FORM 10-Q
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, 2008
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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 001-14793
FIRST BANCORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Puerto Rico
(State or other jurisdiction of
incorporation or organization)
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66-0561882
(I.R.S. employer
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, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company 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: 92,510,506 outstanding as of October 31, 2008.
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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risks arising from credit and other risks of the Corporations lending and investment
activities, including the Corporations condo conversion loans from its Miami Corporate
Banking operations and the construction loan portfolio in Puerto Rico, which may affect,
among other things, the level of non-performing assets, charge-offs and loan loss provision; |
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an adverse change in the Corporations ability to attract new clients and retain existing
ones; |
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changes in general economic conditions in the United States and Puerto Rico, including
the interest rate environment, market liquidity, market rates and prices, and disruptions in
the U.S. capital markets which may reduce interest margins, impact funding sources and
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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uncertainty about the effectiveness and impact of the U.S. governments rescue plan,
including the bailout of U.S. government-sponsored housing agencies, on the financial
markets in general and on the Corporations business, financial condition and results of
operations; |
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uncertainty about the Corporations participation in the Troubled Asset Relief Program,
if it should decide to apply to issue preferred stock through this program; |
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changes in the fiscal and monetary policies and regulations of the federal government and
including those determined by the Federal Reserve System (FED), the Federal Deposit
Insurance Corporation (FDIC), government-sponsored housing agencies and local regulators in
Puerto Rico and the U.S. and British Virgin Islands; |
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risks of not being able to recover all assets pledged to Lehman Brothers Special
Financing, Inc.; |
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changes in the Corporations expenses associated with acquisitions and dispositions; |
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developments in technology; |
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the impact of Doral Financial Corporations and R&G Financial Corporations financial
condition on the repayment of their outstanding secured loans to the Corporation; |
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the Corporations ability to issue brokered certificates of deposit and fund operations; |
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risks associated with downgrades in the credit ratings of the Corporations securities;
and |
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general competitive factors and industry consolidation. |
The Corporation does not undertake, and specifically disclaims any obligation, to update any
of the forward- looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements except as required by the federal securities laws.
Investors should carefully consider these factors and the risk factors outlined under Item 1A,
Risk Factors, of Part II of this Quarterly Report on Form 10-Q, and Item 1A, Risk Factors, in the
Corporations Annual Report on Form 10-K.
3
FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
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(In thousands, except for share information) |
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September 30, 2008 |
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December 31, 2007 |
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ASSETS |
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Cash and due from banks |
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$ |
151,040 |
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$ |
195,809 |
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Money market instruments |
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34,998 |
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148,579 |
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Federal funds sold |
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142,436 |
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7,957 |
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Time deposits with other financial institutions |
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116,684 |
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26,600 |
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Total money market investments |
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294,118 |
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183,136 |
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Investment securities available for sale, at fair value: |
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Securities pledged that can be repledged |
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2,691,829 |
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789,271 |
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Other investment securities |
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1,325,120 |
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497,015 |
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Total investment securities available for sale |
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4,016,949 |
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1,286,286 |
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Investment securities held to maturity, at amortized cost: |
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Securities pledged that can be repledged |
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985,230 |
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2,522,509 |
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Other investment securities |
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748,826 |
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754,574 |
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Total investment securities held to maturity, fair value of $1,711,586
(2007 - $3,261,934) |
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1,734,056 |
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3,277,083 |
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Other equity securities |
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60,796 |
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64,908 |
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Loans, net of allowance for loan and lease losses of $261,170
(2007 - $190,168) |
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12,419,422 |
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11,588,654 |
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Loans held for sale, at lower of cost or market |
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32,510 |
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20,924 |
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Total loans, net |
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12,451,932 |
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11,609,578 |
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Premises and equipment, net |
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172,285 |
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162,635 |
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Other real estate owned |
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40,422 |
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16,116 |
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Accrued interest receivable on loans and investments |
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91,158 |
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107,979 |
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Due from customers on acceptances |
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961 |
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747 |
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Other assets |
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290,723 |
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282,654 |
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Total assets |
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$ |
19,304,440 |
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$ |
17,186,931 |
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LIABILITIES |
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Deposits: |
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Non-interest-bearing deposits |
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$ |
661,197 |
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$ |
621,884 |
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Interest-bearing deposits (including $1,515,525 and $4,186,563 measured at
fair value as of September 30, 2008 and December 31, 2007, respectively) |
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12,158,635 |
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10,412,637 |
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Total deposits |
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12,819,832 |
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11,034,521 |
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Loans payable |
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300,000 |
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Federal funds purchased and securities sold
under agreements to repurchase |
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3,326,936 |
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3,094,646 |
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Advances from the Federal Home Loan Bank (FHLB) |
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986,000 |
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1,103,000 |
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Notes payable (including $12,445 and $14,306 measured at fair value
as of September 30, 2008 and December 31, 2007, respectively) |
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26,725 |
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30,543 |
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Other borrowings |
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231,890 |
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231,817 |
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Bank acceptances outstanding |
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961 |
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747 |
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Accounts payable and other liabilities |
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170,824 |
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270,011 |
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Total liabilities |
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17,863,168 |
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15,765,285 |
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Commitments and contingencies (Note 20) |
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STOCKHOLDERS EQUITY |
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Preferred stock, authorized 50,000,000 shares: issued and
outstanding 22,004,000 shares at $25 liquidation value per share |
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550,100 |
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550,100 |
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Common stock, $1 par value, authorized 250,000,000 shares;
issued 102,408,306 as of September 30, 2008 (2007 - 102,402,306) |
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102,408 |
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102,402 |
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Less: Treasury stock (at par value) |
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(9,898 |
) |
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(9,898 |
) |
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Common stock outstanding, 92,510,506 as of September 30, 2008
(2007 - 92,504,506) |
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92,510 |
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92,504 |
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Additional paid-in capital |
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108,326 |
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108,279 |
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Legal surplus |
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286,049 |
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286,049 |
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Retained earnings |
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451,474 |
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409,978 |
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Accumulated other comprehensive loss, net of tax
benefit of $1,086 (2007 - $227) |
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(47,187 |
) |
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(25,264 |
) |
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Total stockholders equity |
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1,441,272 |
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1,421,646 |
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Total liabilities and stockholders equity |
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$ |
19,304,440 |
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$ |
17,186,931 |
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The accompanying notes are an integral part of these statements.
4
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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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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September 30, |
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September 30, |
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(In thousands, except per share data) |
|
2008 |
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2007 |
|
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2008 |
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|
2007 |
|
Interest income: |
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|
|
|
|
|
|
|
|
|
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|
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Loans |
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$ |
208,241 |
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$ |
223,738 |
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$ |
626,846 |
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$ |
678,288 |
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Investment securities |
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|
79,077 |
|
|
|
62,794 |
|
|
|
211,095 |
|
|
|
202,138 |
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Money market investments |
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|
974 |
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|
|
9,399 |
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|
6,046 |
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|
19,961 |
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|
|
|
|
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Total interest income |
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288,292 |
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|
295,931 |
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|
843,987 |
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|
900,387 |
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Interest expense: |
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Deposits |
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95,089 |
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|
|
143,188 |
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|
301,053 |
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|
401,160 |
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Loans payable |
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|
240 |
|
|
|
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|
240 |
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Federal funds purchased and repurchase agreements |
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|
35,790 |
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|
34,300 |
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|
98,698 |
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|
|
115,460 |
|
Advances from FHLB |
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|
10,018 |
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|
9,172 |
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|
30,738 |
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|
26,370 |
|
Notes payable and other borrowings |
|
|
2,534 |
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|
4,242 |
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|
9,573 |
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|
17,718 |
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Total interest expense |
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|
143,671 |
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|
190,902 |
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|
440,302 |
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|
|
560,708 |
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Net interest income |
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|
144,621 |
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|
|
105,029 |
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|
403,685 |
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|
339,679 |
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Provision for loan and lease losses |
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|
55,319 |
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|
34,260 |
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|
142,435 |
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|
83,802 |
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|
|
|
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|
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|
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Net interest income after provision
for loan and lease losses |
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|
89,302 |
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|
70,769 |
|
|
|
261,250 |
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|
|
255,877 |
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Non-interest income: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Other service charges on loans |
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|
1,612 |
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|
|
1,290 |
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|
|
4,343 |
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|
|
5,499 |
|
Service charges on deposit accounts |
|
|
3,170 |
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|
|
3,160 |
|
|
|
9,725 |
|
|
|
9,536 |
|
Mortgage banking activities |
|
|
1,231 |
|
|
|
1,125 |
|
|
|
2,354 |
|
|
|
2,238 |
|
Net (loss) gain on investments and impairments |
|
|
(564 |
) |
|
|
(3,119 |
) |
|
|
14,950 |
|
|
|
(6,714 |
) |
Net gain on partial extinguishment and recharacterization
of a secured commercial loan to a local financial institution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,497 |
|
Rental income |
|
|
583 |
|
|
|
620 |
|
|
|
1,705 |
|
|
|
1,953 |
|
Gain on sale of credit card portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,819 |
|
Insurance reimbursements and other agreements related to
a contingency settlement |
|
|
|
|
|
|
15,075 |
|
|
|
|
|
|
|
15,075 |
|
Other non-interest income |
|
|
7,839 |
|
|
|
5,769 |
|
|
|
22,176 |
|
|
|
17,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
13,871 |
|
|
|
23,920 |
|
|
|
55,253 |
|
|
|
50,645 |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees compensation and benefits |
|
|
35,629 |
|
|
|
33,995 |
|
|
|
106,949 |
|
|
|
103,719 |
|
Occupancy and equipment |
|
|
15,647 |
|
|
|
14,970 |
|
|
|
46,167 |
|
|
|
43,848 |
|
Business promotion |
|
|
4,083 |
|
|
|
2,973 |
|
|
|
13,150 |
|
|
|
12,767 |
|
Professional fees |
|
|
2,724 |
|
|
|
4,473 |
|
|
|
12,702 |
|
|
|
16,478 |
|
Taxes, other than income taxes |
|
|
4,242 |
|
|
|
4,015 |
|
|
|
12,256 |
|
|
|
11,249 |
|
Insurance and supervisory fees |
|
|
4,213 |
|
|
|
5,282 |
|
|
|
12,142 |
|
|
|
8,773 |
|
Foreclosure-related expenses |
|
|
5,626 |
|
|
|
588 |
|
|
|
12,054 |
|
|
|
1,129 |
|
Other non-interest expenses |
|
|
10,212 |
|
|
|
8,656 |
|
|
|
30,906 |
|
|
|
29,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
82,376 |
|
|
|
74,952 |
|
|
|
246,326 |
|
|
|
227,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
20,797 |
|
|
|
19,737 |
|
|
|
70,177 |
|
|
|
78,752 |
|
Income tax benefit (provision) |
|
|
3,749 |
|
|
|
(5,595 |
) |
|
|
20,952 |
|
|
|
(17,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,546 |
|
|
$ |
14,142 |
|
|
$ |
91,129 |
|
|
$ |
60,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
14,477 |
|
|
$ |
4,073 |
|
|
$ |
60,922 |
|
|
$ |
30,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
|
$ |
0.66 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
|
$ |
0.66 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
91,129 |
|
|
$ |
60,769 |
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
14,188 |
|
|
|
13,239 |
|
Amortization of core deposit intangible |
|
|
2,695 |
|
|
|
2,477 |
|
Provision for loan and lease losses |
|
|
142,435 |
|
|
|
83,802 |
|
Deferred income tax (benefit) provision |
|
|
(23,986 |
) |
|
|
12,511 |
|
Stock-based compensation recognized |
|
|
|
|
|
|
2,848 |
|
(Gain) loss on sale of investments, net |
|
|
(16,135 |
) |
|
|
1,482 |
|
Other-than-temporary impairments on available-for-sale securities |
|
|
1,185 |
|
|
|
5,232 |
|
Derivative instruments and hedging activities (gain) loss |
|
|
(31,889 |
) |
|
|
6,481 |
|
Net gain on sale of loans and impairments |
|
|
(1,635 |
) |
|
|
(1,485 |
) |
Net gain on partial extinguishment and recharacterization of a secured
commercial loan to a local financial institution |
|
|
|
|
|
|
(2,497 |
) |
Net amortization of premiums and discounts and deferred loan fees and costs |
|
|
(956 |
) |
|
|
(936 |
) |
Amortization of broker placement fees |
|
|
10,935 |
|
|
|
7,426 |
|
Accretion of basis adjustments on fair value hedges |
|
|
|
|
|
|
(2,061 |
) |
Net accretion of premium and discounts on investment securities |
|
|
(8,196 |
) |
|
|
(29,550 |
) |
Gain on sale of credit card portfolio |
|
|
|
|
|
|
(2,819 |
) |
Decrease in accrued income tax payable |
|
|
(13,429 |
) |
|
|
(4,791 |
) |
Decrease in accrued interest receivable |
|
|
17,018 |
|
|
|
6,088 |
|
Decrease in accrued interest payable |
|
|
(37,906 |
) |
|
|
(26,374 |
) |
Decrease in other assets |
|
|
12,716 |
|
|
|
2,279 |
|
Decrease in other liabilities |
|
|
(15,378 |
) |
|
|
(97,550 |
) |
|
|
|
|
|
|
|
Total adjustments |
|
|
51,662 |
|
|
|
(24,198 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
142,791 |
|
|
|
36,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Principal collected on loans |
|
|
2,081,236 |
|
|
|
2,330,949 |
|
Loans originated |
|
|
(2,858,266 |
) |
|
|
(2,619,987 |
) |
Purchase of loans |
|
|
(373,997 |
) |
|
|
(147,848 |
) |
Proceeds from sale of loans |
|
|
106,583 |
|
|
|
97,500 |
|
Proceeds from sale of repossessed assets |
|
|
54,127 |
|
|
|
43,756 |
|
Purchase of servicing assets |
|
|
(621 |
) |
|
|
(1,614 |
) |
Proceeds from sale of available for sale securities |
|
|
389,784 |
|
|
|
408,285 |
|
Purchase of securities held to maturity |
|
|
(99 |
) |
|
|
(417,450 |
) |
Purchase of securities available for sale |
|
|
(3,368,093 |
) |
|
|
|
|
Principal repayments and maturities of securities held to maturity |
|
|
1,551,272 |
|
|
|
392,480 |
|
Principal repayments of securities available for sale |
|
|
255,425 |
|
|
|
163,959 |
|
Additions to premises and equipment |
|
|
(21,663 |
) |
|
|
(19,294 |
) |
Proceeds from sale of other investment securities |
|
|
9,474 |
|
|
|
|
|
Decrease (increase) in other equity securities |
|
|
4,224 |
|
|
|
(20,520 |
) |
Net cash inflow on acquisition of business |
|
|
5,154 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(2,165,460 |
) |
|
|
210,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
1,723,172 |
|
|
|
622,608 |
|
Net increase in loans payable |
|
|
300,000 |
|
|
|
|
|
Net increase (decrease) in federal funds purchased and securities
sold under repurchase agreements |
|
|
232,290 |
|
|
|
(1,168,698 |
) |
Net FHLB advances (paid) taken |
|
|
(117,000 |
) |
|
|
445,000 |
|
Repayments of notes payable and other borrowings |
|
|
|
|
|
|
(150,000 |
) |
Dividends paid |
|
|
(49,633 |
) |
|
|
(44,981 |
) |
Issuance of common stock |
|
|
|
|
|
|
91,967 |
|
Exercise of stock options |
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
2,088,882 |
|
|
|
(204,104 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
66,213 |
|
|
|
42,683 |
|
Cash and cash equivalents at beginning of period |
|
|
378,945 |
|
|
|
568,811 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
445,158 |
|
|
$ |
611,494 |
|
|
|
|
|
|
|
|
Cash and cash equivalents include: |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
151,040 |
|
|
$ |
138,037 |
|
Money market instruments |
|
|
294,118 |
|
|
|
473,457 |
|
|
|
|
|
|
|
|
|
|
$ |
445,158 |
|
|
$ |
611,494 |
|
|
|
|
|
|
|
|
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, 2008 |
|
|
September 30, 2007 |
|
Preferred Stock |
|
$ |
550,100 |
|
|
$ |
550,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock outstanding: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
92,504 |
|
|
|
83,254 |
|
Issuance of common stock |
|
|
|
|
|
|
9,250 |
|
Common stock issued under stock option plan |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
92,510 |
|
|
|
92,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In-Capital: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
108,279 |
|
|
|
22,757 |
|
Issuance of common stock |
|
|
|
|
|
|
82,717 |
|
Shares issued under stock option plan |
|
|
47 |
|
|
|
|
|
Stock-based compensation recognized |
|
|
|
|
|
|
2,848 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
108,326 |
|
|
|
108,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal Surplus |
|
|
286,049 |
|
|
|
276,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
409,978 |
|
|
|
326,761 |
|
Net income |
|
|
91,129 |
|
|
|
60,769 |
|
Cash dividends declared on common stock |
|
|
(19,426 |
) |
|
|
(18,131 |
) |
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 |
|
|
451,474 |
|
|
|
428,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, net of tax: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
(25,264 |
) |
|
|
(30,167 |
) |
Other comprehensive loss, net of tax |
|
|
(21,923 |
) |
|
|
(11,776 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
(47,187 |
) |
|
|
(41,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
1,441,272 |
|
|
$ |
1,414,186 |
|
|
|
|
|
|
|
|
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) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
24,546 |
|
|
$ |
14,142 |
|
|
$ |
91,129 |
|
|
$ |
60,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gain (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain (loss)
arising during the period |
|
|
30,773 |
|
|
|
15,364 |
|
|
|
(17,306 |
) |
|
|
(18,522 |
) |
Less: Reclassification adjustments for net loss (gain)
and other-than-temporary impairments
included in net income |
|
|
696 |
|
|
|
3,119 |
|
|
|
(5,476 |
) |
|
|
6,714 |
|
Income tax benefit (expense) related to items of
other comprehensive income |
|
|
109 |
|
|
|
(173 |
) |
|
|
859 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gain (loss) for the period, net of tax |
|
|
31,578 |
|
|
|
18,310 |
|
|
|
(21,923 |
) |
|
|
(11,776 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
56,124 |
|
|
$ |
32,452 |
|
|
$ |
69,206 |
|
|
$ |
48,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Audited Consolidated Financial Statements included
in the Corporations Annual Report on Form 10-K for the year ended December 31, 2007. 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, 2007, included
in the Corporations 2007 Annual Report on Form 10-K. All adjustments (consisting only of normal
recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of
the statement of financial position, results of operations and cash flows for the interim periods
have been reflected. All significant intercompany accounts and transactions have been eliminated in
consolidation.
The results of operations for the quarter and nine-month period ended September 30, 2008 are
not necessarily indicative of the results to be expected for the entire year.
Recently issued accounting pronouncements
On April 30, 2007, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position No. (FSP) FIN 39-1 (FSP FIN 39-1), which amends FIN 39, Offsetting of Amounts Related
to Certain Contracts. 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 became effective for fiscal years beginning after November
15, 2007. The Corporation analyzed the potential impact of FSP FIN 39-1 on its financial
statements. As of September 30, 2008, the Corporation did not apply this pronouncement since FSP
FIN 39-1 applies only to cash collateral and all of the collateral received or delivered to
counterparties for derivative instruments are investment securities.
In November 2007, the SEC issued Staff Accounting Bulletin No. (SAB) 109, Written Loan
Commitments That Are Accounted For At Fair Value Through Earnings Under Generally Accepted
Accounting Principles. This interpretation expresses the views of the staff regarding written loan
commitments that are accounted for at fair value through earnings under GAAP. SAB 109 supersedes
SAB 105, Application of Accounting Principles to Loan Commitments, which provided the prior views
of the staff regarding derivative loan commitments that are accounted for at fair value through
earnings pursuant to Statement of Financial Accounting Standards No. (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities. SAB 109 expresses the current view of the staff
that, consistent with the guidance in SFAS 156, Accounting for Servicing of Financial Assets, and
SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, the expected net
future cash flows related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value through earnings.
SAB 109 became effective for fiscal quarters beginning after December 15, 2007. The adoption of
this statement in 2008 did not have an effect on the Corporations financial statements.
9
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51. This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. It requires consolidated net income to be reported at amounts that include
the amounts attributable to both the parent and the noncontrolling interest. It also requires
disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. This Statement is effective
for fiscal years, and interim periods within those fiscal years, beginning on or after December 15,
2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is
prohibited. The Corporation is currently evaluating the possible effect, if any, of the adoption of
this statement on its financial statements, commencing on January 1, 2009.
In December 2007, the FASB issued SFAS 141R, Business Combinations. This Statement retains
the fundamental requirements in Statement 141 that the acquisition method of accounting (which
Statement 141 called the purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. This Statement defines the acquirer as the entity
that obtains control of one or more businesses in the business combination and establishes the
acquisition date as the date that the acquirer achieves control. This Statement requires an
acquirer to recognize the assets acquired, the liabilities assumed, including contingent
liabilities, and any noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions specified in the Statement. This
Statement applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008.
An entity may not apply it before that date. The Corporation is currently evaluating the possible
effect, if any, of the adoption of this statement on its financial statements.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133. This Statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how derivative instruments and related hedged items are accounted
for under SFAS 133 and its related interpretations, and (b) how derivative instruments and related
hedged items affect an entitys financial position, financial performance, and cash flows. This
Statement is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. Although the Corporation
continues to evaluate the disclosure framework dictated by this Statement, most of the required
disclosures are included in Note 8 Derivative Instruments and Hedging Activities.
In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting
Principles. This Statement identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with GAAP. Prior to the issuance of SFAS 162, GAAP
hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement
on Auditing Standards No. (SAS) 69, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. SFAS 162 provides and direct the GAAP hierarchy to the entities
instead of the auditor as provided by SAS 69 because the entities (not their auditors) are
responsible for selecting accounting principles for financial statements that are presented in
conformity with GAAP. Any effect of applying the provisions of SFAS 162 should be reported as a
change in accounting principle in accordance with SFAS 154, Accounting Changes and Error
Corrections. SFAS 162 is effective 60 days following the SECs approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The adoption of SFAS 162 did not impact
the Corporations current accounting policies or the Corporations financial results.
10
In May 2008, the FASB issued FSP APB 14-1 (FSPAPB 14-1). FSP-APB 14-1 clarifies that
convertible debt instruments that may be settled in cash upon conversion (including partial cash
settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants. Additionally, FSP-APB 14-1 specifies that
issuers of such instruments should separately account for the liability and equity components in a
manner that will reflect the entitys nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP-APB 14-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. As
of September 30, 2008, the Corporation does not have any convertible debt instrument.
In May 2008, the FASB issued SFAS 163, Accounting for Financial Guarantee Insurance Contracts
an interpretation of FASB Statement No. 60. This Statement requires that an insurance
enterprise recognize a claim liability prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured financial obligation. This Statement
also clarifies how SFAS 60 applies to financial guarantee insurance contracts, including the
recognition and measurement to be used to account for premium revenue and claim liabilities. SFAS
163 is effective for financial statements issued for fiscal years beginning after December 15,
2008, and all interim periods within those fiscal years, except for some disclosures about the
insurance enterprises risk-management activities. Except for those disclosures, earlier
application of SFAS 163 is not permitted. The Corporation is currently evaluating the possible
effect, if any, of the adoption of this statement on its financial statements, commencing on
January 1, 2009.
In June 2008, the FASB issued FSP EITF 03-6-1 (FSP EITF 03-6-1), Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities. FSP EITF
03-6-1 applies to entities with outstanding unvested share-based payment awards that contain rights
to nonforfeitable dividends. Furthermore, awards with dividends that do not need to be
returned to
the entity, if the employee forfeits, the award are considered participating securities. Accordingly,
under FSP EITF 03-6-1 unvested share-based payment awards that are considered to be participating
securities should be included in the computation of EPS pursuant to the two-class method under SFAS
128. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. Early application is not permitted. The
Corporation is currently evaluating this statement in light of the recently approved Omnibus
Incentive Plan, however, as of September 30, 2008, there are no outstanding unvested share-based
payment awards.
In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4 (FSP FAS 133-1 and FIN 45-4),
Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No.
