FHA/VA-Guaranteed loans

  $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ —    

Other residential mortgage loans

    246,063       269,200       20,406       246,505       2,372       400       4,643       756  

Commercial:

               

Commercial mortgage loans

    173,632       184,357       33,219       174,846       427       537       720       1,115  

Commercial and Industrial Loans

    179,909       223,226       36,503       181,262       1,056       27       1,673       106  

Construction Loans

    54,767       63,471       21,884       55,926       119       234       228       604  

Consumer:

               

Auto loans

    12,979       12,980       1,515       12,233       231       —         457       —    

Finance leases

    2,293       2,293       92       2,129       51       —         109       —    

Other consumer loans

    8,957       9,601       1,334       8,973       79       2       121       5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 678,600     $ 765,128     $ 114,953     $ 681,874     $ 4,335     $ 1,200     $ 7,951     $ 2,586  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total:

               

FHA/VA-Guaranteed loans

  $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ —    

Other residential mortgage loans

    384,062       416,973       20,406       386,571       4,069       626       8,029       1,304  

Commercial:

               

Commercial mortgage loans

    212,983       225,884       33,219       214,213       731       611       1,256       1,262  

Commercial and Industrial Loans

    206,932       263,903       36,503       209,653       1,088       33       1,716       134  

Construction Loans

    76,483       87,526       21,884       78,006       129       242       238       616  

Consumer:

               

Auto loans

    12,979       12,980       1,515       12,233       231       —         457       —    

Finance leases

    2,293       2,293       92       2,129       51       —         109       —    

Other consumer loans

    12,513       14,628       1,334       11,338       110       22       174       42  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 908,245     $ 1,024,187     $ 114,953     $ 914,143     $ 6,409     $ 1,534     $ 11,979     $ 3,358  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
(In thousands)    Recorded
Investments
     Unpaid
Principal
Balance
     Related
Specific
Allowance
     Average
Recorded
Investment
 

As of December 31, 2012

           

With no related allowance recorded:

           

FHA/VA-Guaranteed loans

   $ —        $ —        $ —        $ —    

Other residential mortgage loans

     122,056        130,306        —          148,125  

Commercial:

           

Commercial mortgage loans

     44,495        54,753        —          45,420  

Commercial and Industrial Loans

     35,673        41,637        —          22,780  

Construction Loans

     21,179        44,797        —          35,379  

Consumer:

           

Auto loans

     —          —          —          —    

Finance leases

     —          —          —          —    

Other consumer loans

     2,615        3,570        —          2,443  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 226,018      $ 275,063      $ —        $ 254,147  
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

FHA/VA-Guaranteed loans

   $ —        $ —        $ —        $ —    

Other residential mortgage loans

     462,663        518,446        47,171        447,491  

Commercial:

           

Commercial mortgage loans

     310,030        330,117        50,959        316,535  

Commercial and Industrial Loans

     284,357        363,012        80,167        239,757  

Construction Loans

     159,504        275,398        39,572        154,680  

Consumer:

           

Auto loans

     11,432        11,432        1,456        11,090  

Finance leases

     2,019        2,019        78        1,987  

Other consumer loans

     9,271        10,047        2,346        8,912  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,239,276      $ 1,510,471      $ 221,749      $ 1,180,452  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total:

           

FHA/VA-Guaranteed loans

   $ —        $ —        $ —        $ —    

Other residential mortgage loans

     584,719        648,752        47,171        595,616  

Commercial:

           

Commercial mortgage loans

     354,525        384,870        50,959        361,955  

Commercial and Industrial Loans

     320,030        404,649        80,167        262,537  

Construction Loans

     180,683        320,195        39,572        190,059  

Consumer:

           

Auto loans

     11,432        11,432        1,456        11,090  

Finance leases

     2,019        2,019        78        1,987  

Other consumer loans

     11,886        13,617        2,346        11,355  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,465,294      $ 1,785,534      $ 221,749      $ 1,434,599  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest income of approximately $8.7 and $16.4 million was recognized on impaired loans for the second quarter and six-month period ended June 30, 2012, respectively.

