FIRST BANCORP.
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
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o |
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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 0-17224
FIRST BANCORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Puerto Rico
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66-0561882 |
(State or other jurisdiction of
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(I.R.S. employer |
incorporation or organization)
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identification number) |
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1519 Ponce de León Avenue, Stop 23
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00908 |
Santurce, Puerto Rico
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(Zip Code) |
(Address of principal executive offices) |
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(787) 729-8200
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer (as defined in rule 12b-2 of the Exchange Act).
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common stock: 92,504,506 outstanding as of October 31, 2007.
FIRST BANCORP.
INDEX PAGE
2
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
Corporations press releases or in other public or shareholder 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.
First BanCorp wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and represent First BanCorps
expectations of future conditions or results and are not guarantees of future performance. First
BanCorp advises readers that various factors could cause actual results to differ materially from
those contained in any forward-looking statement. Such factors include, but are not limited to,
the following:
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an adverse change in the Corporations ability to attract new clients and retain existing ones; |
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general economic conditions, including prevailing interest rates and the performance of the financial
markets, which may affect demand for the Corporations products and services and the value of the
Corporations assets, including the value of the interest rate swaps that economically hedge the
interest rate risk mainly relating to brokered certificates of deposit and medium-term notes as well
as other derivative instruments used for protection from interest rate fluctuations; |
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|
risks arising from worsening economic conditions in Puerto Rico and in the United States market; |
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risks arising from credit and other risks of the Corporations lending and investment activities,
including the condo conversion loans in its Miami Agency; |
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developments in technology; |
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risks associated with changes to the Corporations business strategy to no longer acquire mortgage
loans in bulk; |
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the impact of Doral Financial Corporation and R&G Financial Corporations financial condition on the
repayment of their outstanding secured loan to the Corporation; |
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risks associated with being subject to the cease and desist orders; |
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the Corporations ability to issue brokered certificates of deposit and the ability to fund operations; |
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risks associated with downgrades in the credit ratings of the Corporations securities; |
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general competitive factors and industry consolidation; and |
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risks associated with regulatory and legislative changes for financial services companies in Puerto
Rico, the United States, and the U.S. and British Virgin Islands. |
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 carefully consider these factors and the risk factors outlined under Item 1A,
Risk Factors, in First BanCorps 2006 Annual Report on Form 10-K and under Item 1A, Risk Factors,
in this Quarterly Report on Form 10-Q.
3
FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
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|
|
|
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|
(In thousands, except for share information) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
138,037 |
|
|
$ |
112,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market instruments |
|
|
409,859 |
|
|
|
377,296 |
|
Federal funds sold and securities purchased
under agreements to resell |
|
|
4,501 |
|
|
|
42,051 |
|
Time deposits with other financial institutions |
|
|
59,097 |
|
|
|
37,123 |
|
|
|
|
|
|
|
|
Total money market investments |
|
|
473,457 |
|
|
|
456,470 |
|
|
|
|
|
|
|
|
Investment securities available for sale, at fair value: |
|
|
|
|
|
|
|
|
Securities pledged that can be repledged |
|
|
496,797 |
|
|
|
1,373,467 |
|
Other investment securities |
|
|
795,389 |
|
|
|
326,956 |
|
|
|
|
|
|
|
|
Total investment securities available for sale |
|
|
1,292,186 |
|
|
|
1,700,423 |
|
|
|
|
|
|
|
|
Investment securities held to maturity, at amortized cost: |
|
|
|
|
|
|
|
|
Securities pledged that can be repledged |
|
|
2,336,796 |
|
|
|
2,661,088 |
|
Other investment securities |
|
|
1,064,700 |
|
|
|
686,043 |
|
|
|
|
|
|
|
|
Total investment securities held to maturity, fair value of $3,334,661
(2006 - $3,256,966) |
|
|
3,401,496 |
|
|
|
3,347,131 |
|
|
|
|
|
|
|
|
Other equity securities |
|
|
60,679 |
|
|
|
40,159 |
|
|
|
|
|
|
|
|
Loans, net of allowance for loan and lease losses of $177,486
(December 31, 2006 - $158,296) |
|
|
11,124,036 |
|
|
|
11,070,446 |
|
Loans held for sale, at lower of cost or market |
|
|
24,954 |
|
|
|
35,238 |
|
|
|
|
|
|
|
|
Total loans, net |
|
|
11,148,990 |
|
|
|
11,105,684 |
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
161,717 |
|
|
|
155,662 |
|
Other real estate owned |
|
|
7,297 |
|
|
|
2,870 |
|
Accrued interest receivable on loans and investments |
|
|
106,287 |
|
|
|
112,505 |
|
Due from customers on acceptances |
|
|
697 |
|
|
|
150 |
|
Other assets |
|
|
296,237 |
|
|
|
356,861 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
17,087,080 |
|
|
$ |
17,390,256 |
|
|
|
|
|
|
|
|
Liabilities & Stockholders Equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Non-interest-bearing deposits |
|
$ |
613,868 |
|
|
$ |
790,985 |
|
Interest-bearing deposits (includes $4,314,141 measured at fair value as of September 30, 2007) |
|
|
10,921,279 |
|
|
|
10,213,302 |
|
Federal funds purchased and securities sold
under agreements to repurchase |
|
|
2,519,026 |
|
|
|
3,687,724 |
|
Advances from the Federal Home Loan Bank (FHLB) |
|
|
1,005,000 |
|
|
|
560,000 |
|
Notes payable (includes $14,184 measured at fair value as of September 30, 2007) |
|
|
32,526 |
|
|
|
182,828 |
|
Other borrowings |
|
|
231,792 |
|
|
|
231,719 |
|
Bank acceptances outstanding |
|
|
697 |
|
|
|
150 |
|
Accounts payable and other liabilities |
|
|
348,706 |
|
|
|
493,995 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
15,672,894 |
|
|
|
16,160,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Commitments and contingencies (Note 16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, authorized 50,000,000 shares: issued and
outstanding 22,004,000 shares at $25 liquidation value per share |
|
|
550,100 |
|
|
|
550,100 |
|
|
|
|
|
|
|
|
Common stock, $1 par value, authorized
250,000,000 shares; issued 102,402,306 shares as of
September 30, 2007 (2006 - 93,151,856 shares) |
|
|
102,402 |
|
|
|
93,152 |
|
Less: Treasury stock (at par value) |
|
|
(9,898 |
) |
|
|
(9,898 |
) |
|
|
|
|
|
|
|
Common stock outstanding |
|
|
92,504 |
|
|
|
83,254 |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
108,322 |
|
|
|
22,757 |
|
Legal surplus |
|
|
276,848 |
|
|
|
276,848 |
|
Retained earnings |
|
|
428,355 |
|
|
|
326,761 |
|
Accumulated other comprehensive loss, net of tax
benefit of $253 (December 31, 2006 - $221) |
|
|
(41,943 |
) |
|
|
(30,167 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,414,186 |
|
|
|
1,229,553 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
17,087,080 |
|
|
$ |
17,390,256 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
4
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine-Month Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
(In thousands, except per share data) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
223,738 |
|
|
$ |
216,953 |
|
|
$ |
678,288 |
|
|
$ |
710,646 |
|
Investment securities |
|
|
62,794 |
|
|
|
70,490 |
|
|
|
202,138 |
|
|
|
214,171 |
|
Money market investments |
|
|
9,399 |
|
|
|
30,268 |
|
|
|
19,961 |
|
|
|
65,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
295,931 |
|
|
|
317,711 |
|
|
|
900,387 |
|
|
|
989,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
143,188 |
|
|
|
135,647 |
|
|
|
401,160 |
|
|
|
479,639 |
|
Federal funds purchased and repurchase agreements |
|
|
34,300 |
|
|
|
49,413 |
|
|
|
115,460 |
|
|
|
154,111 |
|
Advances from FHLB |
|
|
9,172 |
|
|
|
2,876 |
|
|
|
26,370 |
|
|
|
9,921 |
|
Notes payable and other borrowings |
|
|
4,242 |
|
|
|
7,073 |
|
|
|
17,718 |
|
|
|
24,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
190,902 |
|
|
|
195,009 |
|
|
|
560,708 |
|
|
|
668,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
105,029 |
|
|
|
122,702 |
|
|
|
339,679 |
|
|
|
321,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
34,260 |
|
|
|
20,560 |
|
|
|
83,802 |
|
|
|
49,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for loan and lease losses |
|
|
70,769 |
|
|
|
102,142 |
|
|
|
255,877 |
|
|
|
272,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges on loans |
|
|
1,290 |
|
|
|
1,228 |
|
|
|
5,499 |
|
|
|
4,181 |
|
Service charges on deposit accounts |
|
|
3,160 |
|
|
|
3,025 |
|
|
|
9,536 |
|
|
|
9,580 |
|
Mortgage banking activities gain |
|
|
1,125 |
|
|
|
1,595 |
|
|
|
2,238 |
|
|
|
1,447 |
|
Net loss on investments and impairments |
|
|
(3,119 |
) |
|
|
(6,083 |
) |
|
|
(6,714 |
) |
|
|
(6,658 |
) |
Net gain (loss) on partial extinguishment and recharacterization
of secured commercial loans to local financial institutions |
|
|
|
|
|
|
1,000 |
|
|
|
2,497 |
|
|
|
(10,640 |
) |
Rental income |
|
|
620 |
|
|
|
847 |
|
|
|
1,953 |
|
|
|
2,458 |
|
Gain on sale of credit card portfolio |
|
|
|
|
|
|
|
|
|
|
2,819 |
|
|
|
|
|
Insurance
reimbursements and other agreements related to a
contingency settlement |
|
|
15,075 |
|
|
|
|
|
|
|
15,075 |
|
|
|
|
|
Other operating income |
|
|
5,769 |
|
|
|
6,433 |
|
|
|
17,742 |
|
|
|
20,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
23,920 |
|
|
|
8,045 |
|
|
|
50,645 |
|
|
|
20,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees compensation and benefits |
|
|
33,995 |
|
|
|
32,881 |
|
|
|
103,719 |
|
|
|
96,876 |
|
Occupancy and equipment |
|
|
14,970 |
|
|
|
13,731 |
|
|
|
43,848 |
|
|
|
40,060 |
|
Business promotion |
|
|
2,973 |
|
|
|
4,512 |
|
|
|
12,767 |
|
|
|
12,611 |
|
Professional fees |
|
|
4,473 |
|
|
|
7,408 |
|
|
|
16,478 |
|
|
|
24,944 |
|
Taxes, other than income taxes |
|
|
4,015 |
|
|
|
3,578 |
|
|
|
11,249 |
|
|
|
8,691 |
|
Insurance and supervisory fees |
|
|
5,282 |
|
|
|
1,862 |
|
|
|
8,773 |
|
|
|
5,473 |
|
Other operating expenses |
|
|
9,244 |
|
|
|
8,968 |
|
|
|
30,936 |
|
|
|
27,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
74,952 |
|
|
|
72,940 |
|
|
|
227,770 |
|
|
|
215,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
19,737 |
|
|
|
37,247 |
|
|
|
78,752 |
|
|
|
77,167 |
|
Income tax provision |
|
|
(5,595 |
) |
|
|
(10,565 |
) |
|
|
(17,983 |
) |
|
|
(14,819 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,142 |
|
|
$ |
26,682 |
|
|
$ |
60,769 |
|
|
$ |
62,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
4,073 |
|
|
$ |
16,613 |
|
|
$ |
30,562 |
|
|
$ |
32,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.05 |
|
|
$ |
0.20 |
|
|
$ |
0.36 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.05 |
|
|
$ |
0.20 |
|
|
$ |
0.36 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.21 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
5
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
60,769 |
|
|
$ |
62,348 |
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
13,239 |
|
|
|
12,567 |
|
Amortization of core deposit intangible |
|
|
2,477 |
|
|
|
2,582 |
|
Provision for loan and lease losses |
|
|
83,802 |
|
|
|
49,290 |
|
Deferred income tax provision (benefit) |
|
|
12,511 |
|
|
|
(35,606 |
) |
Stock-based compensation recognized |
|
|
2,848 |
|
|
|
5,380 |
|
Loss (gain) on sale of investments, net |
|
|
1,482 |
|
|
|
(5,431 |
) |
Other-than-temporary impairments on available-for-sale securities |
|
|
5,232 |
|
|
|
12,089 |
|
Derivative instruments and hedging activities loss |
|
|
6,481 |
|
|
|
64,026 |
|
Net gain on sale of loans and impairments |
|
|
(1,485 |
) |
|
|
(1,064 |
) |
Net (gain) loss on partial extinguishment and recharacterization of secured commercial loans to local financial institutions |
|
|
(2,497 |
) |
|
|
10,640 |
|
Net amortization of premiums and discounts and deferred loan fees and costs |
|
|
(936 |
) |
|
|
(2,046 |
) |
Amortization of broker placement fees |
|
|
7,426 |
|
|
|
15,228 |
|
(Accretion) amortization of basis adjustments on fair value hedges |
|
|
(2,061 |
) |
|
|
458 |
|
Net accretion of discount and premiums on investment securities |
|
|
(29,550 |
) |
|
|
(26,243 |
) |
Gain on sale of credit card portfolio |
|
|
(2,819 |
) |
|
|
|
|
Decrease in accrued income tax payable |
|
|
(4,791 |
) |
|
|
(42,621 |
) |
Decrease in accrued interest receivable |
|
|
6,088 |
|
|
|
2,543 |
|
(Decrease) increase in accrued interest payable |
|
|
(26,374 |
) |
|
|
26,564 |
|
Decrease in other assets |
|
|
2,279 |
|
|
|
4,923 |
|
(Decrease) increase in other liabilities |
|
|
(97,550 |
) |
|
|
17,353 |
|
|
|
|
|
|
|
|
Total adjustments |
|
|
(24,198 |
) |
|
|
110,632 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
36,571 |
|
|
|
172,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Principal collected on loans |
|
|
2,330,949 |
|
|
|
5,209,573 |
|
Loans originated |
|
|
(2,619,987 |
) |
|
|
(3,491,295 |
) |
Purchase of loans |
|
|
(147,848 |
) |
|
|
(134,310 |
) |
Proceeds from sale of loans |
|
|
97,500 |
|
|
|
116,215 |
|
Proceeds from sale of repossessed assets |
|
|
43,756 |
|
|
|
32,989 |
|
Purchase of servicing assets |
|
|
(1,614 |
) |
|
|
(724 |
) |
Proceeds
from sale of available-for-sale securities |
|
|
408,285 |
|
|
|
228,123 |
|
Purchase of securities held to maturity |
|
|
(417,450 |
) |
|
|
(402,607 |
) |
Purchase of securities available for sale |
|
|
|
|
|
|
(225,373 |
) |
Principal repayments and maturities of securities held to maturity |
|
|
392,480 |
|
|
|
509,567 |
|
Principal repayments of securities available for sale |
|
|
163,959 |
|
|
|
168,697 |
|
Additions to premises and equipment |
|
|
(19,294 |
) |
|
|
(47,699 |
) |
(Increase) decrease in other equity securities |
|
|
(20,520 |
) |
|
|
21,378 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
210,216 |
|
|
|
1,984,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits |
|
|
622,608 |
|
|
|
(651,589 |
) |
Net decrease in federal funds purchased and securities
sold under repurchase agreements |
|
|
(1,168,698 |
) |
|
|
(1,605,447 |
) |
Net FHLB advances taken (paid) |
|
|
445,000 |
|
|
|
(372,000 |
) |
Repayments of notes payable and other borrowings |
|
|
(150,000 |
) |
|
|
|
|
Dividends paid |
|
|
(44,981 |
) |
|
|
(47,669 |
) |
Issuance of common stock |
|
|
91,967 |
|
|
|
|
|
Exercise of stock options |
|
|
|
|
|
|
19,756 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(204,104 |
) |
|
|
(2,656,949 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
42,683 |
|
|
|
(499,435 |
) |
Cash and cash equivalents at beginning of period |
|
|
568,811 |
|
|
|
1,380,640 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
611,494 |
|
|
$ |
881,205 |
|
|
|
|
|
|
|
|
Cash and cash equivalents include: |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
138,037 |
|
|
$ |
81,984 |
|
Money market instruments |
|
|
473,457 |
|
|
|
799,221 |
|
|
|
|
|
|
|
|
|
|
$ |
611,494 |
|
|
$ |
881,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest on borrowings |
|
$ |
565,286 |
|
|
$ |
559,114 |
|
Income taxes |
|
|
9,738 |
|
|
|
91,126 |
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Additions to other real estate owned |
|
$ |
7,334 |
|
|
$ |
2,466 |
|
Additions to auto repossessions |
|
|
84,225 |
|
|
|
86,021 |
|
Capitalization of servicing assets |
|
|
913 |
|
|
|
852 |
|
Recharacterization of secured commercial loans as securities collateralized by loans |
|
|
183,830 |
|
|
|
|
|
The accompanying notes are an integral part of these statements.
6
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended |
|
(In thousands) |
|
September 30, 2007 |
|
|
September 30, 2006 |
|
Preferred Stock |
|
$ |
550,100 |
|
|
$ |
550,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Outstanding: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
83,254 |
|
|
|
80,875 |
|
Issuance of common stock |
|
|
9,250 |
|
|
|
|
|
Common stock issued under stock option plan |
|
|
|
|
|
|
2,379 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
92,504 |
|
|
|
83,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In-Capital: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
22,757 |
|
|
|
|
|
Issuance of common stock |
|
|
82,717 |
|
|
|
|
|
Shares issued under stock option plan |
|
|
|
|
|
|
17,377 |
|
Stock-based compensation recognized |
|
|
2,848 |
|
|
|
5,380 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
108,322 |
|
|
|
22,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal Surplus |
|
|
276,848 |
|
|
|
265,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
326,761 |
|
|
|
316,697 |
|
Net income |
|
|
60,769 |
|
|
|
62,348 |
|
Cash dividends declared on common stock |
|
|
(18,131 |
) |
|
|
(17,462 |
) |
Cash dividends declared on preferred stock |
|
|
(30,207 |
) |
|
|
(30,207 |
) |
Cumulative adjustment for accounting change (adoption of FIN 48) |
|
|
(2,615 |
) |
|
|
|
|
Cumulative adjustment for accounting change (adoption of SFAS No. 159) |
|
|
91,778 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
428,355 |
|
|
|
331,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, Net of Tax: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
(30,167 |
) |
|
|
(15,675 |
) |
Other comprehensive loss, net of tax |
|
|
(11,776 |
) |
|
|
(13,141 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
(41,943 |
) |
|
|
(28,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
1,414,186 |
|
|
$ |
1,224,515 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
7
FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine-Month Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
14,142 |
|
|
$ |
26,682 |
|
|
$ |
60,769 |
|
|
$ |
62,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain (loss)
arising during the period |
|
|
15,364 |
|
|
|
48,412 |
|
|
|
(18,522 |
) |
|
|
(20,017 |
) |
Less: Reclassification adjustments for net loss
and other-than-temporary impairments
included in net income |
|
|
3,119 |
|
|
|
6,083 |
|
|
|
6,714 |
|
|
|
6,658 |
|
Income tax (expense) benefit related to items of
other comprehensive income |
|
|
(173 |
) |
|
|
(676 |
) |
|
|
32 |
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) for the period, net of tax |
|
|
18,310 |
|
|
|
53,819 |
|
|
|
(11,776 |
) |
|
|
(13,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
32,452 |
|
|
$ |
80,501 |
|
|
$ |
48,993 |
|
|
$ |
49,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
8
FIRST BANCORP
PART I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements (unaudited) have been prepared in conformity with the
accounting policies stated in the Corporations Annual Audited Financial Statements included in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2006. 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, 2006, included in the
Corporations 2006 Annual Report on Form 10-K. All adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a fair presentation
of the statement of financial position, results of operations and cash flows for the interim
periods have been reflected. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The results of operations for the quarter and nine-month period ended September 30, 2007, are
not necessarily indicative of the results to be expected for the entire year.
Recently issued accounting pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. (SFAS) 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115. This Statement allows
entities to choose to measure certain financial assets and liabilities at fair value with changes
in fair value reflected in earnings. The fair value option may be applied on an
instrument-by-instrument basis. This Statement is effective for periods after November 15, 2007,
however, early adoption is permitted provided that the entity also elects to apply the provisions
of SFAS 157, Fair Value Measurements. The Corporation adopted SFAS 159 and SFAS 157 effective
January 1, 2007. The Corporation decided to early adopt SFAS 159 for the callable brokered
certificates of deposit (brokered CDs) and a portion of the callable fixed medium-term notes
(SFAS 159 liabilities), both of which were hedged with interest rate swaps. First BanCorp had
been following the long-haul method of accounting, which was adopted on April 3, 2006, under SFAS
133, Accounting for Derivative Instruments and Hedging Activities, for the portfolio of callable
interest rate swaps, callable brokered CDs and callable notes. One of the main considerations in
determining to early adopt SFAS 159 for these instruments was to eliminate the operational
procedures required by the long-haul method of accounting in terms of documentation, effectiveness
assessment, and manual procedures followed by the Corporation to fulfill the requirements specified
by SFAS 133.
Upon adoption of SFAS 159, the Corporation selected the fair value measurement for
approximately $4.4 billion, or 63%, of the brokered CDs portfolio and approximately $15.4 million,
or 9%, of the medium-term notes portfolio (SFAS 159 liabilities). Interest rate risk on the
brokered CDs and medium-term notes chosen for the fair value measurement option will continue to be
economically hedged through callable interest rate swaps with the same terms and conditions. The
cumulative after-tax effect on the opening balance of retained earnings from adopting these
standards was an approximate increase of $91.8 million. Under SFAS 159, this one-time credit was
not recognized in current earnings.
9
With the Corporations elimination of the use of the long-haul method in connection with the
adoption of SFAS 159, the Corporation will no longer amortize or accrete the basis adjustment for
the SFAS 159 liabilities. The basis adjustment amortization or accretion is the reversal of the
change in value of the hedged brokered CDs and medium-term notes recognized since the
implementation of the long-haul method. Since the time the Corporation implemented the long-haul
method, it has recognized changes in the value of the hedged brokered
CDs and medium-term notes based on the expected call date of the instruments. The adoption of SFAS
159 also requires the recognition, as part of the initial adoption adjustment to retained earnings,
of all of the unamortized placement fees that were paid to broker counterparties upon the issuance
of the elected brokered CDs and medium-term notes. The Corporation previously amortized those fees
through earnings based on the expected call date of the instruments. SFAS 159 also establishes that
the accrued interest should be reported as part of the fair value of the financial instruments
elected to be measured at fair value. The impact of the derecognition of the basis adjustment and
the unamortized placement fees as of January 1, 2007 results in a cumulative after-tax reduction to
retained earnings of approximately $23.9 million. This negative charge was included in the total
cumulative after-tax increase to retained earnings of $91.8 million that resulted with the adoption
of SFAS 157 and SFAS 159. Refer to Note 14 to these interim unaudited consolidated financial
statements for required disclosures and further information on the impact of adoption of this
accounting pronouncement.
In September 2006, the FASB issued SFAS 157, Fair Value Measurement. This Statement defines
fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about
fair value measurements. This Statement is effective for periods beginning after November 15, 2007.
Effective January 1, 2007, the Corporation elected to early adopt this Statement. For further
details and for the effect on the Corporations financial condition and results of operations upon
adoption of SFAS 157 and SFAS 159, refer to Note 14 to these interim unaudited consolidated
financial statements.
In June 2006, the FASB issued Financial Interpretation No. (FIN) 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109. This interpretation
clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS 109,
Accounting for Income Taxes. This interpretation provides a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
This interpretation is effective for periods beginning after December 15, 2006. The Corporation
adopted FIN 48 effective January 1, 2007. Refer to Note 13 for required disclosures and further
information on the impact of the adoption of this accounting pronouncement.
In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial Assets, an
amendment of SFAS 140. This Statement allows servicing assets and servicing liabilities to be
initially measured at fair value along with any derivative instruments used to mitigate inherent
risks. This Statement is effective for fiscal years beginning after September 15, 2006. The
adoption of this Statement in 2007 did not have a material effect on the Corporations financial
condition and results of operations as the Corporation continues to utilize the amortization
method.
On April 30, 2007, the FASB issued FASB Staff Position No. FIN 39-1 (FSP FIN 39-1), which
amends FASB interpretation No. 39, Offsetting of Amounts Related to Certain Contracts (FIN 39).
FSP FIN 39-1 impacts entities that enter into master netting arrangements as part of their
derivative transactions by allowing net derivative positions to be offset in the financial
statements against the fair value of amounts (or amounts that approximate fair value) recognized
for the right to reclaim cash collateral or the obligation to return cash collateral under those
arrangements. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007,
although early application is permitted. The Corporation is currently evaluating the effect, if
any, of the adoption of FSP FIN 39-1 on its Financial Statements, commencing on January 1, 2008.
10
2 EARNINGS PER COMMON SHARE
The calculations of earnings per common share for the quarters and nine-month periods ended on
September 30, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine-Month Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except per share data) |
|
Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,142 |
|
|
$ |
26,682 |
|
|
$ |
60,769 |
|
|
$ |
62,348 |
|
Less: Preferred stock dividend |
|
|
(10,069 |
) |
|
|
(10,069 |
) |
|
|
(30,207 |
) |
|
|
(30,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
4,073 |
|
|
$ |
16,613 |
|
|
$ |
30,562 |
|
|
$ |
32,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
87,075 |
|
|
|
83,254 |
|
|
|
84,542 |
|
|
|
82,694 |
|
Average potential common shares |
|
|
242 |
|
|
|
83 |
|
|
|
416 |
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares outstanding |
|
|
87,317 |
|
|
|
83,337 |
|
|
|
84,958 |
|
|
|
83,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.05 |
|
|
$ |
0.20 |
|
|
$ |
0.36 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.05 |
|
|
$ |
0.20 |
|
|
$ |
0.36 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential common shares consist of common stock issuable under the assumed exercise of stock
options using the treasury stock method. This method assumes that the potential common shares are
issued and the proceeds from exercise 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 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 in earnings per share. For the quarter and
nine-month period ended September 30, 2007, a total of 2,054,600 stock options were not included in
the computation of dilutive earnings per share since their inclusion would have an antidilutive
effect on earnings per share. For the quarter and nine-month period ended September 30, 2006,
there were 2,179,796 and 2,438,791 weighted average outstanding stock options, respectively, which
were excluded from the computation of dilutive earnings per share because they were antidilutive.
3 STOCK OPTION PLAN
Since 1997, the Corporation has had a stock option plan (the 1997 stock option plan)
covering certain employees. This plan allowed for the granting of up to 8,696,112 purchase options
on shares of the Corporations common stock to certain employees. According to the plan, the
options granted cannot exceed 20% of the number of common shares outstanding. Each option provides
for the purchase of one share of common stock at a price not less than the fair market value of the
stock on the date the option is granted. Stock options are fully vested upon issuance. The maximum
term to exercise the options is ten years. The stock option plan provides for a proportionate
adjustment in the exercise price and the number of shares that can be purchased in the event of a
stock dividend, stock split, reclassification of stock, merger or reorganization and certain other
issuances and distributions such as stock appreciation rights.
Under the Corporations stock option plan, the Compensation Committee had the
authority to grant stock appreciation rights at any time subsequent to the grant of an option.
Pursuant to the stock appreciation rights, the Optionee surrenders the right to exercise an option
granted under the plan in consideration for payment by
11
the Corporation of an amount equal to the
excess of the fair market value of the shares of common stock subject
to such option surrendered
over the total option price of such shares. Any option surrendered shall be cancelled by the
Corporation and the shares subject to the option shall not be eligible for further grants under the
option plan. The 1997 stock option plan expired in the first quarter of 2007 and there is no other
plan in place.
On January 1, 2006, the Corporation adopted SFAS 123R, Share-Based Payment using the
modified prospective method. Using this method, and since all previously issued stock options
were fully vested at the time of the adoption, the Corporation expenses the fair value of all
employee stock options granted after January 1, 2006 (same as the prospective method). The
compensation expense associated with stock options for the nine-month periods ended September 30,
2007 and 2006 was approximately $2.8 million and $5.4 million, respectively. The Corporation
recognized compensation expense associated with stock options of $0.5 million for the third quarter
of 2006, no stock options were granted during the third quarter of 2007. All employee stock options
granted during 2007 and 2006 were fully vested at the time of grant.
The activity of stock options during the first nine months of 2007 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended |
|
|
|
September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted-Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Options |
|
|
Exercise Price |
|
|
Term (Years) |
|
|
(In thousands) |
|
Beginning of period |
|
|
3,024,410 |
|
|
$ |
13.95 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
1,170,000 |
|
|
|
9.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period outstanding and exercisable |
|
|
4,194,410 |
|
|
$ |
12.63 |
|
|
|
7.1 |
|
|
$ |
1,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of options granted in 2007 and 2006, that was estimated using the Black-Scholes
option pricing, and the assumptions used are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Weighted-average stock price at grant date and exercise price |
|
$ |
9.20 |
|
|
$ |
12.68 |
|
Stock option estimated fair value |
|
$ |
2.40-$2.45 |
|
|
$ |
4.56-$4.60 |
|
Weighted-average estimated fair value |
|
$ |
2.43 |
|
|
$ |
4.57 |
|
Expected stock option term (years) |
|
|
4.31-4.59 |
|
|
|
4.22-4.31 |
|
Expected volatility |
|
|
32 |
% |
|
|
46 |
% |
Expected dividend yield |
|
|
3.0 |
% |
|
|
2.2 |
% |
Risk-free interest rate |
|
|
5.1 |
% |
|
|
4.7% - 5.0 |
% |
The Corporation uses empirical research data to estimate option exercises and employee
termination within the valuation model; separate groups of employees that have similar historical
exercise behavior are considered separately for valuation purposes. The expected volatility is
based on the historical implied volatility of the Corporations common stock at each grant date.
The dividend yield is based on the historical 12-month dividend yield observable at each grant
date. The risk-free rate for the period is based on historical zero coupon curves obtained from
Bloomberg L.P. at the time of grant based on the options expected term.
No stock options were exercised during the first nine-months of 2007. The total intrinsic
value of options exercised during the first nine months of 2006 was approximately $10.0 million.
Cash proceeds from options exercised during the first nine months of 2006 amounted to approximately
$19.8 million.
