10-Q 1 d624923d10q.htm 10-Q 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 September 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: 207,067,156 shares outstanding as of October 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 September 30, 2013 and December  31, 2012

     5   
 

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

     6   
 

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

     7   
 

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

     8   
 

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Nine-month periods ended September 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

     70   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     129   

Item 4.

 

Controls and Procedures

     129   

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     130   

Item 1A.

 

Risk Factors

     130   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     134   

Item 3.

 

Defaults Upon Senior Securities

     135   

Item 4.

 

Mine Safety Disclosures

     135   

Item 5.

 

Other Information

     135   

Item 6.

 

Exhibits

     135   

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 and 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 provisions 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 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 and 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;

 

    a credit default by the Puerto Rico government or any of its public corporations or other instrumentalities, and recent and/or future downgrades of the long-term debt ratings of the Puerto Rico government, which could adversely affect economic conditions in Puerto Rico;

 

    the risk that any portion of the unrealized losses in the Corporation’s investment portfolio is determined to be other-than-temporary, including unrealized losses on Puerto Rico government obligations;

 

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    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 New York FED, 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;

 

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

 

    the impact 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 the Corporation’s investment in an unconsolidated entity 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)

 

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

ASSETS

    

Cash and due from banks

   $ 623,019     $ 730,016  
  

 

 

   

 

 

 

Money market investments:

    

Time deposits with other financial institutions

     300       505  

Other short-term investments

     201,065       216,330  
  

 

 

   

 

 

 

Total money market investments

     201,365       216,835  
  

 

 

   

 

 

 

Investment securities available for sale, at fair value:

    

Securities pledged that can be repledged

     1,050,006       1,070,968  

Other investment securities

     997,324       660,109  
  

 

 

   

 

 

 

Total investment securities available for sale

     2,047,330       1,731,077  
  

 

 

   

 

 

 

Other equity securities

     32,096       38,757  
  

 

 

   

 

 

 

Investment in unconsolidated entity

     13,172       23,970  
  

 

 

   

 

 

 

Loans, net of allowance for loan and lease losses of $289,379 (2012 - $435,414)

     9,219,255       9,618,700  

Loans held for sale, at lower of cost or market

     114,592       85,394  
  

 

 

   

 

 

 

Total loans, net

     9,333,847       9,704,094  
  

 

 

   

 

 

 

Premises and equipment, net

     172,371       181,363  

Other real estate owned

     133,284       185,764  

Accrued interest receivable on loans and investments

     49,848       51,671  

Other assets

     181,118       236,194  
  

 

 

   

 

 

 

Total assets

   $ 12,787,450     $ 13,099,741  
  

 

 

   

 

 

 

LIABILITIES

    

Non-interest-bearing deposits

   $ 845,917     $ 837,387  

Interest-bearing deposits

     9,108,280       9,027,159  
  

 

 

   

 

 

 

Total deposits

     9,954,197       9,864,546  

Securities sold under agreements to repurchase

     900,000       900,000  

Advances from the Federal Home Loan Bank (FHLB)

     353,440       508,440  

Other borrowings

     231,959       231,959  

Accounts payable and other liabilities

     127,261       109,773  
  

 

 

   

 

 

 

Total liabilities

     11,566,857       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, 207,588,787 shares (2012 - 206,730,318 shares issued)

     20,759       20,673  

Less: Treasury stock (at par value)

     (55     (49
  

 

 

   

 

 

 

Common stock outstanding, 207,042,785 shares outstanding (2012 - 206,235,465 shares outstanding)

     20,704       20,624  
  

 

 

   

 

 

 

Additional paid-in capital

     887,437       885,754  

Retained earnings

     307,890       487,166  

Accumulated other comprehensive (loss) income, net of tax expense of $7,757 (2012 - $7,749)

     (58,485     28,432  
  

 

 

   

 

 

 

Total stockholders’ equity

     1,220,593       1,485,023  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 12,787,450     $ 13,099,741  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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FIRST BANCORP.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

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

Interest income:

        

Loans

   $ 147,325     $ 155,225     $ 443,954     $ 437,990  

Investment securities

     14,422       11,344       37,650       33,513  

Money market investments

     456       395       1,494       1,220  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     162,203       166,964       483,098       472,723  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     21,453       29,953       70,915       100,176  

Securities sold under agreements to repurchase

     6,531       6,707       19,418       21,825  

Advances from FHLB

     1,524       2,953       5,180       9,222  

Notes payable and other borrowings

     1,790       1,848       5,299       5,426  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     31,298       41,461       100,812       136,649  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     130,905       125,503       382,286       336,074  

Provision for loan and lease losses

     22,195       28,952       220,782       90,033  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     108,710       96,551       161,504       246,041  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income (loss):

        

Service charges on deposit accounts

     3,157       3,267       9,635       9,754  

Mortgage banking activities

     3,521       4,728       12,924       13,260  

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

     —         10       (42     36  

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

     —         (557     (117     (1,933
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses on available-for-sale debt securities

     —         (557     (117     (1,933

Equity in loss of unconsolidated entity

     (5,908     (2,199     (10,798     (10,926

Impairment of collateral pledged to Lehman

     —         —         (66,574     —    

Insurance income

     1,303       1,429       4,831       4,221  

Other non-interest income

     7,987       8,448       22,167       23,211  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income (loss)

     10,060       15,126       (27,974     37,623  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expenses:

        

Employees’ compensation and benefits

     32,823       31,058       99,493       93,770  

Occupancy and equipment

     15,134       15,208       45,150       46,065  

Business promotion

     3,538       4,004       10,726       10,026  

Professional fees

     11,840       7,469       36,707       19,768  

Taxes, other than income taxes

     4,693       3,499       13,921       10,350  

Insurance and supervisory fees

     11,513       13,023       37,018       39,333  

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

     7,052       8,686       29,191       18,915  

Credit and debit card processing expenses

     2,682       2,574       8,040       3,516  

Communications

     1,866       1,797       5,565       5,276  

Other non-interest expenses

     8,013       4,525       22,676       16,959  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expenses

     99,154       91,843       308,487       263,978  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     19,616       19,834       (174,957     19,686  

Income tax expense

     (3,676     (761     (4,319     (4,439
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 15,940     $ 19,073     $ (179,276   $ 15,247  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ 15,940     $ 19,073     $ (179,276   $ 15,247  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) per common share:

        

Basic

   $ 0.08     $ 0.09     $ (0.87   $ 0.07  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.08     $ 0.09     $ (0.87   $ 0.07  
  

 

 

   

 

 

   

 

 

   

 

 

 

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     Nine-Month Period Ended  
     September 30,     September 30,  
(In thousands)    2013     2012     2013     2012  

Net income (loss)

   $ 15,940     $ 19,073     $ (179,276   $ 15,247  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     1,304       898       2,739       4,443  

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

     —         557       117       1,933  

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

        

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

     (20,061     14,868       (89,807     17,009  

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

     —         —         42       —    

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

     414       (442     (8     (92
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (18,343     15,881       (86,917     23,293  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive (loss) income

   $ (2,403   $ 34,954     $ (266,193   $ 38,540  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine-Month Period Ended  
     September 30,     September 30,  
(In thousands)    2013     2012  

Cash flows from operating activities:

    

Net (loss) income

   $ (179,276   $ 15,247  

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

    