 

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Table of Contents

The following tables show the activity for impaired loans and the related specific reserve for the quarter and six-month period ended June 30, 2013:

 

     Quarter
ended
    Six-Month
period  ended
 
     June 30, 2013  
     (In thousands)  

Impaired Loans:

    

Balance at beginning of period

   $ 1,100,265     $ 1,465,294  

Loans determined impaired during the period

     56,210       150,778  

Net charge-offs

     (95,605     (271,972

Loans sold, net of charge-offs

     (111,756     (201,409

Increases to impaired loans-additional disbursements

     763       6,020  

Transfer of loans to held for sale, net of charges-offs

     —         (147,100

Foreclosures

     (10,680     (22,845

Loans no longer considered impaired

     (9,640     (25,789

Paid in full or partial payments

     (21,312     (44,732
  

 

 

   

 

 

 

Balance at end of period

   $ 908,245     $ 908,245  
  

 

 

   

 

 

 

 

     Quarter
ended
    Six-Month
period ended
 
     June 30, 2013  
     (In thousands)  

Specific Reserve:

    

Balance at beginning of period

   $ 144,028     $ 221,749  

Provision for loan losses

     66,530       165,176  

Net charge-offs

     (95,605     (271,972
  

 

 

   

 

 

 

Balance at end of period

   $ 114,953     $ 114,953  
  

 

 

   

 

 

 

Acquired loans including PCI Loans

On May 30, 2012, the Corporation reentered the credit card business with the acquisition of an approximate $406 million portfolio of FirstBank-branded credit card loans from FIA Card Services (“FIA”). These loans were recorded on the Consolidated Statement of Financial Condition at estimated fair value on the acquisition date of $368.9 million. The Corporation concluded that a portion of these acquired loans were PCI loans. PCI loans are acquired loans with evidence of credit quality deterioration since origination for which it is probable at the date of purchase that the Corporation will be unable to collect all contractually required payments. The loans that the Corporation concluded were credit impaired had a contractual outstanding unpaid principal and interest balance at acquisition of $34.6 million and an estimated fair value of $15.7 million. Given that the initial fair value of these loans included an estimate of credit losses expected to be realized over the remaining lives of the loans, the Corporation’s subsequent accounting for PCI loans differs from the accounting for non–PCI loans; therefore, the Corporation separately tracks and reports PCI loans and excludes these loans from delinquency and non-performing loan statistics.

Initial Fair Value and Accretable Yield of PCI Loans

At acquisition, the Corporation estimated the cash flows the Corporation expected to collect on credit card loans acquired with a deteriorated credit quality. Under the accounting guidance for PCI loans, the difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. This difference is neither accreted into income nor recorded on the Corporation’s Consolidated Statement of Financial Condition. The excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans, using the effective-yield method. The table below displays the contractually required principal and interest, cash flows expected to be collected and the fair value at acquisition of PCI loans that the Corporation acquired. The table also displays the nonaccretable difference and the accretable yield at acquisition.

 

26


Table of Contents
      At acquisition  
     Purchased Credit-  
(In thousands)    Impaired Loans  

Contractually outstanding principal and interest at acquisition

   $ 34,577  

Less: Nonaccretable difference

     (15,408
  

 

 

 

Cash flows expected to be collected at acquisition

     19,169  

Less: Accretable yield

     (3,451
  

 

 

 

Fair value of loans acquired

   $ 15,718  
  

 

 

 

Outstanding balance and Carrying value of PCI loans

The table below presents the outstanding contractual balance and carrying value of the PCI Loans as of June 30, 2013 and December 31, 2012:

 

(In thousands)    Purchased Credit-
Impaired Loans
(June 30, 2013)
     Purchased Credit-
Impaired Loans
(December 31, 2012)
 