12
4 INVESTMENT SECURITIES
Investment Securities Available for Sale
The amortized cost, gross unrealized gains and losses, approximate fair value,
weighted-average yield and contractual maturities of investment securities available for sale as of
September 30, 2007 and December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
average |
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
average |
|
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
yield% |
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
yield% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S.
Government sponsored
agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
$ |
500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
500 |
|
|
|
5.70 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
After 5 to 10 years |
|
|
107,595 |
|
|
|
39 |
|
|
|
2,247 |
|
|
|
105,387 |
|
|
|
4.23 |
|
|
|
402,542 |
|
|
|
6 |
|
|
|
11,820 |
|
|
|
390,728 |
|
|
|
4.31 |
|
After 10 years |
|
|
12,984 |
|
|
|
23 |
|
|
|
6 |
|
|
|
13,001 |
|
|
|
6.16 |
|
|
|
12,984 |
|
|
|
|
|
|
|
120 |
|
|
|
12,864 |
|
|
|
6.16 |
|
Puerto Rico Government
obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
13,924 |
|
|
|
134 |
|
|
|
336 |
|
|
|
13,722 |
|
|
|
4.99 |
|
|
|
4,635 |
|
|
|
126 |
|
|
|
|
|
|
|
4,761 |
|
|
|
6.18 |
|
After 5 to 10 years |
|
|
7,174 |
|
|
|
199 |
|
|
|
99 |
|
|
|
7,274 |
|
|
|
5.66 |
|
|
|
15,534 |
|
|
|
219 |
|
|
|
508 |
|
|
|
15,245 |
|
|
|
4.86 |
|
After 10 years |
|
|
4,738 |
|
|
|
23 |
|
|
|
213 |
|
|
|
4,548 |
|
|
|
5.81 |
|
|
|
5,376 |
|
|
|
98 |
|
|
|
178 |
|
|
|
5,296 |
|
|
|
5.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and
Puerto Rico Government
obligations |
|
|
146,915 |
|
|
|
418 |
|
|
|
2,901 |
|
|
|
144,432 |
|
|
|
4.60 |
|
|
|
441,071 |
|
|
|
449 |
|
|
|
12,626 |
|
|
|
428,894 |
|
|
|
4.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
97 |
|
|
|
5.47 |
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
5.99 |
|
After 1 to 5 years |
|
|
846 |
|
|
|
23 |
|
|
|
|
|
|
|
869 |
|
|
|
6.96 |
|
|
|
1,666 |
|
|
|
36 |
|
|
|
|
|
|
|
1,702 |
|
|
|
6.98 |
|
After 10 years |
|
|
5,325 |
|
|
|
55 |
|
|
|
153 |
|
|
|
5,227 |
|
|
|
5.63 |
|
|
|
5,846 |
|
|
|
55 |
|
|
|
110 |
|
|
|
5,791 |
|
|
|
5.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,268 |
|
|
|
78 |
|
|
|
153 |
|
|
|
6,193 |
|
|
|
5.63 |
|
|
|
7,594 |
|
|
|
91 |
|
|
|
110 |
|
|
|
7,575 |
|
|
|
5.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
612 |
|
|
|
8 |
|
|
|
|
|
|
|
620 |
|
|
|
6.47 |
|
|
|
866 |
|
|
|
10 |
|
|
|
|
|
|
|
876 |
|
|
|
6.44 |
|
After 5 to 10 years |
|
|
760 |
|
|
|
4 |
|
|
|
7 |
|
|
|
757 |
|
|
|
6.03 |
|
|
|
795 |
|
|
|
3 |
|
|
|
3 |
|
|
|
795 |
|
|
|
5.53 |
|
After 10 years |
|
|
337,883 |
|
|
|
405 |
|
|
|
7,757 |
|
|
|
330,531 |
|
|
|
5.26 |
|
|
|
379,363 |
|
|
|
470 |
|
|
|
7,136 |
|
|
|
372,697 |
|
|
|
5.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,255 |
|
|
|
417 |
|
|
|
7,764 |
|
|
|
331,908 |
|
|
|
5.26 |
|
|
|
381,024 |
|
|
|
483 |
|
|
|
7,139 |
|
|
|
374,368 |
|
|
|
5.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
43 |
|
|
|
1 |
|
|
|
|
|
|
|
44 |
|
|
|
7.11 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
90 |
|
|
|
7.34 |
|
After 5 to 10 years |
|
|
40,166 |
|
|
|
10 |
|
|
|
725 |
|
|
|
39,451 |
|
|
|
4.83 |
|
|
|
18,040 |
|
|
|
10 |
|
|
|
305 |
|
|
|
17,745 |
|
|
|
4.87 |
|
After 10 years |
|
|
626,892 |
|
|
|
665 |
|
|
|
12,196 |
|
|
|
615,361 |
|
|
|
5.18 |
|
|
|
864,508 |
|
|
|
673 |
|
|
|
11,476 |
|
|
|
853,705 |
|
|
|
5.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
667,101 |
|
|
|
676 |
|
|
|
12,921 |
|
|
|
654,856 |
|
|
|
5.16 |
|
|
|
882,638 |
|
|
|
683 |
|
|
|
11,781 |
|
|
|
871,540 |
|
|
|
5.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage pass-through
certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
165,817 |
|
|
|
3 |
|
|
|
19,059 |
|
|
|
146,761 |
|
|
|
6.13 |
|
|
|
367 |
|
|
|
3 |
|
|
|
|
|
|
|
370 |
|
|
|
7.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities |
|
|
1,178,441 |
|
|
|
1,174 |
|
|
|
39,897 |
|
|
|
1,139,718 |
|
|
|
5.33 |
|
|
|
1,271,623 |
|
|
|
1,260 |
|
|
|
19,030 |
|
|
|
1,253,853 |
|
|
|
5.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
1,300 |
|
|
|
|
|
|
|
137 |
|
|
|
1,163 |
|
|
|
7.70 |
|
|
|
1,300 |
|
|
|
|
|
|
|
83 |
|
|
|
1,217 |
|
|
|
7.70 |
|
After 10 years |
|
|
4,411 |
|
|
|
|
|
|
|
784 |
|
|
|
3,627 |
|
|
|
7.97 |
|
|
|
4,412 |
|
|
|
|
|
|
|
668 |
|
|
|
3,744 |
|
|
|
7.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
5,711 |
|
|
|
|
|
|
|
921 |
|
|
|
4,790 |
|
|
|
7.91 |
|
|
|
5,712 |
|
|
|
|
|
|
|
751 |
|
|
|
4,961 |
|
|
|
7.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (without
contractual maturity) |
|
|
3,316 |
|
|
|
|
|
|
|
70 |
|
|
|
3,246 |
|
|
|
|
|
|
|
12,406 |
|
|
|
452 |
|
|
|
143 |
|
|
|
12,715 |
|
|
|
3.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available for sale |
|
$ |
1,334,383 |
|
|
$ |
1,592 |
|
|
$ |
43,789 |
|
|
$ |
1,292,186 |
|
|
|
5.25 |
|
|
$ |
1,730,812 |
|
|
$ |
2,161 |
|
|
$ |
32,550 |
|
|
$ |
1,700,423 |
|
|
|
5.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 held for sale is based on amortized cost and, therefore, does not give effect to changes
in fair value. The net unrealized gains or losses on available for sale securities are presented
as part of accumulated other comprehensive income.
13
The following tables show the Corporations 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, 2007 and
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government
sponsored agencies |
|
$ |
|
|
|
$ |
|
|
|
$ |
97,891 |
|
|
$ |
2,253 |
|
|
$ |
97,891 |
|
|
$ |
2,253 |
|
Puerto Rico Government
obligations |
|
|
1,320 |
|
|
|
8 |
|
|
|
13,520 |
|
|
|
640 |
|
|
|
14,840 |
|
|
|
648 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
|
|
|
|
|
|
|
|
3,447 |
|
|
|
153 |
|
|
|
3,447 |
|
|
|
153 |
|
GNMA |
|
|
1,158 |
|
|
|
16 |
|
|
|
313,829 |
|
|
|
7,748 |
|
|
|
314,987 |
|
|
|
7,764 |
|
FNMA |
|
|
1,666 |
|
|
|
11 |
|
|
|
628,791 |
|
|
|
12,910 |
|
|
|
630,457 |
|
|
|
12,921 |
|
Mortgage pass-through trust certificates |
|
|
146,415 |
|
|
|
19,059 |
|
|
|
|
|
|
|
|
|
|
|
146,415 |
|
|
|
19,059 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
4,790 |
|
|
|
921 |
|
|
|
4,790 |
|
|
|
921 |
|
Equity securities |
|
|
933 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
933 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
151,492 |
|
|
$ |
19,164 |
|
|
$ |
1,062,268 |
|
|
$ |
24,625 |
|
|
$ |
1,213,760 |
|
|
$ |
43,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government
sponsored agencies |
|
$ |
21,802 |
|
|
$ |
146 |
|
|
$ |
381,790 |
|
|
$ |
11,794 |
|
|
$ |
403,592 |
|
|
$ |
11,940 |
|
Puerto Rico Government
obligations |
|
|
|
|
|
|
|
|
|
|
13,474 |
|
|
|
686 |
|
|
|
13,474 |
|
|
|
686 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
30 |
|
|
|
|
|
|
|
3,903 |
|
|
|
110 |
|
|
|
3,933 |
|
|
|
110 |
|
GNMA |
|
|
354,073 |
|
|
|
7,139 |
|
|
|
|
|
|
|
|
|
|
|
354,073 |
|
|
|
7,139 |
|
FNMA |
|
|
376,813 |
|
|
|
4,719 |
|
|
|
465,606 |
|
|
|
7,062 |
|
|
|
842,419 |
|
|
|
11,781 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
4,961 |
|
|
|
751 |
|
|
|
4,961 |
|
|
|
751 |
|
Equity securities |
|
|
1,629 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
1,629 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
754,347 |
|
|
$ |
12,147 |
|
|
$ |
869,734 |
|
|
$ |
20,403 |
|
|
$ |
1,624,081 |
|
|
$ |
32,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporations investment securities portfolio is comprised principally of (i)
mortgage-backed securities issued or guaranteed by FNMA, GNMA or FHLMC and other securities secured
by mortgage loans (ii) U.S. Treasury and agencies securities. Thus, payment of a substantial
portion of these instruments is either guaranteed or secured by mortgages together with a U.S.
government sponsored entity or is backed by the full faith and credit of the U.S. government.
Principal and interest on these securities are therefore deemed recoverable. The Corporations
policy is to review its investment portfolio for possible other-than temporary impairment, at least
quarterly. As of September 30, 2007, management has the intent and ability to hold these
investments for a reasonable period of time for a forecasted recovery of fair value up to (or
beyond) the cost of these investments; as a result, the impairments are considered temporary.
During the first nine months of 2007 and 2006, the Corporation recorded other-than-temporary
impairments of approximately $5.2 million and $12.1 million, respectively, on certain equity
securities held in its available-for-sale investment portfolio. Management concluded that the
declines in value of the securities were other-than-
14
temporary; as such, the cost basis of these
securities was written down to the market value as of the date of the analyses and reflected in
earnings as a realized loss.
Total proceeds from the sale of securities available for sale during the nine-month period
ended September 30, 2007 amounted to approximately $408.3 million (2006 $228.1 million). The
Corporation realized gross gains of approximately $0.4 million and approximately $1.9 million in
gross realized losses for the first nine months of 2007 (2006 $5.6 million in gross realized
gains and approximately $0.2 million in gross realized losses).
Investment Securities Held to Maturity
The amortized cost, gross unrealized gains and losses, approximate fair value,
weighted-average yield and contractual maturities of investment securities held-to-maturity as of
September 30, 2007 and December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
average |
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
average |
|
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
yield% |
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
yield% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within 1 year |
|
$ |
351,959 |
|
|
$ |
649 |
|
|
$ |
|
|
|
$ |
352,608 |
|
|
|
4.67 |
|
|
$ |
158,402 |
|
|
$ |
44 |
|
|
$ |
|
|
|
$ |
158,446 |
|
|
|
4.97 |
|
Obligations of other U.S. Government
sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within 1 year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,695 |
|
|
|
5 |
|
|
|
|
|
|
|
24,700 |
|
|
|
5.25 |
|
After 10 years |
|
|
2,101,248 |
|
|
|
45 |
|
|
|
34,326 |
|
|
|
2,066,967 |
|
|
|
5.82 |
|
|
|
2,074,943 |
|
|
|
|
|
|
|
53,668 |
|
|
|
2,021,275 |
|
|
|
5.83 |
|
Puerto Rico Government
obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
17,152 |
|
|
|
489 |
|
|
|
148 |
|
|
|
17,493 |
|
|
|
5.85 |
|
|
|
16,716 |
|
|
|
553 |
|
|
|
115 |
|
|
|
17,154 |
|
|
|
5.84 |
|
After 10 years |
|
|
13,920 |
|
|
|
|
|
|
|
325 |
|
|
|
13,595 |
|
|
|
5.50 |
|
|
|
15,000 |
|
|
|
53 |
|
|
|
|
|
|
|
15,053 |
|
|
|
5.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Puerto
Rico Government obligations |
|
|
2,484,279 |
|
|
|
1,183 |
|
|
|
34,799 |
|
|
|
2,450,663 |
|
|
|
5.65 |
|
|
|
2,289,756 |
|
|
|
655 |
|
|
|
53,783 |
|
|
|
2,236,628 |
|
|
|
5.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
12,220 |
|
|
|
|
|
|
|
310 |
|
|
|
11,910 |
|
|
|
3.75 |
|
|
|
15,438 |
|
|
|
|
|
|
|
577 |
|
|
|
14,861 |
|
|
|
3.61 |
|
FNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
19,937 |
|
|
|
|
|
|
|
575 |
|
|
|
19,362 |
|
|
|
4.04 |
|
|
|
14,234 |
|
|
|
|
|
|
|
484 |
|
|
|
13,750 |
|
|
|
3.80 |
|
After 10 years |
|
|
883,060 |
|
|
|
|
|
|
|
32,269 |
|
|
|
850,791 |
|
|
|
4.38 |
|
|
|
1,025,703 |
|
|
|
48 |
|
|
|
36,064 |
|
|
|
989,687 |
|
|
|
4.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
915,217 |
|
|
|
|
|
|
|
33,154 |
|
|
|
882,063 |
|
|
|
4.36 |
|
|
|
1,055,375 |
|
|
|
48 |
|
|
|
37,125 |
|
|
|
1,018,298 |
|
|
|
4.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
2,000 |
|
|
|
|
|
|
|
65 |
|
|
|
1,935 |
|
|
|
5.80 |
|
|
|
2,000 |
|
|
|
40 |
|
|
|
|
|
|
|
2,040 |
|
|
|
5.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
held-to-maturity |
|
$ |
3,401,496 |
|
|
$ |
1,183 |
|
|
$ |
68,018 |
|
|
$ |
3,334,661 |
|
|
|
5.30 |
|
|
$ |
3,347,131 |
|
|
$ |
743 |
|
|
$ |
90,908 |
|
|
$ |
3,256,966 |
|
|
|
5.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 following tables show the Corporations held-to-maturity investments gross unrealized
losses and fair value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, as of September 30, 2007 and
December 31, 2006.
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(In thousands) |
|
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other U.S. Government sponsored
agencies |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,616,922 |
|
|
$ |
34,326 |
|
|
$ |
1,616,922 |
|
|
$ |
34,326 |
|
Puerto Rico Government obligations |
|
|
20,557 |
|
|
|
363 |
|
|
|
4,143 |
|
|
|
110 |
|
|
|
24,700 |
|
|
|
473 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
|
|
|
|
|
|
|
|
11,910 |
|
|
|
310 |
|
|
|
11,910 |
|
|
|
310 |
|
FNMA |
|
|
3,246 |
|
|
|
11 |
|
|
|
866,907 |
|
|
|
32,833 |
|
|
|
870,153 |
|
|
|
32,844 |
|
Corporate bonds |
|
|
1,935 |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
1,935 |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,738 |
|
|
$ |
439 |
|
|
$ |
2,499,882 |
|
|
$ |
67,579 |
|
|
$ |
2,525,620 |
|
|
$ |
68,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(In thousands) |
|
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other U.S. Government sponsored
agencies |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,021,275 |
|
|
$ |
53,668 |
|
|
$ |
2,021,275 |
|
|
$ |
53,668 |
|
Puerto Rico Government obligations |
|
|
|
|
|
|
|
|
|
|
3,978 |
|
|
|
115 |
|
|
|
3,978 |
|
|
|
115 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
|
|
|
|
|
|
|
|
14,861 |
|
|
|
577 |
|
|
|
14,861 |
|
|
|
577 |
|
FNMA |
|
|
24,589 |
|
|
|
1,020 |
|
|
|
975,510 |
|
|
|
35,528 |
|
|
|
1,000,099 |
|
|
|
36,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,589 |
|
|
$ |
1,020 |
|
|
$ |
3,015,624 |
|
|
$ |
89,888 |
|
|
$ |
3,040,213 |
|
|
$ |
90,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities in an unrealized loss position as of September 30, 2007 are
primarily mortgage-backed securities and U.S. agency securities. The vast majority of them are
rated the equivalent of AAA by the major rating agencies. The unrealized losses in the
held-to-maturity portfolio as of September 30, 2007 are substantially related to market interest
rate fluctuations and not deterioration in the creditworthiness of the issuers; as a result, the
impairment is considered temporary. At this time, the Corporation has the intent and ability to hold these investments
until maturity.
16
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, 2007 and December 31, 2006, the Corporation had investments in FHLB stock
with a book value of $59.0 million and $38.4 million, respectively. The estimated market value of
such investments is its redemption value determined by the ultimate recoverability of its par
value.
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, 2007 and December 31, 2006 was $1.7
million.
6 LOAN PORTFOLIO
The following is a detail of the loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Residential real estate loans |
|
$ |
2,978,331 |
|
|
$ |
2,737,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans: |
|
|
|
|
|
|
|
|
Construction loans |
|
|
1,470,933 |
|
|
|
1,511,608 |
|
Commercial mortgage loans |
|
|
1,292,723 |
|
|
|
1,215,040 |
|
Commercial loans |
|
|
2,825,488 |
|
|
|
2,698,141 |
|
Loans to local financial institutions collateralized by
real estate mortgages and pass-through trust certificates |
|
|
647,827 |
|
|
|
932,013 |
|
|
|
|
|
|
|
|
Commercial loans |
|
|
6,236,971 |
|
|
|
6,356,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases |
|
|
383,105 |
|
|
|
361,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
1,703,115 |
|
|
|
1,772,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
|
11,301,522 |
|
|
|
11,228,742 |
|
Allowance for loan and lease losses |
|
|
(177,486 |
) |
|
|
(158,296 |
) |
|
|
|
|
|
|
|
Loans receivable, net |
|
|
11,124,036 |
|
|
|
11,070,446 |
|
Loans held for sale |
|
|
24,954 |
|
|
|
35,238 |
|
|
|
|
|
|
|
|
Total loans |
|
$ |
11,148,990 |
|
|
$ |
11,105,684 |
|
|
|
|
|
|
|
|
The Corporations primary lending area is Puerto Rico. The Corporations Puerto Rico banking
subsidiary (First Bank or the Bank) also lends in the U.S. and British Virgin Islands markets
and in the United States (principally in the state of Florida). Of the total gross loan portfolio
of $11.3 billion as of September 30, 2007, approximately 79% have credit risk concentration in
Puerto Rico, 13% in the United States and 8% in the Virgin Islands.
In February 2007, the Corporation entered into various agreements with R&G Financial
Corporation (R&G Financial) relating to prior transactions accounted for as commercial loans
secured by mortgage loans and pass-through trust certificates from R&G Financial subsidiaries.
First, through a mortgage payment agreement, R&G Financial paid the Corporation approximately
$50 million to reduce the commercial loan that
R&G Premier Bank, R&G Financials Puerto Rico banking subsidiary, had outstanding with the
Corporation.
17
In addition, the remaining balance of approximately $271 million was re-documented as
a secured loan from the Corporation to R&G Financial. Second, R&G Financial and the Corporation
amended various agreements involving, as of the date of the transaction, approximately
$183.8 million of securities collateralized by loans that were originally sold through five grantor
trusts. The modifications to the original agreements allowed the Corporation to treat these
transactions as true sales for accounting and legal purposes and the recharacterization of
certain secured commercial loans as securities collateralized by loans. The agreements enabled the
Corporation to fulfill the remaining requirement of the consent order signed with banking
regulators relating to the mortgage-related transactions with R&G Financial that First BanCorp
accounted for as commercial loans secured by the mortgage loans and pass-through trust
certificates.
As part of the agreements entered into with R&G Financial, the Corporation recognized a net
gain of $2.5 million in the first quarter of 2007 as a result of the differential between the
carrying value of the loans, the net payment received and the fair value of securities obtained
from R&G Financial.
7 ALLOWANCE FOR LOAN AND LEASE LOSSES
The changes in the allowance for loan and lease losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine-Month Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Balance at beginning of period |
|
$ |
165,009 |
|
|
$ |
146,527 |
|
|
$ |
158,296 |
|
|
$ |
147,999 |
|
Provision for loan and lease losses |
|
|
34,260 |
|
|
|
20,560 |
|
|
|
83,802 |
|
|
|
49,290 |
|
Charge-offs |
|
|
(23,173 |
) |
|
|
(21,233 |
) |
|
|
(68,769 |
) |
|
|
(54,494 |
) |
Recoveries |
|
|
1,390 |
|
|
|
5,071 |
|
|
|
4,157 |
|
|
|
8,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
177,486 |
|
|
$ |
150,925 |
|
|
$ |
177,486 |
|
|
$ |
150,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance for impaired loans is part of the allowance for loan and lease losses. The
allowance for impaired loans covers those loans for which management has determined that it is probable that the
debtor will be unable to pay all the amounts due, according to the contractual terms of the loan
agreement, and do not necessarily represent loans for which the Corporation will incur a
substantial loss. As of September 30, 2007 and December 31, 2006, impaired loans and their related
allowance were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
|
|
September 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(In thousands) |
Impaired loans |
|
$ |
144,212 |
|
|
$ |
63,022 |
|
Impaired loans with valuation allowance |
|
|
127,617 |
|
|
|
63,022 |
|
Allowance for impaired loans |
|
|
11,822 |
|
|
|
9,989 |
|
The Corporation recognized an impairment of $8.1 million during the third quarter of 2007 on
four individual condominium-conversion loans, with an aggregate principal balance of $60.5 million,
extended to a single borrower through the Corporations Miami Agency based on an updated impairment
analysis that incorporated new appraisals.
18
There are two main factors that accounted for the increase in impaired loans during 2007.
First, the Corporations identification in the second quarter of 2007 of two large loan
relationships that it determined should be classified as impaired; (i) the aforementioned troubled
loan relationship in the Miami Agency totaling $60.5 million and (ii) one commercial loan
relationship in Puerto Rico totaling $34.1 million. Second, the Corporations impaired
loans decreased, excluding the two relationships discussed above, by approximately $25.2 million during the first nine months of 2007 as a result of
loans paid in full, loans no longer considered impaired and loans charged-off, which had a related
impairment reserve of approximately $8.3 million. In addition to the two large relationships
mentioned above, the Corporation increased its impaired loans by
approximately $11.0 million
comprised of several individual loans, most of them secured by real
estate, which had a related
impairment reserve of approximately $1.4 million.
Interest
income in the amount of approximately $0.8 million and $0.6 million was recognized on
impaired loans for the quarters ended September 30, 2007 and 2006, respectively. Interest income
in the amount of approximately $2.7 million and $2.6 million was recognized on impaired loans for
the nine-month periods ended September 30, 2007 and 2006, respectively.
8 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The primary market risk facing the Corporation is interest rate risk, which includes the risk
that changes in interest rates will result in changes in the value of its assets or liabilities and
the risk that net interest income from its loan and investment portfolios will change in response
to changes in interest rates. The overall objective of the Corporations interest rate risk
management activities is to reduce the variability of earnings caused by changes in interest rates.
The Corporation uses various financial instruments, including derivatives, to manage the
interest rate risk related primarily to the values of its brokered CDs and medium-term notes.
The Corporation designates a derivative as either a fair value hedge, cash flow hedge or as an
economic undesignated hedge when it enters into the derivative contract. As part of the interest
rate risk management, the Corporation has entered into a series of interest rate swap agreements.
Under the interest rate swaps, the Corporation agrees with other parties to exchange, at specified
intervals, the difference between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Net interest settlements on interest rate swaps
and unrealized gains and losses arising from changes in fair value are recorded as an adjustment to
interest income or interest expense depending on whether an asset or liability is being hedged. As
of September 30, 2007, all derivatives held by the Corporation were considered economic
undesignated hedges.
Effective January 1, 2007, the Corporation adopted SFAS 159 for its callable brokered CDs and
a portion of its callable fixed medium-term notes that were hedged with interest rate swaps
following fair value hedge accounting under SFAS 133. Interest rate risk on the callable brokered
CDs and medium-term notes elected for the fair value option under SFAS 159 continues to be
economically hedged with callable interest rate swaps. Prior to the implementation of SFAS 159,
the Corporation had been following the long-haul method of accounting under SFAS 133, which was
adopted on April 3, 2006, for its portfolio of callable interest rate swaps, callable brokered CDs
and callable notes. The long-haul method requires periodic assessment of hedge effectiveness and
measurement of ineffectiveness. The ineffectiveness results to the extent that changes in the fair
value of a derivative do not offset changes in the fair value of the hedged item. The Corporation
recognized, as a reduction to interest expense, approximately $1.4 million and $3.4 million for the
quarter and nine-month period ended September 30, 2006, representing ineffectiveness on derivatives
that qualified as a fair value hedge under SFAS 133.
19
In addition, effective on January 1, 2007, the Corporation discontinued the use of fair value
hedge accounting under SFAS 133 for an interest rate swap that hedged a $150 million medium-term
note (the $150 million medium-term note). The Corporations decision was based on the
determination that the interest rate swap was no longer effective in offsetting the changes in the
fair value of the $150 million medium-term note. After the discontinuance of hedge accounting, the
basis adjustment, which represents the basis differential between the market value and the book
value of the $150 million medium-term note recognized at the inception of fair value hedge
accounting on April 3, 2006, as well as changes in fair value recognized after the inception until
the discontinuance of fair value hedge accounting on January 1, 2007, was being amortized or
accreted over the remaining life of the liability as a yield adjustment. The $150 million
medium-term note was redeemed prior to its maturity during the second quarter of 2007.
The following table summarizes the notional amounts of all derivative instruments as of
September 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Notional amounts |
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Interest rate swap agreements: |
|
|
|
|
|
|
|
|
Pay fixed versus receive floating |
|
$ |
80,394 |
|
|
$ |
80,720 |
|
Receive fixed versus pay floating |
|
|
4,420,686 |
|
|
|
4,802,370 |
|
Embedded written options |
|
|
53,515 |
|
|
|
13,515 |
|
Purchased options |
|
|
53,515 |
|
|
|
13,515 |
|
Written interest rate cap agreements |
|
|
128,083 |
|
|
|
125,200 |
|
Purchased interest rate cap agreements |
|
|
300,895 |
|
|
|
330,607 |
|
|
|
|
|
|
|
|
|
|
$ |
5,037,088 |
|
|
$ |
5,365,927 |
|
|
|
|
|
|
|
|
The following table summarizes the notional amounts of all derivatives by the Corporations
designation as of September 30, 2007 and December 31, 2006:
20
|
|
|
|
|
|
|
|
|
|
|
Notional amounts |
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Economic undesignated hedges: |
|
|
|
|
|
|
|
|
Interest rate swaps used to hedge
fixed rate certificates of deposit, notes payable and loans |
|
$ |
4,501,080 |
|
|
$ |
336,473 |
|
Embedded options on stock index deposits |
|
|
53,515 |
|
|
|
13,515 |
|
Purchased options used to manage exposure to
the stock market on embedded stock index options |
|
|
53,515 |
|
|
|
13,515 |
|
Written interest rate cap agreements |
|
|
128,083 |
|
|
|
125,200 |
|
Purchased interest rate cap agreements |
|
|
300,895 |
|
|
|
330,607 |
|
|
|
|
|
|
|
|
Total derivatives not designated as hedges |
|
$ |
5,037,088 |
|
|
$ |
819,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated hedges: |
|
|
|
|
|
|
|
|
Fair value hedges: |
|
|
|
|
|
|
|
|
Interest rate swaps used to hedge
fixed-rate certificates of deposit |
|
$ |
|
|
|
$ |
4,381,175 |
|
Interest rate swaps used to hedge
fixed- and step-rate notes payable |
|
|
|
|
|
|
165,442 |
|
|
|
|
|
|
|
|
Total fair value hedges |
|
$ |
|
|
|
$ |
4,546,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,037,088 |
|
|
$ |
5,365,927 |
|
|
|
|
|
|
|
|
As of September 30, 2007, derivatives not designated or not qualifying for hedge accounting
with a positive fair value of $23.3 million (December 31, 2006 $16.2 million) and a negative fair
value of $136.1 million (December 31, 2006 $16.3 million) were recorded as part of Other Assets
and Accounts payable and other liabilities, respectively, in the Consolidated Statements of
Financial Condition. As of December 31, 2006 derivatives qualifying for fair value hedge
accounting with a negative fair value of $126.7 million were recorded as part of Accounts payable
and other liabilities in the Consolidated Statement of Financial Condition.
The majority of the Corporations derivative instruments represent interest rate swaps that
mainly convert long-term fixed-rate brokered CDs to a floating-rate. A summary of the types of
swaps used as of September 30, 2007 and December 31, 2006 follows:
21
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
|
|
September 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Pay fixed/receive floating (generally used to economically hedge variable rate loans): |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
80,394 |
|
|
$ |
80,720 |
|
Weighted average receive rate at period end |
|
|
7.04 |
% |
|
|
7.38 |
% |
Weighted average pay rate at period end |
|
|
6.53 |
% |
|
|
6.37 |
% |
Floating rates range from 187 to 252 basis points over 3-month LIBOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed/pay floating (generally used to
economically hedge fixed-rate brokered CDs and notes payable): |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
4,420,686 |
|
|
$ |
4,802,370 |
|
Weighted average receive rate at period end |
|
|
5.00 |
% |
|
|
5.16 |
% |
Weighted average pay rate at period end |
|
|
5.29 |
% |
|
|
5.42 |
% |
Floating rates range from 5 basis points under to 11 basis points over 3-month LIBOR |
|
|
|
|
|
|
|
|
Indexed options are generally over-the-counter (OTC) contracts that the Corporation enters
into in order to receive the appreciation of a specified Stock Index (e.g., Dow Jones Industrial
Composite Stock Index) over a specified period in exchange for a premium paid at the contracts
inception. The option period is determined by the contractual maturity of the notes payable tied to
the performance of the Stock Index. The credit risk inherent in these options is the risk that the
exchange party may not fulfill its obligation.