161. FSP FAS 133-1 and FIN 45-4 amends SFAS 133 to require disclosures by sellers of credit
derivatives, including credit derivatives embedded in a hybrid instrument. A seller of credit
derivatives must disclose information about its credit derivatives and hybrid instruments that have
embedded credit derivatives to enable users of financial statements to assess their potential
effect on its financial position, financial performance, and cash flows. As of September 30, 2008,
the Corporation is not involved in the credit derivatives market. This FSP also amends FASB
Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, to require an additional disclosure about
the current status of the payment/performance risk of a guarantee. Further, this FSP clarifies the
FASBs intent about the effective date of SFAS 161. This FSP clarifies the FASBs intent that the
disclosures required by SFAS 161 should be provided for any reporting period (annual or quarterly
interim) beginning after November 15, 2008. The provisions of this FSP that amend SFAS 133 and FIN
45 will be effective for reporting periods (annual or interim) ending after November 15, 2008. The
adoption of this pronouncement will not have a significant impact on the Corporations financial
statements.
11
In October 2008, the FASB issued FSP No. FAS 157-3 (FSP FAS 157-3), Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active. FSP FAS 157-3 clarifies
the application of SFAS 157, Fair Value Measurements, in a market that is not active and provides
an example to illustrate key considerations in determining the fair value of a financial asset when
the market for that financial asset is not active. This FSP became effective on October 10, 2008
and also applies to prior periods for which financial statements have not been issued. The
adoption of this pronouncement did not impact the Corporations fair value methodologies on its
financial assets.
2 EARNINGS PER COMMON SHARE
The calculations of earnings per common share for the quarters and nine-month periods ended on
September 30, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine-Month Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except per share data) |
|
Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,546 |
|
|
$ |
14,142 |
|
|
$ |
91,129 |
|
|
$ |
60,769 |
|
Less: Preferred stock dividends |
|
|
(10,069 |
) |
|
|
(10,069 |
) |
|
|
(30,207 |
) |
|
|
(30,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
14,477 |
|
|
$ |
4,073 |
|
|
$ |
60,922 |
|
|
$ |
30,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding |
|
|
92,511 |
|
|
|
87,075 |
|
|
|
92,507 |
|
|
|
84,542 |
|
Average potential common shares |
|
|
58 |
|
|
|
242 |
|
|
|
116 |
|
|
|
416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of common
shares outstanding |
|
|
92,569 |
|
|
|
87,317 |
|
|
|
92,623 |
|
|
|
84,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
|
$ |
0.66 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
|
$ |
0.66 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the 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 on earnings per share. For the quarter and
nine-month periods ended September 30, 2008, a total of 3,596,300 (2,054,600 for the third quarter
of 2007) and 2,020,600 (2,054,600 for the nine month period ended on September 30, 2007)
weighted-average outstanding stock options, respectively, were not included in the computation of
dilutive earnings per share since their inclusion would have an antidilutive effect on earnings per
share.
3 STOCK OPTION PLAN
Between 1997 and January 2007, the Corporation 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 options on
shares of the Corporations common stock to eligible employees. The options granted under the plan
could not 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 was 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.
12
Under the 1997 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 stock
appreciation rights, the optionee surrenders the right to exercise an option granted under the plan
in consideration for payment by 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 is cancelled by the Corporation and the shares subject to
the option are not eligible for further grants under the option plan. During the second quarter of
2008, the Compensation Committee approved the grant of stock appreciation rights to one employee.
The employee surrendered the right to exercise 120,000 stock options in the form of stock
appreciation rights for a payment of $0.2 million. On January 21, 2007, the 1997 stock option plan
expired; all outstanding awards grants under this plan continue in full force and effect, subject
to their original terms.
On April 29, 2008, the Corporations stockholders approved the First BanCorp 2008 Omnibus
Incentive Plan (the Omnibus Plan). The Omnibus Plan provides for equity-based compensation
incentives (the awards) through the grant of stock options, stock appreciation rights, restricted
stock, restricted stock units, performance shares, and other stock-based awards. This plan allows
the issuance of up to 3,800,000 shares of common stock, subject to adjustments for stock splits,
reorganization and other similar events. The Corporations Board of Directors, upon receiving the
relevant recommendation of the Compensation Committee, has the power and authority to determine
those eligible to receive awards and to establish the terms and conditions of any awards subject to
various limits and vesting restrictions that apply to individual and aggregate awards. As of the
date of the filing of this Quarterly Report on Form 10-Q, no awards have been granted under the
Omnibus Plan.
The Corporation accounted for stock options using the modified prospective method under SFAS
123R, Share-Based Payment. There were no stock options granted during the first nine months of
2008. The compensation expense associated with stock options for the nine-month period ended
September 30, 2007 was approximately $2.8 million. All employee stock options granted during 2007
were fully vested at the time of grant.
The activity of stock options during the first nine months of 2008 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Month Period Ended |
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Value (In |
|
|
|
Options |
|
|
Price |
|
|
Term (Years) |
|
|
thousands) |
|
Beginning of period |
|
|
4,136,910 |
|
|
$ |
12.60 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(6,000 |
) |
|
|
8.85 |
|
|
|
|
|
|
|
|
|
Options cancelled |
|
|
(121,000 |
) |
|
|
9.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period outstanding and exercisable |
|
|
4,009,910 |
|
|
$ |
12.71 |
|
|
|
6.3 |
|
|
$ |
4,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of options granted in 2007, which was estimated using the Black-Scholes option
pricing method, and the assumptions used are as follows:
|
|
|
|
|
|
|
2007 |
Weighted-average stock price at grant date and exercise price |
|
$ |
9.20 |
|
Stock option estimated fair value |
|
$ |
2.40 - $2.45 |
|
Weighted-average estimated fair value |
|
$ |
2.43 |
|
Expected stock option term (years) |
|
|
4.31-4.59 |
|
Expected volatility |
|
|
32 |
% |
Expected dividend yield |
|
|
3.0 |
% |
Risk-free interest rate |
|
|
5.1 |
% |
13
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;
otherwise, historical volatilities based upon 260 observations (working days) were obtained from
Bloomberg L.P. (Bloomberg) and used as inputs in the model. 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 at the time of grant based on the
options expected term.
The options exercised during the first nine months of 2008 did not have any intrinsic value
and the cash proceeds from these options were approximately $53,000. No stock options were
exercised during 2007.
14
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, 2008 and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
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 and Obligations
of U.S. Government sponsored
agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
6,975 |
|
|
$ |
26 |
|
|
$ |
|
|
|
$ |
7,001 |
|
|
|
6.05 |
|
After 10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,984 |
|
|
|
47 |
|
|
|
|
|
|
|
9,031 |
|
|
|
6.21 |
|
Puerto Rico Government
obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
|
4,584 |
|
|
|
51 |
|
|
|
|
|
|
|
4,635 |
|
|
|
6.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
10,606 |
|
|
|
60 |
|
|
|
337 |
|
|
|
10,329 |
|
|
|
4.51 |
|
|
|
13,947 |
|
|
|
141 |
|
|
|
347 |
|
|
|
13,741 |
|
|
|
4.99 |
|
After 5 to 10 years |
|
|
6,292 |
|
|
|
192 |
|
|
|
73 |
|
|
|
6,411 |
|
|
|
5.80 |
|
|
|
7,245 |
|
|
|
247 |
|
|
|
99 |
|
|
|
7,393 |
|
|
|
5.67 |
|
After 10 years |
|
|
15,782 |
|
|
|
24 |
|
|
|
544 |
|
|
|
15,262 |
|
|
|
5.30 |
|
|
|
3,416 |
|
|
|
37 |
|
|
|
66 |
|
|
|
3,387 |
|
|
|
5.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and
Puerto Rico Government
obligations |
|
|
37,264 |
|
|
|
327 |
|
|
|
954 |
|
|
|
36,637 |
|
|
|
5.27 |
|
|
|
40,567 |
|
|
|
498 |
|
|
|
512 |
|
|
|
40,553 |
|
|
|
5.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
4.99 |
|
|
|
98 |
|
|
|
1 |
|
|
|
|
|
|
|
99 |
|
|
|
5.50 |
|
After 1 to 5 years |
|
|
234 |
|
|
|
4 |
|
|
|
|
|
|
|
238 |
|
|
|
7.03 |
|
|
|
640 |
|
|
|
20 |
|
|
|
|
|
|
|
660 |
|
|
|
7.01 |
|
After 5 to 10 years |
|
|
31 |
|
|
|
3 |
|
|
|
|
|
|
|
34 |
|
|
|
8.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
1,957,623 |
|
|
|
2,001 |
|
|
|
10,826 |
|
|
|
1,948,798 |
|
|
|
5.45 |
|
|
|
158,070 |
|
|
|
235 |
|
|
|
111 |
|
|
|
158,194 |
|
|
|
5.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,957,935 |
|
|
|
2,008 |
|
|
|
10,826 |
|
|
|
1,949,117 |
|
|
|
5.45 |
|
|
|
158,808 |
|
|
|
256 |
|
|
|
111 |
|
|
|
158,953 |
|
|
|
5.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
|
99 |
|
|
|
1 |
|
|
|
|
|
|
|
100 |
|
|
|
5.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
216 |
|
|
|
7 |
|
|
|
|
|
|
|
223 |
|
|
|
6.74 |
|
|
|
496 |
|
|
|
8 |
|
|
|
|
|
|
|
504 |
|
|
|
6.48 |
|
After 5 to 10 years |
|
|
602 |
|
|
|
13 |
|
|
|
|
|
|
|
615 |
|
|
|
5.34 |
|
|
|
708 |
|
|
|
6 |
|
|
|
5 |
|
|
|
709 |
|
|
|
6.01 |
|
After 10 years |
|
|
338,674 |
|
|
|
692 |
|
|
|
1,707 |
|
|
|
337,659 |
|
|
|
5.38 |
|
|
|
42,665 |
|
|
|
582 |
|
|
|
120 |
|
|
|
43,127 |
|
|
|
5.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,591 |
|
|
|
713 |
|
|
|
1,707 |
|
|
|
338,597 |
|
|
|
5.38 |
|
|
|
43,869 |
|
|
|
596 |
|
|
|
125 |
|
|
|
44,340 |
|
|
|
5.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
59 |
|
|
|
5 |
|
|
|
|
|
|
|
64 |
|
|
|
10.01 |
|
|
|
34 |
|
|
|
1 |
|
|
|
|
|
|
|
35 |
|
|
|
7.08 |
|
After 5 to 10 years |
|
|
260,550 |
|
|
|
588 |
|
|
|
272 |
|
|
|
260,866 |
|
|
|
4.98 |
|
|
|
289,125 |
|
|
|
138 |
|
|
|
750 |
|
|
|
288,513 |
|
|
|
4.93 |
|
After 10 years |
|
|
1,315,718 |
|
|
|
5,547 |
|
|
|
2,915 |
|
|
|
1,318,350 |
|
|
|
5.58 |
|
|
|
608,942 |
|
|
|
5,290 |
|
|
|
582 |
|
|
|
613,650 |
|
|
|
5.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,576,327 |
|
|
|
6,140 |
|
|
|
3,187 |
|
|
|
1,579,280 |
|
|
|
5.48 |
|
|
|
898,101 |
|
|
|
5,429 |
|
|
|
1,332 |
|
|
|
902,198 |
|
|
|
5.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage pass-through
certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
146,941 |
|
|
|
2 |
|
|
|
37,217 |
|
|
|
109,726 |
|
|
|
5.64 |
|
|
|
162,082 |
|
|
|
3 |
|
|
|
28,407 |
|
|
|
133,678 |
|
|
|
6.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities |
|
|
4,020,794 |
|
|
|
8,863 |
|
|
|
52,937 |
|
|
|
3,976,720 |
|
|
|
5.46 |
|
|
|
1,262,860 |
|
|
|
6,284 |
|
|
|
29,975 |
|
|
|
1,239,169 |
|
|
|
5.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
1,300 |
|
|
|
|
|
|
|
780 |
|
|
|
520 |
|
|
|
7.70 |
|
|
|
1,300 |
|
|
|
|
|
|
|
198 |
|
|
|
1,102 |
|
|
|
7.70 |
|
After 10 years |
|
|
4,411 |
|
|
|
|
|
|
|
2,534 |
|
|
|
1,877 |
|
|
|
7.97 |
|
|
|
4,412 |
|
|
|
|
|
|
|
1,066 |
|
|
|
3,346 |
|
|
|
7.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
5,711 |
|
|
|
|
|
|
|
3,314 |
|
|
|
2,397 |
|
|
|
7.91 |
|
|
|
5,712 |
|
|
|
|
|
|
|
1,264 |
|
|
|
4,448 |
|
|
|
7.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (without
contractual maturity) |
|
|
1,453 |
|
|
|
|
|
|
|
258 |
|
|
|
1,195 |
|
|
|
1.94 |
|
|
|
2,638 |
|
|
|
|
|
|
|
522 |
|
|
|
2,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available for sale |
|
$ |
4,065,222 |
|
|
$ |
9,190 |
|
|
$ |
57,463 |
|
|
$ |
4,016,949 |
|
|
|
5.46 |
|
|
$ |
1,311,777 |
|
|
$ |
6,782 |
|
|
$ |
32,273 |
|
|
$ |
1,286,286 |
|
|
|
5.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 gain or loss on securities available for sale is presented as
part of accumulated other comprehensive income.
15
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, 2008 and
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008 |
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico Government
obligations |
|
$ |
11,928 |
|
|
$ |
418 |
|
|
$ |
13,624 |
|
|
$ |
536 |
|
|
$ |
25,552 |
|
|
$ |
954 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
1,766,133 |
|
|
|
10,785 |
|
|
|
3,115 |
|
|
|
41 |
|
|
|
1,769,248 |
|
|
|
10,826 |
|
GNMA |
|
|
297,689 |
|
|
|
1,707 |
|
|
|
|
|
|
|
|
|
|
|
297,689 |
|
|
|
1,707 |
|
FNMA |
|
|
880,477 |
|
|
|
3,186 |
|
|
|
21 |
|
|
|
1 |
|
|
|
880,498 |
|
|
|
3,187 |
|
Mortgage pass-through
trust certificates |
|
|
|
|
|
|
|
|
|
|
109,421 |
|
|
|
37,217 |
|
|
|
109,421 |
|
|
|
37,217 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
2,397 |
|
|
|
3,314 |
|
|
|
2,397 |
|
|
|
3,314 |
|
Equity securities |
|
|
474 |
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
|
474 |
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,956,701 |
|
|
$ |
16,354 |
|
|
$ |
128,578 |
|
|
$ |
41,109 |
|
|
$ |
3,085,279 |
|
|
$ |
57,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico Government
obligations |
|
$ |
|
|
|
$ |
|
|
|
$ |
13,648 |
|
|
$ |
512 |
|
|
$ |
13,648 |
|
|
$ |
512 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
48,202 |
|
|
|
40 |
|
|
|
3,436 |
|
|
|
71 |
|
|
|
51,638 |
|
|
|
111 |
|
GNMA |
|
|
625 |
|
|
|
11 |
|
|
|
26,887 |
|
|
|
114 |
|
|
|
27,512 |
|
|
|
125 |
|
FNMA |
|
|
285,973 |
|
|
|
274 |
|
|
|
221,902 |
|
|
|
1,058 |
|
|
|
507,875 |
|
|
|
1,332 |
|
Mortgage pass-through
certificates |
|
|
133,337 |
|
|
|
28,407 |
|
|
|
|
|
|
|
|
|
|
|
133,337 |
|
|
|
28,407 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
4,448 |
|
|
|
1,264 |
|
|
|
4,448 |
|
|
|
1,264 |
|
Equity securities |
|
|
1,384 |
|
|
|
522 |
|
|
|
|
|
|
|
|
|
|
|
1,384 |
|
|
|
522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
469,521 |
|
|
$ |
29,254 |
|
|
$ |
270,321 |
|
|
$ |
3,019 |
|
|
$ |
739,842 |
|
|
$ |
32,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporations investment securities portfolio is comprised mainly of (i) fixed-rate
mortgage-backed securities issued or guaranteed by FNMA, GNMA or FHLMC and other securities secured
by mortgage loans and (ii) U.S. Treasury and agencies securities and obligations of the Puerto Rico
Government. Thus, payment of a substantial portion of these instruments is either guaranteed or
secured by mortgages together with a guarantee of a U.S. government sponsored entity or by the full
faith and credit of the U.S. or Puerto Rico Government. In connection with the placement of FNMA
and FHLMC into conservatorship by the U.S. Treasury in September 2008, the Treasury entered into
agreements to invest up to approximately $100 billion in each agency to, among other things,
protect debt and mortgage-backed securities of the agencies. Principal and interest on these
securities are deemed recoverable.
The unrealized losses in the available-for-sale portfolio as of September 30, 2008 are
substantially related to fluctuations in market interest rates and, to some extent, credit spread
widening. In the case of private label mortgage-backed securities, the unrealized loss is mainly
related to increases in the discount rate used to value such instruments resulting from current
lack of liquidity and credit concerns in the U.S. mortgage loan market. However, the underlying
mortgages are fixed-rate single family loans with high weighted-average FICO scores (over 700) and
moderate loan-to-value ratios (under 80%), as well as a moderate delinquency levels and principal
and interest cash flow expectations have not changed to a material degree. Private label
16
mortgage-backed securities relates to mortgage loans bought to R&G Financial Corporation (R&G
Financial). R&G Financial must cover losses up to 10% of
the aggregate outstanding balance according
to recourse provisions included in the agreements. The Corporations investment in equity
securities is minimal and none is related to U.S. financial institutions that recently failed in
the midst of the current market turmoil. The Corporations policy is to review its investment
portfolio for possible other-than temporary impairment, at least quarterly. As of September 30,
2008, management has the intent and ability to hold these investments for a reasonable period of
time and for a forecasted recovery of fair value up to (or beyond) the cost of these investments;
as a result, there is no other-than temporary impairment.
For the nine-month periods ended on September 30, 2008 and 2007, the Corporation recorded
other-than-temporary impairments of approximately $1.2 million and $5.2 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-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, 2008 amounted to approximately $389.8 million (2007 $408.3 million). The
Corporation realized gross gains of approximately $6.9 million and approximately $0.2 million in
gross losses for the first nine months of 2008 (2007 $0.4 million in gross realized gains and
approximately $1.9 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, 2008 and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
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 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
254,882 |
|
|
$ |
369 |
|
|
$ |
24 |
|
|
$ |
255,227 |
|
|
|
4.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of other U.S. Government
sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
948,904 |
|
|
|
|
|
|
|
10,563 |
|
|
|
938,341 |
|
|
|
5.77 |
|
|
|
2,110,265 |
|
|
|
1,486 |
|
|
|
2,160 |
|
|
|
2,109,591 |
|
|
|
5.82 |
|
Puerto Rico Government
obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
17,765 |
|
|
|
469 |
|
|
|
103 |
|
|
|
18,131 |
|
|
|
5.85 |
|
|
|
17,302 |
|
|
|
541 |
|
|
|
107 |
|
|
|
17,736 |
|
|
|
5.85 |
|
After 10 years |
|
|
5,155 |
|
|
|
|
|
|
|
195 |
|
|
|
4,960 |
|
|
|
5.50 |
|
|
|
13,920 |
|
|
|
|
|
|
|
256 |
|
|
|
13,664 |
|
|
|
5.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Puerto
Rico Government obligations |
|
|
971,824 |
|
|
|
469 |
|
|
|
10,861 |
|
|
|
961,432 |
|
|
|
5.77 |
|
|
|
2,396,369 |
|
|
|
2,396 |
|
|
|
2,547 |
|
|
|
2,396,218 |
|
|
|
5.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
9,098 |
|
|
|
|
|
|
|
123 |
|
|
|
8,975 |
|
|
|
3.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,274 |
|
|
|
|
|
|
|
116 |
|
|
|
11,158 |
|
|
|
3.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA certificates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
8,252 |
|
|
|
|
|
|
|
94 |
|
|
|
8,158 |
|
|
|
3.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
717,292 |
|
|
|
|
|
|
|
11,009 |
|
|
|
706,283 |
|
|
|
4.47 |
|
|
|
69,553 |
|
|
|
|
|
|
|
1,067 |
|
|
|
68,486 |
|
|
|
4.30 |
|
After 10 years |
|
|
25,590 |
|
|
|
|
|
|
|
412 |
|
|
|
25,178 |
|
|
|
5.31 |
|
|
|
797,887 |
|
|
|
61 |
|
|
|
13,785 |
|
|
|
784,163 |
|
|
|
4.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
760,232 |
|
|
|
|
|
|
|
11,638 |
|
|
|
748,594 |
|
|
|
4.48 |
|
|
|
878,714 |
|
|
|
61 |
|
|
|
14,968 |
|
|
|
863,807 |
|
|
|
4.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
2,000 |
|
|
|
|
|
|
|
440 |
|
|
|
1,560 |
|
|
|
5.80 |
|
|
|
2,000 |
|
|
|
|
|
|
|
91 |
|
|
|
1,909 |
|
|
|
5.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
held-to-maturity |
|
$ |
1,734,056 |
|
|
$ |
469 |
|
|
$ |
22,939 |
|
|
$ |
1,711,586 |
|
|
|
5.21 |
|
|
$ |
3,277,083 |
|
|
$ |
2,457 |
|
|
$ |
17,606 |
|
|
$ |
3,261,934 |
|
|
|
5.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
17
The following tables show the Corporations held-to-maturity 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, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008 |
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
agencies |
|
$ |
927,001 |
|
|
$ |
10,066 |
|
|
$ |
11,340 |
|
|
$ |
497 |
|
|
$ |
938,341 |
|
|
$ |
10,563 |
|
Puerto Rico Government
obligations |
|
|
4,960 |
|
|
|
195 |
|
|
|
4,374 |
|
|
|
103 |
|
|
|
9,334 |
|
|
|
298 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
8,346 |
|
|
|
104 |
|
|
|
629 |
|
|
|
19 |
|
|
|
8,975 |
|
|
|
123 |
|
FNMA |
|
|
50,052 |
|
|
|
586 |
|
|
|
689,567 |
|
|
|
10,929 |
|
|
|
739,619 |
|
|
|
11,515 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
1,560 |
|
|
|
440 |
|
|
|
1,560 |
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
990,359 |
|
|
$ |
10,951 |
|
|
$ |
707,470 |
|
|
$ |
11,988 |
|
|
$ |
1,697,829 |
|
|
$ |
22,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored
agencies |
|
$ |
616,572 |
|
|
$ |
1,568 |
|
|
$ |
24,469 |
|
|
$ |
592 |
|
|
$ |
641,041 |
|
|
$ |
2,160 |
|
U.S. Treasury Notes |
|
|
24,697 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
24,697 |
|
|
|
24 |
|
Puerto Rico Government
obligations |
|
|
13,664 |
|
|
|
256 |
|
|
|
4,200 |
|
|
|
107 |
|
|
|
17,864 |
|
|
|
363 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
|
|
|
|
|
|
|
|
11,158 |
|
|
|
116 |
|
|
|
11,158 |
|
|
|
116 |
|
FNMA |
|
|
|
|
|
|
|
|
|
|
849,341 |
|
|
|
14,852 |
|
|
|
849,341 |
|
|
|
14,852 |
|
Corporate Bonds |
|
|
1,909 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
1,909 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
656,842 |
|
|
$ |
1,939 |
|
|
$ |
889,168 |
|
|
$ |
15,667 |
|
|
$ |
1,546,010 |
|
|
$ |
17,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities in an unrealized loss position as of September 30, 2008 are
primarily fixed-rate mortgage-backed securities and U.S. agency securities. The vast majority of
them are rated the equivalent of AAA by major rating agencies. The unrealized losses in the
held-to-maturity portfolio as of September 30, 2008 are substantially related to market interest
rate fluctuations and to some extent to credit spread widening. Refer to the Investment Securities
Available-for-Sale discussion above for additional information regarding concerns about certain
government-sponsored agencies due to the troubled U.S. housing and mortgage markets. At this time,
the Corporation has the intent and ability to hold these investments until maturity, and principal
and interest are deemed recoverable. The impairment is considered temporary.
18
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, 2008 and December 31, 2007, the Corporation had investments in FHLB stock
with a book value of $59.2 million and $63.4 million, respectively. The estimated market value of
such investments is its redemption value determined by the ultimate recoverability of its par
value. Dividend income from FHLB stock for the third quarter and nine-month period ended September
30, 2008 amounted to $1.0 million and $3.2 million, respectively, compared to $0.8 million and $2.0
million, respectively, for the same periods in 2007.