Depreciation

     17,911       18,404  

Amortization and impairment of intangible assets

     4,558       2,311  

Provision for loan and lease losses

     220,782       90,033  

Deferred income tax (benefit) expense

     (2,577     775  

Stock-based compensation

     2,088       395  

Other-than-temporary impairments on debt securities

     117       1,933  

Other-than-temporary impairments on equity securities

     42       —    

Equity in loss of unconsolidated entity

     10,798       10,926  

Impairment of collateral pledged to Lehman

     66,574       —    

Derivative instruments and financial liabilities measured at fair value, gain

     (762     (955

(Gain) loss on sale of premises and equipment and other assets

     (4     259  

Net gain on sales of loans

     (1,603     (3,155

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

     (3,248     1,126  

Originations and purchases of loans held for sale

     (400,614     (295,607

Sales and repayments of loans held for sale

     456,860       304,750  

Loans held for sale valuation adjustment

     6,553       —    

Amortization of broker placement fees

     6,094       7,607  

Net amortization of premium and discounts on investment securities

     7,473       10,087  

Increase (decrease) in accrued income tax payable

     1,130       (1,048

Decrease (increase) in accrued interest receivable

     1,823       (909

Increase (decrease) in accrued interest payable

     1,345       (293

Decrease in other assets

     22,400       20,819  

Increase in other liabilities

     24,076       8,059  
  

 

 

   

 

 

 

Net cash provided by operating activities

     262,540       190,764  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Principal collected on loans

     2,081,371       2,227,673  

Loans originated and purchased

     (2,362,492     (2,284,750

Proceeds from sale of loans held for investment

     309,024       22,203  

Proceeds from sale of repossessed assets

     70,805       59,442  

Purchases of securities available for sale

     (690,377     (788,191

Proceeds from principal repayments and maturities of securities available for sale

     280,694       1,127,667  

Additions to premises and equipment

     (8,919     (7,494

Proceeds from sale of premises and equipments and other assets

     4       1,040  

Proceeds from securities litigation settlement and other proceeds

     —         36  

Net redemptions (purchases) of other equity securities

     6,661       (1,705
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (313,229     355,921  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     83,557       (19,611

Net repayments of securities sold under agreements to repurchase

     —         (100,000

Net FHLB advances (paid) proceeds

     (155,000     151,000  

Repurchase of outstanding common stock

     (335     —    

Repayments of medium-term notes

     —         (21,957

Proceeds from common stock sold

     —         1,037  
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (71,778     10,469  
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (122,467     557,154  

Cash and cash equivalents at beginning of period

     946,851       446,566  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 824,384     $ 1,003,720  
  

 

 

   

 

 

 

Cash and cash equivalents include:

    

Cash and due from banks

   $ 623,019     $ 786,788  

Money market instruments

     201,365       216,932  
  

 

 

   

 

 

 
   $ 824,384     $ 1,003,720  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

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FIRST BANCORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

     Nine-Month Period Ended  
(In thousands)    September 30,
2013
    September 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

     15       —    

Repurchase of common stock

     (5     —    

Common stock sold

     —         29  

Restricted stock grants

     74       76  

Restricted stock forfeited

     (4     —    
  

 

 

   

 

 

 

Balance at end of period

     20,704       20,618  
  

 

 

   

 

 

 

Additional Paid-In-Capital:

    

Balance at beginning of period

     885,754       884,002  

Restricted stock grants

     (74     (76

Restricted stock forfeited

     4       —    

Common stock sold

     —         1,008  

Stock-based compensation

     2,088       395  

Repurchase of common stock

     (335     —    
  

 

 

   

 

 

 

Balance at end of period

     887,437       885,329  
  

 

 

   

 

 

 

Retained Earnings:

    

Balance at beginning of period

     487,166       457,384  

Net (loss) income

     (179,276     15,247  
  

 

 

   

 

 

 

Balance at end of period

     307,890       472,631  
  

 

 

   

 

 

 

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

    

Balance at beginning of period

     28,432       19,198  

Other comprehensive (loss) income, net of tax

     (86,917     23,294  
  

 

 

   

 

 

 

Balance at end of period

     (58,485     42,492  
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 1,220,593     $ 1,484,117  
  

 

 

   

 

 

 

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 September 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 nine-months 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 did 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 nine month periods ended September 30, 2013 and 2012 are as follows:

 

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

Net income (loss)

   $ 15,940      $ 19,073      $ (179,276   $ 15,247  
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ 15,940      $ 19,073      $ (179,276   $ 15,247  
  

 

 

    

 

 

    

 

 

   

 

 

 

Weighted-Average Shares:

          

Basic weighted-average common shares outstanding

     205,579        205,415        205,512       205,349  

Average potential common shares

     1,737        508        —         348  
  

 

 

    

 

 

    

 

 

   

 

 

 

Diluted weighted-average number of common shares outstanding

     207,316        205,923        205,512       205,697  
  

 

 

    

 

 

    

 

 

   

 

 

 

Earnings (Loss) per common share:

          

Basic

   $ 0.08      $ 0.09      $ (0.87   $ 0.07  
  

 

 

    

 

 

    

 

 

   

 

 

 

Diluted

   $ 0.08      $ 0.09      $ (0.87   $ 0.07  
  

 

 

    

 

 

    

 

 

   

 

 

 

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 114,757 for the quarters and nine-month periods ended September 30, 2013 and 2012, respectively. Warrants outstanding to purchase 1,285,899 shares of common stock and 1,435,220 unvested shares of restricted stock were excluded from the computation of diluted earnings per share for the nine-month period ended September 30, 2013 because the Corporation reported a net loss attributable to common stockholders for the period 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 nine-month period ended September 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     192.90        

Options cancelled

     (864     222.05        
  

 

 

   

 

 

       

End of period outstanding and exercisable

     104,499     $ 207.94        2.3      $ —    
  

 

 

   

 

 

    

 

 

    

 

 

 

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 third quarter of 2013, 22,218 shares of restricted stock were awarded to the Corporation’s independent directors subject to a one-year vesting period. In addition, during the first nine months of 2013, the Corporation issued 716,405 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 716,405 shares of restricted stock are 582,905 shares granted to certain senior officers consistent with the requirements of the Troubled Asset Relief Program (“TARP”) Interim Final Rule, which permit TARP recipients to grant “long-term restricted stock” without violating the prohibition on paying or accruing a bonus payment if it satisfies certain requirements: (i) the value of the grant may not exceed one-third of the amount of the employee’s annual compensation, (ii) no portion of the grant may vest before two years after the grant date and (iii) the grant must be subject to a further restriction on transfer or payment as described below. Hence, 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 2013 was based on the market price of the Corporation’s outstanding common stock on the date of the grant. 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:

 

     Nine-Month Period Ended  
     September 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

     738,623       3.69  

Forfeited

     (36,485     3.82  

Vested

     (37,425     3.34  
  

 

 

   

 

 

 

Non-vested shares at September 30, 2013

     1,435,220     $ 3.07  
  

 

 

   

 

 

 

For the quarter and nine-month period ended September 30, 2013, the Corporation recognized $0.5 million and $1.1 million, respectively, of stock-based compensation expense related to restricted stock awards, compared to $0.2 million and $0.4 million for the same periods in 2012. As of September 30, 2013, there was $2.7 million of total unrecognized compensation cost related to nonvested shares of restricted stock. The weighted average period over which the Corporation expects to recognize such cost is 1.8 years.