Contractual balance

   $  26,219      $  28,778  

Carrying value

     8,285        10,602  

Changes in accretable yield of acquired loans

Subsequent to acquisition, the Corporation is required to periodically evaluate its estimate of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and nonaccretable difference or reclassifications from nonaccretable yield to accretable. Increases in the cash flows expected to be collected will generally result in an increase in interest income over the remaining life of the loan or pool of loans. Decreases in expected cash flows due to further credit deterioration will generally result in an impairment charge recognized in the Corporation’s provision for loan and lease losses, resulting in an increase to the allowance for loan losses. During the first half of 2013, the Corporation did not record charges to the provision for loan losses related to PCI loans.

The following table presents changes in the accretable yield related to the PCI loans acquired from FIA:

 

(In thousands)    PCI Loans  

Accretable yield at acquisition

   $ 3,451  

Accretion recognized in earnings

     (1,280
  

 

 

 

Accretable yield as of December 31, 2012

     2,171  

Reclassification to nonaccretable

     (1,352

Accretion recognized in earnings

     (413
  

 

 

 

Accretable yield as of June 30, 2013

   $ 406  
  

 

 

 

 

27


Table of Contents

During the First half of 2013, the Corporation purchased $140.6 million of residential mortgage loans consistent with a strategic program established by the Corporation in 2005 to purchase ongoing residential mortgage loan production from mortgage bankers in Puerto Rico. Generally, the loans purchased from mortgage bankers were conforming residential mortgage loans. Purchases of conforming residential mortgage loans provide the Corporation the flexibility to retain or sell the loans, including through securitization transactions depending upon whether the Corporation wants to retain high-yielding loans and improve net interest margins or generate profits by selling loans. When the Corporation sells such loans, it generally keeps the servicing of the loans.

In the ordinary course of business, the Corporation sells residential mortgage loans (originated or purchased) to the Government National Mortgage Association (“GNMA”) and government-sponsored entities (“GSEs”). GNMA and GSEs, such as Fannie Mae (“FNMA”) and Freddie Mac (“FHLMC”), generally securitize the transferred loans into mortgage-backed securities for sale into the secondary market. The Corporation sold approximately $121.3 million of performing residential mortgage loans in the secondary market to FNMA and FHLMC during the first half of 2013. Also, the Corporation securitized $159.1 million of FHA/VA mortgage loans into GNMA mortgage-backed securities during the first half of 2013. The Corporation’s continuing involvement in these loan sales consists primarily of servicing the loans. In addition, the Corporation agreed to repurchase loans when it breaches any of the representations and warranties included in the sale agreement. These representations and warranties are consistent with the GSEs’ selling and servicing guidelines (i.e., ensuring that the mortgage was properly underwritten according to established guidelines).

For loans sold to GNMA, the Corporation holds an option to repurchase individual delinquent loans issued on or after January 1, 2003 when the borrower fails to make any payment for three consecutive months. This option gives the Corporation the ability, but not the obligation, to repurchase the delinquent loans at par without prior authorization from GNMA.

Under ASC Topic 860, once the Corporation has the unilateral ability to repurchase the delinquent loan, it is considered to have regained effective control over the loan and is required to recognize the loan and a corresponding repurchase liability on the balance sheet regardless of the Corporation’s intent to repurchase the loan.

During the first half of 2013, the Corporation repurchased pursuant to its repurchase option with GNMA $26.6 million of loans previously sold to GNMA. The principal balance of these loans is fully guaranteed and the risk of loss related to repurchases is generally limited to the difference between the delinquent interest payment advanced to GNMA computed at the loan’s interest rate and the interest payments reimbursed by FHA, which are computed at a pre-determined debenture rate. Repurchases of GNMA loans allow the Corporation, among other things, to maintain acceptable delinquency rates on outstanding GNMA pools and remain as a seller and servicer in good standing with GNMA. The Corporation generally remediates any breach of representations and warranties related to the underwriting of such loans according to established GNMA guidelines without incurring losses. The Corporation does not maintain a liability for estimated losses as a result of breaches in representations and warranties.