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, 2008 and December 31, 2007 was $1.6
million. During the first quarter of 2008, the Corporation realized a one-time gain of $9.3
million on the mandatory redemption of part of its investment in VISA, Inc., which completed its
initial public offering (IPO) in March 2008.
6 LOAN PORTFOLIO
The following is a detail of the loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Residential real estate loans, mainly secured by first mortgages |
|
$ |
3,438,292 |
|
|
$ |
3,143,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans: |
|
|
|
|
|
|
|
|
Construction loans |
|
|
1,478,076 |
|
|
|
1,454,644 |
|
Commercial mortgage loans |
|
|
1,422,899 |
|
|
|
1,279,251 |
|
Commercial loans |
|
|
3,602,123 |
|
|
|
3,231,126 |
|
Loans to local financial institutions collateralized by
real estate mortgages |
|
|
579,305 |
|
|
|
624,597 |
|
|
|
|
|
|
|
|
Commercial loans |
|
|
7,082,403 |
|
|
|
6,589,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases |
|
|
371,982 |
|
|
|
378,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
1,787,915 |
|
|
|
1,667,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
|
12,680,592 |
|
|
|
11,778,822 |
|
Allowance for loan and lease losses |
|
|
(261,170 |
) |
|
|
(190,168 |
) |
|
|
|
|
|
|
|
Loans receivable, net |
|
|
12,419,422 |
|
|
|
11,588,654 |
|
Loans held for sale |
|
|
32,510 |
|
|
|
20,924 |
|
|
|
|
|
|
|
|
Total loans |
|
$ |
12,451,932 |
|
|
$ |
11,609,578 |
|
|
|
|
|
|
|
|
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,
including loans held for sale, of $12.7 billion as of September 30, 2008, approximately 80% has credit risk concentration in
Puerto Rico, 12% in the United States (mainly in the state of Florida) and 8% in the Virgin
Islands.
19
The Corporations largest loan concentration as of September 30, 2008 in the amount of $354.6
million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. Together
with the Corporations next largest loan concentration of $224.7 million with another mortgage
originator in Puerto Rico, R&G Financial, the Corporations total loans granted to these mortgage
originators amounted to $579.3 million as of September 30, 2008. These commercial loans are
secured by individual mortgage loans on residential and commercial real estate.
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, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Balance at beginning of period |
|
$ |
222,272 |
|
|
$ |
165,009 |
|
|
$ |
190,168 |
|
|
$ |
158,296 |
|
Provision for loan and lease losses |
|
|
55,319 |
|
|
|
34,260 |
|
|
|
142,435 |
|
|
|
83,802 |
|
Charge-offs |
|
|
(27,175 |
) |
|
|
(23,173 |
) |
|
|
(86,163 |
) |
|
|
(68,769 |
) |
Recoveries |
|
|
2,417 |
|
|
|
1,390 |
|
|
|
6,393 |
|
|
|
4,157 |
|
Other adjustments (1) |
|
|
8,337 |
|
|
|
|
|
|
|
8,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
261,170 |
|
|
$ |
177,486 |
|
|
$ |
261,170 |
|
|
$ |
177,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Carryover of the allowance for loan losses related to a $218 million auto loan portfolio acquired in
the third quarter of 2008. |
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 in accordance with the
contractual terms of the loan agreement, and does not necessarily represent loans for which the
Corporation will incur a substantial loss. As of September 30, 2008 and December 31, 2007,
impaired loans and their related allowance were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
|
|
September 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
Impaired loans |
|
$ |
407,348 |
|
|
$ |
151,818 |
|
Impaired loans with valuation allowance |
|
|
296,351 |
|
|
|
66,941 |
|
Allowance for impaired loans |
|
|
58,963 |
|
|
|
7,523 |
|
During the first nine months of 2008, the Corporation identified several commercial and
construction loans amounting to $321.5 million that it determined should be classified as impaired,
of which $285.0 million have a specific reserve of $57.1 million. Approximately $211.1 million of
the $321.5 million commercial and construction loans that were determined to be impaired during
2008 is related to the Miami Corporate Banking operation, mainly condo conversion loans. As of
September 30, 2008, approximately $182.2 million, or 73%, of a total portfolio originally disbursed as condo-conversion amounting to $251 million is
considered impaired with a specific reserve of $31.4 million.
Meanwhile, the Corporations impaired loans decreased by approximately $64.0 million during
the first nine months of 2008 principally as a result of foreclosed loans related to the Miami
Corporate Banking operations, with a principal balance of approximately $22.4 million, which had a
related impairment reserve of $4.2 million at the time of
foreclosure. Also, a loan was sold, related to the Miami operations, that carried a principal balance of approximately $24.1 million
with a related impairment reserve of $2.4 million at the time of sale.
20
The latter was sold for
$22.5 million during the second quarter of 2008. Other decreases in impaired loans may include
loans paid in full, loans no longer considered impaired and loans charged-off.
Interest income in the amount of approximately $14.4 million and $2.7 million was recognized
on impaired loans for the nine-month periods ended September 30, 2008 and 2007, respectively. The
average recorded investment in impaired loans for the first nine months of 2008 and 2007 was $257.0
million and $101.3 million, respectively.
8 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
One of the market risks facing the Corporation is interest rate risk, which includes the risk
that changes in interest rates will result in changes in the value of the Corporations 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 certificates of deposit (CDs)
and medium-term notes.
The Corporation designates a derivative as a fair value hedge, a cash flow hedge or an
economic undesignated hedge when it enters into the derivative contract. As of September 30, 2008,
all derivatives held by the Corporation were considered economic undesignated hedges. These
undesignated hedges are recorded at fair value with the resulting gain or loss recognized in
current earnings.
The following summarizes most of the derivative 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
notional principal amount. 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), mainly those with long-term maturities, to a variable
rate and mitigate the interest rate risk inherent in these variable rate loans. Similar to
unrealized gains and losses arising from changes in fair value, net interest settlements on
interest rate swaps are recorded as an adjustment to interest income or interest expense
depending on whether an asset or liability is being economically hedged.
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 on
certain private label mortgage pass-through securities and certain of the Corporations
commercial loans to other financial institutions is generally a variable rate limited to the
weighted-average coupon of the pass-through certificate or referenced residential mortgage
collateral, less a contractual servicing fee.
Indexed options 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.
21
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.
The following table summarizes the notional amounts of all derivative instruments as of
September 30, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
Notional Amounts |
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Economic undesignated hedges: |
|
|
|
|
|
|
|
|
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
Interest rate swap agreements used to hedge fixed rate
brokered CDs, notes payable and loans |
|
$ |
1,619,010 |
|
|
$ |
4,244,473 |
|
Written interest rate cap agreements |
|
|
128,052 |
|
|
|
128,075 |
|
Purchased interest rate cap agreements |
|
|
279,247 |
|
|
|
294,982 |
|
|
|
|
|
|
|
|
|
|
Equity contracts: |
|
|
|
|
|
|
|
|
Embedded written options on stock index deposits and notes payable |
|
|
53,515 |
|
|
|
53,515 |
|
Purchased options used to manage exposure to the stock
market on embedded stock index options |
|
|
53,515 |
|
|
|
53,515 |
|
|
|
|
|
|
|
|
|
|
$ |
2,133,339 |
|
|
$ |
4,774,560 |
|
|
|
|
|
|
|
|
The following table summarizes the fair values of derivative instruments and the location in
the Statement of Financial Condition as of September 30, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
Statement of |
|
|
2008 |
|
|
2007 |
|
|
Statement of |
|
|
2008 |
|
|
2007 |
|
|
|
Financial Condition |
|
|
Fair |
|
|
Fair |
|
|
Financial Condition |
|
|
Fair |
|
|
Fair |
|
|
|
Location |
|
|
Value |
|
|
Value |
|
|
Location |
|
|
Value |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Economic undesignated hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements used to hedge
fixed rate brokered CDs, notes payable and loans |
|
Other assets |
|
$ |
207 |
|
|
$ |
213 |
|
|
Accounts payable and other liabilities |
|
$ |
30,281 |
|
|
$ |
58,057 |
|
Written interest rate cap agreements |
|
Other assets |
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
|
77 |
|
|
|
47 |
|
Purchased interest rate cap agreements |
|
Other assets |
|
|
4,621 |
|
|
|
5,149 |
|
|
Accounts payable and other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded written options on stock index deposits |
|
Other assets |
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
1,424 |
|
|
|
4,375 |
|
Embedded written options on stock index notes
payable |
|
Other assets |
|
|
|
|
|
|
|
|
|
Notes payable |
|
|
2,347 |
|
|
|
4,673 |
|
Purchased options used to manage exposure to
the stock market on embedded stock index options |
|
Other assets |
|
|
4,059 |
|
|
|
9,339 |
|
|
Accounts payable and other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,887 |
|
|
$ |
14,701 |
|
|
|
|
|
|
$ |
34,129 |
|
|
$ |
67,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
The following table summarizes the effect of derivative instruments on the Statement of Income
for the quarter and nine-month periods ended on September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain or (Loss) |
|
|
|
Location of Unrealized Gain or (Loss) |
|
|
Quarter Ended |
|
|
Nine-Month Period Ended |
|
|
|
Recognized in Income on |
|
|
September 30, |
|
|
September 30, |
|
|
|
Derivatives |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements used to hedge fixed-rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered CDs |
|
Interest expense - Deposits |
|
$ |
5,667 |
|
|
$ |
61,598 |
|
|
$ |
31,219 |
|
|
$ |
(459 |
) |
Notes payable |
|
Interest expense - Notes payable and other borrowings |
|
|
16 |
|
|
|
168 |
|
|
|
(98 |
) |
|
|
1,222 |
|
Loans |
|
Interest income - Loans |
|
|
(136 |
) |
|
|
(1,856 |
) |
|
|
(96 |
) |
|
|
(578 |
) |
Written and purchased interest rate cap agreements mortgage-backed securities |
|
Interest income - Investment Securities |
|
|
(1,416 |
) |
|
|
(4,464 |
) |
|
|
(559 |
) |
|
|
16 |
|
Written and purchased interest rate cap agreements loans |
|
Interest income - Loans |
|
|
(22 |
) |
|
|
(130 |
) |
|
|
1 |
|
|
|
(262 |
) |
Equity contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded written and purchased options on stock index deposits |
|
Interest expense - Deposits |
|
|
2 |
|
|
|
373 |
|
|
|
(148 |
) |
|
|
372 |
|
Embedded written and purchased options on stock index notes payable |
|
Interest expense - Notes payable and other borrowings |
|
|
32 |
|
|
|
190 |
|
|
|
145 |
|
|
|
(160 |
) |
Total Unrealized (Loss) Gain on derivatives |
|
|
|
|
|
$ |
4,143 |
|
|
$ |
55,879 |
|
|
$ |
30,464 |
|
|
$ |
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments, such as interest rate swaps, are subject to market risk. The
Corporations derivatives are mainly composed of interest rate swaps that are used to convert the
fixed interest payment on its brokered CDs and medium-term notes to variable payments (receive
fixed/pay floating). 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 derivative instruments on earnings. This will depend, for the most part, on
the shape of the yield curve as well as the level of interest rates. The unrealized gains and
losses in the fair value of derivatives that economically hedge certain callable brokered CDs and
medium-term notes are partially offset by unrealized gains and losses on the valuation of such
economically hedged liabilities that were elected to be measured at fair value under the provisions
of SFAS 159. The Corporation includes the gain or loss on those economically hedged liabilities
(brokered CDs and medium-term notes) in the same line item as the offsetting loss or gain on the
related derivatives as set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
|
2008 |
|
2007 |
|
|
Gain |
|
(Loss) Gain |
|
Net Unrealized |
|
Gain |
|
(Loss) Gain |
|
Net Unrealized |
(In thousands) |
|
on Derivatives |
|
on SFAS 159 liabilities |
|
Gain |
|
on Derivatives |
|
on SFAS 159 liabilities |
|
(Loss) / Gain |
Interest expense Deposits |
|
$ |
5,669 |
|
|
$ |
(791 |
) |
|
$ |
4,878 |
|
|
$ |
61,971 |
|
|
$ |
(62,973 |
) |
|
$ |
(1,002 |
) |
Interest expense Notes
payable and other
borrowings |
|
|
48 |
|
|
|
961 |
|
|
|
1,009 |
|
|
|
358 |
|
|
|
483 |
|
|
|
841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period ended September 30, |
|
|
2008 |
|
2007 |
|
|
Gain |
|
(Loss) / Gain |
|
Net Unrealized |
|
(Loss) / Gain |
|
(Loss) Gain |
|
Net Unrealized |
|
|
on Derivatives |
|
on SFAS 159 liabilities |
|
Gain |
|
on Derivatives |
|
on SFAS 159 liabilities |
|
(Loss) / Gain |
Interest expense Deposits |
|
$ |
31,071 |
|
|
$ |
(21,886 |
) |
|
$ |
9,185 |
|
|
$ |
(87 |
) |
|
$ |
(6,575 |
) |
|
$ |
(6,662 |
) |
Interest expense Notes
payable and other
borrowings |
|
|
47 |
|
|
|
1,860 |
|
|
|
1,907 |
|
|
|
1,062 |
|
|
|
613 |
|
|
|
1,675 |
|
23
A summary of interest rate swaps as of September 30, 2008 and December 31, 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
|
|
September 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
Pay fixed/receive floating (generally used to economically hedge variable rate loans): |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
79,349 |
|
|
$ |
80,212 |
|
Weighted-average receive rate at period end |
|
|
4.59 |
% |
|
|
7.09 |
% |
Weighted-average pay rate at period end |
|
|
6.75 |
% |
|
|
6.75 |
% |
Floating rates range from 167 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 |
|
$ |
1,539,661 |
|
|
$ |
4,164,261 |
|
Weighted-average receive rate at period end |
|
|
5.32 |
% |
|
|
5.26 |
% |
Weighted-average pay rate at period end |
|
|
3.15 |
% |
|
|
5.07 |
% |
Floating rates range from 2 basis points to 54 basis points over 3-month LIBOR |
|
|
|
|
|
|
|
|
During the first nine months of 2008, approximately $2.6 billion of interest rate swaps were
called by the counterparties, mainly due to lower 3-month LIBOR. Following the cancellation of the
interest rate swaps, the Corporation exercised its call option on approximately $2.5 billion
swapped to floating brokered CDs. The Corporation recorded a net unrealized gain of $4.8 million as
a result of these transactions resulting from the reversal of the cumulative mark-to-market
valuation of the swaps and the brokered CDs called.
As of September 30, 2008, the Corporation has not entered into any derivative instrument
containing credit-risk-related contingent features.
24
9 GOODWILL AND OTHER INTANGIBLES
Goodwill as of September 30, 2008 amounted to $28.1 million (December 31, 2007 $28.1
million) and was recognized as part of Other Assets. The goodwill resulted primarily from the
acquisition of Ponce General Corporation in 2005. No goodwill impairment was recognized during 2008
and 2007. Goodwill and other indefinite life intangibles are reviewed periodically for impairment
at least annually. Impairment review will be conducted during the
fourth quarter of 2008.
As of September 30, 2008, the gross carrying amount and accumulated amortization of core
deposit intangibles was $45.8 million and $20.9 million, respectively, recognized as part of Other
Assets in the Consolidated Statements of Financial Condition (December 31, 2007 $41.2 million
and $18.3 million, respectively). The increase in the gross amount from December 2007 relates to
the acquisition of the Virgin Islands Community Bank (VICB) on January 28, 2008. During the
quarters ended September 30, 2008 and 2007, the amortization expense of core deposits amounted to
$0.9 million and $0.8 million, respectively. For the nine-month periods ended September 30, 2008
and 2007, the amortization expense of core deposits amounted to $2.6 million and $2.5 million,
respectively.
10 DEPOSITS
The following table summarizes deposit balances:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Non-interest bearing checking account deposits |
|
$ |
661,197 |
|
|
$ |
621,884 |
|
Savings accounts |
|
|
1,353,211 |
|
|
|
1,036,662 |
|
Interest-bearing checking accounts |
|
|
591,820 |
|
|
|
518,570 |
|
Certificates of deposit |
|
|
1,845,731 |
|
|
|
1,680,344 |
|
|
|
|
|
|
|
|
|
|
Brokered CDs (includes $1,515,525 and
$4,186,563 measured at fair value as of
September 30, 2008 and December 31, 2007,
respectively) |
|
|
8,367,873 |
|
|
|
7,177,061 |
|
|
|
|
|
|
|
|
|
|
$ |
12,819,832 |
|
|
$ |
11,034,521 |
|
|
|
|
|
|
|
|
The interest expense on deposits includes the valuation to market of interest rate swaps that
economically hedge brokered CDs, the related interest exchanged, the amortization of broker
placement fees related to brokered CDs not elected for the fair value option 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, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
Interest expense on deposits |
|
$ |
96,111 |
|
|
$ |
139,525 |
|
|
$ |
299,303 |
|
|
$ |
387,579 |
|
Amortization of broker placement fees (1) |
|
|
3,856 |
|
|
|
2,661 |
|
|
|
10,935 |
|
|
|
6,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on deposits excluding
net unrealized (gain) loss on
derivatives and SFAS 159 brokered CDs |
|
|
99,967 |
|
|
|
142,186 |
|
|
|
310,238 |
|
|
|
394,498 |
|
Net unrealized (gain) loss on
derivatives and SFAS 159 brokered CDs |
|
|
(4,878 |
) |
|
|
1,002 |
|
|
|
(9,185 |
) |
|
|
6,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense on deposits |
|
$ |
95,089 |
|
|
$ |
143,188 |
|
|
$ |
301,053 |
|
|
$ |
401,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Related to brokered CDs not elected for the fair value option under SFAS 159. |
25
Total interest expense on deposits includes net cash settlements on interest rate swaps that
economically hedge brokered CDs that for the quarter and nine-month period ended September 30, 2008
amounted to net interest realized of $10.3 million and $30.2 million, respectively (2007 net
interest incurred of $3.4 million for the third quarter and $10.8 million for the nine-month
period).
11 LOANS PAYABLE
As of September 30, 2008 loans payable consist of $300 million in short-term borrowings under
the Federal Reserve (FED) Discount Window Program bearing interest at 2.25%. As of September 30,
2008, the Corporation had additional capacity of approximately $180 million on this credit facility
based on collateral pledged at the FED, including the haircut reflecting the perceived risk
associated with holding the collateral. Haircut refers to the percentage by which an assets market
value is reduced for the purpose of collateral levels.
12 FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Federal funds purchased and securities sold under agreements to repurchase (repurchase
agreements) consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December, 31 |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Federal funds purchased, interest ranging from 4.50% to 5.12% |
|
$ |
|
|
|
$ |
161,256 |
|
Repurchase agreements, interest ranging from 2.75% to 5.39%
(2007 - 3.26% to 5.67%) |
|
|
3,326,936 |
|
|
|
2,933,390 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,326,936 |
|
|
$ |
3,094,646 |
|
|
|
|
|
|
|
|
Repurchase agreements mature as follows:
|
|
|
|
|
|
|
September 30, |
|
|
|
2008 |
|
|
|
(In thousands) |
|
One to thirty days |
|
$ |
339,436 |
|
Over thirty to ninety days |
|
|
100,000 |
|
Over ninety days to one year |
|
|
100,000 |
|
One to three years |
|
|
1,187,500 |
|
Three to five years |
|
|
800,000 |
|
Over five years |
|
|
800,000 |
|
|
|
|
|
Total |
|
$ |
3,326,936 |
|
|
|
|
|
26
As of September 30, 2008 and December 31, 2007, the securities underlying such agreements were
delivered to the dealers with which the repurchase agreements were transacted.
Repurchase agreements as of September 30, 2008, grouped by counterparty, were as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Weighted-Average |
|
Counterparty |
|
Amount |
|
|
Maturity (In Months) |
|
Morgan Stanley |
|
$ |
580,800 |
|
|
|
24 |
|
Credit Suisse First Boston |
|
|
1,171,136 |
|
|
|
34 |
|
JP Morgan
Chase |
|
|
575,000 |
|
|
|
36 |
|
Barclays Capital |
|
|
500,000 |
|
|
|
39 |
|
UBS Financial Services, Inc. |
|
|
100,000 |
|
|
|
46 |
|
Citigroup Global Markets |
|
|
400,000 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
$ |
3,326,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
13 ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB)
Following is a detail of the advances from the FHLB:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December, 31 |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Advances from FHLB, tied to 3-month LIBOR,
with an average interest rate of 2.85% (2007 - 4.98%) |
|
$ |
400,000 |
|
|
$ |
400,000 |
|
Fixed-rate advances from FHLB, with a weighted-average
interest rate of 3.98% (2007 - 4.58%) |
|
|
586,000 |
|
|
|
703,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
986,000 |
|
|
$ |
1,103,000 |
|
|
|
|
|
|
|
|
Advances from FHLB mature as follows:
|
|
|
|
|
|
|
September 30, |
|
|
|
2008 |
|
|
|
(In thousands) |
|
One to thirty days |
|
$ |
29,000 |
|
Over thirty to ninety days |
|
|
400,000 |
|
Over ninety days to one year |
|
|
115,000 |
|
One to three years |
|
|
211,000 |
|
Three to five years |
|
|
231,000 |
|
|
|
|
|
Total |
|
$ |
986,000 |
|
|
|
|
|
As of September 30, 2008, the Corporation had additional capacity of approximately $803
million on this credit facility based on collateral pledged at the FHLB, including haircut
reflecting the perceived risk associated with holding the collateral.
27
14 NOTES PAYABLE
Notes payable consist of:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Callable step-rate notes, bearing step increasing interest
from 5.00% to 7.00% (5.50% as of September 30, 2008 and December 31, 2007)
maturing on October 18, 2019, measured at fair value under SFAS 159 |
|
$ |
12,445 |
|
|
$ |
14,306 |
|
|
|
|
|
|
|
|
|
|
Dow Jones Industrial Average (DJIA) linked principal
protected notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A maturing on February 28, 2012 |
|
|
6,828 |
|
|
|
7,845 |
|
|
|
|
|
|
|
|
|
|
Series B maturing on May 27, 2011 |
|
|
7,452 |
|
|
|
8,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,725 |
|
|
$ |
30,543 |
|
|
|
|
|
|
|
|
15 OTHER BORROWINGS
Other borrowings consist of:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Junior subordinated debentures due in 2034,
interest-bearing at a floating-rate of 2.75%
over 3-month LIBOR (5.57% as of September 30, 2008
and 7.74% as of December 31, 2007) |
|
$ |
103,024 |
|
|
$ |
102,951 |
|
|
|
|
|
|
|
|
|
|
Junior subordinated debentures due in 2034,
interest-bearing at a floating-rate of 2.50%
over 3-month LIBOR (5.70% as of September 30, 2008
and 7.43% as of December 31, 2007) |
|
|
128,866 |
|
|
|
128,866 |
|
|
|
|
|
|
|
|
|
|
$ |
231,890 |
|
|
$ |
231,817 |
|
|
|
|
|
|
|
|
16 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.
28
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%. 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. IBEs that operate as a unit of a bank pay income taxes at normal rates to
the extent that the IBEs net income exceeds 20% of the banks total net taxable income.
For the first nine months of 2008, the Corporation recognized an income tax benefit of $21.0
million compared to an income tax expense of $18.0 million for the same period in 2007. The
positive fluctuation on the financial results was mainly due to two non-ordinary transactions: (i)
a reversal of $10.6 million of Unrecognized Tax Benefits (UTBs) during the second quarter of 2008
for positions taken on income tax returns recorded under the provisions of FIN 48, Accounting for
Uncertainty in Income Taxes, as explained below, and (ii) the recognition of an income tax benefit
of $5.4 million in connection with an agreement entered into with the Puerto Rico Department of
Treasury during the first quarter of 2008 that establishes a multi-year allocation schedule for
deductibility of the payment of $74.25 million made by the Corporation during 2007 to settle the
securities class action suit. Also, the current income tax provision was lower,
excluding the reversal of the FIN 48 contingency, due to higher tax-exempt income. A significant
portion of the increase in revenues was associated with exempt operations conducted through the
international banking entity, FirstBank Overseas Corporation.
As of September 30, 2008, 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 $4.9 million as of December 31, 2007. As of
September 30, 2008, the deferred tax asset, net of the valuation allowance of $6.6 million,
amounted to approximately $115.0 million compared to $90.1 million, net of the valuation allowance
of $4.9 million as of December 31, 2007.
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. 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.