Interest rate caps are option-like contracts that require the writer, i.e., the seller, to pay
the purchaser at specified future dates the amount, if any, by which a specified market interest
rate exceeds the fixed cap rate, applied to a notional principal amount.
To satisfy the needs of its customers, the Corporation may enter into non-hedging
transactions. On these transactions, generally, the Corporation participates as a buyer in one of
the agreements and as the 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.
22
9 GOODWILL AND OTHER INTANGIBLES
Goodwill as of September 30, 2007 amounted to $28.1 million (December 31, 2006 -
$28.7 million), recognized as part of Other Assets, resulting primarily from the acquisition of
Ponce General Corporation in 2005. No goodwill impairment was recognized during 2007 and 2006.
As of September 30, 2007, the gross carrying amount and accumulated amortization of
core deposit intangibles was $41.2 million and $17.4 million, respectively, recognized as part of
Other Assets in the Consolidated Statements of Financial Condition (December 31, 2006 -
$41.2 million and $15.0 million, respectively). For each of the quarters ended September 30, 2007
and 2006, the amortization expense of core deposits amounted to $0.8 million. For the nine-month
periods ended September 30, 2007 and 2006, the amortization expense of core deposits amounted to
$2.5 million and $2.6 million, respectively.
10 DEPOSITS
The following table summarizes deposit balances:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Non-interest bearing checking account deposits |
|
$ |
613,868 |
|
|
$ |
790,985 |
|
Savings accounts |
|
|
1,068,685 |
|
|
|
984,332 |
|
Interest-bearing checking accounts |
|
|
464,614 |
|
|
|
433,278 |
|
Certificates of deposit |
|
|
1,691,191 |
|
|
|
1,696,213 |
|
Brokered certificates of deposit (includes
$4,314,141 measured at fair value as of
September 30, 2007) |
|
|
7,696,789 |
|
|
|
7,099,479 |
|
|
|
|
|
|
|
|
|
|
$ |
11,535,147 |
|
|
$ |
11,004,287 |
|
|
|
|
|
|
|
|
The interest expense on deposits includes the valuation to market of interest rate swaps that
hedge brokered CDs (economically or under fair value hedge accounting), the related interest
exchanged, the amortization of broker placement fees, the amortization of basis adjustment and
changes in fair value of callable brokered CDs elected for the fair value option under SFAS 159
(SFAS 159 brokered CDs).
The following are the components of interest expense on deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Nine-month period ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Interest expense on deposits |
|
$ |
139,525 |
|
|
$ |
141,903 |
|
|
$ |
387,579 |
|
|
$ |
402,956 |
|
Amortization of broker placement fees (1) |
|
|
2,661 |
|
|
|
6,491 |
|
|
|
6,919 |
|
|
|
15,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on deposits excluding net unrealized loss (gain) on derivatives
(undesignated and designated hedges), SFAS 159 brokered CDs
and (accretion) amortization of basis adjustment on fair
value hedges |
|
|
142,186 |
|
|
|
148,394 |
|
|
|
394,498 |
|
|
|
418,152 |
|
Net unrealized loss (gain) on derivatives (undesignated and
designated hedges) and SFAS 159 brokered CDs |
|
|
1,002 |
|
|
|
(11,886 |
) |
|
|
6,662 |
|
|
|
61,069 |
|
(Accretion) amortization of basis adjustment on fair value hedges |
|
|
|
|
|
|
(861 |
) |
|
|
|
|
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense on deposits |
|
$ |
143,188 |
|
|
$ |
135,647 |
|
|
$ |
401,160 |
|
|
$ |
479,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For 2007 the amortization of broker placement fees is related to brokered CDs not elected for the fair value option under SFAS 159. |
Total interest expense on deposits includes interest exchanged on interest rate swaps that
hedge (economically or under fair value hedge accounting) brokered CDs that for the quarter and
nine-month period ended September 30, 2007 amounted to net interest incurred of $3.4 million and
$10.8 million, respectively (2006 net interest incurred of $6.0 million for the third quarter and
$4.3 million for the nine-month period).
23
11 NOTES PAYABLE
Notes payable consist of:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Callable fixed-rate notes, bearing interest at 6.00%,
maturing on October 1, 2024 (1) |
|
$ |
|
|
|
$ |
151,554 |
|
|
|
|
|
|
|
|
|
|
Callable step-rate notes, bearing step increasing interest
from 5.00% to 7.00% (5% as of September 30, 2007 and December 31, 2006) maturing on October 18, 2019,
measured at fair value under SFAS 159 as of September
30, 2007 |
|
|
14,184 |
|
|
|
15,616 |
|
|
|
|
|
|
|
|
|
|
Dow Jones Industrial Average (DJIA) linked principal
protected notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A maturing on February 28, 2012 |
|
|
8,998 |
|
|
|
7,525 |
|
|
|
|
|
|
|
|
|
|
Series B maturing on May 27, 2011 |
|
|
9,344 |
|
|
|
8,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
32,526 |
|
|
$ |
182,828 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the second quarter of 2007, the Corporation early redeemed the $150 million
medium-term note. The derecognition of the unamortized balances of the basis adjustment,
placement fees and debt issue costs resulted in adjustments to earnings of approximately $1.3
million, increasing the Corporations net interest income. |
12 OTHER BORROWINGS
Other borrowings consist of:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Junior subordinated debentures due in 2034,
interest-bearing at a floating-rate of
2.75%
over 3-month LIBOR (8.44% as of
September 30, 2007
and 8.11% as of December 31, 2006) |
|
$ |
102,926 |
|
|
$ |
102,853 |
|
|
|
|
|
|
|
|
|
|
Junior subordinated debentures due in 2034,
interest-bearing at a floating-rate of
2.50%
over 3-month LIBOR (8.09% as of
September 30, 2007
and 7.87% as of December 31, 2006) |
|
|
128,866 |
|
|
|
128,866 |
|
|
|
|
|
|
|
|
|
|
$ |
231,792 |
|
|
$ |
231,719 |
|
|
|
|
|
|
|
|
24
13 INCOME TAXES
Income tax expense includes Puerto Rico and Virgin Islands income taxes as well as applicable
U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income
from all sources. As a Puerto Rico corporation, First BanCorp is treated as a foreign corporation
for U.S. income tax purposes and is generally subject to United States income tax only on its
income from sources within the United States or income effectively connected with the conduct of a
trade or business within the United States. Any such tax paid is creditable, within certain
conditions and limitations, against the Corporations Puerto Rico tax liability. The Corporation
is also subject to U.S.Virgin Islands taxes on its income from sources within this jurisdiction.
Any such tax paid is creditable against the Corporations Puerto Rico tax liability, subject to
certain conditions and limitations.
Under the Puerto Rico Internal Revenue Code of 1994, as amended (PR Code), First BanCorp is
subject to a maximum statutory tax rate of 39%, except that in years 2005 and 2006, an additional
transitory tax rate of 2.5% was signed into law by the Governor of Puerto Rico. In August 2005,
the Government of Puerto Rico approved a transitory tax rate of 2.5% that increased the maximum
statutory tax rate from 39.0% to 41.5% for a two-year period. On May 13, 2006, with an effective
date of January 1, 2006, the Governor of Puerto Rico approved an additional transitory tax rate of
2.0% applicable only to companies covered by the Puerto Rico Banking Act as amended, such as First
Bank, which raised the maximum statutory tax rate to 43.5% for taxable years that commenced during
calendar year 2006. For taxable years beginning after December 31, 2006, the maximum statutory tax
rate is 39%. The PR Code also includes an alternative minimum tax of 22% that applies if the
Corporations regular income tax liability is less than the alternative minimum tax requirements.
The Corporation has maintained an effective tax rate lower than the maximum statutory rate
mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and
Puerto Rico income taxes and doing business through international banking entities (IBEs) of the
Corporation and the Bank and through the Banks subsidiary, FirstBank Overseas Corporation, in
which the interest income and gain on sales is exempt from Puerto Rico and U.S. income taxation.
The IBEs and FirstBank Overseas Corporation were created under the International Banking Entity Act
of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs
operating in Puerto Rico. Since 2004, IBEs that operate as a unit of a bank pay income taxes at
normal rates to the extent that the IBEs net income exceeds predetermined percentages of the
banks total net taxable income; this percentage is 20% of total net taxable income for taxable
years commencing after July 1, 2005.
For the nine-month period ended September 30, 2007, the Corporation recognized an income tax
expense of $18.0 million, compared to $14.8 million for the same period in 2006. The increase in
income tax expense for the first nine months of 2007 as compared to the first nine months of 2006
was mainly due to a decrease in deferred income tax benefits, resulting from lower unrealized
losses on derivative instruments and the adoption of SFAS 159,
partially offset by a reduction in the current income tax provision
due to lower taxable income.
The adoption of the long-haul method of effectiveness testing under SFAS 133, on April 3,
2006, caused significant fluctuations in operating results when comparing year to date figures for
2007 and 2006. Prior to the implementation of the long-haul method, the Corporation recorded as
part of interest expense unrealized losses of $69.7 million in the valuation of derivative
instruments during the first quarter of 2006, which resulted on a
deferred tax benefit. The adoption of the long-haul method during the second quarter of 2006
and SFAS 159 effective January 1, 2007, reduced the earnings volatility that previously resulted
from the accounting asymmetry created by accounting for the financial liabilities at amortized cost
and the derivatives at fair value. For the first nine months of 2007, the Corporation recorded as
part of interest expense, net unrealized and realized losses on derivative instruments and SFAS 159
liabilities of $7.0 million compared to net unrealized losses of $65.0 million for the same period
in 2006.
25
As of September 30, 2007, the Corporation evaluated its ability to realize the deferred tax
asset and concluded, based on the evidence available, that it is more likely than not that some of
the deferred tax asset will not be realized and thus, established a valuation allowance of $6.6
million, compared to a valuation allowance of $6.1 million as of December 31, 2006. As of
September 30, 2007, the deferred tax asset, net of the valuation allowance of $6.6 million,
amounted to approximately $95.4 million compared to $162.1 million, net of the valuation allowance
of $6.1 million as of December 31, 2006. The decrease in the deferred tax asset is due
to a reversal during the third quarter of 2007 related to the class
action lawsuit contingency of $74.25 million recorded as of December 31, 2005. The Corporation
reached an agreement with the lead class action plaintiff during the third quarter of 2007 and payments
totaling the previously reserved amount of $74.25 million were
made. The increase in the deferred tax provision was offset by a
corresponding decrease to the current income tax provision.
The Corporation adopted FIN 48 as of January 1, 2007. FIN 48 prescribes a comprehensive model
for the financial statement recognition, measurement, presentation and disclosure of income tax
uncertainties with respect to positions taken or expected to be taken on income tax returns. The
adoption of FIN 48 reduced the beginning balance of retained earnings as of January 1, 2007 by $2.6
million. Under FIN 48, income tax benefits are recognized and measured based upon a two-step
model: 1) a tax position must be more likely than not to be sustained based solely on its technical
merits in order to be recognized, and 2) the benefit is measured as the largest dollar amount of
that position that is more likely than not to be sustained upon settlement. The difference between
the benefit recognized in accordance with FIN 48 and the tax benefit claimed on a tax return is
referred to as an unrecognized tax benefit (UTB).
As of January 1, 2007, the balance of the Corporations UTBs amounted to $28.5 million, all of
which would, if recognized, affect the Corporations effective tax rate. The Corporation classifies
all interest and penalties, if any, related to tax uncertainties as income tax expense. As of
January 1, 2007, the Corporations accrual for interest that relate to tax uncertainties amounted
to $6.3 million. As of January 1, 2007 there is no need to accrue for the payment of penalties. The
amount of UTBs may increase or decrease in the future for various reasons, including changes in the
amounts for current tax year positions, expiration of open income tax returns due to the statutes
of limitations, changes in managements judgment about the level of uncertainty, status of
examinations, litigation and legislative activity and the addition or elimination of uncertain tax
positions. The Corporation does not anticipate any significant changes to its UTBs within the next
12 months.
The Corporations liability for income taxes includes the liability for UTBs, and
interest which relate to tax years still subject to review by taxing authorities. Audit periods
remain open for review until the statute of limitations has passed. The statute of limitations
under the PR Code is 4 years; and for the Virgin Islands and U.S. income tax purposes is 3 years
after a tax return is due or filed, whichever is later. The completion of an audit by the taxing
authorities or the expiration of the statute of limitations for a given audit period could result
in an adjustment to the Corporations liability for income taxes. Any such adjustment could be
material to results of operations for any given quarterly or annual period based, in part, upon the
results of operations for the given period.
14 FAIR VALUE
As discussed in Note 1 Basis of Presentation and Significant Accounting Policies,
effective January 1, 2007, the Corporation adopted SFAS 157, which provides a framework for
measuring fair value under GAAP.
The Corporation also adopted SFAS 159 effective January 1, 2007. SFAS 159 generally permits
the measurement of selected eligible financial instruments at fair value at specified election
dates. The Corporation elected to adopt the fair value option for certain of its brokered CDs and
medium-term notes on the adoption date. SFAS 159 requires that the difference between the carrying
value before the election of the fair value option and the fair value of these instruments be
recorded as an adjustment to beginning retained earnings in the period of adoption.
26
The following table summarizes the impact of adopting the fair value option for certain
brokered CDs and medium-term notes on January 1, 2007. Amounts shown represent the carrying value
of the affected instruments before and after the changes in accounting resulting from the adoption
of SFAS 159.
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Impact |
|
|
|
Ending Statement of |
|
|
Net |
|
|
Opening Statement of |
|
|
|
Financial Condition |
|
|
Increase |
|
|
Financial Condition |
|
|
|
as of December 31, 2006 |
|
|
in Retained Earnings |
|
|
as of January 1, 2007 |
|
(In thousands) |
|
(Prior to Adoption) (1) |
|
|
upon Adoption |
|
|
(After Adoption of Fair Value Option) |
|
Callable brokered CDs |
|
$ |
(4,513,020 |
) |
|
$ |
149,621 |
|
|
$ |
(4,363,399 |
) |
Medium-term notes |
|
|
(15,637 |
) |
|
|
840 |
|
|
|
(14,797 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect adjustment (pre-tax) |
|
|
|
|
|
|
150,461 |
|
|
|
|
|
Tax impact |
|
|
|
|
|
|
(58,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect adjustment (net of tax), increase to
retained earnings |
|
|
|
|
|
$ |
91,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of debt issue costs, placement fees and basis adjustment as of
December 31, 2006. |
Fair Value Option
Callable Brokered CDs and Certain Medium-Term Notes
The Corporation elected to account at fair value certain financial liabilities which were
hedged with interest rate swaps which were designated for fair value hedge accounting in accordance
with SFAS 133. As of September 30, 2007, these liabilities included callable brokered CDs with an
aggregate fair value of $4.3 billion and principal balance of $4.4 billion recorded in
interest-bearing deposits; and certain medium-term notes with a fair value of $14.2 million and
principal balance of $15.4 million recorded in notes payable. Interest paid on these instruments
continues to be recorded in interest expense and the accrued interest is part of the fair value of
the SFAS 159 liabilities. Electing the fair value option allows the Corporation to eliminate the
burden of complying with the requirements for hedge accounting under SFAS 133 (e.g., documentation
and effectiveness assessment) without introducing earnings volatility. Interest rate risk on the
callable brokered CDs and medium-term notes measured at fair value under SFAS 159 continue to be
economically hedged with callable interest rate swaps with the same terms and conditions. The
Corporation did not elect the fair value option for other brokered CDs because these are not hedged
by derivatives that qualified or designated for hedge accounting in accordance with SFAS 133.
Effective January 1, 2007, the Corporation discontinued the use of fair value hedge accounting for
interest rate swaps that hedged the $150 million medium-term note since the interest rate swaps
were no longer effective in offsetting the changes in the fair value of the $150 million
medium-term note, as a consequence, the Corporation did not elect the fair value option for this
note either. The Corporation redeemed the $150 million medium-term note during the second quarter
of 2007.
Callable brokered CDs and medium-term notes for which the Corporation has elected the fair
value option are priced by valuation experts using observable market data in the institutional
markets.
Fair Value Measurement
SFAS 157 defines fair value as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. SFAS
157 also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair value:
|
|
|
Level 1 |
|
Level assets and liabilities include equity securities that are traded in an active
exchange market, as well as certain U.S. Treasury and other U.S. government and agency
securities that are traded |
27
|
|
|
|
|
by dealers or brokers in active markets. Valuations are obtained
from readily available pricing sources for market transactions involving identical assets or
liabilities. |
|
Level 2 |
|
Observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities. Level 2 assets and liabilities
include (i) mortgage-backed securities for which the fair value is
estimated based on valuations obtained from third-party pricing
services for identical or comparable assets, (ii) debt securities
with quoted prices that are traded less frequently than
exchange-traded instruments and (iii) derivative contracts and
financial liabilities (e.g., callable brokered CDs and medium-term
notes elected for fair value option under SFAS 159) whose value is
determined using a pricing model with inputs that are observable
in the market or can be derived principally from or corroborated
by observable market data. |
|
|
|
Level 3 |
|
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models for
which the determination of fair value requires significant
management judgment or estimation. |
The following is a description of the valuation methodologies used for instruments measured at
fair value:
Callable Brokered CDs
The fair value of brokered CDs, included within deposits, is determined using discounted cash
flow analyses over the full term of the CDs. The valuation uses a Hull-White Interest Rate Tree
approach for the CDs with callable option components, an industry-standard approach for valuing
instruments with interest rate call options. The model assumes that the embedded options are
exercised economically. The fair value of the CDs is computed using the outstanding principal
amount. The discount rates used are based on US dollar LIBOR and swap rates. At-the-money implied
swaption volatility term structure (volatility by time to maturity) is used to calibrate the model
to current market prices and value the cancellation option in the deposits. Effective January 1,
2007, the Corporation updated its methodology to calculate the impact of its own credit standing.
Medium-Term Notes
The fair value of term notes is determined using a discounted cash flow analysis over the full
term of the borrowings. This valuation also uses the Hull-White Interest Rate Tree approach to
value the option components of the term notes. The model assumes that the embedded options are
exercised economically. The fair value of medium-term notes is computed using the notional amount
outstanding. The discount rates used in the valuations are based on US dollar LIBOR and swap rates.
At-the-money implied swaption volatility term structure (volatility by time to maturity) is used to
calibrate the model to current market prices and value the cancellation option in the term notes.
Effective January 1, 2007, the Corporation updated its methodology to calculate the impact of its
own credit standing. The net gain from fair value changes attributable to the Corporations own
credit to the medium-term notes for which the Corporation has elected the fair value option
amounted to $1.6 million for the nine-month period ended September 30, 2007. For the medium-term
notes the credit risk is measured using the difference in yield curves between Swap rates and
Treasury rates at a tenor comparable to the time to maturity of the note and option.
28
Investment Securities
The fair value of investment securities is the market value based on quoted market prices,
when available, or market prices provided by recognized broker dealers. If listed prices or quotes
are not available, fair value is based upon externally developed models that use unobservable
inputs due to the limited market activity of the instrument.
Derivative instruments
The fair value of the derivative instruments was provided by valuation experts and
counterparties. Certain derivatives with limited market activity are valued using externally
developed models that consider unobservable market parameters.
Assets and liabilities measured at fair value on a recurring basis, including financial
liabilities for which the Corporation has elected the fair value option, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
|
|
|
Assets/ (Liabilities) |
(In thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
at Fair Value |
Callable brokered CDs (1) |
|
$ |
|
|
|
$ |
(4,314,141 |
) |
|
$ |
|
|
|
$ |
(4,314,141 |
) |
Medium-term notes (1) |
|
|
|
|
|
|
(14,184 |
) |
|
|
|
|
|
|
(14,184 |
) |
Securities available for
sale (2) |
|
|
126,924 |
|
|
|
1,018,501 |
|
|
|
146,761 |
|
|
|
1,292,186 |
|
Derivative instruments (3) |
|
|
|
|
|
|
(122,852 |
) |
|
|
10,042 |
|
|
|
(112,810 |
) |
|
|
|
(1) |
|
Amounts represent items for which the Corporation has elected the fair value option under SFAS 159. |
|
(2) |
|
Carried at fair value prior to the adoption of SFAS 159. |
|
(3) |
|
Derivatives as of September 30, 2007 include derivative assets of $23.3 million and derivative
liabilities of $136.1 million, all of which were carried at fair value prior to the adoption of SFAS
159. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Fair Value for the Quarter Ended |
|
|
Changes in Fair Value for the Nine-Month Period Ended |
|
|
|
September 30, 2007, for items Measured at Fair Value Pursuant |
|
|
September 30, 2007, for items Measured at Fair Value Pursuant |
|
|
|
to Election of the Fair Value Option |
|
|
to Election of the Fair Value Option |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
Fair Value (Losses) Gains |
|
|
|
|
|
|
|
|
|
|
Fair Value (Losses) Gains |
|
|
|
Losses included in |
|
|
Gains included in |
|
|
Included in |
|
|
Losses included in |
|
|
Gains included in |
|
|
Included in |
|
|
|
Interest Expense |
|
|
Interest Expense |
|
|
Current-Period |
|
|
Interest Expense |
|
|
Interest Expense |
|
|
Current-Period |
|
|
|
on Deposits |
|
|
on Notes Payable |
|
|
Earnings (1) |
|
|
on Deposits |
|
|
on Notes Payable |
|
|
Earnings (1) |
|
Callable brokered
CDs |
|
$ |
(120,937 |
) |
|
$ |
|
|
|
$ |
(120,937 |
) |
|
$ |
(177,301 |
) |
|
$ |
|
|
|
$ |
(177,301 |
) |
Medium-term notes |
|
|
|
|
|
|
290 |
|
|
|
290 |
|
|
|
|
|
|
|
34 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(120,937 |
) |
|
$ |
290 |
|
|
$ |
(120,647 |
) |
|
$ |
(177,301 |
) |
|
$ |
34 |
|
|
$ |
(177,267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Changes in fair value for the quarter and nine-month period ended September
30, 2007 include interest expense on callable brokered CDs of $58.0 million and
$170.7 million, respectively, and interest expense on medium-term notes of $0.2
million and $0.6 million, respectively. Interest expense on callable brokered
CDs and medium-term notes that have been elected to be carried at fair value
under the provisions of SFAS 159 are recorded in interest expense in the
Consolidated Statements of Income based on their contractual coupons. |
29
The table below presents a reconciliation for all assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) for the quarter and
nine-month period ended September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value Measurements |
|
|
Total Fair Value Measurements |
|
|
|
(Quarter ended September 30, 2007) |
|
|
(Nine-month period ended September 30, 2007) |
|
Level 3 Instruments Only |
|
|
|
|
Securities Available |
|
|
|
|
|
Securities Available |
|
(In thousands) |
|
Derivatives (1) |
|
|
For Sale (2) |
|
|
Derivatives (1) |
|
|
For Sale (2) |
|
Beginning balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses (realized/unrealized): |
|
$ |
14,636 |
|
|
$ |
171,988 |
|
|
$ |
10,288 |
|
|
$ |
370 |
|
Included in earnings |
|
|
(4,594 |
) |
|
|
|
|
|
|
(246 |
) |
|
|
|
|
Included in other comprehensive
income |
|
|
|
|
|
|
(18,524 |
) |
|
|
|
|
|
|
(19,059 |
) |
New instruments acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,376 |
|
Principal repayments and amortization |
|
|
|
|
|
|
(6,703 |
) |
|
|
|
|
|
|
(16,926 |
) |
Transfers in and/or out of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
10,042 |
|
|
$ |
146,761 |
|
|
$ |
10,042 |
|
|
$ |
146,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts mostly related to the valuation of interest rate cap agreements which were carried at fair value prior to the adoption of SFAS 159. |
|
(2) |
|
Amounts mostly related to certain available for sale securities collateralized by loans acquired in the first quarter of 2007 as part of the recharacterization of certain secured commercial loans. |
The table below summarizes gains and losses due to changes in fair value recorded in earnings
for Level 3 assets and liabilities for the quarter and nine-month period ended September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Losses |
|
|
Total (Losses) and Gains |
|
|
|
(Quarter ended September 30, 2007) |
|
|
(Nine-month period ended September 30, 2007) |
|
Level 3 Instruments Only |
|
|
|
|
Securities Available |
|
|
|
|
|
Securities Available |
|
(In thousands) |
|
Derivatives (1) |
|
|
For Sale |
|
|
Derivatives (1) |
|
|
For Sale |
|
Classification of (losses) and gains included in earnings (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on loans |
|
$ |
(129 |
) |
|
$ |
|
|
|
$ |
(262 |
) |
|
$ |
|
|
Interest income on investment securities |
|
|
(4,465 |
) |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,594 |
) |
|
$ |
|
|
|
$ |
(246 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount represents valuation of interest rate cap agreements which were carried at fair value prior to the adoption of SFAS 159. |
|
(2) |
|
All gains and losses included in current period earnings were unrealized. |
The table below summarizes changes in unrealized gains or losses recorded in earnings for the
quarter and nine-month period ended September 30, 2007 for Level 3 assets and liabilities that are
still held as of September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Unrealized Losses |
|
|
Changes in Unrealized (Losses) and Gains |
|
|
|
(Quarter ended September 30, 2007) |
|
|
(Nine-month period ended September 30, 2007) |
|
Level 3 Instruments Only |
|
|
|
|
Securities Available |
|
|
|
|
|
Securities Available |
|
(In thousands) |
|
Derivatives (1) |
|
|
For Sale |
|
|
Derivatives (1) |
|
|
For Sale |
|
Changes in unrealized (losses) and gains relating to assets still held at reporting
date: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on loans |
|
$ |
(129 |
) |
|
$ |
|
|
|
$ |
(262 |
) |
|
$ |
|
|
Interest income on investment securities |
|
|
(4,465 |
) |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,594 |
) |
|
$ |
|
|
|
$ |
(246 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount represents valuation of interest rate cap agreements which were carried at fair value prior to the adoption of SFAS 159. |
Additionally, fair value is used on a non-recurring basis to evaluate certain assets in
accordance with GAAP. Adjustments to fair value usually result from the application of
lower-of-cost-or market accounting (e.g., loans held for sale carried at the lower of cost or fair
value and repossessed assets) or write-downs of individual assets
(e.g., goodwill, loans). As of September 30, 2007 no impairment or
valuation adjustment was recognized for assets recognized at fair
value on a non-recurring basis, except for certain loans as shown in
the following table:
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Nine-month
period |
|
|
Carrying
value as of September 30, 2007 |
|
September
30, 2007 |
|
ended
September 30, 2007 |
(In thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total Losses |
|
Total
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) |
|
$ |
|
|
|
$ |
115,795 |
|
|
$ |
|
|
|
$ |
(6,252 |
) |
|
$ |
(8,108 |
) |
|
|
|
|
(1) |
|
Relates to certain impaired collateral dependent loans. The impairment was measured based on the fair value
of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with
the provisions of SFAS 114 Accounting by Creditors for Impairment of a Loan. |
15 SEGMENT INFORMATION
Based upon the Corporations organizational structure and the information provided to the
Chief Operating Decision Maker and to a lesser extent to the Board of Directors, the operating
segments are driven primarily by the Corporations legal entities. As of September 30, 2007, the
Corporation had four reportable segments: Commercial and Corporate Banking; Mortgage Banking;
Consumer (Retail) Banking; and Treasury and Investments, as well as an Other category reflecting
other legal entities reported separately on an aggregate basis. Management determined the
reportable segments based on the internal reporting used to evaluate performance and to assess
where to allocate resources. Other factors such as the Corporations organizational chart, nature
of the products, distribution channels and the economic characteristics of the products were also
considered in the determination of the reportable segments.
The Commercial and Corporate Banking segment consists of the Corporations lending and other
services for large customers represented by the public sector and specialized and middle-market
clients. The Commercial and Corporate Banking segment offers commercial loans, including commercial
real estate and construction loans, and other products such as cash management and business
management services. The Mortgage Banking segments operations consist of the origination, sale and
servicing of a variety of residential mortgage loans. The Mortgage Banking segment also acquires
and sells mortgages in the secondary markets. In addition, the Mortgage Banking segment includes
mortgage loans purchased from other local banks or mortgage bankers. The Consumer (Retail)
segment consists of the Corporations consumer lending and deposit-taking activities conducted
mainly through its branch network and loan centers. The Treasury and Investment segment is
responsible for the Corporations investment portfolio and treasury functions executed to manage
and enhance liquidity. This segment loans funds to the Commercial and Corporate Banking; Mortgage
Banking; and Consumer segments to finance their lending activities and borrows from those segments.
The Consumer segment also loans funds to other segments. The interest rates charged or credited by
Treasury and Investments and the Consumer segments are allocated based on market rates. The
difference between the allocated interest income or expense and the Corporations actual net
interest income from centralized management of funding costs is reported in the Treasury and
Investments segment. The Other category is mainly composed of insurance, finance leases and other
products.
The accounting policies of the business segments are the same as those described in Note 1 of
the Corporations financial statements for the year ended December 31, 2006 contained in the
Corporations annual report on Form 10-K.
The Corporation evaluates the performance of the segments based on net interest income after
the estimated provision for loan and lease losses, non-interest income and direct non-interest
expenses. The segments are also evaluated based on the average volume of their interest-earning
assets less the allowance for loan and lease losses.