Loan sales to FNMA and FHLMC are without recourse in relation to the future performance of the loans. The Corporation repurchased at par loans previously sold to FNMA and FHLMC in the amount of $3.3 million during the first half of 2013. The Corporation’s risk of loss with respect to these loans is also minimal as these repurchased loans are generally performing loans with documentation deficiencies. The amount of loan repurchases over the last three years represents less than 2% of total sales of loans to FNMA and FHLMC and subsequent losses are estimated to have been less than $0.3 million. As a consequence, the Corporation does not maintain a liability for estimated losses on loans expected to be repurchased as a result of breaches in loan and servicer representations and warranties.

Bulk Sales of Assets and Transfer of Loans to Held For Sale

On June 21, 2013, the Corporation announced that it had completed a sale of non-performing residential mortgage loans with a book value of $203.8 million and OREO properties with a book value of $19.2 million in a cash transaction. The sales price of this bulk sale was $128.3 million. Approximately $30.1 million of reserves had already been allocated to the loans. This transaction resulted in total charge-offs of $98.0 million and an incremental loss of $69.8 million. In addition, the Corporation recorded $3.1 million of professional service fees specifically related to this bulk sale of non-performing residential assets. This transaction resulted in a total pre-tax loss of $72.9 million.

On March 28, 2013, the Corporation completed the sale of adversely classified loans with a book value of $211.4 million ($100.1 million of commercial and industrial loans, $68.8 million of commercial mortgage loans, $41.3 million of construction loans, and $1.2 million of residential mortgage loans), and $6.3 million of OREO properties in a cash transaction. Included in the bulk sale was $185.0 million of non-performing assets. The sales price of this bulk sale was $120.2 million. Approximately $39.9 million of reserves had already been allocated to the loans. This transaction resulted in total charge-offs of $98.5 million and an incremental loss of $58.9 million, reflected in the provision for loan and lease losses for the first half of 2013. In addition, the Corporation recorded $3.9 million of professional fees specifically related to this bulk sale of assets. This transaction resulted in a total pre-tax loss of $62.8 million.

 

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Table of Contents

In addition, during the first quarter of 2013, the Corporation transferred to held for sale non-performing loans with an aggregate book value of $181.6 million. These transfers resulted in charge-offs of $36.0 million and an incremental loss of $5.2 million reflected in the provision for loan and lease losses for the first half of 2013.

During the second quarter of 2013, the Corporation completed the sale of a $40.8 million non-performing commercial mortgage loan that was among the loans transferred to held for sale in the first quarter without incurring additional losses.

In a separate transaction during the second quarter, the Corporation entered into an agreement to receive foreclosed real estate in partial satisfaction of debt related to one of the loans written-off and transferred to held for sale in the first quarter. The remaining balance of such partially satisfied commercial mortgage loan held for sale was restructured, resulting in a loss of $3.4 million recorded as part of “Other income” in the second quarter of 2013

The Corporation’s primary goal with respect to these sales is to accelerate the disposition of non-performing assets, which is the main priority of the Corporation’s Strategic Plan. The opportunistic sale of distressed assets is a pivotal and tactical step in the Corporation’s efforts to reduce balance sheet risk, improve earnings in the future through reductions of credit related costs and enhance credit quality consistent with regulators’ expectations of adequate levels of adversely classified assets for financial institutions.

Loan Portfolio Concentration

The Corporation’s primary lending area is Puerto Rico. The Corporation’s banking subsidiary, First Bank, also lends in the USVI and BVI markets and in the United States (principally in the state of Florida). Of the total gross loans held for investment of $9.4 billion as of June 30, 2013, approximately 85 % have credit risk concentration in Puerto Rico, 8 % in the United States, and 7 % in the USVI and BVI.