As of September 30, 2008, the balance of the Corporations UTBs amounted to $15.6 million
(excluding accrued interest), 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 September 30, 2008, the Corporations accrual for
interest that relates to tax uncertainties amounted to $6.4 million. As of September 30, 2008,
there is no need to accrue for the payment of penalties. For the nine-month periods ended on
September 30, 2008 and 2007, the total amount of interest recognized by the Corporation as part of
income tax expense related with tax uncertainties was $1.3 million and $1.7 million, respectively.
The amount of UTBs may increase or decrease in the future for various reasons, including changes in
the amounts for current tax year positions, the expiration of open income tax returns due to the
29
statutes of limitations, changes in managements judgment about the level of uncertainty, the
status of examinations, litigation and legislative activity and the addition or elimination of
uncertain tax positions. During the second quarter of 2008, the Corporation reversed UTBs by
approximately $7.1 million and accrued interest of $3.5 million as a result of a lapse of the
applicable statute of limitations for the 2003 taxable year. For the remaining outstanding UTBs,
the Corporation cannot make any reasonably reliable estimate of the timing of future cash flows or
changes, if any, associated with such obligations.
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 under 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. All tax years subsequent to 2003 remain open to examination under
the PR Code and taxable years subsequent to 2004 remain open to examination for Virgin Islands and
U.S. income tax purposes.
17 FAIR VALUE
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 (SFAS 159 liabilities) on the adoption date.
Fair Value Option
Callable Brokered CDs and Certain Medium-Term Notes
The Corporation elected the fair value option for certain financial liabilities that were
hedged with interest rate swaps that were previously designated for fair value hedge accounting in
accordance with SFAS 133. As of September 30, 2008, these liabilities included callable brokered
CDs with an aggregate fair value of $1.52 billion and principal balance of $1.53 billion recorded
in interest-bearing deposits, and certain medium-term notes with a fair value of $12.4 million and
principal balance of $15.4 million recorded in notes payable. Interest paid/accrued on these
instruments is recorded as part of 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
continues 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 the vast majority of other
brokered CDs because these are not hedged by derivatives. Effective January 1, 2007, the
Corporation discontinued the use of fair value hedge accounting for interest rate swaps that hedged
a $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 and, 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 using observable market data in the institutional markets.
30
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 |
|
Valuations of Level 1 assets and liabilities are obtained from readily available pricing
sources for market transactions involving identical assets or liabilities. Level 1 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 by
dealers or brokers in active markets. |
|
|
|
Level 2 |
|
Valuations of Level 2 assets and liabilities are based on
observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; 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 the value of 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 |
|
Valuations of Level 3 assets and liabilities are based on
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 callable brokered CDs, which are 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.
Medium-Term Notes
The fair value of medium-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
31
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 recorded for the nine-month periods ended September 30, 2008 and 2007 amounted to $1.8
million and $1.6 million, respectively. The cumulative mark-to-market unrealized gain on the
medium-term notes since the adoption of SFAS 159 attributed to credit
risk amounted to $3.5 million as of September 30, 2008.
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.
Investment Securities
The fair value of investment securities is the market value based on quoted market prices,
when available, or market prices for similar instruments. If listed prices or quotes are not
available, fair value is based upon models that use unobservable inputs due to the limited market
activity of the instrument (Level 3) as is the case with certain private label mortgage-backed
securities held by the Corporation. Unlike U.S. agency mortgage-backed securities, the fair value
of these private label securities cannot be readily determined because they are not actively traded
in securities markets. Significant information used for fair value determination is proprietary
with regard to specific characteristics such as the prepayment model, which follows the amortizing
schedule of the underlying loans, which is an unobservable input. Private label mortgage-backed
securities are collateralized by fixed-rate mortgages on single-family residential properties in
the United States and the market valuation is calculated by discounting the estimated net cash
flows over the projected life of the pool of underlying assets using prepayment, default and
interest rate assumptions that market participants would commonly use for similar mortgage asset
classes that are subject to prepayment, credit and interest rate risk.
Derivative instruments
The fair value of the derivative instruments is based on observable market parameters and
takes into consideration the Corporations own credit standing. The Hull-White Interest Rate
Tree approach is used to value the option components of derivative instruments and the discounting
of the cash flows is performed using US dollar LIBOR based discount rates. Certain derivatives
with limited market activity are valued using models that consider unobservable market parameters,
as is the case with derivative instruments named as reference caps (Level 3). Reference caps are
used to mainly hedge interest rate risk inherent on private label mortgage-backed securities, thus
are tied to the notional amount of the underlying fixed-rate mortgage loans originated in the
United States. Significant information used for fair value determination is proprietary with
regards to specific characteristics such as the prepayment model which follows the amortizing
schedule of the underlying loans, which is an unobservable input. The valuation model uses the
Black formula, which is a benchmark standard in financial industry. The Black formula is similar
to the Black-Scholes formula for valuing stock options except that the spot price of the underlying
is replaced by the forward price. The Black formula uses as inputs the strike price of the cap,
forward LIBOR rates, volatility estimates and discount rates to estimate the option value. LIBOR
rates and swap rates used in the model are obtained from Bloomberg everyday and build zero coupon
curve based on the Bloomberg LIBOR/Swap curve. The discount factor is then calculated from the
zero coupon curve. The cap is the sum of all caplets. For each caplet, the rate is reset at the
beginning of each reporting period and payments are made at the end of each period. The cash flow
of a caplet is then discounted from each payment date.
Although most of the derivative instruments are fully collateralized, a credit spread is
considered for those that are not secured in full. The cumulative mark-to-market effect of credit
risk in the valuation of derivative instruments resulted in an
unrealized gain of approximately
$0.9 million as of September 30, 2008 (an immaterial
32
gain of
approximately $13,000 relates to the
first nine months of 2008). The Corporation compares the valuations obtained with valuations
received from counterparties, as an internal control procedure.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008 |
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets/ (Liabilities) |
(In thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
at Fair Value |
Callable brokered CDs (1) |
|
$ |
|
|
|
$ |
(1,515,525 |
) |
|
$ |
|
|
|
$ |
(1,515,525 |
) |
Medium-term notes (1) |
|
|
|
|
|
|
(12,445 |
) |
|
|
|
|
|
|
(12,445 |
) |
Securities available for sale (2) |
|
|
3,592 |
|
|
|
3,903,631 |
|
|
|
109,726 |
|
|
|
4,016,949 |
|
Derivative instruments (3) |
|
|
|
|
|
|
(29,786 |
) |
|
|
4,544 |
|
|
|
(25,242 |
) |
|
|
|
(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, 2008 include derivative assets of $8.9 million and derivative
liabilities of $34.1 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 Values for the Nine-Month Period Ended |
|
|
|
September 30, 2008, for items Measured at Fair Value Pursuant |
|
|
September 30, 2008, 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 Fair Value |
|
|
|
|
|
|
|
|
|
|
Changes in Fair Value |
|
|
|
Unrealized Losses and |
|
|
Unrealized Gains and |
|
|
Unrealized (Losses) Gains |
|
|
Unrealized Losses and |
|
|
Unrealized Gains and |
|
|
Unrealized (Losses) Gains |
|
|
|
Interest Expense included |
|
|
Interest Expense included |
|
|
and Interest Expense |
|
|
Interest Expense included |
|
|
Interest Expense included |
|
|
and Interest Expense |
|
|
|
in Interest Expense |
|
|
in Interest Expense |
|
|
included in |
|
|
in Interest Expense |
|
|
in Interest Expense |
|
|
included in |
|
(In thousands) |
|
on Deposits (1) |
|
|
on Notes Payable (1) |
|
|
Current-Period Earnings (1) |
|
|
on Deposits (1) |
|
|
on Notes Payable (1) |
|
|
Current-Period Earnings (1) |
|
Callable brokered CDs |
|
$ |
(22,841 |
) |
|
$ |
|
|
|
$ |
(22,841 |
) |
|
$ |
(122,833 |
) |
|
$ |
|
|
|
$ |
(122,833 |
) |
Medium-term notes |
|
|
|
|
|
|
749 |
|
|
|
749 |
|
|
|
|
|
|
|
1,223 |
|
|
|
1,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(22,841 |
) |
|
$ |
749 |
|
|
$ |
(22,092 |
) |
|
$ |
(122,833 |
) |
|
$ |
1,223 |
|
|
$ |
(121,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Changes in fair value for the quarter and nine- month period ended September 30, 2008 include
interest expense on callable brokered CDs of $22.1 million, and $100.9 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. |
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, 2008.
Level 3 Instruments Only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value Measurements |
|
|
Total Fair Value Measurements |
|
|
|
(Quarter ended September 30, 2008) |
|
|
(Nine-month period ended September 30, 2008) |
|
(In thousands) |
|
Derivatives (1) |
|
|
Securities Available For Sale (2) |
|
|
Derivatives (1) |
|
|
Securities Available For Sale (2) |
|
Beginning balance |
|
$ |
5,982 |
|
|
$ |
115,190 |
|
|
$ |
5,102 |
|
|
$ |
133,678 |
|
Total gains or (losses) (realized/unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
(1,438 |
) |
|
|
|
|
|
|
(558 |
) |
|
|
|
|
Included in other comprehensive income |
|
|
|
|
|
|
(1,203 |
) |
|
|
|
|
|
|
(8,810 |
) |
New instruments acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments and amortization |
|
|
|
|
|
|
(4,261 |
) |
|
|
|
|
|
|
(15,142 |
) |
Transfers in and/or out of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
4,544 |
|
|
$ |
109,726 |
|
|
$ |
4,544 |
|
|
$ |
109,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts 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 private label mortgage-backed securities. |
33
The table below summarizes changes in unrealized losses recorded in earnings for the quarter
and nine-month period ended September 30, 2008 for Level 3 assets and liabilities that are still
held as of September 30, 2008.
Level 3 Instruments Only
|
|
|
|
|
|
|
|
|
|
|
Changes in Unrealized (Losses) Gains |
|
|
|
Quarter Ended |
|
|
Nine-Month Period Ended |
|
(In thousands) |
|
September 30, 2008 |
|
|
September 30, 2008 |
|
Changes in unrealized (losses) gains
relating to assets still held at reporting date (1) (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on loans |
|
$ |
(22 |
) |
|
$ |
1 |
|
Interest income on investment securities |
|
|
(1,416 |
) |
|
|
(559 |
) |
|
|
|
|
|
|
|
|
|
$ |
(1,438 |
) |
|
$ |
(558 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount represents valuation of interest rate cap agreements which were carried at fair value
prior to the adoption of SFAS 159. |
|
(2) |
|
Unrealized loss of $1.2 million and of $8.8 million on Level 3 available for sale securities
were recognized
as part of other comprehensive income for the quarter and nine-month period ended September 30,
2008, respectively. |
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, 2008, impairment or valuation adjustments were recorded for assets
recognized at fair value on a non-recurring basis as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses recorded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the Nine- |
|
|
|
|
|
|
|
|
|
|
|
|
Valuation |
|
|
|
|
|
month period |
|
|
|
|
|
|
|
|
|
|
|
|
allowance as of |
|
Losses recorded for |
|
ended |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
the Quarter ended |
|
September 30, |
|
|
Carrying value as of September 30, 2008 |
|
2008 |
|
September 30, 2008 |
|
2008 |
(In thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable (1)
|
|
$ |
|
|
$ |
|
|
$ |
237,388 |
|
|
$ |
58,963 |
|
|
$ |
36,707 |
|
|
$ |
61,213 |
|
Other Real Estate Owned (2)
|
|
|
|
|
|
|
|
|
40,422 |
|
|
|
5,176 |
|
|
|
2,388 |
|
|
|
2,892 |
|
|
|
|
(1) |
|
Mainly impaired commercial and construction loans. The impairment was generally measured based
on the fair value of the collateral
in accordance with the provisions of SFAS 114, Accounting by Creditors for Impairment of a
Loan. The fair values are derived from appraisals
that take into consideration prices in observed transactions involving similar assets in
similar locations but adjusted for specific characteristics
and assumptions of the collateral (e.g. absorption rates), which are not market observable. |
|
(2) |
|
The fair value is derived from appraisals that take into consideration prices in observed
transactions involving similar assets in similar
locations but adjusted for specific characteristics and assumptions of the properties (e.g.
absorption rates), which are not market observable.
Valuation allowance is based on market valuation adjustments after the transfer from the loan
to the Other Real Estate Owned (OREO) portfolio. |
During the first nine months of 2008, the Corporation increased its OREO portfolio mainly as a
result of the repossession, in settlement of two impaired loans in Miami, of the associated
collateral. As of September 30, 2008, the carrying amount of such properties at lower of cost or
market was $18.6 million. Total charge-offs recorded during 2008 on these properties amounted to
$4.2 million.
34
18 SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information follows:
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended September 30, |
|
|
2008 |
|
2007 |
|
|
(In thousands) |
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on borrowings |
|
$ |
533,281 |
|
|
$ |
565,286 |
|
Income tax |
|
|
3,262 |
|
|
|
9,738 |
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to other real estate owned |
|
|
47,046 |
|
|
|
7,334 |
|
Additions to auto repossessions |
|
|
64,885 |
|
|
|
84,225 |
|
Capitalization of servicing assets |
|
|
937 |
|
|
|
913 |
|
Recharacterization of secured commercial loans as securities collateralized by loans |
|
|
|
|
|
|
183,830 |
|
On January 28, 2008, the Corporation completed the acquisition of VICB with operations in St.
Croix, U.S. Virgin Islands, at a purchase price of $2.5 million. The Corporation acquired cash of
approximately $7.7 million from VICB.
19 SEGMENT INFORMATION
Based upon the Corporations organizational structure and the information provided to the
Chief Operating Decision Maker and, to a lesser extent, the Board of Directors, the operating
segments are driven primarily by the Corporations legal entities. As of September 30, 2008, the
Corporation had four reportable segments: Commercial and Corporate Banking; Mortgage Banking;
Consumer (Retail) Banking; and Treasury and Investments. There is also 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 brokers. The Consumer (Retail) Banking
segment consists of the Corporations consumer lending and deposit-taking activities conducted
mainly through its branch network and loan centers. The Treasury and Investments 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 (Retail) Banking segments to finance their lending activities and borrows
from those segments. The Consumer (Retail) Banking segment also loans funds to other segments. The
interest rates charged or credited by Treasury and Investments and the Consumer (Retail) Banking
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.
35
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, 2007 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.
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, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
47,786 |
|
|
$ |
45,577 |
|
|
$ |
83,226 |
|
|
$ |
79,222 |
|
|
$ |
32,481 |
|
|
$ |
288,292 |
|
Net (charge) credit for transfer of funds |
|
|
(36,071 |
) |
|
|
16,968 |
|
|
|
(50,306 |
) |
|
|
72,413 |
|
|
|
(3,004 |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
(19,027 |
) |
|
|
|
|
|
|
(115,946 |
) |
|
|
(8,698 |
) |
|
|
(143,671 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
11,715 |
|
|
|
43,518 |
|
|
|
32,920 |
|
|
|
35,689 |
|
|
|
20,779 |
|
|
|
144,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
(1,295 |
) |
|
|
(8,572 |
) |
|
|
(32,694 |
) |
|
|
|
|
|
|
(12,758 |
) |
|
|
(55,319 |
) |
Non-interest income (loss) |
|
|
1,260 |
|
|
|
7,779 |
|
|
|
1,210 |
|
|
|
(466 |
) |
|
|
4,088 |
|
|
|
13,871 |
|
Direct non-interest expenses |
|
|
(5,778 |
) |
|
|
(25,643 |
) |
|
|
(9,118 |
) |
|
|
(1,596 |
) |
|
|
(11,255 |
) |
|
|
(53,390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) |
|
$ |
5,902 |
|
|
$ |
17,082 |
|
|
$ |
(7,682 |
) |
|
$ |
33,627 |
|
|
$ |
854 |
|
|
$ |
49,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets |
|
$ |
2,998,292 |
|
|
$ |
1,902,188 |
|
|
$ |
6,092,228 |
|
|
$ |
5,944,814 |
|
|
$ |
1,401,779 |
|
|
$ |
18,339,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
Non-interest income (loss) |
|
|
1,182 |
|
|
|
5,643 |
|
|
|
764 |
|
|
|
(2,977 |
) |
|
|
4,233 |
|
|
|
8,845 |
|
Direct non-interest 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Consumer |
|
|
Commercial and |
|
|
Treasury and |
|
|
|
|
|
|
|
|
|
Banking |
|
|
(Retail) Banking |
|
|
Corporate |
|
|
Investments |
|
|
Other |
|
|
Total |
|
For the nine-month period ended September 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
140,346 |
|
|
$ |
127,989 |
|
|
$ |
262,972 |
|
|
$ |
215,094 |
|
|
$ |
97,586 |
|
|
$ |
843,987 |
|
Net (charge) credit for transfer of funds |
|
|
(105,217 |
) |
|
|
62,967 |
|
|
|
(157,582 |
) |
|
|
207,522 |
|
|
|
(7,690 |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
(57,752 |
) |
|
|
|
|
|
|
(356,621 |
) |
|
|
(25,929 |
) |
|
|
(440,302 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
35,129 |
|
|
|
133,204 |
|
|
|
105,390 |
|
|
|
65,995 |
|
|
|
63,967 |
|
|
|
403,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
(8,263 |
) |
|
|
(37,561 |
) |
|
|
(65,775 |
) |
|
|
|
|
|
|
(30,836 |
) |
|
|
(142,435 |
) |
Non-interest income |
|
|
2,489 |
|
|
|
21,747 |
|
|
|
3,358 |
|
|
|
15,268 |
|
|
|
12,391 |
|
|
|
55,253 |
|
Direct non-interest expenses |
|
|
(18,283 |
) |
|
|
(78,758 |
) |
|
|
(26,714 |
) |
|
|
(5,032 |
) |
|
|
(34,094 |
) |
|
|
(162,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income |
|
$ |
11,072 |
|
|
$ |
38,632 |
|
|
$ |
16,259 |
|
|
$ |
76,231 |
|
|
$ |
11,428 |
|
|
$ |
153,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earnings assets |
|
$ |
2,907,449 |
|
|
$ |
1,789,607 |
|
|
$ |
5,980,151 |
|
|
$ |
5,514,113 |
|
|
$ |
1,369,900 |
|
|
$ |
17,561,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
Non-interest 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 non-interest 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 |
|
36
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, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income for segments and other |
|
$ |
49,783 |
|
|
$ |
29,503 |
|
|
$ |
153,622 |
|
|
$ |
149,179 |
|
Other Income |
|
|
|
|
|
|
15,075 |
|
|
|
|
|
|
|
15,075 |
|
Other operating expenses |
|
|
(28,986 |
) |
|
|
(24,841 |
) |
|
|
(83,445 |
) |
|
|
(85,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
20,797 |
|
|
|
19,737 |
|
|
|
70,177 |
|
|
|
78,752 |
|
Income tax benefit (expense) |
|
|
3,749 |
|
|
|
(5,595 |
) |
|
|
20,952 |
|
|
|
(17,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated net income |
|
$ |
24,546 |
|
|
$ |
14,142 |
|
|
$ |
91,129 |
|
|
$ |
60,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average earning assets for segments |
|
$ |
18,339,301 |
|
|
$ |
16,863,605 |
|
|
$ |
17,561,220 |
|
|
$ |
16,633,898 |
|
Average non-earning assets |
|
|
701,115 |
|
|
|
708,446 |
|
|
|
707,336 |
|
|
|
635,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated average
assets |
|
$ |
19,040,416 |
|
|
$ |
17,572,051 |
|
|
$ |
18,268,556 |
|
|
$ |
17,269,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 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 its customers. These financial instruments may
include commitments to extend credit and commitments to sell mortgage loans at fair value. As of
September 30, 2008, commitments to extend credit amounted to approximately $1.7 billion and standby
letters of credit amounted to approximately $103.8 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. For most of the
commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to
additional disbursements. In the case of credit cards and personal lines of credit, the
Corporation can at any time and without cause, cancel the unused credit facility. Generally, the
Corporations mortgage banking activities do not enter into interest rate lock agreements with its
prospective borrowers.
Lehman
Brothers Special Financing, Inc. (Lehman) was counterparty to the Corporation on
certain interest rate swap agreements. During the third quarter of 2008, Lehman failed to pay
the scheduled net cash settlement due to the Corporation, which constitutes an event of default under these interest rate swap
agreements. The Corporation terminated all interest rate swaps with
Lehman and replaced them with another counterparty under similar terms and conditions. As of September 30, 2008, the Corporation has
an unsecured counterparty exposure with Lehman, which filed for bankruptcy on October 3, 2008, of
approximately $1.4 million. This exposure has been reserved.
Further, the Corporation is in the process of reviewing its
options for the recovery of securities pledged under these agreements
with Lehman to guarantee the Corporations performance
thereunder. The market value of the pledged securities as of
September 30, 2008 amounted to approximately $63 million.
The Corporation believes that the securities pledged as collateral should not be part of the
bankruptcy estate. At this early stage in the bankruptcy
proceedings the Corporation is not able to determine whether it will
succeed in recovering all or a
substantial portion of the collateral or its equivalent value.
As of September 30, 2008, 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.