31
The following table presents information about the reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Consumer |
|
|
|
Commercial and |
|
|
Treasury and |
|
|
|
|
|
|
|
|
|
Banking |
|
|
(Retail)
Banking |
|
|
Corporate |
|
|
Investments |
|
|
Other |
|
|
Total |
|
For the quarter ended September 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
41,335 |
|
|
$ |
46,172 |
|
|
$ |
104,158 |
|
|
$ |
71,388 |
|
|
$ |
32,878 |
|
|
$ |
295,931 |
|
Net (charge) credit for transfer of funds |
|
|
(32,193 |
) |
|
|
24,340 |
|
|
|
(74,318 |
) |
|
|
89,581 |
|
|
|
(7,410 |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
(20,719 |
) |
|
|
|
|
|
|
(161,721 |
) |
|
|
(8,462 |
) |
|
|
(190,902 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
9,142 |
|
|
|
49,793 |
|
|
|
29,840 |
|
|
|
(752 |
) |
|
|
17,006 |
|
|
|
105,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
(738 |
) |
|
|
(14,019 |
) |
|
|
(11,727 |
) |
|
|
|
|
|
|
(7,776 |
) |
|
|
(34,260 |
) |
Other income (loss) |
|
|
1,182 |
|
|
|
5,643 |
|
|
|
764 |
|
|
|
(2,977 |
) |
|
|
4,233 |
|
|
|
8,845 |
|
Direct operating expenses |
|
|
(5,684 |
) |
|
|
(24,117 |
) |
|
|
(6,254 |
) |
|
|
(2,051 |
) |
|
|
(12,005 |
) |
|
|
(50,111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
$ |
3,902 |
|
|
$ |
17,300 |
|
|
$ |
12,623 |
|
|
$ |
(5,780 |
) |
|
$ |
1,458 |
|
|
$ |
29,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets |
|
$ |
2,585,239 |
|
|
$ |
1,811,466 |
|
|
$ |
5,434,273 |
|
|
$ |
5,705,114 |
|
|
$ |
1,327,513 |
|
|
$ |
16,863,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
38,256 |
|
|
$ |
51,095 |
|
|
$ |
98,146 |
|
|
$ |
100,078 |
|
|
$ |
30,136 |
|
|
$ |
317,711 |
|
Net (charge) credit for transfer of funds |
|
|
(27,473 |
) |
|
|
27,754 |
|
|
|
(69,499 |
) |
|
|
74,735 |
|
|
|
(5,517 |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
(18,302 |
) |
|
|
|
|
|
|
(169,804 |
) |
|
|
(6,903 |
) |
|
|
(195,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
10,783 |
|
|
|
60,547 |
|
|
|
28,647 |
|
|
|
5,009 |
|
|
|
17,716 |
|
|
|
122,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
(209 |
) |
|
|
(11,488 |
) |
|
|
(4,589 |
) |
|
|
|
|
|
|
(4,274 |
) |
|
|
(20,560 |
) |
Other income (loss) |
|
|
1,617 |
|
|
|
5,695 |
|
|
|
835 |
|
|
|
(5,942 |
) |
|
|
4,840 |
|
|
|
7,045 |
|
Net gain on partial extinguishment of a secured commercial
loan to a local financial institution |
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
1,000 |
|
Direct operating expenses |
|
|
(4,759 |
) |
|
|
(20,807 |
) |
|
|
(3,987 |
) |
|
|
(2,398 |
) |
|
|
(11,570 |
) |
|
|
(43,521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
$ |
7,432 |
|
|
$ |
33,947 |
|
|
$ |
21,906 |
|
|
$ |
(3,331 |
) |
|
$ |
6,712 |
|
|
$ |
66,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets |
|
$ |
2,346,487 |
|
|
$ |
1,921,140 |
|
|
$ |
5,297,964 |
|
|
$ |
7,674,849 |
|
|
$ |
1,189,667 |
|
|
$ |
18,430,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Consumer |
|
|
|
Commercial and |
|
|
Treasury and |
|
|
|
|
|
|
|
|
|
Banking |
|
|
(Retail)
Banking |
|
|
Corporate |
|
|
Investments |
|
|
Other |
|
|
Total |
|
For the nine-month period ended September 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
122,153 |
|
|
$ |
139,810 |
|
|
$ |
321,236 |
|
|
$ |
219,741 |
|
|
$ |
97,447 |
|
|
$ |
900,387 |
|
Net (charge) credit for transfer of funds |
|
|
(92,948 |
) |
|
|
78,500 |
|
|
|
(219,446 |
) |
|
|
251,808 |
|
|
|
(17,914 |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
(59,803 |
) |
|
|
|
|
|
|
(476,825 |
) |
|
|
(24,080 |
) |
|
|
(560,708 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
29,205 |
|
|
|
158,507 |
|
|
|
101,790 |
|
|
|
(5,276 |
) |
|
|
55,453 |
|
|
|
339,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
(1,924 |
) |
|
|
(41,706 |
) |
|
|
(25,805 |
) |
|
|
|
|
|
|
(14,367 |
) |
|
|
(83,802 |
) |
Other income (loss) |
|
|
2,336 |
|
|
|
20,786 |
|
|
|
2,780 |
|
|
|
(6,294 |
) |
|
|
13,465 |
|
|
|
33,073 |
|
Net gain on partial extinguishment and
recharacterization
of secured commercial loan to a local financial
institution |
|
|
|
|
|
|
|
|
|
|
2,497 |
|
|
|
|
|
|
|
|
|
|
|
2,497 |
|
Direct operating expenses |
|
|
(16,046 |
) |
|
|
(69,568 |
) |
|
|
(15,762 |
) |
|
|
(6,152 |
) |
|
|
(34,740 |
) |
|
|
(142,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
$ |
13,571 |
|
|
$ |
68,019 |
|
|
$ |
65,500 |
|
|
$ |
(17,722 |
) |
|
$ |
19,811 |
|
|
$ |
149,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets |
|
$ |
2,524,502 |
|
|
$ |
1,838,393 |
|
|
$ |
5,441,358 |
|
|
$ |
5,527,970 |
|
|
$ |
1,301,675 |
|
|
$ |
16,633,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine-month period ended September 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
110,108 |
|
|
$ |
151,607 |
|
|
$ |
365,568 |
|
|
$ |
277,252 |
|
|
$ |
85,324 |
|
|
$ |
989,859 |
|
Net (charge) credit for transfer of funds |
|
|
(77,279 |
) |
|
|
80,959 |
|
|
|
(245,668 |
) |
|
|
256,875 |
|
|
|
(14,887 |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
(52,235 |
) |
|
|
|
|
|
|
(597,709 |
) |
|
|
(18,156 |
) |
|
|
(668,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
32,829 |
|
|
|
180,331 |
|
|
|
119,900 |
|
|
|
(63,582 |
) |
|
|
52,281 |
|
|
|
321,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
(3,796 |
) |
|
|
(24,405 |
) |
|
|
(4,556 |
) |
|
|
|
|
|
|
(16,533 |
) |
|
|
(49,290 |
) |
Other income (loss) |
|
|
1,513 |
|
|
|
17,440 |
|
|
|
3,880 |
|
|
|
(6,788 |
) |
|
|
15,011 |
|
|
|
31,056 |
|
Net loss on partial extinguishment of a secured
commercial
loan to a local financial institution |
|
|
|
|
|
|
|
|
|
|
(10,640 |
) |
|
|
|
|
|
|
|
|
|
|
(10,640 |
) |
Direct operating expenses |
|
|
(12,134 |
) |
|
|
(63,479 |
) |
|
|
(12,549 |
) |
|
|
(5,679 |
) |
|
|
(33,221 |
) |
|
|
(127,062 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
$ |
18,412 |
|
|
$ |
109,887 |
|
|
$ |
96,035 |
|
|
$ |
(76,049 |
) |
|
$ |
17,538 |
|
|
$ |
165,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets |
|
$ |
2,256,743 |
|
|
$ |
1,930,513 |
|
|
$ |
6,613,801 |
|
|
$ |
7,214,537 |
|
|
$ |
1,131,857 |
|
|
$ |
19,147,451 |
|
32
The following table presents a reconciliation of the reportable segment financial information to
the consolidated totals (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine-month Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income for segments and other |
|
$ |
29,503 |
|
|
$ |
66,666 |
|
|
$ |
149,179 |
|
|
$ |
165,823 |
|
Other income |
|
|
15,075 |
|
|
|
|
|
|
|
15,075 |
|
|
|
|
|
Other operating expenses |
|
|
(24,841 |
) |
|
|
(29,419 |
) |
|
|
(85,502 |
) |
|
|
(88,656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
19,737 |
|
|
|
37,247 |
|
|
|
78,752 |
|
|
|
77,167 |
|
Income taxes |
|
|
(5,595 |
) |
|
|
(10,565 |
) |
|
|
(17,983 |
) |
|
|
(14,819 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated net income |
|
$ |
14,142 |
|
|
$ |
26,682 |
|
|
$ |
60,769 |
|
|
$ |
62,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average earning assets for segments |
|
$ |
16,863,605 |
|
|
$ |
18,430,107 |
|
|
$ |
16,633,898 |
|
|
$ |
19,147,451 |
|
Average non-earning assets |
|
|
708,446 |
|
|
|
736,097 |
|
|
|
635,233 |
|
|
|
721,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated average assets |
|
$ |
17,572,051 |
|
|
$ |
19,166,204 |
|
|
$ |
17,269,131 |
|
|
$ |
19,868,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 COMMITMENTS AND CONTINGENCIES
The Corporation enters into financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of customers. These financial instruments may
include commitments to extend credit and commitments to sell and purchase mortgage loans at fair
value. As of September 30, 2007, commitments to extend credit amounted to approximately $1.8
billion and standby letters of credit amounted to approximately $104.8 million. Commitments to
extend credit are agreements to lend to a customer as long as the conditions established in the
contract are met. Commitments generally have fixed expiration dates or other termination clauses.
Generally, the Corporations mortgage banking activities do not enter into interest rate lock
agreements with prospective borrowers.
As of September 30, 2007, First BanCorp and its subsidiaries were defendants in various legal
proceedings arising in the ordinary course of business. Management believes that the final disposition of these matters will not have a material adverse
effect on the Corporations financial position or results of operations, except as described below.
On August 7, 2007, First BanCorp announced that the SEC approved a final settlement with the
Corporation, which resolves the previously disclosed SEC investigation of the Corporations
accounting for the mortgage-related transactions with Doral Financial Corporation (Doral) and R&G
Financial. The Corporation had announced on December 13, 2005 that management, with the concurrence
of the Board of Directors, had determined to restate its previously reported financial statements
to correct its accounting for the mortgage-related transactions. In August 2006, the Audit
Committee completed its review and the Corporation filed the Amended 2004 Form 10-K with the SEC on
September 26, 2006, the 2005 Form 10-K on February 9, 2007 and the 2006 Form 10-K on July 9, 2007.
Under the settlement with the SEC, the Corporation agreed, without admitting or denying any
wrongdoing, to be enjoined from future violations of certain provisions of the securities laws.
The Corporation also agreed to pay an $8.5 million civil penalty and the disgorgement of $1 to the
SEC. The SEC may request that the civil penalty be subject to distribution pursuant to the Fair
Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. The monetary payment had no
impact on the Corporations earnings or capital in 2007. As reflected in First BanCorps previously
filed audited Consolidated Financial Statements for 2005, the Corporation accrued $8.5 million in
2005 for the potential settlement with the SEC. In connection with the settlement, the Corporation
consented to the entry of a final judgment to implement the terms of the agreement.
33
The United States District Court for the Southern District of New York must consent to the entry of the final
judgment in order to consummate the settlement. The monetary payment
was made on October 15, 2007.
In 2007, the Corporation reached an agreement in principle and signed a memorandum of
understanding with the lead plaintiff in a consolidated securities class action relating to
accounting for the mortgage-related transactions named In Re: First BanCorp Securities
Litigations. The agreement specified a payment of $74.25 million by the Corporation subject to
the approval by the United States District Court for the District of Puerto Rico. On August 1,
2007, the District Court issued a Preliminary Order approving the stipulation of this settlement.
The effectiveness of a final order to be issued by the Court is subject to:
|
|
|
The payment of $61 million to be deposited by First BanCorp in a settlement fund within
fifteen calendar days of the date of issuance of the Preliminary Order which was paid on
August 16, 2007 and |
|
|
|
|
The mailing of a notice to shareholders that describes the general terms of the
settlement. |
The court hearing for the final order of approval of the settlement has been set for November
28, 2007. The remaining settlement payment in the amount of $13,250,000 was paid on September 4,
2007. The monetary payment had no impact on the Corporations earnings or capital in 2007. As
reflected in First BanCorps audited Consolidated Financial Statements, included in the
Corporations 2005 Annual Report on Form 10-K, the Corporation accrued $74.25 million in 2005 for
the potential settlement of the class action lawsuit. The Corporation
recognized income of
approximately $15.1 million from an agreement reached with insurance companies and former executives of the
Corporation for indemnity of expenses which were accounted for as Insurance Reimbursements and Other Agreements Related to a
Contingency Settlement on the Consolidated Statement of Income, of which approximately $8.8
million had not been collected as of September 30, 2007 and are accounted for as Accounts Receivable
included as part of Other Assets on the Consolidated Statement of Financial Condition. On
October 2007, the Corporation received an insurance payment in the amount of $5.0 million thereby
reducing the Accounts Receivable to approximately $3.8 million as of that date.
34
17 FIRST BANCORP (Holding Company Only) Financial Information
The following condensed financial information presents the financial position of the Holding
Company only as of September 30, 2007 and December 31, 2006 and the results of its operations for
the quarter and nine-month period ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
17,574 |
|
|
$ |
14,584 |
|
Money market investments |
|
|
82,246 |
|
|
|
300 |
|
Investment securities available for sale, at
market: |
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
46,144 |
|
|
|
|
|
Equity investments |
|
|
3,246 |
|
|
|
12,715 |
|
Other equity securities |
|
|
1,425 |
|
|
|
1,425 |
|
Loans receivable, net |
|
|
2,634 |
|
|
|
65,161 |
|
Investment in FirstBank Puerto Rico |
|
|
1,431,545 |
|
|
|
1,309,066 |
|
Investment in FirstBank Insurance Agency |
|
|
4,105 |
|
|
|
2,982 |
|
Investment in Ponce General Corporation |
|
|
105,641 |
|
|
|
103,274 |
|
Investment in PR Finance |
|
|
2,882 |
|
|
|
2,623 |
|
Accrued interest receivable |
|
|
340 |
|
|
|
401 |
|
Investment in FBP Statutory Trust I |
|
|
3,093 |
|
|
|
3,093 |
|
Investment in FBP Statutory Trust II |
|
|
3,866 |
|
|
|
3,866 |
|
Other assets |
|
|
16,537 |
|
|
|
84,664 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,721,278 |
|
|
$ |
1,604,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Other borrowings |
|
$ |
283,992 |
|
|
$ |
288,269 |
|
Accounts payable and other liabilities |
|
|
23,100 |
|
|
|
86,332 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
307,092 |
|
|
|
374,601 |
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
1,414,186 |
|
|
|
1,229,553 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,721,278 |
|
|
$ |
1,604,154 |
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine-month Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on investment securities |
|
$ |
826 |
|
|
$ |
|
|
|
$ |
2,261 |
|
|
$ |
178 |
|
Interest income on other investments |
|
|
498 |
|
|
|
4 |
|
|
|
515 |
|
|
|
171 |
|
Interest income on loans |
|
|
80 |
|
|
|
983 |
|
|
|
542 |
|
|
|
3,068 |
|
Dividend from FirstBank Puerto Rico |
|
|
45,017 |
|
|
|
22,209 |
|
|
|
68,008 |
|
|
|
41,297 |
|
Dividend from other subsidiaries |
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
|
13,500 |
|
Other income |
|
|
142 |
|
|
|
142 |
|
|
|
421 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,563 |
|
|
|
23,338 |
|
|
|
72,747 |
|
|
|
58,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other borrowings |
|
|
4,747 |
|
|
|
4,755 |
|
|
|
14,087 |
|
|
|
13,423 |
|
Interest on funding to subsidiaries |
|
|
842 |
|
|
|
1,296 |
|
|
|
2,550 |
|
|
|
3,265 |
|
Provision (recovery) for loan losses |
|
|
|
|
|
|
|
|
|
|
1,320 |
|
|
|
(71 |
) |
Other operating expenses |
|
|
514 |
|
|
|
1,492 |
|
|
|
2,148 |
|
|
|
4,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,103 |
|
|
|
7,543 |
|
|
|
20,105 |
|
|
|
20,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on investments and impairments |
|
|
(2,370 |
) |
|
|
(9,139 |
) |
|
|
(5,965 |
) |
|
|
(10,989 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on partial extinguishment and
recharacterization of
secured commercial loans to a local financial
institution |
|
|
|
|
|
|
|
|
|
|
(1,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity
in undistributed earnings of subsidiaries |
|
|
38,090 |
|
|
|
6,656 |
|
|
|
45,470 |
|
|
|
26,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
1,619 |
|
|
|
1,157 |
|
|
|
4,120 |
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in
undistributed (losses) earnings of subsidiaries |
|
|
(25,567 |
) |
|
|
18,869 |
|
|
|
11,179 |
|
|
|
35,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,142 |
|
|
$ |
26,682 |
|
|
$ |
60,769 |
|
|
$ |
62,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 SUBSEQUENT EVENTS
On October 24, 2007, the Corporations Board of Directors approved a voluntary separation
program for eligible employees meeting predefined qualification criteria. There are approximately
110 employees eligible for this program and the estimated cost to cover the benefits to be paid is
approximately $4.0 million. The Corporation estimates that the annual cost savings will
approximate $3.3 million as a result of the voluntary separation program. Since the program is
voluntary and was approved in October, no accrual has been made in the third quarter of 2007. The
benefits to be paid will be accrued at the time the eligible employees accept the offer of
voluntary separation, which according to the program must be no later than November 30, 2007 with
employment terminating no later than March 31, 2008.
36
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
SELECTED FINANCIAL DATA
(In thousands, except for per share and financial ratios)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Nine-Month Period Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Condensed Income Statements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
295,931 |
|
|
$ |
317,711 |
|
|
$ |
900,387 |
|
|
$ |
989,859 |
|
Total interest expense |
|
|
190,902 |
|
|
|
195,009 |
|
|
|
560,708 |
|
|
|
668,100 |
|
Net interest income |
|
|
105,029 |
|
|
|
122,702 |
|
|
|
339,679 |
|
|
|
321,759 |
|
Provision for loan and lease losses |
|
|
34,260 |
|
|
|
20,560 |
|
|
|
83,802 |
|
|
|
49,290 |
|
Non-interest income |
|
|
23,920 |
|
|
|
8,045 |
|
|
|
50,645 |
|
|
|
20,416 |
|
Non-interest expenses |
|
|
74,952 |
|
|
|
72,940 |
|
|
|
227,770 |
|
|
|
215,718 |
|
Income before income taxes |
|
|
19,737 |
|
|
|
37,247 |
|
|
|
78,752 |
|
|
|
77,167 |
|
Income tax expense |
|
|
(5,595 |
) |
|
|
(10,565 |
) |
|
|
(17,983 |
) |
|
|
(14,819 |
) |
Net income |
|
|
14,142 |
|
|
|
26,682 |
|
|
|
60,769 |
|
|
|
62,348 |
|
Net income attributable to common stockholders |
|
|
4,073 |
|
|
|
16,613 |
|
|
|
30,562 |
|
|
|
32,141 |
|
Per Common Share Results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
$ |
0.05 |
|
|
$ |
0.20 |
|
|
$ |
0.36 |
|
|
$ |
0.39 |
|
Net income per share diluted |
|
$ |
0.05 |
|
|
$ |
0.20 |
|
|
$ |
0.36 |
|
|
$ |
0.39 |
|
Cash dividends declared |
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.21 |
|
|
$ |
0.21 |
|
Average shares outstanding |
|
|
87,075 |
|
|
|
83,254 |
|
|
|
84,542 |
|
|
|
82,694 |
|
Average shares outstanding diluted |
|
|
87,317 |
|
|
|
83,337 |
|
|
|
84,958 |
|
|
|
83,054 |
|
Book value per common share |
|
$ |
9.34 |
|
|
$ |
8.10 |
|
|
$ |
9.34 |
|
|
$ |
8.10 |
|
Selected Financial Ratios (In Percent): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets |
|
|
0.32 |
|
|
|
0.55 |
|
|
|
0.47 |
|
|
|
0.42 |
|
Interest Rate Spread (1) |
|
|
2.15 |
|
|
|
2.14 |
|
|
|
2.28 |
|
|
|
2.35 |
|
Net Interest Margin (1) |
|
|
2.67 |
|
|
|
2.65 |
|
|
|
2.83 |
|
|
|
2.83 |
|
Return on Average Total Equity |
|
|
4.14 |
|
|
|
8.90 |
|
|
|
6.28 |
|
|
|
7.01 |
|
Return on Average Common Equity |
|
|
1.99 |
|
|
|
10.31 |
|
|
|
5.50 |
|
|
|
6.72 |
|
Average Total Equity to Average Total Assets |
|
|
7.78 |
|
|
|
6.20 |
|
|
|
7.47 |
|
|
|
5.99 |
|
Dividend payout ratio |
|
|
159.00 |
|
|
|
35.08 |
|
|
|
59.33 |
|
|
|
54.33 |
|
Efficiency ratio (2) |
|
|
58.13 |
|
|
|
55.79 |
|
|
|
58.35 |
|
|
|
63.04 |
|
Asset Quality: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses to loans receivable |
|
|
1.57 |
|
|
|
1.39 |
|
|
|
1.57 |
|
|
|
1.39 |
|
Net charge-offs (annualized) to average loans |
|
|
0.77 |
|
|
|
0.60 |
|
|
|
0.77 |
|
|
|
0.51 |
|
Provision for loan and lease losses to net charge-offs |
|
|
1.57 |
|
|
|
1.27 |
|
|
|
1.30 |
|
|
|
1.06 |
|
Other Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Price: End of period |
|
$ |
9.50 |
|
|
$ |
11.06 |
|
|
$ |
9.50 |
|
|
$ |
11.06 |
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
|
|
September 30, |
|
December 31, |
|
|
2007 |
|
2006 |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
Loans and loans held for sale |
|
$ |
11,326,476 |
|
|
$ |
11,263,979 |
|
Allowance for loan and lease losses |
|
|
177,486 |
|
|
|
158,296 |
|
Money market and investment securities |
|
|
5,227,818 |
|
|
|
5,544,183 |
|
Total assets |
|
|
17,087,080 |
|
|
|
17,390,256 |
|
Deposits |
|
|
11,535,147 |
|
|
|
11,004,287 |
|
Borrowings |
|
|
3,788,344 |
|
|
|
4,662,271 |
|
Total common equity |
|
|
864,086 |
|
|
|
679,453 |
|
Total equity |
|
|
1,414,186 |
|
|
|
1,229,553 |
|
|
|
|
|
1- |
|
On a tax equivalent basis (see discussion in Net Interest Income below). |
|
2- |
|
Non-interest expenses to the sum of net interest income and non-interest income. The denominator includes non-recurring items and
changes in the fair value of derivative instruments and financial instruments measured at fair value under SFAS 159. |
37
OVERVIEW OF RESULTS OF OPERATIONS
This discussion and analysis relates to the accompanying consolidated interim unaudited
financial statements of First BanCorp and should be read in conjunction with the interim unaudited
financial statements and the notes thereto.
First BanCorps results of operations depend primarily upon its net interest income, which is
the difference between the interest income earned on its interest-earning assets, including
investment securities and loans, and the interest expense on its interest-bearing liabilities,
including deposits and borrowings. Net interest income is affected by various factors including
the interest rate scenario, the volumes, mix and composition of interest-earning assets and
interest-bearing liabilities; and the re-pricing characteristics of these assets and liabilities.
The Corporations results of operations also depend on the provision for loan and lease losses,
non-interest expenses (such as personnel, occupancy and other costs), non-interest income (mainly
insurance income and service charges and fees on loans and deposits), the results of its hedging
activities, gains (losses) on investments, gains (losses) on sale of loans, and income taxes.
For the quarter ended September 30, 2007, the Corporations net income amounted to $14.1
million, compared to $26.7 million for the quarter ended September 30, 2006. For the quarter ended
September 30, 2007, diluted earnings per common share amounted to $0.05, compared to $0.20 for the
comparable period in 2006. Return on average assets and return on average common equity were
0.32% and 1.99% respectively, for the quarter ended September 30, 2007 as compared to 0.55% and
10.31%, respectively, for the same quarter of 2006. The Corporations financial performance for
the third quarter of 2007, as compared to the third quarter of 2006, was principally impacted by
(1) a decrease of $17.7 million in net interest income mainly as a result of fluctuations resulting
from the accounting of the fair value of financial instruments, in particular interest rate swaps
not designated or not qualifying for fair value hedge accounting under Statement of Financial
Accounting Standards No. (SFAS) 133, Accounting for Derivative Instruments and Hedging
Activities, in 2006, declining loan yields relating to a higher balance of loans in non-accruing
status and the continued flat-to-inverted yield curve, and (2) an additional provision of $8.1
million to the Corporations specific loan loss reserve as a result of an impairment in the
collateral of a commercial relationship of the Corporations loan agency in Florida (the Miami
Agency). These were partially offset by income, of approximately $15.1 million, recognized during
the third quarter of 2007 from an agreement reached with insurance carriers and former executives
for indemnity of expenses related to the settlement of the class action lawsuit brought against the
Corporation and by a decrease of $6.8 million in other-than-temporary impairments charges related
to its equity securities in comparison to the third quarter of 2006.
The highlights and key drivers of the Corporations financial results for the quarter ended
September 30, 2007 included the following:
|
|
|
Net interest income for the quarter ended September 30, 2007 was $105.0 million,
compared to $122.7 million for the same period in 2006. The decrease in net interest
income for the third quarter of 2007 was mainly driven by fluctuations resulting from the
accounting of the fair value of financial instruments, in particular interest rate swaps
not designated or not qualifying for fair value hedge accounting under SFAS 133 in 2006,
declining loan yields attributable to a higher balance of loans in non-accrual status, and
the continued flat-to-inverted yield curve. |
|
|
|
|
The Corporation recorded net unrealized and realized losses on derivative instruments and
hedging activities (including unrealized losses on SFAS 159 liabilities) of $6.6 million for
the third quarter of 2007, compared to net unrealized gains of $3.6 million for the same
period in 2006. The negative fluctuation is mainly related to certain interest rate swaps
that economically hedged brokered certificates of deposit (CDs) that were not designated or
did not qualify for fair value hedge accounting under SFAS |
38
|
|
|
133 in 2006. The Corporation recorded unrealized gains of approximately $10.9 million for the
third quarter of 2006 on the above noted interest rate swaps not designated under fair value
hedge accounting in 2006. The Corporation decided to early adopt SFAS 159, The Fair Value
Option for Financial Assets and Financial Liabilities for its callable brokered CDs and a
portion of its callable fixed medium-term note (SFAS 159 liabilities) in January 2007, thus
unrealized gains or losses on the fair value of derivative instruments were partially offset
by changes in the fair value of SFAS 159 liabilities. Refer to the Net Interest Income
discussion below for further details. |
|
|
|
|
The reduction in net interest income for the third quarter of 2007, as compared to the same
period of 2006, was also attributable to the increase in the balance of loans in non-accruing
status. Non-accrual loans increased by approximately $89.1 million on a sequential quarter,
compared to an increase of $47.9 million experienced during the
third quarter of 2006 when compared to the second quarter of 2006. |
|
|
|
|
Notwithstanding the decrease in net interest income in absolute terms, the Corporation has
been able to maintain its net interest margin. Net interest margin on a tax-equivalent basis
remained relatively stable at 2.67% for the third quarter of 2007, compared to 2.65% for the
same period in 2006 as decreases in the yield of loans mainly attributable to increases in
non-accrual balances were offset by higher margins on investment securities and the
relatively unchanged overall cost of funds when comparing both periods. The Corporation
was able to maintain a flat overall cost of funding due to the repayment of repurchase
agreements and the redemption of the Corporations callable $150 million medium-term note
(the $150 million medium-term note) which carried a cost higher than the overall cost of
funding. This was partially offset by the increase in the cost of funds for time deposits,
principally brokered CDs, as short-term rates experienced during the third quarter of 2007
were slightly higher than those experienced during the third quarter of 2006, in particular
due to the recent spike in the 3-month LIBOR during August and early September of 2007.