As of June 30, 2013, the Corporation had $250.4 million outstanding in credit facilities granted to the Puerto Rico government and/or its political subdivisions, up from $158.4 million as of December 31, 2012, and $38.6 million granted to the government of the Virgin Islands, up from $35.5 million as of December 31, 2012. A substantial portion of these credit facilities consists of loans to municipalities in Puerto Rico for which the good faith, credit, and unlimited taxing power of the applicable municipality has been pledged to their repayment. Another portion of these obligations consists of loans to public corporations that obtain revenues from rates charged for services or products, such as electric power and water utilities. Public corporations have varying degrees of independence from the central government and many receive appropriations or other payments from it.

In addition to loans extended to government entities, the largest loan to one borrower as of June 30, 2013 in the amount of $248.4 million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. This commercial loan is secured by individual real-estate loans, mostly 1-4 single family residential mortgage loans.

Troubled Debt Restructurings

The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico that is similar to the government’s Home Affordable Modification Program guidelines. Depending upon the nature of borrowers’ financial condition, restructurings or loan modifications through this program as well as other restructurings of individual commercial, commercial mortgage, construction, and residential mortgage loans in the U.S. mainland fit the definition of TDRs. A restructuring of a debt constitutes a TDR if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms that bring a defaulted loan current and provide sustainable affordability. Changes may include the refinancing of any past-due amounts, including interest and escrow, the extension of the maturity of the loan and modifications of the loan rate. As of June 30, 2013, the Corporation’s total TDR loans held for investment of $613.1 million consisted of $317.3 million of residential mortgage loans, $96.8 million of commercial and industrial loans, $153.0 million of commercial mortgage loans, $20.4 million of construction loans, and $25.6 million of consumer loans. Outstanding unfunded commitments on TDR loans amounted to $1.3 million as of June 30, 2013.

The Corporation’s loss mitigation programs for residential mortgage and consumer loans can provide for one or a combination of the following: movement of interest past due to the end of the loan, extension of the loan term, deferral of principal payments for a significant period of time, and reduction of interest rates either permanently (offered up to 2010) or for a period of up to two years (step-up rates). Additionally, in rare cases, the restructuring may provide for the forgiveness of contractually due principal or interest. Uncollected interest is added to the end of the loan term at the time of the restructuring and not recognized as income until collected or when the loan is paid off. These programs are available only to those borrowers who have defaulted, or are likely to default, permanently on their loan and would lose their homes in a foreclosure action absent some lender concession. Nevertheless, if the Corporation is not reasonably assured that the borrower will comply with its contractual commitment, properties are foreclosed.

 

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Prior to permanently modifying a loan, the Corporation may enter into trial modifications with certain borrowers. Trial modifications generally represent a six-month period during which the borrower makes monthly payments under the anticipated modified payment terms prior to a formal modification. Upon successful completion of a trial modification, the Corporation and the borrower enter into a permanent modification. TDR loans that are participating in or that have been offered a binding trial modification are classified as TDRs when the trial offer is made and continue to be classified as TDR regardless of whether the borrower enters into a permanent modification. As of June 30, 2013, we classified an additional $0.6 million of residential mortgage loans as TDRs that were participating in or had been offered a trial modification.