37
21 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, 2008 and December 31, 2007 and the results of its operations for
the quarters and nine-month periods ended September 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
52,700 |
|
|
$ |
43,519 |
|
Money market investments |
|
|
25,236 |
|
|
|
46,293 |
|
Investment securities available for sale, at market: |
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
41,234 |
|
Equity investments |
|
|
1,195 |
|
|
|
2,117 |
|
Other investment securities |
|
|
1,550 |
|
|
|
1,550 |
|
Loans receivable, net |
|
|
|
|
|
|
2,597 |
|
Investment in FirstBank Puerto Rico, at equity |
|
|
1,462,136 |
|
|
|
1,457,899 |
|
Investment in FirstBank Insurance Agency, at equity |
|
|
5,088 |
|
|
|
4,632 |
|
Investment in Ponce General Corporation, at equity |
|
|
109,324 |
|
|
|
106,120 |
|
Investment in PR Finance, at equity |
|
|
2,719 |
|
|
|
2,979 |
|
Accrued interest receivable |
|
|
|
|
|
|
376 |
|
Investment in FBP Statutory Trust I |
|
|
3,093 |
|
|
|
3,093 |
|
Investment in FBP Statutory Trust II |
|
|
3,866 |
|
|
|
3,866 |
|
Other assets |
|
|
7,254 |
|
|
|
1,503 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,674,161 |
|
|
$ |
1,717,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Other borrowings |
|
$ |
231,890 |
|
|
$ |
282,567 |
|
Accounts payable and other liabilities |
|
|
999 |
|
|
|
13,565 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
232,889 |
|
|
|
296,132 |
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
1,441,272 |
|
|
|
1,421,646 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,674,161 |
|
|
$ |
1,717,778 |
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine-month Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on investment securities |
|
$ |
282 |
|
|
$ |
826 |
|
|
$ |
1,072 |
|
|
$ |
2,261 |
|
Interest income on other investments |
|
|
|
|
|
|
498 |
|
|
|
733 |
|
|
|
515 |
|
Interest income on loans |
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
542 |
|
Dividend from FirstBank Puerto Rico |
|
|
20,000 |
|
|
|
45,017 |
|
|
|
61,872 |
|
|
|
68,008 |
|
Dividend from other subsidiaries |
|
|
1,500 |
|
|
|
|
|
|
|
4,000 |
|
|
|
1,000 |
|
Other income |
|
|
98 |
|
|
|
142 |
|
|
|
311 |
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,880 |
|
|
|
46,563 |
|
|
|
67,988 |
|
|
|
72,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other borrowings |
|
|
3,287 |
|
|
|
4,747 |
|
|
|
10,676 |
|
|
|
14,087 |
|
Interest on funding to subsidiaries |
|
|
|
|
|
|
842 |
|
|
|
550 |
|
|
|
2,550 |
|
(Recovery) Provision for loan losses |
|
|
|
|
|
|
|
|
|
|
(1,398 |
) |
|
|
1,320 |
|
Other operating expenses |
|
|
497 |
|
|
|
514 |
|
|
|
1,531 |
|
|
|
2,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,784 |
|
|
|
6,103 |
|
|
|
11,359 |
|
|
|
20,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on investments and impairments |
|
|
(696 |
) |
|
|
(2,370 |
) |
|
|
(1,185 |
) |
|
|
(5,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (losses) of subsidiaries |
|
|
17,400 |
|
|
|
38,090 |
|
|
|
55,444 |
|
|
|
45,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (provision) |
|
|
|
|
|
|
1,619 |
|
|
|
(546 |
) |
|
|
4,120 |
|
Equity in undistributed earnings (losses) of subsidiaries |
|
|
7,146 |
|
|
|
(25,567 |
) |
|
|
36,231 |
|
|
|
11,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,546 |
|
|
$ |
14,142 |
|
|
$ |
91,129 |
|
|
$ |
60,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
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, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Condensed Income Statements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
288,292 |
|
|
$ |
295,931 |
|
|
$ |
843,987 |
|
|
$ |
900,387 |
|
Total interest expense |
|
|
143,671 |
|
|
|
190,902 |
|
|
|
440,302 |
|
|
|
560,708 |
|
Net interest income |
|
|
144,621 |
|
|
|
105,029 |
|
|
|
403,685 |
|
|
|
339,679 |
|
Provision for loan and lease losses |
|
|
55,319 |
|
|
|
34,260 |
|
|
|
142,435 |
|
|
|
83,802 |
|
Non-interest income |
|
|
13,871 |
|
|
|
23,920 |
|
|
|
55,253 |
|
|
|
50,645 |
|
Non-interest expenses |
|
|
82,376 |
|
|
|
74,952 |
|
|
|
246,326 |
|
|
|
227,770 |
|
Income before income taxes |
|
|
20,797 |
|
|
|
19,737 |
|
|
|
70,177 |
|
|
|
78,752 |
|
Income tax benefit (provision) |
|
|
3,749 |
|
|
|
(5,595 |
) |
|
|
20,952 |
|
|
|
(17,983 |
) |
Net income |
|
|
24,546 |
|
|
|
14,142 |
|
|
|
91,129 |
|
|
|
60,769 |
|
Net income attributable to common stockholders |
|
|
14,477 |
|
|
|
4,073 |
|
|
|
60,922 |
|
|
|
30,562 |
|
Per Common Share Results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
|
$ |
0.66 |
|
|
$ |
0.36 |
|
Net income per share diluted |
|
$ |
0.16 |
|
|
$ |
0.05 |
|
|
$ |
0.66 |
|
|
$ |
0.36 |
|
Cash dividends declared |
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.21 |
|
|
$ |
0.21 |
|
Average shares outstanding |
|
|
92,511 |
|
|
|
87,075 |
|
|
|
92,507 |
|
|
|
84,542 |
|
Average shares outstanding diluted |
|
|
92,569 |
|
|
|
87,317 |
|
|
|
92,623 |
|
|
|
84,958 |
|
Book value per common share |
|
$ |
9.63 |
|
|
$ |
9.34 |
|
|
$ |
9.63 |
|
|
$ |
9.34 |
|
Tangible book value per common share |
|
$ |
9.06 |
|
|
$ |
8.78 |
|
|
$ |
9.06 |
|
|
$ |
8.78 |
|
Selected Financial Ratios (In Percent): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets |
|
|
0.52 |
|
|
|
0.32 |
|
|
|
0.67 |
|
|
|
0.47 |
|
Interest Rate Spread (1) |
|
|
3.03 |
|
|
|
2.15 |
|
|
|
2.87 |
|
|
|
2.28 |
|
Net Interest Margin (1) |
|
|
3.37 |
|
|
|
2.67 |
|
|
|
3.25 |
|
|
|
2.83 |
|
Return on Average Total Equity |
|
|
6.98 |
|
|
|
4.14 |
|
|
|
8.51 |
|
|
|
6.28 |
|
Return on Average Common Equity |
|
|
6.76 |
|
|
|
1.99 |
|
|
|
9.26 |
|
|
|
5.50 |
|
Average Total Equity to Average Total Assets |
|
|
7.39 |
|
|
|
7.78 |
|
|
|
7.81 |
|
|
|
7.47 |
|
Dividend payout ratio |
|
|
44.73 |
|
|
|
159.00 |
|
|
|
31.89 |
|
|
|
59.33 |
|
Efficiency ratio (2) |
|
|
51.97 |
|
|
|
58.13 |
|
|
|
53.67 |
|
|
|
58.35 |
|
Asset Quality: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses to loans receivable |
|
|
2.06 |
|
|
|
1.57 |
|
|
|
2.06 |
|
|
|
1.57 |
|
Net charge-offs (annualized) to average loans |
|
|
0.79 |
|
|
|
0.77 |
|
|
|
0.87 |
|
|
|
0.77 |
|
Provision for loan and lease losses to net charge-offs |
|
|
223.44 |
|
|
|
157.28 |
|
|
|
178.56 |
|
|
|
129.70 |
|
Non-performing assets to total assets |
|
|
2.86 |
|
|
|
2.48 |
|
|
|
2.86 |
|
|
|
2.48 |
|
Non-accruing loans to total loans receivable |
|
|
3.95 |
|
|
|
3.58 |
|
|
|
3.95 |
|
|
|
3.58 |
|
Allowance to total non-accruing loans |
|
|
52.20 |
|
|
|
43.86 |
|
|
|
52.20 |
|
|
|
43.86 |
|
Allowance to total non-accruing loans,
excluding residential real estate loans |
|
|
103.83 |
|
|
|
85.24 |
|
|
|
103.83 |
|
|
|
85.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Price: End of period |
|
$ |
11.06 |
|
|
$ |
9.50 |
|
|
$ |
11.06 |
|
|
$ |
9.50 |
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
|
|
September 30, |
|
December 31, |
|
|
2008 |
|
2007 |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
Loans and loans held for sale |
|
$ |
12,713,102 |
|
|
$ |
11,799,746 |
|
Allowance for loan and lease losses |
|
|
261,170 |
|
|
|
190,168 |
|
Money market and investment securities |
|
|
6,105,919 |
|
|
|
4,811,413 |
|
Intangible Assets |
|
|
52,992 |
|
|
|
51,034 |
|
Deferred tax asset, net |
|
|
114,972 |
|
|
|
90,130 |
|
Total assets |
|
|
19,304,440 |
|
|
|
17,186,931 |
|
Deposits |
|
|
12,819,832 |
|
|
|
11,034,521 |
|
Borrowings |
|
|
4,871,551 |
|
|
|
4,460,006 |
|
Total preferred equity |
|
|
550,100 |
|
|
|
550,100 |
|
Total common equity |
|
|
938,359 |
|
|
|
896,810 |
|
Accumulated other comprehensive loss, net of tax |
|
|
(47,187 |
) |
|
|
(25,264 |
) |
Total equity |
|
|
1,441,272 |
|
|
|
1,421,646 |
|
|
|
|
1- |
|
On a tax equivalent basis (see Net Interest Income discussion below). |
|
2- |
|
Non-interest expenses to the sum of net interest income and non-interest income. The denominator includes non-recurring income and
changes in the fair value of derivative instruments and financial instruments measured at fair
value under SFAS 159. |
40
ECONOMIC AND MARKET ENVIRONMENT
In
recent weeks and months, the volatility and disruptions in the capital and credit markets
have reached unprecedented levels. Bankruptcies and forced mergers of major investment banks and
commercial banks in the United States, government bailouts of mortgage giants Fannie Mae (FNMA)
and Freddie Mac (FHLMC), government support of the insurance company American International Group
and increasing concerns about the ability of other financial institutions to stay capitalized have
exacerbated the market disruptions and stress in the credit markets that have affected the economy
over the past year. Following a series of market interventions to bail out particular
firms, a $700 billion Troubled Asset Relief Program to stimulate economic growth and inspire
confidence in the financial markets by the purchase of distressed
assets and capitalization of the banking industry was signed into law on
October 3, 2008. The legislation also increases the limit on deposit insurance at banks and credit
unions and authorizes the Federal Reserve to pay interest on reserves. The credit market has
remained tight despite passage of the rescue plan. Banks continue to hold cash to meet their own
funding needs, wary of lending either to other banks or to businesses and individuals. The Federal
Reserve has taken steps to support market liquidity by lowering the Federal Funds rate and the
discount rate, encouraging banks to use their short-term lending windows and determining to provide
a facility to increase the availability of commercial paper to eligible issuers. The central banks
of Canada, England, Sweden and Switzerland and the European Central Bank have also announced
reductions in policy interest rates.
As is the case with most commercial banks, the lack of liquidity in global credit markets may
affect the Corporations access to regular and customary sources of funding. Also, the slowing
economy and deteriorating housing market in the United States have required increased reserves on
the Corporations loan portfolio, in particular on the
$251 million loans originally disbursed as condo-conversion in the U.S. mainland. However, the Corporation is well capitalized and profitable and maintains
sufficient liquidity to operate in a sound and safe manner. The Corporation has taken
precautionary steps to enhance its liquidity positions and safeguard the access to credit by, among
other things, increasing its borrowing capacity with the Federal Home Loan Bank (FHLB) and the
Federal Reserve (FED) through the Discount Window Program, the issuance of additional brokered CDs
to increase its liquidity levels and the extension of the maturities of its borrowings to reduce
exposure to high levels of market volatility.
The Corporation has not been active in subprime or adjustable rate mortgage loans (ARMs),
nor has it been exposed to collateral debt obligations or other types of exotic products that
aggravated the current financial crisis in the United States. More than 90% of the Corporations
outstanding balance in its residential mortgage loan portfolio consists of fixed-rate, fully
amortizing, full documentation loans and over 91% of the Corporations securities portfolio is
invested in U.S. Government and Agency debentures and U.S. government sponsored-agency fixed-rate
mortgage-backed securities (mainly FNMA and FHLMC fixed-rate securities). In connection with the
placement of FNMA and FHLMC into conservatorship by the U.S. Treasury in September 2008, the
Treasury entered into agreements to invest up to approximately $100 billion in each agency to,
among other things, protects debt and mortgage-backed securities of the agencies. As of September
30, 2008 the Corporation has $4.3 billion and $0.9 billion in FNMA and FHLMC mortgage-backed
securities and debt securities, respectively, representing approximately 85% of the total
investment portfolio. The Corporations investment in equity securities is minimal and none of its
equity securities is related to U.S. financial institutions that recently failed. Also, as part of
its credit risk management, the Corporation maintains strict and conservative underwriting
guidelines, diversifies the counterparties used and monitors the concentration of risk to limit its
counterparty exposure. As of September 30, 2008, the Corporations unsecured counterparty exposure
to the Lehman Brothers Holdings, Inc. bankruptcy filing is approximately $1.4 million, which has
been reserved and relates to interest rate swaps agreements. For more information on current
exposure with respect to the Corporations derivative instruments and outstanding repurchase
agreements by counterparty, management of liquidity risk and current liquidity levels, see the
Risk Management discussion below and Notes 20 and 12 to the accompanying unaudited consolidated
financial statements .
41
The Corporations principal market is Puerto Rico. Although affected by the economic
situation in the United States, Puerto Ricos economy has been in a recession since early 2006 due
to several local conditions including budget shortfalls, diminished consumer buying power driven by
increases in utility costs, gasoline prices, and highway toll charges, the implementation of sales
taxes, and periodic impasses between the Executive and the Legislature branches of the government.
The above conditions together with a recession looming also in the U.S. mainland and rising food
prices will continue to adversely affect the economy in Puerto Rico.
The Corporation has seen stress in the credit quality of, and worsening trends affecting its
construction loan portfolio, in particular condo conversion loans in the U.S. mainland (mainly in
the state of Florida) affected by the continuing deterioration in the health of the economy, an
oversupply of new homes and declining housing prices in the United States. To a lesser extent, the
Corporation also increased its reserves for the residential mortgage and construction loan
portfolio from the 2007 level to account for the increased credit risk tied to recessionary
conditions in Puerto Ricos economy. Nevertheless, the Puerto Rico housing market has not seen the
dramatic decline in housing prices that is affecting the U.S. mainland but there is a lower demand
due to the diminished consumers acquisition power. Recent decreases in oil prices should provide
a relief to consumers and should immediately impact consumers purchasing power positively. In
addition, since 2005 the Corporation has taken actions and implemented initiatives designed to
strengthen the Corporations credit policies as well as loss mitigation initiatives that have begun
to have the desired effects as reflected by a decrease in non-performing consumer loans and
consumer loans charge-offs and a relative stability in non-performing residential mortgage loans.
The degree of the impact of economic conditions on the Corporations financial results is dependent
upon the duration and severity of the aforementioned conditions. As an example, the credit risk is
affected by a deteriorating economy to the extent that the borrowers spending capacity is
decreased and, as a result, may not be able to make their payments when due. A deteriorating
economy could also lead to a decline in real estate values and therefore the reduction of the
borrowers capacity to refinance loans and increase the Corporations exposure to loss upon
default. For more information on credit quality, see the Risk Management Non-performing Assets
and Allowance for Loan and Lease Losses discussion below.
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
service charges and fees on loans and deposits and insurance income), the results of its hedging
activities, gains (losses) on investments, gains (losses) on sale of loans, and income taxes.
Net income for the quarter ended September 30, 2008 amounted to $24.5 million or $0.16 per
diluted common share, compared to $14.1 million or $0.05 per diluted common share for the quarter
ended September 30, 2007. The Corporations financial performance for the third quarter of 2008,
as compared to the third quarter of 2007, was principally impacted by an increase of $39.6 million
in net interest income. By being liability sensitive, (which in general terms means that interest
bearing liabilities reprice faster than interest earning assets) the Corporation benefited from
lower short-term interest rates on its interest-bearing liabilities as compared to rate
42
levels
during the third quarter of 2007. This was partially offset by: (i) an increase of $21.1 million
in the provision for loan and lease losses due to a higher volume of impaired construction and
commercial loans, increases in reserves for potential losses inherent in the loan portfolio
associated with weakening economic conditions, and the growth of the Corporations total loan
portfolio (ii) a decrease of $10.0 million in non-interest income that reflects the impact on the
third quarter results of 2007 of income of $15.1 million recorded in connection with an agreement
reached with insurance carriers and former executives for indemnity of expenses related to the
class action lawsuit brought against the Corporation that was settled in 2007, and (iii) an
increase of $7.4 million in non-interest expenses mainly due to higher foreclosure-related
expenses. A lower current income tax provision due to higher tax-exempt income resulted in an income tax
benefit of $3.7 million for the third quarter of 2008, compared to an income tax expense of $5.6
million recorded for the same period a year ago.
The highlights and key drivers of the Corporations financial results for the quarter ended
September 30, 2008 include the following:
|
|
|
Net interest income for the quarter ended September 30, 2008 was $144.6 million,
compared to $105.0 million for the same period in 2007. The net interest spread and
margin, on an adjusted tax equivalent basis, for the quarter ended September 30, 2008 were
3.03% and 3.37%, respectively, compared to 2.15% and 2.67%, respectively, for the same
period in 2007. The increase in net interest income is mainly associated with a higher
interest rate spread and margin due to a decrease in the average cost of funds resulting
from lower short-term interest rates and to a lesser extent a higher volume of interest
earning assets. The Corporations liability sensitive balance sheet position has allowed
the Corporation to benefit from lower short-term interest rates as compared to rate levels
during the third quarter of 2007. The decrease in funding costs associated with lower
short-term interest rates was partially offset by lower loan yields due to the repricing of
variable rate construction and commercial loans tied to short-term indexes and the increase
in non-accrual loans as compared to 2007 volumes. |
|
|
|
|
Average earning assets for the third quarter of 2008 increased by approximately $1.6 billion
as compared to the same period in 2007. Average loans increased by $1.3 billion driven by the
growth in internal originations, in particular commercial and residential real estate loans,
and to a lesser extent purchases of loans, including the acquisition of a $218 million auto
loan portfolio during the third quarter of 2008 that contributed to a wider interest rate
spread. In addition, the Corporation purchased approximately $3.2 billion in U.S.
government agencies fixed-rate mortgage-backed securities (MBS) having an average yield of 5.44%
during the first half of 2008, which is higher than the cost of borrowings required to
finance the purchase of such assets; thus contributing to a higher net interest income as
compared to 2007. Refer to the Net Interest Income discussion below for additional
information. |
|
|
|
|
For the third quarter of 2008, the Corporations provision for loan and lease losses
amounted to $55.3 million, compared to $34.3 million for the same period in 2007. 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 2008 was primarily due to a higher volume of impaired construction and
commercial loans, increases to the reserve factors for potential losses inherent in the
loan portfolio associated with the weakening economic conditions in the United States and
Puerto Rico, and the overall growth of the loan portfolio. |
|
|
|
|
The Corporation has seen stress in the credit quality of, and worsening trends affecting its
construction loan portfolio, in particular condo-conversion loans in the U.S. mainland
(mainly in the state of Florida) affected by the continuing deterioration in the health of
the economy, an oversupply of new homes and declining housing prices in the United States.
The total exposure of the Corporation to loans originally disbursed as condo-conversion loans
in the United States is approximately $251 million or 2% of the |
43
|
|
|
total loan portfolio. A
total of approximately $182.2 million of this condo conversion portfolio is considered
impaired under Statement of Financial Accounting Standards No. (SFAS) 114, Accounting by
Creditors for Impairment of a Loan, with a specific reserve of $31.4 million allocated to
these impaired loans. With respect to the United States mainland market, the Corporation
recorded approximately $16.7 million in additional reserves for impaired loans during the
third quarter of 2008, including $9.6 million for a condo-conversion loan in Miami, Florida
with an outstanding principal balance of $52.6 million. For the third quarter of 2007,
approximately $8.1 million was recorded as a specific reserve for a previously reported
impaired relationship tied to the Miami Corporate Banking operations in the U.S. mainland.
With respect to the Puerto Rico market, specific reserves of approximately $17.9 million were
allocated to commercial and construction loans that were identified as impaired loans during the
third quarter of 2008. |
|
|
|
|
For the quarter ended September 30, 2008, the Corporations non-interest income amounted
to $13.9 million, compared to $23.9 million for the quarter ended September 30, 2007. The
financial results for the third quarter of 2007 include an income recognition of $15.1
million in connection with an agreement reached with insurance carriers and former
executives for indemnity of expenses related to the class action lawsuit brought against
the Corporation that was settled in 2007. Excluding this transaction, non-interest income
increased by $5.0 million, as compared to the third quarter of 2007 due to a combination of
factors, including lower other-than-temporary impairment charges on equity securities, an
increase in point of sale (POS) and ATM interchange fee income, and an increase in fee
income from cash management services provided to corporate customers. Refer to the Non
Interest Income discussion below for additional information. |
|
|
|
|
Non-interest expenses for the third quarter of 2008 amounted to $82.4 million, compared
to $75.0 million for the same period in 2007. The increase in non-interest expenses for
2008 was mainly due to an increase of approximately $5.0 million in foreclosure-related
expenses, mainly due to a higher inventory of repossessed properties and charges in
connection with valuation adjustments and realized losses on the sale of foreclosed
properties in Puerto Rico, together with an increase in repairs, legal expenses and
management fees paid in connection with foreclosures of properties in the United States
(mainly condo conversion projects in the state of Florida). Furthermore, higher
non-interest expenses was related to: (i) an increase of $1.6 million in employees
compensation and benefit expenses due to higher average compensation and related benefits,
(ii) an increase of $1.1 million in business promotion expenses to support initiatives
directed to increase the Corporations deposit base and mortgage loan originations, and
(iii) an increase of $1.0 million and $0.7 million in data processing fees and occupancy
and equipment expenses, respectively, to support the expansion of the Corporations
operations. Refer to the Non Interest Expenses discussion below for additional
information. |
|
|
|
|
For the third quarter of 2008, the Corporation recorded an income tax benefit of $3.7
million, compared to an income tax expense of $5.6 million for the same period in 2007.
The fluctuation is mainly related to a lower current income tax provision due to higher
tax-exempt income as a significant portion of the increase in revenues was associated with
exempt operations conducted through the international banking entity, FirstBank Overseas
Corporation. |
|
|
|
|
Total assets as of September 30, 2008 amounted to $19.3 billion, an increase of $2.1
billion compared to total assets as of December 31, 2007. The Corporations loan portfolio
increased by $913.4 million (before the allowance for loan and lease losses) driven by new
originations and the purchase of a $218 million auto loan portfolio during the third
quarter of 2008. Also, the increase in total assets is attributable to the purchase of
approximately $3.2 billion of U.S. government agency fixed-rate MBS during the first half
of 2008 as market conditions presented an opportunity for the Corporation to obtain
attractive yields, improve its net interest margin and replace the $1.2 billion of U.S.
Agency debentures called by counterparties. The |
44
|
|
|
Corporation increased its cash and money
market investments by $66.2 million in part as a precautionary measure given the current
crisis in the financial markets. |
|
|
|
|
As of September 30, 2008, total liabilities amounted to $17.9 billion, an increase of
approximately $2.1 billion as compared to $15.8 billion as of December 31, 2007. The
increase in total liabilities was mainly attributable to a higher volume of deposits, as
the Corporation has been issuing brokered CDs to finance its lending activities, pay off
repurchase agreements issued to finance the purchase of MBS in the first half of 2008,
accumulate additional liquidity due to current market volatility and extend the maturity of
its borrowings. Total deposits, excluding brokered CDs, increased by $594.5 million from
the balance as of December 31, 2007. Refer to Risk management Liquidity and Capital
Adequacy discussion below for additional information about the Corporations funding
sources. |
|
|
|
|
Total loan production, including purchases, for the quarter ended September 30, 2008 was
$1.2 billion, compared to $860.3 million for the comparable period in 2007. The increase
in loan production during 2008, as compared to the third quarter of 2007, was mainly
associated with the purchase of a $218 million auto loan portfolio. In addition, there was
an increase of $139.2 million in commercial loan originations. |
|
|
|
|
Total non-performing assets as of September 30, 2008 amounted to $552.9 million compared
to $439.3 million as of December 31, 2007. The slowing economy and deteriorating housing
market in the United States coupled with recessionary conditions in Puerto Ricos economy
have resulted in higher non-performing balances in most of the Corporations loan
portfolios. Total non-performing assets in the United States increased by $23.0 million.
With regards to the United States portfolio, two condo conversion loans totaling
approximately $17.5 million were classified as non-performing during 2008. Also in
Florida, two commercial mortgage loans totaling $12.9 million contributed to the increase
in non-accrual loans. The balance of non-accruing residential mortgage loans was also
adversely affected by deteriorating economic conditions in the United States, which
accounted for $9.9 million of the increase in non-accruing residential mortgages as
compared to balances as of December 31, 2007. |
|
|
|
|
Partially offsetting the increase in non-performing loans and assets in the United States was
the sale, during the first half of 2008, of one impaired condo conversion loan in a single
relationship on its Miami Corporate Banking operations portfolio. The loans carrying amount
was $21.8 million (net of an impairment of $2.4 million), and the loan was sold for $22.5
million. Also, during the first half of 2008, the Corporation added approximately $18.6
million to its other real estate owned (OREO) portfolio, as a result of collateral
repossessed in settlement of two other loans in this impaired relationship. As of September
30, 2008, and as a result of the transactions completed during the fourth quarter of 2007 and
first half of 2008, there were no outstanding loans associated with this relationship. Refer
to Risk Management Non-accruing and Non-performing Assets section below for additional
information about non-performing assets in the United States. |
|
|
|
|
In Puerto Rico, non-performing assets increased by $93.0 million from balances as of December
31, 2007 driven by increases in the residential and commercial non-performing loan portfolio.
The increase in non-accruing commercial loans is related to continuing adverse economic
conditions in Puerto Rico, including the classification as
non-accrual of approximately $33.1
million impaired commercial loans identified during 2008. Increases in the Puerto Ricos
non-accruing construction loans portfolio was driven by the classification as non-accrual of
a $15.2 million impaired loan extended for land development and construction of a residential
housing project in Puerto Rico. The weakening economic conditions in Puerto Rico have also
affected the volume of non-performing residential mortgage loans, which increased by $28.2
million; however, the non-performing to total loan ratio for this portfolio remained flat.
The relative stability of non-performing residential loans in Puerto Rico reflects, to some
extent, the positive impact of loans modified through the loan loss mitigation program that
begun in the third quarter of 2007. |
45
|
|
|
With respect to the U.S. Virgin Islands, a third party purchased, during the third
quarter of 2008, the outstanding debt related to a syndicated commercial loan in the U.S.