During the third quarter of 2012, 44,910 shares of restricted stock were awarded to the Corporation’s independent directors subject to a one-year vesting period. In addition, early in 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 2012 was based on the market price of the Corporation’s outstanding common stock on the date of the grant, $3.34 for restricted stocks granted during the third quarter of 2012 and $4.00 for the restricted stocks granted earlier in 2012. 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 3 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, 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 first nine months of 2013, the Corporation issued 156,331 shares of common stock with a weighted average market value of $6.43 for compensation according to this determination. This resulted in a compensation expense of $1.0 million recorded in the first nine-months 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 September 30, 2013 and December 31, 2012 were as follows:

 

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

U.S. Treasury securities:

                 

Due within one year

   $ 7,495      $ —        $ 3      $ —        $ 7,498        0.12  

Obligations of U.S. government-sponsored agencies:

                 

After 1 to 5 years

     50,000        —          —          1,207        48,793        1.05  

After 5 to 10 years

     214,284        —          —          11,394        202,890        1.31  

Puerto Rico government obligations:

                 

Due within one year

     10,000        —          —          235        9,765        3.50  

After 5 to 10 years

     39,779        —          —          14,569        25,210        4.49  

After 10 years

     21,210        —          —          6,986        14,224        5.79  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

United States and Puerto Rico government obligations

     342,768        —          3        34,391        308,380        1.96  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Mortgage-backed securities:

                 

FHLMC certificates:

                 

After 10 years

     341,854        —          750        6,924        335,680        2.15  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    
     341,854        —          750        6,924        335,680        2.15  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

GNMA certificates:

                 

After 1 to 5 years

     97        —          4        —          101        3.51  

After 5 to 10 years

     745        —          38        —          783        2.59  

After 10 years

     442,842        —          23,460        —          466,302        3.82  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    
     443,684        —          23,502        —          467,186        3.81  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

FNMA certificates:

                 

After 1 to 5 years

     1,533        —          70        —          1,603        4.88  

After 5 to 10 years

     8,207        —          491        —          8,698        4.11  

After 10 years

     902,038        —          4,450        23,052        883,436        2.34  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    
     911,778        —          5,011        23,052        893,737        2.36  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Collateralized mortgage obligations issued or guaranteed by the FHLMC:

                 

After 1 to 5 years

     122        —          —          1        121        3.01  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    
     122        —          —          1        121        3.01  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Other mortgage pass-through trust certificates:

                 

Over 5 to 10 years

     132        —          1        —          133        7.27  

After 10 years

     57,683        15,631        —          —          42,052        2.25  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    
     57,815        15,631        1        —          42,185        2.25  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total mortgage-backed securities

     1,755,253        15,631        29,264        29,977        1,738,909        2.68  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Equity securities (without contractual maturity) (1)

     36        —          5        —          41        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total investment securities available for sale

   $ 2,098,057      $ 15,631      $ 29,272      $ 64,368      $ 2,047,330        2.56  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

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

 

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     December 31, 2012  
     Amortized cost      Noncredit Loss
Component of
     Gross Unrealized      Fair value      Weighted
average yield%
 
        OTTI Recorded
in OCI
     gains      losses        

U.S. Treasury securities:

                 

Due within one year

   $ 7,497      $ —        $ 2      $ —        $ 7,499        0.17  

Obligations of U.S. government-sponsored agencies:

                 

After 1 to 5 years

     25,650        —          7        —          25,657        0.35  

After 5 to 10 years

     214,323        —          8        415        213,916        1.31  

Puerto Rico government obligations:

                 

After 1 to 5 years

     10,000        —          —          —          10,000        3.50  

After 5 to 10 years

     39,753        —          —          553        39,200        4.49  

After 10 years

     21,099        —          948        47        22,000        5.78  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

United States and Puerto Rico government obligations

     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

     125,747        —          3,430        —          129,177        2.13  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    
     125,810        —          3,430        —          129,240        2.13  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

GNMA certificates:

                 

After 1 to 5 years

     143        —          7        —          150        3.57  

After 5 to 10 years

     479        —          37        —          516        3.52  

After 10 years

     564,376        —          39,630        —          604,006        3.98  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    
     564,998        —          39,674        —          604,672        3.98  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

FNMA certificates:

                 

Due within one year

     119        —          —          —          119        2.93  

After 1 to 5 years

     2,270        —          149        —          2,419        4.88  

After 5 to 10 years

     10,963        —          874        —          11,837        3.91  

After 10 years

     602,623        —          10,638        —          613,261        2.49  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    
     615,975        —          11,661        —          627,636        2.52  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Collateralized mortgage obligations issued or guaranteed by the FHLMC:

                 

After 5 to 10 years

     301        —          —          1        300        3.01  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    
     301        —          —          1        300        3.01  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Other mortgage pass-through trust certificates:

                 

Over 5 to 10 years

     143        —          1        —          144        7.27  

After 10 years

     69,269        18,487        —          —          50,782        2.29  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    
     69,412        18,487        1        —          50,926        2.29  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total mortgage-backed securities

     1,376,496        18,487        54,766        1        1,412,774        3.07  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Equity securities (without contractual maturity) (1)

     77        —          —          46        31        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total investment securities available for sale

   $ 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 September 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 September 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

   $ 47,956      $ 20,946      $ 1,243      $ 844      $ 49,199      $ 21,790  

US government agencies obligations

     251,683        12,601        —          —          251,683        12,601  

Mortgage-backed securities:

                 

FNMA

     722,735        23,052        —          —          722,735        23,052  

FHLMC

     263,628        6,924        —          —          263,628        6,924  

Collateralized mortgage obligations issued or guaranteed by FHLMC

     —          —          121        1        121        1  

Other mortgage pass-through trust certificates

     —          —          42,052        15,631        42,052        15,631  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,286,002      $ 63,523      $ 43,416      $ 16,476      $ 1,329,418      $ 79,999  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 Treasury accounted for approximately 96% of the total available-for-sale portfolio as of September 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 $57.7 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
September 30,
    Nine-Month Period
Ended September 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

     —          (557     (117     (1,933
  

 

 

    

 

 

   

 

 

   

 

 

 

Net impairment losses recognized in earnings

   $ —        $ (557   $ (117   $ (1,933
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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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
September 30,
     Nine-Month Period Ended
September 30,
 
     2013      2012      2013      2012  
(In thousands)                            

Credit losses at the beginning of the period

   $ 5,389      $ 5,199      $ 5,272      $ 3,823  

Additions:

           

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

     —          557        117        1,933  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 5,389      $ 5,756      $ 5,389      $ 5,756  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the first nine months 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:

 

     September 30, 2013    December 31, 2012
     Weighted
Average
    Range    Weighted
Average
    Range

Discount rate

     14.5   14.5%      14.5   14.5%

Prepayment rate

     32   20.41%-100.00%      32   21.85%-69.97%

Projected Cumulative Loss Rate

     6.6   .69%-38.58%      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 first nine months of 2013. No OTTI losses on equity securities were recognized in the nine-month period ended September 30, 2012.

As of September 30, 2013, the Corporation held approximately $71.0 million of Puerto Rico government and agencies bond obligations as part of its available-for-sale investment securities portfolio that were reflected at their aggregate fair value of $49.2 million, down $18.2 million from June 30, 2013. In May, the 30-year general obligation bonds of the Puerto Rico government, which are widely held by mutual funds, carried a yield of about 5.3%, which increased during the third quarter, surpassing 10% at one point in September amid a general run-up in interest rates and significant selling by investors after Detroit filed for the largest municipal bankruptcy in United States history. The debt carried a yield of approximately 8.5% as of September 30, 2013. The debt ratings have suffered downgrades in the last ten months, and such downgrades could have an adverse impact on economic conditions, but the ultimate impact is unpredictable and may not be immediately apparent. The Commonwealth of Puerto Rico debt is rated Baa3 with a negative outlook by Moody’s Investor Service (“Moody’s”), BBB- with a negative outlook by Standard & Poor’s (“S&P”), and BBB- with a negative outlook by Fitch, Inc., all one notch above noninvestment grade. Based on the Corporation’s ability and intent to hold these securities until a recovery of the fair value occurs, the unrealized losses are considered temporary. The Corporation will continue to closely monitor Puerto Rico’s political and economic status and evaluate the portfolio for any declines in value that could be considered other-than-temporary.