Higher yields on investment securities were attributable in part to the sale of lower
yielding securities during the third quarter of 2007. Proceeds from the sale of securities
were used to pay down repurchase agreements that carried a higher cost than the yield of the
securities sold. During the second and third quarter of 2007 the Corporation temporarily
invested in short-term investments a portion of the proceeds obtained from newly-issued
brokered CDs in anticipation of expected maturities during the latter part of the year. The
short-term investments carried a yield slightly lower than the cost of the brokered CDs,
thus, affecting the net interest margin rate. The flat-to-inverted yield curve continued to
put pressure on the return on earning assets as funding costs of liabilities tied to
short-term rates remained higher than yields on long-term assets such as mortgage-backed
securities. |
|
|
|
|
On a tax-equivalent basis, excluding the changes in the fair value of derivative instruments,
the ineffective portion resulting from fair value hedge accounting, the basis adjustment
amortization or accretion and unrealized gains and losses on liabilities elected for fair
value option under SFAS 159 (for definition and reconciliation of this non-GAAP measure,
refer to the Net Interest Income discussion below), net interest income for the quarter
ended September 30, 2007 was $114.9 million compared to $124.4 million for the corresponding
period of 2006. The decrease in tax-equivalent net interest income was principally due to
declining loan yields coupled with a decrease in tax-equivalent adjustments and to a lesser
extent a decrease in the volume of average interest-earning assets. The taxable equivalent
basis includes an adjustment that increases interest income on tax-exempt securities and
loans by an amount which makes tax-exempt income comparable, on a pre-tax basis, to regular
taxable income. For the third quarter of 2007, tax-equivalent adjustments amounted to
$3.3 million compared to $5.4 million for the same period in 2006. The decrease in
tax-equivalent adjustments was mainly due to decreases in the net interest spread on
tax-exempt assets as well as changes in the proportion of tax-exempt assets to total assets
and changes in the statutory income tax rate in Puerto Rico. These were partially offset by a
slight increase in the net interest margin due to the reduction of repurchase agreements that
carried a higher cost than the underlying investment securities collateral sold during the
third quarter of 2007 and the redemption of high cost notes payable during the first half of
2007. The net interest spread and |
39
|
|
|
margin, on a tax equivalent basis, for the quarter ended September 30, 2007 were 2.15% and
2.67%, respectively, compared to 2.14% and 2.65%, respectively, for the same period in 2006. |
|
|
|
|
For the third quarter of 2007, the Corporations provision for loan and lease losses
amounted to $34.3 million, compared to $20.6 million for the same period in 2006. Refer to
the discussion under the Risk Management section below for an analysis of the allowance
for loan and lease losses and non-performing assets and related ratios. The increase in
the provision for 2007 was primarily due to an impairment of $8.1 million on four
construction condominium-conversion loans (condo conversion loans), with an aggregate
principal balance of $60.5 million, extended to a single borrower through the Miami Agency
based on an updated impairment analysis that incorporated new appraisals. Increases in
non-accruing loans and charge-offs and the growth of the Corporations commercial loan
portfolio (other than secured commercial loans to local financial institutions) also
contributed to the increase in the provision for loan and lease losses. The increase in
non-accrual loans, other than the aforementioned loan relationship in the Miami Agency, and
charge-offs during 2007, as compared to the first nine months of 2006, is attributed to
weak economic conditions in Puerto Rico. |
|
|
|
|
The $60.5 million relationship comprises four condo conversion loans that the Corporation
had placed in non-accrual status during the second and third quarter of 2007 and had
determined that no impairment was necessary at that time; such analysis was based on the
appraisals used for the granting of the loans. The Corporation requested new appraisals that
showed some collateral deficiency as compared to the
Corporations recorded investment on the
loans. The impairment is mainly attributed to the current stage of completion of two of the
four condominium properties, the underlying collateral. At this stage, the projects are
significantly vacant and the collateral value as appraised on an as rented basis is below
the Corporations recorded investment on the loans. The condo conversion loans typically
required less extensive renovation efforts and are fully funded at the outset and paid down
as the condominium units are sold. The borrower in this relationship experienced financial
difficulties that were aggravated by factors such as property and insurance increased
assessments, tightening credit origination standards, overbuilding in certain areas and
general market conditions in the United States. The Miami Agency has been discussing and
developing action plans with authorized representatives of the borrower in order to ensure
the Corporations collateral remains protected and to obtain optimal recovery of the loans
outstanding. |
|
|
|
|
Although these economic factors can affect the performance of other construction loans
relationships originated through the Miami Agency, the Corporation expects the portfolio to
remain stable because of overall comfortable loan-to-value ratios and
the financial condition of
borrowers. In terms of the Florida market, the Corporation is not exposed to high-end
development areas. The Corporation lends money for condo-conversions in the affordable market
segment, and the collateral values of such properties have been more
stable than in the
high-end development areas. The Corporations Miami Agency loans, except for the
aforementioned relationship, continue to perform adequately, although at slower absorption
rates. As of September 30, 2007, there is no other adversely classified loan in the Miami
Agency. If absorption rates on condo conversion loans are so low that reverting the property
to rental property is more beneficial, the Corporations data shows that the rental market
has not suffered significant decreases. Given more conservative underwriting standards of the
banks in general and reduction of market |
40
|
|
|
participants in the lending business, the Corporation believes that the rental market will
grow and rental properties are expected to hold their values. |
|
|
|
|
For the quarter ended September 30, 2007, the Corporations non-interest income amounted
to $23.9 million, compared to $8.0 million for the quarter ended September 30, 2006.
During the third quarter of 2007, the Corporation recorded as income approximately $15.1
million for agreements reached with insurance carriers and former executives for indemnity
of expenses related to the settlement of the class action lawsuit brought against the
Corporation. Lower other-than-temporary impairment charges on certain of the Corporations
equity securities portfolio also contributed to a higher non-interest income for the third
quarter of 2007, as compared to the third quarter of 2006. These positive variances were
partially offset by a fluctuation resulting from a $1.0 million unrealized gain recognized
during the third quarter of 2006, on a derivative instrument that resulted from a
previously reported profit and loss sharing agreement entered into with a local financial
institution. |
|
|
|
|
Non-interest expenses for the third quarter of 2007 amounted to $75.0 million, compared
to $72.9 million for the same period in 2006. The increase in non-interest expenses for
2007 was mainly due to an increase of approximately $3.3 million on deposit insurance
premium expenses attributable to the new assessment system adopted by the FDIC during 2007.
Although the Corporation had credits to offset the premium increase, these credits were
mainly used against quarterly charges for the first and second quarter of 2007. Refer to
the Non-interest expenses discussion below for additional information. |
|
|
|
|
For the third quarter of 2007, the Corporations income tax expense amounted to $5.6
million, compared to $10.6 million for the same period in 2006. The decrease in the
provision for income taxes for the third quarter of 2007, compared to 2006, was mainly due
to a lower taxable income. |
|
|
|
|
Total assets as of September 30, 2007 amounted to $17.1 billion, a decrease of $303.2
million compared to total assets as of December 31, 2006. The decrease in total assets as
of September 30, 2007, compared to total assets as of December 31, 2006, was mainly the
result of decreases in investment securities and a decrease in the Corporations deferred
tax asset. Notwithstanding the recognition of $146.4 million of securities collateralized
by loans as of September 30, 2007, obtained as part of the execution of several agreements
entered into with R&G Financial Corporation (R&G Financial) as discussed below, the
Corporations investment portfolio decreased by $333.4 million as compared to the balance
as of December 31, 2006. During the third quarter of 2007 the Corporation sold
approximately $300 million of its 10-Year U.S. Treasury investment securities and $113
million of FNMA mortgage-backed securities due to market opportunities and interest rate
margin protection. Also the decrease in the investment securities portfolio resulted from
maturities and prepayments received from the Corporations investment portfolio, mainly
mortgage-backed securities and the Corporations decision to deleverage its investment
portfolio. The decrease in the deferred tax asset was mainly due to the tax impact of the
adoption of SFAS 159, on January 1, 2007, of approximately $58.7 million. |
|
|
|
|
During the first quarter of 2007, the Corporation entered into various agreements with R&G
Financial relating to prior transactions accounted for as commercial loans secured by
mortgage loans and pass-through trust certificates from R&G Financial subsidiaries. First,
through a mortgage payment agreement, R&G Financial paid the Corporation approximately $50
million to reduce the commercial loan that R&G Premier Bank, R&G Financials banking
subsidiary, had outstanding with the Corporation. In addition, the remaining balance of $271
million was re-documented as a secured loan from the Corporation to R&G Financial. Second,
R&G Financial and the Corporation amended various agreements involving, as of the date of the
transaction, approximately $183.8 million of securities collateralized by loans that were
originally sold through five grantor trusts. The modifications to the original agreements
allow the Corporation to treat these transactions as true sales for accounting and legal
purposes. The execution of |
41
|
|
|
the agreements caused a decrease in the Corporations loan portfolio and an increase in the
Corporations investment securities portfolio. |
|
|
|
|
As of September 30, 2007, total liabilities amounted to $15.7 billion, a decrease of
$487.8 million as compared to $16.2 billion as of December 31, 2006. The decrease in total
liabilities was mainly attributable to decreases in securities sold under repurchase
agreements, in line with decreases in investment securities, and to the early redemption
of the Corporations $150 million medium-term note during the second quarter of 2007. The
Corporations decision to redeem the note was influenced by, among other things, the
weighted-average cost of such note, which was above the Corporations weighted-average cost
of funds. |
|
|
|
|
Total loan production for the quarter ended September 30, 2007 was $860.3 million,
compared to $965.6 million for the comparable period in 2006. The decrease in loan
production during 2007 was mainly due to decreases in residential real estate, commercial
and consumer loan originations, which were negatively impacted by worsening economic
conditions in Puerto Rico and the housing market in the U.S. mainland (principally in the
state of Florida), and stricter underwriting guidelines. |
|
|
|
|
Total non-performing loans as of September 30, 2007 amounted to $404.7 million compared
to $252.1 million as of December 31, 2006. The increase in non-performing loans was mainly
attributable to the previously described classification as non-accrual of one loan
relationship in the Miami Agency of approximately $60.5 million and the continued increase
in non-performing residential real estate loans in Puerto Rico of approximately $81.6
million, as compared to the balance as of December 31, 2006. The borrowers financial
condition along with current market conditions and the conversion stage of the underlying
collateral properties resulted in a decline in the value of two properties, located in
Florida and North Carolina, this caused the recognition of an impairment charge of
approximately $8.1 million during the third quarter of 2007. The Corporation has already
started foreclosure proceedings on the real estate collaterals of the impaired loans
relationship from the Miami Agency. Since the third quarter of 2006, the Corporation
decided to limit the origination and reduce the exposure to condo conversion loans in the
U.S. mainland. As a result, the condo conversion loan portfolio decreased from its peak in
May 2006 of approximately $653 million to approximately $337 million as of September 30,
2007, including the $60.5 million in non-accrual loans. In view of current conditions, the
Corporation may experience further deterioration in this portfolio as the market attempts
to absorb an oversupply of available property inventory in the face of the deteriorating
real estate market. However, the Corporation expects a stable performance on its loan
portfolio in the U.S. mainland due to the overall loan-to-value ratios and the financial
condition of borrowers. |
42
Critical Accounting Policies and Practices
The accounting principles of the Corporation and the methods of applying these principles
conform with generally accepted accounting principles in the United States and to general practices
within the banking industry. The Corporations critical accounting policies relate to the 1)
allowance for loan and lease losses; 2) other-than-temporary impairments; 3) income taxes; 4)
classification and related values of investment securities; 5) valuation of financial instruments;
and 6) derivative financial instruments. These critical accounting policies involve judgments,
estimates and assumptions made by management that affect the recorded assets and liabilities and
contingent assets and liabilities disclosed as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual results could differ
from estimates, if different assumptions or conditions prevail. Certain determinations inherently
have greater reliance on the use of estimates, assumptions, and judgments and, as such, have a
greater possibility of producing results that could be materially different than those originally
reported.
The Corporations critical accounting policies are described in the Management Discussion and
Analysis of Financial Condition and Results of Operations section of First BanCorps 2006 Annual
Report on Form 10-K.
Recently Adopted Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS 159. This
Statement allows entities the option to measure certain financial assets and liabilities at fair
value with changes in fair value reflected in earnings. The fair value option may be applied on an
instrument-by-instrument basis. This Statement is effective for periods after November 15, 2007,
however, early adoption is permitted provided that the entity also elects to apply the provisions
of SFAS 157, Fair Value Measurements. The Corporation adopted SFAS 159 and SFAS 157 effective
January 1, 2007. The Corporation decided to early adopt SFAS 159 for the callable brokered
certificates of deposit and a portion of the callable fixed medium-term notes, both of which were
hedged with interest rate swaps (SFAS 159 liabilities). First BanCorp had been following the
long-haul method of accounting, which was adopted on April 3, 2006, under SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, for the portfolio of callable interest rate swaps,
callable brokered CDs and callable notes. One of the main considerations in determining to early
adopt SFAS 159 for these instruments was to eliminate the operational procedures required by the
long-haul method of accounting in terms of documentation, effectiveness assessment, and manual
procedures followed by the Corporation to fulfill the requirements specified by SFAS 133.
With the Corporations elimination of the use of the long-haul method in connection with the
adoption of SFAS 159, the Corporation will no longer amortize or accrete the basis adjustment for
the SFAS 159 liabilities. The basis adjustment amortization or accretion is the reversal of the
change in value of the hedged brokered CDs and medium-term notes recognized since the
implementation of the long-haul method. Since the time the Corporation implemented the long-haul
method, it has recognized changes in the value of the hedged brokered
CDs and medium-term notes based on the expected call date of the instruments. The adoption of SFAS
159 also requires the recognition, as part of the initial adoption adjustment to retained earnings,
of all of the unamortized placement fees that were paid to broker counterparties upon the issuance
of the elected brokered CDs and medium-term notes. The Corporation previously amortized those fees
through earnings based on the expected call date of the instruments. SFAS 159 also establishes that
the accrued interest should be reported as part of the fair value of the financial instruments
elected to be measured at fair value.
In June 2006, the FASB issued Financial Interpretation No. (FIN) 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109. This interpretation
clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS 109,
Accounting for Income Taxes. This interpretation provides a recognition threshold and measurement
attribute for the financial statement recognition
43
and measurement of a tax position taken or expected to be taken in a tax return. This
interpretation also provides guidance on derecognition, classification, interest and penalties,
accounting for interim periods, disclosure and transition. This interpretation is effective for
periods beginning after December 15, 2006. The Corporation adopted FIN 48 effective January 1,
2007.
For additional information and further details on the adoption of SFAS 157, SFAS 159 and FIN
48 as well as other recently adopted accounting pronouncements, refer to Notes 1, 13 and 14 of the
accompanying unaudited interim consolidated financial statements.
Net Interest Income
Net interest income is the excess of interest earned by First BanCorp on its interest-earning
assets over the interest incurred on its interest-bearing liabilities. First BanCorps net
interest income is subject to interest rate risk due to the re-pricing and maturity mismatch of the
Corporations assets and liabilities. Net interest income for the quarter and nine-month period
ended September 30, 2007 was $105.0 million and $339.7 million, respectively, compared to $122.7
million and $321.8 million, respectively, for the comparable periods in 2006. On a tax equivalent
basis, excluding the changes in the fair value of derivative instruments, the ineffective portion
resulting from fair value hedge accounting, the basis adjustment amortization or accretion and
unrealized gains and losses on SFAS 159 liabilities, net interest income for the quarter and
nine-month period ended September 30, 2007 was $114.9 million and $356.2 million, respectively,
compared to $124.4 million and $409.0 million, respectively, for the same periods in 2006.
Effective January 1, 2007, the Corporation discontinued the use of fair value hedge accounting
under SFAS 133 for interest rate swaps that hedge the $150 million medium-term note. The
Corporations decision was based on the determination that the interest rate swaps were no longer
effective in offsetting the changes in the fair value of the $150 million medium-term note. After
discontinuance of hedge accounting, the basis adjustment, which represents the basis differential
between the market value and the book value of the $150 million medium-term note recognized at the
inception of fair value hedge accounting on April 3, 2006, as well as changes in fair value
recognized after the inception until the discontinuance of fair value hedge accounting on January
1, 2007, was amortized or accreted over the life of the liability as a yield adjustment. The $150
million medium-term note was redeemed prior to its maturity during the second quarter of 2007.
Part I of the following table presents average volumes and rates on a tax equivalent basis and
Part II describes the respective extent to which changes in interest rates and changes in volume of
interest-related assets and liabilities have affected the Corporations interest income and
interest expense during the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to (i) changes in
volume (changes in volume multiplied by prior period rates), (ii) changes in rate (changes in rate
multiplied by prior period volumes). Rate-volume variances (changes in rate multiplied by the
changes in volume) have been allocated to the changes in volume and changes in rate based upon
their respective percentage of the combined totals.
For periods after the adoption of fair value hedge accounting and SFAS 159, the net interest
income is computed on a tax equivalent basis by excluding: (1) the change in the fair value of
derivative instruments, (2) the ineffective portion of designated hedges, (3) the basis adjustment
amortization or accretion and (4) unrealized gains or losses on SFAS 159 liabilities. For periods
prior to the adoption of hedge accounting, the net interest income is computed on a tax equivalent
basis by excluding the impact of the change in the fair value of derivatives (refer to explanation
below regarding changes in the fair value of derivative instruments).
44
Part I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume |
|
|
Interest Income (1) / expense |
|
|
Average rate (1) |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Quarter ended September 30, |
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments |
|
$ |
743,628 |
|
|
$ |
2,300,294 |
|
|
$ |
9,418 |
|
|
$ |
31,435 |
|
|
|
5.02 |
% |
|
|
5.42 |
% |
Government obligations (2) |
|
|
2,781,044 |
|
|
|
2,825,929 |
|
|
|
40,694 |
|
|
|
41,202 |
|
|
|
5.81 |
% |
|
|
5.78 |
% |
Mortgage-backed securities |
|
|
2,220,250 |
|
|
|
2,598,632 |
|
|
|
27,954 |
|
|
|
31,407 |
|
|
|
5.00 |
% |
|
|
4.79 |
% |
Corporate bonds |
|
|
7,711 |
|
|
|
4,536 |
|
|
|
144 |
|
|
|
81 |
|
|
|
7.41 |
% |
|
|
7.05 |
% |
FHLB stock |
|
|
43,919 |
|
|
|
22,998 |
|
|
|
802 |
|
|
|
383 |
|
|
|
7.24 |
% |
|
|
6.61 |
% |
Equity securities |
|
|
7,033 |
|
|
|
28,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments (3) |
|
|
5,803,585 |
|
|
|
7,781,362 |
|
|
|
79,012 |
|
|
|
104,508 |
|
|
|
5.40 |
% |
|
|
5.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
2,942,505 |
|
|
|
2,676,886 |
|
|
|
47,093 |
|
|
|
44,176 |
|
|
|
6.35 |
% |
|
|
6.55 |
% |
Construction loans |
|
|
1,469,983 |
|
|
|
1,552,151 |
|
|
|
30,070 |
|
|
|
34,526 |
|
|
|
8.12 |
% |
|
|
8.83 |
% |
Commercial loans |
|
|
4,767,201 |
|
|
|
4,513,941 |
|
|
|
90,528 |
|
|
|
87,429 |
|
|
|
7.53 |
% |
|
|
7.68 |
% |
Finance leases |
|
|
384,302 |
|
|
|
333,170 |
|
|
|
8,350 |
|
|
|
7,397 |
|
|
|
8.62 |
% |
|
|
8.81 |
% |
Consumer loans |
|
|
1,713,625 |
|
|
|
1,790,141 |
|
|
|
50,587 |
|
|
|
54,532 |
|
|
|
11.71 |
% |
|
|
12.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (4) (5) |
|
|
11,277,616 |
|
|
|
10,866,289 |
|
|
|
226,628 |
|
|
|
228,060 |
|
|
|
7.97 |
% |
|
|
8.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
17,081,201 |
|
|
$ |
18,647,651 |
|
|
$ |
305,640 |
|
|
$ |
332,568 |
|
|
|
7.10 |
% |
|
|
7.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
11,429,146 |
|
|
$ |
12,040,646 |
|
|
$ |
142,186 |
|
|
$ |
148,394 |
|
|
|
4.94 |
% |
|
|
4.89 |
% |
Other borrowed funds |
|
|
3,183,421 |
|
|
|
4,448,880 |
|
|
|
39,383 |
|
|
|
56,849 |
|
|
|
4.91 |
% |
|
|
5.07 |
% |
FHLB advances |
|
|
671,026 |
|
|
|
214,920 |
|
|
|
9,172 |
|
|
|
2,876 |
|
|
|
5.42 |
% |
|
|
5.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities (6) |
|
$ |
15,283,593 |
|
|
$ |
16,704,446 |
|
|
$ |
190,741 |
|
|
$ |
208,119 |
|
|
|
4.95 |
% |
|
|
4.94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
$ |
114,899 |
|
|
$ |
124,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.15 |
% |
|
|
2.14 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.67 |
% |
|
|
2.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume |
|
|
Interest Income (1) / expense |
|
|
Average rate (1) |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Nine-month period ended September 30, |
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments |
|
$ |
526,564 |
|
|
$ |
1,785,282 |
|
|
$ |
20,084 |
|
|
$ |
66,314 |
|
|
|
5.10 |
% |
|
|
4.97 |
% |
Government obligations (2) |
|
|
2,715,495 |
|
|
|
2,850,894 |
|
|
|
120,237 |
|
|
|
128,679 |
|
|
|
5.92 |
% |
|
|
6.03 |
% |
Mortgage-backed securities |
|
|
2,313,790 |
|
|
|
2,601,921 |
|
|
|
87,222 |
|
|
|
99,644 |
|
|
|
5.04 |
% |
|
|
5.12 |
% |
Corporate bonds |
|
|
7,711 |
|
|
|
9,386 |
|
|
|
369 |
|
|
|
478 |
|
|
|
6.39 |
% |
|
|
7.23 |
% |
FHLB stock |
|
|
43,183 |
|
|
|
27,322 |
|
|
|
2,004 |
|
|
|
1,644 |
|
|
|
6.20 |
% |
|
|
8.04 |
% |
Equity securities |
|
|
9,244 |
|
|
|
29,935 |
|
|
|
3 |
|
|
|
213 |
|
|
|
0.04 |
% |
|
|
0.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments (3) |
|
|
5,615,987 |
|
|
|
7,304,740 |
|
|
|
229,919 |
|
|
|
296,972 |
|
|
|
5.47 |
% |
|
|
5.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
2,875,978 |
|
|
|
2,563,973 |
|
|
|
139,461 |
|
|
|
126,313 |
|
|
|
6.48 |
% |
|
|
6.59 |
% |
Construction loans |
|
|
1,467,480 |
|
|
|
1,449,775 |
|
|
|
93,286 |
|
|
|
93,429 |
|
|
|
8.50 |
% |
|
|
8.62 |
% |
Commercial loans |
|
|
4,759,132 |
|
|
|
5,938,545 |
|
|
|
271,231 |
|
|
|
313,102 |
|
|
|
7.62 |
% |
|
|
7.05 |
% |
Finance leases |
|
|
378,134 |
|
|
|
314,381 |
|
|
|
24,929 |
|
|
|
21,119 |
|
|
|
8.81 |
% |
|
|
8.98 |
% |
Consumer loans |
|
|
1,741,416 |
|
|
|
1,779,951 |
|
|
|
153,067 |
|
|
|
160,734 |
|
|
|
11.75 |
% |
|
|
12.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (4) (5) |
|
|
11,222,140 |
|
|
|
12,046,625 |
|
|
|
681,974 |
|
|
|
714,697 |
|
|
|
8.12 |
% |
|
|
7.93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
16,838,127 |
|
|
$ |
19,351,365 |
|
|
$ |
911,893 |
|
|
$ |
1,011,669 |
|
|
|
7.24 |
% |
|
|
6.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
10,780,277 |
|
|
$ |
12,293,710 |
|
|
$ |
394,498 |
|
|
$ |
418,152 |
|
|
|
4.89 |
% |
|
|
4.55 |
% |
Other borrowed funds |
|
|
3,553,621 |
|
|
|
4,812,494 |
|
|
|
134,853 |
|
|
|
174,582 |
|
|
|
5.07 |
% |
|
|
4.85 |
% |
FHLB advances |
|
|
654,482 |
|
|
|
272,023 |
|
|
|
26,370 |
|
|
|
9,921 |
|
|
|
5.39 |
% |
|
|
4.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities (6) |
|
$ |
14,988,380 |
|
|
$ |
17,378,227 |
|
|
$ |
555,721 |
|
|
$ |
602,655 |
|
|
|
4.96 |
% |
|
|
4.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
$ |
356,172 |
|
|
$ |
409,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.28 |
% |
|
|
2.35 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.83 |
% |
|
|
2.83 |
% |
|
|
|
(1) |
|
On a tax equivalent basis. The tax equivalent yield was estimated by dividing the interest
rate spread on exempt assets by (1 less Puerto Rico statutory tax rate (39% for 2007 and 43.5%
for the Corporations Puerto Rico banking subsidiary in 2006 and 41.5% for all other
subsidiaries in 2006)) and adding to it the cost of interest-bearing liabilities. When
adjusted to a tax equivalent basis, yields on taxable and exempt assets are comparable.
Changes in the fair value of derivative instruments (including the ineffective portion after
the adoption of hedge accounting in the second quarter of 2006), unrealized gains or losses on
SFAS 159 liabilities, and basis adjustment amortization or accretion are excluded from
interest income and interest expense for average rate calculation purposes because the changes
in valuation do not affect interest paid or received. |
|
(2) |
|
Government obligations include debt issued by government sponsored agencies. |
|
(3) |
|
Unrealized gains and losses in available-for-sale securities are excluded from the average
volumes. |
45
|
|
|
(4) |
|
Average loan balances include the average of non-accruing loans, on which interest income is
recognized when collected. |
|
(5) |
|
Interest income on loans includes $2.0 million and $4.3 million for the third quarter of 2007
and 2006, respectively, and $9.0 million and $11.3 million for the nine-month period ended
September 30, 2007 and 2006, respectively, of income from prepayment penalties and late fees
related to the Corporations loan portfolio. |
|
(6) |
|
Unrealized gains and losses on SFAS 159 liabilities are excluded from the average volumes. |
Part II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
|
Nine-month period ended September 30, |
|
|
|
2007 compared to 2006 |
|
|
2007 compared to 2006 |
|
|
|
Increase (decrease) |
|
|
Increase (decrease) |
|
|
|
Due to: |
|
|
Due to: |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Interest income on interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments |
|
$ |
(19,868 |
) |
|
$ |
(2,149 |
) |
|
$ |
(22,017 |
) |
|
$ |
(47,450 |
) |
|
$ |
1,220 |
|
|
$ |
(46,230 |
) |
Government obligations |
|
|
(668 |
) |
|
|
160 |
|
|
|
(508 |
) |
|
|
(6,083 |
) |
|
|
(2,359 |
) |
|
|
(8,442 |
) |
Mortgage-backed securities |
|
|
(4,645 |
) |
|
|
1,192 |
|
|
|
(3,453 |
) |
|
|
(10,883 |
) |
|
|
(1,539 |
) |
|
|
(12,422 |
) |
Corporate bonds |
|
|
59 |
|
|
|
4 |
|
|
|
63 |
|
|
|
(80 |
) |
|
|
(29 |
) |
|
|
(109 |
) |
FHLB stock |
|
|
380 |
|
|
|
39 |
|
|
|
419 |
|
|
|
847 |
|
|
|
(487 |
) |
|
|
360 |
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88 |
) |
|
|
(122 |
) |
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
(24,742 |
) |
|
|
(754 |
) |
|
|
(25,496 |
) |
|
|
(63,737 |
) |
|
|
(3,316 |
) |
|
|
(67,053 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
4,293 |
|
|
|
(1,376 |
) |
|
|
2,917 |
|
|
|
15,274 |
|
|
|
(2,126 |
) |
|
|
13,148 |
|
Construction loans |
|
|
(1,769 |
) |
|
|
(2,687 |
) |
|
|
(4,456 |
) |
|
|
1,137 |
|
|
|
(1,280 |
) |
|
|
(143 |
) |
Commercial loans (1) |
|
|
4,832 |
|
|
|
(1,733 |
) |
|
|
3,099 |
|
|
|
(64,820 |
) |
|
|
22,949 |
|
|
|
(41,871 |
) |
Finance leases |
|
|
1,118 |
|
|
|
(165 |
) |
|
|
953 |
|
|
|
4,249 |
|
|
|
(439 |
) |
|
|
3,810 |
|
Consumer loans |
|
|
(2,289 |
) |
|
|
(1,656 |
) |
|
|
(3,945 |
) |
|
|
(3,438 |
) |
|
|
(4,229 |
) |
|
|
(7,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
6,185 |
|
|
|
(7,617 |
) |
|
|
(1,432 |
) |
|
|
(47,598 |
) |
|
|
14,875 |
|
|
|
(32,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
(18,557 |
) |
|
|
(8,371 |
) |
|
|
(26,928 |
) |
|
|
(111,335 |
) |
|
|
11,559 |
|
|
|
(99,776 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on interest-bearing
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
(7,536 |
) |
|
|
1,328 |
|
|
|
(6,208 |
) |
|
|
(2,207 |
) |
|
|
(21,447 |
) |
|
|
(23,654 |
) |
Other borrowed funds |
|
|
(15,709 |
) |
|
|
(1,757 |
) |
|
|
(17,466 |
) |
|
|
(46,793 |
) |
|
|
7,064 |
|
|
|
(39,729 |
) |
FHLB advances |
|
|
6,234 |
|
|
|
62 |
|
|
|
6,296 |
|
|
|
2,715 |
|
|
|
13,734 |
|
|
|
16,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
(17,011 |
) |
|
|
(367 |
) |
|
|
(17,378 |
) |
|
|
(46,285 |
) |
|
|
(649 |
) |
|
|
(46,934 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
(1,546 |
) |
|
$ |
(8,004 |
) |
|
$ |
(9,550 |
) |
|
$ |
(65,050 |
) |
|
$ |
12,208 |
|
|
$ |
(52,842 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Significant decreases in volume for the nine-month period ended September 30, 2007
substantially relates to the payment received of $2.4 billion from a local financial institution to
partially extinguish a secured commercial loan during the second quarter of 2006. |
A portion of the Corporations interest-earning assets, mostly investments in obligations of
some U.S. Government agencies and sponsored entities, generate interest which is exempt from
income tax, principally in Puerto Rico. Also, interest and gains on sale of investments held by
the Corporations international banking entities are tax-exempt under the Puerto Rico tax law. To
facilitate the comparison of all interest data related to these assets, the interest income has
been converted to a taxable equivalent basis. The tax equivalent yield was estimated by dividing
the interest rate spread on exempt assets by (1 less the Puerto Rico statutory tax rate (39.0% for
2007 and 43.5% for the Corporations Puerto Rico banking subsidiary in 2006 and 41.5% for all
other subsidiaries in 2006)) and adding to it the average cost of interest-bearing liabilities.
The computation considers the interest expense disallowance required by the Puerto Rico tax law.
The exclusion of changes in the fair value of derivative instruments, including the
ineffective portion for designated hedges after adoption of fair value hedge accounting, the basis
adjustment amortization or accretion, and unrealized gains or losses on SFAS 159 liabilities from
the detailed analysis of net interest income provides additional information about the
Corporations net interest income and facilitates comparability and analysis. The changes in the
fair value of the financial instruments, the basis adjustment amortization or accretion, and
unrealized gains or losses on SFAS 159 liabilities have no effect on interest due or interest
earned on interest-bearing liabilities or interest-earning assets, respectively, or on interest
payments exchanged with swap counterparties.