Virgin Islands on which the Corporation had a participation and that was placed in
non-accrual in the second quarter of 2008. The purchase agreement provided a full release of
the borrowers obligation to the participant banks, thus the carrying value of approximately
$13.0 million on this participation was taken out of non-accrual during the third quarter of
2008. On September 15, 2008, the Corporation collected approximately $ 6.5 million from this
borrower. The remaining balance of approximately $ 6.5 million is due on January 14, 2009. |
|
|
|
|
The non-accruing consumer loan portfolio, mainly composed of Puerto Rico loans, reflects a
decrease of $6.0 million from December 31, 2007, principally related to the auto loan
portfolio. This portfolio continues to show signs of stability and benefited from changes in
underwriting standards implemented in late 2005. The consumer loan portfolio with an average
life of approximately four years has been replenished by new originations under revised
standards. |
|
|
|
|
Refer to Risk Management Non-accruing and Non-performing Assets section below for
additional information. |
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;
6) derivative financial instruments; and 7) income recognition on loans. 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 2007 Annual
Report on Form 10-K. There have not been any material changes in the Corporations critical
accounting policies since December 31, 2007.
46
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, 2008 was $144.6 million and $403.7 million, respectively, compared to $105.0
million and $339.7 million, respectively, for the comparable periods in 2007. On an adjusted tax
equivalent basis, excluding the changes in the fair value of derivative instruments and unrealized
gains and losses on SFAS 159 liabilities, net interest income for the quarter and nine-month period
ended September 30, 2008 was $158.2 million and $433.9 million, respectively, compared to $114.9
million and $356.2 million, respectively, for the same periods in 2007.
Part I of the following table presents average volumes and rates on an adjusted tax equivalent
basis and Part II presents, also on an adjusted tax equivalent basis, the extent to which changes
in interest rates and changes in volume of interest-related assets and liabilities have affected
the Corporations net interest income. 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) and, (ii) changes in rate (changes in
rate multiplied by prior period volumes). Rate-volume variances (changes in rate multiplied by
changes in volume) have been allocated to the changes in volume and rate based upon their
respective percentage of the combined totals.
The net interest income is computed on an adjusted tax equivalent basis (for definition and
reconciliation of this non-GAAP measure, refer to discussions below) and excluding: (1) the change
in the fair value of derivative instruments and (2) unrealized gains or losses on SFAS 159
liabilities.
47
Part I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume |
|
|
Interest income (1) / expense |
|
|
Average rate (1) |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
Quarter ended |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments |
|
$ |
178,973 |
|
|
$ |
743,628 |
|
|
$ |
974 |
|
|
$ |
9,418 |
|
|
|
2.17 |
% |
|
|
5.02 |
% |
Government obligations (2) |
|
|
1,031,654 |
|
|
|
2,781,044 |
|
|
|
18,218 |
|
|
|
40,694 |
|
|
|
7.03 |
% |
|
|
5.81 |
% |
Mortgage-backed securities |
|
|
4,809,138 |
|
|
|
2,220,250 |
|
|
|
78,214 |
|
|
|
27,954 |
|
|
|
6.47 |
% |
|
|
5.00 |
% |
Corporate bonds |
|
|
6,103 |
|
|
|
7,711 |
|
|
|
143 |
|
|
|
144 |
|
|
|
9.32 |
% |
|
|
7.41 |
% |
FHLB stock |
|
|
69,427 |
|
|
|
43,919 |
|
|
|
968 |
|
|
|
802 |
|
|
|
5.55 |
% |
|
|
7.24 |
% |
Equity securities |
|
|
3,692 |
|
|
|
7,033 |
|
|
|
18 |
|
|
|
|
|
|
|
1.94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments (3) |
|
|
6,098,987 |
|
|
|
5,803,585 |
|
|
|
98,535 |
|
|
|
79,012 |
|
|
|
6.43 |
% |
|
|
5.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
3,427,707 |
|
|
|
2,942,505 |
|
|
|
54,756 |
|
|
|
47,093 |
|
|
|
6.36 |
% |
|
|
6.35 |
% |
Construction loans |
|
|
1,487,779 |
|
|
|
1,469,983 |
|
|
|
20,286 |
|
|
|
30,070 |
|
|
|
5.42 |
% |
|
|
8.12 |
% |
Commercial loans |
|
|
5,477,213 |
|
|
|
4,767,201 |
|
|
|
74,164 |
|
|
|
90,528 |
|
|
|
5.39 |
% |
|
|
7.53 |
% |
Finance leases |
|
|
372,404 |
|
|
|
384,302 |
|
|
|
7,842 |
|
|
|
8,350 |
|
|
|
8.38 |
% |
|
|
8.62 |
% |
Consumer loans |
|
|
1,800,336 |
|
|
|
1,713,625 |
|
|
|
52,142 |
|
|
|
50,587 |
|
|
|
11.52 |
% |
|
|
11.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (4) (5) |
|
|
12,565,439 |
|
|
|
11,277,616 |
|
|
|
209,190 |
|
|
|
226,628 |
|
|
|
6.62 |
% |
|
|
7.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
18,664,426 |
|
|
$ |
17,081,201 |
|
|
$ |
307,725 |
|
|
$ |
305,640 |
|
|
|
6.56 |
% |
|
|
7.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered CDs |
|
$ |
7,643,238 |
|
|
$ |
8,268,728 |
|
|
$ |
73,962 |
|
|
$ |
107,065 |
|
|
|
3.85 |
% |
|
|
5.14 |
% |
Other interest-bearing deposits |
|
|
3,677,632 |
|
|
|
3,160,418 |
|
|
|
26,005 |
|
|
|
35,121 |
|
|
|
2.81 |
% |
|
|
4.41 |
% |
Loans payable |
|
|
42,391 |
|
|
|
|
|
|
|
240 |
|
|
|
|
|
|
|
2.25 |
% |
|
|
|
|
Other borrowed funds |
|
|
4,296,355 |
|
|
|
3,183,421 |
|
|
|
39,333 |
|
|
|
39,383 |
|
|
|
3.64 |
% |
|
|
4.91 |
% |
FHLB advances |
|
|
1,212,121 |
|
|
|
671,026 |
|
|
|
10,018 |
|
|
|
9,172 |
|
|
|
3.29 |
% |
|
|
5.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities (6) |
|
$ |
16,871,737 |
|
|
$ |
15,283,593 |
|
|
$ |
149,558 |
|
|
$ |
190,741 |
|
|
|
3.53 |
% |
|
|
4.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
$ |
158,167 |
|
|
$ |
114,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.03 |
% |
|
|
2.15 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
2.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume |
|
|
Interest income (1) / expense |
|
|
Average rate (1) |
|
Nine-Month Period Ended September 30, |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments |
|
$ |
327,451 |
|
|
$ |
526,564 |
|
|
$ |
6,046 |
|
|
$ |
20,084 |
|
|
|
2.47 |
% |
|
|
5.10 |
% |
Government obligations (2) |
|
|
1,532,736 |
|
|
|
2,715,495 |
|
|
|
75,929 |
|
|
|
120,237 |
|
|
|
6.62 |
% |
|
|
5.92 |
% |
Mortgage-backed securities |
|
|
3,674,801 |
|
|
|
2,313,790 |
|
|
|
170,239 |
|
|
|
87,222 |
|
|
|
6.19 |
% |
|
|
5.04 |
% |
Corporate bonds |
|
|
6,158 |
|
|
|
7,711 |
|
|
|
425 |
|
|
|
369 |
|
|
|
9.22 |
% |
|
|
6.39 |
% |
FHLB stock |
|
|
65,998 |
|
|
|
43,183 |
|
|
|
3,229 |
|
|
|
2,004 |
|
|
|
6.54 |
% |
|
|
6.20 |
% |
Equity securities |
|
|
4,020 |
|
|
|
9,244 |
|
|
|
29 |
|
|
|
3 |
|
|
|
0.96 |
% |
|
|
0.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments (3) |
|
|
5,611,164 |
|
|
|
5,615,987 |
|
|
|
255,897 |
|
|
|
229,919 |
|
|
|
6.09 |
% |
|
|
5.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
3,309,221 |
|
|
|
2,875,978 |
|
|
|
160,715 |
|
|
|
139,461 |
|
|
|
6.49 |
% |
|
|
6.48 |
% |
Construction loans |
|
|
1,478,794 |
|
|
|
1,467,480 |
|
|
|
64,751 |
|
|
|
93,286 |
|
|
|
5.85 |
% |
|
|
8.50 |
% |
Commercial loans |
|
|
5,360,382 |
|
|
|
4,759,132 |
|
|
|
233,065 |
|
|
|
271,231 |
|
|
|
5.81 |
% |
|
|
7.62 |
% |
Finance leases |
|
|
375,460 |
|
|
|
378,134 |
|
|
|
24,238 |
|
|
|
24,929 |
|
|
|
8.62 |
% |
|
|
8.81 |
% |
Consumer loans |
|
|
1,689,565 |
|
|
|
1,741,416 |
|
|
|
146,677 |
|
|
|
153,067 |
|
|
|
11.60 |
% |
|
|
11.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (4) (5) |
|
|
12,213,422 |
|
|
|
11,222,140 |
|
|
|
629,446 |
|
|
|
681,974 |
|
|
|
6.88 |
% |
|
|
8.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
17,824,586 |
|
|
$ |
16,838,127 |
|
|
$ |
885,343 |
|
|
$ |
911,893 |
|
|
|
6.63 |
% |
|
|
7.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered CDs |
|
$ |
7,406,242 |
|
|
$ |
7,684,093 |
|
|
$ |
231,883 |
|
|
$ |
306,599 |
|
|
|
4.18 |
% |
|
|
5.33 |
% |
Other interest-bearing deposits |
|
|
3,553,985 |
|
|
|
3,096,184 |
|
|
|
78,355 |
|
|
|
87,899 |
|
|
|
2.94 |
% |
|
|
3.80 |
% |
Loans payable |
|
|
14,234 |
|
|
|
|
|
|
|
240 |
|
|
|
|
|
|
|
2.25 |
% |
|
|
|
|
Other borrowed funds |
|
|
3,898,835 |
|
|
|
3,553,621 |
|
|
|
110,178 |
|
|
|
134,853 |
|
|
|
3.77 |
% |
|
|
5.07 |
% |
FHLB advances |
|
|
1,143,851 |
|
|
|
654,482 |
|
|
|
30,738 |
|
|
|
26,370 |
|
|
|
3.59 |
% |
|
|
5.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities (6) |
|
$ |
16,017,147 |
|
|
$ |
14,988,380 |
|
|
$ |
451,394 |
|
|
$ |
555,721 |
|
|
|
3.76 |
% |
|
|
4.96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
$ |
433,949 |
|
|
$ |
356,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.87 |
% |
|
|
2.28 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25 |
% |
|
|
2.83 |
% |
|
|
|
(1) |
|
On an adjusted tax equivalent basis. The adjusted tax equivalent yield was estimated by
dividing the interest rate spread on exempt assets by (1 less Puerto Rico statutory tax rate
of 39%) 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 and unrealized gains or losses on SFAS 159 liabilities are excluded from
interest income and interest expense 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. |
|
(4) |
|
Average loan balances include the average of non-accruing loans. |
|
(5) |
|
Interest income on loans includes $2.5 million and $2.0 million for the third quarter of 2008
and 2007, respectively, and $7.9 million and $9.0 million for the nine-month period ended
September 30, 2008 and 2007, 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. |
48
Part II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
|
Nine-month period ended September 30, |
|
|
|
2008 compared to 2007 |
|
|
2008 compared to 2007 |
|
|
|
Increase (decrease) |
|
|
Increase (decrease) |
|
|
|
Due to: |
|
|
Due to: |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
(In thousands) |
|
Interest income on interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market investments |
|
$ |
(4,825 |
) |
|
$ |
(3,619 |
) |
|
$ |
(8,444 |
) |
|
$ |
(5,934 |
) |
|
$ |
(8,104 |
) |
|
$ |
(14,038 |
) |
Government obligations |
|
|
(28,168 |
) |
|
|
5,692 |
|
|
|
(22,476 |
) |
|
|
(55,517 |
) |
|
|
11,209 |
|
|
|
(44,308 |
) |
Mortgage-backed securities |
|
|
40,104 |
|
|
|
10,156 |
|
|
|
50,260 |
|
|
|
59,842 |
|
|
|
23,175 |
|
|
|
83,017 |
|
Corporate bonds |
|
|
(34 |
) |
|
|
33 |
|
|
|
(1 |
) |
|
|
(91 |
) |
|
|
147 |
|
|
|
56 |
|
FHLB stock |
|
|
407 |
|
|
|
(241 |
) |
|
|
166 |
|
|
|
1,112 |
|
|
|
113 |
|
|
|
1,225 |
|
Equity securities |
|
|
(9 |
) |
|
|
27 |
|
|
|
18 |
|
|
|
(20 |
) |
|
|
46 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
7,475 |
|
|
|
12,048 |
|
|
|
19,523 |
|
|
|
(608 |
) |
|
|
26,586 |
|
|
|
25,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans |
|
|
7,623 |
|
|
|
40 |
|
|
|
7,663 |
|
|
|
21,168 |
|
|
|
86 |
|
|
|
21,254 |
|
Construction loans |
|
|
234 |
|
|
|
(10,018 |
) |
|
|
(9,784 |
) |
|
|
678 |
|
|
|
(29,213 |
) |
|
|
(28,535 |
) |
Commercial loans |
|
|
11,300 |
|
|
|
(27,664 |
) |
|
|
(16,364 |
) |
|
|
30,435 |
|
|
|
(68,601 |
) |
|
|
(38,166 |
) |
Finance leases |
|
|
(266 |
) |
|
|
(242 |
) |
|
|
(508 |
) |
|
|
(170 |
) |
|
|
(521 |
) |
|
|
(691 |
) |
Consumer loans |
|
|
2,454 |
|
|
|
(899 |
) |
|
|
1,555 |
|
|
|
(4,422 |
) |
|
|
(1,968 |
) |
|
|
(6,390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
21,345 |
|
|
|
(38,783 |
) |
|
|
(17,438 |
) |
|
|
47,689 |
|
|
|
(100,217 |
) |
|
|
(52,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
28,820 |
|
|
|
(26,735 |
) |
|
|
2,085 |
|
|
|
47,081 |
|
|
|
(73,631 |
) |
|
|
(26,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered CDs |
|
|
(7,667 |
) |
|
|
(25,436 |
) |
|
|
(33,103 |
) |
|
|
(10,724 |
) |
|
|
(63,992 |
) |
|
|
(74,716 |
) |
Other interest-bearing deposits |
|
|
4,614 |
|
|
|
(13,730 |
) |
|
|
(9,116 |
) |
|
|
11,737 |
|
|
|
(21,281 |
) |
|
|
(9,544 |
) |
Loans payable |
|
|
240 |
|
|
|
|
|
|
|
240 |
|
|
|
240 |
|
|
|
|
|
|
|
240 |
|
Other borrowed funds |
|
|
11,859 |
|
|
|
(11,909 |
) |
|
|
(50 |
) |
|
|
11,550 |
|
|
|
(36,225 |
) |
|
|
(24,675 |
) |
FHLB advances |
|
|
5,881 |
|
|
|
(5,035 |
) |
|
|
846 |
|
|
|
16,481 |
|
|
|
(12,113 |
) |
|
|
4,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
14,927 |
|
|
|
(56,110 |
) |
|
|
(41,183 |
) |
|
|
29,284 |
|
|
|
(133,611 |
) |
|
|
(104,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
13,893 |
|
|
$ |
29,375 |
|
|
$ |
43,268 |
|
|
$ |
17,797 |
|
|
$ |
59,980 |
|
|
$ |
77,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A portion of the Corporations interest-earning assets, mostly investments in obligations of
some U.S. Government agencies and sponsored entities, generate interest that is exempt from income
tax, principally in Puerto Rico. Also, interest and gains on sales 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 of 39.0%)
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 presentation of net interest income excluding the effects of the changes in the fair
value of derivative instruments and unrealized gains or losses on SFAS 159 liabilities provides
additional information about the Corporations net interest income and facilitates comparability
and analysis. The changes in the fair value of the derivative instruments 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 interest rate swap counterparties.
49
The following table reconciles interest income on an adjusted tax equivalent basis set forth
in Part I above to interest income set forth in the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
|
Nine-month period ended September 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Interest income on interest-earning assets on a tax equivalent basis |
|
$ |
307,725 |
|
|
$ |
305,640 |
|
|
$ |
885,343 |
|
|
$ |
911,893 |
|
Less: tax equivalent adjustments |
|
|
(17,859 |
) |
|
|
(3,259 |
) |
|
|
(40,702 |
) |
|
|
(10,682 |
) |
Less: net unrealized loss on derivatives |
|
|
(1,574 |
) |
|
|
(6,450 |
) |
|
|
(654 |
) |
|
|
(824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
288,292 |
|
|
$ |
295,931 |
|
|
$ |
843,987 |
|
|
$ |
900,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of the changes in fair values of interest rate
swaps and interest rate caps, which are included in interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
|
Nine-month period ended September 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Unrealized loss on derivatives (economic undesignated hedges): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
$ |
(1,438 |
) |
|
$ |
(4,594 |
) |
|
$ |
(558 |
) |
|
$ |
(246 |
) |
Interest rate swaps on loans |
|
|
(136 |
) |
|
|
(1,856 |
) |
|
|
(96 |
) |
|
|
(578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on derivatives (economic undesignated hedges) |
|
$ |
(1,574 |
) |
|
$ |
(6,450 |
) |
|
$ |
(654 |
) |
|
$ |
(824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of interest expense for the quarter and
nine-month periods ended September 30, 2008 and 2007. As previously stated, the net interest
margin analysis excludes the changes in the fair value of derivatives and unrealized gains or
losses on SFAS 159 liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
|
Nine-month period ended September 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Interest expense on interest-bearing liabilities |
|
$ |
155,965 |
|
|
$ |
184,652 |
|
|
$ |
470,669 |
|
|
$ |
537,520 |
|
Net interest (realized) incurred on interest rate swaps |
|
|
(10,263 |
) |
|
|
3,428 |
|
|
|
(30,210 |
) |
|
|
10,775 |
|
Amortization of placement fees on brokered CDs |
|
|
3,856 |
|
|
|
2,661 |
|
|
|
10,935 |
|
|
|
6,919 |
|
Amortization of placement fees on medium-term notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense excluding net unrealized (gain) loss on derivatives (economic undesignated hedges),
net unrealized (gain) loss on SFAS 159 liabilities and accretion of basis adjustment |
|
|
149,558 |
|
|
|
190,741 |
|
|
|
451,394 |
|
|
|
555,721 |
|
Net unrealized (gain) loss on derivatives (economic undesignated hedges) and SFAS 159 liabilities |
|
|
(5,887 |
) |
|
|
161 |
|
|
|
(11,092 |
) |
|
|
7,048 |
|
Accretion of basis adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
143,671 |
|
|
$ |
190,902 |
|
|
$ |
440,302 |
|
|
$ |
560,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
The following table summarizes the components of the net unrealized gains and losses on
derivatives (economic undesignated hedges) and net unrealized gains and losses on SFAS 159
liabilities which are included in interest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
|
Nine-month period ended September 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Unrealized (gain) loss on derivatives (economic
undesignated hedges): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and other derivatives on
brokered CDs |
|
$ |
(5,669 |
) |
|
$ |
(61,971 |
) |
|
$ |
(31,071 |
) |
|
$ |
87 |
|
Interest rate swaps and other derivatives on
medium-term notes |
|
|
(48 |
) |
|
|
(358 |
) |
|
|
(47 |
) |
|
|
999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (gain) loss on derivatives
(economic undesignated hedges) |
|
$ |
(5,717 |
) |
|
$ |
(62,329 |
) |
|
$ |
(31,118 |
) |
|
$ |
1,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (gain) loss on SFAS 159 liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on brokered CDs |
|
|
791 |
|
|
|
62,973 |
|
|
|
21,886 |
|
|
|
6,575 |
|
Unrealized gain on medium-term notes |
|
|
(961 |
) |
|
|
(483 |
) |
|
|
(1,860 |
) |
|
|
(613 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (gain) loss on SFAS 159 liabilities |
|
$ |
(170 |
) |
|
$ |
62,490 |
|
|
$ |
20,026 |
|
|
$ |
5,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (gain) loss on derivatives
(economic undesignated hedges) and SFAS 159
liabilities |
|
$ |
(5,887 |
) |
|
$ |
161 |
|
|
$ |
(11,092 |
) |
|
$ |
7,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the components of the accretion of basis adjustment which are
included in interest expense for 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
|
Nine-month period ended September 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Accretion of basis adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps on
medium-term notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 economically hedge 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 not elected for the fair value
option under SFAS 159).
Unrealized gains or losses on derivatives represent 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).
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.
Effective January 1, 2007, the Corporation discontinued the use of fair value hedge accounting
under SFAS 133 for interest rate swaps that hedge the Corporations $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.
The basis adjustment 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 that
51
was amortized or accreted based on the expected maturity 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.
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 Note 8 Derivative Instruments and Hedging Activities of the accompanying
unaudited consolidated financial statements 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.
Net interest income increased 38% to $144.6 million for the third quarter of 2008 from $105.0
million in the third quarter of 2007 and by 19% to $403.7 million for the first nine months of 2008
from $339.7 million for the same period a year ago. First BanCorps net interest spread and margin,
on an adjusted tax equivalent basis, for the quarter and nine-month period ended September 30, 2008
were 3.03% and 3.37% and 2.87% and 3.25%, respectively, compared to 2.15% and 2.67% and 2.28% and
2.83%, respectively, for the same periods in 2007. The increase in net interest income, spread and
margin reflects the effect of both changes in interest rates and changes in the mix and volume of
the Corporations balance sheet. Net interest income benefited from lower short-term interest
rates and the Corporations liability sensitive balance sheet position. The average rate paid by
the Corporation on its interest-bearing liabilities decreased by 142 and 120 basis points during
the third quarter and first nine months of 2008 when compared to same periods in 2007, mainly due
to lower short-term rates and their effect on the mix of borrowings.
The Corporation has been extending the duration of its borrowings to reduce exposure to high
levels of market volatility. Since the first half of 2008 the Corporation has been replacing
swapped-to-floating brokered certificates of deposit (CDs) that matured or were called (due to
lower short-term rates) with brokered CDs that were not hedged with interest rate swaps; in this
way, the Corporation locked-in current lower interest rates for longer periods. The decrease in
short-term interest rates resulted in the call by counterparties of approximately $2.6 billion of
interest rate swaps used by the Corporation to convert fixed-rate brokered CDs to a floating rate,
during the first nine months of 2008 ($167.2 million for the third quarter of 2008). Following the
cancellation of these swaps, the Corporation exercised its call option on approximately $2.5
billion swapped-to-floating brokered CDs ($129.2 million for the third quarter of 2008).
Also, the Corporation has extended the maturity of other funding sources by, among other
things, entering into long-term repurchase agreements at lower rates compared to rate levels a year
ago. The comparisons against the previous year results reflect improvements in net interest spreads
and margins. However, the extension of the maturity of interest bearing liabilities and increasing
costs due to the current credit crisis in the U.S. financial markets could increase the
Corporations current overall cost of funding in the foreseeable future. This possible increase in
the cost of funds is expected to be offset by higher and more rational loan pricing in the markets
where the Corporation operates.
A lower overall average cost of funds is also related to the repricing of borrowings as
reflected to some extent by net interest settlement income on interest rate swaps of approximately
$10.3 million and $30.2 million for the third quarter and first nine months of 2008, respectively,
compared to net interest settlement expenses of $3.4 million and $10.8 million, respectively, for
the comparable periods in 2007. Meanwhile, interest income was adversely affected by lower
yields in the loan portfolio attributable to the re-pricing of variable rate commercial and
construction loans tied to short-term indexes and the increase in the balance of non-performing
loans.
52
The increase in net interest income was also associated with a higher volume of
interest-earning assets, driven by an increase of $1.3 billion in average loans over the third
quarter of 2007 and of $991.3 million over the first nine-months of 2007. This increase was driven
by the growth in internal originations, in particular commercial and residential real estate loans,
and to a lesser extent purchases of loans, including the acquisition of a $218 million auto loan
portfolio during the third quarter of 2008 which contributed to a wider interest rate spread. The
weighted-average coupon of this portfolio is approximately 10.89%, a significant spread over the
average cost of funding.