 

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Table of Contents

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 September 30, 2013 and December 31, 2012, the Corporation had investments in FHLB stock with a book value of $30.8 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 nine-month period ended September 30, 2013 was $0.3 million and $1.0 million, respectively, compared to $0.3 million and $1.1 million for the comparable periods in 2012.

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 September 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:

 

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

Residential mortgage loans, mainly secured by first mortgages

   $ 2,519,457     $ 2,747,217  
  

 

 

   

 

 

 

Commercial loans:

    

Construction loans (1)

     163,610       361,875  

Commercial mortgage loans (1)

     1,857,794       1,883,798  

Commercial and Industrial loans (1) (2)

     2,663,793       2,793,157  

Loans to local financial institutions collateralized by real estate mortgages

     244,554       255,390  
  

 

 

   

 

 

 

Commercial loans

     4,929,751       5,294,220  
  

 

 

   

 

 

 

Finance leases

     243,553       236,926  
  

 

 

   

 

 

 

Consumer loans

     1,815,873       1,775,751  
  

 

 

   

 

 

 

Loans held for investment

     9,508,634       10,054,114  

Allowance for loan and lease losses

     (289,379     (435,414
  

 

 

   

 

 

 

Loans held for investment, net (3)

   $ 9,219,255     $ 9,618,700  
  

 

 

   

 

 

 

 

(1) During the second quarter of 2013, after a comprehensive review of substantially all of the loans in the 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 September 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.

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

 

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

Non-performing loans:

     

Residential mortgage

   $ 142,002      $ 313,626  

Commercial mortgage

     127,374        214,780  

Commercial and Industrial

     127,584        230,090  

Construction

     64,241        178,190  

Consumer:

     

Auto loans

     19,481        19,210  

Finance leases

     2,603        3,182  

Other consumer loans

     15,100        16,483  
  

 

 

    

 

 

 

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

   $ 498,385      $ 975,561  
  

 

 

    

 

 

 

 

(1) As of September 30, 2013 and December 31, 2012, excludes $80.2 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 $6.0 million and $10.6 million as of September 30, 2013 and December 31, 2012, respectively, acquired as part of the credit card portfolio purchased in the second quarter of 2012.

 

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Table of Contents

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

 

As of September 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)

   $ —        $ 9,857      $ 78,925      $ 88,782      $ —        $ 115,385      $ 204,167      $ 78,925  

Other residential mortgage loans (3)

     —          85,819        155,090        240,909        —          2,074,381        2,315,290        13,088  

Commercial:

                       

Commercial and Industrial loans

     18,419        16,336        150,692        185,447        —          2,722,900        2,908,347        23,108  

Commercial mortgage loans (3)

     —          2,399        135,734        138,133        —          1,719,661        1,857,794        8,360  

Construction loans (3)

     —          318        64,368        64,686        —          98,924        163,610        127  

Consumer:

                       

Auto loans

     77,243        15,616        19,481        112,340        —          986,796        1,099,136        —    

Finance leases

     9,870        2,645        2,603        15,118        —          228,435        243,553        —    

Other consumer loans

     12,486        9,227        19,227        40,940        5,963        669,834        716,737        4,127  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held for investment

   $ 118,018      $ 142,217      $ 626,120      $ 886,355      $ 5,963      $ 8,616,316      $ 9,508,634      $ 127,735  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes non-performing loans and accruing loans that 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 September 30, 2013, includes $7.8 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 on 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 $23.8 million, $199.6 million, $80.4 million and $1.5 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 $36.9 million of residential mortgage loans insured by the FHA or guaranteed by the VA, that are over 18 months delinquent, and are no longer accruing interest as of September 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 (5)
 

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 that 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 on 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, that are over 18 months delinquent, and are no longer accruing interest as of December 31, 2012.

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

 

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

Commercial mortgage

   $ 325,334      $ 15,426      $ —        $ 340,760      $ 1,857,794  

Construction

     74,475        9,179        —          83,654        163,610  

Commercial and Industrial

     181,343        25,576        1,185        208,104        2,908,347  

 

     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  

 

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(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 $80.2 million ($30.4 million commercial mortgage; $49.8 million construction) and $2.2 million ($1.1 million commercial mortgage and $1.1 million commercial and industrial) as of September 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.

 

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

Performing

   $ 204,167      $ 2,173,288      $ 1,079,655      $ 240,950      $ 695,674  

Purchased Credit-Impaired

     —          —          —          —          5,963  

Non-performing

     —          142,002        19,481        2,603        15,100  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 204,167      $ 2,315,290      $ 1,099,136      $ 243,553      $ 716,737  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 $36.9 million of residential mortgage loans insured by the FHA or guaranteed by the VA, that are over 18 months delinquent, and are no longer accruing interest as of September 30, 2013.

 

December 31, 2012    Consumer Credit Exposure-Credit Risk Profile based on payment activity  
     Residential Real-Estate      Consumer  
     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, that 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:

 

Impaired Loans                                                        
(In thousands)                                                        
                                 Quarter ended      Nine-month Period Ended  
                                 September 30, 2013  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Specific
Allowance
     Year-To-
Date
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 September 30, 2013

                       

With no related allowance recorded:

                       

FHA/VA-Guaranteed loans

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

Other residential mortgage loans

     219,685        232,295        —          222,764        2,768        255        7,359        1,013  

Commercial:

                       

Commercial mortgage loans

     45,489        46,384        —          46,126        307        243        767        467  

Commercial and Industrial Loans

     36,095        76,965        —          40,092        14        37        22        49  

Construction Loans

     16,418        19,001        —          18,918        9        8        13        25  

Consumer:

                       

Auto loans

     —          —          —          —          —          —          —          —    

Finance leases

     —          —          —          —          —          —          —          —    

Other consumer loans

     2,997        4,418        —          3,261        31        14        81        42  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 320,684      $ 379,063      $ —        $ 331,161      $ 3,129      $ 557      $ 8,242      $ 1,596  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                       

FHA/VA-Guaranteed loans

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

Other residential mortgage loans

     177,340        191,181        17,982        179,713        1,518        310        4,251        870  

Commercial:

                       

Commercial mortgage loans

     160,165        167,579        28,316        167,019        444        500        1,230        1,480  

Commercial and Industrial Loans

     164,190        180,335        34,438        178,565        1,285        7        2,955        115  

Construction Loans

     57,064        69,448        21,785        59,519        256        51        676        234  

Consumer:

                       

Auto loans

     13,731        13,731        2,364        12,607        242        —          726        —    

Finance leases

     2,290        2,290        77        2,183        57        —          167        —    

Other consumer loans

     9,045        9,595        1,213        8,982        421        16        1,050        28  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 583,825      $ 634,159      $ 106,175      $ 608,588      $ 4,223      $ 884      $ 11,055      $ 2,727  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                       

FHA/VA-Guaranteed loans

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

Other residential mortgage loans

     397,025        423,476        17,982        402,477        4,286        565        11,610        1,883  

Commercial:

                       

Commercial mortgage loans

     205,654        213,963        28,316        213,145        751        743        1,997        1,947  

Commercial and Industrial Loans

     200,285        257,300        34,438        218,657        1,299        44        2,977        164  

Construction Loans

     73,482        88,449        21,785        78,437        265        59        689        259  

Consumer:

                       

Auto loans

     13,731        13,731        2,364        12,607        242        —          726        —    

Finance leases

     2,290        2,290        77        2,183        57        —          167        —    

Other consumer loans

     12,042        14,013        1,213        12,243        452        30        1,131        70  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 904,509      $ 1,013,222      $ 106,175      $ 939,749      $ 7,352      $ 1,441      $ 19,297      $ 4,323  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
(In thousands)                            
     Recorded
Investments
     Unpaid
Principal
Balance
     Related
Specific
Allowance
     Year-To-Date
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 $24.2 million was recognized on impaired loans for the third quarter and nine-month period ended September 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 nine-month period ended September 30, 2013:

 

                                                     
     Quarter Ended     Nine-Month
Period Ended
 
     September 30, 2013
(In thousands)
 

Impaired Loans:

    

Balance at beginning of period

   $ 908,245     $ 1,465,294  

Loans determined impaired during the period

     57,520       208,298  

Net charge-offs

     (19,703     (291,675

Loans sold, net of charge-offs

     —         (201,409

Increases to impaired loans- additional disbursements

     383       6,403  

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

     —         (147,100

Foreclosures

     (2,306     (25,151

Loans no longer considered impaired

     (12,412     (38,201

Paid in full or partial payments

     (27,218     (71,950
  

 

 

   

 

 

 

Balance at end of period

   $ 904,509     $ 904,509  
  

 

 

   

 

 

 

 

                                                     
     Quarter
Ended
    Nine-Month
Period Ended
 
     September 30, 2013  
   (In thousands)  

Specific Reserve:

    

Balance at beginning of period

   $ 114,953     $ 221,749  

Provision for loan losses

     10,925       176,101  

Net charge-offs

     (19,703     (291,675
  

 

 

   

 

 

 

Balance at end of period

   $ 106,175     $ 106,175  
  

 

 

   

 

 

 

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
(In thousands)    At acquisition  
     Purchased Credit-
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 September 30, 2013 and December 31, 2012:

 

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

Contractual balance

   $ 23,921      $ 28,778  

Carrying value

     5,963        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 nine months 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

     (819
  

 

 

 

Accretable yield as of September 30, 2013

   $ —    
  

 

 

 

 

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Table of Contents

During the first nine months of 2013, the Corporation purchased $185.4 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 $189.8 million of performing residential mortgage loans to FNMA and FHLMC during the first nine months of 2013. Also, the Corporation securitized $300.2 million of FHA/VA mortgage loans into GNMA mortgage-backed securities during the first nine months 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 nine months of 2013, the Corporation repurchased pursuant to its repurchase option with GNMA $27.6 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 $4.0 million during the first nine months 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, reflected in the provision for loan and lease losses for the first nine months of 2013. 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 nine months 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 nine months 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.

Furthermore, in the third quarter of 2013, approximately $6.4 million of construction loan held for sale participations were paid-off, resulting in a gain of $0.3 million included as part of “Other income” in the third 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 $9.5 billion as of September 30, 2013, approximately 85% have credit risk concentration in Puerto Rico, 9 % in the United States, and 6 % in the USVI and BVI.

As of September 30, 2013, the Corporation had $326.7 million outstanding in credit facilities granted to the Puerto Rico government, its municipalities and public corporations, compared to $158.4 million as of December 31, 2012, and $40.9 million granted to the government of the Virgin Islands, compared to $35.5 million as of December 31, 2012. Approximately $199.0 million of the granted facilities to the Puerto Rico government or political subdivisions consists of loans to municipalities for which, in most cases, the good faith, credit, and unlimited taxing power of the applicable municipality has been pledged to their repayment. Approximately $79.6 million consists of loans to public corporations that obtain revenues from rates charged for services or products, such as electric power. Public corporations have varying degrees of independence from the central government and many receive appropriations or other payments from it. Approximately $48.1 million consists of loans to units of the Puerto Rico central government. Furthermore, the Corporation had $198.9 million outstanding as of September 30, 2013 in financing to the hotel industry in Puerto Rico guaranteed by the Puerto Rico Tourism Development Fund.

The Puerto Rico economy has been in a recession since March 2006. For fiscal years 2007, 2008, 2009, 2010 and 2011, the Puerto Rico’s real gross national product decreased by 1.2%, 2.9%, 3.8%, 3.6%, and 1.6%, respectively. According to the latest information and projections issued by the Puerto Rico Planning Board, in fiscal year 2012, the Puerto Rico’s real gross national product, increased by 0.1% and, is projected to decrease by 0.03% for fiscal year 2013 and 0.8% for 2014.

The Puerto Rico government has faced fiscal challenges, including an imbalance between its General Fund total revenues and expenditures. The imbalance reached its highest level in fiscal year 2009, when the deficit was approximately $2.86 billion. Since that time, the Puerto Rico government has been able to reduce its deficit every year, except fiscal year 2012, through various measures designed to increase revenues and reduce expenses. The projected deficit for fiscal year 2014 is expected to decline to $820 million.

The Corporation cannot predict at this time the impact that the current fiscal situation of the Commonwealth of Puerto Rico and the various legislative and other measures adopted and to be adopted by the Puerto Rico government in response to such fiscal situation will have on the Puerto Rico economy and on the Corporation’s financial condition and results of operations.

In addition to loans extended to government entities, the largest loan to one borrower as of September 30, 2013 in the amount of $244.6 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.

 

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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 U.S. 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 a troubled debt restructuring (a “TDR”). 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 September 30, 2013, the Corporation’s total TDR loans held for investment of $636.9 million consisted of $335.0 million of residential mortgage loans, $102.0 million of commercial and industrial loans, $154.5 million of commercial mortgage loans, $19.3 million of construction loans, and $26.2 million of consumer loans. Outstanding unfunded commitments on TDR loans amounted to $0.8 million as of September 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 certain 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.

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 TDRs regardless of whether the borrower enters into a permanent modification. As of September 30, 2013, we classified an additional $3.2 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 a 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:

 

     September 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

   $ 22,907      $ 6,455      $ 273,691      $ —        $ 31,902      $ 334,955  

Commercial Mortgage Loans

     37,960        13,033        84,989        7        18,471        154,460  

Commercial and Industrial Loans

     12,304        16,371        7,188        7,365        58,728        101,956  

Construction Loans

     6,911        2,212        8,996        —          1,207        19,326  

Consumer Loans - Auto

     —          773        8,446        —          4,511        13,730  

Finance Leases

     —          1,066        1,224        —          —          2,290  

Consumer Loans - Other

     356        309        7,778        —          1,699        10,142  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings(2)

   $ 80,438      $ 40,219      $ 392,312      $ 7,372      $ 116,518      $ 636,859  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 $71.0 million as of September 30, 2013.

 

     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        —          —          —          2,019  

Consumer Loans - Other

     451        438        6,472        —          —          2,109        9,470  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings

   $ 160,144      $ 42,480      $ 494,071      $ 58,806      $ 71,390      $ 114,839      $ 941,730  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Mainly related to one construction relationship amounting to $53.4 million transferred to held for sale in 2013.
(2) 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.

 

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The following table presents the Corporation’s TDR activity:

 

(In thousands)    Quarter Ended     Nine-Month Period
Ended
 
     September 30, 2013  

Beginning balance of TDRs

   $ 613,129     $ 941,730  

New TDRs

     46,089       110,687  

Increases to existing TDRs - additional disbursements

     284       2,802  

Charge-offs post modification

     (1,497     (125,257

Sales, net of charge-offs

     —         (104,915

Foreclosures

     (1,425     (7,537

Removed from TDR classification

     (185     (6,603

TDRs transferred to held for sale

     —         (131,649

Paid-off and partial payments

     (19,536     (42,399
  

 

 

   

 

 

 

Ending balance of TDRs

   $ 636,859     $ 636,859  
  

 

 

   

 

 

 

TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure generally for a minimum of six months and there is evidence that such payments can and are likely to continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loans being returned to accrual at the time of the restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Loan modifications increase the Corporation’s interest income by returning a non-performing loan to performing status, if applicable, increase cash flows by providing for payments to be made by the borrower, and avoid increases in foreclosure and OREO costs. The Corporation continues to consider a modified loan as an impaired loan for purposes of estimating the allowance for loan and lease losses. A TDR loan that specifies an interest rate that at the time of the restructuring is greater than or equal to the rate the Corporation is willing to accept for a new loan with comparable risk may not be reported as a TDR or an impaired loan in the calendar years subsequent to the restructuring if it is in compliance with its modified terms. During the nine-month period ended September 30, 2013, $6.6 million was removed from the TDR classification, as reflected in the table above.