46
The following table reconciles interest income on a tax equivalent basis set forth in Part I
above to interest income set forth in the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month period ended |
|
|
|
Quarter ended September 30, |
|
|
September 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Interest income on interest-earning assets on a tax equivalent basis |
|
$ |
305,640 |
|
|
$ |
332,568 |
|
|
$ |
911,893 |
|
|
$ |
1,011,669 |
|
Less: tax equivalent adjustments |
|
|
(3,259 |
) |
|
|
(5,377 |
) |
|
|
(10,682 |
) |
|
|
(22,771 |
) |
Plus: net unrealized (losses) gains on derivatives |
|
|
(6,450 |
) |
|
|
(9,480 |
) |
|
|
(824 |
) |
|
|
961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
295,931 |
|
|
$ |
317,711 |
|
|
$ |
900,387 |
|
|
$ |
989,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of the changes in fair values of interest rate
swap and interest rate cap agreements, which are included in interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month period ended |
|
|
|
Quarter ended September 30, |
|
|
September 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Unrealized (losses) gains on derivatives
(economic undesignated hedges): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
$ |
(4,594 |
) |
|
$ |
(7,197 |
) |
|
$ |
(246 |
) |
|
$ |
422 |
|
Interest rate swaps on corporate bonds |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
27 |
|
Interest rate swaps on loans |
|
|
(1,856 |
) |
|
|
(2,279 |
) |
|
|
(578 |
) |
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (losses) gains on
derivatives (economic undesignated hedges) |
|
$ |
(6,450 |
) |
|
$ |
(9,480 |
) |
|
$ |
(824 |
) |
|
$ |
961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of interest expense for the quarter and
nine-month period ended September 30, 2007 and 2006. As previously stated, the net interest margin
analysis excludes the changes in the fair value of derivatives, unrealized gains or losses on SFAS
159 liabilities, the ineffective portion of derivative instruments designated as fair value hedges
under SFAS 133, and the basis adjustment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month period ended |
|
|
|
Quarter ended September 30, |
|
|
September 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Interest expense on interest-bearing liabilities |
|
$ |
184,652 |
|
|
$ |
195,630 |
|
|
$ |
537,520 |
|
|
$ |
583,154 |
|
Net interest incurred on interest rate swaps |
|
|
3,428 |
|
|
|
5,980 |
|
|
|
10,775 |
|
|
|
4,273 |
|
Amortization of placement fees on brokered CDs |
|
|
2,661 |
|
|
|
6,491 |
|
|
|
6,919 |
|
|
|
15,196 |
|
Amortization of placement fees on medium-term notes |
|
|
|
|
|
|
18 |
|
|
|
507 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense excluding net unrealized and realized
losses (gains) on derivatives (designated
and economic undesignated hedges), net unrealized
losses on SFAS 159 liabilities
and
(accretion) amortization of basis adjustments |
|
|
190,741 |
|
|
|
208,119 |
|
|
|
555,721 |
|
|
|
602,655 |
|
Net unrealized and realized losses (gains) on derivatives (designated and economic
undesignated hedges) and SFAS 159 liabilities |
|
|
161 |
|
|
|
(12,264 |
) |
|
|
7,048 |
|
|
|
64,987 |
|
(Accretion) amortization of basis adjustment |
|
|
|
|
|
|
(846 |
) |
|
|
(2,061 |
) |
|
|
458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
190,902 |
|
|
$ |
195,009 |
|
|
$ |
560,708 |
|
|
$ |
668,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
The following table summarizes the components of the net unrealized and realized gains and
losses on derivatives (designated and economic undesignated hedges) and net unrealized losses on
SFAS 159 liabilities which are included in interest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month period ended |
|
|
|
Quarter ended September 30, |
|
|
September 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Unrealized gains on derivatives (designated hedges ineffective portion): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps on brokered CDs |
|
$ |
|
|
|
$ |
(1,013 |
) |
|
$ |
|
|
|
$ |
(3,200 |
) |
Interest rate swaps on medium-term notes |
|
|
|
|
|
|
(378 |
) |
|
|
|
|
|
|
(165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on derivatives (designated hedges ineffective portion) |
|
|
|
|
|
|
(1,391 |
) |
|
|
|
|
|
|
(3,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized and realized (gains) losses on derivatives (economic undesignated
hedges): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and other derivatives on brokered CDs |
|
|
(61,971 |
) |
|
|
(10,873 |
) |
|
|
87 |
|
|
|
64,269 |
|
Interest rate swaps and other derivatives on medium-term notes |
|
|
(358 |
) |
|
|
|
|
|
|
999 |
|
|
|
4,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized and realized (gains) losses on derivatives (economic
undesignated hedges) |
|
|
(62,329 |
) |
|
|
(10,873 |
) |
|
|
1,086 |
|
|
|
68,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss (gain) on SFAS 159 liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on brokered CDs |
|
|
62,973 |
|
|
|
|
|
|
|
6,575 |
|
|
|
|
|
Unrealized gain on medium-term notes |
|
|
(483 |
) |
|
|
|
|
|
|
(613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on SFAS 159 liabilities |
|
|
62,490 |
|
|
|
|
|
|
|
5,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized and realized losses (gains) on derivatives
(designated and economic undesignated hedges) and SFAS 159 liabilities |
|
$ |
161 |
|
|
$ |
(12,264 |
) |
|
$ |
7,048 |
|
|
$ |
64,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of the (accretion) and amortization of basis
adjustment which are included in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month period ended |
|
|
|
Quarter ended September 30, |
|
|
September 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
(Accretion) amortization of basis adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps on brokered CDs |
|
$ |
|
|
|
$ |
(861 |
) |
|
$ |
|
|
|
$ |
418 |
|
Interest rate swaps on medium-term notes |
|
|
|
|
|
|
15 |
|
|
|
(2,061 |
) |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accretion) amortization of basis adjustment |
|
$ |
|
|
|
$ |
(846 |
) |
|
$ |
(2,061 |
) |
|
$ |
458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on interest-earning assets primarily represents interest earned on loans
receivable and investment securities.
Interest expense on interest-bearing liabilities primarily represents interest paid on
brokered CDs, branch-based deposits, repurchase agreements and notes payable.
Net interest incurred or realized on interest rate swaps primarily represents net interest
exchanged on swaps that hedge (economically or under fair value hedge accounting) brokered CDs and
medium-term notes.
The amortization of broker placement fees represents the amortization of fees paid to brokers
upon issuance of related financial instruments (i.e., brokered CDs). For 2007, the amortization
of broker placement fees includes the derecognition of the unamortized balance of placement fees
related to the $150 million note redeemed prior to its contractual maturity during the second
quarter as well as the amortization of placement fees for brokered CDs not elected for fair value
option under SFAS 159.
Unrealized and realized gains or losses on derivatives represent: (1) for economic or
undesignated hedges, including derivative instruments economically hedging SFAS 159 liabilities -
changes in the fair value of derivatives, primarily interest rate swaps, that economically hedge
liabilities (i.e., brokered CDs and medium-term notes) or assets (i.e., loans and corporate
bonds), and (2) for designated hedges the ineffectiveness represented by the difference between
the changes in the fair value of the derivative instrument (i.e., interest rate swaps) and changes
in fair value of the hedged item (i.e., brokered CDs and medium-term notes).
48
For the third quarter of 2007 the Corporation recognized a realized loss of approximately
$10.7 million related to the termination of interest rate swaps that were no longer economically
hedging brokered CDs as their notional amounts exceeded the balances of the brokered CDs. This was
in addition to a previously realized loss of $5.4 million, recognized during the second quarter of
2007, related to the termination of an interest rate swap that economically hedged the $150
million medium-term note redeemed prior to its stated contractual maturity. The realized losses
were substantially offset by the reversal of the cumulative mark-to-market valuation of the swaps as of the date
of the transactions, resulting in a net reduction of earnings of
approximately $0.9 million for the nine-month period ended September
30, 2007.
Unrealized gains or losses on SFAS 159 liabilities represent the change in the fair value of
liabilities (medium-term notes and brokered CDs), other than the accrual of interests, for which
the Corporation elected the fair value option under SFAS 159.
For 2007, the basis adjustment which represents the basis differential between the market
value and the book value of the $150 million medium-term note recognized at the inception of fair
value hedge accounting on April 3, 2006, as well as changes in fair value recognized after the
inception until the discontinuance of fair value hedge accounting on January 1, 2007, was
amortized or accreted over the life of the liability as a yield adjustment. The unamortized
balance of the basis adjustment was derecognized as part of the redemption of the $150 million
note resulting in an adjustment to earnings of $1.9 million recognized as an accretion of basis
adjustment, during the second quarter of 2007. For 2006, the basis adjustment represents the
amortization or accretion of the basis differential between the market value and the book value of
the hedged liabilities recognized at the inception of fair value hedge accounting that amortized
or accreted to interest expense based on the expected maturity of the hedged liabilities as
changes in value since the inception of the long-haul method were recorded to these hedged items.
As shown on the tables above, the results of operations for the third quarter and first nine
months of 2007 and 2006 were impacted by changes in the valuation of derivative instruments that
hedge economically or under fair value designation the Corporations brokered CDs and medium-term
notes and unrealized gains and losses on SFAS 159 liabilities. The change in the valuation of
derivative instruments, net unrealized losses on SFAS 159 liabilities, the basis adjustment and the
ineffective portion on designated hedges, recorded as part of net interest income resulted in net
unrealized and realized losses of $6.6 million and $5.8 million for the third quarter and first
nine months of 2007, respectively, compared to net unrealized gains of $3.6 million and net
unrealized losses of $64.5 million for the third quarter and first nine months of 2006,
respectively.
Derivative instruments, such as interest rate swaps, are subject to market risk. While the
Corporation does have certain trading derivatives to facilitate customer transactions, the
Corporation does not utilize derivative instruments for speculative purposes. The Corporations
derivatives are mainly composed of interest rate swaps that are used to convert the fixed interest
payments on its brokered CDs and medium-term notes to variable payments (receive fixed/pay
floating). Refer to the Risk Management Derivatives discussion below for further details
concerning the notional amounts of derivative instruments and additional information. As is the
case with investment securities, the market value of derivative instruments is largely a function
of the financial markets expectations regarding the future direction of interest rates.
Accordingly, current market values are not necessarily indicative of the future impact of the
values of derivative instruments on net interest
income. This will depend, for the most part, on the shape of the yield curve as well as the level
of interest rates.
For the quarter ended September 30, 2007, First BanCorps net interest income decreased by
$17.7 million, or 14%, compared to net interest income for the quarter ended September 30, 2006.
The decrease in net interest income for the third quarter of 2007 was mainly driven by fluctuations
resulting from the accounting of the fair value of financial instruments, in particular interest
rate swaps not designated or not qualifying for fair value hedge accounting under SFAS 133 in 2006,
declining loan yields attributable to a higher balance of loans in non-accrual status, the
continued flat-to-inverted yield curve and to a lesser extent a reduction in the Corporations
average interest-earning assets of $1.6 billion, or 8%, as compared to the same period for 2006.
49
The Corporation recorded net unrealized and realized losses on derivative instruments and
hedging activities (including unrealized losses on SFAS 159 liabilities) of $6.6 million for the
third quarter of 2007, compared to net unrealized gains of $3.6 million for the same period in
2006. The negative fluctuation is mainly related to certain interest rate swaps that economically
hedged brokered CDs that were not designated or did not qualify for fair value hedge accounting
under SFAS 133 in 2006. The Corporation recorded unrealized gains of approximately $10.9 million
for the third quarter of 2006 on the above noted interest rate swaps not designated under fair
value hedge accounting in 2006. The Corporation decided to early adopt SFAS 159 for its callable
brokered CDs and a portion of its callable fixed medium-term note on January 2007, thus unrealized
gains or losses on the fair value of derivative instruments were partially offset by changes in
the fair value of SFAS 159 liabilities. Refer to the table above that summarizes the components of
the net unrealized and realized gains and losses on derivatives (designated and economic
undesignated hedges) and net unrealized losses on SFAS 159 liabilities which are included in
interest expense.
The reduction in net interest income for the third quarter of 2007, as compared to the same
period of 2006, was also attributable to the increase in the balance of loans in non-accruing
status. Non-accrual loans increased by approximately $89.1 million on a sequential quarter,
compared to an increase of $47.9 million experienced during the third quarter of 2006.
The decrease in average interest-earnings assets for the quarter ended September 30, 2007
compared to the same period a year ago resulted from a decrease of $2.0 billion in average
investments, in particular short-term investments and mortgage-backed securities, partially offset
by an increase in average loans of $411.3 million. The loan repayment of $2.4 billion received
during the second quarter of 2006 from a local financial institution was initially invested in
short-term investments and subsequently used mainly to pay down maturing brokered CDs during the
latter part of the third quarter of 2006, thus deleveraging the balance sheet. This decision
allowed the Corporation to protect its net interest margin from further compression, since most of
the brokered CDs are tied to short-term rates and would have repriced at higher rates causing
negative carry in the investment portfolio.
Notwithstanding the decrease in net interest income in absolute terms, the Corporation has
been able to maintain its net interest margin. Net interest margin on a tax-equivalent basis
remained relatively stable at 2.67% for the third quarter of 2007, compared to 2.65% for the same
period in 2006 as decreases in the yield of loans mainly attributable to increases in non-accrual
balances were offset by higher margins on investment securities and the relatively unchanged
overall cost of funds when comparing both periods. The Corporation was able to maintain a flat
overall cost of funding due to the repayment of repurchase agreements and the redemption of the
Corporations callable $150 million medium-term note (the $150 million medium-term note) which
carried a cost higher than the overall cost of funding. This was partially offset by the increase
in the cost of funds for time deposits, principally brokered CDs, as short-term rates experienced
during the third quarter of 2007 were slightly higher than those experienced during the third
quarter of 2006, in particular due to the recent spike in the 3-month LIBOR during August and early
September of 2007. Higher yields on investment securities were attributable in part to the sale of
lower yielding securities during the third quarter of 2007. Proceeds from the sale of securities
were used to pay down repurchase agreements that carried a higher cost than the yield of the
securities sold. During the second and third quarter of 2007 the Corporation temporarily invested
in short-term investments a portion of the
proceeds obtained from newly-issued brokered CDs in anticipation of expected maturities during the
latter part of the year. The short-term investments carried a yield slightly lower than the cost
of the brokered CDs, thus, affecting the net interest margin rate. The flat-to-inverted yield
curve continued to put pressure on the return on earning assets as funding costs of liabilities
tied to short-term rates remained higher than yields on long-term assets such as mortgage-backed
securities.
The decrease in net interest income was partially offset by a decrease in net interest
settlements payments on derivative instruments due to the termination of certain interest rate
swaps during 2007 that were no longer economically hedging brokered CDs
as the notional balances
exceeded those of the brokered CDs
50
and the termination of an interest rate swap that economically
hedged the $150 million medium-term note redeemed during the second quarter of 2007. The
Corporation enters into interest rate swaps that have the effect of converting its fixed-rate
brokered certificates of deposits as well as its fixed-rate and step rate notes payable to
LIBOR-based variable-rate liabilities. For the third quarter of 2007, the net settlement payments
on such interest rate swaps resulted in charges to interest expense of $3.4 million, compared to
$6.0 million for the comparable period in 2006.
For the nine-month period ended September 30, 2007, First BanCorps net interest income
increased by $17.9 million, or 6%, compared to the same period in 2006. The increase in net
interest income for the first nine months of 2007 was mainly driven by fluctuations in the
valuation of derivative instruments and the adoption of fair value hedge accounting during the
second quarter of 2006 and SFAS 159, effective January 1, 2007, partially offset by a reduction in
the Corporations average interest-earning assets of $2.5 billion, or 13%, compared to the same
period in 2006 and the continued flat-to-inverted yield curve as well as the increase in the level
of non-accrual loans held by the Corporation. For the first nine months of 2007, the change in
the valuation of derivatives and unrealized losses on SFAS 159 liabilities and the basis
adjustment recorded as part of net interest income resulted in net unrealized and realized losses
of $5.8 million, compared to a net unrealized loss of $64.5 million for the same period in 2006.
Prior to the implementation of the long-haul method of effectiveness testing under SFAS 133 on
April 3, 2006, the Corporation recorded as part of interest expense unrealized losses of
approximately $69.7 million in the valuation of derivative instruments during the first quarter of
2006. The Corporation reflected changes in the fair value of derivative instruments as non-hedging
instruments through operations, creating earnings volatility as a result of the accounting
asymmetry created by accounting for the financial liabilities at amortized cost and the
derivatives at fair value. The decrease in average interest-earnings assets for the nine-month
period ended on September 30, 2007, as compared to the same period a year ago, was mainly the
result of a decrease in average loans of $824.5 million and a decrease of $1.7 billion in average
investments including short-term money market investments. The decrease in the Corporations loan
portfolio was primarily due to the repayment of approximately $2.4 billion received from a local
financial institution reducing the balance of a certain secured commercial loan with the Corporation
during the second quarter of 2006. The decrease in the investment portfolio resulted mainly from
the Corporations decision to deleverage its investment portfolio, using proceeds obtained from
the $2.4 billion payment that was initially invested in short-term investments to pay down
maturing brokered CDs during the latter part of the third quarter of 2006 and by not reinvesting
maturities and prepayments received from the Corporations investment portfolio, mainly
mortgage-backed securities. The aforementioned secured commercial
loan partially extinguished,
yielded 150 basis points over 3-month LIBOR. The repayment caused a
reduction of approximately $15.0
million when comparing the net interest income results for the first nine months of 2007 to the
same period in 2006.
Decreases in net interest income for the nine-month period ended on September 30, 2007, as
compared to the same period a year ago, were due to increases in net interest settlement
payments as a result of increases in short-term rates, in particular during the first half of
2006. For the first nine months of 2007, the net settlement payments on such interest rate swaps
resulted in charges to interest expense of $10.8 million, compared to $4.3 million for the
comparable period in 2006.
On a tax equivalent basis, net interest income, excluding the changes in the fair value of
derivative instruments, the ineffective portion of designated hedges, the basis adjustment
amortization or accretion on fair value hedges, and unrealized losses on SFAS 159 liabilities,
decreased by $9.6 million, or 8%, and by $52.8 million, or 13%, for the third quarter and first
nine months of 2007, respectively, compared to the same periods in 2006. The decrease in tax
equivalent net interest income was principally due to declining yield on loans due to higher
balances in non-accruing status, significant decreases in the average volume of interest-earning
assets coupled with a decrease in tax-equivalent adjustments and the continued flat-to-inverted
yield curve. The tax equivalent basis includes an adjustment that increases interest income on
tax-exempt securities and loans by an amount which makes tax-exempt income comparable, on a
pre-tax basis, to the Corporations taxable income. For the third quarter and first nine months of
2007, tax-equivalent adjustments amounted to
51
$3.3 million and $10.7 million, respectively,
compared to $5.4 million and $22.8 million, respectively, for the same periods in 2006. The
decrease in tax-equivalent adjustments was mainly related to decreases in the interest rate spread
on tax-exempt assets due to the sustained flatness of the yield curve as well as changes in the
proportion of tax-exempt assets to total assets and changes in the statutory income tax rate in
Puerto Rico.
First BanCorps net interest spread and margin, on a tax equivalent basis, for the quarter
and nine-month period ended September 30, 2007 were 2.15% and 2.67% and 2.28% and 2.83%,
respectively, compared to 2.14% and 2.65% and 2.35% and 2.83%, respectively, for the same periods
in 2006. The tax equivalent yield on interest-earning assets increased by 2 and 25 basis points
during the third quarter and first nine months of 2007, respectively, compared to the same periods
in 2006, mainly due to an increase in the average yield on investment securities due to the
sale of lower yielding investment securities and the use of short-term investments to pay down
maturing brokered CDs and repurchase agreements, the increase in the proportion of average loans to
total interest-earning assets when evaluating the nine-month period fluctuations, and the
repayment of approximately $2.4 billion from a local financial institution reducing the balance of
lower yielding loans during the second quarter of 2006. These were partially offset by declining
loan yields due to the increase in the amount of non-accrual loans held by the Corporation. The
average rate paid by the Corporation on its interest-bearing liabilities increased by 1 basis
point and 32 basis points during the third quarter and first nine months of 2007 when compared to
same periods in 2006, mainly due to re-pricing of the Corporations interest-bearing deposits,
principally brokered CDs and FHLB advances partially offset by the pay down of high cost
repurchase agreements and the redemption of the $150 million medium-term note.
Provision and Allowance for Loan and Lease Losses
The provision for loan and lease losses is charged to earnings to maintain the allowance for
loan and lease losses at a level that the Corporation considers adequate to absorb probable losses
inherent in the portfolio. The adequacy of the allowance for loan and lease losses is also based
upon a number of additional factors including historical loan and lease loss experience, current
economic conditions, the fair value of the underlying collateral and the financial condition of the
borrowers, and, as such, includes amounts based on judgments and estimates made by the Corporation.
Although the Corporation believes that the allowance for loan and lease losses is adequate,
factors beyond the Corporations control, including factors affecting the economies of Puerto Rico,
the United States (principally the state of Florida), the U.S. Virgin Islands and the British
Virgin Islands may contribute to delinquencies and defaults, thus necessitating additional
reserves.
For the quarter and nine-month period ended on September 30, 2007, the Corporation provided
$34.3 million and $83.8 million, respectively, for loan and lease losses, as compared to $20.6
million and $49.3 million, respectively, for the same periods in 2006.
Refer to the discussions under Credit Risk Management below for an analysis of the allowance
for loan and lease losses and non-performing assets and related ratios.
First BanCorps provision for loan and lease losses for the quarter and nine-month period
ended September 30, 2007 increased by $13.7 million, or 67%, and by $34.5 million, or 70%,
respectively, compared to the same periods in 2006. The increase in the provision for 2007 was
primarily due to an impairment of $8.1 million on four condo conversion loans, with an aggregate
principal balance of $60.5 million, extended to a single borrower through the Miami Agency based on
an updated impairment analysis that incorporated new appraisals. Increases in non-accruing loans
and charge-offs and the growth of the Corporations commercial loan portfolio (other than secured
commercial loans to local financial institutions) also contributed to the increase in the provision
for loan and lease losses. In addition, the higher provision for loan and lease losses during 2007
resulted from increases in the general valuation allowance of its construction and auto loans
portfolio due to deteriorating economic conditions and recent trends in delinquencies and losses.
The increase in non-accrual loans, other than the aforementioned loan relationship in the Miami
Agency, and charge-offs during 2007, as
52
compared to the first nine months of 2006, is attributed to
weak economic conditions in Puerto Rico. Puerto Rico is in the midst of a recession caused by,
among other things, higher utility prices, higher taxes, government budgetary imbalances, the
upward trend in short-term interest rates and the flat-to-inverted yield curve, and higher levels
of oil prices.
The $60.5 million relationship comprises four condo conversion loans that the Corporation
had placed in non-accrual status during the second and third quarter of 2007 and had determined
that no impairment was necessary at that time; such analysis was based on the appraisals used for
the granting of the loans. The Corporation requested new appraisals that showed some collateral
deficiency as compared to the Corporations recorded investment in the loans. The impairment is
mainly attributed to the current stage of completion of two of the four condominium properties, the
underlying collateral. At this stage, the projects are significantly vacant and the collateral
value as appraised on an as rented basis is below the Corporations recorded investment in the
loans. The condo conversion loans typically require less extensive renovation efforts and are
fully funded at the outset and paid down as the condominium units are sold. The borrower in this
relationship experienced financial difficulties that were aggravated by factors such as property
and insurance increased assessments, tightening credit origination standards, overbuilding in
certain areas and general market conditions in the United States. The Miami Agency has been
working with authorized representatives of the borrower for purposes of protecting the
Corporations collateral and obtaining optimal recovery of the loans outstanding.
Although, these economic factors can affect the performance of other construction loan
relationships originated through the Miami Agency, the Corporation expects the portfolio to remain
stable because of overall comfortable loan-to-value ratios and the
financial condition of borrowers. In
terms of the Florida market, the Corporation is not exposed to high-end development areas. The
Corporation lends money for condo-conversions in the affordable market segment, and the collateral
values of such properties have been more stable that in the high-end development areas. The
Corporations Miami Agency loans, except for the aforementioned relationship, continue to perform
adequately, although at slower absorption rates. As of September 30, 2007, there is no other
adversely classified loan in the Miami Agency. If absorption rates on condo conversion loans are
so low that reverting the property to rental property is more beneficial, the Corporations data
shows that the rental market has not suffered significant decreases. Given more conservative
underwriting standards of the banks in general and reduction of market participants in the lending
business, the Corporation believes that the rental market will grow and rental properties are
expected to hold their values.
Refer to the discussion under Credit Risk Management below for additional information
concerning the economy on geographic areas where the Corporation does business and the
Corporations outlook for the performance of its loan portfolio.
Net charge-offs for the third quarter and first nine months of 2007 were $21.8 million and
$64.6 million, respectively, (0.77% of average loans on an annualized basis for each period),
compared to $16.2 million and $46.4 million (0.60% and 0.51%, respectively, of average loans on an
annualized basis) for the same periods in 2006. The increase in net charge-offs for the 2007
periods, compared to 2006, was mainly associated with the
Corporations finance leases commercial
loan and consumer loan portfolio due to higher delinquency levels
experienced during 2007 and to significantly higher recoveries on loans during the third quarter of
2006. The increase in net charge-offs is primarily the result of the aforementioned deteriorating
economic conditions in Puerto Rico. Recoveries made from previously written-off accounts were $1.4
million and $4.2 million for the third quarter and first nine months of 2007, respectively,
compared to $5.1 million and $8.1 million for the same periods in 2006, respectively.
53
Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Nine-Month Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Other service charges on loans |
|
$ |
1,290 |
|
|
$ |
1,228 |
|
|
$ |
5,499 |
|
|
$ |
4,181 |
|
Service charges on deposit accounts |
|
|
3,160 |
|
|
|
3,025 |
|
|
|
9,536 |
|
|
|
9,580 |
|
Mortgage banking activities |
|
|
1,125 |
|
|
|
1,595 |
|
|
|
2,238 |
|
|
|
1,447 |
|
Rental income |
|
|
620 |
|
|
|
847 |
|
|
|
1,953 |
|
|
|
2,458 |
|
Insurance income |
|
|
2,681 |
|
|
|
2,650 |
|
|
|
8,255 |
|
|
|
8,519 |
|
Other commissions and fees |
|
|
62 |
|
|
|
63 |
|
|
|
191 |
|
|
|
1,399 |
|
Other operating income |
|
|
3,026 |
|
|
|
3,720 |
|
|
|
9,296 |
|
|
|
10,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income before net loss on investments, insurance reimbursement
and other agreements related to a contingency settlement,
net gain (loss) on partial extinguishment and
recharacterization of secured commercial loans to
local financial institutions and gain on sale of credit
card portfolio |
|
|
11,964 |
|
|
|
13,128 |
|
|
|
36,968 |
|
|
|
37,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on sale of investments |
|
|
(750 |
) |
|
|
3,056 |
|
|
|
(1,482 |
) |
|
|
5,431 |
|
Impairment on investments |
|
|
(2,369 |
) |
|
|
(9,139 |
) |
|
|
(5,232 |
) |
|
|
(12,089 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on investments |
|
|
(3,119 |
) |
|
|
(6,083 |
) |
|
|
(6,714 |
) |
|
|
(6,658 |
) |
Insurance reimbursement and other agreements related to a contingency
settlement |
|
|
15,075 |
|
|
|
|
|
|
|
15,075 |
|
|
|
|
|
Gain (loss) on partial extinguishment and recharacterization
of secured commercial loans to local financial institutions |
|
|
|
|
|
|
1,000 |
|
|
|
2,497 |
|
|
|
(10,640 |
) |
Gain on sale of credit card portfolio |
|
|
|
|
|
|
|
|
|
|
2,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,920 |
|
|
$ |
8,045 |
|
|
$ |
50,645 |
|
|
$ |
20,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income primarily consists of other service charges on loans; service charges on
deposit accounts; commissions derived from various banking, securities and insurance activities;
gains and losses on mortgage banking activities; and net gains and losses on investments and
impairments.
Other service charges on loans consist mainly of service charges on credit card-related
activities.
Service charges on deposit accounts include monthly fees and other fees on deposit accounts.
Income from mortgage banking activities includes gains on sales of loans and revenues earned
for administering residential mortgage loans originated by the Corporation and subsequently sold
with servicing retained. In addition, lower-of-cost-or-market valuation adjustments to the
Corporations residential mortgage loans held for sale portfolio are recorded as part of mortgage
banking activities.
Rental income represents income generated by the Corporations subsidiary, First Leasing and
Rental Corporation, on the rental of various types of motor vehicles.
Other commissions and fees income is the result of an agreement with a major investment
banking firm to participate in bond issues by the Government Development Bank for Puerto Rico, and
an agreement with an international brokerage firm doing business in Puerto Rico to offer brokerage
services in selected branches of the Corporation.
Insurance income consists of insurance commissions earned by the Corporations subsidiary
FirstBank Insurance Agency, Inc., and the Banks subsidiary in the U.S. Virgin Islands, FirstBank
Insurance V.I., Inc. These subsidiaries offer a wide variety of insurance business.
The other operating income category is composed of miscellaneous fees such as debit and credit
card interchange fees and check fees.
54
The net gain (loss) on investment securities reflects gains or losses as a result of sales
that are consistent with the Corporations investment policies as well as other-than-temporary
impairment charges on the Corporations investment portfolio.
First BanCorps non-interest income for the third quarter and first nine months of 2007
amounted to $23.9 million and $50.6 million, respectively, compared to $8.0 million and $20.4
million for the same periods in 2006. The increase in non-interest income during the third quarter
of 2007 compared to the same period in 2006 was mainly attributable to income recognition of
approximately $15.1 million for agreements reached with insurance carriers and former executives
for indemnity of expenses related to the settlement of the class action lawsuit brought against the
Corporation coupled with lower other-than-temporary impairment charges on certain of the
Corporations equity securities portfolio, as compared to the third quarter of 2006. For the third
quarter of 2007, other-than-temporary impairment charges on equity securities decreased by $6.8
million, as compared to impairment charges recognized for the third quarter of 2006. These
positive variances were partially offset by aggregate realized losses of $0.8 million on the sale
of $300 million of its 10-Year U.S. Treasury investment portfolio and $113 million of its FNMA
mortgage-backed securities portfolio, compared to a realized gain of $3.1 million for the same
quarter a year ago. An intra-quarter decrease in interest rates provided market opportunities to
sell securities having a weighted-average yield of 4.55% which was below the Corporations cost of
funds. The sales resulted in the reduction of the negative spread, thus contributing to the
improvement of the net interest margin. Non-interest income was adversely affected by the
fluctuation resulting from a $1.0 million unrealized gain recognized during the third quarter of
2006, on a derivative instrument that resulted from a profit and loss sharing agreement on the sale
of certain mortgage loans entered into with a local financial institution as discussed below.