For the investments side, the drop in rates in the long end of the yield curve, as compared
to previous year rates, adversely affected interest income in the first nine months of 2008 due to
the early redemption through call exercises of approximately $1.2 billion of U.S. Agency
debentures with an average yield of 5.87% ($18.4 million with an average yield of 5.40% for the
third quarter of 2008). In spite of this, and given market opportunities, the Corporation bought
U.S. government sponsored agencies MBS amounting to $3.2 billion at an average yield of 5.44%
during the first half of 2008, which is significantly higher than the cost of borrowings used to
finance the purchase of such assets. Also, the lack of liquidity in the financial markets has
caused several call dates go by in 2008 without counterparties actions to exercise call provisions
embedded in approximately $949 million of U.S. agency debentures still held by the Corporation as
of September 30, 2008. The Corporation has benefited from higher than current market yields on
these instruments.
As shown on the tables above, the results of operations for the third quarter and first nine
months of 2008 and 2007 were impacted by changes in the valuation of derivative instruments that
economically hedge 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 gains and losses on SFAS 159 liabilities and the basis adjustment (for 2007 results)
recorded as part of net interest income resulted in a net gain of $4.3 million and $10.4 million
for the third quarter and first nine months of 2008, respectively, compared to a net loss of $6.6
million and $5.8 million, respectively, for the comparable periods in 2007. The results for 2008
include a net gain of $0.5 million for the third quarter and of $4.8 million for the first nine
months, resulting from the reversal of the cumulative mark-to-market valuation of swaps and
brokered CDs called.
On an adjusted tax equivalent basis, net interest income, excluding the changes in the fair
value of derivative instruments and unrealized gains and losses on SFAS 159 liabilities,
increased by $43.3 million, or 38%, and $77.8 million, or 22%, for the third quarter and first
nine months of 2008, respectively, compared to the same periods in 2007. The increase in the
adjusted tax equivalent net interest income was principally due to an increase in tax-equivalent
adjustments and the declining interest rates and changes in the mix and volume of the
Corporations balance sheet discussed above. The adjusted 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 2008, tax-equivalent adjustments amounted to
$17.9 million and $40.7 million, respectively, compared to $3.3 million and $10.7 million,
respectively, for the comparable periods in 2007. The increase in tax-equivalent adjustments was
mainly related to increases in the interest rate spread on tax-exempt assets due to lower
short-term interest rates.
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
53
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, 2008, the Corporation provided
$55.3 million and $142.4 million, respectively, for loan and lease losses, as compared to $34.3
million and $83.8 million, respectively, for the same periods in 2007.
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.
The increase, as compared to 2007 periods, is mainly attributable to a higher volume of
impaired construction and commercial loans, increases to the reserve factors for potential losses
inherent in the loan portfolio, and the growth of the Corporations total loan portfolio.
The Corporation has seen stress in the credit quality of, and worsening affecting its
construction loan portfolio, in particular condo-conversion loans in the U.S. mainland (mainly in
the state of Florida) affected by continuing deterioration in the health of the economy, an
oversupply of new homes and declining housing prices in the United States. The total exposure of
the Corporation to loans originally disbursed as condo-conversion loans in the United States is
approximately $251 million or 2% of the total loan portfolio. A total of approximately $182.2
million of this condo conversion portfolio is considered impaired under SFAS 114 with a specific
reserve of $31.4 million allocated to these impaired loans. Specific reserves of $8.1 million were
recorded for impaired loans in the United States for the quarter and first nine months of 2007.
The increase in the provision for loan losses for 2008 was significantly driven by three large
impaired loan relationships, two in the United States and one in Puerto Rico, which required
significant specific reserves. With respect to the United States mainland market, the Corporation
recorded approximately $16.7 million in additional reserves for impaired loans during the third
quarter of 2008 ($36.3 million for the first nine months of 2008), including approximately $10.0
million in the third quarter of 2008 ($22.1 million for the first nine months of 2008) for two
condo-conversion loans in Miami, Florida with an aggregate outstanding principal balance of $81.7
million. With respect to the Puerto Rico market, specific reserves of approximately $17.9 million
were allocated to commercial and construction loans that were identified as impaired loans during
the third quarter of 2008 ($24.6 million for those identified during the first nine months of
2008), including a $4.8 million reserve allocated to a loan extended for land development and
construction of a mid-rise residential housing project with an outstanding principal of $15.2
million. The construction of a second phase of this mid-rise residential project has been delayed
in light of lower than expected demand due to diminished consumer purchasing power and general
economic conditions. This loan is in non-accrual status as of September 30, 2008. The
construction loan portfolio is affected by the deterioration in the economy because the underlying
loans repayment capacity is dependent on the ability to attract home-purchasers and maintain
housing prices.
To a lesser extent, the Corporation also increased its reserve factors for the residential
mortgage and construction loan portfolio from 2007 level to account for the increased credit risk
tied to recessionary conditions in Puerto Ricos economy. Puerto Ricos economy has been in a
recession for about three years caused by, among other things, increases in utility costs, gasoline
prices and highway toll charges, the implementation of sales taxes and periodic impasses between
the executive and the legislative branches of the Commonwealth. The above conditions, together with
a recession looming also in the U.S. mainland and rising food prices, will continue to adversely
affect the economy in Puerto Rico. The Puerto Rico housing market has not seen the dramatic
decline in housing prices that is affecting the U.S. mainland, but there is a lower demand due to
the diminished consumer purchasing power. Recent decreases in oil prices should provide a relief to
consumers and should immediately impact the consumers purchasing power positively.
54
Refer to the discussions under Financial Condition and Operating Analysis Loan Portfolio
and under Risk Management Credit Risk Management below for additional information concerning
the Corporations loan portfolio exposure to the geographic areas where the Corporation does
business.
Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine-Month Period Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Other service charges on loans |
|
$ |
1,612 |
|
|
$ |
1,290 |
|
|
$ |
4,343 |
|
|
$ |
5,499 |
|
Service charges on deposit accounts |
|
|
3,170 |
|
|
|
3,160 |
|
|
|
9,725 |
|
|
|
9,536 |
|
Mortgage banking activities |
|
|
1,231 |
|
|
|
1,125 |
|
|
|
2,354 |
|
|
|
2,238 |
|
Rental income |
|
|
583 |
|
|
|
620 |
|
|
|
1,705 |
|
|
|
1,953 |
|
Insurance income |
|
|
2,631 |
|
|
|
2,681 |
|
|
|
7,910 |
|
|
|
8,255 |
|
Other operating income |
|
|
5,208 |
|
|
|
3,088 |
|
|
|
14,266 |
|
|
|
9,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income before net (loss) gain on investments, insurance
reimbursement and other agreements related to a contingency
settlement, net gain on partial extinguishment and recharacterization
of a secured commercial loan to a local financial institution and gain
on sale of credit card portfolio |
|
|
14,435 |
|
|
|
11,964 |
|
|
|
40,303 |
|
|
|
36,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on VISA
shares and other proceeds |
|
|
132 |
|
|
|
|
|
|
|
9,474 |
|
|
|
|
|
Net (loss) gain on sale of investments |
|
|
|
|
|
|
(750 |
) |
|
|
6,661 |
|
|
|
(1,482 |
) |
Impairment on investments |
|
|
(696 |
) |
|
|
(2,369 |
) |
|
|
(1,185 |
) |
|
|
(5,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on investments |
|
|
(564 |
) |
|
|
(3,119 |
) |
|
|
14,950 |
|
|
|
(6,714 |
) |
Insurance reimbursement and other agreements related to a
contingency settlement |
|
|
|
|
|
|
15,075 |
|
|
|
|
|
|
|
15,075 |
|
Gain on partial extinguishment and
recharacterization of a secured commercial loan to a local financial
institution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,497 |
|
Gain on sale of credit card portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,871 |
|
|
$ |
23,920 |
|
|
$ |
55,253 |
|
|
$ |
50,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and other non-deferrable fees.
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 and servicing rights portfolio, if any, are
recorded as part of mortgage banking activities.
55
Rental income represents income generated by the Corporations subsidiary, First Leasing and
Rental Corporation, on the rental of various types of motor vehicles.
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, credit
card and point of sale (POS) interchange fees and check and cash management fees.
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.
Non-interest income decreased 42% to $13.9 million for the third quarter of 2008 from $23.9
million for the same period a year ago. The financial results for the third quarter of 2007
included an income recognition of $15.1 million in connection with an agreement reached with
insurance carriers and former executives for indemnity of expenses related to the class action
lawsuit brought against the Corporation that was settled in 2007. Excluding this transaction,
non-interest income increased by $5.0 million as compared to the third quarter of 2007 due to a
combination of factors, including lower other-than-temporary impairment charges on equity
securities, an increase in point of sale (POS) and ATM interchange fee income, and an increase in
fee income from cash management services provided to corporate customers.
For the third quarter of 2008, other-than-temporary impairment charges on equity securities
amounted to $0.7 million, compared to a $2.4 million charge recorded for the same period a year
ago. Most of the Corporations investment portfolio is comprised of fixed-rate MBS issued or
guaranteed by FNMA, FHLMC or GNMA and U.S. agency senior debt obligations. Thus, payment of a
substantial portion is secured by mortgages and guaranteed by a U.S. government sponsored entity or
backed by the full faith and credit of the U.S. government. In connection with the placement of
FNMA and FHLMC into conservatorship by the U.S. Treasury in September 2008, the Treasury entered
into agreements to invest up to approximately $100 billion in each agency to, among other things,
protects debt and mortgage-backed securities of the agencies. The fluctuation in non-interest
income, as compared to the same period in 2007, also reflects the absence of sales of investment
securities during the third quarter of 2008 compared to a loss of $0.8 million recorded for the
same period of 2007 on the sale of certain low-yielding U.S. Treasury securities and U.S. sponsored
agency MBS as part of the repositioning strategy of the investment portfolio.
POS and ATM interchange fee income increased by approximately $0.7 million, as compared to the
third quarter of 2007, based on a change in the calculation of interchange fees charged between
financial institutions in Puerto Rico from a fixed fee calculation to a percentage of the sale
amount since the latter part of 2007. Fee income from cash management services provided to
corporate customers increased by $0.3 million for the third quarter of 2008, as compared to the
same period a year ago, positively affected by lower short-term interest rates.
First BanCorps non-interest income for the first nine months of 2008 amounted to $55.3
million, compared to $50.6 million for the same period in 2007. Aside from the items mentioned
above, the increase in non-interest income was mainly attributable to a one-time gain of $9.3
million on the sale of part of the Corporations investment in VISA, Inc. in connection with VISAs
initial public offering, together with a realized gain of $6.9 million on the sale of approximately
$242 million of 5.5% FNMA fixed-rate MBS during the first quarter of 2008. Also, on a
comparative basis to the first nine months of 2007, non-interest income was favorably affected by
the lower other-than-temporary impairment charges on investment securities that decreased to $1.2
million for the first nine months of 2008 compared to an impairment charge of $5.2 million recorded
in the first nine months of 2007. POS and ATM interchange fee income increased by approximately
$1.8 million for the first nine months of 2008, as compared to the same period in 2007, and fee
income from cash management services increased by $0.75
56
million for such period. The impact of these transactions was partially offset, when compared to
the first nine months of 2007, by the aforementioned $15.1 million income recognition for
reimbursement of expenses related to the class action lawsuit settled in 2007, and gains of $2.8
million on the sale of a credit card portfolio and $2.5 million on the partial extinguishment and
re-characterization of a secured commercial loan to a local financial institution that were
recognized in the first nine months of 2007.
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, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Employees compensation and benefits |
|
$ |
35,629 |
|
|
$ |
33,995 |
|
|
$ |
106,949 |
|
|
$ |
103,719 |
|
Occupancy and equipment |
|
|
15,647 |
|
|
|
14,970 |
|
|
|
46,167 |
|
|
|
43,848 |
|
Deposit insurance premium |
|
|
2,967 |
|
|
|
3,705 |
|
|
|
7,658 |
|
|
|
4,389 |
|
Other taxes, insurance and supervisory fees |
|
|
5,488 |
|
|
|
5,592 |
|
|
|
16,740 |
|
|
|
15,633 |
|
Professional fees recurring |
|
|
1,900 |
|
|
|
3,628 |
|
|
|
10,080 |
|
|
|
10,373 |
|
Professional fees non-recurring |
|
|
824 |
|
|
|
845 |
|
|
|
2,622 |
|
|
|
6,105 |
|
Servicing and processing fees |
|
|
2,685 |
|
|
|
1,672 |
|
|
|
7,654 |
|
|
|
5,047 |
|
Business promotion |
|
|
4,083 |
|
|
|
2,973 |
|
|
|
13,150 |
|
|
|
12,767 |
|
Communications |
|
|
2,173 |
|
|
|
1,999 |
|
|
|
6,696 |
|
|
|
6,396 |
|
Foreclosure-related expenses |
|
|
5,626 |
|
|
|
588 |
|
|
|
12,054 |
|
|
|
1,129 |
|
Other |
|
|
5,354 |
|
|
|
4,984 |
|
|
|
16,556 |
|
|
|
18,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82,376 |
|
|
$ |
74,951 |
|
|
$ |
246,326 |
|
|
$ |
227,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses increased 10% to $82.4 million for the third quarter of 2008 from $75.0
million for the same period a year ago and by 8% to $246.3 million for the first nine months of
2008 from $227.8 million for the first nine months of 2007. Expenses increased primarily due to
higher foreclosure-related expenses, employee compensation and benefits, business promotion,
occupancy and equipment expenses and data processing fees partially, offset by a decrease in
professional fees.
Foreclosure-related expenses increased by approximately $5.0 million and $10.9 million for the
third quarter and first nine months of 2008, respectively, as compared to the same periods a year
ago mainly due to a higher inventory of repossessed properties and charges in connection with
valuation adjustments and realized losses on the sale of foreclosed properties in Puerto Rico,
together with an increase in repairs, legal expenses, and management fees paid in connection with
foreclosures of properties in the United States (mainly condo-conversion projects in the state of
Florida).
Employees compensation and benefit expenses increased by $1.6 million and by $3.2 million for
the third quarter and first nine months of 2008, respectively, as compared to the same periods a
year ago, primarily due to a higher average compensation and related fringe benefits, partially
offset by a decrease in expenses related to the fair value of stock options granted to employees.
During the first quarter of 2007, the Corporation recorded $2.8 million in stock-based compensation
expense; no stock options were granted during 2008. The Corporations total headcount has
decreased as compared to December 31, 2007 as a result of the voluntary separation program
completed earlier in the year and reductions by attrition. These decreases have been partially
offset by increases due to the acquisition of the Virgin Islands Community Bank (VICB) in the
first quarter of 2008 and to reinforcement of audit and credit risk management personnel.
Business promotion expenses increased by $1.1 million and by $0.4 million for the third
quarter and first nine months of 2008, respectively, as compared to the same periods a year ago.
The Puerto Rico financial services
57
market is highly competitive and requires investment in marketing efforts. The increase in
expenses incurred during 2008 supports initiatives directed to increase the Corporations deposit
base and mortgage loan originations as well as expenses incurred in customer satisfaction and brand
awareness studies.
Occupancy and equipment expenses, including data processing expenses, increased by $1.7
million and $4.9 million for the third quarter and first nine months of 2008, respectively, as
compared to the same periods a year ago primarily to support the expansion of the Corporations
operations as well as increases in utility costs.
Professional fees decreased by $1.7 million and $3.8 million during the third quarter and
first nine months of 2008, respectively, as compared to the same periods a year ago. The decrease
was primarily attributable to lower legal, accounting and consulting fees due to, among other
things, the conclusion of the process to file all required reports under the federal securities
laws and the settlement of legal and regulatory matters.
For the first nine months of 2008, other expenses decreased by $1.8 million, compared to the
first nine months of 2007. The decrease reflects the impact of approximately $3.3 million in costs
associated with capital raising efforts recorded in the first half of 2007. This was partially
offset by a higher provision for sundry losses and an increase in the amortization of core deposit
intangibles, mainly due to the acquisition of VICB in the first quarter of 2008.
Notwithstanding the above mentioned increases in non-interest expenses, the Corporations
efficiency ratio for the third quarter and first nine months of 2008 was 51.97% and 53.67%,
respectively, compared to 58.13% and 58.35% for the same periods a year ago, as the Corporation has
been able to continue the expansion of its operations without incurring substantial additional
operating expenses.
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 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%. 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. IBEs that operate as a unit of a bank pay income taxes at normal rates to
the extent that the IBEs net income exceeds 20% of the banks total net taxable income.
For the quarter ended September 30, 2008, the Corporation recorded an income tax benefit of
$3.7 million, compared to an income tax expense of $5.6 million recorded for the same period in
2007. The fluctuation is mainly
58
related to a lower current income tax provision due to higher tax-exempt income.
For the first nine months of 2008, the Corporation recognized an income tax benefit of $21.0
million compared to an income tax expense of $18.0 million for the same period in 2007. The
positive fluctuation on the financial results was mainly due to two non-ordinary transactions: (i)
a reversal of $10.6 million of Unrecognized Tax Benefits (UTBs) during the second quarter of 2008
for positions taken on income tax returns recorded under the provisions of FIN 48, Accounting for
Uncertainty in Income Taxes, as explained below, and (ii) the recognition of an income tax benefit
of $5.4 million in connection with an agreement entered into with the Puerto Rico Department of
Treasury during the first quarter of 2008 that establishes a multi-year allocation schedule for
deductibility of the payment of $74.25 million made by the Corporation during 2007 to settle the
securities class action suit. Also, the current income tax provision was lower,
excluding the reversal of the FIN 48 contingency, due to higher tax-exempt income. A significant
portion of the increase in revenues was associated with exempt operations conducted through the
international banking entity, FirstBank Overseas Corporation.
During the second quarter of 2008, the Corporation reversed UTBs by approximately $7.1 million
and accrued interest of $3.5 million as a result of a lapse of the applicable statute of
limitations for the 2003 taxable year. The amount of UTBs may increase or decrease in the future
for various reasons, including changes in the amounts for current tax year positions, the
expiration of open income tax returns due to the statute of limitations, changes in managements
judgment about the level of uncertainty, the status of examinations, litigation and legislative
activity and the addition or elimination of uncertain tax positions. For the outstanding UTBs, the
Corporation cannot make any reasonably reliable estimate of the timing of future cash flows or
changes, if any, associated with such obligations.
As of September 30, 2008, 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 $4.9 million as of December 31, 2007. As of
September 30, 2008, the deferred tax asset, net of the valuation allowance of $6.6 million,
amounted to approximately $115.0 million compared to $90.1 million, net of the valuation allowance
of $4.9 million as of December 31, 2007.
For additional information relating to income taxes, see Note 16 in the accompanying notes to
the unaudited interim consolidated financial statements.
59
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 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, including purchases, for the quarter and nine-month period ended
September 30, 2008 was $1.2 billion and $3.2 billion, respectively, compared to $860.3 million and
$2.8 billion, respectively, for the comparable periods in 2007. The increase in loan production
was mainly due to increases in commercial and residential real estate mortgage loan originations
and to the purchase of a $218 million auto loan portfolio during the third quarter of 2008.
The following table details the First BanCorps loan production for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
|
Nine-month period ended |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Residential real estate |
|
$ |
168,808 |
|
|
$ |
155,331 |
|
|
$ |
560,168 |
|
|
$ |
475,032 |
|
Commercial and construction |
|
|
603,542 |
|
|
|
514,733 |
|
|
|
1,941,416 |
|
|
|
1,676,614 |
|
Finance leases |
|
|
29,131 |
|
|
|
28,651 |
|
|
|
87,217 |
|
|
|
111,796 |
|
Consumer (1) |
|
|
374,556 |
|
|
|
161,605 |
|
|
|
652,193 |
|
|
|
504,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan production |
|
$ |
1,176,037 |
|
|
$ |
860,320 |
|
|
$ |
3,240,994 |
|
|
$ |
2,767,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the purchase of a $218 million auto loan portfolio during the third quarter of 2008. |
Residential Real Estate Loans
Residential mortgage loan production for the third quarter and first nine months of 2008
increased by $13.5 million, or 9%, and $85.1 million, or 18%, respectively, compared to the same
periods in 2007. These loans are mainly fully amortizing fixed-rate loans. The residential
mortgage loan production was favorably affected by recent legislation approved by the Puerto Rico
Government (Act 197) which provides credits to lenders and borrowers when individuals purchase
certain new or existing homes.
The incentives are as follows: (a) for a new constructed home that will constitute the
individuals principal residence, a credit equal to 20% of the sales price or $25,000, whichever is
lower; (b) for new constructed homes that will not constitute the individuals principal residence,
a credit of 10% of the sales price or $15,000, whichever is lower; and (c) for existing homes, a
credit of 10% of the sales price or $10,000, whichever is lower.
From the homebuyers perspective: (1) the individual may benefit from the credit no more than
twice; (2) the amount of credit granted will be credited against the principal amount of the
mortgage; (3) the individual must acquire the property before December 31, 2008; and (4) for new
constructed homes constituting the principal residence and existing homes, the individual must live
in it as his or her principal residence for at least three consecutive years. Noncompliance with
this requirement will affect only the homebuyers credit and not the tax credit granted to the
financial institution.
60
From the financial institutions perspective: (1) the credit may be used against income taxes,
including estimated taxes, for years commencing after December 31, 2007 in three installments,
subject to certain limitations, between January 1, 2008 and June 30, 2011; (2) the credit may be
ceded, sold or otherwise transferred to any other person; and (3) any tax credit not used in a
given tax year, as certified by the Secretary of Treasury, may be claimed as a refund.
Loan originations of the Corporation covered by Act 197 amounted to approximately $18.2
million and $80.9 million for the third quarter and first nine months of 2008, respectively. The
increase in residential mortgage loans was also related to higher purchases through the
Corporations Partners in Business program as explained below, which amounted to $164.5 million for
the first nine months of 2008, compared to $147.8 million for the comparable period in 2007.
Residential real estate loans represent 17% of total loans originated and purchased for the
first nine months of 2008. 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 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. FirstMortgages multi-channel
strategy has proven to be effective in capturing business.
The Corporation has not been active in subprime or adjustable rate mortgage loans (ARMs),
nor has it been exposed to collateral debt obligations or other types of exotic products that
aggravated the current financial crisis in the United States. More than 90% of the Corporations
outstanding balance in its residential mortgage loan portfolio consists of fixed-rate, fully
amortizing, full documentation loans
Commercial and Construction Loans
Commercial and construction loan production for the third quarter and first nine months of
2008 increased by $88.8 million, or 17%, and by $264.8 million, or 16%, compared to the same
periods in 2007. The increase in commercial and construction loan production was experienced
mainly in Puerto Rico. Commercial loan originations in Puerto Rico increased by approximately
$382.3 million for the first nine months of 2008, as compared to the same period in 2007.
Commercial originations include floor plan lending activities which depends on inventory levels
(autos) financed and their turnover. Floor plan originations amounted to approximately $545.1
million for the first nine months of 2008, compared to $528.3 million for the same period a year
ago. This was partially offset by lower construction loan originations in the United States, which
decreased by $91.4 million for the first nine months of 2008, as compared to the first nine months
of 2007 due to the slowdown in the U.S. housing market and the strategic decision by the
Corporation to reduce its exposure to condo-conversion loans on its Miami Corporate Banking
operations. Also, there was a decrease in construction loan originations in Puerto Rico due to
current weakening economic conditions.
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. The Corporation has expanded its distribution network
and participation in the commercial loans middle-market segment by focusing on customers with
financing needs in amounts up to $5 million. The Corporation has 5 regional offices that provide
coverage throughout Puerto Rico. The offices are staffed with
61
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 2008, consumer loan originations increased by $213.0
million and by $147.8 million, compared to the same periods in 2007. The increase was related to
the purchase of a $218 million auto loan portfolio from Chrysler Financial Services Caribbean, LLC
(Chrysler) in July 2008. Aside from this transaction, the consumer loan production decreased for
the third quarter and first nine months of 2008 by $5.3 million, or 3%, and by $70.5 million, or
14%, compared to the same periods in 2007, mainly due to adverse economic conditions in Puerto
Rico.
Finance Leases
For the third quarter of 2008, finance lease originations remained flat as compared to the
same period a year ago. For the first nine months of 2008, finance lease originations, which are
mostly composed of loans to individuals to finance the acquisition of a motor vehicle, decreased by
$24.6 million, or 22%, as compared to the same period in 2007, also affected by adverse economic
conditions in Puerto Rico.