The following table provides a breakdown between accrual and nonaccrual status of TDRs:

 

(In thousands)    September 30, 2013  
     Accrual      Nonaccrual (1)(2)      Total TDRs  

Non-FHA/VA Residential Mortgage loans

   $ 270,211      $ 64,744      $ 334,955  

Commercial Mortgage Loans

     83,572        70,888        154,460  

Commercial and Industrial Loans

     53,664        48,292        101,956  

Construction Loans

     1,164        18,162        19,326  

Consumer Loans - Auto

     8,163        5,567        13,730  

Finance Leases

     2,207        83        2,290  

Consumer Loans - Other

     8,163        1,979        10,142  
  

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings

   $ 427,144      $ 209,715      $ 636,859  
  

 

 

    

 

 

    

 

 

 

 

(1) Included in non-accrual loans are $78.4 million in loans that are performing under the terms of the restructuring agreement but are reported in non-accrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and there is no doubt about full collectability.
(2) Excludes non-accrual TDRs held for sale with a carrying value of $71.0 million as of September 30, 2013.

 

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Table of Contents
(In thousands)    December 31, 2012  
     Accrual      Nonaccrual (1)      Total TDRs  

Non- FHA/VA Residential Mortgage loans

   $ 287,198      $ 124,686      $ 411,884  

Commercial Mortgage Loans

     163,079        124,584        287,663  

Commercial and Industrial Loans

     36,688        96,381        133,069  

Construction Loans

     2,554        83,639        86,193  

Consumer Loans - Auto

     6,615        4,817        11,432  

Finance Leases

     1,900        119        2,019  

Consumer Loans - Other

     6,744        2,726        9,470  
  

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings

   $ 504,778      $ 436,952      $ 941,730  
  

 

 

    

 

 

    

 

 

 

 

(1) Included in non-accrual loans are $197.2 million in loans that are performing under the terms of the restructuring agreement but are reported in non-accrual status until the restructured loans meet the criteria of sustained payment performance under the revised terms for reinstatement to accrual status and there is no doubt about full collectability.

TDRs exclude restructured mortgage loans that are government guaranteed (i.e., FHA/VA loans) in an amount totaling $94.4 million. The Corporation excludes government guaranteed loans from TDRs given that in the event that the borrower defaults on the loan, the principal and interest (debenture rate) are guaranteed by the U.S. government; therefore, the risk of loss on these types of loans is very low. The Corporation does not consider loans with government guarantees to be impaired loans for the purpose of calculating the allowance for loan and lease losses.

 

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Table of Contents

Loan modifications that are considered TDRs completed during the quarter and nine-month period ended September 30, 2013 and 2012 were as follows:

 

(Dollars in thousands)    Quarter ended September 30, 2013  
     Number of
contracts
     Pre-modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Troubled Debt Restructurings:

        

Non-FHA/VA Residential Mortgage loans

     140      $ 29,530      $ 29,984  

Commercial Mortgage Loans

     15        4,481        4,586  

Commercial and Industrial Loans

     13        8,528        7,925  

Construction Loans

     3        133        136  

Consumer Loans - Auto

     149        2,006        2,006  

Finance Leases

     16        334        334  

Consumer Loans - Other

     271        1,118        1,118  
  

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings

     607      $ 46,130      $ 46,089  
  

 

 

    

 

 

    

 

 

 
(Dollars in thousands)    Nine-Month period ended September 30, 2013  
     Number of
contracts
     Pre-modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Troubled Debt Restructurings:

        

Non-FHA/VA Residential Mortgage loans

     253      $ 42,628      $ 43,106  

Commercial Mortgage Loans

     16        4,972        5,077  

Commercial and Industrial Loans

     21        76,579        50,588  

Construction Loans

     8        536        539  

Consumer Loans - Auto

     434        5,874        5,874  

Finance Leases

     54        1,063        1,063  

Consumer Loans - Other

     1,001        4,440        4,440  
  

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings

     1,787      $ 136,092      $ 110,687  
  

 

 

    

 

 

    

 

 

 
(Dollars in thousands)    Quarter ended September 30, 2012  
     Number of
contracts
     Pre-modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Troubled Debt Restructurings:

        

Non-FHA/VA Residential Mortgage loans

     147      $ 23,421      $ 23,431  

Commercial Mortgage Loans

     14        57,100        57,100  

Commercial and Industrial Loans

     11        1,278        1,271  

Construction Loans

     3        4,380        4,380  

Consumer Loans - Auto

     156        2,044        2,044  

Finance Leases

     24        462        462  

Consumer Loans - Other

     304        1,986        1,986  
  

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings

     659      $ 90,671      $ 90,674  
  

 

 

    

 

 

    

 

 

 
(Dollars in thousands)    Nine-Month period ended September 30, 2012  
     Number of
contracts
     Pre-modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Troubled Debt Restructurings:

        

Non-FHA/VA Residential Mortgage loans

     403      $ 64,412      $ 64,773  

Commercial Mortgage Loans

     35        100,036        100,072  

Commercial and Industrial Loans

     47        33,162        29,593  

Construction Loans

     8        9,671        9,661  

Consumer Loans - Auto

     445        5,473        5,430  

Finance Leases

     76        1,384        1,384  

Consumer Loans - Other

     827        5,289        5,289  
  

 

 

    

 

 

    

 

 

 

Total Troubled Debt Restructurings

     1,841      $ 219,427      $ 216,202  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-performing loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The Corporation considers a loan to have defaulted if the borrower has failed to make payments of either principal, interest, or both for a period of 90 days or more.

Loan modifications considered TDRs that defaulted during the quarters and nine-month periods ended September 30, 2013 and September 30, 2012 and had become TDRs during the 12-months preceding the default date were as follows:

 

     Quarter ended September 30,  
(Dollars in thousands)    2013      2012  
     Number of
contracts
     Recorded
Investment
     Number of
contracts
     Recorded
Investment
 

Non-FHA/VA Residential Mortgage loans

     11      $ 1,934        49      $ 8,031  

Commercial Mortgage Loans

     —          —          1        338  

Commercial and Industrial Loans

     —          —          1        1,910  

Construction Loans

     —          —          —          —    

Consumer Loans - Auto

     —          —          3        38  

Consumer Loans - Other

     —          —          6        37  

Finance Leases

     1        18        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     12      $ 1,952        60      $ 10,354  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Nine-Month Period Ended September 30,  
(Dollars in thousands)    2013      2012  
     Number of
contracts
     Recorded
Investment
     Number of
contracts
     Recorded
Investment
 

Non-FHA/VA Residential Mortgage loans

     75      $ 11,549        137      $ 20,841  

Commercial Mortgage Loans

     1        46,102        9        5,549  

Commercial and Industrial Loans

     2        3,829        5        8,189  

Construction Loans

     3        252        2        8,382  

Consumer Loans - Auto

     7        54        39        431  

Consumer Loans - Other

     40        219        12        155  

Finance Leases

     3        38        1        27  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     131      $ 62,043        205      $ 43,574  
  

 

 

    

 

 

    

 

 

    

 

 

 

For certain TDRs, the Corporation splits the loans into two new notes, A and B notes. The A note is restructured to comply with the Corporation’s lending standards at current market rates, and is tailored to suit the customer’s ability to make timely interest and principal payments. The B note includes the granting of the concession to the borrower and varies by situation. The B note is charged off but the obligation is not forgiven to the borrower, and any payments collected are accounted for as recoveries. At the time of restructuring, the A note is identified and classified as a TDR. If the loan performs for at least six months according to the modified terms, the A note may be returned to accrual status. The borrower’s payment performance prior to the restructuring is included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of the restructuring. In the periods following the calendar year in which a loan is restructured, the A note may no longer be reported as a TDR if it is on accrual, is in compliance with its modified terms, and yields a market rate (as determined and documented at the time of the restructure).