For the nine-month period ended on September 30, 2007, non-interest income increased by $30.2
million, or 148%, compared to the same period in 2006. During the nine month period ended on
September 30, 2006, the Corporation recognized a net loss of $10.6 million on the partial
extinguishment of a secured commercial loan extended to a local financial institution. In addition
to the fluctuation caused by the aforementioned loss, the increase in non-interest income for the
first nine months of 2007, compared to the first nine months of 2006, was mainly due to the
aforementioned $15.1 million income from agreements reached with insurance carriers and former
executives, the $2.8 million gain on the sale of the Corporations credit card portfolio and a $2.5
million gain on the partial extinguishment and recharacterization of certain secured commercial
loan extended to a local financial institution coupled with higher income from service charges on
loans.
During the first nine months of 2006, the Corporation recorded a net loss of $10.6 million on
the partial extinguishment of a secured commercial loan extended to a local financial institution
as a result of a series of agreements reached with Doral Financial Corporation (Doral). On May
25, 2006, the Corporation entered into a series of credit agreements with Doral to formally
document as secured borrowings the loan transfers
between the parties that previously had been accounted for as sales. The terms of the credit
agreements specified: (1) a floating interest payment based on a spread over 90-day LIBOR subject
to a cap; (2) an amortization schedule tied to the scheduled amortization of the underlying
mortgage loans subject to a maximum maturity of 10 years; (3) mandatory prepayments as a result of
actual prepayments from the underlying mortgages; and (4) an option to Doral to prepay the loan
without penalty at any time.
On May 31, 2006, First BanCorp received a cash payment from Doral, substantially reducing the
balance of approximately $2.9 billion in secured commercial loans to approximately $450 million as
of that date. In connection with the repayment, the Corporation and Doral entered into a sharing
agreement on May 25, 2006 with respect to certain profits or losses that Doral would incur as part
of the sales of the mortgages that previously collateralized the commercial loans. First BanCorp
agreed to reimburse Doral for 40% of the net losses incurred by Doral as a result of sales or
securitization of the mortgages, subject to certain conditions and subject to a maximum
reimbursement of $9.5 million, which would be reduced proportionately to the extent that Doral did
not sell the mortgages. As a result of the loss sharing agreement and the extinguishment of the
55
secured commercial loans by Doral, the Corporation recorded a net loss of $10.6 million, composed
of losses realized as part of the loss sharing agreement and the difference between the carrying
value of the loans and the net payment received from Doral.
In connection with the repayment, Doral and First BanCorp also agreed to share the profits, if
any, received from any subsequent sales or securitization of the mortgage loans, in the same
proportion that the Corporation shared in the losses, subject to a maximum of $9.5 million.
For the nine-month period ended September 30, 2007, the gain on the sale of the Corporations
credit card portfolios resulted from portfolio sold pursuant to a strategic alliance agreement
reached with a U.S. Financial institution in 2003. There were no such sales during the first nine
months of 2006.
During the first quarter of 2007, the Corporation entered into various agreements with R&G
Financial relating to prior transactions accounted for as commercial loans secured by mortgage
loans and pass-through trust certificates from R&G Financial subsidiaries. First, through a
mortgage payment agreement, R&G Financial paid the Corporation approximately $50 million to reduce
the commercial loan that R&G Premier Bank, R&G Financials banking subsidiary, had outstanding with
the Corporation. In addition, the remaining balance of $271 million was re-documented as a secured
loan from the Corporation to R&G Financial. Second, R&G Financial and the Corporation amended
various agreements involving, as of the date of the transaction, approximately $183.8 million of
securities collateralized by loans that were originally sold through five grantor trusts. The
modifications to the original agreements allow the Corporation to treat these transactions as true
sales for accounting and legal purposes and the recharacterization of certain secured commercial
loans as securities collateralized by loans. As a result of the agreements and the partial
extinguishment of the secured commercial loan, the Corporation recorded a net gain of $2.5 million
related to the difference between the carrying value of the loans, the net payment received and the
fair value of the securities received from R&G Financial.
Non-Interest Expenses
The following table presents the detail of non-interest expenses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Nine-Month Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Employees compensation and benefits |
|
$ |
33,995 |
|
|
$ |
32,881 |
|
|
$ |
103,719 |
|
|
$ |
96,876 |
|
Occupancy and equipment |
|
|
14,970 |
|
|
|
13,730 |
|
|
|
43,848 |
|
|
|
40,060 |
|
Deposit insurance premium |
|
|
3,705 |
|
|
|
412 |
|
|
|
4,389 |
|
|
|
1,201 |
|
Other taxes, insurance and
supervisory fees |
|
|
5,592 |
|
|
|
5,028 |
|
|
|
15,633 |
|
|
|
12,963 |
|
Professional fees recurring |
|
|
3,628 |
|
|
|
2,350 |
|
|
|
10,373 |
|
|
|
8,488 |
|
Professional fees non-recurring |
|
|
845 |
|
|
|
5,058 |
|
|
|
6,105 |
|
|
|
16,456 |
|
Servicing and processing fees |
|
|
1,672 |
|
|
|
1,682 |
|
|
|
5,047 |
|
|
|
5,634 |
|
Business promotion |
|
|
2,973 |
|
|
|
4,513 |
|
|
|
12,767 |
|
|
|
12,611 |
|
Communications |
|
|
1,999 |
|
|
|
2,293 |
|
|
|
6,396 |
|
|
|
6,761 |
|
Other |
|
|
5,572 |
|
|
|
4,993 |
|
|
|
19,493 |
|
|
|
14,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
74,951 |
|
|
$ |
72,940 |
|
|
$ |
227,770 |
|
|
$ |
215,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporations non-interest expenses for the third quarter of 2007 increased by $2.0
million, or 3%, compared to the same periods in 2006. The increase in non-interest expenses was
mainly due to increases in deposit insurance premium expenses as well as employees compensation
and benefits and occupancy and equipment expenses, partially offset by a decrease in professional
fees and business promotion expenses. For the nine-month period ended on September 30, 2007,
non-interest expenses increased by $12.1 million, or 6%,
56
compared to the first nine months of 2006
mainly due to an increase in employees compensation and benefits, deposit insurance premium,
occupancy and equipment expenses and other expenses associated with legal contingencies partially
offset by a decrease in professional fees.
For the quarter and nine-month period ended September 30, 2007 the deposit insurance premium
expense increased by $3.3 million and $3.2 million, respectively, as compared to the same periods
in 2006. The increase in the deposit insurance premium expense was due to the new assessment
system adopted by the FDIC during 2007. Although the Corporation had credits to offset the premium
increase, these credits were substantially used to cover the first and second quarter deposit
premium assessments for 2007.
Employees compensation and benefits expenses for the third quarter and first nine months of
2007 increased by $1.1 million, or 3%, and by $6.8 million, or 7%, respectively, compared to the
same periods in 2006. The increase in employees compensation and benefits expenses was primarily
due to increases in the average compensation and related fringe benefits paid to employees,
partially offset by a decrease in expenses related to the fair value of stock options granted to
certain employees. For the first nine months of 2007, the Corporation recognized $2.8 million in
stock-based compensation expense compared to $5.4 million for the same period in 2006.
On October 24, 2007, the Corporations Board of Directors approved a voluntary separation
program for eligible employees meeting predefined qualification criteria. There are approximately
110 employees eligible for this program and the estimated cost to cover the benefits to be paid is
approximately $4.0 million. The Corporation estimates that the annual cost savings will
approximate $3.3 million as a result of the voluntary separation program. Since the program is
voluntary and was approved in October, no accrual was made in the third quarter of 2007. The
benefits to be paid will be accrued at the time the eligible employees accept the offer of
voluntary separation which according to the program must be no later than November 30, 2007 with
employment terminating no later than March 31, 2008.
Occupancy and equipment expenses for the third quarter and first nine months of 2007 increased
by $1.2 million, or 9%, and by $3.8 million, or 9%, respectively, compared to the same periods in
2006. The increase in occupancy and equipment expenses in 2007 periods as compared to 2006 is
mainly attributable to increases in costs associated with the expansion of the Corporations branch
network and loan origination offices.
For the quarter and nine-month period ended on September 30, 2007, other expenses increased by
$0.6 million, or 12%, and by $4.8 million, or 33%, respectively, compared to the same periods in
2006. The increase in other expenses for the quarter ended on September 30, 2007 was mainly due to
increased costs associated with foreclosure actions on the aforementioned loan relationship at the
Miami Agency and increased expenses
associated with a higher volume of repossessed real estate properties. Higher other expenses for
the nine-month period ended on September 30, 2007, were attributable to a $3.3 million increase in
legal reserves resulting from managements assessment of the probable and estimable loss based on
new information available.
Business
promotion expenses slightly increased during the first nine months of 2007 by $0.2
million, compared to the same period in 2006. Although business promotion expenses decreased by
$1.5 million for the third quarter of 2007, as compared to the same period a year ago, the
Corporation expects to support several initiatives with new campaigns including deposit capture and
mortgage origination during the last quarter of 2007. The Puerto Rico financial services market is
highly competitive and requires investment in marketing efforts.
Professional fees decreased during the third quarter and first nine months of 2007 by $2.9
million, or 40%, and by $8.5 million, or 34%, respectively, compared to the same periods in 2006.
The decrease for the 2007 periods was primarily attributable to lower legal, accounting and
consulting fees due to the conclusion during the third quarter of 2006 of the internal review
conducted by the Corporations Audit Committee and the restatement process. Further reduction in
non-recurring professional service expenses is expected as the Corporation continues
57
to move
forward with its business strategies without the distraction of restatement-related matters and
legal issues.
Because of the ongoing challenges facing the financial services industry, the Corporation has
continued developing cost saving strategies under its Business Rationalization project. Based on
the latest analyses the Corporation expects cost reduction strategies to result in savings of
approximately $16 million (pre-tax) during the year 2008. The cost reductions are expected to come
from, among others, lower legal and consulting fees, the voluntary separation program and other
efficiencies in marketing programs, occupancy and energy, and operations.
58
Provision for Income Tax
Income tax expense includes Puerto Rico and Virgin Islands income taxes as well as applicable
U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income
from all sources. As a Puerto Rico corporation, First BanCorp is treated as a foreign corporation
for U.S. income tax purposes and is generally subject to United States income tax only on its
income from sources within the United States or income effectively connected with the conduct of a
trade or business within the United States. Any such tax paid is creditable, within certain
conditions and limitations, against the Corporations Puerto Rico tax liability. The Corporation
is also subject to U.S. Virgin Islands (VI) taxes on its income from sources within the VI
jurisdiction. Any such tax paid is creditable against the Corporations Puerto Rico tax liability,
subject to certain conditions and limitations.
Under the Puerto Rico Internal Revenue Code of 1994, as amended (PR Code), First BanCorp is
subject to a maximum statutory tax rate of 39%, except that in years 2005 and 2006 an additional
transitory tax rate of 2.5% was signed into law by the Governor of Puerto Rico. In August 2005,
the Government of Puerto Rico approved a transitory tax rate of 2.5% that increased the maximum
statutory tax rate from 39.0% to 41.5% for a two-year period. On May 13, 2006, with an effective
date of January 1, 2006, the Governor of Puerto Rico approved an additional transitory tax rate of
2.0% applicable only to companies covered by the Puerto Rico Banking Act, as amended, such as
FirstBank which raised the maximum statutory tax rate to 43.5% for taxable years commenced during
calendar year 2006. The PR Code also includes an alternative minimum tax of 22% that applies if
the Corporations regular income tax liability is less than the alternative minimum tax
requirements.
The Corporation has maintained an effective tax rate lower than the maximum statutory rate
mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and
Puerto Rico income taxes and by doing business through international banking entities (IBEs) of
the Corporation and the Bank and through the Banks subsidiary FirstBank Overseas Corporation, in
which the interest income and gain on sales is exempt from Puerto Rico and U.S. income taxation.
The IBEs and FirstBank Overseas Corporation were created under the International Banking Entity Act
of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs
operating in Puerto Rico. Since 2004, IBEs that operate as a unit of a bank pay income taxes at
normal rates to the extent that the IBEs net income exceeds predetermined percentages of the
banks total net taxable income; the percentage is 20% of total net taxable income for taxable
years commencing after July 1, 2005.
For the third quarter of 2007, the Corporation recognized an income tax expense of $5.6
million, compared to $10.6 million recognized for the same period in 2006. The decrease in the
provision for income tax for the third quarter of 2007, compared to the same period in 2006, was
mainly due to a lower taxable income.
For the nine-month period ended September 30, 2007, the Corporation recognized an income tax
expense of $18.0 million, compared to $14.8 million in 2006. The increase in income tax expense
was mainly due to a decrease in deferred income tax benefits, resulting principally from lower
unrealized losses on derivative instruments and the adoption of SFAS
159, partially offset by a reduction in the current income tax
provision due to lower taxable income. Prior to the
implementation of the long-haul method of effectiveness testing under SFAS 133 during the second
quarter of 2006, the Corporation recorded as part of interest expense unrealized losses of $69.7
million in the valuation of derivative instruments during the first quarter of 2006, which resulted
on a deferred tax benefit. For the first nine months of 2007, the change in the valuation of
derivatives and unrealized losses on SFAS 159 liabilities recorded as part of interest expense
resulted in net unrealized and realized losses of $7.0 million.
As of September 30, 2007, the Corporation evaluated its ability to realize the deferred tax
asset and concluded, based on the evidence available, that it is more likely than not that some of
the deferred tax asset will not be realized and thus, established a valuation allowance of $6.6
million, compared to a valuation allowance amounting to $6.1 million as of December 31, 2006. As
of September 30, 2007, the deferred tax asset, net of the valuation allowance of $6.6 million,
amounted to approximately $95.4 million compared to $162.1 million as of December 31, 2006. The
decrease in the deferred tax asset is due to a reversal during the third
59
quarter of 2007 related to the class action lawsuit contingency of $74.25
million recorded as of December 31, 2005. The Corporation
reached an agreement with the lead class
action plaintiff during the third quarter of 2007 and payments
totaling the previously reserved
amount of $74.25 million were made. The increase in the deferred
tax provision was offset by a corresponding decrease to the current
income tax provision.
FINANCIAL CONDITION AND OPERATING DATA ANALYSIS
Loan Production
First BanCorp relies primarily on its retail network of branches to originate residential and
consumer loans. The Corporation supplements its residential mortgage loan originations with
wholesale servicing released mortgage loan purchases from small mortgage bankers. The Corporation
manages its construction and commercial loan originations through a centralized unit and most of
its originations come from existing customers as well as through referrals and direct
solicitations. For commercial loan originations, the Corporation also has regional offices to
provide services to designated territories.
Total loan production for the quarter and nine-month period ended September 30, 2007 was
$860.3 million and $2.8 billion, respectively, compared to $965.6 million and $3.6 billion,
respectively, for the comparable periods in 2006. The decrease in loan production during 2007
periods was mainly due to decreases in residential real estate, commercial, and consumer loan
originations which were negatively impacted by worsening economic conditions in Puerto Rico and the
U.S. mainland real estate market (principally in the state of Florida), and stricter underwriting
guidelines.
The following table sets the First BanCorps loan production for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month period ended |
|
|
|
Quarter ended September 30, |
|
|
September 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Residential real estate |
|
$ |
155,331 |
|
|
$ |
203,301 |
|
|
$ |
475,032 |
|
|
$ |
720,706 |
|
Commercial and construction |
|
|
514,733 |
|
|
|
537,459 |
|
|
|
1,676,614 |
|
|
|
2,187,491 |
|
Finance leases |
|
|
28,651 |
|
|
|
43,526 |
|
|
|
111,796 |
|
|
|
133,386 |
|
Consumer |
|
|
161,605 |
|
|
|
181,341 |
|
|
|
504,393 |
|
|
|
584,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan production |
|
$ |
860,320 |
|
|
$ |
965,627 |
|
|
$ |
2,767,835 |
|
|
$ |
3,625,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate Loans
Residential mortgage loan production for the third quarter and first nine months of 2007
decreased by $48.0 million, or 24%, and by $245.7 million, or 34%, respectively, compared to the
same periods in 2006. The decrease in mortgage loan production for 2007 periods, compared to 2006,
was mainly attributable to deteriorating economic conditions in Puerto Rico and stricter
underwriting standards. In May 2006, the Corporation decided to make certain adjustments to its
underwriting standards designed to enhance the credit quality of its mortgage loan portfolio, in
light of worsening economic conditions in Puerto Rico. The implementation of these standards
contributed to the reduction in the Corporations mortgage loan originations.
Residential real estate loans represent 17% of total loans originated and purchased for the
first nine months of 2007. The Corporations strategy is to penetrate markets by providing
customers with a variety of high quality mortgage products. The Corporations residential mortgage
loan originations continued to be driven by FirstMortgage, its mortgage loan origination
subsidiary. The Corporation continues to commit substantial resources to this operation with the
goal of becoming a leading institution in the highly competitive
residential mortgage loans market. FirstMortgage supplements its internal direct originations
through its retail
60
network with an indirect business strategy. The Corporations Partners in
Business, a division of FirstMortgage, partners with mortgage brokers and small mortgage bankers in
Puerto Rico to purchase ongoing mortgage loan production. FirstMortgage Realty Group focuses on
building relationships with realtors by providing resources, office amenities and personnel, to
assist real estate brokers in building their individual businesses and closing transactions.
FirstMortgage multi-channel strategy has proven to be effective in capturing business.
Commercial and Construction Loans
Commercial and construction loan production for the third quarter and first nine months of
2007 decreased by $22.7 million, or 4%, and $510.9 million, or 23%, respectively, compared to the
same periods in 2006. The decrease in commercial and construction loan production for 2007
periods, compared to 2006, was mainly due to adverse economic conditions in Puerto Rico and in the
U.S. real estate market (principally in the state of Florida) and the implementation of stricter
underwriting standards. According to the Puerto Rico Planning Board, Puerto Rico is in a midst of
a recession, causing a slowdown in commercial business activity. The U.S. mainland real estate
market has slowed down, influenced, among other things, by declining home prices and an oversupply of
available property inventory. Increases in property insurance premiums along with rising gas prices
are also affecting the areas in which the Corporation does business in the U.S. mainland.
Commercial loan originations come from existing customers as well as through referrals and
direct solicitations. The Corporation follows a strategy aimed to cater to customer needs in the
commercial loans middle-market segment by building strong relationships and offering financial
solutions that meet customers unique needs. Starting in 2005, the Corporation expanded its
distribution network and participation in the commercial loans middle-market segment by focusing on
customers with financing needs up to $5 million. The Corporation established four regional offices
that provide coverage throughout Puerto Rico. The offices are staffed with sales, marketing and
credit officers able to provide a high level of personalized service and prompt decision-making.
Consumer Loans
Consumer loan originations are principally driven through the Corporations retail network.
For the third quarter and first nine months of 2007, consumer loan originations decreased by $19.7
million, or 11%, and $79.6 million, or 14%, respectively, compared to the same periods in 2006.
The decrease in consumer loan originations for 2007 periods, compared to 2006, was mainly due to
adverse economic conditions in Puerto Rico.
Finance Leases
For the third quarter and first nine months of 2007, finance leases originations, which are
mostly composed of loans to individuals to finance the acquisition of a motor vehicle, decreased
for the third quarter and first nine months of 2007 by $14.9 million and by $21.6 million, as
compared to the same periods in 2006.
Assets
Total assets as of September 30, 2007 amounted to $17.1 billion, a decrease of $303.2 million
compared to total assets of $17.4 billion as of December 31, 2006. The decrease in total assets as
of September 30, 2007, compared to total assets as of December 31, 2006, was mainly the result of a
decrease in investment securities
and a decrease in the Corporations deferred tax asset. Notwithstanding, the recognition of
$146.4 million of
61
securities collateralized by loans as of September 30, 2007, obtained as part of
the aforementioned agreements entered into with R&G Financial, the Corporations investment
portfolio decreased by $333.4 million as compared to the balance as of December 31, 2006. During
the third quarter of 2007 the Corporation sold approximately $300 million of its 10-Year U.S.
Treasury Notes and approximately $113 million of certain FNMA mortgage-backed securities due to
market opportunities and interest rate margin protection. Also the decrease in the investment
securities portfolio resulted from maturities and prepayments received from the Corporations
investment portfolio, mainly mortgage-backed securities and the Corporations decision to
deleverage its investment portfolio. The decrease in the deferred tax asset was mainly due to the
tax impact of the adoption of SFAS 159, on January 1, 2007, of approximately $58.7 million.
During the first quarter of 2007, the Corporation entered into various agreements with R&G
Financial relating to prior transactions accounted for as commercial loans secured by mortgage
loans and pass-through trust certificates from R&G Financial subsidiaries. First, through a
mortgage payment agreement, R&G Financial paid the Corporation approximately $50 million to reduce
the commercial loan that R&G Premier Bank, R&G Financials banking subsidiary, had outstanding with
the Corporation. In addition, the remaining balance of $271 million was re-documented as a secured
loan from the Corporation to R&G Financial. Second, R&G Financial and the Corporation amended
various agreements involving, as of the date of the transaction, approximately $183.8 million of
securities collateralized by loans that were originally sold through five grantor trusts. The
modifications to the original agreements allow the Corporation to treat these transactions as true
sales for accounting and legal purposes. The execution of the agreements caused a decrease in the
Corporations loan portfolio and an increase in the Corporations investment securities portfolio.
62
Loan Portfolio
The composition of the Corporations loan portfolio for the periods indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
Residential real estate loans |
|
$ |
3,003,285 |
|
|
$ |
2,772,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans: |
|
|
|
|
|
|
|
|
Construction loans |
|
|
1,470,933 |
|
|
|
1,511,608 |
|
Commercial real estate loans |
|
|
1,292,723 |
|
|
|
1,215,040 |
|
Commercial loans |
|
|
2,825,488 |
|
|
|
2,698,141 |
|
Loans to local financial institutions
collateralized by real estate mortgages
and pass-through trust certificates |
|
|
647,827 |
|
|
|
932,013 |
|
|
|
|
|
|
|
|
Commercial loans |
|
|
6,236,971 |
|
|
|
6,356,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases |
|
|
383,105 |
|
|
|
361,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and other loans |
|
|
1,703,115 |
|
|
|
1,772,917 |
|
|
|
|
|
|
|
|
Total loans |
|
$ |
11,326,476 |
|
|
$ |
11,263,980 |
|
|
|
|
|
|
|
|
As of September 30, 2007, the Corporations total loans increased by $62.5 million, when
compared with the balance as of December 31, 2006. The increase in the Corporations total loans
primarily relates to new loans originated, in particular commercial and residential mortgage loans,
partially offset by the previously discussed agreements entered into with R&G Financial that
enabled the Corporation to recharacterize certain secured commercial loans as securities
collateralized by loans.
Residential Real Estate Loans
As of September 30, 2007, the Corporations residential real estate loan portfolio increased
by $230.7 million, or 8%, as compared to the balance as of December 31, 2006. The Corporation has
diversified its loan portfolio by increasing the concentration of residential real estate loans.
The Corporations residential real estate loans are mainly composed of fully amortizing fixed-rate
loans. In accordance with the Corporations underwriting guidelines, residential real estate loans
are mostly fully documented loans and the Corporation is not actively involved in the origination
of negative amortization loans or option adjustable rate mortgage loans.
Commercial and Construction Loans
As of September 30, 2007, the Corporations commercial and construction loan portfolio
decreased by $119.8 million, as compared to the balance as of December 31, 2006. The decrease was
mainly due to the aforementioned agreements entered into with R&G Financial that reduced the
Corporations secured commercials loan extended to local financial institutions. The Corporations
commercial and construction loan portfolio, other than loans extended to local financial
institutions, increased by $164.4 million. The Corporations strategy focuses on growing its
commercial loan portfolio principally through commercial real estate and construction loans. A
substantial portion of this portfolio is collateralized by real estate. The Corporations
commercial loans are primarily variable- and adjustable-rate loans.
The Corporation had a lending concentration of $395.7 million in one mortgage originator in
Puerto Rico, Doral, as of September 30, 2007. The Corporation had outstanding $252.1 million with
another mortgage
63
originator in Puerto Rico, R&G Financial, for total loans to mortgage originators
amounting to $647.8 million as of September 30, 2007. These commercial loans are secured by
individual mortgage loans on residential and commercial real estate. In December 2005, the
Corporation obtained a waiver from the Office of the Commissioner of Financial Institutions of the
Commonwealth of Puerto Rico with respect to the statutory limit for individual borrowers
(loans-to-one borrower limit). In May 2006, the Corporation received a payment from Doral of
approximately $2.4 billion, substantially reducing the balance of the secured commercial loan
extended to that institution. As part of the cease and desist order imposed on the Corporation by
its regulators, the Corporation has continued working on the reduction of its exposure to Doral.
As previously discussed, the execution of the agreements entered into with R&G Financial
during the first quarter of 2007 enabled First BanCorp to fulfill the remaining requirement of the
consent order signed with banking regulators relating to the mortgage-related transactions with R&G
Financial that First BanCorp previously accounted for as commercial loans secured by mortgage loans
and pass-through trust certificates.
Consumer Loans
As of September 30, 2007, the Corporations consumer loan portfolio decreased by $69.8
million, as compared to the portfolio balance as of December 31, 2006. The decrease is mainly the
result of decreases in the Corporations auto, personal, and credit card loan portfolios. The
decrease in auto and personal loan portfolio is mainly the result of the application of stricter
underwriting standards in an effort to improve the Corporations credit quality given deteriorating
economic conditions in Puerto Rico. The decrease in the credit card portfolio is mainly driven by
the sale of approximately $15.6 million during the first quarter of 2007 of the Corporations
credit card portfolio pursuant to a strategic alliance agreement reached with a U.S. financial
institution in 2003.
Finance Leases
As of September 30, 2007, finance leases, which are mostly composed of loans to individuals to
finance the acquisition of a motor vehicle, increased by $21.5 million as compared to the portfolio
balance as of December 31, 2006. These leases typically have five-year terms and are
collateralized by a security interest in the underlying assets.
Investment Activities
As part of its strategy to diversify its revenue sources and maximize its net interest income,
First BanCorp maintains an investment portfolio that is classified as available-for-sale or
held-to-maturity. The Corporations investment portfolio, excluding short-term money market
investments, as of September 30, 2007 amounted to $4.8 billion, a decrease of $333.4 million, when
compared with the investment portfolio as of December 31, 2006. The decrease in investment
securities as of September 30, 2007, compared to the balance as of December 31, 2006, was mainly
due to the previously discussed sale of approximately $300 million of its 10-Year U.S. Treasury
Notes and approximately $113 million of certain FNMA mortgage-backed securities during the third
quarter of 2007 coupled with the Corporations decision to deleverage its balance sheet by not
reinvesting maturities and prepayments received from the Corporations investment portfolio, mainly
mortgage-backed securities and government obligations, partially offset by the previously discussed
agreements entered into with R&G Financial that increased the Corporations mortgage-backed
securities portfolio.
64
The following table presents the carrying value of investments at the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
Money market investments |
|
$ |
473,457 |
|
|
$ |
456,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity: |
|
|
|
|
|
|
|
|
U.S. Government and agencies obligations |
|
|
2,453,207 |
|
|
|
2,258,040 |
|
Puerto Rico Government obligations |
|
|
31,072 |
|
|
|
31,716 |
|
Mortgage-backed securities |
|
|
915,217 |
|
|
|
1,055,375 |
|
Corporate bonds |
|
|
2,000 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
3,401,496 |
|
|
|
3,347,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
U.S. Government and agencies obligations |
|
|
118,888 |
|
|
|
403,592 |
|
Puerto Rico Government obligations |
|
|
25,544 |
|
|
|
25,302 |
|
Mortgage-backed securities |
|
|
1,139,718 |
|
|
|
1,253,853 |
|
Corporate bonds |
|
|
4,790 |
|
|
|
4,961 |
|
Equity securities |
|
|
3,246 |
|
|
|
12,715 |
|
|
|
|
|
|
|
|
|
|
|
1,292,186 |
|
|
|
1,700,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other equity securities |
|
|
60,679 |
|
|
|
40,159 |
|
|
|
|
|
|
|
|
Total investments |
|
$ |
5,227,818 |
|
|
$ |
5,544,183 |
|
|
|
|
|
|
|
|
Mortgage-backed securities at the indicated dates consist of:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
Held-to-maturity |
|
|
|
|
|
|
|
|
FHLMC certificates |
|
$ |
12,220 |
|
|
$ |
15,438 |
|
FNMA certificates |
|
|
902,997 |
|
|
|
1,039,937 |
|
|
|
|
|
|
|
|
|
|
|
915,217 |
|
|
|
1,055,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
FHLMC certificates |
|
|
6,193 |
|
|
|
7,575 |
|
GNMA certificates |
|
|
331,908 |
|
|
|
374,368 |
|
FNMA certificates |
|
|
654,856 |
|
|
|
871,540 |
|
Mortgage pass-through certificates |
|
|
146,761 |
|
|
|
370 |
|
|
|
|
|
|
|
|
|
|
|
1,139,718 |
|
|
|
1,253,853 |
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
$ |
2,054,935 |
|
|
$ |
2,309,228 |
|
|
|
|
|
|
|
|
The carrying values of investment securities (excluding other equity securities) as of
September 30, 2007, by contractual maturity (excluding mortgage-backed securities, equity
securities and money market investments) are shown below:
65
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Weighted |
|
(Dollars in thousands) |
|
amount |
|
|
average yield % |
|
U.S. Government and agencies obligations |
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
351,959 |
|
|
|
4.67 |
|
Due after one year through five years |
|
|
500 |
|
|
|
5.70 |
|
Due after five years through ten years |
|
|
105,387 |
|
|
|
4.23 |
|
Due after ten years |
|
|
2,114,249 |
|
|
|
5.82 |
|
|
|
|
|
|
|
|
|
|
|
2,572,095 |
|
|
|
5.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico Government obligations |
|
|
|
|
|
|
|
|
Due after one year through five years |
|
|
13,722 |
|
|
|
4.99 |
|
Due after five years through ten years |
|
|
24,426 |
|
|
|
5.79 |
|
Due after ten years |
|
|
18,468 |
|
|
|
5.58 |
|
|
|
|
|
|
|
|
|
|
|
56,616 |
|
|
|
5.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
Due after five years through ten years |
|
|
1,163 |
|
|
|
7.70 |
|
Due after ten years |
|
|
5,627 |
|
|
|
7.20 |
|
|
|
|
|
|
|
|
|
|
|
6,790 |
|
|
|
7.28 |
|
|
|
|
|
|
|
|
Total |
|
|
2,635,501 |
|
|
|
5.60 |
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
2,054,935 |
|
|
|
4.90 |
|
Equity securities |
|
|
3,246 |
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale
and held-to-maturity |
|
$ |
4,693,682 |
|
|
|
5.29 |
|
|
|
|
|
|
|
|
Net interest income of future periods may be affected by the acceleration in prepayments of
mortgage-backed securities. Acceleration in the prepayments of mortgage-backed securities would
lower yields on securities purchased at a premium, as the amortization of premiums paid upon
acquisition of these securities would accelerate. Conversely, acceleration in the prepayments of
mortgage-backed securities would increase yields on securities purchased at a discount, as the
amortization of the discount would accelerate. Also, net interest income in future periods might
be affected by the Corporations investment in callable securities. Lower reinvestment rates and a
time lag between calls, prepayments and/or the maturity of investments and actual reinvestment of
proceeds into new investments, might also affect net interest income. These risks are directly
linked to future period market interest rate fluctuations. Refer to the Risk Management
discussion below for further analysis of the effects of changing interest rates on the
Corporations net interest income and for the interest rate risk management strategies followed by
the Corporation.