For the commercial real estate, commercial and industrial, and construction portfolios, at the time of the restructuring, the Corporation determines, on a loan-by-loan basis, whether a concession was granted for economic or legal reasons related to the borrower’s financial difficulty. Concessions granted for commercial loans could include: reductions in interest rates to rates that are considered below market; extension of repayment schedules and maturity dates beyond original contractual terms; waivers of borrower covenants; forgiveness of principal or interest; or other contract changes that would be considered a concession. The Corporation mitigates loan defaults for its commercial loan portfolios through its collections function. The function’s objective is to minimize both early stage delinquencies and losses upon default of commercial loans. In the case of the commercial and industrial, commercial mortgage and construction loan portfolios, the Special Asset Group (“SAG”) focuses on strategies for the accelerated reduction of non-performing assets through note sales, short sales, loss mitigation programs, and sales of OREO. In addition to the management of the resolution process for problem loans, the SAG oversees collection efforts for all loans to prevent migration to the non-performing and/or adversely classified status. The SAG utilizes relationship officers, collection specialists, and attorneys. In the case of residential construction projects, the workout function monitors project specifics, such as project management and marketing, as deemed necessary. The SAG utilizes its collections infrastructure of workout collection officers, credit work-out specialists, in-house legal counsel, and third-party consultants. In the case of residential construction projects and large commercial loans, the function also utilizes third-party specialized consultants to monitor the residential and commercial construction projects in terms of construction, marketing and sales, and assists with the restructuring of large commercial loans. In addition, the Corporation extends, renews, and restructures loans with satisfactory credit profiles. Many commercial loan facilities are structured as lines of credit, which are mainly one year in term and therefore are required to be renewed annually. Other facilities may be restructured or extended from time to time based upon changes in the borrower’s business needs, use of funds, timing of completion of projects, and other factors. If the borrower is not deemed to have financial difficulties, extensions, renewals, and restructurings are done in the normal course of business and not considered concessions, and the loans continue to be recorded as performing.

 

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Selected information on TDRs that includes the recorded investment by loan class and modification type is summarized in the following tables. This information reflects all TDRs:

 

     June 30, 2013  
(In thousands)    Interest rate
below market
     Maturity or
term
extension
     Combination
of reduction in
interest rate
and extension
of maturity
     Forgiveness  of
principal

and/or
interest
     Other (1)      Total  

Troubled Debt Restructurings:

                 

Non-FHA/VA Residential Mortgage loans

   $ 24,319      $ 6,586      $ 256,228      $ —        $ 30,162      $ 317,295  

Commercial Mortgage Loans

     44,925        13,080        81,038        200        13,758        153,001  

Commercial and Industrial Loans

     11,461        12,303        6,150        7,493        59,404        96,811  

Construction Loans

     6,844        3,294        9,156        —          1,085        20,379  

Consumer Loans—Auto

     —          836        8,063        —          4,080        12,979  

Finance Leases

     —          1,240        1,053        —          —          2,293  

Consumer Loans—Other

     341        353        7,808        —          1,869        10,371  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings(2)

   $ 87,890      $ 37,692      $ 369,496      $ 7,693      $ 110,358      $ 613,129  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other concessions granted by the Corporation include deferral of principal and/or interest payments for a period longer than what would be considered insignificant, payment plans under judicial stipulation or a combination of the concessions listed in the table.
(2) Included in the bulk sales of assets completed during the first half of 2013 was $188.1 million of TDRs, and the transfer of loans to held for sale included TDRs with a book value of $158.4 million at the time of the transfer. The carrying value of TDRs held for sale amounted to $79.3 million as of June 30, 2013.

 

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      December 31, 2012  
(In thousands)    Interest rate
below market
     Maturity or
term
extension
     Combination
of reduction in
interest rate
and extension
of maturity
     Forgiveness  of
principal

and/or
interest
     Forbearance
agreement (1)
     Other (2)      Total  

Troubled Debt Restructurings:

                    

Non-FHA/VA Residential Mortgage loans

   $ 21,288      $ 4,178      $ 338,731      $ —        $ —        $ 47,687      $ 411,884  

Commercial Mortgage Loans

     103,203        15,578        105,695        46,855        —          16,332        287,663  

Commercial and Industrial Loans

     28,761        15,567        26,054        11,951        9,492        41,244        133,069  

Construction Loans

     6,441        4,195        9,160        —          61,898        4,499        86,193  

Consumer Loans—Auto

     —          1,012        7,452        —          —          2,968        11,432  

Finance Leases

     —          1,512        507        —