 

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Table of Contents

The recorded investment in loans held for investment restructured using the A/B note restructure workout strategy was approximately $90.9 million at September 30, 2013. The following table provides additional information about the volume of this type of loan restructuring and the effect on the allowance for loan and lease losses in the first nine months of 2013 and 2012:

 

(In thousands)    September 30, 2013      September 30, 2012  

Principal balance deemed collectible at end of period

   $ 90,914      $ 128,651  
  

 

 

    

 

 

 

Amount charged off

   $ 25,389      $ 2,735  
  

 

 

    

 

 

 

Charges to the provision for loan losses

   $ 567      $ 1,939  
  

 

 

    

 

 

 

Allowance for loan losses at end of period

   $ 1,588      $ 5,951  
  

 

 

    

 

 

 

Of the loans held for investment comprising the $90.9 million that have been deemed collectible, approximately $89.1 million were placed in accrual status as the borrowers have exhibited a period of sustained performance. These loans continue to be individually evaluated for impairment purposes.

NOTE 7 – ALLOWANCE FOR LOAN AND LEASE LOSSES

The changes in the allowance for loan and lease losses were as follows:

 

(In thousands)   Residential
Mortgage
Loans
    Commercial
Mortgage
Loans
    Commercial &
Industrial
Loans
    Construction
Loans
    Consumer
Loans
    Total  

Quarter ended September 30, 2013

           

Allowance for loan and lease losses:

           

Beginning balance

  $ 35,581     $ 88,013     $ 87,677     $ 34,728     $ 55,048     $ 301,047  

Charge-offs

    (8,698     (5,944     (7,419     (1,824     (15,559     (39,444

Recoveries

    241       26       1,701       1,895       1,718       5,581  

Provision

    4,663       (59     1,090       1,304       15,197       22,195  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 31,787     $ 82,036     $ 83,049     $ 36,103     $ 56,404     $ 289,379  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: specific reserve for impaired loans

  $ 17,982     $ 28,316     $ 34,438     $ 21,785     $ 3,654     $ 106,175  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: purchased credit-impaired loans

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: general allowance

  $ 13,805     $ 53,720     $ 48,611     $ 14,318     $ 52,750     $ 183,204  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held for investment:

           

Ending balance

  $ 2,519,457     $ 1,857,794     $ 2,908,347     $ 163,610     $ 2,059,426     $ 9,508,634  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: impaired loans

  $ 397,025     $ 205,654     $ 200,285     $ 73,482     $ 28,063     $ 904,509  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: purchased credit-impaired loans

  $ —       $ —       $ —       $ —       $ 5,963     $ 5,963  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans with general allowance

  $ 2,122,432     $ 1,652,140     $ 2,708,062     $ 90,128     $ 2,025,400     $ 8,598,162  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

36


Table of Contents
(In thousands)   Residential
Mortgage
Loans
    Commercial
Mortgage
Loans
    Commercial
& Industrial
Loans
    Construction
Loans
    Consumer
Loans
    Total  

Nine-Month period ended September 30, 2013

           

Allowance for loan and lease losses:

           

Beginning balance

  $ 68,354     $ 97,692     $ 146,900     $ 61,600     $ 60,868     $ 435,414  

Charge-offs

    (25,351     (25,214     (54,849     (30,070     (46,673     (182,157

Charge-offs related to bulk sales

    (98,972     (40,057     (44,678     (12,784     —         (196,491

Recoveries

    868       64       3,460       2,042       5,397       11,831  

Provision

    86,888       38,860       41,656       16,566       36,812       220,782  

Reclassification (1)

    —         10,691       (9,440     (1,251     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 31,787     $ 82,036     $ 83,049     $ 36,103     $ 56,404     $ 289,379  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: specific reserve for impaired loans

  $ 17,982     $ 28,316     $ 34,438     $ 21,785     $ 3,654     $ 106,175  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: purchased credit-impaired loans

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: general allowance

  $ 13,805     $ 53,720     $ 48,611     $ 14,318     $ 52,750     $ 183,204  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held for investment:

           

Ending balance

  $ 2,519,457     $ 1,857,794     $ 2,908,347     $ 163,610     $ 2,059,426     $ 9,508,634  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: impaired loans

  $ 397,025     $ 205,654     $ 200,285     $ 73,482     $ 28,063     $ 904,509  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: purchased credit-impaired loans

  $ —       $ —       $ —       $ —       $ 5,963     $ 5,963  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans with general allowance

  $ 2,122,432     $ 1,652,140     $ 2,708,062     $ 90,128     $ 2,025,400     $ 8,598,162  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Refer to Note 6 for information about the reclassification of certain loans between commercial and industrial, construction, and commercial mortgage made in the second quarter of 2013.

 

(In thousands)   Residential
Mortgage
Loans
    Commercial
Mortgage
Loans
    Commercial &
Industrial
Loans
    Construction
Loans
    Consumer
Loans
    Total  

Quarter ended September 30, 2012

           

Allowance for loan and lease losses:

           

Beginning balance

  $ 67,440     $ 100,846     $ 166,021     $ 67,858     $ 54,988     $ 457,153  

Charge-offs

    (7,586     (5,681     (12,795     (9,012     (9,444     (44,518

Recoveries

    228       679       534       686       1,817       3,944  

Provision (release)

    9,083       (6,617     8,117       6,379       11,990       28,952  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 69,165     $ 89,227     $ 161,877     $ 65,911     $ 59,351     $ 445,531  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: specific reserve for impaired loans

  $ 49,640     $ 51,351     $ 57,001     $ 33,349     $ 2,813     $ 194,154  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: purchased credit-impaired loans

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: general allowance

  $ 19,525     $ 37,876     $ 104,876     $ 32,562     $ 56,538     $ 251,377  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held for investment:

           

Ending balance

  $ 2,762,418     $ 1,459,118     $ 3,627,646     $ 352,891     $ 1,986,091     $ 10,188,164  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: impaired loans

  $ 594,788     $ 363,533     $ 238,512     $ 178,462     $ 24,843     $ 1,400,138  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: purchased credit-impaired loans

  $ —       $ —       $ —       $ —       $ 12,741     $ 12,741  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans with general allowance

  $ 2,167,630     $ 1,095,585     $ 3,389,134     $ 174,429     $ 1,948,507     $ 8,775,285  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
(In thousands)   Residential
Mortgage
Loans
    Commercial
Mortgage
Loans
    Commercial &
Industrial
Loans
    Construction
Loans
    Consumer
Loans
    Total  

Nine-Month period ended September 30, 2012

           

Allowance for loan and lease losses:

           

Beginning balance

  $ 68,678     $ 108,991     $ 164,490     $ 91,386     $ 60,372     $ 493,917  

Charge-offs

    (27,976     (15,588     (35,494     (42,908     (29,327     (151,293

Recoveries

    676       721       2,179       4,004       5,294       12,874  

Provision

    27,787       (4,897     30,702       13,429       23,012       90,033  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 69,165     $ 89,227     $ 161,877     $ 65,911     $ 59,351     $ 445,531  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: specific reserve for impaired loans

  $ 49,640     $ 51,351     $ 57,001     $ 33,349     $ 2,813     $ 194,154  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: purchased credit-impaired loans

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: general allowance

  $ 19,525     $ 37,876     $ 104,876     $ 32,562     $ 56,538     $ 251,377  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held for investment:

           

Ending balance

  $ 2,762,418     $ 1,459,118     $ 3,627,646     $ 352,891     $ 1,986,091     $ 10,188,164  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: impaired loans

  $ 594,788     $ 363,533     $ 238,512     $ 178,462     $ 24,843     $ 1,400,138  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: purchased credit-impaired loans

  $ —       $ —       $ —       $ —       $ 12,741     $ 12,741  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans with general allowance

  $ 2,167,630     $ 1,095,585     $ 3,389,134     $ 174,429     $ 1,948,507     $ 8,775,285  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The bulk sale of approximately $217.7 million of adversely classified assets in the first quarter of 2013, mainly commercial loans, resulted in charge-offs of approximately $98.5 million. In determining the historical loss rate for the computation of the general reserve for commercial loans, the Corporation includes the portion of these charge-offs that was related to the acceleration of previously reserved credit losses amounting to approximately $39.9 million. The Corporation considered that the portion not deemed to be credit-related losses was not indicative of the ultimate losses that may have occurred had the assets been resolved on an individual basis, over time and not in a steeply discounted bulk sale. A transaction, such as this one, entered into to expedite the reduction of non-performing and adversely classified assets, can result in charge-offs that are not reflective of true credit-related charge-off history since there is a component related to the discounted value realized on a bulk sale basis. Accordingly, the Corporation concluded that it is reasonable to exclude the component related to the discounted value from its historical charge-offs analysis used in estimating its allowance for loan losses.

As of September 30, 2013, the Corporation maintained a $0.9 million reserve for unfunded loan commitments mainly related to outstanding construction and commercial and industrial loan commitments. The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance sheet loan commitments at the balance sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included as part of accounts payable and other liabilities in the consolidated statement of financial condition.

NOTE 8 – LOANS HELD FOR SALE

The Corporation’s loans held-for-sale portfolio was composed of:

 

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

Residential mortgage loans

   $ 34,358      $ 82,753  

Construction loans

     49,824        —    

Commercial and Industrial loans

     —          1,178  

Commercial mortgage loans

     30,410        1,463  
  

 

 

    

 

 

 

Total

   $ 114,592      $ 85,394  
  

 

 

    

 

 

 

Non-performing loans held for sale totaled $80.2 million as of September 30, 2013 ($30.4 million commercial mortgage and $49.8 million construction loans) and $2.2 million ($1.1 million commercial and industrial and $1.1 million commercial mortgage) as of December 31, 2012. As previously discussed, during the first quarter of 2013, the Corporation transferred to held for sale $181.6 million of non-performing loans. In connection with the transfer, the Corporation recorded charge-offs of $36.0 million in the first quarter 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.

 

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Table of Contents

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.

Furthermore, in the third quarter of 2013 approximately $6.4 million of construction loan held for sale participations were paid-off, resulting in a gain of $0.3 million, recorded as part of “Other income” in the third quarter of 2013.

The Corporation continues with its effort to resolve and dispose its non-performing commercial and construction loans held for sale.

NOTE 9 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

One of the market risks facing the Corporation is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value of the Corporation’s assets or liabilities and the risk that net interest income from its loan and investment portfolios will be adversely affected by changes in interest rates. The overall objective of the Corporation’s interest rate risk management activities is to reduce the variability of earnings caused by changes in interest rates.

The Corporation designates a derivative as a fair value hedge, a cash flow hedge or an economic undesignated hedge when it enters into the derivative contract. As of September 30, 2013 and December 31, 2012, all derivatives held by the Corporation were considered economic undesignated hedges. These undesignated hedges are recorded at fair value with the resulting gain or loss recognized in current earnings.

The following summarizes the principal derivative activities used by the Corporation in managing interest rate risk:

Interest rate cap agreements - Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value increases as the reference interest rate rises. The Corporation enters into interest rate cap agreements for protection from rising interest rates. Specifically, the interest rate on certain of the Corporation’s commercial loans to other financial institutions is generally a variable rate limited to the weighted average coupon of the referenced residential mortgage collateral, less a contractual servicing fee.

Interest rate swaps - Interest rate swap agreements generally involve the exchange of fixed and floating-rate interest payment obligations without the exchange of the underlying notional principal amount. As of September 30, 2013 and December 31, 2012, most of the interest rate swaps outstanding are used for protection against rising interest rates. Similar to unrealized gains and losses arising from changes in fair value, net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense depending on whether an asset or liability is being economically hedged.

Forward Contracts - Forward contracts are sales of to-be-announced (“TBA”) mortgage-backed securities that will settle over the standard delivery date and do not qualify as “regular way” security trades. Regular-way security trades are contracts with no net settlement provision and no market mechanism to facilitate net settlement and they provide for delivery of a security within the time generally established by regulations or conventions in the market place or exchange in which the transaction is being executed. The forward sales are considered derivative instruments that need to be marked-to-market. These securities are used to economically hedge the FHA/VA residential mortgage loan securitizations of the mortgage-banking operations. Unrealized gains (losses) are recognized as part of mortgage banking activities in the Consolidated Statements of Income (Loss).

To satisfy the needs of its customers, the Corporation may enter into nonhedging transactions. On these transactions, generally, the Corporation participates as a buyer in one of the agreements and as a seller in the other agreement under the same terms and conditions.

In addition, the Corporation enters into certain contracts with embedded derivatives that do not require separate accounting as these are clearly and closely related to the economic characteristics of the host contract. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument.

 

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Table of Contents

The following table summarizes the notional amounts of all derivative instruments:

 

     Notional Amounts  
     As of
September 30,
2013
     As of
December 31,
2012
 
     (In thousands)  

Economic undesignated hedges:

     

Interest rate contracts:

     

Interest rate swap agreements used to hedge loans

   $ 31,187      $ 38,097  

Written interest rate cap agreements

     38,697        —    

Purchased interest rate cap agreements

     38,697        —    

Forward Contracts:

     

Sale of TBA GNMA MBS pools

     33,500        6,000  
  

 

 

    

 

 

 
   $ 142,081      $ 44,097  
  

 

 

    

 

 

 

Notional amounts are presented on a gross basis with no netting of offsetting exposure positions.

The following table summarizes the fair value of derivative instruments and the location of the derivative instruments in the Statement of Financial Condition:

 

    Asset Derivatives    

Liability Derivatives

 
    Statement of
Financial
  September 30,
2013
    December 31,
2012
        September 30,
2013
    December 31,
2012
 
    Condition
Location
  Fair
Value
    Fair
Value
   

Statement of Financial Condition Location

  Fair
Value
    Fair
Value
 
    (In thousands)  

Economic undesignated hedges:

           

Interest rate contracts:

           

Interest rate swap agreements used to hedge loans

  Other assets   $ 193     $ 288     Accounts payable and other liabilities   $ 4,350     $ 5,776  

Written interest rate cap agreements

  Other assets     —         —      

Accounts payable and other liabilities

    80       —    

Purchased interest rate cap agreements

  Other assets     79       —      

Accounts payable and other liabilities

    —         —    

Forward Contracts:

           

Sales of TBA GNMA MBS pools

  Other assets     2       3    

Accounts payable and other liabilities

    582       5  
   

 

 

   

 

 

     

 

 

   

 

 

 
    $ 274     $ 291       $ 5,012     $ 5,781  
   

 

 

   

 

 

     

 

 

   

 

 

 

The following table summarizes the effect of derivative instruments on the Statement of Income (Loss):

 

          Gain (or Loss)     Gain (or Loss)  
     Location of Gain or (loss)    Quarter Ended     Nine-Month Period Ended  
     Recognized in Income on    September 30,     September 30,  
(In thousands)    Derivatives    2013     2012     2013