Sources of Funds
The Corporations principal funding sources are branch-based deposits, retail brokered
deposits, institutional deposits, federal funds purchased, securities sold under agreements to
repurchase, notes payable and FHLB advances.
As of September 30, 2007, total liabilities amounted to $15.7 billion, a decrease of $487.8
million as compared to the balance as of December 31, 2006. The decrease in total liabilities was
mainly due to decreases in federal funds purchased and securities sold under repurchase agreements
and notes payable, partially offset by increases in brokered CDs and FHLB advances. Proceeds from
sales, maturities, and prepayments of investment securities as well as from the issuance of new
brokered CDs have been used to pay down repurchase agreements and notes payable. The decrease in
securities sold under repurchase agreements and notes payable was principally due to the
deleveraging of the Corporations balance sheet in order to protect earnings from margin erosion
under a flat-to-inverted yield curve scenario. Notes payable decreased during 2007 due to the early
redemption of the Corporations $150 million medium-term note. The Corporations decision was
influenced,
66
among other things, by the weighted- average cost of such note, which was above the
Corporations weighted-average cost of funds.
The increase in brokered CDs was principally due to the issuance of new brokered CDs in
anticipation of expected maturities during the year. The use of brokered CDs has been particularly
important for the growth of the Corporation. The Corporation encounters intense competition in
attracting and retaining deposits, as financial institutions are at a competitive disadvantage
since the income generated on other investment products available to investors in Puerto Rico has
been taxed at lower rates than tax rates for income generated on deposit products. The brokered CDs
market is very competitive and liquid and the Corporation has been able to obtain substantial
amounts of funding in short periods of time. This strategy enhances the Corporations liquidity
position, since the brokered CDs are unsecured and can be obtained at substantially longer
maturities than other regular retail deposits. Also, the Corporation has the ability to convert the
fixed-rate brokered CDs to short-term adjustable rate liabilities by entering into interest rate
swap agreements.
CDs with denominations of $100,000 or higher, including brokered CDs, amounted to $8.6 billion
as of September 30, 2007. As of September 30, 2007, brokered CDs amounted to $7.7 billion.
Brokered CDs are sold by third-party intermediaries in denominations of $100,000 or less. The
following table presents a maturity schedule of brokered CDs as of September 30, 2007:
|
|
|
|
|
(In thousands) |
|
Total |
|
Three months or less |
|
$ |
535,024 |
|
Over three months to six months |
|
|
1,022,695 |
|
Over six months to one year |
|
|
1,249,404 |
|
Over one year to five years |
|
|
1,555,177 |
|
Over five years |
|
|
3,334,489 |
|
|
|
|
|
Total |
|
$ |
7,696,789 |
|
|
|
|
|
The Corporation maintains unsecured lines of credit with other banks. As of September 30,
2007, the Corporations total unused lines of credit with these banks amounted to $250.0 million.
As of September 30, 2007, the Corporation had an available line of credit with the FHLB, guaranteed
with excess collateral pledged to the FHLB in the amount of $273.9 million.
The Corporations deposit products include regular savings accounts, demand deposit accounts,
money market accounts, CDs, and brokered CDs. Refer to Note 10 Deposits in the accompanying
notes to the unaudited interim consolidated financial statements for further details. Total
deposits amounted to $11.5 billion as of September 30, 2007, compared to $11.0 billion as of
December 31, 2006. The increase in total deposits for 2007 was mainly due to increases in brokered
CDs.
Refer to Net Interest Income discussion above for information about average balances of
interest-bearing deposits, and the average interest rate paid on deposits for the quarters and
nine-month periods ended September 30, 2007 and 2006.
Capital
The Corporations stockholders equity amounted to $1.4 billion as of September 30, 2007, an
increase of $184.6 million compared to the balance as of December 31, 2006. The increase in
stockholders equity for the nine-month period ended September 30, 2007 is due to the sale of 9.250
million shares of First BanCorps common stock to the Bank of Nova Scotia (Scotiabank) in a
private placement. Scotiabank paid a purchase price of $10.25 per First BanCorps common share, for
a total purchase price of approximately $94.8 million. The net proceeds to First BanCorp after
discounts and expenses were approximately $92.0 million. Scotiabank
67
acquired 10% of First BanCorps
outstanding common shares as of the close of the transaction. As of September 30, 2007, First
BanCorp had 92,504,506 common shares outstanding.
Additional increases in stockholders equity was mainly composed of after-tax adjustments to
beginning retained earnings of approximately $91.8 million as part of the adoption of SFAS 159 and
net income of $60.8 million for the first nine months of 2007, partially offset by dividends
declared of $48.3 million during the first nine months of 2007 and other comprehensive losses
associated with the valuation of the Corporations securities available-for-sale portfolio of $11.8
million.
As of September 30, 2007, First BanCorp, FirstBank Puerto Rico and FirstBank Florida were in
compliance with regulatory capital requirements that were applicable to them as a financial holding
company, a state non-member bank and a thrift, respectively (i.e., total capital and Tier 1 capital
to risk-weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to average assets
of at least 4%). Set forth below are First BanCorp, FirstBank Puerto Rico and FirstBank Floridas
regulatory capital ratios as of September 30, 2007 and December 31, 2006, based on existing Federal
Reserve, Federal Deposit Insurance Corporation and the Office of Thrift Supervision guidelines.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking Subsidiaries |
|
|
First |
|
|
|
|
|
FirstBank |
|
To be well |
|
|
BanCorp |
|
FirstBank |
|
Florida |
|
capitalized |
As of September 30, 2007 |
|
|
|
|
|
|
|
|
Total capital (Total capital to risk-weighted assets) |
|
|
14.31 |
% |
|
|
13.59 |
% |
|
|
11.20 |
% |
|
|
10.00 |
% |
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) |
|
|
13.07 |
% |
|
|
12.34 |
% |
|
|
10.71 |
% |
|
|
6.00 |
% |
Leverage ratio (1) |
|
|
9.01 |
% |
|
|
8.50 |
% |
|
|
7.93 |
% |
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (Total capital to risk-weighted assets) |
|
|
12.46 |
% |
|
|
12.25 |
% |
|
|
11.35 |
% |
|
|
10.00 |
% |
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) |
|
|
11.27 |
% |
|
|
11.02 |
% |
|
|
10.96 |
% |
|
|
6.00 |
% |
Leverage ratio (1) |
|
|
7.97 |
% |
|
|
7.76 |
% |
|
|
7.91 |
% |
|
|
5.00 |
% |
|
|
|
(1) |
|
Tier 1 capital to average assets in the case of First BanCorp and FirstBank and Tier 1
Capital to adjusted total assets in the case of FirstBank Florida |
For each of the nine-month periods ended on September 30, 2007 and 2006, the Corporation
declared in aggregate cash dividends of $0.21 per common share. Total cash dividends paid on
common shares amounted to $18.1 million for the nine-month period ended September 30, 2007 and
$17.5 million for the same period in 2006, an increase attributable to the 9.250 million additional
shares issued during 2007. Dividends declared on preferred stock amounted to approximately $30.2
million for each of the nine-month periods ended on September 30, 2007 and 2006.
68
Off -Balance Sheet Arrangements
In the ordinary course of business, the Corporation engages in financial transactions that are
not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are
different than the full contract or notional amount of the transaction. These transactions are
designed to (1) meet the financial needs of customers, (2) manage the Corporations credit, market
or liquidity risks, (3) diversify the Corporations funding sources and (4) optimize capital.
As a provider of financial services, the Corporation routinely commits to financial
instruments with off-balance sheet risk to meet the financial needs of its customers. These
financial instruments may include loan commitments and standby letters of credit. These
commitments are subject to the same credit policies and approval process used for on-balance sheet
instruments. These instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the statements of financial position. As of September
30, 2007, commitments to extend credit and commercial and financial standby letters of credit
amounted to approximately $1.8 billion and $104.8 million, respectively. Commitments to extend
credit are agreements to lend to customers as long as the conditions established in the contract
are met. Generally, the Corporations mortgage banking activities do not enter into interest rate
lock agreements with its prospective borrowers.
Contractual Obligations and Commitments
The following table presents a detail of the maturities of the Corporations contractual
obligations and commitments, which consist of CDs, long-term contractual debt obligations, other
contractual obligations, commitments to sell loans and commitments to extend credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations and Commitments |
|
|
|
September 30, 2007 |
|
|
|
Total |
|
|
Less than 1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
After 5 years |
|
|
|
(In thousands) |
|
Contractual obligations (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
$ |
9,387,980 |
|
|
$ |
4,197,643 |
|
|
$ |
1,431,278 |
|
|
$ |
386,624 |
|
|
$ |
3,372,435 |
|
Federal funds purchased and
securities sold under agreements
to repurchase |
|
|
2,519,026 |
|
|
|
631,526 |
|
|
|
387,500 |
|
|
|
600,000 |
|
|
|
900,000 |
|
Advances from FHLB |
|
|
1,005,000 |
|
|
|
415,000 |
|
|
|
509,000 |
|
|
|
71,000 |
|
|
|
10,000 |
|
Notes payable |
|
|
32,526 |
|
|
|
|
|
|
|
|
|
|
|
18,342 |
|
|
|
14,184 |
|
Other borrowings |
|
|
231,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
13,176,324 |
|
|
$ |
5,244,169 |
|
|
$ |
2,327,778 |
|
|
$ |
1,075,966 |
|
|
$ |
4,528,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to sell mortgage loans |
|
$ |
37,474 |
|
|
$ |
37,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
104,830 |
|
|
$ |
104,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit |
|
$ |
1,188,637 |
|
|
$ |
1,188,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit |
|
|
53,445 |
|
|
|
53,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to originate loans |
|
|
509,560 |
|
|
|
509,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments |
|
$ |
1,751,642 |
|
|
$ |
1,751,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
$30.2 million of tax liability associated with unrecognized tax benefits under FIN 48 has been excluded
due to the high degree of uncertainty regarding the timing of future cash outflows associated with such obligations. |
The Corporation has obligations and commitments to make future payments under contracts, such
as debt, and under other commitments to sell mortgage loans at fair value and commitments to extend
credit. Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Since certain commitments are expected to
expire without being drawn upon, the total commitment amount does not necessarily represent future
cash requirements. In the case of credit cards and personal lines of
69
credit, the Corporation can,
at any time and without cause, cancel the unused credit facility. In the ordinary course of
business, the Corporation enters into operating leases and other commercial commitments. There
have been no significant changes in such contractual obligations since December 31, 2006.
RISK MANAGEMENT
The Corporation has in place a risk management framework to monitor, evaluate and manage the
principal risks assumed in conducting its activities. First BanCorps business is subject to eight
broad categories of risks: (1) interest rate, (2) market risk, (3) credit risk, (4) liquidity risk,
(5) operational risk, (6) legal and compliance risk, (7) reputational risk, and (8) contingency
risk. First BanCorp has adopted policies and procedures designed to identify and manage risks to
which the Corporation is exposed specifically those relating to interest rate risk, credit risk,
liquidity risk, and operational risk.
The Corporations risk management policies are described below as well as in the Management
Discussion and Analysis of Financial Condition and Results of Operations section of First BanCorps
2006 Annual Report on Form 10-K.
Interest Rate Risk Management
First
BanCorp manages its asset/liability position in order to limit the effects of changes in
interest rates on net interest income. The Managements Investment and Asset Liability
Committee of FirstBank (MIALCO) oversees interest rate risk, liquidity management and other
related matters. The MIALCO, which reports to the Investment Sub-committee of the Board of
Directors Asset/Liability Risk Committee, is composed of senior management officers,
including the Chief Executive Officer, the Chief Financial
Officers, the Chief Operating Officer, the Risk Manager
of the Treasury and Investment Department, the Risk Financial
Manager, the Economist and the Treasurer.
Committee
meetings focus on, among other things, current and expected conditions in world financial markets,
competition and prevailing rates in the local deposit market,
liquidity, unrealized gains and
losses in securities, recent or proposed changes to the investment portfolio, alternative
funding sources and their costs, hedging and the possible purchase of derivatives such as swaps and
caps, and any tax or regulatory issues which may be pertinent of these areas. The MIALCO approves
funding decisions in light of the Corporations overall growth strategies and objectives.
On a quarterly basis, the MIALCO performs a comprehensive asset/liability review, examining
interest rate risk as described below together with other issues such as liquidity and capital.
The
Corporation uses scenario analysis to measure the effects of changes in interest rates on net
interest income. These simulations are carried out over a one-year and a two-year time horizon,
assuming gradual upward and downward interest rate movements of 200 basis points. Simulations
are carried out using a projected balance sheet based on recent projections and strategies.
The
balance sheet is divided into groups of assets and liabilities in order to simplify the
projections. As interest rates rise or fall, these simulations incorporate expected future
lending rates, current and expected future funding sources and cost,
the possible exercise of options, changes in prepayment rates, and other factors which may be important in projecting the future growth of net
interest income. These projections are carried out for First BanCorp on a fully consolidated basis.
The
Corporation uses asset-liability management software to project future movements in the
Corporations balance sheet and income statement. The starting point of the projections
generally corresponds to the actual values of the balance sheet on the date of the simulations.
Interest rates used for the simulations also correspond to actual rates at the start of the
projection period.
These
simulations are highly complex, and use many simplifying assumptions that are intended to
reflect the general behavior of the Corporation over the period in question. There can be
no assurance that actual events will match these assumptions in all cases. For this reason,
the results of these simulations are only approximations of the true sensitivity of net interest
income to changes in market interest rates. During 2007, the Corporation began a process of
refining and enhancing interest rate risk measurement and analysis. The Corporation is in the
process of implementing more sophisticated software to measure the Corporations interest rate
risk profile.
The following table presents the results of the simulations as of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income Exposure for the first twelve months |
|
|
Projected Balance Sheet |
(Dollars
in millions) |
|
$ Change |
|
% Change |
+ 200 bp ramp |
|
$ |
4.6 |
|
|
|
1.00% |
|
- 200 bp ramp |
|
($ |
5.5 |
) |
|
|
(1.18% |
) |
Exposure to interest rate risk
in the projected balance sheet is relatively lower on a twelve-month horizon with +/- 200
basis point parallel rate shifts. Based on projected growth expectations, net interest
income (NII) is expected to vary by 1.00% to (1.18%) if rates change gradually by
200 basis points over one year. Excluding derivative valuations, the net interest
income (NII) is expected to decrease by (0.15%) or $(0.7) million
under a +200 bp ramp and
increase to 1.13% or $5.3 million under a -200 bp ramp.
70
Derivatives
First BanCorp uses derivative instruments and other strategies to manage its exposure to
interest rate risk caused by changes in interest rates beyond managements control. The following
summarizes major strategies, including derivatives activities, used by the Corporation in managing
interest rate risk:
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
principal. Since a substantial portion of the Corporations loans, mainly commercial loans,
yield variable-rates, the interest rate swaps are utilized to convert fixed-rate brokered CDs
(liabilities) to a variable-rate to better match the variable-rate nature of these loans.
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 to protect against rising interest rates. Specifically, the interest rate of the
Corporations 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. The Corporation utilizes interest rate cap agreements to
protect against rising interest rates.
Structured repurchase agreements The Corporation uses structured repurchase
agreements, with embedded call options, to reduce the Corporations exposure to interest rate
risk by lengthening the contractual maturities of its liabilities, while keeping funding
costs low. Another type of structured repurchase agreement includes repurchased agreements
with embedded cap corridors; these instruments also provide protection for a rising rate
scenario.
71
The following table summarizes the notional amount of all derivative instruments as of
September 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Notional amounts |
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Interest rate swap agreements: |
|
|
|
|
|
|
|
|
Pay fixed versus receive floating |
|
$ |
80,394 |
|
|
$ |
80,720 |
|
Receive fixed versus pay floating |
|
|
4,420,686 |
|
|
|
4,802,370 |
|
Embedded written options |
|
|
53,515 |
|
|
|
13,515 |
|
Purchased options |
|
|
53,515 |
|
|
|
13,515 |
|
Written interest rate cap agreements |
|
|
128,083 |
|
|
|
125,200 |
|
Purchased interest rate cap agreements |
|
|
300,895 |
|
|
|
330,607 |
|
|
|
|
|
|
|
|
|
|
$ |
5,037,088 |
|
|
$ |
5,365,927 |
|
|
|
|
|
|
|
|
The following table summarizes the notional amount of all derivatives by the Corporations
designation as of September 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Notional amounts |
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Economic undesignated hedges: |
|
|
|
|
|
|
|
|
Interest rate swaps used to hedge
fixed rate certificates of deposit, notes payable and loans |
|
$ |
4,501,080 |
|
|
$ |
336,473 |
|
Embedded options on stock index deposits |
|
|
53,515 |
|
|
|
13,515 |
|
Purchased options used to manage exposure to
the stock market on embedded stock index options |
|
|
53,515 |
|
|
|
13,515 |
|
Written interest rate cap agreements |
|
|
128,083 |
|
|
|
125,200 |
|
Purchased interest rate cap agreements |
|
|
300,895 |
|
|
|
330,607 |
|
|
|
|
|
|
|
|
Total derivatives not designated as hedges |
|
$ |
5,037,088 |
|
|
$ |
819,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated hedges: |
|
|
|
|
|
|
|
|
Fair value hedges: |
|
|
|
|
|
|
|
|
Interest rate swaps used to hedge
fixed-rate certificates of deposit |
|
$ |
|
|
|
$ |
4,381,175 |
|
Interest rate swaps used to hedge
fixed- and step-rate notes payable |
|
|
|
|
|
|
165,442 |
|
|
|
|
|
|
|
|
Total fair value hedges |
|
$ |
|
|
|
$ |
4,546,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,037,088 |
|
|
$ |
5,365,927 |
|
|
|
|
|
|
|
|
The following tables summarize the fair value changes of the Corporations derivatives as well
as the source of the fair values:
72
|
|
|
|
|
|
|
Nine-month period ended |
|
(In thousands) |
|
September 30, 2007 |
|
Fair value of contracts outstanding at the beginning of the period |
|
$ |
(126,778 |
) |
Contracts realized or otherwise settled during the period |
|
|
11,439 |
|
Changes in fair value during the period |
|
|
2,529 |
|
|
|
|
|
Fair value of contracts outstanding as of September 30, 2007 |
|
$ |
(112,810 |
) |
|
|
|
|
Source of Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
Maturity |
|
|
|
|
|
|
|
|
|
|
Maturity |
|
|
|
|
(In thousands) |
|
Less Than |
|
|
Maturity |
|
|
Maturity |
|
|
In Excess |
|
|
Total |
|
As of September 30, 2007 |
|
One Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
of 5 Years |
|
|
Fair Value |
|
Prices provided by external sources |
|
$ |
(577 |
) |
|
$ |
3 |
|
|
$ |
(3,450 |
) |
|
$ |
(108,786 |
) |
|
$ |
(112,810 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to April 2006, none of the derivative instruments held by the Corporation were qualified
for hedge accounting. Effective April 3, 2006, the Corporation adopted the long-haul method of
effectiveness testing under SFAS 133 for substantially all of the interest rate swaps that hedge
its callable brokered CDs and medium-term notes. The long-haul method requires periodic assessment
of hedge effectiveness and measurement of ineffectiveness. The ineffectiveness results to the
extent the changes in the fair value of the derivative do not offset the changes in fair value of
the hedged liabilities due to changes in the hedged risks. Prior to the implementation of fair
value hedge accounting, the Corporation recorded, as part of interest expense, unrealized losses in
the valuation of interest rate swaps of approximately $69.7 million during the first quarter of
2006.
Effective January 1, 2007, the Corporation decided to early adopt SFAS 159 for its callable
brokered CDs and certain fixed medium-term notes (Notes) that were hedged with interest rate
swaps. One of the main considerations to early adopt SFAS 159 for these instruments is to
eliminate the operational procedures required by the long-haul method of accounting in terms of
documentation, effectiveness assessment, and manual procedures followed by the Corporation to
fulfill the requirements specified by SFAS 133. Upon adoption of SFAS 159, First BanCorp selected
the fair value measurement for approximately $4.4 billion, or 63%, of the brokered CDs portfolio
and for approximately $15.4 million, or 9%, of the Notes. The CDs and Notes chosen for the fair
value measurement option were hedged at January 1, 2007 by callable interest rate swaps with the
same terms and conditions. The adoption of SFAS 159 also resulted in a positive after-tax impact
to retained earnings of approximately $91.8 million. Under SFAS 159, this one-time credit was
recognized as an adjustment to beginning retained earnings.
As a result of the implementation of SFAS 159 and the discontinuance of hedge accounting all
of the derivative instruments held by the Corporation as of September 30, 2007 were considered
economic undesignated hedges.
The decrease in the notional amount of derivative instruments held by the Corporation during
2007 is due to the termination of certain interest rate swaps that were no longer economically
hedging brokered CDs as the notional balances exceeded those of the brokered CDs and the
termination of interest rate swap that
economically hedged the $150 million medium-term note redeemed during the second quarter of
2007. The notional amount of the interest rate swaps that were cancelled during the third quarter
of 2007 amounted to $142.2 million with a weighted-average pay-rate of 5.38% and a weighted-average
received rate of 5.22%. The interest rate swap previously held to economically hedge the $150
million medium-term note had a notional amount of $150.0 million with a pay-rate of 6.00% and a
received rate of 5.54% at the time of cancellation.
73
The use of derivatives involves market and credit risk. The market risk of derivatives stems
principally from the potential for changes in the value of derivatives contracts based on changes
in interest rates. The credit risk of derivatives arises from the potential of counterpartys
default on its contractual obligations. To manage this credit risk, the Corporation deals with
counterparties of good credit standing, enters into master netting agreements whenever possible
and, when appropriate, obtains collateral. Master netting agreements incorporate rights of set-off
that provide for the net settlement of contracts with the same counterparty in the event of
default.
Credit Risk Management
First BanCorp is subject to credit risk mainly with respect to its portfolio of loans
receivable and off-balance sheet instruments, mainly derivatives and loan commitments. Loans
receivable represent loans that First BanCorp holds for investment and, therefore, First BanCorp
is at risk for the term of the loan. Loan commitments represent commitments to extend credit,
subject to specific condition, for specific amounts and maturities. These commitments may expose
the Corporation to credit risk and are subject to the same review and approval process as loans.
Refer to Contractual Obligations and Commitments above for further details. The credit risk of
derivatives arises from the potential of a counterpartys default on its contractual obligations.
To manage this credit risk, the Corporation deals with counterparties of good credit standing,
enters into master netting agreements whenever possible and, when appropriate, obtains collateral.
For further details and information on the Corporations derivative credit risk exposure, refer to
Interest Rate Risk Management section above. The Corporation manages its credit risk through
credit policy, underwriting, and quality control. The Corporation also employs proactive collection
and loss mitigation efforts.
The Corporation may also encounter risk of default in relation to its securities portfolio.
The securities held by the Corporation are principally mortgage-backed securities, U.S. Treasury
and agency securities. Thus, a substantial portion of these instruments are guaranteed by
mortgages, a U.S. government-sponsored entity or the full faith and credit of the U.S. government
and are deemed to be of the highest credit quality.
Managements Credit Committee, comprised of the Corporations Chief Credit Risk Officer and
other senior executives, has primary responsibility for setting strategies to achieve the
Corporations credit risk goals and objectives. Those goals and objectives are documented in the
Corporations Credit Policy.
Non-performing Assets and Allowance for Loan and Lease Losses
Allowance for Loan and Lease Losses
The provision for loan and lease losses is charged to earnings to maintain the allowance for
loan and lease losses at a level that the Corporation considers adequate to absorb probable losses
inherent in the portfolio. The Corporation establishes the allowance for loan and lease losses
based on its asset classification report to cover the total amount of any assets classified as a
loss, the probable loss exposure of other classified assets, and the estimated losses of assets
not classified. The adequacy of the allowance for loan and lease losses is also based upon a
number of additional factors including historical loan and lease loss experience, current economic
conditions, the fair value of the underlying collateral, and the financial condition of the
borrowers, and, as such, includes amounts based on judgments and estimates made by the Corporation.
Although management believes that the allowance for loan and lease losses is adequate, factors
beyond the Corporations control, including factors affecting the economies of Puerto Rico, the
United States (principally the state of Florida), the U.S.V.I. or British VI may contribute to
delinquencies and defaults, thus necessitating additional reserves.
For small, homogeneous loans, including residential mortgage loans, auto loans, consumer
loans, finance lease loans, and commercial and construction loans under $1.0 million, the
Corporation evaluates a specific allowance based on average historical loss experience for each
corresponding type of loans. The methodology of accounting for all probable losses is made in
accordance with the guidance provided by SFAS 5, Accounting for Contingencies.
74
Commercial and construction loans in amounts over $1.0 million are individually evaluated on a
quarterly basis for impairment following the provisions of SFAS 114, Accounting by Creditors for
Impairment of a Loan. A loan is impaired when, based on current information and events, it is
probable that the Corporation will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The impairment loss, if any, on each individual loan
identified as impaired is generally measured based on the present value of expected cash flows
discounted at the loans effective interest rate. As practical expedient, impairment may be
measured based on the loans observable market price, or the fair value of the collateral, if the
loan is collateral dependent. If foreclosure is probable, the creditor is required to measure the
impairment based on the fair value of the collateral. The fair value of the collateral is
generally obtained from appraisals. Updated appraisals are obtained when the Corporation determines
that loans are impaired, as it did recently with respect to two relationships as discussed below,
and for certain loans on a spot basis selected by specific characteristics such as delinquency
levels and loan-to-value ratios. Should the appraisal show a deficiency, the Corporation records an
allowance for loan losses related to these loans.
As a general procedure, the Corporation internally reviews appraisals on a spot basis as part
of the underwriting and approval process. For construction loans in the Miami Agency, appraisals
are reviewed by an outsourced contracted appraiser. Once a loan backed by real estate collateral
deteriorates or is accounted for in non-accrual status, a full
assessment of the value of the collateral is
performed. If the Corporation commences litigation to collect an outstanding loan or commences
foreclosure proceedings against a borrower (which includes the collateral), a new appraisal report
is requested and the book value is adjusted accordingly, either by a corresponding reserve or a
charge-off.
As
part of the cease and desist orders, the Corporation hired an independent consulting firm to perform an assessment of the
residential real estate loan portfolio. Such review included, among
others, the purchase of
realtors data to confirm recent property values and purchase of appraisers databases for the same
reason. The independent assessment determined that, based on the deterioration of the economic
conditions in Puerto Rico and the increase of the home price index in Puerto Rico, the Corporation
needed to increase the allowance for loan and lease losses.
The Corporation continues to update the analysis on an annual basis, the latest
being in March 2007 when the Corporation obtained similar
results. Historically, the residential real
estate portfolio losses have not been significant. For example, for 2005 and 2006, losses averaged
less than 5 basis points per year. For 2007, on an annualized basis, losses are approximately 9
basis points. More than 90% of the
residential loans portfolio are fixed rate, thus there is no re-pricing risk.
The Credit Risk area requests new collateral appraisals for impaired collateral dependent
loans. In order to determine present market conditions in Puerto Rico and the Virgin Islands, and
to gauge property appreciation rates, opinions of value are requested for a sample of delinquent
residential real estate loans. The valuation information gathered through these appraisals is
considered in the Corporations allowance model assumptions.
The majority of the Corporations loan portfolio is primarily located within the boundaries of
the U.S. economy. Whether the collateral is located in Puerto Rico, the U.S. Virgin Islands or the
U.S. mainland, the performance of the Corporations loan portfolio and the collateral value backing
the transactions are dependent upon the performance of and conditions
within each specific areas
real estate market. Recent economic reports related to the real estate market in Puerto Rico
indicate that certain pockets of the real estate market are subject to readjustments in value
driven not by demand but more by the purchasing power of the consumers and general economic
conditions. However, the outlook is for a stable real estate market with values not growing in
certain
areas due to the self-inflicted wounds associated with the governmental and political
environment on the Island. The Corporation is
protected by healthy loan-to-value ratios set upon
original approval and driven by the Corporations regulatory and credit policy standards. The real
estate market for the U.S. Virgin Islands remains strong. In Florida we are seeing the negative
impact associated with low absorption rates and property value adjustments due to overbuilding. In
general terms, collateral values in Puerto Rico continue to remain stable although not increasing
at the rates historically evidenced before 2006. In terms of Florida, the Corporation is
75
not
exposed to high-end condominium development. The Corporation lends money for condo-conversion
loans in the affordable market segment, and the collateral values of such properties have been more
stable than in the high-end development areas. However, if absorption rates are so low that
reverting the property to a rental property is more beneficial, the Corporations data shows that
the rental market has not suffered significant decreases. Given this scenario, the Corporation
evaluates the collateral on an as rented basis. Given more conservative underwriting standards
of the banks in general and a reduction of market participants in the lending business, the
Corporation believes that the rental market will grow and rental properties are expected to hold
their values.
The following table sets forth an analysis of the activity in the allowance for loan and lease
losses during the periods indicated:
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Quarter ended |
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Nine-Month Period Ended |
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September 30, |
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September 30, |
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(Dollars in thousands) |
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2007 |
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2006 |
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2007 |
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