Assets
Total assets as of September 30, 2008 amounted to $19.3 billion, an increase of $2.1 billion
compared to total assets as of December 31, 2007. The Corporations loan portfolio increased by
$913.4 million (before the allowance for loan and lease losses) driven by new originations and the
purchase of the $218 million auto loan portfolio during the third quarter of 2008. Also, the
increase in total assets is attributable to the purchase of approximately $3.2 billion of U.S.
government agency fixed-rate MBS during the first half of 2008 as market conditions presented an
opportunity for the Corporation to obtain attractive yields, improve its net interest margin and
replace the $1.2 billion of U.S. Agency debentures called by counterparties. The Corporation
increased its cash and money market investments by $66.2 million in part as a precautionary measure
given the current crisis in the financial markets.
Loan Portfolio
The composition of the Corporations loan portfolio, including loans held for sale, for the
periods indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
Residential real estate loans |
|
$ |
3,470,802 |
|
|
$ |
3,164,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans: |
|
|
|
|
|
|
|
|
Construction loans |
|
|
1,478,076 |
|
|
|
1,454,644 |
|
Commercial real estate loans |
|
|
1,422,899 |
|
|
|
1,279,251 |
|
Commercial loans |
|
|
3,602,123 |
|
|
|
3,231,126 |
|
Loans to local financial institutions
collateralized by real estate mortgages |
|
|
579,305 |
|
|
|
624,597 |
|
|
|
|
|
|
|
|
Commercial loans |
|
|
7,082,403 |
|
|
|
6,589,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases |
|
|
371,982 |
|
|
|
378,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and other loans |
|
|
1,787,915 |
|
|
|
1,667,151 |
|
|
|
|
|
|
|
|
Total loans |
|
$ |
12,713,102 |
|
|
$ |
11,799,746 |
|
|
|
|
|
|
|
|
62
As of September 30, 2008, the Corporations total loans increased by $913.4 million, when
compared with the balance as of December 31, 2007. The increase in the Corporations total loans
primarily relates to new loans originated, in particular residential real estate and commercial
loans and the aforementioned purchase of a $218 million auto loan portfolio.
Of the total gross loan portfolio of $12.7 billion as of September 30, 2008, approximately 80%
has credit risk concentration in Puerto Rico, 12% in the United States (mainly in the state of
Florida) and 8% in the Virgin Islands, as shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto |
|
|
Virgin |
|
|
United |
|
|
|
|
As of September 30, 2008 |
|
Rico |
|
|
Islands |
|
|
States (1) |
|
|
Total |
|
|
|
(In thousands) |
|
Residential real estate loans, including
loans held for sale |
|
$ |
2,601,167 |
|
|
$ |
449,863 |
|
|
$ |
419,772 |
|
|
$ |
3,470,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans |
|
|
779,028 |
|
|
|
165,627 |
|
|
|
533,421 |
|
|
|
1,478,076 |
|
Commercial real estate loans |
|
|
868,188 |
|
|
|
74,410 |
|
|
|
480,301 |
|
|
|
1,422,899 |
|
Commercial loans |
|
|
3,428,878 |
|
|
|
134,434 |
|
|
|
38,811 |
|
|
|
3,602,123 |
|
Loans to local financial institutions
collateralized by real estate mortgages |
|
|
579,305 |
|
|
|
|
|
|
|
|
|
|
|
579,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial loans |
|
|
5,655,399 |
|
|
|
374,471 |
|
|
|
1,052,533 |
|
|
|
7,082,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases |
|
|
371,982 |
|
|
|
|
|
|
|
|
|
|
|
371,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
1,607,679 |
|
|
|
134,506 |
|
|
|
45,730 |
|
|
|
1,787,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, gross |
|
$ |
10,236,227 |
|
|
$ |
958,840 |
|
|
$ |
1,518,035 |
|
|
$ |
12,713,102 |
|
Allowance for loan and lease losses |
|
|
(195,100 |
) |
|
|
(9,434 |
) |
|
|
(56,636 |
) |
|
|
(261,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,041,127 |
|
|
$ |
949,406 |
|
|
$ |
1,461,399 |
|
|
$ |
12,451,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
United States loan portfolio include approximately $251.2 million of loans originally
disbursed as condo-conversion loans, for which a reserve of $31.4 million was allocated as of
September 30, 2008. |
Residential Real Estate Loans
As of September 30, 2008, the Corporations residential real estate loan portfolio increased
by $306.4 million, or 10%, as compared to the balance as of December 31, 2007. The Corporation has
diversified its loan portfolio by increasing the concentration of residential real estate loans.
More than 90% of the Corporations outstanding balance of residential mortgage loan portfolio
consists of fixed-rate, fully amortizing, full documentation 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 adjustable-rate mortgage loans.
Commercial and Construction Loans
As of September 30, 2008, the Corporations commercial and construction loan portfolio
increased by $492.8 million, as compared to the balance as of December 31, 2007. The Corporation
has been able to grow its portfolio with new originations from corporate customers as well as
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 Corporations largest loan concentration as of September 30, 2008 in the amount of $354.6
million is with one mortgage originator in Puerto Rico, Doral Financial Corporation. Together
with the Corporations next largest loan concentration of $224.7 million with another mortgage
originator in Puerto Rico, R&G Financial Corporation (R&G Financial), the Corporations total
loans granted to these mortgage originators amounted to $579.3 million as of September 30, 2008.
These commercial loans are secured by individual
63
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). The Corporation has continued working on the reduction of its exposure to both financial
institutions.
The Corporations construction lending volume has decreased due to the slowdown in the U.S.
housing market and the current economic environment in Puerto Rico. The Corporation has reduced its
exposure to condo-conversion loans in its Miami Corporate Banking operations and is closely
evaluating market conditions and opportunities in Puerto Rico. Current absorption rates in
condo-conversion loans in the United States are low and properties collateralizing some of these
condo conversion loans have been formally reverted to rental properties with a future plan for the
sale of converted units upon an improvement in the United States real estate market. As of
September 30, 2008, approximately $43.3 million of loans originally disbursed as condo-conversion
construction loans have been reverted to income-producing loans. 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
will hold their values.
The composition of the Corporations construction loan portfolio as of September 30, 2008 by
category and geographic location follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto |
|
|
Virgin |
|
|
United |
|
|
|
|
As of September 30, 2008 |
|
Rico |
|
|
Islands |
|
|
States |
|
|
Total |
|
|
|
(In thousands) |
|
Loans for residential housing projects: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-rise (1) |
|
$ |
168,647 |
|
|
$ |
|
|
|
$ |
559 |
|
|
$ |
169,206 |
|
Mid-rise (2) |
|
|
108,510 |
|
|
|
4,842 |
|
|
|
46,564 |
|
|
|
159,916 |
|
Single-family detach |
|
|
105,291 |
|
|
|
2,376 |
|
|
|
45,687 |
|
|
|
153,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for residential housing projects |
|
|
382,448 |
|
|
|
7,218 |
|
|
|
92,810 |
|
|
|
482,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans to individuals secured by
residential properties |
|
|
14,680 |
|
|
|
40,032 |
|
|
|
|
|
|
|
54,712 |
|
Condo-conversion loans (3) |
|
|
|
|
|
|
|
|
|
|
207,835 |
|
|
|
207,835 |
|
Loans for commercial projects |
|
|
184,328 |
|
|
|
81,044 |
|
|
|
23,624 |
|
|
|
288,996 |
|
Bridge and Land loans |
|
|
170,753 |
|
|
|
37,794 |
|
|
|
209,392 |
|
|
|
417,939 |
|
Working capital |
|
|
31,004 |
|
|
|
|
|
|
|
|
|
|
|
31,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before net deferred fees and allowance for loan losses |
|
|
783,213 |
|
|
|
166,088 |
|
|
|
533,661 |
|
|
|
1,482,962 |
|
Net deferred fees |
|
|
(4,185 |
) |
|
|
(461 |
) |
|
|
(240 |
) |
|
|
(4,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total construction loan portfolio, gross |
|
|
779,028 |
|
|
|
165,627 |
|
|
|
533,421 |
|
|
|
1,478,076 |
|
Allowance for loan losses |
|
|
(22,122 |
) |
|
|
(1,292 |
) |
|
|
(48,553 |
) |
|
|
(71,967 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total construction loan portfolio, net |
|
$ |
756,906 |
|
|
$ |
164,335 |
|
|
$ |
484,868 |
|
|
$ |
1,406,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For purposes of the above table, high-rise portfolio is composed of buildings with more
than 7 stories, mainly composed of two projects that represent approximately 75% of the
Corporations total outstanding high-rise residential construction loan portfolio in Puerto
Rico. |
|
(2) |
|
Mid-rise relates to buildings up to 7 stories. |
|
(3) |
|
During the third quarter of 2008, approximately $43.3 million of loans originally disbursed
as condo-conversion construction loans have been formally reverted to income-producing loans
and included as part of the commercial real estate portfolio. |
The following table presents further information on the Corporations construction portfolio
as of and for the nine-month period ended September 30, 2008:
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Total undisbursed funds under existing commitments |
|
$ |
537,247 |
|
|
|
|
|
|
|
|
|
|
Construction loans in non-accrual status |
|
$ |
72,203 |
|
|
|
|
|
|
|
|
|
|
Net charge offs Construction loans (1) |
|
$ |
7,333 |
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses Construction loans |
|
$ |
71,967 |
|
|
|
|
|
|
|
|
|
|
Non-performing construction loans to total construction loans |
|
|
4.88 |
% |
|
|
|
|
|
|
|
|
|
Allowance for loan losses construction loans to total construction loans |
|
|
4.87 |
% |
|
|
|
|
|
|
|
|
|
Net charge-offs (annualized) to total average construction loans (1) |
|
|
0.66 |
% |
|
|
|
|
|
|
|
(1) |
|
Includes charge-offs of $6.2 million related to the repossession and sale of impaired loans in
the Miami Corporate Banking operations. |
64
The following summarizes the construction loans for residential housing projects in Puerto
Rico segregated by the estimated selling price of the units:
|
|
|
|
|
(In thousands) |
|
|
|
|
Under $300K |
|
$ |
82,187 |
|
$300K-$600k |
|
|
162,242 |
|
Over $600k |
|
|
138,019 |
|
|
|
|
|
|
|
$ |
382,448 |
|
|
|
|
|
Consumer Loans
As of September 30, 2008, the Corporations consumer loan portfolio increased by $120.8
million, as compared to the portfolio balance as of December 31, 2007. This is mainly the result
of the above noted acquisition of a $218 million auto loan portfolio from Chrysler. Excluding this
transaction, the consumer loan portfolio decreased by over $90 million since December 31, 2007
mainly due to repayments and charge-offs that on a combined basis more than offset the volume of
loan originations during the first nine months of 2008. Nevertheless, the Corporation experienced a
decrease in net charge-offs for consumer loans that amounted to $40.8 million for the first nine
months of 2008, as compared to $48.1 million for the same period a year ago. The decrease in net
charge offs as compared to 2007 is attributable to the changes in underwriting standards
implemented in late 2005 and as a consumer loan portfolio with an average life of approximately
four years has been replenished by new originations under these revised standards.
Finance Leases
As of September 30, 2008, finance leases, which are mostly composed of loans to individuals to
finance the acquisition of a motor vehicle, decreased by $6.6 million as compared to the portfolio
balance as of December 31, 2007. 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, other than short-term money market
investments, as of September 30, 2008 amounted to $5.8 billion, an increase of $1.2 billion when
compared with the investment portfolio as of December 31, 2007. The increase in investment
securities was mainly due to the previously discussed purchase of approximately $3.2 billion of
U.S. government sponsored agency fixed-rate MBS during the first half of 2008 as market conditions
presented an opportunity for the Corporation to obtain attractive yields, improve its net interest
margin and mitigate the impact of $1.2 billion U.S. Agency debentures called by counterparties.
The Corporation also sold approximately $242 million of MBS in the first quarter of 2008 as a spike
and subsequent contraction in the yield spread during the first quarter provided an opportunity to
sell the MBS at a gain.
Over 91% of the Corporations carrying amount in the securities portfolio is invested in U.S.
Government and Agency debentures and fixed-rate U.S. government sponsored-agency mortgage-backed
securities (mainly FNMA and FHLMC fixed-rate securities). As of September 30, 2008 the Corporation
had $4.3 billion and $0.9 billion in FNMA and FHLMC mortgage-backed securities and debt securities,
respectively, representing 85% of the total investment portfolio. The Corporations investment in
equity securities is minimal and none of its equity securities is related to U.S. financial
institutions that recently failed.
65
The following table presents the carrying value of investments at the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
Money market investments |
|
$ |
294,118 |
|
|
$ |
183,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity: |
|
|
|
|
|
|
|
|
U.S. Government and agencies obligations |
|
|
948,904 |
|
|
|
2,365,147 |
|
Puerto Rico Government obligations |
|
|
22,920 |
|
|
|
31,222 |
|
Mortgage-backed securities |
|
|
760,232 |
|
|
|
878,714 |
|
Corporate bonds |
|
|
2,000 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
1,734,056 |
|
|
|
3,277,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
U.S. Government and agencies obligations |
|
|
|
|
|
|
16,032 |
|
Puerto Rico Government obligations |
|
|
36,637 |
|
|
|
24,521 |
|
Mortgage-backed securities |
|
|
3,976,720 |
|
|
|
1,239,169 |
|
Corporate bonds |
|
|
2,397 |
|
|
|
4,448 |
|
Equity securities |
|
|
1,195 |
|
|
|
2,116 |
|
|
|
|
|
|
|
|
|
|
|
4,016,949 |
|
|
|
1,286,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other equity securities |
|
|
60,796 |
|
|
|
64,908 |
|
|
|
|
|
|
|
|
Total investments |
|
$ |
6,105,919 |
|
|
$ |
4,811,413 |
|
|
|
|
|
|
|
|
Mortgage-backed securities at the indicated dates consist of:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
Held-to-maturity |
|
|
|
|
|
|
|
|
FHLMC certificates |
|
$ |
9,098 |
|
|
$ |
11,274 |
|
FNMA certificates |
|
|
751,134 |
|
|
|
867,440 |
|
|
|
|
|
|
|
|
|
|
|
760,232 |
|
|
|
878,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
FHLMC certificates |
|
|
1,949,117 |
|
|
|
158,953 |
|
GNMA certificates |
|
|
338,597 |
|
|
|
44,340 |
|
FNMA certificates |
|
|
1,579,280 |
|
|
|
902,198 |
|
Mortgage pass-through certificates |
|
|
109,726 |
|
|
|
133,678 |
|
|
|
|
|
|
|
|
|
|
|
3,976,720 |
|
|
|
1,239,169 |
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
$ |
4,736,952 |
|
|
$ |
2,117,883 |
|
|
|
|
|
|
|
|
66
The carrying values of investment securities classified as available-for-sale and held-to-maturity
as of September 30, 2008 by contractual maturity (excluding mortgage-backed securities and equity
securities) are shown below:
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Weighted |
|
(Dollars in thousands) |
|
amount |
|
|
average yield % |
|
U.S. Government and agencies obligations
|
|
$ |
948,904 |
|
|
|
5.77 |
|
|
|
|
|
|
|
|
Due after ten years |
|
|
948,904 |
|
|
|
5.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico Government obligations |
|
|
|
|
|
|
|
|
Due within one year |
|
|
4,635 |
|
|
|
6.17 |
|
Due after one year through five years |
|
|
10,329 |
|
|
|
4.51 |
|
Due after five years through ten years |
|
|
24,176 |
|
|
|
5.84 |
|
Due after ten years |
|
|
20,417 |
|
|
|
5.35 |
|
|
|
|
|
|
|
|
|
|
|
59,557 |
|
|
|
5.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
Due after five years through ten years |
|
|
520 |
|
|
|
7.70 |
|
Due after ten years |
|
|
3,877 |
|
|
|
6.85 |
|
|
|
|
|
|
|
|
|
|
|
4,397 |
|
|
|
6.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,012,858 |
|
|
|
5.76 |
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
4,736,952 |
|
|
|
5.30 |
|
Equity securities |
|
|
1,195 |
|
|
|
1.94 |
|
|
|
|
|
|
|
|
Total investment securities available-for-sale
and held-to-maturity |
|
$ |
5,751,005 |
|
|
|
5.38 |
|
|
|
|
|
|
|
|
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. Approximately $1.2 billion of
U.S. Agency debentures with an average yield of 5.87% were called during the first nine months of
2008. However, given market opportunities, the Corporation bought U.S. government sponsored
agencies MBS amounting to $3.2 billion at an average yield of 5.44% during the first half of 2008,
which is significantly higher than the cost of borrowings used to finance the purchase of such
assets. As of September 30, 2008, there are still approximately $0.9 billion in U.S. agency
debentures with embedded calls. 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
affect net interest income in the future. 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. Also refer to Note 4 to the
accompanying unaudited consolidated financial statements for additional information regarding the
Corporations investment portfolio.
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) liquidity risk, (2) interest rate risk, (3) market risk, (4) credit
risk, (5) operational risk, (6) legal and compliance risk, (7) reputation 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 liquidity risk, interest rate
risk, credit risk, and operational risk.
67
The Corporations risk management policies are described below as well as in the Managements
Discussion and Analysis of Financial Condition and Results of Operations section of First BanCorps
2007 Annual Report on Form 10-K.
Liquidity and Capital Adequacy
Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals,
fund asset growth and business operations, and meet contractual obligations through unconstrained
access to funding at reasonable market rates. Liquidity management involves forecasting funding
requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in
asset and liability levels due to changes in our business operations or unanticipated events.
The Corporation manages liquidity at two levels. The first is the liquidity of the parent
company, which is the holding company that owns the banking and nonbanking subsidiaries. The second
is the liquidity of the banking subsidiaries. The Asset and Liability Committee of the Board of
Directors is responsible for establishing the Corporations liquidity policy as well as approving
operating and contingency procedures, and monitoring liquidity on an ongoing basis. The
Managements Investment and Asset Liability Committee of the Corporation (MIALCO), using measures
of liquidity developed by management, which involve the use of several assumptions, reviews the
Corporations liquidity position on a monthly basis. The MIALCO oversees liquidity management,
interest rate risk and other related matters. The MIALCO, which reports to the Board of Directors
Asset and Liability Committee, is composed of senior management officers, including the Chief
Executive Officer, the Chief Financial Officer, the Chief Operating Officer, the Chief Risk
Officer, the Wholesale Banking Executive, the Risk Manager of the Treasury and Investments
Division, the Financial Risk Manager and the Treasurer. The Treasury and Investments Division is
responsible for planning and executing the Corporations funding activities and strategy; monitors
liquidity availability on a daily basis and reviews liquidity measures on a weekly basis. The
Treasury and Investments Accounting and Operations area of the Comptrollers Department is
responsible for calculating the liquidity measurements used by the Treasury and Investment Division
to review the Corporations liquidity position.
In order to ensure adequate liquidity through the full range of potential operating
environments and market conditions, the Corporation conducts its liquidity management and business
activities in a manner that will preserve and enhance funding stability, flexibility and diversity.
Key components of this operating strategy include a strong focus on customer-based funding,
maintaining direct relationships with wholesale market funding providers, and maintaining the
ability to liquidate certain assets when, and if, requirements warrant.
The Corporation develops and maintains contingency funding plans for both the parent company
and bank liquidity positions. These plans evaluate the Corporations liquidity position under
various operating circumstances and allow the Corporation to ensure that it will be able to operate
through periods of stress when access to normal sources of funding is constrained. The plans
project funding requirements during a potential period of stress, specify and quantify sources of
liquidity, outline actions and procedures for effectively managing through a difficult period, and
define roles and responsibilities. In the Contingency Funding Plan, the Corporation stresses the
balance sheet and the liquidity position to critical levels that imply difficulties in getting new
funds or even maintaining its current funding position, thereby ensuring the ability to honor its
commitments, and establishing liquidity triggers monitored by the MIALCO in order to maintain the
ordinary funding of banking business. Three different scenarios are defined in the Contingency
Funding Plan: local market event, credit rating downgrade, and a concentration event. They are
reviewed and approved annually by the Board of Directors Asset and Liability Committee.
The Corporation maintains a basic surplus (cash, short-term assets minus short-term
liabilities, and secured lines of credit) in excess of a 5% self-imposed minimum limit amount over
total assets. As of September 30, 2008, the basic surplus ratio of approximately 10.9% included
un-pledged assets, FHLB lines of credit, collateral pledged at the FED Discount Window Program, and
cash. Un-pledged assets as of September 30,
68
2008 are mainly composed of U.S. Agency fixed rate debentures, money market investments and
mortgage-backed securities totaling $1.2 billion, which can be sold under agreements to repurchase.
The Corporation does not rely on uncommitted inter-bank lines of credit (federal funds lines) to
fund its operations; and does not include them in the basic surplus computation. The financial
market disruptions that began in 2007, and became exacerbated in 2008, continued to impact the
financial services sector and may affect access to regular and customary sources of funding,
including repurchase agreements, as counterparties may not be willing to enter into additional
agreements in order to protect their liquidity. However, the Corporation has taken direct actions
to enhance its liquidity positions and to safeguard the access to credit. Such initiatives
include, among other things, the posting of additional collateral and thereby increasing its
borrowing capacity with the FHLB and the FED through the Discount Window Program, the issuance of
additional brokered CDs to increase its liquidity levels and the extension of its borrowing
maturities to reduce exposure to high levels of market volatility. The Corporation understands
that current conditions of liquidity and credit limitations could continue to be observed well into
2009. Thus, the Corporation will continue to monitor the different alternatives available under
programs announced by the FED and the FDIC such as the Term Auction Facility (TAF) for short-term
loans, expansions to qualifying collateral that the government will loan against, including
commercial paper, guarantees of new issuances of senior unsecured
debts and the issuance of preferred
stock under the Troubled-Asset Relief Program (TARP).
Sources of Funding
The Corporation utilizes different sources of funding to help ensure that adequate levels of
liquidity are available when needed. Diversification of funding sources is of great importance to
protect the Corporations liquidity from market disruptions. The principal sources of short-term
funds are deposits, securities sold under agreements to repurchase, and lines of credit with the
FHLB, the FED Discount Window Program, and other unsecured lines established with financial
institutions. The Credit Committee of the Board of Directors reviews credit availability on a
regular basis. In the past, the Corporation has securitized and sold mortgage loans as
a supplementary source of funding. Commercial paper has also provided additional funding as well as
long-term funding through the issuance of notes and long-term brokered CDs. The cost of these
different alternatives, among other things, is taken into consideration.
Recent initiatives by the FED to ease the credit crisis have included, among other things,
cuts to the discount rate, the availability of the TAF to provide short-term loans to banks and
expanding the qualifying collateral it will lend against, to include commercial paper. Meanwhile
the FDIC announced a program to strengthen confidence and encourage liquidity in the banking system
by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding
companies, and by providing full coverage of non-interest bearing deposit transaction accounts,
regardless of dollar amount. The FDIC also raise the cap on deposit insurance coverage from
$100,000 to $250,000 until December 31, 2009. Additional actions include the announcement of a
federal government program to purchase stock in private U.S. financial firms, including banks.
These actions made the federal government a viable source of funding in the current environment.
The Corporations principal sources of funding are:
Brokered CDs - A large portion of the Corporations funding is retail brokered CDs issued by the
Bank subsidiary, FirstBank Puerto Rico. Total brokered CDs increased from $7.2 billion at year
end 2007 to $8.4 billion at September 30, 2008. The Corporation has been issuing brokered CDs to
finance its lending activities, pay off repurchase agreements issued to finance the purchase of
MBS in the first half of 2008, accumulate additional liquidity due to current market volatility,
and extend the maturity of its borrowings.
In the event that the Corporations Bank subsidiary falls below the ratios of a well-capitalized
institution, it faces the risk of not being able to replace funding through this source. The Bank
currently complies and exceeds the minimum requirements of ratios for a well-capitalized
institution and does not foresee falling below required levels to issue brokered deposits. The
average term to maturity of the retail brokered CDs
69
outstanding as of September 30, 2008 is approximately 3 years. Approximately 28% of the principal
value of these certificates is callable at the Corporations option.
The use of brokered CDs has been particularly important for the growth of the Corporation.
The Corporation encounters intense competition in attracting and retaining regular retail
deposits in Puerto Rico. 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 insured by the
FDIC up to regulatory limits and can be obtained faster compared to regular retail deposits.
Demand for brokered CDs has recently increased as a result of the move by investors from riskier
investments, such as equities, to federally guaranteed instruments such as brokered CDs and the
recent increase in FDIC deposit insurance from $100,000 t